Q4 2020 Stantec Inc Earnings Call
Yeah.
Yeah.
Yeah.
[noise] [music].
Yeah.
Please standby.
Good day, everyone and welcome to stay on Teck's fourth quarter 2020 earnings results Conference call.
Leading the call today are core Johnston, President and Chief Executive Officer, and Theresa Jang Executive Vice President and Chief Financial Officer.
And by the sound check and likes 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 shouldn't mute your computer as there is a 2002nd delay between the call and webcast.
All information provided during the conference call is subject to the forward looking sticking the qualification set out on slide two detailed Ns Gentex management's discussion and analysis and incorporated in full for the purposes of today's call.
Our company and the World and the first in North America by corporate Knights.
Operating sustainability sustainably is good for our employees and 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 stands at 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 planning the rollout 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.
Through solid project execution and exceptional cost management, we delivered a strong 16, 7% adjusted EBITDA margin.
Lower interest cost, resulting from strong cash flow management and tax recoveries recognized in the fourth quarter further contributed to a 10% year over year increase and adjusted diluted earnings per share to make 2020 a record year.
Two major components.
The first component is the lease space no longer required by the business 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 to increase EPS by an additional 25% to 30 by the end of 2023.
And from a square footage perspective, this translates to an approximate 30% reduction and our existing real estate footprint by 2023. So 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 it helps too.
A key of our sustainability objective and it delivers real value to shareholders and and 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 in support of our commitment to achieve carbon neutrality for 2022 and net zero for 2003 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 ratings across multiple independent and third parties.
In addition to our corporate Knights ranking <unk> is rated as the climate leader with an a minus score by CDP and we are the only firm and our space that has achieved that ratings and the last three years and this illustrates the sustainability isn't something new for sand deck, it's been part of our DNA for decades.
Our ISS ESG quality score continues to outperform our peers year after year and our sustainability.
Our ESG score is low which again is top of class.
Now turning to the performance of the business.
Revenue held up quite well and United States for both the quarter and the year, we saw modest growth and our water business through expansion efforts into our Pacific and U S markets in particular.
Growing urban populations and climate change are resulting in significant water scarcity situations and as an example, we estimated 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 pure water San Diego program, a multibillion dollars of initiative to supply and local sustainable water San Diego of one 4 million residents.
And in addition to this and to get the prime consultant for the treatment related works on the Metropolitan water District of Southern California Regional recycled water program.
And we've also been selected as a key sub consultant on the senior and Los Angeles. This high period 2035 program.
Static and 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.
And we see significant opportunities percentage energy and resources and environmental services business going forward with the fit with the U S efficiently and 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 I just 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 our lead designer role for heavy repair and overhaul.
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 building 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 Tim at the healthcare currently taking place and our Canadian buildings group.
We also announced our participation and the $3 60 trends and alliance.
<unk> hundred 60, <unk> and aligns joint venture during the quarter, which will oversee and estimated $28 5 billion and capital investments for Toronto Transit infrastructure.
Organic growth and our U K 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 of your frameworks, meaning winning most of the key water utilities and the U K, including tangible water, which is the largest UK utility and serves roughly 16 million customers.
The App Dev and frameworks of these 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 were on key programs with utilities like Sydney water, Melbourne, and water and Brisbane water on Australia, and with Christchurch, Wellington and water care and New Zealand, securing our backlog of 2023 and beyond and totaling roughly $70 million of year.
Transportation stimulus funding and the UK and the view and are fueling the infrastructure business and these regions.
And our recent acquisitions of strengthened our ability to participate in these key projects.
In addition growth and our global power and dams and mining businesses 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 European development agencies, including a contract for the conceptual design of the multipurpose port on the <unk> Island and on the West Africa's regional transportation governance projects.
And were also awarded the summer set down of improvement project in Queensland, Australia and with this award. We are currently working on virtually every major Dan and improvement project in Australia.
Overall, our business performed very well and 2020, and we entered 2021 with growing optimism. Thanks to the strength of our client relationships solid backlog and the positive trends and passing many of our business operating units.
