Stantec Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Stantec's Second Quarter 2024 Results Webcast and Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

Leading the call today are Gord Johnston, President and Chief Executive Officer and Teresa Yang, Executive Vice President and Chief Financial Officer. Stantec invites those dialing in to view the slide presentation, which is available in the Investors section at stantec.com. Today's call is also webcast. Please be advised that if you have dialed in while also viewing the webcast, you should mute your computer as there is a delay between the call and the webcast. All information provided during this conference call is subject to the forward looking statement qualification set out on Slide 2, detailed in Stantec's management discussion and analysis and incorporated in full for the purposes of today's call.

Operator

Unless otherwise noted, dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded. With that, I'm pleased to turn the call over to Mr. Gord Johnston. Please go ahead.

Speaker 1

Good morning. Thank you for joining us today. Before jumping into our Q2 results, I want to express how proud I am that Stantec continues to be recognized for our leadership and sustainability. This past quarter, Corporate Knights ranked Stantec as number 2 in their 2024 Best 50 Canadian Corporate Citizens ranking. In addition, Stantec has been included in Time Magazine's list of the world's most sustainable companies of 2024.

Speaker 1

We are the top Canadian company on their list and ranked 14th overall. These accolades are a testament to our authentic approach to sustainability and to doing what is right. I'm very pleased with the strength of our second quarter results. Our revenue growth was excellent and we continued to execute very successfully on our projects, while driving strong operational performance across the business. Many of the long term macro trends we discussed in the rollout of our strategic plan are building momentum and we have continued to capitalize on their growth opportunities that they're creating.

Speaker 1

Our industry leading water business continues to drive growth in critical areas like shoreline protection, wastewater treatment, water security advanced manufacturing and PFAS. In the U. K, our team continues to focus on bidding for AMP 8 contracts. Stantec is well placed with our clients. We've already been awarded a significant number of contracts and are awaiting decisions on several others.

Speaker 1

Themes of addressing aging infrastructure and climate change are very prominent in AMP8 with investment to be directed towards replacement of water mains, significantly reducing leaks and harm from storm overflows and implementing nature based solutions. We're the number one water firm in the U. K. And are extremely well positioned for continued growth. Increased funding for Healthcare continues to drive growth for our buildings business where we are a leader in this space.

Speaker 1

Our expertise in cancer care facilities is world renowned and we currently have 15 projects underway, including 1 in Dubai, 6 in the United States and 8 in Canada. Our buildings business is also a top 5 player in mission critical and data center facilities, currently working with 4 of the top 5 hyperscale data center technology companies. Our infrastructure business is seeing enhanced activity related to aging infrastructure, particularly in the U. S. As funding continues to flow from IIJA with over $460,000,000,000 now allocated to over 60,000 projects across country.

Speaker 1

And innovation continues to be a key enabler in the execution of our strategy. We're seeing a growing trend where our clients are seeking digital solutions that augment our technical expertise with emerging technologies like artificial intelligence. A great example of this is a recent win where Stantec has been engaged to reimagine the monitoring of our clients' sewer pipeline assets. Stantec will design AI machine learning models that can decipher CCTV footage to detect defects in real time producing automated reports. This innovative approach is a stepping stone towards developing an intelligent system considering salinity, infiltration and order data across a vast geography.

Speaker 1

With a collaborative and innovative global workforce that includes civil design engineers and AI experts, Stantec is uniquely positioned to deliver AI powered asset management systems that will revolutionize operations and allow our clients to provide more reliable and efficient services. Looking at the specifics of our 2nd quarter results. We achieved record net revenue for the quarter at $1,500,000,000 up almost 17% compared to Q2 2023 with 7% organic and 9% acquisition growth. We delivered solid organic growth in each of our key geographies. We had organic growth in each of our business operating units with the exception of Energy and Resources.

Speaker 1

Our Water and Buildings businesses both realized double digit organic growth. In addition to the strong organic growth we achieved in the quarter, our recent acquisitions of Zetcon, Morrison Hirschfield and Heidrak are performing as expected and we're busy working on their integration and supporting our 2,700 new colleagues as they transition into Stantec. Adjusted EBITDA for the quarter rose to $247,000,000 up 14.5% with a margin of 16.6% positioning us well for delivering on our margin guidance for the full year. Overall, we delivered adjusted EPS of $1.12 up 13% over Q2 last year. Our U.

