Stantec Inc (STN) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for holding for the Stantec, Inc. 2007 second-quarter earnings release conference call. I would now like to introduce Tony Franceschini. Please go ahead.

Thank you, [Ryan]. Good afternoon, everyone, and welcome to our 2007 second-quarter conference call. Joining me as usual is Don Wilson, our Chief Financial Officer. As usual, we will comment briefly about our results and the outlook for our market, and then we will address individual questions.

Before we begin, I would like to caution you that our discussion this afternoon will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of these forward-looking statements may involve risks and uncertainties, and actual results may differ materially from those discussed in these statements. Additional information concerning factors that could cause actual results to differ materially from those discussed in this conference call can be found in Stantec's filings with relevant securities commissions, located at SEDAR and EDGAR.

I would also like to advise you that this conference call is being broadcast live over the Internet and will be archived for future reference at Stantec.com under the investor relations section. Therefore, we ask any members of the media 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 2007. I am pleased to report continuing positive performance during a very active quarter for us. Gross revenue for the quarter increased 17.2% to 244.7 million from 208.8 million in the second quarter of 2006. Net revenue increased 18.4% to 215.7 million from 182.2 million. Net income increased 4.8% to 17.5 million from 16.7 million. And diluted earnings per share were 5.6% higher at $0.38 versus $0.36 for the same period last year.

On a year-to-date basis, gross revenues up 17% to 461 million, net revenues up 18.2% to 408 million, net income is up 17.1% to 32.9 million, and diluted earnings per share are up 16.4% to $0.71. In Q2 '07 compared with Q2 '06, net income did not increase in line with net revenue due to four principal factors.

One, there was an additional 2.8 million in bad debt expense. We adjust our bad debt expense quarterly based on historical experience. As you are aware, we have provided more detailed tracking of allowance for doubtful accounts since early 2005, and this has created more fluctuations in the consolidated allowance each quarter. This does not reflect a deterioration of bad debt in Q2 '07, but rather improved tracking of historical allowance for doubtful accounts.

Number two, as indicated previously, our self-insured liabilities from our captive insurance are subject to quarterly fluctuations based on actuarial reviews, as well as the timing and the settlement of claims. This quarter we incurred an expense of 2.2 million, versus a recovery of 1 million in Q2 '06.

Number three, we often use retention bonuses as part of our acquired staff integration plan. In Q2 '07 we incurred an additional $700,000 in retention bonuses.

And number four, we incurred additional marketing and administrative expenses due to the orientation and integration activities during the quarter. On this last item, during the second quarter, we integrated approximately 670 staff who joined Stantec since the beginning of April through the acquisition of Vollmer Associates, Land Use Consultants and Geller DeVellis. Although we have incurred some additional costs, we are very pleased with the results and with how quickly these firms' systems have been converted to ours, and how our new employees have taken up our One Team-Infinite Solutions philosophy. We expect the integration of these new colleagues to be substantially complete by the end of the third quarter.

Our overall mix of business among practice areas continues to evolve. In the second quarter, if we look on a trailing 12-month basis, our current mix of business is approximately 32% in urban land, 22% in building, 19% in environment, 14% in transportation, and 13% in industrial and project management. On a year-to-date basis, our overall revenue growth has been about 50% through acquisition and 50% through organic growth.

I would now like to highlight some of our new project awards to illustrate the continuing evolution of our practice. And in particular, I want to focus on some complementary and integrated services, particularly projects secured through the new teams that we are building through recent acquisitions.

For example, the extension of our landscape architecture practice in the U.S. East in the public sector helped us secure the reconstruction of Fort Washington Park project with the City of New York Parks & Recreation Department. This project, involving 160 acres of land fronting the Hudson River, is part of New York City Mayor Michael Bloomberg's PlaNYC initiative, which will give New Yorkers new and reconstructed open space and outstanding recreational opportunities. Our specific responsibilities include completion of the master plan, public outreach, and participation in the schematic, preliminary and final design, including a number of services such as site survey, engineering and landscape architecture design.

Our integrated transportation practice in New York State has also helped us secure projects, such as a two-year contract to complete the preliminary design of the reconstruction of Interstate 90 between Interchanges 24 and 25 for the New York State Thruway Authority. We will be responsible for developing design alternatives, assessing social, economic and environmental impacts, preparing a design approval document, and conducting public information meetings.

