Stantec Inc (STN) 2006 Q2 法說會逐字稿

Thank you for holding for the Stantec Inc. second-quarter 2006 results conference call. I'd like to introduce Tony Franceschini, please go ahead.

Good afternoon everyone, and welcome to our 2006 second-quarter conference call. Joining me is Don Wilson, our Chief Financial Officer, and as usual we will comment briefly about our results and about the outlook for our markets, and then we will address individual questions.

Before I 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 can be found in Stantec's filings with the 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 use and 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 who 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 2006. I am pleased to report excellent results during a very active quarter for us. Gross revenue for the quarter increased 39.1% to $208.8 million from $150.2 million in the second quarter of 2005. Net revenue increased 42.7% to $182.2 million from $127.7 million. Net income increased 28% to $16.7 million from $13.1 million. And diluted earnings per share were 5.9% higher at $0.36 versus $0.34 for the same period last year.

As a reminder to our shareholders you will remember that in the second quarter of 2005 Stantec changed its method of estimating doubtful accounts receivable. This resulted in a $4 million or $0.07 per share positive adjustment to income in the second quarter comparative figures for last year. Excluding the effect of this 2005 adjustment the increase in net income for the second-quarter of 2006 would have been 59.8% while diluted earnings per share would have increased 33.3% quarter to quarter.

On a year-to-date basis gross revenue increased 35.3% to $394.1 million. Net revenue increased 39.9% to $345.3 million. Net income increased 42.1% to $28.1 million, and diluted earnings per share increased 19.6% to $0.61. Again excluding the positive effect of the $4 million adjustment made in 2005, net income would have increased 63.6%, and diluted earnings per share would have grown 38.6% when compared to the same period last year.

We are pleased with our quarterly results, and the good performance is consistent across most of our regions and practice areas. During the quarter performance was strong in both our Canadian and our U.S. West operations and improved in our U.S. East operations. This is particularly rewarding because it reflects the successful integration of the Keith Companies and Keen Engineering, which we completed in the fall of 2005. The quarter also reflected the success of the initial system conversion phase of the Dufresne-Henry acquisition in New England and the addition of ACEx Technologies which augmented our communication systems engineering services in the transportation practice area.

The results also reflect a continued streamlining of and improvement to our mid-Atlantic and New York operations. Each quarter I highlight some of our new project awards to illustrate the wide range, scope and variety of assignments we complete across our company. This quarter I would like to highlight some of our new work in the transportation practice area.

In the area of pavement engineering we secured a new five-year extension of our two long-term pavement performance program contracts with the U.S. Department of Transportation. These contracts worth approximately $11 million in total will help us maintain our leadership position in pavement engineering and design across North America. Our work with the LTPP program which began with more modest assignments in 1988 currently involves the modern trend of data collection for a full 60% of the programs participating transportation agencies, covering a total of 750 pavement sections in 27 states and 8 provinces.

During the quarter we also saw more positive results flowing from the implementation of the new SAFETEA-LU program, also known as the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users. Which is providing stable federal funding for transportation projects in the U.S. For example, in the U.S. East we were awarded a contract to work as part of a team in designing the upgrading of four miles, of 6.44 kilometers, of U.S. Route 15 from a two-lane roadway to a full limited access freeway in Steuben County, New York for the New York State Department of Transportation. The project will also involve the design of drainage and related improvements.

In the West we are designing a new four-lane bridge over Interstate 25 at 128th Avenue in Denver, Colorado for the Colorado Department of Transportation. In Canada new transportation project awards included a contract with the Ontario Ministry of Transportation to design the widening of Highway 402 from two to four lanes for 3.5 kilometers or 2.2 miles from Sarnia, Ontario to the U.S. border crossing.

Overall we believe the second quarter of 2006 was very good for Stantec. We are providing infrastructure design services generally in strong economies in many of our regions, which makes our outlook and prospects positive. I would now like to make some general comments about these markets. Overall as indicated, we expect the outlook for our services, in the diverse North American market that we serve to remain positive for the balance of 2006. From our perspective and considering our geographic presence market conditions continue to be good and in both Canada and the U.S. The market in Canada is very strong in all size practice areas, particularly in our principal market in western Canada where both Alberta and BC are doing very well. There is a good balance of projects between the public and private sectors.

