Stantec Inc (STN) 2015 Q3 法說會逐字稿

Welcome to Stantec Inc.'s third 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 November 5th, 2015, 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 a listen-only mode and who wish to quote anyone other than Mr. Gomes and 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 risk and uncertainties.

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

Thank you. Good afternoon, everyone. Thank you for joining our 2015 third quarter results conference call.

Today we are pleased to report solid results for Stantec's operations in the third quarter of 2015. The strong performance in Infrastructure and positive organic revenue growth in Buildings partially offsets the continued retraction in our Energy and Resources business

Buildings and Infrastructure represents approximately 65% of our gross revenue year to date. Our ability to achieve positive results overall when one business operating unit experienced retraction demonstrates the strength of the diverse business model we have built over the years.

We are managing our energy and resources business very well as we, and our clients, face low commodity prices. I am confident that our Company will continue to be successful as we move forward towards the end of the year.

Dan will now provide a brief summary of our financial results for the third quarter. I will then speak to some highlights from Q3 and provide an update on our outlook. We will then address individual questions.

Dan?

Thank you, Bob. Good afternoon, everyone.

Gross revenue increased 11.3% to CAD750.8 million in Q3 '15, compared to CAD674.7 million. Our gross margin in Q3 was 54.5%, within our targeted range of 54% to 56%.

EBITDA increased 9.4% to CAD93.4 million in Q3 '15 from CAD85.4 million in Q3 '14.

Our net income increased 2.9% to CAD50 million in Q3 '15, compared to CAD48.6 million in Q3 '14.

Diluted earnings per share increased 3.9% to CAD0.53 from CAD0.51 in Q3 '14.

Our backlog grew by about 4% or 5%, or approximately CAD100 million, to over CAD2.1 billion from last year, due to project wins, acquisitions completed in the first few quarters of the year, and foreign currency impacts.

While we have not met our previous organic growth target, we did achieve 6% organic revenue growth in our infrastructure business, and 3.4% organic growth in our Buildings business this quarter. This growth reinforces the ability to manage our business well, and demonstrate positive performance overall, while experiencing retraction in Energy and Resources.

During the second quarter, we closed the acquisitions of VI Engineering, VA Consulting, and, on October 30th, FST. And this morning we announced the planned acquisition of the Americas infrastructure division of KBR, which we expect to close in December.

We declared a cash dividend of CAD0.105 payable on January 14th, 2016, to shareholders of record on December 31st, 2015.

And today we -- finally we announced our intention to repurchase up to 4% of our stock through a normal course issuer bid filed and approved by the Toronto stock exchange, commencing on November 10th. From time to time we believe the market share -- or the market price of our shares does not fully reflect the value of the business and our future prospects. We believe this is an appropriate use of available funds, consistent with maintaining balance sheet strength, and our capital deployment and growth strategies, all of which are designed to enhance shareholder returns.

Overall, we have demonstrated revenue and earnings growth, and have executed well, resulting in a positive quarter.

Bob?

Thanks, Dan. I will now touch on some of our highlights from the third quarter, and speak to our outlook.

Regionally, Canada, primarily Alberta, is still being challenged by low and unstable commodity prices. While our Energy and Resources business continues to experience significant organic revenue retraction, Infrastructure saw strong organic revenue growth in all business lines.

Our Dessau acquisition integration has gone very well, generating new opportunities across geographies in Buildings and Infrastructure. We're also seeing success in P3 projects across Canada.

In the US, we experienced a significant increase in gross revenue in Q3, and saw good improvement in our backlog. While this region also continues to be impacted by the downturn in oil and gas, we are securing great opportunities in Infrastructure. The housing market continues to show steady growth, especially in Florida and California, where our community development services have been in high demand.

We also continue to see growth in the transportation sector, despite uncertainty around the long-term funding for the federal highway and transportation program.

Internationally, our overall revenues were relatively flat this quarter compared to Q3 '14. We retracted organically due to the completion of some large Middle East projects last year. However, we have had great success securing new healthcare and other buildings projects in the Middle East, and in the UK. Our mining operations have been impacted by low commodity prices, offsetting some of the growth in Buildings.

Now, on to our business operating units. Our Buildings group saw strong growth in our Canadian and international operations, and remained stable in the United States. Gross revenues significantly increased due to the previously completed acquisitions, organic revenue growth, and foreign exchange. We continue to have success in the healthcare, education, and commercial sectors.

We are leveraging our recent acquisitions to secure opportunities like our work on 70 Walgreens store conversions. We are able to win this work by leveraging our ability to consistent deliver a large, multi-disciplinary program, consisting of numerous projects, spanning a large geography.

We are also capitalizing on our expertise in P3 delivery. We were the successful design partner for the Red Deer College Center for Health, Wellness, and Sport, which will be a state-of-the-art sports and recreational facility, and will host a number of events for the 2019 Canada Winter Games.

We continue to experience quarter-over-quarter retraction in Energy and Resources, caused by the sharp decline in commodity prices, and unstable market conditions. However, sequentially our Energy and Resources business was relatively stable, when compared to Q2 2015.

While facing these challenges, we have managed our business very well. We've maintained margins, adjusted staff levels, and maintained strong client relationships. We continue to win work, just on a smaller scale.

In 2014, our oil and gas sector represented approximately 25% of our overall annual growth revenue. Today it represents about 15%.

