Stantec Inc

TSX:STN

Earnings Call Analysis

Strong Growth and Record Revenues in Q2 2024

Stantec experienced a robust second quarter in 2024, posting record net revenue of $1.5 billion, up 17% compared to Q2 2023. The company's organic growth was 7% while acquisition growth contributed 9%. Significant double-digit organic growth was noted particularly in the Water and Buildings sectors globally. Despite a slight retraction in Energy & Resources due to project delays, the overall backlog reached a historic $7.2 billion, promising future growth. Adjusted EBITDA rose to $247 million with a margin of 16.6%. The company reaffirmed its full-year financial targets, anticipating 12%-15% net revenue growth and adjusted EPS growth between 12%-16%.

Strong Revenue Growth and Acquisitions

In the second quarter of 2024, the company achieved a remarkable 17% increase in net revenue, bringing the total to $1.5 billion. This growth was driven by a combination of 7% organic growth and 9% growth from recent acquisitions, including ZETCON, Morrison Hershfield, and Hydrock. The company's strategy to expand through acquisitions appears to be paying off, as these newly acquired firms are already contributing positively to the overall performance .

Regional Performance Highlights

The U.S. market continues to be a significant driver for the company, posting a 16% increase in net revenue. This includes 9% organic growth and 6% growth from acquisitions. All U.S. business units experienced solid organic growth, with the Water business seeing double-digit growth thanks to industrial and water security projects. The Infrastructure business also posted strong results, aided by major transit and roadway projects . In Canada, net revenue grew by 16%, with 11% resulting from acquisitions. The Water and Buildings segments both saw double-digit organic growth, although the Energy & Resources segment experienced a slight decline, which is expected to be temporary .

Global Performance and Major Projects

Globally, the company saw a 19% increase in net revenue, driven by 14% acquisition growth and 6% organic growth. Exceptional performance was noted in the Buildings segment, particularly with significant projects like a cancer center in Dubai. The Water business excelled in the U.K., New Zealand, and Australia, largely due to long-term agreements and public sector investments . However, the global infrastructure segment experienced a minor retraction, primarily due to project cancellations in Australia and New Zealand .

Financial Health and Cash Flow

The company's financial health remains robust, with adjusted EBITDA increasing to $247 million, reflecting a margin of 16.6%. Despite a slight dip in adjusted EBITDA margin due to increased insurance claim provisions, the overall financial performance is solid. Operating cash flow doubled to $137 million, compared to the same period last year, underscoring successful working capital management. The net debt to adjusted EBITDA ratio stands at 1.7x, well within the target range of 1 to 2x. This indicates strong liquidity and the ability to fund ongoing and future acquisitions comfortably .

Backlog and Future Outlook

At the end of the second quarter, the company's backlog reached a record $7.2 billion, representing 12 months of work. This includes 8% growth from acquisitions and 3% organic growth. The outlook for the remainder of 2024 and beyond remains optimistic. The company reaffirmed its financial targets for the year, anticipating net revenue growth between 12% and 15% and organic growth in the mid-to-high single digits. Adjusted diluted EPS is expected to grow by 12% to 16%. The company is also anticipating continued benefits from recent acquisitions, although full margin and earnings enhancements are expected to surface after the integration is complete .

Leadership Transition

The company announced a leadership transition, with Vito Culmone set to take over as Chief Financial Officer on September 3rd, following Theresa Jang's retirement. Ms. Jang has been credited with strengthening the company's financial position and leaving behind a world-class finance team. This smooth transition is expected to maintain the company's strategic momentum and financial discipline .

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to Stantec's Second Quarter 2024 Results Webcast and Conference Call. [Operator Instructions] 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 2, 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.

[Gordon Johnston, executive]

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 in sustainability.

This past quarter, Corporate Knights ranked Stantec as #2 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're 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 rollout of our strategic plan are building momentum, and we have continued to capitalize on the 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 #1 water firm in the U.K. and are extremely well positioned for continued growth. Increased funding for health care 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 1 in Dubai, 6 in the United States and 8 in Canada.

Our Buildings business is also a top 5 player in mission-critical and data center facilities, currently working with 4 of the top 5 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.

