Stantec Inc (STN) 2010 Q2 法說會逐字稿

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

Thank you, Andrew. Good afternoon, everyone, and welcome to our 2010 second-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 security 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 will 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 that 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 second quarter of 2010. I am pleased to report that we are on target with our expectations for 2010. We achieved growth in net revenue on a sequential basis and response to the increased activity in several of our markets we were able to increase our overall employee numbers while continuing to manage our business effectively. Dan will now provide a review of our second-quarter financial results. Dan?

Thank you, Bob, and good afternoon, everyone. As Bob just indicated, in the second quarter of 2010 we once again achieved solid results. Our gross revenue in the second quarter was consistent with that achieved in Q1 2010. Compared to Q2 2009 our gross revenue was CAD371.1 million, down CAD17 million. Of this decrease CAD18.4 million was as a result of a change in foreign exchange during the quarter.

Our net revenue in the second quarter was up 2.4% from Q1 2010. Compared to Q2 2009 our new revenue was CAD303.8 million, down CAD14.3 million. Again, this decline reflected an impact -- the impact of foreign exchange as well as staff reductions throughout 2009.

Our gross margin as a percentage of net revenue was 55.7% in the second quarter and continued to fall within our target range of 54.5% to 56.5%. Our administrative and marketing expenses decreased to 41.1% during the quarter from 41.3% in Q2 2009 mainly due to achieving increased efficiencies. We also had lower one-time costs related to severances in the downsizing of certain operations.

Despite the decline in year-over-year revenue net income increased 1.8% to CAD22.7 million in the quarter from Q2 2009 and diluted earnings per share in the quarter were CAD0.49 unchanged from the same time last year. Our cash flows from operations were strong in the second quarter improving to CAD24.5 million.

As part of our long-term financing strategy we are currently renegotiating our credit facility to ensure that we have the flexibility and capacity to support our future needs. During the quarter we filed a shelf prospectus which we may use to supplement our debt financing but only if necessary. We financed all of our announced acquisitions through the combination of cash and debt.

During the second quarter we also renewed our normal course issuer bid with the Toronto Stock Exchange, which will allow us to repurchase up to 5% of our outstanding shares. Pursuant to this NCIB we repurchased and canceled over 198,000 shares in the quarter. Overall we are pleased with our second-quarter results. Our performance in the quarter showed growth on a sequential basis with Q1 2010 and we continue to manage our operations effectively. Bob?

Thank you, Dan. As we mentioned in our news release this morning, we recently completed four acquisitions. During the second quarter we acquired TetrES Consulting based in Winnipeg Manitoba and soon after the quarter end we acquired Industry and Energy Associates, or IEA, headquartered in Portland, Maine; WilsonMiller Inc. headquartered in Naples, Florida; and Natural Resources Consulting Inc., NRC, headquartered in Cottage Grove, Wisconsin.

The addition of these firms enhances our service offerings in environment, power and transportation sectors. The acquisition of WilsonMiller also established a platform for further growth in Florida. I'm pleased to announce that tomorrow we will add CommArts, a 25 person firm based in Boulder, Colorado that offers project visioning, branding and conceptual graphic services. Acquiring this firm will allow us to establish a new discipline in our architectural practice area.

I would now like to highlight some of our new project awards. Our project activity during the second quarter demonstrated our continuing ability to secure significant assignments in a still challenging marketplace. For example, we secured a P3 assignment with Carillion Secure Solutions team that has been chosen to develop a new forensic services and coroner's complex in Toronto, Ontario. We will be responsible for completing the architecture, interior design, buildings engineering and sustainable design consulting for the new facility.

We continue to secure large long-term assignments in geotechnical engineering, a key area of our environment practice. During the quarter as part of a joint venture we were awarded a five-year multi-million-dollar contract to provide geotechnical drilling, sampling and design services for rebuilding the Hurricane Protection System in New Orleans for the US Army Corps of Engineers. The contract is a continuation of the reconstruction of levees and flood walls in which we have been involved following Hurricane Katrina.

Project awards in the industrial practice area, including a contract to help Laidlaw Berlin BioPower convert a chemical recovery boiler at a former pump mill in Berlin, New Hampshire into a biomass boiler. Once operational the Berlin plant will be one of the largest biomass energy facilities in the United States.

