Stantec Inc (STN) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the 2008 first quarter earnings release conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

It is now my pleasure to introduce your host, Mr. Tony Franceschini. Please go ahead, Sir.

Thank you, Sam. Good afternoon, everyone, and welcome to our 2008 first quarter conference call. Joining me is Don Wilson, our Chief Financial Officer.

As usual, we will comment briefly about our results in the outlook for our market; and then we will address individual questions.

Before we begin I would like to caution you that our discussion this afternoon will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of these forward-looking statements may involve risks and uncertainties and actual results may differ materially from those discussed in these statements.

Additional information concerning factors that could cause actual results to differ materially from those discussed in this conference call can be found in Stantec's filings with relevant securities commissions located at SEDAR and EDGAR.

I would also like to advise you that this conference call is being broadcast live over the Internet and will be archived for future reference at stantec.com under the Investors section. Therefore we ask any members of the media who are joining us today in a listen-only mode and wish to quote anyone other than Don or me, please request permission to do so from the individual concerned.

This morning, prior to our annual meeting, we released the results of Stantec's operation for the first quarter of 2008. I am pleased to report that we are beginning the year with continuing improved performance. Gross revenue for the quarter increased 34.9% to $291.8 million from $216.3 million in the first quarter of 2007. Net revenue increased 32.6% to to $254.9 million from $192.3 million. Net income increased 9.7% to $16.9 million from $15.4 million. In diluted earnings per share we were 12.1% higher at $0.37 versus $0.33.

Our performance in the first quarter of 2008 was continuing validation of the strength of our business model and our ability to execute in a challenging business environment. During the quarter, decreased demands for services in our Urban Land practice area was offset by increased demand for services in our industrial land environment practice areas.

I would like to address several items that impacted our performance during the quarter compared to the first quarter of 2007.

From an operational perspective, there was an overall decrease in gross margin from 56.8% to 55%. There was a general decrease in gross margin percentages for all practice areas except Urban Land. This decrease resulted from a combination of factors including some reduced realized billing rates and some increased costs to execute work.

More specifically, I will address the individual practice areas.

In the [buildings] practice area, we worked on a higher then usual number of submissions for public private partnerships or [P3] projects, particularly in Canada. During the pursuit phase of these projects, we performed work for a reduced fee which we expect to make up if we are successful in securing the project.

In the Transportation Practice Area a recent acquisition increased the percentage of projects in the U.S., where we traditionally have achieved lower gross margins due to lower billing rates. In addition our labor cost did increase, due to some poor project execution in several areas and we were required to absorb certain of these costs.

In the Industrial Practice area, there was an increase in the percentage of projects with lower margins in the Power and Resources area. The majority of these projects were inherited from the Neill and Gunter acquisition. This acquisition also contributed to some increased labor cost as acquired (inaudible) new processes and systems resulting in decreased efficiency in projects' execution during the period. And in the Environment Practice area, there was an increase in the percentage of projects with lower margins, most of which were inherited through acquisitions completed in Q4 '07 and Q1 '08.

The results were a reduction in the gross margin percentage for the Environment Practice area, due to an aggression activity for acquisitions completed during the first quarter. The 1.8% reduction in gross margin was partially offset by improved administrative and marketing costs. In Q1 '08 our Administrative and Marketing expenses were about 0.5% lower than in Q1 '07, because we were better able to adjust our staff levels to the available workload.

I also want to point out that this reduction in administrative cost was achieved despite a significant increase in some nonoperational and not necessarily recurring items. Specifically, retention bonuses increased from approximately $350,000 in Q1 '07 to almost $2 million in Q1 '08.

In addition, amortization of intangible assets increased from about $900,000 to $2.7 million; and net interest expense increased from a contribution of $107,000 to $1.5 million. In total, these three items reduced our pretax income by approximately $5 million.

These items will likely continue at the same level for 2008 and then decline. Of course we expect that as we fully integrate our acquisitions, we will see improved performance which will also offset some of these increased costs. We also want to point out, as we have been previously, that fluctuations in the margin reported from quarter to quarter depend on the particular mix of projects and progress during any quarter, as well as our project execution and that performance in any given quarter does not necessarily establish a pattern.

