Q4 2023 Stantec Inc Earnings Call
Operator: Welcome to Stantec's year-end and fourth quarter 2023 results webcast and conference. Leading the call today are Gord Johnston, President and Chief Executive Officer; Theresa Jang.
Welcome to scan text yearend and fourth quarter 2023 results webcast and conference call.
Leading the call today are gored, Johnston, President and Chief Executive Officer, and Theresa Jang.
Operator: Executive Vice President and Chief Financial Officer, invites those dialing in to view the slide presentation. Available in the investors section at stantec.com, today's call is also webcast. It should be advised that if you have dialed in while also viewing the webcast, mute your computer as there is a delay between the call and the web. All information provided during this conference call is subject to the forward-looking statement, the Qualifications set out on slide Detail and Stantec Management.
Executive Vice President and Chief Financial Officer.
Stan Tech invites those dialing in to view the slide presentation, which is available on the investors section at <unk> Dot com.
Today's call is also webcast.
Please be advised that if you have dialed in and 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 statements.
Paula Frication set out on slide two.
Detailed and Stan Tech management.
Operator: 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. Gord Johnston. Good morning, and thank you for joining us today.
Discussion in animals.
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. Gore Johnston.
Good morning, and thank you for joining us today.
Gordon Allan Johnston: 2023 was a remarkable year for Stantec, and I'm very proud of what we accomplished. We achieved record financial results and delivered our best year ever for organic net revenue growth. We grew our employee base by 5% through Organic Hires, another record, while maintaining our best-in-class employee retention rate. And for a fifth consecutive year, Stantec has been ranked by corporate knights as a top ten global leader in sustainability, and once again, we rank first amongst our peers.
2023 was a remarkable year for San Tech and I am very proud of what we accomplished.
We achieved record financial results and delivered our best year ever for organic net revenue growth.
We grew our employee base by 5% through organic hires another record.
Maintaining our best in class employee retention rates.
And for a fifth consecutive year <unk> has been ranked by corporate Knights of the top 10 global leader in sustainability and once again, we ranked first amongst our peers.
Gordon Allan Johnston: None of this would have been possible without the dedication, passion, and commitment of our employees, and I'd like to thank each individual for their contribution. We started 2024 strong from an M&A perspective, and we have already closed both the Zetcon and the Morrison-Hirschfield acquisitions. These are both top-in-class firms, and with the addition of their talented employees to the Stantec team, we are now sitting at over 30,000 people around
None of this would've been possible without the dedication passion and commitment of our employees.
Like to thank each individual for their contributions.
We started 2024 strong from an M&A perspective, and have already closed both of that con and the Morrison Hershfield acquisitions.
These are both top in class firms and with the addition of their talented employees to the <unk> team. We are now sitting at over 30000 people around the world.
Gordon Allan Johnston: Closing these acquisitions early in the year helps us jumpstart our new 2024 to 2026 strategic plan. Now, turning to our 2023 financial results. Overall, we grew net revenue by 14% year over year, with almost 10% coming from organic growth. Market demand in 2023 was particularly robust in our water and environmental service business units and in the US, with each delivering double-digit growth for the year. Our strong operational performance drove record-high adjusted EBITDA of $831 million and an EBITDA margin of 16.4%. And as a result, we delivered significant adjusted EPS growth of 17%, achieving a record high of $3.67.
Closing these acquisitions early in the year helps us jumpstart, our new 2024 to 2026 strategic plan.
Turning to our 2023 financial results.
We grew net revenue by 14% year over year with almost 10% coming from organic growth.
Market demand in 2023 was particularly robust in our water and environmental service business units and in the U S with each delivering double digit growth for the year.
Our strong operational performance drove record high adjusted EBITDA of $831 million.
And an EBITDA margin of 16, 4%.
And as a result, we delivered significant adjusted EPS growth of 17% achieving a record high of $3 67.
Gordon Allan Johnston: Our U.S. business achieved very strong results, with over 18% growth in net revenue for the year, more than 12% of which came from organic growth. In 2023, we achieved organic growth in every one of our business units, with water, buildings, and energy and resources each delivering double-digit organic growth. Demand for public sector and industrial projects, as well as large-scale water security projects, grew a 25% increase in organic growth for our water business.
Our U S business achieved very strong results.
With over 18% growth in net revenue for the year more than 12% of which came from organic growth.
In 2023, we achieved organic growth in every one of our business units.
With water buildings, and energy and resources, each delivering double digit organic growth.
The demand in the public sector and industrial projects as well as large scale water security projects drove a 25% increase in organic growth for our water business.
Our buildings business benefited from higher activity levels in healthcare industrial and science and technology projects.
Gordon Allan Johnston: Our buildings business benefited from higher activity levels in healthcare, industrial, and science and technology projects, and Energy and Resources continued to support Puerto Rico's hurricane recovery, including the upgrading of its power grid, contributing to solid revenue growth. So overall, a very, very solid year for our U.S. operation. In Canada, we achieved greater than 8% organic net revenue growth, which surpassed our expectations for the year. Environmental Services, Infrastructure, and Water each delivered double-digit organic growth. Strong demand for permitting and archaeological work drove growth for environmental services, particularly in Western Canada for the midstream energy sector and in Ontario for large-scale transportation projects. Activity on Environmental Impact Assessments in the Renewable Energy Sector also contributed to revenue growth.
At energy resources continued to support Puerto Rico's hurricane recovery, including the upgrading of its power grid contributing to solid revenue growth.
So overall, a very very solid year for our U S operation.
In Canada, we achieved greater than 8% organic net revenue growth.
Which surpassed our expectations for the year.
Environmental services infrastructure and water each delivered double digit organic growth.
Strong demand for permitting and archaeological work drove growth for environmental services, particularly in Western Canada for the midstream energy sector and in Ontario for large scale transportation projects.
Activity on environmental impact assessments in the renewable energy sector also contributed to revenue growth.
