Stantec Inc. (STN) Q4 2012 Earnings Report, Transcript and Summary

Welcome to Stantec Inc.'s Fourth Quarter 2012 and Year-end Earnings Results Conference Call. With us today from Stantec management are: Bob Gomes, President and Chief Executive Officer; and Dan Lefaivre, Chief Financial Officer. [Operator Instructions] As a reminder, today is February 21, 2013, and this conference call is being recorded as well as broadcast live over the Internet. It will be archived for future reference at stantec.com under the Investors section. Therefore, any members of the media who are joining the call today in a listen-only mode and who wish to quote anyone other than Mr. Gomes or Mr. Lefaivre are asked to please request permission to do so from the individual concerned. Before the call begins, there are a few words from Investor Relations.

Thank you, Sam. Stantec management would like to make you aware of its Safe Harbor statement and to caution you that it will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 in the United States and applicable securities legislation in Canada. By their very nature, forward-looking statements require Stantec management to make assumptions and are subject to inherent risks and uncertainties. In addition, Stantec management will be mentioning additional and non-IFRS measures. You will find descriptions of these IFRS measures and their use and underlying assumptions in the management's discussion and analysis included in Stantec's 2012 financial review. I would now like to introduce your host, Bob Gomes. Please go ahead.

Thank you, Crystal. Good afternoon, everyone, and welcome to our 2012 fourth quarter and annual results conference call. Dan will provide a brief summary of our financial results for the quarter and year, and I will follow with an outline of our market outlook. We will then address individual questions. Today, we released the results of Stantec's operations for the full year of 2012. We ended the year with strong results and continued organic growth in the face of mixed economic conditions. I am pleased to say we met and in some cases, exceeded our targets due to our continued focus on executing our strategy, taking advantage of market opportunities, building strong client relationships and strengthening our business model. We are very happy with our strong top and bottom line performance in 2012. Dan will now provide a review of our year-end and fourth quarter financial results. Dan?

Thank you, Bob, and good afternoon, everyone on the call. As Bob just mentioned, overall, Q4 '12 was a strong quarter for Stantec. Our gross revenue increased 12% to $484 million compared to $432 million in Q4 '11. Approximately $31 million or 60% of this increase resulted from acquisitions completed in 2012 and 2011. We completed 7 acquisitions in 2012. Our organic growth for Q4 '12 was 6% or $26 million over Q4 '11, reflecting growth in our Environment and Industrial practice areas. On a full year basis, gross revenue increased 11.9% year-over-year to $1.9 billion compared to $1.7 billion in 2011. Our full year organic revenue growth was strong at 5.6% with growth occurring in every quarter. This growth is due primarily to increased activity in our mining, oil and gas and urban development sectors. On a full year basis, our gross margin remained within our targeted range at 55% in 2012, a slight decline from 55.4% in 2011. Gross margin was impacted by the mix of projects and progress during the year, low margins from acquisition legacy projects and tighter margins in our Industrial and Transportation practice areas. Our administrative marketing expenses for Q4 '12 remained relatively stable compared to 2011. For 2012 overall, we had a slight decrease in our marketing and administrative costs as a percentage of net revenue at 40.7% compared to 41% in 2011, demonstrating our continued focus on managing costs and operating efficiently. Due to our strong operational performance, we achieved a 12.9% increase in EBITDA to $221 million from $196 million in 2011. Our net income for 2012 increased 17.7% year-over-year to $121 million, and our diluted earnings per share increased 17.3% to $2.64 from $2.25 in 2011, excluding the impact of the 2011 goodwill impairment. Our cash flow from operating activities increased in 2012 to $181 million. And lastly, today, our Board of Directors declared a dividend of $0.165 per share payable on April 18, 2013, to shareholders of record on March 29, 2013, which is an increase of 10% from last quarter. Our increased dividend reflects not only our strong operational performance but also management and the board's optimism in our current and future performance. Bob?