We believe that located items such as gross margin percentage and administrative and marketing costs over a yearly period is more representative of market trends and performance.

In conclusion, although we did not fire on all cylinders in all of our regions and practice areas during the first quarter, and acquisitions as a group added to our top line while we were basically neutral to the bottom line, we had sufficient diversity in our to practice to offset the down markets while focusing on operational performance. Our employees were able to successfully lever our increasing scope and size, while we continued to integrate newly acquired companies and meet the challenges of changing market conditions to effective worksharing across our offices. Our expectation is that performance from acquisitions will gradually improve.

Now I would like to review some of the highlights of the quarter. The first quarter was very active for us as we completed four more acquisitions, which added geographic and practice area reach and strengthened our operations.

In January we acquired the Zande Companies a 285-person firm based in Columbus, OH. This addition strengthened our operations in the Midwestern United States while bolstering our service offerings to public sector clients in the environment sector. We also acquired Rochester Signal a 25 % firm based in Rochester, New York which added Signal Systems design to our transit-related services. In February, we acquired Secor, a firm headquartered in Redmond, Washington. Along with adding 700 employees to our operation, the acquisition of this firm expanded our geographic reach into four new states and increased our capabilities in the environment sector, particularly in the area of environmental remediation.

Finally in March, we acquired RHL Design Group, a 170-person firm. based in Petaluma, California. This addition enhanced the Commercial Development services we provide to national clients to our Urban Land practice area.

Overall we added nearly 1200 employees during the first quarter, bringing our current total staff number to about 9,000.

During each conference call, I would like to outline a few projects that we are working on to give you some insights into the breadth and scope of our design services. After all, projects are what Stantec is all about.

For example, our Buildings Group is acting as the prime consultant for a fast-track project to develop a 12 MW cogeneration facility at the University of Calgary in Calgary, Alberta. Our responsibilities include architecture, structure, mechanical, electrical, engineering and project management. We were also ordered an initial contract to secure all the city and regulatory approvals to begin the early preliminary designs for a new building on the Toronto Western Hospital Campus in Toronto, Ontario.

The assignment will bring together our expertise in architecture, urban planning, clincial planning and sustainable design.

In the Transportation practice area, we are designing the reconstruction of a diamond interchange into a single point open interchange on U.S. Route 301 at Interstate 95 in Robson County, North Carolina. For the NC DOT. The work includes roadway design, interchange design and traffic maintenance.

We are also providing detail design and environmental excess and services for the rehabilitation of Highway 21 in Huron County, Ontario, for the MOT in Ontario.

In environment area, our expanded expertise in geotechnical engineering and environmental remediation has resulted in our serving as the lead geotechnical engineer for the Louisville, Southern Indiana, Ohio River Bridges projects. The work involves over 83 bridges and 38 retaining walls.

In San Bernardino, California we are helping the Municipal Water Department implement a groundwater remedial action at Newmark Groundwater Contamination Superfund Site to address the impacts of chemical compounds on groundwater in a large portion of the city. The remedial action is enabling the Water Department to re-establish the water supply capacity that it's lost to groundwater contamination.

And, finally, in the Urban Land area we are providing landscape architecture, and civil engineering services for a master plan for restoring City Park in New Rochelle, New York, including renovating Skedelsky Athletic Field. And in Niagara County, New York, we are providing civil engineering, landscape architecture, and land planning services for the development of a new privately owned 350-bed student housing apartment building near Niagara County Community College.

It is projects like these that give us our passion for what we do and motivate our staff to excel.

Now I would like to make some general comments and observations about our potential market conditions going forward. First of all, the overall outlook for our Company for the remainder of 2008 continues to be positive because the infrastructure and facilities market in North America is very diverse. Infrastructure is in constant need of repair. And Stantec is positioned well in this market.

There's also increased awareness of the need for private and public sector spending on the development of new and revitalized infrastructure. This is supported by several factors.

High energy prices are likely to continue, which will continue to spur investment in the oil and gas sector. Much of this investment will be in Canada and more specifically in Alberta's oil sand, our very own backyard and an area in which we are well-positioned to take advantage of these opportunities.