Speaker 1

S. Business continues to perform extremely well, delivering a 16% increase in net revenue for the Q2, including 6% acquisition growth from ESD and Morrison Hirschfield and 9% organic growth. Once again, all of our business operating units in the U. S. Had solid organic growth.

Speaker 1

Our water business delivered double digit organic growth with major industrial and water security projects. Infrastructure also achieved double digit organic growth with significant transit, rail and roadway projects contributing to growing momentum. Our buildings business saw strong demand across most subsectors, particularly in healthcare, science and technology and industrial. In Canada, we grew our net revenue by 16% with 11% acquisition growth from Morrison Hirschfield and 5% organic growth. Our water business had very robust double digit organic growth as activity on major wastewater projects remained high.

Speaker 1

Buildings also drove double digit organic growth through projects in the healthcare space in both British Columbia and Quebec. Energy and Resources retracted slightly this quarter as a result of ongoing delays in the ramp up of new projects. However, we continue to grow our backlog and win MSAs, so we expect ENR to shift towards organic growth at the end of the year. Our global operations generated an increase of 19% in net revenue with 14% coming from the Zetcon and Hydroc acquisitions and 6% from organic growth. Our Global Buildings, Water and Environmental Services businesses all achieved double digit organic growth.

Speaker 1

Buildings organic growth reached almost 30%, driven primarily by the cancer center in Dubai and the ramp up of work on the £4,000,000,000 AGRITAS battery manufacturing facility in the U. K. Water's organic growth was achieved across the U. K, New Zealand and Australia through long term framework agreements and public sector investments. Our global infrastructure business saw a slight organic retraction, driven by the cancellation of certain infrastructure projects in Australia and New Zealand and community development in the U.

Speaker 1

K, which continues to see muted levels of activity. And now, I'll turn the call over to Teresa to review our financial results in more detail.

Speaker 2

Thank you, Gord. Good morning, everyone. Once again, we delivered a very solid quarter of performance in Q2. We achieved record net revenue and enhanced project margin. Our gross revenue grew to almost $1,900,000,000 up 15% over Q2 2023 and net revenue of 1,500,000,000 was up 17%.

Speaker 2

Project margin increased 10 basis points due to our continued discipline in project execution. We did see a slight decline of 30 basis points in our adjusted EBITDA margin to 16.6%, which was primarily due to increased insurance claim provisions. Provisions for claims vary from year to year, largely as a result of changes in actuarial projections for our self insurance programs. Claims provisions in Q2 last year were unusually low and returned to more historical levels in Q2 this year. Adjusted diluted EPS in the quarter increased 13% to $1.12 And I would note that we did not see a meaningful impact this quarter as it relates to our long term incentive program revaluation.

Speaker 2

Turning to our liquidity and capital resources. In the 1st 6 months of the year, we generated very strong cash flows, achieving $137,000,000 in operating cash flow, doubled what it was in the comparative period last year. This reflects our ongoing focus on working capital management. This also resulted in a reduction in DSO, achieving 77 days, which continues to be below our target of 80 days. And we closed the quarter with a net debt to adjusted EBITDA ratio of 1.7 times, reflecting the Q2 funding for Hydroc.

Speaker 2

We remain well within our target range of 1 to 2 times. And with that, I'll turn the call back to Gord.

Speaker 1

Thanks, Teresa. At the end of the second quarter, our backlog stood at $7,200,000,000 its highest level ever. Since December 2023, this represents approximately 8% acquisition and 3% organic growth. We achieved organic growth across all of our regions and in all of our BOUs with the exception of buildings. Energy and Resources and Environmental Services both achieved double digit organic growth.

Speaker 1

Wins for Energy and Resources included an award for preliminary engineering and consulting on a power project in Eastern Canada and awards in the mining sector supporting critical minerals in both Canada and global. And our Environmental Services team has secured a number of contracts that include regulatory services to support new power transmission in Canada and permitting for a data center campus in the U. S. Our backlog represents approximately 12 months work. Turning now to major projects ordered in Q2.

Speaker 1

In June, we announced the extension of our program management and technical engineering services for Pure Water San Diego. In addition to this, our water team in a joint venture has been awarded a 5 year contract to provide services for DC Water. This initial contract for US43 $1,000,000 includes implementation of infrastructure upgrades across all drinking water assets. This program also includes development of pure water DC, which will provide resilient water supply through a water reuse approach. We also continue to work to win AMP 8 frameworks in the UK and secured an engineering consultancy framework with Duer Camry Welsh Water.

