Stantec Inc (STN) 2011 Q3 法說會逐字稿

Welcome to the Stantec third quarter 2011 earnings result conference call. With us today from Stantec management are Mr. Robert Gomes, President and Chief Executive Officer, and Mr. Dan Lefaivre, Chief Financial Officer. At this time, all participants are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session.

(Operator Instructions)

As a reminder, today is November 3, 2011, and this conference is being recorded as well as broadcasted live over the Internet. It will be archived for future references at stantec.com under the Investor section. Therefore, any members of the media who are joining the call today are in a listen-only mode.

And, whoever wishes to quote anyone other than Mr. Gomes or Mr. Lefaivre are asked to please request permission to do so from the individual concerned. Before the call today, there are a few words from the Investor Relations.

Thank you. To get started, 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, that its assumptions may not be correct, and that its actual results may differ materially from those discussed in these statements.

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 discussion and analysis included in Stantec's 2010 financial review. It is now my pleasure to introduce your host, Bob Gomes. Go ahead.

Thank you, Crystal. Good afternoon, everyone, and thank you for joining our third quarter 2011 conference call. 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.

This morning, we released the results of Stantec's operations for the third quarter of 2011. I am pleased to report that Stantec's performance over the last quarter was in line with our expectations for the year with organic growth, new acquisitions, and key projects supporting our overall performance. We experienced organic revenue growth in 3 of our 5 practice areas with Canadian organic revenue growth at 3.5% while our US organic revenue was essentially flat compared to the third quarter of 2010. Dan will now provide details of our third quarter financial results. Dan?

Thank you, Bob, and good afternoon, everyone. As Bob just indicated, the third quarter of 2011, once again, reflected the positive growth and solid operational performance for Stantec. Compared to Q3 2010, our gross revenue in Q3 '11 was up 11.3% to CAD430.4 million from CAD386.7 million. Our net revenue for Q3 2011 was also up 11.7% to CAD351.2 million from CAD314.5 million in Q3 2010. Gross margin in Q3 '11 was 55.5% and continues to be within the range of 54.5% to 56.5% on a consolidated basis. Reduced gross margin in our buildings practice was primarily impacted by revised estimated costs to complete on certain large projects and the continued softening in this market.

Our administrative and marketing costs were 40% as a percentage of net revenue compared to 41.3% in Q3 2010. These were lower due to reduced acquisition-related expenses and integration activities compared to last year and our continued focus on managing our costs. We expect going forward that our admin and marketing expenses will remain within the range of 41% to 43%.

Excluding the impact of the CAD7.5 million gain on sale of equity investments in Q3 2010 our EBITDA was up 11.9% to CAD53.5 million in Q3 '11 from CAD47.8 million in Q3 2010. Excluding the impact of the [5.9] -- the same -- gain on sale and equity investments but after tax in Q3 2010, our net income was up 13.8% to CAD28.9 million in Q3 '11 from CAD25.4 million in Q3 2010. And our diluted earnings per share were up 14.5% to CAD0.63 in Q3 2011 from CAD0.55 in Q3 2010.

I'd like to speak briefly on our cash flows from operating activities which improved during the third quarter. However, our day sales outstanding in whip and AR increased to 100 days. This increase in DSOs is due to normal increase in activity and contracted milestone billings. We do expect that this will decline back to more normal levels in the fourth quarter.

During the third quarter, we also successfully amended our CAD350 million revolving credit facility and extended the maturity to August 2015. And during the quarter, we repurchased 334,600 shares of our shares for CAD7.6 million under the Company's normal course issuer bid with the Toronto Stock Exchange. We believe that, at times, the market price of our shares do not reflect the full value of our business or future business prospects, and that at such times the purchase of our shares represents an attractive, appropriate and desirable use of funds.

Overall, we are pleased with our third quarter results. Our consistent performance once again showed top line and bottom line growth compared to the same period last year as we continue to manage our operations effectively. Bob?

Thank you, Dan. Just as Dan stated, our performance during the third quarter of 2011 supported our ongoing goals for top line and bottom line growth. Overall, many sectors experienced good growth, especially in our increased activity in the mining and oil and gas sectors, which had a positive impact on our business, and reflects the growing opportunities in these markets. Acquisitions in 2010 and 2011 also delivered revenue streams while reductions in our administrative costs underlined our focus on operational efficiency.

Targeted organic growth and significant project activity continued in both the United States and Canada in 3 of our 5 practice areas despite the softened economy. Even as challenges related to the economic situation in the United States continue, we have experienced stability in most areas of our business during the third quarter and some continued strength and growth in others that we believe will continue in the remainder of 2011. While the US federal investment and infrastructure is still not fully meeting the needs of our market, it does provide opportunity for growth in our Company.

