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Ladies and gentlemen, thank you for standing by. Welcome to the IBI Group Fourth Quarter and Year-End 2021 Results Conference Call. Please note that IBI's complete financial statements and management's discussion and analysis for the 3- and 12-month periods ended December 31, 2021, were filed on SEDAR and have been posted on IBI's website at www.ibigroup.com. [Operator Instructions] As a reminder, this conference call is being recorded. Some of the statements on today's call might contain forward-looking information. Listeners are cautioned not to place undue reliance on these forward-looking statements since a number of factors could cause the actual future results to differ materially from the targets and expectations expressed. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless expressly required by applicable securities law. For further information on risk factors, please view the company's annual information form filed with the Canadian Securities Regulatory Authorities and available on the company's website, SEDAR or by contacting IBI directly. All amounts discussed today are in Canadian dollars unless otherwise stated. I would now like to turn the call over to Mr. Scott Stewart, Chief Executive Officer for IBI Group. Please go ahead, Mr. Stewart.
Good morning, everyone, and thank you for joining us today. IBI's Chief Financial Officer, Stephen Taylor, is with me on today's call. We are pleased to share an update of IBI's Q4 and full-year 2021 performance and provide an overview of the contributions from each of our business sectors. Please note that throughout the call, references to adjusted EBITDA refer to adjusted EBITDA, net of IFRS, unless otherwise stated. Stephen will provide some additional context on our financial performance later in the call. But to set the stage, I am extremely proud of IBI's 7.5% organic growth, which was achieved while continuing to improve our leverage metrics. IBI exited the year with a net debt multiple of 0.4x adjusted EBITDA. Our achievements didn't stop there though. During 2021, IBI grew net revenue by 13%, grew diluted EPS by 40%, increased our backlog by 8% to a total of CAD 623 million or 17 months, grew 2021 adjusted EBITDA by 11%. Adjusted EBITDA margins would have been approximately 1% higher in both Q4 and full-year 2021 had we not incurred costs in continuing projects for which revenue was not recognized in the year. We achieved this while continuing to generate cash flow, reduce debt and buybacks on 52,728 common shares, demonstrating our strong belief in the underlying value of IBI. An instrumental part of IBI's success can be attributed to our unwavering commitment to the environment, strong social constructs and sound governance principles. Since our inception, ESG is evolving into the fabric of our culture as we strive to design and develop sustainable cities for the future. On Monday of this week, IBI announced that we have taken an equity position in privately-held Ecosystem Informatics Inc., or ESI, a company providing innovative pollution mitigating technology, data modeling and reporting tools to help clients protect the environment while enhancing business performance. The ESI relationship strategically aligns with our earlier investments in EV charging company, SWTCH, as we continue directing investments in new products and tools, which help IBI and our clients take action on climate change and lead the way for sustainable, innovative developments. IBI's GreenIQ product also continues to gain traction. In 2021, we had more than 700 projects who were actively reporting data, up from the 180 in 2020. And some of these 700 projects will be eligible for reporting to the American Institute of Architects' Commitment program also called AIA 2030, offering architects a way to publicly show their dedication and track progress towards a carbon-neutral future.. A few of our notable GreenIQ projects include the City of LA, North Hollywood Sewer Maintenance Yard, which is our best-performing building on GreenIQ and anticipated to be carbon neutral. In Utah, the Club Med, Snowbasin is expected to be one of the first dream projects in the US. We also co-designed 1075 Nelson, a 178-meter skyscraper in Vancouver that is set to be the world's tallest Passivhaus building. Prioritizing ESG principles and commitments will take center stage within our new strategic plan as we laid our goals for improving efficiency and increasing recurring revenue, while levering technology and data to create superior urban environments. We look forward to unveiling details of our plan at our AGM on May 6. Under leadership of Kevin Bebenek, we continue to advance our Intelligence sector. For IBI, Intelligence is a clear differentiator for us from peers. It will be the cornerstone of our ability to accelerate growth, expand margins and increase annual recurring revenue or ARR by applying software systems and support, particularly in the area of mobility, including tolling, containment systems, traffic management and traveler information. Late in 2021, IBI's joint venture partner, Aegis, was awarded a 5-year contract to operate the Traffic Scotland National Control Center and manage the Scottish Trunk road network, which is comprised of some 3,500 kilometers of roads. This contract builds on IBI's 25-year relationship with Traffic Scotland, and will improve the safety and