Stantec Inc (STN) 2012 Q4 法說會逐字稿

Welcome to Stantec Inc.'s fourth quarter 2012 and year end earnings results conference call. With us today from Stantec management are Bob Gomes, President and Chief Executive Officer; and 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 21, 2013, 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 Investor 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. Gomes or Mr. 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, Sam.

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.

In addition, Stantec Management will be mentioning additional and non-IFRS measures. You will find descriptions of these IFRS measures and their use and underlying assumptions in the Management's discussion and analysis included in Stantec's 2012 financial review. I would now like to introduce your host, Bob Gomes. Please go ahead.

Thank you, Crystal. Good afternoon, everyone, and welcome to our 2012 fourth quarter and annual results conference call. Dan will provide a brief summary of our financial results for the quarter and year, and I will follow with an outline of our market outlook. We will then address individual questions.

Today we released the results of Stantec's operations for the full year of 2012. We ended the year with strong results and continued organic growth in the face of mixed economic conditions. I am pleased to say we met and in some cases exceeded our targets, due to our continued focus on executing our strategy, taking advantage of market opportunities, building strong client relationships and strengthening our business model. We were very happy with our strong top and bottom line performance in 2012. Dan will now provide a review of our year end and fourth quarter financial results. Dan?

Thank you, Bob, and good afternoon, everyone, on the call. As Bob just mentioned, overall Q4 '12 was a strong quarter for Stantec. Our gross revenue increased 12% to CAD484 million, compared to CAD432 million in Q4 '11. Approximately CAD31 million, or 60%, of this increase resulted from acquisitions completed in 2012 and 2011. We completed seven acquisitions in 2012.

Our organic growth for Q4 '12 was 6%, or CAD26 million over Q4 '11, reflecting growth in our Environment and Industrial practice areas. On a full-year basis, gross revenue increased 11.9% year-over-year to CAD1.9 billion compared to CAD1.7 billion in 2011. Our full-year organic revenue growth was strong at 5.6%, with growth occurring in every quarter. This growth is due primarily to increased activity in our Mining, Oil & Gas and Urban Development sectors. On a full-year basis, our gross margin remained within our targeted range at 55% in 2012, a slight incline from 55.4% in 2011. Gross margin was impacted by the mix of projects and progress during the year, low margins from acquisition legacy projects, and tighter margins in our Industrial and Transportation practice areas.

Our administrative marketing expenses for Q4 '12 remained relatively stable, compared to 2011. For 2012 overall, we had a slight decrease in our marketing and administrative costs as a percentage of net revenue, at 40.7% compared to 41% in 2011, demonstrating our continued focus on managing costs and operating efficiently. Due to our strong operational performance, we achieved a 12.9% increase in EBITDA to CAD221 million from CAD196 million in 2011. Our net income for 2012 increased 17.7% year-over-year to CAD121 million, and our diluted earnings per share increased 17.3% to CAD2.64 from CAD2.25 in 2011, excluding the impact of the 2011 goodwill impairment. Our cash flow from operating activities increased in 2012 to CAD181 million.

And lastly, today our Board of Directors declared a dividend of CAD0.165 per share payable on April 18, 2013 to shareholders of record on March 29, 2013 which is an increase of 10% from last quarter. Our increased dividend reflects not only our strong operational performance, but also management and the Board's optimism in our current and future performance. Bob?

Thanks, Dan. As Dan just outlined, we saw positive momentum in our performance throughout 2012 with strong organic growth. We remain focused on providing excellent client service and meeting our business objectives, and I believe our results are a testament to the strength of our long-term strategy.

I would now like to outline some of the progress we have made towards our strategic objectives in 2012. First, we continued to successfully adapt our business model to match evolving market conditions. This resulted in achieving positive organic growth that exceeded our targets, especially in our Industrial and Urban Land practices. We saw a decline in our Buildings practice, attributed to a softening of the business market in 2012 and continued competition and pressure experienced in funding for private and public sector clients, especially in the healthcare market. Transportation was stable as a result of our ability to secure projects from repeat clients because of our strong relationships and past performance. We experienced acquisition growth in all practice areas, strengthening our geographic reach and the professional expertise available to our clients.

Secondly, we maintained our record of profitability in 2012. This consistent performance in the face of mixed economic conditions speaks to the strength of our business model, and with a growing backlog of CAD1.3 billion we are confident of our opportunities moving forward. Thirdly, we completed the acquisitions of seven companies in 2012. We welcomed PHB Group, ABMB Engineers, Cimarron Engineering, CT3S, Architecture 2000, Greenhorne & O'Mara, and Landmark Survey and Mapping to the Stantec community. The fourth quarter was especially busy for us with four of these acquisitions in that quarter alone. At Stantec, our strategy is framed by our values. One of these values is we put people first. We believe that our full integration process for new staff is a right step in that direction. To achieve this step, we have integrated these companies that were acquired in the first half of the year and integration of the four acquired in the fourth quarter is well underway.

