Stantec Inc. (STN) Q2 2013 Earnings Report, Transcript and Summary

Welcome to Stantec Inc.'s Second Quarter Earnings Results Conference Call. With us today from Stantec management are Bob Gomes, President and Chief Executive Officer; and Dan Lefaivre, Chief Financial Officer. [Operator Instructions] As a reminder, today is August 1, 2013, and this conference call is being recorded, as well as broadcast live over the Internet. It will be archived for future reference at stantec.com under the Investors section. Therefore, any members of the media, who are joining the call today, in a listen-only mode, and who wish to quote anyone other than Mr. Gomes or Mr. Lefaivre are asked to please request permission to do so from the individual concerned. Before the call begins, there are a few words from Investor Relations.

Thank you, Sam. Stantec management would like to make you aware of its Safe Harbor statement and to caution you that it will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 in the United States and applicable securities legislation in Canada. At their very nature, forward-looking statements require Stantec management to make assumptions and are subject to inherent risks and uncertainties. In addition, Stantec management will be mentioning additional and non-IFRS measures. You'll find descriptions of these IFRS measures under use and underlying assumptions in the management's discussion and analysis included in Stantec's 2012 and Q2 '13 financial reviews. I would now like to introduce your host, Bob Gomes. Please go ahead.

Thanks, Crystal. Good afternoon, everyone, and welcome to our 2013 second quarter results conference call. Dan will provide a brief summary of our financial results for the quarter, and I will follow with an outline of our market outlook. We will then address individual questions. Today, we released to the results of Stantec's operations for the second quarter of 2013. I am pleased to report we are at the halfway point of the year, showing strong results and a continued pattern of organic growth. The company's performance this quarter demonstrates that we continue to meet our business objectives and execute our long-term strategy. Dan will now provide a review of our second quarter financial results. Dan?

Thanks, Bob. Good afternoon, everyone. As Bob just mentioned, the second quarter of 2013 was positive to Stantec. Gross revenue increased 19.7% to $566.7 million compared to $473.4 million in Q2 '12. Of that increase, 7.3% was organic revenue growth, demonstrating a sustained ability to generate organic growth within the diversity of our business model. All of our regions experienced positive organic revenue growth. Gross margin as a percentage of net revenue was 54.2% in Q2 '13, a slight decrease in Q2 '12 due mainly to the growth in revenue in our Industrial business. Administrative and marketing expenses were 40% of net revenue in Q2 '13, which is the same as Q2 '12. This positive result is due to higher utilization this quarter and the continued management of our costs. We achieved an 18% increase in EBITDA to $66.2 million from $56.1 million in Q2 '12. Net income increased 17.5% to $36.2 million and $30.8 million in Q2 '12. Diluted earnings per share also increased 16.4% to $0.78 from $0.67 in Q2 '12. As a result of several major project wins in the quarter, we are pleased that our backlog increased to $1.5 billion at the end Q2 '13 from $1.3 billion at end of last quarter. Lastly, the company declared a dividend of $0.165 per share payable on October 17, 2013 to shareholders of record on September 27, 2013. Overall, we are pleased with our strong growth in Q2 '13 and with our performance over the first half of the year. Bob?

