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Operator
Thank you for holding for the Stantec Inc. third quarter 2006 results conference call. I would like to introduce Tony Franceschini. Please go ahead, sir.
Tony Franceschini - President, CEO
Thank you very much Roseanne, and good afternoon, everyone, and welcome to our 2006 third quarter conference call. Joining me is Don Wilson, our Chief Financial Officer. And as usual, we will comment briefly about our results and provide a brief outlook for some of our markets, and then we would be happy to address individual questions. Before I begin as usual 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 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 third quarter of 2006. I am pleased to once again report excellent results during a very active quarter for us. Gross revenue in the quarter increased 43.9% to $210.2 million from $146.1 million in the third quarter of 2005. Net revenue increased 44.6% to $182 million from $125.9 million. Net income increased 27.9% to $16.5 million from $12.8 million. And finally, diluted earnings per share were 12.5% higher at $0.36 versus $0.32 for the same period last year.
On a year-to-date basis gross revenue was up 38.2% to $604.3 million. Net revenue up 41.5% to $527.3 million. Net income up 36.5% to $44.6 million and diluted earnings per share increasing 16.9% to $0.97. Overall our operations in our regions and practice areas are performing well, including our operations in the U.S. East which are improving and are contributing positively to our results. We conducted our annual goodwill impairment review during the third quarter, and the review concluded that with the improving performance there was no impairment of goodwill. Each quarter I highlight some of the new project awards to illustrate the scope and variety of assignments that we complete across the company and to provide a feel for the types of projects that we are involved in.
This quarter I would just like to highlight a little bit of the work we are doing in the areas of health care and our continuing involvement in sustainable building design. In the health care service sector we were appointed as the owners prime mechanical, electrical and civil engineering consultants on a legacy project which is a large academic acute care hospital and research facility located near downtown Vancouver. This world class facility will be designed to provide a healing environment for patients, a pleasant workplace for staff and a state-of-the-art learning center for health care researchers and practitioners. The design will incorporate innovative and green building features with the goal of achieving Leadership in Energy and Environmental Design or LEED, platinum level certification.
We are also participating in the development of the Kapyong Barracks, which is a new community in Winnipeg, Manitoba that is targeted to achieve certification under LEED for neighborhood development and this would be the first national standard for sustainable neighborhood design. And is also to include LEED certified buildings on the site. As part of a design tea, our architecture group will be responsible for the master planning of 160 acres or 64.7 hectares of the site of vacant brownfield property. We are also providing all of the architecture and interior design services for the presentation center for the development.
Our company continues to be involved in the development of infrastructure complementary to the hosting of the Winter Olympics in British Columbia, Vancouver in 2010. Most recently we were selected to design a retrofit of the wastewater treatment plant in Whistler, British Columbia from secondary through advanced treatment that uses biological nutrient removal technology. The upgraded 14 mega liter per day or 3.7 million U.S. gallons per day plant will service increased effluent from the Olympic venues and from the growing Whistler area.
We are starting to see more significant projects materialize in the Alberta energy sector, as well. For example, we are providing the initial design basis services for the development of the infrastructure utility and support facilities for the two sites associated with the Fort Hills oil sands project. Our design and project management services scope includes things like the plot plan management, site development, water supply, water and effluent treatment, fuel storage, gas supply, water supply, roads or -- sorry, power supply, roads and rail line infrastructure, operations and maintenance buildings, workforce housing, power distribution transmission and communications.
We are pleased overall with our markets and with our regional markets; we are generally operating in some strong regional economies which continue to provide a positive outlook for the balance of 2006 and continuing into 2007. I would now like to make some general comments about the market and in particular I will just focus some of our comments on the urban land market as this is an area that we are often asked about in terms of what we see happening and the impact on our services.
I would just like to provide a couple of additional pieces of information that may help to explain sort of our presence in the marketplace and where we see this market going. First of all, in terms of the percentage of our work, if you look at our percentage work breakdown at the end of the third quarter on a trailing twelve-month basis, our revenue breakdown is approximately 35% in the urban land area, 24% in the buildings area, 18% in the environment area, practice area, 14% in transportation and 9% in the Industrial & Project Management. These numbers, as we've previously indicated, fluctuate a little bit on a quarter-to-quarter basis based on the new projects that we secured during the quarter and the split of revenues.
So as you can see, our urban land practice is still our largest market, but it should be noted that 35% is the same percentage that we had in 2003. Now that percentage dropped a little to 32% in 2004 and then to 34% in 2005. But it has generally been maintained at that sort of 35% range. So then when you look at our urban land market, I think it's important that although we often hear about what the macrotrends and housing starts are in the overall North American market, that it is important to understand where the split of our revenues come from in this area. And on a twelve-month training basis, roughly 35% of our urban land market is in the California market, about 25% is in the Alberta market. About 15% in the other Southwest U.S. states which is primarily Arizona, Nevada, Utah and Colorado, and about 15% in the Ontario market, really the southern Ontario market from Windsor to Ottawa. And the rest of the areas that we operate in including the U.S. East, make up just under 10% of the total revenue split.
