Stantec Inc (STN) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Stantec 2008 Q4 yearend earnings announcement conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Tony Franceschini, President and CEO. Please go ahead, Mr. Franceschini.

Thank you, Marcus, and good afternoon everyone and welcome to our 2008 fourth quarter and annual results conference call. Joining me today for the first time is Dan Lefaivre, our new CFO who assumed his responsibilities on January 1. As usual, we will comment briefly about our results and the general outlook for our markets and then address individual questions.

Before we begin, I would like to make you aware of our Safe Harbor statement. 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 in the United States and applicable securities legislation in Canada. By their very nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties which give rise to the possibility that our estimates, projections, expectations or conclusions will not prove to be accurate, that our assumptions may not be correct, and that actual results may differ materially from those discussed in these statements.

Additional information about the assumptions and material factors that were applied or could cause actual results to differ materially from those discussed in this conference call can be found in the management's discussion and analysis included in our 2008 financial review.

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 investors section. Therefore, we ask any members of the media who are joining us today in a listen-only mode and who wish to quote anyone other than Dan or me, to please request permission to do so from the individual concerned.

This morning we released the results of Stantec's operations for the year and for the fourth quarter of 2008. I am pleased that we can again report our 55th consecutive year of profitability. I now want to highlight our principal financial achievements and our progress on strategic activities for 2008.

First, I want to discuss our financial performance. We achieved record results prior to the impairment of goodwill and intangible assets. For fiscal year 2008, gross revenue increased to CAD1.35 billion, up 41.6% and net revenue increased to CAD1.13 billion, up 36%. In the fourth quarter, we finalized a CAD53 million goodwill impairment we reported in Q3. This charge decreased our diluted earnings per share by CAD1.15. Also, as reported in Q3 '08, we had an impairment of intangible assets. This charge decreased our diluted earnings per share by CAD0.05. As we've indicated previously, these charges are non-cash in nature and do not affect our liquidity, cash flows from operating activities, or debt covenants and will not impact our future operations.

Excluding the impact of these impairments, our financial results for the year reached record levels, generating CAD160 million in cash flows from operating activity. Our net income would have been CAD84.1 million with diluted earnings per share of CAD1.83 for the year. In the news release we only addressed the goodwill impairment. However, in hindsight and for clarification, we should have included the intangible impact for comparison purposes to the Q3 '08 conference call. Including the impact of these impairment charges, net income was CAD29 million compared with CAD69.3 million in 2007. Diluted earnings per share were CAD0.63 compared to CAD1.50 last year.

In comparing our 2008 results with our results in 2007, the following are some significant items. Our gross margin declined from 56.7% to 55.7%. This reduction was offset by a similar reduction in administrative and marketing expenses from 42.3% to 41.3%. We recorded a CAD12.4 million increase in charges related to intangible assets. This increase was due to two factors. An increase of about CAD7 million in the amortization of intangible assets mainly from the backlog balances resulting from the Vollmer, Neill & Gunter, Secor, and McIntosh acquisitions, and a CAD5.4 million impairment to intangible assets recorded in Q3 '08 because of the key client relationships.

We also recorded a CAD5.9 million increase in interest expense because we had more long term debt throughout 2008 compared to 2007. In the fourth quarter of 2008, gross revenue increased to CAD369.3 million from CAD258.3 million in 2007, up 43%. Net revenue increased to CAD297 million from CAD215.9 million which was up 37.6%. Net income was CAD20 million compared to CAD19 million, up 5.3%, and diluted earnings per share were CAD0.44 compared to CAD0.41, up 7.3%.

In Q4 '08 compared to Q4 '07, net income did not increase in line with net revenue mainly because of three factors. One, we recorded a CAD1.5 million increase in the amortization of intangible assets mainly due to the amortization of the backlog balances from the Neill & Gunter, Secor, and McIntosh acquisitions. We recorded a CAD1.2 million increase in interest expense because we had more long term debt throughout the fourth quarter of 2008 compared to the fourth quarter of 2007. And three, our effective tax rate was lower in the fourth quarter of 2007 compared to the fourth quarter of 2008, 21% compared to 31.7%. As you will remember, the effective tax rate in 2007 was positively impacted by the recovery of previously recognized tax expense on Quebec Bill 15 and by the reduced statutory income tax rate in the fourth quarter which affected the carrying value of our future taxes. So overall, we are pleased with our 2008 results.

