Q2 2020 Stantec Inc Earnings Call
[music].
Good day everyone.
Stantecs second quarter Twentytwenty earnings results call.
Leading the call today, our board Johnston, President and Chief Executive Officer, and Teresa Chang Executive Vice President and Chief Financial Officer.
Stantec insights dialing into views a slide presentation, which is available in the investors section at Stantec Dot com.
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 a 22nd delay between the call and the webcast.
All information provided during this conference call is subject to the forward looking statement qualification set out on slide two.
Detailed and Stantec management discussion and analysis.
Incorporated in full for the purposes of today's call.
Our amounts 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. Johnson. Please go ahead.
Good morning.
Thank you for joining.
Oh, you know our call today with a review over second quarter performance.
So will this sale for its financial results before I return to providing updates to our outlook for the remainder of 20 Twond.
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.
Effectively managing our business in controlling costs.
This has allowed us to deliver a 4% year over year increase in Q2, adjusted EPS, yet 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 level.
Our record backlog of 4.7 billion at the end of Q was how people through Q2.
Continues to represent approximately 12 months of work.
At the end of our presentation today I'll review, how before value creators of people.
Excellent innovation and growth that we presented in our 2020 strategic plan continues 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% do you have resulted in our Canadian and global geography.
Also 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 energy resources generated organic growth.
As expected infrastructure revenues contracted slightly.
Transportation delivered 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 to overcome the negative impact to the commercial airport and hospitality sectors and if you choose to go down and buildings that have been deeper than expected.
In water, we saw healthy activity in the United States, United Kingdom and Australia.
This is 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 were field work was impacted by project slowdowns related to cope with 19.
Finally energy and resources generated solid organic growth has resulted in increased midstream oil and gas work in the second quarter.
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 is to continue to provide you services for the duration of the project.
Last quarter, we spent some time reviewing our expectations for how we believe our visit units might be impacted by the pandemic.
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 monitoring power and environmental services, which were partially offset by retraction in building and community development.
Gross margin as a percentage of net revenue decreased 2.3% in the quarter to 52.9%.
The decrease as a percentage of net revenue was due to inefficiency that are rolling through the pandemic related disruptions as long as a shift in our project.
This was driven primarily by major projects and transportation and power and Dan.
In Canada slowing economic growth was amplified by the Colby let him 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 business was impacted by projects slowdown well pandemic related mine shutdowns contributed to lower activity in mining.
This was partially offset by growth in our oil and gas and transportation businesses. Do this has got expansion pipeline project and several large light rail transit projects in Evanson, Montreal, and a 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.
This midstream work contributed to a margin decrease the energy resources and environmental services. However, despite the lower margin others were it drives high utilization at a similar EBITDA contribution has or other business lines.
Global net revenue Refrac is 7.9% in the quarter and was consistent year to date with reduced work volumes during the pandemic part of the offset by increased project opportunities in some markets.
Projects told alber, 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 traction.
Partially offsetting this though was the rep and public transportation projects in New Zealand 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 municipal panel contract gaining traction in Q2.
And just last week, we were running 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 localized challenges on some projects.
I'll now turn the call. We're just two Teresa for a review of financial performance.
Thank you Lord and 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 80% 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 revenues gross margin of 51.5%.
Demonstrated 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 16%, we're managing the business carefully and have taken steps.
It is margin impact on the cost side.
Our balance sheet remains strong at June Thirtyth net debt to adjusted EBITDA was at the bottom 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 that 90 days Dsos decreased four days since Q1 of the results of our 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 clients 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 and $89 million improvement compared to Q2 19.
The improvement was driven by an increase in cash proceeds from client lower payments to suppliers and the benefit of various pandemic tax deferral program, which included the deferral of 35 million in tax payments that are now season at various things before the end of Q1 2021.
Cash flows Houston investing activities were 11 million, that's definitely decreased compared with Q2 19, mainly driven by reduced capital expenditure.
