Stantec Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 11, 2023

There are 7 speakers on the call.

Operator

Welcome to Stantec's First Quarter 2023 Earnings Results Webcast and Conference Call. Leading the call today are Gord Johnston, President and Chief Executive Officer and Theresa Zhang, Executive Vice President and Chief Financial Officer. Stantec invites those dialing in to view the slide presentation, which is available in the Investors section atstantec.com. Today's call is also webcast. Please be advised that if you have dialed in while also viewing the webcast, you should mute your computer as there is a delay leading the call and the webcast.

Operator

All information provided during this conference call is subject to the forward looking statement qualification set out on Slide 2. Detailed Instantec's management discussion and analysis and incorporated in full for the purposes of today's call. Unless otherwise noted, dollar amounts Discussed in today's call are expressed in Canadian dollars and are generally rounded. With that, I am pleased to turn the call over to Mr. Gord Johnston.

Speaker 1

Good morning and thank you for joining us today. I'm happy to report that we're off to an excellent start for the year. We delivered net revenue growth for the Q1 of 17%, reaching $1,200,000,000 This was driven by over 12% organic growth. Market dynamics remained very favorable over the quarter and through strong operational performance, we were able to deliver double digit organic net revenue growth in each of our geographic regions. We also delivered solid organic growth in each of our business segments, most notably in water, which generated over 24% organic growth, 11% in buildings and 16% in energy and resources.

Speaker 1

These results reflect our strong market positioning as we continue to build on the macro themes of aging infrastructure, climate change and reshoring of domestic production. Looking at our operating regions, net revenue in the U. S. Increased 21% with organic net revenue growth of 14%. Robust public and private sector spending continues to drive growth.

Speaker 1

We also benefited from the strong U. S. Dollar in the quarter, which contributed approximately 7% of the increase in net revenue. We saw double digit growth in water, buildings and energy and resources. Our water business continues to be a leader in the U.

Speaker 1

S, achieving significant wins across all megatrends, including water reuse, climate resiliency and large scale water security projects. Buildings continues to be very active based on momentum from investments in healthcare, civic, industrial and the science and technology sectors and Energy and Resources continues to drive growth through the acceleration of mining and significant reservoir and dam projects. And Community Development, demand for industrial and residential units built specifically for rental has spurred growth. Overall, the U. S.

Speaker 1

Had a very strong quarter with the key themes that we've spoken about previously continuing to play out. In Canada, we achieved 11% organic net revenue growth. Environmental Services was driven by project permitting, and Environmental Impact Assessment work in the renewable energy sector. Our water business continued to provide services and Climate Change Resilience, including work surrounding Toronto's basement flooding program. Both Environmental Services and Water achieved close to 20 percent organic net revenue growth.

Speaker 1

Energy and Resources delivered double digit growth with strong activity related to the energy transition, including projects in power transmission and distribution, as well as a large renewable energy project in Western Canada. Our global operations delivered another quarter of solid revenue growth. Net revenue grew 15% with organic growth of over 10% and acquisition growth of 5%. Our water business continues to capitalize on long term water framework agreements and Public Sector Investments in the UK, New Zealand and Australia. Energy and Resources delivered robust organic growth through heightened levels of activity driven by the ongoing demand for copper and other metals that support the increasing imperative for the energy transition.

Speaker 1

Before turning the call over to Teresa, I want to share that our Buildings Group was recently ranked number 2 overall in Modern Healthcare's top construction and design and Burns. Modern Healthcare is the industry's leading source of healthcare business and policy news, research and information. And this is a global ranking and it clearly demonstrates the great work our buildings team is doing in healthcare. And now, I'll turn the call over to Theresa to review our financial results in more detail.

Speaker 2

Thank you, Gord. Good morning, everyone. As Gord noted, we delivered solid first quarter results. We grew both gross and net revenue by 17% to $1,500,000,000 $1,200,000,000 respectively. Project margin for Q1 was 53.7 percent, in line with our expectations.

Speaker 2

Project margin in Canada and the U. S. Remained strong, while we experienced a few challenges in our global operations, none of which were individually material. We expect project margin in Global to strengthen in the coming quarters. And adjusted EBITDA margin was 14.6%, a 10 basis point increase over Q1 2022.

