Stantec Inc

Welcome to Stantec's first quarter 2021 earnings result conference call. Leading the call today are Gord Johnston, President and Chief Executive Officer, and Teresa Jang, Executive Vice President and Chief Financial Officer. Stantec invites those dialing in to view the slide presentation, which is available in the investors section at stantec.com. Today's call is also a webcast. Please be advised that if you are dialed in while also viewing the webcast, you should mute your computer as there is a 20-second delay between the call and the webcast. All information provided during this conference call is subject to the forward-looking statement qualifications set out on slide two, detailed in Stantec's management discussion and analysis, and incorporated in full for the purposes of today's call. Dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded. With that, I'm pleased to turn the call over to Mr. Gord Johnston.

Well, good morning, and thank you for joining us. Stantec delivered solid performance in the first quarter as we continued to execute on our strategic plan. Our focus on excellence delivered increased earnings, improved margins, and strong cash flows. As we look forward, we're seeing solid signs of recovery, with outstanding backlog growth across all of our business units and a book-to-burn ratio of 1.2 for the quarter. Altogether, backlog grew organically by 5.8% from the end of 2020 and now sits at $4.6 billion. Our business development pipeline continues to be very active and we're confident in our ability to deliver on our organic growth expectations over the balance of the year. We also continued to drive acquisition growth in the quarter. We completed two acquisitions in Australia that together had more than 300 employees and increased our presence there by roughly 20%. With these two acquisitions, we've rounded out our ability to deliver services across all of our key sectors and to deliver upon our growth ambitions in the region. Turning now to our results by key geography, as anticipated, U.S. revenue retracted organically. largely due to our buildings and transportation businesses. The good news is that the significant increase in winds through Q1 is driving organic backlog growth in U.S. buildings, and as a result, we expect this business to swing back to organic growth in the third and fourth quarters. In transportation, we continue to wind down several major alternative delivery projects which affected both net revenue and margins this quarter. However, overall, our infrastructure business is holding its own as a result of the breadth and depth of both the transportation and the community development business. And in addition to the significant projects that are already in our backlog, we expect U.S. infrastructure stimulus to become a significant tailwind in future quarters. We continue to see solid growth in our water business and see growing momentum for increased spending in water from the $350 billion from the America Rescue Plan that are being appropriated for state and local governments and that can be used for, among other things, water and wastewater infrastructure. the recent $35 billion Drinking Water and Wastewater Infrastructure Act that's passed the Senate, and the $6.5 billion Water Infrastructure Finance and Innovation Act that's been released by the US EPA. So altogether, we see great momentum for increased water spending going forward. Mining activity in the U.S. is also increasing with improved commodity prices, and our U.S. business development pipeline continued to be very active during the first quarter, driving our backlog up 7.4% organically since year-end 2020. This was driven in part by multiple contracts worth up to $102 million in work supporting the maintenance and enhancement of California's electrical grid. This work will be delivered through our energy and resources and environmental services business units, where organic backlog growth approached 40% and 25%, respectively, during the quarter. Canadian revenue retracted organically due almost entirely to the reduced scope of our role on the Trans Mountain Expansion Project. This dynamic, which has been incorporated into our guidance, will continue to be a headwind for organic growth in 2021. Offsetting this, however, is growth in our Canadian buildings business. The investments being made in Canadian healthcare facilities is unprecedented and has led to record backlog in this sector. This drove organic growth in our buildings business during the quarter, and we continue to win new projects like the Caribou Memorial Hospital redevelopment in British Columbia. Also during the quarter, we generated year-over-year organic growth in infrastructure from both community development and transportation projects. and we expect continued momentum in infrastructure as a result of recent project wins like the Queen's Quay East Extension and the Waterfront East light rail transit projects in Toronto. Strong account management and business development has driven our Canadian backlog up 7.6% organically since year end 2020, with backlog growth across all of our businesses. And as in the U.S., energy and resources and environmental services were particularly strong, with organic backlog growth approaching 35% and 20% respectively during the quarter. We're also seeing continued strength in Canada's water business, partly as a result of our work on Saskatchewan's Westside Irrigation Project. This project is expected to irrigate up to 500,000 acres and more than double the irrigable land in Saskatchewan. And it's also the largest public works project in the province's history. As expected, global revenue retracted organically compared to the pre-pandemic first quarter of last year, and this was largely due to the impact of the pandemic on our buildings business. Our global water business helped to offset the retraction with solid organic growth in the quarter. The AMP7 programs in the UK and the water frameworks in Australia and New Zealand are running at full tilt, and we are actively onboarding new employees to meet project needs. Stimulus funding in the UK and New Zealand continues to fuel organic growth in transportation, and during the quarter, additional work was awarded to our transportation team as part of the ongoing Otaki to North Leaven Expressway project in New Zealand. During the quarter, we announced the acquisition of GTA Consultants, and then on April 30th, we closed our acquisition of Ingenium. And we're already seeing the benefit of combining our teams in Australia in terms of client interest and project opportunities. Backlog declined organically in our global operations by about 1.6%, primarily due to buildings projects as a result of pandemic-related challenges. We also saw a slight retraction in water backlog as we began to work through the longer-term frameworks that we went last year. I'll now turn things over to Teresa to review the quarter in more detail.

