Stantec Inc (STN) 2010 Q3 法說會逐字稿

Welcome to Stantec Inc's third quarter 2010 earnings results conference call. At this time, all participants are in a listen-only mode. And following the presentation, we will conduct a question-and-answer session. (Operator Instructions) Today is November 4, 2010 and as a reminder this conference is being recorded. It will be available for replay on the investor section of stantec.com. It is now my pleasure to introduce your host, Mr Robert Gomes, President and Chief Executive Officer. Please go ahead.

Thank you, Sarah.

Good afternoon everyone. And welcome to our 2010 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 material factors that were applied, or could cause actual results to differ materially from those we discuss in this conference call, in the managements discussion and analysis included in our 2009 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 2010. I am pleased to report that we achieved strong performance, as well as some strategic growth objectives which moved us closer to realizing our vision to become and remain a top 10 global design firm. Traditionally, the third quarter is our strongest quarter of the fiscal year and Q3 2010 was a record quarter for us, as we reported the highest earnings in our Company's history. Dan will now provide a review of our third quarter financial results. Dan?

Thank you, Bob and good afternoon, everyone. As Bob just indicated, the third quarter of 2010 was very productive for Stantec. Our gross revenue in Q3 2010 increased 4.2% from Q2 2010. Compared to Q3 2009, our gross revenue was CAD386.7 million, up CAD2.5 million. With the completion of six acquisitions during the quarter, revenue from acquisitions increased to CAD19.4 million, from CAD6.8 million in Q2 2010. Our net revenue in Q3 2010 was up 3.5% from Q2, and compared to Q3 2009, our net revenue was CAD314.5 million, up CAD7.8 million. Our gross margin as a percentage of net revenue was 56.2% in the third quarter, and 55.8% year-to-date, continuing to fall within our targeted range of 54.5% to 56.5%.

Our administrative and marketing expenses decreased to 40.8% during the quarter from 41.3% in Q3 2009, mainly due to operating more efficiently and managing our costs. We expect, however, that these expenses will be marginally higher in Q4 2010 because we will be integrating staff and systems from our recent acquisitions.

Reported net income was CAD32.1 million in the third quarter, compared to a loss of CAD10 million in Q3 2009. Excluding the impact of a CAD5.9 million after tax gain on the sale of an equity investment in the quarter and of a CAD35 million non-cash goodwill impairment charge in Q3 2009, net income increased 4.8% to CAD26.2 million during Q3 2010. Reported diluted earnings per share in the quarter were CAD0.70 compared -- I'm sorry, without the impact of the gain on sale in the equity investments, diluted earnings per share were CAD0.57. As Bob mentioned, our net income and diluted EPS results in the quarter were records for us and are further evidence that we are continuing to manage our costs and operate effectively. During the quarter, we also reached an agreement with our lenders to increase our credit facility to CAD350 million, and extend its maturity to August 2013. This will ensure that we have the flexibility and funds to support our future activities. We financed all of our acquisitions in the third quarter through a combination of cash and debt.

Overall, we are very pleased with our third quarter results. The quarter was very active, showing solid growth and we continued to manage our operations effectively. Bob?

Thank you, Dan. As we mentioned in our news release this morning, we completed six acquisitions during the third quarter. We acquired IEA Holdings in Maine, WilsonMiller in Florida, Natural Resources Consulting in Wisconsin, Communication Arts in Colorado, Anshen & Allen Architecture in San Francisco, Columbus, Boston and London, England, and ECO LOGIC Engineering in California. Soon after the quarter end, we acquired Street Smarts in Georgia. The acquisition of these firms enhance our service offerings in all five of our practice areas and added approximately 760 staff to our operations. Through the acquisition of Anshen & Allen, we significantly expanded our healthcare design practice and entered a new international market in the United Kingdom. Next month we expect to complete our acquisition of Burt Hill, which will further expand our international presence.

I would now like to highlight some of our new project awards. Our project activity during the third quarter showcased our ability to attract repeat business with existing clients, as well as new contracts with our new clients as a result of the high quality of our work. For example, in the transportation area, we are co-leading with Jacobs Engineering, an eight firm team selected to design a three mile extension of the Metro Light Rail system through downtown Mesa, Arizona for Valley Metro Rail. This is the third section of the light rail system they have designed for this long-term client.

