Stantec Inc. (STN) Q3 2016 Earnings Report, Transcript and Summary

Welcome to Stantec Inc.’s Third 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 the question-and-answer period [Operator Instructions]. Please allow time for everyone to ask a question. As a reminder, today is November 10, 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 in listen-only mode and who would like to quote-in 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, sir.

Thank you. Good afternoon, everyone. Thank you for joining us for Stantec’s third quarter 2016 earnings conference call. Dan is here to provide a summary of our financial results. Then I will share some highlights from our operations following that we will open the call for questions. Just a reminder that we posted a copy of our slideshow presentation on our Web site it will be archived in the Investors section. Today we release the results of Stantec's operations for the third quarter 2016. This was another quarter that demonstrated the value of our long-term strategy. As you can see on slide four, contributions from acquisitions, especially MWH resulted in strong gross revenue growth of more than 67% in Q3. We experienced gross revenue growth in all of our business operating units in Q3. We are pleased to see our strategy continue to add strength to our Company as we continue to fully integrate the acquisitions we have completed over the past several years. Management continues to focus on operational effectiveness throughout all of our operations, while continuing to navigate some difficult economic conditions in certain sectors and geographies. In addition to our to Q3 results, today we announce the appointment of Marie-Lucie Morin to our Board of Directors. Ms. Morin has distinguished 30-year carrier in Canadian federal public service. She was National Security Advisor to the Canadian Prime Minister and Associate Secretary to the Cabinet. She also served as Deputy Minister for International Trade and as Associate Deputy Minister of Foreign Affairs. She's been an Executive Director for the World Bank and an Advisor of Canadian transportation act review panel. Ms. Morin is a welcome addition to our Board. And we look forward to the guidance she will provide. I'll now hand things over to Dan to provide an overview of our Q3 financial statements. Dan.

Thanks Bob. Good afternoon, everyone. As Bob mentioned, our results this quarter reflect the strength of our core operations, and our strategic acquisitions. We are on slide eight for those of you following along on the presentation. Gross revenue increased 67.5% from $750 million to $1.26 billion. This is largely due to the revenue contributions from MWH. Results were impacted by very slight decrease in gross margin from 54.5% in Q3 '15 to 54.2% in Q3 '16. This was mostly due to the addition of lower margin construction services business, which had a gross margin in the 39% range during Q3. Gross margin results were impacted by the mix of projects and downward pressure on fees in some sectors namely in oil and gas and in our Environmental Services business. There was an increase in administrative and marketing expenses as a percentage of net revenue. This increased from 39.4% in Q3 '15 to 41.1% in Q3 '16, mainly due to increased acquisition activity and higher administration labor costs during the quarter. Admin labor costs we’re higher because of increased retention payments and severance payments. Our admin and marketing expenses were also higher when comparing Q3 '16 to Q3 '15 due to the positive impact of fair-value and share-based compensation we recorded last year in Q3'15. Adjusted EBITDA was up a healthy 21.5% compared to Q3 '15, it was up from $93.6 million to $113.7 million. It improved to 13% of net revenues despite our lower gross margin and higher admin costs. There is only a slight difference between adjusted and reported EBITDA this quarter, mainly because we have very few acquisition related costs in the quarter. Interest expense also increased by $5 million in Q3 '16, again primarily due to increased interest expense on our outstanding long-term debt related to the MWH acquisition. Adjusted diluted earnings per share decreased 5.2% from $0.58 to $0.55. This was due to the factors previously mentioned; gross margin, higher SG&A, and interest expense. We declared a cash dividend of $0.1125 per share to shareholders of record on December 30, 2016. Now moving on to slide nine, our overall work backlog remains very healthy. It's at $3.9 billion, consistent with last quarter, and up from $2.2 billion at the end of December 31, 2015. On slide 10, your will see Construction Services earned approximately $250 million in gross revenue in the quarter and $390 million since the MWH acquisition on May 6th. About 60% of the revenue is generated year-to-date occurred in the United States and 40% in the United Kingdom. Now, Bob, I’ll pass it back to you for operational highlights.

