Stantec Inc.
Q4 2020 Earnings Call Transcript

Published: 28 Feb 2021

[Operator:]

Good day, everyone, and welcome to Stantec's Fourth Quarter 2020 Earnings Results Conference Call. Leading the call today are Gord Johnston, President and Chief Executive Officer; and Theresa Jang, Executive Vice President and Chief Financial Officer. Stantec invites those dialing in to view the slide presentation, which is available in the Investors section at stantec.com. All information provided during the conference call is subject to the forward-looking statement qualification set out on slide two, detailed in Stantec's management's discussion and analysis and incorporated in full for the purposes of today's call. Dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded.

[Gord Johnston:]

Good morning, and thank you for joining us. I'll begin our call today with a look back at 2020, review our progress over the year and provide an update on fourth quarter business performance. Theresa will then delve deeper into the financial results and review our 2021 targets, and then I'll return to provide closing remarks. In 2020, a year marked by unprecedented business disruption caused by the COVID-19 pandemic, Stantec continued to demonstrate our operational resilience. The diversity of our business, our global reach and our deep connections to our employees, clients and communities served as strengths as we weather the storm. The world has changed over the past year, and there's been a shift in priorities. Sustainable development is now even more of a priority for governments, organizations and investors around the world. And that's why I'm so proud that Stantec was named the 5th most sustainable company in the world and the 1st in North America by Corporate Knights. Operating sustainability is good for our employees, good for the environment and good for the bottom line. With our continued focus on operational performance, we came into 2020 well positioned and our focused execution throughout 2020 drove the best financial performance in Stantec's 65-year history. We've also made the foundation for future earnings growth through the value creators of excellence, people, innovation and growth, which are the cornerstones of the strategic planning we rolled out at the end of 2019. Despite the disruption caused by the pandemic, we were able to deliver revenues that were consistent with 2019 as a result of the dedication of our employees and our focus on efficient project delivery. Through solid project execution and exceptional cost management, we delivered a strong 15.7% adjusted EBITDA margin. Lower interest costs resulting from strong cash flow management and tax recoveries recognized in the fourth quarter further contributed to a 10% year-over-year increase in adjusted diluted earnings per share to make 2020 a record year. We exited 2020 with an in vivo backlog that grew organically by 3.1% year-over-year to $4.4 billion, representing approximately 11 months of work. We resumed growing through acquisition after pause early in the pandemic, we completed three transactions in the fourth quarter of 2020. And last week, we entered into an agreement to acquire GTA consultants, which grows our presence in Australia by more than 10%.

[Theresa Jang:]

Thanks, Gord, and good morning, everyone. Adjusted net income from continuing operations for the fourth quarter increased 28% to $67 million, which represented 7.8% of net revenue. Adjusted earnings per share also increased 28% to $0.60 per share. Q4 earnings exceeded our expectations with net revenue generation slightly stronger and discretionary costs significantly lower than anticipated.

[Gord Johnston:]

Thanks, Theresa. Through 2020, we made excellent progress on the strategic plan we launched in December 2019 despite the challenges posed by the pandemic. And I encourage you to review our annual report for a more in-depth review of our key accomplishments. As Theresa and I spoke about earlier, our 2023 real-estate strategy with the goal of reducing our office lease footprint by 30% over the next three years, will result in a material increase to net income and EPS growth. We're also affirming today that we intend to meet our long-term financial targets as filing our strategic plan by the end of 2023. We entered this year with a solid backlog of $4.4 billion and expect to return to low to mid-single-digit organic growth over the balance of 2021. We're back in the full swing of our M&A program, and we're ready to continue down this path in 2021 with the benefit of our strong balance sheet and a robust M&A pipeline. I want to close by thanking our employees for remaining steadfast through the pandemic. It's their hard work in continuing to execute our strategic plan and serving our clients that drove record earnings in 2020, while achieving best-in-class sustainability arrangements, and we're going to continue to lean on our core values of doing what's right and putting people first as we move forward into 2021 and beyond. And with that, we'll open up the call to questions. Operator?

[Operator:]

Our first question from Jacob Bout with CIBC. Please go ahead.

[Jacob Bout:]

Good morning. So, I had a question about the planned lease office footprint by 30%. Have you pulled your employees to understand how they're feeling about it? I think we're all getting a little tired of working from home socially during this pandemic?

