Good day, everyone. Welcome to Stantec's Second Quarter twenty twenty Earnings Results Call. Leading the call today are Gord Johnston, President and Chief Executive Officer and Theresa Zhang, 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 twenty 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 two, detailed in Stantec's management discussion and analysis and incorporated in full for the purposes of today's call. Dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded. And with that, I'm pleased to turn the call over to Mr. Gord Johnston.
Please go ahead.
Good morning, and thank you for joining us. I'll begin our call today with a review of our second quarter performance. Theresa will then delve deeper into the financial results before I return to provide an update to our outlook for the remainder of 2020. We delivered a solid second quarter with net revenues in line with the outlook we provided during our Q1 call. Our results continue 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 $4,700,000,000 at the end of Q1 held stable through Q2 and continues to represent approximately twelve months of work. At the end of our presentation today, I'll review how the four value creators of people, excellence, innovation and growth that we presented in our 2020 strategic plan continue to underpin our activities through the pandemic to continue to enhance shareholder value. We delivered net revenues of $951,000,000 in the second quarter, which is comparable to the same period last year.
Net revenue grew organically by 2.3% in The U. S, but retracted in our Canadian and global geographies, resulting in an overall organic contraction of 2.1% in Q2. In addition to our geographic diversity, the diversity of our business lines bolstered our resilience in the second quarter. While certain areas retracted, water and energy resources generated organic growth. As expected, infrastructure revenues 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 healthy activity in The United States, United Kingdom and Australia. This was the result of significant project awards in The US, the AMP7 framework awards we've 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 seven year framework.
This is our first major win in Ireland, which will allow us to establish a long term presence and provide us 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-nineteen. Finally, Energen Resources generated solid organic growth as a result of increased midstream oil and gas work in the second quarter. Our work 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 these 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 U. S. 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 inefficiencies that arose due to pandemic related disruptions, as well as a 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-nineteen 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 and resources and environmental services.
However, despite the lower margin of this work, it drives high utilization and a similar EBITDA contribution as our other business lines. 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 and dams further contributed to revenue retraction. Partly offsetting this though 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.
Thank you, Gord, and good morning, everyone. Adjusted net income from continuing operations increased 3% to $58,000,000 in the second quarter, and adjusted earnings per share increased 4% to $0.52 per share. This was largely due to an 8% decrease in administrative and marketing expenses and a 29% reduction in net interest expense. Gross margin for the quarter decreased 5% to CAD49 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 inefficiencies 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. At June 30, net debt to adjusted EBITDA was at the bottom of our targeted range at one point zero times.
We remain in full compliance with all financial covenants. Days sales outstanding was eighty two days at quarter end compared to our target of ninety 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 twenty nineteen. Operating cash flows from continuing operations were $251,000,000 an $89,000,000 improvement compared to Q2 twenty nineteen. The improvement was driven by an increase in cash receipts from clients, lower payments to suppliers and the benefit of various pandemic tax deferral programs, which included the deferral of $35,000,000 in tax payments that are now due at various dates before the end of Q1 twenty twenty one. Cash flows used in investing activities were CAD11 million, a CAD7 million decrease compared with Q2 twenty nineteen, mainly driven by reduced capital expenditures. We used CAD100 million for net financing activities compared with $83,000,000 in Q2 twenty nineteen.
Cash used in financing activities included $62,000,000 in repayments of drawings on our revolving credit facility and $32,000,000 in payments for lease obligations, partly offset by $19,000,000 in proceeds from the exercise of stock options. And with that, I'll turn the call back to Gord to review our 2020 outlook.
Thanks, Theresa. Given the unprecedented circumstances brought on by the pandemic, we withdrew our 2020 guidance in May. That said, we continue to reevaluate our anticipated financial performance on an ongoing basis. So even though we're not in a position to provide concrete guidance, we are providing our current outlook for 2020 based on the best information available to us at the present time. In The U.
S, we expect a nominal retraction in revenues in Q3 relative to Q2 across all businesses except water, where we see growth. With project slowdowns and the typical downturn related to cold weather and seasonality, we expect Q4 net revenues in The U. S. To be sequentially lower. Full year 2020 U.
S. Net revenues are expected to be comparable to 2019 in U. S. Dollars when combined with our strong results through the first half of the year, and we also expect some additional uplift from foreign exchange. In Canada, Q3 revenues are expected to be stable relative to Q2, while Q4 revenues like The U.
S. Are expected to experience 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 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 three 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 a 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 and mobilization, the health and safety of our people will always come first. We're also taking steps through 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 black, indigenous and people of color communities around the world. And while we've been engaged for many years with organizations that further 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 engagement 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 through decreased administrative and marketing costs.