Thanks you, Dan. As both Dan and I have said, the strength in many parts of our core business and contributions of the full integration of our strategic acquisitions, are propelling our Company’s healthy gross revenue growth. That’s evident across our organization with significant increases in gross revenue in Q3 ’16 compared to Q3 ‘15, especially in infrastructure and energy and resources. And from an adjusted EBITDA prospective, we did very well this quarter. During this quarter we completed the acquisition at Edwards & Zuck, a New York City based buildings engineering firm. They’ll add strength to our buildings business in that part of the United States. Subsequent to the quarter, we signed a letter of intent to acquire Edmonton architectural based Tkalcic Bengert. They were complement our buildings practice in our Canadian Prairies and Territories geography, and add bench strength in the civic sector, which ties well with the government in Canada’s commitments to public spending. We are very pleased with our progress to-date on the MWH integration. The revenue and cost synergies we’ve achieved to-date are in line with our expectations. We’ve completed and communicated a number of key organizational changes, and we’re excited about moving forward as a combined team. In our buildings business operating unit, as shown on slide 14, gross revenue increased by more than 5% this quarter. Organic revenue retraction was just under 3%. This was mainly due to the number of design build P3 projects currently in the bid phase, and because of the decline in oil and gas, and its impact on public and private spending, in Canada and in the Middle East. However, results were positively impacted by $2.2 million success fee for a major healthcare project in Canada. We do look forward to some positive momentum. We have won some major buildings projects recently, and we’re seeing increased activity throughout North America. In Canada, we are seeing strong activity in the healthcare, commercial, and education markets, and steady activity in the civil and industrial sectors. This is highlighted by our architecture landscape and transportation teams being the prime consultants in design-lead on the teams selected has the successful proponent for the new Mackenzie Vaughan Hospital in Ontario. We’re starting to see some results of the Canadian Government’s commitments to public spending as well. For example, we’ve just recently won a large federally funded project for construction of old schools and major renovations to two schools in aboriginal communities in Manitoba. And, we very recently won work on the Regina Transit Fleet Maintenance Facility in yards in Regina Saskatchewan. In the United States, we continued to see increased opportunities in Eastern U.S., especially in commercial. And we continue to benefit from the ongoing urbanization trend in the U.S. Our civic sector provides a range of services to respond to those needs. Outlook for the buildings remained stable for organic growth revenue for 2016. Moving on to energy and resources on slide 15. Gross revenue increased by more than 21% in Q3 ’16 compared to Q3 ’15. We saw a continued organic attraction this quarter, and year-to-date, due to the ongoing lower price environment that is curtailing capital spending, putting pressure on fees. Oil and gas engineering services continue to represent a smaller portion of our overall business. In 2014, they represented 15% of gross revenue. In 2015, that number decreased to 8%. And at the end of the first three quarters of 2016, it fell to 4%. We continue to secure projects it the power sector, and were awarded work on some major alternative energy projects in Canada; including buildings, and interconnection design for Deltro Energy’s battery energy storage system in Toronto. This will be Canada’s largest battery energy storage system. Our outlook for energy and resources remains a retraction in organic gross revenue for the remainder of 2016. Moving on to slide 16, gross revenue in our Environment Services business operating unit increased 9% for the quarter. We did see continued retraction in the organic gross revenue due to market conditions in oil and gas. As with our Engineering Services, the Environmental Services we provide to the oil and gas sector represents a smaller portion of our overall business, reducing from 11% in 2014 to 5% for the three quarters ended September 30, 2016. However, we continue to win Environmental Services work it this sector. During the third quarter, we were awarded the archaeology impact assessment work for all remaining areas scheduled for construction along a large cross-prudential pipeline in Western Canada. We are seeing opportunities for growth in the power sector in both Canada and the United States. And with the Canadian Federal Government’s plans for infrastructure spending, especially in aboriginal communities, we see opportunities with water, transportation and wastewater projects in Canada. For the remainder of 2016, our outlook for Environmental Services remains a retraction in organic gross revenue. Looking at slide 17, you'll see gross revenue for our infrastructure business operating unit increased 70.5% in Q3 '16 compared to Q3 '15. Organic gross revenue was stable this quarter, and up 4.3 year-to-date. Year-to-date growth occurred because of strong organic growth in transportation. About three quarters of our transportation works occurs in the United States. The U.S. economy is expanding, and our maturing presence is leading to work in light rail transit, roadways, and bridge projects. We also saw solid performance in our U.S. Water. Our MWH, now Stantec colleagues were awarded a significant work for the Miami-Dade Water and Sewer Department in Florida. We also secured work to support the Delta Stewardship Council’s long-term management strategy for the Sacramento-San Joaquin River’s Delta in California. Yesterday's election in the United States ended months of speculation. All campaigns focused heavily on infrastructure investments, and we see this as one of the first focus-points for the new administration. Stantec is one of the best positioned firms in North America to take advantage of this new focus on infrastructure, given our geographic footprint that covers over 280 locations in 40 American States, and all Canadian provinces and territories. We have a top tier position in water, transportation, and environmental services. All areas that will benefit from increased infrastructure spending in both Canada and the United States. Our outlook for infrastructure continues to see moderate organic growth for 2016. In summary, this quarter demonstrated the value of managing our operations effectively across the very broad range of services, service offerings and geographic diversity and through our strategic acquisitions. We look forward to continuing to win new work with our new partners. Moreover, I hope that you all take a moment to reflect on the sacrifices of the men and women in service for Remembrance Day here in Canada and for Veterans’ Day in the United States. Slide you are looking at pictures Poppy Plaza in Calgary, Alberta. Stantec’s Landscape Architecture Group contributed to the design of Poppy Plaza in collaboration with our engineering, geotechnical, and lighting experts; the unique public memorial page tributes to the men and women past and in present who served on behalf of Canadians. With that, I'll turn it back to our operator to begin the Q&A.

Thank you [Operator Instructions]. We’ll have our first question from Michael Tupholme with TD Securities.

