Q3 2020 Stantec Inc Earnings Call
That's exactly right.
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Oh come to Stantecs first quarter, Tracy Tracy our units outcome pretty cool.
Yes, and a five 4% increase and adjusted net income.
In spite of net revenue and gross margin retraction.
Backlog grew organically in Q3 to a record high of four 8 billion and our balance sheet continue to strengthen.
Subsequent to the quarter, we closed on our $300 million bond offerings very attractive chairs.
Treasonable discuss this in more detail in her section of the presentation.
At the end of the presentation today or review how're for value creators of people excellence innovation and growth continues underpin our competitive advantage and further enhance shareholder value.
Q Trina revenue is consistent with the outlook, we provided in our future call.
Compared to the same period last year net revenue for the quarter decreased three 8% or $36 million to $916 million.
Revenue retracted organically four 7% in the quarter year.
Year to date net revenues holding up very well despite the COVID-19 pandemic with organic retraction of only 1.0%.
Yeah.
Well, thank goodness continues to be impacted by the pandemic. However, we're seeing continued growth and work for ecommerce clients.
We've also seen a significant increase in the pursuit of activity in the healthcare sector and we were recently and the designer of the preferred pro preferred performing team for the one place where $1 billion Footscray Hospital in Melbourne, Australia.
Our public sector tortured and buildings remain greater than 50%, which is higher than many of our peers.
And we're seeing a trend towards greater exposure to publicly funded projects in our building business, which should bolster future resiliency.
While Q3 2020 net revenue in the U S retracted slightly more than anticipated compared to queue to we're seeing continued growth and water and strong performance and environmental services.
The pandemic of had an unfavorable impact on buildings and his contribute to the slower half of some major transportation projects.
Net revenue grew nominally as favorable foreign exchange rates offset a slight organic retraction.
Continued strong performance in our UK and Australian water business are working new Zealand's transportation sector, and progressive recovery and core markets in our UK infrastructure business all contributed to a strong showing our global operations in Q3.
The impact of Carbonite team was most pronounced in our UK and Australia buildings and European Environmental services business.
Our mining business was also affected by pandemic related short term mine closures in Peru.
Not surprisingly, we are seeing more opportunities in the public sector than we are in the private sector.
I will turn the call over to Teresa now for a review of our financial performance and our outlook.
Thank you Glenn and good morning, everyone.
Adjusted net income from continuing operations increased 5% to $70 million in the third quarter or 70.6% as a percentage of net revenue.
Adjusted earnings per share increased 5% to 62 cents per share. This is largely due to a 9% decrease in administrative and marketing expenses at a 33% reduction in net interest expense.
Gross margin for the quarter decreased 7% to $479 million.
Is to pay down a revolving credit facility, which means that are 800 billion facility is currently largely undrawn, giving a significant dry powder to enter the pandemic and if I'd grown through acquisition.
As a result of the uncertainty created by the pandemic, we withdrew our of 2020 guidance in game, we remain committed to our strategic plan lodged in December 2019, However, destruction caused by the COVID-19 pandemic will likely delay the achievements of our targets within the original time frame.
Time, we're unable to step to revise timeline with a high degree of confidence.
To date, where reiterating our outlook for 2020 at that opening August. We're also providing are targets for 2021.
Targets assumes a continued gradual global recovery, but may not be valid Cherokee geography's experienced severe worsening of the pandemic.
In terms of our revenue expectations in the U S. We expect the step-down result in Q2 223 to continue into the fourth quarter due to the effective projects slowdown combined with the difficult downturn in activity related to the onset of colder weather and seasonal holidays for the full year, we expect U S.
Net revenues to be comparable to all those slightly below 2019 and native currency.
That's the same accused no dynamic to be a plant in Canada, which will result in Q4 2020 net revenues retracting relative to Q3.
Given the week outlook for Canada before the pandemic, we expect Denominal retraction in revenue for the full year compared to last year.
And blood, what we expect that Q4 2020, net revenues will be down slightly relative to Q3.
Our UK buildings practice appears to be more impacted bypass demichele ended headwind than anticipated.
However, we expect strong performance from our water business in the UK in Australia, and our transportation sector in New Zealand, which is largely offset the impact of project slowdown in the private sector for our other businesses.
We expected to result in 2020 revenues being comparable too although slightly below 2019.
Taken together, we expect 2020 net revenues that are comparable to all those slightly below 2019.
Alright within our operations out of our clients and then anticipated meaningful increase in the cost.
Benefits.
We also expect 2021 gross margin to be impacted by an increased volume of lower margin work on our legs midstream pipeline projects and like several of our lower margin multibillion dollar transportation projects, which are nearing completion.
Meanwhile, Edmund and marketing costs will likely return to the typical range of 37% to 39% of that revenue. This strange reflect a more normalized level of discretionary spending relative to 2020, but not a return to preach pandemic levels.
