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spk40: Welcome to Stantec's fourth quarter and year-end 2022 earnings results webcast and 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 webcast. Please be advised that if you have 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 two, 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. Gore Johnston.
spk26: Good morning, and thank you for joining us today.
spk27: We're very pleased to report record Q4 and full year 2022 adjusted earnings per share of $0.82 and $3.13 respectively. Our results reflect a solid execution of our multi-year strategy and clearly demonstrate the resilience, growth, and demand that we're seeing for our business. The outperformance of our guidance for the year was attributable to a very solid fourth quarter where we achieved double-digit organic net revenue growth above our expectations. For the full year, we generated an all-time high of $4.5 billion in net revenue. All of our regions and business units delivered organic net revenue growth in the high single to low double digit range, demonstrating the strength of our diversified business model. This also shows how well positioned we are to address the trends of increasing investments towards aging infrastructure, reshoring of domestic production, and climate change. Particularly notable, environmental services net revenue grew by almost 50%, primarily through acquisition but also from nearly 10% organic growth. And importantly, the top line increase of 23% was exceeded by bottom line growth of 29%. Looking at our results by region, both public and private investment continued to drive high activity levels in the US. In 2022, we grew US net revenue by 26% overall, with over 9% organic and 13% acquisition growth. Our work on large-scale water security projects in the Western U.S. helped drive double-digit organic growth in water. In buildings, we continue to see activity levels rebound with investments flowing into healthcare, civic, industrial, and the science and technology sectors. Energy and resources had strong organic growth with acceleration of activities related to renewable energy and mining projects, as well as reservoir and dam projects all related to the energy transition and energy security. We also delivered solid organic growth in infrastructure from work on projects in transportation as well as in industrial and residential land development activities. Our results reflect how well aligned our U.S. business is with the major trends and government funding sources available. Canada continued to perform very well with sustained year-over-year growth that exceeded our expectations. Net revenue was up almost 8% organically for the year. Similar to the US, both private and public spending was robust in Canada. We had solid performance in environmental services with ongoing demand for permitting work in archaeological services. Power transmission and distribution and energy transition work continued to spur growth in energy and resources. Our buildings group continued to drive growth with projects in healthcare and mixed-use commercial. and infrastructure captured opportunities in community development in Western Canada, bridge work across Canada, and in recovery efforts associated with the flooding in British Columbia in late 2021. In global, we generated over 35% net revenue growth, 11% organically, and 28% from acquisitions. Our industry-leading water business continues to be a significant pillar for us, capturing long-term framework agreements in the UK, Australia and New Zealand. We saw strong demand for our services in community development, in mining driven by strong pricing for metals, and in environmental services for field work. We are exceptionally pleased with each of our regions and business units, which are all benefiting from the themes that we've been discussing. Beyond our excellent financial results, I'd like to express how proud I am of our achievements and commitment to sustainability and enhancing our communities. We were recently provided with great recognition from Corporate Knights as we were ranked in their global 100 most sustainable corporations in the world. Out of nearly 7,000 corporations that Corporate Knights reviewed, we were ranked first among our peers and number seven overall. We've now been included in the Corporate Knights Global 100 for four consecutive years. I'll turn the call over now to Theresa to review our financial results in more detail.
spk20: Thank you, Gord. Good morning, everyone. Starting with our Q4 results, we had an exceptionally strong finish to the year, which drove our full year results to outperform our expectations. We grew gross revenue by 28% to $1.5 billion, and net revenue by 23% to $1.1 billion. Organic net revenue growth was 10.6% for the quarter with strong growth achieved in each of our regions and business units. Canada and the U.S. were particularly strong as we benefited from a longer field season in Canada due to milder than typical weather and building momentum in the U.S. where several business units achieved over 20% organic growth for the quarter. Project margin was very solid at 54.9% and adjusted EBITDA reached 17%, a 150 basis point increase over Q4 2021. This drove fourth quarter EPS to 66 cents compared with 15 cents in the prior year and adjusted diluted EPS of 82 cents compared with 57 cents last year, an increase of 44%. For the full year 2022, we generated gross revenue of $5.7 billion and net revenue of $4.5 billion, an increase of 24% and 23% respectively. Project margin was a solid 54.2%, a 20 basis point increase. And adjusted EBITDA increased by 26% to $724 million. We achieved our highest ever adjusted EBITDA margin of 16.2%, and this is at the high end of the range we set for 2022. We also advanced our 2023 real estate strategy. In 2022, we achieved approximately $0.34 per share of cost savings relative to our 2019 real estate costs, largely achieving our 2023 target of $0.35 to $0.40 a year early. We estimate that on a pre-IFRS 16 basis, these savings would have increased adjusted EBITDA margin by more than 110 basis points. In terms of square footage, we've thus far reduced our footprint by 28%, also largely in line with our target of 30% from a 2019 baseline. As a result of our strong performance, our full year diluted EPS reached $2.22, and our adjusted dilute VPS was $3.13. Both of these are also record highs with respective increases of 23% and 29%. Operating cash flow for the year came in at $304 million and levered free cash flow was $76 million. DSO at the end of December was 81 days, a five-day reduction from the third quarter. As we expected, With the completion of Cardinal Financial Migrations, cash flows began to normalize in the fourth quarter of 2022, which was moderated by stronger than anticipated revenue growth in the fourth quarter, driving additional net working capital investments. This also brought our net debt to adjusted EBITDA down to 1.6 times, which is in the middle of our target range. We closed the year with adjusted ROIC of 10.5%, driven by stronger than anticipated Q4 earnings and reflecting a 20 basis point increase over 2021. With that, let me turn the call back to Gord for our 2023 outlook.
spk27: Thanks, Theresa. At the end of 2022, we had $5.9 billion in backlog, an increase of 15% year over year, 10% organically, and which represents approximately 12 months of work. Our backlog does not yet include any meaningful contribution from U.S. stimulus spending, but we expect this to provide further tailwinds in 2023 and beyond. On the strength of our backlog and as momentum builds for investments spurred by government stimulus around the world, we feel very confident that 2023 will be another strong year for Stantec. Even with the high comps from 2022, we expect to deliver strong organic net revenue growth in the range of mid to high single digits. Looking now to the US, with over 50% of our revenues generated in the US, we expect this region to continue as the key driver for 2023. After delivering almost 10% organic growth in 2022, we expect another solid year, with organic growth to be in the high single to low double digits. Funding from the IIJA is expected to be slower in the first half of the year and to accelerate in the second half, bolstering our infrastructure business unit. Buildings continue to see great opportunities in both healthcare and adaptive reuse. In water, increasingly frequent and extreme climatic events are driving investments in resilient infrastructure to protect against flooding, hurricanes, and storm surges. Investment spurred by the IRA is expected to accelerate renewable and other energy transition projects like the Q-Cells project that we announced last week. At $2.5 billion, this is the largest solar panel manufacturing investment in US history, and passage of the IRA was a major driver in helping this project move forward. The Q-Cells project is also a prime example of the growing trend towards reshoring production and de-risking supply chains, bringing production closer to demand. Another great example of streamlining supply chains is our recent announcement on being selected as the prime consultant on the multi-billion dollar World Logistics Center project in California. Stantec is ideally positioned to provide multidisciplinary expertise to these major projects and we're confident in the opportunities that they'll bring. After a very strong year in Canada, we expect continued high levels of activity in 2023. Organic net revenue growth is expected to moderate relative to 2022 to the low single digits. Specifically, we see our water business continuing to grow with several major projects ramping up. We expect continued strong demand to support the energy transition and the need for increased community development. And we expect high levels of activity in our environmental services and buildings group to remain stable over the year. Our global business has meaningfully grown in recent years, both organically and through acquisitions, and we see ongoing strong demand in 2023 and anticipate organic growth to be in the mid to high single digits. In the UK, Australia, and New Zealand, our buildings business is expected to have strong organic growth due to the need for healthcare, science and technology, and commercial mixed-use development. Growth will also be driven by high levels of activity in our water business, where regulatory drivers are a strong factor. We also expect to see increases in community development in the UK, where we're one of the top three planning consultancies. With a long lead time for development and permitting in the UK, this sector continues to push forward. Transportation activities will lead to growth in Australia, as will the raising of dams, mining, and overall energy transition initiatives. Overall, we expect to drive another solid year of net revenue growth. The 7 to 11% range shown here will come primarily from organic net revenue growth. It also includes some contribution from the acquisitions we completed in 2022, but no other acquisitions are factored into this outlook. In 2023, we're targeting an adjusted EBITDA margin between 16 and 17%. and our goal is to deliver adjusted EPS growth between 9 and 13% over 2022. Further gains may come from M&A as our M&A pipeline remains full and we have the balance sheet strength to capitalize on opportunities that fit strategically for Stantec. With a favorable market backdrop and engaged workforce, a full M&A pipeline and a healthy balance sheet, we're very optimistic for 2023 and the years ahead. And with that, I'll turn the call back to the operator for questions. Operator?
