Q1 2022 Stantec Inc Earnings Call
Welcome to Stan, Texas first quarter 2022 earnings results webcast and conference call.
The call today are Gordon Johnson, President and Chief Executive Officer, and Theresa Jang.
Executive Vice President and Chief Financial Officer.
And taking bites those dialing in to view the slide presentation, which is available in the investors section Outstand Tech dotcom.
Today's call is also webcast. Please be advised if you have dialed in well also viewing the webcast you shouldn't 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 qualification set out on slide two detailed and <unk> 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 around it with that I am pleased to turn the call over to Mr. Gordon 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 Cardinal acquisition and I'm very pleased with the way our two organizations have come together.
We really have validated how aligned our corporate cultures art 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 Cardinal is a top priority for <unk> in 2022.
Transitioning to our Oracle ERP system for Cardinal is Australia, New Zealand and U S businesses are in full flight and are anticipated to be completed by the end of Q3.
From an operational and financial perspective, Cardinal was 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 will more a 300 person firm in the U K that brings our presence in the region to 2500 team members, we closed that transaction on April one.
We're pleased to have the Uk's, leading planning and design consulting firm joined <unk>. 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 that improve communities and strengthens the contributions we make towards the United Nations sustainable development goals for Stds.
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 <unk> 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 and equity and everything in between.
We also celebrated our achievement of carbon neutrality in the U K New Zealand in the EU and we are on track to meet our commitments 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.
Organic growth we achieved in Q1 reflects our ability to capitalize on our sector as strong market fundamentals that continue to be spurred by a robust public infrastructure spending and increasing private investment.
While we still expect growth from infrastructure spending to be more heavily weighted towards the second half of this year, we're already delivering organic revenue growth from spending directed towards new health care facilities public transit and other infrastructure renewal and capacity expansion projects.
Other primary drivers include growing project work related to the re shoring of strategic domestic production and sustainability.
Common threads 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 relevant 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 development cycle and our clients are highly motivated to engage us to help advance their project to the next stage gate.
The addition of cargoes 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.
Instead, they give increasingly involved at the community level, helping public clients determine how to best directly spending and investment for the most significant impact.
Particularly as it relates to infrastructure equity and affordability.
Also noteworthy this quarter as U S buildings returned to organic growth after a challenging 2021.
The Covid pandemic has highlighted the need for increased health care health care capacity and similar to what we saw in Canada last year. This sector is now driving organic growth in the U S.
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 is 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 candidates first renewable diesel facility.
This group is now 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 health care as well as civic and education sectors continued to drive growth.
And rounding out our geographic regions as global.
You also had a remarkably strong quarter net.
Net revenue in our global region grew by 46%.
Canada and the U S every business unit and global grew organically in Q1, delivering <unk> team.
18% organic growth recent acquisitions delivered a further 37% growth.
Water continued its strong performance delivering double digit organic growth as the U K have seven program is in full swing.
Stimulus funding is driving growth in our infrastructure business and in New Zealand and the U K.
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.
Okay.
Thank you Gordon and good morning, everyone.
As Greg noted, we have 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 project pursuits, and overall project mix.
We delivered an 18% increase in adjusted EBITDA, reflecting the overall growth of our business.
<unk> EBITDA margin of 14, 5% was generally in line with Q1 'twenty one 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 in bids increased discretionary spending and investment in internal resources.
Partly offset by a 9 million reduction in share based compensation expense.
That didn't come in Etfs decreased 12, and 13% to 45 million and <unk> 40 per share as increased EBITDA was offset by higher amortization of intangibles from our <unk>.
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.
Call 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, 'twenty two 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 'twenty one.
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 460000 shares for $29 million. This along with funding of our recent acquisitions contributed to our net debt to adjusted EBITDA remaining at one eight 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.
Yeah. So came in at 75 days consistent with Q1, 'twenty, one and with year end 'twenty one.
And before leaving this page I want to bring to your attention the expected impact to our Q2 and Q3 cash flows are rising from the Cardinal integration as with all our acquisitions there will be a delay in converting cognos revenue to cash while we're switching financial systems.
Husband been noticeable with our smaller acquisitions, but given how material card, though is to our overall business. The delay in invoicing during the systems integration will dampen operating cash flows from card minutes businesses over this period. It will also cause DSO to rise slightly but we do expect us to normalize by the end of the year.
Okay.
And we closed the quarter with record backlog of $5 4 billion, which grew by 6% since the end of 'twenty, 168% organically.
