Stantec Inc (STN) 2016 Q4 法說會逐字稿

Welcome to Stantec Inc.'s fourth-quarter and year-end 2016 earnings results conference call. With us today from Stantec management are Bob Gomes, President and Chief Executive Officer, and Dan Lefaivre, Executive Vice President and Chief Financial Officer.

(Operator Instructions)

As a reminder, today is February 23, 2017, and this conference call will be recorded and broadcast live over the internet. It will be archived for future reference at stantec.com under the investor section.

Any members of the media who are joining us in listen-only mode and who would like to quote anyone other than Mr. Gomes or Mr. Lefaivre, must ask permission 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. Stantec management will also mention non-IFRS measures.

And now your host, Bob Gomes. Please go ahead, sir.

Thank you.

Good afternoon, everyone. Thank you for joining us for Stantec's fourth-quarter and year-end 2016 earnings conference call. We're on Slide 3 for those you following the slide show.

Dan will provide a summary of our financial results for the quarter and the year. Then I will share some highlights from our operations and offer some detail on our market outlook for 2017. Following that we'll open the call to questions.

And I'd like to remind you that we have posted a copy of our slide show on our website. It will be archived in the Investors section.

Today we released the results of Stantec's operations for the fourth-quarter and year-end 2016. 2016 was an extraordinary year for Stantec. We closed the year with a 49.5% increase in gross revenue compared to 2015 and a 15.5% increase in adjusted EBITDA.

Our results reflect the hard work of our employees, the five strategic acquisitions completed during the year, the common share offering, and the renegotiation of our long-term debt.

2016 was highlighted by our acquisition of MWH Global and the strategic acquisition of four other companies, each adding strength in key regions and sectors. MWH in particular greatly expands our global reach and adds strength in water infrastructure design, environmental services, and the water, power and dam sector.

In recognition of MWH's well respected water infrastructure business and our own long history in the sector, as of January 1 we broke out our water group from our infrastructure business operating unit and created a separate water business operating unit. This change brings increased visibility and leadership for our world-class expertise in the water industry and positions us for future growth.

I'll now hand things over to Dan for a review of our financial results. Dan?

Thanks, Bob. Good afternoon, everyone.

First I'll go over all of our results and then I'll provide some additional color. I'll begin with the Q4 results on Slide 7, which are quite strong.

In comparing Q416 to Q415, gross revenue increased 74.7% from CAD710 million to CAD1.2 billion. This was mainly due to the impact of acquisitions completed in 2015 and 2016, especially the MWH acquisition.

Gross margin increased from 54.1% to 54.5% and this was mostly due to higher margins on our global and US businesses.

EBITDA increased 51.8% from CAD54.6 million to approximately CAD83 million. EBITDA was positively impacted by increases in gross revenue and gross margin. These increases were partially offset by administrative and marketing expenses as a percentage of net revenue. These went up from 43.7% in Q415 to 44.3% in Q416. This was mainly from a CAD6 million increase in professional fees related to audit and tax planning and an increase in marketing and business development labor.

Adjusted EBITDA increased 41.3% from CAD59 million to approximately CAD84 million. And net income increased 16.2% from CAD25 million to CAD29 million. Diluted earnings per share decreased slightly from CAD0.27 in Q415 to CAD0.26 in Q416.

In addition to the increase in admin and marketing expenses, net income and diluted earnings per share were affected by a CAD12 million increase in amortization of intangible assets. This was mainly related to backlog, client relationships and finite-lived trademarks acquired from acquisitions completed in 2015 and 2016.

We also saw a CAD4.3 million increase in net interest expense mainly due to the increase in our long-term debt acquired for the MWH acquisition.

In addition, the increase in the number of shares outstanding compared to 2015 decreased our overall earnings per share. As part of financing the MWH acquisition last May we completed a public offering increasing our shares by just under 20 million.

Adjusted diluted earnings per share increased 2.9% from CAD0.34 to CAD0.35.

Now I'll move on to our annual results on Slide 8.

As Bob mentioned, when comparing 2015 to 2016 gross revenue increased 49.5%, from CAD2.9 billion to CAD4.3 billion. This increase was mainly due to acquisitions completed in 2015 and 2016 and a 3.7% increase in organic revenue in our infrastructure business operating unit, which Bob will talk to a bit later.

EBITDA increased 9.8%, from CAD306 million in 2015 to CAD336 million in 2016. And adjusted EBITDA increased 15.5%, from CAD305 million to CAD352 million.

As you can see on the slide, we saw some decreases in net income, diluted EPS and adjusted diluted EPS mostly related to acquisition-related costs and financing.

Our cash flow from operating activities increased from CAD205 million to over CAD285 million year over year. We can attribute this to an increase in cash receipts from clients and to acquisition growth and a CAD16 million decrease in taxes paid.

Today we announced an increase in our dividend payable to shareholders to CAD0.125 per share. This is an 11.1% increase from last quarter and I think is our largest increase ever. This speaks to the confidence of Stantec management and the Board we have in our company and our opportunities going further forward.

At December 31, 2016 our net-debt-to-EBITDA ratio was 2.38, which is well within our internal guideline of maintaining net debt to EBITDA at a ratio of between 1.0 and 2.5 times.

Now I'd like to go through some of the factors that impacted our year-end results. We offer more details on Page M-22 of our 2016 Annual Report. There certainly was a lot of noise in 2016, mostly due to the MWH acquisition. Considering the complexity of that acquisition, though, we are pleased with our results.

Our admin and marketing expenses were higher in 2016, mainly due to increases in integration-related labor costs, MWH acquisition costs, additional professional fees incurred, retention and merit payments to retain key employees during integration, and severance costs related to the decline in oil and gas and mining in our legacy business.

As you can see on Slide 9, these noted increases in admin and marketing expenses impacted a number of our financial measures in the year. These totaled approximately CAD52 million and had an EPS impact of approximately CAD0.28.

We also had about a CAD38 million increase in amortization of intangible assets. This was mainly related to backlog, client relationships, finite-lived trademarks, and software acquisitions and additions in 2015 and 2016, translating to approximately a CAD0.20 impact on EPS.

Net interest expense increased by over CAD17 million, mainly due to the increase in long-term debt related to the MWH acquisition, which led to a corresponding approximate CAD0.10 impact on EPS.

