Q4 2020 Stantec Inc Earnings Call
[music].
And.
Please standby.
Good day, everyone and welcome to scan checks fourth quarter, 'twenty and 'twenty earnings results Conference call.
On the call today are a core Johnston, President and Chief Executive Officer, and Theresa Jang Executive Vice President and Chief Financial Officer Shannon.
Ken if I can check invites those dialing in to view the slide presentation, which is available and the investors section at <unk> Dot com.
Today's call is also webcast. Please be advised that if you have dialed in and while also viewing the webcast you should mute your computer as there is a 2002nd delay between the call and webcast on.
The World has changed over the past year and Theres been a shift in priorities sustainable.
Development is now even more of a priority for government organizations and investors around the world and Thats why Im so proud of the <unk> was named the fifth most sustainable company and the World and the first in North America by corporate Knights.
Operating sustainability sustainably and good for our employees good for the environment and good for the bottom line.
With our continued focus on operational performance. We came into 2020 is well positioned and our focused execution throughout 2020 drove the best financial performance and <unk> 65 year history.
We've also laid the foundation for future earnings growth through the value creators of excellence people innovation and growth, which are the cornerstones of the strategic plan and we rolled out at the end of 2019.
Despite the disruption caused by the pandemic, we were able to deliver revenues that were consistent with 2019 as the result of the dedication of our employees and our focus on efficient project delivery.
And through solid project execution and exceptional cost management, we delivered a strong 16, 7% adjusted EBITDA margin.
Two of the facilitate distributed work.
Our strategy of informed by both the survey of our employees referred work arrangements and a detailed review of our entire office lease portfolio.
Our 2023 real estate strategy has two major components the.
The first component is the lease space no longer required by the business and.
And we expect this to drive an increase and of EPS of approximately <unk> 10 per share and 2021.
The second component of our strategy is to implement our flexible workplace model as leases naturally expire over the next three years.
Approximately half of our office space portfolio of expires over the three year period.
And with the further reduction and our occupancy footprint, we expect and increased EPS by an additional 25% to 30 by.
By the end of 2023.
And from a square footage perspective, and this translates to an approximate 30% reduction and our existing real estate footprint by 2023, So and you can see why we're so excited of what this initiative and supports our objective to design the workplace of the future. It provides our employees with the opportunity for a more flexible work arrangement and that helps too.
To achieve our sustainability objectives, and it delivers real value to shareholders and an EPS of <unk> 35 to 40.
Over the next three years.
Our real estate strategy will play an important role and lowering office based emissions and support of our commitment to achieve carbon neutrality for 2022 and net zero for 'twenty three 2030.
The efficiency of our operations, our profitability and our sustainability are all of woven into our long term strategy.
We consistently come on on top and sustainability rating across multiple independent third parties.
In addition to our corporate Knights ranking Sandvik is rated at the climate meter with and in line of score by CDP and we are the only firm in our space and has achieved that ratings for the last three years and this illustrates the sustainability isn't something new percentage and it's been part of our DNA for decades.
Our ISS ESC quality score continues to outperform our peers year after year and are sustained Olympics.
Rates of our ESG score at low, which again is top of class.
Now turning to the performance of the business.
Revenue held up quite well in the United States for both the quarter and of the year, we saw modest growth and our water business through expansion efforts into our Pacific and U S market in particular.
Growing urban populations and climate change are resulting in significant water scarcity situations and as an example, we estimate of spend of 15% to $20 billion over the next 15 years and southern California alone to address the water scarcity.
In October we announced that we are leading the peer water San Diego program on multibillion dollars of initiative to supply of local sustainable water San Diego of one 4 million residents.
And in addition to this standard get the prime consultant for the treatment related works on the Metropolitan water district of Southern California's regional recycled water program.
And we've also been selected as a key sub consultant on the senior of Los Angeles High period of 2035 program.
And that is the only consultant with a leading role in these three ongoing flagship projects.
Growth and our energy and resources business was driven by a continued ramp up of renewable power projects.
And we see significant opportunities percent ex energy and resources and environmental services business going forward with the fit with the U S officially rejoining the Paris climate accord.
Partly offsetting this growth was the continued wind down of several major transportation projects. In addition, our buildings business is still being impacted by the pandemic, but we're beginning to see growing momentum and the pivot towards e-commerce healthcare and other sectors, including the U S Federal government.
Our business development pipeline was very active during the fourth quarter and in addition to the pure water contract that has touched on we also announced that we're the prime consultant as part of the <unk> team for six public schools and Maryland, We were awarded the design and rehab of nine key bridge projects and earlier this week, we announced the lead designer role for heavy repair and overhaul.
And the design build projects for the Washington Metropolitan Transit Authority.
Revenue generation and Canada was solid due to our strong focus on our clients and account management programs, we saw organic growth and our water and environmental services businesses during the fourth quarter, partly offsetting a contraction and energy and resources buildings and infrastructure we.
We've seen a growing focus on water infrastructure, particularly around irrigation and improved water management and our teams of recently and have recently been awarded two large irrigation projects and Western Canada.
We signed three major hospital contracts and the quarter, including our role on the St. Paul's Hospital project, and Vancouver, demonstrating our growing momentum around the pivoted tenant the healthcare currently taking place and our Canadian buildings.
We also announced our participation in the 360 trends and alliance.
<unk> hundred 60, <unk> joint venture during the quarter, which will oversee and estimated $28 5 billion and capital investments for Toronto trend and infrastructure.
Organic growth and our UK and water business was driven by the ramp up of the App Dev and frameworks through 2020.
We've increased our market share of the five plus year frameworks, meaning winning most of the key water utilities and the UK, including tens of water, which is the largest UK utility and serves roughly 15 million customers.
