Earnings Call Transcript - STN Q4 2022

Operator, Operator

Welcome to Stantec's Fourth Quarter and Year End 2022 Earnings Results Webcast and 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. Today's call is also webcast. Please be advised that, if you have dialed in while also viewing the webcast you should mute your computer as there is a delay between the call and the webcast. All information provided during this conference call is subject to the forward-looking statement qualification set out on Slide 2, detailed in Stantec's management's discussion and analysis and incorporated in full for the purposes of today's call. Unless otherwise noted, 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.

Gord Johnston, CEO

Good morning, and thank you for joining us today. We're very pleased to report record Q4 and full year 2022 adjusted earnings per share of $0.82 and $3.13, respectively. Our results reflect a solid execution of our multiyear strategy, and clearly demonstrate the resilience, growth, and demand that we're seeing for our business. The outperformance of our guidance for the year was attributable to a very solid fourth quarter, where we achieved double-digit organic net revenue growth above our expectations. For the full year, we generated an all-time high of $4.5 billion in net revenue. All of our regions and business units delivered organic net revenue growth in the high single to low double-digit range, demonstrating the strength of our diversified business model. This also shows how well positioned we are to address the trends of increasing investments towards aging infrastructure, re-shoring of domestic production, and climate change. Particularly notable, Environmental Services net revenue grew by almost 50%, primarily through acquisition, but also from nearly 10% organic growth. And importantly, the top line increase of 23% was exceeded by bottom line growth of 29%. Looking at our results by region. Both public and private investment continued to drive high activity levels in the U.S. In 2022, we grew U.S. net revenue by 26% overall, with over 9% organic and 13% acquisition growth. Our work on large-scale water security projects in the Western U.S. helped drive double-digit organic growth in Water. In Buildings, we continue to see activity levels rebound, with investments flowing into healthcare, civic, industrial, and the science and technology sectors. Energy & Resources had strong organic growth, with acceleration of activities related to renewable energy and mining projects, as well as reservoir and dam projects, all related to the energy transition and energy security. We also delivered solid organic growth in Infrastructure from work on projects in transportation as well as in industrial and residential land development activities. Our results reflect how well aligned our U.S. business is with the major trends and government funding sources available. Canada continued to perform very well, with sustained year-over-year growth that exceeded our expectations. Net revenue was up almost 8% organically for the year. Similar to the U.S., both private and public spending was robust in Canada. We had solid performance in Environmental Services, with ongoing demand for permitting work in archaeological services, power transmission and distribution, and energy transition work continuing to spur growth in Energy & Resources. Our Buildings Group continued to drive growth with projects in healthcare and mixed-use commercial. And Infrastructure captured opportunities in community development in Western Canada, bridge work across Canada, and in recovery efforts associated with the flooding in British Columbia in late 2021. In Global, we generated over 35% net revenue growth, 11% organically and 28% from acquisitions. Our industry-leading Water business continues to be a significant pillar for us, capturing long-term framework agreements in the U.K., Australia, and New Zealand. We saw strong demand for our services and community development in mining, driven by strong pricing for metals, and in environmental services for fieldwork. We are exceptionally pleased with each of our regions and business units, which are all benefiting from the themes that we've been discussing. Beyond our excellent financial results, I'd like to express how proud I am of our achievements and commitment to sustainability and enhancing our communities. We were recently provided with great recognition from Corporate Knights as we were ranked in their Global 100 most sustainable corporations in the world. Out of nearly 7,000 corporations that Corporate Knights reviewed, we were ranked first among our peers and #7 overall. We've now been included in the Corporate Knights Global 100 for four consecutive years. I'll turn the call over now to Theresa to review our financial results in more detail.

