Q2 2021 Stantec Inc Earnings Call
Paul Johnston, President and Chief Executive Officer, and Theresa Jang Executive Vice President and Chief Financial Officer, Stan Tech and likes those dialing in to view the slide presentation, which is available and the investors section at <unk> Dot com.
Today's call is also webcast. Please be advised that if you have dialed in and we'll also viewing the webcast you should mute your computer as there is the 22nd delay between the call and the webcast.
All information provided during this conference call of the subject to the forward looking statement qualification set.
On slide 2 detailed and stand text management's discussion and analysis and incorporated in full for the purposes of today's call.
Dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded with that I am pleased to turn the call over to Mr. For Johnston. Please go ahead Sir.
Good morning, and thank you for joining us.
<unk> delivered another solid quarter of operational and financial performance.
Through our commitment to executing our strategy through our for value creators, we've delivered considerably higher margins quarter over quarter, leading the second quarter earnings that match the historical record of 62 per share.
Our Canadian and global markets have rebounded strongly to growth while the U S is off to a slower start to recovery.
On a constant currency basis, we grew net revenue by over 2%, which was in line actually a little better than our expectation, we had coming into the quarter.
We see clear evidence of momentum building across all of our key markets as we look for the remainder of this year and beyond we.
And we've generated 6% organic backlog growth for through the first half of this year.
And beyond the wins recorded and backlog, we're seeing a surge and award notifications with well over $1 billion and gross revenue more of half of which is in the U S.
While these notified of awards can take months or longer to filter into our backlog, especially for large multi year frameworks. The sheer magnitude give us every reason to be confident and our outlook.
On the strength of our year to date results and positive outlook for the remainder of the year, we've raised our 2021 earnings guidance.
Turning now to our results by key geography.
The pace of recovery and Canada has been remarkable and this has created tremendous opportunity and virtually every sector we operate in.
Our infrastructure buildings, and environmental services businesses have been particularly strong each generating organic growth and the high teens for the quarter.
Organic net revenue and Canada was over 11% without the without the effect of the day scope to Trans mountain contract and 6% overall.
The investment in infrastructure is a key tool being used by governments to spur economic growth and we've already seen the government's Ontario, and Quebec move forward with large transit projects, which are driving significant revenue growth for our transportation business.
Our work with Toronto Metro links and on the light rail and sustainable transportation development of Montreal demonstrates the high demand for our expertise.
British Columbia, Alberta are also advancing several large transit projects, which bodes well for us.
We're also seeing strong revenues and our community development business with high market demand and Western Canada, and Ontario attributable to a historically low interest rates the pandemic, causing people to reevaluate their housing choices and optimism related to the improving economy fueling organic growth.
We're seeing growing opportunity to draw upon our expertise and ESG to provide innovative solutions and sustainable design and Q2, we were awarded a 7 year agreement to provide engineering and architectural services for drinking water installations for a major Quebec municipality.
Buildings is performing exceptionally well due to the significant volume of major projects and the Canadian health care sector. The new St. Paul's Hospital project in Vancouver, and large hospital projects, and Saskatchewan, and Ontario are driving historically high levels of utilization within our buildings practice.
With a number of additional health care projects, and our backlog and growing activity and the civic and industrial sectors. We expect continued strong organic growth from our buildings business.
And heightened focus on environmental sustainability continues to drive very strong organic growth for our environmental services business.
As activity and sectors like transportation mining manufacturing and commercial development ramps up so too has the demand for our services for our scientists and archaeologists as they support the regulatory and environmental requirements of these initiatives.
Organic growth and water was steady and the quarter.
And wins on multiple large scale water irrigation projects and Western Canada will be a source of increased activity in the months ahead.
And we recently won the role of prime consultant for of wastewater treatment facility upgrade and southern Ontario, as we continue to be recognized as market leaders in this space.
And with the energy transition underway, we're seeing growing opportunities for energy and resources group and renewable energy and a great example of the work. We're doing here is our recent win to provide process mechanical and instrumentation instrumentation services 2 of biogas feedstock project in Saskatchewan.
Many of the themes playing out in Canada are also emerging and the U S. Although the U S recovery is off to a slightly slower start.
Overall, the Q2 performance of our U S business was in line with our expectations with 7.4% organic revenue retraction in contrast to organic growth last year our.
Our U S results were significantly impacted by the strengthening of the Canadian dollar and Teresa will go into this a bit later in the presentation.
Our U S transportation business continues to work through the wind down of several major alternative delivery projects, where revenue recognition at the end of projects tends to slow down due to the complexity of the change order approval process.
Unlike Canada stimulus investment and infrastructure has not yet crystallized, but we are very well positioned to be beneficiaries when it occurs.
With the expected focus on traditional infrastructure like roads bridges and transit, we expect U S stimulus spending will drive strong growth and infrastructure once funds begin to flow.
Building to starting to turn the corner as public and private investment is gaining momentum.
While the commercial sector remains weak we are beginning to see very positive green shoots and other sectors. The focus on health care than we've seen and Canada is emerging and the U S and our expertise in this sector has resulted and recent product pursuit wins for a number of hospitals and urgent care facilities.
And we were recently awarded the design of the state of the art neurological facility that will be over 1 million square feet and size.
Activity is also growing and the civic and industrial sectors, where we've been successful and recent pursuits for a number of large scale of IDI cues for the U S Army Corps of engineers and NASDAQ.
