Q4 2021 Stantec Inc Earnings Call
Yes.
Welcome to <unk> fourth quarter and year end 2021 earnings results conference call, leading the call today are cord Johnston, President and Chief Executive Officer, and Theresa Jang Executive Vice President and Chief Financial Officer.
Gentex invites those dialing in to view the slide presentation, which is available in the investors section at <unk> Dot Com. Today's call is also webcast. Please be advised that if you were a dogged in while also feeling the webcast you should mute your computer as there is a delay between the call and the webcast.
All information provided during this conference call is subject to the forward looking statement qualifications such as on slide two detailed in <unk> management discussion and analysis and incorporation full for the purposes of today's call unless otherwise noted dollar amounts discussed in today's call are expressed in Canadian dollars.
Generally rounded with dash I'm pleased to turn the call over to Mr. Gordon Johnson. Please go ahead Sir.
Good morning, and thank you for joining US today, we're very pleased to report our Q4 and full year 2021 results, which reflect the solid execution of our multiyear strategy.
Grew our global employee base by around 15% through strategic acquisition.
Saw an increase in our employee engagement scores from pre pandemic levels and our financial performance was strong.
For the year, we delivered record earnings per share both on an adjusted and on an as reported basis on stronger margins. The ongoing execution of our 2023 real estate strategy and lower taxes.
Net revenues of $3 $6 billion approximated the prior year and on a constant currency basis increased by roughly 3%.
Excluding Trans Mountain every one of our business operating units had flat or positive organic growth in Q4 and sequentially, we had improving organic growth in each quarter of the year with Q3 and Q4, returning to positive organic growth as expected.
Our adjusted EBITDA margin increased to a record 15, 8%.
And we enter 'twenty, two having built our backlog to a record $5 $1 billion.
Representing 13 months of work.
And this is a 17% increase from 2020.
We significantly advanced our growth ambitions in 2021 through the completion of six acquisitions deploying more than $700 million of capital and adding more than 3200 employees to drive synergistic revenue growth.
Each of these acquisitions are consistent with our strategy of pursuing targeted small to medium sized firms that bolster centex presence in key business lines and geographies.
In doubling the size of our footprint in Australia and materially boosting our environmental services offerings in the U S. We've strengthen our ability to address the growing demand in both of these markets.
The Cardinal integration is going well and of particular note. We're pleased to announce that Susan resort Cardinal's CEO is taking over the leadership of our environmental services business in the second quarter of 2022.
Moving to our results by region.
Our U S business delivered net revenue of $440 million in the fourth quarter and $1 8 billion for 2021.
As we noted throughout 2021, the stronger Canadian dollar was a headwind and the recovery in the U S was slower to start than in other regions.
Our U S backlog achieved 10% organic growth through the year to a record $3 billion with our U S environmental services business recording more than 50% organic backlog growth.
The momentum we're seeing in backlog growth, coupled with significant infrastructure stimulus and economic expansion are all strong indicators that the U S recovery has begun.
It may take another quarter or so to wrap up we're confident that our U S business will deliver a strong performance in 2022.
This growing momentum is evident in our buildings business, where in addition to the health care and E. Commerce work, we've discussed in previous quarters. We recently won our longest largest contract ever for this team.
The Denver International Airport, Great Hall project with fees in excess of $100 million U S dollars will transform the main terminal <unk>.
<unk> security and help our clients achieve their goals to accommodate 100 million passengers.
The drive for greater sustainability is also creating opportunities for us to design for the adaptive reuse of built environments, such as the 2 million square foot L Street station redevelopment pictured here.
The use of existing building stock is gaining favor among our clients as a way to preserve heritage properties and to reduce new construct new construction and carbon emissions.
The need to bolster supply chain security is also creating increased opportunities for <unk>.
We're seeing a push to retrench domestic production facilities in the U S. As global supply chain disruptions have highlighted the need for onshore manufacturing capability.
One example of this is our growing work on domestic vaccine production with a major pharmaceutical company in the United States, where we recently began work on a new facility in California.
Our Canadian business delivered $260 million of net revenue for the fourth quarter and $1 1 billion for the year generally consistent with last year and better than we expected taking into consideration the de scoping of the transfer contract.
Growth was solid in virtually every sector due to strong demand in healthcare transit systems Atlanta development in Western Canada.
And we see the continued strength in these markets as reflected in the project wins that we highlighted on the slide.
There's also a growing demand for expertise as a result of the increased frequency of extreme weather events like what we saw in British Columbia at 2021.
We're being called upon to assist with remediation efforts and for future readiness as we draw upon new technologies developed by our innovation Center.
Good example is our floodplain predictor, which is a cloud based machine learning application that significantly reduces lead times for accurate flood prediction.
And similar to the re shoring efforts underway in the United States, we're working with clients to strengthen the supply of pharmaceutical grade radioactive isotopes for cancer treatment through the development of manufacturing facilities in Canada.
Education, both in K 12, and post secondary continues to be a strong driver for our buildings business.
And the picture on the slide highlights our work on the design of the students Association building at the NICU and University in Edmonton.
Our global business performed very well and delivered $216 million of net revenue in the fourth quarter, a 39% increase compared to the same period last year for.
