Q1 2024 Stantec Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to <unk> first quarter 2024 results webcast and conference call leading to golf today, Our God Johnston, President and Chief Executive Officer, and Theresa Jang Executive Vice President and Chief Financial Officer.
Speaker Change: Damn checking the box those dialing interviewed a slide presentation, which is available in the investors section at <unk> Dot com.
Speaker Change: 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.
Speaker Change: All information provided during this conference call is subject to the forward looking statements qualification set out on slide two detailed in <unk> management's discussion and analysis and <unk>.
Speaker Change: And for the purpose of today's call.
Speaker Change: 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.
Gordon Allan Johnston: Good morning, Thank you for joining us today.
Gordon Allan Johnston: <unk> is off to a great start for the year.
Gordon Allan Johnston: Momentum continues to build on the favorable market trends that have emerged over the past two years.
Gordon Allan Johnston: We continue to see strong demand and major projects in water security and water treatment.
Gordon Allan Johnston: With the recently announced EPA regulations on DFAST, we expect this area to grow significantly.
Gordon Allan Johnston: <unk> has been on the leading edge of DFAST work for several years with multiple contracts underway in data analysis treatment piloting site remediation and full scale system design and we have several key fast treatment systems that are fully operational.
Gordon Allan Johnston: We also continue to see great demand for energy transition and climate solutions, including strengthening our electrical grids and for environmental services.
Gordon Allan Johnston: Aging infrastructure continues to drive significant needs either for the repair or replacement of roads bridges Railways in transit.
Gordon Allan Johnston: With approximately 400 billion of IAG funding now distributed investment towards addressing these needs is spurring growth.
Gordon Allan Johnston: And the ongoing push to reach through our productive capacity continues to drive significant work in advanced manufacturing Datacenters and other mission critical facilities and all of our key markets.
Gordon Allan Johnston: Our solid first quarter results reflect our ability to capitalize on this robust market demand and deliver strong operational performance.
Gordon Allan Johnston: We are also successfully executing on our plans to grow through strategic and disciplined M&A.
Gordon Allan Johnston: In the first quarter, we closed our acquisitions of zircon and Morrison Hershfield.
Gordon Allan Johnston: And it's been very gratifying to see that since joining joining <unk>. Most companies have continued to attract new employees as both firms have grown their head count by over 5% organically.
Gordon Allan Johnston: And on May one, we announced that we acquired hydro and 950 person firm headquartered in Bristol, England.
Gordon Allan Johnston: With 22 locations across the UK Hydro <unk> provides integrated engineering design and energy and sustainability consultancy services.
Gordon Allan Johnston: They offer solutions to major infrastructure projects and landmark buildings across a number of attractive sectors, including healthcare energy education logistics and distribution and the public sector.
Gordon Allan Johnston: <unk> is a great strategic fit for <unk> and.
Gordon Allan Johnston: It grew as our presence in the UK by more than 30% and provides us with a highly complementary line of services and expertise that bolsters, our UK service offerings.
Gordon Allan Johnston: Combined with that corn and Morrison Hershfield, we've added over 2700 people to the <unk> team and the first four months of 2024.
Gordon Allan Johnston: This in conjunction with our Q1 performance sets us up very well and progressing towards our three year targets.
Gordon Allan Johnston: This brings me to our Q1 results.
Gordon Allan Johnston: We achieved record net revenue for the quarter up 12% year over year, with 7% organic and 6% acquisition growth.
Gordon Allan Johnston: We continue to see high demand for water in all of our regions delivering 16% organic growth.
Gordon Allan Johnston: Building is also delivered double digit organic growth this quarter.
Gordon Allan Johnston: Adjusted EBITDA increased to $212 million with a margin of 15, 5%.
Gordon Allan Johnston: And as a result, we delivered a 23% increase in adjusted EPS of <unk> 90.
Gordon Allan Johnston: Our U S business continues to perform extremely well.
Gordon Allan Johnston: Delivering a 14% increase in net revenue for the quarter, including 10% organic growth and 4% acquisition growth.
Gordon Allan Johnston: We achieved organic growth in every one of our business units.
Gordon Allan Johnston: Our water business delivered over 20% organic growth.
Gordon Allan Johnston: The key drivers included industrial and major water security projects like the city of Juliet alternative water source program.
Gordon Allan Johnston: Our health care expertise and hospital structures medical technology and service delivery models drove double digit organic growth in our buildings business along with strong demand for industrial projects, particularly in data centers and other mission critical facilities.
Gordon Allan Johnston: Infrastructure also had a strong solid quarter.
Gordon Allan Johnston: With heavy activity, even major transit rail and roadway projects, reflecting the beginnings of the ramp up of projects funded by the <unk>.
Gordon Allan Johnston: In Canada, we increased net revenue by 7%.
Gordon Allan Johnston: With 6% acquisition growth from Morris in Hartsville, and 1% organic growth.
Gordon Allan Johnston: Our water business delivered double digit organic growth as activity on major wastewater projects remained high.
Gordon Allan Johnston: Infrastructure also delivered double digit organic growth <unk>.
Gordon Allan Johnston: On the strength of several roadway projects across the country.
