Stantec Inc. (STN) Q4 2015 Earnings Report, Transcript and Summary

Welcome to Stantec Inc’s Fourth Quarter and 2015 Year-End Earnings Results Conference Call. With us today from Stantec management are Bob Gomes, President and Chief Executive Officer; and Dan Lefaivre, Executive Vice President and Chief Financial Officer. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer period. [Operator Instructions] As a reminder, today is February 25, 2016, and this conference call will be recorded and broadcast live over the Internet. It will be archived for future reference at stantec.com, under the Investors section. Any members of the media, who are joining us in listen-only mode and who would like to quote anyone other than Mr. Gomes or Mr. Lefaivre must ask permission from the individual concerned. Stantec management would like to caution you that this call will include forward-looking statements and forward-looking information within the meaning of applicable U.S. and Canadian securities laws. By their very nature, forward-looking statements require Stantec management to make assumptions and are subject to inherent risks and uncertainties. Stantec management will also mention non-IFRS measures. And now, your host, Bob Gomes. Please go ahead.

Thank you. Good afternoon, everyone, and thanks for joining us. Welcome to Stantec’s 2015 fourth quarter and year-end conference call. Dan will provide a brief summary of our financial results for the quarter and the year, and then I’ll follow up with some highlights from our annual performance and provide a snapshot of our market outlook. After that we’ll be available to answer your questions. Before we get started, as you can see, we’ve added presentations of call. This is new for us and I hope it provides value for you. It will be archived along with call recording in the Investors section of our website. So, let’s get started. I’ll begin with a high level overview. Today, we released the results of Stantec’s operations for the fourth quarter and full-year 2015. I’m proud to say Stantec had a good year in 2015. When you take the global economic situation into account, you might even say we performed remarkably well. We’ve had a solid revenue growth despite economic challenges facing some of our sectors. We saw a strong organic gross revenue growth in our Buildings and Infrastructure business operating units. This was offset by a significant retraction in our Energy & Resources business operating unit, primarily in our oil and gas business. Despite this, we continue to perform well overall. That’s an incredible testament towards our diversified business model. We also maintained our strong client relationships and our core staff in our oil and gas business line, that’s something we’re very proud of. Our net income in the fourth quarter was impacted by a number of non-cash items, which Dan will outline in his review of our financial results. These non-cash items had a significant impact on our fourth quarter and impacted our annual earnings per share results by approximately $0.14 per share. I’ll hand things over to Dan, and he’ll provide details on our financial results. Dan?

Thank you, Bob. Good afternoon, everyone. As Bob said, all things considered we had a good year overall. Our gross revenue increased 9.7% in Q4 2015 compared to Q4 2014 and it increased 13.7% year-over-year. This was due to strong organic growth in our Buildings and Infrastructure business operating units, as well as completed acquisitions and foreign exchange. Growth was partially offset by a significant organic revenue retraction in our Energy & Resources business operating unit. Gross margin as a percentage of net revenue was within our target range of 54% to 56%, but did decreased in the fourth quarter from 55.6% in Q4 2014 to 54.1% in Q4 2015, but there was only a slight decrease year-over-year from 54.9% in 2014 to 54.5% in 2015. We can attribute the decrease in gross margin to a few things. The broad mix of projects we pursued including ongoing pursuits of design build in P3 projects, especially in transportation. Lower gross margins from our Dessau acquisition and continued downward pressure on margins in Energy & Resources. Our administrative and marketing expenses were higher in 2015 compared to 2014. This includes a $4.3 million increase in severance costs to align staffing levels in the oil and gas and mining businesses. A $3.5 million increase in our share-based compensation, lower utilization due to the decline in oil and gas and mining, and an increase in acquisition and integration expenses, including the French translation costs for our Quebec operations. Factors impacting gross margin and admin and marketing expenses carried through to EBITDA. So a 21% decrease to C$54.6 million while compared to the [Audio Dip] while comparing to Q4 2015 to Q4 2014, and a 3.9% increase to C$306.3 million year-over-year. Further adding to this was a C$4.1 million non-operating loss from the sale of our India subsidiaries in Q4 2015. Amortization of intangible assets increased by C$13.6 million year-over-year. This non-cash item was impacted by an increase in backlog in client relations from acquisitions as well as increased software additions. Net income decreased 4.9%, and diluted earnings per share decreased 5.2%, or C$1.65 in 2015 compared to 2014. As Rob mentioned, these non-cash items of share-based compensation assessments, amortization of intangible assets and the loss of the sale – from the sale of our India that was accounted for reduction of approximately C$0.14 per share for this year, acquisition and integration costs, severance costs in our Energy & Resources has reduced our earnings per share by another C$0.50 [ph]. When you take these items out of the acquisition, diluted earnings per share for 2015 would have been a C$1.86, an increase of 4.6%. Moving on to our 2015 targets, EBITDA as a percentage of net revenue landed at 12.9%, just shy of our target of 13%. When you exclude the increase of admin and marketing expenses and C$4.1 million non-operating loss on the India sale, it would have been squared within the 13% to 15% range. 12.9% of return on equity was lower than we expected. This was due in part to an increase in shareholders’ equity because of this C$62.7 million increase in exchange difference on the translation of the foreign operations reported in other comprehensive income. That’s mostly attributed to the combination of the increase in our U.S. operations performance and the weakening of the Canadian dollar. The Canadian dollar was trading at US$0.86 at the end of 2014 and went down to US$0.72 at the end of 2015. Our annual effective income tax rate was 26.1% in 2015 compared to 26.3% in 2014. This was mainly due to increased recognition of U.S. research and development and other tax credits in Q4 2015. We saw a sizeable increase in backlogs, thanks to recent project wins, foreign exchange and acquisitions completed in 2015. Backlog grew to C$2.2 billion, an increase of 22.2% year-over-year. And I’m pleased to report that our Board of Directors declared a cash dividend of C$11.25 per share payable on April 14, 2016 to shareholders of record on March 31, 2016, an increase of 7.1% over last quarter. And lastly, in November, we filed a Normal Course Issuer Bid with the Toronto Stock Exchange between December 31, 2015 and February 24, 2016 pursuant to the Normal Course Issuer Bid repurchased and cancelled approximately 573,000 shares at an average cost of C$31.76 per share for an aggregate price of C$18.2 million. We do this from time to time when we believe the market price of our common shares doesn’t fully reflect the value of our business and our future business prospects. I’ll turn it back to Bob.