Speaker 1

Our buildings business will serve as a trusted advisor to a confidential Fortune 100 technology client. Augmented by the expertise of ESD and Morrison Hirschfield, the buildings team was recently selected to provide architectural and engineering design services for improvements at 9 data center locations across 5 hyperscale campuses in the United States. And through our partnership with the Kitikmeot Inuit, our environmental services team has been engaged to help restart the environmental permitting and engineering for the Grays Bay Road and Port Project in Northern Canada. The road will ultimately allow full access from Alberta to the Northwest Territories to Nunavut and to the 1st deepwater port in the Western Arctic, which ties to the Beaufort Sea. And now turning to our guidance.

Speaker 1

With our solid results year to date, we are reaffirming our overall 2024 financial targets and making some minor adjustments to certain measures. We now expect to increase net revenue for the year in the range of 12% to 15%, and we remain confident with our expectations of organic growth being in the mid to high single digits. Our outlook for the U. S. Has not changed.

Speaker 1

We continue to see the ramp up of funding from the IIJA, IRA and the Chips and Science Act. Combined, over $560,000,000,000 has been allocated from these 3 bills and the market remains very robust, supporting our expectation for mid to high single digit organic growth. Our outlook for global also remains positive with organic growth still projected to be in the mid to high single digits on the strength of ongoing demand in water and buildings. There is expected to be a resurgence of community development in the U. K.

Speaker 1

In the second half of this year as the new Labour government moves to fulfill its pledge to build 1,500,000 new homes. And just last week, they announced an expert task force to spearhead the development of new large scale communities. And in Canada, we're maintaining our outlook for mid single digit organic growth given the strong backlog that we've built. We have raised our expectations for the net revenue growth from our recent acquisitions, which is now in the high single digits. We're in various stages of transitioning and integrating these firms.

Speaker 1

This increased level of concurrent activity will initially mute margin and earnings enhancements, but these benefits are fully expected once we've completed the work. We've narrowed our target for adjusted EBITDA margin for the year to 16.5% to 16.9%. And finally, we continue to expect our adjusted diluted EPS growth to be in the range of 12% to 16%. 2024 is shaping up to be another excellent year for Stantec as we continue to execute on our 3 year strategic plan. Before wrapping up today, I'd like to welcome Vito Calmoni.

Speaker 1

Vito joined us on July 15 as Executive Vice President and he is already deeply engaged with Teresa and team. Vito will assume the Chief Financial Officer role on September 3. Vito brings a wealth of experience as an accomplished financial leader across multiple industries and will be instrumental as we continue to drive the successful execution of strategic plan. As this will be Teresa's last quarterly conference call, I also want to thank her once again for her tremendous work and dedication to Stantec. Her exceptional leadership and knowledge has left Stantec with a world class finance team and in a very solid financial position.

Speaker 1

Teresa will continue to work with us until September 27 ensuring a smooth transition with Vito. We will miss her and we wish her all the best in her retirement. And with that, I'll turn the call back to the operator for questions. Operator?

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from Sabahat Khan with RBC Capital Markets. Your line is now open.

Speaker 3

Great. Thanks and good morning. And before I get going, this is Theresa, I wanted to acknowledge the significant impact you've had here and wish you all the best with the next chapter.

Speaker 2

Thank you, Salve.

Speaker 3

And I guess just on the kind of capital allocation side, if we think about M and A, I know you've done a number of transactions to start the year. Can you maybe just talk about the pipeline there? And just more specifically, the likelihood of a larger transaction as you do have a bit of a management transition here and you've already done some M and A, just some thoughts on that?

Speaker 1

Yes. So, firstly, as we look at the dry powder that we've got left, you heard Teresa talk about where we are in our from a leverage perspective. We feel really confident that we can continue to move forward and we are not pausing our M and A search and the ongoing discussions in any way. So we're in different levels of discussion with companies really around the world. The pipeline is really full right now.

Speaker 1

And there's some again in that 500 to 1000 to 2000 person range, but there's also some larger ones that we're in the midst of discussions with as well. And so when these would come to bear, there'll be sort of the timing will be what it'll be, But there absolutely Saba is no change in our M and A philosophy with our change in CFO from Teresa DeVito. We're very, very aligned on continuing with our growth philosophy.