Also, our effective income tax rate increased from 26.1% to 27.8% in 2016, mostly due to MWH-related changes in earnings and jurisdictions where we operate, an increase in nondeductible acquisition-related costs, and other nondeductible expenses, which had approximately a CAD0.03 impact on EPS.

Moving on to our targets for 2017, recall that in Q2 2016, as a result of the MWH acquisition we withdrew our targets for the remainder of the year and reevaluated them as part of our annual budget process in 2017. With MWH now included and in consideration of our new capital structure, new mix of projects, and expanded global operations, we developed revised targets for 2017.

As you can see on Slide 10, as a percentage of net revenue we are targeting gross margin between 53% and 55%; admin and marketing expenses between 41% and 43%; EBITDA between 11% and 13%; and net income at or above 5%.

In addition, we believe our capital expenditures, including software additions, will be approximately CAD90 million in 2017, and we expect our amortization of intangible assets to be approximately CAD85 million. Our capital, software and intangible amortization targets exclude any further anticipated acquisitions in 2017.

And while this isn't a target, we expect our tax rate to be approximately 28%, based on the enacted tax rates in the jurisdictions where we currently operate.

All of our targets are based on the expectation of continued economic growth in the US; modest improvement in energy and resource sectors; continued North American support of public infrastructure spending, including water and wastewater facilities; and continued support for and growth of APD project delivery methods.

Now, Bob, I'll hand it back to you for additional operational highlights and a snapshot of our 2017 outlook.

Thanks, Dan.

As you can tell from the length of Dan's presentation, it was a noisy, complicated financial year for us, but one that we are pleased with our performance.

I'll begin my section of the presentation by sharing some of our strategic acquisition highlights for the year. I'm on Slide 12 for those of you following the slide show.

Our well executed acquisition and integration strategy proved very successful in 2016. We're seeing significant opportunities in key sectors and regions thanks to the acquisitions we completed and integrated over the past couple of years.

Specifically, in 2016 we completed the acquisition of Bury, MWH, VOA Associates, Edwards & Zuck, and Architecture - Tkalcic Bengert.

MWH specifically had a significant positive impact on our earnings. Looking at our results, I'm very proud of the work our teams have done to bring MWH and Stantec together, while also continuing to deliver top-tier service to our clients. As we move forward in 2017, integration of MWH's people, systems and best practices will continue to be a focus.

We are nearing full integration for North American consulting services employees from MWH, which is about 1,500 people. We are on track for completing this phase of the integration in Q2 2017. We anticipate the branding transition in North America to be complete in late 2017.

We have combined insurance, health plans, and IT systems, which ensures a common platform for all staff and drives long-term synergies. By the end of 2017 we will have co-located half of MWH locations where we had overlap with Stantec locations. And we expect to continue to review some of our global operations for integration later this year.

Now let's take a look at Stantec's operational highlights by business operating unit. I'll begin with buildings on Slide 14.

Gross revenue for buildings increased 7% in 2016 compared to 2015. This was due to acquisition growth and foreign exchange. Organic revenue retraction for buildings was 2.6%. Our Canada and global operations experienced retraction that was partly offset by strong organic growth in our US operations.

The retraction occurred mainly due to the number of design/build P3 projects that were in the bid phase, and the decline of the oil and gas sector, which impacted private and public spending in our Canadian and Middle East operations.

In Canada, despite an overall organic retraction, we maintained strong activity in the healthcare, commercial, and education markets. And we also experienced steady activity in the civic and industrial sectors.

In the United States we benefited from urbanization trends and increased opportunities in our commercial sector. This was demonstrated by two key project wins during the year.

The first is the redevelopment of Brooklyn Village, a 16-acre parcel of land in downtown Charlotte, North Carolina. The project involves designing, building, and operating a walkable urban village.

During the third quarter we were named prime consultant and the design lead on the successful team for the new Mackenzie Vaughan Hospital in Vaughan, Ontario. Our architecture, landscape, and transportation teams are collaborating on this large greenfield hospital that will be the first in Canada to include fully integrated smart technology.

Moving on to Slide 15, in energy and resources, gross revenue remained stable in 2016 compared to 2015. Revenue was positively impacted by our acquisition growth. Organic growth revenue retracted 31% in 2016 compared to 2015, primarily due to weakness in the oil and gas and mining sectors.

As I've said before, our exposure to these sectors has been reduced and any further decline will have less impact on our overall results. In 2014 our oil and gas engineering services represented approximately 15% of our company's overall annual gross revenue. In 2015 it represented approximately 8%. And now in 2016 it represented 4%. We are not anticipating any further decline in 2017.

In our power sector we continued securing projects as the result of infrastructure improvement, environmental compliance, and the resiliency requirements in the transmission and distribution and power replacement markets.

For example, in the first quarter we were awarded civil and electrical engineering design services for the transmission, infrastructure, electrical system studies, and underground collector systems that will support the Southgate and Windsor solar farms in Ontario. Each farm will have a generating capacity of 50 megawatts.

Gross revenue for environmental services increased by over 12% in 2016 compared to 2015. This was positively impacted by acquisition growth and foreign exchange. Organic growth revenue retracted by approximately 9% in 2016 compared to 2015, but stabilized when comparing Q416 to Q415.

As with energy resources, our exposure has been reduced and any further decline will have less impact on our overall results. In 2014 our oil and gas environmental services represented approximately 11% of our company's annual gross revenue. And in 2016 it represented 5%.

Project highlights include developing environmental sustainability and compliance programs and providing preconstruction biological resource monitoring along a 21-mile section of the California High-Speed Rail Authority's high-speed rail in Kern County, California.

And on Slide 17, gross revenue for infrastructure increased by over 58% in 2016 compared to 2015. This was mainly due to acquisition growth. Organic growth revenue grew by approximately 4% in 2016 compared to 2015. Strong organic growth in our transportation sector was partly offset by retraction in community development.

At the end of September we were selected to provide town planning work for 486 hectares of designated lands within the Tsuu T'ina First Nation west of Calgary, Alberta. This work includes roadway layout, public realm concept design, land use zoning creation, urban and architectural design guidelines, and land lease [plots].