Thanks, Dan. As Dan just outlined, we saw positive momentum in our performance throughout 2012 with a strong organic growth. We remain focused on providing excellent client service and meeting our business objectives, and I believe our results are a testament to the strength of our long term strategy. I would now like to outline some of the progress we have made towards our strategic objectives in 2012. First, we continued to successfully adopt our business model to match evolving market conditions. This resulted in achieving positive organic growth that exceeded our targets especially in our urban -- Industrial and Urban Land practices. We saw a decline in our Buildings practice attributed to a softening of the business market in 2012 and continued competition and pressure experienced in funding for private and public sector clients, especially in the health care market. Transportation was stable as a result of our ability to secure projects from repeat clients because of our strong relationships and past performance. We experienced acquisition growth in all practice areas, strengthening our geographic reach and the professional expertise available to our clients. Secondly, we maintained our record of profitability in 2012. This consistent performance in the face of mixed economic conditions speaks to the strength of our business model. And with a growing backlog of $1.3 billion, we are confident of our opportunities moving forward. Thirdly, we completed the acquisitions of 7 companies in 2012. We welcome the PHB group, ABMB Engineers, Cimarron Engineering, CT3S, Architecture 2000, Greenhorne & O'mara and Landmark Survey and Mapping to the Stantec community. The fourth quarter was especially busy for us with 4 of these acquisitions in that quarter alone. At Stantec, our strategy is framed by our values. One of these values is, we put people first. We believe that our full integration process for new staff is the right step in that direction. We achieved the step we have -- to achieve this step, we have integrated these companies that were acquired in the first half of the year and integration of the 4 acquired in the fourth quarter is well underway. These firms added more than 1,100 staff and expanded the depth and breadth of our expertise in the oil and gas industry, in particular in Western Canada, and our transportation and urban development expertise in the United States. This combination of added resources and talent supports our long-term strategy of providing integrated services to our clients, which results in growth. Our focus on executing on our strategy and taking advantage of market opportunities resulted in us securing projects with new and existing clients. To highlight a few, we continue to win steady opportunities in the key market sectors in our Buildings practice despite softening in some sectors. An example of this is the Cleveland Clinic in Ohio, where we are performing programming, architectural and interior design services for a major expansion for the Taussig Cancer Institute. In our Environment practice, we continue growing our mining, oil and gas and power sectors, as a result of the leveraging our client relationships and integrated presence across North America. A recent project that demonstrates this is our environmental work with the Northern Gateway Pipeline System running from Alberta to British Columbia. We also provide consulting services to 2 natural gas projects and associated port facilities. In our Industrial practice, we continue to strengthen our capacity in the mining, oil and gas and power sectors organically, with our global expertise and with the strategic acquisitions. This strengthened capacity resulted in securing work with the pipeline expansion project in the Eagle Ford shale region in Texas. In addition, we are providing construction management oversight and regulatory support for other projects in the Eagle Ford. Another value that guides us at Stantec is the shared understanding that we are better together. This means strong, long-lasting relationships are at the heart of everything we do and directly impacts the success of our projects. The importance of this value is evident in our Transportation practice where we continue to develop strong, long-lasting client relationships and make strategic acquisitions to increase our presence and further our positioning, especially in the United States. For example, this past year, we once again secured work with a repeat client, the North Carolina Department of Transportation for project studies for proposed improvements of a section of the NC 150, northeast of Charlotte, North Carolina. In our Urban Land practice, we continue to pursue growth opportunities in both the residential and non-residential markets, such as a recent project providing design services to the Lakewood Ranch community expansion in Florida. This is only a very small sample of the projects we are working on but showcases the diversity of our services and expertise. With a reach of over 200 locations across North America, we have the capacity to provide services to a diversified range of projects and clients and that, in turn, allows us to perform consistently to mitigate risk and to adapt to market opportunities. Across all our practice areas, the one common theme is our commitment to doing what is right. In 2012, our projects continued to win awards for excellence, as well as commendations to our staff from our clients. We are very proud of the work our people do every day to serve our clients. Now I'd like to provide -- I'd like to comment briefly on potential market conditions going forward. Overall, we expect to achieve moderate organic revenue growth in 2013 of 3% to 4% while maintaining our high level of operational performance. We expect to see more strength in the second half of the year, especially in the United States where we continue to build a top-tier position. We also expect that alternative project deliveries, especially P3s, will continue to be strong in Canada and will present emerging opportunities in the U.S. market. In our Canadian operations, we expect to see moderate organic revenue growth. We continue to maintain a top-tier position as one of the largest firms and are well-positioned to take advantage of a diverse range of opportunities in a relatively stable economy. In our U.S. operations, we expect to see stable to moderate organic revenue growth. The United States remains a very large market, and we expect our performance to improve gradually throughout the course of 2013. In our international operations, we expect moderate organic revenue growth compared to 2012. This geographic region represents a small percentage of our business, with the majority in our Buildings practice, where we expect to leverage our global expertise to win additional opportunities. Looking at our individual practice areas, we expect the following for 2013. We expect that the organic revenue growth for our Buildings practice will remain stable in 2013. This is an area of our company that has been more affected by the challenging economy. However, our top-tier positioning and global expertise in health care, education and aviation strengthen our ability to pursue a broad range of North American and international opportunities. We expect to achieve moderate organic revenue growth in our Environment practice for 2013. We believe our size, presence and reputation will continue to increase our share of large long-term projects with national and international scope. In the energy sector, we are especially well-positioned to secure opportunities by focusing on integrated service offerings especially related to our Industrial practice area and leveraging relationships with large clients. In the water sector, we are well-positioned to secure projects resulting from a more stringent regulatory environment, and we expect that funding constraints will continue impacting the market. We expect stable to moderate organic revenue in our Industrial practice in 2013. Although we do anticipate there may be weakness in the mining sector due to the pricing of certain commodities, we continue to work on many of our larger mining projects. We see activity continuing to be strong in the oil and gas sector, and our clients continuing with capital spending in their facilities, especially related to the pipelines where our recent acquisitions have increased our expertise and positioning. We anticipate that our clients in Industrial Buildings and Facilities and Power will continue with normal capital spending. In our Transportation practice, we expect revenues to remain stable in 2013 due in part to a growing design build in developing P3 market in the United States and continued potential in Canada. In addition, this practice area continues to win projects for us resulting, again, from strong relationships and repeat clients, especially at the provincial, state and local level. With the passage of the U.S. Transportation bill in the second quarter 2012, we expect to see a stable level of funding for transportation spending over the next year. However, the lack of a long-term federal funding strategy may still hold back larger projects. As well, funding constraints may encourage public-private partnerships and alternative project deliveries. We see this as a good opportunity especially since our recent acquisitions have increased the depth and breadth of our relationships in the United States, especially in Florida and the mid-Atlantic and added to our design build capabilities. In our Urban Land practice, we expect moderate organic revenue growth for 2013. We expect the overall Canadian housing market to slightly soften compared to 2012 with stable activity continuing in Western Canada. In the United States, we anticipate gradual improvement in the residential sector. We recognize that we are still operating in a mixed economic environment. Though conditions appear to be improving, we remain prudent and will continue our focus on efficiently executing our long-term strategy. At Stantec, we believe achievement at every level begins and ends with a firm commitment to being the best we can be. Further to that end, I should mention in 2012 was a comprehensive strategic planning year for us. In a thorough review of our market environment, industry positioning, risk factors, service diversity and many other considerations, we validated and refined our strategy to evolve our organization to best take advantage of market opportunities. Going forward, we will continue to execute on a targeted and steady acquisitions strategy, one that focuses on full integration and provides the strength of local positioning with now over 12,000 staff in our more than 200 offices. We will continue to ensure the diversity of our operations, our clients and the flexibility of our organization allow us to adapt our business to changing economic conditions and to position ourselves for growth in a very large infrastructure and facilities market both within a recovering U.S. economy and internationally. The strength of our performance in 2012 speaks to the strength of this business model and highlights our ability to deliver consistent returns for our shareholders. To that purpose, we look forward to continuing to evolve, to meet the needs of the clients and the communities we serve. This concludes our comments for today. Dan and I are now available to answer any questions you may have. The conference call operator will explain the question procedure. Sam?

