Earnings Call
Stantec Inc (STN)
Earnings Call Transcript - STN Q3 2022
Operator, Operator
Welcome to Stantec's Third Quarter 2022 Earnings Results Conference Call. Leading the call today are Gord Johnston, President and Chief Executive Officer; and Theresa Jang, Executive Vice President and Chief Financial Officer. Stantec invites those dialing in to view the slide presentation, which is available in the Investors section at stantec.com. Today's call is also webcast. Please be advised that, if you have dialed in while also viewing the webcast, you should mute your computer as there is a delay between the call and the webcast. All information provided during this conference call is subject to the forward-looking statement qualification set out on slide two, detailed in Stantec's management discussion and analysis are 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 am pleased to turn the call over to Mr. Gord Johnston.
Gord Johnston, CEO
Good morning and thank you for joining us today. I'm very pleased to report record third quarter results that delivered in line with our expectations. Our results reflect strong operational performance and the ongoing solid execution of our strategic plan, delivering both top and bottom line growth. We generated a 24% increase in net revenue, reaching approximately $1.2 billion, propelled by the key drivers that we've noted over the course of this year; aging infrastructure, climate change, and sustainability, and the reassurance of domestic production. Net revenue was driven by double-digit organic growth of 11% and acquisition growth of 13%. We continued to drive organic growth in each of our geographic regions and business units. Notably, water, and energy and resources delivered 16% and 17% organic growth, respectively. And environmental service continues to have a very strong year, with over 9% organic growth and a 47% net revenue increase overall. Water environmental services continue to account for 40% of our business, which speaks to the strong weighting of our business towards addressing climate change and sustainability challenges. We achieved solid project and EBITDA margins of 54.1% and 16.7%, respectively, and this performance translated into adjusted diluted earnings per share of $0.86 for the quarter. Looking at our results by region, our activity level in the US continues to increase, driven by momentum in both public and private investment. We grew net revenue by almost 29% overall with 12% organic growth, 13% acquisition growth, and 4% from the stronger US dollar. Organic growth in water was driven by the ramp-up of public sector and industrial projects, including advanced manufacturing projects, as well as our work on large-scale water security projects, addressing water scarcity risks in the Western US. We also delivered solid organic growth in infrastructure from work on projects in transportation, as well as in industrial and residential land development activities. And we continue to see activity levels recover in buildings with investments still flowing into healthcare and science and technology. Of note, our US environmental services business has now grown to match the net revenue generation of our US infrastructure business. Our results reflect how well aligned our US business is to continue to capture the wave of opportunities and funding being made available to address the key drivers in developing trends. Canada continued to perform very well. Net revenues were up 7% in the quarter, all attributed to organic growth. Similar to the US, both private and public spending remains robust in Canada. We saw the strongest growth in environmental services with continued high demand for permitting work in archaeological services and in energy and resources where power transmission and distribution and energy transition work generated continued opportunities. We also grew our infrastructure revenues with ongoing work in community development through the housing market, bridge work in Quebec, and the continued recovery efforts in British Columbia from last year's flooding. Work on public healthcare and private commercial projects drove growth in our Building segment. And our Global region continues to lead with 38% net revenue growth for the quarter or 44% on a constant currency basis. Global also continued to have the highest organic growth at just over 14%. The strength of our acquisition programs generated additional net revenue growth of 30%. Our water business continues to be a significant pillar for us to capture long-term framework opportunities in both the UK and New Zealand. And we also continue to see strong demand for our services in community development and in mining. So, you can see that the themes we've been discussing continue to play out across all of our regions. With that, I'll turn the call over to Theresa to review our Q3 financial results in more detail.