Theresa Jang, CFO

Thank you, Gord. Good morning, everyone. Starting with our Q4 results, we had an exceptionally strong finish to the year, which drove our full year results to outperform our expectations. We grew gross revenue by 28% to $1.5 billion and net revenue by 23% to $1.1 billion. Organic net revenue growth was 10.6% for the quarter, with strong growth achieved in each of our regions and business units. Canada and the U.S. were particularly strong, as we benefited from a longer field season in Canada due to milder and typical weather and building momentum in the U.S. where several business units achieved over 20% organic growth for the quarter. Project margin was very solid at 54.9% and adjusted EBITDA reached 17%, a 150 basis point increase over Q4 2021. This drove fourth quarter EPS to $0.66 compared with $0.15 in the prior year and adjusted diluted EPS of $0.82 compared with $0.57 last year, an increase of 44%. For the full year 2022, we generated gross revenue of $5.7 billion and net revenue of $4.5 billion, an increase of 24% and 23%, respectively. Project margin was a solid 54.2%, a 20 basis point increase. And adjusted EBITDA increased by 26% to $724 million. We achieved our highest-ever adjusted EBITDA margin of 16.2%, and this is at the high end of the range we set for 2022. We also advanced our 2023 real estate strategy. In 2022, we achieved approximately $0.34 per share of cost savings relative to our 2019 real estate costs, largely accomplishing our 2023 target of $0.35 to $0.40 a year early. We estimate that on a pre-IFRS 16 basis, these savings would have increased adjusted EBITDA margin by more than 110 basis points. In terms of square footage, we have thus far reduced our footprint by 28%, also largely in line with our target of 30% from a 2019 baseline. As a result of our strong performance, our full year diluted EPS reached $2.22, and our adjusted diluted EPS was $3.13. Both of these are also record highs with respect to increases of 23% and 29%. Operating cash flow for the year came in at $304 million and levered free cash flow was $76 million. DSO at the end of December was 81 days, a five-day reduction from the third quarter. As we expected, with the completion of Cardno financial migrations, cash flows began to normalize in the fourth quarter of 2022, which was moderated by stronger than anticipated revenue growth in the fourth quarter, driving additional net working capital investments. This also brought our net debt to adjusted EBITDA down to 1.6x, which is in the middle of our target range. We closed the year with adjusted ROIC of 10.5%, driven by stronger than anticipated Q4 earnings and reflecting a 20 basis points increase over 2021. With that, let me turn the call back to Gord for our 2023 outlook.

Gord Johnston, CEO

Thanks, Theresa. At the end of 2022, we had $5.9 billion in backlog, an increase of 15% year-over-year, 10% organically, and which represents approximately 12 months of work. Our backlog does not yet include any meaningful contribution from U.S. stimulus spending, but we expect this to provide further tailwinds in 2023 and beyond. On the strength of our backlog and as momentum builds for investments spurred by government stimulus around the world, we feel very confident that 2023 will be another strong year for Stantec. Even with the high comps from 2022, we expect to deliver strong organic net revenue growth in the range of mid- to high-single digits. Looking now to the U.S. with over 50% of our revenues generated in the U.S., we expect this region to continue as a key driver for 2023. After delivering almost 10% organic growth in 2022, we expect another solid year, with organic growth to be in the high single to low double-digits. Funding from the IIJA is expected to be slower in the first half of the year and to accelerate in the second half, bolstering our Infrastructure business unit. Buildings continues to see great opportunities in both healthcare and adaptive reuse. In Water, increasingly frequent and extreme climatic events are driving investments in resilient infrastructure to protect against flooding, hurricanes, and storm surges. Investments spurred by the IRA are expected to accelerate renewable and other energy transition projects, like the Qcells project that we announced last week. At $2.5 billion, this is the largest solar panel manufacturing investment in U.S. history, and passage of the IRA was a major driver in helping this project move forward. The Qcells project is also a prime example of the growing trend towards re-shoring production and de-risking supply chains, bringing production closer to demand. Another great example of streamlining supply chains is our recent announcement of being selected as the prime consultant on the multibillion-dollar World Logistics Center project in California. Stantec is ideally positioned to provide multidisciplinary expertise to these major projects, and we're confident in the opportunities that they'll bring. After a very strong year in Canada, we expect continued high levels of activity in 2023. Organic net revenue growth is expected to moderate relative to 2022, to the low single-digits. Specifically, we see our Water business continuing to grow with several major projects ramping up. We expect continued strong demand to support the energy transition and the need for increased community development. And we expect high levels of activity in our Environmental Services and Buildings Group to remain stable over the year. Our Global business has meaningfully grown in recent years, both organically and through acquisitions. And we see ongoing strong demand in 2023 and anticipate organic growth to be in the mid to high single-digits. In the U.K., Australia, and New Zealand, our Buildings business is expected to have strong organic growth due to the need for healthcare, science and technology, and commercial mixed-use development. Growth will also be driven by high levels of activity in our water business where regulatory drivers are a strong factor. We also expect to see increases in community development in the U.K. where we're one of the top three planning consultancies. With a long lead time for development and permitting in the U.K., this sector continues to push forward. Transportation activities will lead to growth in Australia as well as the raising of dams, mining, and overall energy transition initiatives. Overall, we expect to drive another solid year of net revenue growth. The 7% to 11% range shown here will come primarily from organic net revenue growth. It also includes some contribution from the acquisitions we completed in 2022, but no other acquisitions are factored into this outlook. In 2023, we're targeting an adjusted EBITDA margin between 16% and 17%, and our goal is to deliver adjusted EPS growth between 9% and 13% over 2022. Further gains may come from M&A as our M&A pipeline remains full, and we have the balance sheet strength to capitalize on opportunities that fit strategically for Stantec. With a favorable market backdrop and engaged workforce, a full M&A pipeline, and a healthy balance sheet, we're very optimistic for 2023 and the years ahead. And with that, I'll turn the call back to the operator for questions.

