Stantec Inc (STN) 2012 Q3 法說會逐字稿

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  • Operator

  • Welcome to Stantec Inc's third-quarter earnings results conference call. With us today from Stantec management are Bob Gomes, President and Chief Executive Officer, and Dan Lefaivre, Chief Financial Officer. At this time, all participants are in a listen only mode.

  • (Operator Instructions)

  • As a reminder, today is November 1, 2012 and this conference call is being recorded as well as broadcast live over the internet. It will be archived for future reference at www.stantec.com under the investor 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. Gomes or Mr. Lefaivre, are asked to please request permission to do so from the individual concerned.

  • Before the call begins, there are a few words from Investor Relations. Please go ahead.

  • - VP of IR

  • 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 Q3 2012 financial reviews.

  • It's now my pleasure to introduce your host, Bob Gomes. Go ahead.

  • - President and CEO

  • Thanks, Crystal. Good afternoon everyone and welcome to our 2012 third-quarter results conference 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.

  • Today, we released the results of Stantec's operations for the third quarter of 2012. I am pleased to report we finished the quarter with continued strong results and our fifth 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 third-quarter financial results. Dan, over to you.

  • - CFO

  • Thank you, Bob. Good afternoon, everyone. As Bob just mentioned, the third quarter of 2012 was a strong quarter for Stantec where approximately 50% of our revenue growth was organic and 50% was from acquisitions. Our gross revenue increased 12.4% to CAD483.7 million, compared to CAD430.4 million in Q3 '11. Our net revenue was up 13.4% to CAD398.1 million from CAD351.2 million in Q3 '11. The increase in revenue was mainly due to organic growth in our mining, oil and gas, and urban development sectors. Revenue was also positively impacted by acquisitions completed in 2011 and 2012.

  • Gross margin as a percentage of net revenue was 55% in Q3 '12, which is in line with our target. Our administrative and marketing expenses were 39.7% of net revenue in Q3 '12, compared to 40% in Q3 '11. This improvement is as the result of higher staff utilization in the quarter, fewer acquisition costs and managing our costs effectively. Our net income increased 18% to CAD34.1 million from CAD28.9 million in Q3 '11. And we had record diluted earnings per share, which increased 17.5% to CAD0.74 from CAD0.63 in Q3 '11.

  • Lastly, the Company declared a quarterly dividend of CAD0.15 per share, payable on January 13 or January 17, 2013 to shareholders of record on December 31, 2012. Overall, it's fair to say with solid top-line and bottom-line growth, we had a strong quarter.

  • Bob, back to you.

  • - President and CEO

  • Thanks, Dan. As Dan just outlined, our third quarter demonstrated strong performance for the quarter and year-to-date in 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. We are pleased to note we closed a key acquisition this quarter, Calgary based Cimarron Engineering Limited, a 290 person engineering consulting energy company, specializing in the oil and gas pipeline systems and facilities. Cimarron also has a power division that specializes in the design of medium to high-voltage electrical systems for utility and oil and gas clients. This addition will strengthen our capacity to take on larger scale oil and gas projects, which was a priority strategy for us entering 2012.

  • Our focus on building strong client relationships and capitalizing on market opportunities continues to result in us securing projects with new and existing clients. I'll highlight just a few. Our experience with the Public-Private Partnerships, P3, delivery model has led us to securing a project in our buildings practice to design 12 new schools in Alberta. Implementing the P3 model for this project will accelerate work on the schools being built across Alberta resulting in completion two years sooner than conventional project delivery methods would have provided.

  • In our environment practice, our team continues to demonstrate our diverse service offerings. We recently secured a project that has a Stantec multidisciplinary team working on site-wide environmental monitoring for the Joslyn North mine project in Northeastern Alberta. We are providing aquatics, noise and terrestrial monitoring programs as well as regulatory reporting on this project.

  • In our industrial product we continue our strategy of diversifying our services to our mining clients, just beyond design, into other types of services. For example, we recently secured a project to perform a feasibility study for a mining client in Nevada. In our transportation practice, we continue to secure work in the transit and rail sector. During the quarter, we were selected by the Dallas area rapid transit to provide professional services and be responsible for managing the Trinity Railway Express Positive Train Control Project. Positive train control is a US Federal requirement mandated by the Federal Railway Safety Improvement Act.

  • In urban land pack we continue to secure projects in the US residential market. We are recently awarded a project in Sarasota, Florida, to provide design services from initial site planning through construction phase services for up to 800 units to be built on 500 acres, added to the Country Club East Golf Course Community in Lakewood Ranch. This small sample of projects showcases the diversity of our services and expertise. We work on thousands of projects for clients in the global and national level, as well is 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'd like to comment briefly on potential market conditions going forward. During the quarter, we revised our outlook to 4% to 5% organic growth by the end of 2012 due to the strength we are experiencing, primarily in the mining and oil and gas sectors. We were concerned last quarter that as a result of the upcoming US elections, we would see a delay in slowdown in many sectors as we experienced in our transportation sector, which is more vulnerable to public funding. However, the continued strength in the mining and energy industries, especially in Canada, continue to provide us with strong organic growth this quarter. Our results speak to the strength of our business model where the diversity of our services allows us to take advantage of the changing market conditions.