Thank you, Ford. Q1 earnings were slightly ahead of our expectations, with adjusted net income from continuing operations increasing 3% to $56 million, which represented 6.4% of net revenues. Adjusted earnings per share increased 2% to 50 cents per share. Our adjusted EBITDA margin rose to 14.7% as a result of improved gross margin and lower discretionary spending. I would note that our Q1 stock-based compensation expense increased by $11 million due to the increased valuation of our share price. This has had a 125 basis point impact on our adjusted EBITDA margin In other words, excluding this non-cash fair value adjustment, adjusted EBITDA margin would have been 15.9%. Continued strong cash flow generation meant that no draws were required on a revolving credit facility in the first quarter, which led to a year-over-year decrease in interest expense. Earnings also reflected the benefit of the implementation of our 2023 real estate strategy. which is on track to deliver 10 cents per share in adjusted EPS by the end of 2021. Our balance sheet remains strong as a result of strong cashflow generation and cash management. At March 31st, net debt to adjusted EBITDA remained below our targeted range at 0.8 times. Day sales outstanding was 75 days at quarter end, which is consistent with Q4 2020 and is down 11 days compared to the same time last year. We generated $14 million in free cash flow in the first quarter, when operating cash flows are traditionally an outflow. This represents a $99 million increase over Q1 2020. And while half of this increase can be attributed to the timing of our payroll in the quarter, the improvement in operating cash flows is significant. As I mentioned earlier, our $800 million credit facility is currently undrawn. giving us significant dry powder to fund growth through acquisitions. With that, I'll turn it back to Gordon to wrap up.

Thanks, Teresa. Today, we reaffirmed our guidance and targets for 2021. Our projected low- to mid-single-digit organic revenue growth for the year is underpinned with our expectation that Q1's organic retraction should turn the corner in Q2. Then for Q3 and Q4, we expect a strong shift to growth. Bear in mind that we have not incorporated the proposed U.S. infrastructure stimulus into our revenue expectations because it hasn't yet been finalized or passed. And we think it'll take roughly one to two quarters once this package is approved for revenue to materialize in a meaningful way. So we see this as a tailwind potentially for the last quarter of this year, but more realistically for 2022 and subsequent years. Before concluding, I'd like to draw your attention to our recently released 2020 Sustainability Report, which is available for download through the Interactive Sustainability section on Stantec's website. This report is a fantastic resource that describes our commitments and actions towards achieving our ESG goals. One metric we're particularly proud of is the degree to which our revenues support the UN Sustainable Development Goals. We continue to lead the industry in providing this data, which for 2020 amounted to $2.3 billion. This represents 49% of our 2020 gross revenue that's aligned with the UN SDGs, up 7% from 2019, underscoring the key role our skills and expertise play in the global pursuit of a more sustainable future. And there's also a few areas where we've augmented our disclosure, including enhanced ESG metrics aligned to the Sustainability Accounting Standards Board and the Task Force on Climate-Related Financial Disclosures. On the innovation front, last week we launched our integrated approach to digital services, branded as Stantec.io. Our unified platform combines technologies like machine learning, digital twins, and parametric design with our subject matter experts to accelerate and enhance our solution delivery. Finally, we continue to support our global employee base in every way we can as the pandemic continues to evolve. And I just want to take a moment to thank all of our employees for their continued commitment and diligence in supporting our clients and colleagues around the world. So to wrap up, the quarter delivered as we had expected. Net revenue retracted compared to a pre-pandemic Q1-20 as we've been messaging for the past few quarters. Our EBITDA margin improved, adjusted EPS was up, free cash flow generation was very strong, and our balance sheet is in great shape, and organic backlog grew 5.8%, all of which supports the reaffirmation of our 2021 guidance. This, coupled with a strengthening global economy and the potential for additional infrastructure stimulus, we believe, provides a solid tailwind for the remainder of 2021 into 2022. And with that, we'll open the call up to questions. Operator?

