Earnings Call Transcript - STN Q2 2024

Operator, Operator

Good day, standing by. Welcome to Stantec's Second Quarter 2024 Results Webcast and Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. Leading the call today are Gord Johnston, President and Chief Executive Officer; and Theresa Jang, Executive Vice President and Chief Financial Officer. Stantec invites those dialing in to view the slide presentation, which is available in the Investors section at stantec.com. Today's call is also webcast. Please be advised that if you have dialed in while also viewing the webcast, you should mute your computer, as there is a delay between the call and the webcast. All information provided during this conference call is subject to the forward-looking statements qualification set out on Slide 2 detailed in Stantec's Management's Discussion and Analysis and incorporated in full for the purpose of today's call. Unless otherwise noted, dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded. With that, I'm pleased to turn the call over to Mr. Gord Johnston. Please go ahead.

Gord Johnston, CEO

Good morning. Thank you for joining us today. Before jumping into our second quarter results, I want to express how proud I am that Stantec continues to be recognized for our leadership in sustainability. This past quarter, Corporate Knights ranked Stantec as number two in their 2024 Best 50 Canadian Corporate Citizens ranking. In addition, Stantec has been included in Time Magazine's list of the World's Most Sustainable Companies of 2024. We are the top Canadian company on their list and ranked 14th overall. These accolades are a testament to our authentic approach to sustainability and to doing what is right. I'm very pleased with the strength of our second quarter results. Our revenue growth was excellent, and we continued to execute very successfully on our projects while driving strong operational performance across the business. Many of the long-term macro trends we discussed in the rollout of our strategic plan are building momentum and we have continued to capitalize on the growth opportunities that they're creating. Our industry-leading Water business continues to drive growth in critical areas like shoreline protection, wastewater treatment, water security, advanced manufacturing, and PFAS. In the UK, our team continues to focus on bidding for AMP8 contracts. Stantec is well placed with our clients. We've already been awarded a significant number of contracts and are awaiting decisions on several others. Themes of addressing aging infrastructure and climate change are very prominent in AMP8, with investments to be directed towards the replacement of water mains, significantly reducing leaks and harm from storm overflows, and implementing nature-based solutions. We're the number one Water firm in the UK and are extremely well positioned for continued growth. Increased funding for healthcare continues to drive growth for our Buildings business, where we are a leader in this space. Our expertise in cancer care facilities is world renowned, and we currently have 15 projects underway, including one in Dubai, six in the United States, and eight in Canada. Our Buildings business is also a top-five player in mission-critical and data center facilities, currently working with four of the top five hyperscale data center technology companies. Our Infrastructure business is seeing enhanced activity related to aging infrastructure, particularly in the U.S. as funding continues to flow from IIJ with over $460 billion now allocated to over 60,000 projects across the country. And innovation continues to be a key enabler in the execution of our strategy. We're seeing a growing trend where our clients are seeking digital solutions that augment our technical expertise with emerging technologies like artificial intelligence. A great example of this is a recent win where Stantec has been engaged to reimagine the monitoring of our client's sewer pipeline assets. Stantec will design AI machine learning models that can decipher CCTV footage to detect defects in real time, producing automated reports. This innovative approach is a stepping stone towards developing an intelligent system considering salinity, infiltration, and odor data across a vast geography. With a collaborative and innovative global workforce that includes civil design engineers and AI experts, Stantec is uniquely positioned to deliver AI-powered asset management systems that will revolutionize operations and allow our clients to provide more reliable and efficient services. Looking at the specifics of our second quarter results, we achieved record net revenue for the quarter at $1.5 billion, up almost 17% compared to Q2 2023, with 7% organic and 9% acquisition growth. We delivered solid organic growth in each of our key geographies. We had organic growth in each of our business operating units with the exception of energy and resources. Our Water and Buildings businesses both realized double-digit organic growth. In addition to the strong organic growth we achieved in the quarter, our recent acquisitions of ZETCON, Morrison Hershfield, and Hydrock are performing as expected, and we're busy working on their integration and supporting our 2,700 new colleagues as they transition into Stantec. Adjusted EBITDA for the quarter rose to $247 million, up 14.5%, with a margin of 16.6%, positioning us well for delivering on our margin guidance for the full year. Overall, we delivered adjusted EPS of $1.12, up 13% over Q2 last year. Our U.S. business continues to perform extremely well, delivering a 16% increase in net revenue for the second quarter, including 6% acquisition growth from ESD and Morrison Hershfield, and 9% organic growth. Once again, all of our business operating units in the U.S. had solid organic growth. Our Water business delivered double-digit organic growth, with major industrial and water security projects. Infrastructure also achieved double-digit organic growth, with significant transit, rail, and roadway projects contributing to growing momentum. Our Buildings business saw strong demand across most sub-sectors, particularly in healthcare, science and technology, and industrial. In Canada, we grew our net revenue by 16%, with 11% acquisition growth from Morrison Hershfield and 5% organic growth. Our Water business had very robust double-digit organic growth, as activity on major wastewater projects remained high. Buildings also drove double-digit organic growth through projects in the healthcare space in both British Columbia and Quebec. Energy and Resources retracted slightly this quarter, as a result of ongoing delays in the ramp-up of new projects. However, we continue to grow our backlogs and win MSAs, so we expect E&R to shift towards organic growth at the end of the year. Our global operations generated an increase of 19% in net revenue, with 14% coming from the ZETCON and Hydrock acquisitions, and 6% from organic growth. Our global Buildings, Water, and environmental services businesses all achieved double-digit organic growth. Buildings' organic growth reached almost 30%, driven primarily by the Cancer Centre in Dubai and the ramp-up of work on the £4 billion Agratas battery manufacturing facility in the UK. Water's organic growth was achieved across the UK, New Zealand, and Australia through long-term framework agreements and public sector investments. Our Global Infrastructure business saw a slight organic retraction, driven by the cancellation of certain infrastructure projects in Australia and New Zealand, and community development in the UK which continues to see muted levels of activity. And now, I'll turn the call over to Theresa to review our financial results in more detail.

