Welcome to Stantec's Fourth Quarter and Year End 2018 Earnings Results Conference Call. Leading the call today are Gord Johnston, President and Chief Executive Officer; and Theresa Jang, Executive Vice President and Chief Financial Officer.

Today's call is webcast, and Stantec invites those dialing in to view the slideshow presentation, which is available in the Investors section of stantec.com.

All information provided during this conference call is subject to the forward-looking statement qualification set out on Slide 2, detailed in Stantec's management discussion and analysis and incorporated in full for the purposes of today's call. With that I am pleased to turn the call over to Mr. Gord Johnston..

Thank you and good morning. I'll start with a brief overview of the year then Teresa will share details of the results. Following that I'll share some operational highlights from across our business. In 2018, our Consulting business achieved all the financial targets we established at the start of the year.

We also made significant progress on the business objectives that I set out early last year. The first objective was driving organic revenue growth. We achieved this in every quarter of 2018, culminating in a 3.3% organic net revenue growth compared to 2017.

We generated organic growth in all geographies and in our Environmental Services, Energy and Resources and Water business. My second objective last year was to reinvigorate our focus on strategic acquisitions after we had paused to digest MWH.

Last year, we acquired seven strong firms that add to the diversity, depth of expertise and geographic reach of all our businesses. And notably, three acquisitions were outside North America marking a big step forward in our strategy to build on the global platform we acquired through MWH. Thirdly, we wanted to achieve cost efficiencies.

While we will never compromise on health, safety or our ethical standards, we recognize that maintaining an efficient administrative cost structure is critical to our competitive advantage and profitability. In 2018, we looked closely at administrative costs and successfully reduced spending in several areas.

We continue to see incremental improvements and utilization and reduce their admin and marketing expenses as a percentage of net revenue. And my fourth objective for 2018 was to complete a strategic review of Construction Services. As I reflect back on the MWH acquisition.

I can say that despite the turmoil caused by the construction business, Stantec is stronger with the addition of MWH's design practice. It brought us a global footprint, added strengths to our established teams and gave us a mature and leading presence in the UK Water sector.

However, that narrative was overshadowed by poor performance in Construction Services. We closed the sale of Construction Services in November and we're in the process of reviewing the closing financial statements with the purchaser.

With this chapter largely behind us, we're looking forward to refocusing all our attention and energy on continuing to grow our core Consulting Business. And yesterday our board declared dividend of $0.145 per share, an increase of 5.5% from last year.

This signals the board's confidence in our strategic direction and our ability to execute on our growth strategy, while recognizing construction as weighed down our earnings and cash flows in the last two years.

The board believes a 5.5% dividend increase strikes an appropriate balance in our capital allocation, offering a meaningful dividend increase while supporting investment in growth initiatives that will create long-term shareholder value. Now I'll hand the call over to Teresa to walk us through our results..

Thank you, Gord. Before I jump into our earnings review, I'll note that we've made certain changes to the presentation of our financial results mainly as the result of following accounting rules for discontinued operations which became a requirement when we sold Construction Services.

First, earnings and cash flows for Construction Services have been classified as discontinued operations for the current period and restated as such and comparative periods.

Second, the accounting rules for discontinued operations required that certain corporate costs historically allocated to Construction Services be reclassified with continuing operations because those costs are ongoing in nature, the effect of this has also been incorporated into our receded results.

Unrelated to the sale of Construction Services we've broadened our definition for adjusted EBITDA, adjusted net income and adjusted EPS from continuing operations. We'll discuss these changes in greater detail. And we've done so on page 3 of our 2018 annual report.

And as well, we provided some supplemental financial information as an appendix to this presentation and in the investor section of stantec.com. So let's move on to our results from Consulting Services starting with Q4 2018. All the comparative data I'll reference relates to Q4 '17.

Adjusted net income from continuing operations was 45.5 million or $0.40 per diluted share, representing increases of 14.6% and 14.3%. These increases reflect solid net revenue growth in Consulting Services, reduced admin and marketing expenses as a percentage of net revenue, and decreased amortization of intangible assets.

Q4 net income from continuing operations was 21.2 million or $0.19 per share, increasing by 35.9% and 35.7% respectively and Q4 net revenue increased by a healthy 11.4% reflecting 3.5% organic growth and 6% acquisition growth. Gross margin increased 7.3%, but declined as a percentage of net revenue by 2.1% to 53.8%.

This is largely due to our project mix, downward fee pressures in certain business segments and project execution challenges in some of our Canadian buildings operation. Admin and marketing expenses increased 9.1%, partly due to certain unusual and non-recurring items. Excluding these items that increase would have been 4.3%.

As a percentage of net revenue admin and marketing would have decreased by 3.1% to 43.7%, mainly due to improved utilization, operational efficiencies and reduced share based compensation charges. Adjusted EBITDA increased 26% to 84.2 million, increasing by 1.2% as a percentage of net revenue to 10.1%.

Now looking at discontinued operations, we recorded a 32.2 million after tax loss and Q4, 35.8 million pre-tax. This includes operating losses incurred by Construction Services up until the November 2 divestiture, project losses associated with the remaining UK waste-to-energy project.

5.8 million for past service costs resulting from a court ruling related to equalization benefits for the UK construction defined benefit plan, a 1.5 million gain on sale and the corresponding tax expense. The waste-to-energy project has experienced EPC related delays, but we are now 20 days into our 30 day acceptance testing.