  • We see continued strength in our Canadian operations, where our organic revenue has grown 8.7% year-to-date, compared to the same period in 2011, due primarily to increased resource activity. Our US operations, meanwhile, remained stable, year-to-date, showing our ability to sustain performance despite fluctuations in market conditions. Our international operations outlook is strong, albeit on a very small base. We revised this from stable to moderate growth due to continued opportunities in our urban land and buildings practices.

  • Looking at our individual practice areas, we expect the following outlook for the remainder of 2012. Our overall outlook for our buildings practice is a stable to moderate retraction in organic revenue for 2012. We have noted; however, that this practice is showing signs of stabilizing after three quarters of retraction. We continue to be 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 revenue growth in our environment practice for 2012, 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 working as part of a team on the expansion of the Metro Vancouver Annacis Wastewater Treatment Plant upgrade -- one of the largest wastewater treatment plants in Canada.

  • We anticipate strong organic revenue growth in our industrial practice in 2012 as we continue to see steady activity in our mining, oil and gas, and power sectors. Commodity prices are expected to remain sufficiently strong to encourage our private sector clients to continue their capital spending through 2012. In our transportation practice, we expect to achieve stable growth in 2012, credited to repeat clients and strong relationships, especially at the provincial, state and local level. We revised this from stable to moderate organic revenue growth due to reduced opportunities in the New York state and Florida markets and the lack of certainty around long-term funding.

  • In our urban land practice, we expect strong organic revenue growth for the remainder of 2012. We revised our outlook this quarter from moderate because Canadian markets remain strong, especially in the west. The US economy is showing positive signs, overall; however, until these signs persist, we expect our urban land practice to strengthen gradually. And internationally, we are executing on select projects in the Middle East.

  • Overall, 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. Our local positioning is our strength. Through our 190 offices across the continent, we bring world-class expertise to the communities where we work and where we live. In short, we remain focused and dedicated to executing our long-term strategy. Overall, our performance was strong for the quarter. Our solid top-line growth this quarter demonstrates our ability to remain flexible to changes in market opportunities, while our strong bottom-line performance highlights our ability to deliver consistent results for our shareholders.

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

  • Operator

  • (Operator Instructions)

  • Anthony Zicha of Scotiabank.

  • - Analyst

  • Hi. This is Sammy Boote filling in for Anthony Zicha. Well done on the very strong quarter. My first question is regarding the US markets. When can we expect a turnaround? How sustainable is the organic growth that we are seeing right now? How sustainable is it going into 2013?

  • - President and CEO

  • Well, I mean, the answer in the US economy is really going to be interesting to see what happens next week. I mean, after the elections are out of the way and the new President or the returning President steps up, I think we are expecting that 2013 will be a year where there's going to be more focus on strengthening the economy and there will be programs put in place. So we see that there's going to be short-term benefit, certainly in the US opportunities. But it's still a pretty fragile market there. The organic growth you are referencing is really, to date, has been in Canada for us. The good news is the retraction in the US is minimal and we see the opportunities for growth returning in the US next year. But it's going to be dependent upon how quickly that economy recovers and how quickly the programs that the new President, or returning President, puts in place.

  • - Analyst

  • And in terms of the existing practice areas, whether in Canada, that are showing strong organic growth science -- would you say these are sustainable into 2013?

  • - President and CEO

  • Well it depends what your belief is in the oil and gas and mining markets. That's where most of our organic growth is coming from. Obviously, they're very price-sensitive to the commodity market. But to date, even with the fluctuations we've seen in oil prices over the last quarter, we are still seeing some strong opportunities in oil and gas. And mining, if -- notwithstanding the comments we hear and read about the commodity pricing softening, reducing capital investment, we still see opportunities there. So that growth is really going to be determined upon how strong those opportunities continue into 2013.

  • - CFO

  • And there's no doubt we will be comparing a strong comparables of 2012 in the mining and oil and gas sectors with the strength in commodity prices this year. So do we expect to see 24% growth year-over-year? I wouldn't say so.

  • - Analyst

  • And could you please provide a little bit more color on recent hiring patterns? If you plan on increasing your headcount or -- and if consultant fees have increased due to the increased demand that we've been seeing?

  • - President and CEO

  • With regards to hiring, certainly. In our sector, specifically, again, the mining and oil and gas sectors, we continue to have needs and continue to hire staff. So it certainly is a competitive market and that's never easy. But winning high-profile projects and winning good projects with good clients always attracts staff. So we are continuing to hire staff and will continue to see organic growth, certainly, in those sectors and in other strong sectors.

  • With regards to the impact that has on pricing, we usually don't see a huge increase in price opportunities being increased in a hot market. You would think that with a lot of work out there, there is still lots of competition. And usually what we are doing is -- it's just easier to win work but very hard to leverage a hot market into getting higher fees. And we are always looking at a much more sustainable relationship with our clients. The last thing you want to do is continue to raise prices in a hot market. We are looking beyond that. So that really doesn't have a huge impact on the actual hire fees or margins. It does have an impact on our ability to win projects.

