Stantec Inc

Welcome to Stantec's first quarter 2020 earnings results conference call. Leading the call today are Gord Johnston, President and Chief Executive Officer, and Teresa Jang, Executive Vice President and Chief Financial Officer. Today's call is a webcast, and Stantec invites those dialing in to view the slide presentation, which is available in the investor section at stantec.com. All information provided during this conference call is subject to forward-looking statement qualification set out on slide two, detailed in Stantec's management's discussion and analysis, and incorporated in full for the purpose of today's call. Dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded. With that, I'm pleased to turn the call over to Mr. Gore Johnston.

Good morning, and thank you for joining us. I'll begin our call today with a review of our response to COVID-19 to date and then provide an overview of our first quarter performance. Teresa will then delve deeper into the financial results. Following the presentation of our first quarter results, I'll walk through each of our business units to discuss near-term drivers and potential impacts due to the pandemic. Teresa will then provide an update to our outlook before I return with closing remarks. Since the beginning of the COVID-19 outbreak, our highest priority has been to keep our people, our families, our clients, and our communities safe. We modeled our response based on our four values, which are shown across the top of the slide. Our first value is we put people first. To protect our people and as part of our culture of safety, CENTIC assembled a pandemic committee more than a decade ago. This group of operational, safety and public health experts monitored the outbreak and we mobilized our response plan before the World Health Organization officially declared the pandemic. Secondly, we are better together. We quickly transitioned our global workforce to work from home. Our investments in IT and business continuity systems have allowed our people to continue to work together seamlessly to support one another and our clients. Our third value is we do what is right. which means we've provided our employees with flexible work arrangements and we have proactively engaged with our clients to provide services to meet their evolving needs. We've also taken steps to protect our balance sheet by significantly reducing discretionary spending. And our final value is we are driven to achieve. We continue to build long-term client relationships by supporting them through the crisis with innovative solutions and service offerings to meet their needs in responding to COVID-19. Our values have allowed us to respond rapidly to protect our people, to serve our clients, and to safeguard shareholder value. Against the backdrop of this disruption, I'm very pleased Antec delivered solid first quarter results that were in line with our pre-pandemic expectations. We drove a 5.7% year-over-year increase in net revenue, led in large part by 4.2% organic growth. Each of our regions and businesses generated organic growth in the quarter with a particularly strong performance from the United States. Acquisitions delivered 1.4% growth, mostly in buildings. We saw strong organic growth across all of our business operating units. Growth was especially strong in energy and resources, environmental services, and water. Energy and resources achieved 10.5% organic growth this quarter, with contributions from every sector. Work increased on several mining projects in North America. We also saw higher activity from the Towns Mountain Pipeline project, the Koysha Hydro project in Ethiopia, and our work on a tissue mill located in Georgia in the United States. Organic growth of 6.3% in environmental services was equally split between Canada and the United States. In Canada, environmental management work for infrastructure projects was up year over year. In the U.S., growth was more evenly split between oil and gas, mining, water, and power transmission. In water, organic growth of 5.7% was the result of several new projects. This includes the San Fernando Groundwater Base Remediation Project, which is a progressive design build to treat contaminated groundwater. 5.7% net revenue organic growth in our U.S. operations was driven by water, buildings, energy and resources, and environmental services. We saw a slight retraction in infrastructure due to some localized challenges on certain community development projects. Gross margin in the U.S. was impacted by a number of projects in our transportation business, transitioning from the higher margin design phase to the lower margin construction administration phase. 1.8% organic growth in Canada was driven by environmental services, energy and resources, and transportation. This was partially offset by a retraction in community development, water, and buildings. Our margins were impacted by increased volume of lower margin work related to the midstream oil and gas sector, which is impacting energy and resources and environmental services. That said, utilization for our midstream sector is amongst the highest in all of our businesses, which combined with minimal marketing spend drives a solid EBITDA contribution. Global's 4% organic growth was driven by the UK infrastructure business, a strong quarter in water, partially offset by project wind downs in power and dams and lower activity in environmental services in Europe. Margins in our global operations were primarily impacted by project mix and some ongoing pricing pressures for our services in the UK and Europe. In our UK water business, AMP7 is now well underway, and we continue to ramp up in the delivery of contracts we secured last year with Yorkshire Water and United Utilities. We're also pleased to report a number of significant AMP7 project wins in the last quarter, securing further AMP7 frameworks for the next five years. The first is with Southern Water, where Santec has been re-selected as strategic solutions partner for the new AMP7 period from 2020 to 2025. Under this contract, Stantec will support Southern Water across all areas of the water and wastewater business, including feasibility studies and outline design, project and program management, and water resource planning and environmental management. In addition, just last week, Stantec was awarded two significant packages of work for AMP7 with Thames Water, the largest water provider in the UK. These include securing positions on the Thames Water Project Management Office Framework and on the Capital Delivery Project Management and Assurance Framework. At the end of the quarter, our contract backlog increased to a record high of $4.7 billion, which represents approximately 12 months of work. This was up 11% from year end, with 5.9% of the increase due to organic growth. I'll now turn the call over to Teresa for a review of our financial performance.

Thank you, Gordon. Good morning, everyone. Adjusted net income from continuing operations increased 8% to $54 million in the first quarter, and adjusted earnings per share increased 9% to $0.49 per share. This was largely due to a 5.7% increase in net revenue and lower administrative and marketing expenses. driven by our cost reduction initiatives. Gross margin for the quarter increased 3.7% to 507 million. As a percentage of net revenue, gross margin was 53%. Admin and marketing costs were 367 million, representing 38.5% of net revenue. The 100 basis point year over year improvement is the result of our drive for operational efficiency and a focused reduction on discretionary spending. Adjusted EBITDA increased 10% to $140 million, representing 14.6% of net revenue, a 50 basis point improvement relative to the same quarter last year. Our balance sheet remains strong. At March 31, net debt to adjusted EBITDA, which typically expands in the first quarter, remained at the low end of our targeted range at 1.3 times. We remain in full compliance with all financial covenants. Day sales outstanding with 86 days at quarter end compared to our target of 90 days. DSO increased by seven days since year end, partly as a result of contract terms that influence the timing of invoicing, as well as slight disruptions in payment processes for some of our clients due to COVID-19. Bear in mind that DSO at year end benefited from the receipt of certain milestone-based payments. We remain focused on invoicing and collection activities, but also anticipate that DSO may increase over the balance of the year. Given our strong mix of public sector clients and high quality of our private sector clients, we do not believe our credit risk has increased meaningfully as a result of the pandemic. Moving on to liquidity and capital allocation, our free cash outflow for the quarter improved by 38 months compared to Q1 19. Operating cash flows for continuing operations, typically an outflow in the first quarter, were $45 million, a $43 million improvement compared to Q1 2019. The improvement was driven by an increase in cash receipts from clients and a decrease in cash paid to suppliers. Cash flows used in investing activities were $21 million, a $78 million decrease compared to Q1 2019 when we funded the Wooden Grave acquisition. Capital expenditures were also lower this quarter compared to Q1-19. We used $24 million for net financing activities compared to cash inflows of $62 million in Q1-19. This quarter, we saw a $65 million net reduction in drawings on our evolving credit facility, a $21 million increase in share repurchases, partly offset by a $20 million increase in proceeds from the exercise of stock options. I have to call back to Gordon now to review our 2020 outlook.