Stantec Inc. (STN) Earnings Call Transcript

Good morning, and welcome to Stantec's webcast and conference call covering third quarter 2025 results. Gord Johnston, our President and Chief Executive Officer, and Vito Culmone, Executive Vice President and Chief Financial Officer, are the leaders of today's call. Those of you joining by phone are invited by Stantec to pull up the slide presentation, which can be found in the Investors section of stantec.com. A webcast of today's call is available as well. Please note that if you are on the phone and watching the webcast at the same time, your computer should be muted, since the call and the webcast run on slightly different timing. Everything shared on this conference call falls under the forward-looking statements qualifications laid out on Slide 2, described in detail in Stantec's management discussion and analysis, and included in full for the purposes of today's call. Except where stated otherwise, figures in dollars that come up on today's call are given in Canadian dollars and are generally rounded. I'll now hand the call over to Gord Johnston.

Good morning, everyone, and thanks for being with us today. I'm happy to report that Stantec turned in a strong third quarter, with organic growth generated in every one of our regions and business operating units. Demand for our services remains strong, powered by global trends in water, transportation, energy transition, and mission-critical sectors. And because we are diversified across sectors and geographies, our operations stay resilient. Net revenue for the third quarter rose to $1.7 billion, up almost 12% from Q3 of last year, with organic and acquisition growth each above 5%. Notably, our Water business posted organic growth of almost 13%, while Energy & Resources delivered nearly 10%. Adjusted EBITDA climbed close to 18% year-over-year, at a record 19% margin. We also grew adjusted EPS by 17.7% versus Q3 2024. Now to our results by geography. In the U.S., net revenue rose more than 14% in the third quarter, reflecting 4.6% organic growth and almost 9% from acquisitions. In our Buildings business, net revenue was up by more than 40% in Q3 and over 20% year-to-date, thanks to our acquisition of Page along with continued organic growth. Page is integrating very well, and we are already seeing many revenue synergies from that acquisition.

We anticipate that the financial integration into our systems will be finished by year-end. Investments from both the private and public sectors—especially in mission-critical, Science and technology, and Civic-supported areas—fueled growth in buildings. Our Water and Environmental Services businesses also contributed to organic growth. Double-digit growth in water came partly from large public sector projects involving water supply and wastewater treatment. Within environmental services, growth was supported by the energy transition, mining, and infrastructure sectors, as well as ongoing work for a large utility provider. Net revenue in Canada rose 7.6% for the quarter, entirely on the strength of organic growth. We achieved double-digit growth in our Water and Energy & Resources businesses and high single-digit growth in infrastructure. Over 20% organic growth in Water was helped along by sustained momentum on major wastewater projects. Double-digit organic growth in Energy & Resources was also driven by continued work on major industrial process projects. Infrastructure growth was solid, backed by land development projects in Alberta, airport sector projects in Quebec, and transit and rail projects plus bridge sector work in Eastern Canada. Growth in buildings was driven by public sector investment, mainly in our health care and civic markets. Lastly, net revenue for our global business grew almost 11% in the third quarter, with 5.5% organic growth and 2.8% acquisition growth, plus positive foreign exchange impacts.

Our market-leading water segment kept generating organic growth in the double digits for another period, thanks to long-term framework agreements and public sector spending on water infrastructure throughout the U.K., Australia and New Zealand. Double-digit organic growth in Energy & Resources came from new projects ramping up in Chile and Peru, as rising demand for energy transition solutions keeps driving mining demand for copper. We posted double-digit organic growth in our German infrastructure operation as well, reflecting sustained momentum on a major electrical transmission project and higher volume on transit and rail projects. I'll now hand the call to Vito, who will walk through our third quarter financial results in greater detail.

Thanks, Gord, and good morning to all of you. Stantec's results for the third quarter leave us quite pleased, since they show our business carrying forward its momentum and our operating model proving resilient. Strong demand for what we offer, together with helpful worldwide trends, means we keep delivering record-setting outcomes. During Q3, gross revenue came to $2.1 billion and net revenue reached $1.7 billion, which is 11.8% higher than Q3 of 2024. The drivers were 5.6% organic growth plus 5.2% growth from acquisitions. Measured against net revenue, project margins again landed right where we expected, at 54.4%. Adjusted EBITDA margin for the quarter hit an all-time high of 19%, up 100 basis points from Q3 of last year. That margin gain mostly comes from reduced administration and marketing expenses relative to net revenue, thanks to disciplined operational management and better utilization. Adjusted EPS for the quarter rose 17.7% to $1.53. Now to cash flow, liquidity and capital resources. Operating cash flows for the year to date stand 86% above 2024, moving from $296 million to $551 million, which reflects strong revenue growth, strong operational performance and continued strong collection efforts.

