Stantec Inc (STN) 2013 Q4 法說會逐字稿

Welcome to Stantec Inc.'s fourth quarter and year-end 2013 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 listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, today is February 27, 2014; 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. 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. Please go ahead.

Thank you, Pedlange. 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 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 2013 Annual Report.

I would now like to introduce your host, Bob Gomes. Please go ahead.

Thank you, Crystal. Good afternoon, everyone, and welcome to our 2013 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 fourth quarter and full year of 2013. As you know, our business objective is to be a top 10 global design firm. We do this by focusing on what we do best, providing services that make our community stronger.

In 2013, we brought to life Stantec's core values and focused our efforts to live our promise, design with community mind. I'm pleased to say the result is that we exceeded our expectations for Stantec in 2013 with strong growth, growth that demonstrates the Company's ability to capitalize on market opportunities and position itself for growth. Dan will now provide a review of our year-end and fourth quarter financial results. Dan?

Thank you, Bob. Good afternoon, everyone.

Overall Q4 2013 was a strong quarter and capping a very strong year for Stantec. Our gross revenue increased CAD93.9 million in Q4 2013 or 19.5% compared to the same period in 2012, as a result the impact of acquisitions completed in 2012 and 2013 and organic revenue growth.

Our organic revenue growth for Q4 2013 was very strong at 12% or CAD58 million over Q4 2012. On a full-year basis, gross revenue increased 19.6% year-over-year to over CAD2.2 billion compared to CAD1.9 billion in 2012. Our full-year organic revenue growth was strong at 8.8%, slightly ahead of our Q3 estimates with growth occurring in every quarter. Organic revenue growth occurred in four out of five of our practice areas. Not only did two of those practice areas have extraordinary growth, we also saw growth across all of our geographic regions.

On a full-year basis, gross margin remained within our targeted range of 54.7% in 2013, a slight decline from the 55% we achieved in 2012. Gross margin was impacted by growth in the revenue base of our lower margin businesses such as oil and gas and transportation in the United States. Our administrative and marketing expenses year-over-year as a percentage of net revenue remained stable at 40.7%.

Administrative and marketing expenses were higher in Q4 2013 at 43.7% compared to 41.6% in Q4 2012, primarily due to seasonal holiday charges and an increase in the value of share-based compensation compared to Q4 2012. Year-over-year we achieved an 18.1% increase in EBITDA to CAD261 million from CAD221 million in 2012.

Our annual effective income tax rate for 2013 was consistent with that in 2012. We had a reduction in our annual effective tax rate in Q3 -- or from Q3 to Q4 of 2013, mainly due to our ability to access certain US tax credits. Our net income for 2013 increased 20.8% year-over-year to CAD146 million, and our diluted earnings-per-share increased 18.9% to CAD3.14 from CAD2.64 in 2012.

Our cash flow from operating activities was also very strong, increasing to CAD272 million in 2013. This strong cash flow supported acquisition growth, a CAD61 million reduction in long-term debt and continued dividends. Our strong performance in 2013 also resulted in a return on equity of 18.2%.

And lastly today, we are pleased to report our Board of Directors declared a dividend of CAD0.185 per share payable on April 17, 2014 to shareholders of record on March 28, 2014, which is an increase of 12% from last quarter, reflecting both management's and the Board's confidence in our ability to grow the business and execute on our long-term strategies. Back to you, Bob.

Thanks, Dan. As a result of strategic initiatives implemented over the past few years, 2013 results are demonstrating our ability to capitalize on market opportunities and adapt to an ever-changing market. We are pleased with our organic growth, as Dan mentioned, over 8%, and the momentum we saw throughout the year.

With that, I'd like to take a few minutes to highlight some of the progress we've made this past year. First, we continued Stantec's history of growth and profitability. It was a busy year for us. Organic growth occurred in all geographic regions and in all practice area units except buildings, which was impacted by the soft buildings market and intensified competition. Organic growth was especially strong as a result of increased project activity in the oil and gas and transportation sectors. Resource related projects are an area where Stantec was well-positioned to capitalize on market opportunities.

Secondly, we continued with our strategic acquisition growth with five new companies in 2013. I would like to welcome IDE Consulting Engineers, Ashley Pryce Interior Designers, Roth Hill, JDA Architects and Cambria Gordon into Stantec's community. This builds on the seven firms we brought on board in 2012, adding to our depth and breadth of expertise while strengthening Stantec's position in those markets where we've identified opportunities for growth.

In addition, I'm pleased to note that on subsequent to the year-end, on January 24, 2014, we acquired Williamsburg Environmental Group Inc. and Cultural Resources Inc., adding approximately 115 staff to our Company. This acquisition will expand Stantec's environmental services practice in the US Mid-Atlantic, and will position the Company to capture projects relating to the National Environmental Protection Act, wetlands services, and environmental assessment in permitting.

To complete the conversation on acquisitions to date, I'm also very pleased to say that subsequent to the quarter, we signed a letter of intent to acquire Process Unlimited International Inc., or ProU. Based in Bakersfield, California, ProU is a 450 person multidisciplinary engineering, project management and design firm with seven offices across California, Texas, Georgia, and Tennessee. We expect this acquisition will add significant strength to our oil and gas and industrial service capabilities in the United States. We anticipate this transaction to close in March 2014.

