Stantec Inc

Good day, ladies and gentlemen, and welcome to Stantec's first quarter 2024 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 Investors section at stantec.com. Today's call is also webcast. Please be advised that if you have dialed in while also viewing the webcast, you should mute your computer as there is a delay between the call and the webcast. All information provided during this conference call is subject to the forward-looking statements qualification set out on slide two, detailed in stand text, management, 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.

Good morning. Thank you for joining us today. Stantec is off to a great start for the year.

Momentum continues to build on the favorable market trends that have emerged over the past two years. We continue to see strong demand and major projects in water security and water treatment. With the recently announced EPA regulations on PFAS, We expect this area to grow significantly. Stantec's been on the leading edge of PFAS work for several years, with multiple contracts underway in data analysis, treatment piloting, site remediation, and full-scale system design. And we have several PFAS treatment systems that are fully operational. We also continue to see great demand for energy transition and climate solutions, including strengthening of electrical grids and for environmental services. Aging infrastructure continues to drive significant needs, either for the repair or replacement of roads, bridges, railways, and transit. With approximately 400 billion of IIGA funding now distributed, investment towards addressing these needs is spurring growth. And the ongoing push to restore productive capacity continues to drive significant work in advanced manufacturing, data centers, and other mission-critical facilities in all of our key markets. Our solid first quarter results reflect our ability to capitalize on this robust market demand and to deliver strong operational performance. We are also successfully executing on our plans to grow through strategic and disciplined M&A. In the first quarter, we closed our acquisitions of Zetcon and Morrison Hirschfield. And it's been very gratifying to see that since joining Stantec, both companies have continued to attract new employees,

as both firms have grown their headcount by over 5% organically.

And on May 1st, we announced that we acquired Hydroc, a 950-person firm headquartered in Bristol, England. With 22 locations across the UK, Hydroc provides integrated engineering design and energy and sustainability consultancy services. They offer solutions to major infrastructure projects and landmark buildings across a number of attractive sectors, including healthcare, energy, education, logistics and distribution, and the public sector. Hydroch is a great strategic fit for Stantec. It grows our presence in the UK by more than 30% and provides us with a highly complimentary line of services and expertise that bolsters our UK service offerings. Combined with Zetcon and Morrison-Hirschfield, We have added over 2,700 people to the Stantex team in the first four months of 2024.

This, in conjunction with our Q1 performance, sets us up very well in progressing towards our three-year targets. This brings me to our Q1 results.

We achieved record net revenue for the quarter of 12% year-over-year with 7% organic and 6% acquisition growth. We continue to see high demand for water in all of our regions, delivering 16% organic growth. Buildings also delivered double-digit organic growth this quarter. Adjusted EBITDA increased to $212 million, with a margin of 15.5%.

And as a result, we delivered a 23% increase in adjusted EPS of 90 cents. Our U.S. business continues to perform extremely well.

delivering a 14% increase in net revenue for the quarter, including 10% organic growth and 4% acquisition growth. We achieved organic growth in every one of our business units. Our water business delivered over 20% organic growth. The key drivers included industrial and major water security projects, like the City of Joliet Alternative Water Source Program. Our healthcare expertise and hospital structures Medical technology and service delivery models drove double-digit organic growth in our buildings business, along with strong demand for industrial projects, particularly in data centers and other mission-critical facilities. Infrastructure also had a solid quarter, with heavy activity in major transit, rail, and roadway projects, reflecting the beginnings of the ramp up of projects funded by the IIJA.