The <unk> framework through secured total approximately $120 million of year across the UK business, securing our backlog of 2025 and beyond.
Australia and New Zealand have also begun to adopt the service delivery model and the 2020, we won key programs with the utilities like Sydney water, Melbourne, and water and Brisbane water, and Australia, and with Christchurch, Wellington and water care and New Zealand, securing our backlog of 2023 and beyond and totaling roughly $70 million per year.
Transportation stimulus funding and the UK and review and are fueling the infrastructure business and these regions and.
And our recent acquisitions of strengthened our ability to to participate and the key projects.
In addition growth and our global power and dams and mining business also helped to offset of pandemic related weakness and our global environmental services and buildings businesses.
During the quarter, we signed several projects funded by the European development agencies, including a contract for the conceptual design of the multipurpose support on care of 90 Island and on the West Africa Regional transportation governance projects.
And were also awarded the summer set down improvement project in Queensland, Australia and with this award. We are currently working on virtually every major dam improvement project in Australia.
Overall, our business performed very well and 2020, and we entered 2021 with growing optimism, thanks, and the strength of our client relationships solid backlog and the positive trends impacting many of our business operating units.
And with that I'll turn the call over to <unk> zone for a review of our financial performance and our outlook.
Thanks, Scott and good morning, everyone.
Net income from continuing operations from the fourth quarter increased 28% and 67 million, which represented seven 8% of net revenue adjusts.
Adjusted earnings per share also increased 28% of 60 per share.
Q4 earnings exceeded our expectations of net revenue generation slightly stronger and discretionary costs significantly lower than anticipated our solid adjusted EBIT and margin of 16, 1% was bolstered by approximately 50 basis points as the result of of the recovery of claim costs on a historical projects and <unk>.
Excluding the nonrecurring items adjusted EBITDA was very solid, reflecting our success and mitigating COVID-19 impact on organic net revenue growth and gross margin.
Also on Q4 and strong cash flow generation led to lower than expected interest expense.
And for further augmented by the favorable resolution of certain tax matters recorded in the quarter.
As Greg mentioned earlier, we initiated our 2028 real estate strategy and as a result, we recorded a noncash impairment charge of six.
The $6 7 million.
Turning to full year 2020 results adjusted net income from continuing operations increased 11% to $249 million in 2020, or six 8% as a percentage of net revenue.
Adjusted earnings per share increased 10% to $2 and 22 per share.
Earnings per the year exceeded our expectations on the strength of our fourth quarter performance and the non recurring items previously discussed, which collectively contributed approximately 10% to our ATM.
As the result of reduced discretionary spending adjusted EBITDA increased year over year to $579 million.
Adjusted EBIT and margin increased to 15, 7% from 2020 compared with 15, 5% in 2019.
The claim cost recovery recorded in Q4 contributed approximately 10 basis points to our 2020 adjusted EBITDA margin.
Our balance sheet remains in great shape as a result of strong cash flow generation and cash management, we closed out the year with net debt to adjusted EBITDA below our targeted range at zero of <unk> seven times.
Days sales outstanding was 75 days at the end of the year of four day year over year reduction and it's worth noting net over the last two years, we've reduced DSO by 13 game and while there will always be factors outside our control that can move DSO in either direction and much of the improvements over the past two years.
And the result of our increased focus on timely billings and collections as well as proactive management on contract payment terms.
Moving on to the liquidity and capital allocation, we generated $191 million and free cash flow in the fourth quarter.
Annual free cash flow increased 60% year over year to $440 million.
During the year, we returned $148 million to shareholders $68 million here of the payment of our dividends and $80 million through share buyback.
On October eight we strengthened our capital structure of our inaugural bond offering issuing $300 million of seven year notes and.
We continue to focus on disciplined capital allocation.
Okay, and the return of capital to shareholders with the opportunities to deploy capital towards the acquisition activity.
Yesterday, we announced and therefore, it and increased our dividend by six 5%, reflecting our ongoing confidence and our long term profitability.
Our performance in 2020, along and the progress of our strategic initiatives have increased our earnings expectations for 2021 from the outlook. We established in November 2020, the main driver and the cost statements low Dyer from reduced occupancy costs, which as Gordon mentioned will add approximately 10 seven.
Per share to 2021 EPS.
This will completely offset the absence of the 10 sales we generated from the nonrecurring claim costs and past recovery in 2020 and.
And we expect to grow 2021 earnings further driving two and overall year over year increase on a percentage basis in the low the mid single digits.
We're also to day, increasing our 'twenty, one 'twenty 'twenty, one targets by raising the top end of our adjusted EBIT and margin by 50 basis points to 16%.
And this was driven by our continued strong operating performance and our expectation of that discretionary spending and lower the longer given the current travel restrictions. However.
However, given the ongoing uncertainties associated with the pandemic, we've lapped the low end of the range at 14, 5%.
We're now expecting adjusted net income to the greatest on the six 5% of net revenue of 50 basis points increase and our targets and we.
We've also raised our adjusted return on invested capital target of 50 basis points to be greater than 95%.
And with that I'll turn it back to Greg for his concluding remarks.
Thanks Teresa.
Through 2020, we made excellent progress on the strategic plan and we launched in December 2019, despite the challenges posed by the pandemic and I encourage you to review of our annual reported for a more in depth review of our key accomplishments.
As Theresa and I spoke about earlier, our 2023 real estate strategy with the goal of reducing our office footprint by 30% over the next three years will result in a material increase to net income and EPS growth.
We're also affirming today that we intend to meet our long term financial targets is centered on our strategic plan by the end of 2023.