The Canadian Federal and Provincial governments have increased their 2008 plans for infrastructure spending. For example Ontario recently pledged another $1 billion in new infrastructure spending. In Saskatchewan, the government has released a $1 billion Ready For Growth initiative to ensure that infrastructure spending keeps up with provincial growth.

This and other government initiatives will involve the areas of transportation, gateways and border crossings, conductivity and broadband technology, water and wastewater, solid waste management, renewable energy, disaster mitigation, broad field redevelopment and sports and culture.

With Stantec's broad range of service offerings, we are well-positioned to take advantage of opportunities in most of these areas. In the U.S., Federal funding continues for projects in the public sector including the [Safe TLU] Funding for transportation projects. The outlook for investment in manufacturing sector is generally flat and although services for this sector are not a big component of our business, we have been able to serve selected areas such as biopharmaceuticals, particularly through upgrades to manufacturing facilities and this work is expected to continue with improving confidence in that particular section.

Environmental issues as well as sustainable design and development are becoming increasingly more important to both the government and the public. This awareness includes interest in the development of buildings and facilities with a reduced ecological footprint and of more efficient and effective water, water distribution, water treatment and transportation infrastructure, particularly transit. We believe that with our ability to provide sustainable and innovative design solutions, we are well-positioned to capture opportunities in these areas.

Investment is also increasing in renewable energy initiatives such as wind, solar and biomass. For example the Interior Government has committed to replacing all coal-fired energy generation in the province which currently makes up 20% of its power in the next 10 years. A portion of the replacement will be made up of renewables.

In addition, improvements will be required to strengthen the Provinces' transmission systems. With our growing capabilities in providing services for wind, solar and biomass projects, we are positioned to benefit from this trend.

And, lastly, in the Urban Land market, housing starts in Canada are expected to decrease moderately from 2007 levels. The first quarter saw approximately 99,000 starts in single detached dwellings. However all residential construction home starts are expected to stay above 200,000 or so units for the seventh consecutive year.

In the U.S., the new housing market is forecast to decline further over the remainder of 2008. Seasonally adjusted annual rates of single-family housing starts are now at around 680,000 units, which is approaching the historical low reached in 1991 of 604,000 units. So we believe that we are getting to the bottom of the decline and, certainly, the rate of decline has leveled off considerably.

Single-family housing starts peaked in January 2006 at 1.83 million units. So there's been a very significant decline since then. It should also be remembered that from '90 - '93 to the beginning of 2006 single-family housing starts were always at or above 1 million and usually at or above 1.2 million.

The market is expected to begin showing some positive growth, again, sometime in 2009. We continue to be well-positioned to weather the current downturn because we have a strong market position in the regions we service and are generally able to manage our staff levels to react to market conditions and mitigate some of the impacts.

For example in 2006, about 60% of our Urban Land business was in the U.S. and 40% in Canada. In 2007 we've changed to about 55% in the U.S. and 45% in Canada.

In addition, our mix of business continues to evolve and Urban Land is gradually becoming a smaller component of our overall service offerings. This practice area accounted for 34% of our revenue in 2006 and 30% in 2007, in the first quarter of 2008, (inaudible) Urban Land accounted for 23% of our business. This percentage is expected to perhaps to decline even a little further in 2008, particularly as we increase our services in other areas, particularly in the environment.

As I indicated previously with respect to acquisitions, our focus for the balance of 2008 is really the focus on the integration of the acquisitions that we have done to date. We will continue to look for strategic acquisition opportunities but principally focus on innovating the things that we have right now.

So in conclusion, for the remainder of 2008, we expect as usual to have some strong market sectors for our services, moderated by some weaker sectors. However, we believe that our business model will continue to enable us to react positively to whatever market changes occur.

This concludes our prepared comments for today. Don and I are now available to answer any questions that you may have. The conference call operator, Sam, will explain the question procedure.

(OPERATOR INSTRUCTIONS) Bert Powell from BMO Capital Markets.

