10-may-2018 stantec, inc. · analyst, raymond james ltd. chris murray ... we adopted the ifrs 15...
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10-May-2018
Stantec, Inc. (STN)
Q1 2018 Earnings Call
Stantec, Inc. (STN) Q1 2018 Earnings Call
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CORPORATE PARTICIPANTS
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc.
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc.
......................................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Mona Nazir Analyst, Laurentian Bank Securities
Derek Spronck Analyst, RBC Dominion Securities, Inc.
Jacob Bout Analyst, CIBC World Markets, Inc.
Yuri Jonathan Peter Lynk Analyst, Canaccord Genuity Corp.
Sean D. Eastman Analyst, KeyBanc Capital Markets, Inc.
Benoit Poirier Analyst, Desjardins Securities, Inc.
Maxim Sytchev Analyst, National Bank Financial, Inc.
Michael Tupholme Analyst, TD Securities, Inc.
Ben Cherniavsky Analyst, Raymond James Ltd.
Chris Murray Analyst, AltaCorp Capital, Inc.
......................................................................................................................................................................................................................................................
MANAGEMENT DISCUSSION SECTION
Operator: Please standby. Welcome to Stantec's First Quarter 2018 Earnings Results Conference Call. With us
today, are Gord Johnston, President and Chief Executive Officer; and Dan Lefaivre, Executive Vice President and
Chief Financial Officer.
The call today is webcast and we invite those dialing in to view the slideshow presentation, which is available in
the Investors section at stantec.com. All information provided during this conference call is subject to the forward-
looking statement qualification, which is set out on slide two and detailed in our MD&A and incorporated in full for
the purposes of today's call.
With that, I'm pleased to turn the call over to Mr. Gord Johnston. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc.
Thank you. Good morning, everyone, and thank you for joining us this morning. For those of you following the
slide show, we're on slide 3. For today's call, I'll begin with the high level overview of our first quarter performance.
After that, Dan will provide little bit more specific commentary on our financial results. When Dan concludes his
result – his remarks, I'll provide some operational highlights and our targets and outlook for the remainder of
2018. Finally, to wrap up, I'll ask our operator to open the call for questions.
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Moving on to slide 4. Overall, the company performed well in Q1 with solid organic revenue growth. In fact, this
quarter marks the fourth consecutive quarter that we've achieved overall gross and net organic revenue growth.
This shows we are focused on the top line and our strategy of building and maintaining strong client relationships
around the world continues to enable us to win new work. We haven't ignored the bottom line either. Cost
reduction efforts, office consolidations, and improved employee utilization resulted in a decrease in administrative
and marketing expenses, as a percentage of net revenue when compared to Q1 2017. Stantec is long focused on
continuous improvement and currently, we are in the process of reviewing employee utilization, cost effectiveness
and project execution.
This quarter's results show that our actions are already having a positive impact on our performance. We
completed two key acquisitions this quarter. In the United Kingdom, we acquired ESI Limited, which expands our
environmental services consulting business in that geography. And then, in the Southwestern United States, we
acquired Occam Engineers Incorporated, which bolsters our water, transportation and public works presence in
that region. Just after the quarter ended on April 1, we acquired Traffic Design Group Limited, a transportation
firm with offices throughout New Zealand and a single office in Sydney, Australia. This acquisition makes us one
of the largest transportation players in the region.
Also, subsequent to the quarter, we signed a letter of intent to acquire Norwest Corporation, and Energy &
Resources firm headquartered in Calgary with offices in British Columbia, Colorado, Utah and West Virginia.
Once complete, this acquisition will boost our strength and the recovery in E&R sector in Canada and the United
States. We also signed a letter of intent to acquire Cegertec, an engineering and project management firm
headquartered in Chicoutimi, Quebec with offices in Montreal in Quebec City.
And finally, on April 26, Stantec initiated a strategic review of our Construction Services segment. Stantec
acquired constructors through our acquisition of MWH Global in May 2016. And as part of this review, we will
evaluate a range of strategic options to optimize the value of constructors to provide the best prospects for our
people, our clients and our shareholders.
With that, I'll now turn it over to Dan to provide additional detail on our Q1 financials. Dan? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc.
Thank you, Gord. Good morning, everyone. Overall, our performance improved in Q1 2017 and we had a
performance improvements in revenue, EBITDA and EPS compared to Q1 2017. I'll provide more detail and
context as we go through the remainder of this summary.
Prior to speaking to our specific operating results, however, I'd like to provide a brief summary of the impacts of
two new accounting standards that resulted in changes to our accounting policies that became effective January
1, 2018. We adopted the IFRS 15 Revenue from Contracts with Customers, which impacts the way we recognize
and record revenue as well as IFRS 9 Financial Instruments. With respect to IFRS 15, the impact on ongoing or
on opening retained earnings was a reduction of CAD 23.9 million due to changes in the classification of contracts
with multiple services; the recognition of change orders where we have an enforceable right to the change order
or claim, recovery is highly probable; and liquidated damages where our probability weighting of expected
outcomes is now required. This primarily impacted our Construction business. In addition, the change impacted
how we record holdbacks from clients and deferred contract costs.
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Finally, contract backlog, which under IFRS 15, represents all secured work that really is the remaining
performance obligations, now totaling approximately CAD 5 billion. IFRS 9 changes the way we classify financial
assets and account for debt modifications. IFRS 9 also impacts how we record fair value gains and losses on
equity securities and how we calculate the loss provisions through an expected credit loss model. The primary
impact associated with the adoption of IFRS 9 resulted in a CAD 2.7 million
fair value adjustment [ph] topped (06:00) to other expenses related to the new requirement of recognizing
unrealized losses on equity investments held for self-insured liabilities to the profit and loss statement in Q1 2018.
This was not factored into our adjusted net income calculation and had approximately a CAD 0.02 impact on our
reported EPS.
Now let's focus on the operating results for the quarter. As Gord mentioned, we achieved positive net organic
revenue growth in all geographies and all business operating units with the exception of Buildings. Buildings
retracted in Q1 2018 compared to Q1 2017, primarily because of some project execution issues in the U.S. and
low private and public spending in the UK and the Middle East regions. This retraction was partly offset by our
strength in the Canadian healthcare sector, where we had a number of project wins over the last couple of
quarters.
Our Energy & Resources business operating unit performed very well in Q1, winning significant new work. We're
keeping an eye, however, on certain Canadian pipeline projects, which if delayed or canceled may have a
negative impact on environmental and engineering services in the Oil & Gas sector. Environmental Services had
slight organic net revenue growth in Q1 2018 compared to Q1 2017. Growth in the U.S. was driven by increased
demand for commercial residential development and increase spending in power, transportation, and water
resource infrastructure investments.
Canada continue to be hampered by activity in the Oil & Gas sector and in western Canada and a slight
slowdown in the private sector projects in Ontario. Our Infrastructure BOU performed well in both our Community
Development and Transportation sectors. We believe that in the future, there may be some additional state and/or
provincial Infrastructure funding available because of increased tax revenues in U.S. and Ontario.
Water achieved a 2.3% net organic revenue growth in Q1 2018 compared to Q1 2017 mainly due to our Canadian
and Global operations. We also recorded a CAD 3 million recovery on a U.S. – on a major U.S. design-build
project where we took a provision in Q4 and we talked about that in Q4 2017.
These net organic revenue results were largely offset by the impact of foreign exchange and the 2017 Innovyze
sale where we have recorded revenues in Q1.
Gross margin was down in Consulting Services from 55.5% to 54.5% in Q1 2018. This reduction in margin was
primarily because of project execution issues and the Buildings BOU, our mix of projects, competitive pressures in
Energy & Resources, and the 2017 divestiture of Innovyze, which operated at higher margins and therefore
impacted the margin performance of the Water BOU.