For the year net revenue increased by 18% to $768 million.
This net revenue growth reflects roughly equal contribution from both acquisition and organic growth.
Specifically, we saw the strongest growth in our water and transportation sectors in the U K and New Zealand.
While strong commodity prices drove revenue growth in our mining business.
We also saw increased opportunities from both public and private clients in our buildings business in Australia.
Private investment due to high commodity prices and economic expansion is being supplemented by infrastructure stimulus programs.
The U K government has committed more than 130 billion pounds to the national infrastructure strategy, which will focus spending on transportation energy and utilities.
This is expected to lead to additional transportation projects like the <unk> 19 to <unk> crossing in the UK that we've recently been awarded and the transportation planning services contract. We recently one in Scotland.
In addition to this funding the UK government has committed 26 billion pounds to the Green Industrial Revolution, and 96 billion pounds to the integrated rail strategy.
In Australia, a $110 billion is being spent over 10 years funding energy transportation water waste and social programs.
All of these drivers contributed to global backlog, increasing over 19% during the year to a new record level.
And we continue to expect strong performance from our global operations in 2022 backed by strong macro economic factors and continued investments in infrastructure.
I'll now turn things over to Theresa to review our financial results in more detail.
Thank you Laura and good morning, everyone before I dive into the details we have made some minor presentation changes in order to comply with the new national instruments on non-GAAP measures.
You'll note that we're also using the new term project margin for what we used to call gross margin. There is no difference in how it's calculated.
As Gordon mentioned the change in the Canadian U S exchange rate had a substantial impact on our U S earnings this year and it was particularly pronounced in the first nine months of the year, we summarize the impact on our key financial line items on this slide for your reference.
For the fourth quarter, we reported EPS of <unk> 15, compared to 13 sales last year and adjusted EPS of <unk> 57.
Yeah. It was 60.
Last year.
<unk> performance was stronger than Q4 last year, but recall that last year's results included the favorable recovery of claim costs and resolution of certain tax matters.
Net revenue grew by six 3% with 250% of organic growth and six 7% acquisition growth, partially offset by a two 4% reduction due to foreign exchange.
Execution was very strong in the fourth quarter, increasing project margins by $51 $6 million and buy 250 basis points as a percentage of net revenue to 55, 3%.
And EBITDA increased $142 1 million, representing a 15, 5% margin. The decrease from Q4 last year is mainly due to increased share based compensation expense, which translated to 146 basis points of margin.
Decrease margin also reflects lower utilization in the U S as well as the previously mentioned recovery of certain claim cost recorded last year.
Our Q4 net income on an as reported basis also reflects an aggregate pre tax $37 3 million.
Chairman and onerous contract costs.
<unk> from the ongoing execution of our 2023 real estate strategy.
For the full year, we reported EPS of $1 80, and adjusted EPS of $2 42.
Both of which are records for Santa full.
Full year net revenue was $3 6 billion.
At two 6% increase on a constant currency basis, driven by acquisition growth of three 9%, partly offset by a slight organic retraction well, let the effective foreign exchange net revenue retracted by three 2%.
<unk> margin increased $32 $8 million, delivering a 160 basis point increase as a percentage of net revenue to 64.0%.
Adjusted EBITDA approximated about generated last year and margins increased by 10 basis points to a record 15, 8%. Despite an 83 basis point reduction due to increased share based compensation expense.
Our record earnings also reflect the ongoing success of our 2023 real estate strategy, which contributed more than 18 cents per share in cost savings as reported EPS or 15 cents to adjusted EPS on a pre <unk> 16 basis, we estimate the cumulative impact of this initiative would have.
Increased 2021, adjusted EBITDA margins by more than 100 basis points.
We remain on track for our target of a 30% reduction in real estate footprint by the end of 2023 relative to our 2019 baseline and expect to deliver a further 20 to 25 cents per share by the end of 2023.
Our balance sheet remains strong at December 31, net debt to adjusted EBITDA was one eight times within our expected leverage range.
Anticipate reducing leverage over the course of 2022 on the strength of our cash flow generation.
Days sales outstanding was 75 days at year end consistent with year end 2020.
Our 2021 cash flow generation was strong although it did decrease relative to 2020.
2020 cash from operations was elevated due to the success of our efforts to significantly reduce DSO and due to the deferral of certain <unk>.
Payments under government introduced pandemic measures 2021 cash from ops reflects the stabilized lower level of DSO, the outflow of those deferred tax payments and a substantial effect of the stronger Canadian dollar.
Beyond operating cash flow, we deployed $703 million to fund acquisitions and returned $123 million to shareholders through dividends and the repurchase of shares through our normal course issuer bid.
Our board of directors yesterday increased our annualized dividend by nine 1% for 2022. This is the ninth consecutive year. Our board has increased our dividend and it reflects our confidence in our ongoing cash flow generation and commitment to return capital to our shareholders I'll now turn things back to Gordon to review our outlook.
For 2022.
Thanks Teresa.
As we enter 2022 with a record 13 months have confirmed backlog on our books, we see a number of macro trends. The sandvik is particularly well positioned to capitalize on in the years to come.
Much has already been said about the magnitude of infrastructure stimulus spending that's occurring around the world and that we're well positioned to capitalize on.
