Q3 2021 Stantec Inc Earnings Call

November 4, 2021

Leading the call today are GOR Johnston, President and Chief Executive Officer, and Theresa Jang Executive Vice President and President and Chief Financial Officer, Dan.

Can't take invites those dialing in to view the slide presentation, which is available in the investors section at <unk> Dot Com. Today's call is also webcast. Please be advised that if you've dialed in well also viewing the webcast you should meet your computer as there was a 22nd delay between the call and the webcast.

All information provided during this conference call is subject to the forward looking statement qualification set out on slide two detailed and Stan Tech 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'm pleased to turn our call over to Mr. Korte Johnston.

Good morning, and thank you for joining US two weeks ago, we announced our agreement to acquire Cardinal was North America, and Asia Pacific consulting businesses and the feedback from employees clients and investors has been overwhelmingly positive.

We had a large number of cardinal employees on the webcast. The other week and for those of you who are joining US today. We are really looking forward to welcome welcoming you to <unk> in the weeks ahead.

The tangible excitement about what we can accomplish together.

Cardinal CEO, Susan Ryan Board and I speak almost daily as we chart our path forward and later today, Susan and I will jointly host to virtual all staff events for Cardinal employees, one for the U S and one for Asia Pacific.

In the United States, Cardinal will increase our head count by 15% to 10500 people.

We will add 1100 people to our environmental services team, increasing our presence in this space by 60%.

As the world and our clients respond to climate change and environmental concerns that takes environmental services backlog has grown dramatically in the U S. This year in fact, it's up over 55% since the start of the year.

Expanding our environmental footprint to meet our client needs is essential and with Cardinal we're going to double our presence compared to five years ago.

Australia Carnival almost double the size of centex presence and provide us with the critical mass and diversity to accelerate our growth.

Year to date, Australia has been one of our strongest markets with the recovery from Covid well underway.

Cardinal is Asia Pacific operations will give us increased exposure to this rapidly growing market.

So the timing couldn't be better to bring our two firms together also carnival as 2750 employees at <unk>.

Our global employee count to more than 25000 once the acquisition closes.

And we expect cargo to increase our annual net revenues by more than $350 million in 2022.

We expect the transaction to close before the end of this year and we've already stood up our integration team and have begun the planning process. So we can hit the ground running as soon as we achieve close.

This week leaders from around the world are gathering in Glasgow, Scotland to discuss climate change and the commitments required to prevent the worst global warming scenarios.

<unk> remains committed to doing our part.

To address climate change through our carbon neutrality and net zero pledge is.

Last Friday, we announced that we wrap the sustainability linked loan structure around our existing credit facility, which incorporates <unk> emission targets.

As part of this new structure, we are very proud to be the first organization globally.

Corporate the Bloomberg gender equality index score is a metric.

We're also the first in Canada to commit the directing proceeds from a sustainability linked loan back into our communities to further climate action and social equity.

Aligning our corporate financing strategy with our ESG performance demonstrates our commitment to live by our core value of doing what's right.

And yesterday his Royal Highness, Prince of Wales, and also as Patrick was one of only 45 companies in the world awarded the Terra cotta seal for driving innovation and momentum towards a genuinely sustainable market.

This is yet another accolade for centex sustainability performance and of note. We were the only engineering and design firm selected in the world.

Beyond our commitment to ESG within our operations, we recognize that we make our greatest impact, helping our clients respond to climate change.

Our climate solutions offering at an integrated platform with more than 40 services and disciplines spanning all of Centex business operating units that help clients and communities mitigate greenhouse gas emissions and adapt to our changing climate.

Now turning to our Q3 results.

As demonstrated by our record quarterly earnings our business continues to perform extremely well.

Organic net revenue growth for the quarter was one 4% or three 3% excluding the impact of the <unk> Trans Mountain expansion project.

This reflected almost 11% organic growth in global and 8% growth in Canada, excluding Trans mountain.

The U S demonstrating significant progress towards growth as the market continues to recover and notified of words begin to move into backlog and revenue.

As expected our buildings business unit returned to organic growth this quarter on the strength of activity in Canada and Australia.

Our infrastructure business also returned to positive organic growth this quarter on the strength of the transportation markets in our Canadian and global geographies and in the housing market throughout North America.

In fact.

Excluding the impact from Trans mountain water and energy and resources group all of our business units achieved organic growth this quarter all of them.

And we continue to achieve growth through acquisition.

In addition to our recent Cardinal announcement this week, we deepened our energy transition experience expertise in the Netherlands with the acquisition of driven by values.

This 28 person engineering and consulting firm as a trusted partner for public and private entities navigating the transition towards sustainable energy generation sustainable building design.

Energy infrastructure upgrades and E mobility.

Turning now to our results by key geography.

Our U S operations performed largely in line with expectations and we saw positive progress towards organic growth in the quarter.

Backlog grew 5% from last quarter and native currency to an all time high of $2 1 billion U S dollars as we begin converting the surge and notified awards that we referenced in Q2.

Environmental services performed very well on the strength of both organic and acquisition growth <unk>.

Lemmatically permitting and planning work on power and transmission projects on both coast dominated major projects wins this quarter as utility companies continue to strengthen both the capacity and the resiliency of their grid.

As we expected we're seeing continued strengthening in buildings or buildings group is whether the pandemic much better than the broader buildings sector and the pace of our contract win in buildings to date in 2021 significantly exceeds our wins in each of the previous two years.

This momentum is being driven by health care.

And industrial processing.

On the science and technology front, we recently signed a contract for a major 415000 square foot pharmaceutical lab in California.

Our U S infrastructure water and energy and resources group all delivered in line with expectations.

So we're pleased with the overall results in the quarter and we continue to see growth in backlog and increasing organic growth as we move into 2022.

And anticipation for the U S infrastructure stimulus bill only adds to our optimism.

Our Canadian business had another excellent quarter, achieving 8% organic net revenue growth excluding trans mountain.

Health care, we're seeing continued strength in civic and mixed use projects that are focused on revitalizing and repurposing existing commercial properties in Canada inner cities.

Sustainability is also a key aspect of our recent win with Ontario power generation to design their new corporate campus.

This mass timber construction corporate campus will leverage technology, and innovation to enhance collaboration and achieve sustainability and net zero carbon goals.

Infrastructure continued to be very strong in Canada.

Led by double digit growth in community development, Thanks to strong performance in the west and in Ontario.

Transportation spending is also very healthy in Canada.

With a number of large scale transit and infrastructure projects like our recent win on the extension of trauma was waterfront East LRT transit connection to Polson.

Environmental services continues to see growth in Canada, where we benefited from work on a light rail transit project in Ontario, and Friday permitting work to support projects like the city of Edmonton Metro line Northwest.

In addition to this work <unk> has recently been awarded a groundwater monitoring program to support shell's carbon capture and storage project in Central Alberta.

Beyond strong organic momentum in mining and power and dams energy transition continues to build momentum for our energy and resources team, who are not working with Tidewater renewables to design. The first commercial scale renewable diesel and hydrogen facility in Canada.

<unk> is also currently working on some of North America's largest solar and wind projects.

Like Canada.

Global delivered excellent results in Q3, with a 20% increase in net revenue driven in equal parts by organic and acquisition growth.

Of note our focus on growing and diversifying in Australia, and New Zealand has resulted in solid growth in virtually every sector.

And Australia, GDP unemployment rates are already above pre pandemic levels and this is driving solid growth in our global buildings practice, particularly in healthcare and this is reflected in our recent win for mechanical and acoustics engineering services for the New Shell Harbor Hospital, the New South Wales.

This new hospital will provide critical care to a large number of surrounding indigenous communities.

Organic growth in water continues to be driven by the robust activities under the seven programs in the United Kingdom, and Ireland as well as water frameworks in Australia, and New Zealand.

Transportation is double digit growth was driven by strong performance in Australia, and New Zealand.

We see continued growth for transportation with several recent wins, including a four year multi disciplinary services framework for roads based transport Scotland.

And our Decarbonization project with Kiwi rail in New Zealand.

Our strong results in global energy and resources group were driven by mining where strong commodity prices continue to fuel strong demand overall.

Overall, we're very confident in the continued strength of the global business.

I'll now turn things over to Teresa to review the quarter's financial results in more detail.

Thank you Gordon and good morning, everyone.

We delivered record adjusted EPS in the quarter.

Adjusted EBITDA.

EBITDA was largely comparable to last year.

On an FX neutral basis.

Within adjusted EBITDA, we expanded gross margin by 200 basis points with stronger project execution and a shift in project mix to higher margin work.

This was offset with higher administrative and marketing expenses due to our increased.

Increased business development efforts on major program ended.

As well share based compensation expense increased significantly compared to Q3 2020 in part due to our increased share price.

Impact of our share based compensation revaluation was $5 million.

Our 54 basis points as a percentage of net revenue. So absent this factor our adjusted EBITDA margin would have been 17, 3% Mike.

Matching last years margin.

Our 2023 real estate casualty remains on track to deliver 10% and adjusted EPS by the end of this year.

<unk> has eliminated the visibility of how impactful on our real estate strategy would have been to EBITDA, but for reference we estimate that on a pre <unk> 16 basis, our real estate optimization would have expanded our EBITDA margin by roughly 40 basis points.

However, the value generated is very clear when you look at the material growth in our net income and EPS.

It's been further augmented by our debt and tax management strategy.

