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 2, detailed in Stantec's Management Discussion and Analysis and incorporated in full for the purposes of today's call. All 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. Gord 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. Theresa 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 continuing 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 CAD4.7 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, the people, excellence, innovation and growth that we presented in our 2020 strategic plan, continues to underpin our activities through the pandemic to continue to enhance shareholder value. We delivered net revenues of CAD951 million in the second quarter, which is comparable to the same period last year. Net revenue grew organically by 2.3% in the U.S., 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, while certain areas retracted. Water and Energy & Resources generated organic growth. As expected, Infrastructure revenue contracted slightly. Transportation delivered solid performance, while Community Development work slowed due to the pandemic. And while we've seen…

Thank you, Gord, 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 is largely due to an 8% decrease in administrative and marketing expenses and 29% reduction in net interest expense. Gross margin for the quarter decreased 5% to $490 million. As a percentage of net revenue, gross margin was 51.5%. The pandemic has created a degree of disruption in our operations and our clients' operations causing some inefficiency 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. As 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. Days 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 Q2 2019. Operating cash flows from continuing operations were $251 million, an $89 million improvement compared to Q2 2019. The improvement was driven by an increase in cash proceeds from clients, lower payments to suppliers and the benefit of various pandemic tax deferral programs which included the deferral of $35 million in cash payments that are now due at various states before the end of Q1 2021. Cash flows used in investing activities were $11 million, a $7 million decrease compared with Q2 2019, mainly 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 and drawing on a revolving credit facility and $32 million in payments for these obligations, partly offset 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.

Thanks, Theresa. Given the unprecedented circumstances brought on by the pandemic, we withdrew our 2020 guidance in May. That said, we continue to reevaluate our anticipated financial performance on an ongoing basis. So even though we're not in a position to provide concrete guidance, we are providing our current outlook for 2020 based on the best information available to us at the present time. In the U.S., we expect a nominal retraction in revenues in Q3 relative to Q2 across all businesses except Water, where we see growth. With project slowdowns and a typical downtime related to cold weather and seasonality, we expect Q4 net revenues in the U.S. to be sequentially lower. Full year 2020 U.S. net revenues are expected to be comparable to 2019 in U.S. dollars when combined with our strong results for the first half of the year and we also expect some additional uplift from foreign exchange. In Canada, Q3 revenues are expected to be stable relative to Q2, while Q4 revenues like the U.S. are expected to experience the typical seasonal downturn. Even though weak outlook for Canada before the pandemic, we expect a normal retraction in revenue for this geography for 2020 compared to last year. Net revenues in the Global business are projected to improve modestly from Q2 to Q3 and stabilize at that level in Q4. The strength of the Water business in the U.K. and Australia and the Transportation sector in New Zealand are expected to offset the impacts of project slowdowns in other business resulting in full year 2020 revenues being comparable to 2019. Overall, we expect Q3 and Q4 revenues to decline marginally compared to the same periods in 2019. Taken together, we expect full year net revenue, adjusted net income and adjusted EPS to be comparable to…

Thank you. [Operator Instructions] And we'll take our first question from Benoit Poirier from Desjardins Capital Markets.

Yes. Thank you very much and good morning, everyone. Congratulations for the good quarter. Especially, looking at the gross margin you were successful in maintaining the EBITDA margin despite the contraction in gross margin. So more looking, specifically at Canada and International, could you talk a little bit about the key levers that drove the decline in gross margin, specifically, for those two regions? And what should we expect going forward in terms of gross margin?

Thanks, Benoit. Good morning. So I just pointed out there, I think, it's really important to highlight that we are managing the company for both long-term growth and performance in terms of EBITDA margin and EPS. And that gross margin is certainly one of the levers that we're managing. In concert with that those admin and marketing costs are managing well to balance the gross margin pressure and generate those solid returns that we saw in Q2. So there's a couple of things that I think we saw contributing to the gross margin decline in Q2. One of them would be that -- while our utilization as a measure of productivity is holding up well and in fact is above general seasonal trends there are some integration inefficiencies in project delivery caused by working from home. So that as an example of saying that we have seen working on our project and we get to a certain part and need some input from your clients or from a partner agency it takes a little longer to get that answer back from them. So the team is still working on the project, but likely a little less efficient than they were previously. We've seen a few clients larger ones in particular asked for fee reductions. That's not material on gross margin at this point. But I just wanted to just to point that out that's just a trend we're seeing. Again these aren't significant, but we're just seeing that. But also importantly project mix had an impact this quarter. As an example the Trans Mountain expansion project that we're working on has a little gross margin. As we said in the prepared results so the utilization rates are virtually 100% and we incurred no admin and marketing costs. So the overall EBITDA contribution is similar to other projects in other business lines. So there are a couple of things there that we're working through, but as you said at the beginning -- it is important to note that we're managing the whole business to deliver that consistent performance. And so while gross margins certainly the data point for us. We're balancing gross margin managing of workforce and controlling discretionary costs to ensure that we achieve those strong EBITDA and EPS numbers going forward.

