Sonia Kirby - IR Gordon Johnston - President, CEO & Director Daniel Lefaivre - CFO and EVP.

Benoit Poirier - Desjardins Securities Inc. Jacob Bout - CIBC Capital Markets Sean Eastman - KeyBanc Capital Markets Inc. Yuri Lynk - Canaccord Genuity Mona Nazir - Laurentian Bank Securities, Inc. Derek Spronck - RBC Capital Markets Maxim Sytchev - National Bank Financial, Inc.

Michael Tupholme - TD Securities Christopher Murray - AltaCorp Capital Inc..

Welcome to Stantec's Fourth Quarter and Year End 2017 Earnings Results Conference Call. Today's conference is being recorded. I would now like to turn the meeting over to, Sonia Kirby, Director of Investor Relations. Please go ahead, Ms. Kirby..

Thank you, Ekra. good morning, everyone, and thank you for joining us today for our Q4 and year end call. With us today are Gordon Johnston, President and Chief Executive Officer, and Dan Lefaivre, Executive Vice President and Chief Financial Officer.

The call today is webcast, and we invite those dialing in to view the slideshow presentation, which is available in the Investors section at stantec.com.

All information provided during this conference call is subject to the forward-looking statement qualification, which is settled on Slide 2 and detailed in our MD&A and incorporated in full for the purposes of today's call. With that, I'd like to turn the call over to Gord..

Thank you, Sonia. Good morning, everyone, and thank you for joining us today. For those of you following along in the slideshow, we're on Slide 3. For this morning's call, we'll begin with my introductory overview of our performance and achievements in 2017, and after that, Dan will provide some commentary on our financial performance.

When Dan concludes his remarks, I'll provide some operational highlights and our targets and outlook for 2018, and then finally to wrap up, I'll ask the operator to open the call for questions. Let's move on to Slide 4. There were several company highlights in 2017 that were important milestones that I'd like to address.

In 2017, we achieved our long-standing objective of becoming a top-chain global design firm, and we made significant progress towards fully integrating MWH and solidifying our strong global platform.

We continue to win work together MWH that we couldn't have won as separate organizations, and as of January 1 of this year, we rebranded as Stantec globally. Our core consulting business continues to perform well, and we returned to year-over-year organic growth in 2017.

Last month, we signed a letter of intent to acquire New Mexico-based Occam Engineers, and earlier this month, we announced the signed letter of intent to acquire Traffic Design Group, one of the largest transportation planning and traffic engineering design firms in New Zealand.

Although, I'm disappointed that we didn't meet our expectations in Q4, I'm confident in our strategic plan and in the future. We believe that we are well positioned heading into 2010, and our outlook reflects that optimism. There were several items impacting our results, including legacy project issues, additional administrative cost and U.S.

tax reform in the quarter. So just looking at the headline numbers doesn't provide the full picture of our results from operations, and Dan is going to discuss that in a little more detail. I'll now turn it over to Dan to provide additional detail on our fourth quarter and full-year financials.

Dan?.

Thank you, Gord. Good morning, and I apologize for my voice this morning, I've got a bit of a cold apparently. For those following along with the presentation, we're moving to Slide 6. We've improved our disclosures around gross and net revenue and provided additional reportable segment detail for Consulting Services and Construction Services.

Slide 6 reflects our overall performance in Q4 '17, as compared to Q4 '16. As Gord mentioned, we had several discrete items that negatively impacted our results, specific to the fourth quarter, and I'll begin by speaking to those items in more detail.

Lower gross and net revenue in the quarter were due to a limited number of projects that experienced challenges. These issues also negatively impacted organic growth and gross margins. There were three main areas, where we saw these impacts in the Consulting Services U.S.

Water business, we recorded a $5 million downward revenue adjustment on a major design-build project due to additional costs, design issues and project scope changes. In U.S. Construction Services business, we recorded a $16.3 million impact in cost escalation increases against three legacy hard-bid projects.

Site conditions, product management and craft labor, impacted the execution of these projects. These hard-bid projects are all near completion. These were awarded several years ago, while Construction Services expanded to take on these hard-bid projects outside of their core mutual areas of expertise.

We've placed a hold on any further bidding on hard-bid projects outside of our established areas. Finally, in the U.K. Construction business, we recorded a $5 million increase in cost related to certain waste-to-energy projects that are also nearing completion.

For all of the above-noted construction projects, claims against parties believed to be responsible for these additional costs have been or will be asserted. As of the end of 2017, less than 30% of the asserted claims have been recognized in the earnings.

We expected that any recoveries obtained may benefit future quarters, as these claims are resolved. I'm moving to Slide 8, looking at the impacts on administrative and marketing expenses as the percentage of net revenue.

An increase from 44.3% to 44.9% was due mostly to a $6.2 million increase in the provision for self-insurance and a $3 million increase in marketing and administrative labor. These will partially offset by a $5.3 million decrease in share-based compensation.

We incurred higher admin and labor cost in the fourth quarter, mainly due to the holiday season and weather conditions in colder climates. As we have grown in the U.S., we see lower overall utilization also with the U.S. Thanksgiving holiday break. We've been very proactive in the management of our seasonal workforce.

However, we still experience the impacts of lower utilization in Q4 and Q1 of each year. EBITDA decreased in the quarter from $83 million to $69 million.

Adjusted EBITDA decreased $84 million -- from $84 million to $63 million, mainly due to the $26 million in project impacts on revenue and gross margin and the $4 million increase in the admin and marketing expenses, as I described earlier. I'd like to turn your attention to Slide 9 and the impacts from U.S. tax reform.

In Q4 '17, our reported tax rate was 64.8%, primarily related to a $31.2 million transition or repatriation tax, which was partly offset by the revaluation of deferred tax assets and liabilities, resulting in a net $18.6 million increase in tax expense associated with U.S. tax reform.

