Stantec Inc (STN) 2014 Q4 法說會逐字稿

Welcome to Stantec Inc.'s fourth quarter and 2014 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. (Operator Instructions) As a reminder, today is February 26, 2015, and this conference call is being recorded as well as broadcasted 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.

Stantec management would like to caution you that this call will include forward-looking statements and forward-looking information within the meaning of applicable US and Canadian securities laws. 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. I would now like to introduce your host, Bob Gomes. Please go ahead, sir.

Thank you, John. Good afternoon, everyone, and welcome to our 2014 fourth-quarter and annual results conference call. Dan will provide a brief summary of our financial results for 2014 and the fourth quarter. I will then follow with some highlights from our performance in 2014 and an outline of our market outlook for 2015. We will then address individual questions.

Today, we released the results of Stantec's operations for the fourth quarter and full year of 2014. I am pleased to report we achieved solid results with growth across all our geographic regions and business operations for the year. These positive results for 2014 build on what was a very strong year for Stantec in 2013. While the second half of 2014 was marked by shifts in market conditions, our continued profitability over the year resulted from our diversified business model and our consistent discipline strategy.

Dan will now provide a review of our fourth-quarter and year-end financial results. Dan?

Thank you, Bob. Good afternoon, everyone. Our revenue growth in Q4 2014 was positive compared to Q4 2013 and caps off a solid year of growth. During Q4 2014, our gross revenue increased by CAD72 million, or 12.5%, compared to the same period in 2013, resulting from the impact of acquisitions completed in 2013 and 2014 and organic revenue growth, as well as weakening of the Canadian dollar. The average exchange rate for the Canadian dollar was CAD0.88 during Q4 2014 compared to CAD0.95 in Q4 2013.

Buildings continued its momentum of organic revenue growth in the quarter with an increase of 8.4% compared to Q4 2013. This growth was mainly due to improved project management and growth in our Canadian and international healthcare sectors. In Q4 2014, our energy and resources business had organic revenue retraction of about 6.6% compared to Q4 2013. Recall that we were comparing to an exceptionally strong Q4 2013 performance. We have seen a slowdown primarily in terminals-related work in the oil and gas midstream business.

Our infrastructure business operating unit achieved 4.7% organic gross revenue growth in Q4 2014 resulting from growth in each of the water, transportation, and community development sectors. On a full-year basis, overall gross revenue increased 13.1% year over year to over CAD2.5 billion in 2014 compared to CAD2.2 billion in 2013. Our full-year organic revenue growth was positive at 3.9%. This growth was due to increased activity in all of our business sectors and geographies, as Bob previously mentioned. On a full-year basis, our gross margin remains within our targeted range at 54.9%, an increase from 54.7% in 2013.

Administrative and marketing expenses were lower in Q4 2014 at 42.5% compared to 43.7% in Q4 2013. The expense in Q4 2013 was historically high due to additional charges for seasonal holidays and an increase in the fair value of restricted share units and deferred share units. Administrative and marketing expenses increased sequentially from Q3 2014 to Q4 2014 partly due to lower utilization seasonality, which is fairly normal in Q4, and increased integration activities from acquisitions.

In Q4 2014, EBITDA increased 10.9% to CAD69.1 million from CAD62.3 million compared to Q4 2013. And year over year, we achieved a 12.8% increase in EBITDA to CAD295 million from CAD261 million in 2013. EBITDA as a percentage of net revenue has been very consistent over the last several years.

Our annual effective income tax rate for 2014 was 26.3% compared to 26.5% in 2013. Our tax rate decreased sequentially due primarily to more-than-expected income earned in lower tax jurisdictions and less income earned in higher jurisdictions. Our net income for full-year 2014 increased 12.5% year over year to CAD164.5 million, and our diluted earnings per share increased 10.8% to CAD1.74 from CAD1.57 in 2013. Our contract backlog remained healthy with a 28.6% growth to CAD1.8 billion at the end of 2014 compared to CAD1.4 billion in 2013. Our balance sheet remains very strong, with cash flow in the year supporting acquisition growth and continued dividends. We expect cash balances to decline in Q1 2015 as a result of anticipated acquisitions, taxes, and merit payments.

Lastly, we are pleased to report, today our Board of Directors declared a cash dividend of CAD0.105 per share payable on April 16, 2015, to shareholders of record on March 31, 2015, an increase of 13.5% over last quarter. This is the third year in a row where the Board has declared an increase in the dividend, reflecting both the Board's and management's confidence in our ability to continue to grow the business while providing enhanced shareholder value. Bob?

Thanks, Dan. First, as Dan mentioned, we saw growth across our business despite the shifts in market conditions. We demonstrated the strength of our diversified business model now with more than three years in a row of sustained organic growth and 60 years of profitability. Second, we continue to successfully evolve our Company by completing our realignment into three business operating units. And third, we demonstrated the strength of our disciplined and targeted acquisition strategy with 8 acquisitions in 2014: the close of the Dessau acquisition this January; and with the anticipated addition of Sparling, based in Seattle, announced earlier this month. In addition to Dessau and Sparling, we welcome the Williamsburg Environmental Group, proU, JBR Environmental Consultants, SHW, Wiley Engineering, USKH, Add Inc., and Penfield and Smith to the Stantec community in 2014.

