Q1 2023 Stantec Inc Earnings Call
<unk> Dot 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.
<unk> management discussion and analysis and incorporated in full for the purposes of today's call unless otherwise noted dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded with that I'm pleased to turn the call over to Mr. Gordon Johnson.
Good morning, and thank you for joining us today.
I am happy to report that we're off to an excellent start for the year.
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 remain 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, 11% in buildings and 16% in energy and resources.
These results reflect our strong market positioning as we continue to build on the macro themes of aging infrastructure climate change and re shoring of domestic production.
Looking at our operating regions net revenue in the U S increased 21%.
With organic net revenue growth of 14%.
The robust public and private sector spending continues to drive growth.
We also benefited from the strong us dollar in the quarter, which contributed approximately 7% of the increase in net revenue.
We saw double digit growth in water buildings and energy and resources.
Our water business continues to be a leader in the U S.
Leaving significant wins across all mega trends, including water reuse climate resiliency and large scale water security projects.
Buildings continues to be very active based on momentum from investments in healthcare civic industrial in the science and technology sectors and energy resources continues to drive growth through the acceleration of mining and significant reservoir and dam projects.
And community development demand for industrial and residential units built specifically for rental has spurred growth.
Overall, the U S had a very strong quarter with the key themes that we've spoken about previously continuing to play out.
In Canada, we achieved 11% organic net revenue growth.
Environmental services was driven by project permitting archeological investigations and environmental impact assessment work in the renewable energy sector.
Our water business continued to provide services for climate change resilience, including work surrounding Toronto is a basement flooding program.
Both environmental services and water achieved close to 20% organic net revenue growth.
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.
Our global operations delivered another quarter of solid revenue growth.
Net revenue grew 15% with organic growth of over 10% and acquisition growth of 5%.
Our water business continues to capitalize on long term water framework agreements and public sector investments in the UK, New Zealand and Australia.
Energy and resources delivered robust organic growth through heightened levels of activity driven by the ongoing demand for copper and other metals that support the increasing imperative for the energy transition.
Before turning the call over to Teresa I want to share that our buildings group was recently ranked number two overall in modern health care is top construction and design firms.
Modern healthcare as the industry's leading source of health care business and policy News research and information.
And this is a global ranking and it clearly demonstrates the great work our buildings team is doing in healthcare.
And now I'll turn the call over to Theresa to review our financial results in more detail.
Thank you <unk> good morning, everyone.
As Greg noted, we delivered solid first quarter results.
Through both growth and net revenue by 17% to $1 5 billion and $1 2 billion respectively.
Project margin for Q1 was 53, 7% in line with our expectation.
Project margin in Canada, and the U S remained strong while we experienced a few challenges in a global operation not a fleets were individually material.
Product margin in global to strengthen in the coming quarters.
Adjusted EBITDA margin was 14, 6%, a 10 basis point increase over Q1 2022.
As a result of very strong share price depreciation in Q1, we did have a significant mark to market expense related to the revaluation of our long term incentive plan without that our adjusted EBITDA margins would have been 15, 2%.
Strong revenue growth and lower admin and marketing expenses as a percentage of net revenue drove first quarter diluted EPS of <unk> 59.
<unk> 40 in the prior year and adjusted diluted EPS of <unk> 73.
Compared with 61 last year, an increase of 20%.
Excluding the mark to market revaluation expense adjusted diluted EPS would have been 78 and.
And would have resulted in an increase of 28% over the prior year.
Looking at our liquidity and capital resources operating cash flow for the quarter came in at $37 million, an increase of $31 million over Q1 2000 teams.
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.
DSO at the end of March with 81 days consistent with year end 2002.
And our net debt to adjusted EBITDA was one six times in the middle of our target range and also consistent with year end 2022.
Before I hand, it back to Gordon for final remarks, I would like to draw your attention to our 16th annual sustainability report, which we released last month.
We also achieved our goal of operational carbon neutrality across our entire business, but there is so much more information contained in this report I encourage you to take some time and look through it.
With that I'll turn the call back to board.
Thanks Teresa.
