Stantec Inc (STN) 2016 Q3 法說會逐字稿

Welcome to Santec Inc's third quarter 2016 earnings results conference call. With us today from Santec management are Bob Gomes, President and Chief Executive Officer and Dan Lefaivre, Executive Vice President and Chief Financial Officer.

(Operator Instructions) As a reminder, today is November 10, 2016, and this conference call will be recorded and broadcast live over the Internet. It will be archived for future reference at Santec.com under the investor section.

Any members of the media who are joining us in listen-only mode and who would like to quote anyone other than Mr. Gomes or Mr. Lefaivre, must ask permission from the individual concerned.

Santec management would like to caution you that this call will include forward-looking statements and forward looking information within the meaning of applicable US and Canadian securities laws.

By their very nature, forward-looking statements require Stantec management to make assumptions and are subject to inherent risks and uncertainties. Santec management will also mention non-IFRS measures.

And now your host, Bob Gomes. Please go ahead, sir.

Thank you. Good afternoon everyone. Thank you for joining us for Stantec's third quarter 2016 earnings conference call.

Dan is here to provide a summary of our financial results. Then I'll share some highlights from our operations. Following that we will open the call to questions. Just a reminder that we posted a copy of our slide show presentation on our website, it will be archived in the Investors section.

Today we released the results of Santec's operations of the third quarter of 2016. This was another quarter that demonstrated the value of our long term strategy. As you can see on slide four, contributions from acquisitions especially MWH resulted in strong growth gross revenue growth of more than 67% in Q3.

We experienced gross revenue growth in all of our business operating units in Q3. We are pleased to the see our strategy continue to add strength to our company as we continue to fully integrate the acquisitions we have completed over the past several years. Management continues to focus on operation effectiveness throughout all our operation while continuing to navigate some difficult economic conditions in certain sectors and geographies.

In addition to our Q3 results, today we announce the appointment of Marie-Lucie Morin to our Board of Directors. Ms. Morin has a distinguished 30 year career in Canadian federal public service, to its National Security Advisor to the Canadian Prime Minister and Associate Secretary to the Cabinet.

She also served as Deputy Minister for International Trade and was Associate Deputy Minister of Foreign Affairs. She's been an Executive Director for the World Bank and an advisor to the Canadian Transportation Act Review Panel. Ms. Morin is a welcomed addition to our Board and look forward to the guidance she will provide.

I'll now hand things over to Dan to provide an overview of our Q3 financial statements. Dan.

Thanks, Bob. Good afternoon everyone. As Bob mentioned our results this quarter reflect the strength of our core operations and our strategic acquisitions. We're on slide eight for those of you following along on the presentation.

Gross revenue increased 67.5% from CAD750 million to CAD1.26 billion. This is partially due to the revenue contributions from MWH. Results were impacted by very slight decrease in gross margin from 54.5% in Q3 2015 to 54.2% in Q3 2016. This was mostly due to the addition of lower margin disruption services business, which had a gross margin in the 39% range during Q3. Gross margin results were impacted by the projects and downward pressure on fees in some sectors, namely in oil and gas and in our environmental services business.

There was an increase in administrative and marketing expenses as a percentage of net revenue. This increased from 39.4% in Q3 2015 to 41.4% in Q3 2016. Mainly due to increased acquisition activity and higher administration labor costs during the quarter.

Admin labor costs were higher because of increased retention payments and severance payments. Our admin and marketing expenses were also higher when comparing Q3 2016 to Q3 2015 due to the positive impact of per value share based compensation we recorded last year in Q3 2015. Adjusted EBITDA was up healthy 21.5% compared to Q3 2015, it was up from CAD93.6 million to CAD113.7 million.

It improved to 13% from net revenue despite the lower gross margin and higher admin costs. There's only a slight difference between adjusted and reported EBITDA this quarter, mainly because we had very few acquisition related costs in the quarter. Interest expense increased to CAD5 million in Q3 2016, again, primarily due to increased interest expense on our outstanding long-term debt related to the MWH acquisition.

Adjusted diluted earnings per share decreased 5.2% from CAD0.58 to CAD0.55. This was due to the factors previously mentioned, gross margins, higher SG&A and interest expense. We declared a cash dividend of CAD0.113 per share to share holders of record on December 30, 2016. Now moving on to slide nine.

Our overall work backlog remains very healthy. It's at CAD3.9 billion, consistent with last quarter and up from CAD2.2 billion at the end of December -- at December 31, 2015. On slide ten you'll see construction service approximately CAD250 million in gross revenue in the quarter and CAD390 million since MWH acquisition on May six. About 60% of the revenue generated year-to-date occurred in the United States and 40% in the United Kingdom.

Now, Bob, I'll pass it back to you for operational highlights.

Thank you, Dan.

As both Dan and I have said, the strength in many parts of our core business and contributions of the full integration of our strategic acquisition are propelling our company's healthy gross revenue growth. That's evident across our organization with significant increases in gross revenue in Q3 2016 compared to Q3 2015, especially in infrastructure and energy and resources.

