Stantec Inc (STN) 2010 Q4 法說會逐字稿

Welcome to Stantec Inc.' s fourth-quarter, 2010 year-end earnings result conference call. With us today from Stantec management are Mr. Robert Gomes, President and Chief Executive Officer, and Mr. Dan Lefaivre. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session.(Operator Instructions) Please limit your questions to one at a time.

Before the call begins, Stantec management would like to make you aware of its Safe Harbor statement and to caution you that it 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 Stantec management to make assumptions and are subject to inherent risks and uncertainties that give rise to the possibility that Stantec's estimates, projections, expectations or conclusions will not prove to be accurate, and that its assumptions may not be correct, and that its actual results may differ materially from those discussed in this statement. In addition, Stantec management will be mentioning non-GAAP measures. You will find descriptions of non-GAAP measures and their use as well as more information about the assumptions and material factors that were applied, or could cause actual results to differ materially from those discussed in this conference call, in the management's discussions and analysis included in Stantec's 2010 financial review.

As a reminder, today is February 24, 2010, and this conference call is being recorded as well as being broadcast live over the Internet. It will be archived for future reference at www.stantec.com under the Investors section. Therefore, any members of the media who are joining the call today in a listen-only mode and who wish to quote anyone other than Mr. Robert Gomes or Mr. Dan Lefaivre are please asked to request permission to do so from the individual concerned.

It is now my pleasure to introduce your host, Mr. Robert Gomes. Please go ahead.

Thank you, Sara.

Good afternoon, everyone, and welcome to our 2010 fourth-quarter and annual results conference call. Dan will provide a brief summary of our results for the quarter and year, and I will follow with an outline of our market outlook. We will then address individual questions.

This morning we released the results of Stantec's operations for the full year of 2010. I am pleased to report that we improved our operating performance and expanded our operations in key markets in a challenging economic environment. At the same time, we ended the year with a strong balance sheet leaving us well positioned to support our future growth. Our success was largely due to our relationships with our clients who continue to entrust us with their projects in a difficult environment. Dan will now provide a more in depth review of our year-end and fourth-quarter financial results.

Dan?

Thank you, Bob. Good afternoon everyone.

As Bob just indicated, the fourth quarter of 2010 was positive for Stantec. My update will be a little longer today since I will be touching on the fourth quarter and 2010 annual results as well as addressing the impact of our changeover to IFRS starting in 2011. Now, looking at our operating performance, our gross revenue increased 11.9% to CAD383.7 million in Q4 '10 compared to Q4 '09. Approximately CAD33.2 million of this increase was from acquisitions completed in 2009 and 2010.

Growth in organic revenue contributed CAD13.5 million, signaling a positive swing in our organic revenue after many quarters of retraction. On a full-year basis, gross revenue was essentially flat at CAD1.513 billion compared to CAD1.520 billion in 2009. Our net revenue was also up 13.1% to CAD310.9 million in Q4 '10 from Q4 '09. On a full-year basis, net revenue was down 1.4% or by about CAD16.9 million to CAD1.226 billion. The difference between gross revenue and net revenue relates to sub-consultant costs and direct expenses incurred on behalf of clients and will fluctuate depending on the mix of projects in a given quarter or year.

Our gross margin as percentage of net revenue was 57.1% in Q4 '10 compared to 56.7% in Q4 '09. On a full-year basis, our gross margins remained strong at 56.1%, compared to 56.3% in 2009, continuing to fall within our target range of 54.5% to 56.5%. This ongoing strong operational performance gives us the confidence to maintain our gross margin target in 2011.

Our administrative and marketing expenses for Q4 '10 were 42.6% of net revenue, compared to 41.1% in Q4 '09. As we indicated in our third quarter conference call, we expected these expense to be marginally higher in Q4 '10 because of integrating staff and systems from our recent acquisitions. For 2011 we expect our administrative and marketing expenses as a percentage of net revenue to remain relatively consistent, falling within the range of 41% to 43%.

EBITDA improved to a healthy 15.2% of net revenue or CAD186.3 million in 2010 compared to 14.7% or CAD182.4 million in 2009. Net income for 2010 was CAD93.6 million up 67.4%, compared to CAD55.9 million last year, and diluted earnings per share increased to 67.2% to CAD2.04 from CAD1.22. Excluding the one-time impacts of reorganization of our corporate structure and the gain on sale of equity investments in 2010 and the noncash goodwill charge taken in 2009, net income increased 4.8% to CAD95.3 million from CAD90.9 million and diluted earnings per share increased 5.1% to CAD2.08 from CAD1.98. Our 2010 cash flows from operating activities increased 14.8% to CAD114.8 million, compared to 2009. Return on equity improved to 16.1% in 2010. Overall we are really quite pleased with our 2010 results.

