Stantec Inc (STN) 2014 Q1 法說會逐字稿

Welcome to the Stantec Inc.'s first-quarter 2014 earnings results conference call. With us today from Stantec management are Bob Gomes, President and Chief Executive Officer, and Dan Lefaivre, Chief Financial Officer.

(Operator Instructions)

As a reminder, today is May 15, 2014, 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 Section. Therefore, any members of the media who are joining the call today in a listen-only mode, and who wish to quote anyone other than Mr. Gomes or Mr. Lefaivre, are asked to please request permission to do so from the individual concerned.

Before the call begins, there are a few words from Investor Relations. Please go ahead.

Thank you, Solange.

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 2013 Annual Report and Q1 2014 first-quarter report.

I would now like to introduce your host, Bob Gomes. Please go ahead.

Thank you, Crystal. Good afternoon, everyone, and welcome to our 2014 first-quarter results conference call. Dan will provide a brief summary of our financial results for the quarter, and I will follow with an outline of our market outlook. We will then address individual questions.

Today, we released the results of Stantec's operations for the first quarter of 2014. Overall, we are very pleased with the results. We are on track to meet our expectations for 2014, after coming off a very robust year in many markets. We saw activity throughout our Business, especially in our oil and gas, and water, sectors. And, after a relatively quiet year in 2013, we started off 2014 with robust activity in executing our acquisition strategy.

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

Thank you, Bob. Good afternoon, everyone. Overall, Q1 2014 was a good quarter for Stantec, and a nice start to the year, as Bob mentioned. Our gross revenue increased 11.8% to CAD573.9 million compared to CAD513.2 million in Q1 2013. Of that increase, 5.8% was organic revenue growth, continuing over two consecutive years of sustained organic growth.

Our results were positively impacted by a slight increase in our gross margin to 54.4% in Q1 2014, from 54% in Q1 2013. This increase was offset by an increase in our administrative and marketing expenses to 41.5% in Q1 2014 versus 41.1% in Q1 2013. The increase in both our gross margin, and our admin and marketing expenses, is due to the mix of projects in progress during the quarter, and slightly lower labor utilization, primarily in January.

We achieved a 13.1% increase in EBITDA to CAD62 million from CAD54.8 million in Q1 2013. As a percentage of net revenue, EBITDA was 12.9%, which is slightly just under our annual target range of 13% to 15%. This is typical for the first quarter, and we expect it to increase throughout the remainder of the year. Our net income increased 18% to CAD33.5 million compared to CAD28.4 million in Q1 2013.

Diluted earnings per share increased 16.4% to CAD0.71 from CAD0.61 in Q1 2013; and our backlog grew 14% to over CAD1.6 billion at March 31, 2014, from CAD1.4 billion at December 31, 2013. This increase in backlog was mainly as a result of recent project wins, and acquisitions completed in Q1 2014. Lastly, yesterday, the Company declared a quarterly dividend of CAD0.185 per share, payable on July 17, 2014, to shareholders of record on June 27, 2014.

Overall, we are pleased with our performance in Q1 2014, and with the solid start to the year. Bob?

Thanks, Dan. As Dan just outlined, our results demonstrate positive performance for our first quarter. We have strong backlog to replenish those projects that are nearing completion.

As mentioned, we had a robust start to the year in our goal of continuing to find great companies to join our team. We are very pleased to welcome the following companies into the Stantec community: Williamsburg Environmental Group, Inc. and Cultural Resources, Inc., a 115-person firm based in Virginia, which expanded our environmental services in the US mid-Atlantic; Processes Unlimited International, Inc., who added significant strength to our oil and gas, and industrial service, capabilities in the United States. Subsequent to the quarter, we further enhanced our growing environmental service presence and capabilities across the western US by acquiring JBR Environmental Consultants, Inc., a 140-person, full-service environmental consulting firm based in Salt Lake City, Utah.

Last week, we signed letters of intent with SHW Group, a nearly 300-person Texas-based firm with offices in the Midwest and mid-Atlantic states; and USKH, Inc., a 130-person multi-discipline design firm based in Anchorage, Alaska, with offices across Washington state and Alaska. We expect to close these two acquisitions in the second quarter, which will result in us adding over 1,000 staff to our Company so far this year.

