Q2 2021 Stantec Inc Earnings Call
[music].
Okay.
Please standby.
Good day, everyone and welcome to <unk> second quarter 2021 earnings results call.
Leading the call today, or GOR, Johnston, President and Chief Executive Officer, and Theresa Jang Executive Vice President and Chief Financial Officer.
<unk> invites 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 a 22nd delay between the call and the webcast.
All information provided during this conference call and subject to the forward looking statement qualification set out on slide 2 detailed and Stan 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. <unk> 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 4 value creators, we've delivered considerably higher margins quarter over quarter, leading to 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 to the remainder of this year and beyond we.
And we've generated 6% organic backlog growth 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 awards can take months or longer to filter into our backlog, especially for large multi year frameworks. Their 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.
Investment and infrastructure as 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 and Montreal demonstrates the high demand per 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 their 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 a 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 installation and instrumentation services to a 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 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.
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.
Buildings are 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 to focus on health care that we've seen and Canada is emerging and the U S and our expertise in this sector has resulted and recent pursuit wins for a number of hospitals and urgent care facilities.
We were recently awarded the design of a 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 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 have 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 pumped storage 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 a 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 <unk> solutions failure.
<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 that's 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 and in 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 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 in the high teens.
Acquisitions added a further 9.7% of net revenue growth through our global business highlighting the value we're driving from our M&A program.
We closed our acquisition of and Jenny M. 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 to multi year frameworks, and our UK 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 2021 or.
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 Batesville.
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 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 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 our recent acquisition activity, while spending on capital expenditures has remained consistent.
And we returned $69 million and capital to shareholders and 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 M.
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 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, where our previous guidance was for low to mid single digit growth or 1% to 5%.
Given continued uncertainty around the timing on a U S infrastructure stimulus Bill we believe it's still prudent to exclude any potential upside from U S stimulus spending in our 2021 revenue expectations.
Please refer to this quarter's M DNA 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 a shift from our previous guidance of a 40% 60% split.
And with that I'll turn the call back toward.
Thanks Teresa.
And we're very optimistic as we look toward 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 matches up 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 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.
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. This year. We're also recently ranked the industry's top firm and Canada's best 50 corporate citizens in 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 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 mute option is 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 Ben Rob pouring with Desjardin capital markets. Please go ahead.
Yes, good morning, everyone.
Just with respect on M&A based on your current pipeline and then you have in front of you and assuming a normal closing rates.
How many employees could you acquire throughout the reminder of 2021 I just wanted to get a sense of the opportunity ahead of you and the current context.
Yeah. Thanks for the question and then well.
There's a lot of activity in that thousand person and less market that we typically are looking at is our sweet spot and you you noted earlier this week, we announced the.
The letter of intent for <unk> solution, and I suspect that there's going to be a number of additional firms and that thousand and person and less coming to market over the remainder of the year, particularly in the United States because folks are wondering what would happen with from a 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 been water because we're seeing that there's a lot of activity and the market a lot of players and.
And so really maintaining discipline on the multiples that were prepared to pay in order to be.
Any transaction and be accretive for us from a long term perspective, but you know.
And these things are always lumpy and so I don't think I'd like to parse it a guess at how many folks we could add from our 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 or how many people we would close before the end of the year.
And would be difficult for us to really to get that.
Okay and thanks.
Thanks, Great color and with respect and 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 12 and update with respect to day timing for the flow of funds.
Funds begin to flow and which segments would be and it showed the most down the road.
Book.
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 whats coming from the U S stimulus yes.
Yeah, you know it's interesting when you look at the plan that's lined up from a U S stimulus perspective, it really is right and our wheelhouse and when you look at.
Roughly $550 million.
550 billion, sorry, and new funding over 5 years 110 billion for roads bridges and other major infrastructure.
<unk> 39 billion per public transit $17 billion reported 25 billion for airports.
Zero and low emission buses electrical grid upgrading 55 billion for water infrastructure.
A lot of other 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 with.
And with clients and 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 what we anticipate will come from the U S infrastructure Bill when and when it's finally passed.
Okay. Thanks for the color.
