Stantec Inc

TSX:STN

Earnings Call Transcript 2021-Q2

[Operator]

Good day, everyone. Welcome to Stantec's Second Quarter 2021 Earnings Results 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 Investors [e-mail]. Today's call is also a webcast. [Operator Instructions] 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 purposes of today's call. Dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded.With that, I am pleased to turn the call over to Mr. Gord Johnston. Please go ahead, sir.

[Gordon Allan Johnston, President, CEO & Director]

Good morning, and thank you for joining us. Stantec delivered another solid quarter of operational and financial performance. Through our commitment to executing our strategy through our 4 value creators, we've delivered considerably higher margins quarter-over-quarter, leading to second quarter earnings that match a historical record of $0.62 per share.Our Canadian and global markets have rebounded strongly to growth, while the U.S. is off to a slower start to recovery. On a constant currency basis, we grew net revenue by over 2%, which was in line, actually a little better than our expectation we had coming into the quarter. We see clear evidence of momentum building across all of our key markets as we look to the remainder of this year and beyond. We've generated 6% organic backlog growth through the first half of this year. And beyond wins recorded in backlog, we're seeing a surge in award notifications, with well over $1 billion in gross revenue, more of half of which is in the U.S. While these notified awards can take months or longer to filter into our backlog, especially for large multiyear frameworks, their sheer magnitude give us every reason to be confident in our outlook. On the strength of our year-to-date results and positive outlook for the remainder of the year, we've raised our 2021 earnings guidance.Turning now to our results by key geography. The pace of recovery in Canada has been remarkable and this has created tremendous opportunity in virtually every sector we operate in. Our infrastructure, buildings and environmental services businesses have been particularly strong, each generating organic growth in the high teens for the quarter. Organic net revenue in Canada was over 11% without the effect of the descope TransMountain Project and 6% overall. Investment in infrastructure is a key tool being used by governments to spur economic growth. And we've already seen the governments of Ontario and Quebec move forward with large transit projects, which are driving significant revenue growth for our transportation business. Our work with Toronto Metrolinx and on the light rail and sustainable transportation development in Montreal demonstrates the high demand for our expertise.British Columbia and Alberta are also advancing several large transit projects, which bodes well for us. We're also seeing strong revenues in our community development business with high market demand in Western Canada and Ontario, attributable to historically low-interest rates, the pandemic causing people to reevaluate their housing choices, and optimism related to the improving economy fueling organic growth. We're seeing growing opportunities to draw upon our expertise in ESG to provide innovative solutions in sustainable design. In Q2, we were awarded a 7-year agreement to provide engineering and architectural services for drinking water installations for a major Quebec municipality.Buildings is performing exceptionally well due to the significant volume of major projects in the Canadian health care sector. The new St. Paul's hospital project in Vancouver and large hospital projects in Saskatchewan and Ontario are driving historically high levels of utilization within our buildings practice. With a number of additional health care projects in our backlog and growing activity in the civic and industrial sectors, we expect continued strong organic growth from our building's business. And heightened focus on environmental sustainability continues to drive very strong organic growth for our Environmental services business. As activity in sectors like transportation, mining, manufacturing and commercial development ramps up, so too is the demand for our services for our scientists and archeologists as they support their regulatory and environmental requirements of these initiatives.Organic growth in water was steady in the quarter. Recent wins on multiple large-scale water irrigation projects in Western Canada will be a source of increased activity in the months ahead. And we recently won the role of prime consultant for a wastewater treatment facility upgrade in Southern Ontario as we continue to be recognized as market leaders in this space. And with the energy transition underway, we're seeing growing opportunities for energy and resources group and renewable energy. And a great example of the work we're doing here is our recent win to provide process, mechanical and instrumentation services to a biogas feedstock project in Saskatchewan. Many of the themes playing out in Canada are also emerging in the U.S., although the U.S. recovery is off to a slightly slower start. Overall, the Q2 performance of our U.S. business was in line with our expectations, with 7.4% organic revenue retraction in contrast to organic growth last year. Our U.S. results were significantly impacted by the strengthening of the Canadian dollar, and Theresa will go into this a bit later in the presentation.Our U.S. transportation business continues to work through the wind-down of several major alternative delivery projects, where revenue recognition at the end of projects tends to slow down due to the complexity of the change order approval process. Unlike Canada, stimulus investment in infrastructure has not yet crystallized, but we are very well positioned to be beneficiaries when it occurs. With the expected focus on traditional infrastructure, like roads, bridges, and transit, we expect U.S. stimulus spending will drive strong growth in infrastructure once funds begin to flow. Building is starting to turn the corner as public and private investment is gaining momentum. While the commercial sector remains weak, we're beginning to see very positive green shoots in other sectors. The focus on health care that we've seen in Canada is emerging in the U.S., and our expertise in this sector has resulted in recent pursuit wins for a number of hospitals and urgent care facilities. We were recently awarded the design of a state-of-the-art neurological facility that will be over 1 million square feet in size.Activity is also growing in the civic and industrial sectors, where we've been successful in recent pursuits for a number of large-scale IDIQ's for the U.S. Army Corps of Engineers and NAVFAC. And we're seeing all around the world, the theme of sustainability is creating a growing dimension in our design work in the United States. This is especially pronounced in our energy and resources and environmental services businesses, which have achieved organic backlog growth of 35% and 30%, respectively, since year-end 2020. We expect this trend to continue with increasing opportunities in the renewable and energy transition space like the recently awarded pump storage feasibility study and our continued engagement in on and offshore wind and major solar projects. And this past quarter, our water and environmental services group were awarded a mandate worth approximately $100 million in net revenue to support FEMA to enhance the usability and value of natural hazard risk information, and this will contribute to further growth and backlog for these groups in the quarters ahead.Earlier this week, we announced that we signed a letter of intent to acquire Paleo Solutions. Paleo has the largest staff complement of Paleontology of any firm in the United States. And that expertise, coupled with their strong archeological presence complements our existing capabilities and positions us extremely well to meet the considerable volume of work that's imminent as utilities look to strengthen their electrical transmission infrastructure and our industry responds to the anticipated U.S. infrastructure stimulus. So the wave is coming in the U.S., while slower to materialize than in Canada, it will certainly be larger in scale and scope. And we see evidence of this in the solid 6.4% organic backlog growth that we've logged and in the $500 million of notified awards that are not yet included in backlog.Like Canada, global outperformed our expectations in the second quarter, with net revenue growing organically by 9.9%. Our water business generated over 20% organic growth as the UK AMP7 and large water frameworks in Australia are operating at peak of activity. High commodity prices are also driving strong demand in our mining sector, which achieved organic growth in the high teens. Acquisitions added a further 9.7% of net revenue growth to our global business, highlighting the value we're driving from our M&A program. We closed our acquisition of Ingenium during the quarter, our second acquisition in Australia this year, and we're seeing the benefit of combining our teams in terms of client interest and project opportunities. Backlog for our global region remains very healthy. We're also seeing significant growth in notified contract awards globally, again, not yet in backlog, particularly with respect to multiyear frameworks in our U.K. and Australian water businesses.In addition, other significant awards that are not yet in backlog include 2 separate pump storage facilities in the U.K. These are great examples of how we continue to support our clients in the transition to renewable energy. We've also been appointed to a multidisciplinary role in conceptual design for a 50 story mixed-use development in Australia, consisting of residential, retail, community and commercial spaces, and our global mining business has also been very active with the increase in commodity prices.I'll now turn things over to Theresa, to review the quarter in more detail.

