Stantec - Q2 2023
August 10, 2023
Transcript
Operator (participant)
Welcome to Stantec's second quarter 2023 earnings results webcast and conference call. Leading the call today are Gord Johnston, President and Chief Executive Officer, and Theresa Jang, Executive Vice President and Chief Financial Officer. Stantec invites those dialing in to view the slide presentation, which is available in the investor section at stantec.com. Today's call is also webcast. Please be advised that if you have dialed in while also viewing the webcast, you should mute your computer as there is a delay between the call and the webcast. All information provided during this conference call is subject to the forward-looking statement qualifications set out on slide 2, detailed in Stantec's management's discussion and analysis, and incorporated in full for the purpose of today's call. Unless otherwise noted, dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded.
With that, I'm pleased to turn the call over to Mr. Gord Johnston. Please go ahead.
Gord Johnston (President and CEO)
Good morning, and thank you for joining us today. Stantec has delivered another quarter of strong performance. We continue to execute on our strategy and drive excellent results, with solid project execution across all areas of the business. We're delivering some of our highest organic growth rates ever, with market fundamentals and demand for our services as strong as I've ever seen them in my 35-year career. It's the expertise and commitment of our employees that drive Stantec's ability to capitalize on the favorable market environment. As we continue to lean into our core value of putting people first, I'm very pleased that our recent employee survey shows that Stantec's employee engagement continues to strengthen. Corresponding with this is the continued downward trend for voluntary turnover, which is settling back to normalized pre-pandemic levels.
Similar to the first quarter, Q2 was one of our busiest quarters ever for hiring, and we are now at over 28,000 employees strong. With a highly engaged workforce and robust outlook in our markets, I'm very excited about the second half of this year and beyond. I'd also like to make special mention of two other highlights from the quarter. On June 30th, we continued to execute on our growth strategy as we closed the acquisition of Environmental Systems Design, and I'd like to welcome our new colleagues to the Stantec team. ESD brings their expertise in mission-critical facilities and data center design to Stantec, deepening our strength in smart building engineering capabilities that support the workplace of the future and the emerging trends of decarbonization, building repositioning, and adaptive reuse.
Next, I want to say how proud I am of Stantec's continued recognition as one of the best corporate citizens in Canada. This stems from our commitment to doing what's right and continuously advancing our environmental, social, and governance practices. We've been recognized by Corporate Knights for the 14th time, being ranked first in the engineering and construction category and fifth overall for Canada's best 50 corporate citizens. Turning to our second quarter results, I'm very pleased to report that we've outperformed our expectations as we continued to capitalize on strong drivers while delivering disciplined project execution and operational efficiency. We grew our net revenue by 15% to $1.3 billion, with organic growth of 11%.
Our teams across the entire business continued to deliver significant value with solid double-digit growth in water, environmental services, and energy and resources, and high-single-digit growth in infrastructure and buildings. We've now grown organic net revenue in each of our regions and business operating units for six consecutive quarters. We also continued to drive solid margins, resulting in a 19% increase in adjusted EPS. On the strength of our performance to date and our expectations of continued favorable tailwinds, we've raised our guidance for net revenue and adjusted EPS for the year. Theresa will speak more about this a little later on in the presentation. Looking at the U.S., our teams delivered net revenue growth of 18% in the quarter, with 12% organic growth. We achieved organic growth in each business line.
Water, buildings, and energy and resources all delivered solid double-digit organic growth. Water was driven by projects related to advanced manufacturing, drought resilience planning, water security, and water reuse. We're also seeing a ramp-up of PFAS projects, supporting water utilities as they proactively work towards solutions to the upcoming U.S. EPA regulations. In buildings, organic growth was driven by strong demand in healthcare, industrial, and advanced manufacturing. Work in the commercial and science and technology subsectors also helped drive strong results in buildings. Our Energy and Resources business continues to see significant activity related to power transmission and reservoir and dam projects. Our U.S. business continues to perform extremely well. In Q2, Canada achieved 10% organic net revenue growth, with double-digit growth in environmental services, infrastructure, and water.
Environmental work accelerated for permitting and archaeological services to support energy midstream and transportation projects, while significant bridge and highway work in British Columbia and major roadworks in Alberta were the primary drivers for the growth in infrastructure. In water, growth was driven by major projects like the Iona Island Wastewater Treatment Plant in BC and the Basement Flooding Program in Toronto. Energy and resources continued to see growth, driven by work related to power transmission and distribution projects and renewable energy. Year-to-date, Canada has had higher growth than expected, and our teams have been able to capitalize on this dynamic. Our global operations also delivered another quarter of solid revenue growth. Net revenue increased 12%, with almost 11% from organic growth. Double-digit organic growth was achieved in water and energy and resources.
Our leading global water team continues to deliver significant value, supporting long-term framework agreements and investment in water infrastructure in the U.K., New Zealand, and Australia. Energy and resources increased their net revenue through work on the Coire Glas Pumped Storage project in the U.K., as well as through mining activities for copper and other metals in Latin America, which will support the energy transition. Now, I'll turn the call over to Theresa to review our financial results in more detail.
Theresa Jang (EVP and CFO)
Thank you, Gord. Good morning, everyone. As Gord mentioned, we did deliver another very solid quarter. In Q2, we grew gross revenue by 19% and net revenue by 15%, achieving $1.6 billion and $1.3 billion, respectively. Project margin increased 30 basis points to 54.3% and was up quarter-over-quarter in all of our business regions, demonstrating our strong project execution. In Q2, we again saw a material increase in our share price, and this drove a further upward revaluation in our long-term incentive plan, which amounted to $7.3 million of additional admin and marketing expense and 60 basis points of EBITDA margin.
