Q4 2021 Stantec Inc Earnings Call
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 Tracy Young 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 adult 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 from Pantex management discussion and analysis and incorporated in full for the purposes of today's call unless otherwise.
Dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded with dash I am pleased to turn the call over to Mr. Gordon Johnson. Please go ahead Sir.
Yeah.
Good morning, and thank you for joining us today.
Very pleased to report, our Q4 and full year 2021 results, which reflect the solid execution of our multiyear strategy.
We grew our global employee base by around 15% through strategic acquisition, we 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 growth 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 sequentially.
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 entered 2002, having built our backlog to a record $5 $1 billion representing.
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 <unk> 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 have strengthened our ability to address the growing demand in both of these markets.
The card to integration is going well and our particular note. We're pleased to announce that Susan Reis Board Cardinal 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 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 as evidenced in our buildings business, where in addition to the health care and E. Commerce, we have discussed in previous quarters. We recently one of 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 improve security and help our clients achieve their goal 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 that the scoping of the Trans mountain.
Contract.
Growth was solid in virtually every sector due to strong demand in healthcare transit systems and land development in Western Canada.
And we see the continued strength in these markets as reflected in the project wins that we've highlighted on the slide.
There's also a growing demand for our 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.
An 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 are 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 in 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.
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.
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 won 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 macroeconomic factors and continued investments in infrastructure.
I'll now turn things over to Theresa to review our financial results in more detail.
Thank you Gordon and good morning, everyone before I dive into the details, but 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.
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. Please 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 Jones last year and adjusted EPS of <unk> 57, compared with 60 last year.
Operating 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.
Revenue grew by six 3% with 2.0% of organic growth and six 7% acquisition growth, partially offset by a two 4% reduction due to foreign exchange project execution was very strong in the fourth quarter, increasing project margins by $51 $6 million and buy 200.
50 basis points as a percentage of net revenue to 55, 3%.
Adjusted 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.
Decreased 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.
The chairman and onerous contract costs arising from the ongoing execution of our 2023 real estate strategy.
Yes.
For the full year, we reported EPS of $1 80, and adjusted EPS of $2 42.
Both of which are records for Santa <unk>.
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 and let the effective foreign exchange net revenue retracted by three 2%.
<unk> margin increased $32 8 million.
Delivering a 160 basis point increase.
<unk> net revenue to 54.0%.
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 to as reported EPS or 15 jets to adjusted EPS on a pre <unk> 16 basis, we estimate the cumulative impact of this initiative.
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 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.
We 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>.
<unk> payments under government introduced measures 2021 cash from ops reflects the stabilized lower level of DSO, the outflow of those deferred tax payments and the substantial effect of the stronger Canadian dollar.
Beyond operating cash flow, we deployed $703 million to fund acquisition 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 reflects our confidence in our ongoing cash flow generation and commitment to return capital to our shareholders I'll now turn things back to court to review our outlook.
For 2022.
Thanks Teresa.
As we entered 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 them.
However, a growing component of this infrastructure spend will be directed towards disadvantaged communities, which is an area where centex community focus is a particular benefit to our clients.
Our multidisciplinary expertise and our supplier diversity and equity team helps to align 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.
So these are just two great examples of the full breadth of our service offerings.
<unk> to create a can ticked our competitive advantage.
A major takeaways from the pandemic for governments around the world has been how fragile the global supply chain is and the exposure. This creates for domestic economies if access to critical products and resources is curtailed.
As I mentioned earlier, we're seeing growing investment in domestic manufacturing capability for strategic or essential products like vaccines radioactive isotopes solar panels and 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.
It'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 drawn 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 are 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.
And static is currently working on some of the largest water security projects in the world.
For example in California. Our teams are involved on 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.
And with the mature majority of our staff continuing to work from home I am 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 10 fold increase in the value of our U S Federal IV IQ framework.
And this progress started with a strategic hire who has 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 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 remain disciplined in project execution and operational efficiency, our adjusted EBITDA as a percentage of net revenue is expected to range between 15 three to 16, 3%.
