WSP Global Inc

TSX:WSP

Earnings Call Transcript 2018-Q1

[Operator]

[Foreign Language] Good afternoon, ladies and gentlemen. [Foreign Language] Welcome to WSP's First Quarter of 2018 Results Conference Call. I would now like to turn the meeting over to Isabelle Adjahi, Senior Vice President, Investor Relations and Communications. [Foreign Language] Please go ahead, Ms. Adjahi.

[Isabelle Adjahi]

Thank you, and good afternoon, everyone. Thanks for taking the time to join us today for this quarter in which we will be discussing our Q1 performance. We will first make a few remarks and then we will follow these remarks by a Q&A session. Today with me are Alexandre L’Heureux, our President and CEO; and Bruno Roy, our CFO. Please note that we will be recording the call, and we will post it on our website tomorrow. Before we start the call, I just want to mention that we will be making some forward-looking statements and that actual results could be different from those expressed or implied, and we undertake no obligation to update or revise any of these forward-looking statements. This being said, I will now turn the microphone over to Alexandre L'Heureux. Alex?

[Alexandre L’Heureux, President, CEO & Director]

Thank you, Isabelle, and good afternoon, everyone. I am very pleased with our Q1 performance, which we'll be discussing in detail in a few moments. There are 3 elements I would like to particularly like to highlight today. First, we started 2018 on a solid note and as anticipated, posted organic growth in net revenues across all operating segments. Second, our revenue synergy approach, which is one of the key elements of our M&A strategy, continues to translate into significant project wins. Finally, as we celebrate the first anniversary of our brand, it is becoming clear that the WSP brand has had the anticipated desired impact. This helped us differentiate ourselves from competition, both from an employee and client perspective. Let me start with a few comments on our first quarter financial performance, on which Bruno will further elaborate on later in the call. For the first quarter, net revenues were $1.5 billion, up 15.2% year-over-year. For the -- on a constant currency basis, organic growth in net revenues was strong at 4.6%. Adjusted EBITDA was $133.5 million, with adjusted EBITDA margin reaching 9.1%, slightly better when compared to the prior year. Finally, our backlog, which stood at $6.7 billion at the end of the quarter, representing approximately 10.5 months of revenues, grew 5.4% organically compared to Q4 of '17. Let me now move to our regional operational performance. Organic growth in net revenues from our Canadian operation was positive for the quarter at 3.6%. Adjusted EBITDA margin before global corporate costs was up 9.7%, an improvement compared to the same period in '17 and in line with our expectations. Our Americas operating segment posted robust organic growth [in] net revenue of 8.3%; and adjusted EBITDA margin before global corporate costs, which stood at 11.4% of net revenues, was the highest among our reportable operating segments. Our U.S. operation on a standalone basis delivered 9% organic growth in net revenue. Backlog remains solid, particularly in the Transportation & Infrastructure sector, where we continue to see strong buildup. Our EMEIA operating segment delivered organic growth [in] net revenue of 2.3% and adjusted EBITDA margin before global corporate costs of 10.4% of net revenues, in line with our expectation. Our U.K. operations posted organic growth [in] net revenue of 1.8%, despite lingering Brexit-related uncertainties. Our acquisition of Mouchel in late 2016 enabled us to minimize some of the Brexit-related risk by shifting the U.K.'s operating revenue mix from the private sector towards the public sector, in which the government has been investing over the last 18 months. The Mouchel acquisition also led to significant revenue synergies opportunity, which I will discuss in more detail shortly.Our APAC operating segment posted organic growth in net revenue of 4.4%, and adjusted EBITDA margin before global corporate cost of 9.4% of net revenues. This performance was mainly driven by our Australian operation, which posted double-digit organic growth. The Australian Transportation & Infrastructure market segment continued to pave the way, delivering over half of the region's net revenue and posting a solid adjusted EBITDA margin. Integration of the Opus acquisition in New Zealand is progressing well. Q1 acquisition growth in APAC amounting to 34.4% [are] related to Opus. We are delighted with the Opus operational performance today, [and it is] tracking in line with our original expectations. Finally, as expected, our Asian operated -- operation, I'm sorry, posted negative organic growth in net revenues. We are continuing our work to achieve a better balance between our core Property & Buildings business and our Transportation & Infrastructure business, in line with our other reportable segments. Now that we have discussed our regional performance, the second element I want to highlight is how the depth and the breadth of our expertise combined with our collaborative approach [and] translating into major project wins. A very good example of that is our win of the development of the 2 of the 4 new stations part of High Speed [Two] rail network in the U.K. at the beginning of the quarter. Combining our rail expertise with Mouchel's public transportation, infrastructure and land referencing capabilities, optimally position us to deliver these projects, which will cover the 85-kilometer Western branch between [Crewe] and Manchester and the 198-kilometer Eastern branch between the West Midlands and Leeds. Lastly, I would like to discuss our brand. It has now been a year since we've repositioned our firm under a strong unified brand, constantly putting our employees and clients at the center of our ambition. The ambition is noble yet simple: make a long-term difference in the life of our fellow citizens, while positioning our expert and strategic advisers to our clients. Given its core market and geographical footprint, WSP is uniquely positioned to play a leading role in shaping the world, the future and designing the cities of tomorrow. Our work and more particularly, our future-ready program, which is now becoming an integral part of the way we do business, will impact our cities and communities for generations to come. This innovative program, which originated in the U.K. and led by David Symons, U.K. Director of Sustainability, is a world-class initiative setting WSP apart and placing our business at the heart of creating a resilient, future-ready world. At the core of this program, our aim is to ensure that the projects we're working on today and which will be an integral part of our living environment for the next 50 to 100 years, are designed and delivered using solutions that not only meets today's code and standard, [the muscles will be ready for] constantly evolving as the climate, societies, technology and resources changes. That's where our experts have a role to play, by being future ready, advising our clients and integrating data that will impact the future in today's projects, and we are convinced that we have what it takes to help our client design lasting solutions [to] the development of better communities and optimal environments for the generations to come. That's what our WSP brand is all about, and I want to thank each of our employees for being proud ambassador of what we stand for. This will enable us to constantly raise the bar, thus offering the best to our clients, employees and shareholders. Bruno will now review our Q1 financial results in more details. Bruno?

