Stantec Inc

Welcome to Stantec's first quarter 2022 earnings results webcast and conference call. Leading the call today are Gord Johnson, President and Chief Executive Officer, and Teresa Jang, Executive Vice President and Chief Financial Officer. Stantec invites those dialing in to view the slide presentation, which is available in the investor section at stantec.com. Today's call is also webcast. Please be advised if you have dialed in while also viewing the webcast, you should mute your computer as there is a delay between the call and the webcast. All information provided during this conference call is subject to the forward-looking statement qualifications set out on slide two, detailed in Stantec's management's discussion and analysis and incorporated in full for the purposes of today's call. Unless otherwise noted, dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded. With that, I am pleased to turn the call over to Mr. Gord Johnson.

Good morning, and thank you for joining us today. 2022 is off to a good start with strong operational and financial performance. It's also been a very productive quarter, and I'd like to touch on some of our key activities and milestones. This was the first quarter, first full quarter after closing the Cardano acquisition. And I'm very pleased with the way our two organizations have come together. We really have validated how aligned our corporate cultures are. And as you've heard me say many times, getting the cultural fit right is critical to the success of any acquisition. Given the scale and complexity, the successful integration of Cardano is a top priority for Stantec in 2022. Transitions to our Oracle ERP system for Cardano's Australia New Zealand and US businesses are in full flight and are anticipated to be completed by the end of Q3. From an operational and financial perspective, Cardinal is on track to deliver the results that we initially communicated, and we feel very positive about achieving expected performance in 2022 and beyond. And we are well on our way to delivering the expected annual run rate cost synergies of $10 million ahead of the two-year timeline we initially projected. Most importantly, our teams are working exceptionally well together. We're already working on over 70 joint projects and are pursuing well over 100 additional projects together. Also in Q1, we announced the continued execution of our growth strategy through the acquisition of Barton Wilmore, a 300-person firm in the UK that brings our presence in the region to 2,500 team members. We closed that transaction on April 1st. We're pleased to have the UK's leading planning and design consulting firm join Stantec. Our teams have been collaborating on projects for many years and have already identified multiple new opportunities to work together. Importantly, Barton Wilmore shares our passion in delivering sustainable and lasting projects and improved communities and strengthens the contributions we make towards the United Nations Sustainable Development Goals, or SDGs. And this ties into the third item I want to highlight. On Earth Day, April 22nd, we released our 15th annual sustainability report. We're very pleased to report that our gross revenue aligned with the SDGs has continued to grow, increasing from 49% in 2020 to 53% in 2021. This is a reflection of the growing contribution we make to sustainability as we help our clients address challenges from extreme weather events to water scarcity to social inequity and everything in between. We also celebrated our achievement of carbon neutrality in the UK, New Zealand, and the EU, and we are on track to meet our commitment for enterprise-wide carbon neutrality on our path to net zero. Turning now to our Q1 results, we're pleased to have delivered a 22% increase in EPS in Q1 on the strength of organic net revenue growth in every one of our geographic regions and each of our business units. The organic growth we achieved in Q1 reflects our ability to capitalize on our sector's strong market fundamentals that continue to be spurred by robust public infrastructure spending and increasing private investment. While we still expect growth from infrastructure spending to be more heavily weighted toward the second half of this year, we're already delivering organic revenue growth from spending directed towards new healthcare facilities, public transit, and other infrastructure renewal and capacity expansion projects. Other primary drivers include growing project work related to the reshoring of strategic domestic production and sustainability. A common thread through many of these projects is the need for the skills of our environmental services business, which delivered a 53% increase in Q1 net revenue, of which 11% was from organic growth and 42% was generated by our recently completed acquisitions. Taking a closer look now at each of our geographic regions, The level of activity in our U.S. business has certainly increased relative to last year, and the trajectory is very positive. We're pleased to have delivered organic growth across all of our U.S. business units this quarter, particularly after a year of organic retraction. The roughly 4% organic growth was bolstered by 13% acquisition growth for an overall net revenue increase of 17%. Environmental services was the biggest contributor to U.S. revenue growth, and reflects the strong demand for our expertise in environmental assessment, permitting, and ecological work. The services we provide are critical in the early phases of a project's development cycle, and our clients are highly motivated to engage us to help advance their project to the next stage date. The addition of Cardino's environmental professionals has certainly been timely and strengthens our ability to address this burgeoning market. Our other business units are also responding to high demand for early planning work related to increased private and public spending. And Stantec is increasingly involved at the community level, helping public clients determine how to best direct the spending and investment for the most significant impact, particularly as it relates to infrastructure equity and affordability. Also noteworthy this quarter is U.S. Buildings' return to organic growth after a challenging 2021. The COVID pandemic has highlighted the need for increased healthcare capacity, and similar to what we saw in Canada last year, the sector is now driving organic growth in the US. In Canada, net revenue grew organically by 7% in the quarter, as increasing levels of private and public spending drove strong performances across our businesses. Consistent with the themes playing out in the U.S., our environmental services business in Canada had a very strong quarter, delivering double-digit growth on the strength of archaeological services. Infrastructure delivered growth arising from the strong housing market in Western Canada and public spending on various roadway and transportation projects in Montreal and the Greater Toronto Area. Organic growth in our transportation sector also reflects our continued support of British Columbia's recovery efforts from the extreme flooding that occurred last year. Opportunity stemming from the energy transition drove organic growth in energy and resources, where we're designing Canada's first renewable diesel facility. This group is also now delivering on projects that address the renewed focus on global food security. And we're seeing continued robust momentum in our buildings business, where major public projects in healthcare, as well as civic and education sectors, continue to drive growth. And rounding out our geographic regions is global, which also had a remarkably strong quarter. Net revenue in our global region grew by 46%. Like Canada and the US, every business unit in global grew organically in Q1, delivering 13% organic growth. Recent acquisitions delivered a further 37% growth. Water continued its strong performance, delivering double-digit organic growth as the UK AMP7 program is in full swing. Stimulus funding is driving growth in our infrastructure business in New Zealand and the UK, and in our buildings business in Australia. And our mining sector delivered organic growth on the strength of high copper and other metal prices, client diversification, and the lifting of pandemic-related restrictions. And with that, I'll turn the call over to Teresa to review our Q1 financial results in more detail.

