Stantec Inc (STN) 2010 Q1 法說會逐字稿

Welcome to Stantec [Consulting's] first-quarter 2010 earnings results conference call. At this time all participants are in a listen-only mode. Following the presentation we'll conduct a question-and-answer session. (Operator Instructions). As a reminder, today's conference is being recorded. It will available for replay on the investor section at Stantec.com. It is now my pleasure to introduce your host, Mr. Robert Gomes, President and CEO.

Good afternoon everyone, and welcome to our 2010 first-quarter conference call. Joining me is Dan Lefaivre, our Chief Financial Officer. Dan will provide a brief summary of our results for the quarter, and I will follow with an outline of our market outlook. We will then address individual questions.

Before we begin, I would like to make you aware of our Safe Harbor statement and to caution you that we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 in the United States and applicable securities legislation in Canada. By their very nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties that give rise to the possibility that our estimates, projections, expectations or conclusions will not prove to be accurate, that our assumptions may not be correct, and that our actual results may differ materially from those discussed in these statements.

You'll find more information about the assumptions and material factors that were applied or could cause actual results to differ materially from those we discuss in this conference call in the management's discussion and analysis included in our 2009 financial review.

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 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 Dan 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 first quarter of 2010. I am pleased to report that we began the year on a positive note with growth in gross revenue on a sequential basis. We continued to manage our business effectively in a difficult economy, and after nearly a year of having to reduce our staff levels, we added to our employee numbers during the first quarter.

Dan will now provide a review of our first-quarter financial results.

Good afternoon everyone. As Bob just indicated, in the first quarter of 2010 we achieved revenue growth on a sequential basis from the end of 2009. Gross revenue for the first quarter was CAD371.6 million, down CAD33.2 million from CAD404.8 million in Q1 '09. However, CAD30.4 million of this decrease was as a result of the change in foreign exchange. Our gross revenue in the first quarter of 2010 was up 8.4% in Q4 '09.

Our net revenue for the first quarter of 2010 was CAD296.8 million, down CAD46.4 million from CAD343.3 million in Q1 '09. The strengthening of the Canadian dollar made up CAD24.7 million of this decrease from Q1 '09. Net revenue was also up 8% from the fourth quarter 2009, however.

Our gross margin as a percentage of net revenue was 55.5% in the first quarter of 2010, compared to 56.4% in Q1 '09, and continued to fall within our range of 54.5% to 56.5%. Our gross margin percentages decreased slightly in all practice areas except urban land. These decreases were mainly due to the mix of projects and progress during the quarter, and also due to the pursuit of P3 projects. In the P3 pursuit phase we carry out work at a slightly lower margin, which we make up if we are successful in obtaining the project.

Our administrative and marketing expenses decreased to 42.2% during the first quarter of 2010, from 43.1% in Q1 '09, mainly due to achieving increased efficiencies. We also carried out fewer integration activities during the first quarter of 2010 than in Q1 '09, when we completed the system integration for the C-Cor acquisition and began the process of integrating staff in the Jacques Whitford acquisition.

During the quarter we reorganized our corporate tax structure. Our income tax expense increased by CAD6.2 million, resulting in an effective tax rate of 51.1%. Since we immediately recognized the entire tax impact of this reorganization in the first quarter we expect a lower effective tax rate in each of the three quarters remaining in the year. We believe that by the end of 2010 our effective tax rate will be within our targeted range of 32.5% to 34.5%. This one-time, non-cash event is part of our long-term strategy to make our corporate tax structure more efficient.

Without this one-time tax impact, our net income for the first quarter was CAD19.9 million, compared to CAD20.7 million in the first quarter of 2009, and our diluted earnings per share were CAD0.43, compared to CAD0.45.

With the tax impact, reported net income was CAD13.7 million for the first quarter of '10, and reported diluted earnings per share was CAD0.30.

Overall we are pleased with our first-quarter results. Our performance in the quarter was consistent on a sequential basis with our performance in Q4 '09, and we continue to manage our operations effectively.