[Bruno Roy, Chief Financial Officer]

Thanks, Alex, and good afternoon, everyone. I'm pleased to share our results for the first quarter of 2018. Overall, we are pleased with the Q1 financial results. Organic growth in net revenues was 4.6%. Adjusted EBITDA margin were -- was where we expected it to be at 9.1%. DSO was -- remains stable at 78 days. Free cash flow for the quarter was $35.4 million, quite strong for Q1 and stood at $326.9 million or 152% of net earnings on a trailing 12-month basis. Finally, our balance sheet has remained solid with a net debt to adjusted EBITDA ratio of 1.8x. Now let me dig into the details. For the first quarter, revenues and net revenues were $1.9 billion and $1.5 billion, respectively, an increase of 16.9% [and 16.2% compared] to 2017. Adjusted EBITDA for that period stood at $133.5 million, up $19 million or 16.6% compared to Q1 '17, also slightly ahead of our expectations. Adjusted EBITDA margin reached 9.1%, a slight improvement compared to last year. Keeping in mind that we have seasonality and that Q1 historically represents our lowest quarter in terms of adjusted EBITDA and adjusted EBITDA margin, we remain confident we will attain our full year adjusted EBITDA margin targets of 11%. Our effective tax rate was 24%, in line with expectations. This compares with 25.7% in Q1 2017, which is explained by the positive impact of the U.S. Tax Reform effective January 1, 2018. Adjusted net earnings were at $55.2 million or $0.53 per share, up 10.8% and 8.2%, respectively, compared to 2017. It is mainly due to growth in net revenues and improvement in adjusted EBITDA margin. However, earnings were impacted by an increase in financial expenses compared to Q1 2017 due to a slightly higher debt level than we had last year and slightly higher borrowing costs. Our backlog stood at $6.7 billion, representing approximately 10.5 months of revenue, up $357.2 million or 5.6% compared to the previous quarter. Organically, our backlog grew at 5.4% when compared to both the prior quarter and Q1 2017.Turning to our balance sheet. We ended the quarter with a DSO of 78 days, comparable to both the previous quarter and to Q1 2017. Incorporating a full 12-month adjusted EBITDA for all acquisitions, our net debt-to-EBITDA ratio came in at 1.8x. With access to almost $800 million in cash and available credit facilities, we have the flexibility to pursue our growth strategy and quickly act upon opportunities as they arise. We also declared a dividend of $0.375 per share to shareholders on record as at March 31, 2018, which was paid on April 16, 2018. With a 47.6% dividend reinvestment plan participation, the net cash outflow was $19.5 million. Before turning it back to Alex, I wanted to highlight that the adoption of IFRS 9 and IFRS 15 effective January 1, 2018, did not impact our current results nor necessitate any significant restatement in our previous year's results. The impact of adoption of IFRS 9 and 5 was mainly disclosure-based as indicated in Note 2 of our Q1 interim advanced consolidated financial statements. Alex, back to you.

