Stantec Inc

NYSE:STN

Earnings Call Transcript 2019-Q1

[Operator]

Welcome to Stantec's First Quarter 2019 Earnings Results Conference Call. Leading the call today are Gord Johnston, President and Chief Executive Officer; and Theresa Jang, Executive Vice President and Chief Financial Officer. Today's call is webcast, and Stantec invites those dialing in to view the slide presentation, which is available in the Investors Section at stantec.com. All information provided during this conference call is subject to the forward-looking statement qualifications set out on Slide 2, detailed in Stantec's management's discussion and analysis and incorporated in full, for the purpose of today's call. With that, I'm pleased to turn the call over to Mr. Gord Johnston.

[Gordon Allan Johnston, President, CEO & Director]

Thank you, and good morning. I'll begin with a brief overview of our first quarter performance, then Theresa will provide the details of our results. After that, I'll share some highlights from our operations and touch on our expectations for the remainder of 2019.We started 2019 with solid Q1 results that remind us of what has made Stantec a success for the past 65 years. Our drive to diversify both our geographic reach and our business mix. Our results also reflect the work we've done to drive organic and acquisition growth and maintain an efficient cost structure. I'm especially pleased with performance in our global business this quarter where we achieved 8.1% organic net revenue growth, with increases in all global business operating units. This validates our acquisition strategy in Australia, New Zealand and the U.K., markets we believe provide us with ample opportunity to continue to expand. Another key accomplishment in Q1 was closing the acquisition of Wood & Grieve Engineers. Wood & Grieve is an award-winning buildings engineering firm that serves clients throughout Australia, and we're so excited to be adding these 600 talented people to our team. We're currently working through integration but are already pursuing projects together that neither one of our teams would be able to pursue individually. I look forward to the new opportunities we'll have in Australia's building market, which is forecast to grow steadily through the remainder of 2019. With that, I'll hand it over to Theresa.

[Theresa B. Y. Jang, Executive VP & CFO]

Thanks, Gord. On January 1, we adopted IFRS 16 leases using the modified retrospective approach, which means that we did not restate comparative information. While IFRS 16 didn't have a significant impact on our Q1 net income or EPS, it did reduce admin and marketing expenses by $35.5 million, increased appreciation expense for leased assets by $27.4 million, increased interest expense by $8.1 million and increased EBITDA and adjusted EBITDA by $35.5 million. We provided tabular reconciliations of Q1 financial statements in our MD&A and in the appendix of the slide presentation and has also been posted as supplemental information in the Investors Section of our website. For purposes of this morning's call, we presented Q1 '19 results both before and after the adoption of IFRS 16. And for ease of comparability, all my comments will refer to Q1 '19, excluding the adoption of IFRS 16, in comparison to Q1 '18, which again, was not restated. Our Q1 '19 results were consistent with our expectations, reflecting a typically slower quarter for earnings and cash flows. We reported adjusted net income of $15.3 million or $0.45 on a diluted per share basis, increases of 5% and 7.1%, respectively. I will point out that adjusted net income includes the benefit of a $4.9 million tax recovery, the recognition of which was previously uncertain and was not baked into our guidance.Net revenue was $904.1 million, reflecting growth of 11.8%, with increases across all geographies. Adjusted EBITDA was $91.6 million, representing 10.1% of net revenue. Excluding the impact of IFRS 16, admin and marketing expenses increased from 43% to 43.4% of net revenue, mainly due to acquisition integration costs. And yesterday, our Board of Directors declared a dividend of $0.145 per share payable on July 15 to shareholders of record on June 28.Moving on to Slide 8, you'll see that we revised our annual targets to reflect the impact of adopting IFRS 16 and as well we've set our targets as being relative to adjusted EBITDA instead of EBITDA and adjusted net income instead of net income because we think this is a better reflection of our underlying operation. We expect IFRS 16 to reduce net income and adjusted net income by approximately $3 million or about $0.03 per share. The impact didn't hit the rounding in Q1, but as we progress through the year, we expect approximately $1 million or $0.01 per share impact in each of the remaining quarters.Our target range for admin and marketing expense as a percentage of net revenue decreases by about 4%, now expected to be in a range of 37% to 39%, and adjusted EBITDA increases by a corresponding 4%, now expected to be in the range of 15% to 17%. Adjusted net income is expected to be at or over 6% of net revenue. You will see that we provided additional guidance around depreciation from these assets and amortization of intangible assets related to the acquisitions, and our effective tax rate is now expected to be 28% for the year versus our previous expectation of 27%. We do want to remind investors that seasonally, we typically generate 60% of our earnings in quarters 2 and 3 and 40% in quarters 1 and 4. And we've added expectations for DSO to be 98 days by the end of the year. For the end of Q1, we were at 104 days, 90 days, including deferred revenue. This metric is higher than we want it to be, and it continues to be a key focus for our leadership team in 2019.Now shifting to Slide 9, liquidity and capital resources. Our 2019 priorities include continuing to strengthen our cash flow and leverage metric by improving the efficiency of our working capital and by continuing to be disciplined in how we allocate capital. Looking past the impact of adopting IFRS 16, we used $114.1 million of cash flow for our operating activities, $99.4 million for our investing activities and sourced $89 million through financing activities. It is typical that we would have a net cash outflow from operations for the first quarter of the year due mainly to the timing of employee short-term incentive payments. Operating cash outflows further increased this quarter due to our higher DSO and operating payments arising from our recent acquisitions. These outflows were partly offset by a 10% increase in cash received from client.Looking at sources and uses of cash in the quarter, we had aggregate sources of approximately $256 million that is through cash on hand in our credit facility, and again, we used $114 million to fund operations, $83 million to fund growth due to WGE acquisition, $22 million to invest in capital expenditures and $27 million to return to shareholders through dividends and share repurchases. And this allocation of capital is entirely consistent with our priorities. Operating cash flows will normalize in the inflows over the balance of the year, particularly through quarters 2 and 3, which are our highest earning periods. And you can see this is the case when we look at our sources and uses on a trailing 12-month basis.Our leverage increased this quarter due to funding the WGE acquisition on March 1 and making opportunistic share repurchases. This, combined with the impact of only 1 month of EBITDA from WGE in the denominator, has resulted in a net debt to adjusted EBITDA ratio of 2.67x, excluding IFRS. We have stated that we may go above our internal guideline of 2.5x when we make acquisitions and this is where we are for the quarter. That said, we are well within our bank covenant. When we pro forma EBITDA for our full year's contribution from acquisitions through the last 12 months, we would be closer to our 2.5x guideline. And as our 2019 operating cash flows normalize over the course of this year, this will drive our leverage metric down under 2.5x.I will note that with the adoption of IFRS 16, our internal guidelines for net debt to adjusted EBITDA becomes 1.0 to 2.0x. And at the end of Q1, we would have been at the equivalent of 2.0x. In terms of our borrowing capacity, at the end of Q1, we had approximately $56 million of undrawn capacity on our credit facilities. That number currently sits closer to $100 million, and we continue to have access to another $400 million under our credit facility's accordion feature, if required for future acquisitions. And with that, I will turn the call back to Gord for highlights from our operations.