And from an adjusted EBITDA perspective we did very well this quarter. During this quarter we completed the acquisition of Edwards & Zuck, a New York City based buildings engineering firm that will add strength to our buildings business in that part of the United States. Subsequent to the quarter we signed a letter of intent to acquire Edmonton architectural base (inaudible).

They will compliment our buildings practice in our Canadian prairies and territories geography and add bench strength in the civic sector, which ties well with the government and Canada's commitments to public spending. We are very pleased with our progress to date on the MWH integration, the revenue and cost synergies we've achieve to date are in line with our expectations.

We've completed and communicated a number of key organizational changes and we're excited about moving forward as a combined team. In our building business operating unit, as shown on slide 14, gross revenue increased by more than 5% this quarter. Organic revenue retractions was just under 3%.

This was mainly due to the number of design build P3 projects currently in the bid phase and because of the decline in oil and gas and its impact on public and private spending in Canada and in the Middle East. However, results were positively impacted by a CAD2.2 million success fee for a major healthcare project in Canada. We do look forward to some positive momentum.

We have won some major building projects recently and we are seeing increased activity throughout North America. In Canada we are seeing drawing activity in the healthcare, commercial and education markets and steady activity in the civil and industrial sectors. This is highlighted by our architecture, landscape and transportation teams being named Prime Consultant in design lead on the teams selected as a successful proponent for the new Makenzie Vaughn hospital in Ontario.

We are starting to see some results of the Canadian government's commitments to public spending as well. For example, we just recently won the large federally-funded project and for construction of four schools in major renovations to two schools in aboriginal communities in Manitoba and we very recently won work on the Regina Transit Fleet Maintenance Facility and Yards in Regina, Saskatchewan.

In the United States we continue to see increased opportunity in the eastern US, especially in commercial and we continue to benefit from the on going urbanization trend in the US. Our civic sector provides a range of services to respond to those needs. The outlook for the buildings remains stable for organic growth revenue for 2016.

Moving on to energy and resources on slide 15, gross revenue increased by more than 21% in Q3 2016 compared to Q3 2015. We saw continued organic retraction this quarter and year-to-date, due to the on going lower price environment that is curtailing capital standing putting pressure on (inaudible). Oil and gas engineering services continue to represent a small portion of our overall business. In 2014 they represented 15% of gross revenue, in 2015 that number decreased 8% and at the end of the first three quarters of 2016 it fell to 4%.

We continue to secure projects in the power sector and were awarded work on some major alternative energy projects in Canada, including buildings and interconnection design, for [Deltrol], (inaudible) battery energy storage system in Toronto. This will be Canada's largest battery energy storage system. Our outlook for energy and resources remains a retraction in organic gross revenue for the remainder of 2016.

Moving on to slide 16. Gross review in our environmental services business operating unit increased 9% in the quarter. We did see continued retraction in the organic gross revenue due to market conditions in oil and gas.

As with our engineering services the environmental services we provide to the oil and gas sector represents a smaller portion of our overall business, reducing from 11% in 2014 to 5% of the three quarters ended September 30, 2016. However, we continue to win environmental services work in this sector. During the third quarter we rewarded were awarded archeology impact assessment work to all remaining areas scheduled for construction along a large cross provincial pipeline in western Canada.

We are seeing opportunities for growth in the power sector in both Canada and the United States. And with the Canadian federal government's plan for infrastructure spending, especially in aboriginal communities, we see opportunities of water and transportation and waste water projects in Canada. For the remainder of 2016 our out outlook for environmental services remains a retraction in organic gross revenue.

Looking at slide 17, you'll see gross revenue for our infrastructure business operating unit increased 70.5% in Q3 2016 compared to Q3 2015. Organic gross revenue was stable this quarter and up 4.3% year it date. Year-to-date growth occurred because of strong organic growth in transformation.

About three-quarters of the transportation works occurs in the United States. The US economy is expanding and our maturing presence is leading to work in lightrail transit, roadways and bridge projects. We also saw solid performance in our US water. Our MWH, now Stantec colleges, were awarded a significant work for the Miami-Dade County Water and Sewer Department in Florida.

They also secured work to support the Delta Stewardship Counsel's long term management strategy for the Sacramento and San Joaquin rivers dealt in California. Yesterday's election in the United States ended months of speculation. Both campaigners focused heavily on infrastructure investment and we see this as one of the first focus points for the new administration.

Santec is one of the best position firms in North America to take advantage of this new focus on infrastructure given our geographic footprint that covers over 280 locations in 40 American states and all Canadian provinces and territories. We have a top tier position in water, transportation and environmental services, all areas that will benefit from increased infrastructure spending in both Canada and the United States.

Our outlook for infrastructure continues to see moderate organic growth for 2016. In summary this, quarter demonstrated the value of managing our operations effectively across a very broad range of service offerings with geographic diversity and through our strategic acquisitions. We look forward to continuing to win new work with our new partners.

