Stantec Inc (STN) 2011 Q1 法說會逐字稿

Welcome to Stantec Inc.'s First-Quarter 2011 Earnings Results Conference Call. With us today from Stantec Management are Mr. Robert Gomes, President and Chief Executive Officer, and Mr. Dan Lefaivre, Chief Financial Officer. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session.

(Operator Instructions)

Before the call begins, Stantec Management would like to make you aware of its Safe Harbor statement and to caution you that it will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 in the United States, and applicable securities legislation in Canada.

By their very nature, forward-looking statements require Stantec Management to make assumptions and are subject to inherent risks and uncertainties that give rise to the possibility that Stantec's estimates, projections, expectations, or conclusions will not prove to be accurate, that its assumptions may not be correct, and that its actual results may differ materially from those discussed in these statements.

In addition, Stantec Management will be mentioning non-GAAP measures. You will find descriptions of non-GAAP measures and their use, as well as more information about the assumptions and material factors that were applied or could cause actual results to differ materially from those discussed in this conference call, in Management discussions, and analysis included in Stantec's 2010 Financial Review.

As a reminder, today is May 12, 2011 and this conference call is being recorded, as well as broadcast live over the Internet. It will be archived for future reference at Stantec.com under the Investors section. Therefore, any members of the media who are joining the call today in a listen-only mode and who wish to quote anyone other than Mr. Robert Gomes or Mr. Dan Lefaivre are asked to please request permission to do so from the individual concerned.

It is now my pleasure to introduce your host, Mr. Robert Gomes. Please go ahead, sir.

Thank you, Shelly. Good afternoon, everyone, and welcome to our First-Quarter 2011 Conference Call. Dan will provide a brief summary of our results for the quarter and I will follow with an outline of our market outlook. We will then address individual questions.

This morning we released the results of Stantec's operations for the first quarter of 2011. I am pleased to report that we began the year with strong results in the slowly recovering economy. We owe this performance to our clients, who continue to support us with their projects, and to our employees, who continue to manage our operations efficiently and to provide excellent client service.

Dan will now provide a more in-depth review of our first quarter financial results.

Thanks, Bob. Good afternoon, everyone.

Since this is the first quarter that we have reported our results under International Financial Reporting Standards, also known as IFRS, my comments will be a little longer than usual. We completed the transition of our financial processes and results to IFRS during the first quarter of 2011. Detailed information about the transition is included in our 2011 first-quarter report. The impact of IFRS is disclosed in Note 37 of the financial statements, and is also summarized on pages M-26 through M-31 of the MD&A.

In our opening statement of financial position for January 1, 2010 under IFRS, our shareholders' equity decreased by approximately CAD9.3 million, resulting from transitional adjustments related to the recognition of contingent consideration from prior acquisitions, recognizing intangible asset impairments, and de-recognizing sublease rental income.

The IFRS transition impacted our first quarter 2010 comparative operating results by increasing net income by CAD2.6 million or CAD0.05 on a diluted earnings per share basis. Net income increases resulted primarily from the recognition of the gain on the interest rate swap in net income, which is de-recognized on the opening balance sheet, recognizing virtually certain sublease revenue, and recognizing a decrease in the amortization of intangible assets.

Our full-year 2010 operating results were impacted by all the same items identified for the first quarter of 2010, offset by acquisition-related costs, as well as other minor transitional adjustments. This resulted in an overall increase in 2010 diluted earnings per share of CAD0.02 to CAD2.06.

As Bob just indicated, the first quarter of 2011 was positive for Stantec. Looking at our operating performance on a sequential basis, gross revenue increased 6.5% to CAD408.7 million in the first quarter of 2011, from CAD383.7 million in the fourth quarter of 2010. Compared to the first quarter of 2010, gross revenue was up CAD37.1 million, or 10%, from CAD371.6 million.

Our net revenue was also up 13.5% to CAD336.8 million from CAD296.8 million in the first quarter last year. Approximately CAD37.6 million of this increase was from acquisitions completed in 2010 and 2011, and CAD8.1 million, or 2.7%, was from organic growth. The difference in gross revenue and net revenue growth was due to the reduction in the use of sub-consultants, primarily in our environment and industrial practice area.

Our gross margin as a percentage of net revenue was 55.8% in Q1 2011, compared to 55.5% in Q1 2010, which is still within our targeted range of 54.5% to 56.5%. This ongoing strong operational performance gives us the confidence to maintain our gross margin target for the rest of the year.

Our admin and marketing expenses for Q1 2011 were 42.2% of net revenue, compared to 41.4% in Q1 2010. Our Q1 2010 admin and marketing expenses were impacted by the IFRS transitional adjustments I just mentioned earlier. For the rest of 2011, we expect our administrative and marketing expenses as a percentage of net revenue to remain relatively consistent within our targeted 41% to 43% range. EBITDA increased CAD3.3 million, or 7.7%, to CAD46 million in Q1 2011, from CAD42.7 million in Q1 2010.