Without these impacts, our estimated annual effective tax rate decreased from 27% in Q3 '17 to 24% in Q4 '17, resulting in effective tax rate of only 7.6% in the fourth quarter of 2017. Diluted EPS was down from $0.26 to $0.10, mostly due to project impacts on gross margin, leading to an after-tax EPS impact of $0.17, U.S.

tax reform, with an impact of $0.16 on EPS and administrative and marketing cost increases with an after-tax EPS impact of $0.03. Slide 11 summarizes our full year 2017 results. Gross and net revenue were up 19.5% and 10.3% respectively over the prior year.

Organic gross and net revenue grew 3.6% and 0.1% as well as acquisition growth were partially offset by exchange impacts on foreign exchange -- sorry, and the Consulting Services Water project provision impact, as I previously noted that occurred in the fourth quarter.

Gross margin in 2017 was slightly lower at 53.5% compared to 54.1% in the prior year, mostly due to the Construction Services projects impacting the fourth quarter, as previously discussed. Without the $14.5 million acquisition-related costs we incurred in 2016, administrative and marketing expenses increased in 2017 compared to 2016.

This increase was due primarily to a $12 million increase in the IT costs related to the move to call-based software, developing our global platform and our core networks Infrastructure; a $13.3 million increase in the actuarial estimates associated with the provision for self-insurance, with the addition of the MWH claims experience added to our insurance; a $3.9 million increase in professional and audit fees related to items, such as the first year compliance for SOX for legacy MWH, U.S.

tax reform and the out-from-under planning that we did in the third quarter; MWH integration costs of $3.5 million were incurred in 2017, and these higher costs were partially offset by $11.3 million decrease in occupancy and lease exit costs, as we optimized our space; and a $3.5 million increase in -- or decrease in severance payments.

EBITDA increased to $424 million, and adjusted EBITDA increased to $363 million. Adjusted EBITDA as a percentage of net revenues remains consistent year-over-year for Consulting Services due to higher gross margins offside -- offset by higher admin and marketing costs, as previously discussed.

Construction Services EBITDA was negatively impacted by the cost escalation adjustments on the projects, as discussed earlier. Now moving on to our annual effective tax rate on Slide 13 and the impacts we saw in 2017. On an annual basis, our reported tax rate was 63.2% and was impacted by 3 main areas in 2017.

The $94.5 million tax expense from the sale of -- from Innovyze in Q2 '17; the $3.2 million impact for -- of the out-from-under reorganization, we completed in the third quarter; and the net $18.6 million tax expense from U.S. tax reform enacted in the fourth quarter 2017.

We anticipate our overall effective tax rate for 2018 will be approximately 27%, as many of the historical U.S. federal tax provisions we benefited from such as Section 199 and the deduction of interest expense on certain types of related party cross borders financing structures have been repealed under tax reform.

On Slide 14, adjusted diluted EPS was $1.77 compared to $1.69 in 2016. Adjusted diluted EPS for 2017 was lower mainly due to the gross margin project impacts, as I talked about in the fourth quarter, having an EPS impact of $0.17, increased the marketing and admin cost, I discussed earlier, having an EPS impact of $0.12.

Moving to Slide 15 and the targets we outlined last year. Gross margin and admin and marketing and EBITDA as a percentage of net revenue were all within our expected ranges.

Net income as a percentage of net revenue was 2.8%, the lower targeted range and was negatively impacted primarily by the tax on the Innovyze sale, cost escalations on projects, U.S. tax reform, as previously noted. Without these impacts, the net income as a percentage of net revenue would have met our targeted range.

I'll turn it back over to Gord now to discuss operational performance and our targets and outlook for 2018.

Gord?.

Thanks, Dan. Let's go to Slide 17. I'd now like to summarize the performance of our core business in the fourth quarter and full year, and, we'll then look ahead to our outlook for 2018. We experienced overall organic gross revenue growth in the fourth quarter and the full year 2017.

Stantec's Canadian Consulting Services business had organic gross and net revenue growth in the quarter and full year 2017. Growth in the quarter came from continued strong housing demand in Ontario, Southern Alberta and Québec, several larger pipeline projects and a large mining project.

We also continue to work on our large health care projects in Ontario, Alberta and British Columbia. We move to Slide 18. In United States, Consulting Services organic gross -- organic gross and net revenue retracted in the quarter and on a full year basis.

Organic retraction in the quarter was seen in our Buildings, Environmental Services and Water business and in our Transportation sector.

We completed significant design phases earlier in the year on several large projects in our Buildings and Water business operating units and our Transportation sector, resulting in lower revenues in the fourth quarter.

Water was also negatively impacted by the downward revenue adjustment on a major design-build project, we discussed at the beginning of the call, and that retraction was offset by growth in Community Development, Mining, Power and our Waterpower and Dams sectors.

Our Global Consulting business had a strong organic gross and net revenue growth in the quarter and for the full year due to strong project activity in the U.K., through the AMP6 cycle and improving market conditions in our Latin America Mining sector and our Middle East Water operating business unit.

Construction Services had organic gross revenue growth in the fourth quarter and on a full year basis. Organic gross revenue growth is a better indicator of the net revenue for Construction Services, as very little direct work is self-performed. Construction Services continue to win multiple project awards in 2017, contributing to the organic growth.

On Slide 21, we have summarized organic gross and net revenue growth or retraction in the fourth quarter and the full year 2017 by Consulting Services business operating unit. We also provided some additional color on what contributed to the results within these BOUs.

I'd now like to highlight some of our recent project wins, as you'll see on Slide 22. Our backlog stands at $3.9 billion at December 31, representing roughly $2.8 billion in Consulting Services and $1.1 billion in Construction.

