Stantec Inc (STN) 2016 Q1 法說會逐字稿

Welcome to Stantec Inc.'s first-quarter 2016 earnings results conference call. With us today from Stantec Management are Bob Gomes, President and Chief Executive Officer; and Dan Lefaivre, Executive Vice President and Chief Financial Officer.

(Operator Instructions)

As a reminder, today is May 12, 2016, and this conference call will be recorded and broadcast live over the Internet. It will be archived for future reference at Stantec.com under the Investors section. Any members of the media who are joining us today in a listen-only mode and who would like to quote anyone other than Mr. Gomes or Mr. Lefaivre must ask permission from the individual concerned.

Stantec Management would like to caution you that this call will include forward-looking statements and forward-looking information within the meaning of applicable US and Canadian securities laws. By their very nature, forward-looking statements requires Stantec Management to make assumptions, and are subject to inherent risks and uncertainties. Stantec Management will also mention non-IFRS measures.

Now your host, Bob Gomes. Please go ahead.

Good afternoon, and thanks to everyone for joining us. Welcome to Stantec's first-quarter 2016 earnings conference call.

Before we begin, I would like to mention that the people of Fort McMurray have been in our thoughts. I am pleased to report that all of Stantec's Fort McMurray employees and their families evacuated safely. Our focus continues to be ensuring these employees are supported in the aftermath of the wildfires.

Today, Dan is going to provide a summary of our first-quarter financial results. After that, I will share some operational highlights and provide a glimpse of our market outlook. Following that, we will answer your questions. We have posted a copy of our slide show presentation on our website. It will be archived in the Investors section.

Today we released the results of Stantec's operations for the first quarter of 2016. We achieved good results this quarter. We can attribute that to contributions from previously committed, completed, and integrated acquisitions, which contributed to strong organic gross revenue growth in our buildings and infrastructure business operating units, and to the strength in our United States operations.

Of course, last week we closed the acquisition of MWH Global. This was the largest transaction in our history, and it marks a strong step forward in our journey to be a top-ten global design firm. As a global leader in water and infrastructure, MWH will expand our presence to new locations around the world, including Asia-Pacific, the UK, Europe, and Latin America. It will also add top-tier capabilities in dams and hydropower to the Stantec portfolio.

We also acquired Bury, Inc., and signed a definitive agreement to acquire VOA Associates. Both of these organizations will broaden our reach in key areas of the United States. Before I go further, I will call on Dan to share the details of our first-quarter financial results. Dan?

Thank you, Bob. Good afternoon, everyone.

As Bob mentioned, we achieved good results this quarter. Gross revenue increased 7%, from CAD705.7 million to CAD755.4 million, when comparing Q1 2016 to Q1 2015. We can attribute this strong growth to our US operations, and strong organic gross revenue growth in our buildings and infrastructure business operating units.

Compared to Q1 2015, gross revenue in our US operations grew by 26.3%, with 4.4% of that being organic growth. We are seeing increased opportunities in the US as a result of our growing presence, urbanization trends, and increased federal funding.

At 5.1%, we saw strong organic gross revenue growth in our buildings business operating unit. The majority of that growth was generated in our education, health care, and commercial sectors. We also created a new civic sector in response to the move towards urbanization in cities.

We saw even stronger organic gross revenue growth in our infrastructure business, with an 8.6% increase over Q1 2015. This is mostly from our transportation sector. Right now, about 75% of our transportation work is in the United States. The US economy is rebounding, and our strategic market position is leading to increased work in major light rail, transit, roadways, and bridge projects. Our recent KBR and FST acquisitions further expands our infrastructure foothold in the US.

Moving on to gross margin, we did see a decrease from the 55.2% in Q1 2015, to 53.9% in Q1 2016. This was mainly due to the following factors: The recognition of performance fees obtained on a large mining project in Q1 2015; ongoing pursuits for design build and P3 projects, primarily in transportation; and continued downward pressure on our fees, primarily in oil and gas.

Our administrative and marketing expenses increased as a percentage of net revenue, from 42.5% in Q1 2015 to 43.2% in Q1 2016. This was mainly due to the CAD3.5 million incurred on acquisition-related costs in the quarter. We also had CAD1.2 million increase in lease exit costs, and additional occupancy costs related to office consolidations. As a result of the aforementioned items, our net income decreased 19.5%, from CAD38 million to CAD30.6 million in Q1 2016.

In addition, we are reporting adjusted EBITDA and adjusted diluted earnings per share in the quarter. The costs related to the MWH acquisition had a material impact on our results this quarter, and they will continue to do so going forward. We expect adjustments to be higher in Q2 now that we have closed the MWH acquisition.

We believe these new measures will provide external stakeholders with better insight into our core operations going forward. Therefore we have excluded acquisition-related costs and amortization of acquisition-related intangibles. For a full explanation of the adjustments, please have a look at page M-29 of our Q1 Management Discussion and Analysis.

Adjusted EBITDA decreased 8%, from CAD76.3 million to CAD70.2 million. Adjusted diluted earnings per share decreased 15% to CAD0.46 to CAD0.40. These decreases were mainly due to the reductions in gross margin and the increase in admin and marketing costs that I mentioned earlier. I'd also like to add that our free cash flow has improved quarter over quarter, and is strong on a 12-month trailing basis. The day sales outstanding improved from 96 days at the end of 2015 to 89 days at the end of Q1 2016.

Moving on to slide 8, please note that we'll revisit our 2016 targets as we move forward with MWH integration this year. We closed the acquisition just last week, so we will be able to provide more guidance over the coming quarters. We met our targets for gross margin as a percentage of net revenue this quarter, and missed targets, as mentioned, because of some of the other factors noted in admin and marketing expenses, and EBITDA as a percentage of net revenue.

At 4.9%, gross net income was slightly below our target of 6%. Our return on equity at just shy of 12% was pretty close to the low end of our targeted range. Our net debt to EBITDA was well within our target, below 2.5 times. Again, as a result of the acquisition, that will change materially our capital structure that we'll report in the second quarter. Lastly, we declared a cash dividend of CAD0.1125 per share to shareholders of record on June 30, 2016.