The addition of these companies has strengthened our presence in North America as we continue to build a top-tier position in our sectors and strategically position our Company for market opportunities. And with the close of the Dessau acquisition in Quebec, we now have full capability to service national clients wherever they may be operating across Canada.

Looking at our performance across our business operating units, I would like to provide you with some highlights from 2014. Over the past year, we demonstrated that our diversified business model has responded well to changing market conditions. In our buildings business operating unit, we achieved strong organic growth in the second half of 2014, leading to overall organic growth for the year. We capitalized on strengthening opportunities, especially in key sectors such as education, healthcare, and commercial. For example, during the fourth quarter of 2014, we secured architectural and engineering work for the lake forage -- Lake Forest College Johnson Science Center in Lake Forest, Illinois.

In our energy and resources business operating unit, we achieved moderate growth in 2014 compared to a very robust 2013 and 2012. In our oil and gas sector, strong organic growth occurred in the first half of 2014, with the retraction occurring in the second half of the year due to the winding down of certain terminal projects and the completion of some of our pre-feed work. We expect these conditions and the impact of lower oil prices will affect revenue going forward, especially in the first half of 2015.

Our mining sector achieved increased organic growth revenue in 2014 over 2013 despite the continued slowdown in the industry. Our power sector had an increase in gross revenue in 2014 over 2013 as a result of a resurgence in investments of transmission and distribution infrastructure. Our infrastructure business operating unit achieved growth in all its sectors.

In our water sector, our strength in the traditional water and wastewater areas and the growing need for our flood management expertise led to significant new projects, such as the five-year renewal of our US nationwide risk mapping assessment and planning contract with FEMA and several other ongoing projects with the Tennessee Valley Authority. The strength of our diversified business model was again evident in our transportation sector, where we continue to secure local and regional projects, especially in the United States. We achieved strong results in our community development sector in part from our ability to capitalize on growing activity in the US housing market and the continued strength in the Canadian markets, especially Western Canada.

Now I would like to comment briefly on potential market conditions going forward. Overall, we believe we will achieve a moderate increase of approximately 3% in organic gross revenue in 2015. Our outlook for Canada is to end the year with stable organic growth in the range of 0% to 2%, with some potential retraction in the first half of 2015 primarily due to the retraction in our oil and gas sector. Overall in Canada, business sentiment remains positive, but the recent decline in oil prices has moderated the outlook in the cyclical energy sector. If commodity prices continue to stay down for the long term, we can anticipate a slowing of projects being advanced by our clients.

We expect increased activity in our sectors and regions linked to non-energy-related businesses. With our recent acquisition of Dessau in Quebec, we have significantly strengthened our ability to service our national clients from coast to coast. We are established in Canada with strong, long-term client relationships, and our presence in Quebec will serve to strengthen that position.

In the United States, we expect moderate organic growth for 2015. Overall, the US economy gained momentum in 2014, and we expect it to carry through in 2015. The United States remains very large market. And with our presence continuing to gain critical mass and diversity across sectors, we are confident our performance will gradually improve through 2015. We also expect moderate organic growth in our international operations for 2015. Currently, these operations, mainly within our business buildings operating unit and mining sector, make up a small percentage of our business.

In our buildings business operating unit, we expect moderate growth for 2015. Overall, we anticipate that the buildings industry will recover from the levels of previous years. And because of our top-tier positioning and global expertise, especially in healthcare, commercial education, and airports, we believe we are well positioned to capitalize on this growth. Now with the addition of Add Inc. and the SHW Group, we have expanded our expertise in mixed-use, offices, and retail in key urban centers in the United States. We expect our energy and resources business operating unit to be stable overall for 2015, with more traction in the first half of 2015 compared to 2014, but then stabilizing in the second half the year.

A significant portion of our work in the oil and gas sector is in the midstream segment and in front-end planning and permitting on large multi-year projects. We believe these projects will continue to be advanced in 2015. However, our clients' decisions to proceed with the next phase of these projects will affect our revenue generation. It should be noted that a portion of our work in this sector involves work on all sides of projects, pre-feed studies, and environmental permitting and compliance work that are not as affected by the reduction in capital spending caused by the lower oil prices.

Overall, we do expect a slight reduction in revenue from this sector in the first half of 2015, but we expect our diversity in this sector to moderate this reduction somewhat. We expect the mining sector to remain stable, although the continuation of low commodity prices may limit new project spending or delay current projects.

In the power sector in Canada, we expect that investments in the transmission and distribution infrastructure will continue to provide us opportunities. In the United States, we anticipate some recovery driven by many of our clients focusing on making their systems more resilient.

In our infrastructure business operating unit, we expect moderate growth in 2015, with public infrastructure funding remaining relatively stable across North America. We believe that the community development sector, primarily dependent on residential housing activity, will continue to improve in the United States and remain stable in Canada.

