Q2 2023 Stantec Inc Earnings Call
Okay.
Welcome to <unk> second quarter 2023 earnings results webcast and conference call, leading the call today Al Gore Johnston, President and Chief Executive Officer, and Theresa Jang Executive Vice President and Chief Financial Officer.
<unk> invites those dialing in to view the slide presentation, which is available in the investors section at Stan Tech Dotcom.
Today's call is also webcast. Please be advised that if you have dialed and while also viewing the webcast you should mute your computer as there were there is a 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 instead.
Management's discussion and analysis and incorporated in full for the purpose of today's call.
Unless otherwise noted dollar amounts discussed in today's call are expressed in Canadian dollars and our general are generally round it.
With that I'm pleased to turn the call over to Mr. Gore Johnston. Please go ahead.
Good morning, and thank you for joining us today.
Stan ticket delivered another quarter of strong performance.
We continue to execute on our strategy and drive excellent results with solid project execution across all areas of the business.
We're delivering some of our highest organic growth rates ever.
With market fundamentals and demand for our services is strong as I've ever seen them in my 35 year career.
It's the expertise and commitment of our employees to drive <unk> ability to capitalize on the favorable market environment as.
As we continue to lead into our core value of putting people first I'm very pleased that our recent employee survey shows that stand checks employee engagement continues to strengthen.
A corresponding with this is the continued downward trend for voluntary turnover, which is settling back to normalized pre pandemic levels.
Similar to the first quarter Q2 was one of our busiest quarters ever for hiring and we are now at over 28000 employees strong.
With a highly engaged workforce and a robust outlook in our markets I'm very excited about the second half of this year and beyond.
And I'd also like to make special mention of two other highlights from the quarter.
On June 30, we continued to execute on our growth strategy as we closed the acquisition of environmental systems design and I'd like to welcome our new colleagues to the <unk> team.
E. S. D brings her expertise in mission critical facilities and data center designed to stand Tech deepening our strength and smart building engineering capabilities that support the workplace of the future and the emerging trends of decarbonization building repositioning and adaptive reuse.
Next I want to say, how proud I am of <unk> continued recognition.
It's one of the best corporate citizens in Canada.
This stems from our commitment to doing what's right and continuously advancing our environmental social and governance practices.
We've been recognized by corporate Knights for the 14th time being ranked first in the engineering and construction category and fifth overall for candidates best 50 corporate citizens.
Turning to our second quarter results I'm very pleased to report that we've outperformed our expectations as we continued to capitalize on strong drivers, while delivering disciplined project execution and operational efficiency.
We grew our net revenue by 15% to $1 3 billion with organic growth of 11%.
Our teams across the entire business continued to deliver significant value with solid double digit growth in water <unk>.
Environmental services, and energy and resources and.
And high single digit growth in infrastructure and buildings.
We've now grown organic net revenue in each of our regions and business operating units for six consecutive quarters.
We also continued to drive solid margins, resulting in a 19% increase in adjusted EPS.
On the strength of our performance to date and our expectations of continued favorable tailwind we've raised our guidance for net revenue and adjusted EPS for the year and Teresa will speak more about this a little later on in the presentation.
Looking at the U S.
Our teams delivered net revenue growth of 18% in the quarter with 12% organic growth and we achieved organic growth in each business line.
Water buildings, and Energen resources, all delivered solid double digit organic growth.
Water was driven by projects related to advanced manufacturing drought resilience planning water security and water reuse.
And we're also seeing a ramp up of P fast projects supporting water utilities as they proactively worked toward solutions to the upcoming U S. EPA regulations.
And buildings organic growth was driven by strong demand in healthcare industrial and advanced manufacturing.
Work in the commercial and science and technology sub sectors also helped drive strong results in buildings.
And our energy and resources business continues to see significant activity related to power transmission and reservoir and dam projects.
So our U S business continues to perform extremely well.
In Q2, Canada achieved 10% organic net revenue growth with double digit growth in environmental services infrastructure and water.
And environmental work accelerated for permitting and archaeological services to support energy midstream and transportation projects.
While significant bridge and highway work in British Columbia, and Major Road works in Alberta were the primary drivers for the growth in infrastructure.
In water growth was driven by major projects like the Iona Island wastewater treatment plant in BC in the basement flooding program in Toronto.
Energy resources continued to see growth driven by work related to power transmission and distribution projects and renewable energy.
Year to date, Canada has had higher growth than expected and our teams have been able to capitalize on this dynamic.
Our global operations also delivered another quarter of solid revenue growth net revenue increased 12% with almost 11% from organic growth.
Double digit organic growth was achieved in water and energy and resources.
Our leading global water team continues to deliver significant value supporting long term framework agreements in investment in water infrastructure in the U K, New Zealand and Australia.