And we're seeing all around the world. The theme of sustainability is creating a growing dimension and our design work and the United States. This is especially pronounced and our energy and resources and environmental services businesses.
Which of achieved organic backlog growth of 35% and 30% respectively. Since year end 2020.
We expect this trend to continue with increasing opportunities and the renewable and energy transition space like the recently awarded pump storage for feasibility study and our continued engagement and on and offshore wind and major solar projects.
And this past quarter, our water and environmental services group were awarded of mandate worth approximately $100 million and net revenue to support FEMA to enhance the usability and value of natural hazard risk information.
And this will contribute to further growth and backlog for these groups and the quarters ahead.
Earlier this week, we announced that we signed a letter of intent to acquire Paleo of solutions.
<unk> has the largest staff complement of paleontologists of any firm and the United States.
And that expertise coupled with their strong archaeological presence complements our existing capabilities and.
And positions us extremely well to meet the considerable volume of work Thats imminent as utilities look to strengthen their electrical transmission infrastructure and our industry responds to the anticipated U S infrastructure stimulus.
So the wave is coming and the U S.
While slower to materialize on and Canada, It will certainly be larger in scale and scope and.
And we see evidence of this and the solid 6.4% organic backlog growth that we've logged and and the $5 billion of notified of awards that are not yet included in backlog.
Like Canada global outperformed our expectations and the second quarter with net revenue growing organically by 9.9%.
Our water business generated over 20% organic growth as the U K M 7 and large water frameworks and Australia are operating at peak of activity.
High commodity prices are also driving strong demand and our mining sector, which achieved organic growth and the high teens.
Acquisitions added a further 9.7% of net revenue growth to our global business highlighting the value we're driving from our M&A program.
We closed our acquisition of and Jenny them during the quarter, our second acquisition in Australia. This year and we're seeing the benefit of combining our teams in terms of client interest and project opportunities.
Backlog for our global region remains very healthy.
We're also seeing significant growth and notified contract awards globally, again, not yet and backlog, particularly with respect of multi year frameworks, and our U K and Australia and water businesses.
In addition, other significant awards that are not yet and backlog include 2 separate pumped storage facilities and the U. K. These are great. Examples of how we continue to support our clients and the transition to renewable energy.
We've also been appointed to our multidisciplinary rolling conceptual design for a 50 story mixed use development and Australia, consisting of residential retail community and commercial spaces.
Which remains on track to deliver 10 cents per share and adjusted EPS by the end of 2020.1 are.
Our focus on working capital management, along with the benefit of lower interest rates from our senior note offering last year are driving a reduction in interest expense and we've materially reduced our effective tax rate to the implementation of tax optimization strategies.
These efforts collectively contributed to $70 million in Q2, adjusted net income and 62 sales and adjusted diluted EPS, representing 21% and 19% increases respectively.
Our balance sheet remains strong with net debt to adjusted EBITDA of 0.9 times below our targeted range of <unk>.
Day sales outstanding was 76 days at quarter end, which is relatively consistent with Q1.2021 and down 6 days compared to the same time last year, we've revised our target DSO downward from 90 days to less than the 80 days, which reflects our confidence and our ability to maintain dsos below this level.
Free cash flow for the first half of the year decreased $70 million to $74 million to $51 million, reflecting changes in revenues and corresponding cash receipts, including the effects of foreign exchange.
As well cash flows for the same period last year benefited from the deferral of income tax and other payments, which resulted from various pandemic relief programs.
Increased cash used in investing activities reflects the recent acquisition activity, while spending on capital expenditures has remained consistent.
And we returned $69 million and capital to shareholders in the second quarter $51 million through share repurchases and $18 million through the payment of dividends demonstrating our ongoing commitment to our capital allocation strategy.
Based on our financial performance to date, and our confidence and continuing to execute on our plan, we're raising our earnings guidance for 2021.
We continue to expect 2021 full year organic net revenue growth to be and the low to mid single digits or 1% to 5%, but with a slight shift and mix relative to our previous thoughts.
We now expect organic growth and Canada and global to be slightly stronger than initially projected offsetting a slightly slower start to the recovery and the U S.
As a reminder, whenever we talk about organic growth, we always talk about it on a constant currency basis.
We're raising the lower end of our ranges on all of our financial targets. Adjusted EBITDA margin is now projected to be 15% to 16% of net revenue our.
Our adjusted net income margin target is now 6.8% of net revenue or higher and adjusted ROIC is now expected to be 10% or higher and.
And as for adjusted diluted EPS, we now expect to achieve 4% to 7% growth in 2021 compared to 2020 for our previous guidance was for low to mid single digit growth for 1% to 5%.
Given continued uncertainty around the timing on the U S infrastructure stimulus Bill we believe it's still prudent to exclude any potential upside from U S stimulus spending and our 2021 revenue expectations.
Please refer to this quarter's MD&A for more detailed information about our 2021 outlook, including our updated expectations for our effective tax rate foreign exchange sensitivities and our revised expectations regarding seasonality of earnings where we now project Q1, and Q4 to represent 45% of earnings.
And Q2 and Q3 to represent 55%. This is the shift from our previous guidance of a 40% 60% split.
And with that I'll turn the call back to Gordon.
Thanks Teresa.
