Stantec Inc. (STN) Q2 2016 Earnings Report, Transcript and Summary

Welcome to Stantec Inc.’s Second Quarter 2016 Earnings Results Conference Call. With us today from Stantec management are Bob Gomes, President and Chief Executive Officer; and Dan Lefaivre, Executive Vice President and Chief Financial Officer. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer period. [Operator Instructions] As a reminder, today is August 4, 2016, and this conference call will be recorded and broadcast live over the internet. It will be archived for future reference at stantec.com, under the Investors section. Any members of the media, who are joining us today in a listen-only mode and who would like to quote anyone other than Mr. Gomes or Mr. Lefaivre must ask permission from the individual concerned. Stantec management would like to caution you that this call will include forward-looking statements and forward-looking information within the meaning of applicable U.S. and Canadian securities laws. By their very nature, forward-looking statements require Stantec management to make assumptions and are subject to inherent risks and uncertainties. Stantec management will also mention non-IFRS measures. And now your host Bob Gomes. Please go ahead.

Thank you. Good afternoon, everyone. Thanks you for joining us today for Stantec second quarter 2016 earnings conference call. Dan is with today to share summary of our financial results. After that I will go over highlights from operations and our outlook then we will open the call to questions. Just a reminder that we posted a copy of our slideshow presentation on our website, it will be archived in the Investor section. Today we release the results of Stantec's operations for the second quarter 2016. This was a busy quarter for Stantec. One that had significantly more moving parts and noise than we're used to seeing. However, we are happy with our progress this year and are excited for what the future holds. We believe that the strength and diversity of our business and the breadth of opportunities delay ahead thanks to our strategic acquisitions, our diverse client base and our strong team are preparing us for a strong future. Our performance this quarter highlights our ability to continue to execute on our strategy, while preparing to integrate MWH into our foundation for the next stage of our evolution. As you can see on Slide 4, comparing Q2, 2016 to the same quarter in 2015, we had gross overall revenue growth of more than 47% largely due to the contributions of acquisitions. We also had steady organic gross revenue growth in our infrastructure business operating in it, which is our largest business operating unit in our US operations. The investment we made in MWH this quarter, as well as the integration efforts that will happen over the next few quarters have positioned us a global leader in the water and natural resources sectors expanded our geographic footprint and created a strong foundation for continued sustainable growth. We're now focused on charting the course for ultimate integration of MWH which will, we expect to happen in phases through to the end of next year. I'll hand down things over to Dan for a review of our financial results. Dan?

Thanks, Bob. Good afternoon, everyone. What Bob mentioned it was a busy quarter. I'm on Slide 7 for those following along. Gross revenue increased over 47% as Bob mentioned from $710 million to over $1.05 billion. This is largely due to contributions from MWH Global which added significant gross revenue to many areas of our consulting services business. We did see steady organic gross revenue growth in infrastructure at 5.3% in Q2 mainly due to public infrastructure funding in the US and Canada. We also saw continued organic gross revenue growth nearly 4%, this quarter in our US consulting services business due to the continued market expansion in that country. Net revenue was up almost 31% from $594 million in Q2, 2015 to $777 million in Q2, 2016. Results this quarter were impacted by a slight decrease in gross margin to 53.6%, due to the addition of the MWH construction services business construction services generates a lower margin than consulting services. We also saw an increase in an administrative and marketing expenses as the percentage of net revenue to 43.9% in Q2, 2016. This is mainly due to a $10.6 million increase in acquisition related transaction cost, we also incurred an increase in lease exit cost and severance cost as we continue to right size our business to match our work backlog. Interest expense was also higher by about $8 million in Q2, 2016 primarily due to funds borrowed finance the acquisition of MWH including a one-time $3.9 million breakage fee on our senior secured notes. On an adjusted basis our EBITDA grew by almost 12%, $84.6 million. If you recall last quarter we started reporting adjusted EBITDA. We believe this measure and adjusted EPS provides better insight into our core operations given the material impact the MWH acquisition has had in our results. All of this talks higher non-operating cost such as higher amortization of intangible assets and higher effective income tax rate played a factor in our reported net income [indiscernible] $21.2 million in Q2, 2016. Adjusted EPS was $0.37 in the quarter. The decrease compared to Q2, 2015 was due to a number of factors noted previously including slightly lower gross margin, additional interest expense, the fees on our senior secured notes, lease exit cost, employee severance cost and a higher effective income tax rate. As a note on our capital structure, we completely revamped our capital structure in the quarter manage it according to the internal guidelines we established in our 2015 annual report by maintaining a net debt to EBITDA ratio below 2.5 times. At June 30, 2016 reported net debt to EBITDA to ratio was 3.25 times calculated on a four quarter trailing basis. As we said previously, there may be occasions where we will exceed our target by completing acquisitions that increase our debt level for a short period of time, this was the case for the MWH acquisition. Now when you take the additional 10 months of MWH's EBITDA into consideration into 12-month trailing calculation, the net debt to EBITDA was close to 2.6 times very close to our target at the end of the second quarter. And lastly we declared a cash dividend of $11.25 per share payable to shareholders of record of September 30, 2016. Moving onto Slide 8, backlog was up significantly this quarter. Our contract backlog was $3.9 billion at June 30. $3 billion of that is in consulting services and about $900 million of that is in construction services. This compares to about $2.2 billion at the end of 2015. Overall the $1.7 billion increase was primarily due to the MWH another acquisitions completed in the first two quarters. With regards to our 2016 targets, with the close is the MWH acquisition on May 6, we withdrew our 2016 targets and we'll re-evaluate those as part of our Annual Strategic Planning Process this fall. We will provide revised targets in our annual report. Within constructions services on Slide 9, gross revenue was $140.7 million since close of the MWH acquisition or the United Kingdom generated $58 million and United States generated approximately $83 million meeting management's expectations. We saw significant activity related to waste water treatment plans in the US and in the UK we experienced increased activity in the AMP6 programs. I'll hand things back to Bob.

