Stantec Inc

Welcome to Stantec's third quarter 2021 earnings result conference call. Leading the call today are Gord Johnston, President and Chief Executive Officer, and Teresa Jang, Executive Vice President and Chief Financial Officer. Stantec invites those dialing in to view the slide presentation, which is available in the Investors section at stantec.com. Today's call is also webcast. Please be advised that if you have dialed in while also viewing the webcast, you should mute your computer as there is a 20-second 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 in Stantec 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 the call over to Mr. Gord Johnston.

Good morning, and thank you for joining us. Two weeks ago, we announced our agreement to acquire Cardano's North American and Asia-Pacific consulting businesses, and the feedback from employees, clients, and investors has been overwhelmingly positive. We had a large number of Cardano employees on the webcast the other week, and to those of you who are joining us today, we are really looking forward to welcoming you to Santec in the weeks ahead. There's a tangible excitement about what we can accomplish together. Cardinal CEO Susan Reisbord and I speak almost daily as we chart our path forward. And later today, Susan and I will jointly host two 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 headcount by 15% to 10,500 people and will add 1,100 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, Stantec's 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 client needs is essential, and with Cardinal, we're going to double our presence compared to five years ago. In Australia, Cardinal will almost double the size of Stantec's 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's 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. All told, Cardno will add 2,750 employees to Stantec, bringing our global employee count to more than 25,000 once the acquisition closes. And we expect Cardno 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. Santec 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 a sustainability-linked loan structure around our existing credit facility, which incorporates Santec's emission targets. As part of this new structure, we are very proud to be the first organization globally to incorporate the Bloomberg Gender Equality Index score as a metric. We are also the first in Canada to commit to 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, announced that Stantec was one of only 45 companies in the world awarded the Terra Carta seal for driving innovation and momentum towards a genuinely sustainable market. This is yet another accolade for Stantec's 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 is an integrated platform of more than 40 services and disciplines spanning all of Stantec's 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 1.4% or 3.3%, excluding the impact of the Descope Trans Mountain expansion project. This reflected almost 11% organic growth in global and 8% growth in Canada, excluding Trans Mountain. The U.S. demonstrated significant progress towards growth as the market continues to recover and notified awards 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 markets throughout North America. In fact, excluding the impact from Trans Mountain on our 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 expertise in the Netherlands with the acquisition of Driven by Values. This 28-person engineering and consulting firm is a trusted partner for public and private entities, navigating the transition toward 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 in native currency to an all-time high of 2.1 billion U.S. dollars as we begin converting the surge in notified awards that we referenced in Q2. Environmental services performed very well on the strength of both organic and acquisition growth. Thematically, 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're seeing continued strengthening in buildings. Our buildings group has weathered the pandemic much better than the broader building 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 healthcare, civic, and industrial processing. On the science and technology front, we recently signed a contract for a major 415,000-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 2022-2021. and anticipation for the US 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 from major projects, as healthcare sector work on the St. Paul's Hospital in Vancouver and other large hospital projects in Saskatchewan and Ontario continues. Beyond healthcare, we're seeing continued strength in civic and mixed-use projects that are focused on revitalizing and repurposing existing commercial properties in Canada's 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-constructed 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 Toronto's 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 front-end permitting work to support projects like the City of Edmonton's Metro Line Northwest. In addition to this work, Stantec 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 in dams, energy transition continues to build momentum for our energy and resources team, who are now working with Tidewater Renewables to design the first commercial-scale renewable diesel and hydrogen facility in Canada. Stantec 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. In Australia, GDP and employment 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 Harbour 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 AM7 programs in the United Kingdom and Ireland, as well as water frameworks in Australia and New Zealand. Transportation's 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 multidisciplinary services framework for roads-based transport in Scotland and our decarbonization project with KiwiRail in New Zealand. Our strong results in Global's energy and resources group were driven by mining, where strong commodity prices continue to fuel strong demand. 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, Gord, and good morning, everyone. We delivered record adjusted EPS in the quarter. Adjusted 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 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 business development efforts on major programs and bids. 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 or 54 basis points as a percentage of net revenue. So absent this factor, our adjusted EBITDA margin would have been 17.3%, matching last year's margin. Our 2023 real estate strategy remains on track to deliver 10 cents in adjusted EPS by the end of this year. IFRS 16 has eliminated the visibility of how impactful our real estate strategy would have been to EBITDA, But for reference, we estimate that on a pre-IFRS 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 $0.72 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 drawings from our credit facilities. We expect to remain well within our leveraged target range on close and to deliver toward the low end of our target range by the end of 2022. Days still outstanding with 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 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 to fund our acquisition growth aspirations. And with that, I'll turn the call back to Gord for his closing remarks.