I also want to discuss the progress that we continue to make towards our strategic objectives. Number one is achievement of our ten year goal. I am proud to report that we achieved and exceeded the ten year goal we set in 1998 to become a CAD1 billion annual revenue company. Number two is the ability to adapt to changing economic conditions. Our operating results again demonstrate the ability of our business model to adapt to challenging market conditions. Weakness in the residential market and the economic slowdown in the US in particular contributed to a significant decrease in organic revenue of CAD55 million in our Urban Land practice area. This decrease was entirely offset by increased organic revenue in our other practice areas, and particularly in the Buildings area.

Number three is growth through acquisitions. We continued with our acquisition program and completed five acquisitions in 2008. And the acquisitions completed in 2007 and 2008 added about CAD404 million in gross revenue and increased our geographic reach in practice area diversity. In particular, in January we acquired the Zande Company from Rochester Signal which added about 300 staff to strengthen our operations in the Midwestern United States while bolstering our service offerings in environmental engineering and signal system design.

In February we acquired Secor which added about 700 employees, expanded our geographic reach into four new states, and increased our capabilities in the area of environmental remediation. In March we acquired RHL Design Group which added about 170 employees and enhanced our commercial development services for national clients.

In July we acquired the 200 employees of McIntosh Engineering to expand our services in the mining sector. And finally, at the end of 2008 we completed our largest acquisition to date with the January 2, 2009 addition of Jacques Whitford, a 1,700 person environmental consulting services firm. This acquisition gives us a major Canadian presence in geotechnical engineering, environmental remediation, water resources engineering, environmental assessment, and environmental permitting. So in total, we added about 3,000 employees in 2008 and up to January 2, 2009, bringing our current total staff number to slightly more than 10,000.

As is our practice during each conference call, I would like to outline just a few projects we are working on to continue to illustrate the diversity of our design services and client base. For example, our industrial group in Dartmouth, Nova Scotia was awarded a contract to help Survival Systems Limited develop a crash simulator for a small combat helicopter to train military personnel for escape when crashing or ditching in water. The survival training simulator is the most realistic of its kind and can accommodate up to four trainers and eight trainees for rapid descent and retrieval exercises.

Our transportation group is providing transistence with preliminary and final design services for their replacement of the 14th Street Viaduct in Hoboken, New Jersey including the design of all roadway improvements, two intersection modifications, urban street scaping, and bridge aesthetics. An integrated team in Victoria, British Columbia is providing Victoria Shipyard Company Limited with several site architecture and structural, electrical, and mechanical engineering services for the development of a hangar for housing and maintaining Canada's submarine fleet during extended docking periods.

Our Environment Group was awarded a contract to design and implement the real time control system for the operation of the waste water collection system in Hamilton, Ontario. Services include hydrology, hydraulics, instrumentation and control, system optimization, and detail design. And it is projects like these that provide the diversity and client and project types in all market conditions.

Now I would like to make some general comments and observations about the state of our end markets. At the macro level, general market conditions are clearly deteriorating, but there are some mitigating factors that are expected to dampen the impact specifically on Stantec. The need for new and revitalized infrastructure still exists and both the Canadian and US governments have committed to spend funds in infrastructure through their so-called stimulus packages. Included in these programs is funding for green or sustainable infrastructure which is an area of focus for Stantec. We believe that projects funded by these programs won't necessarily create a bubble of work for us, but will help us maintain our level of backlog in the public sector work, which accounts for nearly 50% of our revenue, and replace assignments that were curtailed because of difficult economic conditions. P3s will also continue to be an alternative means of funding public sector projects, particularly in Canada.

Now to address why we expect our business to remain stable, I want to discuss each practice area. I want to start with Environment. In Q4 '08, Environment accounted for about 31% of our revenue. And for the entire year its organic growth rate was about 3%. With the addition of Jacques Whitford, the Environment practice area is expected to account for about 40% of our business in 2009. This is a very stable part of our operations due to the nature of the work and the client base. Our key clients in the public sector are principally in the water and waste water areas and funding for these projects is assured either through utility rates or government programs including the stimulus spending. In the private sector, the majority of our work is regulatory driven with very large and stable Fortune 500 companies as our clients.