Our water sector had stable organic revenue in 2016 compared to 2015, with the Canadian market outpacing the US market. We continued to see opportunities arising from aging infrastructure replacement and environmental regulatory requirements.

In Q4 a joint venture composed of our MWH team in San Francisco was selected to provide as-needed specialized and technical water contract services, including water supply, treatment, and transmission services as well as public health and environmental and regulatory compliance services for the San Francisco Public Utilities Commission.

Construction services earned CAD645 million in gross revenues since the MWH acquisition on May 6, 2016. Most revenue was generated in the United States and the United Kingdom. We continued to see strong activity in the wastewater treatment construction in the US and in the UK revenue was driven by construction for utilities in the second year of the asset management program cycle.

As we've said many times, the addition of MWH has added greatly to our business. For many reasons, it was a great fit for Stantec. One of those reasons is our shared history in water infrastructure design. Water has been a part of Stantec since 1954, the year we began as a one-person firm. In the 1980s we launched our diversification strategy by acquiring water firms close to our western Canadian base. And now we've grown from there.

With projects like the Panama Canal locks and the San Vicente Dam raise, the largest roller compacted concrete dam raise in the world, MWH's reputation for water infrastructure design is well known across the globe. We see water infrastructure as an important area for growth and we feel the creation of a business operating unit positions us to capitalize on opportunities. The water business operating unit will be organized into the sectors you see on Slide 19.

Moving on to Slide 20, our overall outlook is to achieve a long-term average annual compound growth rate of 15% for gross revenue, which we expect to accomplish in 2017 through a combination of acquisition and organic growth. Since we were publicly traded in 1994, a compound annual growth rate is approximately 19%. For the last five years it is 21%.

Organic revenue remains an important part of the business. And we see positive momentum in many sectors and regions that will support our growth. Certainly with our strong backlog and client relationships and our expanded global presence, we anticipate opportunities to cross-sell services to new end markets.

Going forward in 2017, we will not be providing specific guidance of organic growth per business operating unit or geography. We will focus on our overall growth, our target of 15% top- and bottom-line growth over the long term, what we have achieved and what we are continuing to achieve.

In Canada we expect to benefit from increased levels of federal infrastructure spending, which would positively impact our buildings, infrastructure and water business operating units. The Canadian government has earmarked CAD180 billion in spending over the next 11 years. Over the next five years public transit, water and wastewater and affordable housing will receive the greatest amounts of investment.

Conversely, we do expect a slowdown in residential construction and continued weakness in mining, although we do expect modest increases in capital spending in oil and gas supported by stronger oil prices.

In the United States, the economy is continuing to expand. The job market is strong and interest rates are low. We see this as a positive impact for our buildings and infrastructure business operating units in the United States.

The outlook for water and wastewater infrastructure spending is increasingly optimistic since the federal government approved the WIND Act last December. And we continue to see spending growth in transportation due to the FAST Act. We also anticipate being well positioned to capitalize on increased spending for educational construction, environmental services, and the power generation subsector.

In terms of our global operations, with the acquisition of MWH we have a much larger global presence in the United Kingdom, New Zealand, Australia, Peru, Chile, Argentina, the Netherlands, Italy, India and the Middle East.

In the UK most of our work is in the water market as part of the Asset Management Programme 6. A large portion of the work has already been bid on and secured. And therefore we expect to be insulated from some of the market uncertainty surrounding Brexit.

We believe the economic outlook for New Zealand is positive with growth supported by a stable housing market, a modest increase in consumer spending, and solid export growth. In Australia we anticipate continued adverse economic impacts resulting from low commodity prices and weaker demand from China. However, the general economic outlook is positive, with low interest rates, growth in housing, public sector spending, and modest investment in non-mining business.

And in Latin America we anticipate a modest recovery in 2017 following what was believed to have been a bottoming out in 2016. Economic growth in Peru has been robust, thanks to expanding copper production, increased public spending and accelerated household consumption. And we expect modest GDP growth in Chile due to a stronger global economy and higher commodity prices.

To sum up the year, as I mentioned 2016 was a history-making one for our company, certainly one we look back on with pride. With all the activity we had in 2016, we expect to translate this into positive growth, both on the top line and bottom line in 2017. And we are optimistic about our positioning and opportunities in 2017.

With our strong, diverse and top-tier presence in both Canada and the United States, we believe we are one of the best positioned firms in our space to take advantage of the increased focus on infrastructure spending. Our position in the United States spans public and private clients across the most diverse number of sectors of any of our peers, which allows us to take advantage of increased spending.

As always, our success is supported by our diversified business model, our well executed acquisition strategy, our faithful commitment to creativity, community and client relationships.

With that, we'll move to the Q&A. I'll turn it back to the operator.

Thank you. (Operator Instructions) Anthony Zicha; Scotiabank.

With reference to your 2017 EBITDA target, you're saying your low end is 11% and your high end is 13%. What's the low end contingent on? And what are some of your assumptions? And if we look forward to a tax rate for 2017, would 28% be a good proxy?

I'll answer the second part of that first. The 28% is a good proxy. There's still a lot of uncertainty around tax legislation, especially in the US. So we're assuming that on the basis of enacted tax rates.

The low end of the EBITDA range is really related to if we achieve a lower target on gross revenue -- sorry, gross margin -- and a higher target on admin and marketing expenses, that will result in a lower EBITDA margin. And that's really how we come at these ranges.

Okay. And then when you're looking at the CAD25 million in synergies, so CAD10 million comes from revenue, CAD15 million comes from costs, for modeling purposes how should we look at the flow on a quarterly basis? Is it more back-ended?

I think what we have seen on the cost synergies, we'll start to realize many of those costs flowing through the year. I don't think there's any particular quarter that it's weighted in, Anthony. It's throughout the year. So as Bob mentioned in the script, we've aligned our payroll systems, our benefits in the US. We've now aligned our insurance. And so we'll see benefits of the combined operation throughout the year.

I think the revenue synergies probably are back-ended and weighted. I think the cost synergies, as Dan said, are probably evenly distributed throughout the quarters. But certainly I'd say the revenue synergies are more back-end weighted.

Okay. Bob, what are some of the underlying trends that are improving your client business in the energy segment? And could you comment on your US market position and how you'll be able to leverage your partnerships with key clients such as TransCanada, Enbridge and Spectra?

