Stantec Inc

Welcome to Stantec's second quarter 2023 earnings results webcast and 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 investor 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 delay between the call and the webcast. All information provided during this conference call is subject to the forward-looking statement qualifications set out on slide two, detailed in Stantec's management's discussion and analysis, and incorporated in full for the purpose of today's call. Unless otherwise noted, dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded. With that, I'm pleased to turn the call over to Mr. Gord Johnston. Please go ahead.

Good morning, and thank you for joining us today.

Stantec has delivered another quarter of strong performance. We continue to execute on our strategy and drive excellent results with solid project execution across all areas of the business. We're delivering some of our highest organic growth rates ever with market fundamentals and demand for our services as strong as I've ever seen them in my 35-year career. It's the expertise and commitment of our employees that drive Stantec's ability to capitalize on the favorable market environment. As we continue to lead into our core value of putting people first, I'm very pleased that our recent employee survey shows that Stantec's employee engagement continues to strengthen. Corresponding with this is the continued downward trend for voluntary turnover, which is settling back to normalize pre-pandemic levels. Similar to the first quarter, Q2 was one of our busiest quarters ever for hiring, and we are now at over 28,000 employees strong. With a highly engaged workforce and robust outlook in our markets, I'm very excited about the second half of this year and beyond. And I'd also like to make special mention of two other highlights from the quarter. On June 30th, we continue to execute on our growth strategy as we close the acquisition of environmental systems design. And I'd like to welcome our new colleagues to the Stantec team. ESD brings their expertise in mission-critical facilities and data center design to Stantec, deepening our strength in smart building engineering capabilities that support the workplace of the future and the emerging trends of decarbonization, building repositioning, and adaptive reuse. Next, I want to say how proud I am of Santec's continued recognition as one of the best corporate citizens in Canada. This stems from our commitment to doing what's right and continuously advancing our environmental, social, and governance practices. We've been recognized by Corporate Knights for the 14th time being ranked first in the engineering and construction category and fifth overall for Canada's best 50 corporate citizens. Turning to our second quarter results, I'm very pleased to report that we've outperformed our expectations as we continue to capitalize on strong drivers while delivering disciplined project execution and operational efficiency. We grew our net revenue by 15% to $1.3 billion, with organic growth of 11%. Our teams across the entire business continue to deliver significant value with solid double digit growth in water, environmental services and energy and resources, and high single digit growth in infrastructure and buildings. We've now grown organic net revenue in each of our regions and business operating units for six consecutive quarters. We also continue to drive solid margins resulting in a 19% increase in adjusted EPS. On the strength of our performance to date and our expectations of continued favorable tailwinds, we've raised our guidance for net revenue and adjusted EPS for the year, and Teresa will speak more about this a little later on in the presentation. Looking at the U.S., our teams delivered net revenue growth of 18% in the quarter, with 12% organic growth. and we achieved organic growth in each business line. Water, buildings and energy and resources all delivered solid double digit organic growth. Water was driven by projects related to advanced manufacturing, drought resilience planning, water security and water reuse. And we're also seeing a ramp up of PFAS projects supporting water utilities as they proactively work towards solutions to the upcoming US EPA regulations. In buildings, Organic growth was driven by strong demand in healthcare, industrial, and advanced manufacturing. Work in the commercial and science and technology subsectors also helped drive strong results in buildings. And our energy and resources business continues to see significant activity related to power transmission and reservoir and dam projects. So our US business continues to perform extremely well. In Q2, Canada achieves 10% organic net revenue growth with double digit growth in environmental services, infrastructure, and water. Environmental work accelerated for permitting and archaeological services to support energy midstream and transportation projects, while significant bridge and highway work in British Columbia and major roadworks in Alberta were the primary drivers for the growth in infrastructure. In water, Growth was driven by major projects like the Iona Island Wastewater Treatment Plant in BC and the Basement Flooding Program in Toronto. Energy and resources continue to see growth, driven by work related to power transmission and distribution projects and renewable energy. Year-to-date, Canada has had higher growth than expected, and our teams have been able to capitalize on this dynamic. Our global operations also delivered another quarter of solid revenue growth. Net revenue increased 12%, with almost 11% from organic growth. Double-digit organic growth was achieved in water and energy and resources. Our leading global water team continues to deliver significant value, supporting long-term framework agreements and investment in water infrastructure in the UK, New Zealand, and Australia. Energy and resources increased their net revenue through work on the Corey Glass Pump Storage Project in the UK, as well as through mining activities for copper and other metals in Latin America, which will support the energy transition. And now, I'll turn the call over to Teresa to review our financial results in more detail.