However, a growing component of this infrastructure spend will be directed towards disadvantaged communities, which is an area where centex community focus is there a particular benefit to our clients.
Our multidisciplinary expertise and our supplier diversity and equity team hopes to along funding to strengthen the resilience of these communities and as a competitive advantage for us.
In addition, we have over 150 funding specialists that work with communities across North America.
Collaborating with community leaders technical staff and other partners. This team is focused on helping communities access public funding for infrastructure with an eye towards long term sustainability.
This is a further benefit to our clients as they look for additional sources of funding for their projects.
These are just two great examples of the full breadth of our service offerings.
<unk> to create or can take our competitive advantage.
A major takeaways from the pandemic for governments around the world, there's been how fragile the global supply changes and.
The exposure of the screens for domestic economies if access to critical products for resources is curtailed.
As I've mentioned earlier, we're seeing growing investments in domestic manufacturing capability for strategic or a central products like vaccines radioactive isotopes solar panels that electric vehicle batteries and we're actively involved on all of these fronts.
Another Great example of this domestic supply chain strengthening involves the more than $80 billion, that's been announced related to semiconductor manufacturing in the U S.
We're currently engaged in design work on multiple semiconductor fabrication and related supply chain facilities in the U S.
And these draw the full suite of Centex service offerings from water and wastewater treatment two industrial buildings site development power and environmental services.
The extreme weather events experienced globally in 2021 service critical reminders of global action must be taken to improve infrastructure resilience and we're engaged with clients around the world to harden their assets against increasingly frequent and store and severe events.
<unk> is currently involved in responding to over 20 climate disasters, each with losses exceeding $1 billion that have occurred around the world.
The energy transition is driving growth in our energy and resources business, where we continue to work on the largest solar energy project in Canada. The first large scale renewable diesel facility in Canada, and multiple wind projects globally.
And with a heightened awareness of the affect climate change has on global water supply governments are prioritizing spending towards addressing water scarcity.
<unk> is currently working on some of the largest water security projects in the world.
For example in California. Our teams are involved but every large flagship advanced water treatment project currently underway, which will meaningfully improve water supply security in the region.
Of course, our ability to capitalize on the opportunities ahead is heavily dependent on our ability to attract and retain a talented workforce.
And with the mature majority of our south continuing to work from home I'm grateful to their collective resist resilience and perseverance.
By prioritizing the health safety and wellbeing of our people, we've improved our employee engagement score by 6% relative to pre pandemic levels.
And while the competition for talent continues at all sectors were seeing top industry talent migrate to static and recognition of our culture and future prospects.
You've heard me describe the tenfold increase in the value of our U S Federal IV IQ framework.
And this progress started with a strategic hire who's been a catalyst for building out our federal team.
Similarly, we've recently completed several other key growth related hires in California, Texas and in our water business.
And these strategic hires and our broad portfolio of large scale iconic projects are precipitating revenue growth and follow on talent movement in our direction.
We expect the strong trends that I, just talked about and our recent acquisition.
To drive net revenue growth in the range of 18% to 22% for 2022.
With organic net revenue growth in the mid to high single digits weighted to the second half of the year.
Organic growth in the U S is expected to be in the high single digits, driven by growing momentum as evidenced by our record high U S backlog.
And project opportunities arising from the $1 two trillion dollar of infrastructure stimulus Bill.
After a year of robust organic growth in Canada in 2021, we expect to maintain high levels of activity driving the 2022 organic growth in the low single digits.
Organic growth in global is expected to achieve high single to low double digit growth propelled by strong economic growth continue.
Continued demand and stimulus and infrastructure sectors.
As we continue to be disciplined in project execution and operational efficiency of our adjusted EBITDA as a percentage of net revenue is expected to range between $15 three to 16, 3%.
This range reflects investments were making to support growth by bolstering our internal resources and the commercialization of our new innovations and technologies.
Strong EBITDA margins and the ongoing execution of our real estate strategy are expected to drive our adjusted net income margin to be at or above seven 5% and adjusted EPS growth in the range of 22% to 26%.
And we expect to deliver an adjusted return on invested capital above 10, 5%.
With a favorable market backdrop and engaged workforce, a full M&A pipeline and a healthy balance sheet. We are very optimistic for the years ahead.
And with that I'll turn the call back to the operator for questions operator.
Thank you if you wish to ask a question at this time. Please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment again. Please press star one to ask a question. We will now take our first question from Jacob bout from <unk>.
Please go ahead.
Good morning.
Good morning Jacob.
First question is on on margins.
So 2022, EBITDA Youre, saying 15, 3% to 16, three range 2023 at 16% to 17%.
That's still valid maybe just comment on some of the moving parts.
In your 2022 guidance I mean, I think SG&A moves higher with.
Reopening and theres going to be higher labor costs.
And I guess, you offset is mix.
And I guess better.
Reduced real estate footprint.
So that's on 2022 and then maybe on 23 just talk about the bridge how you get from.
Your guidance on 'twenty two to 'twenty three.
Sure.
All lines up really nicely actually Jacob.
Yes, what we're expecting in 2022, and where we expect to come out for a part of the year as we move into 2023 part of that underlying expectation is that the investments we are making in 2022.
