Stantec - Q2 2024
August 8, 2024
Transcript
Operator (participant)
Good day, and thank you for standing by. Welcome to Stantec's second quarter, 2024 results webcast and conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. 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 Investors 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 qualification set out on slide two, detailed in Stantec's management discussion and analysis, and incorporated in full for the purposes 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. Thank you for joining us today. Before jumping into our second quarter results, I want to express how proud I am that Stantec continues to be recognized for our leadership and sustainability. This past quarter, Corporate Knights ranked Stantec as number two in their 2024 Best 50 Canadian Corporate Citizens ranking. In addition, Stantec has been included in TIME magazine's list of the world's most sustainable companies of 2024. We are the top Canadian company on their list and ranked 14th overall. These accolades are a testament to our authentic approach to sustainability and to doing what is right. I'm very pleased with the strength of our second quarter results. Our revenue growth was excellent, and we continued to execute very successfully on our projects while driving strong operational performance across the business.
Many of the long-term macro trends we discussed in the roadmap of our strategic plan are building momentum, and we have continued to capitalize on their growth opportunities that they're creating. Our industry-leading water business continues to drive growth in critical areas like shoreline protection, wastewater treatment, water security, advanced manufacturing, and PFAS. In the U.K., our team continues to focus on bidding for AMP8 contracts. Stantec is well-placed with our clients. We've already been awarded a significant number of contracts and are awaiting decisions on several others. Themes of addressing aging infrastructure and climate change are very prominent in AMP8, with investment to be directed towards replacement of water mains, significantly reducing leaks and harm from storm overflows, and implementing nature-based solutions. We're the number one water firm in the U.K. and are extremely well-positioned for continued growth.
Increased funding for healthcare continues to drive growth for our buildings business, where we are a leader in this space. Our expertise in cancer care facilities is world-renowned, and we currently have 15 projects underway, including one in Dubai, six in the United States, and eight in Canada. Our buildings business is also a top five player in mission-critical and data center facilities, currently working with four of the top five hyperscale data center technology companies. Our infrastructure business is seeing enhanced activity related to aging infrastructure, particularly in the U.S., as funding continues to flow from IIJA, with over $460 billion now allocated to over 60,000 projects across the country. Innovation continues to be a key enabler in the execution of our strategy.
We're seeing a growing trend where our clients are seeking digital solutions that augment our technical expertise with emerging technologies like artificial intelligence. A great example of this is a recent win, where Stantec has been engaged to reimagine the monitoring of our client's sewer pipeline assets. Stantec will design AI machine learning models that can decipher CCTV footage to detect defects in real time, producing automated reports. This innovative approach is a stepping stone towards developing an intelligent system, considering salinity, infiltration, and order data across a vast geography. With a collaborative and innovative global workforce that includes civil design engineers and AI experts, Stantec is uniquely positioned to deliver AI-powered asset management systems that will revolutionize operations and allow our clients to provide more reliable and efficient services.
Looking at the specifics of our second quarter results, we achieved record net revenue for the quarter at CAD 1.5 billion, up almost 17% compared to Q2 2023, with 7% organic and 9% acquisition growth. We delivered solid organic growth in each of our key geographies. We had organic growth in each of our business operating units, with the exception of energy and resources. Our water and buildings businesses both realized double-digit organic growth.
In addition to the strong organic growth we achieved in the quarter, our recent acquisitions of ZETCON, Morrison Hershfield, and Hydrock are performing as expected, and we're busy working on their integration and supporting our 2,700 new colleagues as they transition into Stantec. Adjusted EBITDA for the quarter rose to CAD 247 million, up 14.5%, with a margin of 16.6%, positioning us well for delivering on our margin guidance for the full year. Overall, we delivered adjusted EPS of CAD 1.12, up 13% over Q2 last year. Our U.S. business continues to perform extremely well, delivering a 16% increase in net revenue for the second quarter, including 6% acquisition growth from ESD and Morrison Hershfield, and 9% organic growth.
Once again, all of our business operating units in the U.S. had solid organic growth. Our water business delivered double-digit organic growth with major industrial and water security projects. Infrastructure also achieved double-digit organic growth, with significant transit, rail, and roadway projects contributing to growing momentum. Our buildings business saw strong demand across most subsectors, particularly in healthcare, science and technology, and industrial. In Canada, we grew our net revenue by 16%, with 11% acquisition growth from Morrison Hershfield and 5% organic growth. Our water business had very robust double-digit organic growth as activity on major wastewater projects remained high. Buildings also drove double-digit organic growth through projects in the healthcare space in both British Columbia and Quebec. Energy and resources retracted slightly this quarter as a result of ongoing delays in the ramp-up of new projects.
