Earnings Call Transcript - STN Q3 2021

Operator, Operator

Welcome to Stantec's Third Quarter 2021 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 20-second delay between the call and the webcast. All information provided during this conference call is subject to the forward-looking statement qualification set out on Slide 2, detailed in Stantec 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'm pleased to turn the call over to Mr. Gord Johnston.

Gord Johnston, CEO

Good morning, and thank you for joining us. Two weeks ago, we announced our agreement to acquire Cardno's North American and Asia Pacific consulting businesses, and the feedback from employees, clients, and investors has been overwhelmingly positive. We had a large number of Cardno employees on the webcast the other week. And for those of you who are joining us today, we are really looking forward to welcoming you to Stantec in the weeks ahead. There's a tangible excitement about what we can accomplish together. Cardno's CEO, Susan Reisbord and I speak almost daily as we chart our path forward. And later today, Susan and I will jointly host two virtual all-staff events for Cardno employees, one for the U.S. and one for Asia Pacific. In the United States, Cardno will increase our headcount by 15% to 10,500 people and will add 1,100 people to our Environmental Services team, increasing our presence in this space by 60%. As the world and our clients respond to climate change and environmental concerns, Stantec's Environmental Services backlog has grown dramatically in the U.S. this year. In fact, it’s up over 55% since the start of the year. Expanding our environmental footprint to meet client needs is essential. And with Cardno, we're going to double our presence compared to five years ago. In Australia, Cardno will almost double the size of Stantec's presence and provide us with a critical mass and diversity to accelerate our growth. Year-to-date, Australia has been one of our strongest markets with the recovery from COVID well underway. Cardno's Asia Pacific operations will give us increased exposure to this rapidly growing market. So the timing couldn't be better to bring our two firms together. All told, Cardno will add 2,750 employees to Stantec, bringing our global employee count to more than 25,000 once the acquisition closes. And we expect Cardno to increase our annual net revenues by more than USD 350 million in 2022. We expect the transaction to close before the end of this year, and we've already set up our integration team and have begun the planning process so we can hit the ground running as soon as we achieve close. This week, leaders from around the world are gathering in Glasgow, Scotland to discuss climate change and the commitments required to prevent the worst global warming scenarios. Stantec remains committed to doing our part to address climate change through our carbon neutrality and net-zero pledges. Last Friday, we announced that we wrapped a sustainability-linked loan structure around our existing credit facility, which incorporates Stantec's emission targets. As part of this new structure, we are very proud to be the first organization globally to incorporate the Bloomberg Gender-Equality Index score as a metric. We are also the first in Canada to commit to directing proceeds from our sustainability-linked loan back into our communities to further climate action and social equity. Aligning our corporate financing strategy with our ESG performance demonstrates our commitment to live by our core value of doing what's right. And yesterday, His Royal Highness The Prince of Wales announced that Stantec was one of only 45 companies in the world awarded the Terra Carta Seal for driving innovation and momentum towards a genuinely sustainable market. This is yet another accolade for Stantec's sustainability performance. And of note, we were the only engineering and design firm selected in the world. Beyond our commitment to ESG within our operations, we recognize that we make our greatest impact helping our clients respond to climate change. Our Climate Solutions offering is an integrated platform of more than 40 services and disciplines, spanning all of Stantec's business operating units that help clients and communities mitigate greenhouse gas emissions and adapt to our changing climate. Now turning to our Q3 results. As demonstrated by our record quarterly earnings, our business continues to perform extremely well. Organic net revenue growth for the quarter was 1.4% or 3.3%, excluding the impact of the descoped Trans Mountain Expansion Project. This reflected almost 11% organic growth in Global and 8% growth in Canada, excluding Trans Mountain. The U.S. demonstrated significant progress towards growth as the market continues to recover and notified awards begin to move into backlog and revenue. As expected, our Buildings business unit returned to organic growth this quarter on the strength of activity in Canada and Australia. Our Infrastructure business also returned to positive organic growth this quarter on the strength of the transportation markets in our Canadian and Global geographies, and in the housing markets throughout North America. In fact, excluding the impact from Trans Mountain on our Energy & Resources Group, all of our business units achieved organic growth this quarter. And we continue to achieve growth through