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WSP Global Inc
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[Foreign Language] Good morning, ladies and gentlemen. [Foreign Language] Welcome to WSP's Third Quarter of 2019 Results Conference Call. I would now like to turn the meeting over to Isabelle Adjahi, Senior Vice President, Investor Relations and Communications. [Foreign Language]
Thank you, and good morning, everyone, for taking the time to join us for the call, during which we will be discussing our Q3 performance, followed by a Q&A session. Today, we are talking to you from our Dubai office, where we had our Board and leadership meetings, so I would like to apologize in advance if we get disconnected. We will reconnect shortly.With us are Alexandre L'Heureux, our President and CEO; and Bruno Roy, our CFO. Joining us as well is Alain Michaud, who as announced in yesterday's press release, will succeed Bruno Roy as CFO, effective at the end of March.Please note that this call is also accessible on our website as a webcast. During the call, we may be making some forward-looking statements, and actual results could be different from those expressed or implied. We undertake no obligation to update or revise any of these statements. Relevant factors that could cause actual results to be different materially from those forward-looking statements are listed in our most recent MD&A.With that, I will now turn the call over to Alexandre L'Heureux. Alex?
Thank you, Isabel, and good morning, everyone. I'm very pleased with our strong Q3 results, which I will be commenting in a few minutes. But before I do so, I would like to take a few minutes to discuss the announcement we made yesterday about the transition at the group CFO level.As part of this transition, Bruno Roy will be leaving WSP at the end of March 2020 to pursue new professional endeavors. Alain Michaud, currently Senior Vice President, Operational Performance and Strategic Initiatives, will succeed him as Chief Financial Officer at such date. Until then, Bruno will continue in the role, complete the current fiscal year and work closely with Alain to ensure a smooth transition.Having joined WSP in 2016, Bruno assisted in delivering on our 2015-2018 financial ambitions. He leaves behind a strong balance sheet and improved working capital management. On behalf of the entire global leadership team and myself, I would like to wish you all the best in your future endeavors, Bruno.Also I want to wish Alain continued success in his new role. Alain has a profound knowledge of WSP, not only has he spent the last few months with regional leadership teams to fully understand our operation and business model, but in his previous role as Senior Partner at Pricewaterhouse Canada, Alain has advised WSP's senior management and the Board of Directors on various matters during the last 6 years. Alain, who received a CPA and CA designation in '97, has an impressive track record of achievements in the professional services industry and a broad range of experience in mergers and acquisitions and strategic planning acquired over his 25-year tenure at Pricewaterhouse.Separately, the process to develop a transition plan for Alain's current role is underway. Over the next few weeks, you will have the opportunity to meet with both Bruno and Alain as we will be organizing breakfast meetings in Montreal and Toronto on November 12 and 13, respectively. Details and registration forms are available on our website and will be e-mailed to you after this call.Perhaps, Bruno, you may want to say a few words?
Thank you, Alex. First, I want to thank you, the Board and the team. I truly consider myself privileged to have had the opportunity to serve as CFO of this terrific company. I take pride in our accomplishments over this period, and I'm particularly proud of the finance teams, not only in Montreal but around the globe. I leave a company which is both financially and operationally strong, and I'm very confident that WSP will continue to deliver shareholder value while continuing to deliver on its mission.As Alex said, I will continue in my current role until we deliver fiscal 2019 and will have the opportunity to interact with most of you over the next few months. We could not have chosen a better successor since, as Alex mentioned, Alain has not only the operational and business model understanding but also the financial leadership to lead the team in the next chapter of its successful journey. Alain, welcome to the role.