These firms added more than 1,100 staff and expanded the depth and breadth of our expertise in the oil and gas industry, in particular in Western Canada, and our transportation and urban development expertise in the United States. This combination of added resources and talent supports our long-term strategy of providing integrated services to our clients which results in growth. Our focus on executing on our strategy and taking advantage of market opportunities resulted in us securing projects with new and existing clients. To highlight a few, we continue to win steady opportunities in the key market sectors in our Buildings practice despite softening in some sectors. An example of this is the Cleveland Clinic in Ohio, where we are performing programming, architectural and interior design services for a major expansion of the Taussig Cancer Institute.

In our Environment practice, we continue growing our Mining, Oil & Gas and Power sectors as a result of the leveraging, our client relationships and integrated presence across North America. A recent project that demonstrates this is our environmental work with the Northern Gateway pipeline system running from Alberta to British Columbia. We also provided consulting services to two natural gas projects and associated port facilities. In our Industrial practice, we continue to strengthen our capacity in the Mining, Oil & Gas and Power sectors organically with our global expertise and with the strategic acquisitions. This strength in capacity resulted in securing work with the pipeline expansion project in the Eagle Ford Shale region in Texas. In addition, we are providing construction management oversight and regulatory support for other projects in Eagle Ford.

Another value that guides us at Stantec is the shared understanding that we are better together. This means strong long-lasting relationships are at the heart of everything we do and directly impact the success of our projects. The importance of this value is evident in our Transportation practice, where we continue to develop strong long-lasting client relationships and make strategic acquisitions to increase our presence and further our positioning, especially in the United States. For example, this past year, we once again secured work with a repeat client, the North Carolina Department of Transportation, for project studies for proposed improvements of a section of the NC 150 northeast of Charlotte, North Carolina. In our Urban Land practice, we continue to pursue growth opportunities in both the residential and non-residential markets, such as a recent project providing design services to the Lakewood Ranch Community expansion in Florida.

This is only a very small sample of the projects we are working on, but showcases the diversity of our services and expertise. With a reach of over 200 locations across North America, we have the capacity to provide services to a diversified range of projects and clients and that, in turn, allows us to perform consistently to mitigate risk and to adapt to market opportunities. Across all our practice areas, the one common theme is our commitment to doing what is right. In 2012, our projects continue to win awards for excellence, as well as commendations to our staff from our clients. We are very proud of the work our people do every day to serve our clients.

Now I would like to provide -- like to comment briefly on potential market conditions going forward. Overall, we expect to achieve moderate organic revenue growth in 2013, up 3% to 4%, while maintaining a high level of operational performance. We expect to see more strength in the second half of the year, especially in the United States, where we continue to build a top tier position. We also expect that alternative project deliveries, especially P3s, will continue to be strong in Canada and will present emerging opportunities in the US market.

In our Canadian operations, we expect to see moderate organic revenue growth. We continue to maintain a top tier position as one of the largest firms and are well positioned to take advantage of a diverse range of opportunities in a relatively stable economy. In our US operations, we expect to see stable to moderate organic revenue growth. The United States remains a very large market, and we expect our performance to improve gradually throughout the course of 2013. In our international operations, we expect moderate organic revenue growth compared to 2012. This geographic region represents a small percentage of our business with the majority in our Buildings practice where we expect to leverage our global expertise to win additional opportunities.

Looking at our individual practice areas, we expect the following for 2013. We expect that the organic revenue growth for our buildings practice will remain stable in 2013. This is an area of our Company that has been more affected by the challenging economy. However, our top-tier positioning and global expertise in healthcare, education, and aviation strengthen our ability to pursue a broad range of North American and international opportunities. We expect to achieve moderate organic revenue growth in our Environment practice for 2013. We believe our size, presence, and reputation will continue to increase our share of large, long-term projects with national and international scope. In the energy sector, we are especially well-positioned to secure opportunities by focusing on integrated service offerings, especially related to our Industrial practice area and leveraging relationships with large clients.

In the water sector, we are well-positioned to secure projects resulting from a more stringent regulatory environment, and we expect that funding constraints will continue impacting the market. We expect stable to moderate organic revenue in our Industrial practice in 2013. Although we do anticipate there may be weakness in the mining sector due to the pricing of certain commodities, we continue to work on many of our larger mining projects. We see activity continuing to be strong in the oil and gas sector and our clients continuing with capital spending in their facilities, especially related to the pipelines where our recent acquisitions have increased our expertise and positioning.

We anticipate that our clients in Industrial, Buildings and Facilities and Power will continue with normal capital spending. In our Transportation practice, we expect revenues to remain stable in 2013, due in part to a growing design/build in developing P3 markets in the United States and continued potential in Canada. In addition, this practice area continues to win projects for us resulting, again, from strong relationships and repeat clients, especially at the provincial, state and local level. With the passage of the US Transportation bill in the second quarter of 2012, we expect to see a stable level of funding for transportation spending over the next year. However, the lack of a long-term Federal funding strategy may still hold back larger projects. As well, funding constraints may encourage public/private partnerships and alternative project deliveries.

