Cardno Limited (STN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for joining us to talk about Stantec's acquisition of Cardno's North America and Asia Pacific operation. Leading the call today are Gord Johnston, President and Chief Executive Officer; and Theresa Jang, Executive Vice President and Chief Financial Officer. [Operator Instructions] This webcast call is being recorded and will be available for replay after the event. Stantec invites those dialing in to view the slide presentation, which is available in the Investors section at stantec.com. All information provided during this webcast and call is subject to the forward-looking statement qualification set out on Slide 2, detailed in this morning's new release and incorporated in full for the purpose of today's call. Listener of today's call and webcast are cautioned not to place undue reliance on the forward-looking statements since a number of factors could cause actual future results to differ materially from the expectations expressed in these forward-looking statements. This morning call will make use of non-IFRS measures and pro forma information as defined on Slide 3. This non-IFRS measure may not be comparable to similar measures presented by the company. We believe that the measures defined here are useful for providing investment with additional information to assist them in understanding components of the acquisition. It should be noted that dollar amount discussed in today's call are expressed in U.S. dollars are generally rounded. With that, I will turn the call over to Gord Johnston, Stantec's President and CEO.

Well, thanks, operator, and good morning, everyone. Thanks for joining us on short notice. We're very pleased to announce our acquisition of Cardno's North American and Asia Pacific business. Cardno has a rich 75-year history of providing environmental and engineering services to clients around the world and combining our firms provide significant client and revenue-generating synergies. This is a needle-moving transaction that supports the growth and diversification objectives of our strategic plan. Cardno is approximately 2,750 employees and annual net revenue in excess of USD 350 million, significantly expand our footprint in North America and almost double it in Australia. This transaction supports our goal of growing our global operations by shifting our geographic mix so that now 25% of our net revenue will be generated outside of North America. In each of our key regions: Canada, the U.S. and global, are now projected to generate over $1 billion in annual revenues, a key milestone for us. Approximately half of Cardno's revenue relates to environmental services with the balance related to infrastructure, community development and water. Building on our environmental platform, the addition of Cardno's environmental expertise grows our environmental services revenue to represent 20% of our pro forma position. Our infrastructure business grows to 30% of pro forma net revenue with the combination of our teams, strengthening our positioning to benefit from global infrastructure stimulus. Collectively, this transaction bolsters our ability to address the world's critical sustainability and infrastructure needs. Cardno's has been on our radar from an acquisition perspective for many years, due to their attractive business mix and geographic presence, and the timing couldn't be better for the combination of our firms. Cardno is seeing the benefits of their multiyear effort to strengthen their operations, and this, coupled with their growing revenue backlog and global environmental and infrastructure tailwinds positions the combination of our firms well for growth and success in the coming years. A key element of this transaction was our ability to select the components of Cardno's business that are most strategic and complementary to Stantec, specifically their North American and APAC operations. For clarity, the transaction does not include Cardno's Latin American operations nor their international development group. Now I'll turn things over to Theresa to walk through the financial details of the transaction.

Thank you, Gord, and good morning, everyone. In addition to the strong cultural and strategic fit, this transaction is financially compelling. We're acquiring Cardno's North America and APAC engineering and consulting groups for USD 500 million or approximately CAD 620 million. This is 9.4x projected 2022 pre-IFRS 16 adjusted EBITDA after synergies. And even without cost synergies, we expect to be immediately accretive by double digits, relative to adjusted EPS. The businesses we're acquiring have an EBITDA margin profile that's on par with Stantec's industry-leading margin. We expect annual run rate cost synergies of approximately USD 10 million to be achieved over the next 2 years. But of course, the real opportunity for value creation will come from revenue synergies, which we have not incorporated into our financial metrics. We're funding the acquisition through a combination of existing cash on hand and by drawing on our credit facility. At close, we expect pro forma net debt to adjusted EBITDA to be 1.5x, well within the target leverage range of 1 to 2x. By the end of 2022, the strength of our cash flow generation should have our leverage back down to the low end of our target range. And with that, I'll turn the call back to Gord to review the strategic merits of the transaction.

