Stantec Inc (STN) 2007 Q4 法說會逐字稿

Good day, and welcome to the Stantec Inc. 2007 year-end and Q4 earnings release conference call. Today's conference is being recorded.

At this time, I will turn the conference over to Tony Franceschini.

Please go ahead, sir.

Thank you, Jennifer.

And good afternoon, everyone, and welcome to our 2007 fourth-quarter and annual-results conference call.

Joining me is Don Wilson, our Chief Financial Officer.

As usual, we will comment briefly about our results and the outlook for our market, and then we will address individual questions.

Before we begin, I would like to caution you that our discussion this afternoon will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of these forward-looking statements may involve risks and uncertainties, and actual results may differ materially from those discussed in these statements.

Additional information concerning factors that could cause actual results to differ materially from those discussed in this conference call can be found in Stantec's filings with relevant securities commissions, located at SEDAR and EDGAR

I would also like to advise you that this conference call is being broadcast live over the Internet and will be archived for future reference at stantec.com under the "Investor Relations" section. Therefore, we ask any members of the media who are joining us today in a listen-only mode and wish to quote anyone other than Don or me to please request permission to do so from the individual concerned.

And just one other note, I'm still suffering the effects of a cold, and I've been coughing. So if I do get this dry cough every once in a while during the conference call, my apologies in advance.

This morning we released the results of Stantec's operations for the year and for the fourth quarter of 2007. I am pleased to report another successful year of growth and increased earnings, as well as our 54th consecutive year of profitability.

For fiscal year-end 2007, gross revenue increased to $954.6 million, up 17%.

Net revenue increased to $830.9 million, up 17.4%.

And net income increased to $69.3 million, up 15.1%.

Diluted earnings per share increased to $1.50, up 14.5%.

In the fourth quarter of 2007, gross revenue increased to $258.3 million from $211.8 million in 2006, up 22%.

Net revenue increased to $215.9 million from $180.6 million, up 19.5%.

Net income was $19 million compared to $15.6 million, up 21.8%.

And diluted earnings per share were $0.41 compared to $0.34, up 20.6%

Overall, we are pleased with our 2007 results. We had a good year, and our results reflect our company's ability to perform during the year of mixed economic performance in our principal geographic areas and market sectors.

In 2007 our performance in the United States was below our expectation due to the weakened U.S. economy and the integration costs associated with the higher number of acquisitions we completed, particularly in the U.S. East. We took advantage of opportunities in our acquisition pipeline to build more mass and a stronger foundation for the future when the U.S. economy improves.

Our U.S. performance was partially offset by better-than-expected performance in Canada and particularly in Western Canada.

Similarly, we had strong performance in three of our practice areas -- industrial, environment, and building -- which generally offset weaker performances in urban land and transportation.

Our urban land practice area, which has been one of our best performing areas over the past ten years, was the only practice area that did not have organic growth in 2007, primarily due to the slowdown in the U.S. housing market and our principal market in California. This reduction, combined with the impact of foreign exchange on the weakness of the U.S. dollar, was approximately 10%.

This organic reduction was replaced by acquired revenue in urban land of about the same amount so that our total revenue in urban land in 2007 was approximately the same as in 2006.

Our strongest organic growth prior to the impact of foreign exchange was in the industrial practice area at 36%, followed by environment at 12%, buildings at 6%, and transportation at 4%.

Some other areas in which some favorable and unfavorable events impacted our performance include the SG&A side, where we had slightly higher than projected costs due to the higher level of acquisition and integration activities completed during the year, particularly during the last half of the year.

We also experienced a slightly lower overall gross margin due to greater percentages of industrial and transportation work, practice areas which generally have lower gross margins.

And we had some foreign exchange impact due to the stronger Canadian dollar.

These unfavorable events were offset by a more favorable tax rate due to generating more fees in lower tax jurisdictions.

In conclusion, and as outlined, 2007 was once again a validation of the strength and robustness of our business model. We did not fire on all cylinders in all of our regions and practice areas, but we had sufficient diversity in our practice to offset the down market, and we had some pluses and minuses in our cost structure that also tended to offset each other so that ,overall, we delivered another year of good performance.

Now I'd like to review some of the highlights of the past year.

2007 was a very active year for us, as we completed 11 acquisitions, which added geographic and practice area reach and strengthened our operations for the long term. We were able to do this many because of the particular combination of size and type of firms involved. In particular, I want to highlight the following:

We nearly doubled our transportation practice area with the addition of New York City-based Vollmer Associates.

We also nearly doubled our industrial practice area with the addition of Neill and Gunter company in New England and Atlantic Canada.

