Stantec Inc (STN) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Stantec 2009 Q3 earnings announcement conference call. As 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. Robert Gomes, President and CEO. Please go ahead, sir.

Thanks, Michelle. Good afternoon, everyone. I would like to welcome you to our 2009 third-quarter conference call. Joining me is Dan Lefaivre, our Chief Financial Officer. Dan will provide a brief summary of our results for the quarter. And I will follow with an outline of our market outlook. We will then address individual questions.

Before we begin, I would like to make you aware of our safe harbor statement and to caution you that we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 in the United States and applicable securities legislation in Canada.

By their very nature, forward-looking statements require us to make assumptions, and are subject to inherent risks and uncertainties that give rise to the possibility that our estimates, projections, expectations or conclusions will not prove to be accurate, that our assumptions may not be correct, and that our actual results may differ materially from those discussed in these statements. You will find more information about the assumptions and the material factors that were applied or could cause actual results to differ materially from those we discuss in this conference call in the Management's Discussion and Analysis included in our 2009 -- 2008 financial review.

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 Dan 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 third quarter of 2009. And I am pleased to report that we continue to manage our business effectively in a difficult economic environment. Our financial results improved from third quarter of 2008 and on a year to date basis.

During the third quarter we completed our 2009 annual review of goodwill. After completing our impairment testing for our four reporting units, US East, US West, Canada East and Canada West, we concluded that an impairment to goodwill existed in one of our reporting units, specifically, the US West. This impairment in the US West was due to fluctuations in the market and uncertainties arising from overall economic conditions, primarily relating to our urban land practice area. We therefore recorded a $35 million impairment charged to income. This charge decreased our Q3 2009 diluted earnings per share by $0.77. The goodwill impairment charge is non-cash in nature and does not affect our liquidity, cash flows from operating activities or debt covenants, and will not impact our future operations.

Dan will now provide a review of our financial results for the third quarter. Dan?

Thank you, Bob, and good afternoon. As Bob just indicated, we recorded a $35 million impairment -- goodwill impairment charge to income in the third quarter. Excluding the impact of the goodwill impairment charge recorded in both Q3 '09 and Q3 '08, net income was $25 million for the third quarter of 2009, and $23 million in the third quarter of 2008. While diluted earnings per share were $0.55 in Q3 '09 and $0.50 in Q3 '08.

We also completed our annual intangible asset impairment test in Q3 '09, and concluded that the recoverability of these assets exceeded their carrying values, and therefore, no impairment existed. In Q3 '08 we recorded an intangible asset impairment charge of $5.4 million.

Our results for the quarter were as follows. Gross revenue increased 10.5% to $384.2 million from $347.6 million in the third quarter of 2008. Net revenue increased 6.1% to $306.7 million from $289.2 million. Our reported net los was $10 million compared to a $30 million loss in the previous year. And diluted earnings per share were a loss of $0.22 versus a loss of $0.66.

On a year-to-date basis, gross revenue was up 19.8% to $1.18 billion dollars. Net revenue was up 16.2% to $968.1 million. Reported net income was $33 million. And reported diluted earnings per share was $0.72.

A detailed Management's Discussion and Analysis was included with our news release. And I would like to summarize a few highlights. As we reported in our Q2 conference call, the decline in organic growth, particularly in our Urban Land business, is as a result of staff reductions made earlier in the year. In Q3 we continued to adjust our staff levels to our available work backlog.

Gross margin percentages increased from 56.0% in Q3 '08 to 56.5% in Q3 '09, mainly due to our continued focus on project execution and the nature of projects in progress during the quarter.

Administrative and marketing expenses as a percentage of net revenue were 41.3% for Q3 '09 and 42% year to date. In Q3 '09 these costs were impacted by a $2 million charge for severance payments and costs associated with downsizing certain operations. Without this impact, our administrative and marketing expenses would have been below our targeted range at 40.7% for the quarter.