Theresa Jang, CFO

Thank you, Gord. Good morning, everyone. Once again, we delivered a very solid quarter of performance in Q2. We achieved record net revenue and enhanced project margin. Our gross revenue grew to almost $1.9 billion, up 15% over Q2 '23, and net revenue of $1.5 billion was up 17%. Project margin increased 10 basis points due to our continued discipline in project execution. We did see a slight decline of 30 basis points in our adjusted EBITDA margin to 16.6%, which was primarily due to increased insurance claim provisions. Provisions for claims vary from year to year, largely as a result of changes in actuarial projections for our self-insurance programs. Claims provisions in Q2 last year were unusually low and returned to more historical levels in Q2 this year. Adjusted diluted EPS in the quarter increased 13% to $1.12. I would note that we did not see a meaningful impact this quarter as it relates to our long-term incentive program revaluation. Turning to our liquidity and capital resources in the first six months of the year, we generated very strong cash flows, achieving $137 million in operating cash flow, doubled what it was in the comparative period last year. This reflects our ongoing focus on working capital management. This also resulted in a reduction in DSO, achieving 77 days, which continues to be below our target of 80 days. We closed the quarter with a net debt to adjusted EPS of 1.7x, reflecting the Q2 funding for Hydrock. We remain well within our target range of 1x to 2x. And with that, I'll turn the call back to Gord.