In the buildings practice area, we secured a contract with Rady Children's Hospital, a continuing client in San Diego, California. Our task is to complete the architecture, interior design and laboratory planning for the hospitals new 160,000 square foot ambulatory and research center.

In the urban land area, work continued on Vanier Woods/Lancaster East at 130-hectare residential development in Red Deer, Alberta. We are providing planning, engineering, landscape architecture, geomatics, and construction management services for the development.

In the environment practice area, we are providing environmental permitting, endangered species evaluation, wet lands mitigation and other services for the Marcellus lateral project, a 240 mile liquid natural gas pipeline, extending from West Virginia to Ohio.

In the industrial practice area, we were chosen to design upgrades to the Diavik Diamond Mines site north of Yellowknife northwest territories. As usual, I've highlighted only a small sample of the projects we're working on, completing many projects for many clients mitigates risk for our Company. As always, we are thankful to our clients for their continuing trust in our services.

Now I would like to comment briefly about the potential market conditions for our services going forward. Overall, we have a strong backlog of work across our practice areas. Without the impact of foreign exchange, our backlog increased by CAD21 million in the third quarter over Q2 2010, and by CAD38 million over Q3 2009. This performance again reflects the renewed confidence we are seeing in some of our markets as well as growth from acquisitions which is resulting in new and continuing projects. We believe that we can continue to improve our backlog level by managing our business effectively and focusing on our top clients through our account management program.

During the quarter, we met our expectations for organic growth in all practice areas except environment and industrial, which continued to be affected by the slower than anticipated recovery in the US economy. Internal growth declined in our environment practice area year-to-date in 2010 over 2009, mainly because several large new environmental projects were not released for start up as quickly as expected. Internal growth also declined in our practice -- industrial practice as a result of the slow start up of projects in the oil and gas, and energy sectors. Although these delays affected our revenues in Q3, we are optimistic that these projects will proceed in 2011.

Looking at our individual practice areas, we expect the following for the end of 2010. We believe that our buildings practice area will end the year with a modest increase in revenue compared to its annual revenue for 2009. Our strategy going forward is to continue to focus on our key capability areas. Higher education, science and technology and healthcare. And to use our success in the Canadian healthcare market and our recent acquisitions to strengthen our position in the United States. We also have implemented strategic initiatives to take advantage of economic recovery in the commercial and retail markets.

We believe that our environment practice area will end the year with a modest decline in revenue compared to its annual revenue for 2009, because of the continuing delays in the commencement of projects in the environmental market and a stronger Canadian dollar in 2010 compared to last year. However, we expect that our current standing amongst the top 10 world environmental service providers will continue to help us win larger, long-term projects with national and international scope. We are also well positioned to obtain projects generated by our clients' needs to meet increasing regulatory requirements and to rehabilitate aging environmental infrastructure.

We believe that our industrial practice area will end the year with a modest decline in revenue, compared to its annual revenue for 2009. However, with the stabilization of commodity pricing, we believe that we will see a continued strengthening of activity in the mining and resource sectors. We are in a good position to take advantage of future opportunities in the industrial market, because of our geographic diversity, expertise and good client relationships.

We believe that our transportation practice area will end the year with stable revenue compared to its annual revenue for 2009. Overall, we expect most of our transportation groups to see consistent levels of activity over the rest of 2010. Short-term extensions to the US Federal Transportation funding have helped maintain activity levels. But factors such as lower tax revenues, federal and state deficits and the lack of long-term US legislation for transportation funding may cause delays in future planned projects. Our transportation practice will continue to focus on completing more local, smaller projects in the United States and on pursuing and executing larger P3 projects in Canada for the rest of the year.

Although the expected recovery of the residential sector in the United States has been slower than forecast, we believe that our urban land practice area will end the year with stable revenue compared to its annual revenue for last year. Where are well positioned for a slow recovery in the housing market and we continue to diversify our client base and use our reputation to win projects in the non-residential public sector.

In summary, we believe that our overall outlook is to end 2010 with stable revenue compared to our annual revenue for 2009. We are still experiencing the impacts of increased competition and project delays resulting from the general economic downturn in 2009. However, we believe that our diversity, client mix and flexibility will help us continue to adapt our business to improving economic conditions.