We made the initial moves towards repeating our Canadian success in developing a buildings practice in the United States with the addition of Chong Partners Architecture, one of San Francisco, California's, most recognized architecture firms. From this West Coast base, we expect to gradually expand our presence in both architecture and buildings engineering to the East Coast and then to other parts of the U.S.

In Canada we strengthened our presence in architecture with additions in Victoria, Vancouver, and Toronto.

We significantly enhanced our landscape architecture practice and our overall company capabilities in this area with the addition of Geller DeVellis in Boston.

And, finally, at the end of the year, we added a new practice area in geotechnical engineering with the addition of Fuller, Mossbarger, Scott & May Engineers based in Lexington, Kentucky.

So, overall, we added approximately 1,800 employees during the year, bringing our total to about 7,800 staff at year end.

But during each conference call I do like to outline a few projects that we are working on to provide some insight into the breadth and scope of our design services.

For example, our buildings group secured a contract to provide architecture, planning, landscape architecture, and structural, mechanical, electrical, civil, and transportation engineering services for the development of a new 300-bed acute-care hospital in Grande Prairie, Alberta.

This group was also awarded an assignment to provide design solutions for renovating the heating, ventilation, and air-conditioning systems of the 53-story Sheraton New York Hotel & Towers.

Our industrial group is designing support facility and infrastructure for the Athabasca upgrader in Northern Alberta, which is a Total E&P Canada project.

The group was also selected as one of six service providers to undertake various projects for the Department of National Defense across Canada over the next five years, and one of the initial assignments that we were awarded is to complete the preliminary design and planning of the new C-17 hangar at Canadian Forces Base Trenton in Ontario.

And our expanded expertise in the design of communication and other systems for public transportation facilities resulted in contracts to provide system integration analysis and planning services for several light-rail transit projects in the southern U.S.

In Canada we secured a particularly interesting and challenging assignment to design improvements to the Trans-Canada Highway through the Kicking Horse Canyon in British Columbia.

It is projects like these that give us our passion for what we do and motivate our staff to excel.

Now I would just like to make some general comments and observations about our potential market conditions going forward.

As in the past few years, we expect the general outlook for our services to remain positive. The need for both private- and public-sector spending on the development of new and revitalized infrastructures still exists and is supported by several factors.

High energy prices are likely to continue at or around current levels, which will continue to spur investment in the oil and gas sector in Canada. Much of this investment will be in Alberta's oil (inaudible), our backyard and in an area in which we are well positioned to take advantage of these opportunities.

The Canadian federal government continues to spend on infrastructure, particularly during periods of balance or surplus budget. Current long-term investment plans include more than $33 billion and announced infrastructure spending over a seven-year period in the areas of transportation, gateways and border crossings, connectivity and broadband technology, water and waste water, solid waste management, renewable energy, disaster mitigation, brown field redevelopment, and sports and culture. We are well positioned to take advantage of the opportunities in most of these areas.

In the U.S. the six-year, $286 billion SAFETEA-LU Act, which was passed into law in August of 2005, continues to support transportation projects.

The manufacturing industry in Canada was negatively affected by the rising Canadian dollar in 2007. However, according to The Conference Board of Canada, the outlook for increased investment in machinery and equipment is positive, and when combined with the federal government's corporate income tax cuts and accelerated capital cost allowances for manufacturers, it's helping to bolster confidence in the industry.

In the U.S. the manufacturing industry is expected to be weaker in 2008.

Although services for this sector are not a big component of our business, we have been able to serve selected areas, such as biopharmaceutical, particularly upgrades to manufacturing facilities, and this work is expected to continue with improving confidence in the sector.

Environmental issues, as well as sustainable design and development, are becoming more important to both the government and the public. This awareness includes interest in the development of buildings and facilities with a reduced ecological footprint and is more efficient than effective water, water distribution, water treatment, and transportation infrastructure, particularly favoring transit. We believe that, with our ability to provide sustainable and integrated design solutions, we are again well positioned to capture opportunities in these areas.

Investment is also increasing in renewable-energy initiatives, such as wind, solar, and biomass. For instance, the Ontario government has committed to replacing all coal-fired energy generation in the province, which currently makes up 20% of its power, in the next ten years. A portion of the replacement will be made up of renewables. In addition, improvements will be required to strengthen the province's transmission system.

With our growing capabilities in providing services for wind, solar, and biomass projects, as well as in transmission facilities, we are positioned to benefit from this trend.

The Canadian housing market is still relatively strong by historical comparison. Single-detached home starts, which is the key metric for our services in urban land, are expected to decrease by about 8% from current levels of 120,000 or so to approximately 107,000 units, while all residential construction home starts are expected to stay above 200,000 units for the seventh consecutive year.

