Stantec Inc (STN) 2017 Q3 法說會逐字稿

Ladies and gentlemen, please stand by. Welcome to Stantec Inc.'s Third Quarter 2017 Earnings Results Conference Call. With us today from Stantec management are Bob Gomes, President and Chief Executive Officer; and Dan Lefaivre, Executive Vice President and Chief Financial Officer. (Operator Instructions)

Today is November 9, 2017 and this conference call will be recorded and broadcast live over the Internet. It will be archived for future reference at the Investor section of stantec.com. Any member 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 first ask permission from the individual concerned.

Stantec management would like to caution you that this call will include forward-looking statements and forward looking information within the meaning of applicable Canadian and U.S. securities law. By their very nature, forward-looking statements require Stantec management to make assumptions and are subject to inherent risks and uncertainties. Stantec management will also mention non-IFRS measures during this call.

And now your host, Bob Gomes. Bob, please go ahead.

Thank you, Jake. Good morning, everyone, and thank you for joining us for Stantec's Third Quarter 2017 Earnings Conference Call. For those of you following the slide show, we're on Slide 3. For today's call will begin with my introductory overview of this quarter's results. After that, Dan will provide an overview of the financials. When Dan concludes his remarks, I'll provide some operational highlights. To wrap up. I'll ask our operator to open the call for questions. There is a copy of the slide show available on stantec.com and it will be archived in the Investor section of our website.

Moving onto Slide 4. Today we released the results of Stantec's operations for the third quarter of 2017. The company's performance reflects the positive trends we anticipated earlier this year. Both gross revenue and overall organic growth revenues are up in Q3 '17 compared to Q3 '16. In fact, we achieved organic gross revenue growth in most of our business operating units. These results represent a continued positive trend in line with the performance projections we outlined earlier this year. The most significant event this quarter, however, was the series of hurricanes that swept across Texas, Louisiana and Florida. We are thankful to report that all our employees in those states are safe and that our disaster recovery plans worked to ensure that outcome.

This of course does not minimize the impact of the storms and the people in those states and Stantec has responded by assisting emergency responders, FEMA, and other disaster relief agencies, and various private and public institutions across all 3 states. We are still assessing our role in future recovery efforts, but with our strong presence in these states and our expertise in storm recovery and resiliency, we expect to be able to help in various capacities. Overall, we feel this quarter's results show the company continues to move in the right direction.

Now Dan will review our financial results for this quarter. Dan?

Thank you, Bob. Good morning, everyone. For those following along in the presentation we're moving to Slide 6, gross revenue increased 3.3% to $1.3 billion. The increase is due to acquisition growth and organic gross revenue growth across most of our business operating units, as Bob previously mentioned. Of note in the quarter, we saw significant strengthening in the Canadian dollar, which had a negative gross revenue impact of $37.2 million or 3% in Q3 '17 compared to Q3 '16.

Gross margin was 53.6% in Q3 '17 compared to 54.2% in Q3 '16. The difference is due to reduced margins in construction services and our Canadian operations, specifically energy and resources, while our water BOU's gross margin was slightly lower due to the divestiture of Innovyze. We had some project completion dates extended in the U.K. and some higher project closing costs in construction services which impacted gross margin.

In addition, certain costs from administrative expenses were reclassified to direct expenses, as these costs were determined to be reimbursable by the client. This brings construction's gross margin to approximately 30% in the quarter. We believe a gross margin range of between 30% and 32% is sustainable going forward.

Administrative and marketing expenses as a percentage of net revenue was 41.2%. Factors impacting admin and marketing expenses were mainly due to an increase in the value of deferred share units and performance share units of $3.8 million in Q3 '17 over Q3 '16. We also incurred approximately $3 million in additional IT investments in our core infrastructure and $1 million onetime cost due to the impact of hurricanes, Bob previously referred to. These impacts were largely offset by better overall staff utilization in the quarter. EBITDA was $106.8 million this quarter compared to $113.1 million in Q3 16.

