Q3 2023 Stantec Inc Earnings Call

Okay.

Okay.

Welcome to <unk> third quarter 2023 earnings results webcast and conference call, leading the call today are Greg Johnston, President and Chief Executive Officer, and Theresa Jang Executive Vice President financial and Chief Financial Officer, Stan Tech invites those dialing into beautiful slide presents.

Patient.

It 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 well also feeling the webcast you shouldn't get your computer as there is a delay between the call and the webcast.

All information provided during this conference call is subject to the forward looking statements.

All vacation set out on slide two detailed and stay on tax management discussion and analyst 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 are generally rounded with that I'm pleased to turn the call over to Mr. Gordon Johnston.

Good morning, Thank you for joining us today I'm very pleased to report that <unk> delivered another quarter of record earnings.

We continue to see very strong market demand across all of our geographies with Canada in particular showing remarkable resilience.

We met this demand with excellent operational performance driven by high utilization and augmented by our effective workforce management strategies and strong talent attraction and retention.

Organic hiring remains robust.

This was the busiest Q3, we've ever experienced in terms of hiring and we are hiring at two times the rate that we were pre pandemic.

At our North American and our employee retention rates remain amongst the best in our industry with voluntary turnover turnover in North America, returning to pre pandemic levels.

These were some of the key drivers that led to our Q3 earnings exceeding our expectations.

Looking at our financial results, we grew our net revenue by 14% to $1 3 billion with organic growth of 9%.

For the seventh consecutive quarter each of our regional and business operating units delivered organic growth with double digit growth in the U S region and in our water and environmental services business segments.

We drove significant margin expansion and delivered record high adjusted EPS of $1.14 on.

On the strength of our performance to date and our expectation of continued favorable tailwind we've raised our guidance for the second time this year and.

And I'll speak more about this a little later in the presentation.

Our U S business delivered a very strong third quarter.

This included net revenue growth of 20% in the quarter with 13% organic growth and 5% acquisition growth driven primarily from our acquisition of ESB.

We achieved organic growth in each business line with water buildings, and energy and resources, all delivering double digit growth.

In particular, our U S water business delivered 26% organic growth.

Driven by public sector, and industrial project demand as well as large scale water security projects in the Western U S.

We continue to see strong demand in healthcare industrial and science and technology end markets for our buildings business.

Within our energy and resources business, where continued on the major power grid upgrade project in Puerto Rico.

And we started to ramp up on our rare Earth minerals energy transition project in California.

Our infrastructure environmental services teams also remained very active in the U S delivering high levels of growth.

In Canada, we delivered over 7% organic net revenue growth with double digit growth in environmental services infrastructure and water.

Environmental services delivered strong growth on the back of demand for services and permitting and archaeological work in the midstream and transportation sectors.

Activity on environmental impact assessments also increased in the renewable energy sector.

Infrastructure remained robust driven by heightened activities around the bridge and roadway work in Western Canada.

And our expertise on large wastewater infrastructure projects drove growth in water.

Our global business delivered 6% net revenue growth quarter over quarter with 2% organic growth.

Our industry, leading water business delivered high single digit organic growth.

The teams remained very active in the UK on <unk> seven and have also begun assisting clients with their amp aid programs submissions.

Work supporting long term framework agreements and investments in water infrastructure in New Zealand and Australia also continued to drive growth.

Double digit organic growth was achieved in energy and resources.

Work on the core glass pump storage project in the UK continued to ramp up as did mining activities in Latin America around copper and other metals that will support the energy transition.

And now I'll turn the call over to Theresa to review our financial results in more detail.

Good morning, everyone as Curt mentioned, our third quarter results exceeded our expectations factors that contributed to our outperformance include stronger than anticipated demand in Canada higher utilization in Canada and the U S.

Both hiring discipline cost management, and a higher than normal volume of change order approval.

Gross revenue was up 15% in the quarter at one 7 billion, while net revenue grew by 14% to reach one 3 billion.

<unk> margin increased 70 basis points to 54, 8% benefiting from disciplined project selection and execution.