I just wanted to start with, I guess, the buildings segment, The rate of organic decline did improved from where it was last quarter, but, I guess, it was mentioned in the M&A and your prepared remarks about some pressures or some drag affects from Canadian and global operations. Just wondering when the comps get a little bit easier as far as those areas that are weighing on the buildings segment?

Are you saying the cost from few -- from 2015 to 2016?

No, I guess the prior -- it seems there’s a couple of issues here in Canadian and global operations. And I think you mentioned some of this tied back to oil and gas. So I guess just wondering, when the prior year comps to come a little bit easier in those -- that thesis to be a drag?

I don’t know if that’s a significant drag, but it will become easier, but probably not for Q1, Q2 next year. I don’t think. That’s when we started to see some of the impact, especially in the Middle East projects and the global operations. And really I’d look at the -- there wasn’t a less of a retraction this quarter in buildings. Really, I wish I’d tell the building story is more a timing issue than anything. So, we won an incredible amount of projects in the last, I would say, month to two months. And really look forward to that being brought into backlog, and then brought into revenue over the next few quarters. So, I see this as a quarter here where we’re basically getting ready to have, I would say, a fairly busy first-half of 2017. So, we’re looking forward to that business improving going forward.

And, Bob, would you say the same about infrastructure. I mean, that’s the segment where the organic growth had been showed at a pretty good cliff for quite a while. And then you were flat this quarter. But everything you suggested about infrastructure, it was pretty constructive in your remarks there. So, is this a similar situation with infrastructure where, looking-forward in the next quarter or two, you’d expect that to bounce back to a more of a positive rate?

Yes. Definitely in infrastructure, both in water and transportation were impacted by a couple of fairly large projects in the United States lining down PCCP projects in New Orleans, the Ohio River project, the bridge projects in Ohio. Both of those are very large projects, those are winding-down. And it takes a lot to fill that back-in. I think what we’re seeing with Canadian Government’s focus on infrastructure, and now with the renewed focus and the election behind us in the United States. You just can't help but look positively on infrastructure. The funding is going to be there. We’re well positioned to win our share of that, and definitely, very optimistic looking forward.

And then just one for me. There was mentioned in the energy and resources area about some benefits from revisions to estimated costs to complete. And I guess this relates back to some MWH work. Any additional information you can provide about that. And just wondering if that’s a raw material in terms of the impact that that had on the favorable side?

Michael, I can give you some color on that. The estimate provisions were related to the Panama Canal project, that project is winding down and we adjusted the estimate to complete. There was a risk release on the project. So we have the corporate reserves. It was only about a $1 million, $1.5 million. But at the same time, you have to recognize, we run thousands and thousands of project. We’re constantly doing our estimate to complete adjustments across all of our business. Last quarter, we saw some adjustments in buildings. We didn’t see the same level of impact again this quarter. So, it’s noted in there for the impact on gross margin, but this was a pretty normal business occurrence for us.

I just want to make sure it wasn’t anything overly unusual or significant, but it sounds very much normal course...

Pretty normal in terms of how we manage our revenue recognition.

We will go next to Jacob Bout, CIBC.

When you look at organic growth for 2017, can you contrast what you’re seeing for U.S. infrastructure versus Canadian infrastructure? I noticed with some of your peers that there was kind of a stock difference. Are you seeing the same type of thing?

I’m sorry, just to make sure I understand the question. You were just saying that, do we see more opportunities for organic growth in infrastructure in Canada versus the U.S.?

No, the other way around. And specifically for 2017, I mean, what I’m getting at here is, it sounds like Canada is more of a bidding year for infrastructure and really kicks in 2018. But wanted to get your perspective?

I think the bidding for infrastructure projects on either side of the border is the bidding is actually the engineering and the architecture, the design is done first. So I would say yes, there is going to be bidding. But then revenue flows in pretty quickly after that. So, I do see revenue flowing-in for infrastructure in both Canada and the United States in 2017. The rate of that happening is really hard to predict. But I wouldn’t say that that’s a 2018, I would certainly see, and as we stated in the conference call, we’re starting to see revenue increase already as a result of the infrastructure spending in Canada. And we see that continuing in ‘17. So for ourselves there is definitely opportunities, especially when you look at a lot of the P3 projects where if you are the owner’s engineer, you’re actually at the very front-end of those projects. You’re preparing the schematic, and you’re preparing the upfront work. The bidding you’re right then for those projects wouldn’t occur until later in ’17. But you’re actually the owner’s engineers work starts quite early before that. So since we play in a number of P3 sometimes on the owner’s side, sometime on the proponent side, we get the opportunity sometimes earlier.

And then may be a couple of questions on the construction division within MWH. How are you thinking about that? I mean, I know there was some discussion when you first took out MWH. Is that still core part of your business? And then the margins that you saw with construction, was that in line with your expectations, slightly better or slightly worse?

