Stantec Inc

Welcome to Stantec's 3rd Quarter 2024 Results Webcast and Conference Call. Leading the call today are Gord Johnston, President and Chief Executive Officer, and Vito Goumon, 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 forward-looking statement, qualifications set out on slide two, detailed and static management discussion analysis, and incorporated in full for the purposes of today's call. Unless otherwise noted, dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded. With that, I'm pleased to turn the call over to Mr. Gore Johnston.

Good morning, and thank you for joining us today. I'm happy to report very solid third quarter results as we delivered another record quarter. We continue to see strong demand in all of our geographies and across our business operating units. Climate change, aging infrastructure, industry shifts, Reshoring of production and incremental and breakthrough technologies all continue to drive this demand. We achieved record net revenue of $1.5 billion, up almost 16% compared to Q3 2023. This was generated with 6.5% organic and almost 8% acquisition growth. We delivered solid organic growth in each of our key geographies, and we had organic growth in each of our business operating units, with the exception of energy and resources. Our water and buildings businesses both realized double-digit organic growth. As a result of solid project execution, adjusted EBITDA for the quarter rose to $275 million, up almost 14%, with a very healthy margin of 18%, and we delivered adjusted EPS of $1.30, also up 14%. in addition to our record results i want to highlight a recent accolade that stantec received newsweek recently released their list of canada's most responsible companies for 2025. i'm very pleased to announce that stantec was ranked at number one for our commitment to climate social welfare and responsible governance over 700 of canada's largest private and public companies were evaluated on over 30 key performance indicators Those results were coupled with a corporate social responsibility reputation survey of over 4,000 Canadian consumers. The final rankings list included only 150 companies where Stantec achieved the highest score and was the only firm in the rankings to achieve a score of 100 related to governance. We're honored to be recognized by organizations like Newsweek for our leadership and sustainability and for making a positive impact on society. I'll turn to our results in each of our geographies. Our US business continues to perform well, delivering a 9% increase in net revenue from the third quarter, including 5.6% organic and approximately 2% acquisition growth. The public and private investments that we're seeing in the US allowed all of our business operating units to achieve solid organic growth. Significant transit, rail and roadway, and residential development projects contributed to double-digit organic growth in infrastructure. Water capitalized on continued robust public sector and industrial demands, as well as large-scale water security projects. Our buildings business saw continued strong demand across most subsectors, including healthcare, industrial, and science and technology. In Canada, we grew our net revenue by almost 18% with 9% organic growth and 8.5% acquisition growth. Each of our infrastructure, buildings, and water businesses experienced double-digit organic growth. Our infrastructure team saw a significant ramp-up in work related to major roadway projects in Western Canada, transit and rail projects in Eastern Canada, and land development projects in Alberta. Our buildings business performed extremely well as they continued their leading work in healthcare, civic, and education. And our water business continued to outperform, working on major wastewater projects across the country. The ramp up of a major power-intensive industrial project this quarter helped our Canadian energy and resources business return to growth. Our global operations generated over 30% growth in net revenue, reflecting 22% acquisition and close to 6% organic growth. Our industry-leading water business saw strong organic growth across the UK, New Zealand, and Australia through long-term framework agreements and public sector investment in water infrastructure. Buildings achieved 16% organic growth as we're continuing to ramp up on the Cancer Center in Dubai and on the 4 billion pound battery cell manufacturing facility in the UK. And our environmental services business continued to see strong organic growth from energy transition projects in Europe. Our global energy and resources business, particularly in mining, saw a slight retraction again this quarter, offsetting growth in the U.S. and Canada. Now I'll turn the call over to Vito to review our financial results in more detail.

