Stantec Inc (STN) 2012 Q2 法說會逐字稿

Welcome to Stantec Inc.'s second-quarter earnings results 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 will conduct a question-and-answer session.

(Operator Instructions)

As reminder, today is August 3, 2012, and this conference call is being recorded as well as broadcast live over the Internet. It will be archived for future reference at Stantec.com under the investor section. Therefore, any members of the media who are joining the call today in listen-only mode and who wish to quote anyone other than Robert Gomes or Dan Lefaivre are asked to please request permission and do so from the individual concerned.

Before the call begins, there are a few words from Investor Relations.

Thank you. 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. In addition, Stantec management will be mentioning additional and non- IFRS measures. You will find descriptions of these IFRS measures and their use and underlying assumptions in the management's discussion and analysis included in Stantec's 2011 and Q2 '12 financial reviews.

It is now my pleasure to introduce your host, Bob Gomes.

Thank you Crystal. Good morning, everyone, and welcome to our 2012 second quarter comments call.

Dan will provide a brief summary of our financial results for the quarter, and I will follow with an outline of our market outlook. We will then address individual questions.

Yesterday we released the results of Stantec's operations for the second quarter of 2012. I am pleased to report that we finished the first half 2012 with strong results and our fourth consecutive quarter of organic growth in the face of mixed economic conditions. The Company's performance this quarter demonstrates that we continue to be on track to meet our targets. Dan will now provide a review of our second quarter financial results.

Dan?

Thanks, Bob.

Good morning, every one. As Bob just mentioned, the second quarter of 2012 was a strong quarter for Stantec. Our gross revenue increased 15.5% to CAD476.2 million compared to CAD412.3 million in Q2 '11, resulting in our fourth consecutive quarter of organic growth on a gross and net revenue basis. Our results were also positively impacted by two acquisitions that closed this quarter. The PHB Group, based in Newfoundland, and ABMB Engineers, based in Louisiana. Bob will speak more to these acquisitions in just a few moments.

Our net revenue was also up 15.9% to CAD396.6 million from CAD342.3 million in Q2 '11. The increase in organic revenue was mainly due to increased activity in the mining and oil and gas sectors. Gross margin as a percentage of net revenue was 54.3% in Q2 '12 compared to 55.1% in Q2 '11. This decrease is mainly due to the growth in our industrial practice, which is a lower margin business. We expect to see our gross margin to be within our targeted range of 54.5% to 56.5% by the end of 2012.

Our administrative and marketing expenses were 40% of net revenue in Q2 '12, compared to 40.4% in Q2 '11. We achieved a 13.5% increase in EBITDA to CAD56.2 million from CAD49.5 million Q2 11. Net income increased 19.8% to CAD30.8 million from CAD25.7 million in Q2 '11, and our diluted earnings per share increased 19.6% to CAD0.67 from CAD0.56 in Q2 '11. As a result of our focus on client relationships and service delivery, our backlog increased also to CAD1.2 billion compared to CAD1.1 billion in Q2 '11. Lastly, the Company declared its third quarterly dividend of CAD0.15 per share payable on October 18 to shareholders of record on September 28, 2012.

Overall, our performance was strong for the quarter and our business continues to grow. A strong topline growth this quarter demonstrates our ability to remain flexible in changes in market opportunities, while our strong bottom-line performance highlights our ability to deliver solid returns for our shareholders.

Back to you, Bob.

Thanks, Dan.

As Dan just outlined, our Q2 performance has resulted in a good first half of 2012. We remain focused, consistent and disciplined in our efforts to meet our objectives, and I believe our results are a testament to the strength of our long-term strategy. As you are aware, this is been a busy quarter for acquisitions in our industry, and we're pleased we closed on two acquisitions, which allows us to continue to expand our services to our clients.

