Stantec Inc (STN) 2004 Q2 法說會逐字稿

Thank you for holding for the Stantec, Inc.

Q2 (ph) 2004 conference call.

I would like to introduce your Chairperson, Mr. Tony Franceschini.

Thank you and good afternoon, everyone, and welcome to our 2004 second-quarter conference call.

As always, I am joined by John 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 wish to quote anyone other than Don or me to please request permission to do so from the individual concerned.

This morning, we released the results of Stantec's operations for the second quarter of 2004.

Gross revenue for the quarter was 136.8 million, compared to 119.1 million in the second quarter of 2003, an increase of 14.9 percent.

Net revenue was 118.7 million compared to 102.4 million, an increase of 15.9 percent.

Net income was 6.4 million, compared to 6.5 million, and basic earnings per share were unchanged at 35 cents.

On a year-to-date basis, gross revenue was 254.1 million, an increase of 11.7 percent.

Net revenue was 222.3 million, an increase of 12.9 percent.

Net income was 12.1 million, an increase of 5.5 percent, and basic earnings per share were 66 cents, an increase of 4.8 percent.

Our performance for the quarter reflects the impact of the acquisition of the Sear-Brown Group, a multidisciplinary design firm with about 400 employees and 10 offices in New York State, Ohio, Pennsylvania, Puerto Rico, and Colorado, which we did in early April.

During the quarter, we also completed the acquisition of GBR Architects, a 35-person firm based in Winnipeg, Manitoba.

The addition of these firms, and particularly the acquisition of the Sear-Brown Group, which is the most significant acquisition we have completed in the history of our Company, generally require us to incur additional initial costs associated the integration of new staff and systems.

These costs are highest during the first quarter of implementation and gradually decrease in the quarters following.

As a result, our administrative and marketing costs are higher for both the second quarter of 2004 and for the year-to-date.

We do continue to make progress in improving our level of billings and collection, which is having a positive impact on our cash position.

We generated 20.1 million in cash from operating activities in the second quarter of 2004, compared to 6.7 million in the same quarter last year.

Project activity also remains strong across the Company, continuing to reflect the robustness and the flexibility of our business strategy.

Over the past few months, we have secured many new assignments, and I would just like to outline some of them to indicate the type of diversity that we get in these projects.

We recently secured the design of a new airport terminal at Niagara Falls International Airport in Niagara Falls, New York.

Once complete in 2007, the 65,000 square foot terminal will serve as the gateway for scheduled and charter airline traffic to the many tourist attractions in the Niagara region.

The project will also involve the design of a parking area, landscaping, signage and a new entrance to the airport.

Although we have completed the design of several airport terminals in Canada, this is our first terminal project in the U.S., which we were able to secure because of our new presence in New York State, and this is an early example of the cross-selling leverage we expect to see in our newest region in the U.S. Northeast.

Quite simply, neither Stantec nor Sear-Brown on its own would have been successful in being awarded this project.

Together, we make a compelling team with a local presence combined with specific and extensive project experience.

During the quarter, we also started work on several new projects in the environmental area.

For example, in Courtice, Ontario, we are providing full program and project management services, acting as the owner's agent, for the design and construction of a new water treatment plant for the regional municipality of Durham.

This project, which is one of the largest municipal water infrastructure projects currently underway in Ontario, will also include the development of the new pumping station, force main and outfall, as well as road and bridge work.

In Pinedale, Wyoming, we're designing a unique wastewater treatment process, an advanced integrated pond system involving ultraviolet disinfection.

For treatment facility upgrades, it will be the first of its kind in the state.

Some other projects obtained during the quarter include an assignment to provide complete architecture and engineering services for the development of a new 18,000 square foot headquarters and conference center for the California Future Farmers of American Association near Sacramento; a material testing services to a field research study of high-performance concrete for the Nevada Department of Transportation in northern Nevada; and planning, design and construction administration type services for the development of the Crowchild Stoney Trail Freeway interchange for Alberta Transportation in Calgary.

