Stantec Inc (STN) 2012 Q1 法說會逐字稿

Welcome to Stantec Inc.'s first quarter earnings results conference call. With us today from Stantec management are Mr. Robert Gomes, President and Chief Executive Officer, 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)

As a reminder, today is May 10, 2012 and this conference call is being recorded as well as broadcast live over the Internet. It will be archived for future reference at Stantec.com, under the Investors Relations. Therefore, any members of the media who joined the call today 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. Before the call begins, there are a few words from the Investor Relations.

Thank you. Stantec management would like to make you aware of its Safe Harbor statement and 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. In addition, Stantec management will be mentioning additional and non-IFRS measures. You will find descriptions of these IFRS measures and their use and underlying assumptions in the management's discussion and analysis included in Stantec's 2011 financial review. It is now my pleasure to introduce your host, Mr. Robert Gomes. Please, go ahead.

Thank you, Crystal. Good afternoon, everyone. And welcome to our 2012 first quarter results 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.

I would also like to mention that we held our annual meeting of shareholders this morning. Those of you that are interested can access a web cast of the meeting on the Investor Relations section of our web site. This morning, we released the results of Stantec's operations for the first quarter of 2012. I am pleased to report we began the year with solid results and our third consecutive quarter of organic growth despite the current investment business. Dan will now provide a more in-depth review of our first quarter financial results. Dan?

Thanks, Bob. Good afternoon, everyone. As Bob just mentioned, the first quarter of 2012 showed positive operational performance for Stantec. Our gross revenue increased 7.4%, to CAD439.1 million, compared to CAD408.7 million, in Q1 '11. Our net revenue was also up 10.1%, to CAD370.9 million, from CAD336.8 million in Q1 '11. The increase in organic net revenue was driven by project activity in our environmental, industrial, and urban land practice areas. Our gross margin as a percentage of net revenue was 54.4% compared to 55.8% in Q1 '11.

The reduction was due to activity in three primary practice areas. In our Buildings practice area, we experienced lower gross margins, due to a continued softening in some of our sectors, particularly health care, within the buildings market. In our Industrial practice area, organic revenue growth increased in the quarter, and the impact of this growth in a lower margin practice area negatively affects our overall consolidated gross margin. In our Environmental practice area, our higher margin work such as field and environmental sciences work, is typically slower in the first quarter due to seasonality. But we expect this to increase throughout the remainder of the year.

So we don't see a decrease in our gross margin as a percentage of net revenue as a trend. We expect to be able to operate within our targeted range of 54.5% to 56.5% throughout the remainder of 2012. Our administrative and marketing expenses were 41.5% of net revenue, right in line with our low end of our targeted range. We achieved a 3% increase in EBITDA to CAD47.4 million, from CAD46 million in Q1 '11. Net income increased 4.6%, to CAD24.9 million, from CAD23.8 million in Q1 '11. And our diluted earnings per share increased 5.8%, to CAD0.55, from CAD0.52, in Q1 '11.

Our cash flow from operating activities are healthy and are stronger than in Q1 '11 given that we were not impacted by any acquisition-related activity in the quarter. Compared to Q4 '11, we saw an increase from the day sales outstanding from 92 days to 96 days. We view this as a temporary increase due in large part to a delay in billing as we completed a major upgrade to our enterprise management system in the quarter, which Bob will speak in more detail to in just a moment. Lastly, the Company declared its second quarterly dividend of CAD0.15 per share payable on July 19, 2012 to shareholders of record on June 29, 2012. Overall, our business continues to grow and we continue to manage it effectively, despite, as Bob said, the current challenges of the economic environment. Bob?

Thanks, Dan. As part of our long-term strategy, we continue to strengthen our internal systems and service offerings to our clients. During the quarter, as Dan stated, we completed a significant upgrade to our enterprise management system, the largest upgrade we have undertaken since launching the system in 2003. This upgrade provides us with a sustainable platform to support our future growth. On the acquisition front, we signed two letters of intent to acquire two firms, which will grow our technical expertise, and geographic reach, to better service clients. We signed a letter of intent to acquire 130-person transportation consulting firm, ABMB Engineers, based in Baton Rouge, Louisiana. We also signed a letter of intent to acquire the assets of PHB Group, a 35-person architecture and interior design firm based in St. John's, Newfoundland. Both transactions are expected to close in May.

I would now like to highlight some current projects that reflect our ability to provide integrated solutions to our clients as one team working across North America and internationally. During the quarter, we secured a project in our buildings practice for a new 102-bed senior care facility in Powell River, British Columbia. This project will use a one-team model with support from our architecture, structural, civil, mechanical, electrical, landscape architecture, interiors, and geotechnical teams. This facility will be designed to LEED Gold standards. In our environmental practice, we are leading the emergency response planning for the Northern Gateway pipeline project, a dual pipeline system running from Alberta to British Columbia.

Project activity continues to grow in our industrial practice. We continue to secure significant projects with the top global mining companies, and build relationships with new clients. During the quarter, we secured work with a new client, Twin Metals Minnesota. Our scope of work includes mine planning and design, as part of a pre-feasibility study being undertaken by the client for an underground copper, nickel, and platinum metals mine in northeastern Minnesota. Relatively high oil prices led to additional projects in the oil and gas sector. Most recently, we won a 140-mile pipeline expansion project in the Eagle Ford shale region of Texas.

