Stantec Inc

TSX:STN

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to Stantec's First Quarter 2022 Earnings Results Webcast and Conference Call. Leading the call today are Gord Johnston, President and Chief Executive Officer; and Theresa Jang, Executive Vice President, and Chief Financial Officer.

Stantec invites those dialing in to view the slide presentation, which is available in the Investors section at stantec.com. Today's call is also webcast. Please be advised 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 2, 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 Johnston.

[Gordon Johnston, executive]

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 Cardno acquisition, and I'm very pleased with the way our 2 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 Cardno is a top priority for Stantec in 2022. Transitions to our Oracle ERP system for Cardno's 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, Cardno is on track to deliver the results that we initially communicated, and we feel very positive about achieving the 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 2-year time-line 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 U.K. that brings our presence in the region to 2,500 team members. We closed that transaction on April 1. We're pleased to have the U.K.'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 Wilmar shares our passion in delivering sustainable and lasting projects and improving communities and strengthens the contributions we make towards United Nations Sustainable Development Goals or SDGs. And this ties into the third item I want to highlight. On Earth Day, April 22, 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 and equity and everything in between. We also celebrated our achievement of carbon neutrality in the U.K., 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 are 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 health care 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 project development cycle and our clients are highly motivated to engage and help advance their project to the next stage gate. The addition of Cardno's environmental professionals has certainly been timely and strengthened 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 ensure 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 as U.S. buildings returned to organic growth after a challenging 2021. The COVID pandemic has highlighted the need for increased health care capacity. And similar to what we saw in Canada last year, the 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 Archeological 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. Opportunities stemming from the energy transition drove organic growth in Energy & Resources, where we're designing Canada's 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 syndicate 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 U.S., every business unit in Global grew organically in Q1, delivered 13% organic growth. Recent acquisitions delivered a further 37% growth. Water continued its strong performance, delivering double-digit organic growth as the U.K. AMP7 program is in full swing. Stimulus funding is driving growth in our infrastructure business 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 Theresa to review our Q1 financial results in more detail.

[Theresa B. Jang, executive]

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 '21 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 $0.40 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 $0.61 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 '22 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 1.8x. Leverage remains within our target range of 1x to 2x, 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 Cardno integration.

As with all our acquisitions, there will be a delay in converting Cardno'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 backlog 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 units. Our U.S. operations led with almost 10% organic growth. Infrastructure and Energy & 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.

[Gordon Johnston, executive]

Thanks, Theresa. 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 cost and security of global supply and security of supply is a global concern. Stantec through expertise gained from acquiring Wink has grown 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 initiates.

And we're also providing architecture and engineering services in the alternative protein space, notably to one of the largest insect 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 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 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?

[Operator]

[Operator Instructions] We'll take our first question from Jacob Bout with CIBC.

[Jacob Bout, analyst]

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. And maybe just comment on is this coming up on the radar of your clients or any geographic areas that you're starting to see some cracks here. And then if you look at your backlog, what areas -- is there some risk?

[Gordon Johnston, executive]

So we -- as we were preparing for the call today and as we're -- as we meet with all of our business and geographic leaders, 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 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, can 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.

[Jacob Bout, analyst]

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 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, are you thinking more the lower end of that range? Or how should we be thinking about that?

[Theresa B. Jang, executive]

Yes. 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's 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 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 to our revenue. So that's the primary driver for where we expect to see strengthened EBITDA margin over the course of the year. And of course, a continued focus on all the things we talked about with staying disciplined on our spending.

[Jacob Bout, analyst]

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 second quarter and have a bit of a negative impact when we look at it from a year-on-year perspective?

[Theresa B. Jang, executive]

For 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 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.

[Operator]

We'll take our next question from Frederic Bastien with Raymond James.

[Frederic Bastien, analyst]

It was great to see the U.S. region, basically come back to organic growth in the quarter and also getting some momentum from 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?

[Gordon Johnston, executive]

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 then 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 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're starting to see some of the infrastructure stimulus projects coming in. As an example, our book-to-burn and 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.

[Frederic Bastien, analyst]

Moving to the U.K. 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. Any color would [ helpful ].

[Gordon Johnston, executive]

Yes. So as we moved into the AMP7 cycle, we are already the #1 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 going to continue with that. We've actually already interestingly started to gear up, and I was in the U.K. about 6 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, and we did -- 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.

[Frederic Bastien, analyst]

Great. And then 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 -- as you continue to grow the business, we should naturally see it trend up.

[Theresa B. Jang, executive]

Yes. 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. 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 over time.

[Frederic Bastien, analyst]

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

[Theresa B. Jang, executive]

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

[Operator]

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

[Devin Dodge, analyst]

All right. 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 most optimism for projects either by region or commodity?