Do however, anticipate an increase in non discretionary costs, including insurance and then play group benefits associated with indirect labor as.
As well, we're increasing our investment to drive innovation and in our system to support our growing give us federal government projects.
We expect adjusted net income equal to or greater than 6% accent revenue as we benefit to lower interest expense and depreciation and amortization.
Return on invested capital is targeted to be equal to or greater than nine zero percent and respect to January 40% of our earnings in Q1, and Q4, 60% in Q2 and Q3.
We could you make to advance our strategic initiatives to optimize occupancy costs beyond those locations identified to date, which could result in the recording of police outset impairment non-cash charges that reflects the change in our plan is to utilize space that is currently under these.
With the long term benefit of reduced occupancy costs and increased earnings and cash flow.
As our analysis is ongoing or 2021 targets do not yet included.
I shall benefit from further optimization.
And again I note R charges do not include any assumed acquisition given the unpredictable nature of besides the timing of such acquisition.
Finally, our continued currently management of leverage we'll keep our net debt to adjusted EBITDA with dinner below 1.0 to 2.0 time, and we're committed to maintaining our triple be credit rating with that I'll turn the call us back to board for his concluding remarks.
Thanks Teresa.
We continue to execute well on our strategic plan, which we rolled our to our employees in the investment community in December of last year.
I want to thank our employees to their continued commitment to serving our clients and and helping them through the unprecedented disruption caused by the pandemic a.
Ah results this quarter are truly a credit to our people.
By keeping a tight grip on administrative and marketing costs, we continue to mitigate the compression of our gross margin.
Ah reshaping efforts in 2019.
Ongoing cost reduction initiatives and a significant reduction in discretionary spending during the pandemic continue to protect our industry, leading adjusted EBITDA margins.
We continue to invest in and develop innovative solutions for ourselves and our clients to meet the challenges posed by COVID-19 and to ensure that we emerge from the pandemic and even stronger competitive position.
We're also implementing strategy to conduct M&A activities by leveraging local resources, even more well travel is restricted.
And will utilize these strategies through the integration of cash months Ah small the strategic acquisition that we announced subsequent to the quarter.
Moving confident in the resilience of our business model and our ability to navigate the ongoing challenges posed by the COVID-19 pandemic give.
Given everything it sounds like you've done in the last year, including or 2019 reshaping initiative alignment of organizational structure continued focus on discretionary cost management and the staffing strategy, we put in place.
We're very well positioned as we head into 2021 and.
And with that will open the call up the questions operator.
Thank you if you would like to pose the question.
Star one on your telephone keypad. Please ensure the mute function on your testimony pushed up to allow the signal to reach our equipment once again.
One for any telephone questions.
First question today comes from Chris Murray of a television capital markets. Please go ahead.
Thanks folks good morning.
Maybe returning to your 2021 guidance. He just maybe we can take into this a little bit more can you talk a little bit about how the niche you believe it's going to be part of the impact and gross margin.
I guess, the the EBITDA margins coming into maybe a little bit lower than we thought and is there any color there would be appreciated.
Sure I think we caught all of that you're recovering from a little bit cough right. I think we got your question around 2021 gross margin.
And project made so so yeah, I mean I think.
Is that is that right.
That's correct.
Okay, alright, great. So I mean I think.
What we saw in 2020.
And really that good.
21 is.
Compression in our gross margin relative too.
The range is that we have historically.
And.
That has been driven by a combination of both.
Reduction in productivity, which is really hard to measure.
Is Julian too, but we do believe that there is there is some of that occurring.
Both from an archive archive.
This is a timeliness around which hour were able to.
We're able to conduct their work and have a responsiveness from our clients.
But there is also.
I'm going to have overall project mix and that has driven our gross margin gallon.
That's what we're expecting to see some continuation of next year.
Now my project is somewhat outside for us relative to our other projects still overall, Boston less than 5% of our total net revenues.
So as we've always said, we don't really have.
Any number of projects that are big enough to to really pushed in one direction or another buttons. One particular project and contract is larger than most and it is as a relatively low gross margin and so that as we move into next year becomes more prominent to Neil Brown.
Mix.
And it brings that gross margin down.
And around that particular project.
Besides this account as well.
Yes.
Cause of the nature of that work.
With.
The employees working out in the field.
There is virtually no admin costs associated with that project and so on balance is the EBITDA margin that is January is comparable I'm, probably a little bit lower over all of the rest of our project work.
The gross margin reduction is not indicative of what flowed through to the ultimate a different mind, so with that picking up steam next year as well as just where we are in the stage of our and there's a number of large transportation projects that are winding down at the end of that lower gross margin range.
Design I remember seeing that it's going to keep our gross margin around where it is currently over at work really hard to bring it up we think there is some opportunity to improve our gross margin.
But.
We're now seeing as you can see from the range, we put out there.