In Canada,

increased net revenue by seven percent with six percent acquisition growth from morrison hirschfield and one percent organic growth our water business delivered double-digit organic growth as activity on major wastewater projects remained high infrastructure also delivered double-digit organic growth on the strengths of several roadway projects across the country and education and civic projects drove organic growth in buildings Energy and resources retracted this quarter, as several significant projects wound down late in 2023, and we experienced delays in the ramp-up of new projects. We're beginning to see these new projects moving towards commencement, and we've successfully added new contracts to our backlog, and so we're confident that ENR will shift towards organic growth later this year. Our global operations generated 11% net revenue growth, with an 8% increase from Zetcon, and 5% organic growth. Our water, buildings and environmental services business units all delivered double digit organic growth. Our industry leading water business delivered strong results across the UK, New Zealand and Australia through long term framework agreements and public sector investment in water infrastructure. Buildings achieved over 20% organic growth with high levels of activity in every major region. Growth was most pronounced in the Middle East, where we are the lead designer of the Hamdan bin Rashid Cancer Center in Dubai. Buildings also started work on the 4 billion pound Agritas battery manufacturing facility in the UK. And the strong performance from environmental services was driven by European energy transition projects. Infrastructure net revenue retracted this quarter due in part to the Australian government's decision to delay or cancel certain transportation projects. And now, I'll turn the call over to Theresa to review our financial results in more detail.

Thank you, Lord. Good morning, everyone. We delivered a very solid quarter of performance in Q1 with record net revenue, enhanced project margin, and disciplined cost management. In Q1, we generated gross revenue of 1.7 billion and net revenue of 1.4 billion. both of which were up 12% compared to Q123. Project margin increased 50 basis points due to our continued discipline in project execution, our ability to raise rates on certain projects to mitigate the impacts of wage inflation, and increased selectivity in project pursuits. This, along with our continued focus on operational efficiency, drove a 90 basis point increase in adjusted EBITDA margin to 15.5%. Diluted EPS for the quarter increased 19% to $0.70, and adjusted diluted EPS was up 23% to $0.90. Again, this quarter, we saw a meaningful increase in our share price, which requires a revaluation of our long-term incentive plan. Excluding the effect of the LZIP revaluation, our adjusted EBITDA margin would have been 15.9%, and Q1 adjusted EPS would have been $0.94. Turning to our liquidity and capital resources, we delivered a strong quarter of cash flow generation in Q1. Operating cash flow increased to 57 million compared to 37 million in Q1 23. And DSO was 79 days below our target of 80 days. Capital return to our shareholders increased as a result of the board raising the dividend rate and a higher number of common shares outstanding compared to Q1 23. And our net debt to adjusted EBITDA ratio was 1.5 times, reflecting the funding for Zepcon and Morrison-Hirschfield, still within our internal leverage range of one to two times. And I'll turn the call back to Boris.

Thanks, Teresa. At the end of the first quarter, our backlog stood at a record $7 billion.

Our recent acquisitions contributed 7% to our backlog since December 2023, primarily in infrastructure and buildings. Backlog increased organically by 3%, with growth in Canada and the U.S. predominantly in our environmental services and infrastructure business units. Project winds and environmental services translated into solid, low double-digit organic growth in our global and U.S. operations. U.S. infrastructure also had a number of strong winds, translating into mid-single-digit organic growth. We're seeing strong demand for transit, bridge and highway projects, underpinned with funding from the IIJA. The non-organic retraction in Global's backlog reflects, in part, the drawdown of our UK backlog associated with the AMP7 cycle. And although we have already won over 60% of the AMP8 programs we are pursuing, these contracts are not yet in backlog. In aggregate, our backlog represents 13 months of work, which is one month higher than it was at year end. We continue to hire at near record pace, and our voluntary turnover remains well below industry average, meaning that we are attracting and retaining the workforce needed to deliver on our growing backlog.

Turning now to major projects awarded in Q1.

Through our Climate Solutions Strategic Growth Initiative, we continue to advance our services and technologies for efficient water use and reuse projects, including a design-build project for Arlington County. This $175 million upgrade will enhance the solids handling facilities and incorporate cutting-edge technology to sustainably transform wastewater into a renewable energy source and a nutrient-rich soil amendment. In support of the energy transition, our energy and resources team will be providing project management and transmission and distribution engineering to the BC Hydro and Power Authority This is a seven-year master services agreement valued at $186 million. And in Eastern Canada, also under a seven-year MSA with options to be extended, we will be providing services to Hydro-Quebec for environmental assessments. The last project I'd like to highlight is an exciting win in Australia that underscores our global strength in the water industry. As part of this four-year project, our water, environmental services and infrastructure teams will collaborate to assist with the $595 million wastewater system upgrade in Sydney, Australia. This is a prime example of how we were able to leverage our leading expertise in water to broaden the scope of services and bring together our expertise from all disciplines and regions across Stantec.