Gordon Allan Johnston: Infrastructure revenue growth was driven by heightened activities around bridge and roadway work in Western Canada and our expertise on large wastewater infrastructure projects through growth in water, especially from work on the Iona, BC, and Barrie, Ontario wastewater treatment facilities. Moving to global, we delivered 6.5% organic growth driven by double-digit growth in water and energy and resources. Our industry-leading water business remains very active, supporting long-term framework agreements and investments in water infrastructure in the UK, New Zealand, and Australia. In Energy and Resources, double-digit organic growth was driven by the advancement of our work on the Corey Glass Pump Storage Energy Project and increased activity related to the National Grid Framework in the UK. Ian R. also continued their work on mining activities around copper and other metals that support the energy transition. And now, I'll turn the call over to Theresa to review our financial results in more detail. Thanks, Gord. Good morning, everyone.
Infrastructure revenue growth was driven by heightened activities around bridge and roadway work in Western Canada.
And our expertise on large wastewater infrastructure projects drove growth in water, especially from work on the island, RBC and very Ontario wastewater treatment facilities.
Moving to global.
We delivered six 5% organic growth driven by double digit growth in water and energy and resources.
Our industry, leading water business remained very active supporting long term framework agreements and investments in water infrastructure in the U K, New Zealand and Australia.
In energy and resources double digit organic growth was driven by the advancement of our work on the core glass pump storage energy project.
And increased activity related to the national grid framework in the U K.
<unk> also continued their work on mining activities are on copper and other metals that support the energy transition.
And now I'll turn the call over to Teresa.
To review our financial results in more detail.
Thanks, Corey and good morning, everyone.
Theresa B. Y. Jang: We closed out the year with a solid quarter of performance in Q4, contributing to another record year for Stantec. In Q4, gross revenue was up 6% compared to Q4'22 at $1.6 billion, while net revenue was up 10% at $1.2 billion. Project Margin was right in the middle of our targeted range of 53-55% but decreased 100 basis points compared to Q4 last year, in part due to changes in project mix in the U.S. This, along with the quarter's 90 basis point impact from the revaluation of our long-term incentive plan, contributed to the reduction in adjusted EBITDA margin to 15.7%. Diluted EPS in the quarter was $0.66, and adjusted diluted EPS was $0.82, both consistent with last year.
Closed out the year with a solid quarter of performance in Q4 contributing to another record year for <unk>.
In Q4 gross revenue was up 6% compared to Q4 'twenty two at $1 6 billion, while net revenue was up 10% at $1 2 billion.
Project margin was right in the middle of our targeted range of 53% to 55%, but decreased 100 basis points compared to Q4 last year in part due to changes in project mix in the U S.
This along with the quarter's 90 basis point impact from the revaluation of our long term incentive plan contributed to the reduction in adjusted EBITDA margin to 15, 7%.
Diluted EPS in the quarter was 66.
And adjusted diluted EPS was <unk> 82.
Consistent with last year.
Theresa B. Y. Jang: Excluding the effect of the offset revaluation, our Q4 adjusted EPS was $0.90. Turning to our full year 2023 results, we generated gross revenue of $6.5 billion and net revenue of $5.1 billion, a 14% increase for both over 2022. Project margin for 2023 was a solid 54.2%, consistent with last year, and adjusted EBITDA increased by 15% to $831 million. We increased our adjusted EBITDA margin by 20 basis points to 16.4%, within our targeted range. This was despite a 70 basis point impact from LTIP revaluation, resulting from the 64% appreciation in our share price for the year. Excluding this, the adjusted EBITDA margin was 17.1%.
Excluding the effect of the outset revaluation, our Q4 adjusted EPS was <unk> 90.
Turning to our full year 2023 results, we generated gross revenue of $6 5 billion and net revenue of $5 1, Billion% to 14% increase for both over 2022.
Project margin with for 2023 was a solid 54, 2% consistent with last year and adjusted EBITDA increased by 15% to $831 million.
We increased our adjusted EBITDA margin by 20 basis points to 16, 4% within our targeted range. This was despite a 70 basis point impact from <unk> revaluation, resulting from the 64% depreciation in our share price for the year excluding.
Excluding this adjusted EBITDA margin was 17, 1%.
Theresa B. Y. Jang: Our full-year diluted earnings per share reached a record high of $2.98, and our adjusted diluted EPS was $3.67, up 34% and 17%, respectively, despite the 24 cent unfavorable impact from the LTIP revaluation. Increased earnings also reflect the successful completion of our 2023 real estate strategy. We're pleased to have achieved the targets we set out three years ago by delivering approximately 38 cents of incremental adjusted EPS and reducing our real estate footprint by over 30 percent from our 2019 baseline. Now turning to our liquidity and capital resources, 2023 was one of our strongest years for operating cash flow generation at $545 million compared to $304 million in 2022. Cash flow this year benefited from a full year of operations post-Cardinal integration, as well as increased revenues and diligent management of our working capital, as shown by our four-day reduction in DSO from 81 days to 77 days. However, increases in operating cash flow were partially offset by higher tax installment payments driven in part by the impact of U.S. Section 174 and higher interest payments.
Our full year diluted earnings per share reached a record high of $2 98.
And our adjusted diluted EPS was $3 67.
Up 34% and 17% respectively. Despite the 24 unfavorable impact from the outset reevaluation.
Increased earnings also reflect the successful completion of our 2023 real estate strategy. We're pleased to have achieved the targets. We set out three years ago by delivering approximately 38 of incremental adjusted EPS and reducing our real estate footprint by over 30% from our 2019 baseline.
Now turning to our liquidity and capital resources 2023, with one of our strongest years for operating cash flow generation at $545 million compared to $304 million in 2022.
Cash flow this year benefited from a full year of operations post Cardinal integration as well as increased revenues and diligent management of our working capital as shown by our four day reduction in DSO from 81 days to 77 days.
Increases in operating cash flow were partially offset by higher taxes installment payments driven in part by the impact of U S section 174, and higher interest payments.
Gordon Allan Johnston: In 2023, we returned more to our shareholders in dividends, but we were less active with share buybacks compared to 2022. And as at December 31, our net debt to adjusted EBITDA was 1 times well within our internal leverage range of one to two times, positioning us very well to fund our acquisitions of Zetcon and Morrison Hirschfield in the first quarter of 2024. And with that, I'll turn the call back to Gordon.
In 2023, we returned more to our shareholders in dividends, but we were less active with share buybacks compared to 2022.
