Stantec Inc (STN) 2015 Q2 法說會逐字稿

Welcome to Stantec Inc.'s second-quarter 2015 earnings results conference call. With us today from Stantec management are Bob Gomes, President and Chief Executive Officer, and Dan Lefaivre, Chief Financial Officer.

(Operator Instructions). As a reminder, today is August 6, 2015, and this conference call is being recorded as well as broadcasted 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 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.

Stantec management would like to caution you that this call contains non- or additional IFRS measures as well as forward-looking statements and information which may involve risks and uncertainties.

I would now like to introduce your host, Bob Gomes. Please go ahead.

Thank you. Good afternoon everyone. Welcome to our 2015 second-quarter results conference call. Today we released the results of Stantec's separations for the second quarter of 2015.

Compared to Q2 2014, we achieved strong organic revenue growth of 5.7% in each of our buildings and infrastructure business operating units which was offset by an organic retraction in our energy and resources business operating unit of 25%. Even with this impact to our energy and resources business, mainly as a result of reduced work available in our oil and gas sector, we successfully managed to meet most of our targets year-to-date in 2015. These results are a testament to our diversified model and show that we effectively produce results, even when our largest sector retracts significantly over a very short time period.

It's important to note that all other areas of our company remain strong with our US operations continuing to benefit from a recovering economy.

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

Thank you Bob. Good afternoon everyone.

During Q2 2015, our gross revenue increased by 12.1% to CAD710.3 million compared to CAD633.8 million in Q2 2014. This growth was mainly due to acquisitions and the impact of foreign exchange rates on revenue earned by our US subsidiaries.

Our gross margin was 54% compared to 54.7% last year. The decrease in gross margin is mainly due to downward pressure on margins in the oil and gas industry and lower margins from the Dessau acquisition.

Our SG&A costs increased to 41.2% from Q2 2015 from 39.9% in Q2 2014 due to lower overall utilization and increased integration related costs associated with recent acquisitions. We also incurred significant severance costs as a result of the rightsizing of staff to match our work backlog in the oil and gas business.

EBITDA increased 5.1% to CAD82.2 million in Q2 2015 from CAD78.2 million in Q2 2014. For Q2 2015, our net income decreased 2.7% to CAD43.1 million compared to CAD44.3 million in Q2 2014. This is due in part to the SG&A items noted previously as well as an increase in the amortization in intangible assets and net interest expense.

Our diluted earnings per share also decreased slightly, 2.1% from CAD0.46 -- or to CAD0.46 from CAD0.47 last year. Our backlog remains stable at CAD2 billion from the end of Q1 2015, which continues to represent about nine months of revenue.

Our balance sheet and free cash flows continue to be strong and provide us with the necessary resources to execute on our growth strategies.

Finally, yesterday, the Company declared a cash dividend of CAD0.105 per share to shareholders of record on September 30, 2015.

Bob?

Thanks Dan. I will provide a bit more detail on our performance in Q2 and some thoughts on the rest of 2015 and then we can go right into Q&A. I will start with some highlights across our business operating units.

Buildings continued to gain momentum with strong growth in the second quarter. In the United States, gross revenue increased significantly due to acquisitions completed in 2014 and 2015 and due to foreign exchange. Organic revenue was stable in the quarter compared to Q2 2014.

In Canada, buildings experienced strong activity in the healthcare market, continued strength in the education sector and study activity in the commercial sector. For example, we acquired Dessau in Q1 and as a result of their well-recognized position in the Quebec market, we secured work in two separate hospital projects in that province.

In energy and resources, we experienced continued retraction in our oil and gas sector. This resulted from the sharp decline in oil prices, which was over 44% since this time last year, and corresponding market conditions. This quarter is also being compared to a robust Q2 2014. Our clients in this sector continue to adjust their capital spending and are releasing fewer and smaller projects. However, we continue to maintain our strong position in the industry and are maintaining our core competencies to be able to respond to the market when it recovers.

Despite the oil and gas sector that comprised 25% of our business in 2014 to now making up 15% this quarter, we continue to manage our business effectively. Our projects are going well and our client relationships are healthy. We have consistent disciplined execution of our business strategy and with our diverse business model, we continue to effectively manage our business through this cycle as we have in the past.

Our environmental services organic revenue from non-resource related sectors remained stable in Canada and achieved overall strong growth in the United States year-to-date. Our infrastructure business operating unit also achieved strong growth in Q2 2015. Each of these three sectors, community development, transportation, and water, experienced strong organic revenue growth year-to-date compared to 2014.