In our transportation practice, we were awarded a three-year contract to provide Canadian Pacific Railway with overall engineering services in western Canada. This project includes planning, design, and construction supervision, related to grading and track work, bridges, geomatics, geotechnical, and environmental remediation. Residential development remains strong in western Canada and our urban land practice continued work on the Big Lake Neighborhood in Edmonton, Alberta. This development incorporates low impact development techniques, constructed wetlands, as well as a major wildlife crossing under an arterial roadway. This is only a small sample of the projects we are working on, but showcases our ability to provide clients with integrated solutions on their projects.

I would now like to comment briefly on potential market conditions going forward. Overall, the outlook for 2012 is a moderate increase in organic revenue. In our Canadian operations, we had a 4% increase in organic revenue growth during the quarter while our US operations were flat, showing our ability to sustain performance despite the softened market conditions. We have built a strong and growing presence in the United States, and are well positioned to take advantage of the recovering economy. Continuing through 2012, we will remain focused on operational excellence, by developing broader long-term relationships with our clients, obtaining larger long-term contracts, and increasing our backlog while managing our business efficiently.

In general, Q1 was a slow quarter for us in the acquisition front. As I stated earlier, we have two LOIs pending. The M&A activity overall in our industry had a slower-than-usual activity in the quarter. However, we still see many opportunities for further acquisitions in 2012, and we are in a number of discussions with some great firms. Looking at our individual practice areas, we expect the following outlook for 2012. We believe our buildings practice area will remain stable for the remainder of 2012. We are one of the top integrated building design practices in the industry and will remain focused on the higher education, and health care sectors in the United States, and internationally.

Despite the uncertainty of the North American economy, we continue to win projects in this practice area, through the growing commercial sector, because of our range of services and wide geographic reach. We expect to achieve stable to moderate organic growth in our environment practice area for the remainder of 2012. The slight retraction in organic revenue compared to Q1 '11 was again as a result of pass-through subconsultant costs, and does not reflect our growth potential for the remainder of the year. On a net revenue basis, we're encouraged to see our organic growth in the mid-single digits in this practice area.

The mining, oil and gas, and power sectors continue to grow due to high oil prices. Providing us the opportunity to provide these clients with comprehensive services starting with permitting and assessment, through to construction support services. New investment in the water sector remained flat in the quarter, as municipalities continue to deal with budget constraints. However, investment will continue due to regulatory requirements and consent decrees that require water and sewage treatment plants to be upgraded. We also see growing opportunities for our water group in industrial applications.

We anticipate moderate organic revenue growth in our industrial practice in 2012. We expect to continue growing the scope and geographic reach of our project work, with a focus on Texas and Louisiana. Commodity prices are expected to remain strong, which we believe will encourage further capital spending with our private sector clients. We expect robust activity in the mining and oil and gas sectors, supported by our continued growth in other sectors, including power and large scale maintenance and upgrade facilities. We believe that we are well positioned to secure opportunities resulting from an increasingly stringent regulatory environment. By leveraging relationships, and cross-selling services to large scale clients, we will continue to expand our reach into new geographic locations while taking advantage of opportunities in a recovering US economy.

We expect to achieve stable to moderate organic revenue growth in our transportation practice area in 2012. Our recent acquisition of ENTRAN and pending acquisition of ABMB will increase our capacity to take on larger transportation projects and will provide us with growth opportunities in the US southeast. We remain cautious, though, as decreasing tax revenues, efforts to reduce state and provincial deficits, and continued uncertainty in long-term funding may continue to cause delays in some planned transportation projects. However, we see continued activity in Canada's P3 market, where we have several active project interests, along with increased opportunity in the US design build market.

The general outlook for our urban land practice shows stable to moderate organic revenue growth for the remainder of 2012. There continues to be mixed signs in the US residential housing sector, while the Canadian housing market is expected to remain steady, with strength in the western provinces, and on locations related to resource activity. We have developed a stronger presence in the re-development and urban planning within the public sector which continues to provide us new opportunities. Overall, our outlook for 2012 remains unchanged with a targeted 2% to 3% increase in organic revenue growth compared to 2011. We are still experiencing a challenging economic environment, which appears to be slowly improving.

Though related pressures, such as increased competition, margin compression, project delays, and fiscal rebalancing are lingering. However, as I said before, this is an exciting time for our Company and we are very well positioned to take advantage of a recovering economy, especially in the United States. We see great potential to expand our services and geographic presence through acquisition and organic growth, while providing enhanced shareholder returns. That 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. Cal?

Thank you.

(Operator Instructions)

Michael Tupholme, TD Securities.

First question I had, you talked about recognizing lower gross margins on a number of projects in the buildings practice area, and wondering if you can elaborate on what is happening there, and if this in any way relates to any of the same kinds of issues you saw in Q3 of last year?

Okay, Dan, I will let you talk about the specifics with regard to those specific projects in the buildings group.

Sure. We identified a few of our major projects in the buildings practice area, largely related to P3s. This is an ongoing lower margin. As we talked about in Q3, you have to recognize the margin that you expect to achieve on those projects through the life of the project, and so we're seeing some of that. The good news is we're seeing one of those major projects we expect to be done by the end of the second quarter, and the second project that this is related to will continue on into next year, so that is what is happening there.