Energen Resources' increase their net revenue through work on the core glass pump storage project in the U K as well as through mining activities for copper and other metals in Latin America, which will support the energy transition.
And now I'll turn the call over to Theresa to review our financial results in more detail.
Thank you Gordon and good morning, everyone as Greg mentioned, we did deliver another very solid quarter.
Q2, we grew gross revenue by 19% and net revenue by 15%, achieving $1 6 billion and $1 3 billion respectively.
Project margin increased 30 basis points to 54, 3% and was up quarter over quarter in all of our business regions, demonstrating our strong project execution.
In Q2, we again saw a material increase in our share price and this drove a further upward revaluation and the long term incentive plan, which amounted to $7 3 million of additional admin and marketing expense of 50 basis points of EBIT margin.
Even with this headwind adjusted EBITDA margin was 16, 9% for the quarter up 20 basis points from Q2 last year and margins would have been 17, 5% without this non controllable expense.
As we noted last quarter. When this dynamic also occurred our guidance target for adjusted EBITDA margin excludes this alsip revaluation impacts.
Either way you look at it our EBITDA margin reflects our success relentlessly driving operational efficiency.
Our Q2 diluted EPS was <unk> 79, compared to 55% in Q2 last year and adjusted diluted EPS increased 19% to 99.
Compared with 83 last year.
Without the <unk> revaluation expense adjusted diluted EPS would have been $1 <unk>.
Looking at our liquidity and capital resources, our strong revenue growth and operating efficiencies.
Positive operating cash flow of $68 million for the year to date compared to $2 million from the same period last year.
Recall that last year's operating cash flow was lower driven primarily by the Cardinal financial system integration.
So at the end of June with 81 days consistent with the last couple of quarters.
Net debt to adjusted EBITDA was one eight times up slightly from last quarter, mainly due to funding the environmental systems design acquisition, which closed on June 30.
And I'll turn it back to work now.
Thanks Teresa.
Our backlog grew to an all time high of $6 6 billion in the second quarter, an increase of over 11% from December 2022.
Backlog for each of our geographic regions has grown organically and this has been most pronounced in the U S and Canada, both of which delivered 12% organic growth coming predominantly from water buildings and environmental services.
Backlog in water continues to increase with wins around water security wastewater treatment solutions and water requirements for power generation to support the energy transition.
And seven in the U K continues to see record levels of investment and we are already securing backlog for app eight.
Buildings grew backlog through wins in almost all of their sub sectors, particularly in health care and industrial.
Buildings also balance benefits from the backlog brought in through the acquisition of ESD.
Environmental services backlog reflects additional project wins related to environmental assessments, including natural resource surveys regulatory permitting and environmental monitoring for construction projects.
Our backlog represents approximately 13 months of work remaining consistent with last quarter.
Our major project wins in Q2 continued to follow the key trends of aging infrastructure reassuring of domestic production and climate change.
Our water group continues to drive significant growth.
Being selected for a number of new projects, including the Queensway sewer and wiring project in the region or regional municipality appeal, Ontario, and the Apache Junction water reclamation facility expansion in Arizona.
Our infrastructure team was recently selected to provide engineering services for the steel repair and corrosion protective coating program for the Mcdonalds Bridge in Halifax, Nova Scotia.
And were also selected for a major design work for different trail in Calgary, which has the busiest freeway in Alberta.
Our energy and resources team continues to build on our success with yet another major pump storage Hydro project.
Through our joint venture water to wire, we were selected to provide a front end engineering and design for the pioneer bird can pumped hydro project in Queensland, Australia.
At five Gigawatts. This is expected to be the largest pumped storage project in the world.
The energy transition continues to be a strong driver of growth.
At the end of July we were selected by pattern energy as the owners engineer for the <unk> transmission project. This project is part of one of the largest clean energy infrastructure initiatives in the U S and will deliver 3000 megawatts of clean power to communities in the southwest region.
Although this is not receiving IRS funding. It is a great example of investment being made towards renewable energy with or without government funding.
And we've been engaged to provide advisory advisory services and the development of proposals for the regional clean hydrogen hubs in the U S.
The department of energy expects as select approximately 10 hydrogen hubs, which will be allocated a combined total of up to $7 billion in Iga funding.
Hydrogen is expected to play a key role in the energy transition and <unk> is well positioned to capture further opportunities here.
So now turning to our outlook for the year with a great start to the year and continued favorable market fundamentals, we remain confident in our ability to deliver another very strong year of financial performance as such we have revised several components of our outlook for the full year.
We've reduced our net revenue growth target for the year to 10% to 13% and now expect organic revenue growth to be in the high single digits.
In the U S. We're raising our expectation our organic net revenue growth to be in the low double digits.
This growth is being propelled by continued the continued imperative to salt water scarcity challenges protect against the year weather events and transitioned to a net zero future.
