Stantec Inc (STN) 2015 Q1 法說會逐字稿

Welcome to Stantec Inc.'s first-quarter 2015 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 May 14, 2015, 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. Stantec management would like to caution you that this call contains non or additional IFRS measures, as well as forward-looking statements and information which may involve risks and uncertainties.

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

Thank you, John.

Good afternoon, everyone, and welcome to our 2015 first quarter results conference call. Dan will provide a brief summary of our financial results for the first quarter. I will then follow with highlights of our performance, and an outline of our market outlook. We will then address any individual questions.

Today we released the results of Stantec's operations for the first quarter of 2015. I am pleased to report we continued to achieve solid performance, even while areas of our Business have been impacted by lower commodity prices. The strength of our diversified business model, again demonstrated its effectiveness in Q1 2015,with overall organic revenue growth in the quarter. We achieved strong organic revenue growth in our buildings and infrastructure business operating units, offset by retraction in our energy and resources business operating unit.

Dan and I will provide a review of our first quarter 2015 financial results. Dan?

Thank you, Bob. Good afternoon, everyone.

We are pleased with our overall results in Q1 2015, compared to Q1 2014. During Q1 2015, our gross revenue increased by almost CAD132 million, or 23% compared to the same period in 2014. Of that increase, 1.7% was organic revenue growth, marking over three years of consecutive organic growth.

The Q1 2015 growth was due to strong activity in our buildings and infrastructure business as Bob mentioned, which was partly offset by a retraction in our energy and resources business operating unit. Gross margin was 55.2% in Q1 2015 compared to 54.4% in 2014, and is within our targeted range of 54% to 56%. Gross margin in our Canadian operations increased mainly from the recognition of certain performance fees obtained in the quarter, and strong project execution.

This was offset by an increase in our administrative and marketing expenses as a percentage of net revenue to 42.5% in Q1 2015 from 41.5% in Q1 2014. This increase was primarily due to overall, lower overall utilization and higher Dessau acquisition integration costs, including additional infrastructure and the French language translation costs. As well, we incurred additional severance costs to align staffing levels to our work backlog, primarily in our energy and resources business.

For Q1 2015, net income increased 13.4% to CAD38 million, compared to CAD33.5 million in Q1 2014. Diluted earnings per share increased 11.1% to CAD0.40 from CAD0.36 in Q1 2014. Our backlog grew to approximately CAD2 billion at the end of Q1 2015, representing approximately nine months of revenue.

Just to come back to Dessau for a moment, they are now fully integrated. We are very pleased with how that acquisition is going. It is going very well, and the staff are enthused.

As we have stated in previous calls, we still expect the Dessau Group to contribute approximately CAD130 million in net revenue in 2015, now that the budgeting process is complete. However, as we expected, the margins were a bit lower due to the mix of work, which is mostly in transportation. Lastly, yesterday, the Company declared a cash dividend of CAD0.105 per share to shareholders of record on June 30, 2015.

Back to you, Bob.

Thanks, Dan.

I will provide a bit more detail on our performance in Q1, and some thoughts on the rest of 2015, and then we can dive right into the Q&A. Looking at our performance across our business operating units, I would like to provide you with some highlights. After a number of quarters of retraction, we are very happy to report that the buildings operating unit experienced growth in all our regions and sectors.

In the United States, we are seeing activity in the commercial and hospitality sectors. The results also increased activity in the education and residential sectors, where we are starting to see synergies and additional work from recent acquisitions such as ADD Inc. and SHW. For example, during the quarter, we secured the planning, management and engineering work for the construction of a new interdisciplinary research lab for the Yale Science Building at Yale University in Connecticut.

In our energy and resources business unit in Q1 2015, our environmental services sector achieved good growth in eastern Canada and in the United States, in contrast to the slow start in Q1 2014 caused by last year's harsh winter conditions. This growth was, however, offset by a retraction in our engineering group in the oil and gas sector, largely due to the impact of the downturn in the sector.

During the quarter, we continued to secure projects in mining and power. In our power sector, activity is being driven by the transmission and distribution market, as well as power replacement to meet environmental compliance requirements.

All sectors in our infrastructure business operating unit experienced organic gross -- revenue growth in Q1 2015, compared to Q1 2014. The community development sector achieved strong organic revenue growth in the quarter. This growth was seen in both the United States and Canada, where each region represents about half of the sector's work.

In our transportation sector, our reputation and presence in a rebounding US economy, together with stable infrastructure spending especially at the state and municipal level, have led to increased opportunities. A project we recently secured is the design of services for the reconstruction of a 10-mile section of the I-4 in Volusia County, Florida.

In our water sector, our expertise in water management signified by several recent key projects is driving demand for our services, related to aging infrastructure rehabilitation and regulatory requirements. One recent award in Ontario is the full scale retrofit of the City of Barrie waste water treatment plant with membrane bioreactor technology. This will be the largest full retrofit MBR project in Canada, and the largest for cold water -- cold weather application in North America.