Thank you, Gord, and good morning, everyone. As Gord mentioned, we did deliver another very solid quarter. In Q2, we grew gross revenue by 19% and net revenue by 15%. achieving $1.6 billion and $1.3 billion, respectively. Project margin increased 30 basis points to 54.3%, and was up quarter over quarter in all of our business regions, demonstrating our strong project execution. In Q2, we again saw a material increase in our share price, and this drove a further upward revaluation in our long-term incentive plan, which amounted to 7.3 million of additional admin and marketing expense and 60 basis points of EBITDA margin. Even with this headwind, adjusted EBITDA margin was 16.9% for the quarter, up 20 basis points from Q2 last year. And margin would have been 17.5% without this non-controllable expense. As we noted last quarter, when this dynamic also occurred, Our guidance target for adjusted EBITDA margin excludes this LTIP revaluation impact. But either way you look at it, our EBITDA margin reflects our success relentlessly driving operational efficiency. Our Q2 diluted EPS was $0.79 compared to $0.55 in Q2 last year. And adjusted diluted EPS increased 19% to $0.99 compared with $0.83 last year. Without the LTIP revaluation expense, adjusted diluted EPS would have been $1.04. Looking at our liquidity and capital resources, our strong revenue growth and operating efficiencies led to positive operating cash flow of $68 million for the year to date, compared to $2 million from the same period last year. Recall that last year's operating cash flow was lower, driven primarily by the Cardano financial system integration. DSO at the end of June was 81 days, consistent with the last couple of quarters. And net debt to adjusted EBITDA was 1.8 times, up slightly from last quarter, mainly due to funding the environmental systems design acquisition, which closed on June 30. I'll turn it back to Gordon now.

Thanks, Teresa.

Our backlog grew to an all-time high of $6.6 billion in the second quarter, an increase of over 11% from December 2022. Backlog for each of our geographic regions has grown organically, and this has been most pronounced in the US and Canada, both of which delivered 12% organic growth, coming predominantly from water, buildings, and environmental services. Backlog in water continues to increase with winds around water security, wastewater treatment solutions, and water requirements for power generation to support the energy transition. AMP7 in the UK continues to see record levels of investment, and we are already securing backlog for AMP8. Buildings grew backlog through wins in almost all of their subsectors, particularly in healthcare and industrial. Buildings also benefits from the backlog brought in through the acquisition of ESD. Environmental services backlog reflects additional project wins related to environmental assessments, including natural resource surveys, regulatory permitting, and environmental monitoring for construction projects. Our backlog represents approximately 13 months of work, remaining consistent with last quarter. Our major project wins in Q2 continue to follow the key trends of aging infrastructure, reshoring of domestic production, and climate change. our water group continues to drive significant growth, being selected for a number of new projects, including the Queensway Sewer and Water Main Project in the Regional Municipality of Peel, Ontario, and the Apache Junction Water Reclamation Facility expansion in Arizona. Our infrastructure team was recently selected to provide engineering services for the steel repair and corrosion protective coating program for the McDonald Bridge in Halifax, Nova Scotia. and we're also selected for major design work for Deerfoot Trail in Calgary, which is the busiest freeway in Alberta. Our energy and resources team continues to build on our success with yet another major pumped storage hydro project. Through our joint venture, Water to Wire, we were selected to provide the front-end engineering and design for the Pioneer Birdkin Pumped Hydro Project in Queensland, Australia. At 5 gigawatts, This is expected to be the largest pump storage project in the world. The energy transition continues to be a strong driver of growth. At the end of July, we were selected by Pattern Energy as the owner's engineer for the SunZia transmission project. This project is part of one of the largest clean energy infrastructure initiatives in the U.S. and will deliver 3,000 megawatts of clean power to communities in the southwest region. Although this is not receiving IRA funding, It's a great example of investment being made towards renewable energy with or without government funding. And we've been engaged to provide advisory services in the development of proposals for the regional clean hydrogen hubs in the U.S. The Department of Energy expects to select approximately 10 hydrogen hubs, which would be allocated a combined total of up to $7 billion in IIGA funding. Hydrogen is expected to play a key role in the energy transition, and Stantec is well-positioned to capture further opportunities here.