Thanks, Dan. As reflected in Dan comments in our materials this quarter. MWH is a significant acquisition for us. It added a lot to our company not only in terms of gross revenue but also global reach, strengthened water and natural resources infrastructure and focused construction services business. The integration of MWH will cause noise in our results over the next few years as we continue to evaluate their capabilities and combine our businesses to prepare the foundation for continued growth. But after only a few months of having acquired MWH. We're even more excited about what we have seen and more optimistic about the future. As a combined company, we offer more diverse suite of services for clients around the world. Since closing the acquisition on May 6, we've been focused on charting the path for ultimate integration, that work includes planning, realignment of our organization structure and our financial systems to facilitate cross-selling and organic growth. We expect to review various segments of MWH's business over the course of 2016 and we anticipate these segments, we integrated into our consulting services business over the course of next year. Some of the global operations are going to take more time. We anticipate reviewing and integrating certain global operations later in 2017. Construction services will continue to be considered a separate business segment and will operate as a separate brand. In addition to MWH, we closed the acquisition of VOA Associates this quarter. VOA and its strong will further expand our buildings presence in several US states and augment our capabilities in commercial and civic sectors. Acquisitions continue to be a key part of our strategic plan and now we have a sustainable global platform that positions us for further expansion into new global markets. Now let's take a closer look at our consulting services business operating [indiscernible]. MWH added significant gross revenue to a number of our business operating units namely in infrastructure, energy and resources and environmental services. As shown on Slide 15, Buildings gross revenue was essentially in Q2, 2016 compared to Q2, 2015 but with a 7.9% increase in gross revenue year to date in 2016 compared to 2015. Organic revenue retraction was approximately 6% in Q2, 2016 compared to Q2, 2015 and is essentially flat year to date. This is mainly due to revenue adjustments on two APD projects and a lower revenue caused by a large number of design build and P3 projects we're actively pursuing in this business. During the [indiscernible] phase of the projects revenue and margins are lower but we pick up once we win projects and collect success fees. We are optimistic that we will continue a strong success rate on these pursuits, which will add to our performance in the second half of the year. Also the effects of the decline in oil and gas sectors is deferring some of our buildings projects in the Middle East. Meanwhile in the US, we're seeing increased opportunities in the East particularly in the commercial sector. Based on the impacts listed earlier, we've changed our outlook for buildings for moderate organic revenue growth to stable organic growth. However, we're still anticipating organic growth in the latter part of the year. Moving onto Slide 16, energy and resources gross revenue by 2% in Q2, 2016 compared to 2015 decreased year to date by approximately 18% compared to 2015. Revenue was positively impacted by acquisition growth in foreign exchange. The MWH acquisition added about $31 million in gross revenue to energy and resources specifically to our mining and power sectors and our new water power and dam sector, where we're seeing increased activity in the US East [indiscernible] and our global operations. Organic gross revenue in energy and resources retract to 29% in Q2, 2016 compared to Q2, 2015 and approximately 34% year to date. This is attributed to the continued weakness in oil and gas. But again, throughout the last two years we focused on maintaining our client relationships and ensuring our staff levels match workload. Although capital spending is down amongst our oil and gas clients. We do continue to win work on smaller projects and are happy with performance of this business unit in the strength of our client relationships in 2016. In the power sector we saw organic revenue growth in the US, where infrastructure improvement initiatives environmental compliance and resiliency requirements are creating opportunities. Growth was offset by organic retraction in Canada where the weakness in oil and gas has led to some cancelled and deferred projects. We saw some organic revenue growth in the US mining sector, but that was offset by a retraction in Canada. Primarily due to further deterioration of the mining market and partly due to comparing to the first half of 2015 where we recognized the one-time fee on a mining project. We've aligned staff levels with workload and have done a good job of managing client relationships. Our outlook for energy and resources remains at organic retraction. Taking a look at environmental service on Slide 17, gross revenue for that business for business operating unit increased approximately 15% in Q2, 2016 compared to Q2, 2015 and over 4% year to date in 2016 compared to 2015. Revenue was positively impacted by acquisition growth and by foreign exchange. The MWH acquisition added over $24 million in gross revenue to environmental services. Organic gross revenue in environmental services retracted 6% in Q2, 2016 compared to Q2, 2015 and 9% year to date. This was again due to low commodity prices and reduced capital spending in the oil and gas midstream sector. However, we're seeing opportunities for growth in the power sector in both Canada and the United States and with the federal government’s plan for infrastructure spending especially in aboriginal communities, we see opportunities in water, transportation and waste water projects in Canada. We've changed our outlook for environmental services from stable to organic retraction, largely due to the depressed oil and gas sector and downward pressure on fees. Moving onto Slide 18, gross revenue for our infrastructure business operating unit increased by more than 63% in Q2, 2016 compared to Q2, 2015 and approximately 47% year to date. These increases were due to acquisition growth, foreign exchange in strong organic growth. MWH added about $100 million in gross revenue to infrastructure since being acquired on May 6. We've had good performance in the UK as a result of that country's five-year asset management program which is in currently entering year two. By contrast, we're seeing some softness in transportation in Asia Pacific which represents a very small portion of the business. Organic gross revenue growth was over 5% in Q2, 2016 compared to Q2, 2015 and almost 75 year to date. Year to date growth was due to strong organic growth revenue in transportation partly offset by a retraction in community development, which occurred primarily in Western Canada. We also saw organic growth in the water sector when comparing to Q2, 2016 to Q2, 2015. Transportation sector continues to perform well. The growing US economy and our strategic positions. Our [indiscernible] work in light rail transit, roadways, and bridge projects in the United States. Our recent acquisitions of KBR and FST further augment our capabilities. While our US community development sector is stable, growth was offset by retraction in Western Canada. However, excluding Alberta is a continued demand for housing, urban development and mixed use commercial in Canada and the United States, and we continue to win work for urban design projects in the US. We're seeing redevelopment in Brownfield development opportunities for municipal clients in Greenfield development and residential work for private sector clients. Organic revenue growth for water is stable year to date. Several large projects have now resumed and we've won some new key projects in Canada and the US. This sector continues to benefit from regulatory requirements including consent decrees in US then mandating [indiscernible] to upgrade their water and waste water facilities. Combining our operations now with MWH, will create a top-tier position for our water business in North America. Our outlook for infrastructure business remains at large organic growth. Now let's turn our focus to our regional consulting services operating units. Beginning with Canada on Slide 19, gross revenue decreased approximately 11% year to date and about 12% in Q2 compared to Q2, 2015. Because of the same energy related themes affecting our business operating units and sectors. We saw another retraction in energy and resources and environmental services partly offset by moderate growth in infrastructure buildings, which remained stable. However the public sector support of infrastructure investment remains robust and we believe that we will continue to bode well for infrastructure in buildings. We also see strong growth in water sector. Our outlook for Canada remains the same as it was in Q1 and that is for organic revenue retraction. Our US operating unit continues to experience good growth. Gross revenue increased over 46% in Q2, 2016 compared to Q2, 2015 and over 36% year to date. These increases were mainly due to acquisition growth in foreign exchange. We also continued to see steady organic revenue growth in the US, but then almost 4% increase in Q2, 2016 compared to Q2, 2015. This was primarily due to the infrastructure business operating unit. The MWH acquisition added approximately $74 million in gross revenue to our US consulting services operations. Approximately 70% of that revenue is generated in the water sector and the other 30% is generated environmental services business operating unit in the mining and water, power and dam sectors. The outlook for the United States remains sustained where we are expecting moderate organic revenue growth. And lastly on Slide 21, gross revenue for our global operations increased $73 million in Q2, 2016 compared to Q2, 2015 and $70 million year to date. This was mainly due to the acquisition of MWH. The MWH acquisition added approximately $80 million in gross revenue to our global operations and greatly expanded our global footprint. With that, I'll turn it back to our operations Ron to begin the Q&A. Ron?

