Stantec Inc

Welcome to Stantec's year-end and fourth quarter 2023 results webcast and 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 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 and Stantec managements, discussion and analysts, 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'm pleased to turn the call over to Mr. Gord Johnston.

Good morning, and thank you for joining us today. 2023 was a remarkable year for Stantec, and I'm very proud of what we accomplished. We achieved record financial results and delivered our best year ever for organic net revenue growth. We grew our employee base by 5% through organic hires, another record, while maintaining our best-in-class employee retention rates. And for a fifth consecutive year, Stantec has been ranked by corporate nights as a top 10 global leader in sustainability. And once again, we rank first amongst our peers. None of this would have been possible without the dedication, passion, and commitment of our employees. And I'd like to thank each individual for their contributions. We started 2024 strong from an M&A perspective and have already closed both the Zetcon and the Morris & Hirschfield acquisitions. These are both top-in-class firms, and with the addition of their talented employees to the Stantec team, we are now sitting at over 30,000 people around the world. Closing these acquisitions early in the year helps us jumpstart our new 2024 to 2026 strategic plan. Turning to our 2023 financial results. Overall, we grew net revenue by 14% year over year, with almost 10% coming from organic growth. Market demand in 2023 was particularly robust in our water and environmental service business units and in the US, with each delivering double digit growth for the year. Our strong operational performance drove record high adjusted EBITDA of $831 million, and an EBITDA margin of 16.4%. And as a result, we delivered significant adjusted EPS growth of 17%, achieving a record high of $3.67. Our US business achieved very strong results, with over 18% growth in net revenue for the year, more than 12% of which came from organic growth. In 2023, we achieved organic growth in every one of our business units, with water, buildings, and energy and resources each delivering double-digit organic growth. The demand in public sector and industrial projects, as well as large-scale water security projects, drove a 25% increase in organic growth for our water business. Our buildings business benefited from higher activity levels in healthcare, industrial, and science and technology projects. And Energy and Resources continued to support Puerto Rico's hurricane recovery, including the upgrading of its power grid, contributing to solid revenue growth. So overall, a very, very solid year for our U.S. operations. In Canada, we achieved greater than 8% organic net revenue growth, which surpassed our expectations for the year. Environmental services, infrastructure and water each delivered double-digit organic growth. Strong demand for permitting and archaeological work drove growth for environmental services, particularly in Western Canada for the midstream energy sector and in Ontario for large-scale transportation projects. Activity on environmental impact assessments in the renewable energy sector also contributed to revenue growth. Infrastructure revenue growth was driven by heightened activities around bridge and roadway work in Western Canada. And our expertise on large wastewater infrastructure projects drove growth in water, especially from work on the Iona BC and Barrie Ontario wastewater treatment facilities. Moving to global, we delivered 6.5% organic growth driven by double digit growth in water and energy and resources. Our industry-leading water business remained very active, supporting long-term framework agreements and investments in water infrastructure in the UK, New Zealand and Australia. In energy and resources, double-digit organic growth was driven by the advancement of our work on the Corey Glass Pump Storage Energy Project and increased activity related to the National Grid Framework in the UK. ENR also continued their work on mining activities around copper and other metals that support the energy transition. And now, I'll turn the call over to Theresa to review our financial results in more detail.

Thanks Gord. Good morning everyone. We closed out the year with a solid quarter of performance in Q4, contributing to another record year for Stantec. In Q4, gross revenue was up 6% compared to Q4 22 at $1.6 billion, while net revenue was up 10% at $1.2 billion. Project margin was right in the middle of our targeted range of 53% to 55%, but decreased 100 basis points compared to Q4 last year, in part due to changes in project mix in the U.S. This, along with the quarter's 90 basis point impact from the revaluation of our long-term incentive plan, contributed to the reduction in adjusted EBITDA margin to 15.7%. Diluted EPS in the quarter was 66 cents, and adjusted diluted EPS was 82 cents, both consistent with last year. Excluding the effect of the LTCH revaluation, our Q4 adjusted EPS was 90 cents. Turning to our full year 2023 results, we generated gross revenue of $6.5 billion and net revenue of $5.1 billion, a 14% increase for both over 2022. Project margin for 2023 was a solid 54.2% consistent with last year, and adjusted EBITDA increased by 15% to $831 million. We increased our adjusted EBITDA margin by 20 basis points to 16.4% within our targeted range. This was despite a 70 basis point impact from LTIP revaluation, resulting from the 64% depreciation in our share price for the year. Excluding this, adjusted EBITDA margin was 17.1%. Our full year diluted earnings per share reached a record high of $2.98, and our adjusted diluted EPS was $3.67, up 34% and 17% respectively, despite the $0.24 unfavorable impact from the LTIP revaluation. Increased earnings also reflect the successful completion of our 2023 real estate strategy. We're pleased to have achieved the targets we set out three years ago by delivering approximately $0.38 of incremental adjusted EPS and reducing our real estate footprint by over 30% from our 2019 baseline. Now turning to our liquidity and capital resources, 2023 was one of our strongest years for operating cash flow generation at $545 million compared to $304 million in 2022. Cash flow this year benefited from a full year of operations post Cardinal integration, as well as increased revenues and diligent management of our working capital, as shown by our four-day reduction in DSO from 81 days to 77 days. Increases in operating cash flow were partially offset by higher tax installment payments driven in part by the impact of U.S. Section 174 and higher interest payments. In 2023, we returned more to our shareholders in dividends, but we were less active with share buybacks compared to 2022. And as at December 31, our net debt to adjusted EBITDA was one times well within our internal leverage range of one to two times, positioning us very well to fund our acquisitions of Zetcon and Morrison-Hirschfield in the first quarter of 2024. And with that, I'll turn the call back to Gord.

