Stantec's (STN) CEO Robert Gomes on Q4 2016 Results - Earnings Call Transcript

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Stantec Inc. (NYSE:STN) Q4 2016 Results Earnings Conference Call February 23, 2017 4:00 PM ET

Executives

Robert Gomes - President and CEO

Daniel Lefaivre - EVP and CFO

Analysts

Anthony Zicha - Scotia Bank

Michael Tupholme - TD Securities

Maxim Sytchev - National Bank Financial

Jacob Bout - CIBC

Yuri Lynk - Canaccord Genuity

Sara O’Brien - RBC

Tahira Afzal - KeyBanc Capital Markets

Mona Nazir - Laurentian Bank

Benoit Poirier - Desjardins Capital Markets

Ben Cherniavsky - Raymond James

Operator

Welcome to Stantec, Inc.’s Fourth Quarter and Year End 2016 Earnings Results Conference Call. With us today from Stantec management are Bob Gomes, President and Chief Executive Officer; and Dan Lefaivre, Executive Vice President and Chief Financial Officer. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer period. [Operator Instructions] Please allow time for everyone to ask a question.

As a reminder, today is February 23, 2017, and this conference call will be recorded and broadcast live over the Internet. It will be archived for future reference at stantec.com, under the Investors section. Any members of the media who are joining us in listen-only mode and who would like to quote anyone other than Mr. Gomes or Mr. Lefaivre must ask permission from the individual concerned.

Stantec management would like to caution you that this call will include forward-looking statements and forward-looking information within the meaning of applicable U.S. and Canadian securities laws. By their very nature, forward-looking statements require Stantec management to make assumptions and are subject to inherent risks and uncertainties. Stantec management will also mention non-IFRS measures.

And now, your host, Bob Gomes. Please go ahead, sir.

Robert Gomes

Thank you. Good afternoon, everyone. Thank you for joining us for Stantec’s fourth and year end 2016 earnings conference call. We’re on slide three for those of you following the slideshow. Dan will provide a summary of our financial results for the quarter and the year.

Then I will share some highlights from our operations and offer some detail on our market outlook for 2017. Following that we will open the call for questions, and I like to remind you that we have posted a copy of our slideshow on our website. It will be archived in the Investors section.

Today, we released the results of Stantec’s operations for the fourth quarter and year end 2016. 2016 was an extraordinary year for Stantec, we close the year with 49.5% increase in gross revenue compared to 2015 and a 15.5% increase in adjusted EBITDA.

Our results reflect the hard work of our employees, a five strategic acquisitions completed during the year, common share offering, and the renegotiation of our long-term debt.

2016 was highlighted by our acquisition of MWH Global and the strategic acquisitions of four other companies, each adding strength in key regions and sectors. MWH in particular greatly expands our global reach and add strength in water infrastructure design, environmental services, and the water power and dams sector in recognition of MWH is well respected water infrastructure business and our own long history in the sector.

As of January 1, we broke out our water group from our infrastructure business operating unit and created a separate water business operating unit. This change brings increase visibility and leadership for our world-class expertise in the water industry and positioned us for future growth.

I’ll now hand things over to Dan for review of our financial results. Dan?

Daniel Lefaivre

Thanks, Bob. Good afternoon, everyone. First, our goal for all of our results and then I’ll provide some additional color. I begin with our Q4 results on slide seven, which are quite strong. Comparing Q4 2016 to Q4 2015, gross revenue increased 74.7% from $710 million to $1.2 billion. This is mainly due to the impact of acquisitions completed in 2015 and 2016, especially the MWH acquisition.

Gross margin increased from 54.1% to 54 5%. And this is mostly due to higher margins on a global and U.S. businesses. EBITDA increased 51.8% from $54.6 million to approximately $83 million. EBITDA was positively impacted by increases in gross revenue and gross margin.

These increases were partly offset by administrative and marketing expenses as a percentage of net revenue. This went up from 43.7% in Q4 2015 to 44.3% in Q4 2016. This is mainly from a $6 million increase in professional fees related to audit and tax planning and an increase in marketing and business development, labor.

Adjusted EBITDA increased 41.3% from $59 million to approximately $84 million. Net income increased 16.2% from $25 million to $29 million. Diluted earnings per share decreased slightly from $0.27 in Q4 2015 to $0.26 in Q4 2016.

In addition to the increase in admin and marketing expenses net income and diluted earnings per share were affected by a 12 million increase in amortization of intangible assets. This is mainly related to backlog, client relationships and finite live trademarks acquired from acquisitions completed in 2015 and 2016.

We also saw a $4.3 million increase in net interest expense, mainly due to the increase in our long-term debt acquired for the MWH acquisition. In addition, increase in the number of shares outstanding, compared to 2015 decreased our overall earnings per share. As part of financing MWH acquisition, last May we completed a public offering increasing our shares by just under 20 million. Adjusted diluted earnings per share increased 2.9% from $0.34 to $0.35.

Now, I’ll move on to our annual results on slide eight. As Bob mentioned when comparing 2015 to 2016, gross revenue increased 49.5% from 2.9 billion to 4.3 billion. This increase was mainly due to acquisitions completed in 2015 and 2016 and a 3.7% increase in organic revenue in our infrastructure business operating unit, which Bob will talk to a bit later.

EBITDA increased 9.8% from 306 million in 2015 to 336 million in 2016, and adjusted EBITDA increased 15.5% from 305 million to 352 million. As you can see on the slide, some – we saw some decreases in net income, diluted EPS and adjusted diluted EPS mostly related to acquisition-related cost in financing.

Our cash flow from operating activities increased from 205 million to over 285 million year-over-year. We can attribute this to an increase in cash receipts from clients due to acquisition growth and $16 million decrease in taxes paid.

Today we announced an increase in our dividend payable to shareholders to $0.0125 per share. This is an 11.1% increase from last quarter, and I think is our largest increase ever. It speaks to the confidence of Stantec management and the board we have in our company and our opportunities going for further.

At December 31, 2016 our net debt to EBITDA ratio was 2.38, which is well within our internal guideline of maintaining net debt to EBITDA at a ratio of between one and 2.5 times.

Now, I'd like to go through some of the factors that impacted our year-end results. We offer more details on page M22 of 2016 annual report. There certainly was a lot of noise in 2016, mostly due to the MWH acquisition considering the complexity of that acquisition, though we are pleased with our results.

Our admin and marketing expenses were higher in 2016, mainly due to increases in integration-related labor costs, MWH acquisition costs, additional professional fees incurred, retention and merit payments to retain key employees during integration and severance costs related to the decline in oil and gas and mining in our legacy business.

As you can see on slide nine. These noted increases in admin and marketing expenses impacted a number of our financial measures in the year. These totaled approximately 52 million and have an EPS impact of approximately $0.28.