Net income for Q1 2011 was CAD23.8 million, or 46%, compared to CAD16.3 million last year, and diluted earnings per share increased 48.6% to CAD0.52 from CAD0.35. As we have indicated previously, net income for the first quarter of 2011 was -- of 2010 -- was impacted by the reorganization of our corporate structure.

Overall, we're quite pleased with our Q1 2011 results. Bob, back to you.

As we mentioned in our news release this morning, during the first quarter we completed the acquisition of Quadratec, a leading mechanical and electrical engineering firm based in Saint John's, Newfoundland, and Labrador. Last week, we also have signed a letter of intent to acquire the Caltech Group, a consulting company headquartered in Calgary, Alberta that specializes in servicing the oil and gas sector.

Together, these additions will increase our 1 team by about 230 people, and it will strengthen our presence in Newfoundland and Labrador and the oil and gas market.

I would now like to highlight some of our new project awards. In the healthcare sector, we secured a contract to design a new hospital in High Prairie, Alberta, as part of the provincial government's 3-year health capital plan to build and update healthcare facilities in small- and mid-sized communities. The CAD90 million center will include 30 acute care beds, as well as continuing care beds, and offer a variety of services under one roof.

In the water sector, we are designing a new dam across the Kentucky River, as well as improvements to the locks and dams that are now over 100 years old. This infrastructure will supply water to 400,000 central Kentucky residents, and facilitate recreational traffic on the river. The project complements the award-winning work we have done previously on lock and dam Number 9 in Eastern Kentucky.

In the energy sector, we were chosen to act as the owner's engineer for a SaskPower project at Saskatchewan's Boundary Dam Power Station. The contract involves refurbishing a 150-megawatt coal generating unit and adding a post-combustion carbon capture system to the facility.

When complete, the project will help meet growing demand for electricity in Saskatchewan, reduce SaskPower's overall carbon dioxide emissions, and provide carbon dioxide for enhanced oil recovery. We have been providing engineering services and support to SaskPower on clean-coal projects since 2006.

In the rail sector, we are providing engineering, design, and construction management services for developing bridge and retaining wall structures along the Georgetown rail corridor in Toronto, Ontario, for continuing a client, Metrolinx. The structures will be built to accommodate expansion of Metrolinx passenger rail service in 4 locations, from 2, to up to 5 tracks.

In the land development sector, we are refurbishing Victoria Park Lake, a recreational amenity that has been an essential component of the green space in Kitchener, Ontario, for over 100 years. The project will involve lake design, park infrastructure improvements, and other services, as well as a pilot program for an innovative sediment management approach on the site.

As usual, I've only highlighted a small sample of the projects we are working on, completing many projects for many clients mitigates risk for our Company. As always, we are thankful to our clients for their continuing confidence in our services.

Now, I would like to comment briefly about the potential market conditions for our services going forward. Overall, we have a strong backlog of work across our practice areas. Our backlog increased by CAD185 million, or 19.7%, to CAD1.123 billion in the first quarter of 2011, from the same time last year.

This performance again reflects the confidence we are seeing in some of our markets, as well as growth from acquisitions, which is resulting in new and continuing projects. We believe that by developing broader relationships with our clients, and managing our business well, we will continue to improve our backlog level.

During the first quarter, we met our expectations for organic growth in all practice areas, except buildings and environment. We saw a retraction in organic growth in our buildings practice area because of increased activity required for integrating our Anshen and Allen, and Burt Hill acquisitions, and because of weak buildings markets in the US West and the United Kingdom.

Organic revenue retracted in our environment practice area due to the reduction in sub-consultant costs that Dan mentioned, the caution release of some projects, and weather-related delays. Although these factors affected our growth and net revenues in the first quarter, we are confident that our positioning in these 2 practice areas will allow us to continue to take advantage of opportunities over the rest of the year.

Looking at our individual practice areas, we expect the following for the remainder of 2011. We believe that the outlook for our buildings practice area is stable for 2011. With our recent geographic expansion through acquisitions, we expect to further strengthen and leverage our expertise in healthcare and educational facility design. However, growth from these acquisitions may be tempered by soft economic conditions in California and the United Kingdom.

In Canada, we expect to continue securing P3 opportunities. We currently are working on several active P3 projects, and pursuing others as a result of our presence and client relationships in P3 markets. In addition, our expanded presence has positioned us to undertake larger and more complex projects. For example, we are working on the Al Mafraq hospital in Dubai, the Guy's and St. Thomas Cancer Centre In London, and the Sacramento Municipal Utilities District operations center and maintenance yard in Sacramento.

We believe that our environment practice area will see stable to moderate organic growth in 2011, with stronger growth in the second half of the year. We base this outlook on factors such as the need for more front-end environmental assessments and compliance services, and increased regulatory requirements in the water, power, and oil and gas sectors.