  • - Analyst

  • And maybe your thoughts on a potential dividend increase or spending free cash flow more weighted towards acquisitions.

  • - President and CEO

  • Well certainly where our focus is still to continue to provide additional services to our clients and we will do that through both organic growth and acquisitions. The allocation of capital -- we will be looking at dividend at the year-end and make those decisions with the board next year.

  • - Analyst

  • And my last question is regarding Hurricane Sandy. Do you expect to see any positive impact to your earnings, extra work, as a result of Hurricane Sandy?

  • - President and CEO

  • With regards to the devastation in the east, I mean, the first thing we are happy to report is our staff are safe. We had a number of offices that sustained closures. We still got two offices that are closed. We have staff that are still without power. So that's our first concern is always that we seem to have survived this disaster from our own standpoint well and our staff have obviously been inconvenienced. But there has been no casualties, which we are very happy about.

  • Whenever there is this type of disaster, there's always a first impact to clean up, to repair, and certainly Stantec is there to offer our assistance to any of our clients in those regards. This has a much longer impact though, again, as storms test our infrastructure. We are seeing the weaknesses in our infrastructure with levees breaking and flooding occurring. So the longer-term impact is this shows what happens when infrastructure is not kept up and isn't repaired. So there usually is that acknowledgement that there needs to be an investment in it, flood protection, analysis is certainly -- there will be investment in this for years to come, just as there was with Katrina hitting New Orleans. So this is going to have, I think, a long-term impact to the infrastructure in the US East and throughout North America. And certainly the Stantec focus on infrastructure is going to have a positive impact on us. But we really feel this is an example of the state the infrastructure is in North America when a disaster like this hits.

  • - Analyst

  • Think you very much, gentlemen.

  • Operator

  • Ben Cherniavsky of Raymond James.

  • - Analyst

  • Hi, guys. I guess you decided -- too much pressure that you were sandbaggers. You had to come clean and raise you numbers.

  • - President and CEO

  • (Laughter) I still go back to -- you know what -- the fact is, our growth has been on really two sectors -- very strong sectors, but also sectors that we live in a very volatile market. And so we had concerns with that. I'm surprised the fact that oil dropped from almost $100 a barrel to the mid-$80s. You know, I would have figured that would have had an impact and it didn't. So things like that -- we were certainly concerned about. The economy in the US and with the elections coming up -- we were concerned about. We're pleasantly surprised that that didn't have a major impact on our third quarter. But those situations still it exists. I mean you look at transportation, it was impacted. It was one of those that is much susceptible to public funding and it went down to over 13% in the quarter. So things like that, certainly, we expected. What we didn't expect is just to continue that strength in mining and oil and gas, which is a nice pleasant surprise.

  • - Analyst

  • Yes, and don't get me wrong. I don't want to -- I'm not criticizing you. I think it's -- if anything, I'd applaud you for being conservative. I don't think anyone's going to fault you for that. It's good to see that you are being realistic about the markets you are facing rather than rosy. It's all positive. It's probably tongue-in-cheek. (Laughter) I guess my question, really -- although it looks like it touched a nerve. The question, though, actually does sort of drill down from that, guys, is that in your end-markets, when you talk about the oil and gas in the mining sector being surprisingly robust and now you've got confidence to extend that outlook into next year and look at it in a positive light, it doesn't really -- it's not really consistent with what we are hearing in other -- with other companies that are -- that serve the same market, albeit, perhaps in different ways. Mining CapEx, oil and gas CapEx is down, it's under pressure. Most indicators suggest the market in those kind of projects is slowing. What's different about the kind of work you are during, or the market you are seeing, that gives you the confidence to raise that outlook?

  • - CFO

  • That's a good point. I will start first with oil and gas. We have made some significant investments in acquisitions to strengthen that position. And I think that the combination of those firms and with what we had has, to a certain degree, changed the landscape in Western Canada, and specifically in Alberta, where we have a very strong position now. So that's -- I think maybe from our perspective is why maybe we are doing a bit better than our competitors in some of those areas. We are very focused in the facilities and in the midstream area where it seems like more of the investments are going and have really increased our position.

  • In the mining area, we know what we specifically did there is we diversified out of just the metal part of the mining and went into the potash. Potash seems to be a little bit more of a stable commodity right now and also, it's probably one of the more, I'd say, more profitable commodities in the mining business. And we just maybe are lucky enough to be linked up with a client that seems to be very focused on continuing their investment in the Jansen mine. Now it certainly -- those are the clouds on the horizon that we worry about is the constant reminder that the CapEx of many clients in the oil and gas and mining sectors are reconsidering their investments for later in 2012 and '13.

  • But for us, maybe we are just hooked up with the right clients. We seem to continue winning some opportunities. So at this point in time, I can just say the diversity in mining and our presence in Alberta has certainly been the two factors we can rely upon.