Now we would like to comment briefly on potential market conditions going forward. Our overall outlook across our Business remains a moderate increase in organic revenue for 2015, with a target of approximately 3%. Our outlooks for 2015 in each of our regions also remain the same, as we outlined in our 2014 annual report.

In Canada, our outlook remains stable. We anticipate that it may continue to retract in the first half of 2015, primarily due to the retraction in our oil and gas sector. However, we expect activity in sectors and regions linked to non energy-related businesses will continue to be positive.

In the United States, we expect to achieve moderate organic revenue growth. Our strong organic revenue growth of 10.2% in the first quarter was due to the US economy continuing to gain momentum in the quarter across many sectors where we provide services, something we expect to carry on through the rest of the year. In addition, our US organic revenue growth reflects the weaker weather-related Q1 2014.

In our international business, we expect to achieve moderate organic revenue growth. Similar to other locations in the United Kingdom and Middle East, we expect to leverage our local position to drive cross-selling opportunities.

Looking at our individual business operating units, for building, we continue to anticipate moderate organic revenue growth. Overall, we anticipate that the buildings industry will continue its recovery. With our global expertise and our stronger positioning across many sectors, we believe we have many opportunities for continued growth. We believe that our energy and resources business operating unit will end the year with a retraction in gross revenue, when compared to 2014.

We revised our outlook included in our 2014 annual report, due to the greater than expected retraction in our Canadian oil and gas sector, compared to the robust growth experienced during the past few years. We expect to see the retraction through the first part of the year, and stabilizing in the second half at those lower levels.

We are seeing some project cancellations in upstream, however, a relatively small portion of our revenues derive from this area. They are mostly in the midstream area where we are seeing delays, while clients adjust their capital expenditures decisions in response to the current economic climate.

We continue to monitor our backlog and make adjustments to align staffing levels with workload and market conditions. In our infrastructure business operating unit, we continue to expect moderate organic revenue growth. We expect that the ongoing requirements for the renewal of existing infrastructure, and development of new infrastructure driven by population growth, urbanization and population growth will continue to drive demand for our services. With the strength of our diversified business model and the consistent, disciplined execution of our strategy, we are committed to achieving revenue growth, and providing long-term value to our shareholders.

This concludes our comments for today. Dan and I are now available to answer any questions you may have. I'll turn it back to John, the conference call operator, who will explain the question procedure.

(Operator Instructions)

Your first question today will come from Mona Nazir with Laurentian Bank. Please go ahead.

-- another great quarter.

Thanks, Mona.

So my first question is just about the acquisition growth in Canada. I believe it was CAD28.3 million. I would just like to confirm, that's all Dessau, correct?

We're both sitting here thinking, yes. I don't think we did another acquisition in 2014 in Canada, so they were all in the US. So right, that would all be Dessau.

Yes, I wrote them out, and I didn't see anything in Canada, but I wanted to be sure.

You're right.

Okay. I was just wondering, was there any seasonality behind that for Q1, or was it maybe a little bit lower, just given the integration?

Specifically, as it pertains to Dessau, there wouldn't be a lot of seasonality in their business, a little bit. I would say most of it was due to the integration efforts.

We do certainly in our overall business have some seasonality, Mona, in both Q4 and Q1. That's where some of that lower utilization comes in during the winter months.

Okay, and I know that you commented on potentially adding to the head count there. Has that happened, or you're just kind of waiting to see how it all comes together?

I think at this point in time, we're working on those opportunities, working on bringing some of our other services into the province, such as mining. That's going to take some time. It's not -- I think that's measured more in months, not weeks. So I don't think we've seen a significant head count at this time, but certainly we're still anticipating there will be.

Okay.

We haven't seen a retraction, and that's positive.

Yes, that's always positive too.

And just lastly for me before I step back in queue, looking at your list of acquisition targets, as you kind of move through the list, is there a certain percentage of success, or some sort of trend to be drawn? Like have you had more success in moving from early discussions to a final transaction announcement currently versus a few years ago, or there's been no change?

And just lastly on that, despite weakness on the energy and resources side, are you seeing that multiples have come down in this sector? And are opportunities looking more attractive?

So to answer the first part of the question, no. No, we really haven't seen a significant change in our ability or process, in searching out acquisitions, having discussions and closing. It is very specific to various sectors, types of firms, size of the firms. We would probably have some similar trends in those.

But from a point of view of 10 years ago to today, not a lot of significant change. Other than we're seeing that the process is a little bit more structured, because there's a lot more knowledge in the industry, about the fact of how the process goes. But not a significant change there.