spk40: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again.
spk39: One moment while we compile the Q&A roster.
spk40: And today's first question will come from the line of Jacob Bout with CIBC. Your line is open.
spk37: Good morning. Good morning, Jacob. I wanted to square 2023 guidance with your backlog in the fourth quarter, so specifically in the U.S. The U.S. backlog actually dipped quarter on quarter, but you're guiding to some pretty solid organic net revenue growth. hearing your commentary, is this kind of a first half, second half type story? Maybe just a bit more detail on the flow of the IIJA, the trillion plan projects. You expect that to ramp second half, I think is what you said?
spk27: Yeah, yeah, absolutely. The IIJA funding, you know, we're starting to see clients putting out projects proposal calls now we do have a little bit of that work already in the backlog and we are generating revenue from it but we're not actually you know a couple things about the US backlog not concerned about that at all you know certainly our the US backlog did drop a bit in Q4 but we had you know 13.5% organic growth in the US in the quarter so we're drawing down that backlog I think you would have seen the same in global that our backlog actually dropped a little bit in Q4 but again you know not concerned Q4 is always a bit of a lower quarter for us for backlog growth, and I think that, coupled with the extremely strong organic growth that we had in Q4, naturally drew that backlog down a little bit. But as we talk to our business leaders, as we look at our pipeline of opportunities, we're not concerned with the backlog, and we feel very solid with our projections for 2023.
spk37: My second question is just on the reduction of the real estate footprint. You're saying if you accomplish your 2023 targets, or essentially you accomplish that, how far do you think you can take this? It sounds like you're around 28%. You're targeting 30%. Can you take it to 35% or how are you thinking about that right now?
spk20: Yeah, so we think 30% is achievable, and again, that has been based on the footprint we had back in 2019. So that remains the target. As we begin our work on the next phase of our strategic plan, we are now starting to evaluate what else is possible, given acquisitions we've done in recent years, but also considering office occupancy and what the landscape looks like for real estate in various locations. I do think that more is possible, but that will come in the form of our next strategy for optimization.
spk01: Thank you.
spk28: Thanks, Jacob.
spk40: Thank you.
spk39: One moment for our next question.
spk40: Benoit Poirier with Desjardins. Your line is open.
spk08: Yeah, good morning, Teresa. Good morning, Gord, and congratulations for the strong finish. Just looking at your organic growth outlook by region, it remains pretty bullish across the board, and I would expect the U.S. infrastructure bill and water program to bring momentum for the foreseeable future. But How should we be looking at your ability to raise margin beyond the 16%, 17% level that you assume in 2023?
spk20: Hi, Ben. You know, I think 16% to 17% remains an appropriate target for us. You know, I've always said that there are, you know, there's not one thing that, one dial we turn that will give us increased margin as many things being done right all the time. What you saw in the fourth quarter of this past year was increasing utilization, which is always one of the best ways for us to improve our margin. We do feel good about achieving that range again in 2023. But again, you know, there's always that sort of pushing against that, whether it's, you know, inflationary impact on our overall cost structure and so on. And so we have to remain pretty diligent and focused on keeping our costs down and ensuring that we are, you know, as highly utilized as possible. And so I think that that is the right range for us.
spk08: Okay. And maybe could you talk about your ability to staff given the strong demand that you're seeing right now?
spk27: Yeah. So, you know, one of the things that as we went into the global pandemic, one of the things that we had stated was that we wanted to continue to be a net attractor or a net importer of talent during these periods of uncertainty. And so we can say now that for full year 2021, And for full year 22, we hired more staff than who left us through voluntary resignations. And so we do continue to build the backlog of – sorry, to build our headcount to service that. And you saw a little bit of that in Q4, you know, the high organic growth rates. In addition to that, you know, we're working hard with our innovation groups to look at how we can use digital products to generate more revenue per employee. And then thirdly, we're looking to continue to expand our growth in our integrated delivery centers in both Pune, India, and in Manila in the Philippines. So, you know, I think there's a lot of different levers that we're looking to use to continue to service that backlog that we've got.
spk08: Okay, and very quick one, last one, just in terms of backlogs. Given the big announcement that we've seen over the last couple of weeks with Q-Sales and the World Logistics Center, would it be fair to expect or what kind of backlog could we expect in Q1 2023, just on the back of these announcements?
spk27: You know, we do think that our backlog in Q1 will certainly increase over where we were in Q2, Q4 of 2022. But those aren't the only jobs that are coming in. We've acquired some additional jobs, new projects in Europe and in other regions as well. So we do expect that the overall backlog in Q1 will be up over Q4 last year.
spk07: Okay. Thank you very much for your time. Thanks, Benoit.
spk40: Thank you. One moment for our next question. Yuri Link with Canaccord. Your line is open.
spk31: Good morning. Nice quarter.
spk03: Good morning, Yuri.
spk32: Good morning. Gord, I don't recall Stantec putting up sequential EBITDA margin improvement in the fourth quarter versus the third, which is what you did at the end of last year. Was there anything – and I know you came out on the top end of organic growth, and is that the reason? I mean, it was better utilization, or was there anything noteworthy in the fourth quarter that would have driven the margin up where we normally see it decline sequentially? And in conjunction with that, I mean, your guidance kind of implies that Q1 and Q4 will be bigger – contributors than I think in the past. So is there a change in your earnings profile?
spk20: Yeah, Gary, maybe I'll take a crack at that. So Q4 EBITDA certainly was, I would say, atypical in terms of its increasing relative to Q3. And so I think a couple of factors. You're right, increasing utilization certainly played a role in that. And again, we point to the longer field season we had in Canada and certainly the northern parts of the U.S. as well, where winter didn't show up for a while. It allowed us to stay more highly utilized for longer. And as we've been saying really throughout 2022, we were expecting to see a ramp-up of utilization in the U.S. as these projects you know, kind of got going and started to reach that part of the cycle where we have, you know, many more of our workforce working on those projects. And so that's in part what we saw as well. And then, you know, beyond that, in trying to keep our, you know, our costs down, we didn't have a big impact on, you know, our share-based comp, which historically has had a bit of a revaluation bump and has caused that expense to go up in the fourth quarter. We didn't see that this year. So a couple of things like that that really drove it. As far as what we expect, there's one more thing that comes to mind in Q4 that is a bit unusual. It relates to the uptake on our employee benefit costs, where year over year it was actually very similar, but for whatever reason, uptake was higher in the first three quarters of the year and lower in the fourth quarter, and that had a bit of an impact on a quarter over quarter basis. So when we look at Q1, Q4, which is looking to be a little bit higher than what we've traditionally seen, still are expected to be slightly lower quarters than the second and third quarter. Some of that is just our growing global footprint where seasonality is less of an issue. And I think we're seeing the effects of that. And again, just continued levels of activity that we're seeing in the U.S. that will come from these various funding sources. So that's the primary driver for the flight shift, I would say, in the seasonal patterns.
