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Stantec Inc (NYSE:STN)
Q3 2019 Earnings Call
Nov 7, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Stantec's Third Quarter 2019 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. Today's call is webcast and Stantec invites those dialing in to view the slide presentation, which is available in the investors section at stantec.com.

All information provided during this conference call is subject to the forward-looking statement qualification set out in slide 2 detailed in Stantec's Management's Discussion and Analysis and incorporated in full for the purpose of today's call.

With that, I am pleased to turn the call over to Mr. Gord Johnston *** Part 4 ***

Gord Johnston -- President and Chief Executive Officer

Good morning and thank you for joining us. I'll begin our call today with an overview of our 3rd quarter performance. Theresa will then provide details on our results. Following that, I'll review our operations in more detail. In Q3, we drove a 12.4% year-over-year increase in net revenue with 7.4% representing organic growth across all geographies.

In particular, we saw major contributions from the United States and our global operations; environmental services and Infrastructure generated double-digit organic growth and water and buildings delivered strong growth of 7.4% and 4.5% respectively. Energy & Resources by contrast, experienced a modest contraction again this quarter mostly due to major projects nearing completion, but it should be noted that comparative figures for last year were very high.

Acquisitions delivered a 4.8% increase in net revenue, primarily in our global buildings business. Gross margin, which is a reflection of project mix and the quality of our execution increased by 13.4% and at September 30th, our consolidated contract backlog remains at a record high 4.4 billion, that's up 5.4% from the end of 2018 and represents approximately 11 months of work.

We've made very good progress on our organization reshaping initiatives and continue to focus on driving efficiency. We reduced administrative and marketing costs, and improved utilization compared to the first half of this year. Importantly, as demonstrated by the results delivered this quarter, our reshaping initiative has not impacted our ability to achieve organic growth, execute projects or build backlog.

In fact, we've won a number of major projects in the back half of this year and we're actively hiring in regions and businesses with strong organic growth. We're also on track to deliver annualized cost savings of approximately $40 million to $45 million or $0.26 to $0.29 per share, consistent with our estimate in Q2.

And with that, I'll hand it over to Theresa.

Theresa Jang -- Executive Vice President and Chief Financial Officer

Thanks Gord. As we've done throughout this year, we presented Q3 2019 results both before and after the adoption of IFRS 16. And you will find a reconciliation of our Q3 '19 statements in our MD&A, in the appendix of the slide presentation and in the supplemental information posted to the investors section of our website.

Adjusted net income for the quarter increased 29.5% to $66.3 million and adjusted earnings per share increased 31.1% to $0.59 per share. This was largely due to net revenue growth, which increased 12.4% *** Part 5 ***

To $952.6 million in the quarter. As Gord outlined earlier 7.4% of that increase was organic growth and 4.8% was acquisition growth; gross margin for the quarter increased 13.4% to $516.1 million as a percentage of net revenue, gross margin increased from 53.7% to 54.2% and this reflects our continued focus on improving project execution and our diverse mix of projects.

Admin and marketing costs were $355.6 million, representing 37.5% of net revenue and that includes a 0.3% impact from services associated with our reshaping initiatives. If we exclude severance as many marketing as a percentage of revenue was consistent with the prior year on a pre-IFRS 16 basis, which is indicative of our normal cycle. Adjusted EBITDA increased 46.9% to $159.1 million, representing 16.7% of net revenue.

Looking at our year-to-date results, we were within our target ranges for all our measures. I do want to remind you that we typically see a slowdown in activity in the 4th quarter as [Indecipherable] northern climate and as we approach the holiday season, resulting in higher admin and marketing costs as a percentage of net revenue, compared to the 3rd quarter. So for the full year, we expect our key financial metrics will be within our target ranges and will materially change from where they [Indecipherable] at the end of Q3.

Our DSO remained unchanged from Q2 [Indecipherable] days or 91 days, including deferred revenue. We have placed a major effort on reducing this metric, and it remains a priority for us. We said that our analysis indicates that the return we generate on our working capital is comparable to that of our peers and relatively consistent with prior years. So in other words, on the whole, we are being compensated for the longer period of time it takes to invoice and collect our receivables; but nevertheless, we know we can strengthen this return by reducing the number of days outstanding. Moving on to liquidity and capital resources, operating cash flow from continuing operations increased 115.8% from $64.4 million to $139 million.

This is mainly attributed to increased cash received from clients and IFRS 16, partly offset by higher supplier and employee costs related to acquisition growth [Indecipherable] year-to-date operating cash flows to an inflow of $212.8 million. Looking at our uses of capital for investing activities, we used 20 *** Part 6 ***

Million in the quarter, which included payments of $14.8 million related to past acquisitions and our typical stand on property and equipment. Cash used for investing activities was $165.5 million for the year-to-date. We had $54.7 million for net financing activities and this includes $26 million and repayments on the revolving credit facility, $16.2 million for dividends and $12.2 million in share repurchases.