Theresa Jang, CFO
Thank you, Gord and good morning, everyone. As Gord stated, Q3 was a very solid quarter for us. We grew gross revenue by 26% and net revenue by 24%. Project margin was also up 24%, driven by strong net revenue growth. As a percentage of net revenue, project margin was very solid at 54.1% in line with our expectations. Our project margin reflects our continued discipline in project execution, our ability to increase rates on certain projects to mitigate the impacts of wage inflation and increase selectivity in project pursuits. Consistent with the increase in our project margin, we also delivered adjusted EBITDA growth of 24% and through solid execution across the business, adjusted EBITDA margin was 16.7%, directly in line with Q3, 2021. Turning to our earnings, net income in the quarter was $68 million or $0.61 per share. This was down slightly compared to Q3, 2021, primarily driven by acquisition-related expenses. Our adjusted net income for the third quarter was $95 million or $0.86 per share, an increase of 18% and 19%, respectively over Q3, 2021, reflecting our focus on delivering both top-line and bottom-line growth. Looking at our liquidity and capital resources, operating cash flows in the quarter were $93 million. DSO was 86 days, largely resulting from the Cardno integration and two days from effective foreign exchange. And net debt to adjusted EBITDA was at 1.9 times. As we approached completion of the Cardno financial migration, cash flows are beginning to normalize, and we continue to expect cash flows, DSO, and leverage to be at more typical levels by the end of the year. However, the disruption during the financial migration has led to our average debt level for the year being slightly higher than anticipated, and this will impact 2022 adjusted ROIC. With that, I'll turn the call back over to Gord.
Gord Johnston, CEO
Thank you, Theresa. We continue to see very strong activity across our business. This is clearly evident in our backlog, which has grown organically by 15% since the beginning of the year and has reached an all-time high of $6.2 billion, representing 14 months of work. As expected, increases in backlog were particularly strong in the US where we had almost 21% organic growth followed by 10% organic growth in Canada. The projects being recorded in backlog are largely following the themes that we've been discussing throughout the year, driving 20%-plus organic growth in our backlog for infrastructure, buildings, and energy and resources. Turning to some of our major project wins in the quarter. In the US, we were awarded a bridge and structures project through the Colorado Department of Transportation for construction management, construction inspection, and materials testing. And we're also very active with project awards for our water programs around the country. These include the design of an alternative water source program in Illinois, project management in a biological review for underground systems hardening in California, and projects for water quality and dam improvements in the Western US. Turning to Canada, in British Columbia, we were selected as the prime consultant for the Cape Horn Pump Station Number 3 for our client Metro Vancouver. And in Toronto, we received a continued services and funding contract with Metrolinx in the Greater Toronto area. In our Global region, we are excited to be contributing to the development of the transport corridors in the Horn of Africa. This project will enable increased mobility and trade within Africa and within Europe. And we've been awarded project management services for an airport expansion project in Asia, our first in the region. These highlighted project wins are reflective of the robust funding being directed towards addressing significant multi-faceted challenges being faced around the world. As we engage with our clients, we continue to see strong advancement of projects, despite some of the economic headwind fears. The message remains the same, that the need to address these imperatives continues to outweigh the risk of cost increases and recession concerns. So, as we look towards the rest of the year with the strong performance that we've delivered year-to-date, we are confident in our ability to achieve our 2022 financial targets for adjusted diluted EPS growth, net revenue growth, adjusted EBITDA margin, and adjusted net income margin. As Theresa indicated, we now anticipate delivering adjusted ROIC of greater than 10% for 2022 compared to our previous guidance of greater than 10.5%. Our execution has been solid. I'm very pleased with the continued growth that we're seeing in all our regions and businesses. We expect this dynamic to continue into next year and into the years to come. In the US, public funding from the IIJA, the CHIPS Act, and the Inflation Reduction Act is starting to accelerate and provide more opportunities in these critical areas. Similarly, in the UK, early procurement for AMP 8 services is already underway. Spend levels for AMP 8 are expected to be higher than AMP 7 as they seek to address severe drought conditions that we haven't seen in decades and the continuing need to harden critical water infrastructure. And in Canada, the need for environmental services and energy transition continues to grow at an unprecedented pace. Stantec is very well-positioned to capture many of these opportunities and to create significant value for all of our stakeholders. As we move into 2023, the last year of our strategic plan, we will remain focused on execution and excellence to deliver on the targets that we've set. And with that, let me turn the call back to the operator.
Operator, Operator
Our first question comes from Yuri Lynk with Canaccord Genuity. Your line is open.
Yuri Lynk, Analyst
Good morning, Gord. Good morning, Theresa. Getting towards the end of the year here, so I thought I'd take a stab at just any update on your 2023 goals, particularly around 16% to 17% margin and 11% EPS growth. Just wondering if the inflationary environment, including higher rates, is kind of weighing on your ability to achieve those targets.