Now I'd like to give you some highlights on our performance across our business operating units. In our buildings business operating unit, with recent acquisitions strengthening our local reach and depth of expertise, we are well positioned to capitalize on opportunities to strengthen our presence in key geographies and sectors. We are continuing to see opportunities for P3 projects in Canada, despite public funding constraints and increased international competition. For instance, during this quarter, Stantec was named as the designer on a team which was selected as the successful proponent for two new hospitals to be constructed on North Vancouver Island in British Columbia.

In our energy and resources business operating unit, our diverse project expertise and depth of experience allows us to continue securing project awards with large national clients in Canada for engineering and environmental services on major pipelines that transport oil and gas products. With recent acquisitions, we are expanding our footprint in the United States to capitalize on opportunities in that market. While we have seen some impact due to extreme weather conditions, this work is typically more seasonal in nature, and will trend higher as the year progresses.

In our infrastructure business operating unit, we had strong growth in water in the quarter, as we benefited from the robust energy sector in Canada and regulatory requirements for upgrades in the United States. For example, during the quarter, we secured a project in Columbus, Ohio, to perform the first physical inspection of the next segment in the city's large-diameter sewer assessment program.

In our transportation sector, growth occurred in Canada due to stable infrastructure spending, but was offset by a retraction in the United States due to the completion of some major projects. We expect activity to increase in our transportation sector in future quarters, as backlog is being replenished by recently awarded work, such as the design rehabilitation work on bridges located in Nassau and Suffolk counties in the state of New York.

Now I'd like to comment briefly on potential markets going forward. Our overall outlook for 2014 is a moderate to strong increase in organic revenue, with a target of approximately 5%. We have increased this target slightly from an original projection. Given the sustained pace of growth in the oil and gas markets into 2014, and our ability to respond to this activity, we think this projection better reflects our organic growth for the year.

Our outlook for our Canadian operations is moderate to strong organic growth in 2014. We revised this from our original moderate growth; again, due to greater-than-anticipated activity resulting from the sustained growth in the oil and gas sector.

In our US operations, we are expecting moderate organic growth in 2014, which is unchanged from our original target. We believe the private sector will continue to strengthen, especially in regions supported by resource activity, and that investments by clients will proceed at a moderate rate. We are still seeing optimism in the US market; however, things are not changing quickly. The United States remains a very large market, albeit a recovering one, and we expect our performance to improve gradually throughout 2014.

In our international operations, we continue to expect moderate growth due to recent projects secured in healthcare and education.

Looking at our individual business operating units, we expect the following as we move through 2014. In our buildings operating unit, we anticipate stable revenue growth, which is unchanged from our original target. Overall, the buildings industry remains cautious. We continue to manage effectively, and while we do expect to recover from the levels of previous years, we believe that recovery may not take place entirely in 2014. Looking forward, however, we see positive signs that are now translating into projects.

We've revised our outlook for our energy and resources business operating unit from moderate-to-strong, to strong for 2014; mainly due to greater-than-expected sustained growth in the energy and resource-related work. The mining business, at this time, remains stable but fragile, and will be dependent on the continuation of current projects and capital spending of our clients in 2014.

We expect moderate organic revenue growth in our infrastructure business operating unit over the remainder of the year. The water sector, especially, will remain strong, partly due to the engineering and architectural work we added in mid-2013 on the major PCCP Constructors joint venture project in New Orleans for the US Army Corps of Engineers.

Strategic changes we made in the last year to our brand positioning and organizational structure are coming to fruition. We are leveraging our focus on local communities to create stronger relationships, and, in turn, leveraging our diversity and expertise into the communities we serve. This is evident in everything from our sustained organic revenue growth to the robust execution of our acquisition strategy.

Our business objective is to be a top-10 global design firm. We are confident in our strategic direction, and in our ability to provide consistent value to our shareholders, as we look forward to the remainder of 2014.

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

(Operator Instructions)

Michael Tupholme, TD Securities.

A question about the organic retraction in the US; it's a two-part question. First of all, wondering how much of the US organic decline in the first quarter was due to weather, which you highlighted in the MD&A?

