Stantec Inc

Welcome to Stantec's third 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 and stand text management discussion and analysts 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.

Good morning. Thank you for joining us today. I'm very pleased to report that Stantec has delivered another quarter of record earnings. We continue to see very strong market demand across all of our geographies. with Canada in particular showing remarkable resilience. We met this demand with excellent operational performance, driven by high utilization and augmented by our effective workforce management strategies and strong talent attraction and retention. Organic hiring remains robust. This was the busiest Q3 we've ever experienced in terms of hiring, and we are hiring at two times the rate that we were pre-pandemic. and our employee retention rates remain amongst the best in our industry, with voluntary turnover in North America returning to pre-pandemic levels. These were some of the key drivers that led to our Q3 earnings exceeding our expectations. Looking at our financial results, we grew our net revenue by 14% to $1.3 billion, with organic growth of 9%. For the seventh consecutive quarter, Each of our regional and business operating units delivered organic growth with double-digit growth in the U.S. region and in our water and environmental services business segments. We drove significant margin expansion and delivered record-high adjusted EPS of $1.14. On the strength of our performance to date and our expectation of continued favorable tailwinds, we've raised our guidance for the second time this year. And I'll speak more about this a little later in the presentation. Our U.S. business delivered a very strong third quarter. This included net revenue growth of 20% in the quarter, with 13% organic growth and 5% acquisition growth, driven primarily from our acquisition of ESD. We achieved organic growth in each business line, with water, buildings, and energy and resources all delivering double-digit growth. In particular, our U.S. water business delivered 26% organic growth, driven by public sector and industrial project demands, as well as large-scale water security projects in the western U.S. We continue to see strong demand in healthcare, industrial and science and technology end markets for our buildings business. Within our energy and resources business, work continued on the major power grid upgrade project in Puerto Rico, and we've started to ramp up on a rare minerals energy transition project in California. Our infrastructure and environmental services teams also remain very active in the U.S., delivering high levels of growth. In Canada, we delivered over 7% organic net revenue growth with double-digit growth in environmental services, infrastructure, and water. Environmental services delivered strong growth on the back of demand for services in permitting and archaeological work in the midstream and transportation sectors. Activity on environmental impact assessments also increased in the renewable energy sector. Infrastructure remained robust, driven by heightened activities around bridge and roadway work in Western Canada. And our expertise on large wastewater infrastructure projects drove growth in water. Our global business delivered 6% net revenue growth quarter over quarter with 2% organic growth. Our industry-leading water business delivered high single-digit organic growth. The teams remained very active in the UK on AMP7 and have also begun assisting clients with their AMP8 program submissions. Work supporting long-term framework agreements and investments in water infrastructure in New Zealand and Australia also continued to drive growth. Double-digit organic growth was achieved in energy and resources. Work on the Corrie glass pump storage project in the UK continued to ramp up, as did mining activities in Latin America around copper and other metals that will support the energy transition. And now, I'll turn the call over to Theresa to review our financial results in more detail.

Thank you, Gord, and good morning, everyone. As Gord mentioned, our third quarter results exceeded our expectations. Factors that contributed to our outperformance include stronger than anticipated demand in Canada, higher utilization in Canada and the U.S., robust hiring, disciplined cost management, and a higher than normal volume of change order approval. Gross revenue was up 15% in the quarter at $1.7 billion, while net revenue grew by 14% to reach $1.3 billion. Project margin increased 70 basis points to 54.8%, benefiting from disciplined project selection and execution. Our strong operational performance drove a 160 basis points increase in our adjusted EBITDA margin. For the quarter, diluted EPS was 94 cents compared to 61 cents in Q3 last year. And adjusted diluted EPS increased 33% to a record $1.14 compared with 86 cents last year. As has been the case all year, the significant increase in our share price for the year to date has resulted in a material increase in our admin and marketing expenses due to the quarterly revaluation of our long-term incentive plan. The impact of revaluing our LTIP was 60 basis points as percentage of net revenue or 5 cents per share for Q3. Year to date, the revaluation was 60 basis points, or 15 cents per share. Now turning to our liquidity and capital resources, we generated $281 million of operating cash flow year to date, compared to $95 million over the same period last year. Cash flow this year has benefited from increased revenues and strong operational performance, partially offset by an increase in working capital investments to support growth, higher tax installment payments driven in part by the impact of U.S. Section 174, and higher interest payments. Last year's operating cash flow reflected the impact of the Cardano financial system integration. At the end of September, DSO was 83 days, a couple days higher than the previous quarters. It is fairly typical for DSO to rise in the third quarter due to seasonality. And our net debt to adjusted EBITDA ratio was 1.5 times, well within our internal leverage range of 1 to 2 times. With that, I'll turn the call back to Gord.