We generated strong cash flows from operating activities in Q3 '09. Our cash flows from operating activities increased to $62.9 million in the third quarter from $3.9 million in the second quarter. This was partly due to increase -- or a decrease, I'm sorry, of two days of net revenue outstanding to 86 days in the third quarter. And during the quarter we repaid $54.9 million of our revolving credit facility, which gives us sufficient capacity to facilitate future financing activities.

I would now like to give you just a brief update of our IFRS conversion project. All Canadian publicly accountable entities with calendar year ends are required to report their financial results using International Financial Reporting Standards, or IFRS, effective January 1, 2011. At Stantec, we have now completed the first two project phases, which include the preliminary planning and scoping phase and the detailed assessment phase. And we have started the solution development phase. To date, we are on target with the timeline in our detailed work plan.

Before 2010, we expect to make changes to certain processes and systems in time to record transactions under IFRS for comparative reporting purposes in 2011. At this stage of the project, we cannot practically quantify the financial reporting impact of the differences between Canadian GAAP and IFRS on our operations.

This concludes my summary for the third quarter financial results. Bob?

Thank you, Dan. To start, I want to mention the recent announcement of our plan to acquire the assets of Granary Associates, subject to certain conditions, in early November. Granary Associates is a Philadelphia-based firm with approximately 100 staff that specializes in project management in the design of healthcare facilities. We are very pleased to be welcoming these new colleagues to our team.

I would now like to highlight some of our new project awards. Our project activity during the quarter demonstrated our ability to differentiate ourselves in the marketplace by offering value-added specialty services to our clients. In the Environment area, we continue to obtain significant contracts in the dam and levee inspection, wastewater treatment and sewer management markets. For example, in the United States we have secured several long-term multi-million dollar contracts under which we are inspecting over 500 miles of levees and more than 100 pump stations in Arkansas, Indiana, Kansas, Missouri, Oklahoma, West Virginia and Kentucky for the US Army Corps of Engineers. Funded partly by the US stimulus package, this work is part of the Army Corps' Levee Safety Program which involves the independent inspection and evaluation of approximately 1,400 federally-authorized levee systems.

New project activity in the Urban Land Area underscored our focus on providing value-added specialty services and expanding our work in the public sector. We have been awarded a five-year contract with the US federal government to provide three-dimensional laser scanning services to the US General Services Administration, the GSA, which is the government body that oversees the construction and management of federal buildings throughout the United States. This surveying program, which is GSA's first nationwide contract, will cover 1,400 buildings and help the government manage its building data more efficiently.

New project awards in the Transportation area highlighted some of the specialty services we offer to the commuter, rail and public transit markets. In the third quarter, we were awarded a contract with the US Department of Transportation, Federal Transit Administration, the FTA, to provide project management oversight services for work completed by transportation and transit agencies across the United States over the next five years. Our responsibilities will include reviewing, auditing, monitoring and reporting on project implementation plans and processes to ensure that the FTA-funded projects are adequately staffed and managed and efficiently and effectively executed.

In addition, we obtained some small assignments related to both US and Canadian stimulus packages. In midtown Manhattan, we were contracted by the Moynihan Station Development Corporation to conduct traffic and transit analysis for railroad station improvement and development project at the Farley Post Office building. The project will serve Amtrak's Northeast Corridor and Empire Corridor rail lines, and is eligible for funding from the Transportation Investment Generating Economic Recovery or TIGER program.

And in the Elmira, Ontario area, we were charged with completing the detailed design as well as providing contract administration and inspection services for the reconstruction of various local roadways in and around the Samuel Street for the Township of Woolwich. This work, which will extend over a year, is a direct result of stimulus funding for infrastructure projects in Canada.