Gord Johnston, CEO

Thanks, Theresa. At the end of the second quarter, our backlog stood at $7.2 billion, its highest level ever. Since December 2023, this represents approximately 8% acquisition and 3% organic growth. We achieved organic growth across all of our regions and in all of our BOUs with the exception of buildings. Energy and Resources and Environmental Services both achieved double-digit organic growth. Wins for Energy and Resources included an award for Preliminary Engineering and Consulting on a Power Project in Eastern Canada and awards in the mining sector supporting critical minerals in both Canada and globally. Our Environmental Services team has secured a number of contracts that include regulatory services to support new power transmission in Canada and permitting for a data center campus in the US. Our backlog represents approximately 12 months of work. Turning now to major projects awarded in Q2. In June, we announced the extension of our program management and technical engineering services for Pure Water San Diego. In addition to this, our Water team in a joint venture has been awarded a five-year contract to provide services for DC Water. This initial contract for $43 million US includes implementation of infrastructure upgrades across all drinking water assets. This program also includes development of Pure Water DC, which will provide resilient water supply through a water reuse approach. We also continue to work to win AMP8 frameworks in the UK and secured an engineering consultancy framework with Dŵr Cymru Welsh Water. Our Buildings business will serve as a trusted advisor to a confidential Fortune 100 technology client. Augmented by the expertise of ESD and Morrison Hirschfield, the Buildings team was recently selected to provide architectural and engineering design services for improvements at nine data center locations across five hyperscale campuses in the United States. Through our partnership with the Kitikmeot Inuit, our Environmental Services team has been engaged to help restart the environmental permitting and engineering for the Grays Bay Road and Port Project in northern Canada. The road will ultimately allow full access from Alberta to the Northwest Territories to Nunavut and to the first deep-water port in the western Arctic, which ties to the Beaufort Sea. And now, turning to our guidance. With our solid results year-to-date, we are reaffirming our overall 2024 financial targets and making some minor adjustments to certain measures. We now expect to increase net revenue for the year in the range of 12% to 15%, and we remain confident with our expectations of organic growth being in the mid to high single digits. Our outlook for the U.S. has not changed. We continue to see the ramp-up of funding from the IIJA, IRA, and the Chips and Science Act. Combined, over $560 billion has been allocated from these three bills, and the market remains very robust, supporting our expectation for mid to high single-digit organic growth. Our outlook for global also remains positive, with organic growth still projected to be in the mid- to high-single digits on the strength of ongoing demand in Water and Buildings. There is expected to be a resurgence of community development in the UK in the second half of this year, as the new Labor government moves to fulfill its pledge to build 1.5 million new homes. Just last week, they announced an expert task force to spearhead the development of new large-scale communities. In Canada, we're maintaining our outlook for mid-single-digit organic growth, given the strong backlog that we've built. We have raised our expectations for the net revenue growth from our recent acquisitions, which is now in the high-single digits. We're in various stages of transitioning and integrating these firms. This increased level of concurrent activity will initially mute margin and earnings enhancements, but these benefits are fully expected once we've completed the work. We've narrowed our target for adjusted EBITDA margin for the year to 16.5% to 16.9%. Finally, we continue to expect our adjusted diluted EPS growth to be in the range of 12% to 16%. 2024 is shaping up to be another excellent year for Stantec as we continue to execute on our three-year strategic plan. Before wrapping up today, I'd like to welcome Vito Culmone. Vito joined us on July 15th as Executive Vice President, and he is already deeply engaged with Theresa and the team. Vito will assume the Chief Financial Officer role on September 3rd. Vito brings a wealth of experience as an accomplished financial leader across multiple industries and will be instrumental as we continue to drive the successful execution of our strategic plan. As this will be Theresa's last quarterly conference call, I want to thank her once again for her tremendous work and dedication to Stantec. Her exceptional leadership and knowledge have left Stantec with a world-class finance team and in a very solid financial position. Theresa will continue to work with us until September 27th, ensuring a smooth transition with Vito. We will miss her, and we wish her all the best in her retirement. With that, I'll turn the call back to the operator for questions.

Operator, Operator

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

Sabahat Khan, Analyst

Hey, great. Thanks and good morning. Before I get going, just recently I wanted to acknowledge the significant impact you've had here and wish you all the best with the next chapter.

Theresa Jang, CFO

Thank you, Saba.

Sabahat Khan, Analyst

I guess just on the capital allocation side, if we think about M&A, you've done a number of transactions to start the year. Can you maybe just talk about the pipeline there and just more specifically, the likelihood of a larger transaction as you do have a bit of a management transition here and you've already done some M&A, just some thoughts on that.