[Theresa B. Y. Jang, Executive VP & CFO]

Thanks, Gord, and good morning, everyone. As Gord mentioned, the change in the Canadian U.S. exchange rate had a substantial impact on our U.S. earnings this quarter. The Canadian dollar strengthened by $0.17 on a quarter-over-quarter basis, which decreased net revenues by $61 million. We've also provided our estimates of the FX impact on our other key financial metrics for the quarter and year-to-date. Without the estimated $0.04 negative impact, Q2 EPS would have achieved a new record.Despite the impact that foreign exchange had on our net revenues, we were able to grow adjusted EBITDA and drive a 110 basis point increase in margin to 16.1% through our continued focus on project execution and disciplined discretionary spending. Our Q2 results also reflect our focus on managing all aspects of our business. Beyond our drive to maintain and grow our industry-leading EBITDA margin, we're continuing to execute on our 2023 real estate strategy, which remains on track to deliver $0.10 per share in adjusted EPS by the end of 2021. Our focus on working capital management, along with the benefit of lower interest rates from our senior note offering last year are driving a reduction in interest expense, and we've materially reduced our effective tax rate to the implementation of tax optimization strategies. These efforts collectively contributed to $70 million in Q2 adjusted net income and $0.62 in adjusted diluted EPS, representing 21% and 19% increases, respectively.Our balance sheet remains strong with net debt to adjusted EBITDA of 0.9x, below our targeted range. Days sales outstanding was 76 days at quarter-end, which is relatively consistent with Q1 2021 and down 6 days compared to the same time last year. We revised our target DSO downward from 90 days to less than 80 days, which reflects our confidence in our ability to maintain DSOs below this level. Free cash flow for the first half of the year decreased $74 million to $51 million, reflecting changes in revenues and corresponding cash receipts, including the effects of foreign exchange. As well, cash flows for the same period last year benefited from the deferral of income tax and other payments, which resulted from various pandemic relief programs. Increased cash used in investing activities reflects our recent acquisition activity, while spending on capital expenditures has remained consistent. And we returned $69 million in capital to shareholders in the second quarter, $51 million through share repurchases, and $18 million through the payment of dividends, demonstrating our ongoing commitment to our capital allocation strategy.Based on our financial performance to date and our confidence in continuing to execute on our plan, we're raising our earnings guidance for 2021. We continue to expect 2021 full year organic net revenue growth to be in the low to mid-single digits or 1% to 5%, but with a slight shift in mix relative to our previous thoughts. We now expect organic growth in Canada and global to be slightly stronger than initially projected, offsetting a slightly slower start to the recovery in the U.S. As a reminder, whenever we talk about organic growth, we always talk about it on a constant currency basis. We're raising the lower end of our ranges on all our financial targets. Adjusted EBITDA margin is now projected to be 15% to 16% of net revenue. Our adjusted net income margin target is now 6.8% of net revenue or higher, and adjusted ROIC is now expected to be 10% or higher. And as for adjusted diluted EPS, we now expect to achieve 4% to 7% growth in 2021 compared to 2020, where our previous guidance was for low to mid-single-digit growth or 1% to 5%.Given continued uncertainty around the timing on a U.S. infrastructure stimulus bill, we believe it's still prudent to exclude any potential upside from U.S. stimulus spending in our 2021 revenue expectations. Please refer to this quarter's MD&A for more detailed information about our 2021 outlook, including our updated expectations for our effective tax rate, foreign exchange sensitivities, and our revised expectation regarding seasonality of earnings, where we now project Q1 and Q4 to represent 45% of earnings and Q2 and Q3 to represent 55%. This is a shift from our previous guidance of a 40%, 60% split.And with that, I'll turn the call back to Gord.