Net revenues, we achieved organic backlog growth in every geographic region and business operating units our U S operations glad with almost 10% organic growth infra.
Infrastructure and energy and resources achieved double digit organic growth in 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.
That financial overview, I'll turn the call back to Gordon.
Thanks Teresa.
As we look as we look toward the rest of the year, we remain confident in our ability to deliver on our financial targets.
Over a 12 months 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 thats in the food and agriculture business, where rising cost of security of global supply.
Security of supply is a global concern sajak through expertise gained from acquiring wig is growing our capabilities and market footprint. In this sector were working on several confidential projects that are intended to strengthen food security, while reducing carbon initiatives.
We're also providing architecture and engineering services and the alternative protein space, notably 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.
<unk> 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 like we're well positioned to retain staff and to continue attracting new employees on this on the strength of our reputation and our people centric corporate culture in Q1, we continued to be.
Net importer of talent.
As for wage inflation, we're monitoring the market to ensure we're providing competitive compensation package for our employees and we're having some success at achieving rate increases from our clients. So we havent seen significant impact 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 projects, 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 <unk> 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 one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Press Star one to ask a question.
Okay.
And we'll take our first question.
From Jacob bout with CIBC.
Good morning.
Good morning Jacob.
Okay.
I see a similar question to what I asked one of your competitors. This morning.
The outlook that you provided.
So very robust, but you know a lot of concern here in the stock market about.
Impending recession or at least a stagflation.
Maybe just comment on.
He is just coming up on the radar of your clients or any.
Rocket hearings that youre, starting to see some cracks here.
And then if you look at your backlog you know what areas.
You know it is there is there some risk.
So we are as.
As we were preparing for the call today and as we are as we meet with all of our businesses and geographic leaders. This was certainly a question that we addressed with all of them and you know as we said in the prepared remarks, we haven't really seen it Jacob.
Projects dropping off.
We're always chatting with their clients and as we mentioned we have had a number of cases, where our clients have asked us to value engineer 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 extensively if there's a supply chain shortage of a particular type of materials 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 later 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 but if there are we don't view it at this point to be material to our our ongoing performance.
Okay and then my second question is just around margins.
<unk> margin was around I think 45% below the targeted range of $15 three to $16 three I know you called out.
You know higher admin expenses.
Does that continue to roll into the second quarter and then just given this current environment of higher inflation wage 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 at 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 is that yeah that the lowest EBITDA margin quarter that we have so it was not surprising to us that we came in at 14 and a half.
And that was actually right about where we expected it to be and we do expect it to strengthen over the course of Q2 and Q3 that typically comes back a little bit in Q4. So I've got so that was not unexpected.
So as we as we think about things like wage inflation, we are having success with Gordon noted in his comments in a.
Getting those are recovered in our rates and so again not seeing a material impact there, but you know as we look toward the rest of the year, where we are expecting to see a strengthened.
Margins is primarily around our 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 stress.
And our EBITDA margin over the course of the year and of course, our continued focus on all the things we talk about with that staying disciplined in our spending.
Just one quick follow up here since it was I think your margin was down.
Year on year and these 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 it.
From a year on year perspective.
Oh, I mean 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 <unk> increased as we.
Put some dollars towards strengthening our already very robust system, but you know that the increased focus on cyber security and so on means that there is a continued data need to invest there. We increased the amount. We spent on recruiting costs are and that sort of thing. So there is.
Going to be some higher costs around talent acquisition, and then Onboarding staff.
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 are we put out in our guidance.
Okay. Thank you.
Thanks Jacob.
And we will take our next question from Frederic Bastien with Raymond James.
Hi, good morning.
Good morning Bert.
It was great to see.
The U S.
Region, basically come back to organic growth in the quarter.
And also getting some momentum from that the health care sector.
And then we saw the backlog increased 10% I mean, how do you how do we expect.
Organic growth to pick up further.
As you progress through the year.
Yes.
Our U S operations are really performing as we had expected 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 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 with the backlog that we've had the projects that are starting to move forward. We do see continued strengthening over the remainder of the year and so we were starting to see.
See some of the infrastructure stimulus projects coming in as an example of our book to burn in our transportation.
Group in the U S was 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 color.
Moving to the U K, you mentioned that the <unk> seven as a one of your many bright spots during the quarter. Just curious if there are opportunities for <unk> to grow its share of the wallet during the current cycle or do you need to wait for the new Amp eight cycle too.
