Earnings Call
Stantec Inc (STN)
Earnings Call Transcript - STN Q2 2021
Operator, 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 Section at stantec.com. Today's call is also a webcast. Please be advised that if you have dialed in, while also viewing the webcast, you should mute your computer as there is a 20 second delay between the call and the webcast. All information provided during this conference call is subject to the forward-looking statement qualifications set out on Slide two, 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.
Gord Johnston, CEO
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 four 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 US 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 than half of which is in the US. 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 de-scoped 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 and sustainable design. In Q2, we were awarded a seven-year agreement to provide engineering and architectural services for drinking water installations for a major Quebec municipality. Buildings are performing exceptionally well due to the significant volume of major projects in the Canadian healthcare 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 several additional healthcare projects in our backlog and growing activity in the civic and industrial sectors, we expect continued strong organic growth from our buildings business. A 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 archaeologists 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. With the energy transition underway, we're seeing growing opportunities for Energy and Resources group in renewable energy. 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 US, although the US recovery is off to a slightly slower start. Overall, the Q2 performance of our US business was in line with our expectations, with 7.4% organic revenue retraction in contrast to organic growth last year. Our US results were significantly impacted by the strengthening of the Canadian dollar, and Theresa will go into this a bit later in the presentation. Our US 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 US 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 healthcare that we've seen in Canada is emerging in the US, 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 one 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 IDIQs for the US 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. 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 in 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. That expertise, coupled with their strong archaeological 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 US infrastructure stimulus. So the wave is coming in the US; while slower to materialize than in Canada, it will certainly be larger in scale and scope. 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 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 multi-year frameworks in our UK and Australian water businesses. In addition, other significant awards that are not yet in backlog include two separate pump storage facilities in the UK. 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 multi-disciplinary 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 Jang, CFO
Thanks, Gord, and good morning, everyone. As Gord mentioned, the change in the Canadian US exchange rate had a substantial impact on our US 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, is 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 0.9 times, below our targeted range. Days sales outstanding was 76 days at quarter-end, which is relatively consistent with Q1 2021 and down six 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. 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. 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 globally to be slightly stronger than initially projected, offsetting a slightly slower start to the recovery in the US. 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. 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 of a US infrastructure stimulus bill, we believe it's still prudent to exclude any potential upside from US 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 the 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.
Gord Johnston, CEO
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 US 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 US 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. 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. 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. I want to thank all of our employees for their continued commitment and diligence in supporting our clients and colleagues around the world. With that, we'll open the call up to questions.
Operator, Operator
We'll take our first question from Benoit Poirier with Desjardins Capital Markets. Please go ahead.
Benoit Poirier, Analyst
Yes. Good morning, everyone. Just with respect to 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.
Gord Johnston, CEO
Yeah. Thanks for the question, Benoit. 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. You noted earlier this week, we announced the letter of intent for Paleo Solutions. I suspect that there's going to be a number of additional firms in that 1,000 person and less category coming to market over the remainder of the year, particularly in the United States, as more folks are wondering what would happen from a taxation perspective. We're also finding that there's some activity in the over 1,000 person range. But these days, discipline is key for us, Benoit, because we're seeing that there's a lot of activity in the market, a lot of players. Maintaining discipline on the multiples that we're prepared to pay in order to have any transaction be accretive for us from a long-term perspective is crucial. But these things are always lumpy. 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 guess.
Benoit Poirier, Analyst
Okay. Thanks. Great color. And with respect to the US, obviously, a little bit slower recovery, but it seems the $1 billion of award notification is excluded from the potential impact of the trillion dollar 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, Gord?
Gord Johnston, CEO
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 US stimulus?
Benoit Poirier, Analyst
More about what's coming from the US stimulus, yes.
Gord Johnston, CEO
Yeah. It's interesting. When you look at the plan that's lined up from a US stimulus perspective, it really is right in our wheelhouse. When you look at roughly $550 billion in new funding over five years, $110 billion for roads, bridges, and other major infrastructure, $39 billion for public transit, $17 billion for ports, $25 billion for airports, zero and low-emission buses, electrical grid upgrades, and $55 billion for water infrastructure, there's a lot of things. And just going back to the electrical grid, there's $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 Paleo also does a lot of work with clients in that space as well. I think with our existing skillset and 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 US infrastructure bill when it's finally passed.