In calculating adjusted EBITDA and adjusted net income. We've excluded certain unusual or non-recurring items because we don't believe that they are reflective of our underlying operations. For Q4 these items include a 12.8 million charge for a lease exit liability related to our Edmonton head office move.

A court ruled 4.7 million past service cost adjustment for our UK defined benefit pension and a 5.5 million unrealized loss on investments held for self-insured liabilities. We've provided a reconciliation of these adjusted measures to net income in the appendix of this presentation.

And now moving to our full year 2018 results where all comparative data referenced relates to full year 2017. Adjusted net income from continuing operations was 206.6 million or $1.82 per diluted share representing increases of 5% and 5.8%.

This demonstrates our success in growing organically and through acquisition while maintaining an efficient cost structure.

For comparison purposes, had we not been required to change our methodology of allocating corporate costs Consulting Services would have reported adjusted net income of 215.5 million or $1.89 on a per share basis, increases 11.1% and 11%.

Unusual or non-recurring items for the year include the Q4 items previously discussed, as well as a 10 million tax recovery because of proposed US Federal Tax regulations in August. Losses incurred from Construction Services coupled with the unusual or non-recurring items had a considerable impact on net income.

2018 net income was 47.4 million or $0.42 per diluted share, decreases of 51.1% and 50.6% respectively. Net revenue increased 5.7% to 3.4 billion. As Gord mentioned at the top of the call we achieved 3.3% organic net revenue growth with growth across all geographies and in our environmental services, energy and resources and water businesses.

Gross Margin increased by 3% to 1.8 billion, but declined by 1.4% as a percentage of net revenue to 54.1%. This was largely due to overall project mix and execution challenges in our Canadian buildings operations compounded by the 2017 Innovyze divestiture which was a higher margin business and several positive 2017 revenue adjustments.

Admin and marketing excluding unusual or non-recurring items fell by 2.1% as a percentage of net revenue to 42.3%, demonstrating the effectiveness of our focus on operational efficiency. Adjusted EBITDA increased by 11.1% to 392.5 million, representing a 11.7% of net revenue.

As for discontinued operations, we recorded an after tax loss of 123.9 million for the year and in addition to the items described in the Q4 discussion the full year loss includes a 53 million non-cash goodwill impairment charge and a 13.8 million tax charge on the disposition.

Despite this, overall, Consulting Services had a very good financial performance year, while all of our financial targets were achieved. And before we move to highlights from operations, I'll touch on our liquidity and capital resources.

Underpinning our pursuit for growth is a commitment to protect and strengthen our balance sheet and to optimize our capital structure.

While we've always benefited from strong liquidity and access to capital, our 2019 priorities include further strengthening our cash flow and leverage metrics by improving the efficiency of our working capital and by being disciplined on how we allocate capital.

Our day sales outstanding has cropped up over the past year from 94 days to 103, and that is higher than we'd like it to be. We know that we can do better. So we're committed to lowering that number, and we've taken targeted measures to do so.

I should note that in calculating our DSO we do not net off deferred revenue from accounts receivable and work in progress. And others may, I think this practice is mixed in our industry, but doing so would drop our DSO to 88 days. This doesn't change our focus on reducing our DSO, but I did think that it was important to highlight.

In terms of our borrowing capacity at the end of 2018, we had approximately 223 million of undrawn capacity on our credit facility and access to another 400 million under our accordion feature if required for future acquisitions. Our net debt to EBITDA ratio was 2.42 at year end, below our target of 2.5 and well within our covenant requirements.

Nevertheless, we're focused on reducing this metric to further enhance the efficiency of our capital structure. We've also been very active in repurchasing common shares through our normal course issuer bid program.

In 2018, we repurchased and cancelled over 2.4 million common shares at an average price of $31.09 per share for an aggregate price of 76.7 million. And so far this year, we've repurchased and cancelled further 195,000 shares.

Lastly, in Q1 of 2019, we'll transition to IFRS 16, which will introduce significant changes to our financial statements including increased assets and liabilities related to our leased assets and reductions to our admin and marketing expenses offset by higher depreciation and financing costs. Our transition is still a work in progress.

So we can't share specifics of the extent of the impact yet. We know IFRS 16 will change the complexion of EBITDA and other metrics. So we're working to develop our disclosures with the aim of providing transparency and comparability. We'll provide an update to our 2019 guidance in our Q1 '19 reporting.

And with that, I'll turn it back to Gord for a closer look at operations and our 2019 outlook and target..

Thank you, Teresa. In 2018, our Canadian operations performed quite well with net revenue increasing by 5.9% in the year. That breaks down to 3.7% net organic growth and 2.2% growth from acquisitions completed in 2017 and '18.

Our power and oil and gas sectors were our strongest performers in Canada largely due to significant progress on several major projects in the power sector and a ramp up of midstream work in oil and gas. Our Water business also had strong growth, driven by major projects in Western Canada where we continue to build a top tier presence.

And although we saw a slowdown in community development work in the Western provinces, we offset this with a steady stream of work in the east. Environmental Services retracted year-over-year, but grew organically in the fourth quarter. Prospects in Canada are positive with midstream and oil and gas we're continuing to increase.

Growth in our Canadian buildings business was impacted by major projects nearing completion and by certain projects that required more specialized consultants. The result was a year-over-year retraction for buildings in Canada.