I would like to briefly turn your attention over to IFRS. Effective Q1 '11, we will be reporting our financial results with comparative 2010 financial statements under IFRS. To gain more insight about the IFRS transition, I would like to direct you to pages M48 to M52 of the recently released MD&A. Our 2011 first quarter financial statements will be more extensive than usual since we will explain the impacts of the changes to accounting policies and statement presentations. Our balance sheet now called the statement of financial position will continue a number of reclassification adjustments effective January 1, 2010. We expect our that our opening shareholders equities will be reduced by about 2% or CAD9.3 million, due to primarily changes associated with the recording of contingent consideration and other IFRS transitional adjustments.

We that expect our income statement may be primarily impacted by changes to sublease revenue recognition and business combination costs that historically were capitalized as part of goodwill under Canadian GAAP. Transitional adjustments that negatively impacted our opening retained earnings will positively impact our comparative 2010 net income. Throughout 2011 we will provide a reconciliation of Canadian GAAP results to IFRS. We do not expect our transition from IFRS to have a material impact on our operating budgets, bank covenants, business systems, controls over financial reporting, or compensation plans. Again, I refer you to the disclosures made on our most recent MD&A for more information. We plan to file our first IFRS statements on May 12, 2011 according to our normal reporting schedule.

Now, with that, I'd like to turn that over -- back to Bob.

Thank you, Dan.

I would like to outline some of the progress we made towards our strategic objectives in 2010.

First, we were able to continue adjusting our business to changing conditions in the markets we serve. During the year, we grew organically in Canada and through acquisitions in North America and internationally. Our urban land practice area stabilized following retraction in 2009, and revenue increased in our buildings and transportation practice areas, offset by a decrease in revenue in our environment and industrial practice areas.

Second, we continued our record of profitability. At year-end our revenue is stable, and our income and earnings increased overall. This performance gave us 57 years of uninterrupted profitability. Without the one-time cost recorded in 2010 and 2009, our net income and diluted earnings per share increased year over year.

Third, we grew through acquisitions. In 2010, we acquired 10 firms, including Project Control Group, TetrES Consultants, IEA Holdings, WilsonMiller, Natural Resources Consulting, Communication Arts, Anshen & Allen Architecture, ECO.LOGIC Engineering, Street Smarts, and Burt Hill. Collectively, these additions brought 1,400 new staff to our Company; strengthened our capabilities in all service areas; created a new service area in project visioning and branding; expanded our presence in the United States, particularly in the Midwest and southeast; and gave us new international office locations in India, The United Arab Emirates, and the United Kingdom. This growth reinforced our standing as truly a North American firm with an emerging international presence, combined with the organic growth, acquisition growth, increased staff numbers to approximately 10,700 by year end.

I would now like to highlight some current projects that reflect our ability to provide integrated services as one team working across North America and internationally. In Canada, more than 120 Stantec staff from 10 offices came together to complete the architecture, interior design, and engineering of major expansions of the Kelowna and Vernon hospitals in British Columbia. Delivered through a public private partnership, the expansions included new patient care towers and a medical school building. In the United States, over 400 employees from 33 offices have been working on more than 70 assignments related to facility assessments at 11 power plants in Tennessee, Kentucky, and Alabama for the Tennessee Valley Authority, and staff from our architecture, environmental remediation, urban land engineering, and transportation practice areas are contributing their skills to a multi-year contract to provide construction management support services to the Los Angeles County Metropolitan Transportation Authority in California. This multi-billion program of work includes a high occupancy vehicle network, bus rapid transit extension, maintenance facilities, and an innovative express lanes pilot project.

During 2010 were also awarded major projects in the mining sector, including a CAD44 million contract to provide design and related services for developing a shaft and hoisting systems for BHP Billiton’s Jansen potash mine in Saskatchewan. We are chosen to design the shaft for Ivanhoe's copper mine in Mongolia. This is only a very small sample of the projects we are working on. Projects like these provide diversity and mitigate risks for our Company.

