Earnings Call
Stantec Inc (STN)
Earnings Call Transcript - STN Q4 2020
Operator, 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. With that, I am pleased to turn the call over to Mr. Gord Johnston. Please go ahead, sir.
Gord Johnston, CEO
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 sustainably 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 pausing 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%. These strategic acquisitions have added almost 600 employees to the Stantec family in the last four months. Our balance sheet and M&A pipeline remains strong, and we remain well positioned to grow through acquisition in 2021. We also achieved a key milestone in the fourth quarter by establishing and defining our 2023 real estate strategy, informed by our sustainability targets and our desire to be an employer of choice. Our objective is to design the workplace of the future. This includes offering flexible work arrangements, leveraging our top-tier in-house workplace design talent and embracing new tools to facilitate distributed work. Our strategy is informed by both the survey of our employees' preferred work arrangements and a detailed review of our entire office lease portfolio. Our 2023 real estate strategy has two major components: The first component is the lease space no longer required by the business, and we expect this to drive an increase in EPS of approximately $0.10 per share in 2021; the second component of our strategy is to implement our flexible workplace model as leases naturally expire over the next three years. Approximately half of our office space portfolio expires over this three-year period. And with this further reduction in our occupancy footprint, we expect to increase EPS by an additional $0.25 to $0.30 by the end of 2023. From this quarter's footage perspective, this translates to an approximate 30% reduction in our existing real estate footprint by 2023. So, you can see why we're so excited about this initiative. It supports our objective to design the workplace of the future. It provides our employees with the opportunity for a more flexible work arrangement that helps achieve our sustainability objective and it delivers real value to shareholders, adding EPS of $0.35 to $0.40 over the next three years. Our real estate strategy will play an important role in lowering office-based emissions in support of our commitment to achieve carbon neutrality for 2022 and net-zero for 2030. The efficiency of our operations, our profitability and our sustainability are all integral to our long-term strategy. We consistently come on top in sustainability ratings across multiple independent third parties. In addition to our Corporate Knights ranking, Stantec is rated as a climate leader with an E minus score by CDP, and we are the only firm in our space that has achieved that rating for the last three years. This illustrates that sustainability isn't something new for Stantec; it's been a part of our DNA for decades. Our IFS ESC quality score continues to outperform our peers year after year and our Sustainalytics rates our ESG score as low, which is again top of class. Now turning to the performance of the business. Revenue held up quite well in the United States for both the quarter and the year. We saw modest growth in our water business through expansion efforts into our Pacific and U.S. markets in particular; growing urban populations and climate change are resulting in significant issues, especially regarding water scarcity. As an example, we estimate a spend of $15 billion to $20 billion over the next 15 years in Southern California alone to address this water scarcity. In October, we announced that we're leading a Pure Water San Diego program, a multibillion-dollar initiative to supply locally sustainable water to San Diego's 1.4 million residents. Additionally, Stantec serves as the prime consultant for the treatment-related works on the Metropolitan Water District of Southern California's regional recycled water program, and we have also been selected as a key sub-consultant on the State of Los Angeles' Hyperion 2035 program. Stantec is the only consultant with a leading role in these three ongoing flagship projects. Growth in our energy and resources business was driven by a continued ramp-up of renewable power projects, and we see significant opportunities for Stantec in the energy and resources and environmental services businesses going forward, with the U.S. officially rejoining the Paris Climate Accord. Partly offsetting this growth was the continued wind down of several major transportation projects. In addition, our buildings business is still being impacted by the pandemic, but we're beginning to see growing momentum in the pivot toward e-commerce, healthcare and other sectors, including the U.S. federal government. Our business development pipeline was very active during the fourth quarter. In addition to the Pure Water contract I just touched on, we also announced that we're the prime consultant as part of a P3 team for six public schools in Maryland, for the design and rehab of nine key bridge projects. Additionally, earlier this week, we announced our lead designer role for a heavy repair and overhaul facility design-build project for the