acquisition. In addition to our recent Cardno announcement, this week, we deepened our energy transition expertise in the Netherlands with the acquisition of Driven by Values. This 28-person engineering and consulting firm is a trusted partner for public and private entities, navigating the transition towards sustainable energy generation, sustainable building design, energy infrastructure upgrades, and e-mobility. Turning now to our results by key geography. Our U.S. operations performed largely in line with expectations, and we saw positive progress towards organic growth in the quarter. Backlog grew 5% from last quarter in native currency to an all-time high of USD 2.1 billion as we began converting the surge in notified awards that we referenced in Q2. Environmental Services performed very well on the strength of both organic and acquisition growth. Thematically, permitting and planning work on power and transmission projects on both coasts dominated major project wins this quarter as utility companies continue to strengthen both the capacity and the resiliency of their grids. As we expected, we're seeing continued strengthening in Buildings. Our Buildings group has weathered the pandemic much better than the broader building sector, and the pace of our contract wins in Buildings to date in 2021 significantly exceeds our wins in each of the previous two years. This momentum is being driven by health care, civic, and industrial processing. On the science and technology front, we recently signed a contract for a major 415,000 square foot pharmaceutical lab in California. Our U.S. Infrastructure, Water, and Energy & Resources group all delivered in line with expectations. So we're pleased with the overall results in the quarter, and we continue to see growth in backlog and increasing organic growth as we move into 2022. Anticipation for the U.S. infrastructure stimulus bill only adds to our optimism. Our Canadian business had another excellent quarter, achieving 8% organic net revenue growth, excluding Trans Mountain. Buildings continues to deliver robust growth on strong volume from major projects as health care sector work on the St. Paul's Hospital in Vancouver and other large hospital projects in Saskatchewan and Ontario continues. Beyond health care, we're seeing continued strength in civic and mixed-use projects that are focused on revitalizing and repurposing existing commercial properties in Canada and its inner cities. Sustainability is also a key aspect of our recent win with Ontario Power Generation to design their new corporate campus. This mass timber constructed corporate campus will leverage technology and innovation to enhance collaboration and achieve sustainability and net-zero carbon goals. Infrastructure continued to be very strong in Canada, led by double-digit growth in community development, thanks to strong performance in the West and in Ontario. Transportation spending is also very healthy in Canada with a number of large-scale transit and infrastructure projects like our recent win on the extension of Toronto's Waterfront East LRT transit connection to Fulham. Environmental Services continues to see growth in Canada, where we benefited from work on a light rail transit project in Ontario and started permitting work to support projects like the city of Edmonton's Metro Line Northwest. In addition to this work, Stantec has recently been awarded a groundwater monitoring program to support Shell's carbon capture and storage project in Central Alberta. Beyond strong organic momentum in mining and Power & Dams, energy transition continues to build momentum for our energy and resources team, who are now working with Tidewater renewables to design the first commercial scale renewable diesel and hydrogen facility in Canada. Stantec is also currently working on some of North America's largest solar and wind projects. Like Canada, Global delivered excellent results in Q3 with a 20% increase in net revenue, driven in equal parts by organic and acquisition growth. Of note, our focus on growing and diversifying in Australia and New Zealand has resulted in solid growth in virtually every sector. In Australia, GDP and employment rates are already above pre-pandemic levels, and this is driving solid growth in our global Buildings practice, particularly in health care. And this is reflected in our recent win for mechanical and acoustics engineering services for the new Shellharbour Hospital in New South Wales. This new hospital will provide critical care to a large number of surrounding indigenous communities. Organic growth in water continues to be driven by the robust activities under the AMP7 programs in the United Kingdom and Ireland as well as water frameworks in Australia and New Zealand. Transportation's double-digit growth was driven by strong performance in Australia and New Zealand. We see continued growth for transportation with several recent wins, including a four-year multi-disciplinary services framework for roads-based transport in Scotland and our decarbonization project with KiwiRail in New Zealand. Our strong results in global Energy & Resources group were driven by mining, where strong commodity prices continue to fuel strong demand. Overall, we're very confident in the continued strength of the Global business. I'll now turn things over to Theresa to review the quarter's financial results in more detail.