Seeing as right back to about 53% to 55% witches historically been the gross margin named we've targeted.
Okay. Thanks, and then I don't know what we'd like to take this one but I guess, there's a couple of pieces around the question around.
Occupancy and I guess first of all I'm going to be curious about your thoughts around how you two organization change that has gone through Covid and how you think about you know folks in an office setting and what that does to your footprint, but then what does that do to the rest of your buildings business and.
How are you guys thinking about that business longer term. So you know on the cost side of the savings for you, perhaps but then it's also you know how how offices get news in the future, maybe a little bit different as well.
Yeah. So.
We'll start off with the overall occupancy side and we we've.
We've seen and I think our industry overall has been based on some of the panels I've been all over the last couple of weeks that.
Across the board, we're seeing that utilization numbers are moving up reasonably well, but there's there's some concern or both be amount of productivity per per billable hour. So there is some benefit to having people together in the offices. There certainly is some business of from.
From a project perspective, particularly as you think are both junior and intermediate South.
Ability to walk by some of the office and ask a question.
Continuing to work given more efficient manner. So there is some benefit.
To that so as soon as we think about overall occupancy we've been serving our staff, we've been talking to other than the industry and.
As we think about occupancy go look forward when you begin to think they're both certainly.
A percentage of people in the office fulltime percentage of people and that would be the majority likely a percentage that would be in and out a couple of days in the office a couple of days at home, perhaps and then a smaller percentage that would work from home exclusively so we're thinking about that as we think about our longer term footprint, we're not coming out and making any.
Statements like we've seen from other than the tech sector that nobody's coming back to the authors or much less than 50% will ever come back to the office because we don't think that's that's the reality in the long term.
But that said you asked about the impact that might have our business.
Our buildings visits in particular, we do have a workforce group in our buildings business that that is certainly advising us as well as a number of our clients on these sorts of decision.
Decisions that holiday might reconfigure it offers perhaps if if those folks coming in the office three days three or four days a week at at home others, maybe those those individuals should not expect to have a dedicated work space for them. So they're looking at how do we moved from our.
Perspective, whether it's dedicated workspaces for people to to some shared or mortality type space.
And in terms of how you think how that might be a factor on our own buildings business certainly that is the commercial the office space segments of our buildings business has been the most impacted due to the downturn in the pandemic that at our hospitality to refer redesigning new multistory hotels and those sorts of things.
As we've talked of what we have to be a bit of a pivot.
Due to some of the activities way people are are responding differently E. Commerce work is up.
We're seeing healthcare work is up but as you saw it in queue trees or buildings business did retract organically again as they did in Q2, so while that pivoted occurring that healthcare at work that we're seeing in particular, there's a lot of health care worker big projects coming out in Australia and in Canada in particular.
That work is starting to ramp up you, so we announced the footscray, but.
I think the the rapid decline that we saw a commercial and hospitality, having been yet offset by the increase that we're seeing in healthcare E commerce and so on so we're watching a pretty carefully matching our workforce to the the type of work that's available.
Okay. Thanks, So I'll turn it over.
Thanks, Chris.
Thank you all.
Alright correction today couch I'm Jacob that's S. T. I D. C. Please go ahead you lines open.
Good morning, and I'm Gonna apologize upfront to pick up at a very Staticky line here. So I hope you can hear my questions.
My first question. It just goes back to the EBITDA margin target.
Maybe you can talk a bit about in a post covid world, where you actually see you.
EBITDA margin normalizing.
Sure Jacob.
The reality, it's hard to say.
But opposed Covid margin most like.
I see where we have been in our strategic planning is thinking about and napping as opportunities to and to look for EBITDA margin improvement and we still believe that those opportunities exist.
It feels a little bit like the.
The goal posts have moved.
As through the pandemic, whether it be shifts and I pointed to an employee benefits.
That's a step change.
The increase in cost that has of course being a a people company is pretty significant.
And things like that that it's hard for us to know where that settles down. When this was kind of a new normal level of costs that we are expecting compare or not.
And so there's a bit of back and forth on on this.
So again hard hard to really pin down where we think it's going to land posed pandemic.
But surely our efforts are around.
Continuing to to to strengthen argue percent biofuel very focused on it.
But I really felt that for 2021 and the range that we put out as in.
Realistic.
I was confident potion, but we're seeing from that gross margin genetic overall cost perspective, and so where does that takes us.
The pandemic is really tough to say at this point.
Okay.
Yeah, I guess some ideas.
Okay. If I go to comedy clubs mix also played into this as well and I thought it you know a normalization of next so much you can choose.
Change their as well post covid.
What happened.
Okay. Yeah, I'll just I'll just entered jacket I don't I don't know I mean, perfect. Thank you will always be a factor for sure but whatever it is that.
That means that permanently business 13 gallon I.