Thanks, Dan. As Dan just outlined, our second quarter demonstrates positive performance for us at the halfway point of the year. We saw increased activity as the result of the robust oil and gas sector, which impacted both our environmental services and industrial practices and we saw a continued activity in the transportation sector. It's fair to say we are very happy with our strong top and bottom line performance at this point. With 2 years now of generating organic growth, we are excited to see increasing opportunities as we move forward. We closed on 3 acquisitions this quarter as part of our strategy to leverage our world-class expertise to our local relationships. IBE Consulting Engineers Inc., based in Sherman Oaks, California, joined us in May, further enhancing our buildings engineering presence on the U.S. West Coast. Also joining us in May was Ashley-Pryce Interior Designers Inc. This Vancouver, British Columbia-based firm will strengthen our interior design practice in that area. In June, we acquired civil engineering firm, Roth Hill, LLC, based in Bellevue, Washington. This acquisition will allow us to expand water, wastewater and municipal service capabilities in the Pacific Northwest. With these 3 smaller acquisitions, all firms with 50 people or under. The strength is really in the local presence expertise and new client relationships they bring to Stantec. Our acquisition strategy focuses as always on full integration with a consistent and disciplined approach to look for synergies and expertise with the size of the acquisition being only 1 consideration. Now I'd like to give you some highlights on our performance across our practice areas. With our 2012 and 2013 acquisitions strengthening our local reach and depth of the expertise, we are well positioned to capitalize on diverse market opportunities across our practice areas. In our Buildings practice, despite some soft markets, we are continuing to seek bigger projects by cross-selling our expertise. For example, by cross-selling our Transportation expertise, we recently secured a project to reconfigure the campus entrance and associated intersections at the University of Maryland, Baltimore County campus to safely and easily get pedestrians, cyclists and drivers to their destinations. In our Environment practice, our expertise in the oil and gas midstream sector continues to generate opportunities for pipelines and associated facilities. The result is that we are securing many projects with a number of new projects under consideration and development. Our recognized water expertise is also showing results. Our local presence and relationships with leading design-build contractors allowed us to secure a project this quarter where we are the lead design consultant for PCCP Constructors, a joint venture selected for a contract at the U.S. Army Corps of Engineers, New Orleans, district. This project consists of 3 new permanent channel closures and pump facilities, which will form 1 of the largest drainage pumping stations in the world, and will operate continuously and independently during major hurricane events to protect the New Orleans area. With a continued global demand for energy, our industrial practice is also benefiting from an increased demand for engineering services, clients who are exporting oil and gas to market. These opportunities have raised our profile, and with our enhanced capabilities, we are now recognized as a top provider to the Canadian midstream sector of the oil and gas industry. In our transportation practice, our relationships, our ability to adapt to changing trends and our increased depth of expertise drive a steady share of projects from repeat clients across North America. This includes ongoing projects like bridge inspections and alternate project delivery models such as design-built. In our Urban Land practice, despite some soft markets in the United States and Canada, we continue to capitalize on opportunities, especially in the brownfield redevelopment, with projects such as the 1 in Guelph, Ontario to provide planning, engineering, environmental and traffic services in a mixed use residential development on former industrial lands in the downtown core. Overall, we are pleased with our performance and the range and number of projects we have recently secured. This is just a small example that demonstrates the diversity of our expertise. As you know, we work on thousands of projects for clients at the global and national level, as well as with local and regional clients. This range of both projects and clients allows us to perform consistently, mitigate risk and to adapt to market opportunities. Now I'd like to comment briefly on potential market conditions going forward. Our overall outlook for 2013 is a moderate increase in organic revenue, with a target of 3% to 4%. We're on track with activity in a number of sectors and our stronger presence in the United States is beginning to drive opportunities across many of our practice areas. Our outlook for our Canadian operations is moderate organic growth in 2013. We see ongoing strength in the private sector, a stable public sector and steady activity in the oil and gas sector. We continue to maintain a top-tier position as 1 of the largest firms in Canada, and we are well positioned to take advantage of a diverse range of opportunities in a relatively stable economy. In our U.S. operations, we're expecting stable to moderate organic growth in 2013. The United States remains a very large market, albeit, still a recovering one, and we expect our performance to improve gradually as the economy strengthens. Our international operations outlook is for moderate organic growth in 2013. International is not expected to have a significant impact on our performance as this makes up only a small portion of our business. Looking at our individual practice areas, we expect the following for the remainder of 2013. Our overall outlook for our Buildings practice is a stable to moderate retraction in our organic gross revenue for 2013. We revised this from stable because it is an area of our company that has been more affected by the challenging economy. We are seeing a soft market, intensified competition and reduced availability of funding for public sector projects. However, we have been monitoring backlog that made adjustments to align staffing levels with workload. We do, however, see positive signs that are now translating into projects. We expect to achieve moderate organic revenue growth in our Environment practice for 2013, mainly due to steady growth in energy- and resource-related work, especially in the oil and gas sectors. We expect our size, presence and reputation in the environmental market will provide opportunities to increase our share of large long-term projects. With our focus on integrated service offerings, especially with our engineering capabilities in our Industrial practice, we are well positioned to secure more opportunities in the energy sector. In the water sector, we are well positioned to seek for projects, resulting from a more stringent regulatory environment and expect that funding constraints will continue to provide us design-build opportunities. We expect strong organic revenue growth in our Industrial practice in 2013. We revised this from stable to moderate growth, recognizing that our long-term client relationships and current market opportunities will provide continued growth in our oil and gas business, especially in the midstream sector. We anticipate that our clients in Industrial buildings and facilities will continue with normal and stable capital spending. And our outlook for power is mixed, being more favorable in our Canadian operations. Our outlook for mining remains cautiously optimistic as we continue to execute on a few significant projects with our long-term clients, both in Canada and the international markets. In our Transportation practice, we expect to achieve stable to moderate organic revenue growth in 2013. We continue to see many local and regional projects in the United States, as well as a growing number of design-build opportunities, which, due to our larger presence, especially in the U.S. east, such as Florida and the mid-Atlantic, we are well positioned to respond to. In our Urban Land practice, we expect stable to moderate organic revenue growth for 2013. We revised this outlook from moderate growth. Signs of improvement are prevalent in the United States. However, new urban development projects have been slower to emerge than anticipated. We do expect the housing markets to slowly continue to strengthen, the Canadian remaining stable and continued activity in the western provinces, resulting from the robust energy market. In the United States, we recognize there is still some uncertainty around the time it will take for the market to fully recover. We are, however, well positioned for recovery in some states, while in others, we are positioning ourselves to capitalize on opportunities and changing trends. Internationally, we expect to continue leveraging our global expertise to win projects, especially in the Middle East. Across our practice areas overall, we are achieving revenue growth, more importantly, organic revenue growth. We continue to execute on a targeted and steady acquisition strategy that focuses on full integration. With our 2012 and 2013 acquisitions providing a significantly strengthened base for operations, we are taking advantage of our new position to pursue greater opportunities. There are more than 13,000 people in over 200 offices across the continent. We bring world-class expertise to the communities where we work and where we live. As we move into the second half of 2013, we are meeting our short-term goals, while executing on our short-term strategy and evolving our business for the future. Our approach is to remain consistent, focused and disciplined as we stay the course for the remainder of the year. As always, we remain committed to the success of our clients and the communities we engage with every day. This concludes our comments for today. Dan and I are now available to answer any questions you may have. Sam, the conference call operator, will explain the question procedure. Sam?