However, we continue to grow our backlog and win MSAs, so we expect E&R to shift towards organic growth at the end of the year. Our global operations generated an increase of 19% in net revenue, with 14% coming from the ZETCON and Hydrock acquisitions and 6% from organic growth. Our global buildings, water, and environmental services businesses all achieved double-digit organic growth. Buildings organic growth reached almost 30%, driven primarily by the Cancer Center in Dubai and the ramp-up of work on the GBP 4 billion Agratas battery manufacturing facility in the U.K.. Water's organic growth was achieved across the U.K., New Zealand, and Australia through long-term framework agreements and public sector investments.
Our global infrastructure business saw a slight organic retraction, driven by the cancellation of certain infrastructure projects in Australia and New Zealand, and community development in the U.K., which continues to see muted levels of activity. Now, I'll turn the call over to Theresa to review our financial results in more detail.
Theresa B. Jang (EVP and CFO)
Thank you, Gord. Good morning, everyone. Once again, we delivered a very solid quarter of performance in Q2. We achieved record net revenue and enhanced project margin. Our gross revenue grew to almost CAD 1.9 billion, up 15% over Q2 2023, and net revenue of CAD 1.5 billion was up 17%. Project margin increased 10 basis points due to our continued discipline in project execution. We did see a slight decline of 30 basis points in our Adjusted EBITDA margin to 16.6%, which was primarily due to increased insurance claim provisions. Provisions for claims vary from year to year, largely as a result of changes in actuarial projections for our self-insurance programs. Claims provisions in Q2 last year were unusually low and returned to more historical levels in Q2 this year.
Adjusted diluted EPS in the quarter increased 13% to CAD 1.12, and I would note that we did not see a meaningful impact this quarter as it relates to our long-term incentive program revaluation. Turning to our liquidity and capital resources, in the first six months of the year, we generated very strong cash flows, achieving CAD 137 million in operating cash flow, double what it was in the comparative period last year. This reflects our ongoing focus on working capital management. This also resulted in a reduction in DSO, achieving 77 days, which continues to be below our target of 80 days. We closed the quarter with a net debt to Adjusted EBITDA ratio of 1.7 times, reflecting the Q2 funding for Hydrock. We remain well within our target range of 1-2x.
With that, I'll turn the call back to Gord.
Gord Johnston (President and CEO)
Thanks, Theresa. At the end of the second quarter, our backlog stood at $7.2 billion, its highest level ever. Since December 2023, this represents approximately 8% acquisition and 3% organic growth. We achieved organic growth across all of our regions and in all of our BOUs, with the exception of buildings. Energy and resources and environmental services both achieved double-digit organic growth. Wins for energy and resources include an award for preliminary engineering and consulting on a power project in Eastern Canada, and awards in the mining sector, supporting critical minerals in both Canada and global. Our environmental services team has secured a number of contracts that include regulatory services to support new power transmission in Canada and permitting for a data center campus in the U.S. Our backlog represents approximately 12 months' work. Turning now to major projects ordered in Q2.
In June, we announced the extension of our program management and technical engineering services for Pure Water San Diego. In addition to this, our water team, in a joint venture, has been awarded a five-year contract to provide services for DC Water. This initial contract for $43 million includes implementation of infrastructure upgrades across all drinking water assets. This program also includes development of Pure Water DC, which will provide resilient water supply through a water reuse approach. We also continue to work to win AMP8 frameworks in the UK and secured an engineering consultancy framework with Dŵr Cymru Welsh Water. Our buildings business will serve as a trusted advisor to a confidential Fortune 100 technology client.
Augmented by the expertise of ESD and Morrison Hershfield, the buildings team was recently selected to provide architectural and engineering design services for improvements at nine data center locations across five hyperscale campuses in the United States. And through our partnership with the Kitikmeot Inuit, our environmental services team has been engaged to help restart the environmental permitting and engineering for the Grays Bay Road and Port project in Northern Canada. The road will ultimately allow full access from Alberta to the Northwest Territories, to Nunavut, and to the first deepwater port in the Western Arctic, which ties to the Beaufort Sea. And now turning to our guidance. With our solid results year to date, we are reaffirming our overall 2024 financial targets and making some minor adjustments to certain measures.
We now expect to increase net revenue for the year in the range of 12%-15%, and we remain confident with our expectations of organic growth being in the mid to high single digits. Our outlook for the U.S. has not changed. We continue to see the ramp-up of funding from the IIJA, IRA, and the CHIPS and Science Act. Combined, over $560 billion has been allocated from these three bills, and the market remains very robust, supporting our expectation for mid to high single-digit organic growth. Our outlook for global also remains positive, with organic growth still projected to be in the mid to high single digits on the strength of ongoing demand in water and buildings.