So if I go back to the Q4 call, I think there were a number of questions about this. I think at that time, if I remember correctly, the thought was that you were largely through. So were there -- did additional things come up? Because it sounds like it is the same projects, is that correct?

It is the same projects but you have to recognize that margin over the life of the project so there is really no new adjustments. These are continuing to have an impact as you go forward through to completion.

Okay. So you've got one wrapping up by the end of the second quarter. And the other one carries on into the early part of 2013?

That's right. And just to be clear, these projects are very profitable. Still profitable, but at a somewhat slightly lower margin than they would have been in the early days of those, until we got to estimating the estimate to complete those.

And is it, between those two projects is, it a roughly equal split such that when the 1 and 2Q wraps up, sort of half of the amount by which the gross margin has come under pressure would come back, and then the other half would sort of come back in early 2013? Is that the way to think about it?

Well, I would suggest yes, but there is always the execution. There is a mix of projects. So to nail it down just on one project, I wouldn't suggest that would be the level of detail that would give you a trend that would make that different. (multiple speakers)

Bottom line, within the next quarter or two, the buildings group will get back to their normal typical gross margin. Stantec overall will certainly get back to our normal typical gross margin in the next quarter or two. I don't see this as being a trend at all. And as we said in the script, it is really related to three different issues -- one in environment, one in the industrial, and one in buildings. And the industrial is a good news story. We're just picking up so much work in the industrial area, it has slightly lower gross margins, which drives the overall, but we don't see that as a tendency that is going to continue. And environment, with it getting busier, in the second quarter, much higher margin work, that will bring it back up as well.

On a consolidated basis.

Maybe I can just pick up on the comments there about industrial, because clearly, if you go back, it is clear that that area is a lower gross margin area. Maybe two things. Can you remind us as to what it is that drives that lower gross margin in that particular practice area, but secondly there is a comment in your MD&A about, in addition to simply a mix issue here, the industry is experiencing lower gross margins in general, I think, is what you're saying. So has there actually been a degradation in margins in the industrial area as well?

No, not really. I think it is fairly typical. There was -- it is certainly a time and materials type industry that because of that type of certainty in your billing methodology, you do it at a lower margin, because you have more flexibility with regards to your upset contract values. I think we stated there was some legacy issues, with regards to some contracts that we picked up, as part of some acquisitions that we did.

We're working through those legacy projects. Those projects were long-term projects for clients here in Alberta. Now, the shift and change in the amount of work going on -- actually sounds counter-intuitive -- you can actually drive a higher gross margin opportunity in a very busy economy, because the competition has so much work to do. So we've actually approached a number of our clients in trying to deal with that legacy issue. But certainly we don't see that as a continuation, in the industrial group. And again, it was more of a legacy area of the acquisitions that we picked up.

Okay. I will get back in the queue. Thank you.

Great. Thanks, Michael.

Tahira Afzal, Keybanc Capital Markets.

Good afternoon, guys, this is [Sauger An] for Tahira. The first question is really around the US elections, presidential elections that are coming up in November. We've been hearing from a few of the ENC firms that deal with the transportation side that they're worried about September, October, November timeframe. They've seen that federal agencies and even state and local agencies might turn off spending just as people get distracted with the elections and all that. Is that something you guys have experienced in the past and something that you're concerned about going forward?

Yes, we've experienced it in the past. Somewhat concerned, but since we expect that, it is built into our forecast. What we said later last year, and certainly in the first quarter, what we're seeing, even though there is -- I would absolutely agree that we're not going to get any resolution to that until later this year. So there is a lot of uncertainty. Sometimes uncertainty provides you though some definition and you got to go ahead and get some things done.

So we've seen a lot of states realize that nothing is going to change on the federal side of it, and they have projects that they have to do. They have some funding set aside. And they're going ahead and doing it. So we're seeing projects come out, albeit it smaller, and much more local jobs, but we're still seeing opportunities come out. But they are being constrained by size. They're not coming out with the bigger ones.

And it is impacting and has impacted actually our transportation forecast. But what we see today is still enough to keep us going in the transportation business, and actually, a lot of small work out there. That's not bad for us. Because really, that's what we are. We are a fairly small local transportation group, in a number of different areas, and that helps us to stay competitive and win those jobs.

Also, just to add, just to remind you that we have a very small federal exposure to any of the federal work in the transportation business.

Most of our business is local -- regional and municipality.

Perfect. And then second follow-up real quick, on your mining business, I know last quarter, you had mentioned that mining revenue, direct and indirect, is around -- I think it was like 7% or 8% of your total business now. CapEx plans from major mining companies have started to see that they're a little bit stretched now and could be coming down. Any concern on your part that eventually that is going to flow through to the front end and impact you guys.

We haven't seen it yet. As a matter of fact, we continue to secure some fairly big mining projects. A lot of that is front end work right now that we are doing. But we are seeing some of the front end work that we've completed for our clients in the last year are now moving into the full design and development stage. So we haven't seen it yet. The clients that we're staying in touch with certainly are still pushing ahead with the capital plan. One thing we realize about the mining business, it is cyclical. But with the pricing the way it is, the commodity prices, we haven't seen any tendency of clients pulling back on their development plans.