Gordon Allan Johnston: And education and civic projects drove organic growth in buildings.
Gordon Allan Johnston: Energen resources retracted this quarter as several significant projects wound down late in 2023, and we experienced delays in the ramp up of new projects.
Gordon Allan Johnston: We're beginning to see these new projects moving towards commencement and we've successfully added new contracts through our backlog and so we are confident that <unk> will shift towards organic growth later this year.
Gordon Allan Johnston: Our global operations generated 11% net revenue growth with an 8% increase from that con and 5% organic growth.
Gordon Allan Johnston: Our water building, an environmental services business units, all delivered double digit organic growth.
Gordon Allan Johnston: Our industry, leading water business delivered strong results across the UK, New Zealand and Australia through long term framework agreements and public sector investment in water infrastructure.
Gordon Allan Johnston: Building achieved over 20% organic growth with high levels of activity in every major region.
Gordon Allan Johnston: Growth was most pronounced in the middle East.
Gordon Allan Johnston: Where we are the lead designer of the harm done bin Rashid cancer Center in Dubai.
Gordon Allan Johnston: Building is also starting to work on the 4 billion pound <unk> battery manufacturing facility in the UK.
Gordon Allan Johnston: <unk> had a strong performance from environmental services was driven by European energy transition projects.
Gordon Allan Johnston: Infrastructure net revenue retracted this quarter due in part to the Australia government decision to delay or cancel certain transportation projects.
Gordon Allan Johnston: And now I'll turn the call over to Theresa to review our financial results in more detail.
Theresa B. Y. Jang: Thank you Blair and good morning, everyone.
Theresa B. Y. Jang: We delivered a very solid quarter of performance in Q1 with record net revenue and hence project margin and disciplined cost management in.
Theresa B. Y. Jang: In Q1, we generated gross revenue of $1 7 billion and net revenue of $1 4 billion, both of which were up 12% compared to Q1 'twenty three.
Theresa B. Y. Jang: Product margin increased 50 basis points due to our continued discipline and project execution, our ability to raise rates on certain projects to mitigate the impacts of wage inflation and increased selectivity in projects.
Theresa B. Y. Jang: This along with our continued focus on operational efficiency drove a 90 basis point increase in adjusted EBITDA margin to 15, 5%.
Theresa B. Y. Jang: Diluted EPS for the quarter increased 19% to 70.
Theresa B. Y. Jang: And adjusted diluted EPS was up 23% to 90.
Theresa B. Y. Jang: Again this quarter, we saw a meaningful increase in our share price, which requires the revaluation of our long term incentive plan.
Theresa B. Y. Jang: Clearly the effect of the algebra revaluation, our adjusted EBITDA margin would've been 15, 9% and Q1 adjusted EPS would have been 94 cents.
Theresa B. Y. Jang: Turning to our liquidity and capital resources, we delivered a strong quarter of cash flow generation in Q1.
Theresa B. Y. Jang: Operating cash flow increased to $57 million compared to $37 million in Q1 dollars 23 and.
Theresa B. Y. Jang: DSO was 79 days below our target of 80 days.
Theresa B. Y. Jang: Capital return to our shareholders increased as a result to support raising the dividend rate and a higher number of common shares outstanding compared to Q1 2003.
Theresa B. Y. Jang: And our net debt to adjusted EBITDA ratio was one five times, reflecting the funding reserve funds in March the first deal still within our internal leverage range.
Theresa B. Y. Jang: Two times.
Theresa B. Y. Jang: And now I'll turn the call back to Bart.
Bart: Thanks Teresa.
Bart: At the end of the first quarter, our backlog stood at a record $7 billion.
Bart: Our recent acquisitions contributed 7% to our backlog since December 2023, primarily in infrastructure and buildings.
Bart: Backlog increased organically by 3% with growth in Canada, and the U S predominantly in our environmental services and infrastructure business units.
Bart: Project wins in environmental services translated into solid low double digit organic growth in our global and U S operations.
Bart: U S infrastructure also had a number of strong wins translating into mid single digit organic growth.
Bart: We're seeing strong demand for transit bridge and highway projects underpinned with funding from the <unk>.
Bart: The nominal organic retraction in globals backlog reflects in part the drawdown of our UK backlog associated with the <unk> <unk> cycle.
Bart: Although we have.
Bart: We have already won over 60% of the Abbvie programs Youre pursuing these contracts are not yet in backlog.
Bart: In aggregate our backlog represents 13 months of work, which is one month higher than it was at year end.
Bart: We continue to hire at near record pace.
Bart: And our voluntary turnover remains well below industry average, meaning that we are attracting and retaining the workforce needed to deliver on our growing backlog.
Bart: Turning now to major projects awarded in Q1.
Bart: Through our climate solutions strategic growth initiatives, we continue to advance our services and technologies for efficient water use and reuse projects, including a design build project for Arlington County.
Bart: This $175 million upgrade will enhance the solids handling facilities and incorporate cutting edge technology to sustainably transformed wastewater into renewable energy source and the nutrient rich soil amendment.
Bart: In support of the energy transition, our energy and resources team will be providing project management and transmission and distribution engineering to the BC Hydro and power authority.