Okay. That's great color, Gord. And could you provide maybe also an update on the M&A in light of the pandemic here?

Absolutely. So I think what we found is that and it's -- even though it seems like much longer I was thinking other day it's actually really been only about little less than four months since the right apply home in mid-March from Australia where we were talking to some firms. And so when we -- I think when we first all moved to home in sort of the third to -- third-ish week in March, our clients also moved to home. We saw that a lot of the firms that we've been talking to as well as both the acquirer and the potential firms that we acquired kind of pulled in their horns a little bit to focus on managing their own businesses through the pandemic. So we've also seen -- and we also have some concerns about how do we travel to do those final bits of due diligence? So I think now we were really having a good look at one saying that I think these travel impediments are with us for a longer term. So if you look at a place like Australia that they might keep their borders closed for non-essential travel through the remainder of this year, well we're really beginning to focus on now is how do we continue with that M&A that the processes utilizing even more the resources that we have in country. So I think we're ideally situated to do that now. If you think about the folks from MWH who joined us -- that was four years ago now. And so when we look at -- in the UK, for example, we've had Cath Schefer, who leads our Global Group based in the UK, the MWH been there for four years. And also now Peter Brett has been there for some time. So we would view -- with MWH, Peter Brett joined us there. So those folks are all sufficiently Stantec guys that they can help us with sourcing acquisition, they can help us with even more digging deeper into due diligence and the integration efforts. They're similar in Australia where in addition to the MWH folks that they have been there since 2016. Now we've got the strong leadership of Wood Grieve Engineers there as well. So I think what we're thinking about and why is that? For the last quarter, I think, everyone, sort of, paused a bit as we all focused on running our own businesses. And now we're seeing people begin to emerge of some of these discussions are starting again. And we're really thinking more about utilizing even more our in-country leadership to help us with the M&A processes going forward.

Okay. That's great. And the last question for me. Could you talk a little bit about buildings? How should we be looking at organic growth following the 8.7% decline in the -- in net revenues in the quarter whether there was anything specific? And whether we are poised for slow to recovery or, let's say, a worst scenario than Q2? Thank you.

Yes. We don't see a significantly degrading from where we were in Q2. As we look at the Buildings Group as we said like the pivot to the healthcare work, e-commerce work and so on is underway. But in Q2 it wasn't enough to catch up to the decline, of course, an in commercial and so on. We're seeing a lot of healthcare opportunities heading the street now probably more than we've seen particularly in Canada for some time. So I think that we -- Building is going to rebound extremely strongly, but I think it will be my guess that it will be stable going forward. Perhaps a slight retraction going forward, but certainly I think, hopefully not to the degree that we saw in Q2.

Perfect. Thank you very much and congrats again.

Thanks, Benoit.

Our next question comes from Sabahat Khan with RBC Capital Markets.

Thanks and good morning. Just a follow-up there on your commentary on the Buildings segment. I guess, you called that some strength in water across a couple of markets for the rest of 2020. I'm thinking more for Environmental Services and Energy. Should we expect kind of similar performance to Q2 being down year-over-year through the rest of the year being more than offset by Water and Infra? Kind of what are your thoughts at a high level across end-markets globally?

Yeah. So overall, as you know, I think as we said, we expect our 2020 net revenue to finish sort of similar to what we saw in 2019. So while there may be a little retraction in some of these going forward for the remainder of the year. We're going to see that strong growth, I think continue through Water. If your remember looking back over the last couple of years, it means we spend a lot of focus on building backlog in Water. And so, now we've had positive organic growth Water overall for the last four or five quarters. And I think we'll see that continuing. So ES had really, really strong growth last year. So we're coming off a bit of a high comp there, but I don't know certainly anything in Western Canada. If we look at the work on Trans Mountain course of gas and so on, that'll be stable work for many years for ES and our oil and gas group, but again it's not huge it's not great margin work. But again no utilization, sorry, firstly 100% utilization, and no business development or admin costs. So it generates a pretty good EBITDA margin.