  • - Analyst

  • So I think we talked about this last quarter. I might ask the same question. But you'd think a lot of this or some of this is -- you've got a better batting average of some of the projects you're going out to the plate on? And that's sort of an analogy would be fair?

  • - President and CEO

  • That would be fair. Especially, I'd say in oil and gas where our presence this year, with the addition of Cimarron and last year with Caltech, has changed that landscape somewhat. So it's almost like we are a new player in that. And we are now a top-tier in that position where two years ago we weren't. The three companies separately, Caltech, Stantec and Cimarron -- we're playing at a different level. Now, today, we are playing at a much higher level. And, yes, the batting average seems to be better.

  • - Analyst

  • That's great. Thanks a lot, guys, and well done.

  • Operator

  • Tahira Afzal of KeyBanc Capital Markets.

  • - Analyst

  • Good evening. Congrats on a great quarter, guys. This is (inaudible). So congrats. First off, you guys have had a tremendous 2012 so far. So I'm going to kind of go and look into 2013 a little bit. If you were to look at your business, maybe other than looking at Canada and the US and looking at your practice areas, where do you see the most potential, Bob and Dan, in terms of your business for growth?

  • - President and CEO

  • Well, you know, it's going to sound like a -- sort of a vague answer, but I think we've got potential in all our sectors and practice areas for growth next year. Certainly, in the areas that are hot. We see opportunities for continued growth and continued opportunities to grow.

  • Our oil and gas presence in the United States isn't as strong as we'd like -- opportunities for growing that. The elections being out of the way, we see just the overall economy in the United States having opportunities. Hopefully those are all going to be positive. So transportation seems to be improved. Public funding, hopefully, will be in a better situation. So I'd have to say that there isn't a practice area, right now, we are looking at that we would say for next year, we see retraction or headwinds. We see improvements and opportunities in all of our sectors and practice areas. Urban land continues to perform well and, certainly, it's going to be directly related to the strengthen the economy. But it really comes down to how strong the US recovers after the elections are over. But certainly don't see retraction anywhere on the horizon.

  • - Analyst

  • Okay. Great. And then one quick follow-up -- you're administrative and marketing expenses have been phenomenal this year, really leading to strong G&A leverage and quite a bit of earnings upside. Now looking at your fourth quarter and into 2013, do you guys think you can maintain it at the levels you guys have been seeing it under 41%? Or should we start seeing it -- are we going to start seeing a tick-up above the 41% mark soon.

  • - CFO

  • I think there's a couple things there, (inaudible), that will impact it. One is, we ramp up any acquisition activity. Certainly, that will have an impact. As we go into the fourth quarter and first quarter, our utilization isn't as high, generally as it is in the third quarter. So that will have an impact with more SG&A, admin, and marketing costs driving our SG&A costs. So those things will have an impact. But I think we -- probably for the year, we will come in around that 41% or below the 41%.

  • - Analyst

  • Perfect. Thank you very much.

  • Operator

  • Chris Lalor or GMP Securities.

  • - Analyst

  • Hi, guys. Great quarter. I was just wondering, given the strength in the industrial and environment markets, particularly in the resources, I was wondering how you see the competitive landscape there. If you've seen any international firms trying to move into that market or any other kind of shifts in the competitive environment.

  • - President and CEO

  • It's specifically in those two and where we play in those two markets. No. The usual suspects are there. Certainly there are international players already. When I reference international in the oil and gas sector for specifically in Alberta, most of those are US or Australian firms are already there. So haven't seen any new players, for example, from Europe, entering that.

  • In the environmental market, in the United States there's a little bit more of an area where we are seeing more competition. We have a very good top-tier presence in environmental services in oil and gas and mining in Canada, not as strong -- growing, but not as strong in the United States. So -- but the landscape really hasn't changed. Certainly, some of the bigger projects -- and I'd have to say more of the EPC, engineering procurement construction projects, more of the upstream projects in the oil sands areas. You are starting to see some more of the larger firms enter that. But we are playing in a little different space where we haven't seen that competitive landscape change significantly this last year.

  • - Analyst

  • Okay. Thanks. And if I can just ask one more short one, just on Hurricanes Sandy again. I was wondering -- you mentioned just the two offices are closed right now. I was wondering if there is any short-term impact, maybe a short-term slowdown or delayed projects? I was just wondering kind of how many of your projects are in the area that could be affected there?

  • - President and CEO

  • That's a good point. I will let Dan answer some too. There is -- there will be an impact to us in the fourth quarter when we have had staff away from the offices and they can't get to work. So that has an impact on, obviously, our chargeability for a few days here. I wouldn't call it significant but certainly it's there. And you are right. We're not sure what's going to happen to some of our projects in the field. There's going to, obviously, be an impact to some of those jobs that were in the construction side of the phase of the project. So still doing those assessments and getting our feet under us but there will be a -- I'd say a small short-term impact to us in the fourth quarter as a result of this.

  • - CFO

  • We found that there is approximately 20 offices that were in the direct line of the storm and have been impacted for a couple of days. Some of those were up and running fairly quickly. Others have taken a day or two and, as Bob mentioned, a couple are still closed. So it will have an impact on revenue generated in those states. But we are -- it's still pretty early days to really figure out the total impact on that and we are evaluating that right now.

