Daniel Lefaivre - Chief Financial Officer and Executive Vice President Robert Gomes - Chief Executive Officer, President.

Chris Murray - AltaCorp Capital Sean Eastman - KeyBanc Capital Markets Jacob Bout - CIBC World Markets Benoit Poirier - Desjardins Capital Markets Mona Nazir - Laurentian Bank Ben Cherniavsky - Raymond James Maxim Sytchev - National Bank Financial Michael Tupholme - TD Securities [Call Started Abruptly] [Operator Instructions] Today is August 9, 2017, and this conference call will be recorded and broadcast live over the Internet.

It will be archived for future reference at the Investor section of the stantec.com. Any member of media who are joining us on a listen-only mode, and would like to quote any other than Mr. Gomes and 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 Canadian and U.S. securities law. 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 during this call. And now your host, Bob Gomes. Bob, please go ahead..

Thank you. Good morning, everyone, and thank you for joining us for Stantec's Second Quarter 2017 Earnings Conference Call. If you're following the slide show, we're on Slide 3. I'll start the call today with my introductory overview of the second quarter results. Dan will then provide his more detailed analysis of the numbers.

After that, I'll provide some operational highlights and an update on our outlook and acquisition strategy. I'll then ask the operator to open the call for questions. There is a copy of the slide show available on stantec.com and it will be archived in the Investor section of the website. Moving on to Slide 4.

Today we released the results of Stantec's operations for the second quarter of 2017. Three months ago during of our conference call for the first quarter results, we said that we expected our results to improve throughout 2017.

While one quarter doesn't necessarily indicate a trend, it's fair to say our operating results this quarter were in line with our expectations. We achieved overall organic gross revenue growth in most of our business operating units and across our Canada, United States, Global and Construction Services reportable segments.

Buildings, Infrastructure and water all experienced organic growth in Q2 '17 compared to Q2 '16. And both business operating units are our 3 biggest contributors to our gross revenue. Environmental Services remained stable, while organic revenue in Energy & Resources retracted 11.8% compared to Q2 '16.

As expected the rate of retraction is slowing down in '17 compared to '16. We continue to progress with the complete integration of MWH, which we acquired in Q2 of 2016. This quarter, we completed the transition of projects of MWH's North American operations into our enterprise management system.

We are now in the process of the full integration of the global region. We expect that work to be completed in 2018. Our full acquisition integration strategy and our ability to provide a diversity of services and build and maintain strong client relationships gives us the ability to pursue small, medium and large projects around the world.

And help to mitigate some of the differences in the economies of different geographies and sectors. Now Dan will review our financial results for the quarter.

Dan?.

Thanks, Bob. Hello, everyone. I'll begin with our Q2 results beginning on Slide 7. Gross revenue increased 26% from just over $1 billion to $1.3 billion. The increase is due to acquisition and organic gross revenue growth, as Bob mentioned, in 3 of our large business operating units, Buildings, Infrastructure and Water.

Favorable foreign exchange rates also added to gross revenue growth. Net revenue also increased 14.7% to approximately $900 million in Q2 '17. Gross margin as a percentage of net revenue was 53.8% this quarter, up from 53.6% in Q2 '16. This is mainly due to an increase in margins in our U.S. operations and in Buildings and Infrastructure.

Administrative and marketing expenses as a percentage of net revenue was 42.3% this quarter, falling within the targeted range of 41% to 43% set out in the 2016 annual report.

As we've indicated in the past, admin and marketing expenses fluctuate from quarter-to-quarter depending on seasonal utilization changes and the mix of clients and projects along with the number of acquisitions completed during the quarter. Recall that in the second quarter of 2016, we had a $10.8 million in acquisition-related costs for MWH.

Without those costs, admin and marketing expenses in that quarter would have been 42.6% compared to the 42.3% in Q2 '17. Our efforts to reduce office expenses through optimization of office space reduced our occupancy costs by about $7 million year-to-date.

These savings were offset by higher IT software licensing investments in our core IT Infrastructure were about $9 million year-to-date. Integration of MWH's North American operations onto Oracle was about $2 million in higher SG&A costs year-to-date, largely related to staff training impacting utilization.

EBITDA rose from $73.7 million in Q2 '16 to $158.1 million this quarter with $54.6 million of the increase related to the gain on the sale of Innovyze, a water software company we acquired along with MWH. We are also reporting adjusted EBITDA, which rose from $84.6 million in Q2 '16 to $103.5 million in Q2 '17, an increase of just over 22%.

Though we expect admin and marketing expense to decrease as we complete the integration of MWH, we also expect to continue our acquisition strategy. So integration-related expenses will always be a part of our business. Therefore, we feel our targeted EBITDA range is still appropriate going forward.

Net income increased from $21.2 million in the second quarter of 2016 to $97.6 million in Q2 '17, a significant portion of this increase is related to the sale of Innovyze on May 5. Adjusted net income up 46.6% from $39.5 million in Q2 '16 to $57.9 million in Q2 '17. Diluted earnings per share is up from $0.20 in Q2 '16 to $0.85 in Q2 '17.