And with that I'll turn the call over to Theresa for a review of our financial performance and our outlook.
Thank you Gloria and good morning, everyone.
Net income from continuing operations for the fourth quarter increased 28% to 67 million, which represented seven 8% of net revenue adjusted.
Adjusted earnings per share also increased 28% and 60 per share.
Q4 earnings exceeded our expectations of net revenue generation of slightly stronger and discretionary costs significantly lower than anticipated our solid adjusted EBITDA margin of 16, 1% was bolstered by approximately 50 basis points as the result of the recovery of claim costs on the historical projects, but.
And excluding this non recurring item adjusted EBITDA was very solid, reflecting our success and mitigating COVID-19 impact on organic net revenue growth and gross margin.
Also on Q4 of our strong cash flow generation led to lower than expected interest expense.
Earnings per further augmented by the favorable resolution of certain tax matters recorded in the quarter.
As Greg mentioned earlier, we initiated our 2023 real estate strategy and as a result, we recorded a noncash impairment charge of $66 7 million.
Turning to full year 2020, and result, adjusted net income from continuing operations increased 11% of $249 million in 2020 were six 8% as a percentage of net revenue.
Adjusted earnings per share increased 10% to $2 and 22 per share.
Earnings for the year exceeded our expectations on the strength of our fourth quarter performance and the nonrecurring items previously discussed which collectively contributed approximately 10 net 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% and 2020 compared to the 15, 5% in 2019.
The current 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 on the year with net debt to adjusted EBITDA below our targeted range at euro of <unk> seven times debt.
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 into the one.
Sales 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 dividend and $80 million through share buyback.
On October eight we strengthened our capital structure of our inaugural bond offering issuing of $300 million of seven year notes and.
And we continue to focus on disciplined capital allocation balancing the return of capital to shareholders when the opportunities to deploy capital towards the acquisition of activity.
Yesterday, we announced the law for us and increased our dividend by six 5%, reflecting our ongoing confidence and our long term profitability.
Our performance in 2020, along on the progress of our strategic initiatives and.
The increased our earnings expectations for 2021 from the outlook, we established in November 2020.
The main driver is the cost statements of the diner from reduced occupancy costs, which as Gordon mentioned will add approximately <unk> 10 per share to 2021 EPS.
This will completely offset the absence of the 10 cents, we generated from the nonrecurring claim cost and tax recovery in 2020.
We expect to grow 2021 earnings further driving two and overall year over year increase on a percentage basis and the Logan mid single digits.
We're also to day, increasing our 'twenty, one 'twenty 'twenty, one target and raising the top end of our adjusted EBITDA margin by 50 basis points to 16%.
This was driven by our continued strong operating performance and our expectation that discretionary spending and lowered the longer given current travel restrictions. However.
However, given the ongoing uncertainties associated with the pandemic with lots of the low end of the range of 14, 5%.
We are expecting adjusted net income to be greater than six five percentage of net revenue of 50 basis points increase and our targets.
We've also raised our adjusted return on invested capital target of 50 basis points to be greater than 95% and with the.
And 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 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 lease 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 and 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 in the 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 through of the pandemic.
It's their hard work and continuing to execute our strategic plan and serving our clients that 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 the call to questions operator.
Thank you if you would like to ask the question on the phone lines today and you can press star one on your telephone keypad. If you are on the 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 part of question.
The question about the the plan to reduce the office footprint 30 per.
<unk>.
Have you pulled your employees to understand how they're feeling about it.
The growth getting a little tired of working from home Squishy term was kind of delek.
Yes, Jacob in fact, we've we've.
Survey of our employees of couple of times through the pandemic and why we found that their thoughts on it.
And working at home versus the office has changed a bit throughout early Independencia looking back in March and April as we've talked to people what they thought they might want to do of the response was this is great. We want to work from home forever.
But what we found.
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 others and the industry as well and we found that when people are looking for is a little bit more flexibility, where they could perhaps be of 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.
Our office footprint and we have it.
Our workplace design group and our buildings group within <unk> and so we're working very closely with that group on what we might do within the <unk>.