Gross margin decreased in Construction Services, primarily related to ongoing UK waste-to-energy projects
where we had a further CAD 3 million net impact. Our U.S. Construction Services business had no further
downward adjustments on the previously noted U.S. hard-bid projects that we mentioned in Q4 2017. We've
reduced administrative and marketing expenses as a percentage of net revenue from 43.4% in Q1 2017, down to
41.3% in Q1 2018. These results were achieved by consolidating office space to reduce our occupancy costs. We
have lower integration costs and management's focused on cost containment and reductions. Employee
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utilization also improved slightly in the quarter despite the ongoing seasonal challenges that we faced in Q1 and
Q4.
Gross revenue grew overall at 0.4% and net revenue increased at 0.7% in Q1 2018 compared to Q1 2017 largely
due to positive organic growth, which is offset by the foreign exchange impact mentioned earlier. Adjusted
EBITDA increased from CAD 89.9 million to CAD 90.4 million mainly due to improvements in administrative and
marketing expenses, which was partially offset by the decline in gross margin as previously mentioned. There
was no material change in our estimated annual effective tax rate in the quarter, which remained at 27%.
Adjusted net income increased 4.4%, but was impacted by IFRS 9 as discussed previously. Adjusted diluted
earnings per share increased 5% from CAD 0.40 in Q1 2017 to CAD 0.42 in Q1 2018. And on April 12, we paid a
dividend of CAD 13.75 per share to shareholders of record on March 29. And yesterday, we declared the same
dividend payable on July 12.
Speaking to cash flow, cash flow used in operating expenses was CAD 122.9 million. Payments for capital assets
and intangibles was about CAD 24 million for total use of approximately CAD 147 million in the quarter. This
compares to about CAD 43 million in Q1 2017. We generally do use more cash in Q1 due to the payment of prior
year merits and tax payments. The use of cash is higher in Q1 as well due to higher days sales outstanding from
year end and the cash used in our construction operations. The majority of the increase in capital expenditures in
Q1 is due to the leasehold improvements incurred for our new Edmonton headquarters. We expect improvements
in cash from operations over the remainder of the year.
On slide 13, you can see that we are on track to meet our annual targets for Consulting Services. We are meeting
our admin and marketing expense target in Construction, but [ph] missed on (12:52) for gross margin and
EBITDA targets as a percentage of net revenue because of the downward project revenue adjustments I
discussed earlier. We also fell short on our overall goal of achieving 5% net income as a percentage of net
revenue. We attribute this to seasonality, project issues in our Buildings business and Construction Services and
the CAD 2.7 million IFRS 9 impact I mentioned earlier. We do believe that we will meet our net income target by
the end of the year.
So now I'll turn it back to Gord to discuss operational performance and outlook for the remainder of 2018. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc.
Thanks, Dan. Let's go to slide 15. I'd now like to summarize the performance of our core business in Q1 and then
look ahead to our outlook for 2018. As Dan noted, we experienced overall organic growth – gross and net
revenue growth this quarter compared to Q1 2017.
Our Canadian Consulting Services business achieved organic gross and net revenue growth of 7.9% and 4.3%
with organic revenue growth in all BOUs except Environmental Services. Growth was driven in the – by the
private sector, especially Energy & Resources and by revenue growth in the healthcare industry in BC,
Saskatchewan and Ontario, which helped our Buildings BOU.
Most sectors in our E&R BOU experienced organic revenue growth. We're seeing some actual growth in the
Canadian Oil & Gas sector winning several projects in the midstream business. Growth in Infrastructure in
Canada was driven by community development work along with interdisciplinary projects, such as the Calgary
Cancer Centre, the Calgary Green Line Corridor. Our Canadian Water BOU's growth was driven by British
Columbia and offset by some minor retractions on the Prairies.
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On slide 16, in the United States, Consulting Services achieved growth of 0.9% in both organic and net revenue
this quarter compared to Q1 2017. But this growth was significantly offset by the weakening American dollar
compared to the Canadian dollar. Divesting Innovyze in Q2 2017 also contributed to the gross revenue retraction.
Growth came from a mix of private sector projects that called on our remediation and recovery expertise in the
Environmental Services business and from stabilization in the U.S. Oil & Gas sector.
We also saw increased activity in the U.S. airport, highway, rail and road projects. On the public sector side, we
benefited from design-build opportunities in transit, bridge inspection, LRT, roadways and bridge design. Organic
growth in our Mining sector and new projects for WaterPower & Dams with higher gross to net revenue ratios
helped our U.S. E&R BOU perform well this quarter.
Global Consulting Services gross revenue grew by 3.6% and organic net revenue by 6.3% in Q1 2018 compared
to Q1 2017. Organic growth was driven mainly by the Mining sector in Latin America, our Water BOU in the
Middle East and in our export business. Our participation on the AMP6 cycle in the UK also provided consistent
revenue volume.
On slide 18, Construction Services experienced organic gross revenue retraction of 3.7% and net organic growth
of 2.3% when comparing Q1 2018 to Q1 2017. There were a number of projects approaching their [ph] close out
(16:34) phase which resulted in gross revenue adjustments. In the U.S., we had significant and steady work on
several major water and wastewater treatment plant construction projects, and in the UK we had ongoing
activities in the AMP6 cycle projects.
Our core Water business in the U.S. and the UK continues to perform well. However, legacy waste-to-energy
project issues continue to impact our UK operations. We actually recovered CAD 7 million in subcontractor claims
but this was more than offset by CAD 10 million in costs related to project delays and certain asserted
performance issues. On the UK waste-to-energy projects, we are pursuing claims on a number of these overruns.
Since our announcement that we're initiating a strategic review of Construction Services, we've heard from
multiple parties interested in exploring a more detailed discussion about the business. We are focused on
gathering core information to share with interested parties and hope to have these in-depth discussions with them
over the next several months. Our aim is to complete our strategic review before the end of the year.
I'd now like to highlight some of our recent project wins, as you'll see on slide 19. Our backlog stands at CAD 5
billion representing CAD 3.8 billion in Consulting Services and CAD 1.2 billion in Construction. Now, this backlog
looks a little bit larger than what you might expect, but that is because of the IFRS changes that Dan mentioned
earlier that now requires to take our entire backlog into account rather than in just the last 12 to 18 months as we
had – as we'd previously done.
During this quarter, we publicized several major project wins. Among them: that will deliver the conceptual design
for raising the Warragamba Dam west of Sydney, Australia to improve flood mitigation in the downstream
community; that will provide engineering, geotechnical, surveying and other services for the Mid-Breton Sediment
Diversion project, which is a key component of Louisiana's master plan for sustainable coast; and just this week,
we announced that we're designing the Hampstead Bypass and US 17 highway improvements in North Carolina.
These are just a few examples of our wins this quarter.
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We believe our overall business is strong with a growing backlog and continued success on strategic pursuits that
you transition to continued growth in Q2 and Q3. This success combined with solid project delivery should make it
possible for Stantec to meet its business goals this year.
Our outlook for 2018, as shown on slide 20, hasn't really changed since our last earnings call in February. To
reiterate, we continue to target a long-term average compound gross revenue growth rate of 15%, through a
combination of organic and acquisition growth. We believe that's doable.
Our backlog and business outlook are favorable and our acquisition funnel is as full as it's ever been. In 2018, we
anticipate overall organic gross revenue growth in the low- to mid-single digits, supported by continued economic
growth in United States, increased Infrastructure spending in both Canada and the U.S., modest improvements in
the Energy & Resources sector, global economic growth, and our ability to continue to expand our global footprint.
Before we finish up today, I want everyone to know that we recently published our 2017 Annual Sustainability
Report. The report covers our ongoing commitment to environmental, social and economic stability and shows our
sustainability performance for fiscal year 2017. I invite everyone to read the report, which is on our website at
stantec.com.
That concludes the presentation section for today. Now, operator, please let's start the Q&A portion of today's
call. ......................................................................................................................................................................................................................................................
QUESTION AND ANSWER SECTION
Operator: Thank you. [Operator Instructions] And our first question will come from Mona Nazir with Laurentian
Bank. ......................................................................................................................................................................................................................................................