Thanks, Teresa. Backlog in the third quarter remained very strong at $6.4 billion, an increase of 8% from December 2022. Backlog has grown organically by 6% and continues to grow in each of our geographic regions. backlog growth was most pronounced in water, which is up 23% organically. Water continues to increase with project wins around water security, wastewater treatment solutions, and water requirements for power generation to support the energy transition. And of course, with AMP7 still underway, we continue to add to our backlog as new task orders are issued. We've also started to secure backlog for AMP8, with Northumbrian Water announced earlier this year, and Southwest Water, which was just announced this week. Buildings backlog saw a solid organic growth. Buildings has captured wind in all of their subsectors, the majority of which continues to be in healthcare, civic, industrial, and science and technology. Buildings is also benefiting from backlog brought in through the acquisition of ESC, which primarily relates to data centers and mission-critical facilities. Environmental services backlog reflects additional project wins related to environmental assessments, including natural resource surveys, regulatory permitting, and environmental monitoring for construction projects. While difficult to precisely quantify, we do know that our backlog includes projects that are backed with IIJA and IRA funding. Our backlog represents approximately 12 months of work. Providing reliable water supply requires investment in water management and water infrastructure, and we're proud to partner with clients around the world to get water to where it's needed. Recently, we announced that we were awarded a continuation of our contract with Tampa Bay Water for the final design and construction management of a new water supply pipeline. We've been working with Tampa Bay Water since 2009 to help meet the growing demand for potable water. Stancheck has been appointed as a civil engineering design consultant for extensive upgrades to Belfast Wastewater Treatments work, the largest wastewater treatment plant in Northern Ireland. We look forward to working with the integrated partners to provide cutting-edge innovations for flood mitigation, doubling the capacity of the plant, and improving the water quality for the community. We continue to provide our expertise for energy transition projects. As the primary environmental consultant for the recently announced Community Offshore Wind Project, we will develop a construction plan, and assist with permitting along with other consultant services. This project has the potential to provide power for over 1 million homes in New York and New Jersey. Looking towards the remainder of this year, we expect to drive towards a strong finish. We've raised our guidance again for the full year as a result of our strong third quarter results. Activity remains robust in the fourth quarter, taking into account its typical seasonality. We've raised our net revenue growth target for the year to 12 to 14% and expect organic revenue growth to be in the high single digits. In the US, we expect low double digit organic revenue growth. In global, we expect mid to high single digit organic growth. In Canada, we're raising our guidance to mid to high single digit growth. We're also increasing our EBITDA margin target for the year in the range of 16.7 to 17.1%. And finally, we're raising our guidance for adjusted diluted EPS growth at 22 to 25%, which reflects the remarkable operating leverage we've been able to achieve so far this year. While the targets I've just spoke to exclude the impact of our long-term incentive plan revaluation, we've also included the targets with the expected impact, which is how they will be reported in our financials. You can view these on slide 13 of our Q3 presentation and in our earnings news release. Looking beyond 2023, we remain very confident that our diverse business model and engaged workforce are ideally positioned to continue creating industry-leading results. We continue to closely monitor projects in our backlog for indications of a recession or economic slowdown, but our backlog remains solid. We're not seeing any significant delays or cancellations. As well, bid activity remains very robust. In developing our upcoming new three-year strategic plan, we've been doing a deep dive across all areas of our business and I can say that we remain very optimistic and excited about the future. We look forward to sharing our vision for the next chapter of our journey on December 5th when we announce our new plan and we hope that you'll be able to join us. And with that, I'll turn the call back to the operator for questions. Operator?

Thank you. If you have a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster.

And our first question comes from the line of Bonnet Pierre with the Jardians.

Your line is open. Please go ahead.

Yes, good morning, everyone, and congratulations for the outstanding results. Looking at the EBITDA margin, 18.3% in the quarter, very impressive. I was just wondering about what were the main drivers behind this strong performance, and it looks like that this is the biggest margin you've posted in recent history despite the LTIP impact. And it looks like that it implies a much weaker margin in Q4. So any thoughts about what drove the performance and the implication for Q4? Thank you.