Looking at the remainder of the year, we are reaffirming our 2024 financial targets, which were provided in February.

We expect net revenue growth for the year to be in the range of 11 to 15%, and expect organic net revenue growth to be in the mid to high single digits. For U.S. and global, we expect mid to high single digit organic revenue growth. And in Canada, we're guiding to mid single digit growth. Acquisition net revenue growth which will now include a partial year for Hydrox, is expected to be in the mid single digits. Our adjusted EBITDA margin target for the year remains in the range of 16.2 to 17.2%. And finally, we expect our adjusted diluted EPS growth to be in the range of 12 to 16%. We are very confident in being able to achieve these targets given the robust activity we're seeing throughout our region and the three successful acquisitions we've completed so far this year. And with that, I'll turn the call back to the operator for questions. Operator?

Ladies and gentlemen, if you have a question or comment at this time, please press star 1 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star 1 1 again. Once again, if you have a question or comment at this time, please press star 1 1 on your telephone keypad. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Benoit Poiret from Desjardins. Sir, your line is open.

Yes, thank you very much, and congratulations for the strong start of the year. In terms of M&A environment, obviously quite positive. You've been able to add almost 2,700 people so far. So congrats. And obviously, in terms of size, it compares pretty well to Carnot. But is there any main difference when it comes to integrating different acquisitions versus a big one like Carnot? And could you talk about whether there's any limit in terms of number of people you could integrate, let's say, over a year? Thank you.

Hi, Benoit. So as we look at integrating these three different firms, they are all a little bit unique and slightly different from Cardno. So Cardno, we had almost two integrations, one in the U.S., one in Australia. The U.S. business, of course, very mature and lots of expertise around to contribute to getting that integration accomplished. Australia was a little bit farther afield, but still had developed a pretty good ability to integrate there. But you'll recall there was some disruption. It was challenging, just given its overall size. We look at these three acquisitions we've just completed. Zetcon is a little bit different from other firms we've acquired because it is our only presence in Germany. And so between language difference, they use German GAP. At Zetcon, we, of course, report under IFRS, and so, you know, the transition will take a little bit longer, and we're not looking to move as fast to bring them on to Oracle because they are our only presence in Germany. Morrison-Hirschfield in Canada, again, great depth here, more presence here, and so I think that is a process that is already underway, and we would look to complete that financial integration in the second half of this year. Hydroc, it's pretty early days for Hydroc as we start mapping out what that integration could look like. So I think these things are always complicated. They always create a little bit of noise, particularly in the acquiring firm. But I think we have a pretty great track record of getting through that quickly and then moving towards sort of that holistic value creation that we can achieve from our acquisitions.

Okay, and is there any reason, Teresa, why you did not adjust yet the guidance this year in light of the solid start, but also the fact that you just completed the IDROC acquisition?

Yeah, I mean, I think the range for guidance is appropriate. You know, we are off to a strong start to the year, but as we look out to the rest of the year, there's always, you know, puts and takes in various corners of our business that we consider. And, you know, I think at the beginning of the year, we want to make sure that we've got latitude to adapt if things unfold either more quickly or more slowly than we've seen. Hydroc, you know, it's eight months. results we'll have. And as we just talked about, we're going to be moving into integration at varying paces, though, of three firms. So it's a pretty high degree of difficulty that we have set for ourselves. We're confident that we're going to be successful in getting these firms integrated and creating value, but I think it's early in the year. We want to make sure that we're focused on integrating and getting these firms aligned within stand tax practices and driving toward those revenue synergies and not overly concerned about how that first sub-period performance looks for the year.

Okay. And last one for me on the water side, obviously a great achievement so far in Q1, organic growth 16%. Great opening remarks also about all the awards that are not yet in the backlog with respect to the M8 program. So could you maybe talk a little bit about the kind of quantify the opportunities that will be added to the backlog? And I know that over the next three years, you're targeting high single-digit growth, Given the start and the potential around the MA, could we even see a low double digit given the backdrop in the water segment overall?