We entered this year with a solid backlog of $4 4 billion and expect to return to low to mid single digit organic growth over the balance of 2021.
We're back into full swing of our M&A program and we're ready to continue down this path of 2021 with the benefit of our strong balance sheet and a robust M&A pipeline.
I want to close by thanking our employees for remaining steadfast and through the pandemic.
It's their hard work and continuing to execute our strategic plan and serving our clients. The drove record earnings and 2020, while achieving best in class sustainability rankings.
And we're going to continue to lean on our core values of doing what's right and putting people first as we move forward into 2021 and beyond.
And with that we'll open up the call of the called the questions operator.
Thank you. Thank you I'd like to ask the question on the phone lines today and you can press star one on your telephone keypad. If you are on a speaker phone. Please make sure you're on mute option is turned off to allow your signal for each of our equipment.
And once again, everyone that of star one on your telephone.
We'll take our first question from Jacob bout with CIBC. Please go ahead.
Good morning.
Good morning, Jacob how the question other.
A question about the the plan to reduce the office footprint.
Scott.
Have you pulled your employees to to understand other feelings on it.
The goal getting a little tired of working from home switch in terms of Sandler.
Yes, Jacob and factories.
Survey of our employees of couple of times through the pandemic and why we found that their thoughts on <unk>.
And working at home versus the off of this changed a bit throughout early and the pandemic looking back in March and April as we talk to people what they thought they might want to do the response was this was great. We want to work from home forever.
But what we found that we didn't think that that would be an accurate reflection of the long term perspective, and so as we've talked to folks throughout other than the industry as well and we found that when people are looking for the little bit more flexibility, where they could perhaps be and the office a couple of days of week, but also have the flexibility to work at home and one or two days of week.
And thats sort of how we're redesigning our office footprint and we have it.
Our workplace design group and our buildings group within sat and Tech and so we're working very closely with that group on what we might do within the.
Our company as well as advisors and other clients and so we really think it's important to half to half of those people not work at home exclusively because we are of very collaborative design presence and so it is important for us to still be able to bring people together. So as we looked at our longer term footprint with a certain percent still being full time and the office.
It's another percentage of being part of time office with maybe some flexibility to work from home once in awhile, but there will be a small subset that we will allow the work at home full time and based upon that designed us where we looked at that roughly a 30% reduction and our and our occupancy footprint.
And each of those points of impact from 2021 important part of the 40 over the next two years.
Yes, the 10 cents as part of the 35 to 40.
Debt, we expect over the next three years.
Okay.
My second question here is just on.
The the longer term targets you have of interest.
The net revenue CAGR of greater than and temperature.
So clearly M&A is playing a key role here.
Talk a bit about how your pipeline of smoking.
<unk>.
And how.
Valuations looking and assuming and this market multiples of getting a little stretched.
Yeah. So the on the M&A pipeline is very very robust and you can see of course of we've mentioned we closed three announced another one here just in the last three or four months.
What we're finding is that while the pipeline was robust going into the pandemic slowed a little bit as we've talked about before through last March April of little bit into June, but really of strengthened and we've reinvigorated and all of the discussions that we had ongoing previously but there has been a lot of new conversations that we've initiated really just over the last.
A couple of couple of quarters, so pipeline very very strong across all of the geographies, where we're where we're active.
It's interesting initially and the pandemic re and hope that we see some.
A reduction and multiples.
And certainly we haven't seen that in the firms of we're talking too we've seen multiple stay reasonably consistent you've seen some of the larger public transactions that have been announced recently that had higher multiples, but we really haven't seen that debt.
Significantly the number of and increase in the firms that we're talking with.
So the Saudi and where are those multiples and the focus towards small and midsize.
Yes.
One of the firms of we're talking to we're seeing the bulk of the multiple is still about six to nine kind of times range and.
And.
Our main focus is still and that's that sub 1000 person firm because that gives us the opportunity to select the exact type of firm, we want and the geography that we that we wanted the specializing.
That said our balance sheet is very very strong.
The our organization has really matured and the various.
Footprint outside of North America, where residents and so we are as larger opportunities come along and we would absolutely look at some of that I wouldn't call. It a of change and our strategy. Our strategy is still not settled and personnel and less but I think we know we've got a little bit more flexibility to look at some of the larger ones. If they are appropriate for.
But what we see for our long term growth.
Okay.
Thank you I'll leave it the.
Great. Thanks Jacob.
We'll take our next question from Chris Murray with <unk> capital markets.
Thanks folks.
Good morning, and so just maybe going back to thinking about the real estate part of the equation.
So just to confirm so you are talking kind of 25 to 35, a couple of years that Thats correct.
Yes, yes, absolutely and as we expected about 10 sales in 2021 and on top of that 25% to 30.
By the end of 2023.
Okay and on top of the Okay, sorry, and then I'm just trying to understand the cadence of it.
And then just.
About debt there.
The earnings piece of it the Theres also.
I guess the.
The liability side of the leases can you talk a little bit about how this plays into your longer term return on invested capital metrics.
Yes.
Absolutely will lift our return on invested capital because the.
Ability to redeploy capital towards the other things that otherwise would have been and servicing these nathan.
And what the opportunity.
Part of the opportunity so.
With that.
And current described there are two of the kind of two pronged to the strategy.
One is we've looked at space debt that we have determined.
Need at any longer and Thats, where we took an impairment charge of the all of those leases at the sort of been find all of the models and we took half of $67 million impairment charge in the fourth quarter.
And so now as we go forward out why and we don't have to incur these costs through our P&L and two of the opportunity to sublease the space both provide sublease income to offset.
And then the second element is.
Again that the.