ABMB, 130 person transportation consulting firm based in Baton Rouge, Louisiana, joined our team. Also joining us in May was the PHB Group, a 35-person architecture and interior design firm based in St. John's, Newfoundland. PHB diversifies the services we can provide our clients in Atlanta, Canada, and ABMB strengthens our position in US Southeast and in our transportation sector. I am pleased to report that both these acquisitions are fully integrated into our enterprise system. Another example of the value in our investment in our foundation.

In addition, during the quarter we signed a letter of intent to acquire Calgary based Cimarron Engineering Limited, a 290 person engineering consulting energy company specializing in oil and gas pipeline systems and facilities. This acquisition will strengthen our capacity to take on large-scale oil and gas projects, which was a priority strategy for us entering 2012. We expect this transaction to close later in August. I would now like to highlight some current projects that reflect the scope of our integrated services strategy.

During the quarter, we secured a commission at the Cleveland Clinic in Cleveland, Ohio to perform programming, architectural, and interior design services for a major expansion for the Taussig Cancer Institute. In our environmental practice, we secured a project in British Columbia at the proposed Suska and Sukunka mines, where we were providing environmental baseline and impact assessments, permitting, regional monitoring engineering and first nation support services. This project represents a step forward in diversifying our expertise in deep mining practices to include open pit operations.

Project activity continues to grow in our industrial practice. For example, we're proud to have been selected to provide integrated engineering and architectural services for infrastructure upgrades to Seaspan's Vancouver British Columbia shipyards. The project will support Seaspan's noncombat program as part of the Federal Government's national shipbuilding procurement strategy. In our transportation practice, Stantec is part of a P3 project team selected for the Northeast expansion of Anthony Henday Drive, a 27-kilometer, 17-mile, 6 and 8 lane divided ring road in Edmonton, Alberta.

In our urban land practice, while remain strong in our residential practice, we continue to diversify into the nonresidential sector. For example, in the United States, we secured a project for the development of various storm water best management practices that will reduce storm water combined sewer overflows for the green infrastructure program in Philadelphia, Pennsylvania.

This small sample of projects showcases the diversity of our services and expertise. We work of thousands of projects for clients at the global and national level, as well as with local and regional clients. This range of projects and clients allows us to perform consistently, to mitigate risk and to adapt to market opportunities.

Now, I would like to comment briefly on potential market conditions going forward. We continue to see a moderate increase in organic revenue for 2012. We hade strong results for the first half of 2012, and expect to meet our targets in the second half of the year. In our Canadian operations, our organic revenue grew 7.7% compared to the same period in 2011 while our US operations were flat, showing our ability to sustain performance despite the softened market conditions.

We have built a strong and growing presence in the United States, and we are very well-positioned to take advantage of a recovering economy. Our international operations outlook remains stable to moderate growth, due mainly to continued opportunities in our buildings practice and in the mining sector.

Looking at our individual practice areas, we expect the following outlook for 2012. Our overall outlook for our buildings practice is a stable to moderate retraction in organic revenue for 2012. We have revised this outlook based on the uncertainty in funding for public projects and increased competition. This is one area of our Company that has been more affected by the challenging economy.

We are, however, ranked as one of the top integrated building design practices in the industry, and with our wide range of services and expanded geographic presence, we continue to win projects in this practice area. We expect to achieve stable to moderate organic growth in our environment practice for 2012, with organic growth mainly due to activity in the mining and oil and gas sectors.

While the water sector is essentially flat with municipalities facing budget constraints, we remain well-positioned to secure opportunities resulting from a more stringent regulatory environment. For example, we are seeing investment continue in existing water facilities that face consent decrees and regulatory upgrading, and as well, was the cross selling opportunities in the industrial water sector. We anticipate strong organic revenue growth in our industrial practice for 2012. We have revised this from moderate as a result of our growth in the first half of 2012.

Commodity prices are expected to remain relatively strong, which we believe will encourage continued capital spending by our private sector clients. Growth in this practice area is fueled largely by robust activity in the mining and oil and gas sectors, including activity in the western Canadian oil sands and in the unconventional plays like Bakken, Marcellus and Eagle Ford. With an acquisition in the oil and gas sector in the last year and our letter of intent this quarter to acquire Cimarron Engineering, we are well-positioned to pursue opportunities in this sector, specifically in the growing oil and gas midstream sector.