In the U.S. the new housing market is forecast to decline further in 2008. Although seasonally adjusted annual rates of single-family housing starts are now at around 780,000 units, they are approaching the historical low reached in 1991 of 604,000 units. So we believe that we are getting to the bottom of the decline.

It should be remembered that single-family housing starts peaked in January 2006 at around 1.83 million units. So there's been a very significant decline since then.

It should also be remembered that, from 1993 to the beginning of 2006, single-family housing starts were always at or above 1 million annually and usually at or above 1.2 million.

The market is expected to begin showing positive growth again in 2009.

We continue to be well positioned to weather the current downturn because we have a strong market position in the regions we service and are generally able to manage our staff levels to react to market conditions and to mitigate some of the impact.

For example, in 2006 approximately 60% of our urban land business was in the United States and 40% was in Canada. California accounted for about 35%, Alberta for about 25%, and Ontario, Canada, for about 15%.

In 2007 our urban land business changed to approximately 55% in the U.S. and 45% in Canada. California accounted for about 25%, Alberta for about 30%, and Ontario, Canada, for about 15%.

In addition, our mix of business is evolving, and urban land is a smaller component of our overall services mix. Urban land accounted for 34% of our revenue in 2006 and 30% in 2007. This percentage is expected to decline further in 2008 as we increase our services in other areas, particularly environment.

So in conclusion, our market outlook for 2008 is similar to that of other years in that we expect to have some strong sectors in region moderated by some weaker sectors in region. We believe that our business model will continue to enable us to react positively to whatever market changes occur.

And this concludes our prepared comments for today. Don and I are now available to answer any questions you may have.

The conference call operator, Jennifer, will explain the question procedure.

Thank you. (OPERATOR INSTRUCTIONS)

Please stand by for the first question.

The first question comes from Bert Powell, BMO Capital Markets.

Please go ahead.

Tony, the G&A at 43.5 this quarter off target mostly because of acquisitions integration. Based on what you're seeing today in terms of the work ahead of you for integration, what would be your target for '08?

For the entire year? I think in the MD&A we provided the range of between 41.5 and 43.5. We believe that for the year we can still be within that range. That maybe in the first quarter, it may tend to be on the higher end, and we'll drop, but we're pretty comfortable with that range for the year.

Okay. And looking at the urban land business for next year, are things starting to stabilize, or do you see things trending worse than was experienced this year?

The only area that is a bit of an uncertainty is California, to be honest. I think the market declined a little bit more than we thought it was going to decline in the latter half. So the question is whether the rate of decline is going to slow.

Certainly from what we've seen so far, there's some positive signs. Not enough to say that we've reached bottom yet, but just two weeks ago we had a new $4 million fee contract from a client which is looking at the front end of some new land that really won't be available for housing for four or five years down the road. So they're going through the approval process and starting to get ready. And the difference is that that client happens -- is a land owner, as opposed to a few years ago, where, say, a lot of the house builders and that had to purchase those parcels of land. So now some of the original land owners are starting to make the investment to prepare their properties going forward.

But I can't base a trend on one or two positive sights that we see, but clearly the rate of decline has slowed, and the feedback that I'm getting from our guys on the ground is that the general feeling is, if we're not there yet, we're a lot -- we're pretty close to it in terms of the bottom. Because, as you see, the numbers are fairly low in terms of -- if you look at the U.S. market as a whole, we're at just about near historical low levels out of the last sort of 15, 20 years. So I think we are starting to see that trend, and we're ready for it.

I mean, we have had reductions in staff, we've done some work sharing because, as you saw, Alberta's done really well so we've been able to use some of our U.S.-based staff to work on projects in Alberta. So part of the urban land issue for us is that, as much as the U.S. declines, is that will the Canadian housing market continue on its strength because that will certainly carry us -- if the Canadian market stays strong in '08, that'll carry us through '08.

Okay. Perfect. Thank you.

The next question comes from Ben Cherniavsky from Raymond James.

Please go ahead.

Good afternoon, guys.

Good afternoon, Ben.

The first question I have is if you could quantify any of the integration costs you may have incurred in the fourth quarter?

You know, specifically, no, we don't track it that way because of the way we integrate, other than to say that that clearly there was more downtime. The way we track it is utilization is down because we have less people working on billable work because they're getting integrated changing projects and that. So -- but the utilization isn't totally related to that because it's also related to the work (inaudible) and so forth.

So clearly we know that it was an impact, but we don't separate it out so we'd be somewhat challenged to do that other than you see what the results are in terms of SG&A and so forth. So I think that's about the best information we can provide.