In community development, organic revenue growth was strong in the United States and stable in Canada. In the United States, we continue to secure major nonresidential projects such as the Coney Island infrastructure design project where we will be designing streets, sidewalks, sewers, water mains, and plaza areas in support of the redevelopment in the area affected by Hurricane Sandy.

In transportation, a rebounding US economy and our North American strategic market position led to increased organic growth opportunities. For example, during the quarter, we were selected as the independent engineer for the new Champlain Bridge corridor design build project in Montreal, Quebec.

Our water sector has also experienced strong organic revenue growth year-to-date in 2015 compared to 2014 with ongoing demand in our services as work continues on key projects in Canada and the United States.

Now I'd like to comment briefly on potential market conditions going forward. We continue to maintain an outlook of moderate organic revenue growth for 2015. We expect to end the year with approximately 2% organic growth, which is a slight reduction from our 3% estimates at the end of Q1. I'm sure most of the analysts on the call have run the numbers and question the ability of us achieving this. This estimate is based on our buildings and infrastructure businesses increasing their performance from the first half of the year and the retraction in our energy and resources business slowing over the second half of 2015. You also have to take into account that we will be comparing the second half of this year to a weaker second half of 2014. So, yes, we are being optimistic in looking forward to the second half of 2015.

We have revised the organic growth outlook in two of our regions from what was included in our annual report. In Canada, we revised our outlook to retraction from stable as a result of the retraction of the oil and gas sector. We expect activity in sectors and regions linked to the non-energy-related businesses will continue to increase over the remainder of the year.

In the United States, we continue to expect moderate organic revenue growth. We are finally seeing some continued momentum in the US economy. We saw good growth in this quarter and we are well-positioned in the US to take advantage of this increased activity through the rest of the year. Despite that momentum, we maintained a moderate outlook because we expect that ongoing growth in all our US sectors will be offset by continued retraction in the oil and gas sector in the United States.

In our international business, we revised the outlook to stable from moderate organic revenue growth. Our international operations, mainly within our buildings business operating unit and mining sector, continues to make about 4% of our overall business. Our revised outlook was due to the year-to-date small retraction in our international mining sector resulting from the challenging global market conditions. We have a strong and diversified mining business with strong client relationships that allows us to continue to operate well, even in a slowing mining sector.

Our outlook for our business operating units is as follows. For buildings, we revised our outlook to strong organic revenue growth from moderate. This change resulted from the better than anticipated organic revenue growth in the first half of 2015. This growth was supported by strong account management and strategic pursuits that materialized into project wins. Overall, we anticipate that the buildings industry will continue to recover and we believe we are well-positioned to capitalize on that growth.

Our energy and resources business operating unit will retract at a slower pace and stabilize at these lower revenue levels during the second half of 2015. We expect our mining and power sectors to remain stable with our oil and gas sector attracting.

In our infrastructure business operating unit, we revised our organic revenue outlook from moderate to strong growth. This is due to better than anticipated revenue growth in the first half of 2015. With our well-established market position in community development, transportation, and water, especially in the United States, we expect to see strong organic revenue growth. We now have over 6,000 staff in the United States and we are gaining a top-tier position in transportation and water and maintaining our dominant position in the community development sector, which is benefiting from a recovering housing market.

Overall, the majority of our business is strong and performing well while 15% of our business has been affected by one of the most dramatic retractions in oil prices in the past 25 years. We are proud of how we have managed our business and how our staff have reacted to [HABE], which was 25% of our business impacted by the collapse in oil prices.

We are also proud that we have maintained loyal to our clients in this sector and maintained our strong relationships and we are now positioned to benefit from the recovery in oil prices when, not if, that recovers. We remain confident that we will continue to provide long-term value to our shareholders with the strength of our diversified business model and consistent disciplined execution of our strategy.

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

(Operator Instructions). Chris Murray, AltaCorp Capital.

I guess we'll start with -- I guess the instantly obvious question is how do you think you are actually going to hit a 2% number? Because I guess as we've done the math, if we are expecting a negative number, call it minus 5% to minus 10% for energy and resources, you're going to probably have well into the double digits for the other side. Any color you can give us on how you actually achieve that would be great.