Thanks, Theresa. This acquisition aligns completely with the strategic plan we launched in December of 2019. The addition of Cardno's talented U.S. employees will drive the largest increase in our U.S. presence since the MWH acquisition back in 2016, adding 1,500 people and increasing our footprint by 15% from where we are today. This adds 1,100 employees to our U.S. Environmental Services Group, representing a 60% increase in our headcount and doubling our size from where we were 5 years ago. The 1,250 employees in Asia Pacific that will be joining us from Cardno will almost double our presence in Australia, further strengthening our diversified platform and it establishes Stantec as a top-tier engineering and design firm in the region. Cardno has a diversified business portfolio in Australia, with transportation and community development generating roughly 60% of annual revenue with water environment contributing the remainder. And as you can see from the pro forma business combination graph on the lower left of the slide, combining our group provides a well-rounded business mix that will provide significant cross-selling opportunities. Infrastructure, namely Transportation, will be our largest business line in Australia. And our combined transportation team stands to benefit significantly from the AUD 118 billion in the federal budget allocated to transportation infrastructure. The addition of Cardno's infrastructure group and our highly complementary recent acquisition of GTA consultants are well positioned to capture an increased share of this work. There are other opportunities for accretive revenue generation as well. Cardno is one of the largest providers of community master planning in Australia, and it fills in the white space we have from a community development perspective in the country. In addition, new legislative standards tightening regulations around mine closure were put in place in 2020. And the Cardno's team was awarded the first major mine closure under the new standards. So this, coupled with our recent acquisition of Ingenium positions us well to capture an outsized allocation of future mine closure work. And the Australian operation also includes 115-person delivery center located in Manila, and we're looking forward to leveraging this group as we do with our Pune, India, delivery center to enhance both project and client-based outcomes. In the U.S., about 3/4 of Cardno's business is focused on the environment and human health through their natural resources, ecosystem assessment and restoration and health sciences teams, while the remainder is focused on transportation infrastructure. As the world and our clients respond to climate change and environmental concerns, we've seen Stantec's Environmental Services backlog grow in the mid-20% range through Q2 and expanding our environmental footprint to meet client needs is essential. So as mentioned earlier, adding the 1,100 U.S. employees from Cardno's environmental practice grows our combined U.S. Environmental Services precedence by 60% and doubles it from where we were 5 years ago. While we already occupy a leadership position related to ecosystem restoration, Cardno adds a complementary offering through their native seed bank and plant nurseries that allow for the restoration of native species throughout much of the United States. This additional offering will allow us to garner an increasing market share in the rapidly growing ecosystem restoration market. Cardno's strong presence in transportation infrastructure and in vivo reputation with state and local government clients dovetails nicely with Stantec's transportation client list, and it provides us considerable opportunity for client and service expansion. Combined, our increased footprint positions us well to secure an increased market share of state and local transportation funding associated with the U.S. infrastructure stimulus package when it's passed. And the opportunity for continued expansion into providing services for the U.S. federal government is particularly exciting. In addition to our complementary service offerings and long-term contracts with the U.S. federal government, Cardno has a division that undertake contracts requiring various levels of security clearances. And we see the opportunity to continue to expand contract capacity in the secure project area with the benefit of additional Stantec resources and service offerings. And finally, Cardno's growing health sciences practice represents a new growth platform that provides expertise in toxicology, industrial hygiene, epidemiology, medicine, modeling and risk assessments. The American Council of Engineering companies expects the bipartisan infrastructure stimulus bill to drive double-digit growth in the engineering space between now and 2026, once it's passed. The table on the right-hand side of the slide shows the significant areas of the proposed bill that fall within the scope of both Stantec and Cardno. The potential U.S. infrastructure stimulus funding, coupled with that previously noted in Australia and additional stimulus in New Zealand provides a strong tailwind for our combined operations over the next several years. Stantec is already a top-ranked firm in its space for sustainability. In addition to being named the fifth most sustainable company in the world by Corporate Knights this year, we consistently come on top in sustainability rankings across multiple independent third parties. Stantec's global leadership and sustainability will be further augmented by the passion and entrepreneurism of Cardno's professionals, who, like us, work at the intersection between clients, science and innovation to solve the ever-evolving challenges confronting communities around the world. Cardno's sophisticated approach to ESG and sustainability services aligns with Stantec and will further strengthen our leadership position in the marketplace. We often talk that cultural fit is the most important criteria when it comes to our evaluation of a potential acquisition because it truly informs the degree to which a combination will be successful. And we spent a great deal of time with Cardno. Through many projects together and in discussion with our senior management team over the past 4 months, we see tremendous alignment between our firms. Beyond a one-for-one match of our externally published values, the lived values of both teams are similar. There's a common commitment to ethics, safety, communication and people and performance. Cardno's staff are also familiar with what it's like being in a public company, and I have every confidence that Cardno's employees will feel at home within Stantec. In terms of a time line, Cardno was called for an extraordinary general meeting, which is expected to be held on or about the 6th of December and what time -- at which time their shareholders will vote on the acquisition. Cardno's largest shareholder, Crescent Capital Partners, holds over 55% of Cardno shares, and it has informed Cardno that it intends to vote in favor of this transaction. Completion of the acquisition is subject to the transfer of non-core businesses outside of the select assets that we're acquiring, the expiry or termination of all Hart-Scott-Rodino Act waiting period, and approval by the -- of the acquisition by the Defense Counterintelligence and Security Agency of the U.S. Department of Defense. We expect the transaction to close before the end of the year and for integration to begin at that time and carry forward through 2022. As I mentioned earlier, this transaction aligns with the strategic plan we launched in December of 2019 and tracks to all of our key 2023 financial targets. Cardno's added revenues alone are expected to boost our 2022 net revenue by more than 10%, and that's before any additional U.S. stimulus spending is included or any anticipated revenue synergies are achieved. We expect to achieve immediate double-digit accretion to adjusted EPS even before any synergies. Cardno's EBITDA margin profile is consistent with our own and will contribute to our progress towards our 2023 target. And on a pro forma basis, this acquisition supports our targeted return on invested capital. We're excited about the impact Cardno's team members will have in advancing our goal to be top tier in all the markets that we serve. We look for firms with strong leadership, creative ideas and a passion for the work that they deliver to their clients, and we have found that with Cardno. And with that, we'll open up the call to questions. Operator?