For the year to date, we used $66.7 million of cash refinancing activities. We continue to strengthen our balance sheet as we progressed through the year of net debt to adjusted EBITDA on the trailing 12-month basis at 1.6 times at the end of the quarter, well within our internal target of less than 2 times.

So our liquidity remains strong, at the end of the quarter, we had approximately $160 million in undrawn capacity on our credit facility. The July amendment to our credit facilities resulted in improved [Indecipherable] such as lowering our interest spread and increase -- and increasing our access to additional funds from $400 million to $600 million, while extending the maturity date of the revolving facility by one year.

And with that I will turn the call back to Gord for highlights from operations.

Gord Johnston -- President and Chief Executive Officer

Thank you, Theresa. In Canada, results continue to be in line with expectations with slower economic growth. Net revenue increased 2.9% in the quarter, 2.2% of which was organic growth. Our Environmental Services mining and transportation businesses [Indecipherable] in the quarter. Our work on LNG projects and in the midstream oil and gas sector drove growth in environmental services; progress on major projects in the Prairie Provinces drove growth in mining and growth in transportation was largely due to continued work on large Light Rail Transit projects.

Energy and Resources retracted as several power and oil and gas projects wrapped up -- or near completion. But we continue to work on Trans Mountain and LNG projects and anticipate ramping up our efforts there. As for key wins in the quarter, our team will complete preliminary design and environmental assessment for a road widening project along the 401 in Ontario.

And we are also retained by [Technical Issues] one of Canada's largest telecom providers to deliver design improvements at up to 1,300 locations across North America. In the United States project opportunities remains strong. Net revenue grew 12.1% in the quarter and that's almost entirely organic growth.

With double-digit growth in transportation, environmental services, and water. Our transportation practice continues to be driven by work on major rail and transit projects, work and renewables and hydropower led growth in environmental services and in water *** Part 7 ***

Our efforts to expand market share in California and Texas are proving successful. From a sector perspective, we're seeing increased opportunities in conveyance and wastewater work; key projects in the US included a 3-year master services agreement for environmental and permitting services and solar power sites across the country and we are also awarded construction in capacity improvements to one of Florida's Turnpike roads. We achieved strong growth in our global business.

Net revenue was up 34.8% in the quarter, a large portion of that growth is due to acquisitions, mostly Wood & Grieve in Australia and Peter Brett in the UK, which both strengthen our global Buildings & Infrastructure practices. We also achieved 6% organic growth. All our global businesses grew organically with the exception of water-power and dams sector where some major projects neared completion.

Our mining export business continues to perform well as due to our water and buildings practices in the Middle East. We also won a sizable project with City of Gold Coast Australia, a partnership involved in was selected to deliver new and improved planning design and management of water and wastewater infrastructure and before we start the Q&A I'll add that Theresa and I will share our 2020 strategic plan publicly in early December.

We will offer insights into our growth opportunities and provide additional details on 2020 guidance and our targets through to 2023. And with that, I'll hand it back to our operator for the Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We'll take our first question from Mark Neville with Scotiabank.

Unidentified Participant

Hi, good morning. Maybe just wanted to talk about the workforce reshaping. So I'm just sort of curious, sort of where you're at, what's left to do. Maybe just start there.

Gord Johnston -- President and Chief Executive Officer

Great. Thanks, Mark. Good question. So the workforce reshaping initiative. The lion's share of that is complete. We got to jump on that really early and hard at the beginning of Q3 and we believe that we're on track to achieve that $40 million to $45 million in annualized cost savings that we spoke about in Q2.

Unidentified Participant

Alright. Sort of on that $40 million to $45 million, is there any way maybe a ballpark sort of how much has hit the P&L at this point if any, sort of just trying to think sort of what's incremental to 2020 and sort of what sort of already been reflected in the numbers *** Part 8 ***

Unidentified Participant

If you can do that.

Theresa Jang -- Executive Vice President and Chief Financial Officer

Yeah. So, Mark, we estimated that for the second half of the year, we would achieve savings in that $16 million to $20 million range before tax and before severance and so I'd say that we are on track for that.

And because the initiatives [Technical Issues] a little bit later in the year that's why not just a simple doubling when we get to the $40 million to $45 million for next year, but we are on track for the second half of this year to be in that $18 million to $20 million range.

Unidentified Participant

Okay. But I guess sort of just by math and sort of progress, there wouldn't be much in Q3, you see more of it in Q4 and probably a bigger chunk sort of next year at least in the P&L, I think about that right?

Theresa Jang -- Executive Vice President and Chief Financial Officer

Yes, that's right.

Unidentified Participant

Okay. I guess just maybe just on the organic growth. You touched on -- you said you'd talk about plans for 2020, I guess next month, but just, I'm just curious if you're seeing any sort of anything that would sort of materially change either up or down, sort of what the business is doing sort of now into next year.

