Stantec Inc (STN) 2005 Q3 法說會逐字稿

Thank you for holding for the Stantec Inc.

Q3 2005 earnings conference call.

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

Good afternoon, everyone and welcome to our 2005 third-quarter conference call.

Joining me is Don Wilson, our Chief Financial Officer.

As usual, we will comment briefly about our results and about the outlook for our market and then address any individual questions.

Before we begin, I would like to caution you that our discussion this afternoon will contain some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Some of these forward-looking statements may involve risks and uncertainties and actual results may differ materially from those discussed in these statements.

Additional information concerning factors that could cause actual results to differ materially from those discussed in this conference call is contained in Stantec's filings with relevant securities commission located at Sedar.com and at SEC.gov/edgar/shtml.

As usual, I would also like to advise you 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.

Therefore, we 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.

Now with the rest of our presentation.

The third quarter was one of the busiest and certainly most exciting periods for Stantec since I became CEO.

We achieved some major milestones by listing on the New York Stock Exchange and completing several acquisitions, including the largest in our history.

With all of this going on, I am also pleased to report that we achieved excellent results for the third quarter of 2005.

Gross revenue for the quarter increased 4.5% to 146.1 million from 139.8 million in the third quarter of 2004.

Net revenue increased 5.1% in to 125.9 million from 119.8 million.

Net income increased 61.2% (ph) to 12.8 million from 8.5 million.

And basic earnings per share were 43.5% higher at $0.66 versus $0.46.

On a year-to-date basis, gross revenue increased 11% to 437.4 million.

Net revenue increased 8.9% to 372.7 million.

Net income increased 58.5% to 32.6 million and basic earnings per share increased 52.7% to $1.71.

Several factors contributed to the strong performance in the quarter, including the fact that we are likely operating on 11 out of 12 cylinders with very few weaker operations in the overall mix of practice areas and regions.

As a result of this, it was an increase in gross margins of 4.6% compared with the same quarter in 2004.

Gross margins are influenced by the type and mix of projects in progress.

We expect that there will continue to be positive and negative fluctuation in the reported gross margin as a result of changes in our service mix over the next year.

Overall, our operations in most of our regions and practice areas are performing well, including our operation in the U.S.

Southeast, which are improving and contributing positively to our results.

We conducted our annual goodwill impairment review during the third quarter.

An independent third party was contracted to perform evaluation of the goodwill of our U.S.

Southeast operation.

Their review concluded that there was no impairment of goodwill.

During the third quarter, we also completed the merger of The Keith companies, which added approximately 850 employees in 17 locations throughout the U.S. to our Company.

This addition was followed after quarter end by the acquisition of Keen Engineering, a 275 person company with 10 offices in Canada and two in the U.S. that specializes in green building systems design.

Through the Keen addition we now have one of North America's largest integrated sustainable design teams.

I would now like to highlight some recent project awards that illustrate the evolution of our project work at Stantec as we increase in size and scope of our practice.

I want to provide a little more insight into Stantec's comprehensive service offering and the diverse expertise of our professionals.

Stantec is an attractive partner to work with in many areas for firms looking for either local or specialist expertise.

For example, we are pleased to be working in association with the world-renowned Studio Daniel Libeskind based in New York City on the design of the Aura, a 39 story, mixed-use condominium complex located in downtown Sacramento.

Stantec is providing local project architecture, mechanical and electrical engineering and landscape architectural services to support the development, which will include 282 residential condo units, retail space and an integrated on-site parking structure.

Our work in the area of sustainable development is also maturing as we take on increasing leadership roles.

One example is the conceptual development, detail design, provision of services during construction and operation monitoring of a sustainable landfill biocell at the Shepard Waste Management facility in Calgary, Alberta.

Our Environmental Group has designed the biocell to function in a two phase cycle that biodegrades organic waste material, collects and recirculates leaching and collects landfill gas a source of energy.

Following the completion of the aerobic cycle, the biocell can be excavated and reused.

Thus ensuring the sustainability of waste treatment at the facility.