In transportation, we expect public-sector budgets to provide a stable level of funding and alternative project delivery product opportunities to remain moderate in 2015 in a competitive environment.

We anticipate growth in our water business driven by the continued demand for water and wastewater projects and the increasing demand for flood mitigation and water resource management. Across our three business operating units, we expect the diversity of our business model to maximize our opportunities in areas of the market that are strengthening while offsetting those at the lower end of their cycle.

Now with over 15,000 employees operating out of 250 offices, we are positioning our Company to capitalize on opportunities in 2015 both in Canada and the United States. We remain disciplined in our strategies for continued organic and acquisition growth and remain confident that our flexible and responsive business model will adapt to evolving market opportunities.

This concludes the comments for today. Dan and I are now available to answer any questions you may have. John, the conference call operator, will explain the question procedure. John?

(Operator Instructions) Sara O'Brien, RBC Capital Markets.

Bob, can you comment on the degree that Alberta is important in your infrastructure and buildings works and how that might unfold into maybe changing in outlook throughout 2015 if commodity price does not improve?

Our infrastructure business, which is transportation, water, and community development, it's really diversified across all of North America. I think if you would have looked at Stantec three years ago, I would say that roughly 30% to 40% of that business would be in Alberta. My guess now is less than 20% of that business is focused in Alberta. It's much more diversified. Our transportation business, for example -- only 60% of our transportation business is south of the border in the United States. So I think that's why we have some confidence that Alberta, although it's important to us, over the past three years the other parts of our business have actually grown in other areas outside of Alberta.

So we are not too concerned. And it's interesting that even though their oil prices are having an impact, that impact we haven't seen affect our water business or our buildings business to any great extent. Transportation is a little bit more dependent upon the public-sector funding, and the Alberta government has made comments with regards to those potential cutbacks in deficits. But to date, we really haven't seen that impact and we don't see it as being overly significant. Again, if oil prices continue to drop, that may have a further impact, though.

Okay. And just in terms of your buildings, how much of that would be related to Alberta versus other geographies?

I would be guessing, Sara, so that would be a bad guess probably. But, again, it's our buildings business. It's well diversified. We do have some significant projects going in in Alberta, specifically in Edmonton right now, but I don't think it's more than 10% or 15%.

Those projects are already in the ground being built as well. We have a large presence internationally and in the US in our buildings practice. So less exposed to buildings in Alberta, Sara.

Okay, great. And then maybe just following on the oil and gas weakness, just wondered if there -- do you view this as an opportunity to -- for expansion in the US market given multiple contraction of our peers and potential targets, or is this something that you wait to see how things play out?

No, I think we are very confident that long-term, that oil and gas, that energy business is still a good part of our diversified model. We are always looking at opportunities at opposite ends of the cycle to see if companies that may not have been interested last year or too busy to talk would be interested now. So we are always looking for those types of opportunities. And for the right price and for the right company, yes, certainly we would be looking at further growth in that area.

Okay. And also just lastly maybe on foreign exchange, I wondered with the Canadian dollar weakness if that impacts your decision in any way to go after US international targets at this point.

No, it doesn't have an impact, Sarah. We mitigate any foreign exchange risk that we have. When we are working in the US, we earn revenue in the US. We have expenses in the US. We mitigate our exposure on our balance sheet, which is really where you could get some volatility and exposure to FX, so we keep a close handle on that. So, no, we don't believe that there's anything constraining us from acquiring a US firm or an international firm due to currency.

Yes, bottom line, FX really doesn't -- it is what it is and it really doesn't impact our strategy.

Okay, great. Thank you.

Bert Powell, BMO Capital Markets.

Bob, it sounds like for 2015, things will shift a little bit more to the US for growth. And historically, that's been a market that's been -- for a number of reasons, cost structure in end markets has been more challenged on the gross margin front. How should we think about the gross margin in your US business today given some of the internal initiatives that you've taken and some of the acquisitions that you've done?

Again, we don't see that gross margin really changing dramatically. You are right that there is a higher cost for doing business in the US. At the same point in time, that's offset by lower SG&A costs that we feel as we get larger in the US. We are finding those efficiencies.

So I think we've proven it over the past five years. We've exponentially grown our US presence. It really has not affected our overall gross margins of the Company, and we don't see that changing over the next few years as we continue to grow in the US.

Okay. And then in terms of Dessau, have you done anything in terms of the integration or that happens now in Q1? And if that's the case, just typically depending on the varying degrees of difficulty or complexity associated with acquisitions, that can chew up more time and allocate more cost to G&A. Just for the next quarter, should we be expecting that G&A to bump up as you do this acquisition, or is this going to be pretty straightforward and we're not going to see that?

Well, certainly Dessau offers us, I would say, more challenges than your typical acquisition for two reasons. One is it's very large. It's the second largest acquisition that we've ever done. And because of the French language, we have a lot of adjustments to our systems to be able to operate in French and English. But we are really happy that we've actually gone through most of that heavy lifting the latter part of December and into January. And Dan can provide a bit more color on it, but we are pretty comfortable that that integration, which we have had to accelerate for a number of reasons to get them into our system, has gone very well.