As indicated, we continue to secure a wide variety of projects in different geographic areas that reflect the fundamental strength of our business model.

We remain confident about our ability to continue to pursue our objective of orderly and profitable growth.

Now I would like to make a few comments about some of our key markets.

At the macro level, we expect the infrastructure and facilities market to continue at a faster rate in the U.S. compared to Canada.

This is likely to be in the 4 percent range over the next year in the U.S., and about 3 percent in Canada.

These rates are higher than what has been experienced over the past two years, so we expect that our internal organic growth rate will be better as well.

One of our key markets in both the U.S. and Canada continues to be the residential housing market, which accounts for about 35 percent of our business.

This market continues to be strong, and we do not expect it to change for the balance of 2004.

Overall, the long-term outlook for professional services in infrastructure and facilities remains strong, with demand driven by population growth, more stringent government regulation, and the need to maintain, upgrade, and replace aging North American infrastructure.

Another trend that will benefit our industry is the continued outsourcing of technical and design services, especially within the public sector.

This concludes my brief comments and introduction for today.

Don and I will now be available to answer any questions that you may have, and the conference call operator, Janice (ph), will explain the question procedure.

Thank you. (OPERATOR INSTRUCTIONS) Ben Cherniavsky with Raymond James.

Good afternoon.

How much did Sear-Brown -- how much do you estimate in revenue came from Sear-Brown in the second quarter?

I don't have the number in front of me, but I think we indicated when we acquired that firm that it is about 400 people that they added.

And I think we have also indicated in the past that a rule of thumb is generally that each person will generate about $100,000 per year.

So on an annual basis, one would expect that that acquisition would add about $40 million U.S. to our gross revenue.

And it is difficult to break that down into quarters, but now one of the things that we know with acquisitions is it takes us some time to integrate and culturalize the acquisition.

We spend a lot of time on training and systems conversions and things like that.

So what we find in the first quarter, in particular, is that our people are spending more time on administrative and business development time than they otherwise would have, and less time, therefore, is left for project-related time.

And of course, revenue is driven by time spent on projects.

So I would expect that in this quarter, the revenue from Sear-Brown would be less than the annual run rate.

Any idea what the expense was in the quarter from that?

You talked about it adding some incremental expenses.

Over and above any lost revenue, do you know --?

The significant explanation for the increase in administrative and business development costs in Q2 really related to the acquisition integration and the systems conversions and the training time and that sort of thing that was incurred.

I think, again, what we have indicated is that when we do an acquisition, it can take up to a couple of years to fully integrate the operation.

And those costs and that time is generally front-end loaded, particularly in the first quarter after acquisition.

I am trying to make some adjustments for what we would expect into the third and fourth quarter, if it is loaded in the first quarter of integration.

Tony, it is a legitimate question.

I think unfortunately, we just do not have the breakout on the individual profit centers, which we would have to add up.

There are not all in one region.

That is probably something we should have put together, but we certainly have that.

It's a good follow-up.

We just need to do a few hours work to consolidate it, but we can identify the revenue and the expenses.

But the question that you ask, I just don't have it right in front of us.

Could I try and ask it in a different way then?

Your first quarter, you did 30 cents, compared to 26 last year, and your second quarter now is actually down.

Now, I think I am right in saying that the first quarter certainly did not have a full quarter.

I don't know if it had anything from Sear-Brown.

It had none.

Okay, so there is obviously some earnings deceleration here.

Do you chalk that all up to the integration issue?

Or is there something else that happened in this quarter that made your revenue and your earnings a bit light compared to trend?

I think we cannot put it all to the Sear-Brown acquisition and integration.

We did do the other smaller one as well.

But, as you know for both quarters this year, we have still been catching up some of the enterprise system implementation.

And I think for the most part, we are pretty well there in terms of being done with that.

