Stantec Inc

TSX:STN

Earnings Call Transcript 2020-Q2

[Operator]

Good day, everyone. Welcome to Stantec's Second Quarter 2020 Earnings Results Call. Leading the call today are Gord Johnston, President and Chief Executive Officer; and Theresa Jang, Executive Vice President and Chief Financial Officer. Stantec invites those dialing in to view the slide presentation, which is available in the Investors section at stantec.com. Today's call is also webcast. Please be advised that if you have dialed in, while viewing the webcast, you should mute your computer, as there is a 20-second delay between the call and the webcast. All information provided during this conference call is subject to the forward-looking statement qualification set out on Slide 2, detailed in Stantec's Management Discussion and Analysis and incorporated in full for the purposes of today's call. All amounts discussed in today's call are expressed in Canadian dollars and are generally rounded.And with that, I'm pleased to turn the call over to Mr. Gord Johnston. Please go ahead.

[Gordon Allan Johnston, President, CEO & Director]

Good morning and thank you for joining us. I'll begin our call today with a review of our second quarter performance. Theresa will then delve deeper into the financial results, before I return to provide an update to our outlook for the remainder of 2020. We delivered a solid second quarter with net revenues in line with the outlook we provided during our Q1 call. Our results continuing to demonstrate the resilience of our business model, which is bolstered by geographic and business line diversification, effectively managing our business and controlling costs has allowed us to deliver a 4% year-over-year increase in Q2 adjusted EPS, even though the pandemic has had an unfavorable impact on our Q2 gross margin. Productivity as measured by utilization has remained strong and is above typical seasonal levels.Our record backlog of $4.7 billion at the end of Q1 held stable through Q2 and continues to represent approximately 12 months of work. At the end of our presentation today, I'll review how the four value creators the people, excellence, innovation and growth that we presented in our 2020 strategic plan continues to underpin our activities through the pandemic to continue to enhance shareholder value. We delivered net revenues of $951 million in the second quarter, which is comparable to the same period last year. Net revenue grew organically by 2.3% in the US, but retracted in our Canadian and global geographies, resulting in an overall organic contraction of 2.1% in Q2. In addition to our geographic diversity, the diversity of our business lines bolstered our resilience in the second quarter, while certain areas retracted. Water and Energy & Resources generated organic growth. As expected, Infrastructure revenue contracted slightly. Transportation delivered solid performance, while Community Development work slowed due to the pandemic. And while we've seen growth in work for healthcare 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 the Q2 slowdown in buildings was a bit deeper than expected.In Water, we saw a healthy activity in the United States, the United Kingdom and also Australia. This was a result of significant project awards in the US, the AMP7 framework awards we received in the UK and a multi-year framework award in Australia. And we've also just won the contract for the Irish Water engineering design services 7-year framework. This is our first major win in Ireland, which will allow us to establish a long-term presence and provide a framework for our other business lines to grow in the region. The retraction in Environmental Services is mostly related to Canada where field work was impacted by project slowdowns related to COVID-19.Finally, Energy & Resources generated solid organic growth as a result of increased midstream oil and gas work in the second quarter. Our worth providing project management services on the Trans Mountain Expansion Project continued in the second quarter under a memorandum of understanding. Subsequent to the quarter, we signed a contract to continue to provide new services for the duration of the project. Last quarter, we spent some time reviewing our expectations for how we believe our business units might be impacted by the pandemic. We continue to believe that these expectations remain valid in the longer term.In the second quarter, our US operations achieved net revenue organic growth of 2.3%. This was driven by project opportunities in Water, Mining, Power and Environmental Services, which were partially offset by a retraction in Buildings 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 rose due to pandemic related disruptions as well as the shift in our project mix, which was driven primarily by major projects in Transportation and Power and Dams. In Canada, slowing economic growth was amplified by the COVID-19 pandemic.Net revenue retracted 6.8% in the quarter and 2.6% year-to-date and was particularly evident in Buildings and Community Development. Our Environmental Services business was impacted by project slowdowns, while pandemic-related mine shutdowns contributed to lower activity in mining. This was partially offset by growth in our oil and gas and transportation businesses due to the Trans Mountain Expansion pipeline project and several large light-rail transit projects in Edmonton, Montreal and the Greater Toronto area. Gross margin decreased 2.7% as a percentage of 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 in Energy & Resources and Environmental Services. However, despite the lower margin of this [indiscernible] it drives high utilization and a similar EBITDA contribution as our other business line.Global net revenue retracted 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. Project slowdowns were most pronounced in our UK and Australia Buildings and European Environmental Services business. Pandemic-related mine closures in Latin America and large project wind-downs in Power & Dams further contributed to revenue retraction. Partly offsetting this still was the ramp up of Transportation projects in New Zealand and continued strong performance in our UK Infrastructure and Water business. We also saw a higher volume of work in our Australian Water business with several large municipal panel contracts gaining traction in Q2. And just last week, we were named Water Industry Consultant of the 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 and Europe, and a couple of localized challenges on some projects.I'll now turn the call over to Theresa, for a review of financial performance.