Sure. Hi, Benoit. So you're right. We had a very, very strong quarter from an EBITDA margin perspective and really reflective throughout our financial results. And so, you know, I'm an accountant, so I think of things as you roll your way through the P&Ls. And it really starts with the quality of our revenue, our ability to execute well that has driven a stronger project margin. And as we work through to our EBITDA, the primary driver, as I've always said, is our ability to maintain high utilization. And so that compounding effect of high utilization that's driving higher absolute dollars, it means that you have a lower proportion of your workforce that is not utilized and, you know, sort of dropping those costs into the unrecoverable line or our admin labor. It also means that there's been a little less time for folks to spend time on marketing and business development, not to the degree to which we would neglect that, of course, but it just means in real time that there is a focus on addressing current projects and getting that work accomplished. And we combine that with, again, a continued focus and discipline on our spending. And we have seen a rise in the use and the hiring in our high-value centers in Pune in particular. So it's really, I think, a matter of doing all the things that we're supposed to be doing all at the same time and driving to a really strong result. As we look towards the fourth quarter, it does typically moderate, and that is our expectation. It tends to be a little bit slower, so utilization is not as high because of weather-related reasons. Field season is largely over in colder climates. It's a busier holiday season. And we do expect and want people to take time off to refresh, to take their vacation time as we work into the fourth quarter. And so that is fairly typical, and that is why the, you know, you see that fourth quarter EBITDA margin is expected to come down.

Okay, that's great color, Teresa. And just looking at your organic backlog, it's declined 4% quarter over quarter, was mostly driven by the U.S. and Canada. Is this mostly due to project timing and the confirmation of funding flow from government infrastructure program? And on a high level, what are you seeing on your end in terms of speed for funding coming out?

Yeah, so maybe I'll address the first piece, and Gord can talk about the timing of funding. But part of what you described is what drove the drawdown of backlog from Q2 to Q3. It was in Canada and the U.S., and again, that correlates directly with the outperformance of organic revenue growth, and it means that we drew down that backlog faster. We were busier, and again, that's reflected in the revenue growth. So it's not a trend that we would find concerning at all. I think it is just sort of the advantage of what you typically see in the backup, usually more in the fourth quarter, But, you know, activity level remains very high on the bidding front. And, you know, as you referenced, the timing within which we actually have everything completed so that we can record and backlog is a snapshot in time. So we're, you know, we're confident that backlog remains very solid and has great trajectories.

Yeah, completely agree. We're not concerned with that reduction in backlog on a quarterly basis. But on the timing, we are seeing some funding starting to flow. We've been talking about this IIJA now for a couple of years, and we've been optimistic as an industry that it's this quarter, the next quarter, this half, the next half. But we are seeing that about 23% of the IIJA funds have been dispersed. We're getting ready for the 24 allocations now. So that's starting to hit the street now. So I think that's only going to continue to strengthen. The interesting thing is that when you look at our strong performance year to date, that's been without really any of the funding from IAGA or some of those other things. So that's, I think, just going to further strengthen as we move into 24 and the years beyond.

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

Thank you.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Michael Dumit with Scotiabank. Your line is open. Please go ahead.

Hey, good morning, guys. Good morning. So on the margins, obviously really good margin expansion Q2, Q3. A little bit of a follow-up on the last question, but now you're exiting Q4 flattish versus the big Q3, Q4 margin expansion, sorry, Q2, Q3 margin expansion. How do we square the moving parts into 2024, given the above average margin expansion in 23, but the flattish margin exits?

So I think, you know, when we look at our margin and we consider it on an as-reported basis, so, you know, throughout this year because of the impact of LTIP revaluation, we pulled that piece out so we can identify what our performance has been relative to the baseline we set at the start of the year. But, of course, as Gord noted in his remarks, The LTIP impact is in our admin and marketing costs, and that does reflect in our EBITDA margin. And so, you know, when we come out of this year, we do expect that the margin will be higher than it was last year. And as we look towards the coming years, we continue to expect to be able to grow that margin, recognizing that, you know, if our share price stays where it is, and continues to expand, that there will continue to be this dynamic of a growing impact on our cause. But notwithstanding that, we do expect that the margin will continue to expand. So, you know, it's not something that we're concerned about in terms of our ability to drive that margin growth. And again, it's all those levers that I talked about earlier and a few other things thrown in that are going to help us to continue to grow our margins.