Thanks, Teresa. Stantec 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-step change in our market share of federal IDIQ programs this quarter. we are now supporting 10 times the total IDIQ 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 in our Canadian and global operations and the positive benefit from Cardinal and our other recent acquisitions, and we see strong tailwinds as we enter 2022. And with that, I'll turn the call back to the operator for questions. Operator?

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 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 Frederick Bastion with Raymond James. Please go ahead.

Good morning, both. Good morning, Frederick. Guys, you highlighted an increase in business development costs, which was to be expected with the economy slowly reopening. Just wondering whether those activities are back to pre-pandemic levels or you're still seeing sort of a gradual ramp up over the next few quarters.

Yeah, Frederick, great question. Those BDE costs are not yet back to pre-pandemic levels. We're still, travel is restricted. Not restricted, but it's a lot slower than it was previously. And we see that, you know, 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 our people to get out and meet with clients again, for our people to go to a conference or a trade show to be into, you know,

elevate our position there again but it certainly remains below pre-pandemic levels and in fact you know even as we think into next year we see that staying the same okay great um i guess maybe a question that's related to that i mean you we saw organic growth return to positive territory in the u.s but it it was a slightly lower than what i was expecting anyway um Just curious as to sort of the ramp up that you're seeing over the next couple quarters. I mean, when do you expect, you know, this organic growth to really resume in, you know, in the healthy territory?

Well, in the U.S. in particular, Frederick, or overall?

No, I mean, there's absolutely nothing wrong with the other regions as you've demonstrated. Just curious about the U.S. specifically.

Yeah, so in the U.S., a couple of things of interest. Our... Our overall backlog in the U.S. is up over 10% year-to-date. And specifically, a couple things that are interesting. I mentioned earlier that our environmental services backlog 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%. You know, couple that with our The IDIQs for the US 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 a billion dollars. So, you know, lots of good opportunities there. And then couple that with the infrastructure stimulus bill on the horizon. And, you know, my gut says the U.S. will get above the line in Q4. But if it doesn't in Q4, Frederick, you know, we see strong, strong tailwinds as we go into 2022. Okay, good to hear it.

My last one relates to Trans Mountain. When did it start, or at least when did de-scoping happen? I'm just curious when it will start eating into the organic growth in Canada.

Yeah, you know, Frederick, nothing will make me happier than in Q1 of next year when we don't have to reference it anymore. So the de-scoping, the way we change that – was started in January 1 of this year. So Q4, so next quarter, will be the last time we'll have to reference anything to do with the impact on growth from Trans Mountain. Okay.

Thanks, Gord. Pass it over. Thanks, Gregor.

Thank you. Our next question comes from Uri Link with Canaccord Genuity. Please go ahead.

Good morning. Good morning, Uri. Morning, Gordon. Teresa, 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, you're 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, you know, is my math off or how should we think about organic growth, particularly in the United States in the fourth quarter?

Yeah, so, you know, in the United States overall, in the fourth quarter, we are expecting sort of, you know, organic growth to be positive. But as we look at overall at the business, to your point, you know, what we've seen that, you know, the year is kind of unfolding as we expected. You know, 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. You know, water's 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 energy and resources without Trans Mountain also returned to positive growth this quarter. And so, you know, we see that continuing into Q4. Will 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 I think what's really important is that for 2022, we're ideally set up with the backlog and the opportunities that it's really going to be strong going forward.

So how should I think about then that 1% to 5% organic growth guidance for 2021? I mean, it doesn't sound like it would quite get there.

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

Okay. So what kind of tax rate should I be thinking about for 2022? And if you could give me that number with Cardinal, that would be even better.

Yeah, so for 2022, we have not put our guidance out yet, and particularly with what it might look like with CART, so that work is still underway. I don't expect generally that there will be like a significant increase relative to this year. I think what we've seen this year ought to also hold true for next year. So I don't expect a significant change, but again, we'll have to confirm that at the end of the year, at the end of February, when we actually do roll out our guidance.

So that would be that 22% to 22% range?

Yeah, I think that's a good working assumption at this stage.

Thank you. I'll turn it over. Thanks, Jerry.