Theresa Jang, CFO
I think we're confident that our 2023 targets are in sight for us. We're working hard towards achieving that. We will formally roll out our outlook for 2023 in February. But there are always going to be pressures and wage inflation is one of them, but we continue to find ways to manage them to maintain our project margins, to operate more efficiently. So, overall, we're confident that those targets that we set for 2023 will be achieved.
Yuri Lynk, Analyst
Okay. And on the margin front, is it just some of the cost synergies coming through and better absorption of your SG&A rather than gross profit improvement?
Theresa Jang, CFO
It's really all of the above. We look towards various factors in driving our EBITDA margin. As I mentioned, we are being selective about the projects we undertake, focusing on pricing and acceptance of margins while pursuing rate increases to offset the higher wages we’ve observed. Additionally, synergies play a significant role. We aim to operate as efficiently as possible throughout our organization. We've noticed an increase in the utilization and expansion of our delivery center in Pune and, now, in Manila. This is a crucial aspect of our overall cost strategy. Moving into 2023, we have specific targets for growing the use of those services. There isn't one key element; it's a combination of many factors.
Yuri Lynk, Analyst
Okay. That's fair. I'll leave it there. Congrats on a nice quarter.
Theresa Jang, CFO
Thanks.
Gord Johnston, CEO
Yeah. Thank you.
Operator, Operator
One moment for our next question. Our next question comes from Devin Dodge with BMO. Your line is open.
Devin Dodge, Analyst
Yeah. Thanks. Good morning. There continues to be good development in the backlog. It's great to see, but can you comment on the efforts to expand the workforce? Just wondering if you've seen net additions in Q3, and should we expect headcount to push higher again into Q4?
Gord Johnston, CEO
We have certainly experienced an increase in headcount during Q3. Our voluntary turnover rates seem to have stabilized; they were slightly up in Q2, but Q3 remained consistent. In fact, Q3 saw some of the highest numbers of new hires in our history. We are bringing in a significant amount of new talent, so headcount is definitely on the rise. Looking ahead to Q4, we plan to continue hiring, although our workforce may sometimes decrease seasonally in Q4 depending on when winter arrives here in Canada. Some of our field programs might wrap up as colder weather and snow set in. Therefore, while we will continue to bring in new hires, it's typical for our workforce to decline slightly in Q4.
Devin Dodge, Analyst
Okay. So, in the outlook, there was mentioned that year-to-date figures were at the end of the guidance ranges, but I think you're expecting Q4 will bring them down and closer to the midpoint. So, given the seasonality you just mentioned, I think this makes sense for EBITDA margins and net income margin, but does this comment also apply for net revenue growth? Either organically or just overall net revenue growth?
Theresa Jang, CFO
Yeah. I mean, net revenue for Q4 should continue to be very strong. We do expect to continue to see good growth in Q4. And of course, because so much of our business is weighted towards the US, we are getting a nice tailwind from exchange rates as well. So, net revenue will it push past the upper bound of our range possibly. But overall, I think we want to draw attention to our overall profitability whether that be EBITDA margin or EPS, and we do expect that to be within the range.
Devin Dodge, Analyst
Okay. Makes sense. And if I just sneak one more in, question for you, Theresa. In the cash flow statement, I think there was about $100 million usage for investments held for self-insured liabilities in the quarter. Looking back, I don't believe we've seen anything close to that magnitude. Just can you give some color for the drivers behind that cash outflow?
Theresa Jang, CFO
Yeah. For sure. So, over the course of this year, actually, we changed the management of our portfolio for our self-insured liabilities, equities I should say. And so, we did have a big outflow, as you note, in the quarter of about $100 million for a purchase. But if you look at the line below that on the cash flow statement, you'll see that a corresponding almost purchase of $75 million. And then further for the year-to-date, the purchases were an outflow of $144 million, but then there was a sale of $179 million. So, it has moved around a little bit. The numbers on a gross basis are higher than you would typically see because of the movement in sale and transfer of investments. But net-net, the impact isn't that significant.
Devin Dodge, Analyst
Okay. Thank you. I'll turn it over.