Earlier this week we announced the filing of a shelf prospectus in Canada and the United States. This prospectus allows us to issue up to 300 million in common shares from time to time over a 25-month period. We believe this shelf prospectus is a good complement to our existing debt facilities and will give us the opportunity to tailor our financing strategy to meet future needs. Although the shelf prospectus is a new tool for Stantec, it is a tool that is commonly used by other companies of similar size.

I would now like to highlight some of our new project awards. Our project activity during the first quarter showcased both our diversity and our growing ability to work with national and international clients on long-term projects.

For example we secured a five-year, multiple award task order contract to provide full architecture and engineering services for various projects with the united -- US Army Corps of Engineers, Los Angeles district. The task orders will include design/build, maintenance, repair and construction projects.

We are also increasing our activity in the area of combined sewer overflow reduction. For example we are providing support services for the municipal flow monitoring project in Tacoma, Washington. In addition to incorporating the city's existing flow monitoring network into our management software, we are providing technical support and training, and assisting with flow monitoring site selection.

CSO reduction is a growing focus for many communities across North America.

Oil and gas, and mining sectors are showing some signs of recovery in 2010. During the first quarter we were awarded a contract to provide the engineering, procurement and construction management services for transporting oil product to the Kearl Oil Sands project in northern Alberta for Inter Pipeline Fund.

In the mining sector we are providing engineering design and related services for developing the shaft and hoisting systems for BHP Billiton's Jansen potash mine project in Saskatchewan.

In the transportation area, noteworthy awards include a three-year contract to provide structural engineering services for transportation projects across Vermont to the Vermont Agency of Transportation, and an assignment to design emergency crossover signaling for the Dallas Area Rapid Transit System.

And in urban land we were chosen to be the prime consultant for a streetscape project at the University of South Carolina in Columbia, which will involve designing storm water management, bicycle lanes, street lighting and other amenities. In addition, land development activity continues to build in Canada, where work has begun on the first stage of a new master planned community in northeast Edmonton. The Big Lake Neighborhood will be the first community to use a bioswale stormwater system in cold climate conditions.

As usual, I've highlighted only a small sample of the projects we're working on. Completing many projects for many clients mitigates risk for our company. As always, we'd like to thank our clients for their continued trust in our services.

Now I'd like to comment briefly about the potential market conditions for our services going forward. As we mentioned in our news release this morning, increased activity during the first quarter enabled us to increase our staff levels to approximately 9400, from 9300 at the end of 2009.

Our backlog also stabilized. After increasing CAD5.5 million in the first quarter of 2010, compared to the fourth quarter 2009, it was then offset by a CAD15.5 million reduction due to the impact of foreign exchange. We believe that we can continue to improve our backlog level by managing our business effectively and focusing on our top clients through our account management program.

Looking at our individual practice areas, we expect the following for the rest of 2010. We believe that we will see continued monitored -- moderate growth in our buildings practice area in the second quarter of 2010. Our strategy for the rest of this year is to continue to focus on our key capability areas -- higher education and healthcare -- and to use our success in the Canadian healthcare market to strengthen our position in the United States.

We expect the outlook for our environment practice to be stable in the second quarter of 2010, with moderate growth expected in the second half of the year. Because of our expansion in this area in 2009, we are now one of the top 10 global environmental service providers, and we anticipate this will continue to lead to larger long-term projects with national and international scope in 2010.

We believe that our industrial practice area will remain stable for the second quarter of 2010 and may grow modestly in the second half of the year, depending on the speed of the economic recovery in the United States.

With the recent increase in commodity prices, we also expect to see activity continue in the mining and resource sectors. We are well-positioned to take advantage of future opportunities in the industrial markets because our geographic diversity, expertise and good client relationships.

We believe that our transportation practice area will remain stable for the rest of 2010, and we anticipate that our rail and transit groups in particular will be more active during the year. Although short-term extensions to the US federal transportation legislation may also help maintain our transportation activity levels, lower tax revenues, state and provincial deficits, and the lack of long-term US legislation may cause delays in many planned transportation projects.