The opportunity for us and that roughly 50% of Empire existing leased space is naturally going to expire over the next three years and so that gives us a really great opportunities and then too.
<unk> do not have to impair about the space, but as they expire to be able to change and reduce our footprint going forward and so that's where that that opportunity for the 25% to 30 and it comes from over the next three and Gary. So those are really the two key components and the way that the.
And the math works.
Okay.
Now that's interesting.
Just I guess the other question I have for you and just the heat about your longer term net revenue grow the interest and part of the Premier of CAGR number.
When you change the timing.
Is that it moves around but if I go back historically and you talked a little bit too of pleasant to an earlier question about that thousand person and I mean, the word years and you guys were doing in 15, and 16 acquisitions of year on various sizes and then a platform of every couple of years.
Is that how we should be thinking about.
The way you think this unfolds over the next few years to hit that number.
Yes, I would think so Chris that's sort of we're going to continue with our we call it back to sort of the base hits, the the and filling up of the the right firm and the right locations and then when the timing is right. The opportunity is right. We might look at doing something a little bit larger as you say from a platform perspective.
Okay.
And Thats all my questions I'll pass the line. Thank you very much.
Thanks, Chris.
And we'll take our next question from Frederic Bastien with Raymond James.
Okay.
Hi, good morning.
Quick question for you are you comfortable with the high.
Can you can you tell me if you're comfortable with the relative weighting of your five operating units right now and I believe.
And infrastructure is close to 30% and it's got you've got and environmental services and energy at.
At the 15%.
And this sort of a.
Place, where you're comfortable being.
At the end of the equilibrium or is there are there opportunities to grow some of these.
The business units further alright on a more aggressive pace on a go forward basis.
Yes, I do.
Do think of it in particular, our water business, which is currently about 21%. We will see continued opportunities for growth of both from it on the organic perspective for the year, our water business grew organically by just a little bit over 4%. So it's going to continue to grow organically, but I do see.
Continued opportunities for us to invest and the water space from an M&A perspective, so I see particularly that area. Our environmental services. We're continually looking for ways to continue to grow that as well so I think and over time the type of firms that we're looking at our water firms environmental services firms and <unk>.
Also a little bit into transportation and buildings. So I think those youll see those as being the primary areas of focus for us so over time.
I would like to see the water business and the environmental business grow a little bit more and.
And so we're putting a particular focus on those areas right now.
Okay, Great that's helpful and.
And in terms of high level.
The priorities for this year would you would you mind kind of off.
And maybe flagging of highly at your top three priorities.
Sure.
After spending a couple of hard year is looking at the back office and getting the and sort of the back of house taken care of from a organizational structure perspective, and leaving the organization and so on 2020 is really of the year, where we're focusing on growth of 2021 and and so.
So we're really focusing on our organic growth programs and we've had great success over the last couple of years, we're going to continue to focus on that we're going to continue to focus on M&A.
Because as we've talked earlier, our balance sheet is in great shape, we've got the maturity and the appetite to continue with that and then also we want to continue to focus on our innovation programs that we have just rolled out in.
And you're really in a formalized way at the start of last year, we see that as a differentiator as we move forward. Both in terms of new service offerings, New technology offerings that we can bring to market. So growth. The innovation absolutely. We will continue to focus on the back of backup house of operational with without question, but that's always there.
But I think you'll really see a focus for 2021 for us on growth and support and innovation.
Okay, Thanks, Cort and great to hear.
Great. Thanks, Peter.
Our next question comes from Mona Nazir with Brian Chin Bank. Please go ahead.
Okay.
Good morning, and thank you for taking my question.
Firstly and financial point of view our debt.
Good morning.
For the Cleveland and just thinking about what the organic contraction that you had in the quarter and even the year. It's ahead of the number of peer on it.
Spike of the vitality and cleaner and.
And our energy and just wondering looking back what do you think help shield of insulate the bad debt.
Mentioned in the opening remarks, we will hospital contracts the morning, and just wondering if you had to pivot the business to me.
And areas and bulk of expertise and other areas of really what the state of Marc Thank you.
Yeah. So thanks, Simona I think the real focus for US was on our organic growth programs.
And we've really been focusing hard the last couple of years, but really through 2021 2020 as well so thats not.
Not only did our backlog grew organically by over 3% through the year, but I think that also was the big driver why are our organic retraction was.
One 8% for the year.
But to your point about pivoting I think thats exactly right as well and nor do we see that as evidenced in our buildings business.
And the the.
And the commercial work that we're doing restaurant fit ups new retail.
One of those projects got pushed off to the right, but we really pivoted to healthcare, particularly in Canada, and Australia, and we pivoted towards e-commerce facilities and doing a lot of great support and we have some global MSA and master services agreements with zone with the with those firms so I think of.
It's really the focus on organic growth through we've got a number of solid programs. Our account management program. We are of corporate campaigns program of strategic growth initiatives program. So I think those are very very important and we will continue to drive growth through 2021.
Okay. That's helpful. Thank you and one of the close of the MD&A the head count of teams and their of total 2000 I joked on the cat.
And from tier and have you taken and that's the right type of uplift and any areas or other plans to and the future and just related to that how is utilization.
Yes, so from a head count perspective, absolutely we've had to manage our head count throughout the year.
We've.
Address that proactively and managing utilization, we actually saw our utilization rates early in the pandemic spike by 3% to 4% and then the sort of come down to more normal type of seasonally adjusted levels, but what we've really tried to do in addition was to not go too far from a head count.
Reduction perspective, because we see the.
Work is there as you can see from our growth and our backlog, we see the opportunity for good stimulus on a from a number of different government locations coming here in 2021, and so as the result of that we wanted to make sure that we have the right team to drive us forward into the future as well.