All right. Perfect. Well, thanks for taking my question, and congrats on a good quarter.

Thanks, Sauger.

Maxim Sytchev, AltaCorp Capital.

Yes, hi. Actually just a question in terms of the emergence of the alternative financing models in the US and how that is progressing. Any updates on that front, that would be very useful. Thanks.

An awful lot of talking still going on, Maxim. There is an awful lot of design build opportunities. We're seeing more design build opportunities than what we would say P3s. But right now, we're tracking around 150 different alternative procurement projects in either the design build space or P3 space. The problem in the United States is still a lack of clarity on the timing. They seem to not have the same definition as the Canadian projects. So I would say that I haven't seen any advancement of the maturity of that market in the United States but I have seen an increase of the need.

So you're seeing again, some of the other callers talking about the lack of federal funding and the stagnation in the US because of the US elections. It is pushing others, and it is pushing individuals to look at the options of P3s. That is both good and bad. Because the good is some of them may actually turn into real opportunities. The bad is, a lot of them just cause a lot of wheel spinning. You got to be very careful about how deep you get into the discussions on these. But to answer your question, simply, we really haven't seen any change in the maturity level of those types of projects in the United States.

Okay. Fair enough. Thanks a lot for the color. And lastly, the question also pertains to the US as well, as you see the economy recovering, albeit slowly, do you feel the need that maybe you have to make perhaps a larger platform acquisition in the states to really take advantage of the fairly decent multiples and trough earnings right now for the firms? What's your view on this?

We would always love to do larger acquisitions. That is always in our interest. It is just not as deep of a pool of companies in those larger firms. There is fewer of those firms around. And there is not as many of those firms of that size that are interested in being acquired. But that is certainly on our radar. That is certainly where our focus is.

We have lots of opportunities, in the CAD50 million range. There is numerous companies and opportunities there. We're much more interested in the CAD100 million to CAD500 million range. That would be great. Just not many companies in that area. But we would certainly be interested in looking at larger acquisitions in the United States to advance our ability of having a larger platform.

Okay. That's great. And maybe just very last question that pertains to the buildings division, because you speak about the negative momentum in relation to the health care and so forth. Is this sort of the same kind of degradation, sort of momentum, or do you feel there is a bit of an acceleration from that perspective?

The health care certainly in the United States is just -- it is affected as well by the elections, the health care bill is not going anywhere. A lot of the health care firms are simply putting their capital plans on pause. However, the same thing is being said, a lot of those are the more major expansion programs, you are seeing a lot of front end work going on. We're helping them analyze their strategic planning to develop alternative strategies for what may happen in the United States. It positions us well, because then we're at a point strategically working with these health care companies and helping them through this. So we're seeing a lot of those opportunities.

We're seeing lots of renovation projects, rehabilitation projects, so these companies are sort of retracting into a maintenance and planning mode, waiting to see what will happen. And those still give us opportunities. And that still feeds some revenue into the Company albeit just not large revenues, but usually higher margin stuff, too. So we're comfortable where we are in the health care. We would love to see a more robust economy, and some better planning and long-term strategy. But the key is, it will come. They cannot continue the way they are. There needs to be some resolution in the United States and the demographics are going to drive that, just as the rehabilitation of infrastructure is necessary, and the demographics are going to drive the need for health care spending so we're very well positioned.

Excellent. Thanks a lot for your time.

Thank you.

Thanks, Max.

Ben Cherniavsky, Raymond James.

Okay, in your market commentary, there are just a couple of things I wanted to dig a little deeper into. And correct me if I misquoted this, but I believe you indicated on the transportation market that you actually expected that to be -- that was one of the weaker spots in Canada. You expected that to be down? Is that correct?

Yes. There is still, in Canada, I think we've got some good opportunities in Canada, and I think we had a slower Q1 in western Canada in transportation, saw some certain concerns there, but what we seem to have secured going forward in Q2 and the rest of the year in western Canada, we're pretty comfortable. We see some good growth opportunities coming back. For the United States, pretty flat. Like we mentioned earlier in the call, a lot of smaller projects. Good stream of them, but they are just smaller projects. So transportation in the US, somewhat flat. We're seeing a pickup in western Canada but there was some softness the first quarter.

Okay. Because my question was going to be, the softness in Canada is not what we're seeing or reading about in terms of highway spending, certainly at the provincial level seems to still be a priority in most regions.

And as we said, we had a, what I would call, a softer than what we thought first quarter in transportation. I'm not sure if I actually said it. That's a fact. We did.

That's just a timing thing, you think?

Yes.

Absolutely. There is some fairly major projects going on am western Canada and we're pretty comfortable in our position there.

All right, right. That makes sense. And the other comment you made, industrial margins down, and you may have been -- maybe you were alluding to this earlier in the call, the industrial margins down and I'm just trying to reconcile that with the fact that activity and demand is high. So how are margins down?

So I did state that earlier, it was really the legacy projects of the acquisition we picked up late last year. They had some longer-term projects with a client that had some, what I would say legacy-related low margin work. We are working through those projects, as well as discussing that opportunity with the client, so we're very comfortable that that is a short-term situation that we will work through those legacy projects and be able to move the margin up to what we believe is what the market rate is now. So you're absolutely right. As the market gets much busier, especially in the industrial area and the clients have lots of money to spend, you can start getting some more reasonable margins and that's where we're at. So we see that industrial margin coming back up in the latter quarters.