Speaker 2

As a result of very strong share price appreciation in Q1, we did have a significant mark to market expense related to the revaluation of our long term incentive plan. And without this, our adjusted EBITDA margin would have been 15.2%. And strong revenue growth and lower admin and marketing expenses as a percentage of net revenue drove 1st quarter diluted EPS of $0.59 compared with $0.40 in the prior year and adjusted diluted EPS of $0.73 compared with $0.61 last year, an increase of 20%. Excluding the mark to market LTIP revaluation expense, adjusted diluted EPS would have been $0.78 and would have resulted in an increase of 28% over the prior year. Looking at our liquidity and capital resources, and Corporate cash flow for the quarter came in at $37,000,000 an increase of $31,000,000 over Q1 'twenty two.

Speaker 2

Operating cash flow was driven by the strong revenue growth we achieved this quarter, partly offset by our short term employee incentive payments, which always occur in the Q1. DSO at the end of March was 81 days consistent with year end 2022 and our net debt to adjusted EBITDA was 1.6 times in the middle of our target range and also consistent with year end 2022. Before I hand it back to Gord for final remarks, I'd like to draw your attention to our 16th Annual Sustainability Report, which we released last month. Our sustainability report is a wonderful resource that reviews all of the amazing work we're doing to achieve our ESG ambitions. We're particularly proud to report and for the 4th straight year, we've increased the portion of our gross revenue that's aligned with the UN Sustainable Development Goals.

Speaker 2

For 2022, we determined this to be 60%, up from 53% in 2021, a 13% increase. We also achieved our goal of operational carbon neutrality across our entire business. But there is so much more information contained in this report. I encourage you to take some time and look through it. With that, I'll turn the call back to Gord.

Speaker 1

Thanks, Teresa. In Q1, we grew backlog to $6,200,000,000 in line with our previous all time high. This is an increase of 15% from Q1 2022 and an increase of 6% since the end of last year. Our U. S.

Speaker 1

Segment delivered over 9% organic growth in backlog this quarter with most of that growth in Environmental Services, Water and Buildings. Growth in Environmental Services backlog stems from strong tailwinds in the marketplace, augmented by robust cross selling and collaboration with our other business units to provide services such as environmental permitting and archaeological work for large infrastructure projects. Backlog in water was driven by wins related to wastewater treatment solutions and water requirements for power generation that will support the energy transition. Buildings also had strong backlog growth in the quarter, generated through wins in advanced manufacturing, education and Healthcare. Our backlog represents approximately 13 months of work.

Speaker 1

As our backlog demonstrates, momentum continues to build based on investments spurred by government stimulus around the world. Looking at some of our major project wins, each of these follows the key trends that we've been discussing. In Q1, We won additional work on semiconductor fabs and in advanced manufacturing, including the Q Cells project, which we mentioned back in February. And the Coriglas 1500 Megawatt Pump Storage Project in Scotland is the 1st large scale pump storage project to be developed in the UK in more than and 40 years. He will more than double current existing storage capacity, greatly supporting the energy transition and the climate change and sustainability imperative.

Speaker 1

The Veterans Memorial Bridge in Kentucky was constructed back in 1936 and it currently carries more than twice its intended daily capacity. The redesign of this bridge will strengthen the aging infrastructure and provide safe multimodal crossing for vehicles, bicycles and pedestrians. And just last week, we announced our appointment to the Homes England Development and Regeneration Technical Services Framework. We expect this appointment will bring us significant amount of work over the next 4 years in community development as we continue to support Homes England in building sustainable and resilient communities. These are just a few examples that demonstrate the continued momentum and Chief Executive Officer.

Speaker 1

Looking at the rest of the year, we remain confident that we will achieve the financial targets that we set out in February. This includes delivering mid to high single digit organic net revenue growth, driven primarily from our significant position in the U. S. While the U. S.

