Stantec Inc (STN) 2005 Q4 法說會逐字稿

Thank you for holding for the Stantec, Inc. fourth-quarter and year-end results for 2005 conference call.

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

Thank you, Brenda.

Good afternoon, everyone.

And welcome to our 2005 fourth quarter and annual results 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 markets.

And then we will address individual questions.

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

Additionally, 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 commissions, located at SEDAR.com and at SEC.gov.

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.

This morning, we released the results of Stantec's operations for the year and for the fourth quarter of 2005.

I am pleased to report excellent results for 2005 to mark our 52nd consecutive year of profitability.

For fiscal year end 2005, gross revenue increased to 618 million, up 18.6%.

Net revenue increased to 524.6 million, up 16.8%.

And net income increased to 40.6 million, up 34.6%.

Basic earnings per share increased to $2.04, up 25.2%.

In the fourth quarter of 2005, gross revenue increased to 180.6 million from 127 million in 2004.

Net revenue increased to 151.9 million from 107.1 million.

Net income was 8 million compared to 9.6 million, and basic earnings per share were $0.36 compared to $0.52 in the fourth quarter of last year.

The decrease in net income and earnings per share in the fourth quarter of 2005 compared with Q4 of 2004 is due to several factors which I would like to expand on.

First, there was an increase in the effective income tax rate from 26.1% to 35%.

This account for about $1.2 million.

Associated with the three acquisitions completed in 2005, we had an increase in the amortization of intangibles of approximately 1.6 million.

We incurred certain costs during the integration of acquired firms.

In Q4, we integrated about 1,000 staff into the organization from The Keith Companies and Keen Engineering, which required understanding new systems, learning new practices and processes.

This results in a decrease in productivity until the learning curve is complete.

We estimate this impact in the 2 to $3 million range.

We are completing the first two years of our captive insurance program, so there will be some fluctuations in claims provisions until we have a longer history record.

In Q4, as part of the year-end actuarial review, we increased the provision for claims by $1 million.

Finally, the weighted average number of shares in the Company outstanding during the fourth quarter of 2005 was 22,307,604, and included the 3,328,776 shares issued as part of the Keith acquisition.

Now I'd like to review some of the highlights of the past year.

In 2005, we completed three acquisitions.

In August, we acquired CPV Group, architects and engineers in Calgary, Alberta.

CPV added about 60 employees, and solidified Stantec architecture as Canada's largest and most geographically diverse architecture and interior design practice.

In September, we completed Stantec's first acquisition of a publicly traded company.

The Keith Companies, who traded on NASDAQ, significantly strengthen Stantec's presence in the U.S. by adding approximately 850 employees, principally in California.

Then in October, we acquired green building specialist Keen Engineering, which added about 275 employees.

Keen increased our buildings engineering and sustainable design capabilities, and made Stantec one of North America's largest sustainable design teams.

Overall, we added over 1,000 staff to our operations this year, bringing us to approximately 5,500 employees and over 60 offices in North America.

In the midst of these three acquisitions, Stantec listed its shares on the New York Stock Exchange and began trading on August 5th under the symbol SXC.

As we have said many times, Stantec has an impressive depth and breadth of services.

And the following four projects, which we would like to highlight that we worked on in 2005, demonstrate the range as well as our ability to work as one team providing sustainable solutions to our clients.

In Kamloops, British Columbia, our architecture and interior design, buildings, engineering, and environmental infrastructure groups teamed up to act as the lead consultants in designing the Kamloops Centre for Water Quality, the largest membrane water treatment plant in North America, with a capacity to provide up to 160 megaliters, or 42 million gallons, of safe drinking water per day.

Targeting to achieve leadership in environmental design [and lead] certification, our team designed the building to perform 66% more efficiently than a comparable facility referenced by the model national building code.

Our sustainable solutions for the project also included habitat restoration, on-site [stormwater] management and treatment, and a wide range of water conservation measures, including the reuse of reject water for irrigating the plant site, along with a 19-hectare, or 47-acre, city park.

In Ontario, California, we were awarded a multi-million-dollar contract for the engineering, design, program, and project management of the eastern portion of the New Model Colony.

The New Model Colony is comprised of approximately 7,676 acres, or 3,106 hectares, consisting of 30 planning areas.