While this is stable from the same period in 2016, we've seen backlog grow organically, however, this gross -- this growth was offset by the impact to foreign exchange.

Earlier this month, we announced that we were chosen as the strategic partner for Yorkshire Water, in a deal worth GBP 50 million, as they precure supply chain arrangements and contracts for the AMP7 period, which runs from 2020 through 2025. This major contract continues until 2025 with a potential to extend by an additional five years.

And just last week, we announced that Stantec will serve as the lead engineer for the recent award of the $1.9 billion design-build commuter rail expansion from the Long Island Railroad and Nassau County, New York. Historically, we haven't routine publicized -- haven't routinely publicized project wins.

We are highly diversified, with tens of thousands of projects, so we aren't reliant on any 1 project for a significant portion of our revenue. However, we're modifying this approach to provide a bit more transparency regarding significant project wins, as we expand globally.

Looking ahead to 2018, we refined our targets to provide better visibility into the differences between the Consulting Services and Construction Services businesses. The Consulting Services, our targets remain the same as our overall target in 2017.

We have now broken our specific targets for Construction Services, and you can see those on the slide as well as the consolidated numbers. In addition to those targets, we also outlined in the MD&A the expected gross to net revenue ratios for Consulting and Construction Services which we expect to be in line with what we saw in 2017.

Additional functions around capital expenditures, amortization of intangibles and software additions in 2018 are also reflected on this slide. In our annual report, which we released this morning, we outlined our outlook for 2018, as shown on Slide 24.

Overall, we continue to target our long-term average compound gross revenue growth rate of 15%, through a combination of organic and acquisition growth, a number that we've achieved over the past 5- and 10-year periods.

In 2018, we expect overall organic gross revenue growth in the low to mid-single digits, supported by a continued economic growth in United States, increased Infrastructure spending in both Canada and the U.S., modest improvement in the Energy & Resources sector, global economic growth and our ability to continue to expand our global footprint.

And just before I open it up to questions, this morning, we announced a 10% increase in our quarterly dividend over last year. We're also pleased to announce that Richard Bradeen has joined Stantec Board of Directors.

Richard is a former Senior Vice President of Strategy, Mergers and Acquisitions, Pensions Investments, Corporate Audit Services and Risk Assessments from Bombardier. Before that, Mr. Bradeen worked at Ernst & Young for about 19 years, holding increasingly senior roles, including Partner, and President of the Corporate Finance group in Toronto. Mr.

Bradeen will serve on our board's Audit and Risk Committee. That concludes this morning's presentation. Thank you for joining us. Operator, let's start the Q&A portion for today's call..

[Operator Instructions]. And we'll take our first question from Benoit Poirier from Desjardins Capital Markets..

Could you provide a little bit -- yes -- sorry, could you provide a little bit more color around the provision for the legacy project on the Water business? And also, could you talk historically about the provision that, that business has taken over the last 5 years? I'm just trying to get a better understanding of the construction leg going forward..

I'll give you a bit more color on that Benoit. It's really in two different areas, so it's the waste energy projects in the U.K., where we took some additional provisions. Those are outside of the historical core Water business that MWH had done on the construction side previously.

When we look at the AMP programs in the U.K., those are all operating very well both on the Consultancy and on the Construction side. So these are legacy projects that were really based on incentives from the U.K. government that have now more or less been taken away as a result of Brexit.

Really working for 1 developer, 3 projects, and those are all nearing completion. We're working through the final tail end of those projects, so that's the U.K. Water business where we have the impacts there..

Okay.

And now, when we look at your consolidated EBITDA margin, you ended with 12.4%, so you were guiding for 10% to 12% on a consolidated basis, so lower than what you were guiding back in 2017, so is the decline -- could you clover -- provide some color around what drives the decline in the EBITDA margin, whether it's only the full contribution from MWH or slightly weaker margin pressure overall or more competition?.

Sure. I think what we have tried to do for everybody is to show you the consolidated business spoken out between Construction and Consulting Services, so on the Consulting Services business, we're confident that we'll still be able to achieve the margins that we have historically, as laid out in our disclosures.

The Construction Services, frankly, is slightly lower margin business, and I think that's where providing that additional color to the investment community, allows you to understand what the consolidated margin should look like. And so, that's why we've broken it out this way.

We're not suggesting that the Consulting business spend is stretched, which is 80% of our business, is retracting or seeing additional price pressures or anything like you mentioned there, Benoit..

Okay.

And given what happened with the Construction business in Q4, does it change your view about whether construction is core or not then?.

I'll let Gord take that one..

Sure. We see the -- still a lot of synergy between the Consulting and the Construction businesses in the U.K. from the AMP programs, there's a lot of synergy with those groups working together. And in the U.S., we work together on a number of design-build jobs, and we're continuing to look for additional synergies there.

So we still feel pretty good about the construction business going forward..

We just got a lot of backlog in what we would call the core Water business in the U.S. Significant backlog and a lot of good project wins, so around the type of projects that are not those hard-bid projects progressive to the design-build and seem R-type projects were much more within the real house..

And as Dan mentioned, the projects in U.S. where we're experiencing some issues in Q4, were projects that they took on outside -- hard-bid jobs that they took on outside of the geographic area of comfort back 3 or 4 years ago, those are all wrapping up now. They're in the 95%, 97% range..

All with the exception of one..

With the exception of one. Yes, so we're looking forward to wrapping those up and then moving forward..

Okay. And last one for me. You ended the year with a strong balance sheet. You mentioned in the past that you expect to be very active on the M&A front in 2018. You already announced two recently.

