Q2 2020 Stantec Inc Earnings Call
[music].
Good day, everyone welcome to Stantecs second quarter Twentytwenty earnings results call.
Leading the call today, our board Johnston.
It didn't and Chief Executive Officer, and Teresa Chang Executive Vice President and Chief Financial Officer.
Stantec dialing into view the slide presentation, which is available in the investors section at Stantec dotcom.
Today's call is also webcast. Please be advised that if you have dialed in Walter you in the webcast you shouldn't do your computer as there is a 22nd 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 and Stantec management discussion and analysis and incorporated in full for the purposes of today's call.
Alps discussed in today's call or expressed in Canadian dollars and are generally rounded.
And with that I'm, please to turn the call over to Mr. core Johnson. Please go ahead.
Good morning.
Thank you for joining us.
Our call today with a review over second quarter before.
Teresa will this sale.
As a result before I refer to provide an update to our outlook for the remainder of 20 Twond.
We delivered a solid second quarter.
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 the business line diversification.
Effectively managing our business in controlling costs. How this has allowed us to deliver a 4% year over year increase in Q2 adjusted EPS.
No depends FX has had an unfavorable impact on our Q2 gross margin.
Productivity as measured by utilization has remained strong and is above typical seasonal level.
Our record backlog of 4.7 billion at the end of Q was how stable through Q2 and continues to represent approximately 12 months of work.
At the end of our presentation today I'll review, how the for value creators of people.
Excellent 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 961 million in a second quarter, which is comparable to the same period last year.
Net revenue grew organically by 2.3 presented to us.
Exactly that our Canadian and global geography, resulting in an overall organically contraction was 2.1% in Q2.
In addition to our geographic diversity in 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 revenues contracted slightly.
Transportation delivered a solid performance well community development work slowed due to the pandemic.
And what we've seen growth in work for health care facilities and E Commerce fulfillment centers. The pivot to these sectors was not sufficient overcome the negative impact to the commercial airport and hospitality sectors and if you choose to go down and building for the this deeper than expected.
In water, we saw healthy activity in the United States, United Kingdom and Australia.
This was the result of significant project awards in the U.S.
Yes definitely framework awards, we received in the UK and a multiyear framework award in Australia.
And we've also just wanted to contract for the Irish water Engineering design services seven your 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 the region.
The retraction in environmental services is mostly related to Canada, where field work was impacted by project slowdowns related to covert 19.
Finally energy and resources generated solid organic growth as a result that increase midstream oil and gas work in the second quarter.
Our we're providing project management services on the trends on expansion projects continue to give a second quarter under a memorandum of understanding.
Subsequent to the quarter, we signed a contract piece to continue to provide new services for the duration of the project.
Last quarter, we spent some time reviewing our expectation for how we believe there visits units might be impacted by the pandemic. We continue to believe that these expectations remain valid in a longer term.
In the second quarter, our U.S. operations achieved net revenue organic growth of 2.3%.
This was driven by project opportunity the water.
I mean power and environmental services, which were partially offset by retraction in building and community development.
Gross margin as a percentage of net revenue increased 2.2% in the quarter to 52.9%.
The decrease as a percentage of net revenue was due to inefficiency that arose depend demick related disruptions as all the shift in our projects, which was driven primarily by major projects and transportation as power and dance.
In Canada slowing economic growth was amplified by the Kogan liking pandemic.
Net revenue retracted six point, he presented the quarter and 2.6% year to date and was particularly evident in building the communities development.
Our environmental services business was impacted by project slowdown well pandemic related mine shutdowns contributed to lower activity decline in.
This was partially offset by growth in our oil and gas and transportation businesses do that has gone expansion pipeline project and several large light rail transit projects, the evanson Montreal at a greater Toronto area.
Gross margin decreased 2.7% presented 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 the energy resources and environmental services. However, despite the lower margin others, where it drives high utilization and a similar EBITDA contribution has or other business line.
Global net revenue refracted, 7.9% in the quarter and was consistent year to date with reduced work volumes during the pandemic, partly offset by increased project opportunities in some markets.
Projects go down were most pronounced in our UK and Australia building and European Environmental services business.
Pandemic related mine closures in Latin America, and large project wind downs empower them further contributed to revenue retraction.
Partly offsetting this though was the rep and public transportation projects in Zealot and continued strong performance at our UK infrastructure in water business.
We also saw higher volume of work at our Australian water business with several large municipal panel contracting traction in Q2.
And just last week, we were named water industry consultants a 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 in Europe, and a couple of localize challenges on some projects.
I'll now turn the call. We're just two Teresa for a review of financial performance.
Thank you doors and good morning, everyone I.
Adjusted net income from continuing operations increased 3% to 58 million in second quarter and adjusted earnings per share increased 4% to 52 cents per share. This was 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%.
I've never has created a degree of disruption in our operations and our clients operation, causing some inefficiencies in project execution.
We also saw higher than anticipated growth in revenue from our lower margin midstream oil and gas project.
As demonstrated by our solid adjusted EBITDA margin of 15%, we're managing the business carefully and have taken steps to mitigate these margin impact on the cost side.
Our balance sheet remains strong at June Thirtyth net debt to adjusted EBITDA was at the bottom of our targeted range at 1.0 in time, 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, yes. So decreased four days since Q1 as there was also <unk> ongoing focus on invoicing and collection activity and we've not seen any notable impact due to the pandemic.
Given our strong mix the public sector client and the high quality of our private sector clients. We do not believe our credit risks can increase meaningfully as a result with the pandemic.
Moving onto liquidity and capital allocation, our free cash flow for the quarter improved by 83% compared to Q2 19.
Operating cash flows from continuing operations were 251 million, an 89 million improvement compared to Q2 19.
The improvement was driven by an increase in cash proceeds from clients lower payments to suppliers and the benefit of various kinds Emmis tax deferral program, which included the deferral of 35 million in tax payment every now and you look at various states before the end of Q1 2021.
Cash flows Houston investing activities were 11 million, that's definitely decrease compared with Q2 19, mainly driven by reduced capital expenditure.
We used 100 million for net financing activity compared with 83 million in 2019 cash used in financing activities, including 62 million and repayments and driving down the revolving credit facility at 32 million in payments, where lease obligation, partly offset by $19 million.
Proceeds from the exercise of stock option, well now turn the call back to Gord to review, our 2020 Uh Huh.
Yes.
Thanks Suzanne.
Many unprecedented circumstances brought on by the pandemic, we withdrew our 2020 guidance and made that said, we continue to reevaluate our anticipated financial performance on 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 accept a nominal retraction in revenues in Q3 relative to Q2 across all businesses, except water, where we see growth.
This project slowdowns in the typical voucher related to cold weather and seasonality. We expect Q4 net revenues in the U.S. to DC.
Eventually lower.
Full year, 2020, U.S. AD revenues or.
Are expected to be comparable to 2019 at U.S. dollars when combined with our strong results for the first half of the here and we also expect from additional uplift from foreign exchange.
In Canada Q3 revenues are expected to be stable relative to Q2.
Well Q4 revenues like the U.S. are expected to experience a typical seasonal downturn.