Great. Thanks Pamela.
We'll take our next question from Michael <unk> with TD Securities.
Thanks, Good morning.
Gordon.
Good morning corridor Teresa 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.
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 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 and so as we think about discretionary spending going forward and.
What we've baked into our EBIT and margin expectations for this year is continued savings continued discipline, but we also know that everyone is sort of pushing.
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 and probably towards the latter part of Q3 and into Q4 and as we as we look toward 2.
2022 and beyond though.
It is our intention that discretionary spending will not go back to levels that.
And that we were at before the pandemic. So we've not yet established what that target is and what percentage reduction we're going to try to cap it at.
But that that is fully our expectation that that it will it will remain low and not as low as during the pandemic, but not as high as before the pandemic.
Okay and I appreciate that.
Color. Thank you.
If we look at the year over year margin improvement and EBITDA margin improvement and Q2 was healthy.
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 call was last night.
Teresa and Gore Bull attempt to call back in from their cell phone.
But she was going to call me.
Lisa was gonna Komal.
And I can hear you yes.
And we can if youre able and Ross isn't.
Is it not us from.
<unk> was it Michael that got dropped.
Lisa are you there.
Yes, I am here and Michael Fine is still established so he may have dropped but it has not disconnected on this and.
Okay.
I thought I'd heard Michael there for a second can we we can continue or maybe we just come back to Michael later.
Alright and guarantee Jacob.
Alright, Okay, I'm curious because you'll hear us.
Okay.
Okay, Lisa if we have any troubles again could you just please call me back on my cell phone apps.
Absolutely.
Okay, sorry, Michael.
So can you hear me.
We can now yes, sorry, okay perfect.
Maybe I'll just re ask the question, but I'm 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 third quarter. It looks like the comp is more difficult on a in terms of the prior year comp.
So I appreciate 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.
And it sounds like we lost him again.
Alright would you like me to dial out to them now.
Yes. Please.
At 1 moment.
Okay.
Alright, and we have them back on the line.
Apologies guys for that.
We're on my cell phone now.
Okay.
So Theresa where you finished with your response no I was just getting started when I got cut off Michael are you able to HERA.
And I can hear you fine yes.
Okay. So apologies again so.
EBITDA margin.
Feel pretty confident about the range that we have that we've put out for the year and.
And it does you know T. There there is still a bit of seasonality and the way our EBITDA margin does tend to go over the course of the year and we think that we'll still roughly be the same reason you would think that it's going to be.
Relatively strong and in the third quarter of a back off and the fourth quarter and and and again hope to be comfortably in the range that we've that we've set as our target.
Okay. Thank you I'll get back in the queue.
Thanks, Michael.
Alright, we will take our next question from Jacob bout with CIBC. Please go ahead.
Morning.
Good morning.
Want to go back to the to the U S and and maybe dig into the drivers of the net.
Negative organic revenue retraction saw and the U S. How.
How much of this was the wind down in the transport and for projects.
Vs shaded b.
Surge and so the delta variant or warm the delay and the U S infrastructure stimulus.
Yeah. So just to start off to say that we have confidence and our long term our U S operations and in the long term we've.
We booked 6.4% organic backlog growth so far this year.
And we've seen certainly we talked about the soft backlog and roughly half of that or over half a billion dollars as well coming there even absent U S infrastructure stimulus and.
And also noted that our comparison as to Q2, 2000, Twenty's and which we had some organic growth.
And 3 to your point about the.
The 2 major Retractors that we did see and in the in the U S. In Q2.
Where transportation and that is related to those those we typically don't like to call out 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 buildings business retracted a bit now we've noticed that we've noted that buildings really has begun to turn the corner and Q2 with the addition of new projects and so I think we're feeling positive about that so really these were not.
Jacob and I don't believe 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 a stronger tailwind for us.
Okay.
And the $1.3 billion and award modifications.
It sounds like that that will be awarded or radical backlog and in our fourth quarters on how we should be thinking about com.
No you know some of those what we tried to do there is just indicate the overall health of our markets even absent those U S infrastructure stimulus, so those where that is true in <unk>.