Mona Nazir Analyst, Laurentian Bank Securities Q Hello? Hi. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Good morning, Mona. ......................................................................................................................................................................................................................................................
Mona Nazir Analyst, Laurentian Bank Securities Q Good morning. How are you? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Excellent. ......................................................................................................................................................................................................................................................
Mona Nazir Analyst, Laurentian Bank Securities Q
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Good. My first question just is a clarification. So I think you had just stated that for 2018, you're expecting organic
growth to be in the low- to mid-single digit range. Was that on a gross or net basis? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Actually on both, Mona. ......................................................................................................................................................................................................................................................
Mona Nazir Analyst, Laurentian Bank Securities Q Oh, okay. Perfect. And then, just secondly touching on the potential divestiture of your construction arm, when
you first purchased MWH, it was stated that it was closely coupled or correlated to some of the consulting work
particularly in the UK. And I'm just wondering, should a sale or a divestiture occur, how stable are those
Consulting revenues? Could we potentially expect some softness or a contraction of how closely coupled those
two divisions are in some geographies? And just secondly on that strategic review of that division, given the non-
material contribution just on the EBITDA level and negative margin this quarter, would you ever consider just
slowly exiting or winding down the business or is that not a possibility? Thank you. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Okay. Well, thanks, Mona. I'll start with your question with regards to the UK. So, both in the U.S. and the UK,
there are – in the U.S. in particular, starting there, there are a number of opportunities where our Consulting
business works together with our Construction business on various design-build jobs both in the public and the
private sector. That said, there are number of situations, particularly in the UK, where the – our objective is to
secure the work and sometimes our Consulting business will partner with our Construction business.
In other situations, either due to client pressure, clients or a preference workload of the Construction business or
geographies where our Construction business is inactive, our Consulting business will partner with other
construction firms. And that works in both directions as well. So in the U.S., we see very little negative revenue
impact, if again, a divestiture would proceed.
In the UK, there are a few clients where they are more closely coupled, our engineering business with our
Construction business. In that case, though, what we're – during the strategic review process, we're spending a
particular amount of time talking to clients, talking to our – both our Consulting and our Construction business and
talking to staff. Because our objective would be, again, if we did go forward with a divestiture in the UK, to ensure
that there is no disruption to our clients, to ensure the projects continued to be executed properly. And certainly,
our objective would be to ensure that the same consulting staff that's currently working on the projects maintains
work and continues to work on them going forward from a continuity perspective for the project and for the client.
So, that is absolutely a consideration, Mona, as we review any potential firms that have come forward with us is
that we want to ensure that our current Consulting business in the UK does not deteriorate.
And to your second question with regards to, would we ever just wind down the operation? I mean, certainly, we
could do that but that's – it's a very robust operation and the core business in both the U.S. and the UK is very
vibrant. And what's been as a pleasant surprise to us since we announced that we're going forward with a
strategic review is the amount of inbound interest that we received. More so than I even thought that there would
be. So, I don't think the – while the option of winding down, of course, is always there, I don't foresee that if we did
proceed with a sale that that would be a requirement. I'm seeing a lot of positive interest in the asset. ......................................................................................................................................................................................................................................................
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Mona Nazir Analyst, Laurentian Bank Securities Q Okay. That's very helpful. I'll step back and let someone else ask some questions. Thank you. ......................................................................................................................................................................................................................................................
Operator: And we will now hear from Derek Spronck with RBC. ......................................................................................................................................................................................................................................................
Derek Spronck Analyst, RBC Dominion Securities, Inc. Q Good morning. Thanks for taking my questions. You've been fairly active doing quite a few nice little tuck-in
acquisitions recently. What's your pipeline looking for the remainder of the year and, the acquisitions that you
have done, what sort of kind of year-over-year growth would that provide once they get the kind of full run rate
into your system? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A The – thanks, Derek. The acquisitions that we've announced so far this year, you're right, have been smaller tuck-
ins, [ph] sub-100 (25:40) Cegertec, where we now see LOI is about 250 people. And those were great
opportunities to strengthen a particular line of business in a particular geography and sort of they're more surgical
in nature. So we're continuing to look at those sorts of opportunities in North America. But we're really focusing as
we've – I think [ph] that we've messaged (26:04) in our strategic plan, we want to continue along with our growth
in the UK and the Australia-New Zealand region to support that footprint that came to us through MWH. So we've
been spending a lot of time in those regions in particular. We've got a pretty robust acquisition funnel, and I think
we'll see that M&A is poised for increased activity in 2018 particularly in the Australia, New Zealand and the UK
regions. ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A I think maybe there's another point to make on this, Derek, and that really is that, some of these acquisitions
actually have closed, the real smaller ones. Cegertec won't close till likely later in Q2, if not the beginning of Q3.
And so, I think it's important that even though these have been announced, they are not in our revenues. And
when I go through and read through all of the analyst expectations and reports, many of you, of the analysts,
include acquisition growth in their projected numbers to be assuming large acquisition growth in the first and
second quarter when these transactions really haven't gotten closed yet, I think is a bit of a overstatement. So, we
just have to be a little careful in managing those expectations around acquisition revenue growth. It doesn't start
when it's announced, it starts actually after the deal has closed, yeah. ......................................................................................................................................................................................................................................................
Derek Spronck Analyst, RBC Dominion Securities, Inc. Q Yeah, that makes sense. Just based on the – your current pipeline and what you've done, is it kind of teeing up at
roughly at 2% kind of revenue lift in 2019 from acquisitions, given the current landscape? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Yeah. That – it's a good question. But the funnel is full. We do see increased activity in 2018, hard to predict
these. They – it's lumpy. We have expectations. But until we get folks to sign up, they haven't signed up, so it
would be hard to provide guidance because we don't really know when those might close.
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Derek Spronck Analyst, RBC Dominion Securities, Inc. Q Yeah. Okay. No, that's fair enough. Just on your longer-term strategy and [ph] if there's (28:36) just some color
around refining that. Could you maybe talk a little bit further about that, specifically what the refinements were
because it seemed, by and large, pretty much the same strategic – strategy, has anything changed at all? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Not particularly, Derek. The one likely change was that we announced our review of the – of our Construction
Services segment. And that's something that we thought long and hard on just to look at where we saw our
company in 3, 5, 10 years from now, and whether that factored in. And so, that's really why we're having a good
look at that now seeing what the market interest might be. But in terms of our strategy of continuing with our
growth through acquisition, no changes there. What we have now is a larger geographic platform to work with
through our acquisition of MWH.
We're going to continue – we're not going to take our foot off the gas in North America in any way. But we're going
to really focus on Australia, New Zealand and the UK where we have that – already have a strong footprint just to
continue to grow that. That said, we're beginning to look at a three- to five-year plan outside of UK, Australia, New
Zealand where else might be attractive locations for us to begin to consider other than opportunistically not
looking at any strategic reviews [ph] there are (30:04) right now or what options might be. But just beginning to
see what might come after Australia, New Zealand and the UK. ......................................................................................................................................................................................................................................................
Derek Spronck Analyst, RBC Dominion Securities, Inc. Q Is it largely geographical focus or could you perhaps move into new end market segments? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A At this point, we're really looking at continuing with the successful model that Stantec has run. We have our five
major BOUs and we look at how we can diversify within those our existing sectors in those newer regions. For
example in the UK, we are the number one water firm, but we're single sector in Water. So, there's lots of
opportunities to build out into other sectors. Environmental Services as you saw with ESI. There's a lot of
opportunities in Transportation and Buildings and other sort of core Infrastructure work that we do there. So I think
we're looking to continue with the tried-and-true Stantec playbook of using that wedge of getting in there.
Example, in the UK, number one water firm, and now expanding into other service lines but at this point not
looking into new service offerings at this point. ......................................................................................................................................................................................................................................................