Moving on to Slide 15, our US operations also had a solid year with 3.5% net revenue growth, which includes 2.5% organic net revenue growth. And with the exception of buildings, all our US businesses and sectors grew organically. Roughly 1.3% of our overall net revenue growth was due to acquisition growth.

Our US Environmental Services business achieved organic growth in several sectors and we continue to capitalize on our environmental mitigation and expertise and build on our remediation and recovery practices. And with commodity prices on the upswing, we experienced organic growth in our US mining, oil and gas and water power and dam sectors.

Our water business grew as well due largely to our ability to capture share of the growing amount of work flowing from California and Texas. And when you're looking at year-over-year costs, it's important to remember that we're still comparing against the sale of Innovyze, which had a strong positive impact on our Water business in 2017.

Elsewhere in our US sectors, community development work is growing in the busy southeast and northeast corners of the country, but this was partly offset by competitive fee pressures in other regions and by projects with higher sub consultant fees.

In transportation, the ramp up of previously awarded major projects offset the ramp down of other projects. We have a strong strategic position in transit, bridge inspection, light rail transit, roadways and bridges and we continue to secure impactful projects.

Our US buildings business had an organic retraction, mostly due to project issues in a large healthcare project that's winding down early in the year.

But in the second half of the year, the downward trend reversed, with strong organic growth in the fourth quarter and growth in our commercial, healthcare and science and technology sectors, especially in Florida and the Northeast.

In global operations on Slide 16, we generated very strong net revenue growth of 14.3% that includes 5.4% net organic growth and roughly 9% acquisition growth, primarily in our Environmental Services and infrastructure businesses.

Leading net revenue growth within global operations was our Water business, propelled by new projects and Australia and New Zealand. Our mining sector continued to benefit from improving commodity prices and a steady flow of Environmental Services work in Latin America.

Our global buildings business performed well with two major project awards in Qatar and the UAE. Due to decreased volume on large project in Europe, Environmental Services retracted. Our water power and dam sector grew as a result of new project wins, but growth was partly offset by projects winding down in our export business.

Now, we'll shift gears and look at backlog. At year-end, backlog for continuing operations was 4.2 billion representing a11.7 months of work. Just over 60% of that work is in the US, about 25% is in Canada and roughly 14% is in our global operations. We were awarded many significant projects in 2018.

Those on the slide represent just a handful of the largest projects in our backlog and of course, these are supplemented by the many thousands of smaller projects we went around the world, thanks to our strong local relationships.

As we look ahead to 2019, we expect organic net revenue growth to be in the low to mid single digits in line with global GDP growth. We remain committed to our long-term average compound target rate of 15% net revenue growth achieved through a combination of organic and acquisition growth.

In Canada, we expect that continued oil price volatility, rising interest rates and increased regulatory restrictions on mortgage qualifications will slow economic growth. In the US, we expect solid consumer spending and business investment, slightly increasing interest rates and continued strong employment. We anticipate growth in our global markets.

As we continue to expand our global footprint. We expect healthy GDP growth in the countries where we operate, less volatility and commodity prices, helping our mining and Environmental Services business.

We do expect Brexit to create someone certainly in Europe and the UK, but we believe our UK business is insulated from these uncertainties given our long-term critical public infrastructure contracts.

Now looking at our 2019 targets on Slide 19, we remain committed to our previously identified target ranges for gross margin, admin and marketing expenses, EBITDA and net income as a percentage of net revenue as shown on the slide.

The transition to IFRS 16 will impact admin and marketing expenses and our EBITDA, and we'll revisit these targets in Q1. Once we've completely assessed to check how the transition to the new standard will impact us.

Our 2019 acquisition strategy is to remain disciplined as we focus on small to midsized firms that will help us deepen our expertise, diversify our services in key regions and create value. We plan to continue to infill in Canada and still see significant opportunity to grow and diversify in the US.

We need to be a top tier provider in multiple sectors to operate at scale and acquisitions are key to growing and diversifying our operations and building vertical depth. Our intent is to achieve the same thoughtful North American focused geographic and business plan expansion in the key global markets, namely New Zealand, Australia and in the UK.

We remain committed to the UK as part of our long-term growth strategy. With long-term infrastructure demands there are plenty of opportunities, but we'll wait and see where everything lands when the uncertainty surrounding Brexit subsides.

Stantec steps into 2019 determined to deliver shareholder value, while providing solutions to challenges facing our clients and the world. Our consulting business remains among the best in the world.

We worked hard to build the practices that is diversified by business line and geography, providing a stable base against potential volatility in any one sector or region.

Our business model is further strengthened by our solid client base, which is well balanced between public and private sector clients and built upon strong local relationship backed by our team of global experts.

Our backlogs are strong and we're well positioned to continue winning meaningful work that will grow earnings and help us create communities. As always, I thank our employees, clients and the investment community for their continued confidence in Stantec. With that, I'll turn our call back to the operator to begin the Q&A..

Thank you. [Operator Instructions] And our first question comes from Jacob Bout. Please go ahead..

Good morning..

Good morning Jacob..

Wanted to go back to your 15% net revenue kicker guidance, I guess we would back into then a kind of a 10% plus M&A for net revenue.

What is your target areas right now for M&A by geography and sector?.