Now, I would like to comment briefly about the potential market conditions going forward. Overall, we have a strong backlog of work across our practice areas. Our backlog increased to CAD1.043 billion in Q4 '10 to CAD948 million in Q4 '09, representing approximately 8.3 months of trailing gross revenue. This performance again reflects the renewed confidence we are seeing in some markets as well as growth from acquisitions, which is resulting in new and continuing projects. Moving into 2011, we will continue to focus on developing broader, long term relationships with our clients; obtaining larger, long term contracts; and increasing our backlog by managing our business effectively.

Looking at our individual practice areas, we expect the following for 2011. We believe that the outlook for our buildings practice area is stable for 2011. Acquisitions were highlights for buildings in 2010 and this practice area also achieved organic growth. We expect that the expanded presence we gained through acquisitions will allow us to further build and leverage our expertise in healthcare and education in the United States and internationally in 2011. At the same time, we realize that growth from our acquisitions may be tempered by softened economic conditions in British Columbia, California, and the United Kingdom. In Canada, we expect to continue to secure P3 opportunities in 2011 based on our current relationships in P3 markets and the top tier positioning of our architecture and buildings engineering practices.

We expect to achieve stable to moderate organic growth in our environment practice area in the first half of 2011, with stronger growth occurring in the second half of the year. Our growth in this area in the past few years has put us in a top ten category among the world's environmental service providers, and we expect that this will help us continue to increase our share of larger, long-term national and international projects in 2011. As well, the environmental services we provide for the energy sector may be affected by the resumption of offshore work and the price of oil in 2011. During 2010 spending on water-related infrastructure was soft, and we anticipate that the water sector may not experience a significant recovery until 2012 or beyond. However, we continue to secure major projects in key areas such as combined sewer overflow and water treatment projects, and we believe that we are well positioned to obtain contracts resulting from a more stringent regulatory environment.

We anticipate moderate organic growth in our industrial practice area in 2011. After improving in 2010 commodity prices are expected to moderate, and activity in the mining and resource sectors is expected to be strong. We currently work with several of the world's largest mining companies, and we are seeing an increase in the number of inquiries from our oil sands and pipeline clients. Many of our clients in both the mining and resource sectors are expecting to spend hundreds of millions of dollars on new projects as well as expansions and rehabilitations in the next few years. We believe that our industrial practice area has the breadth, diversity, and expertise to take advantage of opportunities that arise with these clients.

We expect to achieve stable to moderate growth in our transportation practice area in 2011. Our transportation group had a good year in 2010 and we see the factors that contributed to that growth continuing in 2011. P3 projects continue to provide a potential stream of work in Canada, for our size and geographic presence are well suited for these larger assignments. We also expect our rail and transit groups to maintain their current activity levels in 2011. However, decreasing tax revenues, efforts to reduce state and provincial deficits, and continued uncertainty in the United States about long-term funding may cause delays in some larger, longer term planned transportation projects. Our positioning in the United States is in smaller local projects, which appear to continue to flow in the absence of longer term funding.

Due to the generally anticipated stability in the Canadian and US residential sectors, we believe that the outlook for our urban land process area in 2011 is stable. We expect to continue diversifying our client base, building and leveraging our reputation with the public sector, and focusing on relationships with larger clients who require more complex services as well as our multi-disciplinary team approach.

Over all we believe our outlook for 2011 is a moderate 2% to 3% increase in organic revenue from 2010 in regions and practice areas where we are a top tier service provider. We are still experiencing the impacts of increased competition, project delays, and fiscal re-balancing, resulting from the economic environment in 2010. However, we believe that our diversity, strong client relationships, talented staff, and flexibility will help us continue to adapt our business to improving economic conditions. More specifically, the outlook for our international operations in 2011 is stable compared to 2010, with the recent acquisition of Anshen & Allen and Burt Hill, we have a larger international presence. The outlook for the United States in 2011 is flat to a moderate increase compared to 2010. We are confidence that we can take advantage of our growing US presence to increase our business in the United States as that economy recovers. Finally, the outlook for Canada for 2011 is a moderate rebound, and we expect to see good performance in many of our Canadian operations.

This concludes our comments for today. Dan and I are now available to answer any questions you may have. Sara, the conference call operator, will explain the question procedure. Thank you.

Thank you. (Operator instructions) Please stand by for the first question.

Our first question comes from Anthony Zicha with Scotia Capital. Please go ahead.

