Stantec Inc (STN) 2006 Q1 法說會逐字稿

Thank you for holding for the Stantec Incorporated first-quarter for 2006 conference call. I'd like to introduce your Chairperson, Mr. Tony Franceschini. Please go ahead.

Thank you, Anna. And good afternoon everyone and welcome to our 2006 first-quarter conference call. Joining me is Don Wilson, our Chief Financial Officer. As usual, we will make some brief comments about our results and some brief comments about the outlook for our market and then 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 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 can be found in Stantec's filings with relevant securities commissions located at SEDAR and EDGAR.

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 or joining us today in a listen only mode and who wish to quote anyone other one to Don or me to please request permission to do so from the individual concerned.

This morning prior to our annual meeting, we released the results of Stantec's operation for the first quarter of 2006. I am pleased to report that we are beginning the year with strong performance. Gross revenue for the quarter increased 31.3% to C$185.3 million from C$141.1 million in the first quarter of 2005. Net revenue increased 36.9% to C$163.1 million from C$119.1 million. Net income increased 69.5% to C$11.4 million from C$6.7 million. And diluted earnings per share were 42.9% higher at C$0.50 versus C$0.35.

In general our operations in most of our regions and practice areas performed well during the quarter. You could say that we are firing on 10 to 11 cylinders in our 12 cylinder car, an analogy that we have used before.

Performance was very strong in our Canadian operation particularly in the West and strong in our U.S. operations, U.S. West operations, sorry. Performance in our U.S. East operations although improved over 2005 continued to be weak principally due to lower revenue. Over the past year, we have been focusing on a streamlining these operations to improve performance which has resulted in a reduction of revenue. We expect these initiatives to gradually improve our financial position as we progress in 2006. Of course we will continue to monitor this when we will be undertaking our regular goodwill impairment analysis in the third quarter of '06.

During the quarter we completed the acquisition of Carinci Burt Rogers, an electrical and illumination engineering firm based in Toronto. The integration of this staff will strengthen our growing presence in the greater Toronto area and bolster our building's engineering and elimination design capabilities.

After the quarter end, we also completed the acquisition of Dufresne-Henry, a multidisciplined engineering, planning, environmental and landscape architecture firm headquartered in North Springfield Vermont which added over 270 employees in 12 locations to our Company. Along with complementing our New York operations, this acquisition will expand our services into four new states across New England and create an initial platform for growth in Florida.

I now want to highlight just a few projects that we were awarded during the quarter and in keeping with our annual meeting theme of today, to showcase our growing involvement and sustainable development and particularly some new assignments in the buildings and environment areas.

For example, our buildings engineering team is providing mechanical and electrical engineering design services for the development of the Calgary Campus digital library as well as the Institute for Sustainable Energy, Environment and Economy, ISEE, at the University of Calgary. The digital library will provide space for modern computer environments and wireless networking technology on the University campus. And the ISEE building will provide space for the promotion of sustainable energy research, teaching and technology. Both projects will be constructed to meet the criteria for platinum certification by the Leadership in Energy and Environmental Design, or LEED, greenville building rating system.

In the water and wastewater treatment sectors, our environmental infrastructure team is providing the process, control systems and architectural design of a water treatment plant in [Cormorant], British Columbia. Scheduled to begin operation in 2009, the plant will employ ultraviolet disinfection technology and serve a community of 25,000 people that currently does not have a water treatment facility.

Also of note during the first quarter was the aware of several projects involving the design of infrastructure that is complementary to the oil and gas development sector that is occurring in Alberta. Just one such example is our transportation group which is designing the widening of highway 63 throughout the oilsands development area of Fort McMurray to six lanes as well as two new interchanges and additional bridge structures across the Athabasca River. And these highway improvements are expected to be completed by 2010.

And we're also pleased to be providing civil engineering services for the development of a 230 acre, or 93 hectare regional park facility in Sparks, Nevada. Because of concerns for water conversation and the need to reduce long-term maintenance in this instance, the 12 playing fields which are included in the park will be built with artificial turf.

So overall the first quarter was very good for our Company and in most of our region. We are servicing thriving economies for the most part which makes our outlook and prospects for the balance of the year very positive.

I have a few general comments about our market going forward other than this statement above. Overall, we do expect the outlook for our services in the diverse North American market to remain positive for the balance of 2006. From our prospective and our geographic presence, market conditions are good. Canada continues to be strong particularly Western Canada where both Alberta and BC are in up cycles. Our ability to meet demand is actually starting to be impacted a little by a shortage of qualified professional and technical staff in most of our practice areas in these western provinces.