[Operator Instructions] we'll now take our first question from the line of Anthony Zicha with Scotiabank. Please go ahead.

Good afternoon. Could you give us a bit of an idea about your execution problems, and could there be more ahead?

Thanks Anthony. Project execution issues recently [ph] aren't uncommon especially on an APD project, Alternative Project Delivery projects. It's unusual and disappointing to have three in a quarter, and that's essentially what happened. APD projects because of their size and partnership arrangements and speed are tougher projects to execute, I think we are aware of that, we are probably now into our fifth or sixth year of executing these type of projects. But we had three projects this quarter that impacted it, one was a troubled project that exceeded its timelines and cause requirement to adjust the revenue recognition as we work through those contractual issues, and it's essentially now complete. One was a project we acquired from an acquisition, we have now put appropriate staff on it and now addressing that and another project has a default of a sub consultant on it. So they're relatively unusual circumstances that caused what we would call a more significant loss, it's even more unusual to have three of them happen in the quarter. So we certainly don't see those extending. Dan can talk to you about how we take that revenue recognition and why it's taken in one quarter, but we do believe that those are isolated cases and don't expect that to continue quarter to quarter. Dan, I don't know if you want to add to that.

Sure. I think it's important to note, Anthony, that we take the revenue and gross margin hit on the entire expected project margin in the quarter, we learn about project issues, and as Bob said we had three this quarter. We estimate the expected cost to complete on the project, based on the new expected gross margin and recognize the entire revenue write down amount immediately. We continue to evaluate all of our projects on an earned value basis and in this particular case, we have three that kind of went south on us this quarter. We don't expect that to continue in future quarters based on the estimates that we have today on their estimates to complete.

Okay. So I guess it was a one shot deal, which I haven't seen before. But that's what you're saying.

We've had them before in the past, I think we've seen a few year or so ago in our buildings practice, we had a couple project hits that come and go, certainly we work hard to avoid those issues.

Unfortunately in P3's as a consultant you are not usually in the driver's seat of these projects. So the projects sometimes go off course, not specifically for what we do, but sometimes for what our partners up, not that we are throwing our partners under the bus, but they have a lot of moving parts in those projects and sometimes you are not totally in control. So they are difficult projects to manage. I think our track record on these are excellent and we are certainly not seeing this as systemic or as an erosion of our capability of executing these jobs. As a matter of fact, we do believe year-over-year we have improved. But when you inherit one and you have a sub consultant go basically under on another, they're pretty difficult to try and work on. We are actually very happy that we've dealt with these, brought them forward and now have managed them to the point, where we are comfortable going forward.

Another question relates to BREXIT. Your UK exposure is approximately 10% and how much of it is tied to water? And are you concerned about projects being deferred in the future? I realize nothing has happened this quarter, but going forward because some of the smaller players have been negatively impacted.

So all the work is water in the UK, and.

And little bit of buildings.

[Indiscernible] metric, the small legacy business that we had in the UK was buildings, which is very small, that was 30 or 40 people, now we got almost 2,000 people now in water from MWH. And their projects are for the water utilities there, really they are just eight utilities that we work for in the UK. Those AMP cycle programs, asset management programs that we work on are five or seven-year cycles, that work is provided. Those cycles are budgeted by the utilities, recovered through their rates, there's no real impact really of what's gone on in the UK that's going to impact the cycles that we are currently working on. So we see really no short-term impact when these cycles are now renegotiated. Potentially their work to be adjusted based on overall impact of the economy in the UK, but since they're providing water services for UK service providers, it is - really don't see how that's going to impact water utility clients will have to do in the future. So shorter answer is we don't see any impact, certainly in the short-term. Hard to say what happens to the overall economy in the long-term, but on the short-term no impact.

Okay. Well thank you very much, Bob, Dan.

We'll now take our next question from the line of Yuri Lynk with Canaccord Genuity. Please go ahead

Good afternoon. Just on the guidance of negative 2% to 2% organic growth, I know you're calling for contraction in Canada, would that be a double-digit contraction for the year? Can you help us out a little bit on the Canadian numbers? Because they were a little bit weaker than I think most of us were looking for.

I think that weakness, Yuri is still related to the oil and gas sector in particular and in our Environmental Services business, generally we see a significant pickup from our oil and gas clients in May, June and July as they get work going on the summer. We just didn't see that same level of activity and that's why we changed our outlook for Environmental Services because a big portion of our revenue is earned by those oil and gas clients, to say that it's a double-digit attraction for full year, I think that's pretty tough for us to predict right now. Again, remember we are comparing just the weaker comps on the latter half of last year. So that's why we're, I'm not sure it would be that deep.

I think as every day goes by we don't see any significant further problems in Canada, I think as Dan said we were surprised with the Environmental Services. In the last few months Environmental Services seems to have stabilized and we've definitely reassessed our workload in the same period of time, we certainly got work come in, I think that one thing we've seen is our work backlog in that business is as high as it's ever been on an employee by employee basis. So we are pretty optimistic that things will improve, unlikely double digits.

Okay. I thought given that it was, I thought you had an easy comp this quarter. So okay, it was surprising, that you are seeing some stabilization. Just quickly, housekeeping for me on MWH, when we go a year ahead and that acquisition rolls into the organic growth calculation, am I right in assuming that Construction Services will be excluded from the organic growth calculation?

I think what we will be doing, Yuri is we will be reporting the Construction Services separately from Consulting Services. They are very different businesses, we will try to keep them more or less reported separately.

That's what I thought. And is there much seasonality in MWH?

Both of us, we're looking up at the ceiling and thinking. They work within the same geographies as we do, but their Environmental Services which has probably more of an impact, our transportation has more of an impact. Water business, it really doesn't have as much. So I would say, and this is to say, really off the cuff, their seasonality will be slightly less than ours. They will still have some because they've still got to deliver project in the winter time which is going to have a slower process involved, but I would say they're going to have less seasonality to us, slightly less.