Excess of $1 billion and gross revenue that we were notified of award in the quarter and some of those are actionable 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. 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 that backlog, but what it provides us is with.
Multi years of new.
And no admin no business development and and a group of people working full time on on the projects. So so no I wouldn't expect to see a $1 billion drop into backlog in Q3.
But I think it's just more indicators of the overall health of the of our backlog overall health of the markets and so just supportive of our long term view that things book 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 and 2022 or is this just volume mix play 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% to 28%. We started this year with but of course, we haven't done our our pool, our budgeting for 2022, yet, but we did it.
And implement strategies 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 a U S.
Corporate tax reform, our global tax reform, so theres, a few things floating around out there that we're certainly monitoring, but all things being equal and we should be able to keep her although our effective tax rates and we started the year with.
Okay. Thank you.
Our next question comes from Chris Murray with ATV cap markets.
Please go ahead.
Thanks folks so just kind of continuing on the tax discussion for a second true.
Recently 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.
I am assuming does your guidance I'm, assuming from <unk> 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 would be great.
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 that kind of double digit organic growth rate might be.
Yeah. Thanks.
Thanks, Chris.
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 with Trans Mountain. You know Q2, Q3 Q4 of last year and so apps.
Absent oil and gas every 1 of our business lines, and Canada had organic growth low.
Yes.
In Q2, and so we've seen backlogs are up in Canada.
R R.
Book to burn.
M. Virtually for every group is a is above.
Is above 1 in Canada, and basically overall, Canada 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.
The backlog is there the pipeline of new opportunities is still looking.
Looking out looking good Chris So you know, where we will 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 infrastructure outlook across some of your major regions. Obviously, that's a market that should benefit from stimulus, but what are you seeing and our pipeline specifically for that and the U S or even internationally.
And when we are thanks, Alan and when we look at the U S.
Yeah.
Of course, the infrastructure stimulus bill and continuing to be negotiated and and we'll see what sort of a timeframe. We get there, but I think what's what's interesting. There is what we're seeing is a number of clients.
Putting out conceptual design and 10% designed hiring their consultants getting people on board in anticipation of that work coming so so that 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 and growing confidence and the U S and clients even absent the U S infrastructure stimulus.
We feel good about that.
Outside of the United States, and Canada, certainly backlogs are up and then even stronger from a global perspective.
From a transfer.
From a global transportation perspective.
We're forecasting 17% organic growth going forward really driven by a lot of the work and we're seeing way down South and New Zealand and 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 a global perspective feels like it's going to provide a pretty good tailwind for.
For our industry for the remainder.
For the next couple of years I think.
Alright, Thanks for that and then just kind of turning over to 2 of the 2 of the end markets and have had a bit of a tailwind over the last few years, which is the environment and water.
And good growth and those end markets as well and I can as we look forward to the next 12 to 24 months and abuse Sito's tailwind continuing and you know which market specifically are you and you're seeing more demand for those guys and maybe lack of fears of good growth and those 2 and markets.
Yeah, well you know what 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.
Knock logs 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.
He 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 an 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 new Teresa talked about the backlog growth overall.
And as being a screen extremely strong.
And so we see that continuing that backlog growth will just continue to feed the.
The then revenue generation I've I believe for the quarters to come in and strong support into 2022 as well.
If I could just squeezing 1 more I, just looking at Europe, and our 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 is the opportunity set out there right now at this point and here.
You know there is.
Okay.
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.
And Canada, the United States or globally, but I use C and.
In the U S and particular with pending tax changes that we're going to see additional opportunities come to market here in the second half of the year the.
The pipeline is full already but we've heard discussion about a number of firms come into market and.
And then from the perspective of the firms in excess of 1000 people.
There are 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 we'll evaluate that 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 and the short and the longer term. So I think youll see us maintain our discipline, but our appetite for.
For growth is there a 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 Alan.
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 youre 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 you're thinking about and moving ahead, especially given another solid moving the share price.
Yeah, you know I think.
Our approach to it.
Share buyback share and consistent.