Bob, you mentioned for 2011 that you had a stable outlook for the urban land practice. One, can you tell us what percentage of overall revenues California represents and could you give us some color on that market? Would it be fair to say that this practice area could provide the most upside over the next few years in terms of earnings leverage?

So, with regards to California's component of the urban land business, my guess right now, because we don't break it down that way, Anthony, it's only probably my guess is around 10% of our revenues in urban land. Practice area comes out of the California market. As you know, that one of the areas that Florida and Nevada were very serious hit, so it is not what I would call significant.

With regards to the upside of this practice area, absolutely, but it is all going to depend on what time frame. A few years, yes. It is not going to be one. It is less likely to be two. One would think within two to three years that market will rebound to a point where urban land becomes a more significant component of our revenue. But, we still see enough opportunities there, even without a major rebound in the next two years, so enough revenue there to continue to maintain our own in that process area just because of the diversity that we now do and the type of projects we do.

Bob, California, as a whole also what would it represent?

That's tougher, because we do have transportation in California now with that Los Angeles Metro project. We do a lot of water projects in California. To say the US West -- how much of the US West is of our full area is probably maybe 25% of our revenue, 20% of our revenue. That may be even on the high side. California would probably be a third of that. Overall, California is less than again 10% of our overall revenues coming out of the California market.

But, again we see the California market as being extremely huge amount of upside. From a water standpoint, they have every water problem you can conceive of in California from drought to floods to ground water issues, so they've got infrastructure issues. They just don't have funding today. We see California, though, as being an important part of our business going forward.

Quickly, one last one, is the situation improving for prospects in the US considering that municipalities and state governments are having major challenges raising municipal bonds and state bonds?

There is no doubt that they have funding issues. Some states have more issues than others, but they are all having issues getting sufficient funding to meet their infrastructure needs. The focus is they are doing some funding. They are funding some infrastructure projects. We've always said that you have to be close to the clients; you have to understand which projects are going to get funded and which ones are not going to get funded, so you have to understand the priorities of their capital program.

More importantly you've got to find projects that have to go ahead that they will have to find funding for, those that are regulatory driven. In a very slow economy, even in a economy tight for funding for infrastructure, there is still a huge amount of investment going on when you consider the size of the overall economy in the United States. You just have to be a little bit more selective and you just have to find out a little bit more information from your client, which projects have a better chance of getting funded.

Okay. Thank you.

You're welcome.

Thank you.

Our next question comes from Michael Tupholme. And he is with TD Securities. Please go ahead.

Good afternoon.

Question about your longer term revenue growth target of 15% per year, given your expectations for organic growth in 2011 and your acquisition outlook, as you see it, is there anything standing in your way potentially achieving that in 2011?

No, the only thing standing in the way is finding opportunities for acquisitions. From a balance sheet perspective, financial position, we have a strong position there. That's certainly not a concern. It is finding the right firms in the right areas for a reasonable price, is really the only constraint that you have.

We still see a good, solid acquisition pipeline. We are being a lot more strategic and proactive trying to find companies that meet our metrics and are in our sectors and geographies that we want to grow and still see lots of opportunities for companies. There is still the issue of getting evaluation and agreeing upon reasonable prices. Those are always head winds you have to fight. I don't see them being any different than last year.

I was just going to ask one follow up on that point. In the outlook section of your MD&A, there is a comment in there about on that last point you made there, Bob, about the whole acquisition process continues to be impacted by discrepancies between perceived values. Has that changed at all? Is that comment in there because it continues to be an issue, but, in fact, hasn't deteriorate, maybe getting a little bit better?

It's getting a little bit better -- just the evidence of the number of acquisitions we closed in Q3 and Q4 last year. The expectations of the companies we were talking to had come down to a point, and our comfort level has risen to a point where we had closed that GAAP. As companies recover, that gap will start again, because it's a matter of how quickly they feel they're going to recover in the next two or three years versus how they performed in the last two or three years.

That pressure we feel is still going to be there as we go forward in 2011, but as the 2011 evolves, you get better visibility into that and you can measure it against what they said they would do. We hope, certainly, in the latter part of the year we see it being a point where we should be again be as busy as we were last year.

Thank you.

You're welcome.

Our next question comes from Sara O'Brien with RBC Capital Markets.

Hi, Bob and Dan.

Just a question on margin. The SG&A was a little bit higher given P3 bidding and some integration costs. Is that something that we should expect to continue into the next -- call it the first half year. Or was it Q4 specific?