[Operator Instructions] We have a question coming from Benoit Poirier from Desjardins Capital.

Congratulations for the announcement this morning.

Great. Thanks, Benoit?

Yes. Could you talk about how strategic is the Cardno acquisition ahead of the U.S. infrastructure bill? could you maybe expand a bit on the potential revenue synergies you see with Cardno?

Absolutely. So as we look at already the strength of Stantec and our service offerings in relation to the addressable areas of the bipartisan infrastructure bill, we often sometimes will say that it's almost like they took the Stantec business plan, Stantec business lines, and wrote the plan around it because we service so much of that. But the strength really continues to come from the addition of Cardno really strengthens our service offerings in a number of areas in the United States, specifically related to transportation and infrastructure, which is the largest bucket of the funding sources as well as in the environmental remediation section and particularly with regards to ecosystem restoration. So we're really, really excited about that, Benoit. We have a lot of common clients throughout the United States that will continue to grow. But then I think even we're also equally excited in Australia, where the combination of our teams, as we mentioned, almost doubles our size there and really gives us that critical mass. We have, again, complementary clients down there, lot of good opportunities for cross-selling. When we talked about the service expansion opportunities there into community development, further expansion into mine closure and so on, so we're really excited about how this is additive to a number of our existing service offerings but then brings new opportunities for us as well. So very, very positive about the opportunities in the future.

Okay. That's great color, Gord. And now if you talk -- if we look at integration, how it would differ from MWH given the learning made over the years and the fact that you now have a global platform? If you could explain a little bit about the integration with Cardno that would be great.

Absolutely. So we are a much different company now than we were in 2016 when we acquired MWH. Now with the addition of MWH and the other firms that we've added, of course, in Australia and the U.K. and others, we have -- in Australia, for example, we have a fully developed and experienced leadership team in place, whereas that was not the case with MWH back in 2016. So now we've grown our presence in Australia from about 400-ish people that came with MWH to 1,400 now. Very strong leadership team, which certainly was a big part of our due diligence assessment there. Our Oracle ERP is rolled out in Australia. And so now as we look at adding these additional staff members to come from Cardno, we're building on an already strong and experienced leadership team and group there. So that's much different than our situation from 2016, and I think significantly reduces the integration risk that we have with Cardno over what we had 5 years ago with MWH.

That's great. And last one for me. Could you maybe provide more color about the M&A pipeline and whether you would prefer to digest Cardno before looking at some other M&A opportunities or you'll try to remain opportunistic in this M&A environment?

The -- right now, the primary focus for us is to bring in the Cardno folks and do the best job that we can to really to get the synergy that we're expecting from that. We do have -- the pipeline is full. And so we'll be continuing to look, of course, for other opportunities as well. But this Cardno acquisition for us is extremely important, strategic -- extremely strategic. And we want to make sure that both for Stantec and for the Cardno employees that we spend the time and focus to do this properly.

Your next question comes from the line of Frederic Bastien from Raymond James.

Gord, you mentioned that you had been looking at Cardno for some time, but when did you start engaging in serious discussion around a potential transaction?

That would have been in the summer. In the June sort of time frame we began having discussions then through July. Management presentations were in August. So we've been actively working on due diligence, meeting with Cardno senior leadership for roughly the past 4 months.

Okay. I guess one of the hardest things to gauge when making bigger-sized transaction is whether there's a natural fit between Stantec and Cardno's cultures, it sounds like you had some time to get a better appreciation of how that was the case. Is that correct?

Absolutely. One of the things that we always talk about is that when we evaluate an acquisition -- a firm for potential acquisition, the first thing we look for is culture. Because even if you can make all the financial numbers work out, if the culture just doesn't align, if they don't have a strong leadership team -- and for Stantec we look for that entrepreneurial drive, then we don't think that we'll be successful in the long term. And certainly, through all of the work that we've done with Cardno's leadership through all the other people that we've interfaced with at the company. We feel that strong, strong cultural alignment with them. So we're really looking forward to bringing them into the Stantec family.

Now you mentioned that Cardno's management has done a good job transforming the business, returning it to a strong growth path. Can you give us an idea of what wasn't going so well for the business before?