I think in the past you've had -- you've provided some numbers on some transactions. Like, do you have transaction costs at least? The things that might have -- in terms of the dollars -- that might have been related to doing some of these deals, as opposed to your opportunity costs of utilization rates and such?

Ben, it's Don here.

The actual transaction costs are probably less significant than, as you described, the opportunity costs. And I think it probably relates to things like training time, as we convert to new systems and people are having to understand how to run our new systems, how to prepare invoices, and just the training process that we put new employees through in terms of Stantec policies and processes. And it's very difficult to put a dollar amount on that other than by looking at our overall utilization numbers.

Okay. Tony, you mentioned that the transportation industry -- or segment -- in Canada is down. What would explain that? I mean, everywhere I look there's highway construction and lots of -- and LRT's and all that kind of -- all those kind of projects. Why would you describe that market as being down?

Just for us it's down. It doesn't always necessarily correlate to the overall macro trend.

But the business is really -- for us now -- is more in the U.S. than in Canada. It's about 60% of our transportation business is in the U.S., 40% in Canada. And it's the U.S. part which has -- for us -- has been a building. We're not as mature in the U.S. We did the Vollmer acquisition, which doubled our presence, and it hasn't been quite a year yet. So we're just evolving that practice so, for us, it hasn't been -- it hasn't performed as well. That doesn't mean that there isn't enough transportation work for us to go after.

So sometimes we -- I try to always caution -- it's not always the macro trend in the market. The same way as urban land, we're doing better than what the trends are because we have a stronger, more mature, better-evolved practice, whereas in transportation we don't so it does take us a little bit longer.

So what we're really reporting is that this is what happened. We always said we have some good things happen every year, we have some less-than-good things happen, but overall we generally tend to be able to offset them, and that's really what happened this year.

Did I not hear you right then? Didn't you say that Canada was down in transportation, or were you talking about the whole segment?

Just the whole segment.

Oh, okay. Sorry.

Finally, why was the gross-to-net margin ratio so high in the fourth quarter? Anything in particular to explain that? I mean, if you look at the first three quarters, they're in the range of about 113%, and this was 119%, and I would think just intuitively you guys should be capturing more of the net revenues as your model scales and so forth.

Sorry. Are you talking about revenues or --

Yes, revenues.

Revenues. Okay. You confused me there.

So the gross-to-net, there's really -- I think we said before that, depending on the mix of projects and clients -- I mean, sometimes there's more pass-throughs on a job so that we end up with a lower net fee, as opposed to the gross fee. So I don't think there's any -- I wouldn't read any trend into that. That could fluctuate either way depending on the type of contracts that we have at any point in time.

But shouldn't there be -- I think we've talked about this before too -- shouldn't there be a long-term trend towards a lower ratio on that number?

Well, the long-term trends are in fact lower. If you look at the annual numbers and you look at them on an annual basis, I think you find that the trend is down --

Yes. No, that's the case. I guess I'm just wondering will that continue?

All we're saying is that I don't think one quarter is enough to look at that trend. But what you will find is a couple of the things we -- like in '04 -- or sorry -- in '07 at the end of the year, what you'll find is things like in the buildings area. So when we added architecture with Chong, you'll tend to find a little bit higher ratio between gross to net. And more recently -- although it's not reflected in the fourth quarter -- with Secor is a little bit more pass-through. So that type of work does tend to have a few more subcomponents in it. So that mix will vary.

But I think long term -- and if you look at the total business of the company -- I think you will see a slightly declining trend.

Okay. Great. Thanks, guys.

Thank you.

The next question comes from Sarah Hughes from Cormark.

Go ahead.

Hi, guys. Just firstly, on your admin and marketing expenses on a sales net increase (inaudible) this year, is that a short-term increase in terms of given that you did a number of acquisitions, and would we expect to see it come back down in future years?

That's our plan. I mean, clearly we think that, as we continue to -- we can manage the business better. We have these issues that it's always a challenge of saying do you think short term or long term? If we wanted to minimize our SG&A costs, we would just focus on existing operations. But whenever you're growing and changing and doing things, you're going to get certain bursts.

But to be fair, I don't think -- we don't want to use that as an excuse every time we do an acquisition because not all acquisitions automatically mean that we're going to up the SG&A costs. I think it does vary, and it depends on the specific acquisition and where and the type of firm and so forth.

The particular combination that we had this past year did increase some of the SG&A costs, but we're not saying that that's always going to be the case. And going forward, we're not going to keep ratcheting that number up. In fact, our internal targets are to reduce that target.