[Operator Instructions] And our first question comes in from Anthony Zicha from Scotiabank.

Bob, can you give us some color on your Urban Land development practice, a picture more particularly the state of the market, let's say, California, Nevada, Arizona? Are you winning new clients or are the existing ones coming back?

Both. Both new opportunities are presenting themselves to us. Existing clients are getting active. We're actually making this call, out of our Irvine office in California where we just had our board meeting and are pretty excited with what we hear happening, even here in California. Certainly, we've been experiencing this now for the last few months of increased activity, increased opportunities and inquiries from our clients, starting maybe on the East Coast, but we're starting to feel it even here in California. Starting to see land prices and lot prices and all the indicators that we look towards increasing even in places like Arizona and Phoenix. So we've always been relatively cautious with regards to the urban land market. Always optimistic that we know it's going to recover. We're a little concerned with the length of time that recovery will take, but we continue to be encouraged with the fact that every month, we're seeing more and more opportunities. So certainly, we -- clearly, the worst is behind us and there's a growing optimism, certainly, south of the border here.

Great. On the flip side, if we look in North America, are there any practice areas that have been decelerating or about to? And can you give us some more color on the oil and gas and mining side?

So certainly, as we commented, our Buildings practice has been one that has been harder hit by the softening economy, and it's really due to the sectors that we were in, specifically, health care. That's still going to take some time to recover but the Cleveland project that we mentioned in our conference call is certainly indications that we are well positioned. We can still win the bigger projects. So we just have to be -- work harder and be a little more diligent there but still comfortable that, again, the worst is behind us in the Buildings practice and we've readjusted to what we would call a new economy there. In the mining practice, yes, there's been a lot of noise out there with regards to commodity prices lowering, and it's a very mixed market right now. A lot of the metals are very strong. A lot of the metals are going down. Our strength in potash certainly has given us some comfort there that those projects are continuing to be invested by our clients and are continuing. So for today, you're not going to see the growth of 20% like we had in last year in our mining business, but we don't or aren't overly concerned with it decreasing. We see steady opportunities and maintaining our position there.

Okay. And one quick last question. In Canada, what is your outlook on P3s on the prospects? And if they're good then, could we see some margin pressure going forward?

We'd still see opportunities with P3s. In British Columbia, because of the elections, there may be some threats there, with P3s maybe being more difficult to go with a new government in Ontario. We're still seeing P3s move forward. We've been fortunate enough to be selected on some projects in Alberta, the schools in Anthony Henday. So we're in a comfortable position there. The good news, I think, with P3s in Canada is we're now starting to see P3s move down into a more of a municipal phases, where a lot of the municipalities are being encouraged by P3 Canada to move some of the larger, let's say, transportation and LRT rapid transit projects into a P3 model. So any softening at the provincial level may be offset by a strengthening of opportunities at a municipal level. So we're encouraged with that and certainly see good positioning for ourselves in that market in Canada. In the United States, it's constant talk. Everybody's talking about P3s. Some of the ingredients are coming together, but certainly, the opportunities are a little longer term here in the United States.