Even though we go look for Canada before the pandemic, we expect a nominal 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 UK, Australia, and the transportation sector in New Zealand are expected to offset the impacts of projects slowdowns and other business, resulting in full year 2020 revenues being comparable to 2019.
Overall, we expect Q3 in Q4 revenues to decline marginally compared to the same period in 2019.
Taken together, we expect full year net revenue.
Adjusted net income and adjusted EPS to be comparable to 2019.
We now expect roughly 55% of our earnings to be concentrated in Q2 in Q3 down from the 60% estimate we previously provided.
Our balance sheet is strong and we continue to have excellent liquidity.
Our capital allocation priorities have not changed.
We're committed to returning capital to shareholders the payment of our dividend and we'll continue to repurchase shares opportunistically.
We continue to execute on our through your strategic plan, which we rolled out to our employees and the investment community in December of last year.
Our solid second quarter results, our credit to all of our people around the world and I want to thank our employees for their continued commitment in executing our client centric strategy in the midst of the unprecedented disruption caused by the pandemic.
As we begin our biggest office remobilization that health and safety of our people will always come first.
We're also taking steps through this period to maintain integrity of our workforce.
To position ourselves for the economic recovery that will come.
We're committed to both continuing and expanding upon our long term support for the block indigenous as people of color communities around the world.
And while we've been engaged for many years the organizations as further the interest of these communities both financially and more importantly through the volunteer efforts of our employees. We know that there's more that we can do.
We've engaged with our internal inclusion in diversity councils to develop additional areas of support as their focus our financial commitments and our employee engagements to make a long term lasting impact.
We are being thoughtful and deliberate and how we manage our business.
We are mitigating that compression of gross margin to decrease administrative and marketing costs.
Through our reshaping effort in 2019 ongoing cost reduction initiatives and significant reduction in discretionary spending there during the pandemic we've been successful in protecting our industry, leading adjusted EBITDA margins.
We continue to develop innovative new solution for ourselves and our clients to meet the challenges posed by the corporate 19 pandemic.
For example, internally, we launched a virtual marketing and business development tool kit to enhance our client relationships socially business world.
Externally across North America, Europe, we're using our criteria.
Our proprietary financial planning software to revise utility that optimizing their 2021 capital spending scenario the rate plans in response to cope with Nike impacts on water demand sales have income tax fees and other shared revenues.
While the pace of acquisitions is currently challenged by travel restrictions are growth aspirations have not changed and the acquisition pipeline remains strong.
In the meantime, we've increased our account management focus on key client accounts, leading to a 7.4% organic growth in net revenue from our named accounts compared with Q2 2019.
While the world remains the uncharted territory, we're confident in the resilience of our business model and we will remain vigilant in monitoring the potential impact our clients communities and most importantly, our employees.
And with that we'll open the call the questions operator.
Thank you, ladies and gentlemen, if he'd like to ask a question at this time. Please press star and then one.
If you are using a speaker for today.
Sorry to pick up the handset or do you press your mute function for the signal can reach our equipment.
Again that is star and then one if she'd like to ask a question today.
Well take our first question from <unk> from John.
Yes.
Yep.
Thank you very much.
Good morning, everyone congratulations for the quarter.
Especially looking at the gross margin we were successful in maintaining the EBITDA margin. Despite the contraction in gross margin so more looking specifically at yeah.
International could you talk a little bit about the key levers that growth.
A decline in gross margin specifically for dose to region and what should we expect that going forward.
The gross margin.
Yeah. Thanks have been well good morning. So you know as you 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 at NSS and they'd gross margin is certainly one of the levers that we are managing in concert with out there with admin and marketing costs.
Our managing welcome to balance the gross margin pressure and generate solid returns that we saw in Q2. So there's a couple of things that I think we saw contributing to to the gross margin declined in Q2, one of them would be.
While our utilization as a measure of productivity is holding up well in fact is above general seasonal trends. There are some inhibition inefficiencies in project delivery caused by working from home. So as you know one example, let US see we have a team working on a project and you get to a certain part and Lisa input from your clients are from.
Further agency and take a little longer to get that answer dock from them. So the team is still working on the project, but likely a little less efficiently and then they were previously.
We've seen a few clients a larger ones in particular up for fee reductions no. That's not material on gross margin at this point, but I just wanted just to point out that some of that that's a trend. We're seeing that again. These are significant but we're just seeing out but also importantly, no project mix had an impact this quarter as an example that the Trans mountain expansion project there were.
Working on has a little gross margin.
We said in the prepared results sobi utilization rates are virtually 100% than we incurred no easy to our marketing costs. So the overall EBITDA contribution is similar to other projects in another business line. So.
There's a couple of things there that we're working through but you know as you say that at the beginning it is important to note that we're managing the whole business to deliver that consistent performance.
So while gross margin certainly that data point for us, we're balancing gross margin managing a workforce and controlling discretionary costs to ensure that we achieved those strong EBITDA and EPS numbers going forward.
Okay, that's great color Gord and could you provide maybe also an update on b and they may in light of the pen the mix you have.
Absolutely. So you know what before what we found is that.
Even though it seems like much longer I was thinking here today, it's actually really bad only both little less than four months since I have to fly home in mid March from Australia, where we're talking some firms and.
So when we when I think when we first of all moved home in sort of the third too.
Third this week at March our clients also moved coal.
We saw that a lot of the firms that we've been talking too as well as both the acquire them the potential for for the acquired kind of pulled into orders a little bit to focus on managing their own businesses through the pandemics. So we've also seen and we also had some concerns about how do we traveled to do those final final bids are.
So I think now we were really having a bit looked at it been what I'm, saying that I think these travel impediments are with us for a longer term. So if you look at a place like Australia that has said that they might keep their borders close to non essential travel through the remainder of this year, what we're really beginning to focus on now is how do we continue.
With that M&A, but the processes utilizing even more the resources that we have in country. So when I think were ideally situated to do that analogy. If you think about the full from Mwh, who joined US that was four years ago now and so when we looked at.
In the UK for example, we've had.
Schaeffer, who leaves the our global group based in the UK. The Mwh season, there for 40 years and also know Peter Brad has been there for some time. So we would view youre with between Mwh, Peter Redenius, either jointed there that those folks are all sufficiently stantec eyes that they can they can help us with sourcing acquisition.
They can help us with.
Even more digging deeper into the due diligence and the integration efforts very similar in Australia, where in addition to the Mwh folks that have been there since 2016 now we've got the strong leadership of which would read engineers there as well so.
I think what we're thinking about going why is that.
For the last quarter, I think everyone sort of part of the bit you know as we all focused on running our own businesses and now we're seeing people begin to emerge on some of these discussions are starting again and we're really thinking more about.
Utilizing even more are in country leadership to help us with the M&A.
Assesses going forward.
Okay. That's great and last question for me could you talk a little bit that thousand building, how should we be looking at organic growth. Following the 8.7% declined in the and that revenues in the quarter, whether there was anything specific in what are we are poised for slow to recall.
Or let's say a worse scenario that have been Q2. Thank you.
