Stantec Inc (STN) 2013 Q3 法說會逐字稿

Welcome to Stantec Inc.'s third-quarter earnings results conference call. With us today from Stantec management are Bob Gomes, President and CEO; and Dan Lefaivre, Chief Financial Officer.

(Operator Instructions)

As a reminder, today is October 31, 2013, 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 Investors 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 Mr. Gomes and Mr. Lafaivre, 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.

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 2012 and Q3 2013 financial reviews. I would now like to introduce your host, Bob Gomes. Please go ahead.

Thank you, Crystal. Good afternoon, everyone, and welcome to our 2013 third-quarter 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 2013. I am pleased to report we had an excellent quarter, supported by continued organic revenue growth. The Company's performance this quarter demonstrates that we are well positioned to continue to capitalize on market opportunities.

Dan will now provide a review of our third-quarter financial results. Dan?

Thank you, Bob. Good afternoon, everyone. As Bob just mentioned, the third quarter of 2013 was a very good one for Stantec. Our gross revenue increased 21.3% to CAD581.2 million, compared to CAD479.3 million in Q3 2012.

We achieved double-digit organic revenue growth at 10.1%, marking over two years of sustained organic growth. All of our regions once again, experienced positive organic revenue growth. Gross margin as a percentage of net revenue was 54.3% in Q3 2013. It is trending slightly below our targeted range, which we expect to continue to see through to the end of the year.

Our administrative and marketing expenses decreased to 38.3% of net revenue in Q3 2013, compared to 39.7% in Q3 2012. This positive result is due to strong utilization this quarter, fewer acquisition integration activities compared to last year, and managing our costs effectively. We expect to be at the low end or slightly below our targeted range for admin and marketing expense for the full year.

Our effective tax rate decreased to 27.2% from 27.7% in Q2 2013, mainly due to the recognition of US Research and Development tax credits in the quarter. Our net income increased 34.6% to CAD45.9 million, compared to CAD34.1 million in Q3 2012.

Due to the busy summer season -- and the third quarter is usually our strongest, however, this one was somewhat stronger than usual -- diluted earnings per share increased 32.4% to CAD0.98 from CAD0.74 in Q3 2012. Our backlog remained consistent with the second quarter, at CAD1.5 billion.

Lastly, the Company declared a quarter -- quarterly dividend of CAD0.165 per share, payable on January 16, 2014, to shareholders of record on December 31, 2013. Overall, we are very pleased with our strong growth in Q3 2013, and with our performance year to date. Bob?

Thanks, Dan. As Dan just outlined, we had an excellent quarter that will lead to a very good year. We saw increased activity, as the result of a robust oil and gas sector which impacted both our environmental services and industrial practices in Canada, and we saw continued activity in the transportation sector. By leveraging strong relationships with clients in these markets, we have had great success in securing projects. In managing our business well and executing those projects effectively, we are also demonstrating strong bottom-line results.

We continue to evolve on many fronts to position our Company for the future. We launched a new brand and visual identity in September. It articulates Stantec's ongoing commitment to nurturing solid client relationships, providing creative solutions, and connecting with our communities.

The brand renewal further supports our primary business objective to be a top ten global design firm. We also continued to evolve the practice side of our Company to better align our business with that of our clients.

Now we would like to give you some highlights on our performance across our current practice areas. With our 2012 and 2013 acquisitions strengthening our local reach and depth of expertise, we are capitalizing on diverse market opportunities across all our practice areas. In our buildings practice, despite soft markets and a competitive landscape, we continue to secure projects. For example, we recently secured a project in Northern Canada to provide services to a partnership on the Iqaluit International Airport project, the first public/private partnership, or P3, airport project in North America. We also secured a project with the Iqaluit Aquatic Center, which will provide much-needed recreational space to the community.

Our environment and Industrial practice areas are benefiting from a robust oil and gas sector. Because of this, we are securing several projects on major pipelines and associated facilities across Canada. Given our experience and expertise, we are recognized as a top-service provider to the Canadian midstream sector of the oil and gas industry.

In our Transportation practice area, we saw a strong organic revenue growth fostered by increased strength resulting from recent acquisitions. We are leveraging our geographic presence and depth of expertise in design builds and P3s, to win and execute projects, especially in the United States. For instance, we secured work with the Los Angeles County Metropolitan Transportation Authority to manage the construction of the Westside Subway Transit Corridor, one of the most regionally significant infrastructure programs in Southern California.