From operational performance to over 160 basis point increase in our adjusted EBITDA margin for.

For the quarter diluted EPS was <unk> 94.

Compared to 61 in Q3 last year.

And adjusted diluted EPS increased 33% to a record $1 14.

Compared with 86.

Sure.

As has been the case all year the significant increase in our share price for the year to date has resulted in a material increase in our admin and marketing expenses due to the quarterly revaluation of our long term incentive plan.

The impact of Revaluing, our LCR was 60 basis points as a percentage of net revenue.

<unk> per share for Q3.

Year to date, the revaluation with 60 basis points or 15 cents per share.

Now turning to our liquidity and capital resources.

Generated $281 million of operating cash flow year to date compared to $95 million over the same period last year.

Cash flow. This year has benefited from increased revenue and strong operational performance, partially offset by an increase in working capital investments to support growth higher tax installment payments driven in part by the impact of U S section of 74.

Interest payments.

Last year's operating cash flow reflected the impact of the card note financial systems integration.

At the end of September DSO was 83 days a couple of days higher than the previous quarters. It is early typical for DSO to rise in the third quarter due to seasonality and our net debt to adjusted EBITDA ratio was one five times well within our internal leverage range of one to two times.

With that I'll turn the call back to board.

Thanks Teresa.

Backlog in the third quarter remained very strong at $6 4 billion.

An increase of 8% from December 2022.

Backlog has grown organically by 6% and continues to grow in each of our geographic regions.

Backlog growth was most pronounced in water, which is up 23% organically.

Water continues to increase with project wins around water security wastewater treatment solutions and water requirements for power generation to support the energy transition and.

And of course with <unk> seven is still underway, we continue to add to our backlog as new task orders are issued.

We've also started to secured backlog for Abbvie with North Umbrian water announced earlier this year and southwest waterfront, which was just announced this week.

Buildings backlog saw a solid organic growth.

Buildings is captured wins in all of their sub sectors. The majority of which continues to be at healthcare civic industrial and science and technology.

Buildings is also benefiting from backlog brought in through the acquisition of ESD, which primarily relates to data centers and mission critical facilities.

Environmental services backlog reflects additional project wins related to environmental assessments, including natural resource service surveys regulatory permitting and environmental monitoring for construction projects.

While difficult to precisely quantify we do know that our backlog includes projects that are back with Iga and <unk> funding are.

Our backlog represents approximately 12 months of work.

Providing reliable water supply requires investment in water management and water infrastructure and we are proud to partner with clients around the world to get water to where it's needed.

Recently, we announced that we were awarded a continuation of our contract with Tampa Bay water for the final design and construction management of a new water supply pipeline, we've been working with Tampa Bay water since 2009 to help meet the growing demand for potable water.

<unk> has been appointed as the civil Engineering design consults for extensive upgrades to Belfast wastewater treatment work.

The largest wastewater treatment plant in northern Ireland.

We look forward to working with the integrated partners to provide cutting edge innovations for flood mitigation doubling the capacity of the plant and improving but water quality for the community.

We continue to provide our expertise for energy transition projects as.

As the primarily as the primary environmental consultants for the recently announced community offshore wind project, we will develop a construction plan and assist with permitting along with other consultant services.

This project has the potential to provide power for over 1 million homes in New York and New Jersey.

Looking towards the remainder of this year, we expect to drive towards a strong finish.

We've raised our guidance again for the full year as a result of our strong third quarter results.

Activity remains robust in the fourth quarter, taking into account its typical seasonality.

We've raised our net revenue growth target for the year to 12% to 14% and expect organic revenue growth to be at the high single digits.

In the U S. We expect low double digit organic revenue growth.

<unk> Global we expect mid to high single digit organic growth in.

In Canada, we are raising our guidance to mid to high single digit growth.

We're also increasing our EBITDA margin target for the year in the range of $16 seven to 17, 1%.

And finally, we are raising our guidance for adjusted diluted EPS growth of 22% to 25%, which reflects the remarkable operating leverage we've been able to achieve so far this year.