We see this as a good opportunity, especially since our recent acquisitions have increased the depth and breadth of our relationships in the United States, especially in Florida and the mid-Atlantic, and added to our design/build capabilities. In our Urban Land practice, we expect moderate organic revenue growth for 2013. We expect the overall Canadian housing market to slightly soften compared to 2012, with stable activity continuing in Western Canada. In the United States, we anticipate gradual improvement in the residential sector. We recognize that we are still operating in a mixed economic environment. Though conditions appear to be improving, we remain prudent and will continue our focus on efficiently executing our long-term strategy.

At Stantec, we believe achievement at every level begins and ends with a firm commitment to being the best we can be. Further to that end, I should mention in 2012 was a comprehensive strategic planning year for us in a thorough review of our market environment, industry positioning, risk factors, service diversity and many other considerations. We validated and refined our strategy to evolve our organization to best take advantage of market opportunities. Going forward, we will continue to execute on a targeted and steady acquisition strategy, one that focuses on full integration and provides the strength of local positioning with now over 12,000 staff in our more than 200 offices. We will continue to ensure the diversity of our operations, our clients, and the flexibility of our organization allow us to adapt our business to changing economic conditions, and to position ourselves for growth in a very large infrastructure and facilities market, both within a recovering US economy and internationally.

The strength of our performance in 2012 speaks to the strength of this business model and highlights our ability to deliver consistent returns for our shareholders. [For] that purpose, we look forward to continuing to evolve, to meet the needs of the clients and the communities we serve. 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. Sam?

Thank you. (Operator Instructions) And our first question comes in from Anthony Zicha from Scotiabank. Please go ahead.

Hi, good afternoon.

Hi, Anthony.

Hi, Bob, hi, Dan. Bob, can you give us some color on your Urban Land development practice? A picture more particularly in the state of the market in California, Nevada, Arizona? Are you winning new clients or are the existing ones coming back?

Both. Both the new opportunities are presenting themselves to us, existing clients are getting active. We are actually making this call out of our Irvine office in California where we just had our Board meeting, and are pretty excited with what we hear happening, even here in California. Certainly, we've been experiencing this now for the last few months of increased activity, increased opportunities and inquiries from our clients, starting maybe on the East Coast.

But we're starting to feel it even here in California. Starting to see land prices and lot prices and all the indicators that we look towards increasing even in places like Arizona and Phoenix. So we've always been relatively cautious with regards to the Urban Land market, always optimistic that we know it's going to recover. We are a little concerned with the length of time that recovery would take, but we continue to be encouraged with the fact that every month we are seeing more and more opportunities. So certainly, we, clearly, the worst is behind us. There is a growing optimism, certainly south of the border here.

Great. On the flip side, if we look in North America, are there any practice areas that have been decelerating or about to? And, can you give us a more color on the Oil & Gas and Mining side?

Certainly as we commented, our Buildings practice has been one that has been harder hit by the softening economy. It's really due to the sectors that we were in, specifically healthcare. That's still going to take some time to recover, but the Cleveland project that we mentioned in our conference call is certainly indication that we are well-positioned. We can still win the bigger projects. So we just have to be -- work harder and be a little bit more diligent there. Still comfortable that, again, the worst is behind us in the Buildings practice and we have readjusted to what we would call a new economy there.

In the Mining practice, there's been a lot of noise out there with regards to commodity prices lowering. It's a very mixed market right now. A lot of the metals are very strong. A lot of the metals are going down. Our strength in potash certainly has given us some comfort there that those projects are continuing to be invested by our clients and are continuing. So for today, you are not going to see the growth of 20% like we had last year in our Mining business. But we don't -- or aren't overly concerned with it decreasing. We see steady opportunities and maintaining our position there.

Okay, and one quick last question. In Canada, what's your outlook on P3s on the prospects, and if they are good then could we see some margin pressure going forward?

We still see opportunities with P3s. In British Columbia, because of the elections there may be some threats there with P3s maybe being more difficult to go with a new government in Ontario. We are still seeing P3s move forward. We've been fortunate enough to be selected on some projects in Alberta, the schools and Anthony Henday. We are in a comfortable position there.

The good news, I think, with P3s in Canada is we are now starting to see P3s move down into a more of a municipal basis, where a lot of the municipalities are being encouraged by P3 Canada to move some of the larger transportation and LRT rapid transit projects into a P3 model. So any softening at a provincial level may be offset by a strengthening opportunities at a municipal level. So we are encouraged with that and certainly see good positioning for ourselves in that market in Canada.

In the United States, it's constant talk. Everybody's talking about P3s. Some of the ingredients are coming together, but certainly, the opportunities are a little longer term here in the United States.

Okay. Thank you very much.

You're welcome, Anthony.

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

Hi, guys.

Hi, Sara.

Just getting back to the Industrial segment, which drove significant growth in F '12. Can you comment on sort of the work you are doing on pipelines and pipeline-related activity. And was that most front-end work, or do see it continuing through the phases of the projects that may come about over the next few years?