Net income was $46.2 million. In addition to the factors already mentioned, net income was also impacted by a corporate reorganization that resulted in additional tax expense of $3.6 million. Known as the out from under plan, we moved most of the legacy, MWH global entities out from under the U.S. parent ownership to a U.K. parent entity, making our tax -- our corporate tax and organizational structure much more efficient.

Reported diluted earnings per share was $0.40 compared to $0.43 in Q3 '16, while adjusted diluted EPS was $0.54 compared to $0.55 in Q3 '16. Our net debt to EBITDA was 1.38x, net debt to adjusted EBITDA adjusted again for the Q2 Innovyze divestiture, was 1.57x. Yesterday, we declared a dividend of $0.1250 per share to shareholders of record as of December 29, '17 payable on January 11, 2018. We also announced today that we are renewing our Normal Course Issuer Bid purchasing up to 2% of our issued and outstanding common shares. This renewal follows the conclusion of our previous Normal Course Issuer Bid.

Let's move on to targets as you'll see on Slide 8. Our 2017 targets remain as outlined in our 2016 Annual Report. On a year-to-date basis, our gross margin, admin and marketing expenses and EBITDA have met or exceeded the target range we established for 2017. Net income as a percentage of net revenue is at 3.3% year-to-date. This measure was impacted by the tax related to the sale of Innovyze and the additional tax expense from the corporate reorganization, I mentioned earlier. Without these factors, net income as a percentage of net revenue would have been 5%, at our targeted range. We believe we are on track to meet our targets by the end of 2017.

Bob, back to you.

Thanks, Dan. We're now on Slide 10. The strong organic growth in energy and resources this quarter is mostly due to the growth in the power and mining sectors. The strength in power this quarter was due to continued work with our Waterpower and Dams group on the Oroville Dam Spillway repairs, including the long-term rebuild of the transmission line.

Power also had a number of key wins in the Western U.S., directly related to the acquisition of MWH. Jointly, we have the experience and relationships, which led to a number of project wins in the quarter. In the Eastern U.S, we won a number of transmission and distribution MSAs with major utility providers. And the growth in mining can be attributed to a large contract with a major Canadian mining client awarded in Q2. The rate of retraction in the oil and gas sector continues to slow, which also helps.

For buildings, organic growth of 3% came about from continued activities on Canadian healthcare projects. Infrastructure's organic growth of 2.8% was achieved mainly due to the Canadian transportation sector. And environmental services reached 2% organic growth, primarily because of higher-than-expected project volumes in the company's global operations.

Water experienced organic retraction of 3% comparing Q3 '17 to Q3 '16. This was a result of a number of large water programs being paused or delayed and a few projects coming to an end. However, year-to-date organic growth revenue for this business operating unit grew. We still see growth opportunities for water across all areas and sectors: alternative project development, client operations and maintenance, coastal restoration and protection and compliance with regulatory mandates. This is why we don't see this quarter's water retraction as a trend at all.

We expect water to return to positive organic growth. Construction Services achieved solid organic gross revenue growth of 23% this quarter, earning $298 million in gross revenue. Significant and steady work on several major water and wastewater treatment plant construction projects in the United States generated approximately 2/3 of that growth. Also, activity increased on a major commercial contract in the Western U.S. Under this contract, we are providing construction management and project management services for a major manufacturer. Revenue in the United Kingdom was driven by ongoing construction activities for water utilities in the third year of the AMP6 water cycle.

While construction is a different business than consulting, we believe construction services provides long-term value to our company. Our construction services are focused on one sector, water, where it's a strategic differentiator for us. We work primarily just in 2 regions, the United States and the United Kingdom. These are certain projects in both countries that require us to provide bundled construction services. So there is definitely a value in having the business. In fact, right now, construction backlog is at record levels and their focus is on executing those projects well.

