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spk04: Welcome to STANTEC's year-end and fourth quarter 2023 Results Webcast and Commerce Call. Leading the call today are Gord Johnston, President and Chief Executive Officer, and Teresa Zheng, 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 Commerce Call is subject to the forward-looking statement Polifications set out on slide 2. 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.
spk02: 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 -in-class employee retention rates. And for a fifth consecutive year, STANTEC has been ranked by Corporate Knights as a top 10 global leader in sustainability and once again, we ranked 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-Hirschfield acquisitions. These are both -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 U.S., 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 U.S. 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 a core 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, grew 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, B.C., and Barrie, Ontario wastewater treatment facilities. Moving to global, we delivered .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 U.K., New Zealand, and Australia. In energy and resources, double-digit organic growth was driven by the advancement of our work on the Corrie Glass Pump Storage Energy Project and increased activity related to the national grid framework in the U.K. E&R 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.
spk10: Thanks, Gorge. Good morning, everyone. We closed out the year with a solid quarter of performance in Q4, contributing to another record year for SanTech. 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 outset 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 .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 .4% within our targeted range. This was despite a 70 basis point impact from LTIP revaluation, resulting from the 64% appreciation 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 24 cent 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 38 cents 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 card no 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 US 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 time 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.
spk02: Thanks, Theresa. In the fourth quarter, we reported 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 wins in wastewater treatment, advanced manufacturing, consultancy frameworks, and master planning services. Buildings also had a number of strong wins, translating into solid, high single digit organic growth. We continue to see demand for our expertise in healthcare, multipurpose 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 story mass timber office building. Our building 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 wrap up. This quarter on AppAid, 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 STANTEX 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 Morrison Hershfield. We have raised our net revenue growth target for the year to 11 to 15 percent and expect organic net revenue growth to be in the mid to high single digits. For US 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 percent. And finally, we have revised our adjusted diluted EPS growth to now be in the range of 12 to 16 percent. 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 Teresa's planned retirement. We have been extremely fortunate to have Teresa 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 Teresa 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.
spk04: Operator. Thank you. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while
spk06: we compile the Q&A roster. Our first question comes from Benoit Emporeuil with Day
spk04: Jardin. Your line is now open.
spk13: 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. Gaurd, you mentioned that you're looking at both external and internal candidates. I was just curious if there's any criteria that you're looking at for the CFO search. Any color about the timing for finding the new CFO?
spk02: Yeah, well, you know, the search is underway. Thank you, 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. You know, as we mentioned in the prepared remarks, Teresa isn't going anywhere. So, you know, 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, you know, we hope it certainly will be in 2024, hoping in the next quarter or two.
spk13: 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?
spk02: Oh, absolutely. You know, we've already secured, you know, many, many awards for AMP8. And in fact, some of the planning awards that we've gotten, we've been awarded by clients to help them prepare for AMP8. 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, you know, 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.
spk13: Okay, okay. That's great, Caller. And just in terms of free cash flow, it looks like that the US 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?
spk10: 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 2023. And so as we look year over year, we would expect the impact to be roughly the same. We think of roughly 30 to 40 additional, 30 to 40 million dollars of additional cash taxes as a result of that remaining in place. So again, year over year, it won't create an impact. And we, you know, we'll keep watching to see if that relief package comes, is ultimately approved or not.
spk13: Okay. And maybe last question for me, obviously, very solid organic growth environment. I was just curious if you could provide more, Caller, about the impact of pricing inflation these days on organic growth.
spk02: You know, we, what we've seen over the past couple of years is as we came, well, as we came into 2024, you know, there still is salary pressures, but not to the same degree that we saw it in previous years. So there certainly is, you know, and 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. So, you know, we, we see that there certainly is some inflation, some increase in our fees into that, 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.
spk13: Okay, that's great. Thank you very much and congrats again. Thanks, Benoît.
spk04: Thank you. One
spk06: moment for our next question.
spk04: Our next question comes from Yuri Link with Canon Corp Genuity. Your line is now open.
spk05: Hey, good morning and I'd like to echo Benoît's congratulations to Tris on your retirement.
spk06: Thank
spk05: 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 square some of the moving parts in there. So you're calling for mid to high single digit organic growth in the US, 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 can you maybe a little more detail on how we get to those growth rates?
spk10: 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 is, you know, it's a point in time and it does require us to have 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 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, you know, 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.
spk05: 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?
spk10: At the end of the year, I mean, I would say at the end of the year, assuming, you know, 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 Zetcon 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.
spk05: 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 Zetcon. Safe to assume that's also in there?
spk10: Yes, so Zetcon 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.
spk05: That makes sense. Okay. Thanks. I'll turn it over.
spk06: Thank you. One moment for our next question. Our next question comes from Jacob Belt with
spk04: CIBC. Your line is now open.