Theresa Jang, CFO

Thank you, Gord, and good morning, everyone. We delivered record adjusted EPS in the quarter. Adjusted EBITDA was largely comparable to last year but higher on an FX-neutral basis. Within adjusted EBITDA, we expanded gross margin by 200 basis points with stronger project execution and a shift in project mix to higher margin work. This was offset with higher administrative and marketing expenses due to our increased business development efforts on major programs and bids. As well, share-based compensation expense increased significantly compared to Q3 2020, in part due to our increased share price. The impact of our share-based compensation revaluation was $5 million or 54 basis points as a percentage of net revenue. So after this factor, our adjusted EBITDA margin would have been 17.3%, matching last year's margin. Our 2023 Real Estate Strategy remains on track to deliver $0.10 in adjusted EPS by the end of this year. IFRS 16 has eliminated the visibility of how impactful our Real Estate Strategy would have been to EBITDA. But for reference, we estimate that on a pre-IFRS 16 basis, our real estate optimization would have expanded our EBITDA margin by roughly 40 basis points. However, the value generated is very clear when you look at the material growth in our net income and EPS, which has been further augmented by our debt and tax management strategies. Collectively, these efforts contributed to record Q3 adjusted net income of $80 million, which is a 15% increase over last year. Adjusted diluted EPS increased 16.1% to a record $0.72 per share. Our balance sheet remains strong. At September 30, net debt to adjusted EBITDA was 0.8x, below our targeted range. And as previously announced, we intend to fund the Cardno acquisition using a combination of cash on hand and drawings from our credit facilities. We expect to remain well within our leverage target range on close, and to deliver towards the low end of our target range by the end of 2022. Day sales outstanding was 81 days at quarter end, which is up from Q2, largely due to timing and seasonal factors, but DSO was down by 1 day compared to the same time last year. Free cash flow year-to-date was $101 million, down from last year, with about a third of the reduction due to the effects of foreign exchange and the balance reflecting changes in revenue and working capital. And as I mentioned earlier, our $800 million facility is largely undrawn at the end of September, providing us with sufficient room to fund our acquisition growth aspirations. And with that, I'll turn the call back to Gord for his closing remarks.

Gord Johnston, CEO

Thanks, Theresa. Stantec delivered another great quarter with record earnings and a return to organic growth, and we're looking to finish the year strong. Looking forward, we remain very optimistic about the United States. In addition to increased infrastructure spending on the horizon, our focus on growing our U.S. federal exposure has resulted in a significant step change in our market share of federal IDIQ programs this quarter. We are now supporting 10 times the total IDIQ framework value that we were a year ago. We expect both our increased presence at the federal level and future infrastructure stimulus to further bolster our U.S. backlog, which already achieved record levels this quarter. Add to this the strength we are already seeing in our Canadian and Global operations and the positive benefit from Cardno and our other recent acquisitions, and we see strong tailwinds as we enter 2022. And with that, I'll turn the call back to the operator for questions.

Operator, Operator

And our first question comes from Frederic Bastien with Raymond James.

Frederic Bastien, Analyst

Guys, you highlighted an increase in business development costs, which was to be expected with the economy slowly reopening. Just wondering whether those activities are back to pre-pandemic levels or you're still seeing a sort of a gradual ramp-up over the next few quarters?

Gord Johnston, CEO

Yes, Frederic, that's a great question. The business development costs have not yet returned to pre-pandemic levels. While travel isn't entirely restricted, it has been significantly slower than before. We anticipate that this trend will continue for the rest of the year and into the early part of next year. There is some current demand for our team to meet with clients again and attend conferences or trade shows to enhance our presence, but overall, activity remains below pre-pandemic levels. Even as we look forward to next year, we expect this situation to persist.

Frederic Bastien, Analyst

Okay. Great. I guess maybe a question that's related to that. I mean, we saw organic growth return to positive territory in the U.S., but it was slightly lower than what I was expecting anyway. Just curious as to sort of the ramp-up that you're seeing over the next couple of quarters. I mean, when do you expect this organic growth to really resume in the healthy territory?

Gord Johnston, CEO

Well, in the U.S. in particular, Frederic, or overall?

Frederic Bastien, Analyst

No. I mean, there's absolutely nothing wrong with the other regions as you've demonstrated. Just curious about the U.S. specifically.

Gord Johnston, CEO

Yes. So in the U.S., a couple of things of interest. Our overall backlog in the U.S. is up over 10% year-to-date. And specifically, a couple of things that are interesting. I mentioned earlier that our Environmental Services backlog is up over 55% in the year, again, further supporting the addition of Cardno. And our Energy & Resources backlog, a lot of that in the renewable power space, is up over 40%. Couple that with the IDIQs for the U.S. federal government. Again, those are not included in backlog because those are task order-driven going forward. That's up over 10 times what it was previously to well over $1 billion. So lots of good opportunities there. And then couple that with the infrastructure stimulus bill on the horizon, and my gut says the U.S. will get above the line in Q4. But if it doesn't in Q4, Frederic, we see strong tailwinds as we go into 2022.

Frederic Bastien, Analyst

Okay. Good to hear. My last question is about Trans Mountain. I'm curious when the descoping started and when it will start impacting organic growth in Canada.

Gord Johnston, CEO

Yes. Frederic, nothing will make me happier than in Q1 of next year when we don't have to reference it anymore. So the descoping, the way we changed was started on January 1 of this year. So Q4, so next quarter will be the last time we'll have to reference anything to do with the impact on growth from Trans Mountain.

