Stantec Inc (STN) 2007 Q1 法說會逐字稿

Thank you for holding for the Stantec Incorporated first-quarter 2007 results conference call. I would like to introduce Tony Franceschini. Please go ahead.

Thank you, Matthew. Good afternoon everyone and welcome to our 2007 first-quarter conference call. Joining me as always 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 her 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 on 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 then Don or me to please request permission to do so from the individual concerned.

This morning prior to our annual and special meeting, we released the results of Stantec's operations for the first quarter of 2007. I am again pleased to report that we are beginning the year with strong performance. Gross revenue for the quarter increased 16.7% to $216.3 million from $185.3 million in the first quarter of 2006. Net revenue increased 17.9% to $192.3 million from $163.1 million. Net income increased 35.1% to $15.4 million from $11.4 million. And finally diluted earnings per share were 32% higher at $0.33 versus $0.25.

Contributing to the increase in net income were three factors, decreased amortization of intangible assets, lower net interest expense, and a higher gross margin percentage compared to the same period in 2006 which together positively impacted our bottom line. There was also a small positive impact from foreign exchange since the Canadian dollar averaged $0.85 in the first quarter of 2007 compared to $0.87 U.S. in the first quarter of 2006.

Our gross margin percentage was higher because of the mix and type of projects we completed during the quarter. Over the remainder of the year, we expect both our amortization of intangible assets and our net interest expense to increase as a result of the acquisition of Vollmer Associates early in the second quarter and overall for the year, we still expect our gross margin to be between 55% and 57%.

With respect to net revenue growth of the total $29.2 million, about 39% was due to acquisitions and the balance was primarily from organic growth. Our revenue breakdown by practice area in the first quarter was 31% in Urban Land, 23% in buildings, 20% in environment, and 13% each in transportation and the industrial and project management practice areas. Our practice area split was a little better balanced with less weighting in Urban Land since it was relatively flat for the quarter. However this was offset by good increases in the environment and the industrial and project management practice area.

Each quarter I like to highlight some of our new project awards to illustrate the scope and variety of assignments that continue to demonstrate the strength of our business model and the evolution of our practice areas. In the transportation sector, we obtained an assignment with the New York State DOT to design the reconstruction of ten miles of interstate 87 north of Albany New York. The four-year project will involve pavement analysis and advanced traffic modeling of this busy six-lane urban interstate as well as capacity studies of six service interchanges and a system conjunction with Interstate 90.

We were also granted a three-year on-call assignment with North Carolina DOT Rails division to provide general railroad engineering services, highway railroad crossing evaluation and railroad planning studies throughout North Carolina. And we were awarded a two-year on-call contract with the Ontario Ministry of Transportation to provide engineering services for bridge projects in Ontario's central region.

In the environment sector, we obtained a two-year contract to provide a variety of environmental assessment services throughout the province of Saskatchewan for SaskPower. Our work will include environmental assessments and screenings, field investigations and the development of environmental codes of practice among other responsibilities.

And we are designing an expansion of the Tussahaw Water Treatment Plant in Henry County Georgia doubling its treatment capacity from 13 million U.S. gallons to 26 million U.S. gallons per day. In the building sector, Stantec Architecture was selected in association with another firm to serve as the architect for a new Peace Country Regional Health Center including a 300 bed acute care hospital to be located in Grande Prairie Alberta. We are also providing integrated planning, landscape architecture, transportation, heliport design and structural, mechanical, electrical, and civil engineering services for the project.

And Stantec Architecture and Stantec Consulting are providing integrated architectural and mechanical engineering services in designing the new university center at the University of British Columbia Okanagan campus in Colona. This lead growth targeted project will feature the use of geothermal energy, natural ventilation, heat recycling and other green technology.

Other notable projects include an assignment to provide civil engineering planning and mapping services for the development of McAllister Ranch, a new 2000 acre residential community in Bakersfield California. We've also been chosen as one of six firms to complete various projects across Canada over the next five years for the Department of National Defense. These projects will require integrated services coordinated by our manufacturing industrial team from many of our practice areas.