Bob, back to you.

Thanks, Dan.

Our buildings and infrastructure business operating units continued to grow organically in Q1. As you can see on slide 10, at 73%, buildings and infrastructure represent a large portion of our total business. As Dan said, with the federal funding announcements here in Canada and the United States, we see increased opportunities on our horizon for these business operating units. Of course, as we integrate MWH, we look forward to positioning ourselves to take on some of the most high-profile water and infrastructure projects in the world.

The story in energy resources and environmental services hasn't really changed this quarter. We continue to experience retraction in both of these business operating units, but at a slightly reduced rate compared to the fourth quarter of 2015. Our oil and gas engineering and environmental services work is now a much smaller part of our business. Therefore, market fluctuations will have less impact on us going forward, and we will also be comparing to weaker quarters in 2015.

Regardless, throughout the oil and gas decline we have done a great job on managing our margins. We continue to secure projects, which is a testament to our top-tier presence and strong client relationships, not only in oil and gas, throughout the rest of our Business in Western Canada.

This quarter we secured a couple of key projects. We were awarded the civil and electrical engineering design services for the transmission infrastructure, electrical system studies, and underground collector systems for two solar farms in Ontario. We were also awarded a project for the proposed Aurora LNG export terminal off Digby Island in British Columbia. This project involves completing the marine geotechnical investigation to evaluate the soil and rock conditions for the marine offload facility and main ship-loading jetty.

Moving on to the next slide, we made some significant progress in our acquisition strategy this quarter. The acquisition of Bury and the pending acquisition of VOA Associates are in line with our strategy to expand our presence in the United States. If you recall, our 2016 strategic plan outlined our intent to broaden our acquisition strategy to include larger firms with international presence.

Our MWH acquisition certainly achieves this. While this is the largest acquisition transaction in our history, we don't see it as a departure from our disciplined approach to acquisitions or integration. It's more of a natural evolution. The acquisition aligns with our growth strategy and our objective of building top-tier presence in the markets we serve. Our businesses are very complementary to each other. MWH is established in geographic regions and sectors where we would like to grow, and vice versa.

Our goal is for a phased approach to integration, which will truly be a combination of our businesses. As the year progresses, we will start to realize the full benefits of our acquisition. But we expect that by adding MWH to our team, we will be a global leader in the water and infrastructure markets, and expand our geographic footprint, especially in the UK, Asia-Pacific, and Latin America.

We will also enhance our cross-selling capabilities to different end markets, and add water-related construction capabilities to our portfolio. MWH's position in dams and hydropower, will also allow us to leverage their global expertise with many of our clients. Our employees will have a chance to work on some of the most technology-advanced water-related infrastructure projects in the world.

Moving on to our organic outlook, during the quarter we revised our outlook for Canada. In setting our organic growth outlook for the 2015 annual report, we expected the oil and gas industry would stabilize or increase in the latter half of 2016. But now, the economy is indicating that we might not see a recovery until 2017.

As a result, we now believe our Canadian regional operating unit will retract organically in 2016 compared to 2015. We do expect strong macro environment in government support for investments in infrastructure. We believe organic revenue will be positively impacted in sectors and regions not tied to the energy industry.

We believe that our US operations will achieve moderate organic revenue growth in 2016. This is in line with the outlook in our 2015 annual report. The US economy continues to gain momentum, and that is expected to carry on in 2016. Recent infrastructure acts, like the FAST Act and the Water Resources Development Act, and Proposition 1 in California will bolster opportunities in the transportation and water sectors.

We expect an organic gross revenue retraction in international operations, which currently makes up a small percentage of our business. The retraction is due to the expected decline in our mining operations, which continued to be affected by the decline in the global commodities market, and the continued impact of the divestiture of our India operations, which we completed in Q4 2015.

We believe our overall outlook is to end the year with stable, organic revenue growth in 2016 compared to 2015. Stable organic growth means in the range of negative 2% to plus 2%. Last quarter, we were at the upper end of that range, and we are now expecting to be at the lower end of that range for 2016, in light of a revised outlook for Canada.

Sum it up, with the addition of MWH Global to our team, and with the public support of infrastructure investment, we look forward to increased opportunities. In the short term, that means work in water and infrastructure. In the long term, as we make progress on the MWH integration, we can expect to realize more of the benefits of bringing these great companies together.

Just to note, we look forward to seeing investors at our upcoming Investor Day in Boston on June 2. We will have our business operating unit leaders and MWH leadership in attendance to provide color on our performance and our strategic plan.

With that, I'll turn it back to our operator to begin the Q&A. Thank you.

Thank you.

(Operator Instructions)

We'll pause for just a moment to allow everyone an opportunity to signal for questions. Please stand by.

Jacob Bout, CIBC.

I had a question on -- I know the deal for MWH just closed, but maybe you can talk a little bit about your thoughts, if they've changed at all as far as cost and revenue synergies, and then how the integration is proceeding?

Well, it's -- thanks, Jacob. It's been only five days, so the integration is pretty early days right now. But certainly, we have been holding a lot of meetings in the last couple weeks to really get to know them better, and really understand where the synergies are. Our outlook for that group hasn't changed. It's still pretty early days for us to consider anything, but certainly we're very optimistic. We haven't seen any surprises so far. We haven't seen anything that changes our opinions of what was stated in the prospectus, or what we've seen to date. So far, so good; but it's been basically five days. We'll just see how things progress. Still very excited. We had Alan Krause, who is the CEO of MWH today with our Board, and he presented to the Board, and all very positive right now.

Then your contract backlog, it's pretty close to flat year on year. Talk a bit about your duration of your backlog and mix, both geographically and by industry? Do you have a sense of what the MWH backlog looks like year on year?

Our backlog, it was flat. I think our backlog has always represented our revenue pretty closely. I think, we are happy that our backlog has gone up in buildings, has increased in infrastructure, has gone down slightly in energy and resources, which is a reflection of where our revenues are earned.