And I think that there still may be some cleanup issues -- as a matter-of-fact, there would be some cleanup issues, from the systems conversions, which were just basically caught up (ph) in that quarter.

So you mean that you would not have seen those in the first quarter and they came back in the second?

Well, yes.

I mean, it's not so much that we wouldn't have seen them.

Because we haven't done all of the billings in the first quarter, if there were some adjustments with respect to work in progress and so forth, it would not have taken place until the second quarter, because that is when the stuff was billed.

So the more we catch up -- and we are pretty well back.

If you look at our Days Sales Outstanding, we are really only about 7 to 10 days behind now where we were last year before system implementation on a consolidated basis, which is quite a bit better than the first quarter.

But we are still about 7 to 9 days away from being back on track to where we were before.

Each quarter has been a bit of a catch-up and cleanup on the system implementation.

I'm sorry to belabor it.

I just don't see how that would have impacted your trend bottom-line growth from the first quarter year-over-year to the second quarter year-over-year.

In terms of the bottom line, it's quite simple.

If we have any work in progress when -- if it is sitting there and if it doesn't get reviewed until you actually do the billing for it -- sometimes we cannot bill 100 percent of the work in process.

That review is done during the billing cycle.

If we got behind on the billing cycle when we're catching up, you may have the allowances for work in progress, which would not have been identified and there is no reason to identify it in the first quarter because it was not an issue in the first quarter.

So as it came to light in the second quarter, then we dealt with that.

So I think I would not want to read a lot into the one quarter's performance in terms of trending or what is occurring.

I think it is just, in our mind, it is not totally unexpected.

We did know exactly what the number and the result was going to be because we have been in a bit of a catch-up mode for both quarters.

And it is just a simple reflection of having caught up with some of the backlog, and that is not something that occurred before.

Some of it occurred in the first quarter, but more of it occurred in the second quarter.

And there may be some residual amounts in the third quarter, but certainly not as much as either the first or the second quarter, because we are pretty well back on the cycle that we were last year, in the third quarter of last year.

So it is just inherent lumpiness of the business?

I would say so.

It really would be difficult for me to say that this is a trend one way or the other, either positive or negative.

I just do not think -- and we certainly don't, as a management team, read anything into it in terms of trending.

It is simply a reflection of what we did in the second quarter.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) Mr. Stoneman of Dundee Securities in Toronto.

A couple of questions.

The tax rate was down in the quarter.

Do you expect that to stay at the current level or to return to a higher level?

Richard, our forecast for the tax rate, what we try to do is estimate the tax rate based on the income we anticipate in each region over the course of the year.

And what we have seen to date is some income earned in some of the lower tax jurisdictions, which has pushed down the rate below, I think, what we had indicated at the end of last year was kind of our expectation for this year.

I think we are running at approximately 36 percent right now of pretax income, and the expectation is that it is probably going to be pretty close to that number for the rest of this year, yet it could have a little bit of a bias on the upside.

Okay.

And the other number that I was -- and this may have been covered by earlier questioners -- when I looked at the costs, I noticed that admin was up.

Is that going to continue or will that moderate as you integrate this acquisition?

Richard, it is Tony.

Our admin costs are definitely higher in the second quarter and on a year-to-date basis.

And our expectation is that those numbers are going to go down the rest of the year, that they are at a high level, that they do include a number of one-time nonrecurring costs that were incurred in the second quarter.

And Don mentioned some of them with respect to training integration and so forth, which basically reduces the amount of billable time that we get from staff.

And therefore, the administration costs go up because the nonbillable time ends up as an admin cost.

Tony, are you -- I also noticed that your gross margins improved by 0.7 percent.

Are you experiencing any cost pressures, given higher employment levels, or are you benefiting on that line?

I think, again, it is hard to give you an answer everywhere, because we have examples in our system where there are pressures on margins and they're going down and there's other places where the employment levels are up, so that the margins are up.

And what number reflects is the overall mix that we have in the Company.