And then just on the urban land, I noticed your margins have held in very well despite the more challenging market conditions. Can you just talk a bit about the reasons for that? Is it primarily because Canada stayed strong, and, kind of, what are your expectations going forward?

I think you've certainly addressed that. Margins in Canada stayed strong, and Canada became a little bit of a bigger percentage of the overall business. The margins did drop in the U.S. a little bit more than the overall number, so when you average it out, that's what you get to.

I think our position in land is simply that -- there's still in any market -- there's still 700,000 units being done. We have a good presence in those key markets where housing activity is still going on, and as long as you have a strong number-one, -two position in that market, you can maintain margins at the higher end. They may not always be at that level, but certainly, if '07 is an indication of what, I would say, was a challenging year in urban land, I think it bodes well for 2008. Even if -- we're expecting that 2008 is certainly not -- we're not forecasting 2008 to be better than '07. Our objective in land is to maintain the margins that we have and the volume in business that we have. But we fully expect that, overall, we'll maintain it.

But there will be areas -- like, I think there could be some additional declines in California, some additional declines in Arizona and Nevada, but in the other markets we see it being stable. We're not projecting increases in Alberta, but we think, if we can maintain our Canadian operations, we'll do fine.

All right. Great. Thank you.

Thank you.

The next question comes from Anthony Zicha from Scotia Capital.

Please go ahead.

Hi. Good afternoon.

Tony, you mentioned you made 11 acquisitions last year successfully and integrated them. How many more do you feel comfortable in executing this year, and what are some of the specific areas you would like to focus on?

Well, I think we've indicated before that -- and all things being equal -- that in a typical year we could probably do 8 or 9, maybe 10, acquisitions. So clearly we -- at 11 we're sort of pushing the limit of what -- because it's a combination of number of firms as well as the number of staff in each firm.

Now, the 11 is a little bit increased because that includes 3 separate companies for Neill and Gunter, which, in fact, were 3 separate companies, but they had some similarities so you could maybe say that was really closer to 10.

So we were pretty well at what we'd indicated in the past. We could do 8 to 10 or maybe 4 or 5 larger ones. And so I think that, when we looked at '08, I think that same number applies, it's just that we may do more in the middle to the latter part of the year. But I also don't want to give you the impression that some of the acquisitions that are in the pipeline that, if things come together, we're quite prepared to do them over the next few months.

And the way we've adapted our practices a little bit to take this into account is that, for example, with Secor, which is the most recent one that we've done, we've kind of delayed the integration for about three months. And that -- while we -- so rather than trying to have too many things going at the same time, while we're still integrating Zande and FMSM, in particular, that we're going to delay the Secor integration for a few months. And we have some processes in place and we're doing the, sort of, some of the staff integration, but in terms of the financial systems and support and so forth, we're delaying it.

So we're adapting our processes. We feel comfortable that we're still sticking to our principle of total integration, but the fact that we're delaying it a little bit because of circumstances we don't think is going to impact us overall, and we're comfortable that we can do it.

So I think we'd give you the same guidelines as before that, in any given year, we could do to 8 to 10, depending on size, or 4 or 5 more sizable ones. And we could integrate between -- I think we said -- and typically we could integrate about 2,000 employees with the infrastructure that we have, but if there were larger firms, we could go to 3,000 or 4,000.

How much cash do we have available on the credit facility?

Tony, right now, of course, we've completed the Secor acquisition, and we're using about $150 million of our credit facility right now. So there's about $100 million available.

And last question, Tony, can you give us some color on how the operating environment and conditions are, let's say, in the California and Nevada areas and maybe a little bit on the East Coast, and are there some regions that are picking up?

Thanks.

Well, in terms of the U.S., for us, the West Coast, there are parts of California and the Northwest that are doing better, and even in the desert and mountain areas, but they tend to go more by practice areas. Obviously, the land business in the Southwest and West is really not strong anywhere. We're just holding our own with the work that's there. But the environmental business has clearly picked up for us, and with some of the acquisitions we've done, we think that that will be even stronger.

So in the U.S. West, the best prospects for us in short term in '08 are in the environmental area and the buildings area in terms of some hospital, health care. We're starting to get into some long-term care, seniors-living type of projects.

We're also doing a bit more on the commercial side in urban land, as opposed to the residential, which is the area that's weaker.

So in the West Coast, it would be those three.

In the Midwest and East, in the Midwest areas now, it's more -- again, it's predominantly the environmental side that's strong.

In the East it's -- again, it's a combination of things, but it's transportation in terms of the availability of work. We have to improve our execution on that, as we mentioned before, and, again, environmental. So it tends to be more public-sector-type work.