Okay. Thanks for that. And then your commentary on the overall U.S. market for comparable revenue in 2020. And I guess part of that is driven by the Water market, are you assuming for the operating backdrop there's still a bit of uncertainty out there according to what you said. Are you assuming there is a bit of stimulate some extra dollars put in or is this all really just based on what you have in your backlog?

Yeah. For 2020, we're not really forecasting any significant stimulus. There certainly has been a lot of talk about putting together bipartisan stimulus build, and we really hope that that comes to fruition. But against the backdrop of an election year, we're wondering, if that might be difficult. And so we're not looking at the numbers that we put up for the US, do not include any additional stimulus in 2020. We think that might be if that comes out would be a tailwind going into 2021.

Okay. And then one last one from me, I think in the commentary you mentioned sort of moderating your thoughts on valuations for potential M&A. I guess is that just based on your outlook on what you're willing to pay for the foreseeable future? Or is that more along the lines of no target feeding at this point might be expecting to have a multiple versus what you think is reasonable? So some additional color on that.

Well, there is always that tension as you look to establish valuation for various firms. Everyone no one is exactly sure what the shape of this recovery is going to look like. So we certainly know historic performance and profitability numbers for these various firms. But everyone I think is really thinking about, what does it look like going forward? So what we really thought is that this really isn't the time to pay a high-margin, high multiples on historic earnings. So, there is a bit of attention. And so we're the company that we continue to talk about where all reasonable people as we're talking through. What is it going to look like going forward in terms of recovery, in terms of recovery on profitability and so on. So we haven't seen really good there has been virtually no transactions in our space since the pandemic hit. So, it's hard to get a feel for what the multiples are going to look like. But in our discussions, we haven't seen a lot of stop in, but it's still early days.

Great. Thank you.

Great. Thanks for your questions.

[Operator Instructions] We have a question from Devin Dodge with BMO Capital Markets.

All right. Thank you. Good morning, guys.

Good morning, Devin.

It seems like from the COVID-related restrictions, could have been a boost to your admin and marketing expense control, things like lower travel and training costs. I also suspect voluntary turnover would have been relatively low in the quarter. Just can you talk about the sustainability of these cost benefits into the back half of the year and even into 2021?

Sure. It's something that we are certainly thinking about, because you're right, I mean the degree to which we've been able to bring those costs down in the second quarter. We didn't have a really strong sense as we enter the quarter. And so we can certainly seeing out what's achievable, but as we started to reopen our offices and we are seeing in some geographies wanting to start to travel again. The level that we're at today isn't sustainable. And I would say overall, not good for the business because those expenditures are useful. We're starting to see more discussion around spend on marketing dollars, again for system. And so where those costs were low in the second quarter, we'll keep some of that start to come back again fully over the second half of the year. So, for us it's an expectation that there will be some increase, but we're not expecting it to be a dramatic increase over the rest of the year. It's really going to be a big move into our plan for 2021, a determination of how far backing of the pendulum swing spend and it was certainly our desire that that will be demonstrated that we can operate and operate quite successfully at a lower cost level. Our expectations would be that we that threshold or expectations lower than we have historically. So we do believe that there is opportunity there, but that work for what is sustainable going forward is just beginning now.

Okay. Thanks for that. Maybe just switching gears. U.S. state and local governments it's been a focal point for some investors. I think some of your peers have been suggesting that award activity, it's been good in Q2, and there actually has been a good level of RFPs. But they are expecting kind of new awards to slow in the second half until we get better clarity on federal funding, effectively trying to get projects to be shovel ready in terms of that stimulus. I guess what are you seeing in your business?

We have seen pretty solid continued RFP activity. We have seen that some clients are taking a little longer to make the award. One thing though that we really are seeing is increased opportunities in U.S. federal work. And I think we've press released over the last little while some of the recent U.S. Federal awards, and there's others that we haven't. So while we may see state and local still putting at RFPs with perhaps not awarding as quickly. We are seeing that general strengthening in the amount of U.S. federal work that we're doing. And we've also seen that that while we went into the pandemic restrictions, in March, RFP activity slowed a little bit. We did see sort of in the April-May-June timelines that the number of opportunities in our sales funnel, are up in dollar value and the numbers. So as we look at backlog for the remainder of the year, I feel pretty good that our backlog is going to hold steady. So, I think that's -- and that's really absent any significant government stimulus fund, any government stimulus in the U.S. To give you what we think that will come, we're just not confident that it would be -- go through the House and Senate being announced, and then the -- really the revenue being generated by us in a significant way here in 2020.