Overall, we have a strong backlog of work across our practice areas both in the United States and Canada. Our backlog increased by CAD49 million, or 4.3%, to CAD1.18 billion in the third quarter compared to the second quarter of 2011 which reflects the 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 by developing broader relationships with our clients and managing our business efficiently, we will continue to improve our backlog.

As I referenced, we experienced organic growth in all practice areas except Buildings and Environment during the third quarter. [Though] traction of growth in our Buildings area is largely attributed to the continued soft state of the US and Canadian healthcare markets. Organic revenue retraction in our Environment practice area was due in part to a reduction in pass-through sub-consultant costs and clients implementing their programs at a slower than expected - and a slower than respected recovery in the environmental remediation sector. Although these factors affected our results in the first 3 quarters of 2011, we are confident that our positioning in these 2 practice areas will allow us to continue to take advantage of opportunities during the fourth quarter and into 2012.

Q3 was also a busy period in other areas of our Company and business. At the September board meeting Mr. Doug Ammerman and Dr. Delores Etter were appointed to our Board of Directors. A former partner with KPMG, Mr. Ammerman brings nearly 40 years of fiscal and organizational leadership experience while Dr. Etter brings more than 35 years of technical leadership in both the academic and government sectors.

In this morning's news release, we outlined some of the recent acquisition activity taking place in our Company starting with Bonestroo, Inc. and Bonestroo Services, LLC which we acquired on September 2. The addition of this engineering, planning, and environmental service firm added 275 staff to our Company with offices in Minnesota, Wisconsin, Illinois, Michigan, and North Dakota.

On October 1, we acquired Yellowknife, Northwest Territories-based FSC Architects and Engineers, an integrated architecture and engineering firm specializing in cold climate and remote location projects which added approximately 85 staff to Stantec. The acquisition will significantly strengthen our presence in the High North.

We also acquired Lexington, Kentucky-based ENTRAN Inc. on October 28, which added approximately 115 staff to Stantec with specialized skills will augment our Transportation practice area. To date in 2011, we have completed 5 acquisitions and added a total of over 700 staff.

Now, I would like to highlight some of our new project awards. Our project activity during the third quarter demonstrated our ability to support top line growth by operating efficiently and responding to the needs of our clients and the changing marketplace. Project activity for our Buildings practice area reflected our ongoing primary focus on healthcare and higher education sectors.

We were selected to support the expansion of Brockville General Hospital in Brockville, Ontario with information and communication technology, security consulting as well as mechanical, electrical, and structural engineering. We also secured a design contract for a clean room facility at Carnegie Mellon University in Pittsburgh, Pennsylvania that will house labs for biotechnology and energy research.

The Environment practice area secured projects by effectively responding to the changing needs in the marketplace, including wastewater treatment facility upgrades and maintenance to remediation services. In Detroit, Michigan we were selected to provide construction management and quality assurance services during the environmental remediation activities at the Belleview development site, a former manufactured gas plant site.

A prime example of growth is in our Industrial practice area, where we've been providing services for the world's top mining companies while engaging in new projects during the third quarter. We've grown our client relationship with the Inter-Pipeline Fund considerably and are now providing construction management services on the Cold Lake West property in Alberta. This is a multidisciplinary project utilizing our oil and gas, geotechnical, survey, pipeline, and architectural teams.

In our Transportation practice area, we were selected by the Arizona Department of Transportation to lead the inspection of the Interstate 10 Freeway Deck Park Tunnel in downtown Phoenix, a major roadway that sees more than 260,000 vehicles per day. This is also a multidisciplinary project for our Company to provide engineering services including electrical, mechanical, and structural inspection as well as laser scanning through our Geomatics practice area. This project win is also a result of our long-term client relationship with the Arizona Department of Transportation.

Our Urban Land practice attracted significant projects in several regions, including a multidisciplinary award to redevelop the surrounding grounds of the Alberta Legislature Building and Annex Building in Edmonton. We will provide project management and architectural landscape architecture services, structural, mechanical, electrical, and municipal engineering services, on this high profile property in support of the Legislature Building's upcoming centennial celebration.

Internationally, while we are pursuing numerous opportunities in India and the Middle East while our UK operation continues to face a difficult environment. In the interest of time, I've only shared a small sample of the projects we're working on, but the range of sectors and regions reflects our diverse presence. We continue to be thankful to the new and loyal clients for their value of our services.