Bart: This is a seven year Master services agreement valued at $186 million.
Bart: And in Eastern Canada also under a seven year MSA with options to be extended we will be providing services to hydro Quebec for environmental assessments.
Bart: The last project I'd like to highlight is an exciting win in Australia that underscores our global strength in the water industry.
Bart: As part of this four year project, our water environmental services and infrastructure teams will collaborate to assist with the $595 million.
Bart: Wastewater system upgrade in Sydney, Australia.
Bart: This is a prime example of how we were able to leverage our leading expertise in water to broaden the scope of services and bring together our expertise from all disciplines and regions across the Atlantic.
Bart: Looking at the remainder of the year, we are reaffirming our 2024 financial targets, which were provided in February.
Bart: We expect net revenue growth for the year to be in the range of 11% to 15%.
Bart: And I expect organic net revenue growth to be in the mid to high single digits.
Bart: For U S and global we expect mid to high single digit organic revenue growth.
Bart: And in Canada, we're guiding to mid single digit growth.
Bart: Acquisition net revenue growth, which will now include a partial year for hydraulics is expected to be in the mid single digits.
Bart: Our adjusted EBITDA margin target for the year remains in the range of $16 two to 17, 2%.
Bart: And finally, we expect our adjusted diluted EPS growth to be in the range of 12% to 16%.
Bart: We are very confident in being able to achieve these targets given the robust activity, we're seeing throughout our regions and the three successful acquisitions. We've completed so far this year.
Speaker Change: And with that I'll turn the call back to the operator for questions.
Speaker Change: Later.
Operator: Ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone keypad.
Operator: If your question has been answered or you wish to remove yourself from the queue simply press star one again.
Bart: Once again, if you have a question or comment at this time. Please press star one one on your telephone keypad.
Bart: Standby, while we compile the Q&A roster.
Bart: Our first question or comment comes from the line fit <unk> Poirier from Desjardins, Sir Your line is open.
Poirier: Yes, Thank you very much and congratulations for the strong start of the year.
Poirier: In terms of M&A environment, obviously quite positive you've been able to add almost 2700 people so far.
Poirier: So congrats.
Poirier: And obviously in terms of size it compares pretty well to cardinal but is there any different when it comes to integrating.
Poirier: Different acquisition versus a big one like Cardinal and could you talk about whether there is any limits in terms of.
Poirier: Number of people you could integrate let's say over a year.
Poirier: <unk>.
Speaker Change: Hi, Ben.
Speaker Change: No.
Poirier: As we look to integrating these three different firms they are all a little bit unique.
Poirier: And slightly different from card so Cardinal we had.
Poirier: Almost two integrations one in the U S. One in Australia the.
Poirier: The U S business of course very mature.
Poirier: Months.
Poirier: His expertise around to contribute to getting that integration. The cartilage, Australia was a little bit farther afield, but still had developed a pretty good ability to integrate there, but you'll recall there was no. There was some disruption there was it was challenging just given its overall size.
Poirier: When you look at these three acquisitions, we've just completed a jet condos.
Poirier: So it is a little bit different from other firms, but we've acquired because it is our only focus in Germany and so between language difference they use German GAAP at jet Com, We of course report under <unk> and so.
Poirier: Transition will take a little bit longer and we're not looking to move as fast to bring them onto oracle because they are only presence in Germany of course in hirschfield and calendar again, great depth here.
Poirier: More presence here and so I think that is true.
Poirier: That is already underway and we look to complete that.
Poirier: Financial integration in the second half of this year.
Speaker Change: Hi, Lucas.
Lucas: It's pretty early days.
Lucas: For hydronic as we start mapping out what that integration could look like so.
Lucas: I think these things are always complicated.
Lucas: Always create a little bit of noise, particularly in the acquiring firm. So I think we have a pretty great track record of getting through that quickly.
Lucas: And then moving towards sort of the holistic value creation that we can achieve from our acquisitions.
Speaker Change: Okay and is there any reason Teresa ware.
Speaker Change: Why you did not adjust yet.
Speaker Change: The guidance this year in light of the <unk>.
Speaker Change: Solid start but also the fact that you just completed the <unk> acquisition.
Teresa: Yeah, I mean, I think the range for guidance is appropriate.
Teresa: We are off to a strong start to the year, but as we look out to the rest of the given there's always puts and takes in various corners of our business that we consider.
Teresa: And I think just at the beginning of the year, we wanted to make sure that we've got a magnitude too to adapt if things unfold.
Teresa: Either more quickly or belief that we've seen of hydronic, it's eight months.
Teresa: Results will house.
Teresa: And as we just talked about it we're going to be moving into integration of.
Teresa: At varying paces, so three firms so that's a pretty high degree of difficulty.
Teresa: We have set for ourselves we're confident that we're going to be successful in getting these firms integrated and creating value, but I think it's early in the year.
Teresa: We want to make sure that we're focused on integrating and getting it springs aligns with <unk> practices and driving towards those revenue synergies.
Teresa: Not overly concerned about how that first stub period performance looks for the year.
Teresa: And last one for me on the water side, obviously, a great achievement. So far Q1, though organic growth 16% great opening remarks also about all the awards.