Our outlook for 2011 is similar to that for 2010. We expect to see continued slow growth in our US operations and good performance in many of our Canadian operations. We are also cautiously optimistic that we can take advantage of our continually growing US presence to increase our business in the United States as the economy recovers. This concludes our comments for today. Dan and I are now available to answer any questions you may have. The conference call operator will explain the question procedure. Sarah?

(Operator Instructions) Please stand by for our first question. Our first question comes from Anthony Zicha with Scotia Capital. Please go ahead.

Hi, good afternoon, gentlemen.

Hi, Anthony.

Bob, with reference to Stantec's proportion of US businesses declined, is this still a trend that's in effect and are you seeing some positive signs of a pick-up in the US business? My other part of the question is if we look at the environment, environmental business decline, we've seen negative internal growth, can you give us some more color on the client behavior, like why is it in the decline? Is it more budgetary or is it just that business has basically paused because of the whole economy, federal funding? When can we anticipate a turn around? Thank you.

Well, the first part of the question with regards to our US operations, our US operations haven't done as well as we expected them to do this year, but they have done better than last year, both in top line and bottom line. So, we see that as a positive sign. The negative is it just has not grown as quickly as we thought. So, our US operations, we're happy with the performance and we're happy with this little growth we've seen there, but certainly the US economy has been lagging, specifically with regards to the environmental practice area. The projects there just haven't gone ahead. There has been lots of delays by many of our clients, not canceling projects, just either advancing them very slowly or delaying them and advancing other projects in other areas of their business.

So, one example, to just provide some transparency in that, is something like our Chevron project that we were awarded last year, CAD250 million project. We're just seeing that project go ahead now. It has been very slow off the books from Chevron and that's typical. The only thing we can point to is that all the companies in the US and larger firms are also very cautious on the overall economy. So, they've just been very slow in advancing their projects and that's the biggest issue we've had with our environment and to a certain degree with our industrial practice areas, just that overall cautiousness of what's happening with the US economy, is there going to be a double dip and it's just causing companies to re-evaluate their capital programs and re-evaluate decisions.

Then again, there should be some good pent up demand going forward, probably in 2011.

Yes, that's exactly what we point to is that the clients are still there. We haven't lost those projects. They've just been delayed. So, we would hope that, that's pointing to a stronger 2011 than we had thought. But we thought the same thing at the beginning of 2010. So, we're being as cautious now as our clients are. We don't see 2010 being any -- 2011 being any worse, but still concerned that the economy in the US is just very slow. Growing, not retracting, but certainly just very slow.

Okay. Well, thank you.

You're welcome.

Thank you. Our next question comes from Carolyn Dennis and she is with Dundee Securities. Please go ahead.

Good afternoon.

Hi, Carolyn.

My question is to do with staffing levels. I was just doing the math from the numbers that we have in the report. I don't think you gave an actual staff number. I was wondering if you could give that, what the FT count was at the end of the quarter and talk about whether you've been still in the hiring trend that you were on last quarter or have you had to do some rationalization just given the near term outlook in the environmental and the industrial. Thanks.

So, this quarter we actually had a reduction of 200 staff from last quarter, which overall was really just seasonality. As we get into September and the Fall, late Summer and Fall, we start laying off some of our seasonal staff that we have. So, in the first quarter, I think we hired about 100 people, 300 in the second quarter. We actually had a retraction of 200 staff in the third quarter. So, year-to-date we're still up. Certainly the third quarter, that's somewhat expected, Q3 and Q4. We're going through the seasonality issues. There were probably some of that was also rationalization of staff in the environment and industrial practices, as those projects continue to lag. At some point in time you've got to deal with the staffing issues, but some of it was also seasonality. But 200 is a relatively small number for the quarter.

That's great. Thank you very much.

You're welcome.

Thank you. Our next question comes from Sara O'Brien with RBC Capital Markets. Please go ahead.

Hi.

Hi, Sarah.

Can you talk a little about the competitive environment in the US? Since the economy is lagging a little bit or taking time to tick up, we're hearing from other engineering firms that situations are a little bit more competitive, the margins may see a bit of a squeeze. What's your outlook for both the environmental segment, but also the buildings practice where you're just growing into some acquisition additions there?