With regards to multiples, in the energy and resources area, or specifically even oil and gas, no. And this is fairly consistent, that even when we've seen some downturns, usually what happens in a slower economy, you get more people interested, but not necessarily do their expectations go down. Most of our valuations are done on a forward-looking basis, what we can do with that firm, where they are to-date, how we can build that, develop synergies, look for organic growth subsequent to acquiring them.

So that really everybody is looking towards the future with some optimism. So even if you're at a lower level, that optimism is still there. So it really doesn't change the multiples that much.

Okay. Thank you.

You're welcome.

Your next question will come from Tahira Afzal with KeyBanc. Please go ahead.

Hi, guys. This is Sean on for Tahira today.

So I guess, to start, just given the revision in your energy and resources outlook, I would like to get a better idea of maybe what's offsetting that greater than expected decline in Canadian oil and gas, to give you confidence that you're still going to meet that 3% organic growth target? Are there any markets that are sort of performing ahead of expectations versus your prior outlook?

I would say, as we said in the call and in our MD&A, that both our infrastructure groups and our buildings groups are doing better than we had expected. And it's almost across all the sectors, community development, water and transportation and infrastructure are all doing better. All the sectors in buildings are doing better.

And I guess, that's what gives us that confidence is, and they had good growth of over 7% organic growth in both those business operating units in the first quarter, and we see that continuing. Backlog continues to grow. Opportunities are there. So that in itself, gives us that optimism that that 3% is still achievable.

That's a good answer. Thanks very much.

And then secondly, as it relates to oil and gas, could you just provide a little more color on 1Q 2015 activity levels, and the outlook in the US versus in Canada, in terms of your engineering versus environmental activities? And does that stabilized outlook, that's intact from what you said last quarter, does that sort of imply that your customers are sort of quickly working through this pause in decision-making?

Well, I would say, that we have seen a bit of a difference between Canada and the US. The Canadian market was, I would say a little bit more mature in the midstream area than the US, and therefore their reaction to the pricing was a little bit quicker. In the US, we haven't seen the downplay as significant. But at the same point, we're not as large in the United States as we are as in Canada.

In Canada, as we've messaged, again in the script and the MD&A, we see a continued decline in that oil and gas business in the second quarter. We see it then stabilizing, then maintaining those levels for the rest of the year.

And really, we're taking that information from our clients. Our clients to a certain degree, are -- they're speculating as well, based on how they see the price of oil stabilizing. So there's an awful lot of obviously moving parts in there.

But we continue to stay close to our clients. We're signing new master service agreements with some of our clients. We're working on some smaller projects with them. All of that gives us some very good and strong hope, that we'll be able to continue to ride through this downturn in the oil prices, and our clients are quite confident they can as well.

But as I said, a lot of moving parts with that. And it comes down to, what's happening with the price of oil.

Okay. Fair enough. And then just lastly for me, I'll just sneak one more in.

In terms of the right-sizing going on in your oil and gas business, has this initiative sort of wrapped up in the first quarter? Or are we going to see some of those severance costs sort of pop up again in later quarters in the year?

I think you'll see a few more pop up in the second quarter. They won't be as significant potentially as the first quarter. But again, as we said, we do believe that that should be the bottom of that. We don't feel that we're continuing to the third.

We see enough work coming, albeit much smaller projects, but we also have a much smaller work base, workforce to do that with. So there will be some additional severance costs in the second quarter.

Okay. Thanks so much for taking my questions, guys, and congrats on a great start to the year.

All right. Thanks very much.

Thank you. Your next question will come from the line of Sara O'Brien with RBC Capital Markets. Please go ahead.

Hi. Good afternoon.

Good afternoon, Sara.

How should we think about the EBITDA margin going forward, just given some of the comments in the MD&A? So in other words, a positive from performance metric fees in Canada, Dessau margins are a little bit lower in expectation, and there's more competition in midstream pricing. Just wondering how we sort of put this all together? Are you still comfortable in your margin range that you've seen historically, given these factors?

Thanks, Sara. I'll take that one.

The EBITDA margin is -- at 12.8% in the quarter is, actually if you go back the last several years, it's consistent with what we've seen in Q1 in prior years. That EBITDA margin is again, related to lower utilization overall.

But we had the additional items of integration costs and so on in the quarter, which offset some of that gross margin impact, which is kind of a normal event as well. So I guess, the simple answer is, is we do expect to stay within that EBITDA margin range as we forecast. Q1 is always a little bit lower, as is Q4, and we expect to see a bit of a recovery in Q2 and 3.

Okay. Thanks for that.

And then, wondered if you could comment on public/private partnership opportunities, in particular the Eglinton LRT award that is expected shortly. Just wondered how meaningful -- some of these projects are getting bigger. Stantec is part of the consortium. Just wondering how important these could be to Stantec's revenue flow, and I guess margin expectation over the next year, should you be successful in some of these?

