Stantec Inc

Welcome to Stantec's fourth quarter and year-end 2021 earnings results conference call. Leading the call today are Gord Johnston, President and Chief Executive Officer, and Theresa Yang, Executive Vice President and Chief Financial Officer. Stantec invites those dialing in to view the slide presentation, which is available in the investor section at stantec.com. Today's call is also webcast. Please be advised that if you are dialed in while also viewing the webcast, you should mute your computer as there is a delay between the call and the webcast. All information provided during this conference call is subject to the forward-looking statement qualification set out on slide 2, detailed in Stantec's Management Discussion and Analysis, and incorporated in full for the purposes of today's call. Unless otherwise noted, 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. Please go ahead, sir.

Good morning, and thank you for joining us today. We're very pleased to report our Q4 and full year 2021 results, which reflect the solid execution of our multi-year strategy. We grew our global employee base by around 15% through strategic acquisitions, We saw an increase in our employee engagement scores from pre-pandemic levels, and our financial performance was strong. For the year, we delivered record earnings per share, both on an adjusted and on an as-reported basis, on stronger margins, the ongoing execution of our 2023 real estate strategy, and lower taxes. Net revenues of $3.6 billion approximated the prior year, and on a constant currency basis, increased by roughly 3%. Excluding Trans Mountain, every one of our business operating units had flat or positive organic growth in Q4. And sequentially, we had improving organic growth in each quarter of the year, with Q3 and Q4 returning to positive organic growth as expected. Our adjusted EBITDA margin increased to a record 15.8%. And we entered 22, having built our backlog to a record $5.1 billion, representing 13 months of work. And this is a 17% increase from 2020. We significantly advanced our growth ambitions in 2021 through the completion of six acquisitions, deploying more than $700 million of capital and adding more than 3,200 employees to drive synergistic revenue growth. Each of these acquisitions are consistent with our strategy of pursuing targeted small to medium sized firms that bolster Stantec's presence in key business lines and geographies. In doubling the size of our footprint in Australia and materially boosting our environmental services offerings in the US, we've strengthened our ability to address the growing demand in both of these markets. The Cardano integration is going well, and on a particular note, we're pleased to announce that Susan Riesbord, Cardano CEO, is taking over the leadership of our environmental services business in the second quarter of 2022. Moving to our results by region. Our U.S. business delivered net revenue of $440 million in the fourth quarter and $1.8 billion for 2021. As we noted throughout 2021, the stronger Canadian dollar was a headwind and the recovery in the U.S. was slower to start than in other regions. Our U.S. backlog achieves 10% organic growth through the year to a record $3 billion, with our U.S. environmental services business recording more than 50% organic backlog growth. The momentum we're seeing in backlog growth, coupled with significant infrastructure stimulus and economic expansion, are all strong indicators that the U.S. recovery has begun. And while it may take another quarter or so to wrap up, we're confident that our U.S. business will deliver a strong performance in 2022. This growing momentum is evident in our buildings business, where in addition to the healthcare and e-commerce work that we've discussed in previous quarters, we recently won our largest contract ever for this team. The Denver International Airport Great Hall project, with fees in excess of $100 million, will transform the main terminal, improve security, and help our client achieve their goal to accommodate 100 million passengers. The drive for greater sustainability is also creating opportunities for us to design for the adaptive reuse of built environments, such as the 2 million square foot L Street Station redevelopment pictured here. The use of existing building stock is gaining favor among our clients as a way to preserve heritage properties and to reduce new construction carbon emissions. The need to bolster supply chain security is also creating increased opportunities for Stantec. We're seeing a push to retrench domestic production facilities in the U.S. as global supply chain disruptions have highlighted the need for onshore manufacturing capabilities. One example of this is our growing work on domestic vaccine production with a major pharmaceutical company in the United States, where we recently began work on a new facility in California. Our Canadian business delivered $260 million in net revenue for the fourth quarter and $1.1 billion for the year, generally consistent with last year and better than we expected, taking into consideration the de-scoping of the Trans Mountain contract. Growth was solid in virtually every sector due to strong demand in healthcare, transit systems and land development in Western Canada. And we see the continued strength in these markets as reflected in the project wins that we've highlighted on the slide. There's also a growing demand for expertise as a result of the increased frequency of extreme weather events, like what we saw in British Columbia in 2021. We're being called upon to assist with remediation efforts and for future readiness as we draw upon new technologies developed by our innovation center. A prime example is our floodplain predictor, which is a cloud-based machine learning application that significantly reduces lead times for accurate flood prediction. And similar to the reshoring efforts underway in the United States, we're working with clients to strengthen the supply of pharmaceutical-grade radioactive isotopes for cancer treatment, through the development of manufacturing facilities in Canada. Education, both in K-12 and post-secondary, continues to be a strong driver for our buildings business. And the picture on the slide highlights our work on the design of the Students Association building at the McEwen University in Edmonton. Our global business performed very well and delivered $216 million in net revenue in the fourth quarter, a 39% increase compared to the same period last year. For the year, net revenue increased by 18% to $768 million. This net revenue growth reflects roughly equal contribution from both acquisition and organic growth. Specifically, we saw the strongest growth in our water and transportation sectors in the UK and New Zealand, while strong commodity prices drove revenue growth in our mining business. We also saw increased opportunities from both public and private clients in our buildings business in Australia. Private investment due to high commodity prices and economic expansion is being supplemented by infrastructure stimulus programs. The UK government has committed more than £130 billion to the National Infrastructure Strategy, which will focus spending on transportation, energy and utilities. This is expected to lead to additional transportation projects, like the A19-2Ts crossing in the UK that we've recently been awarded, and the Transportation Planning Services contract we recently won in Scotland. In addition to this funding, the UK government has committed £26 billion to the Green Industrial Revolution and £96 billion to the Integrated Rail Strategy. In Australia, $110 billion is being spent over 10 years funding energy, transportation, water, waste and social programs. All of these drivers contributed to global backlog increasing over 19% during the year to a new record level. and we continue to expect strong performance from our global operations in 2022, backed by strong macroeconomic factors and continued investments in infrastructure. I'll now turn things over to Theresa to review our financial results in more detail.