That was just what were you referring to, I think it was the first question that was asked about that.

That's correct.

And very quickly, if I could, just in terms of expenses, you mentioned that the ERP upgrade gave you slightly higher admin expenses in the first quarter. Does that mean that as that project winds down, we will see any material change in admin expenses, that they would come down at all?

I don't know that you will see a material change, Ben. But the costs that were incurred in the first quarter really was as a result of us bringing the system down for the space of about two weeks to really work through this major upgrade. It is the single largest upgrade that we've undertaken since we implemented the enterprise system. It went extremely well for us, very well executed. We've been planning this thing for well over a year and a half. So it was, in our view, a huge success. It did impact some direct labor and pushed it into admin labor in the quarter. But I don't think we will see a material change over the remaining part of the year.

Actually, even with that, our SG&A costs are still pretty low. I mean --

Well, yes, I that's why I asked, could they even go lower.

No, they're not going to go any lower. (laughter) Not every quarter. It's not a trend.

Okay, great. Thanks very much, guys.

All right.

Sarah O'Brien, RBC Capital Markets.

You talk in your MD&A about the building segment, you talk about adjusting staff levels according to I guess some of the softness in the US market. Just wondering if you can comment on, are these material staff adjustments and would these actually improve your utilization rates and hence your SG&A going forward?

I wouldn't call them significant. They are in some areas. You're going to have to go in and deal with that. We do that on a regular basis. They are done to improve on a short-term basis your utilization. You look out six months, determine what you're going to have in areas. I mean the last possible thing we like to do is actually lay staff off.

But in our buildings group, specifically in western Canada, we have been going through a transition, for the last two years really now, since the Olympics, and this is just a continuation of that. Looking forward, we see some optimism in that side. We are starting to see some of the projects in our sectors starting to flow forward. And we won actually a significant number of projects in the first quarter. The problem with that is the timing, the release of those, and the actual signing of an agreement and executing the jobs and some of them are unknown.

But we now -- that's the project in Powell River and BC. That is a hospital. But it may take two months for that project to actually hit the actual utilization and improve that. So you always have to deal with your staff as quickly as you can. And again, that's the beauty of our system is we can see where the softness is. We've got some great planning tools. And we can make some quick decisions but I wouldn't call them significant at all.

And this is related to Canada, and not in the US market?

That is correct.

Okay. And maybe, just because you guys have been so steady in terms of delivering EBITDA margin, I mean are you still comfortable in the 14%, 14.5% range for the year? Is that an objective?

Absolutely.

Okay. Great. And just on the acquisition front, I know Bob, your comments about not a lot of big targets available out there, but do you consider it a target to get to your 10% to 15% growth for the year, with some of these smaller tuck-in acquisitions? Is that something that you would have as an objective and do you expect it to be realized?

It depends what you define as a tuck-in. A tuck-in now for us unfortunately is 130- or 150- or 200-person firm, is now considered by the industry as a tuck-in for us, because of our size. Our ability of doing five of those in a couple of quarters is definitely there. So all of a sudden, those five tuck-ins become fairly significant. That is a harder way of getting there. But it is also a way that we're pretty comfortable with and pretty good at executing and integrating.

Our preference would be one 500-person firm or a 1,000-person firm. And that certainly is where our focus is. There are just more opportunities in the CAD50 million range, CAD50 million to CAD100 million. So we certainly are continuously pushing and focusing. I just want the industry to understand, that is a limited space. There is just not that many. But I would say we have as good of a connection into that space and I think everybody is aware of what our strategy is. So we will just continue executing it. But we continue to hit base hits and score runs; it still works.

And just on the larger firms, if you do find one, what is your comfort level with being able to pay up? Because I understand the multiples are reasonably high. Is this something that you need to be immediately accretive or do you find opportunities where you can peel out a level of management or something to make it work.

Very rarely do we look at an acquisition and decide that we're going to cut costs to make them more efficient and make it accretive to us. We have always been looking at taking a firm that we can immediately leverage services in, increase revenue, and grow the business quicker than we can on our own or they can on their own. So certainly, that is making it accretive quickly, within the first year, that is tough. Always is.

And that's largely due to the amortization of intangibles. But for a larger firm -- smaller firms, we don't see as many synergies. For larger firms there maybe is some more back office where we can rationalize some costs but that is not really the primary driver of why we're doing this.

That would be a small component of a valuation. The big component of a valuation is really how quickly can you grow the revenue of the combined company, and how well you can do that. So with a big company, the synergies that do that are there. And that is still what we would be focused on.

Okay. Sounds great. Thanks.

Great, thank you.

John Rogers, D.A. Davidson.

A couple of things. First of all, Bob, you made a couple of references to work on some pipeline projects, both British Columbia and Texas.

Yes.

And is that just part of your normal or -- I don't know if normal is the right word -- your environmental practice or do you have special teams that work on pipeline and how big are these projects for Stantec? I mean how big the projects are, but your opportunity there.

Well, thank you. Great question. Because that is something that we're very excited about. We've had a very good position in North America, working on the compliance and on the regulatory permitting side of pipelines. Very strong environmental services group, good relationships. We have not had as strong of a group doing actual pipeline design, especially of longer pipelines.