Tony, today at the AGM, the time line was given for your succession. I think one of the things that folks are concerned about is that you have been the point guy on acquisitions, that you have the relationships. Can you give us some thought that you have in terms of how you are going to transfer that knowledge, that relationship in terms of the new role or -- to the new CEO? And is your role in terms of a director going to continue to be -- are you going to continue to the active on be M&A front?

Thanks for the question. I think, first of all, I think it's important to remember that clearly I do have a role and I have a lot of relationships on the acquisition front. We do have a senior leadership team of 11 individuals and all of the acquisitions that we do, one or more of those individuals are also involved during the process.

So all of the individuals in our senior leadership team have been exposed to the acquisition process and so forth. We also have a dedicated acquisition team to help with the logistics and so forth. So I think that as an organization we are well-positioned to transfer the corporate knowledge that exists and I think all of the individuals in our corporate team can make it happen. And I think although I've been the front face for it, that we are quite strong in the organization. So I'm quite optimistic that we will be able to continue with the success that we have had in the past.

And as our Chairman indicated this morning, I will remain on the Board although I don't have any specific role other than being a Board member; that as a Board member I certainly -- my contacts and so forth are not going to disappear. So that certainly the people that I know in the industry and the relationships that have been established will still be there and available. And as a Board member always available for some questions and (inaudible) and so forth.

Plus the new CEO will have at least five months of catch-up transitioning that we will do at the beginning of 2009. So hopefully there is enough comfort that things in our organization happen as a team and not by one individual. That has always been our philosophy and I'm quite comfortable with the fact that any of the candidates that are being considered for the CEO succession will be able to continue to do that.

Thanks. Just on the gross margin front, when you went through each of the practice areas you talked about inherited contracts having a little margin, some poor execution. Can you give us a sense in terms of the timing when you should choose through some of that stuff that is giving you some challenge on the gross margin front, as we roll through 2008?

If you look back historically, we have the most challenges, kind of in the first couple quarters after we do individual acquisitions. And the magnitude of the changes will depend on the specific acquisition, but generally speaking, we have a little bit higher impact during the first couple of quarters.

So given the moderate activity amount of activity that we did sort of fourth quarter and first quarter of 2008 that -- excuse me. I must apologize. It seems every time we have a conference call I have a cough.

Have some water.

Okay I just did. So that I think that the first couple of quarters are more of a challenge so I think that Q1, which we've just gone through and still have some challenges, but like I said improved in Q2. And since we are not going to -- our plan other than some ones that are already in the pipeline that are reasonably strategic we've put on hold most of the rest until we can work on our operations.

And so this time we are going to try and do it a little quicker than in the past. But I think second quarter will still be a bit of a challenge and then should improve for the latter half of the year.

So just in terms of what you are seeing with P3 and the markets, there is nothing that tells you at this point that your range in terms of gross margin targets needs to be adjusted?

Not yet. I would wait until the end of the year I think we said (inaudible) targeted range that we set for the beginning of the year. I think we can finish the year within that range.

Okay, but I'm talking just about going forward in terms of -- if we start to look beyond 2008, are you still comfortable in your business model that those -- that that's the range you can achieve?

Yes even with the new mix, like if we get -- because I think one of our objectives is that sometimes we can do some improved gross margin. Because remember there's two sides to the gross margin. One is the actual fee that you get. The other half is a project execution. So if we execute the project better, we reduce our direct labor costs which increases the gross margin.

So we think that after a one- to two-year period and hopefully with in many cases with improved systems and discipline and diligence and improved project management that we can improve project execution and bring the margins back up to the range that we've targeted even if we start with lower margins when we initially inherit the firm in the projects and so forth. So our target is still to stay within that range.

Sarah Hughes.

Tony, can you first of all talk a little bit about an update on the transportation market in the U.S.? I know in the MD&A you said that that decline was more due to wasn't market factors. More set contact, set consultants --?

(inaudible) I guess what we are saying in transportation is we are not really blaming the market, but more ourselves. That's one area where there are some challenges in the market but, fundamentally, remember I just talked about project execution and sometimes either we inherit or we perfectly on our own maybe are not managing the jobs as well as we can.

And that's one area where we've had more challenges and we fully expect to recover from that. We certainly have been making changes and we think we'll improve, but when you are focused so much on improving the project's execution it gets in, invariably, it impacts your sales. So you don't quite do as many sales so that's why the organic growth has been flat.