Thanks, Teresa. Super helpful. And I think you talked about some of the reasons for the upside surprise in Canada. I guess the question is, how sustainable do you find this incremental organic push here? Because if we were to assume Canada is, I call it, a mid-single-digit organic growth-type market, does this effectively represent a tougher comp for next year? Just trying to square that out as well.

Yeah, I mean, it does. Anytime you have a very good year, it makes it harder next year from a mathematical growth standpoint. And that's, you know, when we came into this year, that's what we were anticipating because the back half of last year was really strong for Canada. And so, you know, we have been very pleased with the continued high level of demand in Canada. Some drivers around increased investment in health care in our building sector, for instance, has just been greater and more sustained than we had expected. And we're expecting that that's going to continue in the next year. There have been a couple of larger projects for both our environmental and our transportation groups that have gone faster than we expected and driven solid growth this year. And so how that affects our growth rates for next year is part of what we're working on as we prepare to roll out our strategic plan targets and our guidance in early December. But we do expect that there will continue to be growth in Canada. Will it be as strong as it's been this year? Will it moderate somewhat? That's the piece we're working on. But we do still expect Canada to have the capacity to grow next year.

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

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Chris Murray with ATB Capital Markets. Your line is open. Please go ahead.

Yeah, thanks. Good morning, folks. You know, Gordon, this is the second quarter in a row where you guys have seen some really good organic growth in And really your commentary is quite optimistic about the future. So as I'm hearing you and I'm kind of putting together the pieces, you know, it kind of sounds like there, you know, you talked about a little bit that you haven't really even seen much of the benefit from things like IIJ, that a lot of what you've seen in organic has been good. And then you also mentioned, I think your turnover was better maybe than you had expected. you know, as we put that together and we think about the next couple of years, um, is there anything to suggest that you can't, that you wouldn't be above kind of the normal organic, uh, kind of mid single digit growth rate, um, through 24, probably for 25 and 26 as well?

You know, uh, we will be issuing our, um, our guidance for 2024 on in December 5th when we have our, our, um, role at our strategic plan in Boston. So I won't comment specifically on any numbers. But when you think about the industry overall, this is the season where there's a number of these engineering firm CEO conferences. And so I've attended two of those recently. And the general sentiment is that the market is very, very robust. We see that strong support, certainly in water, and in transportation and energy and energy transition. Like there's just an enormous amount of opportunity there. So there is nothing that we see on the horizon in any of our geographies that we would think would be pointing to a downturn in our overall business for us and truly for our competitors. So, you know, we really do feel good about the next several years.

Okay, that's true. And then Teresa, just maybe, Talking and going back to project margin for a couple seconds. Again, very good result. We saw that. You did make the comment, I think, in a couple of the segments that there were some recoveries that also went into the margin. Can you give us a sense of the order of magnitude, either dollars or basis points, on how much that played into the margin performance in the quarter?

Sure. Yeah, I mean, the recoveries... risk releases, change order approvals. Those are always a dynamic within our business, of course. And what we saw this quarter was a slightly higher volume of that than typical, and we felt it was important to call out as one of the drivers. It certainly wasn't the most significant driver in terms of our outperformance, but it had an impact. And we would estimate it was around 20-ish basis points from a margin standpoint. So, again, not overly significant, but enough to make an impact.

Okay. No, that's helpful. Thanks, folks.

Thank you. And one moment for our next question. And our next question comes from the line of Michael Tomey with TD Securities.

Your line is open. Please go ahead.

Thank you. Maybe just to follow up on the last question about the change order impact, Teresa, I appreciate the color on the margin impact. Would that have had any impact in the organic growth rate you did in the quarter in terms of benefiting it?

Not really, no.

Okay, I didn't think so, but I just thought I'd check. And then in terms of the margin for the fourth quarter, when we're just thinking about EBITDA margins, You talked a little bit about this earlier, but when we're looking at project margins and an estimated percentage of revenue in the fourth quarter, what is it that we should really be thinking about as the area that sees the biggest pullback as you go into the fourth quarter and see a bit of a step down?