[Operator Instructions] And our first question comes in from Tahira Afzal from KeyBanc.

I guess first question is on backlog. Based on book to bill in the quarter, I just wanted to make sure whether most of that was organic?

We really don't look at our backlog and measure it from an organic or acquisition perspective. Once we acquire a firm, backlog is backlog. But we don't really break that down. We can give you a little bit of visibility. The backlog, we're very happy, it's strong across basically all the practice areas. It's strong across both Canada and the U.S., and we don't break that down from practice area. But we can say that there are 2 large projects we're working on, the Jansen mine project in Saskatchewan and the PCCP project in New Orleans. Those are both very large projects, so there's some -- was impact obviously or backlog by those projects being active and going ahead. But we're pretty happy with our backlog being consistent across all our areas.

Great. And I guess second question is on 2 end markets, the first being oil and gas in particular midstream. Earlier on, if you rewind to the beginning of the year or even into late last year, I think you spoke a little more conservative on how sustainable the oil and gas trend was. It seems you're clearly much more comfortable around that being a sustainable trend going forward. So would love some incremental commentary on what you see visibility over there. And the second end market was just Urban Land. As you look out, clearly, a very big opportunity still in the U.S. And I would love to know a bit more on timing as you see it now?

Well, yes, certainly, the oil and gas midstream market has been very kind to us. I think we positioned ourselves very well with the acquisitions we did over the last couple of years. And with the group we had previously, it's working very well. Our clients are very busy, they're extremely active. I think we were somewhat concerned how sustainable that was from our own perspective of continuing to find people. But certainly, when you win big projects and you're working for good clients, you tend to attract the best people as well, which is always been part of the strategy. So yes, we're probably getting more comfortable that, that growth will continue in that midstream sector. Very happy with our positioning really based on continuing to find people. The window we see there is still around a 3 to 5 years that it's going to be active and we're just hopeful we can continue to grow that. Urban Land, yes, probably less visibility there. I mean, we've got good visibility in Canada. The land development market tends to be reactive to the strong economy in Western Canada. So right now, we've got good opportunities specifically here in Alberta with Urban Land projects. In the United States, we were cautious in the last couple of quarters with regards to our outlook. We are very positive and optimistic that, that will recover and be a very strong area for us, but we've always said that it was going to take some time. And I think this quarter, we're showing that. But it is still a relatively stressed economy down in the United States and still very cautious. The good news is we continue to see opportunities, but they are slow in developing. So we really haven't changed our outlook there. It's just -- it's coming to fruition that it is still a relatively cautious economy in the United States and the Urban Land business is really responsive to that.

And our next question comes from Michael Tupholme from TD Securities.

Bob, I was wondering -- you mentioned Jansen in the context of the increase in the backlog. Can you remind what your role is on that project? And maybe talk about any concerns you might have about the project in view of the developments in the potash sector earlier this week?

Sure. So our role in Jansen is essentially doing the detail design and construction management associated with the underground portion of the mine. And at this point in time, we're probably the only consultant on site. So we're also managing some safety operations for the overall site as well. That is -- so we're focused on the shaft design, the underground services design and all the associated infrastructure with that. And at this point in time, the mine is about 150 meters deep of the first shaft. So the first shaft is being drilled right now. Head frame is going up for that access shaft. The production shaft is also -- is starting. They're down about 20 to 30 meters on it. So it's a very active site, lots of construction going on. I visited that site in April and was on-site talked to BHP. They're very, very comfortable and very happy with the progress to date, and it's a very efficiently designed, of course, we can say that because we're doing the design, efficiently design mine. And they feel they can be competitive at just about any price. They are very focused on the long-term view of potash and the need for fertilizer in the world. So they're very focused on a long-term strategy. This recent development in Russia certainly is going to cause them some concern. At the very worst though, I'd say, they may slow down the development of that, but I cannot see them stopping shaft design halfway through digging the shaft. So from our perspective, our work is relatively secure there over the next 18 months. The only possibility we see is maybe slowing that down, but certainly we don't see any risk of the project actually getting canceled halfway through where they are today.

That's great color. And just 1 follow-up on Jansen. Was there -- I mean -- you've been talking about Jansen for several quarters and your involvement in it. So was there, what was it that triggered the addition of some work to backlog this quarter? Were you awarded some additional work or some certain milestone was hit?

No, we were awarded some additional work on the project, which was that safety work that I mentioned and more of the construction management on-site, so that was some additional extension to an existing contract we had, which at the time was more specific to the shaft and underground design. So we continue to do the more general engineering services on the site for them, which is all good news for us.

Okay. Got it. And then when we look at the overall backlog around $1.5 billion, is it fair to assume that the timeframe over which you would execute that backlog is not materially different than has historically been the case for your backlog in the past?

