Stantec Inc (STN) 2011 Q2 法說會逐字稿

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  • Operator

  • Welcome to the Stantec second quarter 2011 earnings results conference call. With us today from Stantec management are Mr. Robert Gomes, President and Chief Executive Officer; and Mr. Dan Lefaivre, Chief Financial Officer. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions)

  • Before the call begins, Stantec management would like to make sure that its Safe Harbor statement to caution you that it 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 Stantec management to make assumptions, and are subject to inherent risks and uncertainties that give rise to possibility that Stantec's estimates, projections, expectations, and conclusions will be proved to be accurate, that it's assumptions may be correct. That is, actual results maybe differ materially from discussed in these statements.

  • In addition, Stantec management will mention the non-GAAP measures. You will be finding descriptions of non-GAAP measures and their use, as well as more information about the assumptions and material factors that were applied or could cause actual results to differ materially from those discussed in the conference call, in the management discussions, and analysis included in the Stantec 2010 financial review.

  • As a reminder, today is August 4, 2011 and this conference call is being recorded, as well as broadcasted live over the Internet. It will be archived for future references at Stantec.com under the investor's section. Therefore, any members of the media, who are joining the call today, are in a listen-only mode, and who wish to quote anyone other than Mr. Robert Gomes or Mr. Dan Lefaivre are asked to please request permission to do so from the individual concerned. It is now my pleasure to introduce your host for today's conference, Mr. Robert Gomes. Please go ahead.

  • - President, CEO

  • Thank you, Pamela. That Safe Harbor statement's a mouthful, so, thanks for getting us through that. Good afternoon everyone and welcome to our second quarter 2011 conference call. 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. This morning, we released the results of Stantec's operations for the second quarter 2011. I am pleased to report that thanks to our continuing support of our clients and staff, we are on target with our expectations for the year. I will turn it over to Dan now to provide a review of our second quarter financial results. Dan?

  • - CFO

  • Thank you, Bob, and good afternoon everyone. As Bob just indicated, the second quarter of 2011 was pretty positive for Stantec. The financial statements and notes this quarter are much shorter, as most of the significant IFRS changes outlined in our Q1 statements were incorporated by reference. Compared to Q2 2010, our gross revenue for Q2 2011 was up 11.1% to CAD412.3 million from CAD371.1 million. Our net revenue for Q2 2011 was also up 12.7% to CAD342.3 million, from CAD303.8 million compared to Q2 2010. Overall net revenue grew organically in Q2 2011 as compared to Q2 2010, with positive contributions recorded in our environment, industrial, and urban land practice area. Our gross margin as a percentage of net revenue was 55.1% in the second quarter and continues to fall within our targeted range of 54.5% to 56.5%. Our administrative and marketing expenses decreased 40.4% during the quarter from 40.8% in Q2 2010, better than our targeted range of 41% to 43%. Our net income increased 8% to CAD25.7 million in the quarter, from CAD23.8 million in Q2 2010. And diluted earnings per share in the quarter increased 7.7% to CAD0.56, from CAD0.52. The impact of transition to IFRS on our 2010 comparative financial results increased diluted earnings per share from Q2 2010 by CAD0.03 and on a 2010 year-to-date basis of CAD0.08.

  • Our cash flow from operations were CAD3.1 million in Q2 2011, compared to CAD22.6 million in Q2 2010. These cash flows were affected by higher trade, and other payables assumed on acquisitions completed in the second half of 2010 and in the first half of 2011, and a five-day increase in our investment in un-billed revenue and accounts receivable. This increase was due to a delay in the starting of Springfield activity, the impact of delays in milestone billings, and the delay in the receipt of client payments as a result of the two week Canadian postal strike at the end of the quarter. We have since invoiced a number of these milestone projects and cash receipts are increasing and returning to normal levels.

  • Also during the second quarter, Stantec issued CAD125 million, an aggregate principal amount of five and seven year senior secured notes. This financing is part of our long-term capital plan, which provides interest rate certainty and allows us to continue to execute our growth strategy. We used net proceeds from the notes to pay down debt in our existing revolver credit facility. Overall, we're pleased with the second-quarter results. Our performance in the quarter showed growth compared to the same time last year as we continue to manage our operations effectively. Back to you, Bob.

  • - President, CEO

  • Thanks, Dan. Overall, 2011 is progressing as we expected, and is inline with our expectations as reported at the end of Q1. Canada is showing steady recovery from the strained economic situation created over the past two years, while the US continues to struggle with its recovery. Even with the recent US debt issue and the postponement of a long-term solution, we see continued opportunities for our Company's growth in the United States. Contrary to what you may read in the news, there is still investment occurring in infrastructure in the United States. Although this investment is only a fraction of what is necessary to address the infrastructure deficit, we believe it is still sufficient to provide our Company with opportunities for growth.

