Stantec Inc (STN) 2011 Q4 法說會逐字稿

Welcome to Stantec Inc.'s fourth-quarter 2011 and yea- end earnings results conference call. With us today from Stantec management are Mr. Robert Gomes, President and Chief Executive Officer; and Mr. Dan Lefaivre, Chief Financial Officer. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, today is February 23, 2012, and this conference call is being recorded as well as broadcast live over the Internet. It will be archived for future reference at Stantec.com under the Investors section; therefore, any members of the media who are joining the call today in a listen-only mode and who wish to quote anyone other than Mr. Robert Gomes or Mr. Dan Lefaivre, are asked to please request permission to do so from the individual concerned. Before the call begins, there are a few words from Investor Relations.

Thank you, Valerie. Before the call begins, Stantec management would like to make you aware of its Safe Harbor statement and to caution you that it will be making 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 Stantec management to make assumptions and are subject to inherent risks and uncertainties that give rise to the possibility that Stantec's estimates, projections, expectations, or conclusions will not prove to be accurate, that its assumptions may not be correct, and that its actual results may differ materially from those discussed in these statements.

In addition, Stantec management will be mentioning non-IFRS measures. You will find descriptions of non-IFRS measures and their use, as well as more 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 in the Management's Discussion and Analysis included in Stantec's 2011 financial review. It's now my pleasure to introduce your host, Mr. Robert Gomes. Please go ahead.

Thanks, Crystal. Good afternoon, everyone, and welcome to our 2011 fourth-quarter and annual results conference call. Dan will provide a brief summary of our results for the quarter and year, and I will follow with an outline of our market outlook. We will then address individual questions. This morning we released the results of Stantec's operations for the full year of 2011.

I am pleased to report that we improved our operating performance and expanded our operations in key markets while maintaining a focus on our long-term strategy. In a challenging economic environment, we ended the year with a strong balance sheet and cash flow leaving us well positioned to support our future organic and acquisition growth. Our success was largely due to our relationships with our clients who continue to entrust us with their projects in a difficult economy. Dan will now provide a more in-depth review of our year-end and fourth-quarter financial results. Dan?

Thank you, Bob. Good afternoon, everyone. As Bob just indicated, the fourth quarter of 2011 showed positive operational performance for Stantec. Now looking at that operating performance, our gross revenue increased 12.6% in Q4, '11 to CAD432 million from CAD384 million in Q4, '10. Approximately CAD38 million of this increase resulted from acquisitions completed in 2011 and 2010 and CAD8 million resulted from organic growth. Our organic growth in Q3 and Q4 was approximately 2%, which was in line with our target and reflects a positive swing in the second half of 2011.

On a full-year basis, gross revenue increased 11.3% year over year to CAD1.7 billion compared to CAD1.5 billion in 2010. Our year-to-date organic growth was affected by a softening of the healthcare and higher education markets in our Buildings practice area. Our Canadian and international operations, however, had positive organic growth in 2011, primarily due to increased activity in the oil and gas and mining sectors. In the US, our organic revenue remained essentially flat in 2011. Our net revenue was also up 12% to CAD348 million in Q4, '11 from CAD311 million Q4, '10. On a full-year basis net revenue increased 12.4% to CAD1.4 billion in 2011 from CAD1.2 billion in 2010.

Our gross margins as a percentage of net revenue was 55.1% in Q4, '11, versus 57.1% in Q4, '10. On a full-year basis, our gross margin declined slightly to 55.4% from 56.1% in 2010 and remained within our targeted range. Our Buildings gross margin decreased due to the mix of projects in progress during the year, the softening of the Buildings market, and revisions made to our estimated cost to complete on certain large projects that we talked about in the third quarter. Our administrative and marketing expenses for Q4, '11 were 41.5% of net revenue reduced from 43% in Q4, '10. For 2011, our overall marketing and administrative expenses as a percentage of net revenue were reduced to 41% from 41.7% in 2010, primarily due to fewer integration activities from acquisitions.

Due to strong operational performance, we achieved a 5.3% increase in EBITDA to CAD196 million from CAD185 million in 2010. In the fourth quarter, we performed our annual goodwill impairment test. Due to market fluctuations, our share price of October 1, 2011 had decreased, which adversely impacted our market capitalization. In addition, the short-term performance of our US and international operations, while overall profitable, was weaker than expected due to ongoing challenging economic conditions. Considering these three factors and their impact on the results of our goodwill impairment tests, at October 1, we concluded that goodwill was impaired, which resulted in a CAD90 million impairment charge to income in the fourth quarter. This charge is non-cash in nature and does not affect our liquidity, our cash flow from operating activities, debt covenants, business operations, or our recent dividend announcement.

Despite this point-in-time goodwill accounting charge, our investments over the past five years have positioned us to benefit from an overall improving economy. Our net income for 2011 was CAD12.7 million and diluted earnings per share were CAD0.28. Excluding the impact of the goodwill charge we just talked about, our net income increased 8.4% year over year to CAD102 million from CAD95 million and diluted earnings per share increased 9.2% to CAD2.25 from CAD2.06. Our cash flows from operating activities increased in 2011 to approximately CAD115 million. Our asset management in Q4 was strong, resulting in an improvement in our days sales outstanding from -- or to 92 days from 100 days in Q3.

Finally, subsequent to year end, we declared a quarterly dividend of CAD0.15 per share payable on April 17, 2012, to shareholders of record on March 30, 2012. In just a moment, Bob will provide additional insight on this development. Overall, we continue to manage our business effectively despite the ongoing challenging, but yet improving, economic environment. Back to you, Bob.

Thanks, Dan. Before I proceed, I would like to address the news we released last week and which Dan briefly mentioned at the end of his update. As a result of our detailed strategic planning completed last fall and our long-term strategy for continued expansion of our services and geography, we have implemented a dividend policy at Stantec. Our board of directors approved this policy and concurrently declared the first dividend payable in April, which is evidence of our demonstrated ability to generate ongoing cash flow from operations, continue to grow revenue, and to complete strategic acquisitions while providing enhanced shareholder returns.

