Stantec Inc (STN) 2005 Q2 法說會逐字稿

Thank you for holding for the Stantec Inc.

Q2 2005 earnings conference call.

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

Thank you, Tami.

And good afternoon, everyone, and welcome to our 2005 second quarter conference call.

Joining me is Don Wilson, our Chief Financial Officer.

As usual, we will provide some brief comments on our results and on the outlook for our market and then address individual questions.

This conference call is being broadcast live over the internet and will be archived for future reference at www.stantec.com, under the Investor Relations section.

We would like to ask any members of 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 2005.

I am pleased to report some excellent results during a very active quarter for us.

Gross revenue for the quarter increased 9.8% to $150.2 million, from $136.8 million in the second quarter of 2004.

Net revenue increased 7.5% to $127.7 million, from $118.7 million.

Net income increased 102.7% to $13.1 million, from $6.4 million.

And basic earnings per share were 97.1% higher at $0.69 versus $0.35.

On a year-to-date basis gross, revenue increased 14.6% to $291.3 million, net revenue increased 11% to $246.8 million, net income increased 63.6% to $19.8 million and basic earnings per share increased 59.1% to $1.05.

I would like to now make a few clarifying statements about our results.

As we have been indicating all year, we are starting to see some of the benefits of the implementation of our Enterprise System and it continues to provide better and more timely information for us, which is helping us to streamline aspects of our operation.

A key area of improvement is in the estimate of allowance for doubtful accounts, or AFDA, which has resulted in a positive increase of $0.14 in basic earnings per share this quarter.

We expect this revision of our estimate of AFDA to be a one-time adjustment to our cumulative AFDA account.

This also helped us to reduce our SG&A costs by, approximately, $4 million.

Overall, our operations in most of our regions and practice areas across the Company are performing well.

I think that those of you know that we've used a eight-cylinder car example for our operations, can say that we were probably operating on seven out of eight cylinders last quarter.

Performance in our U.S. southeast region is improving and is contributing positively to our results.

However, it is still not meeting our expectations.

We will be completing a goodwill impairment test of all of our operations, as part of our regularly scheduled annual review of goodwill, during the third quarter of 2005.

At that time, we will address any issues related to the potential impairment of this region.

Each quarter, I highlight some of our new project awards to illustrate the wide scope and variety of assignments that we complete across the Company.

This quarter, I would like to highlight some of the work we are doing in the environmental management transportation, and energy and resources service sectors.

In the environmental management area, we have been retained by the city of Ottawa water resources group, to study the potential effects of wastewater affluence on aquatic life in the Ottawa river.

This evaluation is the first comprehensive environmental study of its kind to be undertaken in Canada and will be used as a case study to demonstrate the federal government's recommended methodology for assessing municipal wastewater impact on aquatic environment.

In the transportation area, we're involved in the engineering and design of the U.S. 17 Super Street, which is an experimental type of intersection being proposed in Brunswick County, North Carolina, by the North Carolina DOT and two independent developers.

Our team is responsible for cable routing, signal and roadway design, operational signing and signal timing plans, computer traffic simulation and development of contact with and construction bid documents, among other tasks and duties.

In the energy and resources sector, we're completing the detailed design of several instrumentation building modules to measure the quality of transmitted products across the end-bridge distribution network in Canada.

This project will require mostly disciplinary engineering services from our staff and offices across the country.

As we have announced, subsequent to the end of the quarter, during August, we plan on closing on CPV Group Architects and Engineers, which is an architectural structural engineering planning and interior design firm based in Calgary, Alberta.

And through the integration of approximately seven additional employees, this acquisition will help to position Stantec as the largest and most geographically diverse comprehensive planning architecture and interior design firm in Canada.

Now, I would just like to make a few general comments about our markets.

The good news is, that last Friday there was finally an agreement on a new transportation bill in the U.S. to replace the T-21.

A new $286.4 billion six-year SAFT-LU program, this is the new acronym, which stands Safe, Accountable, Flexible Transportation Equity Act, a Legacy for Users.