With MWH, they do measure their backlog slightly differently. They do have secured and unsecured backlog, so it's really contracted work, and work that has been awarded but not contracted. They -- statements they make, and certainly in our review of the information, this is the largest their backlog has ever been. It is very strong, especially in the US water market, which is very good to see. I would say it's probably somewhat softer in areas like the Asia-Pacific, but overall on a consolidated basis, their statements are, and again reflected by us in reviewing their information, their backlog is at the highest levels they've ever had.

Last question here, just on impact of the forest fires in Fort McMurray?

Yes, it certainly was a tragedy for the people there, and it's certainly going to be a long-term recovery. We want to assist in every way we can. We were very involved with the government and with all the residents in southern Alberta a few years ago with the flood, so we do have a very strong disaster recovery group that works very closely with the government. We've offered our services. We're going to be assisting them in the re-commissioning of the water plant here soon.

Certainly, we'll do our best to assist that community to get back on its feet. It is going to be a long recovery, but I think that Fort McMurray will continue to succeed. We don't see this long term, hopefully, affecting our staff there -- hope to get back into their houses, but we're certainly looking for our business to continue to grow and flourish in Fort McMurray.

Helpful, thank you.

Thank you.

Thank you.

(Operator Instructions)

Yuri Lynk, Canaccord Genuity.

Good afternoon, guys. Bob, just on MWH, wondering if you could tell us a little bit about how that transaction came to be? Were they in an active sale process, or did you make an unsolicited approach?

I would like to say both. They were in a process. We had heard rumors that they were in a process, but they had not made anything official. I did contact them. It was probably about a week after that they got back to me and stated they had engaged a Company to assist them in reviewing their strategy going forward. They did run a process, but it was quite a relatively short process. It was very focused on finding a strategic partner, that either being a PE firm or a strategic merger. We were lucky enough to convince them that this was the right choice.

Okay, that's good. Everything you read about water, calls for higher spending in that segment. I can see the logic from that perspective on MWH. I was a little bit surprised in the prospectus that the firm has essentially been flat in terms of revenue and EBITDA generation for the last three years. Can you provide any color as to why that is, and if that's what we should be expecting going forward? You talked a little bit about the backlog, but just how should we think about the growth profile of MWH?

I think you're right. When you look at their information, they're definitely -- their revenues were almost retracting, if not being flat, for the last couple years. Two main reasons to that. One, they did have a global platform in some of their operations were in Asia-Pacific, being Australia and New Zealand, which has a relatively flat economy. They were very, also focused in those markets, where in other words they were only doing water, so they didn't have an awful lot of diversity to rely upon, to do -- look at other sectors that may be a little bit stronger in those economies.

They were bidding an app program in the United Kingdom in the last couple years. This is an asset management program of the utility companies, of which there's 12 utility companies in the UK. They go on a five-year cycle for bidding those projects. They were in, in the last year and the year before, into a lot of marketing and business development expense in those programs to secure those. We're happy to say that they were successful on 10 of the 12 programs in the United Kingdom. Those programs last 5 to 10 years, so they now are in the full revenue generation part of those, which is great. That was there.

They also had an ownership capital structure constraint. Maybe I'll pass it to Dan, and he can talk about the fact that they had difficulty growing because of their capital structure.

MWH is an employee-owned firm that had about 1,400 shareholders were employees. Over half of those employees were 55 or older, quite a bit more than half. What they realized over the last few years is that the number of shares having to be repurchased by the Company was more than the shares that new shareholders were buying. It really was a drain on their cash flows, and inhibited them from being able to grow the business. That was probably the third factor that affected their growth over the last few years.

We see all those areas being really addressed by this transaction. We can diversify their operations globally. They're now ramped up in their amp programs, and are working fully. Certainly, we the resolved their capital program. We see those impediments as removed, and we're looking forward for them renewing their organic growth. It was really strong even though the years like 2009, 2010, and 2011. We're optimistic.

Okay, that's all helpful. I'll try to sneak one more in here. Can you talk about the nature of the risk that you're taking on with the construction piece of the business? That's a bit concerning, because that does look like a bit of a departure from your business model that's served you so well for so long. Are we going to wake up one day and see cost-free forecast and that kind of stuff with Stantec, or is the risk really not that great, it's well contained?

I'd like to jump on your last comment. That risk is well contained. That's one thing we are very comfortable with. For one thing, it's 15% of our business, so it's not a large part of the business. We don't see that significantly growing. We see the consulting operations opportunities there. They're a very focused construction business in the water business. It's a business that they understand -- very focused in a very specific part of it, which is water and wastewater treatment.

Because of that, we are very comfortable. They run it like a very separate business, which is very important to us, because we do not see this as an integrated part of our overall Company. This is a part of the business that is different, needs to manage different, needs to be led differently. It is a much different risk profile, as you state. Certainly it's an increased risk profile for us, but again it's only 15%, and it's well-managed and very focused. Only in two countries, the United Kingdom and the United States. It's not that they're going out into the emerging countries and trying to win work.

Again, we feel it's very focused, it is very separate. We do not talk about it as an integrated service delivery between construction and consulting. We talk about it as a bundled delivery service, or a combined. We see that as where the advantage is, especially in the United Kingdom, where a great deal of the work, the majority of the work there is design-build. You need to bring a construction partner to the table. You might as well bring somebody you know.

The same thing with the United States. The design-build market in the US is growing, especially in the water market. Many of the municipalities want to see that bundled together and MWH has that capability. It may be a slight departure, but it's still going to be a very focused part of our business, being not integrated consulting, but complementing it.

Got it. I'll turn it over guys. Thanks.

Mona Nazir, Laurentian Bank.

Good afternoon.

Hi, Mona.

Just a couple for me. Firstly, turning towards your EBITDA guidance, Q1 was below that target. You mentioned a number of factors in your prepared remarks, including project mix, some higher competition putting some pressure on fees. I know, last quarter you saw some margin compression due to lower utilization as you keep those stocking levels static.

I know MWH is going to come into the picture with a little bit lower margin. Can you speak about your confidence that margins will pick up in your legacy business, and how much of the variance between your actual margin this quarter and expectation was confined to the Q1 period? Can you envision right-sizing staffing more, if you're not expecting stability in Canada in 2016? Thank you.