There is expected to be a resurgence of community development in the U.K. in the second half of this year, as the new Labour government moves to fulfill its pledge to build 1.5 million new homes. Just last week, they announced an expert task force to spearhead the development of new large-scale communities. In Canada, we're maintaining our outlook for mid-single digit organic growth, given the strong backlog that we've built. We have raised our expectations for the net revenue growth from our recent acquisitions, which is now in the high single digits. We're in various stages of transitioning and integrating these firms. This increased level of concurrent activity will initially mute margin and earnings enhancements, but these benefits are fully expected once we've completed the work.
We've narrowed our target for Adjusted EBITDA margin for the year to 16.5%-16.9%. Finally, we continue to expect our adjusted diluted EPS growth to be in the range of 12%-16%. 2024 is shaping up to be another excellent year for Stantec as we continue to execute on our three-year strategic plan. Before wrapping up today, I'd like to welcome Vito Culmone. Vito joined us on July fifteenth as Executive Vice President, and he is already deeply engaged with Theresa and team. Vito will assume the Chief Financial Officer role on September third. Vito brings a wealth of experience as an accomplished financial leader across multiple industries and will be instrumental as we continue to drive the successful execution of our strategic plan.
As this will be Theresa's last quarterly conference call, I also want to thank her once again for her tremendous work and dedication to Stantec. Her exceptional leadership and knowledge has left Stantec with a world-class finance team and in a very solid financial position. Theresa will continue to work with us until September 27th, ensuring a smooth transition with Vito. We will miss her, and we wish her all the best in her retirement. And with that, I'll turn the call back to the operator for questions. Operator?
Operator (participant)
Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw a question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Sabahat Khan with RBC Capital Markets. Your line is now open.
Sabahat Khan (Managing Director)
Okay, great. Thanks, and good morning. Before I get going, just Theresa, I wanted to just acknowledge the significant impact you've had here, and wish you all the best with the next chapter.
Gord Johnston (President and CEO)
Thank you, Saba.
Sabahat Khan (Managing Director)
I guess just on the kind of the capital allocation side, if we think about M&A, I know you've done a number of transactions to start the year. Can you maybe just talk about the pipeline there and just more specifically, you know, the likelihood of a larger transaction as you do have a bit of a management transition here and you've already done some M&A, just some thoughts on that?
Gord Johnston (President and CEO)
Yeah. So, you know, firstly, you know, as, as we look at, at the, the dry powder that we've got left, you know, you heard Theresa talk about where we are in our, you know, from a leverage perspective, we feel, we feel really confident that we can continue to move forward, and we are not pausing our M&A, you know, the search and, and the ongoing discussions in any way. So, you know, we're, we're in different levels of discussion with, with companies really around the world. The pipeline is, is really full right now, and there's, you know, there's some, again, in that 500 to 1,000 to 2,000 person range, but there's also some larger ones, that we're in the midst of discussions with as well.
So, you know, when these would come to bear, you know, we'll, you know, they'll be sort of the timing will be what it'll be. But there absolutely, Saba, is no change in our M&A philosophy with our change in CFO from Teresa to Vito. You know, we're very, very aligned on, you know, continuing with our growth philosophy.
Sabahat Khan (Managing Director)
... Okay, great. And then just as we kind of look ahead here to the back half of the year, if you can maybe just talk about kind of the, the trajectory of the, the margin progression here and the sort of margin that might be baked into your backlog here at this point? Thank you.
Theresa B. Jang (EVP and CFO)
Sure. So, you know, as we, as we, get two, three underway here, it generally is, you know, our, our strongest quarter from a, a margin standpoint historically. And, you know, we don't think that will be any different this year. So the back half, I think, is, is going to be solid. And, you know, we, we expect that, you know, the, that range that we've put out in our, in our outlook, is, is very achievable.
Sabahat Khan (Managing Director)
Great. And then just one last one. Just based on the, the discussions you're having with your customers, particularly on the private side, you know, what are you hearing from them? Has there been any change in the tone, just given where the macro is, just kind of the, the feedback you're hearing from kind of non-public clients? Thanks.
Gord Johnston (President and CEO)
Yeah. You know, certainly, as consistent with where we've been in previous quarters, you know, the commercial subsector is still slower. But, some of our main buildings client bases, healthcare, and so on, you know, you've seen, you know, in Q2 of this year, you know, buildings had over 13% organic growth. So, you know, when people often ask about the building subsector in particular, but, you know, in buildings, one of the differentiator from Stantec over other firms is that we have a much larger, you know, public sector perspective there. So all the healthcare and a lot of the work that we're doing there shows up very strong.