Immediately following the end of the first quarter, we completed the acquisition of Vollmer Associates, a 600-person firm headquartered in New York City that focuses on providing engineering, architecture, planning, landscape architecture, and survey services for the transportation sector. Along without adding 20 offices to our operations in the Northeastern United States, this integration of the Vollmer staff will significantly enhance our transportation practice in North America, particularly in the area of toll roads.

So overall, the first quarter of 2007 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 the prospects positive for the remainder of the year.

We base this positive outlook on a number of factors. One, favorable energy prices continue to spur investment in oil and gas infrastructure over the next five years, particularly in Canada where much of this investment is in our backyard, Alberta's oilsands. Although the petroleum market is not one of our core practice areas, Stantec is a major player in the support infrastructure associated with this development such as a site development, utilities, power, transportation, rail, telecommunications, workforce housing, roadways, airfields and other related infrastructure.

The demand for renewable energy facilities such as ethanol, biomass, solar and wind power is also increasing and this is in area of focus in the power sector for us. The demand for also power transmission facilities in North America, another area of service for us from the survey work for line location to facility design is also increasing. And on the public side, there is favorable federal government spending on infrastructure programs in Canada as outlined in the recent 2007 budget and in the United States ongoing with programs such as the SAFETEA-LU program in the transportation sector.

And finally increased funding in both Canada and the U.S. for water quality and wastewater initiatives generally resulting from heightened regulatory activities regarding clean water as well as for the rehabilitation or replacement of aging infrastructure and the development of new infrastructure in those areas where there is population growth which impacts several regions in the U.S.

This completes our brief prepared comments for today. Don and I are now available to answer any questions you may have. The conference call operator, Matthew, will explain the question procedure.

(OPERATOR INSTRUCTIONS) Sarah Hughes, Cormark Securities in Toronto.

Just a few questions. Tony, first of all on the transportation and the Vollmer acquisition, would they have a similar gross margin to your transportation margin?

Generally the answer to that is yes because some of the work that they do, when we look at going forward, it will depend a little bit on the type of work that we do. But generally speaking, some of the public sector work for like the New York DOT and the City of New York would generally tend to have little bit lower margins than the average of what we have in transportation at the present time. Some of the work they do like toll roads and other areas will have higher margins than our average.

At the present time, our best estimate is that overall they should be in about the same range as our consolidated transportation margin. But we are not 100% sure -- we have a -- that is our expectation at this point in time.

Okay. And on the transportation market in the U.S., I know there has been lots of talk on the Transportation Equity Act and that is starting to fuel growth. You had some organic growth in that division in '06 but it was fairly modest. Do you see that upticking in 2007?

We hope so. What happened in '06 was really that it was a little bit the luck of the draw because a number of projects in all five had been put on hold pending the affirmation of the longer-term funding. Those projects then start to get released into '06 and now into '07. We didn't have as many of the ones that had been put on hold for us released so you are correct in that we didn't do quite as well on the organic side in transportation.

We think that the prospects are better in '07 for the ones that we have. So at least in our U.S. practice, we would think that our organic growth in transportation will be better than in '06.

Okay. And on the environment practices, have you seen -- is the strength -- organic strength been similar in Canada versus the U.S. or you've seen it better in Canada?

A little bit better in Canada right now. Our two strongest markets in the environment side are Alberta and Ontario -- Ontario Canada. And both of those areas we've had some fairly good successes in terms of some environmental jobs. You also got a fairly good job in Winnipeg in terms of an upgrade to their wastewater treatment plant. So if I were to look at the two right now, it's probably more like a 60/40 weighted toward Canada.

Okay. And then just lastly I listened to your ATM on the webcast. I was surprised and I think I heard you hardly correctly saying you are building revenue was 90% Canada?

Yes.

And so and obviously building is a pretty big market segment. So going into the U.S., would you have to acquire into that building segment or in say your core markets U.S. East or U.S. West, could you grow into that segment?

No, we would have to -- to answer the first part, we would definitely have to acquire in order to get the kind of presence we want. Our goal is going to continue to do like we have now where its 90/10 like we have a presence but what we need is an anchor on the West Coast and on the East Coast. If we get an anchor on the West Coast first, it will improve our West Coast presence but it won't do that much for the East Coast and vice versa.