Thank you, Gord, and good morning, everyone. Before I dive into the details, we have made some minor presentation changes in order to comply with the new national instrument on non-GAAP measures. You'll note that we're also using the new term project margin for what we used to call gross margin. There is no difference in how it's calculated. As Gord mentioned, the change in the Canadian-U.S. exchange rate had a substantial impact on our U.S. earnings this year, and it was particularly pronounced in the first nine months of the year. We've summarized the impact on our key financial line items on this slide for your reference. For the fourth quarter, we reported EPS of 15 cents compared to 13 cents last year and adjusted EPS of 57 cents compared with 60 cents last year. Operating performance was stronger than Q4 last year, but recall that last year's results included the favorable recovery of claim costs and resolution of certain tax matters. Net revenue grew by 6.3% with 2.0% organic growth and 6.7% acquisition growth partially offset by a 2.4% reduction due to foreign exchange. Project execution was very strong in the fourth quarter, increasing project margin by $51.6 million and by 250 basis points as a percentage of net revenue to 55.3%. Adjusted EBITDA increased $142.1 million, representing a 15.5% margin. The decrease from Q4 last year is mainly due to increased share-based compensation expense, which translated to 146 basis points of margin. Decreased margin also reflects lower utilization in the U.S., as well as the previously mentioned recovery of certain claim costs recorded last year. Our Q4 net income on an as-reported basis also reflects an aggregate pre-tax $37.3 million in impairment and onerous contract costs arising from the ongoing execution of our 2023 real estate strategy. For the full year, we reported EPS of $1.80 and adjusted EPS of $2.42, both of which are records for Stantec. Full year net revenue was $3.6 billion, a 2.6% increase on a constant currency basis driven by acquisition growth of 3.9%, partly offset by a slight organic retraction, and with the effect of foreign exchange, net revenue retracted by 3.2%. Project margin increased $32.8 million, delivering a 160 basis point increase as a percentage of net revenue to 54.0%. Adjusted EBITDA approximated amounts generated last year, and margins increased by 10 basis points to a record 15.8%. despite an 83 basis point reduction due to increased share based compensation expense. Our record earnings also reflect the ongoing success of our 2023 real estate strategy, which contributed more than 18 cents per share in cost savings to as reported EPS or 15 cents to adjusted EPS. On a pre-IFRS 16 basis, we estimate the cumulative impact of this initiative would have increased 2021 adjusted EBITDA margin by more than 100 basis points. We remain on track for our target of a 30% reduction in real estate footprint by the end of 2023 relative to our 2019 baseline and expect to deliver a further 20 to 25 cents per share by the end of 2023. Our balance sheet remains strong. At December 31, net debt to adjusted EBITDA was 1.8 times within our expected leverage range. We anticipate reducing leverage over the course of 2022 on the strength of our cash flow generation. Day sales outstanding was 75 days at year end, consistent with year end 2020. Our 2021 cash flow generation was strong, although it did decrease relative to 2020. 2020 cash from operations was elevated due to the success of our efforts to significantly reduce DSO and due to the deferral of certain tax payments under government introduced pandemic measures. 2021 cash from ops reflects the stabilized lower level of DSO, the outflow of those deferred tax payments, and the substantial effect of the stronger Canadian dollar. Beyond operating cash flow, we deployed $703 million to fund acquisitions and returned $123 million to shareholders through dividends and the repurchase of shares through our normal course issuer bid. Our board of directors yesterday increased our annualized dividend by 9.1% for 2022. This is the ninth consecutive year our board has increased our dividend, and it reflects our confidence in our ongoing cash flow generation and commitment to return capital to our shareholders. I'll now turn things back to Gord to review our outlook for 2022.

