Stantec Inc

Welcome to Stantec's first quarter 2021 earnings result conference call. Leading the call today are Gord Johnston, President and Chief Executive Officer, and Teresa 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 a webcast. Please be advised that if you are 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 this conference call is subject to the forward-looking statement qualifications 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'm pleased to turn the call over to Mr. Gord Johnston.

Well, good morning, and thank you for joining us. Stantec delivered solid performance in the first quarter as we continued to execute on our strategic plan. Our focus on excellence delivered increased earnings, improved margins, and strong cash flows. As we look forward, we're seeing solid signs of recovery, with outstanding backlog growth across all of our business units and a book-to-burn ratio of 1.2 for the quarter. Altogether, backlog grew organically by 5.8% from the end of 2020 and now sits at $4.6 billion. Our business development pipeline continues to be very active and we're confident in our ability to deliver on our organic growth expectations over the balance of the year. We also continued to drive acquisition growth in the quarter. We completed two acquisitions in Australia that together had more than 300 employees and increased our presence there by roughly 20%. With these two acquisitions, we've rounded out our ability to deliver services across all of our key sectors and to deliver upon our growth ambitions in the region. Turning now to our results by key geography, as anticipated, U.S. revenue retracted organically. largely due to our buildings and transportation businesses. The good news is that the significant increase in winds through Q1 is driving organic backlog growth in U.S. buildings, and as a result, we expect this business to swing back to organic growth in the third and fourth quarters. In transportation, we continue to wind down several major alternative delivery projects which affected both net revenue and margins this quarter. However, overall, our infrastructure business is holding its own as a result of the breadth and depth of both the transportation and the community development business. And in addition to the significant projects that are already in our backlog, we expect U.S. infrastructure stimulus to become a significant tailwind in future quarters. We continue to see solid growth in our water business and see growing momentum for increased spending in water from the $350 billion from the America Rescue Plan that are being appropriated for state and local governments and that can be used for, among other things, water and wastewater infrastructure. the recent $35 billion Drinking Water and Wastewater Infrastructure Act that's passed the Senate, and the $6.5 billion Water Infrastructure Finance and Innovation Act that's been released by the US EPA. So altogether, we see great momentum for increased water spending going forward. Mining activity in the U.S. is also increasing with improved commodity prices, and our U.S. business development pipeline continued to be very active during the first quarter, driving our backlog up 7.4% organically since year-end 2020. This was driven in part by multiple contracts worth up to $102 million in work supporting the maintenance and enhancement of California's electrical grid. This work will be delivered through our energy and resources and environmental services business units, where organic backlog growth approached 40% and 25%, respectively, during the quarter. Canadian revenue retracted organically due almost entirely to the reduced scope of our role on the Trans Mountain Expansion Project. This dynamic, which has been incorporated into our guidance, will continue to be a headwind for organic growth in 2021. Offsetting this, however, is growth in our Canadian buildings business. The investments being made in Canadian healthcare facilities is unprecedented and has led to record backlog in this sector. This drove organic growth in our buildings business during the quarter, and we continue to win new projects like the Caribou Memorial Hospital redevelopment in British Columbia. Also during the quarter, we generated year-over-year organic growth in infrastructure from both community development and transportation projects. and we expect continued momentum in infrastructure as a result of recent project wins like the Queen's Quay East Extension and the Waterfront East light rail transit projects in Toronto. Strong account management and business development has driven our Canadian backlog up 7.6% organically since year end 2020, with backlog growth across all of our businesses. And as in the U.S., energy and resources and environmental services were particularly strong, with organic backlog growth approaching 35% and 20% respectively during the quarter. We're also seeing continued strength in Canada's water business, partly as a result of our work on Saskatchewan's Westside Irrigation Project. This project is expected to irrigate up to 500,000 acres and more than double the irrigable land in Saskatchewan. And it's also the largest public works project in the province's history. As expected, global revenue retracted organically compared to the pre-pandemic first quarter of last year, and this was largely due to the impact of the pandemic on our buildings business. Our global water business helped to offset the retraction with solid organic growth in the quarter. The AMP7 programs in the UK and the water frameworks in Australia and New Zealand are running at full tilt, and we are actively onboarding new employees to meet project needs. Stimulus funding in the UK and New Zealand continues to fuel organic growth in transportation, and during the quarter, additional work was awarded to our transportation team as part of the ongoing Otaki to North Leaven Expressway project in New Zealand. During the quarter, we announced the acquisition of GTA Consultants, and then on April 30th, we closed our acquisition of Ingenium. And we're already seeing the benefit of combining our teams in Australia in terms of client interest and project opportunities. Backlog declined organically in our global operations by about 1.6%, primarily due to buildings projects as a result of pandemic-related challenges. We also saw a slight retraction in water backlog as we began to work through the longer-term frameworks that we went last year. I'll now turn things over to Teresa to review the quarter in more detail.

Thank you, Ford. Q1 earnings were slightly ahead of our expectations, with adjusted net income from continuing operations increasing 3% to $56 million, which represented 6.4% of net revenues. Adjusted earnings per share increased 2% to 50 cents per share. Our adjusted EBITDA margin rose to 14.7% as a result of improved gross margin and lower discretionary spending. I would note that our Q1 stock-based compensation expense increased by $11 million due to the increased valuation of our share price. This has had a 125 basis point impact on our adjusted EBITDA margin In other words, excluding this non-cash fair value adjustment, adjusted EBITDA margin would have been 15.9%. Continued strong cash flow generation meant that no draws were required on a revolving credit facility in the first quarter, which led to a year-over-year decrease in interest expense. Earnings also reflected the benefit of the implementation of our 2023 real estate strategy. which is on track to deliver 10 cents per share in adjusted EPS by the end of 2021. Our balance sheet remains strong as a result of strong cashflow generation and cash management. At March 31st, net debt to adjusted EBITDA remained below our targeted range at 0.8 times. Day sales outstanding was 75 days at quarter end, which is consistent with Q4 2020 and is down 11 days compared to the same time last year. We generated $14 million in free cash flow in the first quarter, when operating cash flows are traditionally an outflow. This represents a $99 million increase over Q1 2020. And while half of this increase can be attributed to the timing of our payroll in the quarter, the improvement in operating cash flows is significant. As I mentioned earlier, our $800 million credit facility is currently undrawn. giving us significant dry powder to fund growth through acquisitions. With that, I'll turn it back to Gordon to wrap up.