Stantec will provide professional engineering and consulting services for the backbone infrastructure on over 12 of the 30 areas covering approximately 3,500 acres, or 1,416 hectares.

These facilities will include 34 miles, or 54.7 kilometers, of Ontario Street, water and recycled water mains, sewers, storm drains and dry utilities.

Our energy and resources team designed and commissioned the electrical instrumentation and control apparatus that ultimately enables an energy distribution and services client in Edmonton, Alberta to burn gas extracted from the Clover Bar landfill northeast of the city for the production of electricity for export to the city's power grid.

Previously, the landfill gas was being flared following extraction, and the energy contents of the gas was lost in the process.

And finally, in North Carolina, our environmental management team completed an environmental assessment of the Tuckasegee River at Dillsboro for Duke Power.

After that assessment, Stantec developed a conceptual plan for removing the Dillsboro dam, one of several hydroelectric projects in the area, and restoring the river to its natural condition.

Stantec's hands-on community approach that included creating photo rendering and taking noise readings to demonstrate how the restored river would look and sound, helped to alleviate the residents' concerns about the major restoration project.

Now, I'd like to make a few general comments about our market going forward.

Overall, we expect the outlook for professional services in the diverse North American market to remain positive, with private and public sector spending on infrastructure increasing in 2006 for the near term.

There are a number of factors on which we base this expectation.

There is an overall shortage of public infrastructure in North America as a result of high levels of residential construction, creating a need for public infrastructure in areas like transportation, utilities and other public resources.

Also, in the U.S., the implementation of the new six-year, 286.4 billion SAFETEA-LU promises increased funding for highway projects.

We're also seeing an increasing awareness and focus on sustainable design and development, which is an area that Stantec focuses on.

Strong commodity prices are prompting the planning of pipeline, power plant, and other private infrastructure projects, particularly in Alberta, where we have one of our strongest market presence -- growth in cash reserves of private corporations, which will likely be reinvested in part in the design and construction of new facilities.

And finally, commenting on the single-family housing sector, which accounted for 34% of our business in 2005, and is expected to account for about 40% of our business in 2006 -- despite a slight decrease in housing starts the last quarter or so, this is still expected to be a strong year by historical standards in 2006.

And this continues to be fueled in the principal markets that we operate in by continued affordability, high employment, and positive economic conditions and buoyant consumer confidence.

And as we stated before, the areas that we're most heavily involved in this market include Alberta in western Canada, southern Ontario, southwestern Ontario and eastern and central Canada, California, Arizona, and Nevada in the U.S.

And finally, the anticipated strength of the infrastructure facilities market as we have described, coupled with the diversity of our operation, continues to provide a solid base for our growth and profitability in 2006 and beyond.

That concludes my brief comments for today.

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

Our conference call operator, Brenda, will explain the question procedure.

(OPERATOR INSTRUCTIONS).

Ben Cherniavsky, Raymond James.

Just a question on clarifying a number here.

In the press release, somewhere, you said that the provision for your claims was $4.6 million.

But I thought I heard you say earlier on in the call that it was about 1 something.

Was that 4.6 for the year?

Or did -- can you just clarify that?

I don't remember the 4.6 million, Ben, so I --

Just in your 58-page press release, there's a sentence that says there was a year-over-year $4.6 million increase in our provision for professional liability claims.

The $1 million increase is, as you can appreciate, we have an estimate during the year -- each quarter of our provision for claims.

And in the fourth quarter, our provision was $1 million higher than what we had initially anticipated.

And that arose from the actuarial study that we had completed in the fourth quarter which gave us better information with respect to the amount of claims provision that we should have accrued.

So basically then, just to clarify that during the year, each quarter, we make provisions for claims, or these potential claims.

And I think what you're referring to is the statement that says compared to 2004, the total provisions we were making and budgeting for in '05 were an extra 4.6 million.

So during the year, we budget what we think those numbers are going to be.

But because it's only been two years, we have limited information in terms of what we can do.

And basically, what happened is that in the fourth quarter, we were $1 million short to what we had been providing for after reviewing the actuarial study.

So it's not as if there was a $4.6 million hit all in the fourth quarter or adjustment all in the fourth quarter.

No.

Richard Stoneman, Dundee Securities.