Washington Metropolitan Transit Authority. Revenue generation in Canada was solid due to our strong focus on our clients and account management programs. We saw organic growth in our water and environmental services businesses during the fourth quarter, partly offsetting a contraction in energy and resources, building, and infrastructure. We've witnessed a growing focus on water infrastructure, particularly around irrigation and improved water management, and our teams have recently been awarded two large irrigation projects in Western Canada. We signed three major hospital contracts in the quarter, including our role on the St. Paul's Hospital project in Vancouver, demonstrating our growing momentum around the pivot to healthcare currently taking place in our Canadian Buildings Group. We also announced our participation in the 360 Transitive Alliance joint venture during the quarter, which will oversee an estimated $28.5 billion in capital investment for Toronto's transit infrastructure. Organic growth in our U.K. water business was driven by the ramp-up of the AMP7 framework through 2020. We've increased our market share of these five-plus year frameworks, winning most of the key water utilities in the U.K., including Thames Water, which is the largest U.K. utility and serves roughly 15 million customers. The asset frameworks we secured total approximately $120 million a year across the U.K. business, securing our backlog in 2025 and beyond. Australia and New Zealand have also begun to adopt this service delivery model. In 2020, we won key programs with utilities like Sydney Water, Melbourne Water and Brisbane Water in Australia, and with Christchurch, Wellington and Watercare in New Zealand, securing our backlog in 2023 and beyond and totaling roughly $70 million a year. Transportation stimulus funding in the U.K. and New Zealand are fueling the infrastructure business in these regions, and our recent acquisitions have strengthened our ability to participate in these key projects. Additionally, growth in our global power, dams and mining businesses also helped offset pandemic-related weaknesses in our global environmental services and buildings businesses. During the quarter, we signed several projects funded by European development agencies, including a contract for the conceptual design of the multipurpose port on Kuramae Island and on West Africa's regional transportation governance project, and we have also been awarded the summer sit-down improvement project in Queensland, Australia. With this award, we are currently working on virtually every major dam improvement project in Australia. Overall, our business performed very well in 2020, and we entered 2021 with growing optimism thanks to the strength of our client relationships, solid backlog and the positive trends impacting many of our business operating units. And with that, I'll turn the call over to Theresa for a review of our financial performance and our outlook.
Theresa Jang, CFO
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. Our solid adjusted EBITDA margin of 16.1% was bolstered by approximately 50 basis points as a result of the recovery of claim costs on historical projects. But even excluding this nonrecurring item, adjusted EBITDA is very solid, reflecting our success in mitigating COVID-19's impact on organic net revenue growth and gross margins. Also in Q4, strong cash flow generation led to lower-than-expected interest expense. Earnings were further augmented by the favorable resolution of certain tax matters recorded in the quarter. As Gord mentioned earlier, we've initiated our 2023 real-estate strategy. As a result, we recorded a noncash impairment charge of $66.7 million. Turning to full-year 2020 results: Adjusted net income from continuing operations increased 11% to $249 million in 2020 or 6.8% as a percentage of net revenue. Adjusted earnings per share increased 10% to $2.22 per share. Earnings for the year exceeded our expectations on the strength of our fourth quarter performance and the nonrecurring items previously discussed, which collectively contributed approximately $0.10 to our EPS. As a result of reduced discretionary spending, adjusted EBITDA increased year-over-year to $579 million. The adjusted EBITDA margin increased to 15.7% in 2020, compared with 15.5% in 2019. The claim cost recovery recorded in Q4 contributed approximately 10 basis points to our 2020 adjusted EBITDA margin. Our balance sheet remains in great shape as a result of strong cash flow generation and cash management. We closed out the year with net debt to adjusted EBITDA below our targeted range at 0.7 times. Day's sales outstanding was 75 days at the end of the year, a four-day year-over-year reduction. It's worth noting that over the last two years, we reduced DSO by 13 days. While there will always be factors outside our control that can move DSO in either direction, much of the improvement over the past two years is the result of our increased focus on timely billings and collections, as well as proactive management on contract payment terms. Moving on to liquidity and capital allocation, we generated $191 million in free cash flow in the fourth quarter. Annual free cash flow improved 60% year-over-year to $440 million. During