The third point I wanted to make regarding our progress over the year is that we continue to adapt our business model to strengthen our client focus. In 2013, we began the process of changing Stantec's internal structure to better align with the business of our clients. Effective January 1, 2014, the Company realigned from five practice area units to focus on three business operating units: buildings, energy and resources, and infrastructure.

The alignment allows us to better support our clients, create stronger accountability for our leadership team, and better position the Company for future growth and success while maintaining the core elements of our strategy. I encourage you to take a look at our MD&A for in-depth information on our business operating units or attend our 2014 Investors Day on Tuesday, April 1, in Toronto.

A key area where our Company saw the positive results of our integrated expertise in 2013 was in resource-related sectors. Our environment and industrial businesses combine their strength to respond to the increased activity in large-scale projects in Canada's energy and resource-related sector. The desire to transport Canadian oil and gas products for export generated opportunities for intra-provincial pipelines and associated marine facilities.

Increased activity also required continual assessment, planning and permitting work. We continue to secure projects in our buildings business despite soft markets, intensified competition, and reduced availability of funding for public sector projects. For instance, our expertise and experience allows us -- allowed us to capitalize on opportunities for P3 projects. We recently secured a project in Canada to provide the consulting, architectural and engineering services for the Iqaluit International Airport improvement project, the first P3 airport project to formally proceed in North America.

We saw growth in all our infrastructure businesses: water, urban land -- or as we will call it going forward -- community development, and transportation. One recent project in our water business, resulting from our Company's reputation, our local presence and our expertise, was the opportunity to be the lead engineer and architect for PCCP Constructors, a joint venture selected for a contract with the US Army Corps of Engineers, New Orleans District.

The three new permanent canal, closure, and pump facilities will form one of the largest drainage pumping stations in the world and will operate continuously and independently during major hurricane events. This is an innovative project that Stantec is very proud to be part of. Our community development business achieved growth mostly resulting from the residential activity in typically strong regions such as Western Canada, improvements in the US East, and our efforts to diversify into nonresidential sectors.

Despite the relatively flat market, our transportation business achieved revenue growth. The integration of acquisitions over the past two years has increased our presence in local US markets, and proved to be great additions to our Company. Positive results were evident when Stantec was awarded the construction management services contract for the Westside subway transit corridor project in Los Angeles, California, one of the most regionally significant infrastructure programs and one of the largest transportation programs in the United States. Our performance in 2013 across businesses and geographies speaks to a disciplined approach to execute our strategy.

Now I'd like to comment briefly on potential market conditions going forward. Overall, we expect to achieve organic gross revenue growth of approximately 4% in 2014, while maintaining our high level of operational performance. Coming off two very strong years, we don't believe it's reasonable to expect to maintain current levels of around 8% organic growth.

We anticipate our strong sectors will see some leveling in the pace of growth, while other sectors of our business will increase slowly. We expect energy and resource development in Canada to continue, supporting industries and geographies that relate to or benefit from these sectors. We see continued improvement in the United States, as we build a top-tier position. We also expect that alternative project deliveries, especially P3s, will continue to be released in Canada increasingly at a municipal level and will present new opportunities in the US market.

In our Canadian operations, we expect to achieve moderate organic revenue growth. Canada's economy is faring well and activity in the energy sector is continuing. The residential market remains solid, especially in the West. We are an established player in Canada with strong long-lasting client relationships.

In our US operations, we expect to see moderate organic revenue growth. We are confident and well-positioned for a US economic recovery, though we are still expecting it to be a gradual improvement. Alternative project delivery is emerging as an increasing component of US infrastructure activity, though it is often best suited for large and multi-regional projects. We foresee this evolving further and with our expertise, we are well-positioned for this market.

The United States remains a very large market, and we expect our performance to improve gradually throughout the course of 2014, especially as we strengthen our presence and capabilities. In our international operations, we also expect moderate organic revenue growth compared to 2013. Most of our international business falls within our buildings business and our energy and resource business.

Looking at our individual business operating units, we expect to see the following for 2014. In our buildings operating unit, we anticipate stable revenue growth in 2014. Some of our key sectors in this unit are commercial, education, and institutional and healthcare.

Buildings in and is an area of our Company that has been more affected by the challenging economy. There are, however, positive signs that are now translating into projects and we're comfortable growth will improve going forward. Overall, the buildings industry remains cautious, and while we expect to recover from the levels of previous years because of our top-tier positioning in global expertise, the recovery may not take place entirely in 2014.

We expect to achieve moderate organic revenue growth in our energy and resources business for 2014. The sectors in this business operating unit are oil and gas, mining, and power. We anticipate energy prices will remain stable and continue to support the capital spending plans of our oil and gas clients. However, the rate of growth may moderate, primarily because of the robust growth in 2012 and 2013 and potential labor constraints moving forward.

Key to maintaining momentum in our oil and gas sector is to continue being awarded work as projects move from front end engineering and design to detail design, and to continue providing ongoing environmental planning, permitting and regulatory assessment services. With our long-term client relationships, current market opportunities and acquisitions in our oil and gas business, we anticipate the first-half of the 2014 to be relatively stable with the growth more weighted in the second half of the year.

Over 2012 and 2013, we have demonstrated strength in the midstream sector. With the addition of ProU and other recent acquisitions, we have further strengthened our capacity to offer greater support to clients in both the upstream and downstream sectors.