As well, a number of our commercial clients are reassessing their capital spending in 2011 and our portfolio of spring project starts is favorable overall. Activity in Canada, particularly in Alberta, is strong in this practice area. For example, we are engaged in a tailings pond treatment pilot study for a major oil sands producer in Northern Alberta.

For the industrial practice area, we anticipate moderate organic growth in 2011. We base this outlook on strong commodity prices and robust activity in the mining and oil and gas sectors. We are currently working with several of the world's largest mining and resource companies, and many of our clients in these 2 sectors are expecting to spend significantly on new projects, as well as expansions and rehabilitations, in the next few years.

We believe that our industrial practice area has the breadth, diversity, and expertise to take advantage of opportunities that arise with these clients. Our pending acquisition of Caltech will also give us exposure to potential new clients and projects. In addition, we are well-positioned to use our expertise in renewable energy to take advantage of market opportunities and sustainable energy development.

We expect to achieve stable to moderate growth in our transportation practice area in 2011. P3 projects continue to provide a potential stream of work in Canada, where our size and geographic presence are well-suited for these larger assignments.

We also expect our rail and transit groups to maintain their current activity levels in 2011; however, decreasing tax revenues, efforts to reduce state and provincial deficits, and continued uncertainty in the United States about long-term funding, may cause delays in some larger, longer-term planned transportation projects.

Our position in the United States, however, is in smaller local projects, which appear to continue to flow in absence of longer-term funding.

Due to the generally anticipated stability in the Canadian and US residential sectors, we believe that the outlook for our urban land practice area in 2011 is stable. Throughout the year we expect to continue to diversify our client base and build on our relationships in the public sector.

Overall, we continue to believe that our outlook for 2011 is a moderate 2% to 3% increase in organic revenue from 2010. We are still experiencing the impacts of a tough, slowing recovering economy; however, we believe that our diversity, strong client relationships, talented staff, and flexibility will help us adapt our business and mitigate risk for our investors.

This concludes our comments for today. Dan and I are now available to answer any questions you may have. Conference call operator will explain the question procedure. Shelly?

Thank you, sir.

(Operator Instructions)

The first question comes from Paul Lechem from CIBC. Please go ahead.

Thank you. Good afternoon.

Hi, Paul.

Hi. Just going back on the 2% to 3% organic growth guidance, you might have answered this on previous calls, but maybe if you could remind us again. Is that -- when you talk about organic growth, are you leaving out the impact of foreign exchange? Are we talking gross revenues, net revenues? And are we talking about for the entire year, 2% to 3% up, or is that kind of a run rate on exiting the year?

So that's 2% to 3% at the end of the year, end of 2011, we see our gross revenue being 2% to 3% above our revenue from 2010. That is gross revenue and it is with FX taken out, and with our acquisitions taken out. And we look at, of course, our acquisition revenue as for one year after the acquired company is acquired. So that is organic growth and is gross revenue.

And it's sort of the run rate exiting the year?

That's correct.

Not for the entire --

That's correct.

On the environmental practice, could you give us some breakdown, how much of the work is remediation work, how much is assessments and compliance? Can you give us some sense of how much is public sector, commodities? Can you give us a sense of what does the environmental practice look like?

Okay. Essentially, I would say two very distinct different businesses. One is the water business, which is about one-third of the business is water. So that's municipal water, wastewater projects, the combined sewer overflow projects, mainly for the municipalities. So it would be, 90% of that is for the public clients. That being said, we do some design build work in that area, where the end-user client is the public sector, utility company, or municipality, but we do work for the contractor.

The other two-thirds of the business is really environmental sciences work. So that's where the compliance environmental audits assessments would be done. Of that two-thirds, half of it is for the oil and gas business and the other half of it is for essentially everything else we do. So, the oil and gas business, the half of the two-thirds that's oil and gas, obviously would be for private sector clients, oil and gas and energy clients, and the other half of the remaining two-thirds environmental services is for a mixture of clients, and it would probably be a split 50/50 between private clients and public clients.

I got it. If I can sneak one more in. In terms of that mix, then, where is the weakest part of the environmental practice right now? And what do you see picking up as we go through the year?

Overall, environment didn't do well -- didn't meet our growth expectations in the first quarter, and it probably was a combination from a little bit from all of it. Water is a pretty flat at the moment. We don't see a lot of growth opportunities, but we don't see any retraction in the water business. We still have a number of projects we're chasing, and we still see that as being flat. Where the growth is going to be from this point forward is certainly the oil and gas side, is the environmental services, the two-thirds of the business, and half of that is focused on oil and gas.

That's where we see the biggest upside opportunity right now. We just lagged in the first quarter because a lot of our work we do is field work, a lot of it is collecting data in the field, and did seem like everywhere in North America had a lot of inclement weather in the first quarter, late winter, and that just really constrained our field services work, which resulted in that sector being a little slower. We certainly see it picking up from this point forward and we're still predicting 2% to 3% in that practice area overall by the end of the year.