Gord Johnston, CEO

Yes, so firstly, as we look at the dry powder that we've got left, you heard Theresa talk about where we are from a leverage perspective, we feel really confident that we can continue to move forward and we are not pausing our M&A search and the ongoing discussions in any way. So we're in different levels of discussion with companies really around the world, the pipeline is really full right now. There are some, again, in that 500 to 1,000 to 2,000 person range, but there are also some larger ones that we're in the midst of discussions with as well. When these would come to bear, the timing will be what it'll be, but there's absolutely no change in our M&A philosophy with our change in CFO from Theresa to Vito. We're very aligned on continuing with our growth philosophy.

Sabahat Khan, Analyst

Okay, great. As we look ahead here to the back half of the year, if we can maybe just talk about the trajectory of the margin progression here and the sort of margin that might be baked into your backlog at this point. Thank you.

Theresa Jang, CFO

Sure. As we get to two or three underway here, it generally is our strongest quarter from a margin standpoint historically. We don't think that will be any different this year, so the back half I think is going to be solid. We expect that range that we've put out in our outlook is very achievable.

Sabahat Khan, Analyst

Great, and then just one last one. Based on the discussions you're having with your customers, particularly on the private side, what are you hearing from them? Has there been any change in the tone just given where the macro is, just kind of the feedback you're hearing from the non-public client space?

Gord Johnston, CEO

Yes, certainly it's consistent with where we've been in previous quarters. The commercial sub-sector is still slower, but on some of our main buildings, client bases, healthcare, and so on, you've seen in Q2 of this year, Buildings had over 13% organic growth. When people often ask about the building sub-sector in particular, one of the differentiators from Stantec over other firms is that we have a much larger public sector perspective there. All the healthcare and a lot of the work that we're doing there shows up very strong. But, Saba, we're not really seeing a lot of softening in the approach from our private sector clients around the world. A little bit we were seeing historically and we commented on in community development or the land development business in the UK. With the changes in the government there to the new Labour government and their commitment to build 1.5 million new homes, we do see that home building should kick off and get restarted here in the second half of this year.

Operator, Operator

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

Devin Dodge, Analyst

Alright, thanks. Good morning. I'm going to start with a question on the US. Just wondering if you could provide some context around the organic backlog development there. It appears that the backlog has moderated sequentially on an organic basis, I think, in three of the last four quarters. I'm just trying to get a sense if there's any implications to that growth outlook from that.

Gord Johnston, CEO

Yes, we don't see that at all, Devin. The pipeline of opportunities is still very strong. The one thing that we're seeing in the US is we've had such high organic growth there, 8.7% in Q2, but, 10% or 12%, really going back over the last number of quarters. We're filling the pipeline with new work. We're just consuming it as well since the organic growth is so high. A lot of the new work that we're seeing is just timing issues in terms of when we get it in the contract and when we actually sign it and put it in the backlog. We're not concerned about the US backlog.

Devin Dodge, Analyst

Okay, thanks for that. Can you provide an update on the real estate optimization strategy? I believe there was a lease impairment charge taken in Q2 related to this. I'm just looking to get a sense for what opportunities have been identified over and above that initial program from a few years ago.

Theresa Jang, CFO

Sure. You might recall, Devin, that when we rolled out our strategic plan in December for the next three years, we set a new target for ourselves to reduce a further 10% of our real estate from the 2023 baseline. We estimate about $0.10 per share over that three-year period. So we are well on our way. The lease impairment we took this quarter is related to that effort. We are on track to reach that $0.10 per share over the next three years.

Devin Dodge, Analyst

Okay, sounds good. Okay, and just before I turn it over, I just wanted to thank Theresa for all your help over the last five years. Congrats on the retirement. If Vito's in the background there, good luck in his new role.

Theresa Jang, CFO

Thanks very much.

Operator, Operator

Our next question comes from Yuri Lynk with Canaccord Genuity.

Yuri Lynk, Analyst

Hey, good morning. I'll echo the sentiments to Theresa and Vito. Just wondering about, you mentioned in the MD&A about claim provisions kind of reverting back to normal. Were those lower provisions in play in the back half of 2023, or was it just Q2? I'm looking at the Q3 EBITDA margin from last year which is quite strong, and just wondering if we probably see a bit of a retraction there and maybe a little bump in Q4 as we think about the back half of the year.