I would now like to outline some of the progress we made towards our strategic objectives in 2011. First, we continue to successfully adapt our business model to match evolving market conditions. We achieved positive organic revenue growth in our Industrial, Transportation, and Urban Land practice areas; and gain considerable momentum in the second half of 2011 with positive organic growth in line with our targets, despite challenging market conditions. The Environment practice area experienced a small decline in organic growth year over year, primarily from a reduction of pass-through consultant costs and a reduction or postponement of work from large scale projects in 2010.

We did, however, see positive organic growth in our Environment practice area in the fourth quarter. The decline in the Buildings practice area is largely attributed to softened market conditions in the US, United Kingdom, and UAE; however, we saw an increase in our backlog in Q4 in Canada and in India. We achieved acquisition growth in all of our practice areas throughout 2011, which supported our geographic reach and ability to service clients throughout North America and internationally. Secondly, we sustained our record of profitability in 2011. At year end, our revenue, income, and earnings increased overall. This solid performance has resulted in our 58th year of uninterrupted profitability. Excluding the impact of the goodwill charge, our net income as percentage of net revenue would have been 7.4% in 2011 compared to 7.7% in 2010, which demonstrates the relatively consistent performance of our operation despite the competitive market and challenging economic environment.

Additionally, our backlog increased to CAD1.1 billion in Q4, '11 from CAD1 billion in Q4, '10 representing eight months of trailing gross revenue. This represents the confidence we are seeing in some of our markets as well as growth from acquisitions, which is resulting in new and continuing projects. Our backlog decreased CAD59 million from last quarter, however approximately one-quarter of this decrease is due to foreign exchange, and the remainder is due to a small decline in the backlog of our Environmental and Industrial practice areas. Backlog in these practice areas was affected by certain projects in the oil and gas sector experiencing delays and obtaining notices to proceed from our clients; however, we are confident that these projects will continue in 2012.

Thirdly, we completed the acquisitions of five companies in 2011 including QuadraTec, Caltech, Bonestroo, FSC Architects, and ENTRAN. These firms added more than 700 staff and strengthen our presence in the US Midwest and Southeast. Additionally, operations also expanded to all Canadian provinces and territories, giving us a local presence in the resource-rich high north. The combination of added resources and talent supports our long-term strategy of providing integrated services to our clients, which results in growth.

I would now like to highlight some of the current projects that reflect our ability to provide integrated services as One Team working across North America and internationally. Utilizing a One Team approach from multiple offices on both sides of the Canadian and US border, our Buildings and Urban Land practice areas are illustrating their ability to cross sell by providing multidisciplinary services in the commercial sector for retailer Target with the rollout of its stores in the Canadian marketplace. Staff in more than a dozen offices from our Environmental Services group are providing a variety of environmental compliance and regulatory support services to Talisman, energy for its oil and unconventional gas sites in Pennsylvania, New York, and Texas.

Approximately 45 staff are providing services for a newly secured long-term project with the US Department of Transportation to provide the Federal Highway Administration with technical services in Canada and the United States. This project supports the development and maintenance of the long-term pavement performance program established under the Strategic Highway Research Program. Collaboration of our Urban Land and Environment practice areas led to securing a new park and open space facilities design project at the Sydney Tar Ponds site located on more than 90 hectares, 225 acres, of formal industrial property in Sydney, Nova Scotia. Our Industrial practice area working with Inter Pipeline Fund on the Polaris pipeline expansions and Cold Lake pipeline system projects in Alberta.

Stantec began working with IPF in late 2010 and is now entering a long-term agreement to provide services on IPF projects as the Company expands their pipeline systems. Outside North America, along with our Chilean partner, we were selected to design the new Santiago, Chile, International Airport terminal, which is a collaborative effort with staff from offices on both sides of the Canadian and US border. Our Buildings and Transportation practice areas are providing architecture, civil engineering, and baggage system design services for this facility. This is only a very small sample of the projects we are working on, but showcases our ability to cross sell services in order to provide integrated solutions for clients in diverse market sectors.

Now I would like to comment briefly on potential market conditions going forward. Overall, the outlook for 2012 is a moderate increase in organic revenue. We expect a gradual revenue increase with continued strength in the Canadian economy and stability with signs of recovery in the US economy. Moving into 2012, we will continue to focus on operational excellence by developing broader long-term relationships with our clients, obtaining larger long-term contracts, and increasing our backlog while managing our business effectively. Looking at our individual practice areas, we expect the following for 2012. We believe that the outlook for our Buildings practice area is stable for 2012.

We made a significant investment in 2010 to further strengthen our capabilities. We integrated these acquisitions in 2011, and they're more geographically diverse to take advantage of market opportunities. The combined addition and integration of Anshen + Allen, Burt Hill, and Calmarts has positioned our Buildings group as one of the top integrated buildings design practices in the industry. We will remain focused on the higher education and healthcare sectors in the United States and internationally in 2012. Additionally, we are well positioned to secure significant project opportunities this year in the growing commercial market because of our range of services and wide geographic reach. We expect that we will continue to secure emerging P3 opportunities in Canada and internationally. We expect to achieve stable to moderate organic growth in our Environment practice area in 2012. While new developments in the water sector remain essentially flat in 2011 with municipal budget constraints, investment continues to support maintenance and upgrades of treatment facilities to meet regulatory requirements.

They're also seeing growing opportunities for a water group and industrial applications specifically in mining and oil sands tailings bond treatment. Having fully matured in the integration of our Environmental Services practice over the past three years, we believe that we are well positioned to secure opportunities resulting from an increasingly stringent regulatory environment. By leveraging relationships and cross selling services to large-scale clients in 2012, we will further expand our practice area into new geographic locations while taking advantage of opportunities in a recovering US economy.

We anticipate moderate organic growth in our Industrial practice area in 2012. In 2011, organic growth of this practice area was largely fueled by increased activity in the mining and oil and gas sectors, including continued work for several of the world's largest mining companies. Commodity prices are expected to remain strong this year, which we believe will encourage further capital spending with our private sector clients. We expect robust activity in the mining and oil and gas sectors, supported by our continued growth in other sectors in this practice area, including power and large-scale maintenance and upgrade facilities. We believe our Industrial practice is well positioned to take advantage of these market conditions while maintaining a focus on growth through relationships with global and industrial clients.