Operator, Operator

Our next question comes from Yuri Lynk with Canaccord Genuity.

Yuri Lynk, Analyst

I wanted to follow up, I guess, on Frederic's question on organic growth. I'll ask it a bit of a different way. I mean, you're still guiding to 1% to 5% organic growth in 2021. I think to get there, you're going to need double-digit organic growth across all three segments. So is my math off or how should we think about organic growth, particularly in the United States in the fourth quarter?

Gord Johnston, CEO

Yes. So in the United States, overall, in the fourth quarter, we are expecting sort of organic growth to be positive. But as we look at the overall business, to your point, what we've seen that the year is kind of unfolding as we expected. We've seen a little bit better organic growth each quarter, returning to positive growth here in Q3. It's interesting as you look at some of the segments that we've got. Waters had positive organic growth for the last 10 quarters, our Environmental Services business returned to organic growth in Q2, Buildings and Infrastructure returned to organic growth this quarter, and certainly, Energy & Resources without Trans Mountain also returned to positive growth this quarter. And so we see that continuing into Q4. Will Q4's organic growth be enough to bring everything above the line for the year? I don't know, I haven't penciled that out. But I think what's really important is that for 2022, we're ideally set up with the backlog and the opportunities that it is really going to be strong going forward.

Yuri Lynk, Analyst

So how should I think about then that 1% to 5% organic growth guidance for 2021?

Gord Johnston, CEO

If we were to reach that number, it would likely be close to the lower end of the 1% to 5% organic growth guidance for 2021.

Yuri Lynk, Analyst

Okay. So what kind of tax rate should I be thinking about for 2022? And if you could give me that number with Cardno that would be even better.

Theresa Jang, CFO

For 2022, we haven't provided our guidance yet, especially regarding Cardno. We're still working on that. I don't anticipate a significant increase compared to this year. The trends we've observed this year should remain consistent next year. So, I don't expect major changes. However, we will need to confirm this at the end of February when we roll out our guidance.

Yuri Lynk, Analyst

So that would be that 22% to 23% range?

Theresa Jang, CFO

Yes. I think that's a good working assumption at this stage.

Operator, Operator

Our next question comes from Jacob Bout with CIBC.

Jacob Bout, Analyst

Yes. I'll start off with the timing of the Cardno closing. I know you expected that this is going to close by year-end. Other than the shareholder vote December 6, what other hurdles, regulatory or otherwise, stand in the way?

Gord Johnston, CEO

There are a few customary approvals that we need to get done in the U.S., but I don't think there's anything that would impede the close. The main one really is their shareholder vote on December 6. Assuming we close shortly after that, we don't anticipate seeing a significant amount of revenue from Cardno in Q4. If they come in around mid-December and then we go into Christmas, we just wanted to consider that as we think it through.

Jacob Bout, Analyst

The second question is about the conversion of award notifications. There has been considerable discussion in the past couple of quarters regarding the $1.2 billion in award notifications. How much of that has been converted into backlog? Are we still waiting for components of the U.S. infrastructure buildup, and how quickly do you anticipate this conversion occurring after the infrastructure building costs?

Gord Johnston, CEO

Yes. One thing we noted last quarter is that a portion of our softer backlog, specifically half, was in the U.S. This backlog has started to convert significantly, as we observed a 5% increase in U.S. backlog during the quarter, reaching an all-time record high of just over $2 billion in U.S. dollars. Importantly, this is not reliant on U.S. stimulus, as we have not included that in our calculations. Overall, the situation is very strong, with a record backlog in the U.S., independent of the U.S. stimulus program.

Operator, Operator

And our next question comes from Michael Tupholme with TD Securities.

Michael Tupholme, Analyst

Can you provide an update on the 2023 Real Estate Strategy? It seems like it's progressing according to plan, but could you share any updates? Additionally, how much did this impact EPS in the third quarter?

Theresa Jang, CFO

Sure. The plan is progressing well. We have made significant progress in managing our lease base and how we will approach this over the next few years. For 2021, we had projected earnings of about $0.10 per share, and we are certainly on track to meet that. In the third quarter, this strategy has generated approximately $0.025 per share. The additional earnings of $0.25 to $0.30 that we expected will be more heavily weighted towards the end of 2022 and into 2023. This involves positioning and identifying our leases, as well as understanding our flexible workplace strategy as employees return to the office and make their work choices. Overall, we are very satisfied with this progress, considering both the impact on our profit and loss and the engagement of our employees. It provides them with options for their work and contributes to our emissions reduction goals. This program is proving to be very positive for us and is on track.