[Gordon Allan Johnston, President, CEO & Director]

Thank you, Theresa. Our Canadian operations generate a 4.6% increase in the net revenue, driven largely by acquisition growth from 3 acquisitions completed in 2018. As anticipated, organic net revenue was muted at less than 1%. This reflects the slower Canadian economy and our overall project mix. We're coming off some large building projects in Ontario and some water projects in Ontario and Western Canada. However, we are backfilling out with work that we can't get done -- make public. A number of Canada's largest cities are expanding the public transit systems, and we are involved in several of those projects as well. We also won a significant environmental services MSA in the quarter.Looking out over the balance of the year, we're optimistic about our oil and gas in terms of both engineering and environmental work. We've been hiring in both our Energy & Resources and Environmental Services businesses, and we expect that to continue as fuel season begins. We continue to seek good opportunity in LNG in Canada, and if TransMountain is approved, we are going to pick up there.In the United States, net revenue increased 8.6%, with organic net revenue increasing by 2.4%. Our backlog of work in the U.S. is high, and growth is driven by work in water and transportation. We also saw organic growth in buildings. We have a strong position in the education space, particularly in student housing, but we're also seeing growth in the commercial and civil sectors. We had some retraction in Energy & Resources, which is mostly due to the wrap up of projects. However, we won some significant power projects in the U.S. this quarter. On the water side, organic net revenue growth was offset by the effect of a large recovery recognized in Q1 '18. Our water backlog is solid, and we continue to see robust opportunities, particularly in California and Texas. Growth was strongest in our global business where net revenue increased by 41%. All business units grew organically, resulting in overall net revenue growth of 8.1%. In Australia and New Zealand, work on the water projects is driving growth. As I mentioned, we're now working with the WGE team on pursuits in Australia, and I look forward to continuing to expand our buildings practice there. In Latin America, the mining market continues to improve, and we've been successful in capturing our share of that work. Also boosting performance in global operations is our work in Qatar and the United Arab Emirates. Our buildings work certainly plays into our results in the Middle East but we also do a lot of water work there.Moving on to backlog. We're at $4.4 billion at the end of Q1, a 5.6% increase over year-end. This represents about 12 months of work. And as you can see on the slide, we won some significant projects around the world in the quarter. As for acquisitions, our pipeline is more robust than ever, and we're continuing in discussions with suitable targets. We're still looking to complement our strong presence in Canada with smaller acquisitions in key markets and sectors. Growth in the U.S. continues to be an important focus for us, and we see significant potential to grow our operations there. Outside North America, we see great opportunity for growth in Australia as well as smaller infill opportunities to further strengthen our presence in New Zealand. In the U.K., we continue to monitor the Brexit outcome while completing integrations of Peter Brett Associates. We remain confident in our plan to build a diverse design practice in the U.K. market, and we continue to have a dialogue with firms in Western Europe and the Nordic countries. Our sweet spot remains those midsized firms that closely match our culture, values and ethics and that can provide us with the targeted expertise in key geographies.As we look towards the rest of 2019, our outlook has not changed from what we reported in February. We expect organic net revenue growth to be in the low to mid-single digits. We're still expecting a slower Canadian economy, continued strength in the U.S. and continued growth in our global markets. We're well positioned to respond to the market trends that are driving growth in our industry. We see solid growth potential in all our end markets. We're particularly well positioned in urban places in the U.S. and have become a leader in that space. The interdisciplinary hub of capability within our urban places group has worked in cities like Denver, New York and Sacramento to design smart, livable and resilient urban communities. Water remains a good area of growth for us as