Thank you, Gordon. Good morning, everyone. The very strong results we delivered in Q3 continues our solid track record thus far for the 2024 fiscal year. Gross revenue in Q3 grew to $1.9 billion. up almost 14% year-over-year, and net revenue of $1.5 billion is up almost 16%. On a year-to-date basis, net revenue is approximately $4.4 billion, up almost 15% compared to last year at this time. As a percentage of net revenue, projects came in at 54.3%, a decrease of 50 basis points compared to Q3 of 2023, reflecting a minor shift in project mix, And, as previously stated, project recoveries and change order approvals in 2023 that were higher than normal for a single quarter. As Gord mentioned, we achieved a very solid adjusted EBITDA margin of 18% in Q3. Our year-to-date EBITDA margin now stands at 16.7%. And our adjusted diluted EPS in the quarter increased 14% year-over-year to $1.30. This increase reflects strong operational performance, along with the revaluation impacts of our long-term incentive program due to strong share price appreciation in the prior period. Turning to our cash flow, liquidity, and capital resources. During the first nine months of the year, we generated very strong cash flows, achieving $296 million in operating cash flow. This reflects continued strong organic revenue growth, partially offset by an increased investment in networking capital in support of organic revenue growth. DSO at the end of the quarter stood at 80 days, which is within our target range. And as a reminder, DSO is typically a little higher in the third quarter as a result of the seasonal impacts. Our net debt to adjusted EBITDA ratio at quarter end was 1.5 times, a reduction from 1.7 times at the end of Q2, which reflects the free cash flow we generated in the quarter. We continue to remain well within our target range of one to two times, and the balance sheet is in great shape. Lastly, one technical accounting matter I wanted to speak to briefly. Our Q3 financial statements reflect adjustments emanating from clarifying guidance that the IFRS Interpretations Committee issued in April of this year. This guidance relates to how deferred acquisition consideration should be treated when it may also be contingent on the seller's continuing employment. Note 3 of our Q3 financial statements fully summarizes the accounting impacts resulting from the updated guidance. However, in a nutshell, the adjustments aggregate to a non-cash charge, reducing goodwill by approximately $310 million, and a reduction in our retained earnings by approximately the same amount. I will highlight that this reduction was not in any way related to operating performance, but rather to how the terms of our past agreements were documented, and we do not anticipate future impacts from this updated interpretation. Before handing the call back to Gord, with this being my first earnings call here at Stantec, I just wanted to share how excited I am to be here. It's a true privilege to join you, Gord, my executive colleagues, a strong finance team, and the rest of Stantec's over 32,000 employees. In my short time here, it's abundantly obvious to me that Stantec has truly built something special, and with that comes significant value creation opportunities for years to come. Gordon, I'll hand the call back to you.

Great. Thanks, Guido. At the end of the third quarter, our backlog reached a record-setting $7.3 billion.

since since December of 2023. This represents 9.5% acquisition and almost 5% organic growth, which was achieved across all of our regions. Backlog traditionally declined in the third quarter as we've learned through a significant amount of work. However, this year, despite our strong revenues, we've seen an increase in backlog sequentially from Q2, which really highlights the demand for our services. Our backlog represents approximately 12 months' work. Let me now highlight just some of the major projects we were awarded in Q3. First, I'll note that in the UK, we continue to secure our future workload-related AMP-8 in the regulated water business. During the quarter, we received a significant win with Northern Ireland Water to provide feasibility, design, and climate change services for the next regulatory cycle. In addition, we continue to secure additional AMP8 frameworks across the UK, with significant contracts being won with both Thames Water and United Utilities over the last quarter. This brings the total number of AMP8 frameworks secured across the UK and Ireland to over 20, strengthening our position as the leading water firm in the UK and securing our market share in regulated water. Second, Between community development and buildings, we've been awarded an MSA to assist a confidential data center client in selecting sites and providing design services for multiple data center campuses across Western Canada. In terms of scale, each site will equate to hundreds of megawatts. While data centers currently only account for 1 to 2% of our overall net revenue, it is one of the fastest growing areas within our buildings business. And given our strong expertise in the space, we see this business potentially tripling within just a couple of years. Lastly, I'm pleased to highlight that we've just won our third master services agreement with Luma Energy in Puerto Rico. This MSA is part of a federal emergency management agency funded effort to continue to rebuild and strengthen the electrical grid in Puerto Rico following major hurricanes. We've done a lot of work with LUMA over the past few years, and over the next three years, this new MSA will allow Stentec's teams to continue engineering and grid reconstruction designs and upgrades to aging infrastructure, including multiple transmission lines, distribution feeders, and substations. And now, turning to our guidance. Based on our strong performance in Q3 and outlook for Q4, we're expecting 2024 to be another record-setting year. With that, we're raising certain targets in our guidance and narrowing some ranges further. We're increasing the bottom end of our net revenue range for the year to 14.5% to 15%, up from 12% to 15%. We remain confident with our expectations of organic net revenue growth being in the mid to high single digits and acquisition growth being in the high single digits. In addition, we continue to expect the U.S. and global regions to deliver organic growth in the mid to high single digits and Canada to be in the mid single digits. we maintain our target for adjusted EBITDA margin for the year to 16.5% to 16.9%, which reflects our continued confidence in solid project execution and operational performance. With our increased expectations for net revenue growth, we now expect adjusted diluted EPS growth to be in the range of 16% to 18%, up from 12% to 16%, and our adjusted ROIC to now be above 12%. 2024 is shaping up to be another record-setting year for Stantec, which puts us in a great position to continue to successfully execute on our 2024 to 2026 strategic plan. The demand fundamentals for our business remain strong, and I'm excited for what's to come in 2025 and beyond. And with that, I'll turn the call back to the operator for questions. Operator?