Probably, a little bit more Q4 specific. In the first quarter, there is still going to be some of those integration efforts in some of the companies, because again, we did a couple in the fourth quarter, we did another one earlier this year. There is still going to be higher costs. There is more bidding that goes on in the first quarter of the year. That probably will continue in the first quarter and then improves as the year goes on.

Sara, to give you more color on that, we integrated all but two of the acquisitions that we completed last year -- go to the business systems, did a lot of marketing, personnel integrates, as well. We are well under way on the last of Burt Hill and Anshen & Allen.

Great.

Can you also comment, given some of organic growth that was seen in industrial segment and some of the others in this quarter, a little surprising that the outlook is a little bit more muted to the 2% to 3% range. Is it just extreme caution on your part or is there a real shift that you see happening for 2011 that would make you a little bit less optimistic?

I think in the areas you've commented on, industrial and environment specifically, we did see good growth in the fourth quarter, and we do anticipate that those will be two of our stronger process areas in 2011. If you remember, those are two of our weaker ones in 2010.

We did always say we felt that was going to rebound somewhat in 2011. Overall, we are seeing 2% to 3% growth. We do see some higher growth in environment and industrial with a little bit slower growth in buildings and in urban land.

When you say slower, because do you see we declines or do you think with cross selling opportunities you are going to be positive.

We are going to see positive in our practice areas. Positive to flat. We are looking at buildings in urban land. We don't see -- anticipate any significant growth, 0% to 1%, but we don't see it also retracting. We don't see any of our practice area or any of regions retracting in 2011.

Okay. Great. Thank you.

You're welcome.

Thank you.

Our next question comes from Carolyn Dennis with Dundee Capital Markets, Please go ahead.

Good afternoon.

I just have a quick question on the tax rate in the quarter. I know it is looking backwards, but just, can you provide some color there. I know you had a CAD6.2 million noncash charge in Q1 that was carrying forward through the year, but can you just explain that a little bit?

Sure, Carolyn. At the end of Q3, we had used an estimate of 32.5% for our full year tax rate. As we got through the year end, and you have to go through and deal with all the future tax assets and liabilities. There is expected enacted tax rates in Canada are expected to go down. I think on average about 1.6%, so that impacted our Q2 income tax assets that flows through the income statement. At the same time there is that earnings -- I guess the word would be finalizing your earnings calculations for where your earnings are made, whether it is in Canada, US or any other of our jurisdictions, so that change would have also impacted our tax rate to bring our reported tax rate down to 29.9%.

For the quarter?

Sorry, earlier in the year we had the impact of the Fugro sale and of course the corporate reorganization that we did in Q1.

Right.

But, it was abnormally -- it was very low in the quarter though. But that's related to the CAD6.2 million surge in Q1, right?

Right. You have to take -- when we do our third quarter estimate that creates a 29% to 29.9% is over a 12 month basis, and that's what impacts it in the fourth quarter.

Okay.

That's great. Thank you very much.

Thank you.

Thank you. Our next question comes from Ben Cherniavsky with Raymond James. Please go ahead.

Hi. (Inaudible)

Ben, we can't hear you .

I have to go to my speakerphone. Is that working?

Much better.

Sorry about that.

I just want go back to the topic of acquisitions. There is no question that last year you were very active in terms of number of acquisitions, but at the same time the size of the acquisitions were very small. I think 7 out of 10 of your acquisitions were fewer than a hundred people and some as small as ten. When you start doing acquisitions of this size and given how big you now are, is it a really good use of resources and energy to be doing acquisitions of ten or 50 people? Aren't you guys looking for bigger fish to fry right now? Or shouldn't you be to be moving the needle with your acquisitions?

You are absolutely right. As we grow larger, small acquisitions have less of an impact from a numbers perspective to move the needle. My comments all have been, though, that all acquisitions are important no matter the size; they are adding expertise and providing opportunities to us. They are filling in geographic areas; they are filling in expertise.

The one thing that's Stantec's done well in the last ten years and certainly in the last five, is we have a very strong acquisition integration history. We can acquire firms and we are very good at integrating them into our model. We do it very efficiently. We've shown last year that we can do a lot in a very short period of time. Although we'd like to be doing larger ones, those are harder to find. Certainly, that is where our focus is.