Then we planned an immediate integration of the Dessau operations post-closing. So as soon as we close that transaction, we started the integration of the business systems dealing with training, health and safety, integrity, and business systems training. We will be coming out of blackout here within the next week or so. It takes some time to migrate all the data and the details in the systems. But we had planned for an immediate one. There was a lot of -- as Bob mentioned, a lot of heavy lifting around getting our business systems ready to go, but we are very well positioned and actually very pleased with how it's gone so far. It's been quite a positive experience for everybody involved.

Okay, last question on Dessau. How long before you think you can get them into your targeted EBITDA margin range?

That's where it's going to take some time. It's just got a little bit of visibility. That was our objective is to get the -- and I called you Ben. Sorry, Bert.

That's okay. It happens from time to time.

It just takes a little bit to get visibility. We will be getting visibility right away in the next couple of weeks. As far as getting them to the same EBITDA margins, a little early to comment on that from my perspective. Bob --

Yes, I don't think we have enough visibility in there to really determine. That's why, again, we wanted to get their projects and information into our system so we do get that visibility so I think we will have a better answer to that question in our second quarter call -- our first-quarter call.

Okay. Thanks a lot.

Ben Cherniavsky, Raymond James.

I'm -- one of the things that I want to try and get a better understanding of is your organic growth guidance of 3%. And it sounds like you are saying it's going to be back-end loaded; the first half might contract. That would include, if I recall, a contraction over a fairly easy comp in the first quarter of last year because of the weather impact. And then growth in the back half -- and I -- what is it that gives you the confidence at this point to see that inflection point when the calendar turns to July 1? Like, what's -- what is it other than hope that would say the second half of this year is better than the first?

Oh, well, I've always said hope is never a good strategy. But in this case, we can't control the oil prices. What we've done is really sit down with our clients and try to figure out where do they see their business going. And I think right now that if oil stabilizes or stabilizes as a number closer -- a little bit lower than where it is today, our clients feel that they will still proceed with projects. They were waiting to see what was going to end up and where the bottom was going to hit. So they feel the bottom has been hit or very close to it. And based on that, they will then advance projects that make sense. And we have those projects. It's just a matter of will the clients advance them and when. So we are really going off of the knowledge from our client base. We don't have any more to go off of that. And again, focused on where we are, which is midstream, those projects are much less dependent upon an oil price and more dependent upon their client actually proceeding and signing contracts. And there is still in undersupply of transportation network for the existing oil being produced. So all those factors give us a feeling that the first half of the year, people are just waiting to see what's going to happen, and the second half of the year, a lot of the noise will bleed out and they will be able to proceed with projects. So the proviso there is if oil continues a downward trend and continues, that will continue to drag some of those decision-makings out until even later. But right now, our clients are telling us that, and that's what we are reporting.

Fair enough. I think that's a sensible strategy. It's hard to know it's going to happen right now. But this may be splitting hairs little bit, but, on the energy side, you're talking about down in the first half, stabilizing in the second half, and stable for the year. How do you go down, stable, and stable for the year? How are you not down for the year?

I guess that's the definition of stable. So stable has --

I would like to clarify that, I guess, yes.

That is splitting hairs. So it's always been a few percentage points. It is -- stable would be a negative two to a plus two. So their potential is that in the first half of the year, we could have a slight retraction, and that will get us back to a point that is slightly above zero. Could it end up slightly below? It could. So we try to give ourselves as much wiggle room. You know us, Ben. We are fairly conservative, but we do believe that there's going to be some retraction in the first year, and we feel that will recover. Where it ends up, we'll be as close to zero as we think we can get.

Yes, no, I know you guys are -- in fact, I think in the past, sort of the only thing you could really be criticized for is maybe being too conservative. Although I would -- my impression of your outlook for this year seems, frankly, a little bit aggressive to me. But just sitting where we are at today with what's happened in the energy markets for the year -- not that I don't see the potential for you to grow your business in other areas. But just as far as energy goes, by most accounts this year -- that I've seen this year sort of a write-off for most guys who -- most companies who are touching that sector right now. So as far as the back half goes, it's difficult to see what changes, in my mind.

Yes, I think it's stabilizing, though. And again, we really want to focus the fact that most of our business is in midstream. About 55% of that midstream work is engineering work, which definitely has more of an impact. The other 45% of that business in midstream is environmental services work. That has -- it's less capital -- affected by capital -- by the capital investment of our clients. In other words, the clients will continue to go through, get their permitting, get their compliance work, get their environmental audits done and reviews, and don't usually pull those projects back as strongly as they do actual construction and capital-intensive programs.

So because of where we are in that space, I think we are pretty confident that we are not looking for recovery in oil prices to give us the work, we're just looking for little stabilities where our clients get their feet under them. So maybe that's why we are being a little bit more positive than some of our competitors is because of the space that we play in and the type of work that we do in that space.