We expect the power sector to remain flat in 2014, while emission regulations await clarity and government funding for renewable power continues to be uncertain.

In mining, while we expect commodity prices will remain relatively low, and globally the industry will remain challenged, we do expect our clients, major mining companies, will remain focused on those commodities such as potash that have a strong long-term prospect. However, the mining business at this time remains fragile and will be dependent on capital spending in 2014.

In our infrastructure business operating unit, where some of our key sectors are community development, transportation and water, we expect moderate organic revenue growth for 2014. We anticipate that a gradual continuation of long-term trends, notably population growth, urbanization and the need to rehabilitate aging infrastructure, will further drive the requirement for our water, community development and transportation services. We believe the community development sector, primarily dependent on residential housing activity, will remain stable in Canada and continue to improve in the United States.

We anticipate capital spending will remain stable for our municipal water business and we continue to be enthusiastic about opportunities in the industrial and water resource and flood management business. In transportation, we expect public-sector budgets will provide a stable level of funding and alternative project delivery opportunities will remain moderate in 2014 in a competitive environment.

Going forward, across all our business operating units we remain committed to the communities we serve because we are a part of them. With more than 13,000 employees in over 200 locations across North America and internationally, we are increasing our critical mass where we are leveraging that local strength to pursue greater opportunities. That local strength differentiates Stantec, allowing us to win projects across diversified markets.

While 2013 was a very good year for Stantec, we continue to look to the future. Our business model is flexible, with a demonstrated capacity to adapt to new markets. The world is changing, and we continue to evolve to meet those changes.

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. (Operator Instructions) The first question comes from Saagar Parikh of KeyBanc. Please go ahead.

Hi, good morning. Sorry, good afternoon.

Hi, Saagar.

Sorry, it's been a long day. First question, related to your organizational structure change, I know in the -- in your filing you guys went through how you're changing, how you're creating new executive leadership teams. You guys have been doing really well the last couple years, few years, growing at a good pace.

What was the reason behind it? Why shake things up to some degree when things have been going so well?

That's always a good question. Why change when things are going well? I think that's actually the time you should change. That's always -- you look to the future and say, how can we improve the Company? How can we better leverage the services we have?

And this wasn't an overnight decision. We've been working towards this structure for probably the last 18 months, and really getting leadership into positions and really understanding how we can better leverage and cross-sell our services. And it really is going to focus more on the sectors of our business and where our clients are positioned. And how can we then cross-sell and leverage services better to our clients? And the better way to do that, then, is be organized around your clients and structurally be organized in your Company that way.

Like I said, it wasn't something we did overnight. It was a process we went through in the last 18 months. And we've seen the success of that already. So it is really part of the evolution of Stantec. It is sort of the next step of that, is to mature and get your position in the Company really focused around your clients and what businesses they're in.

So it's -- the right time for a change is what you're doing well. The last thing you want to do is change when you're doing poorly and react. We want to be proactive.

Okay. And then a quick question for Dan related to the guidance ranges. Seems like your gross margin guidance range has been lowered a bit in terms of the midpoint while you're A&M expenses as a percentage of revenue guidance range has been lowered a bit. Could you give us a little bit of color on why you felt comfortable making those changes at this point?

Sure. Thanks, Saagar. The gross margin change I think is really as a result of the increase in our transportation and our oil and gas businesses, which are certainly lower margin businesses than what we would see, say on the front end environmental side of things.

So given the mix of business and when we pulled all of our budgets together, for 2014 that's basically the range that we came in for gross margin. And similarly with Administrative and Marketing expenses, we were running at the low end of that range, we are -- our SG&A picked up little bit in Q4 but we're still comfortable with reducing that to the 40% to 42% range.

Perfect. And one final question, and I apologize if I missed this in the report, but your 4Q gross margin was pretty high versus what was trending in the first nine months of 2013. Can you just give us color on what happened there?

Sure, a little bit of color on the impact of our fringe benefits. We use a standard fringe benefit rate in both our Canadian and US, and for that matter, international operations, and we have to adjust that as we go through the year. And when we get to the year-end, we look at what the actual costs are relative to the standard rates that we're using and we make a one-time adjustment at year-end. We do monitor it through the year and try to keep it pretty tight, but we had a bit of a recovery in Q4 on that.

Perfect. Thank you.

Thank you. The next question is from Moulin Azir of Laurentian Bank Securities. Please go ahead.

So looking at the quarter, there were some margin compression and lower profitability on a sequential basis. Primarily due to an increase in SG&A.

Just wondering if you could speak to the increase in labor and what changed from last year. And does this tie into that labor constraints that you mentioned, and perhaps utilization?

No. It doesn't tie into labor constraints at all. I think what happens in -- and we've talked about it in the third quarter, we talk about the seasonality of our business where utilization is certainly lower in the fourth quarter and the first quarter of every year, given the weather, many of our field people can't be out in the field during the winter.

So people can only charge their time to three places to direct client projects or into indirect labor, and indirect is either marketing or administrative. And that's what drives up some of the SG&A in the fourth quarter.

Okay. Thank you. So I noticed also that the backlog is down a little bit from Q3. Is there any reasoning or that's just kind of normal?

That's pretty normal. If you go back in history, our fourth quarter backlog always tends to decrease. It's again a seasonality thing. Clients start replenishing that backlog with awarded contracts in the first quarter.