Yes, we don't see as significantly de rating from where we were in Q2.
As we look at the buildings group as because like the pivot to the healthcare work E. Commerce work and so one is is underway, but in Q2 it wasn't enough to catch up to the decline of course as an in commercial insulin.
We're seeing a lot of healthcare opportunities that industry, probably more than we've seen particularly in Canada for for some time. So I think that you know we buildings isn't going to rebound extremely strongly but I think it'll be my gut says it will be stable.
Going forward with perhaps a slightly traction going forward, but.
But certainly I think hopefully not to the degree that we signed two too.
Perfect. Thank you very much and congrats again.
Thanks, Good luck.
Our next question comes from some Khan with RBC capital markets.
Alright, Thanks, and good morning, just a follow up there on your commentary on the building segment I guess, you called out 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 your being more than offset by water and trucks and what are your thoughts at a high level across end markets globally.
Yeah. So overall as you know because we said we expect our 2020 net revenue to finish sort of similar to what we saw in 2019. So so while there may be.
A little retraction in some of these going forward it out for the remainder of the year no. We're going to see that strong growth I think continue through water.
If you remember looking back over the last couple of years no. We spent a lot of focus on building backlog in water and so now we had positive organic growth water overall for the last four or five quarters and and I think we'll see that continuing so yes had really really strong growth last year. So.
We're coming off a bit of a high comp there, but that certainly in western Canada. We look at the work on Trans Mountain coaster gas and so on that will be stable work for many years for yes, and our oil and gas group, but again, it's not huge but great margin work, but.
And again, no utilization, sorry, first 300% utilization and no business development or admin costs of the 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, right got part of that is driven by the water market, but what are you assuming for the operating backdrop, you know, there's still a bit of uncertainty out there. According to what you said are you assuming you know there is a bit of stimulate some extra dollars whatever is this all religious preinstall on what's.
You have in your backlog.
Yes for 2020, we're not really forecasting any significant stimulus. There's certainly has been a lot of talk.
Putting together bipartisan stimulus bills, and and we really hope that that come to fruition.
The backdrop of an election year, we're wondering if that might be difficult and so we're not looking the number 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 the thinking the commentary you mentioned no sort of moderating your thoughts on down missions for potential M&A. I guess is that just based on your outlook on what you're willing to pay for the foreseeable future is that more along the lines of targets. Even at this point might be expecting to have a month or versus what you think.
Well some of the conditional color on that.
Well you know, there's always said that attention as you look to establish valuation for for various firms.
Everyone knows exactly sure what the shape of this recovery. So what so we certainly know historic performance and profitability numbers for these various firms, but you know everyone. I think is really thinking about what does it look like going forward.
So what we what we really thought is that it will just really isn't the time to pay high margin high high multiples on historic earnings. So there's a bit of that pension and so were.
The company that we continue to talk about where we're 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 on profitability and and so until we haven't seen really.
There has been virtually no transactions in our space since the pandemic hit so it's hard to get a fuel for what the multiples are going to look like but in our discussions.
No we haven't seen a lot of softening, but it's still early days.
Great. Thank you.
Thanks for your question.
Once again that is star and then I want to she'd like to ask a question. We have a question from Devin.
CMO capital.
Alright, Thank you I good morning, guys.
All right it seems like ER.
It's too.
From the current or what your retention.
Could've been a Bruce to your.
And then in marketing no expense control things like lower travel and training cost.
For suspect.
Voluntary turnover by you know what have been relatively level in the quarter. Just can you talk about the sustainability of these cost factor into the back half a year and grew in 2021.
Sure you know it is something that we.
Certainly thinking about it.
Because you're right I mean, the degree to which we've been able to bring those costs down and a second quarter.
We didnt have a a really strong separately as we ended the quarter and so you know we can you can certainly seeing out whats achievable.
You know as we started to we opened our offices and.
We're seeing in southern geography, close wanting to start to travel again.
The level that we're at sea isn't sustainable and I'd say overall not good for the business.
Okay.
Expenditures are are useful.
We're starting to see more discussion around and then on marketing dollars again, you know for purposes, and someone says where those costs were low.
The second quarter, we'll see some of that start to come back again slowly over the second half year. So you know for us.
Yes.
It's an expectation that there will be some increase but you know we're not expecting it to be a dramatic increase over the rest of the here.
Really going to be as we move into our plan for 2021.
Determination of how far back into the pendulum swings band and you know it would certainly be our desire that now that we've demonstrated that we can operate and operate quite successfully and a lower cost levels, our expectation would be that we sat sina that threshold.
Citation lower than we have historically, so we do believe there's opportunity there, but down brick or what is sustainable going forward is just beginning now.
Yes.
Okay. Thanks for that maybe just switching gears.
Your next state and local government.
Focal point for some investors I think some of your peers have been.
Projecting that award activity.
It's been good in Q2.
And there are actually going a good level of RFP, but.
But they are expecting kind of new or new awards to slow.
In the second half until we get better clarity on on federal funding definitely trying to get you know.
Roger fix that could be shovel ready.
In contrast stimulus I guess what are you seeing in your business.
We have seen pretty solid continued RFP activity.
We have seen that said some clients are taking a little longer to me to make the.
The award one thing, though that we really are seeing is increased opportunities in U.S. federal work.
I think we knew we press release over the last it allows them. Some recent us federal workers and there's others that we haven't so some always knew you heard we may see state and local.
Still putting on RFP, but perhaps not a month.
Awarding as quickly we are seeing that general strengthening in the amount of us federal work that were that we're doing.
And we've also seen that that well.
Well, we when we went into the pandemic restrictions in March.
RFP activity, so little bit we did see sort of in the April may June timelines that the number of opportunities that are sales funnel are up in both dollar value and the numbers. So you 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.
I think that and that's really absent any significant government stimulus sense fund any government stimulus in the in the U.S. because while we think that will come we're just not confident that it would be the.
We'll go through the house and Senate.
You get announced and then the the really the revenue being generated by a significant way here at 20 point.
Okay. That's good color I'll turn it over thank you.
Great. Thank you.
And we have a question from Brian fast with Raymond James.
Yes, thanks, good morning, guys.
Just maybe.
John.
Your your outlook for the back half of the year.
Additional since last quarter, and then maybe what has changed to allow you to be more comfortable to provide guidance.
We didnt.
We've been working really closely with our business leaders and our geography geographic leaders not just in Canada, and you ask what around the world to really honing in on opportunity that they see project award that we now that we can begin to work forward on so we feel pretty comfortable about be the numbers that we put up.
For the our guidance is not guidance or outlook for the second half of the year.
What we see a little bit a retraction going forward a little bit more in Q4, it though the cold weather areas, but we always we'll see that based on.
Based on weather, but I think it in general the number that we 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 have your thoughts changed in respect to the preservation of workforce since last quarter.
No no we've we think that.
We're working really hard to.
To balance the workforce with the work that we have available, but also ensuring that we.
I think we made a statement in the prepared remarks are both really maintaining our workforce for the you know the recovery that we see to come so we for loan people other than our our board our C suite and our executive leadership who've all taken a 10% because we haven't asked our others our south for our.