Staffing levels have now stabilized, and we did not see a material change in our staff complement compared to Q2 '15. While we can't predict commodity prices, we believe that moving forward the pace of retraction in Energy and Resources will begin to stabilize.

Until then, we have been able to move staff with transferable skills to other business lines, to assist with projects in other areas of the Company. We're seeing an increasing demand for transmission and distribution and renewable energy work in our Power sector.

Our Environmental Services team, which represents approximately 20% of our gross revenue year to date, has experienced growth. Over 50% of their work comes from sectors outside oil and gas. This group has proven their ability to diversify. For example, we secured a project with the Nature Conservancy to restore and conserve North American rivers, waterways, streams, and wetlands in rural and urban environments.

Environmental Services was also awarded a contract to conduct environmental assessments and remediation at existing and former US military and aerospace industrial complexes.

Infrastructure experienced strong revenue growth this quarter. Transportation saw strong organic growth due to the rebounding US economy and our strong market position.

Water also experienced strong organic revenue growth, specifically public sector infrastructure opportunities, including water, waste water, and flood mitigation projects. We are working with the Tennessee Valley Authority and FEMA on flood risk mapping and hazard mitigation programs.

In Calgary, we have been retained by the Alberta government to do the environmental impact assessment and engineering design work on the recently announced Springbank offstream reservoir, the largest flood mitigation project in Alberta's history.

As the US economy rebounds, community development continues to see a strong demand for housing and mixed-use commercial projects.

Finally, one of our projects, the Low Level Road in Vancouver, recently received Envision Platinum certification, the first transportation project in North America to receive the Platinum designation. Not only does this solidify our leadership in the Envision certification process, it demonstrates our commitment and our client's commitment to sustainable, resilient infrastructure.

From small projects in our back yard to national and international projects, we are able to compete for and secure a wide variety of work. Also this quarter, we saw 7,300 employees from across the Company take time to give back to the communities we serve for the third annual Stantec in the Community Day.

Even when our employees are working hard to secure and maintain work, they went out in record numbers and volunteered. It surely was a great day across the Company.

As we move towards the end of the year, I'd like to address our outlook. Regionally, we revised our outlook for Canada and our international operations in Q2. We maintain our outlook for Canada as retraction, and stable for our international operations.

In Q2 '15 we revised our outlook for our Buildings and Infrastructure business operating units to strong from moderate, and those outlooks remain the same at the end of the third quarter.

Overall, we have revised our organic revenue projection for the year to end with an approximately retraction of 5%. At the end of Q2 and in our call, we said everything would have to come together in order for us to achieve our organic growth forecast. Throughout the quarter, given the continued deterioration in commodity prices, it became apparent that we would not achieve that projected growth in all areas.'

Even though our Buildings and Infrastructure business operating units experienced growth, it will not be enough to cover the greater-than-anticipated retraction in our Energy and Resources business, which continued into Q3.

We are confident we will continue to report positive results overall and provide long-term value to our shareholders due to the strength of our diverse 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. Conference call operator Angel will explain the question procedure. Angel?

Thank you. (Operator Instructions). And our first question will come from the line of Yuri Lynk of Canaccord Genuity. Please go ahead.

Hey, good afternoon, guys.

Hi, Yuri. How you doing?

Hi. Just a quick one for me on the oil and gas. Perhaps a little bit more color on the stability that you saw and the source of that stability. I mean, is it all that was going to be canceled got canceled, and you kind of saw a continuation of projections from the second quarter? I don't know if that's right or not, but you can correct me.

And secondly, in conjunction with that, can you speak to any level of backlog? I don't know if you disclose that or not, or bookings, so we can kind of get a feel for where that business is on a go-forward business?

So, to answer the first question, you're basically right. All the projects that have been canceled, have been canceled. What we're working on now is new projects that are bringing forward. And they're smaller projects, and more of an exploratory nature.

With regards to the backlog, no, we don't disclose it, but we've always said, and in this case, it's still the same, that our backlog, basically matches our revenue pretty closely. So, what we have in backlog is matching our revenue going forward, pretty much in the percentages that we have, generally. But we don't disclose the numbers, specifically.

Yes, the backlog in Infrastructure and Buildings is certainly up, and it stayed pretty flat, if you will, in Energy and Resources.

Flat sequentially, yes?

Yes.

And -- I mean, when -- I guess these projects are going to phase throughout this quarter and into 2016. We're not facing any kind of cliff or anything like that in terms of the roll-off?

I think we've gone off the cliff already. I think that was experienced in Q1 and Q2. We see Q3 and Q4 not hitting a cliff of any kind. It is still going to be dependent what happens to oil prices. It's going to be dependent on how our clients bring projects forward, but I certainly don't think there's a cliff there.

Great. Last one for me, just broadly on Infrastructure and Buildings, they did have good quarters. But was anything -- did either segment, particularly Buildings, experience any kind of delays in some projects getting off the ground? Or did both of those perform as expected?

I'd say they performed as expected. Buildings was a little bit -- they won a lot of work, but to actually start working on the work, you actually have to sign a contract and have the client see it. So, there was some delays in that. That's not unexpected, though. That is part of that business, but I would say that would be the one area that was slightly affected in Q3 as a result of some projects being awarded but not proceeding.