While the targets I've just spoke to exclude the impact of our long term incentive plan revaluation. We've also included the targets with the expected impact which is how they will be reported in our financials.

You can view these on slide 13 of our Q3 presentation and in our earnings news release.

Looking beyond 2023, we remain very confident that our diverse business model and engaged workforce are ideally positioned to continue creating industry leading results.

We continue to closely monitor projects in our backlog for indications of a recession or economic slowdown, but our backlog remains solid.

We're not seeing any significant delays or cancellations as well bid activity remains very robust.

In developing our upcoming new three year strategic plan, we've been doing a deep dive across all areas of our business and I can say that we remain very optimistic and excited about the future.

Look forward to sharing our vision for the next chapter of our journey on December five when we announced our new plan and we hope that youll be able to join us.

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

Thank you if you have a question at this time. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile our Q&A roster.

And our first question comes from the line of <unk> with <unk>.

Your line is open. Please go ahead.

Yes, good morning, everyone and congratulations for the outstanding results.

Looking at the EBITDA margin 18, 3% in the quarter.

Very impressive I was just wondering about what were the main drivers behind the strong performance and it looks like that this is the.

Biggest margin you posted in recent history, despite the LT pack so.

So and it looks like that implies a much weaker margin in Q4, so any thoughts about what drove that performance and the implications for Q4. Thank you.

Sure.

So you are right.

Very very strong quarter from a EBITDA margin perspective.

It will be reflected throughout our financial result, and so.

I wont account and so I think of things.

As you roll your way through the P&L and it really starts with.

The quality of our revenue our ability to execute well that has driven a strong stronger project margin and as we work through to our EBITDA.

Very drivers have always said is our ability to maintain high utilization and so that compounding effect.

High utilization.

That's driving higher absolute dollars. It means that you have.

Our proportion of your workforce that is not utilized.

So we're dropping those costs into unrecoverable.

Recoverable liner our admin labor. It also means that there's been a little less time for folks to spend timeline on marketing and business development.

Not to the degree to which we would neglect that of course, but it just means in real time is that there is a focus on addressing current projects.

And getting that work accomplished.

And we combine that with.

Again, our continued focus and discipline on our spending and.

We haven't seen a rise in the us and hiring.

High value centers in Kuwait in particular, so it's really I think a matter of doing all the things that that were supposed to be doing all of the same time and driving to a really strong result, as we look towards the fourth quarter. It does typically moderate.

And that is our expectation.

Tends to be a little bit slower so utilization is not as high because.

Weather related reasons, the fill season is largely over in colder climates.

The busier holiday season, and we do expect and want people to take time off.

To refresh to take their vacation time, as we work into the fourth quarter and so that is fairly typical.

That is why the.

You'd see that fourth quarter EBITDA margin is expected to come down.

Okay, that's great color.

And just looking at your organic backlog decline for first time quarter over quarter was mostly driven by the U S and cannot though is this mostly due to project timing and the confirmation of funding flow from government infrastructure programs and on a high level. What are you seeing on your.

And in terms of speed for fund funding coming out.

Yeah, So maybe I'll address the first piece <unk> can talk about the timing of funding, but part of what you described is what drove that.

A drawdown of backlog from Q2 to Q3.

Got it.

It was in Canada, and the U S and again that correlates directly with the outperformance of organic revenue growth and it means that we drew down that backlog faster we were busier.

And again, that's reflected in the revenue growth.

The trends that we would find concerning at all.

This is the third of the advantage of what you typically see in the backup using more in the fourth quarter.

But activity level remains very high on the bidding front and as you referenced the timing within which we actually have everything completed so that we can recorded in backlog, it's a snapshot in time so.

Were confident that backlog remains very solid and unless great trajectory completely agree there.

We're not concerned with that reduction in backlog.

Orderly basis, but on the timing we are seeing that some funding starting to flow.

We've been talking about this now for a couple of years in it and it's always.

We've been optimistic as an industry that it's this quarter the next quarter or this half the next but we are seeing that those well.