A question on the environmental group and the transportation group.

The revenues were fairly flat on the year-over-year basis for both those groups.

And we've seen numbers out of the U.S. and Canada showing those areas improving over the last few months.

I'm wondering if you expect flat '06 over '05 or some growth?

We expect growth.

What you've seen is what has actually happened there.

But certainly, our expectation in '06 is that we will grow those areas organically.

I don't have a specific number for you.

But we certainly do expect those numbers to increase.

If you remember, in the environment area, part of the reason it was flat -- it actually did grow in '05.

But part of the reason was we divested about $8 million worth of business in the central Canada area.

So we made that up with increases in other areas.

So in environment, it's a little bit -- you have to take it within the context of the other things that we did.

In transportation, there wasn't a [divestiture].

That was simply the amount of work that we did in '05.

But in the U.S. market, we just hadn't seen the changes to the SAFETEA-LU on the projects that we were working on really have an impact in '05.

But our expectation is that they will have an impact in '06.

And is that the Goodfellow disposition?

That was the old Beak Group that was in Brampton.

Anthony Zicha, Scotia Capital.

Tony, you mentioned that your intangibles increased by 1.6 million related to the three acquisitions.

Does this really to any impairment test, or are there other possibilities of write-downs?

No, I'll let Don answer that, though.

The additional $1.6 million was the amortization of identifiable intangibles.

When we do acquisitions, the excess of the total purchase price over the tangible assets has to be allocated to intangible assets, which is either goodwill or identifiable intangibles -- which in our case, is primarily client relationships and contract backlog.

The goodwill, as you know, cannot be amortized, but it must be tested for impairment annually.

The other intangible assets, the identifiable intangibles, have to be amortized over their estimated useful lives.

And what that $1.6 million is is the additional amortization on those types of intangible assets that occurred in the fourth quarter of 2005 compared to the fourth quarter of 2004.

Steve Laciak, National Bank Financial.

Just on that same point, looking at your schedule, which is a little less than four times 1.6 -- these aren't extraordinary costs.

You're going to keep expensing them -- I guess reasonably large in 2006, and slightly less in subsequent years --?

Yes.

Normally, they have a different -- slight amortization periods, ranging anywhere from six months to 18 months for backlog.

But that would be -- the principal impact is in the first six to 18 months for those particular acquisitions. (technical difficulty) And then they decline unless we have new ones to add to those.

But generally, we have estimate what each of the intangible items are, what their likely lifespan is.

And since the majority of the intangibles are contract backlog for us, they're kind of in a six- to 18-month time frame.

So it's the contract that -- okay.

And your schedule there is really all the components of it -- it's just -- it includes the contract side of it --?

It does, Steve, include the client relationships, which typically have a longer lifespan.

The contract backlog, as Tony indicated, is typically six to 18 months, and other miscellaneous types of intangible assets as well.

The client relationships may go as far as five years.

Is that the average -- sort of what you're using?

It depends on the specific circumstances of each particular acquisition.

And we have to go through an analysis of the client relationships -- how long they've existed, what sort of value they bring to the Company.

And I think the range that we've seen to date is as long as ten years for some of those client relationships.

But each individual acquisition is going to be unique.

Tony, you talked already -- if I may ask one more, you talked about the divestiture.

But overall, the organic of 10 million, even -- I guess if you add back 9, then it looks better.

What's your own expectation on overall activity out there?

Can the organic sort of speed up?

That's a good question, because I think fundamentally our expectation for organic growth has been going up.

We were in that sort of 4.5% on an adjusted basis or so in 2005.

And we actually are getting pretty decent organic growth.

What has sort of impacted that number a little bit -- it would have been higher, but if you look at the number by geography, it has actually been higher than that in Canada.

It's been reasonably good in the U.S. West.

What has hurt us is we did have -- included in those numbers was a slight shrinkage in the East, where as we've indicated, we have had some issues.

And that's where we've been looking at making some changes.

And I think -- from our perspective, we believe we have addressed most of those issues in the East.

And if they stop sort of being a drag on those numbers, the rest of the numbers are going to look better.

So the only area that I would say we have been weak on the organic growth is the U.S.

East, which we hope to improve.

And we're also putting a little more emphasis there, including the most recent acquisition that we announced, just to bulk up and get a little bit more mass in the East.