Michael Tupholme, Analyst

Okay. That's great. The margins in the quarter were quite strong. Do you see the margin strength you saw this quarter as being sustainable? And you talked about mix benefiting the gross margin. Is the current mix something that you see as representative of what we should expect going forward?

Theresa Jang, CFO

I certainly think that from a gross margin perspective, it has continued to strengthen over the course of this year. We are being very focused and diligent in our review of projects and the ones we choose to take on. We feel that our current position is really healthy, and that is certainly what we aspire to achieve going forward as well. From an EBITDA perspective, we continue to benefit from much lower discretionary spending than we've typically seen, while also managing to keep our overall costs down. As we approach the end of this year, typically in Q4, margins compress somewhat due to the holiday season. We don't have as many chargeable hours during the holidays, particularly in North America. However, we are really pleased with where our EBITDA margin is coming out.

Michael Tupholme, Analyst

Okay. That's great. And then just lastly, looking at Canada's organic net revenue growth, I know it would be higher were it not for the Trans Mountain drag. That said, organic net revenue growth slipped to 1.1% in the third quarter whereas it was closer to 6% in the second. I'm just wondering if you can comment on the driver behind that pullback quarter-over-quarter.

Gord Johnston, CEO

Yes, you're correct that without Trans Mountain, the growth would have been 8%. Trans Mountain continues to have a significant impact, and we are looking forward to the time when we no longer need to reference it. Just one more quarter, and our results will reflect that.

Michael Tupholme, Analyst

Okay. Fair enough. I guess I'm just wondering though, the Trans Mountain impact was in there both in Q3 and Q2. So just looks like it was a bit softer in the third quarter. Just wondering if there's anything kind of behind that.

Gord Johnston, CEO

Nothing in particular. Our Buildings group continued to excel with several major hospital projects. Infrastructure, including land development and transportation, was very robust. I believe we are initiating some new projects in our Environmental Services group, specifically in the Energy & Resources sector, like Tidewater. We saw the start of some of these projects this quarter, including several carbon capture initiatives for Shell. I think this might just be a temporary dip as we restart numerous projects.

Operator, Operator

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

Chris Murray, Analyst

Maybe just continuing on this theme, maybe a different way to ask the same question around Canadian growth. So Gord, ex TMX, you're running an 8% clip in organic growth. Does that feel sustainable to you as we go into 2022?

Gord Johnston, CEO

I believe that Canada and Global experienced a stronger beginning as we come out of the pandemic. In Canada, excluding TMX, Q3 growth was 8%, and Global was 10%, with organic growth slightly over 10% in Q3. These regions started their recovery earlier. We noted excellent growth in both Canada and Global, which had a strong performance at the start of 2021, while the U.S. was somewhat slower. I anticipate that next year, organic growth numbers in Canada and Global may be a bit lower, but the U.S. is expected to show much stronger growth.

Chris Murray, Analyst

Okay. That's fair. One interesting aspect of Cardno is their security business with the U.S. federal government, which I believe is an area where you currently don't engage. It seems to be a significant point in that transaction. Can you discuss how you envision growth in that sector? How can you integrate existing Stantec services into that business? I would expect that due to the exclusive nature of this field, the margin profile might be somewhat improved. Any insights on this would be appreciated.

Gord Johnston, CEO

Yes, the secure area of business related to DoD work is of particular interest to us, and we are continuously learning more about it. To your point, there are significant opportunities to expand Stantec's service offerings into that area. Regarding overall margins and the size of that market, we are still trying to fully understand its scope. We should have a clearer picture to provide you with more clarity during the Q4 earnings call.

Operator, Operator

And our next question comes from Benoit Poirier with Desjardins Capital Markets.

Benoit Poirier, Analyst

Just to come back on the organic growth for the full year, still maintaining the guidance, although you commented about the expectation for Q4. However, when we look at cost containment efforts and the gross margin improvement, am I right to say that the focus is more on the EPS growth? And given those strong margin improvement, it's less dependent on your ability to achieve the high end of the organic growth range?