Absolutely. That's a correct assumption. We're pretty consistent in that approach.

And our next question comes from Bert Powell from BMO Capital Markets.

Bob, I just wanted to circle back on gross margins. A couple quarters where, were below threshold. Is there anything that you're seeing that would have you revisit your underlying assumptions on that? And I guess, I'm trying to interpret your comments on Buildings this quarter, aligning staff. Does that help move that margin up going forward this year?

Well, certainly, the Buildings margins over the last couple of years had decreased. We're seeing that increase now and you're absolutely right, that's as a result of having essentially rationalizing and ensuring we're matching our workload to our backlog. That will assist the gross margin in that area and the overall gross margin. And the company certainly has slid a bit and as we clearly stated, it is really as a result of just the good growth that we've had more in the industrial side of the business, which as we know is at the lower margin. Dan, I don't know if you have more color on that?

Just a comment on the gross margins. The gross margin for the second quarter is really pretty consistent with where we were last year. It's only 0.1%, I think, off and that is due to the increase in the Industrial business. But we're seeing the Environment business pick up and good growth there. Once the Urban Land business, which is a higher-margin business, starts to see growth, we expect that to increase as well. I think what we will be looking at for our 2014 forecast will be taking a close look at those gross margins and see if that, if the overall mix of business has an impact on our targets.

Yes, certainly, the growth in our industrial business has made it significantly bigger than it was 2 years ago. So every year, we do look at that forecast, what that gross margin would be and we'll take that into consideration. But I think as Dan said, we're looking for our other higher margin businesses now to pick up, which should balance some of that off.

And just 1 other comment is, when you look at net margin or EBITDA margin, it's staying pretty stable because in the Industrial business, these are larger projects, less marketing and business development and we expect higher utilization out of these businesses as well, which tends to drive our EBITDA margins. But that's not just a gross margin focus.

Okay. And then looks like Energy East is bigger and has higher degree of certainty and clearly, you guys were doing some work on that. As that advances, is there more opportunity for you on that project?

Yes. We're doing quite a bit already. I mean, we're doing the environmental work, we're doing the socio-economic work. We're doing some feed work on it, front-end engineering design. So where both our engineering industrial groups and environmental groups are very busy, but it is a very large project with lots of moving parts. And at this point in time, we're very good partner in TransCanada and look forward to continuing to provide more services on that.

Did you get involved in the pumping designs and...

Yes. So the pump -- the pipeline and facilities -- the facilities would cover those compressor stations and pumping stations.

Yes. Okay. And then just the last thought. Was -- in your commentary, I know you're cautious on Buildings, but it seemed at the end of the quarter that maybe there was a bit of improvement in opportunities. Are you just being overly cautious there? Or is it really -- that's just not getting any traction?

Oh, no. We feel it's definitely getting some traction. There's been some good project wins in that area. Project -- winning a project is good. Now, starting it and executing, it's another thing. So that's probably where the -- some of the cautiousness comes is we've gotten considerable amount of project wins, but there is always a lag between winning a project and then actually getting the go ahead from the client. That's probably the biggest risk and biggest concern period of time for us is that because you've got to hold on to your staff. You've got to keep them there. But we're pretty confident -- these projects, a lot of them are funded, a lot of them are private clients. So we're pretty optimistic we're turning the corner in most of our sectors. We're still somewhat cautious about healthcare. We heard other consultants talk more positively about it, but a lot of our clients, more of the private healthcare firms in the United States and they're still in a bit of a wait-and-see attitude with regards to the healthcare situation in the U.S. But again, short-term issue, longer-term very comfortable with our positioning. But overall, I think we feel we'll certainly turn the corner in the Buildings portion.

So adding moderate decline to the outlook this quarter, isn't a function of non-activity, it's really a start?

It's where we are. I mean, its' where we are today and how we define a moderate decline. Even though we do -- we'll improve as the years goes, but at the end of the year will still probably result in a small negative organic growth.

And our next question comes from Sarah Hughes from Cormack Securities.

Just a bigger picture question on the U.S. A lot of your organic growth this year came from Canada. And I'm just wondering, I know you're a bit cautious in your commentary earlier about just the U.S. and when it will really start to get going for you. But just wondering if you could compare kind of the momentum you've seen in that market in the last 6 months versus 6 months prior to that? Are you starting to see some building momentum in your business in those -- in the U.S. market and therefore, kind of give you some increased confidence for that in maybe 2014?

Yes. So to answer the question of, are we seeing better opportunities and increased opportunities in and last 6 months compared to the previous 6 months? Absolutely. We certainly are seeing more clients. I'd have to say our Transportation business is probably a good proxy of that, that we're seeing lots of opportunities in Transportation. I would say the U.S. East is a little bit stronger than the U.S. West, if you want a little bit of more detail. But certainly, lots of pent-up demand indeed in the U.S., we're starting to see some of that pick up. I guess, our cautious undertone to all that is we see a lot of people in the market talking very positively about the U.S. We don't disagree, we're maybe being just a little cautious about how strong that really is going to be. It is going to be better than it was in the last 6 months and it's going to be continuing to be better. But it's still going to be a relatively slow and cautious process, but pointed in the right direction for sure.