Let me now -- thank you, Bruno. Let me now comment on our strong third quarter financial performance, which Bruno will further elaborate on later on in this call.For the third quarter, net revenue were $1.7 billion, up 15.3% compared to Q3 of 2018. On a constant currency basis, organic growth in net revenue spending across all reportable segments amounted to 4.4%. On a post-IFRS 16 basis, adjusted EBITDA was $288.2 million, with adjusted EBITDA margin reaching 17% compared to 12.7% last year. Backlog stood at $7.9 billion at the end of the quarter, representing approximately 10.5 months of revenues. Our backlog grew organically by 4.7% when compared to Q3 of 2018 and 2.4% over the first 9 months of the year. Last 12 months free cash flow remained strong at $423.9 million or 147% of net earnings attributable to shareholders.I would like to turn to our regional operational performance highlights. Our Canadian operation generated 1.2% net revenue organic growth, reversing the trend we have seen in the first half of the year. For fiscal 2019, we anticipate low organic growth. Adjusted EBITDA and adjusted EBITDA margin before global corporate costs amounted to $61.4 million and 22.4%, the highest margin among all of our reportable segments. On a pre-IFRS 16 basis, adjusted EBITDA margin before global corporate costs stood at 18.1%, in line with our expectations.Project wins continued to be strong, with Canadian backlog growing organically by 7.7% over the first 9 months of the year. The Ontario government recently released its 2019 P3 Market Update announcing more than $65 billion in potential projects in the years to come, which bodes well for future growth in the province. More specifically, on our wins for the quarter, we are pleased to share that following a 10-year process, the Public Works and Government Services of Canada awarded Innovate Energy, a private partner consortium including WSP, the 35-year Energy Services Acquisition Program, or ESAP: a contract valued at $2.6 billion to design, build, finance, operate and maintain the modernized heating and cooling plants in the national capital region of Ottawa. This project, which is the federal government's green initiatives aimed at promising a safer environment for future generations, will encompass the implementation of a new electric system to power the heating and cooling plants that support 80 federal buildings. WSP will be the lead designer for this project, which is the result of collaborative efforts across our teams in Canada, Sweden, the U.K. and the U.S.On our -- our Americas reporting segment posted organic growth in net revenues of 8.2%, stemming mainly from our U.S. operation. This increase was mainly due to the timing of the revenue recognition of some of our large assignments. For fiscal 2019, we anticipate mid-single-digit organic growth. Adjusted EBITDA and adjusted EBITDA margin before global corporate costs were coming in at $127.4 million and 21.3%, respectively. On a pre-IFRS 16 basis, adjusted EBITDA margin before global corporate cost stood at 17.9%, and organic growth -- backlog growth was particularly strong at 13.9% when compared to Q3 of '18. In the U.S., where we have just start to work -- or started to work on the preconstruction phase of the Texas high-speed rail project providing civil and structural works engineering as a member of the Texas High-Speed Rail LLC, a Salini Lane joint venture. Once completed, this multimillion dollar, 240 miles rail-line will connect North Texas and Greater Houston in 90 minutes at speeds of up to 205 miles per hour. We are also pleased by the renewable of our FEMA contract, which runs over a 5-year period and is -- at USD 943 million. This amount is included in our sales backlog. And for comparative purposes, during the last 5 years, we have generated approximately USD 430 million in revenues from our FEMA work. As often mentioned before, these revenue streams are unpredictable as they are clearly triggered by emergency or natural disasters.Our EMEIA operating segment delivered organic growth in net revenues of 2.1%, led by continued strength in the U.K. Transportation & Infrastructure sector. For fiscal 2019, we anticipate low to mid-single-digit organic growth. And adjusted EBITDA and adjusted EBITDA margin before global corporate costs amounted to $75.6 million and 14%, respectively. On a pre-IFRS 16 basis, adjusted EBITDA margin before global corporate costs stood at 10%.In the Middle East as part of the China Rail-Guizhou joint venture, we were appointed as the design consultant for phases 2B and C of the Etihad Rail line, a 310-kilometer rail project, which construction cost is estimated at USD 1.2 billion. Our APAC operating segments posted organic growth in net revenues of 6%, mainly driven by our operation in Australia and New Zealand, which posted double-digit organic growth in net revenues. For fiscal 2019, we anticipate mid-single-digit organic growth. Adjusted EBITDA and adjusted EBITDA margin before global corporate costs amounted to $48 million and 17.1%, respectively. And on a pre-IFRS 16 basis, adjusted EBITDA margin before global corporate costs stood at 13.4%.In Australia, we were awarded the contract for the Independent Certifier role on the Western Sydney International Airport, one of Australia's largest ever infrastructure earthworks projects. Under the agreement, we will complete certification of the bulk earthworks, pavement works, airfield, terminal and specialty work as well as land side, civil and buildings, so a significant project for us.Now to our acquisition activities during the quarter. In line with our 2019 and 2021 Global Strategic Plan, we strengthened our strategic advisory services offering in Environment, with the acquisition of Orbicon, predominantly based in Denmark. With the subsequent acquisition of Lievense, we established a presence in the Netherlands, bringing our total workforce in Continental Europe to well over 1,000 people now. Once again, I would like to welcome our newest colleagues. And as for Ecology & Environment, we continue to expect the transactions to close during the fourth quarter of this year.Once part of WSP, E&E will also add to our expertise in the environment, bring our total workforce to approximately 50,000 people and our environmental platform to approximately 7,000 employees, an increase of over 20% in this year alone. Bruno will now review our Q3 financial results in more detail. Bruno?