And as at December 31, our net debt to adjusted EBITDA was one times well within our internal leverage range of one two times positioning us very well to fund our acquisitions of dotcom and Morrison Hershfield in the first quarter of 2024.
And with that I'll turn the call back to guard.
Gordon Allan Johnston: Thanks, Theresa. In the fourth quarter, we reported a backlog of $6.3 billion. Backlog has grown organically by 5% since December 2022 and continues to grow in each of our geographic regions, with global posting double-digit organic growth. Compared to the third quarter, our backlog grew organically in native currency, but was offset by foreign currency fluctuation. Our ability to grow backlog in Q4, which is generally softer as a result of seasonality, clearly demonstrates the strength of the market. Backlog and Water continue to strengthen with a 23% organic increase, supported by Project Winds and Wastewater Treatment, Advanced Manufacturing, Consultancy Frameworks, and Master Planning Services. Buildings also had a number of strong winds, translating into solid, high single-digit organic growth.
Thanks Teresa.
In the fourth quarter, we reported backlog of $6 3 billion backup.
Backlog has grown organically by 5% since December 2022, and continues to grow in each of our geographic regions with global posting double digit organic growth.
Compared to the third quarter, our backlog grew organically a native currency, but was offset by foreign currency fluctuations.
Our ability to grow backlog in Q4, which is generally softer as a result of seasonality clearly demonstrates the strength of the market.
Backlog in water continued to strengthen with a 23% organic increase supported by project wins in wastewater treatment advanced manufacturing consultancy frameworks and Master planning services.
Building is also had a number of strong wins translating into solid high single digit organic growth.
Gordon Allan Johnston: We continue to see demand for expertise in healthcare, multi-purpose buildings, and advanced manufacturing and industrial facilities. Our backlog represents approximately 12 months of work. We continue to capture significant opportunities in the fourth quarter. For example, we were selected to provide a full suite of architectural, engineering, and environmental services for a $1 billion lithium-ion battery manufacturing facility in British Columbia. E1 Molly's facility will include a research and development complex with a fully integrated green roof, as well as a seven-story mass timber office building. Additionally, our buildings team was selected to design the first comprehensive cancer hospital in Dubai. At over 600,000 square feet, the hospital will be designed recognizing best-in-class building strategies and practices in sustainability.
We continue to see demand for our expertise in healthcare multipurpose buildings, and advanced manufacturing and industrial facilities or.
Our backlog represents approximately 12 months of work.
We continued to capture significant opportunities in the fourth quarter.
We were selected to provide a full suite of architectural engineering and environmental services for a $1 billion lithium ion battery manufacturing facility in British Columbia.
<unk> facility will include a research and development complex with a fully integrated green roof as well as a seven storey mass timber office building.
Our building seamless selected to design the first comprehensive cancer hospital in Dubai.
At over 600000 square feet. The hospital will be designed recognizing best in class building strategies and practices and sustainability.
Gordon Allan Johnston: Stantec is consistently ranked as a top five design firm in the healthcare space. And as we've talked about in the last number of quarters, the UK water appointments are starting to wrap up. This quarter on AMP-AID, we were appointed to the Northumbrian Water Capital Delivery Framework and to the Severn Trent Water Engineering and Design Consultancy Framework. We were also appointed to the Capital Works PMO framework with Irish Water. Each of these wins secures work for the next five years, with the option to extend beyond that period by agreement. We are also very pleased to announce this morning that we have been selected to provide integrated design services for Agritas, a new battery manufacturing facility in the UK. This is one of the most significant investments in the UK, and the factory will be one of the largest of its kind in Europe. This project award is a testament to the breadth and depth of Stantec's expertise in advanced manufacturing, and we look forward to working closely with Agritas to support the successful completion of this project.
<unk> is consistently ranked as a top five design firm in the health space.
And as we've talked about in the last number of quarters. The UK water appointments are starting to ramp up.
This quarter on average we were appointed to the North Umbrian water capital delivery framework and to the severance trend water engineering and design consultancy framework.
We were also appointed to the capital works PMO framework with Irish water.
Each of these wins secures work for the next five years with the option to extend beyond that period by agreement.
We were also very pleased to announce this morning that we were selected to provide integrated design services for <unk>, New battery manufacturing facility in the UK.
This is one of the most significant investments in the UK and the factory will be one of the largest of its kind in Europe.
This project award is a testament to the breadth and depth of <unk> expertise in advanced manufacturing and we look forward to working closely with <unk> to support the successful completion of this project.
Gordon Allan Johnston: Looking at 2024, we continue to see high levels of activity in all regions, and we've now updated our targets to include Morris and Hirschfield. We have raised our net revenue growth target for the year to 11 to 15 percent and expect organic net revenue growth to be in the mid to high single digits. For the U.S. and global, we expect mid- to high-single-digit organic revenue growth. And in Canada, we're guiding to mid-single-digit growth. Our EBITDA margin target for the year is in the range of 16.2 to 17.2%.
Looking at 2024, we continue to see high levels of activity in all regions and we've now updated our targets to include Morrison Hershfield.
We have raised our net revenue growth target for the year to 11% to 15% in.
And I expect organic net revenue growth to be in the mid to high single digits.
For U S and global we expect mid to high single digit organic revenue growth and in Canada, we're guiding to mid single digit growth.
Our EBITDA margin target for the year is in the range of $16 two to 17, 2%.
Gordon Allan Johnston: And finally, we have revised our adjusted diluted EPS growth to now be in the range of 12 to 16%. While we're only two months into 2024, we are very confident in being able to achieve these targets, and we remain very optimistic about what's to come. Before opening the call to Q&A, I want to comment briefly on the announcement of Theresa's planned retirement. We have been extremely fortunate to have Theresa on the Stantec team for the last five and a half years. She's added tremendous value to the company and has ensured Stantec is in a very strong financial position. While Theresa will remain in her role as CFO until her successor is in place, ensuring a smooth transition, I want to thank her for all of her efforts and everything that she's done for Stantec over the years. And with that, we'll turn the call back to the operator for questions. Operator? Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced.
And finally, we have revised our adjusted diluted EPS growth to now be in the range of 12% to 16%.