  • Overall, we have a strong backlog of work across our practice areas, both in the US and Canada. Our backlog increased by CAD7 million in the second quarter of 2011 to CAD1.13 billion over Q1 '11. This performance again reflects the confidence we are seeing in some of our market, as well as growth from our acquisitions, which is resulting in new and continuing projects. We believe that by developing broader relationships with our clients and managing our business efficiently, we will continue to improve our backlog. During the second quarter, we met our expectations for organic growth in all practice areas except buildings and transportation. We saw a retraction in organic revenue in our buildings practice area, because of continued softness in the US healthcare market. The retraction in organic revenue in our transportation practice area was mainly caused by a reduction in pass-through sub-contractor costs, the delay of some large projects in both Canada and the United States due to funding issues, and the completion of some larger projects. Although these factors affected our growth in net revenues in the second quarter, we're confident that our positioning in these two practice areas will allow us to continue to take advantage of opportunities over the rest of the year.

  • Q2 was an active quarter for other aspects of our business. At our annual meeting on May 13, our Board of Directors elected Mr. Aram Keith as its new Chair. Mr. Keith has been a member of our board since 2005 when we acquired the Keith Companies. He co-founded the Keith Companies in 1983 and served as its Chief Executive Officer and Board Chair until its acquisition.

  • As we mentioned in our news release this morning, we completed the acquisition of the Caltech Group based in Calgary Alberta on May 27. The addition of this firm enhanced our service offerings in the oil and gas and power sectors. Last week we also announced that we have signed a letter of intent to acquire Minnesota-based Bonestroo Inc. This engineering, planning and environmental sciences firm has approximately 275 employees in eight offices in Minnesota, Wisconsin and North Dakota.

  • I would now like to highlight some of our new project awards. Our project activity during the second quarter demonstrated the diversity of our expertise, as well as our growth in certain sectors. For example, new assignments reflected our growth in our business in the commercial buildings sector in Canada. Most notably, we were selected to assist retailer Target with the rollout of its Canadian stores over the next five years. Our work will include architecture, interior design, and structural, mechanical and electrical engineering.

  • In our environment area, we continue to secure a variety of work ranging from infrastructure rehabilitations, to permitting, to stream restorations. During the quarter, we were awarded assignments to provide a variety of environmental compliance and regulatory support services for Talisman Energy's unconventional gas development. Our work will support the company's groundwater protection program, waste management program, spill prevention and control and countermeasures, and prevention and preparedness plan development at sites in New York, Pennsylvania, and Texas.

  • In the industrial area, we continue to expand our business in the mining sector. During the second quarter, we received a contract with QuadraFNX Mining Limited, to carry out a pre-visibility study for a proposed nickel-copper mine near Sudbury, Ontario following the completion of a scoping study we completed in late 2010. This green field assignment also includes preliminary engineering for two planned mine shafts. Once operational, the mine is expected to produce over 1 million tons of ore per year.

  • Notable in the transportation area were contracts to complete the 2011 biannual inspections of the Bayonne and George Washington bridges for the Port Authority of New York and New Jersey. We've also won a contract with this Port Authority to provide aeronautical, civil, and electrical engineering call-in services at its airports in New Jersey and New York area, including the Newark Liberty International, JFK International, Stewart International, Teterboro, and LaGuardia airports.

  • Finally, project activity in the urban land area reflected our focus on increasing our business in the non-residential sector with municipal clients. During the second quarter, we were chosen to provide planning, landscape architecture, civil engineering and transportation engineering services for the development of Wescott Park for the city of North Charleston, South Carolina. The new 57 acre park will contain a youth sports complex, complete with baseball fields, training facilities, boardwalks, playgrounds, picnic areas, an amphitheater and maintenance facilities. As usually, I've highlighted only a small sample of the projects we are 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. Looking at our individual practice areas, we expect the following for the remainder of 2011. We believe that the outlook for our buildings practice area is a modest organic decline in 2011, because of uncertainty in funding for public projects, and increased competition. However, we expect that our recent expansion through acquisitions will help us leverage our expertise in healthcare, and educational facility design in 2011, although growth from these acquisitions may be tempered by economic conditions in the US and United Kingdom. The P3 opportunities in Canada appear to be slowing in the second half of 2011, but we continue to be optimistic of our long-term success in this area, due to our presence and relationships in the P3 markets and top-tier positioning. Our strategy in the buildings group going forward is to continue to focus on healthcare and higher education sectors, while also diversifying into the private sector and commercial markets.

  • We believe that we will see stable to moderate organic growth in our environment practice area in 2011, but all of this growth for 2011 occurring in the second half of the year. Because of our expansion in this area over the last several years, 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 2011. In addition, we believe we are well-positioned to secure opportunities resulting from increasingly stringent environmental regulatory requirements, increased activity in the shale gas market, as well as emerging industrial water issues.

  • We also expect moderate organic growth in 2011 for our industrial practice area. This area of the Company is providing us the strongest organic growth opportunities year-to-date, and with recent years wins in the power and mining areas, we are very optimistic of this trend continuing. The commodity pricing remaining strong, we believe that we will see continued robust activity in the mining and oil and gas sectors. We are also well-positioned to take advantage of opportunities in sustainable energy development.

  • We believe that our transportation practice area will see stable organic growth in 2011. P3 projects continue to provide a potential stream of work in Canada, and we expect our rail and transit groups to maintain their current activity levels during the year. Decrease in tax revenues, efforts to reduce state and provincial deficits, and continued uncertainty in the United States about long-term funding, they continue to cause delays in some planned transportation projects, resulting in our reduced organic growth projections for the remainder of the year.