Now I’ll provide a quick update on the integration of MWH. Last quarter, the Americas region of MWH consulting services was fully integrated and we're now working towards the full integration of the global regions of MWH. In North America and Australia, for example, we have transitioned to using the Stantec brand exclusively. We are on target to rebrand to Stantec for the remaining global consulting business by Q1 2018. Because we fully integrate, we have taken our time to ensure we are making the best for both companies and that we are taking the opportunity to best position Stantec for future global growth.

Full integration takes time and effort, but allows us to build a solid platform to facilitate more organic growth in the future. We have significantly exceeded our estimate for cost synergies in the transaction. Revenue synergies are more difficult to attract -- to track since we combined the companies and expending effort to try and segment them conflicts with our integration efforts. However, we believe we are well on track to achieve our estimated revenue synergies as well.

Let's move on to the next slide for our 2017 outlook. Our outlook for 2017 is based on the expectations described in our 2016 annual report and they remain unchanged. There aren't a lot of headwinds in the business right now and, in some regions and sectors, we see our opportunities growing as governments at various levels grow more optimistic about the prospect of infrastructure funding.

Slide 16 is a representative sample of our recent project wins. Currently, our project backlog stands at $3.8 billion, which is slightly lower than last quarter. However, compared to December 31, 2016, backlog has grown organically, but it was more than offset by the -- strengthening of the Canadian dollar, which had a negative $175 million foreign exchange impact. So even though our backlog grew organically by about $50 million, we show a slight retraction of backlog of 5% due to the foreign exchange.

Our backlog includes significant project wins such as a 650,000 square foot mixed-use entertainment center for the Colorado Rockies, our ongoing work on the reconstruction of the Oroville Dam Spillway in California and the Calgary Green Line light rail transit corridor. This slide represents just a few of the significant project wins we've added to backlog in the quarter.

On another project-related note, we recently learned that the Canadian Council for private-public partnerships announced the winners of their 20th annual national awards for innovation and excellence in P3s. Stantec served as either the prime consultant or sub-consultant on all 5 projects recognized by the council.

Slide 17, we continue to seek out acquisition targets that fit our growth strategy. In July, we acquired RNL facilities. That is a Denver-based firm of 130 people with expertise in interior design -- urban design, architecture and landscaping enhancing our Buildings business operating unit in the United States. And just a few weeks ago, we acquired North State Resources firm based in Redding, California with additional offices in Chico and Sacramento. This acquisition bolsters our Environmental Services unit in California and adds about 60 employees with expertise in environmental services.

Our acquisition and full integration strategy has helped us achieve a longstanding business objective to be a top 10 global design firm. Remaining committed to that strategy has grown us to a firm of over 22,000 employees with expertise and local experience on 6 continents. It is just not about getting bigger, we want to be a top tier global design and delivery firm in the markets and regions we serve.

As many of you already know, I'll be retiring on December 31 of this year, so this is my last earnings call. I'd like to thank the many analysts who have offered insightful questions and feedback over my 9 years in this position and look forward to continuing with Stantec as a member of the Board of Directors.

Dan will be staying on as CFO to support Gord Johnston who takes over as President and CEO on January 1, 2018. Dan and I have been working with Gord to ensure a smooth transition to his new role, and I'm confident Gord is a great choice to grow and evolve the company in the years to come. This concludes this morning's presentation. Thanks for listening.

I will now turn it back to Jake to start the Q&A portion of today's call.

(Operator Instructions) And we'll take our first question from Jacob Bout with CIBC.

My first question is just on the organic revenue retraction in the U.S. How much of that was a Stantec specific event versus a function of the overall state of the U.S. market?