That's very helpful. Thank you. On a more positive note, what are you seeing in US Urban Land specifically? I know you had some comments about it in your MD&A. But in the past, you have said that, counter to much of the excitement around that sector of the market, you guys actually haven't seen a big uptick in demand for design and planning. Is that changing at all yet?

Well, I still wouldn't use the word big uptick, but it has been a steady increase that -- in all markets, in all various sectors in the residential market in the United States, we are seeing more and more projects advance. We are seeing more and more clients get a little bit more confident and aggressive in their planning of projects. We're seeing some resurgence in markets that we haven't seen for a while for Florida, for example.

So even though we haven't seen this big resurgence in demand, we see consistent increases and some consistent flow of projects. So we've had some good growth in that area, and we see that continuing into 2015. We don't see anything on the horizon of the US economy; that's really going to stop that. We also don't see anything, though, in the US economy that's going to create that big resurgence that maybe everyone has been waiting for. But I think we are very happy with the slow and steady growth we've seen.

Thanks a lot for that, too. If I could just squeeze in one housekeeping one for you Dan on the amortization of intangibles. Can you help us -- what that might be in the next couple of quarters or for the year just in light of the Dessau acquisition? Because I know that that moves around with acquisitions.

Yes, I don't have the exact numbers, Ben. We will certainly be able to provide that in the Q1 call with the amortization. I think you can expect certainly the amortization of intangibles to be a little higher in the first half or for 2015 really due to the amortization of work backlog and client relationships. But I don't have those specific numbers for you today.

Okay. Thanks a lot.

(Operator Instructions) Tahira Afzal, KeyBanc.

I guess as I'm allowed to ask a couple of questions, first one really is on the transportation side in the US. There is a preliminary budget as you know that's out, and within that, there's a big safety-related spending stipulation largely assigned to bridges. Who knows if there will be rewrites down, but even then, it's a very sizable increase over anything we've seen in the past.

I would love to get a sense -- I know you guys have a good presence in the Northeast on the bridge side. Would love to get a sense how that market is doing and, if there is an increase, what type of opportunity it represents for you all.

Yes, I can't properly put a number on it, Tahira, with regards to a percentage increase, but our folks in the US and specifically, as you said, in the Northeast where we have a lot of bridge expertise but we also have that brings expertise in the South as well are very excited. We haven't seen a huge number of opportunities come across our desk, but we have clients that we are close to that are certainly anticipating that they are going to be moving projects ahead.

So that's one of the reasons I think we do feel that our US operations are going to be a much stronger contributor to Stantec in 2015 as a result of things like that. So strong bridge group. We are well connected to our clients. We are well positioned. Those projects still have to come out and get bid if it's through a DOT. A lot of our clients are looking at taking and seeing if they can leverage a design build alternative to still leverage those funds. So some planning work going on, but we are also very optimistic that's going to give us some more opportunities in the US.

Got it. And second is on the midstream side in the US. Obviously, everyone is worried about the shield stuff and all. But if you look at some of the large pipelines -- in fact, a lot of the natural gas pipelines which are CAD5 billion type of projects -- they seem to be tied to natural gas movements for end-user consumer at the end of the line. So myself and others, I guess, would love to get a sense if you've kind of started to see a shift in terms of the customers that you're working with. In the US, are you seeing more utilities showing up at your door.

Not really. I can't say that we've seen a major shift. We do get that as well. The comments we've heard from our folks are that there is going to be more pipeline work in the natural gas and more -- and as you say, the distribution, the smaller diameter lines. That's not an area where we are very strong in, and so I don't see that as having an immediate impact to us. What we do see is some of our coal plant clients installing gas-powered turbines to augment what they are doing or even replace some of the power. So we're seeing that as an opportunity linked to gas, but certainly not the smaller-diameter pipeline opportunities. It gives us, though, a focus on if that's an area that we are not taking advantage of, it closes an acquisition opportunity for us for companies that may get a benefit from that area.

Got it. Thank you very much.

Sami Abboud, Scotiabank.

I am filling in for Anthony Zeker. My first question is on the acquisition pipeline. How does it look? And given the weakness in oil, are you seeing any softness in the takeout multiples? And maybe just some color on what you would be targeting -- would you be more aggressive in 2015?

So overall, from an acquisition pipeline perspective, we're still very happy with the good quality companies we're talking to. And we are, I would say, a very well-known acquirer now within the North American market. So we are seeing many still opportunities come forward, and we would say those opportunities are across all the sectors or business operating units we work in.

We are always targeting firms, and certainly some of the firms we targeted in the oil and gas sector, we are reconnecting with them. Last year was a busy year for them; this year, not so much. Again, we have never really felt that multiples have a huge change in the actual multiples. It's really what is that multiple being applied against, and what are the revenues and EBITDA margins for those companies going forward? And how fast is it going to recover, and how much can you pay a multiple on those predictions is really going to dictate how much you pay for those companies. That's why it's always difficult, even in a down cycle, to then predict when will that cycle recover, and how much is that company worth based on that.