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal. Our first question comes from Benoit Poirier with Desjardins Bank. Please go ahead.

Yes, thank you very much, and good morning, everyone. Just with respect to organic growth, obviously in Q1, this has been a tougher compare versus last year. Would you expect organic growth to become positive in Q2? And with respect to organic growth for energy and resources, could you maybe quantify the impact of TMX on organic growth? Thanks.

Yeah. Thanks, Benoit. Good morning. Firstly, as we think about Q2, you know, as we said in the prepared remarks there, I think that Q2, from a net revenue perspective, again, it'll be compared to a Q220, which was, you know, a pandemic influence quarter. I think it's going to be flat to slightly positive in Q2. And then we'll see, I believe, good organic growth in Q3. and Q4 based on the backlog and those things that we were talking about. And that should then result in that low to mid single digit organic growth that we've been talking about for the year. It's interesting, as you mentioned E&R, the backlog growth in E&R this quarter was truly exceptional. The impact of that Trans Mountain job, it's interesting, in Q1, while we saw that Canada had about a 7.6% retraction in net revenue, if we had taken out the impact of the revenue that we had generated from Trans Mountain in the previous year, Canada would have been flat. And it would have taken roughly, overall for the company, would have been about 5.4% instead of 7.4% retraction. So from a net revenue perspective, it's significant. And we see that about 2% as a headwind that we'll see even for the full year. From a company perspective, we'll see about a 2% headwind in... in organic growth because of the removal of that revenue from Trans Mountain. But even factoring that in, we reaffirm our commitments to that low to mid single-digit organic growth for the year.

Okay, that's very good call there, Gord. And now for Theresa, in terms of capital deployment, you were not active in Q1 despite having a leverage ratio well below your targeted levels and showing strong free cash flow numbers. I'm just wondering how should we read into it? Could it be explained by big aspiration on the M&A front or more because the stock hit a certain level in Q1?

Yeah, you know, the capital allocation strategy remains consistent from what I've stated in the past. And so we really are focused on directing our capital toward M&A growth. You know, Gordon will tell you that there's a lot of activity there. The pipeline remains full for various targets that we are looking at. And so from that perspective, you know, retaining that capital for that purpose is our priority. The share price was pretty strong in the first quarter. And so overall, you know, we continue to look for opportunities to purchase shares to the extent we see a bit of a dislocation in the market. And so that remains as well an opportunity for us when we believe the timing is right. But it really is around acquisitions that we'll be looking to allocate our capital.

Okay, that's great. And the last one for me, free cash flow typically is negative in Q1. It seems the good performance was driven by better working capital movements in Q1. Is it a fair statement, and what should we expect in terms of working capital movement for the full year versus the plus 79 million reported for 2020, Teresa?