Notable in the transportation area was the award of the Stoney Trail Southeast project in Calgary, Alberta which is another P3 assignment for Stantec. Our role on the project team is to design approximately 11 kilometers of divided highway, four major interchanges, one freeway-to-freeway interchange, 14 bridge structures and retaining walls as well as drainage and lighting. The southeast section of Trump Stoney Trail will be open to traffic in the fall of 2013.

And in the Urban Land practice area we are contracted to renovate the playing surface at the historic of Florida Citrus Bowl with infield synthetic turf. Host to two college football bowls and other events the stadium must be ready for a nationally televised college football game in September. To shorten the project schedule we developed a way to maintain and reuse most of the existing field base and drainage.

As usual, I've highlight 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 continuing trust in our services.

Now I'd like to comment briefly about the potential market conditions for our services going forward. As mentioned in this morning's news release, increased activity enabled us to increase our staff levels at the end of the second quarter of 2010 to approximately 9,700 from 9,300 at the start of the year. With the acquisition of IEA, WilsonMiller, NRC and CommArts our overall staff levels have now increased to more than 10,000.

Our backlog increased by CAD64 million during the second quarter to just over CAD1 billion. This improvement reflects the renewed confidence we are seeing in some of our markets which is resulting in new and continuing projects. 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 our buildings practice area will be stable for the remainder of the year. Our strategy going forward 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 are also implementing strategic initiatives that will help us take advantage of the recovery in commercial and retail markets. We believe that we will see modest growth in our environment practice area 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 that this will continue to lead to larger, long-term projects with national and international scope in 2010.

We also expect modest growth in the remainder of the year in our industrial practice area depending on the speed of the economic recovery in the United States. With the stabilization of commodity pricing we believe that we will see activity continue in the mining and resource sectors. We are well positioned to take advantage of future opportunities in the industrial market because of 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 will be more active in the second half of the year. Short-term extensions of the US Federal transportation legislation has helped maintain our transportation activity levels.

However, we may continue to see delays in many planned projects because of lower tax revenues, state and provincial deficits and the lack of long-term US legislation for transportation funding. As a result, our transportation practice may need to focus on completing more local smaller projects in the United States for the rest of the year.

We believe that our Urban Land practice area will be stable in the second half of 2010 based on the forecasted increase in housing starts in the United States and Canada. Going forward we expect to continue to diversify our client base in this area and to use and build on our reputation and increase our work with the public sector.

To sum up, we believe that our overall outlook for the rest of 2010 is stable to modest growth. We are still experiencing the impacts of increased competition 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. Andrew, the conference call operator, will explain the question procedure. Andrew?

(Operator Instructions). Chris Blake, Stonecap Securities.

Good afternoon, gentlemen. A quick question for you just on the backlog growing 6% sequentially quarter over quarter. I was wondering if you could provide a little more color on this in the sense of which areas are you seeing the bulk of that increase or are you seeing it right across the board?

Well, from a geographic perspective we're seeing more of our backlog increase in Canada; the US was a bit flatter in the first half of the year than Canada, so most of the backlog is happening in Canada. And it is spread out throughout our practice areas. I'd say that it matches, pretty well matches our revenue generation typically. And that seems to be the case. But certainly from a geographic perspective we're seeing more of our backlog increase in Canada.

And which particular practice areas? Is it more the -- the Urban Land development has actually increased or done probably the first organic growth in a number of years showing up in that quarter. Are you seeing any particular practice area or discipline that seems more or less?

Mainly in environments in transportation. You're right in Urban Land, albeit it was relatively small compared to the backlog increases in environment and transportation.

Okay. And then just lastly on that. How many months of work does the backlog represent currently?

I believe it's about 8.2 months.

Trailing revenue.

Yes, 8.2 months of trailing revenue, correct.

Okay, thanks. I'll get back in the queue.

Okay, Chris.

Sara O'Brien, RBC Capital Markets.

Hi, guys. Can you talk a little bit about the mix going forward in the back half of the year, the confidence in the growth level and maybe the impact on gross margin and EBITDA just as we --? I think, Bob, you made a couple comments about -- in transportation doing some smaller project work, which I imagine is more competitive than lower margin. But in the other practice areas how do you see the margin kind of trending through the back end of the year?

Our margins have been pretty stable. I think we went up like 0.2% from last quarter. Our margins overall track pretty much within 1% of where they are. I don't see a change to that for the second half of the year from what we've experienced in the first half of the year. The project mix seems pretty similar to what we've experienced in the first half. You're right in transportation, but that's the bulk of our work right now. So I don't see that changing in the second half.