And adjusted diluted earnings per share is up 37.8% from $0.37 to $0.51. We are reporting adjusted net income and adjusted EPS or diluted EPS because of the impacts from the divestiture of Innovyze. The adjusted numbers better reflect our actual operating results.

Balance sheet is stronger post the Innovyze disposition, with a net debt to EBITDA of 1.34 times and net debt to adjusted EBITDA of 1.52 times, which gives us significant capacity to support continued growth. It's better than we had forecasted, with strong cash generated from operations in the quarter.

Cash dividend of $0.125 per share was declared for shareholders of record on September 29, 2017, and will be paid in the October 12, 2017. For our Normal Course Issuer Bid in the second quarter, we bought back over 465,000 shares for a total of $14.4 million.

We believe that time -- at times our share price does not reflect the full value of our business and future prospects, which presents a good opportunity to repurchase and cancel shares.

Also in the quarter, we extended the maturity of our $800 million revolving credit facility to May 2021, and redenominated tranche C of our secured term loan from U.S. dollars to Canadian dollars. I want to provide some additional information to assist the investment community in arriving at gross to net revenue comparisons as shown on Slide 9.

Within consulting services, we've seen slightly higher subconsultant expenses as a result of the larger water business. Gross revenue to net revenue is trending at approximately 1.25 times. In construction, there are significantly higher subcontract or material expenses flowing through gross revenues.

Therefore, gross revenue is trending at approximately 4 times to 4.5 times net revenue. When looking at historical and forecast assumptions, it's best to evaluate gross revenue and -- to net revenue individually for Consulting Services and Construction Services, and then add the 2 together to arrive at a consolidated result as shown on the slide.

A breakdown of the actual revenue components can be found in the reportable segment sections on pages, F 29 and F 30 of the Q2 financial statements. 2017 targets remain as outlined in our 2016 annual report. Our gross margin, admin and marketing expenses and EBITDA are all within the range of targets we established in 2017.

EBITDA as a percentage of net revenue is 14%. This result is above our range because of the $54.6 million gain from the sales of Innovyze. And without that impact, EBITDA as a percentage of net revenue would have been 11% this quarter, which is in our targeted range. Net income as a percentage of net revenue is at 2.2% year-to-date.

We missed this target because of the gain on sale of Innovyze was more than offset by income tax spends of $94.5 million year-to-date. Excluding these impacts, the net income, as a percentage of net revenue, would have been at about 4.5% slightly below our target. We believe we are on track to meet all of our targets by the end of 2017.

That concludes my commentary. Bob, back to you..

Thanks, Dan. Let's go to Slide 12. Buildings, Infrastructure and Water performed very well this quarter. These business operating units represented almost 75% of our consulting services gross revenue this quarter. And each experience good organic growth in the quarter.

As expected, our Buildings business operating unit achieved solid organic gross revenue growth of 5.1% over Q2 '16, mainly because of the mobilization of new project wins in Canada that increased activity in healthcare, education and commercial markets, while steady activity in the Civic and Industrial sectors.

In fact, Infrastructure business operating unit achieved organic gross revenue growth of 4.6% over Q2 '16. Our transportation sector experienced organic growth in both Canada and the United States. Our Water business operating unit also achieved strong organic gross revenue growth of 4.1% over Q2 '16. Growth occurred in the United States and the U.K.

and Canada was stable. Growth can be attributed to Infrastructure spending on Water and wastewater treatment facilities and our global top tier position in this sector. Our Environmental Services business operating unit was stable in Q2 '17 compared to Q2 '16 reflecting that our clients' businesses in the oil and gas sectors are stabilizing.

Energy & Resources are still retracting, but as we discussed in the last quarter, the rate of retraction is slowing down. We're well positioned to take advantage of a rebound when it comes. A significant organic growth will lag until oil prices rise or projects proceed. Our mining group is growing slightly in Canada.

Our client relationships allow us to leverage our wide range of services to help us secure new opportunities in different business operating units. The quick response of our Waterpower and Dam's team to the Oroville Dam emergency is a good example.

We were there to help within a couple of days, and that helped our power group to earn some work relocating the transmission line damage during the overflow, and our environmental services group has also engaged in permitting this part of the recovery effort. Rest of our services is as diverse as any in our industry.

Our Energy & Resources and Environmental Services business units, although somewhat reliant on the cyclical nature of the price of commodities, add value to our overall company by providing us the benefit of strong organic growth during recovery and growth periods, if you can manage the retraction appropriately when it occurs.

We believe we have demonstrated that we manage the business well over the past three years, and we are now seeing signs of the benefits of having an exposure to these businesses. Let's move on to our next slide for our 2017 outlook. Our outlook for 2017 is based on the expectations described in the 2016 annual report.

As of June 30, our geographic outlook hasn't changed materially from those described in that report. We expect to achieve a long-term annual compound gross revenue growth rate of 15%. That will come through a combination of acquisition growth and organic growth.