Yeah, so Q1 had a couple of interesting things occur, and you're right. This is, I think, the first time in our memory that Q1 has been cash flow positive from an operating standpoint. Typically because of seasonality, it drives to being a net outflow. And so we do want to point out that it was $99 million increase year over year, that about half of that just was attributed to timing of payroll that went on the day after quarter end. And so we don't want to take credit for all of that increase, but the remaining half is reflective of better working capital management, and the fact that our discretionary spending has gone down dramatically on a comparative basis. And so that has also given our working capital a boost. So I would expect that it's going to remain strong throughout the rest of the year because operations are solid. We're not seeing any headwinds from an operations perspective that will disrupt our cash flows The focus on DSO remains, and our team's just doing a fantastic job of being focused and continuing to find opportunities to keep DSO at the level that it's at now. So overall, I think it should be positive for the year.

OK, that's great.

Thank you very much. Thank you. Our next question comes from Yuri Link with Canaccord. Please go ahead.

Good morning. Gord, I wanted to chat a bit on the American Jobs Act. Obviously, it's featured pretty prominently in your prepared remarks, if it gets passed. How do you feel the industry, and Stantec in particular, is equipped to meet what looks to be double-digit growth in end-market demand, given just the size of the program? You said you anticipate some impact within one or two quarters of it being passed. So how do you see growth going forward and where Stantec plays in that?

Yeah. So, you know, we've been giving a lot of thought to, you know, you're right, there's the American Jobs Plan, but even in some of the other ones, you know, the American Rescue Plan has $350 billion in direct funding to state and local government that they can use on a number of COVID-related, you know, things, but one of which, of course, is water and sewer infrastructure. There's the some of the other potential stimulus as well. So with the American Jobs Plan layered on top of that, we see that as a really, really strong tailwind. It's the latter part of this year, but certainly even into 2022. So what we've been spending a lot of time is thinking about how would we, as a company, we're very good at moving work to different locations, how would we even continue to improve on that? You know, how do we share work even better with, you know, Canada, Australia, New Zealand, the UK? How do we ramp up our operations in Pune, in India, you know, to help support a lot of these things? Because, you know, we do think, you know, we're seeing it now. The labor market is beginning to get tight already. which is one of the reasons why we spent so much time early on in the pandemic investing in communicating with our employees. We've seen a decrease in voluntary turnover rates, but we really wanted to make sure that our staff feel valued. They feel that Stantec has treated them right through the pandemic so that when we all collectively emerge from this, we'll be a net beneficiary of bringing staff into Stantec rather than being an exporter of staff. So that, combined with our ability to move work around to our various global operations, I think are some of the things that we're looking at as a way to be able to staff up for what we believe is quite a wave of opportunity to come.

Yeah. Just on that, I mean, given the size of what's being contemplated in that act, if it were to be passed in its current form, Do you envision a time where your U.S. business, particularly your water business, would be growing at double digits organically?

All of the various programs have yet to roll out, but you can see already our water has been up every quarter over the last couple of years, 3.7% again here. So, you know, to stretch to double digits is possible in water. You know, I would also see transportation as a net beneficiary where we could see some significant growth in transportation, public transit, coastal resilience, you know, a lot of these things. So I think from my gut that those will be the two net beneficiaries in addition to, you know, some of the clean energy work that we're getting out of our power group and our environmental services group to support those.

Okay, and last one before I turn it over, just continuing on this theme, I mean, how would you, what do you have to do to prepare for potentially, you know, double-digit growth in some of these end markets versus how you're positioned now? Thanks.

Yeah, so a couple of things that we've talked about for 2021 is that this was a year that we came into really focusing on growth. So certainly growth from an M&A perspective, but also growth from an organic perspective. And so what we want to ensure is that we're going to get our fair share and then more and grow market share through as these things come out. So again, it's really cranking up our organic growth machine. in terms of some of these will come out in P3s, so talking about contractors, about teaming up already, as we begin to think about what some of the projects were we're already in, talking to some of the clients about that as we chatted about just earlier on there, really thinking about how do we begin to share work amongst the various geographies. So these things are all under active discussion now just to be sure that we're ready to take advantage of this when it comes.

Thanks, Gord. I'll turn it over.

Great. Thanks, Yuri.

Thank you. Our next question comes from Sabahat Khan with RBC Capital Markets. Please go ahead. Great.