We are looking strategically at some of the larger firm and would certainly put a higher priority on those as we are trying to close and have discussions, but as I said, they all count. They all add up. They are all important, but certainly, our preference would be to close a 500 to a 1,000 person firm rather than a 50 person firm. We still see opportunities there. There is still lots of 500 to 1,000 person firms out there, especially in the United States with such a fragmented market. We certainly have a number of those on our list and trying to develop relationships and have discussions.

Thank you.

If I could get one quick more housekeeping item. You feature P3's quite prominently in your MD&A and some of the successes you have, but do you have a total batting average for last year? How many P3's were you successful on versus bidding, do you know?

I don't have -- I think that's one of the things we're going to start getting background on, but I would say, right now, we are well above 35%. We are close to 50% batting average for that, which is a great average. We are saying right now we'd like to be at least a third -- that we bid on that we'd like to win. But, I think it is much closer to 50% at this point in time.

We feel very optimistic and strong about our opportunities for future P3's. In Canada, that's going to disappear in the next five years, but certainly, we are seeing the self supporter. They are starting to get a lot more discussions and talks as P3 as being a good model.

Well done. Thank you.

Thank you.

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

Good afternoon.

Hi, Chris.

Just following up on your comments with respect to integrating the Burt Hill and Anshen & Allen, I was just wondering if you could give us a sense of how those acquisitions are progressing and if you've identified any cross-selling opportunities over and above what you originally anticipated?

Certainly, I think Burt Hill has been with us a few months, Anshen & Allen, a little bit longer. Certainly, we have rolled out to our clients in the sector, specifically to healthcare and post secondary education sectors, a strategy of essentially rebranding the three companies into the one, so that communication strategy has been launched successfully which is -- we are happy to say we did that within a couple of months of after Burt Hill joining. But, we have been working on it for a while.

There is really two levels of integration that goes on. It is that external rebranding and trying to tell the clients who we now are, and the internal one with the systems and processes. As Dan said, we still have Burt Hill to do. They are now being integrated over this first quarter, but Anshen & Allen have now been done. The European or the UK part of Anshen & Allen, we are putting that aside and looking at that carefully over the next couple quarters. Certainly we are looking at what else we can leverage into London, and they were very specifically healthcare.

The rest of the opportunities -- we haven't -- I wouldn't say we've had any positive or negative surprises with regards to that. We have a clear strategy of what we wanted to achieve in leveraging those three companies and very focused on going after larger projects across North America just because of the larger platform we have. Other opportunities outside of the sectors will probably come later in the year. We are very focused on the sectors where we knew we had strength.

Very good.

And just, Bob, to your point earlier with respect to funding issues in the United States with respect to the budget deficits. I was wondering what your opinion with respect -- do you think this will be the impetus to kick start the P3 in the US?

It will certainly be the subject of discussion as a solution to it, but I don't think the US governments -- you've got to say government's -- there is 51 really little government there that operate -- don't have enough clarity and understanding of what it takes to get a good P3. They still have a lot of politics involved in it. Recently, in California there was a P3 that got successfully executed, but it took a year or longer and it was a very tough process.

It will take time before the US governments get their minds around how to successfully execute and use that strategy. For the next year, at least, I see it being more one off-type projects, which is not a very healthy situation, because you can chase that one project for many month or six months and not be successful. What you really need is a good, steady stream, a pipeline of projects. Then you have the opportunity of bidding on two or three or four. We need a couple of them. I still see it being a year or two away, but I don't see a lot of other solutions out there for their funding issues.

Very good. Thanks, Bob.

You're welcome.

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

Just one question on the gross-margins, I don't know if you referred that early on, but you had an excellent quarter on the gross-margin side. It is actually among the best gross-margins in a few quarters. It was surprising because the current context where you have more competition means basically the opposite. Can you give us some kind of perspective on what is happening there? And how sustainable it is going forward?

We've always said, fairly consistently, we pay close attention to our gross-margins. We don't see our gross-margins really fluctuating much more than1% or 2% on a consolidated basis in any year and from any quarter. It is something we are very focused on. Competitive pressures certainly continue to put pressures on pricing, which then effects gross-margin, but at the end of the day you have to manage that gross-margin and you have to ensure you are making money.

You have to chose your projects and your clients more carefully so you have those opportunities to maintaining that margin. You have to execute well. We always come back to a point that we do believe that we have very good controls and systems in place to give your project managers good visibility into what's happening in their projects, so they can deal with issues early on and can maintain that gross-margins. I always like to point back to those systems; they are very key to our success.

