Yahoo Finance Stantec Inc. (NYSE:STN) Q1 2024 Earnings Call Transcript
Stantec Inc. (NYSE:STN) Q1 2024 Earnings Call Transcript May 11, 2024
Stantec Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen, and welcome to Stantec's First Quarter 2024 Results Webcast and Conference Call. Leading the call today are Gord Johnston, President and Chief Executive Officer; and Theresa 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 statements qualification set out on Slide 2 detailed in Stantec's Management's Discussion and Analysis and incorporated in full for the purpose 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.
Gord Johnston: Good morning. Thank you for joining us today. Stantec is off to a great start for the year. Momentum continues to build on the favorable market trends that have emerged over the past 2 years. We continue to see strong demand in major projects in water security and water treatment. With the recently announced EPA regulations on PFAS, we expect this area to grow significantly. Stantec has been on the leading edge of PFAS work for several years with multiple contracts underway in data analysis, treatment piloting, site remediation and full scale system design, and we have several PFAS treatment systems that are fully operational. We also continue to see great demand for energy transition and climate solutions, including strengthening of electrical grids and for environmental services.
Aging infrastructure continues to drive significant needs, either for the repair or replacement of roads, bridges, railways and transit. With approximately $400 billion of IIJA funding now distributed, investment towards addressing these needs is spurring growth. And the ongoing push to restore productive capacity continues to drive significant work in advanced manufacturing, data centers and other mission-critical facilities in all of our key markets. Our solid first quarter results reflect our ability to capitalize on this robust market demand and to deliver strong operational performance. We are also successfully executing on our plans to grow through strategic and disciplined M&A. In the first quarter, we closed our acquisitions of ZETCON and Morrison Hershfield.
And it's been very gratifying to see that since joining Stantec, both companies have continued to attract new employees as both firms have grown their head count by over 5% organically. And on May 1, we announced that we acquired Hydrock, a 950-person firm headquartered in Bristol, England. With 22 locations across the U.K., Hydrock provides integrated engineering design and energy and sustainability consultancy services. They offer solutions to major infrastructure projects and landmark buildings across a number of attractive sectors, including health care, energy, education, logistics and distribution, and the public sector. Hydrock is a great strategic fit for Stantec. It grows our presence in the U.K. by more than 30% and provides us with a highly complementary line of services and expertise that bolsters our U.K. service offerings.
Combined with ZETCON and Morrison Hershfield, we've added over 2,700 people to the Stantec's team in the first 4 months of 2024. This, in conjunction with our Q1 performance, sets us up very well in progressing towards our 3-year targets. This brings me to our Q1 results. We achieved record net revenue for the quarter, up 12% year-over-year with 7% organic and 6% acquisition growth. We continue to see high demand for Water in all of our regions, delivering 16% organic growth. Buildings also delivered double-digit organic growth this quarter. Adjusted EBITDA increased to $212 million with a margin of 15.5%. And as a result, we delivered a 23% increase in adjusted EPS of $0.90. Our U.S. business continues to perform extremely well, delivering a 14% increase in net revenue for the quarter, including 10% organic growth and 4% acquisition growth.
We achieved organic growth in every one of our business units. Our Water business delivered over 20% organic growth. The key drivers included industrial and major water security projects like the city of Joliet alternative water source program. Our health care expertise in hospital structures, medical technology and service delivery models drove double-digit organic growth in our Buildings business, along with strong demand for industrial projects, particularly in data centers and other mission-critical facilities. Infrastructure also had a solid quarter with heavy activity in major transit, rail and roadway projects, reflecting the beginning of the ramp up of projects funded by the IIJA. In Canada, we increased net revenue by 7% with 6% acquisition growth from Morrison Hershfield and 1% organic growth.
Our Water business delivered double-digit organic growth as activity on major wastewater projects remained high. Infrastructure also delivered double-digit organic growth on the strength of several roadway projects across the country. And education and civic projects drove organic growth in Buildings. Energy & Resources retracted this quarter as several significant projects wound down late in 2023, and we experienced delays in the ramp up of new projects. We are beginning to see these new projects moving towards commencement, and we have successfully added new contracts to our backlog. And so we are confident that E&R will shift towards organic growth later this year. Our global operations generated 11% net revenue growth with an 8% increase from ZETCON and 5% organic growth.
Our Water, Building and Environmental Services business units all delivered double-digit organic growth. Our industry-leading Water business delivered strong results across the U.K., New Zealand and Australia through long-term framework agreements and public sector investment in water infrastructure. Buildings achieved over 20% organic growth with high levels of activity in every major region. Growth was most pronounced in the Middle East, where we are the lead designer of the Hamdan Bin Rashid Cancer Center in Dubai. Buildings also started to work on the ₤4 billion Agratas battery manufacturing facility in the U.K. And the strong performance from Environmental Services was driven by European energy transition projects. Infrastructure net revenue retracted this quarter due in part to the Australian government's decision to delay or cancel certain transportation projects.