Gord Johnston -- President and Chief Executive Officer

We're feeling good about the backlog that we've had all year, which is still at record levels. So as we move into next year, I think we're still looking at that low to mid single digit.

Unidentified Participant

Okay. I'll leave it there. I'll get back in queue. But thank you.

Operator

[Operator Instructions] We'll take our next question from Derek Spronck with RBC.

Unidentified Participant

Okay. Thanks guys and congratulations on the nice quarter there, just on the A&M front, how should we be thinking about the range next year should we can continue to see that lower as a percent of sales and any color around where that could be -- I'm assuming mathematically we could kind of reverse engineer, but --

Theresa Jang -- Executive Vice President and Chief Financial Officer

Yeah, I appreciate the question Derek, and this might not be the most satisfying answer, but what we really want to do when it comes to 2020 is provide that commentary when we roll-out our strategic plan. I think it will be important for us to put some context around what we're expecting for the financial metrics and so if you don't mind holding off that, and you're right, you can do some backward math and probably come up with something, but really from our perspective, we'd like to hold off on commenting until December when we roll-out the strategic plan.

Unidentified Participant

Okay. Fair enough. You had a nice pickup in organic growth. Was that just pent-up demand that was released or are you seeing more *** Part 9 ***

Unidentified Participant

More sustainable higher organic growth trends here.

Gord Johnston -- President and Chief Executive Officer

You saw -- as you say, pretty good organic growth, certainly in all of our geographies. Good organic growth this quarter and in all of our business lines with the exception of Energy & Resources. As we look at a couple of the environmental services, we saw strong growth across all the geographies. Will that [Indecipherable] going into 2020. I would think it probably would a little bit; in infrastructure, we saw great pickup in our transportation practice this quarter, double-digit in all of our geographies. And so as we've talked about over the last little while we've had some strong backlog generation and transportation, we talked about some of the large projects we're working on [Indecipherable] in the midst of heavy design at this point.

I think the one that we are most pleased with this quarter would be the water organic growth, we've talked for several quarters that while we are generating good backlog in water, we felt that we haven't seen that translate into organic growth yet. Certainly, we did see that in Q3, it was 7.4% overall, with really strong growth in the United States really as a pick up to a number of those projects that we've been focusing on in California and in Florida.

Unidentified Participant

Okay, that's great, thanks Gord, just maybe one last one for myself, are you seeing any sort of negative headwinds from the divestiture of the construction in water or is it still feeling relatively bifurcated between the design and construction side on the water side?

Gord Johnston -- President and Chief Executive Officer

Sure, good point. And just before I answer that, the operator has just asked if I could say everyone who is in queue for some reason, those people who are in the queue have been dropped from the queue. So looks like Mark is in the queue again, there is Jacob now. So if you need to add yourself back to the queue, please do so. Okay.

Operator

[Speech Overlap]

Gord Johnston -- President and Chief Executive Officer

Great, thanks. Thanks everyone for that.

So as to your question with regards to Constructors; in fact Theresa and I are in the UK this week and meeting with number of our clients and staff here and certainly one of the questions that we've talked about quite a bit was the impact of the divestiture of construction here.

Certainly we have not seen that. But in fact we still work with our construction business here when it makes sense and we have recently won an AMP7 recompete with them for one of the clients here.

So where it makes sense, we'll work together with them, but neither in North America, nor here had we seen a significant negative headwind as a result of *** Part 10 ***

Divestiture.

Unidentified Participant

Okay, that's great. I'll turn it over.

Gord Johnston -- President and Chief Executive Officer

Thanks.

Operator

We'll take our next question from Mark Neville with Scotiabank.

Unidentified Participant

Hi, sorry, I didn't want to see all the questions here, but I guess something on the line. I guess just on M&A, it's been a bit quieter in the last few quarters. So I'm just curious if that's sort of related to the workforce reshaping or if there is sort of something else happening or just sort of a coincidence, I guess --

Gord Johnston -- President and Chief Executive Officer

Yeah, that -- yeah, certainly the slowdown in M&A this year was not intentional in any way. We did close [Indecipherable] in March and it hasn't quite since then. But as we always are -- we're always involved in numerous discussions and really we're just waiting for one to hit. We just haven't had the right mix of cultural fit and opportunity yet, but there is no change to our M&A program.

Unidentified Participant

Okay, thanks. I'll leave it there. Thanks.

Operator

We'll take our next question from Devin Dodge with BMO Capital Markets.

Theresa Jang -- Executive Vice President and Chief Financial Officer

Is operator still there.

Unidentified Participant

Hello.

Unidentified Participant

Hi, can you hear me.

Gord Johnston -- President and Chief Executive Officer

Hello.

Unidentified Participant

Hi, Gord, can you hear me.