Well, certainly the change of our clients' positioning in North America has been interesting for us because we've had strong relationships with TransCanada and Enbridge in Canada and with their expansion of Columbia Pipelines and Spectra in the United States, we certainly are having discussions and seeing where we can help them in the United States.

Over the last two years we certainly have had to cut back in the United States so our position there is probably not as strong as we'd like it to be. But certainly we're working with our clients to see what expertise we can move from Canada to the operations we have in the US to be able to do more work down there.

So certainly we're seeing some stability in the commodity prices in the oil and gas market. That stability is certainly creating more discussions with our clients on opportunities and projects. So we're seeing positive momentum there. Whether that positive momentum will end with actual projects is something we'll continue to work on with our clients.

Okay. And just last one, California is an important market for Stantec. Are you seeing a pickup in new business that's weather-related to the flooding and the roads and the landslides? Thank you.

Yes. There's no doubt that -- we've said it many times that California has every water problem you can have. It goes from drought to flood in a matter of months. So certainly with all the issues in California we are now active on a number of projects. And most specifically we are active on the Oroville Dam project with the State of California, helping them do assessments right now. So certainly with the issues that the rainfall has caused in California will result in opportunities for us here.

Okay. Well, thank you, Bob. Thank you, Dan.

Michael Tupholme; TD Securities.

Just back on the prior question about the EBITDA margin guidance range of 11% to 13%, so I understand your answer, Dan. I'm just wondering are there any particular business operating units that we should be focused on in terms of sort of offering the greatest potential for variability around the margins?

Each of the business units have different drivers. And really the impact, again, is your gross margin as well as your utilization. And that drives your administrative costs. So depending on the amount of effort that's required to win work through bidding, you may need a higher utilization rate. If you're more -- have lower-margin business you want your staff to be more highly utilized.

So every one of our business units, Michael, have certainly a little bit different drivers. But I wouldn't say that any one of them have significant variability in terms of our EBITDA margin, taking the differences in how those businesses are managed.

Right. I guess I'm just wondering specifically for 2017 if there's a particular segment that has the potential to perform one way or another depending on whether certain projects come through or depending on utilization. Or is it -- it's very tough to say right now?

I'd say it is tough to say. But if you were going to push us for one I would say the buildings group. Because the buildings group right now has probably -- the backlog has built significantly. The projects, there's some very large projects. A number of those projects are P3 or APD projects. Those projects have probably the biggest volatility associated with them. They're fast moving projects driven by contractors.

So those projects, both plus and minus, have the greatest potential for us executing well and driving a good gross margin. And they also have equally a risk for us of performing poorly and driving a low gross margin. So if you're looking for volatility that's the one group certainly that we're focused on for 2017. The good news is, they have lots of projects to drive that gross margin.

Okay. That's helpful. Thanks, Bob. Maybe just picking up on that, in terms of the building segment maybe you sort of just addressed it, but we've seen negative growth in that segment on an organic basis for several quarters. Yet you do sound quite positive. So you spoke to the backlog. Is that a segment where we should expect to see some improvement because of the backlog you referenced fairly soon? Or is this going to still take some time?

No, we're expecting that we're going to see some positive momentum with that group fairly soon.

Okay. Perfect. And then just lastly from me, in terms of infrastructure, again, another area that you sound fairly positive on for obvious reasons given the various government announcements that have been made. Can you just comment a little bit on what you're seeing so far? Have you seen much of a pickup thus far? And how do you think about the year in terms of organic growth within that infrastructure segment? Is this something that's going to build? Or do you think we come out of the gate pretty strong toward the beginning of the year?

I think we're going to have positive momentum throughout the year. We had positive momentum in organic growth in that group last year. I see that continuing this year. I don't think that the announcements from either side of the border are going to have a huge impact on the revenue generation and opportunities, especially in the first half of the year. There's still an awful lot of debate on exactly how those projects are going to roll out.

And you've got to remember, our infrastructure group is now a community development and transportation, with water being really another business operating unit. So community development has got the issues associated with still a relatively flat market in Western Canada.

So I'd say the momentum will be very similar to last year in infrastructure, which will translate into transportation, community development and water and should be continuing to accelerate as the year goes as long as the governments continue to push their infrastructure funding out.

Okay. Thank you.

Maxim Sytchev; National Bank Financial.

Couple of questions, I guess. So in terms of trying to get a clean EBITDA for the Q, is there anything that was in relation to, I don't know, like integration costs, that were buried in SG&A? Because the gross margin actually improved year on year, so I'm just trying to see if there was anything unusual which is not going to be repeatable on a going-forward basis, if you can provide some color there, please.

I think I did mention in the script, Max, that there was about a CAD6 million impact of additional professional fees in the quarter that we incurred that we don't expect to be recurring going forward. We did have slightly lower utilization and more time spent on marketing and business development. And Bob mentioned that has translated into an increase in -- for backlog for our buildings for example.

But beyond that, there was some severance costs in the quarter. And we expect that hopefully to be largely done. But not too many other things that -- as you expect in the fourth quarter, as we've always seen, our utilization is slightly lower, given the Thanksgiving holiday in the US and the Christmas break. So that is fairly normal. So we expect that to improve as we get into Q2 and Q3 of next year -- of this year.

I'm sorry. The severance, was it material in the Q?

There was some -- over and above our Q4 of 2015, yes, there was probably -- I think there was CAD3 million or CAD4 million that we still incurred in severance costs in the quarter.

Okay. And then, going back to the range of EBITDA for 2017, I understand that -- it almost sounds a bit like a sensitivity table to me more than anything else. Because if you back out like a bunch of restructuring and things like that that are, again, probably less repeatable in 2017, I mean, the [clean] EBITDA margin for 2016 was around 12%. And with improving macro right now and what seems to be kind of a build of momentum in buildings and infrastructure, less drag in oil and gas, I mean, how is it even conceivable that you could get to the low end of the range? Just if you could provide some color there, please?

Being conservative. I guess that would be it. I think Dan showed that if the worst-case scenario happens, it could be. But you're right; I think we see positive momentum going. You take out the costs, as you said, we don't see -- things would have to go really badly to get to the low end of that.