efficiency of the road network while providing a source of meaningful recurring revenue for IBI. Our team in India successfully implemented IBI's cloud-hosted integrated traffic management system, an evolution of IBI's platform. And we implemented this in 4 of 7 toll roads in approximately 4 months, a project that would have taken 18 months to complete if the installation was done in a traditional way with systems on-prem. We anticipate the remaining 3 orders will be live and operational by the end of this month, providing recurring revenue over the 8-year period of the contract. We were awarded a contract by [indiscernible], the first application of our next-generation tool system back office, which features an all-encompassing functionality to support free flow toll operations as well as web browser-based platform with enriched security features that adhere to the latest industry protocols. In addition, IBI's service contract for the Southern California 511 Interactive Voice Response System was recently renewed for another 4 years. Both of these will contribute to the recurring revenue. Our building sector led by Mansoor Kazerouni continue to lead the GTA residential market as we have more than 200 mid-rise and high-rise buildings currently under design and construction, representing over 50,000 residential units. Our Canada West Living+ packers had similar market share, and we are seeing further growth in our Living+ footprint in the US. Many of these projects are large multi-tower developments and being developed drawing on IBI's various skills, including urban planning and design, landscape architecture and transportation and civil engineering. IBI is providing architectural and master planning services for Mississauga's Exchange District. This is a mixed-use pedestrian-friendly community that will house retail, residential and entertainment space. This project is also aligned with ESG principles as it will feature Ontario's tallest residential building to be powered by geothermal at 66 stories. Also in Mississauga, our building sector secured this line for the M3 Condos at M City, along with over 20 other towers in Mississauga [indiscernible] infrastructure work on the Ontario LRT project. Our industrial practice continues to be a key driver of our success in the US, as the repatriation and manufacturing coming back to North America, along with increased activity in warehousing and logistics. Not only are we working for the Ford Research & Engineering campus in Dearborn, Michigan, some of our other automotive clients in the US have started to take us global, particularly in the area of electric vehicle assembly plants. IBI's healthcare practice has experienced some of the highest activity levels in the UK and remained strong with ongoing work across numerous hospital projects and the major refurbishing of one of Egypt's largest public sector hospitals in Cairo. In the US, IBI -- in the US, IBI's education practice remained robust with several new commissions for post-secondary and elementary schools in Texas. In Irvine, California, we are leading a collaborative design team transforming 110 acres section of the former Marine Corps Air Base El Toro into a multi-faceted cultural complex, [ indicating ] Southern California's answer to Central Park in New York. The integration of our business outcomes truly sets us apart as our building sector secures new work from ongoing infrastructure and transit projects. Both of these sectors provide channels to market for intelligence. On the Yonge North Subway Extension, IBI is designing numerous buildings, stations and bus terminals, as well as station modifications and accommodations for special trackwork. We have a number of similar projects, including mixed-use building and a long transit line in Vancouver and Burnaby, BC. In our infrastructure sector, led by Carl Clayton, we see further collaboration across multiple projects, which represent joint efforts between numerous sectors and offices. I'm very proud of IBI's ongoing progress together over the past few years to leverage the solutions available through our Intelligence sector. Notable recent project wins for infrastructure include the Toronto Basement Flooding Protection Program, which came over as a result of our acquisition of Cole engineering. Our transit electrification practice provides a great example of how the convergence of intelligence, buildings and infrastructure can benefit clients, the environment and IBI. In Florida, we are designing an operations and maintenance campus to support a fleet of 250 electric buses. And we have numerous bus in other vehicle electrification projects underway in both Canada and across the US, which cover the planning and design of facilities, as well as the application of technology. We continue to advance significant design build projects where we have major roles such as Hurontario LRT and Mississauga, Broadway Subway Project in Vancouver, as well as the Scarborough & Yonge Subway Expansion projects in Toronto, where we are the technical advisers for the clients. Our offices in Greece and India have realized success in their local markets, where our commitment to the use of advanced technology and techniques helps to differentiate us from local competitors. I will now hand the call over to Stephen Taylor to share some additional context regarding IBI's financial results for Q4 and year-end 2021. Stephen?