Based on the forecasted minor recovery in the residential sectors in the United States and Canada, we believe our urban land practice will also be stable in 2010. Over the year we expect to continue to diversify our client base in this area and to use and build our reputation with the public sector.

To sum up, we believe that our overall outlook for 2010 is stable, with moderate growth beginning in the second half of the year. At this time we are still experiencing the impacts of increased competition, margin compressions, and project delays. However, we continue to see signs that the North American economy is slowly recovering.

Looking ahead, we believe that our diversity, client mix, and flexibility will help us continue to adapt our business to these improving economic conditions.

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

(Operator Instructions). Sara O'Brien, RBC Capital Markets.

First question on backlog, just book-to-bill is still less than 1 times, and I guess in terms of number of months of backlog, it's still less than eight months. I just wondered if there's anything that's concerning to you on that front. Because I know on the last call you commented that once you book into backlog, it's going to take maybe 3 to 6 months before it translates into a go on the project. So how do you look at your backlog relative to the comments that were made in Q4 at the time when it was growing?

Well, actually once the numbers are actually in our backlog, it doesn't take long for us to actually start producing that into revenue. It takes a long time from a project award to get into backlog because the way that we actually insert backlog is, we only -- we wait for not only a notice to proceed, but once we get a notice to proceed on a signed contract, we are actually just opening a portion of that contract into backlog. But once the number is actually entered into backlog and the task set up, work starts pretty quickly. That turns into revenue obviously right away.

But where the delay is, is from project award, contract signing, notice to proceed -- that sometimes can take 3 to 6 months. But from the time it actually gets into backlog, then that's pretty immediate.

So is the pipeline of these awards until signing, is that looking very strong and that's why you're optimistic that the back half of the year is going to look pretty good and you're going to see some good pickup? Like how of I guess your guidance has already seen in what's behind the scenes that's not in backlog at this point?

Certainly we are waiting on a lot of those project awards. We are waiting on notices to proceed. So we do have an increasing amount of opportunities that we have been awarded, and logically that would then transfer into a project award and notice to proceed and then backlog.

What we're finding is it just seems to be taking longer than normal. I think that's just everybody getting comfortable with how quickly the economy is recovering and getting their confidence back. But certainly our pipeline of opportunities, RFPs and project awards are growing.

Great. If I can just sneak in one, shelf prospectus -- a lot of clients are asking why the shelf prospectus now? Like why do it before sort of an announced target is underway? Is there any kind of reasoning that you can give in terms of why you've filed at this point?

No, we just feel that a self prospectus just gives us flexibility for our financing opportunities. It is not an indication that there is anything there imminently. It just allows us to provide a good complement to our existing revolving credit facility. It provides us an opportunity of tailoring our financial strategy -- financing strategy specific to a future need. So it's not meant to reflect the fact that there's anything imminent happening. It just really is something that provides us more flexibility for the future.

Great, thanks.

If I may add to that just briefly, the intent of the shelf was just to, as Bob indicated, to provide flexibility, but it also gives us that capacity in the future, should we need it. Remember, this is something that is out there for 25 months.

Great. I'll circle back, thanks a lot.

Paul Lechem, CIBC.

I just want -- my questions are on the tax item in the quarter here. Just trying to understand -- well two (inaudible) it is meant to get you a structure more tax efficient over time. Shouldn't your tax rate trend below what you've been suggesting up till now? -- number one.

And then number two, also just trying to understand the trending through the year. You're saying by the end of this year you hope to get back to the 32.5% to 34.5% level. Does that mean the tax rate should be higher through Q2 and Q3?

No. The trends through to the end of the year is that we are expecting it to be in that 30% range. So overall for the year, our overall target is in that 32.0% to 34.5% range. So it -- just because it's higher in the first quarter, that's what leads to the overall higher tax rate on an annualized basis. Then we expect it to drop down again in 2011.

So going forward from 2011, you expect the tax rate to be in the 30% range, versus your current guidance?

That's correct.

That's a good number, 30%?

I think that's a pretty good number.

Okay. Thank you.