We use 100 million for net financing activities compared with 83 million in Chichimene 19, cashews and financing activities included 62 million and repayments and driving down a revolving credit facility at 32 million in payments, where these obligations, partly offset by 19 million in.
Proceeds from the exercise of stock options.
Now I'll turn the call about two core to review our 2020.
Yes.
Thanks Theresa.
Given the unprecedented circumstances brought on by the pandemic, we withdrew our 2020 guidance I made 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 accept a nominal retraction in revenues in Q3 relative to Q2 across all businesses, except water, where we see growth.
This project slow down to the typical belcher related to cold weather for the seasonality. We expect Q4 net revenues in the U.S. could be sequentially lower.
Full year 2020, you Ethernet revenues or.
Are expected to be comparable to 2019 in us dollars when combined with our strong results through the first half of the here 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 experienced 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 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 for 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 to determine in executing our client centric strategy in the mid thirtys unprecedented disruption caused by than has ever.
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 maintaining the integrity of our workforce in order 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 organization that 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 council to develop additional areas of support as their focus our financial commitments and our employee engagement to make a long term lasting impact.
We're being thoughtful and deliberate and how we manage our business. We're mitigating the compression of gross margin through 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 solutions for ourselves and our clients to meet the challenges posed by the corporate banking 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 into Europe, we're using our criteria for our proprietary financial planning software to revive utility that optimizing their 2021 capital spending scenario. The graceland in response to colder Nike impacts on water demand sales have income tax fees and other share.
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 names accounts compared with Q2 2019.
While the role remained uncharted territory, we're confident in the resilience of our business model and we will remain vigilant in monitoring the potential impact on our clients communities and most importantly, our employees.
And with that we'll open the call the questions operator.
Thank you.
Ladies and gentlemen, good to ask a 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 for 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 bundle up all the way from Janney capital markets.
Yes.
Thank you very much and good morning, everyone congratulations for the quarter.
If you'll be looking at the gross margin you were successful in maintaining the EBITDA margin. Despite the contraction in gross margin so more looking specifically at the.
International could you talk a little bit about the key levers that growth via a decline in gross margin specifically for dose to region and what should we expect there going forward in terms of gross margin.
Yeah. Thanks, everyone. 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 and performance in terms of EBITDA margin and easy assets and that gross margin is certainly one of the levers that we are managing in concert with out there with admin and marketing costs are.
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 a flow gen seasonal trend. There are some inhibition inefficiencies in project delivery caused by working from home. So that you know one example of C., we haven't seen working on a project you get to a certain pardon me some 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 a larger ones in particular ask for fee reductions you know that's not material on gross margin at this point, but I just wanted just to point that okay. No. That's as good a trends 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.
I don't have a little gross margin.
We said in the prepared result, Toby utilization rates are virtually 100% and we incurred no easy to our marketing costs. So the overall EBITDA contribution is similar to other projects it up and other business line. So.
This is 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.
And 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 those strong EBITDA and EPS numbers going forward.
Okay, that's great color Gord and could you provide maybe also with update on B and they may in light of the Pembina yeah.
Absolutely. So you know what people are what we found is that north and it's even though it seems like much longer I was thinking M&A is actually really bad only both little less than four months since I have supply home in mid March from Australia, where we were talking to some firms and.
So when we when I think when we first of all loophole 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 acquirer them the potential for for the acquired kind of pulled in their volumes a little bit to focus on on managing their own businesses through the pandemics. So we've also seen and we also had some concerns about how do we travel can do those final you know the final bits of new delay.
But I think now we were really having a good what kind of been one thing that I think these travel impediments are with us for a longer term. So if you look at places 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 I was four years ago now and so when we looked at.
In the UK for example, we've had cash Schaeffer, who leads our global group based in the UK BMW 18 been there for 40 years and also know Peter Brad has been there for some time. So we would view youre with between Mwh pita bread and he aside the joined US there, but 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 would read engineers, there as well so.