It's in line, I would even say, it's on the higher side of what we would expect from typical construction. As we said, construction really isn't core to Stantec’s business, still since its only 8% of our revenue. So it is a relatively small piece. It came along with the business. And as we said it's run is a very separate business and more opportunistic with regards to how we integrate that, or how we bundle it with our design services. So, from a perspective, we’re still learning a bit about it. And really out intent hasn’t changed, and we’re happy with the performance so far.

Just to clarify, construction is about 13% of our revenue, less than 30%.

Final one from me, the synergies with MWH, is that still progressing in line or any update on the cost of revenue?

Yes, the synergy is certainly on the cost side. We’re certainly on track. We’ve seen -- Bob speak to the revenue side of synergies, but we've made a lot of good progress in the last couple of months working with our MWH colleagues, that’s been very collaborative, very positive. We’ve got a lot of our organization structures figured out, both in terms of our operations and our back office. And then it's about really the other objective is winning work together.

So it's been seven months into this. And I think that’s something that we definitely want investment community to understand that the amount of efforts and the amount of work that has gone in to-date to trying to get firms together and integrate them. Stantec model is one of really getting into that very quickly. And it's distracting. It takes a lot of time. But it does take, as Dan said. And I think our performance through that seven months, considering the fact of all the integration we've done so far, we’re very happy. And this is a journey. This isn’t something that happens overnight. But I think we're very happy and very pleased with what we seen so far. And definitely it's meeting our expectations to-date.

We’ll go next to Yuri Lynk, Canaccord Genuity.

Maybe just want to dig an a little bit more on the margins, the gross margin for the quarter guys. I mean, good job. Only down about 30 bps year-over-year, but this is despite the lower margin construction business, the sea pressure that you’ve talked about. Plus I think you've indicated in the past that the U.S. is a bit of structurally lower margin region, and that's grown since last year, so all of that moving against you. I know you did have some small close-outs. But how do we think about the quarter and the mix of work, and how that might have impacted the margin? And if you think that this is a pretty good run-rate going forward?

I’ll let Dan speak to the detail. But thanks for the segway and to the fact that I agree. I think that the quarter with everything that we have facing us, and again to reiterate with the ongoing integration efforts of the largest acquisition we've done, we’re really happy with the performance. We are happy with the margins and the focus on the business. And we haven’t lost sight of the core business, haven't lost sight of what we do. And continue to operate as we have historically, so happy with that. Regarding to the industry, I don’t know, Dan, if you have any comments on variances. But it's really a mixture of work, so I would say....

And it really does come down to the mixture work, and cycle of the full-year and it's certain project. So, there is nothing sitting there that would be out of the norm. Yuri that would be something that would sit-out to us, saying well we should talk about this, it's just normal business.

Not even the -- so you had Panama, which is kind of winding down, Ohio River bridges. So I think you mentioned another, I mean, I know this...

Those are ones that you highlight its going higher. And then, as I said, across all of our business we managed our projects around the estimate to complete, and the percentage of completion. So, you’re going to have some puts and some takes all the way through the entire business. So as I said, we run tens of thousands of projects.

So I wouldn’t look at any increase in the quarter or decrease in quarter as no longer term trend. It happens on a quarter-by-quarter basis.

Just your infrastructure segment, the deceleration we’ve seen in organic growth. Do you care to venture when we might see that pick-up and/or at a minimum can you give us some color as to which part of the business within infrastructure, looks sounded a bit like community development was a drag. But is the transport business growing right now, or is that still something to come more next year?

No, transportation was growing. Water was slightly flat in community development. You are right it was bit of a drag maybe in Canada, more specifically in Western Canada. We don’t see that continuing that much longer in western Canada, as a matter of fact, because of that bit of a retraction this year. We think our clients in Western Canada, from community development perspective, are well prepared to move forward in a more net normal state, I would say. So, don’t see continued drag in infrastructure overall. It really is going to come down to the timing thing. It’s when do those projects start getting released, we spoken previously that Canada was slow in getting the real projects. But we’re starting to see it change there. The United States, still early days. But even without those early days, we were getting some pretty good momentum. I think the one thing that we haven’t spoke about is in addition to the presidential election that went on, there was a number of vary major initiatives for funding of infrastructure that went along with the same cycle of the elections federally, that aren’t being mentioned at all. And those are literally billions of dollars of infrastructure that is being funded to essentially bond initiatives. So, that’s a very positive aspect in addition to everything that the new administration is promising. So, infrastructure is just -- you can't help to be positive. I can't give you a prediction of when, but we know it's coming.

We’ll go next to Mona Nazir, Laurentian Bank.

So firstly just wanted to turn to the Q3 space, you’ve sided in the quarter that you had lower growth in Canada as you invested in several significant P3 pursuits. I just want to confirm that it sounds like they’re all still in the big phase, and they are not lost, but we’re just waiting. Is that correct?