So when you look at overall trends, such as housing starts for example perhaps being down I think in some of the latest numbers maybe about 6.5% or so overall in the U.S., that number is going to vary depending on where these markets are. And for us, when we look at our strongest markets, the decline in housing starts has been sort of in the 5% range in California, but it has been only about 2% or 3% in the Ontario market. And it is actually up about 20% in the Alberta market. So when you look at the overall presence and exposure that we have and the fact that in the key markets that we are in like California and Alberta and Southern Ontario where we have generally a top three position in the marketplace, as there are some shift and changes in the marketplace we continue to be optimistic that our revenues certainly in the balance of 2006, and going into 2007, are not going to be impacted materially in the urban land area. And any reductions which do occur are going to be more than offset by the additional revenues we are seeing in the environment and the transportation practice area.
So I know that this is an often asked question about our exposure to urban land, and hopefully this helps to address where our actual exposure is and what we are doing to maintain our presence in those areas which we are still quite comfortable about. So with that, I will conclude our brief comments for today, and Don and I will be available to answer any questions that anybody on the conference call may. So we will now ask our conference call operator to explain the question-and-answer procedure.
Operator
(OPERATOR INSTRUCTIONS) Sarah Hughes, Sprott Securities, Toronto.
Sarah Hughes - Analyst
-- and how much more we will see throughout the rest of this year.
Tony Franceschini - President, CEO
Sorry, Sarah. This is Tony. I only heard the last five words that you said.
Sarah Hughes - Analyst
Can you hear me now?
Tony Franceschini - President, CEO
I can now. Can you repeat the question?
Sarah Hughes - Analyst
The U.S. East operations in terms of the improvement and contributing positive to (indiscernible) earnings, I'm just trying to get a sense of in the overall improvement in that division how much have you done todate and kind of how much more we will see in the next six months or so in terms of increased contribution to earnings.
Tony Franceschini - President, CEO
I can tell you what we've done todate and hopefully if we stick to plan what we will be able to do in the next 6 to 12 months. Our U.S. operations were basically I think we ended the year last year on a essentially a breakeven operation, and we are now it is contributing about 3% to our bottom line. And as you know, that is about a quarter of what we can do in our other areas. So we don't think we can get to the same level of performance as we have in the US West and in Canada just because of the mass that we have in the U.S. East. It currently only accounts for about 15% of our total business. So in order for us to achieve the same levels as the other areas, it will likely take us about another two years unless we can grow it a little bit more quickly through some acquisitions by adding some mass. So we see it as being a progressive improvement rather than a radical improvement over the next three months.
Sarah Hughes - Analyst
In terms of the Alberta market I have heard from a number of companies just on the labor situation that they are seeing a bit of loosening, and they are able to hire more people than they had in the past. Have you seen that in your business?
Tony Franceschini - President, CEO
I think we had mentioned before in some of these calls that in any employment situation where you're looking at attracting and retaining staff there is a whole bunch of factors that come into play. And we, like others in the last six to nine months in certain selected areas have had difficulty getting staff. And the area has really been the energy and resource areas; people with experience in that particular area. In other parts of our operations in Alberta because we have a leadership position and staff still see us as attractive place to work, we generally have not had as much of an issue as we have in the energy and resources side where we have been somewhat limited in terms of the staff that we could hire. We still have about give or take 90 open positions in Alberta in that energy and resources area. So I can't say that there are no staffing issues. Is that better than it was three months ago? Probably because I think we had about 120 open at the time. But it is still clearly there aren't enough to fill all of the opportunities that are there.
Sarah Hughes - Analyst
And lastly talking about the energy and Alberta you talked in your statement earlier about starting to see more significant projects materializing in that market, is that because you're going after them or is it just a matter of timing?
Tony Franceschini - President, CEO
It is two things. One is that as you know, we started to position ourselves to be sort of more of a player in this market a few years ago through some of the acquisitions and some of the strategic hires that we were doing. And what has happened is that again our focus has always been on the infrastructure and support facilities. And I think even the clients are realizing that I think we can do as good or certainly as good a job as the firms who tend to work on the actual upgrade or projects and things themselves. So we are getting a little bit better recognition that as an infrastructure firm that our expertise is very well suited to doing the support infrastructure for these facilities which traditionally were perhaps being bundled as part of the entire project.