Thank you, Gord, and good morning, everyone. As Gord noted, we had a very strong quarter with an overall 21% and 19% increase in gross and net revenue, respectively. Project margin grew by 22% and by 90 basis points as a percentage of net revenue. And this reflects our continued focus on project execution, our heightened diligence in project pursuits, and overall project mix. We delivered an 18% increase in adjusted EBITDA, reflecting the overall growth of our business. Adjusted EBITDA margin of 14.5% was generally in line with Q1 2021, as higher project margin was offset by higher admin and marketing costs, which in turn was driven by higher business development efforts on major programs and bids, increased discretionary spending, and investment in internal resources, partly offset by a $9 million reduction in share-based compensation expense. Net income and EPS decreased 12 and 13% to 45 million and 40 cents per share, as increased EBITDA was offset by higher amortization of intangibles from our recent acquisitions. However, both adjusted net income and adjusted EPS increased 22% to 68 million and 61 cents per share, reflecting very strong earnings from our underlying operations. In terms of cash flow, we generated 6 million from operating activities a decrease from Q1 last year. Recall that it is more typical for Q1 operating activities to result in a cash outflow due to a lower level of activity in the winter season and the timing of the payment of our short-term incentive program. Positive operating cash flow in Q1 2022 was driven by acquisitions completed late last year and improved market conditions. This was offset by higher cash paid to employees, reflecting our increased workforce and a higher wage environment relative to Q1-21. In addition to returning capital to shareholders through the payment of our quarterly dividend, we were active with our share buyback program in Q1, repurchasing 460,000 shares for $29 million. This, along with funding of our recent acquisitions, contributed to our net debt to adjusted EBITDA remaining at 1.8 times. Leverage remains within our target range of one to two times, And I'm confident in our ability to reduce leverage over the course of this year with our operating cash flows. DSO came in at 75 days, consistent with Q1 21 and with year end 21. And before leaving this page, I want to bring to your attention the expected impact to our Q2 and Q3 cash flows arising from the Cardano integration. As with all our acquisitions, there will be a delay in converting Cardano's revenue to cash while we're switching financial systems. This hasn't been noticeable with our smaller acquisitions, but given how material Cardno is to our overall business, the delay in invoicing during the systems integration will dampen operating cash flows from Cardno's businesses over this period. It will also cause DSO to rise slightly, but we do expect this to normalize by the end of the year. And we closed the quarter with record backlogs of $5.4 billion, which grew by 6% since the end of 21, 6.8% organically. Like net revenues, we achieved organic backlog growth in every geographic region and business operating unit. Our U.S. operations led with almost 10% organic growth. Infrastructure and energy and resources achieved double-digit organic growth. And environmental services' $1.1 billion backlog has never been higher. Our backlog represents approximately 14 months of work, which is also a high watermark for us. And with that financial overview, I'll turn the call back to Gord.