Theresa Jang, CFO

Yes. I think that's right, Benoit. I mean, just back on the outlook for organic growth for the rest of this year, as Gord indicated, I mean we do expect the continued push toward organic growth for the quarter in Q4. And then for the whole year, where that lands us in that range for the full year, we do expect it will be towards the lower end of that range. But I kind of reiterate too, I mean, that is why we provide a range. And I think it's a bit of a reminder as well that a range, at least as we think about it, doesn't necessarily mean that you gravitate to the middle of it. I think we provide a range so that we can give a sense for a range of outcome and so that would be kind of where we sit and what we're thinking about at this point. But to your question about EPS growth, that absolutely is our focus. And of course, revenue growth is going to drive EPS growth, but there are so many other factors that we are focused on in delivering the EPS growth that we've been actually, I think, quite successful on. And so that is better gross margin, but it's also around our EBITDA, our cost containment. It's the strategies we've employed around real estate that have really made a meaningful contribution to EPS. So it is all of those things together that we are very focused on, that we are looking at driving our stronger metrics up from a bottom-line perspective. And that is a reflection of how we think about running this business.

Benoit Poirier, Analyst

Okay. And in the MD&A, you mentioned that employees are in the process of returning to the office. I was just wondering if employees' preference has changed toward work from home versus the initial expectation for the plan.

Gord Johnston, CEO

It's interesting to note that during the pandemic, we've had several occasions where we planned to bring everyone back after Labor Day, only to reverse that decision and tell everyone to stay home again. This pattern of preparing to return to the office and then pausing has been noticeable. However, we are tracking re-entry on a weekly basis and are seeing an increasing number of employees expressing their eagerness to return to the office. Overall, our real estate strategy remains sound based on our discussions with employees. It's important to recognize that this situation varies by region and country. For instance, in urban areas of the United States where many people rely on public transit, the return rate to the office is lower compared to smaller locations where employees can park and walk into the building without needing to use elevators or public transport. We continue to monitor the situation and communicate with our teams, but we remain confident in our real estate strategy.

Benoit Poirier, Analyst

That's great insight, Gord. Regarding the overall labor shortage and wage increases, could you share how this affects organic growth and the potential boost it may provide as you transfer those price increases to customers?

Gord Johnston, CEO

Sure. A couple of points here. First, regarding staff compensation numbers, we believe the best way to maintain high staff counts is to retain our employees. Since the pandemic began, we've emphasized increasing communication and ensuring our employees feel connected to one another and to Stantec. Recently, we conducted an employee engagement survey in the fall and compared those results to pre-pandemic figures. It's noteworthy that our overall employee engagement score increased by nearly 6% since the last survey, while other firms globally have experienced a decline in engagement scores during the pandemic. We're very pleased with this level of engagement and the positive difference compared to the overall industry. One aspect we've frequently mentioned is that our voluntary turnover rates are consistently 2% to 3% below the industry average. While our turnover did drop in 2020, like everyone else's, it has since increased as we emerge from the pandemic. However, our current turnover rates remain a few percentage points lower than they were before the pandemic. We continue to read about the great resignation and are feeling some pressure, but our rates are still below pre-pandemic levels. Our hope during this uncertain period is to attract more talent and continue to grow instead of losing more people. This is certainly a priority and a daily topic of discussion for us. Regarding salary pressure and its potential impact on margins going forward, there is no doubt that we are experiencing salary pressure. While many of our contracts include a cost of living increase, not all do. As we look to the next year, we do not expect a significant impact on margins, though there could be some effects, particularly in the first half of 2022. We remain optimistic overall, but we cannot rule out the possibility of some impact.

Operator, Operator

Our next question comes from Sabahat Khan with RBC Capital Markets.

Sabahat Khan, Analyst

I would like to understand more about the current situation in the U.S. Many of your peers have mentioned that clients there are adopting a cautious wait-and-see strategy, and it seems you are indicating this will persist into late this year. Could you provide insights on the differences you're observing between public and private customers? It appears that there is some hesitation around infrastructure projects. Are clients mainly waiting for the infrastructure bill to pass before moving forward, or is it more about the level of spending? I'm looking for further clarification on the dynamics in that region.

Gord Johnston, CEO

We've observed backlog growth across nearly all of our business units in the U.S., except for Infrastructure, on a year-to-date basis. This seems to be due to a cautious approach in the infrastructure sector, where, despite ongoing projects, there is a tendency to wait and see regarding the infrastructure build. Specifically, we've highlighted the energy transition, including significant work from electrical transmission and distribution companies focused on enhancing and replacing their grids. For the year-to-date, our Energy & Resources business has experienced over a 40% increase in backlog, while our Environmental Services business has seen more than a 55% increase. This growth is particularly notable. Though there is some backlog increase in the public sector, the private sector is also starting to show activity, particularly in areas such as e-commerce facilities, distribution centers, and electrical utilities. Overall, we are seeing robust growth, with over 10% backlog growth in the U.S. year-to-date. I anticipate that this will further accelerate once the U.S. infrastructure stimulus bill is implemented.