I think what we're thinking about why is that.
For the last quarter, I think everyone sort of positive. It 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 would be the M&A.
Excessive going forward.
Okay. That's great and last question for me could you talk a little bit that Bob 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 in what are we are poised for slow recovery.
Or let's say a worse scenario that have been too too. Thank you.
Yes.
I don't see us significantly de rating from where we were in Q2.
We look at the buildings group as we said 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 in commercial and storm.
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 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 saw in Q2.
Perfect. Thank you very much and congrats again.
Thanks, Good luck.
Our next question comes from some Khan with RBC capital markets.
Okay. Thanks, and good morning, just 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 Saliq Sprague kind of similar performance to Q2 being down year over year through the rest of the or be 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 finished 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. It means 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 that continuing so yes have really really strong growth last year. So.
We're coming off a bit of a high comp there, but that certainly in western Canada. If we look at the work on Trans Mountain coaster gas and so on that will be stable work for many years for the us and our oil and gas group, but again, it's not huge that's not great margin work, but.
You know I didn't know utilization, sorry, first 300% utilization and no business development or had been cost 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 greenstone what's.
You have in your backlog.
Yes first for 2020, we're not really forecasting any significance than there was no. There's certainly has been a lot of talk.
Putting together bipartisan stimulus bills and and we really hope is 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 numbers that we put up for the U.S. 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 thinking the commentary you mentioned, you know sort of moderating your thoughts on down.
Central 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 multiple versus what you think as well some of the conditional color that come.
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 what so we certainly know historic performance and profitability numbers for these varies from well 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 you know this really is at the time to pay high margin high high multiples on historic earnings So there's a bit attention 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 on so.
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.
Hillary days.
Great. Thank you.
Thanks for your question.
Once again that is star and then a one if she'd like to ask a question we have a question from Devin.
CMO capital like.
Alright, Thank you I get my guys.
All right it seems like ER.
Correct.
I wouldn't really retraction.
Could've been a Bruce to your.
And then in marketing no expense control things like lower travel and training cost.
I suspect.
Voluntary turnover.
I have been relatively level in the quarter. Just can you talk about the sustainability of these contractor into the back half a year and you grew in 2021.
Sure you know it is something that we.
Our certainly thinking about it.
Because you're right having engaged the degree to which we've been able to bring those costs down in the second quarter and we didnt have a a really strong separately as we entered the quarter and so you know we can you can certainly see now achievable.
But as we start to we opened our offices and.
We're seeing some geography close wanting to start to travel again.
The level that we're at sea isn't sustainable 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 and then on marketing dollars again, you know for purposes of 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 a year. So you know for us.
It is 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 year.
It's really going to be as we move into our plan for 2021, a 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 I know a lower cost level, our expectation would be that we set.
You know that threshold or expectation lower than we have historically, so we do believe there's opportunity there, but down Rick or what is sustainable going forward is just beginning now.
Okay. Thanks for that maybe just switching gears.
Your next state and local government.
Put a focal point for some investors I think some of your peers have been.
Jeff can that award activity.
It's been good in Q2.
There are actually from a good level of.
All right Keith.
But they're 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.
Your next to be shovel ready.
In contrast stimulus I guess, what are you seeing and 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 we press release over the last it allows them. Some recent US Federal awards as you know there's others that we haven't so so 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 are 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 has 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 and fund any government stimulus in 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.
The analysis and then the the really the revenue being generated by I've been 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 touch on.
Your your outlook for the back half of your.
Changed at all since last quarter, and then maybe what has changed to allow you to be more comfortable to provide guidance.
No we didn't.
We've been working really closely with our business leaders and our geography geographic leaders not just in Canada and you asked for 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.
Our guidance does not guidance where 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. So 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.
We made a statement in the prepared remarks are both really maintaining our workforce for the other recovery that we see to come so we for alone people other than our our board our C suite and our executive leadership who've all taken a 10% because we haven't asked or others, our south for no hours.
