Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Stantec Inc. (STN)

Q3 2010 Earnings Call Transcript

November 4, 2010 4:00 pm ET

Executives

Robert Gomes – President and CEO

Dan Lefaivre – CFO and SVP

Analysts

Anthony Zicha – Scotia Capital

Carolyn Dennis – Dundee Securities

Sara O'Brien – RBC Capital Markets

Paul Lechem – CIBC

Pierre Lacroix – Desjardins Securities

Tahira Afzal – KeyBanc

Ben Vendittelli – Laurentian Bank Securities

Chris Blake – Stonecap Securities

Benoit Caron – National Bank

Operator

Welcome to Stantec Inc.'s third quarter 2010 earnings result conference call. (Operator Instructions) As a reminder, this conference is being recorded. It will be available for replay on the investor section of stantec.com.

It is now my pleasure to introduce your host Mr. Robert Gomes, President and Chief Executive Officer. Please go ahead.

Robert Gomes

Thank you, Sara. Good afternoon everyone, and welcome to our 2010 third quarter conference call. Joining me is Dan Lefaivre, our Chief Financial Officer. Dan will provide a brief summary of our results for the quarter, and I will follow with an outline of our markets outlook. We will then address individual questions.

Before we begin, I would like to make you aware of our Safe Harbor statement and to caution you that we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 in the United States and applicable securities legislation in Canada. By their very nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties that give rise to the possibility that our estimates, projections, expectations or conclusions will not prove to be accurate, that our assumptions may not be correct, and that our actual results may differ materially from those discussed in these statements.

You will find more information about the assumptions and material factors that were applied, that could cause actual results to differ materially from those we discuss in this conference call in the management’s discussion and analysis included in our 2009 financial review. I would also like to advise you that this conference call is being broadcast live over the internet, and it will be archived for future reference at stantec.com under the Investors Section. Therefore, we ask any members of the media, who are joining us today in a listen-only mode and who wish to quote anyone other than Dan or me to please request permission to do so from the individual concerned.

This morning, we released the results of Stantec’s operations for the third quarter of 2010. I’m pleased to report that we achieved strong performance as well as some strategic growth objectives which moved us closer to realizing our vision to become and remain a top 10 global design firm. Traditionally the third quarter is our strongest quarter of the fiscal year and Q3 2010 was a record quarter for us, as we reported the highest earnings in our company's history.

Dan, will now provide a review of our third quarter financial results. Dan.

Dan Lefaivre

Thank you, Bob, and good afternoon everyone. As Bob just indicated, the third quarter of 2010 was very productive for Stantec. Our gross revenue in Q3’10 increased 4.2% from Q2’10, compared to Q3’09 our gross revenue was C$386.7 million, up C$2.5 million. With the completion of six acquisitions during the quarter, revenue from acquisitions increased to C$19.4 million and C$6.8 million in Q2’10. Our net revenue in Q3’10 was up 3.5% in Q2 and compare to Q3’09, our net revenue was C$314.5 million, up C$7.8 million. Our gross margin, as a percentage of net revenue was 56.2% in the third quarter and 55.8% year-to-date continuing to fall within our targeted range of 54.5% to 56.5%. Our administrative and marketing expenses decreased to 40.8% during the quarter from 41.3% in Q3’09, mainly due to operating more efficiently and managing our costs. We expect however that these expenses will be marginally higher in Q4’10 because we will be integrating staff and systems from our recent acquisitions.

Reported net income was C$32.1 million in the third quarter compared to a loss of C$10 million in Q3’09, excluding the impact of a C$5.9 million after-tax gain on the sale of an equity investment in the quarter and of a C$35 million non-cash goodwill impairment charge in Q3’09. Net income increased 4.8% to C$26.2 million during Q3’10. Reported diluted earnings per share in the quarter was C$0.70 without the impact of the gain on sale in the equity investments, diluted earnings per share were C$0.57. As Bob mentioned, our net income and diluted EPS results in the quarter were records for us, and our further evidence that we are continuing to manage our costs and operate effectively. During the quarter we also reached an agreement with our lenders to increase our credit facility to C$350 million and extend its maturity to August 2013. This will ensure that we have the flexibility and funds to support our future activities. We financed all our acquisitions in the third quarter through a combination of cash and debt. Overall we are very pleased with our third quarter results. The quarter was very active showing solid growth and we continue to manage our operations effectively. Bob.

Robert Gomes

Thank you, Dan. As we mentioned in our news release this morning, we completed six acquisitions during the third quarter. We acquired IEA Holdings in Maine, WilsonMiller in Florida, Natural Resources Consulting in Wisconsin, Communication Arts in Colorado, Anshen & Allen Architecture in San Francisco, Columbus, Boston and London England, ECO:LOGIC Engineering in California. Soon after the quarter-end, we acquired Street Smarts in Georgia. The acquisition of these firms, enhance our service offerings in all five of our practice areas and added approximately 760 staff to our operations. Due to the acquisition of Anshen & Allen, we significantly expanded our healthcare practices, design practice and entered a new international market in the United Kingdom. Next month, we expect to complete our acquisition of Burt Hill which will further expand our international presence.