  • - President and CEO

  • We are just happy our staff are safe.

  • - Analyst

  • Great. Thanks.

  • Operator

  • Ben Vendittelli of Laurentian Bank Securities.

  • - Analyst

  • Good afternoon, gentlemen. Just a couple of questions on the acquisition front. You've quoted in the past that your long-term growth plan is for 15% annually. If we assume a sort of a 5% organic growth next year, can we expect you to do -- say, call it 1,000 to 1,500 employees through acquisition? Is that a fair target?

  • - President and CEO

  • Roughly. I think you stated the split properly. We have stated that about a third of our growth -- if it's 5% next year will come from organic growth. That means roughly 10% will come from acquisition growth. You never like to state to target 10% definitively because acquisitions -- you only close them when they make sense and you only close them for the right price. So we are not going to push that. But that would be the target, certainly.

  • - Analyst

  • And from that perspective, in terms of a pipeline order, are you are seeing -- is it as healthy as it has been in past? Is it getting better or worst? And also from other valuation standpoint, are you saying valuations change at all?

  • - President and CEO

  • From a pipeline perspective, we are seeing lots of opportunities still. We have actually seen that pick up in the, I'd say, the last quarter or two. We are very comfortable with the number of opportunities. We are comfortable with the quality of the companies we're seeing and talking to. We are still extremely happy with that side. With the valuations -- the valuations are essentially really dependent upon the company, the type of company it is, the performance of that company. We really haven't seen any of those metrics change dramatically. The metrics are usually based on performance -- EBITDA performance in the past two years going forward for the next two years. And those multiples -- regardless of a recession or not, really don't change a lot. They change probably more from a sector-to-sector on a performance perspective. So we really haven't seen any dramatic change in the multiples, but certainly very happy with the number of companies we are talking to right now.

  • - Analyst

  • Okay. And just with regards to your industrial segment -- you have mentioned that given how hot the market is in oil and gas, in particular, there might be a potential for shortage of staff. Is -- has that -- despite the phenomenal growth you are seeing, could that growth have been more if you had the opportunity to get your hands on some staffing? And as a second part to that question is we saw the gross margin come off a little bit. Is that the result of inflation and staffing cost and could that be addressed in the medium term through improved pricing?

  • - President and CEO

  • The first part of the question, with regards to could have we have grown even quicker if we could have hired people faster? You can always grow faster if you can hire more people. So the answer would've been, yes. But we are pretty happy with our ability of attracting staff for our needs in those areas. It's always a very competitive market and in a hot market it becomes very difficult. And it continues to be. But we are happy with our performance there and continue to find good people to attract. And it really helps if you are working on good projects with good clients.

  • With regards to the margin erosion, we've talked about that before. I will let Dan chime in here. Certainly some of that is just a result of the growth in the industrial area, which is typically a lower margin business. We saw our margins increase, which we did say last quarter that we saw that as being somewhat temporary. There was a bunch of reasons why it slid slightly below our range as we give and we're back within the low end of our range. But usually, again, there is some competitive pressure in some sectors -- probably more so in the building than anywhere. But we don't see that as being long-term. Buildings sort of go through that cycle and I think we are coming out of that cycle now with the buildings group. Dan, do you have any other comments on margins?

  • - CFO

  • Just a comment on the industrial gross margins -- we actually did see an increase in our gross margins. That's what we indicated last quarter, that we were expecting that through some of the legacy projects coming to an end, negotiating new fees. So we did see a pickup in our gross margin in industrial. As Bob mentioned though, with the increase in oil and gas, that is a lower margin business than some of the mining practice that we have.

  • - Analyst

  • Okay. Perfect. Thank you.

  • Operator

  • Sara O'Brien of RBC Capital Markets.

  • - Analyst

  • Hi, guys. Nice quarter. Bob, can you comment on Public-Private Partnerships in Canada? We know that the pipeline is slowing a little bit. Maybe just some commentary on if that does happen into the next couple of years, do you see the US picking up where that leaves off? And does it provide you a little bit more of a margin opportunity, given some the cost reforecast you've seen in buildings and transportation?

  • - President and CEO

  • So with the course of P3's, you're right. I think especially in the building side of it, there is probably going to be less opportunities going forward. Still some opportunities, but less. We're still pretty happy and comfortable with our position there and won the project in Alberta, the P3 schools, which certainly helps. But there will be a slowdown in the P3 opportunities in Canada.

  • In the US, will that pickup to replace some of that? The potential is certainly there. The need is certainly there. But there still just isn't those -- the political ingredients, I would say, are on the table to improve the situation on the short-term for P3's in the US. With that being said, we have seen the design-build opportunities in the US be very strong. That probably impacts our transportation area more so than buildings. So we see the opportunities in the US with design-builds being positive. But certainly -- the P3's -- there are things happening. There's enough states that have legislation. There's more positive discussions going on in some states. Florida and the Carolinas are certainly being a little bit more proactive. Every quarter, we are seeing more discussion and more opportunities for different project delivery methods in the United States. I don't think it's going to have a huge impact in 2013 from where we are today, but the potential is certainly there.