In Vancouver, British Columbia, we are pleased to report another assignment associated with the 2010 Winter Olympics.

We are using a sustainable approach in preparing the urban design and site servicing plan for the Southeast False Creek community, which is the future home of the Athlete's Village.

This lead targeted project will be developed on a 36 hectare or 80 acre reclaimed brownfield site near downtown Vancouver and will showcase green technologies and construction processes for storm water management, environmental protection and energy use, including the use of 100% renewable energy sources to produce a greenhouse gas neutral neighborhood.

Of course lead (ph) is the U.S.

GVC's leadership in energy and environmental design program for those who may not be familiar with it.

Some other interesting projects include an assignment in Cornelius, North Carolina to prepare the master plan and provide architecture building engineering and urban land engineering services for the development of Cornelius Town Center.

Forty acre or 16.2 hectare mixed-use, residential and commercial retail community that will make up Cornelius' new downtown.

Designed to be a live/work community, the district will include three-story buildings with retail shops on the ground floor and apartment condominium units above.

The live/work community is an exciting concept that is quickly becoming a popular alternative to some suburban developments.

I would like to conclude with some general comments about our key market.

From our perspective, market conditions in both central and western Canada continue to be robust principally supported by higher energy and resource prices.

At this time, we do not see any immediate change to these positive conditions.

The strong Canadian dollar may gradually impact the industrial manufacturing sector in central Canada or particularly in Ontario.

In the U.S. market, Stantec is better positioned in the West where we continue to see positive market outlook.

Work and prospects are still very strong in the urban land sector, especially in California and Arizona.

Although we're just beginning to exploit the potential in the public sector in California, we believe that we are establishing a solid platform to expand our environmental and transportation services in this market.

In our U.S.

East region, our market outlook is mixed.

In general, the market demand is good in the Southeast, particularly in environment and transportation, and a little weak in the Northeast.

Stantec is still not as well-positioned as we would like to take advantage of the more favorable market conditions in the Southeast because of our relative size and market presence.

Our plan is to strengthen our position through selective acquisitions over the next year or so.

In the Northeast, the biopharmaceutical sector is stable for us while the institutional commercial building sector is weak.

We expect our prospects in the transportation area to improve as a result of the passage of the new transportation bill.

Overall, I think that the market outlook in the areas that the Company operates in are strong and likely the best that they have been in the last few years.

This concludes our prepared brief comments for today.

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

(OPERATOR INSTRUCTIONS).

Ben Cherniavsky, Raymond James for Vancouver.

Congratulations on another good quarter.

My question is about the Keith Company acquisition and really have two parts to it.

First, when you did -- I remember last year when you integrated Sear-Brown, you had a fair amount of -- it had impacted the quarter when you actually closed that deal.

You had some revenue slippage and you had some non-recurring costs, legal costs and those sorts of things.

Did you see any of that in the third quarter when you closed the deal on Keith?

The second part about Keith is whether or not you have got a number for what it did contribute for the short period of time it was on the books in the third quarter?

There's probably two or three parts to that question.

Ben, this is Tony and I will get Don to give you the number on the revenue increase in the quarter.

So to address your questions about the integration noise or slippage and things that happened.

Clearly some of the expenses that were incurred as part of the transaction were incurred in the third quarter.

However, we only had two weeks of the term in our results and as far as the integration is concerned in part of the first quarter where there may be some reduced utilization of staff because of some additional (indiscernible) cost to do the integration and so forth, those types of costs will not show up until the fourth quarter.

So based on our previous practice and our previous acquisition, there will be some costs associated with these types of integration issues in the first quarter immediately following the acquisition.

And we expect those costs to be incurred in the fourth quarter but as we had indicated after the Sear-Brown, I think we did learn from doing that acquisition and our expectation is that the impact won't be as great as it was with Sear-Brown.

Okay.

But if there is any impact it would be yet to come.

It wouldn't have been material in the third quarter?

That's correct, other than expenses like thinks like legal fees that were certainly incurred in the third quarter.