By the close of Q3, DSO stood at 73 days — 4 fewer than at the end of 2024 and consistent with what we saw in Q2. As of September 30, our ratio of net debt to adjusted EBITDA came in at 1.5x, which reflects how we funded the Page acquisition we completed recently. That figure is still inside our internal target range of 1 to 2x and leaves us well positioned for further M&A. And as we've said previously, when the right acquisition comes along, we're comfortable running above that range for a period of time. Gord, I'll turn the call back over to you now.

Thanks, Vito. When the third quarter closed, our contract backlog was $8.4 billion — up almost 15% from a year earlier, and equal to roughly 13 months of work. That backlog keeps expanding organically, rising 5.6% versus the prior year. The organic gains came mainly from our U.S. and global operations, which posted growth of 6.6% and 6.8%, respectively. Acquisitions closed during 2025 added 6.8% to backlog growth, largely in our Buildings and Water businesses. During the quarter, Stantec won a number of significant projects across all 5 of our business verticals, with each one differing in size, scope and complexity. Let me spotlight just a few of those wins. Stantec was chosen as owner's engineer for Manitoba Hydro's $7 billion high-voltage direct current reliability project. That project is meant to ensure communities throughout the province have continuous grid reliability. We have partnered with Manitoba Hydro on power delivery work in the province for more than 50 years, and we look forward to carrying on that work together. Stantec's Infrastructure team was picked for a $745 million project to widen the SC-90 corridor in South Carolina. Our team will shape the overall project vision and layout, with a focus on traffic operations, access management, bicycle and pedestrian infrastructure and minimizing impacts.

And over in Western Australia, our buildings team got picked to provide specialist engineering services for a pair of hospitals — one of them will span more than 94,000 square meters and carries a value of close to $1 billion. The other project involves refurbishment and expansion at Osborne Park Hospital, worth upwards of $250 million. Those projects are going to improve health care for women, children and families. With the strong results we posted in the third quarter, we're raising our adjusted EBITDA margin outlook to 17.2% to 17.5%, reflecting how well we're operating and our discipline on costs, while our net revenue growth guidance for the full year stays as it was. For U.S. organic growth, we're holding to our mid-single-digit guidance, since procurement cycles in that region keep running slower. Even so, we stay optimistic that these are just near-term hurdles, as demand remains strong, driven by our clients' ongoing needs and priorities. In Canada and globally, we continue to anticipate organic net revenue growth in the mid- to high single digits. We expect Canada's growth to come from sustained strong demand and backlog levels that remain elevated. After Budget 2025 came out last week, it was encouraging to see the federal government put infrastructure investments across various sectors at the front of its priorities.

While we aren't anticipating spending right away, that budget points to robust long-term backing for our sector. Globally, growth is being driven by sustained high activity levels in our water business through the AMP8 program in the U.K., along with other framework agreements across Australia and New Zealand. Solid infrastructure demand in Europe and favorable demand fundamentals in Energy & Resources are likewise fueling expansion in our global business. Taking all of this into account, we anticipate adjusted EPS growth between 18.5% and 21.5% for the year, and adjusted ROIC should come in above 12.5% -- thanks to our uniquely diversified business, Stantec stays resilient as market conditions evolve across every one of our regions. We keep advancing toward the goals set out in our 2024 to 2026 strategic plan, which includes reaching net revenue of $7.5 billion by the close of next year. With that, I'll hand the call back to the operator for questions. Operator?

<<operator_script>> Our initial question this session is from Sabahat Khan, representing RBC Capital Markets.

Since we're getting near the end of the year, organic print looked solid this quarter. I was just wondering whether you could give us a big-picture view of how you're approaching 2026. Maybe — and I realize you typically give guidance at Q4 — but with all the moving pieces this year, any color by major end market or by region would be helpful.