Okay. So would it be fair to say April of that and right pricing get occur and the Europe, because the 2019 head count of 22 thoughts on the cloud so any of you might tighten that get of crime.
I think offset by M&A.
Yes, I think Thats, a fair a fair statement loans.
Okay, perfect and just lastly from me and going back to the and then it just really more of our current from H and I understand you have made a number of smaller tuck ins and <unk>.
Think about a number of the new compensation occurring the targeted firms, but given current leverage level is it feasible that we could see and number of medium size transaction call. It 4% to five transactions kind of simultaneously or within a short or try and frame that could bring in a potential combined 3000 people.
All of our fiber to the transaction there would be that the outside of the targeted pace.
I think our balance sheet will certainly support that but it really all depends on the opportunities we have to find the right firms and the right geographies that are selling for the half the rate of motivation to to sell so.
And if the opportunities were there we certainly could drive that forward, but we're not trying to hit a particular quarter, we want to stay continued.
To be disciplined and our M&A and our M&A strategy of what were paying so that we can see that debt long term accretion to our share price but.
If the right firms come along and you're right we've got the balance sheet the.
The room to do it.
Okay perfect.
And of the viral load.
Okay. That's great. Thank you.
And I'll leave it there thanks Mark.
Thank you.
Our next question comes from Michael <unk> with TD Securities.
Thanks, and good morning.
One of nickel.
My first question relates to your organic.
Revenue growth guidance.
You've talked about or you reiterated your expectation for low to mid single digit kind of organic growth and 2021, which is consistent with what you had talked about last quarter.
I'm just wondering how we should think about that as we as we progress through the year, including whether or not and we should be thinking about year over year organic growth and the first quarter being negative or is that is that of positive.
Yes, that's exactly where our third plus or as well Michael you know Q1 of this year is comparing against the pre pandemic Q1 of 'twenty. So we do still foresees somewhat overall organic retraction in the in Q1, but really not the low to mid single digits and sort of where and we expect to be with.
Through Q2, three and four particularly loaded towards the back half, but that's sort of on an annualized number that we would see in the low to mid single digits.
Okay perfect. Thanks, and then.
And just just sticking with organic growth.
And you provided some detail around your expectations for your geographic regions.
On that front can you talk a little bit about the thinking behind the muted organic growth in the U S.
Your guidance doesn't incorporate in the U S infrastructure that may come by.
It seems as though expectations for overall general growth and the U S are fairly upbeat for wondering just.
What's driving the muted outlook, there and I know that isn't any different than you talked about last quarter, but just some thoughts there and then secondly, any commentary on.
The growth expectations by business operating in it as well.
Sure.
The U S. We were just sort of being consistent and cautious we do believe that there will be on.
U S.
Infrastructure stimulus package coming out the.
The industry thoughts were that the president and biting would announce that in February there was some speculation and you might have done it yesterday, but I think we're working through some other and he is working through some other things first of course, so we do see that stimulus program coming but again, there's probably going to be.
It could be a quarter or two lag from from when it's announced.
When our industry in general will begin to start generating some revenue from it. So I think we're just being the cautious there.
And we look at the various.
And the various business operating units to your second question.
Buildings overall as an example, the <unk>.
Commercial market remains challenged but we've really seen this pivot the healthcare coming on in the building segment and we talked about the same policy.
<unk> and in Vancouver, but will also awarded to.
Two additional projects with Trillium health partners, there and the Toronto area on the Mississauga Hospital, Queensland, Queensway Health Center, the Footscray and hospital in Australia. So we're seeing a lot of work and health care and buildings, we're seeing a lot of pivot to E Commerce and has.
Many of us and <unk>.
People are buying more and more things from E. Commerce. So we do see some goods.
Tailwind for building coming, particularly I think we'll see that revenue generation coming into the second half of the year on these projects get wrapped up.
And our energy and resources.
The business, we're seeing great opportunities in the pivot to renewables.
Solar and wind hydropower, and so on and lots of good opportunities, there and and of course, because copper and iron ore prices are so high and although its Chris.
Really good tailwind for our mining business.
And the environmental services business and <unk>.
And 'twenty was a very solid year for that business revenue was roughly flat from 2019, but we're seeing really solid backlog of that group and great opportunities to.
And to come see the see that happening as well.
Just finishing offset of the walk around the business operating units.
And the infrastructure our transportation market is very very strong and and of course, we see that grouping of net beneficiary of various stimulus stimulus programs that will be announced the around the globe, but we've got a really solid backlog into 2021 already for that group.
And of course, our community development group as part of infrastructure as well and we see the housing market strengthening in both Canada and the U S and it was interesting talking with the the lead of one of our land development client zone recent.
The recently he described the market and the southern U S is almost frothy because it was so so so busy.
And then finally looking at water.
Had really solid organic growth in the water segment and 2020, even despite the pandemic backlog really strong I mentioned, a couple of irrigation projects in Canada.
Our long term projects and the UK the long term frameworks of awards and the Australia, New Zealand and certainly.
Some of the opportunities and southern California, some great opportunities and water and there's a lot of it when we look at some of the emerging technologies and water of DFAST and other advanced treatment.
Already leading the charge on a lot of those things. So we see opportunities of water scarcity and reuse and close the resilience and responsive the sea level rise so and generally.
Kind of look across the business, we see positive long term prospect and and virtually all of our opportunities and just going to be a slower ramp up and some groups rather than others. So that's where we feel pretty comfortable with our over the year low to mid single digit organic growth.
Great.
Very good color. Thank you Cort.
And just sneaking one additional question maybe this is for Teresa just on the real estate occupancy cost savings opportunity.