We have also been chosen to provide additional design services for the Thruway Authority's Albany division for highway and interchange reconstruction, bridge rehabilitation or replacement, and transportation facilities projects under a three-year term agreement.

And in Cherry Hill, New Jersey, we are providing fully integrated services in architecture, engineering, (inaudible) planning, surveying, landscape architecture, and construction administration project management for major renovations and additions to four separate fire stations for the Cherry Hill Fire Department. This is the first major collaborative assignment for our new architecture and engineering groups in Rochelle Park and Mount Laurel, New Jersey.

Other significant projects this quarter include work to prepare a comprehensive facility plan for the City of Sparks in Nevada to accommodate population growth to the year 2030. This particular project involves completion of integrated conceptual plans for water, wastewater, drainage and transportation facilities, as well as for infrastructure backbone needs and costs for a 10,000-acre service area.

Similarly, in Ontario, Canada, we are developing an infrastructure asset management plan for the city of North Bay, and working with the City to select and implement an infrastructure asset management software solution. We anticipate that this will be the first of many such projects in the Province of Ontario, as municipalities begin to implement full-cost accounting and other asset management-related initiatives.

We have also been selected for a five-year Master Services Agreement to act as the prime consultant for several projects for Suncor Energy in Alberta. All together these projects will involve the work of integrated teams from all of our practice areas. Currently, one specific project is that we're providing the interior design for a complete renovation of Suncor's corporate headquarters in Calgary. Work has also begun on several projects at the Fort McMurray Oil Sands Plant Site, including the architecture and interior design of office space, warehouses, shops and residences, along with the provision of environmental infrastructure services for water and wastewater treatment.

Our outlook for the remainder of 2007 remains positive. As indicated previously, the urban land market has slowed, and we have seen a modest reduction in our year-to-date organic growth in this area of approximately $5 million in revenue, or 4%. Our clients suggest that we are at or near the bottom for single-family housing starts, as they have been in the 1.1 million range in the U.S. for the past six months, from a high of approximately 1.8 million in January of 2006, and about 140,000 in Canada from a high of 160,000 during the same period. Although we may not see a rebound this year, or early next year, the current consensus is that no further deterioration is expected.

On the other end of the scale, the industrial market is strong, particularly in the energy and resources area in our home base here in Alberta. And we expect continued strong organic growth in this area. On a year-to-date basis, we have seen approximately a 44% increase internally in our revenue.

The environmental market is also strong in Canada and the U.S., with increasing regulatory requirements in the public sector. And this has helped our internal growth rate in the environmental area reach 20%.

The buildings market continues to be strong, again, in our key market areas in Western Canada in our two strongest sectors of healthcare and higher education. And this has contributed to an 8% organic growth.

The transportation market for us has been flat this year, excluding acquisitions, with a modest actual 3% decrease in net revenue. This decrease has been principally due to the timing of some new larger projects, some of which I indicated, and the start of these projects, as well as the completion of some of our largest projects, and does not reflect the general state of this market, which is still favorable due to continued public sector spending.

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

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

Tony, in the transportation space, you had some timing issues this quarter. (technical difficulty) do you expect those contracts that were delayed in terms of starting to start up? Is that going to be this quarter, or is there some larger projects that are going to be phased in over the balance of the year?

We expect, certainly, some to start this quarter, and in the fourth quarter, even more. So, at least all the feedback that we're getting from our guys in the individual regions in this practice area is that this timing issue sometimes comes up -- you're completing some jobs and starting others -- that the workload is there. We have secured the backlog, but we can't always quite dictate when the jobs start. Our expectation is that it will improve in the third quarter.

So is this just some projects ended sooner than you thought, and the ones you thought -- the ones that you have booked are going to start later than you thought? Or is it they're (inaudible) starting later?

It's more of the latter. It's not that they finished sooner than we thought, but the new ones weren't quite there. And what tends to happen is you can't kind of lay off the staff for a month or two months or even three months, so it does increase our admin and marketing costs to some extent. And it also means that we try to do some work sharing and so forth. But in some of the other markets we've been able to do it more effectively. In the transportation area there just wasn't enough, so we had that modest decrease. In terms of the reason going forward, it's mainly the delay in starting new ones, not that we finished early on old ones.

Is there any one thing that accounted for most of the delay? Was it a funding delay or something to that effect?

I don't know that I could put a specific reason for it. Sometimes it's just when the proposals were done. We can't plan exactly when the new work starts. And it's just -- there's probably not a scientific reason; it's a little bit of the luck of the draw in that one.