Certainly, pipelines has been a very strong growth area for us, specifically with the acquisition of Caltech last year -- two years ago -- and Cimarron last year. We have very good position from an engineering standpoint and facility standpoint. We've always had, with the acquisition of Jake's many years ago, a very strong position in the front-end environmental side. But I think we offer a much more complete package now to the clients in that area.

We do a very diverse range of services in environmental and probably a diverse range of products, both LNG and oil gas and oil pipelines. So, certainly, we feel we have a very strong position with our clients, clients like Enbridge, TransCanada. They like to use our front-end services. They like to be also in control of those. So, by offering a very diverse range, we have multiple entry points into those clients and we see that relationship actually growing considerably, especially with the recent acquisition of Cimarron last year. Pretty bullish on the oil and gas market, pipeline specifically.

And would that be, again, like the biggest driver of growth opportunity to offset perhaps some softness in Mining going into F13?

Well, certainly see it as growth opportunity and certainly don't want to give the impression that we see our Mining business softening. We haven't seen any indications of that in recent months. Our large projects like the Jansen project with BHP continues to be funded, continues to go forward. So the softening would be just slower growth really in the mining area. But certainly we're looking for continued growth in the pipelines area.

Okay. Great. And then just wondered, book-to-bill was pretty nicely up in Q4. Anything in particular that was driving that, other than acquisitions? It was just a nice jump that we saw.

Yes. It is nice, certainly some of it as a result of the acquisitions we did. But we're organically, as well, growing our backlog. We're happy with that. The way our projects are inserted into backlog, sometimes can be lumpy because we don't put the entire portion of the project into backlog immediately. Sometimes once a contract is signed, you get the benefit of that. But, again, it's from a very conservative standpoint because we only put a piece of it in. We are very happy with our backlog growth.

Okay. And then, just, you commented in your annual report. You've really focused on cross-selling and in F '12 you looked at segmenting into your core sectors, there are 12 of them. Have you paired out of any segments or do you expect to get out of any segments? Which segments do you expect to grow via acquisition?

We certainly don't see any segments that we need to divest of or to rationalize at this time at all. We are pretty comfortable of all of them that we are in. With regards to which ones we are interested in continuing to grow, it's a pretty big market here in the United States. I don't think there is an area that we wouldn't want to continue investing in and specifically in the US.

In Canada, a little bit more focused with regards to strengthening some of our weaker positions in some of our geographies. But we have a very strong position in, I'd say, a majority of our presence in Canada. But there are still opportunities like we did with Cimarron last year in our Oil & Gas area.

Okay. And are you still content with the mix of the business? If we look Buildings versus Environment, Industrial, Transportation, Urban Land, do you see that mix shifting significantly? Or do you feel like that's pretty much the kind of pie slices that we should see going forward, as well?

No, I think we are pretty comfortable with that mix. I think you will see that continuing to go forward in that fashion.

Okay. And just one last, sorry, maybe for Dan. I noticed your objectives are the same for F '13 as for F '12 in terms of financial metrics. But your SG&A did come in lower than 41%. Just wondering if there is any reason we should expect SG&A to increase in F '13, and why 40% wouldn't have been kind of the low range for F '13?

I think the key issues that we are going to have is the integration of acquisitions in 2013. It did come a little lower. We did see that our SG&A was up a little bit more in Q4 relative to 2011. So, it was pretty consistent with that. We are -- we did have some improvements in our real estate and our occupancy costs last year.

As you do acquisitions, you end up with some synergies and it takes time to work through the lease exits and that. So that contributed in 2012. With some of the acquisitions we did towards the end of 2012, we expect to incur some of those costs in 2013 as we rationalize some of our office locations. So that and the integration, I don't think there's a lot of leverage there, Sara, in our ability to reduce those costs a lot more. Certainly, we are going to continue to focus on it but not a lot of leverage there.

Okay. Great. Thanks so much.

Thank you. (Operator Instructions) And our next question does come in from Michael Tupholme from TD Securities. Please go ahead.

Thanks. Good afternoon, guys. Question on the Urban Land segment. In your MD&A, you indicated that the growth you saw in 2012 was a result of continued activity in certain geographic regions. You mentioned in particular Saudi Arabia. I wonder if you can elaborate on how much of the growth you saw last year, the 10% organic growth, came from Saudi Arabia and maybe give a bit of perspective on what it is you are doing in that region?

Most of the organic growth did come from Western Canada, although Saudi Arabia projects are really the start-up of an industrial city that we saw there in just the beginning phases of that. So, hopefully, that work continues and it really depends on the client and moving that forward. So most of that organic growth that we saw in Urban Land was tied to Western Canada and the Saudi Arabia project. The one thing I would like to just kind of clarify with respect to that growth, we show that in our Urban Land practice. We also show it in our international practice.

Where we reflect organic growth, it's showing in international because that's the location of the project. But a good portion of that work was done by our employees or completed by our employees in the United States. So even though we showed a small organic retraction in the US, most of that work that helped build up the international growth came from our US employees.