Teresa: <unk> not yet in the backlog with respect to them.
Teresa: Program.
Teresa: So could you maybe talk a little bit about.
Speaker Change: Uh huh.
Teresa: The kind of quantify the deal fortunate fees that will be added to the backlog.
Teresa: I know that over the next three years, you were targeting high single digit growth, but given the start and the potential around the MAA could we even see a low double digit.
Teresa: Given the backdrop in the water segment overall.
Teresa: And you're.
Teresa: The water segment on top of 20% organic growth last year, putting up another 16% in Q1 just shows the strength of that water franchise, we have really around the world and so we see strength in all of the regions it could be yet.
Teresa: In Canada, we're seeing great opportunities from our wastewater perspective, a lot of water work here as well as the U S.
Teresa: Certainly while it is already very robust with both municipal and advanced manufacturing facilities, we see considerable growth opportunities in the <unk> space, there as well and then outside of North America, We've talked about the just the strength as we come into the <unk> program and the framework agreements in Australia, and New Zealand, So we feel very.
Teresa: Strong and positive about our water franchise moving forward, but that said it is one component of the overall diversified profile that we have and so while we do see opportunities for continued organic growth going forward.
Teresa: We at this point, we're not looking to change that guidance from the 7% organic growth CAGR for the next step the next three years.
Teresa: <unk> <unk> all of us as we move into your budgeting for Endo.
Teresa: Guidance for next year and the following year, then, perhaps we'll make an adjustment if required but we're not looking to do so at this point.
Speaker Change: So congrats and thanks for that time.
Speaker Change: Thanks Manuel.
Speaker Change: Thank you. Our next question or comment comes from the line of Devin Dodge from BMO capital markets. Mr. Dodd. Your line is now open.
Devin Dodge: Yeah. Thanks, good morning.
Devin Dodge: So good morning, I guess I asked one of your competitors with similar question earlier, but I wanted to give you a chance to address that as well so that looked at the demand environment is clearly strong across a lot of your regions you've talked about this.
Speaker Change: How do you think about the balance between pursuing the growth opportunities that are available, but requires a lot of effort to expand the workforce with being more selective in your bidding activity to drive margin expansion.
Speaker Change: Yeah.
Speaker Change: That's actually a good question, but I think we're really in a unique environment right now at Symantec, where we're focusing on both.
Speaker Change: So we are absolutely being more selective in both our project and our client selection and you can see that in the strong project margins that we've been delivering and actually even in last year in December when we rolled our three year strategic plan and targets. We increased the top end of our project margin guidance range previously from $53 to $50.
Speaker Change: 5% to 53% to 56% so we see that client selection that being more discriminating only taking the the higher higher margin projects being very very successful. We've also talked to our project managers about if you have a client that is particularly problematic.
Devin Dodge: And that day.
Devin Dodge: They pay slow they don't want to give change orders for changes in work Theyre litigious.
Devin Dodge: This is the time in the evolution of our overall company and the industry to not work for those clients and instead expand your energy on positive clients with good good projects and good project margin. So we are absolutely increasing the selectivity of the projects and clients that we're working on but.
Devin Dodge: But in the same way you've heard us say and very accurate that we are one of the lowest voluntary turnover rates in the industry and one of the highest attraction of new staff. So we are we are growing our head count growth by retaining existing staff and attracting new so that we can also take on that higher vol.
Devin Dodge: <unk> of work and grow organically.
Speaker Change: Does have that so I think there as well while it's an excellent question, we are focusing on both b.
Devin Dodge: The focus on clients and projects and on the growth component.
Speaker Change: That was excellent.
Speaker Change: Thanks for that second question I look at the double digit organic growth and the building sector I thought. It was interesting you went through some of the major projects in your prepared remarks, but what.
Devin Dodge: What are some of the subsectors that are driving that strong growth.
Devin Dodge: So a couple of in particular health care is very very strong for us and so we are <unk>.
Devin Dodge: Continuing to ramp up over the over the past number of years on that so we talked about the cancer Center in Dubai. We have also been awarded the design of the first proton therapy treatment Center in Canada, because we have a particular expertise.
Devin Dodge: From that perspective, we're seeing a lot of growth also in data centers no. We were strong in Datacenters before but then what ESD joined US we got even stronger and then with the Morrison Hershfield team joining us we're even stronger again, so we see a lot of growth in the Datacenters mission critical facilities.
Devin Dodge: And health care in particular.
Devin Dodge: Two areas that are very very strong and then of course on top of that is our focus on advanced manufacturing and so we've talked about the average house battery facility. We've talked previously about the the solar panel manufacturing facilities. So there's just an enormous amount of work out there thats really driving solid growth in our buildings business.
Speaker Change: Great. Thanks for that I'll turn it over.
Speaker Change: Thanks, Ed.
Speaker Change: Thank you.
Speaker Change: Our next question or comment comes from the line of Jacob Boot from CIBC. Mr. Boot. Your line is now open.
Jacob Boot: Good morning Gordon.
Speaker Change: This is rahul on for Jacob.
Rahul: Great Good morning.
Speaker Change: Good morning.