Even with this headwind, adjusted EBITDA margin was 16.9% for the quarter, up 20 basis points from Q2 last year, and margin would have been 17.5% without this non-controllable expense. As we noted last quarter when this dynamic also occurred, our guidance targets for adjusted EBITDA margin excludes this LTIP revaluation impact. Either way you look at it, our EBITDA margin reflects our success in relentlessly driving operational efficiency. Our Q2 diluted EPS was $0.79, compared to $0.55 in Q2 last year, and adjusted diluted EPS increased 19% to $0.99, compared with $0.83 last year. Without the LTIP revaluation expense, adjusted diluted EPS would have been $1.04.
Looking at our liquidity and capital resources, our strong revenue growth and operating efficiencies led to positive operating cash flow of $68 million for the year to date, compared to $2 million from the same period last year. Recall that last year's operating cash flow was lower, driven primarily by the Cardinal Financial System integration. DSO at the end of June was 81 days, consistent with the last couple of quarters, and net debt to adjusted EBITDA was 1.8 times, up slightly from last quarter, mainly due to funding the Environmental Systems Design acquisition, which closed on June 30. I'll turn it back to Gord now.
Gord Johnston (President and CEO)
Thanks, Theresa. Our backlog grew to an all-time high of $6.6 billion in the second quarter, an increase of over 11% from December 2022. Backlog for each of our geographic regions has grown organically, and this has been most pronounced in the U.S. and Canada, both of which delivered 12% organic growth, coming predominantly from water, buildings, and environmental services. Backlog in water continues to increase, with wins around water security, wastewater treatment solutions, and water requirements for power generation to support the energy transition. AMP7 in the U.K. continues to see record levels of investment, and we are already securing backlog for AMP8. Buildings grew backlog through wins in almost all of their subsectors, particularly in healthcare and industrial. Buildings also benefits from the backlog brought in through the acquisition of ESD.
Environmental services backlog reflects additional project wins related to environmental assessments, including natural resource surveys, regulatory permitting, and environmental monitoring for construction projects. Our backlog represents approximately 13 months of work, remaining consistent with last quarter. Our major project wins in Q2 continue to follow the key trends of aging infrastructure, reshoring of domestic production, and climate change. Our water group continues to drive significant growth, being selected for a number of new projects, including The Queensway Sewer and Watermain Project in the Regional Municipality of Peel, Ontario, and the Apache Junction Water Reclamation Facility expansion in Arizona. Our infrastructure team was recently selected to provide engineering services for the steel repair and corrosion protective coating program for the Macdonald Bridge in Halifax, Nova Scotia. We're also selected for major design work for Deerfoot Trail in Calgary, which is the busiest freeway in Alberta.
Our energy and resources team continues to build on our success with yet another major pumped storage hydro project. Through our joint venture, Water2Wire, we were selected to provide the front-end engineering and design for the Pioneer-Burdekin Pumped Hydro Project in Queensland, Australia. At 5 GW, this is expected to be the largest pump storage project in the world. The energy transition continues to be a strong driver of growth. At the end of July, we were selected by Pattern Energy as the owner's engineer for the SunZia Transmission project. This project is part of one of the largest clean energy infrastructure initiatives in the U.S., and will deliver 3,000 megawatts of clean power to communities in the Southwest region. Although this is not receiving IRA funding, it's a great example of investment being made towards renewable energy, with or without government funding.
We've been engaged to provide advisory services in the development of proposals for the regional clean hydrogen hubs in the U.S. The Department of Energy expects to select approximately 10 hydrogen hubs, which will be allocated a combined total of up to $7 billion in IIJA funding. Hydrogen is expected to play a key role in the energy transition, and Stantec is well positioned to capture further opportunities here.
Theresa Jang (EVP and CFO)
Now turning to our outlook for the year. With a great start to the year and continued favorable market fundamentals, we remain confident in our ability to deliver another very strong year of financial performance. As such, we've revised several components of our outlook for the full year. We've raised our net revenue growth target for the year to 10%-13%, and now expect organic revenue growth to be in the high-single digits. In the U.S., we're raising our expectation for organic net revenue growth to be in the low double digits. This growth is being propelled by the continued imperative to solve water scarcity challenges, protect against severe weather events, and transition to a net zero future. We are starting to see government stimulus funding flow, and this is beginning to form in our backlog.
We expect continued opportunities to arise, with momentum increasing in the second half of this year and a ramp-up in revenues beginning next year. In Canada, we're raising our guidance to mid-single-digit organic growth. This is on the strength of our year-to-date performance and our confidence in sustained high levels of activity for the balance of this year. We do have very high comps to measure against from the second half of last year, so we anticipate our annual growth rate will moderate, but remain very robust nonetheless. In global, we continue to expect mid-to-high-single-digit organic net revenue growth for the year, with strong momentum driven by water and energy resources.
Our performance for the first half of this year, and confidence in our ability to maintain operational excellence, has led to narrowing the range of our target EBITDA margin to 16.3%-16.7%. We're raising our guidance for adjusted diluted EPS growth to 12%-15%, which results in a range of $3.50-$3.60 per share. Again, I would reiterate that our target ranges have effectively been normalized to exclude the revaluation of our share-based compensation, which is largely beyond our control. In other words, our target margin range should be thought of as being comparable to the 17.5% we achieved in Q2. Likewise, our target adjusted EPS range of $3.50-$3.60 would be comparable to our Q2 adjusted EPS of $1.04.