Benoit Poirier, Analyst
Okay. Thanks for the color.
Operator, Operator
We'll take our next question from Michael Tupholme with TD Securities.
Michael Tupholme, Analyst
Thanks. Good morning.
Gord Johnston, CEO
Good morning.
Michael Tupholme, Analyst
Good morning. Gord or Theresa, the admin and 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 two 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 Jang, CFO
Sure. 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. As we think about discretionary spending going forward, while we've baked into our EBITDA margin expectations for this year, there are continued savings and 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 toward the latter part of Q3 and into Q4. As we look toward 2022 and beyond, though, it is our intention that discretionary spending will not return to levels that we were at before the pandemic. We have not yet established what that target is or 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, Analyst
Okay. I appreciate that. That's great color. Thank you. If we look at the year-over-year margin improvement, EBITDA margin improvement in Q2, it 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? Can you hear me?
Gord Johnston, CEO
We can now, yes.
Theresa Jang, CFO
Sorry about that.
Michael Tupholme, Analyst
Okay, perfect. Or maybe I will re-ask the question. I'm not sure how much of that came through. So, the question was just -
Theresa Jang, CFO
Yeah, that would be great. EBITDA margin, right.
Michael Tupholme, Analyst
Yeah, the question was about - yeah, margins; so you had good year-over-year improvement in the second quarter. I'm 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?
Gord Johnston, CEO
So, Theresa, were you finished with your response?
Theresa Jang, CFO
No, I was just getting started when I got cut off. Michael, are you able to hear us?
Michael Tupholme, Analyst
I can hear you fine, yep.
Theresa Jang, CFO
Apologies again. So EBITDA margin, we feel pretty confident about the range that we have put out for the year. There is still a bit of seasonality in the way our EBITDA margins tend to go over the course of the year. We think that will still roughly be the same. You would think 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.
Michael Tupholme, Analyst
Okay. Thank you. I'll get back in the queue.
Gord Johnston, CEO
Thanks, Michael.
Operator, Operator
Alright. We'll take our next question from Jacob Bout with CIBC. Please go ahead.
Jacob Bout, Analyst
Good morning.
Gord Johnston, CEO
Good morning, Jacob.
Theresa Jang, CFO
Good morning.
Jacob Bout, Analyst
I want to go back to the US and maybe dig into the drivers of the negative organic revenue retraction we saw in the US. How much of this was the wind down in the transport infra projects versus, say, resurgence of the Delta variant or the delay in the US infrastructure stimulus?
Gord Johnston, CEO
Yes. To start off, we have confidence in our long-term - our US operations in the long term. We've 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 $0.5 billion is also coming there, even absent US infrastructure stimulus. Note that our comparison is to Q2 2020 in which we had some organic growth. To your point about the two major retractors that we did see in the US, in Q2, were transportation, and that is related to those - we typically don't like to call out individual projects, but there are two of them that are currently in that stage where we're winding down right now, as well as our buildings business which retracted a bit. We've noted that buildings really has begun to turn the corner in Q2 with the addition of new projects. We feel positive about that. These were not, Jacob, I don't believe, impacted at all by the resurgence of the Delta variant. We do believe that we'll see continued growth in the US going forward, Q3, Q4, but certainly into next year, even absent the US infrastructure stimulus spending, and that would provide only a stronger tailwind for us.
Jacob Bout, Analyst
Okay. 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?
Gord Johnston, CEO
No. Some of those - what we've tried to do there is, it just indicates the overall health of our markets, absent those US infrastructure stimulus. That is true, in excess of $1 billion in gross revenue that we were notified of award in the quarter. 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. It will take several years for us to work through that backlog, but what it provides us with is 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. It is just more indicative of the overall health of our backlog and our markets, supporting our long-term view that things continue to improve and gives us solid tailwinds.
Jacob Bout, Analyst
Okay. 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 Jang, 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. 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. There's a lot of discussion around whether it's US corporate tax reform or global tax reform. There are 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.