spk32: Okay. That makes sense. And my follow-up question, just to Gord, you talked about the bookings, the backlog. Obviously, you burned a lot in the quarter. I get that. But the absolute... level of bookings was well below what we've seen the last four quarters. So anything to call out there in terms of booking activity or maybe any more of a cautious stance on behalf of your clients?
spk27: Yeah, no, not at all, actually. I think a lot of it is just... you know, seasonal type work, things are a little bit slower and, you know, people getting things papered in the quarter. So, you know, I do think that we'll see that rebound here back in Q1. We've already got a number of significant project announcements in our different regions. So, yeah, no concern at all with that.
spk13: Okay.
spk28: Thanks. Great. Thanks, Jarrett.
spk40: Thank you. One moment for our next question. And that will come from the line of Devin Dodge with BMO Capital Markets. Your line is open.
spk25: Thanks. Good morning, Gord. Good morning, Teresa.
spk16: Great.
spk25: I want to come back to one of your earlier comments. You know, I think you've made good progress on expanding the workforce in 2022. So do you expect a similar level of net additions in 2023 in order to meet that mid to high single-digit organic growth in your guidance? And can you touch on maybe the general labor environment in terms of availability and the level of wage inflation that you're seeing?
spk27: Right. So, yeah, so we, you know, we are, of course, actively continue to actively hire. I think another thing that we've seen is that. voluntary turnover rates have begun to stabilize, so we're not losing as many people there. I think anecdotally we also see that we continue to be between 2%, 3%, even 4% below many of our competitors in terms of voluntary turnover rates, so that's a positive. We also are being very fortunate in the number of people that we're able to onboard, and what's interesting is that both at a junior level, at an entry level, but also at very, very senior levels. We're attracting, because of the strength of the brand and some of these big project awards that we've brought in the door, we're getting some very, very senior people joining us for our competitors as well. So, you know, we're feeling good about the hiring, but again, in addition to the hiring, you know, we're seeing the benefits of that innovation program, as we talked about, and also our integrated delivery centers in Pune and Manila. And do you want to talk about wage inflation?
spk20: Yeah, so what we had established for our overall salary increases this year was in that sort of 4% to 5% range. So certainly higher than we have seen in past years. But that's what we've incorporated into our salaries and raised effective Jan 1.
spk25: Okay, good call. Thanks for that. And then maybe another question just for Teresa here. In a working capital, we saw good progress on DSO and Q4. but still a fairly meaningful working capital usage in 2022. Just wondering how we should be thinking about working capital as we look out to 2023.
spk20: Sure. So, yeah, we did see DSO come down as we expected. And I think that when you look at our working capital and how it shifted from say Q3 to Q4, You know, you saw a meaningful progression where it moved from WIP into AR, right? It starts to go from WIP into AR, and then the cash comes in the door. And so that is, you know, the movement that we saw that I think is very encouraging and tells me that we are, again, we're on the right track. You know, so we still are targeting, you know, a DSO level of less than 80 days, 80 days or less, I should say. And that, you know, remains an appropriate target for us. And so I think that that will start to see, again, the working capital continue to normalize as we go through 2023 here. Okay.
spk25: So should we expect working capital to be a source of funds in 2023?
spk20: Sorry, I just missed the last part of your question. That sounds not great, unfortunately.
spk25: Working capital, should it be a, are you expecting it to be a source of cash in 2023?
spk16: Sorry.
spk20: Am I expecting working capital to be – I'm really sorry. The sound on this speakerphone is really terrible.
spk25: Is it a source of cash or a use of cash in 2023? Okay.
spk20: I'm so sorry. Well, I mean, it ought to be a source of cash given what we're expecting. The only reason I'm hedging on that a little bit is that, of course, it's going to depend on the rate of growth. And as you grow, it requires a greater investment in working capital. And so maybe the right way to say it is all things being equal, it should be a source of cash. But if we continue to grow at a rapid clip, you might see it more neutral just based on the need to continue to invest in that working capital as the revenue grows.
spk25: Okay, understood. Congrats on the good results. I'll turn it over.
spk22: Thank you.
spk40: Thank you. One moment for our next question. And that will come from the line of Michael Tupholm with TD Securities. Your line is open.
spk02: Thank you. Good morning. Good morning, Michael. I guess first question is just regarding the organic net revenue growth outlook. So calling for fairly solid organic growth in 2023 in the mid to high single digit range. Can you talk about some of the puts and takes that would lead you to the higher end of that range versus the lower end of that range? And then can you also touch on how you see organic growth in 2023 looking across your various business units?
spk27: Sure. We talked about some of the different regions, U.S. organic growth in the high single to low double digits, and that's off a pretty strong comp this year already. But when you look at the opportunities that we're seeing there, we talked about Q-cells supported by IRA. There's other opportunities like that that we continue to be in discussions with. The Chips and Science Act continues to drive semiconductor opportunities and we're in discussions on a number of those as well right now. And then of course the big one is the IIJA and the support that that's going to give to infrastructure overall. So really a big part of as we look at organic growth that next year All the backdrop is there, but some of it is really just how fast that stimulus spending starts to flow, how fast the clients can get those proposals out, how fast we can get working and generating revenue. We're working with a number of clients now as they're beginning to position, but that'll certainly have an impact there. And when we look in Canada, good opportunities here in Canada off of a high comp as well, but we don't see that same level of general support in Canada. So, you know, we see continued solid growth there, but, you know, we've got it to that low single digits. Globally, though, you know, we see great opportunities and we're guiding to the mid to high single digits off already very strong 2022. You know, we're looking certainly at opportunities in water in the UK, Australia, and New Zealand, as we've talked about. Interestingly, in the UK, we're beginning to see some re-competitions coming out for AMP8, and we see, you know, great opportunities where we feel like we're positioned very, very well. So, you know, I think overall, we're feeling really good about 2023 and our guidance.
spk41: That's helpful. Thanks, Gord.
spk02: And I know some of this touches or relates to some of the government programs and spending in the U.S., but are you as bullish on the outlook for the broader earth, environmental, energy transition-related work as bullish as you have been in the past on that front? Absolutely.
spk27: A lot of the energy transition work, again, will be supported by IRA. But even absent that, in other regions around the world, we're seeing a lot of interest in solar and wind, pump storage and so on. So yeah, we're very, very positive on both what that means for our environmental business, but also our larger design-focused business as well.
spk02: Okay, perfect. And then you mentioned just briefly at the end of your prepared remarks that you do have a full M&A pipeline. I know you typically get asked about this in one way or another every quarter, but is it possible to expand on that a little bit, perhaps talk in a little bit more detail about what the pipeline looks like, where you're most focused right now as far as acquisition opportunities, how active you think you might be this year, and what you're seeing in terms of valuations?
spk27: Yeah, so we... We see great opportunities for M&A activity really in all of our regions, Canada, the U.S., and global. We're always talking to firms that are both various sizes, smaller firms, larger firms, different lines of business. Sometimes it's a bit lumpy, and we have to see what firms might come available, when we can get our valuation to coincide. So we're always in different levels of conversation with firms around the globe, but we certainly are hopeful that there'll be some things that we'll be able to transact here in 2023.
spk02: Okay, so just one follow-up on that, Gord. Again, I know it's hard to predict what opportunities will look like, but Are you more focused on the smaller and medium-sized opportunities, or should we expect that there's a possibility of something on the larger side, as we saw with Cardinal, for example?