Derek Spronck Analyst, RBC Dominion Securities, Inc. Q Okay, that's great. That's all for me. Thanks. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Thanks, Derek. ......................................................................................................................................................................................................................................................
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Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Thanks, Derek. ......................................................................................................................................................................................................................................................
Operator: And our next question will come from Jacob Bout with CIBC. ......................................................................................................................................................................................................................................................
Jacob Bout Analyst, CIBC World Markets, Inc. Q Hi, good morning. Wanted to go back to the strategic review
and just what is your current thoughts right now? Is it to completely exit the Construction business or keeping part
of it and also what's your thinking on the type of process that you're thinking about running? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A We're – as part of the review, we are looking at all alternatives. Certainly, a sale of the asset might be one of the
alternatives that comes out of it. And we have, as you know, we've engaged an advisor to help us through that
process. They've received numerous inbound interest at this point and they are in the process of preparing the
[ph] SIM (32:07). So, we'll work through a process with that, we'll see what sort of interest comes from that. At the
same time, we're talking with our clients, we're talking with our staff, and looking to see other ways that we can
improve our current operations to make them more sustainable in the long-term and certainly grow and continue
to provide good service to our clients.
So, we haven't messaged to the market that we're – that a sale is the only alternative. We're just still looking at a
range of alternatives but that's sort of what a process would look like as we're evaluating interest from potential
acquirers. A number of the folks that have approached us, would be interested in both the U.S. and the UK.
Others have said only the UK, others have said only the U.S. So, there's a wide range of folks that have
approached us. So, we're really just looking at all alternatives at this point, Jacob, and seeing where it takes us. ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A I think it's important to point out again that it's still early days. We only announced this two weeks ago, so the ball
is just getting rolling in terms of the full process that's going to be enacted here in the next couple of months. ......................................................................................................................................................................................................................................................
Jacob Bout Analyst, CIBC World Markets, Inc. Q Got it. Good point, Dan. Maybe my second question here just on your acquisition strategy. In the light of the new
U.S. tax reform, has that changed your approach to your acquisition strategy in the U.S.? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A I don't think it's materially changed our approach. I think certainly companies are looking at it, vendors or sellers
are looking at it and saying well, we get the benefit of – of a lower tax rate, therefore we should get a higher
EBITDA multiple. Certainly, we factor all of that in as we go through our pricing mechanisms and really try to get
the most favorable outcome, both for the seller as well as Stantec and our shareholders. So, it hasn't really
changed our approach but it's certainly another factor that we consider in our acquisition strategy.
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Jacob Bout Analyst, CIBC World Markets, Inc. Q Would it be fair to say it just made it a little more expensive for you to buy something in the U.S.? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A I think it's – every transaction will have a multiple that makes sense. Some, it may make it higher, others, it may
not have had any material impact. ......................................................................................................................................................................................................................................................
Jacob Bout Analyst, CIBC World Markets, Inc. Q Thank you. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Thanks. ......................................................................................................................................................................................................................................................
Operator: And we will now move to Yuri Lynk with Canaccord Genuity. ......................................................................................................................................................................................................................................................
Yuri Jonathan Peter Lynk Analyst, Canaccord Genuity Corp. Q Hey. Good morning, guys. ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Good morning, Yuri. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Good morning, Yuri. ......................................................................................................................................................................................................................................................
Yuri Jonathan Peter Lynk Analyst, Canaccord Genuity Corp. Q Good morning. Just want to make sure I understand what's in the adjusted EBITDA number. Is the CAD 2.7
million fair value adjustment in – that's in the adjusted EBITDA number correct? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A No. That CAD 2.7 million actually falls into other income below EBITDA. So, really, there's virtually nothing really
impacting adjusted EBITDA this quarter, very little anyway. And so, that – that's actually below in other income. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A So, that was about CAD 0.02 of EPS roughly.
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Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Yeah. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A So, if we had adjusted for that, it would have jumped us, from CAD 0.42 to CAD 0.44. ......................................................................................................................................................................................................................................................
Yuri Jonathan Peter Lynk Analyst, Canaccord Genuity Corp. Q Right. Okay. Maybe I'll take it offline, its fine. Can you quantify – so your Consulting Services backlog compared
to where it was at the end of the year is up about a CAD 1 billion, so a big move. You did talk about new contract
awards, but you also mentioned IFRS 15. So, can you just quantify the impact IFRS 15 had on backlog this
quarter? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A It's very difficult to try to get significant detail. But I think, the message is we are now recording all of our backlog,
based on the remaining performance obligations for signed contracts where we have notice to proceed, whereas
previously we only showed the 12 to 18 months. We do know that that we have had a number of project wins in
the quarter which have added to backlog organically. So, there has been some organic backlog growth. Very
difficult to quantify what that number is because we have to go back to January 1 and restate where our backlog
was, so difficult to completely get that number. Although, I do expect that there was growth, which was offset by,
again, some change in the foreign exchange rate strengthening of the Canadian dollar in the quarter. So, I guess,
the bottom line is that some of that is organic growth offset by FX, and then the change in IFRS. ......................................................................................................................................................................................................................................................
Yuri Jonathan Peter Lynk Analyst, Canaccord Genuity Corp. Q Okay. So, you – okay, so safe to say that for Consulting Services, the book-to-bill in the quarter would have been
above 1? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A That's... ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Yes. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A That's exactly what I think, yeah. ......................................................................................................................................................................................................................................................
Yuri Jonathan Peter Lynk Analyst, Canaccord Genuity Corp. Q
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Yeah, okay. And in Q2 and Q3, you talked about a pretty healthy bid pipeline, so just want to make sure I
understand the – what you're saying the – you think that that book-to-bill can stay above 1 for at least the next two
quarters? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A I would think so, Yuri. We were seeing a lot of really strong proposal activity in our major projects, our risk review
process really has ramped up for a number of large projects that we've got in the pipeline. So, I do feel good
about looking forward to Q2 and Q3 as well. ......................................................................................................................................................................................................................................................
Yuri Jonathan Peter Lynk Analyst, Canaccord Genuity Corp. Q Okay. That's helpful and just a follow-up question on the strategic review. Can you share with us what the bulk of
your competitors are doing vis-à-vis owning versus JV-ing with construction companies? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A I think... ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Are these competitors in the design space? ......................................................................................................................................................................................................................................................
Yuri Jonathan Peter Lynk Analyst, Canaccord Genuity Corp. Q Well, but – yeah, yeah, the competitors that you would be going up against on the design side, I mean, how many
of them are bringing integrated construction capabilities to the table? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A I think most of them are partnering. When you look at a competitor like AECOM or SNC, they have more of the
integrated design construction O&M-type firms, but most of the other normal competitors that we run up against
would be partnering. Gord? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Yeah. I would agree with that, yes. The majority of the firms in our space would be partnering on a project-by-
project basis with – where it makes sense with construction firms that have the right technical – the right expertise
in that line of work, strong in that particular geography, just so we can put together the most competitive team. ......................................................................................................................................................................................................................................................
Yuri Jonathan Peter Lynk Analyst, Canaccord Genuity Corp. Q Okay, so you wouldn't be at any major disadvantage by not having those capabilities in-house? ......................................................................................................................................................................................................................................................
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Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Well, I don't see that would be the case. And in particular as well, our Construction business right now is only
active in our Water space and only in the United States and the United Kingdom. So, big swaths of our business
still are – aren't covered by that and still are continuing to grow and perform well. ......................................................................................................................................................................................................................................................
Yuri Jonathan Peter Lynk Analyst, Canaccord Genuity Corp. Q Yeah, no, understood. Okay, I'll turn it over. Thanks. ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Thank you. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Thanks. ......................................................................................................................................................................................................................................................
Operator: And our next question will come from Sean Eastman with KeyBanc Capital Markets. ......................................................................................................................................................................................................................................................