We also had about $38 million increase in amortization of intangible assets. This is mainly related to backlog, client relationships finite lived trademarks and software acquisitions and additions in 15 and 16 translate into approximately a $0.20 impact on EPS.

Net interest expense increased by over 17 million mainly due to the increase in long-term debt related that to the MWH acquisition, which led to a corresponding approximate $0.10 impact on EPS.

Also our effective income tax rate increased from 26.1% to 27.8% in 2016, mostly due to MWH-related changes in earnings and jurisdictions where we operate an increase in non-deductible acquisition related cost another non-deductible expenses which had approximately a $0.03 impact on EPS.

Moving on to our targets for 2017. Recall that in Q2 2016, as a result of the MWH acquisition we went to our targets for the remainder of the year and we evaluated them as part of our annual budget process in 2017.

With MWH, now included and in consideration of our new capital structure, new mix of projects and expanded global operations, we developed revised targets for 2017. As you can see on slide 10, as a percentage of net revenue, we are targeting gross margin between 53% and 55%, admin and marketing expenses between 41% and 43%, EBITDA between 11% and 13% and net income at or above 5%.

In addition, we believe our capital expenditures, including software additions will be approximately $90 million in 2017. And we expect our amortization of intangible assets to be approximately 85 million.

Our capital software and intentional amortization targets exclude any further anticipated acquisitions in 2017. And while this isn’t our target, we expect our tax rate to be approximately 28% based on the enacted tax rates in the jurisdictions where we currently operate. All of our targets are based on the expectation of continued economic growth in the U.S., modest improvement in energy and resource sectors, continued North American support, public infrastructure spending, including water and wastewater facilities and continued support for and growth of APD project delivery methods.

And Bob I’ll hand it back to you for additional operational highlights and the snapshot of our 2017 outlook.

Robert Gomes

Thanks Dan. As you can tell from the links of Dan’s presentation, it was noisy, complicated financial year for us but one that we are pleased with our performance. I'll begin my section of the presentation by sharing some of our strategic acquisition highlights for the year.

I’m on slide 12 for those of you who are following the slideshow. Our well executed acquisition and integration strategy proved very successful in 2016. We have seen significant opportunities in key sectors and regions, thanks to the acquisitions we completed and integrated over the past couple of years.

Specifically in 2016, we completed the acquisition of Barry, MWH, VOA Arc Associates, Edwards & Zuck and Architecture Tkalcic Bengert. MWH specifically had a significant positive impact on our earnings.

Looking at our results, I’m very proud of the work our teams have done to bring MWH in Stantec together and are also continuing to deliver top-tier service to our clients. As we move forward in 2017 integration of MWH's people, systems and best practices will continue to be a focus.

We are nearing full integration for North American consulting services employees from MWH, which is about 1,500 people. We are on track for completing this phase of the integration in Q2, 2017. We anticipate the branding transition in North America to be complete in late 2017.

We have combined insurance, health plans and IT systems, which ensures a common platform for all staff and drives long-term synergies. By the end of 2017 we will have co-located half of MWH locations where we had overlap with Stantec locations. And we expect to continue to review some of our global operations for integration later this year.

Now let's take a look at Stantec's operational highlights by business operating unit. I'll begin with buildings on slide 14, gross revenue for buildings increased 7% in 2016 compared to 2015. This was due to acquisition growth in foreign exchange.

Organic revenue retraction for buildings was 2.6%, our Canada and global operations experienced retraction was partly offset by strong organic growth in our U.S. operations. The retraction appeared mainly due to the number of design build P3 projects that were in the bid phase and the decline of oil and gas sector, which impacted private and public spending in our Canadian and Middle East operations.

In Canada, despite an overall organic retraction, we maintain strong activity in the healthcare, commercial and education markets and we also experienced steady activity in the civic and industrial sectors. In the United States, we benefited from urbanization trends and increased opportunities in our commercial sector.

This is demonstrated by two key project wins during the year. The first is the redevelopment of Bruckman Village a 16-acre parcel land in Downtown Charlotte, North Carolina. The project involves designing, building and operating a walkable urban village.

During the third quarter, we were named prime consultant and design lead on the successful team for the new Mackenzie Vaughan hospital in Vaughan, Ontario. Our architecture, landscape, transportation teams are collaborating on this large Greenfield Hospital will be the first in Canada that include fully integrated smart technology.

Moving on to slide 15 in energy and resources gross revenue remain stable in 2016 compared to 2015. Revenue was positively impacted by our acquisition growth. Organic gross revenue retracted 31% in 2016 compared to 2015, primarily due to weakness in the oil and gas and mining sectors. As I said before, our exposure to be sectors has been reduced. In any further decline will have less impact on the overall results.

In 2014, our oil and gas engineering services represented approximately 15% of our company's overall annual gross revenue. In 2015 it represented approximately 8%, and now in 2016, it represented 4% we're not anticipating any further decline in 2017.

In our power sector, we continued securing projects as a result of infrastructure improvement, environmental compliance in the resiliency requirements in the transmission and distribution power replacement market.

For example, in the first quarter, we were awarded civil and electrical engineering design services for the transmission, infrastructure, electrical system studies and underground collector systems that will support Stonegate and Windsor solar farms in Ontario. Each farm will have a generating capacity of 50 megawatts.

Gross revenue for Environmental Services increased by over 12% in 2016 compared to 2015. This was positively impacted by acquisition growth and foreign exchange. Organic gross revenue retracted by approximately 9% in 2016 compared to 2015, but stabilized when comparing Q4 2016 to Q4 2015.

With Energy & Resources, our exposure has been reduced and any further decline will have less impact on our overall results. In 2014 oil and gas environmental services represented approximately 11% of our company's annual gross revenue and in 2016 it represented 5%.

Project highlights include developing environmental sustainability and compliance programs and providing preconstruction biological resource monitoring along a 21-mile section of a California high-speed rail authorities -- high-speed rail in Kern County, California.

And on slide 17, gross revenue for infrastructure increased by over 58% in 2016 compared 2015. This was mainly due to acquisition growth. Organic gross revenue grew by approximately 4% in 2016 compared to 2015. Strong organic growth in our transportation sector was partly offset by retraction in community development.

At the end of September, we are selected to provide town planning work for 486 hectares designated lands within the Susunia [ph], First Nations, West of Calgary, Alberta. This work includes roadway layout, public realm concept design, land use zoning creation, urban and architectural design guidelines and land lease plots.

Our water sector had stable organic revenue in 2016 compared to 2015, the Canadian market outpacing the U.S. market. We continue to see opportunities arising from aging infrastructure replacements and environmental regulatory requirements.

In Q4, joint venture composed of our MWH team in San Francisco was selected to provide as needed specialized and technical water contract services, including water supply, treatment and transmission services, as well as public health and environmental regulatory compliance services for the San Francisco Public Utilities Commission.