[Gordon Johnston, executive]

Yes. Certainly, we're seeing a lot of interest in the mining sector to your point 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 not really allowed us to get back in to 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 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 these things often take a little bit of time to get rolling. But once the mines are going, we're seeing existing mines are looking to expand their tailings bonds, for example. They're 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, just that continued refreshment of work in -- certainly in good times, but even when times are a little tougher, we still see some of that great debt maintenance work that is ongoing.

[Devin Dodge, analyst]

Okay. 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 some -- the very large buyout firms. We saw Blackstone make an investment earlier this week. But there obviously, there 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?

[Gordon Johnston, executive]

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 what our key is to stick to our netting to maintain our discipline in M&A. We're seeing some of these PE transactions transact at a fairly high multiple which -- and again, we're just trying to stay to our discipline. We're working with firms that want to be part of something bigger than what they were.

And that's kind of always 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 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 PE is maybe a better fit for some of these firms. So we're continuing to monitor it closely. But yes, I would say there absolutely is more PE interest and activity in our space than we would have seen 3 or 5 years ago.

[Devin Dodge, analyst]

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?

[Gordon Johnston, executive]

Yes. We're -- through our M&A and our corporate development team, we're always looking for different opportunities. Certainly, if the Nordics continue to be an area of interest for us. And we're continuing to explore opportunities there. It 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.

[Operator]

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

[Benoit Poirier, analyst]

Yes. Congrats on the great quarter. Yes. 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 I'm just wondering whether it's more frequent these days with respect to the increase in billing rates.

[Gordon Johnston, executive]

Yes. Yes. No, that's a great perspective. So typically, in a lot of our contracts, our -- for the vast majority of our employees, we have our salary review and the 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 matching fee increases with salary increases. But those -- as some of our employees are coming to chat with us looking for potentially a midyear 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 then even late last year, certainly, there's a higher degree of their -- them being accepting of salary increases just because everybody knows the environment is very active. So our beginning salary or 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 multiyear projects, the vast majority of those have the capability for a fee increase in them already.

[Benoit Poirier, analyst]

Okay. Okay. That's a 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 it was similar billable?

[Theresa B. Jang, executive]

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

[Benoit Poirier, analyst]

Okay. Okay. That's great. And 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?

[Gordon Johnston, executive]

Yes. That's 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 when contracted, but the work will be delivered over several years. So we're seeing an increasing number of those. So I think that helps us 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 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. Backlog turning into revenue, utilization rates are increasing. So -- but we still have some capacity truly like in the United States, in particular. So while the backlog is trending upwards, we're -- 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.

[Operator]

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

[Christopher Goolgasian, analyst]

I just wanted to touch on a comment you made right toward the end on agriculture. And I think something on pests or insects too, 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 where I come from on the climate side, I'm super bullish on the intersection of climate change and ag meeting loss of solutions. So I was interested when you made those points.

[Gordon Johnston, executive]

Yes. So that -- in particular, that alternative protein relates to 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 P proteins. And now with this group is beginning to move into some of the seeds and generating oils and canola and these sorts of things. And so it increased -- 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.

[Christopher Goolgasian, analyst]

And then quickly, we've talked in the past about the net 0 retrofit secular cycle we're going to be in here at the building level. A massive amount of money is going to be spent to retrofit buildings. I know you guys have a lane in there. Can you just -- on what you're seeing there?

[Gordon Johnston, executive]

Yes. Certainly, a lot more interest in that energy efficiency in general and in some cases, going all the way to net 0. We're seeing more interest in net 0 at this point for a new build than we are for going all the way and net 0 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 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.

[Operator]

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

[Michael Tupholme, analyst]

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?

[Theresa B. Jang, executive]

Sure. It does often come down to the mix of projects that we have. We did see a bit of a decrease in Canada and some of that related to the sectors where we have slightly lower margins. Energy and Resources tends to have slightly lower margins. But 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, wherever that sits -- and expect that we'll be able to maintain the level that we're at through the opportunities available to us through a really, I think, heightened focus on pursuing higher margin work and just continued discipline around how we're pricing gross margin and then delivering on it.

[Operator]

[Operator Instructions] We'll take our next question from Sabahat Khan with RBC Capital Markets.

[Sabahat Khan, analyst]

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 on call it, kind of 3.5% to 13.5%. Can you -- is there kind of -- is that 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. You said the U.S. is probably going to be a bit more back-end weighted. But just curious on how much pricing was taken there versus kind of like the global where it's been good double-digit organic growth this quarter.

[Gordon Johnston, executive]

Right. No. Great question. So when you look at even somewhere like the U.S., when we -- we've talked for a while about this kind of the wave of work was coming and we're ready for it to translate. We have been disciplined in the pricing that we've been using on projects to preserve our long-term margins. And we're beginning to get the ability to increase fees a bit in some fee expansion with a number of clients as well. So I think 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.

The U.S. was a little bit slower out the gate 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 year. Global is just really working very positively for us. Our water group in global, very, very strong, particularly in the U.K. 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 and 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.