So I think it just means it's a practice area right now that for us is a little bit more challenged, but we can't really blame the market, say the market is down. There is work out there. We just have to secure it, be successful in it and then execute it well. So some of the challenges we've added is basically that we are not executing as well as we could in that area.

And in terms of the changes that are needed for that area, have they been implemented or --?

Well, they've certainly been implemented. You know, I hope that how quickly will we see the result, hopefully sooner rather than later. We are clearly making the changes that we think were required and our leadership team is fully behind it.

Sometimes in any organization you may have some leadership and some individuals who maybe aren't as strong as others, some individual project managers. So you have to go through and make some of those changes and it takes a few quarters and sometimes a year or two to get through that.

Now this is not new. It's the last three quarters we have not been as healthy as we would like so we have been making the changes for the loss. So we think we are pretty well at the bottom of this and that the future is more positive in terms of our ability to execute. And then if you combine that with our ability to secure some reasonable assignment, this should rebound.

And I will give your voice a break and ask Don a question. On the amortization, I know that backlog amortization backlog was a big component of it this quarter. And I believe that that gets amortized quite aggressively. So should we see a decent decline in amortization going into '09?

Sarah, the amortization of backlog is typically over our estimated life of the projects that we have underway at the time of acquisition and typically that's somewhere between six months to 18 months. And it probably averages about a year and I'm just looking to see -- I think for the rest of this year our amortization of backlog and other intangibles is likely to be fairly similar in the rest of the year to what it was in the first quarter.

Right but I was just looking in terms of going into '09, I was thinking given that percentage -- (multiple speakers).

It will drop off after that because much of the amortization will have been related to acquisitions we did in the back half of 2007.

Then just roughly, depreciation. Would we expect it similar in future quarters as we sell in Q1?

Similar dollar amount?

Yes.

Yes. (multiple speakers) It depends on when we do acquisitions and --.

No, I'm assuming (inaudible).

Marie Milien.

Just a question on the capital expenditures that you are expecting. The level about $9 million this quarter. Should we expect that to go forward around the same level?

Traditionally if you take a look at our capital expenditures in the past they probably ranges in any particular year between 2.5 and 3.5% of net revenue. Our expectation for the rest of this year is that we might be a little less than some of our traditional spending in capital expenditures.

Okay. Just in general, I was wondering if you were seeing any pricing pressures in the market you are present right now? And could you discuss that across the board really for most of them?

I think the pricing pressures, there are some and they are in some specific markets and specific regions. Obviously we are not seeing too much pricing pressure in Alberta or Western Canada as a general rule. We are seeing some pricing pressure in some markets in the Southwest U.S. and in the Eastern U.S.

We actually had a little bit less pressure in the East at the beginning of last year and, then, starting at the end of last year and to the beginning of this year, we saw a few markets in the East like in the Carolinas that have sort of withstood some of the initial shock in the U.S. economy better than the West started to have a few pressures. So we have them throughout the Company, but I wouldn't say it's really generalized to a specific practice area. It tends to be more regional in areas that tend to be a little bit weaker at a point in time. There's more supply of services and there's a little bit more pressure on fees but like I said it's a small contributor to what we do. I don't want to blame that too much on some of our performance going forward.

And just some precision on the transportation issue. How -- do I understand correctly that you think this, we are at the bottom now with that should improve in the next couple of quarters or --?

Yes. That's our expectation.

Bill McKenzie.

Tony, I heard you talk today [again] a little bit about the international expansion strategy and some of the thinking behind that. I was wondering if you could take that a little bit further and when you look to move into new markets internationally, are you talking about a preference from between going in and establishing a platform with an acquisition and growing organically from that? Or alternatively, there's a preference to sending people out in new markets, establish a base with your own people and subsequently follow on with acquisitions or does it just depend on a market, by market basis?

Yes, unfortunately, there isn't a simple answer. There is a market by market and there's three different strategies that we are following. Some of the expansion that we have been doing right now and it started in kind of Latin America, Caribbean with existing clients who -- we can go in and sort of organically using our North American practices that they want us to follow. And then hire us some local staff complemented by people that are doing projects. That's one way. That's not going to -- it's going to be a component of what we do. It's not going to account for the majority of it.