And we're very optimistic as we look towards the rest of this year and beyond our increased EPS guidance for 4% to 7% growth and 2021 is predicated on our solid performance and the first half of the year the strength of our backlog and our more than $1 billion and award notifications that arent yet booked into backlog.
While we have not yet incorporated any U S stimulus spending into our revenue assumptions for 2021, the proposed focus on water and traditional infrastructure like roads bridges and transit masters of squarely with our areas of strength.
Given the expected focus on sustainability as part of these investments and our industry, leading exposure to UN sustainable development goals related revenue, we are ideally positioned to capitalize on these opportunities and drive significant growth and our U S operations.
Our ability to meet our high to maintain our high win rate on pursuits, and deliver unparalleled results for our clients is largely dependent on our ability to retain the best talent.
And we're proud to be recognized as an employer of choice is highlighted by some of the accolades noted on this slide.
While our voluntary turnover rate has remained low throughout the pandemic and continues to be a couple of percentage points better than the industry average, we're continuing to strive to maintain a highly engaged and empowered workforce and that's why it's a key priority for us to maintain and inspired work culture and an environment, where everyone feels welcomed included and support.
And it.
Standard continues to stand out as the top ranked firm and its space for sustainability.
In addition to being named the fifth most sustainable company and the world by corporate Knights of this year. We were also recently ranked the industry's top firm and Canada's best 50, corporate citizens of 2021.
Our emphasis on sustainability is interwoven and from our leadership team to the talented staff to guide our clients on their journeys to create more sustainable communities and futures and.
And I want to thank all of our employees for their continued commitment and diligence and supporting our clients and colleagues around the world and with that we'll open the call up to questions operator.
Thank you and if he would like to ask a question on the phone lines. Today. Please press star 1 on your telephone keypad. If you are on a speaker phone. Please make sure your view of options turned off to allow your signal and to reach our equipment. Once again, everyone that is star 1 on your telephone.
We'll take our first question from FINMA pouring with Desjardin capital markets. Please go ahead.
Yes, good morning, everyone.
Just with respect on M&A based on your current pipeline of and then you have in front of you and assuming a normal closing rate on.
On the knee employees could you acquire throughout the reminder of 2021 I just wanted to get a sense of the fortunate. The ahead of you and the current context.
Yeah. Thanks for the question goodwill and certain.
There's a lot of activity in the thousand person and less market that we typically are looking at is our sweet spot and you.
The earlier this week, we announced the.
The the letter of intent for <unk> solution and I suspect that there's going to be a number of additional firms and that thousands of person and less coming to market over the remainder of the year, particularly in the United States, because and will bolster wondering.
It happened with from of taxation perspective, and.
We're also finding that there is some activity and the 1000 plus person range, but these days you know discipline is the key for us and walk because we're seeing that there's a lot of activity and the market a lot of players and so really maintaining discipline on the multiples that were prepared to pay in order to be happy.
The any transaction and be accretive for us from a long term perspective, but you know these.
These things are always lumpy and so I don't think I'd like to the posit of guests at how many folks we could add from the staff count perspective, only to say that the pipeline of firms is full and there's a lot of activity and the space, but how many of the or how many people we would close before the end of the year.
It would be difficult for us to really to get that.
Okay and.
Thanks, Great color and with respect to the U S. Obviously, a little bit slower recovery book.
It seems the 1 billion of award and notification is excluded from the potential impact of the trillion dollar of infrastructure package. So would be curious to 2 out of an update with respect to the timing for the.
Funds begin to flow and which segments would be and it should most of the down the road.
Gore.
And for your question of Ben What did you mean, specifically related to the the soft backlog that we have on the books or is that more with relation to what we see coming from the U S stimulus.
More about what's coming from the U S stimulus yes.
Yeah, you know it's.
It's interesting when you look at the plan this lined up from the U S stimulus perspective, it really is right and our wheelhouse when you look at some.
Roughly $550 million.
550 billion, sorry, and new funding over 5 years of 110 billion for roads bridges and other major infrastructure.
39 billion for public transit $17 billion of reports 25 billion for airports.
Zero and low emission buses electrical grid upgrading 55 billion for water infrastructure.
A lot of the things and just going back to the electrical grid $73 billion to upgrade the electrical grid, which ties in very very well with our acquisition of <unk>.
Last year, plus the existing strength that we had but also paleo does a lot of work and in with.
With the clients in that space as well, so I think with our existing skill set with the skill set of some of the firms that we've added recently.
We are ideally situated to to capitalize on on what we anticipate will come from the U S infrastructure Bill when when it's finally passed.
Okay. Thanks for the color.
Great. Thanks Manuel.
We'll take our next question from Michael <unk> with TD Securities.
Thanks, Good morning.
Gordon.
Good morning corridor truths of the admin and marketing expenses. This quarter. It was noted that the expenses were.
Lower in part due to reduced discretionary spending and the favorable resolution of certain claims just 2 questions there.
The first off can you speak to the details of the claims resolution how material that was and then secondly.
And if you could also speak to how youre thinking about discretionary expenses going forward with with the economic reopening continuing to progress.
Sure, so and with respect to the the claims recovery.
I would say it wasn't as material as what we recorded in Q4 of last year was a couple of million dollars.
But enough to it to be noteworthy I think.
And so as we think about discretionary spending going forward and.
What we've baked into our EBIT margin expectations for this year is continued savings continued discipline, but we also know that everyone is sort of.