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

Good morning. Good morning, Jacob. Maybe I'll start off with the timing of the cardinal closing. I know you expected that this is going to close by year end. Other than the shareholder vote December 6th, what other hurdles, regulatory or otherwise, stand in the way?

You know, there are a few customary approvals that we need to get done in the U.S., but Jacob, I don't think there's anything there that would impede close. You know, the main one really is that their shareholder vote on December 6th. So, you know, assuming we close, you know, very soon after that, we don't see a, you know, just like the caution that I don't know that we'll see a huge amount of revenue from Cardinal coming in in Q4. You know, say they come in, you know, mid-middle, a little earlier than that in December, and then we go into Christmas. So we just wanted to, you know, as we were thinking about it, you know, just try to walk that through. Okay.

Second question here is just on the award notification conversion. I know there was, you know, quite a bit of talk about the last couple of quarters with that $1.2 billion in award notifications. How much of that is converted to backlog? And then, you know, are we still waiting for this U.S. InfraBuild to pass? And how quickly would that conversion happen post the InfraBuild being passed, in your mind? Yeah.

Yeah, so one of the things we mentioned last quarter is that sort of soft backlog, half of it was in the U.S., and it has really begun to convert because we already saw, you know, 5% growth in backlog in the U.S. in the quarter, again, taking us to an all-time record high in U.S. dollars of a little over $2 billion, and none of that is dependent on U.S. stimulus because, you know, we haven't factored any of that in yet. So, you know, very, very healthy, in fact, record backlog in the U.S., even absent the U.S. stimulus program.

Thank you. I'll leave it there. Thanks, Jacob.

Thank you. And our next question comes from Michael Touffon 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 updates there? And then also to what extent that benefited EPS in the third quarter?

Sure. So generally the plan is going really well. 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 with 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 2.5 cents per share that that strategy has generated. The remaining 25 to 30 cents that we indicated would come beyond the 10 cents is, as I've noted previously, more back-end 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 reentering 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. So it's just been a really positive program for us and is on track.

Okay, that's great. Thank you very much, Teresa. 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?

You know, I certainly think that from a gross margin perspective, you know, it's continued to strengthen over the course of this year. And we are being, you know, really focused and diligent in our review of projects and the ones that we choose to take on. So, you know, we do feel like where we are at today is really healthy, and that's certainly what we would aspire to achieve going forward as well. And then from an EBITDA perspective, you know, we continue to benefit from much lower discretionary spending than we've typically seen. But we're also managing to keep our overall cost down. So as we round out the rest of this year, typically Q4, the margin compresses somewhat just because of the holiday season. And so we don't have as many chargeable hours with the holidays, particularly in North America. But I think we're really pleased with where our EBITDA margin is coming out.

That's great. And then just lastly, looking at Canada's organic net revenue growth, I know it would be higher were it not for the Trans Mountain drag. That said, organic net revenue growth slipped to 1.1% in the third quarter, whereas it was closer to 6% in the second. I'm just wondering if you can comment on that. the driver behind that pullback quarter-over-quarter.

Yeah, and you know, also, you're right, without Trans Mountain, that would have been 8%. So, you know, it certainly has a, you know, that Trans Mountain 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, you know, then that'll be clear of our results.

Okay, fair enough. I guess I'm just wondering, though, 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.

You know, nothing in particular. You know, the buildings group continued to roar ahead with a number of the big hospital jobs. Infrastructure, you know, both land development and transportation was very, very strong. You know, I do think that we, you know, we're getting some new projects going in our environmental services group. You know, we mentioned the 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 ES projects that were, again, just starting up, some of the carbon capture projects for Shell and so on. So I think that was probably just, you know, a quarterly blip as a number of projects were restarting.

Okay, thanks for the details.

Thank you. And our next question comes from Chris Murray with ATB Capital Markets. Please go ahead.

Yeah, 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, Gord, you know, at TMX, you're running an 8% clip in organic growth. Does that feel sustainable to you as we go into 2022? I do think that...

you know, Canada and global got off to a stronger start as we emerged from the pandemic. You know, you can look like in our XTMX, you know, Canada Q8% in Q3, global 10%, a little over 10% organically in Q3. I think that those started earlier. And then... Can you hear us? Okay.

Operator, are you able to still hear us?