Jacob Bout, Analyst
Okay. Thank you.
Operator, Operator
Our next question comes from Chris Murray with ATB Cap Markets. Please go ahead.
Chris Murray, Analyst
Thanks, folks. 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 UK statutory rate. I'm assuming - does your guidance, I'm assuming, for this year, bake that in? And to your commentary about maybe slightly lower tax numbers next year, that's also already kind of in that impact?
Theresa Jang, CFO
Yeah. That would be right.
Chris Murray, Analyst
Okay. Thanks. 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?
Gord Johnston, CEO
Yes. Thanks, Chris. 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 in Q2, Q3, and Q4 of last year. Absent oil and gas, every one of our business lines in Canada had organic growth last - in Q2. Backlogs are up in Canada. Our book-to-burn virtually for every group is above one in Canada. Overall, Canada, US, and global, for all our combined, all of our groups had a book-to-burn in excess of one for the quarter, so I think we feel pretty good about that. In terms of sustainability, the backlog is there, and the pipeline of new opportunities is still looking good, Chris. 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.
Chris Murray, Analyst
Okay. That's helpful. Thank you.
Gord Johnston, CEO
Thanks, Chris.
Operator, Operator
We'll take our next question from Sabahat Khan with RBC Capital Markets.
Sabahat Khan, Analyst
Great. Thanks and good morning. 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 US or even internationally?
Gord Johnston, CEO
Thanks, Sabahat. When we look at the US, of course, the infrastructure is seamless still, continuing to be negotiated, and we'll see what sort of a timeframe we get there. I think what's interesting is that 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. I think that's going to create a nice tailwind for us. Even absent that, in the US, we talked about the large hospital neurological institute that we were awarded. We're seeing that soft backlog is there. So there's a lot of confidence, growing confidence, in the US in clients absent the US infrastructure stimulus. I think we feel good about that. Outside of the United States, in Canada, certainly, backlogs are up and even stronger from a global perspective. From a global transportation perspective, we're forecasting 17% organic growth going forward, driven by a lot of the work that we're seeing way down south in New Zealand and some work in Australia as well through our recent acquisition of GTA down there. I think infrastructure, from a Canadian, US, and a global perspective, feels like it's going to provide a pretty good tailwind for our industry for the next couple of years.
Sabahat Khan, Analyst
Thanks for that. Turning to the end markets that have experienced some favorable conditions over the last few years, particularly in the environment and water sectors, we've seen strong growth in these areas as well. Looking ahead to the next 12 to 24 months, do you anticipate these favorable conditions to persist? Which specific market do you observe an increase in demand for, considering the good growth in these two sectors?
Gord Johnston, CEO
Yes. When we talk about our water business first, we've seen organic growth in our water business each quarter for the last eight or nine quarters. It just continues to strengthen, pre-pandemic and even through the pandemic. Backlogs in water are solid. Our market presence is really very strong, whether it's in the United States, in Canada, or globally, and we see continued growth there. A large portion of that soft backlog is in the water space. From the environmental perspective, again, great backlog growth, as we've discussed. Our overall book-to-burn in Environmental Services feels good for us, certainly above one in the quarter. Theresa talked about the backlog growth overall as being extremely strong. We see that continued backlog growth will feed revenue generation for the quarters to come and strong support into 2022.
Sabahat Khan, Analyst
If I could just squeeze in one more. Looking at your balance sheet position here, it still looks good, and you've been chipping away with small to medium-sized transactions for a while. Can you maybe comment on the pipeline of opportunities and 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?
Gord Johnston, CEO
As mentioned briefly earlier, like, in that sub-1,000 person firms, which have 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. I do see, in the US, particularly, with pending tax changes, we'll see additional opportunities come to market in the second half of the year. The pipeline is full already, but we've heard discussion about a number of firms coming to market. As for the firms over 1,000 people, there are a couple of transactions that are live now. I think there are additional ones that we see coming in the latter half of the year that we'll evaluate. As I mentioned before, the key for us is discipline. Our balance sheet is strong, and we look to deploy capital as long as we can ensure that it will be accretive for us in the short and longer term, so you'll see us maintain our discipline, but our appetite for growth is there.