The pushing to be able to get back on the road and on planes and travel and things start to open up. So we are expecting to see a bit of a bump up in travel and so on probably towards the latter part of the of Q3 and into Q4 and as we as we look toward.
2022, and beyond though and.
It is our intention that discretionary spending will not go back to levels.
And that we were at before the pandemic.
So we've not yet established what that target is and what percentage reduction of we're going to try to cap it at.
But that that is fully our expectation that that it will it will remain low.
What is the lowest during the pandemic, but not as high as before the pandemic.
Okay and I appreciate the thoughts.
Good color. Thank you.
If we look at the year over year margin improvement of EBITDA margin improvement and Q2 was healthy.
If we look ahead to the third quarter.
Looks like the prior year margin comp is more difficult in Q3.
Are you able to talk about whether or not you believe that you can continue to see year over year margin improvement and the third quarter.
Okay.
And it appears that the coal was losses.
Losses, Teresa and gold Bull attempt to call back in from the cell phone.
But she was gonna call me.
Lisa was gonna Komal.
And I can hear you yes.
And if youre able to all of us.
Is it not us.
Perhaps then weighted Michael the got dropped.
Lisa are you there.
Yes, I am here and Michael financed on established so he may have dropped but it has not disconnected on the sand.
Okay.
I thought I heard Michael there for a second can we we can continue or maybe we just come back to Michael later.
Alright, well might go on to Jacob.
Okay, I'm curious because youll hear us.
Okay.
Okay, Lisa if we have any troubles again could you just please call me back on my cellphone.
Absolutely.
Okay, sorry, Michael.
So can you hear me.
We can now yes, sorry, okay perfect.
And maybe I'll just re ask the questions and Im not sure how much of it came through so.
Great question Richard.
Sure.
Yes margins. So you had you had good year over year improvement and the second quarter I'm. Just wondering as we look ahead to the the third quarter. It looks like the the comp is more difficult on a in terms of the prior year comp.
So I appreciate the the guidance range, you've given for the full year, but I'm, just wondering and the third quarter.
Do you expect to be able to continue to see year over year, EBITDA margin improvement and the third quarter.
Sounds like we lost him again.
Alright would you like me today lots of them now.
Yes, please at 1 of them.
On that.
Okay.
Yes.
Alright, and we have them back on the line.
Apologies guys for that debt.
We're on my cell phone now.
Okay.
So theresa.
Finished with your response no I was just getting started and when I got kind of Michael are you able the hero.
And I can hear you fine yes.
Okay. So apologies again.
EBIT and margin.
We feel pretty confident about the the range that we have that we've put out for the year and it does take the there is still a bit of seasonality and the way our EBITDA margins tend to go over the course of the year and we think that will sell roughly be the same we would think that it is going to be.
Relatively strong and in the third quarter of of back off in the fourth quarter and and and.
Again hope to be comfortably in the range that we've that we've set of their target.
Okay. Thank you all of that I'll get back on the queue.
Thanks, Michael.
Alright, we will take our next question from Jacob bout with CIBC. Please go ahead.
Morning.
Good morning Liam.
Once go back to the.
To the U S and and maybe dig into the drivers of the.
The negative organic revenue retraction and so on the U S. How.
How much of this was the wind down in the transport and for projects.
Versus suited the the.
Surgeons of the Delta very and tour 1 of the delay and the U S infrastructure some of those.
Yeah. So just to start off to say that we have confidence and our long term off of our our U S operations and in the long term, we've booked 6.4% organic backlog growth so far this year.
We've seen certainly we talked about the soft backlog and roughly half of the doctor over half of $1 billion as well coming there even absent U S infrastructure stimulus and and also noted the our comparison as to Q2, 2000, Twenty's and which we had some organic growth.
The 3 to your point of boat.
The 2 major Retractors that we did see and in the in the U S. In Q2.
We're transportation and that is related to those those we typically don't like the carload individual projects with there's 2 of them that are currently and that stage, where we're winding down right now as.
As well as our building business retracted a bit now we've noticed that we've noted the building really has begun to turn the corner and Q2 with the addition of of new projects and so I think we're feeling positive about that so really these were not.
Jacob on I don't believe are impacted at all by the by the resurgence of the Delta variant.
And we do believe that we'll see that continued growth in the U S. Going forward Q3, Q4, but certainly into next year, even absent the U S infrastructure stimulus spending and that would provide only of stronger Joe and for us.
Okay.
And the $1.3 billion and award notifications.
It sounds like that that will be awarded or added to backlog and in the fourth quarters on how we should be thinking of alcon.
No you know some of those what we've tried to do there you just indicate the overall health of of of our markets even absent the U S infrastructure stimulus. So those where that is true in excess of $1 billion and gross revenue that we were notified of award in the quarter and some of those are actionable.
<unk> immediately and we will start on them right away and some will take several quarters to add to backlog and some will be even longer for example, I mentioned in the prepared results of the the FEMA project that we were awarded a long term multiyear award with FEMA and so you know that that will take several years for us to work through.
The backlog, but what it provides us is with <unk>.
Multi years of you know.
No admin and no business development and and a group of people just working full time on on the projects. So for no I wouldn't expect to see of $1 billion drop into backlog in Q3, but and I think it's just more indicators of the overall health of the of our backlog overall health of the markets and so just the.
Of port of of our long term view that the things work are continuing to improve and gives us solid tailwind.
Okay and then my second question is just on the lower tax rate guidance.