New contracts in the Industrial area reflected our continuing role in designing facilities for major clients in the power and resources sectors. In southern Saskatchewan we are providing multi-discipline engineering services for two crude oil storage terminal expansions for Enbridge Pipelines. We are also serving as the prime consultant on a project to expand Trans-Canada Turbine's testing facility in Calgary, Alberta. Once complete, the project will enable our client to test General Electric gas-fired turbines and use that energy to provide up to 40 megawatts of power during on-peak hours to Alberta's power grid.

Finally, new assignments in the Buildings area showcased our expertise in the design of healthcare and educational facilities and in sustainable design consulting. In Toronto, Ontario, we are part of a team selected as the preferred proponent for Phase 1-B of a redevelopment project, the Center for Addiction and Mental Health, CAMH. The project is being delivered through a public/private partnership and our responsibilities include full integrated design services. Phase 1-B will involve the construction of three new state-of-the-art buildings which, combined, will add 53,000 square meters of space to CAMH.

In the Educational sector, we are contributing buildings engineering, sustainable design consulting, building simulation and modeling, and commissioning services to the development of the Student Success Building at Metro State University in Denver, Colorado. The building will design to LEED Platinum zero net energy standards.

This is only a very small sample of the projects we are working on. Projects like these provide diversity and risk mitigation for our company.

Now I'd like to comment briefly about potential market conditions going forward. As we all know, the economic climate has made 2009 a challenging year. At Stantec, we have reduced our staff levels by approximately 850 people on a year-to-date basis, and by 200 in the third quarter. Our backlog has decreased by $73 million since last quarter, however, with 40% of this decrease due to the impact of foreign exchange. We continue to focus on managing our business effectively in this uncertain economic period as demonstrated by the strength and consistency of our operating margins. We expect our margins to remain stable for the remainder of the year.

As we move through to the end of 2009, we expect continued retraction in revenues due to the challenging economic environment, seasonality in some of our end markets, and reduction in work hours because of the holiday season. For 2010, we anticipate our organic revenue growth to be 2% to 3%.

Looking at our individual practice areas, we expect the following over the balance of the year. Although we are seeing positive effects from the addition of Jacques Whitford and Secor and we are able to attract larger, long-term projects, current economic conditions are such that we would expect organic growth in our largest practice area, Environment, to be flat in Q4 2009. In addition, we will be migrating JW's systems in Q4 which may result in slightly lower revenue and higher administrative and marketing expenses.

Our two principal markets are oil and gas which accounts for approximately 30% of our revenue in the practice area, and water and wastewater, which accounts for about 25%.

We expect organic growth in our Buildings practice area also to be flat. We continue to hold a top-tier position in the buildings market in Canada where we do about 80% of our business. Looking ahead, we believe that our expertise in the Healthcare and Education sectors will mitigate the impacts of the current economic slowdown on this practice area. Our principal Building sector is healthcare which generated approximately one-third of our fee volume in Q3. This is an area that is also increasingly being delivered through a public/private partnership model. Going forward, we will continue to leverage our success in the P3 healthcare market in Canada to strengthen our position in the United States.

We expect organic growth in our Industrial practice area to range from flat to a moderate decline for the balance of the year. Although commodity prices have rebounded over the quarter, we have not yet seen this translate into reactivated or new project starts. We anticipate that project activity will increase, but this may not happen soon enough to have a positive impact on Q4.

We expect revenue generation in our Transportation practice area for the rest of 2009 to continue to be consistent. Most of the work we do in this practice area is for the public sector. As well, the US and Canadian stimulus packages appear to be preventing the deferral of certain transportation projects, and are accelerating some previously deferred projects by stabilizing project funding in the transportation sector. Our principal Transportation market is roadways, which generates more than half of our revenue and we're becoming increasing involved in transit and rail-related work.

We expect revenues for our Urban Land practice area to continue to be weak over the rest of the year. As we have indicated previously, our Urban Land practice has experienced a significant decrease in net revenues, operating earnings and personnel because of the depressed economic conditions and the slowdown in the housing market in the United States.

