Stantec's Q3 2025 Earnings Call: Contradictions Emerge on U.S. Market Growth, Margin Sustainability, and Water Business Performance

Date of Call: None provided

Financials Results

• Revenue: CAD 1.7 billion net revenue in Q3, up 11.8% YOY
• EPS: $1.53 adjusted EPS, up 17.7% YOY
• Gross Margin: Project margins 54.4% of net revenue (in line with expectations)
• Operating Margin: 19% adjusted EBITDA margin, up 100 bps vs Q3 2024

Guidance:

• Maintain full-year net revenue growth guidance.
• Increase adjusted EBITDA margin outlook to 17.2%–17.5%.
• US organic growth expected mid-single-digits; Canada and Global expected mid-to-high single-digits.
• Adjusted EPS growth expected 18.5%–21.5% for the year.
• Adjusted ROIC expected >12.5%.
• Target of CAD 7.5 billion net revenue by end of next year (strategic objective).

Business Commentary:

• Strong Financial Performance:
• Stantec reported net revenue of CAD 1.7 billion for Q3, an 11.8% increase compared to Q3 2024.
• Gross revenue was CAD 2.1 billion, with 5.6% organic growth and 5.2% acquisition growth.

• The growth was driven by robust demand across water, transportation, energy transition, and mission-critical sectors, along with favorable global trends.

  

• Water Business Growth:

• The water business delivered almost 13% organic growth in Q3.

• This was due to long-term framework agreements and public sector investments in water infrastructure across the UK, Australia, and New Zealand, along with project ramp-ups in Chile and Peru.

• Geographical Revenue Increase:

• In the U.S., net revenue increased by over 14%, driven by 4.6% organic growth and almost 9% acquisition growth.
• The growth was supported by significant projects in water, environmental services, and acquisitions like Page.

• Profitability and Margin Expansion:
• Adjusted EBITDA grew by nearly 18% year over year, with a record margin of 19%.
• This expansion was due to disciplined management of operations, higher utilization, and lower administration and marketing expenses as a percentage of net revenue.

Sentiment Analysis:

Overall Tone: Positive

• Management: "Stantec delivered robust performance in the third quarter... Net revenue grew to CAD 1.7 billion... we grew adjusted EBITDA by close to 18% year over year, with a record margin of 19%." Also: "we maintain our net revenue growth guidance... increasing our adjusted EBITDA margin outlook to 17.2%-17.5%."

Q&A:

• Question from Sabahat Khan (RBC Capital Markets): High-level thoughts on 2026 by major end markets and regions given moving pieces this year?
  Response: Directionally positive: strong momentum into 2026 driven by AMP programs (U.K.), frameworks in Australia/NZ, mining demand in South America, Canadian federal budget supporting infrastructure; US procurement slower but macro fundamentals remain strong.

• Question from Sabahat Khan (RBC Capital Markets): On Canada specifically, which buckets (broad infrastructure, energy, pipelines) are you most exposed to from recent federal announcements?
  Response: Canada is broad-based strength—land development in Western Canada, transportation (bridges/roadways), robust water projects and industrial process work; energy opportunities exist but overall exposure across sectors is healthy.

• Question from Yuri Lynk (Canaccord Genuity): Given headlines and mixed macro data, what forward-looking indicators are you seeing (proposals/RFPs) and any signs of weakness?
  Response: Some US procurement delays and unsigned awards compress near-term visibility but not demand; AMP customer issues don't stop AMP spend—work continues; overall leading indicators remain supportive of ongoing demand.

• Question from Yuri Lynk (Canaccord Genuity): Any update on the M&A pipeline given recent market chatter?
  Response: Robust dealflow and active discussions; board and investors supportive; continuing conversations and will pursue the right opportunities when timing and fit align.

• Question from Ian Gillis (Stifel): With US organic backlog flat YTD, does that impair ability to generate US organic growth next year?
  Response: No—backlog is lumpy and some verbally awarded projects await signatures; management expects organic growth in the US next year.

• Question from Ian Gillis (Stifel): Any concern IIJA funds could be withheld or canceled?
  Response: No indication the IIJA would be canceled; program remains intact and a long-term tailwind.