That's exactly it. I think, as I said on the call, I'm sure that everyone has done -- ran the math. And yes, we are going to have to get double-digit organic growth at the end of the year for both our infrastructure and for our buildings business operating units. We've done our forecasts, gone to our leadership, and looked at what we have now coming up and they all believe and we believe that we can achieve that. So that's why yes, they are going to have to perform well. Yes, we are going to have to secure those projects. But the possibility is there. The opportunity is there. All we have to do is execute. That's why we are still being fairly optimistic, but we do believe that 2% is achievable.

And how much of that backlog today is actually secured, or is it predicated on you have to win a few more contracts in order to hit that volume?

We have CAD2 million -- CAD2 billion of backlog today. That has not changed from last quarter, which is good. We are replenishing our backlog. But you are right. That's going to have to increase to be able to get the organic growth to increase in the second half of the year. So that does mean that, yes, we're going to have to win projects but those projects are coming out. Those RFPs are in place. So we just have to simply be good at winning those projects.

Okay, great. Then just my second question, just thinking about acquisitions, is there anything you can do on the acquisition side to keep the growth pace up, or is some of the weakness even in oil and gas affording you additional opportunities?

Well, the additional opportunities in oil and gas is that there are companies out there that are now interested in talking. Yes, that's the case. Interesting that even with the retraction in the prices and the overall market, these companies are still fairly optimistic with their pricing. So, that's usually the case, which is a good sign that they see things recovering as well at some point.

But overall, I think we have a fairly good balance to our acquisition strategy. We are looking at acquisitions and potential opportunities now in all three of our business operating units on both sides of the border. I think the strategy we have really hasn't changed and usually doesn't, but it does -- a market condition like this does give us opportunities in the oil and gas sector where companies are now -- at least have time to sit down and discuss things with us. And that's certainly happening.

All right. Great. Thanks guys.

Benoit Poirier, Desjardins Capital Markets.

If I look at the energy and resources, what makes you confident that the retraction will improve a little bit in the second half? I mean if we look back in Q1, you got some feedback from customers that even if the barrel would stay at $50, we should see an improvement. So I'm just wondering what makes you confident that the retraction number that you put out in Q2 could improve in the second half.

Well, based on the amount of backlog we have in that group. That's one factor. I think it's talking to our clients with regards to what they expect to do in the second half of the year. But I think the point you bring up with regards to the price of oil affecting all this, that's definitely the wildcard in it, that it is something that's hard to predict. But we're also comparing the second half of this year to a slower growth in the second half of last year. So the second half of last year, our business was actually starting to decline and starting to be impacted by what was going on. So now, in the second half of this year, we are comparing against that. So that's in our favor. So that's going to also give us another reason why the retraction is less. But certainly the messaging at the end of last quarter was oil seemed to have stabilized at $60. Now it's down at less than $45. So certainly that has an impact but our clients are still advancing projects. They are smaller and there's less of them, but we still see opportunities there.

Okay. And with respect to your 2015 target range, you just revised your organic growth from 3% to 2%. Am I right to say that you are not changing your target range and you still feel confident to meet those metrics?

Yes, we are still saying that everything in front of us, all things working well, we should be able to achieve that approximate 2%. Could things occur where that 2% is less? Yes. But as far as we're concerned, the opportunities are there. All we have to do is execute and win our share of the projects that we see available.

And with all the other targets and measures that we set out at the beginning of the year, we still expect to achieve those measures.

Okay, okay, that's very good. And now if we look at the infrastructure spending, the different level of government came out with a very bullish number. I was wondering if you see in Western Canada, any ripple effect in infrastructure and buildings, either negative from the oil and gas or now that the government is kind of helping you.

We see opportunities across Canada and across the United States in both buildings and infrastructure. The P3 market is still strong in Canada. We are bidding on a number of projects, very large projects. The design build market in the United States is very strong and getting stronger. State governments in the United States are spending more money on infrastructure this year. So, from those perspectives, all o the indicators are that we don't see any reason why those areas don't continue to grow for us and grow strongly.

Okay. And maybe a quick question for Dan, just in terms of severance costs, maybe it's in your MD&A, but how significant were the severance costs in the quarter? And should we expect something going forward?

On the quarter and on a year-to-date basis, on a year-to-date basis we've had to adjust our staff and our workforce by about 700 people in the oil and gas business, so it's been material, and about half of that was in the second quarter. So the severance costs associated with that were pretty significant on a year-to-date basis. It is buried within our SG&A costs. It's part of our restructuring costs. We don't make excuses for it. We have to adjust our workforce both up and down when markets are good and bad, and it is just buried within SG&A.