[Gordon Allan Johnston, President, CEO & Director]

Thanks, Theresa. We are very optimistic as we look toward the rest of this year and beyond. Our increased EPS guidance for 4% to 7% growth in 2021 is predicated on our solid performance in the first half of the year, the strength of our backlog and our more than $1 billion in award notifications that aren't yet booked into backlog. While we have not yet incorporated any U.S. stimulus spending into our revenue assumptions for 2021, the proposed focus on water and traditional infrastructure like roads, bridges, and transit, matches up squarely with our areas of strength. Given the expected focus on sustainability as part of these investments and our industry-leading exposure to UN sustainable development goal related revenue, we are ideally positioned to capitalize on these opportunities and drive significant growth in our U.S. operations.Our ability to maintain our high win rate on pursuits and deliver unparalleled results for our clients is largely dependent on our ability to retain the best talent. And we're proud to be recognized as an employer of choice, as highlighted by some of the accolades noted on this slide. While our voluntary turnover rate has remained low throughout the pandemic and continues to be a couple of percentage points better than the industry average, we're continuing to strive to maintain a highly engaged and empowered workforce. And that's why it's a key priority for us to maintain an inspired work culture and an environment where everyone feels welcomed, included and supported.Stantec continues to stand out as the top-ranked firm in its space for sustainability. In addition to being named the fifth most sustainable company in the world by Corporate Knights this year, we were also recently ranked the industry's top firm in Canada's best 50 corporate citizens of 2021. Our emphasis on sustainability is interwoven from our leadership team to the talented staff who guide our clients on their journeys to create more sustainable communities and futures. And I want to thank all of our employees for their continued commitment and diligence in supporting our clients and colleagues around the world.And with that, we'll open the call up to questions. Operator?

[Operator]

[Operator Instructions] We'll take our first question from Benoit Poirier with Desjardins Capital Markets.

[Benoit Poirier]

Just with respect on M&A based on your current pipeline of M&A you have in front of you and assuming a normal closing rate. How many employees could you acquire throughout the remainder of 2021? I just want to get a sense of the opportunity ahead of you in the current context.

[Gordon Allan Johnston, President, CEO & Director]

Certainly, there's a lot of activity in that 1,000 person and less market that we typically are looking at as our sweet spot. And you noted earlier this week, we announced the letter of intent for Paleo solution. And I suspect that there's going to be a number of additional firms in that 1,000 in-person unless coming to market over the remainder of the year, particularly in the United States because more folks are wondering what would happen from a taxation perspective. And we're also finding that there's some activity in the 1,000-plus person range. But these days, discipline is the key for us, Benoit, because we're seeing that there's a lot of activity in the market, a lot of players. And so really maintaining discipline on the multiples that we're prepared to pay in order to be -- have the any transaction to be accretive for us from a long-term perspective. But these things are always lumpy. And so I don't think I'd like to posit a guess at how many folks we could add from a staff count perspective, only to say that the pipeline of firms is full, and there's a lot of activity in the space, but how many people we would close before the end of the year would be difficult for us to really to guess that.

[Benoit Poirier]

And with respect to the U.S., obviously, a little bit slower recovery, but it seems the $1 billion of award notification is excluded from the potential impact of the $1 trillion of infrastructure package. So I would be curious to have an update with respect to the timing for the funds to begin to flow? And which segment would benefit the most down the road work?

[Gordon Allan Johnston, President, CEO & Director]

And for your question, Benoit, do you mean specifically related to the soft backlog that we have on the books? Or is that more with relation to what we see coming from the U.S. stimulus?

[Benoit Poirier]

More about what's coming from the U.S. stimulus, yes.

[Gordon Allan Johnston, President, CEO & Director]

Yes. It's interesting. When you look at the plan that's lined up from a U.S. stimulus perspective, it really is right in our wheelhouse. When you look at roughly $550 million -- $550 billion, sorry, in new funding over 5 years, $110 billion for roads, bridges, and other major infrastructure, $39 billion for public transit, $17 billion for ports, $25 billion for airports, 0 and low-emission buses, electrical grid, upgrading $55 billion for water infrastructure. So a lot of the things. And just going back to the electrical grid, $73 billion to upgrade the electrical grid, which ties in very, very well with our acquisition of Teshmont last year, plus the existing strength that we had, but also Paleo does a lot of work in -- with clients in that space as well. So I think with our existing skillset, with the skill set of some of the firms that we've added recently, we are ideally situated to capitalize on what we anticipate will come from the U.S. infrastructure bill when it's finally passed.

[Operator]

We'll take our next question from Michael Tupholme with TD securities.

[Michael Tupholme, Research Analyst]

Gord or Theresa, the admitted marketing expenses this quarter, it was noted that the expenses were lower in part due to reduced discretionary spending and the favorable resolution of certain claims. Just 2 questions there. I guess first off, can you speak to the details of the claims resolution, how material that was? And then secondly, if you could also speak to how you're thinking about discretionary expenses going forward with the economic reopening continuing to progress?