Thanks, Dan. I understand there were some problems with maybe hearing everything Dan said. I think we’re better now, but I can let you know everything that Dan said was really good. So, thanks Dan. Looking back at 2015, it’s tempting to say it was a challenging year, but I’ll stick with my remarkable considering the circumstances. There were certainly some hurdles, but we managed well and we are proud of our results. We had continued growth despite decent significant economic challenges in some areas of our business. In fact, 65% of our business grew organically and practiced fiscal responsibility and remain dedicated to our clients. We also continue to evolve our business to ensure we are meeting our clients’ needs. As of January 1, 2016, Environmental Services became our fourth business operating unit. Environmental Services was previously marked for our Energy & Resources business operating unit where we recognized as a unique business to complement – completes work across most of our sectors as you can see on the slide. This move brings the higher level of management for Environmental Services and also increases its visibility and profile for clients and enhances our cross-selling abilities. Acquisitions remain a pillar in our strategic plan. We’ve opened six companies in 2015: Dessau, Sparling, VI Engineering, VA Consulting, FST and KBR’s Infrastructure Americas Division. Subsequent to year-end, we signed a letter of intent to acquire VOA Architects, a 280-person Chicago-based architectural firm. We expect to close that acquisition this spring. Just last night, we announced that we signed a letter of intent to acquire Bury, an Austin-based, a 300-person infrastructure and buildings engineering firm. The addition of these companies further strengthens our presence in North America as we work towards the top-tier position in every market we serve. Again the strength of our large diversified business model growth was successful, as you can see from our business operating unit results. Beginning with Buildings, we saw strong organic gross revenue of 5.6% led by the healthcare, commercial and education sectors. We had strong growth in Canada and international operations, while the United States was stable. Our presence in Quebec and our growing platform in Texas landed us in key projects including the important design for hospitals in Montreal in Sacré-Cœur as well as the work secured under the Temple Independent School District November Bond in Temple, Texas. The project involves new construction, additions and renovations to several schools across the district. As you can see on this slide, the retraction in our Energy & Resources business was dramatic with a 20.8% organic gross revenue retraction in 2015 compared to 2014. In 2014, Energy & Resources was our largest business operating unit. It’s more than notable that we continue to perform well as a company when our largest business retracted more than 20% in one year. As I’ve said, this is a credit to the strength of our diversified business model. The retraction is due to the unprecedented global downturn in the oil and gas and mining sectors. We have reduced our exposure to further impacts, but we remain committed to our clients and to the Energy & Resources business. Even after the 20% retraction last year, this business still represents 35% of our overall business and as a key element of our strategy and continued success. Throughout this downturn, we have had the opportunity of working even closer with our clients in developing ways of ensuring we are delivering efficient and valuable services. In fact, we believe we strengthened our relationships with our key clients in these sectors and we look forward to further building of these stronger relationships when commodity prices allow our clients to return to increase capital investments. In our power sector, we did see some growth in the United States highlighted by our work on the Warnerville substation upgrades in California. Infrastructure is a good new story all around. We saw organic gross revenue growth of 5.5%. In fact, all of our infrastructure business lines grew. A key example is the Honolulu Authority for Rapid Transit project. We secured work for the east portion of that project. We also secured work on the Bonnybrook Wastewater Treatment Plant in Calgary. Looking at 2016, we’ll start by talking about our strategic plan. We have a three-year planning process, a comprehensive planning year followed by three execution years. 2015 was a comprehensive planning year and 2016 is the first execution year. The key elements of our strategy really won’t change. We’re staying on the course for the most part, but we’re looking to evolve in terms of our appetite for risk and our acquisition strategy. Clients are searching for new ways to deliver projects through alternative project delivery, and engineering procurement construction methods. We recognize that and are prepared to assume some additional risk and take on select projects with trusted clients. With acquisitions, we’ve been very successful in growing our presence in the United States and we’re going to continue to do that. Over the next few years, we’ll more proactively look at possible international firms or larger U.S. firms with strong international presence. As with all our acquisitions, we are looking for companies that share our values and our good cultural fit for Stantec. Our overall outlook for 2016 is for organic gross revenue growth to remain stable. For us that means anywhere from a 2% decrease to a 2% increase. We’re forecasting a 2% increase compared to 2015. Well, we’re optimistic about the U.S. economy continuing its momentum and Canada’s recent federal and provincial infrastructure announcements. We don’t see overall improvement centered energy and resource development markets. We could still see an overall retraction in the first half of 2016, when comparing to the same period of time in 2015, given that significant retraction didn’t start until the second half of last year. In Canada, we believe organic gross revenue growth will be stable as we benefit from government infrastructure spending and as our oil and gas business stabilizes at lower levels than in recent years. We’ll continue to leverage our well-established client relationships and our strengthened presence Quebec. In the United States, we believe, we’ll achieve moderate organic gross revenue growth in 2016. We see continued opportunities in the Infrastructure and Buildings business units and more movement towards alternative project delivery, which we’re well-positioned for. We do expect a slight retraction in international operations as mining clients continue to reduce capital expenditures, but we expect improved markets for our buildings business in the United Kingdom, as well as increasing healthcare projects in the Middle East. The overall increased size for our Buildings business positions us well to be able to compete for these larger projects in the Middle East. Moving on to our business operating unit outlook, we expect moderate organic gross revenue growth in buildings. We believe our established presence in Canada will lead to continued opportunities in healthcare P3s. We plan to increase our market share in commercial buildings in Eastern Canada and we expect moderate growth in the education sector in Canada over the near-term. In the U.S., we expect moderate growth in healthcare, stability in industrial buildings, and growth in the airport sector. And internationally, we believe, we’ll see increased healthcare opportunities in both the Middle East and the UK. Because of our top tier position in global expertise and our increased diversity and strength in more sectors over the past two years, we’re very well-positioned to capitalize on more opportunities in the business – Buildings business. The Energy & Resources when comparing year-over-year, we expect further retraction in the first-half of 2016 with stabilization in the second half of the year. This is as a result of the retraction in the first half of 2015, not being a significant retraction in the second half of the year. This year-to-year comparison will therefore show some further retraction in the first half of 2016. In Environmental Services, we expect stable organic gross revenue growth. Environmental Services operates in all sectors, but mostly in oil and gas, buildings, power and water sectors. So it is impacted by the same factors affecting our other business operating units. We do expect opportunities to arise in Canada given the new Federal Government and Alberta’s new provincial government’s commitment to the environment and infrastructure investment. In Infrastructure, we expect moderate organic gross revenue growth in all our business lines with increased public spending in Canada and the United States. Overall, we fueled by consistently delivering on our strategies for continued organic and acquisition growth and by leveraging our local presence. We are well-positioned to capitalize on opportunities in both Canada and the United States. We got 15,000 talented employees in over 250 offices for global or local or flexible and we designed with community in mind. We’ll turn it over now and answer your questions. The conference call operator, Adam, will explain the procedure for us.

Thank you. [Operator Instructions] So the first question comes from Jacob Bout from CIBC. Please go ahead.

Good afternoon. I had a few questions here on the some of the margin pressure that you’re seeing. So maybe first off, just starting on the comments you made about the ongoing pursuit of P3s, maybe talk a little bit about how competitive it is in these P3 markets, and how long this will continue for?