Hopefully gain now gain market share there.
Any color would ratio.
Yeah. So you know as we moved into the <unk> cycle. We are already the number one waterford by far there, but we did actually continued to grow market share through securing a contract with Irish water. This year that we are this go round that we did not have before so so we're going to continue with that we've actually already interestingly start.
To 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 an eight so we won't really be able to grow market share. Additionally over what we've already got it out in the App seven cycle and we did again, we did grow our market share in <unk> six but we're already positioning now for <unk> and that's what it will have additional opportunity to grow market share again.
Yeah.
Great. Thanks for that and then just just curious around your 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're continuing to grow the business, we should naturally see a trend up.
Yeah. So we don't have specific targets for that one of the things. We you know we try to remind people is that the work we do related to the STG is really driven by our clients and the efforts that they have so of course, we are have a broad suite of offerings and we work with our clients right.
<unk> those opportunities with them, but it's really up to where the clients want to want to take it and you know the good news is that are you know they they are very focused on.
Addressing climate change resiliency and things that support the S. D. G. So 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 overtime.
I mean, they're at 53% in 2021, where where would you estimate your are 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.
Great. Thanks Fredrik.
And we'll take our next question from Devin Dodge with BMO capital markets.
Alright. Thanks.
I wanted to start with a question on the mining sector.
Clearly commodity prices are at a level that support that should support.
No new or expanded projects haven't for some time, but can you can you talk about what youre seeing in this end market and where you're seeing the most optimism for projects either by region or commodity.
Yeah.
Certainly we are seeing.
A lot of interest in the mining sector.
Quite there 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 in South America. So that was very positive and then certainly our operations in Western Australia, where we're supporting a number of.
The mining miners there so it's pretty widespread geographically, where we're seeing interest.
So I think it's actually quite positive from that perspective and then.
You know these things often take a little bit of time to to get rolling but.
Once the mines are going we're seeing exist.
The existing mines are looking to expand their tailings ponds for example, they are looking to.
Our existing clients are looking to get into adjacencies like lithium and so on so we see that once we're in with these clients.
That continued refreshment of work in certainly in good times, but even when when when times are a little tougher we still see some.
That's great that maintenance work that is ongoing.
Okay. Thanks for that.
The second question.
Wanted to ask about you know.
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 has some very large buyout firms, we saw Blackstone make an investment earlier this week.
Obviously, there are some deep pocketed buyers.
So the question for you is do you see P. P firms, playing a bigger role in industry consolidation.
Than they've been in the past.
Yes.
As we look at the the number of acquisitions in our space that have gone to two P E rather than strategics really in 2021 and 2022, there hasn't been a lot of additional PV interested this is an attractive industry. So you certainly can understand.
Our our key is to stick to our knitting to maintain our discipline in M&A. We're seeing some of these <unk> transactions transact that are at a fairly high multiple which are you know and again, we're just trying to stay to our discipline, we're working with firms that.
That want to be part of something bigger than what they were at and that's kind of.
He's been our perspective is that we're looking for firms that have gotten to a certain size and they want to join a strategic like us too to get better back office support to get better opportunities for their clients.
In terms of their employees and better services, our water 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 p/e is may be a better fit for some of these firms. So you know what.
We're continuing to monitor it closely but yeah I would say there absolutely is more p/e 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 see demand soften their bed.
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&A 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 is timing.
Is maybe a 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.
Okay. Thanks.
And we'll take our next question from Ben <unk>.
With Chardan capital markets.
Yes, good morning, a GOR good morning, Teresa and Ah Congrats for a great quarter.
Oh, 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 talks about the the timing of the typical increase in billing rates and I'm just wondering whether it's more frequent.
When these days are with respect to the AR increase in billing rates.
Yeah, Yeah, no that's a great perspective, so so typically in a lot of our contracts.
For the vast majority of our employees, we have our salary review and increases for January one and so that's also what do we target looking at our our fee increases so that we could ensure that we are.
Youll matching fee increases with with salary increases but.
As some of our some of our employees are coming to chat with us looking for potentially a mid year adjustment, we are going to some of our clients and having similar discussions.
The clients that we've gone to over the past quarter and it even if it's later last year certainly there is a higher degree of.
There are then being accepting of of.
A salary increases just because everybody knows the environment is very active so are.
Or are we getting salary or a fee increases in each case 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 a for a fee increases in them already.