But, no, we're not really seeing a lot of softening in the approach from our private sector clients really around the world. A little bit, we were seeing it historically, and then we commented on in the community development or the land develop business in the UK. But yet with the change in the government there to the new labor government, their commitment to build 1.5 million new homes, their appointment of the expert task force, you know, we do see that home building should kick off and get restarted here in the second half of this year.
Sabahat Khan (Managing Director)
Great. Thanks very much.
Gord Johnston (President and CEO)
Thanks, Ella.
Operator (participant)
Thank you. Our next question comes from Devin Dodge with BMO Capital Markets. Your line is now open.
Devin Dodge (Industrial Analyst)
All right. Thanks, good morning. I'm gonna start with a question on the U.S. Just wondering if you could provide some context around the organic backlog development there. It just appears that the backlog has moderated sequentially on an organic basis, I think, in three of the last four quarters. And I'm just trying to get a sense if there's any implications to that growth outlook from that.
Gord Johnston (President and CEO)
Yeah, we don't see that at all, Devin. You know, where the pipeline of opportunities is still very, very strong. I think the one thing that we're seeing in the U.S. is we've had such high organic growth there, you know, 8.7% in Q2, but, you know, 10% or 12%, you know, really going back over the last number of quarters. So we are filling the pipeline with new work. We're just because the organic growth is so high, we're consuming it as well. But there's a lot of the new work that we're seeing there is just timing issues in terms of when we get it in the contract, when we actually sign it and contract it and put it in the backlog.
But we don't see a delay in those, in those contracts being awarded, so it's just a timing issue. We're really not concerned about the U.S. backlog.
Devin Dodge (Industrial Analyst)
Okay. Okay, thanks for that. And then, can you provide an update on the real estate optimization strategy? I believe there was a lease impairment charge taken in Q2 related to this. I'm just looking to get a sense for what opportunities you have identified over and above that initial program from a few years ago.
Theresa B. Jang (EVP and CFO)
Sure. So, you might recall, Devin, that when we rolled out our strategic plan in December for the next 3 years, that we set a new target for ourselves to reduce a further 10% of our real estate from the 2023 baseline. And, you know, we estimate about CAD 0.10 per share over that 3-year period. So we are well on our way, and you're right, that lease impairment that we took this quarter is related to that effort. So, we are well on track to reach that CAD 0.10 per share over the next 3 years.
Devin Dodge (Industrial Analyst)
Okay. Sounds good. Okay, and just before I turn it over, I just wanted to thank Theresa for all your help over the last five years. Congrats on the retirement, and if Vito's in the background there, good luck in his new role.
Theresa B. Jang (EVP and CFO)
Thanks very much.
Operator (participant)
Thank you. Our next question comes from Yuri Lynk with Canaccord Genuity. Your line is now open.
Yuri Lynk (Equity Research Analyst)
Hey, good morning.
Gord Johnston (President and CEO)
Morning, Yuri.
Yuri Lynk (Equity Research Analyst)
Morning. I'll echo the sentiments to Theresa and Vito. Just wondering about, you mentioned in the MD&A about claim provisions kind of reverting back to normal. Were those lower provisions in play in the back half of 2023, or was it just Q2? Because, I'm looking at the Q3 EBIT, EBITDA margin from last year is quite strong and just wondering if we probably see a bit of a retraction there and maybe a little bump in Q4 as we think about the back half of the year.
Theresa B. Jang (EVP and CFO)
Yeah. So it was actually, it was in Q2 of last year that we saw the benefit of that lower provision in our results. And so it-- You know, the timing typically around this time of year, where we get those updated actuarial forecasts. And so I think last year, if you'll recall, too, that there was you know, there was a bit of noise. Q2 last year was the first time that we had that sort of outsized revaluation from our LTIP, and there were a lot of moving parts, but that lower provision was a part of it.
Yuri Lynk (Equity Research Analyst)
... Okay, and was there something in Q3 of last year? I know I'm testing your memory, but it was a very strong EBITDA margin.
Theresa B. Jang (EVP and CFO)
Yeah, and we did see some of that provision benefit continue on through the rest of last year, but the biggest piece of it would've been in Q2. Last year, you know, we had an exceptional Q3. You know, we'll whether we can deliver the same level of margins this year remains to be seen. But yeah, it was. Last year was a very, very strong quarter.
Yuri Lynk (Equity Research Analyst)
Okay. Just to follow up, Gord, to U.S. backlog, are you seeing any delays in kind of award activity from your pipeline due to maybe the election or anything else out there?
Gord Johnston (President and CEO)
Yeah, we're really not, Yuri. You know, at the beginning of the year, when we spent a lot of time thinking about would we see either project awards or proposal activity slow because of it? Or would we see clients pulling things ahead to try and get them out and awarded prior to the election? But we're really seeing neither. You know, we're just sort of steady as she goes type of an approach there from our clients.
