Stantec Inc

Hey everyone, welcome to Stantec's second quarter 2021 earnings results call. Leading the call today are Gord Johnston, President and Chief Executive Officer, 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 Investors section at stantec.com. Today's call is also webcast. Please be advised that if you have dialed in while also 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 qualifications 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 amount 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. Ward-Johnston. Please go ahead, sir.

Good morning, and thank you for joining us. Zantec delivered another solid quarter of operational and financial performance. Through our commitment to executing our strategy through our four value creators, we've delivered considerably higher margins quarter over quarter, leading to second quarter earnings that match a historical record of $0.62 per share. Our Canadian and global markets have rebounded strongly to growth, while the U.S. is off to a slower start to recovery. On a constant currency basis, we grew net revenue by over 2%, which was in line, actually a little better than our expectation we had coming into the quarter. We see clear evidence of momentum building across all of our key markets as we look to the remainder of this year and beyond. We've generated 6% organic backlog growth through the first half of this year. And beyond wins recorded in backlog, we're seeing a surge in award notifications, with well over $1 billion in gross revenue, more of half of which is in the U.S., While these notified awards can take months or longer to filter into our backlog, especially for large multi-year frameworks, their sheer magnitude give us every reason to be confident in our outlook. On the strength of our year-to-date results and positive outlook for the remainder of the year, we've raised our 2021 earnings guidance. Turning now to our results by key geography. The pace of recovery in Canada has been remarkable. and this has created tremendous opportunity in virtually every sector we operate in. Our infrastructure, buildings, and environmental services businesses have been particularly strong, each generating organic growth in the high teens for the quarter. Organic net revenue in Canada was over 11% without the effect of the de-scoped Trans Mountain contract, and 6% overall. Investment in infrastructure is a key tool being used by governments to spur economic growth. And we've already seen the governments of Ontario and Quebec move forward with large transit projects, which are driving significant revenue growth for our transportation business. Our work with Toronto Metrolinks and on the light rail and sustainable transportation development in Montreal demonstrates the high demand for our expertise. British Columbia and Alberta are also advancing several large transit projects, which bodes well for us. We're also seeing strong revenues in our community development business. with high market demand in Western Canada and Ontario, attributable to historically low interest rates, the pandemic causing people to re-evaluate their housing choices, and optimism related to the improving economy fueling organic growth. We're seeing growing opportunity to draw upon our expertise in ESG to provide innovative solutions in sustainable design. In Q2, we were awarded a seven-year agreement to provide engineering and architectural services for drinking water installations for a major Quebec municipality. Buildings is performing exceptionally well due to the significant volume of major projects in the Canadian healthcare sector. The new St. Paul's Hospital project in Vancouver and large hospital projects in Saskatchewan and Ontario are driving historically high levels of utilization within our buildings practice. With a number of additional healthcare projects in our backlog and growing activity in the civic and industrial sectors, we expect continued strong organic growth from our buildings business. And heightened focus on environmental sustainability continues to drive very strong organic growth for our environmental services business. As activity in sectors like transportation, mining, manufacturing and commercial development ramps up, so too is the demand for our services for our scientists and archaeologists as they support the regulatory and environmental requirements of these initiatives. Organic growth in water was steady in the quarter. Recent wins on multiple large-scale water irrigation projects in Western Canada will be a source of increased activity in the months ahead. And we recently won the role of prime consultant for a wastewater treatment facility upgrade in southern Ontario as we continue to be recognized as market leaders in this space. And with the energy transition underway, we're seeing growing opportunities for our energy and resources group in renewable energy. And a great example of the work we're doing here is our recent win to provide process, mechanical and instrumentation services to a biogas feedstock project in Saskatchewan. Many of the themes playing out in Canada are also emerging in the U.S., although the U.S. recovery is off to a slightly slower start. Overall, the Q2 performance of our U.S. business was in line with our expectations, with 7.4% organic revenue retraction in contrast to organic growth last year. Our U.S. results were significantly impacted by the strengthening of the Canadian dollar, and Theresa will go into this a bit later in the presentation. Our U.S. transportation business continues to work through the wind down of several major alternative delivery projects, where revenue recognition at the end of projects tends to slow down due to the complexity of the change order approval process. Unlike Canada, stimulus investment and infrastructure has not yet crystallized, but we are very well positioned to be beneficiaries when it occurs. With the expected focus on traditional infrastructure like roads, bridges, and transit, we expect U.S. stimulus spending will drive strong growth in infrastructure once funds begin to flow. Buildings are starting to turn the corner as public and private investment is gaining momentum. While the commercial sector remains weak, we're beginning to see very positive green shoots in other sectors. The focus on health care that we've seen in Canada is emerging in the U.S., and our expertise in this sector has resulted in recent pursuit wins, for a number of hospitals and urgent care facilities. We were recently awarded the design of a state-of-the-art neurological facility that will be over 1 million square feet in size. Activity is also growing in the civic and industrial sectors, where we've been successful in recent pursuits for a number of large-scale IDIQs for the U.S. Army Corps of Engineers and NAVFAC. And we're seeing all around the world The theme of sustainability is creating a growing dimension in our design work in the United States. This is especially pronounced in our energy and resources and environmental services businesses, which have achieved organic backlog growth of 35% and 30% respectively since year-end 2020. We expect this trend to continue with increasing opportunities in the renewable and energy transition space, like the recently awarded Pump Storage Feasibility Study, and our continued engagement in on- and offshore wind and major solar projects. And this past quarter, our Water and Environmental Services Group were awarded a mandate worth approximately $100 million in net revenue to support FEMA to enhance the usability and value of natural hazard risk information. And this will contribute to further growth and backlog for these groups in the quarters ahead. Earlier this week, we announced that we signed a letter of intent to acquire Paleo Solutions, Paleo has the largest staff complement of paleontologists of any firm in the United States. And that expertise, coupled with their strong archaeological presence, complements our existing capabilities and positions us extremely well to meet the considerable volume of work that's imminent as utilities look to strengthen their electrical transmission infrastructure and our industry responds to the anticipated U.S. infrastructure stimulus. So the wave is coming in the U.S. While slower to materialize than in Canada, it will certainly be larger in scale and scope. And we see evidence of this in the solid 6.4% organic backlog growth that we've logged and in the half billion dollars of notified awards that are not yet included in backlog. Like Canada, global outperformed our expectations in the second quarter, with net revenue growing organically by 9.9%. Our water business generated over 20% organic growth as the UK AMP7 and large water frameworks in Australia are operating at peak of activity. High commodity prices are also driving strong demand in our mining sector, which achieved organic growth in the high teens. Acquisitions added a further 9.7% of net revenue growth to our global business, highlighting the value we're driving from our M&A program. We closed our acquisition of Ingenium during the quarter, our second acquisition in Australia this year, and we're seeing the benefit of combining our teams in terms of client interest and project opportunities. Backlog for our global region remains very healthy. We're also seeing significant growth in notified contract awards globally again, not yet in backlog, particularly with respect to multi-year frameworks in our UK and Australian water businesses. In addition, Other significant awards that are not yet in backlog include two separate pump storage facilities in the UK. These are great examples of how we continue to support our clients in the transition to renewable energy. We've also been appointed to a multidisciplinary role in conceptual design for a 50-storey mixed-use development in Australia, consisting of residential, retail, community and commercial spaces. And our global mining business has also been very active with the increase in commodity prices. I'll now turn things over to Teresa to review the quarter in more detail.

