Stantec Inc

Good day, everyone. Welcome to Stantec's second quarter 2020 earnings results 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 that if you have dialed in while viewing the webcast, you should mute your computer as there is a 20-second delay between the call and the webcast. All information provided during this conference call is subject to the forward-looking statement qualification set out on slide two, detailed in Stantec's management discussion and analysis, and incorporated in full for the purposes of today's call. Dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded. and with that, I'm pleased to turn the call over to Mr. Gordon Johnston. Please go ahead.

Good morning and thank you for joining us. I'll begin our call today with a review of our second quarter performance. Charissa will then delve deeper into the financial results before I return to provide an update to our outlook for the remainder of 2020. We delivered a solid second quarter with net revenues in line with the outlook we provided during our Q1 call. Our results continue to demonstrate the resilience of our business model, which is bolstered by geographic and business line diversification. Effectively managing our business and controlling costs has allowed us to deliver a 4% year-over-year increase in Q2 adjusted EPS, even though the pandemic has had an unfavorable impact on our Q2 gross margin. Productivity, as measured by utilization, has remained strong and is above typical seasonal levels. Our record backlog of 4.7 billion at the end of Q1 held stable through Q2 and continues to represent approximately 12 months of work. At the end of our presentation today, I'll review how the four value creators of people, excellence, innovation and growth that we presented in our 2020 strategic plan continue to underpin our activities through the pandemic to continue to enhance shareholder value. We delivered net revenues of $961 million in the second quarter, which is comparable to the same period last year. Net revenues grew organically by 2.3% in the US, but retracted in our Canadian and global geographies, resulting in an overall organic contraction of 2.1% in Q2. In addition to our geographic diversity, the diversity of our business lines bolstered our resilience in the second quarter. Thank you. Thank you. The pivot to these sectors was not sufficient to overcome the negative impact to the commercial, airport, and hospitality sectors, and the Q2 slowdown in buildings was a bit deeper than expected. In water, we saw healthy activity in the United States, the United Kingdom, and Australia. This was the result of significant project awards in the US, the N7 framework awards we've received in the UK, and a multi-year framework award in Australia. and we've also just won the contract for the Irish Water Engineering Design Services seven-year framework. This is our first major win in Ireland which will allow us to establish a long-term presence and provide a springboard for our other business lines to grow in the region. The retraction in environmental services is mostly related to Canada where field work was impacted by project slowdowns related to COVID-19. Finally, Energen Resources generated solid organic growth as a result of increased midstream oil and gas work in the second quarter. Our work providing project management services on the Transvaalton expansion project continued in the second quarter under a memorandum of understanding. Subsequent to the quarter, we signed a contract to continue to provide these services for the duration of the project. Last quarter, we spent some time reviewing our expectations for how we believe our business units might be impacted by the pandemic. We continue to believe that these expectations remain valid in the longer term. In the second quarter, our US operations achieved net revenue organic growth of 2.3%. This was driven by project opportunities in water, mining, power, and environmental services, which were partially offset by retraction in buildings and community development. Gross margin as a percentage of net revenue decreased 2.3% in the quarter to 52.9%. The decrease as a percentage of net revenue was due to inefficiencies that arose due to pandemic-related disruptions, as well as a shift in our project mix, Thank you very much. This was partially offset by growth in our oil and gas and transportation businesses due to the Trans Mountain Expansion Pipeline project and several large light rail transit projects in Evanston, Montreal and the Greater Toronto Area. Growth margins decreased 2.7% as a percentage of net revenue in the quarter to 48.5%. In addition to pandemic-related disruptions, the decrease as a percentage of net revenue was also driven by an increase in volume of lower-margin work related to the midstream oil and gas sector. This midstream work contributed to a margin decrease in energy and resources and environmental services. However, despite the lower margin of this work, it drives high utilization and a similar EBITDA contribution as our other business lines. Global net revenue retracted 7.9% of the quarter and was consistent with reduced work volumes during the pandemic, partly offset by increased project opportunities in some markets. Project slowdowns were most pronounced in our UK and Australia buildings and European environmental services business. Pandemic related mine closures in Latin America and large project wind downs in power and dams further contributed to revenue retraction. Partly offsetting this, though, was the ramp-up of transportation projects in New Zealand and continued strong performance in our UK infrastructure and water business. We also saw a higher volume of work in our Australian water business with several large municipal panel contracts gaining traction in Q2. And just last week, we were named Water Industry Consultant of the Year in the UK. Gross margin as a percentage of net revenue decreased 4.8% in the quarter to 51.7%. Margins were impacted by the pandemic, project mix, some ongoing pricing pressures in the UK and Europe, and a couple of localized challenges on some projects. I'll now turn the call over to Theresa for a review of financial performance.

Thank you, Gordon, and good morning, everyone. Adjusted net income from continuing operations increased 3% to $58 million in the second quarter, and adjusted earnings per share increased 4% to $0.52 per share. This was largely due to an 8% decrease in administrative and marketing expenses and a 29% reduction in net interest expense. Growth margins for the quarter decreased 5% to $490 million. As a percentage of net revenue, growth margin was 51.5%. The pandemic has created a degree of disruption in our operations and our clients' operations, causing some inefficiencies in project execution. We also saw higher than anticipated growth in revenue from our lower margin midstream oil and gas projects. As demonstrated by our solid adjusted EBITDA margin of 15%, We are managing the business carefully and have taken steps to mitigate these margin impacts on the cost side. Our balance sheet remains strong. At June 30th, net debt to adjusted EBITDA was at the bottom of our targeted range at 1.0 times. We remain in full compliance with all financial covenants. Day sales outstanding was 82 days at quarter end compared to our target of 90 days. DSO decreased four days since Q1 as a result of our ongoing focus on invoicing and collection activities, and we've not seen any notable impact due to the pandemic. Given our strong mix of public sector clients and the 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 flow for the quarter improved by 83% compared to Q219. Operating cash flows from continuing operations were 251 million and 89 million improvement compared to Q219. The improvement was driven by an increase in cash receipts from clients, lower payments to suppliers, and the benefit of various pandemic tax deferral programs, which included the deferral of 35 million in tax payments that are now due at various dates before the end of Q1 2021. Cash flows used in investing activities were $11 million. A $7 million decrease compared with Q2 2019 may be driven by reduced capital expenditures. We used $100 million for net financing activities compared with $83 million in Q2 2019. Cash used in financing activities included $62 million in repayments of drawings on a revolving credit facility and 32 million in payments for lease obligations, partly assessed by 19 million in proceeds from the exercise of stock options. With that, I'll turn the call back to Gord to review our 2020 outlook.