Thanks, Scott. My comments today are designed to provide context around our financial performance rather than to just reiterate figures that you can get from our press release, MD&A and statements. As you've just heard, IBI's results reflect continued positive momentum and strong financial performance, highlighted by strong organic growth of 7.5% in 2021 and 9.6% in Q4. We grew annual net income by 43% and diluted EPS by 40% over 2020 and generated free cash flow, which was allocated to the purchase of 52,728 common shares under our NCIB. We reduced DSOs to 54 days. And by year-end 2021, we also reduced net debt by CAD 35 million to exit the year with CAD 22.2 million in net debt, leading to a 2021 net debt to adjusted EBITDA multiple of 0.4x, 69% lower than in 2020. All of this was achieved while navigating an economy facing continued COVID challenges and inflationary pressures and supply chain bottlenecks. While IBI has been largely shielded from supply chain issues given the nature of our business, we have experienced inflation in the labor market. The increase in salaries, fees and employee benefits for 2021 have not yet been reflected in incremental revenue from our project rate changes, although some of these costs will get passed through. More importantly, however, are the competitive advantages that IBI gains due to our continued investment in productivity tools, which enhance efficiencies. IBI's Q4 and full-year 2021 adjusted EBITDA continue to be robust year-over-year, increasing 9% and 11%, respectively, over the same period in 2020. However, margins in both periods reflect the impact of [Technical Difficulty] and costs incurred during the year on projects where the corresponding revenue was not recognized during the year. As a result of this disconnect, our adjusted EBITDA margins were reduced by approximately 1% for both periods. Going forward, we anticipate our adjusted EBITDA margins will see the benefit of synergies stemming from acquisitions completed in the latter part of 2021. Growth in our intelligence sector also -- was also affected by several factors last year, including the ongoing impact of COVID, particularly in the tech heavy centers such as India, transition of large projects in our Greek office and the effects of foreign exchange. Our billings from recurring software support and maintenance remained stable relative to 2020, but would have been nearly CAD 1 million higher in the absence of the FX impact caused by the strengthening Canadian dollar against the US dollar. We continue to direct resources and activity towards expansion of our SaaS products and opportunities to enhance recurring revenue, particularly from data collection. As we move past the 2021 headwinds, IBI anticipates returning to a normal pattern of growth and performance from intelligence exiting Q1 of 2022. From a capital allocation perspective, IBI has significant flexibility given our strong balance sheet. Our acquisition of Telenium represents a solid growth avenue for intelligence and is expected to contribute an additional CAD 600,000 to CAD 700,000 of recurring revenue over our baseline run rate. We're also very excited about the equity position in ESI that Scott spoke about earlier, which contributes to our growth and aligns with our ESG principles. Complementing these ongoing acquisition activities is our focus on new product development and technologies designed to improve the overall efficiency of IBI and our clients. Collaboration across offices to help level out workloads and meet client deadlines continues to increase as teams in different locations are increasingly more comfortable sharing work and undertaking work for clients where the standards and expectations are less familiar. With a healthy backlog at year-end of CAD 623 million or 17 months, which reflects some major long-life design projects and infrastructure and longer-term technology contracts, coupled with steady staffing at record levels, we are positioned for execution. Just this past week, we bolstered our US expertise with the appointment of Todd Hoisington as Director, United States, along with several other key US appointments. And we made strategic hires in areas such as connected autonomous vehicles, climate change resiliency and rail systems, which enhance our existing capabilities in these areas. Our results in 2021 demonstrate IBI's capabilities and our longer-term growth potential. We remain focused on generating free cash flow that can be directed to prudent and accretive acquisitions, further organic growth, strategic investments in technology and efficiency improvements or allocating capital through the NCIB, which demonstrates our belief in the underlying value of IBI. Consistent with our investments into companies such as SWTCH and ESI or our acquisitions of Teranis and Telenium, we will continue to seek growth opportunities that leverage our growing intelligence capabilities while also supporting IBI's commitment to financial and environmental sustainability. Looking ahead to 2022, we're pleased to provide net revenue guidance of approximately CAD 457 million, and we are excited about the opportunity to potentially generate increased revenue outside of North America. Thank you. Scott and I will now take questions. Operator?
[Operator Instructions] Your first question comes from Benoit Poirier with Desjardins.
Yes. Could you provide additional details on the issues that affected margin on large projects in the quarter? Is it just a timing issue and will it be recovered in Q1?
Benoit, we think that business will return back to normal as we get out the back half of Q1 of this year. So occasionally, we run into situations like this where we're in a position where we have to either start or continue on work where we haven't yet finalized the paperwork on things. And so it really is just a timing issue.
Okay. Okay. That's great. And in terms of outlook for 2022, you mentioned about net revenue being close to CAD 457 million. What about the margin direction for each segment and your ability to improve billing rates to mitigate the inflation and wage costs?
Well, as we both stated in our comments, there is pressure in the industry at the moment to -- on wage costs. And so we are continuing to push forward with automations in all sectors of the business to ensure that we're sheltered as much as we can be. We are exploring the collaboration of work across offices. So utilizing resources in places like Greece and Mexico, where they have great technical capability, but their cost base is lower. And we will continue to do so. As I say, I think we'll be at more of a normal operating rate on margins as we move through 2022.
Okay. So -- okay, go. Sorry.
I was just going to say that -- I mean, for absolute priority, also many of our contracts have wage rate adjustments included in the contract. So, we feel fairly comfortable or quite comfortable that we are able to manage the inflation pressures that we're experiencing.