And what we are seeing is that clients are starting to actually kind of de-bundle their projects, not only with the infrastructure component, but even with some of the actual upgrade or facilities themselves. And so a good example is on the Fort Hills project, give or take the budget say, there's about $6 billion in capital expenditures currently planned, the component that we are going after is about $1 billion of that. So it is like 1/6 of the entire project. And as opposed to the entire $6 billion project going out to one group or one group of consultants, the clients are tending to de-bundle, and that bodes well for us because we really weren't geared up to go after the entire project because we don't have the process expertise. But we're very well suited for the $1 billion bundle which is the kinds of things I mentioned on the infrastructure water wastewater power utilities. That is our sweet spot. So it is a combination of things. Partly the industry recognizing that you have to kind of break down these components and if that fits well with the areas of expertise that we have and also there are a number of projects going on simultaneously. So it is a little easier for us to compete in that space.
Sarah Hughes - Analyst
Thank you very much.
Operator
Steve Laciak, National Bank, Toronto.
Steve Laciak - Analyst
Tony, I think you may have answered this already in terms of explaining it. This internal growth that you have it seems to be getting better. You had 12.7 million on the net revenue line in this quarter. Do you see number one is it coming from what you just mentioned, or is it also coming from the states? And then secondly, do you see that sort of opportunity continuing here?
Tony Franceschini - President, CEO
That is a good question, and it is partly in terms of seeing if we can try and anticipate what's going on. There is no doubt that part of that has been because of the growth in Alberta. Virtually all of the -- not virtually -- all of that growth in the energy and resources area has been organic, it hasn't been through any additional acquisition. So like I said, with the openings we have and we still have another 90 or so openings primarily in that particular sector, in addition to some others that we have, so that is clearly contributing to it. But we are seeing some better growth now again like say in some parts in the East for example where we did reduce our overall staffing levels so we kind of hit bottom at the third quarter to fourth quarter of last year, and we started to build it back up this year. So there is a little bit of that coming from some other parts of Canada, as well as some parts of the East and a little bit in the West. But of that total component that you saw, the largest component has been in Alberta.
Now going forward clearly if we are successful in doing and securing some additional projects in this infrastructure side, that will obviously contribute to it. So the relative percentage is going to depend on how successful we are. But we are seeing some growth in the transportation and environment side in the U.S. because there is a little bit more public sector spending going on. So the prospects for organic growth are better. The goal is going to be at the same level as what they are this quarter. It depends. We've always said our business will tend to go up and down a bit. We are optimistic, and if the accountants deal with S-Ox now, there is a more than likely probability that it will be higher than it has been in the last few years.
Steve Laciak - Analyst
All right. And second thing, you spoke about housing starts. I look at the big number it is 1.7 in the states down from 2.1 million. So where are you getting your 5% from?
Tony Franceschini - President, CEO
I look at 5% I think -- let me give you the numbers that I have and then you can check them. When I look at California, the 5%, the numbers I have which are from national housing group in the U.S. is that the housing starts in California were 192.9, 192,900 in '05 and 183,400 in '06 for a net reduction '05 to '06 of -4.9%. Now when I look at and the same statistics in terms of looking at, and again some people call starts and some people the tract permits. So I hope sometimes we are not using the same stats, but these are as far as we understand and it is the numbers we've always used is the housing starts, not the permits, and the numbers I have for the U.S. is 2,073,000 in '05 in terms of housing starts. And in '06 1,941,000, which would translate to about a 6.4% reduction.
Steve Laciak - Analyst
There were still good numbers in the front half of the year?
Tony Franceschini - President, CEO
Yes.
Steve Laciak - Analyst
And now the decline has accelerated?
Tony Franceschini - President, CEO
Fair enough.
Steve Laciak - Analyst
It seems to be speeding well, the last month was better but I mean from listening to the home builders it sounds like it is speeding up and they might be buying some of their business through incentives and everything else for the time being. What are you seeing in that major market? Alberta I can see that it's going to be good, but is California not falling hard?
Tony Franceschini - President, CEO
Again, I think if you look at California, and I know a few people have done it, it is almost like the danger is to look at it as a state. It is almost on a county by county basis and on individual markets. All I can really comment on is we know that there are the macro statistics. All I can comment on is on the areas that we are working on and the amount of work that we are doing relative to a year ago. And the best way I can translate that to you is because staffing and C revenue are directly correlated. In the last 12 months in California we have had a net staff adjustment of plus seven. So it is basically the same staffing levels that we had 12 months ago in that area. So and that is pretty well what the revenue numbers show that for us, the clients that we are working for, the projects that we are working for are still either in the planning or design stages and where there are houses going out that are being built, there has been some modest reductions in some of our projects but there has also been some new projects that have been started.