Okay, thanks. And last question, could you maybe make some comment on the integration of Dessau versus initial expectation?

I'll give you the high-level just from a point of view of perception and attitude. It's been one of the strongest acquisitions I think we've done. The staff there are very engaged, very enthused, very excited. They're working very hard and performing very well, and that's been very good for us. Dan can give you the details. And I think that's another issue that that is part of those SG&A -- we don't look at it as one-time costs because we do acquisitions all the time, but certainly this was a big one, the second largest one we did. It certainly came with a lot of additional complexities with the French language changes we had to make. All of that is buried in this first- and second-quarter results. So, Dan, maybe you just want to elaborate.

No, I think you've covered it well, Bob. The integration has gone very well. All of these systems and business integration that has occurred, French language translation as we talked about in the first quarter is largely behind us now through the second quarter. But still integration takes several months to complete, but we are through the bulk of it now and it's progressing very well.

Okay, thanks for the time, guys.

John Rogers, D.A. Davidson.

I just wanted to follow-up a little bit on the margins and your expectations there. The mix has changed a little bit with less oil and gas but you are holding your margins range the same. Are you assuming that you are going to see some margin benefits as we work our way through the year, or is it just the mix? And especially in the oil and gas. And I guess that's related maybe, Dan, to your comments about some of the severance costs there. Does that affect your gross margins?

Severance costs doesn't affect gross margin. That really rolls up within SG&A. So the gross margins, they were about 54% in the quarter. We expect to still be within that range. And certain aspects of our business are at somewhat higher margin, like the healthcare sector for example is higher than oil and gas. So we should see some benefit in gross margin, but we don't see it really materially changing outside of that 54% to 56%.

Okay. And anything unusual in particularly the infrastructure segment because margins dropped down there lower than they had been recently.

Yes, and that was the comment around Dessau, Dessau's margins. They have a lot of transportation work, which is a lower margin business. And at the same time, we've been working through the integration of their projects to make sure that we are appropriately recognizing revenue, which did have a bit of drag on gross margin. It's not really a performance issue. It's just how we account for it. But, Dessau in infrastructure does have a slightly lower margin business.

I'd say the other combination of that for infrastructure is that is -- and I mentioned earlier that there is significant P3s and design builds going on in the bid process for those. We usually perform those as a slightly lower gross margin. We win the job. We then get a success to get it back up. So sometimes the timing of those projects in a quarter affects your gross margin but not significantly, but that has a bit of an impact on it as well.

Okay. And then in terms of the -- especially the stronger segments, what are you seeing in terms of pricing in the market, especially on projects that you are currently bidding or negotiating on?

There's always competitive pressures in any market, and I don't think we've seen any significant changes. I think where the ability is sometimes in these P3s in design builds, you are less in a competitive situation because you are not competing for your fees. You are competing for the overall project cost and sometimes the engineering fees are a very, very small portion of that. So we actually find we get some pretty good ability of getting some good pricing opportunities in that P3 and design build market. But overall, John, we haven't seen a significant change of pricing pressures. We always have it. Competition is always there.

Within oil and gas, we have seen, and we talked about this I think earlier in the year, that the entire supply chain is being stressed by the entire industry looking for lower prices. So we've had to adjust to that as well.

I think we already have. I don't think there's any further -- I mean we've given everything we are going to give from that perspective, again which had an impact on us in the first half of the year.

Okay, thank you.

Sara O'Brien, RBC Capital Markets.

Can you comment on utilization rates going forward? It sounds like you've already right-sized the staff in oil and gas for the current level. I'm just wondering though. If you're going to retain some people for when the market does recover, how does utilization look relative to Q2 going forward in the back half of the year?

Overall for the Company, the utilization is good. I think we are at or above what we want to be at this point in the year. But you are right. In the oil and gas business, it's a very high margin business -- I mean very low margin business, very high utilization business, and we are running at slightly lower utilization in that group for exactly the reason you said, that we are trying to maintain the right people so that we are well-positioned. So that has a small impact, but we watch that really carefully and the overall margins of the Company still meet to our targets. But we are pretty comfortable where our margins are right now, but we have consciously looked at our oil and gas and are running a few points below where we optimally would. But clearly why we have to do that is because of what's going on in the industry.