The second practice area is Building. In Q4 '08, Buildings accounted for about 21% of our revenue and for the entire year its organic growth rate was about 16%. In 2009, Buildings is expected to account for about 18% of our business. This practice area is also very stable because over 80% of our business is in Canada and is publicly funded since our principal markets are healthcare, higher education, airports, and commercial.

The third practice area is Transportation. In Q4 '08 Transportation accounted for about 13% of our revenue and for the entire year its organic growth rate was about 5%. In 2009 Transportation is expected to account for about 12% of our business. This practice area is stable because the majority of work is in the public sector and it will benefit from both Canadian and US stimulus programs. So these three practice areas are expected to represent about two-thirds or more of our business in 2009 with a positive current outlook. And combined, they should generate some modest organic growth.

Industrial practice area is the fourth one I want to talk about. In Q4 '08 the Industrial group accounted for about 19% of our revenue and for the entire year its organic growth rate was about 3%. In 2009, Industrial is expected to account for about 16% of our business. This practice area has experienced some recent reductions in staff due to project deferrals or delays in the mining and oil and gas sectors. However, these sectors represent less than 50% of the client base in the practice area. So the outlook is for a moderate decline in organic revenue in 2009. Other sectors within the Industrial area such as biopharmaceutical and project management are expected to remain stable.

And finally, the fifth practice area is Urban Land. In Q4 '08 Urban Land accounted for about 16% of our revenue and for the entire year, it had a minus 19% organic growth. So in 2009 Urban Land is expected to account for about 14% of our business as some further but more moderate declines in housing starts are anticipated. We have done a good job of mitigating the impacts of the decline in housing starts over the past two years by deploying staff in other types of projects. So residential now accounts for only 60% or even a little less of the work in this practice area and it is expected that if we continue along the same path, that this can decline further to about 50% of the fee volume. So the Industrial and the Urban Land practice areas, where the outlook is for a moderate decline, are expected to account for about one-third of our 2009 business.

So at this point, we believe that on a combined basis for all of our practice areas, we can be fat -- flat -- fat, my apology, that we can generally be flat and on the optimistic side have a moderately positive organic growth in 2009. Our focus in 2009 is to maintain operational effectiveness during a more challenging business environment and we believe that we are well positioned to do so since we have no other distractions and can dedicate all of our resources to achieving this goal.

With that, this concludes our comments for today and Dan and I are now available to answer any questions that you may have. Marcus, the conference call operator, will explain the question and answer procedure.

(Operator Instructions). Anthony Zicha, Scotia Capital.

Hi, good afternoon, Tony and Dan. My first question is, how long do you expect it will take to see some benefits from the Canadian stimulus package and the American stimulus package? Or which one do you think is going to have more of a positive effect?

Realistically I don't think we're going to see an impact until the third or fourth quarter of this year. And as we indicated, I think we don't necessarily expect it to be like an uptick or a positive, but really rather to help us maintain the revenue levels that we have right now. So the way we see the stimulus packages, at least for the impact in '09, is that they will assist in funding projects that may have been delayed or postponed in the public sector that now would have some funding or at least will provide the confidence to the public sector agencies that the funding is coming so that the projects will continue. But we don't expect in '09 anyway to have like a bubble or a bump in revenues for us.

And quickly my second question, with adoption of FASB141 and 142, do you see that will affect acquisitions going forward?

You're referring to the new financial standards with respect to business combinations?

Yes.

We don't see that it will be, there will be a major impact on the way we do business. Obviously it will impact the way we account for business combinations, but we have reviewed those standards and have taken those into consideration going forward.

And, Tony, as you know, our strategy is we never did financially engineer transactions. We always do a transaction because it makes sense and the accounting is what it is.

Yes, exactly. Okay, well thank you very much.

Bert Powell, BMO Capital Markets.