While we're only two months into 2024, we are very confident in being able to achieve these targets and we remain very optimistic for what's to come.
Before opening the call to Q&A I want to comment briefly on the announcement of Teresa his planned retirement.
We have been extremely fortunate to have <unk> on the <unk> team for the last five five years.
She has added tremendous value to the company and has ensured static is in a very strong financial position.
While Teresa will remain in her role as CFO until her successor is in place ensuring a smooth transition I want to thank her for all of her efforts and everything that she is understand Jack over the years.
And with that I will turn the call back to the operator for questions operator.
Thank you.
To ask a question. Please press star one on your telephone and wait for your name to be announced.
Benoit Poirier: To withdraw your question, please press star 11 again. Standby while we compile the Q&A room. Our first question comes from Benoit Poirier with Desjardins. Your line is now open. Yes, thank you very much. And good morning, everyone. And Theresa, I wish you all the best for your upcoming retirement. You'll be missed for sure.
To withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from Ben <unk>.
Hey, Jordan Your line is now open.
Yes, thank you very much and good morning, everyone.
Theresa I wish you all the best for your upcoming retirement, you'll be missed for sure.
Gordon Allan Johnston: Gord, you mentioned that you're looking at both external and internal candidates. I was just curious if there's any criteria that you're looking at for the CFO search. Any color about the timing for finding the new CFO? Yeah, well, you know, the search is underway. Benoit, we've been working on it for a couple of months already, and so we're looking forward to now that the information is out in public to really, you know, gearing up a little bit further on it. You know, as we mentioned in the prepared remarks, Theresa isn't going anywhere.
Gordon you mentioned that you were looking at both external and internal candidates.
Just curious if there is any criteria that you're looking at for the CFO search any color.
We were about the timing for.
Finding the new CFO.
Yes.
Searches underway been while we've been working on it for a couple of months already and so we're looking forward to now that the information is out in public too to really gearing up a little bit further on it.
As we mentioned in the prepared remarks, Teresa isn't going anywhere so while we want to be respectful of her wish to two retired we certainly are going to work through this in a planned and orderly fashion and we hope it certainly will be in in 2024, hoping in the next quarter or two.
Gordon Allan Johnston: So, you know, while we want to be respectful of her wish to retire, we certainly are going to work through this in a planned and orderly fashion. And, you know, we hope it will be in in 2024, hopefully in the next quarter or two. Okay, and looking at the M8 program in the UK, one of your US peers stated that although the funding cycle only officially starts in April 2025, it looks like they are already seeing multiple UK water clients going out for procurement to be ready. I was just curious, are you seeing this as well?
Okay.
Looking at the eight program in the UK one of your U S. Spirits stated that although the funding cycle only officially starts in April 2025, it looks like that we are already seeing multiple UK water clients going out for procurement to be ready.
Was just curious are you seeing this as well.
Gordon Allan Johnston: Oh, absolutely. We've already secured, you know, many, many awards for AMP-8. And in fact, some of the planning awards that we've gotten have been given by clients to help them prepare for AMP-8. So we're actually already working on preparatory planning type work to get ready for when April 2025 hits. Okay, okay. That's great, caller.
Oh absolutely.
We've already secured many many awards for <unk> and in fact, some of the planning.
Words that we've gotten.
Been awarded by clients to help them prepare for <unk>. So we're actually already working on preparatory planning type work to get ready for so as soon as that April 2025 hits, we're ready to go but.
We mentioned in the prepared remarks, a couple more with north Umbrian and others that we secured this year. So we've we've already got well over half approaching 60 or 70% of our anticipated.
Wins that have already been issued procured and awarded.
Okay. Okay, that's great color and just in terms of free cash flow it looks like that the U S 174, R&D law remains in place.
Theresa B. Y. Jang: And just in terms of free cash flow, it looks like the US 174 R&D law remains in place. Could you provide a dollar amount, Edwin, for 2024? And what could be the implication in terms of a free cash flow conversion from net earnings?
Could you provide the dollar amount Edwin for 2024, and what could be the implication in terms of the free cash flow conversion from net earnings.
Theresa B. Y. Jang: Sure. So, Section 174 has been in place for two years now. And so, you know, we saw an impact in 2022 and 23. And so, as we look year over year, we would expect the impact to be roughly the same. We think roughly 30 to 40 additional, $30 to $40 million of additional cash taxes as a result of that rule remaining in place.
Sure.
This.
The section 174 has been in place for two years now and so we saw an impact in 2022 and 'twenty three and so as we look year over year, we would expect the impact to be roughly the same we think roughly 30% to 40 additional.
$240 million of additional cash taxes as a result of that Caf will remaining in place. So again a year over year it wont create an impact.
Gordon Allan Johnston: So again, year over year, it won't create an impact. And we'll keep watching to see if that relief package comes, is ultimately approved or not. Okay, and maybe last question for me. Obviously, a very solid organic growth environment. I was just curious if you could provide more color about the impact of pricing inflation these days on organic growth.
And we will.
We will keep watching to see if that if that relief package.
Is ultimately approved or not.
Okay, and maybe last question for me, obviously very solid organic growth environment. I was just curious if you could provide more color about.
The impact of pricing inflation these days.
Benoit Poirier: You know, what we've seen over the past couple of years is, as we came, well, as we came into 2024, there still were some salary pressures, but not to the same degree that we saw in previous years. So there certainly is, you know, and as we, as you know, in previous years, we've been successful in passing along the majority, if not all, of those salary increases to our clients. So, you know, we see that there certainly is some inflation, some increase in our fees reflected in the organic growth numbers that we're putting out, but I'd say it's plus or minus half, you know, half would be fee increases and plus or minus half is just additional organic growth. Okay, that's great. Thank you very much and congrats again.
Organic growth.
We what we've seen over the past couple of years as we came as we came into 2024, there is still some salary pressures, but not to the same degree that we saw in previous years. So there certainly is.
As you know in previous years, we have been successful in passing along the majority if not all of that salary increases to our to our clients. So we see that there is certainly is some inflation some increase in our fees into that the organic growth numbers that we're putting out but.
I'd say, it's plus or minus half would be fee increases and plus or minus half is just additional organic growth.