Thank you, Alex. We are pleased with our strong Q3 financial performance with key metrics exceeding -- or in line with our expectations. For the third quarter, revenue and net revenue rose to $2.2 billion and $1.7 billion, respectively, an increase of 15.2% and 15.3%, respectively, compared to Q3 2018. Organic growth in net revenues amounted to 4.4% for the quarter and 3.3% for the first 9 months of the year, in line with our outlook. Adjusted EBITDA for the period stood at $288.2 million up $100 million or 53.7% compared to Q3 2018. Adjusted EBITDA margins reached 17% compared to 12.7% last year. Excluding the impact of IFRS 16, adjusted EBITDA would have been $224 million or 13.2% of net revenues.Our backlog stood at $7.9 billion, representing approximately 10.5 months of revenue and increased 21.5% when compared to Q3 2018, including 4.7% in organic growth.Turning to our balance sheet. We ended the quarter with a DSO of 80 days. Excluding the impact of the integration of Louis Berger, DSO would have amounted to 76 days, essentially the same level as the same period last year. Trailing 12 months free cash flow amounted to $423 million or 147% of net earnings attributable to shareholders. Incorporating a full 12 months adjusted EBITDA for acquisitions, our net debt-to-adjusted EBITDA ratio came in at 1.4x, including the impact of IFRS '16 and 1.7x excluding it.Finally, we also declared a dividend of $0.375 per share to shareholders on record as of September 30, 2019, which was paid on October 15, 2019. With a 51% Dividend Reinvestment Plan participation, the net cash outflow was $19.3 million.This concludes my remarks. Alex, over to you.
Thank you, Bruno. Before we open the line for questions, I would like to reiterate that we are pleased with our Q3 and year-to-date performance as we delivered solid results, which translated into positive trends on our key financial metrics, strong free cash flow, a strong balance sheet and a healthy leverage ratio, which, by year-end, is projected to land at the low end of our target range. Based on this continued momentum in the regions, we are reiterating our full year 2019 outlook, and expect net revenues and adjusted EBITDA to be at the high end of the range disclosed in Q2 of '19.Finally, as you remember, last quarter, we have increased our full year adjusted EBITDA outlook range to $970 million to $1.030 billion to reflect the impact of IFRS 16. Therefore, we are also updating the adjusted EBITDA margin on our '19-'21 Global Strategic Plan to now reach between 15% and 16%.I would like now to open the call for questions.
[Foreign Language] [Operator Instructions] Your first question comes from the line of Chris Murray with AltaCorp.
Can we just turn back a little bit to your commentary around the -- some of the stuff you saw in Ontario. And any thoughts around whether or not that new P3 package, or anything else, could actually start shaking loose some more activity for you?
Look, the announcement is obviously positive. Having said all that, I will -- only going to believe that when it happens and it materializes. So at this point in time, as I mentioned in my address, the backlog is there. The opportunities are there. We actually have a good backlog in our Canadian business. But I would like to see some progress being made on a consistent basis and for -- and less so than just being anecdotal for me to tell you that this is really promising. So at this point in time, I'm remaining prudent. But I think when this is being unlocked, I think we will be very well positioned to take advantage of that.
Okay. Fair enough. And then just turning to your U.S. segment. Just -- you talked a little bit about some margin pressures, I guess, with the integration, but you also talked about the fact that the integration feels like it's on track. Any thoughts around when you believe or if it's possible to believe seeing margins get back to kind of a normal rate in the U.S.?
Yes, Chris. It's Bruno. On the U.S., again, throughout the year, we -- as you know, we've integrated Louis Berger, which had lower margin than we had in the past. So raising them towards our level of slowly but surely over the course of 2020, you should see some that [ upside ] in cost.
Your next question comes from the line of Benoit Poirier with Desjardins.
Alex, could you talk a little bit about the alliance contracting and what are the implications for WSP? I mean Ontario recently launched a new procurement model with Union Station at RFQ, and it seems that it's a growing trend across the globe. So just would be curious what are the implications for WSP?
Well, we were awarded the contract, so it's not like we have to go through a new procurement process or being impacted by a new model. We won this contract. It's been signed, and that's why I'm disclosing it right now. So I'd say that there are no real implication for us.
Okay. Okay, perfect. And if we look -- with respect to the closing of Ecology and Environmental, could you talk a little bit about the potential for margin improvement. And do you see other opportunities to acquire some public companies that might not perform well but have a strong brand or a strong foothold?
Well, Ecology & Environment, I'm very pleased with this acquisition. It's not the largest. It's -- but the Ecology & Environment historically and for the last 40 years, they've had an extraordinary brand. They have a great list of clients. And I think that this, combined with our Louis Berger acquisition, our legacy WSP business and additional acquisitions in the environmental sector that we hope to complete at some point in time in the future in the U.S., we will be building a very strong brand in the U.S. Already, when you look at our headcount in the U.S. not so long ago we were de minimis. It was essentially very little or 0. And now with the recent acquisitions, I mean, we'll be well above 1,000 people. And now we'll be -- we're not a top firm in the environmental sector yet, but that's certainly an ambition to continue to build our presence. And I think Ecology & Environment is a great step in that direction. So that was the first part of your question.On the second part. Look, I mentioned that when I finished my keynote address that certainly, by the time we get to the year-end and assuming that we are generating the free cash flow that we've generated in past years, clearly, we're going to be in the low end of our range in terms of leverage. So clearly, we have a very strong balance sheet position. But what has made us successful in the past, Benoit, that we've always remained very disciplined and focused on our strategy but also on the price that we pay. So I think our goal is really to be on the lookout, and I have been and the team has been for -- as usual, and the pipeline is good. But it needs to make sense. So clearly, there will be some opportunity. I'm confident that some will show up. Actually in a good market, but also one day, maybe in a downturn, if you have a good balance sheet. So of course, I'm remaining optimistic in the months and years to come.