There is some in the big phase. I don’t know how many P3s we have ongoing at any one-time in both transportation and buildings. But there was a number of that we had bid, and they were basically in the decision phase. There’s some that are in the RFP phase. We’re bidding them and getting some revenue. But that revenue is lower, because that was lower revenue and then you get success fee if you win, as we did with Mckenzie Bond. And some of that were in the RFQ stage where they’re really real, that’s the cost to us at that point in time, but relatively small. Overall, roughly 35 P3s are in that bucket of either RFQs, RFPs or have been bid and are waiting on been selective. So it is a very busy space for us right now. And the timing of those is something you can’t control. So, I would say, at this point, what we suffered in the last couple of quarter was more of those where the RFP and selection phase, and not as many in the execution. Mckenzie Bond has reached financial close, and we will now start generating revenue on that right away.

I think we’re starting to -- our expectation is we’ll start to see more awards or selections into Q1 of 2017.

And you said that you have roughly 35 projects that are in these different phases. Could you compare that to where you were last year? Like, is there a significant uptick, or it’s kind of flattish?

I would say a slight increase. I wouldn’t say there is a huge number that hasn’t doubled or anything to that effect. I would say slightly more, don’t have that number. But just from that view, I’ll say slight more than last year, but not significant. It’s been a good steady, I would say, rolling 12 months of P3 opportunities.

And then just secondly, on utilization rates in Western Canada, if you could speak about those. Have there been any further staffing reductions or everything as is?

We continue to manage. I did mention there were some severances. They weren’t isolated to western Canada. We have certain pockets in the business. And again we talked about operational effectiveness anywhere where we view that weakness we’re going to address those as quickly as possible. Western Canada, certainly, is the oil and gas business is still under some stress. We’re making minor adjustments, but not to the extent that we’ve seen over the last two years. So, it is again part of managing our business effectively.

And just lastly for me, before I turn it over. I know it’s still early days since the MWH acquisition. But I’m just wondering your thoughts surrounding the construction segment and its performance. I see that you booked it out separately. Is there any read-through there that eventually you could try to extract greater value by potentially divesting? Or it does make sense to report it separately from the other segment at this point in time?

Initially, right now, it is definitely from a perspective of reporting it separately. It is a very different business, different drivers, different margins, and that altogether a much different business. We’re still trying to understand it. We’re trying to understand the relationship between the consulting business and the construction business, both here in the United States and in the United Kingdom. Very different businesses; the UK business water business is a very unique business, very different from the Canadian and U.S. business. So we’re trying to understand that as well. So we’re still in learning phase at this point. So the separation should really be seen as the fact that it is a separate business, much different drivers, much different margins, and I think it provides the investment community better clarity with how our real core business, and consulting business, and legacy business of Stantec and MWH is doing and how the construction business is doing.

We’ll go next to Benoit Poirier with Desjardins.

Just to come back on the gross margin, specifically for energy and resources 63.8%, strong performance in the current context, especially when you compare quarter-over-quarter year-over-year. So just wondering if there was anything abnormal aside that the small uptick that came from the Panama Canal, or? And whether it's sustainable going forward?

Nothing really out of the normal again other than what we've noted. The water power business is now part of our new energy and resource business. So that has slightly higher margin and say the oil and gas business, which is usually running at sub-50%.

And just on the debt EBITDA side, you finished the quarter at 3.09%. But I assume that it's not on a pro-forma basis, and including the latest acquisition. So, Dan, could you provide us, what is the pro-forma number on the debt EBITDA ratio?

The reported net debt to EBITDA was 3.09%. I think when you take trailing EBITDA of MWH, it’d be about 2.6%-2.65%, somewhere in that range.

And just in terms of free cash flow. I was wondering in terms of working cap, what we could expect Q4? Is it the typical seasonality where we’ll see a significant increase? Any color about the free cash flow prospect for the year.

Free cash flow, we still expect to generate good cash flow from operations in the quarter. As you know, there is seasonality. Q4, things tend to slow down around the Thanksgiving in the U.S. in November, and then certainly the Christmas break at the end of the year. So, don’t expect revenues and cash flow generation to be as strong in the fourth quarter, similarly in the first quarter, it tend to be use more cash. But we do expect it to be positive in Q4. There isn't say lot of additional huge capital expenditures that we’re expecting in Q4. So, probably slightly down from Q3 as you would normally have seen. And don’t expect any changes. And then MWH cash flow generation, and certainly on the consulting business, it's very consistent with Stantec legacy business.

So basically, Dan, cash flow from operation, excluding working capital, will be slightly down. But the working capital impact should be positive?

That's right. We don’t expect any material change in working capital in fourth quarter.

And just looking at the tax rate 28%, is it kind of a sustainable tax rate we should use going forward?

I think we're assuming, on an annualized basis, the tax rate is around 29%. So we haven't necessarily changed that expectation going forward. It might feel a little bit lower where we have a lot of work to do with the MWH integration and tax planning. We might be able to get a little bit lower. I think we've adjusted it to 28% for this quarter on an annualized basis. But not sure exactly where we’re going to be in 2017. We’re still working on that.

And scheduling delays in dollars on the construction side, how important it is, or it should it be resolved in the coming days? So, could you mention more color about the scheduling delays on the construction side?