We 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 for most people, but we're trying to manage.
Managed 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, Brian.
And we have a question.
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 the gate, the downside exposure or and capture greater opportunity.
Well they say they all have commented on increased demand within the medical PR and you didn't have been a quick service that increased demand I'm, just wondering where you're seeing other potential pivot and whether that be the public private mexicali guarantee a graphic art, even vertical focus or anything else.
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.
Significant exposure to land development, leading up to 2008 that are 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 a revenue exposure to the six month markets oil and gas and mining to exceed 15%. So.
Thats 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 DTA, 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 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 that 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 I was going into 2021.
But I think we feel that that are the areas that could be pivoting from more and more work healthcare public transit transportation water, we're very strong and well situated to to get more than our fair share of that additional work that comes to 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 buildings that energy segments or other areas.
It's primarily for a week, where we've seen it is 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 as well the numbers that they've been looking for a bit in those same sort of reserves.
Same sort of areas you know, sometimes we've had groups that for much more than that but I think the industry in general much as has been pushed occupancy you're not going to get 10%. I mean, there is a 10% of juices to squeeze for anybody so yeah, we seem to be settling in 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 they put it that put a time limited.
Which is a little easier just to for us to samik as well because there we don't have to trend fight to get back at the end.
That's perfect that was my follow up that's going to ask about the length of time, she and so that's great. Thank you.
Okay.
Excellent.
Okay, and once again, ladies and gentlemen that is star one if you have a question today.
On to Michael.
TD Securities.
Thank you.
Asked earlier about some of the factors that weighed on gross margin.
Gross margin percentage in the quarter.
I'm just wondering 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 improvement in gross margins.
You know I think that towards the back half of the year.
We're going to expect gross margin to it to improve modestly, but I, but I think that if you know the reasons that we.
We described for about me sign Q2 to most likely continue and then back half a year.
Whether it.
Overall productivity on the side of our operations for our clients and that is that the heavier weighting that we have going into second half the year with the increase work on the midstream projects.
And some of our I'd like to transportation.
Projects that are moving to engage.
Projects, where the margin slightly lower so you know that going and a bit of these pricing concessions that Gordon alluded to all combined would tell us that it is likely going to say around the territory that as it is now.
Okay. That's helpful with with that in mind, and then thinking about the fact that it sounds as though.
Admin and 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 some escalation and admin and marketing or anything else you're.
Able to do with respect to an admin and marketing costs to try do.
I guess offset whatever escalation you might you might expect in the second us.
Yeah, I mean I think.
Yeah, there's always the opportunity there and where we're really focused on it not only you know within the operation we felt like in our you know that a functional support side, if I 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 you know lung has started out there at the end in the first quarter International estimate how long can see locked in at least is that these initiatives to extend then and now we are looking after having these initiatives kind of continues through the rest of the year. So you know I think.
No.
No we're able to do honestly marketing hasn't really positive as we expect that to continues.
You know maybe long talked me if I did point out that you're typically in Q3 is when you know we usually our most profitable quarter and you can kind of stuck up there and that's because people are out of working or anything else. We you know we don't run you know really significant training programs and have a lot of downtime.
In the third quarter and so it tends to improve and then it steps down in the fourth quarter, we think that pattern will.
Still show up this year.
And overall, Dan you know, we think that we'll be able to bring in.
The admin costs.
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, it's really a focused on the on the long term.
And maintaining that business specialized expertise that we how.
Kevin you noted that the Tailwinds are you getting from.
Favorable interest rate and from having you know.
Pretty low balance.
Comment a revolving credit facility all of those to his collectively will drive us we believe too.
Pretty good outcome for earning is and Thats not definitely the overall focus for US is what is the bottom line you don't look like and outdoor managing.
Okay. That's great. Thank you and then just just lastly.
As a result of the pandemic.
There's been a sort of 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.
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 another short term thing but call format.