Sabahat Khan, Analyst

Okay. Great. I want to ask about your two other markets that are performing well, specifically Water and Environmental Services. Can you share your perspective on whether this is primarily due to overall market growth in these areas? Are you gaining market share in the Water sector because of your positioning? I would like to understand how long you expect this high level of growth to continue in these markets and your thoughts on these businesses as we head into 2022 while comparing to previous numbers.

Gord Johnston, CEO

Sure. So certainly, from a Water perspective, we mentioned that we've seen organic growth in each of the last 10 quarters in our Water business. And so we're very strong in that business. Certainly, we've talked about some of the long-term framework awards in Australia, New Zealand, the U.K., a lot of opportunities, certainly in the U.S. and Canada, U.S., in particular, from coastline hardening, coastline protection perspective. So long term, we continue to feel good about our Water business. And the other one was Environmental Services?

Sabahat Khan, Analyst

Yes.

Gord Johnston, CEO

Our Environmental Services business remains very strong. Year-to-date, we have experienced over 40% backlog growth overall, with 55% in the U.S. This indicates significant progress. We believe that both in Environmental Services and Water, we are gaining market share.

Sabahat Khan, Analyst

And just I guess as we head into '22, could we expect this level of just elevated growth to kind of continue into next year? Or do you see it more normalizing towards broader industry growth rates?

Gord Johnston, CEO

Currently, as we engage with our clients, it seems there is still considerable work ahead. However, I believe it would be unrealistic to expect more than 40% backlog growth annually in our Environmental group. What I do anticipate for next year is that this backlog will translate into revenue, in a manner similar to what we see in Energy & Resources and other groups. Therefore, we are optimistic about these sectors as we move into next year.

Operator, Operator

And our next question comes from Maxim Sytchev with National Bank Financial.

Maxim Sytchev, Analyst

Gord, actually, maybe just kind of building on this comment around backlog. I'm curious if there is anything structural in terms of the projects that you run right now, that the conversion rate would be maybe different versus history? Or how should we think about it? Because, I mean, obviously, when you talk about a 40% backlog jump, people will assume that there is going to be commensurate sort of revenue growth, but clearly, is the duration of these projects is a bit different? Can you provide maybe any color on that?

Gord Johnston, CEO

Yes. We are not observing significant changes in duration, Max. In the U.S., projects seem to be taking longer to transition from backlog to revenue. This appears to be an industry-wide trend, not just specific to Stantec. While work is being initiated, there's a noticeable delay in getting things underway. Our expectation, based on discussions with clients, is that some of these projects will start progressing in the latter part of this year, moving into the first half of next year.

Maxim Sytchev, Analyst

Okay. But there was nothing structural in terms of kind of duration convertibility relative to what you would have seen historically, right?

Gord Johnston, CEO

No. Not at all.

Maxim Sytchev, Analyst

Okay. And then also I was wondering, we talked in the past a lot about AMP programs in the U.K. Just curious right now, is there like any significant rebuild cycle coming up or everything is sort of status quo for the next, let's call it, 12 to 15 months?

Gord Johnston, CEO

Yes. I think that in this typical AMP cycle, we are seeing about a 12% increase in capital compared to the previous cycle. This will approximately reflect in our fee growth as well. There's nothing structural affecting this. We usually ramp up in the first year, and the following years are focused on ongoing design and operations, which is where we are currently. Therefore, we expect our performance on AMP cycle jobs for 2022 and 2023 to remain quite stable.

Maxim Sytchev, Analyst

Okay. Super helpful. And maybe just last question for Theresa, if I may. Just when you talk about tax strategies' optimization, how should we think about this? Is this sort of a permanent change? I guess that's the first question. And do you mind maybe sharing what exactly you guys are doing on this front, if you can disclose that?

Theresa Jang, CFO

It's challenging to provide specifics about our strategies, but I can assure you they are all legitimate and compliant with global regulations. Our goal is to optimize the taxes we pay in the different regions where we operate. The strategies we utilize often involve a tax perspective, and due to recent discussions about U.S. tax reform and other global tax proposals, some of our strategies may not be as long-lasting as previously anticipated. However, it is still too early to draw firm conclusions. While we haven't provided guidance for next year, we currently do not expect any significant changes for next year. Moving forward, we will need to keep an eye on evolving cash legislation.

Maxim Sytchev, Analyst

Right. And sorry, and the minimum tax requirement kind of globally that some countries are pushing for right now, would that have any effect in terms of how you're going to be approaching tax rates or not at all?