Now, I'd like to comment briefly about the potential market conditions for our services going forward. Looking at our individual practice areas, we expect the following for the remainder of 2011. We believe that the outlook for our Buildings practice area is a moderate organic decline in 2011.

This outlook is largely attributed to the continued uncertainty for public project funding and increased competition which are factors that may affect our immediate practice area growth. Challenges exist within the softened economies in the United Kingdom and the United States, as well as a general reduction in large scale US-based healthcare projects. But, our acquisitions in 2011 have expanded our geographic reach and expertise in these areas.

Additionally, we are better positioned to attract local renovation and redevelopment projects and have continued a strong presence in the higher education sector and Canada's commercial sector. We continue to be optimistic of our long-term success with P3s because of our presence and relationship in P3 markets and our Top Tier positioning. Moving forward, our strategy will remain consistent to diversify into the private sector and commercial markets while we continue to pursue healthcare and higher education opportunities.

In our Environment practice area, we see stable organic growth through the remainder of 2011. Improving from trends earlier in the year, we have seen an increase during the third quarter in project approvals for our remediation business and expect this sector to improve for the remainder of the year. Additionally, recovery in the oil and gas, power, and mining sectors position us well for large-scale projects while the continued need for water and wastewater infrastructure upgrades provides potential for growth. Our status as a top, global, environmental service provider compliments our ability to pursue opportunities and meet our clients' needs to comply with increasingly stringent environmental regulatory requirements, increased activity in the US shale gas development programs, as well as emerging industrial water issues.

In our Industrial practice area, our outlook has progressed from moderate to strong organic growth for the remainder of 2011. This area of the Company has displayed the strongest organic growth this year, resulting from increased opportunities in the strong mining and oil and gas sectors and our strengthened relationships with the top mining companies in the world. Commodity pricing has remained strong, and we believe that we would see this activity continue through the year's end while our capabilities in client work and sustainable energy development provided added support for this outlook.

We believe that our Transportation practice area will see continued stable organic growth in the fourth quarter of 2011. The US market shows continued potential for transportation project spending at current levels. While federal support for large-scale projects is still lacking, our relationship with regional municipalities positions us well for the local market projects. In Canada, P3 projects continue to provide a potential stream of work, and we expect our rail and transit groups to maintain their current activity levels during the year.

We believe that the outlook for our Urban Land practice area for the remainder of 2011 is stable to moderate organic growth. During the third quarter, housing starts in Canada and the US remained relatively stable with fluctuations occurring in the US depending on the region. For the fourth quarter, we believe we will see a steady stream of projects for the Canadian residential sectors while diversifying our client base and leveraging our multidisciplinary approach to pursue projects in the public sector.

In closing, we continue to believe that our overall outlook for the remainder of 2011 support continued organic revenue with a targeted 2% to 3% increase compared to 2010. While impacts are still felt from a slowly growing economy, increased competition, and project delays, we believe that our diversity, agility to respond to market conditions, and demonstrated ability to support North American infrastructure will allow us to adapt our business to current economic conditions.

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

(Operator Instructions) The first question comes from Michael Tupholme from TD Securities.

Hi, thanks. Question regarding the admin and marketing expenses as a percentage of revenues? Quite impressive in the quarter. I know you said you're not changing your guidance there, but I'm just wondering if you think we can sustain these lower levels into the fourth quarter? Or, was there enough acquisition activity in the third quarter that that will cause some of the expenses to rise there?

Hi, Michael. Dan here. Yes, we think that the expenses in the third quarter were lower really as a result of fewer acquisitions. We had fewer restructuring-related costs, professional fees associated with acquisitions, but we have done some acquisitions recently. And, the integration costs and administrative time spent in the fourth quarter we expect will bring that up over the 41%.

Okay. And, if I could just ask one other follow-up here. In terms of the P3 market in Canada, can you talk a little bit about that? I guess you made the comment in your MD&A that you are seeing decent opportunity still but at a reduced rate. I want to be clear if that's sort of a function of the law of large numbers. As the number of projects grows, it's harder to maintain that rate of growth. Or, if you're seeing something else there that's suggesting some softness.

We're pretty comfortable that the P3 market, especially in Canada, is still quite strong. We're looking at tracking about 110 alternative delivery projects in design, build, and the P3 space. So, it's actually been growing. There's actually municipalities that are now getting into the P3 market as well before it was much more provincial opportunities. We're starting to see it actually expand, albeit some of those are smaller P3s. But, we still see a strong pipeline of P3 projects, certainly into 2012.

Okay. Thanks.

