Stantec Inc

Welcome to Stantec's second quarter 2022 earnings results webcast and conference call. Leading the call today are Gord Johnston, President and Chief Executive Officer, and Teresa Jiang, 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 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 2. Detailed Instantex management, discussion and analysis are incorporated in full for the purposes of today's call. Unless otherwise noted, dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded. Please go ahead.

Good morning and thank you for joining us today. We're very pleased to report another strong quarter of operational and financial performance. Our second quarter and year-to-date results are tracking very well against our strategic objectives and as such we remain confident that we will deliver on our targets for the year. There are two highlights for the quarter that I want to touch on before turning to our financial results. The first is an update on Cardinal. The integration is progressing very well and is in line with the expectations that we outlined at the time of the transaction. We've already achieved our target of US$10 million in run rate synergies, 18 months ahead of schedule, and we continue to identify opportunities for additional savings. The Oracle Financial Systems migration in Australia and New Zealand is largely complete, and we're in the final stages of the transition. The US integration is in full flight and is progressing nicely. There's still a lot to be done, However, we expect this to be completed before the end of the year. The second highlight that we are very proud of is that Stantec continues to be recognized for our leadership in ESG. For the 13th time, we were recognized as one of Canada's best 50 corporate citizens by corporate nights. We're honored to have earned this recognition, receiving top quartile scores this year for employee health and safety, board and executive gender diversity, racial executive diversity, and clean investments. This recognition affirms that our long-standing commitment to advancing ESG is having a real impact towards a more sustainable future, and we're very proud of the difference that Stantec is making. Turning now to our Q2 results, we are pleased to have delivered a 34% increase in adjusted EPS. We generated 9.4% organic net revenue growth and consistent with Q1, we delivered organic growth in every one of our geographic regions and in each of our business units. This reflects our ongoing ability to capitalize on the key drivers that I've spoken about previously and that I'll talk more about towards the end of the call. A common thread through many of these projects is the need for the skills of our environmental services business, which delivered a 54% increase in net revenue of which 12% was from organic growth and 40% was generated by our recently completed acquisitions. Our Q2 results also reflect very favorable margin expansion, with an 80 basis point increase in project margin and a 60 basis point increase in adjusted EBITDA margin. Taking a closer look now at each of our geographic regions, the level of activity in our US business continues to gather momentum. In Q2, net revenue increased by 27% with 9% organic growth and 14% acquisition growth. We're pleased to have delivered organic growth across all of our business units as we did last quarter. And this is a reflection of the robust level of investment occurring in the U.S. Investment in the reshoring of semiconductor production has driven a significant amount of activity across multiple business units. Environmental services net revenue grew by over 80% and continued to be the biggest contributor to U.S. revenue growth. The combined Stantec Cardinal team is very well positioned to address the strong demand for environmental assessment, permitting and cultural resources work, in addition to ongoing monitoring and ecosystem restoration efforts. Water shifted into double digit growth as activity ramped up on several major projects to address industrial, and advanced manufacturing project needs and water scarcity in the Western US. And buildings continued its post-COVID recovery with another quarter of organic growth, driven by the need for increased healthcare capacity and investment in the civic, industrial, and science and technology sectors. Canada also continued to perform well, delivering 5% organic growth in the quarter. Consistent with the themes playing out in the U.S., our environmental services business in Canada had a very strong quarter, delivering double-digit growth on the strength of high demand for permitting work and our archaeological services. Infrastructure delivered strong growth, arising from the strong housing market in Western Canada. Organic growth in our transportation sector also reflects our continued support of British Columbia's recovery efforts from the extreme flooding that occurred last year. Buildings continued to deliver organic growth on the strength of major public projects in healthcare and science and technology. And growing momentum behind the energy transition and global food security initiatives continued to spur growth in energy and resources. And rounding out our geographic regions is global, which had another remarkably strong quarter. Net revenue in our global region grew by 40%. Every business unit in global grew organically in Q2, delivering 17% organic growth. Recent acquisitions delivered a further 27% growth. The strong financial results global has generated year to date reflect the maturing of acquisitions made in recent years and we're pleased with the way that we're performing together under the Stantec banner. Water continues to perform very well, delivering almost 20% organic growth on the strength of the UK, Australia, and New Zealand water framework programs. Infrastructure has doubled its net revenue with very strong growth in community development and acquisition growth in transportation. And our mining sector delivered organic and acquisition growth on strong commodity prices, client diversification, and the lifting of pandemic-related restrictions. With that, I'll turn the call to Theresa to review our Q2 financial results in more detail.

Thank you, Gord, and good morning, everyone. As Gord noted, we had a very strong quarter, with an overall 21% and 23% increase in gross and net revenue respectively. Project margin grew by 25% and by 80 basis points as a percentage of net revenue, and this reflects our continued focus on project execution and our heightened diligence in project pursuits. We delivered a 27% increase in adjusted EBITDA, reflecting the overall growth of our business, Adjusted EBITDA margin was 16.7%, 60 basis points higher than Q2 2021, resulting from strong performance across the business. Net income and EPS decreased slightly to $61 million and 55 cents per share, as increased EBITDA was offset by higher acquisition-related costs. We also recorded an unrealized fair value loss associated with our equity investments held for self-insurance liabilities. Adjusted net income and adjusted EPS increased 33% and 34% respectively to $93 million and 83 cents per share, reflecting very strong earnings from our underlying operations. Operating cash flows decreased to an outflow of $4 million for the quarter. Cash flow was primarily disrupted by the Cardinal integration due to the financial system migrations for both Australia and the US operations occurring during the second quarter, as we had outlined in our Q1 earnings call. To a lesser extent, Q2 cash flow was also impacted by investment in working capital to support the organic revenue growth. We view these causal factors as purely matters of timing, which will contribute to stronger cash flows in the second half of this year as the effect of the financial system migration dissipates and processing times normalized, particularly in Q4. And we've already seen cash flows pick up in Australia after quarter end, which was the first of the cardinal migrations to occur this year. We continued to be active with our NCIB earlier in the quarter, repurchasing just over 625,000 shares for $37 million. Consistent with the change in our operating cash flow, our DSO is up three days from last year to 79 days, All of these factors, coupled with the funding of Cardano and other acquisitions in the past 12 months, resulted in our net debt to adjusted EBITDA being at 2.0 times the upper end of our internal range. As our cash flow normalizes over the remainder of this year, I'm confident that our leverage will return to the middle of our target range by year end. I'm going to turn the call back to Gord now to review our backlog and outlook.