Well, overall, as we win them, yes, they will have an impact, and yes, they are significant. Unfortunately, the Eglinton is not all that significant. Our participation there, at this time anyway, is relatively small, and that's the point.

These consortiums are made up of a number of different partnerships, and we play in a number of different areas in these, anywhere from doing project management to doing detailed design. So it really depends on what our role is in that partnership, and then, of course, the success of winning it.

But we are -- we feel we're very strong player in the P3 market in Canada. We feel we're a preferred partner in many of the projects in many of the sectors in the P3s in Canada. We have some very good partnerships with our contractor partners and consortium partners.

So we are very positive that that will continue to be a good source of revenue for us. To put it in perspective though, that is still roughly only 5%, a little over 5% of our revenue. So we see that growing and continuing to grow for the rest of this year, and continuing to grow into next year. But it's still a relatively small part, but it can have some significant increases on a project by project basis.

Okay. Thanks. Maybe a follow-on to that.

What about the opportunity in the US? I mean, it's kind of snail-paced along, but there seems to be a little bit more momentum coming for P3s in the US. Would you expect Stantec to get involved in larger projects there, and how soon could we see some of those announcements?

The P3 market isn't as mature in the US, but certainly design build is an area that Stantec is already involved in. As the P3 market evolves, I think we're very well-positioned given our market in Canada to continue to be able to be active in that market as it evolves.

Okay. I'll leave it there. Thanks.

Thanks, Sara.

Thank you. Your next question will come from the line of Anthony Zicha with Scotiabank. Please go ahead.

Yes, good afternoon.

Hi, Tony.

Hi. Could you comment please on the organic growth rate? Like have you experienced any pricing power? And can you give us an idea on the competitive environment, maybe a bit of color on a regional basis?

Well, yes, it is different from sector to sector, different from region to region. But I would say overall, we are probably at a point where the competition is as high as we've ever seen it. Certainly, this happens in times where a very large industry like oil and gas has a downturn.

We get some of the bigger players that are sometimes more focused in that area, get a little bit more interested in some of our more historical or traditional type of engineering business. So that increases it.

Those are always there. Those pressures are there. Usually those firms don't have as good of a position with relationships with their clients.

Although pricing is one of the issues, certainly the relationship with your clients is as important. So it's more just the fact you're having more competition in some of the design bid build type of space that is happening.

In the United States, we haven't seen as much of that, except again in the buildings market. Buildings market is a competitive market. It's also a very segmented and fractured market. So again, we see a lot of smaller competition in some of the smaller projects.

Again, when you're working on the larger projects, you have less competition. When you're working on the highly complex projects, you have less competition.

So overall in Canada, a little bit more competitive environment. In the US, much of the same.

Okay. Is it fair to say that the bigger companies like Stantec, as we continue to grow, it's becoming significantly harder for the smaller players to achieve new business wins?

Well, it depends on what space and the size of the project. Even though we are one of the larger firms in North America, and feel that that does position us very well, sometimes the smaller firms are a little bit more nimble. And so, in our competitive environment, what we see is that it is very difficult for the smaller firms to bid on the mid-size and large projects, but they are very well-positioned to bid on some of the smaller projects.

I guess, our competitive advantage we feel, Tony, is that we can actually position ourselves across that. We can win the bigger jobs, and compete with those with the bigger firms. We're very well-situated in our sweet spot as a mid-sized firm, mid-size projects. But we can also go down, and bid on CAD50,000 projects with much smaller firms. So we find we're well-positioned for that.

But we do find that there is still a large volume of work at the very small and mid-size level for the smaller companies. But we feel we compete very well in that space, compared to some of our larger peers.

Excellent. Well, thank you very much.

You're welcome.

Thank you. Your next question will come from Leon Aghazarian with National Bank Financial. Please go ahead.

Hi, good afternoon. You mentioned that the Dessau has been fully integrated. Can you comment if there are any other related costs left for the remainder of the year? And regarding just kind of your first impression of the acquisition so far?

I'll maybe touch on the integration and additional costs. Yes, we do expect there will still be some additional integration costs, certainly French translation costs were significant in the quarter. We optimized our business systems to get the French language capability in the -- basically the core of our business systems.

We are going through a Phase 2 of that, that's going to allow our employees to operate in French and do their work in French through things like billings, and entering their time cards and expenses and so on. So that's more work that we have to complete this year. Those are largely internal costs though, not a lot of external costs. The bulk of the external costs that we've incurred to date, we don't expect them to continue on through the remainder of the year.

And the second part? Do you want to touch second part of that question, Bob? Second part was -- do you want to just restate that, Leon?

Yes, just your first impressions. Have you seen any surprises, whether it be positive or negative? I know it's early days, but just kind of your first impressions?