In our transportation practice, we expect to achieve stable to moderate organic revenue growth in 2012, credited to repeat clients and strong relationships, especially at the provincial, state, and local level. We remain cautious as decreasing tax revenues, efforts to reduce state and provincial deficits and continued uncertainty in long-term funding may continue to cause delays in some planned transportation projects. However, the local nature of our transportation business maintains a strong backlog, even in times of uncertain funding. We expect some of this uncertainty to be partly offset by the midterm project activity resulting from the recently passed US Map 21 transportation bill.

We also see continued activity in Canada's P3 market where we have secured several active project interests such as the Anthony Henday ring road in Edmonton, Alberta, along with some increased opportunity in the design build market in the United States. For example we secured repeat work with the North Carolina Department of Transportation.

The general outlook for our urban land practice shows moderate organic revenue growth for the remainder of 2012. There are positive signs in the US housing market, albeit from historically low base levels, but overall activity is expected to continue to be slow while the Canadian market will remain steady, notably with the continued strength of the housing market in the Western regions. Organic growth in the practice area has also been helped by a continued focus on diversification into the nonresidential sector.

Overall, although we had a strong first half of 2012 with organic growth over 5%, our outlook for the 2012 remains unchanged with a targeted 2% to 3% increase in organic revenue growth at the end of 2012 compared to 2011. Given our positive results so far this year, this target may see modest. However, we remain cautious and are aware that pressures on the North American and world economy may impact our Business and the general confidence in our markets.

It is fair to say we had a good quarter. We are achieving revenue growth and more importantly, organic growth. We continue to execute on a targeted and steady acquisition strategy that focuses on full integration. And we now have more than 12,000 staff across 190 locations in North America and 4 international offices.

In short, we remain focused and dedicated to executing our long-term strategy. Thanks to the diversity of our operations, the strength of our relationship with our clients and the flexibility of our organization, we will continue to adapt our Business to changing economic conditions and position ourselves for growth in a very large infrastructure and facilities market, both within a recovering US economy and international.

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

Thank you.

(Operator Instructions)

Tahira Afzal, KeyBanc.

Good morning, Bob, Dan and Crystal. This is Saagar on for Tahira. Congratulations on a great quarter, first of all. Two things I want to hit on. One, you guys have done a great job in really growing the business in a difficult and tough economic environment. Can you just talk through the different internal initiatives and strategies that you guys have taken over the past couple of years which have really allowed you to exhibit this growth? I know you guys have mentioned them on the calls, but I think it's good for everyone to see the positives that you guys have done in the business.

There is multiple, obviously, programs and focuses we have, but probably the two biggest that I would have to talk to is account management has been something we have been working on for a couple of years which really focuses on a number of clients. We probably have now account managers for well over 500 clients, and that represents a large section of our revenue. And those account managers really work hard at leveraging various services in a real diversity of services to those clients. As you know, Stantec has grown considerably over the past 5 to 10 years, and we have grown through acquisition mainly. So, as you integrate those acquisitions into your Company, you really work hard at leveraging expanding the services that you are providing to your clients. So, I think that has received great results in our account management strategy.

We're also focusing, I think, specifically on where we see two parts of our client groups. The account management strategy really started after the global national type of account clients that have a need for a wide range of services over a wide geography. Those make sense. But we're really seeing that at the local level we can also focus on some very good local and regional clients and really leverage that local capacity that Stantec has in that local strength. So, we are seeing being able to leverage a lot more services into our local clients as well. By integrating our companies fully, I think we are seeing the benefit of that because it does allow you to leverage your services on a much more integrated fashion and grow the business.

We have also started to focus much more on our sectors and providing, again, the wide range of our services into clients and sectors. We appointed some leadership in the sectors in the Company as well last year, and we are seeing benefits of that. A number of different initiatives, a number of different programs, but they all focus on our clients and understanding their business and really trying to leverage the diversity that we have in the Company to provide them more services. I think that is resulting in the growth.

