Stantec Inc (STN) 2006 Q4 法說會逐字稿

Thank you for holding for the Stantec, Inc., 2006 fourth-quarter year-end earnings conference call. I would like to introduce Tony Franceschini. Please go ahead.

Good afternoon, everyone. Thank you, Matthew. Good afternoon and welcome to our 2006 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 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 -- excuse me, I have a bit of a cough and I may do that a few times during the conference call, so I apologize in advance for the interruption. To continue (indiscernible) -- may cause actual results to differ materially from those discussed in this conference call is contained in Stantec's filings with relevant securities commissions located SEDAR.com and at SEC.gov/Edgar.shtml.

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 year and for the fourth quarter of 2006. I'm pleased to report excellent results for 2006 to mark our 53rd consecutive year of profitability. 2006 was truly a good year for us, and one that positions us for the next phase of our development and evolution.

We have to give credit for our performance this year to our employees across North America and the Caribbean. By working as One Team, we have been successful in winning projects and delivering effective solutions to our clients.

For fiscal year 2006, gross revenue increased to C$816.1 million, up 32.1%. Net revenue increased to C$707.9 million, up 35%. Net income increased to C$60.2 million, up 48.2%. Diluted earnings per share increased to C$1.31, up 32.3%.

In the fourth quarter of 2006, gross revenue increased to C$211.8 million from C$180.6 million in 2005. Net revenue increased to C$180.6 million from C$151.9 million. Net income was C$15.6 million, compared to C$8 million. Diluted earnings per share were C$0.34, compared to C$0.17 in the fourth quarter of last year.

Now I would like to review some of the highlights of the past year. In 2006, we completed three acquisitions. In March, we acquired Carinci Burt Rogers Engineering, which added over 20 employees in the Greater Toronto area and strengthened our electrical engineering practice. In April, we acquired Dufresne-Henry, which added over 270 employees and 12 office locations in the Eastern United States. The acquisition of this multidiscipline firm in engineering, planning, environmental sciences, and landscape architecture expanded our services into four new states in New England and established a new presence in Florida.

In May, we acquired ACEx Technologies, a specialist communications and security systems engineering firm, which added over 25 staff and new locations in Oakland, California, and Irving, Texas, and complemented our services in transit, rail, and power communications and control systems engineering. Overall, our staff increased to over 6,000 employees.

You will remember that we also added about 1,000 staff in the last quarter of '05. So our focus for the early part of the year was on the continued integration of the TKC and Keen; and this has gone well as reflected in our results.

We were able to achieve our integration goals partly because we, the professional staff, the technical staff, and support staff, have created a nurturing One Team culture that embraces change and welcomes new colleagues. In this environment, every acquisition is a true merging of talents, skills, leadership, and expertise. We each play a vital role in helping new staff become part of the Stantec family.

Perhaps more than any other year, 2006 showed the robustness and the resiliency of our business model. Our overall split of revenues was approximately 34% in Urban Land; 23% in Buildings; 18% in Environment; 13% in Transportation; and 12% in Industrial. This mix of business provided us with a good balance between private and public sector clients and allowed us to offset slowdowns in certain areas with increases in others.

As we have said many times, Stantec offers an impressive breadth and range of services. We are proud of the work we do on master plan communities for the residential sector and other public infrastructure projects. However, I want to highlights our work on sort of four sample projects in 2006 that further demonstrates this range of services.

In Vancouver, British Columbia, we continue to get accolades for our sustainable design work on the Southeast False Creek, a mixed-use green community being developed on a reclaimed industrial site to become the Athletes Village for the 2010 Olympics. As part of a design team, we prepared the urban design and site servicing plan for the community, bringing together our expertise in project management, urban design, and civil, structural, electrical, and mechanical engineering. We also created an integrated solid waste management plant, along with designing water and sewer facilities, district heating systems, and roadway and street lighting for the development.

In Klickitat County, Washington, staff from our Portland, Oregon, and Edmonton, Alberta, offices, came together to provide consulting and design services for the development of a 133-turbine wind farm for PPM Energy, the second-largest developer of wind energy in the United States.

In Winnipeg, Manitoba, our Buildings and Environment groups teamed up to serve as the prime consultant providing all civil, mechanical, electrical, and structural engineering services as well as architecture and project management for a major expansion of the South End Water Pollution Control Centre.