spk27: Yeah, you know, there's some very solid opportunities, both in that small to medium size that we're always engaged with, but also from a larger perspective. And I think that what we've seen through Cardinal is – you know, that we feel we're very comfortable, you know, taking on a firm of that size or larger and successfully integrating into Stantec. So we're absolutely looking at those firms as well. Okay, perfect. Thank you. Great. Thanks, Michael.
spk40: Thank you. One moment for our next question. And that will come from the line from Frederick Bastien with Raymond James. Your line is open.
spk35: Good morning, Gordon, Theresa, and congrats to you and the team for the strong results.
spk24: Thanks very much.
spk35: The questions revolve around your most important asset, which goes home at night every day. I appreciate that attracting and keeping talent is always a top priority for Stentec, but can you comment on how that might have changed in the past 12 months, specifically, is labor availability getting better? And are you seeing some of the cost pressures that you were experiencing maybe a year ago getting better or easing?
spk27: Yeah. So a couple of things there. Certainly, you're right. Our primary asset is our people. And we want to ensure that all of our Stantec employees are engaged. They feel connected to the company and our long-term growth plans. And we feel really good about that. you know, from a labor availability perspective, we are seeing greater opportunities there. Certainly as we continue to grow our digital product offerings, you know, we're seeing with some of the reductions in some of the tech companies, there are additional very, very strong resources that are available in that space. But overall, you know, I mentioned earlier that both from a junior employee perspective, but also at very, very seasoned people who often will bring teams with them. We're having great success in attracting those people.
spk35: And in some ways, that's your best acquisition strategy, really, is to be able to recruit people for nothing, really. I wouldn't say nothing, but it's different costs. Now, when discussing with potential targets, are you finding that their expectations are getting more reasonable given the volatile environment that we're in?
spk27: Yeah, it certainly is still a competitive environment for talent, but we are seeing people's expectations moderate a little bit. We're not seeing some of the people coming to us as often with 20%, 30%, 40% salary increases or requests for that because other firms aren't aren't offering those anymore. I think we're seeing some moderation there.
spk33: Okay, great. Thanks, El Paso. Great.
spk06: Thanks, Frederick.
spk40: Thank you. One moment for our next question. And that will come from the line of Sabat Khan with RBC Capital Markets. Your line is open.
spk30: Great. Thanks, and good morning. Just, I guess, a question on kind of the puts and takes in terms of EBITDA for 2020. It looks like In Q4, gross margin was a little bit down, but then more than made up by SGN. I'm just wondering how we should think about, you know, 2023. Should we just look at the fully or one-way for those two metrics as we think about 2023, or was there anything in Q4 that we should keep an eye on that might continue as it relates to kind of those two line items?
spk20: Yeah, so, you know, I'll start by saying that, you know, Broadly, when we think about ranges for project margin or gross margin, that 53% to 55% is the right range for us. It's going to move around a bit based on our project mix. And of course, we are in a nice spot now where we can be a little bit more selective. And I think that's why you've seen that margin move up a little bit year over year. still our focus in terms of project delivery, project margin in that 53% to 55% range. And EBITDA, as I said earlier, in that 16% to 17% range is the appropriate target for us. So in Q4, there were a couple of things that were a bit atypical, I would say, particularly compared to Q4 of 2021. So in 2021, in the fourth quarter, we had you know, increased share-based comp. We had owner's lease costs that were higher than we had this year. So a couple of things like that that made the, you know, that made the admin and marketing as a percentage of net revenue higher in 2021 than in Q4 of 2022. Then when you look overall, though, on a year-over-year basis, that admin and marketing percentage was actually quite consistent at around 39%, maybe 39 plus, a few basis points. Again, we like to think of that as being in that 37% to 39% range, excluding unusual things like owner's lease costs and that kind of thing. That, again, is what will drive to that 16% to 17% EBITDA margin.
spk30: Okay, great. And then just, I guess, one on the regions. It sounds like the U.S., obviously, a lot of bigger picture tailwinds. Maybe if you could just provide a little bit of color on Canada, maybe a bit more color by end markets. You know, which ones do you expect strengthened this year versus the ones that might be tougher comps? And maybe what are the regions or the bigger funding mechanisms that are driving demand in that market? Just a bit more color there.
spk27: Yeah. So, you know, we see some great opportunities still in Canada without question. You know, our Our environmental services group had a really strong year in 2022. We expect that to continue in 2023. A lot of environmental work, a lot of permitting work, a lot of archaeological work. So that's very, very strong. Our community development group, we see very strong as well. It's interesting, I was meeting with some leaders in the overall residential development market several weeks ago in Toronto. You know, as we talk about over the last decade, on average in Ontario, we brought about 70,000 residential properties to market on an annual basis. But going forward with the immigration commitments that the government has made, for the next 10 years in Ontario alone, you know, we'll need up to 150,000 residential properties per year. And so strong, strong, you know, long-term backdrop for affordable housing, additional properties there. And then certainly our water group, I think you're going to see this year very, very busy. We've announced a couple of very, very strong projects that we've got before in Ontario and in Saskatchewan and certainly in British Columbia. So we feel really good about that. And then on the building side, lots of healthcare work ongoing. I think it's pretty broad-based, really, across the end markets that we feel good about Canada, but we don't see that sort of approaching double-digit, you know, mid, so high to single to double-digit growth like we see in the U.S. Canada's going to have a good year, but from our perspective, we don't think it'll be as strong as the U.S. will be.
spk29: Great. Thanks very much. Thank you.
spk40: Thank you. One moment for our next question. We'll come from the line of Maxim Sytchev with NBS. Your line is open.
spk10: Hi, good morning, Gordon, Theresa. Morning, Max. Most of the questions have been asked, but I just wanted to circle back to obviously the amount of people that you guys are hiring right now. I'm curious to hear if maybe you change some onboarding practices just to make sure that people get up to speed as soon as possible. Just any comments there.
spk27: Yeah, no, absolutely right. And so from an onboarding perspective, you know, we're always looking to, you know, how can we make that more efficient? You know, there's certain things that we need to do as we bring people on, you know, welcome them, ensure that they feel part of the Stantec enterprise. But then, you know, it depends also on, where they are in their career progression. You know, one thing that we did mention is that we're, in addition to hiring at that junior intermediate level that we've been very successful the last couple of years, we're also hiring at the more senior level. So the more senior folks can come on and hit the ground a little bit quicker. You know, we have to teach them the SANTEC systems and so on, but they're ready to go. Whereas the more junior folks need a little bit longer typically to ramp up, because they need to, you know, they have to understand the workforce, understand what our expectations are of them. And so, you know, we are looking to bring these folks on in larger groups, which allows us to be more efficient in those onboarding processes.
spk10: Okay, that's super helpful. Actually, maybe I'll squeeze in one more for Teresa. In terms of the kind of approach to share buybacks, is it fair enough that that right now sort of focuses on organic investments and M&A?
spk20: Yeah, I mean, the philosophy really hasn't changed, Max. You know, we will always look to share buyback to the extent that it's opportunistic with the priority on M&A as it has been historically. So, you know, a couple of things as well with, you know, the... The share buyback tax that was going to be in effect in Canada starting next year is, you know, something longer term that will, again, kind of impact the overall valuation metrics when we look at share buybacks. At this point, we don't believe that the new rules in the U.S. will affect our share buybacks in 2024. But, again, philosophically, M&A is the first priority share buybacks when the opportunity makes sense.
spk09: Okay. That's great. Thank you so much.
spk00: Thanks, Max.
spk40: And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Gord Johnston for any closing remarks.
spk27: Well, great. I just want to say, you know, thanks very much for everyone for joining us today. And should you have any follow-up questions, please feel free to reach out to Jess Newkirk in our IR group. And have a great day, everyone. Thanks very much.
spk40: Thank you. Thank you all for participating. This concludes today's program. You may now disconnect.
spk04: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. Thank you. Thank you. So, Thank you. you Thank you.
