Stantec Inc (STN) 2008 Q2 法說會逐字稿

Good day and welcome to the Stantec Inc. 2008 second-quarter earnings release conference call. At this time I would like to turn the conference over to Mr. Tony Franceschini, President and CEO. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to our 2008 second-quarter conference call. Joining me is Don Wilson, our Chief Financial Officer. Usually we comment briefly about our results and the outlook for our markets and then address individual questions. Today I will provide a longer commentary prior to addressing questions to highlight a little bit more of our business.

Before we begin. I would like to make you aware of our Safe Harbor statement. 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 to its 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 who wish to quote anyone other than Don or me to please request permission to do so from the individual concerned.

This morning we released the results of Stantec's operations for the second quarter of '08. I'm pleased to report strong performance during a very active quarter for us. Gross revenue for the quarter increased 40.3% to $343.3 million from $244.7 million in the second quarter of '07. Net revenue increased 34% to $289 million from $215.7 million. Net income increased 26.3% to $22.1 million from $17.5 million, and diluted earnings per share were 26.3% higher at $0.48 versus $0.38 for the same period last year.

On a year-to-date basis, gross revenue is up 37.8% to $635.1 million, net revenue is up 33.3% to $543.9 million, net income is up 18.5% to $39 million, and diluted earnings per share are up 19.7% to $0.85.

Our performance during the second quarter and year-to-date continues to validate the strength of our business model. As we have indicated many times before, our business model is designed to continually adapt to changes in market conditions in the geographic regions and practice areas we serve. In fact, we believe that our business model and operating philosophy are particularly well-suited to challenging periods in our business environment.

Let's take a look at our business today and how we continue to mitigate risk to practice area, geographic and lifecycle diversification.

For year-to-date our 2008 gross revenue mix was environment 27%, buildings 22%, urban Land 22%, industrial 16%, and transportation 13%. This is a well-balanced mix that provides exposure to both public and private sector clients and many market segments.

Our geographic mix is also well-balanced with 50% of our fees generated in Canada and 50% generated in the US.

We also continue to add services in different phases of the project lifecycle. In particular, this year we significantly expanded our decommissioning phase with the addition of environmental remediation services. As you can see, we're growing, evolving and maturing and continuing to succeed with our business model. Of course, any business model is only as good as a Company's ability to execute. Our ability to execute is entirely dependent on our employees, so I want to thank our employees for their passion and dedication to their work and for executing on our projects.

A detailed management discussion and analysis is included with our press release. I want to summarize a few highlights.

Compared to the second quarter of '07, our results for the second quarter of '08 were positively impacted by a reduction in our administrative and marketing expenses as a percentage of net revenue from 42% to 40.8%. This reflects our focus on improving operational performance across all of our practice areas and regions. Our results were negatively impacted by a modest reduction in our gross margin percentages from 56.1% to 55.9%, which for the most part resulted from the mix of business, particularly from adding some lower margin work in the environment practice area.

Our results were also negatively impacted by a $1.7 million increase in the amortization of intangibles from acquisition and a $1.6 million increase in interest expense due to the use of our credit facility to fund acquisitions.

Immediately following the quarter-end on July 2, 2008, we acquired McIntosh Engineering, adding over 200 staff. This acquisition further diversifies our business by expanding our services in the mining sector and adding offices in North Bay and Sudbury, Ontario, a very active area currently similar to Northern Alberta.

I would now like to highlight some of our new project awards to further illustrate the growing diversity of our services. In particular, I want to focus on our increasing capabilities in sustainable design, our growing ability to offer a full suite of services to clients in many market segments and our increasing ability to secure larger, longer-term assignments. For example, in British Columbia we are providing mechanical, electrical and sustainability engineering for the Center for Interactive Research on Sustainability at the University of British Columbia. Once operational, this facility will produce net energy to heat other buildings, while reducing the overall carbon footprint of the University campus, using photovoltaic panels and innovative energy systems.

We are also designing an innovative continuous flow process for producing biodiesel fuel at a plant in Nova Scotia. The process can use either vegetable or marine virgin oil feedstock and will be capable of producing 100 tonnes of biodiesel per day. In Edmonton, Alberta, we are preparing a sustainable neighborhood area structure plant for city-owned land in the Northwest quadrant. And in Barbados we are providing the civil, structural, mechanical and electrical design for the sustainable Barbados Recycling Centre, the first integrated waste management facility in the Caribbean. This one-stop facility is scaled to receive approximately 1000 tonnes of waste material per day on start up, 60% of which will be diverted from landfill disposal.

