Stantec Inc

Welcome to Stantec's third 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 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 this conference call is subject to the forward-looking statement qualification set out on slide two, detailed in Stantec Management's 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.

Good morning, and thank you for joining us. Two weeks ago, we announced our agreement to acquire Cardano's North American and Asia-Pacific consulting businesses, and the feedback from employees, clients, and investors has been overwhelmingly positive. We had a large number of Cardano employees on the webcast the other week, and to those of you who are joining us today, we are really looking forward to welcoming you to Santec in the weeks ahead. There's a tangible excitement about what we can accomplish together. Cardinal CEO Susan Reisbord and I speak almost daily as we chart our path forward. And later today, Susan and I will jointly host two virtual all-staff events for Cardinal employees, one for the U.S. and one for Asia Pacific. In the United States, Cardinal will increase our headcount by 15% to 10,500 people and will add 1,100 people to our environmental services team, increasing our presence in this space by 60%. As the world and our clients respond to climate change and environmental concerns, Stantec's environmental services backlog has grown dramatically in the U.S. this year. In fact, it's up over 55% since the start of the year. Expanding our environmental footprint to meet client needs is essential, and with Cardinal, we're going to double our presence compared to five years ago. In Australia, Cardinal will almost double the size of Stantec's presence and provide us with the critical mass and diversity to accelerate our growth. Year-to-date, Australia has been one of our strongest markets, with the recovery from COVID well underway. Cardinal's Asia-Pacific operations will give us increased exposure to this rapidly growing market. So the timing couldn't be better to bring our two firms together. All told, Cardno will add 2,750 employees to Stantec, bringing our global employee count to more than 25,000 once the acquisition closes. And we expect Cardno to increase our annual net revenues by more than $350 million in 2022. We expect the transaction to close before the end of this year, and we've already stood up our integration team and have begun the planning process so we can hit the ground running as soon as we achieve close. This week, leaders from around the world are gathering in Glasgow, Scotland to discuss climate change and the commitments required to prevent the worst global warming scenarios. Santec remains committed to doing our part to address climate change through our carbon neutrality and net zero pledges. Last Friday, we announced that we wrapped a sustainability-linked loan structure around our existing credit facility, which incorporates Santec's emission targets. As part of this new structure, we are very proud to be the first organization globally to incorporate the Bloomberg Gender Equality Index score as a metric. We are also the first in Canada to commit to directing proceeds from our sustainability-linked loan back into our communities to further climate action and social equity. Aligning our corporate financing strategy with our ESG performance demonstrates our commitment to live by our core value of doing what's right. And yesterday, His Royal Highness, the Prince of Wales, announced that Stantec was one of only 45 companies in the world awarded the Terra Carta seal for driving innovation and momentum towards a genuinely sustainable market. This is yet another accolade for Stantec's sustainability performance. And of note, we were the only engineering and design firm selected in the world. Beyond our commitment to ESG within our operations, we recognize that we make our greatest impact helping our clients respond to climate change. Our climate solutions offering is an integrated platform of more than 40 services and disciplines spanning all of Stantec's business operating units that help clients and communities mitigate greenhouse gas emissions and adapt to our changing climate. Now, turning to our Q3 results. As demonstrated by our record quarterly earnings, our business continues to perform extremely well. Organic net revenue growth for the quarter was 1.4% or 3.3%, excluding the impact of the Descope Trans Mountain expansion project. This reflected almost 11% organic growth in global and 8% growth in Canada, excluding Trans Mountain. The U.S. demonstrated significant progress towards growth as the market continues to recover and notified awards begin to move into backlog and revenue. As expected, our buildings business unit returned to organic growth this quarter on the strength of activity in Canada and Australia. Our infrastructure business also returned to positive organic growth this quarter on the strength of the transportation markets in our Canadian and global geographies and in the housing markets throughout North America. In fact, excluding the impact from Trans Mountain on our energy and resources group, all of our business units achieved organic growth this quarter. All of them. And we continue to achieve growth through acquisition. In addition to our recent Cardinal announcement, this week we deepened our energy transition expertise in the Netherlands with the acquisition of Driven by Values. This 28-person engineering and consulting firm is a trusted partner for public and private entities, navigating the transition toward sustainable energy generation, sustainable building design, energy infrastructure upgrades, and e-mobility. Turning now to our results by key geography. Our U.S. operations performed largely in line with expectations, and we saw positive progress towards organic growth in the quarter. backlog grew 5% from last quarter in native currency to an all-time high of 2.1 billion U.S. dollars as we begin converting the surge in notified awards that we referenced in Q2. Environmental services performed very well on the strength of both organic and acquisition growth. Thematically, permitting and planning work on power and transmission projects on both coasts dominated major projects wins this quarter as utility companies continue to strengthen, both the capacity and the resiliency of their grids. As we expected, we're seeing continued strengthening in buildings. Our buildings group has weathered the pandemic much better than the broader building sector, and the pace of our contract win in buildings to date in 2021 significantly exceeds our wins in each of the previous two years. This momentum is being driven by healthcare, civic, and industrial processing. On the science and technology front, we recently signed a contract for a major 415,000-square-foot pharmaceutical lab in California. Our U.S. infrastructure, water, and energy and resources group all delivered in line with expectations. So we're pleased with the overall results in the quarter, and we continue to see growth in backlog and increasing organic growth as we move into 2022-2021. and anticipation for the US infrastructure stimulus bill only adds to our optimism. Our Canadian business had another excellent quarter, achieving 8% organic net revenue growth, excluding Trans Mountain. Buildings continues to deliver robust growth on strong volume from major projects, as healthcare sector work on the St. Paul's Hospital in Vancouver and other large hospital projects in Saskatchewan and Ontario continues. Beyond healthcare, we're seeing continued strength in civic and mixed-use projects that are focused on revitalizing and repurposing existing commercial properties in Canada's inner cities. Sustainability is also a key aspect of our recent win with Ontario Power Generation to design their new corporate campus. This mass timber-constructed corporate campus will leverage technology and innovation to enhance collaboration and achieve sustainability and net zero carbon goals. Infrastructure continued to be very strong in Canada, led by double-digit growth in community development, thanks to strong performance in the West and in Ontario. Transportation spending is also very healthy in Canada, with a number of large-scale transit and infrastructure projects, like our recent win on the extension of Toronto's Waterfront East LRT transit connection to Polson. Environmental Services continues to see growth in Canada, where we benefited from work on a light rail transit project in Ontario, and front-end permitting work to support projects like the City of Edmonton's Metro Line Northwest. In addition to this work, Stantec has recently been awarded a groundwater monitoring program to support Shell's carbon capture and storage project in central Alberta. Beyond strong organic momentum in mining and power in dams, energy transition continues to build momentum for our energy and resources team, who are now working with Tidewater Renewables to design the first commercial-scale renewable diesel and hydrogen facility in Canada. Stantec is also currently working on some of North America's largest solar and wind projects. Like Canada, global delivered excellent results in Q3, with a 20% increase in net revenue driven in equal parts by organic and acquisition growth. Of note, our focus on growing and diversifying in Australia and New Zealand has resulted in solid growth in virtually every sector. In Australia, GDP and employment rates are already above pre-pandemic levels, and this is driving solid growth in our global buildings practice particularly in healthcare, and this is reflected in our recent win for mechanical and acoustics engineering services for the new Shell Harbour Hospital in New South Wales. This new hospital will provide critical care to a large number of surrounding indigenous communities. Organic growth in water continues to be driven by the robust activities under the AM7 programs in the United Kingdom and Ireland, as well as water frameworks in Australia and New Zealand. Transportation's double-digit growth was driven by strong performance in Australia and New Zealand. We see continued growth for transportation with several recent wins, including a four-year multidisciplinary services framework for roads-based transport in Scotland and our decarbonization project with KiwiRail in New Zealand. Our strong results in Global's energy and resources group were driven by mining, where strong commodity prices continue to fuel strong demand. Overall, we're very confident in the continued strength of the global business. I'll now turn things over to Teresa to review the quarter's financial results in more detail.