the year, we returned $148 million to shareholders, $68 million through the payment of our dividend and $80 million through share buybacks. On October 8, we strengthened our capital structure through our inaugural bond offering, issuing $300 million of seven-year notes. We continue to focus on disciplined capital allocation, balancing the return of capital to shareholders with opportunities to deploy capital toward acquisition activity. Yesterday, we announced that our Board has increased our dividend by 6.5%, reflecting our ongoing confidence in our long-term profitability. Our performance in 2020, along with the progress of our strategic initiatives, has increased our earnings expectations for 2021 from the guidance we established in November 2020. The main driver is the cost savings derived from reduced occupancy costs, which, as Gord mentioned, will add approximately $0.10 per share to 2021 EPS. This will completely offset the outlook of the $0.10 we generated from the nonrecurring claim costs and tax recoveries in 2020, and we expect to grow 2021 earnings further, driving to an overall year-over-year increase on a percentage basis in the low to mid-single digits. We're also increasing our 2021 adjusted EBITDA margin target by 50 basis points to 16%. This is driven by our continued strong operating performance and our expectations that discretionary spending will stay lower for longer, given current travel restrictions. However, given the ongoing uncertainties associated with the pandemic, we left the low end of the range at 14.5%. We're now expecting adjusted net income to be greater than 6.5% of net revenue, a 50 basis point increase in our target, and we've also raised our adjusted return on invested capital target by 50 basis points to be greater than 9.5%. With that, I'll turn it back to Gord for his concluding remarks.
Gord Johnston, CEO
Thanks, Theresa. Through 2020, we made excellent progress on the strategic plan we launched in December 2019 despite the challenges posed by the pandemic. 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 outlined in 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 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 rankings. 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 comes from Jacob Bout with CIBC. Please go ahead.
Jacob Bout, Analyst
Good morning. I had a question about the planned lease office footprint reduction by 30%. Have you polled 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, CEO
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 have changed a bit throughout. Early in the pandemic looking back in March and April, as we talked to people about 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 was that we didn't think that would be an accurate reflection of the long-term perspective. As we've talked to folks throughout the industry as well, we found that what people are looking for is a little bit more flexibility where they could 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. That's how we're redesigning our office footprint. We have a workplace design group in our Buildings group within Stantec, and we're working closely with that group on what we might do within our company as well as advising other clients. It's important to have those people not working from home exclusively because we have a very collaborative design presence. As we look at our longer-term footprint with a certain percentage still being full-time in the office, another percentage being part-time in the office with some flexibility to work at home occasionally, but there will be a small subset that we will allow to work at home full time. Based on that design, we are looking at a roughly 30% reduction in our occupancy footprint.
Jacob Bout, Analyst
Okay. And you said there's a $0.10 impact for 2021 and $0.35 to $0.40 over the next three years?
Theresa Jang, CFO
Yes. The $0.10 is part of the $0.35 to $0.40 that we expect over the next three years.
Jacob Bout, Analyst
Okay. My second question here is just on the longer-term targets you have. I think you said your net revenue CAGR greater than 10%. Clearly, M&A is playing a key role here. Can you talk a bit about how your pipeline is looking and how valuations are looking, assuming that in this market multiples are getting a little stretched?
Gord Johnston, CEO
Yes. The M&A pipeline is very robust. You can see, of course, we've mentioned we closed three and 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, it slowed a little bit as we talked about before through last March, April, and a little bit into June, but really it strengthened and we've reinvigorated all the discussions that we had ongoing previously, and there have been a lot of new conversations that we've initiated just over the last couple of quarters. So, the pipeline is very strong across all the geographies where we're active. Initially, in the pandemic, we had hoped to see some reduction in multiples, but we really haven't seen that. In the firms that we're talking to, we've seen multiples stay reasonably consistent. You've seen some of the larger public transactions that have been announced recently that had higher multiples, but we haven't seen a significant increase in the firms that we're talking with.