Tomorrow I hope that all take a moment to reflect on the sacrifices of the men and woman in service for Remembrance Day here in Canada and for Veterans Day in the United States. The slide you're looking at features Poppy Plaza in Calgary, Alberta. Stantec's Landscape Architecture Group contributed to the design of Poppy Plaza in collaboration with our engineering, geotechnical and lighting experts. The unique public memorial pays tribute to the men and woman past and present who served on behalf of Canadians.

With that I'll turn it back to the operators begin the Q&A.

Thank you. (Operator Instructions). We'll have our first question from Michael Tupholme with TD Securities.

Thanks. Good afternoon.

Good afternoon.

Good afternoon, Michael.

I just wanted to start, I guess, with the building segment. The rate of organic decline did improve to where it was last quarter, but there is mention in the MD&A and your prepared remarks about some pressures or some drag effect from Canadian and global operations. Just wondering what the comps get easier as far as those areas that are weighing on the buildings segment.

You're saying the comps from 2015 to 2016?

Right. Yes. It seems there's a couple of issues here in Canadian and global operations and I think you mentioned some of it ties back to oil and gas. So, I guess, just wondering, yes, when the prior year comps become a little bit easier and that ceases to be a drag?

I don't know if that's a significant drag but it will become easier but not until next year. I don't think that's when we started to see some of the impact especially in the Middle East projects and the global operations. And really, there wasn't less of a retraction this quarter in buildings.

But really I would -- I tell the building story it's more of a timing issue than anything. We won an incredible amount of projects in the last month to two months and really look forward to that being brought into backlog and then brought into revenue over the next few quarters.

So I see this as a quarter here where we are basically getting ready to have, I would say, a fairly busy first half of 2017. So we're looking forward to that business improving going forward.

Okay. And, Bob, would you say the same about infrastructure? I mean, that's the segment where the organic growth had been showed at a pretty good clip for quite a while and then you were flat this quarter. But everything you suggested about infrastructure was pretty constructive in your remarks there.

So, is this a similar situation with infrastructure where looking forward in the next quarter or two you'd expect that to bounce back to more of a positive rate?

Definitely. In infrastructure, both in water and transportation were impacted by a couple of fairly large projects in the United States winding down, the PCCP project in New Orleans the Ohio River project, the bridge projects in Ohio. Both of those are very large projects. Those are winding down and it takes a while to fill that back in.

I think what we are seeing with the Canadian government's focus on infrastructure and now with renewed focus and the election behind us in the United States, you just can't help but look positively on infrastructure. The funding is going to be there. We're well positioned to win our share of that and definitely very optimistic looking forward.

Okay, great. Just last one for me. There was mention in the energy and resources area about some benefits from revisions to estimated cost to complete and I guess this relates to some MWH work. Any additional information you can provide about that and just wondering if that's at all material in terms of the impact that had on the favorable side?

Michael, I can give you some color on that. The estimate provisions were related to the Panama Canal project. That project is winding down, and we adjusted the estimate to completes, there was a risk release on the project so you have the appropriate reserves. It was only about CAD1 million, CAD1.5 million, but at the same time you have to recognize we ran thousands and thousands of projects, we're constantly doing our estimate to complete adjustments across all of our business.

Last quarter we saw adjustments in buildings. We didn't see the same level of impact in this quarter so it's noted in there for the impact on gross margin but this is pretty normal business occurrence for us.

Okay, that's good. I wanted to make sure it wasn't anything overly unusual or significant. But it sounds very much normal course.

Pretty normal in terms of how we manage revenue.

That's all for me. Thank you

Thanks, Michael.

We'll go next to Jacob Bout, CIBC.

Good afternoon.

Jacob.

Jacob.

When you look at organic growth in 2017, can you contrast what you seeing for US infrastructure versus Canadian infrastructure? I noticed with some of your peers that there was a stark difference. Are you seeing the same type of thing?

I'm sorry, just make sure I understand the question. Are you saying do we see more opportunities for organic growth in infrastructure in Canada versus the US?

No, the other way around. And specifically for 2017. I mean, what I'm getting at here is it sounds like Canada's more of a bidding year for infrastructure and really kicks in 2018, but I wanted to get your perspective.

I think the bidding for infrastructure projects on either side of the corridor -- the bidding is actually the engineering and architecture the design is done first. So I would say yes, there is going to be bidding but then revenue flows in pretty quickly after that. So I do see revenue flowing in for infrastructure in both Canada and the United States in 2017.

The rate of that happening is really hard to predict but I wouldn't say that's a 2018 thing. I would certainly see, and as we stated in the conference call, we are starting to see revenue increase already as a result of the infrastructure spending in Canada and see that continuing in 2017. So for ourselves, there's definitely opportunities, especially when you look at a lot of the P3 projects where if you're the owner's engineer you're at the front end of those projects.

You're preparing the schematic and you're preparing the up front work. The bidding, you're right, for those projects wouldn't occur until later in 2017 but you're actually -- the owner's engineers work is earlier. Since we play on the P3 sometimes on the owner side, sometimes on the proponent side, we get the opportunity sometimes earlier.