So for us to take advantage of where we have a physical presence to any meaningful way and then start to lever that to get more organic growth, we need a catalyst on both coasts. And in our acquisition pipeline there are companies that could fuel that goal in the building side.

Would they be fairly big acquisitions given the size of the market segment?

They could but I think we don't -- they don't have to be big in order for them to achieve the objectives that we have. I think that if we start within architectural firm, a 100% architectural firm would be considered a top tier side because there aren't that many architectural firms over 100 staff. There is many that are smaller than that. So our preference in the kind of firms we are looking at is to look at firms on the architectural side that have at least 100 either on the West and East Coast. And then we would follow that up with the buildings engineering component, M&E and structural.

Great, thank you.

Thank you.

Richard Stoneman, Dundee Securities in Toronto.

Good afternoon, Tony. A couple of questions. First question is related to the amortization of intangible assets on page M-10. I'm looking at the paragraph that starts about two-thirds down that says based on the unamortized intangible asset balance remaining at the end Q1 '07, we expect the amortization expense for intangible assets to be in the range of 2.5 to 3 million by year end. Is that in total or is that on a quarterly basis?

Richard, it's Don. That would be the total expense that we would expect for the end of a year.

Okay, so somewhat lower than the current quarter and plus whatever acquisitions you make?

That is exactly correct.

The second question has to do with the housing business. Your Urban Land business was flat Q1 over -- Q1 this year versus Q1 last year. And given the seasonality, it was relatively in line with Q4. Do you think you can keep these numbers at about this flat range over the balance of the year in Urban Lands?

Our target is to do that. If we do that that would be a good thing like we do think there has been pressure as you know for the last year and because of the type of clients and things that we have, we've managed to maintain it flat. And the way we've done that is partly because some of that business has shifted to the commercial retail from some of the residential. We are also doing some worksharing and so forth.

So I think as far as our existing business is concerned excluding acquisition, I think our best case scenario is to keep it flat but we also have a contingency if that does lower 5% to 7%. So we wouldn't be totally surprised if we do get a modest decline. We don't see it yet. We've managed to as you've seen in the numbers maintain that number. But we don't know what is going to happen in that marketplace. And if it does continue to contract, we may be impacted.

In this environment, Tony, flat is a victory.

That is what I was saying. We are happy with flat.

Okay. Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS) Bert Powell, BMO Capital Markets from Toronto.

Thanks. Tony, just looking at the gross margins for the quarter up in most cases especially in Urban Land. Can you help me understand that a little bit? Are we seeing better utilization rates? Do you guys have pricing power in the market better than you've had in the past? I'm just surprised that Urban Land actually would have stayed up this quarter.

It's interesting because part of the thing that affects the gross margin there is two components to the gross margin. The one component is the actual fee that we get in relationship to our direct labor cost so that, if we can charge a bit more then the margin goes up. The second half is that how effectively and efficiently we can do the work because if we don't get to bill till we're happy with our clients. We do work on budget so that if we are able to have better clients and better projects then the likelihood of having to absorb some time on the job is less. And any time that we absorb affects the gross margin.

So if we were a little more efficient in doing our work and part of that efficiency is if we're working on the better clients and better projects, that's why the margins have been a little bit better. So it is a combination of things. In this particular quarter, it hasn't been or really the last couple of quarters, it hasn't been because we are charging more for our services, it has been because we've had less if you want you call them -- they are not really write-downs -- but we've had to absorb less nonproductive time.

Okay. So as the Urban Land business potentially could slow or at least stay flat and your history of tending to work with the same clients over and over, then is it reasonable to expect that the margins should remain at still fairly decent levels given your familiarity with those clients?

That is our objective is that it should remain at these levels. We don't expect them to increase further but we think we can keep them at this level. And if we continue to execute well, which has really been our focus, then they should be there. There may be some pressure on pricing which then may even though we are being efficient if there is more pressure on pricing, that would tend to lower them a little bit. So we really are -- it is one of those two factors.

Right now we are fairly efficient so we've got that part done. The pricing has been stable, so that is good. The thing that would affect the margin would be if there is some price pressures and the actual pricing drops a little bit.