So now turning to our outlook for the year, with a great start to the year and continued favorable market fundamentals, we remain confident in our ability to deliver another very strong year of financial performance. As such, we've revised several components of our outlook for the full year. We've raised our net revenue growth target for the year to 10% to 13%, and now expect organic revenue growth to be in the high single digits. In the U.S., we're raising our expectation for organic net revenue growth to be in the low double digits. This growth is being propelled by the continued imperative to solve water scarcity challenges, protect against severe weather events, and transition to a net zero future. We are starting to see government stimulus funding flow, and this is beginning to form in our backlog. We expect continued opportunities to arise with momentum increasing in the second half of this year and a ramp up in revenues beginning next year. In Canada, we're raising our guidance to mid-single-digit organic growth. This is on the strength of our year-to-date performance and our confidence in sustained high levels of activity for the balance of this year. We do have very high comps to measure against from the second half of last year, so we anticipate our annual growth rate will moderate. but remain very robust nonetheless. In global, we continue to expect mid to high single-digit organic net revenue growth for the year, with strong momentum driven by water and energy resources. Our performance for the first half of this year and confidence in our ability to maintain operational excellence has led to narrowing the range of our target EBITDA margin to 16.3% to 16.7%. And we're raising our guidance for adjusted diluted EPS growth to 12 to 15%, which results in a range of 350 to 360 per share. Again, I would reiterate that our target ranges have effectively been normalized to exclude the revaluation of our share-based compensation, which is largely beyond our control. In other words, our target margin range should be thought of as being comparable to the 17.5% we achieved in Q2. Likewise, our target adjusted EPS range of 350 to 360 would be comparable to our Q2 adjusted EPS of $1.04. So, as Gord stated at the beginning of this call, we are very excited about the second half of this year and well beyond, and we believe that we have the right team in place to continue delivering superior results. And with that, I'll turn the call back to the operator, and we'll take your questions.

Thank you. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Benoit Poirier with Desjardins. Your line is open.

Yeah, good morning everyone and congratulations for the solid results and very nice to see the strong fundamentals across the board. Just first question with respect to the impact of the LTIPS, how should we be thinking about the potential for margin improvement beyond 2023? You've been calling out a new guidance of 16.3 to 16.7. And assuming 14.9 for the year, it looks like there's a 30 bps impact from the LTIPS from a full year basis. So I'm just wondering, looking at 2024, if we should build on the middle of the range. So let's say 16.5 plus 30 bps of LTIPS, assuming no movement in the share price. And just curious about the sensitivity for outfits related to the stock price and if there's some options to neutralize the impact.

Sure. Well, there's a lot in that, Benoit, but I'll do my best to cover it all. I'll start with the end of your question, which was around the opportunity to mitigate some of that volatility. And we have, in fact, hedged a portion of our long-term incentives. So the numbers that we are reporting around the revaluation is already net of the effect of having some swaps on our performance share units, or sorry, our restricted share units. So that is something that we are already doing With respect to expectations for EBITDA margin growth beyond this year, it's certainly our objective to continue driving operational efficiencies. I mean, you've seen in the last couple of years how we have gradually but sustainably raised our EBITDA margin. That really is to the credit of all of our workforce that has focused on this and really delivered on the various strategies that we have in place. And so it would be our goal to continue to execute on those strategies. You know that we are in the midst of developing our next three year strategic plan. And in that, we will roll out new EBITDA targets. But again, certainly, we would expect that we'll continue to drive for margin enhancement in the coming years.

Okay. That's great call, Teresa. And just on the M&A front, you disclosed in the MD&A a cash consideration of $76 million for ESB. which looks higher than typical matrix based on price paid for employees. So I was just wondering if there's anything else to better understand either with respect to the opportunities going forward, whether the valuation is higher than usual. And maybe if you could comment about the M&A environment and the opportunities you see these days for larger size deals. Thank you.

Yeah.

Yeah, great questions, Benoit. You know, we do find multiples vary based on the type of business that you're acquiring, based on their profitability, and certainly based on size and so on. ESD was a very profitable firm. And the data center market that they are, the mission critical environment that they're in, is a very attractive market. And certainly, I'm sure you've read a lot in the papers lately about the tailwind supporting that for the next couple of years. So on a per head basis, it might have penciled out to be a little higher, but also the profitability for that firm was higher as well. For the M&A market in general, we do find it to be very robust in different lines of business really around the world. I'm spending a lot more time really focused on those discussions And we're, as we always are, in all sorts of levels of discussions from initial conversations about cultural fit to, you know, anywhere in different parts through the process. But, you know, to your point on size, there's a number of, you know, three, five, 7,000 firms that are either on the market now or will be coming soon. So you supplement that with, you know, with our sort of the typical 1,000 person and less. And I think we're moving into a pretty robust period for M&A activity.

Okay, that's great, Collier. And last one for me. Some of your engineering peers have reported a cash drag this year coming from the U.S. Section 174 tax law, which eliminates the option to deduct R&D expense in the year. and requires to be amortized. So just given your elevated exposure to the U.S. region, are you seeing any negative cash impact from this?

Yes, absolutely. That has been a factor. And there's a couple of pieces to that. You're right, given our higher earnings there will drive a higher tax component. But the other element around that is, and it becomes a bit technical, but even though the rules came into play in 2022, there was an opportunity to take what was called a safe harbor approach, which was to pay less than what you thought in the event that perhaps those regulations didn't actually come to pass. And so they of course did come to pass. And what we found then was we had to do a catch up payment in Q2 of this year. So just as an example for the year to date of 2023, we would have paid out in cash about $34 million U.S. under Section 174. Last year, for that same period, it was less than $8 million. So it has had an impact, for sure.