Our expertise in that business to date has been much more of the facility side, I would say, in shorter pipeline work, more of the tank farms, compressor stations, pumping stations. And we have the expertise to do the piping but just didn't have the client relationships. So what we've been working on for the last two years is really trying to put that pipeline expertise group in front of our environmental services clients. In addition to that, as part of our strategy of trying to grow that business in the US, we've made some strategic hires in Louisiana and that group has grown tremendously quickly. Their relationship that they brought, so this wasn't an acquisition, but essentially, a few strategic hires that have grown the business, to approximately 20 people, I would say now, and growing rapidly. Their expertise has now landed that project that we referenced in Texas, which is a 140-mile pipeline project.

And those projects, it is around a CAD7 million fee project, so that is significant for us. And especially in a growing market, and in a market that we see great potential for future growth. And this would all be organic growth as well in the United States. So -- and I think this is something we talked about a lot, because it is developing for us. But that project in Texas, where we really don't have a pipeline group, they stayed over in Louisiana, we are basically executing that job, we're going to be opening an office in San Antonio to basically deliver it on the ground there. So it is an exciting opportunity for us. Albeit relatively small, still CAD7 million project is still a good project for us.

Okay. And the second, Bob, in terms of your employee counts now, where did you finish the quarter at?

Around 11,300 employees. If you include others, we were close to 11,500. You got to remember, that is the net number. So after we do our acquisitions. After we may have done some rationalization of the staff in western Canada, all over, all in, it is about 11,300.

Okay. And is that up from the end of the year?

Yes, it was about 11,100 at the end of the year.

And are you continuing to ramp there?

Yes. Absolutely. Do you know anyone who is looking for a job, you can go to Stantec.com and look. (laughter)

I'm just curious because I've heard about a lot of hiring going on and you've managed to keep your SG&A levels down, or deploy the people pretty quickly.

Definitely the people we're looking for right now, oil and gas and mining are two obvious ones where we can't find enough people. So certainly when you do hire those people, they become highly chargeable immediately so it is all good news.

Great. Thank you.

Thanks, John.

Ben Vendittelli, Laurentian Bank Securities.

Just to follow up on some of that staffing comment as well as some of the margin pressure that you saw in the industrial group, is labor cost coming up in certain areas, for example, mining and oil and gas? And is that causing part of that margin pressure in industrial?

I wouldn't say it is causing a significant amount, so to answer the first question, yes, it is happening, absolutely. There are compensation salary issues you have to always deal with in an economy that is as hot as the oil and gas and mining. At the same point in time, a lot of those projects are done on a time and materials, they're also done on a multiplier, so we -- our goal in every case is if we have to pay an employee more, we pass that cost onto the client. So it has not as much of an impact on the margins. That being said, sometimes you don't have the ability of doing that and you do have to react quickly, so it would have a small, but I wouldn't call it significant impact on some of that margin erosion.

And correct me if I'm wrong, more often than not, it is maybe a timing issue, by the time you could pass on the higher costs, it might be a quarter or so, but in the long run, you will pass on the higher costs? Is that it?

That is correct. Absolutely correct.

Okay. And secondly, just if you could give some color with regards to the dynamic, the discrepancy between the organic growth in gross revenue and more organic growth which is nice to see in net revenue, and your subcontracting and that discrepancy between the two and how you see that evolving?

I will maybe jump in on that one, Ben. We did have a close look at the difference in organic revenue growth, between gross and net revenue, and the primary area of that that was impacted was in our environment business. We showed a slight retraction in our gross revenue in environment. But as Bob mentioned in the script, it is mid-single digit organic growth in environment, in net revenue. And we drilled into that, and tried to get some more color, and really, it is -- and we say it all the time -- a mix of projects, a difference in projects. We had a couple of projects in 2011 where there was more services outsourced to subconsultants, whereas we didn't have those same projects in the first quarter of 2012.

Okay. And do you expect that trend to continue for the rest of the year?

Again, it really depends on the mix of projects. Our gross-to-net revenue ranges in that 18% to 22% range. And that's something that we expect to stay within that range.

Okay. Thank you.

Bert Powell, BMO Capital Markets.

Thanks, Bob, just wondering on the acquisition side, what is the current thinking in terms of moving outside of North America?

The current thinking is cautious. At this point in time, we have very small international permanent locations, 3 in London, Dubai, and in India. They all came to us through acquisitions. And we're still in what I would call an exploratory stage, to see exactly what it is like working in those cultures. Working in international, and following our clients is something we've been doing for 30 years. So that is no problem.

It is actually doing an acquisition in an international location. It is something that clearly we just don't have a lot of history with, and it is higher risk. You've got to pick the right country, doing the right company, doing the right clients. It is something we are not as focused on as investing our efforts in where we have a current investment, which is the US. We certainly will look at opportunities, though, that -- we are approached, because as I said earlier, everybody knows we're acquisitive. So we are interested in learning what those opportunities look like.

I would have to say that if we were looking at an international opportunity now, it would be on the larger side. You wouldn't want to simply dip your toe in there. I think what we would want to do is if you are going to partner and get into the international marketplace, our strategy would be to do it on a bigger scale. And certainly, those opportunities out there, and we certainly are looking at them as they come forward. The appetite is just a little bit more cautious. That's all.