Okay. That's good color. I'll turn it over. Thank you.

Great, thank you.

And we have a question from Bryan Fast with Raymond James.

Yes, thanks. Good morning, guys. Just maybe touch on your outlook for the back half of the year, has it changed at all since last quarter? And then, maybe what has changed to allow you to be more comfortable to provide the guidance?

We've been working really closely with our business leaders and our geographic leaders, not just in Canada and US, but around the world to really home in on opportunity that they see project awards that we have that we can begin to work forward on. So, we feel pretty comfortable about the numbers that we put up for the -- our guidance is not -- our outlook for the second half of the year. We see a little bit of retraction going forward, little bit more in Q4 in some of the cold weather areas. So, we always see that based on -- but based on weather. But, I think in general the numbers that we guided for outlook there, I think we feel pretty positive on those for the second half of the year.

Okay. Thanks. And then, maybe I guess have your thoughts changed in respect to the preservation of workforce since last quarter?

No. No, we've -- we think that we are working really hard to balance the workforce with the work that we have available, but also ensuring that we -- I think we needed to say it in the prepared remarks about really maintaining our workforce for the recovery that we see to come. So, we furloughed people other than our Board, our seeds fleet and our executive leadership, who've all taken a 10% pay cut. We haven't asked or others ourselves for hourly fee reductions. In some cases, they're taking vacation. In some cases, they are taking leave without pay or other things like that. In some cases, we've had -- we have furloughed people. So we're trying to manage staffing as best we can. So that going forward, we've got the right people in place to drive us forward.

Okay. Thanks. That's it from me. I'll turn it over.

Okay. Thanks, Bryan.

And we have a question from Mona Nazir from Laurentian Bank.

Good morning and thank you for taking my questions. And I'm just wondering in light of COVID, so many companies are pivoting or looking to pivot to reduce their downside exposure for and capture greater opportunity. And you commented -- have commented on increased demand within the medical field. And you have been equipped to service that increased demand. I'm just wondering where you're seeing other potential pivot, and whether that would be the public private mix exposure, geographic or even vertical focus or anything else I'm missing? Thank you.

Yeah. Thanks, Mona. And so, one thing that we did in terms of limiting downside exposure is one of the things we talked about as part of our strategic planning process last year. When we had looked at our significant exposure to land development leading up to 2008 and our significant exposure to oil and gas leading up in 2014 and that's where we made the statement as part of our strategic plan last year that in terms of limiting potential downside exposure that we would not have our exposure to -- our revenue exposure to the cyclic markets oil and gas and mining to exceed 15%. So, that's really I think limited, if we do see a downside there. But in terms of pivots, you're right we see a lot of work in healthcare. We still see significant work in public transportation, doing a lot of work in the GTA. But, we still see a lot of good opportunities coming there. And I think from a global perspective, we're seeing more and more coming out for both, healthcare, public transit, roadways in general. I think those are the beneficiaries of any stimulus programs of that come along as well. We're also seeing that as more and more work comes out over the last quarter, it has been more weighted on the public side than the private side. And so, will that be a trend going forward? Perhaps, I would think for the second half of the year. We'll continue to see that. And then, depending how the recovery comes, we'll see how that balances out going into 2021. But I think we feel that are -- the areas that could be pivoting for more and more work, healthcare, public transit, transportation, water and we're very strong in and well situated to get more than our fair share of that additional work that comes in that -- those areas.

Thank you. That's very helpful. And just secondly, I'm wondering if you could share with us the magnitude of pricing concessions on the customer side. Is that largely in the Buildings or Energy segments to other areas?

It's primarily where we synergies with coupled very, very large public transportation agencies. And you know what they're looking for is like to 2-ish-percent, 3-ish-percent range. And then, while we have seen some large oil and gas companies' talk about as well, the numbers that they've been looking for a bit in those same sort of reasons that -- the same sort of areas. Sometimes we've had grew that for much more than that, but I think the industry in general, not just as has been pushed back, and say you're not going to get 10%. I mean, there is a 10% of [Indiscernible] for anybody. So, we seem to be settling in a couple of percent range. And some of you that come forward also. Sorry -- and some of them, who come forward also, they said could you take a 2% cut for the next six months. So, they put a time limited, which is a little easier to for us to sound like as well, because they don't have to try to fight to get it back at the end.

