Stantec Inc

and Teresa Jang, Executive Vice President and Chief Financial Officer. Stantec invites those dialing in to view the slide presentation, which is available in the Investor 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 meet 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 is the Stantec management's 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. With that, I'm pleased to turn the call over to Mr. Gore Johnson.

Well, good morning and thank you for joining us. I'll begin our call today with a review of our third quarter performance. Theresa will then delve deeper into the financial results, review our 2020 outlook, and provide our 2021 targets. I'll then return to provide our closing remarks. We delivered another solid quarter in Q3, with net revenues in line with the outlook we provided during our Q2 call. Our business discipline, coupled with the improved operational efficiencies driven by our 2019 reshaping initiative, ongoing staffing management, and controls on discretionary spending, drove a strong 17.3% adjusted EBITDA margin, a 5.1% year-over-year increase in adjusted diluted EPS, and a 5.4% increase in adjusted net income, in spite of net revenue and gross margin retractions. Backlog grew organically in Q3 to a record high of $4.8 billion and our balance sheet continued to strengthen. Subsequent to the quarter, we closed on our $300 million bond offering at very attractive terms. Theresa will discuss this in more detail in her section of the presentation. At the end of the presentation today, I'll review how our four value creators of people, Excellent, innovation and growth continue to underpin our competitive advantage and further enhance shareholder value. Q3 net revenue was consistent with the outlook we provided in our Q2 call. Compared to the same period last year, net revenue for the quarter decreased 3.8% or $36 million to $916 million. Revenue retracted organically 4.7% in the quarter. Year to date, net revenue is holding up very well despite the COVID-19 pandemic, with organic retraction of only 1.0%. Water demonstrated strong year-over-year organic growth in the quarter, with healthy activity continuing in the United States, the United Kingdom, and Australia. As discussed on our last call, this was driven by significant project awards in the U.S., The AMP7 Framework Awards in the UK and the Multi-Year Framework Award in Australia. Looking ahead, we've just started to mobilize for the Irish Water 7-Year Framework and just last week we announced our leadership role in San Diego's multi-billion dollar Pure Water Initiative which will supply sustainable water to the city's 1.4 million residents. Environmental services continues to perform well and slightly ahead of expectations. Essentially all of our environmental services contracted backlog remains in place and is being executed with limited COVID related delays or cancellations. Key projects in LNG facilities and pipelines continue to advance. As well, existing large infrastructure projects in the Northwest Territories, Manitoba and Alberta grew in scope during the quarter. Energy and resources had a strong quarter given the ongoing pandemic. Increased midstream pipeline work in Canada was offset by reduced mining activity in both Canada and our global operations due to pandemic-related shutdowns and deferred industry spending. We're seeing increased opportunities in renewables, particularly in solar. While this market slowed briefly earlier in the year, it's picked up, and we were recently awarded large-scale solar projects in Canada, the US, and Australia. In general, given the critical nature of power generation and transmission infrastructure, the utility market has not slowed. We're seeing strong growth in electrical transmission opportunities, especially in the US, because of resiliency programs, the growth of renewables, and fire threat mitigation. Infrastructure revenues retracted in the quarter, primarily due to several large rail transit projects in the United States which were beginning to wind down. At the same time, the ramp up of some of our other major transportation projects has been a bit slower than normal. We expect our transportation business to be a beneficiary of various infrastructure stimulus programs as they're announced around the globe. and while we have seen concrete stimulus spending commitments in various locations, there will be a timeline between when these programs are announced and when we begin to generate meaningful revenue. That said, our participation in Edmonton's Valley Line West LRT P3 was announced just last week. The commercial, airport and hospitality sectors in our buildings business continue to be impacted by the pandemic. However, we're seeing continued growth in work for e-commerce clients. We've also seen a significant increase in the pursuit of activity in the healthcare sector, and we were recently named as the lead designer of the Preferred Performance Team for the $1.4 billion Footscray Hospital in Melbourne, Australia. Our public sector exposure in buildings remains greater than 50%, which is higher than many of our peers. And we're seeing a trend toward greater exposure to publicly funded projects in our buildings business, which should bolster future resiliency. While Q3 2020 net revenue in the US retracted slightly more than anticipated compared to Q2, we're seeing continued growth in water and strong performance in environmental services. The pandemic has had an unfavorable impact on buildings and has contributed to the slower wrap-up of some major transportation projects. Gross margin as a percentage of net revenue decreased 1.7% in the quarter to 52.9%. This reflects a