As we continue to grow and to expand our services, we are securing larger, longer-term assignments. Some examples include a contract to provide project management services for capital facilities projects at the Suncorp energy site, an expanding complex requiring many years of development near Fort McMurray, Alberta.

In Toronto, Ontario we are providing project control services as part of an integrated multi-firm project team for a subway expansion for the Toronto Transit Commission. Scheduled for completion in 2015, the extension will include six new stations and 8.6 kilometers of line connecting York University to downtown Toronto.

We are also serving as the prime consultant in designing odor control upgrades of the primary treatment and hydration processes at the Humber wastewater treatment plant in Toronto. This five-year project will also focus on improving the performance and reliability of the screenings and treatment processes at the plant.

We also continue to be involved in the higher education facility sector. For example, we're completing two laboratory renovation projects for the Pennsylvania State University, a long-term client in Pennsylvania. One assignment involves architecture and engineering for a retrofit at the 70-year-old North Frear Science Building and to a state-of-the-art lead certified research and teaching facility.

The other assignment is the renovation of the heating, ventilating, air-conditioning and electrical systems at the Central Biological Lab, a 30-year-old animal testing laboratory. We are also contributing civil, structural, mechanical, electrical, plumbing and fire protection engineering to a new engineering and science research facility at Binghamton University in New York.

We are involved in public sector projects in many areas, including transportation where we're completing the environmental assessment, planning and preliminary design of two new highway interchanges in Ontario at Highway 401 near Kitchener and at Highway 11 near Huntsville for the Ministry of Transportation Ontario.

Other assignments include construction administration services for developing two miles of new highways and 15 bridges for the future Interstate 86 in Sullivan County, New York. Along with construction, resident and engineering services, our work will involve the coordination of extensive environmental permitting.

In Rensselaer County, New York, we are designing a steel bridge replacement for the New York State Department of Transportation. The single span Parker truss bridge, which is eligible for listing in the National Register of Historic Places is in need of a new structural deck, sidewalk deck, approach slabs and bearings. We're also serving as the prime design consultant on the design build team for a downtown infrastructure and streetscape improvement project in Tucson, Arizona that will prepare the downtown area for several planned developments, including a four-mile modern street car system.

In addition, we are providing full architectural interior design and all engineering services for our renovation and expansion of the Nassau International Airport in the Bahamas. The project will transform the airport, many parts of which are over 50-years-old into an attractive, efficient 21st century facility.

This is only a very small sample of the projects that we're working on. It is projects like these that give us our passion for what we do and motivate our staff to excel. But most importantly, they provide diversity and risk mitigation for our Company.

I want to further address this. As we have indicated many times, we are operate on many cylinders, and there is no single region, practice area, market segment or client type that dominates our Company. I will highlight this by providing a brief assessment of our practice areas and regions and of our market outlook for the remainder of 2008.

Revenue in the environment practice area year-to-date is nearly double what it was in the second quarter of 2007, principally due to acquisitions that have allowed us to expand into geotechnical engineering and environmental remediation, as well as weather programs. Our gross margin declined slightly during the quarter from 56.4% to 55.9%, principally due to the mix of project work. Our focus this year has been on the integration of acquisitions and operational effectiveness. This integration is nearly complete with the exception of Secor, which we have deferred until late this year and early next year to accommodate required system changes.

The outlook for environment is positive, and we expect to continue to grow this practice area organically due to improved strategic focus on larger clients and projects. Western Canada remains our strongest market, especially in the water and wastewater areas.

In Central Canada the slowing Southwestern Ontario market should be offset by our improved market position in the greater Toronto area demonstrated by recent significant project awards with the City of Toronto. In the United States, we expect favorable conditions for our environmental remediation business as our major oil and gas clients continue to invest in environmental cleanup.

With our focus on sustainable development, the demand for green power and our top tier position in wind power, we're participating in numerous new wind power projects throughout North America, and we expect this trend to continue. Stantec provides a full range of services in wind power in several practice areas from initial environmental assessment to detailed design of the electrical distribution collection and interconnect systems, civil site development and services during installation and construction.

The revenue in the buildings practice area is up about 35% year-to-date, about 70% of which is due to acquisitions. Our gross margin improved during the quarter from 57% to 58%. The outlook for buildings will be mainly influenced by events in Western Canada where most of our operations are located and by the trend towards public private partnerships for which we are also well-positioned because of our fully integrated architecture and engineering practice, but for which the pursuit and opportunity costs are high.

Some softening of the market is taking place in British Columbia, but the outlook for the next few quarters is stable. Our operations in Alberta and the rest of Western Canada are continuing to grow, and we expect this growth to continue for the balance of 2008. Our remaining Canadian and US operations are stable, including our principal market of health care, and we expect this to continue for the remainder of the year.