Thanks very much. Just on the U.S., I guess, one of the themes we heard coming out of Q4 reporting was some of the clients in those end markets were just being cautious until they better understood the priorities of the new administration. Can you maybe give us some insight into some of the conversations we're having and understanding some of these bills haven't passed Where are you seeing movements? Which end markets are still being a little bit cautious? Just some color on the pipeline of the conversations you're having.

Yeah, you know, I do think that there's a lot of optimism amongst our clients there. When you look at different transportation agencies, both roadways and public transit, certainly water, some of the state and local governments, there's a huge backlog right now of opportunities that we've got out in the in the transportation space already but there are some agencies that are waiting to see a little bit what's happening you know from a funding perspective so but that said you know our backlogs in water and and transportation overall as a company are strong and will carry us through the remainder of 2021 in any event, really even absent significant additional projects coming in the door. So as we talked about, I see organic revenue strengthening to flat to slightly positive in Q2, and then continued growth through Q3, Q4, and just really a solid tailwind as we go into 2022.

And then just on your water comments there, I think you mentioned in your commentary earlier that you are working off some of those larger winds. I guess to kind of replace some of that pipeline over the 12, 24-month period, would it have to be some of this funding going into some of these U.S. water projects? Where do you see sort of the opportunity in the water space as you kind of cycle through some of the framework agreements you want in the U.K.?

Yeah, so, you know, a lot of those, the U.K. and the Australia-New Zealand frameworks have been awarded. They've been contracted. So we see that in backlog already. We're continually getting new awards, and they'll continue to grow backlog. But the big backlog growth opportunities really are in North America. A lot of great coastal resilience opportunities down in the U.S., particularly in the Gulf area. A lot of work related to shoreline hardening, shoreline strengthening. A lot of treatment work as well. PFAS and these sorts of things, we're seeing more and more discussion related to how can we treat for those things. So, you know, I think overall the market is pretty robust. We'll see good growth in water. I do believe we'll see good backlog growth in transportation through the remainder of this year as well.

Okay, and then just the last one for me, just digging into the commentary around having to maybe add on staff. I guess if you could give us some color by end market. You know, we're in the U.S. across your end markets. Are you well-staffed? Where do you see the need to maybe hire more people Given what the opportunities are, I just want to get an understanding of where you'll be hiring.

We're actively recruiting. When you look at our number of open postings, we're up well over 1,000 from this time last year. We're actively recruiting in Canada, the United States, UK, Australia, New Zealand, all of those locations. in North America, as we've talked about, for us a big part of it is how do we share work between different geographies? So we're primarily looking for the right people. And if we can get them in some of the growth geographies, Texas, the coast, We'd love to get them there, but if we can get them in other locations, we'll take them there as well with our ability to share work around. We just are more interested in getting the right people. And then, of course, geography would be secondary to where we look. So we're looking to hire additional people in water, in transportation, in buildings. Certainly our power sector is very actively looking for additional staff. as well as our environmental group. So, you know, we're seeing, you know, as we see organic growth ramping up through Q2, Q3, Q4, you know, our hiring will be ramping up to support that.

Sorry, if I could just squeeze in one more. I just want to comment around sharing some of this work, I guess. You know, with some of these bills, do you foresee there might be some of this, you know, made in U.S. element or, you know, do you have staff in the U.S. and then you can send some periphery work out to some of these standards? Just as an industry, I guess, you see that as a potential concern with more government dollars coming into the industry?

Yeah, you know, when you look at some of the Buy American provisions, they seem to be mostly related to products and less related to the services industry. Now, you know, there are some works that we do for... you know, the U.S. Navy and other armed forces groups that have a requirement for a certain number of, you know, U.S. citizens to be involved and their security requirements and so on. But in general, that doesn't seem to be a significant impediment to us being able to move work around.

Thanks very much for the call.

Great. Thanks, Emma.

Thank you. Our next question comes from Jacob Bell with CIBC. Please go ahead.

Good morning. I had a question on your new digital solutions platform, the Stantec.io. How big of a revenue driver do you think this will be? Do you plan on breaking this out into a separate division? And what percentage of this platform do you think will be a recurring revenue-type model? I see that you're offering a subscription service as well as part of this division.