We still expect them to proceed. It's just they're taking longer for clients to actually get to the point of closing and proceeding.

Great. That's it for me. Thanks.

Thanks, Yuri.

And your next question will come from Anthony Zicha, Scotiabank. Please go ahead.

Hi, good afternoon.

Hi.

Bob, a follow-up question to Yuri's, the double-digit growth previously expected in Infrastructure and Buildings to attain modest organic growth this year wasn't achieved. Like, what's changed between Q2 and Q3?

I don't know if anything really changed. I mean, it was -- we're going to our -- we went to our leadership. We asked them what their expectations were with regards to projects that they were chasing, projects that they know they had won, projects that they were being shortlisted for and proceeding with. Based on that information, we did a forecast.

So, what would have happened is, we probably weren't as successful in a) achieving the win on some of those, and, as I said in Buildings, I think a lot of clients just moved a lot slower in advancing their projects. So, as we said in the second quarter, a lot of stars had to align to do that. We were pretty optimistic, but probably more -- a little bit more optimistic than we probably should have been. We still got very good organic growth in those, not the double digits that we thought we could get.

In those two segments. And then in oil and gas, commodity prices continued to decline since the end of June and even to the point of our conference call and after that in August. So, I think the weakness in oil and gas just continued to drive that retraction.

And, actually, just one more comment. On Infrastructure, a lot of the projects, especially in the United States -- and that's where we're seeing some really significant growth and some significant opportunities -- were some larger projects, design/build projects. Those projects have not been awarded. They still are out there, those design/build projects weren't lost. Those projects are just -- it took longer to come to a conclusion on the clients.

Design/build in the States, though, is an extremely large opportunity for us, still.

Okay. And have your views changed on the amount of prospects or opportunities in North America compared to where we were last quarter? And also, could you give us some more color, a business update in terms of California and the US West? Is that really a growth engine that's going to push up the US?

I think if you asked the people in California, they'd say yes. I think there are two opportunities that I think we're seeing, if you're specifically talking the US, and, more specifically, about California, is the water business, which has got funding there. That funding is coming to some decisions that have to be made, and that will be made in the latter part of the fourth quarter. That's going to create some significant opportunities for us in California.

The second one is just community development. We're starting to see the housing market in the United States increase. California, certainly, was always a large growth opportunity for us, and continues to be.

So, overall, in the United States, in answer to the first question, yes, we're extremely bullish on the opportunities we see in the US. With the amount of growth and acquisitions we've done there in the past five years, it's nice to see the economy finally providing us some opportunities we can take advantage of.

Great. And last question, what about the competitive landscape, both in US and Canada? Are you seeing any changes?

No. Business is business. (Inaudible) way too long. You always have competition. It's always there. Certainly in the oil and gas business, whenever you have a downturn and commodity prices decline, you need to find the best way to get their efficiencies up, but that is more of a client focus rather than competition.

We've always had good competition. We always will. We haven't seen a significant change in that landscape.

Okay. Well, thank you very much.

You're welcome, Anthony.

And your next question will come from the line of Bert Powell of BMO Capital Markets. Please go ahead.

Yes, thanks. Hey, Bob and Dan.

Good afternoon, Bert.

The margins in the -- the gross margins in the Energy business were actually up quarter over quarter, which is a little bit surprising. And there didn't seem to be a lot of color in the MD&A around that. So, I'm wondering if you could just talk a little bit about why that was, giving the collapse?

Okay. Well, first off, thanks for pointing that out. It's always nice to have some success pointed out. In a declining market, you tend to focus very hard on your business and what you have, and on your staffing levels. That group does a very good job of that.

The more you focus, the more efficient you become. So, I think we had the ability of looking at that business and understanding what was happening, and dealt with our staff.

The other point of maintaining those margins is really the ability of moving staff into other areas. So, we were very quickly, either we dealt with the staff, or the very good staff you have that you wanted to keep, we were able to move them into some other business operating units, which, then, maintains your margins in your oil and gas business. So, that even though your good staff you want to keep, we were able to keep them busy in other areas. So, that contributes, having some strong margins in a declining market.

This is pretty similar to what we experienced when we went through this in urban land in the late '90s, and, really, 2009 and '10.

As that business was retracting, we actually got better gross margins. It just allows you focus. When your work is retracting, you spend a lot of time in focusing on what -- where you need to place your people. You don't have a lot of business development expenses, because, to tell you the truth, there's not a lot of work out there.

So, all of that contributes to us being able to maintain our margins well.

Okay. That's great. Thanks for that.

And then, just in Canada in its entirety, what's the mix today between public work for you guys versus the private sector?

Okay. I know, overall, it's certainly higher in the private side of the business now, and I would say in Canada -- this would be a rough guess, Bert, but probably close to it would be around 70% of our business would be private, 30% public.

Now, there's a bit of an explanation there, because some of our work in Canada and certainly more in Canada than the US, a lot of Infrastructure work and even some of our water work and some of our Buildings work, is done through a P3 model. So, in that case, our client is a private client, being specifically a concessionaire or a contractor, but, really, the funding's coming from the public sector for those projects.

So, it skews it a little bit. So, 70/30 based on the client mix. Based on where the funding comes from, it'd probably be closer to 60/40.