As Gord stated at the beginning of this call, we are very excited about the second half of this year and well beyond, and we believe that we have the right team in place to continue delivering superior results. With that, I'll turn the call back to the operator, and we'll take your questions.
Operator (participant)
Thank you. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Benoit Poirier with Desjardins. Your line is open.
Benoit Poirier (VP and Industrial Products Analyst)
Yes, good morning, everyone, and congratulations for the solid results, and very nice to see the strong fundamentals across the board. Just first question, with respect to the impact of the LTIPs, how should we be thinking about the potential for margin improvement beyond 2023? You've been calling out a new guidance of 16.3%-16.7%, and assuming 14.9% for the year, it looks like there's a 30 bits impact from the LTIPs from a full year basis. I'm just wondering, looking at 2024, if you should -- we should build on the middle of the range, so let's say 16.5% plus 30 bits of LTIPs, assuming no movement in the share price.
Just curious about the sensitivity for LTIPs related to the stock price and if there's some options to, to, to neutralize the impact?
Theresa Jang (EVP and CFO)
Sure. Well, there's a lot in that, Benoit, but I'll, I'll do my best to cover it all. I'll start with the, the end of your question, which was around, you know, the opportunity to mitigate some of that volatility. We have, in fact, hedged a portion of our long-term incentive. The numbers that we are reporting around the revaluation is already net of the effect of having some, some swaps on our, our performance share units or, sorry, our restricted share units. That is something that we are already doing. With respect to, you know, expectations for EBITDA margin growth beyond this year, you know, it's certainly our objective to continue driving operational efficiencies. I mean, you've seen in the last couple of years, how we have.
gradually, but, but sustainably raised our EBITDA margin. That really is to the credit of, of all of our workforce that has, has focused on this and really delivered on the various strategies that we have in place. It would be our goal to continue to execute on those strategies. You know that we are in the midst of developing our next three-year strategic plan. In that, we will roll out new EBITDA targets. Again, certainly we would expect that we'll continue to drive more margin enhancement in the coming years.
Benoit Poirier (VP and Industrial Products Analyst)
Okay. That's great color, Theresa. Just on the M&A front, you disclosed in the MD&A, a cash consideration of CAD 76 million for ESD, which looks higher than typical matrix based on price paid per employee. I was just wondering if there's anything else to better understand with either, with respect to the opportunities going forward, whether the valuation is higher than usual. Maybe if you could comment about the M&A environment and the opportunities you see these days for larger-sized deals. Thank you.
Gord Johnston (President and CEO)
Yeah. Yeah, great questions, Benoit. You know, the, we do find multiples vary based on the type of business that you're acquiring, based on their profitability and certainly based on size and so on. ESD was a very profitable firm, and the data center market that, that they are, you know, the mission-critical environment that they're in, is a very attractive market. Certainly, you've, you've, I'm sure you've read a lot in the papers lately about the, the tailwind supporting that for the next couple of years. You know, on a per head basis, you know, it might have, you know, penciled out to be a little higher, but also the, you know, the profitability for that firm was, was higher as well.
For the M&A market in general, we're, you know, we do find it to be very robust in different lines of business, really around the world. I'm spending a lot more time really focused on those discussions. We're, as we always are, in all sorts of levels of discussions, from initial conversations about cultural fit to, you know, anywhere in, in different parts through the process. You know, to your, your point on size, there's a number of, you know, three, five, 7,000 firms that are either on the market now or will be coming soon. You, you supplement that with, you know, with our sort of the, the typical 1,000 person and, and less, and I think we're moving into a, a pretty robust period for M&A activity.
Benoit Poirier (VP and Industrial Products Analyst)
Okay. That's, that's great color. Last one for me. Some of your engineering peers have reported that cash drag this year coming from the U.S. Section 174 tax law, which eliminates the option to deduct R&D expense in the year and requires to be amortized. Just given your elevated exposure to the U.S. region, are you seeing any negative cash impact from this?
Theresa Jang (EVP and CFO)
Yes, absolutely. That has been a factor, and there's a couple of pieces to that. You're right, given our, you know, our higher earnings there, will drive a higher, higher tax component. The other element around that is, and it becomes a bit technical, but even though the rules came into play in 2022, there was an opportunity to take what was called a safe harbor approach, which was to pay less than what you thought in the event that perhaps those regulations didn't actually come to pass. They, of course, did come to pass, and what we found then was we had to do a catch-up payment in Q2 of this year.
Just as an example, for the year-to-date, of 2023, we would have paid out in cash about $34 million under Section 174. Last year, for that same period, it was less than $8 million. It has had an impact for sure.
Benoit Poirier (VP and Industrial Products Analyst)
Okay. Thank you very much for the time, and congrats again.
Gord Johnston (President and CEO)
Thanks, Benoit.
Theresa Jang (EVP and CFO)
Thank you.
Operator (participant)
Our next question will come from Yuri Lynk with Canaccord Genuity. Your line is open.
Yuri Lynk (Managing Director)
Hey, good morning, Gordon, Theresa.
Gord Johnston (President and CEO)
Morning.
Yuri Lynk (Managing Director)
Yeah, I just wanna go back on the, on the EBITDA margin discussion. Is it fair to say that the momentum in, in the margin improvement is, is slowing a bit? I mean, it, it looks like, you did, you know, LTIP, you did about 16.6% in the, 16.4% in the first half, that implies 16.6% in H2. That would be, you know, about 20 bips lower than the back half of last year. I know the back half of last year was a bit wonky in some ways, is that just a tough comp, or are there additional costs creeping in, that would, be kind of slowing the momentum a bit?