Construction Services earned 645 million in gross revenue 2016 since the MWH acquisition on May 6, 2016. Most revenue is generated in the United States and United Kingdom. We continue to see strong activity in the wastewater treatment construction and U.S. and in U.K. revenue was driven by construction for utilities in the second year of the asset management program cycle.

As we’ve said many times, the addition of MWH is added greatly to our business. For many reasons it was a great fit for Stantec. One of those reasons is our shared history in water infrastructure design. Water has been a part of Stantec since 1954 the year we began as a 1% firm.

In 1980s, we launched our diversification strategy by acquiring water firms cluster in Western Canadian base and now we have grown from there. The projects like the Panama Canal locks and the [Indiscernible] rays the largest roller compact to concrete dam rays in the world MHS reputation for water infrastructure design is well know across the globe.

We see water infrastructure as an important area for growth and we feel the creation of a business operating unit positions us to capitalize on opportunities. The water business operating unit will be organized into the sectors you see in slide 19.

Moving on to slide 20, our overall outlook is to achieve a long-term average annual compound growth rate of 15% for gross revenue, which we expect to accomplish in 2017 through a combination of acquisition and organic growth.

Since we were publicly traded in 1994, our compound annual growth rate is approximately 19%, for the last five years it is 21%. Organic revenue remains an important part of the business and we see positive momentum in many sectors and regions that will support our growth.

Certainly with our strong backlog and client relationships and our expanded global presence we anticipate opportunities across our services to new end markets. Going forward in 2017, we will not be providing specific guidance of organic growth for business operating unit or geography.

We will focus on our overall growth. Our target of top -- of 15% top and bottom line growth over the long-term, what we've achieved and what we are committed to continuing to achieve. In Canada, we expect to benefit from increased levels of federal infrastructure spending, which would positively impact our buildings, infrastructure, and water business operating units.

Canadian government is earmarked 180 billion in spending over the next 11 years. For the next five years, public transit, water and wastewater, and affordable housing will receive the greatest amount of investment.

Conversely, we do expect a slowdown in residential construction and continued weakness and mining, although, we do expect moderate and modest increases in capital spending in oil and gas supported by stronger oil prices.

In the United States the economy is continuing to expand. The job market is strong and interest rates are low. We see this as a positive impact for our buildings and infrastructure business operating units in the United States.

The outlook for water and waste water infrastructure spending is increasingly optimistic since the federal government approved the Wind Act last December. And we continue to see pending growth in transportation due to the Fast Act. We also anticipate being well-positioned to capitalize on increased spending for educational construction, environmental services and the power generation in sub-sector.

Terms of her global operations with the acquisition of MWH, we have a much larger global presence in the United Kingdom, New Zealand, Australia, Peru, Chile, Argentina, The Netherlands, Italy, India and the Middle East. In the U.K., most of our work is in the water market as part of the Asset Management Program 6.

A large portion of the work has already been bid on and secured and therefore we expect to be insulated on some of the market uncertainty surrounding Brexit.

We believe the economic outlook for New Zealand is positive with growth supported by stable housing market, a modest increase in consumer spending and solid export growth. In Australia, we anticipate continued adverse economic impacts resulting from low commodity prices and weaker demand from China.

However, the general economic outlook is positive with low interest rates, growth and housing, public centric sector spending and modest investment in non-mining business.

And in Latin America, we anticipate a modest recovery in 2017, following what was believed to have been bottoming out in 2016. Economic growth improve has been robust. Thanks to expanding copper production, increased public spending and accelerated household consumption. And we expect modest GDP growth in Chile due to a stronger global economy and higher commodity prices.

Some of the years I mentioned, 2016 was a history making one for a company, certainly one we look back on with pride. With all the activity we had in 2016, we expect to translate this into positive growth both in the top line and bottom line in 2017, and we are optimistic about our positioning and opportunities in 2017.

With our strong diverse and top tier presence in both Canada and the United States, we believe we are one of the best positioned firms in our space to take advantage of the increased focus on infrastructure spending.

Our position in the United States expands public and private clients across the most diverse number of sectors of any of our peers, which allows us to take advantage of increased spending.

As always our success is supported by our diversified business model are well executed acquisition strategy. Our faith for commitment to creativity, community and client relationships.

With that, we’ll move to the Q&A. Turn it back to the operator.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. [Operator Instructions] We’ll take your first question from Anthony Zicha from Scotia Bank.

Anthony Zicha

Hi. Good afternoon, Bob, Dan.

Daniel Lefaivre

Yes, thanks.

Anthony Zicha

With reference to your 2017 EBITDA target, you’re saying your low end is 100% and your high end is 13%, what's the low end contingent on and what are some of your assumptions? And if we look forward to tax rate for 2017, would 28% be a good proxy?

Daniel Lefaivre

I’ll answer the second half of that first. 28% is a good proxy. There is a still a lot of uncertainty around tax legislation, especially in the U.S. So we’re assuming that on the basis on effective tax.

The low end of the EBITDA range is really related to if we achieve a lower target on gross revenue, and sorry, gross margin and higher target on admin and marketing expenses that will result in a lower EBITDA margin and that's really how we come at these ranges.

Anthony Zicha

Okay. And then when you’re looking at a 25 million in synergies so 10 comes from revenue, 15 comes from cost. For modeling purposes, how should we look at the flow on a quarterly basis like is it more back ended?

Daniel Lefaivre

I think what we have seen on the cost synergies, we’ll start realize many of those costs flowing through the year. I don't think there's any particular quarter that it's weighted in that Anthony, it’s more throughout the year.

So as Bob mentioned, we in the script that we aligned our payroll systems are benefits in the U.S. now aligned our insurance and some of the fee benefits of that combined operation throughout the year.

Robert Gomes

I think the revenue synergies probably are back ended and waited. I think the cost synergies as Dan said are probably distributed throughout the quarters. But certainly I’d say, the revenue synergies are more back ended.

Anthony Zicha

Okay. Bob, what are some of the underlying trends that are improving your client business and energy segment, and could you comment on your U.S. market position and how you will be able to leverage your partnerships with key clients such as the TransCanada Enbridge and Spectra?

Robert Gomes

Well, certainly the change of our clients positioning in North America has been interesting for us because we've had strong relationships with TransCanada and Enbridge in Canada. And their expansion of Columbia pipeline's inspector in the United States we certainly are having discussions and seeing where we can help them in the United States. Over the last two years we certainly have had to cut back in the United States. Our position there is probably not as strong as we'd like it to be.

But certainly we're working with our clients to see what expertise we can move from Canada to the operations we have in the U.S. to be able to do more work down there. So certainly we're seeing some stability in the economy and the commodity prices in the oil and gas market.

That stability is certainly creating more discussions with our clients on opportunities and projects. So we’re seeing positive momentum there whether that positive momentum will end with actual projects say something will continue to work on with our clients.