Thanks, Teresa. As we look toward the rest of the year, we remain confident in our ability to deliver on our financial targets. Over a 12-month period, backlog has grown by almost $1 billion. We expect this record backlog and the ongoing ramp up in infrastructure spending to drive accelerated organic growth. Beyond the drivers I've already noted, I want to highlight a relatively new adjacency for us, and that's in the food and agriculture business, where rising costs and security of supply is a global concern. Stantec, through expertise gained from acquiring WENC, is growing our capabilities and market footprint in this sector. We're working on several confidential projects that are intended to strengthen food security while reducing carbon emissions. And we're also providing architecture and engineering services in the alternative protein space, notably to one of the largest insect rearing facilities in North America. And we're providing digital solutions to clients in the agricultural technology sector. Our ability to meet the growing demand for our services is dependent on our highly skilled workforce. And as we're all acutely aware, the landscape for attracting and retaining talent is extremely competitive. While Stantec is not immune to the pressures of a tight labor market, our voluntary turnover rate has historically been 2% to 3% below industry average. We feel that we're well positioned to retain staff and to continue attracting new employees on the strength of our reputation and our people-centric corporate culture. In Q1, we continued to be a net importer of talent. As for wage inflation, we're monitoring the market to ensure we're providing a competitive compensation package for our employees, and we're having some success in achieving rate increases from our clients, so we haven't seen significant impacts to our margins to this point. Similarly, with respect to inflation and rising interest rates, to date we are not seeing this translate to significant project delays or cancellations. In some cases, we're assisting our clients with value engineering their projects to provide solutions to the rising cost environment. There is some potential for clients to reassess the timing or scope of their project. But again, to this point, we are not seeing this materialize in a significant way. So looking ahead, our outlook for the remainder of 2022 has not changed from the guidance we provided last quarter. And I believe Stantec remains very well positioned to capitalize on the opportunities ahead. And with that, I'll turn the call back to the operator for questions. Operator?

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. And we'll take our first question from Jacob Bout with CIBC.

Good morning. I'd like to ask a similar question to what I asked one of your competitors this morning. The outlook that you provided, very robust, but a lot of concern here in the stock market about impending recession or at least stagflation. Maybe just comment on you know, is this coming up on the radar of your clients or your, any geographic areas that, you know, you're starting to see, you know, some, some cracks here. Um, and then if you look at your, your backlog, you know, what areas, uh, you know, is there, is there some risk?

So, you know, we, uh, as we were preparing for the call today and as we're, as we meet with all of our business and geographic leaders, um, This was certainly a question that we addressed with all of them. And as we said in the prepared remarks, we haven't really seen it, Jacob, that projects dropping off. We're always chatting with our clients. And as we mentioned, we have had A number of cases where our clients have asked us to value engineer, you know, to go in and look at the design of a building or a facility and are there ways that we could bring it in less expensively? If there's a supply chain shortage of a particular type of material, could we change up that material and so on? So we haven't really seen it to date. It's certainly something that we're working on following very closely. The other thing to note, as we've discussed previously, is that we have a very diverse client base and project base with no one client or project making up more than 5% of our overall revenue. So we're certainly not hoping that we're going to see any of these project cancellations. But if there are, we don't view it at this point to be material to our ongoing performance.

Okay, and then my second question is just around margins. EBITDA margin was around, I think, 14.5% below the targeted range of the 15.3% to the 16.3%. I know you called out higher admin expenses. Does that continue to roll into the second quarter? And then just given this current environment of higher inflation, wage inflation, You know, are you thinking more the lower end of that range or how should we be thinking about that?

Yeah, it's early to say, Jacob, whether it's going to be in the lower end of that range for the full year. I do want to remind you that first quarter is always typically outside of our range. It is the lowest EBITDA margin quarter that we have. So it was not surprising to us that we came in at 14.5%. It was actually right about where we expected it to be. And we do expect it to strengthen over the course of Q2 and Q3. It typically comes back a little bit in Q4. So that was not unexpected. As we think about things like wage inflation, we are having success, as Gordon noted in his comments, in getting those recovered in our rates. And so, again, not seeing a material impact there. But as we look toward the rest of the year, where we are expecting to see strengthened margins is primarily around our U.S. operations where utilization is still a bit behind just given the projects are still ramping up and so as utilization improves and increases that will drive down the component of labor that sits in admin costs and should be up in gross margin and recoverable through our revenues so that's the primary driver for where we expect to see strengthened EBITDA margin over the course of the year and And of course, the continued focus on all the things we talked about with staying disciplined on our spending.

Just one quick follow up here. It was, I think your margin was down year on year. And these admin expenses that you're talking about, does that roll into the second quarter and have a bit of a negative impact when we look at from a year on year perspective?

For a year on year, yes. I mean, you are going to see, as we noted, that we are spending more to strengthen our internal resources. And we saw that in the first quarter, our spending on IT increased as we put some dollars towards strengthening already very robust IT systems. But the increased focus on cybersecurity and so on means that there is a continued need to invest there. We increased the amount we spent on recruiting costs and that sort of thing. So there is going to be some higher costs around, you know, talent acquisition and then onboarding staff and those kinds of things. And so that will continue through the course of the year. But that, again, was really incorporated into the EBITDA range that we put out in our guidance. Okay.