Jacob Bout, Analyst
Sorry. What are those multiples? And is the focus still on small and mid-size?
Gord Johnston, CEO
Yes. A lot of the firms that we're talking to, we're seeing the multiples still in that six to nine times range. Our main focus is still on 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. That said, our balance sheet is very strong. Our organization has matured in various footprints outside of North America where we're resident. We are, as larger opportunities come along, we certainly look at them, but I wouldn't call it a change in our strategy. Our strategy is still focused on firms with 1,000 people or less, but we now have a bit more flexibility to look at some of these larger ones if they're appropriate for our long-term role.
Jacob Bout, Analyst
Thank you. I'll leave it there.
Gord Johnston, CEO
Okay. Thanks, Jacob.
Operator, Operator
We'll take our next question from Chris Murray with ATB Capital Markets.
Chris Murray, Analyst
Thanks. Going back to the real estate part of the equation. Just to confirm, you're talking about $0.25 to $0.35 a couple of years out. That's correct?
Theresa Jang, CFO
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, Analyst
Okay. So, I'm just trying to understand the cadence of it. And then thinking about that, there's the earnings piece of it, but there's also 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, CFO
Yes. I mean, absolutely, it will lift our return on invested capital because the ability to redeploy capital toward other things that otherwise would have been invested in servicing these leases is part of the opportunity. So, as Gord described, there are these two prongs to the strategy: One is we've looked at space that we have determined we don't need any longer. And that's where we've recorded an impairment charge. All of those leases have been bundled and modeled, and we took about a $67 million impairment charge in the fourth quarter. Now as we go forward: one, we won't have to incur those costs through our P&L; and two, the opportunity to sublease that space will provide income to offset. The second element is that roughly 50% of our existing lease space is naturally going to expire over the next three years. This gives us a great opportunity to change and reduce our footprint going forward. So, those are the two key components and the way that the math works.
Chris Murray, Analyst
Gord, just the other question I have for you is 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 bit 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 this unfolds over the next few years to hit that kind of number?
Gord Johnston, CEO
Yes. I would think so, Chris, that we're going to continue with 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, Analyst
Okay. That's all my questions. I'll pass on the line. Thanks very much.
Gord Johnston, CEO
Thanks, Chris.
Operator, Operator
We'll take our next question from Frederic Bastien with Raymond James.
Frederic Bastien, Analyst
Good morning. Quick question for you. Are you comfortable with the relative weighting of your five operating units right now? I believe infrastructure is close to 30%. You've got environmental services and energy about 15%. Is this a situation where you're comfortable being at equilibrium or are there opportunities to grow some of these business units further or at a more aggressive pace on a go-forward basis?
Gord Johnston, CEO
Yes. I do think that, in particular, our water business, which is currently about 21%, will see continued opportunities for growth there, both from an organic perspective. For the year, our water business grew organically by just a little over 4%. It will continue to grow organically, but I see continued opportunities for us to invest in the water space from an M&A perspective. So, I see that area, in particular. Our environmental services, we're continually looking for ways to grow that as well. So, over time, I'd like to see the water business and the environmental business grow a little more. We're putting a particular focus on those areas right now.
Frederic Bastien, Analyst
Okay, great. That's helpful. In terms of high-level priorities for this year, would you mind maybe flagging or highlighting your top three priorities?
Gord Johnston, CEO
Sure. After spending a couple of challenging years improving our back office and organizing the structure of the company, 2021 is the year we're concentrating on growth. We're focusing on our organic growth initiatives, which have been very successful in recent years, and we will keep prioritizing them. We will also continue to pursue mergers and acquisitions, as our balance sheet is strong and we are ready for that. Additionally, we want to emphasize our innovation programs that we formally launched at the beginning of last year. We believe this will set us apart as we introduce new services and technologies to the market. Growth and innovation will absolutely remain our key focus for 2021.
Frederic Bastien, Analyst
Okay, thanks, Gord. Good to hear that.
Gord Johnston, CEO
Okay. Thanks, Frederic.