And which of your end markets, building versus environmental-industrial would you say you're seeing most momentum in the U.S?

Right now in the U.S., it's probably is transportation is -- would be the strongest of our sectors that is experiencing the uptick. And we anticipated that because there's been such a headwind in Transportation for the last 2 or 3 years in spending in infrastructure, and it is just a matter of having to get some of this work done. A lot of the design build. The second area would be the water and that's mainly is a result of, I would say more of the flood control water resource side of it than the utility water treatment plant side of it. There is -- every time there is a flood or weather situation, we get a fair amount of work and we're still getting that from Superstorm Sandy. A lot of the implementation of the flood protection programs are now being done. We're seeing that come out. And as you saw with the PCCP project, that's as a result of Katrina, which is many years ago, still having an impact. So I'd say, the water resources, flood protection area and transportation would be the 2 where we've seen considerable uptick of opportunities.

And then just lastly on the Industrial gross margins. Just trying to get a sense, we have seen them come down from say '09, '10 and they stabilized around the 48% level give or take a couple of points. Based on how you see your mix within this market, do you think kind of 48-ish gross margin is a good kind of target margin going forward?

Yes, we don't see them continuing to slide. I think the slide from maybe the low-50s to the high-40s is really as a result of the size of the projects we're now working on. A lot of the midstream projects and pipeline projects are very large, very long term, which again drives a little lower gross margin. But as Dan said, lower associated marketing and SG&A costs. So I think where that 48% is probably where we're more comfortable based on where we are today. I don't see that continuing to slide significantly.

And our next question comes from Sara O'Brien from RBC Capital Markets.

A question on the Buildings segment. I just wondered, you talked about having several wins, but the go ahead date might -- may be deferred. At what point you include them in backlog? Is it at the win stage or the go ahead stage?

It's the go ahead stage. Not until we have the authorization to proceed by the client do we actually fund the backlog. So all our project awards, none of that hits backlog until you have the go ahead from the client. And even at that point in time, we would only fund the first year to 18 months of those types of projects. So for an example, we've got 2 large MSAs, 1 for CIBC for a rollout of rejuvenation of their branches and construction of new branches across the country. That's a 5-year program. We only have 1 year of that in backlog. So the backlog is always relatively conservatively managed.

Okay. Great. And just on the Building segment, because we have seen a trend over the last, call it, 2 years plus, of negative organic growth. Just wondering, is there any opportunity for better utilization by further cutting into -- cost cutting right now? Or had you feel like you've already managed it on the way down?

No, I think we've managed it well on the way down. The last thing you want to do is cut into your expertise short-term and rather than look long term with regards to where you see the market going. So I think it's all with the balance regarding that short-term gain. We feel that, at this point in time, you need to keep that expertise and talent to be able to win the projects in the future. So no, I don't think you'll see any further cost cutting and I don't think we have to. I think we're now at that point where we can start seeing a turnaround of that organic growth.

Okay. Great. And then just on the Industrial segment. Just wondering, it sounds like it's pretty chunky in terms of contract size relative to the other segments. I just wondered if that's sort of trend and if you're concerned that some of those chunky projects like Jansen, for example, if it were pulled back could have an immediate pretty negative impact on results.

Well, in mining, I think it's more chunkier than oil and gas. Oil and gas has got a lot of feasibility studies, a lot of smaller projects plus the bigger ones. Mining has that too, but Jansen is somewhat unusual and we're also looking for a freeport in Indonesia, which are some big jobs. So those certainly, if they were immediately removed tomorrow from backlog, that would have an impact. But as I stated before, that would be literally a very, very unusual situation for -- it would have to be fairly disastrous for a client to stop drilling 1,000-meter shaft halfway through, dismantle the TBM and haul it offsite. So we just don't see that happening. So we're pretty comfortable that what we have in backlog with Jansen will stay. The only risk I would say I see, is spreading it out. So right now our backlog is probably 18-month type of backlog. With what's happening, that could all of a sudden be a 2-year backlog. So we may then use up the backlog a little slower. But actually to have it removed is very unusual.

Okay. Great. And then just maybe on acquisitions. We saw that Michael Baker was taken out by a private equity. Just wondering how confident are you that there's still some sizable deals for you? And at the multiple that we saw on Baker, is that where Stantec is prepared to pay? I mean, would you go to the higher levels for the right-sized deal?

Well, first off, the basis of, are there still good companies out there and sizable companies out there? Absolutely. There's still a -- Michael Baker was 1 firm. So certainly that hasn't impacted our whole book with regards to our opportunities. So still, a very robust acquisition strategy and opportunities out there. With regards to price -- really, price comes down to what type of synergies can you develop with a firm. What type of growth can you experience together as a company. So we're always willing to pay good prices for good companies if we see good synergies. So really the price is going to be more of a function of that than anything else. And really can't speak specifically on comparing 1 to another because it's really going to be dependent upon what type of synergy and what type of synergy and what type of opportunities we see with a specific firm.

And our next question comes from Ben Cherniavsky from Raymond James.