Hello? Oh, sorry. Okay. No, good. We just got a note on the side that our audio signal has been lost. So I just wanted to confirm after what we had last time that that was still the case. So... So, yeah, we said that certainly, yeah, we saw great growth in Canada and global, both sort of an early jump out the gate here in 2021, U.S. a little bit slower. So I suspect that next year we'll 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 that's interesting about Cardano is their security business with the U.S. federal government, and I think that's an area that you don't really participate in now. I think it's actually a closing item for that transaction. Can you talk a little bit about the impact that you're thinking about around, you know, growth in that business and how you can leverage, you know, existing Stantec services into that business? And, you know, 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 secure area 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 Stantec service offerings into it. You know, in terms of overall margins and in terms of the overall size of that, I think we're still, you know, truly just kind of wrapping our heads around what that would be. And so we probably have a better picture to give you a little bit more clarity at Q4 earnings call.

Okay. Fair enough. Thanks, folks. I'll turn it over. Thanks, Chris.

Thank you. Thank you. And our next question comes from Benoit Poirier with Desjardins Capital Markets. Please go ahead.

Yeah, good morning everyone. Just to come back on the organic growth for the full year, still maintaining the guidance, although you commented about the expectation for Q4. However, when we look at cost contentment efforts and the gross margin improvement, Am I right to say that the focus is more on the EPS growth and given those strong margin improvement, it's less dependent on your ability to achieve the high end of the organic growth range?

Yeah, I think that's right, Benoit. I mean, you know, just back on the outlook for organic growth for the rest of this year, as Gord indicated, I mean, we do have you know, expect the continued push toward organic growth for the quarter in Q4. And then for the whole year, you know, 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 kind of reiterate, too, 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, it doesn't necessarily mean that you gravitate to the middle of it. I think we provide a range so that we can give a sense for 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, but there are so many other factors that we are focused on in delivering the EPS growth that we've been actually, I think, quite successful on. And so that is better growth margin, but it's also around our EBITDA, our cost containment. It's the strategies we've employed around real estate that have really made a meaningful contribution to EPS. So it is all of those things together. that we are very focused on, that we are looking at driving our stronger metrics from a bottom line perspective, and that is a reflection of how we think about running this business.

Okay. And in the MD&A, you mentioned that employees are in the process of returning to the office. I was just wondering if employees' preference as change toward work from home versus the initial expectation for the plan?

You know, it's interesting that we've seen over the pandemic, because there's been a couple times where we said, okay, let's all go back in, you know, as of after Labor Day, and then, hey, everybody stop, don't, don't, everybody go home again, and so it's, I think, a little bit of this these waves of get ready to come in, okay, stop, get ready to come, good, stop. But, you know, we have seen, we track 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're looking forward to coming back to the office. You know, so I think in general, our overall real estate strategy in terms of the discussions we had with employees remains sound. And then we'll just have to it's different by different regions as well. You know, even by country is different. Some areas, for example, in the United States that are in Urban areas, you know, large cities where a lot of people travel on public transit, we have a little bit less people coming back to the office as a percentage basis than we would in, you know, a smaller center where, you know, you park in the parking lot and walk into the building without needing to go in an elevator or public transit. So we're seeing some of those things. And so we're just continuing to monitor and talk to folks. But we still remain confident in our overall real estate strategy.

Okay, that's great color, Gord. And with respect to the overall labor shortage, wage increase, could you maybe provide some color on how it impacts organic growth, whether it will provide how much of a boost it could provide on organic growth going forward as you pass through those price increase to customers?

Sure. So, you know, a couple of things there. Firstly, about just the, you know, the staff count numbers. You know, we always find there that the best way to keep your staff counts high is to not be losing people. And, you know, 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 to Stantec through the overall pandemic. So we did actually just conduct an employee engagement survey in the fall and able to compare our results to pre-pandemic numbers. And it's interesting that our overall employee engagement score rose by almost 6% since the last survey, whereas globally, overall firms' 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, you know, one of the things we've often talked about is that our voluntary turnover rates are always, you know, 2% to 3% below industry average. You know, certainly ours fell during 2020, but everyone else's did as well. But now that we're coming out, you know, certainly our voluntary turnover rates have risen, but there's still a couple of percentage points below where they were before the pandemic. So we still, you know, we read in the paper about the great resignation and so on, and we're seeing some pressure there, but certainly... again, still below the levels that we were pre-pandemic. And then, you know, so what our hope is that through this sort of period of uncertainty, that we'll be a net importer of, you know, 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, you know, from a salary pressure perspective and how that might impact margins and things going forward, there absolutely, without question, is salary pressure. And You know, many of our contracts, we do have a cost of living increase to them, but certainly not all of them. So, you know, as we go into next year, we don't anticipate significant impact to margins, but, you know, it's possible that we might see some, you know, particularly in the first half of 2020, but, you know, 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, Collar. Thanks very much for the time. Great. Thank you.