No, I think, sorry. I forgot the first part of the question. But yes, we are actually really happy with what we've seen so far.

They are a very enthusiastic group. They want to work hard to be able to prove an awful lot to us. They want to prove that they are a very good firm, so we've a lot of enthusiastic staff.

We've seen no negative surprises at all. And that in itself is a good surprise, because when you acquire a firm with some history, you always are concerned.

We have been very, very pleasantly surprised with everything so far and, believe me, we have been digging into the firm. So it's a real credit to their staff and their leadership. We're very happy.

Great. Then just a follow-up, just a following question for me would be regarding the backlog. We saw that it grew from about CAD1.8 billion at the end of the year to about CAD2 billion. I would assume that some of that's related to Dessau. Can you just comment on how much of the increase is attributable to that, and if or not, you have gained other additional contracts along the way as well?

Yes, a portion of it is certainly attributable to Dessau. A portion of it is attributable to the change in the foreign exchange, and we also saw some organic growth in our work backlog. So a combination of all three contributed to that growth.

Great. Thanks. That's it for me.

You're welcome. Thank you.

Thank you. Your next question will come from Paul Lechem with CIBC. Please go ahead.

Thanks. Good afternoon.

Just wondering, Dan, about the jump in receivables in unbilled revenues. It went to up 100 days, maybe [106] at the end of the year.

Can you give us more details on what's going on there? And also, your allowance for doubtful accounts went up a fair bit. What's your thoughts about collectibility? Thanks.

Yes, there's really no concern, Paul, in terms of the increase in the day sales outstanding. Combination of a couple things.

To start with, in Q4 the DSOs tend to go down a little bit that last week, two weeks of the year, there's less project activity. People are on holiday. So you generate less WIP, and maybe bill a little bit less.

So there's a slightly lower artificially lower DSOs outstanding. I think we were 86 days at the end of the year, bumped to 100.

The addition of Dessau added probably about 4 or 5 days to our DSOs. The Dessau receivables, largely public sector-related receivables are older, but they, they are good receivables. We're not concerned there, collectionability is good.

And the third thing is really, just a bit of a change in the revenue for the quarter. We had three fewer days in revenue in the recognition, just as the way the quarter ended on March 31. So not overly concerned.

It's certainly an area of focus for us is constantly around our asset management of getting that WIP billed and collecting those receivables. So we may -- we target somewhere around that 90 to 95 days is probably a reasonable level.

Okay, thanks. Maybe I could just ask, on the oil and gas base in the midstream sector that you have a good presence in Canada. Can you talk about where in the lifecycle of those projects, do you generate the most of your revenues? Is it upfront in the environmental approval process?

What work do you actually do, as these project moves to construction? Can you just talk a little bit about that, where you play in that cycle?

Sure. No, we play -- I would certainly -- we play at the beginning end of it. So as you said, in the environmental services side.

We're working with the clients on routing. We're working with them on environmental assessments, on regulatory approvals, in stakeholder engagement. So there's a number of areas that we play in that front end regulatory part.

At the same point in time, we're also doing a lot of preliminary engineering, feasibility studies, routing studies, technical studies associated with the engineering sides of those projects. So at the front end of the job, is certainly where we gather most of our revenue.

When it moves into detail design, that's usually environmental services work ends, and the detail design starts. So we're getting to fee designs and detail, again, high revenue generators for us.

Once they are designed, then it turns to construction. Our work then goes into construction management. And that is a much less, I would say roughly 75% of our fees are generated upfront, with only 25% being done in the construction, management and supervision of the project.

So we're still at the front end of most of these jobs. A lot of these course pipelines haven't been built. Most of these pipelines are still going through their routing and regulatory approvals and stakeholder engagements. Still lots of opportunities for the revenue growth.

Of course, what we stated is a lot of those projects have essentially been put on hold. They are moving slower, and new projects aren't being advanced. But that really is a temporary thing. We just have to determine how long is temporary. But we're quite happy with our position, it's still very strong.

Okay. Thanks, Bob.

You're welcome.

Thank you. Your next question will come from Benoit Poitier with Desjardins. Please go ahead.

Yes, congratulations for the good quarter. Just to come back on the energy, could you maybe provide more color on how sizable you expect the retraction in the gross revenues this year?

That's a difficult one. I think, Benoit, we saw the overall in energy and resources retract about 6%. It's really about trying to get -- we're staying close to our clients, as Bob mentioned.

But we are trying to get that visibility into what is going to happen in the second half of the year. Getting the MSAs signed with some of our major clients puts us in a good position for when they are ready to make their decisions to move forward. We expect to bill, as Bob mentioned again, we'll see some further retraction in Q2. But beyond that, not a great deal of visibility.

Okay, okay.

That's been the hardest thing for us to try to determine. Even our clients are having a difficult time determining exactly how long this is going to last.