  • We believe that the outlook for urban land practice in 2011 is stable to moderate organic growth, due to a forecasted increase in housing starts in Canada. Going forward, we expect to continue to diversify our client base in this area, by building on our reputation to secure new work with the public sector.

  • To sum up, we continue to believe that our overall outlook for 2011 is a moderate increase in organic revenue, with a targeted 2% to 3% increase compared to 2011. We're still experiencing the impact of a very sluggish economy in the United dates, increased competition in project delays. However, looking ahead, we believe that our diversity, client mix and flexibility will help us continue to adapt our business to the current economic conditions. This concludes our comments for today. Dan and I are now available to answer any questions you may have. Pamela, the conference call operator, will explain the question procedure. Pamela?

  • Operator

  • Thank you very much.

  • (Operator Instructions)

  • Sara O'Brien, RBC Capital Markets.

  • - Analyst

  • Hello, guys.

  • - President, CEO

  • Hello, Sarah.

  • - Analyst

  • Can you comment on -- your admin and marketing expense was nicely low, contributing to your EBITDA margin. Just wondered is that due to lower P3 proposals right now, and how do you expect that to trend into the back half of the year?

  • - President, CEO

  • It could be. We are always looking at that line item, obviously. But I don't think that it would be specific. The number of P3s we bid on in any one quarter probably is not going to have a dramatic impact on our line item for marketing and business development. Dan, I don't know if you saw anything that was special in the quarter?

  • - CFO

  • No, I think the only other thing that maybe was a bit of an impact, Sara, was we had some lower integration cost from the acquisitions that were back-end loaded in the second half of 2010. So there may not have been as much indirect labor incurred.

  • - Analyst

  • Okay. Turning into the back half of the year, depending on how may acquisitions you make, but do you feel confident that you can remain below the 41% level?

  • - CFO

  • I think we are still targeting that 41% to 43%. That's a pretty normal range for us. I'm not sure we are going to see it get too much below that.

  • - President, CEO

  • And we still will be actively acquiring companies. We just announced another LOI; so anticipate that if we closed there, those costs will continue to hit us in Q3 and Q4. I don't see a dramatic lowering of that cost as we go forward, so I wouldn't look at that number as a trend thing -- as Dan said the 41% to 43% would be our range.

  • - Analyst

  • Okay. P3 market -- you talked about the outlook kind of slowing down in the back half of the year. Is that mainly based on deferrals, based on provincial elections? Or do you feel like the pipeline is actually diminishing for you?

  • - President, CEO

  • No, I think there's a lot of reasons why P3 projects are at a held-back, because there is no doubt the elections in various provinces was causing the administration to move slower. The administration -- we actually like it -- also tends to spread projects out to get better competition by doing that. At this point in time, we are very still bullish on the P3 market. We're working currently in some way, shape or form, on 52 different P3s at this point in time. I think there is a number of active P3's -- I think 16 that we're actively working on -- a number that we're bidding on, and a number that we are qualifying for. So it's still very active, it's just in this quarter, we didn't see a lot that was going to impact our Q3. So that's why we made that statement.

  • - Analyst

  • Okay. Perfect. And then, wondered, given the slowdown -- or the potential additional slowdown in the US economy now -- do you look at a different strategy for growth through acquisition? Do you look at international as another platform to develop more, or are you still focused on the US for healthcare and education?

  • - President, CEO

  • No, that's a good question. Overall, we are still bullish on the United States. There is no doubt that the recent debt issue and the overall economy there is not making life easy. But in the same instance, it is the world's largest economy; they have huge infrastructure needs, and just the size of the market is still clearly a focus for us. For us to deviate from that focus and look internationally at this point -- it just wouldn't be the best strategy for us. International -- we are getting some good knowledge with the acquisitions we did last year. We are setting up some processes and controls to enter that market. But certainly, for next year, and for the next couple years, we still see the opportunities for our Company in the United States. Even with the reductions that are being proposed and the concerns with regards to budgets, I think you have to put it in perspective that, that is a reduction of forecasted future increases.

  • So, it's not like they're going to be spending less money in 2012 in infrastructure than they did in 2011 -- they will be spending less on what they previously maybe had projected. But in some cases, we're seeing that their investment in infrastructure is continuing; that in a lot of cases, their budget issues are still affecting their staffing levels, affecting what they can do within departments, and actually outsourcing gives them another opportunity of moving money into that area. So you've got to be concerned, because certainly, there is a lot of stress in the US economy. But at the same size, it's a huge opportunity.

  • - Analyst

  • Okay, great. And on the environmental, I wondered -- it looks like you need a pretty big jump in the back half of the year to drive some organic growth in the division. And wondered -- is your confidence based on the backlog you have now, or the outlook and the pipeline of bids that you have now?

  • - President, CEO

  • Both. There certainly has been an increase in backlog; we are constantly winning some major projects -- with BP we just renewed a 3-year master services agreement for environmental services with them, and we actually expanded that beyond just one department to BP. We are working on major pipelines in the US as well. We are starting to gain work. Every month our backlog is increasing as a result of the work in the shale gas area. So we are very optimistic in environment with regards to the increase. We're seeing a trend the way we want to. No doubt about it, it's going to have to be a great Q3 and Q4, but we are still very optimistic we can achieve that.