Thank you. Our next question comes from Sabat Khan with RBC Capital Markets. Please go ahead.

Great. Thanks, and good morning. Just wanted to get a little bit more color on what you're seeing in the U.S. We're hearing from a lot of your peers as well recently that the clients there 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 you're seeing in public versus private customers and You know, it sounds like infrastructure was one of the ones where there was some caution. But what are people really, I guess, is it, hey, look, we'll proceed with these projects if the infrastructure bill comes through, or is it the quantum of spend? I just want to get a bit more color on the dynamics in that region.

Yeah. You know, interesting 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 that's because, you know, from an infrastructure perspective, while there's still jobs coming out, people are still taking a bit of that wait-and-see attitude towards, as you mentioned, towards the infrastructure bill. In particular, you know, we called out in the prepared remarks the energy transition and a lot of work from... electrical transmission and distribution companies strengthening their grids, replacing grids, you know, relating to, you know, both, you know, year to, we've got over a, per 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 significant there. So, So, but a lot of that backlog growth we're seeing, certainly some in the public sector, but we aren't actually seeing the private sector, you know, begin to, you know, we've talked there things like with e-commerce facilities, distribution centers, electrical utilities, and the like. So, I think that, you know, we're seeing solid growth, again, over 10%. backlog growth in the U.S. year-to-date, but I think that's only going to increase once the U.S. infrastructure stimulus bill hits.

Okay, great. And then just, I guess, on your two other markets that are going pretty well, the water and environmental services, I just wanted to get your perspective on, you know, is this more of, at this point, there's just a bit of a rising tide going on in those two end markets? You know, are you capturing share in the water market because of your 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. Thanks.

Sure. So certainly from a water perspective, we mentioned that we've seen organic growth in each of the last 10 quarters in our water businesses. And so, you know, we're very strong in that business. Certainly, we've talked about some of the long-term framework awards in Australia, New Zealand, the UK. A lot of opportunities, certainly in the U.S. and Canada, U.S. in particular, from a coastline hardening, coastline protection perspective. So, you know, long-term, we continue to feel good about our water business. And the other one was environmental services. Yeah, and so... You know, yeah, so our environmental services business, sorry, is also very strong. Again, you know, overall in our ES business, you know, 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, you know, we do think from both an ES perspective and a water perspective that we are gaining market share.

And just, I guess, as we head into 22, I guess, could we expect this level of just elevated growth to kind of continue to next year, or do you see it more normalizing towards sort of like broader industry growth rates?

You know, right now, as we're talking to our clients, there still seems like there's a lot of work coming out. But, you know, I think it'd be hard to anticipate that we'd be getting, you know, in our environmental group from an overall basis, you know, in excess of 40% backlog growth on an annual basis would be pretty hard to imagine. But what I do see next year is, you know, that backlog converting into revenue, you know, very similar to energy and resources and some of the other groups. So we feel quite positive about those verticals going into next year.

Great. Thanks very much for the call.

Thank you.

Thank you. And our next question comes from Maxim Sichev with National Bank Financial. Please go ahead.

Hi. Good morning, everybody. Good morning, Max. Gord, actually, maybe just kind of building on this comment 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 maybe different versus history, or how should we think about it? Because, I mean, obviously, you know, when you talk about 40%, you know, backlog jump, people will assume that there is going to be commensurate sort of revenue growth, but clearly, is the duration of these projects a bit different? Can you provide maybe any color in that?

Yeah, not seeing so much from a duration perspective, Max. I do think that, you know, 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 a Stantec perspective, but a bit of an industry-wide phenomenon. People are getting the work out there, but a little slower to get the jump on things going. So, you know, it's our hope, and based on our discussions with our clients, 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 was nothing structural, uh, in terms of, uh, kind of duration convertibility relative to what you would have seen. Okay.

No, not at all.

I'm just, thank you. And then, um, also was wondering, um, you know, we talked in the past a lot about, uh, um, uh, programs in the UK. Just curious right now, is there's like any, uh, significant, uh, rebuild, uh, cycle coming up or, everything is sort of status quo for the next, let's go 12 to 15 months.