Collectively these efforts contributed to record Q3, adjusted net income of $80 million, which.

Which is a 15% increase over last year.

Adjusted diluted EPS increased 16, 1% to a record 72 cents per share.

Yes.

Our balance sheet remains strong at September 30, net debt to adjusted EBITDA was 0.8 times below our target range and as previously announced we intend to fund the Cardinal acquisition using a combination of cash on hand, and drawings from our credit facility.

We expect to remain well within our leverage target range on closing and to deliver towards the low end of our target range by the end of 2022.

Days sales outstanding was 81 days at quarter end, which is up from Q2, largely due to timing and seasonal factors.

<unk> was down by one day compared to the same time last year.

Free cash flow year to date was $101 million down.

Down from last year with about one third of the reduction due to the effects of foreign exchange and the balance reflecting changes in revenue and working capital.

And as I mentioned earlier, our $800 million facility is largely undrawn at the end of September providing us with sufficient room defining our acquisition growth aspiration.

With that I will turn the call back to Gordon for any closing remarks.

Thanks Teresa.

<unk> delivered another great quarter with record earnings and a return to organic growth and we're looking to finish the year strong.

Looking forward, we remain very optimistic about the United States.

In addition to increased infrastructure spending on the horizon.

Our focus on growing our U S. Federal exposure has resulted in a significant step change in our market share of federal <unk> programs this quarter.

We're now supporting 10 times, the total IV IQ framework value that we were a year ago.

We expect both our increased presence at the federal level and future infrastructure stimulus to further bolster our U S backlog, which already achieved record levels this quarter.

Add to this the strength, we are already seeing our Canadian and global operations and the positive benefit from Cardinal and our other recent acquisitions and we see strong tailwind as we enter 2022.

And with that I'll turn the call back to the operator for questions operator.

Yes.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to a laggard signal to reach our equipment.

Again press Star one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal.

And our first question comes from Frederic Bastien with Raymond James. Please go ahead.

Okay.

Hi, good morning Gus.

Good morning Frederic.

Guys, you highlighted an increase in business development costs, which which was to be expected with the economy slowly reopening.

Just wondering.

Those activities are back to pre pandemic levels or are you still seeing a sort of a gradual ramp up over the next few quarters.

Yes, Frederick County, Great question those that.

It was BD costs are not yet back to pre tax pre pandemic levels.

Still travel is restricted not restricted but it's a lot slower than it was previously and we see that sort of being the same for the remainder of the year and certainly into the early part of next year. There is some demand now for for our people to get out and meet with clients again for our people to go to a conference or a trade show <unk>.

Elevate our position there again, but it certainly remains below pre pandemic levels and in fact, even as we think into next year, we see that staying the same.

Okay great.

Guess, maybe a question that's related to that I mean, we saw organic growth returned to positive territory in the U S. But it was slightly lower than what I was expecting anyway.

Just curious as to sort of the ramp up that you're seeing over the next couple of quarters I mean, when do you expect them.

This organic growth to resume.

You know in the healthy territory.

Well in the U S in particular, fredrik or old I mean, theres nothing absolutely nothing wrong with the other regions.

That's great Yeah, just curious about that.

<unk>.

Yes, so in the U S. A couple of things of interest are.

Our overall backlog in the U S is up over 10% year to date.

Specific a couple of things that are interesting I mentioned earlier that our environmental services backlog was up over 55% in the year again further supporting the addition of Cardinal and our energy and resources backlog a lot of that in the renewable power space is up over 40%.

Couple that with our the IDI cues for the U S. Federal government again those are not included in backlog because those are task order driven going forward.

That's up over 10 times, what it was previously to well over $1 billion. So lots of good opportunities. There and then couple that with the infrastructure stimulus bill on the horizon and will.

My gut says the U S will get above the line in Q4, but if it does it in Q4, Frederick we see strong strong tailwind as we go into 2022.

Okay. Good to hear and my last one relates to Trans mountain when did it start or at least.

When did the scoping happen I'm just curious when when it will start.

Eating into the organic growth in Canada.

Yes Fredric.

Nothing makes me happier than in Q1 of next year, when we don't have to reference it anymore. So that would be the scoping the way we change that.

Was started in January one of this year. So Q4, so next quarter will be the last time, we will have to reference.

Anything to do with the impact on growth from transponder.

Thanks Gordon pass it over.

Thanks Robert.

Thank you. Our next question comes from Yuri Lynk with Canaccord Genuity. Please go ahead.

Good morning.

Good morning, Gary.

Good morning, Greg I wanted to follow up I guess on Frederick's question on organic growth I'll ask it a bit of a different way.

I mean, youre still guiding to.

1% to 5%.

Organic growth in 2021.

I think to get there you're going to need double digit organic growth.

Across all three segments.

So.

Is my math off or how should we think about organic growth, particularly in the United States and the <unk>.

Fourth quarter.

Yes, so in the United States overall in the fourth quarter, we are expecting sort of.

Organic growth to be positive.

But as we look at overall at the business to your point, what we've seen that the year's kind of unfolding as we expected we've seen a little bit better organic growth each quarter.

Returning to positive growth here in Q3, it's interesting as you look at some of the segments that we've got water has had positive organic growth for the last 10 quarters.

Our environmental services business returned to organic growth in Q2 builds.

Buildings and infrastructure returned to organic growth this quarter and certainly got energen resources without Trans Mountain also returned to positive growth this quarter and so.

We see that continuing into into Q4, we'll we'll Q4's organic growth be enough to bring everything above the line.

For the year I don't know I haven't penciled that out but.

But I think what's really important is that for 2022, where ideally set up with the backlog and the opportunities that that its really going to be strong going forward.

So how should I think about that 1% to 5% organic growth guidance for 2021.

Yes, we've put out quite get there.

And certainly it is a range and we would see if we were to to get there would be near the lower end of that range.

Okay.

So what kind of tax rate.

I'd be thinking about for 2022.

Hum.

Give me that number with with part of the mill.

That would be even better.

Okay.

Yes, so for 2022.

We have not put our guidance out yet.

And particularly with what it might look like with Cardinal So that work is still underway.

Don't expect generally that there will be a significant increase relative to this year I think what we've what we've seen this year.

Also hold true for next year, and so I don't expect a significant change, but again, we will have to confirm that at the end of the year at the end of February when we actually didn't rollout our guidance.

Well that would be about 22% to 23%.

Yes, I think Thats I think Thats fair.

That's a good working assumption at this stage.

Thank you I'll turn it over.

Thanks Jerry.

Sure.

Thank you. Our next question comes from Jacob bout with CIBC. Please go ahead.

Good morning.

Good morning Jacob.

I'll start off with the timing of the <unk>.

Cardinal closing.

I know you expected that business.

Im going to close by yearend.

Other than that the shareholder vote.

Six one other hurdles regulatory or otherwise.

And on the way.

Okay.

Yes.

There are a few customary approvals that we need to get done in the U S. With Jacob I don't think Theres anything there that would impede close the main one really is that.

Their shareholder vote on December 6th so assuming we close.

Very soon after that we do.

Don't see.

Just like to caution that I don't know that we will see a huge.

Amount of revenue from Cardinal coming in in Q4, Youll say they come in.

Middle a little earlier that in December and then we go into Christmas. So we just wanted to say as we were thinking about it.

Just trying to walk that through.

Okay.

Second question here is just on the award notification.

Conversion.

There was.

Quite a bit of talk about the last couple of quarters.

$1 2 billion and more notifications.

How much of that is converted to backlog.

And then.

Or are we still waiting for the U S and for buildup.

How quickly would that conversion happen post the upper buildings in your mind.

Yes.

One of the things we mentioned last last quarter.

That's sort of a soft backlog half of it was in the U S and it has really begun to convert because we already saw.

5% growth in backlog in the U S. In the quarter again, taking us to an all time record high of in U S dollars, a little over $2 billion and none of that is it dependent on U S stimulus because we haven't factored any of that in yet so very very healthy in fact record backlog in the U S.

Even absent the U S stimulus program.

Okay. Thank you I'll leave it there.

Thanks Jacob.

Thank you and our next question comes from Michael <unk> with TD Securities. Please go ahead.

Thank you good morning.

Good morning.

Can you provide an update on the 2023 real estate strategy. It seems like it's progressing to plan, but.

Any any updates there and then also what to what extent that benefited EPS in the third quarter.

Sure So generally does.

Plan is going really well.

And we've done a lot of work in terms of.

Addressing.

The lease space that we have and how we will work through that over the next couple of years. So 2021.

We had indicated that we would expect to generate about 10 cents per share for the year and we are certainly on track for that and so in Q3 that would have been about $2.05 per share.

<unk> has generated.

The remaining 25% to 30 that we indicated wed come beyond the 10.

As I had noted previously more backend loaded that will come towards the end of 2022 more into 2023 and again.

It's positioning identifying where those leases are.

Understanding where our overall flexible workplace.

Plan is with people re entering the office and the choices, they're making around how they want to work.

So overall, we're really pleased with how thats going.

Think it was I really pop.

Positive move for us not just from a P&L perspective, but in terms of engaging our employees, giving them a choice in how they want to do their work.

And as well from an overall emissions reduction standpoint so.

I really positive program for us and.

<unk> is on track.

Okay. That's great. Thank you very much.

The margins in the quarter were quite strong.