Yes, absolutely Michael we brought it back that was something that we were working on before the pandemic hit in any event, but certainly now where.
We are having a number of discussions we've talked with our with our we survey or larger employee based on where with 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 no.
You know a month to month three months then we have the majority of ourself, saying, 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 company along along that line. So we are really looking at how that would impact our real estate footprint because of.
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 at home or four to 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 our leases over the next three years weekend.
I'll make a change on a significant percentage of our.
Of our portfolio.
Okay. That's helpful. Thank you.
Yeah.
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 Tonight.
I would like to turn the conference back over to or Johnson for any concluding remarks.
Well just want to say your 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 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. We appreciate your participation today.
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Good day, everyone welcome to Stantecs second quarter Twentytwenty earnings results call.
Leading the call today, our board Johnston, President and Chief Executive Officer Entry said Chang Executive Vice President and Chief Financial Officer.
<unk>.
Selling into views a slide presentation, which is available in the investors section at Stantec Dot com.
Today's call is also webcast. Please be advised that if you have dialed in while the webcast you shouldn't be your computer as there was 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.
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.
I'll be your calls today, what are you over second quarter before.
Teresa will then go deeper into the financial results.
Artery character provided updates to our outlook for the remainder of 20 to 20.
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.
Has allowed us to deliver a 4% year over year increase in Q2, adjusted he's yet even though the pandemic that 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 or four points doesn't go even at the end. If you want help people 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 creator of the people.
Excellent innovation and growth there was presented in our 2020 strategic plan.
Opinions to underpin our activities through the pandemic to continue to enhance shareholder value.
We delivered net revenues of 951 million or the second quarter, which is comparable to the same period last year.
Net revenue grew organically by 2.3% the U.S., but.
We talked in our Canadian and global geography, resulting in an overall organically contraction was 2.1% you too.
In addition to our geographic diversity in the diversity of our business lines bolstered our resilience in the second quarter.
Well certain areas retracted water and energy resources generated organic growth.
As expected infrastructure revenue can dockets like.
Transportation delivered solid performance well community development work flow due to the pans out.
And what we see 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 sold out and building deeper than expected.
In water, we saw healthy activity in the United States, United Kingdom and Australia.
This is 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.
We've also just one of the 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 president and provide a springboard for our other business lines to grow in the region.
The retraction in environmental service is it mostly related to Canada were field work was impacted by project slowdowns related to Kogas 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 on expansion project continued in the second quarter under a memorandum of understanding.
Subsequent to 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 there visits unit might be impacted by the bad debt.
We continue to believe that he's 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.
<unk>.
Power and environmental services, which were partially offset by retraction in buildings and community development.
Gross margin as a percentage of net revenue decreased 2.3% in the quarter the 52.9%.
The decrease as a percentage of net revenue would be the inefficiencies that are rolling through the pandemic related disruption as well the shift in our project, which was driven primarily by major projects in transportation as power in Dallas.
In Canada.
Slowing economic growth was amplified by the corporate Nike pandemic.
Net revenue refractories six when he presented the quarter and 2.6% year to date and was particularly evident in building the community development.
Our environmental services business was impacted by project slowdown well pandemic related mine shutdowns contributed to lower activity in mind.
It was partially offset by growth in our oil and gas and transportation business due to the trends about expansion pipeline project and several large light rail transit projects and everything Montreal and the greater Toronto area.
Gross margin decreased 2.7% as a percentage net revenue in the quarter to 48.5%.
In addition depends Everglades disruption 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.
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 with consistent you to date with reduced work volumes during the pandemic, partly offset by increased project opportunities in some markets.
Project Slowdowns were most pronounced in our UK and Australia building and European Environmental services business.
Pandemic related by closures in Latin America, and large project wind downs empower them further contributed to revenue retention.
Partially offsetting this though was the right I public transportation projects in Zealot and continued strong performance at our UK infrastructure and water business.
We also saw higher volume of work in Australia wire business with several large misspoke panel contracting attraction in Q2.