The Ontario market is also doing well but has slowed a little from last year. The continued strength of the Canadian dollar against the U.S. dollar may have a negative impact on export activity for the industrial and manufacturing sector later this year so the Ontario market outlook is perhaps not quite as positive as Western Canada but we believe still stable.

In the U.S. West, market conditions in California, Arizona and Nevada remain strong including the urban land sector and residential development. Large tracts of raw land in less mature areas continue to be acquired by developers which bodes well for longer-term stability of this practice area in that region. In addition, the demand for a public infrastructure in the U.S. West continues to be a high since it still requires improvements just to service existing development which has already been done. There is a bit of a lag between development that's already in place and the supporting public infrastructure to support it.

In the U.S. East, the overall market where Stantec has a presence is relatively flat with some bright spots being areas such as increased spending on transportation projects associated with safety [LUs] starting to come on stream. The private market is also a promising area for growth in the future particularly in the buildings, higher education and the energy sectors. As well, the Northeast is starting to see some commitments being made to develop energy related infrastructure to support renewable energy and natural gas assets.

Our newest market in Florida is actually quite strong particularly for housing and related infrastructure. However, at the present time, our presence in the area is currently small and this is something that we will be working to grow over the next year or so.

Those are our brief comments for today. And Don and I will now be available to answer any questions that you may have. Anna, our conference call operator, will explain the question procedure.

(OPERATOR INSTRUCTIONS) Sara Elford, Canaccord Adams.

Hi guys. Just actually I'll go with one question. I'm kind of curious on this, Tony, if you can comment on it. Stantec obviously just listening through on your webcast for your AGM, it struck me that you've obviously come a long way. And I guess my question is whether or not you have seen sort of an improvement in your ability to attract professionals outside of acquisitions? When you mentioned that you had crossed the 6000 mark as far as employees during your presentation, it struck me that that was higher than I would have thought. And obviously as you get bigger I'm just wondering whether or not you're finding that Stantec is becoming maybe somewhat of a preferred place to come for some engineers out there?

Thanks, Sarah, that is a good question actually and glad you asked that. I think the answer to that is generally yes but not everywhere. I think that we have come a long way. We have positioned ourselves as one of the top three firms in a number of areas both geographically and in terms of practice areas. And I would say that generally in those markets where we have been able to position ourselves as one of the top three firms, we absolutely are getting new people joining us and we're becoming a preferred place to work in.

Having said that, we can't make that statement about every single one of our areas. And clearly in some of the what we would call the emerging areas where we have less of a footprint, we're not quite as well-known an entity and it's a little more difficult in those areas. But if you look at our market right now, I would say that in about 85% of the markets that we are in, 85% to 90% which would represent Ontario West and Canada and sort of the five or so western states that we are in, we would generally be in that positive position.

In the U.S. East that represents in that 10% to 15% of our market, we are not quite there yet. But as we improve I think the same can be expected. So we are in fact hiring more organic staff. I think we hired over partly because of summer as well in Canada but we hired over 100 staff this week I think.

Great, thank you.

Ben Cherniavsky, Raymond James.

Good afternoon. Something that has struck me as I wouldn't say unusual but it's not how I would envision it, is the performance of your organic growth. I commend you guys for breaking down that revenue by acquired and organic growth but I would not have expected to see it so meager against the backdrop of such a strong infrastructure market. Particularly urban land for that matter. I recognize some of that is probably foreign exchange but I just wonder if you can comment a little more on what is going on there?

Okay, two things. First in terms of the definition that we used is we say that organic growth is really things that have been done in the Company excluding acquisitions we have done in the last two years. So when you look at our organic growth, we actually had if you start to break it down across the Company, we would have done quite well if it wasn't for the U.S. East. And like I mentioned when I mentioned that we had lower revenue is that we have had some challenges in the East and the way that we have chosen to address it is to streamline the operation. And by streamlining the operation, this meant that we've gone more for quality of feeds rather than quantity of feed. And as a result, we're down actually a little over $5 million in revenue in the East.

So it's things like the U.S. East that is kind of offsetting the overall organic growth. If you looked at Ontario, for example, it's about flat for us. U.S. East was down about 5 million, Western Canada is actually up over last year. And the U.S. West of course includes TKC, but is actually slightly -- even if you take out TKC, it's slightly higher than it was last year.

