Mr. Gord Johnston reports

STANTEC REPORTS STRONG SECOND QUARTER 2023 RESULTS, ACHIEVES RECORD BACKLOG AND INCREASES GUIDANCE FOR THE FULL YEAR

Stantec Inc. has released its results for the three and six month periods ended June 30, 2023.

Q2 2023 highlights

• Net revenue of $1.3-billion, an increase of 14.5 per cent over Q2 2022;
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margin of 17.5 per cent (excluding LTIP revaluation);
• Adjusted diluted EPS (earnings per share) of 99 cents, up 19.3 per cent over Q2 2022;
• Backlog of $6.6-billion, up 11.4 per cent since Dec. 31, 2022;
• Increased full year guidance for 2023 net revenue and adjusted diluted EPS.

Stantec generated net revenue of $1.3-billion in the second quarter of 2023 on the strength of 11.2-per-cent organic growth. For the sixth consecutive quarter, every regional and business operating unit delivered organic net revenue growth, with notable organic growth achieved in water (16.2 per cent), environmental services (12.1 per cent), and energy and resources (12.0 per cent). Adjusted EBITDA margin increased by 20 basis points over Q2 2022 to 16.9 per cent, despite a significant expense related to the revaluation of Stantec's long-term incentive plan (LTIP), due primarily to strong share price appreciation in the quarter. Excluding the revaluation, adjusted EBITDA margin was 17.5 per cent. Stantec delivered diluted earnings per share (EPS) of 79 cents, and record second quarter adjusted diluted EPS of 99 cents. Backlog at the end of June 30, 2023, reached $6.6-billion, a new all-time high, driven primarily by organic growth of 10.0 per cent since Dec. 31, 2022.

"We continue to deliver significant growth in revenue and earnings driven by strong performance across all our regional and business operating units," said Gord Johnston, president and chief executive officer. "As a result of our strong year to date results and our expectation of continued favourable market fundamentals for the remainder of the year, we are increasing our net revenue and adjusted earnings per share guidance for 2023."

Q2 2023 compared with Q2 2022

• Net revenue increased 14.5 per cent or $162.0-million to $1.3-billion, primarily driven by 11.2-per-cent organic growth. Double-digit organic growth was achieved in all regions and in water, environmental services, and energy and resources businesses.
• Project margin increased $91.3-million or 15.1 per cent to $694.0-million. As a percentage of net revenue, project margin increased by 30 basis points to 54.3 per cent.
• Adjusted EBITDA increased $29.3-million or 15.7 per cent to $216.0-million. Adjusted EBITDA margin increased by 20 basis points over Q2 2022 to 16.9 per cent, despite a significant expense related to the revaluation of the company's LTIP, primarily due to strong share price appreciation in the quarter. Excluding the revaluation, adjusted EBITDA margin was 17.5 per cent.
• Net income increased 45.0 per cent, or $27.3-million, to $88.0-million, and diluted EPS increased 43.6 per cent, or 24 cents, to 79 cents, mainly due to strong net revenue growth, solid project margins, and lower administrative and marketing expenses as a percentage of net revenue.
• Adjusted net income and adjusted diluted EPS achieved record highs in the quarter. Adjusted net income grew 18.1 per cent, or $16.8-million, to $109.4-million, achieving 8.6 per cent of net revenue (9.0 per cent without the effect of the LTIP revaluation), and adjusted diluted EPS increased 19.3 per cent to 99 cents ($1.04 without the effect of the LTIP revaluation).
• Contract backlog increased to $6.6-billion at June 30, 2023, a record high reflecting 10.0-per-cent organic growth from Dec. 31, 2022 -- with double-digit organic backlog growth in Stantec's United States and Canada operations as well as in environmental services and water. Contract backlog represents approximately 13 months of work -- an increase of one month from Dec. 31, 2022.
• Operating cash flows increased $35.4-million, with cash inflows of $31.0-million, reflecting strong revenue growth and operational performance. This compares with $4.4-million outflows in the comparative period, which resulted primarily from the Cardno financial system integration.
• DSO1 was 81 days, consistent with Dec. 31, 2022, and March 31, 2023.
• On June 30, 2023, Stantec acquired Environmental Systems Design Inc. (ESD), a 300-person firm headquartered in Chicago that provides building engineering services, specializing in mission critical and data centre services.
• Net debt to adjusted EBITDA (on a trailing-12-month basis) at June 30, 2023, was 1.8 times, remaining within Stantec's internal target range of 1.0 times to 2.0 times, and reflecting the impact of financing the ESD acquisition on the last day of the reporting period.
• On June 27, 2023, Stantec issued $250-million senior unsecured notes due June 27, 2030, that bear interest at a fixed rate of 5.393 per cent per annum. These notes were assigned an investment-grade credit rating of BBB by DBRS Ltd. Additionally, the company entered into and fully drew upon an unsecured bilateral term credit facility of $100-million that matures on June 17, 2024. The proceeds of both the notes and new term facility were used to repay a portion of existing indebtedness on the revolving credit facility.
• On Aug. 9, 2023, the board of directors declared a dividend of 19.5 cents per share, payable on Oct. 16, 2023, to shareholders of record on Sep. 29, 2023.