Theresa Jang, CFO

It was actually in Q2 of last year that we saw the benefit of that lower provision in our results. The timing typically around this time of year where we get those updated actuarial forecasts. Last year, Q2 was the first time we had that outsized revaluation from our LTIP. A lot of moving parts contributed, but that lower provision helped.

Yuri Lynk, Analyst

Okay. Was there something notable in the third quarter of last year? I realize I'm asking you to recall specifics, but it was a very strong period.

Theresa Jang, CFO

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

Yuri Lynk, Analyst

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

Gord Johnston, CEO

No, we're really not. We spent a lot of time at the beginning of the year thinking about if we might see either project awards or proposal activity slow because of it, or whether we would see clients pulling things ahead to try to get them out and awarded prior to the election, but we're just seeing a steady approach there from our clients.

Operator, Operator

Our next question comes from Jacob Bout with CIBC.

Jacob Bout, Analyst

Hi, good morning and maybe to start Theresa, just wishing the best in retirement.

Theresa Jang, CFO

Thanks very much.

Jacob Bout, Analyst

Maybe I'll just go back to the EBITDA margin guidance and you narrowed full year and you called the margin and earnings enhancement from the three recent acquisitions that will be muted. I had a few questions around that. This period of transition and integration, how long would that be and maybe just talk through how different are the EBITDA margins produced and acquisitions versus the company overall.

Theresa Jang, CFO

Yes, I'll try to address all of those pieces. The integrations are all underway and they're all at various stages. I would say the Morrison Hershfield is—we are moving now to financial migration. That should occur over the second half of this year. Hydrock will wait until the spring. ZETCON, we're really at this point, evaluating. We haven't intended to bring it onto our back office system just because it is more of a standalone business at this point. However, there are elements of ZETCON that are unique in terms of language differences and accounting methodologies that are German gap. It takes time to work through and convert results into IFRS and that is unique to ZETCON. As we get through the back half of this year and perhaps through the first half of next year, things will start to normalize. It's different having three concurrent acquisitions that we're transitioning versus doing one large acquisition. Cardno, was one firm that was on one back office system that we converted. This is three unique and different firms. We're taking our time; we want to ensure the folks we've brought over feel good about being a part of Stantec and learning our processes. That's fully expected, margins wouldn't increase right away. As far as the margin profile, they're all similar to Stantec in terms of business lines. There's really nothing there that causes us to think there will be a margin retraction as a result of these acquisitions.

Jacob Bout, Analyst

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

Theresa Jang, CFO

No, I don't think so. If you think about it from a project margin standpoint, they're all fairly typical relative to their lines of business. So there's not a significant amount of cost synergy from these acquisitions because it's really the growth and revenues collectively that we're in pursuit of.

Jacob Bout, Analyst

Okay, and last question here just on pricing, does the demand environment still support the ability to charge higher fees or is this starting to change?

Gord Johnston, CEO

No, we're still seeing that as a general industry trend. Us and our competitor set are still very busy. Backlogs are high, so we still see that we're not under a lot of pressure on prices. It is still a very competitive industry, but the first question that clients ask us isn't how cheaply can you do it? The first question remains, can you get it done within the timeframe I need it? So we still have pricing tailwinds.

Operator, Operator

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

Chris Murray, Analyst

Yes. Thanks, folks. Good morning, and Theresa, congratulations on your retirement. Hope it ends up well for you. I guess my first question, maybe just turn it back to the U.S. and Gord, you made the comment that you're not seeing anything too much around the election, but we're just sort of—what I wonder is could you help maybe understand, with the ABI metrics being sub-50 for the last little while, it doesn't seem like you guys are seeing much of an impact, which is perhaps a bit surprising. Is that more of the mix of business, or is it special projects that could be helping you out there?

Gord Johnston, CEO

Yes, interestingly, in the U.S. in general, we see, we'll often get asked what do we see we might see if there were to be an administration change. But looking at the big picture in the U.S., infrastructure continues to have bipartisan support. When you look at the IIJ, about a third of it has been awarded, Congress has till the end of 2026 to encumber the remaining. We see that providing significant longer-term tailwinds. There are already discussions about what might IIJ 2.0 look like. Semiconductors are busy, data centers, mission-critical facilities, and PFAS is starting to emerge. We still see that regardless of whether there is a change in who's in the White House in November, our business will continue to be very strong moving forward. Regarding building specifically, with the decrease in some of the concerns with the ABI, we’ve seen commercial being slow but has been slow for a couple of years now. Healthcare is very strong for us, mission-critical facilities are strong, and we see those tailwinds continuing going forward.