Through our reshaping efforts in 2019, ongoing cost reduction initiatives and significant reduction in discretionary spending 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-nineteen 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 into Europe, we're using our proprietary financial planning software to advise utilities in optimizing their 2021 capital spending scenarios and rate plans in response to COVID-nineteen impacts on water demand, sales tax, income tax, fees and other shared revenues. While the pace of acquisitions 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 accounts compared with Q2 twenty nineteen. While the world remains in 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?
Thank you.
You.
And we'll take our first question from Benoit Poirier from Desjardins Capital Markets.
Yes. Thank you very much and good morning everyone. Congratulations for the good quarter. Especially looking at the gross margin, you were successful in maintaining the EBITDA margin despite the contraction in gross margin. So more looking specifically at Canada and international, could you talk a little bit about the key levers that drove the decline in gross margin specifically for those two regions?
And what should we expect going forward in terms of gross margin?
Thanks, Pat, and good morning. So as we pointed out there, 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 the gross margin is certainly one of the levers that we're managing. And 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 inefficiencies in project delivery caused by working from home. So an example was, say we have a team working on a project, and you get to a certain part and you 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 efficiently than they were previously. We've seen a few clients, larger ones in particular, ask for fee reductions. That's not material on gross margin at this point, but I just wanted just to point that out that that's a trend we're seeing.
And 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 low gross margin. As we said in the prepared results, though, the utilization rates are virtually 100%, and we incurred no BD or marketing costs. So the overall EBITDA contribution is similar to other projects in other business lines.
So there's 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 margin is certainly the data point for us, we're balancing gross margin, managing the workforce and controlling discretionary costs to ensure that we achieve those strong EBITDA and EPS numbers going forward.
Okay. That's great color, Gord. And could you provide maybe also an update on the M and A in light of the pandemic?
Absolutely. So I think what we found is that even though it seems like much longer, I was thinking the other day, it's actually really been only about a little less than four months since I had to fly home in mid March from Australia, where we were talking to some firms. And so when we I think when we first all moved home in sort of the third ish week in March, our clients also moved home. We saw that a lot of the firms that we've been talking to, as well as both the acquirers and the potential firms to be 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 had some concerns about how do we travel to do those final bits of due diligence.
So I think now we're really having a good look at it, Benoit, and saying that I think these travel impediments are with us for a longer term. So if you look at a place like Australia that has said that they might keep their borders closed to nonessential travel through the remainder of this year, what we're really beginning to focus on now is how do we continue with that M and A, with the processes, utilizing even more the resources that we have in country. So I think we're ideally situated to do that now. If 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 Kath Sheffer, who leads our global group based in The UK.
The MWH team has been there for four years. And also now Peter Brett has been there for some time. So we would view with between MWH, Peter Brett, ESI that joined us there, that those folks are all sufficiently stantecized, that they can help us with sourcing acquisitions, they can help us with even more digging deeper into due diligence and the integration efforts. Very similar in Australia, where in addition to the MWH folks that have been there since 2016, now we've got the strong leadership of Wood Grieve engineers there as well. So I think what we're thinking about, Benoit, is that for the last quarter, I think everyone sort of paused a bit as we all focus on running our own businesses.
And now we're seeing people begin to emerge out. 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 and A processes going forward.
Okay. That's great. And the 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 net revenues in the quarter, whether there was anything specific and whether we are poised for a slow recovery or let's say a worse scenario than Q2?
Thank you.
Yes. We don't see it significantly degrading from where we were in Q2. As we look at the Buildings Group, as we said, like the pivot to the health care work, the e commerce work and so on is underway. But in Q2, it wasn't enough to catch up to the decline, of course, in commercial and so on. We're seeing a lot of health care opportunities hitting the street now, probably more than we've seen, particularly in Canada, for some time.
So I think that buildings isn't gonna rebound extremely strongly, but I think it'll be my gut says it'll be stable going forward with perhaps a slight retraction going forward. Certainly, I think, hopefully not to the degree that we saw in Q2.
Our
next question comes from Samad Khan with RBC Capital Markets.
Thanks and good morning. Just a follow-up there on your commentary on the Building segment. I guess you called out some strength in Water across a couple of markets for the rest of 2020. I'm thinking more for environmental services and energy. 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?
And what are your thoughts at a high level across end markets globally?
Yes. So overall, I think as we've 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 you remember looking back over the last couple of years, 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 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 certainly in Western Canada, we look at the work on Trans Mountain, Coastal Gas and so on, that will 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, virtually 100% utilization and no business development or admin costs. So it generates a pretty good EBITDA margin.
Okay. And then your commentary on the overall U. S. Market for comparable revenue in 2020. I mean, I guess part of that is driven by the water market.
But what are you assuming for the operating backdrop? Still a bit of uncertainty out there according to what you said. Are you assuming there's a bit of stimulus, some extra dollars put in? Or is this all really just based on what you have in your backlog?