So of that overall 10%, Michael, a little less than half of that was as a result of that work in Saudi Arabia that, as Dan correctly states, was really done out of our US offices.

Okay. As a follow-up, on Urban Land, can you give us a sense as to what percentage of Urban Land now relates to the residential sector? O know there has been a move over the last number of years to diversify away from the residential sector, although that's what is coming back now. But where do you sit now and then maybe where do you see that going in terms of the mix of residential versus non-residential?

Right now, about 80% of our work is what I would call for the typical residential Urban Land projects and 20% represents more of an urban setting for the public sector. As we grow in the residential portion, is the portion that's going to be able to grow quicker. You may see that mix continue to increase in the 80% go up. The good news is, we don't intend to stop working on that 20% public side. We've built some good client relationships and there is some growing opportunities there, as well. Certainly, if Urban Land continues the momentum and growth curve we've been seeing, that 80% would get larger.

Okay. Thank you.

You're welcome.

Thank you. And our next question comes in from John Rogers from D.A. Davidson. Please go ahead.

Hi, good afternoon.

Hi, John.

Bob, just going back to the pipeline business for a second. Other contractors, especially operating up in Canada, have mentioned to me anyway recently, that the customers were looking for contractors that could do both the engineering and the actual construction of the pipelines. Are you seeing that? What are your thoughts about getting into that side of the business more?

Actually, in pipelines we see absolutely the opposite of that. Our pipeline clients like TransAlta, like Enbridge, like to maintain control of specifically the environmental portion of their projects and approvals and permitting. They want to remain in control of the design portion, as well, through using consultants that focus on that. So for ourselves, that's one area of the Oil and Gas business that really has not adopted the EPC model, which we are thankful for because we stay away from that end of the business. We see that trend growing.

These pipeline companies, we've been able to grow our Business and relationships with them and we really understand where they're going, how they want to use their pipelines. For example, the work we are doing is repurposing pipelines, changing the type of material, changing direction. We are working in very integrated fashion with these clients at a very front-end basis and continue then to move that into a design basis. We don't see that being a tendency of pipelines being much more of an EPC model at all. For us, that's why we focused on the Pipeline business in the oil and gas.

We realized that oil and gas was an area we needed to get into and we specifically targeted the Pipeline business because of that aspect, that it's much more of a consulting type of role. So, we are pretty confident with that. We are pretty close to our clients, as well, on that matter.

I appreciate that very much.

Great.

Thank you. And our next question comes in from Tahira Afzal from KeyBanc Capital Markets. Please go ahead.

Hey, Bob; hey, Dan. This is Saagar on for Tahira.

Hey, Saagar, how are you?

Doing great. First off, congratulations on a great quarter and really a great year. I will keep it to one question. I know you went through your markets quite a bit. But where do you see the opportunity in terms of your practice areas and your geographies for the highest upside or surprise versus your current expectations in '13?

So probably you are looking for surprise on the positive side?

Yes. Definitely.

Certainly, we still are looking -- from the point of organic growth, and I will focus there first, great opportunity in Urban Land. We can't minimize that positioning that we have in the Urban Land market is pretty unique and pretty specialized in this industry. So we are very positively looking that if that market continues, the growth curve and opportunity curve we've been seeing, that could exceed our expectations and could be very positive for us. On the acquisition or investment side, we still are taking an extremely strong position now in the pipeline area in Canada and trying to move that into the United States, and are seeing opportunities come there, as well.

So we see those are probably two areas. I've got to throw in the third, not like I'm going to say everything is good, but in Transportation, as well. We did some acquisitions in the United States in the fourth quarter and that added about 700 people, a large amount of those were in the Transportation sector. We did acquisitions of ENTRAN and ABMB Engineering over the last two years. You put all that together, and what we have is an enviable position in the transportation market that may have sneaked up there. We feel that that also could -- if we can leverage that well, which obviously that's the strategy, that could also be another area of growth that could exceed our expectations.

Great. And then one quick follow-up. What worries you the most looking -- now that we are a month-and-a-half, two months into '13? What worries you about the rest of '13?

Well, I think the only worry is that we are sitting on this side of the border making the call and, certainly, the continued discussions and political issues in the United States and the sequestration that's going on is a distraction. It sort of forces people to think about things outside of what their core business is, and that's just unfortunate and distracting. That's got to be resolved sooner rather than later. They have got to continue to move forward.

We've made the messaging pretty clear that the first half of the year is going to be somewhat slower in the US because of that. That's certainly something we worry about. That's-- it's something you can't control, but certainly we feel the quicker that gets dealt with, the quicker people get back to work here. The only other one would just be commodities risk.

A lot of our business in Mining and Oil & Gas is affected by that. We know about as much about that as you -- everybody else does. Basically, we can just simply react with those things happen. Those would be the only two things that are really out of our control that would worry us.

Sounds great. Thank you very much.

You're welcome.

Thanks, Saagar.

Thank you. And our next question comes in from Paul Lechem from CIBC. Please go ahead.