I don't think we would say that that that's the case I think we are adding an interesting period right now where regardless wanting large project that is clearly having an impact on Rosemary chandos known that we would anticipate anything of that size and with that have that kind of a margin profile.
And we can look into the future.
Okay.
My My my last question here.
Don D. He organic.
And when I look across patience lines.
Water skiing so.
Strong organic growth in the corridor.
Do some splints negative.
Can you talk a bit about what happened in the corner and how sustainable questions.
Yeah.
We were very pleased with a 3.2% organic growth, but just in Q3, and then or 10% year to date.
Particularly the pandemic.
A tough tough period initially we saw in queue to some of the.
Some of their opportunities retracted.
Archives move home as well, but they're back now too so we're seeing R. R.
We track on a on a daily basis, the the number of opportunities in the volume of the sides of the opportunities that are in our sales pipeline. Those numbers are back is sort of more normal.
Pre covid type numbers.
We're seeing.
A little bit more from the public sector than the private sector.
It's interesting that the the amount of work the amount of opportunities in our pipeline from one dollar value because never been this high before now I think there's a couple of reasons for that one is that the number of opportunities just kind of return to a more normal sizes a bit of it though too could be that.
Squeezing out the bottom some of those opportunities aren't being awarded quite as quickly.
But I think it's just it's positive for us to see you go that this is the size of opportunity to that or the overall volume of opportunities in the pipeline is.
Continues to rise so I do think that from what we're seeing right now Jacob that the the organic growth that number that we put up for 2021, they feel of alright, and again, that's absolutely do any significant stimulus because it's hard to predict the timing of when that might occur.
Okay, well, thank you very much.
Okay cigarettes.
<unk>.
Thank you.
Question today comes from Denmark.
Hey, Jonathan.
Go ahead to line okay.
Yeah, good morning, everyone.
Uhm.
To come back on via question on the the make that will impact 2021.
Wondering what drove the profit kabuki downward the the the large project that that you just mentioned and whether there could be other projects that I put in my pin plugged it mix in 2021.
I think the the Big project is Teresa refer to it as soon as I said, a big trend mountain pipeline Big Big job, we and we see well we've been wrapping up all over the last number of years 2021 is the will be the major year will will <unk>.
And the majority of our effort and received the majority of the revenue. So that's why I think that in 2021.
That has sort of an outsized impact on pulling down gross margin of it.
The impact of that will be lesser in 2022, and 2022, just because the majority of the work will will phase on so.
So that would be I think the bigger the bigger one.
A lot of that that would have the impact. It again it will be primarily of 2021 is that it should lessen in 2022, and we don't see anything of that size and lower margin profile.
Currently in the pipeline.
Okay.
But.
One one comment denwa around around 10000, I think it's important for.
It is there to get some kind of attention because of the sides and and because of the impact of talking on on our our overall gross margin, but this is a project that we talked about before.
Is it.
Only southwest contract workers and so this is.
Project that we are able to kind of up and down.
The date of workers.
Since the project and is not the case that there is.
A choice to meet made for us around competing projects and we are deploying our efforts towards this one project ask to the detriment of another whereas the choice of other projects that might have different margin profile. This is purely incremental for us and I think from that perspective.
I wanted to touch on that because I think it's important to understand tentative from an incremental perspective.
Probably the problem I return on our working capital perspective, so positive for us and so I don't want to leave the impression that this was the project that.
That we shouldn't be doing the same with dragon.
Dragon or gross margin gross margins important have a mattress, but there's so many other factors that we need to consider when we look at the work that we do in that range that was January and so from a return to respect in this.
This one is.
Is a good project for us.
Okay, that's great dollar, Frank and which respect to the potential with current members that you you might take two in order to reassess the the real estate or cost reduction initiative.
Just curious what would drive the decision is it purely a function of organic growth utilization rate than what could be the the the magnitude or do you see the potential impact we'd like to be in 2021.
Sure so.
It's going to cost friend, you'll you'll recall that business work that we appointed to in our strategic plan and so this is something that we had been analyzing for for some time now and certainly has been moved in the pandemic.
Gave us some real live data as to what was possible.
From from.
Reduction of our footprint.
For those go ahead said she knows and.
I think we need to resist the urge to add to then set this is our new normal and and all of our office spaces to reduce occupancy prostate maybe we need to get any understanding of flat is normal what is long term.
Occupancy what does that that kind of look like and so it will be driven by the work that we had done pre pandemic around what what is the appropriate amount of square footage per employee.
And with blending that with now.
Some new information around.
Can we as a full year expect brown.
Brown, having our employees in the office relative to one of our employees lives how much do they want to be in the hospital finding that right balance as well.
And then are there places where we've got nieces that are are.
May be coming to maturity within the next couple of years that we see an opportunity to to exit now.
As opposed to a manager so it's all of those dynamics that we're looking at what's the scale of it it's really it's tough to say at this point and but I think it's fair to say that we believe that there is a significant opportunity there.