Well, it’s definitely competitive, and I think the P3 market especially in Canada has been attractive, not only to the Canadian consultants or the U.S. competitors, but also there’s European consultants and really a global arena now for P3s in Canada. So, you really got to be careful about what team you’re on, you got to ensure you’re picking the right partners, that is something that we have been focusing on for a number years, because these pursuits are fairly lengthy, and especially the partnering arrangements in getting on the right team. So we feel we’re again very well-positioned, we’ve got a great track record in them, we understand how to deliver to our partners. So I think that yes, it’s competitive, but we feel we have a competitive advantage based on our history of executing them and our position in the Canadian marketplace, where most of the P3 opportunities are right now. So, we still see that continuing. The pipeline of P3s is still strong in both the Alberta and Ontario, and continuing in BC which is good, south to the border, certainly a lot more design builds, which are essentially a P3 without financing, so the partners are more limited. But again, we have a very strong presence in a wide variety of geographical locations that positions us really well. So, as we said in our script we see the alternative project delivery model on both sides of the border continuing to advance. It’s around 5% to 7% for overall revenue now, and we see that continuing to increase over the years.

And then as far as the margin pressure there and the pursuit how long does that continue for?

Well, it really is more subject to project-by-project. You’re going to get more margin pressure in the transportation projects only because there is some more competitive pressure there, more companies competing for those. We find in the healthcare ones, or the Building ones the margin pressure actually isn’t so substantial. There are a lot more complex projects, complex buildings, high operation and maintenance cost which engineering can have an impact on. So less margin pressure there but you do need to be competitive, but we don’t see that as a continuing downtrend, downward trend.

So just one other comment, Jacob, as you go through the pursuit base, we put some of our fees at risk. So we’re not getting the same kind of margin as though we’re working on the project. So you are doing a fair amount of design work during the pursuit phase then when the project, our margins normalize. So there’s been a lot of activity in those pursuits in the quarter.

Okay. That’s helpful. Maybe just to finish your – just going through the half year, you reinforced you are about – the business model to be a top 10 global design group. Maybe talk a little bit about how you expect to approach this growth internationally, can we expect it to be organic versus acquisition? And maybe talk about specific areas which you’re targeting?

Certainly, the growth internationally will be predominantly through acquisitions. We have a small international presence now in the Middle East and in London that is growing well organically. But that’s only above 400 people to 500 people overall. So for us to get that global platform and to compete more on a global basis, it certainly will be through an acquisition strategy, that’s now on our plate. Certainly, we’re starting to do exactly that determine where do we want to be, what sectors do we want to be in. We also are looking at larger U.S. firms that have international platforms, that’s something that in the past we never really paid attention to. If there was a large international portion of the U.S. company we wouldn’t pursue that company because we are looking to establish our platform in the U.S. So that’s another alternative for us is to continue now looking at some of those opportunities. So we’re in the exploratory mode at this point in time, but certainly that strategy is something we’re starting to act on.

Thank you.

You’re welcome.

Thank you. The next question comes from Sara O’Brien from RBC. Please go ahead. Sara O’Brien: Hi, good afternoon. Bob, can you...

Hi, Sara. Sara O’Brien: Hi, can you expand on your comments about taking on select project risk. Your appetite for risk is changing. I missed some of that and just want a little bit more clarification?

Yeah, we – in certain of our sectors, certainly in the Power sector even in some of the Oil & Gas sectors we have clients that are coming to us and saying, can you just hire a contractor and take care of this for us. We essentially do the project through EPCM, which we do. In those opportunities there may be an upside opportunity for us to take on, it is EPC instead of EPCM. We’ve been building some capabilities to do that. It is very different, it’s a small lead to go from EPCM to EPC, but you do need to think differently, act a little differently, manage those projects differently. So we’re seeing those opportunities placed in front of us by very good trusted clients. Our point is we’re now willing to do, select few of those for some trusted clients and go ahead. They are going to be small projects, $50 million range and less, so they’re not going to be things that are significantly large, but it is sort of a sign that we do see those opportunities of moving a little bit into more risky projects again for the right set of circumstances, for the right clients. Sara O’Brien: And for that would you partner with a particular construction firm or do you like to leave the options open there?

No. I think, we would want to go with a trusted partner, absolutely that’s one of the key aspects. If you’re going to do that, you got to have a very good relationship with a very few select clients, so we’re in a contract. So we are not talking about going full into EPC, it is really just letting the market know that we see those opportunities and building up the capabilities of doing it and would look at doing some select project opportunities with some very trusted partners. Sara O’Brien: Okay, great. And then it sounded like on the acquisition front, although it’s exploratory timings looking at international, it sounds like you’re willing to make a larger move in the U.S. as well at this point, if there’s anything changing, is it the multiples of peers that have come down, I am just wondering what’s prompting that and how do you feel about doing that while the Canadian dollar is so low?

Yeah, we don’t let FX really change our attitude with regards to an opportunity, so really we take that out of that. We’re going to be earning revenue in the country, so you buy with that currency, you earn in that currency going forward. So that’s not really an issue. I don’t know if this is really a change, it’s sort of more of an evolution for us. We’ve been doing a lot of smaller acquisitions in the United States, and I think, everybody on the call has probably asked us the question, the lot large numbers is going to catch up to you at some point in time. So we get that and we’re just signaling that we’re starting to see the opportunities for us to take on potentially some larger opportunities, but most of those larger opportunity then come with an international flavor of some kind. So that then coincides with our need to go a little bit more global. So I don’t know if it’s really a change in strategy, but it came out of our strategic planning session last year where we really looked at options, took a real good look at our runway of acquisition opportunities. Still seeing lots of runway in the United States in that smaller to midsize. I mean we’ve done two already this year around the 300 level. But certainly, we’ve got to start raising the bar towards that, and looking at some larger and because we are larger, the risk is less for us to be able to do that now. Sara O’Brien: Okay, great. And maybe just circling back to the gross margin pressure that you saw in infrastructure in particular, just wondered if that was related to a particular, I know that your provisions went up in the quarter over Q3. Just wondering where there provisions for project cost overruns or is this just inherently a lower margin business and we should expect that going forward?

Yeah. No, I don’t think the provisions, they don’t relate to project margins at all Sara. These are the provisions related to potentially acquired claims that we have provisions on the balance sheet. So I think part of it is the Dessau operations in Quebec, is a much lower margin business, and that rolls up within infrastructure. They do operate though at a very, very high utilization. So when you take the offset of lower gross margin and high utilization, the EBITDA margin of those operations is actually still pretty, pretty robust. So that’s where you’re seeing some impact. So it’s a little bit dangerous just to focus solely on gross margins and you have to look at the total mix of business. That’s where part of its coming from. Sara O’Brien: Okay. And then maybe just last question on utilization and EBITDA margin guidance. You’re still in the 13% to 15% range for a target. Just wondered in light of your comments about getting into larger P3 projects and some of the six bid work opportunity, should we expect the EBITDA margin to be closer to what was achieved in 2015 or do you think you can get back to the 14% plus range without some of the one-off costs you saw in last year?

Yeah, I think we can get back Sara. I think there is some of those one-offs that again that we talked about in the MD&A and in the script about some of those items that did affect our EBITDA. So I think we can get back up into that, somewhere in the middle of that 13% to 15%, maybe a little slightly lower as we increased our operations in the U.S., it is again a slightly lower margin business, Dessau is a slightly lower margin business. So it’s still going to be within that range and as we pointed out, we just barely missed that range, just or even with all of those items. Sara O’Brien: Okay. That’s great. Thank you.