Legacy Stantec had a lot more Canadian operations, field operations so I agree, Bob. It'd be somewhat less.

Okay guys. Thanks a lot, I'll turn it over.

Your next question will come from the line of Jacob Bout with CIBC. Please go ahead.

Good afternoon. I had a couple of couple more questions for MWH. So, what are your latest thoughts here as far as the revenue and cost synergies and maybe you can talk a little bit about what you think organic growth for MWH consulting will be on a go forward basis.

So for I'll speak to the revenue synergies, I'll let Dan speak to the cost synergies. We do track the revenue synergies and I'd say at this point in time based on what we said, which was a $15 million bottom line revenue synergy that were on EBITDA, we are on track, and that's - we are measuring that on a day-by-day basis because again we're only a couple months into because of the acquisition. But we are pretty excited with that because you would think that revenue synergies take time, you've got to figure out who's who and combine them and go win a project. And we are already on track for those on a day-by-day basis if you sort of divide their revenue by the number of days, we are on track already with the amount of projects we have won. So, we are very excited on the revenue side of it. It's sort of I guess the low hanging fruit that we didn't even see that we've been able to pick that's worked well. And the cost synergies, I mean we're working through them. You got to work through those carefully, but we are starting to see those add up an impact as well. I don't know if you have any further color on that, Dan.

I think two things. I think one, the MWH pretty much met our expectations in the first eight weeks, six weeks that we've had them as part of Stantec in terms of achieving their revenue and cost earnings budgets. So that was encouraging. There's still more work to do, we are continually focused on their operational effectiveness and ensuring that we deliver what we said we are going to deliver. And at the same time we are working through the early stages of integration and planning of - we've had many, many meetings on the operational side as well as on the functional service team side of how we are bringing our teams together and working to make sure we are optimized. So we are on track I think on that regard, as well. It's too early to suggest that we're going to be above or below, but we are trying to measure and track it, and remember those targets were out to the end of 2017.

From an organic growth, I don't really have a good feel and picture for that now.

We'll be doing our forecasting and budgeting this fall, so will get a better sense of what their expectations are now part of us, what our expectations are for 2017. But we don't have that information yet.

Because I thought it was interesting dynamics during the Investor Day, where the MWH folks were talking about the water industry growing at 3% to 4%, even though historic organic growth rates is closer to 0%. So?

Certainly they know the water business well, and I'd have to say based on what we've seen so far their position is as strong or stronger. They are in some regions that I think are more challenged like Asia Pacific at the same point in time, I was just down there last week and I think we have great opportunities to diversify their operations there, to take advantage of some other sectors that are growing, and even within the water sector, it's growing there. So I think they are in sectors that have great opportunity for growth and certainly the diversity that we can offer them is, we are pretty optimistic there as well.

And maybe just one last question, just as far as quantifying the financial impact of those project execution issues. What was that and were all three [ph] around similar size?

They are all about similar sizes and they are all in that one $1.5 million $2 million range, so I think it was about $4 million, about $4.5 million impact.

It was probably, it went in $1.5 million or less actually. They weren't huge losses, that's the point.

But they were all around that range.

[Indiscernible].

Thanks very much, guys.

We'll now take our next question from the line of Tahira Afzal with KeyBanc Capital Markets. Please go ahead.

This is Sean on for today. From us, first thing is just we're just trying to get a better sense for what Stantec's margin profile should look like going forward. It was a little lighter than we thought it was going to be this quarter with first quarter with MWH. So I didn't see any updated financial targets. But there is clearly some kind of transitory headwinds this quarter and any thoughts you have on where that adjusted EBITDA margin should go going forward would be really helpful.

Sean, I don't have a specific number for you, but I expect it to be better than it was this quarter. As you mentioned, there was certainly the operating issues that we talked about as we continue to right size the business profit margin issues. But there's a lot of non-operating costs as well that we incurred. You have to invest in order to grow the business. And some of those costs what happens with those costs hit obviously before the revenue kicks in, so and that's what we experienced in the second quarter. So I expect margins to improve, be much better than what we saw in the second quarter.

And when do you guys think you might be able to come out with an updated financial target matrix like you used to give us?

I mentioned in the opening comments that we'll be looking to have that, we will have all of our planning and budgeting done in the fourth quarter, so we'll be looking to have that out for annual report.

Okay, great. And then secondly from us, just looking at the intact [ph] organic growth range, clearly some moving parts this quarter within that kind of intact [ph] outlook. I was just wondering how you guys are thinking about the real key swing factors here into the second half, if you get to either the upper or lower end of that range.

The units that I think will contribute to that are certainly, well it's really all of them. Infrastructure is going to be continuing to have strong growth which we projected. Buildings was a disappointment for us this quarter with the project and with P3, but again we see that picking up in the third and fourth quarter, so that's going to contribute to us getting closer to that range that we stated. And with the slowdown of the retraction in Environmental Services and in Energy and Resources, that will contribute to us getting closer to the range that we stated. So it's all of those moving parts that are going to contribute to us getting closer to the range, which we message [ph], first half of the year was going be tougher and the second half the year was going to be better.

All right, thanks gentlemen, appreciate your time.

Your next question will come from the line of John Rogers with D.A. Davidson. Please go ahead.

Hi, good afternoon. A couple things. One, I apologize, I don't have copies of the slides so I couldn't follow everything that you are saying. But in terms of the organic growth that you are looking at in the second half of the year, I mean to get to the negative 2% presumably you'll have positive growth in the second half, are you expecting a ramp up through the year, and could you talk a little bit more about what's driving that specifically?

Since the last call, our projections are looking for our growth is going to improve in Q3 and Q4, we've messaged all year that our organic growth will end the year in the range of stable and really in a moment of weakness we defined that stable in our MD&A to be minus 2 to plus 2, so we've sort of giving that some definition. Our projections at this time indicate that we are going to be close enough to that defined range not to require us to change our outlook. So we look at all the various business operating units and that was all put in the MD&A where we see them going, you do all the math and we look at all our budgets, we look at what our people are telling us, basically we're going to be close enough to that range not to have to change it. So that's as good as we can do at this time.

But Bob, I guess just to be clear, you're below that range so far. In the first half the year and I know.

We'll have to be better to get to the range.

Yes and then last year, the second half, and the oil markets turned down, but it didn't happen, the growth was there looking at, I thought, the same process. And I was just wondering if you think you hardened that process at all, it gives you more confidence in seeing that improvement.