spk40: Welcome to Stantec's fourth quarter and year-end 2022 earnings results webcast and 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 webcast. Please be advised that if you have 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 two, 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. Gore Johnston.
spk26: Good morning, and thank you for joining us today.
spk27: We're very pleased to report record Q4 and full year 2022 adjusted earnings per share of $0.82 and $3.13 respectively. Our results reflect a solid execution of our multi-year strategy and clearly demonstrate the resilience, growth, and demand that we're seeing for our business. The outperformance of our guidance for the year was attributable to a very solid fourth quarter where we achieved double-digit organic net revenue growth above our expectations. For the full year, we generated an all-time high of $4.5 billion in net revenue. All of our regions and business units delivered organic net revenue growth in the high single to low double digit range, demonstrating the strength of our diversified business model. This also shows how well positioned we are to address the trends of increasing investments towards aging infrastructure, reshoring of domestic production, and climate change. Particularly notable, environmental services net revenue grew by almost 50%, primarily through acquisition but also from nearly 10% organic growth. And importantly, the top line increase of 23% was exceeded by bottom line growth of 29%. Looking at our results by region, both public and private investment continued to drive high activity levels in the US. In 2022, we grew US net revenue by 26% overall, with over 9% organic and 13% acquisition growth. Our work on large-scale water security projects in the Western U.S. helped drive double-digit organic growth in water. In buildings, we continue to see activity levels rebound with investments flowing into healthcare, civic, industrial, and the science and technology sectors. Energy and resources had strong organic growth with acceleration of activities related to renewable energy and mining projects, as well as reservoir and dam projects all related to the energy transition and energy security. We also delivered solid organic growth in infrastructure from work on projects in transportation, as well as in industrial and residential land development activities. Our results reflect how well aligned our U.S. business is with the major trends and government funding sources available. Canada continued to perform very well, with sustained year-over-year growth that exceeded our expectations. Net revenue was up almost 8% organically for the year. Similar to the US, both private and public spending was robust in Canada. We had solid performance in environmental services with ongoing demand for permitting work in archaeological services. Power transmission and distribution and energy transition work continued to spur growth in energy and resources. Our buildings group continued to drive growth with projects in healthcare and mixed-use commercial. and infrastructure captured opportunities in community development in Western Canada, bridge work across Canada, and in recovery efforts associated with the flooding in British Columbia in late 2021. In global, we generated over 35% net revenue growth, 11% organically, and 28% from acquisitions. Our industry-leading water business continues to be a significant pillar for us, capturing long-term framework agreements in the UK, Australia and New Zealand. We saw strong demand for our services in community development, in mining driven by strong pricing for metals and in environmental services for field work. We are exceptionally pleased with each of our regions and business units which are all benefiting from the themes that we've been discussing. Beyond our excellent financial results, I'd like to express how proud I am of our achievements and commitment to sustainability and enhancing our communities. We were recently provided with great recognition from Corporate Knights as we were ranked in their global 100 most sustainable corporations in the world. Out of nearly 7,000 corporations that Corporate Knights reviewed, we were ranked first among our peers and number seven overall. We've now been included in the Corporate Knights Global 100 for four consecutive years. I'll turn the call over now to Theresa to review our financial results in more detail.
spk20: Thank you, Gord. Good morning, everyone. Starting with our Q4 results, we had an exceptionally strong finish to the year, which drove our full year results to outperform our expectations. We grew gross revenue by 28% to $1.5 billion, and net revenue by 23% to $1.1 billion. Organic net revenue growth was 10.6% for the quarter with strong growth achieved in each of our regions and business units. Canada and the U.S. were particularly strong as we benefited from a longer field season in Canada due to milder than typical weather and building momentum in the U.S. where several business units achieved over 20% organic growth for the quarter. Project margin was very solid at 54.9% and adjusted EBITDA reached 17%, a 150 basis point increase over Q4 2021. This drove fourth quarter EPS to 66 cents compared with 15 cents in the prior year and adjusted diluted EPS of 82 cents compared with 57 cents last year, an increase of 44%. For the full year 2022, we generated gross revenue of $5.7 billion and net revenue of $4.5 billion, an increase of 24% and 23% respectively. Project margin was a solid 54.2%, a 20 basis point increase. And adjusted EBITDA increased by 26% to $724 million. We achieved our highest ever adjusted EBITDA margin of 16.2%, and this is at the high end of the range we set for 2022. We also advanced our 2023 real estate strategy. In 2022, we achieved approximately $0.34 per share of cost savings relative to our 2019 real estate costs, largely achieving our 2023 target of $0.35 to $0.40 a year early. We estimate that on a pre-IFRS 16 basis, these savings would have increased adjusted EBITDA margin by more than 110 basis points. In terms of square footage, we've thus far reduced our footprint by 28%, also largely in line with our target of 30% from a 2019 baseline. As a result of our strong performance, our full year diluted EPS reached $2.22, and our adjusted dilute VPS was $3.13. Both of these are also record highs with respective increases of 23% and 29%. Operating cash flow for the year came in at $304 million and levered free cash flow was $76 million. DSO at the end of December was 81 days, a five-day reduction from the third quarter. As we expected, With the completion of Cardinal Financial Migrations, cash flows began to normalize in the fourth quarter of 2022, which was moderated by stronger than anticipated revenue growth in the fourth quarter, driving additional net working capital investments. This also brought our net debt to adjusted EBITDA down to 1.6 times, which is in the middle of our target range. We closed the year with adjusted ROIC of 10.5%, driven by stronger than anticipated Q4 earnings and reflecting a 20 basis point increase over 2021. With that, let me turn the call back to Gord for our 2023 outlook.
spk27: Thanks, Theresa. At the end of 2022, we had $5.9 billion in backlog, an increase of 15% year over year, 10% organically, and which represents approximately 12 months of work. Our backlog does not yet include any meaningful contribution from U.S. stimulus spending, but we expect this to provide further tailwinds in 2023 and beyond. On the strength of our backlog and as momentum builds for investments spurred by government stimulus around the world, we feel very confident that 2023 will be another strong year for Stantec. Even with the high comps from 2022, we expect to deliver strong organic net revenue growth in the range of mid to high single digits. Looking now to the US, with over 50% of our revenues generated in the US, we expect this region to continue as the key driver for 2023. After delivering almost 10% organic growth in 2022, we expect another solid year, with organic growth to be in the high single to low double digits. Funding from the IIJA is expected to be slower in the first half of the year and to accelerate in the second half, bolstering our infrastructure business unit. Buildings continue to see great opportunities in both healthcare and adaptive reuse. In water, increasingly frequent and extreme climatic events are driving investments in resilient infrastructure to protect against flooding, hurricanes, and storm surges. Investment spurred by the IRA is expected to accelerate renewable and other energy transition projects like the QCELS project that we announced last week. At $2.5 billion, this is the largest solar panel manufacturing investment in US history, and passage of the IRA was a major driver in helping this project move forward. The QCELS project is also a prime example of the growing trend towards reshoring production and de-risking supply chains, bringing production closer to demand. Another great example of streamlining supply chains is our recent announcement on being selected as the prime consultant on the multi-billion dollar World Logistics Center project in California. Stantic is ideally positioned to provide multidisciplinary expertise to these major projects and we're confident in the opportunities that they'll bring. After a very strong year in Canada, we expect continued high levels of activity in 2023 Organic net revenue growth is expected to moderate relative to 2022 to the lowest single digits. Specifically, we see our water business continuing to grow with several major projects wrapping up. We expect continued strong demand to support the energy transition and the need for increased community development. And we expect high levels of activity in our environmental services and buildings group to remain stable over the year. Our global business has meaningfully grown in recent years, both organically and through acquisitions, and we see ongoing strong demand in 2023 and anticipate organic growth to be in the mid to high single digits. In the UK, Australia, and New Zealand, our buildings business is expected to have strong organic growth due to the need for healthcare, science and technology, and commercial mixed-use development. Growth will also be driven by high levels of activity in our water business, where regulatory drivers are a strong factor. We also expect to see increases in community development in the UK, where we're one of the top three planning consultancies. With a long lead time for development and permitting in the UK, this sector continues to push forward. Transportation activities will lead to growth in Australia, as will the raising of dams, mining, and overall energy transition initiatives. Overall, we expect to drive another solid year of net revenue growth. The 7 to 11% range shown here will come primarily from organic net revenue growth. It also includes some contribution from the acquisitions we completed in 2022, but no other acquisitions are factored into this outlook. In 2023, we're targeting an adjusted EBITDA margin between 16 and 17%. and our goal is to deliver adjusted EPS growth between 9 and 13% over 2022. Further gains may come from M&A as our M&A pipeline remains full and we have the balance sheet strength to capitalize on opportunities that fit strategically for Stantec. With a favorable market backdrop and engaged workforce, a full M&A pipeline and a healthy balance sheet, we're very optimistic for 2023 and the years ahead. And with that, I'll turn the call back to the operator for questions. Operator?