We anticipate continued economic improvements and Infrastructure spending in Canada and the United States. Continue to see spending in water and wastewater and strong spending growth in the U.S. Transportation sector. As we expected, we have seen a stabilization in our Energy & Resources and Environmental Services business units.

We also continue to see opportunities for alternative project delivery methods including P3s in Canada and design builds in the United States. Australia and New Zealand are beginning to see growth in their economies, which is providing us increased opportunities.

As you can see on Slide 15, which shows just a sample of our recent projects wins, our backlog is strong at $3.9 billion.

That backlog includes significant projects such as providing architectural and interior design for the new Calgary Cancer Center, a leading healthcare and academic facility with over 100 exam rooms, 160 patient beds and a variety of labs for cancer research.

It also includes a great construction project in California, a new expanded modern Bio-Solids Digester Facility in San Francisco to help that community to meet its improved sewerage systems service goals. We continue to seek out acquisitions targets that will enhance our business.

In April, we acquired Inventrix Engineering Inc., a mechanical engineering firm with 22 employees based in Seattle. Although this is a very small acquisition, it adds diversity to our growing buildings practice in the Pacific Northwest.

And at the end of July, we closed the acquisition of RNL, a design-based company -- a Denver-based company with about 130 employees with expertise in architecture, interior design, urban design, and landscaping. In addition to Denver, RNL has offices in Phoenix, Los Angeles, Washington, D.C. and Abu Dhabi.

RNL provides us with a top tier position in the Denver market, while adding significantly to our top tier presence in the civic and commercial sectors across North America. The U.S. stills represents a big opportunity for us as we continue to infill our presence there.

We're starting to identify targets in Australia, New Zealand and the UK, where we see plenty of opportunity in the range we like to look at, similar to the acquisition strategy that we executed in Canada and the United States over the past 25 years. Our acquisition and full integration strategy is one of the things that differentiates Stantec.

We merge our people, policies, practices, strategies and enterprise systems. Acquired companies really do become part of Stantec, it's full integration, not just adding pieces to the edges of the company. I'll wrap up with just a couple of comments about my retirement which was announced in June.

As we explained in the announcement, I'll be retiring effective December 31, 2017. Gord Johnston, currently our Executive Vice President for Infrastructure, will be Stantec's new President and Chief Executive Officer effective January 1, 2018.

Stantec's executive management and the Board of Directors have been working on this succession plan for the last 3 years. And Gord, a 30-year veteran of the industry and a 20-year veteran of Stantec, is working closely with me throughout the remainder of 2017. We're well prepared for a smooth transition.

Having worked with Gord since he started at Stantec, I look forward to seeing him lead the next stage of the company's growth and evolution. His understanding of Stantec's culture and strategy makes him a great choice for the company's fifth CEO. And I look forward to continuing at Stantec as a member of the Board of Directors.

We've reached the end of this morning's presentation. Thank you for taking the time to listen today. I'll now turn it over to the operator for our Q&A..

Thank you. [Operator Instructions] We will now take our first question from Chris Murray from AltaCorp Capital. Please go ahead your line is open..

Guys, just as we think forward into the back half of the year, can we talk a little bit about admin and marketing expenses and the pace that you think that those stabilize with MWH? And what we should be expecting on a go-forward basis?.

Yes, I think we'll expect to see in the third quarter our SG&A could be probably similar to where we are in the second quarter. Generally, those are busy months. Our biggest driver of increased cost is utilization expense and SG&A. We are through the bulk of the North America integration of MWH. So that's gone very well for us.

The global part of it will be lagging into 2018 as we really develop the tools and the systems to deal with the globalization of the company. So don't expect to see a material difference in Q3. Q4 is always a little bit weaker when it comes to utilization and really given the Thanksgiving holiday in the U.S. as well as Christmas.

So utilization will be a little lower, which means SG&A will be a little higher. But on an aggregate basis, we still expect to hit our targets for the year..

And then the other question I had, can you help explain the whole tax impact and the tax transaction? And I think what I'm really trying to understand here is what's the ultimate cash flow impact around this whole transaction? So basically what's the net cash proceeds from a transaction after tax payable?.

Well. But really the net cash proceeds, Chris, would have been the approximately $220 million that was used to pay down the credit facility. That was the net cash proceeds. We did have to pay taxes on the sale of Innovyze really because the tax basis and the accounting basis for that company is very different.

We really try to provide that additional information in the MD&A and notes and financial statements. But if you want more color on it, I can take you offline and walk you through every line of it. But, frankly, a lot of it was the cash basis or taxes was much higher than the accounting basis..

But the net number really when you get right down to it was $220 million?.

Exactly. We were required to pay that down on the credit..

Okay. Great. And if I can just one more quickly. Just, Bob, could you talk a little bit maybe about your thoughts around doing more international acquisitions in -- certainly, we're seeing the model working in Canada and the U.S.

Kind of were you thinking about when you might be ready to actually do this for systems and processes and some of the cultural challenges that you may be thinking about as you try to either acquire companies in those areas and some of the integration issues you may be thinking about at this point?.