Sabahat Khan, Analyst
Okay. Thanks very much.
Gord Johnston, CEO
Great. Thanks, Sabahat.
Operator, Operator
We'll take our next question from Ian Gillies with Stifel.
Theresa Jang, CFO
Good morning.
Ian Gillies, Analyst
Good morning, everyone. I was hoping you can maybe talk a little bit about how you're thinking about or you seeing 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. You were pretty active with it in Q2 and how you're thinking about it moving ahead, especially given another solid move in your share price?
Theresa Jang, 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, Ian, in that. We look to use our NCIB opportunistically, and we've found pretty good opportunity to do so in May and June. The preference, and I think, certainly, the more powerful approach to deploying our capital is through M&A, and that’s our preference. 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 Gillies, Analyst
Understood. The other thing I wanted to follow up on is there 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 happy to change jobs. They’ve been hard to find? So I'd be curious how you continue to grow the business in that regard?
Gord Johnston, CEO
Yes. We have actually - interestingly, we had a significant discussion on that just yesterday. A couple of things there; firstly, our voluntary turnover rates are typically 2% to 3% below industry average. While our voluntary turnover rates declined during the early stages of the pandemic, so did those in the industry. We're seeing voluntary rates begin to creep up, but they're still for us in the single digits. As we look at the number of folks that we're able to hire and bring on, it certainly is exceeding the number of folks that we're losing through voluntary turnover. We 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 to ensure that our existing employees feel valued and that they're not going to lose them to clients or competitors, and I think we've had some success there. As I mentioned, 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. We feel good about that. Again, we want to focus on retaining our existing staff and on continuing to recruit new staff.
Ian Gillies, Analyst
Thanks very much. That's helpful. I'll turn the call back.
Gord Johnston, CEO
Great. Thank you.
Operator, Operator
We'll take our next question from Maxim Sytchev with National Bank Financial.
Maxim Sytchev, Analyst
Hi. Good morning, Gord, Theresa.
Theresa Jang, CFO
Good morning.
Gord Johnston, CEO
Good morning, Max.
Maxim Sytchev, Analyst
Gord, just wanted to circle back to acquisitions. When we look historically when kind of 2011, 2012 timeframe, top line at the time was around $1.45 billion. You were allocating maybe $85 million to M&A every year. Right now, we're doing the same, while revenue is close to $4 billion. Obviously, I appreciate looking at accretive acquisitions, things that make sense. 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 two years? Some thoughts there.
Gord Johnston, CEO
Yes. No, that's a great perspective, Max. We are continuing to execute on that small to midsized strategy; those 1,000 person and fewer firms. That is our strategy. As we've probably mentioned over the last couple of quarters, as larger transactions come, we're having a solid look at them. If we can find ones that we think meet our long-term objectives, because of the strength of our balance sheet and the maturity of our global operations, certainly, the appetite from management and our Board, we'll look at those; but again, only where they make sense and we think they'll be accretive to our shareholders in the longer term.
Maxim Sytchev, Analyst
Right. Okay, that makes sense. In terms 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?
Gord Johnston, CEO
We absolutely are seeing more financial buyers come to the table, Max. It’s interesting; we were looking at some statistics just the other day that from five years ago to now, roughly, five years ago, we might have anticipated, on an annual basis, maybe 10% of the transactions going to a financial buyer. So far this year, we've seen up to 30% of transactions going to financial buyers. In some of those cases, the multiple is very, very high. From the perspective of a strategic, as you're getting into these high teen multiples, it would be very difficult for that to be accretive unless there are pretty significant growth opportunities. We're just maintaining our discipline, our focus, but it is certainly a more competitive environment as we see financial buyers looking for some of these platform acquisitions.
Maxim Sytchev, Analyst
Okay. That's super helpful. 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-over-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 accurate?
Theresa Jang, 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, for Q3, we're expecting to be able to replicate what we did in Q2.
Maxim Sytchev, Analyst
Okay. I appreciate the clarification. Thank you so much. That's it for me.
Gord Johnston, CEO
Thanks, Max.