Sean D. Eastman Analyst, KeyBanc Capital Markets, Inc. Q Hi, gentlemen, thanks for taking my questions. I just wanted to drill down on the Buildings segment. Hoping you
guys can provide a little bit more color on those execution issues cited in your commentary. And also for
Buildings, the UK and Middle East softness, it would be helpful to get some perspective on the size of that piece
within Buildings and whether there's any signs of life on some recovery in those more challenged geographies for
the segment? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Okay. So, Buildings has, as you noted, a number of moving parts there. Maybe I'll start with the UK and the
Middle East. We had some large healthcare projects that we were working on in 2017 and 2016 in particular that
drove our Middle East business and a lot of that was centered out of London. So, with that market more or less
retracting in our healthcare businesses has really, really tightened up with the Middle Eastern clients, really
putting either on hold, deferring or cancelling healthcare facilities in areas like Qatar and Saudi Arabia and Kuwait.
So, we are – have really retracted in that market for the last, [ph] essentially (41:39) last year and it's continuing to
go downhill. We're pretty much near the bottom, though, there's not much business left there and that's impacted
our London operations as well for sure.
With respect to the rest of the Buildings business, this is just a ongoing project management, some of it has to do
with acquired entities and getting the estimated cost to complete and budgets lined up, so that the expected
margins on these projects are accurate going forward, so a good part of it is that from acquired entities. That is
ongoing as they get used to operating in a – really, a public company accounting environment. Some of it is just
project execution not managing our projects well in terms of budgets and, again, performance of – out of the cost
to complete.
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We're taking a number of steps to rectify that, really getting down deep into project reviews with project managers
and really focused on the underlying principles of good project management fundamentally is what it comes down
to. When you have thousands of projects that having small incremental provisions on those projects, it adds up
over time. So, we're really taking a hard look in our Buildings practice to really try to turn that around. And I think
we've got some good strategies in place to do so. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A [ph] Right. (43:12) ......................................................................................................................................................................................................................................................
Sean D. Eastman Analyst, KeyBanc Capital Markets, Inc. Q Okay, thanks. That's helpful. And I guess moving over to Energy & Resources segment, double-digit organic
growth in the quarter but also citing some margin pressure from competitive dynamics. So just like to get a better
understanding of what's going on there, and whether this double-digit organic growth is sustainable in your view. It
sounds like it's kind of hinging on a particular pipeline project. So, thoughts around those items would be great. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A There is, you're right, there is a large pipeline that we're working on in Canada. We continue to work on it through
this evaluation phase but there's lots more than just that one pipeline project ongoing in our Energy & Resources
business. The – in our main, one of our main Oil & Gas offices in Calgary, the – just anecdotally, the biggest
concern we have right now there is parking. Because we've – through the last half of last year and so far this year,
we've been hiring. And so that's just anecdotally the – what we're what we're seeing there.
We're seeing a lot of growth in the Mining sector. We're seeing a – particularly in Latin America, we're seeing a lot
of the, in addition to that, a lot of the risk reviews that I mentioned earlier that are coming in are related to
additional Mining work that's – that continues to come in the door. WaterPower & Dams, seeing some continued
growth there, we talked a little bit about the Warragamba Dam project already in, in Sydney, Australia.
So, really, a lot of the groups there – Mining, we're seeing strengthening; Oil & Gas still feels good; WaterPower &
Dams is still coming along; and we're seeing even in the Power sector some additional work coming in,
infrastructure improvement type work, environmental compliance, resiliency, a lot of continued activity in the
Power sector as well. So, I do feel good about the Energy & Resources sector as we flow through the rest of the
year. ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A And I think it's important to note, with the change that we've seen over the last several years as a result of
commodity prices, our Oil & Gas business in Energy & Resources was north of 50% of that that entire business
operating unit. We've got a much better balance and diversification there with the addition of WaterPower; Power
and Mining have both now started to come back. So, pretty equal distribution of revenues generated from that
business unit, which gives us more confidence as well. ......................................................................................................................................................................................................................................................
Sean D. Eastman Analyst, KeyBanc Capital Markets, Inc. Q Thanks a lot for the color, guys.
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Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Thanks, Sean. ......................................................................................................................................................................................................................................................
Operator: And we will now hear from Benoit Poirier with Desjardins Capital Markets. ......................................................................................................................................................................................................................................................
Benoit Poirier Analyst, Desjardins Securities, Inc. Q Yeah. Good morning, gentlemen. Just to come back on the previous question on Energy & Resources. Obviously
strong organic growth but when we look at the gross margin, it's been down year-over-year due to a mix of project
and some competitive pressure. So could you talk about your ability to improve gross margin and maybe provide
more color about the mix of projects? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Sure, maybe I'll touch on that one first. In the – in certain sectors of the industrial sectors, margin is lower
generally than you would see in Buildings and Infrastructure. So, that's just the nature of the business, largely
time and material projects where you don't have really a fixed fee project where you can generate a higher
internal gross margin.
If you recall over the last several years, we said we were negotiating new MSAs with Oil & Gas clients at lower
rates to help them get through their – the need of retraction relative to that business, so they pushed all of their
cost retraction or pressure downstream on to the service providers. We have signed a number of MSAs earlier on
in the process which did provide some compression in our gross margins. But that's – you can have a slightly
lower gross margin but high utilization and it's more than made up once you get to the EBITDA number. So,
because you have people highly utilized, you're not having to go out and really bid on a lot of projects, a lot of [ph]
it's sole-sourced (47:57). So, I don't know that you'll see a material change in gross margin going forward in the
Energy business, but those would be some of the reasons why. ......................................................................................................................................................................................................................................................
Benoit Poirier Analyst, Desjardins Securities, Inc. Q Okay and when would you – when are those big MSAs are up for renewal and would you expect some pricing
increase as a result of, let's say, a better Oil & Gas sentiment? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Yeah. I think as you know, there will be adjustments over time as the market improves. If we could ever get some
of the pipeline political and social issues resolved, that would really help to – help the business in western
Canada. But I think clients still – and certainly on the upstream side – are still pretty cautious not putting a lot of
money into CapEx, which is impacting the midstream business. And that's more impacted though by, again, the
political issues that we're facing in this country. The issue though is, is if those go forward, I do expect that there
will be some price escalation as things get busy again. ......................................................................................................................................................................................................................................................
Benoit Poirier Analyst, Desjardins Securities, Inc. Q
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Okay, that's very good color. And on the pipeline side, could you quantify in the quarter your exposure to pipeline.
Just trying to gauge what could be a kind of a downside scenario assuming some negative news in Canada, Dan. ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Well, there are a lot of smaller type projects that are ongoing, the one project that we mentioned in the first part of
the call, the client just said they're only doing essential services. We're doing bits and pieces of the work, but I
wouldn't suggest we're at full capacity yet, subject to that review. So, I think if that review gets completed and
things go forward, it will have a positive impact, if it doesn't – the Oil & Gas business in our engineering business
now is only – it's less than 5% of our overall revenues in Stantec, and on the Environmental side, Oil & Gas is less
than 5%. So, combination, it's still less than 10% of our overall business in Oil & Gas now. ......................................................................................................................................................................................................................................................
Benoit Poirier Analyst, Desjardins Securities, Inc. Q Okay, that's a very good color. And when we – you'd previously talk about the project performance issues for
Building (sic) [Buildings] (50:38) you gave a lot of color about the UK and Middle East, but could you talk a little bit
about what type of improvement we could see going forward on a gross margin and organic growth basis given
the year-over-year comparison, the healthcare market downturn that started a year ago? Just trying to gauge how
the comparison will be in the second half? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A We've had a closer look with our Buildings leadership to look at our forecast for [ph] leased out (51:14) into Q2
and do expect to see some improvements in margin and operating performance. It's really is getting down to
project-by-project and almost hand-to-hand combat and making sure that we're executing these projects well. ......................................................................................................................................................................................................................................................
Benoit Poirier Analyst, Desjardins Securities, Inc. Q Okay. So, pretty much at the bottom right now, right, Dan? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A At bottom of performance expectations? ......................................................................................................................................................................................................................................................