That's a good point, Chris. It is similar strategy, similar is in perspective of the sizes of companies and the sectors we're looking at. But the process in doing that will have to be different. And I think that's what we're doing over the last 14 months is trying to figure out the cultural differences in those various geographies. How business is done.

What the -- essentially what the competitive position we can have in those areas. So we are taking our time, I think we will be in a position, hopefully in Q3, Q4, of maybe executing one or two of those. But that may also drag into 2018. Now we're not in a rush to do it. I think the first few, you have to do very carefully.

And we are right now working on those systems and getting essentially the platforms in UK and the platforms in Australia and New Zealand set so that when we do those acquisitions, we can merge them into those platforms. So that we've been working on for last 14 months.

Basically getting the platforms steady as well as examining what those arenas look like in the UK, Australia, New Zealand. So I would say in the next three quarters, I would expect us to be able to execute a couple of transactions in those areas..

But fair to think they'll be a -- like smaller that would -- smaller tuck-in type of acquisitions in the sort of core either buildings or infrastructure type areas or water perhaps? Is that the right way to think about it?.

Probably in the UK, I think, it's more of the environmental services and buildings' area. In Australia, New Zealand, a little bit wider diversity there. We can probably enter the transportation market as well, some community development opportunities.

Size wise, yes, you're talking about anywhere from $20 million to $50 million of revenue -- companies of that size, is historically what we feel we can acquire at a reasonable price and also integrate fully in a reasonable fashion.

But you've got to think when we have 800 people in Australia and New Zealand and acquiring a 200-person firm, it's a fairly significant acquisition in that specific region. So the strategy fits really well for us. And we think execute on it well..

Our next question comes from Sean Eastman from KeyBanc Capital Markets. Please go ahead. Your line is open..

And Bob, big congrats on your retirement. First question from me, just hoping to get a little bit more color on the MWH Global integration. Hoping you guys can discuss sort of the timeline as you see it now. And if you could compare the anticipated costs and sort of the distraction elements to the noise that we saw around the domestic integration.

It'll be helpful as we kind of just assess the cushion we should be building in for '18?.

You want to comment....

I'll let Dan, maybe, put some at least order of magnitude in number or give you an idea of the impacts. But I think as per the last caller, that's one of the things we were taking our time on. It's been 14 months, and we're now just starting finish the planning and starting to implement the integration of the -- some of the global operations.

We probably have learnt some of our lessons in doing the U.S. integration. And now we've learned from those, some of the hiccups there, not that they were difficult, it's just that those are always things you have to anticipate or try to anticipate when you're doing the integration, we've learnt from that.

And certainly, we'll build to that into our planning for the global part to try to minimize that impact. But there is no doubt that full integration will have some impact. My feeling is it's not going to be as significant as the U.S. one. There are probably just smaller groups that we're going to be moving [indiscernible] in.

So that's probably I think the issue we're going to do those in pieces. But, Dan could give you a quick overview of the strategy there..

There is numerous phases as you can imagine in an integration. There is the branding, there is policies, procedures, getting the people aligned and then the business systems. So that -- there's many phases in integration. And so there we are -- have been working through many of those things already, the IT continuity between the 2 companies.

We've got a lot of that platform built out already in terms of having people on the same network and the same systems. Most of the impacts that we see going forward are going to be more back office. We have people that will be managing, say, the globalization and localization of, say, Oracle in Australia, New Zealand, the U.K.

Our plan is to -- at least preliminarily right now is to move the Australia, New Zealand people over on to Oracle first, and then the U.K. second in 2018. So probably in the first to second quarter, we'll be ready to do that. But we have to build up.

If you recall a lot of our systems are built for North America, now we're building them out to globalize it. So that is -- that's the platform of Stantec for future growth. So we're investing in that today. And that will drive us into the feature next year.

But I don't expect to see a material impact on costs, maybe, a couple of million dollars here or there, but we'll certainly disclose that when we get there..

And then, I guess, when you look at MWH updated thoughts since the Analyst Day last summer. Interested in where you guys are at on the synergy targets versus initial expectations, particularly, the cost synergies. And you guys talked about a little bit about the lower occupancy costs this quarter.

And I'm wondering what kind of other levers you guys have to pull that could help drive that SG&A margin down towards the lower end of the target range over time?.

Again, I'll start and then pass it on to Dan to talk about the SG&A, but I think, from a perspective of the cost synergies, we solved that pretty quickly. And I think, we've stated we exceeded our expectations of those or what we thought we have achieved by the end of '17. We're well ahead of schedule there.

On the revenue, we're starting to see that build now. I mean, that takes some time to cross sell. Sometimes we have to actually display some current consultant that a client has, that's not easy to do.

But certainly -- well there were some low hanging fruit that we executed on and now, we're seeing some of the building teams together and winning some bigger projects. I think the construction site has certainly been a pleasant surprise for us. We've seen some good opportunities there. The construction business is doing very well.