Okay. No, that's (multiple speakers) --

We don't anticipate that happening.

We don't expect it Max, but you don't know what you don't know.

Of course, of course. And then last question, gentlemen. Very impressive free cash flow generation in Q4. And I think the net debt to EBITDA right now is around 2.4 times. I mean, at what point would you be comfortable again to do, let's call it, medium-size transactions? Is it closer to 1.5? Just trying to gauge your comfort level around the potential timeframes.

I think one thing you have to remember is the first quarter that we use more cash than we generate. So that will drive up our net debt to EBITDA I expect in the first quarter. But I think that's going to come down fairly quickly as we go through the year, as we projected before around 2 times, which will give us sufficient capacity in our revolver to go after small to mid-size acquisitions. So I don't think -- we aren't uncomfortable at all right now where our debt levels are and the projected trends for us, to be able to go and pursue other acquisitions. Bob?

No, I say yes, right now we don't see that as hampering any of our discussions or us pursuing any opportunities at this point in time. We don't expect anything imminently, but certainly we have a fairly full pipeline and we expect to execute on a few throughout the year.

And is there specific geographies or end markets that you're particularly excited about right now from an M&A perspective?

Well, we're continuing in the US. We did MWH and that was sort of a one-time situation when you look at the size and the scope of it. But now our continued acquisition strategy in the United States we're continuing to execute. We've built an enviable position in our buildings group and we're continuing to see opportunities and companies approach us. So certainly we see opportunities there. We see some opportunities even in transportation and water, just again being -- expanding out our geographies in the United States.

From a global perspective we're putting together a strategy now to support our global operations, more specifically in the UK and Australia/New Zealand where we see the opportunities there within our comfort zone and appetite today. Now that is probably going to be much more of a latter half before we get to a point of actually being able to execute on any of those.

But it's a continuation of a strategy that we've had for the last 10 or 20 years as we're continuing that strategy of filling out our diversity in North America and now have a couple of other geographies to think about as well.

Okay, excellent. Thank you so much.

Jacob Bout; CIBC.

I had a couple questions on the construction services. First off, wondering how your thinking has evolved about the strategic importance of the construction services division.

Certainly it's really a two-part answer to that, because it is very different in the US than it is in the UK. In the UK it is a very integrated into teaming arrangements and into the AMP cycle programs that are being provided to the utility companies there. We're still getting our minds around it. I'm going to be in the UK next month really trying to get a closer idea of exactly how those integrated or bundled services are operated in the United Kingdom.

In the US it is very much a design/build opportunity. And those are really a case-by-case basis. You know, do we have the best opportunity of bundling our services with MWH Constructors or do we have a better chance of bundling our services with another contractor? And it really comes down to a geography play, to what the client would like. And so it's more of a case-by-case situation. So what we said we would do is take the first year or two to really analyze the market, really try to understand those opportunities and then make a decision going forward how we want to deal with that business.

But right now it's a well run business, lots of opportunities for teaming with the consulting part and the construction part, and lots of opportunities separately for Constructors. So at this point in time we're comfortable but really still in the analysis situation.

So the past two quarters you've been running roughly about 20% of gross revenues as far as a construction division revenue. Is that how we should be thinking about this on a go-forward basis?

I think it's around that 15% range, Jacob, on what we're seeing in construction overall.

Yes, and I don't see that changing going forward. I think it's going to be very stable. As a matter of fact, if we do any other acquisitions, it's going to probably stabilize at that level or maybe even slightly more. Don't see a lot of change in that percentage of our business at this point in time.

Thank you very much.

Yuri Lynk; Canaccord Genuity.

Dan, just want to be clear on the SG&A as a percent of revenue target for 2017, because it does look a bit elevated to me. At the high end you're kind of flat with what you achieved this year. And this year had a number of items that might not occur next year in terms of severance and stuff like that. So is there more -- is that what it's saying, is that there is more -- you do anticipate more severance, more of these kind of restructuring costs to occur in 2017?

I think what we are expecting, Yuri, is not so much around the severance costs, but more related to the integration costs. As Bob mentioned, we're planning on bringing all of the MWH US operations over to Oracle April 1st. That's a significant amount of work. There is a significant amount of training and essentially downtime for our production people to get onto our new system. So we're expecting that starting in April. That will have an impact on our SG&A costs certainly in the second quarter. I can see some of that bleeding into the third quarter.

At the same time we'll be looking at the integration of the global operations and what impacts we're going to have going forward.

So -- and obviously you're not going to give targets beyond 2017, but, I mean looking into the years out beyond 2017 one could imagine that ratio being a little bit lower, perhaps back to what it was in the past?

Yes, in our SG&A costs, this ratio is still pretty close to what we've had in the past. So even with all this additional activity we're getting back down, getting the economies of scale around the larger operation, a larger base in the US. And so we do expect that to continue to be managed very well. That's one area that we do really manage our business well and continue to focus on that.

Okay. And in terms of the cost synergies that were laid out at the onset of the MWH acquisition, where are we with achieved synergies to date versus the plan?

I don't have an exact number, Yuri. But we're certainly achieving the cost synergies that we talked about. For example, I mentioned the insurance cost synergies. We'll get a long-term benefit in 2017 over achieving those costs. But we're seeing -- we look at the benefit of those through 2017, the impact of certain people leaving. MWH had a higher overhead structure. That's some of what's built into our SG&A costs. And throughout the last year and into this year we're still looking at trying to squeeze those costs.

As we integrate we're going to get better synergies of the integrated operations. So I think we're going to be well on target with the cost synergies. And, as Bob said, the revenue synergies are going to take a little bit longer, but we have been winning a number of projects together.

Yes. But, again, I think those revenues are back-end weighted because those projects are ramping up and that will continue through the year. I'd say the bulk of the cost synergies are there. And the costs of those will be felt throughout 2017. But I think we've executed on the bulk of the cost synergies already and are now focused on the bigger revenue synergies, which take longer. So we're happy with our pace and our performance to date there.

Thanks very much. I'll turn it over.

Sara O'Brien; RBC.