Our company as well as advising other clients and so we really think it's important to have to have 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 look at at our longer term footprint with a certain percent still being full time and the office.
Another percentage being part of time office with maybe some flexibility to work at home once in a while but there will be a small subset that we will allow to work at home full time and based upon that designed us where we looked at that roughly a 30% reduction in our and our occupancy footprint.
And in each of those the pension impact through 2021, and 45% to 40 over the next three years.
Yes, the 10 test as part of the 35% to 40% debt.
We expect over the next three years.
Okay.
And that's my second question here is just on.
The the longer term targets you have I think you said.
Net revenue CAGR of greater than and 10%.
So clearly M&A is playing a key role here and talk.
A bit of both how your pipeline of smoking.
The and how.
Valuations looking and assuming the most markets multiple and sort of getting the little stretched.
So the on the M&A pipeline is very very robust and you can see and 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 all of the discussions that we had ongoing previously, but there isn't and 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.
Ross all of the geographies, where we're where we're active.
It's interesting initially in the pandemic, we had hoped and we see some.
A reduction and multiples.
And certainly we haven't seen that in the firms of we're talking to we have 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 an increase and the firms that we're talking with.
So on and where are those multiples and.
Is the focus towards small and mid size.
Yes.
And one of the firms and we're talking to are seeing the multiple of the multiple is still about six to nine kind of times range and.
And.
Our main focus is still and that that sub 1000 person firm because that gives us the opportunity to select the exact type of firm we launched in the geography that we said 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.
Larger opportunities come along we would absolutely look at them, but I wouldn't call. It a of change in our strategy. Our strategy is still solid and personal and less but I think we.
And now we've got a little bit more flexibility to look at some of these larger ones. If they are appropriate for us, but what we see for our long term growth.
Thank you I'll leave it there.
Great. Thanks Jacob.
We will take our next question from Chris Murray with ATB capital markets.
Thanks folks and good.
Morning, and sort.
And just maybe going back to thinking about the real estate.
Of the equation.
So just to confirm so you are talking and kind of 25% to 35, a couple of years that that's correct.
Yes, yes, and what we said is we expect about 10 sales in 2021 and on top of that 25% to 30.
By the end of 2023.
Okay and on top of that okay. So I am just trying to understand the cadence of it.
And then just.
And you know about that.
The earnings piece of it the there's also.
I guess the the law.
Liability side of the leases can you talk a little bit about how this plays into your longer term on.
And the current invested capital metrics.
Yes.
Absolutely will lift our return on invested capital because the ability.
The ability to redeploy capital towards the other things that otherwise would've been servicing these leases.
What's the opportunity.
Part of the opportunity so.
With that.
As Greg described there are these two of the kind of two pronged to the strategy.
And we've looked at space that we have determined we don't.
Needs at any longer and Thats, where we took an impairment charge of the all of those leases and the sort of been $5 and models and we took out about $67 million of impairment charge in the fourth quarter.
And so now as we go forward, one and we don't have to incur these costs through our P&L and two of the opportunity to sublease that space will provide and sublease income to offset.
And then the second element is.
Again that is free.
The opportunity for us and that's roughly 50% Empire existing in the space is naturally going to expire over the next three years and so that gives us a really great opportunity then to not have to impair that the space, but as they expire to be able to change.
And reduced 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 years. So the.
These are really the two key components and the way that the the math works.
Okay.
No that's interesting.
Just I guess the other question I have for you and just thinking about your longer term net revenue growth the interest and part of a putting era of CAGR number when.
And when you change the timing.
Inside of it moves around but if I go back historically, and and you talked a little bit too of pleasant to an earlier question about that thousand person I mean, the word years and you guys were doing 15, and 16 acquisitions a year of various sizes and then of platform every couple of years.
Is that how we should be thinking about.
And the way you think this unfolds over the next few years to hit that number.
Yes.
Yes, I would think so and Chris that's sort of we're going to continue with our we call it back to sort of the base hits the the in filling up of the the rate curve and the right locations and then and 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 on fossil and thank you very much.
Great. 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 youre comfortable with the relative weighting of your five operating units right now and I believe on.