Can you talk about the sustainability of that as we welcomed the 2022 or is this just really in a mix play for for 2021.
And you know I would say all things being equal that we do expect we will be able to maintain a lower tax rate relative to the 27 and 28%. We started this year with but of course, we haven't done our for our.
Budgeting for 2022, yet, but we did implement the strategy this year that that should sustain it and at a lower level.
Of course, you know, there's a lot of discussion around whether it's the U S.
Corporate tax reform our.
Global tax reforms. So there's a few things floating around out there that we're certainly monitoring, but all things being equal and we should be able to keep on although our effective tax rate and then we started the year with.
Okay. Thank you.
Our next question comes from Chris Murray with ATV cap markets.
Please go ahead.
Thanks folks and so just kind of continuing on the tax discussion for a second true.
Teresa the in the quarter 1 of the things we've seen from some other companies as there was a change and the U K statutory rate.
And I'm, assuming does your guidance on I'm, assuming for for for this year baked that in and your commentary about.
And maybe slightly lower tax numbers next year that that's also already kind of and that impact.
Yeah that was the right.
Okay. Thanks.
And then my other question is around.
The Canadian operations, and just the organic growth rate and Gordon.
And certainly double digit growth rate numbers.
But certainly impacted by by transplant and can you give us some indication on when you think the trans mountain impact is going to slow and and and I guess the other piece of this is.
Kind of excluding the Trans mountain and how sustainable you think of that kind of double digit organic growth rate might be.
Yeah no.
Thanks, Chris the.
The impact of Trans Mountain.
Will will persist for the end of this year, just as a as an organic growth headwind, we changed our contractual relationship with them really at the end of the year. So we were generating that revenue with the with Trans Mountain and Q2 Q3 Q4 of the of last year and so on apps.
Absent oil and gas every 1 of our business lines and Canada had organic growth.
<unk>.
In Q2, and so we've seen the backlogs are up in Canada.
R R.
Book to burn.
Virtually for every group is the is above and.
It's above 1 in Canada, and basically overall kind of the U S and global for all of our combined all of our groups had a book to burn.
And in excess of 1 for the quarter.
So so I think we feel pretty pretty good about that.
But in terms of sustainability.
Of the backlog is there the pipeline of new opportunities is still looking.
Looking not looking good crystal.
Well, we keep double digits quarter on quarter.
That's hard to say, but we do see strong organic growth and Canada for the remainder of the year.
Okay. That's helpful. Thank you.
Thanks, Chris.
We'll take our next question from <unk> Khan with RBC capital markets.
Alright, great. Thanks, and good morning, I'm, just kind of following up on the end market discussion can you maybe talk a little bit about the kind of the infrastructure of outlook across some of your major regions. Obviously, that's the market that should benefit from stimulus, but what are you seeing and the pipeline specifically for that and the U S or even internationally.
And when we think of them when we look at the U S.
Yeah.
Of course, the the infrastructure stimulus Bill you know continuing to be negotiated and and we'll see what sort of a timeframe. We get there, but I think what's interesting. There is what we're seeing is a number of of clients.
Putting out conceptual design and 10% designed hiring their consultants getting people on board and anticipation of that work coming so so debt so.
So I think that's going to create a nice tailwind for us, but even absent that.
In the U S. We talked about the the large hospital neurological Institute that we were awarded a we're seeing that soft backlog is there. So there's a lot of confidence.
Growing confidence and the U S and clients, even absent the U S infrastructure stimulus.
And we feel good about that.
Outside of the United States, and Canada, certainly backlog dropped and then even stronger from a global perspective.
From a transfer.
From a global transportation perspective.
We're forecasting 17% organic growth going for it really driven by a lot of the work and we're seeing way down South and New Zealand.
Certainly some work in Australia as well through our recent acquisition of GTA down there. So I think.
Infrastructure.
From a Canadian or U S and our global perspective feels like it's going to provide a pretty good tailwind for.
For our industry for the remainder.
And for the next couple of years I think.
Alright, Thanks for that and then just kind of turning over to 2 of the 2 at the end markets and have had a bit of a tailwind over the last few years, which is the environment and water now you've had good growth and those end markets as well and I can as we look forward to the next 12 to 24 months kind of do you see those tail wins continuing and.
And you know which market specifically on the way we've seen more demand for those guys, who maybe lap of peers of good growth and those 2 end markets.
Yeah, well you know when we talk about our water business first we've seen organic growth in our water business each quarter for the last 8 or 9 quarters. So it just continues to strengthen pre pandemic and and even through the pandemic.
Backlogs and and water are solid and and I think it's just our market presence there really whether it's in the United States and Canada, where globally.
Is very very strong and we see continue continued growth there and really a large portion of that soft backlog that we talked about is in the water space.
From the from the environmental perspective again, great backlog growth there is as we've talked about.
Our overall book to burn and environmental services field feels good for us, it's certainly above 1 and the quarter and Teresa talked about the backlog growth overall.
And as being of screen and extremely strong.
And so we see that considering that backlog growth will just continue to feed the.
And the then revenue generation of I believe for the quarters, the common and strong support into 2022 as well.
If I could just squeezing 1 more I just looking at your kind of balance sheet position here still looks good and you've been chipping away with.
Small to medium sized transactions for the wild.
Comment on the pipeline of opportunities and I didn't talk to the larger transaction and the past as well just kind of what does the opportunity set out there right now at this point and there.