<unk> always been sorry, I'm, just getting a little bit of feedback I'm not sure where that's coming from but the approach is consistent and in that and we look to use our NCI be opportunistically.
And you know we found pretty good opportunity to do so in in May and June.
But really the Kraft brands and I think certainly the more and more.
Powerful approach and 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, we see a bit 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 and Theres been a lot of talk and M&A and adding people that way are you able to talk about the ability to add people 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 and some growth business in that regard.
Yeah. So we are we have actually interesting we had a significant.
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.
And our industry average and and.
While our voluntary turnover rates declined during the early stages of the pandemic so to those of our.
And of 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 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 day that we're not going to.
To lose them to 2 clients or competitors, but 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. Thank you.
We'll take our next question from Maxim <unk> with National Bank financial.
Hi, good morning Theresa.
Good morning, and good morning.
And of course, I just wanted to circle back to 2.2 acquisitions. So when we look historically when.
Kind of 2011, 2012 timeframe and and topline and at the time was around 1.45 billion and you weren't kind of allocating maybe $85 million to M&A every year and right now we're kind of doing the same while revenue is close to $4 billion and like how much of that really appreciates the.
And the.
And looking at and accretive acquisitions and things that make sense, but how do we 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.
So we are we are continuing to execute on that are small to midsize strategy those thousand person and less firms but.
And that is our strategy and.
I think you know.
And you've probably heard us day over the last couple of quarters that.
Some of these larger transactions come along we're having a a solid look at them and certainly if we can find something that 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 these things or was it all strategic players who were competing against.
We absolutely are seeing more financial buyers come to the table Max.
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 an annual basis, maybe 10% of the transactions went to a financial buyer I think so far this year, we've seen 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. The multiple is is very very high.
That.
And from a perspective of a strategic as you're getting into these 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 thats actually what you are telegraphing that you can be able to grow the margin profile.
In Q3, and then kind of flattish in Q4 is that accurate.
And I don't know if they don't necessarily growth from Q2 to Crazy I think we'd expect it to be relatively stable at the higher end of the.
What we typically see for Q3.
But we do think it'll come back down and in Q4. So Q3, we were.
Expecting too.
And be able to replicate what we did and in Q2.
Okay I appreciate the clarification. Thank you so much that's a channel.
Thank you Max.
And we'll take our next question from Brian and fast with Raymond James.
Thanks, Good morning.
Just to follow up on your commentary on the water business, obviously youre seeing is the market leader and the water space are there any regions that you are not punching above your weight and that vertical.
I think as we look around our major markets, Canada, the United States The U K.
Australia.
We are easily a dominant market player in Canada and U S M.
And and the U K, while were extremely strong and I think probably punching above our weight and Australia I think we have opportunities that continue to strengthen our presence there but through the addition of additional.
Additional resources the team that we have 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 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 that bidding pipeline and I guess the opportunities shaping up for.
For health care and the.
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 coming and for the remainder of the year is health care is really coming on strong and in the United States.
So that was a really nice award 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 from me thanks.
Thanks, Brian.
Our next question comes from Troy Sun with 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> been.
<unk> seen this year and how sustainable that target that you've just for 2000 from 'twenty 1.
And you think of beyond this year and ish day improvement is to continue like should we be expecting.
Structural change in terms of the free cash flow conversion profile from the business.
Yeah, you know we've worked awfully hard over the last couple of years, and our DSO and I think the level that it currently sits at that sort of $75.76 day range and.
It is pretty achievable for us on a on an on going basis can always be thrown off course by certain contractor.
Arrangements, but.
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 effect last year.
And large tax payments that we were able to the person we got some oculus last year, and then of course that that catches up with you and EBITDA.
Higher than usual outflow this year and.
But I think things will normalize there really arent journey and for other programs that we.
Are aware for participating and from related to the pandemic. So I think it is normalizing, but no structural changes.
And think of.
Okay, great. Thank you that's very helpful. And then my next question maybe.
I'm wondering and Gordon if you can just make a quick comment on.
And 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 and third please thank you.
Sure absolutely. So so first talking about 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 Australia and other locations as well, where we're working on solar farms wind farms.