So I was just wondering, if you could provide more color about the dry pattern you have, whether it's talking mostly, or what is the bidding pipeline? If you were looking at any transformational deal? And if you have seen some change in the valuation recently?.

In terms of the pipeline of potential acquisitions, it's probably as full now as it's ever been. The last half of 2017, we really focused on meeting with a number of prospective firms that we think would be a great addition to Stantec, both in the U.K., Australia, New Zealand and throughout North America.

so we've announced two so far this year, and we're confident that there'll be a number of additional ones coming forward. As to the financial metrics, Dan, maybe you could speak to that..

Financial metrics have stayed relatively consistent in that 6 to 8x EBITDA is generally the range that we're looking at, and nothing is really falling outside of that range.

I think it's always a question of what the forward forecasts are and the projections from these entities, looking not only historically but into the future, what the right price to pay. That is only the one factor that we considered though when we do an acquisition..

And we'll take our next question from Jacob Bout with CIBC..

The issues you had in the fourth quarter, maybe comment on, do you expect much of a bleed into the first quarter of 2018?.

We don't expect that to continue to bleed in 2018. The cost adjustments that we took in the fourth quarter are really based on the information that we had at the time. So it's the best information that we had.

When you look at the cost adjustments that we made, as I indicated there was a whole bunch of claims outstanding associated with these cost escalations. And we've have only recognized their less than 30% of the revenue associated with that.

So hopefully, and hope isn't a strategy, but we've got the teams working on the recovery of these claims, and hopefully there'll be a pickup in 2018, but there is no assurance of that.

So you have to look at it from the perspective of the revenue recognition standards where the hope of recovery or the likelihood of recovery is based on 3 primary criteria, one is that there is a highly probable condition of collectibility, so that's really over 80% or 70% certainty of collectibility, that we have a legal basis for our claims, and that we are in a negotiable or a good position with our client to get this result, and that's why we've only recognized a very small portion of the overall claims.

So we do expect to continue to work through these in the first half of 2018..

Turning to the Water segment.

What is the industry -- if you think about the organic growth in the water industry, what you think that's growing at? And how do you expect to perform in 2018?.

You see, the Water business line for us performing very well into 2017 -- or into 2018, sorry. We've won a number of solid projects, over the last couple months, in fact.

A large design-build in the U.S., Northeast, and, in fact, just yesterday, we were awarded the Mid-Breton Sediment Diversion project in -- down in Louisiana, which is a very large project for us. It was a very actively competed.

We see that strengthening going forward, the provision that we took in Q4 was for a legacy project that MWH Water group had been working on with the MWH Construction group.

And so as we -- as Dan mentioned, as we're negotiating the claims for that project, the overall hopeful recovery will be inclusive of recoveries for either the Water Consulting side or the Water Construction side, and that'll come collectively together. So we feel good for water going forward.

We see some of the projects -- some of the big programs that we're working on, moving forward. Of course, we announced that we were successful on the Yorkshire Water AMP7 project. So there's really a lot of good things happening on the water space, and we're comfortable with the growth in that segment going forward into 2018..

Is this like a GDP-type growth business for you or something better than that?.

It'll be better than GDP growth for us..

But maybe just lastly, just on your EBITDA guidance of 10% to 12%, maybe just help us out.

What gets us to the bottom, top and the risk on the downside, is that primarily in the Construction Services?.

I think the guidance -- the risk is really -- when you consider on the consulting side, I'll break it down between the two. On Consulting, the risk is really the -- our ability to keep our utilization up and perform well on our projects.

Obviously, it flows all the way down from getting the appropriate pricing, understanding the scope of a project to our project execution and then having our staff full utilized. So that's what's going to drive the EBITDA on the consulting side, if we have better utilization in 2018 that will push us to the higher end of that range.

In the Construction Services side, the EBITDA is more of a function of gross revenue than net revenue, because we don't self-perform, so gross perhaps should look at changing the metric here for Construction Services, but it's really a function of gross revenue, because of that self-performance, but we expect them to improve their performance over what we saw in the latter part of 2017, and that's really the expectations that we're getting from that business..

And we'll take our next question from Sean Eastman with KeyBanc Capital Markets..

So first of, Gord, just wanted to congrats on your new role, that's sounds like you got a busy year ahead..

Yes, it'll be an exciting year for us..

I just wanted to continue trying to break down that the revenue growth outlook for this year, you guys highlighted a low to mid-single-digit type expectation for 2018. I'm just curious, in particular, what you guys are assuming in there around the Energy and Mining spaces, in particular. It seems like we've seen an inflection here recently.

I'm just wondering, is that -- is a continuation there reflected in this outlook?.

Yes, we're feeling pretty good about our Energy & Resources segment. In the Mining space, with the increases in the copper prices, we're seeing more activity, particularly in our South America operations. We're [indiscernible] additional proposal activity and some more positive momentum there.

On -- In the oil and gas space, certainly, we're -- on some of the large pipeline draws we're working on in Canada, even though there seems to be some interprovincial conflict, and so we're -- our work hasn't slowed on those jobs in both our Environmental Services space and in our Energy & Resources group, our oil and gas group.

So we're -- we are seeing some positive movement there as well..

So both of those segments, or both of those end markets will be up in 2018?.

We believe so. When you look at the momentum in our net revenue growth, in our Energy & Resources space, starting negative early in the year, in Q4, we had almost 35% organic growth in that space. So we're feeling very bullish about that..

Okay, great. And then secondly, I just wanted to ask about the AMP program. In the U.K., you guys secured a contract this quarter. I've been hearing that just around Brexit and just economic quotes in the U.K., that, that AMP program could be smaller.

So if you could just walk me through, when the bidding starts to commence for this next phase? And whether you guys are seeing the next phase as being equal or larger than the previous one?.