Yeah, I'm absolutely ready. Yeah. So we do see that software as a service and these annual subscriptions as something that will be an ever-evolving and increasing amount of work, amount of revenue generation in a number of spaces. Certainly in the water industry, we see it being good opportunities there through some of the financial analysis models that we've got, through some of the models that we're using, working with clients as they're modeling projects. you know, stream flow, dam breaks, and all these sorts of things. So in terms of how big could it get, you know, we're still just exploring that, I think, Jacob, and we see that it'll take, you know, that'll be something that will evolve over time. But now we've got, we've brought together, you know, roughly 40 different platforms that we have. Some are much larger than others, of course. But bringing it together allows us to co-brand it, I think, to give us the opportunity for even more cross-selling and for everyone to understand what we have and what we can offer to our client base. So I think it's an important step. I think it's going to become even more important from a revenue-generating perspective as we move forward. But we're still, I think, determining what percentage of revenue it could be because it'll be different by water versus buildings versus transportation and so on. So Little early for us to maybe come up with those projections now, but we do see it to being an important part of our strategy in the years to come. So our plan is that also that we won't break it out separately. That the product that we have that are related to water will still be revenue generated within water. Those within transportation, still revenue generation within transportation. So it wasn't our intention to break it out sort of as a fifth business operating unit at this point.

And do you have a standalone group that provides this digital solutions platform, or is it more of an integrated type model that you're using?

We do. It's really coming as part of our overall innovation team. We have a couple of folks that are helping to pull this together, looking at how we can design these common platforms going forward. So it is a dedicated group.

And then the impact of the wind down of a number of these large-scale U.S. transportation projects, how much of a headwind will that be in the second quarter?

you know, it's interesting if you look at infrastructure and the organic retraction over the last number of quarters, each quarter the organic retraction becomes less. And so I think that that's what we'll see going forward that, you know, these things have a tail. Sometimes it's a long tail, but it does get a little bit less of an impact each quarter. And we're still, you know, as we're doing this work, we are submitting change orders. So, you know, that change order negotiation process will take some time. And, you know, will we get everything we asked for? Likely not, of course. But, you know, we do see the opportunity for some pickups in, you know, we hope we'd see that in 2021, but likely, you know, more so into 2022, we'll see a pickup as a result of some of the costs we've already incurred. As we negotiate those change orders and get paid, we should, you know, get some inflows subsequent quarters.

I'll leave it there. Thank you.

Great. Thanks, Jacob.

Thank you. Our next question comes from Frederick Baskin with Raymond James. Please go ahead.

Good morning, everybody. Good morning. Gord, I was intrigued by your comment on the unprecedented investment levels in Canadian health care facilities and probably because many super hospitals have already been built. So I was wondering which segments of that particular market are you seeing momentum?

Yeah, certainly out in your neck of the woods, Frederick, there's the St. Paul's Hospital that we're engaged with. You know, in Calgary, we're working on the Calgary Cancer Centre. In Toronto, there's a number of new hospitals we rewarded there. We talked about the, say, the Caribou Regional, you know, up in British Columbia there. So, you know, those, plus just the number of opportunities that we see coming, it's from both a Canadian and also an Australian perspective is where we really see... significant uptick in the healthcare business. And so we've got some additional awards as well that we haven't yet put into backlog or disclosed. So we just see that great opportunities coming in the healthcare space that certainly is keeping our Canadian groups busy. And we're sharing work at this point with our U.S. group. But some good awards, as we mentioned in the prepared remarks, in the U.S. as well, that I think is going to turn our U.S. buildings business into positive organic growth on a quarterly basis on the last half of the year also.

Good. And you're hearing governments pretty much everywhere talking up long-term care and how much money they're going to put into that sector. Are you well positioned to participate in any of the growth that might result from that?

Absolutely. You know, whether it's, you know, healthcare overall, whether it's long-term care facilities or, you know, larger or smaller hospitals, you know, our healthcare group is very, very strong and so very well positioned for that, really, from a global perspective. So, you know, we're looking forward to some of those opportunities coming along as well.