And so Jacob, also like to clarify that that 15% is on a five year average, some years will be higher than that and certainly some years will be lower than that. From a geographic and business line expansion, as we mentioned earlier, we have in the prepared remarks, when we started back in June of 2017, when I was named to this role.

We spent a lot of time in the UK and in Australia and New Zealand looking at firms. So in the UK, we've identified still a number of really good top tier firms that would like to join Stantec. At this point though, we've paused any further additions of firms in the UK until we learn a little bit more about Brexit.

So with that said, we'll continue to focus on Australia and New Zealand. Certainly we've previously press released that we signed a NOI with WG Engineers, Wood & Grieve Engineers of Perth and we'll continue to talk to two additional firms down there. But we don't intend to take our foot off the gas at all in the US.

We still see strong opportunities for growth in the US across all of our business lines and perhaps just for a moment going back to Australia, New Zealand area. In Australia, we have some good presence in Water, an emerging presence in transportation and when WGE joins us subject to due diligence in the first quarter of this year.

That will give us a very strong national buildings presence. So I think we've got a lot of opportunity still in Australia and New Zealand.

Australia in particular to continue to focus on transportation firms additional strength in our Water business, really filling out the full suite of services that typically within the Stantec are five business operating units.

We're seeing still in Australia, a lot of in the south eastern corridor from a land development perspective, community development in the West.

Certainly a lot of emerging work coming back in the mining business and we're hiring there, in fact, having trouble filling some of the positions we want to hire just because it's so robust there, so pretty good geographic opportunities for M&A growth as well as a lot of sectors that we still have a good run rate in as well..

Okay, thank you.

That was helpful and maybe just a question on how the divestiture of your construction businesses impacted your E&C Water business or any impact on win rates or any other impacts thinking about?.

We have not seen any impact on win rates or - at this point in the US in particular, no impact that I could speak of whatsoever and in the UK as well, we still have - we haven't seen any impact from the divestiture of construction at this point..

Okay. Last question here just on the quality of your backlog.

What's the embedded EBITDA margin in your backlog you have currently?.

We feel the backlog hasn't been achieved through price reductions, so we feel good about the quality of the backlog as well that it'll be in line with what we've seen historically..

Thank you very much. Operator Thank you. Thank you in our next question comes from Yuri Lynk. Please go ahead..

Hey good morning, thank you. Just a follow up on the debt to EBITDA ratio, it struck me as rather high 2.42 I think is the number provided.

Can you just clarify if the EBITDA you're using in that calc is restated for just the consulting EBITDA or is that including the losses in the construction business over the last year?.

No, that is using our actual EBITDA, not the adjusted metric..

Okay, that makes a little more sense. So that should, I guess, the thinking if we were to tie that into the plan to do more M&A because at face value it looks like you're rather tight there, EBITDA lapping some easy comps, better cash flow and that kind of gets you into a better comfort range on the balance sheet.

Is that the thinking?.

Yes, and keep in mind the EBITDA is - we know it's going to improve now that we've shut the construction business and so we're anticipating that that coverage to improve pretty dramatically as we roll into 2019 and those as we keep EBITDA from construction rolls off.

So it's something that we're monitoring absolutely, but it's not really for me an area of concern..

Got it, okay. Can you share with me what the guidance implies for the building segment, particularly around margin and you described continued execution challenges in the fourth quarter in that segment. I mean, this has been going on for a while.

What's being done? What are the nature of the issues and when might they seize?.

Yeah, well, we certainly in the fourth quarter of last year we did a deep dive on these two buildings projects in Canada that was the Mackenzie Vaughan Hospital and Kamit [ph] and what we found there was - so the issues we trued up really with a strong earned value assessment, the cost to complete the design phase both those projects are in construction now.

The design phase largely complete and really those - we trued up what we believe the earned value to address with that. Going forward, we have services - we'll continue with services during construction. But that work the services during construction work, those budgets remain intact.

So we believe that the performance in the building sector going forward into 2019, while we don't see it as being spectacular, we don't foresee the degree of impact that we had in 2018..

And was the issue there just under estimating the number of man hours it would take to complete these jobs..

Yeah, those were both P3 jobs and you're right the scope - we found that the scope was not well controlled, the client came back with numerous change orders and perhaps we hadn't managed that as well internally as we could have.

We've changed some people around we've brought in some additional internally, we've put some of our project management specialist on it. That's where we did the deep dive into the earned value and did those true ups in Q4 and that's why going forward we expect that we're going to be in better shape there..

So better margins on the whole and in '19 verses '18 in buildings, is that the message?.

That would be our anticipation, yes..

Okay. Thanks very much. I've got to turn it over..

Okay. Thanks Yuri..

Thank you. [Operator Instructions] Our next question comes from Mark Neville. Please go ahead..

Hey, good morning.

Maybe just first on the last construction project, can you just remind us or just let us know when that officially wraps up and if there's any cash flow impacts that we should expect in Q1?.

So a good question Mark. So as Teresa noted in her remarks we're focused right now on this 30 day acceptance test, and we're over 20 days into it. So that's the next big milestone is to achieve that 30 day acceptance period. Once that's complete, we still have - we have O&M contracted for a five year period.

So we're not particularly focused on the O&M contract right now, but we have received interest from a number of firms who would be interested in picking up that O&M contract from us and thereby us shedding all go forward liability on that.