Okay, that's helpful. And just -- so, I'm just trying to figure out, for Canada, I know the oil and gas stuff has been a direct impact, but I was trying to figure out the collateral impacts, as well. 'Cause in the quarter, you talked about the development activities in Alberta still continue to be strong.

It seems not realistic that that would continue. So, I'm just trying to think about '16 a little bit. I know you're not giving guidance today, but how are you guys thinking about the rest of the business as it's collaterally associated with Energy and Resources?

I can try to answer that by telling you where we are today, and you're absolutely right, one of our concerns for Q3 was that -- how much of our business outside of oil and gas in Western Canada was going to be impacted. And it was surprisingly low.

Certainly in Calgary, the community development part of what we do, which is a lot of greenfield urban development, that was impacted. That certainly has slowed. But, for some reason, Edmonton has been somewhat excluded from that in the Alberta picture, mainly because I think Edmonton's got a lot of development going on downtown, and projects associated with downtown redevelopment, which is very busy for us. So, both from a Buildings standpoint, Infrastructure, and community development, all those areas are very busy, actually, in northern Alberta, as a result of what's happening in Edmonton.

So, because of that, I think it had lesser of a collateral damage. Going forward in 2016, all I can say there is that development opportunities and redevelopment of downtown in Edmonton is continuing strong into 2016. Those projects aren't delayed. They're still carrying on, and so, we'll continue to be fairly busy in northern Alberta on those.

And I think we've reached a bit of a steady state, potentially, in Calgary, but the potential there is community development could be further impacted, depending on how long oil and gas remains low.

Okay. And just last question on international. The Middle East, I think, was noted as a area where you see some strength, but that, too, seems a little a challenged area giving the reliance on oil price to fund a lot of the programs in that market, and my sense is, they're pulling back. So, it seems a little bit at odds with your outlook there.

Yes, I'd say they're pulling back, but they're also still going ahead, I would say, at a smaller scale. A very good example is a project we're working for in Qatar, where they are working on a very, very large healthcare project, a cancer center. They have scaled the project back about 20%, but they're still proceeding with the project. So, it is a very large project, but before the oil collapse, it was an extremely large project.

So, they're still going ahead. There's some investments that they have to make in those countries, especially around healthcare, that they're proceeding with. So, we, I think, are in the right place and in the right sector, based on that.

That's helpful. Thanks, Bob. Thanks, Dan.

You're welcome.

Your next question will come from the line of Tahira Afzal at KeyBanc. Please go ahead.

Hi, folks.

Hi, Tahira.

Hi.

So, if I look at some of the announcements that came out today, it seems like there's a little more optimism on a transportation bill finally going through in the US. And I'd love to get your thoughts. I know I asked you this last quarter, but as the -- closely it seems like it might actually happen, if I look at the levels of spending implied, they're only up 2%, but it could be a bill that, obviously, spans many years. Can you put into perspective, maybe, how important it is that we have a long-term bill versus, really, the actual levels of increase per annum?

Well, you're right. The good news is they've actually got something passed that is more than six months. So, a six-year bill is great. That has three years of relatively secure funding is great.

The bad news is, that funding really isn't to increase. So, it's not nearly enough to get excited about. But you do have to get excited about the fact that there has been a longer term funding put out there that allows clients to, at least, do some planning, longer-scale planning.

Certainly, that getting through the next two hoops of approvals will still be an issue, but the big part was actually getting the first hoop approved. So, that's great news.

I think that our clients -- the good news is our opportunities in transportation have been very strong, year to date. This will only help. Certainly, this is only going to provide even more opportunities.

So, certainly good news. Not only good news, but we've even had a very good year to date without this news, so, this is nice to hear.

Got it. Okay. And are you more excited about the community development side of the business? And you've talked about it a couple of years back. We've been watching it for a while. And if I recall correctly, you've said that when it grows, it can grow exponentially.

Is that still the case? Is that some market we should look out for yourselves into the next year?

Yes. I don't think that's going to be a dramatic change over the next quarter, but definitely I think the word you used "exponentially" is exactly that. Once that people start getting comfortable and start buying houses, it seems to ramp up at a very rapid rate.

And we're probably the only firm in our space that really focuses on this side of the market, that greenfield, single-family, multi-family, commercial development across North America is -- was a very large part of our business. It's back up to almost a CAD300 million business again, and we're certainly very optimistic that we don't see, really, any constraints going forward that's going to stop that. It's just a matter of how quickly it ramps up, but we've seen quarter-over-quarter growth and quarter-over-quarter opportunities in that business in the US, and with everything we've seen in the US, we just can't see that stopping.

Got it. And last question for you folks, you've seen a very notable decline on the oil and gas side. Do you think your comps now, going forward, are just much easier? In a sense, you've got these other markets taking off, and, hopefully, the oil and gas side has probably seen the worst?

Yes, I think we've seen the worst of the retraction, Tahira. We will still be comparing in Q4 and Q1, likely, to slightly higher comps. We've stabilized, as we said we were going to do at the end of the second quarter, and our revenues are pretty flat second and third quarter for this year.

Don't expect a major increase in that. So, we'll still be comparing to slightly higher comps in the first half -- last part of 2015, and first half of 2016.

Thank you much.

Okay.

Thanks, Tahira.

Your next question will come from the line of Ben Cherniavsky of Raymond James. Please go ahead.

Hi, guys.

Hey, Ben.