Speaker 3

Okay, great. And then just as we kind of look ahead here to the back half of the year, if you can maybe just talk about kind of whether it's trajectory of the margin progression here and the sort of margin that might be baked into your backlog here at this point? Thank you.

Speaker 2

Sure. So as we get Q3 underway here, it generally is our strongest quarter from a margin standpoint historically. And we don't think that will be any different this year. So the back half, I think, is going to be solid. And we expect that range that we put out in our outlook is very achievable.

Speaker 3

Great. And then just one last one. Just based on the discussions you're having with your customers, particularly on the private side, what are you hearing from them? Has there been any change in the tone just given where the macro is, just kind of the feedback you're hearing from kind

Speaker 4

of non public clients? Thanks.

Speaker 1

Yes. Certainly, that's consistent with where we've been in previous quarters. The commercial subsector is still slower, But on the some of our main buildings client basis, healthcare and so on, you've seen in Q2 of this year, buildings had over 13% organic growth. So when people often ask about the building subsector in particular, but in buildings, one of the differentiator from Stantec over other firms is that we have a much larger public sector perspective there. So all the healthcare and a lot of the work that we're doing there shows up very strong.

Speaker 1

But no, we're not really seeing a lot of softening in the approach from our private sector clients really around the world. Little bit we were seeing it historically and we commented in community development or the land developed business in the U. K. But yes, with the change in the government there to the new labor government, their commitment to build 1,500,000 new homes, their appointment of the expert task force, we do see that home building should kick off and get restarted here in the second half of this year.

Speaker 3

Great. Thanks very much.

Speaker 1

Thanks, Ella.

Operator

Thank you. Our next question comes from Devin Dodge with BMO Capital Markets. Your line is now open.

Speaker 5

All right. Thanks. Good morning. Let me start with a question on the U. S.

Speaker 5

Just wondering if you could provide some context around the organic backlog development there. It just appears that the backlog has moderated sequentially on an organic basis, I think in 3 of the last four quarters. And I was trying to get a sense if there's any implications to that growth outlook from that?

Speaker 1

Yes. We don't see that at all, Devin. Where the pipeline of opportunities is still very, very strong. I think the one thing that we're seeing in the U. S.

Speaker 1

Is we've had such high organic growth there, 8.7% in Q2, but 10% or 12% really going back over the last number of quarters. So we are filling the pipeline with new work. We're just because the organic growth is so high, we're consuming it as well. But there's and a lot of the new work that we're seeing there is just timing issues in terms of when we get it in the contract that when we actually sign it and contract it and put it in the backlog, but we don't see a delay in those contracts being awarded. So it's just a timing issue.

Speaker 1

We're really not concerned about the U. S. Backlog.

Speaker 5

Okay. Okay. Thanks for that. And then can you provide an update on the real estate optimization strategy? I believe there was a lease impairment charge taken in Q2 related to this.

Speaker 5

I'm just looking to get a sense for what opportunities have been identified over and above that initial program from a few years ago?

Speaker 2

Sure. So you might recall, Devin, that when we rolled out our strategic plan in December for the next 3 years that we set a new target for ourselves to reduce a further 10% of our real estate from the 2023 baseline. And we estimate about $0.10 per share over that 3 year period. So we are well on our way. And you're right, that lease impairment that we took this quarter is related to that effort.

Speaker 2

So we are well on track to reach that $0.10 per share over the next 3 years.

Speaker 5

Okay. Sounds good. Okay. And just before I turn it over, I just wanted to thank Teresa for all your help over the last 5 years. Congrats on the retirement and if Vito's in the background there, good luck in his new role.

Speaker 2

Thanks very much.

Operator

Thank you. Our next question comes from Yuri Lynk with Cannacord Genuity Inc. Your line is now open.

Speaker 6

Hey, good morning.

Speaker 1

Good morning, Gary.

Speaker 7

Good morning. I'll echo the sentiments to Teresa and Vito. Just wondering about you mentioned in the MD and A about claim provisions kind of reverting back to normal. Were those lower provisions in play in the back half of twenty twenty three or was it just Q2? Because I'm looking at the Q3 EBITDA margin from last year is quite strong.

Speaker 7

And just wondering if we probably see a bit of a retraction there and maybe a little bump in Q4 as we think about the back half of the year?