Our ability to grow and to meet the demand for our services in the West is constrained somewhat by the availability of qualified professional and technical staff in many of our practice areas. During the strong economic period staff retention is always a challenge, but we believe that staff retention at Stantec was strong relative to that of other firms in our industry. In part we are also addressing this issue by utilizing available staff in other regions. Our strategy of expanding into diverse geographic regions throughout North America, even in times of down cycles, is paying dividends since we are able to use staff in certain parts of Canada and the U.S. that are currently experiencing some weakness in the local economy.

We are also looking at initiatives for attracting new graduates, as well as immigrants into the consulting industry. In central Canada, which for us is the Ontario market, the market is doing well but is not as strong as the West. And it slowed somewhat from last year likely due to some weakness in the manufacturing export sectors. In this environment we are maintaining our market position in the Toronto market area and actually increasing it in some other areas such as southwestern Ontario.

In the U.S. West market conditions generally remain strong for our services, including the Urban land sector. Although there are some signs of potential weakness in the housing market in certain geographic areas, our strong top three position in most of the markets we serve is mitigating the impact on us of any decrease in overall activity. In addition, the demand for services related to improving public infrastructure is actually increasing because spending has lagged behind the growth in residential development. For example, our environmental practice is well positioned to participate in new projects resulting from the recent signing of the Federal Water Resources Act, which will provide $12 billion in funds for flood control and environmental restoration project. This is an area where we have proven expertise and a successful track record.

In the U.S. East the overall market where Stantec has a presence is strengthening. Our challenge in this market is to increase our critical mass to be more comparable to the U.S. West to take advantage of more synergies and efficiencies. Some bright spots for future work include the rebuilding required in the region affected by Hurricane Katrina. In this area we have established an initial presence in the New Orleans area to assist one of our existing clients in the Southeast with their plans for new residential development.

There is also continued migration of an aging U.S. population to the warmer and more affordable areas of the Southeast, and this continues to generate demand for new housing. This in turn is also influencing local governments to continue to invest in publicly funded transportation and environmental infrastructure. The Northeast overall is stable and more public funds are being invested in rebuilding aged infrastructure in this region.

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

(OPERATOR INSTRUCTIONS) Ben Cherniavsky, Raymond James.

Congratulations. In the quarter you made -- in the press release you made mention of some oil sands projects in your industrials group. Can you maybe just elaborate on that?

Yes, I think as most people know, there is quite a bit of activity in the oil sands area, and we've only indicated that our strength has been in the supporting civil type infrastructure to support those projects, as well as the pipelines and the storage facilities and pack farms and things like that. The good news for us is that really some of our larger competitors are basically focused on the process side of the business, that there are fairly large support civil projects like storage tanks and pipelines and things like that. And in this last quarter we actually have secured several of these that we are involve in so that our Alberta operations in energy and resources are actually doing quite well.

But we are not getting the huge jobs but I guess it all depends on your perspective. These jobs have capital values of only $250 million as opposed to the $4, $5, $6 billion major [off tax] development. We are securing a lot of the support work, so it is not so much the larger jobs, so it doesn't quite get the press. But it's certainly right in our sweet spot as far as the types of projects that we do in that area.

Great. Thanks. Second question, if I may, just looking at how you broke out your revenues by division. In the Urban land it looks like the Keith Company did -- report about or contributed about $45 million U.S. year-to-date in gross revenue. Now correct me if I'm wrong, but I thought when you acquired Keith Companies, if I recall correctly at least the '04 net revenue number was over $100 million; I think around $105 million. So am I reading this indirectly? Is there some seasonality here, or does this suggest that the revenue for Keith Company may be going down in U.S. dollars?

I think you may be -- I am not sure where you're reading it, but the actual figures that we have, of the contribution of the Keith Companies, I have it in Canadian dollars, (indiscernible) was $35.9 million in the second quarter and $71.5 million year-to-date in '06.

What I am looking at in the press release said the $51 million Canadian of the increase in Canadian dollars gross revenue year-to-date was earned from the Keith Company acquisition but we maybe sort that out off-line (multiple speakers).

We can, but the numbers are actually closer; they would be closer to the numbers they were generating last year. I am not sure, I have to check the number but the numbers I gave you are the ones that I also have, is 71.5 Canadian and 35.9 Canadian in the second quarter and 71.5 year-to-date.

I may be misreading this press release, but let's chat after. One final question, if I may a quick one on the transportation side in your discussion there you didn't break out any organic required growth. Is that because most of the in any material increase in your transportation revenue was all organic this year. Or this quarter, I should say?

We do have the outbreak in the MD&A.

Yes, it say the gross revenue was up 24% in 2Q, but it doesn't say where it came from (multiple speakers).