I suspect at least people around Edmonton are more concerned with the Oilers than oil, given what happened to McDavid the other night.

(Laughter).

Yes, just when things started to look good, they threw another challenge in front of us.

They're still going to build the rink, I guess.

Yes, they're too far along to stop that.

Well, on that note, I just wonder in your energy business you've suffered, obviously, a big contraction there, and you've adjusted your cost structure and maintained your margins very well, which is, I know, something you guys are always very focused on.

But how much more room -- like, let's just say there was another leg down in oil prices and in the activity that you're seeing. If we're not at the boom, how much more do you have to adjust your cost base and sustain your margins without cutting into the bone, so to speak, and, basically, at what point do you risk sort of decisions about just closing offices and shutting up and going home, and exiting the practice, because it's just not viable to be there?

Yes, so I can answer the last part real definitively. We -- we're in this for the long term. We're certainly not worried about a collapse that's going to force us to really exit that market. I think we've done a number of things already and still maintained our margins and invested in that business, looking at ways of diversifying within that market itself.

So, to just put it all into context. First off, it's 15% of our business today now. So, we're talking about 15%. About half of that is environmental services, and half of that engineering.

Environmental services, I think we've seen probably the worst. Environmental services clients are now still looking at investing and getting permitting. We're still looking at routing. We have an LNG side of that that's very focused on those projects. Those projects are continuing to advance. So, half of that 15%, we think, is pretty solid, and somewhat insulated from any further retraction in oil prices.

The engineering part, certainly, but there's only so much our clients will stop working, even if they delay some capital programs, they'll still invest in looking at changes, efficiencies.

So, another 10% or 15%, 20%, reduction of that 15%, means an overall 3%, 4% reduction in our overall Company, which is relatively insignificant, and we can manage our way through it.

So, bottom line is, I don't think we're overly concerned about, now, the length of time. That would be nice if it came back, but I think we're now at a relatively good steady state, and any further retraction is not going to have a dramatic impact.

And, again, it's all, we feel, going to be offset by continued growth in Infrastructure and in Buildings.

I'm sorry. I don't quite follow how you think another retraction wouldn't impact you. Wouldn't your labor utilization rates go down, and you'd have offices you've got to keep the lights on?

We'll keep the lights on, but the lights are -- there's other people paying the lights, too, because our offices are shared with a lot of others. Probably only have a dedicated office for oil and gas in Bakersfield, and Bakersfield, we're pretty comfortable where we are there.

But, again, if that retraction does require us to continuously lay off some staff, we would look at that. But certainly, we, right now, are looking at any further retraction, we'd like to keep those people busy. We're going through retraining those in other areas, and moving them into other groups, and we're going to make a commitment of trying to do that as much as we can.

So, we feel we can -- if there is another retraction, we can manage our way through it, just like we've managed through this retraction. But it's not nearly going to be as significant.

Right. And if we are lower for longer, or even goes lower from here, there's no -- you guys -- like, what are the risks of an impairment charge from the acquisitions you did in that segment in that practice area?

I -- you never like to say that you can't, but I can't think -- Dan, maybe you can -- I can't think of --

We look at the indicators of impairment every quarter, Ben. Certainly in Canada there is no concerns around impairment. We look closely around goodwill impairment every quarter. We're doing our full annual review this quarter for our US.

We don't carry any goodwill internationally, so -- but at this point, there's no indicators that would suggest we have an impairment.

That's great. And good to see the buyback in there, too. Thanks a lot.

Okay. Thanks, Dan.

Your next question will come from the line of Sara O'Brien of RBC. Please go ahead.

Hi, good afternoon.

Hi.

I think you guys made the comment that there's a lot more smaller jobs in the Energy segment in oil and gas now. I just wondered, what's the margin outlook on those in a more competitive environment, and would you expect any difference in margin, going forward?

No, I don't think so. We went through the first round with our clients with regards to reducing rates to try and get down to -- make them more efficient. We've done that round of reductions in the second quarter.

I don't see, really -- probably we're less concerned with the competitive environment, going forward, and more concerned just about the amount of work that they give us.

So, don't see the competition or a rate issue, as we said, in our conference call. We're really happy about the fact that we've maintained our client relationships, and it's just a matter of how much work they're giving out at this point in time.

Okay. And then, turning to the US market, just wondered what's your -- where are you most optimistic going into -- with bookings that are going on now? Is it the design/build in the US? Is it the Infrastructure? Maybe you can comment a bit about those.

Yes, I'd like to say it's -- we're optimistic bout everything in the US, but I think design/build in transportation is a very strong market. In a number of states I think we have to reference the fact that we announced this morning about the KBR acquisition of their transportation group. In Texas, they are extremely busy in design/build in the Texas market, which is very strong. That was one of the reasons we wanted to complete that transaction.

So, definitely transportation in design/build is extremely strong in the United States. Our water business continues to be strong in the US, and is expanding as a result of resiliency and flood protection efforts. So, not only is it growing in the more traditional water and waste water area, but we're seeing, now, opportunities in flood control mitigation and resiliency.

So, those definitely are all bundled into Infrastructure, along with community development. So, I'd have to say, really, the community development area and Infrastructure is strong.

Texas is great for us now. It's a state we wanted to get into for years, as we've been messaging now with our acquisition of SHW last year. Their focus in the K-12 school, the bond issues were completed earlier this week, and there's hundreds of millions of dollars of bonds approved, of which Stantec is benefiting, the benefit of that, working with the school boards.