Unfortunately, when you do these kinds of things being the accounting rules are kind of punitive it made strategic cabin non-cash charge.
Right away, but overall it should.
You're you're doing it too.
You're earning profile and your cash flow. So we think it would be a good tradeoff unique but we don't have to slide has an order of magnitude for Ya.
Okay. Thank you very much for the time.
Thanks, so much.
Okay.
The next question today conference credit that fan of Raymond James. Please go ahead.
Hi, good morning, Cuba.
I'm a bit surprised by your boredom.
<unk> I'm a bit surprised by your relatively muted growth expectations Bergen U S. Next year can you provide a bit more detail what's behind that alpha.
A number of things that I would wake up where you're looking at.
We do feel that there will be some infrastructure noticed that it will come forward and will continue to drive drive things, we're seeing some some good activity still in the water space, we see some good activity and transportation certainly power some of the renewables, we talked about solar and so on the building space is going to be.
Next year there as we as we continue to talk about that pivot from commercial that pivot from hospitality, we haven't seen as much of an uptick in opportunities and healthcare and the United States that we have in in Canada, and Australia, and so on and so I. Thank you.
See that from from our perspective on next year, there were were being a little.
Cautious and grill cautiously optimistic perhaps on things that.
We we haven't included acquisitions, we haven't included stimulus.
Think that's just sort of.
The future is a little unwritten, they're still and so we're we're taking a bit of a cautious wait and see attitude towards it.
Oh, that's good to hear I think I think it is a prudent way to go.
King of emanate from that standpoint, you given current condition and a.
A lot of moving parts out there but.
Are there any regions or vertical secure particularly attracted to right now.
We continue to to look for opportunities in many of our verticals work at.
As we've spoken about before in our strategic plan, we're really focused on continuing to grow in those non cyclic businesses.
Water transportation.
And so on and so.
And the buildings component that would be less cyclic there'll be like the healthcare components and so and so certainly we're looking for activity in those those groups. We continue to look.
Good opportunities I think still for some infill in Canada. We are looking in the U S and certainly we haven't changed our geographic profile. We're we're looking outside of North America is still looking at the UK with a bit of a cautious look too too Brexit in the short term looking at bits.
Some of the Nordics Western Europe, a bit and uncertainty down in Australia, and New Zealand.
Okay are you still are you still actively engaged in discussions with respect your man obviously there's.
Uncertainty around Covid.
Timing of transactions and things like that but you still comfortable and happy with.
The number.
Discussions you are having right now.
Yeah, a lot of the discussions interesting over the last for awhile.
I think repeatedly through to provide some color to that we saw a slowdown in activity March April timeframe, most people kind of look inwards to manage their own business.
The existing discussions the ongoing discussions that we're having a brief pause for those are really been reinitiate. It over the last several months and as soon as it also interesting to note that there's been a number of new.
Firms that are initiated discussions with us over the last.
Really month to six weeks.
Affirm that we've been having some discussions with just very very cursory, but.
Really not that big suffered during the third covid because a number of firms.
You know are continuing to do just as well now as they were before.
Instead of just looking at ownership transition and having a little bit more time to think about some of these things so I would say that the.
The discussions that we had ongoing pre covid have continued and we've initiated some additional new discussions over the last month to six weeks.
Upgrade color. Thank you very much.
Great. Thank you.
Thank you. Our next question comes out some type of <unk> K O R. N B C kept semi kit. Please go ahead.
Okay, great. Thanks, and good morning, just.
Just a little bit more on some of the commentary around specific and markets I think part of the U S market in order to some water activity there as well can we would talk about it sounds like there's a bit of a variance within the water market across geographies.
Can you provide a little bit color there on what you're seeing globally.
Sure and it's going to be attracted to end markets and just within the United States or sort of.
If you look at that from a larger perspective, we've talked about the U K U S, Canada, and Australia does that sort of where you were you thinking.
Yeah, just I think it was mentioned in the U S. It seemed like it might be a little bit softer, but yeah. Just globally, just what you're seeing it seems like you can still doing well just curious.
Yeah. So.
Looking at water overall certainly.
The UK.
Florida is a regulated industry in the UK continues to be driven by the EU directed and this is interesting that those are unlikely to briefly relax in any way.
After breakfast and seven is now well underway, where in fact aggressively hiring to continue to as we wrap up and of seven course, that's difficult during the pandemic, but.
So we'll be.
Been very successful and we haven't seen a drop in 2020 years in water in the UK Ah.
Australia New Zealand.
Got a couple of good framework awards ongoing.
In Australia, and I think that will continue to drive growth for us in the water industry through the remainder of 2020 and surveys of 2021 and then in the.
In North America water, we've had organic growth in water.
For the last five six quarters strong growth we saw it again in Q3 and we are.
Projecting continued growth organic growth in water.
2020, as well North America, there's a backlog of projects and the water space very strong.