First, just like to hone in a little bit on your guidance. I know Bert asked about the gross margins, but -- like if I do the math, you've done a 54% gross margin for 6 months. You haven't changed your guidance range for the year. So even just to get to the low-end of your range, 54.5% means you've got to do about 55% in the back half. What and -- what gives you the -- like, what's the inflection point here? What gives you the confidence that starting July 1, your margins are going to go up?

I don't know if the margins have an impact on our forecast with regards to -- so you're saying our forecast with regards to where we believe our margins are going to end up?

Yes, I mean why haven't you lowered your guidance range for the year?

That's a good question, Ben. One of the things we do look at is, is those targets and whether it would be appropriate at this point in time to change that target. We haven't done that in the second quarter, we're certainly looking at that again in the third quarter. But it is 1 of those target ranges that we generally set in our annual review and then we measure against that. So it's not something that we're quick to change on a quarter-to-quarter basis. We also look at our internal forecast and where our leadership are suggesting are going to be between now and the end of the year. And it's going to be pretty close. We're talking within half a point.

Within half a point of the bottom end of your range?

No, that's where we are right now.

Could we miss at the bottom still by the end of the year, the potential is still there. But what we're saying to recast that for the rest of the year and then go back next year and increase it again. Next year, if we see it continuing and see our mix for business, then on an annual basis, we'll adjust it. But like Dan says, I don't think we like to adjust that range on a quarter-by-quarter even semiannual basis. We'd rather adjust that range on an annual basis.

Yes, but we're talking about the annual number, right? For 2013?

Yes, that was the target that we set in our 2012 financial review.

You don't think you'll reach that target?

We currently haven't made that target year-to-date. We're short by 0.3%.

I know that's the nature of the whole question.

If you're looking for....

You're quite a bit off from the bottom end of the range.

So if you're looking for some guidance with regards to, could we miss that target at end of the year? Yes.

Okay. That's helpful because the numbers are extremely sensitive to that assumption, right?

Yes, it depends what your model is built at, yes.

Well, I think it would be the same for anyone when you tweak the -- half a point can be $0.05, $0.10 a share.

Yes, it depends what your associated SG&A cost assumptions are at the same time. So I think those do, as we said, go hand-in-hand because they are associated. We do look at the fact that if you're going to have a lower margin, we expect to have higher utilization and then lower associated SG&A with that.

Run me through that again.

What?

Our SG&A costs, labor can only be charged to a couple of places to direct client projects, which affects our gross margin. And the indirect projects, which is either marketing or administration. And the higher the utilization, the lower the SG&A costs or the marketing and admin costs. That's where it kind of offsets, Ben. So if you get a lower gross margin because of our Industrial practice, the reality is, that's a very high utilization business, which tends to normalize everything once you get down to an EBITDA margin, which includes all of our labor.

Okay. Another question then just with respect to your targets and such. 3% to 4% organic growth. Year-to-date you're at over 6%. This sounds like déjà vu because I think it was in the second quarter last year we started questioning whether or not you're sandbagging the outlook but...

I do remember that conversation.

And I think in the end, you were. But -- again, like if I just try to get to even the midpoint of that range for the year, you're looking at less than 3% in the back half, which is half the growth rate of the first half. So what's behind the thinking there?

We're comparing a second half of '13 to a very strong second half of '12. So that's probably 1 aspect that has a huge impact on us still hanging on to a 3% or 4%, when we're at 6% today. But there's a lot, that's 1. The other 1 would be we do have 2 practice areas that are not performing or growing the way we thought, so somewhat cautious about that. We just talked about the mining business, that could slow down. The growth of that potentially then will decrease in the second half of this year. It's not going to retract, but certainly the growth won't be the way it was and again...

Decelerate.

We're going to be comparing that to again, that stronger second half. So you put all that together, we look at this pretty closely. Are we being conservative? Yes. Are we being overly conservative? We don't think so based on all those factors taken into account.

But it just seems like your language and the enthusiasm you're showing for the market, the end market you serve. I mean, 1 of the things you said is, activity in the U.S. seems to be getting -- interest in activity seems to be getting better compared to 6 months ago, and yet you're looking for a deceleration of your growth. I'm just trying to reconcile that.

Yes. It still was in comparing a very strong second half and I do cautious you to go back to that and look what our growth was in transportation, in urban development, for example, and in industrial last year at the second half.

No, I remember that well.

The conversation is pretty similar. At end of the year, we exceeded targets. You always like to exceed them. I don't think we exceeded them by an unusual amount last year. This year, could we exceed our targets if everything continues to operate at top efficiency? Absolutely we could. But could we maintain our targets? That possibility also exists quite clearly. So the U.S., the opportunities for further growth -- it's there, but as we also said, it's also really slowly developing.

Because your hedging your bets.

Well we're trying our best, Ben.

You're doing a good job of it. It's fair enough.

I appreciate that.

And just lastly, if I can sneak one more in. When I look at your acquired revenue year-to-date and I look at the acquired number of professionals you've added to the business, you're doing about -- you did about $200,000 per person in the last 6 months, which strikes me as a very high revenue rate productivity or however you want to call it. Am I thinking about that right?

Well, I would say based on the firms we acquired, I know we didn't pay $200,000 per -- so I'm not sure exactly where you're getting the information from.

There's a couple...