Thanks. It's a long question, Mona. Certainly, we feel that there was some -- I would say more unusual issues in the first quarter in the P3 projects and the design-build projects we're bidding. There was a higher degree or a higher number of those projects that we were bidding, and certainly that has an impact on margins, because we do bid those projects at a lower margin.

The increased pressure, that is certainly something we feel we've now worked through; but fortunately that will continue through, because in the oil and gas the clients are trying to be as efficient as possible. That just means we need to be as efficient as possible with regards to how we manage those projects.

I think our guidance is that we'll be at the lower end of our range in gross margin, but we still believe that it's going to be within that range. It certainly had an impact, that basically connects right down to our EBITDA margin. We do see us continuing on, but albeit at that lower end.

Turning to the organic growth, I know your original guidance for 2016 was based on some increased infrastructure spend. We're seeing that in the US, but Canada, it's a little bit slower to trickle down, and it's more back-end weighted over the 10 years. Is that now factored into your revised outlook? Or -- and then also, just -- yes, go ahead.

More or less, I think in the United States you're right that it is back-end focused; but it does have an immediate impact with some projects at the state level. That is where we're going to feel we have a good position. The state -- usually the states go ahead and be a little bit more aggressive with their budgeting and their release of some projects once they get some clarity. The FAST Act has provided them some clarity. Even though the FAST Act, you're right, is definitely more back-end weighted, it does have an impact initially at the state level, giving them confidence. That's one thing.

In Canada, it is as well, an interesting infrastructure program. If you read into it, the Canadian government actually put an awful lot of money into what I call the north -- more of the aboriginal first-nation communities, really investing in those communities. That is a very strong position for us. We have eight partnerships up in both territories, in BC and Alberta. That's going to provide us some opportunities there. That funding is actually very strong and is there now. That money's committed. We do feel we've got some opportunities on the short term, as well as, as the programs ramp up we're going to have opportunities in the long term.

Okay. Lastly turning to M&A, is it safe to assume as you work to integrate MWH you're going to hold out on more medium or larger transformational acquisitions this year or perhaps next year, and just continue with the tuck-ins in the US?

I think that's logical to assume. You never want to say never, because an opportunity may come up that is just too good to pass up; but that certainly won't be where our focus is. We want to focus our attention on integrating and leveraging the opportunities we have with MWH. Those are exciting. It's going to take time.

Certainly, we have platforms now in the UK and in Australia and New Zealand that we can now diversify our tuck-in program to other regions globally, whereas our tuck-in program is more or less delegated toward the US and to Canada. We've now got the opportunity in the UK, Australia, New Zealand to look at smaller firms there to build and diversify those practices, as well. Certainly that will be our focus. I think this is a fairly big gulp for us. We want to make sure we do it right and focus on that integration. That will give us some time and certainly then, focus on some of the smaller ones.

That's great. Thank you so much.

Thank you.

Thank you. John Rogers, D.A. Davidson.

Hi, good afternoon.

Hi, John.

A couple of things. First of all, in terms of the impact from -- Bob, you mentioned the FAST Act and the new programs in California and another one in Texas, as well. Have you actually started to see benefits from those yet?

I can't -- not benefits as in real work, real signed projects, no. But where the benefits are is a lot more people are talking about doing projects, and in our relationships with our clients, they're talking to us about that. Certainly it's created the optimism. It's created the focus on these projects. That's where the benefits are, but to say they've turned into real projects in the last three weeks or so, no.

Okay. I just wanted to make sure, because it seems like that's still out ahead of you.

Yes it is, definitely.

On the other hand, the buildings market, there's some reports that would suggest that while certainly not declining, but it appears to be peaking out, or at least the rate of growth there has slowed. I notice that you've seen -- or at least seemed to be seeing more activity on the institutional side of the business. Any thoughts there?

Oh, great. Thanks for the segue, John, because this is something we are starting to see the benefit that maybe sometimes our investors and shareholders don't see. We've invested fairly heavily in our buildings group starting about three years ago, where we needed to diversify out of health care, because we saw what happened to our business when health care declined. We made a real focused intent to get out there and focus into, and diversify into education and more into the commercial. With BOA, it's going to add even more strength in that area.

That groups are now well integrated together, are leveraging their relationships, and all those areas are now growing. Sparling in Seattle has continued to grow, and partner and cross-sell through our other areas. The buildings group -- very quietly, we have built an extremely strong and much more diversified practice in the United States, and are winning work and growing very well.

You don't see that market slowing at all?

No, right now we're as busy as we can be in Texas. Our Florida operations are hiring and busy. Right now that is one part of our Company that is definitely ticking along very well for us.

Great. Lastly maybe for Dan, do you have an estimate of what your acquisition expenses are going to be with the deals that you've completed so far for this year?

I think I have a -- with respect to transaction costs, or --?

Both transaction costs and those cost elements that you're excluding from your adjusted earnings now.

Yes, I don't have a full picture of that today, John. As you know, we just closed the transaction. I know that a number of the costs will get capitalized and amortized over the life of, say, things like our credit facility. There were certainly some transaction-related costs for advisory services, legal services, due diligence, tax, et cetera. Those costs just started coming in at the end of Q1, of which you saw some of them.

I don't have a full picture of exactly what that is, but it will be in the tens of millions of dollars, I can say that. I just don't know -- it will be less than CAD100 million for sure, because a number of those will be capitalized, as well. But I don't have a specific number for you today.

Okay. Then what about for -- you've given us the first quarter of 2015 now. Do you know what the number for the full year is, 2015?

2015 transaction costs were pretty low, in that we -- on all of these smaller transactions, we do the bulk of our work internally. Getting any -- the biggest costs would've been associated with probably legal fees, and some advisory services. It would be probably in the same order of magnitude over the quarters. I don't have it over every quarter at my fingertips here, but I think you could look at the business acquisition notes from our last quarterly reports, and get that information.

Okay, I'm trying to think about how you're going to be presenting these numbers now?

I think you can find that in our business acquisition note where you see transaction costs.

All right. Thanks very much.

Thanks, John.

Thank you. Bert Powell, BMO Capital Markets.