On the front end, for example, one trend that we are seeing that doesn't affect us but may affect others like house builders, for example and I will use California, in a number of places where we are working and house builders who had gotten effectively into the development business, which is when times are good house builders tend to go and start to buy land and become developers and develop land themselves. We have seen a number of those house builders pull back and either not close on land projects or things that they were looking at or basically stop doing that and gone back to their core business. Now traditionally in more moderate times the people that develop land are not house builders. They are developers. That is why there is kind of like land developers and then there is house builders. And land developers have a different perspective on development because they take it through the process and add value and then they sell it to the house builders that they need inventory for their homes. So a number of the projects that we that formerly the house builder was the client, then if they haven't closed on the deal or somebody else has acquired the land, we are now working for the land developers.
A development client who is still taking that project through the entitlement process and is going to get the approvals and the permit so that when the market changes and the house builders are looking for lot inventory they will have the lot. Sure they will be paying more for the lot than if they developed it themselves, but they are also eliminating the risk of not being able to sell it and so forth. And that is the more traditional model and it's also the model that is most common in Canada where most of our development clients are land development clients. They are not house builders. So I think for the type of work that we do particularly in the planning and design stages and the entitlement process, we are just simply getting a different client. The work is still continuing to go on. So if you just look at what the house builders are doing, that is not always necessarily a good indication of what our work volume is and who our potential clients are. So even though they may be suffering, it doesn't necessarily translate to the type of work that we do.
Steve Laciak - Analyst
Okay. Thanks very much.
Operator
(indiscernible) from Vancouver.
Unidentified Participant
I am wondering if you had given any consideration to converting to an income trust.
Tony Franceschini - President, CEO
You're the only guy that hadn't asked us in the last year and a half.
Unidentified Participant
Obviously I'm kidding. You guys probably have been pitched countless times on that and obviously chose the right path. But I do have a serious question. If you could maybe just comment on what you are seeing in eastern Canada outside of housing; I mean obviously there is talk of the manufacturing sectors falling down, and I would imagine it would have some impact on industrial type and buildings work and maybe transportation I don't know, but if there's anything you could add to that.
Tony Franceschini - President, CEO
Again, we often get asked to comment on the macro factors versus the things that happened to us. At the macrolevel the things you are talking about appear to be happening. I mean, we see it at the individual level in terms of our clients and the work that we are doing. I think and to digress for a minute, we always stress that we are pretty adaptable type of organization in that many of our services are flexible to react to changes in the marketplace. So if the auto sector is down, but then the power sector or the utility sector is up, or the bio pharma sector is up that we tend to balance these things out. So although we are likely not going to see perhaps as many opportunities for organic growth in Ontario, we are quite comfortable that we can maintain kind of the revenue level, staffing levels that we have even if the market continues to change. We see maybe automotive going down, some parts of manufacturing but then there is also other areas that are doing well.
And we also still have a very good capability within Stantec which we believe is a competitive advantage for us in that we have truly over the last five years worked very hard at developing not only systems and processes, but attitudes around the company to do workshare effectively. So that if we don't have enough work for our staff in Ontario and we have too much work in Alberta, which is exactly what the case is right now, we will use people from the areas that aren't as utilized. So although the market may be in a slight downturn, it doesn't necessarily mean that the amount of work that we can do from that area is going to change significantly. So from our perspective we expect those kinds of things to occur, but we are not at this point certainly concerned about our ability to be able to react to any of those changes that are going to occur in the marketplace. So hopefully that helps. We are not economists, and we are not out there to try and predict what's going to happen. We've always taken the attitude that all we can do is design our organization and our processes and (technical difficulty) to be able to react to those changes when they occur.
Unidentified Participant
Do you think then what you're seeing is I imagine marketshare is probably difficult to track in your industry, but do you think your gaining market share?
Tony Franceschini - President, CEO
In some areas we are. The areas that we do know because like you see in the land market I for sure we know that when times get tough our market share does go up in those particular markets because it tends to be last in first out. So we have a top three position we generally will increase our market share. Where we have a maybe not quite as strong, we may not see quite as an increase. So in Ontario if we're using Ontario staff to work in Alberta it means we haven't really adjusted our market share in Ontario. We may have increased it in Alberta but in an area like California where when the housing market goes down, our market share in California for urban land does go up because we are still doing the work there.
Unidentified Participant
Great. Thanks very much.
Operator
There is actually no question in the queue right now.
Tony Franceschini - President, CEO
That is always good news. So since there are no more questions, I once again want to thank everyone for joining us and asking the questions, and as always Don and I look forward to speaking with you again at the end of the year end results in February. So thank you very much.
Operator
Ladies and gentlemen, this now concludes the Stantec Inc. third quarter result conference call. Thank you from Tellus Collaboration Services.