No, I think the U.S. market is -- I wouldn't say it’s robust at this time, I think we're still waiting for federal funding to materialize as promised, but really nothing has come from a federal standpoint. I think the retraction in the U.S. from a Stantec perspective had a lot to do with the water retraction as well. So I think those 2 are interrelated. Most of the retraction in water was in the U.S. The major programs we referenced was in Atlanta, San Jose, San Diego. Those are fairly large programs, a couple were just in pause. The programs are 5-year programs, but they do have some volatility to it. The San Diego program is coming to an end. So there is just some volatility there, I would say, with regards to the revenue, but we do not see that as a trend. The water group right now, backlog is good and strong. They’ve won lots of projects in the last quarter. So we see that revenue continuing to grow. So I'd say the U.S. is related to the water retraction for Stantec.

And was there any hurricane impact at all?

Certainly, there was, yes, there was about $1 million roughly of that.

Jacob, we referred to about $1 million impact and this is really affecting our staff and the impact is really them not being able to get into their offices and do work. So that was the cost side of the impact. On the revenue side, we're estimating anywhere $2 million maybe plus of deferred revenue that we’ll be able to pick up over the coming quarters of work that was lost in the third quarter.

And then, you talk about softness in global mining, specifically calling out Indonesia. I'm assuming that's the Grasberg project. What is your exposure to that?

That's correct.

We're doing the underground mining design for that. So that project is -- I mean it's had a history of starts and stops over the last 5 years. So we don't see that as a long-term problem, but certainly that project has suffered through that, but our mining group this period actually grew well. We are happy with that and it’s the result of start of a large mining project in Canada, which is good news I think. We're starting to see some activity there in the start of an actual mine project in Canada, it's great news.

I think the overall exposure and finding is less than 5% of our overall revenues, Jacob.

And now we'll take a question from Sean Eastman with KeyBanc Capital Markets.

I was just hoping to get a bit more color on the energy and resources and environmental services growth this quarter. It was a surprise for us to see a positive number organically there, pretty encouraged by the mid-stream award you highlighted in the materials. And some of the commentary on mining and power is also quite encouraging. So wondering if you're seeing that inflection as a trend here, is this kind of a sustainable inflection?

Yes, I think when you're talking about energy and resources in the mining project, that is something that's going to last for years, not just 1 or 2 quarters. So certainly we're seeing that as a positive trend for mining. I think we were somewhat surprised as well power had a very good quarter. And it really was a result of just continuing to get more requests for work on Oroville Dam, so that was pleasant surprise. And what's good to see is that group got over 5.5% organic growth without oil and gas actually increasing significantly. So with the award of the midstream project for oil and gas, certainly -- it certainly is going to be -- I think help that trend. And Waterpower and Dams had a relatively good quarter too. So all 4 business lines in that area did well.

This is a great example of revenue synergies, we would not likely have gotten much of that power work at Oroville Dam without the former MWH Waterpower and Dams group expertise there . So that's a great example of us being able to leverage the combined organization.

My next question is, we have 2 quarters here, solid positive organic growth. I'm just wondering, to the extent you guys can keep this up consistently sort of mid-single-digit type growth through 2018. Would that be enough for you guys to see EBITDA margins for the full year next year back towards the top end of the range you have in place for this year or is there anything outside of the utilization there we should be thinking about in terms of what kind of margin expansion you guys can deliver next year?

Certainly, if you have positive organic growth, that's going to help the opportunity of good utilization, which is going to help the opportunity of driving your margins up to the higher end. That's what we've always said. So we certainly expect that for next year that we will see that trend for positive organic growth, won't see anything in any of our business lines that's going to stop doing that. We're competitive in all the markets that we're in right now. So I don't see anything that wouldn't stop that, but it is a very competitive business environment right now. So you've got a win work, but you've got a win at the right price. So that's going to have an impact. But I would certainly see it, although positive indicators are pushing this in the right direction.

Now we'll take a question from Benoit Poirier with Desjardins Capital Markets.

I was wondering if you could provide more color about the strong organic growth for construction, over 20%. So 2 consecutive quarters in a row. So just wondering how sustainable is the 20% and what type of expectation we might be looking for going forward.