Speaker 1

Remains as our top growth market for the year, We continue to expect solid growth in our global segment and high levels of activity in Canada. And we're focused on driving bottom line growth that meets and the company's Chief Executive Officer. 2023 is shaping up to be another excellent year for Stantec. And with that, I'll turn the call back to the operator for questions. Operator?

Operator

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

Speaker 3

Yes. Thanks folks. Good morning. Gord, maybe turning back to

Speaker 1

your comments around organic growth and the backlog. Obviously,

Speaker 3

the U. S. Very, very strong, but in the quarter anyway, Canada was Pretty weak and so wins Global. Can you talk a little bit about your thoughts around what we should be seeing and As we move further into the year, maybe each of those regions outside the U. S.

Speaker 3

And is there anything any cost Concerned here or anything particularly odd happening, or is this just maybe a timing issue?

Speaker 1

Yes, I think it's mostly a timing issue, Chris. We had strong organic growth in both of those regions, both over 10%. And there's going to be a little bit of lumpiness when you look between organic growth and backlog. So we're not really concerned. In Global, we had the backlog was a bit retracted a touch there, Primarily due to the timing of AMP cycle stuff in the UK.

Speaker 1

So we're not really concerned with backlog in other locations. We're really confident in our projections for 2023. We think we have a considerable number of opportunities Really that we're working on in all of our regions. Okay. So just even though

Speaker 4

the global Global backlog has been going a

Speaker 1

little bit negative. You don't feel like you're going to burn the backlog faster than you can replace it, at least in

Speaker 3

the near medium term, right?

Speaker 1

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

Speaker 3

Okay. All right. That's helpful. Thank you.

Speaker 1

And

Operator

We'll pause for a moment to follow the Q and A roster. And Our next question comes from Sabahat Khan with RBC. Your line is open. Great.

Speaker 4

Thanks and good morning. I guess just looking I guess closer at the U. S. Market, can you maybe give a little bit of color around where you are with the backlog, which end markets are contributing most? And more importantly, I At this point in the macro environment and with some of the bills pending, where are you seeing opportunities as it relates to your backlog stuff that might not already be in there?

Speaker 4

Thanks.

Speaker 1

Yes. Thanks, Ava. So in the U. S, we did have over 9% backlog growth organically in the quarter and we saw backlog growth in all of our business operating units, strongest backlog growth in Water, Buildings and Environmental Services, and both well into double digits, all of those. So, but we're seeing a pretty broad base across all of the groups.

Speaker 1

And We're really bullish on the U. S. Growth. A lot of the IIJA work has not yet come or has not yet fully baked in or built into the into our backlog there. We see that starting to come more and more.

Speaker 1

You may have seen a recent announcement that the EPA has now funded roughly CAD7 1,000,000,000 sent out to The Water Group, dollars 6,000,000,000 of that came from IIJA. So that's going to just further strengthen the backlog growth in Water going forward as well.

Speaker 4

Great. And then just looking, I guess, on the M and A front, I didn't see a lot of mention of Cardinal assuming the integration there is largely done. How are you looking sort of at the M and A horizon right now? And one of the things we've noticed across the and some of the medium to large size transactions quite a bit. Is it just the valuations are at the right place?

Speaker 4

Is there more of the companies such as yourself in the integration phases. Kind of what do you think on the M and A horizon? Curious where the private sector multiples are at? And just your appetite

Speaker 1

and we're ready for a

Speaker 4

transaction at this point looking beyond Cardinal.

Speaker 1

Yes. So in addition to focusing on backlog growth operational efficiency, We're really focused on our M and A program. And you said that and you're right, there's been a little bit of slowness in some of these transactions, but I think that's just timing issues. The market remains quite robust. The M and A funnel also quite full.

Speaker 1

So I think that We're continuing to stay active. You can see that we've got some dry powder that's ready to take action when the right Opportunity comes along for us. Again, we're maintaining our discipline. But yes, we're ready to transact when the right opportunity comes along.

Speaker 4

And then just one last quick one from me. I guess given your U. S. Exposure, obviously, there's a bit of noise on the U. S.

Speaker 4

Side with the government potentially hitting a bit of a wall on the debt ceiling side. The organic growth there looks good, the backlog is building. But I guess as you look over the medium term, is that something that could potentially be an issue or given the funding that's in the system, you don't necessarily see it as a near term concern given all the bills, etcetera, that are already in the works?