spk40: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again.
spk39: One moment while we compile the Q&A roster.
spk40: And today's first question will come from the line of Jacob Bout with CIBC. Your line is open.
spk08: Good morning.
spk37: Good morning, Jacob. I wanted to square 2023 guidance with your backlog in the fourth quarter, so specifically in the U.S. The U.S. backlog actually dipped quarter on quarter, but you're guiding to some pretty solid organic net revenue growth. hearing your commentary, is this kind of a first half, second half type story? Maybe just a bit more detail on the flow of the IIJA, the trillion plan projects. You expect that to ramp the second half, I think is what you said?
spk27: Yeah, yeah, absolutely. The IIJA funding, you know, we're starting to see clients putting out proposal calls now. We do have a little bit of that work already in the backlog and we are generating revenue from it. But we're not actually, you know, a couple of things about the U.S. backlog, not concerned about that at all. You know, certainly the U.S. backlog did drop a bit in Q4, but we had, you know, 13.5% organic growth in the U.S. in the quarter. So we're drawing down that backlog. I think you would have seen the same in global, that our backlog actually dropped a Q4 is always a bit of a lower quarter for us for backlog growth, and I think that, coupled with the extremely strong organic growth that we had in Q4, naturally drew that backlog down a little bit. But as we talk to our business leaders, as we look at our pipeline of opportunities, we're not concerned with the backlog, and we feel very solid with our projections for 2023.
spk37: My second question is just on the reduction of the real estate footprint. You're saying if you accomplish your 2023 targets or essentially you accomplish that, how far do you think you can take this? It sounds like you're around 28%. You're targeting 30%. Can you take it to 35% or how are you thinking about that right now?
spk20: Yeah, so we think 30% is achievable, and again, that has been based on the footprint we had back in 2019. So that remains the target. As we begin our work on the next phase of our strategic plan, we are now starting to evaluate what else is possible, given acquisitions we've done in recent years, but also considering office occupancy and what the landscape looks like for real estate in various locations. I do think that more is possible, but that will come in the form of our next strategy for optimization.
spk01: Thank you.
spk28: Thanks, Jacob.
spk40: Thank you.
spk39: One moment for our next question.
spk40: Benoit Poirier with Desjardins. Your line is open.
spk08: Yeah, good morning, Teresa. Good morning, Gord, and congratulations for the strong finish. Just looking at your organic growth outlook by region, it remains pretty bullish across the board, and I would expect the U.S. infrastructure bill and water program to bring momentum for the foreseeable future. But How should we be looking at your ability to raise margin beyond the 16%, 17% level that you assume in 2023?
spk20: Hi, Benoit. You know, I think 16% to 17% remains an appropriate target for us. You know, I've always said that there are, you know, there's not one thing that, one dial we turn that will give us increased margin as many things being done right all the time. What you saw in the fourth quarter of this past year was increasing utilization, which is always one of the best ways for us to improve our margin. We do feel good about achieving that range again in 2023. But again, there's always that sort of pushing against that, whether it's inflationary impact on our overall cost structure and so on. And so we have to remain pretty diligent and focused on keeping our costs down and ensuring that we are as highly utilized as possible. And so I think that that is the right range for us.
spk08: Okay. And maybe could you talk about your ability to staff given the strong demand that you're seeing right now?
spk27: Yeah. So, you know, one of the things that as we went into the global pandemic, one of the things that we had stated was that we wanted to continue to be a net attractor or a net importer of talent during these periods of uncertainty. And so we can say now that for full year 2021 and for full year 2022, we hired more staff than who left us through voluntary resignations. And so we do continue to build our headcount to service that. And you saw a little bit of that in Q4, the high organic growth rates. In addition to that, we're working hard with our innovation groups to look at how we can use digital products to generate more revenue per employee. And then thirdly, we're looking to continue to expand our growth in our integrated delivery centers in both Pune, India, and in Manila in the Philippines. So, you know, I think there's a lot of different levers that we're looking to use to continue to service that backlog that we've got.
spk08: Okay, and very quick one, last one, just in terms of backlogs. Given the big announcement that we've seen over the last couple of weeks with Q-Sales and the World Logistics Center, would it be fair to expect or what kind of backlog could we expect in Q1 2023, just on the back of these announcements?
spk27: You know, we do think that our backlog in Q1 will certainly increase over where we were in Q2, Q4 of 2022. But those aren't the only jobs that are coming in. We've acquired some additional jobs, new projects in Europe and in other regions as well. So we do expect that the overall backlog in Q1 will be up over Q4 last year.
spk07: Okay. Thank you very much for your time. Thanks, Benoit.
spk40: Thank you. One moment for our next question. Yuri Link with Canaccord. Your line is open.
spk31: Good morning. Nice quarter.
spk03: Good morning, Yuri.
spk32: Good morning. Gord, I don't recall Stantec putting up sequential EBITDA margin improvement in the fourth quarter versus the third, which is what you did at the end of last year. Was there anything – and I know you came out on the top end of organic growth, and is that the reason? I mean, it was better utilization, or was there anything noteworthy in the fourth quarter that would have driven the margin up where we normally see it decline sequentially? And in conjunction with that, I mean, your guidance kind of implies that Q1 and Q4 will be bigger – contributors than I think in the past. So is there a change in your earnings profile?
spk20: Yeah, Gary, maybe I'll take a crack at that. So Q4 EBITDA certainly was, I would say, atypical in terms of its increasing relative to Q3. And so I think, you know, a couple of factors. You're right, you know, increasing utilization certainly played a role in that. And again, we point to the longer field season we had in Canada and certainly the northern parts of the U.S. as well, where winter didn't show up for a while. It allowed us to stay more highly utilized for longer. And as we've been saying really throughout 2022, we were expecting to see a ramp-up of utilization in the U.S. as these projects you know, kind of got going and started to reach that part of the cycle where we have, you know, many more of our workforce working on those projects. And so that's in part what we saw as well. And then, you know, beyond that, in trying to keep our, you know, our costs down, we didn't have a big impact on, you know, Our share-based comp, which historically has had a bit of a revaluation bump and has caused that expense to go up in the fourth quarter. We didn't see that this year. A couple of things like that that really drove it. As far as what we expect, there's one more thing that comes to mind in Q4 that is a bit unusual. It relates to the uptake on our employee benefit costs, where year over year it was actually very similar, but for whatever reason, uptake was higher in the first three quarters of the year and lower in the fourth quarter, and that had a bit of an impact on a quarter over quarter basis. So when we look at Q1, Q4, which is looking to be a little bit higher than what we've traditionally seen, still are expected to be slightly lower quarters than the second and third quarter. Some of that is just our growing global footprint, where seasonality is less of an issue. And I think we're seeing the effects of that. And again, just continued levels of activity that we're seeing in the U.S. that will come from these various funding sources. So that's the primary driver for the flight shift, I would say, in the seasonal patterns.