No. You tell us how many people are in the firms you acquire. So that's pretty basic math, right?

Yes. But some of that people growth maybe you're understating, Ben, because some of that comes from the latter half or the latter half of 2012 where those acquisitions occurred as well. So you can't take just the 2013 acquisitions that were completed.

No, no. I'm looking at the last 12 months, right?

Okay.

1,100 people equivalent. And you did about what, $56 million in the quarter, you can annualize that. Anyway, we could -- I can send you the numbers as I'm thinking about it, but it just seems like it's a very high revenue per head ratio.

Sure. We will look at that for you if you like.

[Operator Instructions] And our next question comes from John Rogers from D.A. Davidson & Co. John B. Rogers - D.A. Davidson & Co., Research Division: Just a couple of follow-up questions what's already been asked. First of all, can you comment on what you're seeing out of your public clients, particularly government in both U.S. and Canada? I mean are they -- stepping -- when you hear the states and provinces, stepping up spending and mostly in federal governments are slowing, is that your experience?

Well, we are seeing pickup certainly in the United States with the public-sector side. And that applies to transportation in both that and the PCCP project with Corps of Engineers which is federal government spending. So a lot of our growth in the U.S. is as a result of some form of government spending. Now a lot of that is also associated with the design-build work in the United States. So that is a way of them spreading out their cost in a little different fashion. So it is though, a good news story that there is a pent-up demand for some infrastructure spending. We don't do a lot of federal government work in the U.S., so we haven't been impacted by some of that reduction in spending. Most of our business is state and local governments. And larger firms like the Corps would be the only other federal side of the business. So to answer the question along, yes. I think we are seeing some public funding increase in the U.S. and it's been stable in Canada. We haven't really seen a dramatic change in Canada, but opportunities in the P3 space, still good opportunities municipally , not a dramatic increase. Stable. John B. Rogers - D.A. Davidson & Co., Research Division: Okay. And is there a notable difference? I know the federal government is small portion of your revenues still, but is there a notable difference in federal spending?

Again, because the only real federal government work we do is the Corps, we do a little DA work, a little GSA work, which is really insignificant. The Corps, however, it is spending and we have picked up a fair amount of project with that. We're also picking up where with TBA, which can almost be assumed to be part of the federal government in the U.S. So for the clients we work with in the federal government side, it's pretty good, but it's a fairly small part, as you know. John B. Rogers - D.A. Davidson & Co., Research Division: Okay. And then the other thing, Bob, is, you've talked a little bit about the big pipeline projects, some of the P3 work out there. Are there any -- and would you comment on it, major projects that you're currently pursuing that maybe you can identify? I mean especially given that you've gotten some big chunks in this most recent quarter?

Well, there's lots of pipeline projects. I mean I'd like to say that just about every large pipeline project in Canada, we are submitting proposals on and working on. So certainly in the pipeline side, there's lots in the P3 space. There is also large term projects that we are looking at. We look at major project pursuits at our ELT level, and we have basically a long list at this point in time. Can't give specifics more than that, lots of P3 products, lots of pipeline projects.

And our next question comes from Sara Elford from Canaccord Genuity.

Just 1 point of clarification I'm trying to wrap my mind around and maybe further to Ben's questions on your organic growth. I guess I'm looking at your organic growth target for the year is unchanged and I'm trying to reconcile that with your backlog increases on a sequential basis. And I know you guys tend to be conservative in terms of how you allocate the backlog and what you report. So I'm wondering how your backlog can be up 16% sequentially and yet, you're forecasting a decline in overall organic growth on over the balance of the year?

Okay. I see some disbelief in regards to the backlog increasing and the organic growth not going up. So backlog is something that we put into the system as projects are opened. So guidance we give our project managers is anything between 12 and 18 months worth tasks is what you open. As I said, we had 2 large projects. PCCP and Jansen that were both large projects that are probably more in the 18-month to 2 years. So get those projects where they'll probably open all the tasks because the project is a 2- to 3-year job. So I would say the length of time for that increase is probably a little bit longer than maybe -- than it typically has been and that would have some impact in that. So both those jobs are a little bit longer in their take-up of that backlog. Dan?

We'll see some of that revenue show up in 2014, Sara. It won't all be in the latter half of 2013.

Okay. That answers my question. And then my next 1. I'm just kind of curious on acquisition. I know your funnel for acquisitions is always full. I know oftentimes, sometimes it's really in price discovery where things get a little slow perhaps. And I'm wondering with, I guess, the increasing indications maybe in terms of just chatter that the economy in the U.S. is improving, whether you've seen any slowness and I guess any hurdles in those price discovery discussions because people are now expecting a recovery that maybe tentatively you're a little cautious about relative to their expectations? And is that slowing anything down in terms of acquisition completion?

I don't have if it's slowing it down any more than it has as it was last year. You're absolutely right, any kind of optimism from a seller is accentuated by them and is looked cautiously by us. And that's where the process gets dragged out is, how quickly can they grow and is that reasonable? So that has some impact on it. I can't really say, Sara, it's had more of an impact in the last 6 months. It's just we've been very busy in the last 6 months looking. We just haven't closed as many as we would have thought we would have or we would have liked to. But there's always lots of reasons for those discussions not coming to close. I would say that is 1 of them, but not the only.