So, certainly, we are interested. As we said earlier on another call, we are always looking at expanding our business and diversifying it further in all cycles, up or down. And right now, we're seeing multiple opportunities across all those sectors.

Okay. And my last question, can you please maybe comment on the backlog and gross margins within the backlog, maybe just more along the lines of the size of the projects that are currently there. For a while, you started picking up larger-sized projects with the slowdown in energy. Do you think you go back to smaller projects or smaller sizes with higher margins? Just some comment there would be helpful. Thanks.

Sure. You know, Stantec is such a diversified Company with the various business we're in. Our backlog is really made up of literally thousands of projects. And at any one time, yes, you can have a few large ones in there, but we really have thousands of smaller projects all the time. So even when we were capturing those larger projects, a good part of our revenue is just supported by those small everyday projects we work in locally through our 250 locations.

So we feel that that is a real key component of our strategy is we are not dependent upon those large projects going ahead for us to make a good year. What we need is a very broad advancement of projects with all our clients in all our sectors. So right now, the mix in our backlog is -- pretty much reflects in our revenue that we've been generating. We don't disclose the backlog per operating unit or per country, but it is a pretty good reflection of our past revenues. That would be a pretty good representation of where our backlog fits. And gross margins will be when we execute them, so we don't see any of that changing as well.

So I think we like to always stress that Stantec is a Company that is made up of literally thousands of projects and hundreds of clients. So never depend upon that one or two big projects. We're not too early concerned with those not being there. It just means you've got to win a lot more smaller projects.

Mr. Abboud, do you have any further questions?

On no, thanks. That was all.

Michael Tupholme, TD Securities.

There was mention in the MD&A of some additional costs -- estimated costs to complete certain projects or project adjustment costs. I was wondering if you can elaborate on that a little bit, please.

Sure. That was really related to some of our buildings projects. We have -- it's a normal-course event where you are always evaluating your estimates to complete -- your estimates at completion. It did impact the gross margins a little bit in our buildings practice in Q4. That's a pretty normal course, Michael. It's not something that is going to be recurring every quarter. It's a very standard procedure. That's what impacted the margin in the quarter.

I know in the past you haven't -- I know you don't typically like to quantify these things, but if we look at the international gross margin, it was down a lot. So I guess all this was in the international segment. If we were to just think about where that margin was in the prior-year quarter -- prior-year fourth quarter, is that -- absent these adjustments would be somewhere similar to where you were last year?

No, that would be a good estimation of that. It's basically a one-time thing. So we would expect our margins in the fourth quarter should have been around that fourth quarter from 2013.

Okay. And sorry, just last thing on this topic: are these -- this is multiple projects? And are they done, or is there -- do they carry on and, therefore, some potential for the risk?

Once you take that estimate to complete, that should normalize the margins for the remainder of the project, assuming we execute them well. And that's really our objective is to do that.

And I don't see that continuing as a trend on those projects.

Right. Okay, perfect. And then you mentioned, Bob -- we haven't talked about it a lot on this call, but the mining area -- you mentioned in your comments the potential for delays, and I wasn't clear if that was in the context of work you have at hand right now potentially getting delayed or if you're talking about opportunities that you see in front of you potentially being delayed.

No, it's future opportunities. We are talking to clients right now about some future work, and it's whether that work will proceed or not. But we are actually still really happy with our position in that mining industry. Obviously it's worldwide at a low cycle, but we've got some good clients that are still proceeding. And we do a lot of work that's not directly associated with the construction in the mine but also a lot of the pre-feed work and feasibility and analysis. So we've got some front-end work going on that we feel will continue to give us revenue, but there's some more larger projects that our clients are talking about that have not been given the go-ahead yet that may have some impact.

Okay, but nothing you have in hand has been deferred, or you've been asked to stop work on something that you've been working on?

No, Jensen is the only thing that has been slowed down, but we've been messaging that for a number of quarters, and that has not changed.

Okay, great. And then you were asked about the outlook for residential work in the US. Just wondering if you can talk about the outlook for Canada and maybe specifically within that Western Canada given that some of that may tie back ultimately to what's going on with energy markets.

Certainly that's -- our clients in the land market have been through this before. They have seen this movie where there is an impact on people buying houses when they are in a little part of the cycle. So it's not something we are overly concerned about. Our clients are usually going to go ahead with smaller projects in that case, but we still see some revenue generation. The clients we've talked to in Alberta are in a wait-to-see mode, but we still have some projects going ahead. So because of their -- the fact that they have gone through this before, there is not a huge amount of inventory sitting in Alberta that is unused. And they still need to feed that inventory, it just may be fed at a slower rate.

Okay, great. Thanks for the color.

Mona Nazir, Laurentian Bank.

So I'm just turning back to Dessau. I know that you have a lengthy due diligence period. I'm just wondering were there any surprises, or was everything as expected. And is it also possible to gain market share in Quebec now that you have a presence there, given what's going on with some of your peers in the province? And you've previously spoken about adding staff. And is that still in the plan?