So the Yorkshire Water was the very first AMP7 that had been recompete, and so we're glad to be successful on that one. As we start to -- as we are talking to our clients about the next phase of the AMP projects, which is about 2 years out, will be the rebidding.

We're still -- we're not seeing talk of retraction in the size of those projects, currently. There always is some uncertainty with Brexit, uncertainty with some the elections there, with the various parties having different opinions on the ownership of the utilities.

So there's a little uncertainty there, but certainly, at this point, we haven't seen any of our clients coming to us saying that the projects might be certainly put on hold or talking about reductions in the size of the projects at this point..

I think, one of the rest that we've -- we just met with our U.K. leads just last week, and one of the rest with Brexit is a favorite party gets in, and they on their platform, they're talking about nationalization of the water utilities, that would be -- take a lot of very long time and very difficult to do.

These are all private entities, so -- that are operating all these about 12 different water utilities across the U.K..

And we'll take our next question from Yuri Lynk with Canaccord Genuity..

I'd like to go back to the question, I think, was Benoit asking about the -- just the difference in the consolidated EBITDA margin guidance this year is down about 100 bps on both the top and bottom end compared to last year. I understand the new disclosure and it's much appreciated.

But I'm assuming when you gave that guidance last year, you guys had looked at the 2 businesses in their totality.

So -- I guess my question -- is it -- is -- the 100 basis point reduction in EBITDA margin guidance, is that due to the consulting business or the construction business? I'm guessing it's the latter and just some color on what's changed there?.

I think as I indicated earlier, Yuri, it's really based on the construction business. As I said, the consulting business is the -- very similar to what our expectations were last year. I think as we learn more about construction and we break down the business, we're able to get more clarity around construction and that's the additional disclosures.

And with that, we're perhaps being a little conservative overall, given that construction is only 20% of our overall revenues, but that's more reflective of what we expect the construction business to be this year..

And how does the potential recovery of claims play into your guidance?.

We have not factored those into our guidance..

Okay. And maybe one for Gord. Gord, just high level, I mean -- is -- your growth target is 15% compounded revenue growth long term.

I mean, is the revenue growth target really appropriate in light of -- especially in light of some of the execution problems you've had with MWH? And how, I think, difficult it is to do M&A sometimes? I mean, shouldn't it be more of a from per share metric either adjusted earnings per share, free cash flow per share, whatever you want to look at it.

Is revenue the right thing to be thinking about?.

We're going to continue -- revenue growth is just an overall proxy for the success of our overall both organic and acquisition growth program. We will continue to focus on our acquisition, really filling out our global profile, but your point is a good one.

And we are spending a lot of time looking back at the -- on the cost control side of the house and improving some of our cost control structures, spending a lot of time focusing on project execution. And all of those things will certainly have a positive impact on earnings and earnings per share.

We expect our -- long term that our top line and bottom line growth will match. And that's really where we're focusing. We're certainly focusing on growing top line, but we're spending a lot of focus on improving our bottom line growth as well to match top line..

And I think if you look historically, we've accomplished that. When you absorb an acquisition the size of MWH and invest in the -- in doubling that platform out, which is really what we've done throughout 2017, it sets us up well for the future. You see some of the additional costs we incurred in 2017. Those are largely behind us.

The bulk of the integration is complete, at least the heavy lifting of it. We still have the global operations to integrate into our larger ERP system, but that's going to be a much less of an impact than what we've seen in 2017 with getting the North American operations up to speed on Oracle..

Okay. When will all of these projects be completed, the problem projects? I know you're 90%, 95%, but just if you can get more specific on the 3 buckets and when those projects will wrap up? And that will be it for me..

I don't know that we have an exact date, Yuri. We're working through the final commissioning on these projects. They're all in production, with the exception of 1, as I said, and that's about 80% complete. The other ones are all at that 97%, so in the wrap-up phases. And then, obviously, we're working through the claims on these things.

So they will take some time. Speaking with our President of our Construction business yesterday, he was confident that some of these will be wrapped up in the first half of the year..

Okay.

And then there's a warranty period, I would assume?.

That includes the warranty period..

[Operator Instructions]. We will take our next question from Mona Nazir from Laurentian Bank..

So I just want to keep going a little bit on Yuri's question. Of those $26 million in provisions that you took, just wanted to clarify that about $20 million were related to water projects.

So would it be safe to say that those stem from MWH?.

All of them -- all of the $26 million were related to water and all of them were related to legacy MWH projects..

Okay.

And do you know what year -- I know you just talked about when they could end, but do you know what year they were signed?.

I think into that 2013, '14 range..

For the bulk of them. One was more recent, probably in 2016, the large manufacturing project..

Right..

That's helpful. Okay. So that was around the provisions. And just turning to M&A, you said that the pipeline was as full as it's ever been.

Just given the targeted kind of EBITDA multiple of 6 to 8x, is it safe to assume that they are kind of smaller in size or they're tuck-in as you like to call it or could they be larger?.

So there's a number of different size of firms that we're looking at right now, ranging from few smaller ones. We don't see anything as big and transformational as an MWH in the pipeline right now, but certainly, in that small to midsized range..

[Indiscernible] active pursuits if there are -- and we've always said that if there is a larger one that comes along, generally these are going to be brokered processes, we'll participate. But we aren't seeing anything in the pipeline today..

That's helpful. And then, just turning to the integration of MWH and that North America is now behind us. We're moving into U.K., the rest of the world.

I'm just wondering if you could quantify those onetime integration costs for 2017? And what a normalized margin would have been? And what kind of step down could we expect in 2018?.

I think there was two areas where we identified additional costs. One was on the IT side of things, Mona, where we mentioned about $12 million of additional costs.