And then I'll get Don.

He should have the number of roughly what I think what the fee volume was.

It's Don here.

I don't have the precise number for the revenue that was added through the Keith acquisition but, as you know, we closed that transaction on September 15th.

So there would have been about two weeks worth of revenue reflected in the first quarter from Keith.

And I think you can -- if you take a look at their historical numbers to get a sense of what volume they were generating prior to that point.

Fair enough.

Thanks very much.

Richard Stoneman, Dundee Securities from Toronto.

Good afternoon, Tony, Don.

A question on buildings.

It has been a major contributor this year to date in both revenue growth and in margin growth.

Will this trend continue?

Well I think the reason that there has been an increase in the contribution is because we have done a number of acquisitions and there was some good organic growth in those areas over the past year.

We had done Dunlop Architects in Toronto and then CPV earlier this year and then we have done Keen, which really is not reflected in any of those results yet.

So I think that, in general, the growth in that practice area is likely to continue ahead of the growth in some of the other practice areas, at least for the next year anyway just based on the things that we have done during 2005.

The only area that is weak in that area and we indicated in our notes is that the area in the Northeast, the buildings group there has not been doing as well but on an aggregated basis, the group is still doing better as you have indicated but the only weak area that we see in that area for us is the Northeast.

Well it's up over 50% year-to-date.

That's pretty good, Tony.

The other one is in the urban land area, have you noticed any softness in the Ontario market at this point?

It depends on your definition of softness.

If you compare '04 with '05, the '05 numbers are slightly below the '04 numbers.

So if that is an indication of a little bit of softness then I would say that is the case.

It's not like anything -- it's a matter of degree -- the volume and the relative profitability is a little down from last year.

It certainly has been more than made up in other areas of the Company, particularly in western Canada and Arizona to date and we expect in California to come.

Steve Laciak, National Bank Financial from Toronto.

Number one, could we get -- I'm sorry I missed the first part of the call.

You may have addressed it.

But just some metrics on Keith, like how much costs you may take out.

Secondly, what the amortization of any non goodwill, non depreciation items might run at and just your anticipated level of accretion by the time all the costs, any cost savings, if you can speak of that, are implemented as well.

So if you could speak on that first and I'll come back with another question.

It's Don here.

To speak specifically to the question with respect to intangible amortization.

At this point, we haven't completed the purchase price allocation for the acquisition.

That will be done during Q4.

In the filing of the F-4 document, which was the SEC registration document, we had our best estimate at that point of the purchase price allocation and there was an indication in there of how much of the cost was to be allocated to each of the identifiable intangibles and what the anticipated amortization period was going to be for each of those.

We don't have any better information to date with respect to those assets and their amortization periods than we did at that time.

So all I can do is suggest that just refer you to the F-4 for any of those estimates at this time.

How about cost savings and accretion and all that?

I think again beyond what was published in the F-4, I don't think we have any better information.

We did have some discussion at that point about some of the activities we might undertake in combining the two organizations.

Will you address that at a later date?

Well, I think what we will see is as result for the fourth quarter and throughout 2006 are published, the results of the combination of the Keith Companies will be reflected in those reports along with the results of any other acquisitions that we are doing as we go forward.

So we have to wait and see?

I think at this point I don't have anything more in terms of information, Steve, than we did a couple of months ago.

Okay.

But again outline the plans for cost reduction in the two organizations by the time you put them together?

Well Steve, I think, like Don said, we, over the last three or four months, have kind of indicated some of the areas where we would like to look at some cost savings.

We have in the F-4 filings where we could and we had specific pro forma information.

We have pro formaed some of the numbers but we haven't done specific or made any commitments to specific cost savings and synergies associated with that particular acquisition.

Our business model, as we have indicated many times, is a full and total integration of all of the companies that we acquire and part of our discussion and part of our reason for the site visit, if you will later this week, is to see how we put the plan into action in terms of full integration.

And once the companies are integrated, we no longer look at the cost of the individual companies.