In Q1, we grew backlog to $6 2 billion.
In line with our previous all time high.
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 in backlog this quarter with most of that growth in environmental services water and buildings.
Growth in environmental services backlog stems from strong tailwind in the marketplace augmented by robust cross selling and collaboration with our other business units to provide services such as environmental permitting and archaeological work for large infrastructure projects.
Backlog in water was driven by wins related to wastewater treatment solutions and water requirements for power generation that will support the energy transition.
Buildings also had strong backlog growth in the quarter generated through wins in advanced manufacturing education and healthcare.
Our backlog represents approximately 13 months of work.
As our backlog demonstrates momentum continues to build based on investments spirit by governance government stimulus around the world.
Looking at some of our major project wins each of these follows the key trends that we've been discussing.
The core glass 500 megawatt pumped storage project in Scotland is the first large scale pumped storage project to be developed in the U K and more than 40 years.
It will more than double current existing storage capacity greatly supporting the energy transition and the climate change and sustainability imperative.
The Veterans Memorial Bridge in Kentucky was constructed back in $19 36.
And are currently carries more than twice its intended daily capacity.
The redesign of this branch will strengthen the aging infrastructure and provide safe multimodal crossing for vehicles bicycles and pedestrians.
And just last week, we announced our appointment to the homes, England development and regeneration technical services framework.
We expect disappointment will bring a significant amount of work over the next four years and community development as we continue to support homes, England and building sustainable and resilient communities. These are just a few of the few examples that demonstrate the continued momentum that's driving public and private investments.
Looking at the rest of the year, we remain confident that we will achieve the financial targets that we set out in February .
This includes delivering mid to high single digit organic net revenue growth driven primarily from our significant position in the U S.
While the U S 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.
And we're focused on driving bottom line growth that meets or exceeds our topline growth.
2023 is shaping up to be another excellent year for centex.
And with that I'll turn the call back to the operator for questions operator.
Thank you ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone. If your question has been answered you were seeing with yourself from the queue. Please press star one again, we will pause for a moment, while we compile our Q&A roster.
Yes.
Okay.
Our first question comes from Chris Murray with HEB capital markets. Your line is open.
Yes, thanks folks good morning.
Gordon maybe turning back to your comments around organic growth in the backlog.
Obviously, the U S very very strong, but in the quarter or any way, Canada was pretty weak in someone's global.
Can you talk a little bit about your thoughts around.
We should be seeing ethylene even further into the year.
And maybe each of those regions outside the U S and is there any theme.
Any cause for concern here or anything, particularly odd happening or.
Just maybe a timing issue.
Yes, I think it's mostly a timing issue, Chris we had strong organic growth in both of those regions, both over 10% and theres going to be a little bit of Lumpiness. When you look between organic growth and backlog. So we're not really concerned and global we had the backlog was retracted a touch there.
Primarily due to the timing of Amp cycle stuff in the U K. 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.
Okay.
So just just even though global global backlog has been growing a little bit negative.
Feel like Youre going to burn the backlog faster than you can replace it at least.
Medium term right.
No we're feeling actually really good about our both our global business as well.
Okay, Alright thats helpful. Thank you.
Thanks, Chris.
Again, ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone again Thats star one for our questions. We will pause for a moment to compile the Q&A roster.
One moment for our next question.
Our next question comes from Robert <unk> with RBC. Your line is open.
Great Thanks, and good morning.
I guess, just looking I guess closer to the U S market can you maybe give a little bit of color around.
Where you are with the backlog, which end markets are contributing most or more importantly, I guess at this point in the macro environment and with some of the bills pending where are you seeing opportunities as it relates to your backlog stuff that might not already be in there.
Yes, Thanks Eva.
In the U S. We did have over 9% backlog growth organically in the quarter and we saw backlog growth in all of our business operating units.
Strongest backlog growth in water buildings in environmental services.
Both well and knitted into double digits all of those so what we're seeing a pretty broad broad based across all of the groups and so.
We're really bullish on.
On the U S growth a lot of the <unk> work has not yet Congress has not yet fully baked in there built into.
