Stantec Inc

Good day, everyone, and welcome to Stantec's fourth quarter 2020 earnings results 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 investor section at stantec.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 20-second delay between the call and the webcast. All information provided during the conference call is subject to the forward-looking statement qualification set out on slide two, detailed in Stantec's management discussion and analysis and incorporated in full for the purposes of today's call. 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. Gordon Johnston. Please go ahead, sir.

Good morning, and thank you for joining us. I'll begin our call today with a look back at 2020, review our progress over the year, and provide an update on fourth quarter business performance. Teresa will then delve deeper into the financial results and review our 2021 targets, and then I'll return to provide closing remarks. In 2020, a year marked by unprecedented business disruption caused by the COVID-19 pandemic, Stantec continued to demonstrate our operational resilience. The diversity of our business, our global reach and our deep connections to our employees, clients and communities served us strength as we weathered the storm. The world has changed over the past year and there's been a shift in priorities. Sustainable development is now even more of a priority for governments, organizations, and investors around the world. And that's why I'm so proud that Stantec was named the fifth most sustainable company in the world and the first in North America by Corporate Knights. Operating sustainably is good for our employees, good for the environment, and good for the bottom line. With our continued focus on operational performance, we came into 2020 well positioned. and our focused execution throughout 2020 drove the best financial performance in Stantec's 65 year history. We've also laid the foundation for future earnings growth through the value creators of excellence, people, innovation and growth, which are the cornerstones of the strategic plan we rolled out at the end of 2019. Despite the disruption caused by the pandemic, we were able to deliver revenues that were consistent with 2019 as a result of the dedication of our employees and our focus on efficient project delivery. Through solid project execution and exceptional cost management, we delivered a strong 15.7% adjusted EBITDA margin. Lower interest costs resulting from strong cash flow management and tax recoveries recognized in the fourth quarter further contributed to a 10% year-over-year increase in adjusted diluted earnings per share to make 2020 a record year. We exited 2020 with an enviable backlog that grew organically by 3.1% year-over-year to $4.4 billion, representing approximately 11 months of work. We've resumed growing through acquisition after a pause early in the pandemic. We completed three transactions in the fourth quarter of 2020 and last week we entered into an agreement to acquire GTA Consultants which grows our presence in Australia by more than 10%. These strategic acquisitions have added almost 600 employees to the Stantec family in the last four months. Our balance sheet and M&A pipeline remain strong and we remain well positioned to grow through acquisition in 2021. We also achieved a key milestone in the fourth quarter by establishing and defining our 2023 real estate strategy. Informed by our sustainability targets and our desire to be an employer of choice, our objective is to design the workplace of the future. This includes offering flexible work arrangements, leveraging our top tier in-house workplace design talent, and embracing new tools to facilitate distributed work. Our strategy is informed by both a survey of our employees preferred work arrangements and a detailed review of our entire office lease portfolio. Our 2023 real estate strategy has two major components. The first component is the lease space no longer required by the business and we expect this to drive an increase in EPS of approximately 10 cents per share in 2021. The second component of our strategy is to implement our flexible workplace model as leases naturally expire over the next three years. Approximately half of our office space portfolio expires over this three-year period. And with this further reduction in our occupancy footprint, we expect to increase EPS by an additional 25 to 30 cents by the end of 2023. and from a square footage perspective, this translates to an approximate 30% reduction in our existing real estate footprint by 2023. So you can see why we're so excited about this initiative. It supports our objective to design the workplace for the future. It provides our employees with the opportunity for a more flexible work arrangement. It helps to achieve our sustainability objective and it delivers real value to shareholders, adding EPS of 35 to 40 cents over the next three years. Our real estate strategy will play an important role in lowering office space emissions in support of our commitment to achieve carbon neutrality for 2022 and net zero for 2030. The efficiency of our operations, our profitability, and our sustainability are all woven into our long-term strategy. We consistently come out on top in sustainability ratings across multiple independent third parties. In addition to our corporate NICE ranking, Stantec is rated as a climate leader with an A-minus score by CDP and we're the only firm in our space that has achieved that rating for the last three years. And this illustrates that sustainability isn't something new for Stantec. It's been part of our DNA for decades. Our ISS ESG