Thank you. Thanks, Jacob.

We'll take our next question from Frederick Bastian with Raymond James.

Good morning.

Good morning, Frederick.

It was great to see the US region basically come back to organic growth in the quarter and also getting some momentum from the healthcare sector. And then we saw the backlog increase 10%. I mean, how do we expect organic growth to pick up further as you progress through the year?

Yeah, you know, our U.S. operations are really performing as we had expected. You know, we've commented over the past several quarters that our backlog in the U.S. has continued to build and that we really expected it to start converting in the coming quarters. And, you know, it really has. And so... really pleased to see our U.S. operations returning to organic growth in Q1 as you mentioned. So with that, you know, with the backlog that we've had, the projects that are starting to move forward, you know, we do see continued strengthening over the remainder of the year. And so, you know, we're starting to see some of the infrastructure stimulus projects coming in. As an example, our book to burn in our transportation group in the U.S. was 2.0 in the quarter. And so that just bodes well for that continued strengthening in the second half of the year. So we feel really good about our guidance for that organic growth just to continue to strengthen in subsequent quarters.

Okay, thanks for that, Colin. Moving to the UK, you mentioned the AMP7 as one of your many bright spots during the quarter. Just curious if there are opportunities for Stantec to grow its share of the wallet during the current cycle, or do you need to wait for the new AMP8 cycle to hopefully gain market share there?

As we moved into the AMP7 cycle, we are already the number one water firm by far there. but we did actually continue to grow market share through securing a contract with Irish Water this year that we, or this go around that we did not have before. So we're gonna continue with that. We've actually already interestingly started to gear up and I was in the UK about six weeks ago and met with some of our water utility clients already gearing up for AMP8. So we won't really be able to grow market share additionally over what we've already got in the AMP7 cycle. Again, we did grow our market share in AMP7 over AMP6, but we're already positioning now for AMP8, and that's when we'll have additional opportunity to grow market share again.

Great. Thanks for that. And then just curious around the revenues that are related to the U.S. Sustainability Development Goals. Is there a target longer term that you'd like to get to, or is this as you continue to grow the business, we should naturally see it trend up.

Yeah, so we don't have specific targets for that. One of the things we try to remind people is that The work we do related to the SDGs is really driven by our clients and the efforts that they have. So, of course, we have a broad suite of offerings, and we work with our clients to identify those opportunities with them, but it's really up to where the clients want to take it. And the good news is that they're very focused on addressing climate change resiliency and things that support the SDGs. We would not say that we have a specific target, but we are going to continue to support them, and we would expect that, given the focus, that this will naturally continue to increase over time.

Okay, and you're at 53% in 2021. Where would you estimate your peers are at?

Oh, that's a tough question. I don't know if I'd want to answer that one.

Okay, fair enough. Thanks for that. That's all I have. Thank you.

Thanks, Frederick.

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

All right, thanks. I wanted to start with a question on the mining sector. Clearly, commodity prices are at a level that should support new or expanded projects. They haven't for some time. But can you talk about what you're seeing in this end market and where you're seeing the the most optimism for projects either by region or commodity?

Yeah. You know, certainly we're seeing a lot of interest in the mining sector, you know, to your point there. You know, copper prices are good. We're seeing interest in the United States. We're seeing continued interest. We mentioned in the prepared remarks that some of the COVID restrictions were lifted and that really allowed us to get back into work South America so that was very positive and then certainly our operations in Western Australia where we're supporting a number of the you know the the mining miners there so it's pretty widespread geographically where we're seeing interest so I think it's actually quite positive from from that perspective and then you know these things often take a little bit of time to to get rolling but you know once the mines are going you know we're seeing existing mines are looking to expand their tailings bonds, for example. They're looking to, you know, our existing clients are looking to get into adjacencies like lithium and so on. So, you know, we see that once we're in with these clients, just that continued refreshment of work in, certainly in good times, but even when times are a little tougher, we still see, you know, some of that great, that maintenance work that's ongoing.

Okay, thanks for that. The second question, I wanted to ask about private equity. They've been involved in the engineering and consulting space for a while now, but it does seem like it's attracted the interest of the very large buyout firms. We saw Blackstone make an investment earlier this week, but obviously these are some deep-pocketed buyers. So the question for you is, do you see PE firms playing a bigger role in industry consolidation than they've been in the past.