We expect to achieve stable to moderate organic growth in our Transportation practice area in 2012. Our Transportation practice experienced organic growth in 2011, due to a steady stream of projects in the US and Canada. We expect our Rail and Transit groups to maintain similar activity levels during 2012. We remain cautious as decreasing tax revenues, efforts to reduce state and provincial deficits, and continued uncertainty in the long-term funding may continue to cause delays in some planned transportation projects. However, we see activity in Canada's P3 market along with increased opportunity in the US design build market. The general look for our Urban Land practice area shows stable to moderate organic growth in 2012. The economic recovery in the US is expected to be slow, which will have little positive impact in the residential housing sector while the Canadian market will likely remain reasonably steady.

We have developed a stronger presence in the redevelopment and urban planning within the public sector, which continues to provide us new opportunities. In 2012, we expect to continue diversifying our client base, building and leveraging our reputation with the public sector, and focusing on relationships with larger clients who require more complex services and benefit from a One Team approach. Overall, we believe that our outlook for 2012 is a moderate increase in organic revenue with a targeted 2% to 3% increase from 2011 in regions and practice areas where we are top-tier service provider. We are still experiencing a challenging economic environment, which appears to be slowly improving. However, we believe that our diversity of operations, clients, and organizational flexibility will adapt our business to the changing economic conditions and positions us well for growth in a very large infrastructure and facilities market.

The outlook for our international operations in 2012 is stable compared to 2011. This geographic region represents a small percentage of our business with the majority of the work falling within our Buildings practice area. The outlook for the United States in 2012 is stable compared to 2011. However, we are excited to take advantage of the tail winds of our strong US presence to increase our business as the economy shows signs of improving. Finally, the outlook for Canada in 2011 is moderate growth, and we expect to see good performance in many of our Canadian operations.

We continue to maintain a top-tier position as one of the largest firms in our space and are well positioned to take advantage of an improving economy. The last three years have been an interesting for our Company. We continue to grow our business and execute our strategy in some of the most difficult economic conditions our industry has faced. During this time, we continue to expand our foundation of diverse services and geographic presence while still producing income and performance at the top of our industry. We are excited in the opportunity this solid foundation will offer us in what we see is an economy position to take advantage of a strong commodity market and an unprecedented need for the infrastructure investment. The ability to continue to acquire strong companies that add to our expertise in geography and our ability to service our clients has never been more robust.

We are excited to continue to execute our strategy of adding firms to the Stantec One Team; and, with our recently implemented dividend policy, we will be able to continue this strategy of building shareholder value while directly sharing our continued strong performance with our loyal shareholders. This concludes our comments for today. Dan and I are now available to answer any questions you may have. The conference call operator will explain the question procedure.

Thank you, gentlemen.

(Operator Instructions)

And our first question comes from Michael Tupholme of TD Securities. Please go ahead.

Thanks, good afternoon.

Hi, Michael.

First question relates to the goodwill impairment. I was wondering if you can tell me how much of a factor your stock price played in determining the need to take the charge, and what the result would have been of that test, if it would have been dramatically different if you had performed it later in the year?

Good question, Michael, Dan here. The market valuation had a material impact on the goodwill valuation test. It is a point-in-time test. You cannot use backward-looking information or forward-looking information, it is at a point in time. That did have a material impact on the test. As we indicated as well, the short-term performance of our US and international operations, although positive, did not meet our forecast expectations. And especially in the international practice, we were starting from a lower base, which then when you do your discount of cash-flow analysis going forward, you have a more difficult hurdle to get over. So, really, it was a combination of certainly the market valuation with the control premiums that were in place at that point in time, plus the short-term performance of those two operations.

So just to be clear. In terms of -- because you gave some detailed disclosure in your MD&A in the notes about the test. But the market price, that is a -- that determines or has a role to play in determining the discount rate and that's how it factors into this?

It certainly has a role to play in the valuation -- the fair value of our operations. You have to look at what the control premium would be when you assess the fair value of the operations, and that certainly had a big impact on it.

Okay. And you mentioned it's a point-in-time test, so when you talk about international and the US, you are looking at information that was available to you as of October 1, so specifically the Q3 data, or was there any ability to use Q4 information there?

It's certainly again as of October 1. But in terms of our forecast assumptions, we used our 2012 budgets as well as longer-term five-year forecast that you then discount to arrive at your fair value for those operations. So there are a lot of estimates that go into it. Discount rate's a part of it. Your growth rates, your operating -- projected operating performance are all factors that weigh into the fair-value calculations for each of the operating units.

Okay. Thanks. Next question relates to the Buildings practice area. Organic growth in 2012 was fairly weak in that area. It's the one practice area where you're not contemplating at least the possibility of some growth in 2012. Can you talk a little bit about what you are seeing in the healthcare and the higher education markets as you look forward and maybe about the ramp-up you expect in the year? Is this a situation where we start out with lower growth or negative growth, but by the end of the year we could expect some positive growth?

I would -- Michael, Bob here, definitely I see it increasing throughout the year, and actually we are getting some very promising information out of the US; and actually Dan and I are in California right now, we had our board meeting. And we are seeing some increased activity here for whatever reason in both healthcare and higher ed. That being said, we still have to win some of those projects, but we are certainly seeing increased activity and opportunities. So even though we've said stable, that was certainly what our projection is, but we see opportunities and we're very confident that group is going to have a better year this year than last year. But it really is going to be how significant our opportunities are going to build in the US and how quickly. But we do see some positive signs down here, certainly.

Okay. And then just one more for me. Gross margins in the industrial practice area were down. You mentioned competition. Can you talk about the competitive landscape there? Obviously very strong organic growth, but as far as competition, what you are seeing and what your outlook is for margins in 2012 in that area.

Our margins that were slightly lower in our industrial group, also had -- was impacted by the fact that we are just bidding on some much larger projects and longer-term projects, Some mining and oil and gas projects that are lasting three to five years. When you do that, you tend to have lower margins, but you also have then correspondingly lower SG&A costs because you don't have the marketing costs associated with replenishing that large project. Certainly there is increased competition, there is no doubt about that. Increased competition in our viewpoint really doesn't drive down margins significantly.

What it does is just make it more difficult to win a job because you just got more people to bid against. We find that most of the companies that we are competing against have a very similar model. Nobody is out there buying projects at this point in time. So that decrease in the gross margin had more to do with the type of projects we had rather than the competitive landscape, albeit the competitive landscape impacts your ability of winning projects. So it's certainly getting busy in Alberta and in western Canada and in, especially, the mining business. But we have a really good foundation there and really good client relationships. So we are pretty comfortable where we are in the Industrial group and great opportunities there.