The next question comes from Paul Lechem. Please go ahead, Paul.

Thank you, good afternoon.

Hi, Paul.

I was just wondering, can you give us some color around the seasonality of the business? Varying segments which naturally soften in Q4 and Q1 around the winter?

Certainly, any of our practice areas that have a field aspect to them will have some seasonality to it. We have probably more of that seasonality in the first quarter than the fourth quarter. Certainly, Q3 and Q2 are the stronger ones. Q4 is a little bit -- has more seasonal affectedness to it. But actually, we see a fairly busy fall right now. It has been such a lousy summer and spring in a lot of places of North America, we're seeing a lot of pent-up demand for continued field services. So, we're actually expecting a pretty busy fall with a lot of our field operations, but certainly, the Environmental practice area has a lot of fieldwork that is done. So, it certainly is a practice area that's affected.

The Urban Land business with Geomatics has a bit of it. Transportation has a bit of it. Certainly, December with holiday time. There is certainly a slower month there for the third period of that quarter is usually also a quieter period. So, overall, certainly, that's going to have some impact, but we don't see it having any more of an impact than it has in previous years. And, as a matter of fact, because of a bit of a pent-up demand, this may be a busier Q4 than usual for us.

Got you. Looking out into next year, do you have any early comments about what your feeling is with the economy where it's at? Where next year is going to shape up? Is it going to be a similar type of growth rate than 2011? It may be too early to give absolute guidance, but do you have any qualitative comments you can make?

It's a pretty volatile market out there right now, Paul. So, from a world economy basis, certainly there's a lot of unknowns. I think what we see is a pretty similar 2012 to what we experienced in 2011. We just don't see too much. Certainly, we'll be providing our outlook at our next quarter call and going into similar depth there. But, at this point, in time we don't see things getting much better. We also don't see things getting much worse. So I think it's going to be a pretty similar year to what we just experienced.

if I can sneak one more question in. On the acquisition front, Q3 was a little busier, but it has been a bit of a slower year than 2010. Given the cash flow was strong in the quarter, given your credit availability, given Dan's comments about collections normalizing to Q4. You will have cash available to pursue them, but can you give us some sense of why it's been a slower year? And, how it's now shaping up if you can see a pickup in activity?

It's still a pretty good year. Last year was very busy with 11 acquisitions. I think we've done 5 so far this year. I wouldn't say it's been a slower than average year, but there's lots of opportunities out there. There really isn't a cash issue. Certainly, it's not from a lack of funding or a lack of financial capability. Bottom line is, you just don't want to overpay for firms in this type of economy. You have got to be pretty certain with regards to their ability of being stable, of growing, being accretive, and certainly, we're pretty disciplined when it comes to that. So, at this point in time, lots of opportunities, lots of cash. We just have to ensure we're paying the right amount for these firms and ensuring that it's the right thing to do for our shareholders.

Have you walked away from a number of transactions? Or, are they just not even reaching that stage?

All of the above. There's ones where clearly we just didn't feel we could come to a financial conclusion. There's some that just clearly see it's not going to -- you're too far apart even at that beginning. There are some that you negotiate for quite a while just feel you want to see a little bit more stability come to these companies before you close. So, a little bit of everything.

Thank you for that. I will pass it over. Thank you.

Thanks, Paul.

The next question comes from Sarah Hughes from Cormark Securities.

Hi, Dan. Just a question on the Buildings segment in terms of the revised cost estimates. Just wondering if you can give us an idea of what the actual impact was on revenue and margins?

You saw, the margin I think went down a couple points in the Buildings group. So, it's certainly -- it was a result of some of the larger, more complex projects in the Buildings group, and from time to time, we review our accounting for the cost to complete on these major projects. We'll make a revenue adjustment. We manage our scope and our work with our clients, working with change orders. We then negotiate those change orders. And, it's any period of time, you may not have the change orders approved, and you have to just do those revenue recognition adjustments. Essentially, that was the impact to the gross margin in this period which was, I think, 1% to 2%.

I think, overall, it was somewhere around CAD3 million to CAD4 million was the impact in the quarter.

On margins, or on revenue?

Straight from revenue which affects the margins.

Okay. And then, second, I know you were quite active in your buyback this quarter. More active than we've seen in the past. Just wondering, when you go and approach when you want to go in and buy stock, what kind of levels -- is it a multiple you look at? I'm just trying to get a sense of what you're looking at as you determine to become more active on the buyback side?