Okay. And then just seasonally, is there any reason why the second half of the year seems to be busier on that front than the first half and is there reason to expect this year to be similar?

Well, I'd like to say this year would be similar, but I can't say that it will be. Last year, it was the fear of a capital gains change that sort of made the end of the year a little bit more of a target for a lot of the firms we were talking about. And sometimes in any kind of a discussion, the end of the year sort seems to be a natural place to put a deadline saying, let's aim to get it done by the end of the year. This year, I think the capital gains thing is less of a threat, so it probably will be less of a catalyst to get a bunch done in the third and fourth quarter. But we're still pursuing as many as we have last year, and hope to be able to close some.

And our next question comes from Robert Winslow from National Bank Financial.

I'd like to come back to Jansen, if I may. What have you disclosed in terms of the dollar magnitude of Jansen project to this firm? I'm just trying to gauge the significance of Jansen for your backlog.

I'd like to be able to do that for you, but we don't disclose the contracts for a simple purpose.

I thought I'd seen dollar values in the past, but okay, that's fine. So my understanding is that BHP was planning to make a somewhat of a go, no-go decision on the project here in the next -- well, imminently the next weeks, month. By no-go, some would say maybe that just means they're going to allocate 1 year's worth of budget to move it forward. But is that a consistent dialogue that you have with BHP? Because it sounds like they just extended or offered you more project work in the last month or so? Yet, they're looking to make from the highest levels, the C suites, the final decision on the project. I'm just trying to understand the consistency with the message.

Yes, that actual -- that project award was actually a project that we've been negotiating for probably almost over a year for them. So it only shows up in backlog again until we sign. So it wasn't a recent sort of a decision by them. It was a decision that we had just been working on with them a long time and it takes a long time to get a contract signed by BHP. So we got it signed it's in backlog and it's really an extension of what we are currently doing. You're absolutely right with your assessment. They are -- the board is considering this and I would agree with your assessment that a no-go, does not mean you stop the project. A no-go means that you're going to extend the life of the project, extend the funding of the project or slow it down. We do not see no-go, meaning you stop the job, pull the TBM out of the ground and walk way. It's just not going to happen.

On things like this, and they're somewhat unusual. Are there contingencies in projects to protect yourself? Because you're obviously allocating resources to this and if no-go turns out to be indeed full stop, you'd be left holding the bag to some extent on some cost. How -- maybe you could just educate us on how those contingencies might be laid out in the contract if you're willing to do that.

Our mobilization and demobilization costs in contracts that basically deal with those types of situations. So you do have certain protections. Bottom line though, those protections don't certainly reimburse you to the extent the contract would. You do have the capability of -- it's not going to be a immediate stop. And the staff would -- there would be an adjustment timeframe in that. So I can't disclose what it is on Jansen. But again, don't see that as a realistic alternative that's going to be played out in Jansen just because of where they are on that project today and what we're doing for them.

Okay. And this last question I don't expect an answer, but I'll throw it out there. What have you heard in terms of their board decision? Weeks, days, months? That's it for me.

Okay. You're right, I won't answer it.

And our next question comes from Michael Tupholme from TD Securities.

Just a question about the outlook for Transportation. You delivered 12% organic growth year-to-date in that practice area. Significantly better than the 0.6% you've realized in Urban Land, yet the outlook for the 2 qualitatively is the same at stable to moderate growth for the year. So should be thinking about a fairly meaningful slowdown in transportation here in the back half?

It's 0% to 5% is what moderate is. So it does give you a pretty wide basis there. But Transportation is, has and was fairly lumpy, and again, the second half of last year with Transportation it was fairly strong growth. So I would say the outlook for Transportation is stronger right now for the second half of the year. But the end result of it will probably be similar to Urban Land.

And our next question comes from Chris Lalor from GMP.

Just a follow-up on Ben's final question about growth -- revenue growth from acquisitions. I was wondering if -- do you guys expect a similar growth from acquisitions through the balance of 2013, absent of any other acquisitions? Or is this kind of a timing issue where it's somewhat front-end loaded and you expect that to fall off?

I think the acquisition growth -- the way we measure acquisition growth, Chris, is any acquisition that we made, we estimate what that revenue has been for 12 months. And then it falls off and becomes organic growth. So if you don't see a whole lot of acquisitions within the 12-month period, that would all be then a default organic growth. So it really depends on the transactions that we complete in the second half of the year.

So the second half of this year, Cimarron will be -- was an acquisition we did last year. It will contributing to our acquisition growth in the second half of this year because it was acquired last year, is that correct?

No, first half.

First half, that's right.

Second half...

So it does not become acquisition growth in the second half. So to match it, yes, we'd have to be doing some more acquisitions in the second half to get our acquisition growth up. And all you can all do is continue to work at that. You can't force it.

And there are no further questions at this time. Please continue.

Okay. Great. There's no more questions. I'd like to thank you, all for joining us today and close our call by saying that we're confident in our business strategy and the ability to adapt to the marketplace. We look forward to speaking to you again in the near future. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation. You may now disconnect your lines, and have a great day.