Thanks, Sara.

Thank you. [Operator Instructions] The next question comes from Michael Tupholme from TD Securities. Please go ahead.

Thanks. Good afternoon. Question on the lower utilization levels in the quarter, is that something you’re working to address through any further headcount reductions or have you cut as far as you’re willing to cut at this point in the Energy & Resources area?

The lower utilization is a combination of things, and I wouldn’t necessarily frame it all on Energy & Resources. Certainly in the fourth quarter, we always see lower utilization, partially due to seasonality, partially due to the office closures around the Christmas break. So utilization does tend to dip in Q4 and in Q1, it starts to come back in Q2 and Q3 quite a bit higher. But with respect to rightsizing our business, we’re always taking those steps wherever it is and it may not just be Oil & Gas, it could be in other sectors or specific pockets of the organization. So, Bob did you...

Yeah, I’d say Dan in the answering the question, right. There is a – can we say there won’t be continued reductions in staff in Oil & Gas in some of our geographies. There may be, but it’s going to be very small. They’re not – we’re not talking about more wholesale significant. We were down to where we want to be, we’re now investing in these groups to ensure that we’re ready for that recovery. When it comes, I mean it’s not an FX win, but that win could be another 12 months before we see anything significant. The good news is our Oil & Gas clients are still spending money. They are still going to hit projects. And the new reality has now sunk in a little bit and we’re seeing a flow of projects albeit it not anywhere near where it used to be. There is work coming and we have some very strong relationships with these clients and they are getting work. So we’re comfortable that we’re not going to see any more significant retractions, but we’re still comparing overall as we set a fairly good or better part of the ‘15 than in the first half of the year. So, can’t say there won’t be any further but certainly nothing significant.

Okay, perfect. And then just another margin-related question, can you elaborate a little bit further on the fee pressures that you flagged in the MD&A within the Energy & Resources area? And I guess specifically what I’m wondering is, have you seen any further incremental pressures in Q1 relative to Q4 deterioration – further deterioration in the first quarter?

As I would say – said, and I know there were some problems with the conference call sound. But in this script we did mentioned that we have been meeting with our clients. Our clients are very focused on finding a way that they can be more efficient in delivery of their product and their business. They’re looking for us as they’re good partners to find ways to do that. I don’t think there’s going to be overly significant changes to that model from Q1 to Q4. I think most of those have occurred. But there’s no doubt that these clients in the Oil & Gas business are trying to find a way of being as efficient as they possibly can. So we met with some strong clients and they are – think have now come to the point where they’re comfortable where we are, don’t see any more significant changes to that in the first quarter.

Okay, perfect. And then, within the new environmental services segment, I know you’re guiding to stable organic gross revenue for the year, but should we think about the progression in that segment as being somewhat similar to what you’ve guided to within the Energy & Resources area just in terms of starting out weaker and then stabilization in the back half or how do we think about that new segment?

Environment is a little bit different. Their projects obviously aren’t engineering projects, so there’s a lot of preparatory work that goes into the permitting part. So we’re seeing that probably as a bit healthier than the engineering which is much more capital project-related. The environmental business is a little bit more stable, but they definitely are in the same business, where those clients are trying to find efficient ways of doing their business. So at this point a little bit better than the engineering side of it.

And then lastly really quickly, can you remind on your percentage of revenues coming from the province of Alberta?

I don’t have a specific number for that Michael, but I think we’re in 8% to 10% range in total revenues, maybe a little bit higher.

I think it’s a little bit higher than that. I would probably go up to 15%, but I’m not sure of that. So that’s something we could follow-up on. But certainly I know there’s been some questions or concerns with regards to the impact of the Oil & Gas business on the overall Alberta economy. And certainly, it’s had an impact, but we don’t – haven’t seen a significant impact as everybody is sort of predicting. Certainly in the infrastructure side of the business and the building side of the business in Western Canada it’s been – we’ve been very happy with it. And now with the governments putting money into, both federal and provincial into infrastructure, that’s definitely the word of the month. And for us, we feel we’re extremely well positioned in Alberta for that. So we see that impact on the economy in Alberta, still being relatively isolated to the Oil & Gas business. Yes, there’s been impact in the others, but the major impact is really isolated to Oil & Gas.

Probably the only ancillary impact that could be in the community development and we have started to see that already.

But it hasn’t been overtly significant. We did expect there to be almost a direct relationship and it really has not been there. So there is still work going on in both in Edmonton and Calgary in the community development area, albeit not as much as last year, but still good markets to be in.

Great. Thank you very much.

Thank you. The next question comes from Tahira Afzal from KeyBanc Capital Markets. Please go ahead.

Hi guys, this is Sean on for Tahira today. My first question is just digging into the Canada outlook, it’s – just the moving parts in there and the timing would be helpful to get a little more color on what you are planning for just with commodity related businesses being more challenged in the first half in particular? And then, some of the federal, provincial infrastructure programs potentially coming on with a lag, how should we be thinking about first half versus back half in Canada?

No I think you summarized it pretty well. There is going to be increased spending in infrastructure, that’s probably going to be in back half of the year. The commitment letters have already gone out from the federal government to the ministers. So the ministers have their marching orders with regards to what they can do. So, the process is underway but for that to actually flow into design, you’re talking the latter half of the year. The same thing with our Oil & Gas business, although we see a relatively flat year, when we do the Q-over-Q comparison for the last year, it could show some retractions. For the first half of the year overall, there definitely will be some less than the 2% or same forecasting for the whole year, and the latter half of the year will be a stronger second half.

What we’re saying is the infrastructure and buildings are still doing well, offset by a continued weakness in energy.

So, we see them doing well in the first half, doing even better in the second half, that’s the point.

Okay. So, I mean, just in terms of the timing of backlog impact versus the timing of revenue impact from the federal, provincial infrastructure, ramping up, how do we think about that timing?

All right. Now our backlog did go up well, and we’re happy with that, so we’ve had a good significant increase in backlog. Our backlog is really conservative. So, that will be executed quickly into revenue. But you’re right, the backlog increase in the second half of the year will be as a result of that infrastructure spend, hard to quantify exactly when, because we’re not in control of that. The good news is it’s going to happen and we’re well-positioned. With the mandate letters out, we can now position ourselves even more specifically around certain sectors and certain problems. And so – but definitely a second half of year probably story more than first half.

Just to be clear, none of those mandate letters or any of that and commitments from the government is in backlog at this point today. [indiscernible].

Okay, that’s helpful. That’s helpful, guys. And then, just lastly from me, when you’re looking at your U.S. outlook, in MD&A, you guys called out some expected market share gains. I was just wondering how you’re thinking about your U.S. growth outlook in terms of just general market growth versus market share gains?

For the last six, seven years, we’ve been talking about the recovering out of recession in the United States. So I think we’re finally seeing daylight in that recovery. We are starting to see all the sectors confident and even consumer spending is even increasing in the U.S. I think they get the election out of the way. Once we get the election behind us, they will be a little even more stability that becomes a little distracting. But even with that distraction we’re seeing all our sectors in the United States, outside of the Energy & Resources sector being very optimistic and stronger than Canada right now.