In High Point, North Carolina, we contributed a full complement of professional design services, architecture, interior design, surveying, geomatics, and mechanical, electrical, structural, plumbing, fire protection, and civil engineering to the development of a new Truliant Federal Credit Union branch.

Now I would like to make some 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 the development of new and revitalized infrastructure in the historical higher range of spending. We base this expectation on several factors.

Relatively high energy and resource prices are spurring investment in the oil and gas infrastructure in Canada and in the rehabilitation of oil and gas infrastructure in the U.S. In Canada, much of this investment is in Alberta's Oil Sands, where spending is estimated to exceed C$64 billion between 2006 and 2010. In the U.S., the 2005 Energy Act is expected to continue to drive projects and provide potential opportunities in the oil and gas sector in 2007. This is an increasingly important market for Stantec.

The government of Canada and various Provincial governments recently approved additional funding for the healthcare and education sectors. For example, the Ontario government's Renew Ontario plan will contribute C$10 billion to educational facilities and C$5 billion to healthcare facilities between 2005 and 2010. Again, these are markets that Stantec is well positioned for.

The construction of ethanol and other biomass production facilities is expected to increase throughout Canada and as a result of a federal government initiative to achieve a 55% renewable fuel standard in all gasoline and diesel sold in Canada by 2010. Canada's 2006 budget also commits C$2.4 billion over the next five years to a new highways and border infrastructure fund. The Canadian government is also providing C$1.3 billion in support of public transit capital investment. In the U.S., the continued implementation of the six-year C$286 billion SAFETEA-LU has increased the funds available for transportation projects. Again, markets that Stantec is also well positioned for.

The U.S. manufacturing industry is expected to grow in 2007 in response to a continuing need to expand warehousing and manufacturing facilities.

We are seeing an increasing awareness of and focus on sustainable design and development, particularly in the areas of developing sustainable buildings and improving water, water distribution, and water treatment infrastructure. We believe that Stantec is well positioned to capture opportunities in this area, since we have taken a leading position in delivering sustainable design services.

Finally, the single-family residential housing sector in Canada and the U.S., which is still our largest single market sector, is expected to remain stable with perhaps some moderate decline. But it should still be noted that by historical standards, housing is still at a pretty relatively healthy level. Due to our strong market position in this sector in the regions we serve, we expect our positive performance in this area to continue into 2007.

The anticipated strength of the infrastructure and facilities market, coupled with the diversity of our operations, provides a solid base for our continued growth and profitability in 2007 and beyond. So this concludes our comments for today. Don and I are now available to answer any questions that you may have. The conference call operator, Matthew, will explain the question procedure.

(OPERATOR INSTRUCTIONS) Anthony Zicha from Scotia Capital.

Tony, with reference to your internal growth rate in Q4, it seems to have accelerated very well at the 12% level. Going forward, is this still sustainable?

Well, you know, Tony, it depends on the markets. The biggest contributor to that has been our growth in the sort of industrial and energy sector in Alberta. I guess, the expectation there will depend on how strong that market is and at what rate it continues to grow.

We are doing well in other markets, both environment and transportation. But certainly the biggest, the single largest contributor was the industrial sector, and that was primarily driven by growth in the Alberta marketplace. So it is really a matter of what your expectations are for the Alberta marketplace in the next year or two.

Tony, if we would be looking at your backlog, of your backlog like how much of it proportionally would be tied to the industrial side?

Relatively speaking, the backlog is pretty well in proportion to the split of the work that we have right now. Again, as you know, the nature of the projects we do in those areas are such that the time frames for us are not that long. So it doesn't necessarily say if we think that the industrial market is going to be strong; it is not necessarily totally reflected in the backlog numbers, because we haven't necessarily signed up all of the projects.

Okay, and to further expand on that question, with reference to your Environmental division, what were the key drivers behind it? What is the outlook?

For us, it has been -- if you remember in sort of '04, '05, we kind of took a half step back in Environmental area -- and the Transportation sector, for that matter -- to kind of review the markets that we felt we were going to be a little bit stronger in, and that we would place a little more emphasis on those markets.

What we have done is really focused more on what I would call the mid to larger size projects in that area. Some of the projects we referred to like the Winnipeg wastewater treatment plant. We are still working on the water treatment plant in Vancouver. We have a number of other sort of mid to larger size assignments. We made a conscious decision to pursue those larger jobs as well as sort of the smaller projects which we were focusing on before.