There's a table on page 12, and on the table on page 12 the total change in transportation and gross revenue was $5.5 million Canadian, of which $3 million was due to acquisitions, $2.5 million due to internal growth, and the total change was -- and now those get adjusted somewhat on the exchange, but if you look at the table that has the actual breakdown there.

Great. Thanks very much.

Sarah Hughes, Sprott Securities.

Congratulations on the quarter. A few quick questions. Given your continued margin strength would you be able to give us an idea of how much you think is coming from just the overall strength in your end markets versus how much is coming from internal improvements? Ballpark.

That is a good question, but I think it is -- the easy answer is probably half and half. It clearly, it is a combination of both, but I don't have the actual break down. But it is just a guess to say that we are clearly doing both, and there is a contribution from both the overall market, as well as the things that we are doing internally and have done internally to improve our processes, our delivery, our execution of the things that we do. So I think if you look at some of the weaker regions, clearly it is not the market, it is because we're doing a better job. In the stronger markets like in western Canada it would be driven more by the strength in the overall market as a whole.

Okay, and just on in terms of your margins and Urban land I know you talked about maybe some signs of weakness in a few of your housing related markets, and you talk about how you think you can sustain that weakness due to your top three position. What kind of impact do you think it will have on margins if we see a --

Well, it hasn't yet. I mean it is always difficult to estimate. Obviously we believe that our business model is robust enough to withstand these, the margins may stay the same, the volume may drop somewhat. But I think at least in '06 we don't expect the margins to be impacted from everything that we see right now.

And your Urban land had a very strong margin in the quarter; was it pretty much broadbased? Did you see some of that in western Canada given the strength in the housing market there?

Western Canada is doing a little bit better. There is no doubt. Basically we are in an environment where we are turning work away. And as a result you can basically select the best projects and the best clients, and that is the situation we happen to be in right now in Alberta. And still in a few parts of Southern California. But those two markets are quite strong, and they do tend to perhaps swing the overall margin for that area a little bit higher.

Great. Thank you.

(OPERATOR INSTRUCTIONS) Kelvin Cheung, National Bank Financial.

Congratulations on the quarter, fellows. Wanted to follow up on the margins with the Urban land doing well and I guess maybe we can kind of see that activity continue throughout the rest of the year. And because Urban land is such a large portion do you see perhaps your guidance that you expect for '06 because you're doing well compared to them, do you see any perhaps upside to your guidance range on the gross margin side?

No, I think overall we wouldn't expect that to change; if it does, it would likely be a series of circumstances which may or may not be sustainable. So we are comfortable with the ranges that we provided, and we stay within those ranges even though there may be -- there is a possibility it may be exceeded but we wouldn't want to plan on that basis.

I think if you take a look at the past couple of years and quarterly fluctuations in gross margins there are and can be some fairly broad fluctuations there. So that's why we are comfortable with the ranges that we have provided.

Can I also take that one step further and maybe say that you are positively surprised and weren't really expecting something in the order of 59%?

No, I mean I think we've always said this isn't an exact science where we can predict to a tenth of a percentage point what our margins are. Like we've always said, the actual margins in any given quarter will depend on the individual mix of projects and clients and so forth. And we've had some lower quarters. I think if you go back to the end of '05 we were down to 53.5%, 54%. Go back to sort of the second quarter of '05 I think we were about 57%. But there has been some fluctuations up and down, and those will continue, but there will be some ups and downs in each of our practice areas. But we believe we have a good mix, and that mix will always trend to the overall average of our gross margins and generally be within that couple of percentage points. And for the most part have been over the last five years or so.

That's helpful. And then I guess just looking at the SG&A as a percentage of net revenue, at 39.8% I guess anything different or still also the same line of thought, things were pretty good and again can be lumpy sometimes?

Yes, I think the fairest way to look at it is yes, they can be a little bit up-and-down. We are doing a little better than sometimes, but again, we've been down to 38, 38.5, and we've been up to 42%, in that range. It is definitely improved. Hopefully we will maintain it, but there's always little things that come up, and we can't anticipate them all. So if you want our best guess is still the estimates that we provided at the end of the year in the 40% to 42% range.

And just switching over to the Urban land and slowing residential, do you have a kind of visibility as to when you do see perhaps some of that impacting volumes?