Thanks Teresa. In the fourth quarter, we reported a backlog of $6.3 billion. Backlog has grown organically by 5% since December 2022 and continues to grow in each of our geographic regions, with global posting double-digit organic growth. Compared to the third quarter, our backlog grew organically in native currency, but was offset by foreign currency fluctuations. Our ability to grow backlog in Q4, which is generally softer as a result of seasonality, clearly demonstrates the strength of the market. Backlog in water continued to strengthen with a 23% organic increase, supported by project winds and wastewater treatment, advanced manufacturing, consultancy frameworks, and master planning services. Buildings also had a number of strong winds, translating into solid, high single-digit organic growth. We continue to see demand for our expertise in healthcare, multi-purpose buildings and advanced manufacturing and industrial facilities. Our backlog represents approximately 12 months of work. We continue to capture significant opportunities in the fourth quarter. We were selected to provide a full suite of architectural, engineering and environmental services for a $1 billion lithium-ion battery manufacturing facility in British Columbia. E1 Mali's facility will include a research and development complex with a fully integrated green roof, as well as a seven-storey mass timber office building. Our buildings team was selected to design the first comprehensive cancer hospital in Dubai. At over 600,000 square feet, the hospital will be designed recognizing best-in-class building strategies and practices in sustainability. Static is consistently ranked as a top five design firm in the health space. And as we've talked about in the last number of quarters, the UK water appointments are starting to ramp up. This quarter on AMP8, we were appointed to the Northumbrian Water Capital Delivery Framework and to the Severn Trent Water Engineering and Design Consultancy Framework. We were also appointed to the Capital Works PMO Framework with Irish Water. Each of these wins secures work for the next five years with the option to extend beyond that period by agreement. We were also very pleased to announce this morning that we were selected to provide integrated design services for Agritas' new battery manufacturing facility in the UK. This is one of the most significant investments in the UK and the factory will be one of the largest of its kind in Europe. This project award is a testament to the breadth and depth of Stantec's expertise in advanced manufacturing and we look forward to working closely with Agritas to support the successful completion of this project. Looking at 2024, we continue to see high levels of activity in all regions, and we've now updated our targets to include Morris and Hirshfield. We have raised our net revenue growth target for the year to 11% to 15%, and expect organic net revenue growth to be in the mid to high single digits. For U.S. and global, we expect mid to high single-digit organic revenue growth, and in Canada, we're guiding to mid single-digit growth. Our EBITDA margin target for the year is in the range of 16.2 to 17.2%. And finally, we have revised our adjusted diluted EPS growth to now be in the range of 12 to 16%. While we're only two months into 2024, we are very confident in being able to achieve these targets and we remain very optimistic for what's to come. Before opening the call to Q&A, I want to comment briefly on the announcement of Theresa's planned retirement. We have been extremely fortunate to have Theresa on the Stantec team for the last five and a half years. She's added tremendous value to the company and has ensured Stantec is in a very strong financial position. While Theresa will remain in her role as CFO until her successor is in place, ensuring a smooth transition, I want to thank her for all of her efforts and everything that she's done for Stantec over the years. And with that, we'll turn the call back to the operator for questions. Operator?

Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Please stand by while we compile the Q&A roster. Our first question comes from Benoit Emporio with Desjardins.

Your line is now open.

Yes, thank you very much, and good morning, everyone. And, Teresa, I wish you all the best for your upcoming retirement. You'll be missed for sure. Gord, you mentioned that you were looking at both external and internal candidates. I was just curious if there is any criteria that you are looking at for the CFO search. Any color about the timing for finding the new CFO?

Yeah, well, you know, the search is underway, Benoit. We've been working on it for a couple of months already, and so we're looking forward to now that the information is out in public to really, you know, gearing up a little bit further on it. As we mentioned in the prepared remarks, Theresa isn't going anywhere. So while we want to be respectful of her wish to retire, we certainly are going to work through this in a planned and orderly fashion. And we hope it certainly will be in 2024, hoping in the next quarter or two.

Okay, and looking at the AMP8 program in the UK, one of your US peers stated that although the funding cycle only officially starts in April 2025, it looks like that they are already seeing multiple UK water clients going out for procurement to be ready. I was just curious, are you seeing this as well?

Oh, absolutely. We've already secured many, many awards for AMP-8. And in fact, some of the planning awards that we've gotten, we've been awarded by clients to help them prepare for AMP-8. So we're actually already working on preparatory planning type work to get ready for. So as soon as that April 2025 hits, we're ready to go. But as we mentioned in the prepared remarks, a couple more with Northumbrian and others that we secured this year. So we've already got well over half, approaching 60% or 70% of our anticipated wins that have already been issued, procured, and awarded.

Okay, that's great, caller. And just in terms of free cash flow, it looks like that the U.S. 174 R&D law remains in place. Could you provide a dollar amount, Edwin, for 2024? And what could be the implication in terms of a free cash flow conversion from net earnings?

Sure. So, you know, this Section 174 has been in place for two years now. And so, you know, we saw an impact in 2022 and 23. And so, as we look year over year, we would expect the impact to be roughly the same. We think roughly $30 to $40 million of additional cash taxes as a result of that rule remaining in place. So, again, year over year, it won't create an impact. And we'll keep watching to see if that relief package is ultimately approved or not.

Okay. And maybe last question for me. Obviously, very solid organic growth environment. I was just curious if you could provide more color about the impact of pricing inflation these days on organic growth.

What we've seen over the past couple of years is, as we came into 2024, there still is salary pressures, but not to the same degree that we saw it in previous years. As you know, in previous years we've been successful in passing along the majority, if not all of that, salary increases to our clients. You know, we see that there certainly is some inflation, some increase in our fees into the organic growth numbers that we're putting out, but I'd say it's plus or minus, you know, half would be fee increases, and plus or minus half is just additional organic growth.

Okay, that's great. Thank you very much, and congrats again. Thanks, Benoit.

Thank you.

One moment for our next question.