Okay. That's great. Thank you very much and congrats again.
Operator: I'd like to take a while. Thank you. One moment for our next question. Our next question comes from Yuri Lynk with Canucor Genuity. Your line is now open. Hey, good morning.
Thanks Manuel.
Thank you one moment for our next question.
Our next question comes from Yuri Lynk with Canaccord Genuity. Your line is now open.
Hey, good morning.
Good morning, I'd like to Echo yes.
Yuri Lynk: And I'd like to echo Benoit's congratulations to Theresa on: Thank you. Yeah, no problem. Yeah, so just trying to I don't know who wants to take this one just on the guidance trying to understand Square, some of the moving parts in there, so you're calling for mid to high single-digit organic growth in the U.S. But the backlog there grew organically only 2%, but we kind of have the opposite story in global, where you have very strong double-digit organic growth and backlog, and you're calling for mid- So, can you maybe give a little more detail on how we get to those growths?
And I'd like to Echo <unk>.
Congratulations on your retirement.
Thank you.
Yes, no problem.
Yes, so just trying I don't know who wants to take this one just on the guidance China.
Square some of the moving parts in there so youre, calling for mid to high single digit organic growth in the U S.
The backlog there grew organically only 2%.
But we kind of have the opposite story in global where you have very strong double digit organic growth in backlog and youre, calling for mid single digits.
Our revenue growth. So can you maybe a little more detail on.
Theresa B. Y. Jang: Yeah, I mean, when it comes to trying to triangulate how things move from backlog into revenue and what we're seeing in our projections, I think you just have to keep in mind that, you know, there's always a couple of dynamics at play. You know, one is that when we report backlog, it is, you know, it's a point in time. And it does require us to have, you know, everything buttoned up contractually before that work goes into our backlog. But, of course, you know, our business leaders have a line of sight to work that is near final or in negotiation, and they look at the bidding activity. And those are the things that they factor into their organic growth projections.
How we get to those.
Those growth rates.
Yes.
I think when it comes to trying to.
Trying to triangulate, how things move from backlog into revenue and what we're seeing in our projections.
Have to keep in mind that there's always a couple of dynamics at play one is that when we report backlog. It is it's a point in time.
And it does require us to have everything buttoned up contractually before that where it goes into our backlog but of course.
Our business leaders have a line of sight to work that is near final or in negotiation and they look at the bidding activity and those are the things that they factor into their organic growth projections and the other thing to keep in mind as well is that there.
Theresa B. Y. Jang: The other thing that you need to keep in mind as well is that there's often, you know, work that comes through MSAs that really doesn't come into backlog until those task orders are fulfilled. So it, you know, it shows up, and then it is worked through pretty quickly. So that would be the primary reason Yuri that you wouldn't necessarily see a straight line from backlog growth into organic growth projections. Okay, that makes a lot of sense. Theresa, while I've got you, just so I can... CheckMyMath, where would you peg your proforma TET to EBITDA ratio at the end of the year? At the end of the year, I mean, we should be, again, at the lower end of the range.
As often work that comes through Msas that really don't come into backlog until those task orders are issued.
It shows up.
And then as it works through pretty quickly so.
That would be the primary reason here that that you wouldn't necessarily see a straight line from backlog growth into organic growth projections.
Okay that makes a lot of sense.
While I've got you just so I can.
Check my math.
Or would you peg your pro forma debt to.
EBITDA ratio right at the end of the year.
At the end of the year.
I'd say at the end of the year assuming.
No further acquisitions, which is kind of the way we approach our planning and our projections.
Should be again to be at the lower end of the range.
Theresa B. Y. Jang: The equity offering we did in November really did what we intended for it to do, which was give us the additional capacity to fund acquisitions while knowing that we had Zedcon and Morrison-Hirschfield to fund in the first quarter here, so we're in really good shape, and so, as the year unfolds and cash flow remains a focus for us to turn over quickly, I would say that we should be in the lower half of our range. Last one, just quickly; it's a bit of a nitty-gritty one. You do mention specifically that you've included Morrison Hirschfield in your updated guidance. You don't mention it, said Khan.
The equity offering we did in November really.
Did what we had intended for it to do was it gave us the additional capacity to fund acquisitions, while knowing that we had is that continent and Morrison Herzfeld fund in the first quarter here. So we're in really good shape.
And so as the year unfolds and cash flow. It remains a focus for us to turn over quickly.
Say that we should be in.
The lower half of our range.
Okay.
Last one just quickly a bit of a nitty gritty. One you do did you mentioned specifically that you've included.
Morrison Hershfield in your updated guidance.
Has that gone.
Theresa B. Y. Jang: It's safe to assume that's also in there. Yes, so Zetcon was included in the guidance when we rolled it out in December, and so, gradually, we now have MH in there too. But, definitely, both are in our current guidance. Okay, thanks, I'll turn it over.
Safe to assume that's also in there.
Yes, so that <unk> was included in the guidance when we rolled it out in December and so incrementally we now have <unk> in there too, but yes definitely both are in our current guidance.
That makes sense, okay. Thanks, I'll turn it over.
Jacob Jonathan Bout: Thank you. One moment for our next question. Our next question comes from Jacob Bout with CIBC. Your line is now open. Good morning.
Thank you one moment for our next question.
Our next question comes from Jacob bout with CIBC. Your line is now open.
Good morning.
Jacob Jonathan Bout: I had a question on your organic growth, you know, was quite strong in the quarter. But when I look at infrastructure in particular, your low single digit, I think it was around 3% on a net basis. You know, what happened there?
Good morning, I had a question I had a question on your organic growth.
Quite strong in the quarter, but when I look at infrastructure in particular.
Your low single digit I think it was around 3% on a net basis.
What happened there.
Gordon Allan Johnston: You know, especially as we think about the US, was your organic growth a little better in the US? And then what type of improvement are you expecting year on year, specifically in infrastructure and organic growth? Yeah, and you know, the interesting thing is, as you think of infrastructure, primarily for us, that's the transportation business. And as you talk about and land development, of course, but, you know, a lot of this, the focus has been on the transportation business.
Especially as we think about the U S.
Organic growth a little better in the U S or and then what type of improvement are you expecting year on year, specifically on infrastructure.