Into our backlog there, we see that starting to come more and more you may have seen our recent announcements that the.
That the EPA is now funded.
Roughly $7 billion stands out to the the water group $6 billion of that came from <unk>. So that's going to just further strengthen the backlog growth in water going forward as well.
Okay.
Great and then just looking I guess on.
On the M&A front and I didn't see a lot of mention of Cardinal assuming the integration. There is largely done how are you looking sort of at the M&A horizon right now you're one of the things we've noticed across the industry as some of the medium to large sized transactions have quite a bit.
Yes.
The valuations are at the right place.
Are more of the company such as yourself and the integration phases kind of what are you seeing 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.
So in addition to focusing on backlog growth operational efficiency, we're really focused on our M&A program and you said that many of the year and you're right. There has been a little bit of slowness in some of these transactions, but I think thats just timing issues the market remains quite robust the M&A funnel.
So quite full so I think thats.
We're continuing to stay active you can see that we've got some dry powder. This ready to take action when when the right opportunity comes along for US again, we're maintaining our discipline, but yes, we're ready to transact when the right opportunity comes along.
And then just one last quick one for me is given your U S exposure, obviously theres a bit of noise on the U S 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.
Given the funding that's in the system you don't necessarily see it as a near term concern given all the bills et cetera that already in the works.
Yes, I think that.
Greg you mentioned the tablet.
Is where we are.
So we don't see that.
It would be any short term impact.
As I said are underway are funded funds have been dispersed.
And so it's a bit of a question around it.
There is a shutdown how long will that last and our expectation is that it wouldn't be prolonged.
And so there might be a slight impact over the medium or longer term with respect to project center are coming to market.
But we really don't anticipate that there would be any any significant impact to us.
Alright, thanks for the color I'll pass the line.
Thanks, Kevin.
Again, ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone.
One moment for our next question.
Yes.
Our next question comes from you guys with Stifel. Your line is open.
Morning, everyone.
Good morning, Ian.
Gordon the employee count Corporately has kind of been around 26000 employees as reported for the last three quarters can you maybe talks about some of the the dynamics with respect to adding people and what's transpiring, there and how it pertains to backlog growth and revenue et cetera, and how youre managing that dynamic.
Yes, yes.
We continue to.
Two higher far more people than.
Then leaves that are leaving us and so our head coach count continues to grow in fact, we have the highest hiring quarter ever in Q1 of this year. So we continue to see that growth. We often the number excuse me the number will come up in the summer. We're typically over 27000 in the summer because we.
Have our seasonal staff and it drops down to 26000 of those folks go back to college and University. So I think we are we are feeling good about our ability to both recruit and retain employees and I think that will help us to continue to service. The backlog. We are seeing that we're not seeing as much of wage pressure.
As we've seen previously we're not we're seeing that the the pendulum maybe swing them back a little bit from.
Where it was very much in favor of the employee.
Year or two ago, we're seeing it come back to a little bit more of a balanced.
The balance of that situation and our voluntary turnover rates really have tapered off and settled over the last couple of quarters. So we're actually feeling pretty good about from a head count perspective, we continue to grow in our offices, our delivery centers in Pune, India, where we're up well over 700 people there that might be approaching 750 <unk>.
That's the 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 a 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 pretty good shape with it.
Got it.
That's very helpful.
Maybe switching gears to Canada Q1 organic growth was very strong.
<unk>, obviously, it hasnt really moved there you've related you reiterated your confidence but.
Is there a potential <unk>.
<unk> revenue or <unk>.
Traction as we move into the back half of the year in that region.
I'm just trying to Tayo what happened in Q1 versus what May transpire for the remainder of the year.
Yes, I mean, I think Ian what we saw in Q1 was certainly positive.
And we're really pleased with the performance that I think what we saw was some carryover effect from the momentum we saw in Q4, and some projects a little bit less sensitive to seasonality of the cold weather.
That was very helpful for Canada, and so we haven't changed our guidance for the rest of the area. It's still early in the year and we do have some projects that are kind of reaching that ramp down phase.