Sure. Well, maybe just a little bit of stepping back in time to set the stage because I know a lot of people in North America aren't familiar with the overall Cardno story. But Cardno, again, has been around for about 75 years, 76 actually. They went public in 2004. And between 2004 and 2014, they completed over 40 acquisitions, but those acquisitions weren't fully integrated. And so it really was in about 2015, where their current CEO, Susan Reisbord, who I hope many of you will get to meet because she is just a fantastic leader. She -- Susan joined the firm and began to work through, and they call it, in Cardno, they call it the turnaround. So she started the turnaround in North America. And really working with the teams there from about 2016 through 2018, they worked hard on the turnaround, bringing a little bit more focus and financial discipline back to which projects they would pursue, which projects -- how they were delivering them, some changes to the leadership team. During that period of time, some of the firms that had been acquired over time were divested or otherwise leaned out. And so -- as you look at the time line, we kind of think that 2016 through '18 was the time of the Americas turnaround. And so now if you were to look at their FY '21 results that are up on the website, you'll see those EBITDA margins now approaching 15%. You'll see top and bottom line growth for the last 5 years. So that North American turnaround is complete. And then in 2019, Susan took over as CEO of the -- of Cardno, and that's when really the Australia, New Zealand turnaround began 2019, 2020 through 2021, along the same sort of folks -- same focus, financial discipline and as to which -- more financial discipline as to what projects we're pursuing, the delivery pipeline, leadership team, enhancements and so on. And you're really beginning to start to see those improvements now. You'll see FY '21 over '20, some strong improvement there. But I think, importantly, we're exiting FY '21 at the run rate that we need to achieve our 2022 goals. So we feel very, very comfortable that we're -- that things are on the right track there. And I think the ultimate beneficiary of all of this work that's been done are certainly the employees of Cardno, their clients and certainly now as that team joined Stantec, I think collectively, we'll all benefit from it. It's interesting when I -- when you look back at the history of where Stantec came from, starting in 2018, we divested of our construction business to return us to pure-play engineering, which is sort of where we are now engineering, architecture and so on. But Cardno went through a similar path in terms of divesting some of those acquisitions that it came on. And then, of course, through the demerger of Intega back in 2019, again, sort of returning to their pure-play engineering and consulting business. So we're on a similar path. Stantec was maybe a year or 2 ahead. But we feel very, very comfortable, Frederic, with where their organization is now and where -- and more importantly, where it's going in the future.

Great. That's super helpful, Gord. I appreciate it. And my last question is, is Asia Pac mostly Australia and New Zealand? Or does it include other jurisdictions?

The vast majority is in Australia. We have a small presence in New Zealand. And as well, there's about a 115-person delivery center in Manila that would also be included in Asia Pac.

Your next question comes from the line of Yuri Lynk from Canaccord Genuity.

Gord and Theresa, congrats on the transaction.

Thank you.

Just a clarification question, Gord. Usually, when these acquisitions are presented to us, it's on trailing numbers. And I noticed that the EBITDA projection is on fiscal year '22, which I think is to June. So what's the difference in the numbers between that would cause you to want to look at more forward numbers than the trailing numbers?

Yes, maybe I can start with that, Yuri. I think what -- you highlighted something that is actually really important to understand where this transaction and the valuation is concerned. And that is chiefly what Gord just described in terms of the turnaround that Cardno has been undergoing. So when we look at a transaction like this, it's for us less useful to look at the past as an indicator of earnings performance. What we've looked at is the more recent past, the turnaround we're seeing, as Gord described, and very strong performance in their 2022 year-to-date performance, its outperforming their budgets, and so that's very positive for us. And the other thing that we need to take into consideration is sort of the outsized impact that COVID has had on Cardno's Australia and New Zealand business, which, of course, is a big part of what we're acquiring, hit particularly hard in that region of the world. And again, we're starting to see recovery, and we believe as we look at the growth trajectory that we see in our business there and apply what we believe to be sort of consistent metrics to that would be some of the reasons why we have focused more on the 2022 earnings forecast than on historical results.

No, that makes perfect sense. With relation -- with regards to the cost synergies, when do you anticipate having those in place?

We see those as occurring over the next 2 years. Again, lots of focus on integration upfront but believe that the USD 10 million will be achieved over the next 2 years.

Your next question comes from the line of Jacob Bout from CIBC.

How should we think about the Cardno's APAC margins and organic growth in 2022?

Theresa and I are in different locations. So if we're in the same room, we'd look at each other and decide who is going to respond. So maybe I'll start, and then Theresa can add there. We certainly see the margins continuing to strengthen in 2022 over where they were in 2021. And that's really as a result of that turnaround plan. I don't know that we're -- because we're going to integrate that with all of our other groups, I'm not sure that we're ready to call out anticipated EBITDA margins, but certainly, they will be strengthened over where you saw in 2021.