Thanks, Theresa. As we enter 2022 with a record 13 months of confirmed backlog on our books, we see a number of macro trends that Santec is particularly well positioned to capitalize on in the years to come. Much has already been said about the magnitude of infrastructure stimulus spending that's occurring around the world. and that we're well positioned to capitalize on. However, a growing component of this infrastructure spend will be directed towards disadvantaged communities, which is an area where SANJEC's community focus is of particular benefit to our clients. Our multidisciplinary expertise and our supplier diversity and equity team helps to align funding to strengthen the resilience of these communities and is a competitive advantage for us. In addition, we have over 150 funding specialists that work with communities across North America. Collaborating with community leaders, technical staff and other partners, this team is focused on helping communities access public funding for infrastructure with an eye towards long-term sustainability. This is a further benefit to our clients as they look for additional sources of funding for their projects. So these are just two great examples of the full breadth of our service offerings that continues to create our competitive advantage. A major takeaway from the pandemic for governments around the world has been how fragile the global supply chain is and the exposure this creates for domestic economies if access to critical products or resources is curtailed. As I mentioned earlier, we're seeing growing investment in domestic manufacturing capability for strategic or essential products like vaccines, radioactive isotopes, solar panels, and electric vehicle batteries, and we're actively involved on all of these fronts. Another great example of this domestic supply chain strengthening involves the more than $80 billion that's been announced related to semiconductor manufacturing in the U.S., We're currently engaged in design work on multiple semiconductor fabrication and related supply chain facilities in the US. And these draw on the full suite of Stantec service offerings from water and wastewater treatment to industrial buildings, site development, power and environmental services. The extreme weather events experienced globally in 2021 serve as critical reminders that global action must be taken to improve infrastructure resilience, and we're engaged with clients around the world to harden their assets against increasingly frequent and severe events. Nantech is currently involved in responding to over 20 climate disasters, each with losses exceeding $1 billion that have occurred around the world. The energy transition is driving growth in our energy and resources business, where we continue to work on the largest solar energy project in Canada, the first large scale renewable diesel facility in Canada, and multiple wind projects globally. And with a heightened awareness of the effect climate change has on global water supply, governments are prioritizing spending towards addressing water scarcity. And Stantec is currently working on some of the largest water security projects in the world. For example, in California, our teams are involved on every large flagship advanced water treatment project currently underway, which will meaningfully improve water supply security in the region. Of course, our ability to capitalize on the opportunities ahead is heavily dependent on our ability to attract and retain a talented workforce. And with the majority of our staff continuing to work from home, I'm grateful to their collective resilience and perseverance. By prioritizing the health, safety, and well-being of our people, we've improved our employee engagement score by 6% relative to pre-pandemic levels. And while the competition for talent continues in all sectors, we're seeing top industry talent migrate to Stantec in recognition of our culture and future prospects. You've heard me describe the tenfold increase in the value of our U.S. federal IDIQ framework. And this progress started with a strategic hire who's been a catalyst for building out our federal team. Similarly, we've recently completed several other key growth-related hires in California, Texas, and in our water business. And these strategic hires and our broad portfolio of large-scale iconic projects are precipitating revenue growth and follow-on talent movement in our directions. We expect the strong trend that I just talked about and our recent acquisition to drive net revenue growth in the range of 18 to 22% for 2022, with organic net revenue growth in the mid to high single digits, weighted to the second half of the year. Organic growth in the U.S. is expected to be in the high single digits, driven by growing momentum as evidenced by our record high U.S. backlog and project opportunities arising from the $1.2 trillion infrastructure stimulus bill. After a year of robust organic growth in Canada in 2021, we expect to maintain high levels of activity, driving to 2022 organic growth in the low single digits. Organic growth in global is expected to achieve high single to low double digit growth, propelled by strong economic growth, continued demand, and stimulus and infrastructure sectors. As we continue to maintain discipline in project execution and operational efficiency, our adjusted EBITDA as a percentage of net revenue is expected to range between 15.3% to 16.3%. This range reflects investments we're making to support growth by bolstering our internal resources and the commercialization of our new innovations and technologies. Strong EBITDA margins and the ongoing execution of our real estate strategy are expected to drive our adjusted net income margin to be at or above 7.5%, and adjusted EPS growth in the range of 22% to 26%. And we expect to deliver an adjusted return on invested capital above 10.5%. With a favorable market backdrop, an engaged workforce, a full M&A pipeline, and a healthy balance sheet, we are very optimistic for the years ahead. And with that, I'll turn the call back to the operator for questions. Operator?

Thank you. If you wish to ask a question at this time, please press star 1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We will now take our first question from Jacob Bout from CIBC. Please go ahead.

Good morning. Morning, Jacob. Yeah, first question is on margins. So, you know, 2022 EBITDA, you're saying 15.3 to 16.3 range, 2023 at 16 to 17%. I'm assuming that's still valid. Maybe just comment on some of the moving parts in your 2022 guidance. I mean, I think SG&A moves higher with reopening and there's going to be higher labor costs with inflation. I guess the offset is next um and i guess better you know reduced real estate footprint um so that's on 2022 and then maybe on 23 just talk about the bridge how you get from uh your guidance on 22 to 23. sure the you know they've outlined uh really nicely actually jacob the uh you know what we were expecting in in 2022 and and where we expect to come out for for the year

As we move into 2023, a part of that underlying expectation is that the investments we are making in 2022 to really strengthen our internal resources, whether it is on the back office front, HR, accounting, IT systems, and so on, and the investments we're making in innovation, the expectation is that as we move into 2023, we'll continue to see growing benefit from that. because we see such a strong multi-year cycle coming ahead of us for 2022 and beyond that that productivity and efficiency should just continue into 2023. So that's in large part what we're expecting. We're also thinking about continuing to work toward our goals on synergies and integration savings through the Cardinal acquisition, continuing to grow our KUNE operation, which we have grown substantially in 2022, continue to focus on where we can grow that delivery center and now determine how much we can grow the Manila operations that came with Cardinal as well. So there's a number of things, and as I've always said, there isn't just one or two key things that we can do to really change the margins But it is a number, a multiple of things that we'll drive toward.

And in your mind, what's the biggest risk as far as actually achieving these 2023 targets?

I guess, you know, we have talked about, you know, everyone is talking about, you know, the labor shortage. You've heard Gord describe why, although we're not going to be immune to that, why we feel good about our positioning with the culture that Stantec has that is drawing people to us. But that remains a bit of a risk just because of the unknown elements of that. You know, will we be able to hire the people, to hire the people that we need to address the growth that is, you know, kind of coming towards the back end of this year and into next? And I think, you know, as much as we are, you know, very confident in our abilities to integrate acquisitions, Cardano is a large one. And, you know, it's, and it's complicated. So we, you know, as it's progressing, we feel good about the progress we're making and are confident that we'll be successful in that integration. But there's always risk associated with the timing and how disruptive that kind of activity can be to a firm that you've acquired. So those are a couple of things that we're watching.

Last question here. Any exposure or how are you thinking about the Russia-Ukraine conflict and implications for Stantec?