So, there is no specific trends that you can point out? Maybe, can it be related to the fact that you were getting a little bit more important in a certain part of North America or practice as well?

I think the larger you get, you get to bid on some of the projects that allow you to leverage your size to achieve a better gross-margin. We are also bidding on a lot more fixed fee projects, such as the P3's. Those fixed fees allow you then, if you execute well and efficiently, to drive up a gross-margin that may be higher than you anticipated.

I don't see a trend of it going much higher. I also don't see a trend of it going lower. I do believe we can maintain this level, and being a larger player in North America gives us those opportunities to maintain that.

Okay. Good.

Then, one last thing, I don't know if you disclose a little bit more about the backlog. Just wondering what was the impact of acquisitions in this quarter to the growth otherwise in the backlog; otherwise said, if we remove the acquisitions, do we have a growing backlog still?

Yes, certainly some of that backlog increase was part of the acquisitions, but part of was also organic growth.

Okay, so it was positive organic growth?

Yes.

Excellent. Thank you very much.

Thank you.

Our next question comes from Ben Vendittelli with Laurentian Bank Securities. Please go ahead.

Good afternoon, gentleman.

Just a follow up question on the tax rate, can you go over some of the structural changes you made earlier this year that would lead to the lower tax rate and your guidance for lower taxes next year?

Sure.

First of all structural change we made in the first quarter really eliminated some potential duplicate tax from our US to our Canadian operations. We basically sold one of our entities back to our Canadian parent from a US parent. That created a tax impact in 2010. That goes away in 2011, so we now don't have the impact of that sale. We also had the sale of our Fugro asset in the third quarter, which also increased our tax rate this year because of the gain on that sale.

Going forward, there are a couple of key things. One is the inactive tax rates in Canada are going down, as I said before, about 1.5%, 1.6%, and that drives down our expected tax rate. The way we look at our tax rate and our projections going forward is we have our budget for next year. We know where we expect to earn our income, and then we apply the enacted tax rates on that basis for all of our -- and roll it up to our consolidated tax rate for the year.

Okay. Thank you.

Thank you.

Thank you.

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

Thanks. Good afternoon.

You mentioned, Bob, in your remarks that some of your acquisitions last year brought you some international presence in the UK, UAE, and India. In the write up in the MD&A, you mentioned some expansion in your environmental practice and expectation of expanding. It seems to be somewhat sporadic. Can you talk about what is your international -- how big is your international business today? What are the plans to grow that other than just opportunistically here and there?

Last year, our international operations represented about 2% of our revenue. Going forward with the additions of Burt Hill and Anshen & Allen that may increase to 4% or 5%. We'll also going to provide a little bit more feasibility into our international operations going forward because of this.

With regard to the opportunities, I think you used the word correctly. It is going to be more opportunistic. We are not really looking at growing that business significantly. We are looking for opportunities with the good clients we have in those areas to potentially sell some additional services, but we are doing that very cautiously. We want to understand. We understand the clients, understand the cultures in those countries, understand what those opportunities mean to us, and the risks associated with it.

We are looking at this as a good opportunity for ourselves to dip our toe in the international waters and get a better feel of what it means working internationally. Certainly, it is going to be front and center of our mind, but certainly, not a huge focus on growing that practice significantly. It is going to be understanding it and maintaining the good performance we have there and then looking for opportunistic opportunities.

Just to clarify maybe one thing on the expectations of the percentage of revenue for 2011. We have not yet completed our budgets for the Burt Hill acquisition, so that number Bob gave you may go up or down. We don't have the final numbers there yet.

Okay. Yes, it was off the top of my head.

Okay.

Also, you mentioned the industrial and the industrial markets you see less opportunities in the mining resource sector. Is that an area you expect more acquisitions in 2011, and also is that an area where you would expect to be going more internationally along with the opportunities there?

To answer the first and last, right now in our mining sector we do a significant amount of work internationally for the major mining clients, so that is certainly going to continue being part of our mining growth. Working for clients like Ivanhoe in Mongolia, and working for DHP in Indonesia. So, we do those types of projects and very specialized underground mining engineering is what we do.