That's really helpful. Thank you very much.

Thanks, Paul.

Thank you. The next question comes from Carolyn Dennis from Dundee Capital Markets. Please go ahead.

Good afternoon.

Hi, Caroline.

Just to follow on the organic growth theme. The 2% to 3% you said was off gross revenue, and this quarter particularly, you had negative organic growth due to the, I guess, less sub-consultants. Is that a trend we're going to see through the year, or was that something that was specific to Q1?

We see it being more specific to Q1. Again, a lot of the field work that we do also has associated sub-consultants with it. So once we get rolling in the field again, which we are right now, we'll probably see the same similar split between gross and net revenue going forward.

Okay. So we still then will -- we will still see perhaps a pressure on the gross revenue growth, then?

No, we see that coming back. When I said that we'll see it go back to more normal levels --

okay, sorry. Yes, okay.

Rather than what it was in the first quarter. It's split between gross and net, we'll probably go back to more historical.

Okay. Sorry, I misunderstood. Just in the quarter on the net revenue, I apologize if you've given this, were you up in all segments organically?

Organically, no, not in all segments. There was still some that were slightly down. But the good point, good news is, organically overall for Stantec, we are up 2.7%, around CAD8 million, so -- on a net revenue basis.

And which segments were down net revenue?

Very slightly down in environment.

Okay. And then my second question, just on the staff count, I didn't see that anywhere. Is there -- have you added or have you trimmed a little bit in some areas?

It was essentially flat between the end of the year and quarter one, it's essentially flat but sort of represents what the revenue was at too. But it was essentially flat in the quarter.

Okay. That's great, thanks. I'll get back in the queue.

Thanks.

Thank you. The next question comes from Sara O'Brien from RBC Capital Markets. Please go ahead.

Hi, guys.

Hi, Sara.

Can you talk a little bit about -- you got off to a slow start in the US for organic growth. What happens with utilization rates as you wait for some of that to come back? It sounds like in environment, oil and gas will kick back in, but in the building segment, et cetera, do you expect that to be kind of a bit of a drag on margin, or do you adjust for sort of the new reality there?

No, we've been adjusting to the new reality there. So we have been. The last caller just asked about employee numbers. They didn't go up, but they did go up and down in various practices, and certainly in the buildings area we've had to make some adjustments. But we knew that. We realized that was part of the integration of Anshen and Allen, and Burt Hill.

It was part of the strategy that we knew when we combined those companies with what we had that there was going to be some rationalization, and we also realized a relatively flat market was going to have to deal with that. No, you don't wait around too long and let that erode your gross margin, and we have dealt with that in the first quarter.

Okay, great. If we look historically, you've pretty much always achieved kind of a 14.5%-ish EBITDA margin. I know you give ranges, but the range is huge on the EBITDA if you put them together. I just wonder, are you still comfortable, given that you've taken care of those rationalizations, that you can achieve that kind of a margin? Or is there anything that would lead you to expect it to be lower this year?

I don't know that we saw any great anomalies in our EBITDA margin in the first quarter that would lead us to believe that we'd see anything different. Like there wasn't any one-time pick-ups or additional costs that were of any materiality. I'm not sure that we're going to see -- we had a pretty solid gross margin, which obviously leads to that EBITDA margin. So I don't see anything that would stick out there.

Okay, great. And then just to sneak in a last one, as well. Given the slow start in the US for organic growth, what's your confidence level with looking at other chunky acquisitions there? Is it a case where the top line is no longer assured so you kind of step back, or do you still see good opportunities at the right price for your Company?

No, we still see the acquisition pipeline pretty full. Certainly, there's still a lot of cautiousness in the US, so you really have to focus on the backlog and, again, like last year, you can't really look on the trailing two years as really any indicator. You've really got to get into the backlog and try to verify that. But we still see lots of opportunities. There's some companies that certainly are at a point where they continue to struggle, and a way out of that is being acquired. But we're never really all that focused on that. We like to get strong companies that see an opportunity in front of them and to join a larger Company we fulfill that. We still see lots of opportunity there.

Great, thank you.

Thanks.

Thank you. The next question comes from Ben Cherniavsky from Raymond James. Please go ahead.

Good afternoon, guys.

Hi, Ben.

Correct me if I'm wrong, but I thought that maybe around this time last year, when you were going through your outlooks by segment, that environment was one of the areas where you expected it to be up. Unless I've got that mistaken. Was this a bit of a surprise, and what's changed here in that segment of the market to see it drop by as much as it did in the quarter?

No, you're right, Ben. We last year were somewhat disappointed with the performance of the environment group, but there was a lot of indicators out there that I think we pointed to, just the clients having difficulties, BP's spill, Enbridge's spill. This year we felt that they had recovered from all that, our clients were moving forward, oil was at a good price, that which really drives the activity in the oil and gas sector.