Theresa Jang (EVP and CFO)
It's, it's a fair question, and I, I would say the answer is no. We don't see a slowing of momentum. It's something that we are very trained on, and seeing very good success. So there were certainly some things last year, in the last half of the year that were favorable to EBITDA that we would not necessarily expect to recur. We also had, you know, in the first half of this year, we made mention in our MD&A, you know, certain things that in the admin and marketing that were, you know, that were supportive and perhaps had the first half of this year, maybe, you know, a couple basis points higher than we would typically have seen in the first half of the year.
You know, we always say that, that the margin improvement, that we are driving, you know, is really intended to be sustainable, and, and we are continuing to see it grow. You know, I, I think we, we're very comfortable with, with the target and that beyond this year, we continue to, to push to grow it.
Yuri Lynk (Managing Director)
That's fair. Do you still expect Q2 and Q3 to drive 55%-60% of your net income?
Theresa Jang (EVP and CFO)
It is typically higher, slightly higher the second half of the year. I'm just doing math in my head, because typically we talk about Q2, Q3 being about 55%, and the shoulder quarters being 45%. I think that that still holds true. You know, we do typically see that the third quarter is generally our highest earning quarter, and then it moderates a bit in the fourth quarter.
Yuri Lynk (Managing Director)
Yeah. No, I was just asking 55, 60, because that was the, that was the guidance given at the beginning of the year, and I, I didn't see mention of it, so I just wanted to make sure it was still in effect. That's helpful. I'll, I'll turn it over.
Gord Johnston (President and CEO)
Thanks, Yuri.
Operator (participant)
Thank you. Our next question will come from Jacob Bout with CIBC. Your line is open.
Jacob Bout (Managing Director)
Good morning.
Gord Johnston (President and CEO)
Good morning. Actually, good afternoon. Theresa and I are in London today.
Jacob Bout (Managing Director)
Perfect. Good afternoon, then. Very positive commentary and guidance on organic growth. How do you think things play out in 2024? Do you expect the momentum to continue? Then, maybe just kind of a secondary question: you know, if we look across the industry, you know, most firms are raising guidance and what do you think has changed in the past 3 months to drive this?
Gord Johnston (President and CEO)
You know what? I do think as you look at forward... You know, we've talked about the sort of just these, you know, I mentioned the prepared remarks, like, in 35 years of doing this, we've never seen everything lined up the way that it is from an infrastructure perspective, the government funding. When you look at things like an IIJA, for example, you know, these things are always slower, of course, to take off than you think. You know, we're looking at once that ramps up, yeah, latter part of this year into next year, it's gonna continue, you know, up, up till 2028, 2029, that sort of a range. IRA gets going for the next several years. We're just seeing a lot of these, and that's just in, in the U.S., a lot of big drivers, other places as well.
It, it just really feels like there's robust support for, for Stantec, certainly, but for our overall industry. I think that's where you've seen, you know, some of our competitors rising, raising guidance as well, and everyone feeling pretty good about the next three to five years in our space.
Jacob Bout (Managing Director)
Okay. Just in Canada here, you guided to mid-single-digit growth for the remainder of the year, or for the full year, but implies that second half is going to be relatively muted. Is it just a level of conservatism there, or is there something we should be watching for?
Theresa Jang (EVP and CFO)
Yeah, I don't think it's a level of conservatism, because, again, as we said in our remarks, that the level of activity, you know, is going to remain very high in Canada. You know, certainly when we started the year, there was probably a bit of conservatism because we came in pretty strong, and it, it was just a question about how robust the Canadian economy could be and what it could, it could support.
Now, as, you know, as work is continuing, the, the couple of dynamics that we see, is that there, you know, there are some projects that are winding down, or, or have been winding down in the middle part of this year, and that as we begin the ramp-up of new projects, you know, of course, the revenue always takes a while to pick up on, on those larger projects. You know, again, you know, we, we point people to 2022, where in the second half of the year, Canada had, you know, 7.5 and 11, and 11.5% organic growth in Q3 and Q4. You know, the question is: Can Canada stack double-digit growth on top of what was already double-digit growth last year?
I would say that that feels very optimistic. Not impossible, but pretty optimistic. For us, you know, the, as, as we look at the level of activity and what we see coming, you know, the backlog is really strong. How the math works in terms of the actual growth rate, we think it will moderate a little bit.
Jacob Bout (Managing Director)
That's helpful. Thank you, Theresa and Gord.
Gord Johnston (President and CEO)
Great. Thanks, Jacob.
Operator (participant)
Thank you. We have a question from Frederic Bastien with Raymond James. Your line is open.
Frederic Bastien (Managing Director)
Hi there. I'm, 8 hours behind you. For me, it's, it is good morning. Apologize for that.
Gord Johnston (President and CEO)
Good morning!
Frederic Bastien (Managing Director)
To get a better understanding of where the, 11% organic growth coming from, obviously very good, but just, just curious if it's more weighted to higher- a higher employee count, increased utilization, pricing power, or a little bit of everything? Thank you.
Theresa Jang (EVP and CFO)
It's really a combination of, of all of those things. You know, we, we, we see just really, really strong market dynamics for us as, as we look forward, and continuing. I mean, I just finished saying that in Canada, you know, Canada stacked double-digit growth on top of what was double-digit growth at the end of last year, and probably unlikely, but in the U.S., it's absolutely doable, just given the amount of work that is flowing, what we're seeing in our backlog, et cetera. You know, we, we, we've grown, as Gord noted in his, in his comments. I mean, we, we had the highest, highest hiring quarter we've ever had in the second quarter.