Thank you. Definitely, that's one aspect that we wanted to highlight to investors is the construction business is somewhat more lumpy than the consulting business, their project awards and their -- the way they execute projects, this gives you little bit more lumpiness. The good news is they have a record high in backlog. So that's going to continue to push the revenue in a positive direction. But you would expect to see some lumpiness in that, but certainly we would see it to continue to trend in the positive standpoint.

And looking at the hurricanes, you quantified the cost and revenue impact in Q3, but just wondering if you -- we might see some positive impact going forward in terms of revenue opportunities for Stantec?

Absolutely. I mean that's hard to quantify those now because it does take time for government agencies to assess the damage and then determine what the retrofits will be and rehabilitation will be an example of that is when the hurricane hit New Orleans. It's now over a decade ago. We are just finishing up a project in New Orleans for that recovery when the Houston hurricane hit. So it does take a long time, but we're well positioned. We have local staff in Florida and in Texas and Louisiana, so well connected to the government agencies and the local municipalities. So we're definitely there to help them, but it will be something that will probably be a few quarters away before we start seeing some significant impact, but we do see that coming.

And looking at your balance sheet, obviously ended the quarter very strong. Can you talk a little bit about the free cash flow generation if we are going to see the typical seasonal impact that we typically see in Q4?

Yes, I don't see any change in that, Benoit, I still see the -- it is a bit of a shorter quarter in Q4 in terms of billable hours. We have the U.S. Thanksgiving. We've got the Christmas break. So those things will drive down some of our billings, and as a direct result, will impact our cash flows. But -- so we do generally see a lower cash flow generation in Q4 and similarly in Q1. In addition, some of our field staffs, specifically in environmental services, are not able to be out in the field.

And now we will take a question from Yuri Lynk with Canaccord Genuity.

When I look at the outlook for water. I mean there's not a lot of stats available, but the construction put in place numbers show like a 10% year-to-date decline in water supply, is that -- that's obviously not a -- can't be a great indication for what your business is doing, because you've been outperforming that, but is it tougher than you anticipated it would be when you bought MWH in terms of the U.S. water outlook and what might change the funding problems that have kind of hurt spending in that segment this year at least?

Yuri, actually I think we see the opposite in that. Right now, we see more opportunities than we probably thought when we were first looking at MWH, just a combination of the 2 groups is now better positioned us on a number of projects where we were actually looking for sub-consultants and partners. We're now not looking to those partners on some major projects we're looking at. Water sector is so diverse in what it is, that -- maybe the number you are referring to is water treatment plants or something, but we definitely do work in wastewater, we do work in conveyance, we do work in combined sewer overflows and water resources. It is a very deep sector and the good news for Stantec is we play across all those sectors and we play across those sectors in a very top-tier position. So especially in the United States right now, I would say we see more opportunities than we anticipated last year, and I'd say we're more bullish. So it's disappointing to see the retraction this quarter, because that certainly isn't our outlook for that business unit.

Okay and just overall, notwithstanding the currency impacts, but when might we see organic backlog growth pickup, is that more something we'll see next year, because it's -- I understand the FX impact, but it's been, I think, you said $50 million organic backlog growth since Q4?

I think that was $50 million in the quarter quarter-over-quarter organic growth that we saw this quarter, Yuri, on an organic basis.

On an organic basis -- taking out the FX. So the point is our backlog is growing right now organically.

Can you just provide -- back to water for 1 second, the projects that you talked about that were delayed or paused -- or are we talking about a handful of projects here and was there a commonality to the reason it was paused?

No, it was a handful of projects and these projects are water programs, where we're managing a very large program and there is -- hard to say why there was a pause, but 1 was in Atlanta, which was also in the area of the storm, so there is reasons, I guess. So when we talked about, for example, the impact of the hurricanes, that’s a direct impact, but there is ancillary impacts of that, that really is really hard to quantify. So some of those delays may have been associated with that. But again, we don't see that systemic in those programs. They will continue their long programs and we are in the middle of them.