We are starting to see government stimulus funding flow and this is beginning to form in our backlog. We expect continued opportunities to arise that momentum increasing in the second half of this year and the ramp up in revenue beginning next year.
In Canada, we are raising our guidance to mid single digit organic growth. This is the strength of our year to date performance and our confidence in sustained high levels of activity for the balance of this year.
We do have very high comps to measure against from the second half of last year. So we anticipate our annual growth rate will moderate but remain very robust nonetheless.
And global we continue to expect mid to high single digit organic net revenue growth for the year with strong momentum driven by water and energy resources.
Our performance for the first half of this year and confident in our ability to maintain operational excellence.
Led to narrowing the range of our target EBITDA margin to 16, 3% to 16, 7% and.
And we are raising our guidance for adjusted diluted EPS growth to 12% to 15%, which results in a range of $3 50 to $3 60 per share.
Again, I would reiterate that our target ranges have effectively been normalized to exclude the reevaluation of our share based compensation, which is large largely beyond our control in other words, our target margin range should be thought of as being comparable to the 17, 5%. We achieved in Q2 Likewise our target <unk>.
<unk> EPS range of $3 50 to 360 would be comparable to our Q2 adjusted EPS of $1 <unk>.
So of course stated at the beginning of this call. We are very excited about the second half of this year and well beyond and we believe that we have the right team in place to continue delivering superior results.
And with that I'll turn the call back to the operator, and we'll take your questions.
Thank you.
To ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
These standby, while we compile the Q&A roster.
Our first question comes from <unk> <unk> with <unk>. Your line is open.
Yes, good morning, everyone and congratulations for the solid results in a very nice to see the strong fundamentals across the board.
Just first question with respect to the impact of the Lcs, how should we be thinking about the potential for margin improvement beyond 2023.
<unk> been calling out new guidance at 16, three to $16 seven and assuming $14 nine for the year. It looks like there is a 30 bps impact from the Lps from a full year basis. So I'm just wondering looking at 2024.
You should we should build on the middle of the range. So, let's say $16 five plus 30 bps of L trip, assuming no movement in the share price and just curious about the sensitivity for <unk> related to the stock price.
If there are some options to neutralize the impact.
Sure.
There's a lot in that Ben Robert.
To cover it all I'll start with <unk>.
There will be a question, which was around the opportunity to mitigate some of that volatility and we have in fact.
Hedged a portion of our long term incentive so the numbers that we're reporting around the revaluation is already net of the <unk>.
Having some swaps on.
Our performance share units or sorry, our restricted share unit so.
That is something that we are already doing with respect to expectations for EBITDA margin growth beyond this year.
Certainly our objective to continue driving operational efficiencies I mean, you've seen in the last couple of years, how how we have gradually.
Our sustainably raised our EBIT margin and that really is to the credit of all of our workforce that has us focused on this and really delivered on the various strategies that we have in place and so it would be our goal is to continue to execute on those strategies. As you know that we are in the midst of developing our next three year strategic plan.
<unk>.
And in that we will rollout new EBITDA target, but again, certainly we would we would expect that we will continue to drive for margin enhancement in the coming years.
Okay, that's great color theories and just on the M&A front.
Will you disclose in the MBNA cash consideration of 76 million or USD.
Which looks higher than typical matrix based on price paid per employee so.
Just wondering if there's anything else due to better understand.
Either with respect to the a fortunate these going forward.
Valuation is higher than usual and maybe if you could comment about the M&A environment and the opportunities you see these days for larger size deals. Thank you.
Yes, yes, great question.
<unk>.
We do find multiples vary based on the type of business that youre acquiring based on their profitability and certainly based on size and so on.
<unk> was a very profitable firm.
And the data center market that they are mission critical environment that they're in.
Very attractive market and you've certainly I'm sure you've read a lot in the papers lately about that that tailwind supporting that for the next couple of years, so on a per head basis.
It might have penciled out to be a little higher but also the <unk>.
Profitability for that firm was higher as well for the M&A market in general.
Where we do find it to be very robust in different lines of business really around the world I'm spending a lot more time really focused on those discussions and were as we always are in all sorts of levels of discussions from initial conversations about cultural fit to anywhere in different parts through the process.
But to your point on size there is a number of.
$3 $5 7000 firms that are either on the market now or will be coming soon.
You supplement that with with our sort of the typical 1000 person and lesson I think we're moving into a pretty robust period for M&A activity.
Okay, that's great color and last one for me.
Some of your engineering peers have reported that cash drag this year coming from the U S section 174 tax law, which eliminate the option to deduct R&D expense in the year.
It requires to be up more ties. So just given your elevated exposure to the U S region are you seeing any negative cash impact from this.
Yes, absolutely that has been a factor in there is a couple of pieces to that Youre right given our our higher earnings there will drive higher higher tax component, but the other element around that is.