So that's kind of something that we're certainly interested in and will engage in those discussions once we've completed our 30 day performance test, and again, we're over 20 days into that..

Yeah, as far as the cost goes, we took a pretty hard look in the fourth quarter at what we needed to provide for with respect to completing this project as well as the anticipated impacts of the O&M contract over its five year life.

And so from an earnings impact, we feel that we've been conservative in providing at our best estimated amount and so the goal would be that as we move into 2019 to not see material losses recorded in the year and so that's the approach that we've taken.

From a cash flow perspective of course, that timing will be as the project unfolds and over the course of that O&M contract..

But maybe just related to the actual - ignoring the O&M just the construction portion of these wrap up and in Q1 is there a significant cash outflow tied to that?.

I don't think it's significant, no..

Okay and maybe just on your 2019 guidance, I understand we reconcile sort of everything you're saying.

Are you actually expecting growth in the Canadian ops next year?.

Yes. Yeah, we are forecasting organic growth in Canada for next year..

Okay. I mean, it looks like a fairly difficult comp in '19 versus '18 in Canada, like consolidated you're sort of roughly in the same range as what you did in '18.

So I'm just curious, if there is some softness in Canada or if it's down from last year the growth rate maybe where you expect to make that up?.

We're seeing really good activity in the transportation sector in Canada.

We've been shortlisted on a number of projects in the in the GTA area there, Hurontario, Milton Corridor, Lakeshore West, so a lot of good opportunities and transportation, certainly good opportunities continuing in the fourth environmental services and environmental and our energy and resources group as they relate to coastal gas, LNG Canada and Trans Mountain should be approved move forward.

So we do see some green shoots in a lot of our operations in Canada..

Okay, maybe this one last one then for Theresa.

Just on the recap classification of the corporate costs, I apologize if I missed this in the MD&A, but the 11.7% margin that you did in '18, is that sort of reclassified or is that sort of on the old classification the corporate?.

Yeah, so it's - I don't blame you, it's a little bit of a mind twister in following through. So the 11.7% on the EBITDA margin, that piece is related to adjusting out those unusual and non-recurring items. It doesn't take into account the reallocated costs. If you do adjust for the reallocated costs, we would actually have been at 12%..

12%, okay and I guess for - I guess that's my question for '19 the baseline then is 12 or 11.7?.

For '19 the basis would have to be 11.7 because the new methodology of allocating cost is now the go forward approach..

Okay. So the 11.7 is the reallocated number and maybe for your understanding, I apologize.

But the 11.7 is reclassified?.

That's correct..

Okay. Okay. Okay. Alright, I'll turn it over. Thanks a lot..

Thanks Mark. Thank you. Our next question comes from Maxim Sytchev. Please go ahead..

Hi. Good morning..

Good morning, Max..

I had a maybe question for Theresa to start off. The reported tax rates in them MD&A, you talk about 10.9%.

So is that what you use to calculate the $0.40 for the Q4 adjusted EPS?.

The tax rate, it would have included the adjustment for the 10 million recovery that we adjusted for in arriving at adjusted net income. So the lower tax rate would have the recovery included, the normalized rate would have it backed out..

Sorry, the normalized EP - so the normalized EPS that you calculate the 40 because like we're just going through right now through the spreadsheet.

So was that imputing a 27% tax rate or the 10.9?.

That would have been imputing a 27% tax rate..

Okay, okay, thank you. And then in terms of when we look on a by divisional basis, gross profit percentages are trending downwards sort of across the board and especially when you combine it with potential wage pressure due to relatively low unemployment rates.

How should we think about the gross profit percentages on a prospective basis, your comfort level around being able to, to bring those back up?.

Yeah. Max, as we look at gross margin, you're right, that has been kind of trending in a downward direction. We're pretty focused as we did last year, on the cost side.

This year, we're going to continue to focus as well on - and you're right there is wage pressure in a number of our areas and we're also really having a look at our overall workforce, the demographics, the organizational structure, and looking for how we can continue to optimize that and bring down our overall average cost per hour of labor.

So I think as we continue working through these initiatives in the first half of 2019, we're hopeful that that will - as we bring down that average cost of labor that our gross margin will continue to trend back upwards..

Right and so do you mind maybe expanding a little bit on additional efficiencies that you can drive through kind of the system because I'm like it's easy obviously to say like it's going to go up by 100 basis points, but what is exactly behind that?.

So when we look at our overall structure Max, we're looking at how we can continue to lean out the structure a little bit more, how we can get less people looking at administrative type tasks and more people back working with clients and on projects. So we're continuing that work.

We have presented some initial work to the board yesterday and we're going to continue working through that.

In terms of just how can we become leaner and meaner, we need to do that now, but I think you've brought up in the past and some of our discussions that as the US expansionary cycle has gone on for quite some time now, do we see it at some point softening? And if so, how quickly can confirmed, respond to a softening.

So we're making sure that that we're working hard to get out ahead of that..

Okay. No, that makes a lot of sense. And last questions. Last clarification, you've added the adjusted net income to net revenue target better than 5%, and I think consensus is already implying kind of like 7% for 2019.

So what was the rationale of adding that additional target tool to your list if it's possible?.

It's something that we've always tracked internally Max. It's been something that we've used and so the thought was that if it's something that's important for us to track internally and hold ourselves accountable to that from a transparency perspective; we didn't mind sharing that with you as well..