SAFT-LU sounds a little bit easier to say.

The bill received House and Senate approval and is ready for signing by the President, which is expected in mid-August.

This is a welcome announce magnet that should improve our prospects in the transportation area in the U.S.

From our vantage point, market conditions in our Canada west region are excellent, right now.

There is flow of public monies towards infrastructure funding and there is a significant number of transportation and environment projects that are being funded in the public sector.

As well, the continuing high energy prices, a strong real estate market and combined with certain special events, such as Vancouver Olympics, and the one-time event, like the reopening of the border to Canadian beef,; are helping to create very strong economy and, certainly, excellent prospects for the balance of the year and the next few years.

In the U.S. southwest, California is, once again, the place to be in the U.S.

And the neighboring states of Arizona and Nevada are also feeling the glow of the California economy.

And to a lesser extent, Utah and Colorado are both benefiting from the opportunity to also export services to this market.

Our U.S. southwest operations are performing well this year, taking advantage of this stronger economy.

And we are well positioned to take advantage of the strong market, going forward.

In our Canada central region, we are still building our presence and anticipate that all of our business units will continue to experience strong demand for services over the next twelve months.

It is performing quite well, at present time.

Of course, market activity in Ontario is somewhat more tied to the U.S. economy, so our prospects are also tied to the U.S. economy in central Canada.

The market expectations for the U.S. northeast region are mixed over the next twelve months.

We are certainly optimistic in the buyer pharmaceutical sector.

But we do see some weakness in sectors such as residential development, institutional commercial buildings and transportation -- although this last area, transportation, will likely improve with the new SAFT-LU.

The U.S. southeast as a market, overall, is strong and, therefore, demand for all types of infrastructure will continue to be strong over the next twelve months.

To date, we have not been a successful as we would like in penetrating this market, but we believe that our investment and our efforts are starting to pay off so we do look forward to improved performance in this region.

Ladies and gentlemen, this concludes our brief comments for today.

And Don and I will now be available to answer any questions that you may have.

Tami, our conference call operator, will be able to explain the question-and answer-procedure.

Thank you, ladies and gentlemen.

[OPERATOR INSTRUCTIONS] First question is from Ben Cherniavsky with Raymond James in Vancouver.

Please proceed with your question.

Good morning.

I am sorry, I guess it is afternoon now.

Yes.

I was wondering if you can just maybe give a little color on the Keith company acquisition, what the timing of that might be like?

I think you mentioned in the note, it will close this quarter.

I don't know if you can have any more detail on that, if it is in the next couple of weeks, by the end of August or what have you?

And also just looking at your net revenue line, I know that, as a percent of gross revenue fluctuates quite a bit.

Are we going to see any change to that with Keith on your books?

Two questions.

First one, in terms of when we expect Keith to close -- the timing isn't totally within our control, because it does depend on getting all of our approvals on the SEC, and we are almost there, but we are not at a point where we can define the definitive date.

Our expectation, however, now, is that we're likely to close early in September, rather than late in August.

So if everything continues along the lines that we expect, we would expect early in September as a closing date.

As far as the percentage split between net and gross, I can only give you an estimate at this time.

But based on the key work that they're doing, it is possible that we could increase our net to gross, because there is a few less subconsultants that will likely be required on the revenue that is being generated by Keith.

Sorry, so you would be generating a lower -- you would be generating more net as a percent of gross.

That's correct.

Okay.

And what about gross margin, will that be permanently impacted all by Keith?

Or can we just assume something along where you have been trending?

Well, I think two things.

One, is I think, likely, that we'll trend on the higher ranges of what we've provided to you in the past.

The Keith margins on -- certainly, on their urban land-type work has been a little higher than our overall gross margins.

So I think that if you look at the range that we have provided in the past, we should be trending towards the higher end of that range.

Based on what we know right now.

Certainly, as we get into it a little bit more, we'll be able to put a little more color on that, as you say.

Okay.

Thanks a lot and congratulations on a great quarter.