As we've said, there are times when we look at our share price, and when it was trading down in the CAD22, CAD23 range, it certainly looked like an attractive opportunity when you look at the multiples of what Stantec is trading at. And, certainly we know our business. We look at that and say, well is that a better use of cash than maybe going out and buying an acquisition at similar or even lower multiples. And, there's not a lot of certainty.

Those are the kind of things we look at when we look at the share price and take some strategic opportunities. We pick away at it. We don't go big bang on any of this stuff. Again, still fairly conservative in our approach and to repurchasing. Certainly, we have the cash to do more, but we're also looking at it to make sure we're being prudent with the use of that cash. At the same time, we look at offsetting any potential dilution that we would have from options that are exercised in the next year. We try to make sure that that doesn't have a dilutive impact to our shareholders.

That's it for me. Thank you.

The next question comes from Tahira Afzal from Keybanc.

Thank you very much. Just a couple of questions. One in regard to your tunnel project in Arizona. Would love to get a better idea of how you -- what the competitive environment for you has been over there? And, what this win could potentially mean for you in terms of really getting more recognition and traction on the transportation side in the US?

And number two, there have been several projects that have been accelerated by Obama recently on the transportation side. Some of them are fairly large like the Tappan Zee bridge project. Would love to get a sense of if those are projects that could you potentially be vying for?

Certainly, our position in the Transportation group is, what I would certainly call it, to be much more of a local and state-type of presence. So, the Arizona project that you mentioned. We've been in Arizona now for 20 years, and Arizona Department of Transportation has been a client for those 20 years and with the previous number of years with a Company we acquired. So, it's that longstanding reputation that we have with a client like that. With regards to the Tappan Zee project, we do have a strong position in New York with the acquisition we did there, Vollmer Engineering.

So, again, with New York State Department of Transportation and New Jersey, we have a very good position with those. And, those companies -- those state departments are really looking for those good, local, strong firms that have that strong local presence that have been in the state for many years -- has a long relationship. But, then still looking for a company that's large enough. A company that has enough expertise to be able to work on those larger projects. The projects you mentioned are just a classic example of that global expertise, local strength where you need that local strength. You need the local relationship with those departments of transportation to be able to bid on their jobs, plus you have to be big enough to be able to do them because the projects are becoming much larger. So, certainly that's a good example of that requirement of leveraging that global expertise through a very strong local presence.

Great. And then, let's assume Stantec gets at least a piece of the pie of the Tappan Zee Bridge project. Does that -- as you said, because these businesses and the DOTs tend to be fairly localized in terms of reputation and choosing which contractors to work for. Would that not imply any kind of reputational carryover into other states? Or, at least perhaps position you better with -- in terms of making acquisitions in other states?

Certainly, if you're working on those types of projects that gives you great presence. It shows you have the size and capability to do it. So, it does allow you then to leverage that into other locations. The recent acquisition we just did with ENTRAN in Kentucky and Ohio was exactly that. That firm was very interested in the fact that we were a much larger transportation firm that they first thought, and certainly working with us on a number of projects, they saw that ability for them to do more in other states by joining Stantec rather than just their local area. So, a firm like ENTRAN that had some very good long bridge span capabilities, but much more local in the Kentucky market, now gets to utilize that capability in other states. Certainly, yes, it does allow us to do that.

Thank you very much.

The next question comes from Pierre Lacroix from Desjardins.

Thanks very much. Very general question. You decided to keep your 2% to 3% organic growth target for 2011. I guess you're aware that if you reach even the low end of that target, it means that the fourth quarter will be anywhere something like 5% to 10% organic growth. To which extent are you confident that you are going to reach that kind of level?

Year-to-date, Pierre, we have already on a net revenue basis have achieved over 2% organic growth. 2.4% organic growth -- 2.1% year-to-date, 2.4% in Q3. I think we can see that sustaining for the rest of the year.

On a gross basis, right now essentially, we're flat. But, to get to the end of the 2% to 3% for the fourth quarter would require to us do around 5% to 6%. So, we can very easily -- we've got fantastic growth right now going on in our Industrial practice area. Our Transportation has been strong. Urban Land has been strong. We expect Environment to pick up and have a very strong fourth quarter. The only one that we see as being stable, in other words not recovering stronger in the fourth quarter, is the Buildings practice area. But, the other practice areas we're expecting to have a very good fourth quarter and do expect that we can still hit that 2% to 3%.

That's great. Thanks for that. One final. Just thinking strategically speaking on the Building segment, on the trend -- the down trend in margins. I know that you had some cost issues -- cost re-forecast issues, but are you downsizing the segment? Or, right-sizing the segment? Do you have any specific strategy there to see margins growing again?