Okay. And last one for me. When we look at the Americas, you mentioned a favorable timing in Q3. But does it mean that Q4, should we expect a little bit more softness in Q4, given the favorable timing issues in Q3, Alex?
As I said, we are going to end the year in the upper end of our range, both on net revenue and EBITDA. Therefore, I would not argue -- I don't think what you just mentioned is a fair statement. I think that we're different than other companies in the sense -- than other industries, I should say, in the sense that the income recognition will change from 1 quarter to the other, depending on the degree of advancement of your work. It's not like selling widgets between quarters. I mean -- so obviously, income recognition is going to vary from 1 quarter to the other. But I do not expect any adverse impact in Q4, given that we're going to finish in the higher range of our -- higher end of our range, I'm sorry.
On aggregate.
On the aggregate, yes.
Your next question comes from the line of Jacob Bout with CIBC.
Maybe just going back to Canada. Your thoughts on the results of the federal election, does that actually help or hurt your outlook?
Well, it's not for me, Jacob, to comment on politics. Our job is to deliver services to our client with or without the government that is out right now leading the country. So I don't necessarily have an opinion on it. I think the jury is out. We'll see what the federal government will come up with from an infrastructure point of view. But we're not trying to be distracted by who won in politics and really trying to deliver the best services. Now as I said before, the backlog is good. And with a bit of luck and some momentum, hopefully, things will pick up and we'll be in a position to really take advantage of it.
I know you've talked about that Nordics slowing from a very robust level. But outside of that, are you seeing any areas of weakness at all from where you were last quarter?
I'm sorry because I missed the first part of your question. Can you repeat it, please?
Yes. The first part of the question, I was just commenting on the Nordics. And I know in the past, you said you've seen a little bit of slowing there. But I'm just trying to get a feeling as far as how you're thinking globally versus last quarter. Are you seeing any slowing globally?
Look, we're going to finish the year in the Nordics on a good note. I think it's fair to say when you look at the public data, that the private sector residential market has cooled off a little bit. And I'm not talking about recession here, not at all. Not even close. But all I can tell you, and I think I've talked about this for quite some time, a few quarters now, that yes, the private residential sectors has cooled off a little bit. But this year, the Nordics will be delivering on budget, will be delivering good organic growth and actually an improved margin profile, which is refreshing given that the Nordics had a decline in margins for the last 2 years. So this year, we're back on the right trajectory, and I'm very pleased about that.
And outside of the Nordics, is there any signs of weakness globally?
Look, you read and listen the news like I do. Of course, I'm always quite impressed, that's probably the right word, by the way our business in the U.K. has been performing. Given the uncertainty that the country is going through, I'm very impressed. And as I said in the last quarter, I think our team should be commended for the way -- the good work that they've done. Globally, clearly, of course, there is some uncertainty on tariffs and trade wars and election. And -- but as I said to you early on, we cannot stop thinking about uncertainties that we don't have any control over, nor we can think about politics. Our job is to win work, create shareholder value and deliver on ambitions. So that's what we're basically doing. And we're going to do the best that we can in the environment in which we operate.
And just a housekeeping item here on the IFRS 16 impact and guidance reconciliation. So if I remember correctly, you're guiding that the full year impact of IFRS 16 on EBITDA is around $240 million. If my calculation is correct, you're around $192 million year-to-date. So does that guidance still hold for full year?
Yes. We'll be -- again, in the upper end of the guidance, we have given on that. So 240-ish is the right number at this stage.
Your next question comes from the line of Derek Spronck with RBC.
Your organic growth rate seems to be tracking ahead of the industry and potentially gaining market share. Would you say this is accurate? And what do you think are some of the key drivers of this dynamic?
Well, a couple of more granular observation, and they are more intuitive, and I don't have the data in front of me. So -- but just to give you a bit of color. Indeed, I believe right now, in Australia, we are gaining market share. I think in Asia Pacific over the recent years, I believe we've been growing at faster rates than some of our peer group. I believe in the U.K., despite, as I said before, a more challenging environment, I do feel that WSP, over the recent years, have been gaining market share and have been doing extremely well in the marketplace. And while doing that, we were able also to improve our margin profile in the U.K.In Canada, I think we are certainly a leading firm in the Canadian market, probably the leading firm now in the Canadian market. So -- but it's been, I believe, a challenging environment for everybody. So I wouldn't argue that we are, at this point in time, gaining market share. But we're certainly not losing any. I think we're doing well. But I'd like to see a better organic growth rate for me to suggest that we are. And in the U.S., I mean, we have definitely a plan to gain some market shares in pillars or business lines where we don't have a strong presence. So in the years to come, we will try to grow them aggressively. And then in our main markets, I believe that we've been growing at a good rate. And we've been doing very well, and I'm feeling good about the future of our U.S. business.