I would now like to highlight some of our new project awards. Our project activity during the third quarter showcased our ability to attract repeat business with existing clients as well as new contracts with our new clients as a result of a high quality of our work. For example, in the transportation area we are co-leading with Jacobs engineering an eight firm team selected to design a three-mile extension of the METRO Light Rail system from downtown Mesa Arizona for Valley Metro Rail. This is the third section of the Light rail system they have designed for this long-term client. In the buildings practice area, we secured a contract Rady Children's Hospital, a continuing client in San Diego California. Our task is to complete the architecture, interior design and laboratory planning for the hospital's new 160,000 sqft ambulatory and research centre. In the urban land area, work continued on Vanier Woods/Lancaster East, a 130 hectare residential development in Red Deer Alberta. We are providing planning, engineering, landscape architecture, geomatics and construction management services for the development.

In the environment practice area, we are providing environmental permitting, endangered species evaluation, wetlands mitigation and other services for the Marcellus lateral project, the 240 mile liquid natural gas pipeline extending from West Virginia to Ohio. In the industrial practice area, we are chosen to design upgrades Diavik Diamond Mines site north of Yellowknife Northwest Territories. As usual, I have highlighted only a small sample of the projects that we are working on. Completing many projects for many clients mitigate the risk for our company. As always we are thankful to our clients for their continuing trust in our services. Now I would like to comment briefly about the potential market conditions for our services going forward. Overall, we have a strong backlog of work across our practice areas. Without the impact of foreign exchange, our backlog increased by C$21 million in the third quarter over Q2’10, and by C$38 million over Q3’09. This performance again reflects the renewed confidence we are seeing in some of our markets as well as growth from acquisitions, which is resulting in new and continuing projects. We believe that we can continue to improve our backlog level by managing our business effectively and focusing on our top clients through our account management program. During the quarter, we met our expectations for organic growth in all practice areas except environment and industrial which continued to be effective by the slower than anticipated recovery in the US economy. Internal growth declined in our environment practice area year-to-date in 2010 over 2009, mainly because several large new environmental projects were not released for startup as quickly as expected. Internal growth also declined in our practice, industrial practice as a result of the slow start-up of projects in the oil and gas and energy sectors. Although these delays affected our revenues in Q3, we are optimistic that these projects will proceed in 2011.

Looking at our individual practice areas, we expect the following for the end of 2010.We believe that our buildings practice area will end the year with a modest increase in revenue compared to its annual revenue for 2009. Our strategy going forward is to continue to focus on our key capability areas, higher education, science and technology, and healthcare, and to use our success, in the Canadian healthcare market and our recent acquisitions to strengthen our position in the United States. We also have implemented strategic initiatives to take advantage of economic recovery in the commercial and retail markets. We believe that our environment practice area will end the year with a modest decline in revenue compared to its annual revenue for 2009 because of the continuing delays in the commencement of projects in the environmental market and a stronger Canadian dollar in 2010 compared to last year. However, we expect that our current standing amongst the top 10 world environmental service providers will continue to help us win larger long-term projects with national and international scope. We are also well positioned to obtain projects generated by our clients’ needs to meet increasing regulatory requirements and to rehabilitate aging environmental infrastructure.

We believe that our industry of practice area will end the year with a modest decline in revenue compared to its annual revenue for 2009, however with the stabilization of commodity pricing, we believe that we will see a continued strengthening of activity in the mining and resource sectors. We are in a good position to take advantage of future opportunities in the industrial market because of our geographic diversity, expertise and good client relationships. We believe that our transportation practice area will end the year with stable revenue compared to its annual revenue for 2009. Overall, we expect most of our transportation groups to see consistent levels of activity over the rest of 2010. Short-term extensions to the US Federal Transportation funding had helped maintain activity levels. But factors such as lower tax revenues, federal and state deficits and the lack of long-term US Legislation for transportation funding may cause delays in future plans and projects. Our transportation practice will continue to focus on completing more local smaller projects in the United States and on pursuing and executing larger P3 projects in Canada for the rest of the year.

Although the expected recovery of the residential sector in the United States has been slower than forecast, we believe that our urban land in practice area will end the year with stable revenue compared to its annual revenue last year. We are well positioned for a slow recovery in the housing market and we continue to diversify our client base and use our reputation to win projects in the non-residential public sector. In summary, we believe that our overall outlook is to end 2010 with stable revenue compared to our annual revenue for 2009. We are still experiencing the impacts of increased competition and project delays resulting from the general economic downturn in 2009. However we believe that our diversity, client mix and flexibility will help us continue to adapt our business to improving economic conditions.