Okay, great. Thanks for taking my question, guys. I appreciate it.

You’re welcome, thanks.

Thanks.

Thank you. The next question comes from Yuri Lynk from Canaccord Genuity. Please go ahead.

Hey, good afternoon guys.

Hi, Yuri.

Just a quick one from me. Just Bob on the guidance, I mean, 2% organic growth. How do you feel about that number. I mean, do you feel you kind of hit the ball down the middle of the fairway to get to that 2%, just kind of the pluses and minuses around that because it’s a little bit higher than what I was expecting for 2016 given the kind of the uncertainty that we’re seeing.

Right. I’d love the golf analogy of the book of ball being down in the middle of the fairway. That never happens for me. So – but I – we’re comfortable with the 2%. Its, I think we’ve had that question after receiving in the house sales. How comfortable are we? That’s what our budget shows. We take that information readout and that’s what we give to the street. Now as we said in the first half of the year in the first quarter and the second quarter, it probably won’t be there, because that’s where we’ll probably ramp up as the year goes. We feel pretty strongly that and optimistically that, that 2% is achievable.

And just to be clear on the guide, you did mention something about negative two to plus two in your prepared remarks. And that’s not clear on, if that’s the range

Yeah. We’ve tried – we’ve tried over the years to define are stable, are moderate, are strong because we – our guidance has always been in those terms. So over the years, we’ve tried to provide some definitions to that for the market. So stable for us means it could be anywhere from negative two to positive two. It gives you a little bit of essentially wiggle room for us to short range rather than a specific number. But if everybody still likes to have a specific number. So essentially what we’re seeing or is it a positive end to that stable range we’ve given you at 2%.

Okay. And as your forecasting methods changed since six months, nine months ago or is it still the same process?

No, we’re following similar processes to what we’ve followed every year for many years, so no material changes there.

Okay. Last one. Just on the backlog, on my numbers anyway, I’m showing kind of the slowest backlog burn we’ve seen in quite some time in the quarter, and then for the full year. Is that accurate? Anything you guys are noticing on the slow burn and might that kind of revert back to more historical levels in 2016?

Yeah. Both Dan and I are frowning at each other here, because yeah, I don’t think we’ve ever experienced or would point to a slow burn of our backlog so

Yeah. So we don’t really refer to it as a slow burn. I think what you’re referring to is the revenue was lower in the quarter and I think that again speaks more to utilization than a slowing of the backlog burn.

Okay. guys, that’s it from me. Thanks very much.

Okay. Thanks.

Thank you. The next question comes from Mona Nazir from Laurentian Bank. Please go ahead.

Good afternoon.

Hi, Mona.

Hi. So just going back to organic growth, I know, because you touched on this, but I just want to be clear. So you’re expecting a pickup in activity in the back half of 2016 in part due to increased spending and the Federal government’s infrastructure plan but also just because of lower comparative period, correct?

Yeah.

Okay.

Correct.

Okay. And then just secondly from me going back to your Indian subsidiary and the C$4.1 million loss that you took, I’m just wondering, can you speak about why you pulled out of the market and the dynamics surrounding that?

Sure. India came to us through an acquisition we did in about 2011, I think, Burt Hill. And they had that India office, it was about 90 people, so those two experts went back to India and built business up in India on behalf of Burt Hill. So it was Indian staff doing work for Indian clients in rupees in the Indian marketplace, very difficult if not economically impossible to cross some North American services into that Indian market. What we tried to do over the first three years or four years well has turned that operation more into a lower cost center to be able to outsource some of our North American work to India. Where clearly there is an economic benefit to do, that’s not easy to build, especially when that office is really self-sustaining and really focused on the Indian market to introduce on outsourcing concept to them was very difficult to grow. So, we tried but we really felt it wasn’t – we weren’t doing justice to the office there and the leadership there and they wanted to continue to grow their business in the Indian market, and of course, it didn’t make sense for us. So we felt the best thing for the people there and the best thing for the leadership is to turn it over to them and allow them to have more control of their own destiny and really focus in the market that they knew. So it was – we thought that it was the right thing to do for the leadership and staff in India, and the right thing to do for us.

They had a particular strengths in the Infrastructure and Buildings, whereas we’re really trying to get the leverages would be in our oil and gas business when we were busy a couple of years ago. Now that tailed off of obviously through later part of 2014 and 2015. And to put the C$4.1 million in context, the loss on the investment was really about U.S. $2 million and the rest of that was impacted by foreign exchange that came out of other operating or other comprehensive income. So about half of that was really the loss from the investment and the rest of it was a FX impact.

Okay, perfect. And actually I’ll step back in queue.

Okay. Thanks, Mona.

Thank you. The next question comes from Bert Powell from BMO Capital Markets. Please go ahead.

Thanks. Bob, you took the 50 basis points off the gross margin guidance range at the midpoint. What was your thinking in terms of taking that down. What’s causing you to think about that. Is that mixed utilization, competition – what has to happen to be at that range?

It is really mix. It is looking at our business at this point in time, I think Dan outlined before [indiscernible] which was considerable addition, but that a lower margin business. It’s just overall mix of our business to-date. We’ve got transportation and Infrastructure, which is higher margins, but in the Québec market certainly that was a factor for us, just take a look at it, and so basically it’s the mix of projects, and mix of our business today.

And again that’s built up from our forecasting, but we look at that across the business and then see aggregate of all of our forecast and that just changed a little bit. It’s also the continued growth in the U.S., which is a slightly lower gross margin business, and that’s largely due to a higher labor cost.

Okay. And then just with the new segmentation, the breaking Environmental Services out, I just want to be clear, is the $566 million in gross revenue did in that this year. Does that include – my assumption is that includes the amounts related to oil and gas?

Yes.

It does. Okay. So, that would mean, so, if I just kind of do the math, it would indicate that, relative to last year the oil and gas has come from 55% of the Environmental Services businesses down to 40%. It’s hard to see how that – that’s not risked too for more pressure in that space. And I notice in your outlook, under Environmental Services, you actually don’t say anything about the oil and gas side of it. So, I’m just curious

The oil and gas and Environmental Services would be, I mean, there were cuts last year in that business as well, it followed a similar decline. Our Environmental Services build business is much more seasonal business, as compared to the engineering side of it. So, this is a very slow period of time for them as well. But their impact in oil and gas is slightly more, but it’s more positive and what’s happening in the engineering side just because, clients in a capital in the year where they don’t spend as much on capital projects, they tend to spend more on the permitting and compliance side than the environmental side. So, we do feel a little bit more positive about that. And there Environmental Services is also another sector. So, they do – it is both half the business is in this energy and resources related, but they do have business in transportation and water projects as well. So, again the overall impact to them is not quite as bad as the oil and gas side of Environmental Services part.

But is this a year, Bob, where that could change where given what’s happening in continued low commodity prices that, you guys don’t – capital related Environmental Services, it doesn’t get offset with you guys continuing to work on permitting and that sort of stuff that it’s just simply what it’s kind of pins down guys, we’ll wait?