Okay.
Yes.
It's interesting as you think of infrastructure, primarily for us as the transportation business and as you talk about the and land development of course, but.
A lot of this the focus has been on the transportation business and when you talk about the U S of course, we see that continuing to ramp up.
Gordon Allan Johnston: And when you talk about the US, of course, we see that continuing to ramp up. The IIGA continues to roll out. And, you know, you've heard it from us and others, it's always a little bit slower, but it's continuing to ramp up. And so we're, you know, we're seeing continued support for that business as we evolve through 2024 and move into subsequent years. So we're not concerned about that. Um, second question just on mix. You know, when you look at the Infor Water Environmental Service building, you know, what are you? Are you happy with your mix right now?
Uh huh.
Yes.
<unk> continues to rollout and you've heard it from us and others is always a little bit slower, but it's continuing to ramp up and so we are.
We're seeing that continued support for that business.
We are all through 2024 and move into subsequent years, so were not concerned about that.
Okay.
Yes.
The second question just on on mix.
When you look at for water environmental services building.
Yes.
Are you are you happy with your mix right now where would you like to bulk up and maybe just a quick one on one second on enforcing hirschfield.
Gordon Allan Johnston: Where would you like to bulk up and maybe just comment quickly on what the Con and Morrison Hirschfield bring to the table? Yeah, so, in general, we're very happy with our current mix. I think that when you look at Morrison Hirschfield, it's primarily a lot of expertise in the building segment, as well as in transportation. So again, two core areas for us that will continue to move forward. Zetcon is also very active in the transportation space, and primarily from a project management and construction management perspective.
Please proceed.
Yes.
In general, we're very happy with with our current mix I think that.
So when you look at at Morris and <unk> Thats, primarily a lot of expertise in the building segment as well as in.
In transportation. So again, two core areas for us that will continue to move forward does that corn is very active also in the transportation space and.
Primarily from our project management and construction.
Construction management perspective, so roadways and bridges beginning to get involved in some of the electrical grid work in Germany as well, so again I'll sort of the core activities that we've got and none of them. Neither of those are on their own are really going to materially move our our overall split between our various business operating units.
Gordon Allan Johnston: So roads, bridges, and beginning to get involved in some of the electrical grid work in Germany as well. So again, all sort of the core activities that we've got, and none of them on their own are really going to materially move our overall split between our various business operating units. Thank you. Please take a moment for our next question. Our next question comes from Michael Doumet with Scotiabank. Your line is now open.
Thank you.
Thank you.
One moment for our next question.
Our next question comes from Michael <unk> with Scotiabank. Your line is now open.
Michael Doumet: Hey, good morning, Gordon, Theresa. Very impressive pace of morning, very impressive pace of organic hires. Just wondering if you can comment on the extent of, you know, the improvement in labor availability this year or now versus last year. And if you can comment on, you know, whether you're looking to maintain that piece of organic hires to 2024. Right. And so, yeah, a good question. A couple of things there. First of all, we have really ramped up the pace of hiring over the last number of years, doing a lot. And a lot of the hires, interestingly, are both. It's been a bit divergent. One is that we continue to hire at the entry level in order to, you know, continue to fill out that portion of our demographic profile. So a lot of hiring at the new graduate level, people in their first five or 10 years of their careers.
Hey, good morning, Gordon Teresa.
Very impressive pace.
Morning, very impressive pace of organic hires just wondering if you can comment on.
To the extent.
The improvement in labor availability this year now versus last year.
And if you can comment on whether you are looking to maintain that pace of organic hires 2024.
Great and so yes. Good question a couple of things there firstly, we have really ramped up the pace of hiring over the last number of years doing a lot at a lot of the hires.
Interestingly our both.
But a bit divergent one is that we continue to hire at the entry level in order to continue to fill out that portion of our demographic profile. So a lot of hiring at the new graduate level people in their first five or 10 years of their career, but one thing that we've seen.
Gordon Allan Johnston: But one thing that we've seen evolve over the last couple years, as we're continuing to get more and more of these large projects, is that we're bringing in a lot of more senior staff as well, you know, people with 30-35 years of experience, and we're becoming increasingly attractive to those folks also. So, you know, we're seeing labor availability. It's tight out there, no question. But our brand, the type of projects that we're bringing to the table, really is enabling us to continue with that hiring. And to your question about whether we see that continuing, Absolutely. You know, when you look at the organic growth numbers that we're putting up, our expectations, and our guidance for this year, you know, that will require continued hiring. And we, you know, I wouldn't say it's easy, but we've been very successful in bringing these people on board. Great color, too.
<unk> all over the last couple of years as we were <unk>.
Continuing to get more and more of these large projects that were bringing in a lot of more senior south as well people with 30% to 35 years of experience in and were becoming increasingly attractive to those folks also so.
We're seeing labor availability, it's tight out there no question, but our brand the type of projects that we're bringing to the table really is enabling us to continue with that hiring and to your question about do we do we see that continuing absolutely.
When you look at the organic growth numbers that we're putting up there our expectations our guidance for this year that will require continued hiring and we.
I wouldn't say, it's easy, but we've been very successful in bringing these people on.
Michael Doumet: Thanks, Gordon. And maybe if I turn to the EBITDA margins, in 23, 16.3, 17.1x LTIP. So about an 80 basis points difference, I guess, between the two.
Great color, Thanks, Gordon and maybe if I turn to the EBITA margin in 'twenty three.
$16 three.
$17, one ex Alberta.
So about 80 basis points.
Difference I guess between the two.
Theresa B. Y. Jang: And then if I look at your 24 EBITDA guide, you're effectively calling for a 40 basis points margin expansion. You know, just wondering what is assumed as LTIP? What is assumed in terms of underlying margin improvement in 24? Yeah, so the way that we establish our guidance is that we assume we use the share price at the end of that reporting period.
And then if I look at your 24, EBITDA guide, you're effectively calling for a 40 basis points margin expansion.
Just wondering.
What is assumed to delta and what is assumed in terms of underlying margin improvement in 2004.
Yeah. So.
The way that we establish our guidance.
Is that we assume we use the share price at the end of that reporting period. So in this case at the end of December 2023, and we project our alsip on that basis.