And our next question comes in from Sara O'Brien from RBC Capital Markets.

Just getting back to the Industrial segment, which drove significant growth in F'12. Can you comment on sort of the work you're doing on pipelines and pipeline related activity? And was that most front-end work or do you see continuing through the phases of the project that may come about over the next few years?

Certainly, pipelines has been a very strong growth area for us, specifically with the acquisition of Caltech last year -- 2 years ago, and Cimarron last year. We have a very good position from an engineering standpoint, facility standpoint. We've always had, with the acquisition of Jacques many years ago a very strong position in the front-end environmental side. So I think we offer a much more complete package now to the clients in that area. We do a very diverse range of services in Environmental and probably a diverse range of products, both LNG and oil and gas, and oil pipelines. So certainly, we feel we have a very strong position with our clients, clients like Kenbridge, TransCanada. They like to use our front-end services. They like to be also in control of those. So by offering a very diverse range, we have multiple entry points into those clients. And we see that relationship actually growing considerably, especially with the recent acquisition of Cimarron last year. So pretty bullish in the oil and gas market, pipeline specifically.

And would that be again like the biggest driver of growth opportunity to offset perhaps some softness in mining going into F'13?

Well, certainly we see it as growth opportunities and certainly don't want to give the impression that we see our mining business softening. We haven't seen any indications of that in the recent months. Our large projects like the Jansen project with BHP continues to be funded, continues to go forward. So the softening would be just slower growth really, in the mining area. But certainly, we're looking for continued growth in the pipelines area.

Okay. Great. And then just wondered, book-to-bill was pretty nicely up in Q4. Anything in particular that was driving that other than acquisitions? It was just a nice jump that we saw.

Yes, I mean, it is nice. Certainly, some of it is a result of the acquisitions that we did, but we're organically as well growing our backlog. So we're happy with that. The way our projects are inserted into backlog sometimes can be lumpy because we don't put the entire portion of the project into backlog immediately. So sometimes once a contract is signed, you get the benefit of that. But again, it's from a very conservative standpoint because we only put a piece of it in. We're very happy with our backlog growth.

Okay. And then just you commented in your annual report, you've really focused on cross-selling in F'12 unit sort of segmenting in to your core sectors, there were 12 of them. Have you pared out of any segments or do you expect to get out of any segments and which segments do you expect to grow via acquisition?

Well, we certainly don't see any segments that we need to divest of or to rationalize at this time at all. We're pretty comfortable with all of them that we're in. With regards to which ones we're interested in continuing to grow, it's a pretty big market here in the United States. So I don't think there's an area that we wouldn't want to continue investing in, and specifically in the U.S. In Canada, a little bit more focused with regards to strengthening some of our weaker positions and some of our geographies, but we have a very strong position in, I'd say, a majority of our presence in Canada. But there's still opportunities like we did with Cimarron last year in our oil and gas area.

Okay. And are you still content with the mix of the business? I mean, if we look at Buildings versus Environment, Industrial, Transportation, Urban Land, do you see that mix shifting significantly? Or do you feel that's pretty much the kind of pie slices that we should see going forward as well?

No, I think we're pretty comfortable with that mix, and I think you'll see that continuing to go forward in that fashion.

Okay. And just one last, sorry, maybe for Dan, -- I noticed your objectives are the same for F '13 as for F '12, in terms of financial metrics, but your SG&A did come in lower than 41%. Just wondering if there's any reason we should expect SG&A to increase in F '13 and why 40% wouldn't have been kind of the low range for F'13?

I think that the key issues that we're going to have is the integration of acquisitions in 2013. It did come a little lower. We did see that our SG&A was up a little bit more in Q4 relative to 2011. So it's pretty consistent with that. We did -- we are -- we did have some improvements in our real estate and our occupancy costs last year. As you do acquisitions, you end up with some synergies, and it takes time to work through the lease exits in that, so that contributed in 2012. With some of the acquisitions we did towards the end of 2012, we expect to incur some of those costs in 2013 as we rationalize some of our office locations. So that and the integration. I don't think there's a lot of leverage there, Sara, in our ability to reduce those costs a lot more. Certainly, we're going to continue to focus on it but not a lot of leverage there.

[Operator Instructions] And our next question does come in from Michael Tupholme from TD Securities.

A question on the Urban Land segment. In your MD&A, you indicated that the growth you saw in 2012 was a result of continued activity in certain geographic regions, and you mentioned, in particular, Saudi Arabia. I'm wondering if you can elaborate on how much of the growth you saw last year, the 10% organic growth, came from Saudi Arabia, and maybe give a bit of perspective on what it is you're doing in that region.