Okay. Okay, that's great color 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 was similar billable.
No it would be consistent with what we had last year a bad law.
Okay. Okay, that's great and last one for me in terms of backlog, obviously now reaching 14 months provides obviously great visibility for you, but is there any level, where you would start to feel maybe more comfortable 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.
A good point a lot of the contracts that were that we have been receiving a larger number of these are for.
Multi year awards. So we the full value of the award is entered into backlog, we had contracted but the work will be delivered over several years. So we're seeing an increasing number of those so I think that helps to helps us met.
Feel positive about that a couple of other things I think are interesting, though we've talked before about how in previous in 2021, we've accepted a bit of a decrease in utilization and some of our businesses and geographies. So that we have the staff in place that we can deliver on the the wave of work that we saw coming and we're seeing that bear fruit for us.
Now backlog turning into revenue utilized the utilization rates are are increasing so, but we still have some capacity.
Truly like in the United States in particular, so you know while the backlog is trending upwards, where at this point, we are not concerned with our ability to deliver and that's something we talked about with our group's everyday because we don't want to take work if we can't deliberate because that's not a positive for us or our clients in the long run.
That's great. Okay. Thanks for the time.
Great. Thanks for that one.
And we'll take our next question from Chris go Gaussian with Wellington.
Hey, guys. Thanks for the time.
I just wanted to touch on a comment you made right towards the end on agriculture.
And I think something on.
Pests or insects drew can you just I know you said some of this is.
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 am Super bullish on the intersection of climate change and meetings lots of solutions. So I wasn't ready to when you made those points.
Yeah, so in particular that alternative protein.
You know relates to.
Grasshoppers cricket these sorts of things and.
And so we have one client in particular, but others that we're working on that are you know really into this space and see it as a as a growing area of a protein generation through the firm we acquired a couple of years ago Awake. We also got into the the Pea proteins and now with this group is is beginning to move into some.
The the seeds and generating oils and.
<unk> is in these sorts of things and so it increased.
We're seeing that this is a really rapidly growing area for us.
Chris said and what do you think I think we'll be talking about more in the future.
Thanks, and then quickly we've talked in the past about the net.
<unk> zero retrofit secular cycle, we're gonna be in here at the building level.
Massive amount of money is going to be spent to.
Trophy buildings I know you guys have a lean in there could you just.
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 and more interest and net zero at this point for Newbuild than we are for going all the way to net zero in.
With existing but certainly a lot of energy efficiency and we are in discussions with some clients about going all the way to take a little bit further from 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.
Got it thanks guys.
Okay. Thanks, Chris.
Well go to our next question from Michael <unk> with TD Securities.
Thank you good morning.
Good morning, Michael.
My question is about the the project margin percentage, though it was up nicely.
Nicely on an overall basis year over year, and you did see good growth in the United States and our global but the the margin in Canada was relatively flat or actually down a touch just wondering if you can talk about what the differences in terms of Canada not seeing the same kind of improvement you are seeing the other regions.
Sure. It's you know it does often comes down to the mix of projects that that we have a we did see.
A bit of a decrease in in Canada, and some of that related to the sectors, where we have.
Slightly lower margins or energy and resources it tends to have slightly lower margins.
But you know overall I think we're really pleased that our community development sector really strong in Canada that tends to have really the hot the highest margins, we often talk about environmental services, but our community development does generate very high margins and the.
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 does that broad mix them. We're not that we're quite pleased with where oh, sorry, I still call it gross margin where where that sits.
And expect that we'll be able to maintain the level that we're at through you know the opportunities available to us through I really I think a heightened focus on pursuing higher margin work.
Continued discipline around how we're pricing and gross margin and then delivering on it.
Okay. That's great. It's all I had thank you.
Okay. Thanks, Michael.
And again, if you'd like to ask the question a question. Please press star one at this time.
And we'll take our next question from Sabat Con.
RBC capital markets.
Great. Thanks, and good morning, just I guess on the topline just looking at a little bit further into your geographic regions is a bit of variability on the organic rates from call. It three and a half to 13, 5%.
Is it is it 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. Just wondering if that contributed to some of the variance and I said the U S is probably going to be a bit more backend weighted but just curious on how much pricing was taken there versus kind of a global or you know it's been good double digit organic growth this quarter.
Great Great Great question. So when you look at even somewhere like the U S. When we we.
We've talked for a while about this kind of a wave of work was coming and we're ready for it to translate you know we have been disciplined in the pricing that we've been that we've been using all projects to preserve our long term target margins and we're beginning to get.