Chris Murray, Analyst

Okay, interesting. Just turning back into your energy and resources business, a lot of the wins sound like they're in grid and resiliency, but there have been a number of announcements from a lot of companies regarding oil and gas and what I call traditionally your backyard, LNG and things like that. Just wondering what's your opportunity pipeline looking like more in the traditional oil and gas energy business these days?

Theresa Jang, CFO

The more traditional oil and gas work is still relatively muted, and I don't know that it will approach what it was a decade ago. The work is really shifting towards transmission and power generation. Power transmissions and hardening the grid are high priorities for many geographies. We've seen a lot of growth for the national grid in the UK. We announced the work we've won under MSA with BC Hydro, so that's where we're seeing the growth. Renewables are a bit muted at the moment given the regulatory requirements, and proponents are still figuring out how to make those projects economic. A part of our business that does stitch around our mining work, which is a smaller part of our overall business, is also fluctuating with the commodity prices; but longer term, it will continue to grow.

Operator, Operator

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

Sean Jack, Analyst

Hey, good morning, guys. Just a quick one from me. Looking at the five different business operating units from an M&A perspective, wondering where the firm is seeing the best value right now for potential new targets?

Gord Johnston, CEO

We have considerable strength in each of our five BOUs. We're actively engaged in discussions in all of those BOUs. We're continuing to look at some opportunities in Canada, but even more so in the United States. Our geographical M&A pipeline remains robust through all of our BOUs, with no preference at this time. We're looking at all opportunities that are available.

Operator, Operator

Our next question comes from Benoit Poirier with Desjardins.

Benoit Poirier, Analyst

Yes. Good morning, everyone. And welcome to the team, Vito, and all the best to you, Theresa.

Theresa Jang, CFO

Thank you.

Benoit Poirier, Analyst

Yes, just a strong organic growth overall, but we've seen some retraction for energy and resources due to some delays in the ramp-up of new projects. Could you provide more color about how many projects are part of these announcements and whether it's a matter of just one quarter and when the ramp-up of these projects is pushed out?

Theresa Jang, CFO

Yes. We've seen this delay for a couple of quarters now; also just the wind down of some other larger projects we had last year. Some of these projects, the BC Hydro project I referenced earlier, is something we've been waiting on for a while to get going, and we're starting to see that now. That's just a good example where we've won the work, it's in our backlog, we've got people sort of standing by and ready to go. We need to work with our client to get the project up and running. We’ve also seen this in the mining sector, and it’s going to take a little while due to regulatory factors, and the outlook for commodity prices. Good contracts are in the backlog as we wait for our clients to get them going, which has caused a bit of that retraction in the first half of this year.

Benoit Poirier, Analyst

Okay, and just curious, what drove the lower gross margin in Canada despite the overall solid organic growth achieved for the region? Would that be the exposure to energy and resources?

Theresa Jang, CFO

Not so much, Benoit. We had a couple of projects, particularly in environmental services that were very high margin and large projects. This includes some coastal gas work and working for Metrolinx in Ontario, but that work has wound down. You're seeing that in the project margin. It's more reflective of just the overall mix we have this year versus last.

Benoit Poirier, Analyst

Okay. That's great. Perhaps the last one for Theresa in terms of DSO and free cash flow. Obviously, DSO came in at 77 days below the target of 80. Given that, we tend to see a big collection period in Q4, would it be fair to expect DSOs to further improve and potentially reach low 70s or below 75 days? Just in terms of free cash flow expectation, if you could provide a breakdown in the second half and whether you're still confident to achieve 100% conversion for this year. Thank you.