Yes, I mean, I think the decline in our energy and resources business and to a certain extent our Environmental Services business, they are much smaller businesses now, so because of that I think it gives us confidence, those businesses were significant portions of our business last year, the rate of their decline was hard to try to predict, even our clients couldn't. Now things have stabilized a lot more, things aren't changing day-to-day there, and to we got a little bit more clarity. It's still not great, but it's a little bit better clarity. So that gives us a little bit more confidence because of the size of those business, the rate of decline seems to be slowing, gives us a little bit more confidence that we can hit those numbers.

Just for recollection, our exposure to the energy and resources oil and gas segment both are combined of our oil and gas engineering and our environmental business, so it was about 26% at the end of 2014. It's now about 10% of our overall business. And I think as Bob mentioned through the opening comments, we have maintained those client relationships, we're in a very good position when that market returns. We just don't have great visibility when that's going to occur. But it's a much smaller piece of our business today.

Okay and then just as it relates to MWH, I know that as you've talked about, you've locked up the management that you wanted to keep, and I think at the Investor Day you talked about going down into the next levels. Are you pretty comfortable that you've got the staff you need? And how is specifically their growth going, relative to your expectations?

Well as Dan said, their growth or their performance since joining us on May 6, is in accordance with their projections, which is good, especially the first couple of months. I visited in the last quarter, I think all told over 10 offices in three different continents gone, down into offices and talked to staff and leadership in each of those regions and every meeting we have, we've come away more optimistic. The staff are very engaged, they are very excited over the opportunities. So still early days, John but we are very excited and very optimistic that as we get deeper into this company we are starting to get even more comfortable with the leadership team that we maintained and we kept and tied in, are also very engaged and excited. So, so far so good. We are pretty happy with the first couple months here.

Okay and that's true for bookings and I guess oil rates back looked okay. Good, all right. Thanks a lot.

Your next question will come from the line of Mona Nazir with Laurentian Bank. Please go ahead.

Good afternoon and thank you for taking my questions. So, just firstly from me, I wanted to hone in a little more on the EBITDA margin, you mentioned a few items that drove some of the contraction. And you touched on the APD execution. I'm wondering if you could discuss a little bit the pressure that you are seeing on fees. Has it been stable or has the pressure increased as we move through the year and maybe competition heats up? And then the second part of that, is if you could touch on the utilization in Canada or more specifically, Western Canada and if you could quantify kind of staffing reductions that have occurred this year.

I'll deal with the fee pressures and retraction in fees, and certainly that pressure came I would say in the oil and gas area which affected both our Energy and Resources and our Environmental Services group. And those negotiations have been completed, so we don't see that pressure from the retraction in that business which has forced our clients to come to us and ensure they are getting the best deal they can and trying to find efficiencies, that usually results in everybody tightening their belts, which we were partners with them and did. That's done, now all those agreements are signed, and we were probably one of the first at the table to do that with our clients because we wanted to truly demonstrate that partnership. So I would say that is the competitive fee nature in the rest of our business, it's always there. I would say the competitive fee part really comes in to play more in some of the design build or alternative project delivery where the competition becomes a little bit more global now because of the size of those projects. But again I think as that business matures, experience, expertise and talent sometimes outweighs that. So, I think the rest of the business, it's okay and it's stabilized where there was a lot of fee pressure when that was mainly in the oil and gas side. Dan?

And perhaps to speak to the staff reductions, it's pockets, Mona. It's not across the board. We have certain staff reduction, certainly in Canada is where we've experienced more, as Bob mentioned again in the opening comments we had some weakness in our mining business, so we've had to right size our staff there, we were expecting some projects come through that, didn't. So the bulk of our staff reductions have been in Canada, although there are pockets in other areas. Our Middle East operations were impacted by really the oil and gas market there, where a lot of the state governments in areas, like Qatar for example, reduced their spending and they're re-evaluating the budgets as a result, projects get deferred or canceled. So that had an impact. But the bulk of our terminations this quarter and year to date have been in Canada.

And that is now driving up utilization.

Right.

As you go through that rationalize the staff, we've seen actually utilization trending up even in Western Canada, which is the result of those staff rationalizations that Dan spoke to. So we are on the right track and the trend is going up.

And just secondly, you had anticipated some improvement in organic growth in the back half of the year on increased infrastructure spend in Canada and some in the US FAST Act funding coming into play. Are you still expecting some of the flow of funds into your business or it's still a bit of a waiting game?

In Canada, the waiting game is there, we are seeing those projects getting released, we are seeing a lot of activity in transportation in the United States, that's been one of the areas growing very well for us. We're also seeing a pickup of opportunities in the water business as well, which was anticipated to be more back end weighted in the year. In Canada, we really haven't seen an extreme change in this quarter, we still see it happening before the end of the year, but I can't say we've seen anything yet.

I'll step back in queue, thank you.

We'll now take the next question from the line of Benoit Poirier with Desjardins. Please go ahead.

Good afternoon, gentlemen. Just to come back on three contracts where you experienced some execution issues, where they all related to building, Bob?

Two were buildings and one was transportation.

Okay. Perfect. So looking more specifically at building, organic growth down 6%. What makes you confident that the organic growth will recover in the second half and when you look at the gross margin in buildings, so down almost 200 basis points year-over-year, was it mostly related to a function of the organic growth?

Definitely the margin 200 basis points is more to the P3. We chased at any point in time our buildings business as about 30 P3's are on the go. About third of those are in what I would call the proposal stage where we are actually getting paid, but we are only getting a portion of our normal fee would be and we will then get a success fee upon the team being successful. A third of those are in the qualification stage and about a third of those are in the tracking stage. So at any one point in time, we've got a third of those projects that we are working on, but working on at a lower margin. And depending on the timing of the quarter and those projects, that may have less of an impact or more of an impact on the actual gross margin for the quarter. So that certainly has an impact on the margins. What gives us the confidence that it's going to come back? Just our success in that so far. We are constantly getting chosen to actually pursue these projects where we do get paid, and then you get a chance to win, our success ratio in those projects is around 30%, which is very high. Once we then win those projects, we then get success fee, that fee is rationalized over the life of the project, so the margins are then normalized for the life of the project, but that does give us some revenue in that quarter that we received success fee. And we intend to win some of those we're working on now. The number that we are working on this quarter was higher than the normal. So that bodes tough for the quarter, but based on us being successful down the road, that means that we get those excess fees that generates revenue and that brings back that organic growth. So, we are pretty confident the group is very strong, they've got great work backlog, their utilization is up, it was really one quarter where the stars aligned against them for a number of reasons.