So all the indicators were pointing to having a pretty good quarter one. It just didn't happen, mainly because our clients continued to be somewhat cautious, even with CAD100-barrel oil. We're seeing our oil and gas clients really sluggishly push their projects forward. That, combined with the fact that we couldn't get out and do a lot of our spring work in environmental services, just caused more of a timing delay than anything.

We're still very confident that we have a huge backlog there. We're comfortable with our clients' capital plan. We have -- we're hiring people right now to start our spring work. Usually we're hiring them in March for April, now we were hiring them in April for May. It just seems like we're about a month behind. We do anticipate that we're still going to be able to get back on track, even with a slight retraction in Q1, to get back on track by the end of the year to still get our 2% to 3%.

That's helpful. Thank you. One more, if I may. You've often talked in the past about your strategy in the US for gaining market share, or winning more jobs, in the sense that the US market may be down but you're such a small fraction of that market that you could still grow by executing well. How has that strategy evolved for you, and maybe you could shed some light on exactly what you're trying to do differently, or how you're going about trying to gain share and win more projects than the other guy in the US?

Good question. That is clearly our strategy. To get those bigger projects with the bigger clients, you really have to show them that A, you have the resources, you have the ability of delivering staff on those projects. What we're starting to see is a lot of clients in the US know of the big players, the big five or six, and the big five or six are always invited on those larger projects. The goal has been getting in front of those clients and explaining to them who Stantec is, explaining to them where we have offices, what capabilities we have, and we're really trying to leverage that through the account management strategy.

Where we already have a relationship with clients like Chevron, is always the one I throw up there, or even like Kinder Morgan, where we do work for them in the environmental services area, but they're not aware of the fact that we can also do engineering work for them, and do other services, and they also don't realize that we have 5,000 staff in the United States. So it's a real education program of explaining to the trusted clients we do have that we can do more work for them, and we are gaining momentum.

That's not easy, though. It's not something you do overnight, because those clients already have service providers that they're comfortable with, and to win that work you're going to have to continue to explain to them what we do, explain to them to give us an opportunity to bid on a larger project. And we're getting those opportunities from those clients now. And so it's just a matter of executing on that strategy. But clearly, that's strategy. It's really almost an education service to our clients in the US to explain to them who we are and what we do.

But you still have to, once you've shown you've got the resources, you still have to win them over from their current relationships and providers. What's the pitch on Stantec for how you go about doing that?

The pitch is A, we're a new player on the block. B, we have a trusted relationship with them already. They like what we do in the environmental side. So you really try to leverage that to have -- I was down meeting Chevron just two weeks ago in California, and that was the point is, they loved what we were doing in one area, so we tried to put the two presidents together of the two groups and say okay, give us a chance in the other area.

I think they're always looking for new suppliers, they're always looking for an edge, they're always looking for something better, and if they feel Stantec can offer that, they're going to give us a chance. Then of course you go, you've got to deliver. I think most of our clients are always willing to, if you have a good relationship with them, are always willing to you a shot.

That's a good answer. Thank you.

Thank you. The next question comes from John Rogers from D.A. Davidson. Please go ahead.

Hi. Good morning.

Hi, John.

Or good afternoon. Sorry.

No problem.

Couple of things. First of all, in terms of your backlog growth in the quarter, how much of that was organic versus acquired?

A good chunk of it was acquired.

Okay.

Organic growth in the period was 2% to 3% overall, but I would say the backlog growth, a good chunk of that, the majority of that, was certainly acquisition growth -- acquisition growth in backlog.

But is backlog growing faster than revenue at this point, organically?

Right now it's growing about the same.

Okay.

Our backlog has been growing around the same as our revenue growth. Now, that's on an overall consolidated basis. We have some of our practice areas where it's growing faster --

Yes

And I'd say those right now are environment and industrial, and some growing slower. But overall, it's matching pretty well.

Okay. And I assume margins are relatively stable there?

Yes, they always have been. Margins always bounce around 1% or 2%, but they've been pretty stable. It's usually just the mix of projects from quarter to quarter that adjusts that.

Okay. Secondly, in terms of your administrative costs, you mentioned in the financial statements that there was some costs in there relative to the acquisitions and the integration, and sounds like some you had to go back on a little bit. Were those significant costs this quarter? And kind of how do they play out this year?

John, I'll take that one. The acquisition cost is really a change in the accounting rules from how we used to record acquisition costs. A lot of those used to be capitalized as part of your acquisition. Now under IFRS it's more aligned with US GAAP. You have to expense those costs as they are incurred. I believe in the quarter our acquisition costs were, in the latter part of 2010, were about CAD1.8 million, I think something in that range.