And now we'll take a question from Maxim Sytchev with National Bank.

So sorry to belabor on water, but should we expect return to positive organic growth in Q4?

Yes.

And in terms of -- Bob, can you update us in terms of M&A sort of strategy, the pipeline, how are you guys feeling especially in 2018? What's unfolding there?

No. Thanks for the question, Max. Because that's something we've been working hard on, although this year has been relatively slow there is a reason for it. A, we were still integrating MWH and that took up an awful lot of time. But we're also just preparing ourselves for what we believe will be a busy year in 2018 and specifically in the U.K. and Australia, New Zealand. So we've taken a number of trips over there and familiarize ourselves with opportunities. We're very encouraged to what the number of opportunities we see in both of those in regions that we will be focusing on. So we had to set up a base of operations there, ensure that we understood that market, which is different than the U.S. market and be ready to acquire those firms and then be able to integrate them. So that's the reason for the pause, maybe, in some activity. But 2018 is then shaping up to be a very busy year as a result of all the efforts we've put into the last half of 2017 year.

And Bob, should we expect both medium-sized transactions that you typically focused on or maybe something of even greater size that you guys are potentially looking at right now?

The sizes we're looking at are pretty diverse. But I would not say we're looking at anything in the 4,000 or 5,000 person range. But there are some hundreds -- 200 to 300 person firms, and there are a few thousand person firms that are on the list, which is encouraging. That is something we were concerned about. There is -- the initial discussions were, I would say, on the smaller side, but over the last few months, we've seen some good size opportunities come onto the table that are real. And we hope to be able to put some of those on the list for next year.

And in terms of expectations for the sellers. Is it still in line with historical ranges, sort of the bigger the transaction, obviously the higher the multiple, but what's the seller's expectations now?

The seller's expectation is always high. But I'd say -- and our progress of those discussions and some of the ones we're closer on, we don't see a significant change in the multiples we've been paying. So we're pretty confident that we'll be able to get these in a very similar historical range to our previous ones.

And then maybe just last question for you. In terms of any IT integration costs that would expect -- we should expect from MWH in Q4 and the first half of 2018 or is that mostly behind us?

I still think there is still work to do, Max. We are working on the globalization of our platforms, that means getting our core network and infrastructure all in place. So it's operating globally. So I still think we'll see more impacts. I'm not sure we'll see the same dollar magnitude, but certainly they're still going to be impacts. We are also building out our data center, which is getting us ready for moving into our new office facilities in Edmonton. So that's also part of what's going on around the core infrastructure. So we'll see some of that impacting us in 2018, but I don't think that's going to be overly material.

No, and it's going to continue to decline as we get into '18. So a little bit in Q4, but in '18, it should decline as we get into '18.

Setting the platform today for the future.

And maybe, sorry to sneak in, one last one. In terms of oil and gas specifically, it looks like we're seeing a bit of pick-up on the midstream side of things. I mean is it conceivable to see this market for you to be flat in 2018? Or do you have to see a pickup also on the upstream side of things to get the ball rolling?

No, I think we've been messaging that, as long as the similar trajectory that we see right now, the types of projects we're looking at continue to come, we will get to flat in 2018. So certainly we see positive trend with the award of the midstream project in Canada. That's going to provide us revenue opportunities into Q4 and into Q1. It's a 3 to 5-year program. So it's going to certainly help that business line. Any additional awards it’s just going to even help that and accelerate it. So we're -- we'd like to say we're bullish on that and getting excited, but we're close to it, we are starting to see opportunities.

And now we'll hear from Derek Spronck with RBC Capital Markets.

I was just jumping over from a different conference call, so I apologize if some of these questions have been addressed. Just around your U.S. business and NAFTA, are there any concerns there if NAFTA were to be taken off the table?