Speaker 2

Yes. So it was actually it was in Q2 of last year that we saw the benefit of that lower provision in our results. And so the timing is typically around this time of year where we get those updated actuarial forecasts. And so I think last year, if you'll recall too that there was a bit of noise. Q2 last year was the first time that we had that outside revaluation from our LTIP and there were a lot of moving parts, but that lower provision was a part of it.

Speaker 7

Okay. And was there something in Q3 of last year? I know I'm testing your memory, but it was a very strong EBITDA margin.

Speaker 2

Yes. And we did see some of that provision benefit continue on through the rest of last year, but the biggest piece of it would have been in Q2. And last year, we had an exceptional Q3. And we'll whether we can deliver the same level of margins this year remains to be seen. But yes, it was faster was a very, very strong quarter.

Speaker 7

Okay. Just a follow-up, Gord, to U. S. Backlog. Are you seeing any delays in kind of award activity from your pipeline due to maybe the election or anything else out there?

Speaker 1

Yes, we're really not, Yuri. We at the beginning of the year when we spent a lot of time thinking about would we see either project awards or proposal activity slow because of it or would we see clients pulling things ahead to try and get them out and awarded prior to the election? But we're really seeing neither. We're just sort of steady as she goes type of an approach there from our clients.

Speaker 7

Okay. Good to hear. I'll turn it over there. Thank you.

Speaker 8

Thanks.

Operator

Thank you. Our next question comes from Jacob Bout with CIBC. Your line is now open.

Speaker 9

Good morning. And maybe to start, Teresa, just wishing the best in retirement.

Speaker 2

Thanks very much.

Speaker 9

Maybe I'll just go back to the EBITDA margin guidance, and you narrowed full year. And you called out the margin and earnings enhancement from the 3 recent acquisitions that will be muted. And just, I guess, I had a few questions around that. This period of transition integration, how long will that be? And maybe just talk through how different are the EBITDA margins for recent acquisitions versus the company overall?

Speaker 2

Yes. So I'll try and address all of those pieces, Jacob. The integrations are all underway. They're all at various stages, I would say. The Morrison Hirschfield is we are moving now to financial migration.

Speaker 2

That should occur over the second half of this year. Hydrop will wait until the spring. Zepcon, we're really at this point, evaluating. We haven't intended to bring it onto our back office system just because it is more of a standalone business at this point. But having said that, there are elements of ZECON that are unique in terms of language difference for starters and accounting methodology that is German GAAP.

Speaker 2

And so taking it takes some time to kind of work our way through and convert their results into IFRS. And so that again is kind of unique to ZECON. So I think as we get through the back half of this year and perhaps through the first half of next year, things will start to normalize. But it is it's different having, as Gord mentioned in his comments, the 3 concurrent acquisitions that we are transitioning is different from doing 1 large 2,700 firm acquisition. Cardno, if you think about that, was one firm that was on one back office that we converted.

Speaker 2

This is again 3 unique and different firms. So we're taking our time. We want to make sure that the folks that we have brought over are feeling good about being a part of Stantec and learning their way around and learning our processes and so And so that is completely expected for us that margins that you wouldn't see a pop in right away. And so as far as the margin profile, so they're all very similar to Stantec in terms of the lines of business that we have. So there's really nothing there that would cause us to think that there will be a margin retraction as a result of having acquired them.

Speaker 9

Given the improvement that you've seen in your margins, there hasn't been a gap that's opened up between some of these smaller acquisitions and yourself and over time?

Speaker 2

No, I don't think so. And again, it sort of goes back if you think about it from a project margin standpoint. They're all fairly typical relative to their lines of business. So we always talk about transportation having slightly lower margins that typically public projects. Some of the construction management project program management work that ZECON does tends to be higher margin.

Speaker 2

So it's fairly typical. We generally say as well that there's not a significant amount of cost synergies from these acquisitions because it's really the growth in revenues collectively with them that we're in pursuit of.

Speaker 9

Okay. And last question here just on pricing. The demand environment still support the ability to charge higher fees or is this starting to change?

Speaker 1

No, we're still seeing that as a general industry trend that there's us and our competitor set is still very, very busy. Backlogs are high. And so, yes, we still cease that we don't get a lot of pressure on prices. Again, it's still a very competitive industry without question. But the first question that clients ask us isn't how cheaply can you do it.