Do you see the margin strength you saw this quarter as being sustainable and you talked about mix benefiting the gross margin.

Is the current mix something that you see as representative of what we should expect going forward.

I certainly think that the.

From a gross margin perspective.

It has continued to strengthen over the course of this year.

And we are being really focused and diligent in our review.

Projects and the ones that we choose to take on so we do feel like where we are at today.

Really healthy and that's certainly what we would aspire to achieve going forward as well.

And then from that from an EBITDA perspective.

We continue to benefit from.

Much lower discretionary spending than we've typically seen.

But we're also.

Managing to keep our overall costs down so as we.

Round out the rest of this year and typically Q4 the <unk>.

Margin compressed somewhat just because of the holiday season.

<unk>.

And so we don't have as many as many chargeable hours with.

The holidays, particularly in North America.

But I think where we are.

We're really pleased with where our EBITDA margin as is coming out.

That's great and then just lastly.

Looking at Canada as organic net revenue growth.

I know it would be higher were it not for the Trans mountain drag.

Ted.

<unk> net revenue growth slipped to one 1% in the third quarter, whereas it was closer to 6% in the second and I'm. Just wondering if you can comment on.

The driver behind that pullback quarter over quarter.

Yes.

So youre right without Trans mountain that would have been 8%.

So certainly has.

<unk> continues to have that sort of an impact and we're actually really looking forward to when we don't have to reference Trans mountain anymore here, one more quarter and then.

That will be clear of the.

Of our results.

Okay Fair enough I guess, I guess I'm, just wondering though with the Trans mountain impact was in there both in Q3 and Q2. So just looks like it was a bit softer in the third quarter.

I just wonder if there's anything kind of behind that.

Nothing in particular are the buildings group continued to Aurora head with a number of the big hospital jobs infrastructure.

Both of our land development and.

Transportation was very very strong I.

I do think that we were getting some new projects going in our environmental services group, We mentioned <unk>.

<unk> resources group, we mentioned Tidewater. So some of these projects were just starting up in the quarter as well as some of the projects that we're again just starting up.

The carbon capture projects for shell and so and so I think that was probably just.

A quarterly blip as a number of projects we're restarting.

Okay. Thanks for the details.

Yeah.

Thank you and our next question comes from Chris Murray with ATB capital markets. Please go ahead.

Yes, thanks folks good morning.

Maybe just kind of continuing on this theme maybe a different way to ask the same question around Canadian growth.

So Gordon <unk> Youre running 8% clip.

And in organic growth.

Is that does that feel sustainable to you as we go into 2022.

I do think that.

Canada and global got off to a stronger start as we emerge from the pandemic you can look like in our <unk>.

Canada <unk>, 8% in Q3 global 10%, a little over 10% organically in Q3, I think those started earlier and then.

Okay.

Can you can you hear us.

Okay.

Operator are you able to still heroes.

Oh, Okay, Oh, sorry, Okay. No. Good we just got a note on the side that we had been our audio signal has been lost so I just wanted to confirm after what we had lost last time.

Okay.

So yes, we said that certainly yes, we saw great growth in Canada and global both at sort of an early jump out the gate here in 2021 U S. A little bit slower. So I suspect that next year, we will see a little bit lower organic growth numbers in Canada, and global but much stronger in the United States.

Okay, that's fair.

And then to the U S. I mean, one of the things Thats interesting about cardinal as their security business with the U S Federal government and the congratulatory that you don't.

Participating in now I think it's actually.

Our closing item for that transaction can you talk a little bit about the.

The impact that Youre thinking about.

Around.

Growth in that business.

How you can leverage existing Stan tech services into that business.

And.

I would assume that because of the exclusivity of being in that world.

The margin profile should be a little bit better, but any thoughts around that would be helpful.

Yes, that's secure.

<unk> business Dot type work is of particular interest for us and we're still learning more and more about it but to your point there are great opportunities there to expand the <unk> service offerings into it.

<unk>.

In terms of overall margins and in terms of the overall size of that I think we're still truly just kind of wrapping our heads around what that would be.

And so we probably have a better clear better picture to give you a little bit more clarity at Q4 earnings call.

Okay fair enough. Thanks, I'll, just I'll turn it off.

Thanks sure. Thank you. Thank you and our next question comes from Ben Wyatt Poirier with Desjardins capital markets. Please go ahead.

Good morning, everyone.

Just to come back on the organic growth for the full year, we're still maintaining the guidance. Although you commented about the expectation for for Q4.

However, when we look at the cost containment efforts and the gross margin improvement on my right to say that.

Focus is more on the EPS growth and given those are strong margin improvement.

It's less dependent on your ability to achieve the high end of the organic growth range.

Yes, I think thats right in line.

On the outlook for organic growth for the rest of this year and as Gordon indicated I mean, we do expect the continued push toward organic growth for the quarter.

In Q4, and then for the whole year.

Where that lands us in that range.

For the full year, we do expect it will be towards the lower end of that range, but I tried to reiterate to you I mean that is why we provide a range.

And I think it's a bit of a reminder, as well that a range.

At least as we think about it doesn't necessarily mean that you would gravitate to the middle of it.

Think we provide a range to that so that we can give it sounds more.

A range of outcomes.

And so that would be kind of where we sit and what we're thinking about at this point, but to your question about EPS growth that absolutely is our focus and of course.

Revenue growth is going to drive EPS growth that there are so many other factors.

That we are focused on delivering the EPS growth that we've been actually I think quite successful line.

So that is.

Gross margin, but it's also around our EBITDA our cost containment.

The strategies we have.

Employed around real estate that has really made a meaningful contribution.

Into EPS. So it is all of those things together.

That said, we are very focused on that we're looking at driving.

Stronger metrics.

The bottom line perspective.

And that that is a reflection of how we how we think about running this business.

Okay.

<unk> you mentioned that employees are in the process of returning to the office.

Just wondering if employees preference.

Change towards work from home versus the initial expectation for the plan.

Yes, it's interesting that we've seen.

Over the pandemic because theres been a couple of times, where we said okay. Let's all go back in as of after Labor Day, and then Hey, everybody saw don't don't everybody go home again, and so I think a little bit of this these waves of getting ready to come in cased off get ready to kind of good stuff.

But we have seen we track on a on a weekly basis sort of re entry we are seeing more and more people coming back to the office or more people, saying that they are looking forward to coming back to the office.

I think in general our overall real estate strategy in terms of the discussions we had with with employees remains sound.

And then we'll just have to it's different by different regions as well even by country is different some areas. For example in the United States that are in urban areas large cities, where people a lot of people travel on public transit, we are a little bit less.

People coming back to the office as a percentage basis than we would in.

A smaller center, where you parked in the parking lot in <unk>.

Walk into the building without needing to go in and elevated public transit. So we're seeing some of those things.

And so we're just continuing to monitor and talked to folks, but we still remain confident in our overall real estate strategy.

Okay, that's great color guard and with respect to the overall labor shortage wage increase could you may be provide some color or on how it impacts organic growth whether it will provide a much of a boost it could provide on organic growth going forward as you pass through.

Those price increase to customers.

Sure. So a couple of things there firstly about just the.

The staff comp numbers.

We always find there that would be.

The best way to to keep your staff count as high as to not be losing people and we've always talked about since the pandemic began about how we've been increasing communication and ensuring that our employees felt connected to each other and <unk> through the overall pandemic. So we did actually just conduct.

An employee engagement survey in the fall enable to compare our results to pre pandemic numbers and it's interesting that our overall employee engagement score rose.

By and by almost 6% since the last survey, whereas globally.

Overall firm's engagement scores have fallen through the pandemic. So we're very pleased by that level of.

Of engagement, we've got and the Delta to our overall industry, but one of the things. We've often talked about is that our voluntary turnover rates are always 2% to 3% below industry average certainly ours fell during 2020, but everyone else is did as well.

The nation, and so on but and we're seeing some pressure there, but would certainly again still below the levels that we were pre pandemic.

And then so what are you.

Is that through this period of uncertainty that will be a net importer of having people join us and continue to grow rather than losing more people overnight, but it absolutely is top of mind and something that we're talking about every day.

And then from a salary pressure perspective, and how that might impact margins and things going forward. They are absolutely without question is his salary pressure in many of our contracts. We do have a cost of living increase to them, but certainly not all of them.

So.

As we go into next year, we don't anticipate a significant impact to margins, but it's possible that we might see some particularly in the first half of 2020, but you certainly can never say never and we don't anticipate it to be significant but there could be some impact there.

Okay.

Great color. Thanks, very much worked upon.

Great. Thank you.

Thank you. Our next question comes from <unk> Khan with RBC capital markets. Please go ahead.

Okay, great. Thanks, and good morning, I, just wanted to get a little bit more color on what youre seeing in the U S. Nobody hearing from a lot of your peers as well recently that the clients. They were taking a bit of a wait and see approach and I think you indicated that continues into late this year can you maybe share a little bit of color on what youre seeing in public versus private customers and.

It sounds like infrastructure was one of the one where there was some caution but what are people really I guess is that hey look we'll proceed with these projects if the infrastructure Bill comes through or is it the quantum of spend just wanted to get a bit more color on the dynamics in that region.

Yes.

Interesting that that we've seen backlog growth in all of our business operating units in the U S. With the exception of infrastructure on a year to date basis, and I think thats because from an infrastructure perspective, while there are still jobs coming out.

