Stantec Inc. (NYSE:STN) Q1 2023 Earnings Call Transcript May 11, 2023

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 Jang, Executive Vice President and Chief Financial Officer. Stantec invites those dialing in to view the slide presentation which is available in the Investors section at stantec.com. Today’s call is also webcast. [Operator Instructions] All information provided during this conference call is subject to the forward-looking statement qualification set out on Slide 2, detailed in Stantec’s management’s 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.

Gord Johnston : Good morning, and thank you for joining us today. I’m happy to report that we are off to an excellent start for the year. We delivered net revenue growth for the first quarter of 17%, reaching $1.2 billion. This was driven by over 12% organic growth. Market dynamics 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 & Resources. These results reflect our strong market positioning as we continue to build on the macro themes of aging infrastructure, climate change and re-shoring of domestic production.

Looking at our operating regions, net revenue in the U.S. increased 21% with organic net revenue growth of 14%. Robust public and private sector spending continues to drive growth. 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 & Resources. Our Water business continues to be a leader in the U.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 & Resources continue to drive growth through the acceleration of mining and significant reservoir and dam projects.

In community development, demand for industrial and residential units built specifically for rental have spurred growth. Overall, the U.S. had a very strong quarter with the key themes that we’ve spoken about previously, continuing to play out. In Canada, we achieved 11% organic net revenue growth. Environmental Services was driven by project permitting, archeological investigations, environmental impact assessment work in the renewable energy sector. Our Water business continue to provide services for climate change resilience, including work surrounding Toronto’s basement flooding program. Both Environmental Services and Water achieved close to 20% organic net revenue growth. Energy & 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 & Resources delivered robust organic growth through heightened levels of activity driven by the ongoing demand for copper and other metals that support the increasing imperative for the energy transition. Before turning the call over to Theresa, I want to share that our Buildings group was recently ranked #2 overall in Modern Healthcare’s top construction and design firms. 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 building team is doing in healthcare. And now I’ll turn the call over to Theresa to review our financial results in more detail.

Theresa Jang: 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 $1.5 billion and $1.2 billion, respectively. Project margin for Q1 was 53.7%, in line with our expectations. 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. Adjusted EBITDA margin was 14.6%, a 10 basis point increase over Q1 2022. As a result of very strong share price appreciation in Q1, we did have a significant mark-to-market expense related to the revaluation of our long-term incentive plan.

Without this, our adjusted EBITDA margin would have been 15.2%. Strong revenue growth and lower admin and marketing expenses as a percentage of net revenue drove first quarter diluted EPS of $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. Operating cash flow for the quarter came in at $37 million, an increase of $31 million over Q1 ’22. Operating cash flow was driven by the strong revenue growth we achieved this quarter, partly offset by our short-term employee incentive payments, which always occur in the first quarter.

DSO at the end of March was 81 days, consistent with year-end ’22, and our net debt to adjusted EBITDA was 1.6x 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 that for the fourth straight year, we’ve increased the portion of our gross revenue, that’s aligned with the UN sustainable development goals. For 2022, we determined this to be 60%, 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.

Gord Johnston : Thanks, Theresa. In Q1, we grew backlog to $6.2 billion, in line with our previous all-time high. This is an increase of 15% from Q1 2022 and an increase of 6% since the end of last year. Our U.S. segment delivered over 9% organic growth in backlog this quarter, with most of that growth in Environmental Services, Water and Buildings. Growth in Environmental Services backlog stems from strong tailwinds in the marketplace, augmented by robust cross-selling and collaboration with our other business units to provide services such as environmental permitting and archeological work for large infrastructure projects. Backlog in water was driven by wins related to wastewater treatment solutions and water requirements for power generation that will support the energy transition.

Buildings also had strong backlog growth in the quarter, generated through wins in advanced manufacturing, education and healthcare. Our backlog represents approximately 13 months of work. As our backlog demonstrates, momentum continues to build based on investments 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. The Coire Glas 1,500-megawatt pumped storage project in Scotland is the first large-scale pumped storage project to be developed in the UK in more than 40 years with more than double current existing storage capacity, greatly supporting the energy transition and the climate change and sustainability imperative.

The Veterans Memorial Bridge in Kentucky was constructed back in 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 that’s driving public and private investments. Looking at the rest of the year, we remain confident that we will achieve the financial targets that we set out in February.

This includes delivering mid to high single-digit organic net revenue growth, driven primarily from our significant position in the U.S. While the U.S. remains as our top growth market for the year, we continue to expect solid growth in our Global segment and high levels of activity in Canada. And we’re focused on driving bottom line growth that meets or exceeds our top line growth. 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?

Q&A Session

Operator: [Operator Instructions] Our first question comes from Chris Murray with ATB Capital Markets.

Operator: [Operator Instructions] Our next question comes from Sabahat Khan with RBC.

Operator: [Operator Instructions] Our next question comes from Ian Gillies with Stifel.

Operator: Our next question is the follow-up question from Sabahat Khan.

Operator: Our next question comes from Frederic Bastien with Raymond James.

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.

Gord Johnston : 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 day.