Tony, I'm just wondering if you look out and there's a lot of guys that are going to be looking at backlogs that are going to have cancelled orders and whatnot. They must be clearly trying to fill that back up and I've got a bet that the competition in terms of areas where traditionally you might have felt that you guys had a lock on something or whatnot, that there's a lot more folks showing up there and that's eating into your potential margins on projects. I'm just wondering if you can give us a comment, maybe not necessarily by each practice area, but across, generally across what you're seeing out there from that perspective?

Well it's a good question because fundamentally when the market is tougher there is always either more competition or I guess you could say stiffer competition. But our business model is, we're saying during the good times as well, was that we were always prepared for the down times or the downturns because I personally experienced it three times in my 31 years with this Company. The reason we had this top three philosophy, being a top three player in a particular market, is that when times are tough in that market, it's generally the last in, first out. So the people that were generally getting the work are going to be leaving the market and the people that are going to be competing for it are going to be the strongest people that survive. And we are seeing that, that in the markets where we have kind of that top three positioning, which is most of the Canadian markets, a number of markets in the southwestern US, a number of markets in the northeastern US, we are holding our own quite well. In the areas where we're not as -- don't really have that position, things like the mid-Atlantic states, the southeast and sort of south part of the US and in some areas of the western US, yes, we are losing more business than we were before. So we're being impacted more in those areas. Fortunately, we have more areas where we have that strong position and we're able to compete with whoever comes along.

Occasionally, yes, we're getting some impact on margin. You saw a little bit of that reflected in the fourth quarter results. But we think that that's kind of the range of the impact of the margins that we're going to have, because by all measures, the fourth quarter was pretty competitive. It had all of the factors that you're talking about. Reduced market, clients canceling projects, competing for other projects, and we had to replace some of the work that we lost. And overall, we maintained our backlog at a pretty reasonable level. And I just want to remind everybody again that our backlog numbers are very robust because they're not based on sales. We report our backlog based on funded backorders that we are working on and it comes right out of our financial reporting system. So really our -- the backlog is real and it's made up of several thousand projects. So we're quite comfortable with not only the backlog number but with our ability to generally replace the work that we lose through deferrals and cancellations with other projects. But absolutely it's more competitive and that's why it's important to be a big player in the markets that we are in.

Okay. Two kind of housekeeping questions. What was backlog, just remind us where backlog was at the end of Q3?

800 and--

978.

978.

978. And then just in terms of the amortization of intangibles looking forward to 2009 and 2010, you've got a schedule in there for what you expect. That's not including Jacques Whitford, correct?

That's correct.

Okay, so out of the CAD7 million or CAD7.3 million for '09 intangibles that are going to be chraged off against, charged on the P&L, what would you add in for Jacques Whitford based on what you know now? Do we end up kind of looking the same as this year?

We're looking at perhaps somewhere in the -- we haven't finalized the purchase allocation for Jacques yet, but we're looking anticipating somewhere between CAD4 million and CAD5 million in terms of amortization this year.

So that would bring the number closer to CAD11 million for 2009 then? We'd add that right onto the CAD7.3 million?

Yes.

Okay. Thank you.

Sarah Hughes, Cormark Securities.

Hi, guys. Can you talk a little bit more about the outlook for the Jacques business? I'm wondering if they've seen any order cancellations at all.

In general I think you could make similar comments about the Jacques business to what we have in ours. The -- it's really by components of work. The type of work that they do on the things like the environmental remediation, you know they have -- we often talk about our four or five big clients, they have one significant client in Canada and it's a longer term contract that goes into 2010. So the remediation side of the business which is maybe a third, is not impacted too much, it's stable. The other third would be business like environmental impact studies and assessments and baseline studies for work like whether it's a pipeline project or energy or resource project. That type of work is, again, fairly stable because a lot of that work is either funded directly or indirectly by government agency or by proponents of the project that because they require base lining over a long period of time, those projects don't get put on hold even if the projects themselves are postponed or delayed or in some cases may never be built. But that type of work continues. And a third of the work is more the one that has a whole bunch of components in it including things like geotechnical engineering, some of which is specific either foundation or other work related to individual projects whether they're dams, levees, and so forth. That portion of the business is where you're seeing some of the same things that we are which is some delays, some cancellations, and so forth. So maybe a third of their business is going through the same issues that we talked about. So roughly speaking overall, we're about the same ratio, two-thirds kind of looking good, and one-third not so good.