All are still taking a bit of a wait and see attitude towards as you mentioned towards the the infrastructure built in particular, we called out in the prepared remarks, the energy transition in a lot of work from.

Electrical transmission and distribution company strengthening their grids, replacing grids.

Relating to both the year to we've got over a one.

Our year to date, sorry over a 40% backlog increase in our energy and resources business and over a 55% increase in our environmental services business, so pretty pretty significant there. So so but a lot of that backlog growth. We're seeing certainly some in the public sector, but we are actually seeing the private sector.

Begin to we've talked there things like.

With e-commerce facilities distribution centers.

Electrical utilities and the light so I think that we're seeing solid growth again over 10% backlog growth in the U S year to date, but I think thats only going to increase once the U S stimulus.

Infrastructure stimulus Bill hits.

Yes.

Okay, Great and then just I guess on your two other markets that are growing pretty well the water environmental services I just wanted to get your perspective on is this more of at this point, there's just a bit of a rising tide going on in those two end markets.

Capturing share in the water market because of your positioning, but I just want to understand how long this sort of elevated level of growth in those two end markets can continue on your thoughts on those two.

Businesses as we head into 2022 and you lap some of these numbers.

Sure.

So certainly from a water perspective, we mentioned that we have seen organic growth in each of the last 10 quarters in our water business and so we're very strong.

And that business certainly we've talked about some of the long term framework awards in Australia, and New Zealand the U K a lot of opportunity certainly in the U S and Canada U S. In particular from a.

Coastline hardening coastline protection perspective, so long term, we continue to feel good about our water business.

And the other was with environmental services.

Yes, and so yes.

Yes, so our environmental services business sorry, what is also very strong again overall.

Our es business.

What we've seen.

Over 40% backlog growth year to date, 55% in the U S well over 40% overall, so a lot of continued good work there.

So we do think from both an EPS perspective, and a water perspective that we are gaining market share.

And just I guess as we head into 'twenty two I guess could we expect this level of just celebrated growth to kind of continue into next year to see a more normalized towards sort of like broader industry growth rates.

Right now we as we're talking to our clients are still seems like theres a lot of work coming out but I.

I think it would be hard to to anticipate that we'd be getting when our environmental group.

Overall basis in excess of 40% backlog growth on an annual basis will be pretty hard to imagine, but what I do see next year is that that backlog converting into revenue very similar to energy and resources in some of the other groups. So we feel quite positive about those those verticals going into next year.

Great. Thanks, very much for the color.

Great. Thank you.

Thank you and our next question comes from Maxim <unk> with National Bank Financial. Please go ahead.

Hi, good morning, everybody.

Good morning, Matt.

Maybe just kind of building on this.

No comments around backlog I'm curious if there is anything structural in terms of the projects that you're on right now that the conversion rate would be may be different versus <unk> or how should we think about it because I mean, obviously when you talk about 40% backlog jumped people will assume that there was going to commence.

Our revenue growth, but clearly is the duration of this projects is the different can you provide maybe any color on that.

Yeah, not seeing so much from a duration perspective, Max I do think that in the U S. We have seen projects a little slower to convert from backlog to revenue.

It just seems to be not just from from a static perspective, but a bit of an industry wide phenomenon people are are getting the work out there, but a little slower to get to get the jump on things going so it's our it's our hope.

Based on our discussions with our clients that will some of those things will get going.

The latter part of this year, but really into the first half of next year.

Okay, but there's nothing structural.

In terms of kind of duration convertible issue relative to what you would've still historical right.

Okay.

I'm just.

Thank you and then.

Also was wondering.

We will talk to in the past a lot about.

Our programs in the U K just curious right now is there's like any significant rebuild cycle coming up or.

Everything is sort of status quo for the next let's call. It 12 to 15 months.

Yes, no I think that.

The with the cyclical amp cycle and there is about a 12% capital increase in this out of cycle over the previous so that will roughly translate into to our fee growth as well.

No there is nothing.

Structural there we tend to ramp up in year, one year than the next couple of years or sort of just years of continuous design and having things going and that's where we are now so we kind of expect our performance on the up cycle jobs too for 2022 2023 to be pretty stable actually.

Okay Super helpful. Thank you and maybe just last question for Theresa If I may just when you talk about tax strategies optimization, how should we think about this is this sort of a permanent change I guess, that's the first question do you mind, maybe sharing what exactly you guys are doing on this front if you can disclose.

Yes.

Hard to go into detail masked around what are the various strategies are that we are employing other than to say that they are they are all.

Sally.

And completely permissible within legislation around the world.

And so what we effectively try to do is optimize given.

The geographic locations that we operate in.

To try and optimize.

The taxes that we incur in those various jurisdictions and so.

The various strategies that we use typically do have a tax or kind of a horizon to them.

And in particular now with some of the strategies, we have given discussions around U S tax reform and other.

Proposed changes globally to taxes, yes, there is a potential that some of the strategies that we have in place.

Abbvie as long tail as we would've expected so.

It's too early to say I think we feel again, we haven't given guidance for next year, but at this stage, we don't think theres going to be a material change next year beyond that we're going to have to monitor and see what happens with it.

Changes in tax legislation.

And sorry and.

Alright.

Minimum tax requirement kind of globally.

How much people are pushing for right now would that have any impact in terms of how youre going to be approaching tax rates will not at all.

So that's yes, I think youre, referring to the 15% minimum corporate tax that globally thats being discussed by the OECD.

We don't think that that will as we currently understand it has a significant impact on us.

And again.

The rules that they are bringing in I really to try and capture organizations that are trying to take advantage of that.

The lower tax rates are where they really don't have operations and that is different from <unk> approach. When we do carry on economic activity in the countries, where we are taxed.

So we don't see a big impact to us, but again that that has.

<unk> been fully written yet and so you never know for sure until they until they've actually got got that went down on the page and you've had a chance to review it.

Okay, Alright, well thats very helpful. Thank you so much.

Thanks Max.

Thank you. Our next question comes from Ian Gillies with Stifel. Please go ahead.

Morning, everyone.

Good morning.

I wanted to start with the backlog you noted in the release I believe you saw 30% increase in the environmental services backlog year over year.

Alright, now is obviously going to have any material increase in that once it gets consolidated into <unk> operations can you talk a little bit about what that may do to the businesses margin profile.

Moving ahead, and how we should be thinking about that.

When you look at the.

Cardinal business in the U S largely.

Environmentally focused their backlog is in the order is in the same sort of range as ours. We have about 12 months backlog I think you've added roughly 11%.

But.

I think as we've noted that.

Their margins in the U S are actually even a bit stronger than ours.

So I think as we add these two groups together backlog will be will be similar and then margins will be similar if not slightly strengthened in the environmental group.

Okay. That's helpful. The other thing I wanted to touch on was revenue per employee on a consolidated basis I mean, it's kind of inching back up to where it was pre pandemic.

Do you think you can get there and has there been any new process put in place, where maybe you get a bit better so the need for people isn't quite as high as one might think.

There you are right that revenue per employee continues to creep up and I don't see any reason why we won't get back to.

To where we were there were a number of things that come through our innovation program, where we're looking to continue to be more and more efficient design automation tools.

And the likes to make ourselves become more efficient. So I do think there are some opportunities too.

As we go forward to potentially even increase that revenue per employee, even a squeeze a little bit more out of it but.

We're still working through incrementally.

Now how much that might be but certainly if you look to increase both our competitive positioning as well as potentially the.

Margin as well.

Perfect. That's very helpful. That's all for me. Thank you very much.

Thanks Ian.

Thank you and as a reminder to our audience you may ask your question by pressing star one.

Our next question comes from Troy Sun with Laurentian Bank Securities. Please go ahead.

Good morning.

Yeah.

Good morning Troy.

Good morning Barton.

Maybe just a first question.

Wondering if you can may cause some incremental common time, the Australia market. Obviously I appreciate the fact that the GDP unemployment data is back to pre pandemic levels now just given how the geography is coming out of.

Very strict COVID-19 restrictions, how should we be thinking about the organic growth profile for that region in 2022, and knowing that you've doubled the head count in the in the country as well.

Sort of a reasonable assumption for the midterm growth profile for <unk> in the region. Please thank you.

Yes, great.

We haven't provided guidance for 2022, so a little hard to comment on on.

On that but you know what a couple of things that I could comment on is that.

When we combine our teams transportation will be the largest group that we are one of the largest groups that we have down there and certainly huge transportation funding opportunities there they've announced roughly 118 billion Aussie dollars in transportation funding also very very strong in water.

We're already very strong from a <unk> perspective, when we look to continue to grow that certainly.

With some of the.

The <unk> or the commodity prices high yield mining continues to grow and certainly great opportunities to continue to grow our environmental business. So we feel very very good about Australia and New Zealand.

For the remainder of Q4, but also going into next year, a great tailwind there the strengthening of the size of our team expanded client relationships associated with that will get in Australia, I think it's going to situate us very very well for continued growth.

Great that's super helpful and maybe just switching gears a quick question for Theresa.

The color on the the decrease on the lease depreciation.

The real estate strategy there.

Is it fair to.

Do you expect that line item to continue to trend down in the near future.

Yeah.

For sure that.

As a part of the overall real estate strategy.

Is where.

With <unk> 16 that those costs do reside now in the depreciation and interest line and so as we continue to execute on our strategy that that reduction should be realized.