That's great. You guys have done a great job with that. And then one follow-up, really just, and I know you mentioned -- you had some comments around why you haven't taken up your 2% to 3% organic growth rate for the year, even though in the first half you had 5% to 6% growth. What -- could you give us a little more details around which of your sectors you're worried about that could potentially get impacted? Industrial has seen 20% plus growth, is that an area that you are potentially concerned could see a slowdown in the second half, or is it really just you guys totally building in a big cushion?

Certainly, that's going to be probably a few questions on today's call, is regarding that. Is 2% or 3% cautious given what we achieved in the first half? And probably it is somewhat cautious. But we feel there is still a lot of questions out there in the economy. You are in the US and I think you still feel it. There is a sense of recovery, but that recovery is still somewhat mixed. We had strong sectors, but we also have some concerns with others. Buildings is certainly where our concerns still lies. We have seen some stability come to that, our retraction has leveled off, and we anticipate that to be stable for the rest of the year. But we don't see a significant recovery in that business until next year.

With regards to our strong growth in industrial, yes, that is really based on the commodity market. I think we have all seen it in the past, though. Any kind of a dip in oil prices or commodity prices will have a bit of a -- an impact, and because of the tenuous nature of the economy, those reactions tend to be a little bit quicker on the pullback. Canada and the US the governments both retracted their guidance for second half growth of the year. So, there is just an overall concern that even though we are seeing some strong growth in some practice areas, it is still a pretty stressed economy. And we're going to be comparing the second half of 2012 to which was a stronger second half of 2011, so that has an impact. Dan?

Particularly with the industrial practice area. We saw some good organic growth in our industrial practice area towards the end of last year, the last half of last year. So, we are comparing to that as well.

The last point is our backlog is stable. We are happy with our backlog. It went up CAD100 million this year to CAD1.2 billion from CAD1.1 billion. But it's not growing as much as our top line is. Our backlog is a very robust way of calculating it. So, we're very comfortable with the project awards we have, but we don't put a project award into backlog until we have been given notice to proceed, and we still see a lot of our clients very slow in releasing those notice to proceeds. Again, we're not worried about our backlog because we see lots of opportunities. We have lots of project awards that we have won, but there is still some delay in getting those projects into actual revenue and working on it. So, you combine all those things into a picture, could we have gone from 2% to 3% to 4% or 5%? Yes, we could have, but our strategy has always been pretty consistent. Even with our clients, we like to under promise and over deliver, and I think we're basically approaching that the same way.

Sounds great, thank you.

Thanks, Saagar.

Ben Cherniavsky, Raymond James.

Good morning.

Good morning, Ben.

Just maybe a little more on that guidance issue. Can you clarify if -- are you actually seeing something in the pattern of your business, the behavior of customers that's causing you to be conservative like that? Or are you just reading things in the headlines and saying, well, we'd better be careful here?

It's -- I think you defined it as sandbagging, Ben. I think that it is the latter. There is that -- we're in an election year in the United States. It is a lot of uncertainty, a lot of distractions in the US, a lot of worldwide distractions. We continue to hear stresses in Europe. For some reason, our clients read the paper, they see that Europe is still having difficulties and they just delay another week or two on their projects. We don't see any real signs and behaviors. We are seeing increases in capital programs. Our oil and gas clients are still really bullish, but there is an awful lot of stuff in the papers that this causes everyone just to move a little slower than we'd be comfortable with. I think we're being conservative but I think there is some reality to that conservatism.

And what about on the SG&A guidance as well? That performed very well, 40%, I think you're at about 40.5%, maybe 40.7% year to date. You're still talking about 41% to 43% for the year.

Yes, I think on the SG&A side, Ben, that obviously we continue to focus on managing our costs, and that is something that's in our DNA. It's part of our culture, it's not something that really changes, but it is an area of focus. We've seen an improvement in our utilization which will drive down some of your SG&A cost. But we also note that we have fewer acquisitions in the first half of the year, which tends to also impact your SG&A. We expect that to pick up a little bit, given the Cimarron transaction that we are going to close, hopefully the end of August. That's why we are guiding still on the higher end of 41% to 43%.