Operator, Operator
One moment for our next question. Our next question comes from Jacob Bout with CIBC. Your line is open.
Jacob Bout, Analyst
Good morning.
Gord Johnston, CEO
Morning Jacob.
Jacob Bout, Analyst
Strong backlog and organic revenue growth in this quarter. Can you talk geographically if you're seeing any signs of weakness? Seems like it can lag a bit in the US, and Global, and do things improving in Canada?
Gord Johnston, CEO
I think we feel quite positive about our operations in each location. The situation in the US is progressing as we anticipated. As you may remember, towards the end of last year, the rebound was slower. Canada rebounded more quickly than the US last year, which is why our Canadian organic growth is compared against a higher figure from last year. The US is developing as expected, with many projects starting to come in, especially in the buildings group and significant healthcare projects. Our backlogs and organic growth are increasing, and we feel very optimistic about that. Similarly, Global has shown excellent growth throughout the year, and we expect this trend to continue next year as well.
Jacob Bout, Analyst
Are you seeing any change in customer behavior as you move through 2023?
Gord Johnston, CEO
We've been speaking to all of our business leaders and the people who are closest to the clients. Are we seeing projects get delayed and an increase of projects that might be getting canceled? And we're really not seeing that in any of our business units or in any of our geographies. Our customers have not been telegraphing concern for Q4 and have not been telegraphing concern for 2023 either. So, I think we feel pretty good about the backlog that's there, that it's valid, and that we'll be drawing upon it as we move forward.
Jacob Bout, Analyst
And strategically as we think a bit longer term, as far as geographic mix, I think in the quarter it was roughly 50% US and then 25 percentage for net revenue Global and Canada. Is that kind of the right geographic mix strategically or where do you think you would be outside?
Gord Johnston, CEO
We've talked a little bit about overall from an M&A perspective, where we might be looking to deploy capital and to continue to grow. So, certainly, there are continued opportunities for us to grow headcount through M&A activity in the United States, but also a lot of opportunity. If you look at the UK, things are a little challenged there right now, certainly, but we continue to look for good long-term opportunities there. I think we could double or triple our size in the UK. We're still looking at, as we've been messaging consistently, looking up into the Nordics and Scandinavia and countries to continue looking for opportunities there because we really aren't present in those geographies. And then, additional opportunities down in Australia. So, I think the mix in general is comfortable, but I think you'll see a change over the years to come based on these acquisition growth opportunities.
Jacob Bout, Analyst
I'll leave it there. Thank you.
Gord Johnston, CEO
Thanks Jacob.
Operator, Operator
One moment for our next question. The next question comes from Chris Murray with ATB Capital Markets.
Chris Murray, Analyst
Thank you, everyone. Good morning. Following up on that question, I would like to know more about the UK business. It has certainly faced many changes in government and some delays. Gord, you mentioned that AMP 8 is coming. Looking back a couple of years, your focus has primarily been on water in the UK, but there has been some discussion about branching into other areas. Can you provide further insights on how you view the evolution of the UK market? You hinted that you believe M&A could help you double or triple in that market. With all the current disruptions, are there opportunities arising that may expedite that plan?
Gord Johnston, CEO
As we examine the UK market, we have consistently stated that we are the leading water company there, and this position remains stable despite inflation and economic challenges. Our water projects are ongoing, and with AMP 8, we anticipate even higher expenditures due to issues like drought. We have also been expanding our focus into planning. With the acquisition of Barton Willmore earlier this year, we have become the top planner in the UK, building on the strong planning capabilities of Peter Brett Associates. There is an ongoing discussion about the shortage of affordable housing, and various housing authorities across the UK are actively seeking solutions. We are involved in multiple large-scale planning schemes, which is advantageous as we also engage in community design work. Additionally, Peter Brett Associates has a robust buildings and infrastructure division, which has enabled us to secure transportation and highway projects that wouldn't have been possible without their team. We are developing a solid multi-sector business in the UK. Regarding the current economic situation, while we are aware of the potential for multiple compression in M&A activity, we are engaging with strong Tier 1 firms that have weathered downturns successfully. We will maintain our relationships with these companies and act when the time is right.