Sure. In environmental, there certainly are -- there is competition. There always is competition. But certainly when there is less work out there, firms certainly squeeze margins and take a little bit more risk. Usually in that practice area, though, we're dealing with very large clients who really do understand the business and understand the pricing requirement. So, there is margin pressure, but that really doesn't affect our gross margins significantly. As you all know, our gross margins vary by maybe 1% or 2% at any point in time. So, some of that's competition and you deal with it. You try to work for good clients that understand the value.

In the building section, certainly that's been an area where there's a lot of firms hurting in the US that are now trying to go after projects that we're competing on. The good news there is the projects, our focus is in healthcare, science and technology, higher education. Usually those are very complex facilities. They require very special expertise. They require a very long portfolio of projects you've done before. So, even though people may be competing, if they can't show that, if they can't show that expertise, they can't show the portfolio of complex projects, then pricing becomes somewhat irrelevant. If they can't compete and do the work, doesn't matter what price they offer. That's why we're focused in those areas in the US. We're not into high levels of commercial. We're not into the retail or condo market there. We're very focused in the more complex buildings because we find that the competition is less in those areas.

Okay. Great. Given that you have seen a deferral of some of the contracts in the environmental segment, would you expect that the margin in that segment could see some pressure in 2011, based on the way they were quoted in 2010? Or do you not see any pressure at all from that?

Not unless they come back to us and say renegotiate. In a lot of these cases, we've won these projects already. We already have a price established and contract terms and conditions agreed to. In some cases, the client will come back and say we want you to shave some price, cost off. Bottom line is, our costs don't go down year to year. The only way that we're going to shave the cost is by reducing scope. We've had those discussions with clients. We give them the best price we can. If they come back to us, our point of negotiation is we really can't cut costs more. That could happen. But again, it really depends on your client relationships. Understanding your clients and having a good relationship with them is where the value comes in and where you can try to avoid those circumstances, where they're going to come look for better price.

Okay. And just a last point, on buildings, just, again, we've been reading that some of the scope changes have been taking effect and that the greenfield buildouts have become more an expansion of what's already there in some healthcare facilities. Do you see that hindering the growth profile from where you stand into F 2011 or do you still see that as a pretty hot sector?

We certainly still see that as a long-term hot sector as well. In Canada I think we're experiencing that now and we still see that as a growing sector in the United States. That's why we're investing in it now. We feel it's a long-term growth sector for us.

Okay. Great. Thanks.

Thanks.

Thank you. Our next question comes from Paul Lechem with CIBC. Please go ahead.

Thank you. Good afternoon.

Hi, Paul.

In the US, with the stimulus funding, I guess the same thing's happening in Canada, it's coming to an end soon, wondering the impact of what that could do to your public sector business and also if there's any impact you expect from the midterm elections, any uncertainty that might cause on public projects and delays that could come out of that?

With regards to the stimulus programs, we've been pretty consistent for the last 18 months that we really didn't see those programs having a major impact on us. And so, therefore, the discontinuance of those programs really isn't going to have an impact on us. That program certainly back-stops some projects and maybe provided funding to keep projects going in 2009. We really haven't seen any impact in 2010 and don't see the fact that there won't be a specific stimulus program in Canada in 2011 having much of an impact on us.

And the midterm elections in the US, certainly there's been a shift and the Republicans now in somewhat control. It actually will provide some certainty there won't be any further debates because there probably won't be a lot going on in the US from a long-term perspective. There's some good and bad with that. The good really is now I think a lot of states are just going to get on with it. They were sort of waiting to see what the outcome is there. You're not going to expect a lot, so you better get on with things. And we've always said that there's still a huge amount of investment in infrastructure in the US regardless of what's happening at the federal level, states and municipalities still have to invest some money in infrastructure and that is still a huge market for us, and that's still a market that we're going after. So, even in a slow economy in the US, we still feel there's lots of opportunity for growth for ourselves.

Okay. Thanks. If I could squeeze one more in. Just on the acquisitions, you've been pretty active in the last few months on the acquisition front. What is the integration effort entail? Is there -- you mentioned there might be some higher costs. Is that just sort of integration of back office or is there anything along reorganization and rationalization that we should expect?