  • - Analyst

  • Okay. And I guess just for the buildings practice in the US, outside of the P3's. Do you think the opportunity for growth is enough to offset what might be a bit of a loss contract awards in Canada under the P3 mode?

  • - President and CEO

  • Yes. I think that a lot of our retraction in the buildings group is also in the United States. Certainly, we are starting to see some improvements there. That, I think, will offset any reductions in P3's. We have a good position in P3 so even if there's less opportunities, you just have to get your batting average up and win the ones that are out there. And we still believe that we have a good position there. But once the elections are resolved in the United States, that will provide some clarity to the healthcare -- even if it's one way or the other. It doesn't matter which way. That will provide some clarity which will release some capital program projects in the US. And again, we are very well positioned there.

  • - Analyst

  • Okay. Great. And just in terms of the margin on P3. I know there's been some cost reforecasts that have been negative on buildings and also transportation. Just wondered if, as the P3 take less room, let's say in your revenue line going forward, if that's a margin expansion opportunity?

  • - President and CEO

  • You know, that's an interesting way of looking at it. It's -- I wouldn't say it's significant. P3's are really tough projects. They are fast-moving. They are extremely complex. They are robust, at best. And we are learning, every time we do one, your relationship with your partners and being proactive, all those things help you. But they're still good projects. It's not like we are losing money. But certainly, you do -- you have to respond quickly and they are extremely volatile projects. If those disappeared, would the re-emergence go up? Yes, but we wouldn't to see them. It wouldn't be significant and we don't want to see them disappear. They are still a very viable way of building infrastructure and still something we're still big in favor of.

  • - CFO

  • They may impact at gross margin but certainly net margin is also impacted, Sara, as we've talked about before, where you don't have the additional admin and marketing business, the pursuit costs, once you've engaged in a large P3. You still have it but to a lesser degree.

  • - Analyst

  • Okay. And maybe just in the last quarter, you guys were talking about how the notice to proceed was still kind of slow coming out of -- for projects coming out of backlog. Just wondering if in Q3, did you see that speed up and that's what drove some of this organic growth? Or was it just regular contract awards and flow as you'd seen in the previous quarter?

  • - President and CEO

  • I'd say regular. I didn't hear about anything being accelerated. Certainly in the United States -- in two states, Florida and New York -- some of those projects, transportation jobs, that just not only slowed, they just stopped. We anticipated that. So that would -- we'll come back next once the election's is over. For the regular -- for the rest of our projects, no, there wasn't really any delays or accelerated project deliveries. They are flowing essentially the way we predicted.

  • - Analyst

  • Okay. Great. Thank you.

  • Operator

  • Michael Tupholme of TD Securities.

  • - Analyst

  • Thanks. Good afternoon. Just wanted to circle back on a question on the gross margins within industrial. Dan, you talked about the possibility of some improvement. I guess you saw some improvement this quarter. Some of that I guess relates to the repricing of some of these legacy contracts. Is that fair to say?

  • - CFO

  • Correct.

  • - Analyst

  • And is there more to go there? Or was that sort of a one -- like, have we seen all of that now or is there -- is that a gradual thing where that's going to continue to play over the next few quarters and there's room for them to move up? And if so, how do we think about that?

  • - CFO

  • I don't expect to see a material changes in gross margins, given the current mix of business. Michael, I think the industrial business -- it is in that high 40%, very low 50% gross margin. So I don't expect to see material change, there.

  • - Analyst

  • Okay. And I just wanted to ask about the US. Not hugely negative, but a little bit of negative growth there and I guess it was suggested that transportation was one of the key areas there. But was there anything else in terms of practice areas that you could point to that contributed to the negative growth in the US?

  • - President and CEO

  • Certainly transportation was the largest, but I would say the other one was environmental services in the United States. There was a couple things there that did impact us. One, there was the production tax credit elimination in the wind farm side. We did a lot of permitting and environmental analysis in the wind farms, especially in the US east. That -- as a result of that expiration of the credit, a lot of our clients moved their projects into construction and to the capital side and stopped the permitting and that's where most of our revenue was. So that was one area that we suffered a retraction. The other one would be just in the shale gas opportunities with the price of gas going down, we're seeing some of the clients pullback on their capital program in the natural gas ones, moving more to the wet side of the oil shale opportunities. So we are seeing a move them out of Marcellus, for example, into other areas. Marcellus was one area where we were focused in. So there was a slight retraction opportunity there. So those two also had an impact in our environmental services, which showed a bit of retraction in the US.

  • - CFO

  • I guess the other thing I would add, is it's a little bit lower use of sub consultants. So our net revenue, really, our labor revenue is pretty much flat. So some of that has also due to contraction using (inaudible - multiple speakers).

  • - President and CEO

  • Yes so year-to-date in a net basis -- essentially, we're flat in the US. We're pretty happy with that. Again, in a year that -- a typical year approaching a US federal election is usually a year where there is retraction and we are hanging in there and holding our own. We are pretty happy with that.