Okay. Thank you very much for the time, and congrats again.

Thanks, Benoit.

Our next question will come from Yuri Link with Canaccord Genuity. Your line is open.

Hey, good morning, Gordon, Theresa. Morning. Yeah, I just want to go back on the EBITDA margin discussion. Is it fair to say that the momentum in the margin improvement is slowing a bit? I mean, it looks like you did, you know, XL tip, you did about 16.4% in the first half. That implies 16.6 in H2. That would be, you know, about 20 beeps lower than the back half of last year. So I know the back half of last year was a bit slower, wonky in some ways. So is that just a tough comp or is there additional costs creeping in that would be kind of slowing the momentum a bit?

It's a fair question and I would say the answer is no. We don't see a slowing of momentum. It's something that we are very trained on and seeing very good success So there were certainly some things last year in the last half of the year that were favorable to EBITDA that we would not necessarily expect to recur. We also had, you know, in the first half of this year, we made mention in our MG&A, you know, certain things that in the admin and marketing that were, you know, that were supportive and perhaps had the first half of this year maybe, you know, a couple basis points higher than we would typically have seen in the first half of the year. But we always say that the margin improvement that we are driving is really intended to be sustainable, and we are continuing to see it grow. So I think we're very comfortable with the target and that beyond this year, we continue to push to grow it.

That's fair. Do you still expect Q2 and Q3 to drive 55% to 60% of your net income?

It is typically higher, slightly higher the second half of the year. I just do math in my head because typically we talk about Q2, Q3 being about 55% and the shoulder quarters being 45%. And I think that that still holds true, but we do typically see that the third quarter is generally our highest earning quarter, and then it moderates a bit in the fourth quarter.

Yeah. No, I was just asking 55-60, because that was the guidance given at the beginning of the year, and I didn't see mention of it, so I just wanted to make sure it was still in effect. That's helpful. I'll turn it over.

Thanks, Yuri.

Thank you. Our next question will come from Jacob Belt with CIBC. Your line is open.

Good morning.

Good morning. Actually, good afternoon. Theresa and I are in London today.

Perfect. Good afternoon. Very positive commentary and guidance on organic growth. How do you think things play out in 2024? Do you expect the momentum to continue? And then maybe just kind of a secondary question, you know, if we look across the industry, you know, most firms are raising guidance. And what do you think has changed in the past three months to drive this?

You know, I do think as you look at forward, you know, we've talked about the sort of just these, you know, I mentioned the prepared remarks. Like in 35 years of doing this, we've never seen everything lined up the way that it is from an infrastructure perspective. the government funding. When you look at things like an IIJA, for example, you know, these things are always slower, of course, to take off and you think, but, you know, we're looking at once that ramps up, then a latter part of this year into next year, it's going to continue, you know, up till 2028, 2029, that sort of a range. IRA gets going for the next several years. So we're just seeing a lot of these, and that's just in the U.S., a lot of big drivers, other places as well. So it just really feels like there's robust support for Stantec certainly, but for our overall industry. And so I think that's where you've seen some of our competitors raising guidance as well and everyone feeling pretty good about the next three or five years in our space.

Okay. And then just in Canada here, you got into mid-single-digit growth for the remainder of the year or for the full year, but implies that second half is going to be relatively muted. Is there just a level of conservatism there, or is there something we should be watching for?

Yeah, I don't think it's the level of conservatism because, again, as we said in our remarks, the level of activity is going to remain very high in Canada. Certainly, when we started the year, there was probably a bit of conservatism because we came in pretty strong. There was just a question about how robust the Canadian economy could be and what it could support. Now, as work is continuing, the couple of dynamics that we see is that there are some projects that are winding down. or have been winding down in the middle part of this year. And that as we begin the ramp up of new projects, you know, of course, the revenue always takes a while to pick up on those larger projects. But, you know, again, you know, we point people to 2022, where in the second half of the year, Canada had, you know, 7.5% and 11.5% organic growth in Q3 and Q4. And so, you know, the question is, can Canada stack double-digit growth on top of what was already double-digit growth last year? And I would say that that feels very optimistic, not impossible, but pretty optimistic. So for us, you know, as we look at the level of activity and what we see coming, you know, the backlog is really strong, but how the math works in terms of the actual growth rate, we think it will moderate a little bit.

That's helpful. Thank you, Trisha and Gordon.

Great to see you. Thanks, Jacob.

Thank you. We have a question from Frederick Bastine with Raymond James. Your line is open.

Hi there. I'm eight hours behind you. For me, it is good morning. So I apologize for that.

Good morning.