And now I'll turn the call over to Theresa to review our financial results in more detail.
Theresa Jang: Thank you, Gord. Good morning, everyone. We delivered a very solid quarter of performance in Q1 with record net revenue, enhanced project margin and disciplined cost management. In Q1, we generated gross revenue of $1.7 billion and net revenue of $1.4 billion, both of which were up 12% compared to Q1 '23. Project margin increased 50 basis points due to our continued discipline in project execution, our ability to raise rates on certain projects to mitigate the impacts of wage inflation and increased selectivity in project pursuits. This, along with our continued focus on operational efficiency, drove a 90 basis point increase in adjusted EBITDA margin to 15.5%. Diluted EPS for the quarter increased 19% to $0.70, and adjusted diluted EPS was up 23% to $0.90.
Again, this quarter, we saw a meaningful increase in our share price, which requires a revaluation of our long-term incentive plan. Excluding the effect of the LTIP revaluation, our adjusted EBITDA margin would have been 15.9% and Q1 adjusted EPS would have been $0.94. Turning to our liquidity and capital resources. We delivered a strong quarter of cash flow generation in Q1. Operating cash flow increased to $57 million compared to $37 million in Q1 '23. And DSO was 79 days, below our target of 80 days. Capital return to our shareholders increased as a result of the Board raising the dividend rate and the higher number of common shares outstanding compared to Q1 '23. And our net debt to adjusted EBITDA ratio was 1.5x, reflecting the funding for ZETCON and Morrison Hershfield, still within our internal leverage range of 1 to 2x.
And now I'll turn the call back to Gord.
Gord Johnston: Thanks, Theresa. At the end of the first quarter, our backlog stood at a record $7 billion. Our recent acquisitions contributed 7% to our backlog since December 2023 primarily in Infrastructure and Buildings. Backlog increased organically by 3% with growth in Canada and the U.S. predominantly in our Environmental Services and Infrastructure business units. Project wins in Environmental Services translated into solid low double-digit organic growth in our global and U.S. operations. U.S. Infrastructure also had a number of strong wins translating into mid single-digit organic growth. We are seeing strong demand for transit, bridge and highway projects underpinned with funding from the IIJA. The [indiscernible] organic retraction in Global's backlog reflects in part the drawdown of our U.K. backlog associated with the AMP7 cycle.
And although we have already won over 60% of the AMP8 programs we are pursuing, these contracts are not yet in backlog. In aggregate, our backlog represents 13 months of work, which is 1 month higher than it was at year-end. We continue to hire at near-record pace, and our voluntary turnover remains well below industry average, meaning that we are attracting and retaining the workforce needed to deliver on our growing backlog. Turning now to major projects awarded in Q1. Through our Climate Solutions Strategic Growth initiative, we continue to advance our services and technologies for efficient water use and reuse projects, including a design build project for Arlington County. This $175 million upgrade will enhance the solids handling facilities and incorporate cutting-edge technology to sustainably transform wastewater into a renewable energy source and a nutrient rich soil amendment.
In support of the energy transition, our Energy & Resources team will be providing project management and transmission and distribution engineering to the BC Hydro and Power Authority. This is a 7-year master services agreement valued at $186 million. And in Eastern Canada, also under a 7-year MSA with options to be extended, we will be providing services to Hydro-Quebec for environmental assessments. The last project I'd like to highlight is an exciting win in Australia that underscores our global strength in the water industry. As part of this 4-year project, our Water, Environmental Services and Infrastructure teams will collaborate to assist with the $595 million wastewater system upgrade in Sydney, Australia. This is a prime example of how we are able to leverage our leading expertise in water to broaden the scope of services and bring together our expertise from all disciplines and regions across Stantec.
Looking at the remainder of the year, we are reaffirming our 2024 financial targets, which were provided in February. We expect net revenue growth for the year to be in the range of 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 are guiding to mid single-digit growth. Acquisition net revenue growth, which will now include a partial year for Hydrock, is expected to be in the mid single digits. Our adjusted EBITDA margin target for the year remains in the range of 16.2% to 17.2%. And finally, we expect our adjusted diluted EPS growth to be in the range of 12% to 16%. We are very confident in being able to achieve these targets given the robust activity we are seeing throughout our regions and the three successful acquisitions we've completed so far this year.
And with that, I'll turn the call back to the operator for questions. Operator?
See also
12 Monthly Dividend Stocks with Over 5% Yield and
20 Largest Publicly Traded Financial Companies in the US.
To continue reading the Q&A session, please click here.