You're right. The water segment, on top of 20% organic growth last year, putting up another 16% in Q1, just shows the strength of that water franchise we have really around the world. we see strength in all of the regions. You know, it could be in, you know, in Canada, we're seeing great opportunities from a wastewater perspective, a lot of water work here as well. The U.S., certainly, while it's already very robust with most municipal and advanced manufacturing facilities, you know, we see considerable growth opportunities in the PFAS space there as well. And then outside of North America, you know, we've talked about, you know, just the strength as we come into the AMP8 program and the framework agreements in Australia and New Zealand. So we feel very, very strong and positive about our water franchise moving forward. But, you know, that said, it's one component of the overall diversified profile that we have. And so, you know, while we do see opportunities for continued organic growth going forward, you know, I think we, at this point, we're not looking to change that guidance from that 7% organic growth CAGR for the next three years. And As things evolve, as we move into budgeting and guidance for next year and the following year, then perhaps we'll make an adjustment if required, but we're not looking to do so at this point.

Perfect. So congrats and thanks for the time.

Thanks, Benoit.

Thank you. Our next question or comment comes from the line of Devin Dodge from BMO Capital Markets. Mr. Dodge, your line is now open. Thanks. Good morning.

So I asked one of your competitors a similar question earlier, but I wanted to give you a chance to address it as well. So look, the demand environment is clearly strong across a lot of your regions. You talked about this. But how do you think about the balance between pursuing the growth opportunities that are available but requires a lot of effort to expand the workforce with being more selective in your bidding activity to drive margin expansion?

Yeah. No, that's actually a good question. But, you know, I think we're really in a unique environment right now. At Stantec, we're focusing on both. So we are absolutely being more selective in both our project and our client selection. And you can see that in the strong project margins that we've been delivering. And actually, even last year in December, when we rolled our three-year strategic plan and targets, we increased the top end of our project margin guidance range previously from 53 to 55% to now 53 to 56%. So we see that client selection, that being more discriminating, only taking the higher margin projects, being very, very successful. We've also talked to our project managers about if you have a client that is particularly problematic and that they pay slow, They don't want to give change orders for changes in work. They're litigious. This is the time in the evolution of our overall company and the industry to not work for those clients and instead expend your energy on positive clients with good projects and good project margins. So we are absolutely increasing the selectivity of the projects and clients that we're working on. But in the same way, you know, you've heard us say and very accurate that We have one of the lowest voluntary turnover rates in the industry and one of the highest attraction of new staff. So we are growing our headcount both by retaining existing staff and attracting new so that we can also take on that higher volume of work and grow organically because of that. So I think there's, you know, while it's an excellent question, we are focusing on both the focus on clients and projects and on the growth component.

That was excellent. Good color. Thanks for that. Second question, I looked at the double-digit organic growth in the building sector I thought was interesting. You went through some of the major projects in your prepared remarks, but what are some of the subsectors that are driving that strong growth?

So, a couple in particular. Healthcare is very, very strong for us. And so, we are... continuing to ramp up over the past number of years on that. So we talked about the cancer center in Dubai. We've also been awarded the design of the first proton therapy treatment center in Canada because we have our particular expertise from that perspective. We're seeing a lot of growth also in data centers. Now, we were strong in data centers before, but then when ESD joined us, we got even stronger. And then with the Morrison-Hirschfield team joining us, we're even stronger again. So we see a lot of growth in that data centers, mission-critical facilities, and healthcare in particular as two areas that are very, very strong. And then, of course, on top of that is our focus on advanced manufacturing. And so we've talked about the Agritas battery facility. We've talked previously about the solar panel manufacturing facilities.

So there's just an enormous amount of work out there that's really driving solid growth in our buildings business. Great, thanks for that. I'll turn it over. Thanks, David.

Thank you. Our next question or comment comes from the line of Jacob Boot from CIBC. Mr. Boot, your line is now open.