Our outlook for 2011 is similar to that for 2010. We expect to see continued slow growth in the US operations and good performance in many of our Canadian operations. We are also cautiously optimistic that we can take advantage of our continuingly growing US presence to increase our business in the United States as the economy recovers. This concludes our comments for today, Dan and I are now available to answer any questions you may have, the conference call operator will explain the question procedure. Sara.

Question-and-Answer Session

Operator

My apologies, (Operator instructions) please stand by for our first question. Our first question comes from Anthony Zicha with Scotia Capital, please go ahead.

Anthony Zicha Scotia Capital

Hi, good afternoon, gentlemen.

Robert Gomes

Hi, good afternoon, Anthony.

Anthony Zicha – Scotia Capital

Bob, with reference to Stantec’s proportion of US businesses declined –is this still a trend that is in the fact and are you seeing some positive signs of a pickup in the US business? My other part of the question is, if you look at the environment, environmental business, decline we've seen negative in terms of growth. Can you give us some more color on the client behavior like why is it in the decline? Is it more budgetary or is it just that business has basically paused because of the whole economy, the federal funding. When can we anticipate a turnaround? Thank you.

Robert Gomes

Okay, well, the first part of the question with regards to our US operations. Our US operations have not done as well as we expected them to do this year but they have done better than last year both in top line and bottom-line. So we see that as a positive sign, the negative is that just has not grown as quickly as we thought. So our US operations were happy with the performance and were happy with this little growth we have seen in there, but certainly the US economy has been lagging specifically with regards to the environmental practice area, the projects there just have not gone ahead. There is been lots of delays by many of our clients, not canceling projects, just either advancing them very slowly or delaying them and advancing other projects in other areas of their business. So one example, to just provide some transparency in that is something like our Chevron project that we were awarded last year C$250 million project. We're just saying that project go ahead now. It has been very slow off the books from Chevron and that's typical. The only thing we can point to this that all the companies in the US and larger firms are also very cautious on the overall economy. So they have just been very slow in advancing their projects and that is the biggest issue we have had with our environment and to a certain degree with our industrial practice areas. It's just that overall cautiousness of what's happening with the US economy. Is there going to be a double-dip and it's just causing companies to re-evaluate their capital programs and re-evaluate their decisions.

Anthony Zicha – Scotia Capital

But then again, there should be some good pent-up demand going forward most probably in 11.

Robert Gomes

Yes, that's exactly what we point to is that the clients are still there, we haven't lost those projects, they have just been delayed. So we would hope that’s pointing to a stronger 2011 that we thought. But we thought the same thing in the beginning of 2010. So we are being as cautious now as our clients are and we don't see 2010 being – 2011 being any worse but still concerned that the economy in US is just very slow, growing not retracting but certainly it is very slow.

Anthony Zicha – Scotia Capital

Okay. Well thank you.

Robert Gomes

You are welcome.

Operator

Thank you. Our next question comes from Carolyn Dennis and she is with Dundee Securities. Please go ahead.

Carolyn Dennis – Dundee Securities

Good afternoon.

Robert Gomes

Hi, Carolyn.

Robert Gomes

Hi, Carolyn.

Carolyn Dennis – Dundee Securities

My question is to do with staffing levels. I was just doing the math from the numbers that we have in our report. I don’t think you gave an actual staff number, wondering if you could give that what the (inaudible) count was at the end of the quarter and talk about whether you have been still in the hiring trend that you were in the last quarter or how have you have to do some rationalization just given the near-term look in the environmental and industrial.

Robert Gomes

So this quarter, we actually had a reduction of 200 staff from last quarter which overall was really dis-seasonality as we get into September and in the fall late summer and fall we start laying off some of our seasonal staff that we have. So in the first quarter, I think we hired about 100 people, 300 in the second quarter, we actually had a retraction of 200 staffing in the third quarter. So year-to-date we're still up certainly the third quarter – that’s somewhat expected the Q3 and Q4, we are going through the seasonality issues. There were probably some of that was also the rationalization staffing in the environment and industrial practices as those projects continue to lag. At some point in time you have got up deal with the staffing issues but some of this is also seasonality. But 200 is a relatively small number for the quarter.

Carolyn Dennis – Dundee Securities

Okay. That's great. Thank you very much.

Robert Gomes

Welcome.

Operator

Thank you. Our next question comes from Sara O'Brien with RBC capital markets. Please go ahead.

Sara O'Brien – RBC Capital Markets

Hi guys.

Robert Gomes

Hi, Sara.

Dan Lefaivre

Hi, Sara.

Sara O'Brien – RBC Capital Markets

Can you talk a little bit about the competitive environment in the US, since the economy is lagging a little bit or taking time to tick up? We are hearing from other engineering firms that situations are a little bit more competitive, the margins may see a bit of a squeeze. What's your outlook for both the environmental segment but also the buildings practice where you just growing into some acquisition additions there?