Yes. For 2020, we're not really forecasting any significant stimulus. There certainly has been a lot of talk about putting together bipartisan stimulus bills, 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 the numbers that we put up for The U.
S. Do not include any additional stimulus in 2020. We think that might be a if that comes, that would be a tailwind going into 2021.
Okay. And then one last one from me. Think in the commentary, you mentioned sort of moderating your thoughts on valuations for potential M and A. I guess, is that just based on your outlook and what you're willing to pay for the foreseeable future? Or is that more along the lines of target, even at this point, might be expecting to have a multiple versus what you think is reasonable?
So I'm just wondering if some color on that comment.
Well, there's always that tension as you look to establish valuation for various firms. Everyone no one's 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. 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 high multiples on historic earnings.
So there's a bit of that tension. And the companies that we continue to talk about, 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 profitability and so on. 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 feel for what multiples are going to look like. But in our discussions, we haven't seen a lot of softening, but it's still early days.
Great. Thank you.
Thanks for your questions.
We have a question from Devin Dodge with BMO Capital Markets.
Hi, thank you. Good morning, guys. It seems like it seems that, you know, some of the COVID related restrictions, you know, could have been a boost to your, admin and marketing, you know, expense control, you know, things like lower travel and training costs. You know, I also suspect voluntary turnover, you know, would have been relatively low in the quarter. Just can you talk about the sustainability, of these cost benefits, you know, into the back half of the year and even into 2021?
Sure. It's something that we are certainly thinking about because you're right. I mean, the degree to which we've been able to bring those costs down in the second quarter, We didn't have a really strong sense for us as we entered the quarter. And so we can certainly see now what's achievable. But as we start to reopen our offices and we're seeing in some geographies, folks 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 pursuits and so on. And so where those costs were low in the second quarter, we'll see some of that start to come back again slowly 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 as we move into our planning for 2021, a determination of how far back the pendulum swings expand.
And it would certainly be our desire that now that we've demonstrated that we can operate and operate quite successfully at a lower cost level, our expectation would be that we set that threshold or expectation lower than we have historically. So we do believe that there's opportunity there. But that work for what is sustainable going forward is just beginning now.
Okay. Maybe just switching gears. U. S. State and local governments, it's been a focal point for some investors.
I think some of your peers have been suggesting that award activity, it's been good in Q2, and there actually has been a good level of RFPs. But they're 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 time for that stimulus. I guess, what are you seeing in your business?
We have seen pretty solid continued RFP activity. We have seen that some clients are taking a little longer 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 recent US federal awards, and there's others that we haven't. So while we may see state and local still putting on RFPs, but 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 while we when we went into the pandemic restrictions in March, RFP activity slowed a little bit. We did see sort of in the April, May, June time line visit, the number of opportunities in our sales funnel are up in both 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 and that's really absent any significant government stimulus funds, any government stimulus in The US. Because while we think that will come, we're just not confident that it would go through the House and Senate, announced, and then really the revenue being generated by us in a significant way here in 2020.
Okay. That's good color. I'll turn it over. Thank you.
Great. Thank you.
And we have a question from Brian Fast with Raymond James.
Yes, thanks. Good morning, guys. Just maybe I want to 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 guidance?
We've been working really closely with our business leaders and our geographic leaders, not just in Canada and The U. S, but around the world to really hone in on opportunities that they see, project awards that we've had that we can begin to work forward on. So we feel pretty comfortable about the numbers that we've put up for our not guidance, but our outlook for the second half of the year. We see a little bit of retraction going forward, a little bit more in Q4 in some of the cold weather areas, but we always would see that based on weather. But I think in general, the numbers that we've guided for outlook there, I think we feel pretty positive on those for the second half of the year.
Okay. And then maybe, I guess, have your thoughts changed in respect to the preservation of workforce since last quarter?
No. We think that we're working really hard to balance the workforce with the work that we have available, but also ensuring that we I think I made a statement 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 C suite, and our executive leadership who have all taken a 10% pay cut. We haven't asked our other staff for hourly pay reductions. In some cases, they're taking vacation.
In some cases, they're taking leave without pay or other things like that. In some cases, have furloughed people. But we're trying to manage staffing as best we can so that going forward, we've got the right people in place to drive us forward.
Okay, thanks. That's it for me. I'll turn it over.
Okay, thanks Brian.
And we have a question from Mona Nazis from Laurentian Bank.
Good morning and thank you for taking my question. I'm just wondering, in light of COVID, so many companies are pivoting or looking to pivot to reduce their downside exposure or and capture greater opportunity. You commented or 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 pivots and whether that be your public private mix exposure, geographic or even vertical focus, anything else I'm missing? Thank you.