It becomes a bit technical but even though the rules came into play in 2022, there was an opportunity to take what was called a safe Harbor approach, which was to pay less than what you thought in the event that perhaps those regulations didn't actually come to pass and so they of course did come to pass.
And what we found that we had to do a catch up payment.
In Q2 of this year. So just as an example for the year to date of 2023, we would have paid out in cash about 34 million U S. Under section 174 last year for that same period. It was less than $8 million. So it has had an impact for sure.
Okay. Thank you very much for the time and congrats again.
Thank you Eduardo.
Our next question will come from.
Yuri Lynk with Canaccord Genuity your line is open.
Hey, good morning, Gordon Theresa.
Good morning.
Yes, I just wanted to go back on the on the EBITDA margin discussion.
Is it fair to say that the momentum in the margin improvement.
Is slowing a bit.
It looks like.
You did.
L tip, you did about 16, 6%.
64% in the first half.
That implies $16 six in each two.
That would be about 20 bps lower than the back half of last year. So I know.
Half of last year was a bit wonky in some way so.
Is that just a tough comp or is there additional costs creeping in.
That would be kind of slowing the momentum of it.
It's a fair question.
I would say the answer is no.
We don't see a slowing of momentum and it's something that we are very trained on and on.
<unk> very good success.
So there were certainly some things last year in the last half of the year that were favorable to EBITDA that we would not necessarily expect to recur. We also had.
In the first half of this year, we made in our MD&A, yes certain things.
In the admin and marketing that were there were supportive and perhaps had the first half of this year, maybe a couple of basis points higher than we would typically have seen in the first half of the year.
But we always say that the margin improvement that we are driving is really intended to be sustainable.
And we are continuing to see it grow so.
I think we were very comfortable with what the target and that beyond this year, we continue to push to grow up.
That's fair.
Sure.
Do you still expect Q2, and Q3 to drive 55% to 60% of your net income.
It is typically higher slightly higher in the second half of the year.
Not in my head because typically we talk about Q2, Q3, being about 55% and the shoulder quarters being 45% and I think that that still holds true.
But we do typically see that the third quarter is generally our highest earning quarter.
It moderates a bit in the fourth quarter.
Yes.
Just asking $55 60, because that was the.
That was the guidance given at the beginning of the year and I didn't see mention of it. So I just wanted to make sure it was still.
In effect.
That's helpful I'll turn it over.
Thanks Jerry.
Thank you.
Our next question will come from.
Jacob bout with CIBC Your line is open.
Good morning.
Good morning, actually good afternoon, <unk> in London today.
Good afternoon.
Very positive commentary and guidance on organic growth.
How do you think things play out in 2024 do you expect momentum to continue.
And then.
Maybe just kind of a secondary question, if we look across the industry.
Most firms are raising guidance and what do you think has changed in the past three months to drive this.
I do think as you look at forward, we've talked about the sort of just these.
I mentioned in the prepared remarks like in 35 years of doing this we've never seen everything lined up the way that it is from an infrastructure perspective, the government funding when you look at things like an Iga for example.
These things are always slower of course to take off and you think but we're looking at once that ramps up in the latter part of this year into next year, it's going to continue up till 2028, 2029 that sort of a range irag gets going for the next several years. So we're just seeing a lot of these and Thats just in the U S. A lot of big drivers other places as well.
So it just really feels like there's robust support for first ANTEC, certainly, but for our overall industry and so I think that's where you've seen some of our competitors rising raising guidance as well and everyone's feeling pretty good about the next three to five years in our space.
Okay.
And then just in Canada here.
You're guiding to mid single digit growth for the remainder of the year or for the full year.
That implies that second half is going to be relatively muted. It seems just a level of conservatism there or.
Is there something Wishy washy part.
Yes, I don't think that's the level of conservatism because again as we said in our remarks at the level of activity is going to remain very high in Canada.
And certainly when we started the year there was probably a bit of conservatism because we came in pretty strong and there was just a question about how robust the Canadian economy could be and what it could it could support.
Now as work is continuing.
Full of dynamics that we see.
Is that there are some projects that are winding down.
Our have been winding down in the middle part of this year that as we begin the ramp up of new projects and of course, the revenue always takes a while to pick up on those larger projects, but again.
We point people to 2022 were in the second half of the year, Canada had seven 511, and 11, 5% organic growth in Q3, and four and so the question is Ken Canada stack double digit growth on top of what was already double digit growth last year and.
I would say that that feel very optimistic not impossible, but pretty optimistic for us.
As we look at the level of activity and what we see coming.
Backlog is really strong, but how the math works in terms of the actual growth rate, we think it will moderate a little bit.
That's helpful. Thank you Trisha and Gore.
Rich thanks Jacob.
Thank you.