Year to date Q2 2023 compared with year to date Q2 2022

• Net revenue increased 15.7 per cent or $340.4-million to $2.5-billion, primarily driven by 11.7-per-cent organic growth. Double-digit organic growth was achieved in all regions and in the water, environmental services, and energy and resources businesses.
• Project margin increased $184.2-million or 15.7 per cent to $1.4-billion. As a percentage of net revenue, project margin remained consistent at 54.0 per cent.
• Adjusted EBITDA increased $56.2-million or 16.6 per cent to $395.1-million. Adjusted EBITDA margin increased by 20 basis points over the prior period to 15.8 per cent, despite a significant expense related to the revaluation of the LTIP, primarily due to strong share price appreciation in the year to date. Excluding the revaluation, adjusted EBITDA margin was 16.4 per cent.
• Net income increased 44.9 per cent, or $47.4-million, to $152.9-million, and diluted EPS increased 45.3 per cent, or 43 cents, to $1.38, mainly due to strong net revenue growth and lower administrative and marketing expenses as a percentage of net revenue.
• Adjusted net income grew 18.2 per cent, or $29.3-million, to $190.3-million, achieving 7.6 per cent of net revenue (8.1 per cent without the effect of the LTIP revaluation), and adjusted diluted EPS increased 18.6 per cent to $1.72 ($1.82 without the effect of the LTIP revaluation).
• Operating cash flows increased $66.1-million, with cash inflows of $67.7-million, reflecting strong revenue growth and operational performance. This compares with $1.6-million in the comparative period, which resulted primarily from the Cardno financial system integration.
• Year to date Q2 2023, Stantec repurchased 129,036 of common shares under the company's normal course issuer bid (NCIB) program at a cost of $10.0-million.

2023 outlook

Stantec is revising and increasing certain targets contained within the company's 2023 guidance (provided on page M-10 in the 2022 annual report) based on the strength of the company's financial performance to date and the outlook for the balance of this year.

Stantec is raising its guidance for net revenue and adjusted diluted EPS growth and narrowing the target range for adjusted EBITDA as a percentage of net revenue.

In setting the revised targets and guidance, the average value for the United States dollar was assumed to be $1.34, pound sterling to be $1.65 and Australian dollar 91 cents. For all other underlying assumptions, see the assumptions section of the Q2 2023 MD&A (management discussion and analysis). These targets do not include the impact of revaluing the share-based compensation, which fluctuates primarily due to share price movements subsequent to Dec. 31, 2022.

Net revenue

The company is raising the net revenue growth target range to 10 per cent to 13 per cent (previously 7 per cent to 11 per cent), and overall organic net revenue growth target to high single digits (previously mid to high single digits). In Canada, Stantec now expects organic net revenue growth to be in the mid single digits (previously low single digits). Additionally, the company now expects organic growth in the U.S. to be in the low double digits (previously high single digits to low double digits), driven by momentum from the record-high U.S. backlog and project opportunities arising from previously announced programs and acts. The company also continues to expect global to achieve mid to high single digit organic growth, driven by continued high levels of activity in the United Kingdom water business and demand and stimulus in environmental services.

Adjusted EBITDA margin

Stantec is narrowing the target range for adjusted EBITDA margin to 16.3 per cent to 16.7 per cent (previously 16.0 per cent to 17.0 per cent). This reflects the company's confidence in continued solid project execution and operational efficiency.

Adjusted diluted EPS

Based on the factors described herein, Stantec is raising the target range for adjusted diluted earnings per share growth to 12 per cent to 15 per cent (previously 9 per cent to 13 per cent).

Consistent with guidance previously provided, these targets do not include the impact of revaluing share-based compensation, which fluctuates primarily due to share price movements subsequent to Dec. 31, 2022. For the year to date, this revaluation resulted in a $14.9-million expense (pretax), the equivalent of 60 basis points relative to net revenue and 10 cents per share.

These targets also do not include any assumptions for additional acquisitions given the unpredictable nature of the size and timing of such acquisitions.

Webcast and conference call

Stantec will host a live webcast and conference call on Thursday, Aug. 10, 2023, at 7 a.m. Mountain Time (9 a.m. Eastern Time) to discuss the company's second quarter performance.

To listen to the webcast and view the slide presentation, find a link in the original version of this release.

If you are an analyst and would like to participate in the Q&A (question and answer), find a link in the original version of this release.

The conference call and slideshow presentation will be broadcast live and archived in their entirety in the investors section of Stantec's website.

About Stantec Inc.

Communities are fundamental. Whether around the corner or across the globe, they provide a foundation, a sense of place and of belonging, which is why Stantec always designs with community in mind.

Stantec cares about the communities it serves. This allows the company to: assess what is needed and connect its expertise; appreciate nuances and envision what has never been considered; and bring together diverse perspectives and collaborate toward a shared success.

Stantec comprises designers, engineers, scientists and project managers, innovating together at the intersection of community, creativity and client relationships. Balancing these priorities results in projects that advance the quality of life in communities across the globe.

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