shift in our project mix, primarily driven by the major projects in our transportation sector. During the quarter, we won a number of new major projects, including the San Diego Pure Water Contract, the Arctic Research Support and Logistics Contract, and the I-93 North York Lightning Project in Pennsylvania. In Canada, Q3 net revenues were slightly ahead of Q2, which was consistent with our outlook. While Canada experienced a 5.3% organic retraction compared with Q3 2019, we're seeing growth in our energy and resources business, largely due to midstream pipeline work, and in our transportation sector. As well, environmental services performance has remained consistent year over year. The impact of slowed economic growth Amplified by the COVID-19 pandemic was more pronounced in buildings and community development. Gross margin decreased 1.8% as a percentage of net revenue in the quarter to 50.4%. This was mainly due to a shift in our project mix, driven largely by the increased volume of lower margin work related to our midstream pipeline and rail transit work. Some of the major contracts we won in the quarter include the design for Canada's fighter jet squadron infrastructure upgrades in both Alberta and Quebec, and a new integrated academic and student housing facility in British Columbia. Net revenues in our global business achieved 5.8% growth over Q2, which was generally in line with our expectations. Year over year, Q3 net revenue grew nominally as favorable foreign exchange rates offset a slight organic retraction. Continued strong performance in our UK and Australian water business. Our work in New Zealand's transportation sector and progressive recovery in core markets in our UK infrastructure business all contributed to a strong showing in our global operations in Q3. The impact of COVID-19 was most pronounced in our UK and Australia buildings and European environmental services business. Our mining business was also affected by pandemic-related short-term mine closures in Peru. Gross margin as a percentage of net revenue decreased 3% in the quarter to 53.5%. Margins were impacted by project mix and some ongoing pricing pressures for our services in the UK, Europe, and Australia. Additionally, localized challenges on certain projects reduced gross margin in our Middle East water and buildings business. During the quarter, we were awarded a number of major contracts in our global operations. As I mentioned earlier, we were selected as a Building Services Engineer for the Plenary Health Consortium, which has been selected as a preferred proponent for the new Footscray Hospital project. And we were also selected by the European Commission to support development of a Continental Generation and Transmission Master Plan to meet Africa's growing power needs. The backlog expanded in Q3 to a record $4.8 billion, which represents approximately 12 months of work. Backlog has grown 12.7% since the end of 2019, of which 10.6% is organic growth. And since Q2, backlog has grown organically by 3.2%. Our book-to-burn ratio for Q3 2020 was 1.1 compared to 1.0 for Q3 2019, and it's greater than 1 across each of our five business operating units. Overall, our sales pipeline remains healthy after the brief dip in activity we saw in Q1. The number of new pursuits in our pipeline has returned to more typical levels, and not surprisingly, we're seeing more opportunities in the public sector than we are in the private sector. I'll turn the call over to Theresa now for a review of our financial performance and our outlook.

Thank you Gordon, good morning everyone. Adjusted net income from continuing operations increased 5% to $70 million in the third quarter, or 7.6% as a percentage of net revenue. Adjusted earnings per share increased 5% to $0.62 per share. This is largely due to a 9% decrease in administrative and marketing expenses and a 33% reduction in net interest expense. Gross margin for the quarter decreased 7% to $479 million. As a percentage of net revenue, gross margin was 52.3%. The pandemic continues to disrupt our and our clients' operations to a degree, causing some inefficiencies in project execution. As demonstrated by our solid adjusted EBITDA margin of 17.3%, We're managing the business carefully and we've taken steps to mitigate COVID-19's impact on organic growth and gross margins. Our balance sheet remains strong. At September 30th, net debt to adjusted EBITDA was below our targeted range at 0.8 times. Day sales outstanding with 82 days at quarter end compared with our target of 90 days. PSO has remained unchanged since Q2 and we've not seen any notable impacts due to the pandemic. Moving on to liquidity and capital allocations, we generated $124 million in free cash flow for the quarter, a 31% increase compared with Q3 2019. Sequentially, our free cash flow has improved every quarter for the past four quarters on a trailing 12-month basis. On October 8, we closed our inaugural bond offering, issuing $300 million in senior notes for the seven-year term, bearing interest at 2.048%. The notes were rated triple B with a stable trend by DBRS. And we used the proceeds to pay down our revolving credit facility, which means that our $800 million facility is currently largely undrawn, giving a significant dry pattern to weather the pandemic and to fund growth through acquisition. As a result of the uncertainty created by the pandemic, we withdrew our 2020 guidance in May. We remain committed to our strategic plan, launched in December 2019. However, destruction caused by the COVID-19 pandemic will likely delay the achievement of our targets within the original timeframe. At this time, we're unable to set a revised timeline with