Infrastructure is close to 30% and it's got.
And you got environmental services and energy.
The 15%.
This sort of the.
The place where you're comfortable being.
At the end of the equilibrium and or is there a are there opportunities to grow some of these businesses.
The business units further alright on more aggressive pace on a go forward basis.
Yes.
I do think it's and 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 and 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'd 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 also a little bit into transportation and building. 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 so we're putting on particular focus on those areas right now.
Okay, Great that's helpful and in terms of high level.
Our priorities for this year would you would you mind kind of maybe flagging of our highly <unk>.
Top two 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.
<unk> structure perspective, and leaving the organization and so on 2020 is really the year, where we're focusing on growth of 2021, sorry and and.
So we're really focusing on our organic growth programs and we've had great success over the 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.
As we talked earlier on 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 and a formalized way if the <unk>.
And 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 and innovation absolutely. We will continue to focus on the back of how is the operational without question, but thats always there, but I think you'll you'll really see a focus.
For 2021 for us on growth and supporting the innovation.
Okay. Thanks, Cort Greg here.
Great. Thanks Fredrik.
Our next question comes from Mona Nazir with non Kim Bank. Please go ahead.
Okay.
Okay.
Good morning, and thank you for taking my question.
Firstly, one of them took place on <unk>.
Got it and.
Morning.
Firstly, and just thinking about what the organic contraction that you had in the quarter and even the year. It's ahead of a number of peers on it.
Spike of device having greater.
And the greater energy debt and just wondering looking back what do you think help shield and insulate the bad debt.
You mentioned in your opening remarks.
Hospital contracts awarded and just wondering if you had to pivot the business to new areas and bulk up expertise and other areas of really about the state of mix. Thank you.
Yeah. So.
So thanks, Simona I think the real focus for us was on our organic growth programs.
We've really been focusing hard the last couple of years, but really through 2021 2020 as well so thats.
Not only did our backlog grew organically by over 3% through the year, but I think that also was a big driver why are our organic retraction was one 8% for the year.
But to your point about pivoting I think that's exactly right as well and and nor do we see that as evidenced in our buildings business.
The the.
And the commercial work that we're doing restaurants fit ups new retail.
One of those projects that 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 we have some global of Msas Master services agreements with.
With with those firms. So I think 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 points of the MD&A the head count the teams and their total 2000 I joked on the cat.
And I'll ask and tier and have you taken any steps to right size the business and any areas or are there plans to and the feature and just related to that how would you do something.
Yes, so from a head count perspective, absolutely we'd have 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 that the.
The work is there as you can see from our growth and our backlog, we see the opportunity for good stimulus 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 had the right team to drive us forward into the future as well.
Okay. So what are the it's fair to say eight all of that and.
All right pricing get occur and the year, because the 2019 head count of 22000 and cloud so any REIT title that get of crime and here was largely offset by M&A.
Yes, I think that's a fair fair statement margin.
Okay, perfect and just lastly for low.
And going back to the M&A. It just really more of a crank on H and I understand you have made a number of smaller size tuck in on it.
And we did speak about the number of new conversations occurring with targeted firm, but given current leverage levels is it feasible that we could see a number of new.
Medium sized transaction call. It four to five transactions kind of simultaneously or within a short or try and frame that could bring in potential combined 3000 people over five or six transactions there would be that the outside of the targeted pace.
I think our balance sheet, but 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 is what we're paying so that we can see that long term accretion to our share price but.
And if the right firms come along and you're right we've got the balance sheet.
Our room to do it.
Okay perfect.
And of the realm of.
The possibility okay. That's great. Thank you.
Leave it there okay. Thanks Mark.
Thank you.
Our next question comes from Michael <unk> with TD Securities.
Thanks, Good morning.
Good morning, Michael.
My first question relates to your organic.
The revenue growth guidance.
You've talked about or you reiterated your expectation for low to mid single digit 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 of positive.
Yes, that's exactly where our costs are as well Michael Q1 of this year is comparing against the pre pandemic Q1 of 'twenty. So we do still foresee somewhat overall organic retraction in the in Q1, but really that the low to mid single digits of sort of where we expect to be with.