Okay, so you would expect to be in the positive territory and expand your margin in the second half for building.

Yes. We don't control the process of the awards, but the timing that we have been told for those projects are Q3 and Q4. So unless something happens from infrastructure Ontario and those that control the process, that should happen, yes.

Okay. And you were also referencing to Middle East, there were some projects there [indiscernible]. I'm just wondering how sizable is the exposure in Middle East inside building.

It's a lot smaller now. It was really just a handful of projects. They are, though, very large projects, and the one Dan referenced in Qatar was a very large project, they were working with the government trying to scale it back down and the government quite surprisingly just pulled the entire project and shelved it. So that has an impact, that project in all its revenue just goes away. The good news is we are still working on it, the good news is it will come back. It's just a matter of when does the government gets confidence in the oil prices to be able to put this back into their queue. So that's had an impact. So today it's not a significant part of the buildings business, before I think it was close to 10%, a little over 10% of their business, it's now less than that.

Okay so and your expectation on the second half, is it on expectation that this business will recover, or with Qatar?

In fact, we see that project probably shelved for the rest of the year.

Okay, very good, very good. And for Energy and Resources, I mean not that much surprise on the organic growth side, but looking at the margin, I mean, you were up year-over-year, also a good improvement from last quarter. I remember you were foreseeing the kind of 45% gross margin for the future, but now at 50%, almost 51%. So, just wondering what is driving the solid performance on the gross margin, whether it's the contribution of MWH, and also whether this number is sustainable going forward.

Certainly, MWH helped the projects that they do and that business is a higher margin than what we were doing. So it's more water related, which was - gets higher margin, so that was good. I think our people are very focused right now on executing the projects very well for our clients. It's important at this point in time. It's a very good group. I mean, they've put their budgets forward and they're executing those well with some very key staff. So for all that I think we are happy, and can we maintain them? I think we're going to remain closer to that than probably historically where we were. But it is still a lower margin business, that Energy and Resources. We are probably at the upper end of where we expect to be in that business.

So probably there will be some downside from the 50.8% you reported in Q2.

My guess would be that we would be somewhere in that 45% to 50% range, would be more of a normal. But having said that I really don't know how the impact of the waterpower and dams business will impact our margins that could be the key that would drive it a bit higher.

Yes, that business from what we've seen is at the higher end of that range, and so that's the one part where we are hesitating a bit, is if it was our legacy business we would be comfortable saying 45% to 50%. With this business now included, we could be at the higher range of that now.

Okay, perfect. And just in terms of administration expense and marketing expense, obviously with the acquisition, it went up from 41% to almost 44% in the quarter and, obviously you will be looking to reduce the number, the percentage going forward. So, just wondering what kind of level could you be looking at in the longer-term, and what could be kind of the timeframe to get back to a more normalized level.

I think we will be seeing a more normalized level starting in Q3, much of the transaction cost that we incurred in the first and second quarter are behind us. So excluding those impacts, I think we would be closer to that 42.5% range year to date. Bob mentioned our utilization has been picking up, that certainly drives SG&A costs. We will probably still have some severance costs, some lease exit costs in the latter half of the year, as we continue to manage our business as tightly as we possibly can. So I think it's going to be closer to the 42% range, perhaps a little higher in the second half of the year, but certainly lower than where we are today.

And last one for me, just in terms of debt to EBITDA given your slightly more bearish outlook, you ended with a 3.25 debt EBITDA, you previously mentioned that you would be close to 3 times on a pro forma basis. So just wondering whether it puts you closer to the 2.5, 2.75 covenant that will take place in the next few quarters, and also whether it removes some dry powder for the tuck-in strategy you were looking for.

Good question, Benoit because we didn't talk much about cash flow or the debt levels. The debt level at 3.25 did not include trailing EBITDA of MWH when I mentioned it in the opening comments that would've dropped our debt to EBITDA ratio below 2.6. So, right around 2.6 range. When you look at our cash flows, our operating cash flows and free cash flows in the quarter, they were actually really strong and are very strong year to date. Something we didn't really talk about, so we are actually quite pleased with where our cash flows are. And those cash flows, the free cash flow was affected, operating cash flows were affected by both $40 million in transaction costs, and costs associated with the acquisition. So, cash flow is pretty good. So, I still expect to see those debt ratios come down in alignment with our guidance that we provided when we went forward with the equity offering.

Okay. So at the end of 2016, fair to say that you should be able to be below 2.5, given you were at 2.6 on the pro forma basis at the end of Q2.

When you look at it on a trailing 12-month basis, we won't have all of the MWH for reported debt to EBITDA in that, but we will continue to give you a sense of what that is on a trailing basis including MWH's EBITDA.

Thank you very much for the time.

We'll now take the next question from the line of Sara O'Brien wit RBC. Please go ahead.

Thanks for the questions. Okay, first on the EBITDA, what are you adding back exactly? It says acquisition related costs, but you referred Dan, to other kind of integration costs where you don't see the benefit until a few months later. Just wondering are there any other kind of one-off costs that you have not one-off'ed basically in the quarter, in that $10.8 million?

No, we've not one-off'ed. I don't think so, Sara. I think the $10.8 million were all really related to transaction acquisition related costs. And all of those were really the professional fees, tax and insurance and these are really hard costs. We have not added back any of the activities that we've done around integration and the getting together and meeting with MWH leadership and our leadership, and those are all still included in our regular SG&A costs.

Thinking what I educate, what classifies as hard external costs therein. It's not the soft things that we typically do and typically include, we always have included, we still are including, that is just part of doing an acquisition. So I think we just tried to take out the really unusual ones, which is the one that Dan referred to or really those outside costs.

Okay. So if we were to think of severance costs going forward in certain divisions and stuff, you would not be one-offing those?

Not from an adjusted EBITDA perspective, no. We wanted to explain that they are still in our results as your business continues to retract from certain sectors, you have to continue to manage your business that way and that shows up in SG&A. So we just wanted to highlight that, but that's still a cost that would incur.

Not taken out of the adjusted number included.

No, that's right, it's included in the adjusted.

Would that have been significant in the quarter?

Yes, it was still material. I think we indicated it was in that 2 - let me see, about a little over $2 million range in the quarter.

Okay. And just wondering on the MWH, can you comment on the organic growth that, that business saw in Q2 year on year?

Not really. I don't think we have that information.

Okay. And then maybe just lastly on the synergies for MWH, just wondered if you've already seen staff retirement synergies or are you expecting to see some of those in the next quarter?