As the temperature began to increase in the Ukraine last fall, we researched any project that we might have ongoing in the Ukraine. We did have an EU-funded project, a development project that was ongoing. We withdrew our people from the Ukraine late last year, and this year, as the temperature continued to increase in January, we met with our client and we wrapped the project up, wrote our final report. You know, we really haven't had historically very much exposure to the Ukraine other than through some EU development projects. And certainly, so all of our people are out, all of our people are safe, and we don't see at this point it to be a significant impact on us one way or the other.

That's helpful. Thank you. Thanks, Jacob.

We will next. We will now take our next question from Jean-Francois Levoux from Desjardins Capital Markets. Please go ahead.

Yes, thank you very much and good morning. So I know it's still early in the integration process, but I was wondering if you could talk about what's your vision for the margin profile of Cardinal's Asia Pacific business over the next two to three years, please. Thank you.

Certainly. You know, as we talked about when we announced the acquisition Overall, we expect Cardano's margin profile to be largely consistent with ours and to continue to improve over time as we're driving within legacy Stantec. And we have noted that between the U.S. business and the Australia business, the margin profile is different. In the U.S., where it is largely focused on environmental services work, that does tend to be a higher margin business. And so that portion of Cardano will generate stronger than average Stantec margins. In Australia, where the business is more focused on transportation and other sectors that are still consistent with Stantec businesses but not as high as ES, we would say that those margins will continue to be a little bit lower than our average. So all in all, it kind of underscores why it was such a good fit for us. Very consistent margin profile to our specific sectors and opportunities to continue to streamline and expand margins as we continue those initiatives within Stantec.

Okay, that's really helpful. Thank you very much. And then I was wondering if you could talk a bit more about your M&A strategy. You mentioned that the pipeline was full, but considering that the integration is still in its early phase, should we expect more of a tuck-in approach in the near term for 2022, or are there still some opportunities that could materialize later this year?

Yeah, so, you know, firstly, our primary focus is to ensure a smooth integration of the teams that are joining us from Cardinal. So we're working hard on that. You know, to your point, that said, our balance sheet remains really strong, even after the Cardinal transaction, and the pipeline of potential firms is really robust. So, you know, we're continuing to look for firms. We're in active discussions, as we are at any time, with firms in different geographies. Primarily right now, you know, we're looking at firms in Canada, in Canada, the United States, the UK, Western Europe, New Zealand, primarily looking at firms, water, transportation, buildings, environment, and so on. And so while we're continuing to look in Australia, you know, the teams there, you know, we've almost doubled the size of our group there, so we wouldn't want to layer on another significantly sized acquisition in Australia, I think certainly within the first half of this year, until we kind of get over the hump with the overall integration there. So, you know, I think the pipeline is still very full. Our appetite is still very strong. And our ability to integrate additional firms, you know, we still have the capacity to do that. We could do it in Australia as well, but I think it just would be probably too much to layer on an additional one there. Because remember, in Australia in 2021, we acquired GTA, Ingenium, and then Cardinal. So we're really in the process of integrating three firms into our one Stantec philosophy in Australia. So we want to give a good chance for that to settle and ensure we're getting the success of that before we layer it on too much more.

Okay, that's great. And the last one for me, you mentioned in the press release the investment you're making for commercialization of new technology. I was wondering if you could provide a bit more details about that and the impact it might have on margin in 2023 and beyond. Thank you very much.

Yeah, thank you. So, you know, within our innovation group, we're working on a number of things. Firstly, we're working on... systems and processes that can make ourselves more efficient internally so that we'll be able to deliver projects faster, be able to increase the net revenue generation per employee, per FTE. And so we're working on a number of things there to automate and expedite the design process. But externally, we're working with clients to develop a number of systems that will meet their needs. And so, you know, I mentioned in the prepared remarks the floodplain predictor model that helps us to, you know, assess where there might be flooding events, where we might see landslides and these sorts of things. We have other products that we've developed and have, you know, 60 or more clients using it, which is like a financial management system that helps clients automate their – their capital planning process. And the beauty of that is that it both is a sort of a software as a service, an annual software renewal type of an agreement, but then we're often hired as well on our consultative practice to help them work with the software and deliver it. So those are just a few examples of the types of things we're doing both internally and externally. You know, we are investing in those things this year. We've also talked previously about some of the investments that we're making in third-party firms like Blue Sky Resources that are underway and will add additional benefit to our clients. So as an example, Blue Sky Resources that we've talked about previously uses remote sensing information to provide information on concentrations of contaminants in the in the atmosphere, and it can be used really anywhere around the world to provide some of our multinational clients with understandings of, you know, are they meeting their regulatory requirements in terms of pollutants and things in different locations. So these are the types of things that we're delivering, investing in now, but a number of them are bearing fruit already for us. So we're really pleased with the progress in that area.

Great. Thank you very much.

Thank you.

We will now take our next question from Yuri Link from County Courts. Please go ahead.

Hey, good morning, Gordon, Teresa. Good morning.

Good morning.

I'm wondering, I don't know who wants to take it, but just wondering if you could talk about your expectations for utilization in 2022 versus last year.