Yes. As we look at the number of acquisitions in our space that have gone to PE rather than strategics really in 2021 and 2022, there has been a lot of additional PE interest. This is an attractive industry, so you certainly can understand, but our key is to stick to our knitting to maintain our discipline in M&A. You know, we're seeing some of these PE transactions transact at a fairly high multiple, which, you know, and again, we're just trying to stay to our discipline. We're working with firms that, you know, that want to be part of something bigger than what they were. And that's kind of, you know, always been our perspective is that we're looking for firms that have gotten to a certain size and then want to join a strategic like us to to get better back office support, to get better opportunities for their clients, their employees, and better services, wider service offerings for their clients. Other firms just want to sell and keep doing what they're doing. And so there are cases where a PE is maybe a better fit for some of these firms. So we're continuing to monitor it closely. But yeah, I would say there absolutely is more PE interest and activity in our space than we would have seen three or five years ago.

Okay, and maybe just one quick follow-up. You've been targeting expansion in the Nordics for a little bit now. We've seen demand soften there a bit. It was a pretty strong market for a number of years. Do you think this could be an opportune time to enter into the Nordics, and are you seeing good opportunities there?

Yeah, through our M&E and our corporate development team, we're always looking for different opportunities. Certainly, the Nordics continues to be an area of interest for us, and we're continuing to explore opportunities there. Timing is maybe positive there, and we'll just keep working on it, and we'll see what we can bring in the door.

Okay, thanks. I'll turn it over.

Thanks.

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

Yeah, good morning, Gord. Good morning, Teresa, and congrats for the great quarter. Yeah, good morning, everyone. Yeah, you mentioned some color at the beginning of your remarks with respect to the ability to pass through the cost increase to the customer. Could you maybe provide some thoughts about the timing of the typical increase in billing rates and Just wondering whether it's more frequent these days with respect to the increase in billing rates.

Yeah, that's a great perspective. So typically in a lot of our contracts, the vast majority of our employees, we have our salary review and increase is for January 1. And so that's also when we target looking at our fee increases so that we can ensure that we're – you know, matching fee increases with salary increases. But, you know, those, as some of our employees are, you know, coming to chat with us looking for potentially a, you know, mid-year adjustment, you know, we are going to some of our clients and having similar discussions. The clients that we've gone to over the past, you know, quarter and even late last year, certainly there's a higher degree of them being accepting of, you know, of salary increases, just because everybody knows the environment is very active. So, you know, are we getting salary or fee increases in each case? You know, I would say not in every case, but for the vast majority of clients that we're approaching, we are seeing those fee increases. And certainly for our multi-year projects, the vast majority of those have the capability for fee increases in them already.

Okay, okay. That's great call, Eric. And with respect to your organic growth, was there an impact from a change in your billable days as opposed to a year ago, or it was similar billable?

No, it would be consistent with what we had last year, Benoit.

Okay, okay, that's great. And the last one for me in terms of backlog, obviously now reaching 14 months, it provides obviously great visibility for you, but Is there any level where you would start to feel maybe more uncomfortable with respect to your ability to deliver? And is the strong visibility should translate into stronger organic growth or the contract duration is just longer?

Yeah, you know, that's a good point. A lot of the contracts that we have been receiving, a larger number of these are for multi-year awards you know so we the full value of the award is entered into backlog when contracted but the work will be delivered over several years so you know we're seeing an increasing number of those so I think that helps to helps us met feel positive about that a couple other things I think are interesting though you know we've talked before about how in previous in 2021 we've accepted a bit of a decrease in utilization in some of our businesses and geographies so that we have the staff in place that we could deliver on the wave of work that we saw coming. And we're seeing that bear fruit for us now. Backlogs turning into revenue, utilization rates are increasing. But we still have some capacity, truly, like in the United States in particular. So while the backlog is trending upwards, at this point, we are not concerned with our ability to deliver. And that's something we talk about with our groups every day, because... We don't want to take work if we can't deliver it because that's not positive for us or our clients in the long run. That's great. Okay, thanks for the time. Great, thanks, Benoit.

And we'll take our next question from Chris Golgassian with Wellington.

Hey, guys, thanks for the time. I just wanted to touch on a comment you made right toward the end on agriculture, and I think something on agriculture. uh, pests or insects too. Can you just, I know you said some of this is, um, uh, being kept confidential. So I appreciate that. But if you could just touch on maybe at a high level, what you're seeing on the ag side, you know, where I come from on the climate side, I'm super bullish on the intersection of climate change and ag needing lots of solutions. So I, I was interested when you made those points.

Yeah. So, you know, that, that in particular, that, that alternative protein, um, you know, relates to, uh, grasshoppers, crickets, these sorts of things. And so we have one client in particular, but others that we're working on that are really into this space and see it as a growing area of protein generation. Through the firm we acquired a couple of years ago, Wink, we also got into the pea proteins. And now with this group is beginning to move into some of the seeds and generating oils and you know, canolas and these sorts of things. And so, you know, it increased, you know, we're seeing that this is a really rapidly growing area for us, Chris, and one I think we'll be talking about more in the future.