spk12: Good morning. 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 it was around 3% on a net basis. What happened there, especially as we think about the US, was your organic growth a little better in the US? And then what type of improvement are you expecting year on year specifically on infrastructure organic growth?
spk02: Yeah, it's interesting as you think of infrastructure, primarily for us, that's the transportation business. And as you talk about the land development, of course, but a lot of this, the focus has been on the transportation business. And when you talk about the US, of course, we see that continuing to ramp up. The IJA continues to roll out. And 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 seeing that continued support for that business as we evolve through 2024 and move into subsequent years. So we're not concerned about that.
spk12: The second question just on mix, when you look at in for water, environmental service building, are you happy with your mix right now? Where would you like to bulk up? And maybe just comment quickly on what's at con and Morrison Hirschfield bring to the table?
spk02: Yeah, so 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. That con 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. So, 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 our overall split between our various business operating units.
spk01: Thank you.
spk06: Thank
spk04: you.
spk06: One moment for our next question. Our next question comes from Michael Dumont with
spk04: Scotiabank. Your line is now open.
spk11: Hey, good morning, Gordon, Teresa. Very impressive pace of organic hires. Just wondering if you could comment on the extent of the improvement in labour availability this year or now versus last year. And if you can comment on whether you're looking to maintain that pace of organic hires into 2024.
spk02: 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 doing a lot. And a lot of the hires, interestingly, are both a bit of a bit divergent. One is that the 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 labour availability. It's tight out there, no question. But our brand, the type of project that we're bringing to the table really is enabling us to continue with that hiring. And to your question about do we do we see that continuing? Absolutely. You know, we 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.
spk11: Great color. Thanks, Gordon. And maybe if I turn to the EBITDA margins in 23, 16.3, 17.1 x LTCH. 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 is out to what is assumed in terms of underlying margin improvement in 24.
spk10: Yeah, so, you know, we 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 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 if 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 a steady share price for our LTIP.
spk11: All right. Thank you.
spk07: Thank you.
spk04: Thank you. One moment for
spk06: our next question. Our next question comes from Devon Dodge with BMO
spk04: Capital Markets. Your line is no.
spk03: Yeah, thanks. Good morning. I wanted to pick up on Michael's last question there. I looked ahead one 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 class and how much of that has been hedged in 2024?
spk10: Sure. So you're right. We have put total return swaps on a component of our ELSA 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. So that 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 makes the results even noisier. So it's hard to give a sensitivity because every quarter we accrue, you know, another tranche of a three year program that, you know, 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, you know, it's hard to say how accurate that that simulation process is. And that's the primary reason it's very hard to give a given estimation.
spk03: Okay, good call. Yeah, 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, was they different much from when you're looking to acquire from a single owner?
spk02: Yeah, we're absolutely seeing increasing discussions with employee owned firms. And, you know, both Zetcon and Morrison Hershfield 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, you know, we, those ones, particularly Morrison Hershfield, as well as a number of other discussions that we have ongoing, are just related to the, you know, the folks coming up through the organization, those 30-somethings and 40-somethings, you know, with not having the ability to acquire shares. You know, they're in many major metropolitan areas, you know, 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 these, 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 firm, 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. You know, 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.
spk03: Excellent color. Thanks for that. I'll turn it over.
spk04: Thank
spk06: you. Thank you. One moment for our next question. Our next question comes from
spk04: Maxim Sitchov with MBS. Your line is now open.
spk08: Hi, good morning.
spk07: Morning.
spk08: And then, Teresa, all the best and future endeavors.
spk07: Thank you.
spk09: 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.
spk02: Thanks. So a couple of things we're seeing there, certainly the on the renewable side, you know, a lot still a lot of activity as we talk about pump storage. We talk about, you know, solar and wind and some things, but you are seeing some slowdown in some of the 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, you know, in Alberta in particular, you know, a pause on on new renewables. So that's our non new renewable power. So that's slowing things there a little bit as well. But we, you know, we so we're continuing to monitor all those things. We're not seeing any particular long term systemic issues. You know, we still are projecting good organic growth for the year in that sector.
spk09: OK, and you're not seeing, I guess, sort of a negative slower effect into your environmental and what a business is, because I think typically there's some subcontracting going on.
spk02: Yeah, no, no, we're not seeing any at this point.
spk09: OK, super helpful. Thanks so much. And then in terms of obviously, you know, people are asking questions around sort of employee on firms, but just to see what's happening with some of the private equity owners. If potentially that could open up an additional sort of venue for for for targets for for you from an M&A perspective.
spk02: Thank you. We yeah, we absolutely have seen a number of P 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.
spk09: OK, thank you so much. That's it for
spk02: me. Thanks, Max.
spk04: 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.
spk02: 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.