Good morning, Gordon, Teresa. This is Rahul on for Jacob. Good morning. Morning. So looking at organic net revenue growth, strong performance in water and buildings, but notice that growth in the infrastructure business has been creeping higher as well. So with about 40% of that IIJA funds now released, are you seeing that hit the revenue line more meaningfully now? And how should we be thinking about the ramp up there for the balance of the year?

Yeah, yeah. So we absolutely are starting to see more IIJ projects being awarded. We're starting to generate some revenue there, but we see that ramping up even more towards as the year progresses. So, you know, a little bit coming on now, but, you know, backlogs are coming up and we see that work increasing, you know, even more in the second half of the year and then holding pretty steady, even growing a little bit kind of through 25 through 28, 29. So we see a Now that the ramp up is happening, of course, it always took longer to get going than we industry had hoped it would. But we are seeing it now, ramping up through the second half of the year and then holding at a pretty elevated level for the next three to five years.

Right. Okay. That's helpful. And then maybe just a question on the pace of M&A. So three deals announced so far this year. Do you expect this pace to continue in 2024, or do you now anticipate taking a bit of a pause to focus on integration? And maybe if you can comment on your overall M&A pipeline, that would be helpful.

Great. So the overall M&A pipeline is really full and just continues to strengthen. And so, you know, our balance sheet is good. Our ability to integrate is solid. So we don't see taking a pause at all. So we're, as we always are, actively in different levels of discussion with companies and around the world. And so, you know, but we're maintaining our discipline. And so when the right opportunity comes around, we absolutely would pull the trigger and make that happen.

Great. Appreciate the responses. Thank you. I'll turn it over. Thank you.

Thank you. Our next question or comment comes from the line of Michael Dumais from Scotiabank. Mr. Dumais, your line is now open.

Good morning, guys. Good morning.

Good morning, Gord. Hey, Teresa. So maybe first question, can you remind us how much of the E&R is in Canada and just maybe discuss the moving pieces for Canada? And then just maybe as a follow-on to that, I think you laid out in the prepared remarks a comment about returning to organic growth in E&R in the second half. of the year. Just wondering if we should assume that maybe Q2 growth there should be a little squishy.

Sure. So I'll start there. So we had really strong growth in ENR in Canada through last year, working on several significant projects, Trans Mountain and others, and a lot of them wrapped up near the end of last year. So we expected, of course, a little bit of revenue retraction from that. But, you know, our backlog has really increased in that group over the last period of time. So we do see that coming back in the second half of last year. We're also coming off a really high comp. And, you know, when you look at Q1 2023 and ENR was a really high comp. So, you know, we're seeing that, you know, inflation, rising interest rates, slow regulatory approvals, all slowing a little bit of that in Western Canada in particular. But overall, ENR in Canada is less than 5% of the overall net revenue for Stantec.

Okay, very helpful. Thank you. And then, you know, last year, the organic hires accounted for about 5% of the increase in the employee base. So you're, you know, you're nearing or maybe a couple of months away from peak season. You know, how do you think 2024 will trend versus that? And I'm just wondering, how much of the organic hires is in water, you know, maybe versus the rest of the...

company yeah well you know we are of course actively hiring in water but we're actively hiring in a number of our other groups as well well water ramps up a little bit in the in the summer months but some of our other groups even wrap up more and when you get into the north northern hemisphere field season you know environmental services gets more busy more people out in the field a lot of transportation land development workout so it always You know, it depends a little bit about, you know, the types of people you're hiring and have some seasonality impact as well. So, you know, as we said in the prepared remarks, we are at a record hiring. You know, we're just a little bit off of kind of the pace where we were last year. So we see really continued strong organic growth from a hiring perspective this year. And we've also seen that... labor pressures have come off a little bit. You know, a little easier to hire people than it was a couple of years ago. Salary increased pressure a little bit less than it was a couple of years ago. So we're actually feeling really good about both our ability to retain, of course, but our ability to attract people. And then, as you've seen through our project margin, pass along any salary increases or any pressure we see that way to our clients. The other interesting point just to note is that our water group has the lowest voluntary turnover rate of any of our business lines. And so while we're actively hiring there, we also do, while we do an incredibly good job of retaining everywhere, it's even more solid in the water franchise.