Most of the organic growth did come from Western Canada although the Saudi Arabia projects are really the start-up of an industrial city that we saw there and just the beginning phases of that. So hopefully that work continues and it really depends on the client and moving that forward. So most of that organic growth that we saw in Urban Land was tied to Western Canada and the Saudi Arabia project. And one thing that I'd like to just kind of clarify with respect to that growth, we show that in our Urban Land practice, and we also show it in our International practice, and where we reflect organic growth, that's in -- it's showing an International because that's the location of the project. But a good portion of that work was done by our employees, or completed by our employees in the United States. So we even though we showed a small organic retraction in the U.S., most of that work that helped build up the International growth came from our U.S. employees.

So of that overall 10%, Michael, a little less than half of that was as the result of that work in Saudi Arabia that, as Dan correctly states, was really done out of our U.S. offices.

Okay. And can you -- just as a follow-up on Urban Land, can you give us a sense as to what percentage of Urban Land now relates to the residential sector? I know there's been a move over the last number of years to diversify away from the residential sector although that's what's coming back now. But where do you sit now and then maybe where do you see that going in terms of the mix of res versus non-res?

Right now, about 80% of our work is what I would call for the typical residential urban land projects and 20% represents more of a -- an urban setting for the public sector. As we grow, and the residential portion is the portion that is going to be able to grow quicker, you may see that mix continue to increase and the 80% go up. The good news is we don't intend to stop working on that 20% public side. We've built some good client relationship and there's some growing opportunities there as well. But certainly, if Urban Land continues the momentum and growth curve we've been seeing, that 80% would get larger.

And our next question comes in from John Rogers from D.A. Davidson. John B. Rogers - D.A. Davidson & Co., Research Division: Bob, just going back to the pipeline business for a second. Other contractors especially operating up in Canada have mentioned to me anyway recently that the customers were looking for contractors that could do both the engineering and the actual construction of the pipelines. Are you seeing that and what's your thoughts about getting into that side of the business more?

Actually in pipelines, we see absolutely the opposite of that. Our pipeline clients like Trans Delta, like Kenbridge, would like to maintain control of specifically the environmental portion of their projects and approvals and permitting, and they want to remain in control of the design portion as well, through using consultants that focus on that. So for ourselves, we -- that's one area of the oil and gas business that really has not adopted the EPC model, which we're thankful for because we stay away from that end of the business. And we see that trend growing. These pipeline companies, we have been able to grow our business and relationships with them, we really understand where they're going, how they want the use their pipelines. For example, the work we're doing is re-purposing pipelines, changing the type of material, changing direction. We're working very -- in a very integrated fashion with these clients at a very front-end basis and continue then to move that into a design basis. We don't see that being a tendency, of pipelines being a much more of an EPC model at all. So for us, that's why we focused on the pipeline business and oil and gas. We realize that oil and gas was an area we needed to get into. And we specifically targeted the pipeline business because of that aspect, that it's much of a -- much more of a consulting type of role. So we're pretty confident with that. We're pretty close to our clients as well on that matter.

And our next question comes in from Tahira Afzal from KeyBanc Capital Markets.

This is Saagar on for Tahira. I'll keep it to one question. And I know you went through your markets quite a bit but where do you see the opportunity in terms of your practice areas and your geographies for the highest upside or surprise versus your current expectations in '13?

So you're probably looking for surprise on the positive side?

Yes, definitely.

Certainly, we still are looking -- from a point of organic growth, I'll focus their first, great opportunity in Urban Land. And we can't minimize that, that positioning we have in the Urban Land market is pretty unique and pretty specialized in this industry. So we are very positively looking that -- if that market continues the growth curve and opportunity curve we've been seeing, that could exceed our expectations and could be very positive for us. On the acquisition or investment side, we still are taking an extremely strong position now in the pipeline area in Canada and trying to move that into the United States and are seeing opportunities come there as well. So we see those are probably 2 areas. And I've got to throw in a third, not like I'm going to say everything is good, but in Transportation as well, we've had -- did some acquisitions in the United States in the fourth quarter, and that added about 700 people. A large amount of those were in the transportation sector. We did acquisitions of ENTRAN and ABMB Engineering over the last 2 years. So you put all that together and what we have [indiscernible] position in the transportation market that may have snuck up there. So we feel that, that also could -- if we can leverage that well, which obviously, that's the strategy, that can also be another high area of growth that could exceed our expectations.

All right. Great. And then one quick follow-up, what worries you the most looking -- now that we're 1.5 months, 2 months into '13, what worries you about the rest of '13?

Well, I think the only worry is that we're sitting on this side of the border, making the call and certainly the continued discussions and political issues in the United States and the sequestration that's going on is a distraction. It sort of forces people to think about the things outside of what their core business is and that's just unfortunate and distracting. So that has got to be resolved sooner rather than later. They've got to continue to move forward. We've made the messaging pretty clear that the first half of the year is going to be somewhat slower in the U.S. because of that. That's certainly something we worry about that, that's something you can't control but certainly we feel the quicker that gets dealt with, the quicker people will get back to work here. And the other one would be just commodities risk. A lot of our business in mining and oil and gas is affected by that. But we know about as much about that as you -- everybody else does basically. We can just simply react when those things happen. But those would be the only 2 things that are really out of our control that would worry us.