Our Urban Land practice is the only area where we have a reduction in revenue of about 3% year-to-date. This is the net result of adding about $24 million in revenue from acquisitions, offset by a decline in organic growth of about $19 million and a foreign exchange impact of about $10 million.

Since I still get asked about residential exposure in our Urban Land practice area, I want to outline how we have been adapting and changing this part of our business. The current market for services in Urban Land is mixed with a continued decline in revenue in the residential housing market in the United States which accounts for about 50% of our business, offset by ongoing strong performance in the housing market in Canada. Our three principal markets are Alberta at just over 30%, California at just under 20% and Ontario, Canada at just over 15%.

For the balance of 2008, we expect seasonally adjusted single-family housing starts in the US to stabilize at slightly below current levels and then to start gradually increasing in 2009. Although housing starts have decreased in Alberta in 2008, our workload in Canada, including Ontario, has remained strong. Industry forecasts suggest that starts will increase in 2009.

Offsetting this slowdown in housing is an increase in our revenues in the nonresidential sector, in the commercial development area and work for public sector clients, particularly in planning, landscape architecture and surveys. Currently about 35% of our Urban Land practice is in the nonresidential area. Our focus in 2008 has been on rightsizing our operations to deal with the decline in housing in the US. But we now expect staff levels to remain at or close to existing levels for the next several quarters. We believe that we are very well-positioned to take advantage of the residential housing market when it starts to grow again.

Industrial revenue has grown by about 70% with about 88% of this growth coming from acquisitions. Our gross margin improved during the quarter from 48.3% to 51.4% due to project mix and improved project execution.

During the third and fourth quarters, we will focus on integrating our newly acquired staff from McIntosh Engineering. Through this acquisition we will be able to offer a complete integrated package of environmental, scientific, engineering and project management services to global mining clients. The outlook for industrial remains positive, particularly in the areas we have been focusing on. We are well-positioned to participate in the upgrade and expansion of oil, gas and power transmission systems. We are also continuing to grow our project management group and expanding our ability to support clients in developing major programs across North America.

Transportation revenue is up about 24% year-to-date, principally due to acquisitions. Our gross margin improved during the quarter from 51.7% to 54.7% due to improved project execution. We see positive growth trends in Canada where we generate about 40% of our revenues due to public spending on improvements to infrastructure and a continuing healthy economy that supports current or expanded spending levels.

In the United States, we are less optimistic, and we are expecting flat or moderately declining expenditures into 2009. Our focus has been and will continue to be on strengthening our leadership and specialty skills in growth areas so that we are better positioned to compete for transportation projects.

I also want to provide a brief summary by region. Our operations in Canada are performing very well, and we expect this to continue into 2009. We're focusing on operational effectiveness in all regions, and improvements in this area should offset any potential weakening in revenue growth.

Western Canada will continue to be strong overall lead by Alberta. Any potential weakness in British Columbia will be offset by growth in Saskatchewan and Manitoba. We expect Central Canada to be stable because any weakening in the manufacturing sector in Southwestern Ontario will be offset by City of Toronto work and the relative strength of our new mining practice in Sudbury and North Bay. Our operations in Atlantic Canada have been integrated and performance is improving, and we also expect this region to be stable.

In the US West, our operations have been impacted by the real estate downturn, particularly in California where we have a significant presence. We're making progress in diversifying our service offerings in California in areas such as buildings, environment and transportation. But basically to date we have just offset the reduction in Urban Land. We have been more successful in diversifying our operations in the other Southwestern, Mountain and Northwestern states. We believe that we are now at or near bottom with respect to downsizing in Urban Land, and our goal is to maintain our market presence in key areas of future growth, to be ready for improvements in the Urban Land market which we believe will begin sometime in 2009.

The US East has experienced a period of intense growth, and our focus has been on integration and improving operational effectiveness by consolidating offices where possible and better deploying and levering staff with shared project and client opportunities. We expect practice area diversification and significant market presence in the Northeastern region of the US to result in improving performance. The balance of our presence in the East is expected to remain stable.

I have spent a little more time on operations and outlook to reaffirm our business model and outline the many market sectors and client types we serve. Our operating philosophy of one team offering integrated services, combined with our geographic and practice area diversity, is what sets Stantec apart and gives us the ability to deliver strong results in any market condition. Our employees have been rising to the challenge, and their efforts are helping Stantec to succeed and grow in a changing market.

On a final note, I'm pleased to report that our trading symbol on the New York Stock Exchange is now STN, matching our symbol on the Toronto Stock Exchange and reflecting our single brand identity and our one team philosophy.