And on the private side, we're still doing quite well on the biopharmaceutical side, and a lot of that is being done in the East.

And, of course, when we move into Canada, we really have not seen any signs of any immediate or upcoming slowdown in Western Canada. Things are really firing -- as far as the economy's concerned -- on all cylinders. And pretty well all of our practice areas. I can't think of one that is struggling in Western Canada. They're all doing well.

Central Canada, we don't have as strong a presence in areas like transportation so we don't do as much, but the buildings practice -- again, health care focus is doing quite well. And it's more industrial related on the East Coast in Atlantic Canada.

So hopefully that gives you a little bit of a sense regionally where we see -- for our business -- where we can do better.

Okay. Well, thank you very much.

Thank you.

The next question comes from Paul Lechem, CIBC World Markets.

Please go ahead.

Thank you. Good afternoon.

Just wondering, in the West -- the U.S. West -- in the areas that you've seen the most slowdown, have you taken any action to actually layoff employees, and what is your ability to cut back staff as necessary?

Well, yes, we've laid off about 100 employees or so just in the -- sort of, the urban land area, and the rest we've been able to keep occupied. Because the slowdown that -- that impacted there. So in rough numbers that's about what we've had to do.

If things deteriorate, can we reduce that number further? Yes. I mean, I think our ability is that we're large enough now that we're not, sort of, still hitting it where we have to get out of the business if we start laying off too many people.

But having said that, there's no doubt that, when you're in a slowing and a downturn-type market, it doesn't matter what people tell you and anything else. You never quite catch up in terms of trying to match staff levels to the reducing volume. I mean, it's just human nature, and it's also timing that you're always behind in the sense that you're always carrying more people than perhaps if -- in an ideal world, if somebody were to do a financially engineered analysis could say, well, you need 23 fewer people so lay them all off on Monday. It's never quite that simple.

But I think you have to accept -- and we accept -- in a downturn-type market in a particular sector that we're not going to be as profitable as we could be and some of our SG&A costs are going to go up because our utilization is down so we are carrying some additional people. So if you ask me are there 20 people in California that we could lay off, maybe, but it's not quite that easy.

So I think what we're really saying is that, if things improve, we can do better real quickly because we can put those people to work and being utilized.

And are your staff all salaried employees, or do you use contractors in any of these regions?

For the most part they're salaried with maybe up to 30% of our staff are in some form of hourly or casual or contract type of employment agreement. And those, obviously, are the ones that we try to tend to use when things are really good, and they're the first ones to go. So we do have some flexibility in that sense, but rough -- 70% of our staff are full-time, salaried staff, and it's a little bit harder to make reductions in that area.

But the issue is not so much that -- the numbers because it's not a matter of saying, well, we've got to lay 20 people off. Well, the hourly and the casual people may be people that are actually fully utilized, and it's the salaried people that aren't -- and they're not totally interchangeable so we can't just sort of say, well, we'll lay off a salary guy -- or lay off the hourly guy and keep the salary guy. It's not always just a one for one. Like, not all staff are created equal in a professional services environment so there is certainly management of those resources that we have to take into account and what the impact is going to be. So I think, as a general rule, when times are tough, your SG&A costs are going to be a little bit higher in those areas.

Right. And I noted in the MD&A that you increased your bad-debt expense last year.

Yes.

Where are you at now? I mean, have you gone through the entire receivables and sort of scrubbed that and you feel you're done, or do you feel that there's still some at risk?

Well, I think our approach has always been -- I think -- for those of you who have been following us for a while -- we always like to be on the cautious side if we see it. So when we see -- if a market is really slowing down and receivables start to age a little bit longer than we like to see it -- we did go through at the end of the year and made sure that we had an honest assessment of the receivables. I mean, we're still, obviously, pursuing them.

We're just taking allowances where we think that the risk is more likely than not that it may not get paid so we would make a provision for it. But if things turn around and or -- it doesn't mean those clients aren't necessarily going to pay. It just means that we felt the risk level went up and, therefore, we did a cleanup of all of our receivables, as well as our work in progress. So we believe we've captured it all, but unless there's any new surprises that come up in the first quarter, we think we did a pretty good job of cleaning it up.

Do you have any metrics in terms of receivables over 90 days or 120 days or anything you can give us along those lines?

Well, not --

Don, do you --

Well, one of those things, Paul, that we take a look is our day sales outstanding in receivables, for example, and I think at the end of 2006, I think it was 74 days, and at the end of 2007 it was 72 days. So -- and that, of course, is net of the allowances that we've taken on those.

And on those allowances, again, I think if you take a look at the balance sheet, I think our allowance for doubtful accounts was somewhere around 4.5% of gross receivables at the end of 2007, which is a little higher than the amount at the end of 2006.