I would think, given the lack of opportunities, or the tightness in the North American market, I think as you get larger by definition, you are ultimately going to have to go there, correct?

Absolutely. We've always said that, that at some point in time, when we reach that maturity level in the US, that will not only go there, that will become our focus. Sometime in the next few years, we are going to have to start shifting our focus to that international. So to say we're not interested in it today is not correct. Yes, we would be looking at something in the international marketplace today. It just simply would have to be somewhat bigger. It would have to be very stable and a very proven long-term international opportunity.

Okay. And then just turning to the US market, I know in the past you guys have had in the urban land practice some good success in the housing market which I think has been -- the recovery has been called every year for the last few years.

We're still looking for it.

I suppose one day it is going to come. And it will probably take people by surprise. But I'm just wondering, what is your resource allocation to that now? And how quickly could you mobilize to capitalize on that part of the business, if it --

Really quickly.

Really quick, okay.

Right now 2/3 of our business in urban land and urban land is roughly 11% of our overall revenue, 2/3 of it is in Canada, 1/3 of it is in the US. The Canadian business is what I would say is good, bordering on strong, especially in western Canada around the resource areas. The good news about that business is it is really a relationship-based business. You have to have a few very top project managers and engineers that understand the business, understand clients and how they measure success. Beyond that it is basically building roads, sewers, water lines, parks, everything, power lines, anything that supports a residential or mixed-use community, which I don't mean to minimize it, I spent my career in that business. It is not complex engineering, but you have to understand how to package it and deliver it in a proper way.

So if you have the knowledge of packaging and delivering it, you can find the people to provide the services to do it fairly quickly. And we also have those services imbedded throughout our organization. The key staff in our urban land business are still here. All of our key staff in Florida, in California, western Canada, in the US northeast, they're still with Stantec doing things like some urban land projects, some environmental projects, and transportation. So that is really what our strategy is, to continue to stay in the business, continue to deploy that staff, and wait for the recovery to actually start making a difference to the housing market.

Okay. Thank you very much.

You're welcome.

Pierre Lacroix, from Desjardins Securities.

I wanted to have an update on the account management program that you put together a couple of years ago. You had quite a good success in 2010 and 2011. So I was going, maybe you could give a little bit more detail if you have any.

It certainly is continuing. It is something that we're now expanding. So what we started in 2010 was really what we almost refer to as a pilot program, with about 20 of our top -- those national global clients. We rolled it out last year to an additional 65, again, clients that had a wider geographic spread. This year, we rolled it out to even further, and looking at the account management strategy, even on a low point or regional basis, essentially every municipality that we operate in, that municipality has a number of different departments. And that municipality is an account and we've assigned account managers in all of the municipalities that we operate in where we have a significant presence.

So we are continuing to push that and grow that well beyond what I would call a small national global account management strategy. We've also developed some very key partners in that business as well where our partners almost becoming accounts. So on the design build business, we've had some good success there, too. So it is something that we track. It is something that staff are very aware that we are paying attention to it. And I can't say enough about how that has really allowed us to leverage our services better and we've seen some good opportunities.

Would you say that it is becoming a significant portion of your organic growth? You're seeing a 4% net revenue in the first quarter, so is it a significant component of that?

We don't track specifically. But I can comfortably say that yes, it is a significant portion of our organic growth. Tennessee Valley Authority was one of our first accounts in the United States where we set up an account management strategy. That was specific to an issue they had with a coal ash facility that we helped them do the repairs and analysis and work. They now have gotten us doing other work, and really, it was leveraging that relationship, with that account manager, and introducing new services to Tennessee Valley Authority, we're now doing work for them that is totally unrelated to the original project that we had. So that is just an example of a very successful account management strategy of developing a trusted partner and then being able to develop and to provide them more services.

Thanks for that. Just coming back on this, in 2011, the result of that program, do you have a number on top of your head what it generated in terms of organic growth?

No, I don't.

You don't, okay. Just another general question related to -- you mentioned that you're getting quite large projects, especially the pipeline project you talk about in the US, so you have several number of small contracts, and you're starting to get some larger ones. What will you need to get, to move up in this scale of contracts eventually over time? What do you need to get there?

Well, I think a couple of things you need. One, you need the trust of your client, that he is going to trust you, he or she is going to trust you with a larger project. So what you need to do is develop a bit of a track record with that client and being able to execute on those larger projects. So that is -- it is sort of a chicken and the egg. You don't get the opportunity to deliver until you have proven you can deliver. And really, the way to do that is to get their trust that you can work on incrementally larger projects all the time.

You're also, to work on those bigger projects, you have to have diverse enough services that you can provide more services. The mining is a good example. The mining business that we do, we're doing as much mining work as we can from an underground perspective, but we can also do a lot more of the transportation work, environmental services work, power line work, the mining community, and trying to leverage that. So you get the opportunity of doing that if you have the availability of those services. So we are well positioned from that perspective.

We've also implemented a major projects group. When you have a major project that is, let's say, CAD50 million in fees. It takes different skill sets, different approach, and different technique and expertise to manage and deliver that type of project compared to say a CAD5 million job. So we recognize that. We formed this group that has the processes, controls, the expertise, the senior project managers, and we actually implemented that early last year, so it has been in place now for over a year, and that group enters into those major projects, and assists in managing that, in a much more I would say focused way, than a CAD5 million project. That also allows you to take on those bigger jobs, is have that type of system in place.