So, there's a lot of areas that in the United States we're extremely optimistic about.

Okay, great. And then maybe just lastly on acquisitions, you have previously commented that there's other areas of oil and gas, pockets that are quite strong in the US, in pipeline-type work. I just wondered what the pipeline of acquisition opportunities is for that?

No pun intended, but, yes, the pipeline is strong.

Good. I mean, we've been focused on that now for a number of years. We'd like to say that we can, hopefully, do something in the short term, but certainly we're still very optimistic that we can do something in that area in the United States over the next several months. We just see lots of opportunities, but, certainly that business is a difficult business to get into in the US. But certainly we're still optimistic we can do something.

And that's one where you could leverage your talent in the Canadian market?

Absolutely. Talent and dollar.

Okay. Thank you.

You're welcome.

Your next question will come from the line of Mona Nazir of Laurentian Bank. Please go ahead.

Good afternoon.

Hi, Mona.

So, my first question is, just turning to the geographic growth. In Canada, we're seeing increased infrastructure spend, an uptick in P3 projects, but a weak commodity price environment. In the US, we're seeing economic rebound and the US transportation bill is promising.

Now, you did speak to growth opportunities in the US, but if you could speak to opportunities in Canada, particularly in the Buildings and Infrastructure space, that would be great.

I think with the change in the federal government is, certainly, from an Infrastructure perspective you've got to be optimistic. They built their platform around a significant increase in infrastructure spending, albeit some of that was back-end loaded. But certain their focus on infrastructure, I would say, is good news to our transportation and water business across Canada.

I guess the one point I'd like to drive home is that we do have offices coast to coast. We have almost 100 offices in Canada in every province, and that allows us to access both provincial and municipal opportunities.

So, we see ourselves being very well positioned in the Canadian market to take advantage of that focus that the government now has on infrastructure. In Alberta, same thing. Even though that province has been, obviously, hit hard with -- as a result of the oil prices, the new government has certainly focused on investing in infrastructure and schools.

So, that's all good news for us. I mean, that's the heart and soul of our Company is Infrastructure. So, we certainly see that as a boost to our Canadian business.

On the Building side, the continued focus on P3s in Ontario and British Columbia is also good news for us, as that's a strong market for us. So, overall, I think all the recent news in Canada is seen as a benefit to Stantec.

Okay. And just secondly for me, on the M&A front, we continue to see a steady flow of tuck-ins.

Just given your significant financial flexibility, and low leverage, any thoughts on speeding up the M&A strategy, perhaps to offset potentially weaker organic growth, and given FX is stabilizing?

I don't think we ever look at our acquisition strategy to offset anything. Our strategy has always been very consistent. We look at a wide range of companies from a perspective of geography and size. We've always had desire of doing larger acquisitions, and, as you say, we have the capability of doing it. It's a matter of finding firms that want to join you, and there's just less firms that are larger in the United States and Canada.

The firms that have been acquiring are those types of firms that get to a point in their evolution where they need to do something and joining a larger platform is a great solution to some of the issues they face in growth.

So, really, our strategy has been consistent. I don't think our strategy gets adjusted by what's going on in the economy, or going on with regards to others. We're really focused on remaining disciplined in that acquisition strategy, which we've been.

Okay, thank you.

You're welcome.

Your next question will come from the line of Jacob Bout of CIBC. Please go ahead.

Good afternoon. I just had a follow-up here on your backlog. Maybe talk a little about -- I'm not sure if you look at it this way, but on a same-store basis, what that backlog will look compared to, say, a year ago, or even last quarter? I'm trying to get an idea of what acquisitions have added to the backlog?

Yes, we don't really refer to it as same-store. That's -- we don't really look at it from the perspective of specifically what geography that's coming from.

But certainly we have seen an uptick in our backlog in our Infrastructure and Buildings units. Probably about a third or more -- around a third of that backlog is certainly organic growth. Some of that, about 20% probably, is around FX growth, and the rest would be through acquisition.

Okay, that's helpful. And then maybe if you can talk a little bit about EBITDA margins and specifically the move into the US, how should we be thinking about EBITDA margins on a go-forward basis? Are we going to see a compression here as we see more work on the US transportation side?

It's not just a US story. It's a combination of the mix of business, because transportation, for example, is both Canada and the US, is a lower margin business. But certainly in he US, our overhead cost -- we've talked about this before, particularly around labor -- benefit costs are higher in the US. You could expect to see somewhat of a retraction in the EBITDA margins as we roll forward.

It's not going to be material, though, Jacob. It's not like it's going to be a 3% or 4% or 5% reduction. It's going to be incremental, over time.

Yes. And maybe just lastly, if you could provide us a bit of an update on how you're looking at international acquisitions?

Oh, international for us is probably in our future. I would say it's a much shorter-term future than it has been in the past, because as we continue to mature in the US, then we need to start looking at augmenting that. I think we've been messaging over the last several months that now that's coming to a point where we see starting to look at international acquisitions in the next 24 months, two years, to three years.

I think in the short term, we're going to try to get familiar with what's going on in the international market, where we fit, where would be the right entry point for us, what geographies, what sectors, what types of companies we would be interested.