Rahul: So looking at organic net revenue growth strong performance in water and buildings, but noticed that growth in the infrastructure business has been creeping higher as well.
Rahul: So with with about 40% of that.
Rahul: Hey funds out of the lease.
Rahul: Are you seeing that hit the revenue line more meaningfully now and how should we be thinking about the ramp up there for the balance of the year.
Speaker Change: Yes, yes.
Rahul: So we absolutely are starting to see more iga projects being awarded we're starting to generate some revenue there, but we see that ramping up even more towards as the year progresses. So a.
Rahul: A little bit coming out now.
Rahul: Backlogs are coming up and we see that work increasing even more in the second half of the year, and then holding pretty steady even growing a little bit kind of through 25 through 28 29, So we see.
Speaker Change: Now that the ramp up is happening of course, it always took longer to get going then we industry I don't do it but we are seeing it now ramping up through the second half of the year and then moving at a pretty elevated level for the next three years to five years.
Speaker Change: Right. Okay. That's helpful.
Speaker Change: And then maybe just a question on the pace of M&A.
Speaker Change: Three deals announced so far this year.
Speaker Change: Do you expect this pace to continue in 2024 or do you now anticipate taking a bit of a pause.
Speaker Change: Focus on integration and maybe if you can comment on your overall M&A pipeline that would be helpful.
Speaker Change: Great. So.
Speaker Change: The overall M&A pipeline is is really full and just continues to strengthen and so our balance sheet is good our ability to integrate is solid so we don't seem to be taking a pause at all so we are as we always are actively in different levels of discussion with companies around the world.
Speaker Change: And so what we're maintaining our discipline and so when when the right opportunity comes around we absolutely would would pull the trigger and make that happen.
Speaker Change: Great I appreciate the responses. Thank you I'll turn it over.
Speaker Change: Thank you.
Speaker Change: Thank you our next question or comment comes from the line of Michael <unk> from <unk>.
Michael: Scotiabank Mr demand. Your line is now open.
Michael: Good morning, guys.
Michael: Good morning.
Michael: Good morning, Greg.
Michael: So maybe first question can you remind us how much of the Anr is in Canada, and just maybe discuss the moving pieces for Canada.
Speaker Change: And then just maybe as a follow on to that I think you laid out in the prepared remarks.
Michael: Comment about returning to organic growth in <unk> in the second half.
Michael: The year, just wondering if we should assume that maybe Q2 growth there should be a little squishy.
Speaker Change: Sure So I'll start there so.
Speaker Change: We had really strong growth at Anr in.
Michael: In Canada through last year working on several significant projects.
Michael: Trans mountain and others, a lot of them wrapped up near the end of last year. So we expect that of course, a little bit of revenue retraction from that but you know our backlog is really increased in that group over the over the last period of time. So we do see that coming back in the second half of last year. We're also coming off a really high comp.
Michael: You look at Q1, 2023, and Anr was a really high comp so.
Michael: We're seeing that inflation rising interest rates slow regulatory approvals, all slowing a little bit of that in western Canada in particular, but overall.
Michael: And Canada is less than 5% of the overall net revenue per center.
Speaker Change: Okay very helpful. Thank you.
Speaker Change: And then last year, the organic hires accounted for about 5% of the <unk>.
Michael: The increase in the employee base.
Speaker Change: Sure you are nearing or maybe a couple of months away from peak season. How do you think 2024 will trend versus that and I'm just wondering how much of the organic hires as in water.
Speaker Change: Maybe versus the rest of the company.
Speaker Change: Yes, but we are of course actively hiring in water, but we're actively hiring in a number of our other groups as well while water ramps up a little bit.
Speaker Change: The summer months.
Speaker Change: Some of our other groups, even ramp up more and when you get into the.
Speaker Change: Northern Hemisphere field season, environmental services gets more busy more people out in the field, but in transportation land development work out so it always depends a little bit about.
Speaker Change: The types of people you are hiring and had some seasonality impact as well so as we said in the prepared remarks, we are at a record hiring.
Speaker Change: Just a little bit off of kind of the pace, where we were last year. So we see really continued strong organic growth from a hiring perspective this year.
Speaker Change: We've also seen that.
Speaker Change: Labor pressures have come off a little bit little easier to hire people and it was a couple of years ago salary increase pressure a little bit less than it was a couple of years ago. So we're actually feeling really good about both of our ability to retain of course, but our ability to attract people and then as you've seen through our project margin pass along any salary increase.
Speaker Change: Is there any pressure, we see that way to our clients.
Speaker Change: The other interesting point just to note is that our water group has the lowest voluntary turnover rate of any of our business lines and so while we're actively hiring there. We also do while we do an incredibly good job of retaining everywhere, it's even more solid in the water franchise.
Speaker Change: Super helpful. Thank you very much.
Speaker Change: Thanks, Michael.
Speaker Change: Thank you.
Speaker Change: Our next question or comment comes from the line.
Speaker Change: Chris Murray from <unk> capital markets. Mr. Murray Your line is now open.
Chris Murray: Gordon as we said around wants to take this one but coming back to hydraulics, just talking a little bit about.