a high degree of confidence. Today, we're reiterating our outlook for 2020 as set out in August. We're also providing our targets for 2021. These targets assume a continued gradual global recovery but may not be valid to our key geographies experience a severe worsening of the pandemic. In terms of our revenue expectations in the US, we expect the step down we saw from Q2 to Q3 to continue into the fourth quarter due to the effect of project slowdowns combined with the typical downturn in activity related to the onset of colder weather and seasonal holidays. For the full year, we expect US net revenues to be comparable to, although slightly below, 2019 in native currency. We expect the same seasonal dynamics to be at play in Canada, which will result in Q4 2020 net revenues retracting relative to Q3. Given the weak outlook for Canada before the pandemic, we expect a nominal retraction in revenue for the full year compared with last year. In global, we expect that Q4 2020 net revenues will be down slightly relative to Q3. Our UK buildings practice appears to be more impacted by pandemic-related headwinds than anticipated. However, we expect strong performance from our water business in the UK and Australia and our transportation sector in New Zealand, which has largely offset the impact of project slowdowns in the private sector for our other businesses. We expect this to result in 2020 revenues being comparable to although slightly below 2019. Taken together, we expect 2020 net revenues that are comparable to although slightly below 2019. Adjusted net income and adjusted EPS are expected to be comparable to 2019 as a result of lower admin and marketing costs and lower interest costs. As noted last quarter, we expect to achieve roughly 55% of our 2020 earnings to be concentrated in Q2 and Q3, with 45% in Q1 and Q4. Our balance sheet is strong, and we continue to have excellent liquidity. Our capital allocation priorities have not changed. Our M&A activity has been reengaged, and we're committed to returning capital to our shareholders through the payment of our dividends, and we'll continue to repurchase shares We anticipate muted net revenue growth in the U.S. in the low single digits. While we believe we're well positioned to benefit from stimulus spending, we haven't yet incorporated any potential upside for this in our revenue expectations due to the uncertainty around the timing of such legislation being passed. I should also note that our outlook for 2021 assumes a U.S. to Canada exchange rate of 0.76, so a weaker U.S. dollar than the average we saw in 2020. Organic growth in Canada is expected to be in the mid single digits, driven by work in the midstream pipeline space where activity is anticipated to be at peak levels in 2021. Excluding this activity, organic growth in Canada is expected to be in the low single digits. Global organic growth is also expected to be in the mid single digits benefiting from strong performance in the regulated water market and with stimulus funds beginning to flow. and while we've re-engaged our M&A activity, we have not incorporated any acquisitions into our 2021 outlook, as it's difficult to predict the cadence of when a particular transaction may close. For 2021, we're targeting adjusted EBITDA to be in the range of 14.5 to 15.5%. This range is the result of our expectation that gross margins will hold steady relative to 2020, while admitted marketing costs normalize. We anticipate gross margin to be somewhere in the range of 52 to 53.5%, which reflects our expectation that the pandemic will continue to impact productivity both within our operations and that of our clients, and an anticipated meaningful increase in the cost of employee group benefits. We also expect 2021 gross margin to be impacted by an increased volume of lower margin work on our large midstream pipeline project, and on several of our lower margin multi-billion dollar transportation projects, which are nearing completion. Meanwhile, admin and marketing costs will likely return to the typical range of 37 to 39% of debt revenue. This range reflects a more normalized level of discretionary spending relative to 2020, but not a return to pre-pandemic levels. We do, however, anticipate an increase in non-discretionary costs, including insurance, and employee group benefits associated with indirect labor. As well, we're increasing our investments to drive innovation and in IT systems to support our growing U.S. federal government practice. We expect adjusted net income to be equal to or greater than 6% of net revenue as we benefit from lower interest expense and depreciation and amortization. Return on invested capital is targeted to be equal to or greater than 9.0%. and we expect to generate 40% of our earnings in Q1 and Q4 and 60% in Q2 and Q3. We continue to advance our strategic initiative to optimize occupancy costs beyond those locations identified to date, which could result in a recording of lease asset impairments, non-cash charges that reflect the change in our plans to utilize space that is currently under lease. with the long-term benefit of reduced occupancy costs and increased earnings and cash flows. As our analysis is ongoing, our 2021 targets do not yet include the potential benefits from further optimization. And again, I note our targets do not include any assumed acquisitions, given the unpredictable nature of the size and timing of such acquisitions. Finally, our continued prudent management of leverage will keep our net debt to adjusted EBITDA within or below 1.0 to 2.0 times, and we're committed to maintaining our BBB credit rating. With that, I'll turn the call back to Gord for his concluding remarks.