You know there is.
The.
You mentioned briefly earlier like and in that sub 1000 person firm kind of which has historically been the symantec sweet spot. There is a lot of opportunity come into market and whether it's.
In Canada, the United States of our globally, but I would use the in the U S and particular with pending tax changes.
Debt, we're going to see additional opportunities come to market here in the second half of the year.
Pipeline is full already but we've heard discussion of what a number of firms come into market and then from the perspective of the firms in excess of 1000 people.
For a couple of transactions that are our lives now, but I think theres a number of additional ones that we see coming and the latter half of the year as well.
And really valuing.
As I mentioned before the key for us is discipline and and not.
Our balance sheet is strong and we look to deploy the capital.
As long as we can ensure that it'll be accretive for us in the short and the longer term. So I think youll see us maintain our discipline, but our appetite for.
For growth is there on balance sheet is strong and our level of global maturity is also quite strong. So I think we we feel good about opportunities going forward.
Great. Thanks very much.
Great. Thanks Erle.
We will take our next question from and Gilead with Stifel.
Good morning, everyone.
Good morning.
I was hoping.
You can maybe talk a little bit about how you're thinking about using the buyback versus M&A at this point, especially given that you just highlighted and there's a fair bit of stuffs and the pipeline and it was pretty active with it and Q2 and how youre thinking about and moving ahead, especially given another solid moving the share price.
Yeah, you know I think.
And our approach to it.
Share buybacks share.
And.
But it's always been sorry, I'm, just getting a little bit of feedback I'm not sure of that coming from but the the approach is consistent and in that and we love.
To use our NCI be opportunistically and.
And you know we found pretty good opportunity to do so in in May and June.
But really the the the craft brands and I think certainly the most of the more.
<unk> approach of deploying our capital is through M&A, and so that that's our preference and.
But again when we have that when we have the opportunity with EBIT of a dislocation and pricing.
In the markets, we will go in and and buy shares.
Understood.
The other thing I wanted to follow up on Theres been a lot of talk on the M&A and adding the people that way and are you able to talk about the ability the IP organically right now given and below levels of unemployment and feels like people haven't been very apps change jobs and they've been hard to find and so I'd be curious how you can kind of grow the business in that regard.
Yeah. So we are we have actually an interesting we had a significant.
The discussion on that just this yesterday and and what we are.
A couple of things are firstly, our voluntary turnover rates are typically 2% to 3% below.
Our industry average and and.
While our voluntary turnover rates declined during the early stages of the pandemic sort of those of our.
Of the industry and so while we're seeing voluntary rates begin to creep up there's still for us in the in the single digits.
And as we look at the of number of folks that we're able to hire and bring on it. It certainly is exceeding the number of folks that were that were losing through voluntary turnover and so we'd always want it to be a net importer of staff. During this volatile period and and we're finding that to be the case.
Of course, we want to do everything we can to ensure that our existing employees feel valued and and that the that we're not going to lose them to 2 clients for competitors, but you know and.
And I think we've had some success there. So you know as I mentioned, we are to date, we've been and net imported and adding to staff when I look at our staffing numbers now versus at the end of the quarter versus a year ago. Our numbers are are up and so we feel good about that but again, we want to focus on retaining our existing staff.
And on continuing to to recruit and and new style.
Thanks, very much that's helpful I'll turn the call back over.
Okay. Thanks, Ian.
We'll take our next question from Maxim <unk> with National Bank of financial.
Hi, Good morning got Teresa.
Good morning, good morning.
And.
And just wanted to circle back to 2.2 acquisitions so on.
And look historically when.
Kind of 2011, 2012 timeframe and in top line and the time was around 1 point for.
5 billion and you were kind of allocating maybe $85 million to M&A every year and right now on kind of doing the same while revenue is close to $4 billion and like all of us that really appreciates the looking at accretive acquisitions and things of that makes sense, but.
How do you think about materiality and the ability to kind of move the needle from acquisitions and whether that's been changing as you have been executing dramatically better over the last 2 years, so maybe some thoughts there.
Yeah, No no that's a great perspective, Max so.
We are we are continuing to execute on that.
Small to mid size strategy of those thousand person and less firms, but you know and.
And that is our strategy and I.
I think you've probably heard of stay over the last couple of quarters debt.
And some of these larger transactions come along we're having a a solid look at them and certainly if we can find some debt that we think meet our long term objectives.
Because of the strength of our balance sheet and the maturity of our global operations and certainly the appetite from from management and from our board.
And we'll look at those but again only only where they make sense and we think there'll be accretive to 2.
To our shareholders and the longer term.
Right, Okay that makes sense and in terms of kind of the competitive landscape for acquisitions are you seeing more financial buyers as well and kicking the tires on those things or is it all strategic players who were competing against.
We absolutely are seeing more financial buyers come to the table and Max the.
And it's interesting we were looking at some stats just the other day that from 5 years ago to now 5 years ago, roughly we might have anticipated and on annual basis, maybe 10% of the transactions went to a financial buyer I think so far this year. We've seen you know it could be up to 30% of the transactions have gone to the financial buyers and.
And some of those cases, and you would've seen and some of them as well and the multiple is is very very high.
Debt.
And from a of the perspective of a strategic as you're getting into the high teens multiples it'd be very difficult for that to be accretive unless there's pretty significant growth opportunities.