That's going to take some research and time, so, I don't see it happening over night or in the short term, but, certainly, in the next couple years I think you can start seeing us augment our North American strategy by looking at -- outside of North America. But it's still a couple years away.

Thank you very much.

You're welcome.

Your next question will come from the line of John Rogers of D.A. Davidson. Please go ahead.

Hi, good afternoon.

Hi, John.

A couple of follow-ups. First of all, in terms of the backlog growth that we've seen now running ahead of revenue growth, is that just the longer length of the projects, especially on the Infrastructure side? Or, you know, is that a precursor of some acceleration here?

No, I don't think it's got anything to do with the length of projects, John. It's just a precursor to and mirrors the growth that we've seen historically in Infrastructure and in our US operations.

Okay. And then, in terms of the acquisitions and the KBR and I forget the name of the other one that closed subsequent to the end of the quarter, the businesses that you're looking at, and, I guess, especially on the Infrastructure side, is it very complementary to what you're already doing? Or does this put you more into construction management, than is typically.

No, both of these -- FST was the one we closed subsequent to the quarter.

Thank you.

And KBR, both of those are very, very similar to what we do right now. FST brings us just a much higher degree of water capabilities. In certain areas of New England in transportation, they augment what we have there already, and really increases our position in that area of the country.

And KBR is just clearly a water and transportation geography positioning for us in a very, very strong state that invests money in those areas. So, none of this is moving us further into construction. None of these guys do anything different than what we do today.

Okay. And, Bob, just in terms of the pipeline of acquisitions, is still the standard talking to a lot of people, or--

Yes. I mean, it's still business. The pipeline is still full. We're in a, I think, from a certain perspective, an enviable position, because we're known as a very acquisitive company. We pride ourselves on our ability to be able to integrate companies well. We've got lots of very good companies that we're talking to, and a lot of very good companies that want to talk to us.

So, all that we can say there is it's been as busy as it's ever been.

Okay, thank you.

You're welcome.

Your next question will come from the line of Benoit Poirier, Desjardins Capital Markets. Please go ahead.

Yes, thank you very much, and good afternoon, gentlemen.

Hello, Benoit.

Just to come back on the federal election and also the Alberta budget. Obviously, positive milestones for you, but looking at your experience, what is the delay or how long does it take before it flows to revenues and the backlog?

That's a good point. I mean, it's going to take a while to flow to revenues. We're probably going to see, really, no significant change in that arena until next year, and I would say probably no significant change into revenues until maybe even the second half of next year. It takes government a long time to get their act together and start acting on a lot of campaign promises.

But what it does do, is the existing projects in that pipeline, the existing projects that the provincial government and federal government were thinking about will get accelerated. So, some of that will impact the first half.

But it will take some time to get some significant uptick into our business. The good news, don't see anything stopping that. It's just a matter of how long. But a couple quarters before you'd start seeing that.

Okay. And you mentioned the color about the transportation bill. Obviously, there was a lot of discussion in the last few days. Now, given that the needs are still there, they seem to exceed the current funding. Do you think there will be, basically, more P3 apportion fees down the road in the US? And is it something that you want to strengthen, over time?

Yes, I could go on for half an hour and talk about the P3 opportunities in that market in the US. A federal bill, probably, is not going to change that thinking significantly in the US. The P3 market is still what I would call somewhat noisy in the United States.

Now, that doesn't mean there's not opportunities, it's just you've got to be careful about which opportunities you chase. A funding bill, probably, is not going to affect hat, because the P3s in the United States are looking outside of any typical traditional public sector funding to build infrastructure. So, in the United States I almost see them as very two separate buckets.

So, the bill is a good thing. Them talking about it and actually getting something approved is a good thing, but I don't see it changing the landscape significantly in either P3s, or in the typical public sector funding.

Okay. Very good. And you mentioned the good color about the inability to achieve double-digit in Infrastructure and Building, although it was still very solid. I was just wondering, looking at the architecture billings index that was out in the last three months, there was a slowdown before it ramped up in September.

I was wondering how much of a read-through is it on your Infrastructure and Building business?

Not that much. I mean, we've been questioned that in the past about that index. We don't see a significant amount of correlation between that index and the opportunities we see.

So, all we can say right now is that our Buildings business is extremely busy bidding on projects, getting ready for projects, so, if that index has been decreasing, even the fact that I'm not aware of that shows the fact that we don't pay that much attention to it.

Okay. And, related to share buyback, I mean, it's a change versus your comments you made in Q2. I was wondering what was the main driver. Was it more a comment about the fact that the stock price, more confident about your outlook? What drove the change in you view about the NCIB?

I don't think there were was really a change in the view around the NCIB. We did say and indicate that we're looking at it. We continue to look at it. In this quarter, we -- yes, the share price decline did have an impact. We look at the materiality of that impact. We look at where our multiples are, and we look at what our capital allocation is, and we look at our long-term prospects.

And we think there's some value there, and brought that forward to the Board, and got it approved this quarter.

Okay. And maybe last question, Dan, when we look at your working capital items, if you recall, in Q1 there was a significant drag for a few reasons, almost CAD160 million. I was just wondering whether we should expect a big reversal to happen in Q4 to make kind of the working cap change neutral for the whole year?

So, is this with reference to cash flow from operations?