Theresa Jang, CFO

Yes. I'm really happy with where DSO is, particularly when we've got this continued pace of organic growth. Maintaining a DSO below 80 days is positive. Will we get down to 75? It's hard to predict given the volume of projects and complexities around billing processes. We're satisfied with where we are; there's always room to improve. As for free cash flow conversion, the goal to have it at one times coverage of net income is a three-year target. We nearly achieved it last year, but the goal is to push towards that conversion rate, we'll see how it goes. We're off to a good start for cash flow generation so I'm hopeful. But whether we get there this year or continue to work towards it over the next two years remains to be seen.

Operator, Operator

Our next question comes from Maxim Sytchev with NBF.

Maxim Sytchev, Analyst

Hi. Good morning. Theresa, obviously, all the best in the future.

Theresa Jang, CFO

Thank you.

Maxim Sytchev, Analyst

Gord, I have a couple of quick questions. In terms of the seller's expectations, I'm wondering if you are observing any emerging trends. Is it still pretty steady? I guess the larger geos, the bigger the multiple? What are you guys seeing on the ground right now?

Gord Johnston, CEO

Yes, in general, we’re seeing trends are pretty consistent; we haven't seen any particular uptick in expectations for multiples, but we certainly haven't seen a decrease either. Trends are pretty steady.

Maxim Sytchev, Analyst

Thank you. One last question, I noticed that Western Canada has slowed down. I was curious if there has been any negative impact on environmental services as a result. Is there anything helping to balance that out? I'm interested in how the different commodity sectors interact and their overall effect on environmental services. Thanks.

Gord Johnston, CEO

Our ES business remains busy, particularly, we're seeing strong growth globally. There’s a little bit of slowness from an organic growth perspective in Canada right now, but as Theresa said, it's because we were so busy that the comps are really high from last year and some large projects we were working on. We still feel good about ES; it works with all of our other groups as well, whether transportation or water, and overall, we're optimistic about environmental business, we don't see that retracting going forward.

Maxim Sytchev, Analyst

Yes, makes sense. Sorry, you mentioned Water and I'm curious if you have insights on the latest PFAS fluctuations. At one point, it seemed we were committing to it, and right now, it doesn't seem to be the case. I’m wondering if that changes anything for you on the ground or not.

Gord Johnston, CEO

Our Water business is so diversified that as PFAS began to pick up, we were front and center in that work. We've mentioned that up to $200 billion in capital was initially estimated, but we know it's going to be more than that. But it’s not a meaningful or significant contribution to our overall net revenue. Whether PFAS fluctuates, our Water business looks to remain solid in the years to come.

Operator, Operator

Our final question comes from Ian Gillies with Stifel.

Ian Gillies, Analyst

Good morning, everyone. There's been quite a bit of talk around the integration through M&A this year. As we think about pressing into 2025, would you anticipate that margin expansion year-over-year in 2025 maybe be greater than average as you roll through some of these costs and get everything on the same platform? Or are you thinking it’s going to be a normal year?

Theresa Jang, CFO

I think the opportunity to expand margin next year is really good, for a number of reasons, including what you're pointing to around the integration work wrapping up. It's the enhancement that comes from having a bigger scale and a bigger platform. It's those who have joined us through the acquisitions being integrated and on the Stantec platform. Our own employees are taking the time and working with our new colleagues through that transition. Several factors will drive strong utilization and reduce admin labor, leading through the back half of this year and into next year to margin enhancement that will meet our target for the end of 2026 at 17% to 18%.

Ian Gillies, Analyst

That's very helpful. Can you also comment on the M&A pipeline? What opportunities did ZETCON bring, perhaps in Germany or other jurisdictions around continuing to grow in that region as you try to get towards critical mass?

Gord Johnston, CEO

Yes, we're focused primarily on Germany right now, and they have operations in Austria as well. There are good opportunities out there, and we're certainly interested in moving forward. We want to get ZETCON into Stantec a little; there are some IT aspects we’re working through, getting their systems integrated. I wouldn't see us doing anything more in Germany in 2024 just because we want to ensure ZETCON is on that solid Stantec footprint before we move forward; however, there are plenty of good opportunities to continue to expand to achieve that critical mass you mentioned.

Operator, Operator

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

Gord Johnston, CEO

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

Theresa Jang, CFO

Thank you.

Operator, Operator

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