Dan and I are both looking at each other. I don’t remember significant or I mentioned them for construction delays. Now construction projects certainly are like the design projects unless you get the approval to go ahead. It definitely causes an issue, as you staff-up and get ready for it, but can't actually proceed until you get the notice to proceed. But I haven’t seen anything unusual. I don’t know who has mentioned some place that I missed.

And then last one for me, just in terms of gross margin for global 57.7% versus 52.1%. Is this more a matter of a contract that wind-down in the quarter?

Yes.

We will go next to John Rogers, D.A. Davidson.

Couple of things, just specifically on the MWH. Can you give us a sense of how their revenue is -- or backlog is growing internally?

Their backlog definitely in water is very healthy, and has been growing since we closed the acquisition. So that -- I would say the majority of the biggest part of their business, their backlog and their water power in dams’ area has not been growing, that was the group that was doing the Panama Canal. That’s somewhat -- that’s not unusual for them. Those projects are much larger. So they’ve got a lot of opportunities. But that backlog has been shrinking. And they have an environmental services group as well and that backlog, I would say, is stable. So overall for the Company it has been increasing.

I think in Asia-Pacific, there is still some weakness in the MWH business, just given the economy in Australia and New Zealand. So we still see some weakness there. But the UK, they’re in the middle of their asset management program, and backlog is...

Very healthy...

And that that was over five years, so it's pretty healthy.

And then just in terms of overall revenue with the Panama Canal was running off. Are they down year-over-year?

They certainly will be down year-over-year on that, based on that project in Latin America, yes.

But that project again if you’re looking last year 2015, it was really winding down in '15. I would say it was probably more of a '14 big difference there. So, actually that project was near completion at the end of last year. And so the end of last year and beginning of this year, those revenues were dwindling at that point in time.

What you saw in the quarter is kind of the tail-end of the effect of that project still winding down.

So that transition, I mean, we should be largely through that now. And then hopefully grow it into '17. I assume that’s the expectation?

That would be the expectation.

And then your acquisition activity is smaller, but picked up again. And I am just wondering about the pipeline there and the opportunities, still the same and you’re focusing more on outside of North America at this point?

At this point in time, I think, we’re getting -- we’re trying to gain knowledge about outside of North America. MWH didn’t have a capital -- ability to do a lot of acquisitions. They definitely have the desire. So, we’re working with them to get better feel of where the opportunities are and how that fits with their position in those countries and ourselves. So I don’t think you’ll anything significant there outside of North American community the second half of next year. But certainly here in North America, the program continues. It is still lots of opportunities, much more in that smaller firm. The $50 million in revenue and less is still where there are lots of opportunities in our space, especially in the United State. So we’re pretty happy with that. But we’re going to be, as we always have been, very focused and very disciplined in our approach. And as we’re spending a lot of time and effort with MWH, that focus and discipline is a little bit more heightened. So I don’t think we’re going to be continuing at, may be, the numbers that we have historically. But there have been years we’ve only done one or two, and here we’ve done nine or 10. So, next year would be probably a slower year from that prospective, but lots of opportunities which we’re very happy about.

Maybe to add to that, of the -- we’re really going to -- we really are focusing on the integration, the full integration of MWH into our businesses. And our branding, our people, all coming together and a lot of that heavy lifting will be started -- well it’s already started, but taking impact in the first-half of next year, certainly, for the North America operations.

And just, Dan, just two modeling questions, applicable shares going forward, will it climb up to -- I mean I’ve seen you guys up $3 million options out granted to, means we look for that go up over a 115 million shares in 2017?

We will be discussing with Board in February, the auction program, the long-term incentive program, and getting that run-rate. I think the expectation is we aren’t going to see our run-rate increase significantly more than what it has in the past. So, we’ll be keeping it running. It’s generally run around 1% of our volume as that deals with that long-term compensation.

And then I know you addressed this earlier. But in terms of the tax rate for 2017, given the geographic mix, how should we think about that now?

Again we were using 28% for our annual rate for this year. I don’t have a solid forecast number for you, John, for next year. But I would assume something in the same range. We’re still working on optimizing our structures there.

We’ll go next to Bert Powell, BMO Capital Markets.

Just on the construction business, trying to think about that going forward. The sub-consultant costs, look like they’re about 70%, or 73% this quarter for gross to net versus the consulting at 20%. Is that a good way to think about it going forward? And also just in terms of the seasonality of that business, $250 million this quarter. Just in terms of kind of model that business. So if could help us with, that’d be appreciated?

Sure. I would say that that 70% range is a very typical number, and I think you can see that as being something consistent in that range going forward. With regards to seasonality, the type of work that MWH does, it is impacted by winter somewhat but not nearly as much as the transportation project. Their business, a lot of it is water treatment plants, wastewater treatment plants, which is somewhat in close facility. Yet, those are impacted by weather, but not like a transportation project as much, so there’s seasonality. Definitely the revenue is going to have some seasonality to it, but the impact is, I would say, is going to be less than a typical construction firm or utilities firm that is digging a lot of pipe, and burying pipe in the ground, it has to do with that; so a little bit different, but some seasonality.

