Q1 2023 Stantec Inc Earnings Call

Speaker 1: Welcome to Stantec's first quarter 2023 Earning Results Webcast and Conference Call. Leading the call today are Gore Johnston, President and Chief Executive Officer, and Theresa Jang, Executive Vice President and Chief Financial Officer.

Speaker 1: Stantec invites those dialing in to view the slide presentation, which is available in the investor section at stantec.com. Today's call is also webcast. Please be advised that if you have dialed in while also viewing the webcast, you should mute your computer as there is a delay between the call and the webcast. All information provided during this conference call is subject to the forward-looking statement qualification set out on slide two. Detailed in Stantec's management discussion and analysis and incorporated in full for the purposes of today's call. As otherwise noted, dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded. With that, I am pleased to turn the call over to Mr. Gore Johnston. Good morning, and thank you for joining us today. I'm happy to report that we're off to an excellent start for the year.

Speaker 1: We delivered net revenue growth for the first quarter of 17%, reaching $1.2 billion. This was driven by over 12% organic growth. Market dynamics remained very favorable over the quarter and through strong operational performance, we were able to deliver double-digit organic net revenue growth in each of our geographic regions. We also delivered solid organic growth in each of our business segments, most notably in water, which generated over 24% organic growth.

Speaker 1: 11% in buildings, and 16% in energy and resources.

Speaker 1: These results reflect our strong market positioning as we continue to build on the macro themes of aging infrastructure, climate change, and reshoring of domestic production.

Speaker 2: Looking at our operating regions, net revenue in the US increased 21%, with organic net revenue growth of 14%.

Speaker 2: Robots public and private sector spending continues to drive growth.

Speaker 2: We also benefited from the strong US dollar in the quarter, which contributed approximately 7% of the increase in net revenue.

Speaker 2: We saw double-digit growth in water, buildings, and energy and resources.

Speaker 2: Our water business continues to be a leader in the U.S., achieving significant wins across all mega trends including water reuse, climate resiliency, and large-scale water security projects.

Speaker 2: Buildings continue to be very active based on momentum from investments in healthcare, civic, industrial and the science and technology sectors, and energy and resources continue to drive growth through the acceleration of mining and significant reservoir and dam projects.

Speaker 2: In community development, demand for industrial and residential units built specifically for rentals have spurred growth.

Speaker 2: Overall, the US had a very strong quarter, with the key themes that we've spoken about previously continuing to play out.

Speaker 2: In Canada, we achieved 11% organic net revenue growth.

Speaker 2: Environmental services was driven by project permitting, archaeological investigations, and environmental impact assessment work in the renewable energy sector.

Speaker 2: Our water business continue to provide services for climate change resilience, including works around Toronto's Basement Flooding Program.

Speaker 2: Both environmental services and water achieve close to 20% organic net revenue growth.

Speaker 2: Energy and resources delivered double-digit growth. With strong activity related to the energy transition, including projects in power transmission and distribution, as well as a large renewable energy project in Western Canada.

Speaker 2: Our global operations delivered another quarter of solid revenue growth.

Speaker 2: over 10% and acquisition growth of 5%.

Speaker 2: Our water business continues to capitalize on long-term water framework agreements and public sector investments in the UK, New Zealand and Australia.

Speaker 2: the increasing imperative for the energy transition.

Speaker 2: overall and modern healthcare's top construction and design firms.

Speaker 2: Modern healthcare is the industry's leading source of healthcare business and policy news, research, and information.

Speaker 2: And this is a global ranking and it clearly demonstrates that great work our building team is doing in healthcare.

Speaker 2: And now, I'll turn the call over to Teresa to review our financial results in more detail.

Speaker 3: Thank you, Gord. Good morning, everyone. As Gord noted, we delivered solid first quarter results. We grew both growth and net revenue by 17 percent to $1.5 billion and $1.2 billion, and the project margin for Q1 was 53.7 percent.

Speaker 3: in our global operations, none of which were individually material. We expect Project Margin in global distraintment in the coming quarters.

Speaker 3: Adjusted EBITDA margin was 14.6%, a 10 basis point increase over Q1 2022. As a result of very strong share price appreciation in Q1, we did have a significant mark to market expense related to the revaluation of our long-term incentive plan.

Speaker 3: Excluding the mark-to-market LTIP revaluation expense, adjusted diluted EPS would have been 78 cents and would have resulted in an increase of 28% over the prior year.