Benoit Poirier Analyst, Desjardins Securities, Inc. Q Yeah, or... ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Yes. ......................................................................................................................................................................................................................................................
Benoit Poirier Analyst, Desjardins Securities, Inc. Q ...kind of [indiscernible] (51:43) yeah, okay. Okay, perfect. And last one for me. You mentioned that there was
obviously significant cost overrun incurred to-date on some legacy hard-bid project. But on the other side it seems
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that there is an opportunity to recover. So, could you maybe quantify what could be the amount that could be
recover and also provide some color about the timing on those potential recoveries? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Every project is unique with respect to the stage of either negotiation or – what's the right word, that's not
remediation, but the – litigation... ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A [ph] And mediation. (52:27) ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A ...or – and mediation in any one of these projects, it's different and they are at different stages. So, the timing is
certainly uncertain. The -- with respect to the probability, we do put a probability weighting on it but we cannot
recognize any of that into revenue until it's highly probable that we've come to a conclusion with the client and that
we will get paid for those claims. We – I think we indicated in the fourth quarter, we had about CAD 50 million in
claims of which we've recognized about 15% of that, so that number hasn't materially changed in Q1. ......................................................................................................................................................................................................................................................
Benoit Poirier Analyst, Desjardins Securities, Inc. Q Okay. Perfect. Thank you very much for the time. ......................................................................................................................................................................................................................................................
Operator: And our next question will come from Maxim Sytchev with National Bank Financial. ......................................................................................................................................................................................................................................................
Maxim Sytchev Analyst, National Bank Financial, Inc. Q Hi, good morning. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Hey, Max. ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Good morning, Max. ......................................................................................................................................................................................................................................................
Maxim Sytchev Analyst, National Bank Financial, Inc. Q I just wanted to ask you a question in terms of your U.S. footprint. When we look at some of your U.S. peers
specifically, it seems to me that the organic growth momentum there is stronger. And I'm just wondering is it just
the question of positioning or do you feel that, perhaps, you are starting to lose a bit of market share in that
important [ph] start of the broader (53:45) market? ......................................................................................................................................................................................................................................................
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Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A No. I don't think we're losing market share at all there, Max. We've got a lot of great wins in the Transportation
sector over the last little bit that are just starting to ramp-up. We talked about the Long Island Rail Road. Good
wins in the Water sector; we talked about the Mid-Breton Sediment project just ramping up again these are some
larger projects.
And, really, in each sector we're seeing that. So, I think the market there is strong. I think, we're winning our fair
share and a lot of these larger projects that we've secured really are just beginning to ramp-up now. ......................................................................................................................................................................................................................................................
Maxim Sytchev Analyst, National Bank Financial, Inc. Q Okay, that's helpful. And then, in terms of – there was a commentary in the Buildings division where you had
some client departures from the acquired firms. Any color on that front, please? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Yeah. Really what that is, is because we operate as an integrated Buildings firm where we have integrated our
Buildings engineering and our architecture business, when you have a Buildings engineering in a legacy
business, generally a lot of their clients who they work for are the architects. So, when you bring that engineering
business in-house, some of those architects don't want to work for a firm or don't want a vendor working for them
that has also got architecture expertise. So, that's really what that relates to. It's not material, we see it all the time
as we do Buildings, particularly engineering acquisitions, but we do get the benefit when we do architecture
acquisitions where we can generate more revenue internally by using our own internal engineering expertise. So,
it's a bit of a trade-off sometimes. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Right. ......................................................................................................................................................................................................................................................
Maxim Sytchev Analyst, National Bank Financial, Inc. Q Okay. And then, just going back on Construction, I guess, we'll see how the process is going to play out. But if it's
a status quo situation obviously, the margin is lagging right now relative to your 7% to 9% EBITDA guide. So, how
should we think about the rest of the year? Is there a catch-up dynamic and what gives you confidence you're
going to be able to hit those well, let's call it, 8% midpoint EBITDA? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Yeah, I think the – we have seen good progress on the waste-to-energy projects in the first quarter. We received
a turnover acceptance of one of the projects. We have hit some critical milestone dates on another project. And
the third project is essentially complete, it's in O&M. And we've got two of them now in operating and
maintenance. And so, we've made some really good progress. So, we aren't seeing a whole lot of additional
negative headwinds on those projects. Although, they're [ph] call it, qualified after (56:37) there's still work to
complete on one in particular to get the final turnover and acceptance. But good progress in the quarter on that.
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And again, in the U.S., I think it's important to note that the core Water business both in the U.S. and the UK is
very strong. It's a good business and operating well. We didn't take any material hits on the design-build projects,
[ph] the fixed (57:05) projects that we had to take some provisions on in Q4 and Q1, so our estimates to complete
are holding up and we expect that to continue. And we're just ramping up on some other projects that are new
that should help generate good revenues in the next couple of quarters for Construction. ......................................................................................................................................................................................................................................................
Maxim Sytchev Analyst, National Bank Financial, Inc. Q Okay. Well, that's it from me. Thank you very much. ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Thanks, Matt. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Thanks, Matt. ......................................................................................................................................................................................................................................................
Operator: And we will now move to Michael Tupholme with TD Securities. ......................................................................................................................................................................................................................................................
Michael Tupholme Analyst, TD Securities, Inc. Q Hi, thanks. Maybe just to pick-up on that last question. Dan, is part of the issue this quarter in Construction
Services the fact that some of these projects that we're challenging in the last quarter are running at zero margin
until everything is completed? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Not zero margin, but they're certainly running at a lower margin. I think, frankly, a lot of the margin on these
projects had been recognized quite early and they didn't leave enough margin for the tailend of these projects.
We're at the end of them, but I wouldn't say they're at zero margin or negative margin but significantly lower
margin than what was anticipated at the start. ......................................................................................................................................................................................................................................................
Michael Tupholme Analyst, TD Securities, Inc. Q Okay. And the one project that's not yet fully completed or very close to completion that you mentioned, when is
that due to be finished? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A We're expecting to get turnover – we have to go through about a two-week – I forgot exactly what the... ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A A performance testing.
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Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Performance testing on the plant. It's all constructive, now we're in the – in the actual final phases of making sure
that can generate power on a consistent basis over 14 days. We achieve that acceptance and it turns over. It's
always subject to discussion and negotiation with the client, but we do expect to see that either towards the end of
Q2 or perhaps in the beginning of Q3, but we expect to get that in the next quarter or so. ......................................................................................................................................................................................................................................................
Michael Tupholme Analyst, TD Securities, Inc. Q Okay. And then, just in terms of the – your comments about the strategic review, I think you suggested you expect
it to be completed before the end of the year, and I just want to be clear about what you mean. Do you mean you
will have decided on what path you're going to take by the end of the year or you would expect any transaction,
for example, if there is an, in fact, a sale to be closed by the end of the year? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A No, our – we're active in the – in that review process now. Our anticipation is that we would have made the
decision on our direction and if there – if we were going to proceed with a transaction, it would be our expectation
that we would complete the transaction by the end of the year. ......................................................................................................................................................................................................................................................
Michael Tupholme Analyst, TD Securities, Inc. Q Okay. Perfect. ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A So, essentially, yes. ......................................................................................................................................................................................................................................................
Michael Tupholme Analyst, TD Securities, Inc. Q Right. Okay, perfect. You've been asked about Buildings a number of times. I just want to circle back on one
follow-up question regarding Buildings. [ph] Is there – certainly (01:00:15) there were a number of issues in that
segment that were impacting the quarter. But if we look at the margin being down and you mentioned execution
issues, is there any way to help quantify what the gross margin might have looked like absent these execution
issues? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A I think the gross margin would have been closer to what our expectations are and what we have forecast for gross
margin for Buildings. So, it should have been closer to what our historical gross margins were in Buildings. We're
off a couple of percentage points is really what that quantification is. ......................................................................................................................................................................................................................................................