We have a question from Fredrik <unk> with Raymond James Your line is open.
Hi, there I'm.
Eight hours behind you for me if it is good morning.
So apologize for that.
Morning.
To get a better understanding of where the.
11% organic growth coming from obviously very good but just curious if it's more weighted to higher a higher employee count increased utilization pricing power a little bit.
<unk>.
Thank you.
It's really a combination of all of those things we see.
Really.
Really strong market dynamics for us as we look forward.
And continuing.
Just finished saying that in Canada cannot staff double digit growth on top of what was double digit growth at the end of last year.
And probably unlikely but in the U S is absolutely doable just given the amount of work that is slowing what we're seeing in our backlog et cetera. So we've grown as Curt noted in his comments I mean, we had the highest highest hiring quarter, we've ever had in the second quarter of voluntary turnover.
Over his doubling that to sort of pre pandemic level, where we have been leaders in maintaining our staff. So it is a bit of all of those things that you mentioned.
And great and given the.
Positive momentum you have with hiring and retention.
I have no concern whatsoever as to your ability to handle all of that that growth is coming in.
Correct.
No no no not at all we're feeling pretty good about it Fredrick in addition to that we're expanding our delivery center in Pune.
And continuing to add resources really in all of our regions.
Okay, Great and then since you offered it earlier you herb.
Both in London any special reason why are there.
No just to as we move our our board meetings around every every couple of years, we'd like to take the board two way one of our our office locations and working with them. We selected the U K. This this time around so we have our whole board here with us.
Alright, alright. Thank.
Thank you very much.
Thank you.
Thank you.
One moment for our next question.
It comes from Devin Dodge with BMO capital markets. Your line is open.
Thanks, Beth good afternoon.
I think the question or probably be per Theresa, but when I when I look at our guidance framework, we provided and we kind of exclude that L tip reevaluation figures.
It implies roughly even distribution of adjusted EBITDA between H, one and H two despite when we look historically I think H twos accounted for a little.
But more than that 50% share of full year EBITDA.
Can you provide any color for why the EBITDA contributions in the second half this year might be a bit lower compared to that seasonal pattern.
Yes, it's actually when you when you.
Through the math the implied range for the second half of the year would be 16% to 17%. So it is we're heavily weighted towards that theyre being more upside in the second half of the year and it is.
Is there a range that largely.
Is somewhat dependent on again, how quickly or how slowly some of these projects rollout at the U S.
The biggest driver, but we do expect that the second half EBITDA will will likely fall to be sorry, not Paul will likely be high.
In the second half as it typically is.
Okay.
Okay. It just seems like on a dollar basis, it's a little bit more evenly distributed an uplift on the margins, but I will say maybe.
Maybe offline here.
If you are in the UK, maybe I'd ask question here, but there's been some reports in the media regarding some potential financial distress amongst some U K water utilities I think terms of water in particular, just wondering if you've seen any change in behavior from your UK water clients in terms of pulling back on some work.
And it's been packed adjusted how it manages its payables.
For these customers yes.
Yes, we actually so firstly, we've seen no issues with payables for for any of these these customers.
And we also have seen no change in behavior from them.
These app programs are set like on a five year cycle and with a certain spend then they are able to get certain.
Results are certain rates and so on so no we haven't seen any.
They have to move forward with that work. So we haven't seen any change in behavior and it's interesting as we are here certainly in chatting with their folks we've been providing water and wastewater services for London in terms that the Thames Valley for almost 200 years with them.
Any way that.
The client has been organized what their name might be public private the water and wastewater services need to continue to be provided the regulatory environment is strengthening here not weakening and so we don't regardless of how the things may shake out we don't see any reduction in the amount of work that needs to be done in the U K water and wastewater.
Industry going forward.
Okay. Thanks, that's good color I'll turn it over.
Great. Thank you.
Thank you and our next question will come from Chris Murray with ATB capital markets. Your line is open.
Yes.
Good afternoon folks.
So maybe Gordon just turn it back on you made some interesting comments about Canada, but the fact that it's actually performing a little bit better.
The unexpected.
Just wondering if theres something thats, the hull that maybe contributed to that.
Any sort of new legislation or funding or maybe its resources just trying to understand where it is or maybe more tied to project.
Any sort of color on awareness of that and if there is anything that maybe.
More into 'twenty four as well.
We've seen a lot of work coming forward in our in transportation, we talked about some of the work that we've been doing in BC gear for trail coming in Calgary, a lot of opportunities in transportation and bridges and so on.
A lot of work also in our Es group, they're supporting archaeological work and permitting work really across the Canada a lot of NBC right now so it's pretty widespread our water group we've talked about.
In previous quarters, some of the work that we're doing in Saskatchewan on the Buffalo pound plant in Regina some work in Ontario and at Berry.