Okay. That's helpful. Thanks.

My last question is, Tony, maybe for you. I think you've mentioned in the past that a certain number of acquisitions don't work out as expected, and I think you've mentioned even as high as one in four might not transpire exactly as you expect it. You did 11 acquisitions last year so, mathematically, that suggests a couple of them might not be entirely what you thought would happen. Can you give us any comments on where the acquisitions to date have gone in terms of your integration and any surprises?

Of the ones we did in '07 or --

Yes. Well, and into '08. Yes. Too early, I guess.

Well, I think we're getting better. I think our overall ratio is probably in that one in four. I think we're getting better.

I think in terms of acquisitions, there's two things. One is in terms of staying -- did they perform like we thought they were going to perform, and that is different for different types of acquisitions. Some firms, we expect them to contribute immediately on close, and others, we think with the integration it's going to take a little bit longer.

So when you look at '07 and that -- there's sometimes issues that come up. With Vollmer, the company, fundamentally, is meeting our expectations in terms of the metrics that we have set in terms of utilization contracts and so forth. But so far, because of the type and nature of the work that they were doing, we have been a little frustrated with getting all the contracts and dotting all the i's and crossing all the t's so that we can say that we are still not quite where we would like to be there. Although, fundamentally, we're happy with the company and what's happening, it's just -- we haven't put the numbers that we would have liked to put on it in '07.

The other firms that we did at the end of the year, still a little bit too early to tell, and some of the other ones we did earlier were a little bit smaller.

So there will be a few challenges on Chong just because of the nature of the work, which is architecture, and there's some contracts that are halfway through and we, of course, spend the first three or four months making sure that we do our estimates of cost to complete.

And, quite honestly, when we do an acquisition, we tend to be on the conservative side because they haven't been in our system long enough to know. So we do tend to make sure that we have enough fees left over, and if not, we would take the proper provision.

So a lot of that cleanup is really what tends to happen at the end of the year, and so some of that occurred in Q4.

But if I were to look at our experience in '07, it's probably typically, and I'd say it's -- three quarters were positive, and there's one quarter we're not quite sure yet. But give us another year, and we'll be able to do that.

Some of the more recent ones we've done, particularly FMSM and Secor, we certainly have high expectations, and we don't expect that those are going to be issues for us. And certainly we'll be able to give you a better indication at the end of the first quarter, but so far we think that those are going well.

Okay. Thanks. That's great. Thank you.

Sure.

The next question comes from Richard Stoneman, Dundee Securities.

Go ahead.

Good afternoon, Tony, Don.

Good afternoon, Richard.

Couple of questions.

First of all, you mentioned your plans for future growth over the next ten years in your press release. Have you considered going into turnkey construction-related projects, like a lot of engineering firms, to accelerate growth?

Not yet -- or not directly. What we do have -- we are clearly seeing a trend here -- and particularly in Canada -- with sort of what we could call "P3's" -- or public-private partnerships. And we just kind of reviewed what we're doing there, and we're probably in various stages of submittal or proposal of close to 20 P3-type projects, at least a handful of hospitals in Canada and a number of transportation-type facilities and a few others.

The approach that we've taken so far is that there are some fairly good financial partners on the turnkey that we have -- at least have developed a good relationship. So out of the 20 or so projects, we're probably only working with three or four different financial sponsors or partners and three or four contractors.

And what we've done on the turnkey is to say we'll continue to focus on the design component, which they need. They like us because of the diversity, what we can do, besides the ability to deliver, the ability to put in half a dozen proposals at the same time, which are fairly extensive. And we think that -- at least so far -- that we can participate in that turnkey space without us actually becoming either the financial sponsor or the contractor, but we're not being precluded from doing it, and we can still focus on the things that we do well.

Now, sometimes in -- this is also where you see the -- since you asked the question on SG&A -- when you're doing these proposals on P3, everybody wants you to take a little bit of a risk. So though we don't do the work for nothing, we do do the work in preparing for those submissions on a reduced rate with a success fee and a bonus when we are successful. So that will sometimes tend to increase the SG&A costs as well.

But that's how we're participating in the turnkey rather than doing it ourselves.

And have you considered operating in some high-growth, oil-based economies, like Libya and Venezuela, in terms of growth over the next ten years?

Not yet. I mean, again, we may have clients -- North American-based clients -- take us there. But so far we really don't -- we're not pursuing anything there.