Okay, that's helpful. Thank you very much..

Thank you. Thank you and our next question comes from Mona Nazir. Please go ahead..

Good morning and thank you for taking my questions..

Good morning, Mona..

Good morning. So my first question is just following on the last line of questioning, you had 11.7% consulting margin in 2018, which was a year that effectively there was a lot of noise surrounding the business. You had challenges within your construction division.

You are trying to sell that new management transition and given the noises have subsided for the most part in your recent comments surrounding optimization.

Do you think it's possible to hit the upper end of the guidance range for EBITDA, so 12.5% or more?.

Mona, we're going to continue to focus hard on that both through efficiency, increasing our quality of delivery and so on, we feel that range of 11 to 13 is reasonable. Often we get asked would we ever get above 13 and I don't think that getting back in those 14% numbers that we had several years ago. It could happen.

We're going to focus hard to do - to get the best we can there, but certainly, I think the midpoint is probably a reasonable objective for us to think about..

That's helpful. And then just secondly, I wanted to turn to infrastructure spending initiatives both in Canada and the US and it's been slow to take off on both sides and from calls dating back to last year and even 2017 there was an overall optimism within the sector and saw strong rallying albeit somewhat died down since.

I'm just wondering if your current organic growth forecast of low to mid single digits, does that factor in any uptick in spending or is it based on the status quo..

It's really based on the status quo Mona. Certainly there's been a lot of talk both north and south of the border in a significant increase in infrastructure spend. But we really haven't seen anything that has materially come along.

The market is pretty close to capacity, both on the design and the construction side, so if there was a big injection of significant infrastructure funds, either north or south of the border, part of my concern is that that would lead to some significant inflationary spirals in our industry.

But to your point, no, we have not included in our forecast a significant uptick in infrastructure spend..

Okay, that's it for me. Thank you..

Thanks Mona..

Thank you, and our next question comes from Derek Spronck. Please go ahead..

Good morning. Thank you for taking my questions.

Can you provide any updates on the AMP6 to AMP7 transition?.

Yeah, that that process is going well. We're currently as you know in AMP6. AMP7 really kicks in, in April of 2020. So as we have a number of AMP6 clients in which we have the provision as they roll into AMP7 of just renegotiating the contract.

We will not have to re-compete, so we're in discussions with a number of clients on that now, but there has only been two AMP7 contracts that have gone out, one for Yorkshire Water and one for Southwest Water and we were successful on winning both of those AMP7 agreements - those AMP7 contracts going forward, both run through 2025 with an option to extend past that.

So we feel pretty comfortable with where we are in the AMP6 to AMP7 transition..

Okay, that's great. Thanks Gord. With the backlog $4.2 billion, you indicated that you're feeling relatively comfortable with any sort of uncertainty that might arise with Brexit due to the long-term nature of your contracts there.

If we were to look at your $4.2 billion backlog, how much of that do you expect to be converted over the next 12 months or what's the duration of the backlog?.

As you know, with the new accounting rules that rolled in last year - we used to always report on our upcoming 12 to 18 months backlog. Now, we're required to report on our full backlog. So certainly that gives us 11.7 months.

In terms of how much do we plan to convert, it will be just our continued taking from where we are - in 2018 as we roll forward with our organic growth into 2019, I don't see - well we won't consume all that because we have certainly a number of additional projects coming on..

But it gives you pretty good visibility for 2019, I mean the majority -.

Yeah, we feel quite comfortable for 2019 absolutely..

Okay that's great and then just one more for myself.

You indicated that gross margins were down largely due to changes in project mix, was that just a quarterly variance or do you see that trend continuing at all in the future and maybe a little bit more color there would be helpful?.

We do find that that some of the energy and resources work that we do on the large pipeline jobs and large oil and gas jobs are at a lower margin than some of our other lines of business. So I think as that work increased a bit in 2018 we saw a little bit of margin impact from that.

But going forward, we don't see margin contraction in a lot of the new work that we're either bidding or being awarded.

So coupled with the types of projects that we're getting in the door, coupled with us working to increase our average cost of labor efficiencies we're optimistic that the gross margins will see no further deterioration, it'll either be stable or increase through the year..

Okay and just one last one quickly for myself before I turn it over.

Did you see any sort of impact from the US government shut down there in the first quarter?.

We really didn't see a significant impact on our US operations due to that. A big part of our work is for agencies like FEMA and their funding was unaffected by the shutdown. So we really didn't see much of an impact at all..

Okay, thank you very much..

Thanks Derek..

Thank you. And our next question comes from Devin Dodge. Please go ahead..

Hey, good morning..

Good morning Devin..

Some of your US peers continue to generate really strong organic growth, high single digit, low double digit kind of range. It's good to see a bit of a lift on your US organic growth in the quarter, but it still seems like there's a bit of a gap between yourselves and the larger players like AECom and Jacobs.

Is this just a function of the specific market you're in or the end markets you serve or are there other things that we should be thinking about?.

And you're right. When you look at our organic net revenue growth in Q4 in the US we had 4%. We've kind of seen strengthening from Q3 '18 to Q4 '18 and so we see some continued strengthening. We are projecting in the US that we'll have higher organic growth this year, certainly than in Canada. So we've got some good project wins.

We've referenced a couple of the big transportation projects. We've got some good water projects down there. In water in particular, our backlogs are at an all-time high and we're working through that process, so we need to hire more people, get them in the door in order to get the work out the door.