well, with major infrastructure investment driven by population growth, regulatory standards and climate change. Power also remains robust in the continued push for the development of renewable energy.Technology continues to revolutionize the design industry, and clients are looking for data-driven and digital solutions. Stantec has a well-established track record of creativity, innovation and entrepreneurship in these areas. In recent years, we've become leaders using data visualization, augmented and virtual-reality technology and modeling and parametric design to deliver enhanced services to our clients and create efficiencies in the design process. We worked on the first Connected Vehicle test beds in North America. We've used geolocation technology to design transportation infrastructure. And with 9 active projects, we're the leading practitioner of using environmental DNA technology for environmental permitting and remediation. We continue to occupy spot on the leading edge, and I believe we'll continue to be a top choice for clients looking for technologically innovative fit-for-purpose solutions. Our goal is to be a top-tier design and delivery firm in all sectors and regions we serve. With our talented team and our focus on growth and efficiency, I know we can achieve our targets and continue to deliver value for our shareholders.Before I wrap up, I'd like to mention that earlier this week, we released our 2018 Sustainability Report. In the report, we offer details on Stantec's environmental, social and governance programs, and I invite you to review the report in the sustainability section of Stantec.com. And finally, before we start the Q&A, I'll add that I look forward to diving deeper into our strategy and outlook at our Investor Day on June 12 in Edmonton. Leaders from across our company will present on their respective businesses and provide insight into our drivers, trends, growth opportunities and improvement initiatives. If you miss the invitation, please let us know, we look forward to seeing you there. I'll now hand it back to our operator to begin the Q&A.

[Operator]

[Operator Instructions] We will now take our first question from Jacob Bout from CIBC.

[Jacob Jonathan Bout]

Looking at the -- your net revenue, organic growth, we compare it to what you saw in the fourth quarter 2018, looks like there's a big drop in Energy Resources and water. Is this just tough comps? Or are we just seeing an overall slowing? I guess specifically on the water side, I mean I thought that industry should be growing at kind of 4% to 5%. When we compare, you've actually produce some pretty good numbers there, too.

[Gordon Allan Johnston, President, CEO & Director]

Yes, good question. In Energy & Resources, we're coming off a high comp. Q1 '18 had almost 22% organic growth over the year-on-year. So Energy & Resources is a bit of a tough comp. We do have some good opportunities in Energy & Resources. And I think that, that will continue to improve throughout the year. Our water backlogs are still at all-time high for that group there. Part of this prob is, if we did receive a big input, a provision recovery in Q1 of '18, so that when you compare to that, it kind of drops a little bit. But if you normalize that out, water would've been roughly flat or a little bit above the line. But that's still not good enough. As you say, the market is very robust. For us, in water, we have the backlog. I think what we'll see in Q2 and Q3 is the ability now for us to start to move that backlog out the door.

[Jacob Jonathan Bout]

And how do you think about the water industry as far as inorganic growth rate?

[Gordon Allan Johnston, President, CEO & Director]

I do see us in that -- it's still consistent with the overall corporate growth rate. I see us in that low to mid-single digits.

[Jacob Jonathan Bout]

Okay. And then maybe just turning to EBITDA margins outside of the guidance range, maybe just talk a bit about how the seasonality of margin should look?

[Theresa B. Y. Jang, Executive VP & CFO]

I think the seasonalities will be -- you should see it improve over the course of the year, still within the range that we've been guiding towards. But I think historically, you'd see where Q1 is, it's outside of the range, a little bit below what the range is, that's been posted. So we do expect that to improve as the year progresses.

[Jacob Jonathan Bout]

Last question here just on backlog. So you talked a bit about the pipeline for water looking good, but clearly, seeing some strong growth quarter-on-quarter and year-on-year, how is that mix in backlog evolving here?