Okay. And for intelligence, obviously, you made some incremental investments. You mentioned some color about the growth expectation for Telenium and ESI. What type of growth should we expect for intelligence in 2022?
We have traditionally experienced intelligence overall growth of between 6% and 8%, which is typically above what we have incurred, about twice the rate of what we've incurred elsewhere in the firm in more conventional professional services. We do have a number of opportunities that we are in negotiation stage on final selection, and it is actually looking quite robust for intelligence overall in 2022. I would say as well that we're really also focused on margin improvement. So the investments that we're making in either new products or adapting traditional products to the cloud are paying dividends for us. So when I cited the project in India, where traditionally, there would have been 7 separate projects, but the way it is, we have one project with 7 instances, if you will. So, there's no additional software development involved in them bringing on those extra projects. And the margin, you might appreciate, but the one common platform is very high. Same can also be said for Telenium where they had, in the acquisition, they had their own systems, where we're deploying it to our cloud-based platform. And once we're past the integration stage on that, marginal cost to us is de minimis. So, again, we would look to see that the revenue would go to the bottom line.
Okay. That's great color. And last one for me in terms of M&A. Could you talk maybe a bit about the bidding pipeline, the valuation expectations from potential sellers? And also given your very strong balance sheet, just wondering if you would be willing to look at larger deals as opposed to some tuck-in acquisitions that typically tends to be the focus?
We have, at the moment, a long list of firms that we are in various stages of discussions with, and they do a range from tuck-ins that can be accommodated very easily through 2 firms of the scale of [ Cole and Roger ]. And we have an M&A team that is now very diligent in making -- dealing with brokers, outreach, focused in particular areas. So, I would see that we'll see through 2022 a significant expansion in our M&A activities. As for multipliers, we're always looking for something that is naturally accretive. We wouldn't do anything that we couldn't see or would be accretive. So, we would be looking at margins that would be anywhere from the 4x EBITDA for the smaller firms to 5 or 6 or more for larger companies.
Your next question comes from Ian Gillies with Stifel.
With respect to some of the changes in the US team that were announced recently, can you maybe just provide a bit of additional detail on maybe what sort of markets you're trying to penetrate? Or what sort of change you're trying to affect for that business moving ahead, given that it seems to be a pretty key growth area?
You're right. The US is a very key growth area and certainly a strategic direction for us in the plan that we'll be announcing. There are a few different areas that are already strong. Certainly, education has been a very strong area for us in the K-12. But what we have seen, that has grown very rapidly in the last year and a half, 2 years is the industrial sector. We have a long history of working for the automotive sector of Detroit. And we have -- and we've explained before that we are designing the global design headquarters for Ford in Dearborn in Michigan. But we're also heavily involved in the electrification plans. We are doing a major plant in Arizona. And there is discussions underway about working with that same company that internationally. So, we see the -- what we have referred to as the onshoring of manufacturing into the United States and North America has been a key area of growth for us and building off of our industrial practice in South field as well as here in Ontario. The organization that we put together, Todd, has been -- Todd Hoisington has been the head of the industrial practice in the US, and has been very active in the leadership of our US East business. We have also put together a structure, though, that with Todd having the overall responsibility for the US, also has other sector leads. So, we have another individual that's heading up buildings across the United States and another individual that's heading up the infrastructure and then also intelligence. And we feel that by the bringing together of the disciplines across the United States in this way that will allow us to take, as we've seen in Canada, a better advantage of our presence locally and our diversity of skills. For example, I mentioned the electric vehicle electrification, maintenance and operations facilities. We have, at the moment, 8 projects that are in the planning are defined today, as I had mentioned, the one in Florida, but there's a number of those underway and a couple buildings, infrastructure, as well as Intelligence. So, those are some key areas. In terms of the growth, we're certainly looking to the south, southern part of the United States, the sunbelt, where there is more natural organic growth. But we're also looking at acquisitions and other areas that would be able to -- where we'd be able to add in services in water, power, green energy, communications, that we can also then take more widely across the United States and for that matter, globally. And there are certainly good companies in the more established market areas of Midwest and such that we are looking at.
Okay. That's very helpful. With respect to the other operational costs in the quarter, you noted higher computer vendor costs. Sometimes these can be one-time in nature, [ other ] subscription services. So are you able to provide any outlook on whether that reverts back to a number that we would have seen in prior quarters or whether it kind of hangs out around that CAD 13.5 million mark?