[Gord Johnston:]

Yes, Jacob. In fact, we've surveyed our employees a couple of times through the pandemic, and we found that their thoughts on working at home versus the office has changed a bit throughout. Early in the pandemic looking back in March and April, as we talked to people what they thought they might want to do, the response was, "this is great, we want to work from home forever." But what we found that we didn't think that, that would be an accurate reflection of the long-term perspective. And so as we've talked to folks throughout others in the industry as well, we found that what people are looking for is a little bit more flexibility where they could perhaps be in the office a couple of days a week, but also have the flexibility to work at home one or two days a week. And that's sort of how we're redesigning our office footprint. We have a workplace design group in our Buildings group within Stantec and so we're working very closely with that group on what we might do within our company as well as advising other clients. And so we really think it's important to have those people not work that home exclusively because we have a very collaborative design presence. And so it is important for us to still be able to bring people together. So, as we look at our longer-term footprint with a certain percent still being full-time in the office, another percentage being part-time office with maybe some flexibility work in home once in a while, but there will be a small subset that we will allow to work at home full time. And based upon that design, therefore, we look at that, roughly a 30% reduction in our occupancy footprint.

[Jacob Bout:]

Okay. And you said there's a $0.10 impact for 2021 and 35% to $0.40 over the next three years?

[Theresa Jang:]

Yes. The $0.10 is part of the $0.35 to $0.40 that we expect over the next three years.

[Jacob Bout:]

Okay. And my second question here is just on the longer-term targets you have. I think you said your net revenue CAGR greater than 10%. So, clearly, M&A is playing a key role here. Talk a bit about how your pipeline is looking, the -- and how valuation is looking and assuming in this market, multiples are getting a little stretched?

[Gord Johnston:]

Yes. So, the M&A pipeline is very, very robust. And you can see, of course, we've mentioned we closed three, announced another one here just in the last three or four months. What we're finding is that while the pipeline was robust going into the pandemic, slowed a little bit as we talked about before through last March, April, a little bit into June, but really it strengthened and we've reinvigorated all the discussions that we had ongoing previously, but there's been a lot of new conversations that we've initiated really just over the last couple of quarters. So, pipeline very, very strong across all of the geographies where we're active. It's interesting, initially, in the pandemic, we had hoped that we see some -- a reduction in multiples, but certainly, we haven't seen that. In the firms that we're talking to, we've seen multiple stay reasonably consistent. You've seen some of the larger public transactions that have been announced recently that had higher multiples, but we really haven't seen that significance of an increase in the firms that we're talking with.

[Jacob Bout:]

Sorry. And what are those multiples? And is the focus still small and midsize?

[Gord Johnston:]

Yes. A lot of the firms that we're talking to, we're seeing the multiples still in that six to nine kind of times range. And our main focus is still in that that sub-1,000 person firm because that gives us the opportunity to select the exact type of firm we want in the geography that we want to specialize in, but that said, our balance sheet is very strong. Our organization has really matured in the various footprint outside of North America where we're resident. And so we are, as larger opportunities come along, we absolutely look at them, but I wouldn't call a change in our strategy. Our strategy is still not a 1,000 person or less, but I think we now we've got a little bit more flexibility to look at some of these larger ones, if they're appropriate for what we see for our long-term role.

[Jacob Bout:]

Thank you. I'll leave it there.

[Gord Johnston:]

Okay. Thanks, Jacob.

[Operator:]

We'll take our next question from Chris Murray with ATB Capital Markets.

[Chris Murray:]

Thanks. So, just maybe going back to thinking about the real-estate part of the equation. So, just to confirm, so you're talking kind of $0.25 to $0.35 a couple of years out. That's correct?

[Theresa Jang:]

Yes. What we said is we expect about $0.10 in 2021. And on top of that, $0.25 to $0.30 by the end of 2023.

[Chris Murray:]

Okay. I'll talk about that, okay. So, I'm just trying to understand the cadence of it. And then just thinking about that, there's the earnings piece of it, but there's also, I guess the liability side of the leases. Can you talk a little bit about how this plays into your longer term return on invested metrics?

[Theresa Jang:]

Yes. I mean, absolutely, will lift our return on invested capital because the ability to redeploy capital toward other things that otherwise would have been in servicing these leases is what part of the opportunity. So, with as Gord described, there are these kind of two prongs to the strategy

[Chris Murray:]

Gord, just I guess the other question I have for you is just thinking about your longer-term net revenue growth, the interesting part about putting in a CAGR number when you change the timing is that it moves around, but if I go back historically, and you talked a little bit to, I think, to an earlier question about that 1,000 person. I mean, there were years that you guys were doing 15, 16 acquisitions a year of various sizes and then a platform every couple of years. Is that how we should be thinking about the way you think that this unfolds over the next few years to hit that kind of number?

[Gord Johnston:]

Yes. I would think so, Chris, that sort of we're going to continue with our -- we call it the sort of the base hits, the infilling of the right firm and the right locations. And then when the timing is right, the opportunity is right, we might look at doing something a little bit larger, as you say, from a platform perspective.