And our next question comes in from Paul Lechem from CIBC.

Just going back to the Industrial division again, I'm just trying to understand your guidance of stable to moderate growth. It seems that might have been an area that I would've thought you would have thrown into one that could have potential upside for the outlook, especially given your comments around the pipeline business, and even though mining, in general, seems to be weakening, you said your projects are still moving forward. So what is behind your thinking of why it seems to be somewhat cautious in terms of the outlook, stable to moderate, versus your 20% organic growth this year, this past year?

Well, I guess, we got to -- we look towards mining even though we've said our mining is stable. It is that weakness in some of the commodity prices that causes some concern as well. What we found in both the mining business and the oil and gas business, they are very large projects, very long-term projects. Those projects for us sometimes last up to 3 to 5 years. And in a market where the commodities may soften, the clients tend to drag the projects out slower in awarding things. So that has an impact. If everything remains the same, commodity prices stayed strong, you're probably right. It probably is a more conservative number, but we can't ignore those risks that are out there.

And at the same time, we're comparing year-over-year growth on what we have was a very, very strong organic growth here in our Industrial practice with higher year-over-year comps. I think we're still seeing growth, but it's maybe not as high as 20% that we would have experienced in 2012.

And just maybe a quick follow-up. Can you give us some sense of a breakdown in that business, in the Industrial business, between the different sectors in terms of mining versus oil and gas versus pipelines versus power?

We don't have -- well, let's say in the industrial side of the business, oil and gas would probably be -- now I'm giving you an approximate number, it would probably be anywhere from 30% to 35%. Mining would be roughly 30% and power, roughly 25%. The 3 of those together represent probably 80% of our revenue in the industrial sector, with oil and gas being slightly larger than mining and power.

And our next question comes in from Chris Blake from Stonecap Securities.

Just a couple of quick questions for you with respect to your recent acquisitions that you've closed, I think, 4 in the fourth quarter. I'm just trying to get a sense of how many of those have actually closed as opposed to being announced with LOIs?

They're all closed. All 4 of them were closed in the fourth quarter. So the LOIs were issued before that, but they've all closed.

Okay. Perfect. And Dan, with respect to your maintenance capital expenditures, I think you provided $50 million to $60 million range, it's up from $30 million this year. I was trying to get a sense, I think, you mentioned upgrades to your IT systems as partial reasons for the increase. But I'm just wondering if you could provide a little more granularity around that increase.

Sure, Chris. There's a couple of things. The enterprise system last year, I think you may recall, we upgraded the software of the Oracle enterprise system to our R12, to the R12 -- Release 12. We're working on upgrading the hardware and the back office, if you will, to take us to the next level, which will sustain us for a much longer period of time. In addition to the IT upgrades, which is kind of normal maintenance that you have to go through on a regular basis, but beyond that we are -- have a number of offices where we're either expanding or relocating and so there's some CapEx associated with leaseholds and office equipment and furniture and things like that, so when we did our budget in the fourth quarter, all of these things combined gave us that indication that's probably where our CapEx will be this year.

Very good. And just lastly, Bob, if I may, I think you mentioned in the MD&A that your margins were impacted by some -- certainly, earlier in the year, we talked about the legacy contracts and some acquisitions that impacted the margins. I was wondering if you could maybe quantify what the impact that might have been on your 2012 gross margins. I know it was down 40 basis points year-over-year, but how much lift do you think we can get this year as a result of those coming off?

We expect to be back in our range, I think, that's what we've stated, of between 54.5 and 56.5. So we see ourselves getting back into the probably the lower end of that range, but certainly within the range. So those specific projects probably didn't have -- they certainly contributed to the overall decrease in the gross margin, where probably it was a combination of all the things we mentioned in the MD&A that equally had a bit of an impact. And we've been successful of renegotiating some of those legacy contracts, so we expect them to not have the same impact in 2013.

I think what you'll find is, with the increase of some of our Transportation business and our industrial business, which is a lower gross margin business, that is offset to some extent by a lower SG&A cost as well. There's a lot higher utilization, lower cost to go out and secure work. So they kind of offset once you look at -- get down to the EBITDA line, it should all balance out.

And our next question comes in from Sarah Hughes from Cormark Securities.

Bob, I just wanted to ask you a little bit about your International market and this -- the revenue we saw, a good jump this year, and I know it's still a small part of the overall business but trying to get a sense of where you could see this in the next couple of years. I know, later on, you're going to look at acquisitions in the International but just in terms of organic growth potential in this revenue stream in the next 2 or 3 years?