So, Scott -- yes, I think, Ian, on the question of computer costs, those appear to be with us for the future. I think this is something that has definitely occurred during COVID when work from home, all of the vendors that certainly we deal within our industry have seen that businesses have become very dependent on their software tools and have adjusted their rates accordingly. So, I think that we will see continuing costs in the computer area. We did reduce our overall cash cost on real estate, our footprint by just short of 10% during the last year. And Scott has spoken in past about our plan of reducing our real estate footprint. We are still paying in excess of CAD 21 million, CAD 22 million in real estate costs. As and when those leases come up for renewal, we will be working on reducing that cost. So, I think you will see us at least being able to hold the line and perhaps show some improvement in the other operating costs in the business as we move forward.
Okay. That's helpful. I appreciate that. Last one for me. There's -- with rising interest rates on the come and a housing shortage, it's a bit confusing to understand. And so I guess, are you seeing any slowdown in demand from any of your buildings customers on the residential side? Or is that continuing at pace?
That is gaining momentum that we've seen. So, we are still seeing -- certainly, in Canada, the amount of immigration that we're seeing with some expected 400,000-plus people coming into Canada. Most of them are destined to Toronto, Vancouver, Calgary, Montreal for a whole host of reasons. So, there's no shortage of demand, and there's no shortage of activity. One of the possibilities for that -- and we are seeing more on this is a movement, especially for pension funds, that are very active in the housing market in Canada, that there's a movement away from -- or maybe I should say away from, but more in the way of rental construction that is occurring. And the expectation on that is more affordable for a wide array of people and it provides sort of longer-term steady return for the pension funds, making the investments more. So, we're not seeing any lessening of demand.
Okay. That's really helpful to know. I'll turn it back over.
Your next question comes from Maxim Sytchev with National Bank.
Scott, just maybe wanted to touch up on the intelligence vertical again because I think you have Kevin, who's been leading the practice since May 2021. And I'm just wondering if there's been any sort of operational changes since obviously, new leadership. And again, any thoughts in terms of revenue acceleration, go-to-market strategy, sort of maybe -- any updates on those sides, please?
Well, what we've experienced in the past year, it started preceding, Kevin thinking [ November ] was a bit of slowing down on the pace of new opportunities, we thought being something limited by COVID. We're certainly now seeing a much stronger activity and right now, we're looking at some and involved in discussions, negotiations, [indiscernible] around some 10 very significant projects in North America. What we have been doing though that has been significant is in addition to building the new platforms such as Nspace and CurbIQ, we have been rebuilding our traffic management systems and toll systems. And that's involved a significant investment. It will continue for the next year or so in both of those areas. And that's to make those platforms, A, more contemporary and 2, more aligned with the objective of delivering services from the cloud. So, there would be -- we anticipate and we go through a process constantly of looking at the market for these products, looking at the competitive situation and looking at the margins that we are looking for. So, we anticipate that with -- in our experiencing. But certainly, as we make investments in the new platforms and more in the cloud that we're going to be moving the margins up even higher than what has been the case in the past. That being said, we still have a very large installed base of on-prem platforms. As they come up for renewal and replacement, we will be in an extremely competitive situation, be able to then continue the relationship with the client. So, we're making investments. There was a slowdown, but there is now a very long tail of, if you will, demand for these services and platforms.
Okay. That's helpful. And then is it possible to quantify the amount of investments that you're making right now on the digital side? I don't know if you want to talk a bit from like an annual perspective and how we should be thinking about this as time progresses.
Stephen?
Yes. Max, we're currently and have been for the last couple of years. And this is just items hitting the profit and loss, not the amount that has been going into intangible assets, but we're spending about between CAD 3 million and CAD 4 million a year in investment, in technology, capability and products, looking to build for the future.
Okay. And then in terms of -- I mean, can you get -- like credits, can you capitalize sort of more of that stuff or that's not how it works?
We are capitalizing as much as the accounting rules will allow. And we're also doing a very thorough job of building business cases and assessing as we go along, the spend that we're making at the moment, whether that's, in fact, generating a return now. And if not, what is the short- and medium-term outlook for us being able to realize a good return on those investments we're making? So it's a constant process of assessing what we're spending against what we expect to get back.
Okay. I also -- go ahead.
I was just going to add a bit of color on the investments in some of these platforms. They -- for example, in CurbIQ, which is really -- it's looking out 3 years or 4 years or 5 years as to how we might manage ever more limited curb space around buildings in urban areas. We invested in that. And what it does is to put us into a really unique position then as cities now start to understand the value and importance of their curb space. What we're getting is more now the studies and the professional services that go along with that because of the CurbIQ platform. However -- and we're now doing work across North America and in other parts of the world, including Latin America. Because of that, we're getting the fees from that and then we're able to lead behind, if you will, the continuing platform for the ongoing use for the -- the service for an ongoing use. So it's really helping us on the software or on the soft services side, the consulting design side. And that's also the case with the Ford building. It was because of our relatively small percentage of fees that went into the building related to technology of the building, but it really was a differentiator that allowed us to take over the architecture as the lead designer then on that project as we completed and did the issue for construction design work. So, there's a symbiotic relationship there that they help each other. One allows us to be able to take on more of that design work. But because we have that relationship with the client, we're then also able to leave in many cases or establish a continuing recurring revenue relationship with the platforms that we have. So maybe a little slower in terms of growth, but it's -- we see it as being very strategic for the resilience of the firm.