[Chris Murray:]

Okay. That's all my question. I'll pass on the line. Thanks very much.

[Gord Johnston:]

Thanks, Chris.

[Operator:]

We'll take our next question from Frederic Bastien with Raymond James.

[Frederic Bastien:]

Good morning. Quick question for you. Are you comfortable with can you tell me if you're comfortable with the relative waiting of your five operating units right now? I believe infrastructure is close to 30%. I mean you've got environmental services and energy about 15%. Is this sort of a play where you're comfortable being at equilibrium or is there are there opportunities to grow some of these business units further or at a more aggressive pace on a go-forward basis?

[Gord Johnston:]

Yes. I do think that, in particular, our water business, which is currently about 21%, we'll see continued opportunities for growth there, both from an organic perspective. For the year, our water business grew organically by just a little bit over 4%. So, it's going to continue to grow organically, but I do see continued opportunities for us to invest in the water space from an M&A perspective. So, I see particularly that area. Our environmental services, we're continually looking for ways to continue to grow that as well. So, I think over time, the type of firms that we're looking at are water firms, environmental services firms and then also a little bit into transportation and buildings. So, I think those, you'll see those as being the primary areas of focus for us. So, over time, I would like to see the water business and the Environmental business grow a little bit more. And so we're putting a particular focus on those areas right now.

[Frederic Bastien:]

Okay, great. That's helpful. In terms of high-level kind of priorities for this year, would you mind kind of maybe flagging or highlighting your top three priorities?

[Gord Johnston:]

Sure. After spending a couple of hard years looking at the back office and getting the sort of the back of house taking care of from organizational structure perspective and leading the organization and so on, 2020 is really the year where we're focusing on growth -- 2021, sorry. And so we're really focusing on our organic growth programs. And we've had great success over those the last couple of years. We're going to continue to focus on that. We're going to continue to focus on M&A because as we talked earlier, our balance sheet is in great shape. We've got the maturity and the appetite to continue with that. And then also, we want to continue to focus on our innovation programs that we had just rolled out in really in a formalized way at the start of last year. We see that as a differentiator as we move forward, both in terms of new service offerings, new technology offerings that we can bring to market. So, growth and innovation, absolutely. We will continue to focus on the backup house is operational, no question, but that's always there, but I think you'll really see a focus for 2021 for us on growth and supporting innovation.

[Frederic Bastien:]

Okay. Thanks, Gord. Good to hear that.

[Gord Johnston:]

Okay. Thanks, Frederic.

[Operator:]

Our next question comes from Mona Nazir with Laurentian Bank. Please go ahead.

[Mona Nazir:]

Good morning and thanks for taking my questions. First, when I'm just thinking about your organic contraction that you had in the quarter and even the year ahead of a number of peers in spite of you guys having greater Canadian exposure and greater energy base. I'm just wondering, looking back, what do you think help shield or insulate the business? I mean you had mentioned in your opening remarks, three new hospital contracts awarded. I just wondering if you had to pivot the business to new areas or bulk up expertise in other areas or really was it due to mix?

[Gord Johnston:]

Yes. So, I think the real focus for us was on our organic growth programs. We've really been focusing hard the last couple of years, but really through 2021, 2020 as well so that not only did our backlog grow organically by over 3% through the year, but I think that also was a big driver why our organic retraction was 1.8% for the year, but to your point about pivoting, I think that's exactly right as well. And nowhere do we see that as evidence is in our buildings business where the commercial work that we are doing, restaurant, fit ups, new retail, a lot of those projects are pushed off to the right, but we really pivoted to healthcare, particularly in Canada and Australia, and we pivoted toward e-commerce facilities and doing a lot of great support. We have some global MSAs, master services agreements, with those firms. So, I think it's really the focus on organic growth through we've got a number of solid programs, our account management program. We have a corporate campaigns program, a strategic growth initiatives program. So, I think those are very, very important, and we'll continue to drive flow through 2021.

[Mona Nazir:]

Okay. That's helpful. And when I'm just going through the MD&A, the headcount is stated in there at 22,000. I just wanted to ask to your end, have you taken any steps to right size the business in any area or are there plans to in the future and just related to that, how is utilization sitting?

[Gord Johnston:]

Yes. So, from a headcount perspective, absolutely, we've had to manage our headcount throughout the year. We've addressed that proactively in managing utilization. We actually saw our utilization rates early in the pandemic spiked by 3% to 4%. And then they've sort of come down to more normal type seasonally adjusted levels. But what we really try to do, in addition, was to not go too far from a headcount reduction perspective because we see that the work is there as you can see from our growth in our backlog. We see the opportunity for good stimulus from a number of different government locations coming here in 2021. And so as a result of that, we wanted to make sure that we have the right team to drive us forward into the future as well.