• Question from Krista Friesen (CIBC): What changed to drive stronger margins and the tightened guide relative to earlier in the year?
  Response: Margin improvement driven by disciplined project selection/pricing, slightly higher project margins, lower admin & marketing as % of net revenue (100 bps improvement YTD), scale, higher utilization and occupancy benefits.

• Question from Krista Friesen (CIBC): Any update on Page acquisition integration and synergies?
  Response: Integration progressing very well; early revenue synergies and operational efficiencies realized quickly due to familiarity with Page team; finance integration to complete by year-end.

• Question from Benoit Perrier (Desjardins): Is the pace of EBITDA margin improvement sustainable into 2026 and what are the puts/takes?
  Response: Expect continued multi-year EBITDA margin expansion driven by organic revenue growth and operational leverage; not providing specific 2026 margin guidance now but expect to be at these levels or better.

• Question from Benoit Perrier (Desjardins): What is Stantec's exposure to defense and how material could that opportunity be relative to data centers?
  Response: Current exposure to US federal ~5% and <5% in other countries; defense-related work aligns with core infrastructure capabilities and is expected to grow but not become a material portion quickly.

• Question from Benoit Perrier (Desjardins): Strong free cash flow and DSO improvement—drivers and sustainability into Q4?
  Response: Significant improvement from strong revenue, collections and working-capital focus; DSO ~73–74 (target mid-70s possible); may give some back in Q4 but full-year cash flow to remain well ahead of prior year.

• Question from Michael Tupholme (TD Cowen): Can you break out water organic growth by region (US and Canada) and drivers?
  Response: Water growth is strong: US ~10% organic in quarter, Canada >20%; drivers are large municipal wastewater/water treatment projects, AMP frameworks, flood protection, reuse/recycle, PFAS regulation and manufacturing needs.

• Question from Michael Tupholme (TD Cowen): Update on data-center activity and revenue share; outlook for 2026?
  Response: Working on over 100 data-center projects; represents roughly 2–3% of net revenue today, could modestly grow to ~3–5% but management prefers to keep exposure diversified.

• Question from Chris Murray (ATB Capital Markets): Are you married to the CAD 7.5B target or is it aspirational given 7% CAGR is challenging?
  Response: Not married to the $7.5B number; strategy (organic growth + M&A) drives activity—company has optionality via M&A and won't force deals merely to hit a numerical target.

• Question from Chris Murray (ATB Capital Markets): Thoughts on returning capital via buybacks/NCIB versus M&A?
  Response: Capital priorities: modest capex, dividend, NCIB available and used opportunistically, but M&A remains a core priority as a significant value-creation mechanism.

• Question from Maxim Sytchev (National Bank Financial Markets): Has US procurement become more 'book and burn' impacting visibility and backlog/organic divergence?
  Response: Procurement changes and a recent shutdown slowed signings; awarded projects exist but await signatures—long-term market remains attractive and management expects recoveries in visibility.

• Question from Maxim Sytchev (National Bank Financial Markets): Why is environmental services lagging while water accelerates?
  Response: ES has several large US federal projects awarded but unsigned, which suppressed near-term organic growth; management expects acceleration as those contracts are finalized into work in 2026.

• Question from Maxim Sytchev (National Bank Financial Markets): What's driving double-digit growth in Germany and will you pursue inorganic expansion there?
  Response: Growth driven by major electrical transmission projects, rail/transport momentum and recent government spending; plan is to grow organically and pursue bolt-on inorganic opportunities to expand the German foothold.

• Question from Jonathan Goldman (Scotiabank): How did US organic trend progress sequentially after July into Aug–Nov given Q3 US organic 4.6%?
  Response: US organic slowed from July's high single-digits to just under 5% for the quarter but management does not see further deterioration recently and expects some buoyancy heading into Q4.

• Question from Jonathan Goldman (Scotiabank): Q4 appears to imply a slight YoY margin decline—why would margins pull back given YTD improvement?
  Response: No expectation of material margin pullback; some Q4/near-term effects could come from Page financial integration timing and lumpy comps, but structural drivers for margin expansion remain intact.