Chris Murray, Analyst
Okay. That's helpful. Thanks. My next question maybe more for Theresa. Theresa, as we've gone through Q3 reporting, a number of companies have talked about changes in taxes. I guess, there's been a lot of changes in US regulations, the UK has been whipping around tax rates, maybe early days. Anything to think about cash flows? Is there any potential for like one-timers that we should be thinking about or any material change to tax rates or cash taxes next year that we should maybe be aware of?
Theresa Jang, CFO
Yeah. I mean, cash flows, particularly when you operate on a global scale like we do, are always tricky because there are so many moving parts to it. At this stage, I would not say that there is anything in particular that I'm aware of that will require an unusual cash outflow. We will have better guidance for you in February, but there's always going to be kind of puts and takes. This global minimum tax of 15% that has been discussed. We don't expect that it will have much of an impact on us. The second may, but we don't think that it'll be material. So, there are all things that we monitor very, very closely. And as I said in February, we'll give clarity as we can on that, but nothing that I see on the horizon that will be kind of a big material cash outflow.
Chris Murray, Analyst
All right. That’s helpful. Thank you.
Operator, Operator
One moment for our next question. Our next question comes from Sabahat Khan from RBC. Your line is open.
Sabahat Khan, Analyst
Hi, good morning. Gord, earlier you mentioned the backlog build in the US. One of your peers shared some early insights regarding the 2023 outlook, specifically about when the IIJA will start to produce effects. At this stage, could you explain the funding sources that are influencing demand? It seems that some of the larger bills might begin to take effect in 2023, yet the backlog on the US side is significantly increasing for you. Can you elaborate on which end markets are receiving more funding? Additionally, I’d like to hear your perspective on when some of the major US bills you're connected to are expected to start impacting the situation. There was a suggestion yesterday about a timeline beginning in calendar Q2, but I’m interested in your thoughts.
Gord Johnston, CEO
I agree that a significant portion of the IIJA funding and some of the IRA funding will start coming in soon. We already have some of that in our backlog, generating a small amount currently, mostly from early releases. I'm optimistic that we'll see more of this funding in the second and third quarters of next year, which will further enhance our robust backlog in the US. Overall, we've experienced backlog growth across all our business units. Notably, the Building segment has shown strong growth, particularly with healthcare projects and logistics centers. The energy and resources group has also seen the largest backlog growth, driven by a shift towards renewable energy. Overall, there has been backlog growth in every business unit in the US, and I expect this trend to continue and strengthen as we progress through 2023.
Sabahat Khan, Analyst
All right. Great. Thanks for that. And then, as you look over the next years, I think you talked about kind of the margin profile a little bit earlier on. I guess, how are you thinking about kind of the drivers of this margin improvement? Do you think it's going to be sort of the larger scale post-Cardno, kind of the end market? Can you just maybe walk us through how you think about your margin progression over the next few years kind of post-Cardno?
Theresa Jang, CFO
The Cardno business is very similar to ours, and we've already achieved some synergies. We'll continue to seek efficiencies as we combine the businesses. The key factors for our EBITDA margin revolve around effective project selection and execution, along with increasing our use of delivery centers in India and the Philippines. We've invested in our back-office systems this year, which will enhance the efficiencies derived from those investments. We're committed to driving innovation and efficiency in all areas. Looking ahead to next year, our target margin of 16% to 17% is within reach, and that is our goal. As we enter the next stage of our strategic planning, we will explore potential step-change opportunities, but primarily, our focus will be on making incremental improvements rather than relying on a single significant change.
Sabahat Khan, Analyst
Okay. And then, just one last quick one. I think there was some discussion earlier on kind of some of the tax changes. And I think we heard from your peers that there was a US tax change around expensing R&D. So, maybe we could take this offline, but I guess for you guys, that wasn't an impact in the quarter, I guess? And maybe you don't do a lot of R&D in the US. Just trying to understand if there was any impact from that change in tax policy in the US side.
Theresa Jang, CFO
Yes, it did have an impact on us because we maintain a strong R&D program. For the year-to-date, this has resulted in additional cash taxes of about $20 million, and we anticipate around $10 million more for the remainder of the year. However, as I mentioned earlier, there are always different factors at play. When we evaluated our total cash flow in connection with our capital income, particularly our US tax income, they balanced each other out. Therefore, we didn’t feel it was necessary to highlight this further.