[Alexandre L’Heureux, President, CEO & Director]

Thank you, Bruno. With a solid balance sheet, favorable market positioning and a very strong brand, we remain well positioned to pursue our growth strategy. Our Q1 results represent a solid start to the year and put us on the right path to pursue and achieve our objectives. As such, we are reiterating our full year 2018 outlook. Now let's open the line for questions. Thank you.

[Operator]

[Foreign Language] [Operator Instructions] Your first question comes from the line of Yuri Lynk from Canaccord Genuity.

[Yuri Lynk]

[I didn't hear] with regards to the outlook, I think last quarter on the call, you pointed to organic growth guidance of 1% to 4% for 2018. Is that still your expectation? Because you started out the year well above that and the Q2 comp is pretty easy as well. So just wondering if that organic outlook has changed at all?

[Bruno Roy, Chief Financial Officer]

Yuri, Bruno here. No, our outlook remains the same. Do keep in mind that our fourth quarter comp will be significantly harder to beat due to the work that we had with FEMA in the fourth quarter. So then, we do expect a 1% to 4% organic growth rate for the year.

[Yuri Lynk]

Okay. So it's on that -- it's on the 6.3% that you did in 2017, not the 4.4%, excluding the FEMA work?

[Bruno Roy, Chief Financial Officer]

The 1% to 4% includes the FEMA work.

[Yuri Lynk]

Yes. Okay, got it. The -- I just want to clarify on IFRS 15 because the backlog performed fairly well and some of your peers are getting a bit of a boost in backlog from the adoption of that measure. So no change in your backlog due to IFRS 15?

[Bruno Roy, Chief Financial Officer]

No change.

[Yuri Lynk]

Okay. So the -- in that case, the bookings were very strong. Can you just talk about where that strength is and the outlook to be able to maintain a book to bill in excess of 1 throughout the year here?

[Bruno Roy, Chief Financial Officer]

Yes, Yuri. The America -- Americas, I should say, and Asia Pacific have been strong. The U.K. has been, frankly, a good outcome and a good surprise for us in the first quarter of this year. I mean, obviously, we were -- we finished the year in '17 on a good note, and we are entering '18 now on a solid note. But clearly, the U.K., given the Brexit uncertainty, we were not too sure. I mean, it's difficult. We didn't have a crystal ball. And I must say that in Q1, we did very well. So with the 2 major projects that were awarded and I talked about that during my address, so I'd say that those 2 major hubs -- or 3 major hubs, I'm sorry, did very well. And the other countries also are working as planned and as expected.

[Operator]

Your next question comes from the line of Benoit Poirier from Desjardins Capital Markets.

[Benoit Poirier]

If we look at your EBITDA margin year-over-year in Q1, you've been able to improve your margin by 10 bps. So I'm just wondering for the full year, you're still maintaining 11% guidance, which represent almost 60 bps. So what makes you confident that the EBITDA improvement should accelerate in -- as we go through the Q2 and the second half?

