WSP Global Inc.
Third Quarter 2017 Results
Conference Call
Wednesday, November 8, 2017 – 4:00 PM ET
wsp.compage 1PRESENTATION
QUESTION AND ANSWER SESSION
wsp.compage 1PRESENTATION
Operator
Bonjour, mesdames et messieurs. Good afternoon, ladies and gentlemen. Bienvenue à la conférence téléphonique sur les résultats financiers du troisième trimestre de l’année 2017 de WSP. Welcome to WSP’s third quarter 2017 results conference call. I would now like to turn the meeting over to Isabelle Adjahi, Vice President, Investor Relations and Corporate Communications. À vous la parole. Please go ahead, Ms. Adjahi
Isabelle Adjahi, Vice President, Investor Relations & Corporate Communications
Thank you and good afternoon, everyone. I want to thank you for taking the time to join the call so that we can discuss our Q3 2017 performance. We will follow the remarks by a Q&A session.
Joining me today are Alexandre L’Heureux, 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 I just want to mention that we may be making some forward-looking statements. The material factors or assumptions that we use to develop these forward-looking statements are set forth in our MD&A dated November 7, 2017. Actual results could be materially different from those expressed or implied and we do not undertake any obligation to update or revise any of these forward-looking statements.
I will now turn the call over to Alexandre. Alex?
Alexandre L’Heureux, President & Chief Executive Officer
Thank you, Isabelle, and good afternoon, everyone.
Before Bruno gets into the financial details, there are a few elements I would like to highlight, as we are very pleased with the performance of our firm in Q3. First, we posted solid organic growth across all operating segments, both for the quarter and year to date. Second, we maintained our year-to-date adjusted EBITDA margin above 10.5% and optimally managed our balance sheet. Third, we completed several acquisitions during the quarter in geographies we believe will be drivers of future for our organizations. There are significant accomplishments which demonstrate our commitment to deliver on our 2015-2018 strategic plan and, as such, I would like to congratulate all of our employees from around the world.
Before moving on with our Q3 performance I would also like to take a moment to announce one of our most recent project wins. WSP does not typically press release project awards; however, given the importance of this one I would like to discuss it in more details. We have been awarded the engineering, architectural, and design management services contract for Parliament’s Centre Block rehabilitation project in Ottawa. This is Canada’s largest and most multidisciplinary heritage rehabilitation project ever and globally represents WSP’s biggest property and buildings win in the history of our firm. This successful bid is the result of our revenue synergy strategy. Led by Tom Smith, Global Director, Property and Building, it combined intra-disciplinary effort and a collaborative approach that successfully leverage the strength of our buildings team in Canada, our global expertise in large heritage restoration projects, and our acknowledged leadership and project management for complex infrastructure projects. We have completed many iconic projects around the world but we are particularly proud of this one. The multi-year project is of scale that as it peaks will require over 200 resources on the team and is an excellent opportunity for us to enter into the long-term partnership with the Government of Canada. Congratulations to all involved within this project.
Let me now turn to our operational performance for each region. In Canada, organic growth and net revenues was particularly strong at 6.8%. This growth was mainly led by transportation infrastructure and property and buildings market segments. In addition to Centre Block, we won several significant projects with Ontario’s Ministry of Transportation. We also won a portion of the 4TRANSIT joint venture Metrolinx contract for Regional Express Rail Program, which helped propel our backlog to a record high $1 billion. Organically, backlog grew 6.3% year over year. Adjusted EBITDA margin before global corporate costs were strong at 13% due to the higher utilization rates achieved and improved project delivery.
Our America operating segment posted flat organic growth in net revenues and adjusted EBITDA margin before global corporate costs stood at 17.8% of net revenues, once again the highest amongst our reportable operating segments. Our US operation on a standalone basis delivered approximately 1% organic growth in net revenues for the quarter and 6.1% year to date. Backlog organic growth stood at 11.5% compared to prior quarter due to significant wins. As an example, in Colorado we were awarded the Central 70 project from the Colorado Department of Transportation, a project with capital value above $1 billion. We also secured the (inaudible) program management, a $54 million fee project.
Our EMEIA operating segment delivered organic growth in net revenues of 5.4% and adjusted EBITDA margin of 11%, both in line with our expectations. The Nordics operation remained strong, delivering organic growth in the low double digits. The UK operation posted moderate organic growth in net revenues of 1.6%. While the transportation and infrastructure sector is particularly robust, concerns pertaining to Brexit are expected to linger in the short run, negatively impacting the private commercial and retail markets.
Our APAC operating segment posted 7.8% organic growth in net revenues for the quarter. Our Australian operation continued on the strong performance we have seen since the beginning of the year, posting significant organic growth in net revenues. Finally, our Asia operation continued to suffer from a significant slowdown in China’s property and buildings segment. This being said, there are some good news in Asia as our team in Hong Kong has won two large hospital contrasts, including a mandate for the Prince of Wales Hospital in Hong Kong.