In our Urban Land practice, activity remains steady in Canada, and is continuing to improve in the United States. We are well positioned to leverage our integrated services and strong relationships to capitalize on residential and nonresidential projects for our clients.

A recent example is securing the preliminary planning work and Design Master Service Agreement to evaluate airport land parcels at the Tampa International Airport to support the development of amenities and unique shopping experiences for airport visitors. In fact, Dan and I are in Florida today for our Board meeting, and are taking this call from our Tampa office. This is just a small sample of projects that demonstrates the diversity of our expertise.

Now I would like to comment briefly on potential market conditions going forward. We expect to achieve strong organic revenue growth for 2013, with a target of 5% to 7%. This is an increase over our original projection of 3% to 4%, as the result of a strong growth we achieved in the third quarter and year to date.

Organic revenue growth for our Canadian operations will be strong for 2013. We revised this from moderate growth, due to the steady activity in the oil and gas sector, ongoing strength in the private sector, and a stable public sector. In our US operations, we are experiencing stable to moderate organic revenue growth in 2013.

We see increased activity in some regions, although the healthcare market remains uncertain across the United States, and a full housing market recovery has yet to take hold. The United States remains a very large market, albeit still a recovering one, and we expect our performance to improve gradually as the economy strengthens.

We expect strong organic revenue growth for our international operations in 2013. We revised this from moderate growth due to our continued work on the global mining projects where our clients have committed funding, and activity in our buildings practice as a result of the improving economy in the United Kingdom. However, international is not expected to have a significant impact on our performance, as this makes up only a small portion of our business. Across all our regions we see continuing strength in many sectors, and are optimistic for the recovery in a number of others, with our increased presence across the United States also beginning to drive opportunities.

Looking at our individual practice areas, we expect the following for the remainder of 2013. Our buildings practice will experience a retraction in organic revenue for 2013. We have revised this from stable, because it is an area of our Company that has been more affected by the challenging end markets.

We are seeing a soft market, intensified competition, and reduced availability of funding for public sector projects. However, there are positive signs that are now translating into projects, and we anticipate the growth will improve going forward.

We expect to achieve strong organic revenue growth in our environment practice for 2013. We revised this from moderate, mainly due to an increase in the energy and resource-related work, especially in the oil and gas sectors. We expect our size, presence and reputation in the environmental market will provide opportunities to maintain our share of large, long-term projects. We continue to see opportunities in our Water business, and are currently working on a number of large projects.

We expect strong organic revenue growth in our Industrial practice in 2013, recognizing that our long-term client relationships and current market opportunities will provide continued opportunities in our Oil & Gas business, especially in the midstream sector.

Our outlook for Mining remains cautiously optimistic, due to a healthy mix of domestic and international projects that are currently funded by our [project] clients. In our Transportation practice, we expect to achieve strong organic revenue growth in 2013. We revised this from stable to moderate growth in the third quarter, due to overall increased activity in the United States, especially in the United -- US East. We continue to see many local and regional projects in the United States, as well as a growing number of design build opportunities, which, due to our larger presence, we are well positioned to respond to.

In our Urban Land practice, we expect stable to moderate organic revenue growth for 2013. Signs of improvement are prevalent in the United States, however, new urban land development projects especially in certain pockets have been slower to emerge than anticipated. We are, however, well positioned for recovery in some states, while in others we are positioning ourselves to capitalize on opportunities and changing trends. The Canadian market remains stable, with continued activity in the Western provinces, resulting from the robust energy market.

Across our practice areas overall, our strong client relationships, our reach into local communities, and our creative solutions for our clients positions us for success. With some markets proving to be especially strong this year, we have demonstrated we are well positioned to respond to those markets, and expect to close 2013 with solid organic results. Through our more than 13,000 people in over 200 offices across North America, we bring world-class expertise to the communities where we work, and where we live. This is what differentiates us from some larger competitors.

We have the local presence to win projects and execute effectively, as well as the global expertise to serve national and international clients. Our approach is to remain disciplined for the remainder of the year, while continuing to position the Company for the future. I would like to thank our talented staff who strive for excellence every day, and our clients who entrust us with their projects.

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

Thank you.

(Operator Instructions)

The first question comes from Tahira Afzal from KeyBanc Capital Markets. Please go ahead.

Hello; good afternoon, everyone. This is Saagar on for Tahira.

Hello, Saagar. How are you?