And 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 just sticking with organic growth.
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.
And 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.
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 <unk>.
Growth expectations by business operating unit as well.
Sure and the.
The U S. We were just sort of being consistent and cautious we do believe that there will be a <unk>.
U S infrastructure.
The infrastructure stimulus package coming out the.
The industry thoughts were that the president biting would announce that in February there was some speculation you might've done it yesterday, but I think we're working through some other you know 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.
Could be a quarter or two lag from from when it's announced.
When our industry in general will begin to search and generating some revenue from it. So I think we're just being cautious there.
As we look at the various.
The the various business operating units to your second question.
Buildings overall as an example, the <unk>.
Commercial market remains challenged but we really see this pivot to healthcare coming on in the building segment and we talked about the St Pauls.
<unk> in in Vancouver, but we were 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 Hospital and Australia. So we're seeing a lot of work and health care and buildings, we're seeing a lot of pivot to e-commerce.
As many of us and <unk>.
People are buying more and more things for E. Commerce. So we do see some goods.
<unk> per building coming, particularly I think we'll see that revenue generation coming into the second half of the year as these projects get wrapped up.
And our energy and resources.
We're seeing great opportunities and the pivot to renewables.
Solar.
When the hydropower and so on and lots of good opportunities there and of course, because copper and iron ore prices are so high and all of those present really good tailwind for our mining business.
And the environmental services business.
2020 was a very solid year for that business revenue was roughly flat from 2019, but we're seeing really solid backlog and that group and great opportunities.
To come see to see that happening as well.
And 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 around the globe, but we've got a really solid backlog into 2021 already for that group and.
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 clients zone.
The recently he described the market and the southern U S is almost frothy because there was so so so busy.
And then finally looking at water, we had really solid organic growth in the water segment in 2020, even despite the pandemic backlog really strong I mentioned, a couple of those irrigation projects in Canada.
Long term and out projects and the U K the long term frameworks awards in the Australia, and New Zealand and certainly some of the opportunities and southern California, So and create opportunities and water and there's a lot of when we look at some of the emerging technologies and water of P fast and other advanced treatment, we're already leading the charge on of <unk>.
All of those things, so we see opportunities and water scarcity and reuse and close the resilience and responsive the sea level rise so in general as best we can.
Kind of look across the business, we see positive long term prospects 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 of 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.
All of it surprised that there was no adjustment to the admin and marketing expenses as a percentage of revenue guidance, which was sold and a 37, 39% range.
Yeah. Thank you for asking that question because it's actually at the edge.
Really important one that we should have highlighted and.
The unfortunate part of Ifr 16 is that this is really going to show up below the EBITDA line and now that all of you on leasing activity to get reflected in depreciation and interest.
And so.
And.
This is 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 and does not really move the needle on EBITDA.
Got it thank you.
Great. Thanks, Michael.
Alright, we will take our next question from shallow head on with RBC capital markets.
Thanks, and good morning, just kind of building off of the last question around the savings of the three year targets I guess, how should we think about the drivers of the EBITDA margin improvement I guess, what the real estate.
It's a relatively large contributor but on what else is driving adjusted EBITDA margin improvement and this is sort of below the line as we think over the next three years.
Sure so as we.
We mentioned in our.
And our 2021.
And some of that is going to be driven we expect by the continued discipline around our discretionary spending.
And we had expected interest start to ramp up a little sooner in 2021, but.
But as we pointed to the.
The ongoing travel restrictions means that we will likely be able to push that out a little bit farther into the year. If not beyond that we've also said though of 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 tools.
So we know that the need for travel and Ken can be addressed through the piece.
Virtual meetings.
On a large degree so the directionally the 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 Pune, India operation.
It is.
And delivers just.
Excellent delivery of four.
On.
And on both of the design side and in our back office and so.
So we are driving commitments really on our business of more how we can increase our footprint. There we're still currently and that 400.
People range and so there is the lack of opportunity for us the scale that up and so that and that is really effective and beyond concept from just an efficiency standpoint of having that 24 hour clock.