We don't see that trending down any further. That was basically a one-time readjustment. I don't see the margins continuing to erode. Certainly, we have taken a very pragmatic approach to what we see as a very softened market. And, yes, we have been right-sizing that group. Certainly, that's in Canada and the United States.

We knew we had to do that as part of the two large acquisitions we did last year with Anshen & Allen and Burt Hill. It takes, for those types of firms, the first year is really almost a year of integration. And, we've gone through that now with them. I feel that we're now certainly at that right size. So, we see that group now being much more stable going forward. But, unfortunately because of the soft economy, it's going to struggle for growth. There's no doubt. The opportunities just aren't there. I certainly feel very strong about our future potential. We now have a very, very strong healthcare practice, very strong higher education practice in North America. So, we feel the capability now of leveraging that, we can -- even if there may be reduced opportunities, we have a higher degree of success in that market.

Thank you, Bob.

You're welcome.

The next question comes from Chris Blake from Stonecap Securities. Chris, go ahead.

Good afternoon. I just had one follow-up question. Most of my questions have been answered so far. But I just want to touch base again on the transportation segment. I know you mentioned in your MD&A that the lack of long-term funding and the strategy in the United States is holding back larger projects. I was trying to get a sense given the organic growth in Q3 and the year-to-date for that segment, I guess the question I have is, how much of those larger size contracts have benefited or contributed to your results? Relative to those shorter maintenance-type projects that are proceeding fairly rapidly?

We've got some long-term, larger projects that are still definitely contributing to that growth. We continue to work on the Stoney Trail project in Calgary, on the South Perimeter project in Vancouver. We're chasing some fairly large transportation design/build opportunities in the United States, and our design/build opportunities are a fund of -- or a source of revenue as well. Because we get paid for our pursuits in those projects. So, all that -- those large projects are also contributing to the growth we're experiencing in the transportation sector. And, are obviously then good contributors to growth for the upcoming quarters as well. So we're pretty happy with the performance of our Transportation group in what is a pretty competitive and tough economy. They've managed to really leverage that local relationships they have. Again, because of our size, we're starting to be able to win some of those bigger projects.

That's great. Thanks.

The next question comes from Tristan Richardson from D.A. Davidson. Please go ahead.

Just on behalf of John Rogers.

How are you, Tristan?

Good. On the environmental side, you maintained your comments for stable to moderate organic growth. But, as you said later, it does look like you expect a really strong fourth quarter. I'm just curious, what's driving that? What's the acceleration in the fourth quarter?

I'd say probably two major issues. One, certainly, we are seeing a pent-up demand from the remediation services that had a really, really slow first and second quarter. In the third quarter, we're starting to see a lot of those projects now get released. Our client is now starting to push us to commence the program that really we thought should have commenced in the first half of the year. Now, it's starting to roll in the second half of the year. Our remediation group is looking very busy.

The other one would be the shale gas opportunities that we see developing in the United States, specifically. So, in just about all the basins right now, we have clients that we're working with. Certainly, probably the busiest is the Marcellus area. But, we are working in a number of different shale gas opportunities. A third one also would be the industrial water side. That's still picking up and getting busy for us. Even though the municipal is relatively soft, we still have municipal projects and continue to win them, but see some increased opportunities in the industrial water sector as well. So, all areas of the Environmental group is looking for a busy Q4.

Got you. It sounds like these activities aren't necessarily isolated in the fourth quarter like one or two particular projects. It sounds like this strength could carry forward. Is that fair to say?

Yes. I think the one practice area that we thought would have a better year is Environment, and it seems that the clients are still there. The opportunities are still there. They have just moved slower. So, that bodes well for next year as long as the economy doesn't decrease. We see lots of opportunities going forward. And, there's also the pipeline bill that was approved -- passed by the Senate, anyway -- is another opportunity that just increased regulatory requirements in that oil and gas sector is just creating more and more opportunities for us. So, certainly, we see it continuing well into 2012.

Thank you very much.

The next question comes from Ben Cherniavsky from Raymond James.

Hi. Can you hear me?

You bet, Ben. How are you?

Good, thanks. Most of my questions have been asked. But, while I've got the chance, I can maybe get you to address a few smaller issues. This is a question that I know I've asked in previous quarters, but the number still moves around a bit. I'm talking about the gross-to-net ratio. My understanding is that number should trend down over time as you do more cross-selling, acquire firms, and do less outsourcing. And yet, we saw a big bounce this quarter. How should we think about that going forward? Is it still a number that will trend down in 2012 even though there may be some quarterly lumpiness?