Thank you. Good afternoon.

Hi, Paul.

Hi. Just going back to the Industrial division again and just trying to understand your guidance of stable to moderate growth. It seems -- it seems that might have been an area that I would've thought you'd have thrown into one that could have had potential upside to the outlook, especially given your comments around the Pipeline business and even though mining in general seems to be weakening, you said your projects are still moving forward. So what's behind your thinking of why it seems to be somewhat cautious in terms of the outlook, stable to moderate versus your 20% organic growth this past year?

I guess we've got to -- we look towards mining even though we've said our mining is stable, it is that weakness in some of the commodity prices that causes some concern, as well. What we found in both the Mining business and Oil & Gas business, they are very large projects, very long-term projects. Those projects for us sometimes last up to three to five years. And in a market where the commodities may soften the clients tend to then drag the projects out slower in awarding things. That has an impact.

If everything remained the same, commodity prices stayed strong, you are probably right. It probably is a more conservative number. But we can't ignore those risks that are out there.

And at the same time, we are comparing year-over-year growth on -- what we had was a very, very strong organic growth year in our Industrial practice with higher year-over-year comps. I think we are still seeing growth. But it's maybe not as high as the 20% that we would have experienced in 2012.

Okay. And just maybe a quick follow-up. Can you give us some sense of a breakdown in that business, in the Industrial business, between the different sectors in terms of Mining versus Oil & Gas versus pipelines versus Power?

We don't have -- let's say in the Industrial side of the business, Oil & Gas would probably be -- I'm giving you an approximate numbers, would probably be anywhere from 30% to 35%. Mining would be roughly 30% and Power roughly 25%. The three of those together represent probably 80% of our revenue in the Industrial sector with Oil & Gas being the slightly larger than Mining and Power.

Perfect. Thanks very much.

You're welcome.

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

Good morning, gentlemen, or good afternoon, rather. Just a couple quick questions for you with respect to your recent acquisitions that you've closed, I think, four in the fourth quarter. I was just trying to get a sense of how many of those have actually closed, as opposed to being announced with LOIs?

They are all closed. All four of them were closed in the fourth quarter. So the LOIs were issued before that, but they've all closed.

Okay. Perfect. And then, with respect to your maintenance capital expenditures, I think you provided a CAD50 million to CAD60 million range, it's up from CAD30 million this year. I was trying to get a sense of, I think you mentioned upgrades to your IT systems as partial reasons for the increase. But I was just wondering if you could provide a little more granularity around that increase?

Sure, Chris. There's a couple of things. The enterprise system last year, I think you may recall, we upgraded the software of the Oracle enterprise system to our R12, to the R12 level, release 12. We are working on upgrading the hardware and the back office, if you will, to take us to the next level, which will sustain us for a much longer period of time. In addition to the IT upgrades, which is just kind of normal maintenance that you have to go through on a regular basis, but beyond that we have a number of offices where we are either expanding or relocating.

So, there is some CapEx associated with leaseholds and office equipment and furniture and things like that. So, when we did our budgets in the fourth quarter, all of these things combined gave us that indication. That's probably where our CapEx will be this year.

Very good. And just lastly, Bob, if I may, I think you mentioned in the MD&A that your margins were impacted by some, certainly, early in the year we talked about the legacy contracts of some acquisitions that impacted the margins. I was wondering if you could maybe quantify what the impact of that might have been on your 2012 gross margins? I know it was down 40 basis points year-over-year, but how much lift do you think we can get this year as a result of those coming off?

We expect to be back in our range. I think that's what we stated, of between 54.5% and 56.5%. So, we see ourselves getting back into probably the lower end of that range, but certainly within the range. So, those specific projects probably didn't have -- they certainly contributed to the overall decrease in the gross margin, but probably it was a combination of all the things we mentioned in the MD&A that equally had an impact. We've been successful of renegotiating some of those legacy contracts, so we expect them to not have the same impact in 2013.

I think what you'll find is with the increase of some of our Transportation business, and our Industrial business, which is a lower gross margin business, that is offset to some extent by a lower SG&A cost, as well. There's a lot higher utilization, lower cost to go out and secure work. So they kind of offset, once you get down to the EBITDA line it should all balance out.

Very good. Thanks very much, guys.

Thanks.

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

Hi. Bob, just wanted to ask you a little bit about your International market and the revenue. We saw a good jump this year. I know it's still a small part of the overall business, but trying to get a sense of where you could see this in the next couple of years? I know later on you are going to look at acquisitions in the international, but just in terms of organic growth potential in this revenue stream in the next two, three years?

Because it is a relatively small start of our Business it doesn't take much to get some pretty significant organic growth. You win one or two large projects and that will definitely give you some good results. We expect that to continue to happen in 2013. We continue to work on the projects in Saudi Arabia and in the Middle East. So recently, we won a very large hospital project, again, in the Middle East.