Thank you, Saba. This is definitely a topic we devote considerable time to as well. You're correct that formal guidance for 2026 will come in February. Still, looking at the trajectory, momentum heading into next year appears quite strong. Within global operations, AMP8 programs in the U.K. will keep accelerating, along with frameworks in Australia and New Zealand. So ongoing robust backing for our water business is what we anticipate. Copper demand tied to grid reinforcement and the energy transition continues fueling expansion for our mining teams, especially in South America — I was actually down there last month visiting our offices. Here in Canada, the federal budget just released maintains support for infrastructure throughout the country — sorry, across the country. Plenty of opportunities exist within the major projects Prime Minister Carney announced last week, plus those he introduced earlier. Several of those projects already have us working on them, and we're involved in talks and taking part in numerous others. In the U.S., there's a short stretch of uncertainty, though macro fundamentals there remain solid as we see it.

You’ve got aging infrastructure, effects tied to the climate, manufacturing coming back onshore, data centers, and mission-critical facilities. So every one of those areas is strong, whether we’re looking globally, at Canada, or at the U.S. And then another point we’ve discussed often is that worldwide there’s certainly plenty of talk about boosting spending on defense work. For us, that means ports, dry docks, aircraft hangars and runways, housing, and all kinds of other infrastructure. So we’re genuinely upbeat about the prospects and the momentum as we head into 2026.

Thanks. Maybe now, if you wouldn't mind going deeper on Canada, which is clearly a big chunk of your business. Clearly, we've seen <<inaudible>> come out so far. Could you give us your thinking on this — is it mainly the wide-ranging infrastructure initiatives in Canada that the Prime Minister is announcing, the ones you're participating in? Or is it more the energy side, since I know historically some of the pipeline work out in Western Canada made up a major portion of your business? Are you perhaps seeing some of those opportunities as more significant? I'm just curious about where, within those buckets, Stantec has exposure.

Yes. Great. Thanks, Saba. I think there are strong opportunities in both of those areas—both from what Prime Minister Carney has announced and from what we're seeing. But you've witnessed the truly robust organic growth we've had in Canada throughout the year—8.5% year-to-date organic growth in Canada, to be precise. And that, of course, is without any of those projects Prime Minister Carney mentioned. So when we look at Canada, we've actually seen considerable strength in Western Canada, especially in land development. We've seen strong opportunities in transportation. Several of the projects we're handling involve bridge work in Toronto, along with plenty of roadway projects out here in Western Canada. But water has been extremely strong for us all year. And we really don't see any slowdown in the public sector work we're doing. We've discussed our work with Metro Van in Vancouver, in Winnipeg and other locations, but there's also a lot of private sector work coming through—advanced manufacturing, data centers and that kind of work. So that's very, very robust. And then, of course, as you mentioned, the energy sector—we've seen some opportunities there as well, and that group also handles the work we do on industrial projects.

During earlier quarters, we discussed certain efforts underway in Eastern Canada involving a number of industrial projects. Canada, then, is performing quite well, with strength spread across a wide range of areas. Overall, our outlook on Canada is quite positive, and that holds as we move into next year.

And moving on, our following question is from Yuri Lynk, who is with Canaccord Genuity.

Gord, I'd like to press you a bit further regarding the outlook. I get that conditions are strong at present, but in some cases that largely mirrors work that was booked 12, 18 months back. Could you speak to a few of your most forward-looking indicators? And here's what I'm getting at — if you look across Canada, I know the headlines are largely positive, yet the economic data right now is fairly weak. Australia is soft apart from water. AMP8, which is one of the largest customers there, is under financial strain. The U.S. government shutdown. There are plenty of concerning signals out there. So are you picking up any of that in proposals or RFPs or whatever you examine at the very leading edge of your outlook?

Yes. No, that's a great question. Perhaps I'll take a few of those one at a time. In the U.S., there's no doubt that a combination of factors has created some uncertainty and somewhat slowed the procurement cycles there. Certainly, that isn't something only Stantec is experiencing, and you've seen it across the industry. So in the U.S., we've — and you'll notice our U.S. backlog has remained flat year-to-date. Much of that comes from having been verbally awarded a number of projects without being able to get them signed and contracted. As a result, they haven't appeared in backlog. A somewhat slower start on certain items. Environmental Services in the U.S., and perhaps a bit slower thus far as we wait for some of those to pick up. We're encouraged that the government is back at work now. We're also watching that quite closely — it might only last a couple of months before we have to go through this again. But the macros in the U.S. haven't changed, whether it's aging infrastructure and roadways tied to and supported by IIJA, and we still see that support flowing toward some of the reshoring we're seeing in the private sector.