So Q4, we always see a little bit of tailing but we're certainly not concerned about that as a trend. We're pretty comfortable with our backlog going up and I think it's up about 11% year-over-year.

Okay. And you have fared extremely well despite more muted spending on the nonresidential construction side in 2013. With the US set for recovery, and thinking that you could keep some of that momentum as you cited. Just wondering if you experienced any, so to speak, growing pains or challenges handling the growth in 2013 that could limit our cap growth going forward?

Well, if you are referencing the growing pains specific to the residential market or the community development market, not really. That's a market that does have a fair amount of capability out there in the market to find people, and you can deal usually with growing pains associated with increased revenue in those sets, it's very easy.

I would say that certainly the growing pains in reacting to the increased revenue in the energy and resources sector and specifically the oil and gas business, was certainly a challenge in 2014. That will always be a challenge going forward in a very busy sector, but we have some very good clients, some very good projects and that tends to attract people. So you've always got to worry about it. It's always growing pains in reacting to an increased market but we're faring pretty well.

Perfect. And lastly here, your organic growth target for of 2014 at 4% I know you touched on it. It's less than half of what you actually did in 2013. Wondering if you're seeing a potential contraction in your end markets or it's just more caution with providing guidance?

No. It's certainly just the latter. It's more caution. As we said in the formal comments, we are coming off two very, very strong years of organic growth revenue. We don't think it's reasonable to expect to maintain that current pace of growth if you looked at our fourth quarter or even the third quarter in our oil and gas business, it's 20%, 25% growth.

So we anticipate those sectors to continue being strong, but certainly not at those levels. So we're certainly not negative. We're not suggesting any retraction in anyway.

In fact, we think 4% organic growth is still pretty good in the economy that we're in. And it's hard to compare what we've done in the last two years going forward. So it's a bit of cautiousness but also a bit of reality that we had came off a couple very strong years and 4% in this market is still pretty good.

Perfect. Thank you.

Thank you. The next question is from Sara O'Brien of RBC Capital Markets. Please go ahead.

You guys have shown some pretty consistent EBITDA margin for the last three years and now you're putting out a range of 13% to 15%. I'm wondering is that just related to acquisition opportunities and how that might skew it up or down? Or is there anything that fundamentally we should think of as different impacting margins going forward?

I don't think there's anything fundamentally different, Sara. I think we've just added this year because often when we talk about EBITDA, or the analyst, the investment community talk about EBITDA, we never really put in a target there or a range. So we thought it would be effective to do that. It's a new target this year. The 14% or thereabouts is fairly consistent, so we're expecting to be right in the middle of that range again.

It's also as a result -- when we've been tracking moving further into the industrial market with the lower gross margins, we really wanted to point out the fact that even with lower gross margins in those businesses, they also have associated lower SG&A costs which then really doesn't affect the EBITDA line. That stays relatively stable. So that's why we figured we'd add that as well because it provides that color, that even though your gross margins may be retracting slightly because of the business, your EBITDA margin really isn't impacted to any great extent.

Okay. Great. And wondered on the new reporting structure, I may have missed this but have you recruited senior managers for each of those three divisions or how does it -- is it internal promotions that you've made? Wondering how you look at the management structure any differently now.

There is no changes to our senior management and the senior leadership team. This is to really give an opportunity for bringing leadership from within the Corporation up to different levels. It's really tasking a layer of leadership that we've had in place for many years to be more involved in the business, more responsible for the business, giving some of our existing senior leaders the capability and time to be able to focus more on emerging markets and emerging opportunities.

As we've said before, this is really an evolution that we knew was coming and really does allow some great succession planning that's been going on in the Company to actually be realized. So every single individual is from within. And we're very proud of that fact.

Okay. I assume that your Investor Day this is the way the presentations will go? You'll have each of these divisional heads?

We'll have some of them there. We want to ensure that were putting probably the individuals in front of you that have the most to say and where the impact to the business but yes, you will see a much larger cross section of our leadership.

And maybe on acquisition pipeline, because we now have the segmentation different we see energy and resources at 43% of your business. How comfortable are you growing that portion to 50% plus or do you look to maintain an equal balance with the three segments now?

You always want that balance. That's been our history through the Company is you never want to be weighted too much in any one division or practice area or sector. We love that the diversity and balance.

At the same time, a lot of our acquisitions are somewhat opportunistic. You can't force them to happen. But certainly, we want to be able to adapt to opportunities that are out there.

We had this conversation probably eight years ago where the urban land business was at 37% to 40% of our business. We have the ability I think of balancing that off and certainly are looking for opportunities in infrastructure and buildings at this point.

Okay. Great. And maybe on a very small point but on consulting subcontractors in Q4 was quite high. I wondered if there was anything to read into that or any reason why the quarter would be higher?

That would just be a mix of business, Sara. There's really nothing to add in with respect to difference between gross and net revenue. We're going to see those kind of fluctuations depending on the time of year and the mix of projects.

Okay. Great. Thank you.

Thank you. The next question is from Bert Powell of BMO Capital Markets. Please go ahead.