Last question, just on urban land. And maybe I'm barking up the wrong tree here. Some of the projects that you do in urban land are fairly large master community kind of projects that I would assume have, probably, multi-year characteristics to them. If you look at the work that you've got booked, or you think you'll have booked over the next 18 months, do we have some big projects coming to an end, and we can see an air pocket in that business in 2008? And you're hoping with the fact that -- your remarks, you talk about us being near the bottom, that you start to fill in that bookings air pocket. Or is your visibility with what you've got in that business reasonably decent for the next 18 months?

I think it's good. Our backlog is down. If you look at the backlog in that particular area, it is down a bit, which means that the -- and really what that really means is that from the point of view of sort of -- we look at it on the organic side, that the jobs -- sorry -- the individual phases on the project aren't starting up, and the clients do have some flexibility. And when you get to a slow market like we are right now, clients tend to make last-minute decisions, rather than two years ago, they would plan six months, 12 months in advance. Now they're planning six to 12 days in advance. So the idea is everybody wants to maintain their flexibility, so we're kind of caught in the middle a little bit, that the work is there, the projects are all long-term, but individual phases of the projects can be delayed. And generally, that impacts maybe a quarter of the business we do in there, things like the long-range planning, the master planning work and things like that. The entitlement process doesn't change as much. But the portion that's related to actually moving dirt and putting utilities and roadways on the ground, the portion that's more related to the actual number of sales that our clients are doing, that's the portion that gets impacted.

So if you look at Canada, reasonably healthy, with the U.S. weaker, but your strength is in the California market that has certain characteristics that might necessarily make it as weak. Is that still the case?

Yes. The California market is a little less than 35% of our business now. Actually, Alberta is probably a little more than 25%. We've probably gained a couple of percentage points in the Alberta market compared to California. Those are our two biggest markets -- combined account for a little over 60% of our business, or about 60%. So the California market has slowed, while the Alberta market has continued to grow. And they have tended to somewhat offset each other. Where the -- those two for the most part have offset each other. Where we've had a little bit of a slowdown is in the Ontario market compared to last year. And then the other areas are about the same or slightly improved, like the U.S. East, a little bit Florida, North Carolina, markets like that. So far, really, California and Alberta are offset each other.

Ben Cherniavsky, Raymond James.

I just have a quick question for you guys, one of the favorite recurring themes on acquisitions. What's the -- I know -- I'm assuming you've still got just as many companies in backlog as you normally do in your ongoing negotiations, but what's the general environment like for pricing? How aggressive are you being at the moment? Can you give us any indication of what you would like to achieve on the acquisition front in, say, a 12 to 18 month horizon?

Sure. I think, as we indicated before, the market is quite healthy. There are a number of firms that are [available]. We see more options coming out there. As we've indicated before, our preference has been to do negotiated transactions. And the good news is that we still have many of those. And the ones that are closest to completion are all effectively negotiated transactions that we are working on. We are participating in maybe not quite a handful, what I would call at least a modified version of an [auction], where there is more than one interested party for the firm. And clearly, on those, as well as the ones that we are negotiating on a one-on-one basis, the valuation expectations have gone up in the last year. They continue to be there. Are we being a little more aggressive? Perhaps. I think some of the valuation that we're putting on it is a reflection of the current market, and we expect to pay a little more. Having said that, there is enough in our pipeline and at different stages of discussion that it's not unrealistic to expect 200 to $250 million in additional volume in that 18-month timeframe that you indicated.

(OPERATOR INSTRUCTIONS). Richard Stoneman, Dundee Securities.

Tony, following on from Ben's question, what sort of ratios are people paying up there now for acquisitions, in terms of enterprise value EBITDA or earnings multiples.

The enterprise value EBITDA would probably be in -- if you want to be generous, in the 5 to 8 range. Maybe for the good firms, and certainly the larger -- what I would call the larger firms, let's say, the 50 million up, closer to the 6 to 8. Some of the smaller firms are still -- have a little more realistic expectations in the 5 to 6 range. But clearly, the good firms are getting closer to the 8.

And on a P/E basis, or do you use that?

Not really. (technical difficulty) tax structures (inaudible) on a simple conversion that (inaudible) EBITDA, Don, would convert to what? 15? 14, 15? (multiple speakers) it varies so much in terms of what the (multiple speakers)

(multiple speakers) partnership, so there's no taxable, no tax cost. And so it's really hard to compare.