So was that we just look at Q4 kind of at 10% variance then. Would that be the right way to think about it in terms of relative [multiple speakers]?

I'd be guessing if I say yes, but I wouldn't see it's been a lot more than 10%.

We’ve got that into the Q1 as well.

And then just in terms of that business, it looks like, if I just run rate the quarter, the book to bill is one-time. Is that a good place for this business at this time of year? And also, wouldn't mind your understanding how much of that business would be booked that would be tied into a Stantec MWH designed versus work that you’d be doing for projects that weren’t?

That would vary between Canada -- I mean, between the U.S. and the United States there -- in the UK and United States. I don’t have the numbers at the top -- at my fingertips. My guest would be in the United States it is probably 60% with MWH, 40% for working with outside teams. A little bit less in the U.K. we’re may be 70% is with MWH and 30% with outside team. So, the UK again has a little bit more synergies, a little bit more partnerships, and a little bit more connection. And in the United States, a little bit more separation, the clients are little bit more selective.

Yes, that kind of leads to my second thought around that, which is, when you have that, your design, your build. Are the margins inherently better in those projects versus the construction work that gets done for outsiders?

No, that is essentially the same. The approach is we feel when you're working with the MWH constructors, the relationship is better. You can get the projects done efficiently, but we’re probably -- what we are bidding on is relatively the same. In other words, we’re going to bid the projects the same. I think we execute them a little bit better. So you may get a little better margin. But it really comes down to how you execute those projects.

We’ll go next to Ben Cherniavsky, Raymond James.

Bert stole my question about the sub-consultant rate. But let me ask you something else Bob. Bob it sounds like you've got really excited here about infrastructure. I don’t want say all of a sudden. But it strikes me as you’ve taken a more positive tone both in Canada and the U.S. Do you run the risk that you might overpromise on this? I mean, it's interesting -- realities of infrastructure and especially in Canada, and particular in your part of the world have been pretty active in the last few years. There is the funding that has been promised in Ottawa at least, is very back-end loaded. And there is still lot of fiscal realities that could get in the way of political promises, turning this into real big needle moving opportunities. And I am thinking just a little bit, because we went through this in ’09 with the big stimulus promises, and the Canada action plan, and everything else. And I remember waiting around for it to really translate into meaningful opportunities. And in fact we’re still sitting here talking about trying to get the economy going through infrastructure. So I just, I am curious, I guess my question is what suddenly gives you the confidence that it's going to be different this time?

First, I didn’t promise that it would happen I just got excited that it could happen. So let me clarify that. We’re finally starting to see some of it, and we referenced the couple of projects that we saw coming in for the aberrational schools. A lot of the money that has now -- we are starting to see the government actually approach industry and say we need to get this money out into the communities, how can we do it. I think the aberrational schools, those are really good example of that. So they are small, but not insignificant. So that gives us hope again have our good strategy but it is -- there is the promises have been made by the government. So you’re absolutely right, governments been promising infrastructure spend for a while. But certainly the approach in Canada is a little different this time, and a little bit more unique with regards, really focused on transit as well. So there has been a very strong focus to transit. We’re seeing a lot of talks and discussions around that; again gives us hope. In the United States I think where you get excited, Ben, is just it's been a significant change in attitude. I think you just saw that with the market yesterday getting excited as well. I think they’ve been waiting for a change. And a change administration then gives you maybe a change in how money is going to be funnelled. And I think you’re going to see some very strong promises, try to get implemented quickly. And hopefully, they won't make the same mistake, they make or which is not a lot of toppled going. But certainly that gives us an opportunity to get excited. And again the bond issues which is an area in the United States where lot of people do ignore. And it's getting to be a much more prevalent way of funding infrastructure is you can't wait for federal or state governments. So go out and get the tax initiatives done, raise the money yourself. And it's very specific tax initiatives as well. So certainly there is a lot of reason to get excited, we didn’t promise anything, yet.

We’ll go next to Sara O'Brien, RBC Capital Market.

Can you comment just on -- if there is any seasonality that you’ve noticed in the MWH business outside of construction. Just wondering either margin-wise or revenue-wise. Is the flow pretty even through the quarters? Or do you see a summer kind of bump-up?

It's going to be very similar to Stantec. Their business inherently is really sensitive, infrastructure, mainly water infrastructure. So I see just as much seasonality. That being said, a lot of their business is in the UK, which is less affected by the seasons than I would say North America is; so to put that into an overall summary, maybe slightly less seasonality than Stantec, but similar.

And then just wondered on the synergies, you said you’re pleased with the progress. Can you quantify how much of your $15 million U.S. cost synergies you might have seen in the quarter?

No, we can't -- at this point in time, I don’t think we have a good handle on the number. That is more of just an overall field that program is headed indefinitely the right direction. Dan, I don’t know if you have better view for the actual...