Thanks. Hi, Bob and Dan. A couple questions. One, the cultural fit with MWH. I just want to make sure -- if you could walk us through how you got comfortable, and how that aligns with Stantec? Also, if the catalyst for the transaction for them was a skewness to higher age, isn't that a problem that you inherit in terms of the talent being -- not having the duration you might like?

With regards to the culture, culture is always a hard one to define. I've always said, you know it when you feel it. Certainly it's been a number of conversations we had with them. I had the opportunity of having some very one-on-one conversations with their people. You look at their values as a Company. You look at what they do, what's important to them, how they run their business, how their leadership manages their business; all of that contributes to the culture of the Company. I think we're pretty good at doing that. That's something we feel we do analyze well.

Financial due diligence of a Company is -- I'm not going to say it's easy, but it's more black and white; where the cultural due diligence is one where you've really got to understand, what do you mean by culture? I think we do a good job of that, for the factors that I listed. We do feel -- everything we've seen in the numerous meetings we've had in the last couple weeks, where we've now driven in deeper into the organization, we're very comfortable that we've read that right. That's good news so far.

With regards to the issue of age of senior people and the runway of them then being -- you're making the assumption those senior people are the key people. Some of these people were probably near retirement, or probably should have retired, but unfortunately there were no shareholders to buy their shares, and the cash flow wasn't there to buy their shares. That has a tendency of having people hanging on to their careers at the end maybe longer than they wanted to.

That was something we looked at in our due diligence, who those shareholders were, what positions in the Company did they have. Their leadership is actually very young. Their leadership in the Company, deep down into the Company, is very young. We were at their Chicago office a couple weeks ago. Thankfully, I was the oldest person in the room. It was a very young group of leadership.

We're not worried about that. That was part of our due diligence we looked at. Those key leaders are still there. We've tied up the key leaders that we feel we need to tie up. We're pretty comfortable that we have the right people here to run that business.

Okay, thanks for that. Next question, if I think about the business going forward, probably more infrastructure, which means at some level more P3s -- certainly that will be the case, I guess, in Canada and the UK. We've got competition. We're throwing construction into the mix. Are, gone are the days where we can think of the EBITDA margins at Stantec of being that 13% to 14% range? Are we going to be in a new range when you give the updated targets? I'm not sure whether you're going to do those in Q2 or at the Investor Day in Boston? If you can give us a sense of directionally, what you're thinking about that, at least today?

I think the first thing is MWH's margins, as you would've seen in the prospectus, are slightly lower. We're going to work hard to get them to the same levels as Stantec margins, particularly in the US. That's the first part of that.

The second part of that, construction margins in this industry, as you know, are lower. But we will be reporting, and intend to report, the construction business separately from the consulting business. We get more visibility into the relative margins of the various operating units. That's our intent going forward. Whether we have that information available for the Investor Day, I don't think we're going to have that available. That's only three weeks out, and we're just now just getting our arms around it. We don't have the exact visibility today.

Bottom line, yes it might have a slight impact. I still think the fact that our margins are at the highest end of our industry, I think that's going to be maintained, but it might be slightly lower than what our historical ones have been, just because of how that business mix is changing. Certainly, we're going be still at the upper and of the range.

Yes. I was trying to put the competition in there, as well, whether that seems like that might be more permanent or not. Maybe it is transitory.

You always have competition. Sometimes when markets are slower, that competition gets a little hungrier, that's all.

Fair enough. Thank you.

You're welcome.

Sara O'Brien, RBC.

Hi, good afternoon. Can you guys comment on -- just based on the backlog that you have and the duration for MWH now, what the outlook is for revenue? Should we still look to the F-15 numbers for modeling purposes, or is there opportunity for organic growth to come through as early as 2016?

The question basically is our organic growth of the core Stantec business going to potentially be affected by the acquisition?

No, is MWH likely to show organic growth relative to what we see in the prospectus? The CAD1.7 billion, or CAD971 million or so net revenue?

I think what you'll see, Sara, is we reported that as acquisition growth. I think what we're going to try to do -- and that was part of an earlier question, as well, is where we see synergies. Where Stantec and MWH together are winning new work, we will try to keep track of that. It's obviously going to be difficult, but that was where we would see what we would call organic growth in the traditional sense, where neither of us would have won those projects independently, but we win them together. We would probably try to classify that, and give you that commentary around synergies going forward.

I guess -- does Stantec still only consider organic growth one year following an acquisition?

That's how we've historically done it, and again to date we haven't changed that.

Okay, so even if we were to classify it as acquisition growth, I just wonder if the starting point of the prospectus revenue is a likely -- is what you're expecting for FY16, or if you would expect that number can increase, just based on the current backlog?

It is based on the expectations of Management from MWH, and we've reviewed that. They have, as we indicated earlier, their backlog is strong, it's healthy, and it's growing. We expect them to see those revenue targets. They are in a couple difficult markets in the Asia-Pacific region, that Bob mentioned, and certainly in the -- anything commodity related in those markets. But overall, the other groups seem to be doing fairly well.

Okay. Then maybe, Dan, if you can comment on first steps for integration, and the timeline to seeing synergies. Is it more of a cost up-front, benefits later, or do you see some immediate synergies? If you could, qualify what those might be?

I think Bob mentioned that there's been a number of operational meetings that we've had. We're starting to get more in-depth meetings around almost doing detailed due diligence around integration and what the opportunities are there.

In terms of cost synergies, there's going to be some immediate things. We said we'd try to achieve those cost synergies out to the end of 2017. We're going to incrementally -- again, there could be some early days. They had shareholder requirements and things like that, and the external board. Some of those will go away pretty quickly. Over time, as we combine and optimize our combined operations, we'll continue to see some cost synergies.

With regard to the revenue synergies, the meetings we referenced, that Dan referenced and I referenced, there were six different meetings held in the last two weeks with a number of their leaders and our leaders in various sectors that we have. The focus of those meetings aren't integration. The focus of those meetings aren't about -- it's about winning work together -- what clients do you have, what clients do we have, what projects are you chasing that we can help you win? That's all we talk about, because there's no better way of integrating a Company or getting together than winning a project together.