Yes, I think that's right. And I would add that, again, our combined view of the business shows us that the margins are completely in line, it's actually not even slightly better than our adjusted EBITDA margins. So we're very optimistic that combining the firms together will provide a solid margin platform for the company.

How much work is left to be done in the APAC turnaround?

The business discipline that was brought in place over the last couple of years is in place. The leadership enhancements that have been made are in place. So really, where we are now is just beginning to see the benefit of those coming through. So there's always work to do even in our ongoing operations, so you can never say that you're done, but the heavy lifting is complete.

Okay. And then when you made the comment earlier, you said that the acquired assets will have similar margins to, I guess, Stantec's legacy business. Is that for 2022? Or is that something we should be thinking 2, 3, 4 years out?

Yes. The margin profile is currently consistent with ours.

Okay. And then how should we be thinking about organic growth for the acquired assets in 2022?

As we look at the -- we exist in similar marketplaces for the most part. So I think as we think about our -- the Stantec organic growth rates, we would expect similar from Cardno. We haven't put out all the numbers yet for next year. But we do see some pretty good tailwinds for our industry overall in the geographies that we're talking about here, the U.S., Australia, New Zealand, pretty solid organic growth rates, and we expect that they'll be similar to what we're going to see in legacy Stantec.

Your next question comes from the line of Mark Neville from Scotia Bank.

Maybe just a follow-up on the historical operating performance. And Gord, I really appreciate the history lesson. But I guess if I'm understanding correctly, the North American operations were fixed, all 2018, Australia and New Zealand heavy lifting is done. So when you're talking -- again, I'm just, I guess, trying to understand the margin, consistent margin now, is that incrementally better as Australia, New Zealand fix? Or is that sort of assumed that sort of it's done. I just, I guess, trying to understand where Australia and New Zealand is at versus where margins are at versus where could they go?

Their margins most recently have stabilized and again continuing to adjust like everyone as we come out of COVID. But I would say that their margin performance as we see it today will strengthen slightly. They're pretty strong where they sit today. So again, we've got a lot of comfort that, that heavy lifting has been done and that discipline has been brought into the organization. And so we feel good about where it sits today, and then we'll just see continued improvement over time. And any synergies that we plan to achieve will be fairly broad-based across the organization. And so segment-wise, you'll see some uplift both in Australia and in the U.S.

And just to follow up on that a bit. In the North America, we're already sitting at just shy of 15% EBITDA margin based on FY '21, whereas APAC was down in the 4% range. So we certainly -- while we'll see some strengthening in North America, the majority of that strengthening will come from -- now that the turnaround is taking effect down in Australia.

Okay. But the -- I guess the gap is in the 4% and 15%, you're pretty comfortable that? What needs to be done has largely been done?

Absolutely.

Okay. Maybe just on the multiple, I'm just trying to consolidate pre d post's IFRS, if my math is correct, that sort of put the IFRS -- post IFRS multiple at roughly 8x for this asset?

That would probably be about right. I mean, we have really looked at it from a pre perspective. And again, in the year, valuation is sort of done agnostic of IFRS 16, but that's probably about right.

Okay. Maybe just one last one. And just in terms of shareholder support, I think you mentioned the largest shareholder was voting or has agreed to vote in favor of this. Is there anything else? I was just curious on the shareholder side, sort of what you need to get the deal done.

Our understanding, Mark, is that, it's 50% plus 1% is required in terms of the shareholder support. And Crescent Capital, the largest shareholder, and all the members of the Board have said that they will vote their shares in favor. So we feel very, very positive that the transaction will be approved at their meeting in early December.

And that sort of 51%, that's the consolidated, that's a total, that's not the minority, correct? The minority of what's left after the large shareholder. I'm just not sure if it's a structured...

Yes. The largest shareholder currently owns a little over 55% of the shares outstanding. So we feel comfortable going forward.

Yes, it's not 51% of the 45% remaining.

Yes. Right. Sorry. That's right.

No, that's right. 51% of total.

Your next question comes from the line of Michael Tupholme from TD Securities.

Gordon, Theresa, congratulations on the announcement.

Thanks, Michael.

My first question relates to the backlog of the Cardno assets you're acquiring. Can you speak to what the backlog looks like? And then related to that, it sounds like recently, Cardno's operations have seen a pickup in growth. I'm wondering how the backlog has trended as well?

Sure. So over the last year, for example -- maybe I'll start in Australia. The backlog year-on-year in Australia was up a little 11%. So that's very, very positive, and it continues to support that turnaround there. And here in the U.S. operations, it was kind of flat. Your backlog was flat over the year, just down slightly above, a little over 1%, but again, that's on a mature operation. So I think we're quite comfortable with the backlog. In general, but we're sitting at about 11 months of backlog for Cardno versus the 12 months for legacy Stantec. So pretty comparable.

Okay. That's helpful. Can you talk about what happens at the leadership level? What leadership is joining Stantec from Cardno coming with the transaction? And how does that work?