Voluntary turnover is settling back to that sort of pre-pandemic level, where we have been leaders in maintaining our staff. It is a bit of all of those things that you mentioned.
Chris Murray (Managing Director)
Great, and given the positive momentum you, you have with hiring and the retention, you have no concern whatsoever as to your ability to handle all that growth that's coming in, correct?
Theresa Jang (EVP and CFO)
No. No, not at all.
Gord Johnston (President and CEO)
We're feeling pretty good about it, Frederick. In addition to that, you know, we're expanding our delivery center in Pune and, you know, and continuing to add resources really in all of our regions.
Chris Murray (Managing Director)
Cool. Great. Then since you offered it earlier, you are both in London. Any special reason why you're there?
Gord Johnston (President and CEO)
No, just as we, we move our, our board meetings around every, every couple of years, we like to take the board to a, you know, one of our, our office locations and working with them, we selected the U.K. this, this time around. We have our whole board here with us.
Chris Murray (Managing Director)
Great. All right, enjoy it. Thank you very much.
Gord Johnston (President and CEO)
Thank you.
Operator (participant)
Thank you. One moment for our next question. It comes from Devin Dodge with BMO Capital Markets. Your line is open.
Devin Dodge (Industrials Analyst)
Thanks. Good afternoon. I think this question would probably be for Theresa, but when I, when I look at the guidance framework you provided, and we kind of exclude that LTIP revaluation figures, it implies roughly even distribution of adjusted EBITDA between H1 and H2, despite when we look historically, I think H2 is accounted for, you know, a bit more than that 50% share of full year EBITDA. Just, can you provide any color for why the EBITDA contributions in the second half this year may be a bit lower, just compared to that seasonal pattern?
Theresa Jang (EVP and CFO)
Yeah. It's actually, when you, when you push through the math, the implied range for the second half of the year would be 16.2%-17%. It is, you know, more heavily weighted towards there being more upside in the second half of the year. It is, you know, the, a range that largely is somewhat dependent on, again, how quickly or how slowly some of these projects roll out of the U.S. as, as the biggest driver. We do expect that the second half EBITDA will, you know, will, will likely fall to be. Sorry, not fall, will likely be higher in the second half as it typically is.
Devin Dodge (Industrials Analyst)
Okay. Okay, it just seems like on, on a dollar basis, it's a little bit more evenly distributed, not so much on the margins. Anyway, we'll touch base maybe offline here. Just, if you're in the, in the U.K., maybe an apt question here, but there's been some reports in the media regarding some potential financial distress amongst some U.K. water utilities, I think Thames Water in particular. Just wondering, have you seen any change in behavior from your U.K. water clients in terms of pulling back on some work, and has Stantec adjusted how it manages its payables for these customers?
Gord Johnston (President and CEO)
Yeah, we, yeah, we, we actually. Firstly, we've seen no issues with payables for any of these customers. We also have seen no change in behavior from them. You know, these AMP programs are set, like, on a five-year cycle, and with a certain spend, then they're able to get certain results or certain rates and so on. No, we haven't seen any. They have to move forward with that work, so we haven't seen any change in behavior.
You know, what it's interesting as we're here, certainly and chatting with our folks, we've been providing water and wastewater services for, you know, London and Thames, the Thames Valley for, you know, almost 200 years with a you know, any way that, that, that the, the, the client is gonna organize, what their name might be, public, private, the water and wastewater services need to continue to be provided. The regulatory environment is strengthening here, not weakening. We don't regardless of how the things may shake out, we don't see any reduction in the amount of work that needs to be done in the U.K. water and wastewater industry going forward.
Devin Dodge (Industrials Analyst)
Okay, thanks. That's good color. I'll, I'll turn it over.
Gord Johnston (President and CEO)
Great. Thank you.
Operator (participant)
Thank you. Our next question will come from Chris Murray with ATB Capital Markets. Your line is open.
Chris Murray (Managing Director)
Yeah, good. I guess good afternoon, folks. Maybe, Gord, just turning back, you made some interesting comments about Canada, about the fact that, it's actually performing a little bit better, than expected. Just wondering if, you know, there's something external that's maybe contributed to that, any sort of new legislation or funding, or maybe it's resources. Just trying to understand where it is or if it's maybe more tied to project, you know, any sort of color on, on where this is at, and if there's anything that maybe, drives it more into 2024 as well.
Gord Johnston (President and CEO)
You know, we've seen a lot of work coming forward in our, in transportation. You know, we talked about some of the work that we've been doing in BC, you know, Deerfoot Trail coming in Calgary, a lot of opportunities in, in transportation and bridges and so on. A lot of work also in our ESD group. They're, they're supporting archaeological work, and permitting work, really across the Canada, a lot in BC right now. So it's, it's pretty widespread. Our, our water group, you know, we've talked about in previous quarters, some of the work that we're doing in Saskatchewan on the Buffalo Pound plant in Regina, some work in Ontario, in Barrie. Certainly the one of the largest capital programs for Metro Vancouver, the Iona project, where we're project program manager.
Whether it's water or transportation or environmental services, you know, the energy sector and some, some transition, energy transition type work, it's pretty broad-based, actually. It's, you know, the year has held up really well, and, and, you know, we're, we're, we're seeing, you know, still positive momentum going forward.