  • - Analyst

  • Great -- maybe 1 last 1. You mentioned competition, a little increase in the buildings practice. Is that unique to the US, or are you seeing that in both sides of the border?

  • - President, CEO

  • More in the US than Canada, but it is across the board. It's just more competitive in the US, because there is more companies. And certainly, in the architecture, buildings, engineering area there is a lot of very hungry firms. We've always said that, that competition really doesn't drive down gross margins a lot, because we are going to continue to bid our projects to achieve that. But it's certainly you're bidding against more competition. I would say a lot of that competition probably isn't qualified in some of the more complex sectors, like healthcare and higher education. But, certainly, that's a concern and it's an issue that drags things out.

  • - Analyst

  • Okay, great. I will leave it at that. Thank you.

  • - President, CEO

  • Thank you, Sarah.

  • Operator

  • Tahira Afzal, KeyBanc Capital Markets.

  • - Analyst

  • Hello, guys. This is Sadra on for Tahira. Congratulations on a great quarter. And then, first question -- looking at Caltech and the firm that you are now [plan stick] in Minnesota. Really going forward, where is your acquisition strategy looking, focus-wise? I know is the US, but again, you've added an environmental firm, you've added an industrial focused firm. I want to see if the mindset has changed there any since we last talked?

  • - President, CEO

  • No, I think it's a pretty broad program. I wouldn't say that we -- certainly, the focus is in the United States, but that doesn't mean we won't be acquiring companies in Canada. And certainly we announced a couple this year already in Canada. So from a geographic perspective, obviously, the opportunity for our growth is more in the US than Canada. So you will see more and probably larger acquisitions in the US, from a sector perspective. Certainly industrial and environmental are two very hot areas for us right now. Neither one of those, we'd call ourselves a mature presence in the US. So it still gives us lots of opportunities. Even in areas that you may be think you're struggling in, which is like transportation -- still a huge opportunity in the United States for us. So we see all our practice areas, except maybe urban land, but hey -- even urban land has got capabilities of companies that do a lot of municipal work, and do a lot of environmental work. So I hate to say it's across the board, but it is a very diverse strategy; more focused in the US than Canada, and probably more focused in the industrial and environmental areas.

  • - Analyst

  • Has there been any change or shift in pricing, in what companies are looking for there then?

  • - President, CEO

  • No, I think as we've talked about before, it's probably more to do with the expectations, the multiples as we talk about, the multiples on EBITDA really hasn't changed. What's really changed is the EBITDA. I am trying to figure out -- the performance of companies based on what's happened in the last couple of years is pretty difficult right now. So that's probably where the effort is going into -- is trying to really determine the performance of the companies we are looking at, trying to determine their backlog, where their work is coming from. So it's more the expectations on what their EBITDA is. The multiples are pretty common, we've always said they're anywhere from 4 to 8, probably tighter to the 5 to 6 range. More of the work goes into trying to figure out what's the revenue and what is the bottom line performance going to be.

  • - Analyst

  • Okay; and 1 last question related to backlog. With the CAD7 million increase in backlog, I don't know if you guys would disclose this -- but how much of that was related to acquisitions? And also, if there's been any shift in backlog? If we dig inside of it and look at the different practice areas, if there's been any shift there?

  • - President, CEO

  • We don't disclose the details, and we don't segment our backlog into acquisitions or practice areas. Though, usually, our backlog follows our revenue fairly well. If you saw an increase in revenue in the practice areas and the regions in Q2, the backlog in Q1 probably fed that. And so that's essentially -- you'd get an idea for your models; the backlog pretty well tracks our revenue pretty closely.

  • - Analyst

  • Great, thank you.

  • Operator

  • Thank you. Ben Vendittelli, Laurentian Bank Securities

  • - Analyst

  • Good afternoon, gentlemen. It's the second quarter in a row that we see a little bit of a reduction in sub-consulting costs. Is that in an effort to bring up your utilization rates, given potentially some lower levels of activities in certain segments; or is there something else driving that?

  • - President, CEO

  • Essentially, what's driving it, Ben, is exactly that. When we acquire companies, the first thing we look at is -- what work did they sub-out in the past that we now, as a larger Company, can do for them? That's an ongoing strategy of cross-selling our services; and essentially looking at our sub-consultants and determining -- do we have that expertise to do that work in-house, and how do we do that? It's an ongoing strategy, as a firm that's quite inquisitive, is the easy way of building that revenue is -- what can you internalize and what can you do yourself? That reduction in sub-consultant costs from quarter to quarter is a good sign. What it's indicating is, we are being more successful in moving that work internally, rather than giving it away to our competitors.

  • - Analyst

  • Okay. So can we expect going forward for it to stay in that 17% to 18% of gross revenue?

  • - President, CEO

  • It's been hovering there. I would love to see it continue to come down, but obviously there is numerous factors involved on teaming projects, on having services that you don't do. There's a lot of issues associated with sub-consulting costs out. But the goal, certainly, is to continuously try to drive that number down, because if we do that, that means our revenue line will go up.