Certainly, though one of the largest capital programs for Metro Vancouver, The Iona project, where we're project program manager, so, whether it's water or transportation or environmental services.
The energy sector and some some transitions energy transition type work, it's pretty broad based actually and it's.
The year has held up really well and we're we're seeing still positive momentum going forward.
Okay. That's helpful and then just quickly.
Quickly.
That question.
I don't think I, maybe I missed it I think one of the one of the folks asked what are you actually is despite liquidity based on.
Where you have the hedge position on the outset at this particular point.
And I guess, just kind of a second part of his question.
The volatility you had kind of a noisy coffee is it fair to think that as you evaluate.
Maybe 2024 that we kind of changed the presentation.
Maybe get rid of us.
Yes.
It's a really good question.
Let me answer that one first.
And we've given that a fair bit of consideration this year and your share price always moves around and to the extent that a portion of that hedged as we've got it it should have even less of an effect. We've just never seen this rapid movement in either direction of our share price in such a short period of time.
And so it's particularly pronounced in and Thats why we are calling it out.
And would we change our EBIT presentation.
As we considered at this year would have required that we went back and restated our prior comparative quarters and again.
We'd love to see the share price continues to rise at this rate whether that will happen or not remains to be seen.
And so if you go back and kind of restate your adjusted numbers and we're not really sure.
If that value added and really felt that it would be cleaner just to continue to report on a consistent basis or anything new that we calculated it and then call out. This this one piece and.
You may expect that it would be a little bit more muted in terms of volatility as we as we go forward.
And then in terms of sensitivity than it is it's very hard to model because.
Or else. It includes both the share price piece, but it's also heavily weighted towards that relative.
Total shareholder return and so in order to do that calculation. It gets run through a Monte Carlo simulation, which makes it really like a quite difficult to predict.
And that's what makes it hard to kind of provide that kind of a sensitivity. So.
That does make it difficult and kind of preclude me from being able to give you any kind of a rule of thumb on it.
Okay fair enough.
Alright ill leave it there thanks Brooks.
Thank you.
Thank you.
Yes.
Our next question will come from.
Michael.
Two for me with TD Securities. Your line is open.
Thanks.
With the demand environment.
Sounded like sounding like it continues to be very healthy wondering if you can comment on what you've been seeing in general terms rigor.
Regarding price increases on new work in recent quarters, and how that would compare to the sorts of pricing gains you've seen over the last several years.
I do think with the overall market being very busy the industry is very busy that this is always a competitive market. We're all going to always have some price competition, but I think we're seeing a little bit less competition on price and more.
Clients are checking with their consultants can you get the work done do you have the people can you get it done with the quality and in this timeframe price is always important, but but I do think Michael it's less price sensitive than it's historically been the last several years.
Okay. Thank you that's helpful. And then secondly, Gordon you mentioned that this seems to be the first time in 35 years or so where all sectors are really firing on all cylinders.
It is great to hear it doesn't sound like are there any areas of major sort of concern or risk, but is there anything that you that you are watching.
If you look out potentially to next year.
I know theres been some concern around the outlook for commercial buildings activity just curious if there's anything that you've kind of god.
Keeping a closer eye on as far as potential changes to what Youre seeing now.
Yes.
The one area that we are keeping an eye on it and in fact, we're here in the U K is on the private development work in the in the U K certainly there's been some softening of the economy here because of Brexit and high interest rates and there is very high inflation and so on so there is a huge backup.
Hog of housing here, but we are having trouble in the UK getting it through the permitting cycle and getting it built so we're watching our planning teams here.
Certainly allergic looking for some weakness that we've seen a bit of a slowdown but again here in the U K well over half of our revenue is generated in the water business and we haven't seen any slowdown there. So there is always areas and it's a good question. That's one of the ones that we're looking at right now is that planning and community development work here in the U K.
Okay, Perfect and then maybe just on on commercial real estate or commercial buildings activity I mean, I think your buildings practices.
Fairly diversified and there are other areas that have been performing well, but specifically on commercial.
Buildings, what are you seeing a high rate.
Yes, so our commercial building segment is only about 4% of our overall corporate net revenue and while we're not seeing a notable slowdown in the sector theres always going to be it's slowing a little bit, but what's interesting for us even within that commercial segment that we have again, 4% of our net revenue.
We have a number of subsectors, so we have multifamily residential.
Lot of that is.
Purpose built residential units and we're seeing we're still seeing some of that coming certainly its a lot of discussion on that in Ontario, where you are these days about how we can get more multifamily residential to help break the backlog of housing shortage. We also have in their retail and hospital hospitality, but that's a pretty small sub sector for us so.
While we keep monitoring the sector.
There is some there is also an year repurposing industrial underutilized office buildings. That's the type of work that we're doing we've talked with I think in previous quarters about we call. It adaptive reuse so even within that 4%. There are some areas like that adaptive reuse that are still driving others that are a little bit slower. So we're keeping an eye.