Michael Tupholme Analyst, TD Securities, Inc. Q
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And given the focus on improving execution in that segment, it's something you expect improvement but should
we expect that improvement to show up in the next quarter or so? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A I think it'll be incremental and we'll see it through the year. We're implementing a lot of things including
reevaluating project manager certifications, making sure we have the right PMs on projects to improve the
margins here and developing proper project plans and so on. So, by the end of the year, I expect us to be
improved for sure. ......................................................................................................................................................................................................................................................
Michael Tupholme Analyst, TD Securities, Inc. Q Okay. And then just lastly, really, really strong improvement in admin and marketing as a percentage of revenue
in the quarter on a year-over-year basis. So, I think there were a number of factors at play there, some of which
you listed. Things like lower occupancy costs, lower discretionary spending, lower integration costs. Would you
expect additional improvement in some of those types of factors sequentially? So, what I mean is there – would
occupancy costs come down further for example on a sequential basis as we move through the year and this
discretionary spending drops even further? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Yeah, I think we started seeing some of the improvement in the occupancy costs in Q4, as you might see a little
bit more, then it'll normalize through the remainder of the year. I think where, hopefully, we do see some
improvement is in utilization, we're now coming off at one of the weaker quarters. Q4 and Q1 are always weak
from a seasonality perspective. So we should see some improved utilization in Q2 and Q3. So that should help
contain if nothing else the admin and marketing expenses as a percentage of revenue. ......................................................................................................................................................................................................................................................
Michael Tupholme Analyst, TD Securities, Inc. Q Right. Okay, thank you very much. ......................................................................................................................................................................................................................................................
Operator: And we will now move to Ben Cherniavsky with Raymond James. ......................................................................................................................................................................................................................................................
Ben Cherniavsky Analyst, Raymond James Ltd. Q Hi guys. Most of my questions have been asked, I think. Just a little more on the U.S. I mean, the organic growth
rates between Canada and the U.S. struck me as maybe a little counterintuitive. I mean the U.S. construction
markets from everything that I've been seeing would have suggested perhaps a higher organic growth rate there.
I know you guys have touched on some of that already and break it down in the MD&A, but is there – like if you're
not losing market share, what would be – is it just lumpiness or what would account for still a fairly modest organic
growth rate south of the border? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Yeah. I think some of it is lumpiness, Ben, so we don't – it's really hard to quantify projects. We're coming on and
off of projects. But certainly, the lower gross margin also impacts revenue. So areas like the Buildings segment
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would have impacted our organic growth and you see that, and a good portion of that business is in the U.S. –
over almost 60% of that business is in the U.S. We had fairly tepid growth on a gross revenue basis, of course, on
Water and a good portion of our business there, about half of that, is in the U.S. But we grew well on a net
revenue basis.
And in Environmental Services, again, fairly flat. So, I think when you look at the mix of business, we're about just
shy of 60% of our revenue now in Consulting Services is in the U.S. and you see a little bit of weakness in some
of those end markets and Buildings in particular that's going to drive down your overall U.S. organic growth. ......................................................................................................................................................................................................................................................
Ben Cherniavsky Analyst, Raymond James Ltd. Q So, without leading you into any kind of a guidance trap, I mean do you think the number for the year is better
than what you just put up, like the – or is this as good as it gets in the U.S. right now? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A No, we – I think, Ben, we do see going forward that that – our gross and net organic growth in the U.S. will
improve. We talked about a number of the projects that we've got that are ramping up. So, no, we certainly sub-
1% would not be our expectations for organic growth in the U.S. for the remainder of the year. ......................................................................................................................................................................................................................................................
Ben Cherniavsky Analyst, Raymond James Ltd. Q Okay, that's helpful. And maybe just at a high level, Gord, the strategic review of Construction. Not long ago, you
guys were saying it's critical to the business, we're committed. I think when you initially looked at it, it was – you
were committed, but it was – you were going to investigate it and then you were committed and now you're
reconsidering it. I mean what – how should we interpret the change in the philosophy of the Construction
business, and whether or not it is indeed critical to what you're doing compared to what, frankly, has been a little
bit of mixed messaging around the business? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Yeah. I think, Ben, the one key to that is, I came in with a new set of eyes. Certainly, had been part of our
leadership team for some time. But I wanted to come in and re – have a new look at everything. We're looking at
the cost side of things and we've done some work there, and you see we've had some benefits here in Q1. We've
been looking at really re-kicking going with our acquisitions program.
You've seen a few already. You'll see, hopefully, some increased activity there through the rest of the year. That
and but construction was something we wanted to have a good look at as well. Is it – as we were integrating
MWH, as we're learning more about it in the market, I think the statement that we made was appropriate for the
time, but now we're really reevaluating, does this – is this where we want to be in three years or in five years. I
think the – because even though what we're in Construction, it's only in Water, only in the U.S. or the UK. So, it's
not certainly in all of our BOUs. It's certainly not in all of our geographies. We've perhaps found in – as we looked
at it in the U.S. It was – we don't need that tight integration in all cases.
In the UK, we found that the tight integration with some of the clients wasn't as tight as perhaps we had thought.
And in other cases, we're looking for opportunities again if we – if, should we decide to divest to ensure that we
have that continuity both in our Consulting group for our revenue generation, but also for the clients and for
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project delivery. So we're just having a good look at it. Ben, I don't know that, that you'll see continued changes. I
mean once we make – once we go through and make our decision, here will be set. ......................................................................................................................................................................................................................................................
Ben Cherniavsky Analyst, Raymond James Ltd. Q So, could I just ask, if you take a bigger step back, as a follow-up on that, the – your stock hasn't really performed
very well since the MWH acquisition, I mean, even maybe going a little further back since the oil downturn. What
other lessons learned would you say have there been in the last few years and things that you're considering as a
new like – generally, there's a fair amount of consistency in the message. You've been in internal appointment,
you've been part of the plan all along in management, but is there anything that investors – do you want to say to
investors about how Stantec – what your – how your mandate might look different from what's happened in the
past? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Your point that starting back when Oil & Gas turned down and our stock [ph] didn't have to (01:09:29) see a lot of
appreciation there. I think that that makes sense. We – Oil & Gas was a big part of our business at that time. The
oil market turned down. We experienced some organic retraction in revenue, and the markets rightfully saw that.
Then we acquired MWH, still committed that that was the right thing to do. We stepped back from our – a lot of
acquisition and expansion for a number of years as we sort of processed what did that mean, we had to get our
systems in place, we had to learn a little bit more about how that group functioned and how we could get them all
integrated. It was a big bite for us.
So, I think your – since the MWH acquisition, things have been a little flat from an earnings perspective. They've
been a little flat from a stock appreciation perspective. And a big part of that I think is that we – while we had
some acquisition during that time to continue our growth, we weren't – and this was part of the plan – we weren't
extremely active there. But we – starting in the last half of last year and certainly very active through the first part
of this year and it'll continue, we're really ramping up that organic growth.
So, as we talked about the four things that I've been working on then they were looking at some of the cost
containment with our leadership on how we could – not that anything was broken, but we just wanted to continue
that continuous evolution of refining our cost structure, getting utilization up. We're really focused on organic
growth with our campaigns and our account management plan, and you're seeing the organic growth show up this
year in this quarter in all the regions. We're really focusing on acquisition growth, and you've seen five LOIs or
things that we've closed so far this year. You'll see continued activity, I believe, in 2018. And then, certainly, we're
relooking at everything and one of those is that review of Construction.
So, I think, as you said, what we'd like the markets to see, how – my thoughts going forward, that's really it. It's
the same strategy that the tried-and-true Stantec strategy of continued growth through acquisition, keeping the
focus on moving up the bottom line in concert with the top line and just sort of getting back and sticking to or
knitting sort of thing. So, I think that's what you'll see going through 2018 and beyond. ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Maybe just to add one other thing, Ben, is I think the market tends to under appreciate the massive amount of
effort and investment that we made in 2017, and we'll continue to do so in positioning ourselves for that global
growth. We spent a ton of money in terms of trying to – and effort – in trying to get ourselves positioned for that
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eventual acquisition growth globally, and we are very well-positioned today. We've got collaborative tools around
the world, we've got a platform now set up around the world, we're going through the final stages of that execution
which will take some time of – for example, getting our Australia, New Zealand and UK operations onto Oracle.