Not all of that was integration related, but probably about -- I would suggest about -- I don't have the exact number, but probably about $3 million of that would have been related to MWH getting the -- all of our collaboration tools, our global networks putting everyone on to the same network would've been part of that.

And then we identified about $3.5 million of pure integration costs and that's usually related to labor being not billable to clients as we're working through the integration and people getting used to the new systems and learning the new revenue recognition approach and so on.

So I think there's probably about $6 million to $7 million there in the impact of MWH integration in 2017. Going into 2018, I don't think, it'll be as high, certainly don't expect that amount in the next year. I think the other thing that impacted our results was the additional insurance costs and the actuarial estimates with the addition of MWH.

And that will be normalized going forward. And so we don't expect that to be a year-over-year increase in 2018 that we saw in 2017. So it will be more embedded into our actuarial estimates of our claims outstanding in 2018.

So you take those 3 items, those would be the impact that we saw this year that -- certainly don't expect to see that level of impact in 2018..

And we'll take our next question from Derek Spronck from RBC Capital Markets..

Just on the acquisition front. The change in the U.S.

tax regime, does that change your focus at all in terms of regional acquisition focus? And or -- does that kind of spur potential sellers into selling in that region?.

I don't think it certainly doesn't impact us from a U.S. tax reform perspective. It really doesn't have an impact on us from that perspective. I don't think it has a material impact on sellers. I don't know, honestly, in tax reform whether there's a change in the capital gains rules or any of those type of things.

And I don't think there were as more related to the lower tax rate and the repatriation tax. So I don't think there's been a material impact there. It certainly doesn't impact us from doing the acquisition. Where it does have an impact for Stantec is the elimination of the deductibility of interest expense above a certain level on EBITDA.

So we're looking closely at that and that's why our effective tax rate does not take into consideration any potential changes or optimization. The rules are still changing. The IRS is still issuing guidance every day -- multiple guidances every day.

So as we get through -- further through 2018, we'll be looking at what alternatives we have to optimize our effective tax rate in the U.S. and going forward..

Presumably, it will be an improvement though, all else equal.

Is that the right assumption?.

Yes. We don't expect it to be any higher. If anything, we'll hopefully get a few basis points lower in the effective rate in the U.S..

Okay. Great. And just on the accounting front, IFRS 15.

Did your guidance take that into consideration -- and I know due to the nature of your contracts, it's probably going to be less impactful, but any color around the potential impact of IFRS 15 and 9?.

Yes. Derek, I can give you a bit of additional color. We didn't touch on it in our script. IFRS 15 is required to be implemented in Q1 of 2018. We will be implementing it on a modified retrospective basis. We are currently completing our contract reviews and the impacts of those have not yet been formally determined.

If there are any impacts, it will impact our opening retained earnings. So there'll be adjustments there. We are looking closely at the performance obligations under IFRS 15 and it really is about the segregation and consolidation of contracts and the services that we provide under those contracts.

We don't have, as I said, the numbers related to those. In addition, we're reviewing any contract modifications, claims. I mentioned the highly probable, legally enforceable and client history impacts. We're looking at those under IFRS 15. We won't be discounting holdbacks any longer under the new standard.

And we will be having a number of additional disclosures in Q1. So we don't have the exact numbers yet. We've certainly been working through it. It's been a very long and arduous process getting to this standard. Where the impacts are going to occur, I expect to your question, is going to be more on the construction side than on the consulting side.

The other big change that we will see is in backlog. Historically, as you know, we've only represented backlog about the next 12 to 18 months on a contract. In the future, we'll be recognizing all of the backlog that we have contracted, which -- I think you'll see a significant bump in backlog once we report that in Q1..

Okay. That makes sense.

And so lowered retained earnings, higher backlog and maybe some timing-related revenue recognition by and large?.

Exactly. Yes..

Okay. And just quickly one last question. You won 2 very significant projects or part of the consortium that won the projects, the Montreal LRT and the Long Island Railroad project.

Any way to quantify your proportion of those contracts? And when we should start seeing the positive financial implications of those 2 projects going through the financials?.

The Long Island Railroad project kicks off right away. And we have got people working on those already. In Q4, we saw a little bit of net revenue retraction in transportation because of a lot of the bidding work that we are working on.

We wrapped up a number of projects in Texas, doing a lot of bidding work on the REM, certainly, in Montreal and on Long Island Railroad. So 2 that we have been successful on and we're looking to get people engaged on them right away. But we're seeing some good momentum going into Q1 in the transportation space..

We'll take our next question from Maxim Sytchev with National Bank Financial..

Dan, I don't know if you're going to have these numbers off hand, but what percentage of work in construction is fixed price in nature? Because my understanding, it will be on probably the bulk of it, no?.

No. In fact, we're seeing a big swing. Once we get through these legacy projects that are all causing the issues, the bulk of them are fixed priced contracts. I think we're estimating it's between 20% and 30% of the legacy -- of the MWH Construction Group -- actually, now Stantec Construction Group are fixed priced.

So in order to be able to be it contracted, you do have to self perform some of these and you do have to have some of that are hard bid. So it's about that 20% to 30%, but certainly a smaller portion of the work and you've seen historically with that group..

Right. But I mean, correct me if I am wrong, a lot of the Water projects are done on the, sort of, full EPC basis.

So -- I mean, the ability to ramp down that percentage, is that conceivable? I'm just trying to see how you're going to be able to approach the business development on a going forward basis?.

Right. And so to your point, Max, as Dan said, 20% to 30% would be that hard bid type number. But we have a lot that are construction management at risk. The big job we're doing right now in San Francisco is construction management work.

And a lot of the other work that we do is actually progressive design build, where you iterate through the design of what the structure will look like with the client until you get to a high level of certainty. So it's less risky, less hard bid type work. So that hard bid work is really the minority of the work in the U.S.