No, the integration is usually getting staff on to our systems, getting their projects into our enterprise system, getting their staff and clients loaded into our enterprise system. There's some training then of our systems and processes that we have that staff have to go through. There is -- I can let Dan talk specifically about some of the integration efforts that we really have fine-tuned over the last 10 years and for all the acquisitions to date, except for Anshen & Allen, they've all been fully loaded into our enterprise systems. So, you have the staff and the clients and the projects for every one of our acquisitions, except Anshen & Allen, already loaded in. Dan can maybe put some visibility. We focus quite heavily on our integration processes, trying to ensure that they don't interfere with the business and are done very efficiently. Dan, you want to add any more color to that?

Bob indicated we were well down the road in terms of getting a lot of these acquisitions integrated into our business systems. That's just one one step in the process. It's a matter of getting the staff trained up. Getting the projects functioning so we can get billings back out the door. That's where some of the additional integration costs come in that we're expecting in the fourth quarter.

Order of magnitude, the additional costs, can you give us any?

It's not huge, Paul. We're just cautioning that you probably won't see the same level of efficiency that you saw in the third quarter because there will be some more administrative costs incurred.

I got you. All right. Thanks for that.

Thank you. Our next question comes from Pierre Lacroix with Desjardins Securities. Please go ahead.

Thank you. Good afternoon.

Hi, Pierre.

First question, just wondered on the backlog side, what was the impact of the acquisition in the quarter?

We actually haven't tracked that, Pierre, because as Bob talked about, we integrate these acquisitions fully and so we don't track the acquisition backlog specifically. We are able to tell you what's FX related and what is -- what our total number is and I think Bob indicated that the total backlog had increased by CAD21 million, excluding the impact on FX.

Even including FX it went up CAD6 million too. So, the backlog is now at CAD101.008 billion.

Just also point out that the backlog number that we provided excludes the backlog of ECO LOGIC and ANA because we don't have those numbers yet.

Okay. Right. Okay. Thank you for that. Looking at the margins, building side, you provided some explanations, but it's been trending down since the last eight quarters. Competitive I guess issues in the US, but is there any major reasons why it's going down and do you see that kind of stabilizing and going forward, what should we expect there?

Our gross margin is usually very stable. It's more so impacted by the mix of projects we have. Specific to the buildings group, we do have a lot of P3 activity going on. If you have a P3 pursuit in a quarter, which we did have, that causes some margin pressure because as we've explained in the past, when we pursue a P3 we do the upfront work at a slightly lower margin and then when we get a success fee, we incorporate that success fee to get a higher margin. So, if you have a lot of P3 pursuit activity in a quarter, that could have a point or two effect on your margin. That's probably the impact in buildings. But it's a relatively minor shift quarter to quarter.

Okay. I see then that you're still bidding quite heavily on P3s and the bidding is offsetting the wins you're getting.

It just has a slight impact if you're doing a couple bids in a quarter, it will have an impact because we do that work at a slightly lower margin.

On the urban land side, the margins have been trending up quite nicely in the last eight quarters. Is the competitive situation in that segment an explanation of the margin situation there?

Our urban land business has always been a high margin business for us. That's just the way the work is done and the clients from a competition perspective, you're probably right. There isn't an awful lot of competition in that sector right now because of what's happened in the last three years, there's been a lot of companies that either disappeared or have moved on to other things and our focus has always been to stay in that business as it is a high margin business, and we just continue to drive a higher margin as the work comes back in. So, a lack of competition could probably be pointed towards that one.

Just one last question on the debt to equity ratio. You mentioned in the past that you don't want this to go much above 0.6 times. To which extent you're willing to go above this level given the pipeline you have in front of you?

Our actual target is we don't like to go above 0.5 times, but right now I believe we're at 0.43, which is just marginally higher than the second quarter, even given the number of acquisitions that we did complete in the third quarter. So, it shows pretty positive cash generation. But we have said in the past that we won't go above that 0.5 to one for the right acquisition and for the right opportunities. So, we're still pretty comfortable with where our debt levels are at and as I said, we would go above it at some point and you would only expect to be at that level for a short period of time.

Okay. Great. Thank you very much.

Thank you.

Thank you. Our next question comes from Tahira Afzal with KeyBanc. Please go ahead.

Good afternoon, gentlemen.

Good afternoon.

My first question is in regards to your strategy to grow in the US. Obviously there's some states which are seeing more of a fiscally balanced situation than others. Would like to get an idea of which states you see as being fiscally strong going forward and how you're positioned there right now, and how you plan to position in the stronger states going forward.