[Bruno Roy, Chief Financial Officer]

It's a good question, Benoit. Look, clearly, the first quarter historically has always been our weakest quarter of the year. So I mean, we still, at this time, still feel confident that we will be reaching our 11% target.

[Benoit Poirier]

Okay, perfect. And when we look at the stock price, are there any change? Or should we expect you to be closer to the high end in terms of corporate cost? Because it tends to influence the corporate costs. So any color on that?

[Bruno Roy, Chief Financial Officer]

No. I mean, we're -- we'll be within the guidance we provided on that front.

[Benoit Poirier]

Okay. Okay, perfect. And when we look at the M&A pipeline, you've announced an acquisition of ConCol on April 26. Just wondering what we -- if you could talk about the pipeline right now, and where do you see the greatest opportunities around the globe?

[Alexandre L’Heureux, President, CEO & Director]

Yes. Just a small correction, Benoit. We announced ConCol before Christmas, but the pipeline is good. Look, we -- Benoit, as we've said in the past, it's a people business and it's very -- it's not impossible to time acquisitions. I think what we're doing is having active and more informal -- active dialogues in some and informal dialogues with others, with a view to develop a relationship with the firms that we believe would be complementary to our platform. I would tell you that we do not believe our pipeline to be less or more active than what we've had in the past and we'll continue to work in the same fashion we've worked in the past in a very disciplined and focused way to achieve our goals.

[Benoit Poirier]

Okay, very good. And when we look at APAC, last question, you reported a pretty robust organic growth of 4.4% despite the fact that Asia turned negative. So any thoughts on what would be organic growth without Asia and if you see any opportunity to improve the operation on Asia?

[Alexandre L’Heureux, President, CEO & Director]

Well, first, let me take the opportunity to comment on the Opus acquisition. I mean, New Zealand in the first quarter of this year, Opus generated very solid result. We're very pleased, and we obviously do not report this separately and it's obviously not part of the organic growth calculation. But I just wanted to take the opportunity to comment on the New Zealand market. It's a new market for us, but the company has performed extremely well. The integration is going extremely well, so we're pleased. As it relate to organic growth, I mean, Australia has been a solid market for us over the last, I would say, 6 quarters. And I will let Bruno comment in the more granular details in the numbers.

[Bruno Roy, Chief Financial Officer]

Yes, Benoit. On Australia, we're over 10% for the quarter, which is again in continuity of the performance that we had last year, and New Zealand is about half of that. So both markets are posting very robust growth rates.

[Benoit Poirier]

Okay. And is it fair to say that those numbers are sustainable going through the remainder of the year, Bruno?

[Bruno Roy, Chief Financial Officer]

Let's put it this way. Right now, those markets are performing at a very high level, very strong activity level. So can't comment for the future, but with what we know today, we are confident about '18. Let's put it this way.

[Operator]

Your next question comes from the line of Mona Nazir from Laurentian Bank.

[Mona Nazir, VP & Senior Research Analyst]

So my first one just has to do with acquisitions and potential targets that you're looking at. And just given your scale and size, do you still have to call out? And do you still have a group that's actively seeking out targets? Or is it safe to assume that a lot of your calls have been incoming or you're finding these acquisitions through connections and your network? And I'm just wondering, in a given year or quarter, what is the percentage of targets that you look at that actually translate into a transaction? And I'm just trying to get a sense of the market and if the M&A landscape has been shrinking through the years from your perspective.

[Alexandre L’Heureux, President, CEO & Director]

Okay. Look, it's -- I think the simple answer to this is to tell you that all of the above assumptions are true. And I mean, we do get some inbound calls because WSP is a good name in the industry, and I'm saying that very humbly, by the way. I'm just saying that I think we like to believe as a company that our best references are our past acquisitions, and we believe we can be a good home and provide great career opportunities for engineers who wishes to pursue and foster their career within our firm. So we did get inbound calls in the past, and I believe we'll continue to get some inbounds. But at the same time, I mean, it is my job to develop our ties with some of our peers in our industry around the world. And a good portion of my time is dedicated to developing those relationships. And as I said, and answering the questions before yours, Mona, I mean, the pipeline hasn't changed. We continue to have discussion. In some markets, it's more consolidated than it used to be. There's no doubt about that. New Zealand, for instance, is a very mature market. Australia is more consolidated now than it was 10 years ago, so is the U.K. Having said all that, I'm confident that there's a lot of opportunities out there for us to complement our platform with additional M&A activity. So that's how I feel about it. And in relation to -- we say no more than we say yes. I mean, that's the way I would answer it. I mean, in order to consummate a transaction and to merge with another company, oftentimes we will pass on many more opportunities before we decide to go ahead and pull the trigger, so yes.