Absolutely. We have seen some staff retirements, some staff have left, we are managing as best we can in keeping everyone that we need certainly through the integration, but yes, we have seen some people leave already.

And you would expect that to continue through the year?

Yes. No, I think we are working through it, we are working through various groups of - are going to go quicker than others, but there are some groups especially I would say more in the functional services teams that we really have to combine the back offices, that will continue throughout the year.

Okay, great. Thank you.

We'll take the next question from the line of Ben Cherniavsky with Raymond James. Please go ahead.

I had to go back to one of my themes on the organic growth rate guidance. Again, you guys are spending a lot of time on the call. Defending what your targets are, talking about why your past performance didn't line up with where you thought it was going to be. Have you given any more thought to the whole methodology or even just the whole philosophy of trying to get this granular with the number? I mean, you go back far enough and you never used to do this. I think as you start adding more geographic footprints and practices to your business, it's only going to become more and more of a fool's errand to try to get this precise on all these moving parts. And it distracts from - it just adds a lot of noise to the story. And I still struggle with how you come up with these numbers and why they are never really very accurate.

No, you're right. That's why we withdrew the other metrics as well. Definitely we've heard that from our investors as well in this last quarter when we talked to them, is we certainly have to do a second thinking about how we project our business, and certainly we've struggled through it with you for the last almost year and a half. So certainly the answer -

Longer than that, Bob, because it used to be you ended up being way above what your guidance was going to be. Remember we used to think you were sandbaggers.

No, that is not the case, anymore.

Now it's the opposite, yes I know exactly neither is a good situation though, really.

That's right. So the answer to your question is yes, we are re-evaluating that.

Okay. Thank you, that's good to hear. And just on the utilization rates, if I read correctly in the MD&A, I think you said at least year to date your utilization rates are up. Was that true in the quarter and does that hold despite the MWH integration? Historically when you've done big acquisitions you talked about how you kind of turn in words and your utilization rates go down. Is that a factor here or not?

It will be a factor, but I think we're trying to manage that the best we can. We've really sheltered this from what I would call full blown integration. MWH is really when you look and take a step back they've got a US operations UK, Australia, New Zealand, South America, they've got a programs business. We've put into various compartments and we've really tried to restrict that interaction to really focus on where is the best and highest use of our people and their people. So I think we are doing a really good job of that because we were aware of the impact that could have if we extrapolated it over the smaller ones we do, to MWH. So I think overall, the utilization targets for the Company we're managing very carefully, and I would say they are trending in the right direction.

Yes, we saw about a 4% increase in utilization second quarter over the first quarter, Ben. And I think we're going to have an impact as we get further along into really the heavy lifting on integration that we will see a bit of an impact there. To date, we have really tried to keep the business doing what they are doing and not impacting the business and having leadership discussions doing the planning, going through the process of figuring out how to go about this over the last several weeks and are now coming up with strategies that will start to be implementing in the fall and into next year.

So the good news is utilization overall is going up.

And that should be reflected in both gross margins and revenue to G&A? Or mostly in.

[Indiscernible] Gross margin, but certainly G&A.

G&A, okay. And then so excluding, like if you strip out the integration issues, would your utilization rate improving just because you've done some downsizing too? Is there a way to look at it that way?

Yes. No doubt about it, that has a lot to do with it and that should be an impact of it as you are trying to get your utilization of your staff the right level, and the way to do that is either win more work or unfortunately reduce your staffing levels.

Okay, great. If I could finally squeeze in one last one, I'm just curious how you guys would describe this quarter. There's a lot of moving parts, a lot of noise, someone-timers, etc. And I know you guys are always fairly candid, and frank about you won't sugar coat things, if that's the case so, in that spirit, is there some context you can put to how you think this quarter looked?

I think the disappointment in buildings which was really focused on three projects. You take that out, and I am very happy over the performance in this quarter. That was disappointing because those three projects should be in our control, when you dug into them a lot of them, couple of them were not in our control and we did the best we can but we still suffered away with them because those are unexpected, you never plan for those. But everything else I think is ticking along the way we sort of saw. The Canadian side of the business is operating as well is it can in a tough economy. So I think, again, we are managing through that well, if [ph] this is not reflected in fantastic results, but I think we are managing the business very well through that period. And the one comment I've got to say is, all that is just projecting towards when this does recover, it's an incredible opportunity for both coming back. But outside of buildings, I would say I'm very happy.

Unfortunately it didn't look like the market was that happy. The stock was down 7% today.

I look at what we accomplished in the quarter is, quite remarkable. We've had an extremely busy quarter, not only refinancing the entire company, but beginning the integration process with MWH, allowing our business to stay focused on the business, we did a lot of things right this quarter, but it's frontloaded with a lot of costs, which we didn't talk about the tax rate as well, which is also has an impact, but it's all of those things are just positioning us for stronger growth in the future.

Okay, I appreciate your candor as always. Thanks, guys.

Your next question will come from the line of Michael Tupholme with TD Securities. Please go ahead.

Thanks. Sorry to go back to this at this stage of the call, but Dan, the execution challenges. Can you just repeat what you'd said earlier about the actual impact in the quarter, and what the impact was?

I think I have indicated that the project challenges amounted to about $4 million pre-tax, a little over $4 million, about $4 million to $4.5 million.

And the reference to the transportation sector, that is part of the buildings BOU though? That one project that I guess is in the transportation area, that's in the buildings area?

No, that one project is in infrastructure.

Okay, so two are in buildings and one is in infrastructure.

Right.

And I think you mentioned that one of the contracts was finished, but the other two, when are they expected to be finished?

They will extend into 2017.

And then, when I look at the building segment and the organic growth there, I think if you look at dollar wise organically your revenues were down $11.8 million, and there's this issue you mentioned with respect to the Middle East and the project in Qatar. If you had not had that project deferred and if I'm understanding correctly this quarter was the first impact you felt from that, if that did not happen, what would organic growth look like in the building segment?

More than it is now. I don't know. I couldn't put a number to it. But it would have obviously been less than what we reported.

Would that alone would not have flipped you back to positive.

I don't think so.

Right, okay. And then just lastly, in terms of the margin improvement, it sounds like you're fairly optimistic that sort of the pieces are coming together and you should start to see some improvement. But is this still sort of a gradual build here or do we start to see kind of more of a step function improvement in Q3, Q4?

Which margin are you referring to?

Just the overall margins in the Company. You mentioned there were a number of factors that had been weighing on margins and it sounds like you're fairly optimistic that some of those factors are going to start to subside.