We're seeing some positive signs there. You brought up AMP8, and one of the biggest customers in that framework is clearly dealing with financial trouble, and we've all seen that covered in the press. But that genuinely doesn't affect our business, because the way those AMP cycles are structured, the water company commits to a certain level of capital spending to justify rate increases and so forth, along with improvements in overall operations. So that work still has to be completed. And folks have asked, well, what happens if that particular client were to be nationalized? Well, from our standpoint, we wouldn't want that to occur. But if it did happen, the work would still need to get done. And we've partnered with Thames Water and all -- and for a number of successor companies over the last 200 years in the region. So we do believe that no matter how things turn out there, the AMP8 work is going to carry on. So it's certainly a somewhat cloudy environment out there, not all rays of sunshine, but we do see the demand drivers in our business as being pretty strong.

The sole point I would tack onto that, Gord, is that your arguments are tough to dispute. Still, I believe the breadth of what our platform offers is a tremendous strength, and it's beginning to show itself — you can see that reflected in our results for the year to date, and I expect that will keep proving true both by region and throughout our segments. So even so, you're going to see gains and losses along the way. Regarding net debt, picking up on Gord's opening remarks here, we will be positive as we head into 2026, without question.

Alright, glad to hear that. This is my second and final question. Is there any news on the M&A pipeline? From what I understand, during the last year or 2, a few sizable private companies may have been moving toward a sale? Has anything shifted in the pipeline?

Yeah. The industry is quite strong at the moment, with plenty of conversations taking place. You definitely see coverage in the newspapers about certain private companies heading to market. There have also been rumors concerning large players in our sector holding talks. And naturally, we aren't able to speak to any of that, except to say that our view of M&A remains extremely favorable, both broadly and particularly where Stantec is concerned. Our Board backs it. The -- our investor community backs it. We back it, and the opportunity set exists. So we're carrying on with a number of discussions and look forward to putting something forward when the timing is right.

The next question is from Ian Gillies at Stifel.

To follow up on what's been said earlier and maybe put it plainly: given the organic backlog increase in the U.S. supply so far this year, you don't see that affecting your capacity to deliver some level of organic growth in the U.S. as we head into next year?

Yes, that's exactly right, Ian. We don't see our backlog for the year to date as a sign that organic growth will be flat as we head into next year. Organic growth will be positive next year. We'll provide guidance again at the right moment, but what we expect right now — and you heard Gord repeat the opening remarks about the U.S., the U.S. included — we feel quite good about it. Here are the factors behind the year-to-date picture. First, backlog tends to be lumpy. And clearly, we expect it to build as we move through the first half of the year. Even so, our year-to-date backlog, including in the U.S. — our year-to-date, which is perhaps a better comparison, or an equally important one, excuse me — our year-over-year is up 6.6%, I believe, or more than 6%. So on the whole, despite the combination of factors we've discussed and that our peers have discussed, we clearly expect organic growth in the U.S. as we head into next year.

Got it — that helps a lot. And perhaps in the same vein, since most of the other engineering companies have gotten this question, I'll ask it too: do you have any worries that IIJA money might not be released with some certainty — for example, does your U.S. team remain pretty confident that most of those funds will flow out over the next, say, 4 to 5 years and ought to keep serving as that long-term tailwind rather than getting canceled?

Yeah, so I'd say our response is pretty much in line with what you've heard from some of the other companies that have reported — we've seen no sign that a program such as the IIJA would be scrapped or that its funds would be held back. We're still seeing momentum continue there. And no, we believe that program is still intact.

Krista Friesen with CIBC has our next question.

Perhaps we could just look at your margin for a moment—clearly a rather impressive quarter, with the guidance raised and narrowed for the rest of the year. Could you talk about what has shifted on that front compared with the start of the year, when you initially put out your guidance?

Krista, yes, this is Vito. You've got that exactly right. We're extremely happy with the considerable effort put in by every team, naturally, throughout the whole company in achieving an EBITDA margin. For the year to date, that's 17.7%, which is 100 basis points better than the prior year — or actually even more than that. So we're genuinely, genuinely happy about it. I know I probably sound like a broken record saying this, but project margins are where it all begins. So the right customer, the right project, the right pricing, the right risk profile. We devote a great deal of time to that, and our professionals do an excellent job delivering on it. So our project margins for the year to date stand 0.1% above where they were a year ago. So absent that, that's the foundation. And then what you're seeing, naturally, is admin and marketing as a share of NSR declining. So on a year-to-date basis, 37.6% compared with 38.6% a year ago, which again works out to a 100 basis point gain. And a range of factors is driving that. Scale clearly plays a large role in it. So as we expand, and organic growth makes up a significant portion of that, being able to obviously deliver against that base more efficiently — that matters to us, and it has contributed meaningfully to our results for the year to date.