Our next question comes from Yuri Link with Canaccord Genuity. Your line's now open.

Hey, good morning. Good morning, Yuri. Yeah, good morning. And I'd like to echo Benoit's congratulations to Teresa on your retirement. Thank you. Yeah, no problem. Yeah, so just trying to, I don't know who wants to take this one, just on the guidance, trying to, some of the moving parts in there. So you're calling for mid to high single-digit organic growth in the U.S., but the backlog there grew organically only 2%. But we kind of have the opposite story in global, where you have very strong double-digit organic growth and backlog, and you're calling for mid-single-digit revenue growth. So maybe a little more detail on how we get to those growth rates.

Yeah, I mean, I think when it comes to trying to triangulate how things move from backlog into revenue and what we're seeing in our projections, I think you just have to keep in mind that there's always a couple of dynamics at play. One is that when we report backlog, it's a point in time. And it does require us to have, you know, everything buttoned up contractually before that work goes into our backlog. But, of course, you know, our business leaders have a line of sight to work that is near final or in negotiation, and they look at the bidding activity, and those are the things that they factor into their organic growth projections. The other thing that, you know, to keep in mind as well is that there's often, you know, work that comes through MSAs that really don't come into backlog until those task orders are issued. So it shows up and then is worked through pretty quickly. So that would be the primary reason, Yuri, that you wouldn't necessarily see a straight line from backlog growth into organic growth projections.

Okay. That makes a lot of sense. Teresa, while I've got you, just so I can check my math, where would you peg your pro forma debt to EBITDA ratio at the end of the year?

At the end of the year, I would say at the end of the year, assuming no further acquisitions, which is kind of the way we approach our planning and our projections, we should be, again, to the lower end of the range. The equity offering we did in November really did what we intended for it to do, was it gave us the additional capacity to fund acquisitions while knowing that we had Zedcon and Morrison-Hirschfield to fund in the first quarter here. So we're in really good shape. And so as the year unfolds and cash flow, it remains a focus for us to turn over quickly. I would say that we should be in the lower half of our range.

Okay. Last one, just quickly. It's a bit of a nitty-gritty one. You do mention... specifically that you've included Morrison-Hirschfield in your updated guidance, you don't mention ZEDCON. It's safe to assume that's also in there?

Yes, so ZEDCON was included in the guidance when we rolled it out in December, and so incrementally we now have MH in there too. But yes, definitely both are in our current guidance.

That makes sense. Okay, thanks. I'll turn it over.

Thank you. One moment for our next question. Our next question comes from Jacob Bell with CIBC.

Your line's now open.

Good morning. I had a question on your organic growth. You know, it was quite strong in the quarter, but when I look at infrastructure in particular, your low single-digit, I think it was around 3% on a net basis. What happened there, especially as we think about the U.S.? Was the organic growth a little better in the U.S.? And then what type of improvement are you expecting year on year, specifically on infrastructure organic growth?

Yeah, and, you know, it's interesting as you think of infrastructure. Primarily for us, that's the transportation business. And as you talk about the – and land development, of course. But, you know, a lot of this, the focus has been on the transportation business. And when you talk about the U.S., of course, we see that continuing to ramp up. The, you know, IIJA continues to roll out. And, you know, you've heard it from us and others. It's always a little bit slower, but it's continuing to ramp up. And so we're, you know, we're seeing that continued support for that business, you know, as we evolve through 2024 and move into subsequent years. So we're not concerned about that.

The second question just on mix, you know, when you look at in for water environmental service building, you know, are you happy with your mix right now? Where would you like to bulk up? And maybe just comment quickly on what Zetcon and Morrison-Hirschfield bring to the table.

Yeah, so, you know, in general, we're very happy with our current mix. I think that... So when you look at Morrison-Hirschfield, it's primarily a lot of expertise in the building segment as well as in transportation. So again, two core areas for us that will continue to move forward. Zetcon is very active also in the transportation space and primarily from a project management and construction management perspective, so roadways, bridges, beginning to get involved in some of the electrical grid work in Germany as well. Again, all sort of the core activities that we've got, and neither of those on their own are really going to materially move our overall split between our various business operating units.

Thank you.

Thank you.

One moment for our next question. Our next question comes from Michael Dumont with Scotiabank.

Your line is now open.

Hey, good morning, Gordon, Teresa. Very impressive pace of organic hires. Just wondering if you could comment on the extent of the improvement in labor availability this year or now versus last year. And if you can comment on, you know, whether you're looking to maintain that pace of organic hires into 2024.

Right. And so, yeah, good question. A couple of things there. You know, firstly, we have really ramped up the pace of hiring over the last number of years. And a lot of the hires, interestingly, are both... It's a bit divergent. One is that we continue to hire at the entry level in order to continue to fill out that portion of our demographic profile. So a lot of hiring at the new graduate level, people in their first five or ten years of their career. But one thing that we've seen evolve over the last couple of years as we're continuing to get more and more of these large projects, that we're bringing in a lot of more senior staff as well, you know, people with 30, 35 years of experience. And we're becoming increasingly attractive to those folks also. So, you know, we're seeing labor availability. It's tight out there, no question. But our brand, the type of projects that we're bringing to the table really is enabling us to continue with that hiring. And to your question about do we see that continuing, absolutely. You know, when you look at the organic growth numbers that we're putting up, our expectations, our guidance for this year, you know, that will require continued hiring. And we, you know, I wouldn't say it's easy, but we've been very successful in bringing these people on.

Great color. Thanks, Gordon. And maybe if I turn to the EBITDA margins, in 23, 16.3, 17.1x LTB. So about an 80 basis points difference, I guess, between the two. And then if I look at your 24 EBITDA guide, you're effectively calling for a 40 basis points margin expansion. You know, just wondering, you know, what is assumed as LTIP and what is assumed in terms of underlying margin improvement in 24?