So we are going to follow clients in those markets particularly petroleum, biopharma, and mining. We are starting to do more work for mining clients outside of their home base in North America. So in that case it is going to be likely primarily organic in those situations where we are following the client.

In other areas, where we have a particular expertise and the clients are hiring us, because of that expertise that's also our guidance. Because the acquisitions don't really add anything to us; and the clients are hiring us for our North American expertise in specific areas so if you look at an area like buildings, things like airport terminals or education or health care facility, I think we can do that organically.

Then the third component which is where acquisitions come in is where we want to have a more permanent presence in certain jurisdictions. That we identify preliminary risks at jurisdictions that are similar, overall, sort of risk profiles to [where] we have now. And so that starts to narrow it down for us initially to markets like the UK, Australia, New Zealand and Western Europe.

So in those areas, we fully expect to use acquisitions as a catalyst to get us that local presence and essentially operate similar to the expansion we've done in the U.S. using principally acquisitions to enter a market and then supplement it with organic growth.

Great. Thanks. Then I just had a question with respect to working capital, fair bit of working capital investment this quarter. Could you guys talk a little bit about your expectations as we go through the rest of the year? How that will reverse and if you have a target for total working capital investment for the full year?

I would think, Bill, one of the things that I would look at in terms of working capital is the day sales outstanding investment in work in progress and accounts receivable. And there's certainly been an increase in the absolute dollar amount of investment in those two assets compared to the end of the year. But if you take a look at the DSO calculation, it's actually been pretty consistent.

In fact I think the combined day sales in both -- for both the end of Q1 and the end of December was 94 days of sales invested in work-in-progress and accounts receivable. So I think when you take a look at that, the absolute dollar increase in the investment of those is due to the growth in the Company and the growth in the revenue.

So we think that if we can keep the DSO number down in that low 90s day number, that's been about as good as we have been able to accomplish in the last number of years and certainly well under the 100 day mark that we were, at even just a couple of years ago.

That's helpful. Thank you. Then one last if I could. Just going back to, Tony, your previous comments on transportation and hopefully getting close to a bottom there. Just wondering if you had any thoughts on some of the funding issues in the U.S. There's a bit of chatter about potential changes to the gas tax or a reduction to that. Do you have any concerns on -- obviously in Canada, we've got a pretty robust government of the situation here, but not really the same in the U.S.

Is that a concern for you at all. Or is there enough work out there that irrespective of that, you guys can continue to grow that just by taking share?

Right now it's not a concern yet, but it could become. I mean, obviously, if the overall market for the services is reduced, it becomes more competitive and more difficult to get the work. It doesn't mean we won't be successful, but it's just more challenging. So you almost have to deal with it when it happens. So as an organization, we never try to take for granted the work that we get and we always assume that we have to compete for and be the best in the sectors that we're in.

So our objective is to make sure we are strong and well-positioned so that if the market does in fact decline for whatever reason whether it's because of a change in the taxes or the funding, that we will continue to get the share of the market that we think we can; or even, as you suggest, capture a bigger percentage of it.

Our approach has always been the strongest firms will survive better than the weaker firms so if we can be a strong firm in the sectors that we are end, we are going to do better. But we can't, you know, our guesstimate as to what is going to happen in those markets is really no better than yours.

[Anthony Zicha].

Tony, with reference to internal growth it was I believe flat this quarter again. And how do you see evolving during the year and what are some of the ways that we can stimulate this growth?

Like we said when you are focusing on operations, that are focused on your cost structure sometimes your sales numbers don't improve as well as they could. Our objective is to get that number higher and I think again if you look -- our expectation is that by the end of the year, we are still going to be closer to that 6 to 8% organic growth that we target every year. And it just means we are going to have to do more in the second and third quarters.

I think even though the market is more competitive in some places, we are well-positioned and it's just a matter of when the work comes in. And the kinds of things that could make that number look really good, like I said, we will work on a lot of P3s for example in building, so those jobs could -- one or two of those jobs come in this quarter and all of a sudden the growth starts to look a little better. We have a couple in Transportation that are outstanding that, if they -- if we're successful on that, that's going to make a big difference as well.