Dan, just want to go back to that margin guidance for 2017. To hit the 13%, is that sort of a conservative range overall? Because if we look back at the prospectus on a pro forma basis when you closed, or were looking to close MWH, we could pretty much get to the 13% EBITDA including the synergies that were expected. So I'm just wondering if there was an opportunity to beat the 13% in 2017 and is it an objective sort of longer term.

I think there's an opportunity to beat the 13%. But, again, everything is going to have to go exactly as we would hope it would go in the best case scenario. As I indicated, in 2017 we are going to have more integration-related costs. So everything else -- utilization would have to be maxing out. Gross margins would have to be very solid. So those would be the areas that would drive perfect performance.

But if you're looking for can it happen -- absolutely.

Okay. And then just wondered, you gave a directional I think CAD85 million for amortization of intangibles. How much of that is going to be added back in the adjusted EPS on a net basis?

I don't think, Sara -- we haven't stated it specifically in our year-end statements, but I don't think we're going to be going with adjusted EPS or adjusted EBITDA in our 2017 reporting. We'll revert back to purely reported numbers I think.

You'll be the only ones, but that will -- okay. And just a last question on sub consulting costs as a percentage of gross revenue, trending at 30%-plus. I think it was 34% in the quarter. Just wondering if you're subbing out more work than historically and if that's a trend that's expected to continue.

I think there's two things there, Sara. The first is Constructors runs between 70% and 75% between gross revenue and net revenue. So a lot of [craft] labor and trades that are in those numbers. So you have to take that into consideration. The Constructors has much higher than the consulting business.

In the fourth quarter I think our consulting was around 25%, which is a little higher than -- it's been trending around 22%, 21% over the prior quarters. And I think that's a mix of projects. The UK has slightly higher sub consultant costs in their business.

Yes, those projects, both in the UK and some of our P3 projects and design/build projects, what we're finding now, Stantec is sometimes taking, more times taking a prime consultant role in the design team. So we're getting more sub consultants reporting to us. That's certainly the case in the UK where they have a very strong position. And we're starting to see the same situation in the US and Canada. So that's starting to drive up some of our sub consultants cost because we're reverting from being a sub ourselves to being actually a prime and taking on more subs.

So does that impact the way we should look at kind of the ratio between organic growth on a growth revenue basis and the actual growth margin that you generate going forward? I'm just wondering if we should look at sort of net revenue growth rates or gross revenue and then a little bit more subbing out.

The way we're going to report our revenue is still going to be on a gross revenue basis. But we do spread out by essentially the cash-generating units. So we'll have a consulting business spread out between Canada, US and global, as well as by the business operating units. And then we'll have Constructors also separately identified. So you'll be able to get all the information you need from that perspective.

Okay. Thank you.

(Operator Instructions) Tahira Afzal; KeyBanc Capital Markets.

The first question I had was, if you look over the next two to three years, because it seems there are a lot of countries and regions having stimulus plans put in place, which ones are you the most excited about in terms of what it can mean for you guys?

Well, two to three years is a long ways out in these days with everything changing. But I would say Stantec, we've got to really be focused on the areas that we're now in that global platform, and really wrap our minds around it. So it's really the UK, Australia, New Zealand. We have some operations in Europe, but it's in Central Europe, and some operations in Latin America. And really look at those operations, what MWH was doing with those operations, just from a growth perspective, and starting to see how we can cross-sell the Stantec operations into those.

And really that's where our focus is I think in the next year or two, is really looking at diversifying what MWH had in the UK, which was an extremely top-tier water business. But that's all they did. We have now the capability of diversifying those operations as we've done in Canada and the US with Stantec, following the same strategy in Australia and New Zealand. So rather than looking at maybe the global opportunities in other places, really focusing on where we have a foundation now to build on and diversify, is where our focus will be.

Got it. Okay. And, Bob, if you look at your business it seems sometimes we need a disaster to make spending happen. And so unfortunately if you look at all the flooding that's happening in California naturally and through the dam that had the spillway broken, is this an opportunity potentially, developing for yourselves? And is this opportunity potentially expediting the spending you see out there?

Absolutely. You hate to be seen as taking advantage of a disaster, but really we're there to help the states and the governments and our clients to resolve the issues as quickly as possible and as safely as possible. So, as I stated in an earlier question, we are in California working on the Oroville Dam with the State of California evaluating the spillway, moving some power lines, trying to ensure that they can keep the people in that area and the dam as safe as possible. That will be a long-term opportunity for us I think in ensuring that we're there to help our clients.

We've actually created a division in the Company that responds to those so that we have a team that can respond to these situations, especially in the pipeline area, environmental services. We have a team, a spill response team, that can be on site within 24 hours and help our clients mitigate the damage and repair the operation.

So it certainly is a part of what we do now, and it is a very large part of our opportunity. So when you see something large like what's happening in California, that's definitely a significant potential and opportunity for us.

Got it. Okay. And last question is really on the [shale] side. As I've been through a lot of your customers calls over the last week and really some of the E&P names as well, it seems that there are select pockets of (inaudible) that are potentially coming back. Any thoughts on how that could play out with what you've baked into your guidance?

Well, I don't think we've actually baked a significant increase or any kind of real strong pickup in that area in the United States. So if you're hearing that there is, we haven't seen significant opportunities in that area. Certainly we're still close to our clients and talking to them. But I haven't seen any, but it's good news that you've been hearing about some. And certainly we have opportunities that we will try to take advantage of.

Got it. Thank you very much. That's all I had.

Mona Nazir; Laurentian Bank.

So firstly, on the subcontracting costs as a percentage of gross revenue that you discussed with Sara, last quarter it was more the 31% range as a percentage of gross revenue. If I'm going to be more conservative, given your comments that you're seeing an uptick in subcontracting work in the US similar to the UK, would you say that the 34%-slash-35% range that we saw in the quarter to be a good run rate? Or do you think it could turn back down to that 30% range?

I think it is a reasonable run rate. It's going to be somewhere in between there. I think part of it is in the UK the construction business got more ramped up in 2016. And now it's operating at more capacity. We've also seen the US construction business grow as well throughout the year. So I think that range for Constructors of being that 70% to 75% is pretty reasonable.

Okay. And just talking about the infrastructure spending programs and the flow of funding into you guys, I'm just wondering from the FAST Act that was put in place at the end of 2015, have you seen any of that flow into you in 2016 at all? And then secondly, is there anything that you need to do to make sure you're well positioned to reap some of the infrastructure spend particularly as it pertains to MWH on the water side?