Right, I forgot about that acquisition variable. That can usually be pretty material.

It can be, yes.

And finally, just when you're talking about organic growth, and I don't mean to beat a dead horse, I'm just trying to get a better idea of what you're seeing, or at least on the organic growth you have achieved. How much of that, would you say, is end market activity versus your ability to, like you said cross sell, be more effective with your sales? Really just when contracts can gain market share?

I would like to say they are related. I would like to say that our cross-selling ability allows us to take advantage of a good strong market. But certainly, a lot of our growth has been in the mining and oil and gas sectors, and that is just simply a result of winning projects. What I would like to say in a lot of those cases, though, the winning of those projects is really just a really close relationship with our clients. A lot of those projects have been sole sourced as well, which we are very happy with that, because it eliminates some of your SG&A cost and allows you to build your revenue quicker. So, we have been very happy with those client relationships in building that. But we are also -- certainly favorable market -- end market conditions are helping. If you want a percentage, probably 50/50.

So, you would say your batting average, if you want to call it that, is going up?

Yes, I would say so. And that certainly is helped, again, by a strong economy because you have got more opportunities, more at bats. But certainly, I see our average is going up.

Great, that's helpful. Thanks a lot, guys.

Thanks, Ben.

Sara O'Brien, RBC Capital Markets.

Hi, guys.

Good morning, Sarah.

In your MD&A, you talk a lot about the building segment being more competitive, whether it's in Canada with the US players coming up or P3s and now getting into design build in the US. Just wondering how confident you are on that growth margin front going forward. It sounds like it's going to pick up in the back half of the year, but going into say '13 and '14, do you expect there will be major pressure on margins, or is it still opportunity for Stantec to maintain its steady 14%, 14.5% EBITDA margin?

I don't see our margins staying at this lower level or decreasing in the building sector. I think the competition factor is -- usually increases when you do have a slow period. When there isn't a lot of business out there, you have a lot of competitors say entering sectors that are not necessarily strong at. If we are at a cyclical low, I would say with the opportunities in the building sector, the same number of competitors are out there, so you just have more competitors bidding against you. And like I said, a lot of those are bidding outside of where I would say their comfort zone is in their sector, and that tends to then be at the lower end of the margin scale. So, that has a bit of an impact as well.

It may take some time to return, I think it's probably going to be 2013 or so, but we are seeing some positive sectors. The commercial sector, which has picked up very large for us, has assisted us, the healthcare sector has decreased. Overall, we're seeing -- we're comfortable that we are at that cyclical low. We feel that the opportunities will pick up after the US elections specifically in the United States when all that noise is pushed aside. I think you'll see some activity increase in 2013. So, we are expecting that and therefore, we are expecting the competition issue to level off of it.

The other thing in the healthcare sector, in particular in the US, really, is the federal election is going to determine which way clients will decide to proceed depending on how that gets resolved.

Okay, and then just on the buildings, some negative reforecast, is that on the P3s in Canada? And just wondering how confident you are that that's done, because we've heard of that in the past quarters as well.

I think in the third quarter of last year, that's where we adjusted our estimates to complete, which impacted our gross margins. And we have actually seen our gross margins in our buildings practice improve since Q3. So, now we're at that normalized level, we believe that we have taken most of the -- any of the hits that we need to take on those major projects and our gross margins should remain pretty stable, as far as I can tell at this point, Sara, going forward.

Okay, great. And then maybe last one on dividend payout ratio, is pretty low acquisition still in the cards, is there room for dividend growth? And do you see it growing with earnings, or is there potential for a bigger payout ratio?

Certainly, it is our anticipation that the dividends will grow as our revenue and income grows. At this point in time, we haven't set anything for next year, but certainly we see -- that's the strategy, will be that it will grow along with the Company.