It’s not as I would say the term pins down, it’s definitely related to the engineering side. And environmentally like to finish certain aspects of it, and the investment isn’t as quickly shut off. So it is different. But there’s no doubt they live in that space, and they’re working for clients right now that are certainly looking for every possible way of lowering their cost. But again our Environmental Services also does lot of LNG, so they are little bit broader in their focus outside of just oil and gas, they have that gas side as well, where engineering side is much more focused on, unfortunately strictly oil and midstream. So, yes, the Environmental Services is not immune to what’s going on. But that is not as much of an – it doesn’t impact them as much as it does the other side, but we can’t say there is no impact.

Okay. And then just lastly, Dan, it was very hard to hear you there when you were going through, what you were talking out as one-times for the quarter. Can you just run through again, did you say C$4.3 million of severance for the quarter, S$4.7 million in share, C$4.1 for India and what was the share – per share number and the tax assumption behind that?

Yeah. I apologize for the sound, we don’t know what the caused that, but just to clarify Bert, I’ll go through the numbers again.

Yeah. Could you just for the Q4?

Yeah. So that was – all the numbers I quoted were year-over-year. The C$4.3 million, the share-based compensation was C$3.5 million we talked about lower utilization. The increased costs related to the integration and franchization of our systems and then the C$4.1 million was certainly a – with respect to the India subsidiary sale, it was in the fourth quarter. For – just purely fourth quarter cost, taking all of those items into impact – into consideration, severance was higher this year versus last year by about C$1.3 million – sorry it was a cost for about C$1.3 million in severance, it’s about a C$1 million higher than last year. Share based compensation was about C$2.8 million higher than last year. Amortization of intangibles was again about another C$1 million higher and then of course the sale of India. So all of those impacts in the quarter were about approximately C$0.08 a share in Q4. And then about C$0.17 in total on year basis.

And what was the tax assumption coming up with that for Q4? What did you use to kind of tax affect those numbers?

Well the taxes always get affected by what actually occurs and what happens in your operations. So our estimated tax rate at the end of Q3 was 27.5% and dropped to 26.1% and so it’s taking all of those items into consideration in our results. We did recognize and you have to wait to recognize your R&D tax credits. We’ve had a pretty active program internally getting SR&ED [ph] credits in Canada, 179D credits in the U.S., we recognized some of those tax credits that we’ve got a good, now record and track record of managing us. We’ve recognized some of those tax credits. That had about C$0.02 impact in the quarter and for the year and that’s really what drove down the tax rate in the fourth quarter.

Okay. Thanks a lot.

Okay.

Thank you. The next question comes from Ben Cherniavsky from Raymond James. Please go ahead.

Good afternoon, guys.

Hi, Ben.

Seems like every quarter for the last couple of years, at least, you guys get beaten up a little bit on your guidance, not long ago a lot of people, myself included – thought you were sandbagging numbers and more recently it seems like there is a fair amount of the questions around whether or not you’re now being conservative enough and I don’t mean to open old rooms but?

So hence there is [indiscernible] factor here.

I don’t mean to open old rooms, but a year ago you said 2% for 2015, you ended up down 6%, you affirmed that 2% as recently as August. In the third quarter, you said, you would end the year at 5%, you ended at 6%, by my math that implies the fourth quarter, organic growth rate, contracted by twice the rate you initially assumed 8% instead of 4% and so can you maybe – maybe the question I would have in all of this is, can you tell us a little bit about your forecasting methodology? What are you guys doing maybe – have you thought about maybe trying to change it or maybe trying to change the guidance you provide, because it’s frankly, it hasn’t been terribly helpful. And the way that you’ve painted the picture for this year, to me in some areas inconsistent with what some of the economic indicators, especially in the construction markets in North America would be suggesting at this point?

So I think, if you not to make excuses, but if you go back to the last four quarters, what went on in our largest business operating unit whether that would – I’d say is somewhat unprecedented. So, I don’t think anybody saw this decline coming as quickly as rapidly or as deep as it was. So I think, you’re seeing very firm, especially our clients, the impact of them over the past year has been dramatic. So, the forecasting last year, yeah, pretty difficult in a market that was in a steep plunge. This year, it’s still difficult, but probably not as difficult because that business is in more of a holding pattern, I would say, it is really going to be subject to how our clients move forward, and what really happens in that. So, the forecasting is bottom-up. We look at our business. We – each of our individual business units and leaders put their forecast. We assemble them and put it out to the market. So, if we’ve been off, I would say that that’s outside influence that sits infecting that rather than the fact that we’re not very good at forecasting. It’s not easy to give the answer, especially when – what we’ve gone through has been somewhat unprecedented.

But, you got to somehow figure out, I mean, your business is impacted by outside influences. So, if you’re not taking those into account, are you missing something or is it all a futile exercise? [Indiscernible] last year was difficult, I think by the third quarter...

But this year we’re better.

Well, by the third quarter, like your business your energy business is still I think in the fourth shrank by like 25% and I know we had a very specific exchange on this very same topic in November about, what you – if you think your assumptions are on energy are conservative enough and you guys were adamant that they were and your business shrank by twice as much as you expected on a consolidated basis. So, – and then if I go back, like I said, I mean it’d be different if you have a – if this methodology worked really well over time, but even in years when things are going well, you underestimated the growth. And I suppose it’s better to be conservatives than overly optimistic, but I think that might be the concern right now as whether or not, I know Yuri had the same questions, if you’ re being conservative enough given all of the issues and uncertainties that are out there?

Yeah. That’s all we can do is provide the information that we see in our business going forward. When we look at everything outside of our Energy & Resources business is very strong, as we see good growth opportunities. Yes, in Canada, it’s more in the second half of the year; in U.S. it’s consistent. Our clients – when you get back to even the fourth quarter, we were basing what we were saying to the industries based on what our clients were telling us. So, not to push the blame on to our clients, but I think they are having different good idea for even figuring out what they were going to be doing with their business. So, yeah, we’re in a difficult situation with that part of our business, the rest of the business I’d say we’re very confident. Dan, if you want to add more color?

I think it’s just again to be clear is we’re not forecasting organic growth in the first half of the year, we’re still – we were still coming down the curve on the retraction in the oil and gas business and mining as well in the overall Energy & Resources, we expect that to be pretty weak in the first half of the year, and again expect that to more than offset the growth that we’re seeing in the other business units. So, we aren’t really giving guidance in the first half of the year at this point, we’re seeing on a full year basis that’s where we think we’ll be – but really the first half.

Yeah. But since then, visibility is always easier. The shorter you look out, the easier the visibility is. I mean it’s hard – the amount of times I have been told over the years, the second half recovery like, I’m starting to make a tally of it. It’s – though I’m not sure, most of the indicators and directly – I think maybe this is the important point, I don’t want to be the dead horse, but you’re – and I’m not saying it’s right or wrong, but you think it’s important that everyone understands that you clarify that your forecasting method is based on talking to your customers. It’s not a top-down, you guys don’t spend a lot of time looking at the sort of economic data and construction like I looked at the U.S. non-residential spending and it’s been ruling over the last couple of months, you guys don’t put that into your forecast.