[Gordon Allan Johnston, President, CEO & Director]

It's a -- we've recently secured, and I mentioned in my comments, we've recently secured some good awards in our buildings group, in our water group that we're not able to disclose yet because the clients are asking us to hold off for a couple of weeks or a month, but those will come out. I think that you'll see that certainly in water and in buildings, some good recoveries there, good additional backlog generation. I would say, in general, we've had some good backlog as well in Environmental Services. And you saw in Q1 a big uptick in organic growth in Environmental Services. In general, the -- I would say that the backlog mix is pretty consistent with our overall revenue proportion.

[Operator]

[Operator Instructions] We will now take our next question from Yuri Lynk from Canaccord.

[Yuri Lynk]

Gord, can you comment on how the quarter fared versus your expectations? I mean there had been some talk about it being a little bit weaker, kind of below the normal seasonality for the quarter. So did it turn out as you guys had thought or a little bit better?

[Gordon Allan Johnston, President, CEO & Director]

No. I think we're pleased with the way that the quarter turned out. As you know, February and -- was pretty rough up in Canada from a weather perspective and that slowed a number of our -- February into March slowed a little bit of our fieldwork. I think, in general, we're pleased with it. 2.5% organic growth in the first quarter is okay. We do see that picking up in Q2 and Q3, which are -- normally are more seasonally adjusted, little stronger quarters for us.

[Yuri Lynk]

Okay. There were some comments made that maybe the seasonality would be around 18% of total EBITDA, 18% to 20%. Do you think that's where things shook out?

[Theresa B. Y. Jang, Executive VP & CFO]

Yes. I think it did come out about where we expected. It might have been slightly stronger. And there's never a perfect science to this. We can look historically, we can look at our forecast and see how things are shaking out, and that 18% to 20% is above what we expected.

[Yuri Lynk]

Okay. I think on the last call, Gord, you had expressed confidence that Canada would have positive organic growth this year. Is that still your expectation? And where would that strength be coming from?

[Gordon Allan Johnston, President, CEO & Director]

Yes. We do see strength in Canada overall. I think it will be a little more muted than the growth that we'll see in the U.S., but I still think we'll -- we've just won, as I mentioned, the projects that we won in both water and buildings were in Canada, so I think that will strengthen our backlog even further in those groups going forward. We see Environmental Services pretty robust in Canada. And we are still engaged on a number of the LNG projects, coastal, gas banks and archaeological work on Keystone and so and so. And if we can get TransMountain approved, then that will only further strengthen our revenue generation in Canada.

[Operator]

We now take our next question from Benoit Poirier from Desjardins Capital Markets.

[Benoit Poirier]

Just to come back on the backlog, so there was obviously a nice sequential growth in the overall backlog. Would it be possible to comment or provide more granularity about what has been done organically and maybe what is driven by FX or maybe more color about the backlog, please?

[Gordon Allan Johnston, President, CEO & Director]

Yes. On the FX impacts?

[Theresa B. Y. Jang, Executive VP & CFO]

I don't have the FX pulled out directly. There will be some impact there just because of the movement in the dollar, but I don't expect that, that would have played a very large role in our growth in our backlog.

[Benoit Poirier]

Okay. And organically, if there is and you -- do you have some numbers on organically what did -- does it represent?

[Theresa B. Y. Jang, Executive VP & CFO]

No. Actually I don't have that here broken out for me. I think when we gather our backlog information, we look at it by business and by geography, I don't think that we had to go through and sift through what has come through an acquisition in the data that I see. It certainly would be available this summer, but I don't have that.

[Benoit Poirier]

Okay. Perfect. And from a free cash flow standpoint, could you comment a little bit about how the IFRS 16 impacts your free cash flow? It seems that there's mostly just the boost of $25.6 million on the free cash flow side. Is that the way we should see it?

[Theresa B. Y. Jang, Executive VP & CFO]

Yes. I think so. I think that impact that you saw in the operating activities about $24-or-so million in the quarter would be what you'd expect really for the -- for each quarter of the outgoing years. And from a capital expenditure standpoint, of course, that doesn't impact that number at all.

[Benoit Poirier]

Okay. And net debt to EBITDA, including the IFRS 16, you're at 2x obviously. Any color about where would you like to end 2019, Theresa?

[Theresa B. Y. Jang, Executive VP & CFO]

Well, I think we'll -- if we used to state that our internal guideline was that 1.5 to 2.5x. We've shifted that metric down to 1.0 to 2.0. My expectation is that by the end of the year, if we stay at a course that we have in our plan, that we'll be well within that 1 to 2x range comfortably. Of course, that doesn't factor in additional acquisitions, which are always under consideration. But all things being equal, being somewhere we are to date, I'm comfortable that we'll be well in that range by the end of the year.

[Operator]

We now take our next question from Devin Dodge from BMO Capital Markets.