Great, thank you.

Our payout ratio is pretty consistent with what we see in this part of the industry. Certainly, we wouldn't be compared to financials in other type of firms that payout a higher ratio, but we're still over 2% in terms of a payout ratio, which is a pretty reasonable return.

Okay, great, thanks.

Thanks, Sara.

John Rogers, D.A. Davidson.

Hi, good morning.

Good morning John.

A couple of things, just wanted to follow-up on. First well, in terms of the urban land work, how much of that would you is say is tied to residential activity still? And if you could break that out between the US and Canada.

We have about 55% of our revenue right now is in Canada. Largely western Canada is primarily residential work.

So, 65%, 70% is in residential, and I would say probably, I'd say 75% to 80% of that is in Canada. So, 20% to 30% of our businesses is in the public side, which is much more of landscape, architecture, park serving. I think the actual residential portion would be 75% of our business right now. And most of that in Canada.

Okay, so residential -- direct residential activity in the US is, what, some 2%, 3% of your total business?

Let's do the math on that. Probably would be in the order of less than 5% for sure. It is -- if you turn the clock back six years, a big story difference from six years ago. But we still see that as an opportunity, John. We're actually seeing, what I would say some positive signs. We shouldn't get carried away with those positive signs because again, on a real low base. But we are seeing opportunities even in California and Florida where clients are coming back into the market, albeit slowly.

Okay. And then secondly, in terms of oil and gas business with your recent acquisitions and your expansion there, at some point does that become -- how big of a business is -- however you want to define it. Can that become for Stantec and over what period of time?

That's a great question. It's actually significant to us right now. Oil and gas itself is, I think 16% of our business overall in the Company, two-thirds of that is in the permitting side of it and one-third of it is in the engineering side, pipeline facilities. So, it's now a fairly significant portion of our business. You throw mining in there as well, and it's 25% of our business. So it has changed dramatically, again, from six years ago where we were barely touching oil and gas. Where could oil and gas go from 16%? Could it be ever 25% of our business? Unlikely, maybe 20%. Certainly see growth opportunities over the next few years. Our goal is to have that balance. We never like to be too overbalanced in any one specific sector, but the growth opportunities we see right now in oil and gas, it would not be a stretch to see that 16% to go over 20% in the next year.

Okay, great, thank you, and congratulations.

Thanks John.

Thank you. Bert Powell, BMO Capital Markets.

Thanks. Bob, in the industrial segment, you talk about growth being limited by your ability to higher qualified personnel. And I'm just wondering if the opportunity that you see is such that that might make you a little bit more aggressive on the acquisition front, knowing that with the other capabilities of the firm that you can deliver synergies. Just wondering what your thoughts would be on that.

Yes, there is no doubt, if you are trying to acquire companies right now in the oil and gas and mining sectors, it is -- you would have to be aggressive to get those firms to join the Company. So certainly, there is some opportunities there that we would see. But at the same instance, you've got to be careful doing that. You've got to be careful simply doing an acquisition. That's a very short-term strategy.

We would be concerned about trying to, say, over pay for something that would give you a short-term benefit. And then if there's a change in commodity price, you have got to struggle with it. But certainly, we have been -- Cimarron was certainly one of those firms where we saw an immediate ability of leveraging that. But Cimarron has also been a long-term player in the Calgary market. We feel that there is certainly opportunity. At the same point, we have been pretty successful in hiring staff. But that still a concern, how far you can go. But from an acquisition perspective, the answer would be yes, we would be somewhat more aggressive in a strong sector when we come to justifying an acquisition because it's pretty easy to see where the leveraging is.

Okay, and then just lastly on gross margin for this quarter and what you your anticipation is or what you see for the second half of this year. I wonder if you could give us a little bit more color on anything in this quarter that might be one-time in nature, and what drives the margin higher in the second half? Is it mix, execution? Just to try to get a little bit more color on that -- the gross margin.