And if we do that, I think we can increase our organic growth to higher levels than we had in 2005.

Sarah Hughes, Sprott Securities.

One question.

In your housing exposure, you talked about 40% of revenue.

The split between Canada and the U.S. -- is it similar to your overall split, or are you more levered to housing in Canada versus U.S., or the other way around?

Actually, no.

The overall split in housing is about -- it's a little more than half in the U.S. right now.

It's about -- I would say for estimate purposes it's roughly half and half.

As you compare Alberta and southern Ontario and then eastern -- in Ottawa, you put those markets together, they would be a little less than California, Arizona and Nevada.

All right.

I'm assuming in the U.S., the majority -- more than 50% would be California?

Or is it --

Yes, that's correct.

And that's in Southern California with the Keith acquisition.

Ben Cherniavsky, Raymond James.

Just a follow-up on some of the numbers in the quarter.

I remember when you acquired Sear-Brown, and you've had some integration expenses, what would those have been in the fourth quarter for the acquisitions that you were integrating this time around?

Or is that 2 to $3 million you talked about -- does that account for that?

I was assuming that -- that sounded like that was sort of forgone revenue.

Don, you can go first, and then I'll --

I think it's a little bit of combination of both.

Certainly, we incur integration costs in terms of new signage and downtime for people to go out and speak to clients and explain the new organization to them.

But there's also just a training time and an understanding time.

For us, whether the time is showing up as a G&A cost that doesn't get charged to a client, or gets charged to a project and not invoiced to client and therefore shows up as [direct] labor really doesn't make too much difference.

It's still a cost to us.

And we estimated the integration costs there by taking a look at what we think the operating income should have been in a normal period from these operations and compared it to what we are actually reporting.

And that's why it's a little bit of a soft number.

But the range is pretty reasonable there between the 2 and $3 million.

So would that include all the legal expenses as well?

Legal expenses, with respect to the acquisition and the other legal costs that we had in terms of SEC registration and New York Stock Exchange listing -- those would have been costs then that would have been capitalized as part of the purchase price of the Company, or as a charge to share capital for things like the listing costs.

I guess it's just that -- correct me if I'm wrong, but once -- wasn't the Sear-Brown cost estimated more like $6 million?

And this sounds like it's considerably less for a larger acquisition.

We're getting better, remember? (laughter) I think we said that we are getting better, and we had some bigger issues.

We were also in the middle of implementing our new system and also integrating the people at the same time.

I guess from our perspective, we think that considering the amount of noise that was going on in terms of the employees and everything else, and I think we had indicated that we would expect it to be better.

Overall, we think it wasn't too bad.

And we also think that fundamentally, like our operations, are strong.

These costs happen.

And we have to account for them.

But we have no concerns about the fundamental underlying operations in any of those areas.

Okay.

Could I get you just to quickly comment on the gross margin as well?

I know -- that fell down to 53.5% in the fourth quarter.

It sounds like you're still holding to 54 to 56 for 2006.

So is this just an issue of mix and lumpiness and all those kind of things?

I think you have answered the question really.

It really is something that we do see fluctuations from quarter to quarter based on the mix of projects, the status of various projects at any particular point in time.

And I think what's important to look at for this line item, as well as a lot of the other line items on the financial statements, is the annual number.

I think at the beginning of the year, we estimated that our gross margins for the year was likely to be in the range of 53 to 55%.

I think we ended up at just over that at 55.3%, if my memory serves correctly.

And looking at where we think we should be in 2006, we've increased our estimated range to 54 to 56%.

Anthony Zicha, Scotia Capital.

With reference to the claims, have they risen over time?

And can you elaborate in terms of what's a typical claim like, Tony?

In terms of [risen], the best way to answer that is -- I think as a percentage of our revenues, actually our claims experience, I think, is improving, because we've implemented better risk management procedures, starting from the initial contract reviews to then with self-insurance now being able to address the claims more quickly.

So I think that the majority of the claims that we get are actually handled more efficiently now than they were, say, two years or three years ago.

And if you look at an overall number, we actually resolved more claims than we added in the last quarter.

So we are making progress.