Yeah, so, you know, the way that we establish our guidances is that we assume we use the share price at the end of that reporting period so in this case at the end of December 2023 and we you know we project our LTIP on that basis because you know as you know you have no idea how your share price is going to move over the over the course of the year and so we don't try to bake in any kind of guesses one way or the other and And so as you think about our EBITDA margin from the 16.4 that we reported for 2023 relative to our guided range of 16.2 to 17.2, that is all margin improvement that is incorporated into our current target and assumes a steady share price for our LTIP.

All righty. Thank you.

Thank you.

Thank you.

One moment for our next question. Our next question comes from Devin Dodge with BMO Capital Markets.

Your line's now open.

Yeah, thanks. Good morning. Good morning. I wanted to pick up on Michael's last question there. I looked ahead when from LTIP revaluation, clearly a high-class problem to have. You know, I believe there's been some effort towards insulating this impact from near-term results? Is there a framework or a sensitivity that you can provide in terms of how a change in the stock price impacts LTIP costs and how much of that has been hedged in 2024?

Sure. So you're right. We have put total return swaps on a component of our LTIP program. So there's three tranches of units, two of which are based purely on share price movement. and one tranche, which is the bigger tranche, unfortunately, the performance share units that are based on share price movement and our relative TSR. And so we have hedged the majority of the component that is purely sensitive to share price movement. And so even, you know, as we've been talking through the year about identifying the revaluation impact, that's already net of having hedged that component of our units. It does make it hard for us. We don't hedge the performance share units because we can't get hedge accounting treatment on them and it makes the results even noisier. It's hard to give a sensitivity because every quarter we accrue another tranche of a three-year program. That number then gets multiplied by a share price. The whole number of units you have outstanding gets revalued at the current share price. And then we put it through a Monte Carlo simulation to try and peg what the TSR impact is. And that's a piece that you just can't give a sensitivity or an estimation for. It's an accounting requirement, and so it's hard to say how accurate that simulation process is. And that's the primary reason. It's very hard to give an estimation.

Okay. Good call there. I appreciate a lot of moving parts there. Okay. Maybe just switching over to M&A. Just wondering, are you seeing more seller interest from employee-owned firms that may be finding it challenging to fund their growth plans? And just wondering if those discussions or negotiations with employee-owned firms, whether they differ much from when you're looking to acquire from a single owner?

Yeah, we're absolutely seeing increasing discussions with employee-owned firms. And, you know, both Zetcon and Morrison Hirschfield fell squarely into that category. And one of the... A couple of things that are of note there with those discussions. Certainly, you know, what we're finding is one of the key ones is as they're thinking about share transition, you know, from one generation to the next, And those ones, particularly Morrison-Hirschfield, as well as a number of other discussions that we have ongoing, are just related to the folks coming up through the organization, those 30-somethings and 40-somethings, with not having the ability to to acquire shares. In many major metropolitan areas it's a struggle to buy a house and so they're not finding that they're having the funds to buy in and so as the older generation is retiring there's not the new guys coming in to take over the firm and to buy them out. Lots of interest in staying with the firm doing that type of work but just not the ability to fund share purchases. The other thing that we're seeing with some employee-owned firms is that the investment required not so much, you know, certainly for growth, but also for some of the digital transformations that we see coming. You know, AI increasing demands at both financial and from a knowledge base to keep up with some cyber threats and so on. So we're seeing a number of employee-owned firms beginning to struggle with funding some of those things as well. And so that's generating a lot of the ongoing conversation. A couple of things, though, that you mentioned is talking with an employee-owned firm different than others, maybe public deals, and that is true. The one thing that we find, and is a huge benefit for Stantec in these discussions, is that employee-owned firms are extremely sensitive to culture. They've built this firm, they've owned this firm for many decades, And so who they would transition this firm to from a cultural perspective is very important. And certainly, you know, we're very comfortable there with, you know, the cultural alignment that we bring to a number of these firms. So, yeah, they are a little bit different.

All right. Excellent, Collar. Thanks for that. I'll turn it over.

Thank you.

Thank you. One moment for our next question.

Our next question comes from Maxim Suchov with MBS. Your line is now open.

Hi, good morning. Good morning.

And Teresa, all the best in future endeavors.

Thank you.

I was wondering if it would be possible to get a bit more color on the energy market, which witnessed a slight retraction. Just curious to see what's going on there.

Thanks. A couple of things we're seeing there, certainly on the renewable side, still a lot of activity as we talk about pump storage, we talk about solar and wind and some things, but you are seeing some slowdown in some of the offshore wind projects and things, seeing some stress in some of the suppliers, equipment suppliers. Also, you're seeing in Western Canada, in Alberta in particular, a pause on new renewables. So that's a new renewable power, so that's slowing things there a little bit as well. So we're continuing to monitor all those things. We're not seeing any particular long-term systemic issues. We still are projecting good organic growth for the year in that sector.

Okay. And you're not seeing, I guess, sort of a negative spillover effect into your environmental and what a business is because I think typically there's some subcontracting going on, right?

Yeah. No, no. We're not seeing any at this point, Max.

Okay. Super helpful. Thanks so much. And then in terms of, obviously, people are asking questions around sort of employee-owned firms, but curious to see what's happening with some of the private equity owner's if potentially that could open up an additional sort of venue for targets for you from an M&A perspective.

Thank you. Yeah, we absolutely have seen a number of PE-owned or backed firms in initial stages of conversation, you know, as they're nearing the end of their investment cycle. So I do think in addition to employee-owned firms, we'll see more and more PE firms coming to market, you know, through the year.

Okay. Thank you so much. That's it for me.

Thanks, Max.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Gord Johnson for closing remarks.

Great. Well, thank you again for joining us today. We're very pleased with our Q4 and full year 2023 performance, and we're really optimistic about the outlook here for 2024. So thanks again, and goodbye.