Chris Murray (Managing Director)
Okay. Well, that's helpful. Then, Theresa, just a quickly clean up question. I maybe I missed it. I think one of the, one of the folks asked, you know, what actually is the sensitivity based on, where you have the hedge position on the LTIP at this particular point? I guess, just kind of a second part of this question, you know, given the, the volatility and kind of the noise it's causing, is it fair to think that as you evaluate, maybe 2024, that we kind of change the presentation just to maybe get rid of this?
Theresa Jang (EVP and CFO)
Yeah, that's, it's a, it's a really good question. Let, let me answer that one first. We, we've given that a fair bit of consideration this year, and, you know, your share price always moves around, and the, to the extent that, you know, a portion of it's hedged as we've got it, it, it should have even less of an effect. We've just never seen, you know, this, rapid, movement in either direction of our share price in such a short period of time. So it's, it's particularly pronounced, and, and that's why we're calling it out. You know, would we change our, our EBITDA presentation? You know, as we considered it this year, it would have required that we went back and, and restated our, our prior comparative quarters.
Again, it, you know, like, we'd love to see the, the share price continue to rise at this rate. Whether that will happen or not remains to be seen. So to go back and kind of restate your, your adjusted numbers, we're not really sure if that's value added and really felt that it would be cleaner just to continue to report on a consistent basis, so you knew that's how we calculated it, and then call out this, you know, this, this one piece. You know, may expect that it would be a little bit more muted in terms of, of volatility as we, as we go forward.
In terms of sensitivity, it is, you know, it's very hard to model because our LTIP includes both the share price piece, but it's also heavily weighted towards our relative total shareholder return. In order to do that calculation, it gets run through a Monte Carlo simulation, which makes it really, like, quite difficult to predict. That's what makes it hard to kind of provide that kind of a sensitivity. That does make it difficult and kind of precludes me from being able to give you any kind of a rule of thumb on it.
Chris Murray (Managing Director)
Okay. Well, fair enough. All right, I'll leave it there. Thanks, folks.
Gord Johnston (President and CEO)
Thank you.
Operator (participant)
Thank you. Our next question will come from Michael Tupholme with TD Securities. Your line is open.
Michael Tupholme (Managing Director)
Thanks. With the demand environment, sounding like, sounding like it continues to be very healthy, wondering if you can comment on what you've been seeing in general terms, regarding price increases on new work in, in recent quarters, and, and how that would compare to the sorts of pricing gains you've seen over the last several years?
Gord Johnston (President and CEO)
You know, I, I do think with the overall market being very busy, the industry is very busy, that, you know, this is always a competitive market. We're all gonna always have some price competition, but I think we're seeing a little bit less competition on price and more, you know, clients are, are checking with their consultants: Can you get the work done? You know, do you have the people? Can you get it done with, with quality and in this time frame? Price is always important, but, but I do think, Michael, it's, it's less price sensitive than it, than it's historically been the last several years.
Michael Tupholme (Managing Director)
Okay. Thank you. That's helpful. Then secondly, Gord, you mentioned that this seems to be the first time in 35 years or so, where all sectors are really firing on all cylinders, which is great to hear. Doesn't sound like there are any areas of major sort of concern or risk, but is there anything that you, that you are watching, you know, as you look out potentially to next year? I know there's been some concern around the outlook for commercial buildings activity. Just curious if there's anything that you've keeping a closer eye on as far as potential changes to what you're seeing now.
Gord Johnston (President and CEO)
Yeah, well, you know, the, the one, the one area that we are keeping an eye on, and in fact, you know, we're here in the U.K., is on the, the private development work in the, in the U.K. You know, certainly there's been some softening of the economy here because of Brexit and high interest rates and, or, sorry, high inflation and so on. There's a huge backlog of, of housing here, but we're having trouble in the U.K. getting it through the permitting cycle and, and getting it built. We're, you know, we're watching our planning teams here, certainly looking for some weakness, and we've seen a, a bit of a slowdown. You know, again, here in the U.K., well over half of our revenue is generated in the water business, and we haven't seen any slowdown there.
you know, there, there's always areas, and it's a good question. That's one of the ones that we're looking at right now, is that planning and community development work here in the U.K..
Michael Tupholme (Managing Director)
Okay, perfect. Maybe just on, on commercial, real estate or commercial buildings activity. I mean, I think your, your buildings practice is fairly diversified, and there are other areas that have been performing well, but, but specifically on commercial, buildings, what, what are you seeing there right now?
Gord Johnston (President and CEO)
Yeah. That, you know, our Commercial Buildings segment is only about 4% of our overall corporate net revenue. You know, while we're not seeing a, a notable slowdown in the sector, there's always gonna be-- it's slowing a little bit. What's interesting for us, even within that Commercial segment that we have, again, 4% of our net revenue, we have a, a number of sub-sectors. We have multifamily residential. A lot of that is, you know, purpose-built residential units, and we're still seeing some of that coming. Certainly, it's a lot of discussion on that in Ontario, where you are these days, about how we can get more multifamily residential to help break the backlog of housing shortage.
... We also have in there retail and hospitality, but that's a pretty small subsector for us. You know, while we keep monitoring the sector, there's also in here repurposing industrial, underutilized office buildings. That's the type of work that we're doing. We've talked with, I think, in previous quarters about we call it adaptive reuse. You know, even within that 4%, there's some areas like that adaptive reuse that are still thriving, others that are a little bit slower. We're, you know, we're keeping an eye on it, but it's not really material to the overall success of the company.
Michael Tupholme (Managing Director)
All right. That's helpful. Thank you.
Theresa Jang (EVP and CFO)
Thank you.
Gord Johnston (President and CEO)
Thank you.