I'd say you're always going to have the quarterly lumpiness because there's some work that we simply can't do internally. So, there's a lot of sub-consultant work that we simply do have to pass on that we just simply don't have the capability -- nor do we want to have the capability to do. There is requirements. A lot of these larger projects require teaming. So, we're starting to see that if you have a large project that you win in that quarter that has a lot of sub-consultants working on it, that could also then inflate that quarter compared. Certainly, the overall goal has not changed. That's something we look at, on a quarter-by-quarter basis, is the sub-consultants we use and look at those as one of the opportunities to cross-sell as sort of low-hanging fruit. But, it is -- I wouldn't call it a trend going up. It is going to always be lumpy for us just because of the nature of our business, but certainly, something we're still focused on.

The idea is to get it down over time still?

Yes, but you're never going to eliminate it. There's always going to be the need for partnering. There is always going to be a need for using third-party subcontractors for work that we simply can't do. But, the goal is to always, yes, trend it down.

Right. But, I mean, if I look long enough back, you went a long stretch of years -- granted, the number was a lot higher when you were a lot smaller. But, it was about 130%, 140% in the late '90s. Then, it did take a step down almost every year, consistent trend, right down to about 2006, 2007. But, since then, it's been going the other way.

The biggest change in the last, I would say, two years would be the acquisition of Jacques and Seacor, the environmental services business. That business has a large degree of subcontractor work that we just don't want to do. There's a lot of testing work, a lot of drilling work, that we subcontract out. So, that is probably a result of -- if you're looking back three, maybe four years ago, that was only probably 10% of our business. That's now 35% of our business. But, I would probably have to think its impact would be that practice area in itself.

And, that's something that won't change much.

No, that's right. That's -- probably not because the more environmental services work we do, the more drilling companies we'll use, the more testing companies we'll use. So, potentially, that would stay the same.

Okay, that's good to know. One other question, if I may. I was curious if you could elaborate a little bit on the commentary you made in your MD&A about the Canadian healthcare space in particular. And, that was a market that you saw slowing. Do you think that -- how do we read into that? Is that a function of governments being a little more stingy? Or, is it lumpiness? Or, is it stimulus money? I didn't think stimulus had a lot to do with that particular sector. So, just wondering if you could give us your perspective on that?

I would use the word lumpiness. It is still -- we still are tracking some major hospital projects both in Canada and the US. In Canada, a lot of them are P3s, and the P3s -- both the BC and the Ontario government are doing a very prudent job of ensuring that they're spacing those projects out and not overloading the market by issuing too many. So, there is a bit of a gap in there right now, and that just really caused a bit of softness. But, we still see long-term opportunities in Canada through P3s and non-P3 conventional healthcare projects. And, certainly very optimistic that it is going to recover in the United States. Right now, I see that as a short-term issue in healthcare in Canada. It was just because of that lumpiness of the release of P3 projects.

That's helpful. Thanks. Good quarter.

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

Hi. Bob, can you please provide us some insight on future contract pricing? Are you seeing any more pressure than in the past? Is it getting more expensive to bid? Maybe could you give us some idea of differences between the geographies -- US, Canada, and the UK. Thanks.

Certainly, the UK is just -- there's not a lot to even bid on. So, that's the situation there. So, when that happens, it does get competitive. But, we have a very specialized in higher education and in healthcare in the UK. Canada and the United States, certainly, the competitive nature and any time of a tough economy, you just have more bidders bidding. So, rather than it having a huge impact in lowering gross margins or lowering pricing, it just means you are going to be bidding against 10 people instead of three people. If you have a really good position, if you have a really good relationship with your client, that really doesn't matter. Because it's your top two or three competitors that are going to be the ones to beat you out. The additional seven or eight are -- I hate to say it -- more noise than anything. But, it does mean that there are more people bidding on your projects.

We haven't seen a huge impact to margins, and that's certainly not a game we like to play. When you're bidding those jobs, you just have to understand the scope much more carefully. You have to understand your clients -- what they want is deliverable much more carefully. You have to bid the project as tight as you possibly can. But, you can't be in the business of buying jobs. That just doesn't last very long. If you are competing against good companies, they're using the same strategy as us. That tends to then keep prices in a reasonable position, but certainly, everyone is trying as hard as they can to ensure that they've determined the scope as clearly as they can and are bidding the project as efficiently as they can. But, it does require you to put more effort into it, and the effort is actually going to pay off for you because they're also going to be exercising those jobs -- or executing them more efficiently. I'll answer the question by -- if you've forgotten what it was -- but, certainly, it is getting competitive, but no more so than any other tough economy that we've worked through.