Thanks, Gord, and good morning, everyone. As Gord mentioned, the change in the Canadian U.S. exchange rate had a substantial impact on our U.S. earnings this quarter. The Canadian dollar strengthened by 17 cents on a quarter-over-quarter basis, which decreased net revenues by $61 million. We've also provided our estimates of the FX impact on our other key financial metrics for the quarter and year-to-date. Without the estimated 4 cent negative impact, Q2 EPS would have achieved a new record. Despite the impact that foreign exchange had on our net revenues, we were able to grow adjusted EBITDA and drive a 110 basis point increase in margin to 16.1% through our continued focus on project execution and disciplined discretionary spending. Our Q2 results also reflect our focus on managing all aspects of our business, Beyond our drive to maintain and grow our industry-leading EBITDA margin, we're continuing to execute on our 2023 real estate strategy, which remains on track to deliver $0.10 per share in adjusted EPS by the end of 2021. Our focus on working capital management, along with the benefit of lower interest rates from our senior note offering last year, are driving a reduction in interest expense. and we've materially reduced our effective tax rates through the implementation of tax optimization strategies. These efforts collectively contributed to $70 million in Q2 adjusted net income and 62 cents in adjusted diluted EPS, representing 21% and 19% increases, respectively. Our balance sheet remains strong, with net debt to adjusted EBITDA of 0.9 times below our targeted range. Day sales outstanding with 76 days at quarter end, which is relatively consistent with Q1 2021 and down six days compared to the same time last year. We've revised our target DSO downward from 90 days to less than 80 days, which reflects our confidence in our ability to maintain DSOs below this level. Free cash flow for the first half of the year decreased $74 million to $51 million reflecting changes in revenues and corresponding cash receipts, including the effects of foreign exchange. As well, cash flows for the same period last year benefited from the deferral of income tax and other payments, which resulted from various pandemic relief programs. Increased cash used in investing activities reflects our recent acquisition activity, while spending on capital expenditures has remained consistent. And we returned $69 million in capital to shareholders in the second quarter, $51 million through share repurchases, and $18 million through the payment of dividends, demonstrating our ongoing commitment to our capital allocation strategy. Based on our financial performance to date and our confidence in continuing to execute on our plan, we're raising our earnings guidance for 2021. We continue to expect 2021 full-year organic net revenue growth to be in the low to mid single digits, or 1% to 5%, but with a slight shift in mix relative to our previous thoughts. We now expect organic growth in Canada and global to be slightly stronger than initially projected, offsetting a slightly slower start to the recovery in the U.S. As a reminder, whenever we talk about organic growth, we always talk about it on a constant currency basis. We're raising the lower end of our ranges on all our financial targets, Adjusted EBITDA margin is now projected to be 15% to 16% of net revenue. Our adjusted net income margin target is now 6.8% of net revenue or higher. And adjusted ROIC is now expected to be 10% or higher. And as for adjusted diluted EPS, we now expect to achieve 4% to 7% growth in 2021 compared to 2020, where our previous guidance was for low to mid-single digit growth, or 1% to 5%. Given continued uncertainty around the timing on a U.S. infrastructure stimulus bill, we believe it's still prudent to exclude any potential upside from U.S. stimulus spending in our 2021 revenue expectations. Please refer to this quarter's MD&A for more detailed information about our 2021 outlook, including our updated expectations for our effective tax rate, foreign exchange sensitivities, and our revised expectation regarding seasonality of earnings, where we now project Q1 and Q4 to represent 45% of earnings and Q2 and Q3 to represent 55%. This is a shift from our previous guidance of a 40%-60% split. And with that, I'll turn the call back to Gord.