In those line items.

And sorry, so just to confirm so from the real estate sale strategy itself like Youre expecting the impact on legacy EBITDA to be 40 basis points right.

[music].

Welcome to <unk> third quarter 2021 for earnings result conference call.

Leading the call today are gored Johnston, President and Chief Executive Officer, and Theresa Jang Executive Vice President and President and Chief Financial Officer.

Dan take invites those dialing in to view the slide presentation, which is available in the investors section at <unk> Dot Com. Today's call is also webcast. Please be advised that if you have dialed in while also viewing the webcast you should meet your computer as there was a 22nd delay between the call and the webcast.

Dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded.

With that I'm pleased to turn the call over to Mr. Korte Johnston.

Okay.

Good morning, and thank you for joining us.

Two weeks ago, we announced our agreement to acquire Cardinal is North America, and Asia Pacific consulting businesses and the feedback from employees clients and investors has been overwhelmingly positive we.

We had a large number of cardinal employees on the webcast. The other week and for those of you who are joining US today, we are really looking forward to wealthy welcoming you to <unk> in the weeks ahead.

As a tangible excitement about what we can accomplish together.

Cardinal CEO, Susan Ryan Board and I speak almost daily as we chart our path forward and later today, Susan and I will jointly host to virtual all staff events Ricardo employees, one for the U S and one for Asia Pacific.

In the United States, Cardinal will increase our head count by 15% to $10 500 people and we will add 1100 people to our environmental services team increasing our presence in this space by 60%.

As the world and our clients respond to climate change and environmental concerns that's ex environmental services backlog has grown dramatically in the U S. This year in fact, it's up over 55% since the start of the year.

Expanding our environmental footprint to meet our <unk> needs is essential and with Cardinal we're going to double our presence compared to five years ago.

In Australia Carnival, almost double the size of centex presence and provide us with the critical mass and diversity to accelerate our growth.

Year to date, Australia has been one of our strongest markets with the recovery from Covid well underway.

Cardinal is Asia Pacific operations will give us increased exposure to this rapidly growing market.

So the timing couldnt be better to bring our two firms together.

So carnival add 2750 employees as ANTEC, bringing our global employee count to more than 25000 once the acquisition closes.

And we expect cargo to increase our annual net revenues by more than $350 million in 2022.

This week leaders from around the world are gathering in Glasgow, Scotland to discuss climate change and the commitments required to prevent the worst global warming scenarios.

<unk> remains committed to doing our part.

To address climate change through our carbon neutrality and net zero pledges.

Last Friday, we announced that we wrapped the sustainability linked loan structure around our existing credit facility, which incorporates <unk> emission targets.

As part of this new structure, we are very proud to be the first organization globally.

Corporate the Bloomberg gender equality index score is a metric.

We're also the first in Canada to come.

Hence the directing proceeds from our sustainability linked loan back into our communities to further climate action and social equity.

Aligning our corporate financing strategy with our ESG performance demonstrates our commitment to live by our core value of doing what's right.

And yesterday his Royal Highness, the Prince of Wales, and also <unk> was one of only 45 companies in the world awarded the Terror Carlos deal for driving innovation and momentum towards a genuinely sustainable market.

This is yet another accolade for centex sustainability performance and of note. We were the only engineering and design firms selected in the world.

Beyond our commitment to ESG within our operations, we recognize that we make our greatest impact helping our clients respond to climate change our climate solutions offering at an integrated platform with more than 40 services and disciplines spanning all of Centex business operating units to help clients and communities mitigate greenhouse gas emission.

And adapt to our changing climate.

Now turning to our Q3 results.

As demonstrated by our record quarterly earnings our business continues to perform extremely well.

Organic net revenue growth for the quarter was one 4% or three 3% excluding the impact of the <unk> Trans Mountain expansion project.

This reflected almost 11% organic growth in global and 8% growth in Canada, excluding Trans mountain.

The U S demonstrating significant progress towards growth as the market continues to recover and notified awards began to move into backlog and revenue.

As expected our buildings business unit returned to organic growth this quarter on the strength of activity in Canada and Australia.

In fact <unk>.

Excluding the impact from Trans mountain water and energy and resources group all of our business units achieved organic growth this quarter all of them.

And we continue to achieve growth through acquisition.

In addition to our recent <unk> announcement. This week, we deepened our energy transition experience expertise in the Netherlands with the acquisition of driven by values. This.

This 28 person engineering and consulting firm as a trusted partner for public and private entities navigating the transition towards sustainable energy generation sustainable building design.

Energy infrastructure upgrades and E mobility.

Turning now to our results by key geography.

Our U S operations performed largely in line with expectations and we saw positive progress towards organic growth in the quarter.

Backlog grew 5% from last quarter and native currency to an all time high of $2 $1 billion as we begin converting to surge and notified awards that we referenced in Q2.

Environmental services performed very well on the strength of both organic and acquisition growth <unk>.

Lemmatically permitting and planning work on power and transmission projects on both coasts dominated major projects wins this quarter as utility companies continue to strengthen both the capacity and the resiliency of their grids.

As we expected we are seeing continued strengthening in buildings or buildings group is whether the pandemic much better than the broader building sector and the pace of our contract win in buildings to date in 2021 significantly exceed their wins in each of the previous two years.

This momentum is being driven by health care.

<unk> and industrial processes.

On the science and technology front, we recently signed a contract for a major 415000 square foot pharmaceutical lab in California.

Our U S infrastructure water and energy and resources group all delivered in line with expectations.

So we're pleased with the overall results in the quarter and we continue to see growth in backlog and increasing organic growth as we move into 2022.

And anticipation for the U S infrastructure stimulus bill only adds to our optimism.

Our Canadian business had another excellent quarter, achieving 8% organic net revenue growth excluding trans mountain.

Buildings continues to deliver robust growth on strong volume for major projects as health care sector work on the St. Paul's Hospital in Vancouver, and other large hospital project in Saskatchewan, and Ontario continues we are in healthcare, we're seeing continued strength in civic and mixed use projects that are focused on revitalizing and repurposing.

Existing commercial properties in Canada inner cities.

Sustainability is also a key aspect of our recent win with Ontario power generation to design their new corporate campus.

This mass timber construction corporate campus will leverage technology, and innovation to enhance collaboration and achieve sustainability and net zero carbon goals.

Infrastructure continued to be very strong in Canada.

Led by double digit growth in community development, Thanks to strong performance in the west and in Ontario.

Transportation spending is also very healthy in Canada.

With a number of large scale transit and infrastructure projects like our recent win on the extension of trauma was waterfront east LRT trended connection that paulson.

In addition to this work <unk> has recently been awarded a groundwater monitoring program to support shell's carbon capture and storage project in Central Alberta.

<unk> is also currently working on some of North America's largest solar and wind projects.

Like Canada.

Global delivered excellent results in Q3, with a 20% increase in net revenue driven in equal parts by organic and acquisition growth.

Of note our focus on growing and diversifying in Australia, and New Zealand has resulted in solid growth in virtually every sector.

And Australia, GDP unemployment rates are already above pre pandemic levels and this is driving solid growth in our global buildings practice, particularly in healthcare and this is reflected in our recent win from account when acoustics engineering services for the New Shell Harbor Hospital in New South Wales.

This new hospital will provide critical care to a large number of surrounding indigenous communities.

Organic growth in water continues to be driven by the robust activities under the seven programs in the United Kingdom, and Ireland as well as water frameworks in Australia, and New Zealand.

Transportation is double digit growth was driven by strong performance in Australia, and New Zealand.

We see continued growth for transportation with several recent wins, including a four year multi disciplinary services framework for Rowan's based transport in Scotland.

And our de Carbonization project with Kiwi rail in New Zealand.

Our strong results in global energy and resources group were driven by mining where strong commodity prices continue to fuel strong demand overall.

Overall, we're very confident in the continued strength of the global business.

I'll now turn things over to Teresa to review the quarter's financial results in more detail.

Thank you Gordon and good morning, everyone.

We delivered record adjusted EPS in the quarter.

Adjusted EBITDA.

EBITDA was largely comparable to last year, but higher on an FX neutral basis.

Within adjusted EBITDA, we expanded gross margin by 200 basis points with strong project execution and a shift in project mix to higher margin work.

This was offset with higher administrative and marketing expenses.

Increased business development efforts on major program and then.

As well share based compensation expense increased significantly compared to Q3 2020 in part due to our increased share price.

The impact of our share based compensation revaluation was $5 million.

We're 54 basis points as a percentage of net revenue. So absent this factor our adjusted EBITDA margin would have been 17, 3% Mike Matthew.

Matching last years margin.

Our 2023 real estate casualty remains on track to deliver 10% and adjusted EPS by the end of this year.

<unk> 16 has eliminated the visibility of how impactful our real estate strategy would have been to EBITDA.

For reference we estimate that on a pre <unk> 16 basis, our real estate optimization would have expanded our EBITDA margin by roughly 40 basis points.

However, the value generated is very clear when you look at the material growth in our net income and EPS, which has been further augmented by our debt and tax management strategies.

Collectively these efforts contributed to record Q3, adjusted net income of $80 million.

Which is a 15% increase over last year.

Adjusted diluted EPS increased 16, 1% to a record 72 per share.

Our balance sheet remains strong at September 30, net debt to adjusted EBITDA was 0.8 times below our targeted range and as previously announced we intend to fund the Cardinal acquisition using a combination of cash on hand and draws from our credit facility, we expect to remain well within our leverage target range.