And just last week, we were running water industry consultant at the year UK.
Gross margin as a percentage of net revenue decreased 1.8% in the quarter to 51.7%.
Surgeons were impacted by the pandemic project mix some ongoing pricing pressures you paid in Europe, and a couple of look like relative on some projects.
I'll now turn the call. We're just two Teresa for a review of financial performance.
Thank you board and 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 80% 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 revenues gross margin was 51.5%.
Now looking for you to the degree of disruption in our operations and our clients operation, causing some inefficiencies in project execution.
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 you 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 Dsos decreased four days since Q1 of the result of <unk> ongoing focus on invoicing and collections 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 risks could increase 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, an 89 million improvement compared to Q2 19.
The improvement was driven by an increase in cash proceeds from client lower payments to suppliers and the benefit of various pandemic tax deferral program, which included the deferral of 35 million in half payment under now do at various things before the end of Q1 2021.
Cash flow used in 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 jockeys in financing activities included 62 million and repayments and driving down the revolving credit facility at 32 million in payments one of these obligations, partly offset by $19 million.
Proceeds from the exercise of stock option, well without will turn the call about two core to review our 2020 okay.
Yes.
Thanks Theresa.
In 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 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.
With projects slow down to the typical delta related to cold weather in seasonality, we expect Q4 net revenues in the us to be sequentially lower.
Full year 2020, U.S. net 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 revenue like the U.S. are expected to experienced a typical seasonal downturn.
Given the weak outlook for Canada before the pad down that 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.
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 period in 2018.
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.
Welcome to 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 is a mix of the unprecedented disruption caused by the pen Devon.
As we begin our biggest office immobilization, the health and safety of our people will always come first.
We're also taking steps in this period to maintain the integrity of our workforce in order 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 in did unit that people have color communities around the world.
And while we've been engaged for many years the organization that burden the interest of these communities both financially and more importantly through the volunteer efforts of our employees. We know that there is more than we can do.
We've engaged with our internal inclusion 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 there's a 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 19 pandemic.
For example.
Currently we lost a virtual marketing and business development tool kit to enhance our client relationships as firstly just the world.
Externally across North America, Europe, we're using our car chair.
Our 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 sales have income tax.
These 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 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 community and most importantly, our employee.
And with that open the call the questions operator.
Thank you.
And gentlemen.
Question at this time, please press star and then one.
If you are using a speaker phone today, it might be necessary 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>.
Gentlemen capital markets.
Yep.
Thank you very much and good morning, everyone congratulations for the quarter.
If you'll be looking up 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 or a decline in gross margin specifically for dose region and what should we expect there 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 at EPG assets and the gross margin is certainly one of the levers that we're managing in concert with that there with admin and marketing costs.
Start managing welcome to balance the gross margin pressure and generate solid returns that we saw in Q2. So there's a couple of things, but I think we saw contributing to to the gross margin declined in Q1 of them would be.
While our utilization as a measure of productivity is holding up well in fact is a flow gen seasonal trends. There are some initial inefficiencies in project delivery caused by working from home. So.
I will let us see we haven't seen working on a project you get to a certain part and needs 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 a larger ones in particular for fee reductions no. That's not material on gross margin at this point, but I just want to disappoint got hope is that good trends, we're seeing that again these are significant but we're just seeing.
We're also importantly, no project mix had an impact this quarter as an example that the Trans mountain expansion project that we're working on has a little gross margin you want reset 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.
In other business line so.
There's a couple of things there that we're working through but you know as he is at the beginning it is important to note that we're managing the whole business to deliver that consistent performance.
And 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 those strong EBITDA and EPS numbers going forward.
Okay, that's great color Ward and could you provide maybe also with a big don't be and then they in light of the Pembina <unk> yeah.
Absolutely.
I think what what we found is that no one.
Even though it seems like much longer I was thinking M&A is actually really bad only in both little less than four months since I have to fly home 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 to a.