Yes. So as we've met with the senior leadership of Cardno over the last 4 months, truly, we've been extremely impressed with their level of dedication, engagement and professionalism. So all of the leaders, of the operations of which we're taking, the Americas and Australia, are coming with the transaction. There are some members of sort of the corporate head office, the CFO, for example, that will stay with the legacy Cardno. But all of the client-facing, revenue-generating leadership that is with Cardno currently will join Stantec as well.

Okay. You were asked about cross-selling opportunities and you mentioned or you spoke to them to an extent in your prepared remarks, but can you elaborate a little bit just first off, I guess, any sense high level, how material that opportunity is? What is the sort of the expected time line for potentially beginning to realize cross-selling opportunities? How long does that likely take? And then are there a couple of areas in particular where you see the greatest opportunity?

Yes. As always -- as soon as you -- we announced this morning, these -- the transaction, I've got e-mails from legacy Stantec staff already saying, "Hey, can I reach out to this person and can we start working together?" And what we have to do is just caution everyone that the transaction isn't complete until it's approved in December. So we have to dampen the enthusiasm that legacy Stantec staff have on beginning to move forward with these cross-selling opportunities already. We can still work absolutely in a sort of a prime-sub arrangement, but we can't fully integrate our teams at this point. So we see great cross-selling opportunities that will start virtually immediately. But in particular, some of the areas that I think that we have great opportunities for cross-sell is with the Cardno Health Sciences group, which we currently at legacy Stantec have limited size and scope in. So what we're going to bring what that group brings to us will significantly -- it is new service offerings. I think also now you begin -- we begin to see the benefit of some of the acquisitions that we've done over the last little while in Australia. So we announced the acquisition of Ingenium, a really strong mining firm that supplemented the work that we have there. But now when you see the mine closure work that Cardno has plus the mining and the mining client experience that we got from Ingenium and what we have from legacy Stantec, that really gives us a much stronger position for that. Certainly, on the community development side, as I mentioned, Cardno is one of the largest master planning groups in Australia, there's still a lot of inbound migration to Australia. So that's going to give us lots of strong opportunities. And then certainly, the U.S. federal that -- as we've talked about on our quarterly calls over the last little while, we've been putting a real focus on U.S. Federal over the last couple of years, and we're seeing considerable benefit in the work that we're doing for NAVFAC, the Naval Facilities Group, for FEMA and for other groups as well. Now Cardno brings with us the -- their ability to work on secure -- projects that require security clearance. And so Cardno being an Australia-listed company already had their FOCI clearance, that's a Foreign Ownership, Control or Influence clearance. So what we're going to start on working on immediately is to begin to put our plan together and our organization together to apply to transfer that to Stantec and then continue with that, which is a new offering for Stantec and expand it with the additional service offerings that we have.

Okay. That's very helpful, Gord. And then just last one for me. I know Theresa, you indicated that you looked at the transaction financially on a pre-IFRS 16 basis, but you're going to be reporting it inclusive of IFRS 16, obviously, going forward, and that's how we need to model this. Are you able to comment on what the expectation would be as far as incremental lease liabilities that will come on to the balance sheet and then what the EBITDA impact in terms of this would be as well just on the IFRS 16 side?

Sure. I can speak to the P&L side of it a little bit better than the balance sheet off the top of my head. The impact to Cardno's EBITDA, on a post-IFRS basis is about 25% in terms of dollar value. And then as you think about EBITDA margin, that will look fairly similar to when we adopted IFRS 16. It's about a 4% uplift in EBITDA margin. And so we would expect to see that as well on the Cardno side. I don't have at my fingertips the -- what the balance sheet impact will be, but we can certainly follow up with you on that.

Okay. That's helpful. I'm sorry, just to be clear, when you say -- we're talking about a 25% lift in post-IFRS 16 EBITDA relative to pre-IFRS 16 EBITDA?

That's right. That's right.

[Operator Instructions] Your next question comes from the line of Ian Gillies from Stifel GMP.

I was hoping to get a little bit of detail on some of the tax impacts. Just given some of the struggles Cardno has historically. Do you think there's much impact to Stantec's tax rates or cash tax rates going ahead? Is there any coverage you may get from this deal that may or may not be included in synergies?

I don't foresee a dramatic change in our overall tax rate from this particular transaction. As far as uplift, there were some operating losses in the U.S. that we will be able to take advantage of. We did a whole bunch of diligence around that. But from an overall standpoint, I don't see a big change in our cash taxes.

Okay. That's helpful. And Gord, on a strategic level specific to the U.S., I apologize if I missed this in the prepared comments, but is there any specific geographic regions that you're picking up from the Cardno acquisition that you weren't -- haven't historically been strong in previously?

No really new areas, but in particular, we're strengthening our transportation capabilities in the U.S. east, particularly in the southeast, which is a very, very strong market for us. And the ecosystem restoration group that is very, very complementary and additive to ours and really significantly strengthens our capabilities there. So really not so much from a geographic perspective where we weren't strong before, but just an overall strengthening of our team.