But we're trying to still be very disciplined and in our hiring practices and certainly in our pay that we don't fall into a cycle of just continuing to escalate our pay, which would then - the pay profile which would then lower our margin.

So we're trying to be disciplined and balance that discipline with our need to consume the backlog and get the workout the door, so we're trying to balance a little bit there.

And I think we're having some success in water so far this year, where we've hired a number of people at the production ranks upwards of - well, without getting into the numbers, but we're certainly having some success there in hiring people and maintaining our pay profile in the way that we want to do so going forward..

Thanks a lot, that's good color. Maybe just switching gears here, last quarter you talked about the acquisition pipeline was as fuller than it's ever been.

I guess how is this evolved over the last three or four months and maybe just further to that I just want to make sure I have this clear, but I think Theresa mentioned that there's a desire to strengthen the balance sheet, may be reduced leverage.

Does this in any way suggests that M&A could slow down in 2019 versus maybe what it was last year?.

No, we don't see that that occurring and so first I'll talk about the pipeline perspective. From both within North America primarily in the United States and outside Australia, New Zealand and there's some good opportunities in some of these solid Western European countries up in the Nordics as well, some good opportunities there.

So the pipeline remains very, very full and probably even fuller than when we had that discussion last quarter. In terms of the capital allocation and our growth going forward perhaps I'll let Theresa answer that question..

Yeah, I think it's really a matter of ensuring we maintain our discipline. There are so many opportunities in the M&A pipeline that - in selecting the ones that we will actually pursue. It will be about ensuring that that's the best place to place our capital. And that's really what that optimization will be for that I talked about earlier..

Okay, makes sense. Thank you..

Thank you. And our next question comes from Benoit Poirier. Please go ahead..

Yes, good morning Gord and Theresa.

And just to come back on the M&A, could you mention if you saw a step up in the evaluation that took place over the last year given the overall improvement in evaluation in this space?.

We continue to be pretty disciplined Benoit as we look at these. The ones that typically would go to an auction and see even higher and higher prices where we typically don't participate in those because the seller's motivation to sell and be part of a strategic buyer like Stantec is very important to us.

We six to eight range maybe over the last year or so, it's kind of gone to little bit of a seven to nine. But we still maintain our discipline and our focus in paying what we believe to be the right price for the acquisitions.

And if money is the only reason for an acquisition to join us then oftentimes we'll find that they might be better to go elsewhere..

Okay, perfect. And just in terms of capital allocation Theresa, sorry if I missed the answer at the beginning, but fund to debt EBITDA stood at 2.4 times at the end of the year.

I was wondering what type of level would you like to be going forward and also what type of free cash flow generation we should be looking for in 2019?.

As I mentioned earlier, the 2.42 is based on our actual EBITDA that does include the impact of the construction business and so as we start to roll away from having those results in that metric we know that the metric will improve.

Where do we want it to be, I think historically Stantec as I said, 1.5 to 2.5, so we're well within where we want it to be. It is about improving it further. And we know that that will occur as we continue to grow and again, as we shed the construction impacts.

From a free cash flow perspective, I think you're going to see the same thing that our cash from operations is forecast to increase from our consulting business. And along with that 2018 was a heavy year for us from a capital expenditure perspective mainly because of the movement to the new tower and so we expect that spending to come down in 2019.

And so both of those effects of higher cash from operations, lower CapEx will we think dramatically improve our free cash flow..

Okay, have you provided a number in terms of capital for 2019 Theresa?.

Yeah, we provided a range of 60 million to 65 million for capital expenditures and 5 million to 10 million for software additions..

Okay, perfect.

And would it be fair that the free cash flow conversion, you're still expecting kind of a 100% of the net income going forward, or is there any changes that we should take into account?.

So I think getting close to that one time is certainly what we're shooting for..

Okay, perfect. And the last question for me, could you talk a little bit about the overall environment for energy and resources, obviously, strong organic growth and earlier this year, it seemed that it was strong across each segment, so mining, power, oil and gas. I would be curious if it's well balanced between those two segments.

And also what type of - if you could provide kind of an outlook for this segment going into 2019. Thank you..

Sure. Certainly we don't see the continued 20% type of growth that we saw in that group over 2018. It's coming off some pretty low comps in 2017, but there remain very good opportunities for that overall group. In the mining sector, for us a big part of that is in Latin America, we're seeing that group very busy.

We're seeing continued hiring in Latin America, really in all three countries where we're active. We see mining work in Western Australia picking up again, we talked about some of the hiring we're doing there and how we're having trouble filling some of the position that we're looking to hire there.

Certainly the power side remains robust for us, a lot of renewable type work there. And then in our standard sort of more of the engineering side, which for us is a lot of midstream pipeline, we see good opportunities in both Western Canada and some opportunities in the US as well.

So I think we'll see continued growth in energy and resources in 2019, but certainly not in the 20% plus range that we saw in 2018..

Thanks very much for the time..

Thanks Benoit..

Thank you. And our next question comes from Michael Tupholme. Please go ahead..

Thanks. Good morning..

Good morning Michael..

You provided some additional disclosure around the backlog in terms of backlog by reportable segment, geographic region this year, which is helpful. Thank you for that.