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 for for the acquired kind of pulled in their volumes a little bit to focus on on managing their own businesses through the pandemic. So we've also seen and we also had some concerns about how do we traveled to do those final final bits of New Delhi.
Good.
I think now we really haven't even look at it been one thing that I think these travel impediments are with us for a longer term. So 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.
Hey, 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 the full 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 cash Shepherd, who leads our global group based in the UK. The under today's season, there for four years and also know Peter breadth is there for some time. So we would view youre with the Mwh Peter Redenius, either joined US there, but 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.
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 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.
Going forward.
Okay. That's great last question for me could you talk a little bit about building how should we be looking at organic growth. Following the 8.7% decline in the and net revenues in the quarter, whether there was anything specific in what are we are poised for slow recovery.
Or let's say a worse scenario that have been Q2. Thank you.
Yes, we don't see is typically rating from where we were in Q2.
We look at the building group as we said 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 and saw him.
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 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 those thoughts into.
Perfect. Thank you very much and congrats again.
Thanks, Good luck.
Our next question comes from some <unk> 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 energy, So 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.
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 2019. So 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.
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 that's continuing so yes, it really really strong growth last year. So.
We're coming off a bit of a high call there, but 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 it's not great margin work, but.
No I didn't know utilization, sorry, first 300% utilization and no business development or had been cost. 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 were 20 Twond right got part of that is driven by the watermark here, but what are you assuming for the operating backdrop yards. So a bit of uncertainty out there. According to what you said are you assuming you know there's a bit of stimulate some extra dollars whatever is this all religious based on what's.
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 build them and we really hope that that comes 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.
For a moderating your thoughts on valuations for potential M&A I guess, there's got to 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 of bolt on that one additional color there.
Well you know, there's always that attention as you look too.
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 very firm, 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 no theres really isn't the time to pay high margin high high multiples on historic earnings So there's a bit attention as the work, but it's 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.
So we haven't seen really.
It 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 discussion.
We havent seen a lot of softening, but it's still early days.
Great. Thank you.
Yes, Thanks for your question.
Once again that is star and then a one that she'd like to ask a question. We have a question from Devon Dodd with BMO capital.
Alright, Thank you I good morning, guys.
All right it seems like.
It seems that from cowen or like a retraction.
Could've been a booth to your.
And they're in marketing no expense control things like lower travel and training costs.
Alex is back.
Voluntary turnover.
I've been relatively level in the quarter. Just can you talk about the sustainability. These contracts entered the back half a year and Greenbrier 2021.
Sure.
Something back 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 end of second quarter.
We didnt have a a really strong test for us we as we ended the quarter and so we can you can certainly see now achievable.
But as we started to we opened our offices and.
We're seeing in some geographies close wanting to start to travel again.
The level that we're at sea isn't sustainable 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 purposes of someone so where those costs were low.
Second quarter, we'll see some of that start to come back again slowly over the second half a year. So you know for us.
This is an expectation that there will be.
The increase but no we're not expecting it to be a dramatic increase though with the rest of the year.
It's really going to be as we move into our plan for 2021, a determination of how far back into the pendulum swings band and you know we would certainly be our desires that show now than we demonstrated that we can operate an outbreak quite successfully I had a lower cost level, our expectation would be that we set.
You know that threshold or expectation is lower than we have historically, so we do believe there's opportunity there, but that work or what is sustainable going forward is just beginning now.
Yes.
Okay. Thanks for that let me just switching gears.
New York State and local government.
Focal point for some investors I think some of your peers have been.
Exactly that award activity.
It's been good in Q2, and they're actually from a good level of our activities.
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 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 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 opportunity 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 on 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 well.
While 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 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 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 I've been a significant way here in 2012.
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.
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.
Our guidance does not guidance, but our 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 weve.
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 weve furloughs 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.
Already pay reduction in some cases is taking vacation in some cases are taking leave without pay or other things like that in some cases, we've had we have for those people, but we're trying to manage.