In response to these market conditions, we continue to monitor our short-term backlog and to match our staff levels to the work available. We also continue to pursue public sector and nonresidential related projects in this practice area and to use our staff on projects undertaken by other practice areas.

Our Urban Land practice now contributes about 19% of the gross revenue in our US West operations year to date, compared to approximately 60% for the same period in 2006 when economic conditions were favorable for the practice.

In conclusion, for the remainder of 2009, we expect three or four of our practice areas to be flat, moderated by one or two weaker practice areas. However, it is important to remember that altogether we operate in well over 50 different sectors of the economy. And each sector has a different client group. At any given time, we are working on many projects with many clients. That is why quarter after quarter we are able to continue to perform. Our business model continues to enable us to react positively to whatever market changes occur.

This concludes our comments for today. Dan and I are now available to answer any questions you may have.

The conference call operator, Michelle, will explain the question procedure.

Thank you. (Operator instructions.) Your first question comes from Bert Powell, BMO Capital Markets. Please go ahead.

Thanks. Bob, when you talk about 2% to 3% organic growth next year, is that start out negative in the first half and bigger in the second? Or do you start to see organic growth positives in Q1?

I think it's going to be flat in Q1. I see it ramping up as the year progresses, Bert. Certainly, we see Q1 as being a flatter period for the year. That could even progress into Q2. But I think you'll see as 2010 continues, we'll see the organic growth pick up as the year goes. But I would expect Q1 to be flat.

Okay. So more looking like a second-half story?

Yes.

Okay. And then before I get back in queue, the -- in terms of the acquisitions, that's obviously been a big part of the Stantec story and I think most folks anticipate that. At this point, based on what you're currently working on, is it still reasonable to expect that you could increase your headcount by 15% in 2010 through acquisitions? Or is that even something, given the current state of flux, that you're even contemplating at that level of magnitude?

No, we know the law of large numbers is going to challenge us as we continue to get larger. That 10% to 15% acquisition growth is bigger numbers every year. But we do believe that we have sufficient opportunities in the marketplace. We're talking to a number of firms at this point in time. And actually, are expanding our program to start talking to firms that we realize we may be not acquiring for two to three years down the road. So I think our acquisition program is actually gaining speed, knowing full well that we have that challenge ahead of us with regards to the numbers we're going to have to continue to acquire to meet our projections. But we're still comfortable with our projections.

Okay, thank you.

Thanks, Bert.

Thank you. Your next question comes from Anthony Zicha of Scotia Capital. Please go ahead.

Hi, good afternoon.

Good afternoon, Anthony.

Hi, Anthony.

With the SAFETEA-LU expiring in September and then with the federal government rescinding some $8.7 billion of states' highway contract authority at the same time, are you noticing any slowdown of -- or project deferrals in the US transportation practice area?

No, we haven't. I mean, right now it's being expanded on a month-to-month basis. But there is some uncertainty. And I guess it's that uncertainty if anything that is slowing down. But we don't expect that that's going to be resolved in 2009. Our hope is that in early 2010 there will be a resolution to that. So at that this point in time there are some uncertainty in the funding that have slowed it down. But we do see that being resolved early in 2010.

Okay, great. I'll get back in the queue. Thanks.

Thank you.

Thank you. Your next question comes from Sarah Hughes, Cormark Securities. Please go ahead.

Just wondering, in terms of the cost cuts you've made on the admin and marketing side over the past year, just as organic growth returns, wondering if -- how much of those are permanent or will we see those go back up with an increase in activity levels?

I think -- I mean, it's our goal that those improvements we've made in the efficiency of running the business is going to translate to as we grow again we're going to keep those percentages at the same rate they're at. We feel pretty comfortable that the programs that we've instituted can work well going into the future. So we don't see those creeping up on us. And that's certainly going to be our goal to focus on that.

And so could you see that come in below your kind of 41% to 43% target level?