Okay, thanks. That's all for me. Thank you.

Thank you.

Thank you. And our next question comes from Bert Powell of BMO Capital Markets. Please go ahead.

Thanks, Bob. In your press release you talk about an account management program designed to increase the number of top clients. And you also mentioned you are considering alternative funding strategies to cultivate growth. And I'm just wondering if you could maybe elaborate a little bit on what you mean by that.

That would be alternative funding from a client perspective. Clients that are -- and really the alternative project delivery, some P3s and others, design build. It's that type of tendency of maybe alternative project delivery that I think we are focused on there.

Okay.

We are certainly not looking at alternative funding arrangements. We are simply still in the consulting business, but our clients are getting very creative. They are looking for partnerships between contractors and engineers in the design build world to come forward and certainly we are seeing many more of those opportunities as well.

Have you seen -- okay, so thanks for that. Have you seen -- P3 seems to have a little bit better traction in Canada. Is there anything -- and the US has been a little bit later to that. Is there anything changing from your perspective there? Is it still a bit of a tough go in the P3 in the US?

Well, the desire and the need are certainly here in the US. The focus is there. That is a word that is brought up at every meeting we have in the United States. There are a number of P3s. Much larger ones that were looking at a high-speed rail here in California, for example, that has been talked about. But they are just the structure of P3s in the United States is, I would say, still in the exploratory stage.

They don't have some very key elements that Canada -- the Canadian projects has. We think that will work out with time. That as the need continues, I think the US will get it figured out. It's a very politically charged environment in the US P3 world, which causes it to have just a lot of noise and uncertainty, whereas in Canada, I think they have taken the politics out of the process and have a very clear structure for defining a P3, defining how it's executed, and award it whereas in the United States that certainty is not there. But we are chasing P3s in California, in New York, in Florida, in the Carolinas.

But those are more one-offs rather than a clear program. But it shows that they are trying. It shows that the interest is there and certainly the need is there. So we are pretty comfortable that we are at the cutting edge in the United States when it comes to the P3s. We offer an awful lot of strategy and advice to our partners, and we are -- certainly are seeing we are a sought-after partner for some of these bigger P3s; but time will tell if they actually come to fruition.

Okay. So there is no sea change that is happening that should drive growth as the market looks to the public -- private sector for funding that's going on here?

Well, certainly, like I said, there are some opportunities in the design build space, that's happening. But I don't think it's going to be hugely significant this year. It's certainly is providing some interesting opportunities down the road.

Okay. And just last question. Just can you give me a sense in terms of your total gross revenue right now, how much of that is related or directly related to oil and gas and mining? It seems to be a pretty universal theme throughout your fourth-quarter results.

I'd say, off the top of my head I don't have that right in front of me. Oil and gas -- total, oil and gas both environmental, industrial was approximately around 16%, I would say. And for mining, my guess now is mining is creeping up to the 8% or 9% overall for revenues in overall in the Company.

Perfect. Thank you.

Thank you.

(Operator Instructions)

Our next question comes from John Rogers of Davidson. Please go ahead.

Good afternoon.

Hi, John.

Could you talk a little bit about the seasonality you expect to see this year in 2012. Bob, you mentioned the timing of some of your oil sands work being delayed, and I'm just trying to think about how that is going to play out through the year. And I guess also, Dan, I'm not sure if you mentioned it, the tax rate for the year.

I will deal with the seasonality first. Seasonality and also what we saw was just a bit of a delay in getting projects moving to the notice to proceed stage in our Industrial and specifically oil and gas. And I've said it many times, the oil and gas sector is a very difficult one to read. We've won some very significant projects in both oil and gas and mining, signed contracts, but the notice to proceeds were dragging. We are seeing a turnaround of that just actually recently. Maybe whenever oil goes over CAD100 a barrel, it seems to get their interest. But certainly in December, we saw a lag of actually having those projects move into real backlog into a notice to proceed.

From a seasonality perspective, yes, we do have significant operations in both Urban Land and in Environmental that are affected by weather, and therefore, the seasonality ramps up in about April -- March and April. We don't see that changing from past years though. Our mix is pretty much the same. So the only thing that's going to impact us, and it appeared it was going to impact us, was just some of the delay of the projects in oil and gas. But actually just in the last couple of weeks, we've seen that release. So it shouldn't have an huge impact on us this year. And, Dan, you have tax rate?

John, with respect to the tax rate, we are forecasting a rate around 28.5% for 2012. We are seeing some lower legislative rates in Canada and that'd be offset by expected higher earnings in the US.

Okay. Great. Thank you.

Thanks, John.

Thank you. And our next question comes from Sara O'Brien of RBC Capital Markets. Please go ahead.

Hi. I'm just wondering how much flexibility did you have for the date of your goodwill impairment assessment? I just wonder if it wasn't something you could have pushed back to the year end to kind of avoid the noise.

Yes, Sarah, this was a conscious decision that was made if you recall. Previously we had made the decision to do our goodwill impairment tests as at July 1.

Yes.

But given the transition to IFRS over the last two years, we had done three or four or five impairment tests throughout that whole transition, both under Canadian GAAP and under IFRS. One of the things we considered as we were then setting our target date or the date to have to do this test was, we had additional information in the fourth quarter at our October 1, we will have completed the first round of our strategic planning with the board. We would have had our first cut at our budgets for 2012. So we had better information at that point in time so that was the decision that was made.

You have to do it at least annually. And it also -- one other thing, acquisitions later in the year would force companies to do an additional test if there was a material acquisition later in the year. So all of those factors combined is where the conscious decision was made to do it at October 1. The fact that the external markets weren't cooperating is out of our control. But it was a factor for sure.

But -- so you didn't have the ability to move it from October 1 to, say, December 31 once you were in Q4?

No. That decision had already been made and so that effective date was the date.

Okay. And maybe just because you commented that strategic planning had been done and the board had looked at budgets, could we anticipate then that the 2% to 3% organic growth is kind of conservative given the signs you are seeing in the US economy now?

You'd always like to say that you're going to put a budget in front of the Company that is going to stretch people and push them. We are still comfortable at 2% to 3%. If the lot of the opportunities -- there is an awful lot of noise still in the United States. I think there is just an awful lot of hope that the economy really is going to recover. Let's give it a quarter or two and see what actually happens here in the US. But certainly with the opportunities we are seeing, 2% to 3% should be something we should be able to achieve comfortably.