[Mona Nazir:]

Okay. So, would it be fair to say, though, that any rightsizing that did occur in the year because the 2019 headcount was 22,000 as well. So, any rightsizing that did occur in the year was largely offset by M&A?

[Gord Johnston:]

Yes. I think that's a fair statement, Mona.

[Mona Nazir:]

Okay. Perfect. And just lastly for me. And going back to the M&A, it's just really more of a confirmation. I understand you have made a number of smaller-sized tuck-ins, and you did speak about a number of new conversations occurring with targeted firms, but given current leverage levels, is it feasible that we could see a number of medium-sized transactions, call it, four to five transactions kind of simultaneously within a shorter timeframe that could bring in a potential like combined 3,000 people over five or six transactions or would be -- that be outside of the targeted pace?

[Gord Johnston:]

I think our balance sheet would certainly support that, but it really all depends on the opportunities. We have to find the right firms and the right geographies that are selling for the -- to have the right motivation to sell. So, if the opportunities were there, we certainly could drive that forward. But we're not trying to hit a particular quota. We want to say continue to be disciplined in our M&A strategies, what we're paying so that we can see that long-term accretion to our share price, but if the right firms come along, you're right, we've got the balance sheet room to do it.

[Mona Nazir:]

Okay. Perfect, but that is the upside of the realm of possibilities. Okay, thanks great, thank you. I'll leave it there.

[Gord Johnston:]

Thanks, Mona. Thank you.

[Operator:]

Our next question comes from Michael Tupholme with TD Securities.

[Michael Tupholme:]

Thanks, good morning.

[Gord Johnston:]

Good morning, Michael.

[Michael Tupholme:]

My first question relates to your organic revenue growth guidance. You've talked about or you've reiterated your expectation for low to mid-single-digit organic growth in 2021, which is consistent with what you had talked about last quarter. I'm just wondering how we should think about that as we progress through the year, including whether or not we should be thinking about year-over-year organic growth in the first quarter being negative or is that a positive?

[Gord Johnston:]

Yes. That's exactly where our thoughts are as well, Michael. Q1 of this year is comparing against a pre-pandemic Q1 of '20 so we do still foresee some overall organic retraction in Q1. But really, that low to mid-single digits is sort of where we expect to be with through Q2, three and 4, particularly loaded toward the back half, but we -- that's sort of an annualized number that we would see in that low to mid-single digits.

[Michael Tupholme:]

And then just sticking with organic growth, you provided some detail around your expectations for your geographic regions. On that front, can you talk a little bit about the thinking behind muted organic growth in the U.S.? I know your guidance doesn't incorporate any U.S. infrastructure that may come, but seems as though expectations for overall general growth in the U.S. are fairly upbeat. So, wondering just what's driving the muted outlook there. And I know that isn't any different than you talked about last quarter, but just some thoughts there? And then secondly, any commentary on growth expectations by business operating unit as well?

[Gord Johnston:]

Sure. In the U.S., we were just sort of being consistent and cautious. We do believe that there will be a U.S. infrastructure stimulus package coming out. The industry thoughts were that President Biden would announce it in February, there was some speculation you might have done it yesterday, but I think we're working through some other -- he's working through some other things first, of course. So, we do see that stimulus program coming, but again, there's probably going to be, it could be a quarter or two lag from when it's announced to when our industry, in general, will begin to start generating some revenue from it. So, I think we're just being cautious there, but as we look at the various -- the various business operating units to your second question, buildings overall, as an example, the commercial market remains challenged, but we've really seen this pivot to healthcare coming in the Building segment. And we talked about the same cause project in Vancouver, but we are also awarded two additional projects with Trillium Health Partners there in the trona in the Mississauga Hospital, Queensway Health Center, the Footscray Hospital in Australia. So, we're seeing a lot of work in healthcare buildings, we're seeing a lot of pivot to e-commerce. As many of us, people are buying more and more things from e-commerce. So, we do see some good tailwind for building coming, particularly -- I think we'll see that revenue generation coming into the second half of the year as these projects get ramped up. In our energy and Resources business, we're seeing great opportunities in the Pivots renewables solar wind, Hydropower and so on, a lot of good, good opportunities there. And of course, because copper and iron ore prices are so high, those present really good tailwinds for our mining business. In our Environmental Services business, 2020 was a very solid year for that business. Revenue was roughly flat from 2019, but we're seeing really solid backlog in that group and great opportunities to come to see that happening as well. Just finishing off the walk around the business operating units. In infrastructure, our transportation market is very, very strong. And of course, we see that grouping a net beneficiary of various stimulus programs that will be announced around the globe, but we've got a really solid backlog into 2021 already for that group. And of course, our community development group is part of infrastructure as well. We see the housing market strengthen in both Canada and the U.S. and it was interesting talking with the leader of one of our land development clients recently described the market in the Southern U.S. is almost frothy because it was so busy. And then finally, looking at water, we had really solid organic growth in the water segment in 2020 even despite the pandemic. Backlog is really strong. I mentioned a couple of those irrigation projects in Canada. Long-term map projects in the U.K., the long-term frameworks awards in Australia and New Zealand. And certainly, some of the opportunities in Southern California. So, great opportunities in water. There's element, when we look at some of the emerging technologies in water like PFAs, another advanced tech treatment. We're already leading the charge on a lot of those things. So, we see opportunities in water scarcity and reuse and coastal resilience and response to sea level rise. So, in general, as we kind of look across the business, we see positive long-term prospects in virtually all of our opportunities and just going to be a slower ramp-up in some growth rather than others. So, that's where we feel pretty comfortable with our -- over the year, low to mid-single-digit organic growth.