So in places like Alberta, for example, and certain parts of Ontario, and now even in certain parts of BC, the margins have improved because of the current situation there.

Whereas in the other parts, we have actually got some lower margins.

In some parts of New York State, the margins are as little bit lower.

So the overall answer is that the current mix of business does generate a little bit higher margin for us, but that does vary by the different regions and even some of the practice areas.

So that variance can move around -- it is not a trend.

And the other variance in terms of admin and marketing should moderate as the year goes on?

That's right.

So I think that there could be a little better variance either way on those numbers.

It is very difficult for us to project that in terms of going forward because it does depend on the mix of business and so forth that we got.

Thanks, Tony.

I appreciate it.

Mike Hohn (ph) with National Bank Financial in Toronto.

Just a few questions.

Not to belabor this, but just wondering if you could quantify how much additional SG&A was incurred in the second quarter strictly from the Sear-Brown integration in terms of a dollar value?

I think like I have indicated to Ben that we will, I think, provide a follow-up and try to extract some of that number.

It would be an estimate, because we do not track it -- like when we integrate, not all of the Sear-Brown operations are in one unit.

They are in a number of our units in terms of the way we track them, because they are integrated.

But we did agree that we will break that out in terms of the revenue and the cost, so we will provide that as a follow-up.

Great.

Second question staying with Sear-Brown.

Was there anything unexpected or unusual with Sear-Brown compared to previous acquisitions and integration you have done?

It just seems like others have perhaps gone a little more seamlessly and we have not seen that same lift in the SG&A.

Is there anything in particular that happened with that integration?

Other than size and number of offices.

And I think if there is one thing that would be different about this, which we do not expect to incur again, is that we did this at the same time that we were still not fully implemented with our ERP system and that we were still in a learning curve ourselves.

So while we were in a learning curve and we were also trying to get them integrated and in a learning curve at the same time.

And this was the first conversion that we have done in our new system, so we have to develop a number of the processes and procedures and so forth to do the conversion, which again, once all the documentation and procedures are outlined, the next one obviously is going to take less time and also our staff (indiscernible) and so forth.

So that would certainly be an extra one-time cost that obviously (ph) we don't expect to incur again as long as we are using the same Enterprise system, because we have to develop those procedures for converting data electronically (indiscernible) and so forth because we hadn't done one before.

Okay, thanks.

Sara Elford with Canaccord Capital in Vancouver.

I have a couple of questions.

The first one is an easy one.

Could you remind me what the value of your Edmonton office is on the balance sheet?

I know you're trying to do a sale leaseback on that, and I'm just curious as to its balance sheet value at this point.

Sara, I think we are carrying that between 25 and $26 million right now.

And do you have any idea on timing, as far as the sale leaseback might go, or you don't even want to venture a guess, I guess, at this point?

I can tell you that -- based on the discussions that we are having, it may be completed by the end of the third quarter.

We are not positive about it, and therefore, we're not sure if it will be done in the third quarter; it may be in the fourth quarter.

But certainly, our expectation is that it would be done this year.

Okay.

And balance sheet-wise, you're comfortable one way or the other in terms of the types of -- obviously, it's a fairly major asset for you at this stage.

Are you comfortable with your current ratios as to where they are right now, based on the plans as far as acquisitions go and the like?

Yes.

The building sale will certainly enhance the balance sheet and remove all of the debt related to the building, plus some additional operating debt as well.

But there is -- the result of that will improve the current ratio pretty significantly, but it is certainly not a driving reason behind doing that transaction.

Okay.

I guess just touching back on the comments you made, Tony, with respect your learning curve with the ERP system and what that meant as you were trying to integrate the Sear-Brown acquisition, do you feel now as though you are at a point where you can pursue other acquisitions?

Obviously, you don't want to tackle too much while you're going through that process with not only the largest acquisition you have done to date, but at the same time, you're going at that learning curve.

Do you think you're at a point now where you can get more aggressive on the acquisition front?

Absolutely.