Managed staffing as best we can.
So the goal going forward, we've got the right people in place to driving forward.
Okay. Thanks, that's it for me I'll turn it over.
Thanks, Brian.
A question from Mona.
From Laurentian Bank.
Good morning, Thanks for taking my question.
I'm just wondering in light of coal bed. So many companies that pivoting looking to pivot to reduce the downside exposure or and capture greater opportunity.
Well they say they all 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 pockets or anything else.
Thank you.
Well, thanks, a lot 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, 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 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 six month markets oil and gas in mining to exceed 15%. So.
That's really I think limited if would you 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 feel 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 that 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 I was 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 kind of were 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 is with a couple 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 well we we've seen some some large job.
Oil and gas companies talk about as well the numbers that they've been looking for a bit and those things sort of reasons.
Same sort of areas you know, sometimes we've had group that 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 juices. This week for anybody so yeah, we seem to be settling in that couple of percent range.
And some of the Port also Mona.
Sorry in some of them the right come forward also they said could you take a 2% cut for the next six months, let's make with it 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 pumps, yet so that's great. Thank you.
Thanks.
And once again, ladies and gentlemen 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 want 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.
Tourism side and offer some relief and improvement in gross margins.
No I think that for the back half of the year.
We're going to affect gross margin to it.
Improved modestly, but I, but I think that if he has the reasons that we.
We described for what we saw in Q2 will likely continue in the back half a year.
Whether it.
Overall productivity on the side of our operations are our clients.
The heavier weighting that we have going in the 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 going and had been in these pricing concessions that Gordon alluded to all combined.
That is likely going to stay around the territory that as it is down.
Okay. That's helpful with with that in mind, and then thinking about the fact that it sounds as though.
Then in marketing costs, which were 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 level to possibly some escalation in a minute marketing it or anything else. You are you able to do with respect to an admin and marketing costs to try to.
I guess offset whatever escalation you might you might.
Stuck in the second half.
Yeah, I mean I think.
There's always the opportunity there and we're we're really focused on it not only you know within the operations not within our.
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 up again.
And so you have all when we started all of the at the end of the first quarter some customer how long do you want casino games these initiatives.
And then and now we are looking after having these initiatives kind of continues through the rest is a year. So you know I think he knows our love we're able to do on admin marketing hasn't really positive and we expect that to continue.
And also maybe longer toppings 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 down.
Hi, guys in the third quarter and so it tends to improve and then that's down in the fourth quarter, we think that pattern will.
Still show up this year.
And overall that we think that we'll be able to bring in.
The admin costs.
You know what we'd 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 focused on the on the long term.
And and maintaining.
Actualizing expertise that we have.
I think he knows the tailwind we're getting from.
Favorable interest rate and from having you know a.
Pretty low balance.
On a revolving credit facility all of those things collectively will drive us we believe.
Pretty good outcome for earning and that's that's really the overall both as far as 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.
The 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.
I.
I realize it's somewhat currently still but have you thought about that and any thoughts on.
Reconsidering that that's real estate footprint kind of over the medium to longer term realize it's not a short term thing, but caught up on that.
Yes, absolutely Michael we brought it back down to something that we were working on before the pandemic in any event, but certainly now where.
We are having a number of discussions we've talked with our with our we certainly are larger employee based on where what they're thinking about going forward and I think trees. As said earlier that you will remember them when when the pandemic first fit everybody went home. They also this was very well I've never coming back to the office, but no.
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 is it possible 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 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 three days in the office buildings at home reporting one no perhaps you won't get a dedicated work space 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 having to take any.
Any impairments on.
Leases you know over the next three years weekend.
It will 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 ask a question today. Please press Star then one at this time.
Okay.
And it appears we have no further questions today.
I would like to turn the conference back over to Gordon 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 and stay healthy thanks very much.
Yeah.
And once again, ladies and gentlemen that does conclude today's conference. We appreciate your participation.