You know, there has been some slowdown in land for like a year. So I think our approach has always been that because of the strong position that we have that we are able to withstand a 10% reduction or so in the overall market. But my crystal ball isn't any better than yours in terms of trying to determine what's going to happen in those areas. The thing that comforts us is that although it is still in that 38% or so of our business that we are increasing in the public sector side, and we have enough of a mix that I don't think we have all our eggs in one basket. The margins are reasonable in our other areas, as well, and our business model is always relied on, having some up, some down. And right now yes, there have been land up but there is also a lot of strong geographic areas. Environment is doing well. Transportation is doing well. Our energy resources group is doing better. So I think it's a mix of things.

Great. I appreciate that.

Sara Elford, Canaccord Adams.

Just actually two questions for me. One is an accounting one and I just wanted a clarification. There's a line item on your income statement that, the new one relative to last quarter although you have kind of readjusted the way you reported it. And if I am wrong on that my apologies, just the way it may appear in my model. Could you just fill me in on what is in this other income, Don? You have 1.032 in other income, and I am just curious what that is.

Sarah, a good chunk of that is, I think is the investment income that arises from the assets that we hold in our captive insurance company.

Okay, perfect. And then my second question is just more of a kind of a bigger picture one, Tony, could you comment maybe a little bit about whether or not you are seeing any progress so far in terms of -- I guess what I would refer to as cross selling some of your other practice areas into California and into where post (indiscernible) acquisition, if you see any progress on that front.

Thanks for the question, actually. Absolutely. I think that in particular if I were to rank the services it would be our environmental group has made good inroads. A lot of this hasn't totally translated into meaningful contracts yet, but we are getting more and more contracts. We've certainly been more exposed, more visible, putting in a lot more proposals in the public sector. So in terms of contributing more profitably to our results it may still be one or two quarters. But we clearly have made progress. And then in the transportation area as well. So I would say both environment and transportation have done well in terms of cross selling, and it's just a matter of time before it becomes a little more significant.

And if I could just ask one final question it really relates to the whole labor issue, and I'm wondering whether or not you are having to find some means of changing the way you compensate or incentivize some of your people to keep them around, if it is getting to be that competitive.

Well, I think in Alberta and BC to some extent actually, BC is quite strong as well, as I indicated it really is a continuous challenge, and absolutely we are doing some things. But fundamentally I think we believe we've had very good employment practices and very good relationships with our employees going back to the tougher times, and I still believe in loyalty and most people still respect that. And yes, we are losing some staff and we are recruiting new staff to replace them; but for the most part we have a very good core stable group staff, and that is still carrying the majority of the workload. But there is no doubt there is challenges, and I would say for the most part when we lose staff it is really not as much to our competitors as it is to our clients sometimes. Because they are growing and they want to experience that, and to other sectors like the oil and gas sector generally can -- has a salary and compensation structure which is higher than the consulting sector. So we tend to lose some staff to those areas. But overall it is absolutely a challenge and will continue to be in Alberta certainly for the next little while that we can assess that we can see from what is happening. But having said all that, both our Edmonton and Calgary offices are larger than they were last year, so the net result of everything that we've done is that we still have larger operations and true organic growth because we haven't really done too many acquisitions. We did see CPV in Calgary but excluding that we still had good organic growth in both Edmonton and Calgary.

And Tony does that labor challenge, does that feed into any particular challenges on the acquisition front? Cause obviously you have always looked at these acquisitions as a means of pretty efficient bulk hire. Does that become more challenging in this environment?

In Alberta it does, yes, and also it is not a good time because it really has to be the right firm, because given the mobility of the market and also not the best time to do an acquisition if the assets or the employees in the market is very volatile that way you may not keep as many staff as you normally would. And therefore it is not as good a day time, perhaps to doing acquisition in these markets and that is why other than maybe getting into an area or service area that we don't currently provide, and the only way to do that is with an acquisition, we are really not looking for acquisitions in Alberta.

And that is specifically western Canadian centric or are you seeing some of that in other areas as well?

I would say right now the severity of what I had indicated is really more of an Alberta phenomenon; to a lesser extent in BC. There are some of the usual pressures in some of the other areas; there are some pricing pressures in terms of valuation because some of the firms including Stantec have done well in the public market. And a lot of people look at those as the benchmark and therefore valuations have gone up and it is a bit more of a challenge. But our philosophy has always been to target the right acquisition and do it for reasons other than commercial terms and then hopefully get the individuals to agree to reasonable commercial terms. And clearly they may be higher than what we paid a few years ago, but then a lot of things have gone up. So I think for the right acquisitions we're still competitive in terms of the pricing, but for the average ones or things that really aren't a good fit for us, we are more likely to pass. And as a matter-of-fact we've probably passed on more acquisition opportunities this year than the last three in the first six months. Because one, the fit maybe wasn't as good but we may have taken a chance on it a couple years ago but given the valuation it is not worth it for us.