And it's very strong and well run. So we haven't -- bottom line, we haven't seen any surprises in the MWH integration that we had not anticipated originally. And if there are any surprises, they've been very positive ones. So basically as expected, which is just great news for us. We just haven't seen anything that we could anticipate was there.

And certainly, are executing on all the synergies that we thought we could..

With respect to the range, I think that we do create a range because we do expect that there is some seasonality as I pointed out before. So I don't know, Sean, if you may get to lower end of the range in a particular quarter but on annual basis, we expect to be right in -- right within that 41% to 43%..

Just last quick one from me. Just -- it seems like you've got -- we've got some P3 Buildings projects, and some strong growth in construction really driving results right now.

I'm just wondering how you guys are managing around what seems to be, maybe, a bit higher level of execution risk?.

Well, I think the execution risk is always there whether it's Consulting or Construction. The larger projects you get into, certainly, they become more complex. But I think we have the right teams in place for that. We have been building the processes and those teams for a while in anticipation that we would be working on some of those bigger projects.

I think we have learned our lessons in the P3 and design build space from a consulting standpoint, how to work together with our partners. And now having a construction element, we can now leverage that synergy. And certainly, the construction business itself is a higher risk business.

But again, we feel it's extremely well run, and it manages their risk very well..

Our next question comes from Jacob Bout from CIBC..

The U.S. market politically quite volatile there right now.

You talk a bit about -- are you seeing any changes there as far as the tone? Or how the statement I suppose, or federal Infrastructure spend is being approached right now?.

Volatile is a good word for it, but I think it's volatile maybe at the political level. At the state-level and municipal level where we play the most, we haven't seen significant changes. If anything we've seen some stabilization, some optimism creep into the states, they feel that spending is coming from a federal levels.

So whenever they feel that there is going to be some resolution or some funding elements coming from the federal side, the state usually starts spending a little bit more, a little less conservatively. Let's put it that way. The municipal side as well for us, it's been strong.

So in one-word, I would say that optimism is increasing in the United States on a monthly basis right now. The volatility at the political level doesn't seem to be filtering down into the state and municipal level where we play..

And in the Canadian market place, have you seen -- is it more or less competitive there?.

It's competitive everywhere. I would say, it's attractive to a lot of more global players in the Canadian market. Very difficult for them to enter that local market, they -- where we see the competition, in Canada is on those P3 projects where you're having more of the international players, stepping into the marketplace.

But even then, those international players have to team up with a local team to really have any chance of winning projects. So to sum it up, I don't think that the competitive nature in Canada is really any different than the competitive nature in U.S. The U.S. has a lot of companies and lots of work. And the competition is there.

And Canada, a smaller market, and with more global players entering it. So competition is always there, you just got to offer better value proposition to your client..

I guess what I was getting at is we've heard from some of your peers that the Canadian marketplace as some of these international players become more focused on the U.S.

markets, as thing starts to improve there that the Canadian market has become a little less competitive?.

I'd like to say, yes, because it sounds logical that they're going to be moving into the U.S. market. But we really haven't seen it. There's still a lot of competition, especially, as I said at the P3 market in Canada. It's still an attractive marketplace for the international players. We're still seeing them here. Yes, the U.S. market's getting better.

But these are big players, they can play base both sides of the border. So I haven't seen any significant change..

Last question, just on divestitures. Anything that we should be thinking about on a go-forward basis.

Where is your thoughts right now as far as the MWH construction as well?.

We've said it a number of times. We have no interest to divest the construction business. It was core to what MWH was doing. And we have taken on that strategy and our goal is to execute better on that strategy. So we have no interest in any further divestitures..

Our next question comes from Benoit Poirier from Desjardins Capital Markets. Please go ahead your line is open..

You mentioned in some comments about the residential construction being soft in Canada.

So I was just wondering if you could mention a little bit of your exposure to residential construction in Canada?.

The most of that residential market is in our Community Development group, and that is centric in -- here in Alberta and in essentially the Ontario market. It has -- from a revenue generation perspective quarter-over-quarter, is where we see that softness.

I would say though in the last couple of months within this quarter, we've seen a lot more communication between ourselves and our clients. Our clients are feeling a little bit more positive. Our both markets are very well run. In other words, the clients are not overextending themselves where a slowdown is going to impact them.

They basically move the product onto the market in a very staged fashion. So they can react very quickly one way or the other to a changing marketplace. So we're actually seeing a lot of planning work going ahead now. We've seen a lot of optimism.

So that softness, although it existed in the first two quarters here, we see the potential for that turnaround in the last two quarters in the Canadian market..

That's good color. And when we look at Energy and Resources, Bob, I mean, still negative the retraction has improved.

But when would you expect to kind of reach the breakeven point or being able to show some positive momentum on this side?.

You've got to be careful not to overpromise and under deliver here. So it is a very still -- still very dependent upon what's happening in the overall global market and the price of oil.

But I think you're seeing it now with a lot of projects -- pipeline projects coming on stream that even without a significant change in oil prices, we're getting some projects moving forward. So we're starting to see some of that improve in the oil and gas sector. Mining is starting to improve.