Anthony Zicha

Okay. And just last one, California is an important market for Stantec, are you seeing a pickup in the new business that's weather-related, is it related to the flooding and the roads and the landslides? Thank you.

Robert Gomes

Yes. There is no doubt that and we’ve said it many times that California has every water problem you can have. It goes from drought to flood in a matter of months. So certainly with the issues that the rainfall has caused in California will result in opportunities for us here.

Anthony Zicha

Okay. Well thank you, Bob. Thank you, Dan.

Robert Gomes

Thanks.

Operator

We will hear next from Michael Tupholme from TD Securities.

Michael Tupholme

Thanks, good afternoon. Just back on the question, the prior question about deeper dive margin guidance range of 11% to 13% so I understand your answer, Dan. I’m just wondering are there any particular business operating units that we should be focused on in terms of sort of offering the greatest potential for variability around the margins?

Daniel Lefaivre

You know, each of the business units have different drivers and really the impact again as your gross margin as well as your utilization that drives your administrative costs. So, depending on the amount of effort that's required to win work through betting you may need a higher utilization rate.

If you're more at the lower margin business, you want your staff to be more highly utilized. So every one of our business units Michael have certainly a little bit different drivers, but I wouldn't say that anyone of them would be have significant variability in terms of our EBITDA margin picking the differences and how those businesses are managed.

Michael Tupholme

Right. I guess I am just wondering specifically for 1207. If there's a particular segment that has the potential to perform one way or another, depending on whether certain projects come through and depending on utilization or is it very tough to say right now?

Robert Gomes

I would say it is tough to say but if you're going to push us for one I would say the buildings group because the buildings group right now has probably backlog is built significantly, the projects are some very large projects, number of those projects are P3 or APD projects. Those projects have probably the biggest volatility associated with them. They are fast-moving projects driven by contractors.

So those projects both plus and minus have the greatest potential for us executing well and driving a good gross margin and they also have equally a risk for us, to perform poorly and drive a low gross margin.

So if you're looking for volatility that's the one group certainly that we're focused on for 2017. The good news is they have lots of projects to drive that gross margin.

Michael Tupholme

Okay. That's helpful. Thanks, Bob. Maybe just picking up on that in terms of the buildings segment maybe you sort of just addressed it, but we have see negative growth in that segment on an organic basis for several quarters yet, you do sound quite positive. So you spoke to backlog is, is that a segment where we should expect to see some improvement because of the backlog you referenced fairly soon or is this going to still takes some time?

Robert Gomes

No, we're expecting that we're going to see some positive momentum with that group fairly soon.

Michael Tupholme

Okay, perfect. And then just lastly for me in terms of infrastructure, again another area that you sound fairly positive on for obvious reasons given the various government announcements that have been made.

Can you just comment a little bit on what you're seeing so far I mean have you seen much of a pickup thus far and how do you think about the year in terms of organic growth within that that infrastructure segment? Is this something that's going to build or do you think we come out of the gate pretty strong toward the beginning of the year?

Robert Gomes

I think we're going to have positive momentum throughout the year. We had positive momentum and organic growth in that group last year. I see that continuing this year. I don’t think that the announcements from either side of the border are going to have a huge impact on the revenue generation and opportunities especially in the first half of the year.

There is still an off a lot of debate on exactly how those projects are going to rollout. And you got to remember, our infrastructure group is now in a community development to transportation with water being really another business operating unit. So community development has got the issues associated with the – still a relatively flat market in Western Canada.

So it’s going to be, I’d say the momentum will be very similar to last year and infrastructure which will translate into transportation community developments in water, and should be continuing to accelerate as the year goes as long as the governments continue to push their infrastructure funding out.

Michael Tupholme

Okay. Thank you.

Robert Gomes

Welcome. Thank you.

Operator

Maxim Sytchev from National Bank Financial. Your line is open.

Maxim Sytchev

Hi, good afternoon gentlemen.

Robert Gomes

Good afternoon Max.

Maxim Sytchev

Couple of questions I guess, so in terms of – trying to get a clean EBITDA for the Q, is there anything that was in relation to I don’t know like integration costs that were buried in SG&A because I mean the gross margin actually improve year-on-year, so I'm just trying to see if there is anything unusual which is not going to be repeatable on a go forward basis, if you can provide some color there please?

Daniel Lefaivre

I think I did mention in the script Max, it was about $6 million impact, additional professional fees in the quarter that we incur that we don't expect to be a recurring going forward. We did have slightly lower utilization and more time spent on marketing and business development and Bob mentioned that translated into an increase in – for backlog our buildings for example.

But beyond that there is some service in severance costs in the quarter and that we expect that hopefully to be largely done, but not too many other things that as you expect in the fourth quarter as we've always seen our utilization is slightly lower, given the Thanksgiving holiday in the U.S. and the Christmas break. So that is fairly normal. We expect that to improve as we get into Q2 and Q3 of next year – of this year.

Maxim Sytchev

And sorry the severance was it material in the Q?

Daniel Lefaivre

There was some – over and above our Q4 2014, yes, it was probably I think it was $3 million or $4 million of that we still incurred in severance costs in the quarter.

Maxim Sytchev

Okay. And then going back to the range of the EBITDA for 2017, I mean, I understand that it almost sounded bit like a sensitivity table to me more than anything else because if you back out like a bunch of restructuring and things like that are probably less repeatable in 2017 I mean, the Queen EBITDA margin for 2016 is around 12%. So -- with improving macro right now and what it seems to be sort of a building momentum and in buildings and infrastructure less drag in oil and gas, I mean how is that even consumable that you could get to the low end of the range, just if you can provide some color there, please?

Robert Gomes

Being conservative, I guess, that would be it. I think Dan show that the worst case scenario happens. It could be, but you’re right. I think when you see positive momentum going, you take out the cost as you said. We don't see. Things would have to go really badly to get to the low end of that.

Maxim Sytchev

Okay. No, that's helpful.

Robert Gomes

No need to be that happen.

Maxim Sytchev

Right.

Daniel Lefaivre

We don't go back than that. We don’t what you don’t know.

Maxim Sytchev


Of course, of course. And then last question, gentlemen. I mean a very impressive of free cash flow generation in Q4 and I think the net debt to EBITDA right now is around 2.4 times, I mean, at what point would you be comfortable again to do. Let's call it medium size transactions. I mean, is it closer to 1.5 and just trying to gauge your comfort level around the potential timeframes?

Daniel Lefaivre

I think the – one thing you have to remember is that first quarter that we use more cash than we generate. So that will drive up our net debt to EBITDA I expect in the first quarter. But I think that's going to come down fairly quickly as we go through the year as we projected before around two times, which will give us sufficient capacity in our revolver to go after other small to midsize acquisitions.

So I don't think we aren’t uncomfortable at all right now where are our debt levels are and that projected trends for us to be able to go and pursue other acquisitions, Bob.