Secondly, in your outlook for the US, you continue to expect moderate organic growth for the full year. Just wondering what makes you confident that you'll see that growth, given some of the non-weather issues that you highlighted as being a factor in Q1?

The retraction in the US, there were a few components. Weather was a portion of it. I don't think you can blame it all on weather. Weather did affect some of our environmental services fieldwork and, to a lesser degree, some of our transportation fieldwork. There was also the fact that our Buildings group did retract overall, and some of that was in the United States. So that also contributed to the retraction.

Why are we confident that it's coming back? Certainly a lot of the backlog that we have seen build over the first quarter, a lot of that is in the US. We're seeing that strength gives us the confidence that the work's coming back. As we said, there is overall optimism in the US. They don't see anything there that is going to continue to cause us to retract. Not that there's going to be significant growth, but certainly, we see that retraction turning around.

Essentially, I think we're confident because just the general feeling of the work is picking up; and the backlog is supporting that.

Is any of that expectation for some improvement related to the energy and resources area, where it sounds like you're feeling maybe more confident about resource-rich regions in the US?

Certainly with the acquisition of ProU in the first quarter, that's going to contribute to that. That's a space we were not in the United States that we now will have them contributing to the performance in the US from this point forward. That will help. That will be a portion of it.

Our presence outside of ProU, in the Oil and Gas sector, is relatively small in the US. But certainly, with the ProU acquisition, that's providing some contribution to our optimism in the US as a result of that acquisition.

Great. Thanks. Next question, in terms of the gross margins for the various areas, in Energy and Resources and Infrastructure, there were some things going on. Specifically, incentive fees mentioned for Energy and Resources and positive adjustments in the Infrastructure area. Just a little bit more color on those, if possible, please.

It's exactly that. We have projects with some of our oil and gas clients that result in if we meet certain criteria, some certain metrics that we get, essentially bonus payments, which were reflected in the first quarter.

That had a small impact. And it's related to things like schedule, health and safety, making sure that we're managing projects effectively for our clients.

It sounds like it's fairly small. Would it have been materially different if you had not had those adjustments?

No. It wouldn't have been materially different, Michael.

Okay. That's all for me. Thanks.

Paul Lechem, CIBC.

Just wondering about the backlog up pretty significantly in Q1. I was wondering if you can break out for us a little bit in terms of the growth, how much might have come from movement in foreign exchange? How much from acquisitions? You mentioned a few project wins. I'm wondering if you can quantify that as well. Thank you.

Some of it did come from FX. From exchange, roughly around 15% of the backlog would have been as a result of a favorable impact of the exchange rate. About 25% came from acquisitions. The rest of it, being around 60%, came organically.

That's good, again, from a perspective that even though the backlog increased significantly, more than half of it was organic increases. We're quite happy with that. In fact, essentially there was 8% organic growth in backlog, if you want to do the math backwards.

We saw that growth not only across all of our business operating units, but also across every geographic region.

Okay. When you're talking growth, are you talking versus December 31 or year over year?

Both.

Okay.

Quarter over quarter, it was about 14%. Year over year, about 25%.

But those numbers that Bob gave you around 60% organic was quarter over quarter sequential.

Correct. That's right.

Great. Given you've had such a run of acquisitions in the last couple of months here, I was just wondering, does that empty the pipe? Or do you still have an active DD program underway here, or should we be expecting to slow down for a little bit now?

As we've always said, you can't predict the timing of acquisitions. It's always lumpy, but I can certainly tell you the pipeline's still pretty full. There are still lots of companies we're talking to.

We just had a good period of closing some transactions. We've always said, at any point in time, we have over 30, probably, conversations going on. And they take time to mature. But we were fortunate enough to have three of them close so far and a couple more come to conclusion with LOIs.

We're pretty comfortable that we will be able to continue. Maybe not at that same pace, but certainly, we see lots of opportunities going forward.

Okay. Lastly, given the acquisitions, typically, once you complete an acquisition, we see a period where you're admin costs rise a little bit as you integrate them. Should we expect a similar impact this time around where Q2, Q3 margins might be a little bit depressed because of that?