Okay. And maybe just on the margin, just wondering you talked a little bit about alternative project delivery. If we get into more P3s or design build, does that put pressure on your margin just because typically you get the push down impact from the fixed bidder, if you like? Is that something that you expect to see going forward or is it not material enough to make a difference?

I will go with, it's not material enough to make a difference. You never want to minimize the fact that you are working with a partner and you've got to give them the best price and best deal possible. However, our involvement in a P3 is really critical in the overall team successfully executing a project, and our impact in the overall capital costs and our impact in the OEM costs has a huge impact on the success of the team.

What we are finding is our good partners, our partners that understand that, really want us to work hard at developing the best strategy for winning the project. And if they are willing to pay a little extra for it because I think they see the value in it. So I don't see a huge significant margin impression there, it's more of an execution. They are fast-moving jobs, extremely fast-moving, very complex projects. And that probably has more as that execution issue is probably more of a concern than really getting margin push down pressure from our partners.

Okay. And then if we just circle back to consolidated EBITDA margin for the Company, is there any reason to expect that it should change materially from where it is now? It's been pretty steady but with a slight decline this year, just wondering if there is any pressure that you are seeing competitively or otherwise that would change that?

No. Again, we don't see our gross margin going down. We see our SG&A costs, we have been tight with them. That all translates to a pretty consistent net income line. So we don't see that changing significantly at all.

And EBITDA line.

And EBITDA line, yes.

Okay. Great. Thanks.

Thanks, Sara.

Thank you. And our next question comes from Tahira Afzal of KeyBanc. Please go ahead.

Good afternoon, gentlemen.

Hi, Tahira.

A couple of -- a lot of my questions have been answered. I did have a couple more. As you said, there seems to be a bit of a hope trade at least in the US on the non-Res side. And so just wanted to get a sense. It seems your outlook on the US is still sort of a little cautious. Fundamentally it seems that might be driven partly as you are seeing some project and them coming up, but you don't know in terms of timing, duration, whether they're going to fall through. Any color you can provide on how cautious you are being this year versus last year? Is there any incremental change in terms of your outlook? Was it around this time of the year last year when you were giving your outlook on the US?

Well, if we turn the clock back 12 months and say, are we more optimistic today about the US economy than last year? Absolutely. We are. It's just been a tough three years. And I think everyone -- you've just got to be worried that is that optimism being driven by just the frustration and nothing happening? Or is it really finally we are seeing enough of a positive influence in the US?

I think here in the US as you know, Tahira, that because of the political environment, not much is going to happen this year. And I think that's causing some frustration and some people are just running out of time and saying, let's go ahead with our projects. We are seeing here -- we are in California right now and what we are seeing is funding is starting to become very specific. And because of the lack of other funding coming forward, we are seeing some very special builds come forward and within counties -- we are in Orange County right now. That it is funding very specific pieces of infrastructure.

So we were starting to see that move where this -- where that was not happening last year, at least not to this degree. So I'd have to say we're much more optimistic this year because there's many more signs and we are actually seeing some realities of some of those signs. But you still have to be somewhat cautious that there is not a lot of extra funding out there. So this is really just a pent-up demand I think of some necessary infrastructure going ahead, and we are seeing that all through the United States, very optimistically. Dan?

And in addition, there is still the macro economic concerns that are out there that we don't know what's going to happen with the EU. Although we don't have direct exposure to it, it could have a trigger effect for other economies. So that's also an overriding cautiousness.

That's what we always say is, we just wish people would stop reading the papers about Greece and just focus on the builds that's in front of them.

Yes. I'd probably agree with you there. We've basically seen something similar to what you are seeing across several industries. We've had utilities come back and say they're not going to wait until more certainty around elections and really going to go ahead with the CapEx plans right now because it's getting late. So it seems like a lot of the deferred spending decisions have started to be made, and let's assume that is the case. Have you tried to size up the potential upside to your outlook? Let's say if things in the US do work out, just from a year's perspective or two years' perspective.

No. If you are looking at, have we looked at what the upside of all this could be, we're probably more focused on trying to stay close to what our clients want to do and win those jobs rather than try to predict how good could this get. Let's stay focused on what is in front of us and the clients that we have. So, no, I can just say that if everything comes through and clients actually continue to push projects forward as fast as they have in the last six weeks, it could be an interesting year in the United States.

Got it. Okay. And a last question is around the Urban Land business. Again, when I look at our internal forecast, at least within KeyBanc, a very bearish home-building analyst for the first time fundamentally seems to be turning positive. I know it's a business that you have sort of rationalized over the cycle when the cycle turns. But how fast do you think that could come back for you, and how fast do you think you could ramp up in the US if you see that opportunity given that you have been here before?

Well, the first question is a harder one to answer because we're not sure how fast that is going to recover. I really don't see it making a significant comeback in 2012. There is a better chance of that maybe in 2013, and I think even a better chance in 2014. I think we were looking at still a two- to three-year slow increase of that business, but I have been wrong before in that business. It does -- when it does ramp up, it ramps up quickly. It's a very what I'd call emotional market because you are talking about people buying homes, and that changes very quickly. They get comfort in the economy, comfort with their job, they immediately start going and buying houses and that tends to create that frenzy.

So we don't see that happening in the next year or two, but when it does, it ramps up very quickly. Our ability to ramp up in that business is what we believe to be one of our biggest differentiators and advantages because we have the core of staff that are here that understand the business. We have the client relationships. So in the United States we are very, very well positioned. And you can hire staff then to do the drafting, to do the design. What you need is those senior project managers and client managers, which we've kept and we have them in not only Urban Land group, we have them in our Environmental group and in our Transportation group. And so fundamentally we feel that's a huge differentiator for us.

In Canada, different story, we're starting to see that ramp up now; with -- especially in Alberta, with the oil sands and with oil being over CAD100 a barrel, that creates the need for jobs, it creates the need for people moving to Alberta which creates the need for housing development. So we are starting to see signs. We've returned in Canada to our 2007 levels for urban land. The height was 2005 and 2006 Not sure we will get it back to that, but 2007, we're back to those levels in Canada. So that certainly helped recover our Urban Land business, and we are showing some good organic growth there this year.