Operator (participant)
One moment for our next question. We have a question from Giles Thorne with Stifel. Your line is open.
Ian Giles (Analyst)
Morning, everyone.
Gord Johnston (President and CEO)
Morning.
Ian Giles (Analyst)
I was just curious, organic backlog growth year to date is 10%. You know, or net organic revenue growth looks like it's kind of mid to high-single digits in the back half of the year. Is there anything unique or changing happening with the conversion of backlog into revenue? i.e., if there are often lulls, are those getting a bit longer? It's just, I'm trying to tie out those two items, acknowledging they don't always work perfectly together.
Theresa Jang (EVP and CFO)
Yeah, I don't know that there's anything fundamentally that's changed, Ian. Certainly, you know, when we were talking to our business leaders, we are always asking about, you know, cancellations, delays, and we're not seeing or hearing any evidence of that by any significant measure. One of the things that we have a little bit of is, you know, as we get through that sort of contacting process and get the projects wrapped up, in the U.S. in particular, is that there are pockets where we're seeing projects slow-walk a little bit.
I think, you know, the, the team is very, you know, wants to really be clear that slow-walk does not mean delayed, does not mean canceled, but it's just, you know, the clients are taking a bit longer to turn things around, to approve things, to get things moving. I don't know that that's, you know, what you would be referring to in terms of what you're seeing converting into revenue, but that is a, a bit of a dynamic we're seeing. Other than that, you know, we're not really seeing or hearing anything, anything dramatically different.
Ian Giles (Analyst)
Okay. No, that's helpful. Then the other thing I wanted to ask about was employee utilization. It's come up on a number of calls and conversations. I'm just curious how you're feeling about your staff utilizations, how much room you have left to maybe increase those, and how close you are to effective full utilization of your staff.
Theresa Jang (EVP and CFO)
Yeah, and, and it, it currently varies amongst the groups. I would say in general, and this is what you're seeing in our results, that utilization is very high. And to the extent where, you know, for instance, in our water group, which is, you know, is very busy, there, there's a lot of sort of importing of talent from other geographies, even from some of our business lines, where there are, are potentially folks that can, can support projects in the water group. We are seeing that as well.
Again, you know, one of the things I've pointed out, in previous calls is where there is a bit of latency in our utilization does relate to our infrastructure group, where, you know, as we continue to, to hold out and wait for some of these IIJA projects to really ramp up and, and get rolling, we are not as fully utilized there yet, but, you know, want to make sure that we are, are managing our staff, and have them, available and ready to go when those projects do come on.
Ian Giles (Analyst)
Perfect. Thanks very much. I'll turn the call back over.
Theresa Jang (EVP and CFO)
Thank you.
Operator (participant)
Thank you. Our next question will come from Sabahat Khan with RBC. Your line is open.
Sabahat Khan (Managing Director)
Great. Thanks very much. Just a question on the outlook commentary. You've taken up the organic growth guidance for the U.S. and Canada. Just wondering if you could maybe share a bit of granularity around how we should think about end markets within the context of that guidance. You know, should we think the ones that you called out as having double-digit organic growth, do those continue for the back half in the same manner, or is it a bit more varied? Just trying to understand how we should think about it on an end market basis. Thanks.
Theresa Jang (EVP and CFO)
Yeah, it's a bit of both, actually. It sort of depends on the geography. You know, for instance, we've had very high levels of activity and high organic growth in Canada around, like, our water business and, you know, those projects that Gord mentioned, Iona, Barrie, those will continue to be very busy, and so we expect to see continued high growth there. Areas like our, you know, our mining practice, where perhaps things will slow down a little bit relative to the first half of this year. In the U.S., I think, you know, you're going to see continued strong growth, really across all sectors and global.
You know, again, we always talk about our water practice, and that should continue to show very good growth. It may be a bit of a bit of slowing in the land development, which as Gord described, and potentially, you know, being offset by growth in buildings. It is, it is a bit of a mix, but I would say that, that for the most part, you know, the by geography, in terms of the ranges we've provided, would be, you know, about the right way to think about where that growth is coming from.
Sabahat Khan (Managing Director)
Great. Then, just on the kind of the longer term outlook, I think two-part question. One, you know, your peers are calling out sort of a 26-28, 2026-2028 peak for the IIJA funding. Based on where you're sitting, do you sort of agree with that timeline, or what are you seeing? Then second part... You know, one of the questions that we're getting, given some of the organic numbers we've seen across the space, is, you know: What's kind of the momentum in the pipeline? How long does this sustain for? Just curious, based on your vantage point, you know, what is sort of the medium-term outlook for broader engineering demand from your perspective, given the funding that's in the pipeline?
Gord Johnston (President and CEO)
Yeah. Firstly, with regards to IIJA, yeah, I, I would agree with that. You know, the, the timeline ramping up, you know, through, through a little bit this year into 2024, peaking in that 2026 to 2028 period, or certainly being highly sustained during that period. I think, you know, it should be pretty, evenly distributed, so that's gonna be good long-term support. In terms of the, the organic growth, you know, we really do see, and, and, you know, as I'm talking with my industry CEO colleagues as well, sort of that three to five-year timeline of really solid supports for the overall business. I think we, we feel good about it this year, and we feel good about, you know, our organic growth prospects for the next several years.
Sabahat Khan (Managing Director)
All right, great. Just I guess on the market in U.K., that's probably where most of your European exposure is. You call it water is about halfway, but maybe a bit of color, you know, are there any ebbs and flows in the rest of your European presence or even in Europe, just given what's going on in the macro? Just curious, kind of, outside of water, how some of the end markets are doing there.