Robert Gomes

Sure. In environmental there certainly are – there is competition, but there is always is competition but certainly when there is less work out there, firms certainly squeeze margins and take a little bit more risk usually in that practice area, though, we are dealing with very large clients who really do understand the business and understand the pricing requirements. So there is margin pressure but that really doesn't affect our gross margins significantly. As you all know our gross margins vary by maybe 1% or 2% at any point in time. So some of that is competition and you deal with it – you try to work for it good clients that understand the value. In the building section, certainly that has been an area where there is a lot of firms hurting in the US that are now trying to go after projects that we are competing on. The good news there is the projects are that focuses in healthcare, science and technology higher education. Usually those are very complex facilities they require very special expertise they required a very long portfolio of projects you have done before. So even though people may be competing if they can’t show that if they can’t show that expertise they can’t show the portfolio of complex projects then pricing becomes somewhat relevant because if they just can't compete and do the work it doesn't matter what price they offer. So we – that's why we're focused in most areas in the US. We're not into high levels of commercial; we're not into the retail or condo market there. We are very focused in the more complex buildings because we find that the competition is less in those areas.

Sara O'Brien – RBC Capital Markets

Okay, great. And given that you have seen a deferral of some of the contracts in the environmental segment, would you expect that the margin in that segment could see some pressure in 2011 based on the way they were quoted in 2010 or do you not see any pressure at all from them?

Robert Gomes

Not unless they come back to us and say we negotiate, because in a lot of these cases we have won these projects already. We already have a price established and contract terms and conditions agreed to. In some cases, the client will come back and saying we want you to shave some price, cost off, bottom line is our cost doesn't go down year-to-year. The only way that we are going to shave the cost is by reducing scope. So we have had those discussions with clients, we have given them the best price we can. So they come back to us our point of negotiation is we really can't cut costs more. So that could happen but again it really depends on your client relationships, understanding your clients and having a good relationship with them is where the value comes in and where you can try to avoid those circumstances where they are going to come and look for better price.

Sara O'Brien – RBC Capital Markets

Okay. And just a last point on buildings, again within reading that some of the scope changes have been taking effect in the Greenfield build outs, have become more expansion of what is already there in some healthcare facilities. Do you see that hindering the growth profile from where you stand into F11 are do you still see that as a pretty hot sector?

Robert Gomes

No, we certainly still see it is a long-term hot sector as well. In Canada I think we are experiencing that now and we still see that as a growing sector in the United States. So now that's why we're investing in it now, we feel it's a long-term growth sector for us.

Sara O'Brien – RBC Capital Markets

Okay, great, thanks.

Robert Gomes

Thanks.

Operator

Thank you. Our next question comes from Paul Lechem with CIBC. Please go ahead.

Paul Lechem – CIBC

Thank you. Good afternoon.

Robert Gomes

Hi, Paul.

Paul Lechem – CIBC

In the US with the stimulus funding, I guess the same thing is happening in Canada it's coming to an end soon. Wondering the impacts of what that can do to your public sector business and also if there is any impact do you expect from the term elections. Any uncertainty that might cause on public projects and delays that could come out of that?

Robert Gomes

With regards to the stimulus programs, we have been pretty consistent for the last 18 months but we really didn't see those programs of having a major impact on us and so therefore the discontinuance of those programs really isn't going to have an impact on us. That program certainly back stops some projects and maybe provide funding to keep projects going in 2009. We really haven't seen any impact in 2010 and don't see the fact that there won't be a specific stimulus program in Canada in 2011 having much of an impact on us and the mid-term elections in the US, certainly there has been a shift and the Republicans now in somewhat control. It actually will provide some certainty there won't be any further debates because there probably won't be a lot going on in the US from a long-term perspective. There is some good and bad with that and the good really is now I think a lot of states who are just going to get on with that. They were sort of waiting to see what the outcome is, the outcome is there, you are not going to expect a lot so you better get on with things and we have always said that there is still a huge amount of investment in infrastructure in the US regardless of what's happening at the federal levels, states and municipalities still have to invest some money in infrastructure and that is still a huge market for us and that's still a market that we are going after. So even in a slow economy in the US, we still feel there is lots of opportunity for growth for ourselves.

Paul Lechem – CIBC

Okay, thanks. If I can squeeze one more in, just on the acquisitions. I know you have been pretty active in the last few months on the acquisition front. What is the integration effort in, is there – you mentioned there might be some higher cost, is that just sort of integration of back-office or is there anything along reorganization and rationalization that we should expect?

Robert Gomes

Well, that integration is usually getting staff on to our systems, getting their projects into our enterprise system, getting their staff and clients, loaded into our enterprise system, there are some training then if our systems and processes that we have that staff have to go through there is – I can let Dan talk specifically about some of the integration efforts that we really have fine-tuned over the last 10 years and for all the acquisitions to date except for Anshen & Allen, they have all been fully loaded into our enterprise system. So we have the staff and the clients and the projects for every one of our acquisitions except Anshen & Allen are already loaded in. But Dan can maybe put some visibility. We focused quite heavily on our integration processes trying to ensure that they don't interfere with the business and are done very efficiently but Dan you want to add any more color to that?