About 23% of the <unk>.

Funds have been dispersed and we're getting ready for the 24 allocation now.

That's starting to hit.

To hit the Street now so I think that's only going to continue to strengthen the interesting thing is that when you look at our strong performance year to date.

Thats been without really any of the funding from IHA or some of those other things. So thats I think just going to further strengthen as we move into 'twenty four and the years beyond.

Okay. So thank you very much and looking forward to seeing you in Boston on December 5th.

Thank you. Thank you and one moment as we move on to our next question.

Okay.

And our next question is going to come from the line of Michael <unk> with Scotiabank. Your line is open. Please go ahead.

Yes.

Hey, good morning, guys.

Good morning.

Good morning, so on the margins, obviously really good margin expansion in Q2 Q3.

A follow up on the last question, but now you're exiting Q4 flattish versus the Big Q3, Q4 margin expansion, sorry, Q2 Q3 margin expansion.

Do we how do we square the moving parts into 2024, given the above average margin expansion in 'twenty, three but the flattish or generics it.

So I think when.

When we when we look at our margin and we consider it on an as reported basis. So throughout this year because of the impact of revaluation, we pulled that piece out. So we can identify what our performance has been relative to the baseline reset at the start of the year, but of course.

As Greg noted in his remarks.

We also have the impact is in our admin and marketing costs and that does reflect.

Our EBITDA margin and so when we come out of this year, we do expect that.

The margin will be.

Higher that was last year.

And as we look towards the coming years, we continue to expect to be able to grow that margin recognizing that.

If our share price stays where it is.

<unk> continues to expand that there will continue to be this dynamic of a growing impact on our cost, but notwithstanding that we do expect that the margin will continue to expand so it's not something that.

We.

That we're concerned about in terms of our ability to drive that margin growth and it's again, it's all of those levers that I talked about earlier.

And a few other things thrown in that that are going to help us to continue to grow our margin.

Thanks for you. So it's super helpful and I think you talked about some of the reasons for the upside surprise in Canada.

I guess the question is how sustainable do you find this incremental.

Organic push here.

Because if we were to assume in Canada as I call. It a mid single digit organic growth type market.

Does this.

Effectively represent a tougher comp for next year, just trying to square that out as well.

Yes.

Anytime you have that.

A very good year. It makes it harder next year from a from a.

Mathematical growth standpoint.

When we came into this year.

What we are anticipating because the back half of last year was really strong for Canada.

So we have been very pleased with that.

Our continued high level of <unk>.

In Canada some drivers.

Increased investment in healthcare in our building sector for instance has just been.

Greater and more sustained than we had expected and we're expecting that that's going to continue in the next year.

A couple of larger projects for both our environmental and our transportation groups.

<unk>.

Hum.

Have gone.

Gone faster than we expected to be driven solid growth this year.

And so how that affects our growth rates for next year as part of what we're working on as we are prepared to rollout of our strategic plan targets and our guidance in early December but we do expect that there will continue to be growth in Canada will it be as strong as it's been this year will moderate.

Somewhat.

That's the piece, we're working on but but we do still expect Canada to have the capacity to grow next year.

Very helpful. Thanks, a lot and I'll see you soon.

Thank you.

Thank you and one moment as we move on to our next question.

Yes.

And our next question is going to come from the line of Chris Murray with ATB capital markets. Your line is open. Please go ahead.

Yes, thanks, good morning.

Gordon.

The second quarter in a row, where you guys are seeing some really good.

Organic growth and really your commentary is.

Optimistic.

The future.

No.

If im hearing you and I've kind of putting together the pieces you've kind of sounds like there you talked about a little bit that you haven't really haven't seen much of the benefit from things like <unk>.

There's a lot of what youre seeing in an organic has been good and then you also mentioned I think your turnover was was better maybe than you had expected as we put that together and we think about the next couple of years.

Is there anything to suggest that U K that you wouldn't be above kind of our normal organic.

Mid single digit growth rate.

Through 'twenty, four probably for $25 26 as well.