Yes. For sure. Makes sense. And then a quick question in terms of the outlook. Obviously, I think backlog was up 6%, 7% year-on-year. Your revenue forecast is for plus 3%. Do you mind maybe just talking through? Is it the duration of the projects that has extended somewhat, so the backlog doesn't necessarily translate into the same projected revenue increase? So how should we think about it? Or is the 3% you viewed as relatively conservative? Obviously, I appreciate that you had very strong growth for 2021 as well.
I'll start on that. So, we have a history, Max, of being conservative in terms of what we forecast. I would say that we do have the benefit of some very long-term projects and that certainly sets up the 17 months of overall backlog. And that includes many of the projects on the intelligence side that have 5, 6, 7 plus year contract terms as well.
Okay. That's helpful. And then just last question. Stephen, sorry, I don't want to be sort of the dead horse on the margin side of things. But -- so can you maybe provide a bit more color? Was it sort of contractually that you could not collect the revenue while you had to do the work? Just -- I'm trying to better understand that because it doesn't seem like it's an execution issue. It's more sort of the billing. Or how should we think about this? And how can we sort of mitigate this on a going forward basis?
No, Max, the way you need to look at it is that there are situations where as architects in particular and engineers as well, when you either get a notice to proceed on work or you're in the middle of work and in particular, when you're in the middle of work and the steel has been ordered and the concrete is being poured, there are changes in scope to the work that clients need you to undertake. But under the accounting rules, until you get the paperwork all signed up, you can't actually start to recognize revenue on that stuff. So, you have an obligation to continue on working away on the project. But you need to get the signed contractual paperwork before you can actually recognize the revenue. And that's why it's a timing issue, and we expect it to revert to a more normal course over the balance of this year.
Okay. Super helpful. That's it for me.
Your next question comes from Michael Tupholme with TD.
Maybe just to pick up again on the question of the margins and impact of the issue you just described, Stephen. I guess, first off, was this -- this was concentrated in the buildings segment?
No, both buildings and infrastructure. So it affects both of those sectors, not so much intelligence.
Okay. And I mean, not to get too specific, but is it sort of equal impact roughly to both of those areas? Or is one more -- is it more pronounced in one versus the other?
No, I would assume that it impacted both pretty well equally.
Okay. And then you had noted that it's about a 1% drag on margins in the quarter and also for the full year. So the quarter is easy to understand. But as far as which other quarters in 2021 felt this impact, if it had a full 1% on the entire year's margins as well?
Less so in Q1, more so spread over the remaining 3 quarters of the year.
Okay. And then it sounded like earlier in the call, you mentioned that you sort of expect this to the situation to sort of normalize and be overcome during the latter part of the first quarter of 2022. But then just a moment ago, maybe it sounded like in response to Max's question, like this could persist a little longer throughout the year. So, I guess I'm just trying to get some clarity on, first off, when would you expect that the revenues and the billings catch up with this and sort of get back to more of a normalized regular margin performance?
I think we're -- by the time we get into next month, it should be largely resolved.
Okay. So if I think about -- there wasn't much impact in Q1 2021, but there's going to be some impact in the first quarter of 2022. Should we be thinking about margins in Q1 2022 being down versus the 15% you did in the first quarter of last year. Is that directionally right?
I would say that we'll be pretty close to the 15% that we did last year.
Okay. Helpful. And then maybe just the last.
Revenue will be up understandably. We think revenue will be up in order to achieve our guidance that we've given for the year, but margin percentage will improve as we move along month-to-month.
Okay. That makes sense. And I guess just to wrap up and kind of along the lines of that improving margin. I think Scott mentioned that certainly you strive to improve the margins. So if there was a 1% drag on the full-year margin in 2021, I guess I'm just trying to understand, you reported a 15.3% margin -- EBITDA margin. With a 1% drag, you would have been at 16.3%. So when you talk about trying to -- or striving to improve the margins in 2022, should we be thinking about improvement versus what you actually did in 2021 or improvement over and above what would be kind of a normalized margin in 2021 of 16.3%? Just trying to get a sense for which one we should be [ keening ] on there?
No. I think you -- whatever we did last year, we would be looking to improve and get that to a more -- like, we're not saying we're going to do 17%. 16% is what we're striving to get closer to.