Well, we do, but we’re by look at – based on an account-by-account basis. So it’s based on looking at a client, a book of work that they have, what we on get from that client. So, rather than looking at the economic forecast, I also get it’s a lot better looking at your clients, and what they – because they understand their business. Understanding our clients business were there, but really you’re really going to be focused on what work did they have coming down the pipe and what possible new work do we have. So, yes, economic forecasts are nice, they may give you a little bit of indication of where the investments and opportunities will be but it comes down really to your accounts and your management of those accounts.

Yes. Okay. Assuming they have better information than everyone else, but anyway I don’t want to belabor, just want to squeeze in one last question just on the P3s. The Federal government, it’s interesting you guys are quite excited about the P3. Obviously, the P3 market has been very strong but going forward you seemed to have same amount of enthusiasm for the P3s, so but there have been some comments out of auto or from the new Ministry of Finance that they want to drop some of the public-private requirements for infrastructure funding. Do you see that as a potential threat to P3s or politicization of the process or does that have any meaning to you or the P3 outlook at all as the government wraps up spending.

That was Federal Government statement...

Yes.

And the Federal Government invested in P3s is probably in much more in the municipal layer. It’s not as probably – doesn’t have the same impact at the provincial level and so most of our P3 work, I would say is funded through the potential side of the P3 funding, not the federal side. So, you’re right, the new liberal government has been cautionary with regard to their future P3s, but there’s still a lot of projects in that P3 hopper from federal perspective, but I would say most of our opportunities is in the provincial sector.

But to your point if it gets more politicized, that’s not a great thing for...

Again, that’s a smaller part of the P3 market in Canada is the federal part.

Yes. Okay. Thanks guys.

Thanks, Ben.

Thank you. The next question comes from Connor Sedgewick from National Bank Financial. Please go ahead.

Hey, guys. I am calling on behalf of Leon Aghazarian. I was just – I want to follow up a little bit on Sara’s question on M&A, so that you guys have picked up a bit of activity. So I want to know is because you’re seeing better pricing out there. And in addition to that are there equal opportunities in each segment?

Pricing really doesn’t change. It is – it’s really kind of figure out what the company’s actual revenue generation and EBITDA performance is and the multiples are really within still a pretty tight range. So, it’s not – I wouldn’t call it on an opportunity from a pricing perspective. It’s still just an opportunity that this is a continued consolidation in our marketplace and a continued sign that stream of acquisition opportunities is not drying up especially at that 100 to 300 person level. There is lots of those companies out there. And yes, I would say that they are across sectors you saw the two we done that this year that we’ve announced LOIs is in the architectural building side of it and also in the infrastructure community development side. KBR, last year was in the transportation side. So, we’re seeing a good diversification across most of our business units. The one that we’re seeing still some pressure on is the Energy & Resources. Those companies certainly are impacted just as we’ve been. So, very difficult to then forecast what you’d be willing to pay based on pretty murky forecast going down the road. So, in that sector not as many opportunities.

Okay, great. And I’m going to go a little bit more on the energy side. You guys mentioned that there will be more modest retracts in the Energy & Resources. You’ve done a pretty good job at quantifying that for stable moderate. I was wondering if you could give us a bit of quantification for more modest retractions?

Yes. I don’t know that I have a specific number for you with respect to how much the retraction is going to be. We just know that our staff levels today are lower than they were at the first half of the year. And so therefore there is going to be a retraction there. We are doing everything we can at this point in time to keep those staff. So, but it’s – it is revenue generation that we measured. So, from a staffing level perspective, certainly we feel we move those staff in other areas. We’re going to reduce work weeks, we’re cutting even compensation and not nearly as much as our clients have done, but from a revenue perspective, hard to pick a number to it, but it would not be nearly as significant as it was last year.

Okay. Great. Thanks for the time guys. That’s it from me.

Welcome. Thanks.

Thank you. The next question comes from Maxim Sytchev from Dundee Capital Markets. Please go ahead.

Hi, good afternoon, gentlemen.

Hi, Max.

I just wanted to actually to circle back to maybe trying to think about this sort of the clean EBITDA for the quarter. You provided an incremental C$0.08 impact on the EPS, but in terms of EBITDA, what do you think you would have been if you were to exclude the potential sort of severance, India like all that type of stuff. Is it closer to somewhere in the C$65 million range, I’m just trying to get a cleaner number.

I don’t know what that would be exactly at the 65% Max, I think it should be closer to 60%, maybe 60%, 61%.

Okay.

I don’t have the exact number. But I don’t think you’ve had gotten to the 65%. Once you add back to…

Sorry, Dan, you were breaking up unfortunately.

Sorry for that. If you added back the impact of severance share based, amortization of intangibles, you’d probably get closer $63 million impact on EBITDA and adjusted EBITDA or adjusted revenue.

Okay. That’s helpful. And I guess going back to the EBITDA margin guide for 2016, and kind of being able to hit that mid-range. But I mean we have seen compression sort of across the business and markets are still very challenging. I guess what gives you the visibility and I guess the comfort that you’re going to be able to stay within that historical range in 2016?

Again, it comes back to having a pretty good understanding of our business fee, where we’ve seen a lot of the retraction obviously and impacts, that’s been with energy and we don’t expect to see that same level of one-time impacts in 2016. The whole thing around share based compensation that’s kind going to fluctuate quarter-over-quarter-over-quarter, and so everything else is fairly normal with respect to our business. We’re not seeing, we got to remember that two-thirds of our business is running pretty well.

Yes.

And we expect that to continue.

Yes. Okay, now that makes sense. And then, maybe just going back to M&A, I mean obviously you have a great balance sheet. So, just thinking about how you would use and leverage the balance sheet in terms of the metrics, your level of comforts going to, I don’t know, in 2.5 times of each EBITDA, our net debt to EBITDA, is that something that you are prepared to do or can you provide a bit of color there?

Absolutely, we will go up to 2.5 and actually we can go up to 3 times and still be fairly within the comfortable range. The reality is, so these acquisitions come along and not necessarily, because we generate such good cash flows, do we have to get up to that level of leverage. So, you can’t make acquisitions happen, they come along and when they do, we will be prepared to lever up.

Do you believe that, right now, the expectations of sellers have normalized a little bit on the M&A front?

I don’t know, if you can ever say they are normalized, everyone always believe is that next year is going to their best year, they’ve ever had. So, you’re always have to bring it down to reality. But I think, everyone is dealing with the same economic reality. So sometimes a little bit easier to get better numbers when the reality is somewhat more muted. So – but I’d say it’s always the expectation of any firm we talk to is the next year is going to be their best year.

Right. And on the international front as well, I mean, obviously buying U.S. company with international presence is one thing, but would you actually look out right I don’t know a firm in the UK or Australia, what is your thought process there in terms of risk appetite?