And 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 clients' 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 $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 & 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 $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 $1.12, up 13% over Q2 last year. Our U.S. business continues to perform extremely well, flaring 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 health care, 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 health care space in both British Columbia and Quebec. Energy & 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% 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.

And now I'll turn the call over to Theresa to review our financial results in more detail.

[Theresa B. Jang, executive]

Thank you, Gord. Good morning, everyone. Once again, we delivered a very solid performance in Q2, and we achieved record net revenue and enhanced project margin. Our gross revenue grew to almost $1.9 billion, up 15% over Q2 '23, and net revenue of $1.5 billion was up 17%.

Product 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 $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 6 months of the year, we generated very strong cash flows, achieving $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. And we closed the quarter with a net debt to adjusted EBITDA ratio of 1.7x, reflecting the Q2 funding for Hydrock. We remain well within our target range of 1 to 2x.

And with that, I'll turn the call back to Gord.

[Gordon Johnston, executive]

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 & Resources and Environmental Services both achieved double-digit organic growth.

Wins for Energy & 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. And 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 awarded 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 5-year contract to provide services for DC Water. This initial contract for USD 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 U.K. and secured an engineering consultancy framework with Dwr Cymru Welsh Water. Our Buildings business will serve as a trusted adviser 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 9 data center locations across 5 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 Bulford 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% to 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 3 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 Labour government moves to fulfill its pledge to build 1.5 million new homes. And just last week, they announced an expert task force to spearhead the development of new large-scale communities.

And 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% to 16.9%. And finally, we continue to expect our adjusted diluted EPS growth to be in the range of 12% to 16%. 2024 is shaping up to be another excellent year of Stantec, as we continue to execute on our 3-year strategic plan.

Before wrapping up today, I'd like to welcome Vito Culmone. Vito joined us on July 15 as Executive Vice President, and he is already deeply engaged with Theresa and team. Vito will assume the Chief Financial Officer role on September 3. 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 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 27, 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]

[Operator Instructions] Our first question comes from Sabahat Khan with RBC Capital Markets.

[Sabahat Khan, analyst]

Okay. Great. And before I get going, Theresa, I wanted to just acknowledge the significant impact you've had here, and wish you all the best with the next chapter.

And I guess, just on the kind of the capital allocation side, if we think about M&A. You've done a number of transactions to start the year. Can you maybe just talk about the pipeline there? And just more specifically, 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.

[Gordon Johnston, executive]

Yes. So firstly, as we look at the dry powder that we've got left, you heard Theresa talk about where we are in our. From a leverage perspective, we feel really confident that we can continue to move forward, and we are not pausing our M&A search and the ongoing discussions in any way.

So we're in different levels of discussion with companies really around the world. The pipeline is really full right now. 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.

And so when these would come to bear, there'll be sort of -- the timing will be what it will be. But there absolutely, Saba, is no change in our M&A philosophy with our change in CFO from Theresa to Vito. We're very, very aligned on continuing with our growth philosophy.

[Sabahat Khan, analyst]

Okay. Great. And then just as we kind of look at it here to the back half of the year, if you can maybe just talk about kind of this trajectory of the margin progression here and the sort of margin that might be baked into your backlog here at this point?

[Theresa B. Jang, executive]

Sure. So as we get Q3 underway here, it generally is our strongest quarter from a margin standpoint historically. And we don't think that will be any different this year. So the back half, I think, is going to be solid, and we expect that, that range that we put out in our outlook is very achievable.

[Sabahat Khan, analyst]

Great. And then just one last one. Just based on the discussions you're having with your customers, particularly on the private side, what are you hearing from them? Has there been any change in the tone just given where the macro is, just kind of the feedback you're hearing from kind of nonpublic clients?

[Gordon Johnston, executive]

Yes. Certainly, it's consistent with where we've been in previous quarters. The commercial subsector is still slower. But on the -- some of our main buildings client bases, health care and so on, you've seen in Q2 of this year, Buildings had over 13% organic growth. So when people often ask about the Buildings subsector in particular. But in Buildings, one of the differentiator from Stantec over other firms is that we have a much larger public sector perspective there. So all the health care 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 in the community development or the land developed business in the U.K. But yes, 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, we do see that, that homebuilding should kick off and get restarted here in the second half of this year.

[Operator]

Our next question comes from Devin Dodge with BMO Capital Markets.