And we're starting to see some project wins there, power, and Waterpower and Dams have been stable. So all the indicators are looking forward and all I can basically commit to at this point in time is the retraction will continue to get less. We will continue to improve as we move to the end of the year.

When you hit that trigger point is sort of a mathematical calculation of what you're comparing to last year or the previous year's quarter, to what our growth is. So that tipping point, I would have to say, is going to be in the next two or three quarters, Benoit. It's close to that tipping point that we're going to start some positive organic growth.

And that may come even without a significant change to commodity prices..

That's good color. And with respect to share buyback activity you've been active in the quarter.

So any thoughts about how active could you be in the second half given where we are right now and given your strong balance sheet?.

When we look at it as I said in the opening comments, Benoit, when we believe the share price is attractive for repurchasing. And we're doing it on an opportunistic basis. So it really depends on the share price, what happens to that over the coming quarter.

And we will be repurchasing if it hits a trigger that we have internally for returns for our shareholders..

Okay. And last one for me.

Just to be clear related to the previous comments on construction, So am I right to say that now you made a decision that the construction portion is now core at Stantec? Before, you were kind of mentioning that the decision would be postponed, you were studying that decision, but now should we assess that it's kind of core, Bob?.

Well core it's still a smaller part of our business. And I would say construction in the water business and in the water sector right now is an area that we're confident that we can leverage the construction portion that MWH has built and leveraged it well with the consulting.

So within that specific sector and in North America and in the UK, it fits very well with our business. To call it core probably wouldn't be fair, because it's in one sector and in two geographies. But certainly, the last thing we want to do is be indecisive with regards to what the focus is and what we're going to do. So I think that's clear.

In this quarter, we've made the decision that we feel that at this point in time, we can leverage that experience that they have in construction well. And it is part of our core strategy going forward in those sectors and in those geographies..

Our next question comes from Mona Nazir from Laurentian Bank. Please go ahead. Your line is open..

Bob, I just wanted say congrats on the legacy that you're leaving at Stantec. Firstly, just wanted to say, nice return to organic growth for the first time in 2 years. It's what everyone has kind of been waiting for. You touched on Buildings, Infrastructure and water organic growth, hitting the kind of mid-single-digit range.

Looking at Infrastructure spending programs and market trends, we're not seeing a heavy flow through spending as you alluded to and touched on.

I'm wondering, as you reach a certain size and scale, is any of the growth attributable to Stantec so the way in which you're doing things, your competitive advantage or the premium attached to your name? Or at this point is that largely macro market-driven growth? And on that, now that you've hit a pivot point, going back to a positive organic growth, can we expect that this could continue for the foreseeable future?.

But I think -- first off, I think, you're right. We really have not seen a significant flow through of funding that has accelerated or advanced an unusual amount of infrastructure projects in Canada. There has been an increased activity in the United States but I tend to also say that's [not] the result of any kind of increase in funding.

It's just maybe increased optimism. So there are opportunities, but we haven't seen a remarkable increase. So if our growth, therefore, is strong in what is a more or less stable market, the only answer is we're winning our share of projects and a little bit more than our share of projects.

You can attribute that to a lot of things, that's involved in strategy, but certainly, we're proud of the fact that we are winning projects and some major projects. So size does matter in some cases, especially in some of the P3s, expertise matters, the relationships with your clients.

All those things matter and your ability of winning projects and beating off the competition. So we are happy with our position in those 3 business operating units. Because there's opportunities, and we're winning our fair share, or increased share in those opportunities. That's all based on our strategies.

But I don't think there is one particular element you can call out that you can point to other than the fact that we've worked hard on that strategy over the last 2 years, and it's nice to finally see some positive organic growth, which we did tell everybody would eventually happen, we're happy it's happening now.

Whether it's going to continue at that rate, all that we can say is that we just got to continue win work and execute it well. We see no reasons why we can't do that. We don't see a very significant change in the marketplace that we're competing in at this point in time.

So we are hopeful that we can continue that single-digit organic growth especially in those 3 business operating units.

That answers that?.

That does answer the question very well. Secondly, I just wanted to touch on the margins, particularly on the energy side. And among peers, we're seeing some margin pressures persist within the energy segment. There's increased competition, pricing concessions, which even you've spoken about on past calls.

Your energy margin has actually increased looking at Q1 and Q2 combined. And in the MD&A, you state there is water, power and dam sector work that was brought in with MWH.

Can you speak about that specific margin profile? And as you continue with the MWH integration, any there any areas aside from just the synergies where you can have higher margins by eliminating some lower profitability work?.

Certainly, the Waterpower and Dams group is a great group to focus on, because the work that they do is extremely specialized. When they are bidding on some major projects and even the global ones, the competition is very small.

And when you have a highly complex projects, that are large with low competition or small competition that just drives up your ability of getting better margins. So certainly within the arena of our Energy & Resources group, our Waterpower and Dams group out of the 4 business lines within that, probably have the highest margins.