Well, with regards to the first question on the FAST Act, I think there was some small projects. I think the overall FAST Act in implanting funding and transportation had a cascading effect into states spending some of their money as well, because there was some clarity on what projects would be federally funded and what projects would be state funded.

So just the fact that the Act was advanced us helped us, because it just advances our clients' plans and solidifies them and that creates project opportunities.

With regards to infrastructure spending as it applies to our position now with MWH, certainly there is opportunities there that are going to come forward. I'm not sure exactly when and I think that's where some of the clarity is. But certainly Stantec is as strongly positioned or better positioned than any other company in the US when it comes to water projects. We've got to be in the top three and are going to be competitive and going to be considered for the largest and highest profile water projects in the US. So just because of that profile presence and expertise, that in itself gives us increased opportunities.

As part of the election there was also a lot of money put forward in ballots. And those were very specific infrastructure funding ballots. We're starting to see those move forward into opportunities as well, which really have nothing to do with federal funding. They are very specific funding mechanisms that are much more local in nature and are also creating opportunities.

So we're definitely seeing those opportunities. The overall federal funding we're not seeing, but certainly we are seeing a wider diversity of projects come out of infrastructure through other mechanisms.

And just lastly from me, when you bought MWH you spoke about branching into other geographies. Just wondering is that still part of the plan? Is there any greater clarity on internationals that look appealing or where you're seeing some low hanging fruit from an M&A perspective.

No, I think as we said on another call earlier our focus will be on diversifying MWH operations that they currently have in the global arena. They have a very strong presence in the UK that is about 1,000 people in consulting, but all water. So we feel there's capabilities through M&A to diversify the operations in the United Kingdom.

The same scenario in Australia and New Zealand where the bulk of their operations are focused in water. We have the capability with that foundation of operations that they are to diversify, again through M&A, the operations within Australia and New Zealand.

Those would be our two, number one and two, focuses for the next year or two as we see and get our feet under us with regards to what those opportunities look like. Then we can start looking at Europe and Latin America where, again, MWH has operations in.

So rather than branch out into new global operations, I think what we'd want to do is diversify the operations we acquired through the MWH merger.

Okay. Thank you.

Benoit Poirier; Desjardins Capital Markets.

Just to come back on the construction, you mentioned some comment about the fact that there was not so much seasonality among construction. So when we look at the gross margin, I was wondering if you could provide more color behind the 5% decline in the gross margin on a sequential basis.

Yes. I don't think necessarily those are connected, Benoit, the gross margin versus the seasonality. Where you do get some seasonality is where we're doing construction in the northern states or where there are weather delays or those type of things that are impacting those projects. It is a little bit of a lumpy business. So I don't know that there is a direct correlation there.

So is it more type of a mix of projects that impacted the gross margin in the quarter? And should we expect the gross margin for construction to come back into the high 30s in 2017, Dan?

I think we are expecting the gross margin to be in that mid-30%, 35% range. I think it was about 37% in 2016. So we don't expect it to be materially different from that in the next year.

Okay. And just in Canada when we look at the outlook obviously still optimistic about infrastructure building, but you mentioned kind of an offset by residential housing. Would it be possible to quantify the percentage of revenues related to residential housing?

Residential in Canada right now -- Dan's just going to see if he can find a number. The one comment I'd make is this isn't a significant retraction that we're really talking about in Western Canada. I think we've already experienced that. It's just that the continued slow operations is probably going to continue into 2017.

This business is really now going to start ramping back up because as the economy starts recovering there's going to be the need for housing. But in certain parts of the province and most of our operations in Alberta, some of the province was overbuilt and it's just going to be a little bit slower. I don't see a significant retraction. It's just really the growth is going to be muted.

Okay, perfect. And when we look at your balance sheet, Dan, you ended the quarter at 2.38 times. But when you take into account on a pro forma basis with MWH, I would assume the number could be even much lower. So do you have the kind of more clarity or the number on the pro forma basis, Dan?

Yes, I think the numbers that you saw this quarter really absolutely meet with our expectations for this year. We do expect that, again, with the good cash flow generation as we get through 2017 that that number will come back down to around 2 times, is what our expectations are. And that really hasn't changed from when we did the initial share offering back in May.

Okay. And related to the MWH integration, you mentioned some color about the cost synergies. But just we're looking at the office relocation -- could you quantify how many offices have you been able to relocated? And how many remains to be done potentially?

I think we identified -- don't quote me exactly on the number, but I think we identified around 22 offices where there were potential opportunities and overlaps. And we've looked at all of those. And a good significant number of them, over half of them, have already -- we've taken steps to integrate those offices or merge them together. And I think the number's close to that, around 20 of them and we're well on the way of doing -- I know a half a dozen were done pretty quickly, so. And the plans are there to deal with the rest of them. So we've got a really good strategy around real estate right now.

Okay, perfect. And lastly, on the energy side we saw a lot of announcements with Kinder Morgan obviously, Enbridge, Keystone. So just understand that you still feel some persistent weakness in oil and gas, but given all the momentum around energy, any expectation on when the energy should turn out to be a very positive contributor to your revenues?

If we knew that, that would make our life a lot easier. If we could just plan on when that recovery is there. I think the statement is we don't see any further significant retraction. At the same point in time when that momentum will be significant for us and start -- be on a steeper curve, really just don't have that clarity.

Our clients are talking to us. We've got -- and we're really happy with our recurrent relationships, especially with the big pipeline companies. But we have not seen that momentum shift dramatically in the first few months here.

Okay. And then lastly for me, just a quick question. When you look at the CapEx, CAD75 million in 2017, is software addition, the CAD50 million number is part of that? Or it's on top and part of the addition to PP&E?

The software additions are in addition to the CAD75 million. A big portion of that expense this year is really related to upgrading our IT infrastructure. We're building a new data center that will house our core and our core network. So we're investing a lot in that this year. We are certainly looking at globalization of our Oracle system. And just with the additional size of the Company there's a lot more CapEx related to IT this year.

But it's not like we're behind. We're continuing to invest in the future.

Okay. And does it mean then that the purchase of property and equipment on the cash flow statement will be closer to CAD90 million?