Robert Gomes

No. I'd say additive right now we don't see that as hampering any of our discussions are us pursue any opportunities at this point in time. We don't expect anything imminently. But certainly, we have the fairly old pipeline. And we still expect to execute on a few throughout the year.

Maxim Sytchev

And if there is the specific geographies or end markets that you’re particularly excited about right now from an M&A perspective?

Daniel Lefaivre

Well, we’re continuing in the U.S. I mean that we did end up with Canal was sort of one-time situation when you look at the size and scope of it. But now our continued acquisition strategy in the United State is continuing to execute. We’ve built an enviable position in our buildings group and we’re continuing to see opportunities and companies approach us. So certainly we see opportunities there. We see some opportunities even in transportation and water just it began being expanding out our geographies in the United States.

How much global perspective we’re putting together on strategy now to support our global operations and more specifically in the UK and Australia, New Zealand, where we see the opportunities there within our comfort zone and appetite today on average probably going to be much more of a latter half before we get to a point of actually maybe being able to execute on any of those. But it’s a continuation of the strategy that we've had for the last 10 or 20 years as we’re continuing that strategy of filling out our diversity in North America and now have a couple other geographies to think about as well.

Maxim Sytchev

Okay, Excellent. Thank you so much

Daniel Lefaivre

Thanks.

Operator

We’ll hear next from Jacob Bout, CIBC.

Jacob Bout

Good afternoon. I’ve got a couple of questions on the construction services and just I guess first off, wondering, how your thinking has evolved about the strategic importance of the construction services division?

Daniel Lefaivre

Certainly, it's really a two-part answer to that because it is very different in the U.S. than it is in the U.K. In the U.K. it is a very integrated into teaming arrangements and into the camp of cycle programs that are being provided to the utility companies there. So we're still getting our minds around and I’m going to be in U.K. next month really trying to get a closer idea of exactly how that those integrated or bundled services are operated in the United States I mean in the United Kingdom.

In the U.S. it is very much a design build opportunities and those are really a case-by-case basis. You know do we have the best opportunity of bundling our services with MWH constructors, or we have a better chance of bundling our services with another contractor. And it really comes down to a geography play to what the client would like and so it’s more of a case-by-case situation. So we’re – and what we said we would do is take the first year or two to really analyze the market, really try to understand those opportunities and then make a decision going forward, you know how we want to deal with that business.

But right now it's a well-run business. Lots of opportunities for teaming with the consulting part and the construction part and lots of opportunities separately for constructors. So at this point in time we’re comfortable but really still in the analysis situation.

Jacob Bout

So the past two quarters you have been running roughly about 20% of gross revenues as far as the construction division revenue. Is that how we should be thinking about those on a go forward basis?

Daniel Lefaivre

I think it’s around that 15% range Jacob on what we're seeing in construction overall.

Robert Gomes

Yeah. And I don't see that changing going forward. I think its going to be very stable it’s a matter of fact if we do any acquisitions its going to be probably stabilize at that level or maybe even slightly more don't see a lot of change in that percentage of our business at this point in time.

Jacob Bout

Thank you very much.

Robert Gomes

You’re welcome.

Operator

Your next question will come from Yuri Lynk from Canaccord Genuity.

Yuri Lynk

Hi, good afternoon.

Robert Gomes

Hi, Yuri.

Yuri Lynk

Dan just wanted to be clear on the SG&A as a percent of revenue target for 2017 because it does look a bit elevated to me. At the high-end you are kind of flat with what you achieve this year and then this year had a number of items that might not occur next year in terms of severance and stuff like that. So I mean it is there more is that what its saying is that there is more you do anticipate more severance more of these kind of restructuring costs to occur in 2017?

Daniel Lefaivre

I think what we are expecting Yuri is not too much around the severance costs are more related to the integration costs. As Bob mentioned, we're planning bringing all of the MWH US operations over for the first. That’s a significant amount of work. There is a significant amount of training and essentially downtime for our production people to get on to our new system. So we're expecting that in -- starting in April that will have an impact on our SG&A cost.

Certainly in the second quarter I see some of that leading into the third quarter. At the same time we will be looking at the integration of global operations and what impact s we're going to have you going forward?

Yuri Lynk

So and obviously you are not going to give targets beyond '17, but I mean look actually have going forward. So as you not to give targets the on '17, I mean looking into the years out beyond 17 I mean that ration begin we wanted. Imagine that that ratio being a little bit lower, perhaps back to where it was in the in the past and interest in a cost. This ratio is pretty close to what we had actually been all that the selectivity getting back.

Daniel Lefaivre

Our SG&A cost this ratio was pretty close to what we had in the past or even with all this additional activity for getting back down, getting the economies of scale around the larger operational archer base in the U.S. And so we do expect that to continue to be managed very area. That’s one area that we do really manage our business well and continued focus on that.

Yuri Lynk

Okay. And then in terms of the cost synergies that were laid out at the onset of the MWH acquisition, I mean how – where are we with – with achieved synergies to-date versus the plan?

Daniel Lefaivre

I don't have an exact number Yuri, but we’re certainly achieving the cost synergies that that we talked for example I mentioned the insurance cost synergies we got – we’ll get a long-term benefit in 2017 over achieving those costs. But we’re seeing that we will get the benefit of those through 2017. The impact of certain people leaving MWH had a higher overhead structure. Some of what's built into our SG&A cost and throughout the last year and into this year, we’re still looking at trying to squeeze those costs.

As we integrate, we’re going to get better synergies of the integrated operations. So I think we’re going to be well on target with the cost synergies. And as Bob said, the revenue synergies are going to take a little bit longer, but we have been winning number of projects.

Robert Gomes

But again I think those revenues are backend waited because of projects are ramping up now continued through the year. I’d say the bulk of the cost synergies are there. The cost of those will be felt throughout 2017, but I think we've executed on the bulk of the cost synergies already and are now focused on the bigger revenue synergies which take longer. So were happy with our pace and our performance to-date there.

Yuri Lynk

Thanks very much guys. I’ll turn it over.

Operator

Next we’ll hear from Sara O’Brien from RBC.

Sara O’Brien

Hi, good afternoon. Dan just want to go back to that margin guidance for 2017 to hit the 13%, is that sort of a conservative range overall? If we look back at the prospectus on a pro forma basis when you closed there or looking to close MWH, we could pretty much get the 13% EBITDA including the synergies that were expected. So I am just wondering, if there an opportunity to beat the 13% in 2017 and is it an objective sort of longer-term?

Daniel Lefaivre

I think there is an opportunity to beat the 13%, but again everything is going to have to go exactly as we’d hope it would go in the best case scenario. As I indicated in 2017, we’re going to have more integration-related costs. So everything else utilization would have to be maxing out gross margins so that to be very solid. So those would be the areas that would drive perfect performance.