And a lot of that is planning around what we’re expecting to do in terms of the integration of the two firms. We’ve certainly seen some cost synergies in areas that we’ve been looking at. We’ve been working on our employee benefit programs that will impact our cost next year. For all of our U.S. employees, we’ve been evaluating our insurance programs. We’ve been evaluating our procurement approach. So, all of these things, as we’ve been working together to coordinate the integration of our firms, we’ll see those start to take hold in 2017.

We’ve also done few office relocations, so we’re starting to see some of those. They’re not big numbers, but those synergies were starting to rationalize those. So there is about 21 offices that we’ve seen we can move forward-on and were started as well. So, the point is I think we’re very happy on many fronts that we’re starting to see the synergies that we predicted come to fruition.

And then just wondered if you’ve seen any staff retirements from MWH, you commented on the acquisition that there was pretty top heavy organization. What’s happened in those first seven months since closing on that level?

Well, absolutely. We’ve seen a lot of that. And that was predicted and that was planned, and that is happening. So definitely, that’s part of those synergies that we’ve seen.

We’ve been I think let me speak to this partly, the retention of the key leaders is what we expected as well. So we haven’t seen an exodus of the key leadership that we wanted to retain.

Definitely.

Just wondering if you’re already seeing better utilization rates, or is again something to come in ’17?

No, we’re already seeing better utilization rates. From where they were prior to closing, we had laid-out a plan they have laid-out a plan, relative their budgets. We knew that they have to make some changes to achieve those utilization targets. They’re moving well along that line and they are getting pretty close to their budget expectations as well. So we’re pretty happy with the progress that’s been made there.

And just lastly on, may be pipeline work opportunity, you certainly closed down, I guess, a lot of operations and have to let go staff. How quickly could Stantec ramp back-up on pipeline work? And how much of the work, did Stantec was involved with, was either in the U.S. or north-south pipeline type work?

So definitely staff in that industry can be found very quickly when we make a point of saying, very well-connected to the staff, but unfortunately that we have to release. That industry is quite all-around, so we know where the people are. We do be very comfortable that we can get staff very quickly, and already are, as we win some small projects. We staff-up very quickly. With regards to the work in the United States, that’s something that, certainly, we did not have a stronger presence in the United States, we have a smaller presence. So it's actually doing much better in the last quarter, but it’s the smaller presence in the United States. However, a lot of our clients in Canada, and this time have taken some very strong measures to move south of the border with TransCanada acquiring Columbia Pipeline, and Enbridge acquiring Spectra. We’re seeing the Canadian companies who are our clients move south of the border, and we look that, and we look at that as a very positive move for ourselves as we maintain those relationships, and hopefully will be able to move our resources south of the border with them.

We’ll go next to Tahira Afzal, KeyBanc Capital Markets.

This is Sean on for Tahira today. I just wanted to expand on the U.S. election topic in a little bit more detail. It seems like the Trump campaigns really discussed infrastructure in a really broad-based way, really kind of across the board push. And I was just curious in your previous experience, or looking at certain funding structure already in place. Is there a particular area, whether it’d be water, or roads, or whatever, that you think might be the earliest just starting to see a boost?

I’ll take that. That's I think where the questions are going to be asked, that may be not be able to answered for a while. The promises were there. I’ve seen some of them. They were some broad-based ones, clean water, transportation, were the two obvious ones. We can't say when we would see some of that money flowing in, but I think because the promises were so strong and were so definitive that this was going to happen. They've got to start quickly. And it matters -- transportation is usually the area that you can get the biggest bang for your buck, because you can see it quickly. But I think there is real pent-up demand for water as well. So I think pipelines on the private side, we shouldn't also forget about that. When we say infrastructure, it's both public and private infrastructure. And I think the new administration is focused on pipelines as being one of their areas. They also feel should be a change in policy or change in focus. So, we see that as positive. And that could be fairly quick, because that could be something that is done with just a simple change in order. So there’s some areas that seem to come quickly; others, based on the history of political investment and infrastructure is going to come slower. But I think it will come. It was such a focus.

And I guess maybe to dig into the pipeline side a little bit more. I mean just seeing this election result. I mean, how does it change? How you guys are thinking about next year for mid-stream? I know you're in the middle of your budgeting process now. But how significant could this be in terms of the trajectory of Stantec’s oil and gas business for next year?

The fact that pipelines now maybe go quicker in the United States will help. That will really depend on how efficient we are being able to capture that work when we don't have a strong position in the U.S. So I don’t want to predict that that's going to have a huge impact for us. But certainly, we’re well positioned again with the clients that we think could get involved with us. With regards to a big change in momentum in oil and gas is still going to be subject to the price of oil and gas. It comes down to that commodity price itself. And that will probably be the big needle changer for us when it comes to our oil and gas business. But certainly the focus in the new administration on pipeline is not going to hurt us. It's going to only help that business.

That does conclude the question-and-answer session. I'll turn the conference back to management for additional or closing remarks.

Great. Thanks very much everybody for listening into us today. That concludes our call. Thanks for joining us. And we'll talk to you in next quarter. Thank you.

That does conclude today's conference. Thank you for your participation. You may now disconnect.