Well, I don't know if there's any states that are fiscally strong right now in the US based on what I've been reading, but the states we are in, even the states that would be considered not fiscally strong, let's say California, we are actually seeing some increase in business there and our US west operations have actually improved their bottom line operations in the last quarter. So, it's more than the individual states, because only a portion of our revenues come from -- are affected by, say, a state's fiscal ability to fund projects because half our work comes from the private sector as well, which really then isn't dependent on state budgets and again it depends what that state is funding. The state may be in difficulty in certain areas, but our focus is infrastructure and what we find is regardless of how -- what fiscal constraint a state has, they still find ways of investing in the infrastructure that has to be upgraded and again, that's where our focus is, is to focus on the infrastructure that has either a regulatory or an integrity issue associated with it that has to be upgraded, regardless of the fiscal ability. And because they will find the funds necessary to invest in that area of infrastructure. So, we're really not too concerned with regards to what the overall fiscal capability of a state is. More specific, what are their needs and what clients we have in those areas.

Got it. Okay. That is helpful. Number two, if I look at the ABI index which tends to be a good leading indicator for some of your markets, last month for the first time it entered positive territory. Would love to get a sense of typically if you do look at that index and if you do, how many months or quarters you think that your business might lag that index.

To tell you the truth, we don't really worry about that index too much. That's more of a retail index than a lot of the areas where we're focused in. Our focus, especially in the building's architectural area, is the higher education, science, technology, healthcare, which we find really doesn't track closely to the index, overall index. So, it's a nice -- nice that it's going up. That's good. It can't hurt us. But even when the index was at lower levels we still found lots of opportunities in the sectors that we were focused on.

Got it. Okay. And the third question I had was in regards to acquisitions. Several of your peers in the US who have reported have indicated that acquisition prices have been going up. I would love to get a sense of what you're seeing and whether you think if prices are going up, it's a temporary phenomenon.

I wouldn't say that the multiples are going up. For good firms, you're willing to pay at the higher end of the multiple range. But the actual multiples really have not been going up. It's a question of what kind of EBITDA is the acquired firm actually producing and more importantly, going forward, what is their performance going to be and what kind of performance are they going to have once you blend them into the Stantec team, and what kind of revenues can you generate from that new integrated acquisition.

So, the valuations you do for companies is a very complex process and I wouldn't say that prices are actually on general going up. I think that for good companies, that have good revenue generation potential in the future you pay a higher multiple for and that's probably more of the issue than the overall cost going up. There's lots of opportunities we see out there right now and it's probably from that perspective, if you have to pay higher for a firm, there's lots of other firms out there as well, so it's a good market from that perspective.

Got it. Thank you very much.

You're welcome.

Thank you. (Operator Instructions) Our next question comes from Ben Vendittelli with Laurentian Bank Securities. Please go ahead.

Good afternoon.

Hi, Ben.

Just to follow up on the acquisitions, I wanted to get your thoughts on what we could expect going forward. You've made quite a few acquisitions in the past couple quarters. Can we expect that to continue and what does your pipeline look like?

We've been pretty busy in the last quarter. So, are we effectively worked through some of our pipeline of opportunities, but certainly we've got a number of firms that we still are talking to. We don't -- we're not in that much of a rush between now and the end of the year. We're very focused on trying to now integrate the firms that we have acquired and so I don't think you'll see a Q4 as busy as Q3, but certainly our acquisition program is ongoing. It's an ongoing program that every month we're talking to companies and moving closer to trying to negotiate a transaction with them. So, we're still working very hard and a lot of these companies take months to years to get to them to a point where we can agree on a transaction. It's not a program you can sort of skip, it's ongoing, occurring every month. But certainly Q4 will be not as busy from a conclusion of transactions as Q3 was.

Okay. And looking ahead, you're still looking at the same sort of sectors, looking at health and education as your primary areas for targets?

Well, with the last two acquisitions in that area, Anshen & Allen and with the pending acquisition of Burt Hill, that would probably meet our immediate needs for the architectural buildings, engineering, healthcare, science and technology, higher education sector. Our other sectors that we're looking at, we were still very interested in the industrial sector. Still very interested in transportation, energy, oil and gas in the United States. From a geographic perspective would love to be in Texas and areas in the middle of the US. We still have lots of opportunities in the southeast as well. So, the program is a pretty diverse program. As diverse as Stantec's practice areas and geography is. We certainly highlighted science and technology and healthcare earlier on in the year. Again, like I said, with those acquisitions, we feel that we can now start turning our focus to more of the industrial, some environment and some geographic -- geographies in the US.