Because it is a relatively small part of our business, it doesn't take much to get some pretty significant organic growth. You win 1 or 2 large projects, and that will definitely give you some good results, and we expect that to continue to happen in 2013. We continue to work on the projects in Saudi Arabia and in the Middle East. So recently won a very large hospital project in the Middle East. So those projects will fuel some international growth. And I think Dan, though, has outlined some of that international growth though helps our U.S. and Canadian operations because international is where the project is, but a lot of those projects are worked on by staff here in the U.S. and Canada. So we -- certainly though you'll see strong organic growth in -- moderate to strong in our international operations for the next few years as we continue to try and leverage those relationships we have. We're probably 3 years out before we start looking at some acquisitions in that space.

And do you have like, in terms of just sales and new sales in this region, is it like a dedicated kind of sales-focus or is it more just existing customers going international?

Probably more international, partly existing clients. So we have both international and domestic that are taking us with them and with us leveraging our existing relationships with some clients and winning some new projects. So not a large marketing effort to go look for new clients and new opportunities. Our goal has always been, let's see if we can leverage our existing opportunities with good clients and sell them more services in a more diversified market. So that would be more of our focus.

And just quickly. Urban Land organic growth in the U.S. in the quarter or this year in 2012, was it negative? Or -- was it negative growth or did you see positive organic growth in the U.S.?

In the U.S., I don't think we -- we don't have that broken down, Sara, between Canada and U.S., but we certainly don't see retraction going on in our Urban Land business in the U.S. right now.

Yes, we look at the Urban Land overall corporately and, of course, that did grow. I'd have to say that certainly with the project that Dan referred to in Saudi Arabia, which most of the work was done out of United States Urban Land project areas and some of the increased opportunities we're seeing, that's not a major concern for us. It's going to be now finding that people get the work done again, which is a good problem to have.

Our next question comes from Bert Powell from BMO Capital Markets.

Bob, there's been talk in the last while about insourcing in the U.S. or a manufacturing renaissance. And I'm wondering, from your vantage point, what you're seeing and if you're -- if there's an opportunity to participate in that?

Certainly. We've read the same things you have, Bert. I mean, we hear about that as well. Our position in the market is probably stronger in Canada, certainly. We have some partners here in the United States and we partner up on some bigger opportunities, and we are currently talking to them about that. So we do see some of those opportunities in the U.S. with the bigger manufacturing facilities. It falls under Industrial Buildings and Facilities group and -- which has been very busy in Canada in the last few years. We're seeing some of those opportunities now increase in the United States. Because -- but since we don't have some strong local presence in the staff sector in many locations, we're probably going to be dependent upon working with some of our partners down here, which is great, because that also provides us opportunities of expanding operations with them.

So is there -- looking at that trend to the extent that it has legs, is that a place where you would see deploying capital to add on the acquisition front?

Absolutely. It has been one that we've been looking at for a number of years now. Those firms are few and far between with that expertise, very specific expertise, but that's the point. We don't mind working with a company for a number of years in joint ventures and cooperating because it allows us then to develop that relationship with them. But absolutely, that would be an area we would be interested in investing in.

Okay. And then just -- Dan, just on the CapEx, $50 million to $60 million this year, it sounds like there's a bump up this year to a step function increase. What would you look at given the acquisitions today and assuming we are where we are, what would be the normal level of maintenance capital?

Well, I think, on a historical basis, Bert, it's always been in that 2% to 3% range of net revenue. So we're not far out of that range. There's just a couple of significant projects that we're undertaking this year. So normally, I think you can assume that it's somewhere in that 2% to 3% range.

And our next question comes in from Ben Vendittelli from Laurentian Bank Securities.

All my questions have been answered.

And the next question comes in from Maxim Sytchev from AltaCorp Capital.

Just a very quick question for you guys. I mean, historically, you've been extremely diligent in terms of what you paid for acquisitions and so forth. But right now, on a relative basis, I mean, you certainly have the multiple to contemplate maybe something larger. Can you maybe comment on your appetite for doing larger deals given where the stock price is?

Well, we always look at -- we're looking at a multiple -- different companies at multiple different sizes and always have. So we'd be comfortable looking at any size of a company that would, we believe, add value to our shareholders. So certainly as we get larger and we have the capability to be able to do larger deals and certainly we'll look at that and always entertain that, if we feel that it's a good company. At the same time, we really built this company by getting good strong local companies that have a wonderful position in their community and bringing them into the Stantec family and then leveraging services into that community. So that will still remain a strong part of our acquisition strategy. But at the same time, our size now gives us opportunities of looking at larger firms, but basically doing the same thing, ensuring that company is going to bring in an opportunity to Stantec and make that acquisition accretive to our shareholders.

I think we're going to continue to be prudent and fiscally responsible when it comes to valuing and pricing acquisitions. Certainly, our share price is a good thing, but we don't control that. And I really look at these as mutually exclusive events, doing acquisitions versus what's going on in the public markets.

Yes, certainly. It's more about our size that's probably giving us the capability of looking at larger companies. The share price is something we can't control.