And to be able to use with the time zone differences.
And beyond that balance.
Continued focus on disciplined.
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 that's on the.
Discretionary side, that's going up and some of that may be offsetting the real estate savings if I look at the <unk>.
Net revenue CAGR of greater than 10% and net earnings CAGR or EPS CAGR of about 11% or more I guess is there and some puts and takes of the real estate sales, maybe being offset by some of the the discretionary spend and you are mentioning and might come back.
Yeah, I think so I think thats.
It's a reasonable assumption.
Okay, Great and then I guess, just looking at the three year targets. The one of the Proto Mexico and a few years, but the bid mentioned the organic growth CAGR on there as well and I know you mentioned and the 2021, the organic growth will be there.
And how you're thinking about 'twenty and 'twenty two and beyond is it the maybe the lack of visibility that's keeping us on putting those targets are you thinking about organic growth over that three of the period.
We've always talked about are net of revenue CAGR of greater than 10% sort of as the number we haven't really split out of organic growth.
We typically provide our our target for organic growth for the current year for 2021. So we haven't really looked at providing organic growth numbers for 2022, and 2023, there's a little bit of.
And my Crystal ball isn't completely clear of Im not sure anyone visible and whats going to happen during the latter part of the year when the opportunities will come but.
And just what are you seeing even through the pandemic is any indication.
We're just going to keep focusing on our clients focusing on the various organic growth.
The programs, we have and and hope to just to continue with growth in that area in the years to come.
Okay, Great and then I'm just kind of one last one on the little bit more on Canada, I guess I guess based on what you're seeing coming out of Q4 with the improving commodity environment and what's the kind of directional view on some of the end markets specifically in Canada, and there is demand picking up directionally as of the commodity environment and lesser.
And Canada or are people sort of taking a bit of a cautious view on until they have a bit more visibility into the the cardio.
Yes.
Great Great question, so on Directionally on some of the things we did talk about in our building segment and some of the health care projects that we brought in St. Pauls two of Trillium, there and the Toronto. So we're seeing those health care projects continuing to move forward on the building side e-commerce as well.
Solid opportunities and transportation.
And as well, we talked about our our work on the the $28 $5 billion.
The public transit initiatives and in Toronto, which will provide good long term opportunities.
And as well and water, we just talk about those two of water irrigation projects and we recently were awarded here in Western Canada and those are significant projects that are in part funded by by some of the recent the last the last fall the government of Canada. The if some of the.
The infrastructure stimulus programs that they've talked about so we see good of Scott opportunities and.
And and water as well the environment looks good for us and Andrew.
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 of those projects that we've been working on are continuing so we just see while we don't see significant growth in those areas and this just long term longer duration contracts.
So it was a gift stability for for this year and following.
Okay, great. Thanks for the color.
Great. Thanks Alan.
And we'll take our next question from Mark Neville with Scotiabank.
Hey, good morning.
Good morning, Mark and maybe just the.
Morning, maybe just a first question just on the real estate is it over the over the seat at the three year period will there be any significant cash costs associated with the consolidation.
Sorry, I just missed it.
The significant cash.
Yes.
And any cash costs associated with it.
No we're not anticipating that note.
And if anything it will bolster our cash flow through three of the.
The sub leasing of that space.
So we're not expecting.
The outflow of four restating, our space and in terms of capital expenditures are and diesel maybe of.
And what Youre asking about it.
Yeah, the same sort of one time cost of sort of being terminated and stuff like that but the bulk of that.
So we're not one that's not that's not a part of our plan.
Okay and.
And maybe just the question because I'm a three year plan.
And the expectation beat on your free cash flow of sort of guerrilla marketing earnings or do you think theres still an opportunity and stuff of Dsos, where you might be free cash flow and grow at a range of boats.
And I think there's always an opportunity I think we've shown over the last couple of years debt that we can move the dial on that pretty dramatically how much more of their there is we're always going to try to improve on that so certainly the areas.
And as a continued focus on it and so I think there is an opportunity and not sure but it'll be as dramatic as we've seen and the last couple of years.