Sorry, Yuri. You were really soft there. I couldn't quite hear. Were you asking about utilization? Utilization for 2022 over 2021? Yeah. Okay, excellent. From a utilization perspective, as you've seen reflected in our results for 2021 and the guidance we've given for 2022, the U.S., we've said a lot, was slower to come up and recover than we expected. And so as much as we have been managing our workforce in the U.S., there is some latency there because as we look at the size of our backlog and notified awards and then the momentum we expect to continue to build when infrastructure spending starts to flow, we've maintained good portion of that workforce which you know in 2021 was not as highly utilized as we would typically want or expect um and so as we go into into next year um you know we we do think as and we're seeing in q1 that it is you know continuing to be slow in terms of that ramp up uh and so us utilization will probably be again, a little bit lower, and that's why we're saying, you know, that our Everton margin in Q1 is probably going to be at the low end or maybe even a bit below the low end of our range for, you know, seasonal reasons. It's typically a little bit lower, but coupled with the lower utilization in the U.S. that we expect to really build as we get past the first quarter into the second and beyond. So that's the situation we expect to improve. And of course, you know, in light of the labor shortage and the very, you know, technical and skilled employees that we need, you know, we believe it's the right thing to retain those employees so that we have that workforce available to address the growth that is coming.

Okay. So not a, on the whole, maybe not a big change in utilization in 22?

I think as we get towards the second half of the year, we expect a significant improvement, but I think Q1, maybe not so much.

Yeah, okay. And correct me if I'm wrong, but utilization would be one of the biggest drivers of your project margin?

Not project margin, but EBITDA margin, because to the extent that Project margin is your revenue minus direct labor. That we expect to just continue to be quite strong, but it's when you have a workforce that isn't chargeable that that goes into your admin and marketing costs, and that will cause those expenses to be a little bit higher. So it will be more reflected in our EBITDA margin and not in project margin.

Okay. And second one, just digging in on the first quarter, Why would your organic growth be back half weighted when you're facing really, really easy comps in the first quarter? It was down almost 7.5% last year.

You know, I think as we're looking into the first quarter, we continue to see in the U.S. and somewhat in global as well, that these larger projects that we are winning and are in our backlogs, So that gives us confidence that the backlog, the work is there. We are finding it is taking a little bit longer to complete the processes and get the work started. We're winning larger size projects. They're more complex. And so the early work that we have to do is not... labor intensive. It's a handful of specialists kind of dealing with the client to get the specific scoped out and the work orders issued. And then as those projects ramp up, it's really when we can deploy large numbers of our staff to really get those projects up and running. So that's what we're seeing in the first quarter. And despite Q1 being an easy comp, I would say that that's probably the biggest factor is just that lag in getting the backlog converted into task orders and work orders that we can actually deploy large portions of our workforce toward.

Okay. And last one, why wouldn't that bleed into the second quarter?

It may. I think our expectation is that given what's in our backlog and that sort of early work that as we get towards the second quarter, you know, that we will largely have passed that hurdle and have those projects up and running. That's our expectation.

And I think another factor there too, Yuri, is the environmental services backlog. And that, you know, that typically really gets rolling in the second quarter. particularly in Northern United States and in Canada, when we can put those people out in the field. And, you know, you've seen in our USES backlog up by, you know, 50% organically. Add on that the Cardinal folks. And so I think, which of course won't show up in organic growth for the first year, but, you know, I think we see pretty robust growth in our environmental services business. And that really ramps up in quarters two and three. Thank you. Thanks, Eric.

We will now take our next question from Michael Tobholm from TD Securities. Please go ahead.

Thank you. Good morning.

Good morning.

Maybe just to build on one of Yuri's last questions there, just with respect to organic growth guidance in 2022, are you able to provide just sort of a little bit more detail about the cadence and the progression through the year I guess overall, but also across the regions, the various regions, global, Canada, and U.S.?

Yeah, so sure. I'll start with that, and perhaps Teresa can dive in when it's appropriate. So maybe I'll start with global, because we had a really strong year in global, almost 9% organic growth in 2021. And we really, with the backlog that we've got, we see that coming in – you know, good backlog growth. We mentioned high single to perhaps low double-digit growth in 2022. So, we're seeing a lot of transportation work. I mentioned the prepared results in the UK, certainly Australia and New Zealand. We're seeing, you know, some buildings work down there. We've talked about the Footscray Hospital and others. And we talked just about the amount of infrastructure stimulus, UK, Australia, and so on. Also, we're getting support from high copper and some of the other commodity prices in our mining businesses in South America and Western Australia. So I think we feel pretty good about our global organic growth, even though it was strong in 2021, we feel it's going to be pretty strong and robust in 2022 as well. Then maybe talking about Canada, you know, excluding Trans Mountain, and we'll be so happy that we don't have to ever mention that again after this quarter, the impact on revenue of that project. You know, excluding that, we had organic growth this year in Canada of just over 5%. And so, you know, Canada came out of the gates pretty quick, as did Global in 2021. So, you know, we expect good performance still in 2022, but because a lot of Canada sort of came out of the gates in 2021, You know, we see organic growth in Canada in that low single digits in 2022. U.S. is interesting because, you know, you've seen the organic growth that we've got there, you know, 10% organic growth in the U.S. And when you add in our acquisition backlog, you know, U.S. backlog is up over 23%, you know, to a record of 3 billion Canadians. So pretty significant there. You know, strong, strong backlog as we go into 2021. the tailwind from infrastructure stimulus that I think will be a second half of the year. We're starting to see some of those RFPs hit the street now from the bipartisan infrastructure law that is anticipated to come. We're seeing some state and local work coming out in anticipation of it, in water, lead service line replacement, transportation. interesting, we've responded to five EV charging network RFQs in the past two weeks alone. So there's a lot of work coming out in those areas too. We talked about semiconductors, where we're working on a number of these facilities already, and certainly there's more to come. So we do feel pretty good about organic growth in the US, but I think many of our other multi-sector global peers have talked about the first part of the year being a little slower than the second part, and And I think what we're feeling is consistent with that.

Okay, thanks very much, Gord. That's very helpful. Just shifting over to your margin, your EBITDA margin guidance, in the release you talked about the guidance reflecting investments in internal growth resources to support the growth in the business and the commercialization of new innovations and technologies as being factors that are going to weigh on the margins. Can you just elaborate on the investments you're making and what you're doing in those areas?