Thank you.

Thanks, Frederick.

Thank you. And our next question comes from Chris Murray with ATB Capital Markets. Please go ahead.

Thanks, folks. Good morning. So just maybe thinking a little bit about the product portfolio going forward and your energy and resources business. So this has been one of the more cyclical parts of the business, I guess, for a few years now. And it certainly sounds like TMX is going to shrink a little bit. Can you just talk a little bit about how you think you want to shape the energy and resources business going forward? And I'm also thinking about things like carbon capture, storage, hydrogen, and some of your other ESG goals in that context.

Yeah. So, you know, as we saw this quarter, you know, with changing our contractual relationship on Trans Mountain, we're really, we're just not running all the independent contractors through Stantec. That's why, you know, the revenue has decreased from an oil and gas perspective. We're still doing all the other work that we were doing previously. But we see a real pivot on the power side. You know, we've talked before about the work that we're doing in renewables, solar and wind and pump storage and so on. And You know, we talked in the U.S., you know, this quarter we got up to a $100 million project to strengthen the grid in California. So we're seeing a pivot, really, on the power side, particularly to clean power. In mining, you know, we're seeing certainly the increase in commodity prices. Copper, iron, ore are, you know, at... certainly at significant peaks from where they have been over the last number of years. But we're also seeing our mining practice pick up into other areas that do support the long-term transition also to cleaner energy sources. We're doing some work on lithium mines in Central and South America, required, of course, for battery storage. So I see that over time, you know, that the power group will continue to grow, our mining group, particularly with, you know, as we talked about with Ingenium and some of the opportunities that they have, you know, that transition to sustainable mining and so on, as well as our water power and dams group will continue to grow, and we're seeing that already. So I think just over time, we're not planning in any way to – to divest or get out of oil and gas. But I just see the other groups probably growing at a higher rate than we see in that oil and gas sector.

All right, fair enough. And then going back to M&A and your original comments, I think, earlier this year, thinking about, you know, how you wanted to see growth, I guess, for the full year. You know, certainly, you know, we've seen some really neat little tuck in acquisitions. But I guess going back to thinking about the rate of growth that you want to be able to achieve, I guess a couple of pieces of this. I mean, one, I'm assuming you're still thinking about that's what you want to try to get to this year. But two, how has the M&A process been evolving now that in a lot of ways we're moving past some of the COVID complications with getting some of the overview and transactions done?

Yeah, you know, we're still very active, certainly in the M&A space. We've seen, you know, our balance sheet is really strong, of course. But we really are continuing with our strategy as it is. We're being very disciplined as we're reviewing firms, certainly looking because we need these to be successful from a long-term perspective. So we're sticking to the geographies that we talked about, Canada, even more so the United States, looking into the U.K., the Nordics, Denmark, and Australia, New Zealand, and so on. And the pipeline of firms that's come to market right now is really, really strong. And there's some larger firms as well that are beginning to come to market. Some of them are PE exiting at the end of their investment horizon. So, you know, we're having a good look at all of these things, as others are as well. You know, will they spin to PE again? Will they come out to a strategic? You know, these are all decisions that are, you know, things that we'll have to continue to assess. But certainly our appetite for continued M&A growth is strong. Our balance sheet is strong. And so... we will participate in having a look at these acquisitions, whether they're in our typical sweet spot of less than 1,000 firms, less than 1,000 people, but some of the larger ones as well. But it's really for us just maintaining that continued discipline as we move forward.

Okay. And has your ability to do due diligence improved in any way, shape, in the last maybe few months?

You know, I think over the pandemic and even before that, we were really looking at how to improve our opportunity to diligence these potential acquisition targets from a global perspective. So, you know, I think our organization is much more mature now in terms of our, you know, UK and European operations, in terms of our Australia and New Zealand operations. So we have the ability to to diligence those potential acquisitions using local or certainly in any event regional resources, and we don't have to send people from North America to do that. So I think that's been a maturing and a strengthening of the overall organization, certainly maturing and strengthening of it from an M&A and a diligence perspective.