Yes. It's really the change in the non-cash working cap. There was a big drag in Q1. So, you gave some very color at that time, but I was wondering, given your performance in Q2 and Q3, whether we should expect a positive reversal in Q4?

I would expect to see a bit of improvement in Q4 in our day sales outstanding, our WIP, and A/R outstanding. So, we should see that come down a little bit. I believe we're at 103 days at the end of Q3. That is fairly typical, if you look at the seasonality of our business, year over year. It is a little higher this year, and a lot of that has to do -- not a lot of it -- but a portion of it has to do with the Dessau operations, whose working capital is a little bit higher.

It just takes longer to -- we have milestone projects and it takes longer for public sector clients to pay. So, that has an impact.

But generally, we do see working capital improve in the fourth quarter. It is usually pretty low in the first quarter, though, and we should see some recovery continuing on into Q4.

Okay. Thank you very much for the time.

You're welcome, Benoit.

Your next question will come from the line of Maxim Sytchev of Dundee. Please go ahead.

Good afternoon.

Hi, Max.

Just a very quick question. Are you hiring on a net basis, outside of oil and gas, right now?

Yes. And we (inaudible) without knowing the details of it, but, yes, we're hiring outside of oil and gas, yes.

And can you maybe quantify it? I mean, is it 1%, 2%? Is that -- that's kind of the --? I mean, I know that you don't have the numbers in front of you.

I would say it's probably in that range. It's not significant. It's not like we got -- but I would say that, just one point, the KBR acquisition that we've done and we'll be working on closing, is a very, very busy firm. We anticipate we will probably even have to hire people on top of that acquisition to complete the backlog that they have. So, that's good news.

But I would say it's higher in the US than Canada, but certainly we're hiring.

Okay, that's interesting. And can you remind us, what is the percentage of revenue that comes outside of Alberta in Canada?

Okay, so, I'll just give you some idea. Canada West, which is, I would say mainly Alberta. Alberta makes up about 20% of our overall revenue, and probably it makes up about 60%, 65% of our Canadian revenue.

So, right now, to put it in perspective, Alberta's 20% of our overall revenue percent is in Alberta.

Okay. And out of that 20%, I would, I guess, guesstimate that probably half of that is still kind of oil and gas related? Is that a fair assumption?

Now, that figure I don't have in my head. I'd have to think about that. It may be close to half. Don't know, Max, but 20% is Alberta. It's probably close to half. It's still a big part of our business. There's no doubt about it.

No, I guess my point is that, as the E&P exposure kind of directly is shrinking, and Buildings is growing, transportation is growing, and I'm not trying to weasel sort of the answer for 2016 guidance, but it does shape up sort of nicely from a directionality perspective. Is that kind of a fair assessment in how you approach the budgeting and 2016 process?

I'd say that's a fair assessment. Yes.

Okay. Okay, excellent. That's it for me. Thank you very much.

Okay. Thanks, Max.

Your next question will come from the line of Chris Murray of AltaCorp Capital. Please go ahead.

Thanks, guys. Good afternoon.

Just thinking about the Energy business, and not only just your Energy business, I think some -- even some of your clients. Are you seeing any shift amongst your client base to push work that they used to be doing internally maybe over to you, just with the entire space contracting?

I don't know. I can't say that they are. That's one question -- I haven't had our leadership tell us that they see that happening. I think our clients right now are really focused on trying to be as efficient as they possibly can. It would almost be logical that some of that efficiency could be achieved by pushing some work into consultants. So, it sounds like a logical assumption, but I can't verify that's happened.

All right, guys. Thanks.

Thanks.

And our next question will come from the line of Michael Tupholme of TD Securities.

Thanks. Good afternoon.

Hi, Michael.

Just one question. The Building segment, we saw the organic growth rate slow a little bit this quarter, and yet your outlook seems fairly positive there. You did mention that I think part of what happened in the quarter was some work that you -- it didn't quite come to completion, or some delays in signing that work.

How quickly would expect to sort of see that growth rate, maybe, pick back up? And how should we think about it? Is it sort of like the levels we saw in the earlier part of the year?

I think what you're going to see, Michael, in buildings is we started to see a pickup in that segment in Q4 of last year. Remember, we started to see some turnaround in organic growth. So, I'm not sure you're going to see the same levels of organic growth in Q4 and into the first half of 2016.

Because of the comparables.

Because of the comps.

Yes.

But still pretty strong growth.

And a lot of that retraction or slower growth -- we went to 3.4% growth from a quarter two of 5.7%, was also just some projects coming to completion without some new projects coming in or replacing it. We will have those projects come in and replace in the fourth quarter.

But Dan's right. In the fourth quarter, we're going to be comparing against a stronger Q4 2014. So, it's hard to say if it's going to come back to the same levels at the beginning of the year.

Okay. That's helpful color. Thank you.

Okay. You're welcome. Thank you.

And we have no further questions at this time. I'd like to hand it back over to our speakers for closing remarks.

Okay. Thanks, Angel. I'd like to close our call by saying that we're proud of our performance this quarter. We continue to win work, maintain client relationships, and manage our business well, even in some challenging economies in some of our business.

I think our long-term success really proves that that diverse model that we've built over the years continues to serve us well, even in a period of time like this.

So, we're confident we'll continue to deliver those results to our shareholders, and we look forward to speaking to you again soon. Thanks very much.

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