Okay. No, that's great. Do you think -- is the driver -- obviously, with the margin profile improving it doesn't appear like this is a price-led sort of market share strategy. Would you say it's your positioning? And your positioning within the marketplace being more of a specialty-type of engineering shop versus a more commodity-type of engineering shop? And if so, how do you think about your peers -- who your true peers are from a valuation perspective?
Well, I'm glad you're raising this point because I have rarely an opportunity to comment on WSP's expertise. I'm not going to comment on our peer. I have the utmost respect for our competitors. But I can comment on ours. I have -- I believe that WSP, and I mentioned it many times, is uniquely positioned to take advantage of the trends that are taking place in our industry. I think the brand -- the rebrand of our organization and the brand awareness over the recent year has been tremendous. We've added a lot of momentum. But at the end of the day, we're selling green power and we're selling expertise. And both organically by attracting top talent in our organization and also through acquisition, where we acquired a lot of very strong expertise, I think we've been able to develop a really solid offering for our clients. And I think we are witnessing that right now. And I must say that I'm quite pleased with the way we've positioned WSP as a trusted adviser to the main clients in this industries -- in this industry, I'm sorry. And I think if we do it well, I think it's going to bode well for the company in the years to come.
And your next question comes from the line of Devin Dodge with BMO Capital Markets.
I just wanted to come back to the U.K., you've touched on this a couple of times here. But some of your competitors have suggested that uncertainty related to Brexit has started to impact the timing of certain projects. Just trying to get a sense for -- have you seen any impact on your business in the U.K.? And if not, can you help us understand how you've been able to avoid any kind of slowdown there?
Look, I mentioned it previously -- in previous calls, to suggest that Brexit has not had any impact on our company is untrue. Clearly, I think it's impacting everybody. And I would agree with our competitors that clearly, for instance, in the private sector real estate sector that real estate developer, oftentimes are on the wait-and-see approach. They want to see what may come up and what -- how things will shape up before putting a massive project to the -- to start working on a number of significant projects. So clearly, in the U.K., we have seen a bit more of a wait-and-see approach from some of our clients. But at the same time, it's still formidable to see that the country is fairly resilient despite the uncertainty that we've been seeing. I think we have a good backlog. We shouldn't take our backlog for granted, and we're absolutely not. We're monitoring that very carefully. But I have to tell you, and as I said before, I myself am very impressed with the way our team has been performing in this uncertainty, with this environment essentially. So I'd say that we're going to have a good end of the year in the U.K. and we are in the middle of our budgetary process in 2020. But right now, I think we're entering the year thinking that we're well positioned in the U.K.
Okay. That's helpful. Maybe just switching gears here. But just given the tight labor markets across many of your regions, have you seen employee turnover pick up at all? And just maybe further to that, what sort of wage inflation are you seeing across the company? And where are you seeing the most wage pressures?
Yes. The wage increase, I'm not going to disclose. This is truly a competitive advantage. So it's something that clearly we're using oftentimes to attract talent. So I'm not going to comment on this. But it's not -- just to put things in perspective, it's not more than it has been in previous years. It's certainly not the top lever that we're using to attract talent. But clearly, you're right. I mean, we're a people business. Although we are using and we're digitalizing our services more and more, it's very much a people business environment, and creating the perfect environment to attract the top talent is really important. And you're right, there is a war on talent. But it's not consistent and the same across the globe. So there is some more turnover in some places and more than other places. But I think you are right to point out that, yes, we are all chasing the same talent. It's our job to attract the best talent in the industry by offering very exciting career opportunities. So there is some higher turnover in some places. But in other places, in our large hubs, the turnover is actually below industry average because I believe we're doing a great job at creating a great career environment for our people.
Your next question comes from the line of Michael Tupholme with TD Securities.
Alex, can you provide a little bit of an update on the integration of Louis Berger? And I believe Bruno mentioned something to the effect of expecting some margin improvement in the Americas region as the -- as that integration occurs next year, but I didn't quite catch the comment there. So if you could reiterate that, that would be helpful.
Yes. So for the first 9 months, Louis Berger turnover has been below 10% which is, by industry standard, very low. So that means that I think we've done a very good job at selling the vision, selling the strategic rationale, the combination between Louis Berger and WSP U.S. Today, the subsidiary of Louis Berger, ABAM, the port and rail business is fully integrated to WSP of the U.S. is well underway to be completed. So by year-end, this will be fully integrated. I think benefits have been fully integrated. But more importantly, I mean, we've won a number of assignments already together as a corporation, especially in the federal space. That would have not been won by Louis Berger had we not been there. So I think there's a lot of good momentum. It's very complementary to what we do. As a friendly reminder that we do some great environmental work in the federal space, they have a very strong planning advisory piece to their offering, something that is very complementary to what we do. And finally, in bridges, they're very strong. So I think it's been great news. And I think it bodes well for the future. There will be a bit more, I would say, cost synergies and what I should say, integrating -- integration costs in 2020 when we turn our eyes on Louis Berger International. We mentioned at the time of the announcement that there is a certain part of the Louis Berger International that we would want to restructure. So we're working on this right now. But things are going as planned, and we're very pleased with that.