Now that's something we do in all of ours, but the opportunities here have been very exciting. I think that's the one thing we're very -- we see already is that focus has already paid dividends, where we are going to see clients this week and next week as a combined Company, looking at cross-selling into them. Certainly we expect to see some of those revenue synergies start flowing in quickly.

Okay, is it fair to say then, number one is cross-selling opportunities, and then number two is go after the cost synergies?

They can go on the same time, actually, to tell you the truth. They are happening at the same time, because they're really in different areas. In operations, the focus is on winning work. Combining the companies from maybe a back-office perspective, the opportunities are cost synergies.

Okay, that's great. Thank you.

You're welcome.

Thank you. Tahira Afzal, KeyBanc.

Hi, folks, how are you?

Very good, how are you?

I'm doing well. Bob, I know that you've probably been watching the whole Flint, Michigan, debacle here in the US. We've talked about under-spending on the water infrastructure side in the US in the past. Are you seeing any of this translate into real movement on infrastructure spending and water picking up here?

Absolutely. Thanks again, good segue with Flint. All you need is a disaster to get people actually focused and aware that they're exposed, and they need to start investing so you don't become another Flint, Michigan. We're absolutely seeing our clients are much more open to saying -- evaluating what their risk is, looking at that. Absolutely, every time that happens, you get a call from a client saying we'd like you to come in and analyze our system and tell us what our risk is.

There is -- water's -- that's why we did this. Water's such a great area to invest in, because I don't think anybody can complain about having clean water. It's just a matter of investing in it. With the consent decrees and the capital investment programs out there for infrastructure, yes, we're pretty optimistic that funding will continue to flow, because the need is there.

Got it. Building on that, Bob, we've seen two years of flooding in Texas, which is unusual. Now that you watch television more you've probably seen it, too. Clearly, there's a lot of climate change effects potentially coming through, and they'll probably be compounded as we go forward. As you've gone out with your new acquisition under your wing, do you see that's maybe one of the bigger growth areas, more on a global level where water is concerned?

Absolutely, we talked -- you're hitting two real on-ace high points, thank you. With water, there is the water treatment, the wastewater treatment. The other huge area for growth is surface water flooding, water resources, resiliency of cities. Instead of going in and fixing a municipality after a flood, is protecting it from the flood happening in the first place. That resiliency focus and spending money up front in protection rather than in recovery is where municipalities are starting to put their focus in across the United States into Canada, and you're right, globally.

It is an area that when we are considering where did we want to grow and with who did we want to do that with, MWH was perfect with their global footprint, and with their dams and hydropower. We're working with them now in the Dakotas, and in the Ohio Valley, looking at TVA with their flooding. You're right, we now have around 800 people in Texas. They've gone through some worst floods they've had in a century. That is a huge area for growth, in the water resources side, which is really something new. You're right, it hasn't been a focus. It's more new recovery. We're now into the proactive, into the resiliency side of it.

Got it. Okay, Bob. Last question for me, you talked in your written text, which you released earlier, on really some transportation competitive pressures. Are those regionally in one area, or is this pretty broad-based? Are they, as per client, is it more public sector, P3-oriented? Any color would help.

The P3 really depends on what team you're on. You really have to be careful who you choose as a partner to go after a project. We're very selective about that. Now, because we're getting certainly significantly more mass than we had in the past years, we're now attracting some of the bigger contractors there. We feel that we have improved our capability, our competitiveness in that area, without actually having to lower our fees and margins to get on a team, which is usually what you need to do if you're a little bit more inexperienced. You may be able to price your way on a team. Now our experience and our mass are getting us on teams.

There is some regional focus to that. There is some regional competitiveness, where competition is higher in some areas. I would have to say competition is everywhere. There is -- no matter where, and especially on the bigger projects, and you attract some of the bigger players, you have that competition. For us, it's really important then to get on the right team with the right partner.

I think it's fair to also state here, as we're pursuing those projects on a design-build or P3, we do a significant amount of design; but we're putting some of our fees at risk and at lower margin. That's why you're seeing some of the lower gross margin happens in the P3 markets in Canada, as well as the design-build transportation markets in the US, where that's where you're bidding and pursuing these projects. If we win them, then we get an up-tick on our margins and a success fee. If you don't, you carry on to the next one.

Got it. Thank you, folks, and congrats on the acquisition.

Thanks very much.

Ben Cherniavsky, Raymond James.

Hi, guys.

Hi, Ben.

Can you talk a little bit about how you plan to get the margins higher in MWH? What are some of the specific addressable parts of the business that have room to be managed up, and how long that might take?

I think first off, that's not going to be immediate. That is something where you really look at the teams you have, and by combining our teams, by combining how we execute projects, we feel we are very efficient at that, are managing those projects. We feel again we're very efficient at that. That drives up those gross margins.

That takes time. It's working through them and their systems and processes, what team, how you utilize your people across a wider footprint. All those things improve your margins. We've done it before with a lot of companies, and it is something that takes months. It's not something you go into the first project and do it. It will be something we're pretty confident that we've done it before, but it does take a while.

From a back-office perspective, Ben, we have to take a very prudent and disciplined approach toward our integration. We don't want to break things. We want to make sure that as we combine our companies we're getting the best of both firms. That takes some time. From that, we'll be able to optimize both businesses, make sure we're doing the right things there. We're going to be very disciplined about this and be cautious. It's not about going in and just cutting costs. It's about doing it, very on a measured and appropriate approach for what's right for both companies.

How much of it is productivity related? Where -- how would you compare the -- you guys do a very good job of managing your office and labor productivity, utilization rates, et cetera. How does that compare to what you've seen so far at MWH? They're a partnership, a lot of more senior, more seasoned guys who may have been, as you say, looking to retire. I imagine they're still showing up at work, but you might not get the same productivity out of a hungry, young engineer. How -- is there anything to that at all, or do you see an opportunity to improve productivity in those sorts of areas?

I think there are opportunities, Ben, for sure. When you look at their business, their labor costs are similar to Stantec's, and that makes up the bulk of their cost. Utilization is an area that we will be focusing on. There are some other overhead costs at marketing and business development and so on that are large on the income statement. We are focusing on that. Their utilization rates have some opportunity to increase, so we're focusing on that, as well, as another part of this integration.