We also secured last year, we are being successful in sort of P3s. We have a wastewater treatment facility in Nogales on the Arizona-Mexico border that we're working on, and there are likely to be more assignments of that area.

So I think has just been a focus on some larger projects that have a little bit longer tail on them and take better advantage of the skill sets that we have in the Company.

Okay, great. With reference to your Vollmer acquisition, Stantec boosted up their presence in the Northeast U.S. in the Transportation area. But are there any other specific regions or areas you are targeting now?

Well, we still -- I think I said that our goal is to eventually be in all regions of the U.S., so in some cases, we react to opportunities if they come up. But there is no secret that I think we have been indicating in the last year or so that we wanted to balance out our U.S. operations with a stronger presence on the East Coast.

So with the Vollmer acquisition, we will almost have a balance in staffing between the U.S. West and the U.S. East. We would still like to do a few more things in the East, but also continue to react to opportunities in other parts of the U.S. So we don't have a very definitive or strong preference for one region versus another.

Peter Brieger, GlobeInvest Capital.

Gentlemen, great quarter. A couple of comments and questions. I notice on page 36 of the release, the gross margins and the pretax margins have been going up very nicely. Do you have any targets at which point you would say they have reached a maximum?

Well, I think realistically, we're pretty happy at where those margins are right now. I think, realistically, any improvement should be considered a bonus over those numbers.

Okay. And looking at the acquired growth, which I guess is page 38, it seems that most of the growth that occurred in the last couple of years has come from acquisitions. Do you see that being an accelerating part of the total growth picture? Or do you see it decelerating? And if so, which areas?

Well, our historical, if you average it out over the years, it has been roughly two-thirds in acquisitions and one-third in organic growth. Realistically, that is likely to continue. In any given year it may fluctuate up or down. But I think realistically, it is likely to be two-thirds, one-third.

Okay, and looking forward, just one last question. Looking at the five key areas, do you see any particular growth opportunities in one versus the other looking out two to three years?

Well, from an organic growth perspective, where we are seeing the best opportunities right now are in what we would call our Industrial sector. That is again primarily being driven by our optimism in the Alberta marketplace, where we do have a strong presence. Again, recognizing that the market that we serve is the infrastructure support for that development. That is really what we focus and specialize on.

Also, some of the work we are doing in renewable energy is in that sector, and like the wind project and we have some solar. We're working on and a major solar power plant as well. That we think the opportunities are good for us.

So of all of our five practice areas, probably the Industrial would be the one that we see the most opportunities for organic growth, as well as Environment sort of being number two, and then perhaps Transportation with some of the new things that we are doing.

Great, thank you very much.

Brent Thielman from D.A. Davidson.

Just a quick housekeeping question for me. Would you be able to break out revenue by practice areas for the fourth quarter?

Yes, I can give you that. Just for the fourth quarter?

That's right.

I have it for you; just hang on. I have to work out -- I have got some dollar values. So do you want -- I can get Simon to forward that to you for the fourth quarter. We will send out an update for everyone. We will just post it on the site.

We have the numbers but we don't have the percentages broken out right now. We will be happy to provide that for you.

Okay, that's all I had. Thanks, guys.

Ben Cherniavsky from Raymond James.

Tony, it sounds like you need some rest.

Well, you know, I think this -- I have a bit of flu that was going around, and I managed to get the tail end of it. There is a cough that hasn't gone for a few weeks, so my apologies for that.

I hope you're feeling better.

Thank you.

There are just a couple things as I walk through the press release that I wanted maybe to get some more clarity on. You noted that there was C$3.2 million paid in retention bonuses as part of G&A.

Yes.

Is that not an unusual -- or is that all that unusual of an expense? Don't you normally pay retention as you do acquisitions?

Not always. Like I think what's a little unusual about it is that these are just sort of bigger numbers, because we have -- in some of the acquisitions that we did, we had a bigger retention bonus component that in previous years would have been accounted for as part of the acquisition price. These are just being expensed as part of sort of an additional compensation. It is like an additional cost, if you will, that we had not been incurring certainly in the previous years.

Okay, fair enough. The trend of your net revenues as a percentage of gross falling continued last year. I understand there's reasons for that. As you get bigger you don't have to outsource as much and such. Where does that level off? Is that something -- should we assume that goes a tick lower as well in the coming years?