Thanks, Loma. So one thing that we did in terms of limiting downside exposure is one of the things that we talked about as part our strategic planning process last year, where we had looked at our significant exposure to land development leading up to 02/2008, then our significant exposure to oil and gas leading up to 2014. 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 allow 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 health care. 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 health care, public transit, roadways in general. I think those will all be beneficiaries of any stimulus programs 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 the areas that could be pivoting to more and more work, health care, public transit, transportation, water, we're very strong in and well situated to get more than our fair share of that additional work that comes to those areas.
Thank you. That's very helpful. And just secondly, I'm wondering if you could share with us the magnitude of pricing concessions on the customer side. Is it largely in the buildings or energy segments or other areas?
It's primarily where we've seen it is with a couple of very, very large public transportation agencies. And what they're looking for is like in a two ish, three ish percent range. And then while we've seen some large oil and gas companies talk about it as well, the numbers that they've been looking for have been in those same sort of areas. Sometimes we've had groups ask for much more than that, but I think the industry in general, much as us have pushed back and say, you're not gonna get 10%. I mean, is a 10% of juice to squeeze for anybody.
You know, we seem to be settling in that couple percent range. Some of these have come forward also, Mona. Sorry. And some of them have come forward also. They said, could you take a a 2% cut for the next six months?
So they put a time limited, which is a little easier to brush the stomach as well because then we don't have to try and fight to get it back at the end.
That's perfect. That was my follow-up. I was gonna ask about the length of term negotiated. So that's great. Thank you.
Thanks, Mona.
K. And once again, ladies and gentlemen, that is star one if you have a question today. We'll move on to Michael Tupholme with TD Securities.
Thank you. You were asked earlier about some of the factors that weighed on gross margin percentage in the quarter. I'm just wondering 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 sort of subside and offer some relief and improvement in gross margins?
I think that for the back half of the year, we're going to expect gross margin to improve modestly. But I think that the reasons that we've described for what we saw in Q2 will largely continue in the back half of the year. So whether it's overall productivity 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 projects and some of our large transportation, EPD projects that are moving to a stage of the projects where the margin is slightly lower. So that and a bit of these pricing concessions that Gord alluded to, all combined, would tell us that it's likely going to stay around the territory that it is now.
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 brought people back to the office. So just thinking about gross margins sort of being maintained at these kinds of levels with possibly some escalation in the admitted marketing. Is there anything else you're able to do with respect to admitted marketing costs to try to, I guess, offset whatever escalation you expect in the second half?
Yes. I mean, think there is always the opportunity there, and we're really focused on it not only within the operations, but within our the functional support side of our business as well. Initiatives to look at where we've been able to reduce costs and it has been significant. And so when we started all of this at the end of the first quarter, there was some question about how long did we want 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're able to do on the mid marketing has been really positive, and we expect that to continue. But I'll just maybe while we're talking about it, point out that typically in Q3 is when we it's usually our most profitable quarter, and you see kind of a step up there. And that's because people are out working, they're in the field. We don't run really significant training programs. So don't 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, then 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 in gross margin? I think that remains to be seen.
But as Gord said, it's really a focus long on term and maintaining the specialized expertise that we have. And the tailwind we're getting from favorable interest rates and from having a pretty low balance drawn on our revolving credit facility, all of those things collectively will drive us, we believe, to a pretty good outcome for earnings. And that's really the overall focus for us, what the bottom line will look like, and that's what we're managing.
Okay. That's great. And then just lastly, as a result of the pandemic, there's been, I forgot, a 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 to longer term?
I realize it's not a short term thing, but thoughts on that?
Yeah, absolutely, Michael. And in fact, that was something that we were working on before the pandemic hit in any event. But certainly now, we are having a number of discussions. We've talked with our we surveyed our larger employee base on what they're thinking about going forward. And I think Teresa said earlier that a number of them, when the pandemic first hit and everybody went home, they all said, this is great.
I'm never coming back to the office. But now a month, two months, three months in, we have the majority of our staff saying, we wanna go back to the office. Like, 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 gonna be full time in the office, you'll have a dedicated workspace.
But if you're going to be in and out three days here, three days in the office, two days at home or four in one, perhaps you won't get a dedicated workspace. It'll be more towards a hoteling type of a perspective. So we do have a significant number of our leases that are coming up for renewal over the next three years. And so we are really thinking about what 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, 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 portfolio.
Okay. That's helpful. Thank you.
Thanks, Michael. The reminder,
ladies and gentlemen, if you would like to ask a question today, please press And it appears we have no further questions today. I would like to turn the conference back over to Gord Johnston for any concluding remarks.
Well, I just want to say thank you again for joining us on the call and that we look forward to speaking with you in the near future about our continued progress. And everyone have a great day and stay healthy. Thanks very
much. Thank you.
And once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.