Sure. Again, there are a couple of components to it, but as I mentioned earlier, the growth that we see coming, coupled with some disruption in overall labor that everybody is experiencing, We are seeing a need, you know, for instance, to bolster our internal resources and human resources because we need the talent acquisition people to hire the people to deploy to these projects. And that's a really hot market right now. And so, you know, hiring additional people in HR, hiring additional people, you know, on our other back office teams to support the growth. is something that we have been quite brutal on in the last couple of years and just believe that in order for us to be able to achieve the growth that we see coming, we need to now kind of loosen those purse strings a little bit. Cybersecurity continues to be an area that requires just constant investment, and we see some of that coming And as well, our IT systems to support, you know, we've talked about the increased work we're doing on both US and Canadian federal. And, you know, there are requirements there around your IT systems. The increased IDIQ work that Gord has been referencing, you know, it requires us to, you know, to put some investment toward our IT systems to meet the regulations and the requirements of that particular client. So those are the kinds of things that we are focused on internally. And from an innovation standpoint, it is around ensuring that we are not penny wise and pound foolish when it comes to innovation, but that we are really critically determining where to put our capital dollars towards what innovation activities that will either create opportunities with our clients in terms of new services or make them stickier to us as an entryway and add on other services to it, or in our ability to deliver our work such that we can be more efficient and can either drive to more competitive pricing or greater margin expansion that we're able to keep. So that's kind of the general suite of things that we're looking at.

Okay, thanks very much, Teresa. And then maybe just one last one, probably for you as well, Teresa, just sticking with the subject of your EBITDA margin guidance. I know you said you've not made any assumptions around the impact of share price movements since year-end as it relates to stock-based comps, but what have you baked into your 2022 adjusted EBITDA margin guidance with respect to stock-based compensation relative to what you would have expensed in 2021?

So what we have baked in is an assumption that the share price remains stable as of where it was at the end of the year. So given market activity today and how long it lasts, it may help or hurt us as we go forward. One thing I will mention with respect to our stock-based comp, and it's in our MD&A, and I suspect we haven't gotten to those pages yet in our public disclosures, but we did at the end of the year enter into swaps for a portion of our stock-based compensation to try and mitigate some of the volatility that we saw this year. And so in aggregate, about 35% of the units that we have outstanding have been hedged effectively, and we should be able to then offset volatility in share price movement for that portion of the units we have outstanding. The balance remains subject to share price fluctuations, but those swaps will help to mitigate it somewhat.

Okay. I'll take a look at that and follow up with Steve. Thank you.

Okay.

Thanks, Michael.

We will now take our next question from Frederick Basteen from Raymond James. Please go ahead.

Good morning. Have you seen the coming together of Cardano and Stantec drive new revenue opportunities that might not have been attainable prior to the combination?

Yeah, I think what's been interesting with combining Cardano and Stantec, Frederick, is that While we were working through the process, doing the due diligence, certainly it was only the executive level that was aware of the transaction and we were chatting about it. We felt that there was really good synergy in clients and with some of the individuals. When we announced the transaction, just the outpouring of folks from both Cardinal and Stantec who said, we work with this group on a project here or I work with them at a you know, previously at, you know, their company or this company, just the amount of synergy between the employees has been fantastic. So without question, that has driven more excitement and more opportunities, I think, in terms of than we actually thought that there was initially. So it's been a pleasant surprise for us.

Thank you. don't like asking that question, but were there any things that surprised you from more of a cautionary example or something that may not have been super pleasant about the acquisition or is overall everything pretty good to go?

Through the due diligence, we had really searched hard to unearth any concerns that we might have from you know, tax and project due diligence, IT due diligence, and so on. So, no, there's actually been no real downside surprises because we had unearthed those things during due diligence.

Okay, super. Where do you expect the leverage to finish by the end of this year, assuming, you know, you don't do any major acquisitions? You know, is it possible you go back towards the low end of your target range?

Yeah, that is my expectation, assuming that if we don't lay around any assumptions around acquisitions, we should be towards the low end of our range.

Awesome. That's all I have. Thank you very much. Thanks, Frederick.

We're going to take our next question from Ian Gillis from Stifel. Please go ahead.

Morning, everyone. Good morning. Could you elaborate a little bit on how you factored in a rate hiking cycle and the impacts it may have on the building's portion of your business, whether it be on the commercial side and or on the residential side?

So as we've been talking with our clients, They haven't really been too – we haven't seen a lot of sensitivity in our discussions at this point to rate hikes. Where we have seen more sensitivity from some of our commercial buildings clients has been with regards to inflation in terms of supplies. And if the cost of the building increases by a certain amount, how can we value engineer it to kind of get the cost back down in line with where things might be? Yeah, so the discussions we've been having so far have been less about rate hikes and more about just inflationary pressures overall.

Okay, that's helpful. And the other thing I wanted to ask about was respect to the infrastructure bill in the U.S. You're already starting to see some commentary that proponents or people who are going to participate are moving to smaller projects rather than larger projects given inflationary pressures. I mean, does Stantec have any preference on whether we're working on smaller or large projects with respect to this bill, or is it kind of all equal?

Yeah, you know, I think that's one of the beauties, actually, of the Stantec model, is that we work on projects from, you know, $5,000 in fees to several hundred millions of dollars in fees, and we've kind of scaled our whole operation from the smaller community ones to those larger sort of global class type projects. So, no, I think... Ian, we're okay. However our clients decide to put out the projects, we'll be just fine with us.

Okay. Thanks very much. I'll turn it back over. Thanks, Ian.