There is really no pattern to that. It really depends on the type of work that we get in any given year. It is possible like in some work -- I know we have a couple of outstanding proposals in the Industrial area, for example, where the amount of pass-throughs are actually higher; and so that the gross to net number is going to be higher if we are successful in some of those areas. It is just simply the nature of the contracts and the preferences of the clients.

So in some of the areas there has been a reduction simply because we have been able to do more. But in any given year, there is really no specific pattern to it.

Well, I recognize that there may be some large contracts that come up that throw that off. But to me it looks like there is a pattern over the very long term. If my numbers are right, 1996 it was about 150% gross revenue to net; and almost every consecutive year falling by some degree since then.

Yes. No, you are right. And I would say with the exception of those contracts that come up, the normal work if you will (inaudible) as we have more areas of expertise, even smaller -- I mean, ACEx, this year, is a good example. In the communications and security area that are now [RT] projects, we would normally subcontract part of that work to them. But now we can also do as part of our services.

So with the exception of specific contracts in certain areas, the trend is generally to decrease, but it's a decrease in marginal reduction.

Right, you're not going -- it is not going to zero.

Right.

But I mean if you just assume that you can't predict the lumpiness of any given contract, the general trend would tell you it is reasonable to expect that to come down a few basis points?

That's correct. (inaudible)

Okay, fair enough. Then, can you -- it may have been in the text here; unfortunately I only had time to glance through it quickly. But what was the organic growth rate in revenue for '06? Did you --? I know you have mentioned some numbers; but do you have a percentage?

Was it about 12% (inaudible)?

That was for the quarter, wasn't it?

Yes. And for the whole year, we're just trying to find it here.

I mean, it was more than low single digit.

Yes, we had a pretty good year. We had 46 out of 50. It is about 20, 25%; it was closer to the 20 to 25% of the total growth.

Okay, all right. But my point is that you have mentioned that the demand for Infrastructure tends to -- or GDP growth is a good proxy for Infrastructure growth. Yet, you had an organic growth rate that was well in excess of growth in the economy. Is that because there is --? My thought on this and my question would be whether or not you can just comment and some color -- is on the one hand, demand for Infrastructure is probably growing disproportionally in your regions, as is the economy. And secondly, your brand and your scalability is getting you on bigger projects, call it greater market share if you will. But there are other things going on such that your organic growth is going to be higher than GDP.

Yes, that is a good comment. I think it is the same comment that we have always made with respect to the Urban Land business, where we say if you look at the macro numbers they don't necessarily reflect how it impacts us. You have to look at the specific services that we provide and in the markets that we are in, and where we're making inroads.

So in certain markets, obviously, when you break it down, we have been able to do better than GDP. If you look at it at the total macro scale, the whole sector is growing at the same rate as GDP. But obviously, we tried to target the areas where we think we have a particular competitive advantage and that we can do better than the GDP growth.

Okay, thanks very much.

Sarah Hughes from Sprott Securities.

Just a few questions. On the Industrial organic growth in '06, was there any one major project that contributed significantly, or was it just a lot of smaller projects?

It wasn't a lot of smaller projects, but it was a handful of projects. The assignments in that area tend to be a little larger than our typical assignment. So it was probably a handful of projects combined that contributed to it, as opposed to one or two. So they weren't one or two very large, but it wasn't like 30 or 40 either.

Okay. If you are looking in your backlog, if you have a good amount of backlog of these larger projects in your Industrial group to continue that growth, because I know the Industrial will probably be a bit lumpier because of the larger (multiple speakers).

We have good backlog right now. But we are even better in terms of the -- we have outstanding proposals that we don't know about. It all depends on -- we may know better after the first quarter. But we certainly have a number of outstanding proposals out there that, if we are successful, we certainly would do better.

And are you, going forward as you look more into this Industrial market, do you still want to continue to focus on the smaller Infrastructure type projects as opposed to competing with the bigger guys on the larger projects?

The general answer is yes. But when we say that we're not competing with the big guys on the sort of the things like the upgraders themselves; but we compete with them on the infrastructure components. So for example, the way to describe that, if you take, say, like an example of one of the projects that we're looking at, it has a total capital value of roughly say 12 to C$13 billion. That includes the upgraded facility. Of that 12 to C$13 billion, maybe C$2 billion of that is the Infrastructure component that supports the $12 billion facility.