Our target is still 41% to 43%. With the one-time cost, you're right, this period we're a little bit under. But as we move forward, I think you're going to see, in 2010 certainly, a little bit more reinvestment back into some of our marketing efforts. And that'll keep that administrative cost still within our range. But in a time like this with 2010, I think we're going to be really focused in investing in the top line. And so those costs will stay within our range. I don't see them dropping down below it.

Right. But would you be surprised if they go at the top end, like on a consistent basis? I know it varies on a quarterly basis.

Yes, it varies on a quarterly basis. I don't see it trending to the top. I think we've got some pretty good systems in place to invest that money wisely in business and development. So no, I don't see it trending to the top. But certainly it's not going to fall below the range.

Okay, great. Thank you.

Thanks, Sarah.

Thank you. Your next question comes from Sarah O'Brien of RBC Capital. Please go ahead.

Hi.

Hi, Sarah.

Bob, just on your comment on the environmental revenues being flat year over year, is that flat even including the Jacques numbers? So basically we should look for the same kind of dollar figure as last year?

Yes, that's correct. Jacques was with us basically throughout 2009. So for 2010 to be flat, that would include Jacques numbers.

Okay, meaning there will be some pretty significant organic decline on -- in this segment overall?

We've already actually had that organic decline even in this quarter. So that's already occurred.

Okay. And can you just talk about -- I mean, like when we saw the Chevron contract. It looked pretty significant and could drive some pretty significant growth. I wondered when do you expect that to kick in and are there any other such contracts out for bid that could actually change your 2% to 3% organic growth expectation for next year?

That specific project with Chevron was a project that was over three to five years. And we did know that it was going to be weighted more towards the end of that timeframe. At this point in time we're still going through the negotiations with them with regards to where -- which projects we're going to take. It was a four-part, four consultants involved in that. And the first stage was just negotiating with Chevron with regards to which projects we're going to work on and in which country.

So we see that ramping up in 2010. It did not have much of an impact with us for 2009, unfortunately. Going forward, other projects. The one good note, even though we've had some retraction in backlog, the opportunities in our pipeline are increasing. So we're seeing lots of opportunities. The only concern we have, and that's translated into only a 2% to 3% organic growth forecast, is we're concerned how quickly those translate into real opportunities. So we're tracking a lot of them, but how many of them actually come to real projects and real RFPs is where the concern lies.

Okay. And just maybe a last one on the stimulus money. That's included in your 2% to 3%? Is there anything -- when do you expect that money to really kick in? We've seen some trace projects there, but any significant that could be on the horizon in 2010?

We're seeing lots of opportunities. We don't see anything significant in the early part of 2010. But there are some more major projects coming out -- water and wastewater and transportation that we see, that it's just a matter, Sarah, how quickly are those going to get to the market? We all thought that they'd even get to the market this fall. And that's -- just hasn't happened. So we are anticipating that they're going to get into the pipeline and into -- be real projects. But that sort of translates into the fact that we see organic growth maybe being higher in the second two quarters rather than the first two quarters.

Thank you. Your next question comes from Bill MacKenzie of TD Newcrest. Please go ahead.

Thank you. Just -- I was wondering if you would comment on the acquisition pipeline that you're looking at. And specifically, if there are any particular practice areas where you're seeing greater opportunity. Or if there is a particular strategic focus towards any of the specific practice areas?

Stantec is a pretty diverse company in the number of practice areas we have. So I'd have to say our acquisition program is as diverse. Certainly, our priorities would be in some of where we see some more opportunities coming quickly. For example, in power and the transmission and distribution area, in our industrial sectors and transportation sectors are certainly some of the higher priorities we'd be looking for in our acquisitions. But that being said, you look at also being opportunistic, that if you see a good company, no matter what sector they're in, we're going to be interested in them. But from a prioritization perspective, we certainly are looking more in the transportation and power sectors.