To get a better understanding of where the – 11% organic growth coming from, obviously very good, but just curious if it's more weighted to a higher employee count, increased utilization, pricing power, or a little bit of everything. Thank you.

It's really a combination of all of those things. We see just really strong market dynamics for us as we look forward. and continuing. So, I mean, I just finished saying that in Canada, you know, Canada's staff, double-digit growth on top of what was double-digit growth at the end of last year, and probably unlikely, but in the U.S., it's absolutely doable, just given the amount of work that is flowing, what we're seeing in our backlog, et cetera. So, you know, we've grown, as Gordon noted in his comments. I mean, we had the highest hiring quarter we've ever had in the second quarter, voluntary turnover is settling back to that sort of pre-pandemic level where we have been leaders in maintaining our staff. So it is a bit of all of those things that you mentioned.

And great. And given the positive momentum you have with hiring and retention, you have no concern whatsoever as to your ability to handle all that growth that's coming ahead, correct?

No. No, not at all.

We're feeling pretty good about it, Frederick. In addition to that, you know, we're expanding our delivery center in Pune and, you know, continuing to add resources really in all of our regions.

Cool, great. And then since you offered it earlier, you are both in London. Any special reason why you're there?

No, just as we move our Our board meetings around every couple years, we like to take the board to one of our office locations, and working with them, we selected the UK this time around. So we have our whole board here with us.

Great. All right. Enjoy it. Thank you very much.

Thank you.

Thank you. One moment for our next question. It comes from Devin Dodge with BMO Capital Markets. Your line is open.

Thanks. So good afternoon. I think this question will probably be for Teresa, but when I look at the guidance framework you provided and we kind of exclude that LTIT revaluation figures, it implies roughly even distribution of adjusted EBITDA between H1 and H2, despite when we look historically, I think H2 is accounted for a bit more than that 50% share of full year EBITDA. Can you provide any color for why the EBITDA contributions in the second half this year may be a bit lower just compared to that seasonal pattern?

Yeah, it's actually when you push through the math, the implied range for the second half of the year would be 16.2% to 17%. So it is more heavily weighted towards there being more upside in the second half of the year. And it is, you know, a range that largely is somewhat dependent on, again, how quickly or how slowly some of these projects roll out of the U.S. as the biggest driver. But we do expect that the second half EBITDA will, you know, will likely fall to be, sorry, not fall, will likely be higher in the second half as it typically is.

Okay. Okay, it just seems like on a dollar basis, it's a little bit more evenly distributed, not so much on the margins. But anyway, we'll touch base maybe offline here. If you're in the UK, maybe an apt question here, but there's been some reports in the media regarding some potential financial distress amongst some UK water utilities, I think Thames Water in particular. Just wondering, have you seen any change in behavior from your UK water clients in terms of pulling back on some work? And has FinTech adjusted how it manages its payables for these customers? Yeah, we...

Firstly, we've seen no issues with payables for any of these customers. We also have seen no change in behavior from them. These AMP programs are set on a five-year cycle, and with a certain spend, then they're able to get certain results or certain rates and so on. They have to move forward with that work, so we haven't seen any change in behavior. And, you know, it's interesting as we're here, certainly, and chatting with our folks, we've been providing water and wastewater services for, you know, London and Thames, the Thames Valley for, you know, almost 200 years with any way that the client has been organized, what their name might be, public, private, the water and wastewater services need to continue to be provided. The regulatory environment is strengthening here, not weakening. And so we don't, regardless of how the things may shake out, we don't see any reduction in the amount of work that needs to be done in the UK water and wastewater industry going forward.

Okay, thanks. Good call. I'll turn it over. Great. Thank you.

Thank you. And our next question will come from Chris Murray with ATB Capital Markets. Your line is open.

Yeah, good. I guess good afternoon, folks. So maybe, Gordon, just turning back, you made some interesting comments about Canada, about the fact that it's actually performing a little bit better than expected. Just wondering if, you know, there's something external that's maybe contributed to that, any sort of new legislation or funding or maybe it's resources. Just trying to understand where it is or if it's maybe more tied to project, you know, any sort of color on where this is at and if there's anything that maybe drives it more into 24 as well.

You know, we've seen a lot of work coming forward in transportation. You know, we talked about some of the work that we've been doing in BC, you know, Deerfoot Trail coming in Calgary, a lot of opportunities in transportation and bridges and so on. A lot of work also in our ES group. They're supporting archaeological work and permitting work really across the Canada, a lot in BC right now. So it's pretty widespread. Our water group, you know, we've talked about... in previous quarters, some of the work that we're doing in Saskatchewan on the Buffalo Pound plant in Regina, some work in Ontario and in Barrie, certainly one of the largest capital programs for Metro Vancouver, the Iona project, where we're project program manager. So whether it's water or transportation or environmental services, you know, the energy sector and some transition, energy transition type work, it's pretty broad based actually. And it's, you know, the year has held up really well. And, you know, we're, we're seeing, you know, still positive momentum going forward.