Early pay reductions in some cases are taking vacation in some cases, they're taking leave without pay or other things like that in some cases, we've had we have for most people, but we're trying to manage.
Now I'd staffing as best we can so that going going forward, we've got the right people in place to to drive us forward.
Okay. Thanks, that's it for me I'll turn it over.
Thanks, Ron.
And we have a question from or not.
From Laurentian Bank.
Good morning, Thanks for taking my question.
And just wondering in light of coal bed arm. So many companies that pivoting looking to pivot to reduce the downside exposure or and capture greater opportunity.
Well, they say they'll have commented on increased demand within the medical field.
You didn't have been a quick to service that increased demand I'm, just wondering where you're seeing other potential pivot and whether that be the public private mix exposure in geographic right, even vertical focus or anything else.
Thank you.
Well, thanks will and so one thing that we did in terms of limiting downside exposure is one of the things that we talked about as part of our strategic planning process last year, where we had looked at our.
Significant exposure to land development, leading up to 2008 than our significant exposure to oil and gas heating 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 allow our.
Exposure to our revenue exposure to the cyclical 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 pivot 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 Eagle, 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 will all be beneficial beneficiaries of any stimulus programs that come along as well.
We're also seeing that that.
As more and more work comes over the last quarter. It has been more weighted on the public side than the private side and so what about the 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 that balances out going into 2021.
But I think we feel that that are the areas that could be exhibiting some more and more work healthcare public transit transportation water, we're very strong in and well situated to to get more than our fair share about additional work that comes in those areas.
Thank you that's very helpful. Secondly, I'm wondering if you could share what that's a magnitude of pricing concessions on the customer site.
Largely in the buildings, our energy segments or other areas.
It's primarily where we where we've seen it is with a couple of very very large public transportation agencies and you know what they're looking for is like in the two ish threeish percent range and then while we've seen some some large.
Oil and gas companies talk about it as well the number that they've been looking for a bit in those same sort of reserves.
Same sort of areas.
Hi, guys, we've had groups out for much more than that but I think the industry in general much assessment pushed occupancy you're not going to get 10% I mean, there is a 10% of juice the suite for anybody so we seem to be settling in a couple of percent range.
And somebody come forward also Mona.
Sorry in some of them right come forward also they said could you take a a 2% cut for the next six months. So they could put a time limited.
Which is a little easier just to for us to samik as well because there we don't have the trend fight to get back at the end.
That's perfect that was my follow up I was going to ask about the length of time.
So that's great. Thank you.
Thanks.
Okay, and once again, ladies and gentlemen that is star one if you have a question today.
On to Michael.
TD Securities.
Thank you.
Perhaps earlier about some of the factors that weighed on gross margin a gross margin percentage in the quarter.
And just what I can comment on how you see that gross margin evolving in the back half relative to where you were in Q2.
Are there some factors that you expect to.
Sort of some side and offer some relief and improving gross margins.
No I think that's for the back half once a year, so we're going to affect gross margin to it.
[laughter] modestly, but I, but I think that if you know the reason that we.
We've described for about me sign Q2 will likely continue and then back half a year.
Whether it.
Overall productivity on the side of our operations are our clients and that is that as a heavier weighting that we have going into second half the year with increased work on the midstream projects.
And some of our I'd like to transportation.
Projects that are moving to a C.
Projects, where the margin by the lower so you know that going and amenities pricing concessions that Gordon alluded to all combined what caused that is likely going to see around the territory that as it is now.
Okay. That's helpful with with that in mind and 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 with possibly some escalation and admin and marketing is there anything else you're.
Able to do with respect to admin and marketing costs to try do.
I guess offset whatever escalation you might you might expect in the second half.
Yeah, I mean, I think the you know there's always the opportunity there and we're we're really focused on it not only you know within the operation and start within our you know that the functional support side of our business as well. So initiatives still go ahead, where we've been able to reduce cost and then has anything yet because.
And so you won't get started all of the at the end in the first quarter initial estimate how long do you want Seanergy. These initiatives to expand then and now we are looking after having these initiatives kind of continues through the rest of the year. So you know I think.
What we're able to do on digital marketing hasn't really positive as we expect that to continues.
And also you know people are talking as I did point out that you're typically in Q3 is when you know we it's usually our most profitable quarter and you can kind of stuck up there and that because people are out of working or anything else. We you know we don't run really significant training program, so not a lot of downtime.
Hi.
In the third quarter and so it tends to improve and then it steps down in the fourth quarter, we think that pattern will.
Don't show up this year.
And overall, Dan you know, we think that we'll be able to bring in.
As many cost.
You know what we'd be able to fully offset all of the compression. We're seeing gross margin I got remains to be seen but as Gordon said you know, it's really a focus on the on the long term.
Okay, and maintaining that that's a specialized expertise that we have.
He knows the Tailwinds, we're getting from.
Favorable interest rate.
And from having you know.
Pretty low balance.
Tom I know revolving credit facility all of those thing is collectively will drive us we believe too.
Pretty good outcome for earnings and that's not definitely the overall focus for US is what is the bottom line look like and therefore managing.
Okay. That's great. Thank you and then just just lastly.
As a result of the pandemic.
There's been a sort of the discussion about.
Firms thinking about their real estate requirements given the success of transitioning employees to working from home early in here early in the pandemic.
I realize it's somewhat early still but have you thought about that and any thoughts on.
Reconsidering and Thats really say footprint kind of over the medium to longer term realize it's not a short term thing but thoughts on that.
Yes, absolutely Michael we brought it back up or something that we were working on before the pandemic hit in any event, but certainly now where we.
We are having a number of discussions we've talked with our with our distributor or larger employee based on where what they're thinking about going forward and I think Teresa said earlier that you a number of them when when the pandemic first fit everybody went home. They also this is ray you know I've never coming back to the office, but now.
You know a month to month three months then we have the majority of ourselves things we want to go back to the office like maybe you always impossible that I can come back and work in the office and work from home one day, a week or two days or weeks something along the along that line. So we are really looking at how that would impact our real estate footprint because our.
Receptive 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 you know.
Three days here treaties in the office he gave it home reporting one no perhaps you won't get a dedicated work seems to be more towards a hotel and 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 does 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 you know without even having to take any.
Any impairments on.
Leases over the next three years weekend.
Well make a change on a significant percentage of our.
Of our portfolio.
Okay. That's helpful. Thank you.
Hey, thanks.
The final reminder, ladies and gentlemen, if you would like to ask a question today. Please press Star then one at this time.
Thanks.
And it appears we have no further questions today I.
I would like to turn the conference back over to or Johnson for any concluding remarks.
Well just want to say you know thank you again for joining us on the call and then we look forward to speaking with you in the new near future about our continued progress as everyone have a great day and say healthy thanks very much. Thank you.
And once again, ladies and gentlemen that does conclude today's conference. We appreciate your participation today.
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Good day, everyone welcome to Stantecs second quarter Twentytwenty earnings results.
Leading the call today, our board Johnston.
And Chief Executive Officer entry said Chang Executive Vice President and Chief Financial Officer.