[Michael Tupholme:]

Great. That's very good color. Can I just sneak in one additional question? Maybe this is for Theresa. Just on the real-estate occupancy cost savings opportunity, can you talk about where those savings will actually show up on the income statement? I'm just wondering if this is all through in the admin and marketing. And if that is the case, a bit surprised that there is no adjustment to the admin and marketing expenses as a percentage of revenue guidance, which is still in the 37% to 39% range?

[Theresa Jang:]

Yes. Well, thank you for asking that question because it's actually a bit it's a really important one that we should have highlighted. The unfortunate part of IFRS 16 is that this is really going to show up below the EBITDA line. Now that all of your leasing activities get reflected in depreciation and interest for line item. So, there's going to be a minimal impact on EBITDA on a post-IFRS 16 basis, but it does drop to the bottom line. It is still positive to cash flow, ultimately, but unfortunately, does not really move the needle on EBITDA.

[Michael Tupholme:]

Got it. Thank you.

[Gord Johnston:]

Okay. Thanks, Michael.

[Operator:]

Alright. We'll take our next question from Sabahat Khan with RBC Capital Markets.

[Sabahat Khan:]

Thanks and good morning. Just kind of building off of the last question around the savings and the 3-year target. I guess, how should we think about the drivers of the EBITDA margin improvement, I guess, just real state funds, it sounds like it's a relatively large contributor, but what else is driving, I guess, EBITDA margin improvement, if this is sort of below the line as you think over the next two years?

[Theresa Jang:]

Sure. So, as we mentioned in our 2021 outlook, some of that is going to be driven, we expect, by continued discipline around our discretionary spending. We had expected it to start to ramp up a little sooner in 2021, but as we pointed to the ongoing travel restrictions means that we will likely be able to push that out a little bit further into the year, if not beyond that. We've also said, though, that we don't intend to go back to the level of spending that we were incurring pre-pandemic. We've got all these fantastic collaboration tools. So, we know that the need for travel can be addressed through virtual meetings in a large degree. So, the direction we've given to people is that when things do open up, we expect cost savings to continue, but certainly not to the level that we've enjoyed in 2020. Beyond that, we continue to look at our ability to leverage our pruning India operations, which is delivers just excellent delivery for us on both the design side and in our back office. And so we are driving commitments throughout our business for how we can increase our footprint there. We're still currently in that 400-people range. And so there is a lot of opportunity for us to scale that up. And so that is really effective. Beyond cost from just an efficiency standpoint of having that 24-hour clock to be able to use with the times of differences. And beyond that, it's continued focus on discipline, leveraging our Oracle back-end systems that we continue to integrate all of our operations that, again, drive efficiency. And those are really the main things that we'll be focused on.

[Sabahat Khan:]

Okay. So, I guess some of the stuff that on the discretionary side, that's going up, is some of that may be offsetting the real-estate savings, if I look at the net revenue CAGR greater than 10% and net earnings CAGR or EPS CAGR of about 11% or more. I guess, has there been some puts and takes with the real-estate savings maybe being offset by some of the discretionary spend that you were mentioning that might come back?

[Theresa Jang:]

Yes, I think so. I think that's a reasonable assumption.

[Sabahat Khan:]

Okay, great. And then I guess, just looking at the three-year target for one you've got actually a few years ago, we did mention our organic growth CAGR in there as well. I know you're mentioning the 2021 organic growth will be there. I guess, how are you thinking about 2022 and beyond? Is it just maybe the lack of visibility that's keeping you from putting those targets? How are you thinking about organic growth over that 3-year period?