Two really.
Yes, Sir.
Our internal resources, whether it is.
On the back office branch HR accounting.
Our systems and so on and the investments we're making in innovation the expectation is that as we move into 2023.
Ill.
You need to see growing benefit from that because we see such a strong multiyear cycle coming ahead of us.
For 2022, and beyond that that productivity and efficiency should just continue into 2023. So that's in large part.
We're expecting we're also thinking of those continuing.
How to work toward our goals.
Synergies and integration savings through the Cardinal acquisition are continuing to grow our cleaning operation, which we have grown substantially in 2022 and continue to focus on where we can grow.
Grow without delivery center.
And now determined how much we can can grow into Manila operations that came with cardinal as well so there's.
A number of things that as I've always said there isn't just one or two key things that we can do to really change.
The margin, but it is a number a multiple things that said that we will drive toward.
And then in your mind, what's the biggest risk as far as actually achieving these 2023 targets.
Oh, I guess, you know we have talked about.
The.
Everyone is talking about.
The labor shortage.
<unk> Gard describe why.
Although we're not going to be immune to that why we feel good about our positioning with the.
The culture.
Okay.
Drawing people to us but that remains.
A bit of a risk just because of the unknown elements of that.
Will we be able to hire the people to hire the people that we need to address the growth that is kind of coming towards the back end of this year and into next.
And I think you know as much as we are very confident in our ability to integrate acquisitions Cardinal is a large one and it's and it's complicated. So we you know as is progressing we feel good about the progress, we're making and our confidence.
It will be successful in that integration, but there's always risk associated with the timing and and how disruptive that kind of activity can be two efforts that you've acquired so those are a couple of things that we're watching.
Last question here any any exposure.
How are you thinking about the Russia Ukraine.
Conflict and implications for <unk>.
We.
As the temperature began to increase in the Ukraine last fall, we researched and any projects that we might have ongoing in the Ukraine. We did have an EU funded projected development project that was ongoing we withdrew our people from the Ukraine late last year and this year as the temperature continue to do it.
Increase in January we met with our clients and we wrap the project out what our final report. So we really haven't had historically very much exposure to the UK other than through some EU development projects and certainly.
So all of our people are out all of our people are safe and we don't see at this point it to be a significant impact on us.
One way or the other.
That's helpful. Thank you.
Thanks, Jake Cleveland Nets.
We will now take our next question from Sean from floor level from Desjardins capital markets. Please go ahead.
Yes. Thank you very much and good morning, So I know, it's still early in the integration process, but I was wondering if you could talk about what's your vision for the margin profile of God knows as your base business over the next two to three years.
<unk>.
Certainly.
As we talked about when we announced the acquisition overall, we expect card noted margin profile to be largely consistent with ours.
And to continue to improve over time as we're driving within legacy Stan Tech and we have noted that between the U S business in the Australia business the margin profile is different.
In the U S where it is largely focused on environmental services work that does tend to be a higher margin business.
And so that that portion of cars no I will generate stronger than average centex margins in Australia, where the business is more focused on transportation.
And the other sectors that are are are still consistent with downturn businesses, but not as high as yeah.
We would say that those margins will continue to be a little bit lower than our average so all in all of it it's kind of a just curious why it was such a good fit for us very consistent margin profile to our specific sectors.
And opportunities to continue to streamline and expand margins as we continue those initiatives within within downtown.
Okay. That's really helpful. Thank you very much and then I was wondering if you could talk a bit more about your M&A strategy you mentioned that the.
The pipeline of school, but considering that the integration is still in its early phase should we expect more of a tuck in that approach in the in the near term for 2022 or there are still some opportunities that could materialize later this year.
Yes, so firstly our primary focus is to ensure the smooth integration of the teams that are joining us from Cardinal So we're working hard on that.
To your point that said our balance sheet remains really strong even after the cardinal transaction and the pipeline of potential firms is really robust.
We're continuing to look for firms we're in active discussions as we are at any time.
But with firms in different geographies, primarily right now you know we're looking at firms in the in Canada, The United States. The U K Western Europe , New Zealand.
Primarily looking at firms water transportation buildings environment, and so on and so while we're continuing to look in Australia. The teams there we've almost doubled the size of our group. There. So we wouldn't want to to layer on another significantly sized acquisition in Australia.
Certainly within the first half of this year until we kind of get over the hump with the overall integration. There. So I think the pipeline is still very full our appetite is still is still very strong and our ability to integrate additional firms. We still have the capacity to do that we could do it in Australia as well.
But I think you just would be you'll probably too much to layer on an additional one there because remember in Australia in 2021, we acquired GTA in Jennie O and then Cardinal So we're really in the process of integrating three firms into our one stands at philosophy in Australia. So we want to give a good chance for that to settle in.
Sure we're getting the the success of that before we layered on to much more.
Okay. Great then the last one for me on <unk>, you mentioned in the press release.
Investment, you're making for commercialization of the technology I was wondering if you could provide a bit more details about that.
In fact, it might have on margin in 2020 three and beyond thank you very much.
Yeah. Thank you so within our excuse me within our innovation group, we're working on a number of things like <unk>.
Firstly, we're working on.
Systems and processes that can make ourselves more efficient internally, so that we'll be able to develop projects.