I don't think, Bert, there's anything that stands out in my mind that would have driven the gross margin other than, like we say, the increase in the industrial business as a percentage of our overall revenues in the quarter. We have actually seen, I think as I indicated earlier, an improvement in our buildings gross margin from where we were in Q3 '11. I think to a large degree, it does reflect the mix of business. We have some larger projects in our buildings and MSAs for example, in our environment practice, which have driven some of the lower gross margins.

We did have some legacy projects from acquisitions that we are working through those, and as those projects come to completion, working on improving the fees on those projects or any new projects going forward. That's why we are thinking overall our gross margins are going to probably be within that 54.5% to 56.5% range. I think it will be probably at the lower end of the range. I don't see us getting up to the 56.5%, but it will be somewhere in that range, I think.

In terms of legacy contracts, are those substantially done in Q3? Just give us a sense of how long those are with you.

There are, actually. For example, it would be where one of our acquisitions bid on a project at a lower margin rate to basically get their foot in the door with the client, and that project has now accelerated into something that is 10 times the size of the original opportunity. What we have decided is to go back to that client and start actually saying that the original gross margin was for a much smaller project, and we need to recalculate or renegotiate that. That are some of the efforts we are working on at this point to do, but we don't see that as a trend at all. If anything, the stronger the sector is, as oil and gas and mining, you can't actually see the margins go up just because there's not a lot of competition around. And clients understand that. So, we certainly don't see that as a continued trend in industrial, but as that business grows, and it is a lower gross margin business, it does have a bit of an impact. So, as Dan says, we don't see our gross margin recovering to the top and of our range but certainly see a recovering to the bottom end of our range.

Okay, thank you.

You are welcome, Burt.

Thank you. (Operator Instructions) Chris Blake, Stonecap Securities.

Good morning gentlemen.

Good morning, Chris.

Just a quick question with respect to your cross-selling opportunities. I know you mentioned in your MD&A with respect to the industrial environmental practice area, I'm just wondering, given the strength on the industrial side, do you think you might see a further uptick on the environmental side in the back half of the year as you develop those cross selling opportunities? I'm just trying to get a sense of how those two divisions might be interconnected and how that may impact the second half of the year on the environmental side.

Well, they certainly are interconnected. There's no doubt that the strength in the environment sector right now is the oil and gas area. We do expect that environment will have a stronger second half of the year. There is a lot of opportunities working on pipeline permitting and working with the pipeline companies with what we hear in the papers. So certainly, that is an opportunity for us that will allow our environment area to be able to get busier in the oil and gas sector. In fact, some of the leveraging is the other way around. Sometimes in the oil and gas sector where our environmental staff are usually in the front end of projects and there with the permitting and evaluation stage, and then what we're trying to do is leverage that relationship to get some of the engineering and preliminary design phases. A lot of synergy between the two, but certainly from an environmental standpoint, with the activity in oil and gas, we see a stronger second half

That's good, thank you. Most of my other questions have been asked, but lastly, I was trying to get a sense, obviously, one of your peers has made a major international acquisition during the quarter. I was curious to hear your thoughts of how this might impact the competitive environment here in Canada?

That's an interesting question, Chris. No one has brought that up today because it certainly was a major acquisition for them. A very large win in the international space. And I think it has just an overall impact and really does accentuate the fact that it is a global business. And it's not like we are not interested in that or that we are not aware of that. It's just today, our focus is much more in the North American market. At the same point in time, we are not ignoring what's going on in the internationals space. So, it's certainly of interest to us, we are continuing to watch it.

I think you'll see some more international -- major international acquisitions going on. CBI acquired Shaw, or at least announced that they are going to acquire Shaw. There is some big, big things happening in the industry that certainly we are aware of and not ignoring. But at the same point, we don't want to take away from our focus of where we see our opportunities. Our strategy has been always much more focused on a logical stage of progression. But much lower risk, at that end, where you go at a major international acquisition at a much higher risk. I will not say it wasn't a good deal, it's just we will maybe be in a wait and see and certainly, we are still interested in what opportunities are out there in the world for Stantec. And certainly, that acquisition has made us -- got our tenants up to ensure that we are aware of what is going on. But still, we are very focused on maintaining that low risk cultural fit staged acquisition strategy fully integrating, and we don't see us moving off of that too quickly.