On closing and to deliver towards the low end of our target range by the end of 2022.

Days sales outstanding was 81 days at quarter end, which is up from Q2, largely due to timing and seasonal factors, but DSO was down by one day compared to the same time last year.

Free cash flow year to date was $101 million down.

Down from last year with about one third of the reduction due to the effects of foreign exchange and the balance reflecting changes in revenue and working capital.

And as I mentioned earlier, our $800 million facility is largely undrawn at the end of September providing us with sufficient room defining our acquisition growth aspirations and with that I will turn the call back to Greg for his closing remarks.

Thanks Teresa.

<unk> delivered another great quarter with record earnings and a return to organic growth and we're looking to finish the year strong.

Looking forward, we remain very optimistic about the United States.

In addition to increased infrastructure spending on the horizon, our focus on growing our U S. Federal exposure has resulted in a significant step change in our market share of federal <unk> programs this quarter.

We are now supporting 10 times, the total IV IQ framework value that we were a year ago.

We expect both our increased presence at the federal level and future infrastructure stimulus to further bolster our U S backlog, which already achieved record levels this quarter.

So this the strength we are already seeing in our Canadian and global operations and the positive benefit from Cardinal and our other recent acquisitions and we see strong tailwind as we enter 2022.

And with that I'll turn the call back to the operator for questions operator.

Again press Star one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal.

And our first question comes from Frederic Bastien with Raymond James. Please go ahead.

Hi, good morning Gus.

Good morning Byron.

Guys, you highlighted an increase in business development costs, which which was to be expected with the economy slowly reopening just wondering.

Those activities are back to pre pandemic levels or are you still seeing sort of a gradual ramp up over the next few quarters.

Yes Fredric.

Great question those.

So with BD costs are not yet factored pre tax pre pandemic levels. Our yogurt, we're still travel is restricted not restricted but it's a lot slower than it was previously and we see that sort of being the same for the remainder of the year and certainly into the early part of next year. There is some demand now for for our people.

To get out and meet with clients again for our people to go to a conference or a trade show <unk>.

Elevate our position there again, but it certainly remains below pre pandemic levels and in fact, even as we think into next year, we see that staying the same.

Okay great.

I guess, maybe a question that's related to that I mean, we saw organic growth returned to positive territory in the U S. But it was slightly lower than what I was expecting anyway.

Just curious as to sort of the ramp up that you're seeing over the next couple of quarters I mean, when do you expect.

This organic growth to resume.

And the healthy territory.

Well in the U S in particular Frederic <unk>.

<unk>.

Absolutely nothing wrong with the other regions.

That's great. It just curious about specifics.

Pacifically.

Yes, so in the U S. A couple of things of interest are.

Our overall backlog in the U S is up over 10% year to date.

Specific a couple of things that are interesting I mentioned earlier that our environmental services backlog.

<unk> is up over 55% in the year again further supporting the addition of Cardinal and our energy and resources backlog a lot of that in the renewable power space is up over 40% a couple.

Couple that with our the IDI cues for the U S. Federal government again those are not included in backlog because those are task order driven going forward.

Over 10 times, what it was previously to well over $1 billion. So lots of good opportunities there and then couple that with the infrastructure stimulus bill on the horizon and will.

<unk> got says the U S will get above the line in Q4, but if it does it in Q4, Frederick we see strong strong tailwind as we go into 2022.

Okay. Good to hear and my last one relates to Trans mountain when did it start or at least.

When did the scoping happen just curious when when it will start.

Eating into the organic growth in Canada.

Yes Fredric.

Nothing will make me happier than in Q1 of next year. When we don't have to reference it anymore. So that it could be the scoping the way we change that.

Was started in January one of this year. So Q4, so next quarter will be the last time, we will have to reference.

Anything to do with the impact on growth from <unk>.

Thanks go ahead and pass it over.

Thanks Robert.

Thank you. Our next question comes from Yuri Lynk with Canaccord Genuity. Please go ahead.

Good morning.

Good morning, Eric.

Good morning, Greg I wanted to follow up I guess on Frederick's question on organic growth I'll ask it a bit of a different way.

I mean, youre still guiding to.

1% to 5%.

No.

Organic growth in 2021, I think to get there you're going to need double digit organic growth.

Across all three segments.

So.

Is my math off or how should we think about organic growth, particularly in the United States in the fourth quarter.

Yes, so in the United States overall in the fourth quarter, we are expecting sort of.

Organic growth to be positive.

But as we look at overall at the business to your point, what we've seen that the year's kind of unfolding as we expected we've seen a little bit better organic growth each quarter.

Returning to positive growth here in Q3, it's interesting as you look at some of the segments that we've got at work.

<unk> had positive organic growth for the last 10 quarters.

Our environmental services business returned to organic growth in Q2.

Buildings and infrastructure returned to organic growth this quarter, and certainly energen resources without Trans Mountain also returned to positive growth this quarter and so.

We see that continuing into into Q4, well Q4 is organic growth be enough to bring everything above the line.

For the year I don't know I haven't penciled that out but.

But I think what's really important is that for 2022, where ideally setup with the backlog and the opportunities that that its really going to be strong going forward.

So how should I think about that.

That 1% to 5% organic growth guidance for 2021.

Yes, we've put out quite get there.

And certainly it is a range and we would see if we were to to get there would be near the lower end of that range.

Okay.

So what kind of tax rate should I be thinking about for 2022.

Thank you.

Give me that number with with Cardinal.

That would be even better.

Yes, so for 2022.

We have not put our guidance out yet.

And particularly with what it might look like with Cardinal So that work is still underway.

Don't expect generally that there will be a significant increase relative to this year I think what we've what we've seen this year.

Also hold true for next year, and so I don't expect a significant change, but again, we will have to confirm that at the end of the year at the end of February when Lee Ashley gene rollout our guidance.

Well that would be about 22% to 23%.

Yes, I think Thats I think Thats fair.

That's a good working assumption at this stage.

Thank you I'll turn it over.

Thanks Jerry.

Sure.

Thank you. Our next question comes from Jacob bout with CIBC. Please go ahead.

Good morning.

Good morning Jacob.

I'll start off with the timing of the <unk>.

No closing.

I know you expected that business.

<unk> going to close by yearend.

Other than that the shareholder vote.

Six one other hurdles regulatory or otherwise.

Dan on the way.

Okay.

Yes.

There are a few customary approvals that we need to get done in the U S. With Jacob I don't think Theres anything there that would impede close the main one really is that.

Their shareholder vote on December 6th so assuming we close.

Very soon after that.

Just like to caution that I don't know that we'll see a huge.

Amount of revenue from Cardinal coming in in Q4, Youll say they come in.

Middle a little earlier that in December and then we go into Christmas. So we just wanted to say as we were thinking about it.

Just trying to walk that through.

Okay.

Second question here is just on the award notification.

Conversion.

In other words.

Quite a bit of talk about the last couple of quarters.

At $1 2 billion in more non institutions.

How much of that is converted to backlog.

And then.

Or are we still waiting for the Hughes Center buildup.

How quickly would that conversion happen.

The Emperor buildings in your mind.

Yes so.

One of the things we mentioned last last quarter.

That sort of soft backlog half of it was in the U S and it has really begun to convert because we already saw.

Even absent the U S stimulus program.

Okay. Thank you I'll leave it there.

Thanks Jacob.

Thank you and our next question comes from Michael <unk> with TD Securities. Please go ahead.

Thank you good morning.

Good morning.

Can you provide an update on the 2023 real estate strategy. It seems like it's progressing to plan, but.

Any any updates there and then also what to what extent that benefited EPS in the third quarter.

Sure So generally does.

The plan is going really well.

And we've done a lot of work in terms of.

Addressing.

The lease space that we have and.

Now we will work through that over the next couple of years, so with 2021.

<unk> indicated that we would expect to generate about <unk> <unk> per share for the year and we are certainly on track for that and so in Q3 that would have been about $2.05 per share that that strategy has generated.

The remaining 25 to 30 dams that we indicated would come beyond the 10.

<unk> is as I had noted previously more backend loaded that will come towards the end of 2022 more into 2023 and again.

Its positioning identifying where those leases are and understanding where our overall flexible workplace.

One is with people re entering the office and the choices, they're making around how they want to work.

So overall, we're really pleased with how that's going we think it was a really positive move for us not just from a P&L perspective, but in terms of.

Engaging our employees, giving them a choice in how they want to do their work.

And as well from an overall emissions reduction standpoint.

Positive program for Us and.

<unk> is on track.

Okay. That's great. Thank you very much.

The margins in the quarter were quite strong.

Do you see the margin strength you saw this quarter as being sustainable and you talked about mix benefiting the gross margin.

Is the current mix something that do you see as representative of what we should expect going forward.

I certainly think that the.

From a gross margin perspective.

It's continued to strengthened over the course of this year.

And we are being really focused and diligent in our review of projects and the ones that we choose to key clients. So we do feel like where we are at today.

It's really healthy and that's certainly what we would aspire to achieve going forward as well.

And then from that from an EBITDA perspective.

We continue to benefit from <unk>.

Much lower discretionary spending than we've typically seen.

We're also.

Managing to keep our overall costs down so as we grow.

Around the rest of this year typically Q4 the <unk>.