Dan Lefaivre

As Bob indicated, we were well down the road in terms of getting a lot of these acquisitions integrated into our business systems. That's just one step in the process, it is a matter of getting the staff trained up getting the projects functioning swing, get billings back out the door and so that's where some of the additional integration costs coming in and that we are expecting in the fourth quarter.

Paul Lechem – CIBC

Okay. And this order of magnitude for the additional costs?

Dan Lefaivre

It’s not huge Paul I think it's just – we are just cautioning that probably we won't see the same level of efficiency that you saw in the third quarter because there will be some more administrative costs incurred.

Paul Lechem – CIBC

I got you. All right, thanks a lot.

Operator

Thank you. Our next question comes from Pierre Lacroix with Desjardins Securities. Please go ahead.

Pierre Lacroix – Desjardins Securities

Thank you. Good afternoon.

Bob Gomes

Hi, Pierre.

Pierre Lacroix – Desjardins Securities

First question, just wondered on the backlog side what was the impact of the acquisition in the quarter?

Dan Lefaivre

We actually haven’t tracked that Pierre, because as Bob talked about we integrate these acquisitions fully and so we don't track the acquisition backlog specifically. We are able to tell you what is FX related and what is – what our total number is and I think Bob indicated that the total backlog had increased by C$21 million excluding the impact on FX.

Robert Gomes

Even including FX it went up C$6 million. So the backlog is now at 101 billion, 8 million [ph]

Dan Lefaivre

I should also point out that the backlog number that we provided excludes the backlog of ECO:LOGIC and A&A because we don't have those numbers yet.

Pierre Lacroix – Desjardins Securities

Okay, right. Okay, thank you for that looking at the margins building side you provided some explanations but it’s trending down since the last 8 quarters competitive I guess issued in the US but is there any major reasons why it's going down and do you see that kind of stabilizing and going forward. What should we expect there?

Robert Gomes

Our gross margin is usually very stable. It's more so impacted by the mix of projects we have specific to the buildings group. We do have a lot of P3 activity going on and if you have a P3 pursuit in a quarter which we did have, that causes some margin pressure because as we are explained in the past when we pursue a P3, we do the upfront work at a slightly lower margin and then and when we get a success fee, we incorporate that success fee to get a higher margin. So if you have a lot of P3 pursuit activity in a quarter, that could have a point or two effect on your margin. That's probably the impact in buildings but it's a relatively minor shift quarter to quarter.

Pierre Lacroix – Desjardins Securities

Okay, I see then that you are still bidding quite heavily on P3's and the bidding is offsetting the wins you are getting.

Robert Gomes

Yes, it just has a slight impact if you're doing a couple of bids and a quarter it will have an impact because we do that work at a slightly lower margin.

Pierre Lacroix – Desjardins Securities

Okay. On the urban land side, the margins have been trending up quite nicely in the last eight quarters. Is the competitive situation in that segment an explanation of the margin situation there?

Robert Gomes

Our urban land business is always has been a high margin business for us, that's just the way work is done and the clients from a competition perspective you are probably right there isn't an awful lot of competition in that sector right now because of what's happened the last three years. There has been a lot of companies that has either disappeared or moved on to other things. Our focus has always been to stay in that business as it is a high margin business and we discontinue to drive a higher margin as the work comes back in. So a lot of competition can probably be pointed towards that one.

Pierre Lacroix – Desjardins Securities

Just one last question on the debt to equity ratio. You mention about that, you don’t want this week to go much above 0.6 times, to which extend you’re willing to go above this level given the pipeline you have in front of you.

Dan Lefaivre

Our actual target is this, we do not like to go about 0.5 times but right now I believe we are at 0.43, which is just marginally higher than the second quarter given the number of acquisitions that we did complete in the third quarter. So that shows pretty positive cash generation. But we have said in the past that we will go about that 0.5 to 1 for the right acquisition and for the right opportunities, so we are still pretty comfortable with debt levels we are at and as I said we would go above that at some point and you would only expect to be at that level for a short period of time.

Pierre Lacroix – Desjardins Securities

Okay, great, thank you very much.

Robert Gomes

Thank you.

Operator

Thank you. Our next question comes from Tahira Afzal with KeyBanc. Please go ahead.

Tahira Afzal – KeyBanc

Good afternoon, gentlemen.

Dan Lefaivre

Good afternoon, Tahira.

Tahira Afzal KeyBanc

My first question is in regards to your strategy to grow in the US, obviously there are some states which are seeing more of a fiscally balanced situation than others. Would like to get an idea of which states you see as being fiscally strong going forward and how you’re positioned there right now, and how you plan to position in the stronger states going forward.