Operator, Operator

Operator Instructions. And today's first question will come from the line of Jacob Bout with CIBC.

Jacob Bout, Analyst

One to square 2023 guidance with your backlog in the fourth quarter. So specifically in the U.S., the U.S. backlog actually dipped quarter-on-quarter, but you're guiding to some pretty solid organic net revenue growth. So hearing your commentary, is this kind of a first half, second half type story? Maybe just a bit more detail on the flow of the IIJA, the $1 trillion plan projects. Do you expect that to ramp second half, I think, is what you said?

Gord Johnston, CEO

Yes, absolutely. We're beginning to see clients issuing proposal calls related to the IIJA funding. We have some of that work already in our backlog, and it's generating revenue for us. However, we're not worried about the U.S. backlog. While it did decrease slightly in Q4, we experienced 13.5% organic growth in the U.S. during that quarter, which is contributing to the reduction of the backlog. The same trend was observed globally, where our backlog also saw a slight drop in Q4, but again, we're not concerned. Q4 typically presents lower growth for our backlog. The strong organic growth we achieved in Q4 naturally led to a bit of a drawdown in our backlog. From our discussions with business leaders and reviewing our pipeline of opportunities, we remain confident about the backlog and are optimistic about our projections for 2023.

Jacob Bout, Analyst

My second question is about the reduction of the real estate footprint. You mentioned that you have achieved your 2023 targets. How much further do you think you can go with this? It seems you are currently around 28% and targeting 30%. Is 35% a possibility, or what are your thoughts on this right now?

Theresa Jang, CFO

Yes. We believe that achieving 30% is possible, based on the footprint we had in 2019. That continues to be our goal. As we advance our strategic plan, we are starting to assess what additional opportunities might be available, taking into account the acquisitions we've made in recent years as well as office occupancy and the current real estate landscape in different areas. I do believe that there is potential for more, but that will be part of our next strategy for optimization.

Operator, Operator

Benoit Poirier with Desjardins.

Benoit Poirier, Analyst

Just looking at your organic growth outlook by region. It remains pretty bullish across the board, and I would expect the U.S. Infrastructure, Building and Water program to bring momentum for the foreseeable future. But how should we be looking at your ability to raise margin beyond the 16%, 17% level that you assume in 2023?