What is difficult to address now, say, compared to a few years ago, when we went to self-insurance -- because we self-insure the overwhelming majority of the claims that we have -- in fact, we have not dipped into our second and third tier of insurance yet -- is that there may be a little more lumpiness because we have to address the claims as they come up.

And we can't predict when they're going to come up.

So what happens is, if a potential claim comes up in December, then as part of the actuarial review, we end up having to account for that versus, say, if we were -- the old ways, when we used to get insurance, but those premiums went through the roof, and that wasn't a good strategy either.

You basically pay your premium every month, and you don't have to worry about these changes.

So until we get a little bit better history, say, three or four years, there may be a little more of these types of fluctuations if we haven't done as good an estimate as we can of what the likely occurrence of potential claims is.

So from an overall point of view of the company, we have a better handle on it, and we have fewer claims.

From the point of view of the potential impact on the financials each quarter, there could be a little more lumpiness.

And as what you saw in the fourth quarter, where we had that extra million.

But that could just as easily come back in the positive during 2006.

What's a typical claim like?

Can you give us some examples?

I can give you our perspective on a typical claim, that some are simply what I would class as nuisance, or basically a misunderstanding.

I would say the majority of the claims that we get are not actual technical design errors, but there may be a misunderstanding on the scope or terms of reference of what the assignment was and sort of what we deliver to the client and perhaps what the expectation was.

So that could range from someone claiming that that affected the timing or schedule on their project.

And it could be a claim for $25,000 to a claim for $1 million.

So what we do is we do an assessment, we have our own in-house people to do that as well as we work with our external insurers, and try to work on that.

But there is no such thing, I guess, as a typical claim.

It generally arises out of a misunderstanding of something that -- the client expected something, and we delivered something that we thought was what they wanted, but they didn't.

But occasionally, we do make design errors, or -- like field errors.

So we may, for example, stake out -- if you're staking out a roadway, it may be offset by a meter.

So that they built part of it, and then they have to go back and fix it.

So occasionally that happens, or you may stakeout the wrong property line or things like that.

So it's basically what we call errors and omissions in delivering our professional services.

(OPERATOR INSTRUCTIONS).

Sara Elford, Canaccord Capital.

I was going to resist from asking questions because of my voice -- I am battling a cold, so my apologies.

Just one question for you, Tony.

I'm curious if you could comment on how the integration of Keith and Keen went in terms of getting all their data and processes onto your system.

I want to know whether or not that was a fairly smooth process, and you were happy with how it went, and whether you are where you want to be now.

We're not 100% where we would like to be.

I think overall, I would say that we are happy and we're satisfied with what we did.

But we are never really 100% happy.

What really has happened -- we're seeing some of the impact, we haven't quite caught up with the billings yet.

So our earned revenue is ahead of our billings.

And that creates some issues with provisions on work in process and so forth.

So I would say that on a scale of one to 10, I'd give it an eight.

And if you want a comparison, I would have given Sear Brown maybe a four or five at best.

That would have been my next question.

Yes, so I think we're doing better, but we're still not where we would like to be.

But overall, the data and everything was converted in the fourth quarter.

They are fully 100% onto our systems.

So the conversion activity has been done.

But with any new system, there is this training, people learning new processes.

And what tends to happen during the first little while is that people will still sort of superimpose some of their old sort of manual processes onto the new processes that we have.

It's almost like people sometimes need to satisfy themselves that the systems are actually doing and giving them the same numbers as they were getting before.

So there is that familiarization that -- people just aren't as effective as when they're fully trained.

So although the systems are all up and running, and we're using it 100%, we're not as efficient in using them as we could be.

And how long do you think it takes you before they start really embracing the tools that it will offer them?

Well, our plan is that by the end of the first quarter -- which is another five or six weeks, so we're almost there -- is that the majority of that acceptance and the improvements will be in place.

But then, it will likely be smaller improvements for the rest of the year in '06.

So this is a continual improvement thing.

But the bulk -- getting over the big acceptance in that should be over by the end of the first quarter.

Currently, there are no questions in the queue.

Well, if there are no other questions, we appreciate everyone's participation.

And that would conclude our comments for today.

And thanks, everyone, for joining us.

And as always, we look forward to speaking with you at the end of the first quarter.

Thank you.

Thank you for participating in the Stantec, Inc. fourth-quarter and year-end results for 2005 conference call.

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