[Theresa Jang:]

We've always talked about our net revenue CAGR of greater than 10% sort of as the number. We haven't really split out organic growth. We typically provide our target for organic growth for the current year for 2021. So, we haven't really looked at providing organic growth numbers for 2022 and 2023. There's a little bit of my crystal ball isn't completely clear, as I'm not sure anyone visible what's going to happen during the latter part of the year when the opportunities will come, but what we've seen even through the pandemic as any indication, we're just going to keep focusing on our clients focusing on the various organic growth programs we have and hope just to continue with growth in that area in the years to come.

[Sabahat Khan:]

Okay, great. And then just kind of one last one on that will be more on Canada, I guess. I guess based on what you've seen coming out of Q4 with including commodity environment, the is also kind of directional view on some of the end-markets specifically in Canada. I know that I'm picking up trucks he has the commodity including much in Canada or are people so taking it a bit of a cautious behind COVID, and having a bit more visibility into the CAGR.

[Gord Johnston:]

Yes, you know what, great question. So, directionally on some of the things, we did talk about in our Buildings segment and some of the healthcare projects that we've got in St. Pauls to a trillion there in Toronto. So, we're seeing those healthcare projects continuing to move forward on the Buildings side, e-commerce as well, solid opportunities in transportation as well. And we talked about our work on the $28.5 billion Shape Public Transit Initiative in Toronto, which will provide good long-term opportunities. And as well water, we just talked about those two water irrigation projects that we recently were awarded here in Western Canada. Those are significant projects that are in part funded by some of the recent last fall, the government of Canada, the in some of the infrastructure stimulus programs that they've talked about. So, we see got opportunities in water as well. Environment looks good for us. And really, from an energy and resources perspective, our -- the work that we do in the oil and gas segment, as we've talked about before, is really midstream pipeline work. And those projects that we've been working on are continuing. So, we just see -- well, we don't see significant growth in those areas. It's just long term, longer duration contracts. So, again stability for this year and following.

[Sabahat Khan:]

Okay, great. Thanks for the color.

[Gord Johnston:]

Okay thanks, Sabahat.

[Operator:]

We'll take our next question from Mark Neville with Scotiabank.

[Mark Neville:]

Good morning.

[Gord Johnston:]

Good morning, Mark.

[Mark Neville:]

Maybe just maybe just a first question. Just on the real estate, over the three-year period, will there be any significant cash loss associated with this consolidation?

[Theresa Jang:]

Sure. Just not any significant cash loss?

[Mark Neville:]

Yes. Well the any cash loss associated with this?

[Theresa Jang:]

No. We're not anticipating that, no. If anything, it will bite our cash flow through this. So, we're not expecting outflow for restating our space and in terms of capital expenditures or lease roles, is that maybe what you're asking about?

[Mark Neville:]

Yes. It sort of onetime cost to sort of maybe turn the stuff like that?

[Theresa Jang:]

No, that's not a part of our plan.

[Mark Neville:]

Okay. And maybe just a question again on the three-year plan, would the expectation be that your free cash flow is sort of grow along with your earnings or do you think there's still an opportunity on some of DSOs where you might be free cash flow grow at a rate above?

[Theresa Jang:]

I think there's always an opportunity. I think we've shown over the last couple of years that we can move the dial on that pretty dramatically. How much more there is -- we're always going to try to improve on that. So, certainly, there is a continued focus on it. So, I'd say, yes, there is an opportunity. I'm not sure that it will be as dramatic as we've seen in the last couple of years.

[Mark Neville:]

Okay. Thanks for taking my questions.

[Operator:]

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

[Yuri Lynk:]

Good morning. I just wanted to ask another question on the real-estate footprint. I mean it doesn't strike here is a bit early to make a move like this. I mean, I know you said you surveyed your employees. They've done that at our firm as well. And at first, I was all forward. And now I flip-flopping back and forth, I'd love to get back to the office. So, just wondering if it seems to me to be a little early, people can change their minds. And then beyond that, I mean, how do you control talent evaluation, margin utilization, fostering collaboration, which I think is important in the industry. Maybe just a little bit more detail on the steps you've taken?

[Gord Johnston:]

Yes. No, great question. So, what we've done there is, in addition to talking to our staff about what they're looking for. We're not looking to have everyone working remotely. As an example, the way that we're looking to roll out our footprint is roughly 50% of the people would be still full-time in the office. Roughly 30 percent-ish would have that ability to be part-time in the office and part-time at home, but those individuals won't have a dedicated workspace. We'll have we'll be looking at reducing footprint because some of that will be like selling or temporary use office space. And then the remainder would be folks that could work at home full time. Those would be people who don't have the need to collaborate as much with others. So, we do think it's reasonable. It's also going to move over the three-year period as we talk to what as that 50% of our office space comes available over three years. We don't anticipate that there'll be any need to adjust our program, but should we get some huge kickback or the industry changes significantly one way or the other, we still have the opportunity to respond, but I don't think that, that will be the case actually.