I on it but it's not really material to the overall success of the company.
Alright Thats helpful. Thank you.
Thank you. Thank you.
One moment for our next question.
We have a question from Ian <unk> with Stifel. Your line is open.
Good morning, everyone.
Good morning.
I was just curious organic backlog growth year to date is 10%.
Our net organic revenue growth looks like it's kind of mid to high single digits in the back half of the year is there anything unique or changing happening with the conversion of backlog into revenue or.
Our opt in laws or those are kind of getting a bit longer. It's just I'm trying to tie those two items acknowledging they don't always work perfectly together.
Okay.
Yes, I don't know that there's anything fundamentally that's <unk>.
And certainly when we were talking to our business is we are always asked me about.
Cancellations or delays and we're not.
Seeing or hearing any evidence of that.
Bye.
Measure one of the things that we have a little bit.
As we get through that sort of contracting process and get the projects ramped up.
In the U S. In particular that there are pockets, where we're seeing progress slow, what's a little debt and and I think that the.
<unk> is very well.
What's really be clear does that slow walk does not mean delay does not mean cancer, but it's just the clients are taking a bit longer to turn things around to improve things to get things moving.
And I don't know that that's what you would be referring to in terms of what youre seeing conversion into revenue, but that is a bit of a dynamic routine but other than that we're not really seeing or hearing anything anything dramatically different.
Okay. No that's helpful and then the.
The other thing I wanted to ask about was employee utilization its come up on a number of calls and conversations I'm just curious how you're feeling about your staffs utilization how much room, you have left to maybe increase those and how close you argue effective full utilization of your staff.
Yes.
It's currently varies amongst the lowest in general and this is what youre seeing in our results our utilization is very high.
And to the extent where for instance in our water group, which is very busy there's a lot of sort of importing of talent from other geographies, even from some of our business lines, where there are potentially folks that Ken Ken.
Support projects in the water group. So we are seeing that as well and again one of the things I pointed out in previous calls is where there is a bit of latency in our utilization does relate to our infrastructure group.
As we continue to add to.
Hold us and wait or some of these <unk> projects to really ramp up and get rolling.
Not as fully utilized there, yes, but want to make sure that we are managing our staff and have them available and ready to go win those projects do come on.
Perfect. Thanks, very much I'll turn the call back over.
Thank you.
Thank you.
Our next question will come from.
So Bob Hahn with RBC Your line is open.
Okay, great. Thanks, very much just a question on the outlook commentary you've taken up the organic growth guidance for the U S and Canada. Just wondering if you could maybe share a bit of granularity around how we should think about end markets within the context of that guidance.
Shall we think the ones that you called out as having double digit organic growth to those continue for the back half here in the same manner or is it a bit more bare just trying to understand how we should think about it on our end market basis. Thanks.
Yeah, I think it's it's a little bit.
It's a bit of both actually sort of depends on the geography. So for instance, we've had very high levels of activity and high organic growth in Canada around like our water business and those projects that Gordon mentioned Iona Barry.
We will continue to be very busy and so we will continue we expect to see continued high growth there.
Areas like.
Our mining practice, where perhaps things will slow down a little debt relative to the first half of this year in the U S. I think youre going to see continued.
Strong growth really across all sectors.
In global.
We always talk about our water practice and that should continue to show very good growth. It may be a bit of slowing in the land development as Gordon described and potentially.
Yes.
Being offset by growth in building. So it is a bit of a mix.
But I would say that for the most part.
By geography in terms of the ranges we've provided would be would be about the right way to think about where that growth is coming from.
Okay, Great and then just on the kind of the longer term outlook I think two part question one.
Here's a calling out sort of a 26 to 28 2026 to 28 peak for the IHA funding based on where Youre sitting do you sort of agree with that timeline or what are you seeing in the second part and one of the questions that we're getting given some of the organic numbers, we've seen across the space says.
What's kind of the momentum in the pipeline how long does this sustain for just curious based on your vantage point.
What is sort of the medium term outlook for broader engineering demand from your perspective, given the funding that's in the pipeline.
Okay.
Yes, so firstly with regards to IAG, yes, I would agree with that.
Timeline ramping up.
Through a little bit this year into 'twenty four.
Peaking in that 26 to 28 period are certainly being highly sustained during that period I think it should be pretty evenly distribute it so thats going to be good long term support in terms of the.
<unk> growth.
We really do see and as I'm talking with my industry CEO colleagues as well sort of that three to five year timeline of really solid supports for for the overall business. So I think we feel good about it this year and we feel good about.
Our organic growth prospects for the next several years.
Okay, Great and then just I guess on the market.
UK and Thats, probably where most of their European exposure as you call. It was about half of it but maybe a bit of color.