Gord Johnston -- President and Chief Executive Officer

Gord and Theresa are here, but we can't hear you at this point.

Theresa Jang -- Executive Vice President and Chief Financial Officer

[Indecipherable] we lost you. But they can hear Chris.

Unidentified Participant

I can hear you guys. I'm not sure if you can here me though.

Analyst

[Indecipherable]

Theresa Jang -- Executive Vice President and Chief Financial Officer

[Technical Issues] Can you hear us now?

Unidentified Participant

I can hear you. Can you hear me?

Theresa Jang -- Executive Vice President and Chief Financial Officer

We can hear you.

Unidentified Participant

Okay, great. Okay.

Gord Johnston -- President and Chief Executive Officer

We still got technical difficulty here, perhaps I'll dial-in again using a different phone line.

Unidentified Participant

So If you can hear me. I'll just go ahead and ask my question.

Gord Johnston -- President and Chief Executive Officer

So if you can hear us. [Speech Overlap]

Theresa Jang -- Executive Vice President and Chief Financial Officer

We are going to disconnect and dial in, our apology.

Gord Johnston -- President and Chief Executive Officer

Okay, apologize for this, we'll connect with you again right away.

Unidentified Participant

First, I don't know if you heard that that Theresa and Gord are recalling in *** Part 11 ***

Gord Johnston -- President and Chief Executive Officer

[Technical Issues] Hello, it's Gord Johnston here, can you hear us.

Unidentified Participant

Hi, Gord, I'm here, this is Devin [Phonetic]. Can you hear me.

Gord Johnston -- President and Chief Executive Officer

Devin I'm so sorry for that. I don't know what happened, but yes, we can hear you. Thank you.

Unidentified Participant

Okay.

Gord Johnston -- President and Chief Executive Officer

I apologize for the IT issue.

Unidentified Participant

That's OK. I just wanted to come back to the organic growth in Q3. I'm just trying to get a sense for what was the driver. I think you addressed what verticals and where that strong strength came from. Just trying to understand whether it was like project specific revenue recognition changes or a higher head count or utilization or what was driving that outsized organic growth in Q3.

Gord Johnston -- President and Chief Executive Officer

Certainly, a number of the projects that we've been waiting to fully engage in really kicked into high gear. There is certainly a seasonality component in Q3 as well as we have more people out in the field and those programs are going a bit stronger, so it really wasn't due to any one of those issues, but pretty broad-based across all the geographies, and we feel good about the quarter.

Theresa Jang -- Executive Vice President and Chief Financial Officer

And just, just to confirm, we did not change any of our revenue recognition approach for the quarter. So there wasn't anything from an accounting perspective that caused that. I think it's probably a bit of that *** Part 12 ***

We have commented that we were slow getting out to the field this year because of the cold winter and so on and we saw [Technical Issues] in our results in the first and second quarter. So I think in some respect as well [Indecipherable] up ability to move forward and it was more pronounced in the 3rd quarter because of that.

Unidentified Participant

Okay, it makes sense.So maybe just kind of continue in that team, but organic growth in the Canadian business was positive in Q3, remained lower or bit -- a bit lower on a year-to-date basis. Just with what you see in the backlog, what you're seeing in the bid pipeline. Just wondering how we should be thinking about the pace of organic growth in Canada over the next -- let's say 2 to 4 quarters.

Gord Johnston -- President and Chief Executive Officer

As we look at Canadian organic growth going forward. This quarter, we were at just about 2%, we saw to sort of see it in a similar number going over the next couple of quarters.

If we -- that will bring the year in the reasonably flat. And I think that's sort of in line with our expectations for Canada this year; next year, I would see us going forward in a similar number to that, slightly positive organic growth but not huge, certainly not in the high numbers.

Unidentified Participant

Okay. And maybe just one last one for Teresa, DSO reduction progress, I mean we're stuck at 104 days. It just seems like that target of 98 days is becoming maybe less likely what is -- how should we be thinking about a reasonable target by the end of the year.

Theresa Jang -- Executive Vice President and Chief Financial Officer

So the target at 98 days that we said at the start of the year. I would agree with you, it's increasingly unlikely that we will achieve that by the end of the year. I -- the work that we've done and there has been a tremendous effort put toward this, it would indicate to us that maybe a day or two improvement at best over to end of the year, the reasons are the same as I pointed out in earlier calls, a lot of it centers around in our operations outside of North America and for some of it is this meeting some of those contracts to roll off, certainly as we go forward and as Gord mentioned, we're in the UK, we're talking with our global leaders and as we're entering into new contracts, there is very keen focus on payment terms as we enter into new work, but it's just going to take a while for those other contracts to roll off.

Unidentified Participant

Okay. So a day or two by year-end. And it sounds like there is a little bit more room to go, maybe in 2020, is that fair.