Theresa Jang, CFO

I believe you're referring to the 15% minimum corporate tax being discussed by the OECD. We currently don't anticipate that it will have a significant impact on us. The new rules are aimed at organizations that exploit lower tax rates in jurisdictions where they lack operations. This differs from Stantec's approach, as we actively engage in economic activities in the countries where we are taxed. Therefore, we don't expect a major impact. However, these regulations have not been finalized yet, so we cannot be completely certain until we see the specifics and have a chance to review them.

Operator, Operator

Our next question comes from Ian Gillies with Stifel.

Ian Gillies, Analyst

I wanted to start with the backlog. You noted in the release, I believe, you saw a 30% increase in the Environmental Services backlog year-over-year. Cardno is obviously going to have a material increase in that once it gets consolidated into Stantec's operations. Can you talk a little bit about what that may do to the business' margin profile moving ahead and how we should be thinking about that?

Gord Johnston, CEO

When examining the Cardno business in the U.S., which is primarily focused on environmental services, their backlog is well aligned with ours, sitting at around 12 months for us and approximately 11 months for them. Notably, their margins in the U.S. appear to be slightly stronger than ours. Therefore, when we combine these two entities, we can expect similar backlogs and margins, with the potential for the Environmental segment's margins to improve slightly.

Ian Gillies, Analyst

Okay. That's helpful. The other thing I wanted to touch on was revenue per employee on a consolidated basis. I mean, it's kind of inching back up to where it was pre-pandemic. Do you think you can get there? And has there been any new process put in place where maybe you get a bit better, so the need for people isn't quite as high as one might think?

Gord Johnston, CEO

You're right, that revenue per employee continues to creep up. And I don't see any reason why we won't get back to where we were. There are a number of things that come through our innovation program where we're looking to continue to be more and more efficient. Design automation tools and the like to make ourselves become more efficient. So I do think there's some opportunities to, as we go forward, to potentially even increase that revenue per employee, even squeeze a little bit more out of it. But we're still working through incrementally how much that might be. But certainly, it will increase both our competitive positioning as well as potentially the margin as well.

Operator, Operator

Our next question comes from Troy Sun with Laurentian Bank Securities.

Troy Sun, Analyst

Gord, maybe just a first question. I'm wondering, Gord, if you can make some incremental comments on the Australian market. Obviously, appreciate the fact that the GDP and employment data is back to pre-pandemic levels now. Just given how the geography is coming out of very strict COVID restrictions, how should we be thinking about the organic growth profile for that region in 2022? And knowing that you've doubled the headcount in the country as well, what's sort of a reasonable assumption for mid-term growth profile for Stantec in the region, please?

Gord Johnston, CEO

We haven't provided guidance for 2022, making it challenging to comment on that specifically. However, I can share that when we combine our teams, transportation will be one of the largest groups we have. There are significant transportation funding opportunities, with roughly AUD 118 billion announced for transportation. We're also performing very well in the Water sector and plan to continue our growth there. Mining is expanding, thanks to higher commodity prices, and there are excellent opportunities to grow our environmental business. Overall, we feel very optimistic about Australia and New Zealand for the rest of Q4 and heading into next year, with strong positive trends. The growth of our team and expanded client relationships in Australia will position us well for continued success.

Troy Sun, Analyst

Great. That's super helpful. And maybe just switching gears, quick question for Theresa. Appreciate the color on the decrease on the lease depreciation from the Real Estate Strategy there. Is it fair to expect that line item to continue to trend down in the near future?

Theresa Jang, CFO

Yes, definitely. As part of the overall Real Estate Strategy, those costs are now reflected in the depreciation and interest lines due to IFRS 16. As we carry on with our strategy, we expect to see a decline in those line items.

Troy Sun, Analyst

And sorry, Theresa, just to confirm. So from the Real Estate Strategy itself, like you're expecting the impact on legacy EBITDA to be 40 basis points, right?

Theresa Jang, CFO

Yes. Well, what I said was for the quarter. And I think for year-to-date, it's actually a little bit higher on a pre-IFRS 16 basis. Yes, that would have been a 40 to 50 basis point uplift in pre-IFRS 16 EBITDA margin.

Operator, Operator

And that concludes today's question-and-answer session. Mr. Johnston, at this time, I will turn the conference back to you for any additional or closing remarks.

Gord Johnston, CEO

Well, great, I just wanted to say to everyone, thanks again for joining us on the call today. We look forward to speaking with you in the near future about our continued progress. So have a great day, everyone.

Theresa Jang, CFO

Thank you.

Operator, Operator

And this concludes today's call. Thank you all for your participation. You may now disconnect.