Our to deliver projects faster being able to increase the net revenue generation per employee per FTE.
And so we're working on a number of things there to automate and expedite the design process, but externally, we're working with clients to develop a number of systems that will meet their needs and so you know I mentioned in the prepared remarks, the floodplain predictor model that helps us too.
SaaS.
We're where there might be flooding events, where we might see land slides and these sorts of things we have other products that we've developed and have 60 or more clients using it which is like a financial management system that helps clients automate their their.
Our capital planning process and the beauty of that is that is it both as a sort of a software as a service and annual renewal software renewal type of an agreement then.
Then, we're often hired as well on our consultative practice to help them work with the software it and deliver it. So those are just a few examples of the types of things we're doing both internally and externally. So we are investing in those things this year.
We've also talked previously about some of the investments that we're making in <unk>.
In our third party firms like Blue Sky resources that are getting that are underway and we will add that additional benefit to our clients. So as an example, blue sky resources that we've talked about previously.
It uses remote sensing information to provide information on.
Concentrations of contaminants in the in the atmosphere and it can be used really anywhere around the world to provide some of our multinational clients with understandings of of are they meeting.
Are they meeting their regulatory requirements in terms of pollutants and things in.
In different locations. So these are the types of things that we're delivering investing in now but a number of them are are bearing fruit already for us. So we're really pleased with the progress in that area.
Great. Thank you very much.
Thank you.
We will now take our next question from your evening from Canaccord. Please go ahead.
Hey, good morning, Gordon Teresa.
Good morning, good morning.
I'm wondering I don't know who wants to take it but just wondering if you could talk about your.
So utilization and <unk>.
2022% last year.
Sorry, <unk> was that are you just you're you were really.
Thoughts there I couldn't quite hear did you.
Utilization.
Utilization of our 2022 over 2021, yeah, Okay excellent.
From a utilization perspective.
And you've seen reflected in.
Our results for 2021, and the guidance, we've given for 2022.
We spend a lot less.
The slower to come out.
And recovery than we expected.
And so as much as we have been managing our workforce in the U S. There is some latency there because as we look at the size of our backlog and notified awards and then the momentum we expect to continue to build when infrastructure spending starts to flow and we've maintained.
<unk>.
A good portion of that workforce, which in.
2021 was not as highly utilized as we would typically want or expect.
So as we go into into next year.
We do think and we're seeing in Q1 that is continuing to be slow in terms of that ramp up.
So U S utilization will probably be again, a little bit lower and that's why we're saying that.
Our EBITDA margin in Q1 is probably going to be at the low end or maybe even a bit below the low end of our range for seasonal reasons, it's typically a little bit lower but coupled with that.
The lower utilization in the U S that we expect to really builds as we get past the first quarter into the second and beyond so that's the situation, we expect to improve and of course in light of the.
They have a shortage.
It's very technical and skilled employees that we need.
We believe it's a it's the right thing to retain those employees. So that we have that workforce available to interest.
That is coming.
Okay, so not a.
On the whole maybe not a big change in utilization in 'twenty two.
I think as we get towards the second half of the year will we expect.
Significant.
Improvement.
But I think Q1, maybe not not so much.
Yeah Okay.
And correct me, if I'm wrong, but utilization would be one of the biggest drivers of your project margin.
Not project margin, but EBITDA margin because to the extent that a project.
Project margin as your revenue minus direct labor.
That we expect to just continue to be quite strong, but it's when you have.
A workforce that is in charge of work that goes into your admin and marketing costs and that will cause those expenses to be in a little bit higher so it would be more reflected in our EBITDA margin and not as project margin.
Okay.
Second one just digging in on the first quarter.
Why would your organic growth the back half weighted when you're facing really really easy comps in the first quarter. It was down almost seven 5% last year.
I think it's weird.
Looking into the first quarter, we continue to see in the U S and Jay and somewhat in global as well that these larger projects that we are winning and are are in our backlog.
So that gives us confidence that.
The backlogs of work is there we are finding it is taking a little bit longer to complete the processes and get the work started.
Yeah, we are winning larger sized projects are more complex and so you know the early work that we have to do.
Is not.
Labor intensive.
A handful of specialists kind of dealing with with the client to get specifics scoped out and the work orders issued.
And then as those projects ramp up is really when we can deploy large numbers of our staff to really get those projects up and running so that's what we're seeing.
The first quarter.
Despite Q1 being.
An easy comp.
I would say that that's probably the biggest factor is just that that lag in getting the backlog converted into the task orders and work orders that we can actually deploy large portions of our workforce toward.
Okay.
One why wouldn't that bleed into the second quarter.
It may I think our expectation is that given what's in our backlog and the early work that as we get towards the second quarter. You know that we will largely have passed that terminal in house have those projects.
I've been writing that that's our expectation.
And I think another factor there are two year is.
The environmental services backlog and that you know that typically really gets rolling in the second quarter, particularly in northern United States and in Canada. When we can put those people out in the field and you have seen in our U S E S backlog up by.
50% organically add on that the Cardinal.
Folks and so I think what which of course won't show up in organic growth for the first year, but.
We see pretty robust growth in our environmental services business and that really ramps up in quarters, two and three.