So we can work on the same site as the big guys, except we're doing the things like the site preparation, the earth works, the utilities, the communication, the water treatment, the administration buildings, the access roadways, rail, things like that. So we are working on the large projects, but we're working on the Infrastructure support component of it, as opposed to doing the process facilities themselves.

That is the area that we don't -- we are not in that market, so we don't compete with what I would call the big players who do the EPC work in that area. But we're quite competitive with them and others on the Infrastructure components.

Okay. Then just lastly on the segments, in your Buildings product segment, I would have thought organic growth would have been a bit higher given the strong nonresidential construction and the commercial construction activity in the U.S. and Canada.

Well, that business for us is primarily a Canadian business right now. About 85 to 90% of the work we do in the Buildings sector is in Canada. So we're not impacted too much by activity in the U.S.

But in Canada, the markets that we are in are generally strong. Except in Ontario, last year, our biggest single market in Ontario was healthcare, and there was a slowdown in the healthcare sector in Ontario, which is starting to pick up again in '07. But because of that, that offset some of the growth that occurred in Alberta and in BC in higher education and healthcare. So when you look at the country as a whole, not every area of Canada was as strong in those sectors.

Right. Okay. Then just lastly, in the fourth quarter your admin and marketing expenses had a fairly decent jump. Were there any one-times? Or is this -- did you have a big --? The retention bonus, did that have a big impact in the fourth quarter?

Well, that was one of the larger items that we could break out. There were a few others; but that was probably the largest of the single items that we could break out.

Okay. Was that -- so the retention bonus, was most of that in the fourth quarter?

Don?

Retention bonuses were spread throughout the year. But the aggregate increase amount, Sarah, over the year was about C$3.2 million higher than all of 2005. There may have been some loading of that in the fourth quarter, but I don't know how much that amount would have been.

I think what you take a look at, though, if you take a look at our quarterly results, over the past any number of years there are variations from quarter-to-quarter. I don't think that you can look at any particular quarter and establish that as being a trend in a particular quarter.

Okay.

Sorry to interrupt, but since we have just calculated the percentages, so it saves us sending out in e-mail. We will provide the information to everybody.

The question that was asked by Davidson on the split in our practice areas in the fourth quarter of 2006, the percentages are Urban Land 33%; Buildings 22%; Environment 20%; Industrial 13%; Transportation 12%.

Richard Stoneman.

Tony, question on the split of revenue and earnings in the U.S. U.S. generated about 43% of revenue last year and it contributed 13% of EBIT. Now that EBIT was up sharply from the prior year. Will revenues and U.S. EBIT move more in line over time? Or is there a reason?

Well, there is a reason. I will let Don sort of outline that. I think you are looking at the tax version -- that is the tax version versus the contributions. But Don, do you want to address that?

Sure, Richard, I think -- and I can't remember if it was note 14.

Page 44, Don.

Sorry, my page numbers wouldn't correspond with your page numbers necessarily. But there is a note in the financial statements that does break out income in Canada and income in the U.S. What that relates to, though, is it reflects the income breakdown after all those costs, including the internal financing costs.

So what happens is, our parent Company provides financing to Canadian operations and U.S. operations. In the event, financing income then would be reflected as part of the Canadian income. It wouldn't have an effect on the net Canadian numbers, but it would reduce the U.S. numbers lower than what the operating income would be. So the numbers that you would be looking at there in that note would not be reflective of operating income. It is more of a taxable income item.

Okay, thanks for the explanation. Second question, there is a dispute; the City of Ottawa walked away from a contract that I believe you were involved in. A couple of your partners were forced to take provisions related to that contract until there is a settlement. I'm just wondering what sort of earnings per share number did that cost you while you wait for the City of Ottawa to repay contractors?

Well, two things on that. One is that our impact isn't as great as our other partners. Because on those P3 type assignments, we get paid for part of the work that we do when we are preparing the proposal. Because we have to do most of the work in order for our partners to be able to put a price on it.

So the exposure that we get is more that all of the costs that we have incurred for that have all been accounted for. We generally tend to get a bonus, like a success fee, when the project is awarded.

So overall, it is not immaterial number in terms of the way it affects us, either if we are successful or if we are not. They are reviewing that contract, by the way, and it may still come back. You never know. Because they are reviewing it as we speak because of the costs. But our partners have certainly made a claim for the cancellation of the contract; and if they are successful, we actually get a bit of a bonus on that rather than costing us anything.