And this could reacted in so many spaces.
And dominate really in North American a number of everything from Costa resilience type work to water wastewater treatment big water conveyance water resources project. So received continued good opportunities and water really going to all of our nature Geography's in.
For remainder of 2020 at into 2021.
Alright, Thanks, and then I guess just on the 20th and 21 commentary that you provided you know appreciating the fact that I'm in is not included in there I guess can you really comment on maybe the scale or size of potential transactions are you. Currently engaged we're just trying to see if there is potentially some neato moving opportune.
<unk> in the pipeline totally understand so uncertain given the backdrop for what kind of conversations are you having as a larger prayers are smaller players typically.
Yeah, we haven't really changed our philosophy, there, which is still to target those small to mid smaller to mid sized firms kind of less than a thousand people.
That's really.
Is our area of focus.
There will be larger ones that come I think in 2021, and we'll have a we'll have a look at them, but our primary area of focus is still on that small to mid sized less than a thousand people.
Space.
And then I think he made some comment or there's some commentary earlier that kind of health care workers picking up in some markets and not in the U S mail somewhat surprising can really shut some color on that region might be a little bit different on that front.
The Oregon, it's there's a lot of ongoing discussions still in the U S. But we've just seen less pursuit activity over the last quarter quarter and a half in the U S. And then we have in Canada and Australia in particular.
I do think that we will see it coming back perhaps there is some of these larger projects, where we're waiting to.
To learn more about.
You want any of the impact of any potential stimulus I might be coming forward.
U S also has more.
More private healthcare sort of operations down there. So we may be waiting just to see a little bit more how how some of these things shake out over the next quarter. So there is still a great opportunity. There. It's just that over the last quarter quarter have we've seen less opportunities come to market in the US then we have another locations.
Okay, Great and then just last one for me I think you mentioned earlier on this larger project, which it sounds like as a Tia Max the gross margin might be lower but there's less SG&A or discretionary costs associated with it can you really talk about what driving is or just the nature of the work you're doing there.
Resulting in Laura Jana.
Yes, So Theresa mentioned that.
Vast majority of the individuals that we have working for us on the job or contractors and so.
Their bills typically they they won't see the inside of a sand check office. These are folks who are hired specifically to be onsite working on that project. So.
So a lot of these the admin, there's there's really no marketing costs for those folks Lauren involved in when working on other proposals.
They often will bill a day rate.
For the work that they do their so there's really limited to noble administrative time, certainly no marketing time.
And have expenses are covered so there is there is.
There's really no none of those discretionary admin and marketing costs for.
For the most part that we would see with with other operation. So during well the gross margin on the work is lower.
Really there is you can never say, none, but there is very very limited.
Edwin and marketing cost of it so on the flip side, so utilization rates are virtually 100%.
Okay, great. Thank you very much for the color.
Okay. Thank you.
Thank you.
Our next question today account now and N as their online can think please go ahead.
Good morning, and thank you for taking my questions.
Mm entire conference calls on the back cover. These stated that there was some pricing confessions put in place and I believe the majority of those for short term in nature three to six months I'm. Just wondering if they have come up at all or are there further concessions and I'm just wondering related to <unk> increased competition are pricing pressure. Thank you.
Yes. Thanks laws. So some certainly some of those that were of shorter duration have come off.
Others will will stick for a bit longer.
But we factored all that into our forecast for the remainder of this year and next.
I'll look for next year as well.
In terms of what we're seeing to import this is always a price competitive market.
But we haven't seen some of these a the pricing pressures from from a competitive environment that we saw early on in the pandemic, we've seen a bit of lessening of that.
You'll see from other firms that you look at it in the space.
These companies are still doing fairly well. So this is the need to to continually beat each other up and continued drive prices down to secure additional market share. It has become less of a concern because of the pandemic is preceded setting like as I say, it's always a competitive market, but but a lot of us pricing.
Pressure that we saw the first couple of months of as people move home really has has come off to a degree.
That's very have call and then get secondly, earn M&A I know you can speak with.
To a number of questions on that we have not seen the number of transactions within the space I think <unk> with kind of one of the only ones in my coverage universe and just wondering you mentioned the various geography that you continue to target UK Nordic Australia.
Just wanted to confirm that there's not a higher probability emanate in Canada or the U S. Just giving location and proximity travel restrictions and then on that I'm, just wondering if you're comfortable with the ability to do due diligence from that for our the financial for the companies that you're targeting and related.
Integration.
Yeah.
In terms of where we are looking.
What's really important to us is that we're we're looking for a firm we have.
Solid press.
Presence from a sense of perspective, we have people that understand.
What it takes to to go through due diligence a source of firm was the cultural fit look like and we feel very comfortable with the leadership that we haven't played in.
In the UK Western Europe, Australia, New Zealand. In addition to the leadership, we have replaced in Canada, and the United States. So.