Theresa Jang, CFO

I believe the 16% to 17% is still a suitable target for us. I've always maintained that there isn't a single factor that will enhance our margin; it's a combination of multiple elements being executed effectively. What we observed in the fourth quarter of last year was an increase in utilization, which consistently helps us boost our margin. Therefore, we are optimistic about reaching that range again in 2023. However, we must remain aware of potential challenges, such as the impact of inflation on our overall cost structure. It's crucial for us to stay vigilant and focused on managing our costs while maximizing our utilization. I think that range is appropriate for us.

Benoit Poirier, Analyst

And maybe could you talk about your ability to staff, given the strong demand that you're seeing right now?

Gord Johnston, CEO

Yes. As we entered the global pandemic, we aimed to remain a net importer of talent despite the uncertainties. I can now say that in both 2021 and 2022, we hired more employees than those who left voluntarily. We are actively increasing our headcount to manage our backlog, and you may have noticed a bit of this growth in Q4 due to high organic growth rates. Additionally, our innovation teams are focusing on utilizing digital products to boost revenue per employee. We also plan to expand our integrated delivery centers in Pune, India, and Manila, Philippines. We have several strategies in place to continue addressing our backlog.

Benoit Poirier, Analyst

And a very quick one, last one. Just in terms of backlog, given the big announcement that we've seen over the last couple of weeks with Qcells and the World Logistics center, would it be fair to expect or what kind of backlog could we expect in Q1 2023 just on the back of these announcements?

Gord Johnston, CEO

We do think that our backlog in Q1 will certainly increase over where we were in Q4 of 2022. But those aren't the only jobs that are coming in. We've acquired some additional jobs, new projects in Europe and in other regions as well. So we do expect that the overall backlog in Q1 will be up over Q4 last year.

Operator, Operator

And the next question will come from the line of Yuri Lynk with Canaccord.

Yuri Lynk, Analyst

Gord, I don't remember Stantec showing a sequential improvement in EBITDA margin in the fourth quarter compared to the third, unlike what happened at the end of last year. Was there a specific reason for this? You did come in at the high end of organic growth, but did better utilization play a role? Was there anything significant in the fourth quarter that would have contributed to the margin increase, considering it usually declines sequentially? Additionally, your guidance suggests that Q1 and Q4 will be more significant contributors than in the past. Does this indicate a change in your earnings profile?

Theresa Jang, CFO

Yes, Yuri, I can address that. The fourth quarter EBITDA was certainly unusual as it increased compared to the third quarter. Several factors contributed to this. Increased utilization played a significant role, and the extended field season we experienced in Canada and the northern U.S., where winter arrived later than usual, allowed us to maintain high utilization for an extended period. Throughout 2022, we anticipated an increase in U.S. utilization as projects kicked off and we engaged more of our workforce in those efforts, which contributed to what we observed. Additionally, we managed to keep our costs down by avoiding a substantial impact from share-based compensation, which has historically seen a revaluation increase that typically raises expenses in the fourth quarter. This year, that did not occur, among other factors driving these results. Another unique aspect in the fourth quarter was the trend in employee benefit costs, which year-over-year appeared quite similar. However, for reasons unknown, there was a higher uptake in the first three quarters and a lower one in the fourth quarter, affecting our quarter-over-quarter comparison. Looking ahead to the first quarter, while we expect it to be slightly higher than usual, it's still anticipated to be lower than the second and third quarters. This can partly be attributed to our expanding global presence where seasonality has less impact, coupled with continued activity levels in the U.S. supported by various lending sources. These factors have contributed to a slight change in the seasonal pattern we typically observe.

Yuri Lynk, Analyst

And my follow-up question, just to Gord. You talked about the bookings in the backlog. Obviously, you burned a lot in the quarter. I get that. But the absolute level of bookings was well below what we've seen in the last four quarters. So anything to call out there in terms of booking activity or maybe any more of a cautious stance on behalf of your clients?

Gord Johnston, CEO

Yes, not at all. Much of this is simply seasonal work. Things are a bit slower as we finalize arrangements this quarter. I believe we will see a rebound in Q1. We already have several significant project announcements across our regions. So, I have no concerns about this.