Bob, I know fit's always front and center for you guys on acquisition front, but price does matter. And I'm just wondering if you could give us a sense in terms of what the market looks like today, now that the world's starting to get better, have prices gone up or have prices stayed flat, but the underlying fundamentals got better making the business more attractive? Wondering if you could just give us a little bit of sense in terms of how the acquisition environment looks to you guys today.

Not to give you a vague answer but it is a very -- it is different from company to company, sector to sector. There is still some sectors in our buildings business, for example, that the companies are coming to us with probably not as strong a structure as they had a few years ago. That's going to affect valuations.

Your growth potential is not maybe as strong as it was five years ago. That's going to affect valuations. Then you move to something like the energy and resources sector, where the fundamentals are strong, the growth potential is strong. That's going to affect valuations at the higher end.

But in our fundamentals and our strategy for evaluating companies hasn't changed from whether it's a strong economy or a weaker economy. It really comes down to the point of how is that company going to fit into your firm? How can you then leverage their capabilities, their client relationships?

And really, if you look at the history, our multiples of EBITDA and our multiples of revenue are very consistent for the approximately 100 acquisitions we've come in a relatively tight range. Really the variability is from sector to sector and how the growth opportunities for those sectors look and can we leverage capabilities and grow that business faster? That will probably have more of an impact on the valuation in some of the multiple ranges.

Can you give us a sense in terms of how many guys you'd be talking to today versus last year? How good the pipeline looks? 2013 was kind of a light year on the acquisition front. Just to get us a sense of what 2014 could look like, whether you build that pipeline and 2014 is the year where you can execute on closing some of these?

Sure. I actually, when you say 2013 was light, it was actually probably one of the busiest and stressful times because of the number that we looked at and the work we put into it. Unfortunately, a lot of those didn't close, but that's key to this, is you can't force those. You can't just close an acquisition for the sake of closing it. It's got to work. It's got to fit, the cultural fit's got to be there. So 2013 was really busy. It's just didn't result in a lot of companies closed.

From a point of view of the pipeline, it's as strong as it's ever been. We -- I'd say I think we said this before, at any one point in time, we're talking anywhere from 20 to 50 different companies I'd say at this range we're in the 30 range. Now that's at different stages. We may be close to signing an LOI with a handful. We may be discussing some details with another handful, and then we're setting up meetings with a bunch of others.

So it's certainly a process that takes a long time. And our concern is getting in front of companies that we really want to be added to our firm and focused areas for growth.

Because we're inquisitive and because everybody knows we're inquisitive, we get just about everybody that's contemplating selling their company phone us up. So it becomes a very busy period and you need to filter through what makes sense, what doesn't. And you have to do that quickly.

But it is -- I'd have to say, we're very comfortable with the depth of the pipeline. You always want more because we understand how difficult it is to get to close, but we're pretty comfortable where we are.

Okay, thanks. And then a question for Dan, can you explain to us what's this derecognition of note payable in the quarter?

Sure. That was -- when we do acquisitions, you have certain liabilities that you accrue for. We resolved that liability, it ended up in a -- basically you have to bring it back into income. You can't put it back with respect to the accounting rules. You can't put it back against goodwill. Which is really where it belongs. You have to bring it back into income. We've resolved that liability. It wasn't required. And therefore that's the appropriate accounting treatment for it.

Okay. And then just lastly, Dan, on the WIP in the quarter on the balance sheet came down quite a bit, resulting in pretty good cash flow generation. More so than past years when you look, Q3 to Q4. Anything particular going on there?

I think there's really two things there, Bert. And the first one has to do with again some of the seasonality with the office shutdown during the seasonal Christmas break. You're not generating work in progress and you're not doing invoices so that naturally will bring down your days sales outstanding.

But at the same time it's one of those areas that we continually focus on and we had very good billings in Q4 and cash collections. So, those two factors really drove down the DSOs.

Okay. Thank you.

Thank you. The next question is from Michael Tupholme of TD Securities. Please go ahead.

I think this was sort of asked earlier, but I want clarify, the admitted marketing expenses as a percent of net revenue rising a couple hundred basis points year-over-year. In the MD&A, you talked about additional charges from seasonal holidays. Can you just expand on that a little bit?

Sure. It happened primarily in the United States where we have -- we basically closed our office between Christmas and New Years. And it resulted in about four or five extra days of administrative costs in December, which we didn't have. And was probably about three extra days compared to 2012. So that's what increased a good portion of the SG&A.

As well as the change in value of our DSUs and RSUs as a result of the share price. Those two things are the primary factors that impacted SG&A in Q4.

So the office was closed more for a longer period this year than was last year?

Yes. We gave the staff off in the United States off between Christmas Day and New Year's Day.

Got it. Okay. And then just on the regional outlooks, you described the outlook for both Canada and the US as moderate growth. The organic growth in Canada's been tracking well ahead of the US, even though we saw some nice improvement in the US organic growth in the fourth quarter. But for them to be both described as moderate, should we be assuming, I guess, further pickup in the US, and then deceleration in the growth in Canada? Or are these just broad comments and we'd still be expecting Canada to be ahead of the US?

Canada I think will still be ahead of the US. But I think your comment was correct. You'll probably see a little bit of moderation of that growth in Canada and a little bit of acceleration of that growth in the United States through 2014.

When you think of the United States as -- sorry, Canada's, growth predominantly last year was in the oil and gas sector. We feel that's going to moderate and not be quite a strong, which will then have an impact on the overall growth rate in Canada. In the United States we see the economy continuing to get strong, albeit slowly.