Speaker 3: Looking at liquidity and capital resources, operating cash flow for the quarter came in at $37 million, an increase of $31 million over Q1-22.

Speaker 3: Operating cash flow was driven by the strong revenue growth we achieved this quarter, partly offset by our short-term employee incentive payments, which always occur in the first quarter.

Speaker 3: of BRN 22 and our net debt to adjusted EBITDA was 1.6 times in the middle of our target range and also consistent with the year end 2022.

Speaker 4: released last month.

Speaker 3: Our sustainability report is a wonderful resource that reviews all of the amazing work we are doing to achieve our ESG ambitions. We're particularly proud to report that for the fourth straight year, we've increased the portion of our gross revenue that's aligned with the UN Sustainable Development Goals. For 2022, we determined this to be 60%

Speaker 3: But there is so much more information contained in this report, I encourage you to take some time and look through it.

Speaker 3: With that, I'll turn the call back to Gordon.

Speaker 2: Thanks, Teresa.

Speaker 2: In Q1, we drew backlog to $6.2 billion in line with our previous all-time high.

Speaker 2: This is an increase of 15% from Q1 2022 and an increase of 6% since the end of last year. Our U.S. segment delivered over 9% organic growth and backlog this quarter, with most of that growth in environmental services, water and buildings. Our growth in environmental services backlog stems from strong tailwinds in the marketplace.

Speaker 2: the energy transition.

Speaker 2: Buildings also had strong backlog growth in the quarter, generating through wins in advanced manufacturing, education, and healthcare.

Speaker 2: Our backlog represents approximately 13 months of work. As our backlog demonstrates, momentum continues to build based on investments spurred by government stimulus around the world.

Speaker 2: In Q1, we want additional work on semiconductor fabs and in advanced manufacturing, including the Q-CELS project, which we mentioned back in February .

Speaker 2: The Corrie Glass 1500 megawatt pump storage project in Scotland is the first large-scale pump storage project to be developed in the UK in more than 40 years.

Speaker 2: multi-modal crossing for vehicles, bicycles, and pedestrians.

Speaker 2: And just last week, we announced our appointment to the Holmes England's Development and Regeneration Technical Services Framework. We expect this appointment will bring a significant amount of work over the next four years in community development as we continue to support Holmes England in building sustainable and resilient communities.

Speaker 2: These are just a few examples that demonstrate the continued momentum that's driving public and private investments.

Speaker 2: Looking at the rest of the year, we remain confident that we will achieve the financial targets that we set out in February .

Speaker 2: This includes delivering mid to high single digit organic net revenue growth, driven primarily from our significant position in the US. While the US remains as our top growth market for the year, we continue to expect solid growth in our global segment and high levels of activity in Canada.

Speaker 2: and we're focused on driving bottom line growth that meets or exceeds our top line growth.

Speaker 2: 2023 is shaping up to be another excellent year for Stantec.

Speaker 2: And with that, I'll turn the call back to the operator for questions.

Speaker 2: to the operator for questions. Operator?

Speaker 1: Thank you. Ladies and gentlemen, if you have a question or comment at this time, please press star 11 on your telephone. If your question has been answered and you wish to move yourself from the queue, please press star 11 again. We'll pause for a moment while we compile our Q&A roster.

Speaker 1: Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered and you wish to move yourself from the queue, please press star one one again. We will pause for a moment while we compile our Q&A roster.

Speaker 1: Our first question comes from Chris Murray with ATB Capital Markets. Your line is open.

Speaker 2: But in the quarter anyway, Canada was pretty weak and so was global. Um, can you talk a little bit about your thoughts around? What we should be seeing as we move further into the year and maybe each of those regions outside the US and Is there anything? You know any concern here or anything?

Speaker 2: really concerned in global. We had a, you know, the backlog was a bit retracted a touch there.

Speaker 2: primarily due to the timing of AMP cycle stuff in the UK. So we're not really concerned with backlog in other locations. We're really confident in our projections for 2023. We think we have a considerable number of opportunities really that we're working on in all of our regions.

Speaker 2: Okay, so just even though the global backlog has been going a little bit negative, you don't feel like you're going to burn the backlog faster than you can replace it, at least in the meeting room, right?

Speaker 2: No, we're feeling actually really good about that global business as well.

Speaker 5: Okay, alright, that's helpful, thank you.