Okay, that's helpful. Thank you, folks.

Thanks, Chris.

Thank you. And once again, if you would like to ask a question, please press star 1. And our next question comes from Michael Tufolm with TD Securities. Please go ahead, sir.

Thanks. Good morning. I was hoping you could provide an update on the progress you've made in terms of your real estate footprint optimization.

Sure. I guess what I'd say is that we are a couple months into a three-year planned execution. So with still a large portion of our workforce working from home. There hasn't been a lot of movement per se in terms of folks coming back to the office. What we have done over the last couple of months is communicated with our staff who have been very welcoming of this flexible workplace arrangement and having discussions with staff around at the individual level, what's appropriate for them given their roles, given where they are, and starting to map that out. So everything's on track, but it is early days.

Okay, thanks for that. Next question is just, I guess, somewhat of a follow-up related to M&A, which you've already touched on, Gord. Just a question about the Australian market. You've been fairly active there with acquisitions. I'm wondering if you can just comment on how you feel about your footprint in that market now and how much more additional acquisitions in that market you think you may or may not need if you're comfortable with where you're at now or it's a continued focus region for you in terms of further M&A.

It is a region of continued focus for us. I think now we have a good water platform there. We have a good transportation platform. Certainly mining is good. Buildings are strong. But we have continued opportunities to grow in environment, certainly continued opportunities to continue to grow in transportation, even in water. So, you know, really the majority of our business groups there, we could continue to grow. And we do see Australia, and to a lesser extent New Zealand, as a great opportunity for us to, you know, to continue to deploy some capital towards M&A.

And have you started to – to realize some cross-selling benefits as you've been there now for some time and layered in additional acquisitions?

Absolutely. Yeah, with bringing on Ingenium in the mining space, both on the east and west coast, we have an environmental presence as well. And so we see great opportunities to tie that environmental group in with the client base that Ingenium had. We're seeing a lot of cross-selling even between our transportation business and water and energy.

building so we're really getting the benefit of adding these additional resources down there and so that's where I think it's so attractive for us to continue to grow through M&A to sort of fill out our space there a bit that's helpful thank you I'm just a question regarding organic growth I know you had been calling for a retraction in q1 and you reiterated your full year organic growth target range I'm just wondering, though, if your assessment of risks around being toward the top end of your organic range for the full year versus the bottom end, if that assessment has evolved at all since last quarter, considering sort of the start you had to the year with organic growth.

Yeah, you know, I think we still see that we would target and guide into that low to mid organic growth. Also, the caveat that, as we mentioned early on there, that taking out the revenue that we had generated from Trans Mountain is about just approaching a 2% headwind to that organic growth for the year already. So, you know, while we say low to mid, you know, we're reaffirming that, even with that approaching 2% headwind from Trans Mountain.

Okay, got it. And then lastly, Teresa, you had talked a little bit about stock-based compensation and the increase year over year. What have you included in your 2021 EBITDA margin guidance range for stock-based comp when you set that range?

You know, we would have based it on, you know, sort of the prevailing share price at the time that we were preparing our budgets and our forecast. So, you know, we've seen, as you know, a pretty significant increase in the share price since January, February. And so that's kind of what's driven it to the range that it's at. And our practice is to not try to predict where it's going to go with the year. We sort of base it on what the prevailing price is. So that increase was a pleasant surprise, but did create a headwind on our EBITDA margin.

Okay. And so based on the price of the stock at the time that you've been developing the budget, would that have... sort of led you to be forecasting kind of flattish stock-based copy every year, whereas, in fact, now it's, at least to start the year, it's coming in higher. Yeah, that's right. Got it. Okay. Thank you.

Okay.

Thank you. And we have no additional questions at this time. Mr. Johnston, I will now turn the conference back to you for any closing or additional remarks.

Great. Well, I just wanted to say thanks to everyone for joining in our call today. And, you know, we look forward to continuing to connect with you in the near future and talk about our continued progress. So on behalf of Teresa and I, have a great day, everyone, and stay safe. Thank you.

Thanks, everyone. And this concludes today's call. Thank you all for your participation.

You may now disconnect.