The other question I had was I'm trying to get a better feel for what you're seeing, or what's going on, frankly, in the infrastructure markets in Canada. Personally, I've been getting more mixed messages. Some companies say nothing really is happening, it's difficult to say where ground is going to break, and what kind of projects will occur where, how, and when, et cetera. Unless I misinterpreted it -- so correct me if I'm wrong -- but it sounded like you guys are already seeing some activity in the markets related to stimulus, et cetera. Can you maybe clarify that for me?

I think it's more of our being proactive and understanding that there is money out there that has been dedicated and identified for certain areas of infrastructure, and as I mentioned, the north and aboriginal communities. We have the partnerships. Really, we're -- it's like the FAST Act in the United States; we haven't seen any real projects. We're excited that there is money there and there's an opportunity there. All you have to do is match the money to the opportunity. In those communities, it's not as clear how that's going to be done.

What we're doing is let's get close to our clients. We understand that market very well. We're starting to create some business cases for those communities that go after the money, to make their case to the government that there's a reason for them to access those funds. That's where we're seeing -- the opportunity is there, but I think you're right in saying, it's a little cloudy how this is going to land.

Our point is, then let's go create it. Let's get out there and find the opportunity, write the business case, access the money; because I think the government isn't even sure how to actually deploy it. I think the money is there, the opportunity is there, our clients are there. We see the opportunity in connecting those dots.

Nothing's been said about the tragedy up in Fort McMurray, and you hate to try to see opportunity in misfortune like that. But I imagine there is going to at one point be a lot of rebuilding and engineering work that would have to go along with that. Do you guys -- do you see that being an eventual outcome at some point?

In any kind of a disaster, there is always the need to go in and help and recover after that. In Fort McMurray's case, they did an outstanding job of protecting their key infrastructure -- their water treatment plants, wastewater treatment plants, their schools, a lot of municipal buildings have all been saved. There's a cleanup effort. There is a validation and commissioning to get things back on its feet. There's a rebuilding process, obviously, for the 2,800 homes that were damaged.

Again, I mentioned the flooding in southern Alberta. What happened is you have to create housing for these people, because it's not going to be overnight. In southern Alberta there were basically mini cities constructed in industrial areas so that people could go live for a year or so while their houses are being rebuilt. We have that experience, that knowledge, and that past history, and are offering our services to the government; and we hope we can help them.

Well, like you say, you hope -- at the same time, you hope that you don't have to help. It's good that they've saved a lot of infrastructure.

They have. I don't think -- it's been a disaster, and families are going to be suffering for years; but again, I commend the people that protected the key infrastructure there.

That's great. Thanks, guys.

Thanks.

Benoit Poirier, Desjardins.

Yes, good afternoon, guys. My first question is related to the gross margin in energy and resources. I understand your comparing against a tough quarter last year, because there was a recognition of some fees for certain performance metrics. But wondering, the 45% we saw in the quarter, whether it's a sustainable level going forward on the energy and resources side?

Yes, I think it is. I think one thing we've been very happy with is the performance in the margins that our group has been able to maintain. You're right, we are comparing against a stronger quarter in Q1, 2015, plus that one-time metric for that one project. That was an up-tick that again made the comparable a little bit out of line.

That 45% going forward, we do feel it's sustainable. That group has got solid work now going forward. We're comforted by that fact. We don't see growth, so to speak; but we certainly are now getting to feel that we have stabilized at that level, and we can maintain the performance at that level.

I think it's important to note that internally, our oil and gas business, in particular in Canada where the bulk of it is, is achieving the targets that we set out for it. They are in a very difficult environment, managing extremely well.

Okay, perfect. Just for the organic growth prospects for infrastructure and building, obviously a good performance in Q1. Is it a good run rate for 2016?

Yes, I think our outlook for both of those are good for 2016. We don't see anything changing that outlook. Certainly, that's the areas of our Company which again, represents almost 75% of our business that's performing very well.

Okay, perfect. On the SG&A side, is there -- I know it creates a little bit year -- is there any opportunity for additional work force reduction in certain business segments?

We monitor our utilization really well, really focus on investing in our marketing and business and development costs really well. I wouldn't say there's anything significant that we can get in there and dig deeper. At this point in time, you've got to make sure that you're investing in your business. I'd say the only weakness that is now impacting us, is the mining business, where we came off the Jansen project last year. There is some reductions there that we're dealing with in Q2. Outside of that, I think we're managing the rest of the business pretty well.

Okay. Given the change in the tone for energy with the recent spike in commodity, how does it translate? Do you see some renewed momentum? What would drive upward the gross margin for energy and resources?

The gross margin, I think we just stated, it's probably going to be pretty stable at that level it's at. You're probably going to need a much more robust market to be able to start charging a little bit higher fees to drive up the margin. The clients are still talking to us, we're still having a great relationship with them. The good news is they're starting to look forward, and they're starting to try to figure out what they're going to be doing with their capital program. They're talking to us about those programs. We have as much optimism as we can at this point in time. Let's put it that way.

Okay. Thanks for the time, gentlemen.

Thanks, Benoit.

Maxim Sytchev, National Bank Financial.

Hi, Max.

Hi, good afternoon. A couple of quick questions. In terms of integrating MWH, obviously this is the largest deal you've done. Are you doing anything differently from integration perspective relative to what you have done historically -- again, considering the size?

Considering the size, they are a mature firm. The had good processes, good systems. They ran a good business They were, for a private company, there was as public feeling as you could get. Because of that, we've got to be a little slower in assuming certain systems will be integrated into ours. We have to look closely at their processes and controls, and how they do their work. It's not going to be as simple as a 200-person firm that clearly we do have some more sophisticated systems. They have some very sophisticated systems.

I would say the biggest thing is not presuming that -- we think we know what we know. We've got to find out, understand, share opportunities. Bottom line, it's just going to take us longer and slower, but the focus is there. Very clearly, we want to get the benefits out of combining the businesses, both from best practices, as well as cross-selling, and leveraging the client relationships. That focus is continuing and going through.

