investor day 2015

INVESTOR DAY 2015
JIM NEVADA, PRESIDENT, ENVIRONMENT, U.S.
JUNE 10, 2015
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INVESTOR DAY 2015
JUNE 10, 2015
JIM NEVADA, PRESIDENT, ENVIRONMENT, U.S.
Jim Nevada:
Thanks, everybody, for the opportunity to talk about
the environmental business in the U.S. I'm going to
take a little different task here and actually talk about
the sector in general in the U.S. just to give you a
little overview of what it looks like.
So it's been a strong growth for environmental
services over the years. What we're seeing right now
is it's just about $30 billion in toll fees and some of
the professional services around the environmental
sector.
We see this is an opportunity where, you know,
we're under scale for obvious reasons right now and
want to grow that piece of the market share. It's
interesting to look at the market share and let's take a
look at the top six environmental firms.
In 1995, they represented about 7 percent total
market in terms of environmental services and
professional fees. They represent about 33 percent
right now. And if you look at firms 20 years ago
like AECOM, URS, Petrotech and Golder, none of
those firms had revenues in an excess of $100
million 20 years ago.
Now they're all firms that are well over a billion
dollars so completely changed the marketplace in
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terms of the landscape of those firms. And that all
happened as a result of consolidation. So
consolidation has been a big piece of the
environmental and what it looks like.
If you look at our in terms of the environmental
sector as far as services are concerned, public versus
private, it's about 50/50 right now. Ten years ago, it
was about 60/40 so it hasn’t changed dramatically
but there's been some changes in regulatory
compliance in terms of the industrial sector as well
as the public sector for some slowdown in spending
as well especially on federal side where Department
of Defense and other areas have slowdown because
off sequestration.
What we see in the public sector in terms of
environmental services, typically, we're talking
about environmental plan and services, you're
talking about services related to what's called the
National Environmental Policy Act. There are
things like environmental assessment, environmental
impact statements plus the water and wastewater.
In the private sector, it tends to be heavy on the
industrial side and when I'm talking about industrial
I'm talking about manufacturing as well as oil and
gas and energy and mining. And what we've is that,
you know, a lot of firms have actually taking
advantage of the production or the increase in
production in oil and gas in the U.S. that increases
their share of oil and gas over the last couple of
years and the recent drop in the oil and gas prices
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has had an impact on those firms. So you're starting
to see some of them scape that marketplace.
What we see in the sustainability side especially on
the high-end consulting services is that some of the
case-rich firms and companies are the ones that are
buying these services. They have a little but more
maturity around their corporate sustainability
programs and it's actually a competitive marketplace
for them in terms of finding good talent.
You take a look at the high tech firms, they're after
young folks that are - it's a very competitive market
in terms of employees. So sustainability is a big
agenda for those employees and obviously they want
to better than competition.
So I want to talk a little but about economic trends,
socially economic trends. Some of this was covered
by David and Cliff but it's worth mentioning because
it's part of the environmental landscape going
forward.
On a demographic side, the aging population, it's a
big factor. If you take a look at the Baby Boomers,
they're retiring. They're living longer. In the next 15
years, the number of people who are going to be 65
and older in this country is going to increase by 30
million, a 75 percent increase from this year from
where we're at right now.
So huge demand for healthcare. Most of the growth
in the U.S. is expected to occur in the South and the
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West. So that's going to be a key thought process
around our strategy going forward. And we talked
about urbanization in kind of key cities so everybody
touched on that so it's part of our strategic thought
process as well.
Climate change, obviously, has the big impact on
environmental services not just in U.S. but
everywhere. There's billions of dollars that are
needed for water and wastewater improvement in
terms of the infrastructure.
Aging infrastructure around the water and
wastewater systems in addition to drought conditions
in the California region, drought conditions that
occurred for several years now. There's - currently
there's about 15 desalination projects that are talked
about along the coastline from San Francisco to LA
and that’s where they take seawater and try to turn it
into potable water. And so they're major programs
that they're talking about.
Sea level rises, catastrophic storm events, they are
impacting the, you know, the thought process around
the coastline and we're located in terms of our city
locations in major coastlines so that has an impact as
well in terms of what we're doing.
And there are some greenhouse gas emission
regulations or at least some thought process around
the regional greenhouse gas programs that are in
place in the U.S. but not all states participate. It's
not required. It's a voluntary basis and there's no
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regulation around the entire group if you don’t
comply with some of these rules and they're not
really rules. They're more like guidelines to some of
the greenhouse gas reductions.