[Devin Dodge, Analyst]

Just wanted to come back to the leverage, obviously at the upper end of your target range -- I know some of this would be related to the seasonal uptick in working capital, but do you feel that the elevated leverage maybe restricts your ability in any way to pursue M&A in the next couple of quarters?

[Theresa B. Y. Jang, Executive VP & CFO]

No. Not at all. Again, recognizing it's high for all the reasons that we've already stated, the seasonality and the discrete uses of funds this quarter, but no, I don't see it as a restriction from a liquidity standpoint and access to capital, as I mentioned. We have an accordion that we can draw on. It requires approvals from the banks and we can use that feature, and we already are seeing, from the end of March, a strengthening in our overall cash flow position. So all that gives me confidence that there really is no constraint in terms of looking to do additional acquisitions this year.

[Devin Dodge, Analyst]

Okay. Okay. And maybe just switching gears here, but U.K. water project supporting AMP6, it seems like they're nearing completion. Just wondering, is it likely that we'll see a bit of softness in the U.K. water business until AMP7 activities ramp up in a more meaningful way?

[Gordon Allan Johnston, President, CEO & Director]

It is typical that in the last year of an AMP cycle, things slow a little bit. But I think we've chatted earlier that some of the decline in terms of provisions where they can renegotiate fees and roll into AMP7, and we're starting to have discussions with some of those clients now. And we can't say whether they will or not, it's really -- decision is up to them, but we've been doing good work for them there. And so if we are able to just roll into AMP7, then that will mitigate some of that slow down and pick up again. Recall that we also have already won 2 AMP7 projects that are brand new. So we are -- work is ramping up on those already.

[Devin Dodge, Analyst]

Okay. That's helpful. Maybe just one last one, just on Wood & Grieve, can you give us a sense for the revenue and maybe EBIT margins going in after that business? I just -- I saw the notes in the financial statements, the consideration given was maybe a bit higher than we were expecting.

[Gordon Allan Johnston, President, CEO & Director]

Do you have that information, Theresa?

[Theresa B. Y. Jang, Executive VP & CFO]

Yes. I just can't decide how to share that information. We'll expect -- I think maybe the better way to think about it is, in the quarter, Peter Brett and Wood & Grieve would have collectively contributed about 4.1% of the 6.6% growth we saw in our global business. I think that's a decent run rate to use if you were to extrapolate it for a full year. So I think we also expect from a margin perspective that it's going to be a little bit lower than what we might expect for our broader business in the first year as we integrate and we spend some time and resources on getting those integrated into Stantec. But on the whole, we do expect that -- it made a solid contribution for that period in Q1, and we'll expect that to continue through the year.

[Devin Dodge, Analyst]

Okay. So maybe put a different way, just if we put reasonable assumptions on like revenue per headcount and maybe going in margins, we're kind of backing into a number of kind of low to mid-teens EBITDA multiple? Is that at all what you're thinking? Or is there something else that we should be thinking about?

[Theresa B. Y. Jang, Executive VP & CFO]

I think for the first year, we would expect it to be a little bit less than that from an EBITDA margin perspective. Again, just for the reasons I've cited, it's the cost to get them integrated into Stantec will cause those margins to be a little bit lower than what you're citing.

[Operator]

We now take our next question from Maxim Sytchev from National Bank Financial.

[Maxim Sytchev, Managing Director and AEC]

Just if we may continue on the topic of Australia, do you mind maybe providing a bit more color in terms of the outlook specifically for Wood & Grieve in terms of backlog opportunities? And if there is any sign of growth plateauing on the horizon?

[Gordon Allan Johnston, President, CEO & Director]

So Max, may be Wood & Grieve is -- has good geographic diversity throughout the -- throughout Australia. So in the West, with our office in Perth, Stantec had a legacy environmental office as well in Perth. So the combination of those 2 -- our 2 offices working on projects for some of the miners there, now we're able to provide additional services that Wood & Grieve couldn't provide to those mining companies before as well as Stantec. So we are -- both firms are hiring in Western Australia to continue to meet the demand there. More on the Eastern side, certainly there's still robust activity in land development and community enhancement in the eastern part, Wood & Grieve is active in that. Certainly, the legacy Stantec group active on the water side there. So we do see kind of throughout, whether it's Western Australia, good opportunity is there, or the buildings environment and opportunity for growth, primarily associated with land development and inbound migration in Eastern Australia. We still see good activity in 2019, Max.

[Maxim Sytchev, Managing Director and AEC]

And is it fair to say, I mean it's still going to be greater relative to kind of the consolidated run rate on an organic basis, kind of like mid-single-digit plus. Is that what we should be expecting from this asset on a going-forward basis?

[Gordon Allan Johnston, President, CEO & Director]

That would be our thesis as well.

[Maxim Sytchev, Managing Director and AEC]

Okay. And then quickly just in terms of -- you mentioned some positive activity on mining in Lat Am, do you mind maybe expanding a little bit in terms of what exactly you're involved in right now? And how real is that potential rebound?