Thanks. And then quickly, we've talked in the past about the net zero retrofit secular cycle we're going to be in here at the building level. Massive amount of money is going to be spent to retrofit buildings. I know you guys have a lane in there. Can you just talk about what you're seeing there?

Yeah, certainly a lot more interest in that energy efficiency in general, and in some cases going all the way to net zero. We're seeing more interest in net zero at this point for a new build than we are for going all the way to net zero with existing. But certainly a lot of energy efficiency, and we are in discussions with some clients about going all the way to you know, take a little bit further from a retrofit perspective. But I think that's going to be a very, very robust area for us over the next several years as well.

Thanks, guys.

Thanks, Chris.

We'll go to our next question from Michael Tupholm with TD Securities.

Thank you. Good morning. Good morning, Michael. Good morning. My question is about the project margin percentage. So it was up nicely on an overall basis year over year, and you did see good growth in the United States and global, but the margin in Canada was relatively flat or actually down a touch. Just wondering if you can talk about what the difference is in terms of Canada not seeing the same kind of improvement you're seeing in the other regions.

Sure. It's, you know, it does often come down to the mix of projects that we have. We did see, you know, a bit of a decrease in Canada and some of that related to the sectors where we have, you know, slightly lower margins. Energy and resources tend to have slightly lower margins. But, you know, overall, I think we're really pleased that the community development sector really strong in Canada that tends to have really the highest margins. We often talk about environmental services, but community development does generate very high margins. Environmental services continues to be strong in Canada. It's also, we saw a lot of growth in transportation in Canada, which tends to be on the lower end. So it is that broad mix. We're not, we're quite pleased with where, sorry, I still call it gross margin, where that sits. and expect that we'll be able to maintain, you know, the level that we're at through, you know, the opportunities available to us through a really, I think, a heightened focus on pursuing higher margin work and just continued discipline around how we're pricing gross margin and then delivering on it.

Okay, that's great. Thank you. Thanks, Michael.

And again, if you'd like to ask a question, please press star 1 at this time. And we'll take our next question from Sabat Khan with RBC Capital Markets.

Great. Thanks, and good morning. Just, I guess, on the top line, just looking a little bit further into your geographic region, there's a bit of variability on the organic rates. We'll call it kind of 3.5% to 13.5%. Is there kind of Is it timing of projects? And also, can you maybe talk a little bit about how much pricing has been passed through in each of those regions? I was wondering if that contributed to some of the variance. You know, you said the U.S. is probably going to be a bit more back-end weighted, but just curious around how much pricing was taken there versus kind of like a global where, you know, it's been good double-digit organic growth this quarter.

Right. No, great, great question. So, you know, when you look at even somewhere like the U.S., you know, when we, you know, we've talked for a while about this kind of the wave of work was coming and we're ready for it to translate. You know, we have been disciplined in the, you know, the pricing that we've been using on projects to preserve our long-term margins. And, you know, we're beginning to get... you know, the ability to increase fees a bit in some fee expansion with a number of clients as well. So I think we're, you know, we're feeling good about what's in the backlog from a fee and from a margin perspective. But, you know, I think, you know, you're exactly right that the US was a little bit slower out the gate for us in 2021. But we're seeing that wave beginning to come here and in Q1 of this year and we see continued strengthening for the rest of the year. Global is just really working very positively for us. Our water group in global, very, very strong, particularly in the UK and down in Australia and New Zealand. Transportation is robust. We're seeing a lot of growth into renewables, some pump storage work that we're seeing in Scotland and so on. So I think we're feeling pretty good just overall about but our organic growth rates and I think where, you know, and for our overall guidance for the year.

Okay, great. And this is a quick follow-up, I guess, as you look to the back end of the year, is it really just some of the soft backlog, some of the conversations or having that just firming up and coming through a backlog into your organic growth or, you know, are there other, you know, is it just more along the lines of some of the projects that you won last year? I think you indicated that they probably get going a bit more in the back half. They just want to get a better understanding of the, the contributors through H2 of this year?

Yeah, I think for the most part, it is a project that we already have committed, you know, and you see that in our backlog that's so high that we're going to just start seeing that really strengthen it as those existing projects begin to deliver in the second half of this year. You know, are there more projects coming in the funnel? Absolutely. You know, I mentioned that our you know, our U.S. transportation business had a book to burn of 2.0 in the quarter. So that's really that infrastructure work starting to come in the door. So I think just further supporting additional strengthening in the second half of the year.