  • - Analyst

  • Okay. And with regards to the acquisitions that you're taking a look at, particularly in the United States -- would you be able to discuss what sort of evolution you have seen in recent months, and their backlogs, and how backlogs are growing in the US in general?

  • - President, CEO

  • The answer I give you is straight across the board. We have seen some firms that have suffered a reduction of backlog, have had to reduce staffing levels, have to reorganize themselves, have gone through a lot of stress in the last two years. And then we've seen other firms that have actually just incredibly increased. For whatever reason, they have been at the right place at the right time, and their strategies have been working. But we've seen other firms that we're currently talking to, where the backlog levels are increasing. So I wouldn't say there is a trend; I would say it's probably more firms that have had a reduction in the last two years in the United States, and are certainly now, therefore, looking for strategies of what they need to do to re-build their company. And certainly being acquired is one of those strategies.

  • There is probably more on that side of the ledger than companies that have an increasing strong backlog, that are then looking for help to get their work done. But certainly we see a variety. But probably more on the lower end, where the backlog has been reducing and they need to do something. We are always very careful -- when you look at those firms, you really look at -- where their clients are, where the backlog is going, where their relationships are, and what we can do with them once we move them into the Stantec model. That's always the secret -- trying to figure out how you can leverage what they do with a larger team of services.

  • - Analyst

  • Okay. And are those discrepancies between the growing firms and the firms that are in decline -- are those discrepancies dependent on maybe a practice area, or potentially a geographic region? Or is that straight across the board?

  • - President, CEO

  • All of the above. There are some practices where you would think a firm would be reducing in size, and in fact they are growing and having increase an in backlog. And you've got others that are firms that should be growing that are reducing. So it's not specific to a practice area geography; it's probably more specific to where that company was in its evolution before this crisis hit.

  • - Analyst

  • Okay, perfect. Thank you.

  • Operator

  • Carolyn Dennis, Dundee Capital Markets.

  • - Analyst

  • On gross margin -- it was down a bit in the quarter, and I know that in the MDNA you talked about why. But in terms of -- especially in the United States, with the competition -- I know you haven't changed your guidance range, but do you see that coming down over, say, through 2012?

  • - President, CEO

  • No, we still feel that the 54.5% to 56.5% is still the range that we can achieve, both going forward for the rest of the year, as well into 2012. There is no doubt that, as it tightens up in the United States, that competition is usually a factor of how many projects we win, rather than what's your gross margin on the project is going to be. We are pretty strict with regards to how we bid a project; and we are not going to simply buy jobs. So if we lose a job because of the low price, so be it. But you don't, in a lot of the sophisticated clients and a lot of the government clients -- there's so much transparency in requirements in the way you bid, it's not really going to affect your gross margin. It's probably going to affect how many projects you actually win.

  • That's where the competition comes into it. You've got to be sharp on your pencil. So that may have 1% or 1.5% effect on it, but it's not going to change our gross margins from 54.5% down to 52% overall for the Company. So this trend this quarter -- I wouldn't call it a trend -- it's a mix of projects you have from quarter to quarter. We did a lot of remediation projects in environment in the second quarter, that just drives your margin down a little bit more. A lot of the projects we see coming down the pipeline is a lot more engineering projects, which will drive the margin back up. We don't see that as a long-term trend to what you saw in Q2.

  • - Analyst

  • That's great, thanks. And 1 question, more housekeeping, on the tax rate. The last couple of quarters it was 27%; and you are talking about being under 28.5% for the year. Should we expect a bump in the back half?

  • - CFO

  • Carolyn, Dan here.

  • I don't think we are expecting too much of a change in that tax rate, so that 27%, that's an annualized rate that we're estimating today, based on where we expect our earnings to be over the year. So that 27% is probably going to be pretty stable this year. Last year, there was some fluctuation due to reorganization. But this year, I think it will be pretty stable.

  • - Analyst

  • In 2012, I think -- last quarter you were talking about 30% -- is that still a decent number to estimate in 2012 for tax?

  • - CFO

  • That might be a little high; we haven't gone out and started doing our projections for 2012 yet in terms of our tax rate. But we haven't done our budgets yet for 2012. But I would suggest that would be just probably a little high.

  • - Analyst

  • Okay, that's great; thanks so much.

  • Operator

  • Michael Tupholme, TD Securities.

  • - Analyst

  • Question regarding the geographic detail that you provided. On a consolidated basis, you again were in a situation this quarter where net internal growth was slightly negative on a gross revenue basis, but positive on a net revenue basis to the sub-consultant changes. In terms of the geographic detail you've given, you saw net internal growth in the US was negative on a gross basis. Ca you give us some sense as to how that would have looked on a net basis? Were those same sub-consultant issues a factor there?

  • - President, CEO

  • There were still overall a slight retraction in net revenue, organic growth in the US. But certainly it was offset by the Canadian operations. But there was a slight retraction in year-to-date net revenue in the US.

  • - Analyst

  • Okay. And then, in terms of the delays in the transportation practice area that you talked about, suggested that some of that is a function of funding related issues. Can you talk about both the US and Canada? Can you maybe elaborate on what is driving that in Canada?