Robert Gomes

But if you're looking for can it happen, absolutely.

Sara O’Brien

Okay. And then just wondered, you gave a directional, I think 85 million for amortization of intangible, how much of that's going to be added back in the adjusted EPS on a net basis?

Daniel Lefaivre

I don't think server. We haven't stated that specifically in our year-end statements, but I don't think we’re going to go be going with adjusted EPS or adjusted EBITDA in our 2017 reporting. We’ll revert back to purely reported numbers I think.

Sara O’Brien

You’ll be the only ones, but bravo. Okay. And just last question on sub-consulting cost as a percentage of gross revenue trending at 30% plus I think it was 34% in the quarter. Just wondering if you’re subbing out more work than historically and then if that sort of a trend that expected to continue.

Daniel Lefaivre

I think there is two things there so. The first is constructor’s runs between 70% and 75% between gross revenue and net revenue. So, a lot of across labor and trades that are in those numbers. You have to take that into consideration, the constructors is much higher than the consulting business.

In the fourth quarter, I think our consulting was around 25%, which is a little higher than it's been trending around 20% to 21% over the prior quarters. I think that's a mix of projects the U.K. has slightly higher sub-consultant costs in their business.

Robert Gomes

Those projects both in the U.K. and some of our P3 projects and design build projects over finding now Stantec is sometimes taking more times taking a prime consultant role in the design teams. So we’re getting more sub-consultants reporting to us. That certainly the case in the U.K. where they have a very strong position, and we’re starting to see the same situation in the U.S. and Canada. So that starting to drive up some of our sub-consultant costs as we’re reverting from it being a sub ourselves to being actually a prime and taking on more subs.

Sara O’Brien

So does that impact the way we should look at kind of the ratio between organic growth on a growth revenue basis and the actual gross margin that you generate going forward. Just wondering if we should look at sort of net revenue growth rates or gross revenue and then a little bit more subbing out?

Robert Gomes

We were going to report our revenue is still going to be on a gross revenue basis, but reduce without by essentially the test generating units. So we have our consulting business, spread between Canada, U.S. and global as well as the private business operating unit and then we’ll have constructors also separately identified. So you’ll be able to get all the information you need from that perspective.

Sara O’Brien

Okay. Thank you.

Operator

[Operator Instructions] We’ll move next to Tahira Afzal from KeyBanc Capital Markets.

Tahira Afzal

Hi, folks. How are you doing?

Robert Gomes

Better. Tahira how are you? I was expecting you.

Tahira Afzal

Doing well. I thought I would surprise you actually. So I guess the first question I had was, if you look over the next two to three years and you know because it seems there a lot of countries and regions having stimulus plants put in place. Which ones are you the most excited about in terms of what could it mean for you guys?

Robert Gomes

Two or three years is a long ways out in these days, with everything changing. But I would say Stantec we've got to really be focused on the areas that we're now in that global platform and really wrap our minds around it. So it's really the U.K., Australia, New Zealand, we have some operations in Europe, but it's in Central Europe and some operations in Latin American really look at those operations. What MWH was doing with those operation systems of growth perspective and starting to see how we can cross-sell the Stantec operations into those.

And really that's where our focus is I think in the next year or two is really looking at diversifying what MWH had in the U.K. which was an extremely top-tier water business, but that's all they did. We have now the capability of diversifying those operations as we've done in Canada and U.S. with Stantec following the same strategy in Australia and New Zealand. So rather than looking at maybe the global opportunities and other places really focusing on where we have a foundation now to build on and diversify is where our focus will be.

Tahira Afzal

Got it, okay. And you know Bob if you look at your business it seems sometimes we need a disaster to make spending happen and fortunately if you look at all the flooding that’s happening in California naturally and through the dam that had the spill broken. Is than an opportunity, potentially developing for yourselves and is this opportunity potentially expediting the spending you see out there?

Robert Gomes

Absolutely, you need to – you hate to the scene is taking advantage of a disaster. But really we're there to help the states and the governments and our clients to resolve the issues as quickly as possible and safely as possible. So as I stated in an earlier question, we are in California working on the horrible dam with state of California evaluating the spillway, moving some power lines, trying to ensure that they can keep people in that area and the dam estate possible that will be a long-term opportunity for us. I think in the ensuring that were there to help our clients.

We've actually created a division in the company that response to those, so that we have a team that can respond to these situations, especially in the pipeline area environmental services. We have a A-Team a spill response team that can be on site within 24 hours and help our clients mitigate the damage and repair the operation.

So it certainly is a part of what we do now and is a very large part of our opportunities. So when you see something large like what's happening in California. That's definitely a potential significant potential and opportunity for us.

Tahira Afzal

Got it. Okay. And last question is really on the shale side, as I have been through a lot of your customer’s sort of calls over the last week and really some of the E&P. It seems that there is there are select buckets of gathering that are potentially coming back. Any thoughts on how that could play out rest is what you baked into your guidance?

Robert Gomes

I don't think we have actually baked on a significant increase or any kind of real strong pick up in that area in the United States. If you're hearing that there is we haven't seen significant opportunities in that area, certainly we're still close to our clients and talking to them, but I haven't seen any, but its good news that you've been hearing about some and certainly we have opportunities that we will try to take advantage of.

Tahira Afzal

Got it. Thank you very much. That’s all I had.

Robert Gomes

Thanks.

Operator

Mona Nazir with Laurentian Bank. Please go ahead.

Mona Nazir

Good afternoon and thank your for taking my questions. So firstly on the subcontracting, cost as a percentage of gross revenue that you discussed with Sara. Last quarter it was more the 31% range as the percentage of gross revenue. I am going to be more conservative, given on your comments that you are seeing an uptake in subcontracting work in the U.S. similar to what you are seeing in the U.K. would you say that the 34, 35% that we saw in the quarter to be a good run rate or do you think I could trend back down to that 30% range.;

Robert Gomes

I think it is reasonable run rate it's going to be somewhere in between there. I think part of it is in the U.K. the construction business coupled around top in 2016, and now its operating at poor capacity. We’ve also seen the U.S. construction business grow as well throughout the year. So I think that range for constructors have been at 70%, 75% is pretty reasonable.

Mona Nazir

And just talking about the infrastructure spending programs and the flow of funding into your guys, I am just wondering from the Fast Act I would put in place the end of 2015, have you seen any of that for windshield in 2016 at all?

And then secondly, is there anything that you need to do to make sure you're well positioned to read some of that infrastructure spends particularly as it pertains to MWH and the water side?

Daniel Lefaivre

Well with regards to first question, the Fast Act, I think there were some small projects. I think the overall Fast Act, and implementing funding and transportation had a cascading effect into states spending and some of their money as well because there was some clarity on what projects would be federally funded and what projects would be state-funded. So just the fact that the Act was advanced, and it helped us because it just advances our clients plans and solidifies them and that creates project opportunities.