Stantec dialing into views a slide presentation, which is available in the investors section at Stantec.
Today's call is also webcast. Please be advised that if you have dialed in Walter you in the webcast you shouldn't be your computer as there is a 22nd delay between <unk> and the webcast.
All information provided during this conference call, it's subject to the forward looking statement qualification set out.
Too detailed and Stantec management discussion and analysis and incorporated in full for the purposes of today's call.
Oh amounts discussed in today's call or expressed in Canadian dollars and are generally around it.
And with that I'm pleased to turn the call over to Mr. core Johnson. Please go ahead.
Good morning, and thanks for joining Oh.
I'll be your call today, what are you over second quarter before.
Teresa will delve deeper into financial results before I return to providing updates to our outlook for the remainder of 2020.
We delivered a solid second quarter.
Net revenues in line with the outlook, we provided during our Q1 call.
Our results continued to demonstrate the resilience of our business model, which is bolstered by geographic and the business line diversification.
It's definitely managing our business in controlling costs.
This has allowed us to deliver a 4% year over year increase in Q2, adjusted east yet, even though the pandemic they've 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 or 4.7 billion at the end of Q, what how stable through Q2. It continues to represent approximately 12 months at work.
At the end of her presentation today I'll review, how the for value creators of people.
Excellent innovation and growth that we presented in our 2020 strategic plan.
Opinions to underpin your activities through the pandemic to continue to enhance shareholder value.
We delivered net revenues of 951 million, a second quarter, which is comparable to the same period last year.
Net revenue grew organically by 2.3% in the U.S., but we succeed in our Canadian a global geography, resulting in an overall organically contraction was 2.1% in Q2.
In addition to our geographic diversity in 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.
Restructure revenue contracted slightly.
Transportation delivered solid performance well community development work flow due to the has them.
And what we've seen growth in work for health care facility and E Commerce fulfillment centers. The pivot to these doctors was not sufficient overcome the negative impact to the commercial airport and hospitality sectors, and if you're just going out and building for the big deeper than expected.
In water, we saw healthy activity in the United States, United Kingdom and Australia.
This was the result of significant project awards in the U.S.
Yes definitely framework award we received in the UK.
In a multi year framework award in Australia.
It was also just one of the contract for the Irish water Engineering design services seven your framework.
This is our first major when it's higher than which will allow us to establish a long term president and provide a springboard for our other business lines the growth in the region.
The restructuring in environmental services, it's mostly related to Canada, where fuel work wasn't impacted by project slowdowns related the coldest IP.
Finally energy and resources generated solid organic growth as a result in increased midstream oil and gas work in the second quarter.
Our we're providing project management services on the trends bottom expansion project continued in the second quarter under a memorandum of understanding.
Subsequent to the quarter, we signed a contract piece to continue to provide you services for the duration of the project.
Last quarter, we spent some time reviewing our expectation for how we believe our visit units might be impacted by the pandemic.
We continue to believe that these expectations remain valid longer term.
In the second quarter, our U.S. operations achieved net revenue organic growth of 2.3%.
This was driven by project opportunity the water monitoring power and environmental services, which were partially offset by retraction in buildings and community development.
Gross margin as a percentage of net revenue increased 2.3% in the quarter the 52.9%.
The decrease as a percentage of net revenue would be the inefficiencies that arose did a pandemic related disruptions as well to shift our project, which was driven primarily by major projects in transportation as power and dance.
In Canada slowing economic growth was amplified by the cold it like he pandemic.
Net revenue retracted six when he presented in the quarter and 2.6% year to date and was particularly evident in building the community development.
Our environmental services businesses in pockets like projects slowdown well pandemic related mine shutdowns contributed to lower activity in mind.
Was partially offset by growth in our oil and gas and transportation businesses do that has gone extension pipeline project and several large light rail transit projects in Evensen, Montreal, and the greater Toronto area.
Gross margin decreased 2.7% as a percentage net revenue in the quarter to 48.5%.
In addition to pandemic related disruption the decrease as a percentage of net revenue was also driven by increases in volume of lower margin work related to the midstream oil and gas sector.
Midstream work contributed to a margin decrease the energy resources and environmental services. However, despite the lower margin of his work it drives higher utilization at a similar EBITDA contribution has or other business line.
Global net revenue retracted, 7.9% of the quarter and was consistent year to date with reduced work volumes during the pandemic, partly offset by increased project opportunities in some markets.
Projects go down were most pronounced in our UK and Australia building and European Environmental services business.
And then related mine closures in Latin America, and large project wind downs empower them further contributed to revenue traction.
Pardon me offsetting this though was the right and public transportation projects in Zealot and continued strong performance at our UK infrastructure and water business.
We also saw higher volume of work at our Australian water business with several large misspoke panel contracting attraction in Q2.
And just last week, we were running water industry consultant at the year in the UK.
Gross margin as a percentage of net revenue decreased 1.8% in the quarter to 51.7%.
Margins were impacted by the pandemic project mix, some ongoing pricing pressures in the UK Europe had a couple of localize talented lots of projects.
I'll now turn the call over to future resell for a review of financial performance.
Thank you for Jim Good morning, everyone.
Adjusted net income from continuing operations increased 3% to 58 million in second quarter and adjusted earnings per share increased 4% to 52 cents per share.
Largely due to an 8% decrease in administrative and partly assessments and 29% reduction in net interest expense.
Gross margins for the quarter decreased 5% to 490 million.
As a percentage of net revenue gross margin was 51.5%.
I'd now like has created a degree of disruption in our operations and our clients operation, causing some inefficiencies in project execution.
We also saw higher than anticipated growth in revenue from our lower margin midstream oil and gas project.
As demonstrated by our solid adjusted EBITDA margin of 15%, we're managing the business carefully and if he could mitigate these margin impact on the cost side.
Our balance sheet remains strong at June Thirtyth 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 with 82 days at quarter end compared to our target of 90 days Dsos decreased four days since Q1 of the result of <unk> ongoing focus on invoicing and collection activity and we've not seen any notable impact due to the pandemic.
Given our strong mix of public sector client and the high quality of our private sector clients. We do not believe our credit risk and increased meaningfully as a result with the pound data.
Moving onto the liquidity and capital allocation, our free cash flow for the quarter improved by 83% compared to Q2 19.
Operating cash flows from continuing operations were 251 million and 89 million improvement compared to Q2 19.
The improvement was driven by increasing cash proceeds from client lower payments to suppliers and the benefit of various pandemics tax deferral program, which included the deferral of 35 million in tax payment under now do at various things before the end of Q1 2021.
Cash flow used in investing activities were 11 million Assembly decrease compared with Q2 19, mainly driven by reduced capital expenditure.
We used 100 million for net financing activities compared with 83 million in she to 19 cash used in financing activities, including 62 million and repayment of drawing down the revolving credit facility at 32 million in payments, where these obligations, partly offset by $19 million.
Proceeds from the exercise of stock option.
I'll turn the call about two core to review our 2020.
Thanks Teresa.
Given the unprecedented circumstances brought on by the pandemic, we withdrew our 2020 guidance okay.
That said, we continue to reevaluate our anticipated financial performance on 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.