This concludes today's conference call. Thank you for participating. You may now disconnect. Bye. Thank you. you you

Thank you. We'll be right back.

Welcome to Stantec's year-end and fourth quarter 2023 results webcast and 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 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 and Stantec managements, discussion and analysts, 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'm pleased to turn the call over to Mr. Gord Johnston.

Good morning, and thank you for joining us today. 2023 was a remarkable year for Stantec, and I'm very proud of what we accomplished. We achieved record financial results and delivered our best year ever for organic net revenue growth. We grew our employee base by 5% through organic hires, another record, while maintaining our best-in-class employee retention rates. And for a fifth consecutive year, Static has been ranked by Corporate Knights as a top 10 global leader in sustainability. And once again, we rank first amongst our peers. None of this would have been possible without the dedication, passion, and commitment of our employees. And I'd like to thank each individual for their contributions. We started 2024 strong from an M&A perspective and have already closed both the Zetcon and the Morrison Herschfield acquisitions. These are both top-in-class firms, and with the addition of their talented employees to the Stantec team, we are now sitting at over 30,000 people around the world. Closing these acquisitions early in the year helps us jumpstart our new 2024 to 2026 strategic plan. Turning to our 2023 financial results. Overall, we grew net revenue by 14% year over year, with almost 10% coming from organic growth. Market demand in 2023 was particularly robust in our water and environmental service business units and in the US, with each delivering double digit growth for the year. Our strong operational performance drove record high adjusted EBITDA of $831 million, and an EBITDA margin of 16.4%. And as a result, we delivered significant adjusted EPS growth of 17%, achieving a record high of $3.67. Our US business achieved very strong results, with over 18% growth in net revenue for the year, more than 12% of which came from organic growth. In 2023, we achieved organic growth in every one of our business units, with water, buildings, and energy and resources each delivering double digit organic growth. The demand in public sector and industrial projects, as well as large scale water security projects, drove a 25% increase in organic growth for our water business. Our buildings business benefited from higher activity levels in healthcare, industrial and science and technology projects. And energy and resources continued to support Puerto Rico's hurricane recovery, including the upgrading of its power grid, contributing to solid revenue growth. So overall, a very, very solid year for our U.S. operations. In Canada, we achieved greater than 8% organic net revenue growth, which surpassed our expectations for the year. Environmental services, infrastructure and water each delivered double-digit organic growth. Strong demand for permitting and archaeological work drove growth for environmental services, particularly in Western Canada for the midstream energy sector and in Ontario for large-scale transportation projects. Activity on environmental impact assessments in the renewable energy sector also contributed to revenue growth. Infrastructure revenue growth was driven by heightened activities around bridge and roadway work in Western Canada. And our expertise on large wastewater infrastructure projects drove growth in water, especially from work on the Iona BC and Barrie Ontario wastewater treatment facilities. Moving to global, we delivered 6.5% organic growth driven by double digit growth in water and energy and resources. Our industry-leading water business remained very active, supporting long-term framework agreements and investments in water infrastructure in the UK, New Zealand and Australia. In energy and resources, double-digit organic growth was driven by the advancement of our work on the Corey Glass Pump Storage Energy Project and increased activity related to the National Grid Framework in the UK. ENR also continued their work on mining activities around copper and other metals that support the energy transition. And now, I'll turn the call over to Theresa to review our financial results in more detail.

Thanks Gord. Good morning everyone. We closed out the year with a solid quarter of performance in Q4, contributing to another record year for Stantec. In Q4, gross revenue was up 6% compared to Q4 22 at $1.6 billion, while net revenue was up 10% at $1.2 billion. Project margin was right in the middle of our targeted range of 53% to 55%, but decreased 100 basis points compared to Q4 last year, in part due to changes in project mix in the U.S. This, along with the quarter's 90 basis point impact from the revaluation of our long-term incentive plan, contributed to the reduction in adjusted EBITDA margin to 15.7%. Diluted EPS in the quarter was 66 cents, and adjusted diluted EPS was 82 cents, both consistent with last year. Excluding the effect of the LTIP revaluation, our Q4 adjusted EPS was 90 cents. Turning to our full year 2023 results, we generated gross revenue of $6.5 billion and net revenue of $5.1 billion, a 14% increase for both over 2022. Project margin for 2023 was a solid 54.2% consistent with last year, and adjusted EBITDA increased by 15% to $831 million. We increased our adjusted EBITDA margin by 20 basis points to 16.4% within our targeted range. This was despite a 70 basis point impact from LTIP revaluation, resulting from the 64% depreciation in our share price for the year. Excluding this, adjusted EBITDA margin was 17.1%. Our full year diluted earnings per share reached a record high of $2.98, and our adjusted diluted EPS was $3.67, up 34% and 17% respectively, despite the $0.24 unfavorable impact from the LTIP revaluation. Increased earnings also reflect the successful completion of our 2023 real estate strategy. We're pleased to have achieved the targets we set out three years ago by delivering approximately $0.38 of incremental adjusted EPS and reducing our real estate footprint by over 30% from our 2019 baseline. Now turning to our liquidity and capital resources, 2023 was one of our strongest years for operating cash flow generation at $545 million compared to $304 million in 2022. Cash flow this year benefited from a full year of operations post Cardinal integration, as well as increased revenues and diligent management of our working capital, as shown by our four-day reduction in DSO from 81 days to 77 days. Increases in operating cash flow were partially offset by higher tax installment payments driven in part by the impact of U.S. Section 174 and higher interest payments. In 2023, we returned more to our shareholders in dividends, but we were less active with share buyback compared to 2022. And as at December 31, our net debt to adjusted EBITDA was one times well within our internal leverage range of one to two times, positioning us very well to fund our acquisitions of Zetcon and Morrison Hershfield in the first quarter of 2024. And with that, I'll turn the call back to Gord.