This range reflects the investments, we're 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 July youre sticking on 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 Yeah first question is on margins.
So 2022, EBITDA Youre, saying 15, 3% to 16, three range 2023 at 16% to 17%.
Assuming that's still valid maybe just comment on some of the moving parts.
In your 2022 guidance I think SG&A moves higher.
Reopening and theres going to be higher labor costs.
<unk> I guess, you offset is mix.
And I guess better.
<unk> 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.
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 that that the investments we are making in 2022 two.
Strengthen our internal resources, whether it is on the back office spreads HR accounting.
Systems, and so on and the investments we're making in innovation the expectation is that as we move into 2023.
Continue 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.
Now to work toward our goals on.
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 without delivery center.
<unk> now determined how much we can can grow as our Manila operation that came with cardinal as well so.
A number of things and as I've always said there isn't just one or two key things that we can do to really.
<unk>.
Margin, but it is a number a multiple of things that that will drive toward.
And then in your mind, what's the biggest risk as far as actually achieving these 2020 targets.
Oh I guess.
We have talked about.
The.
Everyone is talking about.
The labor shortage, you heard Greg describe why.
Although we're not going to be immune to that why we feel good about our positioning with the.
The culture.
I kept that incentives 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.
Into next.
And I think as much as we are very confident in our ability to integrate acquisitions Cardinal is a large one and.
It is complicated so we as is progressing we feel good about the progress, we're making and are confident that we'll be successful in that integration, but there's always risk associated with the timing.
And how how disruptive that kind of activity can be two law firms that you've acquired so those are a couple of things that we're watching.
Last question here any exposure.
Or how are you thinking about the Russia Ukraine.
Flipped and implications for <unk>.
We.
As the temperature began to increase in the Ukraine last fall.
We researched any 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 continued to.
To increase in January we met with our client and we wrap the project up road our final report.
No we really haven't had historically very much exposure to the Ukraine 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.
Okay. That's helpful. Thank you.
Thanks, Steve where you go next.
We will now take our next question from Sean Francois <unk> from Desjardins capital markets. Please go ahead.
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 a garden hose is your basic.
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 are driving within legacy <unk> 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 portion of cars no will generate stronger than average contract margins.
Australia, where the business is more focused on transportation.
And other sectors that are.
Are still consistent with phanteks businesses, but not as high as Es.
We would say that those margins will continue to be a little bit lower than our average so all in all kind of I'm. 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 or school, but considering that the integration is still in its early phase should we expect more of a tuck in approach 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.
With firms in different geographies, primarily right now we're looking at firms 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.
And 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've just would be probably too much to later.
On an additional one there because remember in Australia in 2021, we acquired GTA and Jennie O and then Cardinal So we're really in.
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 and ensure we're getting the success of that before we layered on to much more.
Okay.
And the last one for me on <unk>, you mentioned in the press release.
Desman, 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 2023 and beyond thank you very much.
Yes. Thank you so within our excuse me within our innovation group, we are 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 I mentioned in the prepared remarks.
Marks 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 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.
Looking in <unk>.
In the 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 understanding those of are they meeting.
Are they meeting their regulatory requirements in terms of pollutants and things.
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 Theresa.
Good morning, good morning.
Im wondering I know who wants to take it but just wondering if you could talk about your.
So utilization.
2022 last.
Last year.
Sorry, <unk> was that it.
You just you were really.
Software and Couldnt quite <unk> utilization.
Utilization for 2022 over 2021, yeah, Okay excellent.
From a utilization perspective.
<unk> seen reflected in our results for 2021 and the guidance we've given for 2022.
As we've said a lot.
The slower to come us.
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 we've maintained.
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 are 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 Thats why were saying that 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 build 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 later.
The.
They have a shortage.
It's very technical and skilled employees that we need.
We believe it's the right thing to retain those employees that we have that workforce available to address the growth 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, we expect.
Significant.
Improvement.
But I think Q1, maybe not so much.
Yes, 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.