Got it. If you had to pinpoint -- if you had to say there is one area specifically where you saw a faster recovery, possibly if the macroeconomic outlook in North America improves, would you say it's urban land?

Well, I think -- certainly urban land has an interesting factor to it, but there is still a lot of inventory out there. I think if the economy settles down and if the funding issue in the United States has some visibility to it, I think transportation is an area that is still just a huge need for investment in the United States, and for Canada for that matter. And that is still, I think, one of the biggest areas only because there has been so little investment in the last three or four years. And such a huge deterioration of that infrastructure that, once there is comfort in the economy and funding returns, that could be big.

And water, same thing, water is a very similar thing, it's affected by funding. There's been very little expansion of water facilities. Minimal regulatory increases. Once funding is resolved, which I think is going to be tied to a recovering economy, I think you're going to see both those areas grow significantly.

Great. That is very helpful. Thank you very much.

You're welcome, Tahira.

Thank you. Ladies and gentlemen, our next question comes from Paul Lechem of CIBC. Please go ahead.

Thank you. Good afternoon.

Good afternoon, Paul.

On the -- in the Buildings practice you mentioned again there was some costs overruns or free forecast or something along those lines in the course. Could you give us some sense of the magnitude of that, and also how do you get these kind of cost overruns? What are they related to and when do you feel that you will be through them?

It's not really cost overruns. What I'd ration and what I'd characterize them as is these again are on P3 projects, which I've always said are very fast-moving projects. They are projects that you literally the words are you do whatever it takes to get it done, and you are working with partners, you're building to basically a performance specification. So there is unknowns in that type of project and unknowns with regards to the amount of effort that you're going to have to put in to get the job done. It's not like a project that you work for a Department of Transportation or you're working for a health authority, you are working for a contractor. So much -- a lot of moving parts in those projects.

So what we do is we -- at certain points of the projects, we will basically normalize what our gross margin is on the job. And on those projects, what we realized is the gross margin normalizing the job was going to be lower, so we do that now and that causes an impact in your revenue recognition. So it was more of that fact than it wasn't an overrun or a write-off. We are still making money on those jobs, we're still making very acceptable profit on those jobs. It's just not as much as we thought when we first started them, and because of -- they're so fast moving and the change order process is so quick and so dynamic, that they have a little bit more volatility in them than a typical project.

So -- and we are getting better at it too. I think that as we and our partners work through more of those, we get a better understanding of what it takes to actually get them done. So we look at that as a great investment for the future because the next job we don't expect that to happen. Dan, I don't know if you'll have any more color on that.

Just another comment on the requirements around revenue recognition. The intent is to manage your project over the life of the project and estimate what your estimate costs to complete are and what your gross margin is on that project over the life of the project. So we adjusted our estimates to complete and you do that on a regular basis to evaluate and measure what that margin is that you have to recognize, and that's what the adjustments were in Q3.

Okay. Can you give us some sense of the magnitude of that adjustment?

I think an overall cost of 2% gross margin drop in the Buildings growth. Now, so that had the impact and got carried through, I think it was in the 52.5 for both those quarters. Where usually we're expecting more of a 54 or 55 in the Buildings group, so it had that kind of an impact.

And how is that going to continue into 2012, or isn't it? Do you feel now that Q4 is done or --

No, those are done. You do that normalization once in those projects and work through. Cam H is almost finished, the other one will be finished in 2012. Certainly, we are picking other P3s up; and as I said before, you get better at it, you get a better understanding of what your partner needs and the volatility of the project, so we don't see that continuing. We see our gross margins getting back to what we would call a normal level in the Buildings group.

Okay. So in Q1, we should see an improvement in the gross margin for the Buildings.

We should.

Okay. Last question just on the impairments going back again. You gave some specifics in your filings about the geographic allocation of the charge. Can you get any more granular than that? Can you tie it back to any specific division, any specific acquisition? Or is it -- do you just do it by the geographic area?

Certainly we measure it on a cash generating unit, which for us was the United States and international. We don't track our goodwill on a acquisition-by-acquisition basis or regional basis. It's done on a US basis and international basis. Dan, I don't know if you want to provide any more color there?

No, that's right, Bob, it's just based on the cash-generating unit, and we reorganized our cash-generating units in 2011 to reflect international US and in Canada.

What it does show though, Paul, is that we really put a very concerted effort into investing in the United States in the last three or four years, and we did that in a very stressful economy. So it's no surprise really when you take a look at that type of investment during that period of time. At the end of the time you may not be able to perform and that causes that goodwill impairment. But that investment we've made in the United States is now poised very well for what we see as a recovering economy. So we think that was just a great investment, and we are not done. We continue to see the opportunities in the US for further investment. But certainly doing it when you had probably one of the worst recessions ever certainly made it challenging, but the end result, we are coming out of it as a much stronger Company.

Okay. Actually, if I could speak one more. You still have CAD509 million of goodwill on the books even after the impairment. How should we think about the risk of that goodwill? What would it take now for further impairments to happen? I think that you've had a couple of prior impairments before this one, so how -- what kind of confidence level do you have on the remaining goodwill on the books?

Well, how confident are we in the economy recovery? So, we've been pretty confident that we've seen -- we believe we've seen the end of this recession. And we see the economy improving; and if that happens and we perform, I don't see any risk to the goodwill. If we enter into another recession as we just entered in 2009, who knows. Don't see that happening. We are pretty comfortable in our outlook. We don't see the same signs we saw in '07, so unlikely. Dan?

Paul, at least -- probably about half of that goodwill, I think it's in the notes to our financials, is allocated to the Canadian operating unit, and there is so much clearance in our Canadian operations that goodwill -- the rest is essentially allocated to the US because there is no longer any goodwill associated with our international operations.

Okay, thanks. I appreciate that.

Thank you. And our next question comes from Sarah Hughes of Cormark Securities. Please go ahead.

Okay. Just wanted to clarify Paul's question on building margins and the P3 project impact. Did you see a 2% gross margin drop also in Q4 or that just in Q3?

That was in Q3 and it translated into Q4. I think it stayed fairly steady between Q3 and Q4. It was -- gross margin in Q3 was 52.7, it was 52.3 in Q4, so roughly the same.