We knew it would be you.

I'm doing great. Well, first off, congrats on a phenomenal quarter.

Thank you. No, it was very good.

So the biggest thing is, you have outperformed every single quarter now in 2013. Your top line growth projection is now 5% to 7% on the gross revenue side. Can you just walk us through what has surprised you, and what has really led to this performance? And looking at it after the 3Q results and what you thought maybe nine months ago were expectations for even you have changed?

Well, probably two areas that have outperformed what our expectations were at the beginning of the year has to be the oil and gas midstream sector, which has affected both our environmental services and our industrial groups. So both our engineering groups and our environmental services group that service the midstream sector of oil and gas have been extremely busy, and even busier than we expected at the beginning of the year. That market is much deeper and much stronger than we anticipated. And so, certainly that has been the prime reason.

The secondary reason would be the transportation sector, which is a surprising one, considering that most of our transportation business is in the United States. And given the funding issues in the US, one would be surprised that we would achieve double-digit organic growth in that type of situation. But certainly I think the number of acquisitions we have done in the last two years -- a number of smaller, very strong regional companies that have worked together -- that has certainly allowed us to grow that business beyond our expectations at the beginning of the year.

So certainly those would be the two areas that, looking back at the beginning of the year, looking to where we are today, has certainly been stronger than we expected.

And then your A&M expenses continue to trend downwards. And I know you gave commentary on why it could have been lower; why it was lower in the third-quarter. But it has been trending under your guidance for a few quarters now. Is that something that you could look at potentially giving new guidance on, going forward for '14? Especially as industrial has become a bigger component of your business?

Yes, Saagar, Dan here.

We absolutely will be looking at that guidance for 2014. We are just completing our budgets now for 2014, so we will be looking at that and provide updates in the fourth quarter. I think one of the key things to recognize, though, is the utilization. As Bob said, certain markets have been very strong. And our utilization has been very strong in the quarter as well. With us coming now into the winter months, utilization does tend to drop off. And also want to reiterate that we haven't done very many significant acquisitions this year, which also tends to drive the SG&A up a little bit. So we will be looking at all of those factors going into 2014.

And a follow-up to that, Dan -- you mentioned your utilization has been fairly strong in the third quarter. Can you give us an idea of what a good utilization level is for your Company now? Maybe what it was in the last cycle, what it was in the downturn?

Utilization only changes by a couple of percentage points. And if you are down around the 68% range, your SG&A is going to be higher. You move up into the 71%, 72% range, which is more like where we were in the third-quarter -- around 70%, 71% -- that really has an impact on your SG&A.

As we talked about before, that sensitivity of that 1% or 2% or 3% has an amazing impact. That all goes right to the bottom line if you execute well. So it is definitely a number that helped.

Great. Thank you very much and congrats again on a great quarter.

Thanks a lot.

Thank you. And the next question is from Michael Tupholme from TD Securities. Please go ahead.

Thanks. Good afternoon.

Hello, Michael.

Just maybe to follow up on one of the last questions -- when we think about the admin and marketing costs as a percentage of net revenues, recognizing that there are a number of factors at play that have been helping drive that down, but you mentioned acquisition activity and less integration activity as being one of them. If that were to come back and get back to the types of levels you have seen more historically, how much of the decline do you think that we've seen in admin and marketing costs as a percentage of net revenues that you could hang onto?

Well, good question.

I think certainly, if we were doing more integration, which is really where that cost is, we would probably get back to more of our norm. How much we would go back into it really would depend on the number of acquisitions you do, and how big and how busy they were. But our typical range last year was -- it is still in that same -- target range is the same.

Yes, for 2013. And what we did in 2012, 2013, the target range is pretty much the same. Given the lower acquisitions and utilization, like I said -- utilization has a big impact on our SG&A cost.

Okay.

But we probably will -- as I said before, we will look at those multiples and those percentages for next year, and bring that forward in the fourth quarter.

Okay. And then just related to that, what is it about industrial that, when industrial activity ramps up causes its admin and marketing to be lower? What is the specific issue there?

The projects that industrial work on are much larger projects. And so they would be working on a project -- there is upfront costs, obviously to do the proposal, win the project from the client; and then you start executing it. And the execution could last you anywhere from two to five years. So you usually don't then have the same level of business and development and marketing costs associated with that large project after you win it. So that once you win those big projects, then you are executing them, and you are not doing as much business development. You are still doing some, obviously, but not as much.