We will be issuing our.

Our guidance for 2024 on December five when we have our own roll out our strategic plan in Boston, So I won't comment specifically on any numbers, but when you think about the industry overall.

This is the season, where theres a number of these.

Engineering firm CEO conferences, and so I've attended two of those recently.

Yes.

The general sentiment is that the market is very very robust we see that.

Strong.

Strong support in certainly in water and transportation and energy and energy transition like there's just an enormous amount.

Of opportunity there. So there is nothing that we see on the horizon in any of our geographies that we would think would be pointing to a downturn.

Our overall business for us.

Truly for our competitors. So we really do feel good about the next several years.

Okay sure.

And then Teresa just maybe talking and going back to project margin for a couple of seconds.

Again very good result, we saw that we did make the comment I think.

A couple of the segments that there were some recoveries that also went into the margin.

Can you give us a sense of the order of magnitude either dollars or basis points on on how much that played into the margin performance in the quarter.

Sure.

Yes.

Recoveries.

<unk> releases, a change order approval those are always.

Dynamic within our business of course, and what we saw this quarter was a slightly higher volume than.

And then typically we felt it was important to call out as one of the drivers. It certainly wasn't the most significant driver in terms of our outperformance, but it but it has an impact and we would estimate it was.

Twentyish basis points up from a margin standpoint, so again, not overly significant but enough to make an impact.

Okay. That's helpful. Thanks folks.

Thank you and one moment for our next question.

Yes.

Yes.

And our next question comes from the line of Michael <unk> with TD Securities. Your line is open. Please go ahead.

Okay.

Maybe just a follow up on that last question about the change order impact trees.

Appreciate the color on the margin.

Would that have had any impact in the organic growth rate you did in the quarter in terms of benefiting it.

Yes.

Not really no.

Kevin I think some others got a check and then in terms of the margin for the fourth quarter. When you were just thinking about EBITDA margins.

Can you talk a little bit about this earlier, but when we're looking at project margins and SG&A as a percentage of revenue in the fourth quarter. What is it that we should really be thinking about as sort of.

The area that see sort of the biggest.

Pullback as you go into the fourth quarter and see a bit of a step down.

I think as we head into the fourth quarter again net debt.

We are going to expect in general that organic growth.

Will likely moderate relative to what we've seen for the first nine months of this year I think project margin we should expect.

Would not very dramatically in terms of the.

Percentage.

<unk> margin because that is purely a reflection of.

Our execution on particular projects.

But we do expect that.

EBITDA margin driven mostly by admin and marketing costs will be will be lower than what you've seen for Q2 and Q3 in particular again as we have.

Yes.

Probably a slower or a step down in our utilization to reflect that.

Consistent with the comments I made earlier.

So thats, where youre going to see it I think and that there should be fairly broad based across our organization.

That's helpful and then.

I suspect we may get some more.

Thoughts on detail on this at the Investor day, but maybe I'll just.

Ask right now just in terms of looking forward on the margin.

Performance in potential within the business.

How do you think about the margin improvement potential from here again, you had a very strong quarter here in the third quarter.

Hum.

Are there.

What would be the potential drivers to further improvement in sort of how much room might there be to go on that front.

Yes.

As I said earlier, there is room to continue to expand margins.

And we will go into a bit more detail.

Our Investor day, when we have a leather strap plan, but there.

There is not going to be anything shocking in there. So it's all the same drivers and I think again, what you saw and what you've seen us do for the year to date is really in the successfully deploy all of these strategies to grow our margins and so I've every expectation that what we've done to this point, we will continue and the outlook.

The operating leverage that will again sure.

Our business through our size our scale.

Our ability to to manage our workforce in a strategic way.

All of those things will continue to give us opportunity to expand our margins.

Okay. Thank you and maybe just one last one here.

I appreciate the challenge early in the year with trying to provide guidance that is inclusive of the chip.

Yes.

Piece.

We appreciate you, giving us that that detail.

This time around because it's sort of more closely aligned with how the results actually.