Operator, Operator
Our next question comes from Mona Nazir with Laurentian Bank. Please go ahead.
Mona Nazir, Analyst
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 helped shield or insulate the business? I mean, you had mentioned in your opening remarks, three new hospital contracts awarded. I just wonder 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, CEO
Yes. I think the real focus for us was on our organic growth programs. We've really been focusing hard the last couple of years, particularly through 2020, so that not only did our backlog grow organically by over 3% through the year, but I think that also was a big driver as to why our organic retraction was 1.8% for the year. To your point about pivoting, I think that's exactly right and nowhere do we see that as evidence in our buildings business, where the commercial work we were doing—restaurant fit-ups, new retail, a lot of those projects pushed off to the right, but we 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 Master Services Agreements with those firms. So, I think it's really the focus on organic growth through some solid programs, our account management program, a corporate campaigns program and strategic growth initiatives program. We'll continue to drive this through 2021.
Mona Nazir, Analyst
Okay. That's helpful. And when I'm just going through the MD&A, the headcount is stated in there at 22,000. 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, CEO
Yes. 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 spike by 3% to 4%. Now they've sort of come down to more normal types of seasonally adjusted levels. 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 we wanted to make sure we have the right team to drive us forward into the future as well.
Mona Nazir, Analyst
Okay. So, would it be fair to say 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, CEO
Yes. I think that's a fair statement, Mona.
Mona Nazir, Analyst
Okay, perfect. And just lastly for me, going back to the M&A, it's 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 that be outside of the targeted pace?
Gord Johnston, CEO
I think our balance sheet would support that, but it depends on the opportunities. We have to find the right firms and geographies that are motivated to sell. We certainly could drive that forward if the opportunities were there. But we're not trying to hit a particular quota. We want to be disciplined in our M&A strategies regarding what we're paying, so we can achieve long-term accretion to our share price. If the right firms come along, you're right; we have the balance sheet room to do it.
Mona Nazir, Analyst
Okay, perfect, but that is the upside of the realm of possibilities. Thank you. I'll leave it there.
Gord Johnston, CEO
Thanks, Mona. Thank you.
Operator, Operator
Our next question comes from Michael Tupholme with TD Securities.
Michael Tupholme, Analyst
Thanks, good morning.
Gord Johnston, CEO
Good morning, Michael.
Michael Tupholme, Analyst
My first question relates to your organic revenue growth guidance. 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 positive?
Gord Johnston, CEO
Yes. That's exactly where our thoughts are, Michael. Q1 of this year is comparing against a pre-pandemic Q1 of 2020, so we do foresee some overall organic retraction in Q1. However, we expect to see that low to mid-single digits throughout Q2, three, and four, particularly loaded toward the back half.
Michael Tupholme, Analyst
And then just sticking with organic growth, you provided some detail around your expectations for your geographic regions. Can you talk a little 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 it 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. I know that isn't any different than you talked about last quarter, but just some thoughts there? Any commentary on growth expectations by business operating unit as well?
Gord Johnston, CEO
Sure. In the U.S., we were 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, and there was speculation you might have done it yesterday, but I think he's working through some other things first, of course. We see that stimulus program coming, but there's probably going to be a quarter or two lag from when it's announced to when our industry will begin generating revenue from it. We're being cautious there. As for the various business operating units, the buildings overall, for example, the commercial market remains challenged, but we are seeing a pivot to healthcare coming in the Building segment. We talked about the same cause project in Vancouver, and we were awarded two additional projects with Trillium Health Partners in Mississauga in addition to the Footscray Hospital in Australia. We're seeing a lot of work in healthcare buildings, and we see good tailwinds for buildings coming, particularly, I think we'll see that revenue generation in the second half of the year as these projects ramp up. In our energy and resources business, we're seeing great opportunities in the renewables space—solar, wind, hydropower and so on, a lot of good opportunities there. Because copper and iron ore prices are so high, those present strong tailwinds for our mining business. In our environmental services business, 2020 was a solid year; revenue was roughly flat from 2019, but we're seeing strong backlog and great opportunities. Lastly, in infrastructure, the transportation market is very strong, and we see that group as a net beneficiary of various stimulus programs to be announced globally. We're witnessing robust backlog heading into 2021 for that group. Our community development group is part of infrastructure as well; we see the housing market strengthen in both Canada and the U.S. Recently, it was described as almost frothy in the Southern U.S. We also see solid opportunities in water; our backlog is strong, with several irrigation projects in Canada. Long-term framework projects in the U.K. and frameworks in Australia and New Zealand are promising. Overall, we see positive long-term prospects in virtually all of our opportunities, but there will be a slower ramp-up in some growth than others. We feel comfortable with our forecast of low to mid-single-digit organic growth over the year.