Okay. And then just a quick one on kind of capital allocation side, obviously still integrating kind of Cardinal. We bought back some shares over the last little while. How are you thinking about capital allocation? What do you think over the rest of this year?

It's pretty much consistent with what the strategy has been for the last couple of years now, Saba. The balance sheet is still strong. With the net debt to EBITDA of 1.8 times, we still have room there to make acquisitions if we find the right one. And so that continues to be our primary target for capital allocation. We know that we can generate solid returns if we're disciplined in our pricing and we find the right acquisitions. Of course, share price has been pretty volatile the last little while, and it has given us an opportunity to go out and buy shares. And so that will remain opportunistic there and continue to use our NCIB where appropriate. So still acquisitions first, NCIB as there are opportunities there. And that's, you know, it's kind of in that order.

Great. Thanks very much. Thanks.

We'll go to our next question from Ian Jules with Stiefel.

Good morning, everyone.

Good morning, Ian.

I was curious if you could talk a little bit about some of the leading edge commentary you're having with your clients around domestic onshore and given things that have transpired from a geopolitical standpoint. And perhaps if possible, maybe some of the price sensitivities that they're talking about and whether they're going to do this regardless of costs that needs to happen.

Yeah. We are having a lot of discussions with our clients with regards to onshoring things like semiconductors, and I think we've talked about that in previous quarters as well. We see that continuing to move forward. And, you know, I don't know that any client would say they'll do it at any price, but certainly a lot of, you know, continued support for semiconductors. You know, we've, in the medical field, you know, radioactive isotopes, we're doing some work. there because of you know there was shortages there you know in the past and we see people wanting to onshore the production of those vaccines you know we're working on facilities there in California so we do see just a lot of discussion about bringing back some of that self-reliance into the North American supply chain and you know as I say I don't think anyone will is completely immune to price sensitivity so you know we continue to work with these people about you know, how we can value engineer, but how we can keep things moving forward. And, you know, some of these plants, we've broken ground on them already, one of them even just this week. So things are moving forward and we're moving into construction.

Okay. That's helpful. On the community development side, I mean, the U.S. housing market is pretty clearly rolling over a little bit here. Can you remind us what your exposure is to that business and kind of how that's evolved over time?

Yeah. So our current, when we look at our overall corporately, our community development business is about 10% of our overall revenue. But when we look at where it's come from, back in the 2007, 8 timeframe, just before the financial crisis, we were about 35% in land development. So we've really de-risked our exposure to that because that can be a bit of a cyclic industry. You know, we're seeing it different in different locations. You know, some places in Western Canada are still greenfield. When we look in the U.S., we're seeing there is still some greenfield, but a little bit less, more urban redevelopment. And certainly in the U.K., where we were before, but even strengthened with Barton-Wilmore, there's a huge shortage of housing stock in the U.K. So, you know, that's very, very busy and robust and will be for years to come there. So, you know, I think that land development business overall will still be cyclic, but less cyclic than maybe it was in the past, just because of this urban stock redevelopment and some of the locations like the UK that have a stated objective to continue to bring housing stock on to lessen their housing crisis.

That's a really helpful context. I appreciate that. Last one for me, the revenue per employee, which I know is not a perfect metric, was up nicely year over year, but for the employees that were active in the quarter and kind of embedded in that project margin, is there much incremental utilization you can get out of them at this point? Or do you think what else could perhaps happen there from an efficiency standpoint?

Yeah, you know, so I think we have a little bit upside from both perspectives. You know, we do have some opportunities to continue to increase our utilization rates in the U.S. in particular. So we have a little bit of extra capacity there, which is good because with the wave of work that's coming, you know, we're going to be using it. But, you know, we're also using our innovation group to continue to expand the sort of the net revenue that we can generate per employee. And so, you know, some of the examples of things that we're doing there is we've developed internal systems for, for example, when you're doing the design to design the electrical conduit that you would have, you know, for the electrical system. We have an electrical conduit routing design system that we've put together. We have a parametric design system using design parameters to detail out steel in floor slabs. We're just finalizing a parametric design system for pump station design to make that more efficient. So, you know, all of those things will continue to drive efficiencies and, you know, assist us in generating with additional net revenue per employee going forward.

Perfect. That's all for me. I'll turn the call back over.

Great.

Thanks.

We'll go next to Maxim Sychev with National Bank Financial.

Hi. Good morning.

Good morning, Max.

Gordon, I was wondering if it would be possible to get a bit of an update on how the Cardano integration is progressing, maybe some early wins, synergies, and so forth, and Correct me if I'm wrong, some of the geographies that are sort of low and margin profile relative to kind of the overall entity and maybe if you can discuss sort of the progress there. Thanks.