Speaker 5: OK, all right, that's helpful. Thank you. Thanks, Chris.

Speaker 1: Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your telephone. Again, that's star 11 for questions.

Speaker 6: We'll pause for a moment to compile the Q&A roster.

Speaker 6: for a moment to compile the Q&A roster. One moment for our next question.

Speaker 2: all of our business operating units. The strongest backlog growth in water, buildings, and environmental services, both well into double digits, all of those. So, you know, but we're seeing a pretty broad base across all of the groups. And so, you know, we're really bullish on...

Speaker 2: on the US growth. A lot of the IIJA work has not yet come or is not yet fully baked in or built into our backlog there. We see that starting to come more and more. You may have seen a recent announcement that the EPA has now funded roughly $7 billion sent out to the US government.

Speaker 2: What do you think on the M&A horizon? Curious where the private sector multiples are at and just your appetite for a transaction at this point looking beyond Cardinal. Yeah, so in addition to focusing on backlog growth, operational efficiency, we are really focused on our M&A program. And you said that, and you are right, there has been a little bit of slowness in some of these transactions, but I think that is just timing issues. The market remains quite robust, the M&A funnel also quite full. So I think that we are continuing to stay active. You can see that we have got some dry powder that is ready to take action when...

Speaker 2: when the right opportunity comes along for us. Again, we're maintaining our discipline, but we're ready to transact when the right opportunity comes along.

Speaker 2: And then just one last quick one for me. Given your US exposure, obviously there's a bit of noise on the US side with the government potentially hitting a bit of a wall on the debt ceiling side. The organic growth there looks good, the backlog is building, but I guess as you look over the medium term, is that something that could potentially be an issue or...

Speaker 2: Given the funding that's in the system, you don't necessarily see it as a near-term concern given all the bills, etc., that are already in the works. I think that last part you mentioned, Sabah, is where we are. We don't see that there would be any short-term impact. The projects that are underway are funded. Funds have been dispersed.

Speaker 3: And so, you know, it's a bit of a question around if the, you know, if the, there is a shutdown, how long will that last? And you know, our expectation is that it wouldn't be prolonged. And so there might be, you know, a slight impact over the medium or longer term with respect to projects that are coming.

Speaker 1: your telephone. One moment for our next question. Our next question comes from Ian Giles with Steve Kuehl, your line is open.

Speaker 7: Good morning, everyone. Good morning, Ian. Gord, the employee count corporately has kind of been around 26,000 employees as reported for the last three quarters. Can you maybe talk about some of the dynamics?

Speaker 7: with respect to adding people and what's transpiring there and how it pertains to backhaul growth and revenue, etc. and how you're managing that dynamic.

Speaker 2: Yeah, yeah, we continue to hire far more people than are leaving us and so our headcount continues to grow. In fact, we had the highest hiring quarter ever in Q1 of this year. So we continue to see that growth. We often...

Speaker 2: You know the number will come up in the summer. We're typically over 27,000 in the summer because we have our seasonal staff and it drops down to 26,000 as those folks go back to college and university. So I think we are feeling good about our ability to both recruit and retain employees.

Speaker 2: and I think that will help us to continue to service the backlog. We are seeing that we're not seeing as much wage pressure as we've seen previously. We're seeing that the pendulum may be swinging back a little bit from where it was very much in favour of the employee. A year or two ago we're seeing a...

Speaker 2: offices, our delivery centers in Pune, India. We're up well over 700 people there now, might be approaching 750. So that's only almost a doubling of the size of that group over the last couple of years and we see continued opportunities to grow there. So no, I think we're feeling pretty good about the from staffing perspective. We still talk about it every day of course because that's our number one our number one asset but we're feeling...

Speaker 7: in pretty good shape with it. Got it. That's very helpful. Maybe switching gears to Canada, Q1 organic growth was very strong. Guidance obviously hasn't really moved there. You've reiterated your confidence, but is there potential that...

Speaker 7: there's revenue or contraction as we move into the back half of the year in that region. I'm just trying to tie out what happened in Q1 versus what may transpire for the remainder of the year.

I think what we saw in Q1 was certainly positive and we were really pleased with the performance there. I think what we saw was some carryover effect from the momentum we saw in Q4 and some projects a little less sensitive to seasonality or the cold weather. That was very helpful for Canada.