Thanks Teresa. In the fourth quarter, we reported a backlog of $6.3 billion. Backlog has grown organically by 5% since December 2022 and continues to grow in each of our geographic regions, with global posting double-digit organic growth. Compared to the third quarter, our backlog grew organically in native currency but was offset by foreign currency fluctuations. Our ability to grow backlog in Q4, which is generally softer as a result of seasonality, clearly demonstrates the strength of the market. Backlog in water continued to strengthen with a 23% organic increase, supported by project winds and wastewater treatment, advanced manufacturing, consultancy frameworks, and master planning services. Buildings also had a number of strong winds, translating into solid, high single-digit organic growth. We continue to see demand for expertise in healthcare, multi-purpose buildings and advanced manufacturing and industrial facilities. Our backlog represents approximately 12 months of work. We continue to capture significant opportunities in the fourth quarter. We were selected to provide a full suite of architectural, engineering and environmental services for a $1 billion lithium ion battery manufacturing facility in British Columbia. E1 Mali's facility will include a research and development complex with a fully integrated green roof, as well as a seven-storey mass timber office building. Our buildings team was selected to design the first comprehensive cancer hospital in Dubai. At over 600,000 square feet, the hospital will be designed recognizing best-in-class building strategies and practices in sustainability. Static is consistently ranked as a top five design firm in the health space. And as we've talked about in the last number of quarters, the UK water appointments are starting to ramp up. This quarter on AMP-AID, we were appointed to the Northumbrian Water Capital Delivery Framework and to the Severn Trent Water Engineering and Design Consultancy Framework. We were also appointed to the Capital Works PMO Framework with Irish Water. Each of these wins secures work for the next five years with the option to extend beyond that period by agreement. We were also very pleased to announce this morning that we were selected to provide integrated design services for Agritas' new battery manufacturing facility in the UK. This is one of the most significant investments in the UK and the factory will be one of the largest of its kind in Europe. This project award is a testament to the breadth and depth of Stantec's expertise in advanced manufacturing and we look forward to working closely with Agritas to support the successful completion of this project. Looking at 2024, we continue to see high levels of activity in all regions, and we've now updated our targets to include Morris and Hirschfield. We have raised our net revenue growth target for the year to 11% to 15%, and expect organic net revenue growth to be in the mid to high single digits. For U.S. and global, we expect mid to high single-digit organic revenue growth, and in Canada, we're guiding to mid single-digit growth. Our EBITDA margin target for the year is in the range of 16.2 to 17.2%. And finally, we have revised our adjusted diluted EPS growth to now be in the range of 12 to 16%. While we're only two months into 2024, we are very confident in being able to achieve these targets and we remain very optimistic for what's to come. Before opening the call to Q&A, I want to comment briefly on the announcement of Theresa's planned retirement. We have been extremely fortunate to have Theresa on the Stantec team for the last five and a half years. She's added tremendous value to the company and has ensured Stantec is in a very strong financial position. While Theresa will remain in her role as CFO until her successor is in place, ensuring a smooth transition, I want to thank her for all of her efforts and everything that she's done for Stantec over the years. And with that, we'll turn the call back to the operator for questions. Operator?

Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Benoit Emporio with Desjardins. Your line is now open.

Yes, thank you very much, and good morning, everyone. And, Teresa, I wish you all the best for your upcoming retirement. You'll be missed for sure. Gord, you mentioned that you were looking at both external and internal candidates. I was just curious if there is any criteria that you are looking at for the CFO search. Any color about the timing for finding the new CFO?

Yeah, well, the search is underway, Benoit. We've been working on it for a couple of months already, and so we're looking forward to, now that the information is out in public, to really gearing up a little bit further on it. As we mentioned in the prepared remarks, Theresa isn't going anywhere. So while we want to be respectful of her wish to retire, we certainly are going to work through this in a planned and orderly fashion. And we hope it certainly will be in 2024, hoping in the next quarter or two.

Okay, and looking at the AMP8 program in the UK, one of your US peers stated that although the funding cycle only officially starts in April 2025, it looks like that they are already seeing multiple UK water clients going out for procurement to be ready. I was just curious, are you seeing this as well?

Oh, absolutely. We've already secured many, many awards for AMP-8. And in fact, some of the planning awards that we've gotten, we've been awarded by clients to help them prepare for AMP-8. So we're actually already working on preparatory planning type work to get ready for. So as soon as that April 2025 hits, we're ready to go. But as we mentioned in the prepared remarks, a couple more with Northumbrian and others that we secured this year. So we've already got well over half, approaching 60% or 70% of our anticipated wins that have already been issued, procured, and awarded.

Okay, that's great, caller. And just in terms of free cash flow, it looks like that the U.S. 174 R&D law remains in place. Could you provide a dollar amount, Edwin, for 2024? And what could be the implication in terms of a free cash flow conversion from net earnings?

Sure. So, you know, this Section 174 has been in place for two years now. And so, you know, we saw an impact in 2022 and 23. And so, as we look year over year, we would expect the impact to be roughly the same. We think roughly $30 to $40 million of additional cash taxes as a result of that rule remaining in place. So, again, year over year, it won't create an impact. And we'll keep watching to see if that relief package is ultimately approved or not.

Okay. And maybe last question for me. Obviously, very solid organic growth environment. I was just curious if you could provide more color about the impact of pricing inflation these days on organic growth.

we've seen over the past couple years is as we came well as we came into 2024 you know there still is some salary pressures but not to the same degree that we saw it in in previous years so there certainly is uh you know and as we as you know in previous years we've been successful in passing along the the majority if not all of that salary increases to our to our clients so You know, we see that there certainly is some inflation, some increase in our fees into the organic growth numbers that we're putting out, but I'd say it's plus or minus, you know, half would be fee increases, and plus or minus half is just additional organic growth.

Okay, that's great. Thank you very much, and congrats again.