California is the most progressive state of all with
states in the U.S. in terms of environment. They
actually have cap-and-trade program in place and
I'm going to talk a little bit about that when we get
into the projects.
And then quick talk about the aging infrastructure.
No need to repeat that but I'm surprised to say the
environmental has a big impact in terms of its piece
on the infrastructure side.
And on the industrial side, we do lot of
environmental due diligence work. So our M&A
activity that occurs within the industrial sector has
an impact on our business.
So our competition looks quite different depending
on what our services are and we broke our services
out into four distinct categories. First is compliance
and compliance is really - this is regulatory
compliance typically in the private side. These are
things like air noise. It's your environmental health
and safety. It's your site remediation and site
contamination services.
Natural resources is really where the NEPA side of
the world fits in addition to our environmental
planning as well. So, the National Environmental
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Policy Act which has the environmental assessment
and environment impact statements fall under that
category.
Sustainability, you can see the competition, it's quite
different there. It's technical advisory firms that we
typically compete with the likes of Deloitte and
KPMG and Ernst & Young. They’ve gotten into
that space and we've actually been able to steal some
of those employees from those groups which is good
for us in terms of our ability to compete.
And what's -- just to make a distinction about these
services, the natural resources and wastewater group
right now are sitting hopped in to the transportation
business. Really what the environmental sector is
the compliance and sustainability side of things.
But we wanted to show the depth and breadth of the
four environmental service offering. So we're going
to mix this up a little bit and I'll explain as we go
along.
So this right now, this graphic shows 128 employees
and reason why I'm showing the 128 employees as
opposed to full depth and breadth is because our
financial information as of 2014 once you'll see on
the review in backlog side is based on these 128
employees. That's before any of the integration
occurred.
What we have in the U.S. is about 400 total
environmental folks that are - what we consider
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environmental expertise, those folks that are focused
solely on environmental.
In 2015, this year, we brought on a number of folks
who were part of what we call the environmental
specialists from the acquisition. Those were folks
who are in hazardous materials and air nose. That
brought our total in terms of environmental sector to
around 200 and again the other 200 are sitting
hopped in to the transaction infrastructure business.
So we wanted differentiated on that. So you
understand what the scope of the - what I'm going
here right now is. You could see we are a small part
of the business. We have lots of room for growth
and that's obviously the strategic play for us.
This laid out the actual expertise in the business, the
depth and breadth. It's the 400 total employees. It's
not just the 128. So you can see we're actually well
diversified. It gives us a good platform for growth
for the future.
We are - this is not a typical of what you see in the
industry as a whole. This kind of lay out of
contaminated sit solutions versus planning versus
water and wastewater. So we are well positioned in
that regard in terms of our overall platform for being
able to expand on these services.
So I'll talk a little bit about the different service
offerings here in terms of the various kind of
categories. I won't be redundant but it's in your
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slide. If you have any questions on the specific
service offerings, I can go over that. For the sake of
time, I'll keep going on here.
Our market sectors, again, based on our expertise
overall in the business, you know, we've got about
almost 60 percent of our service being offered to
government agencies. So, you - take the natural
resource side of things, the water and wastewater,
heavy on the public side as well as piece of the
environmental specialties that’s still largely a public
offering. So, a total of about 60 percent.
The industrial side, industrial manufacturing as well
as the legal financial and services, these all kind of
dovetail together because what we do for legal and
financial, specifically as the M&A, the
environmental due diligence and a lot of that is for
industrial sectors. So, there are almost, it's almost a
kind of tie in as far as the total services provided
there.
Traditional contracts, contract vehicles, we don’t,
you know, we don’t typically do much in terms of
lump sum or fixed fee type of contracts. It's mostly
across plus arrangements. It's mostly a prime
agreement. In the case of some of our services that
are being offered and supportive transportation
business, it's largely a contract vehicle that exists
within the transportation and then supporting that.
Our key clients, this is a list of our key clients that
we typically do work with in terms of the
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sustainability and the compliance side of things.
You'll see that there's - besides MPA there's not a
whole lot of public clients listed here, largely
because it's included within the transportation
business.
But in the industrial side of things, we - that's where
we typically do our compliance, our regulatory
compliance work. So, you see the likes of
StanleyBlack&Decker, Vishay, Emerson, even CBS,
that's our compliance side of things.
On the sustainability side, this is where we tend to
get into more of the - what I prefer to as cash-rich
firms or the high tech firms. It's also the banking
institution. So, the likes of Microsoft and Avaya,
and Bank of America as well.