<unk> and others that we're expecting to ramp up in the year and so that always causes a little bit of slowdown in restart.
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 see that.
Continue to be as strong in the west in Q1, So we'll see how it plays out.
Certainly well, thanks, very much I'll turn the call back over.
One moment for our next question.
<unk>.
Our next question is a follow up question from February comp of RBC. Your line is open.
Okay, great good morning again.
I guess, maybe this one is for Teresa just given where your share price of that currently and we talked a bit about M&A earlier, just curious how youre looking at capital allocation at this point for the remainder of the year given kind of the options out there.
Yes, I mean, the philosophy really hasn't changed.
Of course, where 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.
Answer that.
There is really no.
Turning of the approach there we go.
To be doing accretive M&A transactions, we wont go into the market. When we see that there is some dislocation there and be opportunistic about that approach, but we're also focused on.
Maintaining solid beverage, so keeping our iron or a cash flow into play toward paying down our revolver every opportunity we get so again not.
Another change that strategy.
Okay, Great and then there was a bit of discussion earlier around the U S. I wanted to touch a bit more of it in the UK.
Programs, obviously are contributing for you, but I'm curious how the demand trends and the outlook is for some of the other end markets in that region, where we operate.
Sure.
You mentioned the Amp program. So so we're in the middle of AST, <unk>, certainly and were robust.
Growth there we continue to hire to service the App seven demands, but we are beginning to see some clients.
Begin to Recompete for <unk>, eight and we've been successful in securing those other areas of the U K. There's a lot of discussion about the UK housing market and if you are reading in the papers lately.
Some people have said theyre going to take off.
Numbers that they need to to continue to build out as I said, we need to put those back on but I think so we're seeing a little bit of softness there, but I think we've mentioned before the <unk>.
The permitting process for housing in the U K is quite onerous and it takes quite some time. So once you begin to develop a project you typically keep going through till you get your permitting and I think we feel particularly good with that U K housing market with our appointment to that homes, England four year framework that we talked about homes, England is re.
Really looking to push increasing housing stock there. So that's going to I think be very very positive for us for the next four years. So those would be our two largest end markets. There would be the community development group that we talked about in water on the transportation side, we have some good wins, there with highways, England that they continued to deliver so.
I think we're we're feeling okay about the UK, but we're certainly keeping up.
Absolutely.
And just one last one for me on the U S side, obviously, the other big buildup there. The IRA. Thank you announced a large solar project win there just curious what are some of the other buckets within the IRR, where youre pursuing projects or opportunities, whether it's by end market or type of project just some color there. Please.
Yes, the IRS really is supportive of sort of a transition to greener more renewable power. So there is a number of different projects that we're talking to our clients about their as.
There's opportunity there as the extension of a project start dates and production tax credits for wind and solar and geothermal biomass hydrocarbon.
Sorry, hydropower projects carbon sequestration.
So we're in discussions with clients on all of these.
The IRS has.
Expense credits for clean hydrogen renewable fuels EV charging infrastructure. So there is 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, Kevin one of them are for our next question.
Okay.
Our next question comes from Frederic Bastien with Raymond James Your line is open.
Okay.
Good morning.
Good morning Frederic.
Just question.
Big picture here, if all else equal where would you look to deploy your next dollar on M&A and.
Secondly, if.
If we fast forward five years, how does the revenue profile of <unk>.
Different from here on in terms of geographic exposure. Thank you.
Yeah. So 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, we're certainly in discussions with folks in the U S.
That doesn't in any way negate the continued discussions that we'd be having in Canada from a global perspective.
So, but you're right if I had one dollar I'd probably spend it on buying a company in the U S. 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 multiple discussions with with firms around the world.
And then from overall, what would be what would the revenue profile looks like I think we're pretty comfortable with where we are with those.
Taking advantage of the big programs, where they are coming via infrastructure water buildings and so on environment certainly so we're going to continue.
To focus on the Mega trends, but I would not expect our revenue 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 at this time I'll turn the call back over to Gordon 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 2023. So thanks again for joining us and we look forward to catching up with you as the year progresses.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Okay.