Thanks, Benoit.

Thank you.

One moment for our next question.

Our next question comes from Yuri Link with Canaccord Genuity. Your line's now open.

Hey, good morning. Good morning, Yuri. Yeah, good morning. And I'd like to echo Benoit's congratulations to Teresa on your retirement. Thank you. Yeah, no problem. Yeah, so just trying to, I don't know who wants to take this one, just on the guidance, trying to, some of the moving parts in there. So you're calling for mid to high single-digit organic growth in the U.S., but the backlog there grew organically only 2%. But we kind of have the opposite story in global, where you have very strong double-digit organic growth and backlog, and you're calling for mid-single-digit revenue growth. So maybe a little more detail on how we get to those growth rates.

Yeah, I mean, I think when it comes to trying to triangulate how things move from backlog into revenue and what we're seeing in our projections, I think you just have to keep in mind that there's always a couple of dynamics at play. One is that when we report backlog, it's a point in time. And it does require us to have, you know, everything buttoned up contractually before that work goes into our backlog. But of course, you know, our business leaders have a line of sight to work that is near final or in negotiation and they look at the bidding activity and those are the things that they factor into their organic growth projections. The other thing to keep in mind as well is that there's often work that comes through MSAs that really don't come into backlog until those task orders are issued. So it shows up and then is worked through pretty quickly. So that would be the primary reason, Yuri, that you wouldn't necessarily see a straight line from backlog growth into organic growth projections.

Okay, that makes a lot of sense. Theresa, while I've got you, just so I can check my math, where would you peg your pro forma debt to EBITDA ratio at the end of the year?

At the end of the year, I would say at the end of the year, assuming no further acquisitions, which is kind of the way we approach our planning and our projections, we should be, again, to the lower end of the range. The equity offering we did in November really did what we intended for it to do, was it gave us the additional capacity to fund acquisitions while knowing that we had Zedcon and Morrison-Hirschfield to fund in the first quarter here. So we're in really good shape. And so as the year unfolds and cash flow remains a focus for us to turn over quickly, I would say that we should be in the lower half of our range.

Last one, just quickly, it's a bit of a nitty-gritty one. You do mention specifically that you've included Morrison-Hirschfield in your updated guidance. You don't mention ZEDCON. It's safe to assume that's also in there?

Yes, so ZEDCON was included in the guidance when we rolled it out in December, and so incrementally we now have MH in there too. But yes, definitely both are in our current guidance.

That makes sense. Okay, thanks. I'll turn it over.

Thank you. One moment for our next question. Our next question comes from Jacob Bell with CIBC.

Your line is now open.

Good morning. I had a question on your organic growth. It was quite strong in the quarter, but when I look at infrastructure in particular, Your low single digit, I think, was around 3% on a net basis. What happened there, especially as we think about the U.S.? Was organic growth a little better in the U.S.? And then what type of improvement are you expecting year on year, specifically on infrastructure organic growth?

Yeah, and, you know, it's interesting as you think of infrastructure. Primarily for us, that's the transportation business. And as you talk about the – and land development, of course. But, you know, a lot of this, the focus has been on the transportation business. And when you talk about the U.S., of course, we see that continuing to ramp up. The, you know, IIJA continues to roll out. And, you know, you've heard it from us and others. It's always a little bit slower, but it's continuing to ramp up. And so we're, you know, we're seeing that continued support for that business, you know, as we evolve through 2024 and move into subsequent years. So we're not concerned about that.

The second question just on mix, you know, when you look at in for water environmental service building, you know, are you happy with your mix right now? Where would you like to bulk up? And maybe just comment quickly on what Zetcon and Morrison-Hirschfield bring to the table.

Yeah, so, you know, in general, we're very happy with our current mix. I think that... So when you look at Morrison-Hirschfield, it's primarily a lot of expertise in the building segment as well as in transportation. So again, two core areas for us that will continue to move forward. Zetcon is very active also in the transportation space and primarily from a project management and construction management perspective, so roadways, bridges, beginning to get involved in some of the electrical grid work in Germany as well. Again, all sort of the core activities that we've got, and neither of those on their own are really going to materially move our overall split between our various business operating units.

Thank you.

Thank you.

One moment for our next question. Our next question comes from Michael Dumont with Scotiabank.

Your line is now open.

Hey, good morning, Gordon, Teresa. Very impressive pace of organic hires. Just wondering if you could comment on the extent of the improvement in labor availability this year or now versus last year. And if you can comment on, you know, whether you're looking to maintain that pace of organic hires into 2024.

Right. And so, yeah, good question. A couple of things there. You know, firstly, we have really ramped up the pace of hiring over the last number of years. And a lot of the hires, interestingly, are both It's a bit divergent. One is that we continue to hire at the entry level in order to continue to fill out that portion of our demographic profile. So a lot of hiring at the new graduate level, people in their first five or ten years of their career. But one thing that we've seen evolve over the last couple of years as we're continuing to get more and more of these large projects, that we're bringing in a lot of more senior staff as well, you know, people with 30, 35 years of experience. And we're becoming increasingly attractive to those folks also. So, you know, we're seeing labor availability. It's tight out there, no question. But our brand, the type of projects that we're bringing to the table really is enabling us to continue with that hiring. And to your question about do we see that continuing, absolutely. You know, when you look at the organic growth numbers that we're putting up, our expectations, our guidance for this year, you know, that will require continued hiring. And we, you know, I wouldn't say it's easy, but we've been very successful in bringing these people on.

Great color. Thanks, Gordon. And maybe if I turn to the EBITDA margins, in 23, 16.3, 17.1x LTIP. So about 80 basis points difference, I guess, between the two. And then if I look at your 24 EBITDA guide, you're effectively calling for a 40 basis points margin expansion. You know, just wondering, you know, what is assumed as LTIP and what is assumed in terms of underlying margin improvement in 24?