Thank you. At this time, we'll conduct a question-and-answer session To ask a question, you will need to 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 the line of Benoit Poirier of Disjardins. Your line is now open.

Yes, thank you very much. Good morning, everyone. Congrats for the results and welcome to the STEM Tech team, Vito.

Thank you, Benoit.

Yeah, just in terms of organic growth, obviously very strong performance during the quarter, especially from water and building that reported the double digit. Any thoughts about the double digit sustainability for those two segments? And also, if you could comment about the energy and resources Obviously, you experienced some delays in the ramp up of new projects and the wind down of some projects late in 2023. So, just wondering what we could expect in the coming quarter for this segment. Thank you.

Yeah, thanks, Benoit. You know, for water and buildings, you know, we see really strong tailwinds for both of them. You know, certainly our water franchise, extremely busy here in Canada, the U.S., Australia, New Zealand with the framework agreements there. And as we've mentioned, we've now won over 20 AMP-based frameworks in the U.K. and Ireland. So very, very strong growth going forward for the next couple of years there. You know, buildings is another interesting one for us. You know, we all look at the ABI index in 2020. orders of success of, you know, performance below 50. But yet for us, you can see, you know, the strong organic growth that we've had in buildings, you know, for the last couple of years, you know, just a little over 11% year to date for us here now. So we see good continued growth in the building section. So to your comment on ENR, You're right, we've come off, you know, last year, you know, every quarter that we had in ENR in 2023 was, you know, pretty strong, particularly in the first part of the year. So, you know, we have seen some, so in Q3, Canada and the US, we both had some positive net revenue growth there, but it really was the global mining business that pulled things down a little bit. So I think what we see is that We're still confident that we're going to return to organic growth in ENR in Q4. Just as an aside, the backlog in our energy and resources group is up about 9% year-to-date. So that really kind of supports that thesis of returning to backlog growth here in Q4 and certainly stronger performance going into 2025. Yeah, definitely an improvement trend in ENR.

Okay, that's great caller. And just with respect to the margin, a little bit down versus a year ago, even if you normalize with LTIPS, I'm looking at the admin and marketing expenses percentage was up slightly versus a year ago. Is it just a matter of LTIPS or is there more cost to support the strong bidding activities that you see out there?

Benoit, you're absolutely right. As a percentage of NR, our Q3 admin was 37.5% this year versus 37.3%. So up a little bit. That does reflect some benefit, actually, we had. Last year, the share-based compensation would have been a headwind, again, because we had share price appreciation. This year was fairly neutral. So when you adjust for that, you do have a bit more of a... increase relative to what we're showing in the externals. And what that reflects really is labor, training and integration with respect to some of the acquisitions, which is normal, all within our expectations. We've got some slightly lower utilization as we move staff off over some major projects coming out of last year into this year. But all very much within our expectations, and we really are, as we look into Q4 and into 2025, pleased with the progress against that.