Hey, guys. Thanks for taking the questions of goodwill.
Okay. Thanks Mark.
We will take our next question from Yuri Lynk with Canaccord Genuity.
And good morning.
400.
Good morning, and just wanted to ask another question on the on the real estate footprint.
Okay.
And this isn't the strike here is a bit early to make a move like this and I'm familiar you and <unk>.
And the survey.
Employees the done.
At our firm as well and at first islands.
All four of them now on.
The flip.
Flip flopping back and forth I'd love to get back of the office. So just wondering if you know.
It seems to me the view a little early people and <unk>.
Range of the mines, and then beyond that and how do we control.
Talent of valuation margin and utilization and fostering collaboration of just under the <unk>.
And then when the street, 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 and over as an example, the way that we're looking to rollout our footprint is roughly 50% of the people would be still full time and the office roughly 30% ish.
And would have the ability to be part time, and the office and <unk> and part time at home, but those individuals' won't have a dedicated work space, we'll have we'll be looking at reducing footprint and so some of that will be the compelling or.
Temporary use office space and then the the remainder would be.
The folks 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.
And we do think it's reasonable it's also going to move.
Move over the three year period, as we talked with us and that 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 we get some huge kickback or the industry changes significantly one way or the other we still have the opportunity to to respond with.
I don't think that that that'll be the case actually.
And the planning to do it now because of the kiln.
I'm confident the.
That's what the employees want or is it also the.
The next question of both.
And when you think and stuff.
Note that because of the different line up with the city.
It's volume.
And it's also positive for some of that stuff.
And so.
Okay.
Yes.
The timing of just trying to get a sense of why why why do the smile.
Why not wait another couple of quarters.
Right well you're part of.
Of the reasons for looking at it now is we've actually been planning our real estate program of.
Actually even from the latter part of 2019, we've been thinking about this we've been talking to staff.
And so really the.
The as the pandemic just advanced some of those programs.
Allowed us to try.
The trial people working from home is that really what they want and the way it worked 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 space and the planning standards because we see.
Our average square foot per person is lower in Europe. As an example 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 consumption of of office space per employee. So we are looking to sort of get everyone back to more of a standard on that so that was the best part of the square footage reduction is that part part of it is the flexible work arrangement part of it really is the fact that we announced that now it's just part of our long term planning that we've been working on.
And for likely 18 months now.
Okay.
I'm sorry.
Okay. Thanks for taking the questions and the solid quarter and Cvs.
Okay.
Great. Thank you.
Our next question comes from Maxing, the chance with National Bank financial.
Hi, good morning, the courtroom.
Yes.
Good morning, guys and good morning.
Was wondering if I'm not sure if a few months and it's already involved in the Texas situation.
And I'm curious to see whether you can leverage.
Greg kind of analytics capabilities to help.
How proud of in that geography, and maybe how the business might evolve over time.
Yes, that's of great perspective, and the work that.
And that our newly acquired debt, we had previously within status and that certainly bolstered of through the acquisition of cash months really supports that sort of grid strengthening type of work that will require that they will need to be done and Texas.
And the fact that the Texas grid and wasn't winterized and ready for a storm like that has been known for a decade or more I guess, what it will be interesting now is whether the the regulator and of course the <unk>.
And the Texas will luxury required some of that debt that work to be done, but we've known this work is needed to be done since I believe there was an ice storm in 2011 and the results of that were very similar 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 come available to actually make some adjustments this on.
And we're ready and willing to telephone and we've had some discussions already there, but im not sure of that and we've got anything meaningful from a contract perspective at this point.
Okay. That's helpful and Cold and then just I think the question of obviously adds.
The fleets have been electrified and I'm talking about the passenger cars and something.
The buses and things like that is there a greater opportunity from Blackstone and benefits from that given sort of all of the green credentials.
I do think so Matt.
You're right as more and more people have.
Electric cars and the I'll bring them home and the evening to deployment of in the grid and the majority of of our communities can't support it and so there will be a lot of grid strengthening work required certainly are higher so are the work that we do there from a grid perspective.