Yuri Lynk (Equity Research Analyst)
Okay. Good to hear. I'll, I'll turn it over there. Thank you.
Gord Johnston (President and CEO)
Thanks.
Operator (participant)
Thank you. Our next question comes from Jacob Bout with CIBC. Your line is now open.
Jacob Bout (Managing Director)
Good morning, and maybe to start, Theresa, just wishing you the best in retirement.
Theresa B. Jang (EVP and CFO)
Thanks very much.
Jacob Bout (Managing Director)
Maybe I'll just go back to the EBITDA margin guidance. And you narrowed full year, and you called out, you know, the margin and earnings enhancement from the three recent acquisitions that will be muted. And just, I guess, I had a few questions around that. You know, this period of transition and integration, you know, how long will that be? And maybe just talk through, you know, how different are the EBITDA margins for recent acquisitions versus the company overall?
Theresa B. Jang (EVP and CFO)
Yeah. So I'll try and address all of those pieces, Jacob. You know, the integrations are all underway, and they're all at various stages, I would say. You know, the Morrison Hershfield is we are moving now to financial migration, that should, you know, occur over the second half of this year. Hydrock, we'll wait until the spring. ZETCON, we're really at this point evaluating. We hadn't intended to bring it onto our back office system, just because it is more of a standalone business at this point.
But having said that, there are, you know, there are elements of ZETCON that are unique in terms of language difference, for starters, and accounting methodology that is German GAAP. And so, you know, it takes some time to kind of work our way through and convert their results into IFRS, and so that again is kind of unique to ZETCON. So, you know, I think as we get through the back half of this year, and perhaps through the first half of next year, things will start to normalize.
But it is, you know, it's different, having, as Gord mentioned in his comments, the three concurrent acquisitions that we are transitioning is different from doing one large, you know, 2,700-firm acquisition. Cardno, if you think about that, was, you know, one firm that was on one back office system that we converted. This is, again, three unique and different firms. So we're taking our time. We wanna make sure that the folks that we have brought over are feeling good about being a part of Stantec and learning their way around, and learning our processes and so on. And so that, you know, that is completely expected for us, that margins, you know, that you wouldn't see a pop in right away.
As far as the margin profile, so they're all very similar to Stantec in terms of the lines of business that we have. So there's really nothing there that would cause us to think that there will be a margin, you know, retraction as a result of having acquired them.
Jacob Bout (Managing Director)
Given the improvement that you've seen in your margins, there hasn't been a gap that's opened up between, you know, some of these smaller acquisitions and yourself then over time?
Theresa B. Jang (EVP and CFO)
No, I don't, I don't think so. And again, it, you know, sort of goes back if you think about it from a project margin standpoint, they're all, you know, fairly typical relative to their lines of business. So, you know, we always talk about transportation having slightly lower margins than typically, you know, public projects. You know, some of the construction management project program management work that ZETCON does tends to be higher margin. So it's fairly typical. You know, we generally say as well that there's not, you know, a significant amount of cost synergies from these acquisitions because it's really the growth in revenues collectively with them that we're in pursuit of.
Jacob Bout (Managing Director)
Okay. And last question here, just on pricing: Does the demand environment still support the ability to charge higher fees, or is this starting to change?
Gord Johnston (President and CEO)
No, we're still seeing that as a general industry trend, that there's, you know, us and the our competitor set is still very, very busy. Backlogs are high, and so yeah, we still see that, we don't get a lot of pressure on prices. Again, you know, it's still a very competitive industry, without question, but the first question that clients ask us isn't, you know, "How cheaply can you do it?" The first question at this point still remains: "Can you get it done within the timeframe that I need it?" So, we still have that pricing tailwinds.
Sean Jack (Associate Analyst Equity Research)
... Okay, helpful. Thank you.
Gord Johnston (President and CEO)
Great. Thanks, Jacob.
Operator (participant)
Thank you. Our next question comes from Chris Murray with ATB Capital Markets. Your line is now open.
Chris Murray (Managing Director)
Yeah, thanks, folks. Good morning, and Theresa, congratulations on your retirement, and hope it, hope it ends up well for you. I guess the first question, maybe just turning back to the U.S., and Gord, you made the comment that you're not seeing anything too much around the election. But just was wondering if you could help maybe understand, you know, with the ABI metrics being sub 50 for the last little while, it doesn't seem like you guys are seeing much of an impact, which is maybe a bit surprising. And I'm just wondering if that's more of the mix of business or if it's special projects that that maybe is helping you out there?