And that we won't have finished by the end of the year. But it's – we're advancing on that and a number of other
initiatives internally to really strengthen the business while at the same time really focusing on things like, as Gord
mentioned, utilization and project execution and so on. ......................................................................................................................................................................................................................................................
Ben Cherniavsky Analyst, Raymond James Ltd. Q Okay, thanks very much. ......................................................................................................................................................................................................................................................
Operator: And our next question comes from Chris Murray with AltaCorp Capital. ......................................................................................................................................................................................................................................................
Chris Murray Analyst, AltaCorp Capital, Inc. Q Thanks, guys. Just a couple of quick questions for you. First just going back to the Construction business one
more time. I guess what I'm trying to understand, well, we've talked about historically it's always been the Water
business. You folks have alluded to the fact that maybe the margins weren't set up right for the Construction
business. You're getting yourself into trouble on waste-to-energy projects, which I'm still struggling to understand,
for Water business, why you're even in that business. How much of the issues that you're facing right now do you
think were part of a lack of control before you guys acquired the business and how should we feel about where
the business is today on kind of new projects or projects that are running so we don't see any more issues
through the balance of the year? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Chris, we talked a lot about that in our year end reporting. First of all, the waste-to-energy projects were an
opportunity that MWH saw as a big business opportunity should the market go that direction in turning waste into
energy. It was subsidized by the UK Government, which then was more or less pulled once Brexit came along. It
was a good opportunity that they pursued and if they – that thing could have turned either way where, had the
market continued, they would have been a leader in terms of the expertise gained in the waste-to-energy plants.
And we've learned a lot, obviously, in those plants in the first three. Since then, we've obviously put a hold on any
new waste-to-energy projects. At the same time, they were addressing emerging business opportunities in 2013,
2014 in the U.S. going after the design-build hard-bid projects in areas that were outside of their traditional
geographies. So, they maybe didn't understand the entire supply chain, the craft labor, the equipment suppliers,
et cetera in those markets. So, we've pulled that back as well. And thus the – again, part of the reason for the
strategic review, if – it can't be that satisfying for employees in our Construction business where we say we're not
going after this, we're not expanding in – by acquisition, we're keeping you close back down to your knitting in
terms of where your core expertise is, all of those things we've added that additional governance and oversight
since the acquisition of MWH, so I think we now have that business more or less contained and under control,
focused on what they do best. But it can't be satisfying for them. So, another factor in the strategic review
discussions. ......................................................................................................................................................................................................................................................
Chris Murray Analyst, AltaCorp Capital, Inc. Q Fair enough. And then, very quickly just on Energy & Resources. We did see a pretty strong number up. I guess
more just color in a couple of things. You talked about Mining and Energy as well as WaterPower really did take a
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step up. Just trying to figure out, is this – are these awards that you had won a long time ago? And this is just a
timing issue of when we get to the work, or is this – what are you seeing in terms of the pace of demand for those
services? Like is this a big step-up in terms of a ramp, or like new work coming in kind of this – like just last month
type thing to get done today, or is this something that's been kind of in the backlog for a while? And then, as a
piece of this too, as a follow-on, if we [ph] give a positive FID (01:17:07) from – on the LNG projects this year, can
you just kind of give us an idea how you think that may impact you as well? ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Sure, on – to your first question, Chris, the – no, these are jobs that are – have recently come in. They are
Warragamba Dam a lot of the Power and pipeline job, the kind of the smaller work that we're doing, these are new
awards. So, this isn't things that have been on the books for a long-term. Certainly, a lot of activity in our Latin
America Mining sector as well, we're hiring there again. So, I think that's all positive. And should we get a positive
investment decision on the LNG, certainly, a lot of activity there that we'd be well-positioned for from
Environmental work to, you name it, we'd be... ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A Pipeline work. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Yeah. Pipelines and Environmental and even a lot of core Infrastructure, Transportation and Power lines and all
sorts of things there. So, I think we'd be positively impacted by that. ......................................................................................................................................................................................................................................................
Chris Murray Analyst, AltaCorp Capital, Inc. Q Okay, great. That's a good color. I'll leave it there. Thank you. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A Thanks, Chris. ......................................................................................................................................................................................................................................................
Operator: And once again we will hear from Mona Nazir with the Laurentian Bank. ......................................................................................................................................................................................................................................................
Mona Nazir Analyst, Laurentian Bank Securities Q Hi. Just had a quick follow-up. You touched a little a bit on the various OpEx line items and some seasonality. But
just stepping back, in your prepared remarks, you spoke about honing in on employee utilization, cost
effectiveness and initiatives that are flowing through and starting to have some impact on margins. I'm just
wondering, trying to hear from you and your perspective, what's the biggest takeaway when you've been going
through this process of honing in on all of these drivers? Thank you. ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A
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So, a number of things, Mona. It's not just one line item. So, I'll give you a couple of examples. So, obviously, the
occupancy costs we talked about, consolidating office space, that has a big impact. The accounting rules mean
you have to take a lease exit liability upfront but it's a long-term benefits of having lower surplus space out there.
So, we're continually focused on that. When it comes to things like other lines of business, travel and
entertainment is a big line item for us. We've really curtailed travel to just necessary travel. We've implemented
new programs, for example, around our corporate card program which gives us a lot more efficiencies and
information visibility into our spend.
Utilization is probably the biggest item where we're continuing to evaluate the – the demographic mix of our staff
and the utilization. Certainly trying to get that – make sure we're right-sized in each of our business units. This is
not a broad-brush approach, you have to be somewhat surgical in how you deal with utilization and you really do
have to look out at in a local area and look at the work backlog that we have and match our staff. So, we're being
very focused and disciplined in going about evaluating discipline to it or utilization. So, it's always all of those type
of things. We're looking, as Gord said, at everything to make sure that we're optimizing our business where we
can. ......................................................................................................................................................................................................................................................
Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc. A And this will – Mona, this will always be on ongoing. It's just continuous improvement. We've invested in
technology and collaboration tools to allow people to be more efficient, to mean they don't have to travel to be
able to collaborate effectively. So we're really pushing the utilization of these tools to get more efficient and, at the
same time, reduce some of these travel costs and things as Dan mentioned. ......................................................................................................................................................................................................................................................
Mona Nazir Analyst, Laurentian Bank Securities Q Okay, that's great. And just on that, some of those – you surgically looking at these line items and trying to overall
reduce costs, is some of that already factored into your guidance or is there potentially further upside down the
road? ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A I think we expected, when we set our guidance at the beginning of the year, that we would achieve these targets.
I'm not suggesting that by doing this that we will have a massive increase in the targets that we've set so – but we
have certainly expected when we set these that we would achieve certain utilization ratios of which we're still
targeting that. ......................................................................................................................................................................................................................................................
Mona Nazir Analyst, Laurentian Bank Securities Q Okay. That's very helpful. Thank you. ......................................................................................................................................................................................................................................................
Daniel J. Lefaivre Chief Financial Officer & Executive Vice President, Stantec, Inc. A [ph] Yes. (01:21:47) ......................................................................................................................................................................................................................................................
Operator: And with no further questions, I'd like to turn the call back over to management for any additional or
closing remarks.
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Gordon Allan Johnston President, Chief Executive Officer & Director, Stantec, Inc.
Well, I just wanted to say, thanks again for everyone for joining our Q1 earnings call. We think we feel that we've
– we had a good quarter and we feel things are – will be continued improvement for the remainder of the year.
Enjoy the rest of your day. ......................................................................................................................................................................................................................................................
Operator: And once again that does conclude our call for today. Thank you for your participation. You may now
disconnect.
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