So that's what impacted our Q4 2010, and that's really just a re-statement moving to IFRS. It wasn't that there was an error or anything. That's the way you have to record them. Going forward in Q1, I don't think we had too many acquisition costs. It was less than CAD100,000 I think in the quarter. Most of the costs we incur for acquisitions are internal, so those get expensed anyway. It's when you deal with external legal counsel or tax advice, or things like that, or some due diligence, where we will incur those costs.

The internal costs and the costs of integrating these acquisitions, are they significant in the quarter?

Well, no more so than any other quarter. We've always expensed those costs in any event, John.

Right. I just meant, given the level of acquisition activity had picked up recently, and contributed more in terms of revenue.

Yes, a lot of our acquisition integration activity occurred in the fourth quarter. We were integrating Burt Hill, Anshen and Allen and QuadraTec in the first quarter.

Okay.

Those are all moving along very well.

Okay, all right. Finally Bob, you talked a little bit about the oil sands activity, or related around it. It sounds like you're saying we should see pick-up in the second half of this year. Are we anywhere close to any sort of situation where capacity's getting constrained for the types of services you provide? In other words, is there any real pricing power in the market?

I wouldn't say we're there yet, from a perspective of saturation in the market where there's no capacity left. If they continue -- I think the oil has sort of bounced around that CAD110 and it's gone down under CAD100 again, and that's good because it just keeps everybody in -- I like the activity level right now. It's reasonable. We can comfortably bid on projects and it's okay.

Once it gets a little busier, sometimes you lose the opportunity on good jobs because you're too busy to work on others. So right now, no. We're at a comfortable level in the oil and gas industry here in Alberta, and we see that probably the only hot area that we see that's going to start stressing capacity would maybe be in the US East, in the Marcellus area, a lot of activity going on there.

Okay. All right, thanks.

Thanks.

Thank you. The next question comes from Tahira Afzel from KeyBanc Capital. Please go ahead.

Hi, guys, this is [Sadra Arns] for Tahira. Couple questions. First, can you talk a little bit about your Caltech Group acquisition, and just the pricing that was paid, what you guys are seeing out there, how you see that integrating into your industrial group?

I'll let Dan talk about the pricing if he wants, and I'll talk about the integration into the group.

First of all, that acquisition hasn't closed. We just announced the letter of intent. The pricing is pretty much in the range that we normally price these acquisitions. This being an industrial firm in the oil and gas sector in Alberta, pricing's at a little higher of the range but that's about all I can say at this point. The deal hasn't finalized, so I can't give you a whole lot more information.

From a point of view of integrating into our industrial group, having an office in Calgary in the oil and gas business in Canada is like having an office in Houston, in Texas. You have to be there. This was a long-term strategy of trying to find the right firm, and very happy that we've signed the letter of intent with Caltech. They're a very young group. They're very enthusiastic. They're very good client base.

They really had trouble going from that mid-level type of company to the larger project and really needed that bigger platform to be able to do it. So they are a company that's got some great growth opportunities. They've got some good clients. They deal in some of the unconventional oil side, in the oil sands doing some SAGD. Certainly it was very strategic for us to get into that market. It is a developing market right now, and so to get in with a company like Caltech, we're quite excited.

Very nice. With your transportation practice area, you had your fourth straight quarter there of organic growth on the gross revenue side. Are you -- what are you seeing with the US market with SAFETEA-LU being extended, and fiscal year '11 budget being solved? Have you seen any more bidding proposals out there, also with state and local budgets coming back a little bit, with tax revenues coming back?

We haven't seen an increase, but we also haven't seen a decrease. I think it's sort of unfolding the way we thought. I don't think there's been really any surprises. SAFETEA-LU, I think we realized that it'd just be extended. Whether they actually get a new bill approved, who knows? So there's still a lot of uncertainty there. I don't see that changing quickly.

The state and local budgets, weren't going to affect probably that much work this year. Those projects have to be planned and executed. It's evolving the way we thought, which is not a huge change from last year. The fact is, we're still growing slightly organically in that practice area. And it shows that I think we've got some good, solid local contacts in that business in the US.

Sounds great. Thank you very much.

Great. Thank you.

Thank you. The next question comes from Chris Blake from Stonecap Securities. Please go ahead.

Good afternoon, gentlemen.

Hi, Chris.

Just want to have a quick clarification on the backlog. With respect to -- quarter-over-quarter was up -- I think I calculated about 8%. Now I know you mentioned organically, it was in line with your revenue growth. Was that -- what you were referring to, was that with respect to year-over-year backlog growth or sequentially?

I think it was more year-over-year in the backlog growth. A lot of that came from acquisitions, Chris.

Right. So quarter-over-quarter, there was maybe less than 1% growth in the employee base, but the backlog growth 8%, so I was trying to get a sense of which practice areas were you seeing that growth. Was that a matter of the environmental delays, weather-related delays that's building that backlog that's not getting booked into the revenues in Q1, but you anticipate that coming back into the second half? Can I read that into that?