I wouldn't say that because of the size of these -- if there's quite a few of them -- but I wouldn't say there's going to be a significant impact for administration.

In fact, I'd see our admin costs coming down, as our business is a little seasonal. We expect our utilization to continue to increase through Q2 and Q3. In fact, that'll drive our EBITDA margin up, as we indicated previously.

Thanks very much.

Sara O'Brien, RBC Capital Markets.

Can you talk a little bit about the duration of the backlog with your oil and gas contracts in Canada for pipelines? Just wondering how much of this organic growth is sustainable through -- like what period of time should we expect that?

If the question is, how long do we see sustained activity in the Oil and Gas sector, midstream sector, in Canada, we see a good two to three years of good workflow projects with our clients. In the US, it's probably longer.

It's not as mature a market in the United States; it's still emerging. But that's probably a longer flow of maybe five to ten years. And that's why we feel we still have some time to build our capability in the US.

Certainly right now in Canada, it is a relatively small window. This isn't going to go on for five years. We see a good two- to three-year run of organic growth in that sector.

Okay. Great.

Wondering if you could comment a little bit on the EBITDA target of margin of 13% to 15%? There was some commentary about how you expect to achieve or exceed that in FY14. I wonder, is that a gradual progress through the year? Or is there any kind of period where we it would expect it to be weaker for any reason versus last year?

The first quarter usually is a weaker quarter for us. And again, as Dan said, some of our business is seasonal. Our utilization picks up, and that translates right down to an EBITDA increase as well. I think you'll see that gradually continue to increase as we get into the year, and certainly in the second and third quarter.

I don't know that the expectation is that we'll exceed the range of targets. But we certainly believe we'll be well above the 13%, closer to where we have been historically. If you look at where we were in Q1 last year, we were below 13% as well. But just marginally, just like exactly where we are today.

Okay. That's helpful.

On the acquisition, the pipeline's full. How much time does it take from the management team to once you've negotiated and closed these and you start integrating? I just wonder how comfortable you are continuing on that acquisition path? Or, again, do you take time to digest these and then move on?

No. I think we've shown in the past, we're pretty capable of sustaining some continued acquisitions throughout the year. We don't really need to pause our acquisition strategy to transition companies in because it's a pretty wide diverse team doing it.

We're doing one in Oil and Gas on the engineering side. We're doing some environmental ones, and now we're going to be doing some architectural ones. We have the capability, because we're so diverse, to use a wide range of people to do those integrations. It's not really one team of people that go from one to the next. It's a very diverse group. We have the capability of continuing to add companies and not really having to take a pause to integrate.

From an integration perspective, a number of these acquisitions that we've already closed this year, we're well underway in terms of integrating. Good progress is being made. We have the capacity on the due diligence side to complete the two firms' due diligence that we announced LOIs for last week. So we're in pretty good shape, Sara.

I'd definitely like to reiterate that you just can't predict when things are going to happen. You just can't simply plan and say, okay, we will add three every quarter. Acquisitions just don't work that way. You just continue to negotiate, continue to talk, and then you come to some conclusions on some.

It's a very lumpy process. It is a process that we really can't predict. All we can tell you is there are lots of companies we're talking to.

Okay. Great. Thank you.

Leon Aghazarian, National Bank Financial.

My first question is regarding the P3 projects. You mentioned that you're seeing a bit more activity in Canada. Can you please comment on that?

And the second part of that question is, are you seeing any increased competition from International players for P3 projects? Thanks.

I'll answer the second one first. Yes, we are seeing increased competition from just about everywhere in the world in the Canadian P3 market. The Canadian P3 market is, I would call it, mature. It's been in existence for over five years now.

There's some clarity with regards to the process and the projects. So that attracts people coming into Canada that are experienced in doing these types of projects and other places in the world, as well as anybody that feels like they can contribute to teams.

I think we're well-positioned in Canada, though. We're here; we've been here a long time; we've got some great connections to the communities where these P3s are being developed. We understand how to execute on P3s. We have some great partners on P3s. We feel we're well-positioned to compete with that higher competition coming in, and I think the success translates into us winning some of the projects we have been.