So those projects will fuel some international growth. I think, Dan, though, has outlined some of that international growth, though helps our US and Canadian operations because international is where the project is. But a lot of those projects are worked on by staff here in the US and Canada. So we, certainly, though, you will see strong organic growth, moderate to strong in our international operations for the next few years as we continue to try and leverage those relationships we have. You're probably three years out before we start looking at some acquisitions in that space.

Do have -- in terms of the sales and new sales in this region is it like a dedicated kind of sales focus? Or is it more just existing customers going international?

Probably more international, partly existing clients. So, we have both international and domestic that are taking us with them and with us leveraging our existing relationships with some clients and winning some new projects. So, not a large marketing effort to go look for new clients and new opportunities. Our goal has always been, let's see if we can leverage our existing opportunities with good clients and sell them our services in a more diversified market. So, that would be more of our focus.

Just quickly, Urban Land organic growth in the US in the quarter, or this year in 2012, was it negative? Or-- was it negative growth, or did you see positive organic growth in the US?

In the US, I don't think we -- we don't have that broken down, Sarah, by between Canada and the US. We certainly don't see retraction going on in our Urban Land business in the US right now.

Yes, we look at the Urban Land overall corporately. Of course, that did grow.

Yes.

I would have to say that certainly with the project that Dan referred to in Saudi Arabia, which most of the work was done out of the United States Urban Land project areas and some of the increased opportunities we are seeing, that's not a major concern for us. It's going to be now finding the people to get the work done, again, which is a good problem to have.

Okay. That's it for me, thanks.

Thanks.

Our next question comes from Bert Powell from BMO Capital Markets. Please go ahead.

Thanks. Bob, there's been talk in the last while about in-sourcing in the US, or a manufacturing renaissance, and I'm wondering, from your vantage point, what you are seeing, and if there's an opportunity to participate in that?

Certainly, we've read the same things you have, Bert. We hear about that, as well. Our position in that market is probably stronger in Canada, certainly. We have some partners here in the United States that we partner up on some bigger opportunities and we are currently talking to them about that. So we do see some of those opportunities in the US with bigger manufacturing facilities.

It falls under our Industrial Buildings and Facilities Group which has been very busy in Canada in the last few years. We are seeing some of those opportunities now increase in the United States. Because, but since we don't have some strong local presence in the stats sector in many locations, we're probably going to be dependent upon working with some of our partners down here which is great because that also provides us opportunities of expanding operations with them.

So is there -- looking at that trend, to the extent that it has legs, is that a place where you would see deploying capital to add on the acquisition front?

Absolutely. It has been one that we've been looking at for a number of years now. Those firms are few and far between with that expertise, very specific expertise. But that's the point. We don't mind working with a company for a number of years in joint ventures and cooperating because it allows us then to develop that relationship with them. But absolutely, that would be an area we'd be interested in investing in.

Okay. And then, just, Dan, on the CapEx, CAD50 million to CAD60 million this year. It sounds like there's a bump up this year just to -- a step function increase. What would you look at given the acquisitions today and assuming we are where we are? What would be the normal level of maintenance capital?

Well, I think, on a historical basis, Bert, it's always been in that 2% to 3% range of net revenue. So we aren't far out of that range. It's just a couple of significant projects that we're undertaking this year. So normally, you could assume that it's somewhere in that 2% to 3% range.

Okay. That's great. Thank you.

Thank you. And our next question comes in from Ben Vendittelli from Laurentian Bank Securities. Please go ahead.

Thank you. All my questions have been answered.

Great, okay, Ben.

Sorry, Ben, thanks.

Thank you. And the next question comes in from Maxim Sytchev from AltaCorp Capital. Please go ahead.

Hi, good afternoon.

Hi, Max.

Just a very quick question for you guys. Historically, you've been extremely diligent in terms of what you paid for acquisitions and so forth. But right now on a relative basis, you certainly have the multiple to contemplate maybe something larger. Can you maybe comment on your appetite for doing larger deals, given where the stock price is? Thanks.

We always look at -- we are looking at a multiple different companies at multiple different sizes and always have. So, we'd be comfortable looking at any size of a company that would, we believe, add value to our shareholders. Certainly, as we get larger, we have the capability to be able to do larger deals and, certainly, we will look at that and always entertain that if we feel that it's a good company. At the same time, we've really built this Company by getting good, strong, local companies that have a wonderful position in their community and bringing them into the Stantec family and then leveraging services into that community.

So that will still remain a strong part of our acquisition strategy. But at the same time, our size now gives us opportunities of looking at larger firms, but basically doing the same thing, ensuring that that company is going to bring in an opportunity to Stantec and make that acquisition accretive to our shareholders.

I think we are going to be continue to be prudent and fiscally responsible when it comes to valuing and pricing acquisitions. Certainly, our share price is a good thing, but we don't control that. I really look at these as mutually exclusive events, doing acquisitions versus what's going on in the public markets.

Yes, certainly. It's more about our size is probably giving us the capability of looking at larger companies. The share price is something we can't control.