Okay. Well, that's helpful. And then, Teresa, just a quick maybe clean-up question. I don't think – maybe I missed it. I think one of the folks asked, you know, what actually is the sensitivity based on where you have the edge position on the LZIP at this particular point? And I guess just kind of a second part of this question is, You know, given the volatility and kind of the noises causing, is it fair to think that if you evaluate maybe 2024 that we kind of change the presentation just to maybe get rid of this?

Yeah, it's a really good question. Let me answer that one first. We've given that a fair bit of consideration this year. And, you know, your share price always moves around. And to the extent that a portion of it's hedged as we've got it, it should have even less of an effect. We've just never seen this rapid movement in either direction of our share price in such a short period of time. And so it's particularly pronounced, and that's why we're calling it out. Would we change our EBITDA presentation? As we considered it this year, it would have required that we went back and restated our prior comparative quarters And again, we'd love to see the share price continue to rise at this rate. Whether that will happen or not remains to be seen. And so to go back and kind of restate your adjusted numbers, we're not really sure if that's value added and really felt that it would be cleaner just to continue to report on a consistent basis so you knew that's how we calculated it and then call out this one piece. And, you know, may expect that it would be a little bit more muted in terms of volatility as we go forward. And in terms of sensitivity then, it is, you know, it's very hard to model because our LTIP includes both the share price piece, but it's also heavily weighted towards our relative total shareholder return. And so in order to do that calculation, it gets run through a Monte Carlo simulation. which makes it really quite difficult to predict. And that's what makes it hard to kind of provide that kind of a sensitivity. So that does make it difficult and kind of precludes me from being able to give you any kind of a rule of thumb on it.

Okay. Fair enough. All right.

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

Thank you. Our next question will come from Michael Tufome with TD Securities, your line is open.

Thanks. With the demand environment sounding like it continues to be very healthy, wondering if you can comment on what you've been seeing in general terms regarding price increases on new work in recent quarters and how that would compare to the sorts of pricing gains you've seen over the last several years.

You know, I do think with the overall market being very busy, the industry is very busy that, you know, this is always a competitive market. We're all going to always have some price competition, but I think we're seeing a little bit less competition on price and more, you know, clients are checking with their consultants. Can you get the work done? You know, do you have the people? Can you get it done with quality and in this timeframe? Price is always important, but I do think, Michael, it's, less price sensitive than it's historically been the last several years.

Okay, thank you. That's helpful. And then secondly, Gord, you mentioned that this seems to be the first time in 35 years or so where all sectors are really firing on all cylinders, which is great to hear. It doesn't sound like there are any areas of major sort of concern or risk, but is there anything that you are watching as you look potentially to next year? I know there's been some concern around the outlook for commercial buildings activity. Just curious if there's anything that you've kind of got keeping a closer eye on as far as potential changes to what you're seeing now.

Yeah, well, you know, the one area that we are keeping an eye on, and in fact, you know, we're here in the UK, is on the private development work in the UK. You know, certainly there's been some softening of the economy here because of Brexit and high inflation and so on. So there's a huge backlog of housing here, but we're having trouble in the UK getting it through the permitting cycle and getting it built. So we're watching our planning teams here, certainly looking for some weakness. And we've seen a bit of a slowdown, but again, here in the UK, well over half of our revenue is generated in the water business, and we haven't seen any slowdown there. So, you know, there's always areas and it's a good question. That's one of the ones that we're looking at right now is that planning and community development work here in the UK.

Okay, perfect. And then maybe just on commercial real estate or commercial buildings activity. I mean, I think your buildings practice is fairly diversified and there are other areas that have been performing well, but specifically on commercial buildings. What are you seeing there right now?

Yeah, so that, you know, our commercial building segment is only about 4% of our overall corporate net revenue. And, you know, while we're not seeing a notable slowdown in the sector, there's always going to be, it's slowing a little bit. But what's interesting for us, even within that commercial segment that we have, again, 4% of our net revenue, we have a number of subsectors. So we have multifamily residential. So a lot of that is, you know, purpose-built residential units. And we're seeing We're still seeing some of that coming. Certainly, it's a lot of discussion on that in Ontario where you are these days about how we can get more multifamily residential to help break the backlog of housing shortage. We also have in there retail and hospitality, but that's a pretty small subsector for us. So, you know, while we keep monitoring the sector, there's also in here repurposing industrial underutilized office buildings. That's the type of work that we're doing. We've talked with, I think, in previous quarters about we call it adaptive reuse. So, you know, even within that 4%, there's some areas like that adaptive reuse that are still thriving, others that are a little bit slower. So we're, you know, we're keeping an eye on it, but it's not really material to the overall success of the company.