Are there any ebbs and flows in the rest of our European presence or even in Europe , just given what's going on in the macro just curious kind of outside of water. How some of the end markets are doing there.
Yeah, so outside of the U K.
Operations in both Belgium, and the Netherlands here in Belgium is primarily a.
We do a lot of work there for the European Bank Reconstruction development, a lot of the EU Commission and funding agencies that work is continuing and in fact, if anything is ramping up a little bit as well, we're seeing a lot of energy transition work and policy, where does the type of projects that we undertake in Belgium, and the Netherlands, we do a lot of.
It'll work Gis.
In general for underground utilities, and so on that work is also very busy in our Netherlands operations, we feel very good about here in the U K in.
In addition to the water business, which we see very very robust now and as we move into Amp eight we're even looking for for an increase in.
<unk> spending over <unk>, seven and the actual quantum of that has not yet been determined and so we hear different numbers, whether it's 15%, 25% or more increase in app eight funding.
But it's the other parts of the UK economy that we're watching closely we did mentioned that planning and housing development and so on we're watching closely we do some environmental work here that remains busy we do some.
Transportation work that remains busy good funding supports as their buildings.
Showing some growth in global as well both whether it's here in the U K with some of the work we're doing on some high performance laboratory and so on are certainly down in Australia, and New Zealand, where we're seeing some growth there as well so in general we feel we feel pretty good about things.
And maybe just one last quick one.
Obviously, there's been some headlines around the water stuff in Europe and there was a question earlier on one of the utilities I guess, what do you think the government responses to that over the next amp cycle. It could it be a net positive that they have to spend more to fix things or how do you think they sort of address app eight given some of those headlines around the utilities, either not keeping up their end of the bargain or some of the.
Our financial ratios they are having.
Yes.
Yes, we do see because of the regulatory environment recall last summer here in the U K there was a lot of water shortage issues.
<unk> been reading a lot about sewage spills during overflow events, you've been reading about the bathing waters or the beaches and so on and being closed due to contamination. So there is a lot of push here both from society and from the regulators to clean up and continue to drive forward with improvements to the water and wastewater systems.
So I think thats where were seeing.
These these projections of amp eight being considerably higher than <unk>, seven and I see that happening in a lot of that will be built into the water rates. So that's where a lot of that tradeoff will come is that certainly the <unk>.
Society in general and the regulators want to see this improved performance.
It comes at a capital cost and so how much can we build into the rate structure to drive that forward and so I think that those are the tradeoffs that we'll be seeing discussed here over the next year to 18 months as the App eight programs are being set.
Thanks very much.
Great. Thanks Alan.
Thank you.
We have a question from.
Maxim <unk> with National Bank financial your line is open.
Hi, good afternoon.
Good afternoon.
I just had a quick.
A follow up question in terms of her comment that <unk> made in relation to.
Margin advancements on a on a prospective basis I guess.
Or are both Gordon Teresa so it's not just how.
How should we be thinking about utilization rates and so forth, but it's more maybe.
Potentially going after the right projects. So you can more effectively amortize your sort of marketing spend on all these things demand maybe going a little bit.
In that direction in terms of how you think some of the strength of the market is benefiting from that perspective, I'm just curious to hear your thoughts on that.
Thanks.
Yes, absolutely.
And so as we're in this environment where.
The industry is busy we're busy we're really focusing our marketing into business development spend on projects that will both generate a higher gross margin project type in general, but also on client selection.
Some clients are better workforce than others others.
Some will pay fairly for for change orders that they want to put forward others will we'll try to get away from from paying an artist fair in that so we're selecting we're focusing on what clients that will select refocusing on the projects.
That we select in order to optimize that.
Optimize both our marketing and business development spend and then gross margin that we can generate for the projects that we assume.
Right.
And I don't know do you have any color maybe on your win rates, how those metrics on a hold over time.
Trucks specifically.
We do track win rates.
Both by number of pursuits that we chase as well as by the dollar value of those pursuits. So that you can get a feel for are you winning the big ones are losing the big one so we track that by geography, we chop that by business line, we track that actually by marketing our account management leader. So that we can tell who's being effect.
Live in their spend and who isn't and so Ben who needs additional training additional supports and <unk>.
And so on so we do track that.
It's not a piece of information that we disclosed because it is so variable by type of work and geographies and so on but but no thats certainly that is something that we track in and review on a monthly basis.
Okay. Okay. Thank you so much that's it for me great quarter.
Thank you. Thank you.
I'm showing no other questions in the queue I would like to turn the call back to Gordon Johnson for closing remarks.
Greg with only to say thanks again for joining US today, we are really pleased with our performance this quarter and with a solid backdrop that we see for the rest of the year. So hope you all have a great day and bye for now.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Okay.
Good.
Yes.
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Okay.
<unk>.