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

(OPERATOR INSTRUCTIONS). Bert Powell, BMO Capital Markets.

Tony, G&A in the quarter, is this just better utilization rates and some staff reductions, or are we seeing some other things like lower liability claim costs and bad debt adjustments in here as well?

All of the above and a few others. It is really a whole bunch of small things. It is improved utilization in some areas, so we have a little bit less downtime on admin activities. It is improved management of work-in-progress, so you have less work-in-progress write-downs. It is improved collections of NRAs so that we have a little bit less provisions there. It is really a combination of things that we have clearly been focusing on this year.

So is this level, this quarter a good indicative level going forward, or is this a little bit anomalous in the context of what we have seen for the last 18 months?

You know, I knew you would ask -- someone would ask that question because we have had -- clearly the last two quarters we have done better. Our expectation is that we can do better like staying at these levels as long as no surprises come along.

So our expectation is that, yes, absolutely we can maintain these levels because we have implemented a number of changes that are helping us, and clearly it is reflected in the numbers for the first two quarters, and we think we can maintain it there. But we always -- that is why we give our guidance range at plus or minus at 1 -- I would say plus or minus 1% from where we are right now.

Okay. And last quarterly call you talked about being fairly quiet on the acquisitions for the balance of this year. Is that still the plan? Also, I think at that time you also indicated that you felt organic growth or internal growth could be in the 6% to 8% range. Are those two things still substantially unchanged?

Sort of. I think on acquisitions, we are really only focusing on one or two sort of larger more strategic ones because they could take longer. You know, they could come together in a month or 12 months. So there's lots of activity out there, but we are really sort of passing on a lot because we do want to focus on the internal stuff. So I think that that is a fair comment, and yes, I think by the end of the year, I think that the 6% to 8% organic growth is not an unrealistic target.

Okay, last question. Last quarter you also indicated that perhaps from acquisitions that you were kind of defocused in the transportation sector. You saw good organic growth this quarter. Likely to see the same kind of effects in the environmental side of things now that you're going to be fairly quiescent on the acquisition side?

That is a fair comment, but I think we're expecting reasonable organic growth in the environmental side. But we would not turn down an acquisition in the environmental side if that is what came up.

Anthony Zicha, Scotia Capital.

Are you noticing a delay or reluctance by state governments to take on transportation projects in the US given that safety LU expires in September '09 and that the US trust fund has been expected to run a deficit in '09?

There is some delay, but probably our biggest contributor is the fact that state revenues are down. You know like they rely on taxes and other sources of revenue, and if the economy is generally a little down, then they have a little bit less resources. So I would say that basically during these periods, there's two things.

One is the market is still fairly large. It is just that basically competition gets tough. So for us to get work, we just have to be more competitive. That's why getting our cost base down is important. But there clearly are some projects that are being delayed. We just have to find something to replace them.

Okay. Now you mentioned that you reduced your headcount in the US in Urban Land business. How many people did you let go, and do you expect still to do some additional reductions?

Well, I think I indicated in my comment that we think we're pretty well there. Certainly from what we know right now, we're not really expecting more significant changes. But in certain markets in the US like California, almost half the Urban Land staff is no longer with us. So it was fairly significant in the California market, but overall again we certainly maintained our numbers in Canada and in sort of some of the mountain states, and the numbers were down in the US East. So it has been a significant rightsizing, but we think we have rightsized it to where we think we're going to be. We're not expecting -- actually right now we are not expecting any further significant reductions in that side of our business for the rest of the year. If there are reductions, they would be pretty modest.

Okay. Within acquisitions can you give us an update like on the multiples on what is happening in the market? Generally speaking it seems for what I have read and people I have talked to that business owners are worried about a change of government and also the change in capital gains tax. So it seems that there more sellers than buyers out there pushing multiples down. Would you agree with that?

I agree that there are more sellers then buyers right now. Not everybody, though, has still quite accepted that when you have more sellers than buyers that the price gently comes down. So I think it is starting to happen, but for sure there are more sellers than buyers right now.

Okay. Then the last question, could we expect that you make an acquisition on an international scene?

Not this year. Not likely to happen this year, no.

But it could happen, let's say, in '09?

I would say it could happen in the two to three-year timeframe, maybe even '09 may be a little early.

Are there any specific regions that you would be looking at?

Yes, we are still looking at sort of UK, Australia and New Zealand as our first choice.

Frederic Bastien, Raymond James.

You gave a pretty good overview of your outlook for each segment that you are operating in. I'm just curious as to where the backlog currently stands in terms of the month of fees?