Okay. Just on the...
And the last point -- sorry, Michael, the last point, clearly, of course, we are working at improving the margin level of Louis Berger to our level. And actually, this year, we've had a good year in that regard.
Okay. That's helpful. On the subject of acquisitions just, more generally. I think you maybe touched on this a little bit. But any commentary on the acquisition pipeline in general? And beyond that, are there any regions that you're more focused on now than previously. Any changes in terms of the regions you're focused on for acquisitions? And specifically, I'm looking at the fact that you recently announced the Lievense acquisition in the Netherlands. So wondering if continental Europe has become more of a focus for you.
At the time of the -- when we unveil our strategy in early January, I mentioned the geographies of interest to us. So clearly, we are going to continue to deploy the vast majority of our capital in the OECD countries. We will continue to deploy capital in places where we are subscale. Back then, I mentioned that there are a number of geographies in the U.S. where we are subscale. As an example, California has the economy of Canada and Texas has the economy of Australia. So on its own, the U.S. is multiple countries. And we are subscale in many places in the U.S., so we'll continue to look for good opportunities to scale up our U.S. business. But equally, in Europe, not so long ago in Central Europe, we were very small with a very little presence. And when you look at the Holland and Spain and France and a number of jurisdictions and countries, we talked about a pool of 300 million people population. And our work is not always correlated to GDP growth. It's correlated to needs in the countries. And therefore, I think it's really important for us if we aspire to become the best professional consultants in our industry to grow our presence in that region. And the Netherlands are known to have very, very solid engineers and a lot of shared expertise. And it was important for us, and frankly for many years now, to enter the Dutch market, and I'm very pleased about this acquisition.
Okay. And then lastly, just wondering if it's possible to get a bit of an update on your thoughts around capital allocation. So clearly, it sounds as though acquisitions will continue to be an important part of the mix. But you did talk about your leverage ratio coming down further by year-end. So just wondering if you can provide some more general comments on overall capital allocation priorities and whether other parties are likely to be in the mix as well.
Well, it's fairly simple, right? I mean there are 3 things we can do. We can increase the dividend, we can buy back stock or we can deploy our capital by making additional acquisitions. So obviously, I do feel at this point in time that the pipeline of potential acquisitions in the next 12 to -- by the end of our strategic plan is still intact. We have a good pipeline. And therefore, this is certainly my first choice. And so therefore, we're monitoring that very carefully. But it's our job also to always review our capital structure. And in December, this is when I'll be discussing with our Board about what we want to do next.But if you look at our yield, dividend yield. I mean, we have a very attractive yield compared to our peer group despite our stock appreciation. If you look at our payout ratio, with or without the DRIP, I think we are tracking very well. I'm pleased about that. So I think we are in a good place. I see this, to me, as a real opportunity to take advantage of it if good opportunity presents itself. But we'll see what 2020 will look like. And then we will inform you in due course. But I think the fact of the matter that we are in a position to already be on a pre-IFRS basis, I'd say at 1.5x by year-end I think will be a great place to land. And that -- the credit should go to our team who has created a very strong free cash flow over the last few years, and we were able to deleverage fairly quickly.
Your next question comes from the line of Frederic Bastien with Raymond James.
Just building on that, you do have the balance sheet strength to continue buying several more businesses down the road. But how are you feeling about your capacity to absorb and integrate them?
I think I'm feeling very good, Frederic. I think -- I look at the -- recently over the last few years, we've done a number of smaller-sized acquisition but also a number of midsized acquisitions. The Louis Berger and Opus and Mouchel, just to name a few very -- in recent years. And clearly, I mean, the Opus integration in history, the Mouchel integration is history. Louis Berger will be very soon history as well. So I'm feeling good about it. And I think we are good integrators because we do a lot of work upstream ahead of signing an agreement. And so therefore, I do feel good about it, yes.
And are you agnostic to the size of the firms you're kind of looking at? I mean, would you rather do a 5,000-employee firm acquisition versus 5 acquisition of 1,000-employee firms.
I don't think it would be fair to say I'm agnostic because, to me, every acquisition is different, whether It's a 50-people firm or a 15,000-people firm. If we -- should we choose to complete them because they bring something to the table, and they're allowing us to strengthen our platform. So clearly, I think we have the capacity to do those 500-people firm. We have the capacity to do the 5,000 people from. And obviously, clearly, given our fire power, now we have the capacity to do bigger, much bigger. So -- but it needs to make sense at the end. I see a lot of potential transaction that makes sense financially on paper. But I also know that strategically and practically, that product would not create long-term value for our shareholders, and I'd rather not do them. So we're very disciplined but I'm open-minded. And it's not because we're now a 50,000-people firm that we're not looking at the smaller-sized firm. That's not our culture, and that's not the way we work.