[Theresa B. Y. Jang, Executive VP & CFO]

Sure. So with respect to the claims recovery, I would say it wasn't as material as what we recorded at Q4 of last year, it was a couple of million dollars, but enough to be noteworthy, I think. And so as we think about discretionary spending going forward, well, we've baked into our EBITDA margin expectations for this year is continued savings, continued discipline. But we also know that everyone is sort of pushing to be able to get back on the road and on planes and travel as things start to open up. So we're expecting to see a bit of a bump up in travel and so on, probably towards the latter part of Q3 and into Q4. And as we look towards 2022 and beyond, though, it is our intention that discretionary spending will not go back to levels that we were at before the pandemic. So we've not yet established what that target is, what percentage reduction we're going to try to cap it at. But that is fully our expectation that it will remain low, not as low as during the pandemic, but not as high as before the pandemic.

[Michael Tupholme, Research Analyst]

If we look at the year-over-year margin improvement, EBITDA margin improvement in Q2 was healthy. If we look ahead to the third quarter, it looks like the prior year margin comp is more difficult in Q3. Are you able to talk about whether or not you believe that you can continue to see year-over-year margin improvement in the third quarter?

[Unknown Executive]

It appears that the call was lost, Theresa and Gord attempt to call back in from their cell phone.[Technical Difficulty]

[Gordon Allan Johnston, President, CEO & Director]

We can continue or maybe we just come back to Michael later.

[Operator]

All right. We'll move on to Jacob...

[Gordon Allan Johnston, President, CEO & Director]

Lisa, if we have any troubles again, could you just please call me back on my cell phone? Absolutely. Okay. Sorry, Michael.

[Michael Tupholme, Research Analyst]

So can you hear me?

[Operator]

We can. Yes. Sorry about it.

[Michael Tupholme, Research Analyst]

Maybe I'll just reask the question because I'm not sure how much of it came through. So the question was our questions -- yes, margin. So you had good year-over-year improvement in the second quarter. I'm just wondering as we look ahead to the third quarter, it looks like the comp is more difficult on a -- in terms of the prior year comp. So I appreciate the guidance range you've given for the full year, but I'm just wondering in the third quarter, do you expect to be able to continue to see year-over-year EBITDA margin improvement in the third quarter.

[Theresa B. Y. Jang, Executive VP & CFO]

So EBITDA margin, we feel pretty confident about the range that we have -- that we put out for the year. And it does -- there is still a bit of seasonality in the way our EBITDA margins tend to go over the course of the year. And we think that will still roughly be the same. You would think that it's going to be relatively strong in the third quarter, it will back off in the fourth quarter, and again, hope to be comfortably in the range that we've set as our target.

[Operator]

We'll take our next question from Jacob Bout with CIBC.

[Jacob Jonathan Bout]

I want to go back to the U.S. and maybe dig into the drivers of the negative organic revenue retraction we saw in the U.S. How much of this was the wind down in the transport infra projects versus, say, the surgeons of the Delta variant or the delay in the U.S. infrastructure stimulus?

[Gordon Allan Johnston, President, CEO & Director]

Yes. So just to start off to say that we have confidence in our long-term -- our U.S. operations in the long term. We booked 6.4% organic backlog growth so far this year. We've seen -- certainly, we talked about the soft backlog and roughly half of that or over $500 million as well coming there even absent U.S. infrastructure stimulus. And also note that our comparison is to Q2 2020 in which we had some organic growth. So to your point about the 2 major retractors that we did see in the U.S. in Q2 were transportation, and that is related to those -- we typically don't like to call out individual projects, but there's 2 of them that are currently in that stage where we're winding down right now as well as our buildings business retracted a bit. Now we've noted that buildings really has begun to turn the corner in Q2 with the addition of new projects. And so I think we're feeling positive about that. So really, these were not, Jacob, I don't believe, impacted at all by the resurgence of the Delta area. And we do believe that we'll see that continued growth in the U.S. going forward, Q3, Q4, but certainly into next year, even absent the U.S. infrastructure stimulus spending, and that would provide only a stronger tailwind for us.

[Jacob Jonathan Bout]

And the $1.3 billion in award notifications, it sounds like that will be awarded or added to backlog in the fourth quarter. Is that how we should be thinking about that?

[Gordon Allan Johnston, President, CEO & Director]

No. Some of those -- what we've tried to do there is it just indicates the overall health of our markets, even absent those U.S. infrastructure stimulus. So those were -- that is true, in excess of $1 billion in gross revenue that we were notified of award in the quarter, and some of those are actionable immediately, and we'll start on them right away. But some will take several quarters to add to backlog and some will be even longer. For example, I mentioned in the prepared results, the FEMA project that we were awarded. That's a long-term multi-year award with FEMA. And so that will take several years for us to work through that backlog. But what it provides us is with multi-years of no admin, no business development, and a group of people just working full-time on the project. So no, I wouldn't expect to see $1 billion drop into backlog in Q3. But I think it's just more indicative of the overall health of our backlog, overall health of the markets. And so just supportive of our long-term view that things are continuing to improve and gives us solid tailwinds.

[Jacob Jonathan Bout]

And then my second question is just on the lower tax rate guidance. Can you talk about the sustainability of that as we look into 2022? Or is this just really a mix play for 2021?