Okay. And then maybe just diving into Q2 a bit, there was a gain on sale for I guess a cumulative CAD6.7 million. Would the integration charges and severance charges have offset that or maybe going forward, are there other such gains that you would expect that can wipe out some of the charges that are continuing?

No. The additional charges that we took in SG&A more than offset, almost double offset, the gains that we received on the sale of buildings. We sold our Winnipeg building. We've been trying to sell that for a long time and actually successfully sold it in the quarter. It's just the event of that timing. And the other one is really rebalancing our portfolio in our insurance captive. And again, that is a long-term strategy. It had nothing to do really with quarterly results. It just happened to occur in the quarter.

So you had about CAD13 million of other charges then going through related to integration and severance?

Yes, maybe slightly less than that, Sara. Probably around close to that -- about CAD10 million to CAD12 million.

Okay. That's helpful. Thank you.

Bert Powell, BMO.

I just want to go back to the guidance in terms of organic growth. You are facing some tougher comps in the second half of this year relative to the second half of last year, and it just seems like there's such a big leap. Are you just that confident in getting those double-digit organic growth in kind of the buildings and infrastructure and that the resources will kind of taper off? I'm just trying to figure out what's driving such a big increase in such a short period of time.

Actually, the increase has been building, but the tougher comps is in the other two business operating units in oil and gas were comparing against a weaker second half. But you are right. In the others, we are competing against fairly good growth. But we did sit down very carefully and look at the opportunities we have in front of us and would look at the opportunities on both sides of the borders in infrastructure and in buildings and have come back with the opportunities are there. All we have to do is win the projects. If the opportunities weren't there and the opportunities or the revenue growth was not even possible, I think we'd have to recast it. But the revenue possibilities are there. So the point is we have to be successful in winning those projects and adding that revenue in, but certainly the opportunities are there.

So, does this sort of scale up into a big number for Q4, or is the step change there available in Q3 as well?

I think you'll see a step change in Q3 and Q4. I think we started to see some improvement in our buildings practice towards the end of last year in Q4. We are still comparing to fairly weak comps where we are pretty robust today in our buildings practice, so that's where you're going to see some of the uptick I would expect.

Okay. And then on Dessau, I know you talked about it being a lower margin business, but I think, in the past, you had indicated that the plan was to get that into the kind of Stantec range. Is that still the thinking? Can you still, based on the book of business, do that over the medium term, or does that require you've got to churn through their backlog at the embedded margins and then you are able to reset it?

I think part of it is getting through that -- the existing projects and then reset it. But as I said earlier as well, we are normalizing our margins on those projects, making sure that we are appropriately recognizing revenue. You see that basically continuing through to the end of Q3 and then start to see things normalize as we move forward after that.

But it would be a longer-term thing. There's no doubt. You just don't change that overnight, so that will be something we work through for the second half of the year.

For sure. Some of it is the transportation client mix and it is you're working for the provincial governments and the municipal governments and it is a lower margin business in Quebec.

Correct.

And then just I want a quick point of clarification just in terms of the severance charges and whatnot, the CAD10 million to CAD12 million. Are you referring on a six-month basis or are you referring to this quarter?

That was really in the quarter. It's over CAD15 million on a year-to-date basis.

Okay. So G&A otherwise would have been sort of closer to CAD235 million.

If you were to take -- yes. We don't have that number in front of us but yes, they would have been much less than what we said.

Okay. That's great. Thank you.

Ben Cherniavsky, Raymond James.

So, your stock you probably saw was off like 11% today. I think it's the most -- the biggest reaction I can remember to quarterly results. So clearly, the market and analysts, myself included, were surprised by these numbers. Were you guys surprised by them?

Since we've seen them for a while, we weren't as surprised maybe as you. But I think one thing we were concerned about over this quarter was certainly the drop in the price of oil. I think our clients weren't expecting that. They were expecting some stabilization of it. So that certainly had an impact with how they were releasing projects.

As we were working through the end of Q1, we were getting a fair amount of requests for putting pricing on projects for our clients. After that, when the price started to drop and drop below $50, they continued to hold those projects back. So that certainly has had an impact on us that we did not really anticipate and did not see.

Will oil continue to drop? As soon as somebody tells us that, we'll have a better idea, but at this point in time, our clients are now getting used to the new pricing and we continue to give them prices on projects. So the work is still there. But were we surprised? You know, as the quarter unfolded, we were more disappointed than surprised.