They basically get integrated 100% and what you have to look at is the overall performance of the company and how the company improves either its gross margin or its SG&A costs and so forth.

And we don't attribute those individual improvements to -- the overall improvements to any individual acquisition that we do.

We think that there our business model relies on having a total and complete integration of the company and the consolidated result is what results from this.

And we have really have never tried to track individual contributors to that because it is fundamentally not the business model that we use.

Okay.

The other item now.

You have had two quarters in a row of significantly better than historic performance.

Can you comment to -- and thank you for the information now that you are disclosing on a business practice area.

That is helpful in seeing it.

Your improvements are across the board.

So I take it that the business organization, all of your steps have helped out on that side.

But at the same time it is concentrated in buildings and urban land.

How should we treat the numbers of the last two quarters?

Are they a function of a strong market, a function of specific contracts that you have that have been exemplary on margin or significant improvement in your core business practice?

Well, Steve, it's Tony.

I think it's a combination of all of the above and as we said, our business model traditionally if we have a 12 cylinder car, we're maybe operating on nine or ten cylinders and sometimes because of strong market conditions combined with our own execution in individual markets and practice areas, we fire on more cylinders.

And obviously our goal and our objective is to continue to fire on as many cylinders as possible.

But it is not always possible because things come up and market conditions change, individual projects change and so forth.

So clearly we have had to -- I think we have had like eight years of excellent performance --

I realize that but the last two have been --

And I guess what I'm saying is we have had two quarters that have been even better than what we normally do.

Our goal is to try and maintain a high level of performance.

But as we have indicated many times, it would be unrealistic to expect that every quarter going forward is going to be the same as these quarters.

Can we have one or two more?

Perhaps.

Can we go back to the more traditional performance, which is still pretty good?

I think that is possible as well.

Quite honestly, we don't have any better crystal ball than you do in terms of trying to predict with all the market and execution forces are out there.

All we can do is say look back and see what we have done in the past.

As much as we would like to be able to predict what's going to happen in the future, all we can do is keep relying on the record and the performance that we have had in the past and we can do better in some quarters versus others.

But I wouldn't take one or two quarters, like we've indicated before, I wouldn't take any one or two quarters as being the long-term trend.

And last point, just tax guidance?

Steve, it's Don.

To the end of the third quarter I think we are using a 35% effective tax rate and based on what we see for the rest of the year, we still believe that that is our best estimate of the effective tax rate for the rest of this year.

And next year?

Next year we will know a little better after we complete this year and I think when we produce our annual report for 2005, we will be in a better position to provide you with some ideas of what we think the tax rate is likely to be in 2006.

Hillary Lawson, Sprott Securities.

Revenues were down 12% by the U.S. year-over-year.

Should we expect to see another decrease in Q4?

Well not in the U.S. because we will be adding the Keith acquisition in the U.S.

Can you give a little insight into what happened this quarter?

Well it was a combination of things, including the fact that the exchange rate -- Don probably would have I think in the MD&A, there is an actual number.

I think the exchange rate alone was about 8 million give or take.

Just based on the -- because we consolidate in Canadian numbers.

So the majority of that change was likely due to the exchange rate.

So you're not seeing a decrease in business in terms of U.S. dollar business?

There are some areas of the business.

I think we had indicated in the previous quarter -- we did close and consolidate some offices in the East.

So some of the reduction would be associated with the fact that we did streamline some of our operations in the East.

So when we close certain offices and operations that would have an impact on revenue, on the top line anyway.

The reason we do that is to improve the bottom line.

Okay.

Some of these operations were not contributing positively.

In fact, they were contributing revenue but not operating income.

So we're actually better off.

Okay.

Do you know what your most recent employee count is?

Sorry?

What our employee count is?

Yes, with the closing of these acquisitions.

Our current count is -- we're just in the 5600 range.

There are currently no more questions holding in the queue.

That's good.

If there are no more questions, again, we would like to thank everyone for joining us today and Don and I look forward to speaking with you again in the near future.

Thank you very much for attending.

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

Q3 2005 earnings conference call.

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