Gord Johnston (President and CEO)
Yeah. So, you know, interestingly, the, you know, U.S. in general, you know, we see-- you know, we'll often get asked, you know, what do we see we might see with, you know, if there were to be an administration change there. But, you know, just looking at the big picture at the U.S., you know, infrastructure really continues to have bipartisan support there. So when you look at the IIJA, where, you know, about a third of it has been awarded and Congress has till the end of 2026 to encumber the remaining. So, you know, we see that providing, you know, significant longer term tailwinds. Already some discussions about, you know, what might IIJA 2.0 look like. You know, semiconductors are busy, data centers, mission-critical facilities, PFAS is starting to come on, so kind of that broad-based support there.
So we, you know, we still see that regardless of whether, you know, there is a change in who's in the White House in November, we see that our business will continue to be very, very strong going forward. But, you know, to your point about building specifically with the, you know, the decrease in and you know some of the concerns with the ABI. You know, we've seen that, you know, commercial certainly has been slow, but it's been slow for a couple of years now. But healthcare is very, very strong for us. Mission-critical facilities are very strong. So we see those tailwinds continuing, you know, going forward.
Okay. Interesting. And then just turning back maybe to your energy and resources business. A lot of the wins it sounds like are in things like grid and resiliency. But there's been a number of announcements from a lot of companies around oil and gas and, you know, what I call traditionally kind of your backyard, kinda, kind of in, you know, LNG and things like that. Just wondering, you know, what's your opportunity pipeline looking like more in the m- in the traditional kind of oil and gas energy business these days?
Theresa B. Jang (EVP and CFO)
So I'd say, Chris, that as far as the more traditional oil and gas work, it's still relatively muted. And I don't know that, you know, that it will ever approach what it was, you know, a decade ago. But you're right, that work really is shifting toward transmission, power generation, power transmission. The hardening of the grid is a high priority in many geographies. We've seen a lot of growth for the National Grid in the U.K., for instance. We've announced the work that we've won under MSA with BC Hydro. So that's really where we're seeing the growth.
You know, renewables are a bit muted at the moment, just given, you know, the regulatory requirements and so on are still pretty onerous. And I think, you know, proponents are still trying to figure out how to make those projects economic. So, you know, I think the other piece of that does sit around our mining work, which again, is a smaller part of our overall business. But I do think that, you know, as we sort through, you know, the fluctuations in commodity prices, but longer term, that is gonna be a business that will continue to grow.
Chris Murray (Managing Director)
Okay. Thank you very much. Appreciate the call.
Gord Johnston (President and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Sean Jack with Raymond James Limited. Your line is now open.
Sean Jack (Associate Analyst Equity Research)
Hey, good morning, guys. Just a quick one from me. Looking at the five different business operating units and from an M&A perspective, wondering where the firm is seeing the best value right now for potential new targets?
Gord Johnston (President and CEO)
You know, we have considerable strength in each of our five BOUs, so we're actively engaged in discussions really in all of those BOUs. You know, we're continuing to look at some opportunities in Canada, but even more so in the United States. You know, our geographies really haven't changed from where we're looking, Sean. Certainly in the United States, still into the U.K., Northern Europe, you know, down in Australia, New Zealand, to a degree as well. So we, you know, we see the geographic M&A pipeline is very robust as well, really through all of our BOUs. And so there's not one that we're preferentially looking at at the time. We're just sort of looking at all the opportunities are there and maintaining those discussions set.
Sean Jack (Associate Analyst Equity Research)
Okay, perfect. That's all from me, guys. Thanks.
Gord Johnston (President and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Benoit Poirier with Desjardins. The line is now open.
Benoit Poirier (VP and Industrial Product Analyst)
Yeah, good morning, everyone, and welcome to the team, Vito, and all the best to you, Theresa.
Theresa B. Jang (EVP and CFO)
Thank you.
Benoit Poirier (VP and Industrial Product Analyst)
Yeah. Just obviously, strong organic growth overall, but we've seen some retraction for energy and resources due to some delays in the ramp up of new projects. So could you provide more color about how many projects are part of this announcement, and whether it's a matter of just one quarter and when the ramp up of these projects is pushed out?
Theresa B. Jang (EVP and CFO)
... Yeah, so we've, you know, we've seen this delay for a couple of quarters now, and also just the wind down of some other larger projects that we had last year. You know, some of these projects, you know, the BC Hydro project that I referenced earlier, for instance, is something that, you know, we've been waiting on for a while to get going, and we're starting to see that now.
So, you know, that's just a good example where, you know, we have—we've won the work, it's in our backlog, you know, we've, we've got people sort of standing by and ready to go, and we just need, you know, as we work with our client, to get the project up and running, so that we have our staff on, just working at a steady state. So, you know, we're also seeing in the mining sector, and, you know, that, that's gonna take a little while to sort through. And again, a lot of that is, you know, regulatory. Some of it is driven by, you know, outlooks for commodity prices and so on.