Chris Murray: Maybe in the U K water business and what that brings to you a couple of questions around that.
Chris Murray: First of all you described hydrops.
Speaker Change: As an integrated firm.
Speaker Change: And I'm wondering.
Speaker Change: Maybe get your thoughts on does that mean, there is a construction element in there that we have to be thinking about or anything like that and as also part of this.
Speaker Change: Whats hydropower competitor of yours around Amp eight or does it change how you guys can occur.
Speaker Change: Attack, maybe the rest of the EMP program as we go through the year.
Speaker Change: Yes got it great great questions, Chris So firstly on 100% with clarity they do no construction work and so when we and so when we.
Speaker Change: Talk about there being an integrated firm, they're really integrated.
Speaker Change: Fire safety energy sustainability civil structural transportation environmental Geo Tech that's why they are integrated from their perspective, but they do little to no water work, which is why there is so complementary to Stan tech there because there is very very very.
Speaker Change: Very very little overlap, but great opportunities for synergies as we can bring our water expertise to their clients. They can bring some of their expertise and MEP and fire safety and so on to our clients. So that's why we're so excited about hydro and they are a great firm with incredibly strong leadership.
Speaker Change: It would be really really additive to our operations in the UK.
Speaker Change: Okay, Great that's great I appreciate the clarification.
Speaker Change: And then the other question just very quickly.
Speaker Change: Don't know who wants to take this one but I guess Teresa you had indicated that you were thinking of retiring this year any update on the transition that you can provide us would be great.
Speaker Change: Actually no thats a good question.
Teresa: Because I fully intend to retire this year, yes. So.
Speaker Change: The selection process is continuing.
Speaker Change: Got some incredibly strong growth in internal and external candidates.
Speaker Change: We are beginning the formal interview process and we will be able to announce something to you here.
Speaker Change: When when when it's time, but.
Speaker Change: The first is just.
Speaker Change: Just going along well we've been extremely impressed with the quality of candidates that we're attracting.
Speaker Change: Alright ill leave it there thanks Brooks.
Brooks: Thanks, Chris.
Speaker Change: Thank you our next question or comment comes from the line of Michael.
Speaker Change: Sure Paul Cheng from TD Securities. Mr. <unk>. Your line is now open.
Michael: Thank you good morning.
Michael: Good morning.
Michael: Yeah.
Paul Cheng: Corridor trees, a couple of questions about project margins. So first off it looks like the improvement that you saw in the first quarter on a year over year basis was really driven by a couple of specific use namely water and buildings.
Paul Cheng: Whereas the other video you saw flat or down project margins year over year.
Paul Cheng: I guess as we're looking toward the rest of the year are the are the project margin improvement opportunities more prolific in certain <unk> and others.
Speaker Change: Yeah, I think Thats I think thats accurate.
Speaker Change: We've always pointed to.
Speaker Change: Public sector work, which is of course this is very much where transportation since it tends to be on the lower end of the project margin range that we put out their water, especially in the specialty water work that we provide and it does tend to garner those higher margins.
Speaker Change: We were flat in environmental services, but as we move into the peak season, which will be later in Q2 and really strong into Q3, I would expect to see that strength and again so.
Speaker Change: Yes, I think that is just the nature of the.
Speaker Change: The different difference that you see across the businesses.
Speaker Change: But really strong performance and as you know.
Speaker Change: In water and in buildings.
Speaker Change: Okay. That's helpful. Thank you and then.
Speaker Change: As a follow up at your Investor Day late last year, you talked about looking to reduce your sub consultant to us.
Speaker Change: Using that as a means of helping improve project margins I was wondering to what extent that is already happening. If that is a something you would expect to happen in the near term or if we should be thinking about that as more of a sort of medium.
Speaker Change: Potentially longer term opportunity.
Speaker Change: Yes, I mean, it is absolutely a longer term initiative.
Speaker Change: Let's say what we've done thus far is really have all of our business leaders.
Speaker Change: And then.
Speaker Change: The makeup of their sub consultants there has been noticed.
Speaker Change: Today, there is always going to be a requirement to a sub workout, particularly for federal work.
Speaker Change: In the U S and Canada, where you are required to allocate a portion of your contracts too.
Speaker Change: Oh under a minority owned businesses and so on.
Speaker Change: We are identifying where there are opportunities to use.
Speaker Change: Different components this downturn as opposed to billing outside so that analysis is really well underway and of course in some <unk>.
Speaker Change: It's there's a greater opportunity than than in others.
Speaker Change: I think we've got a good handle on.
Speaker Change: Where we have the opportunities and now we will move towards that over the next couple of years.
Speaker Change: Great. Thank you I will leave it there.
Speaker Change: Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone keypad our.
Speaker Change: Our next question or comment comes from the line of Maxim <unk> from NBA <unk>. Mr. <unk>. Your line is open.
Maxim: Hi, good morning.
Maxim: Good morning.
Maxim: Obviously, a very solid performance.
Maxim: On all the fronts.
Maxim: I was wondering if you don't mind, providing a bit of an update on your design center.