Bruno will now review our Q3 2017 consolidated financial performance. Bruno?
Bruno Roy, Chief Financial Officer
Thank you, Alex, and good afternoon, everyone.
For the quarter, revenues and net revenues came in at $1.6 billion and $1.3 billion, representing an increase of 5.4% and 8.1% respectively compared to Q3 2016. We posted consolidated organic growth in net revenues of 4.4%, slightly ahead of our expectations for quarter. Consolidated acquisition growth stood at 6% for the quarter and 5.5% for the year. The bulk of it related to the Mouchel acquisition made in Q4 of 2016. The impact of foreign exchange was negative 2.3% on a consolidated basis.
Adjusted EBITDA for the period stood at $160.4 million, up $13.2 million or 9% compared to Q3 2016. Adjusted EBITDA margin reached 12.5%, up from 12.4% last year, mainly due to the improved performance in our Canadian operations and the strong performance in our Austrian operations. Our effective tax rate was 28% for the quarter, in line with our expectations. Adjusted net earnings stood at $79.5 million or $0.77 per share, up 18.8% and 16.7% respectively compared to Q3 2016. The increase was mainly due to growth in net revenues and higher adjusted EBITDA margins.
Our backlog stood at just under $6 billion, comparable to Q2 2017 and representing approximately 10.2 months of revenues. It was up $592.7 million or 11%, 9% organically, compared to the same period last year. We ended the quarter with a DSO of 86 days, comparable to Q3 2016 and in line with our seasonality cycle.
For the third quarter of 2017 our free cash flow was positive at $19.9 million. On a trailing 12-month basis free cash flow amounted $261.3 million and represented 105% of net earnings. As mentioned previously, we believe free cash flow should be reviewed on a trailing 12-month basis as opposed to a quarter-over-quarter basis as the timing of investment and CapEx initiatives and the management of working capital can vary significantly on a quarterly basis.
Moving on to the balance sheet, our net debt to adjusted EBITDA ratio remains stable coming at 1.8 times. At the end of Q3 2017 we had access to over $850 million in cash and available credit facilities. Subsequent to the quarter end we drew upon those facilities to finance the acquisition of Concol, a 1,000-employee firm base in Colombia. Alex will provide more colour on our M&A activity later in the call. We also declared a dividend of $0.375 per share to shareholders on record as at September 30, 2017, which was paid on October 16, 2017. With the 52.8% dividend investment plan participation, the net cash outflow was $18.2 million.
So, on the whole, we are pleased with the results for the quarter as well as for the first nine months of the year. As such, we are reiterating our full year 2017 outlook with a bias towards the higher end of the ranges provided pertaining to net revenues, to organic growth in net earnings, and to adjusted EBITDA. This reaffirmed outlook takes into account the billable days differential we’ve mentioned previous calls. As you might remember, a differential in billable days between Q4 2017 and Q4 2016 will negatively impact some of the Q4 2017 performance metrics. More specifically, organic growth in net revenues.
Alex, over to you.
Alexandre L’Heureux, President & Chief Executive Officer
Thank you, Bruno.
Before we open the line for questions I would like to provide a brief update on our M&A activity. Q3 has been a busy quarter for us. In addition to the acquisition of Poch in Chile we’ve also acquired LBG, a 150 people employee groundwater and environmental engineering services firm based in the United States. The addition of LBG will bolster WSP’s water and environment practice by increasing its groundwater geology capabilities, strengthening its environmental services expertise, and expanding its national footprint.
We also recently announced the acquisition of Concol, a professional services firm headquartered in Colombia with approximately a 1,000 employees in Colombia, Peru, Panama, Chile, and Mexico. It is one of the largest firms in Colombia and enjoys a solid reputation in power, transport, oil and gas, environment, as well as project management. With now north of 205,000 employees in Latin America, this acquisition will be a catalyst to position WSP as a top-tier player in this region. It will enable us to extend growth in the development of our people, client base, expertise, and capabilities. Paul Dollin, our COO, will spend the next few months focusing on integrating all of our Latin American operations, so more to come on that front.
Finally, although we have not yet closed this transaction, we announced our intention to acquire 100% of the share of Opus, a 3,000 person professional firm based in New Zealand with presence in the UK, Canada, and Australia. This company has best-in-class asset management expertise and is a leading brand in the New Zealand market. As of today we have 90% of the shares either under lock-up agreements or already tendered. Once we receive the consent of the overseas investment office we will exercise our statutory right to compulsory acquire the remaining shares. Consequently, we are very confident in our ability to close this transaction in Q4.
Now I would like to open the line for questions. Isabelle?
Isabelle Adjahi, Vice President, Investor Relations & Corporate Communications
We can go ahead with the first question please, operator.
QUESTION AND ANSWER SESSION
Operator
Certainly. If you would like to ask a question, simply press star then the number one on your telephone keypad.
Your first question comes from the line of Mona Nazir from Laurentian Bank. Your line is open.
Mona Nazir, your line is open.