[Devin Dodge, analyst]

All right. I'm going to 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 3 of the last 4 quarters. And I'm just trying to get a sense if there's implications to that growth outlook on that?

[Gordon Johnston, executive]

Yes. We don't see that at all, Devin. 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. 8.7% in Q2, but 10% or 12%, 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 -- and 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 contracts being awarded. So it's just a timing issue. We're really not concerned about the U.S. backlog.

[Devin Dodge, analyst]

Okay. Okay. And 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 have been identified over and above that initial program from a few years ago?

[Theresa B. Jang, executive]

Sure. So you might recall, Devin, that when we rolled out our strategic plan in December for the next 3 years, that we've set a new target for ourselves to reduce a further 10% of our real estate from the 2023 baseline. And we estimate about $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 $0.10 per share over the next 3 years.

[Devin Dodge, 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 5 years. Congrats on the retirement. And if Vito's in the background there, good luck in his new role.

[Operator]

Our next question comes from Yuri Lynk with Canaccord Genuity Inc.

[Yuri Lynk, analyst]

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 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, executive]

Yes. 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 the timing is typically around this time of year where we get those updated actuarial forecast. And so -- and last year if you'll recall, too, that 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, 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, executive]

Yes. And we did see some of that provision benefit continue on through the rest of last year, but the biggest piece of it would have been in Q2. And last year, we had an exceptional Q3. And we'll -- whether we can deliver the same level of margins this year remains to be seen. But yes, it was -- last year was a very, very strong quarter.

[Yuri Lynk, analyst]

Okay. Just a follow-up, Gord, to U.S. backlog. Are you seeing any delays in kind of award activity from your pipeline due to a maybe the election or anything else out there?

[Gordon Johnston, executive]

Yes. We're really not, Yuri. We -- 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. We're just sort of steady-as-she-goes type of an approach there from our clients.

[Operator]

Our next question comes from Jacob Bout with CIBC.

[Jacob Bout, analyst]

And maybe to start, Theresa, just wishing the best in retirement. Maybe I'll just go back to the EBITDA margin guidance. And you narrowed the full year. And you called out the margin and earnings enhancement from the 3 recent acquisitions that will be muted. And just, I guess, I had a few questions around that. This period of transition and integration, how long will that be? And maybe just talk through, how different are the EBITDA margins for recent acquisitions versus the company overall?

[Theresa B. Jang, executive]

Yes. So I'll try and address all of those pieces, Jacob. The integrations are all underway, and they're all at various stages, I would say. The Morrison Hershfield is -- we are moving now to financial migration that should occur over the second half of this year. Hydrock will wait until the spring.

ZETCON we're really at this point evaluating. We haven't intended to bring it on to our back-office systems just because it is more of a standalone business at this point.

But having said that, there are elements of ZETCON that are unique in terms of language difference for starters and accounting methodology that is a German GAAP. And so taking -- 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 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's different having, as Gordon mentioned in his comments, the 3 current acquisitions that we are transitioning is different from doing 1 large 2,700 firm acquisition. Cardno, if you think about that, was 1 firm that was on 1 back-office system that we converted. This is again 3 unique and different firms.

So we're taking our time. We want to 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 is completely expected for us that margins, that you wouldn't see a pop in right away.

And so as far as the margin profile, 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 retraction as a result of having acquired them.

[Jacob Bout, analyst]

Given the improvement that you've seen in your margins, there hasn't been a gap that's opened up between some of these smaller acquisitions and yourself and over time?

[Theresa B. Jang, executive]

No, I don't think so. And again, it sort of goes back, if you think about it from a project margin standpoint, they're all fairly typical relative to their lines of business. So we're always talking about transportation having slightly lower margins than typically public projects, some of the construction management project -- program management work that ZETCON tends to be higher margin. So it's fairly typical. We generally say as well that there's not 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, analyst]

Okay. And last question here, just on pricing. Is the demand environment still support the ability to charge higher fees? Or is this starting to change?

[Gordon Johnston, executive]

No, we're still seeing that as a general industry trend, that there's -- us and our competitor set is still very, very busy. Backlogs are high. And so yes, we still see that we don't get a lot of pressure on prices. Again, it's still a very competitive industry without question. But the first question that clients ask us isn't 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.