So, you know, I think as we head into the fourth quarter again that we're going to expect in general that organic growth will likely moderate relative to what we've seen for the first nine months of this year. I think, you know, project margin we should expect would not vary significantly. dramatically in terms of the percentage of project margin because that is, you know, purely a reflection of, you know, our execution on particular projects. But, you know, we do expect that EBITDA margin, driven mostly by admin and marketing costs, will be lower than what you've seen for Q2 and Q3 in particular, again, as we have probably a slower or a step down in our utilization to reflect the, you know, consistent with the comments I made earlier. So that's where you're going to see it, I think. And that should be fairly broad-based across our organization.

That's helpful. And then I suspect we may get some more thoughts and detail on this at the Investor Day, but maybe I'll just ask right now, just in terms of looking forward on the margin period, you know, performance and potential within the business. How do you think about the margin improvement potential from here? Again, you had a very strong quarter here in the third quarter. Are there, what would be the potential drivers to further improvement and, you know, sort of how much room might there be to go on that front?

Yeah, so there, you know, we, as I said earlier, there is room to continue to expand margins. And we will go into a bit more detail at our investor day when we roll out our strat plan. But, you know, there's not going to be anything shocking in there. It's all the same drivers. And I think, again, what you saw, what you've seen us do for the year to date is really, you know, successfully deploy all of these strategies to grow our margins. And so I have every expectation that what we've done to this point will continue. And that will be operating leverage that we'll gain through our business, through our size, our scale, our ability to manage our workforce in a strategic way. All of those things will continue to give us opportunity to expand our margins.

Thank you. And maybe just one last one here. Appreciate the challenge early in the year with trying to provide guidance that is inclusive of the LTIP guidelines. I really appreciate you giving us that detail this time around because it's sort of more closely aligned with how the results actually get reported. I guess the question is, in the guidance you've given that includes the expected impact of LTIP re-evaluation, do you make assumptions for the fourth quarter in coming to these numbers on what that looks like, or do you just assume nothing, or how do you deal with that in the fourth quarter in the assumptions?

Yeah, it's proven to be quite tricky to think our way through how to provide it in a way that's helpful because, you know, I'll start by saying a number of you have asked us, you know, one-on-one, why can't you give us specific guidance or a rule of thumb or how this works? And in part, what complicates this is our need from an accounting standpoint to run a Monte Carlo simulation on data. on what our performance from a relative TSR standpoint is compared to our peers. And so that is a wild card. So in the guidance that we've provided, what we've said is assuming there's no change in our share price from the end of September, assuming all of those metrics stay the same, here's what the impact will be. And that's the best guidance we can provide because, of course, we don't know what's going to happen from a share price perspective. And so the piece that even if our share price doesn't change from the third to the fourth quarter, as we continue to accrue a quarterly tranche of our LTIP, that now gets priced at a higher level than would have been assumed when we set our guidance at the start of the year. And so there's an impact even if your share price doesn't move from third to fourth quarter, and that's the value that we've tried to give you.

Okay, that's helpful. Thank you.

Thank you. And one moment as we move on to our next question. Our next question comes from the line of Sabahat Khan with RBC Capital Markets. Your line is open. Please go ahead.

Great. Thanks, and good morning. So you put a bit of color on the outlook and just the demand environment, but I was hoping we could go a little bit deeper into and what you might be hearing from kind of the U.S. federal, state, municipal customers, like a lot of the pushback we heard from investors over the recent week has been macro-related. So I was hoping you could just maybe give an opportunity to share some comments on kind of some of the specifics you're hearing on the rollout of these bigger plans, kind of their ability to fund these programs, and just kind of the state of the U.S. kind of government customer relative to where it was maybe three, four months ago. Thanks.

Yeah, thanks, Abba. Good morning. You know, we... We're feeling really strong about the U.S. economy overall. You've seen where organic growth this year has been about 13%, 12.9%. We're just kind of matching that here in the third quarter. But we still see very strong growth. When we look at some of our big markets in the U.S., water, certainly 26% organic growth in water in the quarter. And we see no slowdown in the type of work that we're doing there, certainly a A lot related on the industrial side. We've talked about some of the advanced manufacturing facilities previously that we're working on there. We see a lot of work with the U.S. federal government from the perspective of shoreline resiliency type work and so on. So a lot of opportunity there. So we feel very, very strong in the water business. Transportation remains robust. And that's even, as you said, before the IIJA has really started to hit. And we do expect that to be more of a tailwind for us through 24. But really, that's going to provide, once that's ramped up, strong bidding environment out to 2028 and beyond. Energy transition, still very strong. We see a lot of work coming out in electrical grid strengthening. You know, we saw just yesterday, I think it was announced, a valid initiative in Texas, several billions of dollars in electrical grid strengthening. So whether it's, you know, electrical grid work, environmental work, water work, transportation work, you know, we're just seeing very strong supports in all of our businesses in the U.S. The one area that we are seeing a little bit of potential softness would be in our land development business. You know, you've seen housing starts trending down a little bit as interest rates have gone up. So that's something we're certainly monitoring. And that's not just in the United States. We're seeing that in the UK as well. So, you know, it's not a significant piece of our business, but certainly something that we're watching closely. But other than that, you know, we see, you know, very, very strong tailwinds across our business.