We will be required and we also have through our innovation offers 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 of the connected and on a ton of as the 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 and things like charging stations and.
And grid strengthening requirements.
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.
And the Canadian Federal government rolled out of volatile.
And we've done a lot of work on zero emission buses 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 <unk>, whether it's on the design side of the program management side the technology side.
We're 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 talked about housing obviously being very robust right now.
I mean, historically the wind development practice was obviously pretty trouble income in that.
We've seen a pickup in the vertical and to which extent on the how big as of right now.
Per land development practice, or we call. It community development and currently is in 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 I see it strengthening a little bit over the next little of it I don't see of being dominant and in our and our.
Overall revenue mix as it was say back in 2008 2009 before the U S financial crisis.
And 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 I mean, the businesses should be pretty good luck on it.
Yes.
And even when patients I can order habits and 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 pick up and and and opportunities.
Okay, that's super helpful and lots of them on the same question in terms of mining, obviously with commodities up on the stick right now.
And do you mind, reminding us the level of exposure and how that could.
The wallowing, let's call it over the next 12 to 18 months as producers are.
Sharpening the pencils on on Greenfield and brownfield projects.
Yeah. So our mining practice currently is just a little bit less and 5% of the overall revenue generation of the company, but we know early on and the pandemic, we saw mining and dropped off the Ico, Peru and some of the places in South America close the mines due to Covid, but certainly we've seen those on.
Working around how we can get on staff into the mine to continue the work copper prices of course of all time highs the iron ore price was very very strong growth as well. So we are seeing a pickup in our mining work and South America, Western Australia and other locations as.
So I do see positive tailwind for mining and in the foreseeable future of also.
Active and some other things like lithium we've been doing some work on some lithium mines and the example.
We get more and more towards battery storage battery technology, we can see additional.
Opportunities coming in that area as well.
Okay. That's super helpful. Thanks, So much thats true.
Thanks Vince.
As a reminder, everyone that is star one on the telephone cash question.
And we'll take our next question from Benoit Poirier with Desjardins capital markets.
Yes, good morning, everyone and congratulations for the quarter.
And just to come back on their real estate. The 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.
The kind of.
Is it the unfortunate be too.
To get closer to your peers or it's really leading the pack and the.
Lower range the.
The average square feet per person and try 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 competitor set and.
Overall, so we're doing what we believe is the right thing and.
We've talked with our clients, we've talked of our space planning 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 Thats really not our objective. We wanted to ensure that we're doing the right thing balancing cost optimization with ensuring that our employees feel feel feel feel positive about their work environment.
And that they want to come to the office they want to collaborate and so I think that's a bit of a balancing act.
I've been wise as we look to to optimizing that real estate footprint.
Okay, that's great color and looking of the backlog was there anything in particular that drove the sequential decline on you grow organically on a year over year basis is it purely a matter of FX here.
Ward.
The early.
A couple of things and looking at the backlog that transitioned from the third two of the two the first quarter and Thats part of it was just try and exchange in terms of.
The strength of the U.
Versus the Canadian dollar and we do typically see that book to burn and that goes down in front of 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 didn't note in our MD&A as well.
And have now changed our our contractual relationship on the Trans mountain, which was going to be on slightly bigger chunk of revenue.
Backlog.
And that relationship and changed such that now.
We've removed some of that out of our backlog, so that was really sort of flat quarter over quarter change.
Yeah, Okay. Okay, that's great color and looking of 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 about where we're at.
We recognize and we left our targeted 90 days and they probably could and should have tightened that up a little bit on.
But truly we feel like we are and I really the space.
And just sort of 75 day, Mark So we're not anticipating on.
Large move upwards and DSO and we just wanted to make sure that we left room for the ability to around things that are out of our control of that may cause of DSO and to move in either direction.
Okay. Thank you very much for the us on.
And I extend my thanks very much.
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.
Progress. So thanks, again, and I'll have a great day and stay healthy and thanks, everyone and thank you.
And that does conclude todays presentation. Thank you for your participation you may now disconnect.
[noise].
Yeah.
[music].
And.