It just slightly lower than it was at the end of the second quarter, about $963 million compared to about $983 million. So it is basically flat compared to the first quarter of '08, and the biggest -- and really that difference is pretty well in the Urban Land side. It is about 10 to $15 million or so reduction in the backlog in Urban Land. So overall I would say we are about flat.

Okay. So you are still replenishing your backlog in the other segments?

Yes.

Okay. A technicality. I notice that the ratio of gross revenue to net revenue jumped a bit in the quarter. I know it is fairly unpredictable, but I'm just wondering where you think this will end up? Will it revert back to the levels you have maintained over the last couple of years, or should we adjust our assumptions?

I think in the next year or so, it will stay where it is right now because some of the businesses that we have added, particularly the remediation side on the environmental side, does have a higher level of pass-throughs. So the ratio to growth to net is higher than our other businesses, and it is the type of work that we don't do. So it will continue to be a pass-through.

So I think the levels that we are at right now are closer to what they are likely to be rather than reverting back to where we were before.

That is helpful. Thank you.

Sarah Hughes, Cormark Securities.

Tony, just on the transportation margins, we saw a good rebound this quarter. I'm just wondering if the initiatives that you've put in place that we have seen all the impact from, or do we see more margin improvement going forward?

I think, you know, as I indicated in Q1, the reason the margins were down was mainly self-inflicted. It was partly we were not just executing as well on certain projects, and we just had a (inaudible) they sort of came together. I think we cleaned all those up, so the margins are back up to more normal levels. I don't think we're looking at another 2 or 3 percentage point improvement. I think where they are right now is probably a good range you know plus or minus .5 point is really I think we have done most of the things we can do.

Great. And then your expectation for organic growth, 6% to 8%, what markets do you see the biggest growth opportunities for you organically?

Industrial and environment.

And is that mostly Canada, or could you see is it US/Canada?

Environment probably half and half between Canada and the US. Industrial would be more like 90% Canada.

Okay. And then just lastly, you talked about in Urban Land how you've seen your non-res component go up to 35%. Where would it have been previously?

Well, you know, we sometimes used to round up and say that give or take 30% or so of our business could have been in the nonresidential. So I would say that in the last six to nine months we have maybe increased it by 5%.

And could you see that going close to 50%, or would you think in and around here is probably where you see it continuing?

Not 50% in the short-term, but there is room to add another 5% there.

Sara Elford, Canaccord Adams.

Just one question for me is maybe a bigger picture, and I often sort of think about the potential of the US business to start to approach the profitability levels that Canada is able to achieve just by virtue of your critical mass there and the history that has come behind it -- before it. Could you maybe talk a little bit more about margin trends that you are seeing in the US and maybe even Canada as well? You talked generally speaking about the environments there, but I'm just curious if you could add a little bit more color on the profitability front and what progress you're making south of the border?

Okay. Good question. Because the biggest difference in the US is that we start with the same gross margins on our business, but because we are not -- and this is just a step back -- we have always said take a long-term view and even our growth and the things that we do is to take a long-term plan that says we want to mature, be a top three player in the individual markets that we are in. Clearly the more mature and the longer we have been in a place, the larger our presence and so forth, then the lower our overall SG&A costs are, and therefore, the better the net margins for us are going to be.

And in the US East partly through circumstance and partly through strategy, we have to start to get a presence. And we worked with acquisitions that were available, and invariably whenever you do one, you get maybe 12 offices. You really only want eight, but you've got to take the other four and then maybe a lot of smaller offices which have a higher overhead and so forth. So, as we continue to increase the mass and mature in the areas, our SG&A costs are reduced, and our project execution goes up, or the type of jobs we get and the clients we work on improve.

So the way I look at our really particularly the US East operations is that the upside potential is quite large from that perspective. Because, you know, the margins are not near what they are in Canada at the present time on a net basis.

US West is -- we have a few larger offices and a more concentrated presence in certain areas. So we are a little bit ahead. So I think that the question really is when are we going to be able to have similar net operating margin performances in the US compared to Canada. It gets better all the time. And as long as we keep -- if we maintain our presence in Canada, things will be quite positive. But if Canada declines and then we improve in the US, they will tend to offset each other. But clearly we see our US, even though excluding what the revenues may be, the markets and everything else, that we see our US net margin over the next year and two improving.

Okay. That is ultimately what I was getting at, just a bigger picture over the longer term. And then secondly, even if people are concerned about what is going on in the US market or economy in general, that, in fact, you've got lots of room for improvement that could completely offset that by just efficiency gains and just progress in the development of your business there. Fair enough?

Fair enough. I could not have said it better myself.

Bill Mackenzie, TD Newcrest.