[Theresa B. Y. Jang, Executive VP & CFO]

I would say all things being equal, that we do expect we'll be able to maintain a lower tax rate relative to the 27% to 28% we started this year with. But of course, we haven't done our full budgeting for 2022 yet. But we did implement some strategies this year that should sustain it at a lower level. Of course, there's a lot of discussion around whether it's U.S. corporate tax reform, global tax reform. So there's a few things floating out there that we're certainly monitoring. But all things being equal, we should be able to keep a lower effective tax rate than we started the year with.

[Operator]

Our next question comes from Chris Murray with ATB Cap Markets.

[Christopher Allan Murray]

So just kind of continuing on the tax discussion for a second. Theresa, in the quarter, one of the things we've seen from some other companies is there was a change in the U.K. statutory rate. I'm assuming, does your guidance, I'm assuming for this year, baked that in. And to your commentary about maybe slightly lower tax numbers next year, that's also already kind of in that impact?

[Theresa B. Y. Jang, Executive VP & CFO]

Yes. That would be right.

[Christopher Allan Murray]

Okay. And then my other question is around the Canadian operations and just the organic growth rate. And Gord, certainly double-digit growth rate numbers, but certainly impacted by TransMountain. Can you give us some indication on when you think the TransMountain impact is going to slow? And I guess the other piece of this is kind of excluding the TransMountain, how sustainable you think that kind of double-digit organic growth rate might be?

[Gordon Allan Johnston, President, CEO & Director]

The impact of TransMountain will persist for the end of this year, just as an organic growth headwind, we changed our contractual relationship with them really at the end of the year. So we were generating that revenue with TransMountain Q2, Q3, Q4 of last year. And so absent oil and gas, every one of our business lines in Canada had organic growth last -- in Q2. And so we've seen backlogs are up in Canada. Our book-to-burn virtually for every group is above 1 in Canada. And basically, overall, Canada, U.S., and global, for all of our combined, all of our groups had a book-to-burn in excess of 1 for the quarter. So I think we feel pretty good about that. But in terms of sustainability, the backlog is there. The pipeline of new opportunities is still looking good, Chris. So will we keep double digits quarter-on-quarter? That's hard to say, but we do see strong organic growth in Canada for the remainder of the year.

[Operator]

We'll take our next question from Sabahat Khan with RBC Capital Markets.

[Sabahat Khan, Analyst]

I'm just kind of following up on the end market discussion. Can you maybe talk a little bit about the kind of the infrastructure outlook across some of your major regions? Obviously, that's a market that should benefit from stimulus. But what are you seeing in the pipeline specifically for that in the U.S. or even internationally?

[Gordon Allan Johnston, President, CEO & Director]

When we -- thanks, Sabahat. When we look at the U.S., of course, the infrastructure is seamless still, continuing to be negotiated, and we'll see what sort of a time frame we get there. But I think what's interesting there is what we're seeing is a number of clients, putting out conceptual design, 10% designed, hiring their consultants, getting people on board in anticipation of that work coming. So that -- so I think that's going to create a nice tailwind for us. But even absent that, in the U.S., we talked about the large hospital neurological institute that we are awarded. We're seeing that soft backlog is there. So there's a lot of confidence in growing confidence in the U.S. and clients, even absent the U.S. infrastructure stimulus. So I think we feel good about that. Outside of the United States, in Canada, certainly, backlogs are up and then even stronger from a global perspective. From a global transportation perspective, we're forecasting 17% organic growth going forward, really driven by a lot of the work that we're seeing way down south in New Zealand. Certainly, some work in Australia as well through our recent acquisition of GTA down there. So I think infrastructure, from a Canadian, U.S. and a global perspective, feels like it's going to provide a pretty good tailwind for our industry, for the remainder -- for the next couple of years, I think.

[Sabahat Khan, Analyst]

And then just kind of turning over to the end markets that have had a bit of a tailwind over the last few years, which is the environment in water. You've had good growth in those end markets as well. And I can as we look forward to the next 12, 24 months, do you see those tailwinds continuing? And which market specifically are you at seeing more demand for those as maybe lap of peers of good growth in those 2 end markets?

[Gordon Allan Johnston, President, CEO & Director]

Yes. When we talk about our water business first, we've seen organic growth in our water business each quarter for the last 8 or 9 quarters. So it just continues to strengthen, pre-pandemic and even through the pandemic. Backlogs in water are solid. And I think it's just our market presence there, really, whether it's in the United States, in Canada, or globally, is very, very strong, and we see continued growth there. And really, a large portion of that soft backlog that we talked about is in the water space. From the environmental perspective, again, great backlog growth there, as we've talked about, our overall book-to-burn in environmental services feels good for us. It's certainly above 1 in the quarter. And Theresa talked about the backlog growth overall as being extremely strong. And so we see that continuing that backlog growth will just continue to feed the revenue generation, I believe, for the quarters to come and strong support into 2022 as well.

[Sabahat Khan, Analyst]

If I could just squeeze in one more. Just looking at your kind of balance sheet position here still looks good and you've been chipping away with small to medium-sized transactions for the while. Can you maybe comment on the pipeline of opportunities and an on top of the larger transactions in the past as well? Just kind of what is the opportunity set out there right now at this point in the year?