And you talk about where those savings will actually show up on the income statement and just wondering if this is all through and the minute admin and marketing and and if that is the case.
And a bit surprised that there was no adjustment to the admin and marketing expenses as a percentage of revenue guidance, which is sort of a 37% to 39% range.
Thank you for asking that question, because the SaaS and Thats really important one that we should have highlighted.
The unfortunate part of <unk> is that this is really going to show up below the EBITDA line and.
And now that all of the on leasing activities get reflected in depreciation and interest from <unk>.
Line items so.
And is that theres going to be a minimal impact on EBITDA on a post <unk> 16 basis, but it does drop to the bottom line. It is still positive free cash flow ultimately, but unfortunately does not really move the needle on EBITDA.
Got it thank you.
Great. Thanks, Michael.
We will take our next question from shallow had kind of with RBC capital markets.
Thanks, and good morning.
Building off of the last question around the savings over a three year targets I guess, how should we think about the.
And the drivers of the EBITDA margin improvement against the gross real estate like it's a relatively large contributor but on what else is driving I guess the EBITDA margin improvement is the sort of below the line that we think over the next three years.
Sure.
As we mentioned in our and our 2021 the.
And on some of that is going to be driven and we expect side and continued discipline around our discretionary spending.
And we had expected interest start to ramp up a little sooner in 2021 balance.
We plan to the ongoing travel restrictions means that we will likely be able to push that out a little bit farther.
The year, if not beyond that we've also debt, though that we don't intend to go back to the level of spending that we were incurring pre pandemic and we've got all of these fantastic collaboration tool.
So we are without the need for travel can.
Can be addressed true.
Virtual meetings.
And a large degree so the directionally given the seasonal is that when things do open up.
We expect cost savings to continue let's.
But certainly not to the level of that we've enjoyed in 2020 the.
And that we continue to look at our ability to leverage our India operations.
It is.
<unk> delivers just.
Excellent delivery and for us on.
And both the design side and in our back office and so.
So we are driving and commitment through our business of.
And for how we can increase our footprint there we're still currently and that 400.
People range and the there is a lot of opportunity for us to scale that up and and so that and that is really effective and beyond cost per from just an efficiency standpoint of having that 24 hour clock.
And to be able to use with the time zone differences.
And beyond and that balance is.
Continued focus on discipline.
Leveraging our Oracle backend systems that we continue to integrate all of our operations and again drive the PC.
And those are really the main things that will be focused on.
Okay. So I guess some of the stuff.
Discretionary side that is growing up and some of that may be offsetting the real estate savings. If I look at the net revenue CAGR of greater than 10% and net earnings CAGR or EPS CAGR of about 11% of our more I guess is there.
And puts and takes of the real estate sales, maybe being offset by some of the the discretionary spend and you were mentioning on might come back.
Yes, I think so and I think thats and Thats a reasonable assumption.
Okay, Great and then I guess the supplement.
And the three year targets. The one that we put out of Mexico, and a few years, where the did mentioned the organic growth CAGR on there as well because I know you mentioned and the 2021 organic growth will be there I guess, how are you thinking about 2022 and beyond is of the maybe the lack of visibility that's keeping you from putting the target are you thinking about organic growth over that three of period.
We've always talked about our net revenue CAGR of greater than 10% sort of as the the number we haven't really split out of organic growth.
And we typically provide our our target for organic growth for the current year for 2021, but we haven't really looked at providing organic growth numbers for 2022 2023.
Little bit of the.
And my Crystal ball isn't completely clear as I'm not sure anyone visible what's going to happen during the latter part of the year when the opportunities will come but.
And what we've seen even through the pandemic is any indication.
And we're just going to keep focusing on our clients focusing on the various organic.
Gross programs, we have and and hope to continue.
And with growth in that area in the years to come.
Okay, Great and then just kind of one last one on and I will get more on Canada I guess.
And based on what you're seeing coming out of Q4 with the equivalent commodity environment and what's your kind of directional view on some of the end markets specifically in Canada debt.
And there is demand picking up directionally as of the commodity environment. The crews on western Canada or are people sort of taking a bit of a cautious view on until they have a bit more on visibility into the the Korea.
Yes.
Great Great question sort of Directionally on some of the things we did talk about and are building segment and some of the health care projects that we brought the St. Pauls two of Trillium. There is in Toronto and so we're seeing those health care projects continuing to move forward on the building side e-commerce as well.
Solid opportunities and transportation.
As well again, we talked about our our work on the the $28 5 billion.
The public transit initiative and in Toronto, which will provide good long term opportunities.
And as well water and we just talked about those two of water irrigation project and we recently were awarded here in Western Canada, and Lindbergh significant projects that are in.
And part funded by by some of the recent.
The last fall the government of Canada the some.
Some of the infrastructure stimulus programs that they talked about so we see good of Scott opportunities and.
And and water as well environment looks good for us and and really.
And from an energy and resources perspective are the work that we do and the oil and gas segment as we've talked about before is really midstream pipeline work and those projects that we've been working on are continuing.
So we just see while we don't see significant growth and those areas. This is long term.
The longer duration contracts some of the gift of stability.
For this year and following.
Okay, great. Thanks for the call.
Great. Thanks, Kevin.
Yeah.
And.
We'll take our next question from Mark Neville with Scotiabank.
Hey, good morning.
And maybe just the.
Good morning, maybe just a first question is on the real estate is it over the over the proceeds with the.
The three year period over the year.
And any significant cash costs associated with the consolidation.
Sorry, I just missed any significant cash.
Yes.
But think of any cash costs associated with us.
No.
And I'll anticipating that note.
And if anything it will go on our cash flow through.
And three of the sub leasing of that space.