That's very helpful for me, Tony. Thank you.

Richard Stoneman, Dundee Securities.

Good afternoon, Tony. In the last conference call you said you were turning Urban land work away in Southern California and Alberta, and you've mentioned that you are still continuing to turn work away this quarter. Is it just in Urban land, or are you maxing out in other practice areas?

In Alberta pretty well most of the practice areas are in that situation. It is just it is about -- I've been around for a long time, and I was here in the late '70s, and Alberta is going through the same cycle that we did in the late '70s. And there is a lot of work for everybody.

And in Southern California, is it -- are you just strapped for capacity in Urban land, or there any other areas that you are --

For us in Southern California its only in land, because we don't have as strong a presence there yet in the other areas. We are actually in the opposite situation; we are trying to -- we have some staff availability in transportation and environment because we are trying to cross sell both services. So you are kind of higher before you have some of the work in those areas, so we don't have that same issue where we are turning work away in transportation and environment. And the Urban land is starting to get a little more rational in Southern California. We still have good clients, and we have strong markets, but it is a good market but it is not as quite as hot as Alberta is right now.

Tony, could you give us some idea of what percentage of your Urban land business is in Alberta and British Columbia?

Very little or none in BC. We do very little. They don't have sort of the large scale Urban land. Our BC work is more in the public sector transportation, environment and buildings. We do hospital, health care and education. Those would be the three biggest markets in BC. In Alberta I am just going to give you, off the top, it would be about maybe 15 to less than 20 -- between 15, 18% of our total Urban land business; maybe just under 20% would be in Alberta as the company as a whole.

And the final question a number of municipalities and cement companies have mentioned that with the price of asphalt having gone through the roof over the last nine months, they've had to cut back on transportation spending on road work. Have you felt any of that or is it just in municipal work?

Well, indirectly. Some of the projects that we're working on the cost estimates are coming in 35%, 40% over budget. And so when things like that happen sometimes the client may decide to postpone project or only build half of it as opposed to build two lanes instead of four lanes on a roadway. So construction prices on concrete and asphalt will definitely have an impact, but certainly in the markets where that has been an issue, there is so much work -- in a way the stuff that is being cut back todate is not had a negative effect on the stuff that we are doing, but it has impacted the cost of some jobs. And there doesn't seem to be total consistency because we will get some projects coming in 5 to 10% over budget; others at 35, and I must admit we don't always have good rationale as to why the differences in the pricing. So it must be some material shortages or pricing pressures in asphalt and concrete that affect that.

Thank you very much.

Anthony Zicha, Scotia Capital.

Good afternoon, gentlemen. All my questions have been answered. Thank you.

Thanks for trying anyway.

Be faster next time.

(OPERATOR INSTRUCTIONS) [Gordon Jeremenko], The Edmonton Journal.

A couple details. How many employees does Stantec have now, and how are they distributed between say Alberta, the rest of Canada and the United States?

I can provide them; I will give you the approximate numbers and then maybe off-line Simon can call you, but we have 6200 employees. Of those we have about 1400 or so in Alberta and then overall we have about close to just under 4000 in Canada, 3800; and about 2400 in the U.S.

Okay.

And if you want a more detailed breakdown, I'll get Simon to give you a call, and he can give you breakdown. I don't have them all at the top of my head.

Then I had a general question. You have the stated target of becoming a $1 billion a year company by 2008. Are you on trend to reach that in 2008, or if sooner, when?

We are on target to reach it in 2008.

These results indicate to me that if you projected out over the full-year you are going to be around $800 million gross. So does that put you within sight of reaching that billion dollars?

Sure, only $200 million in two years. Yes. We can certainly do that, and it could be little higher than 800 million this year.

Where was your starting point when you set that target?

We were doing about $90 million in revenue.

90?

90,9 0 -- what year was that?

That was at the end of 1997.

Holy mackerel. What has been the main driver there? It is almost tenfolds in nine years. Is there any one main thing that is making you able to do that?

No, we had a plan and we've been executing on that plan. It's a combination of things that like any other business plan you set some targets and then you go about executing on it. And I think as a firm we have generally done well in the execution of that plan.

Thank you very much.

Thank you. Gabriel, if there are no more questions I would like to thank everyone for joining us yesterday, and I look forward to speaking with everyone at the end of our third-quarter results. Thank you very much.

Thank you. Ladies and gentlemen, this concludes the Stantec Inc. second-quarter 2006 results conference call. Thank you.