Okay. And can I just sneak in one? Just on your guidance for stable or modest growth. That's relative dollar wise to Q2 and Q1 that we're talking, it's not year over year?

Right. So, we have a problem with the words stable and modest growth. So stable in our minds would mean that we would have consistent revenue generation in the second half of the year compared to the first half of the year. Growth would mean we'd have more revenue generation in the second half of the year compared to the first half of the year.

Okay, perfect. I'll circle back. Thank you.

Okay, thanks.

Pierre Lacroix, Desjardins Securities.

Yes, thank you very much, good afternoon. First question on the acquisition side. Have you noticed -- I know you've been active in the quarter and the last few weeks, but are you noticing any particular pickup of activity in that sector? We were just looking at (inaudible) Technology in the last 24 hours announced two relatively sizable acquisitions. Can you comment a bit on that?

Well, with the fact that we've done four in the last few weeks and they've done a couple and Tetra Tech announced one it certainly seems that it's getting more active. And certainly we've been talking to these firms for a number of months, so it just is a matter that I think finally we're getting enough visibility into their performance this year and getting some confidence on where they're going forward that to close that valuation gap we referred to in the first-quarter's call. And we're seeing that we're finally concluding some of our discussions.

So, it is certainly a very active period right now. There are a number of firms that we're still talking to, and so that's good news. It seems that -- I think that's all pointing towards confidence in the future.

But do you feel that competition coming from your -- the big firms is making the situation a little bit tougher to bid on these firms?

No, competition is good. I don't see it being an issue where prices are getting driven up. I think everyone has pretty much the same metrics that they've got to deal with when they acquire firms. So I don't see that being an issue. I think that depending on the firm's size certain companies are in certain space, we're in a different space.

So certainly AECOM's acquisition at Tishman for example is something that Stantec wouldn't be involved in just due to the sector it was in. But we haven't seen really a competition driving up prices and we're not really too worried about what other firms are doing. We're quite focused on our strategy and seem to have quite a full pipeline of companies that are interested in talking to us.

Excellent. One last one and then I'm going to jump back in the queue. The environment in the quarter, you had negative organic growth. It was a little bit lumpy, but you mentioned that there was some timing on contract completion versus other start-up of contracts. Can you comment a little bit on that?

Yes, that's a normal thing in business where you're awarded a project but you aren't given the notice to proceed by a client. There were some of those timing issues in the first quarter that seemed to just get lumped together. It wasn't anything unusual, it just happened to all happen in the first half. So we've seen certainly some of those projects get released.

Certainly the way the economy was, a lot of our clients' CapEx budgets were somewhat under scrutiny and being reviewed and adjusted and that caused some timing issues of getting delays. But certainly we see a lot of that being released now and our backlog in that area certainly has increased in the second quarter.

Okay, thanks, Bob.

You're welcome, Pierre.

Ben Cherniavsky, Raymond James.

Guys, what are the prospects from your perspective on the P3 market in the US? Has that advanced at all in the last six months? I know it was something you spoke quite a bit about at your investor day in New York at the beginning of the year. I wouldn't expect these things to turn overnight, but is there anything that makes you believe these projects might advance at any quicker rate in the near term?

No, I don't like being pessimistic about anything, Ben. But I don't see the P3 market in the US advancing quickly to the same level as it has in Canada. It really is -- the P3's in the US still are what I'd call in an evolution of infancy at this point. The government still hasn't got I think -- haven't got behind P3's the way that they need to as they have in Canada.

That being said, the design build market in the US is quite strong. So it just doesn't have the financing component to operations and maintenance. But certainly it does have the design and build component that a P3 offers. So we've seen some increase in that area and certainly the environment sector in the water business we've seen a lot of design build opportunities and some design build opportunities in transportation as well.

So, that seems to be an increasing area of project delivery in the states. But P3's, I said it before, the governments in the US have got to get behind them in a different way. And to that point I don't think they're very -- taking a long time to evolve. And that costs people money. So we're not very active in the P3 market in the states yet.

Okay, thanks.

You're welcome, Ben.

Benoit Caron, National Bank.

Good afternoon, gentlemen. Sorry if I'm asking a question that's already been answered, I missed the first few minutes of your comments. But I was looking at the organic growth in the Urban Land development. I suppose this is mostly due to the big rebound that we've seen in Canadian real estate?