That's great, caller. I'll pass it over. Thank you.

Thank you. Thank you. One moment for our next question. Our next question comes from the line of Jacob Bell of CIBC. Your line is now open. Good morning. Morning.

Yeah, looking for maybe your thoughts around the election results. You know, the view seems to be the Trump administration would be supportive of the IJA and the CHIPS Act, but that we could see some changes to the IRA program and USAID. You know, what are your thoughts and any adjustments that you think you'll have to make?

You know, I think as we were, we've been thinking over the last year or so, what it change in administration, either change or same administration in the U.S. might look like for our business and our industry overall. You know, I think in general, we feel, you know, pretty neutral about whichever firm was in there. We've been around a long time, performed well under, you know, Republican presidents and Democratic presidents. So, you know, to your point, I think IAJ is good. I think Chips and Science is good. Even IRA, you know, the majority of that funding has been dispersed to Republican states. So, you know, will there be a pullback there? Hard to say, Jacob. But, you know, if President Trump might bring tariffs in, certainly that might bring some onshoring of manufacturing facilities back. And we've actually already had some manufacturing clients calling us asking about siting and design should that occur. So, you know, we actually feel pretty positive, you know, about the economic opportunities for us going forward.

Okay. And then maybe just going back to the investor day that we had last December, you know, you're talking in a 26 net revenue of 7.5 billion and EBITDA margins at 17 to 18%. Does that feel about right? I mean, you know, you're taking up your revenue guidance here or at least a midpoint. Does it feel like it's a bit more on the conservative side or how are you thinking about that?

I think we still feel really comfortable with that, you know, Jacob, you know, recall that was 50% net revenue growth in a three-year period of time. And so, you know, we're performing well. This year, we see that continued performance. But, yeah, we're not putting out any changes to that guidance at this point.

Yeah. Yeah, Jacob, on the margin side of things, obviously, we're pleased with our year-to-date EBITDA margin. I think we delivered a strong Q3 here. Feel good about where we're tracking on a full-year basis. We'll obviously provide 2025 color here with our year-end results in February and feel very confident that we can step into that 17% and 18% range. And then we'll take it from there, quite frankly. I think there's lots of opportunity.

Excellent. Thank you. Thank you. We'll move it for our next question. Our next question comes from a line of Frederick Bernstein of Raymond James. Your line is now open.

Good morning. I hope everyone's well. Just wanted to switch gears on M&A. And, Gord, wondering if your pipeline is as busy or healthy as it was 12 months ago.

Yeah, thanks, Frederick. Great question. We actually do see the pipeline of M&A very full, not just here in Canada and the United States, but also in different countries around the world. And all sorts of different sizes from, you know, that sub-1,000 firm size to, you know, some that are a little bit larger than that. So, you know, we feel really good about the overall pipeline. We're still feeling good about the competitive environment. as to who we would see out there in various processes. So no change to our M&A thoughts, no change to sort of what we're seeing out there in terms of competition or the amount of firms available.

Okay, and when you think about adding new building blocks, I guess you mentioned a number of regions, but is there a specific end market where you would like to bolster your presence?

Yeah, you know, I think we still have some opportunities for some tuck-ins here in Canada. But as I look at the U.S., I absolutely see the opportunity to even double our size in the U.S. U.K., you know, we still have great opportunities to expand there while we're dominant in water. We're not dominant in some of the other areas that we have, buildings, transportation, and so on. You know, we've spoken previously about the Nordics. I still would be interested in doing the right deal up in the Nordics. And we're looking down in Australia and New Zealand a little bit as well. But really focusing on a little bit Canada, the U.S., U.K., Nordics, and then a little bit down in Australia and New Zealand.