We mentioned a biofuel facility that we're working on right now and.
In Saskatchewan and getting started with so we're seeing a real uptick and worker, we mentioned a number of our pump storage project as well, but we have a particular area of expertise. So we just see that backlog of work continuing and in addition to that renewable space.
Think we'll see a lot of work.
Weighted to grid REIT strengthening and we won.
1 other proposals and in the U S infrastructure build at it Bill is 73 billion to rebuild the electrical grid and we've.
C and issues related to that certainly with the the ice storms in Texas.
You've seen some other utilities in California, and make a commitment to to brewery up to 10000 miles of.
Electrical transmission cabling for as a result of to reduce viral wildfire and and and other sorts of damages. So I see a lot of work coming and that and that electrical transmission and distribution renewable space.
Strong tailwind for us for the remainder of this year and and I think for the next couple of coming years and.
And then and the mining space certainly a lot of commodity prices are quite high.
Seeing our business growing certainly in South America, we're seeing a lot of work and through the also our acquisition of and genuine and Australia continued work there copper iron ore gold and <unk> and so on and some of the junior gold producers, but a real particular area of expertise that we have as well is with.
<unk> to lithium and you know a lot of our 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 perspective growth rate in that vertical to be I guess slightly higher and that we've seen traditionally from from the energy business.
Yeah, you know I think.
<unk>.
Previously and our overall energy and resources business, we saw over the last couple of years, a 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 electrical distribution. So.
And I think we will see probably it'll even out a little bit M.
From a go forward perspective.
Great. Thank you that's it from me.
Thanks Troy.
And we have a follow up question from Michael touched on with TD Securities.
Thanks for taking the follow up yet so just wanted to go back to the $1.2 billion and gross revenue Award notifications you highlighted quarter I think you said that was a.
Quarterly figure.
I'm wondering if you can put that figure into 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 that in that quarter and it was healthy for sure.
And.
Probably that and for us that really just an indication of the overall health of the backlog the overall health of the industry and a 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.
It 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 with the with the backlog up 6% organically year to date.
Are you gonna 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 these styles and 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.
15%, 20% and in our operations there.
And where we would have been a year ago. So you know I think we feel good about our ability to continue to.
To retrain retain and attract staff in our markets, but also in our Pune, India Center, but.
All that to say is this is a huge area of focus for us going forward is staff retention and south attraction.
Okay, and then just lastly related to that can you speak at all to as you as you work to attract staff.
What youre seeing in terms of wage inflation pressures.
They're absolutely and some wage inflation pressures not in all geographies and certainly not in all business lines, but we are seeing it and and.
A couple of things that we're seeing happen is as you probably all have red and the papers about the great resignation, they're calling it we're seeing that a number of people who are leaving us 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 when our employees go to clients.
Net it's positive for us and the longer term because they know the good people. We have we know they know the quality of work that we deliver so and also often is positive net positive force and longer term of course, we'd rather not lose that 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.
Okay. Thanks, Michael.
Our next question comes from Yuri Lynk with Canaccord.
Hey, good morning.
Alright, and maybe Theresa good morning, Greg I don't know and wants to take this 1 just a clarification on the on your organic growth guidance of 1% to 5%.
With the mid <unk> to the midpoint of that guidance implies 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 a year over year basis.
And you know that.
And as we've noted a few times.
Coverage is coming and we see it and Gordon noted.
And a number upfront.
But as we work through the rest of this year, we think it will likely finish off like that and Q3, we think we'll be well.
We hope to be.
<unk> slightly better than.
Flat and.
But overall given other attractions that we saw and the first and second quarter sales. This year as a whole year, well will probably be relatively neutral.
Okay, so that implies a pretty.
And a pretty big swing in Q3, but when I look at the comps.
That's part of the reason right here lapping kind of 5 and a half down.
Hmm and off per cent negative in 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 recovery is still a little bit questionable and so we expect that we'll be able to maintain them.
And the margin we garnered in the second quarter, but then again Q4, it tends to fall off a 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 streamlining that trend. So I appreciate the color and.
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 and the near future 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.
[music].
[music].
[music].
[music].