Okay, thanks for that, Tony. Thanks, Don.

(OPERATOR INSTRUCTIONS) Anthony Zicha from Scotia Capital.

Tony, with reference to the shortage of engineers across North America, could you please tell us about the employee turnover at Stantec and how does it compare to the North American industry?

Well, I think from most of the stats that we have our turnover is comparable to the rest of the industry. In some areas, we are probably a few percentage points higher than the industry; and that, you should expect it because of the acquisitions and things that we do.

So we are not dissatisfied with our turnover. We think it is manageable. Quite honestly, we are managing to do okay on the turnover part. Where we face a challenge and I think most of our competitors face a challenge is not as much on the turnover. It is on the ability to sort of grow more organically by being able to find additional staff.

In most of the markets that we are in, with respect to turnover, we're able to attract good quality employees because we are still a good employer. We have a good reputation, and we generally have been able to replace staff even at higher turnovers the last year or two.

But if there is a concern, it is more (inaudible) it is an industry concern. It is really more if the entire infrastructure sector continues to grow. There may not be sufficient staff overall without poaching other companies. On the turnover side, though, we are okay.

Thank you.

Sara Elford from Canaccord Adams.

Just bigger-picture question that I am I guess personally interested in is with respect to some of the momentum that you're seeing in sustainable design, whether it is related to renewable energy or green or LEED certified buildings and the like. Do you think it is -- it strikes me from the outside that it has picked up materially. Is that a fair assessment on my part? Do you think that it is here to stay?

Well, I mean, as you know, we are biased because we have been kind of investing in this for the last five years in anticipation of this trend happening. It is certainly more front of center. We see it more in terms of clients asking for it.

It is still in the minority of the work that we do overall and that clients do. But we're certainly seeing a tremendous pickup in interest. We haven't seen it totally translate to assignments yet. But I think if the interest is any indication, in the next year or two it should definitely pick up. Again, we think when that happens, that we are well positioned for it.

Tony, I guess that kind of brings in to my next question. I know that you have spent a lot of time focusing on this over the last several years. Do you believe that that then offers you somewhat of a lead in terms of -- I don't know if competitive advantage is the right term. But do clients recognize that when the time comes?

Well, we hope so. That is the plan. We certainly are doing our part. We are even attracting some employees who want to be part of that. I think in today's environment, employees sort of interview companies as much as companies interview them. So in a competitive environment for employees, having the right culture and values and ethics is really important, and we think we are well positioned for that.

So I think it will help us both in attracting employees and positioning ourselves with clients. Because what tends to happen is that -- like if you take an example like with LEED certification and accreditation, there's a lot of people that can become accredited. But when you then ask, well, how many actual LEED certified buildings have you done and have you actually had certified? Our numbers stand out because most people maybe could claim one or two.

So I think the fact that we have been doing it a bit longer for the clients who really care and want to get people that aren't just going to learn on their job, I think we are going to be well positioned for that. Whether that provides us a competitive advantage, it is up to the market to decide. We obviously believe that it will; and that is why we continue to invest in it. But we also think it is the right thing to do, so we are doing it not just for market reasons. It is also we believe it is the right thing to do.

Okay, great. Thank you, Tony.

Ben Cherniavsky from Raymond James.

Just a couple quick follow-ups on the income statement. What was the other income that amounted to -- looks like about C$1.5 million for the year?

That primarily is investment income earned by our insurance captive.

I'm sorry, earned by what?

By our captive insurance company.

Oh, okay. The amortization dropped off considerably in the fourth quarter. There was a comment in the press release about how that will move around following acquisitions. So has the pig swallowed the snake, so to speak? Have you digested most of the big increase in amortization from the last two big acquisitions? Or where -- just looking for a little bit of guidance on where this is going to go in the next few quarters and next year.

Well, that is a great picture in my mind, but what happens, Ben, as you know, when we do acquisitions there's a number of identifiable intangible assets that we assign values to as part of the purchase price. Typically, the two largest ones would be client relationships, which typically have a longer life. Perhaps 10 years, seven to 10 years is not an unreasonable time to amortize that over.

The other major one would be the value of backlog. That is typically amortized over what we estimate the length or the average life of projects to be. So that will be depending on the type of company and the types of projects that are in that company -- could be between 9 and 18 months as a range.