We always said, we know the destination. The destination is going to be a combined, totally integrated firm. With MWH, that road we're going to take there, we're going to travel a little slower down that road this time.

I assume that pace of integration has been impounded in your expectations when you telegraphed the synergies number, right?

Yes. I think when I say that, to back up for a second, there's going to be parts to their company that we will be able to integrate relatively quickly. Then there's other parts of their Company that we have to take much slowly. That was a generalized statement, saying that we're going to take it slow; because there are some pieces that we can feel almost immediately, let's combine these businesses and move in.

Environmental services, they have a small group. Small is a relative term. It's a couple hundred people. We have about 1,400 people in the US. Very quickly, we can integrate that group into us. Same thing with mining. They do mining work, and saw some synergies there. All that was forecast certainly in the prospectus, and what we've seen so far, nothing changes that viewpoint.

Okay, no, that makes sense. In terms of -- do you have a sense of the percentage overlap in terms of clients, or is it so minimum it's not even worth discussing?

I would say the overlap is there. First off, in water in the United States the overlap is really small. We were very surprised, pleasantly surprised. I think it was like five centers, municipalities, where we're both chasing projects out of probably 50 municipalities. We're very pleasantly surprised there.

Where we do have client overlap, for example in mining, the client overlap was totally separated by different services. We have what they do for the mining clients, we don't do, and vice versa. Where we did have some overlap with clients, the overlap with synergies isn't there.

Certainly, when you look at water, even in the United States, MWH has a very strong presence in what I'd call the west California and up through to Oregon and Washington. We have a very strong presence on the east coast. Combined, we now have a dominant presence in the United States. With our combined presence in Texas, we have a commanding presence in that state, too.

We're pleasantly surprised. We felt this going through the prospectus. We felt it doing our due diligence. That's been confirmed in the last couple weeks as we dig into the business.

Okay, yes, that's very positive. Actually one follow-up question on the environmental services. Obviously, the disclosure right now is ex-MWH; but in terms of -- can you maybe highlight what is exposed to -- let's call it maintenance/regulatory spending, and then whatever is really required from a CapEx spending perspective on oil and gas; if you can clarify that please?

They do very little environmental work on oil and gas. I think they really had Kinder Morgan as a client, and one other client in the US. Their other big clients for environmental services was Honeywell, Boeing, GE. Their business in that is not very -- it's very little exposure to the -- I would call the energy side of the business.

Okay, that's very helpful. Thank you very much.

Thanks, Max.

Anthony Zicha, Scotiabank.

Yes, hi, good afternoon, gentlemen. Bob, with reference to MWH and the construction division, how do you see it going in the future in terms of importance? Are you going to expect to maintain the 15% revenue, or will it decline over time? Could you give us a bit more color on its future?

Hard to say. At this point in time, we're still trying to understand the construction business. As far as we're seeing, the backlog is very strong in their business. We are much more focused on just taking on enough work that they can do. I don't see us doing any acquisitions specifically in that space, Anthony, in the next short while, while certainly we want to grow the consulting business through acquisition.

Just because of that, I would assume that as the consulting business grows, the construction business may be a smaller piece going forward. But I still see growth opportunities organically, certainly, for the construction business based on the backlog that they have.

That business, as we've said many times, is a really different business. You've got to be much more careful, even on your organic growth, to maintain it within a limit that you can manage. Simply going out and hiring a bunch of laborers is one thing, but finding the right people to manage those jobs is much more difficult. We're very cautious in that area. That cautiousness probably will result in it being slightly smaller going forward over the next couple years.

Could we anticipate -- prior to the acquisition, there was talk about potentially selling it off. Did MWH look at selling it off in the past?

No, as a matter of fact, MWH -- and that's something that we were committed to, as well -- felt it was very core to their strategy, especially as it comes to design-build, both in the United States, but even more importantly in the United Kingdom, where the design build was almost a requirement of the majority of the clients there. You needed to bring a construction partner to the table. Again, if you have construction partners part of your Company, they're much more comfortable in that relationship and knowledge. We see that growing business in the United States, as well.

MWH saw that. They were positioning themselves for that. They would never consider selling it, because they see it as a strategic investment. Again, as I said earlier on the call, and it's very clear that we feel very differently maybe than some of our competitors, that that difference needs to be maintained, that separation needs to maintain. We will bundle the services together. We'll combine those services on projects for clients. But in no way does that mean integrating those services, because they're different businesses. Again, MWH had that same philosophy.

Okay, and quickly other question. The US Senate recently approved a $11 billion water resource bill. There's talk about authorizing funds to 27 US Army Corps of Engineer projects. Could you give us a bit of color, MWH's relationship with the US Army Corps of Engineers? Is it an important client? When you look at those contracts, are they at similar or lower margin than the typical contracts when you deal with government bodies? Thank you.

I would say they're at the -- from a government type of work, the Corps' work is -- I wouldn't say more near the upper end of that. It's certainly much more of a managed business, with very prescriptive profitability. We -- it's a long client. Of course, a long client of Stantec, and it's a long client of MWH. Again, the benefit for us we see is very complementary services to the Corps. Our services was much more in the geotechnical part of the dams. Theirs is much more in the actual design of the dams and levee systems.

We were very excited about the work with the Corps. We're very excited about the work with TVA, because those are complementary services to those clients, and not overlapping. All those builds, all that funding, is exactly why we saw the opportunities here of leveraging what they do. Both in the Water Act and in the core investments, we have numerous Corps contracts right now that we feel we can leverage MWH services into it. We're definitely excited over both those opportunities.

Excellent. Thank you very much.

Thanks, Anthony.

Thank you. There are no further questions at this time. Please continue with any additional or closing remarks.

Thank you again for joining us today. This is an exciting time for our Company, our clients, and our employees. With the addition of MWH and the numerous other acquisitions that we have added and integrated over the past few years, our solid strategic plan, and our strong diversified business model, we believe we have a lot to look forward to. This concludes our call. Thanks again for joining us. We'll see some of you on June 2 in Boston. Thank you.

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.