spk32: Okay. That makes sense. And my follow-up question, just to Gord, you talked about the bookings, the backlog. Obviously, you burned a lot in the quarter. I get that. But the absolute... level of bookings um was you know well below what we've seen the last four quarters so anything to call out there in terms of booking activity or or you know maybe any more of a cautious stance on behalf of your clients yeah no not at all actually i think it's a lot of it is just um
spk27: you know, seasonal type work, things are a little bit slower and, you know, people getting things papered in the quarter. So, you know, I do think that we'll see that rebound here back in Q1. We've already got a number of significant project announcements in our different regions. So, yeah, no concern at all with that.
spk13: Okay.
spk28: Thanks. Great. Thanks, Jarrett.
spk40: Thank you. One moment for our next question. And that will come from the line of Devin Dodge with BMO Capital Markets. Your line is open.
spk25: Thanks. Good morning, Gord. Good morning, Teresa.
spk16: Great.
spk25: I want to come back to one of your earlier comments. You know, you've made good progress on expanding the workforce in 2022. So do you expect a similar level of net additions in 2023 in order to meet that mid to high single digit organic growth in your guidance? Um, and can you touch on maybe the general labor environment in terms of availability and the level of wage inflation that you're seeing?
spk27: Right. So, yeah, so we, uh, you know, we are, of course, actively continue to actively hire. I think another thing that we've seen is that, um, voluntary turnover rates have begun to stabilize. So we're not losing as many people there. I think, you know, anecdotally, we also see that, you know, we continue to be, you know, between two, three, even 4% below many of our competitors in terms of voluntary turnover rates. So that's a positive. We also are being very fortunate in the number of people that we're able to onboard. And what's interesting is that both at a junior level, at an entry level, but also at very, very senior levels. We're having, we're attracting, because of the strength of the brand and some of these big project awards that we've brought in the door, we're getting some very, very senior people joining us for our competitors as well. So, you know, we're feeling good about the hiring, but again, in addition to the hiring, you know, we're seeing the benefits of that innovation program, as we talked about, and also our integrated delivery centers in Pune and Manila. And do you want to talk about wage inflation?
spk20: Yeah. So what we had established for our overall salary increases this year was in that sort of 4% to 5% range. So certainly higher than we have seen in past years. But that's what we've incorporated into our salaries and rates effective Jan 1.
spk25: OK. Good call. Thanks for that. And then maybe another question just for Theresa here. In a working capital, we saw good progress on DSO and Q4. but still a fairly meaningful working capital usage in 2022. Just wondering how we should be thinking about working capital as we look out to 2023.
spk20: Sure. So, yeah, we did see DSO come down as we expected. And I think that when you look at our working capital and how it shifted from say Q3 to Q4, You know, you saw a meaningful progression where it moved from WIP into AR, right? It starts to go from WIP into AR, and then the cash comes in the door. And so that is, you know, the movement that we saw that I think is very encouraging and tells me that we are, again, we're on the right track. You know, so we still are targeting, you know, a DSO level of less than 80 days, 80 days or less, I should say. And that, you know, remains an appropriate target for us. And so I think that that will start to see, again, the working capital continue to normalize as we go through 2023 here. Okay.
spk25: So should we expect working capital to be a source of funds in 2023?
spk20: Sorry, I just missed the last part of your question. That sounds not great, unfortunately.
spk25: Working capital, should it be a, are you expecting it to be a source of cash in 2023?
spk16: Sorry.
spk20: Am I expecting working capital to be – I'm really sorry. The sound on this speakerphone is really terrible.
spk25: Is it a source of cash or a use of cash in 2023? Okay.
spk20: I'm so sorry. Well, I mean, it ought to be a source of cash given what we're expecting. The only reason I'm hedging on that a little bit is that, of course, it's going to depend on the rate of growth. And as you grow, it requires a greater investment in working capital. And so maybe the right way to say it is all things being equal, it should be a source of cash. But if we continue to grow at a rapid clip, you might see it more neutral just based on the need to continue to invest in that working capital as the revenue grows.
spk25: Okay, understood. Congrats on the good results. I'll turn it over.
spk22: Thank you.
spk40: Thank you. One moment for our next question. And that will come from the line of Michael Tupholm with TD Securities. Your line is open.
spk02: Thank you. Good morning. Good morning, Michael. Um, I guess first question is just regarding the organic, uh, net revenue growth outlook. So calling for fairly solid, uh, organic growth in 2023 in the mid to high single digit range. Um, can you talk about some of the puts and takes that would lead you to the higher end of that range versus the lower end of that range? Um, and then can you also touch on how you see organic growth in 2023 looking across your various business units?
spk27: Sure. So, um, We talked about some of the different regions, U.S. organic growth in the high single to low double digits, and that's off a pretty strong comp this year already. But when you look at the opportunities that we're seeing there, we talked about Q-cells supported by IRA. There's other opportunities like that that we continue to be in discussions with. The Chips and Science Act continues to drive semiconductor opportunities and we're in discussions on a number of those as well right now. And then of course the big one is the IIJA and the support that that's going to give to infrastructure overall. So really a big part of as we look at organic growth that next year All the backdrop is there, but some of it is really just how fast that stimulus spending starts to flow, how fast the clients can get those proposals out, how fast we can get working and generating revenue. We're working with a number of clients now as they're beginning to position, but that'll certainly have an impact there. when we look in canada good opportunities here in canada off of a high comp as well but we don't see that same level of general support in canada so you know we see uh continued solid growth there but you know we've got it to that low single digits uh globally though you know we see great opportunities and we're guiding to the mid to high single digits off already very strong 2022 and You know, we're looking certainly at opportunities in water in the UK, Australia, and New Zealand, as we've talked about. Interestingly, in the UK, we're beginning to see some re-competitions coming out for AMP8. And we see, you know, great opportunities where we feel like we're positioned very, very well. So, you know, I think overall, we're feeling really good about 2023 and our guidance.
spk41: That's helpful. Thanks, Gord.
spk02: And I know some of this touches or relates to some of the government programs and spending in the U.S., but are you as bullish on the outlook for the broader earth, environmental, energy transition-related work as bullish as you have been in the past on that front? Absolutely.
spk27: You know, a lot of the energy transition work, again, will be supported by IRA, but even absent that, in other regions around the world, we're seeing, you know, a lot of interest in solar and wind, pump storage and so on. So, yeah, we're very, very positive on both what that means for our environmental business, but also our larger design-focused business as well.
spk02: Okay, perfect. And then you mentioned just briefly at the end of your prepared remarks that you do have a full M&A pipeline. I know you typically get asked about this in one way or another every quarter, but is it possible to expand on that a little bit, perhaps talk in a little bit more detail about what the pipeline looks like, where you're most focused right now as far as acquisition opportunities, how active you think you might be this year and what you're seeing in terms of valuations?
spk27: Yeah, so we... We see great opportunities for M&A activity really in all of our regions, Canada, the U.S., and global. We're always talking to firms that are both various sizes, smaller firms, larger firms, different lines of business. Sometimes it's a bit lumpy, and we have to see what firms might become available, when we can get our valuation to coincide. So, you know, we're always in different levels of conversation with firms around the globe, but, you know, we certainly are hopeful that there'll be some things that we'll be able to transact here in 2023.
spk02: Okay, sorry, just one follow-up on that, Gord. Again, I know it's hard to predict what opportunities will look like, but Are you more focused on the smaller and medium-sized opportunities, or should we expect that there's a possibility of something on the larger side, as we saw with Cardno, for example?