So both, because you are going to be pleasantly surprised but you obviously weren't pleasantly --.

We were pleasantly surprised on everything else in the business and I think that's the one thing we wanted to highlight, that the other parts of our business are actually doing very well. And our buildings is doing fantastic compared to last year infrastructure-wise. So, we are pleasantly surprised on how well the rest of the business responded. When you have 25% of your business impacted the way we did at the beginning of the year to the result halfway through the year, we are pretty happy actually where we are.

Yes but so Bob, like we hashed this out in the last call about the expectations you have, particularly around the energy business, that you backend loaded the growth. And I went back and revisited the dialogue. Very explicitly you've said it yourself, you repeated it again today, that very dependent on the oil price. At that point, oil was at $60 and you were talking about, well, if it goes to $70 then the projects are going to start to get released. Now I mean a lot of people -- I'm not expecting you guys to be commodity forecasters but I'm just -- it brings back the question that a lot of people are really trying to get some clarity on, is how on earth could you have not revised your energy outlook for the back half of this year now and made it -- retracted it by more? It's hard to reconcile what you guys are saying.

We don't define retraction beyond retraction. So we were actually thinking of that, we should say significant retracting. But yes, I mean if we were going to give guidance specific to a percentage for each of our business operating units, we would increase that. But a retraction for us is still a retraction.

You do give shades of gray when it grows, right? Moderate, strong --?

We've never had this type of retraction, so we've never had to devise a color system for that.

You have to invent some new words. But I mean so basically what you are saying is you are conceding that the outlook for the energy and resources has gotten worse but because buildings has gotten better, you are net neutral for the year.

Yes.

Buildings and infrastructure.

Buildings and infrastructure.

Buildings and infrastructure. And then where you've ended up for the quarter doesn't set you behind at all from what your expectations were, like --?

It makes those expectations difficult, but we don't believe they are unachievable.

I think it sets us a little further behind than what we had expected at Q1 Ben, but --.

Yes, that's what I'm getting at. But you feel like you can catch up, even though most of the indicators in the economy are suggesting things are actually slowing, not getting -- not accelerating.

In the rest of the economy outside of the energy sector, actually yes (multiple speakers)

Yes, I mean even like broadly speaking, I think it's fair to describe it that way. Unemployment and other indicators.

We see the businesses, and especially in the United States, I just spent a week down there last week and every office I went to were hiring staff, looking for more space. So we are actually really bullish on the US economy.

Yes, some data, like the manufacturing data, is slowing. The services is up. I don't know, maybe that has an impact on you.

It must because, at this point in time, the US is definitely -- our base there is stronger and certainly we have the opportunities for growth there.

Okay. Well, it will be an interesting back half of the year. Thanks a lot.

Mona Nazir, Laurentian Bank.

Just two or three questions for me. Number one, in the MD&A, you mentioned, on the energy side, project delays, pricing pressure, reduced CapEx as variables that played into the retraction. And I'm just wondering. For those of us not in the same geography, could you discuss maybe the magnitude of the impact that you've seen in the quarter, the percentage of projects that have been delayed or canceled? How much pricing pressure are you seeing, the magnitude of the concessions? And do you anticipate more staffing reductions or you are right-sized right now?

I'll try to answer all that into may be a simple answer. From a staffing reduction, there may still be some additional but I don't think we'll -- we will not see the magnitude that we've experienced in the first half of the year with the backlog we have. If we do not win any additional projects in that area, certainly there may have to be. But clients are coming out.

I think the percentage of reduction of projects is probably in relationship to the percentage of reduction of our overall revenue. I don't -- we are also not giving any additional concessions or any additional pricing pressures. And the pricing pressures were simply our clients coming to us and asking for reductions. They weren't re-tendering things and going out and rebidding. We simply have these projects and the clients are coming in asking for a lower price. That's also gone through its run, so we're not doing that any further.

So we are now at that steady-state where we feel we do have the core staff left. We do have more backlog. We're not being asked for any additional price reductions. We just need to have some additional work coming in and our clients are telling us that, yes, even based on today's prices, there are some small projects and there is work coming forward. So that gives us the feeling that the retraction and the worst of the retraction is over.