I think a lot of the backlog growth in the first quarter came from our industrial group, which has grown significantly. Specifically, the mining practice area within the industrial area has been seeing some great growth. So I think most of the backlog there was some project awards that we won in the first quarter.

Very good. Okay, with respect to your acquisitions, I know you mentioned there's some integration-related expenses with Burt Hill and Anshen and Hill. I was just trying to get a sense of if you could maybe provide a little more color on the breakdown of how much that impacted the quarter, with respect to -- how long does that conversion take, and training of employees, and maybe in terms of number of hours, that maybe weren't billable hours as a result of the transition.

Let maybe Dan try to take a stab at it. Our integration is a very staged, very planned strategy, and a strategy that we sort of adapt to every individual company, really depending on what their needs are, what their business is, what -- how busy they are. So it's really hard to try and break it down to a number of hours of training that we do, because like I said, some cases we'll do certain aspects of training immediately, then postpone others for a month, and try to stage it so we don't really disrupt their business.

The real goal is keeping everyone chargeable and getting everybody trained at the same period of time. It's a tough balance sometimes, but I wouldn't say that the integration costs have a huge impact on us quarter-over-quarter because we really try to stage that out over a number of different weeks and a number of different quarters over the year. Our goal is to have a company fully integrated over the year. Fully integrated means that they're on an enterprise system, their billing, all their information, is within the system. Even beyond that, there is still some integration that continues on certain aspects of training.

So it is not a -- it's an ongoing process that we try to plan so it really doesn't have a huge impact on our operations and our performance.

As Bob says, it's not a cookie cutter approach. We can't just treat everyone the same in terms of an integration. It really is a high-touch, hands-on approach on how we manage through each of these. It's not just the business systems. It's the clients. It's the branding, the marketing systems, how we brand our image to our clients, how we get the information out to our clients, and so on. It can take anywhere from, Bob said, one or two months to a year to integrate these firms.

Okay. Very good. Just lastly, with respect to the Caltech Group, when do you anticipate, for modeling purposes, that acquisition to close?

We anticipate closing that by the end of the month, the end of May.

Okay, very good. Thanks, guys.

Thanks, Chris.

Thank you. The next question comes from Sarah Hughes from Cormark Securities. Please go ahead.

Hi, just a question on your gross margins. In your MD&A you segmented your gross margins by region, which I believe is new. It shows Canada 57%, US, 53%. Just wondering historically is this a range they've been at, these two regions, going back?

This is the first time that we've actually disclosed information on a regional basis for gross margins. But based on what we see, I would assume that is fairly historical for us. It really is as a result of the mix of businesses, rather than more of a country issue. In the US, a lot of our environmental remediation business is almost exclusively done in the United States. That's a fairly big business for us. It's done through master service agreements and, therefore, results in lower gross margins.

At the same point in time, you have lower marketing costs associated with those MSAs with the larger clients, but you do have a local gross margin. As well in the United States, our transportation work that we do in the United States falls under FAR accounting requirements, which is basically an audited overhead rate. So again, that results in lower gross margins. There certainly is a slightly higher cost, labor cost, in the United States over Canada, that also impacts that as well. So health and medical.

But we see as we continue to grow in the US, we'll be able to leverage our size there and get some economies in scale to deal with any further impact. Really, as we grow in the US, it depends what businesses we grow into. We already have a pretty strong remediation practice, so I don't see us getting too much stronger in that. As we grow into other practices and other businesses, they probably have a higher gross margin which will help that. Certainly the impact of the gross margin from one side of the border to the other is more complicated than just the country you work in.

So if you look at the EBITDA margins, taking into account the lower G&A, is it fairly similar, Canada to the US, excluding the environmental side?

There's still that labor cost item that's in there right now, so the labor cost, the higher medical is -- still translates down to the bottom line. That's a couple percentage points. Again, that's what we hopefully will leverage as we get larger in the States, but right now that does translate somewhat to the bottom line.

That's probably the primary cost, medical cost, that creates a difference between Canada and the US. Everything else in our business, we always work towards the gold standard in managing our business, and the border isn't the differential.

That was it from me. Thank you.

Thanks.

Thank you. The next question comes from Anthony Zicha from Scotia Capital. Please go ahead.

Hi, good afternoon, gentlemen.

Hi, Anthony.

Bob, considering that you're increasing bids on P3s, and the jobs are becoming much more complex than they were, what kind of impact could we anticipate going forward on profitability?

Well, certainly we're not going to sacrifice profitability to win P3s. You're right, P3s are getting a lot more complex, a lot more competitive, but the same instance, there's not -- the firms you're bidding against are very similar size to Stantec, very similar business model. So you usually don't lose on a rate basis, or price. P3s are -- it's, from our perspective, it's more important to ensure that we're giving our team members the right information to ensure that translates into lower capital costs and lower operation and maintenance costs.