Thank you.

Thank you.

Our next question is from Sara Elford with Canaccord in Vancouver.

Please proceed with your question.

Hi, guys.

Thank you.

Hate to focus in on the one part that was less than positive, but on the U.S. southeast discussion that you had, Tony, could you just go over in a very broad brush, what kind of challenges you have seen in that region?

Okay.

I think, again in hindsight, our timing wasn't perfect.

We kind of got involved in the region just before things started to slow down, in terms of the transportation work, because that region was a little bit more dependent on transportation-related work.

The other thing is that, we had expected that we would be able to do some additional acquisitions to assist with the sort of the large -- the relatively large number of offices that that region had for the revenue that was being generated.

So those things didn't happen -- so what happened is we ended up in a cost control mode, rather than a revenue increasing mode.

And as a result, we didn't achieve the targets that we originally set out for ourselves.

Now, having said that, we obviously, believe that this is still a very important region for us.

We're happy to have gone through the pain, if you will, of establishing ourselves, getting exposure and so forth.

And we certainly think the worst is behind us and the prospects going forward are more positive.

So I think we can look at this as being an investment, rather than as an area where we maybe didn't grow.

As a matter of fact, we shrunk in size from the time that we did our acquisition.

So in hindsight the timing wasn't 100%, but we still do believe that it is an integral part of what we want to do.

And we are quite confident that we've made all of the right moves and we're in a position where we can now grow from that base, albeit a smaller base than what we had expected when we first went into the region.

That's helpful.

Could you tell me how many employees you have there now?

About 240 or so.

Okay.

And I guess, I have one final question if I may, you've mentioned doing your annual -- your typical annual goodwill impairment review.

Could you give us an idea -- I am assuming that a lot of -- if there were to be any write-down with respect to that issue, it will relate to the U.S. southeast.

Could you give us an idea how much goodwill on the books is associated with that region?

Is that a question you can answer?

I will let Don address that.

Sara,it -- as you know, when Tony mentioned earlier, we do an annual impairment test for goodwill and we complete that every year in the third quarter.

It is a two-step test.

And the first step is to determine whether or not goodwill is impaired, and then the second step, if we determine that goodwill is impaired, is to determine a value for that goodwill.

And we use the services of a valuation consultant to help us with that.

In the U.S. southeast, the amount of goodwill that we carry on that is about $9 million Canadian.

But I guess the thing there is, since the U.S. southeast is contributing to our results, if there were any impairment identified, it would unlikely to be anywhere near the maximum amount of goodwill that's being carried.

That's super helpful.

And then just, sorry, one additional question, cause as you were talking, it prompted another question in my head.

You do say that the region is now contributing positively to your bottomline.

Is that the first time since you moved into that region that will be the case?

Or has it been fairly lumpy there, over the course of your time there?

It has been lumpy.

We've had some ups and downs, but in the last year it did not contribute at all in 2004, so this is a positive sign.

Okay.

Great.

Thank you very much.

Thank you.

Thank you.

The next question comes from RIchard Stoneman with Dundee Securities in Toronto.

Please proceed with your question.

Hi, Don, Tony.

Hi, Richard.

A couple more questions to carry on from Sara.

Could there be any tax recovery if there was a write-down on the impairment?

Richard, it is on -- the goodwill is not a tax-affected asset, and therefore, there wouldn't be any tax recovered related to that.

It would be a -- if there were an impairment determined in that particular case, it would be a non-cash reduction of the goodwill asset.

And would currency swings have anything to do with the magnitude of any contemplated adjustments?

No, the valuation of the goodwill -- because all of the earnings in any particular region are in native dollars.

And in U.S. southeast, for example, the revenue and expenses are all denominated in U.S. dollars, and the goodwill is actually carried in U.S. dollars.

I have given you a Canadian dollar equivalent, simply because that's the amount that we report on consolidated financials.

The swing that you've seen in the last couple of quarters in DS Atlantic, how would it be year-over-year -- an extra million dollars or an extra hundred thousand dollars?