Maxim: <unk> and especially how we should be thinking about this sort of like the ceiling. We can contemplate over the long term because of some of the federal work I presume you are not allowed to use some of those design centers. Just wondering if you can provide a bit more color on that.
Speaker Change: Our process. Thank you so much.
Speaker Change: Sure. Thanks, Matt So so we have three.
Speaker Change: These integrated delivery center is currently our largest one is <unk>.
Speaker Change: And we've talked about before just a little bit less than 1000 people. There now we have one in Manila in the Philippines.
Speaker Change: Joining us through the Cardinal acquisition at just shy of 150 people and then we have one in visit in India that came.
Speaker Change: Came with MH Morrison Hershfield.
Speaker Change: About 75 people or thereabouts so.
Speaker Change: Combined let's call it just a little bit over 1000 people, we have plans within our three year.
Speaker Change: Target here to increase that to 2000 people that we see the opportunity to do that.
Speaker Change: In Pune, India, we've already taken the real estate, we had an additional floor plates available above us that we've taken a workplace we spin it out we've already moved people to it so.
Speaker Change: The resources are available to us. So we are actively hiring to prove that tend to move forward on that and double up relative to 2000, and we've mentioned before that when you compare <unk> the percentage of our overall global employee head count that's in our integrated delivery centers.
Speaker Change: Versus our competitors, we are probably sub scale compared to a number of our other global competitors. So we see opportunities. There now as you say there are some clients.
Speaker Change: They don't like the use of these integrated delivery centers.
Speaker Change: There is others that basically required so you have to manage the growth of that along with your client base and being clear and honest and disclose everything to them at your clients as you work through it but we still see great opportunities for further expansion there.
Speaker Change: Okay. That's very helpful. Thank you so much and maybe just a quick follow up to probably Michael's question to us of when I look at.
Speaker Change: Environmental services gross revenue versus net revenue.
Speaker Change: So on gross like the retraction and two 5% growth on net basis. So is this where we're starting to see that.
Speaker Change: Sort of in sourcing capacity.
Speaker Change: Bearing fruit, that's how should we thinking about this.
Speaker Change: I would say probably not Max I think what you saw in the first quarter, sometimes that happens where it depending on project mix.
Speaker Change: That dynamic where gross revenue level.
Speaker Change: It tracks and net revenue growth.
Speaker Change: Organically.
Speaker Change: Would not attribute that to.
Speaker Change: The longer term effort around <unk>.
Speaker Change: Okay. Okay. Thanks, a lot for conference that's it for me.
Speaker Change: Thank you. Our next question or comment comes from the line of Frederic Bastien from Raymond James Mr. Bastian. Your line is now open.
Frederic Bastien: Good morning.
Frederic Bastien: Good morning.
Frederic Bastien: Hi, guys, if we look at your footprint.
Frederic Bastien: We're still very much overweight North America, which has worked great in recent years and you're comparatively more sub scale globally.
Frederic Bastien: We take Q from the recent deals.
Frederic Bastien: You are obviously changing that but is the intent longer term too.
Frederic Bastien: To grow that 20% that you derive.
Frederic Bastien: That 20% of revenue that you derive globally.
Speaker Change: Yes, I think as we look at things.
Speaker Change: What are the opportunities that we have for continued growth certainly will come from from outside of North America that said, we still have and I think we've mentioned before in our calls that we have the opportunity based on the size of the U S market to roughly double our footprint there or even more so we are actively looking at opportunities there but outside of north.
Speaker Change: America, Youre, absolutely right and it's a big world out there and so we have opportunities to continue to grow in the U K, Australia, but then as we talked about before and up into the Nordics.
Speaker Change: And certainly while we've got an initial start in Germany with zircon create opportunities for further expansion there.
Frederic Bastien: The German market is extremely fragmented.
Frederic Bastien: The largest firm, they're only taking about 1% of the overall revenue so great opportunities for continued growth into that market. So I think we're looking at all markets Frederic and then from a disciplined perspective wherever we can find the best place to deploy capital we get good returns we will continue to do.
Frederic Bastien: To grow there.
Speaker Change: Great You beat me to my second question you answered it by disciplined so I'm all set thank you very much.
Speaker Change: Great. Thank you.
Speaker Change: Thank you our next question or comment comes from the line of Ian Gillies from Stifel.
Ian Brooks Gillies: Your line is now open.
Ian Brooks Gillies: Good morning, everyone.
Ian Brooks Gillies: Good morning.
Ian Brooks Gillies: It feels like a lot of the growth or it seems that a lot of the growth or it's going to be coming in for advanced manufacturing power data center et cetera. Can you can you talk a little bit about how easy or how challenging is going to be to repurpose. Some of your employees from other areas.
Ian Brooks Gillies: To that area.
Ian Brooks Gillies: Yes.
Ian Brooks Gillies: Well, we certainly do see growth in those areas that we're in a year.
Ian Brooks Gillies: Scribing Theres also a considerable growth in the general core areas that we had water obviously, we see transportation continuing to grow so as we look at data centers. There are some absolutely some specialty.
Ian Brooks Gillies: Disciplines required there, but we have those through the ESB acquisition through the <unk> acquisition and others.
Ian Brooks Gillies: <unk> also brings a considerable amount of specialty building services.