Okay. And then, Bob, you made a comment in your initial remarks in terms of the buildings and kind of your reason you expect a stable growth in 2012 versus the decline we saw in terms of just the investment that you made in 2010, the integrations you did in 2011 and just having such a stronger platform now in the US, have you seen any signs of that actually coming to fruition in terms of the benefit of that? Like have you seen that in the last few months in terms of winning more market share or projects or that type of thing, or do you think it's kind of potentially later in the year?

Well, if you would have asked me that question a month ago, I would have said we expected to see it later in the year. We have been very excited by the number of project awards we've had in our architectural practice in the first month of 2012. So we are excited over the platform we do have, and we are starting to finally win some of those projects. So we are pretty confident that as long as those project go ahead -- that's the danger, you win a job is wonderful news. The worse news you can have is to win a job and have it postponed.

And so at this point in time, we've won projects and our architectural practice is strong. Our Buildings engineering practice is probably where some of our weakness is in western Canada. And that's just as a result of getting a stronger architectural practice sometimes does have the impact of affecting some of our business in our Buildings engineering practice, which is, of course, other architects. But having a stronger architectural practice sometimes does have an impact on your Buildings engineering practice. We we're pretty comfortable that with Anshen + Allen, Burt Hill, Calmarts and the Stantec architectural practice, we now have a very, very strong team and we are starting to see that win some projects for us.

And do you think that is just because you are gaining share in the certain regions, or is it the market improvement that you are seeing?

Actually, I would say it's more of winning our share of projects. We didn't and don't anticipate seeing a significant change in either healthcare or higher ed, but we're starting to win a better portion of our share of projects. Commercial is the other area, though, where we do see an increase in the actual market -- the commercial market, especially in Canada, is very positive, and we have been very successful in winning our share of projects there.

Great. That's it for me. Thank you.

Thanks, Sarah.

Thank you.

(Operator Instructions)

And our next question comes from Ben Vendittelli of Laurentian Bank Securities. Please go ahead.

Good afternoon, gentlemen.

Hi, Ben.

Just a follow-up on the impairment question. What share price was used for the test, and had you used say, today's share price or a CAD30 share price, how much of a difference would it have made in the CAD90 million impairment?

Ben, I think you'd have to go back and look at the share price at October 1. I believe it was somewhere right close to CAD23. Today -- I'm not sure exactly where we closed today. It certainly would have had an impact on the valuations. We didn't, however, go back and redo all the calculations. You can imagine it's quite an arduous process to get to that valuation. So I wouldn't -- I don't really know what that might have been today. The share price at October 1, I believe, was CAD23.57.

Okay. So can we assume it will be proportional to the change in share price?

No. I think there are a number of factors. The share price is one factor. It was the operating performance, the cash forecast, the discount rates, the earnings assumptions, everything that goes into the goodwill valuation for your operating units. So it's any number of factors.

Okay. And just on your implementation of a dividend and your dividend policy, the Company's stance has for a long time been that, as long as you have the opportunity to reinvest your retained earnings into viable acquisitions that will return a reasonable amount of return on investment -- invested capital, that you would continue to do so. Are we to see the implementation of a dividend as meaning that there is less acquisition opportunities out there, or are you starting to see a slow down or less opportunities?

No. Not all. In contrary, I think the dividend just is reflective of what we feel now is, we've reached a certain critical mass, a certain size and scale of a Company where we can continue to still invest in those acquisitions and continue to grow the Company at 15% organically -- in acquisition at 15%; and still have cash flow left over to be able to pay a dividend and return back to our shareholders. And it was something we reviewed every year. Every year, we analyzed it, we would model it, you'd look at your cash flow generation, you'd look at your growth projections, and then make a decision, can we afford to do it or not? We never felt we were at a strong enough position in our evolution to be able to do it.

Now we feel we have and now we feel that we have been able to do that; from a perspective of opportunities we've seen the pipeline is, it's not only is it more full it's ever been, there's just more even companies and opportunities there. What we have to do is maybe be a little bit more selective, a little bit more focused on where we want to be because we are seeing a noisy M&A environment in the last six months of 2011 and certainly that's carried forward into 2012. So certainly don't read into a dividend that we want to be less acquisitive or that the pipeline of opportunities has reduced. It's actually, in fact, the reverse. We feel there's as many opportunities, we just have to be more selective, we have to be more focused, and we have the ability of doing that and still paying a dividend.

Okay. And the focus I guess would still be larger acquisitions as compared to smaller acquisitions not -- maybe not in your most recent history but a little further back?

We did some bigger acquisitions. I think there was Keith, up to 850 people and Secor was about 800 people and [Jake's Whitford] was 1700. We did Burt Hill a year ago at 650 people. There is less large companies in North America than smaller companies. So obviously the pool is going to be a lot deeper at the smaller companies, and all the companies certainly provide value no matter the size. It's just a matter of how much does it move the needle.

So certainly larger firms have more of an impact and probably shareholders and everyone would like to be able to do larger firms. But our motto has always been, we will look at all sizes of companies as long as they fit our model and add value to the Company. Certainly the goal will be to try and get larger firms. But that's not to say that we're going to ignore the smaller ones.

Okay. And, sir, you mentioned Burt Hill and with regards to the impairment of international goodwill, I believe, if I understood correctly, you mentioned that goodwill for international firms is down to zero, did I understand that correctly?

That's right.

And the bulk of that, did the bulk of that come from the Burt Hill acquisition or was there other acquisitions in there?

No, there was -- Anshen + Allen was another acquisition that was in there. I think we did a small one a number of years ago. Portions of our acquisitions have international components to them over the years as well. So again, Anshen + Allen and Burt Hill would probably have the majority of that, but they weren't exclusively only those companies.

Okay. Thank you very much. I appreciate it.

You're welcome, Ben.

Thank you. And our next question comes from Gareth Tingling of Macquarie. Please go ahead.

Thank you, gentlemen. I will keep it really brief. My first question is just with respect to your duration of contracts, your revenue duration of contracts. Would you say overall, is it the same, is it increased or has it declined.

No, it's definitely Increasing. The size of our projects are increasing. We have signed some projects in the mining sector where they are five-year projects. Some oil and gas projects are five-year projects. We have a project management -- construction management project here in California that is a five-year project. So we are starting to see some of those longer-term projects, longer-term clients, and larger programs. So certainly the length of our projects has increased year over year.