So with regards to the first question, have we seen any surprises to date, no. That's the good news is so far, it's been pretty much as we expected. We are pleasantly surprised, to tell you the truth, that we haven't seen more issues that we weren't aware of. So far, we are very happy with what we've seen. We are very satisfied with the staff, their motivation, their enthusiasm, their excitement. I spent last week in Quebec visiting eight of their offices, and I was very impressed with their passion and their enthusiasm, which is a really key part of any transaction when you're talking about people business.

With regards to increasing our operations in Quebec, absolutely that is our goal. One of the reasons we did the transaction is so we can get a larger market share in Quebec as well as leverage the capabilities and expertise that is within Quebec into other clients outside of Quebec and are already seeing that. We have their power group working in some of our projects in Maine and augmenting what we do there. We're using some of their telecommunications people to try and win work in Western Canada. We have now a much larger transportation group. We've added the Stantec team, of course, to the Dessau team. We can now win some bigger projects. We can now attract some bigger partners and take a better position on many of the PIII projects that are there.

So the strategies, I would say those are typical that you always use when you do an acquisition. But for Dessau, we see some of those happening sooner than later. So I did make a comment when I was in Quebec that our goal is to hire more people in Quebec. That's the goal. Today, we can't say how quickly we can act on that goal because that's going to require us to win some additional work. But certainly we see the opportunities, the strategy is working well, and the staff are very enthusiastic. So all the ingredients are there, we just need to win some work.

Okay, perfect. Thank you. And secondly, for those of us based outside of Western Canada, it's hard to see the potential impact of declining crude prices on your business. And I know you spent some time on the call on it. We are well into Q1 now. And just based on your comments that you've made, is it fair to say that the contraction on the energy resources side could be greater than 3%? And with that, do you expect any reductions in headcount?

Well, there -- you always -- especially in the business, the oil and gas business or any type of the resource business that is what I would call a lower-margin business where you have to manage high utilization, the minute those revenues decrease or projects are delayed or projects are canceled or postponed, you have to deal with rationalizing staff. That is always a hard thing to do when you are just a people business, but we understand that business and we understand, and I think our staff understand, that that is one of the ramifications of the oil and gas business. So we have had to. We constantly are doing that. It's an ongoing strategy. We are starting last year, and we will continue to essentially match our staff to our backlog in a very accurate and a very quick way.

What we've seen so far is much as what we expected. I don't think that we are overly surprised with our clients' cautiousness associated with their projects and them holding some projects back. But as I said, that is really impacting, I would say, our engineering business first, which is 55% of that midstream business, and will start impacting our environmental services business secondly. And we haven't seen as much of that impact yet on the environmental business.

So still early days of the quarter and certainly early days of the first half of this year. We haven't seen any surprises. The good news: oil seems to be stabilizing. It bounces around a lot, but if it stabilizes around the level it's at now, we are pretty comfortable the second half of the year will recover.

Okay. Can you quantify how many staff have been rationalized? (laughter)

(laughter) Rationalized. That's a cruel word. (laughter) There has been, I would say, a little over 200 to 300 staff. That's mainly in Alberta, but it has extended to some of the projects in Atlantic Canada or some of our staff in Atlantic Canada and into the US as well with the proU. So around that 300 mark. I think everybody's got to put it in perspective. We probably hired 800 people in the last two years, so we're still well above where we were when we started in this business. And, as we have said before, this is fairly common. We've gone through these cycles before.

Okay. And just lastly for me, turning to your balance sheet, factoring in Dessau, your net debt EBITDA is up although still below one times. You have said previously that you are in all the practice areas that you want to be. And I just want to confirm that this still holds true. Is there any area of expertise or niche area that Stantec is missing at this point in time?

No, I wouldn't say there's any significant area outside of the practices we are in. There's always specialized niche areas that are complementary to what we do in the energy resources, in the buildings and the infrastructure area. So certainly don't see ourselves having to step outside of that at all. There's always things like specialized services. In studies in mining, for example, you can do and look for some acquisitions to really strengthen your portfolio services within those areas. But we are very comfortable that we are pretty diverse as it is, and we want to focus on that current diversity we have. So don't see ourselves stepping outside that.

Okay, perfect. Thank you.

Benoit Poirier, Desjardins.

Hey guys, this is Charles Perron filling in for Benoit. Just one quick question. Can you discuss about the EBITDA margin outlook for 2015, which is stable from 2014? But maybe more details about is it more resiliency across the board in your margins, or is it a shift around the different divisions that you expect in 2015 for those margins?

I think the EBITDA margin, Charles, on each of our business lines fluctuates a little bit. It really depends on the gross margin that we are getting and the utilization of our staff. But what we found is when we are running our forecast is it still will result in an overall EBITDA margin of being fairly consistent with what we've seen not only in 2014 but in prior years. So you can see some fluctuation in gross margin, but the EBITDA is largely driven by utilization as well.

Great. Thank you.

John Roger, DA Davidson.

Most of my questions are answered. But Bob, just going back to a couple of your comments relative to your discussions with clients, is there a general expectation that energy prices will stabilize at current levels? Or are they assuming some sort of a recovery? And I'm thinking about just as it relates to your comments on maybe some improvement in the second half of the year.?