Thank you.
Thanks, Rick.
We will now take our next question from Mike <unk> from <unk>.
TD Securities. Please go ahead.
Thank you good morning.
Good morning.
Maybe just to build on one of your last question there just with respect to organic growth.
Guidance in 2022 are you able to provide just sort of a little bit more detail about.
The cadence and the progression through the year.
Overall, but also across the regions.
The various regions Global Canada and U S.
Yes, so sure I'll I'll start without an <unk> III can dive in.
Appropriate so.
Maybe I'll start with global video, we had a really strong year in global almost 9% organic growth in 2021, and we really with the backlog that we've got we see that coming in.
A good backlog growth, we mentioned high single to perhaps low double digit growth in 2022. So we're seeing a lot of transportation work I mentioned in the prepared results.
In the U K, certainly, Australia, and New Zealand were seeing.
Some some buildings.
Work down there we've talked about the puts great hospital, and others and so and we talk just about.
The amount of infrastructure stimulus U K, Australia, and so on also where we're getting support from.
Hi, copper and some of the other commodity prices in our mining business is.
South America in Western Australia.
We feel pretty good about our global organic growth throughout the year, even though it was strong in 2021, we feel it's going to be pretty strong and robust in 2022 as well.
Then maybe talking about Canada.
Excluding trans mountain and will be so happy that we don't have to ever mentioned that again after this quarter that the impact on revenue of that project.
Excluding that we had the organic growth this year in Canada just over 5%.
And so Canada came out of the gates pretty quick as did grow in 2021.
We expect good performance still in 2022, but because a lot of Canada sort of came out of the gates.
2021, we see organic growth in Canada in that low single digits in in 2022 U S is interesting because you've seen the organic growth that we've got there you know 10% organic growth in the U S and when you add in there our acquisition backlog.
<unk> backlog is up over 23% to a record of 3 billion Canadian so pretty significant there.
<unk> strong backlog as we go into 2021.
Tailwind from infrastructure stimulus I think will be a second half of the year.
We're starting to see some of those those rfps hit the street now from from the bipartisan infrastructure law that is anticipated to come we're seeing.
Some state and local work coming out in anticipation of it.
In water lead service line replacement.
Transportation interesting we've responded to five EV charging network are accused in the past two weeks alone. So theres a lot of work coming out in those areas too.
We talked about semiconductors, where we're working on a number of these facilities already and certainly theres more to come. So we do feel pretty good about organic growth in the U S. But you know what I think you might you know many of our other multi sector global peers have talked about the first part of the year being a little slower than the second partner and I think what we're feeling is.
Consistent with that.
Okay. Thanks, very much court, that's that's very helpful.
Just shifting over to your margin if your EBITDA margin guidance.
In the release, you talked about the guidance, reflecting investments in internal growth resources to support.
To support the growth in the business and the commercialization of new.
Innovations and technologies is being factors that are going to weigh on the margins can you just elaborate on.
The investments, you're making and what youre doing in those areas.
Yeah sure. So you know again.
There is is there a couple of components to it but you know.
As I mentioned earlier the growth that we see coming coupled with.
Some.
Disruption in <unk>.
Overall labor that everybody is experiencing.
We are seeing a need for instance to bolster our internal resources and human resources, because we need the talent acquisition people to hire the people.
I tend to deploy to these projects.
And that's a really hot market right now.
So you know hiring additional people in HR.
Higher and additional people on our on our other back office teams to support the growth.
Is this something that we have been quite brutal onto the last couple of years.
And just believe that in order for us to be able to achieve the growth that we see coming we need to know what kind of loosen those press strength a little bit.
Cyber security continues to be.
An area that requires constant investment and we see some of that coming and as well our it systems to support it we always talked about the increased work we're doing on both U S and Canadian federal.
And there are requirements there around your it systems.
The increased <unk> work that the court has been referencing it requires us to you know to put some investment toward our it systems to meet the regulations and the requirements of that particular client. So those are the kinds of things that we are focused on internally.
And from an innovation standpoint is it around <unk>.
Ensuring that we are not pennywise and pound foolish when it comes to innovation, but we are really critically determining where to put our capital dollars towards what what innovation.
<unk> that will either create opportunities with our clients.
In terms of new services or make them stickier to us through.
Entry way and add on other services to us.
Or in our ability to deliver.
Our work such that we can be more efficient and can either drive to more competitive pricing or greater and greater margin expansion that we're able to keep so that's kind of a general suite of things that we're looking at.
Okay. Thanks, very much Teresa and then maybe just one last one.
For you as well Theresa just just sticking with the subject of your EBITDA margin guidance I know you you said you.
You've not.
Made any assumptions around the impact of share price movements.
Since year end as it relates to stock based comps, but what have you baked into your.
2022, adjusted EBITDA margin guidance with respect to stock based compensation relative to what you would've expense in 2021.
So what we are what we have baked in there is an assumption that we that the share price remains stable as of where it was at the end of the year.
So given market activity today, and how long. It lasts you know it may it may help or hurt us as we go forward one thing I will mention with respect to our stock based comp and it's in our MD&A.
We havent gotten to those pages, yet in our public disclosures, but we did at the end of the year enter into.
Yeah.