The ability to increase fees a bit in some.
So you will see expansion with a number of clients as well. So I think we're we're feeling good about what's in the backlog from a fee and from a margin perspective, but I think you're exactly right that the U S was a little bit slower of the game for us in 2021, but we're seeing that wave beginning to come here in Q1 of this year and we see continued strengthening.
For the rest of the rest of the year Global is just really.
<unk> really been working very very positively for us our water group in global very very strong, particularly in the U K and down in Australia, New Zealand transportation is robust we're seeing a lot of growth into renewables, so pumped storage work, but we're seeing it in.
In Scotland, and so on so I think we're feeling pretty good just overall about what our organic growth rates and I think we're.
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 we're having that just firming up and coming through backlog into your organic growth or are there. Other is it just more along the lines of some of the projects that you won last year I think you indicated that they'd probably get going a bit more in the back half there.
Just want to get a better understanding of the the contributors through H two of this year.
Yeah, I think for the most part it is a project that we already have committed and you.
You see that in our backlog is so high that we're going to just start seeing that really strengthen as those existing projects begin to deliver in the second half of this year are there more projects coming in the funnel absolutely you know I mentioned that are our U S transportation business had a book to burn off of 2.0 in the quarter. So that's really that infrastructure.
Structure work starting to come in the door. So I think just further supporting.
Additional strengthening in the second half of the year.
Yeah.
Okay, and then just a quick one on kind of the capital allocation side, obviously still integrating cardinal.
Bought back some shares over the last little while how are you thinking about capital allocation like we think over the rest of this year.
Oh, it's pretty much consistent with what.
Let the strategy has been for the last couple of years now Saba.
You know the balance sheet is still strong with the.
Net debt to EBITDA of one eight times, we still have room, there to make acquisitions. If we if we find the right one.
So you know that it continues to be our primary target for capital allocation, we know that we can generate.
Solid returns if we if we're disciplined in our pricing and we find the right acquisition and then of course, you know the share price has been 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 and continue to to use our NCI.
It'd be where appropriate so you know, it's still acquisition as far as the N T I D.
There are opportunities and and that's.
In that order.
Great. Thanks very much.
Thanks.
Well go to our next question from Ian <unk> with Stifel.
Good morning, everyone.
Good morning.
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. So we we are having a lot of discussions with our clients with regards to onshoring things like semiconductors, and we 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.
That any client will say they'll do it at any price, but certainly lot of continued support for semiconductors, we vote on the in the medical field radioactive isotopes, we're doing some work there because of you know there is shortages there.
In the past and we see people wanting to onshore the production of those vaccines. We're working on other facilities. There in California. So we do see just a lot of discussion about bringing back some of that self reliance.
To the North American supply chain, and you know as I.
I don't think anyone is completely immune to price sensitivity. So we continue to work with these do you see these people about.
You know, how we can value engineer, but how we can keep things moving forward in some of these plants. We've broken ground on them already are one of them. Even just this week. So I think things are moving forward and we're moving into construction.
Okay. That's helpful.
On on the community development side, I mean, the U S housing markets pretty clearly rolling over a little bit here and there.
Can you remind us what your exposure is to that business and kind of how that's evolved over time.
Yeah. So our current you know when we look at our overall Corporately our community development business is about 10% of our overall revenue.
But when we look at you know where it's come from back in the.
2007 to eight timeframe just before the financial crisis, we were about 35% in land development. So we've really derisked, our exposure to that because that can be a bit of a cyclic industry, but now we're seeing a different in different locations you know some places in.
Western Canada are still Greenfield when we look at the in the U S. We're seeing there is still some greenfield, but a little bit less more urban redevelopment.
It's certainly in the U K.
Where we were before but he was strengthened with BARDA will more there's a huge shortage of housing stock in the U K. So that's very very a bit busy at a robust and it will be for years to come there. So 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 the locations like the U K that have a stated objective.
You have to continue to bring housing stock on to lessen their housing prices.
That's really helpful context, I appreciate that.
Last one for me the revenue per employee, which I know is not a perfect metric 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 happened there from a from a efficiency standpoint.
Yeah. So I think we have some a little bit upside from both perspectives. We do have some some opportunities to continue to increase our 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 we're going to be we're going to be.
Using it but 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 some of the examples of things that we're doing there is we have developed internal systems for.
For example, when you're doing the design too.