Speaker 1

The first question at this point still remains, can you get it done within the timeframe that I need it? So we still have that pricing tailwinds.

Speaker 3

Okay, helpful. Thank you.

Speaker 1

Great. Thanks, Jacob.

Operator

Thank you. Our next question comes from Chris Murray with ATB Capital Markets. Your line is now open.

Speaker 4

Yes, thanks folks. Good morning. And Teresa, congratulations on your retirement and hope it ends up well for you. I guess the first question, maybe just turning back to the U. S.

Speaker 4

And Gord, you made the comment that you're not seeing anything too much around the election. But I was just wondering if you could help maybe understand with the ABI metrics being sub-fifty for the last little while, it doesn't seem like you guys are seeing much of an impact, which is maybe a bit surprising. And I'm just wondering if that's more of the mix of business or if it's special projects that maybe is helping you out there?

Speaker 1

Yes. So interestingly, the U. S. In general, we see we'll often get asked what do we see we might see with if there were to be an administration change there. But just looking at the big picture at the U.

Speaker 1

S, infrastructure really continues to have bipartisan support there. So when you look at the IIJA, we're about a third of it has been awarded and Congress has till the end of 2026 to encumber the remaining. So we see that providing significant longer term tailwinds. Already some discussions about what might IIJ 2.0 look like. Semiconductors are busy, data centers, mission critical facilities, PFAS is starting to come on.

Speaker 1

So kind of that broad based support there. So we still see that regardless of whether there is a change in who's in the White House in November, we see that our business will continue to be very, very strong going forward. But to your point about building specifically with the decrease in some of the concerns with the ABI, We've seen that commercial certainly has been slow, but it's been slow for a couple of years now. But healthcare is very, very strong for us. Mission critical facilities are very strong.

Speaker 1

So and we see those tailwinds continuing going forward.

Speaker 4

Okay, interesting. And then just turning back into your energy and resources business, a lot of the wins it sounds like are in things like grid and resiliency. But there's been a number of announcements from a lot of companies around oil and gas and what I call traditionally kind of your backyard kind of in LNG and things like that. Just wondering what's your opportunity pipeline looking like more in the traditional kind of oil and gas energy business these days?

Speaker 2

So I'd say, Chris, that as far as the more traditional oil and gas work, it's still relatively muted. And I don't know that it will ever approach what it was a decade ago. But you're right, that work really is shifting toward transmission, power generation, power transmission, the hardening of the grid is a high priority for in many geographies. We've seen a lot of growth the national grid in the U. K.

Speaker 2

For instance. We've announced the work that we've won under MSA with BC Hydro. So that's really where we're seeing the growth. Renewables are a bit muted at the moment just given the regulatory requirements and so on are still pretty onerous. And I think proponents there are still trying to figure out how to make those projects economic.

Speaker 2

So and I think the other piece of that does sit around our mining work, which again is a smaller part of our overall business. But I do think that as we sort through the fluctuations in commodity prices, longer term that is going to be a business that will continue to grow.

Speaker 4

Okay. Thanks very much. Appreciate the color.

Speaker 1

Thank you.

Operator

Thank you. Our next question comes from Sean Jack with Raymond James Limited. Your line is now open.

Speaker 8

Hey, good morning guys. Just a quick one for me. Looking at the 5 different business operating units and from an M and A perspective, wondering where firm is seeing the best value right now for potential new targets?

Speaker 1

We have considerable strength in each of our 5 BOUs. So we're actively engaged in discussions really in all of those BOUs. And we're continuing to look at some opportunities in Canada, but even more so in the United States. Our geographies really haven't changed from where we're looking, Sean. Certainly, the United States, still into the U.

Speaker 1

K, Northern Europe, down in Australia, New Zealand to a degree as well. So we see the geographic M and A pipeline is very robust as well really through all of our BOUs. And so there's not one that we're preferentially looking at the time. We're just sort of looking at all the opportunities are there and maintaining those discussion set.

Speaker 8

Okay, perfect. That's all for me guys. Thanks.

Speaker 1

Thank you.

Operator

Thank you. Our next question comes from Benoit Poirier with Desjardins. The line is now open.

Speaker 10

Yes. Good morning, everyone, and welcome to the team Vito and all the best to you, Theresa.

Speaker 2

Thank you.