Okay. Fair enough. And maybe if I can maybe sneak in one more. In your MD&A, you are talking about the gross margins in the States continue to improve. Maybe is it -- can you slice it up maybe in terms of what's macro-related and what is truly Stantec, as you have built out a much larger platform in that market that obviously helps in terms of scale and spread the cost over a much larger base?

I'm trying to put an answer that makes some sense. As we grow in the U.S., certainly, I think what allows us to make a margin increase, specifically from a gross margin perspective, is the fact that we are now working on some larger projects, and the larger projects give us the ability that we are in more competitive position where there's not as many firms as large as we are that can bid on those projects. So that sometimes gives you the availability of having a slightly larger gross margin. The overall margin increases as we continue to grow in the U.S., you're right. We're going to be able to get economies of scale where that our SG&A cost would probably come down. But the one fact we can't control in the U.S., is the health care cost, which is basically a fixed cost for us that is always higher in the U.S. But we feel there's other aspects of that SG&A cost, but as we get larger we're going to be able to continue to improve our efficiency in that area, which would then offset any of those extra margin cost that we're experiencing.

And we're continually working on our project execution and management projects, and that's just an ongoing factor.

And our next question comes in from Gregory Jackson from Raymond James Securities.

I just had a question on your outlook, Canada versus the U.S. You described Canada as moderate but the U.S. as only stable to moderate. At this point in the cycle, I'd expect that the U.S. outlook would be better than Canada, can you comment on that?

Well, the U.S. outlook would be better than Canada from just a perspective of opportunity and size, but it's still a lot much -- we have not that strong presence in the United States as we have in Canada. And the economy overall in the United States is not offering up as many opportunities in some of the sectors. But in Canada, we have a mature presence. We have a stronger presence in many of our regions, so therefore, have a better opportunity of taking advantage of those opportunities. In the U.S. maybe not as strong. But Dan?

I think there's also the near-term headwinds that Bob mentioned earlier around the more macro environment, a little more uncertainty with what's going on with the political situation, which causes clients to maybe be a little more cautious.

But your point's -- is good one to focus on is even in a tough economy in the United States even in an economy that is at best, stable, huge opportunities just because of the size of the market down there. So we still see the U.S. as a great opportunity for growth, but certainly those headwinds give us a little bit more cautious outlook.

Okay. And then just one follow-up. On the Industrial practice area, you've got it towards moderate organic growth. But this seems to contrast with all the other indicators in the resource market right now. Just in terms of CapEx, budgets being -- going down and projects being delayed or deferred. So can you just comment on what you're seeing in the specific resource markets that you're in?

Yes, certainly. The 2 areas that we're strong in that area is oil and gas and mining. And we've talked about that before that, certainly, there are lots of discussions in the mining sector with regard to projects being put on hold, CapEx budgets being lowered. From our perspective though, that hasn't hurt us to a great deal. The projects we are working on, they are continuing to be invested and funded by our clients. And they're in those commodities, things like copper and gold and potash that seems to be a little stabler, little stronger, and in other areas, nickel, a little bit weaker. So we have a pretty diverse range of services in many different commodities in mining, so it gives us a feeling that we can ride out any of these smaller commodity price fluctuations. And in oil and gas, pipelines probably have a much less -- or are much less volatile or much less reaction to the actual oil and gas price. Whereas, if you're working in oil sands projects, they have a much more direct relationship to a fluctuation in an oil and gas price. In the pipelines where we're focused, much less volatility in their projects associated with the fluctuation in gas or oil prices. So again, we're in -- I think, just because of the space we're in, we are maybe a little more comfortable and -- with regards to our performance in that area in 2013.

And our next question comes in from Michael Tupholme from TD Securities.

Just a question on your overall outlook. You're guiding to more strength in the second half of the year. Can you help me think about how that relates to the various practice areas, please?

Okay. That second half of the year, I think, would be a comment that's probably more focused on the United States which, certainly, is going to have an impact overall, in Stantec as well. And as that second half strength applies to each of our practice areas, I think it's probably going to have more of an impact to the Transportation side of the business that is certainly more dependent on the public sector funding. And that's certainly the area that has a lot of noise associated with it right now. And potentially as well, health care, which has again issues associated with the health care bill. So I would say any of our sectors that have a direct or indirect connection to sort of the public side of the space and funding from the U.S. federal government would then have that be impacted in the first half of the year and have a stronger second half of the year. Projects or things like oil and gas and urban development would certainly -- much more of a private sector funded business and has less of an impact with regards to that first half, second half fluctuation.

And that was our last question. Please continue.

All right. If there are no other questions, I'd like to thank you all for joining us today and close our call by saying that we're confident in our business strategy and ability to adapt to the evolving needs of the marketplace. Our focus will continue to allow us to achieve profitable growth and provide sustainable returns for our shareholders. Thank you, all, and I look forward to speaking with you again in the near future. Goodbye.

Ladies and gentlemen, this does conclude your conference call for today. We thank you for your participation. You may now disconnect your lines and have a great day.