Sabahat Khan, Analyst
Perfect. Thanks so much for the color.
Operator, Operator
One moment for our next question. Our next question comes from Maxim Sytchev with National Bank Financial. Your line is open.
Maxim Sytchev, Analyst
Hi. Good morning.
Gord Johnston, CEO
Morning.
Theresa Jang, CFO
We're finalizing our October results and have noticed an improvement in our working capital as Days Sales Outstanding has decreased a couple of days since the end of September and is moving closer to our target of 80 days. The developments are aligning with our expectations, which is encouraging. However, we must maintain the pressure to reach our usual 80-day target. Our goal for the end of the year is to return to that 80-day range. Additionally, the ongoing Cardno migration has influenced our financial performance. Our revenue growth is impacted because the same team manages both projects and the migration. Consequently, our overall activity levels are elevated, causing invoicing and collection processes to take longer than normal. This activity level has contributed to our current working capital situation, which is typical under such conditions. However, we are observing positive trends and anticipate this will continue into year-end.
Maxim Sytchev, Analyst
Okay. So, do you think it's going to be possible to get leverage maybe down to, I don't know, like 1.6%, something around that because again like some of the stuff is one-off free ups?
Theresa Jang, CFO
Yeah. For sure. For us, that's our goal to be somewhere around about 1.5%, 1.6% range. It is absolutely possible, and we're doing everything we can to push towards that.
Maxim Sytchev, Analyst
Okay. Thank you very much for clarifying. And then another question for Gord, if I may. I think in the past, we spoke about some semiconductor opportunities. One of the things that I'm more sort of curious about is I guess if you can attach sort of any materiality to those things? And maybe talk about sort of the attach rates of additional services that you're able to introduce to those, I presume, new clients? So, maybe just any color on that vertical, please?
Gord Johnston, CEO
Yes, absolutely. We mentioned last quarter that we are currently collaborating with five of the top ten manufacturers globally. Besides our ongoing projects, we have $1 billion in potential fees within our sales pipeline. While we won't secure all of that, it represents a significant opportunity for us, not just in the United States but also in Europe and other regions. These clients often take us to different locations. Regarding the services we provide, they typically include zoning, site selection, water management, transportation, and master planning. We also perform advanced water and wastewater treatment at these sites, which frequently serves as our initial entry point. Once we are involved, there are many additional areas we can serve, including parking lots, office buildings, and site security, affecting nearly all our business lines at large facilities. This is why our fees in the opportunity pipeline stand at approximately $1 billion. However, I want to clarify that this is not backlog, and we won't capture all of it, but the potential is substantial.
Maxim Sytchev, Analyst
All right. And then, in terms of talking to some of the stuff in Europe, I mean, like is this more of a, I don't know, 2024 sort of timeframe? Or how should we think about it in terms of timing?
Gord Johnston, CEO
Yes, as we engage with the firms, we are currently searching for sites and related elements. You might be correct in thinking that significant revenue generation would likely begin in 2023, but it is also expected to extend into 2024.
Maxim Sytchev, Analyst
Okay. Excellent. Thank you so much. That’s it for me.
Gord Johnston, CEO
Okay. Thanks Max.
Operator, Operator
One moment for our next question. Our next question comes from Benoit Poirier with Desjardins. Your line is open.
Benoit Poirier, Analyst
Good morning, Gord. Good morning, Theresa.
Gord Johnston, CEO
Good morning.
Benoit Poirier, Analyst
Gord, you provided great insight into the impact of the US infrastructure bill, which is developing as expected. You'll be ending the year with strong organic growth. I was wondering, based on your comments about the timing for the US infrastructure bill, if it would be reasonable to anticipate an acceleration in organic growth in 2023, or is it too early to consider the organic growth outlook?
Gord Johnston, CEO
We haven't put out our guidance yet for next year. However, if you consider the macro environment, the speed and volume of projects emerging from IIJA, especially in the infrastructure sector, are expected to increase. We will be coming off a higher comparison as well, but I believe there will be significant opportunities for us in the US infrastructure space in 2023.