As long as we're in a location, where we have that strong.
Leadership, I think we feel very comfortable continuing to to to move forward and we have our having ongoing discussions really and all of those geographies that you that you mentioned then from so from the perspective of conducting due diligence and so on again are the are leaders in.
These various areas when you're doing a project due diligence HR accounting taxation.
We will have people on the ground, but will always be in contact with sort of are the groups that the group of people that leads that initiative just to ensure that we are out there right questions were pushing forward with due diligence appropriately so.
I don't really see that these travel restrictions at this point are really significantly inhibiting our ability to to move forward with our M&A discussions.
Okay. That's very helpful. In depth lastly for me I appreciate you, providing 2021 guidance, particularly in such challenging time and understand that there are a number of questions surrounding the outlets that does it just more of a clarification, just giving me David that organic organic growth target is kind of feeling right.
But then you're all set somewhat cautious just for my own purposes would it be fair to say that you would characterize the overall guidance as being realistic based on how things were sitting right now or perhaps somewhat conservative.
We we feel good about it but I think we feel it's realistic based on what we know now and.
We do feel comfortable with where we are we didn't we didn't want to put.
Are sort of our targets that we thought were an achievable. Because then that'll causes issues. All of next year. So I think these are realistic numbers that we feel.
Reflect our how we're thinking about the environment at this point.
Perfect. That's great. Thank you congrats on the performance.
361.
Thank you for our next question comes from Michael took home from T V security.
Ahead.
Oh. Thanks, Good morning, Uhm wanted to go back to the the description of a strategic initiative to look at the optimization of occupancy costs.
Teresa is this chick in terms of timing it sounds like you're sort of stolen in an evaluation or add an evaluation stage here and now you said, it's not included with no benefits included in your 2021 guidance from there but.
What is the timing for protection coming to some conclusions through this process and.
Then how quickly could you expect to see some benefits.
From that.
Well I think based on where we are.
It'd be realistic to think that in the next.
Three to six months.
We all know draw trying to conclusion and again because.
<unk> situation around work from home continues to be Blue head and we're trying to make a long term decision.
It may may take longer than we expected back very thousand 350 locations around the world total amount of data to crash through and a lot of them thinking around.
Let the appropriate.
Finding that that we that we.
You want to put in place so.
Our expectation is that it would be.
I would say that six month.
Period.
But with the economy, it could take longer than that as getting at 10, a change unexpectedly.
And if it is within that period in terms of it too.
<unk>, making process.
I know it takes time to to.
Get out of leases are those sort of rearrange things on that front.
What would be a realistic expectation for when you would start to become to see the benefits.
Well you know I think.
So.
What's interesting about the way the accounting rules work is that.
When you make a determination and establish.
Established.
Pretty friendly what your plans are around the use of that space.
And take that impairment charges right away and the context taken that turns right away and start to see and benefit through.
Sure occupancy costs.
Mostly junior depreciation and interest expense line items, but also to some extent in your G&A like that and you start to see that right away because you know kind of a new versions yourself for us at least so it is it is pretty immediate the cash Williams have could be slightly like an independent when you're able to to.
Easter somebody's that space.
Earning standpoint, even start to see that pretty much ran away.
Okay. That's helpful. Thank you and then.
Second question God I think you were speaking earlier and you mentioned that you can see the the opportunity pipeline. The awards pipeline is being very strong.
Could you thinking back to the last quarterly.
Alicia call there was some discussion about observing.
Some slowdowns any current projects and then new awards in the second half of 2020, so I'm just trying to sort of reconcile the.
The strength of that pipeline with the commentary last quarter about the pipeline I made a new award sort of.
Can be slowing a bit I mean, the pipeline I suppose could be very robust, but are you are you confident sort of in a conversion of those opportunities to award or or are there still some.
Pressures, giving me a are nowhere in in terms of.
That conversion.
Yeah, we have seen some sometimes some of the award process can take a little bit longer but yet you.
You can see from the three 2% increase in organic growth in our backlog in Q3, we have been converted goes so I think that we're getting back to a more normal cadence although.
It's still sometimes it in an environment, where all the the clients are working at home and can take a little longer to get all the paperwork down and move all these things forward, but again really just the fact that our our backlog increased organically by 3% in Q3.
Think sort of provide me some comfort that we are seeing that conversion from opportunities to backlog.
Okay. So I've been.
That makes sense I'm just wondering has it been it's actual improvement from your perspective in terms of the.
Relative to those comments you made last quarter about.
Slowdowns.
Slow awards like cause that type of bad situations sort of improved.
Perspective.
In order to get disconnected microlitic, it's interesting because.
My father mode over the over the next period of time, it's going to be one of flexibility.
I think if we looked at now the UK for the next month when the UK now gone into Lockdown I think we're gonna see now Luckily we've got all our App awards going in the projects are underway, but for new awards in the UK during the Lockdown for the next couple of months our next month.