Okay. And then if I could just slide in a quick third one. You've talked previously about your goal for headcount in Australia previously. Can you just remind us what that number is? And I guess, in relation to where you get with the Cardno acquisition?

Yes. We've often said that we believe that maturity for us in Australia would be getting us to that 5,000-ish plus or minus mark. And so we were about 1,400 this -- the addition of the Cardno employees takes us to about 2,500. So really strengthens and diversifies our portfolio. But there is -- Australia is a great and very, very strong market. So there still is opportunity for us to further build on our team there.

Your next question comes from the line of Sabahat Khan from RBC Capital Markets.

Just, I guess, a comment on just buying out some of the, I guess, the North American and the APAC business. Is it going to be easy to sort of wrap up some of the projects that might be happening cross-border across some of their segments that are current operations and sort of how are you thinking about that? Like, is it going to be to sort of siphoning off and then roll into your Stantec operations? I just want to get an idea of how you're thinking about separating that business and then rolling into your operations.

Yes. Their operations, Saba, are completely complementary to ours. So one thing that often occurs when we -- whenever we acquire a company is we go and talk to the client. And the clients first question to us also is, "Do I have the same project manager on my job? Do I have the same delivery team on my job?" And if so, the logo on the business card is of less importance to me. And so I think that's really reassuring to our clients and that we -- the leadership and the delivery teams from Cardno are coming over to join us. So in terms of legacy projects that they're working on, they'll wrap them up just as they always have. And once we -- the other thing is that there really is no overlap with their international development group, and we aren't taking that international development group, of course. So I hope I've answered your question, but we don't see any -- as per what we normally do through these acquisitions, the delivery teams will remain consistent. The client managers will remain consistent -- and when the time is right, as the acquisition completes, then we'll just begin to bid work, propose on work together and integrate our delivery teams even further.

Okay. Great. And then just, I guess, some of the commentary you made on the margins earlier. So I was hoping to get a little bit more color on it. If I'm looking at the Cardno's disclosures correctly, it looks like the revenue from Asia Pac and North America is roughly similar, but I know you commented that the Asia Pac margins are in sort of the 4%, 4.5% range. I guess, what's the long-term potential there? Because it looks like the Americas region is already sort of in line with what you're reporting. What do you see the potential for this Asia Pac margin and so what could it go to over the next few years? And so I guess the other question being what is the cause of maybe the variance between those 2 segmented margins?

Yes. Some of the variance, of course, is legacy projects that we had on the books that the Cardno team perhaps took some time ago with less financial discipline. -- that we're now working through as those just naturally transition off it. And many of them are either done or will be transitioning off soon with the additional financial discipline on both projects that they'll pursue. And then on delivery, we see those naturally coming up. And we'll see those margins getting into the double digits, similar to our operations there.

Okay. And then I guess is there sort of a time line or I guess is there sort of a natural margin improvement there as some of those legacy projects wrap up? Like, how are you thinking about that going forward?

Yes. The run rate that we're seeing now on the projects is all -- so far this year is already trending in the right direction. So will we be back to that -- will we get to those double digits in year 1? I'd like to think so, but there will always be a little bit of -- as you're integrating 2 companies like this, there's always a little bit of a uncertainty. So I feel certainly very strong though going forward in the next year or so that we're going to be exactly where we need to be and then continue to expand on those -- that margin profile.

Your next question comes from the line of Maxim Sytchev from National Bank Finance.

Gord, Theresa, congrats on the transaction. Most of the questions have been asked already. And Gord, I just had one for you, if you don't mind. Do you mind maybe talking about kind of how additive the Environmental Services business is from Cardno, in terms of expertise to kind of the legacy Stantec platform, maybe if you don't mind just talking about that.

Yes. Great question. And as we said, it increases our head count in the U.S. by 60%. And so they've got a few major lines of work that their environmental groups are involved in the United States. So we talked a little bit about the health sciences work that is for -- by and large, net new to Stantec, and I think is going to be a really exciting offering to our existing clients. Their ecosystem restoration group, it is very, very complementary to our group. We work occasionally in the same geographies, but there's a lot of different geographies that we work on. So there will be limited sort of cannibalizing and overlap there. They'll be -- those are very, very additive. But then I think what's really exciting is as a differentiator for our combined ecosystem restoration offering, is this the native plant -- the plant nursery that they have, the seed bank that they have, that really is a differentiator for our overall offering. And then they do a lot of work in a group they call natural resources, but it's FERC and EPA compliance work, hydro dam, relicensing, permitting for renewable power. Many of those things we do as well, but they have a new client base. So it's bringing in a brand-new client base and opportunities to grow there. So again, very, very additive.