So, I'm going to go back, again, to our sort of
footprint of where we were in 2014 which was about
120 employees because this is the way that financial
information was presented and most of the other
financial information for 2014 before was tucked
into the transportation business.
And you see we had a little bit of a dip in 2013 and
that's because we had a number of our folks that
were actually approached by competitor. It was in a
specific service area that we - we were trying to
grow in our business and they came around, coach
those folks. We actually did a very nice job, I think
the team did a very nice job in trying to rally those
clients to our - to our business so we grew our
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business back to where we were in terms of, you
know, our position as of 2012 to 2014.
Again, based on the 128 employees as of 2014,
almost all private, almost all fee for services or what
you call cost plus or time and material type of
contracts.
Backlog, we have six months worth of backlog in
the space that we're talking about which is the
compliancy side and the sustainability is not
uncharacteristic. It's actually quite normal and that’s
because most of our contracts are a month to two
months duration.
So I'm going to talk a little bit about the market
trends, some of this might be repetitive in terms of
the social economic trends we talked about and the
reason for this is that understand what we see as the
future in terms of our strategic objective.
California, got the eighth largest economy in the
world. The most environmentally friendly of all the
states and it's growing. It's growing in the bay area,
it's growing in southern California so we see that as
an opportunity for us to expand.
Texas. Texas is the 12th largest economy in the
world and it's the fastest growing state of all the
states. So, again, opportunities for expansion from
where we are right now.
The coastal programs talked about the climate
change and some of the storm events and what that
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means in terms of folks that are in that space and as
far as our clients thinking about how we redesign
and help redesign coastal areas. And so, we see that
as a niche play and being able to provide some
expertise that some firms are looking to do as well
but certainly, there's not a whole lot in that space.
And then our geographic footprint offers
opportunities for us to expand our water and
wastewater capabilities so that's a big focus area for
us as well.
Revenue synergy. We've seen a lot of revenue
synergy opportunities since the merger last year.
What we're - what we're experiencing is, right now,
is the need to understand what everybody does in the
business. So, we're meeting on a regular basis to try
to figure out where we can provide those revenue
synergy opportunities.
I'll talk a little bit of that on the project level so
we've got some examples. What we see, though, is
that environmental plays a part in almost project and
there's certainly a lot of opportunities because of
that. Now, we have a scale of the business that
provides a massive opportunity in terms of our
internal client being the overall business in the U.S.
and outside the U.S., quite honestly, to provide that
opportunity for our growth.
And as an example, Roger, who's going to come up
next on the industrial and energy side, we've been
talking about the permitting services. There's always
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permitting services associated with a lot of work he
does and how we leverage that.
Certainly, we - we see healthcare as a potential for
the future. Actually, healthcare - there was a recent
survey done of environmental executives across the
U.S. and they rated healthcare the number one
growth opportunity in the sector. And so, we see the
CCRD offering as a potential opportunity for us to
generate revenue synergies as well. And then, of
course, the wider geographic footprint, lots of
opportunities there.
Organically, that's going to be a big focus for us, not
just internally within the business but organically
outside the business and we want to expand our
service offering in places where we have good
expertise. We want to expand our service offering in
places where we've got a great geographic footprint
but we don’t have the level of expertise in those
specific locations and we want to expand some of
our niche or service offerings so we see, you know, a
good opportunity to grow our business organically.
Let me go over a few projects that I thought were
important in terms of the context of what we're we're talking about today. the U.S. Coast Guard
headquarters is a great example of what we do
exceptionally well in this business which is we
provide great expertise to our clients and then it
translates into more work.
So, this is an example where we were doing work for
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park construction for the U.S. Department of
Transportation headquarters and they sole source the
fund with Coast Guard headquarters projects
because of the work we did.
And this is a site that’s located in the southeastern
portion of Washington, D.C. that's actually home to
one of the largest psychiatric hospitals in the world,
actually home to John Hinckley who shot Ronald
Reagan just as a side note. But it's a massive - it's a
massive, you know, it's a massive amount coal ash
and contaminant soil that we had to plan for in terms
of excavation in a very short period of time about
three months.
Well, what's nice about this project is that we've
provided multiple services with an environmental,
not just the soil, the soil study and the soil plan but
also asbestos abatement plan. We did the air and
noise and dust planning and we also oversaw the
remediation of the contaminate soil.