Slot.
For a portion of our stock based compensation to try and mitigate some of the volatility that we saw this year.
So in aggregate about 35.
Percent of the units that we have outstanding has been hedged effectively and we should have that.
We should be able to then offset volatility and in share price movement for that portion of the units we have outstanding.
Our balance remains subject to share price fluctuations, but those swaps will help to mitigate that somewhat.
Okay I'll take a look at that in the fall.
Follow up thank.
Thank you.
Okay. Thanks, Michael.
We will now take our next question from Frederic Bastien from Raymond James. Please go ahead.
Hi, Good morning, I have you have you seen the coming together of Cardinal once that's like drive new revenue opportunities that might not have been attainable prior to the combination.
Yes, I think what was what's been interesting with with combining Cardinal one static Frederic is that while we were working through the process of doing the due diligence certainly with only the executive level that was aware of the transaction and we were chatting about it and we we felt that there was really good synergy and clients.
With some of the the individuals, but when we announced that.
The transaction.
The outpouring of folks so from from both Cardinal and <unk>, We said.
We work with this group on a project here or I worked with him at <unk>.
Previously at their company or this company.
Just the amount of synergy between the the the employees has been fantastic. So without question that has driven.
More excitement and more opportunities I think in terms of.
Then we actually thought that there was initially so it's been a pleasant surprise for us.
Don't like asking that question, but was there anything that surprised.
Surprise to you from a more of a.
Cautionary.
Example, or something that may or may not have been.
Super Pleasant about the acquisition or is overall happening pretty.
Good to go.
We through the through the due diligence we had really searched hard to unearth any concerns that we might have from attacks and project due diligence due diligence and so on so.
There's actually been no no real downside surprises because we had a nurse.
Those things during due diligence.
Okay Super.
Where do you expect the leverage to finish by the end of this year, assuming you don't do any major acquisitions.
Is it possible you go towards the low end of your target range.
Yes, Scott that is my expectation assuming that if we don't there on any assumptions around acquisitions, we should be towards the low end of our range.
Awesome, that's all I have thank you very much.
Thanks Richard.
We will now take our next question from Ian <unk> from Stifel. Please go ahead.
Good morning, everyone.
Right right.
Could you elaborate a little bit on how you factored in.
Our rate hiking cycle and the impact it may have on the buildings portion of your business, whether it be on the commercial side <unk> on the residential side.
So as we've been talking with with our clients they haven't really been its been too.
We haven't seen a lot of sensitivity in our discussions at this 0.2 rate hikes, where we have seen more sensitivity from some of our commercial buildings clients has been with regards to inflation in terms of supplies.
<unk>.
If the if the cost of the building increases by a certain amount how can we value engineer it to kind of get the costs back down in line with where things might be so yeah. So the discussions we've been having so far have been less about rate hikes and more about just inflationary pressures overall.
Okay. That's helpful.
The other thing I wanted to ask about with respect to the infrastructure Bill in the U S. You're already starting to see some commentary that proponents are people are going to participate or moving into smaller projects rather than larger projects given inflationary pressures.
I mean does <unk> have any preference on where they were working on smaller large projects with respect to this bill or is it kind of all equal.
Yes, I think thats one of the beauties actually of the static model is that we work on projects from $5000 in fees to several hundred millions of dollars in fees and we've kind of scaled our whole operation from the smaller community wants to those larger sort of global class type projects. So no.
I think you were okay. However, our clients decided to put out the projects.
We'll be just fine with us.
Okay. Thanks, very much I'll turn it back over.
Thanks Ian.
Our next question comes from Max Some high tariff from National Bank Financial. Please go ahead.
Hi, there Theresa good morning.
Good morning.
Just a quick question in terms of.
The U S.
Potential benefiting from.
By the stimulus in the back half I think when we look at some of the peers.
Peter as people are sort of pointing to 2023. So just wondering what gives us the confidence about that inflection point, maybe a little bit earlier.
Yes, so I guess any comment there.
Yeah, Yeah, no great point market, it's interesting one of the ones that came out.
Earlier this week that was talking about 2023 I think there. There are currently 23 starts in our Q4, so as they're talking about 2023 is kind of maybe even back half to us. So so I do think because we are starting to see some of the projects hit the streets now that you know this won't be a Q1 story for us or you know I think we'll start to see some rare.
You generated in Q3, but I do think this will be a Q3 Q4 story for us and certainly you'll providing strong strong tailwind as we go into <unk>.
Calendar year 2023 also.
Okay. That's helpful. Thank you and then just one last question in terms of expectations of sellers.
Obviously, we have seen a deflation of multiples in the public market, but wondering if.
You know the conversation like Yelp right now with the potential private targets, if youre seeing any change in the body language or it's still kind of pretty pretty sticky. So maybe just any commentary. Thanks.
Yeah.
Yeah, you know I.
Some of the discussions that we've been having certainly in the latter part of last year expectations of sellers from a multiples perspective crept up you know as in concert the public company multiples, we're creeping upwards as well so it's been.
Since the beginning of the year that we've seen some of the public multiples come down a little bit so.
The firms that we're talking to I think they are.
The academically they understand that there's there's a certain accretive delta between though that we need to hold onto.