It reported.

The question is in the guidance you've given that include the expected impact of our tape revaluation do you make assumptions.

For the fourth quarter and coming to these numbers on what that looks like or do you just assume nothing or how do you how do you deal with that and the fourth quarters and assumptions.

Yes.

Tricky to think our way through how to provide it in a way that's helpful. Because.

Jeff by saying.

A number of you have asked US one on one why can't you give us.

Specific guidance or a rule of thumb or houses were extended in part what complicates. This is our need from an accounting standpoint to run a Monte Carlo simulation.

On what our performance from a relative GSR standpoint, as well compared to our peers and so that.

That is a wildcard so in the guidance that we've provided what we've said is assuming there is no change in our share price from the end of September assuming all of the metrics stayed the same here's what the impact will be and Thats. The best guidance. We can provide because of course, we don't know what's going to happen from a share price perspective.

And so the.

The piece that even if our share price doesn't change from the third to the fourth quarter as we continue to accrue a quarterly tranche of our L. Set that now gets priced at a higher level than what had been assumed when we set our guidance at the start of the year and so there is an impact even if your share price doesn't move.

<unk> from third to fourth quarter, and thus the value that we've tried to give you.

Okay.

That's helpful. Thank you.

Thank you and one moment as we move on to our next question.

Yes.

Our next question comes from the line of Saba Khan with RBC capital markets. Your line is open. Please go ahead.

Great Thanks, and good morning.

Quite a bit of color on the outlook and just the demand environment I was hoping we could go a little bit deeper into it.

You might be hearing from kind of the U S Federal state and municipal customers like a lot of the other.

Pushback, we've heard from investors over the recent week has been macro related. So I was hoping you could just maybe give you an opportunity to share some comments on.

And kind of some of the specifics youre hearing on the rollout of these bigger plans kind of their ability to fund these programs.

Just kind of a state of the U S kind of.

Government customer relative to where it was maybe three or four months ago. Thanks.

Yes, thanks have a good morning.

<unk>.

We're feeling really strong about the U S economy overall you've seen.

Organic growth this year's been about 13% 12, 9%, we just kind of matching that here in the third quarter, but we still see very strong growth. When we look at some of our big markets in the U S.

Water, certainly 26% organic growth in water in the quarter and we see no slowdown in the type of work that we're doing there is certainly a lot related on the industrial side, we've talked about.

Some of the advanced manufacturing facilities previously that we're working on there we see a lot of work with the U S. Federal government from the perspective of.

Shoreline resiliency type work and so on so a lot of opportunity. There. So we feel very very strong in the water business transportation remains robust and thats even.

Said before the <unk>.

<unk> has really started to hit and we do expect that to be more of a.

Tailwind for us through 'twenty, four but really that's going to provide once that's ramped up strong bidding environment out to 2028.

Beyond energy transition still very strong and we see a lot of work coming out in <unk>.

The electrical grid strengthening we saw just in that and just yesterday I think it was announced a valid initiative in Texas.

Several billions of dollars in electrical grid strengthening so whether it's <unk>.

Electrical grid work environmental work Waterwork transportation, where we're just seeing very strong support.

And all of our businesses in.

In the U S. But one area that we are seeing a little bit of potential softness would be in our land development business.

You've seen housing starts trending down a little bit as interest rates have gone up so that's something we're certainly monitoring.

Not just in the United States, we're seeing that in the UK as well so it's not a significant piece of our business, but certainly something that we're watching closely but other than that we see.

Very very strong tailwind.

Our business.

Okay, Great and then I guess.

Amidst this kind of outlook how are you thinking about staffing up weather.

Primarily in the U S. You know you've got a potentially large pipeline of demand.

And are you going more with full time or are you looking more to go toward contract to keep some flexibility just and maybe how does the wage situation in terms of hiring engineer.

Engineers consultants et cetera.

Yes, so the majority of the people that we bring on some of our full time full time employees and I've made a couple of comments in our.