That's good color, thank you very much. That's it for me.

Great, thanks, Chris.

Thank you.

(Operator Instructions)

Pierre Lacroix, Stantec.

(Laughter) Yes, I changed my job.

You got in at the last minute there, Pierre.

Thank you for taking my question. Just one on the acquisition side. And the price stayed as we went through the downturn in the last couple of years, and you often mentioned that the price asked by companies were maybe a bit high because of their -- or actually, the high backlog out of the 2007, 2008 timeframe and our revenues and so on and so forth. The multiple that you are paying right now, you always said something like 6 to 8 times EBITDA. Are you looking more toward the high end of that range now, that EBITDA might be depressed to some extent and you are looking for a recovery going forward? Maybe the you can give us some perspective on the price that are being paid right now in the market.

I wouldn't say that our multiples have really changed that much, and I wouldn't say that we are leaning towards the higher side of multiples, especially with companies with lower EBITDA. It really comes on the major impact of what you can pay, is really comes down to how that company performs, how they perform once they are integrated in Stantec and how we can leverage that, more importantly than anything, how we can leverage that in the Stantec world. That probably has a bigger impact on the multiple that you are willing to pay. And it is really that forward-looking estimate of EBITDA that you've really got to be focused on and looking backwards. But it's that forward-looking one that you've really got to be confident that you are going to be able to generate a reasonable revenue and a reasonable EBITDA to be able to then pay a reasonable multiple.

I wouldn't say our multiples have changed. It just really -- I see the due diligence and review of these companies is really what we have had to focus on in the last 12 months. Really get color and understanding of where they have come to, how they've come out of the recession, how they've maintained their relationships with their clients, where we see those opportunities. So, that's where our focus is. It is a very busy timeframe right now. The pipeline is, I would say, as full as it can be. Lots of companies coming, say, through the recovery and looking at optimistically of opportunities, but at the same time realizing those opportunities are better fulfilled maybe in a bigger Company and where they can leverage. Interesting times right now, but I wouldn't say that that means that the multiples are automatically creeping up, it really is a much more deeper story than that.

Okay, and lastly on this point. Is the strategic angle of taking a foothold in a specific practice or market more important now than it was maybe 1.5 years, 2 years ago?

Yes, as we grow as a Company, our acquisitions will probably become a little bit more targeted. In the past, we needed just to cover a certain amount of geography to be able to attract those clients and be able to do the work there, so we are looking at, I would say, a little bit more generalized types of companies. You'll still see that occur in the United States because we're still not at the same maturity level as we are in Canada. In Canada, you'll see similar acquisitions we have done this year, very focused acquisition in Newfoundland where we see a very strong economy, but we are very focused just in the environmental area.

So, acquired buildings groups last year and architectural firm this year. In Calgary, we knew that we needed to have more industrial focus in Calgary, that's the center of the oil and gas business in western Canada. You need it to be there, that focus on acquisition specifically in Calgary. I would say that the focused acquisition strategy is, in our mature markets, is much more the strategy and the general geographic one is probably a little bit more where we need that coverage and not as mature

Sounds good, thank you very much, Bob.

Thanks, Pierre. Do we still have any other callers?

John Rogers.

Hi, sorry, just wanted to follow-up. Just so I'm clear, your margin targets that you mentioned, getting to that goal level, you said by year-end or for the year?

For the year, John.

Okay, all right. That's just what I wanted to be clear on. All right, thank you.

You are welcome.

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

Thanks Michelle. If there is no more questions, I would like to thank you all for joining us today and close our call by saying that we are confident in our business strategy and the ability to adapt to the evolving needs of the marketplace. Our focus will continue to allow us to achieve profitable growth and provide sustainable returns to our shareholders. Thanks for your call this morning, and I look forward to speaking to you again in the future.

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