Speaker 2

Yes, I think that last part you mentioned Saba is where we are. So we don't see that there would be any short term impact. The projects that are underway are funded, funds have been dispersed. And so it's a bit of a question around if There is a shutdown. How long will that last?

Speaker 2

And our expectation is that it wouldn't be prolonged. And so there might be a slight impact over the medium or longer term with respect to projects that are coming to market, But we really don't anticipate that there would be any significant impact to us.

Speaker 4

Great. Thanks for the color. I'll pass the line.

Speaker 5

Thanks, Helen.

Operator

One moment for our next question. Our next question comes from Ian Giles with Stifel. Your line is open.

Speaker 6

Good morning, everyone.

Speaker 1

Good morning, Ian.

Speaker 6

Gord, the employee count corporately is kind of been around 26,000 employees as reported for the last three quarters. Can you maybe talk about some of the dynamics with respect to adding people and what's transpiring there and how it pertains to backlog growth and revenue, etcetera, and how you're managing that dynamic?

Speaker 1

Yes. We continue to hire far more people than leave than are leaving us. And so our headcount continues to grow. In fact, We had the highest hiring quarter ever in Q1 of this year. So we continue to see that growth.

Speaker 1

We often and The number will come up in the summer. We're typically over 27,000 in the summer because we have our seasonal staff and it drops down to 26,000 as those folks go back to college and university. So I think we are feeling good about our ability to both recruit and retain employees. And I think that will help us to continue to service the backlog. We are seeing We're not seeing as much wage pressure as we've seen previously.

Speaker 1

We're seeing that the pendulum maybe swing them back a little bit from where it was very much in favor of the employee. A year or 2 ago, we're seeing it come back to a little bit more of and our voluntary turnover rates really have tapered off and settled over the last couple of and headquarters. So we're actually feeling pretty good about from a headcount perspective. We continue to grow in our offices, our delivery centers in Pune, India. We're up well over 700 people there now might be approaching 750.

Speaker 1

So that's only almost a doubling of the size of that group over the last couple of years and we see continued opportunities to grow there. So, no, I think we're feeling pretty good about the from a staffing perspective. We still talk about it every day, of course, because that's our number one asset, but we're feeling in pretty good shape with it.

Speaker 6

Got it. That's very helpful. Maybe switching gears to Canada, Q1 organic growth was very strong. Guidance obviously hasn't really moved there. You've reiterated your confidence, but is there potential that there's revenue or and contraction as we move into the back half of the year in that region.

Speaker 6

I'm just trying to tie out what happened in Q1 versus what may transpire for the remainder of the year.

Speaker 2

Yes. I mean, I think, Ian, what we saw in Q1 was certainly positive, and we're Really pleased with the performance there. And I think what we saw was some carryover effect from the momentum we saw in Q4 and some projects a little bit less sensitive to seasonality or the cold weather. And so that stuff was very helpful for Canada. And so we haven't changed our guidance for the rest of the year.

Speaker 2

It's still early in the year and we do have some projects that are kind of reaching that ramp down and others that are we're expecting to ramp up in the year. So that always causes a little bit of slowdown and restart. So it is currently our expectation that we will see that growth moderate a bit over the course of the rest of this year. But we'd be happy to see it continue to be as strong as it was in Q1. So we'll see how it plays out.

Speaker 6

Certainly. Well, thanks very much. I'll turn the call back over.

Operator

One moment for our next question. Our next question is a follow-up question from Sabaat Khan with RBC. Your line is open.

Speaker 4

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

Speaker 2

Yes, I mean the philosophy really hasn't changed Saba. Of course, we're pretty happy with where the share price is trading at. But overall, M and A remains our top focus in terms of capital deployment. And And so that's there's really no altering of the approach there. We want to be doing accretive and M and A transactions.

Speaker 2

We will go into the market when we see that there's some dislocation there and be opportunistic about that approach. But we're also focused on maintaining solid leverage, so keeping our cash flow deployed toward paying down and revolver every opportunity we get. So again, not a change there in strategy.