[Gordon Allan Johnston, President, CEO & Director]

What we've seen there, Max, is that the -- we work for the global multinational miners down in Latin America. And so after a number of years of sort of muted capital expenditure, we're seeing them come back with -- these aren't huge projects that they're coming back with, but a lot of sustaining capital-type work, a lot of base hits that we're seeing. And then that's all good work for us. We're seeing a lot of big increase in proposal activity, and we are hiring in that region as well. So I -- this isn't swinging for the fences-type work. This is just ongoing sustainable work. And then we would see a continued improvement in that through 2019 as well.

[Maxim Sytchev, Managing Director and AEC]

Okay. That's helpful. And just a last little question, if we were to combine environmental and water services, can you maybe let us know what is the exposure of these 2 verticals to energy and kind of resources? Just again, trying to get a bit more color on sort of the second derivative, oil and gas exposure for these 2 verticals.

[Gordon Allan Johnston, President, CEO & Director]

I would say from environmental services end and Energy & Resources that our exposure of those 2 groups is likely around 7%. Those 2 groups together make up about 28% of our firm and when I extract out the portions that they do for Environmental Services -- for oil and gas, that would be -- about like 7% of the overall revenue generation of the company would be in oil and gas now. And that was part of our strategy, Max, when we -- if you compare us back to coming up to 2013 and '14, our exposure to oil and gas was more in that 35% of overall company revenue. And through rebalancing, that now currently sits at about in this roughly 7% to 8% of overall corporate revenue.

[Theresa B. Y. Jang, Executive VP & CFO]

And there wouldn't be much exposure in water, et cetera.

[Gordon Allan Johnston, President, CEO & Director]

Yes. Not much exposure in water. You're right.

[Operator]

We now take the next question from Mark Neville from Scotiabank.

[Mark Neville, Analyst]

Maybe just the first question for Theresa. Just so to clarify just on the EBITDA impact from IFRS, the best way to think about this is just take $35.5 million and annualize it?

[Theresa B. Y. Jang, Executive VP & CFO]

Yes. I think that's right. Maybe the other way to think about it is, about 3.8% to 4% of net revenue is what has shifted from admin and marketing to below the line.

[Mark Neville, Analyst]

Okay. Yes, okay. I guess, I'd do that math, but still it's fairly close to those -- those 2 numbers are roughly the same, right?

[Theresa B. Y. Jang, Executive VP & CFO]

Yes.

[Mark Neville, Analyst]

Yes. Okay. And I'm not sure if you answered this question, just on the backlog, how much of that was Wood & Grieve, the increase?

[Theresa B. Y. Jang, Executive VP & CFO]

We did not answer that.

[Gordon Allan Johnston, President, CEO & Director]

Yes. I don't know that we analyze it in that way, Mark. I don't have that information available. But…

[Theresa B. Y. Jang, Executive VP & CFO]

But maybe we can tell you that of the change in our global backlog -- of our backlog, that global was about 15% increased. And so Wood & Grieve would certainly play a role in that. But just to what degree, I haven't got that here.

[Mark Neville, Analyst]

Okay. And maybe if I can just -- one last one if I can ask the balance sheet question I guess another way? You're at the high end of your range. I appreciate cash flow comes in through the year, but you're also talking about, I forgot the wording, but the most robust pipeline in M&A you've seen in a while. So I'm just curious sort of how high you'd be willing to take the leverage if something were to come along?

[Theresa B. Y. Jang, Executive VP & CFO]

I don't think that, that's a data point that I can give you directly. It's going to depend on the acquisition, where we are at the time. I think the only thing I can say is what I have been saying, and that is, that we've got good access to capital. We don't see a constraint there. We have the capability within our lending arrangements to expand beyond the covenant thresholds that we have to accommodate acquisitions for a period of time. So there isn't a constraint. How comfortable I'd be willing to go beyond the range to date? It'll totally depend on the acquisition itself and what we see as its earnings generation capabilities. So if there -- I don't have a hard number in my head, if that's another way for me to help you get the answer. There's no fixed number in my head.

[Mark Neville, Analyst]

Yes. No. That's fair. And maybe if I can just ask another one, I guess. I think Yuri sort of touched on this earlier. But just on the earnings pattern on a quarterly basis, I think if we take the Q1 number and sort of multiply by 5, assuming it's 20%, you get a fairly big number. So I'm just curious if the Q1 maybe a little stronger than you thought? Or if Q1 is maybe a bit more than what Q4 would be or a bit more than 20% this year?

[Theresa B. Y. Jang, Executive VP & CFO]

Yes. Well, I think the only thing I would point out, I'll go back to saying, it came out about where we expected, that sort of 18% to 20%. The reason if you take our actual results and extrapolate it by 4, you're going to get a big number, it is likely that $4.9 million tax recovery that you kind of have to take that out of the mix and then normalize it and then kind of annualize it from there, and you'll get the number that makes a little bit more sense.