Benoit Poirier, Analyst
Okay. Perfect. And on the water side, you provided some color about the upcoming AMP program 8. Could you provide an update on the AMP 7 program so far? And maybe more color about the expectation for the forthcoming program and maybe the timing?
Gord Johnston, CEO
We are currently progressing well in the five-year AMP 7 program, and it is proceeding as we anticipated with our clients across the UK. Some of them are already starting discussions about reprocurement for AMP 8. Typically, they will soon present their capital expenditure plans to the regulator, which is crucial since this spending influences water rates for consumers. The regulator will assess factors such as drought resilience, leakage reduction, regulatory burdens, and overflows, along with the necessary capital programs to address these issues in the upcoming AMP 8 cycle. Once they finalize their plans with the regulator, they will get back to us. Although we are not at that stage yet, many clients are beginning to consider it. There is a common belief that AMP 8 spending will exceed that of AMP 7, although I cannot provide a specific figure at this time.
Benoit Poirier, Analyst
Okay. Perfect. And maybe for Theresa, you provided an excellent explanation regarding the 86 days for DSO. The outlook for 2023 remains strong. I'm just curious if the target of under 80 days is still feasible, or if we might see it rise above 80 days in the future, considering the robust market conditions beyond Q4.
Theresa Jang, CFO
My expectation is that we will maintain 80 days or fewer. I believe this is achievable, and it's certainly what we are aiming for. I don't see any reason why we can't reach this target after we move past the significant push in the fourth quarter and stabilize with Cardno. So for now, that is the goal we will be pursuing.
Benoit Poirier, Analyst
That's right. Thank you for the time.
Gord Johnston, CEO
Thanks Benoit.
Operator, Operator
One moment for our next question. Our next question comes from Michael Tupholme with TD Securities. Your line is open.
Michael Tupholme, Analyst
Thanks. Good morning.
Gord Johnston, CEO
Morning.
Michael Tupholme, Analyst
Gord or Theresa, wondering if you can talk about your confidence in the outlook for your Global geographic segment. And I guess, specifically, I'm looking at the change in organic backlog growth for Global this quarter. It does sound like you remain upbeat, but curious about the year-to-date organic backlog growth in that region moving down to 3.2% in Q3 from 13.4% in the second quarter.
Gord Johnston, CEO
We’re not overly worried about the backlog growth. There are several significant projects in the pipeline, so these fluctuations can happen. Additionally, Global achieved our highest organic growth at approximately 14%. We are actively working through that backlog, and when considering the overall growth, it reflects some irregularities in the timing of project awards and the strong organic growth that is reducing the backlog. Therefore, we are not concerned at this time.
Michael Tupholme, Analyst
Okay. I'm glad to hear that you're not experiencing any significant slowdown in overall activity due to the rising rate environment and inflation pressures. I can understand why this might be true for public sector work. However, can you confirm that the same applies to the private sector? Are you observing any issues there, and what do you think is behind that? How are clients managing the rising rate environment and increased project costs? How are they securing additional funding if necessary?
Gord Johnston, CEO
To answer your first question, I think your statement is correct. We certainly see that in public sector projects. However, after checking with our business leaders about the private sector, we have not observed any significant increase in projects being delayed or canceled. As for the reason behind this, I believe there are still strong underlying fundamentals. For instance, we are working on a large logistics center in Southern California, and interest in that facility remains very high. We do not see any signs of slowdown there or in other similar projects. While higher interest rates or an economic downturn might eventually change this, we have not experienced it yet.
Theresa Jang, CFO
I think it's important to note that in the US, the IRA funding is playing a crucial role in supporting private investments. In fact, project proponents who might have hesitated are now being encouraged to invest significantly in energy transition due to this funding. This financial support is effectively driving investments as intended, and these stimulus programs are having a positive impact.
Michael Tupholme, Analyst
Okay. That's helpful. Thank you. And then lastly, just a question about the sustainability of the strength you're seeing in energy and resources. It's been one of your better performing business units on a year-to-date basis, but it was I think the best performing business unit from an organic growth perspective in the third quarter. Gord, I think you mentioned some of that's being driven by renewables activity. And so, I can appreciate there's probably a long tail on that type of work. But as it relates to the oil and gas piece, has that been a major contributor? And given that's a more cyclical area, how do you see that looking going forward? And again, just touch on the sustainability of that strength?