Great, thanks. And in your backlog, I was wondering, does it break out similarly to what you told us in terms of what to expect for revenue in terms of percentage from the different segments?

If we have to say a general comment is it's close but it isn't. Like it will fluctuate because we'll get a slew of assignments in one particular practice area and that tends to bump up the backlog in one area. But we're a little reluctant to break it out by practice area because it does fluctuate from quarter to quarter and there really isn't a trending that you could establish from that. So I think the overall number is a better indicator of the impact and-- but it does fluctuate from quarter to quarter in the individual areas. The outlook that I sort of gave you tries to kind of give you a sense of where the stronger areas are.

And would I assume -- you've seen a bit of growth in that sequentially in year over year. Is a good portion of that coming from on the environmental side?

Well certainly if you look at the number we gave you at the end of '08, which doesn't include Jacques, it will be a greater component will be with environmental after the first quarter. But I think it would be fair to say that the backlog has grown in proportion to the way the practice areas have shifted. So that I think three years ago we had 38% of our business in Urban Land, so you could have expected that in that 35% to 40% of the backlog was in Urban Land, now we're expecting about 14% of our business in '09 in Urban Land. So obviously the backlog number in Urban Land is in that sort of 10% to 15% range.

And then just lastly, on the admin expenses, previous quarters are kind of trending towards the lower end of your guidance range and you were hoping to try to keep them at that lower end. They popped up a bit in Q4, but as we go into '09, is it still plausible that you could see them kind of hovering towards the lower end of that range?

Yes we would still certainly like our focus is to reduce those costs. And quite honestly, the numbers were still sort of trending to the lower side. There were -- like we always seem -- sometimes in the fourth quarter there's a number of adjustments and things that come on-stream. And sometimes those adjustments give you a positive result and sometimes a less favorable result. And in the fourth quarter, which is included in the numbers that we reported, but there were a number of things that kind of went the other way in terms of adjustments. Probably the single biggest one was we did our true-up on the claims adjustment and it had an impact in the CAD2 million to CAD3 million range on the SG&A costs. So the reason I mention that is that from an operational point of view we are continuing with our reductions, but because some of these one-time items are included in SG&A, they will have an impact, but it is what it is. But it's actually better than what we're reporting I guess is what I'm trying to say. Operationally, the trend continued in Q4.

Great. Thanks, guys.

John Rogers, Davidson.

Hi, good afternoon. Just in terms of Jacques Whitford, you're still expecting that to be flat revenue for 2009? Or are you expecting that to be up?

We're going to -- we're taking the cautious view and expect it to be flat. If it's up it will be a positive for us.

Okay. And the other thing is, just with the lower organic growth in the fourth quarter, have you had to make significant adjustments in the headcount?

We've made adjustments but I guess it depends on your definition of significant. Over the last six months, we've had sort of a net staff reduction of about 500 staff of which some of it was in-- I think in the fourth quarter, maybe half, not quite half, you know 200, 250 range would have been in the fourth quarter.

Okay. And then finally, I know you're approaching '09 with some conservatism, but what about the acquisition opportunities that are out there? I would assume that valuation is probably looking as appealing now as it has in the last seven or eight years anyway.

Well that's all a bonus. We're giving you -- based on what we have right now, what we've done, I think we see that we can maintain a stable business in this environment and in this climate. So any acquisition opportunities that come up, quite honestly we're only going to pursue ones that are attractive. There is no particular compelling reason for us to do anything that isn't attractive. I think with the integration of Jacques Whitford this year which translates to give or take about 15% acquisition growth. So if you have a kind of flat organic business, we could still overall grow the business by 15%. There's really no reason other than to if it's really strategic and it fits something that we've been looking for for awhile and if the valuation is reasonable. So we see any of those acquisition opportunities as being a bonus to everything that we said today.

And your pipeline or the number of sort of fish on the hook, still talking to a number of opportunities, companies now?