Greg, maybe it's time for me to chime in. You know, as the UGA, we've been on the road a little bit, and I do get the questions around, capital structure and our perspectives on M&A. And I just want to reiterate what Gord has already articulated here. Historically, M&A has been one of the biggest sources of our value creation, and we continue to see significant opportunities. We'll obviously remain disciplined. Balance sheet's in great shape. We'll continue to deliver here through Q4 into the early part of the year. But significant growth ahead of us through the M&A channel.

Thank you both, and welcome, Vito. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Maxim Sichev of MBS. Your line is now open.

Gordon, I was wondering if you potentially could comment around the UK market in general. It feels like there's a bit of a turning of the page on kind of austerity dynamic. I'm curious to see if and how that could translate for your business in the geography. Thanks.

Yeah, thanks, Max. Certainly in the UK, you know, we've talked a lot about the AMP8 cycle, and certainly we're transitioning to that. It officially starts in April of 2025. The final ruling from AFWAT as to the size of the AMP8 program is expected here in December, but You know, as we've talked about before, all indications are a 40 to a 50% increase in funding availability. You know, I mentioned that we've, you know, we've secured over 20 new, you know, renewals or new AMP frameworks there. So we've been, you know, growing by market share a little bit in addition to securing the existing. Water is really, really strong. We've already taken some additional real estate space there. We're hiring people there, scaling up our Pune India operations already there for that. You know, from a housing perspective, you know, the new Labour government has talked about, you know, reducing some of the regulatory burden on the permitting side and getting more new houses built, up to 1.5 million new houses. We mentioned, I think, previously that we have a four-year master services agreement with... Holmes England to support that. So, you know, maybe it does feel like some of those things are all really positive tailwinds for us in the UK.

Okay, thank you so much. And then just shifting gears to, I think in the past couple of quarters, you said that, you know, recent M&A sort of in the short term is constraining the margins somewhat. And I'm just wondering if you can maybe provide an update here and potentially link it to some of the design center opportunity that could be coming through. Yeah, thanks.

Yeah, Max, it's Vito here. You know, honestly, from an acquisitions perspective and the integration, we're very, very pleased with the four that we're integrated at this point. We've got our normal sort of impact related to that, but nothing to call out. Really pleased with the margins, really pleased with how admin costs are performing as a percentage of NR. So really, I think it provides a bit of a tailwind as we move through Q4 into 2025, but nothing really abnormal relative to other acquisitions we've had to call out all in order.

Okay, that's right. Thanks a lot, Peter. Thank you. One moment for our next question. Our next question comes from the line of Jonathan Goldman of Scotiabank. Your line is now open.

Hi, good morning, and thanks for taking my questions. Just one for me. I wanted to circle back to the question around the potential impacts of the recent elections. Gordon, has that changed your outlook for the water franchise in the U.S., and specifically the potential funding allocated to the PFAS renewal work and other water info programs?

Yeah, you know, there's some funding for water program enhancement in the IIJA, and certainly that's there. You know, will there be changes to, you know, either PFAS regulatory limits or timeframes for, you know, for work to be done? You know, all remains to be seen. But while we've done some of that work, and the industry is starting to wrap up for that work, That still is a couple of years down the road. So whether or not there's a change made to that, I don't see causing any impact on our water business in the next number of years. Huge amount of opportunity still in water related to scarcity of water, Southern California, Southwestern US in general. flooding work in a number of the projects that we're doing in Texas and other areas. So there's just so much opportunity there in addition to the number of advanced wastewater and wastewater treatment that we're seeing with some of these new manufacturing facilities that are going in, whether they're semiconductors, solar panel manufacturing, and others. So, no, I think really any impact from the election on our water business will be really muted.

Oh, that's great color. Thanks. I'll get back in queue. Thank you.

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

Great. Well, thank you, Operator, and thank you to everyone for joining us this morning. If you have any questions following today's call, please reach out to Jess Newkirk, our VP of Investor Relations. So thanks again, and we look forward to chatting with all of you again soon.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.