  • - Analyst

  • Okay. I guess just on the subconsultant issue, I guess that was one of the reasons that transportation was down. And if you adjusted for that, would it -- I mean it still would've have been down, but marginally. Is that how to think about that?

  • - President and CEO

  • Never did the math on it but it probably -- that would be a fair statement. If you take that out, it would've been much closer to being even.

  • - Analyst

  • Okay. That's all for me. Thanks.

  • Operator

  • Maxim Sytchev of AltaCorp Capital Inc.

  • - Analyst

  • Hi. Good afternoon. Just a quick question -- when I look at the backlog year-on-year growth, I see that it's up roughly 1% and organic growth for the quarter is at 6%. I'm just trying to think, is there a way to potentially reconcile the two figures on a going-forward basis? Do you feel that the backlog has to pick up in terms of the growth rate in order for you to sustain the organic growth progression? Or how should we think about that?

  • - CFO

  • I guess one of the first thing I'll speak to and then I'll let Bob jump in, is on the backlog, certainly, we've seen sequential growth in our backlog as well as quarter-over-quarter. A positive sign. I think one of the things that isn't necessarily reflected in the numbers is the FX impact on our backlog. Our backlog would have been, probably, about CAD50 million higher or CAD80 million higher year-over-year as a result of the impact on FX impacting backlog. So the other thing is, as you know, we are pretty conservative in how we report backlog. We will not put anything into our numbers that we don't have any orders to proceed on.

  • - Analyst

  • Okay. And so if you were to adjust for the FX impact, what would it have grown for the year?

  • - CFO

  • It would have been probably a year-over-year -- probably about CAD80 million higher.

  • - Analyst

  • CAD80 million. Okay.

  • - President and CEO

  • 2% to 3% higher that we thought.

  • - Analyst

  • Okay. That's great. Thank you.

  • Operator

  • Sarah Hughes of Cormark Securities.

  • - Analyst

  • Hi, guys. I just wanted to follow-up on the acquisition question from previous. You mentioned your pipeline now is stronger than a year ago. But I know in the last year you've talked about just not as high comfort level in terms of the acquisitions because there's always that question on the backlog. But you are seeing on these acquisition opportunities the true backlog given what's going on in the economy. So I'm just trying to get comfort -- an idea of what's your comfort level with these acquisitions now versus a year ago? I'm just trying to get a sense of what we can see for acquisition activity as we move into 2013?

  • - President and CEO

  • Good question, Sarah. I think we are more comfortable now because we have gone through a couple years of retraction. So you get better visibility into the past two years and a little bit more certainty with regards to how they perform in the last two years in a pretty tough economy. So it's still -- the magic is still trying to figure out what's going to happen in the forward-looking years once we join forces and unify as a company. How can you leverage the stronger relationship to be able to win more jobs? That is still, certainly, where the factors are in making it a successful transaction. But better visibility in the last two years has given us a comfort level.

  • And I think looking at the recent one we've just done, which was Cimarron, is they had two very strong years. In the last couple of years we clearly saw the opportunities for leveraging what they do with what we do. That is the best example as we possibly can show is a one plus one equals three -- is individually, we would not have been able to win some of the projects we see winning in the next while. Together, we now can bid on them. We are credible and we can when those jobs. We are much more comfortable, to answer your question, much more comfortable now because we have gone through a couple years where we've got two years a pretty good history, now, with these firms and their performance through a recessionary period where two years ago we were just entering it and really didn't know what was going to happen. We are a lot more comfortable.

  • - Analyst

  • I know a lot depends on just the timing and negotiation and that type of thing. Would you assume your acquisition activity coming into 2013 would be more active than what you've seen over the past year?

  • - President and CEO

  • You would always hope that with more opportunities means you're going to have more transactions you close. Bottom line is, you still got to close those transactions in a way that's going to be accretive. So that's still the deciding factor but certainly if the number of opportunities dictates you're going to have more transactions close, that certainly would be the case.

  • - Analyst

  • Okay. And just one last quick question. On the G&A side, I'm just trying to get a sense of the improvement we've seen coming down a 40% of revenue. How much of that would have come from a lower acquisition activity and, therefore, lower integration costs versus the internal improvements that you've talked about?

  • - CFO

  • Certainly, it's a combination, Sarah. I don't know that I have an exact number but that is one of the critical elements that, as you're integrating five or six or eight firms at a particular time, it takes the staff -- and it really does drive into utilization. It takes the staff away from client related projects dealing with integration training and so on. So that does have an impact. The other end of the scale, we are a firm that continues to work hard at managing our business and are very focused on the investments that we make in our SG&A costs. So it is a combination of a real focus as well as having more acquisitions. So I wouldn't put anything to one or the other.

  • - Analyst

  • Okay. Thanks a lot guys.

  • Operator

  • Bert Powell of BMO Capital Markets.

  • - Analyst

  • Thanks. Maybe I will just pick up where Sarah left off, just in terms of the acquisitions. How much of an impact do you think is the US election having in terms of people's decisions on the acquisition front?