Yeah, so, you know, the way that we establish our guidance is that we assume, we use the share price at the end of that reporting period, so in this case at the end of December 2023, and we, you know, we project our LTIP on that basis because, you know, as you know, you have no idea how your share price is going to move over the course of the year, and so we don't try to bake in any kind of guesses one way or the other. And so as you think about our EBITDA margin from the 16.4 that we reported for 2023 relative to our guided range of 16.2 to 17.2, that is all margin improvement that is incorporated into our current target and assumes a steady share price for our LFIP.

All righty.

Thank you.

Thank you.

Thank you.

One moment for our next question. Our next question comes from Devin Dodge with BMO Capital Markets.

Your line's now open.

Yeah, thanks. Good morning. Good morning. I wanted to pick up on Michael's last question there. I looked ahead when from LTIP revaluation, clearly a high class problem to have. I believe there's been some effort towards insulating this impact from near-term results? Is there a framework or a sensitivity that you can provide in terms of how a change in the stock price impacts LTIP costs and how much of that has been hedged in 2024?

Sure. So you're right. We have put total return swaps on a component of our LTIP program. So there's three tranches of units, two of which are based purely on share price movement. and one tranche, which is the bigger tranche, unfortunately, the performance share units that are based on share price movement and our relative TSR. And so we have hedged the majority of the component that is purely sensitive to share price movement. And so even as we've been talking through the year about identifying the revaluation impact, that's already net of having hedged that component of our units. It does make it hard for us. We don't hedge the performance share units because we can't get hedge accounting treatment on them and it makes the results even noisier. So it's hard to give a sensitivity because every quarter we accrue another tranche of a three-year program. That number then gets multiplied by a share price. The whole number of units you have outstanding gets revalued at the current share price. And then we put it through a Monte Carlo simulation to try and peg what the TSR impact is. And that's the piece that you just can't give a sensitivity or an estimation for. It's an accounting requirement, and so it's hard to say how accurate that simulation process is. And that's the primary reason. It's very hard to give an estimation.

Okay. That's a good call there. I appreciate a lot of moving parts there. Okay. Maybe just switching over to M&A, just wondering, are you seeing more seller interest from employee-owned firms that may be finding it challenging to fund their growth plans? And just wondering if those discussions or negotiations with employee-owned firms, whether they differ much from when you're looking to acquire from a single owner?

Yeah, we're absolutely seeing increasing discussions with employee-owned firms. And, you know, both Zetcon and Morrison Hirschfield fell squarely into that category. And one of the... A couple of things that are of note there with those discussions. Certainly, you know, what we're finding is one of the key ones is as they're thinking about share transition, you know, from one generation to the next, And those ones, particularly Morrison-Hirschfield, as well as a number of other discussions that we have ongoing, are just related to the folks coming up through the organization, those 30-somethings and 40-somethings, with not having the ability to to acquire shares. In many major metropolitan areas it's a struggle to buy a house and so they're not finding that they're having the funds to buy in and so as the older generation is retiring there's not the new guys coming in to take over the firm and to buy them out. Lots of interest in staying with the firm doing that type of work but just not the ability to fund share purchases. The other thing that we're seeing with some employee-owned firms is that the investment required not so much, you know, certainly for growth, but also for some of the digital transformations that we see coming. You know, AI increasing demands at both financial and from a knowledge base to keep up with some cyber threats and so on. So we're seeing a number of employee-owned firms beginning to struggle with funding some of those things as well. And so that's generating a lot of the ongoing conversation. A couple of things, though, that you mentioned is talking with an employee-owned firm different than others, maybe public deals, and that is true. The one thing that we find and is a huge benefit for Stantec in these discussions is that employee-owned firms are extremely sensitive to culture. They've built this firm, they've owned this firm for many decades. And so, who they would transition this firm to from a cultural perspective is very important. And certainly, you know, we're very comfortable there with, you know, the cultural alignment that we bring to a number of these firms. So, yeah, they are a little bit different.

All right. Excellent, Collin. Thanks for that. I'll turn it over.

Thank you.

Thank you. One moment for our next question.

Our next question comes from Maxim Suchov with MBS. Your line's now open.

Hi, good morning. Good morning. And Teresa, all the best in future endeavors.

Thank you.

I was wondering if it would be possible to get a bit more color on the energy market, which witnessed a slight retraction. Just curious to see what's going on there.

Thanks. A couple of things we're seeing there, certainly on the renewable side, still a lot of activity as we talk about pumped storage, we talk about solar and wind and some things, but you are seeing some slowdown in some of the offshore wind projects and things, seeing some stress in some of the suppliers, equipment suppliers. Also, you're seeing in Western Canada, in Alberta in particular, a pause on new renewables. So that's a new renewable power, so that's slowing things there a little bit as well. So we're continuing to monitor all those things. We're not seeing any particular long-term systemic issues. We still are projecting good organic growth for the year in that sector.

Okay. And you're not seeing, I guess, sort of a negative spillover effect into your environmental and what a business is, because I think typically there's some subcontracting going on, right?

Yeah. No, no, we're not seeing any at this point, Max.

Okay. Super helpful. Thanks so much. And then in terms of, obviously, people are asking questions around sort of employee-owned firms, but curious to see what's happening with some of the private equity owners if potentially that could open up an additional sort of venue for targets for you from an M&A perspective.

Thank you. Yeah, we absolutely have seen a number of PE-owned or backed firms in initial stages of conversation, you know, as they're nearing the end of their investment cycle. So I do think in addition to employee-owned firms, we'll see more and more PE firms coming to market, you know, through the year.

Okay. Thank you so much. That's it for me.

Thanks, Max.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Gord Johnson for closing remarks.

Great. Well, thank you again for joining us today. We're very pleased with our Q4 and full year 2023 performance, and we're really optimistic about the outlook here for 2024. So thanks again, and goodbye.