So that certainly has helped our overall Energy & Resources group's margins. But as I -- we've said all along that group, all 4 of those business lines manage their project very well.

They do have lower margins compared to something like Buildings or Committee Development that have, maybe, a little bit of luxury of having wider gross margins these people -- these groups do not. So they manage their projects very well. And in a strong economy or an improving economy that just gives them the ability of raising their margins.

So I think that's probably the reason we're seeing it.

Waterpower and Dams is -- was certainly a part of MWH that we're just now starting to see that it was a world-class expertise that was, I wouldn't say hidden within the group, but certainly, they're no water -- water treatment -- base wastewater treatment conveyance but certainly, the Waterpower and Dams as a group they acquired in 2001, the Harza group that is still very world-class in their capabilities for that, so that's certainly is something we're leveraging into other projects that they did not have the relationships where an example is using the Waterpower and Dams expertise with our client, TVA, Tennessee Valley Authority.

The projects are smaller, they're more levees and dams, but the expertise is very similar that given some opportunities where MWH didn't have a strong relationship with TVA; Stantec did, that's generating more income there. So definitely it's a group we're excited about..

[Operator Instructions] Our next question comes from Ben Cherniavsky from Raymond James..

Most of my questions have been asked. I guess just to follow up on some of the commentary about competitiveness and market bidding, etcetera.

Have you guys been pleased with the -- with your P3 batting average the kind of projects, your win rate? And how would you describe the level of competitiveness in that particular segment of the market?.

I would say at this point in time, we are now happy with our batting average in P3. So if you turn the clock back 12 months ago or 18 months ago, we were not happy with our P3 batting average. I think we've become much more focused in our approach on that.

We've said a number of times, you can have a great idea, but it really is going to integrate performance, but it's really going to be dependent upon the contractor and concessionaire bidding the project. Because that's going to win or lose it.

So we've been very focused on creating those great partnerships working with the right partners to win those projects. So we're -- we feel that, that has improved our batting average. We have focused very specifically on some healthcare projects in Canada. And that focus really started two years ago to win these projects now.

And that was very strong with a couple of significant wins on Ontario. So we are happy with it. But it is still a very competitive market, it is a comeback. Competition is driven all the way through all the concessionaires and contractors that are also bidding these projects very competitively.

So, therefore, the heightened requirement to execute those project well to be able to drive reasonable margin is going to continue in that marketplace. So as we -- so it's good business. It is large projects, but the marketplace should understand they are top projects, they are higher risk even for the consulting side of the business.

So got to execute well. And, therefore, better pick your projects carefully..

And maybe just on a broader note after nine years in the driver's seat, I suspect you had a lot of good discussions with Gord and will continue to work on that transition.

But could you share with us what some of the lessons learned, words of wisdom, whatever, however you want to describe it? One of those -- some of those top words of advice that you would pass onto Gord, as he takes over this position after the fairly eventful period that you've managed?.

I think the one thing that Stantec has always maintained through my transition with Tony and now my transition with Gord is just maintain that clear strategy. And ensure that you don't get seduced by what's going on around you and focus on that strategy and execute well on that strategy.

So I think that's something that I was -- I found out very quickly that a lot of things change in the marketplace, a lot of things happen around you, but focus on your strategy, focus on the execution of that strategy. And at the end, the result will always be positive for you.

So I think that, that's the one high-level point I'll pass on to Gord, we have -- Gord's been on our leadership team for a number of years, so he's really part of that strategy.

So it's really not a significant change really going forward, because the entire leadership team's been executing on a strategy that I see being very consistent going forward as well..

Our next question comes from Maxim Sytchev from National Bank Financial. Please go ahead your line is open..

Just a couple of very brief questions.

Dan, the impact of foreign exchange on backlog, do you have it handy by any chance?.

I don't have it handy, Max. I don't think it's going to be material though. I think our backlog stays fairly stable. So we're winning work essentially at the same pace what we were burning through. So I don't think it had a material impact, Max..

So you're comfortable with the backlog, how it's progressing.

You don't feel that you have to sort of, play catch up in certain segments to kind of make the numbers?.

No. Absolutely not. And I think, if -- on an overall basis, our backlog per full-time equivalent is actually growing. So both in the Consulting and in the Construction business. So essentially, the FX impact has been flat relative to backlog..

Okay. That's helpful. And then can you shed a bit more color on Buildings, obviously, material flip from negative to positive. What happened there? Just in terms of how when -- you were telegraphing that the ramp of some of the projects that you thought would come, I guess, came to fruition.

But anything to highlight specifically there? And how should we think about kind of Q3, Q4 in terms of momentum. Because last year, it was quite negative as well..

No, definitely, it was something that we messaged; we knew that we had won some projects. The projects are some of those P3 projects take a long time to ramp up. When they do get -- reach financial close and start being executed they ramp up very quickly. But there is a timing issue, so we did say it was a timing issue.