Okay. And then just lastly, can you talk about acquisitions? It has obviously been a slower year. Can you comment on market conditions for starters? And then secondly, maybe touch on whether or not you are as active in terms of looking for acquisition opportunities, particularly given that your organic growth has been as strong as it has been.

Yes, so when you say that it has been a slower year for acquisitions, it has actually just been a slower year for closing acquisitions.

It has been a very busy year, from having discussions and talking to firms and continuing to seek out opportunities. So there are a large number of companies that we are talking to in our pipeline. I would say at this point, our pipeline is as full as it has ever been. We are very positive with regards to continuing to be able to work with companies, and close transactions in a similar fashion we have in the past.

So even though it has been a slower than typical year up to this point, I don't think that is reflective of the amount of time we spent and the quality of the discussions and firms that we have talked to. So we are still very positive about going forward. The acquisition pipeline is extremely full at this point, and very positive for us.

Okay. Thanks very much. I will turn it over.

Thanks.

Thank you. And the next question is from Sara O'Brien from RBC Capital Markets. Please go ahead.

Good afternoon.

Hi, Sara.

Can you comment -- your organic growth in Canada has been pretty phenomenal this year, about 12% year-to-date. Just wondering -- with the oil and gas midstream work, are you confident that your backlog allows you to maintain the same level of activity going into F14 and potentially grow that?

Yes, we don't see any reason why it's -- the only thing that's going to slow down the growth -- I wouldn't say stop the growth; it would slow down the growth -- is resources, finding people to work on the projects. But it is somewhat of an issue that the more projects you win, the larger projects you win, people are attracted to come to work for firms that are working on those larger projects. So we don't anticipate that, that significant organic growth is going to continue at that rate. But we do still see room for opportunity and growth in that sector going forward.

And I think the fact, Sara, that our backlog stayed comparable to where we were in Q2, having had such a good quarter in Q3 in terms of revenue generation, that speaks to us being able to replace the backlog that we have worked through in the quarter.

Okay. That's great. And then -- utilization rates; you talked about a 71%. What would be your goal across the firm? Can you get much higher than that?

That is operating at a very high level. I think that, that exceeded our expectations in the quarter. So probably that 69%, 70% is usually you are doing pretty well at those levels. But as I said, the third-quarter was much higher.

Okay. And then maybe just a question on buildings practice. We have heard about some kind of owner-client pushback on fee and fee structure. Can you comment a little bit on that? And how you think that may impact profitability going forward?

Well, really we have experienced that throughout this year. That it was really part of that impact at the gross margin in that practice area. It has actually probably been over the last couple years, that when the economy is slower and those end markets are slower, clients got an awful lot of buying power, basically, with the number of companies that become -- I wouldn't say desperate, but very hungry for projects.

So that has changed to a certain degree. There has been a change in a certain degree of how building projects are put together. The P3 world in the building space in Canada has also changed that somewhat. So it has been an interesting couple years.

And at the same point in time, we are pretty happy where we are now, in the space we are in. And especially very happy with the number of projects that we have been able to win recently; and we are still a very attractive partner in P3. We believe we've learned how to do those effectively, and make money at them; work efficiently with our partners. So even though that world has changed -- you are right, the end user clients have, I think changed some of the dynamics in that space. We still see room for growth in our gross margin back up to the mid-50%s though, and certainly see opportunities for growth going forward.

Maybe just one last one, Bob.

Can you comment just on, what do you need to see in the US to see buildings recover? Is it healthcare specifically? Or can you use your architects on different types of projects?

Well, that is what we have been trying to do, is diversify some of our practices; especially, for example, in San Francisco, which was much more of a healthcare-focused area. We have moved some people from some of our other operations there, looking for some strategic hires, to be able to diversify a little bit. We have increased some of our focus in our commercial projects in the United States as well.

Certainly, a healthcare recovery or stability to the healthcare visibility would help that practice area significantly. But you can't wait around for that. That will happen. But in the interim, we certainly have been diversifying, and looking for other companies and acquisitions to be able to strengthen us and expand our geographies.

So definitely, the US is still an area we feel is a wonderful growth opportunity for our buildings group, but not singularly around healthcare. We do have to be more diversified.

Great. Thank you.

Thank you.

And the next question is from Bert Powell from BMO Capital Markets. Please go ahead.

Thanks.