So when you think back to, for example, Keith and Keen, which were the acquisitions we completed in the fourth quarter of 2005, the backlog would be amortized for those. Either nearly amortized at the end of 2006 or very early in 2007 we will be just about completely amortized out on those.

Okay. So we are looking then at -- it won't be as high as last year? As we lap these next couple quarters we will see --?

We would expect that the amortization of backlog would decline in 2007, outside of other acquisitions that are completed.

It looks to me like you had an awfully low interest expense in the quarter. I recognize you paid down some debt, but the number still looks quite low to me relative to your debt balances through the quarter and for the year. Is there anything you can say about that?

Well, in addition to the amount of debt, especially bank debt at the end of the quarter, which was pretty negligible, we had cash on hand, which is invested in interest-bearing accounts, even overnight accounts. At the end of the year, it was C$28 million. So when you net those amounts, that will have an impact on the net expense in the quarter as well.

Okay. Sorry, just going back really quickly to that insurance company that you talked about. It was up quite a bit from the previous year. Is there something going on there that is -- why is this growing like this? Other income?

No, I don't think there is anything unusual there. Like I say, that is the largest part of that, the number would be investment income that is earned on the investments in our insurance captive. But it would also include other items as well. So you see that variation.

I think as you also take a look at the amount of investment capital that is held by the captive, it has been growing since we set up the captive in the fall of 2003. So the amount of capital that is there has been growing during the year as well.

If you remember, I think we indicated when we set up the captive that it would take as a few years to get that thing up and running and stable, in terms of its capital base. I think we are pretty well there now.

As a result, though we have -- we may take certain provisions and we do our actuarial studies, so we have the proper provisions. But there's still capital in the insurance company that some of these potential claims may have a five- to seven-year tail on them. (multiple speakers) we have the provisions and we have got the capital to cover it. They are not necessarily -- the funds are still being held in the account.

Okay, sorry to focus on that. I had just forgotten about that, that you had established that fund. Thanks.

Richard Stoneman.

Just a bit of color on the California market. Housing starts are down 30% year-over-year. Any sign that infrastructure spending is increasing? Any sign that the housing start decline has started to level off?

Well, I guess there are statistics and other statistics. When we look at the California market in the areas that we track, we are seeing -- and where we are most active, we saw about a 5% decline in '06. The projection for '07 is probably a similar level of decline, in and around the 5%. So I think in the areas that we are tracking the numbers are not quite as severe as perhaps the 30% number. Maybe that is the overall market.

The other thing is there has been some bond issues that were approved in the last election, or in the referendum that they had, that does increase public spending in California for environmental and transportation projects.

So although we are not a big player in that market yet, we have been spending the time since we did the TKC acquisition adding staff, and doing strategic hires, and pursuing assignments. We have started to be successful in getting assignments. Although they haven't shown up in our results really to a material effect yet, the prospects for us are quite good.

We think as far as Stantec is concerned -- again, not looking at the macrotrend -- since we didn't have much of a presence in the public sector, for us it is a growth sector in the California market.

Tony, if I can recall, the Transportation Equity Act 2100, it took about two years between the money getting approved and any projects being let. Is this the same sort of time frame again?

Well, for new projects it is right, and in some instances if they had projects that were already designed and were in the shop and they were ready to go, that money was freed up a little bit earlier. We didn't have too many of those. So we are kind of following on the tail end. So you are probably right in that it is about a two-year lag from the time that things were announced and the new funds are freed up for other assignments that were not on the shelf and had been done previously.

So we are starting to see that. So even though -- like if you look at our Transportation revenue, that even though as a percentage it has gone down, in absolute dollars it is up about C$50 million in '06. So sometimes again the percentages [made] historic to what is actually happening in an area because of the other things where we have been growing faster.

But we actually did quite a bit better in Transportation. I think from a base of give or take C$90 million in revenue to about 105, C$106 million in '06. So it was about a 15% increase in -- 15 to 17% increase in the volume that we were doing in that area. So we are seeing the trend as far as Stantec is concerned.

Okay, thanks Tony. Hope you're feeling better.

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Okay. Well, if there are no more questions, I would like to thank everyone for joining us today. Don and I look forward to speaking with you again at the end of the first quarter. Thank you very much.

Thank you. Ladies and gentlemen, this concludes the Stantec, Inc., 2006 fourth-quarter year-end earnings conference call. Thank you from TELUS.