Dan Lefaivre

I don't know if there's any states that are fiscally strong right now in the US based on what I have been reading, but the states we are in, even the states that would be considered not fiscally strong, let's say California, we are actually seeing some increase in business there and our US West operations have actually improved their bottom-line operations in last quarter. So it is more than the individual states, because only a portion of our revenues comes from, come or affected by say a state’s fiscal ability to fund projects, because half of that comes from the private sector as well which really then isn't dependent on state budgets and again it depends what that state is funding. The state may be in difficulty in certain areas, but our focus is infrastructure and what we find is regardless of how, what fiscal constraint a state has. They still find ways of investing in the infrastructure that has to be upgraded and again that is where our focus is to focus on the infrastructure that has either a revelatory or an integrity issue associated with it that has to be upgraded and regardless of their fiscal ability and because they will find the funds necessary to invest in that area of infrastructure. So we really are not too concerned with regards to what the overall fiscal capability of the state is, more specific what are their needs and what clients we have in those areas.

Tahira Afzal – KeyBanc

Got it, okay. That was helpful. Number two, when I said, look at the ABI index which tends to be a good leading indicator for some of your markets. Last month for the first time should have entered positive territory, would love to get a sense of-typically if you do look at that index and if you do-how many months or quarters you think that your business might lag by the index.

Dan Lefaivre

To tell you the truth, we do not really worry about that index too much. That is more of a retail index than of all the areas we were focused in, so our focus is especially in the buildings architectural area is the higher education, science technology, health care which we find really doesn’t track closely to the index, overall index. So it is nice that it is going up, that is good. It cannot hurt us, but even when the index was at lower levels, we still found lots of opportunities in the sectors that we were focused on.

Tahira Afzal – KeyBanc

Got it, okay. And the third question I had was in regards to acquisitions. Several of your peers in the US who have reported have indicated that acquisition prices have been going up. I would love to get a sense of what you are seeing and whether you think if prices are going up, it is a temporary phenomenon.

Dan Lefaivre

I wouldn’t say that the multiples are going up. For good firms, you are willing to pay at the higher end of the multiple range but the actual multiples really have not been going up, it is a question of what kind of EBITDA is the acquired firm actually producing and more importantly going forward what is their performance going to be and what kind of performance are they going to have once you bring them into the Stantec team and what kind of revenues can you generate from that new integrated acquisition. So the valuations you do for companies is a very complex process and I wouldn’t say that prices are actually on general going up, I think that for good companies that have good revenue generation potential in the future, you pay a higher multiple for it and that’s probably more of the issue than the overall cost going out. There's lots of opportunities we see out there right now and it is probably from that perspective if you have to pay higher for a firm, there is lots of firms out there as well, so it is a good market from that perspective.

Tahira Afzal – KeyBanc

Got it, thank you very much.

Dan Lefaivre

Welcome.

Operator

Thank you. (Operator instructions) our next question comes from Ben Vendittelli with Laurentian Bank Securities. Please go ahead.

Ben Vendittelli – Laurentian Bank Securities

Good afternoon.

Robert Gomes

Hi, Ben.

Dan Lefaivre

Hi, Ben.

Ben Vendittelli – Laurentian Bank Securities

Just a follow-up on acquisitions, I wanted to get your thoughts on what we could expect going forward. You have made quite a few acquisitions in the past couple of quarters. Can we expect that to continue and what does your pipeline look like?

Robert Gomes

We have been pretty busy in the last quarter so, we have effectively worked through some of our pipeline of opportunities but certainly we have got a number of firms that we still are talking to. We don't, we are not in that much of a rush between now and the end of the year. We are very focused on trying to now integrate the firms that we have acquired and so I don't think you will see our Q4 as busy as Q3. But certainly our acquisition program is ongoing, it's an ongoing program that every month, we're talking to companies and moving closer to trying to negotiate a transaction with them so we are still working very hard and a lot of these companies take months to years to get up to a point where we can agree on a transaction so it is not a program you can sort of skip. It is ongoing, occurring every month, so but certainly Q4 will be not as busy from a conclusion of transactions as Q3 was.

Ben Vendittelli – Laurentian Bank Securities

Okay. And looking ahead, you still looking at the same sort of sectors looking at health and education is your primary areas for targets.

Robert Gomes

With the last two acquisitions in that area Anshen & Allen and with the pending acquisition of Burt Hill, that would probably meet our immediate needs for the architectural buildings engineering, healthcare science and technology, higher education sector. Our other sectors that we are looking at, we were still very interested in the industrial sector, still very interested in transportation, energy oil and gas in the United States. From a geographic perspective, we would love to be in Texas and areas in the middle of the US, we still have some lots of opportunities in the south-east as well. So the program is a pretty diverse program, so as diverse as Stantec’s practice areas and geography is. We certainly highlighted science and technology and healthcare earlier on in the year but again like I said that those acquisitions, we feel that we can now start turning our focus to more of the industrial, some environment and some geographies in the US.