So I think that moderate -- our range for moderate in the past has been from 2% to 5%. So both of them will probably fall within that 2% to 5%, but I would expect Canada to be a little bit larger.

Okay. And lastly the low tax rate this quarter, I'm not clear that was just a unique situation but maybe you can clarify that as well as tax rate guidance for 2014?

Sure. You have to look at the tax rate on an annual basis. We try to predict what that annual tax rate is as we go through each quarter.

The reduction in the tax rate in the fourth quarter was as a result of recognizing really R&D credit from prior years that we actually worked through those, and so we got a bit of a benefit from the R&D credits from prior years and then recognizing the current year research and development credits. We still expect our tax rate to come in around the 28.5% or below 28.5% for 2014.

Okay. Perfect. Thanks, guys.

Thank you. The next question comes is Pierre Lacroix of Desjardins Capital Markets. Please go ahead.

Basically all my questions got answered, but in terms of growth by acquisition, Bob, what is the message going forward again in terms of your target was in the past something like between 10% and 15% per year of growth there. Are you sticking to that number more closer to the 10%, or where do you stand on this?

Overall growth target we say is 15%, and that will be a combination of organic growth and acquisition growth. So if we're projecting around 4% organic growth, our target would be nice to get the 11% to 12% in acquisition growth.

We've always been cautious of that, because you never want force that issue, and you never want to push an acquisition to close just to achieve a target. But certainly over a 5-year period, that 15% is reasonable and organic for today is going to be around a third of it and acquisition is going to be around two-thirds of it.

So yes, we're continuing to go forward with that 10% to 12% acquisition growth in our mind as we go forward.

Understood. One last, on the biggest projects you have in the portfolio, at this point, with the oil and gas now being the best momentum you have in the business, do you see the projects or the biggest projects in your portfolio getting bigger in terms of total share of your revenues?

Yes. I mean, we certainly are now becoming the size and the expertise and being able to leverage that and winning some much bigger projects and certainly a lot of those are in oil and gas, a lot of those are in mining, which are typically larger projects. But that being said, we're also leading very large projects in buildings, and the Iqaluit Hospital -- the Airport we referenced is a very large project, the PCCP project in New Orleans, the world's largest drainage pumping station, is one of our largest projects. And it's in our water group.

So we are well-positioned to work on very, very large projects in all of our business operating units. The same point in time, we want to send the message that that's not our only business. It is really a small part of what we do. We love the projects that are mid-sized. We love smaller projects for good clients, that maintains relationship and builds that relationship to allow us to work on their big jobs when they get them.

So it's the size that we-- what matters to us is, all size of projects are important for a really good client because you can leverage that into bigger projects and a longer relationship. But yes, big projects are nice to talk about as a big company, but for us it's part of the plan and part of the strategy and all sizes of projects are important.

Bob, will you be ready to give me something like an example in the CAD1.4 billion backlog, what is the biggest ticket in there?

We don't disclose detailed information of our backlog, but we can tell you projects that we've been awarded and I think we do provide a lot of that through our MD&A quarter by quarter. We usually like to reference some of our largest projects or projects that have significance to us, or are part of a strategy we have that shows how we're executing that strategy. But certainly, I think in the Investor Day, that's one of the things we'll show is some of those projects and some of the strategies we're developing.

Okay. Looking forward to it. Thank you very much.

Thank you. The next question is from Ben Cherniavsky of Raymond James. Please go ahead.

You just had 20% earnings growth last year. And you raise your dividend 12%. And you're still sitting on almost no debt.

Are we to read into that, that you're trying to position yourself for some kind of monster acquisition? Unless you do something of a very significant size, it's hard to see how you would get a more efficient capital structure unless you're contemplating other strategies like a share buyback or another dividend increase or a special. Can you just talk a little bit about your leverage and those different options?

Well, certainly our focus is still to deploy our capital in our acquisition strategy. That certainly hasn't changed.

As we said a few times on the call, we talked about many times, you can't force that. You can't overpay for companies. You can't buy companies that don't fit. You got to continue to work at it and I think it's more of that, that 2013 was a year where we didn't close as many would as we would have liked to. But we see the pipeline very strong.

You also know Ben, we've talked a number of times, big acquisitions is really not our style. It hasn't been in our style through our history. The sizes we do are actually relatively small.

That being said going forward, you'd like to do bigger ones, but the monster acquisition, the big risky acquisition, really, we're not saying we'd never do it, but really, that's just not our priority and not something we're focused on. That would probably be way more opportunistic type of thing. And we always -- ask if Dan to add some more color to how we deploy our capital the best way. From my perspective, buying companies that fit into our strategy is the best way of deploying that capital today.

Yes. And I think we definitely want to continue to reinvest in the business. At the same time, I've been all over Bob and others to make sure we try to get those acquisitions closed. But as you said, you can't push it. Our optimal capital structure is in that one to two times and yes, we're a little below that and --

You're way below that, Dan.

We're trying to be nice.

Let's be realistic about it. Like (multiple speakers) I mean, I understand -- I agree -- understand your strategy and your history and all the years I've covered you you've never -- maybe there's been one or two acquisitions you might call them monster, but it's not your style, so if you're not contemplating that, why would you be sitting on a capital structure like this? Why wouldn't you at least have had a more aggressive dividend increase?