[Operator]

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

[Chris Murray, analyst]

Theresa, congratulations on your retirement and 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 sort of -- I was wondering if you could help maybe understand, 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 the mix of business or if it's special projects that maybe is helping you out there?

[Gordon Johnston, executive]

Yes. So interestingly, the U.S. in general, we see -- we'll often get asked, what do we might see with if there were to be an administration change there. But just looking at the big picture of the U.S., infrastructure really continues to have bipartisan support there.

So when you look at the IIJA, where about 1/3 of it has been awarded and Congress has till the end of 2026 to encumber the remaining. So we see that providing significant longer-term tailwinds. Already some discussions about what might IIJA 2.0 look like. Semiconductors are busy, data centers, mission-critical facilities, PFAS is starting to come on. So kind of that broad-based support there.

So we still see that regardless of whether 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 to your point about Buildings specifically with the decrease in -- some of the concerns with the ABI. We've seen that commercial certainly has been slow, but it's been slow for a couple of years now. But health care is very, very strong. For us, mission critical facilities are very strong. So -- and we see those tailwinds continuing going forward.

[Chris Murray, analyst]

Okay. Interesting. And then just turning back to your Energy & 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 what I call traditionally kind of your backyard kind of LNG and things like that. Just wondering what's your opportunity pipeline looking like more in the traditional kind of oil and gas energy business these days?

[Theresa B. Jang, executive]

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 it will ever approach what it was 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 for -- 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. Renewables a bit muted at the moment, just given the regular requirements and so on, they're still pretty onerous. And I think proponents, they're still trying figure out how to make those projects economic.

So -- and 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 as we sort through the fluctuations in commodity prices longer term, that is going to be a business that will continue to grow.

[Operator]

Our next question comes from Sean Jack with Raymond James Limited.

[Sean Jack, analyst]

Just a quick 1 for me. Looking at the [indiscernible] business operating yields and from an M&A perspective, wondering where the firm is seeing the best value right now for potential new targets?

[Gordon Johnston, executive]

We're -- we have considerable strength in each of our 5 BOUs. So we're actively engaged in discussions really in all of those BOUs. And we're continuing to look at some opportunities in Canada, but even more so in the United States.

Our geographies really haven't changed from where we're looking, Sean. Certainly, in the United States, still into the U.K., Northern Europe, down in Australia, New Zealand to a degree as well. So 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 that are there and maintaining those discussion.

[Operator]

Our next question comes from Benoit Poirier with Desjardins.

[Benoit Poirier, analyst]

Yes. And welcome to the team, Vito, and all the best to you Theresa. Yes. 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 1 quarter and when the ramp-up of these projects is pushed out?

[Theresa B. Jang, executive]

Yes. So 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. Some of these projects, the BC Hydro project that I referenced earlier, for instance, is something that we've been waiting on for a while to get going, and we're starting to see that now. So that's just a good example where we have -- we've won the work. It's in our backlog. We've got people sort of standing by and ready to go. And we just need, as we work with our client, to get the project up and running so that we have our staff on -- working on the steady state.

So we're also seeing in the mining sector. And that's going to take a little while to sort through. And again, a lot of that is regulatory, some of it is driven by outlook for commodity prices and so on. But 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, 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 that be the exposure to Energy & Resources?

[Theresa B. Jang, executive]

Not so much, Benoit. We came off in Canada. We had a couple of projects, particularly in Environmental Services that were very high margin and really big projects. And so that included some of the coastal gas work, working for Metrolinks in Ontario. And that work has wound down. And so that's what you're seeing in the project margin, is just more reflective of just the overall mix that we have this year versus last.

[Benoit Poirier, analyst]

Okay. And 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?

[Gordon Johnston, executive]

Yes. So one area in particular that we're monitoring right now, Benoit, is Australia and particularly on the transportation side. We -- I think we've chatted previous quarters that the federal government in Australia launched their federal infrastructure review as a result, canceled about 20% of -- or deferred about 20% of the projects that they were planning to move forward with. So we've seen that.

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 trended a bit slower the first part of this year. But as we mentioned with the transition to the labor government, then really looking to bear down and move forward with the -- with house building there, I think that will be very positive for our group going forward.