Mona Nazir, Laurentian Bank
Good afternoon. Can you guys hear me?
Alexandre L’Heureux, President & Chief Executive Officer
Yes. Hello, Mona.
Mona Nazir, Laurentian Bank
Hi. How are you? So, just firstly from me, in regard to the Parliament Centre Block heritage project that you referenced, firstly congratulations, I’m just wondering if the work is to span the entire 10 years that the project’s expected to take. And also, will the work begin in 2018 or has it already started?
Alexandre L’Heureux, President & Chief Executive Officer
No, the project has already started, very recently, we were just not in a position to announce it publicly. Only today we got the permission to announce it. So, it’s a very, very—we’re extremely proud and pleased by the win of this contract. As I said before earlier on, I mean this is the largest project we won in property and building in WSP history. You know that we’ve worked on many fine and great projects in the past, but this one is the largest, so we’re very pleased by it.
Mona Nazir, Laurentian Bank
Okay. And then just turning to kind of more of a macro question, you have a business with a strong legacy, you’re a known pioneer in the engineering space considering the deep-rooted companies that you have acquired, Parsons for example, I’m just wondering if you could give us a taste of any particular change factors or a potential disruptors that you are thinking about and proactively addressing when you think about WSP five to ten years or even further out in order to remain competitive.
Alexandre L’Heureux, President & Chief Executive Officer
Wow. I mean that’s a great question. Look, obviously right now, Mona, we’re very focused on executing on our strategic cycle, this strategic cycle, which will come to an end by the end of next year. But I can tell you right away that already we are thinking extremely hard about what our next strategic cycle will be, which end markets we will want to pursue, or to enter frankly, what are the geographies we want to look at, but also I would tell you that there should be a big digital component or IT component to our next strategic cycle.
We will take the next year, the next 12 months, to really come together as an organization and I want to engage with our young professionals, our more mature professionals, and our leaders to really get a feel and really take the time to understand where the industry is going over the next decade. I have good views, I have my views on this already, but I would like to save my answer, if you can be patient, in 12 months when we roll out our next strategy. But all that to say that clearly the world is changing. There are mega trends that are really impacting the world and impacting our industry. You’ve heard me saying and talking a lot about the organization movement, the demographic change and shift, also the power, and we all know now that the power is moving is east in the world right now and for the last 100 years was out west. So, there are many, many large trends that are impacting the world and right now what I’m doing and what I’m doing with the team is really to position the company to be actually uniquely positioned to take advantage of those trends. So it’s not just internal, we also need to look at the external factors, and I think we are well positioned if you ask me.
Mona Nazir, Laurentian Bank
Okay. And just lastly from me, and this just talks about kind of the opportunities that you’re seeing in Latin America now that you have a great presence post Concol, if you could speak about the pipeline. And then also on acquisition, looking at what’s more attractive, was it the revenue synergy potential or cost synergies?
Alexandre L’Heureux, President & Chief Executive Officer
Okay, let me start with the first subset, the first part of your question. I mean if you recall when we rolled out the 2015-2018 strategy we had said that Latin America would be a region that we would want to grow. We would first explore and then grow if we were determining that this would be profitable and would be advantageous for the company. And we conclude with that. We want to be a reading firm in Latin America. We don’t want to play in all of the countries in Latin America, so we picked countries that we believe will have tremendous growth over the next 20 to 25 years.
So, again, to give you a few examples, if you look at San Diego and Chile, this is a city that will reach, will be close to nine million people, the population, by 2030. And if my memory is not failing me, both Peru, Lima in Peru and also Bogota in Colombia will be exceeding ten million people. So they will be essentially megacities in the region. And I mentioned and talked about our strategy in the past on many different occasions, we want to be the go-to trusted advisor to assess those megacities, both on the property building point of view but also transportation and civil infrastructure, but also in environment and energy. So that’s what I’m saying by positioning the firm where the growth will be in the years to come. So that’s why Latin America is strategic to us.
And then the second part of your question, yes, I believe there are tremendous opportunities for revenue synergies. If you take Concol as an example, this is a firm that has designed close to 30,000 kilometres of transmission lines in Latin America. So this is instantly going to become our centre of excellence when it comes to distribution and power. So, I think I see a lot of opportunity for Concol and also for WSP to work together around the world on this. And also on cost synergies, we have 500 people at the beginning of this year in Latin America but now with the combination of Poch, legacy WSP, and also with Concol, obviously, hopefully we will be able to generate some cost synergies.
Mona Nazir, Laurentian Bank
Thank you. Very helpful.
Alexandre L’Heureux, President & Chief Executive Officer
Thank you.
Operator
Our next question comes from Jacob Bout of CIBC. Your line is open.
Jacob Bout, CIBC World Markets
Good afternoon. I had a question on your organic growth rate in Canada, 6.8% in the quarter, very strong and much better than what we’ve seen in previous quarter and years I guess. Maybe just talk a little bit about what you’re seeing happening there. I think it seems to be a consistent trend from what we’re seeing from others in the industry as well.