Ben Vendittelli – Laurentian Bank Securities

Great. Thank you. I will get back in the queue.

Robert Gomes

Okay, thanks.

Operator

Thank you, our next question comes from Chris Blake with Stonecap Securities. Please go ahead.

Chris Blake – Stonecap Securities

Good afternoon, gentlemen.

Dan Lefaivre

Hi, Chris.

Chris Blake – Stonecap Securities

I just had a quick question on your building section again, I know you mentioned in your opening remarks, with respect to implementing some strategic initiatives to take advantage of the recovering markets as when they do the commercial side. Can you just give us a little more color on what those initiatives might be?

Robert Gomes

Yes, we said that actually after our last couple of quarters and no one ever has again asked a question, so thanks Chris. Specifically in those sectors that were softer at the end of last year. We saw an opportunity of looking for key individuals that we felt at a slower period of time we could sort of enhance or encourage to come over to Stantec, so there actually is a couple of strategic hires where Stantec managed to attract over to our team and those are some of the strategic initiatives so that is an ongoing program. Certainly we look for good companies and good acquisitions but we are also looking for good individuals and strategic hires is one of our key initiatives and we are successful in attracting the couple of people to come over in the first couple of quarters, the first three quarters of this year.

Chris Blake – Stonecap Securities

Okay. And just switching gears over that transportation, I know you mentioned as well as in the opening remarks with respect to mainly focusing also on the local project level in the United States as opposed to the state-level. How does that project mix change in terms of your margins. Is it very similar to the – when you go down that local level, is that economics a little bit different I’m just trying to get a sense.

Robert Gomes

Actually at the federal level, the margin, because the competition is higher and the projects are bigger the margins tend to be smaller and lower. And at the local projects you have less competition and actually more relationship based and you have the opportunity of getting the higher margin. So I think one of the reasons our transportation groups performed so well this year is exactly that case is that we have been relying upon those more local higher margin projects that have been driving pretty good performance.

Chris Blake – Stonecap Securities

Very good. That's it for me guys. Thank you.

Robert Gomes

Thank you.

Operator

Thank you. Our next question comes from Benoit Caron with National Bank. Please go ahead.

Benoit Caron – National Bank

Thank you. Good afternoon everyone. Bob, I’m just wondering there seems to be an ongoing trade going on and this has been mentioned in the past and I'm sorry if I'm actually asking a question that has been answered or mentioned in the beginning of the call. I missed the first two minutes there but what about the dividend policy now that the organic growth is stabilizing it’s no longer being such a drag as to offset whatever contribution from your consolidation strategy. Is it time to consider a dividend – paying a dividend and looking at the short interest on your stock and we have got a good idea what's going on behind that trade there.

Dan Lefaivre

Are you interested to get some insight on what's going on behind that trade Ben?

Robert Gomes

Yes if you could tell us what's happening in the short position we would very appreciate that actually but from a dividend perspective we still – every year we analyze our strategy going forward and our growth initiatives and we determine what capital we need to continue to execute on that strategy and today we still feel that we can employ, reemploy, deploy our capital into our growth and paying dividend at this point in time isn’t in the best interests of our shareholders. So we continue to analyze that with our board every year during the strategic planning session. We look at what the options for growth, what the possibilities for growth are over the next five to ten years and still feel strongly that we feel that's still the best strategy. Dan I know if you want to add anything more to that?

Dan Lefaivre

Most of having said that the short position really picked up in May once we put out the short perspectives and that was again as we discussed part of our longer term financing strategy and so we really saw an increase at that point in time and it has gone slightly higher since then but that seems to have been quite a majority of the shorts have come into the market.

Benoit Caron – National Bank

Okay well, so it's still a bit premature to talk about a dividend then?

Robert Gomes

Yes.

Benoit Caron – National Bank

All right. Well that's all I had, thank you gentlemen.

Robert Gomes

Welcome.

Operator

Thank you. We have another question from Carolyn Dennis with Dundee Securities. Please go ahead.

Carolyn Dennis – Dundee Securities

Hello again.

Robert Gomes

Hello again.

Dan Lefaivre

Hi, Carolyn.

Carolyn Dennis – Dundee Securities

My question is on the utilization rates. I – just as a follow on to other question again and tied into some of the acquisition questions was – I guess with all the acquisitions activities trying to get a sense of what's going on just wondering for your staff that I mean organic growth is down but have you seen like an increase in utilization rates in any of the areas?

Robert Gomes

No, we monitor as you know, we monitor utilization really, really closely and we don't like our utilization overall in the company to vary more than 1% or two over our targets. So we really haven't seen a significant increase overall, it's quite stable and it's at our – I think it’s just below 70% right now. Yes there is certainly there is higher utilization in some practice areas compared to others but I wouldn't say that at this point in time we are too concerned about our utilization because we're looking at it on a weekly basis and making sure it's within our target and then adjusting staff levels as necessary. So I wouldn't say that on an overall basis we are too concerned.