Just to add to that, we really haven't changed our guidance between that 54.5% and 56.5% overall for our business -- gross margin.

Yes. Thank you very much.

The next question comes from Sara O'Brien from RBC Capital Markets. Please go ahead, Sara.

Hello.

Hi, Sara.

Can you talk -- just to follow up on that last question. The extra effort made to making sure that your bids are appropriate? Could that drive your marketing and admin costs up over time? How would you expect that to play out?

Potentially, the more time you spend on business development, certainly, that does affect your SG&A costs. You have to continue to get work in the door. So, we do invest in our business development costs for sure. It wouldn't necessarily impact our gross margins, but it could impact our SG&A.

Okay. Go ahead.

Go ahead, Sara.

I was going to ask also about the cost to complete re-forecast on the Buildings. I wondered if that was P3-related? You can answer that first, and then I'll go on.

Some of it was P3, yes. Some of those complex projects were P3 projects.

Does that change at all your view of bidding on future P3s? Or do you see them going into different practice areas where you may have more of a competitive advantage?

Oh, no, we still are very strong on P3s. This is something that we do on a regular basis when you recast and relook at the projects. It's something that we realize that the more complex the project, the faster they move. Sometimes, the tougher it is the timing -- you're changing the change orders and get those approvals. So, we're still very comfortable with our ability of executing those P3 projects. We've done a lot them. This wasn't what I would call curiously unexpected, but they are tough projects. I've said that all along. They're complex jobs. We're very conservative in the way that we look at our revenues on these projects. So, that's another factor that comes into it, but realistic as well. I think we execute those jobs as well as any of our competitors and still very optimistic about our opportunities going forward.

Okay.

Just to add, we may obtain a slightly lower margin on these projects, but they are still very profitable projects for us.

As they go down in scale and size, we're hearing a lot more about municipalities bundling services. Could be even wastewater treatment facilities, for example. Is that kind of project of interest to you? Do you have the expertise? Do you see the opportunity for, again, a decent margin there? Or, is it just getting too competitive to play that out?

No, I think, as we mentioned earlier in the call, it's that local strength and that local capability that we have. If we have a local office that's strong in a municipality that's bundling some P3s together, that's a double benefit for us because we have the P3 experience. We understand what it's like to work for a contractor on one of those types of projects. Plus, we have that good local expertise and good local relationship. So, those local jobs we feel we can compete very well with a local competitor. Even more so because we have that P3 knowledge to bring to the table as well.

Okay, great. Maybe just a question on the acquisition strategy. Overall, you mentioned 15% growth with two-thirds of that via acquisition. Just wondering what your feeling is. Going into 2012, do you expect to be as aggressive on the acquisition front? Or, is it more caution regarding the backlog of some of these targets you're looking at?

Well, certainly we're going to be as aggressive, but we're absolutely going to be just as diligent looking at the backlog and evaluating those companies with the same level of conservativeness we always have. Certainly, we see lots of opportunities there. We still feel that there's lots of opportunities for acquisition growth for us. Probably more so in the US than Canada, but certainly on both sides of the border there's lots of areas of the Company that we feel can still be benefited by acquisitions. So as you said, we just to have ensure that the backlog is real. That their opportunities that are good, and we look at the synergies between themselves and Stantec. And, just ensure that we're being conservative and realistic in the valuations but still very aggressive in the acquisition space for sure.

Just the last question. How do you feel about your track record, let's say, in the last couple of years, of examining and doing due diligence on backlog and, how it actually panned out? If you look at a company like Burt Hill, for example. Are you pleased with the way that flowed through? Or were there expectations that backlog would have been much higher at this point?

I would say on 80% to 90% of the acquisitions that we do in the last 18 months, we've been very happy with the way they've turned out. There's always somewhere, because of the economy, some of the projects that they looked at coming up were just put on hold. And, certainly Burt Hill has been a very positive. Certainly, in the US, some of the UK -- that wasn't Burt Hill though. Some of the UK work, certainly, dropped off the map. That hurt an Anshen & Allen-type of situation. But for Burt Hill, solid in India, a little bit of softness in the Middle East, but that probably is just getting familiar with the business over there. I've been very happy with the progress in the last year as a result of their backlog that they showed. It's been as expected.

Great. Thank you very much.

Thank you.

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

Okay. Thank you. If there's no further questions, I would like to thank you all for joining us today. We're confident in our strategy, our business model, and our ability to continue to manage our business effectively. I look forward to speaking with you again in the near future. Thanks very much.

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