Theresa Jang -- Executive Vice President and Chief Financial Officer

You know we're going *** Part 13 ***

We're going to keep trying. And I think DSO is clearly one of those things that every organization, particularly as a professional services company should be working on to reduce. I made the comment earlier around the work we've done on looking at our return on working capital. And that would indicate to us that over the last couple of years even when DSO has moved up and by -- a fair number of days that we are still, the return we're generating has been consistent.

So I don't want to downplay the issue, I don't want to say that we're not going to focus on anymore because we certainly are. I would also say that given the return is good. That is -- it's important for us to bring the number down, but it's more important for us to focus on generating profitable earnings and that moves the metric move the return far more than shaping a day or two of our DSO, if that makes sense -- it's still important to us, but from a more broad perspective, the metric that matters to me a lot around our returns, that number is in good shape.

Unidentified Participant

Okay, that's helpful. Congrats on the good quarter. I'll turn it over.

Gord Johnston -- President and Chief Executive Officer

Thanks very much.

Operator

We'll take our next question from Chris Murray with AltaCorp Capital.

Unidentified Participant

Thanks Folks just Gord, -- just turning back into growth and the Canadian business, Energy & Resources, I mean we've kind of had a bit of a recovery. Now, kind of looking a little concerned about what's going on. So I was wondering, can you maybe talk about how we should be thinking about that business, and as well can you give us any updates on how you guys are progressing along some of the pipeline.

So we have just been hearing different stories about pacing on things like [Indecipherable] and Coastal GasLink and some of the challenges, I was just wondering if you can shed any color on that from your perspective.

Gord Johnston -- President and Chief Executive Officer

Sure. Absolutely and great question, so Energy & Resources, you were right, we were down 2.7% in Q3, but again that's coming off a comp of just about 26% in Q3 '18. So it's a pretty high comp. But to your point specifically about some of the pipeline jobs, on coastal gas. In addition to the environmental work we've been doing for some time. We've also -- we've just recently have been engaged on some compression type projects there and on TMX we continue to support that project [Indecipherable] on expansion project. We continue to support it going forward, we have had a number of kick off meetings to get going. So right now, we continue to work on detailed engineering.

We're working on project management, construction monitoring and inspection, and permitting work on [Indecipherable]. So pretty busy there and *** Part 14 ***

And as that job or has those jobs continue to increase the pace, our involvement will increase as well.

Unidentified Participant

Okay. Are you seeing anything unusual in the regulatory environment, because I know you guys like you're sort of at the front end of that, we've just been hearing like there's been a lot of issues around getting some of the construction actually going.

Gord Johnston -- President and Chief Executive Officer

Yeah, I think we're pushing forward with our clients as fast as we can. But I don't see anything unusual there at this point.

Unidentified Participant

Okay, fair enough. And then just turning back, I ask the 2020 organic question but I guess you guys all -- but just for expectations, can you just give us some more color on what your plan is on releasing your strategic or how should we expect to the press release and a conference call, or -- investor day, any kind of more granularity on exactly when you expect to releases would be great.

Gord Johnston -- President and Chief Executive Officer

Yeah. Great question. We're just checking some schedules and we expect to do that in early in December and we thought it would be a webcast type of an event, where we would just would layout our 3-year vision for the company, where we're planning to take the firm as well as financial metrics both for 2020, but also where we see we might be able to take some of those metrics moving forward over the 3-year period.

Unidentified Participant

Okay. Thanks guys, I will turn it over.

Gord Johnston -- President and Chief Executive Officer

Great, thank you.

Operator

We'll take our next question from Jacob Bout with CIBC.

Unidentified Participant

Good morning.

Gord Johnston -- President and Chief Executive Officer

Good morning.

Theresa Jang -- Executive Vice President and Chief Financial Officer

Hi.

Unidentified Participant

Yeah, I had a few questions on the water business. It sounds like you're executing on the backlog. If you talk about the issue of the staff shortages in the US. I know you were talking about utilizing Canadian staff and India delivery center, has some of those issue has been resolved?

Gord Johnston -- President and Chief Executive Officer

Yeah, when we certainly, while we've always been working on using our staff and across border way and taking advantage of even folks in the water business from Australia or from the UK in addition to our Pune, India operation, we've really ramped that up over the last couple of quarters.

So certainly that did help us as the project launched that did help us to get the resources that we needed to continue to drive them forward.

Unidentified Participant

And then obviously strong organic growth in the quarter. But it sounds like it might start to average down as we go forward, but do you think you're going to get back to where the industry is growing at that kind of 4% to 5%.

Gord Johnston -- President and Chief Executive Officer

From water in particular?

Unidentified Participant

Correct.

Gord Johnston -- President and Chief Executive Officer

Yeah, absolutely. The *** Part 15 ***

Backlog of projects is there and a number of the projects that we're just beginning to engage with our large multi-year projects, so once they get rolling, we feel confident in that type of a range going forward that 4% to 5%.