Operator, Operator

One moment for our next question. And that will come from the line of Devin Dodge with BMO Capital Markets.

Devin Dodge, Analyst

I want to come back to one of your earlier comments. You've made good progress on expanding the workforce in 2022. So do you expect a similar level of net additions in 2023 in order to meet that mid to high-single digit or growth in your guidance? And can you touch on maybe the general labor environment in terms of availability and the level of wage inflation that you're seeing?

Gord Johnston, CEO

We are actively hiring and have noticed that voluntary turnover rates are stabilizing, which means we're not losing as many employees. We are maintaining turnover rates that are 2% to 4% lower than many of our competitors, which is a positive sign. We're fortunate in the number of new hires we're able to onboard, successfully attracting talent at both entry and senior levels. The strength of our brand and recent major project awards have helped us bring in senior professionals from competitor companies. We're optimistic about our hiring efforts, and in addition, we are seeing benefits from our innovation program and our integrated delivery centers in Pune and Manila. Would you like to discuss wage inflation?

Theresa Jang, CFO

Yes. So what we had established for our overall salary increases this year was in the sort of 4% to 5% range. So certainly higher than we have seen in past years. But that's what we incorporated into our salaries and rate effective Jan 1.

Devin Dodge, Analyst

And then maybe another question just for Theresa here. On working capital, we saw good progress on DSO in Q4, but still a fairly meaningful working capital usage in 2022. Just wondering how we should be thinking about working capital as we look out to 2023.

Theresa Jang, CFO

Sure, we did see DSO decrease as we anticipated. When you examine our working capital shift from Q3 to Q4, it shows a significant improvement as it moved within accounts receivable, and then cash inflowed. This movement is quite encouraging and indicates that we are on the right path. We're still aiming for a DSO of 80 days or less, which we believe is a suitable target. I expect to see our working capital continue to normalize as we progress through 2023.

Devin Dodge, Analyst

Okay. So should we expect working capital to be a source of funds in 2023?

Theresa Jang, CFO

Well, it should generate cash based on our expectations. The only reason I have some reservations is that it will depend on the growth rate. As we expand, we will need to invest more in working capital. So, all things considered, it should be a source of cash. However, if we continue to grow quickly, it may balance out due to the ongoing investment required in net working capital as revenue increases.

Operator, Operator

One moment for our next question. And that will come from the line of Michael Tupholme with TD Securities.

Michael Tupholme, Analyst

I guess first question is just regarding the organic net revenue growth outlook. So calling for fairly solid organic growth in 2023 in the mid to high-single digit range. Can you talk about some of the puts and takes that would lead you to the higher end of that range versus the lower end of that range? And then can you also touch on how you see organic growth in 2023 looking across your various business units?

Gord Johnston, CEO

Sure. We discussed various regions, noting that U.S. organic growth is projected to be in the high single to low double digits, despite a strong comparison from last year. We see opportunities, such as those related to Qcells with IRA support, and we're having ongoing discussions about similar prospects. The CHIPS and Science Act is also facilitating semiconductor opportunities, and we are engaging in conversations regarding several of those. Moreover, the significant driver is the IIJA, which supports overall infrastructure. As we assess next year’s organic growth, we have good conditions, but it will depend on how quickly similar spending commences, how fast clients can submit proposals, and how promptly we can start generating revenue. We are in communication with several clients as they start preparing. In Canada, there are promising prospects despite a high comparison, but we don't perceive the same level of general support; thus, we expect steady growth, guiding to low single digits globally. However, we anticipate mid- to high-single digits growth off a strong 2022. We also see potential in the Water sector in the U.K., Australia, and New Zealand. Specifically, in the U.K., we are starting to observe re-competitions for AMP8, where we feel well-positioned. Overall, we are optimistic about 2023 and our guidance.

Michael Tupholme, Analyst

Are you still optimistic about the outlook for the broader environmental energy transition work as you have been in the past?