Okay. So we had one year of relatively slow acquisition growth. As you know, with our strategy, that's going -- it takes time. This is the first time in five years that our capital structure is about as low as it is. We expect that to improve with the acquisitions that we're going to complete in 2014.

At the same time, we want to make sure that we have a consistent, growing dividend. And the payout ratio is kept fairly conservative so that we can continue to reinvest in the business. That's our strategy. That's the targets that we've set and --

And that's the point. Consistency has been our strength and its consistency regardless of what's going sometimes around us. And this is -- we have what we feel is a very strong acquisition pipeline. We see lots of companies there that we will be able to deploy capital and will be able to spend that money on the investments we want.

So if that strategy is strong, if that strategy view is going to be executed, why change it just because you've got a little higher target than you may like?

No. I'm not suggesting that you should go and buy more companies just to get your leverage up, but you shouldn't be sitting on idle cash. I mean, you in my model, if -- even if I assume acquisitions like you've done in some of your busier years, you still end up with below your target capital structure.

So again, the only thing that we can criticize you guys about is being too conservative. So let me play devil's advocate on that. (multiple speakers) It's a good problem to have, guys. But I think it's still something you guys need to think about. You just actually lowered your payout ratio at a time when your balance sheet's the strongest it's ever been.

Like I said, I think we have a pretty strong plan going forward for deploying that capital and we're pretty confident it's the right thing to do.

So that's the way to read into this is, is that you're ready to pull the trigger on this?

We're always willing to close acquisitions if they fit into what we're doing and it's for the right price. And we feel we've got a lot of those opportunities in front of us.

I think the other think you need to remember, the first quarter of the year, we do have additional cash that gets paid out. We accrue our merit, for example, through the year that gets paid out in the first quarter. So the cash position you're going to see change.

Okay. One second one. Just on the P3s, which has been a bigger part of your story, you're starting to see it emerge in the US. I remember when this market emerged in Canada and you guys started to dip your toe into it. You said it tends to be a market where you lead with expenses and you're not going to win all the bids. And the success of the strategy really depends on getting a sufficient batting average, winning enough to cover the cost of those that you lose. So my question is, what has been your batting average with the P3s over the last couple of years would you say?

We don't keep an official record specific on P3s or APD, which is a design build as well. It's, I would say, lower than we'd like it to be. And that is focusing us to ensure that going forward, we're being a little bit more selected on the P3s.

But I would say that winning a P3 so you can pay for the ones you lose is probably much more of a constructor, contractor issue than us. We get paid for our P3s, albeit not full value. We still get paid for them, so the risk for us is lower, but that's still being said, I think we can do a better job and I think we are going forward, putting a little bit more discipline in front of the projects we want, the partners we want, and the projects we feel that we can make a good profit on.

So we're going to be a little bit more selective in the Canadian market. And certainly the selectivity in the US market is even more important, because the P3s there drag on for years. And we've got a track record that I think is at an industry high. And we're still proud of it, we just always like to be better.

Okay. Great. Well, thanks very much. Great year too.

Great. Thanks. Appreciate it.

Thank you. The next question is from Anthony Zicha of Scotiabank. Please go ahead.

Bob, with reference to transportation segment, we've seen four consecutive quarters of declining organic growth rate. Could you please talk about prospects and what states are likely to lead a turnaround? Stantec of course, has good exposure in California. It seems that the Los Angeles and San Francisco markets are picking up. So is Stantec benefiting from this trend?

So yes. I think your reference was that the transportation practice area in 2013 was retracting. In fact, the transportation practice area had a very good year. It had organic growth in every quarter. We came out the year having organic growth of close to 7% or so. So we've actually been very happy of our transportation sector growth and, quite specifically, happy with that growth in the United States.

In the US west, most of our transportation efforts are more along the construction management program management side. A little lighter on the design. Our strength in the US East is much more in the designs. And we have become, I think, a very strong player in the design build market in the United States transportation sector. We have a lot of strong partners and a lot of strong clients.

So we're pretty happy with our transportation growth. And we see that continuing next year. We see the US east having -- with the acquisitions we've done in the last three, four years -- as having a very strong position.

But that being said, the transportation market in the United States really isn't growing. The transportation market for us is, by our growth, has been essentially stealing work from others. And the transportation growth in the United States is still really waiting for transportation build that has some significance and longevity to it. And today,, that's still not there, and you're probably not going to see significant growth in the United States transportation sector until they fix that build, which is still, in my opinion, some time in the future.

And what about the California market? Do you see a pickup in those major cities?

Yes. We're sitting here right now in Irvine, California. And we drove the 405. We're doing all the construction management work on that project, which is probably the busiest road in the United States.

Huge amount of work going on in California, funded mainly through special funding bonds by the actual municipalities and not the states. That's again the issue here in California is the state has very little money to invest. And that's created some desperation in the transportation sector here and they're coming up with some pretty innovative ways of providing funding for a very large project.

So we are playing a part of that. We see opportunities for further growth in that market here in California.

Okay. Good.

We provided a good reference to the type of project in the conference call script and in our materials.

Great. And one last question. Looking at urban land segment, it's showing a good positive momentum.

So could you give us some ideas here on prospects and what the expected drivers will be, and could we see organic growth rate above the 9%? We've gone from negative 2.4% to 3.8% to 8.3%, so the momentum clearly is up there.