Unidentified Participant

And then maybe just on the US, so seeing some outsized growth there. It sounds like a pretty big step up in transportation, environmental, you've got a couple of projects here, the Long Island, the red purple line, how are those projects, one of the expected end and how are you thinking about the continued growth in the US.

Gord Johnston -- President and Chief Executive Officer

Yeah, And a great question. We have those projects certainly in the midst of full design, we have resources from throughout the United States and Canada working on them, but they are large projects. So those will certainly be going for the next couple of quarters; in the case of Long Island and in terms of full flat out design and for Chicago even longer than that.

But as that winds down, we talked about during the prepared comments, the roadway project in Florida comes on. And we have other light rail projects that we're working on in Canada. So we see good backlog in transportation overall.

Unidentified Participant

I'll leave it there. Thank you.

Gord Johnston -- President and Chief Executive Officer

Great, Thank you.

Operator

We'll take our next question from Benoit Poirier with Desjardins Capital Markets.

Benoit Poirier -- Desjardins Securities Inc. -- Analyst

Yeah, good morning. Gordon, Theresa and congrats for the good quarter. First question on energy and resources. I mean, when we look at Q4 last year, the growth was more pronounced. So would it be fair that you could probably turn the corner in Q4 and show some positive organic growth for Energy & Resources.

Gord Johnston -- President and Chief Executive Officer

Our Energy & Resources group is made up of a number of different components, one of which of course is oil and gas. So if the pipeline projects get engaged in a larger way, certainly will see an uptake in that type of work In Canada; our mining space is also within our Energy & Resources Group and we're seeing good growth in mining in Canada and Australia in particular, as a result of our involvement [Indecipherable], but also some of the battery metals. So that feels good going forward over the next little bit as well. So I don't see Energy & Resources having a significant change to the positive in Q4, but I think what we are hoping to see some good growth there going forward.

Benoit Poirier -- Desjardins Securities Inc. -- Analyst

Okay. And for enviro *** Part 16 ***

Environmental services you already provide some color, but if you look at the organic growth, it's been in the double-digit over the last 2 quarter, would you feel or is it reasonable to expect double-digit in Q4 again, but maybe kind of a more moderate growth for 2020 in the mid to high. How should we be thinking about 2024 Environmental Services.

Gord Johnston -- President and Chief Executive Officer

Yeah, I would expect to see that growth to moderate 17% from this quarter was very high. So I would expect to see that growth moderate, we're still hopeful for double-digit growth going forward. But certainly it will moderate from that number.

Benoit Poirier -- Desjardins Securities Inc. -- Analyst

Okay, perfect. And if we look at the province of Ontario. The recently released the market -- the P3 market update -- they highlighted about $65 billion of opportunity. So, could you provide some color on the potential upside for Stantec and whether it could boost the growth prospect in Canada for Stantec for the years to come Gord.

Gord Johnston -- President and Chief Executive Officer

Yeah, certainly some great projects were identified on that list in Ontario. And so for a number of them we have begun working on teaming discussions already and certainly we believe we've got some strong positioning for those.

So we believe that that would bode well for us into the future, but we like the industry in general, where we are waiting for these projects to come to market and -- we're looking forward to competing for them.

Benoit Poirier -- Desjardins Securities Inc. -- Analyst

Okay, perfect. And for Theresa, may be question about the DSO you mentioned already some color on what we should expect by year-end, but when will be looking at the next 3 years, is it fair to assume that 98 it's still a number that could come out and be part of the plan or given the focus on profitability, it's less the end goal.

Theresa Jang -- Executive Vice President and Chief Financial Officer

The number for the 3 years notice is something that we will share when we roll-out our strategic plan in December.

Benoit Poirier -- Desjardins Securities Inc. -- Analyst

Okay. Okay, that's great. And for free cash flow conversion in Q4, anything unusual we should expect or it will be kind of normal seasonality here Theresa.

Theresa Jang -- Executive Vice President and Chief Financial Officer

I expect it to be pretty normal. As Q3 tends to be the high point for us, generated really solid cash from operating activities and free cash flow for the quarter and for the year to date and really strong conversion of cash from operating activities to net income. So it should moderate some as we go into the 4th quarter. *** Part 17 ***

But I would expect that from a cash flow perspective and overall leverage perspective that those will both be in good shape in the fourth quarter.

Benoit Poirier -- Desjardins Securities Inc. -- Analyst

Okay, perfect. And depreciation of lease asset is $29 million to $30 million, a good number on a run rate basis or the numbers should accelerate a little bit as you grow revenues Theresa.

Theresa Jang -- Executive Vice President and Chief Financial Officer

I don't think it would be that far from the guidance that we gave at the start of the year.