Speaker 4

Okay, great. And then there's a bit of discussion earlier around the U. S. Side. I want to switch a bit more over to the U.

Speaker 4

K. The AMP programs obviously are contributing for you, but I'm curious and how the demand trends and the outlook is for some of the other end markets in that region where you operate.

Speaker 1

Sure. Well, you mentioned the AMP program. So we're in the middle of AMP7 certainly and we're robust growth there. We continue to hire to service the AMP7 demands. But we're beginning to see some clients begin to recompete for AMP-eight and we've been successful in securing those.

Speaker 1

Other areas of the U. K, there's a lot about discussion about the U. K. Housing market. And if you're reading in the papers lately, Some people have said they're going to take off the numbers that they need to continue to build.

Speaker 1

Others have said we need to put those back on. But I think so we're seeing a little bit of softness there. But I think we've mentioned before the permitting process for housing in the UK It's quite onerous and takes quite some time. So once you begin to develop a project, you typically keep going through till you get your permitting. And I I think we feel particularly good with that U.

Speaker 1

K. Housing market with our appointment to that Homes England 4 year framework that we talked about. And Homes England is really looking to push increasing housing stock there. So that's going to I think be very, very positive for us for the next 4 years. And Those would be our 2 largest end markets there would be the community development group that we talked about and water.

Speaker 1

And Cretaceous side. We have some good wins there with Highways England that they continue to deliver. So I think we're feeling okay about the UK, but we're certainly keeping And I own it, absolutely.

Speaker 4

And just one last one for me. On the U. S. Side, obviously, the other big bill out there is the IRA. I think think you've announced a large solar project win there.

Speaker 4

Just curious, what are some of the other buckets within the IRA where you're pursuing projects or opportunities, whether it's by end market or and type of project, just some color there please.

Speaker 1

Yes. The IRA really is supportive of sort of a transition and to Green and More Renewable Power. So there's a number of different projects that we're talking to our clients about. There There's opportunities, there's an extension of project start dates and production tax credits for wind and solar and geothermal, biomass, hydrocarbon sorry, hydropower projects, carbon sequestration. So we're in discussions with clients on all of these.

Speaker 1

There's the IRA has and Expands credits for clean hydrogen, renewable fuels, EV, charging infrastructure. So there's a lot of opportunities there And we're in discussion with clients on really any number of these projects.

Operator

Thanks very much for that.

Speaker 1

Thanks, Evan.

Operator

One moment for our next question. And our next question comes from Frederic Bastien with Raymond James. Your line is open.

Speaker 5

Good morning.

Speaker 1

Good morning, Richard.

Speaker 5

Just and Question, big picture here. If all else equal, where would you look to deploy your next dollar on M and A? And secondly, I mean, If we fast forward 5 years out, does the revenue profile of Stantec look different from here in terms of geographic exposure? Thank you.

Speaker 1

Yes. So we've talked about before the number of opportunities that we have around the world, But I think some of the biggest opportunities we still have are in the United States. So as we're looking for and Chief Executive Officer. We're certainly in discussion with folks in the U. S, but that doesn't in any way negate the continued discussions that we'd be having in Canada and from a global perspective.

Speaker 1

So, but you're right, if I had $1 I'd probably spend it on buying a company in in the U. S. Right now. But as you know, we're in a pretty good shape. Our leverage so we have more than $1 So we continue to have multiple discussions with firms around the world.

Speaker 1

And then from overall, what would the revenue profile look like? I think we're pretty comfortable with where we are with those and taking advantage of the big programs where they're coming in infrastructure, water, buildings and so on, environment certainly. So we're going to continue to focus on the megatrends, but I would not expect our net revenue profile to be significantly different in the if we look out 5 years from now.

Speaker 5

Great, thanks. That's all I have.

Speaker 2

Thanks, Robert.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to Gord for any closing remarks.

Speaker 1

Great. Well, thanks everyone for joining us This morning, we're really pleased with our Q1 results and are very optimistic about the remainder of 2023. So Thanks again for joining us and we look forward to catching up with you as the year progresses.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful

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