Just to give us an idea of the order of magnitude.

In terms of operating income?

Yes.

It would be in the several hundreds of thousands.

So it is not a big number, relative to the rest of the P&L.

That's correct.

And Tony, could you give us some idea of the trend line in your industrial group?

What percentage it was that -- of your business at the end of last year and what percentage it is now?

You mentioned that that was improving in the last quarter, in terms of the color of that business and just sort of so we can get idea of how it is moving.

At the present time, if you look at sort of at a four quarter rolling number, the industrial group is about 10% -- is about 10% of our revenues.

And that has increased from the end of '03.

So if you take all of '04, from about 6% at the end of '03 to 10% now -- now a part of that increase has been through the buyer farm area and part of it has been through the energy and resources area, but we're currently at about 10%.

And final question, Tony, there was a major transit program approved in Vancouver today.

Would you be getting any piece of that light rail operation?

I don't know.

It's possible, the specifics of that one.

I know we have been submitting a number of proposals on those things.

And even though we're not in line for the prime consulting assignment, but we have submitted a number of proposals to work with the prime contractor on a number of areas like stations -- our architectural group, in particular, -- stations and some of the aligned components.

So it is a possibility that we would get some of that work.

Thank you very much.

Thank you, Richard.

Thank you.

The next question comes from Steve Laciak with National Bank Financial in Toronto.

Please proceed with your question.

Number one, on the AFDA, over what time period were those accruals built up?

So just to give us a gauge of -- ?

Steve, it is Don.

The loans per doubtful accounts, we've used a pretty consistent approach on that in the past and we've based our estimate of the allowance, primarily, on the age of accounts.

So it is fair to say that we have been consistent over a number of years on that approach.

And, I guess, if you take a look at the growth in accounts receivable over any number of years, you'll also see a growth in the allowance.

And what we've indicated is that, given our new Enterprise System, we're able to track, in much more detail, our loss experience, based on the aging buckets of each of those accounts.

And we've been able to, now, better estimate what that allowance should be.

Like you say, it is not -- it should be treated as one time, but it does relate to a certain time period?

Was it a two or three year time period?

Because you have to give yourself some credit for that $4 million.

Yes, Steve, it is difficult to nail it down with any precision, but two to three years is as good as estimate as any.

Don, another one on the accounting end, in Q4, your self insurance boosted your gross margin.

There is no commentary this go around, on that.

Was it not a factor at all in the higher gross margin that you realized here, this time?

Well, it wouldn't affect gross margins, Steve.

Our insurance captive -- every year we engage in actuary to provide us with a lost estimate for that captive.

And we do that in Q4.

What we're doing this year is, we're basing our loss estimate during the year on the actuarial study that was completed last year.

Once we're completed the 2005 actuarial study in Q4, we'll adjust those loss estimates to actual, but at this time, we're not aware of any reason to anticipate any significant adjustments.

Any adjustments that do come through, will be reflected in our administrative and marketing costs.

Okay.

Now the 57 then, there some commentary here, that they will fluctuate -- that they are an improvement based on your computer system.

How much of this should we treat as great projects in the quarter, versus permanent improvement in the way you operate?

Well, I think what Tony indicated earlier is that, we anticipate that our gross margin percentage this year will be trending towards the higher end of the range that we anticipated at the beginning of the year.

And I think we're going to see some fluctuations from quarter to quarter.

Can you tell me what that range was?

53 to 55% was what we indicated in our annual report last year.

Okay.

Thank you very much.

Thank you.

There is currently no additional questions in the queue.

If there are no additional questions, then, as always, we would like to thank everyone for taking the time to join us for today.

And certainly, we look forward to speaking to you again, next quarter.

Thank you, everyone, for participation.

And I will let the conference call operator sign everyone off.

Ladies and gentlemen, thank you for participating in the Stantec Inc.

Q2 2005 earnings conference call.

On behalf of myself and the rest of my teleconference team, thank you for using teleconferencing.