And in 2005 and 2006 you saw a drop off in activity in your urban planning division. And you were opportunistic and moved into the midstream sector. And where you are standing right now and just with some of the predictions that oil prices could remain depressed as other analysts have discussed, as we move into next year, have you thought about further diversification and what that next growth opportunity maybe like midstream was for you nine, 10 years ago? And is there any area or subsector where demand is high and you have the ability to bulk up or transfer resources there, or are you just focusing on the buildings and infrastructure right now?

I'll try to answer that too. We have already moved some of our staff from oil and gas into other areas, so that has benefited us where we have moved a lot of our project managers, moved the project managers and kept them busy into our infrastructure and our buildings groups, especially infrastructure.

Our move into the midstream base area really wasn't associated with a reduction of the land development market in the late 2000s. It really was the strategy we've had all along and the opportunities presented ourselves. And we saw the uptick of projects, especially in Canada.

Right now, we see the opportunities (technical difficulty) the United States, midstream is not over. There are going to be pipelines built in Canada. That's going to continue.

Where the big plus is, there's going to be even more pipelines built in the United States. And the US market has not been hit as hard as the Canadian market has been. So, the areas for investment for us is to continue to have a strong position in all of our sectors and we believe that there is growth opportunities within that.

So, we don't believe we need to branch out outside of the sectors we are in. We believe that that's a diverse enough range of services to provide. It's actually a much more diverse range of sectors that any of our competitors actually work in. We do believe there's some geography spread that we need to get better and a lot of our business is still local people. A lot of our business comes from state and municipalities, especially in water and transportation. So, there we see opportunities for further investment. So we still feel strongly we will be investing in our current sectors in North America rather than branching out into new sectors. It's a conservative strategy but one we know really well.

Okay. That's great. And then lastly, just a quick question, if we could take Western Canada out of the equation, can we quantify how much organic growth was in central or eastern Canada?

That would be just a total gut feel answer because we certainly don't have those numbers and we don't look at our businesses that way. I think we could pause at the bottom line. I think we retracted in Canada overall. That retraction was western Canada and that retraction was in oil and gas. The retraction wasn't even in other sectors. I would say some of them were stable but the retraction was oil and gas in western Canada. Take that out of the mix and I'd have to say that the rest of Canada was a plus. Now, I couldn't tell you how much, but certainly they would be above zero.

That's great. Thank you so much.

Tahira Afzal.

As you've been asked so many questions about oil and gas, I'll do something much more fun, which is infrastructure. And so can you talk a bit about the growth you are seeing there? Bob, it seems like after eight years there is probably a pretty high chance that there will be a transportation bill passed in the US. Could that sort of accelerate the growth outlook you have for this year into next year?

So you are probably more optimistic than I am that you are going to get a transportation bill, but anything significant more than a six-month or a two-year extension. But you are right. If there is a significant change and if there is a significant bill come forward, that would even I would say increase our optimism beyond what it is today because, today, we are basing it off of what we know today and most of our work is state and municipal and that's steady. That would be accelerated I think with an appropriate or with a bill that addressed the issues that they've had to deal with. So, that would be a plus I would say for our current outlook, would be a robust transportation bill passed.

If you have that happen let's say hypothetically, Bob, alongside the strength you are seeing on the nonres building side, would that be enough to actually accelerate your growth even potentially on an aggregate basis so you can climb out of that 2% zone into something higher next year?

Since we are speaking theoretically, I'll answer sure, yes. If you have a good bill on a good robust bill, then absolutely. There is a pent-up demand for major transportation projects in the US. We all know that. If the bill addresses that, all it's going to do is create bigger opportunities. I think we are very well-positioned, as well positioned as any of the bigger players in transportation now in the US and we are continuing to invest in it. So I would say that, yes, that would then increase our outlook even further.

And Bob, what about the water infrastructure side? You touched a bit on that. Are there areas where you need to beef up a bit inorganically if you do see that as a sustainable opportunity?

Well, we are getting -- it is a sustainable opportunity and it's growing to beyond just I think historically where most of our business was, which is in the municipal water wastewater treatment and distribution system combined (technical difficulty) sewer overflows. Those are still strong. Those consent decrees are still there. There's some confidence now coming back. We're seeing a lot of our historical opportunities come. But now we are starting to see a lot of the flood control, the investments in flood protection and that is a very strong, growing business. And then you go to California where they have every water problem you can think of and the drought is just making it worse. That's where we probably need to strengthen some of our capabilities is to have a better presence in California. But, we are still very bullish on water. Water is the one area that regulatory changes are never going to get less. They are always going to get more stringent. That just requires more of our services. So our water business right now is very strong, very robust, and very well-positioned. But we do need to be stronger in many of our states, and California is one of them.