Some of it is, some of it is our Canadian market in the land development side, the master plan community side, especially in Western Canada has certainly helped some organic growth in our Urban Land group. As well though we've got certainly a portion, 30% of our business is now in the public sector and landscape architecture survey is also increasing as well. So, it isn't only the increased land development business in Canada that's helping that. But certainly both those factors are good news to that sector and it's been a long time coming for us.

Okay then. And then correct me if I'm wrong, the land surveys and stuff like that, this is more like a recurring business for municipalities and states, so could be more of a stable angle to the business than what you had before?

Yes. I mean, it was part of the business we really didn't pursue before. And certainly we have the capability and expertise to pursue it. So that has been some work that we've been doing is now for municipalities and counties doing that type of work. So, yes, that certainly has filled a void that the private market left behind.

That's good news. Thank you for your time, Bob, that's all I had.

No problem, thank you.

[Mixun Sitchev], Northland Capital Partners.

Yes, hi, good afternoon. Just one question for you. I mean obviously for a company that generates almost CAD100 million in free cash flow every year, I was wondering can you please remind us where you stand right now in terms of potentially considering a dividend policy here?

Well, a dividend policy is something that every year at the Board we do discuss. We look at our budget for the year, look at the cash we generate and determine, given our strategic plan, how we are going to invest that and grow. Every year we come to the conclusion that we can continue to invest that money into companies and growing our base of operations, expanding our services and our geographic presence.

And certainly going forward, at least for the short term, we still feel that that's our current philosophy. Given the state of our evolution in the United States we still feel that we need to continue to strengthen our operations in the US and we we'll be using our cash flow to invest in companies to do exactly that, to increase our services and geographic presence.

Okay, thank you.

You're welcome.

Sara O'Brien, RBC Capital Markets.

Hi, guys. First question, just on backlog, with the pipeline that you have is it -- are you comfortable looking at growth into next year at this point? I mean, I know you don't book everything into backlog, but you do have a pipeline available to you. What are your initial thoughts on F11 and how that plays out on the sales line?

Yes, we probably would look at -- backlog for us is a fairly robust number and it usually is work that we're currently working on and expect to work on in the next year. So we'd probably look at our opportunity pipeline which gives us a better idea of what RFPs are we competing against, what leads are we chasing, also looking at our account management strategy and looking at our capital program of our major clients and where they're headed.

So, what's giving us good confidence for 2011 is the fact that all that's going up. Opportunity pipeline has more opportunities in it every month and our clients are constantly looking at increasing their budgets for what they're spending in their capital programs next year. So, with our backlog going up, our opportunity pipeline increasing and our clients talking positively gives you some optimism towards 2011 certainly.

Okay, great. And just wondered how that -- again, at your investor day you talked about cross-selling initiatives and on this call you've talked about focusing on your core customers, your core clients. How is that cross-selling going and is that going to drive some organic growth for you next year or is it still early stages?

Well, certainly it is still the early stages. Account management isn't something that happens in a month, it is a strategy of developing a true partnership with your clients and developing a trusted advisor position with them. So it takes a while to do that with some. However, in some of our account management strategies we already have that position and we're seeing growth in those accounts, certainly we're tracking that on a monthly basis and we're happy with our results to date.

Our cross marketing of our services is mainly at a local and regional level and we're seeing some very exciting things there. Stantec did a lot of acquisitions in 2008 and in 2009 we did the major one at the beginning of the year. We're now starting to see those firms really gel together and see some opportunity. So, we're definitely excited about the organic growth opportunity that's going to drive for us in the future.

Okay, perfect, thank you.

Thank you.

Pierre Lacroix, Desjardins Securities.

Yes, just to follow up on the environmental business. The Gulf oil spill, you mentioned in your release that you may be involved in doing some work for the recovery there. So, can you give us some perspective on which extent you could be involved?

Presently we have almost 30 people down in the Gulf in four different locations. They're working long shifts right now working with the BP staff, mainly in the areas of biology, safety and waste evaluation. So we have some of our botanists and geologists down helping BP assess the situation and in sifting and cleanup.

So, at this point in time that's good new for news for us, helping them try to advance their cleanup efforts. They now appear to have successfully capped the leak. So certainly we see some further work coming from them. But BP has taken a very structured approach to what they're doing in the Gulf and we're going to be there to continue helping them. But at this point in time we have 30 different -- 30 people working down there.