Bob, just listening to your commentary on each of the practice areas, and we are substantially pretty close to the end of 2013. On the oil and gas, these seem like long-life, big projects; you have got some green shoots in the building; transportation is turning. Is there any reason why the organic growth we are seeing this year wouldn't be the same for 2014?

Well, we haven't completed our review for 2014 yet. That is certainly some of the areas we are going to be looking at; finishing our budgets over the next little while. When you compare, then, 2014 to 2013, we will be off a pretty high comparable. So that is going to affect some of that growth.

But again, we are working towards looking at what 2014 is going to hold for us. We don't see significant changes in the market conditions going forward, which is good news. And certainly see, then, room for us to continue to increase our presence in certain markets in the United States, and certainly have a lot of capacity in environmental services for growth areas. So certainly see opportunities going forward. But we haven't completed our budget process yet.

Yes, if I think about the outlook for your business at the beginning of this year, I think the thoughts would have been, Canada would have slowed and the US would have picked up. But I think we have got the opposite outcome. And with the prospects for continued strength in Canada and the US on the [if comp], it sounds like 2014 could be setting up to be a pretty good year for you.

Well, we are still looking at our 15% growth target, top and bottom line, as being something that is achievable next year. Don't see any reason why we can't continue to perform very well and meet those targets.

That is a combination of the organic and acquisition growth.

And then just one maintenance question -- half the revenue in industrial was oil and gas. Can you just give us a sense on the environmental side, considering those two businesses account for close to 60% of your business right now?

So you are asking for how much of our oil and gas business is environmental versus engineering?

Well, versus -- sorry -- so the oil and gas industry was half of the industrial. And environmental -- how much was oil and gas of the environmental? In other words, any environmental work you were doing for the oil and gas industry, I was just wondering how much of the revenue was related to --?

Half the revenue.

On environmental as well?

Yes.

Okay. Thanks.

Yes, the other big piece of our environmental business, of course, is -- we do provide environmental services in sectors outside of oil and gas. The other big piece is in the water business. That is about third of our environmental revenue as well.

Okay. Thanks.

Thank you. And the next question is from John Rogers from D.A. Davidson. Please go ahead.

Congratulations. Great quarter.

Thanks a lot, John.

I guess Bob, one thing I am just curious about. The environmental, industrial and transportation practices, which are so strong -- is it your sense that -- and I know how Stantec is positioned in the market, but is this all in preparation of a significant investment cycle? Or is this just catch-up work that, that had been deferred, and needed to be done? And if we end up in a strong investment cycle, how does Stantec -- I mean, do you have opportunities for construction management and some of those functions as well? I am just trying to think how this plays out over the next couple of years.

Well, I think -- it is a bit of both. For example, in the pipeline industry, this is the start of a huge investment cycle, no doubt about it, which is playing catch-up. There is great capability for increased production in the oil sands in Canada, which the result of it is there isn't a mechanism for transporting that. So the business is investing huge, billions of dollars -- they are all billion dollar projects -- to essentially catch up. So it is the beginning of that investment cycle that we see lasting anywhere from at least three to five years of continued investment by our clients in that sector.

In transportation, right now, it is really just playing catch-up. There has been so many projects deferred in the United States, waiting for a transportation bill, and waiting for magic money to come in to provide funding, that they have delayed and deferred. And now the States just are in a situation where they just have to go ahead and do projects. And there have been a lot of smaller ones, they moved into design build projects.

Here in Florida there has been a huge focus on P3s -- all funded through toll roads, but still a lot of P3s or design build, operate, maintain. So a lot of unique things going on in the transportation business, trying to fill that void in the infrastructure spend, which I believe is at the beginning of a major cycle. It is a matter of continuing to find a funding mechanism to keep that going, which is right now the constraint in the US.

And as you think about acquisition opportunities, is it your intent to invest -- I know you are busy with looking at a lot of things, but is it your intent to invest, to add capacity in these strong markets? Or in anticipation of a recovery in building and urban land? Or a stronger recovery?

The answer to all that is yes. All of the above. (Laughter). You can't just chase that one strong area that is there right now. Certainly, we want to do that in the oil and gas side of the midstream in the US. That is where a major focus is. But at the same time, you can't lose sight of the fact that our building practice needs to be strengthened.

Even though it's not in a strong end market cycle right now, it will be. So that is sometimes the best opportunity to do investments. So our investments in acquisitions have been quite diverse, and as diverse as our current practice, and will remain that way. So it's a pretty -- that is why the earlier question was, it doesn't seem like it's that busy. It is actually really busy at the moment, because we are looking at all those various sectors.