Think it might be a little bit slower.
And Conversely, if we looked at Australia, where they just which is pretty active Australia, New Zealand work with our officer open. We're back Melbourne has reopened after they are locked out I would expect to see award in the Melbourne area that perhaps a bit of it's slower during lockdown speed up a little bit again, so I think it's gonna be.
It's hard to make a broadbrush statements at this point because the world is going to be I. Thank goodness.
Move forward lurched backwards move forward verse backwards.
Going to be some of the words that we've been using internally is just be flexible and understand that something that's going to happen faster something's going to happen slower but on balance we feel like we're on we're on the right track backlog is growing booked.
Butcherbird greater than one in each of our business operating units and the Quartersaw.
Pretty impressive.
But it's it's.
The future it has different the same way as we've talked about 2021, I think we're we're just being a bit cautious to make any broad statements because the world is getting a bit of an unknown place though.
Right that makes sense now I appreciate the fluidity and the fact that Richie stiffer spend.
So that makes complete sense just final question for me in the past and the discussion around the 2021 outlook.
There was some commentary about.
Looking at a meaningful increase in cost of employee benefits and I apologize if I missed this but.
Can you just explain to me and put a little more detail on on what's behind that what's driving us.
Yeah, you know I think what we're seeing is.
As soon as the pandemic.
It was interesting because initially people at home and kind of stopped doing everything by the time we're on the.
The use of.
Employee benefits has really increased pretty pretty.
Pretty high right and people are going to physio getting getting a next adjusted then call and get massages, they're getting all these things taken care of and importantly, taking advantage.
Is counting that gentleman emotional support that's always true employee programs and that is of course why those programs.
I believe what we're seeing now is the pricing into the programs for next year that is reflective.
I assumed hiring and.
People accompanying a that can have quite a quite a dramatic effect on us when the cost of those type of programs increase in so that's what we're seeing.
And last month is factored into what I think and the weather is currently I have no idea, but I know for next year.
A.
Increase.
Okay that makes sense, thanks very much.
Thanks.
Thanks.
Thank you for our next question comes on that same to check <unk> National Bank financial. Please go ahead.
Hi, good terms of the morning.
Alright. Thanks.
Just wanted to shuffle back to unplug, the commentary around the bill being about one.
Look at the dark like which is which is strong them organic growth on the revenue side, obviously Gibbs.
How should we think about sort of the the change in the burn rate or there was one really none of just timing, which is kind of impacting things. So I just talked to my question is how quickly can be see organic growth actually coming back.
Into Palm territory.
Given the backup sounds great.
Yeah. So we have seen that some of these projects are stretching out a little bit longer than they had it. So as we look into 2021 and are are sort of.
Low to mid single digit organic growth assumptions that we put forward there that sort of as as we as we've spoken with our leaders and the various business lines and the different geographies, that's sort of a number that is everyone feels pretty comfortable about certainly we see a group like water probably at the higher end.
Of that and other groups and different different positioning in the organic growth spread but.
So I think we feel pretty big Macs, a boat load of a single digit organic growth in 2021 based on what we see in the pipeline and based on what we've got in backlog.
Okay, but I I guess I mean can you crush boy, a bright kind of Q1 or Q2 is gonna be the first quarter, whether you received some appointment approach.
I think that as part of what we typically see from us seasonality perspective.
Q1 is always a little bit slower because certainly appear in the notice we don't have a lot of fuel programs, moving and and things. So I think what we.
And no one of course.
Q1, 20 was still frequent pre pandemic.
So that it could be a higher cost with where we get into the queue to we're looking at a post pandemic. So.
So we're going to see a.
While the revenues might be might be <unk>.
React as we would expect from a seasonal perspective.
From a organic growth perspective, as we look at Q2 21, we're still comparing to that higher Q1 hundred 23 pandemic calm so.
I think we'll probably see numerically reflect much better than Q too because we're wrapping up and coming off the lower post pandemic calm.
Yeah that makes sense.
Lastly, just.
Give us out of all the moving parts of the building side do you feel about the hub towns that you have a mob condition, specifically it yourself sort of a 12 preet.
Given the revenue opportunities.
You guys assume on the problem.
I guess my question is that you could give me.
So the consequences of itself.
Yeah that that group has been manage extremely well true through the pandemic and we've been matching headcount at different levels in the organization to available work throughout so I think we'll continue managing it very judiciously as we have but I don't see the need for any any.
More significant headcount reductions because it's been running very well throughout the pandemic.
Okay excellent. Thank you so much that's it for me.
Great. Thanks Max.
Okay that one I can say that the question and answer session I'd like to have that correct ticket today for any of the smell or clothing.
Okay, well, thanks, everyone for joining us on the call today, we look forward to continuing to speak with you about our future progresses.
A great day and stay healthy thanks very much similar.