[Theresa B. Y. Jang, Executive VP & CFO]

Thank you, Gord, and good morning, everyone. Adjusted net income from continuing operations increased 3% to $58 million in the second quarter, and adjusted earnings per share increased 4% to $0.52 per share. This is largely due to an 8% decrease in administrative and marketing expenses, and 29% reduction in net interest expense.Gross margin for the quarter decreased 5% to $490 million. As a percentage of net revenue, gross margin was 51.5%. The pandemic has created a degree of disruption in our operations and our clients' operations, causing some inefficiency in project execution. We also saw higher than anticipated growth in revenue from our lower margin midstream oil and gas projects. As demonstrated by our solid adjusted EBITDA margin of 15%, we are managing the business carefully and have taken steps to mitigate these margin impacts on the cost side.Our balance sheet remains strong. As June 30th, net debt to adjusted EBITDA was at the bottom of our targeted range at 1.0 times. We remain in full compliance with all financial covenants. Days sales outstanding was 82 days at quarter end compared to our target of 90 days. DSO decreased four days since Q1, as a result of our ongoing focus on invoicing and collection activities and we've not seen any notable impact due to the pandemic. Given our strong mix of public sector clients and the high quality of our private sector clients, we do not believe our credit risk has increased meaningfully as a result of the pandemic.Moving on to liquidity and capital allocation. Our free cash flow for the quarter improved by 83% compared to Q2'19. 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 pandemic tax deferral programs, which included the deferral of $35 million in cash payments that are now due at various states before the end of Q1, 2021.Cash flows used in investing activities were $11 million, a $7 million decrease compared with Q2'19, mainly driven by reduced capital expenditures. We used $100 million for net financing activities compared with $83 million in Q2'19. Cash used in financing activities included $62 million in repayments and drawing on a revolving credit facility and $32 million in payments for these obligations, partly offset by $19 million in proceeds from the exercise of stock options.With that, I'll turn the call back to Gord to review our 2020 outlook.

[Gordon Allan Johnston, President, CEO & Director]

Thanks, Theresa. Given the unprecedented circumstances brought on by the pandemic, we withdrew our 2020 guidance in May. That said, we continue to reevaluate our anticipated financial performance on an ongoing basis. So even though we're not in a position to provide concrete guidance, we are providing our current outlook for 2020 based on the best information available to us at the present time.In the US, we expect a nominal retraction in revenues in Q3 relative to Q2 across all businesses except Water where we see growth. With project slowdowns and a typical downtime related to cold weather and seasonality, we expect Q4 net revenues in the US to be sequentially lower. Full year 2020 US net revenues are expected to be comparable to 2019 in US dollars when combined with our strong results for the first half of the year and we also expect some additional uplift from foreign exchange. In Canada, Q3 revenues are expected to be stable relative to Q2 while Q4 revenues like the US are expected to experience the typical seasonal downturn. Even though weak outlook for Canada before the pandemic, we expect a normal retraction in revenue for this geography for 2020 compared to last year.Net revenues in the Global business are projected to improve modestly from Q2 to Q3 and stabilize at that level in Q4. The strength of the Water business in the UK and Australia and the Transportation sector in New Zealand are expected to offset the impacts of project slowdowns in other business resulting in full year 2020 revenues being comparable to 2019. Overall, we expect Q3 and Q4 revenues to decline marginally compared to the same periods in 2019. Taken together, we expect full year net revenue, adjusted net income and adjusted EPS to be comparable to 2019. We now expect roughly 55% of our earnings to be concentrated in Q2 and 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 with the payment of our dividend, and we'll continue to repurchase shares opportunistically.We continue to execute on our 3-year strategic plan, which we rolled out to our employees and the investment community in December of last year. Our solid second quarter results are 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 phased office remobilization, 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 are committed to both continuing and expanding upon our long-term support for the block indigenous and people of color communities around the world. And while we've been engaged for many years with organizations referred to the interest of these communities both financially and more importantly through the volunteer efforts of our employees, we know that there is more that we can do. We've engaged with our internal inclusion and diversity council to develop additional areas of support and to focus our financial commitments and our employee engagements to make a long term lasting impact.We're being thoughtful and deliberate in how we manage our business. We're mitigating the compression of gross margin to decrease, administrative and marketing costs. Through our reshaping efforts 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 COVID-19 pandemic. For example, internally we've launched a virtual marketing and business development toolkit to enhance our client relationships in a socially-distanced world. Externally, across North America and Eastern Europe, we're using our proprietary financial planning software to advise utilities and optimizing their '20-'21 capital spending scenarios and rate plans in response to COVID-19 impacts on water demands, sales tax, income tax, fees, and other shared revenues.While the pace of acquisition is currently challenged by travel restrictions, our 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 account compared to Q2 2019. While the world remains of 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 to questions. Operator?