And so we haven't changed our guidance for the rest of the year. You know, it's still early in the year. And we do have some projects that are kind of reaching that ramp down, stays, and others that are, we're expecting to ramp up in the year. So that always causes a little bit of slowdown and restart. So it is currently our expectation that we will see that growth moderate a bit over the course of the rest of this year.

But we'd be happy to continue to be as strong as the West and Q1. So we'll see how it plays out.

Certainly. Well, thanks very much. You all turn the call back over. One member for our next question.

Our next question is a follow-up question from sabbath.com. RBC, your line is open.

Hey, great. Good morning again. I guess maybe this one's for Teresa. You know, just given where your share price is at currently, you know, we talked a bit about M&A earlier, just curious how you're looking at capital allocation at this point for the remainder of the year given kind of the options out there.

Yeah, I mean the philosophy really hasn't changed, Sabah. Of course, we're pretty happy with where the share price is trading at, but overall, M&A remains our top focus in terms of capital deployment, and so there's really no altering of the approach there.

toward paying down our revolver every opportunity we get. So again, not a change there in strategy.

Okay great and then there's a bit of discussion earlier you know around the US side. I want to switch a bit more over to the UK. Now the AMP programs obviously are contributing for you but I'm curious how you know how the demand trends and the outlook is for some of the other end markets in that region where you operate. Sure well you know you mentioned the AMP program so we're in the middle of AMP 7 certainly and we're you know

reading in the papers lately, you know, some people have said they're going to take off, you know, the numbers that they need to continue to build, others have said we need to put those back on. But I think, so we're seeing a little bit of softness there. But, you know, I think we've mentioned before the permitting process for housing in the UK is quite onerous and takes quite some time. So once you begin to develop a project...

you typically keep going through until you get your permitting. I think we feel particularly good with that UK housing market with our appointment to that Homes England four-year framework that we talked about. Homes England is really looking to push increasing housing stock there, so that's going to be very positive for us for the next four years.

Those would be our two largest end markets. There would be the community development group that we talked about and water on the transportation side. You know, we have some good winds there with highway Zinglin that they continue to deliver. So, you know, I think we're feeling okay about the UK, but we're certainly keeping an eye on it. Absolutely. Absolutely.

This one last one for me. On the US side, obviously, the other big build-up, there is the IRA. I think you've announced a large solar project when there. Just curious, what are some of the other buckets within the IRA where you're pursuing projects or opportunities, whether it's band market or type of projects, just on the core of their place? Yeah, the IRA really is supportive of...

sort of a transition to green or more renewable power. So there's a number of different projects that we're talking to our clients about. There's opportunities, there's an extension of projects start dates and production tax credits for wind and solar and geothermal biomass, hydrocarbon.

hydropower projects, carbon sequestration. So we're in discussions with clients on all of these. The IRA expands credits for clean hydrogen, renewable fuels, EV charging infrastructure. So there's a lot of opportunities there and we're in discussion with clients on really any number of these projects.

Thanks very much for that. Thanks, Adam. One moment for our next question.

Thanks, Evan. One moment for our next question.

Our next question comes from Frederick Bastion with Raymond James. Your line is open.

Good morning. Good morning, Robert. Just a question, big picture here. If all else equal, where would you look to deploy your next dollar on M&A? And secondly, I mean, if we fast forward five years out, does the revenue profile of Stantec?

look different from here in terms of geographic exposure. Thank you. Yeah, so you know we've talked about before the number of opportunities that we have around the world, but I think some of the biggest opportunities we still have are in the United States. So as we're looking for...

opportunities, you know, we're certainly in discussion with folks in the US, but that doesn't in any way negate, you know, the continued discussions that we'd be having in Canada and from a global perspective. So, but you're right, if I had $1, I'd probably spend it on buying a company in the US right now, but as you know, we're in a pretty good shape, our leverage, so we have more than $1, so we continue to have, you know, multiple discussions with firms around the world.

And then from overall, what would the revenue profile look like? I think we're pretty comfortable with where we are with those...

taking advantage of the big programs where they're coming, infrastructure, water, buildings and so on, environments. So we're going to continue to focus on the megatrends, but I would not expect our net revenue profile to be significantly different if we look out five years from now.

Great, thanks. That's all I have. Thanks, Robert. And I'm not showing any further questions this time. I'll turn the call back over to Gord for any closing remarks. Great. Well, thanks everyone for joining us this morning. We're really pleased with our Q1 results and are very optimistic about the remainder of 2020.