[Yuri Lynk:]

And the planning to do it now, is it because you feel confident that that's what the employees want or is it also that into Mark's question about urging leases and stuff like that because you just line up with lease expiry that's also cost-effective from that standpoint?

[Gord Johnston:]

Yes. It's the timing.

[Yuri Lynk:]

I'm just trying to get a sense of why do this now, why not later in another couple of quarters?

[Gord Johnston:]

Right. Well, the important reason for looking at it now is that we've actually been planning this real-estate program actually, even from the latter part of 2019. We've been thinking about this, we've been talking to staff, we've been -- and so really, the pandemic just advanced some of those programs, allowed us to try out people working from home, is that really what they want and the way to work through those things. So, I think that's important. The other thing that is part of the reduction in the square -- beyond that 30% square footage reduction is that we're also looking to reduce our average square footage per person. Those overall space and planning standards because we see our average square foot per person is lower in Europe as an example, that it was America. And so as we acquire firms and we bring them on, some of these firms have larger, less efficient square footage consumption of office space per employee. So, we're looking to sort of get everyone back to more of a standard on that. So, that's part of the square footage reduction is that part. Part of it is the flexible work with a ranger part. But really, it's the fact that we announced it now is just part of our long-term planning that we've been working on for likely 18 months now.

[Yuri Lynk:]

Okay. Solid quarter, and I'm happy to see your outlook.

[Gord Johnston:]

Great. Thanks, Yuri.

[Operator:]

Our next question comes from Maxim Sytchev with National Bank Financial.

[Maxim Sytchev:]

Good morning.

[Gord Johnston:]

Good morning.

[Maxim Sytchev:]

I was wondering if -- I'm not sure if FEMA is already involved in the Texas situation. Curious to see whether you can leverage grid kind of analytics capabilities to help out in that geography and maybe how the business might evolve over time?

[Gord Johnston:]

Yes. That's a great perspective. And the work that that are newly acquired that we had previously within Stantec, but certainly bolstered through the acquisition of Teshmont really supports that sort of grid strengthening type work that will require that they will need to be done in Texas. The fact that Texas grid wasn't winterized and ready for a storm like that has been known for a decade or more. I guess what will be interesting now is whether the regulator and of course, the citizens of Texas will actually require some of that work to be done, but we've known this work as needed to be done since I believe there was a nice storm in 2011. And the results of that were very similar and really no work was done at that point. So, we got all the skills. We've got great relationships. And so should the funding come available to actually make some adjustments this time, we're ready and willing to tell, but we've had some discussions already there, but I'm not sure that it has got anything meaningful from a contract perspective at this point.

[Maxim Sytchev:]

Okay, that's helpful. And Gordon, maybe just a big question of, obviously, as the fleets are being electrified, and I'm talking about the passenger cars and some buses and things like that. Is there a greater opportunity for you guys to benefit from that given sort of all your green credentials?

[Gord Johnston:]

I do think so, Max, you're right. As more and more people have electric cars and they all break them home in the evening to plug them in, the grid in the majority of our communities can't support it. And so there will be a lot of grid strengthening work required certainly, our so our the work that we do there from a grid perspective will be required. We also have, through our innovation office, one of our first innovative business opportunities as it relates to connected and autonomous vehicles. So, we're coming at it from a number of perspectives

[Maxim Sytchev:]

And then maybe just a couple of clarification points, if I may. Gord, I think you talked about housing, obviously being very robust right now. I mean historically, your rent development practice was obviously pretty prevalent in that. I mean, are we seeing a pickup in this vertical and to which extent and how big is it right now?

[Gord Johnston:]

Okay, that's helpful. And then maybe just a couple of clarification points, if I may. Gord, I think you talked about housing, obviously being very robust right now. I mean historically, your rent development practice was obviously pretty prevalent in that. I mean, are we seeing a pickup in this vertical and to which extent and how big is it right now?

[Maxim Sytchev:]

And then maybe just a couple of clarification points, if I may. Gord, I think you talked about housing, obviously being very robust right now. I mean historically, your rent development practice was obviously pretty prevalent in that. I mean, are we seeing a pickup in this vertical and to which extent and how big is it right now?

[Gord Johnston:]

Yes, in that development practice with our community development, it currently is in the 8% range of our overall revenue. And it's been plus or minus a little bit in that area. And while I see it strengthening a little bit over the next little bit and I thought I don’t see it being dominant in our overall leveraging mix as it was say back in 2008, 2009, before the U.S. financial crisis. But I see it being in the 8% 9% range, maybe up to 10% but it nearly was up to 35% back in 2008, we'll see nothing like that again.