Well, if we had the answer to that, that would be great. Our clients -- I think each one you talk to probably is a different level of either optimism or pessimism with regards to where they see the current trend: whether it's going to stabilize, where it's going to continue to decrease. Each of these clients are probably making their forecasts based on what they believe is going to be best in their business when they are dealing with us or dealing with their client.

So it's really hard to try and figure out of all this, what really is the consensus and really where it could happen. It's -- a company like Sanovis has done three budgets in the last month. So I don't think they know any more than we do. I think everybody is trying to figure out where things are going to go. As I said earlier in the call, hope isn't a strategy, but I think the strategy is to hope for the best that it will stabilize and will come back. That could be just as right as it is wrong. So at this point in time, our clients are across the board with regards to their vision on what's going to happen. Wish we had a better answer, but all we can do is keep talking to our clients.

What is it that is leading them to suggest that they will ramp up planning, or planning for capital spending in the --

I think what they are looking for more than anything else is some stability. What they would like to see is things to stop moving. And if it stopped going down, they are not looking for a recovery to advance. They just want to see that things are stabilizing and this latest drop is now creating a new plateau and this is going to be the new world. So once they get a comfort that that is the case, then they're going to advance.

As I said, in the midstream business, they are less directly connected to the oil price. Their clients are, so those clients are then determining what contracts they will sign with the pipeline companies. So a lot of this is really our clients' client, where they believe it's going to be. But that's what our clients tell us, is they are looking for some signs of stability, not really recovery -- and stability so they can then do their recalculations on their projects and proceed. A lot of them still have projects that they feel they need to go ahead with almost regardless of what the oil price is.

Okay. And then secondly, you've got your hands full in the first half I know with some of the integration. But given the disruptions in the market, and I'm thinking more down here in the US into Texas and with some of the mergers, are there more resumes and organic expansion opportunities -- resumes on the street, organic opportunities for you? Especially --

Absolutely. We have seen definitely with some of the bigger transactions that were occurring in the past 12 months and those companies going through their rationalization of cost-saving measures, which a lot of those transactions were based on cost savings rather than cost synergies, we are seeing resumes on the street. We are seeing people that are concerned and worried about where their future is. So that's given us a great opportunity. It is probably -- at this point, it has probably been one of the busiest times from a point of view of good-quality, long-term individuals out there looking for work -- or looking for opportunities, let's put it that way.

And I guess lastly, does that change your capital spending plans or capital investment plans?

No. That would just be augmented by that. It wouldn't change it.

Okay, great. All right. Thank you.

Chris Murray, AltaCorp.

Just looking at Dessau, just to kind of confirm a couple things, one, the last time we sort of talked about it during the acquisition call, you felt at least that net revenue was probably around CAD130 million, but you kind of want to review it after your budgeting process. Are you still comfortable with the number for 2015, or should we be thinking about something different?

I don't have a different number yet, Chris. As we just indicated, we're just getting them integrated now. I think by the end of Q1, we will have a much better idea of where that budget is. There's nothing today that would suggest that it is materially different from what we were anticipating before, but I don't have a specific number today.

Okay, that's great. And then just in your early remarks, you talked a little bit about the fact that you will be growing down some cash in the quarter. I guess part of that will be for Dessau, but you also mentioned there were some bonuses and stuff like that. I guess, a couple quick questions. One, do you have an idea what the magnitude of the drawdown is going to look like? And then second, just to confirm, I'm assuming that a lot of these bonuses have already been accrued back into 2014; it's just going to be the actual payments that will be going to the employees.

Absolutely. All of those mirror 10 taxes all being accrued, those are normal-course operations. With respect to the drawdown, I think we will increase our credit -- use of our credit facility in Q1 more than we have in the past. So I think our debt-to-EBITDA ratio will come up a little bit. So any of the surplus cash that we have at the end of the year will be used up.

Okay. And any rough idea what the magnitude is going to look like?

I don't have a specific number, again, on that. Certainly you will get that at Q1.

Sure. Thanks. And then just a follow-up question for me, just looking at the relationship between net revenues and gross revenues, again, in Q4 it seems like subcontract and other direct expenses were a little higher than what they have historically been. Any particular thought as we going into 2015 on what the backlog has got in it, if that trend is going to hold similar to what we saw Q3, Q4?

The gross to net revenue, it's been running in that 18% to 22% range and probably closer to 20% to 22% range over the last several years. I don't see any material change in the work backlog that would suggest that that is going to materially change as well, Chris.

Okay. So you think it will be fairly stable through 2015? Okay, great. Thanks, guys.

Thank you. We have no further questions at this time. I will turn the call back over to Mr. Gomes for any closing comments.

Thanks, John. Since there are no more questions, I would like to close our call by saying we're confident in our ability to achieve our objectives and continue to deliver consistent value to our shareholders. Our diversity plan, I think, is certainly one of the things we have relied upon to be a successful firm to date, and it is definitely something that we are relying upon this year. Look forward to speaking to you again in the future.

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