That's based on enacted rates today. You never know what the enacted rates may change to though.

Okay.

Michael Tupholme, TD Newcrest.

Just wanted to ask a question about the outlook. Generally it seems pretty consistent with what you presented in your fourth-quarter call. Is it fair to say that you're still looking for year-over-year internal growth in the 2% to 3% range?

Yes. Correct. At the end of the year we still predict to be 2% to 3% above 2009.

And then in terms of the segmented outlook that you ran through, sort of a follow-on as it relates to the outlook, you ran through the various segments. Just to be clear, when you're talking about modest growth in certain cases, are you talking about sequential growth? Or are you talking about year-over-year growth in that case?

Actually both. We are looking for year-over-year growth in the various practice areas that we referenced, so for example, environmental -- we are looking for overall growth of 2% to 3%. Buildings would be in the 2% to 3% as well. And urban land is probably flat, transportation would probably be in the order of 1% to 2%. And then industrial, also probably between 2% to 3%.

So overall, it -- we are still consistent with what we said last year. Our outlook really hasn't changed from Q4 to the end of Q1 now. We are still looking for 2010 to be a good year in the second half and relatively flat in the first half.

If I could just -- actually, no. That's great, thank you very much.

Chris Blake, Stonecap Securities.

A couple of questions, just more specifically within the divisions and -- well, actually first off just on the staffing levels, I was wondering if you could provide some commentary with respect to -- I know you've added 100 employees in Q1. How is that trending so far in Q2?

Well, we haven't really seen anything in Q2 yet. So I don't see any reason why you wouldn't see that trend continuing, but we don't have any information on Q2 yet, or even the first [or] fourth quarter. But we saw that through the first quarter. It was increasing every period. And we like that trend. Usually Q2 is a very strong quarter for us, because that's when a lot of our seasonal work starts up again. So April/May is when we start hiring people back for a lot of the fieldwork. So you typically will see a significant increase in staffing, mainly summer staffing, in April and May. So we are anticipating the staffing levels will continue to increase in Q2.

And just switching over to the industrial side, I noticed your gross margins came in 300 basis points lower year-over-year. Can that be attributed to more of the higher-margin project work maybe for last year's period? Or is there something else there?

This was specific to the industrial practice area? The gross margins? Or just overall gross margins?

No, just on the industrial side.

I guess the second part of that question, actually, if I may, is that a lot of the construction names or conference calls recently have indicated that the design firms are seeing a lot of activity in the oil sands related space. I was just wanting to see if you are experiencing [some of that] marked increase in activity, if you're seeing that.

Well, I'll answer the second one first and then go back to the first one. So the second one with regards to increased design activity in the oil sands, we are not a huge player in the oil sands. We are more of a support, and we provide infrastructure design support. And we are seeing some increase in that area. But we haven't seen a marked increase. I wouldn't say that it's surprisingly busier in the first quarter than we anticipated. We anticipate that to increase further in Q2 and Q3.

The oil sands has been an area that is one of those areas I referred to that seems to be recovering slower than one would indicate. So I think a lot of those clients are just a little suspicious and cautious.

With regards to gross margin, for industrial group, that gross margin is within our range for the industrial group. It really is a mix of the type of projects. I would have to say that in the first quarter we certainly have some larger mining projects that we did get awarded. Larger mining projects are usually a slightly lower margin, because their big contracts. For example the BHP Billiton one was over CAD40 million. So those tend to drive the margin down to the lower level. But (technical difficulty) that 50 point is not a surprising number for the industrial group.

Just lastly, switching gears over to the environmental side, with the US Environmental Protection Agency's budget up 30% year-over-year, I know some of your peers in the US have indicated in their calls that a lot of that activity -- or a lot of that funding has yet to come out, primarily for an administrative reason. So I was wondering is that maybe one of the reasons -- I know you saw a couple of key projects in your environmental area, a couple of big wins. I was wondering if that's the reason why you're seeing such significant growth in that area, or a pickup and in number of contracts in that area.