Yes. The momentum is good. We're pretty happy with what we see, which is an improving market.

At the same point, that community development is really reliant upon that residential market. That residential market is reliant upon a strong economy. And that strong economy then gives some confidence to people to go out and buy houses and get a mortgage. And until you see that strong confidence in the United States, I don't think you're going to see that 9%, 10% organic growth. But the fact is, it will happen.

The US economy's continuously improving, continuously getting more optimistic on opportunities, and there's going to be that tipping point at some point, where people then feel comfortable enough to say, okay, I'm going to go get a mortgage and buy a house. And we see that approaching soon. Don't know how to define soon.

It's really reliant upon the overall strength of the economy and the confidence in the overall consumer. And that's a very tenuous situation here in the US. But much more positive than last year and continuing to get better.

Bob, how quickly can you scale up when you see this recovery?

Very quickly. Not to make light of it, but the community development isn't technically a very difficult business. How you put the projects together, how you react, having that local strength and local context of knowing the local community's rules, laws, regulations for development, knowing the developers that owned the land and property, all of that is where the secret to that success is. Once you have the project, finding the people is much actually in this sector a little bit easier than the others. So we can ramp up very quickly.

Okay. Well, thank you very much.

Thank you. We'll take our next question from John Rogers of D.A. Davidson. Please go ahead.

Couple of clarifications. First of all, in terms of the acquisitions that you've built into the growth assumptions for 2014, back of the envelope -- and I may be off -- but looks like it's around CAD150 million to CAD180 million in revenue. How much of that is already in place?

So how many of that is already in place from a perspective of --

Of previously closed deals? Some of them that closed out during part way through 2013 and your most recent acquisition in 2014? In other words, I'm just trying to get a sense have you got half of that done? A third of it? None of it?

Dan and I are trying to do the mental math. Maybe 10% or 15% of that is in acquisitions we did in 2013. And the few that we've done in the first quarter or the first few months here of 2014.

We haven't closed ProU yet, and so that will be coming in in March, and that will add perhaps around CAD40 million of revenue, something like that. But --

So we've still got lots of opportunity for filling that projection of the CAD180 million you said, but maybe 10% or 15% of that is in place or will be in place soon.

Okay. And then secondly, Bob, you've indicated the buildings market is --isn't growing -- I want to make sure I characterize it right. Isn't maybe growing as quickly as we thought a couple of quarters ago in terms of the pace of the recovery?

That's correct. Yes. It has not grown as well as we thought it would in 2013. And in fact it, retracted and that retraction continued throughout the year.

I'm just curious is your sense of that -- and also what's your exposure, private versus public or quasi public project? And then how should we think about that -- those markets?

I would say that the quasi public is a good way of putting it because the [buildings] group -- I would say that's one group where we have much more P3s and design builds that in the other sectors those P3s are dependent upon public funding, [so] really for private clients. So I would say that that is a sector today for us that probably was skewed more towards the public side than the private side. It's been public side that has retracted and the private side has actually grown, doing more retail work for Targets and Kohl's and McDonald's restaurants and rollout retail, that has grown for us in the private side and it's public side, the healthcare and educational ones that has retracted.

And it's sort of an evolution for Stantec. We're a very large group now. And what we found is a lot of the companies we acquired over the years were buildings engineering firms that were reliant upon architectural companies, that work was drifting up and now much more of our work is integrated.

So it certainly is an area that we almost have had to retool who we are, what we do and how we do it, and that was really being done throughout 2013. We feel that's now in place, with the realignment of the leadership and the VOUs. We have a much different style there. And we really do believe we can now leverage that strength in a different way.

So it's been an interesting year and an interesting transition. But we feel that that end is near and we certainly see us starting to win some bigger projects and getting back some of that work we lost.

Okay. And then lastly, the longer-term, you're now ranked -- was it what is it, number 10 in engineering services in North America? But most of the companies are ahead of you also have much larger construction elements to them. Is it still of your mind that you don't need to go there?

That's still in our mind. We don't need to go to there. And actually we're quite proud of that. Thanks for bring it up, John. Because it is what differentiates us maybe from those, is that we still are that [peer] design firm, and still focused on what we know our business still has that clarity to it. Where when you get the construction and you try to blend that construction in, it's a much different business and it affects what you do, how you do it, when you do it.

So for us, having that clarity of design, focusing to what we do is important to us. And again, becoming the differentiator, because in the P3 alternative project delivery design build world, we're a great partner, and we can choose contractors all over North America, multiple sectors, and we can then leverage our design expertise with many different partners, where some of our competitors have to take care of their construction arm and are then forced to use a team that may not be the best positioned team to win the project.

So for us, we feel that design focus is not only part of our culture, but is also becoming a bit of a differentiator for us. And we feel the market is still really strong for us to continue to find firms, grow and expand our services within that design-focused culture. So we're still pretty confident that's a great strategy for us.

Okay. Great. Thank you very much.

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

Thank you. If there's no further questions, I'd like to thank you all for joining us today. As a reminder, I hope you can all join us on April 1 in Toronto for our Investor's Day.

I'd like to close our call by saying that we are confident in our business strategy and the 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 to our shareholders. I look forward to speaking to you all again in the future. Thank you.

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