And really in the U.K., it's -- a lot of it is the progressive design build, not a lot of hard bid work there.

We're seeing that risk profile change from those projects that we -- in that 2013, '14 period of time where MWH Constructors kind of moved out of their -- as part of a growth strategy out of their area of core competence and in geographic areas where they were comfortable. And we're sort of just wrapping up those projects now.

And certainly, we will not be repeating that going forward..

All right. Okay. No, that's helpful.

And then in terms of, Dan, kind of the numbers, I assume that the goodwill in relation to MWH was tested for impairment given what transpired in Q4, but how should we think about that part of -- from an accounting perspective on a going forward basis?.

Good question, Max. I think the -- yes, we evaluated goodwill. October 1 is the valuation date. And all of that's in the disclosures, in the notes of the financial statements and to some extent in the MD&A. But in essence, the -- both Canada and U.S. have significant clearance in terms of goodwill.

So any change in assumptions should not impact goodwill or cause an impairment. Where we are close is on the construction business and on our global operations and you would expect goodwill -- the fair value or the carrying value to be fairly close in -- given that we've only had a very short history.

So it's all about the change in assumptions going forward. The discount rates, the operating performance expected, so we go through a very thorough valuation effort to compare the results historically and the forecast assumptions.

We are close on those two as you would expect, but given the -- our expectations around the global economy improving, certainly, we expected our global goodwill on the consulting business will be fine. Construction, we have to get through the -- this rough spot and continue to perform.

With the backlog that we see in construction right now, we're optimistic that, that business is growing. And frankly, the only way to avoid a goodwill impairment is growth. And if you continue to grow and you've got that projection into the future, that's what's going to prevent any goodwill. So that's where we are today.

Don't expect any material change from what we saw in the quarter. It's only 1 quarter, and it certainly doesn't impact us [indiscernible]..

All right.

And what is the next impairment test time line?.

A list of quarterly indicators of impairment have -- we have to go through every quarter. And if there's an indicator of impairment, then you have to go through the full test. So we look at it every quarter, but the forecast is on annual basis at a minimum..

Can you maybe also comment please on U.S. organic growth retraction? When we look at most of your peers, everybody is in that sort of 4% to 5% range growth in the local market. Just trying to see why there is that discrepancy? Is it timing? Are you losing market share? Any color on that, please..

No. We actually feel good about the -- our growth forward there, Max. In the water space, we did see some retraction in Q4 and that was primarily related to the -- to that construction provision that we took as we discussed earlier. We're feeling positive going forward with our recent project awards.

Dan?.

Water would have actually been positive without that $5 million impact on the 1 consulting project..

Infrastructure, we're feeling very strong. Again, you saw the recent awards there in the Northeast and the Long Island Railroad. So Infrastructure feels good from both the transportation perspective as well as Community Development, our land development business. We're seeing that -- some strengthening there in Florida and some of the Southern states.

So you're right. 2017 was a bit of a blip in those areas. We see Energy & Resources coming back up. So we do -- I think, Max, going in through to 2018, we will see some more positive numbers for us there.

When you have the overall lower organic growth of first couple of quarters of 2017, we'd always message that we are going to return to positive organic growth by the end of the year. And we got there just by a little bit, but we did get there and we see the momentum going in the right direction through 2018..

And I think, to add to that, Max, we saw in the U.S. -- we talked about a bit in the third quarter, where the water projects were in between the cycles on the program So those who've come back there add to our revenues in 2018 as well as the large transportation projects in Texas that we completed largely in the last quarter.

We'll start to see -- we saw a bit of that impact in Q4. So as Gord mentioned, there's some of the new wins that will pick us back up again..

All right. And last question on M&A. I know that you have highlighted certain geographical areas of interest. But in terms of the verticals that you're going after right now, where is the focus? Because, I mean, it's been been a bit about some of the painful dynamics. A lot of capital is deployed in oil and gas.

Now water having some issues and that was a growth market a couple of years ago.

So where do you see the opportunity to deploy critical capital now?.

Certainly, and if we look at some of the different geographies, in the U.K., we're already the number one water firm. So we're not looking to acquire additional water firm strength there. There we're looking at environmental services, buildings, transportation, some of our other core strengths.

Australia, New Zealand, again, looking at strength in transportation, environmental services, buildings and so on there. So those are really our areas of focus in those geographies. And looking forward, tuck-in word makes the most sense in North America as well..

And we'll take our next question from Michael Tupholme with TD Securities..

Just back on the $26 million of provisions in the quarter. I know you mentioned that all of that is related to water projects and all of it's related to MWH work.

Is it all in the construction side? Or was any of that -- did any of that actually affect the consulting business?.

Yes. $5 million impacted the consulting business and that was a revenue adjustment, as I stated in the opening comments, it relates to revenue estimates on that project.

All the other ones were cost escalation estimates, so earned value on our estimates to complete on those projects, but $5 million on consulting and the remainder were on the construction business..

Okay. Sorry, I apologize, if you did already mention it. But what is it -- I mean, I think, everybody sort of understands how you can find yourselves in these kinds of situations on the construction side with fixed price projects. But on the consulting, what causes to carry on this.

But what was the nature of the situation that triggered this $5 million impact on the consulting side?.

In fact, that one was on a design build job with our construction firm as well. So it was in the -- just due to some scope change issues. And as we work it through -- so again, that one was related to construction and just how the client responded there.

So as we're negotiating the overall claim with that client, we're looking at negotiating holistically the best recovery that we can and whether in the end we [indiscernible] to the recoveries, assuming we've achieved recoveries get coded to consulting nor construction. Our optimum solution is just to get the best that we can for Stantec..