With regards to infrastructure spending as it applies to position now at MWH, certainly there is opportunities there that are going to come forward. I'm not sure exactly when and if that's were some the lack of clarity is, but certainly Stantec is as strongly positioned or better position than any other company in the U.S. when it comes to water projects.

We got in the top three and are going to be competitive and going to be considered for the largest and most highest profile water projects in the U.S. So just because of that profile presence and expertise that in itself gives us an increase opportunities.

As part of the election there was also a lot of money put forward in ballots and those were very specific infrastructure funding balance. We’re starting to see those move forward into opportunities as well, which really – really nothing to do with federal funding. They are very specific funding mechanisms that are much more local in nature and are also creating opportunities.

So we’re definitely seen those opportunities. The overall federal funding we’re not seeing, but certain we're seeing a wider diversity of projects come out of infrastructure through other mechanisms.

Mona Nazir

And just lastly from me, when you bought MWH, you spoke about branching into other geographies, just wondering, is that still part of the plan? Is there any greater clarity on international that look appealing or where you’re seeing some low hanging fruit from an M&A perspective.

Daniel Lefaivre

No. I think as we said in another call earlier, our focus will be on diversifying MWH operations that they currently have in the global arena. They have a very strong presence in the U.K. that is about 1,000 people in consulting, but all water. So we feel there's capabilities through M&A to diversify the operations in the United Kingdom, the same scenario in Australia, New Zealand, where the bulk of their operations are focused in water. We have the capability with that foundation of operation, but they’re to diversify again through M&A, the operations within Australia and New Zealand. Those will be our two, number one and two focuses for the next year or two as we see and get our feet under us with regards to what those opportunities look like. Then we can start looking at Europe and Latin America where again, MWH has operations. So rather than branch out into new global operations, I think what we want to do is diversify the operations we acquired through the MWH merger.

Mona Nazir

Okay. Thank you.

Daniel Lefaivre

Welcome.

Operator

Benoit Poirier with Desjardins Capital Markets. Your line is open.

Benoit Poirier

Hey, good afternoon, gentlemen.

Daniel Lefaivre

Good afternoon, Benoit

Benoit Poirier

Just – yeah, just to come back on the construction, I mean, you mentioned some comment about there, the fact that there was not so much seasonality among construction. So when we look at the gross margin I was wondering if you could provide more color behind the of the 5% decline in the gross margin on a sequential basis?

Daniel Lefaivre

Yeah. I don’t think necessarily those are connected involved in the gross margin versus the seasonality. Where you do get some seasonality is overdoing construction in the northern states or where there are weather delays or those type of things that are impacting those projects. It is a little bit of a lumpy business.

So I don't know that it's a direct correlation there.

Benoit Poirier

Or is it more type of mix of project that impacted the gross margin in the quarter and should we expect via the gross margin for construction to come back in the high 30s in 2017, Dan.

Daniel Lefaivre

I think we are expecting the gross margin to be in that mid 30%, 35% range. I think it was about 37% in 2016. So we don't expect it to be materially different from that in the next year.

Benoit Poirier

Okay. And just in Canada when we look at the outlook, obviously still optimistic about infrastructure of building but you mentioned kind of a offset by residential housing, would it be possible to quantify the percentage of revenues related to do residential housing?

Robert Gomes

Well, residential in Canada right now Dan is just going to see if he can find a number. The one comment I’d make is it’s a fantastic and significant retraction that were really talking about in Western Canada. I think we've already experienced that it's just that that continued slow operations is probably going to continue into 2017. This business is now is really now going to start ramping back up because if the economy starts recovering there's going to be the need for housing.

But in certain parts of the province and most of our operations in Alberta, some of the province was overbuilt and so it’s just going to be a little bit slower. Don’t see a significant retraction it's just really the growth is going to be muted.

Benoit Poirier

Okay, perfect. And when we look at your balance sheet Dan you ended the quarter at 2.38 times but when you take into account on a pro forma basis with MWH, I would assume the number to be even much lower. So do you have the kind of a more clarity or the number on the pro forma basis there?

Daniel Lefaivre

Yeah, I think the numbers that you saw this quarter are really, absolutely beat with our expectations for this year. And we do expect that again with the good cash flow generation as we get through 2017 that that number will come back down to around two times is what our expectations are. And that really hasn’t changed from when we did the initial share offering back in May.

Benoit Poirier

Okay. And related to the MWH integration you mentioned some color about the cost synergies, but just looking at the office relocations, could you quantify how many offices have you been able to relocated and how many remains due to be done potentially?

Daniel Lefaivre

I think we’ve identified and don’t know the exact number but I think we’ve identified around 22 offices where there were potential opportunities and overlaps. And we’ve looked at all of those and a significant number of over half of them have already taken steps to integrate those offices or merge them together.

Robert Gomes

I think the number is closer at around 20 of them and you know we’re well on the way of doing and half a dozen we have done pretty quickly.

Daniel Lefaivre

And the plans are there to deal with the rest of them. So we've got a really good strategy around real estate right now.

Benoit Poirier

Okay. Perfect. And lastly on the energy side, we saw lot of announcement with margin obviously Enbridge keystone. So just to understand that you still feel some persistence weakness in Oil & Gas, but given all the momentum around energy, any expectation on when the energy should turn out to be a very positive contributor to your revenues?

Daniel Lefaivre

Now, if we knew that that would make our life a lot easier. We could just plan on when that recovery is there. I think the statement is we don't see any further significant retraction. At the same point in time, when that momentum will be significant for us and start on a B on a C preferred. Really, just don't have that clarity. Our clients are talking to us. We've got -- we're really happy with our current relationships especially with the big pipeline companies, but we have not seen that momentum shift dramatically in the first few months here.

Benoit Poirier

Okay. And lastly for me just from -- a quick question. When you look at the CapEx 75 million in 2017 is software addition, 15 million numbers part of that or it's on top in part of the addition to PP&E?

Daniel Lefaivre

The software additions are in addition to the 75 million. A bit of portion of that expense this year is really related to upgrading our IT infrastructure, we're building a new data center that will house our core in our core network. So we're investing a lot and that this year. We're certainly looking at globalization of our Oracle system and this fits with the additional size of the company is a lot more CapEx Related IT this year. But it's not like we’re behind we're continued through investment in future.

Benoit Poirier

Okay. And does it mean then that the purchased of property and equipment on the cash flow statement will be closer to 90 million?

Daniel Lefaivre

Including software, yes.

Benoit Poirier

Okay, perfect.

Daniel Lefaivre

Excluding software it's 75 million.

Benoit Poirier

Okay. And software is part of that typically?

Daniel Lefaivre

Software is part of the 90. Yeah.

Benoit Poirier

Okay. Thanks you, thank you guys.