  • - President, CEO

  • In Canada, some of that was P3s. So some of the delays was just how the P3s actually roll out; how they're actually structured; whether a project is going to be issued for RFQ; how long it then takes to be then issued for RFP. So we are seeing a little bit of drag in between that period; and some projects that we thought would come up for an RFQ were held back a month or two. So it's just that overall P3 process seems to be taking a little bit longer. There were some projects in Alberta that were about a month delayed, and that (inaudible) passed, obviously, some growth in the revenue.

  • - Analyst

  • Okay. You mentioned in your prepared remarks at the start of the call, the award work for Target as they roll out their stores in Canada. Can you talk a little bit more generally about what you're seeing in terms of the commercial building sector in Canada? Sounds like you're seeing some strength there, and if you can elaborate on that a little bit in terms of whether or not that's specific to certain geographic markets, or particular types of buildings? Or any color you can provide on that.

  • - President, CEO

  • We have seen a growth, actually, in that, that we've got another national brands store that is moving from the US into Canada that we are working with as well. We are working with a large food chain that is also rolling out and doing renovations to their stores. So most of our commercial increase that we are seeing is beyond just the stuff we do in a local basis. We have seen a lot of national focus; that was a strategy that we started actually last year, was to look at some national clients, and certainly that has paid great dividends for us. That's probably the biggest increase -- is more the national brands doing either renovations to their stores, or US stores entering the Canadian market and secured a couple major contracts there.

  • - Analyst

  • Okay, that's great. That's all for me; thank you.

  • Operator

  • Ben Cherniavsky, Raymond James.

  • - Analyst

  • Good afternoon, guys. Most of my questions have been answered. But maybe I will try to -- not to beat a dead horse -- but talk a little more about the end market activity. Because I looked at your organic growth rates in the US; which, according to everything I see is where the real problems are in your markets. You were down 3% in this quarter; down 4% year-to-date -- that doesn't look all that bad compared to what were the kinds of statistics you see in the construction markets in the US. I'm wondering if you can explain that a little bit.

  • Do think there is -- you did mention how, despite the headlines, there is lots of activity in infrastructure needs in the US, some of which continues to move forward. But is there something else that you can attribute in terms of market share or execution, that is helping you hold up your share of the market there in the US against some very significant headwinds? And for that matter, if things were to get -- what we are seeing from all the economic data, and obviously the market today, that people are concerned things are going to get worse in the US. Can you imagine it getting any worse in the construction markets than what you have seen in the last 6 to 12 months?

  • - President, CEO

  • That's a good question, Ben. It sorts of gives us the opportunity in talking about the US. Because I think you're right. We're comfortable with our position in the US, and actually, we see the growth that we've experienced in the past 3 years in the US is now give us an opportunity where we are a big player in the United States; and we're probably have not been taking advantage of that as well as we could. And we are starting to see those opportunities, by cross-selling our services, by explain to our clients exactly now who we are, and the services we have. That's an ongoing program, that's an ongoing effort of getting into your clients and explaining that, as a new acquisition, you're now part of this bigger Company, Stantec, that can provide all these services.

  • So, with 4,500 staff in the United States, that puts us in a very, very upper echelon of the size of companies there. And we are just realizing it ourselves; and our US staff and Canadian staff are realizing that we have a lot to offer to those American clients. So we are now starting to see that starting to gain some leverage -- leverage is starting to gain some capabilities for us. In California, we are starting to get more and more work and winning work for some very major competitors, major firms in the US. We're competing with them head-to-head in California, and winning some very large projects. We are very comfortable that even with a very tough economy in the United States, there are opportunities to get in a fresh face, so to speak, in front of a client, and essentially steal market share. Even without growth in the economy, there is a market there that is still ripe for consolidation. And with our acquisitions over the past 3 years, we're just starting to scratch the surface of those opportunities.

  • Could it get any worse? It could always get worse. But I can't see it getting worse, because of the fact that they are spending such a minimal amount right now on infrastructure in the United States, they have to keep up a minimal amount of investment just to keep things going. And that's basically where they are now. So they are at about the lowest point in the past 50 years of spending and infrastructure. And I can't see it getting much lower. Even yesterday, there was talk in the United States that they now have to turn their focus back to infrastructure. I think President Obama's comment was -- that's the way of getting Americans back to work, is to start building things. So I think you're going to see a renewed focus of that in the United States --

  • - Analyst

  • They just have to find the money (laughter).

  • - President, CEO

  • Yes, they've got to find the money. But there will be other alternative ways of doing it. You'll hear -- if you listen to our competitors in the US, the word P3 is thrown around in every one of those firms. But P3 Is still in its infancy in the United States. It is still -- right now, I would not call it a solution to their problems for 2012. But it will be a portion of the solution of their problem going forward. There will be new ways of investing in the United dates -- there will be new taxes, there will be new user fees on toll roads. They will find a way of funding it, because the problem won't go away. We're still very, very bullish on the United States, as you can hear.

  • - Analyst

  • That's great color. Thanks very much, guys.

  • Operator

  • Paul Lechem, CIBC.

  • - Analyst

  • Thank you; good afternoon. Dan, you made some comments in your opening remarks about the cash flow in the quarter. And I was wondering if you could elaborate maybe on what the back half of the year will look like? And do you anticipate getting to the same level of operating cash flow as you did lat year, maybe?