Sure. So in terms of the overall integration, you know, it's proceeding as we would have anticipated. You know, we're working, you know, we've done all the back office work in terms of harmonizing benefits, getting employee contracts put together. You know, that sort of hygiene work is done. The IT integration is ongoing. We haven't interfaced our networks yet because we're just making sure everything's up to the same standards and so on. But even more importantly, then, from a leadership perspective, you know, I attended a meeting, a joint meeting of the Cardinal and the Stantec Environmental Services leadership in Vancouver a couple weeks ago, starting that process of how do we optimize, you know, the strengths of Cardinal, the strengths of Stantec, you know, to create something from a leadership perspective that's even stronger. And of course, we've mentioned that with the retirement of our current environmental services leader that Susan Riesbord, who was the Cardinal CEO, will take over our leadership of our environmental services group. So that's coming together well. In Australia, we're working on the same thing from a leadership perspective, looking at harmonizing sort of the Stantec leadership in Australia, Cardinal leadership. Cardinal strengthens us in a number of areas, you know, water, transportation, You know, all of these things are adding to make us even stronger there. So working through that. The Oracle integration is proceeding well. And I think, you know, it should all be wrapped up by the end of Q3. So, you know, we had stated that we wanted to get that done this year. So we should even perhaps be a quarter sooner than we had hoped, you know, based on where we currently sit. So, you know, those things are always fluid. So I think we're feeling pretty good about it overall, Max. And then maybe, Teresa, if you wanted to talk about some of the margins things that we're seeing in both the U.S. and in Australia.

Yeah, I mean, it's really unfolding as we expected. The margins are strong in the areas that we had talked about on acquisition. Environmental services is really strong from a project margin perspective. And so that's all been really positive and really just in line with what we expected. Maybe except for... Australia where, you know, I know on acquisition, there were some questions about, you know, had they really completed their turnaround? Where are we going to see margin improvement? And I would say that that performance has been a little bit better than we expected in Australia. So, so pretty positive from that standpoint.

Okay. That's super helpful. And actually just, can you, you made a comment in your prepared remarks around sort of the working gaps and things like that. I just wanted to clarify. So, um, So we're going to see a bit of an inflection point in Q2, Q3, and then sort of formal normalization by year end, or how should we think about it in terms of time?

Yeah, that's right. And so, you know, when we're changing financial systems, we are, of course, continuing to generate revenue, but we have to enter what we call a blackout period where we can't generate invoices because of that movement in the financial system. So Australia and then the U.S., Q2 and Q3, is going to cause some lag in getting those invoices out the door. And so we expect that that will get caught up by the end of the year. And overall, for broader Stantec, we're thinking a couple of days of DSO slippage for impact to all of Stantec as a result. and maybe a day or two more in Q3 as well. But we do expect that we'll put a big push once those integrations or those migrations are done to get caught up by the end of the year.

Okay, that's super helpful. And then, Gordon, just one last question. In terms of oil and gas, obviously WTI, very healthy levels. Just curious to see what you're hearing from your clients on the ground. Yeah.

Yeah. And so, you know, our oil and gas business is really a midstream pipelining business. And so, you know, the projects that we have ongoing there, you know, are continuing to flow through. You know, we're seeing with, you know, you're right, with the prices high, not a lot of new capital flowing into the industry in terms of new capital projects. I think that, you know, a lot of you've seen some of the earnings have come out. These, you know, firms seem to be, for the most part, you know, dealing with that inflow of funds in different ways rather than expanding their capital stock. But the projects that we have ongoing continue, but we're not hearing a lot about new opportunities for us in the pipelining space at this point.

Okay, that's it for me. Thank you so much.

Thanks, Max.

We'll go to our next question from Troy Sun with Laurentian Bank.

Good morning. Maybe just a very quick follow-up on Max's question here. Just in terms of some of the early success that you have experienced with the Cardinal integration, just trying to get a sense of your ongoing M&A strategy, have you maybe started to think about potentially larger transactions just given your recent experience or still quite focused on small to medium-sized deals?

Yeah. We continue to, you know, our stated strategy is always still that sort of thousand person and less, those base hits that we know we can get and integrate easily. But, you know, Cardinal has been very successful for us. And so, you know, we're continuing to look at some of these other opportunities as they, you know, as they arrive. And, you know, I don't think that we would shy away from doing something larger if it was strategic and it made sense for us from a long-term perspective. Certainly, we would have a good look at it.

Thank you. That's super helpful. That's it for me.

Great. Thanks, Troy.

It appears there are no further questions at this time. I'll turn the call back for any additional or closing remarks.

Great. Well, just quickly in wrap-up, the year is unfolding as we had hoped. We appreciate all of you joining us this morning, and we look forward to chatting with you further as the quarter and the year goes on. So thanks very much, everyone.

This concludes today's call. Thank you for your participation. You may now disconnect.