With respect to would we like to see acquisitions in that sector? Absolutely, but as you know, in hot sectors usually the people are so busy they don't like to talk about acquisitions, but at the same point in time they get to a point where they are so busy they cannot keep up and they want to get a larger platform to get more assistance to execute those projects. We are looking in that area and certainly would love to find more mining companies and oil and gas companies in the industrial sector. Those commodity markets we do see as being a growth opportunity in 2011, and if we can find opportunities for acquisitions that would be even better.

Okay. Thanks. Thanks a lot.

You're welcome.

Our next question comes from Tristan Richardson with DA Davidson.

Good afternoon. This is Tristan in for John Rogers.

I'm sorry if I missed this earlier, but following up on the tax question, we talked about the puts and takes, rolling that up into consolidated number. What was the number that you expected for this year in terms of tax rate?

A t the end of the third quarter, we were expecting 32.5%.

Okay. Thank you.

And then, more broadly, given the cost associated with the acquisitions, integrations, et cetera, and given 2% or 3% organic growth, is that enough or can you leverage margins with that kind of organic growth? Or how do you leverage margins?

How do you mean leverage margins?

I guess the opportunity with margin expansion with that kind of organic growth?

I don't know if organic growth is going to give you margin expansion. I think organic growth gives us the opportunities -- it comes from opportunities of winning larger projects, so really from my perspective organic growth follows the fact that you have larger opportunities with larger clients.

Having said that a lot of SG&A costs are fixed. 70% of our costs are labor costs, so we have some of those fixed costs that are -- you may get leverage from, but most of our costs are labor. You are not going to see a huge margin and pick up as a result of organic growth. You'll see some.

Got you. Okay. Thank you very much.

You're welcome.

Our next question comes from with [Rari Asi] with [C Bank]. Please go ahead.

This is [Dida] speaking. Just had a couple of questions. Number one, would you say that you are incrementally a little more cautious about growth in the US just gauging from your qualitative commentary? If so, what in fact is that having in your focus in terms of the tax rate and the margins that you are projecting?

With regards to our -- more cautiousness with regards to opportunities for growth in the US versus Canada, I'd say that's more relative to the opportunities and the economy growing. We do see still lots of opportunity for us to grow in the United States, even in a cautious economy just by, essentially stealing market share, by acquiring and stealing market share from our competitors.

We do believe we now have a position in the United States where it is large enough where we can exercise that strength and size and leverage it to win larger projects and get a larger piece of that maybe fairly stable pie in the United States. Even without the growth, the cautiousness is probably more around the economy in the United States rather than our opportunity for growth.

With regards to -- sorry your second question was with regards to the -- ?

Basically, if you look at the US, has anything incrementally changed in your tax rate and margin assumptions given you seem to be cautious in the US, but I think that it hasn't really changed your strategy and exposure outlook for the US and hence I assume it hasn't had an impact on your tax rate as much and outlook.

We are not seeing too many changes in our expectations for tax rate changes in the US at this point. We are basing all of our assumptions on the current enacted tax rates and the revenue and earnings that we expect in the US relative to Canada and our foreign operations. That's how we look at the taxes. We'd have to basically go off of what's enacted today.

Then second question is if you look at the Middle East, obviously a bit of destruction over there. Could you about your exposure there and whether the near term uncertainty really your seeing really changes any strategy decisions you might have in regards to that?

Our exposure in the Middle East today is a relatively small presence. We are talking approximately 150 people in the United Arab Emirates, in Qatar, and in Dubai. It is very focused in the healthcare sector of those two countries. We haven't seen any evidence of any pull back short term in the last couple of months on those projects. We have no real other exposure outside of that very small presence in the Middle East. So, the unrest in the Middle East right now isn't impacting us directly at all. It doesn't have a direct impact.

Got it. Okay. Last question is on the accounting side, as you transition your accounting, do you see any changes to the way you account for backlog amortization and on your P&L going forward from acquisitions?

We are not seeing any real change in our accounting for backlog. We are seeing some changes in the way sublease revenue is going to be recognized as a result of the rule differences. There is going to be some impacted on the amortization of intangibles, but not material.

I think one of the bigger ones that you'll see is IFRS aligns with US GAAP in terms of expensing costs associated with difference combinations, which under Canadian GAAP we used to capitalize those costs. Now, under IFRS, you'll see the impact of some of the business combination costs that we incur hitting our P&L.

Great. Thank you very much.

Thank you.

Gentlemen, there are no more questions at this time.

Okay.

If there are no more questions, I would like to thank you all for joining us today. I look forward to speaking with you again in the near future. Thank you.

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