Thanks. And one last, just about checking something, the backlog was up 4% in this quarter and it seems to be all organic. And the Canadian dollar was up as well against the US dollar which is another good sign and also the building was a negative contributor. So overall, what was the biggest driver in that backlog increase?

The biggest driver was in fact organic growth, which was offset to some extent by the foreign exchange difference. So it was all organic growth in the quarter.

But in terms of segment and specific businesses.

Again, we don't really track our backlog by practice area. But again, we would suggest that the backlog would be equivalent to the revenues that we're generating in each of the practice areas.

Okay. Thank you very much.

Thank you.

Paul Lechem, CIBC.

Thanks. Just a couple of quick financial questions if I may, Dan. In the MD&A, it mentions that you expect full-year amortization expense of intangibles to in be the range of CAD10 million to CAD11 million, where Q1 was CAD4.7 million on its own, so it suggests quite a big dropoff in intangible amortization expense through the rest of the year. Can you just give some color around that?

Sure, Paul. It really relates to the amortization of backlog. The backlog, as you acquire companies, generally ranges anywhere from that 12 months to 18 months range, so as your acquisitions get further out, your amortization becomes lower through that duration.

Okay. So we should expect something in the CAD2 million range per quarter --

No. That is without any discussion around any other acquisitions that we would do, or close this year.

And will the next three quarters be linear, they will be the same, or do you expect it to ramp down through the year?

I don't actually have the detailed information. Every time we do an acquisition, you have to go through the purchase price accounting and you have to go through that detailed assessment of the backlog and client relationships, which are the two primary intangibles that we have. But I don't have that information at this point.

Okay. And just one other. On the CapEx, CAD14 million, in Q1, there is a comment here, that it is within the expected range for 2012. So what is CapEx expected to be for the year?

I think we had budgeted somewhere -- I think we had indicated before somewhere around CAD35 million, in that range. The implementation of the enterprise system, we're starting to see some of the work that we had done in the development efforts get expensed. We just renewed a couple major contracts on our software, which is where you start to amortize your software expense. But we also expect later in the year to be acquiring additional servers to continue to develop and enhance our systems, to give us a stronger platform for future growth. So that's where our CapEx is going for the remainder of the year. So we're building out our server platform.

Okay. Great. Thank you very much.

Thanks, Paul.

Anthony Zichta, Scotia Bank.

Bob, can you give us an update on the shale plays in the United States? Are you seeing a lot more work coming in from let's say the Marcellus project, or some of the other ones like [dom trim] and the Bakken.

Yes, we're still seeing opportunities in the shale plays. What we've done is, I think we mentioned in Q4, is really try to take a step back, where we're trying to focus more specifically on where we can focus on. So we are working with clients like Talisman, Chesapeake, InCana, Marathon, mainly the more focused larger ones. We're doing still a number and a wide variety of projects for them. So we're doing anything from permitting and compliance to site work, doing design of the gathering systems, pipeline systems.

Specifically Eagle Ford is the area in Texas that we just won a long pipeline project. That was directly related to the shale gas opportunities in that area. So we certainly are still seeing the opportunities flow in. We've taken a step back and are trying to be much more focused in it -- it was, I think we've referenced it before, a very chaotic situation last year. And we've just take a step back, focused more specifically on Marcellus, and the Bakken area, and Eagle Ford. And looking at those three plays, rather than just trying to chase everything. And we've been very happy with our performance now and our growth, once we started to focus. The opportunities are certainly there.

Okay. Excellent. With reference to the exposure to natural gas versus oil, can you give us some idea of what it is? Obviously, natural gas will be increasing in importance but just to give us some idea.

With regards to our split in natural gas to oil or --?

Yes.

Good question. Off the top of my head, I would say right now, most of our opportunities are in the oil side of the business. It is developing in the gas side of the business. So I would say at this point in time, more on the permitting maybe would be the areas where we probably have a higher degree of capability. But right now I would say more on the oil side than the gas side. And where we're seeing a lot of the plays are where there is oil and gas combined, that's where more of the investment is going. If it is gas on its own, with the price of gas the way it is, some of the focus on the areas where they can combine the efforts.

And last question, in reference to the competitive landscape, are you seeing more foreign competition here in Canada?

If you reference US as foreign, yes. We certainly -- I mean everybody in the world right now is focused in Alberta. So everybody is coming here. Because there is lots of opportunities. It is not a lot heck of a lot different than it has been in any of the other boom economies.

We always have competition. When it comes to the competition from a US company coming in and acquiring a Canadian company, we don't look at that as a change in competition. Really, that is just a change of a name. They're not really leveraging a heck of a lot of their US capacity yet. But certainly in the oil and gas area in Alberta, there always has been and there always will be more foreign competition coming into Alberta. But it comes down to relationships with your clients and that takes a long time to develop. Okay. Thank you.

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

Okay, thank you. If there is no more questions, I would like to thank you all for joining us today. And close our call by saying, we're still very confident in our business strategy, and ability to adapt to the evolving needs of the marketplace while still increasing the value of the returns to our shareholders. So I look forward to talking to you again in the near future. Thank you.

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.