Due diligence service. I've talked a little bit about
that. That we're - we're actually very well known,
especially with the client base that we have for our
due diligence services in terms of environmental due
diligence for - especially for industrial clients and
that’s not just a localized U.S. offering. It's a global
offering and we've - we've talked about the - we've
talked about the clients we had on that list.
But the clients are global clients for us as well. So,
we actually see a lot of and we've seen this over this
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years as - that we've had a lot of opportunities as a
work across regions and this is a good example here
where we've had utilized the services of different
parts of - parts of the world in terms of our skill sets
and due diligence and this is a common type of
project for us.
What's nice about this is that it's another good
example where we've done exceptional work and the
clients come back. This was a private equity firm in
2007, can't name then because it's confidential but
the private equity firm in 2007, are looking to buy
this - this global auto parts manufacture. We did the
work for them, did it on a global basis. They loved
what we did.
They went to sell the business in seven years as
you'd expect with most private equity firms and we
we're given the work. So, it was a nice story for us
to win that work. Sole sourced again.
Our sustainability services. We've got a strong
strong sustainability services. As I've said, we
compete very well against some of the top technical
advisory firms in terms of their name. This is where
we provide some good technical advisory services
up front.
And this is a great story around the revenue synergy
that wouldn't have happened if we didn’t do a
merger last year. So, this was actually sourced out
of our Seoul, Korea office post merger. And it
included multiple sectors, included multiple regions
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as well.
Solar planning group was involved. The west region
environmental planning group out of the
transportation function in the U.S. was involved.
Sustainability in the U.S. led the charge, the Canada
structural engineering group and Roger's wind
engineering group, all involved in this project. So,
great revenue story. And early on, we did this in
start of 2015.
And finally, this is going to sound a little bit
redundant because Cliff went over this, but the
California High-Speed Rail. It's a transportation
project but there is an interesting environmental
component to this and I talked before about the fact
that California has a Cap-and-Trade Program. This
was the first project, at least the first big project that
was funded under the Cap-and-Trade Program.
And so, our job was to create the methodology and
approach the greenhouse gas, so they could get to
net zero emissions. So, it's a nice upfront, technical
advisory function that we've performed which,
obviously, helped to - helped to get the project
rolling and funded in for the future.
So, that's it. Questions?
Male:
Thanks. M&A seems conspicuous in its absence under
growth initiative so I'm wondering how you're
thinking about that?
Jim Nevada:
Well, we've touched on it a little bit with the
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strategic objectives in terms of some of the
geographic views, California, Texas, water and
wastewater and specifically in trying to maybe look
at some niche place in terms of some of our kind of
niche, like, sustainability and environmental health
and safety in terms of that.
Our view is that, right now, our focus is on trying to
organically grow the business especially within the within the broader sense of what we have as far as
the geographic footprint across the U.S.
Male:
Is there an opportunity here for something that's more
transformational for this business in terms of
acquisitions like, you know, CH2M Hill which
obviously has some issues…
Jim Nevada:
Well, we want to - we want to make sure that it's the
right firm. It's not just transformational in terms of
size. So, obviously, we want to make sure we've got
a good complement of our - of our business and
specifically in terms of the pure play, that's what our
objective is.
So, we certainly, you know, we'll rule out anything
at this point in time but our focus, as I've said, is
really on making sure we develop the platform that
we have and develop from that but we, you know,
what our kind of core skill sets are.
Male:
Thanks.
Jim Nevada:
Everybody must be hungry. Roger, you're in real
trouble here.
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Male: (Inaudible) profitable that (inaudible) size, you're not losing
money but how would you compare the profitability
of your environmental business against your peers?
Is it highest to lowest and…
Jim Nevada:
Yes. It's a, you know, it's a strong business. It's a
strong business in terms of the profitability of the
business and as - as Greg pointed out, you know,
we've got a double digit EBITDA margin in the U.S.
and business is aligned with that.
It depends on the space you place and, of course,
you know, in what we do in the private sector tends
to have a bit higher multipliers than what is in the
public space but the mix of those and that we have a
nice mix, the mix of those type of service has
actually provided a healthier return.
Male:
OK. And given the fact that you're pure engineering
consultant, will the volume - incremental volume
will help you to drive higher margins or should
expect kind of (inaudible) margin or…
Jim Nevada:
Male:
OK.
Yes. We think it's going to continue to be a strong
business. We think it's going to continue to have
good margins to the business and our goal is to do
more in the frontend advisory services which,
obviously, has a play in terms of our ability to try to
take advantage of those financial opportunities and
as far as returns are concerned.