  • - CFO

  • Good question, Paul. I think, first of all, we see a little bit of cyclicality in the DSOs -- days sales outstanding -- in our cash flows, essentially go through the middle of the year, Q3 and Q2. Certainly, we always see negative cash flows in the first quarter due to a lot of payments. I think the upfront cash outflows this year really related to a lot of those acquisitions, and the Q1 cash flows also that we normally see. But we are expecting to see our DSOs decline in the third quarter, and come back into more of our historical normal range in that 85 to 90 days. We will see a pickup in our cash flows in the third quarter and through into the fourth quarter. Will it be as high as last year on a trailing 12-month basis? Kind of hard to determine right now, based on the acquisition flow that we see.

  • - Analyst

  • All right, but absent acquisitions, would your operating cash flow in the back half of the year catch up and realize you to get to sort of a similar level as last year for the full year?

  • - CFO

  • We expect them to improve, yes.

  • - Analyst

  • Okay. On the usage of cash -- obviously acquisitions is one. You're buying a little bit of -- a few shares back -- is that activity likely to continue? And has the Board continued to discuss the potential for a dividend as well, at some point? And under what circumstances?

  • - CFO

  • We do expect to see some activity and uses of cash for the repurchase of shares. There is a couple of reasons, and a couple things that we do there. 1, we look at the share price, and if we believe it's undervalued, we will repurchase shares and cancel those shares, which is a good return for our shareholders. Secondly -- I just lost my train of thought -- to offset the options, that's the other reason we do it. With respect to the dividend question?

  • - President, CEO

  • We discussed that, I think, with every 1 of our Canadian investors on a fairly regular basis, and we'll continue to. We always do on an annual basis, review the use of our cash; and look at paying a dividend, looking at the return to our shareholders for paying a dividend versus continuing our growth strategy. Discuss that with the Board. We are coming up to that session again this year in September. We'll have that discussion with the Board again. In the past, certainly we feel that the use of our funds today is still best used for our shareholders by investing in our growth. And still feel very positive about the opportunities for that continued growth. So at growth of 15% per year, we can continue to use our proceeds to invest in that growth and get a good return for our shareholders. If we analyze it in the future and see a change in that strategy, then obviously paying a dividend would be a result of that analysis.

  • - Analyst

  • Okay, thanks. 1 last question -- and relates to your 2% to 3% organic growth guidance for the year. I'm wondering -- if you were to achieve that, suggest high growth in the back half of the year -- do have the bench strength, do you have the resources to actually deliver on that? If so, does that mean that margins could potentially go higher, because your utilization rates will go up? Or how should we think about that?

  • - President, CEO

  • It will be a combination of increased utilization and hiring staff. If we continue to win work, continue to grow the backlog, there's only 2 ways of doing it, and it's usually going to start getting higher utilization from the current staff or hiring staff, and it's going to be a combination of both, Paul. There will be some -- in some areas, an increase in margins as a result of that; in other areas we'll be hiring staff. It will be a combination of that.

  • - Analyst

  • Okay, thank you.

  • Operator

  • Jayson Moss, Salman Partners.

  • - Analyst

  • Hello, guys. Wanted to actually build on that last question and get a better handle on the organic growth target of 2% to 3%. You did lower your outlook in the transportation building sectors, which are arguably your second and third largest sectors, or rather practice areas. Trying to get a handle on some of the moving parts -- where you're seeing for the back half of the year strength?

  • - President, CEO

  • Actually, transportation is our fourth-largest; industrial is actually our third-largest practice area; and it's actually that practice area that is performing very well right now. Year-to-date, I think that practice area is, from a net revenue perspective, over 10% to maybe 12% to 13% growth. So it's doing quite well. We feel that environment, which is right now essentially flat year-to-date, is going to have a very good second half of the year. So that's where the growth is going to come from -- essentially those 2 very large practice areas. I think one is 35% of our revenue, the other 1 is around 16% to 17% of our revenue. Those 2 certainly would increase activities and feed the organic growth. The last 1, we even always keep ignoring is urban land; albeit urban land is only 11% of our revenue, it still has had some good organic growth. And it's not retracting, it's not taking away at this point in time, so it's contributing as well. Those 3 practice areas, and with the growth we see in those in the second half of the year, even though we feel that we are going to have a retraction in our projections for transportation and for buildings, we feel that the other ones are going to make up for it and still achieve 2% to 3%.

  • - Analyst

  • Okay, that's great. Thanks guys.

  • Operator

  • Tristan Richardson, DA Davidson.

  • - Analyst

  • Afternoon guys. Good quarter. Going back, Bob, to what you were saying earlier about the P3 model here in the US. We are hearing that some of your competitors have seen an increase in P3 activity here in the US. I was wondering if that's something you are seeing at all? It kind of sounds like you are not.

  • - President, CEO

  • I guess, Tristan, it depends how you define activity. So -- is it a real project that's going to really go ahead and actually build stuff, or is it just talk? I don't mean to be sarcastic, but that's really what we hear right now, is an awful lot of areas that are just talking about P3s -- they're putting together a program, they're putting together the idea of what they want to build. The structure around the P3s in the US is just not consistent, it's not transparent or clear. And that's the danger of it right now is, they tend to be one-offs, they don't have clear metrics associated with how they are going to actually award a project, or when they're going to award a project. So that causes us concern; it takes time to chase a P3 and get yourself on the team.