Okay. Great. And just to follow-up. It's an interesting -- the announcement for a dividend quite frankly, it took me a little bit by surprise. I was just wondering, if I take your maintenance Cap Ex around CAD25 million a year, the dividend's going to be about CAD27 million a year. You're generating generally about 100 and -- let's call it CAD115 million in cash flow from operations. That leaves about CAD60 million exclusive of some debt component for acquisitions. First of all, does that strike you as about right what I've said, Dan?

The numbers are probably roughly right. When I look at it we went through that same sort of mental calculation. So that translates to about CAD120 million of acquisitions. Because the way we do our acquisitions is roughly, we put half the cash up front and then the other half of the cash is spread over a three-year period. So that CAD60 million cash-free cash would allow you then to actually leverage that to CAD120 million of acquisition revenue, without touching your debt.

And I think the CAD115 million number was our 2011 cash from operations. I think we are expecting that to be a little bit higher in 2012 given our forecast.

Sure, fair enough. Okay. And you haven't -- one of the things that the last person asking a question was getting at was the size of acquisitions. Have you made acquisitions so far in 2012 that individually have not been material enough for individual disclosure, but that we could expect to see something when you report Q1?

No. To date what we have done is a number of what we would call large employee hires, but nothing that would be an acquisition.

We do have a number of active discussions going on at the time though.

Yes. Certainly. But actually closed as of the -- no, that's correct.

Okay. And I will keep this last one really brief. Just in terms of the multiples that you paid out, I spoke to Dan about this, Bob, so you wouldn't know -- necessarily know the specifics around them. But without getting into what the actual multiples were on average, compared to 2010 when you've bought companies through 2011, were the multiples similar, were they slightly more expensive or were they less expensive?

Well, since you asked Dan the question already, I will let him answer. It will be the same answer. I would have to say -- I say relatively the same. I haven't seen multiples change.

Yes, it's about the same.

Yes. Multiples really haven't changed. We always say right now the bigger issue is trying to figure out what the forward-looking EBITDA and revenue generation is going to be and translate that to what the Company has done in the past. We have seen a big delta between when you look at trailing two years to forecast the two years just because of what's gone on in the economy. So really it's trying to get visibility into what -- how the Company's performed and what their opportunities for growth are. At the end of the day, we are paying market rates. You're going to have to be competitive in that business, and we pay what we feel will be accretive to the Company and with -- and certainly try to make the companies we acquire happy as well. By the end of the day it's a market rate, but we haven't seen a significant change of multiple EBITDAs as a result of that.

Okay. Thank you very much.

Thank you. And our next question comes from Chris Blake of Stonecap Securities. Please go ahead.

Good afternoon, gentlemen.

Good afternoon, Chris.

I want to follow up, Bob, you mentioned from previous conference calls with respect to Shell gas development activity in Marcellus and you were looking to get more active in that region. I was just wondering if you've put any specific initiatives -- put forth in the fourth quarter or what you have planned this year in that initiative?

Well, certainly, we still see that as one of the good growth areas we have in the US. I think that the way we've characterized that business in the past year is chaotic. We're starting to see a little bit of settling down come to our clients. They are getting a little better at forecasting. We are getting better at organizing our services. We are getting better at leveraging the variety of services we have.

Twenty feet from where we are taking this call, we have our oil and gas team from around the country meeting for a day to determine how we can better leverage the capabilities we have with companies like Talisman. So we are seeing still some good opportunities. I think we were getting better at organizing ourselves around those opportunities, and our clients are getting better at organizing themselves. So we see that as an improving market. It's certainly still a very strong and buoyant market for us here in the US.

And just how many employees do you have dedicated in that market right now?

That's a tough one. I would say right now -- dedicate is a hard word because they continue to move around on projects. But we have at least I'd say 60 people that are putting the majority of their time into either working on projects or chasing projects. And I just stepped into that meeting for a couple of minutes this morning and came out, and all they are talking about is recruiting and trying to find more people. So, I would say by the end of the year we would have more than 100 people focused in that area.

Okay. Very good and just some more housekeeping items, Dan, I was wondering -- or Bob, we've talked about the dividend the last couple of questions. But I was wondering if you had a target dividend payout ratio in terms of the earnings or free cash flow that the board's decided.

The target payout ratio is something that we talk about with the board. The board makes a decision or will be making a decision every quarter. There are a number of factors that go into the decision around the amount of payout. Certainly we want to provide a dividend that is meaningful and provides some return to our shareholders.

Okay. And just secondly with respect to your maintenance CapEx for this year, I think last year it was roughly around CAD20 million, CAD25 million. Do you anticipate a similar amount being spent this year?

Yes. We actually expect our CapEx to be slightly higher this year, probably around the CAD30 million to CAD35 million. That's really because of our enterprise system. We are going through upgrades. We have to upgrade the hardware and the servers and the infrastructure that supports that. It underpins our enterprise system, which gives us the top form for future growth.

Okay. That's it for me. Thanks.

Thanks a lot.

Thank you. And we have a follow-up question from Ben Vendittelli of Laurentian Bank Securities. Please go ahead.

Yes. You mentioned you've had a lot of new hires recently, would you be able to give us the number of employees as of the most recent or as of today?

I actually don't have that number as of today.

Because at year end, we were at about 11,100, and we know that there is activity going on in certain of our sectors and locations, but I don't have that exact number either, Ben.

Okay. Maybe not as of today, but as of more recently than last year or the end of the quarter?

Actually, no, I don't --

End of the quarter was 11,100.

All I can say is we are hiring staff in all areas of the Company right now. We have very few rationalizations still going on in some of the areas that we were doing last year. All it is, is it looks positive in just about all of our regions right now in North America, which is a good thing.

Okay. Thanks a lot.

Thanks, Ben.

Thank you. There are no further questions at this time. Please continue.

Well, thank you. If there's no more questions, I would like to thank you all for joining us today and I'd like to close our discussion today by saying that we are confident in our business strategies, optimistic regarding our growth opportunities, and excited to announce the approval of a dividend policy to provide increased value and sustainable returns for our shareholders. Look forward to speaking to you again in the near future. Thanks very much.

Thank you. Ladies and gentlemen, this does conclude your conference call for today. We thank you for your participation. You may now disconnect your lines and have a great day.