Our next question comes from Max from National Bank Financial. Please go ahead.

Hi, Claude. Teresa, good morning. Good morning. Good morning. Gordon, just a quick question in terms of the U.S. potential benefiting from Biden's stimulus in the back half. I think when we look at some of the other peers, people are sort of pointing to 2023. So just wondering what gives us sort of the confidence about that inflection point maybe a little bit earlier. Yeah, so I guess any comment there?

Yeah, yeah, no, great point, Max. And it's interesting, one of the ones that came out recently Earlier this week, it was talking about 2023. I think they're 2023 starts in our Q4. So as they're talking about 2023, it's kind of maybe even back half to us. So I do think because we're starting to see some of the projects hit the streets now. that this won't be a Q1 story for us, or I think we'll start to see some revenue generated in Q3, but I do think this will be a Q3, Q4 story for us, and certainly providing strong, strong tailwinds as we go into calendar year 2023 also.

Okay, that's helpful. Thank you. And then just one last question. In terms of expectations of sellers, Obviously, we have seen a deflation of multiples in the public market, but wondering if the conversation that you have right now with the potential private targets, if you're seeing any change in the body language or it's still kind of pretty sticky. So maybe just any comment there. Thanks.

Yeah. Some of the discussions that we've been having, certainly in the latter part of last year, expectations of sellers from a multiple perspective crept up. you know, as in concert, you know, the public company multiples were creeping upwards as well. So it's been, you know, since the beginning of the year that we've seen some of the public multiples come down a little bit. So the firms that we're talking to, I think they, academically, they understand that, you know, there's a, you know, a certain accretive delta in between there that we need to hold on to. So we've had some discussions on those with some sellers, and I think they're just waiting to see kind of what happens with things. So I think everyone's being reasonable, but this response in the public market since the beginning of the year hasn't quite crept into some of these private firms yet, but I think it will if things stay where they are. But We haven't seen any transactions since the beginning of the year to really know how that all plays out. Right.

Okay. That's very helpful. Thank you. Thank you so much.

Great.

Thanks, Max.

We will now take our next question from Mark Neville from Society Bank. Please go ahead.

Hey, good morning. A few questions. First, just to be clear, do you expect the business to put up some organic growth in Q1?

Yeah, yeah, absolutely. You know, we sort of, Teresa and I were looking at each other in terms of who was going to respond, but we do expect organic growth in Q1, just strengthening, you know, quarter or over quarter as we go into the latter part of the year.

Yeah. Got it. In terms of the investments that you've laid out, Teresa and Gord, appreciate the color, but is there any, could you maybe provide sort of a quantum of the size of that investment? Just, to understand sort of the impact it's having this year?

You know, it's effectively embedded in the adjusted EBITDA range that we've put out, the 15-3 to 16-3. So our assumptions around where that spending will go, coupled with some, you know, increased spending. I think that the one, actually the one area that I haven't hit on, I talked about, you know, HRIT, is our marketing and business development activities. So that assumption is baked into that EBITDA margin. And we haven't provided sort of specific dollar ranges for what those additional costs might be explicitly.

Okay. No, that's fine. Maybe just the last question, just on free cash flow. I mean, the expectation sort of grows in line with earnings. Is there anything to think about in terms of CapEx or working cap or no?

Well, I would say that, you know, I agree with you. The expectation is that free cash flow will grow along with our earnings. So that should be pretty robust this year. So CapEx is never a huge part of our overall spend. It will probably notch up a little bit next year just because through the pandemic, we've been pretty careful in tamping back requests for capital spending. It won't be outsized by any stretch, but it will probably creep up a little bit relative to this year. Got it.

All right. Thanks for the time. Appreciate it. Thank you.

We will now take our next question from Sabat Khan from RBC Capitals. Please go ahead.

Great. Thanks, and good morning. I guess there's been a bit of discussion on the U.S. and the infrastructure bill contribution. I guess trying to get an idea of when you think about sort of building a buffer, the mid to high single-digit organic growth guidance, I'd say some of the spend from the infrastructure bill does get pushed into 23. Is that what maybe pushes the organic growth into sort of the mid single-digit range for the year for a total company? Just want to understand kind of the buffering or how much contribution you maybe reflected in the guide for this year.

Yeah, so as we put our thoughts together on what our expectations were for the U.S., the things that we're starting to see both from what's in our backlog to the level of activity on the marketing front, is embedded in that mid to high single digit organic growth. And you're right. I mean, some of it is, you know, there's always a component of revenue that you think you're going to win, but maybe isn't explicitly identified to projects yet. And so that is embedded in that mid to high single digit range. And as we've talked about in Q1, with a bit of a slower uptick, Again, how the year unfolds and how quickly we get actually moving in and getting utilization up and getting those projects up and running toward the end of the year, whether that pushes us toward the higher end remains to be seen. But those are the assumptions that would be embedded in that range.

Okay, great. Thanks for that. And I guess this one related to kind of the real estate rationalization strategy. I think it looks like from your income statement buildup, there's a non-cash impairment related to some of the leasehold assets on your balance sheet. It looks like there was one last year. I just want to make sure I understand that. Is that really just being able to sublet space that you might be operating in at a lower rate than maybe what you might have gotten? I just want to make sure we understand the accounting here. And then also, if you can comment on, if you are subletting space, is that going to be recognize that maybe an offset to your SG&A costs, or where would that kind of fall into your income statement? Just a bit of clarity on those line items, please.