Carolyn Dennis – Dundee Securities

Okay and just a follow on and then just about the acquisition activity. Can you just – how long – I mean you talked about that most of the acquisitions are on the ERP system already but in terms of reaching – having them integrated to your expected utilization rate. How long does that take and I guess it depends on the size, but just currently how long do you think it will take to get through to the 70% on the acquisitions that you have done.

Dan Lefaivre

In terms of –

Carolyn Dennis – Dundee Securities

Fully integrated. In terms of up to full capacity for the employees that you hired.

Dan Lefaivre

It generally takes two or three months to get all of them kind of back-office (inaudible) and get people going again but generally we try to do a lot of that in the back-office and not affect the operations personal. One of our objectives in integrating these companies is not to get in the way of them doing business. So there is some impact but generally that’s fairly short-term. Some of the longer term impacts is getting the synergies and cross marketing opportunities and those take a little longer than the physical mechanical integration of these companies.

Robert Gomes

Just add to it. Dan is right – the effect – the impact we want on our new acquired companies business to our clients is minimal. The last thing we want is that the client saying that you have been acquired by Stantec and now I seen an erosion in service, I've seen an erosion in the delivery of projects. So we are very focused on ensuring that they stay very clearly focused on their clients still on their business. So it is a back room type of integration in the first three months and then as Dan says, we take literally a year to two years to get fully done because you just don't want to interrupt that business and start eroding the service to the client.

Carolyn Dennis – Dundee Securities

Okay, so a sense within the impact is what you're talking with the increased administration costs next quarter essentially for most of the acquisitions that you have done.

Robert Gomes

Yes it's not a huge increase in costs because a lot of the administration already there, it’s just on how focused on the integration side of it.

Carolyn Dennis – Dundee Securities

Okay that's great. Thank you very much.

Robert Gomes

Welcome.

Operator

We have another question from Sara O’Brien with RBC Capital Markets. Please go ahead.

Sara O’Brien – RBC Capital Markets

Hi just wanted you to comment on public, private partnerships. You certainly had an impact from the bidding in the quarter. Is there still a huge opportunity for you in Canada? What sectors do you like most and what do you consider putting capital to work either into Canada or US for P series?

Robert Gomes

Okay. So yes still very bullish on P3, still see it is a very key focus for us going forward in 2011. We still see lots of opportunities specifically those opportunities would be in the transportation sector in Ontario and Alberta and British Columbia. So all three are those provinces have ongoing P3s that are out right now for RFQ and RFP. So lots of opportunities in the transportation sector in those three provinces. And in British Columbia and Ontario we see continued opportunities in the healthcare sector, and bidding on RFPs in British Columbia and in Ontario in the healthcare. So, we see it is still being a very good part of our business, we are continuing to gain expertise, continuing to gain reputation are being able to execute these projects which we said before our very, very different projects and very large projects. So really the size of a Stantec is very conducive to us being able to execute these projects but we feel better than our competitors. With regards to putting capital into these projects, no I mean that's really outside of our zone of knowledge and interest. We want to focus on doing the design, we want to focus on strengthening our partnerships with our partners our contractors and concessionaires. They are experts and they are companies that have the expertise and the focus to bring the money to the table. So really you don't see that as being a good business strategy for us.

Sara O’Brien – RBC Capital Markets

Okay and then in the US would you go into any kind of these partnerships or is it too early?

Robert Gomes

Oh, Way too early. The US is still a wildcard there – the US has not really established the clarity necessary to go into the P3 market. The design builds okay, but they just don't have the clarity in how they bring the money to the table or how they give the operations. As said before that in Canada the government has totally thrown their support behind P3s but then got out of the way and used essentially arms length corporations like infrastructure in Ontario. In Ontario in partnerships we have see in BC, we see to administer and execute the projects which is the right way to do it. If politicians stay in and keep their hands in the administration of the project, it just doesn't go anywhere and that's what we're seeing in the P3 market in the US. It's just dragging, they can't come to terms with the concessioners and contractors and you spin your wheels and that cost you a lot of money. So we are very cautious in the P3 market in the US. That being said, their time will come at some point in time they will see that there is some efficiencies and savings to the tax payers by using that model but the politicians have to get their minds on how to operate it properly.

Sara O’Brien – RBC Capital Markets

Okay great thank you.

Robert Gomes

You are welcome.

Operator

Thank you. There are no further questions at this time. Please continue.

Robert Gomes

Okay, if there is no further questions, I would like to thank you all for joining us today and I look forward to speaking with you again in the near future. Thank you.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation and you may now disconnect your line and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Stantec CEO Discusses Q3 2010 Results – Earnings Call Transcript
This Transcript
All Transcripts