Including software, yes.

Okay, perfect.

Excluding software, CAD75 million.

Okay. And the software is part of that typically.

Software is part of the CAD90 million, yes.

Okay. Thank you.

Ben Cherniavsky from Raymond James.

Most of my questions have been asked. One of them I'll just ask another way. With respect to the direct expenses to gross revenue or your net to gross revenue ratio, a few questions have been asked about that.

But can you guys help us with a number or a range where this thing might be for next year, because you can be quite sensitive to that? And as you pointed out, it has gone up with MWH.

And furthermore, is there an opportunity to bring that down over time, either as the construction business, revenue gets diluted by growth in other markets or just by doing some of that work yourself and keeping it internal?

Dan's calculating at the moment, so he wants to come up with a number for you, so.

That'd be helpful.

I think the gross to net ratio, I think if you're using an overall percentage, Ben, of around 40%, would be appropriate. And the, again, the significant portion of that increase is, in construction, between 70% and 75% and consulting between 20% and 25%.

But the last couple quarters, you've been well above that 40%, I think, right?

I'm not certain we've been well above it. It's somewhere in that range, I believe. I think we were at 37% in Q4. I could be wrong, though.

Yes, okay. I mean, yes, we could maybe take the chat offline. But I was --

Sounds good.

Yes. I mean, I've been -- yes, let's take it up offline.

Similarly, the other variable that is difficult to forecast but can be quite material, especially since you guys will be including it, which I agree is a good thing, is amortization.

And you have been helpful in providing a schedule for amortization over the coming 12-month period, assuming no additional acquisitions. So I mean, that number ends up being slightly different when you add more acquisitions. But it's still a good guidance range, like a good barometer.

What about 2018, does that number, like just in terms of the amortization schedules, do those number decrease over time?

Yes, absolutely. Where you get the bulk of the amortization in the first year or two years is really around work backlog. And so we acquired a significant amount of work backlog. So that amortization will come off.

Client relationships, we tend to amortize over a longer period, about 10 years. There's trademarks that we amortize over a longer period.

And we ended up with more intangibles this year because of some of the trademarks and the global iconic status of MWH.

So without asking you for a specific number, I mean, by 2018, if -- like this year, I think you said about CAD85 million, excluding additional acquisitions.

Yes.

Would that number be lower then in 2018?

I expect it to be lower without other acquisitions.

Yes. And based on what we have in front of us right now in the pipeline, I think you would expect that [their] acquisition is going to be slower this year or quieter compared. So, yes, I would say that it was going to be less than 2018, based on that.

Right. Okay. And finally, just another point of clarification, it's already been asked. Did you say that there were some more integration expenses in 4Q that were specifically tied to things like professional fees or severance or anything like that?

There were some additional integration expenses in Q4 that we incurred. And we did have some additional professional fees. And then there was the additional, we had additional merit fees associated with the MWH acquisition that we had to accrue in Q4 as well, that were pretty much contractual in nature.

And normally, Dan, you guys have had periods following acquisitions where your utilization rate, billable hours, and such, goes down a little bit as some of your people become more internally focused on integration projects. Is that the case here, too?

I think I stated on an earlier question, yes, I expect in Q2, we'll have a small impact on utilization as we integrate all these people. That'll be over a couple of weeks. It's not like it's going to extend for a long extensive period of time.

But there will be a bit of an impact, I expect in Q2. We have had a lot of --

Sorry. But was it an impact in Q4, just because the numbers seem a little bit high to me?

Yes, there has been some impact in Q4. That's just what I was getting too, Ben, is we've spent a significant amount of time planning and staging and getting ready for the overall integration of the U.S. operations for Q2. So we spent a lot of time with planning and [working] this.

Absolutely, there was significant. I mean, and we don't disclose that. That's just part of what we do. So it is part, and some of that will continue into Q1 with the actual implementation of that strategy. So there's no doubt those costs were in Q4 and going to be in Q1. That's part of what we do, so.

Yes, understood. And if you do more acquisitions, you'll see more of that in the future. I'm not suggestion that we should adjust for that. That's part of what you do. But it does result in some volatility in that number from quarter to quarter, depending on the size and timing of acquisitions, correct?

Absolutely. Absolutely.

Absolutely. But it's, again, the long-term focus there is the reason why we do it.

And we try to stage that. It's not like we push all that. But we are aware of that. We try to stage out our integration efforts and really try to push that so we don't totally absorb our staff. We do recognize that they do have to have some focus on the business. But I think we manage that well.

So I think back to, and Yuri may have already asked this in another way. But back to the targets you provided for 2017, with T&A being 41% to 43% versus, I think historically you were 40% to 42%.

Is that increase really just the integration work or is that a permanent increase for some reason in how the business has changed?

No, I think we always are trying to look at our G&A costs and always reflecting that we want to be as efficient as possible. I think that bump this time is just because of the significant efforts that we anticipate we're going to need throughout the year with MWH. It's never a long-term objective to keep that cost there. It's how we can always be more efficient.

But has the profitability of the business become lower by whatever magnitude, 100 basis points or however you defined it? I mean, here your net margin guidance is down by 100 basis points.

Does that reflect the change in the business with MWH and construction and shift to international markets and things like that?

I think that's part of it, Ben, and it's also the additional growth in the U.S., where the Canadian operations, in particular the western Canadian operations were quite strong for many, many years.

We've certainly built up a presence in the U.S., and we're gaining critical mass. But it still is more expensive to do business in the U.S., and, again, primarily related to healthcare costs.

So it is, I think a nature of the mix of business as well as the other items we talked about.

Okay. So I don't want to belabor it. But just to be clear, the revision in your profitability ratios that you presented, all of which are slightly lower for 2017, it's not just a function of integration work, you're indicating that as the businesses change, the profitability might be a little bit lower going forward, for the reasons you mentioned?

Likely lower, yes.

Yes. Okay. Good. That's helpful to understand. Thanks, guys.

And at this time there are no further callers in the queue. I'd like to turn the conference back over to Mr. Gomes for any additional or closing comments.

I just thank you all for joining us today and listening in, and we look forward to talking to you next quarter. Thanks very much.

That does conclude today's teleconference. We thank you all for your participation.