quality score continues to outperform our peers year after year and our Sustainalytics rates our ESG score as low, which again is top of class. Now turning to the performance of the business. Revenue held up quite well in the United States for both a quarter and a year. We saw modest growth in our water business through expansion efforts into our Pacific and U.S. markets in particular. Growing urban populations and climate change are resulting in significant water scarcity situations. And as an example, we estimate a spend of $15 to $20 billion over the next 15 years in Southern California alone to address water scarcity. In October, we announced that we're leading the Pure Water San Diego program, a multi-billion dollar initiative to supply local, sustainable water to San Diego's 1.4 million residents. And in addition to this, Stantec is the prime consultant for the treatment-related works on the Metropolitan Water District of Southern California's Regional Recycled Water Program. And we've also been selected as a key sub-consultant on the City of Los Angeles' Hyperion 2035 program. Stantec is the only consultant with a leading role in these three ongoing flagship projects. Growth in our energy and resources business was driven by a continued wrap-up of renewable power projects. And we see significant opportunities for Stantec's energy and resources and environmental services business going forward, with the U.S. officially rejoining the Paris Climate Accord. Partly offsetting this growth was the continued wind-down of several major transportation projects. In addition, our buildings business is still being impacted by the pandemic, but we're beginning to see growing momentum in the pivot towards e-commerce, healthcare, and other sectors, including the U.S. federal government. Our business development pipeline was very active during the fourth quarter. And in addition to the pure water contract I just touched on, we also announced that we're the prime consultant as part of a P3 team for six public schools in Maryland. We were awarded the design and rehab of nine key bridge projects. And earlier this week, we announced our lead designer role for a heavy repair and overhaul facility design build project for the Washington Metropolitan Transit Authority. Revenue generation in Canada was solid due to our strong focus on our clients and account management programs. We saw organic growth in our water and environmental services businesses during the fourth quarter, partly offsetting a contraction in energy and resources, buildings and infrastructure. We've seen a growing focus on water infrastructure, particularly around irrigation and improved water management, and our teams have recently been awarded two large irrigation projects in Western Canada. We signed three major hospital contracts in the quarter, including our role on the St. Paul's Hospital project in Vancouver, demonstrating our growing momentum around the pivot to healthcare currently taking place in our Canadian buildings. We also announced our participation in the 360 Transit Alliance joint venture during the quarter, which will oversee an estimated $28.5 billion in capital investment for Toronto's transit infrastructure. Organic growth in our UK water business was driven by the wrap-up of the AMP7 frameworks through 2020. We've increased our market share of these five-plus year frameworks, winning most of the key water utilities in the UK, including Thames Water, which is the largest UK utility and serves roughly 15 million customers. The AMP7 frameworks we've secured total approximately $120 million a year across the UK business, securing our backlog to 2025 and beyond. Australia and New Zealand have also begun to adopt the service delivery model and in 2020 we won key programs with utilities like Sydney Water, Melbourne Water and Brisbane Water in Australia and with Christchurch, Wellington and Watercare in New Zealand securing our backlog to 2023 and beyond and totaling roughly 70 million dollars a year. Transportation stimulus funding in the UK and New Zealand are fueling the infrastructure business in these regions and our recent acquisitions have strengthened our ability to participate in these key projects. In addition, growth in our global power and dams and mining business also helped to offset a pandemic related weakness in our global environmental services and building businesses. During the quarter, we signed several projects funded by European development agencies, including a contract for the conceptual design of the multipurpose port on Kirimati Island and on West Africa's regional transportation governance project. And we're also awarded the Somerset Dam Improvement Project in Queensland, Australia. And with this award, we are currently working on virtually every major dam improvement project in Australia. Overall, our business performed very well in 2020, and we entered 2021 with growing optimism thanks to the strength of our client relationships, solid backlog, and the positive trends impacting many of our business operating units. And with that, I'll turn the call over to Theresa for a review of our financial performance and our outlook.

Thanks, Gordon. Good morning, everyone. Adjusted net income from continuing operations for the fourth quarter increased 28%. Thank you. Thank you. Our solid adjusted EBITDA margin of 16.1% was bolstered by approximately 50 basis points as a result of the recovery of claim costs on a historical project. But even excluding this non-recurring item, adjusted EBITDA was very solid, reflecting our success in mitigating COVID-19's impact on organic net revenue growth and growth margins.