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.
This project slowdowns in the typical downtime related to cold weather is seasonality. We expect Q4 net revenues in the U.S. could be sequentially lower.
Full year 2020, U.S. that revenues are expected to be comparable to 2019 at U.S. dollars when combined with our strong results through the first half of the here and we also expect from 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 a typical seasonal downturn.
Given the weak outlook for Canada before the pandemic, we expect a nominal 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 UK, Australia, and the transportation sector in New Zealand are expected to offset the impact of project slowdowns and other business, resulting in full year 2020 revenues being comparable to 2019.
Overall, we expect Q3 in 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 2019.
We now expect roughly 55% of our earnings to be concentrated in Q2 in Q3 down from the 60% estimate previously provided.
Our balance sheet is strong and we continue to have excellent liquidity.
Our capital allocation priorities have not changed.
We're committed to returning capital to shareholders the payment of our dividend and we'll continue to repurchase shares opportunistically.
We continue to execute on our through your strategic plan, which we rolled out to our employees and the investment community in December of last year.
Our solid second quarter results, our credit to all of our people around the world and I want to thank our employees for their continued commitment in executing our client centric strategy in the mid thirtys unprecedented disruption caused by the has ever.
As we begin our biggest office your mobilization, the health and safety of our people will always come first.
We're also taking steps in this period to maintain a finger give our workforce in order to position ourselves for the economic recovery that will come.
We are committed to both continuing and expanding upon our long term support for the block units as people of color communities around the world.
And while we've been engaged for many years the organization that bring to the interest of these communities both financially and more importantly through the volunteer efforts of our employees. We know that there's more that we can do.
We've engaged with our internal inclusion of diversity council to develop additional areas of support as their focus our financial commitments and our employee engagements to make a long term lasting impact.
We're being thoughtful and deliberate and how we manage our business.
We are mitigating the compression of gross margin decreased administrative and marketing costs.
Through our reshaping effort in 2019 ongoing cost reduction initiatives and significant reduction in discretionary spending there during the pandemic we've been successful in protecting our industry, leading adjusted EBITDA margins.
We continue to develop innovative new solutions for ourselves and our clients to meet the challenges posed by the corporate banking pandemic.
For example, internally we've lost a virtual marketing and business development toolkit to enhance our client relationships socially just the world.
Externally across North America, Europe, we're using our car chairside approach of proprietary financial planning software to revive utility that optimizing the 2021 capital spending scenario the rate plan in response to colder Nike impacts on water demand.
Income tax fees and other shared revenues.
While the pace of acquisitions currently challenged by travel restrictions are growth aspirations have not changed and the acquisition pipeline remains strong.
In the meantime, we've increased our account management focus on key part accounts, leading to a 7.4% organic growth and net revenue from our names accounts compared with Q2 2019.
While the world remains the uncharted territory, we're confident to the resilience of our business model and we will remain vigilant in monitoring the potential impact on our clients communities and most importantly, our employee.
And with that we'll open the call the questions operator.
Thank you.
Ladies and gentlemen.
Question at this time, please press star and then one.
If you are using a speaker for today it might be necessary to pick up the handset or do you press your mute function. So the signal can reach our equipment.
Again that is star and then one if she'd like to ask a question today.
And we'll take our first question from <unk>.
Gentlemen capital markets.
Yep.
Thank you very much and good morning, everyone congratulations for the quarter.
If you'll be looking at the gross margin you worked successfully maintained <unk> EBITDA margin. Despite the contraction in gross margin so more looking specifically at.
International could you talk a little bit about the key levers that grow.
A decline in gross margin specifically for dose region, and what should we expect <unk> going forward.
In terms of gross margin.
Yes, they have been well good morning, So as you pointed out there I think it's really important to highlight that we are managing the company for both long term growth of performance in terms of EBITDA margin and efforts and the gross margin is certainly one of the levers that we are managing in concert with that there with admin and marketing costs.
So our managing welcome to balance the gross margin pressure and generate solid returns that we saw in Q2. So there's a couple of things that I think we saw contributing to to the gross margin declines in Q.
One of them wouldn't be.
While our utilization as a measure of productivity is holding up well getting back to the flow Gen seasonal trends. There are some initial inefficiencies in project delivery caused by working from home. So when you know one example of C., we haven't seen working on a project you get to a certain part and need to input from your clients are from a.
Partner agencies, 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 efficiently and then they were previously.
We've seen a few clients the larger ones in particular for fee reductions no. That's not material on gross margin at this point, but I just wanted to disappoint got hope is no. That's as good a trends we're seeing that again. These are significant but we're just seeing that we're also importantly, no project mix had an impact this quarter as an example that the Charles Grom expansion project there were worth.
And on has a little gross margin.
We said in the prepared results Toby utilization rates are virtually 100% and we incurred no easier marketing costs. So the overall EBITDA contribution is similar to other projects that up and other business lines. So.
There's a couple of things there that we're working through but you know as you say that at the beginning as it is important to note that we're managing the whole business to deliver that consistent performance.
So while gross margin certainly the data point for us, we're balancing growth margin managing a workforce and controlling discretionary costs to ensure that we achieved both strong EBITDA and EPS numbers going forward.
Okay, that's great color Gore and could you provide maybe also with update on B and then in light of depend they make yeah.
Absolutely.
I think what what we found is that what.
Even though it seems like much longer I was thinking M&A, it's actually really bad only about little less a four month since I have to fly hold in mid March from Australia, where we're talking to some firms and.
So when we when I think when we first of all we've all been sort of the third two or.
Third this week at March our clients also moved coal.
We saw that a lot of the firms that we've been talking too as well as most of you acquire them the potential firms that we acquired kind of pulled in their volumes a little bit to focus on managing their own businesses through the pandemic. So we've also seen and we also had some concerns about how do we travel can do those final final fit.
Good.
I think now we really haven't even look at it been was saying that I think these travel impediments are with us for a longer term. So again, if you look at places like Australia that has said that they might keep their borders close the non essential travel through the remainder of this year, what we're really beginning to focus on now is how do we continue with that M&A.
Okay, but the processes utilizing even more the resources that we have in country. So what I think were ideally situated to do that now if you think about data flow from Mwh, who joined US that was 40 years ago now and so when we looked at.
In the UK for example, we've had.
Schaeffer, who leads our global group based in the UK BMW AC then there for four years and also now Peter breadth there for some time, so we would view youre with Pacific Mwh, Peter Redenius, either joined US there that those folks are all sufficiently stantec eyes that they can they can help us with sourcing acquisition.
They can help us with.
Even more digging deeper into due diligence and the integration efforts very similar in Australia, where in addition to the Mwh folks that have been there since 2016 now we've got the strong leadership.
I would read engineers, there as well so.
I think what we're thinking about we've been why is that.
For the last quarter, I think everyone sort of positive it.
We all focused on running our own businesses and now we're seeing people begin to emerge on some of these discussions are starting again and we're really thinking more about.
Utilizing even more art in country leadership to help us with the M&A.
Going forward.