That's helpful. And then maybe a couple questions on the construction division within MWH. How are you thinking about that? I mean, I know, there was some discussion when you first took out MWH, is that still core part of your business? And then margins that you saw with construction, was that in line with your expectations? Slightly better? Slightly worse?

It's in line. I would even say it's on the higher side of what we would expect from typical construction. As we said, construction really isn't the core of Santec's business, it still isn't. It's only 8% of our revenue so it is a relatively small piece that came along with the business.

As we said it's run as a very separate business and more opportunistic with regards to how we integrate that or how we bundle it with our design services. So from a perspective we're still learning a bit about it and really our intent hasn't changed and we're happy with the performance so far.

Just to clarify, construction is about 13% of our revenue, less than 15%.

Finally for me, the synergies with MWH is that still progressing online or any update on the cost to revenue?

Yes, the synergies certainly on the cost side were certainly on track. We have seen, I'll let Bob speak to the revenue side of synergies, but we've made a lot of good progress in the last couple of months working with our MWH colleagues. It's been very collaborative and positive. We've got a lot of our organization structures figured out, both in terms of our operations and back office and then it's about, really the other objective is winning work together.

It's been seven months and I think that's something that we definitely want the investment community to understand. The amount of effort and the amount of work that has gone in to date through trying to get the firms together and integrate them. You know, Santec's model is one of really getting into that very quickly. And it's distracting, it takes an awful lot of time, but it does pay dividends and I think our performance through that seven months considering the fact of all the integration we've done so far, we're very happy.

This is a journey. This isn't something that happens overnight. But I think we're very happy and very pleased with what we see so far. And definitely it's meeting our expectations to date.

Thank you very much.

Thanks, Jacob.

We'll go next to Yuri Lynk, Canaccord Genuity.

Hi. Good afternoon, guys.

Hello, Yuri.

Just wanted to dig in a little bit more on the margins, the gross margin on for the quarter guys. I mean, good job. Only down about 30 beeps year over year. But this is despite the lower margin construction business, the fee pressure that you've talked about plus I think you've indicated in the past that the US is a bit of a structurally lower margin region and that's grown since last year.

So all of that kind of moving against you. I know you did have some small closeouts. But how do we think about the quarter and the mix of work and how that might have impacted the margin and if you think that this is a pretty good run rate going forward?

I'll let Dan speak to the details but thanks to the segway. I think the quarter, with everything that we have facing this and again, to reiterate, with the on going integration efforts of the largest acquisition we've done, we're really happy with the performance. We're happy with the margins and the focus on the business and we haven't lost sight of the core business, haven't lost sight of what we do, and continue to operate as we have historically. So happy with that. With regards to the intricacies, I don't know, Dan, If you have any comments on the variances, but it's a mixture of work I would say.

It really does come down to the mixture of work and cycle of where you are in certain projects. There's nothing sitting there that would be out of the norm, Yuri, that would be something that would sit out to us as saying well we should talk about this. It's just normal business.

Not even -- so you had Panama which is kind of winding down. Ohio River bridges and I think you mentioned another one.

Those are the ones that you highlight as going higher. And then, as I said, across all of our business we manage our projects around the estimate to complete and the percentage to completion. So you're going to have some puts and some takes all the way through the entire business. As I said, we run tens of thousands of projects. I wouldn't look at any increase in a quarter or decrease in a quarter as a longer term trend. It happens on a quarter by quarter basis.

Okay. That's fair. Your infrastructure segment, the deceleration we've seen in organic growth, do you care to venture when we might see that pick up or at a minimum can you give us some color as to which part of the business within infrastructure? It sounded a bit like community development was a drag but is the transport business growing right now or is that still something to come more next year?

No. Transportation was growing. Water was slightly flat in community development, you're right, was a bit of a drag (inaudible) Canada, more specifically in western Canada. You know, we don't see that continuing much longer in western Canada, as a matter of fact because that bit of a retraction this year we think our clients in western Canada, from a community development perspective, are well prepared to move forward in a more normal state, I would say. So don't see continued drag in infrastructure overall.

It really is going to come down to a timing thing. When did those projects start getting released. We have spoken previously Canada was slow in getting real projects but we're starting to see a change there. The United States it's still early days. But even without those early days we were getting some pretty good momentum.

I think the one thing we haven't spoke about is, in addition to the presidential election that went on there was a number of very major initiatives for funding of infrastructure that went along with the same cycle of the elections federally that aren't being mentioned at all and those are literally billions of dollars of infrastructure that is being funded through essentially bond initiatives. So that's a very positive aspect in addition to everything that the new administration is promising. So, infrastructure, you can't help but be positive and I can't give you a prediction of when but we know it's coming.

Great. I'll turn to over things.

Thanks.

We'll go next to Mona Nazir, Laurentian Bank.

