Stantec Inc

Welcome to Stantec's first quarter 2022 earnings results webcast and conference call. Leading the call today are Gord Johnson, 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 investor section at stantec.com. Today's call is also webcast. Please be advised if you have dialed in while also viewing the webcast, you should mute your computer as there is a 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'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 Johnson.

Good morning, and thank you for joining us today. 2022 is off to a good start with strong operational and financial performance. It's also been a very productive quarter, and I'd like to touch on some of our key activities and milestones. This was the first quarter, first full quarter after closing the Cardano acquisition. And I'm very pleased with the way our two organizations have come together. We really have validated how aligned our corporate cultures are. And as you've heard me say many times, getting the cultural fit right is critical to the success of any acquisition. Given the scale and complexity, the successful integration of Cardano is a top priority for Stantec in 2022. Transitions to our Oracle ERP system for Cardano's Australia New Zealand and US businesses are in full flight and are anticipated to be completed by the end of Q3. From an operational and financial perspective, Cardinal is on track to deliver the results that we initially communicated, and we feel very positive about achieving expected performance in 2022 and beyond. And we are well on our way to delivering the expected annual run rate cost synergies of $10 million ahead of the two-year timeline we initially projected. Most importantly, our teams are working exceptionally well together. We're already working on over 70 joint projects and are pursuing well over 100 additional projects together. Also in Q1, we announced the continued execution of our growth strategy through the acquisition of Barton Wilmore, a 300-person firm in the UK that brings our presence in the region to 2,500 team members. We closed that transaction on April 1st. We're pleased to have the UK's leading planning and design consulting firm join Stantec. Our teams have been collaborating on projects for many years and have already identified multiple new opportunities to work together. Importantly, Barton Wilmore shares our passion in delivering sustainable and lasting projects and improved communities and strengthens the contributions we make towards the United Nations Sustainable Development Goals, or SDGs. And this ties into the third item I want to highlight. On Earth Day, April 22nd, we released our 15th annual sustainability report. We're very pleased to report that our gross revenue aligned with the SDGs has continued to grow, increasing from 49% in 2020 to 53% in 2021. This is a reflection of the growing contribution we make to sustainability as we help our clients address challenges from extreme weather events to water scarcity to social inequity and everything in between. We also celebrated our achievement of carbon neutrality in the UK, New Zealand, and the EU, and we are on track to meet our commitment for enterprise-wide carbon neutrality on our path to net zero. Turning now to our Q1 results, we're pleased to have delivered a 22% increase in EPS in Q1 on the strength of organic net revenue growth in every one of our geographic regions and each of our business units. The organic growth we achieved in Q1 reflects our ability to capitalize on our sector's strong market fundamentals that continue to be spurred by robust public infrastructure spending and increasing private investment. While we still expect growth from infrastructure spending to be more heavily weighted toward the second half of this year, we're already delivering organic revenue growth from spending directed towards new healthcare facilities, public transit, and other infrastructure renewal and capacity expansion projects. Other primary drivers include growing project work related to the reshoring of strategic domestic production and sustainability. A common thread through many of these projects is the need for the skills of our environmental services business, which delivered a 53% increase in Q1 net revenue, of which 11% was from organic growth and 42% was generated by our recently completed acquisitions. Taking a closer look now at each of our geographic regions, The level of activity in our U.S. business has certainly increased relative to last year, and the trajectory is very positive. We're pleased to have delivered organic growth across all of our U.S. business units this quarter, particularly after a year of organic retraction. The roughly 4% organic growth was bolstered by 13% acquisition growth for an overall net revenue increase of 17%. Environmental services was the biggest contributor to U.S. revenue growth, and reflects the strong demand for our expertise in environmental assessment, permitting, and ecological work. The services we provide are critical in the early phases of a project's development cycle, and our clients are highly motivated to engage us to help advance their project to the next stage date. The addition of Cardino's environmental professionals has certainly been timely and strengthens our ability to address this burgeoning market. Our other business units are also responding to high demand for early planning work related to increased private and public spending. And Stantec is increasingly involved at the community level, helping public clients determine how to best direct the spending and investment for the most significant impact, particularly as it relates to infrastructure equity and affordability. Also noteworthy this quarter is U.S. Buildings' return to organic growth after a challenging 2021. The COVID pandemic has highlighted the need for increased healthcare capacity, and similar to what we saw in Canada last year, the sector is now driving organic growth in the US. In Canada, net revenue grew organically by 7% in the quarter, as increasing levels of private and public spending drove strong performances across our businesses. Consistent with the themes playing out in the U.S., our environmental services business in Canada had a very strong quarter, delivering double-digit growth on the strength of archaeological services. Infrastructure delivered growth arising from the strong housing market in Western Canada and public spending on various roadway and transportation projects in Montreal and the Greater Toronto Area. Organic growth in our transportation sector also reflects our continued support of British Columbia's recovery efforts from the extreme flooding that occurred last year. Opportunity stemming from the energy transition drove organic growth in energy and resources, where we're designing Canada's first renewable diesel facility. This group is also now delivering on projects that address the renewed focus on global food security. And we're seeing continued robust momentum in our buildings business, where major public projects in healthcare, as well as civic and education sectors, continue to drive growth. And rounding out our geographic regions is global, which also had a remarkably strong quarter. Net revenue in our global region grew by 46%. Like Canada and the US, every business unit in global grew organically in Q1, delivering 13% organic growth. Recent acquisitions delivered a further 37% growth. Water continued its strong performance, delivering double-digit organic growth as the UK AMP7 program is in full swing. Stimulus funding is driving growth in our infrastructure business in New Zealand and the UK, and in our buildings business in Australia. And our mining sector delivered organic growth on the strength of high copper and other metal prices, client diversification, and the lifting of pandemic-related restrictions. And with that, I'll turn the call over to Teresa to review our Q1 financial results in more detail.