So there are a lot of jobs that are potential out there and when they come in, then the organic numbers will start to look better, but until they do, it's a little bit difficult to predict.

Thanks and another question with reference to acquisitions. Have you seen more offers on the table recently since there's been a slowdown with the private equity markets? Have they been more willing sellers?

I would say there's been actually quite an increase. Unfortunately we are turning most of them down and for two reasons. Partly, I think a lot of them, it -- during when times were a little bit better people were -- you know, every company looked good. Now some of them say, "well, maybe strategically going forward there's not much opportunity for growth and things and everything else." So more firms are definitely for sale, but fewer of them fit our strategic objective.

And also because we've done quite a few in the last eight months we are actually like I said taking a bit of a breather. Want to make sure we integrate the ones we have well. So we will probably tend to pass on some that were maybe (inaudible) marginal that we may have looked at a year ago but maybe won't right now. Because we kind of increased -- I hate to put it this way but like we've increased the standard of the ones that we are looking at.

So we really are going to really close only on the ones we think are really added to us and are not as disruptive while we kind of digest the things that are in the system right now.

So as I said our focus is on making sure we digest properly and integrate properly, has been our practice in the past, the firms that we have. And so that we then have a stronger 9,000 person firm as opposed to three or four firms of different sizes that add up to 9,000. We want to be a fully integrated 9,000 person firm and use that as a base to grow further, which will make it easier for us then to do a 1,000, 2,000 person acquisition in 2009.

So all things being equal, like I said, we see a reduced activity in acquisitions in for the balance of '08 even though the opportunities are there. And some of these have to be flushed out to the system, but every once in a while there's a nugget in there and if the right nugget comes along, of course we will look at it. And, hopefully, valuations and other things are also going to be a little better in ['09] and we have seen a little bit of that already.

And, Tony, with the weakness in the U.S. dollar, have you seem increased competition on bidding or have the American engineering firms in Canada in willing to lower their prices because of this? Has there been an increase in contribution --?

I'm not sure. There's desolate been an increase in competition. I don't know if it's attributable to the lower U.S. dollars. But clearly, yes, we have more -- all of the larger U.S. firms are in Canada and which is okay for us in the sense that, that's why we wanted to make sure we were strong and can defend our turf and we are quite comfortable in our ability to maintain our market share. That I think, perhaps, a lot of that growth for the U.S. firms has been through acquisitions. So as people who were already competing with before, now they may be sort of a little stronger, a little better.

But we always set our site on the best competitors in the world not just the people that were here. So we are ready and are competing quite favorably with them in the marketplace. Yes, it's competitive and probably always will be.

John Rogers.

Couple of things. You talked about the transportation market and what you are seeing out there, but given that you're at the front end of a lot of these projects and talking to the States and provinces about proposals, what is your sense of the activity level out there? Are they sitting on their hands or waiting to see what budgets look like? I know down here in the States they come out the 1st of June, but what is your sense there?

There's a bit of that. I mean, again, you guys are better act determining when is it a trend or when is it just a number of isolated activities. I mean, clearly, we could point to a number of situations where we've had clients either hold or postpone or delay doing something. I'm not sure we have enough information to say that that's a trend, but clearly there is apprehension. There's knowledge, there's awareness that there may be some stresses in some of the municipal and state budgets based on their funding levels that are coming in and I agree with you.

Once the budgets come out it may become a little bit more clear. So in a few instances, individuals are holding back. But whether it's a trend or not yet, may be a little early to tell.

Secondly, I was wondering if you could talk a little bit about what kind of pricing you are seeing in the market and specifically. General trends and multipliers or billing rate. I mean acquisition prices coming down, I assume there's a little more capacity out there. Is that showing up in pricing?

It's partly reflected in the margins that we report (inaudible) say a portion of that was related to some -- a little lower pricing, but not all of it. The other was on the execution side. So I guess if you can use one quarter as a trend then, clearly, the first quarter would suggest that, yes, that was an indication in four of our five practice areas. Now will that continue into the next quarter? You know, honestly, I'm not sure. And I guess if four out of the five had some of that you'd think that it's more likely than not that that will continue but whether it will be to the same level or not I don't know.