Hi. Good afternoon and thank you for taking my questions. So, firstly I just wanted to turn to the P3 space. You cited in the quarter that you had lower growth in Canada as you invested in several P3 pursuits. I just want to confirm though it sounds like they're all in the bid phase and they're not lost but we're just waiting. Is that correct?

There are some in the bid phase. I don't know how many P3s we have ongoing at any one time in both transportation and buildings. But there was a number that we had bid and they were basically in the decision phase. There are some that in the RFP phase where we're bidding and getting some revenue but that revenue is lower because you bid them at a lower revenue and then you get the success fee if you win, as we did with Makenzie Vaughn.

And some of them are in the RFQ stage, where they're really , that's a cost to us at that point in time but relatively small. Overall roughly 35 P3s are in that bucket of either RFQs, RFPs or have been bid and are waiting on being selected. So it is a very space for us right now and the timing of those is something you can't control.

So I would say at this point what we suffered in the last couple of quarters were more of those were in the RFP and the selection phase and not as many in the execution. Mackenzie Vaughn has reached financial close and we'll now start generating revenue on that right away.

I think we're starting -- our expectations we'll start to see more awards or selections into Q1 of 2017.

And you said you have roughly 35 projects that are in these different phases. Could you compare that to where you were last year? Like, is there a significant uptick or it's kind of flattish?

I would say a slight increase. I wouldn't say there's a huge number. It hasn't doubled or anything to that effect. I would say slightly more, don't have that number but just from a gut feel I'd say slightly more than last year but not significant. It's been a good steady, I'd say, rolling 12 months of P3 opportunities.

And then, just secondly on utilization rates in western Canada. If you could speak about those, have there been any staffing reductions or everything as is?

Well, we continue to manage -- I did mention there was some severances, they weren't isolated to western Canada. We have certain pockets in the business and we talk about operational effectiveness. Anywhere where we do have weakness we're going to address those as quickly as possible. Western Canada certainly the oil and gas business is still under some stress. We're making minor adjustments, but not to the extent that we have seen over the last two years. So it is, again, part of managing our business effectively.

And just lastly for me before I turn it over. I know it's still early days since the MWH acquisition, but I'm just wondering your thoughts surrounding the construction segment and its performance. I see that you've broken it our separately. Is there any read through there that eventually you could try to extract greater value by potentially divesting or it just makes sense to report it separately at this point in time.

Initially, right now, it is definitely from a perspective of reporting it separately. It is a very different business, different drivers and different margins and all together a much different business. We're still trying to understand it. We're trying to understand the relationship between the consulting business and the construction business, both here in the United States and in the United Kingdom. Very different businesses.

The U.K. business, water business is a very unique business, very different from the Canadian and US business. So we're trying to understand that as well so we're still in the learning phase at this point. So the separation should really be seen to the fact that it is a separate business, much different drivers, much different margins and I think it provides the investment community better clarity with -- how our core business and consulting business and legacy business of Stantec and MWH is doing and how the construction business is doing.

Okay, thank you.

We'll go next to Benoit Poirier with Desjardins.

Yes. Thank you very much and good afternoon. Just to come back on the gross margin, specifically for energy and resources, 53.8%, a strong performance especially when you compare quarter over quarter and year over year. Just wondering if there was anything abnormal aside that the small uptick that came from the Panama Canal or whether it's sustainable going forward?

Nothing really out of the normal, again, other than what we have noted. But the water power business is now part of our new energy resource business. So that has slightly a higher margin than say the oil and gas business, which is usually running sub 50%.

Okay. Okay. That's very good. Just on the debt EBITDA side, you fished the quarter at 3.09 but I assume it's not the pro forma basis and including the latest acquisition. So, Dan, could you provide us -- what is the pro forma number on the debt to EBITDA ratio?

Sure. The reported net debt to EBITDA was 3.09. I think when you take trailing EBITDA of MWH would be about 2.6, 2.65, somewhere in that range.

Okay, okay. Very good. Just in terms of free cash flow, I was wondering in terms of working cap, what we could expect in Q4. Is it the typical seasonality where we'll see a significant increase.? And any color about the free cash flow prospect for the year?

Free cash flow we still expect to generate good cash flow from operations in the quarter. As you know there is seasonality in Q4, things tend to slow down around the Thanksgiving in the US in November. And then certainly the Christmas break at the end of the year, so don't expect revenues and cash flow generation to be as strong in the fourth quarter. Similarly in the first quarter we tend to use more cash but we do expect it to be positive in Q4. There isn't a lot of additional huge capital expenditures that we're expecting in Q4 so probably slightly down from Q3, as you normally have seen and don't really expect any changes. And then MWH cash flow generation and, certainly on the consulting business, is very consistent with the Stantec legacy business.

Okay. So basically then cash flow from operation excluding working cap will be slightly down, but the working capital impact should be positive?

That's right. We don't expect any material change in working capital in the fourth quarter.

Okay, perfect. And just looking at the tax rate 28%, is this kind of a sustainable tax rate we should use going forward?