Great, thanks. And then in terms of the backlog, is there any seasonality in the backlog? Or has there been -- with the Jacques acquisition, has the seasonality of the backlog changed at all? I'm just wondering if you look at the sequential increase Q2 to Q3. Is there any seasonality in that or is it just the foreign exchange and the general market that's driving that?

Well, there is -- as we said in the call script, there is -- 40% of the change was as a result of FX. But some of our work in some of our sectors is seasonal. And Jacques probably does work within some of those areas. They do a lot of field work that -- in [the end in] Canada where they can't do in December and January. So there is some seasonality to Jacques. It's not material, though, in the overall basis. It's just in December a lot of that seasonality, combined with the holidays, does have an impact on it.

Okay. And then just one last question. I appreciate there is still clearly a focus on acquisition growth here. But as it gets more difficult to sort of realize the same rate of growth as you had in the past from acquisitions, are there any considerations to dividend implementation and using your capital for things other than acquisitions?

Well, every year we sit down and review our strategic plan with our Board. And at that point in time we provide our Board with our goals for growth. And at this point in time we still see the opportunities for organic and acquisition growth in the 15% to 20% range. So given today, we still feel that that that's the best way to invest the money for the shareholder.

That being said, every year we do go through that analysis and we do that analysis with the Board. And we essentially annually decide how we will proceed in the next year. So for this year we still feel that 15% to 20% growth is achievable. So therefore, dividends aren't in our viewpoint for this year.

Thank you. (Operator instructions.) Your next question comes from Gregory Jackson of Raymond James. Please go ahead.

Good afternoon.

Good afternoon.

Hi, Gregory.

Just looking at your gross revenue to net revenue ratio, the last couple of years it's been trending up. And if you go back to, say, like as far back as '95, it had been trending down for some time. I realize that's a function of some of your recent acquisitions. But is it reasonable to assume that that number is going to come down in, say, in 2010 or 2011?

I think you see the same trend coming down. As we continue to get larger and continue to acquire companies that are complementary services, our goal is to obviously -- always cross-sell those services. So instead of going to a sub-consultant and using them, the goal will be to continue to use internal services to provide that work. So as effect, that will reduce the difference between gross and net revenue. So I think you'll see that trend continue to go down as we continue to grow.

Do you have some type of internal target that you're aiming for?

Not really. I mean, it's just an ongoing process that wherever we see the opportunity of being able to provide that service for our client instead of using a sub-consultant, we do it. But we don't have a specific target. We review all our subcontractors lists and we determine where we have the capabilities to provide that service, and then we act on it. But there isn't specifically a target for a trend or a number.

Okay. And if I could just get guidance on CapEx for the remainder of the year and 2010?

I'll let maybe Dan answer that.

I'm not sure that you'll see too much variation in our CapEx. That's remained fairly consistent. It's been a little lower this year. I think it's just as a result of some of the contraction that's taken place and us paying attention very closely to these costs. But it's not going to be significant through to the end of the year. And I wouldn't expect it to be highly variable.

So for the fourth quarter of -- or for the year-end should we expect say, somewhere in the $18 million to $20 million range for your CapEx?

On a year-to-date full-year basis?

Yes, on a full-year basis.

That's as good a number as any, I think.

Okay.

We certainly don't see any major expenditures between now and Christmas, though.

No.

And then that would be something -- that $18 million to $20 million is also consistent for 2010?

I think in our forecast for 2010 it's slightly higher, Gregory. It's probably somewhere in the neighborhood of $30 million.

Okay, thank you.

You're welcome.

Thank you. (Operator instructions.) Your next question comes from Anthony Zicha of Scotia Capital. Please go ahead.

A quick follow-up, Bob. You mentioned that you experienced some pricing pressure as a result of increased competition. Do you expect this trend will continue or do you think that things will get better in 2010?