Gord Johnston, CEO
Absolutely, that's a great point. The renewables sector has indeed been growing and is expected to continue its upward trajectory. We're also observing significant activity related to enhancing the power grid, particularly with the transition of overhead power lines to underground installations. Additionally, the mining sector remains robust. Although there has been a slight decline recently in copper and iron ore, many investment decisions have already been made, and the projects we are involved in are progressing well. Overall, the renewables and power sectors are performing strongly, as is mining. However, in terms of oil and gas, we've noticed that the fees derived from this sector as a percentage of our total net revenue have been gradually decreasing over the past few years. Our focus in oil and gas primarily revolves around midstream pipelining work, and we are actively engaged in several projects. Yet, as these projects conclude, the representation of oil and gas work in our backlog has been consistently trending downward. We are also assisting many of our oil and gas clients with transitional projects, particularly focusing on pipelines for carbon sequestration or natural gas. We are in discussions with clients about these transitions. The question moving forward will be whether to classify these projects as oil and gas, even if they involve carbon sequestration pipelines. In summary, we are optimistic about the long-term prospects for that segment of our business.
Michael Tupholme, Analyst
Okay. That’s helpful. Thank you.
Operator, Operator
One moment for our next question. Our next question comes from Ian Gillies with Stifel. Your line is open.
Ian Gillies, Analyst
Morning everyone.
Gord Johnston, CEO
Morning.
Ian Gillies, Analyst
It has been a very challenging hurricane season in the US, and Stantec has a long history of disaster recovery work in that area. Can you remind us how long such work typically appears in the backlog? Additionally, does it tend to be significant for the growth profile?
Gord Johnston, CEO
After the recent hurricanes, we have teams on the ground almost immediately to assess the damage. For instance, in Puerto Rico, we had 14 or 18 crews deployed in various areas to evaluate the situation and develop remediation plans. Similarly, in the continental United States, we are involved with repair efforts for drainage pump stations and sewage lift stations that have been affected. While the impact can be significant, we do not consider it materially affecting our overall portfolio. It's important to recognize that these projects can take a considerable amount of time. For example, the PCCP lift station we installed in New Orleans following Hurricane Katrina was commissioned about ten years after the event. This timeline includes the hurricane and flooding, recovery efforts, design of the new pump station, construction, and eventual commissioning. Many of these projects can span multiple years. While ten years for Katrina might have been on the longer side, it's not unusual to see similar timelines. So we have both short-term recovery efforts and long-term design and commissioning tasks.
Ian Gillies, Analyst
Okay. That's helpful. And then, the backlog is obviously very, very healthy. You're adding headcount. But Gord, is there any increased level of concern that you're not going to be able to add people quickly enough and you could end up with some disappointing customers just because you can't quite get to the volume of work?
Gord Johnston, CEO
We evaluate this for every project we pursue. If we can't meet our quality standards and the timeline we've committed to, we'll seek partnerships to help us complete it, or we may redirect work to our delivery centers in India or Manila, among other solutions. However, we will not take on projects unless we have a clear plan to deliver them on time.
Ian Gillies, Analyst
Is there any intention to add additional delivery centers in international jurisdictions in 2023?
Gord Johnston, CEO
I think our main focus will be on continuing to grow our existing operations. Over the past year, we've increased our headcount at our delivery center in Pune, India by just over 20%. It's still early for us in Manila, but we have a solid team there. Therefore, we plan to concentrate on expanding these current centers before considering the addition of new ones.
Ian Gillies, Analyst
Okay. No, that’s helpful color. Thanks very much. I will turn the call back over.
Gord Johnston, CEO
Great. Thank you.
Operator, Operator
And I'm not showing any further questions at this time. I'd like to turn the call over to Gord for any closing remarks.
Gord Johnston, CEO
Okay. Well, thanks. I'd like to thank everyone for joining us today. And I look forward to engaging with many of you throughout the quarter. So, if you have any follow-up questions, please feel free to reach out to Jess, our Vice President of Investor Relations. And have a great day everyone.
Theresa Jang, CFO
Thanks everyone.
Operator, Operator
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.