Our actual fees on those P3s is really relatively insignificant on the overall price of the P3. So we find good opportunity still to bid on P3s, because if we can help the team win, again, our fees are pretty insignificant. We still see that as a very good opportunity for us. If you can have a proven track record of ensuring your team is winning these P3s because you're providing them solutions that result in lower capital costs, and lower operation and maintenance costs, those have way more impact on the success of a P3 than a lower consulting cost.

So we don't see a lot of our partners really trying to shave down the cost. They're really pushing us to give them good information so we can result in lower capital costs. We still see P3s as a great opportunity for us.

Okay, great. My second question relates to the competitive landscape in Canada and the US. Can you kind of give us an idea, compare/contrast both markets, and what has been the trend on pricing, let's say year-over-year, has it been relatively stable or has it gone up?

The competitive market in Canada and the US, I would say, prior to maybe two years ago, it was certainly much more competitive in the US than it was in Canada. Right now, that's changed a little bit. A lot of the slow economy in the US has sort of pushed some of our friends to the south across the border to Canada, and they're very interested in the Canadian market. We're seeing the competitive landscape now on both sides of the border is probably about the same.

From a point of view of pricing, competition always drives you to be efficient in your pricing, but we really haven't seen it be trending up or down. Whenever things are tough last year, it might have been slightly a higher competitive landscape, which drove a little bit of pricing. But at the end of the day, you've still got to get your gross margin. You've still got to come out of there with a profit. It really comes down to more of just being more efficient for the way you bid the job and execute the job. That really will win you or lose you the project, not the actual pricing, but how you intend to execute it.

Right. Okay, well thank you.

Okay, thanks.

Thank you. The next question comes from Jayson Moss from Salman Partners. Please go ahead.

Hi, guys.

Hi, Jason.

Just kind of building on that last question, what practice groups are you seeing competition in still, and margin compression?

Well, first you see competition in every practice area, so you have competitors, good competitors, everywhere. I'd say the margin compression, and as I like to say, we don't like to bid projects at a lower margin. But where you're getting the competition, where you have to figure out how you have to win the job, it's certainly still in the environmental area. There's lots of companies that have good, strong environmental practices, and have a lot of capabilities. So very competitive in that area.

But again, we don't like to sacrifice a margin to win a job. What you really are trying to do is keep your gross margins and your operating income margins at the levels, and find a way of winning the job by just bidding with lower hours, reviewing the scope, and ensuring you understand the deliverable of the project so you can just be more efficient in the way you deliver it, at your normal gross margin. That's been Stantec's models for years. We understand what it takes to execute the job, and that's what's going to win you the job.

And then just a point of clarification here, I think on the environmental side you said you were looking for 2% to 3% organic growth. Is that going to be a really strong pick-up in the back half of the year? Q2, are you going to see some pressure on that environmental remediation side? And then just kind of pick up from there, and just some color around that would be great.

Certainly with the fact that the environment business had a slight retraction in Q1, and we're still predicting a 2% to 3% at the end of the year. They certainly will have to have a much stronger second half of the year than the first half. In the second quarter we're starting to see it pick up. Certainly we're starting to see our spring work, and in our environmental remediation practice we have some good, strong, master service agreements with clients.

I had an opportunity of now visiting three out of them, the 7-Eleven, Chevron, and BP. All of them have a very strong program for 2011, so that's good for us. So we certainly are still optimistic that that practice area's going to be able to rebound to still achieve that 2% to 3%.

Okay, great. Thanks a lot, guys.

Thank you. The next question comes from Pierre Lacroix from Desjardins Securities. Please go ahead.

Thanks, my question has been answered. Thank you.

Thanks, Pierre.

Thank you. You have a follow-up question from Paul Lechem from CIBC. Please go ahead.

Thanks. When I look back at last year, around this time you had very small and few acquisitions, and then second half of the year came on pretty strong. Can you give us any sense of timing of upcoming acquisitions through the balance of this year? I don't know if it's even possible to answer this. But I mean what is -- you talked about a full pipeline. Can you give us any more thoughts about what might be coming?

That is a tough question to answer, Paul. You can't force an acquisition. You can't create them. You've just got to work through them. All I can tell you is we have at this point in time, we probably have as many or more discussions under way than we had this time last year. So whether those discussions actually transpire into an actual acquisition, who knows? We'd love to be able to do that, but there are two parties involved in it.

And we do have to ensure it's accretive and fits in. So lots of discussions, various degrees of the evolution of those discussions, where some of them are just the first meeting, some of them are into the third and fourth meetings. At this point, it looks like it's going to be a busy year. But you never -- you can't -- again, you can't force them.

Fair enough. Thank you.

Thanks, Paul.

Thank you. There are no further questions in queue at this moment. Please proceed.

Okay, thank you. If there is no more questions, I'd like to thank you all for joining us today and I look forward to speaking with you again in the near future. Thanks, everybody.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your lines, and have a great day.