Actually, we haven't seen a significant change. We really haven't seen -- we always have pricing pressure in a lot of our sectors. We only bid for 30% to 40% of our work and we don't really see that as being a huge impact. And we haven't seen a change in it, to tell you the truth. You'd almost expect that you'd have more competition. That's really different from sector to sector. The only sector that I would say that we're seeing competitive pressure is probably in the Transportation sector.

Okay. Well, thanks very much.

Thank you.

Thank you. Your next question comes from Richard Stoneman, Dundee Securities. Please go ahead.

Good afternoon, Bob, Dan.

Hi, Richard.

Severance costs in Q3, were they about $2 million matching Q2?

Yes, the severance costs, Richard, and the rationization of certain of our offices were about $2 million in total. Yes.

So that brings us to about $9 million year to date?

Yes, $9.2 million.

And would you expect severance costs in the same range in Q4 or would they go down?

I think we're still seeing them trend down, Richard, from where they were earlier in the year.

I think we've gone through and done most of the major rationalizations we've had to through the year. So I see that certainly trending down in Q4.

And a second question, if you don't mind. The number of firms available in North America, do you have any data on how many firms would be available with, say, in excess of 500 people in North America that might be available for acquisition?

Yes, I mean, we certainly track that fairly closely and we're starting to develop as much data that we can on that. As we said, in the past we feel that we need to start ramping up some of our acquisition activities. And that starts with developing a good funnel of companies. So we've analyzed it and there are well over 120 companies that hit that category in North America. That's between, say, revenues of $70 million to $500 million, which that's maybe above where our sweet spot has been, but it probably is where our sweet spot needs to be going forward. So we certainly are starting to start to track and identify who they are and start doing some reviews. So my guess is anywhere between 100 and 150 companies meet that category, that parameter.

Thanks, Bob. I'll get back in queue.

Thanks, Richard.

Thank you. Your next question comes from Bert Powell of BMO Capital Markets. Please go ahead.

Thanks. Bob, just wanted to talk a little bit about the margins in the -- the gross margins in the environmental business. Pretty strong year over year, and pretty strong relative to the trend in the first half of the year. Is there anything specific that's accounting for that? Is that stable at these levels? It just looks particularly strong.

Especially in Q3. I mean, from Q2 to Q3 we had a good jump. And it really is affected by just the project mix you have. But we certainly see it in environmental businesses and the type of environment business we're in. We're going to be at the upper end of the range for our gross margins for our sector. So having them in between the 56% to 58% range is where we would see environment continuing going forward based on the type of work we're in.

Okay. So this is kind of -- this is a high watermark quarter for that business?

Yes, at 58.6% that's certainly at the higher upper end, but not unusual. It's good to -- I'd like to be at the 58% range all the time. But it's certainly at the higher end.

And Dan, just quickly, what was the total headcount for the -- as you ended the quarter?

People?

Yes.

Total in my dashboard this morning was 9,350. I look at it every day.

I don't have the exact number right in front of me here.

Yes. But that's what I show -- 9,350.

That's as of today?

That's as -- well, it's (inaudible). End of the quarter (inaudible) okay.

Okay. Thank you very much.

Okay, thanks.

Thank you. Your next question comes from Benoit Caron of National Bank. Please go ahead.

Yes, thank you. Good evening, everyone. Just briefly -- I missed the early part of the conference call. Could you give us some clarification on the backlog and the staffing levels at the end of third quarter?

Okay. So at the end of the third quarter we had about 9,500 staff. And the backlog, I believe, I'm just going to get the number here. Was -- at the end of the quarter was $970 million, which was down from last year. I think we commented on the fact that our backlog was down 40% as a result of FX, down to that $970 million number.

All right, good. Thank you, that's all I had.

Thank you. There are no further questions at this time. I'll turn the conference back to Mr. Gomes.

Okay, thank you. If there are no more questions, I'd like to thank you all for joining us today. And I look forward to speaking with you again in the near future. Thanks very much, everyone.

Bye now.

Ladies and gentlemen, this does conclude the conference for today. You may now disconnect your line and have a great day.