[Sabahat Khan, analyst]

Okay. Great. And just a quick follow-up. I guess as you look to the back end of the year, is there really just some of the soft backlog, some of the conversations you're having that just firming up and coming through a backlog into 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 probably get going a bit more in the back half just want to get a better understanding of the contributors through H2 of this year.

[Gordon Johnston, executive]

Yes. I think for the most part, it is a project that we already have committed. And you see that in our backlog that's 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. I mentioned that our U.S. transportation business had a book-to-burn of 2.0 in the quarter. So that's really not infrastructure work starting to come in the door. So I think just further supporting additional strengthening in the second half of the year.

[Sabahat Khan, analyst]

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

[Theresa B. Jang, executive]

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 1.8x, 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, and that's -- it's kind of in that order.

[Operator]

We'll go to our next question from Ian Gillies with Stifel.

[Ian Gillies, analyst]

I was curious if you could talk a little bit about some of the leading-edge commentaries 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 cost that needs to happen.

[Gordon Johnston, executive]

Yes. So we are having a lot of discussions with our clients with regards to onshore things like semiconductors, and I think we've talked about that in previous quarters as well. We see that continuing to move forward. And I don't know that -- that any client would say they'll do it at any price, but certainly, a lot of continued support for semiconductors. We've -- in the medical field, radioactive isotopes, we're doing some work there because there were shortages there in the past, and we see people wanting to onshore the production of those vaccines. We're working on our 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 as I said, I don't think anyone -- is completely immune to price sensitivity. So we continue to work with these people about how we can value engineer but how we can keep things moving forward. And 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.

[Ian Gillies, analyst]

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?

[Gordon Johnston, executive]

Yes. 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, '08 time frame 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 cyclical industry. But we're seeing it different in different locations. Some places in Western Canada are still greenfield. When we look at the -- in the U.S., we're seeing -- there is still some greenfields, but a little bit less more urban redevelopment. And certainly, in the U.K., where we were before we even strengthened with Barton Wilmore, there's a huge shortage of housing stock in the U.K. So that's very, very busy and robust and 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 locations like the U.K. that have a stated objective to continue to bring housing stock on to lessen their housing crisis.

[Ian Gillies, analyst]

No, that's really helpful context. I appreciate that. And 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 happen there from an efficiency standpoint?

[Gordon Johnston, executive]

Yes. So I think we have a little bit of upside from both perspectives. 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 way of work that's coming, 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've developed internal systems for example, when you're doing the design to design the electrical conduit that you would have for the electrical system, we have an electrical conduit routing design system that we 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 all of those things will continue to drive efficiencies and assist us in generating with additional net revenue per employee going forward.

[Operator]

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

[Maxim Sytchev, analyst]

Gord, I was wondering if it would be possible to get a bit of an update on how the Cardno integration is progressing, maybe some early wins, synergies and so forth. And correct if I'm wrong, some of the geographies had sort of lower margin profile relative to kind of an overall entity? And maybe if you can discuss some of the progress there.

[Gordon Johnston, executive]

Sure. So in terms of the overall integration, it's 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 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 is up to the same standards and so on. But even more importantly, then from a leadership perspective, I attended a meeting -- joint meeting of the Cardno and the Stantec Environmental Services leadership in Vancouver a couple of weeks ago, starting that process of how do we optimize the strengths of Cardno, the strength of Stantec 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 Reisbord, who leads -- who was the Cardno CEO, will take over our -- the 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. Cardno leadership -- Cardno 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 it should all be wrapped up by the end of Q3. So 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 based on where we currently sit. So -- but those things are always fluid. So I think we're feeling pretty good about it overall, Max. And then maybe, Theresa, if you want to talk about some of the margin things that we're seeing in both the U.S. and in Australia.

[Theresa B. Jang, executive]

Yes. 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 I know on acquisitions, there were some questions about have 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 pretty positive from that standpoint.

[Maxim Sytchev, analyst]

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

[Theresa B. Jang, executive]

Yes, that's right. And so 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 are 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 2 more in Q3 as well. But we do expect that we'll put a big push once those integrations are -- or those migrations are done to get caught up by the end of the year.

[Maxim Sytchev, analyst]

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

[Gordon Johnston, executive]

Yes. And so our oil and gas business is really a midstream pipelining business. And so the projects that we have ongoing there are continuing to flow through. we're seeing with -- you're right with the price is high, not a lot of new capital flowing into the industry in terms of new capital projects. I think that a lot of -- you've seen some of the earnings have come out, these firms seem to be, for the most part, dealing with the 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.

[Operator]

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

[Troy Sun, analyst]

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 Cardno 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.

[Gordon Johnston, executive]

Yes. We continue to -- our stated strategy is always still that sort of 1,000 person and less those base hits that we know we can get and integrate easily. But Cardno has been very successful for us. And so we're continuing to look at some of these other opportunities as they arrive. And 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.

[Operator]

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

[Gordon Johnston, executive]

Great. Well, just quickly and 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.

[Operator]

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