[Mark Neville, Analyst]

Sure. But that $4.9 million was not in the EBITDA, right? That's a tax number, right?

[Theresa B. Y. Jang, Executive VP & CFO]

That's correct. But as we think about -- when I think about the sort of 18% to 20%, I do think about that from an adjusted earnings perspective.

[Gordon Allan Johnston, President, CEO & Director]

And Mark, I had a quick -- just looking at the track record and of the backlog growth which was just shy of $250 million, the majority of that backlog growth was in the United States. There certainly was some global backlog increase, and certainly some of that would've come from Wood & Grieve. But the overall backlog increase, Wood & Grieve wouldn't have been the major contributor to the overall quarter-on-quarter backlog growth.

[Operator]

We now take our next question from Ben Cherniavsky from Raymond James.

[Ben Cherniavsky, Managing Director of Industrial Research]

Theresa, I guess you've been there now maybe 6 months or so. I'm just curious what your observations are as you settle into the role about the opportunities that the impact you can have, the changes you can make and what the priorities might be for the near term, say, the next 12 to 24 months from the CFO's perspective?

[Theresa B. Y. Jang, Executive VP & CFO]

Sure. I think it's been -- there's been an awful lot to learn certainly in the months that I've been here, but it also has highlighted for me that there is something I can bring to the table from -- in terms of my experiences, both in terms of -- from a capital markets perspective, from an Investor Relations perspective and then the M&A perspective. So all of those things which are on high on our priority list here at Stantec are really where I see the focus of my energy and attention. I've been spending a lot of time, just kind of understanding historically what Stantec's philosophy kind of been around capital allocation? How we think about acquisitions, which are really central to our growth strategy. And then just from my own perspective, then formulating and I would say don't have a fully formulated picture yet, but formulating how I think about the rigor that we've built through as we make those acquisitions and I think I've -- everything I've seen to this point gives me confidence that this is a good management team. It's knowledgeable and disciplined. And so part of what I think I can bring to the table is just some -- perhaps more formalized metrics around how we think about where we allocate our capital to the growth, I think over the years, has been positive. It's created value for our shareholders. And so for me, it hasn't been highlighted extract that, that message is going to be able to delineate and tell the story in a way that the markets transcend and take and hold up against their own measurement and understand and see the value that we created. So those are all things that I'm focused on. I think from a capital structure standpoint, we thought there's some opportunity to enhance further our overall structure. And then from an internal standpoint, this is -- I've been really pleased with just the strength of my team and the talent that they bring to the table. And so working internally as well to continue to develop and work with the folks that I have on my team, those are all my key areas of focus for the next little while.

[Ben Cherniavsky, Managing Director of Industrial Research]

Okay. Maybe as a follow-up, I'd leave this open to you, either you or Gord, but if you look at the stock price, it's been kind of range bound for 6 or 7 years now. What do you think that tells you guys? What signal are you getting from the market? And what do you think the market might be missing from your perspective if there's any incongruences between those 2?

[Gordon Allan Johnston, President, CEO & Director]

Well, Ben, I'll go back to actually, I think, a comment that you made in one of your last investor notes, which is, show me. And I think that's sort of where we are. We knew, certainly coming into -- up to 2014, we were on a real trajectory, an upwards trajectory. That leveled off, as we mentioned earlier. And we were pretty heavily embedded or exposed to commodities and oil and gas at the time, which was a good "make hay while the sun is shining" strategy that leveled off a little bit with the downturn in commodities prices. Then when we acquired MWH, I think that was moving us in the right direction. And then we had the problems with construction. So now we're -- as we come into 2019, we're trading at a bit of a discount, from a multiple perspective for some of our peers, but I think that we'll put up good numbers, we'll operate well, put up good numbers for the next couple of quarters. And I think hopefully, we will show you, fellows like yourself who are just waiting to see that.

[Operator]

We'll take our next question from Christopher Murray from AltaCorp Capital.

[Christopher Allan Murray]

Just Gord, you made the comment about the U.K. and about your acquisition strategy there and the comment about monitoring the situation. Can you give us some thoughts around what it is exactly that you're monitoring? Or what would be kind of go, no-go decisions around further acquisitions?

[Gordon Allan Johnston, President, CEO & Director]

We -- starting in the summer of 2017, when I was first selected for this role, we spent a lot of time over there talking to really solid Tier 1 U.K. companies and really a business lines that lineup of our business line. And so we've got a pretty robust group of folks that want to join us, but because these are Tier 1 firms, we haven't seen their valuations come down at this point. So if their valuation comes down, we would gladly buy now one of the uncertainty related to Brexit, but now because these valuations are still sort of -- valuations pre-Brexit uncertainty, we don't want to overpay for something and then have Brexit go south on us. So really, that's where we are, it's just waiting and monitoring. I know some of our competitors have made moves in the U.K. lately and that's appropriate for them. For us, we're just taking a bit of a wait and see.

