Ian Gillies

Ian Gillies from Stifel inquired about the expected impact of AI on Stantec's revenue per employee, utilization rates, and the timeline for private companies to adjust their valuation expectations in the M&A market following recent public equity resets.

Answer

Gord Johnston, President and CEO, Stantec, stated that AI is viewed as a favorable tool, similar to past technological advancements, that will drive higher net revenue per employee and improve efficiency. Vito Culmone, EVP and CFO, Stantec, added that while valuation is a component, the primary focus for acquisitions remains strategic fit and client enablement, with no perceived timing issues.

Ian Gillies asked about the impact of AI on Stantec's revenue per employee and utilization, and how the recent reset in public equity valuations might affect private company M&A valuations and execution timelines.

Answer

President and CEO Gord Johnston stated that AI is expected to favorably impact revenue per employee and utilization, similar to past technological advancements. He acknowledged the recent public market valuation decline and the time it takes for private company expectations to adjust, suggesting a potential delay in M&A execution. EVP and CFO Vito Culmone emphasized that strategic fit and client enablement remain primary drivers for acquisitions, not just valuation.

Ian Gillis asked if flat organic backlog growth in the U.S. year-to-date would impede Stantec's ability to generate organic growth next year, and if there are concerns about the certainty of IIJA funds being released.

Answer

Vito Culmone, EVP and CFO, confirmed that flat U.S. backlog year-to-date is not expected to impede organic growth next year, noting backlog lumpiness and a 6.6% year-over-year increase. Gord Johnston, President and CEO, stated there is no indication that IIJA funds would be canceled or withheld, expecting continued momentum from the program.

Ian Gillis questioned whether flat organic backlog growth in the U.S. year-to-date would impede Stantec's ability to generate organic growth in the U.S. next year. He also asked about concerns regarding the certainty of IIJA fund releases and the U.S. team's confidence in its long-term tailwind.

Answer

Vito Culmone, EVP and CFO, clarified that flat year-to-date U.S. backlog does not indicate a lack of organic growth for next year, noting backlog lumpiness and a 6.6% year-over-year increase in U.S. backlog. Gord Johnston, President and CEO, stated that Stantec has no indication of IIJA program cancellation or fund withholding, expecting continued momentum from the program.

Ian Gillies of Stifel asked if margin expansion in 2025 could be better than average as M&A integrations complete. He also inquired about the new M&A opportunities the ZETCON acquisition has created in Continental Europe.

Answer

CFO Theresa B. Jang confirmed that the opportunity for margin expansion in 2025 is strong, driven by the completion of integration work, benefits of scale, and improved utilization as delayed projects ramp up. CEO Gordon Johnston noted that while ZETCON presents good opportunities in Germany, Stantec will not pursue further acquisitions there in 2024, prioritizing the full integration of ZETCON onto its platform first.

Inquired about additional liquidity levers beyond government support, the outlook for production and shipments if tariffs remain high, and whether recent Canadian import restrictions are improving domestic plate pricing.

Answer

The company is focused on working capital optimization as an additional liquidity lever. They do not expect to curtail production further, with shipments likely to remain around Q2 levels. They have not yet seen a positive pricing impact from the Canadian government's new import restrictions.

Ian Gillies from Stifel Financial Corp. asked about additional liquidity levers beyond existing measures, the potential for further production curtailments if tariffs persist, and whether new Canadian import restrictions were improving domestic plate pricing.

Answer

CFO Rajat Marwah identified working capital optimization as a key additional liquidity lever, expecting it to become a source of cash by year-end. He also projected that shipment volumes would likely remain around Q2 levels, absent major shifts from trade discussions. CEO Michael Garcia added that while the company provides feedback to the government, they have not yet seen the intended positive effect on pricing from recent import measures but expect the government to take further action.

Ian Gillies asked for details on the EAF project delay, the critical path to first production, the timeline for the second furnace, and questions regarding liquidity, including the ability to draw on the credit facility with negative EBITDA and any plans for incremental debt.

Answer

CEO Michael Garcia attributed the EAF project's shift from a Q1 to a Q2 start to harsh winter weather impacting the commissioning of critical systems, and he targeted the end of 2025 for the second furnace. CFO Rajat Marwah clarified that the credit facility can be drawn with negative EBITDA, with a covenant test only on the final 10%. He stated that while all scenarios are under review, the company sees no immediate need for incremental debt due to sufficient liquidity and is actively engaged with the government on support programs.

Inquired about the specifics of the EAF project delay, the timeline for the second furnace, and details regarding the company's liquidity, including access to credit facilities and potential need for new debt or government loans.

Answer

The EAF delay into Q2 was primarily due to harsh winter weather impacting the commissioning of critical systems. The second furnace is targeted for the end of 2025. The company can draw on its credit facility even with negative EBITDA (except for the last 10%) and currently sees no need for incremental debt, though government programs remain an option. A net release of working capital is still expected for the full year.

Asked for clarification on the breakeven price point with tariffs, the potential for increasing plate production, the possibility of government support beyond tariffs, the company's strategy for furnace utilization and inventory management if tariffs worsen, and anticipated carbon tax rebates.

Answer

The company clarified it would be profitable, not just breakeven, at $950 CRU with tariffs, as its HRC cost is $650. There is a significant opportunity to increase plate sales within Canada due to new retaliatory tariffs on U.S. steel. The company is in discussions with the government about potential support. They will not stockpile coil but will build plate slab inventory to support sales opportunities. A carbon tax rebate of ~$7.5M is expected soon.

Ian Gillies of Stifel requested clarification on the profitability of U.S. sales under tariffs, the strategy for increasing plate production, and the potential for additional government support beyond retaliatory tariffs. He also asked about the company's operating strategy for the blast furnace if tariffs worsen and inquired about expected carbon tax rebates.

Answer

CFO Rajat Marwah clarified that at current prices, U.S. sales are profitable, not just breakeven, and confirmed a $7.5 million carbon tax rebate is expected. CEO Michael Garcia outlined a plan to ramp up plate production to capture the Canadian market, which is now protected by tariffs. He confirmed that discussions with government officials about further support are ongoing. He also stated the company would not stockpile unsold coil but would build plate slab inventory to support market opportunities.

Asked about the strategy for the plate mill ramp-up in a weak market, the certainty of the revised EAF project budget, and the expected trend in cost per ton over the next few quarters.

Answer

The company is proceeding with the plate ramp-up but is focusing on rebuilding strategic inventory and making process improvements rather than chasing volume in a weak market. The EAF project cost is expected to finish within 5% of the latest budget, with most costs now locked in. Cost per ton is expected to remain stable or trend slightly lower, hovering within a couple of percentage points of the current level, with more significant reductions anticipated once EAF production increases.

Ian Gillies of Stifel followed up on the plate mill ramp-up, asking if Algoma was considering slowing it down given the current market oversaturation. He also questioned the finality of the updated EAF project budget and inquired about the expected trend for cost per ton in the coming quarters.

Answer

CEO Michael Garcia responded that while they are mindful of market conditions, they are using the slow period to rebuild strategic plate inventories and improve rolling profiles, positioning them for when demand returns. On the EAF budget, he expressed high confidence the project will finish within 5% of the latest guidance, as over 90% of the work is now under fixed-price contracts. CFO Rajat Marwah added that cost per ton should trend slightly lower but remain within a couple of percentage points of current levels, influenced by product mix.