I think we'll start to see them subside. Certainly we won't have a one-time transaction cost to the same extent that we saw in the second quarter and we think most of those are behind us. There will be - it's important to point out as you do this, there will be costs incurred over the life of the amortization of say the equity issuance or the debt costs, so those will become part of our baseline costs going forward. And I expect to see costs improving over the third and fourth quarter. Remember, there is some seasonality in our business as well, and third quarter is usually a bit stronger.

Okay, that's all for me. Thank you.

Your next question will come from the line of Maxim Sytchev with National Bank Financial. Please go ahead.

Good afternoon, gentleman. Just a quick question on, sorry to badger you on this one, but on buildings. What is the geographical breakdown for this practice, if you don't mind sharing this information?

In terms of our overall business?

No, just for the buildings, please.

Buildings, geographic breakdown.

Roughly.

I think just off the top of my head, I think about a little over half is in the US now. And half in Canada, a little bit globally. So I think it's maybe two thirds, almost two thirds, 60% in the US, 40% in Canada, something like that.

Roughly, I'd say, so larger in the United States, and 60% is going to be close to it, it's probably around 40% in Canada. Some of it's still international but it's probably less than [indiscernible].

I guess my question is really just in relation to - is it conceivable that you are seeing also a bit of a second derivative impact from the overall kind of commodity weakness spilling over into, for example, buildings practice or this is just very hypothetical in terms of a question?

The question about the cascading effect of the oil and gas commodity market into other businesses, it, certainly in Western Canada we've seen that it isn't dramatic, but it's there in every one of our businesses it is an overhang over that. I wouldn't say that it's had dramatic impact in the US businesses. I think it's more what happened in our buildings business is more of this P3 timing issue, a number of P3's are working on the timing of those P3's, and in the projects. I think there is maybe a small impact to that commodity cascading effect, but I wouldn't say it's overly significant.

And then, Dan, so just from an accounting perspective, just because you had an issue on those three projects, that would not have had any impact on revenue, right? It's just the bottom line impact, correct?

No, it does have an impact on revenue. It also affects the margins. You have to adjust your revenue recognition on those projects and adjust it down, but just part of what's contributed to the retraction in organically is, you have to adjust your revenue down to what your expected revenue is over the life of the project at that new margin. So you take that hit in the quarter that you recognize that, so yes it does have an impact on revenue as well.

All right. So, I guess it would be fair to say that if you were to exclude those, that dynamic then, what is the negative retraction if you were to exclude those projects or not?

I'm sorry?

If you were to exclude.

The number was around $3 million on the project impacts, which flows right from the top line to margin.

So, I don't know what the percentage would have been those, that didn't work that backwards.

[Indiscernible] backwards [indiscernible].

That's still helpful, I appreciate that. And in terms of - Dan, I think you mentioned it's 10% oil and gas exposure, is that directly upstream downstream, or is that inclusive of the Environmental Services as well?

That includes Environmental Services. So that includes our engineering and our environmental work now.

Okay. So right now that's as you said 10%, right?

Right.

Okay, excellent, thank you very much.

Your next question will come from the line of Mona Nazir with Laurentian Bank. Please go ahead.

Just despite taking on the larger MWH acquisition you've discussed remaining active in M&A. I just want to check if that still holds true or if the near-term focus remains on integration of MWH. And then, just on that, are there any areas that you envision growing particularly within MWH's geographic reach?

Yes, I think the way what we've messaged, is our acquisition program within the United States, we feel we can continue it. Certainly we are going to be a little bit more focused on ensuring that those are the right firms. But, really, we've done that all along. So, I'd have to say that generally we are still confident we want to continue what I refer to as now our tuck-in acquisition strategy in the United States and in Canada. And we will continue that as we go through to integrate MWH, we feel we have the capacity to do that. It's really different groups in different places doing it. With regards to our acquisition strategy with MWH, it's still early days. But I would say at a high level right now we see great opportunity of diversifying their UK operations. They are a number one water firm in the United Kingdom, that's really all they do. And certainly we look at opportunities to provide a better foundation and diversify the operations in the UK so we will be looking for areas like transportation and Environmental Services in the UK. And in Australia and New Zealand, we see opportunities there as well. They have a strong water business, they have a small transportation business that we feel, again, with very strategic acquisitions in Australia and New Zealand, we can start diversifying their operations there. So we don't see that happening really until 2017, and it's going to take us some time to really get our feet under us and understand the market in those two continents and really try to understand where to best position our - we are going to remain very disciplined as we always have with regards to our acquisition strategy, but it will continue.

Thank you, I appreciate it.

Your next question will come from the line of Chris Murray, Alta Corp Capital. Please go ahead.

Thanks guys, I'll try to keep this brief. Just to confirm, because I've heard the number a couple different ways, just the re-forecast on the buildings, its $4 million pre-tax, that's a good number to work with?

I think I suggested to Max it was around $3 million.

And I think Bob said $4 million pre-tax, and we started with $1.5 million for each of the three. So?

One of the three was in transportation. So if it's only buildings it's only $3 million.

Okay, but all in it would be about $4 million pre-tax.

That's right, a little over that. Yes. $4 million to $4.5 million.

$4 million to $4.5 million. Okay, perfect. The cost for the breakage fee on the redemption of $2.9 million, when we look through your adjusted net income numbers, is that in there, or is that just in the normal earnings as well?

It should be in the adjusted net income number as well.

So you guys did take that out, it wouldn't be in EBITDA but okay. Perfect. And then just so I am clear on this, your new credit facility, you talked about you're around the 3.25 times. Does the credit facility give you any credit pro forma for the acquisition's EBITDA or is that you just have to go with your reported numbers?

No, we absolutely get the pro forma in the credit facility. And the key difference there is the credit facility used total debt versus net debt. So we have a lot of cash sitting on the balance sheet, but we don't get credit for that in our credit facility, but absolutely, it allows us to look at the pro forma or the trailing EBITDA of the acquired companies.

All right. Still I mean, fair to think that no real issues with leverage then.

No, we are well below the three times on total debt basis, with the certificates that we provide to bank.

All right, great. Thanks, guys.

Mr. Gomes, there are no further questions at this time. I'd like to turn the call over to you for any closing remarks.

Okay, thanks, everybody. As we said when we started, it was a noisy and busy quarter for us, but again I think we are very happy with our progress, and we are very optimistic with regards to the future of the Company. So thanks very much. We will see you next quarter.

Ladies and gentlemen, this does conclude today's call. Thank you for your participation and you may now disconnect your lines.