Stantec Inc. (STN)

Q1 2010 Earnings Call

May 13, 2010 3:00 pm ET

Executives

Robert J. Gomes - President & CEO

Daniel J. Lefaivre – Chief Financial Officer

Analysts

Sara O'Brien - RBC Capital Markets

Paul Lechem - CIBC World Markets

Mike Tupholme - TD Newcrest

Chris Blake - Stonecap Securities

Richard Stoneman - Dundee Securities

Ben Cherniavsky - Raymond James

Pierre Lacroix - Desjardins Securities

John Rogers - D. A. Davidson & Co.

Bert Powell - BMO Capital Markets

Presentation

Operator

Welcome to Stantec Consulting’s first quarter 2010 earnings results conference call. (Operator Instructions) As a reminder, today’s conference is being recorded. It will be available for reply on the Investor section at Stantec.com. It is now my pleasure to introduce your host, Mr. Robert Gomes, President and CEO.

Robert J. Gomes

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

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

You will find more information about the assumptions and material factors that were applied or could cause actual results to differ materially from those we discuss in this conference call in the management’s discussion and analysis included in our 2009 financial review.

I would also like to advise you that this conference call is being broadcast live over the internet and will be archived for future reference at Stantec.com under the Investors section. Therefore, we ask any members of the media who are joining us today in a listen-only mode and who wish to quote anyone other than Dan or me to please request permission to do so from the individual concerned.

This morning we released the results of Stantec’s operations for the first quarter of 2010. I am pleased to report that we began the year on a positive note with growth in gross revenue on a sequential basis. We continue to manage our business effectively in a difficult economy and after nearly a year of having to reduce our staff levels, we added to our employee numbers during the first quarter. Dan will now provide a review of our first quarter financial results.

Daniel J. Lefaivre

Thank you Bob and good afternoon everyone. As Bob just indicated, in the first quarter of 2010 we achieved revenue growth on a sequential basis from the end of 2009. The gross revenue for the first quarter was $371.6 million, down $33.2 million from $404.8 million in Q1 ’09. However, $30.4 million of this decrease was as the result of the change in foreign exchange.

Our gross revenue in the first quarter of 2010 was up 8.4% from Q4 ’09. Our net revenue for the first quarter of 2010 was $296.8 million, down $46.4 million from the $343.3 million in Q1 ’09. The strengthening of the Canadian dollar made up $24.7 million of this decrease from Q1 ’09. Net revenue was also up 8% from the fourth quarter 2009 however.

Our gross margin as a percentage of net revenue was 55.5% in the fourth quarter of 2010 compared to 56.4% in Q1 ’09 and continued to fall within our range of 54.5% to 56.5%. Our gross margin percentages decreased slightly in all practice areas except urban land. These decreases were mainly due to the mix of projects and progress during the quarter and also due to the pursuit of P3 projects.

In the P3 pursuit phase, we carry our work at a slightly lower margin which we make up for through our success in obtaining the project. Our administrative and marketing expenses decreased to 42.2% during the first quarter of 2010 from 43.1% in Q1 ’09, mainly due to achieving increased efficiencies.

We also carried out fewer integration activities during the first quarter of 2010 than in Q1 ’09 when we completed the system integration for the Secor acquisition and began the process of integrating staff in the [Dig Clifford] acquisition.

During the quarter we reorganized our corporate tax structure. Our income tax expense increased by $6.2 million resulting in an effective tax rate of 51.1%. Since we immediately recognized the entire tax impact of this reorganization in the first quarter, we expect a lower effective tax rate in each of the three quarters remaining in the year. We believe that by the end of 2010 our effective tax rate will be within our targeted range of 32.5% to 34.5%. This one time non-cash event is part of our long term strategy to make our corporate tax structure more efficient.

Without this one time tax impact our net income for the first quarter was $19.9 million compared to 20.7 million in the first quarter of 2009 and our diluted earnings per share was $0.43 compared to $0.45. With the tax impact, reported net income was $13.7 million for the first quarter of 2010 and reported diluted earnings per share was $0.30.

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