[Mona Nazir, VP & Senior Research Analyst]

Okay. That was very helpful. And then just secondly, on [someone's] question about margin expansion and then global corporate costs. Just looking at the different segments, so Canada, Americas, EMEIA. Over 80% of the mix, I mean, you had well over 30 basis point margin improvement. So would it be safe to assume that global corporate costs should trend down with the quarters? Or either that or that the other segment should see greater margin expansion?

[Alexandre L’Heureux, President, CEO & Director]

[Always cautious], Mona, that our investors and our analysts to [salami-slice] if you want the fix cost or the variable cost or the trajectory of our business, I mean, the life cycle of our projects are way beyond 3 months or 6 months or 9 months in many cases for that matter. So I think the outlook that we provided, I think, is a fair assumption of what we believe we will be achieving for this year in '18.

[Operator]

[Foreign Language] [Operator Instructions] Your next question comes from the line of Frederic Bastien from Raymond James.

[Frederic Bastien, Senior Vice President]

I found a way to ask another question on the M&A. We'll see if -- I don't know how you can add color there, but is your primary goal right now to fill in holes geographically? Or are you also looking at potentially adding or bolstering expertise in other areas? Or will you do both if it makes sense strategically?

[Alexandre L’Heureux, President, CEO & Director]

So Fred, I'll take another stab at answering a question on M&A differently. No, look, again, all of the above. I mean, we -- I think, in our case, we still believe that it's a clearly unfinished business. There are markets where we are still subscale. And just to remind everyone on the call, I mean, our strategy is quite clear. We've always said that we want to be a top-tier player in every geography and/or where we operate, and that's not going to change and that's the case. And that will be part of our next 3-year strategy. So if you look at our footprint, both from a vertical point of view but also from a geographic point of view, we are subscale in some parts of the world. We are subscale in a number of verticals. So clearly, in the years to come, we will pursue our strategy to complement those verticals and geographies accordingly.

[Operator]

Your next question comes from the line of Michael Tupholme from TD Securities.

[Michael Tupholme, Research Analyst]

Alex, in the last year or so, we've seen very strong growth out of the Nordics region for WSP. Can you talk a little bit about what you're seeing there now? Is that -- does that growth remain as healthy as it's been? Or are things leveling off at all? Or just what are you seeing in that region?

[Alexandre L’Heureux, President, CEO & Director]

It's a good question. I mean, I'm pleased to answer that. With -- over the years and for as long as WSP has been a player in the region, I would say, since early 2000, [I mean, this operation should be] commended for their hard work that they've put in because they've been doing an outstanding job, and they've been generating growth over the years. And it's been like that, as I said before, for the last 15 years, even during the 2008 recession. So it's a business that has been very resilient. And you know what, it remind me a little bit of Canada during the recession, with a very strong banking system. So the government has been wise and was wise to reinvest in the country [in] infrastructure. And also if you look at the economics, you look at the trends, you look at the immigration trends that you're seeing in that part of the world, really, this has fueled some growth in the region. And thankfully, we entered the market 15 years ago, so we have a leadership position in Sweden; a good position, I would say, in Finland; and we are growing our position in Norway very fast at this point in time. So it's been a good market for us last year, the year before and for many years before that. Is it going to be a strong market like we have seen for as long as we remember? Obviously, I wouldn't be surprised if at some point in time, in the years to come, the private sector, for instance, may be cooling off a little bit. But this year, we have a good start of the year, and we're feeling confident that we'll meet our expectation in 2018 and we'll see in '19, '20, 21. But so far, we're -- we don't have any signs that lead us to believe that we should be concerned by that region.