Yeah, no, I think that, you know, with the typical app cycle, there is about a 12% capital increase in this app cycle over the previous. So that will roughly translate into, you know, to our fee growth as well. No, there's nothing structural there. We tend to ramp up in year one, then the next couple of years are 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 app cycle jobs for 2022, 2023 to be pretty stable, actually.

Okay, super helpful. Thank you. And maybe just last question for Therese, if I may. 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, and do you mind maybe sharing what exactly you guys are doing on this front, if you can disclose that?

Yeah, so it's hard to go into detail, max around what the various strategies are that we are employing, other than to say that they are all sound strategies, 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, is 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, there is a potential that some of the strategies that we have in place may not be as long-tailed as we would have expected. So it's something that'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 there's going to be a material change next year. Beyond that, we're going to have to monitor and see what happens with changes in tax legislation.

Right. And sorry, the minimum tax requirement kind of globally that some initiatives are pushing for right now would that have any effect in terms of how you're going to be approaching tax rates or not at all?

So that's the, I think you're referring to the 15% minimum corporate tax globally that's being discussed by the OECD. We don't think that that will, as we currently understand it, have a significant impact on us. And again, those rules that they're bringing in are really to try and capture organizations that are trying to take advantage of lower tax rates where they really don't have operations. And that is different from Stantec's approach where 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 hasn't been... and so you never know for sure until they've actually got the words down on the page and you've had a chance to review it.

Okay. All right. Well, that's helpful. Thank you so much. Thanks, Max.

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

Morning, everyone.

Morning, Ian.

I wanted to start with the backlog. You noted in the release, I believe, you saw a 30% increase in the environmental services backlog year over year. Cardinal is obviously going to have a material increase in that once it gets consolidated into Stantec's operations. Can you talk a little bit about what that may do to the business's 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 businesses, you know, their backlog is in order, is in the same sort of range as ours. We have about 12 months backlog. I think, you know, they have roughly 11. But, you know, I think as we've noted that their margins in the U.S. are actually even a bit stronger than ours. So, you know, I think as we add these two groups together, you know, backlog will be similar, and then, you know, 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?

You're right, that revenue for employee continues to creep up, and I don't see any reason why we won't get back to where we were. There are 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's some opportunities to, as we go forward, to potentially even increase that revenue per employee, you know, even squeeze a little bit more out of it. But, you know, we're still working through, you know, incrementally, you know, how much that might be. But certainly it will 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 a question by pressing star 1. Our next question comes from Troy Sun with Laurentian Bank Securities. Please go ahead.

Good morning. Good morning, Troy. Good morning, Gord. Maybe just the first question. I'm wondering, Gord, if you can make some incremental comments on the Australian market. Obviously, I appreciate the fact that the GDP and employment data is back to pre-pandemic levels now. Just given... how the geography is coming out of, you know, very strict COVID restrictions. How should we be thinking about the organic growth profile for that region in 2022? And knowing that you've doubled the headcount in the country as well, what's sort of a reasonable assumption for a midterm growth profile for Stantec in the region, please? Thank you.

Yeah, great. You know, we haven't provided guidance for 2022, so it's a little hard to comment on that. But, you know, a couple of things, though, I could comment on is that, you know, when we combine our teams, transportation will be the largest group that we – or one of the largest groups that we have down there. And, you know, certainly huge transportation funding opportunities there. They've announced roughly $118 billion in transportation funding. Also very, very strong in water. We're already very strong from a Stantec perspective, and we look to continue to grow that. Certainly with some of the commodity prices high, mining continues to grow, and certainly great opportunities to continue to grow our environmental business. We feel very, very good about Australia and New Zealand for the remainder of Q4, but also going into next year. Great tailwinds there. The strengthening of the size of our team, expanded client relationships and such that we'll 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 decrease on the lease depreciation from the real estate strategy there. Is it fair to expect that line item to continue to trend down in the near future?

Yeah, for sure. As a part of the overall real estate strategy, is where, you know, with IFRS 16, you know, those costs do reside now in the depreciation and interest lines. And so as we continue to execute on our strategy, that reduction should be realized in those line items.

I'm sorry, Teresa, just to confirm. So from the real estate strategy itself, like you're expecting the impact on legacy EBITDA to be 40 basis points, right?

Yeah, well, what I said was for the quarter, and I think for a year to date it's actually a little bit higher on a pre-IFRS 16 basis. Yes, that would have been a 40 to 50 basis point uplift in pre-IFRS 16 EBITDA margin.

Okay, great. That's it for me. Thank you. Thanks, Greg.

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.

Thank you.

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