So I think the reason the overall mix is lower is because we're being impacted by the US[Es]. If that improves the way we expect it to improve I think you'll see that Q1 is probably a bit of an anomaly when you look at the year overall.

I haven't got the numbers in front of me and I don't want to pin you down to precise numbers. But would it then be fair to say that if you stripped out U.S. Southeast and the foreign exchange impact that your organic growth rate would be closer to double-digit, is that a reasonable estimate?

I'm not sure that --

Or high single digit?

-- that calculation in my double-digit. I don't think I can't do that. Don, can you do the math that quick? But --

It would be much higher.

It would certainly be much higher, yes. I think you have to realize that when we talk about organic growth some areas are growing and some areas are actually flat or declining. And when you add it all up, that's what tends to happen.

Okay, that is a great answer. Thanks a lot.

Peter Brieger, GlobeInvest Capital.

Hi gentlemen. A great quarter. I have two macro questions and then I'll come back in a few for nits on the income statement or perhaps I'll reverse that. Despite the disappointments in the Southeast, am I correct in assuming that the gross margin and the pretax margins were better for the first quarter than they were up to the year ended December? I calculate the March gross margin as being 55.7 versus 54.3 for the year and 10.4 versus 8.7 pretax margins. That is a bit inconsistent. I guess I can assume that had we not had the difficulty in the Southeast those would be significantly higher?

Peter, it's Don Wilson. I think you're for the most part right in terms of the calculation. One of the things that you see if you look at the Company over a longer period of time that we do see fluctuations in quarterly results year-over-year from quarter-to-quarter. And a lot of that has to do with the diversity in our operation and our 3-D risk mitigation model.

I think if you take a look at our gross margin for the quarter, it is in the range that we anticipated in our 2005 MD&A. We indicated that our expectation for 2006 was that our gross margin would be between 54% and 56%. It is 55.7% for the quarter. We indicated that our administrative and marketing costs would be between 40% and 42%. It's 41.9% for the quarter. And we indicated that our effective tax rate would be between 32% and 34% and it is 33% for the quarter. So I think the answer is that we are in the ranges that we anticipated and that we did outline for the year.

Can I sneak another one in which is a sidebar question? And that is that cash is down considerably from the year end and also it would please me immensely that the allowance for doubtful accounts is down as well given the fact which is amazing given the fact you've increased the accounts receivable and so on. Any comments?

With respect to the cash, typically our first quarter is a quarter when cash does decline. There are a number of things that occur in the first quarter. First of all, we do typically pay our annual employee bonuses in the first quarter, our annual income tax payments are made in the first quarter. And those do have an impact on the cash during the quarter.

In addition, just in terms of timing we have a biweekly payroll and just in terms of the timing at the end of the first quarter, we had one less weak outstanding in terms of our payroll accruals than we did at the end of the year which means one more week that we've actually paid out in cash. So all of those things combine to use cash during the quarter. And I think if you take a look historically that is typical of our first quarter.

With respect to the allowance for doubtful accounts, yes it is lower at the end of the first quarter than it was at the end of the year. And that is I think if you take a look at the quarterly allowances during 2005 you also see some fluctuations quarter-to-quarter. And those are based on our best estimate of the collectibility of the accounts at any particular point in time. A lot of the reason why the receivables are higher and part of the reason why the allowance is lower is if you recall, we completed the Keith acquisition just at the beginning of the fourth quarter of 2005. And we converted all onto the Stantec Systems during that quarter. Now it always takes a little while to get the processes in place and get the invoicing up to speed. So at the end of December we had higher work in progress in that area than would normally be expected.

During the first quarter of 2006, we have pretty much caught up on our invoicing and that work in progress has now declined. And I think you see that on the balance sheet from December 31st to March 31st. And that has been related to an increase in the accounts receivable most of which is fairly new receivables as well. So that would explain or have partial the explanation for the lower doubtful accounts number.

(OPERATOR INSTRUCTIONS) [Calvin Chung], National Bank Financial.

Good afternoon, fellas. I'm trying to get a sense of the percentage of net revenue coming from urban land. I see how the gross revenue line was more or less slightly up sequentially, the direct expenses underneath gross revenue came off sequentially and I guess just to get a feel for the direct expenses in urban land. I would have thought that there's probably more of that that pertains to buildings and industrial. I just wanted to hear what color you might be able to give on the urban land percentage of (multiple speakers)?