Not really. We -- most of our contracts in the environmental area of course are private companies, and that's just part of the remediation program. If there's any funding change or work coming out of the US government, we do not do a lot of work for the US federal government. That's one of the areas certainly we are focused on going forward. But currently we don't do a lot of environmental work for the US federal government.

Very good, that's it for me guys.

(Operator Instructions). Richard Stoneman, Dundee Securities.

Bob, the urban land group, revenues were up 10% sequentially. They fell sequentially in the four quarters of 2009. Do you expect that they will sequentially recover in 2010 to come back with a flat year-over-year revenue number?

Yes. That's exactly what we are indicating. It's been a good news story for our urban land group in this first quarter -- is we do see some small growth, and we're certainly seeing growth both in the private and public sector of the urban land group (technical difficulty). So we do anticipate that that sequential growth quarter over quarter will get us to a point of being flat by the end of the year.

Thank you very much.

[Dan] Cherniavsky, Raymond James.

They asked that -- I said it was Ben like Benjamin, but they still got Dan there. They don't slaughter my last name, it's my first name.

Just a quick question, just sort of some handholding on the numbers, because I always find your depreciation moves around more than intuitively it should. I understand your amortization of intangibles, but the depreciation of capital assets. What should we expect that number to be on a quarterly or an annual basis, just looking at how in the first quarter of this year, for example, it was up quite a bit from where it was in the fourth but down from where it was in the first of last year.

I think there's a couple things you need to consider. The depreciation includes the amortization of software now, it's -- was a change in the accounting from last year. But we -- and we expect though that the amortization of software will be in that 15 to -- or 16 -- or sorry -- amortization of intangibles will be in the CAD16 million to CAD17 million range.

But the depreciation -- really if you look at it on a percentage of revenue basis, it's really following revenue. As we contracted last year, we didn't have to buy as much assets, so our depreciation is down a little bit on a year-over-year basis. But we are still maintaining a normal level of capital expenditures. We aren't -- where there is a need, we aren't pulling back.

Okay. So should we not expect as much fluctuation going forward then?

I think as a percentage of revenue you're going to see it remain fairly consistent.

Well, maybe you can just elaborate on what exactly -- how that relates to a percent of revenue. What does that represent that you're depreciating? Is it on a per hourly basis or something like that? I often tend to think of depreciation in capital assets is a fairly fixed expense.

It is. But again, we haven't had to acquire as many assets in the last year due to the retraction, and so our depreciation year over year over year may be a little lower. But I won't (multiple speakers)

But what would those assets be though in your firm? Would it be like software and computers for people?

Yes. Computer, desks, equipment, engineering equipment and so on. But assets are depreciated on the basis of the useful life of those assets. So (multiple speakers)

So is there a direct relationship between that, like as you laid people off you got rid of their computers and their desks and things like that, and that expense went down?

That's part of the rationalization, the clean-up that we went through last year. Again, you may have some surplus assets that maybe you don't have to replace as soon.

Right. Okay, that's helpful. Thanks.

Pierre Lacroix, Desjardins Securities.

Just coming back on the shelf, you filed for [how much] shares, but are you also considering the alternative products, such as convertible debentures, given the cost of capital and so on and so forth? Can you expand a little bit on that?

We look at our cost of capital, we look at our capital structure, and we take a fairly conservative view. Our intent is to remain -- use leverage wherever possible, and that is the cheapest cost of capital. We will only issue equity if it's accretive to our shareholders. But yes, we look at alternatives around capital and capital structure, whether it's convertible debentures or private placement debts or other forms of financing.

Good. And a couple of small questions here, just to come back on the tax rate, just want to be sure that I understand well, the run rate in the second, the third and the fourth quarter should be lower than the 30% if you want to get to the 32%, 34% range; right?

No. We are expecting it will still be in that 30% range. But you've got increased revenues in the second and third quarter -- or income is the anticipation. Q1, Q4 are usually a little bit lower. And then we get a bit of an increase in the second and third quarter.

Okay. And the 2% organic growth, is this inclusive of the currency impact? Or it's exclusive?