spk04: This concludes today's conference call. Thank you for participating. You may now disconnect.
spk00: Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
spk04: Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Welcome to STANTEC's year end and fourth quarter 2023 results webcast and commerce call. Leading the call today are Gord Johnston, President and Chief Executive Officer, and Teresa Jeng, 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, Polification set out on slide two, detailed in STANTEC management, 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.
spk02: 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 -in-class employee retention rates. And for a fifth consecutive year, STANTEC has been ranked by Corporate Knights as a top 10 global leader in sustainability, and once again, we ranked 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-Hirschfield acquisitions. These are both -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% -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 U.S., 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 U.S. 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, grew 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, B.C., and Barrie, Ontario wastewater treatment facilities. Moving to global, we delivered .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 U.K., New Zealand, and Australia. In energy and resources, double-digit organic growth was driven by the advancement of our work on the Corrie Glass Pump Storage Energy Project and increased activity related to the National Grid Framework in the U.K. 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.
spk10: Thanks, Gorge. Good morning, everyone. We closed out the year with a solid quarter of performance in Q4, contributing to another record year for SanTech. 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 upset 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 .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 .4% within our targeted range. This was despite a 70 basis point impact from LTIP revaluation, resulting from the 64% appreciation 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 24 cent 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 38 cents 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 card no 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 US 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 time 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.
spk02: Thanks, Theresa. 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 wins in wastewater treatment, advanced manufacturing, consultancy frameworks, and master planning services. Buildings also had a number of strong wins, translating into solid, high single digit organic growth. We continue to see demand for our expertise in healthcare, multipurpose 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 story 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 Amph-8, 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 Morrison Hershfield. We have raised our net revenue growth target for the year to 11 to 15 percent and expect organic net revenue growth to be in the mid to high single digits. For US 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 percent. And finally, we have revised our adjusted diluted EPS growth to now be in the range of 12 to 16 percent. 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 Teresa's planned retirement. We have been extremely fortunate to have Teresa on the Stantec team for the last five and a half years. She has added tremendous value to the company and has ensured Stantec is in a very strong financial position. While Teresa 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.
spk04: Operator. Thank you. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile
spk06: the Q&A roster. Our first question comes from
spk04: Benoit Emporeuil
spk06: with
spk04: Desjardins. Your line is now open.
spk13: Yes, thank you very much and good morning everyone. And Teresa, wish you all the best for your upcoming retirement. You'll be missed for sure. Gaurd, you mentioned that you're looking at both external and internal candidates. I was just curious if there was any criteria that you're looking at for the CFO search. Any color about the timing for finding the new CFO?
spk02: 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 gearing up a little bit further on it. As we mentioned in the prepared remarks, Teresa 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.
spk13: 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?
spk02: Oh, absolutely. You know, we've already secured, you know, many, many awards for AMP8. And in fact, some of the planning awards that we've gotten, we've been awarded by clients to help them prepare for AMP8. 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, you know, 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 percent of our anticipated wins that have already been issued, procured and awarded.
spk13: Okay. Okay. That's great, Calder. And just in terms of free cash flow, it looks like that the US 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 free cash flow conversion from net earnings?
spk10: 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 2023. And so as we look year over year, we would expect the impact to be roughly the same. We think roughly 30 to 40 additional, 30 to 40 million dollars 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, you know, we'll keep watching to see if that relief package comes, is ultimately approved or not.
spk13: 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.
spk02: You know, we, what we've seen over the past couple of years is as we came, well, as we came into 2024, you know, there still is salary pressures, but not to the same degree that we saw it in previous years. So there certainly is, you know, and 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. So, you know, we, we see that there certainly is some inflation, some increase in our fees into that, 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.
spk13: Okay, that's great. Thank you very much and congrats again.
spk02: Thanks, Benoît.
spk06: Thank
spk04: you.
spk06: One moment for our next question.
spk04: Our next question comes from Yuri Link with Canocore Genuity. Your line is now open.
spk05: Hey, good morning. And I'd like to echo Benoît'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 square some of the moving parts in there. So you're calling for mid to high single digit organic growth in the US, 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 can you maybe a little more detail on how we get to those growth rates?
spk10: Yeah, I mean, I think when it comes to trying to, trying to triangulate how things move from backlog into, 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 is, you know, it's a point in time and it does require us to have 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 work that comes through MSAs that really don't come into backlog until those task orders are issued. So, you know, 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.
spk05: 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 at the EBITDA ratio at the end of the year?
spk10: At the end of the year, I mean, I would say at the end of the year, assuming, you know, 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 Zetcon 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.
spk05: 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 Zetcon. It's safe to assume that's also in there.
spk10: Yeah, so Zetcon 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.
spk04: Does that
spk05: make
spk04: sense? Okay, thanks. I'll turn it over.