Okay. Thank you. I'll get back in the queue.

Thanks.

Thank you. Our next question comes from Chris Blake with stone Stonecap Securities. Please go ahead.

Good afternoon, gentlemen. I just had a quick question on your building section. I know you mentioned in your opening remarks, with respect to implementing some strategic initiatives to take advantage of the recovering markets, if and when they do in the commercial side. Could you just give us a little more color on what those initiatives might be?

We said actually after our last couple quarters and no one's ever asked the question, so thanks, Chris. Specifically, in those sectors, that were softer at the end of last year, we saw an opportunity of looking for key individuals that we felt at a slower period of time we could sort of enhance or encourage to come over to Stantec. So, there actually was a couple strategic hires Stantec managed to attract over to our team and those are some strategic initiatives. So, that's an ongoing program. Certainly, we look for good companies and good acquisitions, but we're also looking for good individuals and strategic hires is one of our key initiatives and we were successful attracting a couple people to come over in the first couple quarters or the first three quarters of this year.

Okay. And just switching gears over to transportation, I know you mentioned as well in your opening remarks with respect to maybe focusing more so on a local project level in the United States, as opposed to the state level. How does that project mix change in terms of your margins? Is it very similar to the -- when you go down to that local level, is the economics a little bit different? I'm trying to get a sense.

Actually, at the federal level, the margin, because the competition is higher, the projects are bigger, the margins tend to be smaller and lower and the local projects you have less competition and you actually more relationship based and you have an opportunity of getting a higher margin. So, I think one of the reasons our transportation groups performed so well this year is exactly that case, is that we've been relying upon those more local, higher margin projects that have been driving pretty good performance.

Very good. That's it from me. Thank you.

Thank you.

Thank you. Our next question comes from Benoit Caron with National Bank. Please go ahead.

Good afternoon, everyone. I'm just wondering, there seems to be an ongoing trade going on and this has been mentioned in the past. I'm sorry if I'm actually asking a question that has been answered, or mentioned at the beginning of the call. I missed the first few minutes there. What about the dividend policy now that the organic growth is stabilizing, it's no longer being such a drag as to offset whatever contribution from your consolidation strategy. Is it time to consider a dividend, paying a dividend? I'm looking at the short interest on your stock and we've got a good idea what's going on behind that trade there.

Be interested to get some insight on what's going on behind that trade Benoit.

If you could tell us what's happening in the short position, we'd be pretty appreciative actually. From a dividend perspective, we still -- every year we analyze our strategy going forward and our growth initiatives and we determine what capital we need to continue to execute on that strategy. And today we still feel that we can employ -- deploy our capital into our growth and that paying a dividend at this point in time isn't in the best interest of our shareholders. So, we continue to analyze that with our Board every year during the strategic planning session, look at what the options for growth, what the possibilities for growth are over the next five to 10 years. And still feel strongly that we feel that that's still the best strategy. Dan, I don't know if you want to add anything more to that.

Also having said that, the short position really ticked up in May once we put out the shelf prospectus and that was again as we discussed part of our longer term financing strategy, and so we really saw an increase at that point in time and it has gone slightly higher since then, but that seems to have been where the majority of the shorts have come into the market.

Okay. Well, so it's a bit premature to talk about a dividend then?

Yes.

That's all I had. Thank you, gentlemen.

You're welcome.

Thank you. We have another question from Carolyn Dennis with Dundee Securities. Please go ahead.

Hello again.

Hello again.

My question now is on utilization rates. Just as a follow-on to my other question again, tied into some of the acquisition questions, I guess with all the acquisition activity this quarter it's hard to get a sense of what's going on there this quarter. For your staff that -- I mean, organic growth was down, but have you seen an increase in utilization rates in any of the areas?