Utilization — that's another factor that's been a plus for us. Occupancy costs are helping us too on a year-to-date basis. So all told, this business carries meaningful operational leverage. And as organic growth keeps coming and acquisitions keep adding to net revenue growth, obviously, there's an ongoing chance for EBITDA margin expansion down the road. At the same time — and this matters a great deal — we need to keep putting money into our people, into our offerings, and into the market. That's just as important, maybe more so, as we work our way through this period.

Thanks for that helpful context. And this will be my final question. You said the integration of the Page acquisition is going smoothly and that some synergies are beginning to be realized. Could you give us a bit more detail on that? Yes.

There isn't a great deal I can add beyond what Gord said. Before this acquisition, Page was a company we understood extremely well. We had worked alongside them. And I have to say, everything since the deal closed has only confirmed what an outstanding team they are — they truly hit the ground running when it came to integration. The speed at which we're capturing certain opportunities, whether in the market or on the efficiency side, speaks to how well we already knew one another and to the considerable time we'd invested in these kinds of conversations long before. That said, Gordon, do you have anything further to say about Page?

No, once we actually began digging into the integration, everything we believed was in place has proven out — and then some. So it has genuinely been extremely positive. There are plenty of strong synergies on both project work and pursuit work. So honestly, we feel very good about Page. I only wish we could locate another 5 companies like Page to bring on board.

And moving on, we have Benoit Poirier from Desjardins with the next question.

Yes. Strong margin results, and the detail you gave on the earlier question was helpful too. So as we look toward 2026, could you comment on whether the rate of improvement we've seen so far this year can hold up as we move into 2026? And what are the puts and takes for margins as we head into next year?

That's a rather sly method of requesting guidance that's already out there, Benoit. But we'll handle that in February. I mean, I think if you look back over the past several years, you've seen consistent improvement year over year — 0.3, 0.4, 0.5 — and this year, as you pointed out, we're running somewhat ahead of our historical track record, which is great. A major contributor to the EBITDA margin expansion is clearly tied to much of what this call has focused on, namely the pace of organic revenue activity within the business. So that's obviously a significant driver of what you're able to deliver on the bottom line. But if you step back, regardless of where we might land here in 2026 — which, again, we feel reasonably comfortable about at this point — and you consider a 2-, 3-, or 4-year horizon with macro demand and so forth, I think it's fair to expect continued EBITDA margin expansion, obviously. We're just moving through — we're now entering year three of our 3-year strat plan, where we committed to 17% to 18%. Obviously, we're at the upper end of that range as we sit here in 2025. We expect to remain at these levels or better, obviously, as we head into 2026, and we'll refine that next year.

Still, it's commercial activity that largely lets us push hard into these margin expansions, and we expect that to keep going.

All right, that's really helpful context. And Gord, you offered some strong points regarding the opportunities you see on the defense side. So I'd be interested to know what your defense exposure looks like at present. And given the opportunities you're seeing out there, how significant could it become? I'd be curious how that would stack up against, say, the opportunities in data center?

Yeah. No, that's great. The Stantec model's strength really lies in that diversification element. So even looking at the U.S., where we handle plenty of dry docks, aircraft hangers, and similar projects, our overall exposure to the U.S. federal government remains in that roughly 5% range. That's the strength of the diversified model. I think you'd find that in other nations worldwide, it's likely below 5%, what we'd be doing there. But again, much of this is simply our core infrastructure work, just slightly different — rather than a hangar for a commercial aircraft, it's for a military one. So this is work we're all extremely comfortable with. And we don't anticipate that, despite many commitments to boost defense spending and some of these infrastructure items, it will ramp up immediately. Building it will take time. And that's fine. We're investing considerable time with our clients, making sure that once they receive the budget and are ready to proceed, we're top of mind for them.

So I believe growth will keep going, though I’m not certain it will—that we’ll see it become material.

All right, that's excellent. And this might be my final question. Regarding free cash flow, Vito, really impressive results this quarter. It seems you managed to hold DSO steady even though they usually rise somewhat sequentially between Q2 and Q3. So I'm curious whether this reflects stronger collection efforts, or is it about business mix? And what's the expectation, say, for Q4? Was any free cash flow pulled forward? I'd be interested to hear your thoughts on that strong free cash flow performance.