Gord Johnston (President and CEO)
Yeah. Outside of the U.K., we have operations in both Belgium and the Netherlands here. Belgium is primarily a, We do a lot of work there for the European Bank for Reconstruction and Development, a lot of the EU Commission and funding agencies. That work is continuing, and in fact, if anything, is ramping up a little bit as well. We're seeing a lot of energy transition work and policy work. That's the type of projects that we, that we undertake in Belgium. In the Netherlands, we do a lot of environmental work, GIS, in, in general, for underground utilities and so on. That work is also very busy, and our Netherlands operations, we feel very good about.
Here in the U.K., you know, in addition to the Water business, which we see very, very robust now, and as we move into AMP8, we're even looking for an increase in, you know, AMP8 spending over AMP7. You know, the actual quantum of that has not yet been determined, and so we hear different numbers, whether it's 15%, 25%, or more increase in AMP8 funding. You know, it's the other parts of the U.K. economy that we're watching closely. You know, we did mention that planning and housing development and so on, we're watching closely. We do some environmental work here that remains busy. We do some transportation work that remains busy. Good funding supports is there.
You know, buildings, is showing some, you know, some growth in global as well, both whether it's here in the U.K. with some of the work we're doing on some high-performance laboratories and so on, or certainly down in Australia and New Zealand, where we're seeing some growth there as well. You know, in general, we, we feel, we feel pretty good about things.
Sabahat Khan (Managing Director)
Maybe just one last quick one. You know, obviously, there's been some headlines around the water stuff in Europe, and there was a question earlier on the one of the utilities. I guess, what do you think the government response is to that over the next AMP cycle? Could it be a net positive that they have to spend more to fix things, or how do you think they sort of address AMP8, given some of those headlines around the utilities, either not keeping up their end of the bargain or some of the financial issues they're having? Thanks.
Gord Johnston (President and CEO)
Yeah, you know, we do see. You know, because of the regulatory environment, recall, last summer here in the U.K., there was a lot of water shortage issues. You've been reading a lot about sewage spills during overflow events. You've been reading about the bathing waters or, you know, the beaches and so on, being closed due to contamination. There's a lot of push here, both from society and from the regulators, to clean up and continue to drive forward with improvements of the water and wastewater systems. I think that's where we're seeing, you know, these projections of AMP8 being considerably higher than AMP7. I see that happening. A lot of that will be built into the water rates.
That's where a lot of that trade-off will come, is that certainly the society in general and the regulators wanna see this improved performance, but it, it comes at a, at a capital cost. How much can we build into the rate structure, you know, to drive that forward? I, I think that those are the trade-offs that we'll be seeing discussed here over the next, you know, year to 18 months as the AMP8 programs are being set.
Sabahat Khan (Managing Director)
Thanks very much.
Gord Johnston (President and CEO)
Great. Thanks, Alan.
Operator (participant)
Thank you. We have a question from Maxim Sytchev with National Bank Financial. Your line is open.
Maxim Sytchev (Managing Director)
Hi, good afternoon, Gordon and Theresa.
Gord Johnston (President and CEO)
Good afternoon.
Maxim Sytchev (Managing Director)
I just had a quick follow-up question in terms of the comment that Theresa made in relation to margin advancement, sort of on a prospective basis. And I guess it's a, it's a question for both, you know, Gordon and Theresa, so it's not just, you know, how we should be thinking about utilization rates and so forth, but it's more maybe potentially going after the right project so you can more effectively amortize your sort of marketing spend and all these things. Do you mind maybe going a little bit in, in, in, in that direction in terms of how you think some of the strength of the market is benefiting you from, from that perspective? I'm just, you know, curious to hear your thoughts on that. Thanks.
Gord Johnston (President and CEO)
Yeah, you know, absolutely, Max. So as we're in, in this environment where the industry is busy, we are busy, we're really focusing our marketing into business development spend on projects that will both generate a higher gross margin project type in general, but also on client selection. You know, some clients are better to work for than others. Others, you know, some will pay fairly for change orders that they wanna put forward. Others will, you know, try to get away from, from paying and aren't as fair in that. We're selecting, we're focusing on what clients that we'll select.
We're focusing on the projects, that, that we select in, in order to optimize that, you know, optimize both our marketing and business development spend, and then gross margin that we can generate for the projects that we assume.
Maxim Sytchev (Managing Director)
Theresa, I don't know, do you have any color maybe on your win rates, how those metrics have evolved over time, or it's hard to track specifically?
Gord Johnston (President and CEO)
We do track win rates, you know, Max, both by number of pursuits that we chase, as well as by the dollar value of those pursuits, so that you can get a feel for, are you winning the big ones or losing the big ones? We track that by geography. We track that by business line. We track that actually by marketing or account management leader, so that we can tell who's being effective in their spend and who isn't. Then who needs additional training, additional supports, and so on. We do track that. You know, it's not a piece of information that we disclose because it is so variable by type of work and geographies and so on. Know that certainly that is something that we track and review on a monthly basis.
Maxim Sytchev (Managing Director)
Okay. Okay, thank you so much. That's it for me. Great quarter.
Gord Johnston (President and CEO)
Thanks, Max.
Operator (participant)
Thank you. I'm showing no other questions in the queue. I'd like to turn the call back to Gord Johnston for closing remarks.
Gord Johnston (President and CEO)
Great. Well, only to say, you know, thanks again for, for joining us today. We are really pleased with our performance this quarter and, and with the solid backdrop that we see for the rest of the year. Hope you all have a great day, and, bye for now.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.