But, you know, good contracts that we've got in the backlog that as we wait for our clients to get them going has caused a bit of that retraction in the first half of this year.
Benoit Poirier (VP and Industrial Product Analyst)
Okay. And just curious, is it what would drove the, what drove the lower gross margin in Canada, despite the overall solid organic growth, achieved for the region? Would, would that be the, exposure to energy and resources?
Theresa B. Jang (EVP and CFO)
Not so much, Benoit. We, we came off in Canada, we had a couple of projects, particularly in, in environmental services, that were very high margin and really big projects. And so that included, you know, some of the, the coastal gas work, working for, Metrolinx in Ontario. And that work has wound down. And so, you know, that's what you're seeing in the project margins. It is more reflective of just the overall mix, that we have this year versus last.
Benoit Poirier (VP and Industrial Product Analyst)
Okay. Looking at the global region, you were able to achieve 5.5% organic growth, which is pretty solid. You mentioned the strong performance from building in Dubai, a double-digit growth in water and environmental services. I was just curious to see if you could provide more color, maybe on some other regions that are lagging or that needs to be maybe a little bit more monitored these days.
Gord Johnston (President and CEO)
Yeah, so, you know, one area in particular that we're monitoring right now, Benoit, is Australia, and particularly on the transportation side. You know, I think we, we've chatted previous quarters that, you know, the federal government in Australia launched their federal infrastructure review. As a result, you know, canceled about 20% of, or deferred about 20% of the projects that they were planning to move forward with. So we've seen that, you know, certainly that's impacted Stantec's transportation business in Australia, as well as our competitors as well. So we're actively watching that. We're also watching the community development or the land development group in the U.K., which has, you know, trended a bit slower the first part of this year.
But, you know, as we mentioned with the transition to the Labour government, them really looking to, you know, to bear down and move forward with the house building there, I think that will be very positive for our group going forward. So those are the two primarily that we've got our eye on, is transportation Australia and our community development business in the U.K..
Benoit Poirier (VP and Industrial Product Analyst)
Okay, that's great. And maybe last one for Theresa. In terms of DSO free cash flow, obviously DSO came in at 77 days below the target of 80. Given it tends to, we tend to see a big collection period in Q4, would it be fair to expect DSOs to further improve and potentially reach low 70s or below 75 days? And just in terms of free cash flow expectation, if you could provide a breakdown in the second half and whether you're still confident to achieve 100% conversion for this year. Thank you.
Theresa B. Jang (EVP and CFO)
Yeah. So, you know, I'm really happy with where DSO is, particularly when, you know, we've got this continued pace of organic growth. So to be able to maintain a DSO below 80 days is really positive. You know, will we get down to 75 or... It's pretty hard to predict, to be honest, just given the volume of projects that we have and the complexities around just those sort of billing processes. But, you know, we're happy with where it is, and there's always room to continue to drive it downward, and we're certainly gonna try and do that.
From a free cash flow conversion standpoint, you know, the goal to have it 1 times coverage of net income is really a 3-year target. I think we almost achieved it last year, but that's certainly, again, the goal is to try and push toward that conversion rate. And so, you know, we'll see how it goes. We're off to a really good start for cash flow generation, so I'm hopeful. You know, whether we get there this year or continue to work towards that over the next 2 years remains to be seen.
Benoit Poirier (VP and Industrial Product Analyst)
Thank you very much for the time.
Theresa B. Jang (EVP and CFO)
Okay, thanks.
Gord Johnston (President and CEO)
Thanks, Benoit.
Operator (participant)
Thank you. Our next question comes from Maxim Sytchev with NBF. Your line is now open.
Maxim Sytchev (Managing Director)
Hi, good morning.
Gord Johnston (President and CEO)
Morning.
Maxim Sytchev (Managing Director)
Theresa, obviously, all the best in the future.
Theresa B. Jang (EVP and CFO)
Thank you.
Maxim Sytchev (Managing Director)
Gord, I was wondering if I just had a couple of quick questions. In terms of kind of the sellers expectations, wondering if you are observing sort of any emerging trends, or is it still pretty steady? I guess the larger the deals, the, you know, the bigger the multiple. What are you guys seeing on the ground right now?
Gord Johnston (President and CEO)
... Yeah, I think what we're in general, we're seeing the trends are pretty consistent, Max. We haven't seen any particular uptick in expectations from multiples, but certainly we haven't seen a decrease either. So I'd say pretty consistent there.
Maxim Sytchev (Managing Director)
Okay. Okay, that's great. Thank you. And then the last question I just had, so like Western Canada, obviously slowed down. I was wondering if there was a bit of a negative spillover effect into the environmental services. And I guess on the other side of the ledger, mining, you know, being better right now, that's helping to offset it. Just curious about the sort of interplay of kind of, you know, commodity verticals and how that pertains to environmental services overall. Thanks.