You know you've always got to worry about -- on an extremely unusual event occurring. From what we've seen and from the people we've talked to we just don't anticipate anything that drastic, but it's still early days in those discussions. But really no, I think the bottom line is we don't see a significant impact of that. But we also don't really think that that's going to come to the extreme fruition of what maybe some of the media has been reporting.

Part of what protects us from that is we have over 10,000 employees in the U.S. generating revenue in the U.S. and the communities in the U.S. So we do have some cross-border labor sharing that could be where the impact is, but we really don't know yet until progress on those negotiations.

On the other side of the equation, would you stand to benefit if there was a new tax regime or tax cut basis in the U.S.?

We're also looking at that, Derek. It's tax reform is still pretty early in terms of the potential impacts, but lower rates could reduce corporate income tax rates overall. We are proposing right now 20% corporate federal rate, but there are other offsetting things of being able to write off property right away or limit interest deductions and so on. So there is also the territorial system that we're moving to in terms of repatriating profits and cash from foreign operations that could offset some of that. So still lots of moving parts we're paying close attention to it, but -- and we'll be modeling the impact of those reforms once we get more clarity.

Just moving on, I know, I guess, the nature of your contracts. I don't know if this would be a relevant question. But any major contracts that you're currently short listed on that would be material that could be coming up to tender and/or any contracts that could be being rolled over or completed that we should account for?

Well, I like to -- we could probably spend the next 15 minutes talking about major projects that we feel we're short-listed on or have good opportunities. I think from a Canadian standpoint, the REM project in Montreal, we are partnering with SNC on that and certainly see good opportunities for that project, that's a huge project. So -- but we probably are bidding right now on half a dozen major P3s, where we are shortlisted on those and again you're shortlisted to 1 of 3 firms that's going to be chosen, so you at least figure you have a 1-in-3 chance of winning them. So -- and then the AMP programs are now starting to get into their rebidding phase and those are all major programs that are 5-year programs. There is a major water project in California that we are one of short list of companies that will be bidding on that. So because of our top-tier presence in the number of sectors we are, there are numerous major projects now that we are either short listed on or feel we have a good opportunity to win over the next couple quarters.

And any contracts that are coming to completion that you're currently working with?

Yes, there was, probably the biggest project it is, it's the PCCP project in New Orleans where we've been working on that project for almost 4 years now. That was almost a $1 billion project and it's coming to completion. We've got a few P3 projects that are coming to completion, but I'd say right now we have more opportunities coming up than we have projects winding down, which is good.

And just one more last one from myself if I could. From an M&A perspective, you might have already addressed this, but geographically where do you see the best opportunities right now for Stantec?

We have, I think, equal opportunities in the U.S., Australia, New Zealand and the U.K., those are the 3 areas we're focused on right now, probably more heavily focused on the U.K. and Australia, New Zealand just because we like to diversify our operations we acquired through MWH in those 2 regions. But we have a continued program in the U.S. that our pipeline funnel was full and lots of opportunities, albeit in the U.S. I would say more of the tuck-ins smaller firms and more regional firms in Australia, New Zealand and the U.K., probably a more diversity of the type of firms that we're looking in that area. So we said to answer that on a previous question, we feel right now the 2018 will be a very busy year from an M&A perspective.

And now the next question will come from Mona Nazir with Laurentian Bank.

So the first topic, I wanted to touch on was the MWH integration. I know that you are moving into the global integration efforts. Is it similar to the U.S. or North America, where there was a large IT component or does it vary? And I'm just wondering when you expect it to be completed. Is it more midway through 2018, early part of latter?

The global integration model does contain a large IT component. When we're building out [Oracle] it’s like doing a new implementation in every new geography. We certainly have the platform and the foundation and the metrics and KPIs and things that we track that we'll be integrating into those operations. But it does require a lot of heavy lifting and basically rebuilding the system for each of those geographies. That doesn't mean that there is a big additional cost and a lot of that work is done internally. We have a very strong team that does this and is very good at it. So we expect that to continue through 2018. We're hoping to get one of the global operations, Australia, New Zealand onto Oracle sometime around second quarter and finish up with the U.K. towards the end of 2018. So we expect to have most of that heavy lifting done by the end of the year.