Okay. That makes sense. And then just the second question for me. With respect to the remaining work to do on the MWH integration -- and I think you touched on this to some extent. If I understand correctly, it's the -- really the global operations, where there's still some work to do.

Can you just be a little more clear about what exactly is left? And does this take all year long? Just trying to get a better sense as to what remains to be done there?.

I'll try to add a bit more color, Michael. The global integration consists of many parts. So I think it's important to understand that much of it has been completed. So the integration of our leadership, of our branding, of our marketing systems, all of that kind of effort has been completed. What's remaining is really the financial migration.

Moving them onto Oracle or in the smaller global operations onto a smaller system. We have a Dell tech system that we use because Oracle is just way too much overhead for a smaller operation. So that's what's left. So we are in the middle of doing the detailed planning phase.

When you implement a business financial system in any jurisdiction outside of our legacy jurisdictions, think of it as a brand-new implementation because you have to deal with the localization, the tax, the payroll, the legal side of how you set up your accounts, et cetera. And we're going through that detailed work.

This is all with internal staff that do this on an ongoing basis all the time, so it's not an additional cost. Where the additional cost will come in is once we start flipping the switch and moving all of the projects that we have into Oracle at that time or the other system.

And that's where there'll be some training and some downtime related to the operations staff getting used to -- being trained up on the new system. So it's not anywhere near as significant as what we've seen historically. So we're talking about a thousand people or so in the U.K. that have to move over and [indiscernible] in Australia, New Zealand.

But every jurisdiction is a new implementation. So we talk about Australia, New Zealand, that's where we're implementing Oracle in two different countries. All the basis is there. All the framework, if you will, the chart of accounts, et cetera, is all there. It's just a matter of luring it into place once we're completely ready..

And we'll take our next question from Chris Murray from AltaCorp Capital..

Turning back to the construction segment. So if we think about your comments about some of these projects were out of scope, but were there -- are there runoff position now. I guess, a couple of things. How should we be thinking about the construction business -- as you say, it's going to be part of the core.

What would be -- what should we think of the margin impact to call that these out of scope projects are going to be through '18? Maybe -- what's a more normalized margin on a longer-term basis? And I guess, the piece of this question is, how do you have the confidence that you actually have the systems in place to manage the construction business, so you don't get into these problems again?.

Start with the margin..

Yes. I'll start with the margins. I think what we've guided to, Chris, on the margins in construction services is exactly what our expectations are. So we aren't expecting any further major hits. That's not to say it can't happen. It's based on what we know today.

And the evidence that we have in front of us in the claims, as I mentioned, that we have outstanding. So the guidance that we provided is really the margin guidance that we're expecting.

And on the second part, Gord?.

Sure. In terms of overall governance, we've done a number of things. We have set up an overall risk committee that our COO, and our Chief Practice Officer sit on in addition to the construction group. We've looked at shutting down hard-bid projects that pursuits outside of the geographies and the sort of our core competencies.

So we don't see that reaching a little bit from several years ago that's causing us some heartburn now. So we feel that we've got the new projects that we're looking to acquire. We feel that we've got the risk profile back under control..

Okay. I guess my question was more [indiscernible]. We appreciate that your guidance taking into account some of these out of scope projects.

I guess, what I'm trying to get up my head around is, with those out of scope and runoff projects in the numbers, is it fair to think that if you get back into scope say into '19 or into '20, would that margin should improve?.

I think it can improve. We're always looking at trying to improve our margins. I think, as we remove some of the risks associated with these hard bid projects, it can get improved margin..

Okay. I'll leave it there. And Dan, just going through your outlook, one of the items that was a little bit surprising, just your capital spending will be a lot different I think this year, comes in onetime items. Can you just walk us through some of the puts and takes on, I guess, there some lease changes and some other onetime costs and then CapEx.

Can you just walk us through all those moving parts and maybe some of the timing that we should be aware of?.

Absolutely, Chris. Good question, because that wasn't necessarily highlighted in our outlook, but it was all in the material. So -- for everyone, it's worthwhile having a look at that. So our capital expenditures in total, I think, are going to be about $150 million. I don't have the exact number in front of me, but that includes a couple of things.

One, primarily, the move to the Stantec Tower in Edmonton, the new tower. It's a combination of leasehold improvements and office furniture and equipment. That CapEx is going to be offset by tenant improvements under the lease which gets amortized over the [indiscernible]. So we'll have the pure cost incurred in 2018 with that offset.

I think it's about $50 million. So we have $79 million, if my numbers are correct, an additional costs associated with moving to the new tower offset by both $50 million in TI. So that's the impact on that. And then the remainder of our CapEx is really normal course of business, which is very consistent with what our spend was in 2017.

And there's just one other element and it has to do with lease-exit liabilities, we're expecting that we will have to take, for accounting purposes, our lease-exit liability in the fourth quarter. We mentioned that in our materials. So expect that in the results in Q4.

It's a noncash item because what happens is, when you terminate a lease, you'll automatically have to record the lease-exit liability. However, the landlord is -- our new landlord is paying for any of the remaining lease costs that we have as part of our new lease agreement. So there is 0 cash impact that's an accounting impact.

And the benefit that we get from the new lease is amortized again over the life of the new lease. So it's a bit of an accounting nuance that really doesn't necessarily reflect the business reality or the economic reality. It's an accounting things we'll be adjusting for in the fourth quarter, so expect that..

And it appears there are no further questions at this time. I'd like to turn the conference back to you, Gord Johnston, for any additional or closing remarks..

Okay. Well, I want to just to say thanks, everyone, for joining our Stantec's earning call and for your questions. And both Dan and I look forward to speaking with you in the coming quarters. So thanks very much..

This concludes today's presentation. We thank you for your participation. You may now disconnect..