Okay. My last question, how are you feeling about the state of the U.S. markets and your position within those markets?
Well, look. You look at recent data on a high-level basis, I think banks don't seem to be in a position to agree whether we are facing, and on a relatively short-term basis, a recession or not. So it's obviously not my job. But it's also tough for us to see what's coming up. At the same time, you look at our backlog, our backlog is growing. I think our 2020 backlog is in a good shape. I feel we have the team to execute, so we'll continue to execute on our strategy despite the environment that we operate in. And so we have a very, very clear strategy in the U.S. And as I said, the teams will execute on it and I feel good about it.
Your next question comes from the line of Dimitry Khmelnitsky with Veritas.
So I have 2 questions. First is -- has to do with the 2019 acquisitions. Three other acquisitions going beyond the Ecology & Environment acquisition. Do they have similar financial profile or performance as the E&E acquisition? So that's first part of the question. And second is if you can talk a little bit more about how you can improve profitability at Ecology & Environment going forward.
The answer is no. The profile is not the same in all of the acquisition that we completed for a number of different reasons. Some may have a very healthy EBITDA margin profile. Some others may need some operational excellence. We need some best practice to be implemented. I am convinced that that's the case with Ecology & Environment. Ecology & Environment is a very strong brand and had been a very strong brand for many, many years with great people. And this company needs to join a group that will allow them to spread their wings, take advantage of our network in the U.S. and abroad and work with us to improve the margin profile of it. Our history is proof that we are good at joining forces with companies and working with them to improve the margin profile. So I am confident that we will be able to improve the margin in the U.S. -- and I mean in Ecology & Environment. But as I said before, the profile is not the same. And also, the country margin profile is not the same, so -- whether you buy in 1 place or the other. So I hope that this answers your 2 questions.
Yes. Maybe if you can provide a little bit more color in general on how would you address margin improvements related to acquisitions. What will be some of the measures that you'll take?
Margin improvement is not just an acquisition. Margin improvement relates to our existing business as well. We can always improve as a business. You're never going to hear me saying that now we've reached a level where we're no longer in a position to improve. We constantly have to challenge the status quo to reinvent ourselves, and that's what we're doing right now. But there's not 1 single answer to your question. The levers that are needed, for instance, to improve the margin profile in Australia may be completely different than in the U.S. And on acquisitions, some companies may have a pricing issue or a client selection issue, a project selection issue. Some others may be more of a matter of utilization and better use the resources that they have internally. Also, it may be just the position in the marketplace or the service offering that you may want to use. So in our industry, it's not 1 single lever that will move the margin. It's a number of small but very important [ actions ] that will drive performance in the company.
Your next question comes from the line of Nauman Satti with Laurentian Bank.
So Alex, if you could comment high level on the competitiveness of the bidding activity as compared to last year. And has that impacted in any way the pricing?
My intuition, like first gut-feel answer, is that is hasn't changed materially, or at all, frankly. Let's not kid ourselves. We have -- we are operating and involved in an industry with formidable companies, and we're competing every day against very good companies. And therefore, it's a very, very competitive environment, whether you operate in the U.K., or in Canada, or in the U.S. or elsewhere, you always bump into great players. And you need to be on your A game to win the job. So I think my answer, very simple answer that it hasn't changed much, or at all, frankly, since last year.
And just going back to the Canadian operations and its margin. What will you attribute this? Is there anything specific? Or again, is this multiple levers at play?
It's multiple levers. But I can tell you, being very close to our Canadian operation that the team should be commended. Cost containment, they've done a very good job this year at managing the business, at streamlining the business, at reacting to market conditions very quickly in our space. And I may have mentioned it to you, we are a variable cost business. We have very little fixed costs. We have very little CapEx as a percentage of our net revenue. So the beauty of our model is that if you have good leaders and a good management team, this team is able to react very quickly to changing environment and Canada, happened to have that this year. So that's why they have a good margin profile. And this has been, by all standard, as far as I'm concerned, a good year for Canada despite the difficult market environment.
Your next question comes from the line of Mark Neville with Scotiabank.
Just on the Ecology & Environment acquisition, again, I appreciate it hasn't closed yet. But again, looking at sort of trailing numbers, profitability looks fairly muted. I mean, is there any target, specific targets you could share with us? Or I guess, is there any structural reason why the margins there couldn't look sort of comparable to your Americas or U.S. business?
Well, like I said before, it's a number of different levers. For example, just to give you a bit more detail. They have a great multiple and right -- great pricing, great pricing metrics within E&E. But utilization, perhaps leveraging our platform, we'll be able to improve significantly the utilization. Perhaps also the cost structure of the company is a bit too high relative to what we would come to expect in a company of this size. So we are working closely with management to really improve -- we will be working very closely with management to improve performance. But beyond and above that, this deal is a revenue synergy game. It's not a cost synergy game. I am confident that E&E within our platform and within our network, we will be able to create a lot of cross-selling together and grow the business very rapidly and leverage the cost structure that they have. So I'm very excited about this transaction.