Thanks for the question. In our annual meeting we've kind of summarized our Q1 four quarter trailing percentages of each of our practice areas. And urban land on a four quarter trailing basis to the end of the first fourth quarter is 35% of our revenues and then buildings is 25%. And environment is 17%, transportation is 14% and industrial and project management is 9%.

I appreciate that, thank you.

Peter Brieger, GlobeInvest Capital.

Just like a bad cold, you can't get rid of me. The macro question is stripping out the acquisitions, what was the overall year-over-year growth? And sort of secondly, when you're out making acquisitions, given your very good reputation to the people who you're considering buying or them considering selling to you, do they see you coming and do you see that you are paying more and more than you otherwise would for new acquisitions?

Maybe we will tag team on this. Don, you've got the numbers there in front of you. I'll let Don just give you the numbers on the organic and I'll answer the rest of the question.

Peter, in our MD&A, we do have a table that does show the acquisition growth, the net internal growth for the quarter and the impact on revenue of foreign exchange rates. And the numbers for the first quarter acquisition growth accounted for $46.8 million; there was a net internal growth for the quarter of $0.5 million; and the impact of foreign exchange was a negative $3.1 million for a total of $44.2 million. Now that net internal growth and Tony talked to this earlier, it does fluctuate quarter over quarter. I think again we published the last four quarters internal growth numbers and it doesn't fluctuate each quarter. And it is something that can be a little bit of a challenge as Tony mentioned in terms of identifying internal versus acquisition growth because we do tend to integrate acquisitions very quickly and it is very difficult to identify some of the acquisition numbers.

However, and again Tony spoke to this earlier, breaking down the results in the quarter we did actually see a decline in revenue in the U.S. East as we consolidated some offices and rationalized some of our operations there to improve profitability and performance. And we have seen some very strong growth in Canada particularly Canada West as well as California, Arizona and Nevada.

I think the second part of your question was about I think indirectly related to valuation and what the expectation of these firms are that we are out there looking for them. I mean there is no doubt that people look at us and our track record and the things that we do and in some cases the expectations are higher than they should be. But we've always been disciplined to say that we will do acquisitions if it can affect a growing at the organization. Because for us there isn't a huge difference between organic and acquisition growth because organic growth isn't free in the sense that we still have people that aren't necessarily fully utilized and there's other costs associated with it.

So it's always a trade-off in deciding how much we would sort of pay for something versus trying to grow it organically and hiring people and so forth. But as we get a better exposure and reputation particularly in the U.S., we are being sought out by a number of firms. And in a few cases if we basically sense that the primary reason they are doing it is just sort of as a financial transaction, we generally would shy away from those. We prefer to decide to do the acquisition first and then work on the commercial terms. So we get them interested for reasons other than the fact that we're going to pay a certain amount of money for the firm.

And then as Don mentioned, part of the cultural fit we look at is if they went to be integrated in part of a large organization because we're going to do the integration right away, starting the next day. I hope that addresses it. I'm not sure if that's what you're getting at?

Yes, thank you very much.

Calvin Chung, National Bank Financial.

Hi there. I apologize if you might have covered this in the annual meeting as well. The net revenue I guess breakdown that we just went through, it looks as though just comparing it to the first quarter just a slight shift from industrial into I guess buildings and transportation compared from a net revenue compared to a gross revenue basis. Do you expect that breakdown -- I guess what I'm asking is that breakdown that you gave earlier for the trailing four quarters, is that the sort of breakdown that you expect to see for the full year 2006?

I think that since the four quarter trailing on Q1 includes two quarters with the Keith acquisition and the Keith, a larger percentage of the Keith revenue is in the urban land area. And so starting when you look at the second quarter and you go back on a four quarter trailing basis, the urban land component would likely go up 2 perhaps 3 percentage points so that it could be 37% to 38% in urban land in the second quarter with a slight corresponding reduction in the other areas to offset that.

The Dufresne-Henry on the other hand which will start to come in in the second quarter is about 50% environment and 35% transportation and then a few other things. So that will then tend to offset a little bit on the transportation and environment side. But our expectation is that in '06 unless we do some other type of acquisition that's related to urban land, that percentage is not likely to go above 38%.

Great, that is very helpful.

(OPERATOR INSTRUCTIONS) Mr. Franceschini, there are no more questions in the queue.

Well thank you Anna. On that basis since there are no more questions, I would like to think everyone for joining us today. And as always, Don and I look forward to speaking with you again after the second quarter. Thank you very much.

Thank you. And this concludes the Stantec Incorporated first quarter for 2006 conference call.