In the prepared remarks, firstly that our our voluntary turnover rate when people leave us have returned to pre pandemic levels down almost 2% in the last in the last year, we've had record hiring quarters in terms of number of people. Joining US Q3 was another record we're hiring at roughly two times the rate that we did before the pandemic.

So we've got we've got good work.

Bringing on good employees from a salary perspective, interestingly, we're seeing salary pressure softened a bit this year from what we saw last year last year, we saw overall salary increases.

In that four to four 5% ish type range. This year, we're seeing it in that three to three 5%, sometimes four but certainly we've seen that.

The wage inflation has moderated.

From an expectation perspective, as we go into 2024 and our industry.

Okay, Great and then maybe just one last one just kind of take the demand commentary just a commentary around the labor situation kind of how would you think about pricing into kind of 'twenty four 'twenty five relative to maybe 23 I'm not sure if that's something.

Youre going to correct, the Investor day, but just curious how the directional pricing environment is trending.

Yes, I think what certainly what we've seen all through 2023, when you look at our project margin and such you see that we've been able to pass on that additional salary pressure.

And from a fee perspective, certainly I think we see that being the case as we move into 'twenty, four and beyond as well.

The industry is busy.

People, we certainly are being more selective in terms of the projects that we pursue the clients that we've worked for and so I think that does give us a little bit of pricing pressure pricing.

Support as well.

But this is still a competitive industry no one gets the right their own check, but we are seeing that.

We have a little bit of ability to.

Increased pricing as well to cover that.

Salary increases.

Alright, thanks very much.

Thank you.

One moment as we move on to our next question.

Yes.

Our next question is going to come from the line of Ian Gillies with Stifel. Your line is open. Please go ahead.

Yes.

Yes.

Good morning, everyone.

Good morning.

With respect to employee utilization in the third quarter or can you get it any better than it was or was that kind of as good as it gets.

Thanks.

I think Ken.

Get better.

There is always room to move upward again.

Do you think about object detection, we work in.

You have different levels of utilization across different business lines geographies. So I would say that generally there is opportunity to increase utilization.

It was really interesting about the third quarter and utilization where it was the strongest was our water business in Canada, particularly the U S and you saw that in our revenue growth and that really was the product.

Being able to import.

From brokers from other parts of our business and to help address the backlog.

So I think about 100 ftes.

That we used from an important standpoint.

I think they use.

360, Ftes in our Q&A office, and Thats really what helped to drive the utilization.

As I commented earlier, when we go into the fourth quarter.

We really want to see some of those folks take a take a bit of time away because the utilization has been so kind of and so again.

Expect some of those folks that may be have been with.

So that's into that business go back into their own.

Our businesses as they start to pick up so that mix is really really dynamic, but it's a bit of a long answer Ian but I think really.

We were very successful and have become very successful at how we manage our workforce and so I think overall the ability to continue to move utilization up is certainly there.

Okay. Thanks, that's quite helpful.

Maybe bring you back to some of your time at Barrick.

I wanted to ask about cash taxes.

I know theres been some changes in the U S, which are kept those elevators are you seeing anything transparency transpiring on that front that makes you go back to normalize our change in future aircraft, perhaps even improve free cash generation and where it is today or is it a pretty steady state.

No I mean, I think for cash taxes. Unfortunately has taken a step in the wrong direction, mainly because of this U S $2.

74, the change in how the allowance deductibility for your R&D costs. So I think everybody knows that yes up until.

Very recently, you were able to deduct as you incurred them and starting this year, we now have to capitalize them for tax purposes.

And and are only allowed to amortize them over a five year period and so what that's done is it's actually increased our cash taxes.

Until we reach kind of a five year time horizon, where now we have five years of programs all rolling over together.

I'll take it jumped out of our cash flow to a greater extent than we've seen before.

As you saw from our results that we.

We continue to focus on strong cash flow generation.

And in spite of that extra bit of taxes, we're having to be in the U S.

We're managing to continue to strengthen our cash flow.

Okay. That's helpful. Thanks, very much I'll turn it back over.

Okay.

Thanks Ian.