There's a lot more municipal-level projects that are coming. P3 Canada is funding municipal level. In the past, most of the P3 projects in Canada have been provincially sponsored P3s -- a lot of healthcare projects in Ontario and BC, a lot of transportation projects in Alberta, BC, and Ontario. We're now starting to see that translate into municipal opportunities.

There's transit and rail opportunities in a lot of major centers in Western Canada that are getting funded through a P3 model. There are still healthcare projects being advanced in British Columbia and Ontario. And, again, we mentioned that we were selected as the proponent in the P3 hospital in BC.

So we still see the P3 market, both in transportation and in buildings, here in Canada being a good model and sustained projects for the next few years.

Your comment on the municipal side is quite interesting. Do you feel that there's a considerable push there? Enough to move the needle for Stantec because of the municipal push that you're seeing? Or is that more of just a new type of growth profile for you?

No. Definitely, there are new opportunities for P3s at the municipal level that are constantly growing. It's a new model.

Municipally, there's only been a few projects. Ottawa LRT is a project that's advanced. The Edmonton LRT project is advancing through a P3 model. We're starting to see municipalities better understand and get more comfortable with a P3 model, and I think that's just the tip of the iceberg.

There are other pieces of infrastructure that municipalities can advance using a P3 structure. And, again, P3 Canada are the ones that are pushing this through a funding partnership with the cities and the provinces. It's a good model.

What we're encouraged by is a new, basically, leg to the P3 model that was developed into the provincial mode. And we're starting to see the municipal level gives us another opportunity.

That's great.

Moving onto the Building side, you mentioned you expect stable growth in the buildings but also many opportunities in Canada. I'm just trying to see if we're reading through that. You might see more of a decline on the US building side -- if that's an accurate assessment from us?

No. We see, actually, with the acquisition of SHW bringing us into another sector in the United States, we're encouraged by that. We feel that we have rationalized our staffing levels in Canada and United States sufficiently, so we don't see any further retraction. We see a stable group of projects in the United States. I think we've just been a little bit more successful in some of the Canadian projects.

Certainly being able to provide a more integrated solution to a client, I think, is another reason for some of the success. But we see strength in our Buildings units growing throughout. It may be a little stronger in Canada than the United States, but it doesn't mean the United States is further retracted.

Okay. On the backlog, are you providing a breakdown between what's for Canada and what's for the US? We are seeing some growth on the backlog side. Just a geographic breakdown, if possible.

We don't break down our backlog from a regional or from a business unit perspective. Suffice it to say that all the areas have grown very well, maybe a little bit more in the US. But we don't give a detailed breakdown.

Thank you.

(Operator Instructions)

Mona Nazir, Laurentian Bank.

Congrats on another great quarter.

I'm just looking at the growth in the Energy and Infrastructure verticals, both of which had nice year-over-year double-digit increases. I'm just wondering, are you content with the current mix of business? Or have you thought about maybe allocating more resources into the energy resources, given substantial demand? Or alternatively, pursuing acquisitions in the Buildings vertical so that you'll be well-positioned for the recovery?

I think you've seen from the acquisitions we've done this year and the LOIs we've signed, it's been a pretty balanced approach to expanding the geographic range and diversity of the Company. We like the fact that we want to be strong in all three of our business operating units. So you don't want to focus just on one that's the most successful now and, as you say, not expand our operations in a buildings group, which we feel is subject for some good recovery.

At the same point in time, we realized that we needed to expand our Energy and Resources group in the United States. Three of the acquisitions -- the JVR, the Williamsburg, and ProU -- were all in that Energy and Resources business unit. And it was in the United States where we felt we had an opportunity for growth.

Our approach has always been very balanced. You never chase the highest and best. You really have to have a balanced approach. Our acquisition strategy, I think, so far this year demonstrates that pretty well.

Thanks. I just wanted to go into the oil and gas and midstream work that you're doing. You said, over the last few quarters, that the strong growth was hard to predict and somewhat unanticipated.

I know there was an impact of weather and some seasonal softness in the quarter. But overall, is the growth simply a matter of doing more work with existing customers? Or is it increasing opportunities with new clients or in new geographies, i.e., parts of the US?