Michael Tupholme, Analyst
Great. That's very good color. Can I just sneak in one additional question? 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 admin and marketing. If that's the case, I'm 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, CFO
Yes. Thank you for asking that question because it's very important. The unfortunate part of IFRS 16 is that this will show up below the EBITDA line. All of your leasing activities get reflected in depreciation and interest line items. Therefore, there will be a minimal impact on EBITDA on a post-IFRS 16 basis, but it does contribute positively to cash flow. Unfortunately, it doesn't really move the needle on EBITDA.
Michael Tupholme, Analyst
Got it. Thank you.
Gord Johnston, CEO
Okay. Thanks, Michael.
Operator, Operator
We'll take our next question from Sabahat Khan with RBC Capital Markets.
Sabahat Khan, Analyst
Thanks, and good morning. Just building off of the last question around the savings and the 3-year target. How should we think about the drivers of the EBITDA margin improvement? It sounds like real estate funds are a relatively large contributor, but what else is driving EBITDA margin improvement if this is below the line as you think over the next two years?
Theresa Jang, CFO
Sure. As we mentioned in our 2021 outlook, some of that is driven by continued discipline around discretionary spending. We expected it to ramp up sooner in 2021, but the ongoing travel restrictions means we can certainly push that out further into the year, if not beyond. We also mentioned that we don't intend to revert to the level of spending that we were incurring pre-pandemic. We have excellent collaboration tools, so we know the need for travel can be addressed through virtual meetings. We expect cost savings to continue but not to the level enjoyed in 2020. Beyond that, we aim to leverage our Pune, India operations, which deliver great value on both the design side and our back office. There's also efficiency in our Oracle back-end systems as we integrate operations, which drives overall efficiency. Those are the main focuses for us.
Sabahat Khan, Analyst
Okay. So, I guess some of the stuff on the discretionary side 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, has there been some puts and takes with the real estate savings maybe being offset by some of the discretionary spending you mentioned that might come back?
Theresa Jang, CFO
Yes, I think so. I think that's a reasonable assumption.
Sabahat Khan, Analyst
Okay, great. And then looking at the three-year target, you mentioned 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 the lack of visibility that's keeping you from putting those targets? How are you thinking about organic growth over that three-year period?
Theresa Jang, CFO
We've always talked about our net revenue CAGR of greater than 10% 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. We haven't really looked at providing organic growth numbers for 2022 and 2023. There's a little bit of crystal ball haziness because I'm not sure anyone has visibility into the latter part of the year and where the opportunities will come. We’ll continue focusing on clients and our organic growth programs and hope to maintain growth in that area.
Sabahat Khan, Analyst
Okay, great. And then just kind of one last one on that will be more on Canada. Based on what you've seen coming out of Q4, including commodity environment, is there also a directional view on some of the end markets specifically in Canada? I know that commodity exposure has been prevalent in Canada, are people still taking a bit of a cautious approach behind COVID? How do you see visibility into CAGR?
Gord Johnston, CEO
Yes, you know what? Great question. Directionally, we discussed our Buildings segment and some of the healthcare projects we have in St. Paul's as well as Trillium and Queensway Health Center in Mississauga. We're seeing these healthcare projects moving forward. E-commerce also provides significant opportunities, and the transportation marketplace is very strong. We discussed our role in the $28.5 billion Shape Public Transit Initiative in Toronto, which will provide sound long-term opportunities, along with water irrigation projects recently awarded here in Western Canada. The environment looks positive for us. The work we do in oil and gas is mainly focused on midstream pipelines, and those projects are ongoing. We don't foresee significant growth in those areas, but we do experience stability with longer-duration contracts.