I think it's a good comment though that -- to talk about why is this taking us a little bit longer because I think our initial guidance if we go back a year ago is we would have thought we would have been done maybe halfway through the year. But with a large acquisition like MWH and more so a very mature company like MWH, what we explored when we're looking at processes and everything is they had some very strong processes. They ran some very large programs in some very large projects like a Panama Canal, for example, where we're taking the best of that, building that into Oracle and essentially upgrading Oracle, which is going to benefit all our historical Stantec operations as well. So we took probably an extra 6 months here in '17 to explore that, analyze it, rewrite our programs and now we're launching that. So I think it's a point for investors to understand that that is a key part of our integration strategy. It's taking the best from that firm and now rerating things in the historical Stantec and legacy Stantec to improve that part of it. So we're pretty excited over that. I think that's the one difference from this time last year, where we were very excited with the opportunity of MWH. We're even more excited now because we believe that a lot of the things we've done this year is going to build value for us going forward.

They’re foundational for the long term, that's really what we're doing.

That's right.

And just following on that, I believe with the Q1 '17 results, on the call you disclosed that the higher IT costs related to the integration for that quarter was kind of sitting around that $10 million mark. Do you expect kind of a material decline from that $10 million as you shift into the global integration?

I would say yes, Mona. We've done most of the heavy lifting in terms of getting the core infrastructure, the costs incurred there, it's going to decline over the next year, yes.

And lastly for me, just turning to the energy and resources segment. Very pleased to see the near 6% growth versus the contraction last quarter. I'm just wondering, is that growth attributable to maybe an easier comp period or is it really, and I know you touched on this in your earlier remarks, but I'm just trying to clarify, is it really some significant market shift that's caused the increase and giving you increased confidence going forward?

I think it's both. There is no doubt that we’re comparing it over poor comps from last year. But there is no doubt it's because we want to work, there is no doubt winning the project, the mining project in Canada is self-mining. Winning the work orders in the Oroville Dam has just added to the revenue generation in power -- in Waterpower and Dams. So that really is where the areas of growth or it's [winning] work in areas, that is the major contributor to that shift and whether that will continue at 6%. we will see, but certainly we're seeing positive trends in all 4 of those business units in energy and resources.

(Operator Instructions) We'll now hear from Michael Tupholme with TD Securities.

Just one question for me, Bob and Dan. There was again a big difference in the net revenue organic growth rate and the gross revenue organic growth rate. And my question is when we look at the segments, all showed positive organic gains on a gross basis other than water. So I'm just wondering apart from water, did any of the other segments show negative organic growth on a net basis in the third quarter?

As I'm speaking, Dan is flipping through this notes to see if he can find that. I think on a net basis, we are essentially flat for the quarter. And on a net basis, I think we're essentially flat year-to-date. So certainly the organic growth at a gross level is positive, but at a net level, it's flat. I'm not sure about the individual business units.

We saw -- we continued to see some negative net organic revenue in energy and resources, largely driven by oil and gas and environmental services. Those 2 units, everything else had positive net organic growth.

But the negative was less than it was last quarter, which is again positive.

I think in energy, it was less than 10% now which is the first time we've seen it in single digits in terms of the retraction related to oil and gas.

So sorry, just to be clear on that point, Dan, on a net basis, energy and resources was a less than 10% retraction?

That's correct, just marginally less.

With that, ladies and gentlemen, this does conclude your question-and-answer session. We do -- I'll turn the call back over to your host for his closing remarks.

Great, thank you, Jake. And thank you again for joining Stantec's third quarter earnings call, and thank you for all your questions.

And with that, ladies and gentlemen, that does conclude your call for today. Thank you for your participation. You may now disconnect.