Next question is, on page F8 of your notes, I'm looking at contract backlog this year, in terms of assets and liabilities acquired, versus last year. While the net assets acquired have gone from 17 million last year to 45 million this year, the contract backlog acquired has gone from 475,000 down to 29,000. Why would -- and the other one is client relationships; they've gone from 1.4 million to 888,000. Why haven't those numbers increased with the assets, or in line with the assets? They've gone down instead of up.

Those identifiable intangible assets are valued on a transaction-by-transaction basis, and it's based on the length of time that they've dealt with certain clients, the number of clients that the acquired companies have in their portfolio, as well as the number of projects, the size of projects, and the profitability of projects that those companies have. And I don't know that there's a simple formulaic answer that one can apply to it. We do engage external valuation consultants to assist us with placing a value on those other identifiable intangibles. And of course, what happens then is the excess of the purchase price of a company over the fair market value of the tangible assets falls into intangible assets. And anything that we can't identify, like client relationships or contract backlog, then falls into goodwill. But there is no simple straight-line relationship between the price that we pay for a company and the amount that we would assign to the value of client relationships and backlog.

Finally, in terms of bad debt, the City of Ottawa defaulted on that transit contract, and you guys were going to court. Have you recovered on that, and how big a dollar value is it?

The answer is we haven't recovered on that. We do have a provision that is set up for the amount. And as you know, that number could be more significant. But for us, order of magnitude, it's in the $2 million range.

Would that have influenced the bad debt provision?

Not specifically per se, because like the provision adjustment that we're talking about is kind of a running total consolidated number. I guess the answer is partially, but not totally, in terms of being able to specifically identify it as such. It's part of the whole basket of allowance for doubtful accounts, and it's really as much -- Don, correct me -- but it's kind of the change over that period of time.

One more question, Tony. You at Stantec have a big bridge inspection business.

Yes.

Following the incident in Montreal, I think there a bit more interest in that business. Do you think there's a lot more business to be had in terms of inspecting infrastructure? And how significant is it?

I think it could be big, just (inaudible) one of our structural engineers was a witness in that Montreal inquiry because of our bridge maintenance experience. And we probably do certainly over 1000 inspections a year across the system. I think it is an issue. We haven't seen it specifically translate to additional business yet. But you could speculate that it would certainly be more front of center. There's more awareness. And we're certainly in a position to do more of that type of work. And we do have a number of bridge maintenance and inspection manuals and systems and processes that could be implemented on a fairly quick basis with new jurisdictions. So I think you can expect that we will certainly make clients aware of that. Whether there's a takeup on it or not, I don't know. But we certainly are quite capable to react to that.

Brent Thielman, D.A. Davidson.

Just looking at your building segment, sort of in the commercial area, can you maybe give just a general sense of what that market looks like? You had it looks like about 15% growth there. Sort of what you're seeing in that area in particular.

Just as background, for those who don't know, our buildings market currently is about 90% in Canada. So our comments are really related to the Canadian marketplace more so than the U.S., because it only accounts for 10%. In Canada, we have four principal sectors that we work in, in order of the amount of work that we do. Number one is healthcare, number two is higher education, number three is airport terminals, and number four is commercial retail-type buildings. So those markets -- our number one market -- number one and two, healthcare and education, are both quite strong, because there is increased public spending in Canada in those two sectors. And our key markets in Alberta and B.C. are also very strong. And our third strongest market is Ontario, and that's also going up in healthcare and higher education. So we are not a huge commercial firm, so that has a little bit less impact on the things that we are doing. Clearly, the two principal factors are going to be continued investment in healthcare and education. And if that continues as it's expected it to, that sector of our business is going to continue to do well.

Do you have any interest in expanding that business into the U.S., or does sort of Canada look like a better market to you?

As a matter of fact, I'm glad you asked. We have been looking to expand on the West Coast and East Coast of the U.S., where we think we have the most compatibility with our existing practices. And without kind of revealing anything about specifics of our acquisition strategies, that we do expect to use an acquisition as a catalyst in the buildings market, either or both East Coast and West Coast, and hopefully this year.

Currently there are no further questions in the queue.

If there are no more questions, Don and I would like to thank you for joining us today. We certainly look forward to speaking with you again at the end of the Q3 call. Thank you.

Ladies and gentlemen, this now concludes the Stantec, Inc. 2007 second-quarter earnings release conference call. On behalf of myself and the rest of the conferencing team, thank you, and have a great day.