Most of it was just expanding work with existing clients. With the addition of ProU, they have brought some clients to us, notably Chevron, that we can also expand and provide services to them in other regions that ProU could not. By leveraging the geography that we have, we are looking at expanding some additional clients. There also, some LNG activity that we were successful in winning, more in the environmental side. That also brought some extra revenue and performance into the first quarter.

That's where some of the unexpected nature is. We were looking that some of our very busy clients were going to take a bit of a pause in the first quarter; that just didn't happen. They continued to advance projects, and we've continued to build our revenue.

So it's a bit of both -- a little bit of expansion to new clients, and expanding some services into areas that we didn't anticipate we would be successful. So all good news.

Okay. I'm glad that you touched on LNG because that was my next question. How has your work increased over the last few quarters, and are you seeing more demand for LNG services?

Yes. Most of the services we provide in the LNG is in the environmental side. Certainly in the British Columbia market we're doing a considerable amount of work for the various opportunities there.

We do some engineering work, more though associated with the pipeline in facilities and leading up to the LNG facility. We don't have, and I don't want to confuse the market to say that we have capabilities to do the process side of an LNG plant.

We can certainly do all the associated environmental work. And we can do all the work engineering work necessary up to the plant. That is where our sweet spot is in the LNG market. A lot of that is in British Columbia, and we have a great presence there.

Great. Thank you. That's it.

John Rogers, DA Davidson.

Congratulations on the quarter.

Bob, I wanted to ask specifically about the acquisition of SHW. A lot of companies have been talking about trying to expand in Texas, but primarily targeting the Energy market. And SHW is primarily buildings education. How quickly can you use that footprint to add other Stantec services? Or would you have to do another acquisition to get into the industrial energy side of the market down there?

I think for us to say that we can take a building's K to12 focused group in Texas and turn them into an oil and gas firm, win work would be a little bit of a stretch. No, what we will be able to do is do more associated infrastructure work associated with the work SHW does in Texas and in Michigan. We can certainly do more work for those school districts that they work for. But really, this gives us a presence in Texas that we can now leverage to say we want to increase our presence in Texas.

I don't think we can say that SHW is going to allow us to grow our Oil and Gas business in Texas better. But it gives us a presence there. It gives us offices there, where we can put staff in those offices that can start that process of determining how else can we now expand it?

But to be real clear, we'd need an acquisition in the Oil and Gas business in Houston to be able to say that we're in that business in Texas. They have an office in Houston. We will leverage that address as much as we can. But really, we're looking for additional acquisitions specifically in that Oil and Gas sector in Texas.

Okay. Thank you.

On the power side of the business, and you touched on this a little bit, but the growth you're seeing in those markets outside of the P&D, how much of it is power generation? And is that predominantly gas-fired power plants?

Essentially, what it is, is there's the need in many power areas -- and that Alaska one's a good example -- where they need some additional power generation, mainly peak power producing areas. Especially also they need it in areas that have some, I'd call them, more sustainable power sources, like wind and solar.

So what we're seeing is gas is a great alternative. First, it's quick. You install some gas turbines, and you can immediately generate power.

You either can do it through a combined cycle, one that is really a different type of power generation. They're relatively inexpensive to put in, relatively inexpensive to operate. We're even seeing some of the coal facilities install gas turbines to increase their power generation. We're starting to see a lot of those opportunities. We're not in the power generation business.

But we certainly can do all the necessary associated infrastructure work to install gas turbines, and do all the necessary balance of plant work necessary to get those turbines installed. We're seeing some contractors; we're seeing some design build opportunities coming out of that. It's a fairly robust market that we start seeing increasing.

We're pretty excited about that because we've gotten some good partnerships, and we have the capabilities of doing that type of work. That's where some of the power increase is coming from.

Okay. Great. Thank you.

(Operator Instructions)

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

If there are no more questions, I'd like to close the call by saying that we're confident in our business strategy and ability to adapt to the evolving needs of our marketplace. Our focus will continue to allow us to achieve profitable growth and provide sustainable returns to our shareholders. Thanks and we look forward to speaking to you again in the near future.

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