Operator, Operator
And we'll take our next question from Bryan Fast with Raymond James.
Bryan Fast, Analyst
Thanks. Good morning. 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?
Gord Johnston, CEO
You know, I think as we look around, our major markets, Canada, the United States, the UK, Australia, we are easily a dominant market player in Canada, the US, and the UK, while we're extremely strong and probably punching above our weight in Australia. We have opportunities to continue to strengthen our presence there through the addition of additional resources. The team that we have there is fantastic. 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 certainly, that would be an area of focus for us going forward.
Bryan Fast, Analyst
Okay. Thanks, Gord. You highlighted a nice project win in the US healthcare vertical. I guess, how is that bidding pipeline? What are the opportunities shaping up for healthcare, in the US specifically?
Gord Johnston, CEO
It's interesting. In the first quarter of the year, we really saw healthcare opportunities blossom in Canada in particular and in Australia. But through Q2 and the bidding pipeline coming for the remainder of the year, healthcare is really coming on strong in the United States. That was a really nice award for us. I think we'll see momentum continue to build as we go forward for the remainder of this year.
Bryan Fast, Analyst
Okay. That's it for me. Thanks.
Gord Johnston, CEO
Thanks, Bryan.
Operator, Operator
Good morning.
Troy Sun, Analyst
Good morning.
Gord Johnston, CEO
Good morning, Troy.
Troy Sun, 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? How sustainable is that target that you gave for 2021 when we think beyond this year? If the improvement is to continue, should we be expecting a structural change in terms of the free cash flow conversion profile for the business?
Theresa Jang, CFO
Yes. We've worked awfully hard over the last couple of years on our DSO. The level that it currently sits at, at around 75 to 76 days, is pretty achievable for us, on an ongoing basis. 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. I would expect free cash flow standpoint that since we had a bit of disruption this year from the effect last year of pretty large tax payments that we were able to defer, we got some uplift last year. That catches up with you, and we had a bit of higher than usual outflow this year. I think things will normalize. There really aren't any further programs as we are aware of participating from related to the pandemic. It is normalizing, but no structural changes that I can think of.
Troy Sun, Analyst
Okay. Great. Thank you. That's very helpful. I wonder if you could 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 healthier 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? Thank you.
Gord Johnston, CEO
Absolutely. First, talking about the renewable energy space; we’re seeing interest in that both Canada and the United States, Australia, and other places, where we're working on solar farms, wind farms. We've mentioned a biofuel facility that we're working on in Saskatchewan. We see a real uptick in work. We mentioned a number of pump storage projects as well, where we have a particular area of expertise. The backlog of work continues. In addition to the renewable space, a lot of work related to grid strengthening. One of the proposals in the US infrastructure bill is $73 billion to rebuild the electrical grid. We've seen issues related to that; certainly, with the ice storms in Texas, some utilities in California have committed to bury up to 10,000 miles of electrical transmission cabling to reduce wildfire and other damages. I see a lot of work coming in that electrical transmission, distribution, renewable space that is a strong tailwind for us for the remainder of this year and for the next couple of years. In the mining space, commodity prices are quite high, and we're seeing growth in South America. We're seeing work through our acquisition of Ingenium in Australia; continue work there - copper, iron ore, gold, and, particularly, lithium. A lot of the lithium production is in South America, and we're active with several firms that are already in or looking to get into that field. We see a lot of potential upside for lithium.
Troy Sun, 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?
Gord Johnston, CEO
Yes. I think that previously, in our overall Energy and Resources business, we saw a significant upswing in revenue from TransMountain in some of these pipeline projects. As those are winding down, we're now seeing the uptick really coming or our involvement in those projects, we're seeing a significant uptick in mining, energy transition, and electrical distribution. I think it will even out a bit from a go-forward perspective.
Troy Sun, Analyst
Great. Thank you. That's it for me.
Gord Johnston, CEO
Thanks, Troy.
Operator, Operator
We have a follow-up question from Michael Tupholme with TD Securities.