  • Once the P3 is actually initiated and they short list it and you start submitting information on it, we start getting money. But before that, all it is, is a drain on your marketing business developments. So until we see some clarity that there is something real there, we are going to be very cautious on how we approach it. The need is there, the desire is there, but the structure isn't. So, there's been an awful lot of talk about what needs to be done, but really, that activity is more talk than action.

  • - Analyst

  • Got you. Thank you guys very much.

  • Operator

  • Pierre Lacroix, Desjardins Capital Markets.

  • - Analyst

  • Thanks, and good afternoon guys. 1 question on the Bonestroo acquisition in the Midwest US. I don't know if you covered that, but what was the main reason that you finally hit that market more significantly? In the past, was there any kind of evaluation issues, was there a lot of competition to go after the firm in that specific region? Or simply, was that market not compelling enough? What was the economy driver that you see there, in terms of renewable energy or -- I would like to have your view on your strategy there in that specific region.

  • - President, CEO

  • Sure, Minnesota and Wisconsin is probably where their strength is. They just opened up offices in North Dakota, and right now, just about everybody seems to want to open an office in North Dakota. That area of the country has not suffered as much from the recession as other states. Certainly, they've had their troubles, but they offered us a new geography. They offered us an enhancement to what we do in that area in the environmental area. So those two were attractive. They were a company that was going through restructuring, and a leadership succession that provided them an opportunity, and we've always stated that, that is one of the attractions of being acquired is that leadership succession issue. So they have the issue is well, that contributed to their interest in being acquired.

  • But certainly, it was an area of the country that we thought we were not in. They were what I would call an extremely good local firm. They have a long history, long client relationships; they have been working for clients for 30 and 40 years. And it's that type of model that really fits well with Stantec. You get that good, strong local company that is very specific in their services, and provides what we would call complementary services to what we have, and what we can now offer their clients. They were very specific in the services they offered their clients. We can now take that client relationship, which is externally strong, and offer more services. It really fits with our overall strategy of buying those good, strong local companies and then leveraging that global expertise into them.

  • - Analyst

  • Do you see more potential to expand in that region?

  • - President, CEO

  • It's not a huge market, so I would say we have to be careful about where else; we would probably maybe look at a different practice area in that geography. And certainly, we'd like to be maybe a little bit further east, into the Chicago area, where we don't have a lot of strength. So if you're looking for the general area, we certainly see the Chicago market as something that we'd like to enter. But Minnesota and Wisconsin and North Dakota certainly fill the void for us, from a geography standpoint.

  • - Analyst

  • Okay. Maybe 1 last, Bob. I was wondering -- I was reading about some small US municipalities filing for bankruptcy -- chapter 9 I think. And was wondering about you guys -- how do deal with that kind of situation if it happened to you? Or if you monitor that risk with your clients and stuff like that. How do you look at this potential --

  • - President, CEO

  • From a private client perspective, certainly we monitor that risk and are very concerned about where the financial stability of our private clients. On the public side of it, we haven't experienced a situation where one of our municipalities that filed into bankruptcy. Certainly, we had trouble in California last year, with the California delay in their budget approvals. But those usually are delays, they're never result in a lack of payment. And certainly, I think municipalities that are going into bankruptcy are much smaller municipalities, which we are not focused in. Even the Minnesota focus that we had -- I think the smallest municipality therein is St. Cloud, which is just outside of St. Paul and Minneapolis. They're very large municipalities. I don't see that as an issue for us.

  • - CFO

  • We monitor our accounts receivable very closely as well, and at a project level. I don't think any 1 particular client getting into some sort of fiscal difficulty will cause a big issue for Stantec, given our client diversity.

  • - Analyst

  • Okay, that was great; I appreciate it. Thank you.

  • Operator

  • Chris Blake, Stonecap Securities.

  • - Analyst

  • Good afternoon guys. A quick follow-up. Most of my questions have been answered. I wanted to touch base, Bob, with respect to your comments on -- I know your annual target is about 10% to 15% acquisition-related growth and year-to-date you're tracking at about 5% to 6%. I was just wondering, do you still reiterate that guidance for 2011?

  • - CFO

  • The overall growth of 15% is a combination of acquisition growth and organic growth. And that 15% is over a 5-year period. It's never a specific target on an annual basis. The last thing you want to be saying is -- set a specific target, an annual basis for acquisition growth. Because it will sort of push you into making maybe decisions you don't want to. We always look at our growth over a 5-year average. Over that 5-year average, we expect to have 15% compound annual growth rate. So in any given your we may be 12% 1 year, 17% the next year.

  • - Analyst

  • Right, okay. Very good. That's it for me, guys. Thanks.

  • Operator

  • Thank you. Those are all of the questions on the phone lines. Please go ahead.

  • - President, CEO

  • Thanks very much for listening to and asking questions today for our second quarter. I'd like to thank you for joining us, and we will see you again next quarter. Thanks very much.

  • Operator

  • 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.