Well they don't like to be called fish on a hook. Of course they're all desirable acquisition candidates that we are pursuing. I think it would be fair to say that there are still a number of similar opportunities out there. But the second part of your question before was about attractive valuations. And there's fewer with the attractive valuations so far. So I think you just have to kind of wait and see if things become a little more realistic because some of the potential acquisitions are really looking backwards rather than looking forward, and the numbers look a little bit better when you look backward.

I can imagine. Okay, thank you.

Bill Mackenzie, TD Newcrest.

Thanks. I guess first, Tony, maybe can you just give us a bit of an update on how the integration is going with Jacques Whitford and from an employee retention perspective how that's proceeding and culturally just how it feels at this point?

Well as much as you can say after two months, I think it's positive. I mean we thought it was going to be positive before. We're very pleased with the leadership team and we are kind of being a little cautious in terms of the actual integration and how we're doing it. We're taking our time to assess and evaluate any of the differences and things that could potentially be disruptive. So I would say because of the size and the scope and the impact that we are being perhaps a little more cautious than we have been in the past in terms of the integration plan. But on that basis, everything is going well and generally as we expected.

And sort of what point in the year would you expect to be kind of through the vast majority of the integration there?

Well not sure yet. We'll let you know at the end of the Q1 conference call. Because we're just going through that process. Matter of fact, the next meeting I have after the conference call is to discuss that specific schedule that you're asking for. So we are in the process of working that out and are not quite there yet.

Okay, great. And then just in terms of the headcount, you mentioned 500 employee reductions. Can you give us a little bit more color in terms of the geographic split in terms of Canada versus the US?

Yes, we are -- I'm going to guess, I think we're about 4,200, 4,300 in US and the balance in Canada. And that includes all staff including corporate and overhead staff.

And of the 500 that you're down on a net basis, what would be the split in terms of how much down in Canada versus how much down in the US?

It would be roughly 400 I think in the US, maybe 100 in Canada. The Canadian was really in the more recent one. But that's kind of the total number, four and one.

Okay. And then just one last question. In terms of looking at '09 in terms of sort of the growth outlook, acquisitions and versus organic growth, I just want to clarify what I thought you said earlier is the way we should be looking at it is sort of 15% acquisition growth, stable organic growth on the top line. Is that what I heard you say earlier?

Yes. Today if we had to give you our best guess, that's our best guess.

Great. Thanks.

Jeff Mull, Mar Investment Management.

Good afternoon, gentlemen. Just a question on the US northeast. A couple of years ago we were talking about how it was one of the weaker divisions with lower margins and so on. Is that still the case, especially since you've done several acquisitions there in the last two years?

The northeast, no. We have in fact, through a combination of the improvement of what we had and with the acquisitions that we did, so if you look at sort of New Jersey, New York and up, and including New England, we're okay. South of that, if you look at Mid-Atlantic being south of New Jersey, and the southeast and south, that hasn't improved.

Okay. And in terms of integrating offices there, are there still more opportunities?

Yes, it's an ongoing exercise. We have maybe a half a dozen or so still that we plan on doing this year. Some of the smaller offices. The majority are in the Mid-Atlantic and southeast and outside of the US. There's the odd one in the northeast because of some overlap with offices, but most of that reduction is there and we are looking at, with some of the slowdown that occurred like over the last two years in some of the markets, we are reassessing and reevaluating some markets that we were in where we just could not get to that kind of top tier position. And we're looking at two or three other offices that if the prospects all look like they're going to improve, we may close the office down even if we still have some lease obligations in that. But we would at least, we would eliminate the labor costs in that. So we're constantly reviewing each of our offices. And when you have a difficult sort of economy like this, we do tend to concentrate on the stronger areas and some of the weaker areas will suffer. But at the end of the day, we're going to be better off.

Okay, and in terms of your offices, or maybe on a percentage of revenue basis, how many offices would you say are below the sort of internal benchmark rates for the profit center?

Well that's a good question, but I'd say -- that fluctuates. Are you talking about perpetual problems or just short term problems? Some -- we really look at the issues as being more like sort of the habitual, serial non-performers, it's probably like 5% or less. But at any point in time there could be others and the number could be 15% or more. But we think we have action plans that could fix the problems.