Got it. And any chance you'd look at investing in the coal ash side of the business there? You know, given that going from virtually zero in spending to potentially CAD20 billion?

I think that's one area we have to say we don't talk a lot about but we are probably way ahead than I think most of our competitors in that area. We've been working with one of the largest clients in that area, the Tennessee Valley Authority for, the last six, seven years, working with them, advancing their repairs and their protection of their coal ash facilities. We've worked with the EPA in actually developing the regulations that were passed. So, we see that as a huge growing opportunity for us and are extremely well-positioned. Probably we don't talk about it well enough but a lot of our clients don't like us talking about it because a lot of the work they are doing is trying to catch up to those regulations, but that is absolutely a growing part of our business.

Got it. Thank you very much folks.

Maxim Sytchev, Dundee Capital Markets.

Just a quick question in trying to clarify the severance. So are you done right-sizing the platform right now or could we see some additional impacts in Q3?

I think, if you saw any impacts, they would be very small. As Dan referenced, we've done over 700 -- a reduction of 700 staff in the first half of this year. You would see, if we did, it would be extremely insignificant compared to that number. You never want to say we will never have to continue to adjust that because we are very careful in trying to match our staff to the backlog we have. The backlog is fairly stable right now, but it's also smaller projects that are done very quickly. So we've got to replenish that backlog to remain -- you know, to keep those staff. Right now, we are confident we can do that but there may be some slight additional ones but they would not be near the magnitude we've had to do to date.

Okay. So technically, all things being equal, we should see more normalized margin in Q3, even when accounting for the typical seasonalities. Is that a fair way to think about it, or is that being too aggressive?

I think that's a fair way to think about it, Max. You should start to see some normalization of SG&A costs without these big one time hits that we've had to take.

Right, okay, that makes sense. And then going back to Canada, obviously energy is being impacted. Have you seen any spillover effect, not -- infrastructure is doing splendid obviously -- but in your legacy urban land development business, any developments there?

It's certainly slower in Calgary and Edmonton. So I'd say that's more in Alberta and western Canada. That is a bit of an overhang in association with the fact that there is less influx of people. But we are doing an awful lot more of -- I'd say our position in our urban land business in Alberta is much different than it was 10 years ago where it was totally dependent upon those greenfield projects. We are seeing a lot of newer projects that are a lot more brownfield projects, a lot more projects involved in landscape architecture and planning. So our impact has been much less severe than it was in the late 2000s when the real estate market collapsed. So it's not -- it definitely is I would say much more stable, so there's not significant growth, but we don't see significant retraction in that business in Alberta.

Right. And then I guess contrary in the US, is the rebound that you are seeing, is it commensurate with, I don't know, housing starts, sort of in line with that, or is it stronger than that?

It's in line with that. I think, again, our position in the US is much more diversified than it was back in the late 2000s where was a very, very dependent upon that greenfield new home development. So we are capturing our share, if not more, of that greenfield project. But we've also got some other work, master planning and landscape architecture work, that helps that revenue. So, I'd say it's in line with the housing and maybe a little bit better than it.

And we are also in the lot more geographies than we were in 2008.

Okay. Excellent. And then just for a last question, in terms of capital allocation and given the stock price reaction today and given the very strong balance sheet, any potential appetite in terms of thinking about returning some capital to shareholders via buyback? Is this being considered?

The share price reaction today was just today, so it is something that we'll have to talk to the board about. We'll be meeting them in September. But the short answer is not to date.

And I think we've got some great opportunities for continuing to invest in acquisitions. Our acquisition pipeline is full. We've got lots of opportunities to invest in continuing to grow our business. I think if those opportunities faded, then we would maybe look at that. But I think our prime focus would always be to invest in the growth of the Company and in continuing to expand our strategy.

Okay, that's very helpful. Thank you very much.

At this time, there are no further questions. Please continue Mr. Gomes.

Thank you. I'd like to close our call by saying that we are proud of how we have faced the headwinds in portions of our business to date and we are confident in our ability to continue to deliver consistent value to our shareholders. Our diversified plan allows us to provide consistent results and we expect it to continue to assist us in executing on our strategic plan. I look forward to speaking to you again. Thank you.

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