spk06: Thank you. One moment for our next question. Our next question comes from Jacob Belt with CIBC.
spk04: Your line is now open.
spk12: 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 it was around 3% on a net basis. What happened there, especially as we think about the US, was your organic growth a little better in the US? And then what type of improvement are you expecting year on year specifically on infrastructure or organic growth?
spk02: Yeah, it's interesting as you think of infrastructure, primarily for us that's the transportation business. And as you talk about the land development, of course, but a lot of this, the focus has been on the transportation business. And when you talk about the US, of course, we see that continuing to ramp up. The IIJA continues to roll out and you've heard it from us and others. It's always a little bit slower, but it's continuing to to wrap up. And so we're seeing that the continued support for that business, as we evolve through 2024 and move into subsequent years. So we're not concerned about that.
spk12: The second question just on mix, when you look at in for water, environmental service building, are you happy with your mix right now? Where would you like to bulk up and maybe just comment quickly on what's at con and Morrison Hirschfield bring to the table?
spk02: Yeah, so, you know, in general, we're very happy with 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 in Germany as well. So, again, all sort of the core activities that we've got and none of neither of those on their own are really going to materially move our our overall split between our various business operating units.
spk04: Thank you. Thank you. One moment
spk06: for our next question. Our next question comes from Michael Duhmet with
spk04: Scotiabank. Your line is now open.
spk11: Hey, good morning, Gordon, Teresa. Very impressive pace of organic hires. Just wondering if you could comment on, you know, 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.
spk02: 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 doing a lot. And a lot of the hires, interestingly, are both a bit divergent. One is that the 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 and we're becoming increasingly attractive to those folks also. So, you know, we're seeing labor availability. It's tight out there. No, no question. But our brand, the type of projects that we're bringing to the table really is is enabling us to to continue with that hiring. And to your question about do we do we see that continuing? Absolutely. You know, we 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.
spk11: Very color. Thanks, Gordon. And maybe if I turn to the EBITDA margins in 23, 16.3, 17.1 X. 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 is out to what is assumed in terms of underlying margin improvement in 24.
spk10: Yeah, so, you know, we 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 L tip 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 so if 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, a steady share price for our L tip.
spk04: All righty. Thank you.
spk07: Thank you.
spk06: Thank
spk04: you.
spk06: One moment for our next question. Our next question comes from Devon Dodge with BMO Capital
spk04: Markets. Your line is now open.
spk03: Yeah, thanks. Good morning. I want to, I want to pick up on the Michael's last question there. I looked ahead one from L tip 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, you know, how a change in the stock price impacts L tip class and how much of that has been hedged in 2024?
spk10: Sure. So you're right. We have put total return swaps on a component of our L tip 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. So that 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 makes the results even noisier. So it's hard to give a sensitivity because every quarter we accrue, you know, another tranche of a three year program that, you know, 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, you know, it's hard to say how accurate that that the simulation process is. And that's the primary reason it's very hard to give a given estimation.
spk03: Okay, good call. Yeah, I appreciate a lot of moving parts there. Okay. Maybe just switching over to M&A. I'm 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?
spk02: Yeah, we're absolutely seeing increasing discussions with employee owned firms. And, you know, both Zetcon and Morrison Hershfield 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, you know, those ones, particularly Morrison Hershfield, 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, you know, with not having the ability to acquire shares. You know, they're in many major metropolitan areas, you know, 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 these, 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, you mentioned is talking with an employee firm, 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. You know, 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.
spk03: Excellent color. Thanks for that. I'll turn it over.
spk04: Thank you.
spk06: Thank you. One moment for our next question. Our next question comes from
spk04: Maxim Sitchov with NBS. Your line is now open.
spk08: Hi, good morning.
spk07: Morning.
spk08: And Teresa, all the best in future endeavors.
spk07: Thank you.
spk09: 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.
spk02: Thanks. So a couple of things we're seeing there, certainly the on the renewable side, you know, a lot still a lot of activity as we talk about pump storage, we talk about, you know, solar and wind and some things, but you are seeing some slowdown in some of the 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, you know, in Alberta in particular, you know, a pause on on new renewables. So that's our non new renewable power. So that's slowing things there a little bit as well. But we, you know, we so we're continuing to monitor all those things. We're not seeing any particular long term systemic issues. You know, we still are projecting good organic growth for the year in that sector.
spk09: OK, 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.
spk02: Yeah, no, no, we're not seeing any at this point.
spk09: OK, super helpful. Thanks so much. And then in terms of obviously, you know, people are asking questions around sort of employee on 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 for for targets for for you from an M&A perspective.
spk02: Thank you. We 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.
spk09: OK, thank you so much. That's it for me.
spk02: Great. Thanks, Max.
spk04: 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.
spk02: 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.
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