I think we're assuming on an annualized basis the tax rate is around 29%. So we haven't necessarily changed that expectation going forward. It might be a little bit lower. We have a lot of work to do with the MWH integration and tax planning and we might be able to get a little lower. I think we've adjusted it to 28% for this quarter on an annualized basis. But not sure exactly where we're going to be in 2017, we're still working on that.

Okay. And scheduling delays in Dallas on the construction side, how important it is or should it be resolved in the coming days? Could you mention more color about the scheduling delays on the construction side?

Dan and I are both looking at each other. I don't remember a significant or a mention of the construction delays. Now, construction projects are certainly like the design projects, unless you get the approval to go ahead it definitely causes an issue because you staff up and get ready for it but can't proceed until you get the notice. But I haven't seen anything unusual. I don't know if it was mentioned someplace that I missed.

Okay. And last one for me, just in terms of gross margin for global 57.7% versus 51% or 52.1%. Is it more a matter of contracts that wind down in the quarter?

Yes.

Okay, perfect. Okay, thanks again for the time.

You're welcome.

Thanks, Benoit.

We'll go next to John Rogers, D.A. Davidson.

Hi and good afternoon.

Hi, John.

Couple of things. Just specifically on the MWH, can you give us a sense of how their revenue is or backlog is growing internally?

Their back log definitely in water is very healthy and has been growing since we closed the acquisition. So that is the majority or biggest part of the business. Their backlog and water power in dams area has not been growing. That was the group that was doing the an Panama Canal, that's somewhat -- that's not unusual for them, those projects are much larger. So they've got a lot of opportunities but that backlog has been shrinking and they have an environmental services group as well and that backlog, I would say, is stable. So overall for the company it has been increasing.

Okay.

I think in the Asia-Pacific there is weakness in the MWH business just given the economy in Australia and New Zealand so we're seeing weakness there. But they're in the middle of the asset management program and the back log is extended out over five years so it's pretty healthy.

And then just in terms of overall revenue with the Panama Canal work running off, are they down year over year?

They certainly will be down year over year based on that project in Latin America, yes.

That project, again if you're looking last year at 2015 it was already winding down. I would say it was probably more of a 2014 big difference there. Actually that project was near completion at the end of last year and so the end of last year and beginning of this year those revenues were dwindling at that point in time.

What you saw in the quarter was king of the tail end of the effect that project still winding down.

Okay. So that transition -- I mean, we should be largely through that now and then hopefully --

Exactly.

-- it grows into 2017. I assume that's the expectation.

That's the expectation.

And then, your acquisition activity is smaller but picked up again. I'm wondering about the pipeline there and the opportunities still the same and are you focusing on more on outside North America at this point?

At this point in time I think we're trying to gain knowledge about outside in North America. MWH didn't have a capital ability to do a lot of acquisitions, they definitely had the desire. So we're working with them to get a better feel of where the opportunities are and how fits their position in their countries and ourselves.

I don't think you'll see anything significant there outside of North America until maybe the second half of next year. But certainly here in North America, the program continues. It is still lots of opportunities. Much more in that smaller firm, you know the CAD50 million in revenue and less is still where there are lots of opportunities in our space, especially in the United States. So we're pretty happy with that.

But we're going to be as we always have been very disciplined in our approach. And as we're spending a lot of time and effort with MWH that focus and discipline is more heightened. I don't think we'll be continuing at maybe the numbers that we have historically. But, you know, there have been years we have only done one or two and years we have done nine or ten. Next year would probably be a slower year but lots of opportunities which we're happy about.

We're really are focusing on the integration of -- full integration of MWH of our branding and people and all coming together and a lot of that heavy lifting be started, well it has already started. But taking impact in the first half of next year. Certainly for the North American operations.

And then, Dan, just two modeling questions. Applicable shares going forward, I mean, will it climbs up to 3 million options out (inaudible) so, I mean, should we look for that to go over 115 million shares in 2017.

We'll be discussing with the board in February the option program, the long term incentive program and getting the run rate. I think the expectation is we aren't going to see our run rate increase significantly more than what it was in the past. So we'll be keeping it running. It generally runs around 1% of our volume that deals with that long term compensation.

And then, I know you addressed this earlier, but in terms of the tax rate for 2017 given the geographic mix, how should we think about that now?

Well, again, we're using 28% for our annual rate for --

This year, right.

For this year, I don't have a solid forecast number for you, John, for next year. But I would assume something in the same range. We're stilling working on optimizing our structures here.

Okay. Great. Thank you.

We'll go next to Bert Powell, BMO Capital Markets.

Yes, thanks and good afternoon, Bob and Dan. Just on the construction business trying to think about that going forward, the sub consultant costs look like they're at 70% or almost 73% this quarter for -- you know the gross to net versus the consulting at 20%. Is that a good way to think about it going forward? And also just in terms of the seasonality of that business 250 this quarter and just in terms of trying to model that business and if you could help us with that I would appreciate it.