Sabahat Khan, Analyst
Okay, great. Thanks for the color.
Gord Johnston, CEO
Okay, thanks, Sabahat.
Operator, Operator
We'll take our next question from Mark Neville with Scotiabank.
Mark Neville, Analyst
Good morning.
Gord Johnston, CEO
Good morning, Mark.
Mark Neville, Analyst
Just on the real estate, over the three-year period, will there be any significant cash loss associated with this consolidation?
Theresa Jang, CFO
No, we're not anticipating that. If anything, it should positively impact our cash flow.
Mark Neville, Analyst
Okay. And just a question again on the three-year plan, would the expectation be that your free cash flow is sort of growing along with your earnings, or do you think there's still an opportunity on some of DSOs where you might be free cash flow growing at a rate above?
Theresa Jang, CFO
There's always an opportunity. We've shown over the last couple of years that we can move the needle on that. I'm not sure that it will be as dramatic as we've seen in the past couple of years.
Mark Neville, Analyst
Thanks for taking my questions.
Operator, Operator
We'll take our next question from Yuri Lynk with Canaccord Genuity.
Yuri Lynk, Analyst
Good morning. I just wanted to ask another question on the real estate footprint. I mean, it seems a bit early to make a move like this. I know you said you surveyed your employees. They've done that at our firm as well. At first, I was all for it; now I flip-flop back and forth. I'd love to get back to the office. Just wondering if it seems to be a little early. People can change their minds, right? Beyond that, how do you control talent evaluation, margin utilization, and fostering collaboration, which is important in the industry? Maybe just a little more detail on the steps you've taken?
Gord Johnston, CEO
Yes. That's a great question. What we've done is, in addition to talking to our staff about their desires, we aren't looking to have everyone working remotely. The way we're rolling out our footprint is roughly 50% of people will still be full-time in the office. Another percentage will have the ability to be part-time in the office and part-time at home, but those individuals won't have a dedicated workspace. We'll be looking to reduce our footprint with temporary use office space. The rest will be folks who can work at home full time. We do think it's reasonable to implement now because we've been working on this since late 2019. We've been in conversations with staff, and the pandemic has allowed us to gauge staff working from home versus in the office. We can adapt to any major changes in the industry; however, I don't think that will be necessary.
Yuri Lynk, Analyst
Is the timing also influenced by aligning with lease expiries in a cost-effective manner?
Gord Johnston, CEO
Yes, that is part of it. The timing is aligned with our long-term planning completed over the past 18 months. The pandemic advanced some of these programs, and we trialed staff working from home to determine if this is what they want. Additionally, we're also looking to reduce our average square footage per person, as we see that our average square footage per person is higher in North America than Europe. We plan to optimize that space.
Yuri Lynk, Analyst
Okay. Solid quarter, and I'm happy to see your outlook.
Gord Johnston, CEO
Great. Thanks, Yuri.
Operator, Operator
Our next question comes from Maxim Sytchev with National Bank Financial.
Maxim Sytchev, Analyst
Good morning.
Gord Johnston, CEO
Good morning.
Maxim Sytchev, Analyst
I was wondering if FEMA is already involved in the Texas situation. Curious to see whether you can leverage grid analytics capabilities to help out in that geography and maybe how the business might evolve over time?
Gord Johnston, CEO
Yes. That's an interesting perspective. The work that we had previously within Stantec has been strengthened through the acquisition of Teshmont, which supports that kind of grid improvement project. The fact that the Texas grid wasn't winterized for a storm like that has been known for some time. It'll be interesting to see if regulators require adjustments this time, but we have the skills and good relationships ready to act if any funding becomes available, despite discussions already happening without meaningful contracts at this point.