All right. That's helpful. Thank you.

Thank you.

Thank you.

One moment for our next question. We have a question from Ian Giles with Stifo. Your line is open.

Morning, everyone. Morning. I was just curious. Organic backlog growth year-to-date is 10%. Net organic revenue growth looks like it's kind of mid to high single digits in the back half of the year. Is there anything unique or changing happening with the conversion backlog into revenue, i.e., are there often lulls or are they getting a bit longer? It's just I'm trying to tie out those two items, acknowledging they don't always work perfectly together.

I don't know that there's anything fundamentally that's changed, Ian. And certainly, you know, when we were talking to our business leaders, we are always asking about, you know, cancellations, delays and we're not seeing or hearing any evidence of that by any significant measure. One of the things that we have heard a little bit of is as we get through that sort of contracting process and get the projects wrapped up, in the U.S. in particular, that there are pockets where we're seeing projects slow watch a little bit. And I think the team wants to really be clear that slow watch does not mean delay, does not mean cancel, but it's just the clients are taking a bit longer to turn things around, to improve things, to get things moving. And I don't know that that's what you would be referring to in terms of what you're seeing converging into revenue, but that is a bit of a dynamic we're seeing. But other than that, we're not really seeing or hearing anything dramatically different.

Okay. I know that's helpful. The other thing I wanted to ask about was employee utilization. It's come up on a number of calls and conversations. I'm just curious how you're feeling about your staff

utilizations how much room you have left to maybe increase those and how close you are to effective full utilization of your staff yeah and and it um it certainly varies amongst the groups but i'll say in general and this is what you're seeing in our results that utilization is is very high uh and to the extent where you know for instance in our water group which is you know is very busy there's a lot of sort of importing of talent from other geographies, even from some of our business lines where there are potentially folks that can support projects in the water group. So we are seeing that as well. And again, you know, one of the things I've pointed out in previous calls is where there is a bit of latency in our utilization does relate to our infrastructure group, where, you know, as we continue to hold out and wait for some of these IIJ projects to really ramp up and get rolling. We are not as fully utilized there yet, but want to make sure that we are managing our staff and have them available and ready to go when those projects do come on.

Perfect. Thanks very much. I'll turn the call back over.

Thank you. Thank you. Our next question will come from Sabat Khan with RPC. Your line is open.

Great. Thanks very much. I guess just a question on the outlook commentary. You've taken up the organic growth guidance for the U.S. and Canada. Just wondering if you can maybe share a bit of granularity around how we should think about end markets within the context of that guidance. Should we think the ones that you called out as having double-digit organic growth, do those continue for the back half in the same manner, or Is it a bit more varied? Just trying to understand how we should think about it on an end market basis. Thanks.

Yeah, I think it's a little bit of both, actually. It sort of depends on the geography. So, you know, for instance, we've had very high levels of activity and high organic growth in Canada around, like, our water business. And, you know, those projects that Gord mentioned, Iona, Barrie, Those will continue to be very busy, and so we expect to see continued high growth there. Areas like our mining practice, where perhaps things will slow down a little bit relative to the first half of this year. In the U.S., I think you're going to see continued strong growth really across all sectors and global. Again, we always talk about our water practice, and that should continue to show growth. very good growth. It may be a bit of flowing in the land development, as Gord described, and potentially being offset by growth in buildings. So it is a bit of a mix, but I would say that for the most part, by geography in terms of the ranges we've provided would be about the right way to think about where that growth is coming from.

Great. And then Just on the kind of the longer-term outlook, I think two-part question. One, you know, your peers are calling out sort of a 26 to 28, 2026 to 28 peak for the IIJ funding. Based on where you're sitting, do you sort of agree with that timeline or what are you seeing? And then second part, you know, one of the questions that we're getting given some of the organic numbers we've seen across the space is, you know, what's kind of the momentum in the pipeline? How long does this sustain for? Just curious, based on your vantage point, you know, what is sort of the medium-term outlook for broader engineering demand from your perspective, given the funding that's in the pipeline?

Yeah, so firstly, with regards to IIJA, yeah, I would agree with that. You know, the timeline ramping up, you know, through a little bit this year into 24, peaking in that 26 to 28 period, are certainly being highly sustained during that period. I think, you know, it should be pretty evenly distributed. So that's going to be good long-term support In terms of the organic growth, we really do see, and as I'm talking with my industry CEO colleagues as well, sort of that three- to five-year timeline of really solid supports for the overall business. So I think we feel good about it this year, and we feel good about our organic growth prospects for the next several years.

Great. And then just, I guess, on the market in the UK, that's probably where most of your European exposure is. You call it water is about halfway, but maybe a bit of color. Are there any ebbs and flows in the rest of your European presence or even in Europe, just given what's going on in the macro? Just curious, kind of outside of water, how some of the end markets are doing there.