Operator

Thank you. [Operator Instructions] We will move next to Ben Cherniavsky from Raymond James.

Ben Cherniavsky

Hi guys.

Daniel Lefaivre

Hi, Ben.

Ben Cherniavsky

Most of my questions have been asked. One of them I’ll just ask another way. With respect to the direct expenses – sorry direct revenue to – I am sorry direct expenses to gross revenue or your net to gross revenue ratio, few questions have been asked about that, but can you guys help us with a number or range where this thing might be for next year because you know you should be quite sensitive to that. And as you pointed out, it has it has gone up with MWH. But what's – and further more, is there an opportunity to bring that down overtime, either as the construction business revenue gets diluted by growth in other markets or just by doing some of the more – some of that work yourself and keeping it internal?

Daniel Lefaivre

Dan is calculating at the moment. So he wants to come up with a number for you, so.

Ben Cherniavsky

That would be helpful.

Daniel Lefaivre

I think gross to net ratio, I think if you are using an overall percentage, it’s been around 40%, would be appropriate. And again the significant portion of that increase is in construction between 70 and 75 and consulting between 20 and 25.

Ben Cherniavsky

But the last couple of quarters, you’ve been well above that 40%, is that right?

Daniel Lefaivre

Not certainly been well above. I did somewhere in that range of 37% in Q4. It could be wrong though.

Ben Cherniavsky

Yeah, okay, I mean, we can maybe take the chat offline, but I was – I mean I’ve been – let’s take it up offline. Similarly, the other variable that is difficult to forecast, but can be quite material, especially since you guys will be including in which I agree as a good thing is amortization, and you know you have been helpful in providing a schedule for amortization over the 12 – coming 12 months period, no assuming, no additional acquisitions which so I mean that number ends up being slightly different when you add more acquisitions, but it's still good guidance range like a good barometer. What about 2018? Does that number – like just in terms of the acquisition – the amortization schedule, do those numbers decrease overtime?

Daniel Lefaivre

Yes absolutely. The – where you get the bulk of the amortization in the first year or two years is really around work backlog. And – so we acquired a significant amount of work backlog, so that amortization will come off find relationships, we tend to amortize over longer period. We ended up with more intangibles this year because of some of the trademarks and the global iconic status of MWH.

Ben Cherniavsky

So we’re not asking for a specific a number, I mean, by 2018 if like this year I think you said about 85 million excluding additional acquisitions. Will that number be lower than in 2018?

Daniel Lefaivre

I expected to be lower without other acquisitions.

Robert Gomes

And based on our – what we have in front of us right now in the pipeline, I think you'd expect that the other acquisition is going to be slower this year, quieter, comparatively, yeah, I would say that its going to e less than 18 based on that.

Ben Cherniavsky

Right. Okay. And finally just another point of clarification, sorry, been asked but, did you say that there were some more integration expenses and import you -- that were specifically tied to things like professional fees or severance or anything like that?

Daniel Lefaivre

There were some integration expenses in Q4 that we incurred and we did have some additional professional fees and then we see additional – we have additional merit fees associated with the MWH acquisition that we have to queue in Q4 as well that were pretty much contractual in nature.

Ben Cherniavsky

And normally, Dan, you guys have had periods following acquisitions where your utilization rate billable hours and such goes down a little bit and some of your people become more internally focused on integration projects. Is that the case here too?

Daniel Lefaivre

I think as I stayed on in earlier question, I guess, I expect in Q2 we’ll small impact on utilization as we integrate all these people, that will be a couple -- over a couple of weeks. It's not like it's going to extend for a long extensive period of time, but there will be a bit of an impact, I expect in Q2. We have…

Ben Cherniavsky

Was it impact – sorry, was it impacting Q4, just because the numbers little bit higher to me?

Daniel Lefaivre

Yeah. There has been some impact in Q4, that's what was again to, Ben, as we spent a significant amount of time planning and staging and getting ready for the overall integration of the U.S. operations for Q2. So we spent a lot of time with planning and working this.

Robert Gomes

Absolutely. There was significant timing and we don't know don't disclose that. That's just part of what we do. So it is part and some of that will continue into Q1 with the actual implementation of that strategy. So there's no doubt those costs were in Q4 and is going to be in Q1. That's part of what we do.

Ben Cherniavsky

Yeah, I understood. And you do more acquisition you'll see more of that in the future, I’m not suggesting that we should adjust with that that’s part of what you do. But it does result in some volatility in that number from quarter-to-quarter, depending on the size and timing of acquisitions correct?

Daniel Lefaivre

Yeah, absolutely, absolutely.

Robert Gomes

Absolutely. But again the long term focus here is the reason why we do that. And we try to state that it’s not that we push all that. We are aware of that and we try to stage alter our integration efforts and really try to push that. So we don't totally absorb our staff we do recognize that they do have to have some focus on the business. So I think we manage that well.

Ben Cherniavsky

So I think back to you may have worry, ask this in another way back to the targets you’ve provided for 2017 with G&A being 41 to 43 versus I think historically you were 40 to 42. Is that increase really just the integration work or is that a permanent increase in for some reason and how the businesses changed?

Daniel Lefaivre

No, I think we always are trying to look at our G&A costs and always reflecting it. You know we want to be suspicion to as possible. I think that bump this time is just because of the significant efforts that we anticipate we’re going to need throughout the year with MWH. It's never a long-term objective to keep their cost there. It’s how we can always be more efficient.

Ben Cherniavsky

But how the business become – how the profitability of the business become lower by how whatever magnitude 100 basis points or however you defined it I mean here your net margin guidance is down by 100 basis points, does that -- does reflect the change in the business with MWH and construction and the shift to international markets or things like that?

Daniel Lefaivre

I think that’s part of the plan it’s also the additional growth in the U.S. where the Canadian operations and particular Western Canadian operations are quite strong for many, many years. We've certainly built up a presence in the U.S. and we're great gaining critical mass, but it still is more expensive to do business in the U.S. And again, primarily related to healthcare costs. So it is I think a nature of the mix of business as well as the other items we talked about.

Ben Cherniavsky

Okay. So I don't want to elaborate it but just to be clear the revision in your profitability ratios that you presented all of which are slightly lower for 2017 not just a function of integration work. There is – you're indicating that as the business is changed the profitability might be a little bit lower going forward for the reasons you mentioned?

Daniel Lefaivre

Likely lower yes.

Ben Cherniavsky

Yeah, okay. That’s helpful to understand. Thanks guys.

Robert Gomes

Okay. Thanks.

Operator

And at this time, there are no further callers in the queue. I would like to turn the conference back over to Mr. Gomes for any additional or closing comments.

Robert Gomes

I’ll just thank you all for joining us today and listening in. and we look forward to talking to you next quarter. Thanks very much.

Operator

That does conclude today's teleconference. We thank you all for your participation.

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