[Operator]

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

[Benoit Poirier]

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

[Gordon Allan Johnston, President, CEO & Director]

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

[Benoit Poirier]

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

[Gordon Allan Johnston, President, CEO & Director]

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

[Benoit Poirier]

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

[Gordon Allan Johnston, President, CEO & Director]

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

[Benoit Poirier]

Perfect. Thank you very much and congrats again.

[Gordon Allan Johnston, President, CEO & Director]

Thanks, Benoit.

[Operator]

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

[Sabahat Khan, Analyst]

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

[Gordon Allan Johnston, President, CEO & Director]

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

[Sabahat Khan, Analyst]

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

[Gordon Allan Johnston, President, CEO & Director]

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

[Sabahat Khan, Analyst]

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

[Gordon Allan Johnston, President, CEO & Director]

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

[Sabahat Khan, Analyst]

Great. Thank you.

[Gordon Allan Johnston, President, CEO & Director]

Great. Thanks for your questions.

[Operator]

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

[Devin Dodge, Analyst]

All right. Thank you. Good morning, guys.

[Gordon Allan Johnston, President, CEO & Director]

Good morning.

[Devin Dodge, Analyst]

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

[Theresa B. Y. Jang, Executive VP & CFO]

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

[Devin Dodge, Analyst]

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

[Gordon Allan Johnston, President, CEO & Director]

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

[Devin Dodge, Analyst]

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

[Gordon Allan Johnston, President, CEO & Director]

Great. Thank you.

[Operator]

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

[Bryan Fast, Research Analyst]

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

[Gordon Allan Johnston, President, CEO & Director]

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

[Bryan Fast, Research Analyst]

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

[Gordon Allan Johnston, President, CEO & Director]

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

[Bryan Fast, Research Analyst]

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

[Gordon Allan Johnston, President, CEO & Director]

Okay. Thanks, Bryan.

[Operator]

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

[Mona Nazir]

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

[Gordon Allan Johnston, President, CEO & Director]

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

[Mona Nazir]

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

[Gordon Allan Johnston, President, CEO & Director]

It's primarily where we synergies with coupled very, very large public transportation agencies. And you know what they're looking for is like to 2-ish-percent, 3-ish-percent range. And then while we have seen some large oil and gas companies talk about as well, the numbers that they've been looking for a bit in those same sort of reasons that -- the same sort of areas. Sometimes we've had grew that for much more than that, but I think the industry in general, not just as has been pushed back and say, you're not going to get 10%. I mean there is a 10% of [indiscernible] for anybody. So we seem to be settling in a couple of percent range. And some of you that come forward also. Sorry. And some of them who come forward also they said, could you take a 2% cut for the next 6 months. So they put a time limited, which is a little easier to for us to sound like as well because they don't have to try to fight to get it back at the end.

[Mona Nazir]

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

[Gordon Allan Johnston, President, CEO & Director]

Thanks, Mona.

[Operator]

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

[Michael Tupholme, Research Analyst]

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

[Theresa B. Y. Jang, Executive VP & CFO]

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

[Michael Tupholme, Research Analyst]

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

[Theresa B. Y. Jang, Executive VP & CFO]

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

[Michael Tupholme, Research Analyst]

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

[Gordon Allan Johnston, President, CEO & Director]

Yeah, absolutely, Michael. We've -- and in fact, that was something that we were working on before the pandemic in any event, but certainly now we are -- we are having a number of discussions. We talked with our -- we survey our larger employee base on what they're thinking about going forward. I think Theresa said earlier that a number of them -- when the pandemic first hit, everybody went home, they all said, this is great. I will never coming back to the office. But now a month, 2 months to 3 months in, we have the majority of our staff saying, we want to go back to the office. So it may be -- is it possible that I can come back and work in the office and work from home one day a week or two days a week, something along that line. So we are really looking at how that would impact our real estate footprint. Because our perspective is -- if you're going to be full-time in the office, you'll have a dedicated workspace. But if you're going to be in and out, 3 days here, 3 days in the office, 3 days at home, or four in one, perhaps you won't get a dedicated workspace to be more towards a hotel type of a perspective. So we do have a significant number of our leases that are coming up for renewal over the next three years. And so we are really thinking about what is the new footprint look like going forward. And so I do think that we'll see some footprint reduction over the longer term, but for us without even having to take any impairments on leases, over the next three years, we can make a change on a significant percentage of our of our portfolio.

[Michael Tupholme, Research Analyst]

Okay. That's helpful. Thank you.

[Gordon Allan Johnston, President, CEO & Director]

Thanks, Michael.

[Operator]

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

[Gordon Allan Johnston, President, CEO & Director]

Well, I just want to say 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.

[Theresa B. Y. Jang, Executive VP & CFO]

Thank you.

[Operator]

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