[Maxim Sytchev:]

Right. But I guess my point is that I mean this is should be pretty good what by now?

[Gord Johnston:]

Yes, absolutely. And even with like you know were haven't here today had slowed, but we've really seen some great strengthening in the markets in Edmonton and Calgary, certainly GTA, but really in the southern states is where we're seeing a significant pickup in opportunities.

[Maxim Sytchev:]

And last one, the same question in terms of mining. Obviously, the commodity is up going to stick right now. Do you mind maybe reminding us your level of exposure and how that could be below in, let's call it, the next 12 to 18 months as producers are shopping like pencils on Greenfield and brownfield projects?

[Gord Johnston:]

Yes. So, our mining practice, currently it's just a little bit less than 5% of the overall revenue generation of the company, but we have early on in the pandemic. We saw mining dropped off as Peru and some of the places in South America closed the mines due to COVID, but certainly, we've seen those working around how we can get staff into the mines to continue to work copper prices, of course, was all-time high is high on oil price is very, very strong gold as well. So, we are seeing a pickup in our mining work in South America, Western Australia and other locations as well. So, I do see positive tailwinds for mining and then the foreseeable future. Also, we're active in some other things like lithium. We've been doing some work on some lithium mines in example. As we get more and more toward battery storage, battery technology, we can see additional opportunities coming in that area as well.

[Maxim Sytchev:]

Okay. That's really helpful. Thanks so much.

[Gord Johnston:]

Thanks, Max.

[Operator:]

We'll take our next question from Benoit Poirier with Dejardins Capital Markets.

[Benoit Poirier:]

Yes. Good morning, everyone. Congratulations for the quarter. Just to come back on the real-estate question, with respect to the optimization plan. You provide great color about the potential impact in the years to come. But when looking at your average square feet per person, is it kind of is it an opportunity to get closer to your peers or it's really leading the pack and lowering the average square feet per person and try to really make North America more comparable to Europe?

[Gord Johnston:]

Yes. We're it's a little bit of both, actually. That certainly, the European average square footage per person is lower than we would see in North America. In our industry, not just for us, but where our competitive set and overall. So, we're doing what we believe is the right thing as we've talked with our clients, we talk about our space planning group, where we can get to. So, we're I don't think that we're looking to lead the charge and set the lowest possible square footage per employee, that's really not our objective. We want to make sure that we're doing the right thing, balancing cost optimization with ensuring that our employees feel positive about their work environment that they want to come to the office, they want to collaborate. So, I think it's a bit of a balancing act, Benoit, as we look to optimizing that real-estate footprint.

[Benoit Poirier:]

And looking at the backlog, was there anything in particular that drove the sequential decline, I mean, you grow organically on a year-over-year basis. Is it purely a matter of FX era war?

[Theresa Jang:]

There are really a couple of things in looking at our backlog that transitioned from the third to the fourth quarter. So, part of it was just foreign exchange in terms of the strength of the U.S. versus Canadian dollar. And we do typically see that our scope to burn that goes down from the third to the fourth quarter, the fourth quarter being a little bit of a slower season for us. Those are the two large contributors. And we did note in our MD&A as well that we have now changed our contractual relationship on Trans Mountain, which was going to be a slightly bigger chunks of revenue within our backlog, but that relationship has changed such that now we've removed some of that out of our backlog. So, that was really sort of the quarter-over-quarter change.

[Benoit Poirier:]

And looking at the DSOs, obviously, very strong performance over the last year. How should we be thinking with respect to 2021, whether we should be more cautious in terms of DSOs? How should we be thinking on that front?

[Theresa Jang:]

Yes. I think we're feeling very positive about where we're at. Recognize we left our target at 90 days, and we probably could and should have tightened that up a little bit, but truly, we feel like we're in a really good space around the sort of 75-day mark. We're not anticipating a large move upward in DSO. We just wanted to make sure that we've got room for inevitabilities around things that are out of our control that may cause DSO to move in either direction.

[Benoit Poirier:]

Okay. Thank you very much for the time.

[Operator:]

And that does conclude the question-and-answer session. I'd like to turn the call back over to Gord Johnston for any additional or closing remarks.

[Gord Johnston:]

Great. Well, thank you again for joining us on the call today. We look forward to speaking with you in the near future about our continued progress. So, thanks again. Have a great day and stay healthy. Thanks, everyone.

[Theresa Jang:]

Thank you.

[Operator:]

And that does conclude today’s presentation. Thank you for your participation. You may now disconnect.