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 will be more reflected in our EBITDA margin and not in project margin.
Okay.
And second one just digging in on the first quarter.
Why would your organic growth the back.
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 as we as we're looking into the first quarter.
Continue to see in the U S and.
Somewhat in global as well that these larger projects that we are winning.
In our backlog.
That gives us confidence that.
The backlog the work is there we are finding it is taking a little bit longer.
To complete the processes and get the work started.
We are winning larger sized projects are more complex and so.
The early work that we have to do.
Is not.
Labor intensive.
A handful of specialists kind of dealing with with the clients to get.
Specific scoped out and the work orders issued in.
Dan 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 in the first quarter.
And despite Q1 being.
<unk> comp.
I would say that thats, probably the biggest factor is just that that lag in getting the backlog converted into task orders and work orders that we can actually deploy large portions of our workforce toward.
Okay and last 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.
We will largely have passed that terminal in house have those projects.
Up and running that's our expectation.
And I think another factor there are two year is.
The environmental services backlog and 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've seen in our U S es backlog up by.
50% organically add on that the Cardinal.
And so I think what which of course won't show up in organic growth for the first year, but.
I think we see pretty robust growth in our environmental services business and that really ramps up in quarters, two and three.
Thank you.
Thanks, Eric.
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 I guess overall, but also across the regions.
The various regions global Canada and <unk>.
Yes.
Yes, so sure ill I'll start with that and <unk> can dive in when it's 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.
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 talked to us about that.
The amount of infrastructure stimulus U K, Australia, and so on also we're getting support from.
Hi, copper and some of the other commodity prices in our mining business is in.
South America in Western Australia, So I think 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.
They may be 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 it global in 2021.
We expect good performance still in 2022, but because a lot of Canada sort of came out of the gates in 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 10%.
Organic growth in the U S and when you add in the our acquisition backlog U S backlog is up over 23% to a record of 3 billion Canadian so pretty significant there strong strong backlog as we go into 2021, the tailwind from infrastructure stimulus and I think will be a second half of the year.
Sure.
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 transfer.
Transportation interesting we've responded to five EV charging network RFP was 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 there is more to come. So we do feel pretty good about organic growth in the U S. But.
Thank you.
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 that's very helpful.
Just shifting over to your margin 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 Youre, making and what youre doing in those areas.
Sure So again.
There are a couple of components to it but.
As I mentioned earlier the growth that we see coming coupled with.
Some.
Disruption in <unk>.
Overall labor that everybody is experiencing we're 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 hiring additional people in HR.
Hiring additional people on our on our other back office teams to support the growth.
Is this something that we have been quite brutal on to 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 now kind of loosen those <unk> 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 system to support <unk> 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 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 activities that will either create opportunities with our.
Yes.
In terms of new services or make them stickier to us through <unk>.
The 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 are able to key 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 said you.
You have 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 <unk>.
2022, adjusted EBITDA margin guidance with respect to stock based compensation relative to what you would have expense in 2021.
So what we what we have baked in 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 last 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 yes. It is.
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.
Swaps.
A portion of our stock based compensation to try and mitigate some of the volatility that we saw this year.
And so in aggregate about 35.
Percent of the units that we have outstanding has been hedged effectively.
Has that helped.
We should be able to then offset volatility in the share price movement for that portion of the units we have outstanding.
The balance remains subject to share price fluctuations, but.
Those swaps will help to mitigate it somewhat.
Okay I'll take a look at.
A follow up.
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 and drive new revenue opportunities that might not have been attainable prior to the combination.
Yes, I think what's what's been interesting.
Drifting with combining cardinal incentive Frederic.
While we were working through the process doing the due diligence certainly with only the executive level that was aware of the transaction and we were chatting about it and we felt that there was really good synergy and clients and with some of the the individuals, but when we announced that.
The transaction the just 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 them.
Previously at their company or this company.
Just the amount of synergy between the <unk>.
The employees has been fantastic. So without question that has driven more.
More excitement and more opportunities I think in terms of.
And 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 you from.