Sure. I would say that 70% range is in the very typical number and I think you can see that as being something consistent in that range. With regards to seasonality, the type of work that MWH does it is impacted by winter somewhat but not nearly as much as the transportation project. Their business, a lot of it, is water treatment plants which is somewhat in closed facilities. Yes, they are impacted by weather but not like a transportation project as much. So though seasonality, definitely the revenue's going to have some seasonality to it but the impact, I would say is going to be less than a typical construction firm or utility firm that is digging a lot of pipe and burying pipe in the ground and has to deal with that. So a little bit different but some seasonality.

Would you look at sort of Q4, kind of a 10% variance then? Would that be the right way to think about it?

I'd be guessing if I said yes, but I wouldn't see it being a lot more than 10%.

And that's into Q1 as well.

Okay, good. And then just in terms of that business, you know, if I just run rate the quarter the book to bill is one time, is that a good place for this business this time of year? And also, wouldn't mind understanding how much of that business would be a book that would be tied into a Santec MWH design versus work you'd be doing for projects that weren't.

That would vary between Canada -- I'm sorry, between the US and the United States. -- UK and the United States. I don't have the numbers at the top -- at my fingertips. My guess would be in the United States, it is probably 60% with MWH, 40% for working with outside teams. A little bit less in the UK where maybe 70% is with MWH and 30% with outside teams.

So, the UK has a little bit more synergies and a little bit more partnerships and little more connection and in the United States a little bit more separation, the clients are a little more selective.

Yes, and that leads to my second thought around that which is, when you have that, you know, your design, your build, are the margins inherently better in those kinds of projects versus the construction work that gets done for outsiders?

No. No, it is essentially the same. The approach is, we feel when you're working with the MWH construction, relationship is better and you get the project done efficiently. But we're probably -- what we are bidding on is relatively the same. In other words we're going to bid the projects the same, I think we execute it a little bit better so you may get a little better margin but it really comes down to how you execute the projects.

Okay. That's good. That's helpful. Thank you very much.

We'll go next to Ben Cherniavsky, Raymond James.

Hi, guys. Bert stole my question about the sub-consultant rate. Bob -- I'm sorry?

No, go ahead.

Okay. Bob, it sounds like you got really excited here about infrastructure. I don't want to say all of a sudden. But it strikes me as you have taken a more positive tone both in Canada and the US. Do you run the risk that you might over promise on this? I mean, the realities of infrastructure and especially in Canada, in particular your part of the world have been pretty active in the last few years.

There's the funding that has been promised in Ottawa at least is very back in the end loaded and there's still a lot of fiscal realities that could get in the way of political promises. Turning this into real big needle moving opportunities. I'm thinking just a little bit because we went through this in 2009 with the big stimulus promises and the Canada Action Plan and everything else and I remember waiting around for it to translate into meaningful opportunities and, in fact, we're sitting here trying to get the economy going through infrastructure. So, I guess my question is what suddenly gives you the confidence that it's going to be different this time?

First I didn't promise that it would happen. I just got excited that it could happen. Let me clarify that. We're finally starting to see some of it, we referenced a couple project that's we saw coming into the aboriginal schools.

A lot of the money that is now -- we're starting to see the government actually approach industry and say, we need to get this money out into the communities. How can we do it? I think the aboriginal schools are a really good example of that. They are small but not insignificant. So that gives us hope, again never a good strategy but it is -- the promises have been made by the government. But you're absolutely right.

The government has been promising infrastructure for a while but the approach in Canada is little different this time and a little bit more unique with regards. Really focused on transit, as well so this has been a very strong focus to transit we're seeing a lot of talk and discussions around that. Again, gives us hope.

In the United States, where you get excited, Ben, it's been a significant change in attitude and I think you just saw that with market getting excited as well. I think they've been waiting for a change and a change in the administration then gives you, maybe, a change in how money will be funneled. I think there are strong promises try to get implemented quickly and hopefully they won't make the same mistake. But certainly that gives us an opportunity to get excited.

Again, the bond issues, which is an area in the United States and some ignore is getting to be a much more prevalent way of funding infrastructure, you can't wait for federal or state governments so go out and get tax initiative done and raise the money yourself and very specific tax initiative as well. So certainly, there is a lot of reason to get excited. We didn't promise anything yet.

Okay.

We'll go next to Sara O'Brien, RBC Capital Markets.

Hi, good afternoon. Can you comment just on if there's any seasonality that you've noticed in the MWH business outside of construction. I'm wondering there are margin wise or revenue wise. Is the flows even through the quarter or do you see a summer kind of bump up?

It's going to be similar to Santec. Their business inherently is really centered around infrastructure, mainly water infrastructure. So I see just as much seasonality. That being said, a lot of their businesses in the UK, which is less effected by the season than North America is so to put that into an over all summary, maybe slightly lessee seasonality than Stantec but similar.

Okay. And then just wondered on the synergies, you said on the synergy you said you're pleased with the progress. Can you quantify how much of you CAD15 million US cost synergies you might have seen in the quarter?

No, we can't. At this point in time I don't think we have a good handle on the number. That is more of just an overall feel that progress is headed in the right direction. Dan, I don't know if you have better feel for the actual --.