[Gordon Allan Johnston, President, CEO & Director]

There's -- mentioned briefly earlier, like in that sub 1,000 person firm, kind of -- which has historically been the Stantec sweet spot, there is a lot of opportunity coming to market, whether it's in Canada, the United States, or globally. But I do see, in the U.S., in particular, with pending tax changes, that we're going to see additional opportunities come to market here in the second half of the year. The pipeline is full already, but we've heard a discussion about a number of firms coming to market. And then from the perspective of the firms in excess of 1,000 people, there are a couple of transactions that are live now. But I think there's a number of additional ones that we see coming in the latter half of the year as well. That we'll really evaluate. But as I mentioned before, the key for us is disciplined and not -- our balance sheet is strong, and we look to deploy the capital as long as we can ensure that it will be accretive for us in the short and the longer term. So I think you'll see us maintain our discipline. But our appetite for growth is there, our balance sheet is strong, and our level of global maturity is also quite strong. So I think we feel good about opportunities going forward.

[Operator]

We'll take our next question from Ian Gillies with Stifel.

[Ian Brooks Gillies]

I was hoping you can maybe talk a little bit about how you're thinking about using the buyback versus M&A at this point, especially given that you just highlighted that there's a fair bit of stuff in the pipeline, it was -- you're pretty active with it in Q2 and how you're thinking about it moving ahead, especially given another solid move in to share price?

[Theresa B. Y. Jang, Executive VP & CFO]

Yes. I think our approach to share buyback is consistent with what it's always been. Sorry, I'm just getting a little bit of feedback. I'm not sure where that's coming from. But the approach is consistent in that we look to use our NCIB opportunistically, and we found pretty good opportunity to do so in May and June. But really, the preference, and I think, certainly, the more powerful approach to deploying our capital is through M&A. And so that's our preference. But again, when we have the opportunity, we see a bit of a dislocation in pricing in the markets we will go in and buy shares.

[Ian Brooks Gillies]

The other thing I wanted to follow up on, there's been a lot of talk on M&A and adding people that way. Are you able to talk about the ability to add people organically right now, given low levels of unemployment, it feels like people haven't been very app to change jobs that they've been hard to find. So I'd be curious if how you can grow the business in that regard?

[Gordon Allan Johnston, President, CEO & Director]

Yes. So we have actually interesting. We had a significant discussion on that just yesterday. And what we're -- a couple of things there. Firstly, our voluntary turnover rates are typically 2% to 3% below industry average. And we -- while our voluntary turnover rates declined during the early stages of the pandemic, so did those of our -- of the industry. And so while we're seeing voluntary rates begin to creep up, they're still for us in the single digits. And as we look at the number of folks that were able to hire and bring on, it certainly is exceeding the number of folks that we're losing through voluntary turnover. And so we'd always wanted to be a net importer of staff during this volatile period and we're finding that to be the case. Of course, we want to do everything that we can to ensure that our existing employees feel valued and that they -- that we're not going to lose them to clients or competitors. But -- and I think we've had some success there. So as I mentioned, we are -- to date, we've been a net importer, adding to staff. When I look at our staffing numbers now versus at the end of the quarter versus a year ago, our numbers are up. And so we feel good about that. But again, we want to focus on retaining our existing staff and on continuing to recruit in MUSA.

[Operator]

We'll take our next question from Maxim Sytchev with National Bank Financial.

[Maxim Sytchev, MD & AEC]

Gordon, just wanted to circle back to acquisitions. So when we look historically when kind of 2011, 2012 time frame, I mean top line at the time was around $1.45 billion. You were kind of allocating maybe $85 million to M&A every year. And right now, we're kind of doing the same, while revenue is close to $4 billion. And like obviously, I really appreciate the -- looking at accretive acquisitions, things that makes sense. But how do you think about materiality and the ability to kind of move the needle through acquisitions and whether that's been changing as you have been executing dramatically better over the last 2 years? So maybe some thoughts there.

[Gordon Allan Johnston, President, CEO & Director]

Yes. No, that's a great perspective, Max. So we are continuing to execute on that. Our small to midsized strategy, those 1,000 person and less firms. But -- and that is our strategy. And I think you've probably heard us say over the last couple of quarters that as some of these larger transactions come along, we're having a solid look at them. And certainly, if we can find some that we think meet our long-term objectives, because of the strength of our balance sheet and the maturity of our global operations and certainly the appetite from management and from our Board, we'll look at those. But again, only where they make sense, then we think they'll be accretive to our shareholders in the longer term.

[Maxim Sytchev, MD & AEC]

And in terms of kind of the competitive landscape for acquisitions, are you seeing more financial buyers as well, keeping the tires on these things? Or is it all strategic players you're competing against?

[Gordon Allan Johnston, President, CEO & Director]

We absolutely are seeing more financial buyers come to the table, Max. The -- and it's interesting, we were looking at some stats just the other day that from 5 years ago to now, 5 years ago, roughly, we might have anticipated on an annual basis, maybe 10% of the transactions went to a financial buyer. I think so far this year, we've seen -- could be up to 30% of the transactions have gone to financial buyers. And in some of those cases, and you would have seen some of them as well, the multiple is very, very high that from the perspective of a strategic, as you're getting into these high teens multiples, it'd be very difficult for that to be accretive unless there's pretty significant growth opportunities. So again, we're just -- we're maintaining our discipline. We're maintaining our focus, but it is certainly a more competitive environment there as we see financial buyers coming in, looking for some of these platform acquisitions.