Can you provide a bit of context around how each of those regions, the backlog would have changed Q4 versus where it would have been say in Q3 or even earlier in 2018?.

I think we would have seen not a material change. While we've had some large projects awarded in one geography or another, there wasn't a - when you're looking at a $4.2 billion backlog, even if you win a very large project $100 million in fees or so it doesn't materially make a difference in the big picture.

So I don't think that the geographic mix would have changed significantly between Q3 to Q4 or even on a quarter-on-quarter basis, pretty similar. And the backlog is more or less in line with where we find our headcount and where we're proceeding from that perspective, so we feel pretty good about it overall..

Okay. So no one region would have driven a disproportionate share of the change one way or the other. It was it was pretty balanced..

Theresa and I are looking at each other thinking, no, we think it was pretty balanced..

Okay, sounds helpful. Thank you.

Can you talk a little bit about the outlook for your community development activity both in Canada and the US?.

Yeah, so we still see that in Western Canada things are a bit slower than they had been a decade ago and that's just as a result of the slowness in the oil and gas business.

Certainly the coast Vancouver is still very robust, we're seeing some good activity in eastern Canada, Toronto and so and then still a lot of good activity in the US in the Sunbelt states whether it's, Florida and California those areas, we're seeing a good uptick in our land development business in the initiative that we rolled out called Urban Places and that really brings together all of our groups from across the company looking at mixed use development, sort of the creation of new urban downtown cores, re-densification, we're seeing a lot of that in these larger cities.

So that actually is the initiative we started several years ago and we're seeing really strong uptick in that area..

Okay, thank you.

And then just lastly, just to confirm the Wood & Grieve acquisition has that now closed?.

It has not closed. We issued our letter of - we had signed a letter of intent there some time ago. We're just working through the due diligence and we stated that we anticipate that closing in Q1 and that's still our thought process..

Okay, thanks very much..

Thanks Michael..

Thank you. Our next question again comes from Max Sytchev. Please go ahead..

Hi. Sorry, I just have one follow up. Teresa, I can't seem to find the reconciliation to the non-cash working capital changes in the financial statements.

Is there a reason why that's not there or am I missing something?.

So it won't be in the financial statements, but it will be in the MD&A..

Okay, so the same reconciliation to the indirect method is summed in the MD&A right?.

No, I'm sorry, you're telling about the cash from ops on the on the cash flow statement. No, we did not put that in the financial statements in my drive to reduce the number of pages on the financials and the notes. That is not a required disclosure. And so we did not include that in the note this year..

Because it's just - it's kind of hard for us like looking from the outside to get a better view on what's happening on each of the kind of the buckets of non-cash working capital?.

Yeah, there's a number of complexities involved in that this year, particularly with the construction services affect. And so that was one of the other reasons that we didn't put it in there.

And I don't know that I can commit to - ordinarily I'd say, if there was something you needed when we put it on the website for you, I don't know that we can commit to that just because of the complexities required to get that number or that information, right. But let us take that away and see if we can figure something out there..

Yeah, that would be very useful. Thank you very much..

Thanks Max..

Thank you. Our next question comes from Yuri Lynk. Please go ahead..

Yeah, sorry, Max took my question. But I would just echo if we could get that information at least on a go forward basis it would be appreciated. It's pretty important. Thanks..

Okay, noted..

Okay, thank Yuri. Good perspective..

Thank you. And we'll come back to Benoit Poirier..

Just a follow up question, I was wondering if you see any impact of the Vale disaster within the water segment especially with regards to the dam work?.

Yeah, we have not seen any impact from that at this point Benoit. Certainly that's an area of expertise that we have. We were not involved in that particular dam, so we don't see any downside.

Could be potentially some upside as that particular firm or other firms need to really have a look at their intelligence ponds and their empowerments to make sure that they're up to standard, so we have not seen certainly any negative impact, if anything going forward we might see a positive impact..

That's great color. Thank you very much, Gord..

Thank you..

Thank you and our final question comes from Mona Nazir. Please go ahead.

Hi, I'm just wondering what's your UK geographic exposure post the construction divestiture and then the Peter Brett addition..

Exposure Mona, so the two types of work we have is certainly the AMP6, AMP7 work that we're doing in the Water business I think with regards to a Brexit would have very little to no impact of a Brexit there.

The work that's being done, the capital programs are committed and in fact as we go into the AMP7 cycle we see them increasing with the addition of Peter Brett certainly some solid infrastructure work there that we continue to be involved in. So I don't see considerable exposure.

And in fact, that's the reason why we went forward of the number of the firm's that we were considering in the UK that really was the reason that we went forward with Peter Brett because we saw them to be least exposed to any downside coming from a Brexit..

Do you have a number as a percentage of revenue on a pro forma basis or a head count?.

In the UK we have - right I'm going to say roughly 1800 to 2000 people of that roughly 1200 would be the Legacy MWH folks who are involved in the water company work, so I would see no potential for a downside there. If there was a potential with regards to any downside, it would be with the Peter Brett folks, which are in the 600 to 800 person range.

But again, a lot of that work we don't see having significant downside either..

That's exactly what I was looking for. Thank you..

Thanks Mona..

Thank you. And we have no additional questions at this time..

Great, well, thanks everyone that concludes our call today. Thank you again for joining us. And we look forward to catching up with many of you over the coming quarter..

Thank you..

And this concludes our call today. Thank you all for joining..