And again, we're just we're maintaining our discipline, we're maintaining our focus.
But it is certainly a more competitive environment there as we see our financial buyers coming in and looking for some of these platform acquisitions.
Okay. No. That's super helpful. And then just 1 quick clarification for Teresa if I may So I think it was.
Michael asking the question and from the back half margin improvement year on year can you just confirm that that's actually what you on telegraphing that you've been able to grow the margin profile.
In Q3, and then kind of flattish in Q4 is that accurate.
I don't know if they don't necessarily grow from Q2 to Crazy I think we'd expect it to be relatively favorable at the higher end of the.
Of what we typically see for Q3.
But we do think it'll come back down and in Q4. So Q3, we were.
And I'm expecting to be.
And be able to replicate what we did and in Q2.
Okay I appreciate the clarification. Thank you so much lots of channel.
Thanks, Matt.
And we'll take our next question from Brian and fast with Raymond James.
Thanks, Good morning.
To follow up on your commentary on the water business, obviously youre seeing is the market leader in the in the water space are there any regions that you are not punching above your weight in that vertical.
I think as we look around our major markets, Canada, the United States The U K.
Australia, we are easily of dominant market player in Canada, the U S and.
And and the U K, while we are extremely strong and I think probably punching above our weight and Australia I think we of opportunities that continue to strengthen our presence there but through the addition of of additional.
Additional resources the team the rehab there is fantastic.
And they've won some really really strong awards and you can see that and in the growth numbers, but I think we can add some more staff there and so certainly it would be and area of focus for us going forward.
Okay. Thanks.
And then you highlighted the nice project win and the U S health care vertical I guess, how is the bidding pipeline and I guess the opportunities shaping up for health care and the U S. Specifically.
Yeah.
It's interesting and the first first quarter of the year, we really saw health care opportunities really blossoming in Canada in particular and in and in Australia, and what we've seen through Q2 and the bidding pipeline come in and for the remainder of the year is health care is really coming on strong and in the United.
And so.
You know that was a really nice the word for us here, but I think you will see that that momentum continue to build as we go forward for the remainder of this year.
Okay. That's it for me thanks.
Thanks, Brian.
Our next question comes from twice on Laurentian Bank. Please go ahead.
Good morning.
Good morning.
Good morning, I'm, just wondering if you can provide a little bit more color on the DSO and <unk>.
<unk> seen this year and how sustainable that target that you've just for 2021, when we think of beyond this year and ish and the improvement is to continue like should we be expecting.
So change in terms of the free cash flow conversion profile for the business.
Yeah, you know we've worked awfully hard over the last couple of years at our DSO and I think the level that it currently sits at that sort of $75.76 day range.
It is is pretty achievable for us on the on an on going basis now can always be true.
And of course buy.
And certain contractor.
Arrangements, but we.
We are we're pretty confident that this is a good range that we can achieve and and I would expect then from a free cash flow standpoint that we had a bit of disruption this year from the impact last year of <unk>.
The large tax payments that we were able to the person and he got some arguments last year and then of course that debt catches up with you and a bit of a.
Higher than usual outflow this year and.
But I think things will normalize there really arent journey for other programs that we.
And are aware for participating from related to the pandemic. So I think it is normalizing.
No structural changes.
And think of.
Okay, great. Thank you that's very helpful. And then my next question maybe.
And I'm wondering and Gordon if you can just make a quick comment on.
The energy and market is good to see the backlog coming back and also just the metals commodities pricing.
Becoming more healthy and that vertical can you maybe just comment on some of the work that youre seeing that space. Some of the pipeline that you are targeting now particular also in the renewable energy space.
Any color on third please thank you.
Sure.
So so first talking about the the renewable energy space and so we're seeing a lot of interest and that both Canada, and the United States and and and and.
<unk> and other locations as well, where we're working on.
<unk> farms wind farms.
We mentioned the biofuel facility that we're working on right now and.
In Saskatchewan and getting started with so we're seeing of real uptick and worker. We mentioned the number of pump storage project as well we are of a particular area of expertise. So we just see that backlog of work continuing and in addition to that renewable space.
Think we will see a lot of work.
<unk> 2 grid strengthening and we won.
1 of the proposals and in the U S infrastructure build it Bill is 73 billion to rebuild the electrical grid and we've.
And issues related to that certainly with the the ice storms in Texas.
You've seen some of the utilities in California, and make a commitment to to brewery up to 10000 miles of of.
Of electrical transmission cabling for as the result of to reduce wireless wildfire and and and other sorts of damages. So I see a lot of work coming and that and that of electrical transmission distribution renewable space.
A strong tailwind for us for the remainder of this year and and I think for the next couple of coming years, and then and then in the mining space certainly a lot of commodity prices are quite high.
Seeing our business growing certainly in the South America, we're seeing a lot of work and that through the also our acquisition of and journey of them and Australia continued work there copper iron ore gold and and so on and some of the junior gold producers, but a real particular area of expertise that we have as well is with.
Adds to lithium and you're a lot of the lithium production.
Production is in South America, or lithium stores or in South America, and we're active and South America with a number of the firms that are.
Either already and are looking to get into that field. So I think we see a lot of potential upside to that to lithium as well true.
So would you would you say that you would qualify as sort of the prospective growth safety and that vertical to be I guess slightly higher and that we've seen traditionally from from the energy business.
Yeah.
The.