Great. And then I guess, you know, amidst this kind of outlook, how are you thinking about staffing up, whether, you know, I think primarily in the U.S., you know, you've got a potentially large pipeline of demand. And are you going more with full-time? Are you looking more to go toward contract to keep some flexibility? And maybe how is the wage situation in terms of hiring engineers, consultants, et cetera?

Yeah, so, you know, the majority of the people that we bring on, Sav, are full-time employees. And, you know, I made a couple comments in our... In the prepared remarks, firstly, that our voluntary turnover rates when people leave us have returned to pre-pandemic levels, down almost 2% in the last year. We've had record hiring quarters in terms of number of people joining us. Q3 was another record. We're hiring at roughly two times the rate that we did before the pandemic. So we've got good work. We're bringing on good employees. From a salary perspective, interestingly, we're seeing salary pressures soften a bit this year from what we saw last year. You know, last year we saw overall salary increases in that 4% to 4.5%-ish type range. This year we're seeing it in that 3% to 3.5%, sometimes 4%. But, you know, certainly we've seen that wage inflation has moderated from an expectation perspective as we go into 2024 in our industry.

Great. And then maybe just one last one. If you're going to take the demand commentary, just a commentary around the labor situation, how would you think about pricing into kind of 24 and 25 relative to maybe 23? I'm not sure if that's something you're going to cover at the investor day, but just curious how the directional pricing environment is trending.

Yeah, I think certainly what we've seen all through 2023, when you look at our project margin and such, you see that we've been able to pass on you know, that additional salary pressure from a fee perspective, certainly I think we see that being the case as we move into 24 and beyond as well, that, you know, the industry is busy. People, we certainly are being more selective in terms of the projects that we pursue, the clients that we work for. And so I think that does give us a little bit of pricing pressure, pricing support as well, sorry, But this is still a competitive industry. No one gets to write their own check, but we are seeing that we have a little bit of ability to increase pricing as well to cover that salary increases.

Great. Thanks very much.

Thank you.

And one moment as we move on to our next question. Our next question is going to come from the line of Ian Gillius with Stifel.

Your line is open. Please go ahead.

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

I think it can get better. there's always room to move it up. And again, when you think about all the different sectors we work in, you have different levels of utilization across different business lines or different geographies. So I would say that generally there is opportunity to increase utilization. What's really interesting about the third quarter and utilization where it was the strongest was our water business, both in Canada but particularly the U.S., and you saw that. in our revenue growth, and that really was the product of being able to import workers from other parts of our business to help address the backlog. So I think about 100 FTEs that we used from an imported talent standpoint. I think they used 50 to 60 FTEs in our Pune office And that's really what helped to drive utilization up. But as I commented earlier, when we go into the fourth quarter, we really want to see some of those folks take a bit of time away because the utilization has been so high. And so, again, we'll expect some of those folks that maybe have been lent into that business go back into their own businesses as they start to pick up. So that mix is really, really dynamic. But, you know, it's a bit of a long answer, Ian, but I think really we were very successful and have become very successful at how we manage our workforce. And so I think overall the ability to continue to move utilization up is certainly there.

Okay, thanks. That's quite helpful. Teresa, to maybe bring you back some of your time with Veris, I wanted to ask about cash taxes. I know there's been some changes in the U.S. which have kept those elevated. Are you seeing anything transpiring on that front that makes you think that that could normalize or change in the future here to perhaps even improve free cash generation where it is today or is it a pretty steady state?