I was wondering if you could talk a little bit more about some of the worksharing initiatives that are going on across the Company and to what level you track this and quantify it, can you quantify it? But I was wondering if you had a sense as to what the sort of percentage of total billable hours are involved in some sort of worksharing arrangement or a headcount or just if not if you can't give that sort of detail quantitatively, then just qualitatively talk about what is going on from that perspective.

I cannot do it quantitatively because our whole, again, operating philosophy of the one team, and we take the resources wherever we can. And we try not to track too much who is working where from who because that tends to develop silos in different parts of the organization. So we encourage people to use the best people that are available.

But qualitatively I can certainly tell you that especially when times get a little tougher, that is when guys look inside the family first and then would look at doing rightsizing. So we always -- whenever there is a possibility that an individual is no longer required in an area because there is not enough work, we look around the Company, and if at all practical because it's not always practical, then we would try and use that individual, even if it cost us more. So that our gross margins may be reduced a little bit or our SG&A costs would go up because we may not be always able to recover the same cost or it cost us a little bit more because the person is not familiar with it. So it is really more of an attitude and a culture which you build up over time, and so you have the philosophy and then you have the systems that support it. And our organizational structure in terms of our practice area leaders working across the Company working in concert with the regional leaders helps that.

So qualitatively I can tell you that it is up. Specifically I cannot put a number to it. But to give you an order of magnitude, we are not talking more than 10% of the total business. We're talking in the low single digits in terms of the work that would be staffed across the Company.

Okay. Thank you. That is helpful. And then just in terms of going back to Canada versus the US again, are you guys able to give us any sense in terms of what the respective internal growth rates were for the two different regions?

Again, we track it more by practice area. So -- but I would -- it is a difficult number again to develop. We could go in and find it, but we don't think philosophically it is the one that we are looking at. We look at the market as a North American market for all intents and purposes.

Do you think the US would have grown at all in the quarter or been flat, just kind of your thoughts?

I would say the US overall would have grown slightly. We obviously had a bigger negative impact on Urban Land. Actually all the negative impact was in the US. So we needed the other stuff to offset it.

I know in specific markets like California where I've even mentioned in my notes, we've pretty well basically offset the decline in Urban Land with the growth we had in the other areas. So in the US as a whole, there may have been a modest organic growth.

Okay. Great. Thanks. And just one last one. In terms of some of the internal growth targets that you're hoping to get to by the end of the year, the 6% to 8%, are you expecting a disproportionate amount of the acceleration from current levels to come from Canada versus the US, or are you expecting the acceleration from current internal growth rates to those levels to be proportionately similar in Canada and the US?

I would say it would be weighted -- that Canada would do more than the US. But we do expect some in the US as well.

Paul Lechem, CIBC World Markets.

Just on the Environmental Practice, given it's importance to your business now and the size of it, can you give us a bit more of a breakdown of who your clients are in that practice area? And to the extent that some of them are public sector clients, is the slowdown in state spending would that impact the Environmental Practice as well as much as maybe the Transportation Practice?

First, not as much as transportation. In transportation like 90%, 85 to 90% of our clients are public sector clients, and environment is about half. So the other half are private sector clients. And the private sector clients are people like energy and utility companies on the wind side and then on petroleum, oil and gas companies as well. So a fairly broad range of clients. So I think if you're looking at reductions in public sector spending, it would have more of an impact on transportation than it would on environment overall.

What have you seen up until this point in time in terms of a slowdown in public sector spending? Have you actually seen any effects of that yet, or is it just something that is out there and people are aware of but have not really yet seen the actual impacts of it?

Well, we have seen some projects delayed and postponed or some uncertainty in a number of areas in the US. But to date we have had projects canceled and suspended. But we for the most part have been able to replace them with other projects. So either we're being better competitively in order to get those jobs, or there's enough jobs out there that we're able to get our pro rata share.

I think in any competitive marketplace, it is not necessarily that everybody gets treated equally when there is a reduction. So I think our challenge is to make sure that we get I guess more than our fair share. If there is a reduction, we have to be a little more competitive. And that is why I indicated we're investing in some of the specialty areas. You have seen us do stuff in other small firms, you know in signals and signals systems, communication, security to kind of bolt on or put as part of the package in our transportation services so that we can do transit and also do transit communication systems and signal systems and that sort of thing, which we think will make us a little more competitive in some of the projects that we're going after. So that if there's fewer projects for the consulting community to get, Stantec can still get the numbers that we were looking for.

Alright. On your acquisitions that you have made over the last year, can you talk a little bit about the integration and where you are at with them? You also mentioned I believe at Secor you're holding off a little bit on that integration. Can you talk about maybe why that is?