The only areas that we have seen that there is some potential for us -- again, it's a little bit like the strategy that we have followed in Alberta, which is to work on the support infrastructure and facilities and so forth -- that particularly now that we have a fairly mature buildings practice that there really are a lot of buildings-type projects in some of the Middle Eastern Emirates, like Dubai and Abu Dhabi and places like that, and there are some places in China, like Shanghai, and those are things that we think we may be able to pursue, again, primarily from a North American base with a little bit of presence there.

But we are not pursuing some of those things like you mentioned, like Libya and Venezuela. Those aren't markets that are in our sights, certainly not in the short term.

Thank you very much.

Thank you.

The next question comes from John Rogers from Davidson.

Please go ahead.

Hi. Good morning -- or good afternoon.

Hi, John.

I guess, first of all, you talk about the acquisitions, Tony, seven or eight, but in terms of revenue contribution from those, we look for the same, sort of, $90 million, or shouldn't that continue to grow by the 18% or so just to keep up with your growth targets?

You mean in terms of the --

Dollars from acquisitions.

Dollars. Yes. I mean, like, we still see that -- I mean, two-thirds or so of our growth is going to come from acquisitions so I think we will look at -- and assuming all things being equal, that at least we would have positive organic growth. Really, in '07 we did have positive organic growth, but in one of our practice areas it was negative -- in urban land -- that, obviously, those kinds of things have an impact. And then the foreign exchange had an impact on us in '07. So those kinds of things tend to offset some of the growth that happened. But other than that, we still see a third or more being organic and maybe two-thirds -- 60% to two-thirds -- being through acquisition.

In terms of the environment for acquisitions, is it more, less competitive? What are you seeing out there?

Well, that's a good question because there's certainly been sort of one really aggressive player in our industry the last few months that -- and in a few cases we were competing with them. So clearly there's always competition out there.

But our approach has never been to just compete on price, and it's just our charm and personality, that it's really about integration and fit and cultural fit. So although there's really good competition, we think that the nature of our business -- at least the types of firms that we're acquiring -- it's just as much of a culture and fit as it is about price. So although there is quite a bit of competition, we're not -- we're still able to do enough to keep up with our growth plan.

Okay. And just in terms of raw numbers of potential targets and, I guess, owners that are willing to talk, has that changed notably?

You know, we've always said that at any point in time we have somewhere between 20 and 30 people in our pipeline, and, quite honestly, it's been -- it seems that every time we do something, someone else takes its place in the line at different stages. So the pipeline is still quite healthy.

The issue with us is to -- I think in '08 we're going to be a little more selective. Not to say we haven't been selective in the past, but I think we're looking at things that really are going to -- given that we have a few to integrate and are going into the system -- that we're really looking at ones that can really help us longer term and are more strategic for us, rather than just saying maybe there's a good deal out there. We'll tend to pass on that and really focus on the strategic one.

Okay. And then, I guess for Don, in terms of the tax rate for the coming year, I mean, it dropped off quite a bit in the fourth quarter. What are you expecting for this year?

You know, John, we do have that in our opening section of the MD&A --

I'm sorry. Okay.

-- and I'm just looking for which page that --

That's okay. I'll find it then. I'm sorry.

I think it's on M-27, John.

Okay. Thank you.

(Inaudible) the number?

And 29 to 31.

29 to 31.

Yes.

Okay. Thank you.

The next question comes from Marie Millien from RBC Capital Markets.

Please go ahead.

Good afternoon. A quick question on the environmentals. Is one of the -- if we read the press, it's one of probably the high-growth sectors and everything else. But if I look at your results, actually, in the last two quarters, it hasn't shown that much growth from the organic growth. There's been growth, of course, on the acquisition side, but less growth than one would expect from the market. Is that something I -- that's different here than from what we are hearing out there?

Not totally. The way to explain that is that some of the -- sometimes when we end up with a certain market, where, if things maybe slow down for us in a particular area, we'll tend to do a staff reduction, and then that staff reduction will impact us. So I think our assessment is that the environmental market is healthy.

In terms of what's our ability to take advantage of that, it really does depend by region, but our expectation for '08 is actually that environment is likely going to be on -- both organic and acquisitions -- one of our strongest practice areas. So the signs that we're seeing for the type of jobs we're pursuing and what we're doing would support your first statement that it is a strong and healthy market, but in any couple of given quarters, we may or may not reflect that.

Okay. Thank you very much. That's about it for me. Thank you.

Thank you.

Gentlemen, there are no further questions at this time. Please continue.

Well, since there are no further questions, we'd like to thank everyone for joining us today, and Don and I look forward to speaking with you again at the end of the first quarter. Thank you very much for participating.

Ladies and gentlemen, this concludes the conference call for today. Thank you very much for your participation, and have a nice day.