So we've had some discussions on it on those with some with some sellers and I think they're just waiting to see kind of what happens.
We think so.
I think everyone's being reasonable but.
This response to the public market since the beginning of the year Hasnt.
Hasn't quite crept into the some of these private firms yet, but I think it will if things stay where they are but we haven't seen any transactions since the beginning of the year to really know how that all plays out.
Right. Okay. That's that's very helpful. Thank you. Thank you so much.
Great. Thanks, Matt.
We will now take our next question from Mark Murphy from Society Bank. Please go ahead.
Yeah.
Hey, good morning.
Just a few questions first just to be clear.
Do you expect the business to put up some organic growth in Q1.
Yes, yes, absolutely, we sort of <unk> and I were looking at each other in terms of who is going to respond, but we do expect organic growth in Q1, just strengthening quarter over quarter as we go into the latter part of the year.
Okay got it.
In terms of the investments.
That you've laid out.
Teresa Gordon I appreciate the color but.
Is there any could you maybe provide sort of a quantum of the size of that investment just to understand sort of the impact that's having this year.
You know it.
Effectively embedded in the adjusted EBITDA range that we've put out.
The 15, 3% to 16, three so our assumptions around where that spending will go coupled with.
Greece spending I think that the one actually is the one area that I haven't.
Talked about HR it.
It is our marketing and business development activities. So.
That assumption is baked into that EBITDA margin that we haven't provided specific dollar ranges for Blackstone.
Those additional cost might be.
Currently.
Okay, No that's fine.
Maybe just a last question just on free cash flow I mean is the expectation sort of grows in line with earnings.
Or is there anything sort of to think about in terms of capex or working capital.
Well I would say that.
I agree with you the expectation is that free cash flow will grow along with our earnings so that should be pretty robust this year.
Capex was never a huge part of our overall spend.
It will probably notch up a little bit next year, just because you go through the pandemic, we have been pretty careful in in counting back.
Our cost for capital spending.
It will be outsized by any stretch.
It will it will probably creep up a little bit relative to this year.
Alright, thanks for the time I appreciate it.
Thank you.
We will now take our next question from setbacks Kim from RBC capital. Please go ahead.
Alright, great. Thanks, and good morning, I guess theres been bit of discussion on the U S and the infrastructure build contribution I guess trying to get an idea of when you think about sort of building a buffer at the mid to high single digit organic growth guidance I'd say some of the spend from the infrastructure Bill does get pushed into 'twenty three is that what maybe pushes the organic growth.
Sort of the mid single digit range for the year for total company just want to understand kind of the buffering or how much contribution may be reflected in the guide for this year.
Yeah. So there.
We've put our thoughts together on.
What our expectations were for the U S.
The things that we're starting to see flows from that.
What's in our backlog to the <unk>.
Level of activity on the marketing front.
Is embedded in that that mid to high single digit organic growth and then your age I mean, some of it is where it is.
There's always a component of it.
The revenue that you think youre going to win but maybe isn't explicitly identified two projects yet and so that is embedded in that mid to high single digit range.
And as we've talked about in Q1 with a bit of a slower uptick again, how how the year unfolds and how quickly we get actually moving.
And getting utilization up and getting those projects up and running.
Towards the end of the year, whether that pushes us towards the higher end it remains to be seen but those are those are the assumptions that you would be embedded in that range.
Okay, great. Thanks for that and I guess, just one related to kind of the real estate rationalization strategy.
It looks like from your.
Income statement buildup, there's a noncash impairment related to some of the leasehold assets on your balance sheet. It looks like there was one last just want to make sure I understand that is that really just being able to sublet space that you might be operating in at a lower rate than maybe what you might've gotten it I just want to make sure we understand the accounting here and then also if you can comment on.
If you are subletting space is that going to be recognize that maybe an offset to your SG&A costs or would that kind of flowing through our income statement just a bit of clarity on those are the line items. Please.
Yeah sure so.
I mean, if anyone can can cross the NASA and Ifr 16, yeah. They deserve a metal is very convoluted and complex.
Let's just talk about the lease impairments first and so we did take the large impairment last year and that related to.
Base that we identified that we could both downsized.
Downsized and then make available to sublet or leases that.
We could exit at that time.
And so as we advance through this year.
The lease impairment that we took in 2020 was made up of two pieces.
One is the further identification of spaces.
That we could rationalize.
The second relates to some of the space that we impaired last year almost all.
Kind of modeling that goes into the determination of the value of those leases and what you write off and for some of that space market conditions. In 2021 ended up to be outside to the low end of what we would've modeled so we had to take a further impairment on those spaces.
So then as we look forward into into what that means.
It does mean that there's going to be a combination of <unk>.
Cost savings from having.
Having exited spaces that we are no longer paying for high or.
Or spaces that we have rationalized and our sub leasing.
That will result in some some inflow.
Earnings and cash and so.
As far as I can see.
That inflow of cash.
Not flow through our admin and marketing expenses I think the majority of it is going to still be outside of our our EBITDA calculation.
And it will you know if this cash flow question it'll show up in our cash flow statement.
But it is it is a little convoluted and if it a bit tough to pick apart but.
The effects of leasing now really largely reside outside of the EBITDA calculation.
Okay.