Okay. Fair enough. Maybe if I could just sneak in one more. In your MD&A you're talking about the gross margins in the States continuing to improve. Is it -- can you slice it up, maybe in terms of what's macro related and what is truly Stantec as you have built out a much larger platform in that market that, obviously, helps in terms of scale and spread the cost over a much larger base?

I'm trying to put an answer that makes some sense. As we grow in the US, certainly, I think what allows us to make margin increase specifically from a gross margin perspective is the fact that we are now working on some larger projects and the larger projects give us the ability that we are in a more competitive position where there's not as many firms as large as we are that can bid on those projects. So that sometimes gives you the availability of having a slightly larger gross margin.

The overall margin increase is, as we continue to grow in the US, you are right. We are going to be able to get economies of scale where that our SG&A costs will probably come down. But the one fact we can't control in the US is the healthcare costs, which is basically a fixed cost for us that is always higher in the US. But we feel there are other aspects of that SG&A cost that as we get larger, we are going to be able to continue to improve our efficiency in that area, which would then offset any of those extra margin costs that we are experiencing.

We are continually working on our project execution and management of projects and that's just an ongoing factor.

Okay. Excellent. I appreciate the call. Thank you very much.

Thank you, Max.

Thank you. And our next question comes in from Gregory Jackson from Raymond James Securities. Please go ahead.

Hey, guys. Just had a question on your outlook, Canada versus the US. You described Canada as moderate, but the US is only stable to moderate. At this point in the cycle, I'd expect that the US outlook would be better than Canada. Can you comment on that?

Well, the US outlook would be better than Canada just from a perspective of opportunity in size. But it's still a much -- we have not as strong a presence in the United States as we have in Canada and the economy, overall, in the United States is not offering up as many opportunities in some of the sectors. But Canada, we have a mature presence. We have a stronger presence in many of our regions, so, therefore, have a better opportunity of taking advantage of those opportunities. In the US, maybe not as strong. But, Dan?

I thin there is also the near-term headwinds that Bob mentioned earlier around the more macro environment, a little more uncertainty with what's going on with the political situation, which causes clients to maybe be a little more cautious.

Your point is a good one to focus on. Even in a tough economy in the United States, even in an economy that is, at best, stable, huge opportunities just because of the size of the market down there. So we still see the US as a great opportunity for growth, but certainly those headwinds gives us a little bit more cautious outlook.

Okay. And then just one follow-up. On the Industrial practice area, you've guided towards moderate organic growth. But this seems to contrast with all the other indicators in the resource market right now. Just in terms of CapEx, budgets being, going down and projects being delayed or deferred. Can you just comment on what you are seeing in the specific resource markets that you are in?

Yes, certainly, the two areas that we are strong in that area is Oil & Gas and Mining. We've talked about that before. Certainly, there are lots of discussions in the mining sector with regards to projects being put on hold, CapEx budgets being lowered. From our perspective, though, that hasn't hurt us to a great deal.

The projects we are working on, they are continuing to be invested and funded by our clients. They are in those commodities, things like copper and gold and potash that seem to be a little stabler, a little stronger, and in other areas, nickel, a little weaker. So, we have a pretty diverse range of services in many different commodities in mining. So, it gives us a feeling that we can ride out any of these smaller commodity price fluctuations.

And in Oil & Gas, pipelines probably have a much less -- are much less volatile or much less reaction to the actual oil and gas price, whereas, if you are working in oil sands projects, they have a much more direct relationship to a fluctuation in an oil and gas price. The pipelines where we are focused, much less volatility in their projects associated with a fluctuation in gas or oil prices. So, again, just because of the space we are in, we are maybe a little bit more comfortable with regards to our performance in that area in 2013.

Okay. Thanks, guys.

Okay, thanks.

Thank you. And our next question comes in from Michael Tupholme from TD Securities. Please go ahead.

Thanks for taking a follow-up. Just a question on your overall outlook. You're guiding to more strength in the second half of the year. Can you help me think about how that relates to the various practice areas, please?

Okay. That's the second half of the year, I think, would be a comment that's probably more focused on the United States, which certainly is going to have an impact overall on Stantec, as well. As that second half strength applies to each of our practice areas, I think it's probably going to have more of an impact to the Transportation side of the business that is certainly more dependent on the public sector funding.

And that is certainly the area that has a lot of noise associated with it right now. And potentially, as well, healthcare, which has, again, issues associated with the healthcare bill. I would say any of our sectors that have a direct or indirect connection to the public side of the space and funding from the US Federal government would then have that be impacted in the first half of the year and have a stronger second half of the year. Projects or things like oil and gas and urban development would -- are certainly much more of a private sector funded business and has less of an impact with regard to the first half, second half fluctuation.

Great. That's helpful. Thank you.

Thank you and that was our last question. Please continue.

All right. If there are no other questions, I'd like to thank you all for joining us today and close our call by saying that we are confident in our business strategy and ability to adapt to the evolving needs of the marketplace. Our focus will continue to allow us to achieve profitable growth and provide sustainable returns for our shareholders. Thank you all, and I look forward to speaking with you again in the near future. Goodbye.

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.