Okay. And just one last question. When you look at your backlog, clearly this quarter you cited mix as a beneficiary for you. When you look at the projects that you have coming down the pipeline in the next year would you expect to see a similar level of mix -- or the type of mix that we saw this quarter going forward or is there any shifts that you see in the next year?

I think as you get on into the year, we are starting to do some larger jobs. Of course the larger jobs come with bigger backlogs sort of per unit of work because they tend to go over a longer period of time whereas the smaller jobs tend to be three, six, nine months. So I think the trend if we are successful in getting the larger jobs should be to increase the backlog moderately over our existing levels.

No, but the mix in the backlog in terms of the types of projects that you take on your expectations for margins out of those projects.

Oh, in terms of margins.

Yes.

Sorry. The margins -- generally I think the margins that you see here are generally in the right range and I think overall we said 55% to 57% is what we are comfortable with.

Okay, thank you very much.

John Rogers, D.A. Davidson in Portland.

Good afternoon. Tony, I heard what you were saying about margins and not really boosting prices to a significant degree. But I am curious listening to some of the other engineering firms talk about seeing some better multipliers in the market. And I'm wondering if you are not seeing that, why or is jut a different market -- markets that you are in? And secondly, in terms of retention of people and hiring of new people for organic growth, can you give us an update there, how that's going?

Okay, the first question on the margins I think maybe if you looked at our margins, we generally are in the upward 10% of our industry so they have been at the top end. I think perhaps some of the other firms are just catching up in terms of getting closer to those margins. From our perspective and the client with the client base that we have, they've always been good clients and as a result, we have tended to have better margins and that is why we are not necessarily seeing them trend up too much.

We started this trend about three years ago and I think through a combination of factors have improved our overall gross margins in the 2% to 3% arrange. But maybe we are slightly ahead of the curve with respect to some of our competitors, that is why we don't really see a lot more opportunity for improvements to the margin.

As far as staffing is concerned, we see that as a regional thing. There are areas like (inaudible) Alberta in Canada where hiring people is an issue overall in the marketplace. Fortunately it also happens to be an area we're a top player so it is easier for us to attract and retain the best talent because we are an attractive employer. The same in some of the other areas we are in like California where we have a top tier position.

I think as a company, we have a pretty good plan to deal with shortages in any one area because I honestly believe that unlike most if not all of our competitors, over the last five to seven years we have spent a lot of time and effort trying to get everybody in the company to work across different offices and share work and everything else. And all of those things that we've developed and evolved is helping us now when we have shortages in certain areas. But quite honestly there are still a lot of talented people but it happened to be in places like Vermont and Maine and Michigan and other areas that are not doing as well and -- but they are not in some of the areas that are really busy.

So we've had really good success with truly being able to work share. And also we had a very -- we've always taken a long-term view and have always hired people so that we have a pretty good pipeline of younger people moving up.

The issue with staffing right now, John, is that if you ask people in our industry, everybody is looking for the same individuals with 110 to 15 years experience. And the reality is there simply are not enough of those guys. So what happens is we steal some from our competitors, they steal some from us and so forth. But it is a zero net sum gain. There is only so many people in the industry with 10 to 15 years experience.

SO our approach and we would kind of recognize this, so we always say and we said it this morning in our annual meeting that if you want people with 10 to 15 years experience, you hire them 10 or 15 years ago. So if you've had a very good staff training and retention program over the last 10 or 15 years, you will now find that you are getting more people moving up. What we have found is that we are tending to put people with seven, eight, nine years experience perhaps into roles that normally would have been 10, 11, 12 years.

So, it is an issue for the industry, but I think as a firm at least so far we've been able to cope with it and I can't honestly say that we're being limited in our organic growth simply because we can't find enough staff. It is a factor but on its own, it is not the major factor.

Thank you.

Thank you.

There is currently no question in the queue.

Okay, we always like it when it is a brief conference call. So since there are no more questions, I would like to thank everyone for joining us today. We certainly look forward to speaking to you again -- speaking with you at our next conference call. So we will now sign off.

Thank you. Ladies and gentlemen, this concludes the Stantec, Inc. first-quarter 2007 result conference call. Thank you from [Telus].