Ian Brooks Gillies: Do some of our Australian operations. So we actually feel really good about the overall mix of our disciplines of our employee head count in there so.
Ian Brooks Gillies: Where possible, we absolutely do cross trained and move people around but we actually see growth really broad brush across the organization being so several cross training and moving folks around isn't a huge part of what we're looking to do over the next little bit.
Speaker Change: Okay. That's helpful and then.
Ian Brooks Gillies: Obviously, you've added footprint in Germany.
Ian Brooks Gillies: Is there is there anywhere else in Europe at this juncture that youll find yourself, particularly interested in where you would like to add scale or perhaps add another leg under the stool.
Ian Brooks Gillies: Yes, I think the one area that we're continuing to look at is the northern.
Ian Brooks Gillies: And we have no presence up there currently.
Ian Brooks Gillies: In addition to <unk>.
Ian Brooks Gillies: Building out the footprint that we have now in Germany, we are still looking to see if there is a.
Ian Brooks Gillies: An entry for us up into the <unk>.
Speaker Change: Okay. That's helpful. Thanks, very much I'll turn it back over.
Speaker Change: Great. Thank you.
Speaker Change: Thank you. Our next question or comment comes from the line of Saba Hot Kang from RBC. Mr. Khan. Your line is now open great.
Speaker Change: Great. Thanks, and good morning, I was hoping as we look out to 'twenty four and into 25. If you can maybe give us some perspective on sort of the price and volume mix, presumably pricing was quite a high over the last few years is it fair to assume that volume is becoming a bigger contributor and how are the pricing discussions going with some of your customers that is new work.
Speaker Change: Is up for bid and or maybe places where youre looking to get price increases.
Speaker Change: Yeah, So a couple of things there. Thanks.
Ian Brooks Gillies: As we think about pricing certainly were able to reflect in our pricing the increases that we see from from for the most part for from salary increases you can see that because project margins continue to stay the same or even increase a little bit. So what we're hearing from clients. Now is of course, there is always price sensitivity in our.
Ian Brooks Gillies: Business, but.
Ian Brooks Gillies: Clients that we're talking to now are more concerned about schedule.
Ian Brooks Gillies: And you get the work done within the timeframe that are required.
Ian Brooks Gillies: Of course with high quality is still important but and of course pricing is important but it's really the schedule is the primary driver right now so that gives us and the overall industry a little bit of opportunity here.
Ian Brooks Gillies: Some tail winds on pricing again.
Ian Brooks Gillies: It's still it's still competitive space no one gets to raise their own ticket but.
Ian Brooks Gillies: We do have some opportunities with some tailwind as the pricing over the next several years.
Speaker Change: And then just a follow up to that presumably you're able to reallocate staff.
Speaker Change: Across regions and your leverage our international centers, but are there any areas of your business, where you are seeing a bit of labor tightness, where you're most focused on for hiring the demand might be outpacing supply.
Speaker Change: No not really.
Speaker Change: And where there is a lot of great demand like in water. For example, we are so strong in water that we continue to attract the best and brightest there so where there is a little bit of additional tightness were very strong. So yes. There is no particular areas that I can think of that.
Speaker Change: That are of concern for us.
Speaker Change: Okay, and then just one last quick one I guess.
Ian Brooks Gillies: There's a view out there that would wrap up and <unk> expect over the next 12 to 18 months and we would talk about the end markets, where you are starting to see some of that money shopping customer had been where the kind of the rfps with rfps are getting going I'm, just trying to get a perspective of which end markets. We could see some acceleration in the U S for yourself and maybe it was broader than <unk>.
Ian Brooks Gillies: Thanks.
Speaker Change: Yes, yes, and so we're starting to see primarily in the transportation space with department of the state departments of transportation and so on the local and local municipal government as well. So we see that ramp up in transportation and we're starting to see southern water as well, but when you look at the overall.
Ian Brooks Gillies: <unk> funding the majority of it is transportation related so I think we will see a gradual runoff in transportation.
Ian Brooks Gillies: <unk> seen that state dot budgets are up roughly 12% already this year and part of that will be through <unk>. So we will see that ramp up into the second half of this year and the hold steady for the next several years.
Ian Brooks Gillies: What are kind of coming along as well but of course at a smaller level supported by <unk>.
Ian Brooks Gillies: But still water very very robust due to the other drivers that we're seeing there.
Speaker Change: Great. Thanks very much.
Speaker Change: Great. Thanks, Adam.
Speaker Change: Thank you I'm showing no additional questions in the queue at this time I would like to turn the conference back over to Mr. Johnston for any closing remarks.
Johnston: Great well, thank you operator, and thanks, everyone for joining us this morning and in follow ups should you have any questions. Please contact just newkirk, our VP of Investor Relations is always available to take your calls.
Speaker Change: Thank you. Thank you ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
Speaker Change: Standby.
Johnston: Okay.
Johnston: [music].
Johnston: Okay.
Ian Brooks Gillies: Yes.
Ian Brooks Gillies: [music].
Ian Brooks Gillies: Okay.
Ian Brooks Gillies: Mhm.
Ian Brooks Gillies: Sure.