Gord Johnston, CEO

Absolutely. A lot of the energy transition work, again, will be supported by IRA. But even absent that, in other regions around the world, we're seeing a lot of interest in solar and wind, pump storage and so on. So yes, we're very, very positive on both what that means for our environmental business, but also our larger design-focused business as well.

Michael Tupholme, Analyst

And then you mentioned just briefly at the end of your prepared remarks that you do have a full M&A pipeline. I know you typically get asked about this in one way or another every quarter. But is it possible to expand on that a little bit, perhaps talk in a little bit more detail about what the pipeline looks like, where you're most focused right now as far as acquisition opportunities? How active you think you might be this year and what you're seeing in terms of valuations?

Gord Johnston, CEO

We see significant opportunities for mergers and acquisitions in all our regions: Canada, the U.S., and globally. We are consistently engaging with firms of various sizes and across different business lines. The pace can be somewhat uneven, and we need to align our valuation with the availability of firms. We are actively in discussions with companies around the world and are optimistic that we will be able to complete some transactions in 2023.

Michael Tupholme, Analyst

Sorry, and just one follow-up on that, Gord. Again, I know it's hard to predict what opportunities will look like. But are you more focused on the smaller and medium-sized opportunities? Or should we expect that there's a possibility of something on the larger side as we saw with Cardno, for example?

Gord Johnston, CEO

Yes. There are some very solid opportunities, both in that small to medium size that we're always engaged with, but also from a larger perspective. And I think that what we've seen through Cardno is that we feel we're very comfortable taking on a firm of that size or larger, and successfully integrating into Stantec. So we're absolutely looking at those firms as well.

Operator, Operator

One moment for our next question. And that will come from the line of Frederic Bastien with Raymond James.

Frederic Bastien, Analyst

My questions focus on your most important asset, which operates every night. I understand that attracting and retaining talent is always a top priority for Stantec. Can you discuss how this situation may have changed over the past year? Is labor availability improving? Are you experiencing any relief from the cost pressures you faced about a year ago?

Gord Johnston, CEO

Yes. So a couple of things there. Certainly, you're right. Our primary asset is our people. And we want to ensure that all of our Stantec employees are engaged. They feel connected to the Company and our long-term growth plans, and we feel really good about that. But from a labor availability perspective, we are seeing greater opportunities there. Certainly, as we continue to grow our digital product offerings, we're seeing with some of the reductions in some of the tech companies, there are additional very, very strong resources that are available in that space. But overall, I mentioned that earlier that, both from a junior employee perspective, but also at very seasoned people who often will bring teams with them, we're having great success in attracting those people.

Frederic Bastien, Analyst

In some ways, that's the best acquisition strategy, which is being able to recruit people at a minimal cost. I would say it's not nothing, but it's a different cost. Now, when discussing with potential targets, are you finding that their expectations are becoming more reasonable given the volatile environment we're experiencing?

Gord Johnston, CEO

Yes. It certainly is still a competitive environment for talent, but we are seeing people's expectations moderate a little bit. We're not seeing some of the people coming to us as often with 20%, 30%, 40% salary increases, because a request for that, because other firms aren't offering those anymore. I think we're seeing some moderation there.

Operator, Operator

One moment for our next question. And that will come from the line of Sabahat Khan with RBC Capital Markets.

Sabahat Khan, Analyst

Just, I guess, a question on kind of the puts and takes in terms of EBITDA for 2023. It looks like in Q4, gross margin was a little bit down, but more than made up by SG&A. Just wondering how we should think about 2023? Should we just look at the full year run rate for those two metrics as we think about '23? Or was there anything in Q4 that we should keep an eye on that might continue as it relates to kind of those two line items?