Speaker 10

Yes. Just obviously strong organic growth overall, but we've seen some retraction for energy resources due to some delays in the ramp up of new projects. So could you provide more color about how many projects are part of this announcement and whether it's a matter of just 1 quarter and when the ramp up of these projects is pushed out?

Speaker 2

Yes. So we've seen this delay for a couple of quarters now and also just the wind down of some other larger projects that we have last year. Some of these projects, the BC Hydro project that I referenced earlier, for instance, is something that we've been waiting on for a while to get going, and we're starting to see that now. So that's just a good example where we have we've won the work, it's in our backlog. We've got people sort of standing by and ready to go.

Speaker 2

And we just need as we work with our client to get the project up and running, so that we have our staff on a working at a steady state. So we're also seeing in the mining sector And that's going to take a little while to sort through. And again, a lot of that is regulatory. Some of it is driven by outlooks for commodity prices and so on. But good contracts that we've got in the backlog that as we wait for our clients to get them going, it has caused a bit of that retraction in the first half of this year.

Speaker 10

Okay. And just curious, is it what would drove the lower gross margin in Canada despite the overall solid organic growth achieved for the region? Would that be the exposure to energy and resources?

Speaker 2

Not so much Benoit. We came off in Canada. We had a couple of projects, particularly in environmental services that were very high margin and really big projects. And so that included some of the coastal gas work, working for Metrolinx in Ontario. And that work has wound down.

Speaker 2

And so that's what you're seeing in the project margin. It is more reflective of just the overall mix that we have this year versus last.

Speaker 10

Okay. And looking at the global region, you were able to achieve 5.5% organic growth, which is pretty solid. You mentioned a strong performance from building in Dubai, double digit growth in Water and Environmental Services. I was just curious to see if you could provide more color maybe on some other regions that are lagging or that needs to be maybe a little bit more monitored these days?

Speaker 1

Yes. So one area in particular that they're monitoring we're monitoring right now Benoit is Australia and particularly on the transportation side. We I think we've chatted previous quarters that the federal government in Australia launched their federal infrastructure review as a result canceled about 20% of or deferred about 20% of the projects that they were planning to move forward with. So we've seen that. Certainly, that's impacted Stantec's transportation business in Australia as well as our competitors as well.

Speaker 1

So we're actively watching that. We're also watching the community development or the land development group in the U. K, which has trended a bit slower the 1st part of this year. But as we mentioned with the transition to the labor government, them really looking to bear down and move forward with the with house building there, I think that will be very positive for our group going forward. So those are the 2 primarily that we've got our eye on is Transportation Australia and our Community Development business in the UK.

Speaker 10

Okay. That's great. And maybe last one for Theresa in terms of DSO free cash flow. Obviously, DSO came in at 77 days below the target of 80. Given the tends to we tend to see a big collection period in Q4, Would it be fair to expect DSOs to further improve and potentially reach low 70s or below 75 days?

Speaker 10

And just in terms of free cash flow expectation, if you could provide a breakdown in the second half and whether you're still confident to achieve 100% conversion for this year? Thank you.

Speaker 2

Yes. So I'm really happy with where DSO is, particularly when we've got this continued pace of organic growth. So to be able to maintain a DSO below 80 days is really positive. When we get down to 75 or it's pretty hard to predict to be honest, just given the volume of projects that we have and the complexities around those sort of billing processes. But we're happy with where it is and there's always room to continue to drive downward and we're certainly going to try and do that.

Speaker 2

From a free cash flow conversion standpoint, the goal to have it one times coverage of net income is really a 3 year target. I think we almost achieved it last year, but that's certainly again the goal is to try and push towards that conversion rate. And so we'll see how it goes. It's we're off to a really good start for cash flow generation. So I'm hopeful.

Speaker 2

But whether we get there this year or continue to work towards that over the next 2 years remains to be seen.

Speaker 10

Thank you very much for the time.

Speaker 11

Thanks. Thanks, Benoit.

Operator

Thank you. Our next question comes from Maxim Sytchev with NBF. Your line is now open.

Speaker 4

Hi, good morning.

Speaker 6

Good morning.

Speaker 11

2 is obviously all the best in the future. Gord, I was wondering if I just had a couple of quick questions. In terms of kind of the sellers' expectations, wondering if you are observing sort of any emerging trends or is it still pretty steady? I guess the larger the deals, the bigger the multiple. How what are you guys seeing on the ground right now?