Good. And going further in time with all their regulations that will likely come up for offshore drilling, you have expertise, right, in the modeling for oil spill and all that stuff? So do you expect to be positively impacted in the future? Do you have any kind of context or perspective to share with us?

Nothing specific. I think everybody believes and I think it's going to be true that anytime you have a disaster it's usually followed by regulatory rigor. You could get increases in regulatory requirements and permitting, Stantec is very well positioned in that area. We do have some high-class growth experts that are involved in doing work in that area.

So, we certainly feel that this is going to help us provide additional services to the clients we're working with and in the future as regulations improve or increase we feel there's going to be even further work for us.

So, you never like to see a disaster, an event like this that has an impact on the environment. But certainly the reaction usually is further and additional regulatory requirements. So, we only see that as additional opportunities for us.

And, Bob, I think they will be looking for local content as well in terms of doing businesses with local firms. How do you position with regard to that request or that --?

You're absolutely correct. One of the things BP has tried to do is use local content and people in the Florida area. That was one of the reasons we saw acquiring WilsonMiller provided as an opportunity for a platform in Florida where we didn't have a very strong one before. Certainly they have an environmental component of their business that they do and we're looking at opportunities right now by using that staff on this project.

Excellent. Thank you very much.

Thank you.

Carolyn Dennis, Dundee Securities.

Good afternoon. Just a question, you seem to be adding -- you were adding organically this quarter and I'm wondering if you can let us know if you were adding in the US or Canada? And also if you're continuing to add organically into Q3 and if it's seasonal or not?

Well, on the last question first, some of it is seasonal. We do hire a lot of summer staff for a lot of our field work. But some of the organic growth has just been the fact that our business has been picking up. With regards to approximately where it sort of follows our backlog as well.

Most of the staff hirings have been in Canada but some have been in the states as well and into Q3 we're certainly seeing that continue; we're starting to see all areas hire more staff. So at this point in time that's good news as all our areas geographically are hiring people at this point in time.

That's great. Thanks so much.

You're welcome.

Ben Cherniavsky, Raymond James.

Hi, Ben.

Carolyn Dennis, Dundee Securities.

Hi, again. I had another question; it was more of a micro-question. It was just on the acquisitions. You were talking -- you touched on it briefly in an answer previously about the AECOM and Tishman acquisition. And I mean they seem to have been taking on a fair bit of risk with the construction at risk management. And I am wondering what your line is in the sand in terms of taking on that kind of risk?

Yes, at this point in time we don't see ourselves entering that construction market, doing construction management at risk is probably not on our short-term plan. Consulting companies when they get to a certain size certainly it always gets enticed by our clients to want to take on additional risk in the project. But we feel that's really out of our area of expertise.

And to answer that market you really have to do what AECOM did which is acquire a firm that understands that business, has the skill sets and the processes set up to be able to execute that work properly. To try and do that with your existing consulting staff is never a good venture. So, today for Stantec we still see lots of opportunity for our growth in the fee-for-service arena and we at this point in time don't see the need to entering that construction management at risk or agency area.

Okay, that's great. Thank you so much.

You're welcome.

Pierre Lacroix, Desjardins Securities.

This is the last time, I promise.

No problem, Pierre.

I was looking at the new orders [overall] in the quarter and it came up relatively strong, above CAD400 million. And do you expect or was there anything special in this quarter or do you expect that the CAD400 million plus level could be sustainable going in the second half of the year?

Sorry, Pierre, I'm not sure where -- the CAD400 million refers to what?

Yes, it's the new orders basically. I'm doing the calculation, you don't provide that number, but it's my own estimate, so it's -- well, if you refer to the level of others you're having in the backlog with the trend going in the second half, do you see backlog growing again in the third and the fourth quarter?

Yes. I mean if you're referring to do we see continued growth of our backlog, yes, we do expect our backlog to continue to grow. That's sort of going back to the question about the opportunities. We see more RFPs and certainly with more RFPs there's the hope that we'll close those and add to our backlog. We're seeing a lot of our contracts that were awarded to us finally getting noticed to proceed and go ahead and then we can enter those contracts into our backlog. So we do see quarter over quarter an increased growth of our backlog throughout 2010.

Excellent. Thank you very much.

You're welcome, Pierre.

There are no further questions. Please continue, Mr. Gomes.

Okay, if there are no further questions I'd like to thank all of you for joining us today and both Dan and I look forward to speaking with you again in the near future. Thanks very much.

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