That's perfect. That was my follow-up. I was going to ask about the length of term negotiated. So, that's great. Thank you.

Great, thanks Mona.

[Operator Instructions] We'll move on to Michael Tupholme with TD Securities.

Thank you. You were asked earlier about some of the factors that weighed on gross margin percentage in the quarter. I just wonder if you can comment on how you see the gross margin evolving in the back half relative to where you were in Q2. Are there some factors that you expect to some services side and offer some relief and improve any gross margins?

I think that for the back half of the year, we're going to expect gross margin to improve modestly, but I think that the reason that we we've described for what we saw in Q2 will largely continue in the back half of the year. So, whether it's -- so, overall connectivity on the side of our operations or our clients, the heavier weighting that we have going into the second half of the year with the increased work on the midstream project. And some of our large transportation ECB projects that are moving to a stage of the projects where the margins are pricing lower. So, that and a bit of these pricing concessions that Gord alluded to all combined would tell us that it's likely going to stay around the territory that is just down.

Okay, that's helpful. With that in mind and then thinking about the fact that it sounds as though admin and marketing costs which were quite well contained in the second quarter? Those may start to creep higher as you've got people back to the office. So, just thinking about gross margin sort of being maintained at these kinds of levels possibly some escalation in the admin and marketing. Is there anything else you're able to do with respect to admin and marketing costs to try to I guess offset whatever escalation you might expect in the second half?

Yes, I mean I think there is always the opportunity there. And we are really focused on it not only within the operations but within our -- the functional support side of our business as well. So, initiatives to look at where we've been able to reduce costs -- have been significant. And so when we started all of those at the end of the first quarter, there were some questions about how long that we wanting of these initiatives to extend? And now we are looking at having these initiatives kind of continue through the rest of the year. So, I think what we are able to do on admin and marketing has been really positive and we expect that to continue. And I'll just -- maybe more taking about and I point out that is typically in Q3 is when we -- it's usually our most profitable quarter and you see kind of a step-up there. And that's because people are working they're in the field. We don't run really significant training programs. There is a lot of downtime in the third quarter. And so it tends to improve and then it sets down in the fourth quarter. We think that pattern will still show up this year. And overall, we think that we'll be able to bring in the admin costs. Will we be able to fully offset all of the compression we're seeing gross margins? I think that remains to be seen, but as Gord said, it's really a focus on the long-term and maintaining the specialized expertise that we have. And the tailwind we're getting from favorable interest rates and from having a pretty low balance drawn under revolving credit facility, all of those things collectively will driver us, we believe, to a pretty good outcome for earnings. And that's really the overall focus for us what is the bottom-line going to look like and that's where we're managing.

Okay, that's great. Thank you. And then just lastly as a result of the pandemic, there has been a further discussion about firms thinking about their real estate requirements given the success of transitioning employees to working from home early in the pandemic, realize it's somewhat early still, but have you thought about that? And any thoughts on reconsidering Stantec's real estate footprint kind of over the medium longer term realizes another short-term thing that thoughts on that.

Yes absolutely Michael. I believe -- and in fact, that was something that we were working on before the pandemic hit in any event, but certainly, now we are having a number of discussions. We talked with our -- we survey our larger employee base on what they're thinking about going forward. I think Theresa said earlier that a number of them -- when the pandemic first hit, everybody went home, they all said this is great. I'm never coming back to the office. But now a month, two months, three months in, we have the majority of our staff saying we want to go back to the office. So, it may be -- is it possible that I can come back and work in the office and work from home one day a week or two days a week something along that line. So, we are really looking at how that would impact our real estate footprint. Because our perspective is -- if you're going to be full-time in the office, you'll have a dedicated workspace. But if you're going to be in and out, three days here -- three days in the office, two days at home, or four and one, then perhaps you won't get a dedicated workspace; it would be more towards a hoteling type of a perspective. So, we do have a significant number of our leases that are coming up for renewal over the next three years. And so we are really thinking about what is the new footprint look like going forward. And so I do think that we'll see some footprint reduction over the longer term, but for us without even having to take any impairments on leases over the next three years, we can make a change on a significant percentage of our of our portfolio.

Okay, that's helpful. Thank you.

Thanks Michael.

[Operator Instructions] And it appears we have no further questions today. I would like to turn the conference back over to Gord Johnston for any concluding remarks.

Well, I just want to say thank you again for joining us on the call. And we look forward to speaking with you in the near future about our continued progress. And everyone, have a great day and stay healthy. Thanks very much.

Thank you.

And once again ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.