Benoit Poirier -- Desjardins Securities Inc. -- Analyst

Okay. Okay and last one for me, when we look at the strategic plan that you are going to be providing in December. I'm wondering whether, how should we be thinking about management compensation and what are the compensation will be aligned with the plan.

Gord Johnston -- President and Chief Executive Officer

Well, I think that our management compensation -- always has been aligned with our plan, we have from a our LTIP long-term incentive metrics certainly are driven by specifically by financial metrics in the plan. So I don't see that that would change going forward.

Benoit Poirier -- Desjardins Securities Inc. -- Analyst

Okay, thank you very much for the time.

Gord Johnston -- President and Chief Executive Officer

Great, thank you.

Operator

We'll take our next question from [Indecipherable].

Unidentified Participant

Hey, good morning everyone.

Gord Johnston -- President and Chief Executive Officer

Good morning.

Theresa Jang -- Executive Vice President and Chief Financial Officer

Hi.

Unidentified Participant

So just on the M&A side, I understand that you're going through a workforce reshaping and then there is cost saving initiatives there as well. How comfortable are you from operational perspective to absorb M&A activity in the future.

Theresa Jang -- Executive Vice President and Chief Financial Officer

Is your question around funding?

Unidentified Participant

From operational perspective, bringing those M&A new companies in and making sure that they are aligning with the rest of the business.

Theresa Jang -- Executive Vice President and Chief Financial Officer

[Technical Issues] Okay.

Gord Johnston -- President and Chief Executive Officer

[Technical Issues] In fact, that's an area where we are very comfortable, certainly within North America we have well established operations. The biggest part for us with our, and we look for M&A firms to join us is cultural alignment. And so when we find firms that are very culturally aligned with Stantec, we do find that the that integration flows very smoothly. So now that we've got here in the UK where Theresa in I are, MWH has been with us for three years now. Peter Brett Associates were in their offices today, very good alignment and in fact that the team is really looking forward to having other firms to join, and to continue to grow our presence here. So from an operational and integration perspective, we feel good about that.

That would be a similar statement in Australia-New Zealand, also [Technical Issues] we continue to look. So *** Part 18 ***

Yeah, we feel very comfortable from an operational perspective in terms of bringing new firms into the fourth.

Theresa Jang -- Executive Vice President and Chief Financial Officer

We have as well. Then also last year, we completed our ERP system integration in Australia and New Zealand. And in the process of integrating systems here in the UK. And so again that just adds to our capacity and capability of being able to operationalize acquisitions and get them on the same system.

Unidentified Participant

That's great, thanks for that. And just if you could comment on the M&A pipeline and if you've seen any changes to the valuation of the prices has gone up.

Gord Johnston -- President and Chief Executive Officer

Yeah, I would say that the pipeline still remains very robust in terms of both firms in North America, Australia, New Zealand, UK, Western Europe Nordics, we're always talking to the firms in these areas. From an overall valuation perspective, we're not seeing significant up creep in valuations from where we typically have seen over the last number of quarters, but it is a very active market, it is a very active market.

Unidentified Participant

Thank you.

Gord Johnston -- President and Chief Executive Officer

Thank you.

Operator

We'll take our next question from Maxim Sytchev with National Bank Financial.

Unidentified Participant

Hi, good morning.

Gord Johnston -- President and Chief Executive Officer

Good morning Max .

Theresa Jang -- Executive Vice President and Chief Financial Officer

Hi.

Unidentified Participant

I was wondering maybe if you can comment please about the UK, the operating environment, some of the global peers have witnessed some slowdown in the market, maybe any type of color you can provide please .

Gord Johnston -- President and Chief Executive Officer

Yeah, great question. And so, as I said, that's where we are this week. And so we've met with a number of the water clients, offset with water, and as we transition between AMP6 and AMP7 a number of those awards, as we've talked about before, we've been awarded a number of AMP7 contracts already, but in general, as the industry transitions from AMP6 to AMP7, 2019 seem to be sort of the lower year from an overall industry revenue generation perspective and next year, we're looking to see an uptick, so our water business was solid this year and we see that only continuing to improve next year and then to AMP7 as that gets rolling.

From buildings perspective, we've met with a number of our property development clients here and there is no concern with regards to projects being or certainly we've heard none of projects being canceled, but there is a little bit of a, let's just hold on for a bit and see what happens with Brexit. So we're seeing projects move to the right a little bit, still perhaps moving forward with a bit of plan *** Part 19 ***

And getting planning permissions and consent, but not moving into the next stage. So a little bit I think of trepidation -- trepidation. Little bit of a wait and see on some of those properties on the project.

Analyst

Okay that's fair enough. And the other question I had was just in terms of capital allocation priorities. Do you have any thoughts incrementally speaking in terms of deploying capital via M&A versus share buybacks. Just in terms, if you have evolved you're thinking over the last little while. Just maybe any thoughts there please.