Previously and our overall energy and resources business, we saw over the last couple of years of significant upswing in and revenue from Trans Mountain and some of these pipeline projects, but as those are winding down now we're seeing the uptick really coming or our involvement and the winding down and we're really seeing that uptick coming in mining and the energy transition of electrical distribution.
And I think we'll see probably it'll even out a little bit.
From a go forward perspective.
Great. Thank you that's it for me.
Thanks Troy.
And we have a follow up question from Michael touched on with TD Securities.
Thanks for taking the follow up here. So just wanted to go back to the $1.2 billion and gross revenue of award notifications you highlighted the quarter I think you said that was the <unk>.
Quarterly figure.
I'm wondering if you can put that figure in the context and how that would compare to what you would have historically seen in terms of award notifications on a quarterly basis.
Yeah.
I think we saw.
Michael with the in that quarter and it was healthy for sure and.
Probably the debt and for us that really just an indication of the overall health of the backlog the overall health of the industry and and our client base and so we thought it would be just nice day to call out this.
This quarter that not just as backlog, good and up 6% since the beginning of the year, but but that soft backlog is also very very healthy I don't know that it's something that we'll look to quantify every quarter, but it's just something that we thought we'd call out because of the.
Was particularly healthy and and.
And indicative of strong healthy underlying market.
Okay and I appreciate that.
And then you were speaking about.
Employee turnover and.
I'm seeing net additions to employees and just I'm wondering what the with the backlog up 6% organically year to date.
And you're going to be staffing up from here and how difficult is that to do and the current market.
Yes, so we absolutely are actively staffing up.
Actively hiring and and the virtually all of our business lines and virtually all of our geographies.
And so there is certainly a war for talent there, but you know as as I mentioned to date, we've been a net importer of the staff and we'll look to continue to do that 1 other thing that we've talked about and in previous quarters. We didn't bring up yet today as is our is our delivery center in Pune, India and we've all.
So continue to grow our resourcing there.
We're up.
The 15% to 20% in our operations there.
And where we would have been a year ago. So I think we feel good about our ability to continue just to.
To retrain retain and attract staff in our markets, but also in our Pune, India Center, but all.
All of that to say is this is a huge area of focus for us going forward is staff retention and south of attraction.
Okay, and then just lastly related to that can you speak at all to have you as you work to attract staff.
What youre seeing in terms of wage inflation pressures.
And so there absolutely is some wage inflation pressures not in all geographies and certainly not in all business line, but we are seeing it and.
A couple of things that we're seeing happen is as you probably all of us have read and the papers about the great resignation, there, they're calling it we're seeing that a number of people who are leaving us on.
Arent going to competitors instead, they're going to our clients who have these large capital programs coming up and are looking for people to help them execute them and while we never like to lose.
Employees, often 1 of our employees go to clients.
Net is positive for us the milk and the longer term because they know the good people. We have we know they know the quality of work that we deliver so it also often as positive net positive for us and the longer term of course, we'd rather not lose the top individuals but.
All per se that we are seeing some some wage pressures.
I think that that's just an industry wide phenomenon and and that we're all grappling with.
Okay. Thanks for taking the follow ups.
Great. Thanks, Michael.
Our next question comes from Yuri Lynk with Canaccord.
Hey, good morning.
Alright, and maybe throughput and good morning, I don't know who wants to take this 1 just a clarification on the on your organic growth guidance of 1% to 5%.
<unk>.
With the mid <unk> to the midpoint of that guidance imply positive or negative organic growth and the United States.
You know I I think what we're expecting for the U S is that it is going to come out.
At the end of the year roughly roughly flat.
On on a year over year basis.
And then as we've noted a few times.
The the recovery is coming and we see us and Gordon noted.
On a number of front.
But as we work through the rest of this year and we think it will likely finish off the Q3, we think we'll be well.
And we hope to be.
The slightly better than.
Black.
But overall given the other attractions that we saw and the first and second quarters of of this year the whole year, well will probably be a relatively neutral.
Okay, so that implies a pretty.
The pretty big swing and in Q3, but when I look at the comps.
The.
That's part of the reason right, you're lapping kind of 5 and a half down.
Hmm and 5 per cent negative and from Q3, so the easier comp combined with a bit of a recovery. That's that's the explanation I guess.
Yeah.
Yeah, Okay, and then and just I think this will be the third time and you're off to clarify and I'll go for it.
Youre talking Q.
Q3 EBITDA margins.
Roughly flattish with the quarter, you just reported right.
For Q3, Yeah, Yeah, we I mean, Q2, and Q3 tends to be our highest EBITDA margin quarter and so we would expect.
Given the pace of the recovery is still a little bit questionable and so we expect that we'll be able to maintain the.
On the margin we garnered in the second quarter, but then again Q4 tends to fall off the traditionally and and we would expect that to occur again, so that would be the general shape.
Yeah, no that makes sense and we're just you know last year the sequentially increased over 200 basis points. So.
1 of them and so we're not the streamlining that trend. So I appreciate the color and I'll.
Okay.
Okay. Thanks.
Alright, and there are no further questions I'd like to turn the call back over to core Johnson for any additional or closing remarks.
Great well. Thank you again for joining us on the call today apologize for the issues, they're partway through.
And we look forward to speaking with you all of them in the near future of about our continued progress towards our goals. So thanks again and have a great day.
And that does conclude todays presentation. Thank you for your participation you may now disconnect.
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