Theresa B. Y. Jang: So, in this case, at the end of December 2023. And we, you know, we project our LTIP on that basis because, you know, as you know, you have no idea how your share price is going to move over the course of the year. And so we don't try to bake in any kind of guesses one way or the other.
Because as you know you.
You have no idea how your share price is going to move over there over the course of the year and so we don't try to bake in any kind of guess is one way or the other and so as you think about our EBIT margin from the 16th floor that we reported for 2023 relative to our guided range of 16% to 17 to that is all margin <unk>.
Theresa B. Y. Jang: And so if you think about our EBITDA margin of 16-4 that we reported for 2023 relative to our guided range of 16-2 to 17-2, that is all margin improvement that is incorporated into our current target and assumes a steady share price for our LTIP. Alright, thank you. Thank you. Thank you. One moment for our next question. Our next question comes from Devin Dodge with BMO Capital Markets. Your line is now open. Yeah, thanks. Good morning.
<unk> add that is incorporated into our current target and assumes that.
Eddie a steady share price for our <unk>.
Alright, thank you.
Thank you.
Thank you one moment for our next question.
Our next question comes from Devin Dodge with BMO capital markets. Your line is now open.
Yes, thanks, good morning.
Alright, I wonder I wanted to pick up on.
Devin Dodge: I wanted to pick up on Michael's last question there. Look, the headwind from LTIP revaluation is clearly a high-class problem to have, but I believe there's been some effort towards insulating this impact from near-term results. Is there a framework or sensitivity that you can provide in terms of, you know, how a change in the stock price impacts LTIP costs and how much of that will be hedged in 2024? Sure. So you're right. We have put total return swaps on as a component of our ELSA program. So there are three tranches of units, two of which are based purely on share price movement, and one tranche, which is the bigger tranche, unfortunately, the performance share units that are based on share price movement and our relative TSR.
Michael last question, there I looked the headwind from revalued.
Reevaluation clearly a high class problem to have I believe theres been some effort toward.
Insulating this impact from near term results is there a framework or a sensitivity that you can provide in terms of.
How it changes in stock price impact I will say path and how much of that has been hedged in 2024.
Sure. So you're right. We have put total return swap on a component of our <unk> program. So there's the three tranches of units.
Two of which are based purely on share price movement, and one trial, which is a bigger tranche. Unfortunately is that performance share units that are based on share price movement, and a relative TFR and so we have hedged the majority of the component that is purely a sensitive to share price move.
Theresa B. Y. Jang: And so we have hedged the majority of the component that is purely sensitive to share price movements. And so even as we've been talking through the year about identifying the revaluation impact, that's already net of having hedged that component of our units. So it does make it hard for us. We don't hedge the performance share units because we can't get hedge accounting treatment on them, and it makes the results even noisier.
And so even as we've been talking through the year about identifying the revaluation impact that is already net of having hedged that component of our unit. So.
That it does make it hard for us we don't hedge the performance share units, because we can't get hedge accounting treatment on them and makes the results that even noise here. So.
Theresa B. Y. Jang: So it's hard to give a sensitivity because every quarter we accrue another tranche of a three-year program. That number then gets multiplied by a share price. The whole number of units you have outstanding gets revalued at the current share price, and then we run it through a Monte Carlo simulation to try and peg what the TSR impact is.
It's hard to give a sensitivity because.
Every quarter, we accrue another another tranche of a three year program that that number then gets multiplied by a share price. The whole number of units you have outstanding against re valued at the current share price and then we put it through.
A monte Carlo simulation to try and peg what that TSA.
Theresa B. Y. Jang: And that's the piece that you just can't give a sensitivity or an estimation for. It's an accounting requirement, and so it's hard to say how accurate that simulation process is. And that's the primary reason why it's very hard to give an estimation.
<unk> and that's the piece that you just can't give I gave a sensitivity or an estimation for it's an accounting requirement and so.
It's hard to say how accurate that that stimulation process is.
And Thats. The primary reason, it's very hard to give a give an estimation.
Devin Dodge: Okay, good. A good call there. I appreciate a lot of moving parts there. Okay. Maybe I'm just switching over to M&A. Just wondering, are you seeing more seller interest from employee-owned firms that may be finding it challenging to fund their growth plans? And just wondering if those discussions or negotiations with employee-owned firms differ much from when you're looking to acquire from a single owner? Yeah, we're absolutely seeing increasing discussions with employee-owned firms. And, you know, both Zetcon and Morris & Hirschfield fell squarely into that category.
Okay. That's good color I appreciate a lot of moving parts, okay maybe.
Maybe just switching over to.
M&A.
Wondering are you seeing more seller interest from employee owned firms that may be finding it challenging to fund their growth plans.
I'm just wondering if those discussions or negotiations with employee employee owned firms whether they differ much from when you are.
Looking to acquire from a single owner.
Yes.
Absolutely seeing an increasing discussions with employee owned firms, both zircon and Morrison Hershfield fell so squarely into that category and one of the.
Gordon Allan Johnston: And one of the things that are of note there with those discussions is that, certainly, what we're finding is one of the key ones is as they're thinking about share transition, you know, from one generation to the next. And, you know, we, those, those ones, particularly Morris & Hirschfield, as well as a number of other discussions that we have ongoing, are just related to the, you know, the folks coming up through the organization, those 30 somethings and 40 somethings, you know, with not having the ability to, to acquire shares, you know, they're in many major metropolitan areas, you know, it's a struggle to buy a house. And so they're not finding that they're having the funds to buy in.
A couple of things that fit.
That are of note there with those discussions certainly what were finding is one of the key ones is as they're thinking about share transition from one generation to the next.
Those those ones, particularly in <unk> as well as a number of other discussions that we have ongoing are just related to the the folks coming up through the organization those 30 somethings into 40 some things.
With not having the ability to to acquire shares.
And many major metropolitan areas.
Troubled to buy a house and so they are not finding that they are having the funds to buy it and so these as the as the older generation is retiring theres not the new guys coming into to takeover the firm it enter by them out lots of interest and sitting with a firm doing that type of work, but just not with the ability to to fund share purchases. The other thing that we're <unk>.