As we've said, the retraction in the second quarter, shouldn't be as large as the retraction we experienced in the first quarter. And then, it should level off for the rest of the year. But a lot of that is dependent on the price of oil, and how quickly our clients react.

And we have to remember, we were comparing to a very strong H1 of 2014 as well.

Yes, good point. Very good color.

Just on the election side with the NDP, have you seen any changes? Or should we expect any projects to be delayed? What -- any views on that?

It's still very early days. There has been an awful lot of discussion, a lot of comments in the press, and really we believe everyone just needs to relax a little bit. We do believe that this government has said all the right things so far.

I think they really do want to work with the oil and gas industry. They want to protect what Alberta has built. I think it's still early days.

The problem is in any kind of a government change, in any kind of a major shift in government, just the transition of that, and the lack of clarity causes concern. And I think that's where most of the corporation's concern is. I don't think the concern is gravitating to immediately being negative. I think the concern is, just that there isn't currently a good amount of clarity in how fast things are going to move forward, and how new items are going to play out.

So we're certainly optimistic. We believe that the government understands the business here in Alberta, and will work with business to ensure that it's protected. But it will take some time, and there is a lack of clarity today in how long that will take.

Okay, and lastly, just to come back on Paul's question around the accounts receivable. Obviously, it puts a lot of pressure on the working cap this quarter. Looking also last year, typically you consume some working cap in Q1.

So just wondering for 2015, whether you should almost recover the full amount that you consumed in Q1? So any more color on the working cap going forward?

Yes, that would be our expectation, Benoit. We generally do have lower cash generated from operations in the first quarter. We used a lot of our cash for merit, as well as for the payment of Dessau.

So our cash flows are -- I know we were somewhat criticized for our working capital and our structure previously. That's all remedied. We're back in our optimal capital range, and we still expect to generate pretty solid free cash flows this year.

Okay, perfect. I assume the recovery in working cap typically happens in the second half, right?

In Q2 and Q3 are the best quarters for that, that's correct.

Oh okay. Thank you very much.

You're welcome.

Thank you. Your next question will come from Michael Tupholme with TD Securities. Please go ahead.

Thanks. Good afternoon, guys.

Hi, Michael.

I was wondering if you could help me a bit more with the energy and resources business unit? I understand the second half is murky. But when we think about the second quarter, the 6% retraction you saw in Q1, is that consistent with what you expect to see in Q2, or could it be worse than that?

Good question. I don't think it's going to be worse than that. Could it be the same as that? Potentially it could.

I am saying maybe and potentially, because I am not sure what I am comparing to, again in second quarter of Q 2014. So it was still pretty strong. So that's why we would have to look at -- comparing it, that may result in the number being larger.

But we don't see more layoffs in the second half, or more staff rationalization in the second quarter, than we experienced in the first quarter. So to me, that would translate into slightly less retraction in the second quarter than the first quarter.

Okay. And then secondly, is there anything -- any more color you can provide on the performance fees in the Canadian mining area in Q1? And then, would the Canadian mining practice or business have still grown without those fees?

It would have been a very small growth. I think most of the growth that we experienced in that revenue growth, was associated with that, was that project success fee. Which was part of something we do all the time, is rationalize those projects.

This was a safety and schedule revenue generator bonus for us, or a project award. It wasn't, I would call overly significant. It would have probably ended up being a few cents difference to the bottom line. But without that, the mining business would have probably been flat.

Okay, perfect. And then, f I could squeeze one more in, I think I saw a mention of an adjustment to the Dessau purchase price. Just wondering if you can elaborate on that, how much it was, and what drove that?

Yes, I don't -- sorry, Michael. I don't have the exact number, it certainly isn't material. I think it's around CAD4 million or something like that.

But it's just the working capital adjustment from the original payment and the closing balance sheet. We've now received their closing balance sheet, and we're going through the final purchase price accounting on that. So it's not material.

Got it. Okay. Thanks a lot.

Thank you. Your next question will come from the line of Bert Powell with BMO Capital Markets. Please go ahead.

Thanks. Bob, we're hearing a lot about growth in the building side of things these days. I am wondering if you can give us a little bit more color in terms of the different sectors within that? I know you said it's pretty broad based for you guys, but I would be particularly interested in what's driving stuff on the commercial side?

I know healthcare and education tend to be more your focus. But I'm just wondering if you can give us any insights in terms of what's really driving the uptick in the activity in the building space?

I think we can really point to the acquisition of ADD Inc., which has a -- what I would call a commercial workforce planning, some residential high-rise capabilities. They had a very strong presence in Miami, a very strong presence in Boston. We have been able to translate that, and move that around the rest of the country where we do have good relationships with commercial clients and residential clients. But didn't have that high portfolio of strong projects in a high-rise type of developments.