  • - President and CEO

  • I mean, right now the elections are probably more of a distraction than anything. But there is -- and we've seen this for probably the last couple of years, there's a capital gains tax that there is a potential for that disappearing at the end of the year depending on whether the Democrats or the Republicans win. That capital tax has an impact on the individual and the transactions we have. So that does, usually at the end of the year, push some individuals to say, if we have to make a decision, let's take it now because, potentially, that could put more money in our pockets. So that has an impact on some of the transactions, certainly, but we've sort of had that for the last few years. Every year, there's the threat that that capital gains is going to be changed. And it hasn't. But certainly in an election year, there's a higher probability of that maybe happening.

  • - Analyst

  • Okay. Does that tip things over for Q4?

  • - President and CEO

  • Well it may force some of our transactions we are discussing to make a decision a little quicker than they normally would. And that makes them also a little bit more interested in closing a transaction. So that could potentially help us, yes.

  • - Analyst

  • Okay. It would seem that the transactions have been, I guess, a little bit more skewed to Canada lately. Do have a sense in terms when -- looking at your pipeline, is it much more skewed to the US today? Or is that -- is it still kind of equal opportunity in both countries?

  • - President and CEO

  • Well, no. We've said that more of our focus is going to be in the United States. And certainly that is where our opportunities for further growth is. And our growth through acquisition is a very efficient way for us to get a foothold. So that will continue to be the focus. But we also said at the beginning of the year that we had a focus in the oil and gas that we wanted to strengthen our position in Alberta. So that's really fulfilling that focus as well. But certainly today, and going forward for the next couple of years, there will be more opportunities for us and more focus in the United States.

  • - Analyst

  • Okay. And just in terms of the urban land, historically you guys have had pretty strong presence in West Coast of the US. Based on what's happening in the US residential market, can you give us any color in terms of what you're seeing in that market? And how quickly that can show up? Because it was interesting to see Florida show up this quarter.

  • - President and CEO

  • That's a good point. I don't know if I've seen an 800 lot project in Florida for five years now. So that's certainly a good sign. And it's -- we are seeing more of the Pacific side of Florida, actually, increasing. So -- but albeit small. Let's not get too excited that the housing market and the residential housing market is returning in California and Florida. But our position is great for when it does happen and we are starting to see those signs. But it's still going to be dependent on the economy. It's going to be dependent upon people feeling strong enough and confident enough in their position, personally, to go get a mortgage and buy a house. That's going to really drive the recovery in the housing market in the US.

  • What we are seeing is a stabilization. We are seeing certain pockets of areas respond to specific needs, but a full-scale recovery is really going to be dependent upon a strong US economy. But we're there waiting for it. We've got strong client relationships. We've maintained those relationships in California. We've expanded by acquiring firms that have relationships now in Florida. We have positions up the East Coast as well. So we are extremely positive with regards to that opportunity, but the speed in which that opportunity comes is still going to be really dependent upon a strong US economy.

  • - Analyst

  • Okay. And then just lastly, Dan, in terms of your projects execution and transportation in the quarter, was that material?

  • - CFO

  • There's one project that we had, in particular, that was material on the transportation practice. On a consolidated basis, it has a minor impact. But we are through the worst of that and we think, now, that we are nearly done.

  • - Analyst

  • Can you just give us a sense -- is that a basis point or five basis points on the total gross?

  • - CFO

  • Bert, I'd have to get back to. I don't have an exact number that I can give you. All I know is that it is -- there was a project there -- we actually had two projects that were causing us a bit of difficulty. But we're through the end of those.

  • - President and CEO

  • Yes, I wouldn't say it was significant.

  • - CFO

  • It's not going to be -- I can't give you an exact number.

  • - Analyst

  • Okay. Fair enough. Thanks.

  • Operator

  • (Operator Instructions)

  • Chris Blake of Stonecap Securities.

  • - Analyst

  • Good afternoon, gentlemen. Most of my questions have been answered. I just wanted to follow up on your P3 project and the 12 schools in Alberta. Just getting a sense -- trying to get a sense of how, or how significant that work is and just over what time frame you expect to conduct that project work?

  • - President and CEO

  • Good questions. I don't have the specifics of the details in front of me, but in generalities, it's probably going to be a 2 to 3 year project, and potentially 2 to 2.5 years. P3's are relatively fast. But it is 12 schools, but they will be done in multiple locations and they will done concurrently, not consecutively. So it will be a fast moving, large project. Rough fees -- over CAD20 million in fees certainly would be that order of magnitude but I don't have the specific number in front of me.

  • - Analyst

  • Very good. Thanks guys and congratulations.

  • Operator

  • There are no further questions on the phone lines at this time. Please continue.

  • - President and CEO

  • Thank you. If there's no more questions, I would like to thank you all for joining us today. We 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. Thank you all for listening and we look forward to speaking to you again in the future.

  • Operator

  • Thank you. Ladies and gentlemen, this does conclude your conference call for today. We thank you for your participation. You may now disconnect your lines and have a great day.