• Question from Jonathan Goldman (Scotiabank): Are there bottlenecks in executing M&A (valuations, targets, culture) and how do cycle times compare historically?
  Response: No systemic bottleneck—dealflow is robust; cycle times vary by situation (some long courtships, some shorter processes); valuations are sector-dependent but not an impediment to pursuing strategic deals.

• Question from Jonathan Goldman (Scotiabank): Have valuations trended meaningfully year-to-date vs prior years?
  Response: No major change in valuations overall; sector dynamics affect multiples but valuations are not currently preventing M&A activity.

Contradiction Point 1

U.S. Market Growth Expectations

It involves differing expectations for U.S. market growth, impacting investor sentiment and strategic planning.

Are you concerned about the IIJA funds not being released with certainty? - Ian Gillis (Stifel)

2025Q3: We do not believe the IIJA program will be canceled or funds withheld. The program remains intact and continues to support infrastructure projects. - Gord Johnston(CEO)

What is your outlook for U.S. market spending over the next two years? - Christopher Allan Murray (ATB Capital Markets)

2025Q2: U.S. organic growth is expected to accelerate in the second half of the year and next year, driven by IIJA and OBBA initiatives. - Gordon Allan Johnston(CEO)

Contradiction Point 2

Margin Improvement Sustainability

It involves differing views on the sustainability of margin improvement, affecting financial forecast expectations.

Is the rate of margin improvement sustainable through 2026? - Benoit Perrier (Desjardins)

2025Q3: Yes, the pace of margin improvement is sustainable, driven by organic growth. - Vito Culmone(CFO)

How do you view the multiyear organic growth guidance beyond 2026? - Michael Tupholme (TD Cowen)

2025Q2: We expect to continue to achieve growth through diversification, organic growth, and M&A opportunities. - Vito Culmone(CFO)

Contradiction Point 3

Free Cash Flow Performance

It involves differing explanations for free cash flow performance, impacting financial understanding.

Can you explain the strong free cash flow this quarter and Q4 expectations? - Krista Friesen (CIBC)

2025Q3: Our year-to-date operating cash flows are up 86% due to strong revenue growth and effective management. - Vito Culmone(CFO)

Impact of Section 174 tax changes on free cash flow? - Benoit Poirier (Desjardins)

2025Q2: We are raising free cash flow and we continue to expect strong free cash flow in the second half of the year. - Vito Culmone(CFO)

Contradiction Point 4

U.S. Government Business and Market Uncertainty

It reflects differing perspectives on the impact of uncertainty in U.S. government business on Stantec's operations and market dynamics, which can influence investor confidence in the company's growth projections.

Are forward-looking indicators showing a market slowdown? - Yuri Lynk (Canaccord Genuity)

2025Q3: In the U.S., a confluence of factors has slowed procurement cycles, but we're bullish on long-term demand. The U.K.'s AMP program and framework agreements in Australia support water infrastructure. However, we're aware of potential short-term challenges. The macro fundamentals remain strong. - Gord Johnston(CEO)

Can you update us on U.S. federal, state, and local government business, especially regarding recent uncertainties? - Chris Murray (ATB Capital Markets)

2025Q1: In the U.S., we aren't seeing any appreciable impact from this uncertainty. We've seen a little bit of slowing in procurement cycles in some areas, but it has worked through, and we see that we're back into a more normal cadence now. - Gord Johnston(CEO)

Contradiction Point 5

Water Business Growth and Market Dynamics

It involves differing statements on the growth and market dynamics of Stantec's water business, which is a significant part of its operations and revenue.

Can you update organic growth rates in water for Canada and the U.S.? - Michael Tupholme (TD Cowen)

2025Q3: Water business saw double-digit growth in the U.S. and over 20% in Canada. Key drivers include public sector wastewater projects, water scarcity, and flooding prevention. - Vito Culmone(CFO)

Why did you maintain the 2025 guidance despite the Page & Ryan Hanley acquisitions? - Benoit Poirier (Desjardins)

2025Q1: The Water business was impacted in the first quarter of 2024 due to reduced spending on some municipal infrastructure projects in Canada. - Vito Culmone(CFO)