It in native dollars, so the 2% to 3% organic growth would be in native dollars.

In dollars, absolute dollars. Okay, perfect.

It's pretty difficult to predict the impact of foreign exchange.

Yes, I agree. On the -- and finally on the bank line, I don't know if you mentioned that in your comments, but what is the amount available at the end of the quarter?

About CAD[116] million at this point in time.

CAD160 million. Excellent. Thank you very much.

John Rogers, D.A. Davidson.

This quarter you weren't as active on the acquisition side, just small transactions. And maybe you could just talk about what the market opportunities look like. Are you seeing fewer deals? Are you just being more conservative?

No, we are seeing lots of opportunities. I think we reported last quarter that there is a bit of a valuation gap due to the fact a lot of firms had retraction in 2009 that makes it difficult to forecast what they're going to be doing going forward. So some of that just takes a little bit longer, as there's more discussions that are probably necessary. But at this point in time, our pipeline of opportunities for acquisitions are quite full. And we see ourselves continuing and looking at opportunities, and the fact that we haven't done any major ones would reflect that upon our investment in time and energy looking for them. There are certainly a lot of discussions occurring.

That's good to hear, thank you.

Sara O'Brien, RBC Capital.

Just on the gross margin, you talked about competitive pressures, doing some larger project work and also the P3 bidding. How does that bode into sort of the rest of the year in terms of your outlook for EBITDA margins? Can you maintain them at sort of the previous year's level? Or are we going to see a bit of pressure throughout the year based on these factors?

No, we give that range of 54.5 to 56.5 for gross margin. We feel we are going to still fall within that range at the end of the year. It will fluctuate from quarter to quarter. There's a lot of bidding for example that goes on in Q4 and Q1 on P3's. But then you get them awarded and you start working on the project, and when you get the success [fee] we then normalize our gross margin.

So no, we see the little fluctuations that occur time to time will not take us outside of our range.

And then maybe can you just comment on which P3 projects in particular would be material to you or that -- we have a list of the ones that you're bidding on, but which ones are most material to you that would be like kind of a real win for you?

There's lots of them out there. I guess we can comment on the ones that we've won. So [South Frazier Perimeter Road] I think has been disclosed. The name of the concessionaire is Fraser (inaudible) Group, and Stantec is the lead designer on that project. That's a 40-kilometer roadway project in British Columbia.

I think we announced [Cam H] last period, which was a major project.

We have others that we are working on that are close to being awarded or have been awarded that haven't been publicly notified, so we don't like to speak to those. But certainly Fraser is a big job for us. We are quite happy with that, and we are the preferred proponent. There still have to be -- contract negotiations still have to be closed. So that one will still take six weeks to a couple of months to actually hit our backlog.

But it will be material to your backlog?

It will be significant in the transportation group.

Okay. Thank you, that's great.

Bert Powell, BMO Capital Markets.

In your MD&A you talked about investing more time in business development and marketing initiatives. I'm just wondering if that was something that was started towards the end of the quarter and is likely to ramp through the year, or is this something that you've been doing throughout the quarter. I guess where I am going with the question is, in terms of the admin and marketing expense, are you signaling that that is likely to move up because of increased initiatives in this area?

No. I think it's going to be stable now throughout the year. I don't see it ramping up and continuing to increase. It has -- was higher than it was in Q4 because, yes, we are spending more time, and within our range of what we predicted for 41% to 43%, and we are within that range. We don't see it going about the 43% in any time through the year.

No, but would be closer to the 43% than the 40 -- the 42% that you've been more recently experiencing?

At this point I don't see it increasing up to 43%. It really is dependent upon how many opportunities we've got and how big those proposals are. It's difficult to anticipate. At this point in time I don't see it ramping up another percentage in the next quarter or anything. We are busy, but we are also getting busy and billable work too. So we see it staying within the range, and it would be that midrange.

Great, thank you.

There are no further questions at this time. Please continue.

If there's no more questions, I'd like to thank you all for joining us today, and I look forward to speaking with you again in the near future. Thank you very much.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line. And have a great day.