No, I mean, I think free cash taxes, unfortunately, have taken a step in the wrong direction and mainly because of this U.S. Section 174, the change in how they allow deductibility for your R&D costs. So, you know, I think everybody knows that up until very recently, you were able to deduct them as you incurred them. And starting this year, we now have to capitalize them for tax purposes and are only allowed to amortize them over a five-year period. And so what that's done is it's actually increased our cash taxes And until we reach kind of a five-year time horizon where now we have five years of programs all rolling over together, this will take a dent out of our cash flow to a greater extent than we've seen before. But as you saw from our results, we continue to focus on strong cash flow generation. And in spite of that extra bit of taxes we're having to pay in the U.S., we're managing to continue to strengthen our cash flow.

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

Thanks, Ian.

Thank you. And one moment as we move on to our next question. Our next question comes from the line of Maxim Sycheff with NBF. Your line is open. Please go ahead. Hi.

Good morning, Latrice. Good morning, Max. Good morning. I think you guys have recently added a chief technology officer to your management roster. And I'm just wondering in terms of maybe some of the kind of the roadmap that this new individual is going to be hoping to sort of implement, especially on the digital side. I was wondering if you can give us a bit of a preview from that perspective.

Yeah, absolutely. We're thrilled with the individual that joined us as our chief technology officer. And so the You know, as we've been talking over the last couple of years about some of our digital programs, whether those are internal initiatives to increase the amount of net revenue that we can generate per employee from an efficiency perspective, and also externally in terms of the products that we can develop and offer for sale to our clients who are looking for them. And so we've been working through that for the last couple of years. This individual who's joined us, really his charge is to to focus on both of those activities, both internal and external, working very, very closely with our current chief information and security officer who provides sort of the foundational piece, the cyber, the tool sets, and then working closely with our CTO to ensure that we're focused, we're getting the highest use. And I think you'll see over the next couple of years, we're going to increase the amount of time and focus that we're spending on those those digital products. So we're really excited about it. And I think we'll see some really short-term benefit from that as we go into 2024 and then only strengthening in the years to come.

Okay. Yeah. So, and to your point, like the tools that are being kind of developed or rolled out, I presume it's most of the stuff is kind of over the shelf. So it's not so like sort of super bespoke to see the results like in 2027, right?

No, I think that's right. So a lot of the products that we are developing externally, for example, we already have products for sale on the Microsoft Azure marketplace that clients are going directly there to purchase and go. So we are looking at less bespoke one-off type products for a client and more of something that we can resell, offer as a software as a service and generate higher margins from that, increasing the amount of non-labor revenue that we generate there.

Okay, super happy. Thank you so much. And Teresa, just a quick question for you, if I may. Do you mind maybe just commenting on kind of, you know, the puts and takes of global growth outside of the UK, just in terms of what you guys are seeing there? Thank you.

Yeah, so I think, you know, outside of the UK, Australia is certainly our next biggest geography or probably actually similar in size. And if you throw New Zealand in with that, Again, both performing very well. We see good growth drivers in both of those geographies. New Zealand in particular is an incredibly strong operation for us, albeit just under 1,000 people. They continue to perform very well. So the water sector in both of those geographies will continue to be strong, and of course we're very strong there. And the transportation side of things, from an infrastructure standpoint, probably still on the upswing as we've seen in the U.S. with funding promises and funds allocated. And so that growth we would expect to continue to show up. And on the energy and resources side, from both the mining standpoint in Australia and The growing market for energy, renewable energy in those geographies in Australia, again, are very strong drivers. So we feel very positive about that. Some of the smaller spaces, the Netherlands where we have an environmental services business, very good demand there. And so across the board, I think we feel that there are good drivers in each of those geographies. And again, as it gets smaller, it's a little bit harder to detect in our results. But, you know, as we've said before, it really is a part of what makes our business model so resilient is how diversified we are both in terms of business line and geography.

Yeah, 100%. And Gordon, maybe just any kind of final thoughts in terms of kind of the M&A landscape. What are you seeing now?

Yeah, you know, the... The M&E landscape is very, very busy, you know, and we certainly are in active discussions with firms in different locations around the world. So, you know, it's robust. We're seeing multiples not necessarily trending upwards, but not a lot of softening either over the last couple quarters. So, you know, we're going to keep working on it, Max. You know, we're very, very disciplined. And, you know, when we're ready to move forward, you can see that the you know, the dry powder is there, and we look forward to announcing something.

Excellent. Thank you so much.

Thank you, and I would like to turn the conference back over to Gord Johnston for closing remarks.

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

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