So we've been able to export that, especially out of the Miami office, and have been winning projects across North America and into Canada. In that what I would call workforce planning, high-rise residential, high-rise commercial space, which was not a big space for us before. So that would be probably the biggest reason, or biggest indicator for the growth there.

Okay. And then just coming back to residential, that was a big area for you guys in prior to 2007, I guess. There was always a view that there was scarce resources that you had or capabilities that you had that would position you well for when that market recovered.

I am just wondering if you could talk to us about, if that's still the case today? And generally what kind of line of sight you have to what's going on in that space, especially in the US?

Yes, you're right. It is especially in the US.

In Canada, a good chunk of our community development work is in Western Canada, and to date there has been some slight pausing in reduction of projects, especially in Calgary. Not as much as in the Edmonton, Eastern Canada still is fairly strong.

In the US though, no doubt, that's where we are seeing some pickup, and we are seeing some growth, and some more opportunities. And you're right, we were well-positioned from the 2007 and 2008.

Some of the problems that we're starting to see, is in some of the areas, and I would say probably especially California that, that downturn was so long. It extended well into 2012 and into 2013. It lasted five to six years in the California market. So we didn't -- we're probably not as well-positioned as we would like in California, still well-positioned, but we had a dominant position in 2006 and 2007.

So that was one of the reasons, we made an acquisition of Penfield & Smith in the fall of last year, there in the Santa Barbara, and up in that valley, and they are doing a lot of that land development work. It seems to be a strong area of California. We've done some strategic hires in our Southern California, Orange County area, trying to get a better position in that marketplace.

We did invest in Wilson Miller in 2010, 2011, which was essentially a community development firm in Florida. So we have a very strong position in Florida.

We're seeing a strong pickup of opportunities there. We're trying to build some a presence into Texas in there, because Texas has a very strong community development that it is facing, to be almost somewhat unaffected by the recession.

So we still see that community development area being a very strong differentiator for us. It's something none of our competitors are in, or focused on. That gives us a great competitive advantage, and we have a strong position, and continuing to build even a stronger one.

Okay. That's great, and I'll respect your two question limit, and not try to sneak in another one. Thanks.

Okay, thanks, Bert.

Thank you. Your next question will come from the line of John Rogers with D.A. Davidson. Please go ahead.

Hi, good afternoon. Congratulations on the quarter as well.

Thanks, John.

Bob, in your comments, and I think I have this right, you mentioned that within the US, you expected continuation of current growth rates 10%. But then you also used the word moderate growth. And so I just want to make sure I have that straight.

Yes, we -- (multiple speakers)

Maybe that's how you think about moderate growth (laughter).

Our moderate growth for us is -- we sort of waiver around certain definitions of our guidance, but moderate in our words, was 2%-plus to 5%-plus organic growth in that range.

Yes.

Plus 10% in the first quarter is substantially more than moderate. But we were comparing that first quarter, against the relatively low first quarter in 2014. So because of that, that weakness in Q1 of 2014 resulted in maybe a little higher number in Q1 2015.

When you look at Q2 2014, in comparing to Q2 2015, that's where we still feel it's moderate. Now we would hope it's going to be at the upper end of that moderate range we gave. So but to be back at 10% again, probably not. So when we say continued growth, continued strength in the US, you do have to take into account, the quarter, quarterly results we're comparing to from last year.

Okay. Thank you.

And then just in terms of thinking about organic growth overall, is it hopefully continuing to pick up here? Could you talk a little bit about your hiring? And are you trying to hire out ahead of that, or are you following the client's lead, in terms of when their orders come in? Just how you're thinking about that, and how you expect to drive it, versus acquisition growth, bringing in people that way?

Yes, certainly, our organic growth, I would say, is two-fold. When you win projects, you have a core group of people to do that project. But just about every project, when you win it, especially the larger ones, that gives you an opportunity of staffing up, and that generates hiring people and getting organic growth.

And that's company-wide, in other words, we may win a project in Western Canada, but that may result in organic growth in California, because we're going to be leveraging that, the expertise in California on that project. So winning a job, no matter where we win it in North America is one, one catalyst obviously for organic growth.

The other one would be more of a strategic hire. An individual -- and we're starting to see more and more of that. That we've created -- we're not there yet, but we're pretty close to getting to a position in the United States, where we can start leveraging that position to get stronger organic growth.

But in some geographies and in some sectors, we just need that one person, that special individual that's got a great client relationship, a great history, a great portfolio of expertise, that we can then leverage with the rest of the company we have in other areas. So we're starting to see that hiring, and hiring some strategic individuals. And a lot of the geographies in the US is starting to also, then build organic growth opportunities. So those would be two ways we would look at our organic growth.

Okay. Thank you.

You're welcome, John.

Thank you. Your next question will come from Ben Cherniavsky with Raymond James.