Gordon Allan Johnston: And so these, as the, as the older generation is retiring, there's not the new guys coming in to take over that the firm and to buy them out. Lots of interest in staying with the firm doing that type of work, but just not the ability to, to fund share purchases. The other thing that we're seeing with some employee owned firms is that the investment required, not so much, you know, certainly for growth, but also for some of the digital transformations that we see coming, you know, AI, increasing demands at both financial and from a knowledge base to keep up with some cyber threats, and so on. So we're seeing a number of employee owned firms beginning to struggle with with funding some of those things as well. And so that's generating a lot of the ongoing conversation. A couple things, though, the you mentioned is talking with an employee firm, own firm different than than others, maybe public deals. And that is true.
Being with some employee owned firms is that the investment required not so much certainly for growth, but also for some of the digital transformation that we see coming.
By increasing.
Demands in both financial and from a <unk>.
Knowledge base to keep up with some cyber threats and so on so we're seeing a number of employee owned firms beginning to struggle with funding some of those things as well and so that's generating a lot of the ongoing conversation.
A couple of things, though that you mentioned is talking with an employee firm one firm different than than others, maybe a public deals in there.
Gordon Allan Johnston: The one thing that we find, and this is a huge benefit for Stantec in these discussions, is that employee-owned firms are extremely sensitive to culture. You know, they've built this firm; they've owned this firm for many decades. And so who they would transition this firm to from a cultural perspective is very important. And, and certainly, you know, we're very comfortable there with the, you know, the cultural alignment that we bring to a number of these firms. So yeah, they are a little bit different.
That is true but <unk>.
One thing that we find.
And a huge benefit first and take in these discussions is that employee owned firms are extremely sensitive to culture.
They've built this firm they've owned this firm for for many decades, and so who they would transition this firm to from a cultural spectrum perspective is very important in and certainly we're very comfortable there with.
The cultural alignment that we bring to a number of these firms. So yes, they are a little bit different.
Devin Dodge: All right, excellent, caller. Thanks for that. I'll turn it over.
Alright excellent color. Thanks for that I will turn it over.
Operator: Thank you. Thank you. One moment for our next question. Our next question comes from Maxim Sytchev with MBS. Your line is now open. Hi, good morning. Morning. And Theresa, all the best, and teacher.
Thank you.
Thank you one moment for our next question.
Yeah.
Our next question comes from Maxim <unk>.
Bliss MBS your line is now open.
Hi, good morning.
Good morning.
And then Teresa <unk>.
Maxim Sytchev: Thank you. I was wondering if it would be possible to get a bit more color on the energy market, which has witnessed a slight retraction. Just curious to see what's going on.
Q2 numbers.
Thank you.
I was wondering if possible to give us more color on the energy markets, which witnessed a slight <unk>.
So just curious to see what's what's going on there.
Gordon Allan Johnston: So a couple of things we're seeing there, certainly on the renewable side, you know, a lot, still a lot of activity as we talk about pump storage, we talk about, you know, solar and wind and some things, but you are seeing some slowdown in some of the some of the offshore wind projects and things, and seeing some stress in some of the suppliers, equipment suppliers. Also, you're seeing in Western Canada, you know, in Alberta, in particular, a pause on new renewables. So that's our non renewable power. So that's slowing things down there a little bit as well. But we, you know, we're continuing to monitor all those things, we're not seeing any particular long-term systemic issues, you know; we still are projecting good organic growth for the year in that sector. And you're not seeing, I guess, sort of a negative spillover effect into your environment and what a business is because I think typically there's, you know, some subcontracting going on. Yeah, no, no; we're not seeing any at this point, Matt.
Okay.
So a couple of things we are seeing there certainly.
The on the renewable side a lot still a lot of activity as we talked about pump storage we talk about.
Solar and wind and some things, but you are seeing some slowdown in some of the.
Some of the offshore wind projects and things seeing some stress in some of the suppliers equipment suppliers also youre seeing in Western Canada.
Alberta in particular.
Cause on new renewables, so that's not.
New renewable power, so that's slowing things there a little bit as well.
So we're continuing to monitor all of those things we are not seeing any particular.
Long term systemic issues, we still are projecting good.
Organic growth for the year in that sector.
Okay.
Jim I guess.
No spillover effects into your environmental and what are the sticking points.
There's.
Some some subcontractor.
Yes, no no we're not seeing any at this point Max.
Gordon Allan Johnston: Super helpful. Thanks so much. And then in terms of, obviously, you know, people are asking questions around sort of employee forms, but curious to see what's happening with some of the private equity owners, if potentially that could open up an additional sort of venue for targets for you from an M&A perspective. We yeah, we absolutely have seen a number of PE-backed firms in the initial stages of conversation, you know, as they're nearing the end of their investment cycle. So I do think, in addition to employee-owned firms, we'll see more and more PE firms coming to the market, you know, through the year.
Okay Super helpful. Thanks, so much.
And then in terms of obviously people are asking questions around sort of employee owned firms, but curious to see what's happening with some of the private equity owners.
Yes, potentially that could open up an additional sort of venue for the sorts of targets for.
For you from an M&A perspective.
We yes, we absolutely have seen a number of PE owned or back firms.
In initial stages of conversation as they are nearing the end of their investment cycle. So I do think in addition to employee owned firms, we will see more and more p/e firms coming to market.
Through the year.
Gordon Allan Johnston: Thank you so much, Bethany. Great, thanks, bye. Thank you. I'm asking no further questions at this time.
Okay. Thank you so much.
Great. Thanks, Matt.
Yeah.
Thank you.
I am showing no further questions at this time.
Gordon Allan Johnston: I would now like to turn it back to Gordon Johnston for closing remarks. Greg, well, thank you again for joining us today. We're very pleased with our Q4 and full year 2023 performance, and we're really optimistic about the outlook here for 2024.
Now I'd like to turn it back to Gordon Johnson for closing remarks.
Great well. Thank you again for joining US today, we're very pleased with our Q4 and full year 2023 performance and we're really optimistic about the outlook here for 2024, so thanks again and goodbye.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Yes.
Okay.
Gordon Allan Johnston: So thanks again, and goodbye. This concludes today's conference call. Thank you for participating. You may now disconnect.
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