[Michael Tupholme, Research Analyst]

Okay, perfect. And I guess in the same vein or same region anyway within your breakdown by regions, EMEIA, the U.K., you mentioned you've continued to see some strength in the public sector that's helped offset some of the private sector slowdown. Is there still a decent pipeline from your perspective of public sector work as you look out in the U.K.?

[Alexandre L’Heureux, President, CEO & Director]

Yes. The answer is yes. I mean, there's a lot of work going on right now in the rail sector and the public sector more widely. And we're fortunate to have developed since 2012. And I mentioned that in previous calls and the last few quarters that we were fortunate enough to really shift slowly but surely our project mix away from a very private sector-centric to a more balanced portfolio between the public and private sector. And today, I think we're bearing -- I think we're benefiting from this shift that we orchestrated in the last few years.

[Michael Tupholme, Research Analyst]

Perfect. And then just lastly, a lot of companies, both in your sector but even in other sectors, have recently been talking about the improvements they've been seeing in the Energy and Resource markets more broadly. I know it's not a very significant part of your business, but you did do the Focus acquisition several years ago. Just wondering if you are seeing some pickup in activity within your oil and gas and more broadly, resource areas.

[Alexandre L’Heureux, President, CEO & Director]

Again, to just remind and reiterate our strategy around the Resource sector and the Energy sector, what we've always said is that in a resource-based country and commodity-based country, if you want aspire to be a leading player, it's -- those markets are tough to ignore. And that's why, for instance, the mining sector, we have a good presence in Australia. And that's why in Canada we strengthened our position in 2014 in the oil and gas sector. So certainly that if the market is picking up, we will be benefiting from that, and we're pleased about it.

[Michael Tupholme, Research Analyst]

Okay. Have you started to see some pickup as well, though, so far? Or is it early?

[Alexandre L’Heureux, President, CEO & Director]

Yes. I think it's early days to jump and celebrate. I think that, clearly, this week, given the -- what's happening and what took place, we've seen a bump in the barrel, and that's good news for some of our peers and for us essentially. But to now pretend that everything is rosy, and we're out of the woods, I think it's early days. But I think -- do I -- do we feel slightly better now? The answer is yes. We are feeling better by what we're seeing. And I think we see our teams [and] typically on the ground being a bit more upbeat, which is good news.

[Operator]

Your next question comes from the line of Jacob Bout from CIBC.

[Jacob Jonathan Bout]

So I think the last Analyst or Investor Day, you talked about doubling the size of your U.S. presence. Does the change in the U.S. Tax Reform change that strategy at all?

[Alexandre L’Heureux, President, CEO & Director]

No. No, it hasn't changed our strategy. I mean, this comment was based on our industry, based on the fundamental of the country, based on how we believe we can win in the marketplace. So it was -- this was -- the comment was made irrespective of the changes in the tax reform or the changes that the government [may affect] in the tax system.

[Jacob Jonathan Bout]

But from a -- how about from a valuation of some of these targets?

[Alexandre L’Heureux, President, CEO & Director]

You mean that the -- given they're paying less tax, they're valued more?

[Jacob Jonathan Bout]

Yes.

[Alexandre L’Heureux, President, CEO & Director]

Well, that's obvious. I mean, clearly all of a sudden -- I mean, given that they are paying less tax generated more cash flow that there may be some excitement around the Tax Reform. And frankly, that's good news, and we should all celebrate it. But that hasn't changed our mind on whether or not we wish to grow our presence in the U.S.. We want to grow our presence in the U.S..

[Operator]

There are no further questions at this time. Madam Adjahi, I turn the call back over to you.

[Isabelle Adjahi]

Thank you. Alex, you may want to conclude?

[Alexandre L’Heureux, President, CEO & Director]

Thank you very much for attending the call, and we look forward to updating you in our next call in August related to the release of our Q2 numbers. Thank you very much, have a good day.

[Operator]

[Foreign Language] This concludes today's conference call. You may now disconnect.