So we're not expecting.
Outflow of four restating, our space and in terms of capital expenditures of our leasehold net.
And what Youre asking about it.
Yeah, and you can sort of one time cost of sort of internally and stuff like that but the bubble.
Sales were not running the balance that's not that's not a part of our plan.
Okay.
Maybe just the question again on the three year plan.
And the expectation of beating your free cash flow. So the guerrilla marketing of earnings or do you think theres still an opportunity on some of our Dsos, where you might be free cash flow grow at a range above.
And I think there's always an opportunity I think we've shown over the last couple of years that debt. We can move the dial on that pretty dramatically how much more there is there is.
We're always going to try to improve on that so that's certainly the areas.
The continued focus on and so I think there is an opportunity and I'm not sure that it will be as dramatic as we've seen and the last couple of years.
Hey, guys. Thanks for taking the proceeds for debt.
Okay. Thanks Mark.
We will take our next question from Yuri Lynk with Canaccord Genuity.
And good morning.
Good morning, Greg.
Good morning.
Wanted to ask another question on the on the real estate footprint and then.
Okay.
It doesn't strike here of a bit early to make a move like this and then I know you.
And the survey.
And the employees the done that.
And at our firm as well and at first islands.
All forward and now on.
The flip flopping back and forth of love to get back from the office I was just wondering if you know.
It seems to me to be a little early people and change the mine and then beyond that and how do you control.
Talent, the valuation margin utilization and fostering collaboration on terms of important and the industry, maybe just a little bit more detail on.
And the steps you've taken.
Yes.
Great question. So what we've done there is in addition to talking to our staff about what Theyre looking for.
We're not looking to have everyone working remotely as an example, the wave and we're looking to rollout our footprint is roughly 50% of the people would be still full time and the office roughly 30% ish.
We'd have the ability to be part time, and the office and and part time and home, but those individuals won't have a dedicated workspace, we'll have we'll be looking at reducing footprint because some of that will be the compelling or.
Temporary use office space and then the remainder would be full.
Most of that could work and home full time and those of the people who don't have the need to collaborate as much with others.
We do think it's reasonable it's also going to go to.
Moving over the three year period, as we talked what else is at 50% of our office space comes available over three years, we don't anticipate that there'll be any need to adjust our program but should.
Should we get some huge kickback or the industry changes significantly one way or the other we still have the opportunity to respond, but I don't think that that'll be the case actually.
And the appointment and to do it now with the close.
And then.
The confidence.
That's what the employee of one or is it also the.
The next question of both.
Okay.
But that because of the gypsum lineup with the weaker.
And it's also possible for some of that.
Okay.
Okay.
Yes.
And the timing of just trying to get a sense of why why do the smile.
Why not wait another couple of quarters.
Right on your part.
And the reason for looking at it now is we've actually been planning are of this real estate program of.
Actually even from the latter part of 2019, we've been thinking about the as we've been talking to the staff and so really the the.
The pandemic and.
Advanced some of those programs.
Allowed us to try to.
The trial and people working from home.
Really what they want and get away and work through those things. So I think that that's important and the other thing that debt.
Part of the reduction and the square foot square due on that 30% square footage reduction is that we're also looking to reduce our average square footage per person those overall based on the planning standards because we see.
Our average square foot per person is lower in Europe. As an example of that it would be and North America and so as we acquire firms and we bring them on some of these firms have larger less and less.
Less efficient.
Square footage of consumption of of office space per employee. So we are looking to sort of get everyone back to more of a of standard on that so that will be the best part of the square footage reduction is that part and part of it is the flexible work arrangement part of it really is the.
And the fact that we announced that now it's just part of our long term planning that we've been working on for likely 18 months now.
Okay.
Okay.
Okay. Thanks for taking the questions and.
On a quarter.
And I think he's one of them.
Great. Thanks, Rick.
Our next question comes from Maxing, the Chatswood and National Bank financial.
Hi, good morning, the courtroom steps.
On.
Good morning, guys good morning.
What's the bundling.
I'm not sure.
Few months and it's already involved in the Texas situation.
For instance.
Whether you can leverage.
Greg kind of analytics capabilities too.
And how proud of net geography, and maybe how the business might might evolve over time.
At the <unk>.
Great perspective, and the work that's that.
And that our newly acquired debt, we had previously with the incentive but certainly bolstered and through the acquisition of cash months really supports that sort of grid strengthening type of work that debt will required there'll need to be done and Texas.
And the fact that the Texas grid wasn't winterized and ready for a storm like that has been known for a decade or more I guess, what it'll be interesting now is whether the the regulator and of course and the citizens of Texas will flush of required some of that debt that work to be done. The we've known this work is needed to be done.
And I believe there was an ice storm in 2011 and the results of that were very similar and.
And really no work was done at that point so.
We've got the all of the skills, we've got great relationships and so should the the funding income available to actually make some adjustments and from.
We're ready and willing to tell although we've had some discussions already there, but im not sure of it and we've got anything meaningful from a contract perspective at this point.
Okay, that's helpful and coordinate and just until the question of obviously ex.
The fleets have been the electrified and I'm talking about the passenger cars and something.
Net.
Buses and things like that is there a greater opportunity from guidance to benefit from that given sort of volume green credentials.
I do think so.
You're right as more and more people have.
The electric cars and the algorithm zone and the evening to plug and then the grid and the majority of of our community count supportive and so there will be a lot of grid strengthening work required.
Certainly on the work that we do there from a grid perspective.
We will be required we also have through our innovation office one of our first.