No, we monitor, as you know, we monitor utilization really, really closely and we don't like our utilization overall in the Company to vary more than a percent or two over our targets. So, we really haven't seen a significant increase overall. It's quite stable and it's at our -- I think it's just below 70% right now. There is certainly -- there's higher utilization in some practice areas compared to others. But I wouldn't say that at this point in time we're too concerned about our utilization because we're looking at it on a weekly basis and making sure it's within our targets, and then adjusting staff levels as necessary. So, I wouldn't say that on an overall basis we're too concerned.

And just follow-on then, just with the acquisition activity. Can you just revisit how long -- you talked about most of the acquisitions are on the ERP system already, but in terms of reaching -- having them integrated to your expected utilization rate, how long does that take, I guess it depends on the size. But currently, how long do you think it would take to get through to the 70% on all the acquisitions that you've done?

In terms of --

Fully integrated in terms of up to full capacity for the employees that you hired.

In general, takes two or three months to get all of the kind of back office noise out of the way and get people going again, but generally we try to do a lot of that in the back office and not affect the operations personnel. One of our objectives in integrating these companies is not to get in the way of them doing business. So, there is some impact, but generally that's fairly short term. Some of longer term impacts is getting the synergies and cross marketing opportunities and those take a little longer than the physical mechanical integration of these companies.

Just to add to it, Dan's right, the impact we want on our new acquired companies, business to our clients, is minimal. The last thing we want is a client saying that you've been acquired by Stantec and now I've seen an erosion in service or I've seen an erosion in the delivery of projects. So, we're very focused on ensuring that they stay very clearly focused on their clients still and on their business. So, it is a back room type of integration in the first three months and then as Dan says, we take literally a year to two years to get it fully done because you just don't want to interrupt that business and start eroding the service to the client.

Essentially then the impact is what you are taking about, the increased administration cost next quarter essentially for most of the acquisitions that you've done?

It's not a huge increase in cost. A lot of the administration is already there. They're now focused on the integration side of it.

Okay. That's great. Thank you very much.

You're welcome.

We do have another question from Sara O'Brien with RBC Capital Markets. Please go ahead.

Hi, just wondering if you could comment on public, private partnerships. You certainly had an impact from the bidding in the quarter. Is there still a huge opportunity for you in Canada? What sectors do you like most and would you consider putting capital to work either in Canada or US for P3s?

Yes, still very bullish on P3s. Still see it as a very key focus for us going forward in 2011. We still see lots of opportunities, specifically those opportunities would be in the transportation sector in Ontario and Alberta and British Columbia. So, all of these of those provinces have ongoing P3s that are out right now for RFQ and RFP. So, lots of opportunities in the transportation sector in those three provinces. In British Columbia and Ontario we see continued opportunities in the healthcare sector and bidding on RFPs in British Columbia and in Ontario in the healthcare. We see it as still being a very good part of our business. We're continuing to gain expertise, continuing to gain a reputation of being able to execute these projects. Which as we said before, very, very different projects and very large projects. So, really the size of the Stantec is very conducive to us being able to execute these projects, we feel better than our competitors.

With regards to putting capital into these projects, no, that's really outside of our zone of knowledge and interest. We want to focus on doing the design. We want to focus on strengthening our partnerships with our partners, our contractors and concessionaires.There are experts and there are companies that have the expertise and the focus to bring the money to the table, so really don't see that as being a good business strategy for us.

In the US would you go into any partnerships or is it too early?

Way too early. The US is -- it's still a wild card there. The US has not really established the clarity necessary to go into the P3 market. The design builds, okay, but they just don't have the clarity in how they bring the money to the table, how they deal with the operations. I said before that in Canada the governments have totally thrown their support behind P3s, but then gotten out of the way and used essentially arm's length corporations like Infrastructure in Ontario and Ontario Partnerships BC in BC to administer and execute the projects which is the right way to do it. If the politicians stay in and keep their hands in the administration of the project, it just doesn't go anywhere and that's what we're seeing in the P3 market in the US.

It's dragging. They can't come to terms with the concessionaires and the contractors and you spin your wheels and that costs you lot of money, so we're very cautious in the P3 market in the US. That being said, their time will come. At some point in time they will see that there is some efficiencies and savings to taxpayers by using that model, but the politicians have got to get their minds around how to operate it properly.

Okay. Great. Thank you.

Thank you. There are no further questions at this time. Please continue.

If there's no further 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. Thank you.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation and you may now disconnect your line and have a great day.