Okay. That's great and last question for me could you talk a little bit about building how should we be looking at organic growth. Following the 8.7% declined in the and net revenues in the quarter, whether there was anything specific and what are we are poised for slow recovery.
Or let's say a worst scenario that I've been to two thank you.
Yes, we don't see it significantly de rating from where we were in Q2.
We look at the building through bad because like the pivot to the.
Healthcare work E Commerce work and so on it is underway, but in Q2, it wasn't enough to catch up to the decline of course as an in commercial and so on.
We're seeing a lot of healthcare opportunities hitting the street, probably more than we've seen particularly in Canada for for some time. So I think that we are building isn't going to rebound extremely strongly but I think it'll be my gut says it will be stable.
Going forward with perhaps a slightly traction going forward, but.
But certainly I think hopefully not to the degree those thoughts into.
Perfect. Thank you very much and congrats again.
Thanks, Good luck.
Our next question comes from some Khan with RBC capital markets.
Thanks, and good morning, just a follow up there on your commentary on the building segment I guess, you called out some strength in water across a couple of markets for the rest of 2020.
I'm thinking more for environmental services and energy, So expect kind of similar performance to Q2 being down year over year through the rest of your be more than offset by water and trucks and what are your thoughts at a high level across end markets globally.
Yes. So overall as you know because we said we expect our 2020 net revenue to finished sort of similar to what we saw in 29 teams. So so while there may be.
A little retraction in some of these going forward it out for the remainder of the year no. We're going to see that strong growth I think continue through water.
Remember looking back over the last couple of years, knowing we spent 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 and I think we'll see that continuing so yes, it really really strong growth last year. So.
We're coming off a bit of a high call there, but that certainly in western Canada. We look at the work on Trans mountain call for gas and so on that will be stable work for many years for yes, and our oil and gas group, but I guess, it's not huge it's not great margin work, but.
No I don't know utilization, sorry, first 300% utilization and no business development, there had been cost of it generates a pretty good EBITDA margin.
Okay. Thanks for that and then your commentary on the overall U.S. market for comparable revenue were 20 Twond right got part of that is driven by the watermark you believe assuming for the operating backdrop.
A bit of uncertainty out there. According to what you said are you assuming you know there's a bit of stimulate some extra dollar spending or is this all religious based on what you have in your backlog.
Yes first for 2020, we're not really forecasting any significant stimulus. There's certainly has been a lot of talk.
Putting together bipartisan stimulus bill that and we really hope is that comes to fruition.
Yes, the backdrop of an election year, we're wondering if that might be difficult and so we're not looking the number 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 the big in the commentary you mentioned.
Moderating your thoughts on down missions for potential M&A I guess is that based on your outlook on what you're willing to pay for the foreseeable future is that more along the lines of targets. Even at this point might be expecting to will have a mall oversee when you think as well some of the conditional color on that.
Well you know, there's always that attention as you look through.
Established valuation for for various firms everyone knows exactly sure what the the shape of this recovery what so we certainly know historic performance and profitability numbers for these varies from when you everyone. I think is really thinking about what does it look like going forward.
So what we what we really thought is that no theres really isn't the time to pay high margin high high multiples on historic earnings. So there's a bit as I've mentioned in store.
The company that we continue to talk about work.
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 on profitability and and so until we haven't seen really heard there has been virtually no transactions in our space since the pandemic hit so it's hard to get a fuel for one.
Multiples are going to look like but in our discussion.
We haven't seen a lot of softening, but it's still early days.
Great. Thank you.
Great. Thanks for your question.
And once again that is star and then a one if she'd like to ask a question. We have a question from Devon Dodd with BMO capital.
Alright, Thank you I good morning, guys.
Right right.
It's too early.
Retraction.
You know kind of going up to your admin and marketing no expense control things like lower travel and training costs.
I would suspect.
Voluntary turnover.
I have been relatively level in the quarter. Just can you talk about the sustainability these contracts into the back half a year and Greenbrier 2021.
Sure.
It's something that we.
Our certainly thinking about it.
Because you're right I mean, the degree to which we've been able to bring those costs down in the second quarter.
We didnt have a a really strong separately as we ended the quarter and so we can you can certainly see now whats achievable.
But as we start to we opened our offices and.
We're seeing in some geographies close wanted me to start to travel and get on.
The level that we're at sea isn't associated ones and I would say overall not good for the business.
Because those expenditures are are useful.
We're starting to see more discussion around then on marketing dollars again, you know for gross proceeds and someone so where those costs were low.
In the second quarter, well see some of that start to come back again slowly over the second half year. So you know for us.
This is an expectation that there will be some increase but no we're not expecting it to be a dramatic increase over the rest of the year.
It's really going to be as we move into our plan for 2021, a determination how far back into the pendulum swings band and you know we would certainly be our desire that has now than we demonstrated that we can operate and operate quite successfully at a lower cost level.
Expectation would be that we set to know that threshold or expectation was lower than we have historically. So we do believe there's opportunity there, but down work or one is sustainable going forward is just beginning now.
Okay. Thanks for that let me just switching gears.
New York State and local government.
Kind of focal point for some investors I think some of your peers have been.
Projecting that award activity.
It's been good in Q2.
And there are actually from a good level of.
All right keys, but.
But they are expecting kind of new or new awards to slow.
In the second half until we get better clarity on on federal funding effect when trying to get you know.
Projects could be shovel ready.
In contrast 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 me to make the.
To make the award one thing, though that we really are seeing is increased opportunities in U.S. federal work.
I think we we press release over the last it allows them. Some recent us Federal awards and there's others that we haven't so so why would you heard we may see state and local.
Still putting an RFP, but perhaps not as much.
Awarding as quickly we are seeing that general strengthening getting to the amount of us federal work that were that we're doing.
And we've also seen that that well.
While we when we went into the pandemic restrictions in March.
RFP activity, so little bit we did see sort of in the April may June timeline that that the number of opportunities that are sales funnel are up in both dollar value and it's been numbers. So you 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.
I think that and that's really absent any significant government stimulus beds.
Any government stimulus in the in the U.S. because your while we think that will come we're just not confident that it wouldn't be the.
We'll go through the house and Senate.
The analysis and then the the really the revenue being generated by a significant way here at 20 point.
Okay. That's good color I'll turn it over thank you.
Great. Thank you.
And we have a question from Brian.
<unk>.
Yes. Thanks, Good morning, guys I'm, just maybe a touch on.
Your your outlook for the back half of your.
The change at all since last quarter, and then maybe what has changed to allow you to be more comfortable to provide guidance.
No we.
We've been working really closely with our business leaders and our geography geographic leaders not just in Canada and you asked that were around the world to really honing in on opportunity that they see project award that we now that we can begin to work forward on so we feel pretty comfortable about be the numbers that we put up for it.
Our guidance does not guidance or outlook for the second half of the year.
What we see a little bit a retraction going forward a little bit more in Q4, and some of the cold weather areas, but we always and see that based on.
Based on weather, but I think it in general the numbers that we 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.
I guess have your thoughts changed in respect to the preservation of workforce since last quarter.
No no we've got to we think that.
We're working really hard to.
To balance the workforce with the work that we have available, but also ensuring that we.