Then in terms of -- you mentioned maybe a little less acquisition activity through the remainder of this year and presumably if you make these acquisitions there's some initial inefficiencies, integration costs. Will that have materially changed the outlook for SG&A costs or integration in terms of operating margins? Is that material?

Not material, no. I mean they'll have impacts but like we showed in the first quarter there are things that usually -- often we can do, because we are also reducing and adjusting our own cost base. So to reflect what's happening and I don't think it's going to be material yet, I think we have a pretty good indication after the second quarter as well.

Then finally as you sort of position the Company for a larger acquisition, what do you think about in terms of balance sheet targets by the end of this year or to make that kind of 1,000 person type acquisition?

If we have a decent year with -- generate a reasonable amount of cash, pay back some of the debt we've incurred and we've still got reasonable credit line, I'm sure for the right deal, probably still a lot of friendly bankers out there that could probably allow us to do the transaction with even taking on -- if for the right deal and obviously if it was larger it would be a little bit more predictable, a little bit more stable. I think it's a little early to tell without knowing the specifics, but we think that we can do that obviously. Otherwise we wouldn't be pursuing that.

Now if it it was a 4000 or 5000 person tournament that may be a little bit more challenging but still not impossible.

And just one final question I guess from Don, is tax rate --? Should we think about that 30% level for this year?

I think that's right in the middle of our projected range for 2008 and there's nothing that we've seen to date that would cause us to think about adjusting that range.

[Stephanie Price].

Could you talk a bit about P3? You mentioned it several times in the call. Could you just give us an idea of the size of the opportunity and things you are looking at right now?

Yes, it's fairly substantial. I think in one way or another we are working on, roughly, 20 proposals on P3. Mainly in Canada. Seven of those were in healthcare and hospitals. A few that we should know about any day now or a couple of them, but I think four in British Columbia, three in Alberta. So there are about seven in healthcare, about six or so in schools in Alberta. We got, then we've got a roadway, a roadway work in Alberta. We've got a bridge in Vancouver has a couple of waste product treatment plants in the southwestern U.S. which we are calling P3s because they are similar. They may call it something else in the U.S. in those cases. But they are actually the same type as what we would call a P3 in Canada.

So fairly healthy activity, certainly in (inaudible) above average. We wouldn't normally be working on that many. We would normally in a quarter we may be working on two or three, but again I hate to use a quarter as a trend. But because we did so many in the first quarter that that is going to continue. It's clearly an upward trend from what it has been in the past, but we may be going from sort of three to five a quarter not necessarily 15 or 20.

In terms of acquisitions, you mentioned that the acquisitions had an impact on revenue in the quarter, but not very much on the net income line. Can you talk about how long it takes a typical acquisition to become accretive?

It depends on how good a job we did. You know we've had -- our past history would go anywhere from one quarter to seven or eight quarters. So I think it is a fairly wide range. The average may be two to 4. But normally would take maybe a year, that four quarters you know that when you are fully there, but you get sort of some improved performance. But you get the most noise in the first two quarters after the acquisition.

Finally in terms of your debt level, they are up this quarter obviously because of the acquisitions. Can you talk about what level you are comfortable with going forward?

We've always had an internal guideline of a debt equity ratio of 0.5 to 1 and we are slightly above that ratio right now but we've also always been consistent in saying that we would be prepared to exceed that internal target for the right acquisition or acquisitions. And we continue to say that and we would continue to say that for the right acquisition that would come up even in the remainder of this year that we would be prepared to use debt to finance additional acquisitions as well.

So I think that if we were to not do any acquisitions at all for the remainder of this year we would be well below our debt equity target guideline. But we wouldn't have any -- we would not be adverse to continuing to grow by acquisition and using debt for the rest of this year.

Since there are no more questions I would like to thank everyone for joining us today and as always Don and I look forward with -- to speaking with you again in the future. Thank you very much.

Ladies and gentlemen, this does conclude your conference call. Thank you for attending and you may now disconnect your lines.