That’s what we are looking at now, Max, is really trying to get a better handle on what’s out there in the market. We’ve been very focused on the U.S. market, so I have to say that be our first preference because we’re so comfortable with the U.S. market and we saw how we need to grow in the U.S. market. The first preference would be to acquire a firm that has a 50-50 in the work balance say between the U.S. and international. But we’re also willing to step outside of that for the right international firm. I would say though that would have to be a solid platform. It would have to be a platform that’s probably across a few countries. So the preference from a risk appetite perspective would be starting with something out in the U.S. and starting to branch that way, but we are looking at beyond that as well and seeing what else is out in the marketplace.

Right. I’d would assume mostly you’re focused on OECG countries, correct?

Yes, correct. That’s right.

Okay. Excellent. That’s it from me. Thank you very much.

Thank you, Max.

Thank you. The next question comes from John Rogers from D A Davidson. Please go ahead.

Hi, good afternoon. Just one bit of follow-up, in terms of the planning process for the next five years, you’ve got the 15% growth assumption still there. Have you changed your expectations of how much of that will be organic versus acquisitions?

No, I think we’re still comfortable with that, one-third, two-thirds as we said, it never is exact in any one given year.

Sure.

But still in overall guidance, still would be that one-third, two-thirds organic to acquisition growth and as I said that’s over a five-year period.

And then I think you could see some fluctuations because as Bob mentioned, if we do an international acquisition, that would be a more of a platform acquisition. So, you certainly would see a higher acquisition growth in the year like that then you would see organic. But overall we’re still targeting to still achieve reasonable organic growth of course.

Okay. I guess – yes, I’m just going back to some of the earlier questions about the organic growth and when we might see that coming back. I mean it’s not going to be…

Yes...

I’m sorry go ahead, Bob. Now can you say it’s not going to be 2016, so I mean just to get there, I mean it’s got to be pretty good snapback at some point and trying to think about – I guess that’s coming out of the – more out of the U.S. is your expectation?

Agreed. This year there would be more of the opportunity certainly is in the U.S. here. But we still see some organic growth in Canada too. So, certainly at a 2% growth this year, that means that probably our acquisition growth will be higher to get to the 15%. So, the snapback we’re seeing in organic growth as soon as we see some stability in oil and gas, the snapback is going to be incredibly large. And I guess that’s the opportunity to maybe everyone needs to think about it, when it does happen, we’re the best positioned to take advantage of that and that snapback will be there.

Okay. All right. Well, thank you.

Welcome, John.

Thanks, John.

Thank you. The next question comes from Benoit Poirier from Desjardins Capital Markets. Please go ahead.

Yes, good afternoon, gentlemen. Just looking at the gross margin of each business segment for 2016, I’m just wondering where we could see the largest contraction, given the impact from pricing and also mix?

The largest retraction in gross margin would probably still have to be the Energy & Resources area because as I’ve said, our clients still want to go ahead with work, they still have programs. They’re just trying to be as efficient as they possibly can and that efficiency unfortunately is usually passed down to us. Good news is we’re about as sufficient as we can be right now in that business and I can’t see it significantly retracting further, but certainly that’s where the biggest opportunity is because that’s where the biggest need is from a client perspective.

So you will see that in oil and gas as well as the environmental services part figure with oil and gas.

Exactly.

Okay. Perfect. And just on the free cash flow, is there any big draw on the working capital expected in Q1 like from a seasonality standpoint and what kind of working capital changes could we see in 2016?

Well, we have seen a little bit of an increase in our days sales outstanding in accounts receivable, again largely due to the mix of business and due to the sole client receivable. So we’re seeing a little bit of a working capital impact in our accounts receivable. But the only thing that you generally will see in the first quarter is the payments of taxes and the impact on our direct payments that happened in the first quarter related to 2015. So those are really going to be the impacts in our free cash flow in the first quarter. But generally, we do use cash in the first quarter versus generate cash.

Okay. Perfect. And given your discussion about the focus on some EPC projects, what type of margins, I understand there will be more volatility or more risk attached to the margins, but what kind of margin profile could we see on those contracts. And any impact potentially on the working capital items?

So, no impact on working capital. Again these are pretty small projects overall scope of what we’re talking about at the size of Stantec. So that’s not going to have a material impact on the working capital for us. But, I would say there would be potentially margin pressure with those, but we got to remember we’re only doing these in a non-bid situation really with really some trusted clients that are asking us to bring them forward. So, I wouldn’t think that we’re going to have more than 1% or so margin attraction, it’s not that we’re going in fully bidding an EPC open bid project, we’re looking at really just bringing those capability to some opportunities with some clients.

Okay. Perfect. And backlog – looking at your backlog at the end of the quarter obviously up coming from acquisition FX and some projects awarded, just wondering if you could quantify what was the impact coming from acquisition and FX?

I don’t have the exact numbers, Ben, but we did see organic growth in backlog in our Infrastructure and Buildings business units certainly with the retraction in energy and then the rest of it would have been combination of acquisition and FX.

Okay. And just related to Canada, it seems that you foresee an uptick in the second half 2016, pretty confident about the backlog increase so, just wondering what makes you confident that we should see an uptick in the second half and how much visibility do you have in the second half?

Well, that’s good point. The visibility is really based on the government stating that they are going to invest in projects, so that has two impacts. One, it gets the provinces comfort that they can continue with the programs they currently have. So they know that there is funding coming for other making a wish projects. They will accelerate projects they currently have, get them out there into the marketplace so they are ready to process other one. So just the fact that the government is coming in and saying we have funding commitments for infrastructure will allow the provinces to accelerate their current projects they have to get ready for that, so that sort of gives us the comfort is that there every year and at all our provinces invest heavily in infrastructure, if they know increased spending is coming, they would advance that – those projects they have on the books with comfort that they have more money coming, so that’s why we have the comfort that it is going to be there, we are going to get that revenue in the second half of the year, because some projects they have already currently thinking about are going to be advanced.

Okay. And last question just on the M&A front, you already provided a very color, but in the past you made some comments about potentially creating similar business model in the U.S. like the oil and gas to increase your foothold on the oil and gas, but based on your answers a few minutes ago, is it fair to say that the focus will be more on the infrastructure building U.S. international as opposed to U.S. oil and gas?

Yeah. I would have to say that’s probably fair. It is we love to do an investment in oil and gas, but obviously it is an extremely nebulous future on a short-term basis with that and the company is better in that space, are comfortable with what they’re doing, their expectations are that they will recover. So it’s hard to then close a transaction when you got a difference of opinion with regards to the speed of that recovery, which then affects what we can pay. In the other markets, the infrastructure especially it’s a solid market. We can look at the forecast fairly well and have some comfort. They’re going to be able to generate the necessary revenue and EBITDA out of an acquisition and then feel comfortable to pay. So certainly, the comfort level and the risk level has been more conducive for us to invest in that area.

Okay. Thank you very much for the time.

Thank you.

Thank you. There appears there are no further questions. Mr. Gomes and Mr. Lefaivre, I’d like to turn the conference back to you for any additional or closing remarks.

Thanks very much, Adam. Since there are no more questions, I’d simply close our call by saying we’re confident in our ability to achieve our objectives, and deliver the consistent values our shareholders have come to expect from Stantec. So thanks again, and we look forward to speaking to you soon.

Ladies and gentlemen, this concludes today’s call. Thank you for your participation.