Okay. And in terms of on a percentage of revenue basis, what percent of revenue would you say was coming from geographies where you weren't a top three player?

15% to 20%. It's a bit of a qualitative assessment in terms of where we think we are, but maybe 15% to 20% where it's more challenging for us.

Okay. And in terms of a target that's EBITDA for the end of the year if you don't make any more acquisitions?

By the end of '09?

Yes.

It will be less than 2 and it will be somewhere between 1.5 and 2.

Okay. And are you -- do you think in this environment you'll be able to get more bank line if you were to make another big acquisition if an opportunity came?

Well, if we needed it. But banks could change their mind. So far we would expect that if we had -- particularly if we had a specific use of proceeds, I don't know. I guess the bottom line is when you're in the courtship stage everybody tells you you can. When you actually go and apply, there may be a different answer. But we're not really looking right now.

Okay, that's fair. And the last question was just the covenants on the current debt.

What's the question?

Sorry, what are the covenants on the current line?

I don't believe we disclose the actual covenants. We do tell you that we are fully compliant with those covenants.

Okay. And are you moving closer or further away in this environment?

We don't have any specific concerns today about where we are with our covenants.

Okay, good. Thank you very much.

(Operator Instructions). Pierre Lacroix, Desjardins Securities.

Thank you. First question is on what would be the proportion of your US business that is public?

It would be currently -- it's pretty close to 50-- give or take five percentage points, about 50/50.

50/50?

Yes, it could be 45 public, be 45 to 50.

Mainly in Environmental and Transportation I guess?

It would be -- Transportation is like 100% and that business is biased to the US even though it's 14%, 15% of our business. The Environmental business is more like 50/50 between private and public. And there's actually some of what we now have Urban Land is public sector because we've been shifting some of those resources, almost half in the US in particular, like almost half that Urban Land business is in sort of nonresidential sites. And there's about half of that would be in the public side. There's a little bit in what you would call the industrial side where if you call sort of power authorities funded -- like agencies like the Tennessee Valley Authority. We kind of consider that almost public. So there's agencies that are not sort of straight in that private sector. It would be in that 45% plus public sector.

That's good information. Thank you. For now looking at -- in terms of margins when you do business with public or private, what kind of differential that you see in term of the level of margins you can get?

Well I think we talked about sort of margins in the past and although the gross margins will vary and in most -- if you wanted a general answer, is that in general the public sector gross margins are lower than the private sector gross margins? However, sort of the SG&A costs associated with generating those margins and the risk of non payments or write off of bills and things, stuff like that, also tends to be lower. So at the end of the day, if we manage the projects well, we can get to similar net margins in both private and public.

Okay, that was good, and one last question if I may. On the working capital, I just want to understand if there is any seasonality into this. I mean the end of the year you saw the non cash working capital going up like CAD60 million to CAD70 million in the fourth quarter. So what kind of seasonality do we have to look for there and any kind of reversal expected in early 2009?

I don't think, Pierre, that there is any real trends that you can draw any conclusions from on the seasonality. Our working capital, our current ratio is a little higher because we had cash at the end of the year for in anticipation of the Jacques closing and payroll that we paid first part of January. But nothing that I think you can draw any conclusions from.

Okay, that's useful information. Okay, thank you very much, guys,

Ben Cherniavsky, Raymond James.

Good afternoon, guys. I realize that someone already asked for clarification on this point, but I'm still not entirely clear. You guys are forecasting 0% or flattish growth organically. And then are you saying 15% growth from your past acquisitions or do you think you can add another 15% growth from future acquisitions?

No, past. Things we've done like Jacques Whitford being the main one and there was McIntosh and there's a little bit from RHL which was done not -- it was done like three or four months there, there's a couple of months in Secor. It's basically what we have done already.

Okay, so that will get you to 15% growth for the year if organic is flat. If organic is down, then you might do 5% or 10%?

That's correct.

Okay. And another point of clarification on SG&A. Was there anything in the fourth quarter that was related to integration or legal costs particularly with Jacques Whitford being a fairly sizeable acquisition?

There wasn't integration kind of related costs. We obviously spent a little bit more on outside fees and things and stuff like that. Would it be material? If you're talking CAD300,000 or CAD400,000 and sort of one-time costs associated with that.