Theresa Jang, CFO

Yes. I'll start by saying that when we consider our ranges for project margin or gross margin, the right range for us is 53% to 55%. This can fluctuate somewhat based on our project mix. Currently, we are in a favorable position where we can be more selective, which is why you may have noticed an increase in margin year-over-year. Our goal remains to achieve project delivery and project margin within the 52% to 55% range. As for EBITDA, we previously stated that the appropriate target for us is in the 16% to 17% range. In Q4, there were a few atypical factors compared to Q4 of 2021. Specifically, in 2021, we faced increased share-based compensation and higher onerous lease costs, which impacted our admin and marketing expenses as a percentage of net revenue, making them higher in 2021 than in Q4 of 2022. However, if we look at the year-over-year comparison, the admin and marketing percentage remained quite consistent at around 39%, possibly a bit over that. Generally, we consider this to fall within the 37% to 39% range, excluding any unique expenses like onerous lease costs. This consistency will contribute to achieving our 16% to 17% EBITDA margin.

Sabahat Khan, Analyst

And then just, I guess, one on the regions. It sounds like the U.S., obviously, a lot of bigger picture tailwinds. Maybe if you could just provide a little bit of color on Canada. Maybe a bit more color by end market, which ones do you expect strengthen this year versus the ones that might be tougher comps? And maybe what are the either the regions or the bigger funding mechanisms that are driving demand in that market? Just a bit more color there?

Gord Johnston, CEO

Yes, we see significant opportunities in Canada. Our Environmental Services group had a strong performance in 2022, and we anticipate this will continue into 2023. There is a lot of work in environmental services, permitting, and archaeological efforts, which are all performing well. Our community development group is also strong. Recently, I met with leaders in the residential development market in Toronto. Over the past decade, we have typically brought around 70,000 residential properties to market each year in Ontario. However, due to the government's immigration commitments over the next decade, we will need up to 150,000 residential properties annually in Ontario alone. This indicates a robust long-term demand for affordable housing. Our Water group is also expected to be very active this year, with several significant projects announced in Ontario, Saskatchewan, and British Columbia. We feel confident about these developments. Additionally, there is a lot of healthcare construction happening. Overall, we have a positive outlook for Canada across various end markets. However, we do not expect growth rates to match the strong double-digit growth we see in the U.S. Canada will perform well, but we believe it won’t be as strong as the U.S. market.

Operator, Operator

One moment for our next question. It will come from the line of Maxim Sytchev with NBF.

Maxim Sytchev, Analyst

Most of the questions have been asked, but I just wanted to circle back to, obviously, the amount of people that you guys are hiring right now. I'm curious to hear if maybe you change some onboarding practices, just to make sure that people get up to speed as soon as possible? Just any comments there. That's it.

Gord Johnston, CEO

Yes, you're correct. From an onboarding perspective, we are constantly seeking ways to improve efficiency. There are essential actions we take to welcome new hires and integrate them into the Stantec team. The approach may vary depending on their career stage. In addition to successfully hiring at the junior and intermediate levels over the past few years, we are also bringing in more senior hires who can adapt more quickly. While they still need to learn our systems, they are generally ready to contribute right away. Conversely, junior employees typically require more time to adjust as they familiarize themselves with the workforce and our expectations. To enhance efficiency in our onboarding processes, we aim to onboard these new hires in larger groups.

Maxim Sytchev, Analyst

And so, maybe I'll squeeze in one more for Theresa. In terms of the kind of approach for share buybacks, is it fair enough that right now, sort of the focus is on organic investments and M&A?

Theresa Jang, CFO

Yes. I mean the philosophy really hasn't changed, Max. We will always look to share buybacks to the extent that it's opportunistic with the priority on M&A, as it has been historically. A couple of things as well with the share buyback tax that was going to be in effect in Canada, starting next year, is something longer term that will again kind of impact the overall valuation metrics when we look at share buybacks. At this point, we don't believe that the new rules in the U.S. will affect our share buyback in 2024. But again, philosophically, M&A is the first priority, share buybacks when the opportunity makes sense.

Operator, Operator

And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Gord Johnston for any closing remarks.

Gord Johnston, CEO

I want to express my gratitude to everyone for joining us today. If you have any follow-up questions, please feel free to contact Jeff Newkirk in our investor relations group. Have a great day, everyone, and thank you very much.

Theresa Jang, CFO

Thank you.

Operator, Operator

Thank you all for participating. This concludes today's program. You may now disconnect.