Hi, guys.

Hi, Ben.

I'm out of ammo. All the good questions have been asked.

(Laughter) Oh, come on, you've got something for us.

Well, frankly, it's hard to keep coming up with questions, when everything is so consistently the same every quarter.

(Laughter). We try to be consistent.

Yes, I know you do that very well. Congratulations.

I might just ask you, since I have the mic, to clarify what seems to be implicit, and I think a little bit explicit in your MD&A is an anticipation that the oil and gas business might improve a bit in the second half. Are you seeing -- like what would give you the reason to believe that? And what are you seeing in your order book if you will, specifically in oil and gas business in Alberta right now?

That's actually a good question, because it is not an easy one to answer. What gives us the confidence, that the second half of the year is going to be stable and plateau off, and be better than the retractions we've suffered in the first half?

So a few reasons for that. One, that's what our clients are saying. Our clients are telling us that it's their expectation.

When you try to get -- dig into why they are saying that, it really comes down to the price of oil, so it's stabilized around this [$]60. It hasn't continued to decline. It hasn't gone to [$]40 like everyone thought it was going to be, it's staying at [$]60. They are trying to find where is that going to stabilize.

And even in some of our discussions in the last few days with some clients, they are even looking at, okay, if it gets back to [$]65, we're going to start moving projects back into the hopper. It gets to [$]70 and we're going to be ramping up even more.

So I think a lot of the anticipation for a stronger second half, is because there is a general feeling that oil is either plateaued at this level at [$]60, or is potentially even going to sneak up to the [$]70 range by the end of the year. Now, all we need to do is hope that actually happens, and then all of this will come to fruition.

But at this point in time, that's what we're hearing. That's what we read about. We don't know probably any more than anybody else does, because we're getting our information from our clients.

Okay, great. Thanks very much.

Thanks, Ben.

Thank you. Your next question will come from the line of Chris Murray with AltaCorp Capital. Please go ahead.

Thanks, guys. Good afternoon. Just really quick. A couple more follow-ups.

Just on intangible assets, you kind of gave us the numbers there. So you're still expecting that, I guess it would trend down quarter-over-quarter. Is that the fair way to think about it? Or is there some reason you're thinking of a step jump, as we move through the year?

No, I think the intangible asset amortization is really two key assets. It's work backlog that we acquire, in the client relationships. So we did a number of acquisitions in 2014, the beginning of 2015 with Dessau and Sparling.

So we expect to -- I think we gave the number in the MD&A about what our expectations are for the year. We certainly had a more active year in 2014, and that's working its way through the intangible amortizations for this year. I don't expect them to be higher as a percentage of net revenue than what we saw in Q1.

Okay. Great.

Now that is contingent on other acquisitions occurring as well.

Fair enough. And then just, just kind of returning to Dessau very quickly. And I guess, I'll also to tie this into just the SG&A costs that maybe went into that.

I guess, looking at the EBITDA margin for Dessau, I think your comment was that you expect at this particular point EBITDA margins will be a bit lower. Now, I guess, by a bit, do you mean sort of what's the bottom edge of your target range, or are we talking couple points lower? And like some of the comments you made, you'll have to bring in different services over the next couple years perhaps, before that moves higher?

And then, I guess, the second part of that is, there seems to be a lot of the acquisition costs that happened in Q1. Do you still think that you could hit your target for SG&A on a full-year basis?

The Dessau acquisition-related costs did contribute to higher SG&A. As I said, I think earlier, we expect most of those external costs have been incurred. There's still some training, some other integration activities that we have to continue on, and still some French language translation. But most of those costs now are internal.

So that's going to affect utilization, which obviously affects SG&A. So the bulk of the external costs though have been incurred.

With respect to lower EBITDA margins, yes, we expect the Quebec market is very different in terms of the clients and the margins. So what really is needed there is, they may get a lower gross margin, but we need to have very high utilization.

And what we're seeing so far, is that the utilization levels for the Dessau operations are actually quite high, higher than the rest of their business. They know how to manage in that market. So we expect it to be a little bit lower, maybe a couple points on EBITDA, but overall, it's going pretty much as we expected it would.

Okay, good. And do you still expect -- just your thoughts around, I guess, hitting your target range on administrative and marketing expenses?

I'm sorry, yes. I think, as you get through Q2 and Q3, the overall utilization increases. So yes, we do expect to get there.

Awesome. Thank you, guys.

Okay.

Thank you.

(Operator Instructions)

We seem to have no further questions at this time. I'll turn the call back over to Management for any closing comments.

Thanks, John. I would like to close our call by saying that we're confident in our ability to continue to deliver that consistent value to our shareholders. Our diversified plan has served us well to date, and considering the circumstances in the market, we expect it to serve us well over the long-term.

Look forward to speaking to you again in the future. Good-bye.

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