That's going back to a question that was already asked, but it struck me that SG&A particularly in the fourth quarter was high both in the number and as a percent of sales. I mean, what can we -- how can we expect that to level off for '09?

Well not having any of these one-time things that we had like -- I have a list here --

I'm just trying to get a sense of how, like how all these one-time things --

I can give you a list, when you look at all the items that -- we had maybe, probably half a point on the marketing and admin related activities that because you're trying to generate a little bit more business and stuff like that, you're likely to have a little bit more activity on stuff like that. As I said, we have --

You mean because it's not -- it's more competitive you're suggesting?

Well in that particular quarter. Like I said, I wouldn't necessarily, like we said before, read a trend, but certainly in the fourth quarter there was a number of these kind of one -- not necessarily one-time, but there were kind of changes from some of the trending that we had in the rest of the year. So, but if you look at it overall, even with the changes we were still a little below where we were in 2007. It was only a half a point, but we were averaging a couple of points up until the end of the fourth quarter. So we also did the five integrations, we were completing some of that work. And I mentioned the increased admin and marketing costs. So are they all one-time costs? The claim certainly is which was the single biggest item that was one-time. And the rest we think as we've indicated that we can continue on that sort of path that we were last year and I think we can be in the same range as we were in the first, second, third quarter in '08.

As a percent of sales?

As a percent of sales, yes.

Okay, great. Thanks a lot.

Paul Lechem, CIBC World Markets.

Good afternoon. The question is, would be relative to gross margin and you're guiding down a little bit for '09 versus '08 in terms of your guidance range. But still when I look back historically in maybe weaker times the gross margin was even lower than the guidance range. Back in the early 2000s it was sort of 53% and before, in the late 90s, it was 51%, 52%. So even 54% to 56% still seems strong compared to historical levels. So is there something fundamentally different about the business going through this downturn than it has in past? Or could the margin revisit those kind of levels that we saw historically?

Oh, we expect it to. We think we're better now than we were before. I think we've indicated that one of the items that impacts gross margin is two factors. One is the actual fee that you charge the client for it. And obviously if the fee is going up, then the gross margin will go up. But the second component is how well you manage the project in terms of the hours that you put on it in terms of within scope. So that if we write down any work in progress in terms of number of hours that are charged to a project that we can't bill, that's reflected in the gross margin numbers. And in 2003, part of the implementation of the enterprise system and then the business intelligence tools that we used, as we implemented the system, we got better at managing our gross margin. And that's why the gross margin went up. It wasn't all because the rates were being charged were better during good times. I think we've indicated before that in our business that the increase in the margins due to maybe being able to get better rates, at best would have accounted for half of the increase in the approved margin. But the other half was due to better project control. So the project control part stayed and the portion that was related to the fees, yes, some of the fees will go down and that's reflected in that 1% or so that we see occurring right now. Could it be a little bit more than that? Yes, but it's not likely going to be 3%. It could be another point as worst case scenario if rates really change.

We also, in addition to the systems things that we did in December we reported our quality assurance, quality control processes like the entire company is now ISO9001 certified. So our systems, processes, ways that we do work and maintain quality on jobs is improved. So we have a higher confidence in our ability to maintain those margins.

Thanks. And last question revolves around lay-offs. I guess -- how much can you cut before you start getting into sort of the fixed versus variable cost issue in terms of -- is it-- can you continue to cut for a little bit before you start running into issues of you're not going to start getting returns from cutting anymore?

Our expectation is that, in rough numbers because we have done some sensitivity analysis and have run some scenarios as to what happens if certain things are there, it's probably about a 10% reduction in revenues is where sort of that point starts to shift.

Okay, great. Thank you very much.

Thank you and I'll now turn things back over to Mr. Franceschini.

It looks like there are no more questions, so once again, we'd like to thank you for joining us today and I certainly look forward to speaking with you again for my last conference call for Q1 of '09. So thank you very much. We're going to sign off.

Ladies and gentlemen, this does conclude the conference call for today. We'd like to thank you for your participation. You may now have your lines disconnected and have a great rest of the day.