Yeah. So outside of the UK, we have operations in both Belgium and and the Netherlands here. And Belgium is primarily a, we do a lot of work there for the European Bank reconstruction development, a lot of the EU commission and funding agencies, that work is continuing. And in fact, if anything is ramping up a little bit as well, we're seeing a lot of energy transition work and policy work, that's the type of work of projects that we undertake in Belgium. In the Netherlands, we do a lot of environmental work, GIS, in general for underground utilities and so on. That work is also very busy, and our Netherlands operations we feel very good about. Here in the UK, in addition to the water business, which we see very, very robust now, and as we move into AMP8, we're even looking for an increase in AMP8 spending over AMP7. And, you know, the actual quantum of that has not yet been determined. And so we hear different numbers, whether it's 15%, 25% or more increase in AMP8 funding. But, you know, it's the other parts of the UK economy that we're watching closely. You know, we did mention that planning and housing development and so on, we're watching closely. We do some environmental work here that remains busy. We do some transportation work that remains busy. Good funding supports is there. And, you know, buildings, is showing some, you know, some growth in global as well, both whether it's here in the UK with some of the work we're doing on some high-performance laboratories and so on, or certainly down in Australia and New Zealand where we're seeing some growth there as well. So, you know, in general, we feel pretty good about things.

And maybe just one last quick one. You know, obviously, there's been some headlines around the water stuff in Europe, and there was a question earlier on one of the utilities. I guess, what do you think the government response is to that over the next AMP cycle? Could it be a net positive that they have to spend more to fix things? Or how do you think they sort of address AMP 8, given some of those headlines around the utilities either not keeping up their end of the bargain or some of the financial issues they're having? Thanks.

Yeah, you know, we do see, you know, because of the regulatory environment, recall last summer here in the UK, there was a lot of water shortage issues. You've been reading a lot about sewage spills during overflow events. You've been reading about the bathing waters or, you know, the beaches and so on being closed due to contamination. So there's a lot of push here from society and from the regulators to clean up and continue to drive forward with improvements to the water and wastewater systems. So I think that's where we're seeing, you know, these projections of AMP8 being considerably higher than AMP7. And I see that happening. A lot of that will be built into the water rates. So that's where a lot of that trade-off will come is that certainly the society in general and the regulators want to see this improved performance, but it comes at a capital cost. And so how much can we build into the rate structure, you know, to drive that forward? And so I I think those are the trade-offs that we'll be seeing discussed here over the next, you know, year to 18 months as the AMP-8 programs are being set.

Thanks very much. Great. Thanks, Ella.

Thank you. We have a question from Maxim Sychev with National Bank Financial. Your line is open.

Hi. Good afternoon. Good afternoon. I just had a quick follow-up question in terms of a comment that Theresa made in relation to margin advancements on a perspective basis. I guess it's a question for both Gordon and Theresa, so it's not just how we should be thinking about utilization rates and so forth, but it's more maybe potentially going after the right project so you can more effectively amortize your marketing span and all these things. Do you mind maybe going a little bit in that direction in terms of how you think some of the strength of the market is benefiting you from that perspective? I'm just curious to hear your thoughts on that.

Thanks. Yeah, absolutely, Max. And so as we're in this environment where the industry is busy, we are busy. we're really focusing our marketing into business development spend on projects that will both generate a higher gross margin project type in general, but also on client selection. You know, some clients are better to work for than others. Others, you know, some will pay fairly for change orders that they want to put forward. Others will, you know, try to get away from paying and aren't as fair in that. So we're selecting, we're focusing on what clients that we'll select. We're focusing on the projects. that we select in order to optimize that, you know, optimize both our marketing and business development spend and then gross margin that we can generate for the projects that we assume.

And, Teresa, I don't know, do you have any color maybe on your win rates, how those metrics have evolved over time where it's hard to track specifically?

We do track win rates, you know, Max, both by number of pursuits that we chase as well as by the dollar value of those pursuits so that you can get a feel for are you winning the big ones or losing the big ones. So we track that by geography. We track that by business line. We track that actually by marketing or account management leader. so that we can tell who's being effective in their spend and who isn't. And so then who needs additional training, additional supports, and so on. So we do track that. It's not a piece of information that we disclose because it is so variable by type of work and geographies and so on, but know that certainly that is something that we track and review on a monthly basis.

Okay. Okay. Thank you so much. That's it for me. Great. Thank you.

I'm showing no other questions in the queue. I'd like to turn the call back to Gord Johnston for closing remarks.

Great. Well, it's only to say, you know, thanks again for joining us today. We are really pleased with our performance this quarter and with the solid backdrop that we see for the rest of the year. So hope you all have a great day and bye for now.

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