A lot of that is planning around what we are expecting to do in terms of the integration of the two firms. We certainly have seen some cost in areas we've been looking at we've been working on our employee benefit programs that will impact our costs for all our US employees, we've been evaluating our insurance programs and evaluating our procurement approach. So all these things we've been working together to coordinate into the integration of our firms, you'll see those start to take hold in 2017.

We've also done a few office relocations so we're starting to see some of those. They're not big numbers but those synergies we're starting to rationalize those. So there's about 21 offices that we've seen that we can move forward on and we started that as well. The point is, I think we're happy on any fronts, that we're starting to see the synergies that we predicted come to fruition.

Okay, great. And then just wondered if you have seen any staff retirements from MWH. You commented on the acquisition that it was a pretty top heavy organization. What's happened in the first seven months since closing on that level?

Absolutely, we've seen a lot of that and that was predicted and planned and that is happening. So definitely that is part of those synergies.

We've been, I think you can maybe speak to this, Bob, the retention of the key leaders is what we expected as well so we haven't seen an exodus of the key leadership we wanted to retain.

Definitely.

Okay. Just wondering if you're already seeing better utilization rates or is that, again, something to come in 2017?

We're already seeing better utilization rates from where they were prior to closing, we had laid out a plan and they had laid out a plan relative to their budget. We knew that they had to make some changes to achieve those utilizations. They are moving well along and getting close to their budget expectations as well. So we're happy with the progress that's been made there.

Okay. Great. And just lastly, on maybe pipeline work opportunity. You certainly closed down, I guess a lot of operations and had to let go of staff. How quickly could Santec rev back up on pipeline work and how much of the work that Santec was involved with was either in the US or north-south pipeline type work?

Definitely staff in that industry can be found very quickly when we make a point of staying well connected to the staff, unfortunately that we had to release. That industry is quiet all around so we know where the people are and we do feel very comfortable that we can get staff very quickly and already are as we win some small projects we staff up quickly.

With regard to the United States that's something that, certainly, we did not have a strong of a presence in the United States. We have a smaller presence that's actually doing much better in the last quarter but it's a smaller presence in the United States.

However, a lot of our clients in Canada, in this time, have taken some very strong measures south of the border with TransCanada acquiring Columbia Pipeline and [Embridge] acquiring Spectra, we're seeing the Canadian companies who are our clients move south of the border and we look at that as a very positive move for ourselves as we maintain those relationships and hopefully will be able to move our resources south of the border with them.

Okay, great. Thank you.

Thank you.

We'll go next to Tahira Afzal, KeyBanc Capital Markets.

Hi, gentlemen. This is Shawn on for Tahira today. I just wanted to expand on the US election topic in a little bit more detail. It seems like the Trump campaign really disgusts infrastructure in a really broad based way, really across the board. I was just curious in your previous experience or looking at certain funding structures already in place, is there a particular area, whether it be water or roads or whatever, that you think might be the earliest to start to see a boost?

I think that's where the questions are going to be asked that might not be able to be answered for a while. T he promises were there -- I'd say even some of them, they were some broad based ones. You know, clean water, transportation were the two obvious ones.

We can't say when we would see some of that money flowing in. But I think because the promises were so strong and were so definitive this is going to happen. They've got to start quickly. And it's a matter -- transportation is usually the area that you can get the biggest bang for your buck because you can see it quickly. Because I think there is a real pent up demand for water as well.

I think pipelines on the private side we shouldn't also forget about that. When we say infrastructure it's both public and private infrastructure and I think the new administration is focused on pipelines as being one of their areas they also feel should be a change in policy or focus. So we see that as positive and that could be fairly quick because that could be something that is done with a simple change in order.

You know, there's some areas we think could come quickly and others, based on the history of political investment and infrastructure, is going to come slower. But I think it will come, it was such a focus.

That's helpful. I guess maybe dig into the pipeline side a little bit more. I mean, just seeing this election result, I mean, how does it -- how does it change how you guys are thinking about next year or Midstream? I know you're in the middle of your budgeting process now. How significant could this be in terms of trajectory of Santec's oil and gas business for next year?

The fact that pipeline now go quicker in the United States depends on how efficient we are being able to capture that work when we don't have a strong position in the US, I don't want to predict that's going to have a huge impact for us. But certainly we're well positioned we the they could get involved with us.

With regards to a big exchange in momentum oil and gas it it's going to be subject to the price of oil and gas, it comes down to that commodity price itself. And that will probably be the big needle changer for us when it comes to our oil and gas business. But certainly the focus and the new administration on pipelines is not going to hurt is. It can only help that business.

Fair enough. Good answer. Thanks so much, guys.

Thanks.

That does conclude the question-and-answer session. I'll turn the conference back to management for additional or closing remarks.

Great. Thanks very much for listening in to us today. That concludes our call. Thanks for joining us and we'll talk to you next quarter. Thank you.

That concludes the conference. Thank you for your participation. You may now disconnect.