Super helpful. Thank you very much. Thanks, Michael.

Thank you. Our next question or comment comes from the line of Chris Murray from ATB Capital Markets. Mr. Murray, your line is now open.

You know, Gordon, I don't know who wants to take this one, but turning back to Hydroc and just talking a little bit about maybe the UK water business and what that brings to you, a couple of questions around this. First of all, you described Hydroc as an integrated firm. And I'm wondering, you know, maybe get your thoughts on, you know, does that mean there's a construction element in there that we have to be thinking about or anything like that? And as also part of this, Was Hydroc a competitor of yours around AMP8, or does it change how you guys can attack maybe the rest of the AMP8 program as we go through the year? Yeah, great questions, Chris. So, firstly, 100% with clarity, they do no construction work. And so, when we talk about them being an integrated firm, they're really integrated. fire safety, energy, sustainability, civil, structural, transportation, environmental, geotech. That's why, you know, they're integrated from their perspective, but they do little to no water work, which is why they're so complementary to Stantec there, because there's very, very little overlap, but great opportunities for synergies as, you know, we can bring our water expertise to their clients, they can bring some of their expertise, and you know, MEP and fire safety and so on to our clients. So that's why we're so excited to vote Hydrox. They're a great firm with incredibly strong leadership. So we're going to be really, really additive to our operations in the UK. Okay, great. No, that's great. I appreciate the clarification. And then the other question, just very quickly, I don't know who wants to take this one, but I guess, Teresa, you indicated that, you know, you were thinking of retiring this year. Any update on the transition that you can provide us would be great.

Actually, no, that's a good question for Gord to answer, because I do fully intend to retire this year.

Yeah. So the selection process is continuing. We've got some incredibly strong growth in internal and external candidates. So we're beginning the formal interview process, and we'll be able to announce something to you here when it's time. But it You know, the process is going along well. We've been extremely impressed with the quality of candidates that we're attracting. All right, I'll leave it there. Thanks, folks. Thanks, Chris.

Thank you. Our next question or comment comes from the line of Michael Tupone from TD Securities. Mr. Tupone, your line is now open.

Thank you. Good morning. Good morning. Gord or Theresa, a couple of questions about project margins. So first off, it looks like the improvement that you saw in the first quarter on a year-over-year basis was really driven by a couple of specific BOUs, namely water and buildings, whereas the other BOUs saw flatter down project margins year-over-year. I guess as we're looking toward the rest of the year, are the project margin improvement opportunities more prolific in certain BOUs than others?

Yeah, I think that's accurate. We've always pointed to public sector work, which of course is very much where transportation sits. It tends to be on the lower end of the project margin range that we put out there. Water, especially the specialty water work that we provide, does tend to garner those higher margins. We were flat in environmental services, but as we move into the peak season, which will be, you know, later Q2 and really strongly into Q3, I would expect to see that strengthen again. So, yeah, I think that is just the nature of the differences you see across the businesses, but really strong performance, as you noticed, in water and in buildings.

Okay, that's helpful. Thank you. As a follow-up, at your investor day late last year, you talked about looking to reduce your sub-consultant use and using that as a means of helping improve project margins. Wondering to what extent that is already happening, if that is something you would expect to happen in the near term, or if we should be thinking about that as more of a sort of medium to potentially longer-term opportunity.

Yeah, I mean, it is absolutely a longer-term initiative. I would say what we've done thus far is really have all of our business leaders examine the makeup of their sub-consultants. As we noted yesterday, there's always going to be a requirement to a sub-workout, particularly for federal work in the U.S. and in Canada, You know, you are required to allocate a portion of your contract to indigenous-owned or minority-owned businesses and so on. But we are identifying where there are opportunities to use different components of Stantec as opposed to going outside. So that analysis is really well underway. And of course, in some BOUs, there's a greater opportunity than in others. But I think, you know, we've got a good handle on where we have the opportunities, and now we'll move towards that over the next couple of years.

Great. Thank you. I will leave it there.

Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. Our next question or comment comes from the line of Maxim Steichev from NBF. Mr. Steichev, your line is open.

Hi, good morning. Good morning. Obviously, you know, very solid performance on all the fronts, and I was wondering if you don't mind providing a bit of an update on your design center strategy, and especially how we should be thinking about this, sort of like the ceiling we can contemplate over the long term, because in some of the federal work, I presume you're not allowed to use some of those design centers. Just wondering if you can provide a bit more color on that, Thank you so much.

Sure. Thanks, Max. So we have three of these integrated delivery centers currently. Our largest one is in Pune in India that we talked about before, just a little bit less than 1,000 people there now. We have one in Manila in the Philippines that joined through the Cardinal acquisition at just shy of 150 people. And then we have one in Visig in India that came with MH Morrison Hirschfield. At about 75 people or thereabouts. So, you know, combined, let's call it just a little bit over 1,000 people. We have plans within our three-year target here to increase that to 2,000 people. We see the opportunity to do that. In Pune, India, we've already taken the real estate. We had an additional floor plate available above us. So we've taken that floor plate. We've fitted out. We've already moved people to it. So the resources are available to us. So we're actively hiring to move that, to move forward on that and double that roughly to 2,000 people. We've mentioned before that when you compare at Stantec the percentage of our overall global employee headcount that's in our integrated delivery centers versus our competitors, we are probably subscale compared to a number of our other global competitors. So we see opportunities there. Now, as you say, there are some clients that don't, like the use of these integrated delivery centers, but there's others that basically require it. So you have to manage the growth of that along with your client base and being clear and honest and disclose everything to them and your clients as you work through it. But we still see great opportunities for further expansion there.

Okay, that's about it. Thank you so much. And maybe just a quick follow-up to probably Michael's question. So what I look at, environmental services gross revenue versus net revenue and so gross like to attraction and 3.5 percent growth on that basis so is this where we're starting to see that sort of in sourcing capacity bearing fruit that's that's how should we think about this next

I would say probably not, Max. I think what you saw in the first quarter, sometimes that happens where, you know, depending on project mix, you can get that dynamic where at a gross revenue level, it tracks and net revenue grows organically. So I would not attribute that to the longer-term effort around subs.

Okay. Okay. Thanks, Paul, for clarifying. That's it for me.

Thank you. Our next question or comment comes from the line of Frederick Bastian from Raymond James. Mr. Bastian, your line is now open.

Good morning. Good morning. Guys, if we look at your footprint, you're still very much overweight in North America, which has worked great in recent years, and you're comparatively more subscaled globally. Now, if we take cue from the recent deals, you're obviously... changing that, but is the intent longer term to grow that 20% that you derive, that 20% of revenue that you derive globally?

Yeah, you know, I think as we look at things, a lot of the opportunities that we have for continued growth certainly will come from outside of North America. You know, that said, we still have, and I think, you know, we've mentioned before on our calls that We have the opportunity, based on the size of the U.S. market, to roughly double our footprint there or even more. So we are actively looking at opportunities there. But outside of North America, you're absolutely right. It's a big world out there. And so we have opportunities to continue to grow in the U.K., Australia. But then, as we talked about before, up into the Nordics. And certainly, while we've got an initial start in Germany with Zetcon, great opportunities for further expansion there. The German market is extremely fragmented with, you know, the largest firm. They're only taking about 1% of the overall revenue. So great opportunities for continued growth into that market. So I think we're looking at all markets, Frederick, and from a disciplined perspective and wherever we can find the best place to deploy capital to get good returns, you know, we'll continue to grow there.

Great, you beat me to my second question. You answered it by discipline, so I'm all set. Thank you very much.

Great, thank you.

Thank you. Our next question or comment comes from the line of Ian Gillies from Stiefel. Mr. Gillies, your line is now open.

Morning, everyone. Morning. It feels like a lot of the growth, or it seems that a lot of the growth is going to be coming from advanced manufacturing, power, data center, etc., Can you talk a little bit about how easy or how challenging it's going to be to repurpose some of your employees from other areas into that area?