Yes. No, that's helpful color. Earlier or previously, you talked about environment being a big focus. I think now you said you're up to sort of 7,000 employees in the practice. Sort of longer term or sort of where you're at now, how much larger could this get? Or how much bigger would you like to make it as part of the, sort of the whole?
What we said in our strategy is that we want to grow significantly in the years to come, our advisory services. We have an enviable position in the design space. And we continue to capitalize on our strength in the design space, and we continue to strengthen our platform and the design. But in parallel, we have great ambitions to expand our other pillars. And I think in the years to come, and it's certainly going -- in the underlying circumstances, obviously, it will be our goal to really strengthen our other pillars. Such that from the beginning of a project where the client needs a permit to the full design of what a client -- with conditions in terms of [ product ] we are sitting next to this client and act as a trusted adviser from beginning to the end, and leave the construction to someone else.
Understood. I'm -- sorry, for Bruno. The lease expense, you're tracking roughly $65 million per quarter. Is that a good number to use?
Yes. Again, we doubled our range at around 240-ish, and it's not a bad number.
Okay. But that, I guess --okay, so 60, 65-ish, I guess, then again, it would imply a fairly big step down in Q4. But I think you're sort of talking 60, 65-ish. Am I reading that right?
Yes.
Yes.
Yes, okay. Yes, okay. So the -- and just maybe just 1 last question. Just to confirm the 15%, 16% EBITDA margin for 2021, that's after corporate, correct?
Yes. After corporate and after IFRS, yes.
Your next question comes from the line of Maxim Sytchev with National Bank Financial.
Alex, just 1 very quick follow-up on M&A. Wondering if the landscape for transactions has changed or evolved at all in terms of seeing emergence of other competitors, maybe private equity, looking at the assets that potentially you could be looking at because some of your peers as well are trading at pretty healthy multiples. So any color you can provide there, please.
Well, it's -- every day, we're competing against some parties that may be or may not be playing in our industries. And you're right in saying that in the last years, there has been some companies chose -- that chose to sell to a prior equity versus strategic. But it doesn't change our focus and it doesn't change our approach. We want to merge or join forces with companies that want to join WSP, want to be part of our story, want to be part of our ambitions and visions to build something special and different. So those companies that wish to join the project would be, probably will not share our vision and culture in the first place. So it's not like we are targeting essentially the same targets. If I was to end up, just for argument's sake, in the process, and I was competing head-to-head with a private equity, this would lead me to believe that we might not be the right fit for a target like this because we don't have a short-term view. We take decisions for the long-term benefit of the organization. And more importantly, I mean, what we wanted both is not about creating money in the next year or 2 and offload the asset. It's really creating long-term value for our shareholders. So I'm not sure I'm answering your question, but that's how I view the world. And first and foremost, I mean, we do participate in very little process. We do tend to sole-source our deals and develop a relationship over a long period of time before we can consummate the transaction. So oftentimes, we're not playing in the same field and the same space than with private equities.
And your next question comes from the line of Yuri Lynk with Canaccord.
Just a quick one for me. Great quarter, but I couldn't help but notice earnings -- EPS kind of flattish year-on-year. Looks like your interest expense kind of doubled sequentially. Assuming a portion of that is noncash, Bruno, any color you can put on that?
Yes. You've got details in our financial statements on it. So a chunk of it is IFRS 16, obviously, if you take the year-to-date number, the [ $65 million ] a charge we didn't have last year. So just that [ debt experienced ] there in the year-to-date number. We do have more debt than we had last year in aggregate, at this stage. So obviously, the interest [ facilities ] a little bit higher than it was last year. And then last but not least, we have a bit of FX in there as well, which accounts for about $7 million.
And that's one thing that I've noticed, and I'm making an observation to all of our analysts in the investment community. I think like that line, the finance expense line, I do feel from 1 quarter to the other that on a consistent basis, there seem to be some discrepancies. But Bruno is right, our debt level -- I mean, we incurred more expenses this year, finance costs. And there is IFRS. And lastly, it's the FX that took place in the quarter that has been impacting us. That's the only reason. There's no real other explanations.
Right. I mean, I was obviously excluding the IFRS impact, but it was still a big step up relative to kind of unchanged levels versus last quarter. Anyway, I'll maybe take it offline after the call.
You should take it offline with Bruno, yes.
There are no further question at this time. I will turn the call back over to the presenters for closing remarks.
Well, I would like to thank you for attending this call this morning. We are, again, very pleased with the way our quarter turned out. And we look forward to providing an update during our Q4 on the performance of our year and our 2020 prospect and views on what 2020 could look like. So I look forward to continuing the discussion, and wish you a great day. Thank you very much.
Thank you.
This concludes today's conference call. You may now disconnect.