Thank you, Gord, and good morning, everyone. We delivered record adjusted EPS in the quarter. Adjusted EBITDA was largely comparable to last year, but higher on an FX neutral basis. Within adjusted EBITDA, we expanded gross margin by 200 basis points with stronger project execution and a shift in project mix to higher margin work. This was offset with higher administrative and marketing expenses due to our increased business development efforts on major programs and bids. As well, share-based compensation expense increased significantly compared to Q3 2020, in part due to our increased share price. The impact of our share-based compensation revaluation was $5 million or 54 basis points as a percentage of net revenue. So absent this factor, our adjusted EBITDA margin would have been 17.3%, matching last year's margin. Our 2023 real estate strategy remains on track to deliver 10 cents in adjusted EPS by the end of this year. IFRS 16 has eliminated the visibility of how impactful our real estate strategy would have been to EBITDA, But for reference, we estimate that on a pre-IFRS 16 basis, our real estate optimization would have expanded our EBITDA margin by roughly 40 basis points. However, the value generated is very clear when you look at the material growth in our net income and EPS, which has been further augmented by our debt and tax management strategies. Collectively, these efforts contributed to record Q3 adjusted net income of $80 million which is a 15% increase over last year. Adjusted diluted EPS increased 16.1% to a record $0.72 per share. Our balance sheet remains strong. At September 30, net debt to adjusted EBITDA was 0.8 times below our targeted range. And as previously announced, we intend to fund the Cardinal acquisition using a combination of cash on hand and drawings from our credit facilities. We expect to remain well within our leveraged target range on close and to deliver toward the low end of our target range by the end of 2022. Days still outstanding with 81 days at quarter end, which is up from Q2, largely due to timing and seasonal factors, but DSO was down by one day compared to the same time last year. Free cash flow year-to-date was $101 million, down from last year with about one-third of the reduction due to the effects of foreign exchange and the balance reflecting changes in revenue and working capital. And as I mentioned earlier, our $800 million facility is largely undrawn at the end of September, providing us with sufficient room to fund our acquisition growth aspirations. And with that, I'll turn the call back to Gord for his closing remarks.