To design the electrical conduit that you would have for the electrical system, we havent electrical conduit rooting design system that we've put together we have a parametric design system using design parameters to to detail out steel and floor slabs were just finalizing a parametric design system for pump station designed to make that more efficient.
All of those things will continue to to drive efficiencies and.
Just us in generating with additional net revenue per employee going forward.
Perfect. That's all for me and ill turn the call back over.
Great. Thanks.
Well go next to Maxim <unk> with National Bank financial.
Hi, good morning.
Good morning, guys.
I was wondering if it would be possible to get a bit of an update on.
How the Cardinal integration is progressing.
Maybe some early wins synergies and so forth and.
Correct me, if I'm wrong some of the geographies.
Sort of lower margin profile relative to kind of flatten overall entity and maybe if you can discuss some of the programs there. Thanks.
Sure. So in terms of the overall integration is proceeding as we would have anticipated we've we're working.
We've done all the back office work in terms of harmonizing benefits getting employee contracts put together.
That's sort of hygiene work is done the integration.
Is ongoing we haven't interface our networks, yet because we're just making sure everything's up to the same standards and so on but even more importantly than from a leadership perspective.
I attended a meeting joint meeting of the Cardinal and the.
Stanczyk environmental services leadership in Vancouver, a couple of weeks ago, starting that process of how do we optimize the strengths of Cardinal the strengths of <unk> to create something from a leadership perspective is even stronger and of course, we've mentioned that with the retirement of our current environmental services leader that Susan Reis Board who leads.
Who was the Cardinal CEO will take over our leadership over our environmental services group. So that's that's coming together well in Australia, where we're working on the same thing from a leadership perspective looking at harmonizing sort of the the Stan Tech leadership in Australia.
Cardinal leadership, Cardinal strengthens us in a number of areas.
Water transportation 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 we should all be wrapped up by the by the end of Q3. So we had stated that we wanted to get that done. This year. So we should even if perhaps be a quarter sooner than we had hoped.
Based on where we currently sit so EBITDA.
Those things are always fluid. So I think we're feeling pretty good about it overall vaccinate, maybe Theresa if you wanted to talk about some of the margin things that we're seeing in both the U S and in Australia.
Yeah, I mean, it's it's really unfolding as we expected the margins are strong in the areas that we had talked about an acquisition environmental services is a is a really strong from a 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 how they really completed their turnaround where are we going to see margin improvement and I would say that that performance has been.
It's 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 are supposed to work and Kathryn and things like that I just wanted to clarify so.
So we're going to see a bit of an inflection point in Q2, Q3, and then sort of pull the normalization by by Yamana, Duke how should we think about it in terms of the time.
Yeah, that's right and so you know when we're changing financial system. We are of course, continuing to generate revenue, but we have to enter what we call a blackout period, where we can generate invoices because of that movement into financial system. So Australia and then the U S Q2 and Q3.
I was 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 stay on tax you know, we're thinking a couple of days of DSO.
For our impact to all of a sound check out 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 at once those integrations are the migrations are done I think.
Got caught up by the end of the year.
Okay. That's super helpful. And then just one last question in terms of oil and gas. Obviously, you know WTO aren't very healthy levels, just curious to see what you're hearing from your.
Clients in the ground.
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.
We're continuing to flow through.
We're seeing with the drug with the prices high not a lot of new capital flowing into.
And to the industry in terms of new capital projects I think that.
A lot of you have seen some of the earnings have come about these.
These firms seem to be for the most part.
You're dealing with there.
The inflow of funds it in different ways, rather than expanding their 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 pipeline space at this point.
Okay. Okay. That's it for me. Thank you so much.
Thanks Max.
Well go to our next question from Troy Sun with Laurentian Bank.
Good morning.
Alright, and then maybe just a very quick follow up on <unk> questions 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 so it's still quite focused on small to medium size deals.
Yeah, you know we.
We continue to you know our stated strategy is always still that sort of thousand person unless those base hits that we know we can we can get an integrate easily but cardinal has been very successful for us and so we're continuing to look at some of these other opportunities as they are.
As they arrive as well.
Well 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.
We would we would have a good look at it.
Thank you that's super helpful. That's it for me.
Great. Thanks, Greg.
And it appears there are no further questions at this time I'll turn the call back for any additional or closing remarks.
Great well I'll just quickly wrap up.
The year is unfolding as we had as we had hoped we appreciate all.
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.
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Okay.
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