Michael Tupholme, Analyst
Thanks for taking the follow-up. I wanted to go back to the $1.2 billion in gross revenue award notifications you highlighted, Gord; I think you said that was a quarterly figure. I'm wondering if you can put that figure into context on how that would compare to what you would have historically seen in terms of award notifications on a quarterly basis?
Gord Johnston, CEO
Yes. I think we saw, Michael, that in that quarter, it was healthy, for sure. For us, that really is just an indication of the overall health of the backlog and the overall health of the industry and our client base. We thought it would be nice to call out this quarter, not just that backlog is good and up 6% since the beginning of the year, but that soft backlog is also very healthy. I don't know that it's something that we'll look to quantify every quarter, but we thought we'd call it out because it was particularly healthy and indicative of strong underlying markets.
Michael Tupholme, Analyst
Okay. I appreciate that. And then you were speaking about employee turnover and seeing net additions to employees. I'm just 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?
Gord Johnston, CEO
Yes. We absolutely are actively staffing up, actively hiring in virtually all of our business lines and virtually all of our geographies. There is certainly a war for talent there. As I mentioned, to date, we've been a net importer of these staffs. We'll look to continue to do that. One thing we talked about in previous quarters is our delivery center in Pune, India. We’re also continuing to grow our resources there; we've increased operations by 15% to 20% over where we would have been a year ago. We feel good about our ability to continue to retain and attract staff in our markets and in our Pune, India center. All that said, this is a huge area of focus for us going forward: staff retention and staff attraction.
Michael Tupholme, Analyst
Okay. 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?
Gord Johnston, CEO
There are absolutely some wage inflation pressures, not in all geographies, and certainly not in all business lines, but we are seeing it. A couple of things happening and as you've probably read in the papers about the great resignation. 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 large capital programs coming up and are looking for people to help them execute them. While we never like to lose employees, when our employees go to clients, net is positive for us in the longer term because they know the great people we have, the quality of work we deliver; it’s often positive for us in the longer term. Of course, we'd prefer not to lose that individual, but all to say we are seeing some wage pressures in an industry-wide phenomenon. We're all grappling with it.
Michael Tupholme, Analyst
Okay. Thanks for taking the follow-ups.
Gord Johnston, CEO
Thanks, Michael.
Operator, Operator
Our next question comes from Yuri Lynk with Canaccord.
Yuri Lynk, Analyst
Hi. Good morning.
Gord Johnston, CEO
Good morning, Yuri.
Yuri Lynk, Analyst
Maybe Theresa - good morning, Gord. I don't know who wants to take this one. Just a clarification on your organic growth guidance of 1% to 5%. Does the midpoint of that guidance imply positive or negative organic growth in the United States?
Theresa Jang, CFO
I think what we're expecting for the US 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 like the Q3; we hope to be slightly better than flat. Overall, given the retractions that we saw in the first and second quarters, the whole year will probably be relatively neutral.
Yuri Lynk, Analyst
Okay. 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 Jang, CFO
Yes.
Yuri Lynk, Analyst
Yeah. Okay. I think this will be the third time you're asked to clarify this, but I’ll go forward. You're talking Q3 EBITDA margins roughly flattish with the quarter you just reported, right?
Theresa Jang, CFO
For Q3, yes. Q2 and Q3 tend to be our highest EBITDA margin quarters. We expect that, given the pace of recovery being still a little bit questionable, we expect that we'll be able to maintain the margin we achieved in the second quarter. The Q4 typically falls off, and we would expect that to occur again, so. That would be the general shape.
Yuri Lynk, Analyst
No, it makes sense. We're just - last year, they sequentially increased over 200 basis points, so I wanted to make sure we're not straight-lining that trend. So, I appreciate the color, and I'll turn it over.
Theresa Jang, CFO
Okay. Thanks.
Operator, Operator
And there are no further questions. I'd like to turn the call back over to Gord Johnston for any additional or closing remarks.
Gord Johnston, CEO
Great. Thank you again for joining us on the call today. I apologize for the IT issues that were partway through. We look forward to speaking with you all in the near future about our continued progress toward our goal. So, thanks again, and have a great day.
Operator, Operator
And that does conclude today's presentation. Thank you for your participation. You may now disconnect.