Yeah, sure. So, you know, I mean, if anyone can crack the nut on IFRS 16, you know, they deserve a medal. It is very convoluted and complex. So we'll just talk about the lease impairments first. And so, you know, we did take a large impairment last year, and that related to space that we identified that we could both downsize and then make available to sublet or leases that we could exit at that time. And so as we advanced through this year, the lease impairment that we took in 2021 made up of two pieces. One is the further identification of spaces that we could rationalize And the second relates to some of the space that we impaired last year. There's all kinds of modeling that goes into the determination of the value of those leases and what you write off. And for some of that space, market conditions in 2021 ended up to be outside to the low end of what we would have modeled. So we had to take a further impairment on those spaces. So then as we look forward into what that means, it does mean that there's going to be a combination of cost savings from having exited spaces that we are no longer paying for, or spaces that we have rationalized and are subleasing, and that will result in some inflow of earnings and cash. And so as far as I can see, that inflow of cash will not flow through our admin and marketing expenses. I think the majority of it is going to still be outside of our EBIT calculation. And it will, you know, if there's cash flow, of course, it'll show up in our cash flow statement. But it is a little convoluted and a bit tough to pick apart. But you know, the effects of leasing now really largely reside outside of the EBITDA calculation.

Okay, no, good, and I appreciate the color, and yeah, definitely a bit convoluted. And I guess in terms of just the work towards it, it seems like a good chunk of the savings already came in in 21. Is there just, I guess, a bit more of this subleasing slash exiting of leases remaining, or maybe just in terms of the amount of legwork left to get those savings done for the next year or so?

You know, we have identified, you know, a good portion of the spaces that we have both impaired or made available for subleasing. There's still a bit to go, but I think, you know, from an identification perspective, we have done a lot of that legwork. You know, but it's being managed pretty carefully, and so, you know, the potential that there might be some spaces that that become available or that we identify that we hadn't initially pegged is always possible. But we would continue to say, again, $0.20 to $0.25 over the next two years of EPS uplift from this initiative.

Great. Thanks very much for that.

We will now take our final question from Devin Dodge from BMO Capital Markets. Please go ahead.

All right, thanks. I wanted to start with the global segment, and can you help us understand that really strong net revenue growth figure that you reported? I just don't recall seeing an organic revenue growth number that high before, where there's some favorable closeouts or settlements, or is this a true reflection of the underlying demand?

Go ahead. In Q4, there was some collection of previously provided for reserves, not material enough to kind of swing things, but there was a bit of that in Q4. But overall for the year, what we saw was just really strong performance in Australia and New Zealand, some pretty large projects that we were successful in winning and then we're executing on. Mining was really strong, especially as we got towards the back half of the year. And some of the community development and transportation work we were doing in the UK was also pretty strong. So the AMP program in the UK is in full swing. And that is also, you know, being really supportive from a revenue organic growth standpoint. So, you know, those two regions in particular, Australia, well, Australia, New Zealand and the U.K., is where much of the growth occurred. And really, as we look into next year, what we would continue to expect is really strong macro factors in those regions that will drive growth.

And it's interesting, as I go back and look at the organic growth each quarter of this year, we did have a retraction in Q1. But Q2 and Q3 organic growth were both in, you know, plus or minus the 10% range. And then so, you know, to finish the year at 9%, it's sort of like, you know, it's kind of reflective of what we've seen sort of in the mid part of the year. A little higher in Q4, but overall, you know, that 9%, 10% is sort of what we've been seeing.

Okay. Now, have you been, I'm just trying to understand, have you, is a lot of this, let's say, internal hires that you guys have been able to, you know, accommodate that work, or is it more subcontractors coming on, or I guess, how should we think about that? Because obviously that kind of plays into how the next year, how 2022 unfolds in that global segment.

Yeah. Well, you know, we have been actively hiring in the majority of our regions from a global perspective. And, you know, it's It's certainly a robust labor market out there. You know, the one thing that I think we've been able to do is, you know, we continue to be able to move our work around. You know, so, for example, we can send project work from the UK over to Australia and vice versa and then into Canada and so on. So I think that's certainly been beneficial. I think the one benefit that we have going into 2022 is that, you know, a lot of the You know, the size of our workforce in Australia and New Zealand is influenced by in brown migration as well. And really in 2021, there was very little to none of that because the borders were sealed in those locations. And so now that we're starting to see those borders open again, I think that'll give us an additional source of of individuals that we can draw from as we hire people into Australia, hire people into New Zealand. That'll certainly help in those locations as well. Something that we did not have really in 2021.

Okay, thanks for that. Maybe just to close off here, the cadence of EPS in 2022, part of the guidance was you're pointing to 40%. EPS in Q1 and Q4. You're pointing to a stronger second half, so presumably Q4 will take up more, you know, a greater share of that 40%. So I usually don't like to get too granular on this stuff, but I just wanted to give you an opportunity to frame the consensus numbers here. So do you expect to improve earnings sequentially, so from Q4 into Q1, despite a full quarter contribution from Cardinal?

Yeah, thank you for bringing that up. The 40-60 split is what we'll expect for the shoulder quarters and the second and third quarter being stronger. That will be the case just because that's when we can be most productive. But you're absolutely right. Typically, we expect Q1, Q4 to be roughly even, partly because of weather, partly because you ramp up in Q1. Q4 is very heavy with holiday and time away. But in 2022, we do expect that Q4 will be stronger than Q1. So that's 40% overall. You know, you should not expect, we don't think that to be evenly split between Q1 and Q4. It should be more weighted towards the fourth quarter.

Okay. Thanks for that. Okay. Thank you.

If there are no further questions in the queue at this time, I'd like to turn the call back to your speakers for any additional or closing remarks.

Great. Well, thanks again, everyone, for joining us on the call today. And we look forward to continuing to speak with you throughout the year about our continued progress, a year that we're pretty excited about. So thanks again, everyone. Have a good day.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.