Okay. That makes sense. And then on the net revenue side and the guidance. So, you did 7.5% organic growth for full-year 2021. The 2.8% growth that's implied by the revenue guidance you've given, 2.8% growth for 2022, how would that break down between volume gains, pricing gains and also the benefit of the acquisitions you did in 2021 that weren't in there for the full year?
Well, Mike, I think that the reasons for are being cautious in terms of giving guidance is that it is a competitive labor marketplace. We have a healthy backlog. But at this point in time, we're not going to overcommit in terms of whether we can actually increase the number of professional staff that we have on board to accelerate the pace at which we are delivering the work. So, I think our assumption at this point in time is that most of what we would be achieving would be through increased rates as it stands now. However, depending on what the hiring approach is or our success over the year, that may move more towards volume increase as well. And as Scott has said, we've got a lot of candidates we're talking to about acquisitions. So non-organic growth is very likely to happen this year also.
Okay. That's helpful. And then maybe just lastly. On the subject of labor inflationary pressure, I guess, 2-part question. Number one, can you provide some sort of a sense for what sort of level of pressure you're actually experiencing right now? Like either there's -- we can look at general CPI numbers. I don't know how relevant those are. Like what kind of a rate increase in terms of pressures you're actually seeing?
Scott, can you speak to that?
Yes. Compensation pressure that we are seeing at the moment is in the 4% to 5% range.
Okay. And then I guess just the last one relates to that is -- so, Scott, you mentioned the ability to pass on, I think you said at least a part of those increases. Like -- so contractually, how is it actually structured? Or can you simply sort of say, like, look, these are the rate increases we're experiencing and therefore, you should be able to pass on most of those and get close to that? Or is -- or are these contracts tied to some other metric, which may not necessarily in the current environment, some other indicator or metric, not necessarily currently aligned with the 4% to 5% you just mentioned?
It's complex to answer. But let me give you a sense of the kinds of contracts that we have. We have fixed price contracts to deliver a product solution, whatever. And we have the ability within that then to increase the rates on the project because it's against that fixed price. And so it's our decision how we then deal with it. But we have other contracts that are based on rate multipliers. So if a salary goes up, the multiplier is constant, but the ultimate billing rate goes up because it's against the base of what the compensation is. And in other contracts, we have built in CPI adjustments against certain [ men ]. So it's quite a mix of responses, about how we deal with it. But I wouldn't say that we were probably covered somewhere between 70%, 80% in terms of the ability to capture the adjustments, the wage rate adjustments. There are other situations that are even -- take an entirely different perspective where we're paid on the basis of the capital cost of the buildings or the asset that's being constructed. So as those rates go up, our fee goes up accordingly. So I would still say, on balance, it would be somewhere in that 70% to 80% that would be fully recoverable and then the rest would be sort of somewhat recoverable.
Okay. No, that's really helpful. And then, I guess, yes, you rely on productivity gains to try to make up the balance.
Make up the balance. And then those contracts come to an end and then you start new work with the new rate base.
Right. Okay. No, that's all very, very helpful.
We have a following question from Benoit Poirier.
Yes. Steve, could you provide some color about the expectation for DSOs, CapEx and free cash flow movement for 2022?
Yes. I don't think, Benoit, we're -- and I know I say this every year and then we do better. But I, honestly, at mid-50 days -- at the moment, I don't see us dramatically improving on that. I think in the CapEx, we will spend between CAD 3 million and CAD 3.5 million on intangibles, the development of software products that will go on the balance sheet. And we are planning for about CAD 6.5 million of other expenses. Although that's in the plan, I think we can probably come in at a lower number than that. But if you went overall range, 9% to 10% on CapEx for the year, I think that, that would be a sensible number. Sorry, what was the third part of your question again? Can you repeat?
Movements on the free cash flow kind of -- is there a movement in terms of working cap or some key elements aside that we should take into account?
I think that our generation of free cash flow will be -- I don't think it will be quite as robust as last year. We had a very, very good year in terms of cash collections. But I think free cash flow in the business will be CAD 25-ish million. Basically, I think if we didn't invest in new businesses, which -- that isn't part of our plan, but if we didn't invest in new businesses, we would basically be pretty well at a net debt number that's at or below 0 by the end of the year. Now that -- the generation of cash, and you can see this pattern in prior years is that we tend to use cash in the first half of the year. And we tend to generate cash more significantly in the back half of the year. So when you're looking at it quarter-by-quarter, you should make reference to what we've been able to do in prior years in terms of quarterly cash generation.
Okay. And last question with respect to the upcoming strategic plan. Any color about what kind of metrics we should be expecting going forward in terms of focus?