Margin compressed somewhat just because of the holiday season.

And so don't have as many as many chargeable hours with.

The holidays, particularly in North America.

But I think where we are.

We're really pleased with where our EBITDA margin as is coming out.

Okay, that's great and then just lastly.

Looking at Canada as organic net revenue growth.

I know it would be higher were it not for the Trans mountain drag.

Organic net revenue growth slipped to one 1% in the third quarter, whereas it was closer to 6% in the second I'm. Just wondering if you can comment on.

The driver behind that pullback quarter over quarter.

Yes, and also Youre right without Trans mountain that would have been 8%.

So certainly has that.

That has a home continues to have that sort of an impact and we're actually really looking forward to when we don't have to reference Trans mountain anymore here, one more quarter and then.

And then that'll be clearer.

Of our results.

Okay Fair enough I guess I guess I'm, just wondering now with the Trans Mountain impact was in there both in Q3 and Q2. So just looks like it was a bit softer in the third quarter.

Just wondering if there's anything kind of behind that.

Nothing in particular are the buildings group continued to Aurora ahead with a number of the big hospital jobs infrastructure.

Land development and <unk>.

Transportation was very very strong.

I do think that we were getting some new projects going in our environmental services group, we mentioned.

Energy and resources group, we mentioned Tidewater. So some of these projects were just starting up in the quarter as well as some of the EES projects. They were again just starting up.

But some of the carbon capture projects for shell and so I think that was probably just.

Okay.

Quarterly blip as a number of projects we're restarting.

Okay. Thanks for the details.

Thank you and our next question comes from Chris Murray with ATB capital markets. Please go ahead.

Yes, thanks folks good morning.

Maybe just kind of continuing on this theme maybe a different way to ask the same question around Canadian growth.

<unk> ex <unk>, you run an 8% clip.

And in organic growth.

Is that does that feel sustainable to you as we go into 2022.

I do think that.

Canada and global got off to a stronger start as we emerge from the pandemic you can look like in our.

<unk>.

Canada <unk>, 8% in Q3 global 10%, a little over 10% organically in Q3, I think those started earlier and then.

Okay.

Can you can you hear us.

Okay.

Operator are you able to still heroes.

Oh, sorry, Okay. No. Good we just got a note on the side that we had been our audio signal has been lost so I just wanted to confirm after what we had lost last time and.

I would say so.

So yes, we said that certainly yes, we saw great growth in Canada and global growth.

An early jump out the gate here in 2021 U S. A little bit slower. So I suspect that next year, we will see a little bit lower organic growth numbers in Canada, and global but much stronger in the United States.

Okay, that's fair.

And then to the U S. I mean, one of the things Thats interesting about cardinal as their security business with the U S. Federal government congratulatory that you don't.

Really participating in now I think it's actually.

Our closing item for that transaction can you talk a little bit about the impact that youre thinking about.

Round.

Growth in that business and how you can leverage existing Stan tech services into that business.

And.

I would assume that because of the exclusivity of being in that world.

The margin profile should be a little bit better, but any thoughts around that would be helpful.

Yes, that's secure.

<unk> business Dod type work is of particular interest for us and we're still learning more and more about it but to your point there are great opportunities there to expand the <unk> service offerings into it.

Sure.

In terms of overall margins and in terms of the overall size of that I think we're still truly just kind of wrapping our heads around what that would be.

And so we probably have a better clear better picture to give you a little bit more clarity at Q4 earnings call.

Okay fair enough. Thanks, I'll, just I'll turn it off.

Thanks sure. Thank you. Thank you and our next question comes from Ben <unk> with Desjardin capital markets. Please go ahead.

Good morning, everyone.

To come back on the organic growth for the full year are still maintaining the guidance. Although you commented about the expectation for for Q4.

However, when we look at cost containment efforts on the gross margin improvement I am I right to say that.

Focus is more on the EPS growth and given those are strong margin improvement.

It's less dependent on your ability to achieve the high end of the organic growth range.

Yes, I think that's right Ben look I mean, just back on the outlook for organic growth for the rest of this year and as Gordon indicated we do expect the continued push toward organic growth for the quarter.

In Q4, and then for the whole year.

Where that lands us in that range for the full year, we do expect it will be towards the lower end of that range, but I can reiterate.

That is why we provide a range.

And I think it's a bit of a reminder, as well that a range.

At least as we think about it doesn't necessarily mean that you gravitate to the middle of it.

Think we provide a range so that we can give a sense for it.

A range of outcomes.

And so that that would be kind of where we sit and what were thinking about at this point, but.

Your question about EPS growth that absolutely is our focus and of course.

Revenue growth is going to drive EPS growth that there are so many other factors.

We are focused on delivering the EPS growth that we've been actually I think quite successful line and so that is.

Better gross margin, but it is also.

Around our EBITDA our cost containment.

The strategies, we have employed around real estate.

That has really made a meaningful contribution to EPS. So it is all of those things together.

We are very focused on that we are looking at driving.

Stronger metrics.

On a bottom line perspective.

And that.

Is that a reflection of how we how we think about running this business.

And in the MD&A you mentioned that employees are in the process of returning to the office.

Just wondering if employees preference.

Change towards work from home versus the initial expectation for the plan.

It's interesting that we've seen.

Over the pandemic because theres been a couple of times, where we said okay. That's I'll go back in as of after Labor Day, and then Hey, everybody saw don't don't get everybody go home again.

We've got a little bit of this these waves up get ready to come in cased off get ready to kind of a good start.

But we have seen we track on a.

On a weekly basis sort of re entry, we are seeing more and more people coming back to the office more and more people, saying that they are looking forward to coming back to the office.

I think in general our overall real estate strategy in terms of the discussions we've had with with employees remains sound.

People coming back to the office as a percentage basis than we would in a.

A smaller center, where you park in a parking lot and walk into the building without needing to go in and elevated public transit. So we're seeing some of those things.

And so we're just continuing to monitor and talked to folks, but we still remain confident in our overall real estate strategy.

Okay, that's great color Gordon and with respect to the overall labor shortage wage increase could you may be provide some color or on how it impacts organic growth whether it will provide a much of a boost it could provide on organic growth going forward as you pass through.

Through those price increases to customers.

Sure. So a couple of things there firstly about just the.

The staff comp numbers.

We always find there that would be.

The best way to to keep your staff count as high as to not be losing people and we've always talked about since the pandemic began about how we've been increasing communication and ensuring that our employees feel connected to each other and <unk> through the overall pandemic. So we did actually just conduct.

An employee engagement survey in the fall enable to compare our results to pre pandemic numbers and it's interesting that our overall employee engagement score rose.

By the by almost 6% since the last survey, whereas globally.

Overall firm's engagement scores have fallen through the pandemic. So we're very pleased by that level.

Of engagement, we've got and the Delta to our overall industry, but one of the things. We've often talked about is that our voluntary turnover rates are always a 2% to 3% below industry average certainly ours fell during 2020, but everyone else's did as well.

But now that we're coming out certainly our voluntary turnover rates have risen, but theres still a couple of percentage points below where they were before the pandemic. So we still we read in the paper about the the great resignation and so on but and we're seeing some pressure there, but certainly again still below the levels that we were pre pandemic.

And then so what.

Is that through this sort of period of uncertainty that will be a net importer of having people join us and continue to grow rather than losing more people than that.

But it absolutely is top of mind and something that we're talking about every day.

And then from a salary pressure perspective, and how that might impact margins or things going forward. They are absolutely without question is it a salary pressure in many of our contracts. We do have a cost of living increase but certainly not all of them.

So.

We go into next year, we don't anticipate significant impact to margins, but.

It is possible that we might see some particularly in the first half of 2020, but you certainly can never say never we don't anticipate it to be significant but there could be some impact there.

Okay. That's great color, thanks, very much working upon.

Great. Thank you.

Thank you. Our next question comes from <unk> Khan with RBC capital markets. Please go ahead.

Okay, great. Thanks, and good morning, just wanted to get a little bit more color on what youre seeing in the U S. Nobody hearing from a lot of your peers as well recently that the clients. They are taking a bit of a wait and see approach and I think you indicated that continues into late this year can you maybe share a little bit of color on what youre seeing in public versus private customers and.

It sounds like infrastructure is one of the one where there was some caution but what are people really I guess is that hey look we'll proceed with these projects if the infrastructure Bill comes through or is it the quantum of spend just want to get a bit more color on the dynamics in that region.

Yes.

People are still taking a bit of a wait and see attitude towards as you mentioned towards the.

The infrastructure build in particular, we called out in the prepared remarks, the energy transition in a lot of work from.

Electrical transmission and distribution company strengthening their grids, replacing grids.

Relating to the <unk>.

<unk>.

Year to date, we've got over a one.

Our year to date, sorry over a 40% backlog increase in our energy and resources business in over 55% increase in our environmental services business, so pretty pretty significant there. So so but a lot of that backlog growth. We're seeing certainly some in the public sector, but we are actually seeing the private sector.

Begin to we've talked there things like.

With e-commerce facilities distribution centers.

Electrical utilities and the like so I think that we're seeing.

Solid growth again over 10% backlog growth in the U S year to date, but I think thats only going to increase once the U S stimulus infrastructure.

Infrastructure stimulus Bill hits.

Okay, Great and then just I guess on your two other markets that are growing pretty well the water environmental services I just want to get your perspective on is this more of at this point, there's just a bit of a rising tide going on in those two end markets.