Okay. That's great to hear. And maybe just as a follow-up question to that, I presume that the client overlap, if you were trying to kind of do a Venn diagram, it's pretty limited? Or how should we think about that if it's possible?

Yes. We're both active in the marketplace. So there will always be some overlap of the Venn diagram. But I would say that it is, by far, the minority of our clients that we would overlap. So we feel very positive about combining the firms from that perspective.

Your next question comes from the line of Chris Murray from ATB Capital Markets.

Just going through the press release from Cardno, just a couple of questions that they pointed out. One of the things I did mention that the Creston Capital ownership stake, they did mention that they're consenting barring superior proposal. So a couple of questions here. One, what kind of lockups do you have on this sort of thing? And can you maybe talk a little bit about the process? And why you would think that you should be okay and you wouldn't expect anything else to come into the process to kind of derail it at this point?

Cardno has -- firstly, on the process. So Cardno has ran a public process that started back in June. So they launched a strategic review. So firms and buyers that were interested in participating have been involved in the process. I think we were probably further ahead of everyone from a due diligence perspective. And so that's very strong there. So we don't anticipate that with the amount of work that we've done that a new buyer would come out of the woodwork for already unknown process in the next 5 or 6 weeks. Anything can happen, but it seems very unusual. And then the statement with regards to the superior proposal is statutory wording that's required in Australia. So whenever there is a -- someone has a large block of shares on a majority shareholder who says that they're going to vote in favor, certainly, it's a statutory wording that they do say that there -- it's subject to not a superior proposal coming in. We don't expect that will happen, Chris, but we look -- but I guess we'll know in the next 5 or 6 weeks. And in terms of a lockup, I think they did say in their press release as well that we do have a break fee. It's only $5 million. But in the event that something did occur, we have a break fee that would cover the majority of our cost to date.

All right. Fair enough. And actually kind of moving to costs, and just thinking about like the synergies. But historically, when you guys have done some of these larger transactions. There were some kind of upfront costs just for IT harmonization and things like that, appreciating that Cardno is probably a more sophisticated operation than maybe some of the other acquisitions you've done in the past. Should we be expecting any step-up in SG&A or anything like that for integration in the near term as we go into 2022?

Yes, there always are, Chris, you're right. There's always going to be a cost to integrate companies together. And I think, typically, you'd see a multiple relative to synergies with integration costs on kind of a 1:1, maybe a little bit more on the integration side, and we think that would be fairly typical in this case.

Okay. Fair enough. And so the synergies numbers, that's just a gross number, that's not a net number?

That's right.

Okay. And then, Gord, the other question I had for you, just kind of going back to -- you talk about the M&A portfolio. Certainly sounds like at least the Australia business is going to be pretty busy. But can you discuss a little bit -- you did mention you had a full M&A pipeline. And part of the discussion that we have had was certainly looking at other parts of the world outside of just Australia, in terms of being able to grow and follow kind of where you've made some inroads with some of the other acquisitions you've done including MWH. When we think out your ability to do further acquisitions, it certainly looks like the balance sheet is stretched by any means and certainly we'll walk it back through 2022. But can you talk about your capability to do something again of this size maybe in another geographic area over the next little while?

Certainly, I think you could see from a balance sheet or a financing perspective, we could -- that is something that we could execute on. We're continuing to look for other opportunities and in other geographies, certainly in the United States. We've talked about the U.K., Western Europe. So we're continuing to look there. I do think that if we were to look at something, subsequent acquisitions, we probably would stay away from stretching our Australian teams in the next little while. But we could look at something in the U.K., Western Europe, Canada, North America. So those things are always on the table. But really, I think, as we mentioned earlier, we're focused on ensuring that we do the right thing by -- through the integration of Cardno so that we really get the value from it. And it's -- and both our legacy Stantec clients and Cardno clients see the benefit of the merger. But that's not to say in any way, Chris, that we will stop looking at other M&A targets because that is absolutely not the case. We still are active in evaluating other opportunities.

Okay. And do you feel comfortable that you've got sufficient management teams. You made the comment that you felt good about doing the integration because you've got a more senior management team now in place in Australia. Do you feel a similar comfort level in other parts of your geographies?

Absolutely. The maturity that we've got in place now in the U.K., for example, very similar to the statements that we made related to Australia, coming in with really building off the MWH platform that we got in 2016 from the waterside, now adding Peter Brett Associates, which was a significant acquisition there and some other firms as well that we've bolted on. We have a mature, experienced leadership team in the U.K., really in Western Europe as well. So from a similar perspective, even with travel difficult, we could source due diligence and integrate another firm over there, again, just from the maturity of our overall global model at this time.

And speakers, we don't have any questions over the phone. Please continue.

Great. Okay. Well, thanks, everyone, for joining us on the call today. We're really excited about this acquisition of Cardno. And we look forward to speaking with you on November 4 when we discuss our third quarter and year-to-date results. So thanks again, everyone. Have a good day.

Thank you.

And ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.