Innovative business opportunity as it relates to connected and autonomous vehicles. So we're coming out of from a number of perspectives first the connected amount of kind of a ton of its vehicle work that we're doing to consult with clients on how they would roll it out and a lot of that is planning for the vehicles planning for the infrastructure looking at things like charging stations and and grid strengthening requirement.
And so it's all part of the overall package that we're putting together as you look at.
Other other areas lifestyle.
Zero emission buses.
The Canadian federal government rolled out a while ago.
We've done a lot of work on zero emission buses and charging stations and and in fact on this one we're working with the CIB to help administer that program. So lots of opportunities from numerous different perspectives on the <unk>, whether it's on the design and size of the program management side the technology side.
Sure.
All over and these opportunities from whichever way that we can service our clients.
Okay. That's helpful. And then maybe just a couple of clarification points. If I may go back and keep the talk about housing obviously being very robust right now.
I mean, historically the Linde development practice was obviously from troubled and that I.
I would see a pickup and the.
Vertical and to which extent on the how big of the platform.
Per land development practices or we call of community development. The currently is and the 8% range of our of our overall revenue and it's it's been plus or minus a little bit in that area and while it is strengthening a little bit over the next little of it I don't see of being your dominance and in our and our.
Overall revenue mix as it was say back in 2008 2009 before the U S financial crisis.
I see of being in that eight and 9% range, maybe up to 10, but it was up to 35% back in 2008, we will see nothing like that again.
But I guess, my and my point of that businesses and should be.
Pretty good luck on them.
Yes.
Absolutely and even though the patients I can order it hasnt been here today that had slowed but we've really seen some great strengthening and the markets and Edmonton and Calgary, certainly GTA, but really of the southern States is where we're seeing a significant pickup in and and.
And opportunities.
Okay. That's super helpful and last one from the same question in terms of mining obviously of the commodities up on the stick right now.
And maybe reminding us the level of exposure and how that.
The commodity last quarter of the next 12 to 18 months of from.
The <unk>.
Sharpening the pencils on Greenfield and brownfield projects.
Yeah. So our mining practice currently is just a little bit less than 5% of the overall revenue generation of the company, but we have early on and the pandemic. We saw mining dropped the authors Peru and some of the places in South America closed the mines due to Covid, but certainly we've seen those on.
Working around how we can get our staff into the mine to continue the work copper prices of course of all time highs. The iron ore price is very very strong goals as well. So we are seeing a pickup and our mining work and South America, Western Australia, and other locations and <unk>.
Well, so like I do see positive tailwind.
The remaining in the foreseeable.
The future also.
Active and some other things like lithium we've been doing some work on some lithium minds and example.
We get more and more towards battery storage battery technology, we can see additional.
And opportunities coming in that area as well.
Okay. That's super helpful simple so much the point.
Yes, Thanks, Matt.
As a reminder, everyone that is star one on the telephone to ask a question.
And we'll take our next question from Benoit Poirier with Desjardin capital markets.
Yes, good morning, everyone and congratulations for the quarter.
Just to come back on the real estate question with respect to the optimization plan and you provide great color about the the potential impact in the years to come but when looking at your average of square feet per person.
Is it kind of.
Is it and the fortunate thing to do.
The gift closer to your peers or it's really leading the pack and the.
Lower range.
The average square feet per person and try to to to really make the North America and more comparable to Europe.
Yes.
It's a little bit of both actually.
Certainly the European average square footage per person is lower than we would see and North America and our industry not just for us with where our competitive set and.
The overall, so we're doing what we believe is the right thing.
We've talked with our clients, we talk of our space funding group, where we can get so we're I don't think that we're looking to.
Two to lead the charge and set the lowest possible square footage per per employee and industrial and other objective. We wanted to ensure that we're doing the right thing balancing cost optimization with ensuring that our employees feel free.
Feel feel positive about their work environment.
But they want to come to the office a water collaborate so I think it's a bit of a balancing act.
And then why and as we look to to optimizing net real estate footprint.
Okay, that's great color and looking of the backlog was there anything in particular that drove the sequential decline I mean, you grow organically on the year over year basis is it purely a matter of FX of <unk> work.
And there are really a couple of things and looking at our backlogs and transitioned from the third to the to the fourth quarter and the.
Part of it was just to try and exchange in terms of.
On the strength of the <unk>.
The Canadian dollar and and we do typically see that debt.
Book to burn that goes down from the third to the fourth quarter part of being a little bit of a slower season for us.
Hi.
The two large contributors and we did note in our MD&A as well that we have now changed our our contractual relationship on the Trans mountain, which was going to be a slightly bigger chunk of revenue within our backlog.
And that relationship and changed such that now.
We have to move some of that out of our backlog and that was really sort of that quarter over quarter change.
Okay. Okay, that's great color and looking at the Dsos, obviously very strong performance over the last year.
How should we be thinking with respect to 2021, whether we should.
The more cautious in terms of the.
Dsos and how should we be thinking on desktop.
Yeah, I think we're feeling very positive on where we're at.
Recognize and we left our targeted 90 days and we probably could and should obtain that incremental debt.
On slide Spectrally, we feel like we are and I really the ace.
Around the sort of 75 day in March so we're not anticipating on.
A large move upwards and DSO and we just wanted to make sure that we left room for Inevitabilities around things that are out of our control of that may cause the DSO channel to move in either direction.
Okay. Thank you very much for the time.
And it's been a lot of things by months.
And that does conclude the question and answer session and I'd like to turn the call back over the core Johnson for any additional or closing remarks.
Great well. Thank you again for joining us on the call today, and we look forward to speaking with you and the near future of both our continued profit.
Progress. So thanks again have a great day and stay healthy and thanks, everyone. Thank you.
And that does conclude todays presentation. Thank you for your participation you may now disconnect.
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