I would say -- and obviously we are constantly checking on this with our staff -- but literally, like we said, every day our comfort level gets bigger.

And quite honestly, we're over the hump and we don't see really any constraints to that now.

Like even the procedures that we did with Sear-Brown will help us in terms of doing anything going forward.

So quite honestly, I really do think all of this stuff is behind us and that we're really quite well-positioned now to do acquisitions of whatever size.

Would it be fair at all, Tony, to say that you consciously have slowed down your acquisition activity because of that?

In other words, other than Sear-Brown and your most recent one, you have been active, but also quiet relative to the pipeline of opportunities you have identified over time.

Was that a conscious decision as a result of this?

In other words, the opportunities still very much still exist and it is timing that you control at this point?

I'll answer that two ways.

One is, it is partly correct, what you said, in terms of we did consciously say that unless we really had something that we wanted to do, that if we were on the edge of doing something, we would rather err on the side of not doing it so we could focus on the internal stuff.

But that is not totally the answer.

There have been a number of acquisitions this year that we did go down a fair amount in the past, or there was a couple where some expectations got beyond what we thought were reasonable.

And we did not conclude them because we couldn't reach a deal, not because we didn't think we could integrate them.

We would have done them if the price was right.

And if there was anything I would say that, yes, this year, there have been more that did not conclude in terms of where we went down up to a certain point and they did not conclude -- it was a higher number than normal.

Whether that will continue, obviously I can't guess.

But it was not because of lack of trying.

There was a bit of that, but there was also just the way things worked out, that a number of the ones that we were pursuing just did not come to pass and they just happened to happen at the same time.

But in terms of the potential, I think the numbers are still quite positive, and I think that we're certainly not concerned about the number of opportunities that we have or their potential or there scope -- and they are quite good.

But we still have to do the deal.

And it is typically the larger ones where price tends to get higher than what you're comfortable with?

Is that fair as well?

Yes.

And I think we have been adjusting the way that we would assess some of the larger acquisitions because we are looking at -- there are some benefits to acquiring some larger firms.

And I would be not being totally honest if I said that the acquisitions we have been pursuing this year have not been larger than normal.

We clearly have been pursuing some larger deals, and they just take longer to conclude.

But on the other hand, we have to do fewer of them.

So perhaps in the past, we were used to doing 8 or 9 or 10 small ones, so we are constantly doing something.

That this year, if we do 2 fair sized ones, we would do as much or more than we have done in the past.

Okay, that helps me out.

Thank you very much.

Anthony Zicha with Scotia Capital in Montreal.

Good afternoon, Tony.

My question relates to what you were saying before.

It was a reference to the different markets, so we can get a bit more detail in terms of the residential and the housing market in Ontario, maybe some insight on Western Canada, impact of the future Winter Olympics, as well as relating to maybe the light rail transit system, and then a bit of your perspectives in the U.S.

Okay, if we take housing, in terms of Canada as a whole, it is reasonably healthy.

But Ontario in terms of housing starts -- use that as a good handle -- 2004 is expected to be about the same as 2003.

I think the numbers were actually about 85,000 for 2003 and about 84,000 or so for 2004.

And the expectation there is that that will drop in the 75,000 or so range for 2005.

And our other major market in Canada is Alberta, and that market is about half the size of Ontario.

It was about 36,000 last year.

The expectation is it will be around 34, 35,000 this year, and in the 30,000 range next year.

So the trend is that there will be a modest reduction in that, but in most cases, the impact on our market share in those areas is pretty modest as well, and likely in the same range as those numbers, but if our clients are not the ones that are actually doing the reductions, we could stay at about the same level.

So in that market, our Ontario and Alberta markets are quite strong.

In the U.S., in housing, we're still looking at Phoenix, Sacramento and Las Vegas as our three main markets.

And for the most part, I would say the forecasts and the outlooks are similar to Canada.

I don't have the numbers off the top of my head, but it would be in that same range in terms of the modest reductions that we are experiencing in Canada.