It's going to be a redoubling on technology, I mean, generally and with a much stronger emphasis on climate and being able to not only provide advisory service, but create and deliver solutions into the climate metrics, if you will. That's the investment in SWTCH, the investment in ESI. It's about being able to take those products and integrating into other kinds of -- as an illustration, into other kinds of services that we provide. But there will be other areas that we will elaborate on that are going to be more focused on establishing that continuing relationship with the clients and the recurring revenue theme.
Your next question comes from Frederic Bastien with Raymond James.
Scott or Stephen, can you spend a bit more time on your M&A strategy and perhaps highlight the things you are doing differently today than you might have been in your early days as a public company?
Well, in the early days, Frederic -- no, those early days, sorry, the difference between then and now. When we did acquisitions back starting in 2004 through 2012, it was always about the acquisition. It was really never about the integration. It was never about common reporting. It was never about common reward and compensation mechanisms. They were -- it was acquisitions because it would seem to be accretive. And now -- and the focus since I took over and Stephen joined, has always been about putting the platforms in place that allow us to have immediate or daily access, updated information on the firm as a whole, doesn't matter what offers, what company, what entity. We have this comprehensive access to information about our financial performance, our marketing initiatives as well as HR. And we have a very impressive, if you will, presentation information, access from everything that you could imagine about running a company. So when we, as an example, acquired Cole, they were on our systems and had their buildings out at the end of the first month. So, that's been a really significant direction. So, we were monitoring Cole's performance within the IBI structure immediately. They did their time sheets on our platforms, et cetera. So one, common platforms. 2 is about the due diligence on the firms and how they add value. So, we certainly are much more aware of where there is growth that is driving our sector. And certainly, in Canada, we've been very blessed with a lot of immigration that really plays nicely into the kinds of services that we provide, growth that's related to infrastructure investments. And certainly, that is the case in various parts of Canada and Quebec, Ontario, Alberta and BC, but also in the United States. And also, as we looked in the United States, looking for more fundamental growth that is organic growth, population growth and immigration and that is really more in the Southern states and the -- and along the coast. So, that has a priority for us because when you have population growth through whatever means, typically immigration, you have a need for all of the services that we provide, where people live, where they work, where they heal, where they learn. And so we're able to provide all of these services [indiscernible] and then, of course, the infrastructure. The other dimension to the acquisition strategy is around being able to provide those kinds of fundamental services that support urban environments. So it's water and wastewater. It's power. It's communications and it's mobility. And so where there may be firms in the -- as I mentioned earlier, in the Midwest, where they may not be the -- or Pennsylvania or other places like that, where there may not be strong indigenous growth or local growth, those are skill sets that we can take into the growth areas. So that's another dimension to sort of the infrastructure and building sector. On the technology side, we're, first and foremost, going to be looking for smaller acquisitions where we can get a lot more leverage and where they would come into a firm like our investment in an acquisition of Aspyr and what that did for us in Ford and hospital work. There may be other bigger investments that we might make, but it would really depend on the particular circumstances. So, that's sort of a broad overview. We have a team now of people within the firm that are dealing with M&A, and Steve and I have weekly reviews on where we're at, in the outreach, their contact with us, putting together a business case as we do the assessment of these firms before we get into extensive due diligence. And that then becomes a decision point about how we go forward, how we organize. And then the other key thing is that we have all of the other administrative functions organized to and support that integration from IT to design technology to HR, finance and accounting and then, of course, the professional practices. So the theme that used to be the case back in 2004 to 2012 was [ why ] and don't worry, nothing will change. Now you'll be part of IBI.
Scott, I think there's a couple of comments I'd like to make on the people part of the acquisitions as well. Frederic, one of the things that we're paying a lot of attention to is rather than just focusing on the shareholders of the business that we might be acquiring, we're also looking before we pull the trigger on an acquisition at the next level of business leaders in the business because understandably in 3 years or 4 years' time, the person you just gave a big payday is likely to go off and play golf somewhere and you want to make sure that the people that are there in the business are going to be able to sustain and grow what you bought. So, we're paying a lot of attention to that. We're also looking to leverage our own internal management talent. And this was particularly evident on the Cole acquisition, where we -- before we go ahead with an acquisition, we look for who is the right person or persons within IBI to take responsibility and be accountable for ensuring this business comes on as part of IBI and makes the transition smoothly and that -- we ensure that the acquisition is going to be a success. So the whole people part of doing acquisitions is a very important aspect at the moment.
This is exactly the answer I was looking for. That's all I have.
Thank you. There are no further questions. Mr. Stewart, you may proceed.
Well, thank you, everybody, for joining on the call today. We're certainly very pleased with the results of the quarter and the year. And we look forward to continued progress and improvements as we go forward. So everybody, have a very good weekend. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.