Speaker 1

Yes. I think in general, we're seeing the trends are pretty consistent, Max. So we haven't seen any particular uptick in expectations from multiples, but certainly we haven't seen a decrease either. So I'd say pretty consistent there.

Speaker 11

Okay. Okay. That's great. Thank you. And then the last question I just had.

Speaker 11

So like Western Canada obviously slowed down. I was wondering if there was a bit of a negative spillover effect into the environmental services. And I guess on the other side of the ledger, if mining being better right now, that's helping to offset it. Just curious about the sort of interplay of kind of commodity verticals and how that pertains to environmental services overall? Thanks.

Speaker 1

Yes. We our ES business is remains pretty busy, particularly we're seeing strong growth globally. There is a little bit of slowness from an organic growth perspective in Canada right now. But as Teresa said, it's because we were so busy that the comps are really, really high coming off of last year and some of the big projects that we were working on. I think we still feel good about ES.

Speaker 1

Certainly, our environmental services group does work with mining, but it also works with all of our other groups as well, whether it's transportation, water, citing a new water main. ES is engaged with all of our lines of business. So, no, we're optimistic about the environmental business. We don't see that really retracting going forward. So I think we feel good about it.

Speaker 11

Yes, makes sense. And then actually so because you mentioned water and I'm curious if you have any kind of hot take on the latest PFAS sort of flip flopping. Like on one hand, like at some point, it felt like we're committing to it and right now it doesn't seem to be the case. So again wondering if that changes anything for you kind of on the ground or maybe not?

Speaker 1

Our water business is so well diversified that when as PFAS began to pick up, certainly we're front and center in that work. And we've mentioned you up to $200,000,000,000 in capital was initially estimated there. We know it's going to be more than that. But it's not a meaningful or contribution to the overall net revenue. So whether PFAS goes up a little bit or it comes down a little bit, our water business looks to remain very, very solid for the years to come.

Speaker 11

Okay. Excellent. That's it for me. Thank you so much.

Speaker 1

Thanks, Max.

Operator

Thank you. Our final question comes from Ian Gillis with Stifel. Your line is now open.

Speaker 6

Good morning, everyone. Good morning. There's been quite a bit of talk around the integration through M and A this year. As we think about pressing into 2025, would you anticipate that margin expansion year over year in 2025 is perhaps a bit better than average as you roll through some of these costs and start to get everything on the same platform? Or are you thinking it's kind of a normal year?

Speaker 2

No. I think the opportunity to expand margin next year is really good for a number of reasons, including what you're pointing to around the integration work wrapping up. It's the enhancements that comes from having a bigger scale, a bigger platform. It's those that have joined us through the acquisitions being integrated and on the Stantec platform. It's our own employees that are taking the time and working with our new colleagues that and helping with that transition.

Speaker 2

But we've noted a couple of times as well that when you look at where we are this year, the wind down of some larger projects and waiting for others to ramp up, We as that ramp up takes hold, that will drive strong utilization and reduce the amount of admin labor that we have. So there's a number of things that as we move forward will lead to, I believe, margin enhancement that will be on track to achieve that 17% to 18% that we're targeting for the end of 2026.

Speaker 6

That's very helpful. The other question I had is around the M and A pipeline. I'm just curious on what opportunities Ekcon has brought perhaps in Continental Europe, whether it be in Germany or in other jurisdictions around continuing to grow in that region as you try and get towards the critical mass?

Speaker 1

Yes, certainly, we're focused primarily on Germany right now and they have some operations in Austria as well. There are good opportunities out there and we're certainly interested in moving forward. We want to get ZECON itself into Stantec a little bit. There's some IT things that we're working through, getting on those systems and so on. So we're I wouldn't see us doing anything more in Germany in 2024, just because we want to ensure that ZedCon is on that solid Stantec footprint before we move forward.

Speaker 1

But certainly lots of good opportunities there to continue to expand and get that critical mass as you mentioned that we want in Germany.

Speaker 6

Understood. Thanks very much. I'll turn the call back over.

Speaker 11

Thanks, Ian.

Operator

Thank you. At this time, I'm showing no further questions. I would like to turn it back to Gord for closing remarks.

Speaker 1

Great. Well, thank you, operator, and thanks everyone for joining us this morning. If you have any additional follow-up questions, Jess Newkirk, our VP of Investor Relations is always available for your call. So thanks very much.

Speaker 2

Thank you.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Stantec Q2 2024
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