The markets are quite similar in that way.

As far as the Olympics are concerned, we are well-positioned in terms of getting some of the key assignments.

There are five basically major assignments for design firms like us.

And they have not been commissioned yet in terms of being awarded, but what I can tell you is that we are on the short list for all five.

So we cannot say we're going to get all five or two or one, but our odds are pretty good that we're going to get some of those projects that are directly related to the Olympic Games.

And then we're also on one of the two short-listed teams for the improvement to the Sea-to-Sky Highway, or a section of it -- but it's $400 million and there are two teams on it, and we are on one of the short-listed teams.

So again, our prospects look good.

In terms of the specifics, we don't have anything to report yet until some of the decisions are made on these awards, but at least we're in the game.

Can you quantify what the five targets are worth?

In terms of total fees, I believe the capital value of them is in the 500 or so million dollars.

The largest component of that is what they call the sliding-type facilities, the bobsled and things, and all that with some other things, which is a little over 200 million.

So in terms of total fees, potentially it is up to about $50 million in fees.

And depending on what portion and percentages of those we get, that would reflect some percentage of that.

Okay, great.

That answers my question.

Thank you.

At this time, we have no questions in the queue. (OPERATOR INSTRUCTIONS) We do have a question from Tim Caulfield with Salman Partners in Vancouver.

Can you just give a review overall of your outlook for acquisitions right now?

I can do that, Tim.

I think it's about as positive as it's ever been.

I think in response to Sara's comments, you could say, well, if the prospects are so good -- I know we haven't closed that many this year, but I can tell you we certainly continue to work on it.

And we do have a good number of mid-sized and even some larger acquisitions and a few smaller ones that we are pursuing.

If there has been any change, it is that most of the better prospects are mid-sized firms as opposed to some of the smaller firms we have pursued in the past.

The price of some of the smaller firms seems to be getting the same, effectively, as some of the mid-sized firms, so there is no particular reason to do a small firm.

There is a lot more integration issues there.

So the pipeline, I would still rate it at about two dozen to 30 or so firms, and at various stages of discussions, to where we do have some draft letters of intent out for consideration by the vendors, to where we have just done some initial presentation to attract the vendors.

And the firms that we are talking to are, for the most part, in existing regions that we are in or contiguous or complementary regions to where we are at the present time.

So a very good pipeline, very good prospects.

The only thing we can't define, because fundamentally most of the firms we are talking to are not for sale or going through a process; they're basically deciding if they want to do it and if they want to do it with us.

In a number of cases, the firms have decided they want to do it with us, so we're trying to negotiate the terms.

In a number of other cases, they haven't decided whether they even want to do a transaction or not.

So that is the process that we are going through.

But I am quite optimistic and positive about our ability to complete some of these this year.

Great, thanks.

Also, wondering if you're willing to break out what the debt associated with Sear-Brown was.

If we should assume that the 7 million is a good number in addition to the 11 million cash consideration you indicated in the first quarter?

Tim, it is Don.

We have not broken out individual companies, but if you take a look at note 3 to the financial statements, it does break out the total purchase price and the assets and liabilities acquired for both of the acquisitions completed during the quarter.

And I think it is also fair to take a look at the different sizes of those two acquisitions.

I think you can come to some conclusions about what the total purchase price might have been for each of them.

Excellent.

Great, thanks.

At this time, again, there are no questions in the queue.(OPERATOR INSTRUCTIONS)

Okay, well, since there does not appear to be any more questions, once again, we would like to thank all of you for joining us and thank you for the opportunity to provide some comments.

And we certainly look forward to speaking with you again at the end of our third-quarter results.

And as we did promise that we will provide some follow-up information to the participants.

Thank you very much.

We're going to sign off now.

Thank you for participating in the Stantec Inc.

Q2 2004 conference call.

On behalf of myself and the rest of my teleconference team, thank you for choosing Telus.