Thank you and one moment as we move on to our next question.

Our next question comes from the line of Maxim <unk> with MBS. Your line is open. Please go ahead.

Hi, good morning laboratories.

Good morning, Matt.

Thank you.

<unk> recently added a chief Technology officer to your management from Austria, and I'm, just wondering in terms of.

Maybe some of the kind of the Roadmaps.

This new individual is going to be hoping to sort of.

Implement a special on the digital side I was wondering if you can give us a bit of a pretty prudent from that perspective.

Yeah, absolutely we're thrilled with the individual that joined us as our Chief Technology officer, and so that.

We've been talking over the last couple of years about our some of our digital programs, whether those are internal initiatives to increase the amount of net revenue that we can generate per employee from an efficiency perspective, and also externally in terms of the products that we can develop and offer for sale.

To our clients, who are looking for them and so we've been working through that for the last couple of years. This individual who has joined US really his charge is too.

To focus on both of those activities, both internal and external working very very closely with our <unk>. Our current chief information Security officer, who provide sort of that foundational piece of cyber the the tool sets and then working closely with our CTO to ensure that we are.

We're focused we're getting the highest use and I think youll see over the next couple of years, we're going to increase the amount of time and focus that we're spending on those those digital those digital products. So we're really excited about it and I think it'll we'll see some really short term benefit from that as we go into 2024, and then only strengthening in the year.

To come.

Okay, Yes, so and to your point like the tools that are being kind of developed a rolled out I presume most of that stuff is kind of off the shelf. So it's not like super bespoke to see the results like in 2027 months.

No I think thats right. So a lot of the products that we are developing externally for example, we already have products for sale on the Microsoft Azure marketplace that decline.

The clients are going directly there to purchase and go. So we are looking at less bespoke one off type products for our client and more of something that we can resell.

<unk> is a software as a service and generate higher higher margins from that increasing the amount of non labor revenue that we generate there.

Okay Super helpful. Thank you so much and Teresa just a quick question for you. If I may do you mind, maybe just commenting on the kind of the puts and takes of global.

Growth outside of the U K just in terms of what you're going to assume there. Thank you.

Yeah, So I think.

Outside of the UK, Australia is certainly.

Our next biggest geography, probably actually similar inside.

And each of the New Zealand.

That.

Again, both performing very well.

See good growth drivers in both of those geographies.

And in particular in <unk>.

Credibly strong operations for us, albeit just under a thousand people they continued to perform very well so.

The water sector in both of those geographies will continue to be strong and of course, we're very strong there and.

The transportation side of things from an infrastructure standpoint, probably still on the on the on the.

The upswing as we've seen in the U S but funding.

Mrs and funds allocated so that growth will expect we would expect to continue to to just show up and on the energy and resources side.

From a.

The mining standpoint in Australia.

The growing market for energy.

Renewable energy in those in those geographies in Australia again are very strong drivers. So we feel very positive about that.

The smaller spaces, the Netherlands, where we have an environmental services business very good demand there.

And so across the board I think we feel that there are good drivers in each of those geographies and again as it gets smaller so a little bit harder to detect in our results but.

As we've said before it really is.

Part of what makes our business model resilience is how diversified we are both in terms of business line and geography.

100% and maybe just any kind of final thoughts in terms of kind of the M&A landscape.

What are you seeing now.

Yes.

The M&A landscape very very busy.

We certainly are in active discussions with firms in different locations around the world. So.

It's robust, we're seeing multiples not necessarily trending upwards, but not a lot of softening either over the last couple of quarters. So we're going to keep working on it Max.

Very very disciplined and.

When we're ready to move forward you can see that.

The dry powder is there and we look forward to announcing something.

Excellent. Thank you so much.

Thank you and I would like to turn the conference back over to Greg Johnson for closing remarks.

Great well. Thank you again for joining US today, we're very pleased with our performance this quarter and we look forward to rolling out our new three year strategic plan on December 5th in Boston, and we hope youll be able to join us either in person or via the webcast Goodbye and thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

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Yes.

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