[Christopher Allan Murray]

That's fair enough. My other question -- and I'm not sure if you or Theresa want to take this, but it's kind of interesting as I go through the financial statements and, of course, it's always interesting to see the Q1 and how they kind of change. But one of the things that's becoming evident is, call it, maybe a more equal focus on the way you guys think about net revenue and gross revenue. And I know that's been something that some investors have been concerned about, but historically we're already focused more on gross revenue versus net, which with the construction business cause maybe a lot of confusion. But I guess my question is, how are you thinking about how you run the business for a revenue -- from an organic growth rate? Is that on a gross basis? Is it on net basis? And is that kind of thinking even filtering down into your business [ senior leaders ]?

[Gordon Allan Johnston, President, CEO & Director]

That's a great question. And net revenue is really where we generate revenue and generate EBITDA. And so that's really what we'll continue to focus on is from that perspective. You're right, when we got into construction, the growth to net ratios are completely different there. But now that we're back to our consulting business, really, net is -- we want to continue to grow net. That's where we hire more people and get more people busy and utilized. There still will be -- historically, we've had a pretty consistent relationship between gross and net, but what we're finding now and it's interesting that as we become larger and as we become more dominant in a number of our fields, a decade ago, we might have been a subconsultant to someone on a very, very large project. Now we're taking the prime position. So in that prime position, we have to -- we'll have a partner, we'll have in the United States, in particular, we might have minority or disadvantage or small businesses that we have to bring on as part of the team. But really, where we generate the revenue, where we hire the people is based on net revenue. So that is -- that's really the area that we want to continue to focus on.

[Theresa B. Y. Jang, Executive VP & CFO]

And I think just -- I'll just add onto that in terms of what you're seeing in our disclosures. I'm sure you've heard us say before and others in our peer group that it's the accounting rules that drive us to have to show growth and net revenue in equal prominence, I think we've been willing in the last years to sort of test the boundaries of that a little bit, so we still show the information because we have to, but to try and focus the discussion around what really matters which, to Gord's point, is net revenue. So we'll never get away from having to provide the gross revenue number, but trying to minimize the focus on it because it really, it's not what drives our EBITDA.

[Operator]

We now take our next question from Michael Tupholme from TD Securities.

[Michael Tupholme, Research Analyst]

Can you just talk a little bit about expectations as far as how you see admin and marketing expenses as a percentage of revenue evolve as we move through the year? And I know that one of the comments you made was that integration costs were said to be part of the reason that they were up year-over-year. So I was just wondering how you think about those as we go through the year as well?

[Theresa B. Y. Jang, Executive VP & CFO]

Yes. We do expect it to normalize back down over the course of the year into the range that we've provided. The efforts that we put in last year to bring admin and marketing as a percentage of net revenue down, those efforts continued. And so whether you think of it, the 41% to 43% on excluding IFRS basis, or a 37% to 39% with IFRS, that is a range that we believe that we can hit. So you will see that over the course of the year, we will fall back into that range.

[Michael Tupholme, Research Analyst]

Okay. And then just a clarification, as far as the new annual financial targets that conform to the new reporting, including IFRS 16, are all of the changes you've made strictly to account for that accounting change? Or have there been any underlying changes in any of the assumptions that went into the full year targets?

[Theresa B. Y. Jang, Executive VP & CFO]

No. In terms of the targets that we've revised, the only effect would be tax. So setting that aside for a second, in terms of margin, admin costs, EBITDA, net income leverage, those are all only reflective of the change in the accounting rules. The tax piece where we're seeing the effective tax rate is going to notch up from 27% to 28%. It's just updated forecast in terms of generating income and higher tax jurisdictions and new projections on nondeductible expenses and that sort of thing. So that would be the only one that changed slightly because of something other than IFRS 16.

[Michael Tupholme, Research Analyst]

Okay. And you've been asked about this a couple of times, but just to be clear, when you provide the earnings pattern and the percentage of earnings I suppose that will fall into the first and fourth quarters versus second and third, we should not be looking at those percentages as applicable to the EBITDA, the adjusted EBITDA for the company, is this strictly as it relates to earnings or adjusted earnings?

[Theresa B. Y. Jang, Executive VP & CFO]

Yes. I'm looking at it from an earnings standpoint.

[Operator]

It appears there are no further questions at this time, sir. I'd like to turn the conference back to you.

[Gordon Allan Johnston, President, CEO & Director]

Great. Well, thank you again for joining our call. Appreciate your questions, and we look forward to seeing you next month in our Investor Day here in Edmonton. So thanks very much.

[Theresa B. Y. Jang, Executive VP & CFO]

Thank you, everyone.