Theresa Jang -- Executive Vice President and Chief Financial Officer

Sure, and it's really pretty consistent Max from what I shared in the earlier part of the year; from our perspective, allocating capital to make accretive acquisitions is our biggest priority. It drives growth and drive returns and so that remains a priority. Having said that, so long as there are opportunities that present itself where our share price get dislocated as it has been, and we remain well within our leverage metrics and for me that is also a good use of capital. So we have been active in the NCIB market for this past year, which had been an appropriate and valuable way for us to create shareholder value. But as I said, acquisitions are our priority and so at the moment, I'm not making one trade off over another.

Analyst

Okay, that's fair enough. That's it from me. Thank you very much.

Gord Johnston -- President and Chief Executive Officer

Thanks.

Operator

Thanks. We'll take our next question from Ben Cherniavsky with Raymond James.

Analyst

Hi guys. Most of my questions have been answered. And there have been a fair number of questions about organic growth, but if I could just maybe ask it in a different way. I mean the confidence you have in the sustainability of the kind of growth you put up, it sort of at odds with a lot of the leading indicators out there, I think Maxim asked about Brexit and you know the ABI index has been slowing. There have been other indicators, not just in Alberta, but elsewhere that activity is slowing and so how, what do you think explains your ability to sort of go against the grain with some of those trends.

Gord Johnston -- President and Chief Executive Officer

I do think that Q3 was a particularly good quarter for us. We had good seasonality, we got people [Indecipherable] field. A lot of the projects that we've been waiting to get going got started *** Part 20 ***

And so you can see that from a quarter on quarter basis throughout the year, organic growth increased significantly in Q3 over the previous quarters, our guidance I think is still in that low to mid single digits. So would we expect to see the type of growth that we saw this quarter in all of our quarters going forward, I don't think that that would be an accurate statement. I think our guidance would you still be in that low to mid single digits and something that is sustainable in the long term.

Unidentified Participant

Yeah. Okay, that's helpful. And I mean there is no question that you guys have put up some good numbers here and it's also no secret. In the last couple of quarters, if not the last couple of years you've been a little beaten up on your results. So before expectations get too far ahead of themselves. What do you feel like this is a turning point for you guys that things just sort of the work you've been doing is coming together here and beyond just a few projects getting released, what would you explain or what do you see this as an inflection point in your performance.

Gord Johnston -- President and Chief Executive Officer

Yeah that's a good point. You know that we've been focused on a number of things for some time. Certainly the divestiture of Constructors was important for us, working through the reshaping initiative, working on some of the other internal efficiency type things that we've been working for building backlog. We do feel like we are ready to continue forward with more sustainable delivery, not spiking up, but not spiking in a negative direction either, we do feel like we've turned the corner, really certainly added a lot of focus from all of our leadership and employee based on that just at long-term sustainable delivery.

Unidentified Participant

But can you point to a couple of things if there any catalysts or anything in particular that's been working for you lately, you feel better about or is it a whole bunch of little things that -- that are projects you've been focused on that are coming together.

Gord Johnston -- President and Chief Executive Officer

Yeah, it's a combination, it certainly any number of a number of small things, but we certainly have seen that are reshaping initiatives. In addition to achieving that $40 million to $45 million of annualized cost savings that we talked about, it also has reenergized the organization to a large degree, there has been a number of people who now have stepped out into the sunlight [Indecipherable] better word that have an opportunity to really *** Part 21 ***

And show us what they can do and we've seen really a number of people step up to do that. So I think that while that was something we needed to do from a cost efficiency perspective, I think from an organizational perspective. It was also very positive.

Unidentified Participant

And what work remains to be done. What are you guys focused on. I mean I guess we'll hear more about this in the strategic plan. But what's occupying your focus right now Gord.

Gord Johnston -- President and Chief Executive Officer

For now, we're continuing to focus on getting ready to roll out our strategic plan to both internally and externally in early December. We're continuing to focus on the M&A pipeline and spending a lot of time there.

And then just overall working with the teams to ensure that long-term efficiency, long-term operating ability is there.

Unidentified Participant

Okay, great, thanks very much.

Gord Johnston -- President and Chief Executive Officer

Okay, thanks.

Operator

We apologize for the technical difficulties and thank everyone for their patience. There are no more questions in the queue at this time, I would like to turn it back over to today's speakers for closing remarks.

Gord Johnston -- President and Chief Executive Officer

Okay. Well, thank you everyone for taking the time to join our call today. We look forward to providing you with some additional information in the near future. About the timing and the date for -- when we roll out our strategic plan to you in early December. So thank you very much.

Duration: 53 minutes

Call participants:

Gord Johnston -- President and Chief Executive Officer

Theresa Jang -- Executive Vice President and Chief Financial Officer

Unidentified Participant

Analyst

Benoit Poirier -- Desjardins Securities Inc. -- Analyst

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