Okay. Last thing if I could -- how are you doing on hiring and people for all this work?

Well, two things about that. One, the first thing you want to do, is keep the people you have, and we are doing very well with that. We feel we are at an industry-leading standard, under 10% for turnover, which right now probably the industry is more at 13%. So we are pretty happy with that.

We definitely have focus on recruitment. Certainly, we said before, as well, when you are working on bigger projects, you probably have the best chance of attracting employees to come work for you, because they like that. But right now, I'd have to say, in the environmental services area in Western Canada, where we have the bulk of the work at the moment, we are almost at capacity. At the same point in time, whenever we say it, we continue to be able to at least find some people to be able to add. Because, again, at that point we are working on those top tier projects.

Okay. Thank you.

Thanks, John.

Thank you. The next question is from Sami Abboud of Scotiabank. Please go ahead.

Congratulations on a strong quarter.

Thank you.

This -- I am speaking on behalf of Anthony Zicha from Scotiabank.

My first question would be, what are the catalysts that would take the US engineering design space from its modest level of activity to one of strong growth?

If you are looking for one indicator, it would just be the overall economy. Right now, the overall economy in the United States is, I would say, in recovery mode. If that economy was stronger, that is going to spur on infrastructure projects.

Right now, I think that a stronger economy just gives people confidence. It allows our clients to feel secure in going and investing in their projects. The urban land business will be stronger, as people will feel more confident to go buy a house with a mortgage. All that is missing today.

So just a stronger economy. And if I really want to get blunt, that stronger economy probably will be spurred on by a stronger or more stable political system. At this point in time, the politics in the United States are quite divided. And there is a lot of major issues that the two parties polarized themselves on. And that has just caused an awful lot of noise. So at this point in time, I think that would be the one key thing that would cause an improvement to the opportunities in the United States.

Okay. And my last question would be -- regarding acquisitions, I know you have made a few acquisitions this year. Could we expect more? I know we only have a month to go, or two months to go, left. And if I could only get your comments on a French article that suggested that Stantec and [EMEC] were interested in acquiring a Quebec-based [vessel]?

So, certainly from a perspective of activity, as we said, we have always got a very full pipeline. We are working and talking to companies all the time, and always trying to search out all the opportunities we possibly can see.

So we would anticipate that if we can continue to reach a conclusion, there would be a possibility of concluding some of those by the end of the year. But you have got to continue to work through them, and we don't actually disclose or talk about any specific acquisitions. We talk about our acquisitions are, as we said pretty broad. And we look at all opportunities that are out there, and definitely looking for good opportunities in all geographies.

Okay. Thank you.

Thank you. The next question is from [Moulin Azir] of Laurentian. Please go ahead.

Good afternoon. Congrats on some great results.

Just going back to the acquisition question, I was wondering if the potential lack of closing of acquisitions -- is it more of a function of the purchase price? Or is it just normal due diligence negotiations?

A little bit of both. In had some of the sectors that we are trying to acquire firms -- for example, in the oil and gas business -- they are very busy. The outlooks are very strong and that usually increases expectations, and increases their projections for revenue growth, that definitely then have an impact on the amount we can or want to pay. So that certainly is a part of it.

Part of it is just the normal cycle. It takes a long time with some firms to really ensure that the cultural match is there, and they are doing it for the right reasons. A lot of them have lots of shareholders they have to convince. So I would say this is a normal occurrence, except for in that oil and gas energy sector, which is very busy across North America, and that definitely then impacts the availability of time the companies have to actually talk about it; their desire to want to talk about it; and certainly the price.

Okay. Perfect.

And just lastly here, I know that you said you are working on your internal forecast, but for now that 15% growth that you are targeting -- one-third of that is organic growth, and two-thirds is from acquisitions? Are you still sticking with that?

That's correct. That's still the general tendency is one-third is organic, two-thirds acquisition.

Okay. Perfect. (Multiple Speakers).

(Inaudible) assumption at this point, Moulin.

Thank you.

You are welcome.

Thank you. The next question is from Ben Cherniavsky of Raymond James. Please go ahead.

Hello.

Hello, Ben.

I guess I had better congratulate you as well. (Laughter).

Okay. Thanks, Ben.

Frederick wants to congratulate you as well.

Thanks, Frederick.