Thank you, Gord, and good morning, everyone. As Gord noted, we had a very strong quarter with an overall 21% and 19% increase in gross and net revenue, respectively. Project margin grew by 22% and by 90 basis points as a percentage of net revenue. And this reflects our continued focus on project execution, our heightened diligence in project pursuits, and overall project mix. We delivered an 18% increase in adjusted EBITDA, reflecting the overall growth of our business. Adjusted EBITDA margin of 14.5% was generally in line with Q1 2021, as higher project margin was offset by higher admin and marketing costs, which in turn was driven by higher business development efforts on major programs and bids, increased discretionary spending, and investment in internal resources, partly offset by a $9 million reduction in share-based compensation expense. Net income and EPS decreased 12 and 13% to 45 million and 40 cents per share, as increased EBITDA was offset by higher amortization of intangibles from our recent acquisitions. However, both adjusted net income and adjusted EPS increased 22% to 68 million and 61 cents per share, reflecting very strong earnings from our underlying operations. In terms of cash flow, we generated 6 million from operating activities a decrease from Q1 last year. Recall that it is more typical for Q1 operating activities to result in a cash outflow due to a lower level of activity in the winter season and the timing of the payment of our short-term incentive program. Positive operating cash flow in Q1 2022 was driven by acquisitions completed late last year and improved market conditions. This was offset by higher cash paid to employees, reflecting our increased workforce and a higher wage environment relative to Q1-21. In addition to returning capital to shareholders through the payment of our quarterly dividend, we were active with our share buyback program in Q1, repurchasing 460,000 shares for $29 million. This, along with funding of our recent acquisitions, contributed to our net debt to adjusted EBITDA remaining at 1.8 times. Leverage remains within our target range of one to two times, And I'm confident in our ability to reduce leverage over the course of this year with our operating cash flows. DSO came in at 75 days, consistent with Q1 21 and with year end 21. And before leaving this page, I want to bring to your attention the expected impact to our Q2 and Q3 cash flows arising from the Cardano integration. As with all our acquisitions, there will be a delay in converting Cardano's revenue to cash while we're switching financial systems. This hasn't been noticeable with our smaller acquisitions, but given how material Cardno is to our overall business, the delay in invoicing during the systems integration will dampen operating cash flows from Cardno's businesses over this period. It will also cause DSO to rise slightly, but we do expect this to normalize by the end of the year. And we closed the quarter with record backlogs of $5.4 billion, which grew by 6% since the end of 21, 6.8% organically. Like net revenues, we achieved organic backlog growth in every geographic region and business operating unit. Our U.S. operations led with almost 10% organic growth. Infrastructure and energy and resources achieved double-digit organic growth. And environmental services' $1.1 billion backlog has never been higher. Our backlog represents approximately 14 months of work, which is also a high watermark for us. And with that financial overview, I'll turn the call back to Gord.