Okay. First, the integration is -- we're pretty well complete with most of the ones that we have done, and certainly systems-wise they are all done with the exception of Secor and I will address that, and we're just starting on McIntosh. So the integration is well underway. And, of course, it always takes two or three quarters after it is integrated, it gets better all the time, right?

So when I talked about Atlantic Canada, a lot of that -- really all of that business came from Neill and Gunter, which we did last fall. And I think we have got that done, integrated and performance is improving and it is looking up.

In terms of Secor, in terms of integration operationally, we are integrated in terms of cross-selling, and they are all on our payroll system, e-mail system and everything else. What we have not converted is the accounting and billing systems, and the reason we have not done the conversion is that because of the nature of the types of clients that they have, they have a lot of very specific and unique billing requirements that are like not only electronic but they are very specific to individual clients. And they also have electronic payments and other things that have been essentially customized to individual clients. And because of that, we essentially need to customize our system to be able to accommodate the electronic billing and collection from really about six clients. But they are all fairly significant clients like the Chevron's, Conoco Philips's, BP's of the world, and they have very strict and explicit ways of doing it. And we wanted to make sure that we would test fully the changes that we had to make to our Oracle financial system to be able to accommodate that.

So we decided to delay it to a later date rather than doing it right away because our system was not just a matter of converting everything. We have to make some changes to our system. So that is the reason. There is no other reason. But from a philosophical and operational perspective, we are integrated.

Okay. And my last question, just all other things being equal, if you just progressed your current integrations of all the acquisitions, would you expect to be able to improve upon your profitability from where you are at in Q2?

There is probably -- I guess yes, maybe. There is maybe -- if you look back at certainly where we have been, we could be a point better on our net, and can we do it? There's a whole bunch of ifs in there that it is possible, but we're not providing guidance on that.

Just saying your question was, is it possible? I think yes. You know, can we do it? Yes, but there is a lot of this. A lot of things could go right but some other things could go the other way. So you never know.

Okay. Thank you very much.

John Rogers, D.A. Davidson.

Tony, could you talk a little bit -- you have sort of been around a bit -- in terms of pricing in the market. Are you seeing -- I know that wages for a lot of the engineering talent have gone up, but are you seeing higher multiples for that work? (multiple speakers) -- and what is more relevant by sector?

I think yes. Again, we are in so many different sectors that it is hard to put a generalized comment on that. But the only generalized comment I would have is that in most of the markets that you are in at the end of the day, the pricing sort of reflects the changes that take place in salaries and so forth. In some of the public sector work, you actually are effectively -- the rate structure is such that you establish what the profit margin is going to be, and then everything else gets backed out.

So if you start with the premise you are going to make 8% on the fee, that at the end of the day you're going to make 8% whether the multiples change whatever and so forth. Some of the industrial work is done on the same basis, and that is the way the fees are actually structured so that you end up making a certain amount of money, and that is the amount of money you're going to end up regardless of how you get there at the end of the day.

In some of the areas where we do have more flexibility on pricing, it is generally the areas where we do less work in terms of volume. Any really high-volume work when all is said and done at the end of the day, you're going to end up with roughly the same net margin. I don't know if that helps at all.

No, that helps a little. Then just some questions. When you talked about acquisitions and seeing more sellers than you have in the past, does it tempt you to look at other practice areas?

Sometimes. Like, I think yes and there would be -- what we look for is principally professional type services and similar markets but not necessarily identical markets. But yes, it does -- we look at it from that perspective to see if the fundamentals of the business are the same. But we have been tempted to date to look at construction type firms, which there are a number available because that is kind of outside the things that we do, unless the construction component is only a small percentage of what the people do, and it is integrated into their design services.

Okay. But what about I guess it would be the private sector, some more industry-specific or I guess we would just be growing the industrial side as a whole?

Yes, I mean we look at some of the other areas in industrial. I think mining was an example of going into an area where again we looked at where we thought we could make a difference and find the right firm that we could add to it. I mean that is something we have not really done, and certainly underground mining is something we have been involved in before. So I think we feel comfortable expanding into those areas because fundamentally the business is the same.

And the last question if I could, you gave us the backlog number. Do know what that was a year ago?

Yes, if you will just hang on here. I just happen to have that number in front of me. So Q2 '07 it was $723 million.

Okay. Great. Thank you.

Richard Stoneman, Dundee Securities.

Tony, you have made a fair number of adjustments in terms of rightsizing operations in the quarter. Did that depress margins? Were there some additional costs related to that activity?

Do you mean in terms of severance and things like that?

Yes.

Yes, there were some. Yes, in a few cases, the numbers were more than others, and in some we were in a situation where it was, you know, (inaudible) employees, but in other cases we had some severance agreements.