No, seriously, it was a good quarter.

I guess I am going to go back to my favorite topic here. When we spoke in the second quarter, I asked you a little bit about the language you were using around expectations for the back half of the year. And you hadn't changed your organic growth rate assumptions, even though you were trending at a very high rate. You gave me a long list of reasons. I just re-read the transcript actually, of why you still had reason to be cautious. And here you are again, with another blow-out quarter.

I won't ask -- I will ask a sandbagging question a different way. (Laughter). What was it in the third-quarter that happened, that you didn't see coming? What surprised you? And is that surprise repeatable? Can you -- whatever those factors were, are we going to see that continue here? Because it sounds to me like your language -- you have finally now thrown in the towel, albeit with two months left in the year -- and you are ready to tell everybody it's going to be a great year. But just wondering what has changed?

If you turn the clock back to the third quarter, and why did we maintain -- and I think even halfway through the call, after talking to you, you were sort of edging toward the fact that, yes, probably we were going to be higher than those targets.

There was probably two things that we saw, that really -- had to put our finger on. One, the oil and gas business was strong for us, but we had two very significant major projects out there, that we had not been given the go-ahead. Our clients weren't sure they were going to go ahead. If they didn't, we were going to probably level off on our current trend for -- in that oil and gas, both engineering and environmental services. Those projects did get awarded and we did go ahead. So that was one thing that certainly increased the organic growth in the third quarter.

Also, the buildings practice was continuing to retract. We certainly saw that, that was an area that was a concern for us. And it did retract, but it certainly didn't have the impact that we were forecasting. And two other areas I think we talked about -- you got the transcript. I don't. I should have been better prepared. (Laughter).

Mining was -- we have two projects that is keeping the mining business going right now, and both those projects were -- rumors out there about them being delayed, and both are still going ahead strong. So that also helps.

So that was -- certainly would have impacts to the PCCP project in New Orleans is going much stronger than again we forecasted. We are ahead of schedule, with regards to where we are at on that job. So all those factors -- we weren't 100% sure. But at this point in time, you are right -- it is pretty clear that we are going to be between that 5% and 7%. And could we be at the higher end if the fourth quarter continues? Yes, we could.

But the fourth quarter is our slower quarter. It isn't a quarter that, because of seasonality, that will drop off; our environmental services, our busiest hardware business -- that is very seasonal. So that has some indications. That is why we went to the 5% or 7%. If we have a great winter in Canada, and we keep the people in the field longer, that may could go to the higher end of that.

Yes, and October was probably a pretty good start.

Yes, not bad. Not bad. It was -- there was areas where it wasn't that great. But it wasn't bad.

Okay. Great. Well, no, seriously, congratulations. Good to see. Well done.

Thanks, Ben.

Thank you. And the next question is from Robert Winslow of National Bank Financial. Please go ahead.

Good evening.

Hello, Robert.

I wonder if you could just spend a few minutes elaborating, giving us your thoughts on SunCor's Fort Hills project -- what that might mean for Stantec here in the near-term? And how you are prepared to go after that business? And if you are successful in the ancillary business or what have you -- related business -- when might we see timing of project wins on that?

To tell you the truth, Robert, I'm not 100% sure of the Fort Hills project. It is much more of an oil sands project, so we would be doing the ancillary type of work. It wouldn't I think have as much of an impact on us as a lot of the midstream work we have been doing.

Dan, I don't know if you know much about the project. We haven't really in our reviews, haven't talked -- (Multiple Speakers). We are doing some environmental work on the project. So I know that will certainly, if it goes ahead -- which it was announced it's going to go ahead -- we will be doing some environmental work. But the engineering side of it would be more on the ancillary side; it would be more of an impact to our environmental group.

And then if I may, one last question -- just, I am just trying to make sure I don't get surprised in Q4. Were there any one-off or one-time items that got pulled forward, perhaps into the Q3 results from Q4, that might have made them higher than usual?

The only thing that I can speak to was the impact on our tax rate, the recognition of the US R&D tax credits. We went back, and we spent the year going back and looking at all our R&D, and filed amended tax returns, federal tax returns. So that would be the only thing, so that affected our annual tax rate. But other than that, I wouldn't see anything else.

That's great. Thank you.

You're welcome.

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

Well, thank you. 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 ability to adapt to the marketplace. I look forward to speaking with you again as we continue to evolve our business to meet future opportunities. Thanks a lot, everybody.

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