[Maxim Sytchev, MD & AEC]

And then just one quick clarification for Theresa, if I may. So I think it was Michael asking the question in terms of the back half margin improvement year-on-year. Can you just confirm that that's actually what you're telegraphing that you're going to be able to grow the margin profile in Q3 and then kind of flattish in Q4? Is that afterward?

[Theresa B. Y. Jang, Executive VP & CFO]

I don't know if it will necessarily grow from Q2 to Q3. I think we would expect it to be relatively stable at the higher end of what we typically see for Q3. But we do think it will come back down in Q4. So Q3, we're expecting to be able to replicate what we did in Q2.

[Operator]

And we'll take our next question from Bryan Fast with Raymond James.

[Bryan Fast, Research Analyst]

Just to follow up on your commentary on the water business. Obviously, you're seen as the market leader in the water space. Are there any regions that you are not punching above your weight in that vertical?

[Gordon Allan Johnston, President, CEO & Director]

I think as we look around our major markets, Canada, the United States, the U.K., Australia, we are easily a dominant market player in Canada, the U.S., and the U.K. while we're extremely strong, and I think probably punching above our weight in Australia. I think we have opportunities to continue to strengthen our presence there by -- through the addition of -- additional resources. The team that we have there is fantastic. And they've won some really, really strong awards, and you can see that in the growth numbers. But I think we can add some more staff there. And so certainly would be an area of focus for us going forward.

[Bryan Fast, Research Analyst]

And then you highlighted a nice project win in the U.S. health care vertical. I guess how is that bidding pipeline? And I guess the opportunities shaping up for health care in the U.S. specifically?

[Gordon Allan Johnston, President, CEO & Director]

Yes. It's interesting. In the first quarter of the year, we really saw health care opportunities really blossoming in Canada in particular and in Australia. But what we've seen through Q2 and the bidding pipeline coming for the remainder of the year is health care is really coming on strong in the United States. So that was a really nice award for us here. But I think we'll see that momentum continue to build as we go forward for the remainder of this year.

[Operator]

Our next question comes from Troy Sun with Laurentian Bank.

[Troy Sun, Industrials Analyst]

I'm just wondering if you can provide a little bit more color on the DSO improvement that you've been seeing this year? And how sustainable that target that you gave for 2021 when we think of beyond this year? And if the improvement is to continue, like should we be expecting a structural change in terms of the free cash flow conversion profile for the business?

[Theresa B. Y. Jang, Executive VP & CFO]

Yes. We've worked awfully hard over the last couple of years at our DSO. And I think the level that it currently sits out that sort of 75 to 76-day range is pretty achievable for us on an ongoing basis. Now I can always be thrown off course by certain contracts or arrangements, but we're pretty confident that this is a good range that we can achieve. And I would expect them from a free cash flow standpoint that we had a bit of disruption this year from the effect last year of pretty large tax payments that we were able to defer. So we got some uplift last year. And then, of course, that catches up with you and a bit of higher than usual outflow this year. But I think this will normalize. There really aren't any further programs as we are aware for participating in from -- related to the pandemic so I think it is normalizing, but no structural changes that I can think of.

[Troy Sun, Industrials Analyst]

And then my next question, maybe I'm wondering, Gord, if you can just make a quick comment on the energy end market. It's good to see the backlog coming back and also just the metals commodities pricing becoming more healthy in that vertical. Can you maybe just comment on some of the work that you're seeing in that space, some of the pipeline that you're targeting now, particularly also in the renewable energy space? Any color there, please?

[Gordon Allan Johnston, President, CEO & Director]

Sure. Absolutely. So first, talking about the renewable energy space. And so we're seeing a lot of interest in that, both Canada and the United States and in Australia and other locations as well, where we're working on solar farms, wind farms. We mentioned a biofuel facility that we're working on right now in Saskatchewan getting started with. So we're seeing a real uptick in work. We mentioned a number of pump storage projects as well but we have a particular area of expertise. So we just see that backlog of work continuing. And in addition to that renewable space, I think we'll see a lot of work related to grid strengthening. One of the proposals in the U.S. infrastructure build -- bill is $73 billion to rebuild the electrical grid. And we've seen issues related to that, certainly with the Ice storms in Texas. You've seen some of the utilities in California make a commitment to bury up to 10,000 miles of electrical transmission cabling as a result of -- to reduce wildfire and other sorts of damages. So I see a lot of work coming in that electrical transmission, distribution, renewable space, strong tailwind for us for the remainder of this year and I think for the next couple of coming years. And then in the mining space, certainly, a lot of commodity prices are quite high. We're seeing our business growing certainly in South America. We're seeing a lot of work through the -- also our acquisition of Ingenium in Australia, continue work there. Copper, iron ore, gold, and so on, some of the junior gold producers. But a real particular area of expertise that we have as well is with regards to lithium. And a lot of the lithium production is in South America or lithium stores are in South America. And we're active in South America with a number of the firms that are either already in or looking to get into that field. So I think we see a lot of potential upside to that to lithium as well, Troy.

[Troy Sun, Industrials Analyst]

So would you say that you would qualify sort of the prospective growth rate in that vertical to be, I guess, slightly higher than what you've seen traditionally from the energy business?