Gord Johnston (President and CEO)
Yeah, we, you know, our ES business is, you know, remains pretty busy. You know, particularly we're seeing, you know, strong growth, globally, where there is a little bit of slowness, from an organic growth perspective in Canada right now. But, you know, as Theresa said, it's because we were so busy that the comps are really, really high coming off of last year and some of the big projects that we were working on. So I think we still feel good about ES. Certainly, our environmental services group does work with mining, but it also works with all of our other groups as well, whether it's, you know, transportation, water, siting a new water main, you know, that ES is engaged with all of our lines of business.
So, no, we're optimistic about the environmental business. You know, we don't see that really retracting going forward. So I think we feel good about it.
Maxim Sytchev (Managing Director)
Yeah, makes sense. And then actually, so because you mentioned, you know, water, and I'm curious if you have any kind of hot take on the latest PFAS sort of flip-flopping. Like, on one hand, like at some point, it felt like we're committing to it, and right now, it doesn't seem to be the case. So again, I'm wondering if that changes anything for you kind of on the ground or maybe not.
Gord Johnston (President and CEO)
You know, our water business is so, you know, well diversified that, you know, when, as PFAS began to pick up, certainly, you know, we're front and center in that work. We've mentioned, you know, up to $200 billion in capital was initially estimated there. We know it's gonna be more than that, but it's not a meaningful or, you know, contribution to the overall net revenue. So whether PFAS goes up a little bit or it comes down a little bit, our water business, you know, looks to remain very, very solid for the years to come.
Maxim Sytchev (Managing Director)
Okay, excellent. That's it for me. Thank you so much.
Gord Johnston (President and CEO)
Thanks, Max.
Operator (participant)
Thank you. Our final question comes from Ian Gillies with Stifel. Your line is now open.
Ian Gillies (Managing Director)
Morning, everyone.
Gord Johnston (President and CEO)
Morning.
Ian Gillies (Managing Director)
There's been quite a bit of talk around the integration through M&A this year. As we think about pressing into 2025, would you anticipate that margin expansion year over year in 2025 is perhaps a bit better than average as you roll through some of these costs and start to get everything on the same platform? Or are you thinking it's kind of a normal year?
Theresa B. Jang (EVP and CFO)
No, I think the opportunity to expand margin next year is really good, you know, for a number of reasons, including what you're pointing to around the integration work wrapping up. You know, it's the enhancement that comes from having, you know, a bigger scale, a bigger platform. It's, you know, those that have joined us through the acquisitions, you know, being integrated and on the Stantec platform. It's, you know, our own employees that are taking the time and working with our new colleagues, you know, that and helping with that transition.
But, you know, we've noted a couple of times as well that, you know, when you, when you look at, where we, where we are this year, the, the wind down of some larger projects and waiting for others, to, to ramp up, you know, we... As that ramp up, takes hold, that will drive, strong utilization, and reduce the, the amount of, admin labor that we have. So there's a, a number of things that as, as we move forward, will lead to, I believe, a margin enhancement, that, that will be, you know, on track to achieve that 17%-18% that we're, that we're targeting for the end of 2026.
Ian Gillies (Managing Director)
That, that's very helpful. The other question I had is around the M&A pipeline. I'm just curious on what opportunities that ZETCON brought, perhaps in continental Europe, whether it be in Germany or in other jurisdictions, around continuing to grow in that region as you try and get towards the critical mass.
Gord Johnston (President and CEO)
Yeah, certainly, we're focused primarily on Germany right now, and they have some operations in Austria as well. There are good opportunities out there, and, you know, we're certainly interested in moving forward. We wanna get ZETCON itself into Stantec a little bit. There's some IT things that we're working through, you know, getting them on those systems and so on. So we're you know, I wouldn't see us doing anything more in Germany in 2024, just because we want to ensure that ZETCON is on that solid Stantec footprint before we move forward. But certainly lots of good opportunities there to continue to expand and, you know, get that critical mass, as you mentioned, that we want in Germany.
Ian Gillies (Managing Director)
Understood. Thanks very much. I'll turn the call back over.
Gord Johnston (President and CEO)
Thanks, Ian.
Operator (participant)
Thank you. At this time, I'm showing no further questions. I would like to turn it back to Gord for closing remarks.
Gord Johnston (President and CEO)
Great. Well, thank you, operator, and thanks everyone for joining us this morning. If you have any additional follow-up questions, you know, Jess Nieukerk, our VP of Investor Relations, is always available for your call. So thanks very much.
Theresa B. Jang (EVP and CFO)
Thank you.
Operator (participant)
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.