So those are the 2 primarily that we've got our eye on, is transportation, Australia and our community development business in the U.K.

[Benoit Poirier, analyst]

Okay. Great. And maybe last 1 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, 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 are still confident to achieve 100% conversion for this year.

[Theresa B. Jang, executive]

Yes. So I'm really happy with where DSO is, particularly when we've got this continued pace of organic growth. So to be able to maintain DSO below 80 days is really positive.

When we get down to 75, it's pretty hard to predict, to be honest, just given the volume of projects that we have and the complexities around those sort of billing processes. But we're happy with where it is, and there's always room to continue to drive it downward, and we're certainly going to try and do that.

From a free cash flow conversion standpoint, the goal to have a 1x coverage of net income is really a 3-year target. I think we almost achieved it last year. But that certainly, again, the goal is to try and push towards that conversion rate. And so we'll see how it goes. It's -- we're off to a really good start for cash flow generation, so I'm hopeful. But whether we get this year or continue to work towards that over the next 2 years remains to be seen.

[Operator]

Our next question comes from Maxim Sytchev with NBF.

[Maxim Sytchev, analyst]

Theresa, obviously, all the best in the future. 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 bigger the multiple? How -- what are you guys seeing on the ground right now?

[Gordon Johnston, executive]

Yes. I think we're -- in general, we're seeing the trends are pretty consistent, Max. So 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, analyst]

Okay. Okay. That's great. 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 [indiscernible] being better right now, that's helping to offset it. Just curious about the sort of interplay of kind of commodity verticals and how that pertains to Environmental Services overall.

[Gordon Johnston, executive]

Yes. We -- our ES business is -- remains pretty busy. Particularly, we're seeing strong growth globally. We're -- there is a little bit of slowness from an organic growth perspective in Canada right now. But 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 transportation, water, citing a new water main, ES is engaged with all of our lines of business. So no, we're optimistic about the environmental business. We don't see that really retracting going forward. So I think we feel good about it.

[Maxim Sytchev, analyst]

Yes, makes sense. And then actually, sorry, because you mentioned Water. And I'm curious if you have any cuts of hotcake on the latest sort PFAS of flip flopping on the 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.

[Gordon Johnston, executive]

Our Water business is so well diversified that when as PFAS began to pick up, certainly, we're front and center in that work. And we've mentioned up to $200 billion in capital was initially estimated there. We know it's going to be more than that. But it's not a meaningful or contribution to the overall net revenue. So whether PFAS goes up a little bit or it comes down a little bit, our Water business looks to remain very, very solid for the years to come.

[Operator]

Our final question comes from Ian Gillies with Stifel.

[Ian Gillies, analyst]

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 '25 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, executive]

No. I think the opportunity to expand margin next year is really good for a number of reasons, including what you're pointing to around the integration work wrapping up. It's the enhancement that comes from having a bigger scale, a bigger platform. It's those that have joined us through the acquisitions being integrated and on the Stantec platform. It's our own employees that are taking the time and working with our new colleagues that -- and helping with that transition.

But we've noted a couple of times as well that when you look at where we are this year, the wind down of some larger projects that we've been waiting for others to ramp up. We -- as that ramp-up takes hold, that will drive strong utilization and reduce the amount of admin labor that we have. So there's a number of things that as we move forward will lead to, I believe, margin enhancement that will be on track to achieve that 17% to 18% that we're targeting for the end of 2026.

[Ian Gillies, analyst]

That's very helpful. The other question I had is around the M&A pipeline. I'm just curious on what opportunity ZETCON has 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 a critical mass?

[Gordon Johnston, executive]

Yes. 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 we're certainly interested in moving forward. We want to get ZETCON itself into Stantec a little bit. There's some IT things that we're working through getting on those systems and so on. So we're -- 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 are to continue to expand and get that critical mass, as you mentioned, that we want in Germany.

[Operator]

Thank you. At this time, I'm showing no further questions. I would like to turn it back to Gord for closing remarks.

[Gordon Johnston, executive]

Great. Well, thank you, operator, and thanks, everyone, for joining us this morning. If you have any additional follow-up questions, Jess Nieukerk, our VP of Investor Relations, is always available for you call. So thanks very much.

[Theresa B. Jang, executive]

Thank you.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.