Capturing share in the water market because of your positioning, but I just want to understand how long this sort of elevated level of growth in those two end markets can continue and your thoughts on those two.

Businesses as we head into 2022 and you lap some of these numbers.

Sure. So so certainly from a water perspective, we mentioned that we have seen organic growth in.

In each of the last 10 quarters in our water business and so we're very strong.

And that business certainly we've talked about some of the long term framework awards in Australia, and New Zealand the U K a lot of.

<unk> certainly in the U S and Canada U S in particular from a.

Cost line hardening coastline protection perspective, so long term, we continue to feel good about our water business.

And the other with environmental services.

Yes, and so yes.

Yes, so our environmental services business sorry, what is also very strong again overall.

Our es business.

What we've seen.

Over 40% backlog growth year to date, 55% in the U S well over 40% overall, so a lot of continued good work there.

So we do think from both an <unk> perspective, and a water perspective that we are gaining market share.

And just I guess as we head into 'twenty, two I guess could we expect this level of elevated growth to kind of continue into next year do you see it more normalizing towards sort of like broader industry growth rates.

Right now we as we're talking to our clients are still seems like theres a lot of work coming out but I.

I think it would be hard to to anticipate that we'd be getting our environmental group.

Overall basis in excess of 40% backlog growth on an annual basis will be pretty hard to imagine, but what I do see next year is.

That backlog converting into revenue.

Similar to energy and resources in some of the other groups. So we feel quite positive about those those verticals going into next year.

Alright, thanks, very much for the color.

Great. Thank you.

Thank you and our next question comes from Maxim <unk> with National Bank Financial. Please go ahead.

Hi, good morning, everybody.

Good morning, Matt.

CT absolutely maybe just kind of building on this.

Comments around backlog I'm curious if there is anything structural in terms of the projects that you are on right now that the conversion rate would be maybe different versus history or how should we think about it because I mean, obviously when you talk about 40% backlog jumped people will assume that there was going to be commensurate.

Our revenue growth.

Clearly as the duration of this projects is the different can you provide maybe any color on that.

Yeah, not seeing so much from a duration perspective, Max I do think that in the U S. We have seen projects a little slower to convert from backlog to revenue.

It just seems to be not just for them from a <unk> perspective, but a bit of an industry wide phenomenon I guess people are getting the work out there, but a little slower to get to get the jump on things going so.

It's our hope that and based on our.

<unk> with our clients that will some of those things will get going the latter part of this year, but really into the first half of next year.

Okay, but there's nothing structural in terms of kind of duration compatibility relative to what you would have still historical right.

Okay.

I'm just.

Thank you and then.

Also was wondering.

We'll talk to in the past a lot about.

Our programs in the U K just curious right now is this like any significant rebuild cycle coming up or.

Everything is sort of status quo for the next let's call. It 12 to 15 months.

Yes, no I think that.

The with the cyclical amp cycle and there is about a 12% capital increase in this up cycle over the previous so that will roughly translate into to our fee growth as well.

No theres nothing structural there we tend to ramp up in year, one year than the next couple of years or sort of just years of continuous design and having things going and that's where we are now so we kind of expect our performance on the up cycle jobs too for 2022 2023 to be pretty stable actually.

Okay Super helpful. Thank you and maybe just last question for Theresa If I may just when you talk about tax strategies optimization, how should we think about this is this.

Sort of a permanent change I guess, that's the first question do you mind, maybe sharing what exactly you guys are doing on this front.

<unk> disclosed that.

Yes.

Hard to go into detail knocked around what the various strategies are that we are employing other than to say that they are they are all.

Our sound.

And completely permissible within legislation around the world.

And so what we effectively try to do is optimize given.

The geographic locations that we operate in.

To try and optimize.

The taxes that we incur in those various jurisdictions and so.

The various strategies that we use typically do have a tax or kind of a horizon to them.

And in particular now with some of the strategies, we have given discussions around U S tax reform and other other proposed changes globally to taxes, yes, there is a potential that some of that.

<unk> that we have in place may not be as long tails as we would've expected. So its something its too early to say I think we feel again, we haven't given guidance for next year, but at this stage, we don't think theres going to be a material change next year beyond that we're going to have to monitor and see what happens with us.

Changes in tax legislation.

Right and sorry and.

The minimum tax requirements kind of globally.

Somebody is pushing for right now would that have any effect in terms of how youre going to be approaching tax rates or not at all.

So thats I.

I think youre, referring to the 15% minimum corporate tax that globally thats being discussed by the OECD.

Yes.

We don't think that that will as we currently understand it has a significant impact on us.

And again those.

Will that they are bringing in I really to try and capture organizations that are.

And trying to take advantage of.

The lower tax rates are where they really don't have operations and that is different from <unk> approach when we do carry on economic activity.

In the countries, where we are taxed and so we don't see a big impact to us, but again that hasnt been fully written yet.

We know for sure until they until they've actually got got that went down on the page and you've had a chance to review it.

Okay, Alright, well Thats real helpful. Thank you so much.

Thanks Max thank.

Thank you. Our next question comes from Ian Gillies with Stifel. Please go ahead.

Morning, everyone.

Good morning.

I wanted to start with the backlog you noted in the release I believe you saw 3% increase in the environmental services backlog year over year.

Alright knows obviously, you're going to have a material increase in that once it gets consolidated into <unk> operations can you talk a little bit about what that may do to the businesses margin profile.

Moving ahead, and how we should be thinking about that.

When you look at the.

Cardinal business in the U S largely environmentally focused.

Our backlog is an order is in the same sort of range as ours. We have about 12 months backlog I think you have roughly 11.

But.

I think as we've noted that the margins.

Margins in the U S are actually even a bit stronger than ours. So I think as we add these two groups together backlog will be will be similar and then margins will be similar if not slightly strengthened in the environmental group.

Okay. That's helpful. The other thing I wanted to touch on was revenue per employee on a consolidated basis I mean, it's kind of inching back up to where it was pre pandemic.

Do you think you can get there and has there been any new process put in place, where maybe you get a bit better so the need for people isn't quite as high as one might think.

There you are right that revenue per employee continues to creep up and I don't see any reason why we won't get back to sort of to where we were there were a number of things that come through our innovation program, where we're looking to continue to be more and more efficient design automation tools.

And the like to make ourselves become more efficient. So I do think there are some opportunities to add.

As we go forward to potentially even increase that revenue per employee, even a squeeze a little bit more out of it but.

We're still working through incrementally.

How how much that might be but certainly it will increase both our competitive positioning as well as potentially the margin.

Margin as well.

Perfect. That's very helpful. That's all for me. Thank you very much.

Thanks Ian.

Thank you and as a reminder to our audience you may ask your question by pressing star one.

Our next question comes from Troy Sun with Laurentian Bank Securities. Please go ahead.

Good morning.

Yes.

Good morning Troy.

Good morning, maybe just a first question.

Wondering if you can may cause some incremental common time, the Australian market. Obviously I. Appreciate the fact that the GDP unemployment data is back to pre pandemic levels now just given how the geography is coming out of.

Very strict COVID-19 restrictions, how should we be thinking about the organic growth profile for that region in 2022, and knowing that you've doubled the head count in the country as well.

It's sort of a reasonable assumption for the midterm growth profile for <unk> in the region. Please thank you.

Yes, Greg we Havent provided guidance for 2022, so a little hard to comment on on.

On that but you know what a couple of things that I could comment on is that.

When we combine our teams transportation will be the largest group that we are one of the largest groups that we have down there and certainly a huge transportation funding opportunities there they've announced roughly 118 billion Aussie dollars.

Transportation funding also very very strong in water, we're already very strong from a <unk> perspective, and we look to continue to grow that certainly.

With some of the.

The <unk> or the commodity prices higher mining continues to grow and certainly great opportunity to continue to grow our environmental business. So we feel very very good about Australia and New Zealand.

For the remainder of Q4, but also going into next year, great tailwind there the strengthening of the size of our team expanded client relationships and subsequently I will get in Australia, I think is going to situate us very very well for continued growth.

Great. That's super helpful and maybe just switching gears a quick question for Teresa I appreciate the color on the the decrease on the lease depreciation from the real estate strategy there.

Is it fair to.

Do you expect that line item to continue to trend down in the near future.

Yeah.

For sure is that as a part of the overall real estate strategy.

Is where.

<unk> 16 does cost you reside now in the depreciation and interest line is and so as we continue to execute on our strategy that that reduction I shouldn't be realized.

In those line items.

And sorry, sorry, so just to confirm so some of the real estate sale strategy itself like you were expecting the impact on legacy EBITDA to be 40 basis points right.

Yes, well, what I said was for the quarter and I think for year to date, it's actually a little bit higher on a pre <unk> 16 basis, yes that would have been 40% to 50 basis points uplift.

<unk> pre <unk> 16 EBITDA margin.

Okay, Great. That's it for me thank you.

Thanks Ricky.

Thank you and that concludes today's question and answer session. Mr. Johnson at this time I will turn the conference back to you for any additional or closing remarks.

Well, Greg I, just wanted to say to everyone. Thanks again for joining us on the call today, we look forward to speaking with you in the near future about our continued progress so have a great day everyone.

Yeah.

And this concludes today's call. Thank you all for your participation you may now disconnect.

Q3 2021 Stantec Inc Earnings Call

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