Yeah. Well, we certainly do see growth in those areas where you're describing. There's also considerable growth in the general core areas that we have. Water, obviously. We see transportation continuing to grow. So as we look at data centers, there are absolutely some specialty disciplines required there. But, you know, we have those through the ESD acquisition, through the MH acquisition and others. Hydroc also brings a considerable amount of specialty building services, as does some of our Australian operations. So we actually feel really good about the overall mix of our disciplines, of our employee headcount in there. So we... Where possible, we absolutely do cross-train and move people around, but we actually see growth really broad-brushed across the organization. That whole cross-training and moving folks around isn't a huge part of what we're looking to do over the next little bit.

Okay, that's helpful. Obviously, you've added a footprint in Germany. Is there anywhere else in Europe at this juncture that you find yourself particularly interested in where you would like to add scale or perhaps add another leg under the stool?

Yeah. You know, I think the one area that we're continuing to look at is the Nordics. And, you know, we have no presence up there currently. So, you know, in addition to, you know, building out the footprint that we have now in Germany, we are still looking to see if there's an entry for us up into the Nordics.

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

Great. Thank you.

Thank you. Our next question or comment comes from the line of Sabahat Khan from RBC. Mr. Khan, your line is now open.

Great. Thanks, and good morning. I was hoping, you know, as we look ahead to 24 and into 25, you can maybe give us some perspective on sort of the price and volume mix. Presumably, pricing was quite high over the last few years. Is it fair to assume that volume is becoming a bigger contributor? And, you know, how are the pricing discussions going with some of your customers as new work is up for bid or places where you're looking to get price increases. Thanks.

Yeah. So a couple of things there. Thanks, Tava. As we think about pricing, certainly we're able to reflect in our pricing the increases that we see from, for the most part, from salary increases. You can see that because project margins continue to stay the same or even increase a little bit. So what we're hearing from clients now is, of course, there's always price sensitivity in our business. But clients that we're talking to now are more concerned about schedule. You know, can you get the work done within the timeframe that I require? Of course, with high quality is still important, but of course, pricing is still important, but it's really the schedule is the primary driver right now. So that gives us and the overall industry a little bit of opportunity for some tailwinds on pricing. Again, it's still a competitive space. No one gets to write their own ticket, but I think we do have some opportunities for some tailwinds to pricing over the next several years.

I guess then just to follow up to that, presumably you're able to reallocate staff across regions and leverage your international centers, but Are there any areas of your business where you are seeing a bit of labor tightness or you're more focused on for hiring because demand might be outpacing supply?

Not really. Where there is a lot of great demand, like in water, for example, we are so strong in water that we continue to attract the best and brightest. Where there is a little bit of additional tightness, we're very strong. Yeah, there's no particular areas that I can think of, Salvo, that are of concern for us.

Okay, and then just one last quick one, I guess. There's this view out there that would wrap up in IIJ's expect over the next 12 to 18 months. Can we talk about the end markets where you are starting to see some of that money show up in customer hands and where the RFQs and RFPs are getting going? Just trying to get a perspective of which end markets we could see as some acceleration in the U.S. for yourself and maybe even just the broader industry. Thanks.

Yeah. Yeah. And so, you know, we're starting to see primarily in the transportation space with, you know, the Department of State, Departments of Transportation and so on, local and local municipal government as well. So we see that ramp up in transportation. We're starting to see some in water as well. But when you look at the overall IIJ funding, the majority of it is transportation related. So I think we'll see a gradual run up in transportation. You know, you've seen that state DOT budgets are up roughly 12% already this year. In part, that will be through IIJA. So we'll see that ramp up into the second half of this year and hold steady for the next several years. And water kind of coming along as well, but of course at a smaller level, supported by IIJA, but still water very, very robust due to the other drivers that we're seeing there.

Great. Thanks very much. Great. Thanks, Evan.

Thank you. I'm sure I know additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Johnston for any closing remarks.

Great. Well, thank you, Operator, and thanks, everyone, for joining us this morning. And in follow-up, should you have any questions, please contact Jess Newkirk, our VP of Investor Relations. She's always available to take your call. Thank you.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Speakers, stand by.