So there were costs that we incurred in the quarter to do that. We have not broken them out. It is just part of our operations. And we do have some space that we probably have surplus space in a number of areas that will gradually start to disappear. Because in some cases we have not been able to just -- because it is not necessarily empty. We're just carrying access space that we could fill. So that is where the premise costs are maybe higher as a percentage of revenues in a number of areas. So we have some of those costs.

Are they material? You know, I don't know. It depends on what you consider material. But there is probably just -- if you want me to throw a number out, I will, but there is probably no advantage to doing that. But clearly there are some of those costs.

A second question, in the last conference call, you mentioned that you were looking at some additional depreciation and amortization and some additional costs in terms of retention bonuses that were paid in the acquisitions that you have made. Do you expect that there will be a few million dollars savings when you get out of that period later this year, early next year?

Well, there will be a few million dollars savings, but the biggest drop -- the few million will come in 2010. We still have -- it is the highest this year in '08, but it is more like, maybe more like $1 million reduction in '09 and then maybe another $1.5 million in 2010, and then another $1.5 million in 2011, and it pretty well goes away in 2012.

Are those retention bonuses?

Yes, those are just retention bonuses.

Okay. And that is a year, not a quarter?

That is a year, sorry.

And in terms of the amortization, do you think it will drop off next year given you had a cluster of acquisitions earlier this year?

Well again, they go by part, like it depends on where we put the backlog and the client relationships and so forth. We are, Don, I am going to have to see if we have got some number here. I can give you an idea. But we have got 10 where are we at two quarters ended June 30.

For the first six months of this year, the amortization of intangible assets was just over $5 million. We expect that outside of any other acquisitions that we might do later this year, that we would expect the full-year expense and amortization of intangibles this year to be in that range of 10 to $10.5 million. And because there are different time periods for different types of intangible assets, it follows us off at different rates. But certainly the backlog number that we have there, which is the biggest part of that, is an amount that we expect typically to be between six and 18 months that we amortized that over.

We will reduce it. Assuming we don't do anything else to add to it within the next year, most of that will fall off.

Most of the $10 million?

Yes, but it will be in quarters, right?

And the steady decline? Thank you very much.

Bill Mackenzie, TD Newcrest.

I just wanted to follow-up on two things. One, what is the backlog that is on the balance sheet at the end of the Q2 on the asset side?

Do you have it there (multiple speakers). It could be the same as the number I gave you before, the 963 number. Yes, 963 million.

963 -- I'm looking for the amount of backlog that is on the balance sheet in the assets -- and the intangibles?

You're looking -- the amount that is being --

Amortized backlog that is in --

Okay. That -- yes, I have given our total backlog. That is not the number. I don't know. I don't have that handy.

We will have to find that for you. We don't have it broken down.

Okay. That's fine. And just a question on pricing, and Tony, you guys have done a great job in terms of reallocating resources away from segments of your business that are seeing some softness in delays like transportation in the US and Urban Land.

I'm just wondering presumably other players out there in the industry are doing the same, and you are getting certainly more than your fair share of that business. But historically in your experience, is there any lag in terms of when pockets of the market soften and there could be any kind of pricing reaction? Are you comfortable that the pricing in some of those markets are going to stay at reasonably healthy levels?

Yes, that is kind of a difficult question to answer again because I think every little area that we are in, it is a little bit different. And for sure, we're going to get some pricing pressures in areas that are very competitive. But at the end of the day, it is still about the ability to execute based on the price that you do get. And we will like others accept a lower price sometimes if the difference is between keeping some staff or not doing any work at all.

But there is a number of that built into our results because not everything that we are doing is at the highest level. Even when we report the consolidated margin in a particular practice area, there could be parts of that business that is getting a lower margin and some that is getting a higher margin. So there is always all of that, but what you see in our results is the end result, that there are some good ones and some medium ones and not so good ones in there. And that is the consolidated number that you see.

So when you see the overall margin fluctuate, that is why we generally try to indicate whether it is really the mix of projects or the type of things that we are getting or if it is simply execution on our part. And for the most part with the exception of when we talked about some transportation more cost time which we clearly improved, it generally is that mix of projects which affects our overall margins in those businesses.

Well, I'm glad we were able to answer all the questions in our 30 minutes that we had set aside. Since we have addressed all the questions, I want to thank everyone for joining us, and as always, Don and I look forward to speaking with you again at the end of the third quarter.

So thank you very much. We will sign off now.

Ladies and gentlemen, this does conclude your conference call for today. We thank you for your participation. You may now disconnect your lines, and have a great rest of the day.