spk27: Yeah, you know, there's some very solid opportunities, both in that small to medium size that we're always engaged with, but also from a larger perspective. And I think that what we've seen through Cardno is – you know, that we feel we're very comfortable, you know, taking on a firm of that size or larger and successfully integrating into Stantec. So we're absolutely looking at those firms as well. Okay, perfect. Thank you. Great. Thanks, Michael.
spk40: Thank you. One moment for our next question. And that will come from the line from Frederick Bastien with Raymond James. Your line is open.
spk35: Good morning, Gordon and Theresa, and congrats to you and the team for the strong results.
spk24: Thanks very much.
spk35: My questions revolve around your most important asset, which goes home at night every day. I appreciate that attracting and keeping talent is always a top priority for Stantec, but can you comment on how that might have changed in the past 12 months? Specifically, is labor availability getting better? And are you seeing some of the cost pressures that you were experiencing maybe a year ago getting better or easing?
spk27: Yeah. So a couple of things there. Certainly, you're right. Our primary asset is our people. And we want to ensure that all of our Stantec employees are engaged. They feel connected to the company and our long-term growth plans. And we feel really good about that. you know, from a labor availability perspective, we are seeing greater opportunities there. Certainly as we continue to grow our digital product offerings, you know, we're seeing with some of the reductions in some of the tech companies, there are additional very, very strong resources that are available in that space. But overall, you know, I mentioned that earlier that both from a junior employee perspective, but also at very, very seasoned people who often will bring teams with them. We're having great success in attracting those people.
spk35: And in some ways, that's your best acquisition strategy, really, is to be able to recruit people for nothing, really. I wouldn't say nothing, but it's a different cost.
spk34: Exactly.
spk35: Now, when discussing with potential targets, are you finding that their expectations are getting, you know, are they getting more reasonable given the volatile environment that we're in?
spk27: Yeah, you know, it certainly is still a competitive environment for talent, but we are seeing people's expectations moderate a little bit. You know, we're not seeing some of the, you know, people coming to us as often with, you know, 20%, 30%, 40% salary increases or requests for that because other firms aren't aren't offering those anymore. I think we're seeing some moderation there.
spk33: Okay, great. Thanks, El Paso.
spk27: Great.
spk06: Thanks, Frederick.
spk40: Thank you. One moment for our next question. And that will come from the line of Sabat Khan with RBC Capital Markets. Your line is open.
spk30: Great. Thanks, and good morning. Just, I guess, a question on kind of the puts and takes in terms of EBITDA for 2020. It looks like In Q4, the gross margin was a little bit down, but then more than made up by SGN. I'm just wondering how we should think about, you know, 2023. Should we just look at the full year run rate for those two metrics as we think about 2023, or was there anything in Q4 that we should keep an eye on that might continue as it relates to kind of those two line items?
spk20: Yeah, so, you know, I'll start by saying that, you know, Broadly, when we think about ranges for project margin or gross margin, that 53% to 55% is the right range for us. It's going to move around a bit based on our project mix. And of course, we are kind of in a nice spot now where we can be a little bit more selective. And I think that's why you've seen that margin move up a little bit year over year. And so it's still our focus in terms of project delivery, project margin in that 53% to 55% range. And EBITDA, as I said earlier, in that 16% to 17% range is the appropriate target for us. So in Q4, there were a couple of things that were a bit atypical, I would say, particularly compared to Q4 of 2021. So in 2021, in the fourth quarter, we had you know, increased share-based costs. We had owner's lease costs that were higher than we had this year. So a couple of things like that that made the, you know, that made the admin and marketing as a percentage of net revenue higher in 2021 than in Q4 of 2022. Then when you look overall, though, on a year-over-year basis, that admin and marketing percentage was actually quite consistent at around 39%, maybe 39-plus, a few basis points. So, again, we like to think of that as being in that 37% to 39% range, excluding unusual things like owner's lease costs and that kind of thing. So that, again, is what will drive to that 16% to 17% EBITDA margin.
spk30: Okay, great. And then just, I guess, one on the regions. It sounds like the U.S. obviously a lot of bigger picture tailwinds. Maybe if you could just provide a little bit of color on Canada, maybe a bit more color by end markets. You know, which ones do you expect strengthened this year versus the ones that might be tougher comps? And maybe what are the regions or the bigger funding mechanisms that are driving demand in that market? Just a bit more color there.
spk27: Yeah. So, you know, we see some great opportunities still in Canada without question. You know, our Our environmental services group had a really strong year in 2022. We expect that to continue in 2023. A lot of environmental work, a lot of permitting work, a lot of archaeological work. So that's very, very strong. Our community development group, we see very strong as well. It's interesting, I was meeting with some leaders in the overall residential development market several weeks ago in Toronto, and as we talk about Over the last decade, on average in Ontario, we brought about 70,000 residential properties to market on an annual basis. But going forward with the immigration commitments that the government has made, for the next 10 years in Ontario alone, you know, we'll need up to 150,000 residential properties per year. And so strong, strong, you know, long-term backdrop for affordable housing, additional properties there. And then certainly our water group, I think you're going to see this year very, very busy. We've announced a couple of very, very strong projects that we've got before in Ontario and in Saskatchewan and certainly in British Columbia. So we feel really good about that. And then on the building side, lots of health care work ongoing. So we... I think it's pretty broad-based, really, across the end markets that we feel good about Canada, but we don't see that sort of approaching double-digit, you know, mid, so high to single to double-digit growth like we see in the U.S. Canada's going to have a good year, but from our perspective, we don't think it'll be as strong as the U.S. will be.
spk29: Great. Thanks very much. Thank you.
spk40: Thank you. One moment for our next question. We'll come from the line of Maxim Sytchev with NBS. Your line is open.
spk10: Hi. Good morning, Gordon and Theresa. Good morning, Max. Most of the questions have been asked, but I just wanted to circle back to obviously the amount of people that you guys are hiring right now. I'm curious to hear if maybe you change some of the onboarding practices just to make sure that people get up to speed as soon as possible. Just any comments there.
spk27: Yeah, no, absolutely right. And so from an onboarding perspective, you know, we're always looking to, you know, how can we make that more efficient? You know, there's certain things that we need to do as we bring people on, you know, welcome them, ensure that they feel part of the Stantec enterprise. But then, you know, it depends also on, where they are in their career progression. You know, one thing that we did mention is that we're, in addition to hiring at that junior intermediate level that we've been very successful the last couple of years, we're also hiring at the more senior level. So the more senior folks can come on and hit the ground a little bit quicker. You know, we have to teach them the SANTEC systems and so on, but they're ready to go. Whereas the more junior folks need a little bit longer typically to ramp up, because they need to, you know, they have to understand the workforce, understand what our expectations are of them. And so, you know, we are looking to bring these folks on in larger groups, which allows us to be more efficient in those onboarding processes.
spk10: Okay, that's super helpful. Actually, maybe I'll squeeze in one more for Teresa. In terms of the kind of approach to share buybacks, is it fair enough that right now sort of focuses on organic investments and M&A?
spk20: Yeah, I mean, the philosophy really hasn't changed, Max. You know, we will always look to share buyback to the extent that it's opportunistic with the priority on M&A as it has been historically. So, you know, a couple of things as well with, you know, the – The share buyback tax that was going to be in effect in Canada starting next year is something longer term that will, again, kind of impact the overall valuation metrics when we look at share buybacks. At this point, we don't believe that the new rules in the U.S. will affect our share buybacks in 2024. But, again, philosophically, M&A is the first priority share buybacks when the opportunity makes sense.
spk09: Okay. That's great. Thank you so much.
spk00: Thanks, Max.
spk40: And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Gord Johnston for any closing remarks.
spk27: Well, great. I just want to say, you know, thanks very much for everyone for joining us today. And should you have any follow-up questions, please feel free to reach out to Jess Newkirk in our IR group. And have a great day, everyone. Thanks very much.
spk40: Thank you. thank you all for participating this concludes today's program you may now disconnect
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