Maxim Sytchev, Analyst
Okay, that's helpful. And Gord, regarding the fleet electrification, is there a greater opportunity for you guys to benefit from this given your green credentials?
Gord Johnston, CEO
Yes, you're right. As more electric cars plug in at home for charging, the existing grid cannot support it. So, there's a lot of necessary grid improvement work that will arise. Our innovation office has also identified connected and autonomous vehicles as part of our first innovative business opportunities. We're tackling this from multiple angles: designing and planning for infrastructure, including charging stations and grid strengthening needs. There are additional opportunities from a design, program management, and technology perspective.
Maxim Sytchev, Analyst
And a couple of clarification points if I may. Regarding housing, your land development practice has been historically prevalent. Are we seeing a pickup in this vertical, and to what extent?
Gord Johnston, CEO
Yes. Our development practice comprises about 8% of our total revenue and has fluctuated around that area. While I see a slight strengthening in this area over time, it won't return to the levels seen circa 2008, and we're not likely to go above 10%. However, we are witnessing solid opportunities now.
Maxim Sytchev, Analyst
Right. Just to clarify, should this be a pretty good vertical growth by now?
Gord Johnston, CEO
Absolutely. Despite some areas having slowed, we’re seeing good strengthening in Edmonton, Calgary, and especially the GTA, with significant opportunities arising in the Southern states.
Maxim Sytchev, Analyst
And lastly, regarding mining, do you mind reminding us of your level of exposure and how that could grow in the next 12 to 18 months, especially with commodity prices being strong?
Gord Johnston, CEO
Yes. Our mining practice currently comprises just under 5% of our overall revenue. We did see a significant slow of work early in the pandemic as Peru and other locations closed mines due to COVID. However, we're witnessing resurgence as operators find ways to manage staff safely. With copper and iron ore prices at all-time highs, we expect a pickup in mining work in South America, Western Australia, and other locations. Long-term, we're also active in exploring opportunities in lithium for battery technology.
Maxim Sytchev, Analyst
Okay, that's helpful. Thanks so much.
Gord Johnston, CEO
Thanks, Max.
Operator, Operator
We'll take our next question from Benoit Poirier with Dejardins Capital Markets.
Benoit Poirier, Analyst
Yes. Good morning, everyone. Congratulations on the quarter. Just to come back on the real estate question, regarding the optimization plan, you provided great color about the potential impact in the years to come. When looking at your average square feet per person, is there an opportunity to get closer to your peers, or is it really leading the pack and lowering the average square feet per person to try to make North America more comparable to Europe?
Gord Johnston, CEO
It's a bit of both, actually. The average square footage per employee is lower in Europe compared to North America. We're not trying to lead the charge for the lowest possible square footage, however. Our objective is to balance cost optimization while ensuring employees feel positive about their work environment, so it's a balancing act as we optimize our real estate footprint.
Benoit Poirier, Analyst
Looking at the backlog, was there anything in particular that drove the sequential decline? I mean, you grew organically year-over-year. Is it purely a matter of FX?
Theresa Jang, CFO
There were a couple of things that contributed to the decline in backlog transitioning from the third to fourth quarter. Foreign exchange impacted the strength of the U.S. versus Canadian dollar. Typically, our scope burn goes down from Q3 to Q4, as Q4 tends to be a slower season. Additionally, we did note in our MD&A that we've changed our contractual relationship on Trans Mountain, which affected backlog.
Benoit Poirier, Analyst
Looking at the DSOs, you exhibited great performance over the last year. How should we think about this for 2021? Should we be cautious with DSOs?
Theresa Jang, CFO
We're feeling positive about our DSO performance. We left our target at 90 days, and we probably could have tightened that up a bit, but we feel good around the 75-day mark. We're not anticipating a large move upwards in DSO; we simply wanted to account for factors outside our control.
Benoit Poirier, Analyst
Thank you very much for the time.
Operator, Operator
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, CEO
Great. 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. Thank you, everyone.
Theresa Jang, CFO
Thank you.
Operator, Operator
And that does conclude today’s presentation. Thank you for your participation. You may now disconnect.