[Gordon Allan Johnston, President, CEO & Director]

Yes. I think that previously, in our overall energy and resources business, we saw over the last couple of years a significant upswing in revenue from TransMountain and some of these pipeline projects. But as those are winding down, now we're seeing the uptick really coming or our involvement in the winding down. We're really seeing that uptick coming in mining the energy transition, electrical distribution. So I think we'll see probably -- it will even out a little bit from a go-forward perspective.

[Operator]

We have a follow-up question from Michael Tupholme with TD Securities.

[Michael Tupholme, Research Analyst]

So just wanted to go back to the $1.2 billion in gross revenue award notifications you highlighted, Gordon. I think you said that was a quarterly figure. I'm wondering if you can put that figure into context and how that would compare to what you would have historically seen in terms of award notifications on a quarterly basis?

[Gordon Allan Johnston, President, CEO & Director]

Yes. I think we saw, Michael, that in that quarter, it was healthy, for sure. And probably -- and for us, that really is just an indication of the overall health of the backlog, the overall health of the industry and our client base. And so we thought it would be just nice to call out this quarter that not just as backlog good and up 6% since the beginning of the year, but that soft backlog is also very, very healthy. I don't know that it's something that we'll look to quantify every quarter, but it's just something that we thought we'd call out because it was particularly healthy and indicative of strong healthy underlying markets.

[Michael Tupholme, Research Analyst]

And then you were speaking about employee turnover and seeing net additions to employees. I'm just -- I'm wondering, with the backlog up 6% organically year-to-date, are you going to be staffing up from here? And how difficult is that to do in the current market?

[Gordon Allan Johnston, President, CEO & Director]

Yes. So we absolutely are actively staffing up, actively hiring, and virtually all of our business lines and virtually all of our geographies. And so there is certainly a war for talent there. But as I mentioned today, we've been a net importer of the stab, and we'll look to continue to do that. One other thing that we've talked about in previous quarters, we didn't bring up yet today is our delivery center in Pune, India. And we've also continued to grow our resourcing there. We're up 15% to 20% in our operations there over where we would have been a year ago. So I think we feel good about our ability to continue to retain and attract staff in our markets, but also in our Pune, India center. But all that to say is this is a huge area of focus for us going forward is staff retention and staff attraction.

[Michael Tupholme, Research Analyst]

And then just lastly related to that, can you speak at all to -- as you work to attract staff, what you're seeing in terms of wage inflation pressures?

[Gordon Allan Johnston, President, CEO & Director]

There absolutely is some wage inflation pressures, not in all geographies and certainly not in all business lines, but we are seeing it. And a couple of things that we're seeing happen is, as you probably all have read in the papers about the great resignation they're calling it. We're seeing that a number of people who are leaving us aren't going to competitors. Instead, they're going to our clients. Who have these large capital programs coming up and are looking for people to help them, execute them. And while we never like to lose employees, often when our employees go to clients, net is positive for us in the longer term because they know the good people we have. We know -- they know the quality of work that we deliver. So it also often is positive, net positive for us in the longer term, of course, we'd rather not lose that staff individual, but all to say that we are seeing some wage pressures. I think that's just an industry-wide phenomenon and that we're all grappling with.

[Operator]

Our next question comes from Yuri Lynk with Canaccord.

[Yuri Lynk]

I don't know who wants to take this one. Just a clarification on your organic growth guidance of 1% to 5%. Would the -- does the midpoint of that guidance imply positive or negative organic growth in the United States?

[Theresa B. Y. Jang, Executive VP & CFO]

I think what we're expecting for the U.S. is that it's going to come out at the end of the year, roughly flat on a year-over-year basis. As we've noted a few times, the recovery is coming. We see it, as Gord noted, on a number of fronts. But as we work through the rest of this year, we think it will likely finish off the Q3, we think we'll be -- we'll -- we hope to be slightly better than flat. But overall, given the retractions that we saw in the first and second quarters of this year, the whole year will probably be relatively neutral.

[Yuri Lynk]

So that implies a pretty big swing in Q3. But when I look at the comps, that's part of the reason, right? You're lapping kind of 5.5%, down 5.5% negative in Q3. So the easier comp combined with a bit of a recovery. That's the explanation, I guess?

[Theresa B. Y. Jang, Executive VP & CFO]

Yes.

[Yuri Lynk]

Yes. Okay. And then -- and just -- I think this will be the third time you're asked to clarify I'll go forward. You're talking Q3 EBITDA margins roughly flattish with the quarter you just reported, right?

[Theresa B. Y. Jang, Executive VP & CFO]

For Q3, yes. Yes. We -- I mean, Q2 and Q3 tend to be our highest EBITDA margin quarter. And so we would expect, given the pace of recovery is still a little bit questionable. And so we expect that we'll be able to maintain the marginally regarded in the second quarter. But then again Q4 tends to fall off traditionally and we would expect that to occur again. So that would be the general shape.

[Yuri Lynk]

Yes. No, it makes sense. We're just -- last year, they sequentially increased over 200 basis points. So one, and so we're not straight-lining that trend. So I appreciate the color and I'll turn it over.

[Operator]

All right and there are no further questions. I'd like to turn the call back over to Gord Johnston for any additional or closing remarks.

[Gordon Allan Johnston, President, CEO & Director]

Great. Well, just thank you again for joining us on the call today. I apologize for the IT issues they're partway through. We look forward to speaking with you all in the near future about our continued progress towards our goal. So thanks again and have a great day.

[Operator]

And that does conclude today's presentation. Thank you for your participation. You may now disconnect.