I think we made a statement in the prepared remarks are both really maintaining our workforce for the you know the recovery that we need to come so we for loan people other than our our border our C suite and our executive leadership who've all taken a 10% because we haven't asked our others are so for now.
Really pay reduction in some cases are taking vacation in some cases are taking leave without pay or other things like that in some cases, we've had we have hurdles people, but we're trying to manage.
Now if staffing as best we can so the goal going forward, we've got the right people in place to to drive us forward.
Okay. Thanks, that's it for me I'll turn it over.
Thanks, Brian.
A question from Mona.
From Laurentian Bank.
<unk>.
Good morning, Thanks for taking my question.
I'm just wondering in light of coal bed arm. So many companies that pivoting looking to pivot to reduce the downside exposure or and capture greater opportunity.
Well, they say they'll have commented on increased demand within the medical.
And you have been a quick to submit that increased demand I'm, just wondering where you're seeing other potential pivot and whether that be the public private mix exposure and geographic or even vertical focus or anything else that midpoint. Thank you.
Well. Thanks will then 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, where we had looked at our.
A significant exposure to land development, leading up to 2008 than our significant exposure to oil and gas leading up to 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 allow our.
Exposure to our revenue exposure to the sync with markets oil and gas in my to exceed 15%. So.
That's really I think limited if we do see a downside there but in terms of pivot you're right. We see a lot of work in healthcare.
We still see significant work in public transportation.
Doing a lot of worked in the Eagle, 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 will all be beneficial beneficiaries of any stimulus programs that come along as well.
We're also seeing that that.
As more and more work comes over the last quarter. It has been more weighted on the public side than the private side and so what about the 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 that balances out going into 2021.
But I think we feel that that are the areas that couldn't pivoting for more and more work healthcare public transit transportation water, we're very strong and well situated to to get more than our fair share about additional work becomes the that those areas.
Thank you that's very helpful. Secondly, I'm wondering if you could share what that's the magnitude of pricing concessions on the customer site.
Largely in the building energy segments or other areas.
It's primarily where we where we've seen it with a couple of very very large public transportation agencies and you know what they're looking for is like in the two ish threeish percent range and then while we've seen some some large job.
Oil and gas companies talk about it as well the numbers that they've been looking for a bit in those same sort of reserves.
Same sort of areas.
Times, we've had groups out for much more than that but I think the industry in general budget has been pushed occupancy you're not going to get 10%. I mean, there is a 10% of juices. This week for anybody so yeah, we seem to be settling into a couple of percent range.
And some of the Port also Mona.
Sorry in some of them right come forward also they said could you take a a 2% cut for the next six months like so thanks with its put a time limited.
Which is a little easier just to for us to samik as well because I don't have to trying to fight to get back at the end.
That's perfect that was my follow up I was going to ask about the length of term close yet so that's great. Thank you.
Thanks.
And once again, ladies and gentlemen that is star one.
And today.
On to Michael.
PB security.
Thank you.
After earlier about some of the factors that weighed on gross margin a gross margin percentage in the quarter.
I just wonder if you can comment on how you see that gross margin evolving in the back half relative to where you were in Q2.
Are there some factors that you expect to.
Tourism side and offer some relief and improvement in gross margins.
No I think that's up towards the back half of the year.
We're going to affect gross margin to it.
Improved modestly, but I, but I think that he has the reasons that we.
We've described for what we saw in Q2 will likely continue and then back half a year.
Whether it.
Overall productivity on the side of our operations, where our clients.
The heavier weighting that we have going into second half the year with the increase work on the midstream projects.
And some of our lives transportation.
Projects that are moving you will see the other projects, where the margin slightly lower so you know that than it had been in these pricing concessions that Gordon alluded to all combined what caused that is likely going to stay around the territory that as it is now.
Okay. That's helpful with that in mind and thinking about the fact that it sounds as though.
In in marketing costs, which were were quite well contained in the second quarter those may start to creep higher.
As you brought people back to the office. So just thinking about gross margin sort of being maintained at these kinds of level to possibly from escalation in a minute marketing it or anything else. You are you able to do with respect to admin and marketing costs to try to I guess offset whatever escalation you might you might.
In the second.
Yeah, I mean I think the.
There's always the opportunity there and where we're really focused on not only you know within the operations not within our.
Functional support side of our business as well so initiatives to look at.
Where we've been able to reduce cost and then has anything yet because.
And so when we started out all of the at the end of the first quarter. There were some customer how long do you want us to navigate these initiatives.
And then and now we are looking at having these initiatives kind of continues through the rest of the year. So you know I think.
What we're able to do on has been marketing hasn't really positive as we expect that to continue.
It also.
Our topic, if I did point out that is typically in Q3 is when you know we usually are our most profitable quarter and you can kind of is back up there and that's because people are out of working there anything else. We we don't run really significant training program going up a lot of downtime in the third.
Third quarter and so it tends to improve and then that's down in the fourth quarter. We think that pattern will will still show up this year.
And overall that you know, we think that we'll be able to bring in.
The main cost.
You know will we be able to fully offset all of the compression. We're seeing gross margin I think that remains to be seen but as Gordon said, it's really a focus on the on the long term.
And maintaining the specialized expertise that we have.
You know the tailwind we're getting from.
Favorable interest rate.
From having you know a.
Pretty low balance drawn under our revolving credit facility all associated collectively will drive us we believe too.
Pretty good outcome for earning and that's that's really the overall focus for us to what does the bottom line don't look like and up or managing.
Okay. That's great. Thank you and then just just lastly, as a result of the pandemic.
There's been a target a discussion about.
Firms thinking about their real estate requirements given the success of transitioning employees to working from home early in their early in the pandemic.
Realize it.
Early still but have you thought about that and any thoughts on.
Reconsidering that that's really say footprint kind of over the medium to longer term realize it's not a short term thing but call format.
Yes, absolutely Michael we brought it back down to something that we were working on before the pandemic in any event, but certainly now we're we are having a number of discussions we've talked littered with our we certainly are larger employee based on where with there.
Thinking about going forward and I think Teresa said earlier that you want number them when when the pandemic first fit everybody went home. They also this is great.
Ever coming back to the office, but now you know a month to month three months. Then we have the majority of ourselves thing we want to go back to the office like maybe even 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 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 you know.
Three days here treaties in the office begins at home reporting one no perhaps you won't get a dedicated work space to be more toward the hotel and hydro 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 does 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 you know without even having to take any.
Any impairments on our leases you know over the next three years weekend.
Well make a change on a significant percentage of our.
Of our portfolio.
Okay. That's helpful. Thank you.
Great. Thanks.
The final reminder, ladies and gentlemen, if you would like to ask a question today. Please press Star then one at this time.
Thanks.
And it appears we have no further questions today I.
I would like to turn the conference back over to or Johnson for any concluding remarks.
Well just want to say, yes. Thank you again for joining us on the call and then we look forward to speaking with you in the near future about our continued progress and everyone have a great day in and stay healthy. Thanks very much. Thank you.
And once again, ladies and gentlemen that does conclude today's conference I appreciate your participation today.