More of a.
Cautionary example, or something that may or may not have been.
Super plasma and about the acquisition our overall everything pretty.
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 <unk>.
Tax and project due diligence due diligence and so on so.
No there's actually been no no real downside surprises because we had a nurse those.
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 does guidance my expectation assuming that if we don't layer 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.
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 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.
And.
The cost of the building increases by a certain amount how can we value engineer it to kind of get the cost back down in line with where things might be so yes. So the discussions that 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. Youre 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 are 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 we're okay. However, our clients decide 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 from Chi Tsang from National Bank Financial. Please go ahead.
Hi.
Theresa good morning.
Good morning.
Just a quick question in terms of the.
The U S.
Potential benefiting from.
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.
So I guess any commentary.
Yes, yes, no no great market, it's interesting one of the ones that came out.
Earlier this week they were talking about 2023 I think 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.
This won't be a Q1 story for us or I think we'll start to see some revenue generated in Q3, but I do think this will be a Q3 Q4 story for us and certainly youll, 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.
The compensation that you have 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.
Yes.
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 as in concert.
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.
The academically they understand that there is there is 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 are 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 quite crept into the some of these private firms yet, but I think it will if things stay where they are.
We haven't seen any transactions since the beginning of the year to really know how that all plays out.
Alright, okay.
That's very helpful. Thank you. Thank you so much.
Great. Thanks, Matt.
We will now take our next question from Mark Neville from Society Bank. Please go ahead.
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.
Turning to investments.
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 they have in nature.
No.
Effectively embedded in the adjusted EBITDA range that we've put out.
The 15, 3% to 16, three so our assumptions around where does that spending will go coupled with.
Increased spending I think the one actually is the one area that I haven't.
You talked about HR it.
Our marketing and business development activities.
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.
Think about in terms of Capex and 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 is never a huge part of our overall spend.
It will probably notch up a little bit next year, just because through the pandemic, we have been pretty careful in in counting back.
Our cost for capital spending.
It won't be outsized by any stretch.
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 Seth <unk> from RBC capital. Please go ahead.
Alright, great. Thanks, and good morning, I guess theres been bit of discussion on the U S infrastructure Bill contribution I guess trying to get an idea of when you think about sort of building a buffer the mid to high single digit organic growth guidance.
Some of the spend from the infrastructure Bill does get pushed into 'twenty three is that what maybe pushes the organic growth into 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 you may be reflected in the guide for this year.
Yeah, So as we put our thoughts together on.
What our expectations were for the U S.
The things that we're starting to see both from that front.
What's in our backlog to the level of activity on the marketing front is embedded in that that mid to high single digit organic growth and Youre right. I mean, some of it is is.
<unk>.
There's always a component of that.
Revenue that you think youre going to win but maybe isn't.
Recently 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 I think it looks like from your <unk>.
Income statement buildup, there's a noncash impairment related to some of the leasehold.
Thats on your balance sheet. It looks like there was one last I 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 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 <unk>.
Hey 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.
If anyone can can crack the nut on <unk>. They deserve a metal is very convoluted and complex.
So let's talk about the lease impairment first and so we did take a large impairment last year and that related to.
Base that we identified that we could both downside and then make available to sublet or leases that.
We could exit at that time.
And so as we advance through this year.
The least impairments that we took in 2021 made up of two pieces.
One is the further identification of spaces.
We could rationalize and the second relates to some of the space that we.
<unk> last year, and there's all kinds of modeling that goes into the determination of the value of those leases and what you write off and.
Sure some of that space market conditions in 2021 ended up to be outside to the low end of what we would've model. So we have to take a further impairment on those spaces.
So then as we look forward into it.
Into what that means.
It does mean that there is going to be a combination of.
Cost savings from.
Having exited spaces that we are no longer pain score.
Or spaces that we have rationalized and our sub leasing.
And that will result in some some inflow.
Of earnings and cash and so.
As far as I can see.
That inflow of cash.
Not flowed 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.
Cash flow question to sharpen our cash flow statements.