It was also the fact that the Middle East projects had declined and almost halted. We're starting to see some activity in those that we see up potentially, starting up, again, in Q3 and Q4. So really it was what we thought has come to fruition. It is project wins.

And those projects now being executed that increases revenue, requires you to hire staff and that would probably results in organic growth. So no real surprises. We were happy to see it ramp up this quickly. We thought that would extend into Q3, so we're happy to see it happen in Q2..

Great. And sorry, Bob, if I may just follow-up on your commentary in terms of the Middle East, is this the project that you had in hand that was pushed to the right? Or you see the overall activity level starting to pick up in the Middle East..

No, it is those projects that have been pushed to the right.

And for those projects that have been put on hold by some of the governments waiting for their economies to change a bit with the price of oil, not that there has been a significant change in oil price, but the longer those projects are put on hold the more likely they're going to be brought forward at some point in time..

Right.

Are they part of your backlog right now?.

No. Not for the day..

No. Once we do get the notice to proceed then we'll add them to backlog. But they're not in there today..

Okay. Excellent. And then another question I had just thinking about the M&A strategy kind of going back to maybe your roots of medium-sized transactions. What are the expectations of sellers right now in terms of multiples? Because when we look at platform transactions, in certain instances it's 10x of [each] EBITDA, if not higher.

What should we expect for the smaller, I don't want to call them tuck-ins, but still smaller M&A..

I'm glad you're not calling them tuck-ins because it sounds like that's kind of meaningless, but they are smaller. And definitely for those smaller ones, we're not seeing the same multiples, that's the first comment. And we're having to fight that battle when we're talking to some smaller firms. They see the public multiples of 10 times.

They do the simple math with their EBITDA. And we have to sit them down and explain, no, that's not reality. So we see those multiples as actually being relatively stable, still in that 5 times to 7 times range. Still the quality of what the EBITDA is, it's going to be a big significant matter.

But we do not see having to raise the values to 8 times to 9 times to 10 times to be able to close those smaller transactions. Hence why we're focused on that area..

[Operator Instructions] Our next question comes from Michael Tupholme from TD Securities. Please go ahead. Your line is open..

Bob, just a question on the IT software licensing investments. In the MD&A, you talked about those costs being up about $9 million year-to-date. I think you recall the amount that you talked about in Q1 was pretty similar to that number.

So was it really little actually running through Q2 in terms of your year-to-year gain or increase?.

I think -- I'll take that one, Michael. The year-over-year, it's about the same, you're right. And most of that impact was in Q1 as you renew your licenses in March, so a lot of [activity] too.

It is important to note though that we -- even we're going to get some synergies as we merge our IT systems for MWH, we do have some additional costs this year that we will be incurring this year. It's in our budget, it's in our forecast around IT, Infrastructure. We're building out a new data center. There is some operating costs there.

There is some capital expenditures. And at the same time, we're going through all the lease renewals for software. And what's happened in the industry is software is treated differently now in terms of capitalizing the FX. We have to expense it more quickly as more firms are going to Software as a Service.

So we are amortizing it over a shorter period of time. So that's why some of those software costs are going up..

And I think you mentioned earlier, just want to clarify, with respect to additional integration of MWH outside of the Americas region, you're expecting an additional couple million dollars of IT-related costs associated with that integration, is that correct? And what is the timing there?.

I don't know if it's just going to be IT cost, it's going to be probably more related to utilization costs as we train our staff on the new systems. A lot of our costs are internal. We have the teams that build out our systems internally. So we don't expect to have to hire a lot of external consultants to help us.

So the impact is really going to be related to utilization..

Okay. So I guess just having gone through all that just to sort of ramp up or summarize, I mean. If I look at this quarter, I think you mentioned earlier that the synergies were coming through, maybe, a little quicker than you expects in terms of the MWH synergies, cost synergies.

There wasn't any kind of a big IT -- increase in IT costs sequentially in this quarter.

So is this a fairly clean quarter when you look at the adjusted EBITDA margin performance to look at sort of how we should think about it going forward as well?.

I think that's a fair statement, Michael. It is a fairly clean quarter. Yes, we identified some pluses and minuses. The investment community made it clear that they wanted me to provide more color. Once I broke down all the details and went through it, there just wasn't that much that was creating a whole bunch of variance.

So I did provide the disclosures around those various items. But beyond that, it was a very clean quarter..

Okay.

Perfect and then just lastly, Dan, working cap -- changes in non-cash working capital in the back half of the year, how do we think about that? I guess it was fairly positive this quarter, maybe some of that was to do with Innovyze, but -- anyway for the back half how do you think about that?.

I don't -- I think you will see pretty good working capital in the third quarter. And, again, it tends to decline a little bit in the fourth quarter. So we will see a good cash generated from operations in the third quarter as we do more work for our clients and then slowdown in the winter months. So that will be a little bit of seasonality..

As there are no further questions from the queue, I'll now turn the call back to your host for any additional or closing remarks..

Thank you very much, and thanks, everyone, for your questions today, and thanks for joining us. That concludes our call. Thank you..

Thank you. That will conclude today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect..