Atkinsrealis Group Inc.

Thank you for standing by. This is the conference operator. Good morning and welcome to SNC-Lavalin's first quarter 2023 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then zero. I would now like to turn the conference over to Denis Jesmin, Vice President, Investor Relations. Please go ahead.

Thank you, Cherise. Bonjour tout le monde. Good morning, everyone, and thank you for joining us today. For those dialing in, we invite you to view the slide presentation that we have posted in the Investors section of our website, which we will refer to during this call. Today's call is also webcast. With me today are Yin Edwards, President and Chief Executive Officer, and Jeff Bell, Executive Vice President and Chief Financial Officer. Before we begin, I would like to ask everyone to limit themselves to one or two questions to ensure that all analysts have an opportunity to speak. You are welcome to return to the queue for any follow-up questions. I would like to draw your attention to slide two. Comments made on today's call may contain forward-looking information. This information, by its nature, is subject to assumptions, risks, and uncertainties, and as such, actual results may differ materially from the views expressed today. For further information on these assumptions, risks, and uncertainties, please consult the company's relevant filings on CDAR. These documents are also available on our website. Also during the call, we may refer to certain non-IFRS financial measures, Reconciliation of these amounts to the corresponding RFRS financial measures are reflected in our earnings release and MD&A, which can be found on CDAR and on our website. And now I'll pass the call over to Ian Edwards. Ian?

Thank you, Denis. Good morning, everyone, and thank you for joining us today. We began the year on a strong footing, as Q1 results were solid across our SNCL services businesses. Our core purpose? Is engineering a better future for the planet and its people? And we're only able to do so through the hard work and dedication of our employees whose contributions help us achieve our long-term growth aspirations. I'm very proud of this growing team. On slide three, we outline our accomplishments in relation to our pivoting to growth strategy as we have become a professional services and project management company. As a reminder, our goal was to wind down our LSDK projects and grow our SNCL services businesses in our chosen geographies to drive long-term value creation. Our results in Q1 further emphasize that our plan is now working. SNCL services continued to grow, expanding its revenue by 10.8% year on year, while segment-adjusted EBIT grew 23.4% as we were able to deliver strong margin percentages. we achieved another record backlog this quarter, totaling $12.1 billion at March 31, as demand for our services remains very strong in our core end markets and geographies. We purposely pivoted into these geographies when we developed our strategy, and we are excited by the progress we've made in these markets. We continue to be recognized as leaders in the nuclear sector. During the first quarter, our backlog grew 23% year over year to just under a billion dollars. This quarter's growth represents the largest backlog growth since 2016 and highlights the long-term potential of this business. As we indicated last quarter, our two Ontario LSDK projects are largely physically complete. Testing and commissioning is proceeding as planned and they remain on track to be handed over to our clients later this year. We recognized the $9 million loss in this quarter in line with the expectations we provided on the fourth quarter call. And as anticipated, the robust cash flow generated from our SNCL services business offset the cash used on our LSTK projects. Our success this past quarter further emphasizes that the strengths of our new strategy, the resilience of the business through times of uneconomic certainty, and our growth opportunities are unfolding as planned. We continue to have great confidence in our forward trajectory, and we are well on track to deliver our stated goals for 2023. On slide four, we highlight our backlog growth across SNCL services. Our 8% growth in the first quarter of 2023 versus the first quarter of last year was mainly driven by wins across our engineering services and nuclear businesses. The public sector focus on converting to a greener grid for baseload power for greener infrastructure has resulted in continued key wins across our core geographies, as well as in other markets, such as Saudi Arabia. Turning to slide five, our engineering services business continues to drive robust growth for S&C Loveland and outperformed year over year during the first quarter. Acceleration across our core geographies led to a 17.5% organic revenue growth versus the first quarter of 2022. Our year-over-year progression highlights our ability to capture market share and provides a clear roadmap for near-term and long-term growth prospects for sustainable infrastructure demand. Segment adjusted EBIT margin and segment adjusted EBITDA over net revenue margin were 8.4 percent and 14 percent, respectively, during the quarter. We continue to achieve record backlog results with another quarter of growth. It now stands at approximately $4.8 billion, which represents 25 percent growth versus our backlog as at March 31, 2022. On slide six, we provide further insight into each of our core geographies of the UK, the US, and Canada. In addition to organic revenue growth, we also earn several key wins across these markets that touch all of the engineering services that S&C Loveland provides. In the UK and Europe, we saw continued revenue growth, which speaks to the focus of governments to spend on defense and energy. Performance this quarter emphasizes the resilience of our business as market dynamics appear positives, despite underlying uncertainty in global economies. Our key wins this quarter include a contract to upgrade railways in the south of England over the next five years and leading the design of the new Dublin Metrolink in Ireland. In the US, we continue to achieve record high backlog in this growing market. Our positioning in the U.S. is a key pillar of our pivoting to growth strategy. Our robust pipeline and long-term commitment by the governments to expand infrastructure spending, as evidenced by Windsor's quarter, sets us up well to maintain and accelerate our recent revenue and margin performance. At home in Canada, we're also seeing increased government spending on infrastructure. Growth in markets include the focus on energy transition, energy storage, and mining operations. We secured a number of key wins in Canada across the industrial power and EV battery markets, as well as road improvements. Looking out, demand remains robust for our services, driven by generational investments in infrastructure and climate resiliency, reshoring of manufacturing, and the energy transition. Here in Canada, for example, the $180 billion infrastructure investments program spread over 12 years and established in 2016 by the government of Canada still has more than half of the budget left to spend. In the U.S., the Infrastructure Investment and Jobs Act and the Inflation Reduction Act provide a strong tailwind for future growth opportunities. Our robust pipeline sets us up well for top-line and bottom-line growth in our engineering services business across each of the geographies for the foreseeable future. I'd now like to move to slide seven and the results of our nuclear business. Our positioning in the expanding nuclear marketplace continues to bear fruit as we achieved approximately 5% organic revenue growth versus the first quarter of 2022 and see strong demand trends across each of our core geographies, with particularly noteworthy growth in Europe. Our nuclear backlog now stands at $986 million, which represents a 23% growth versus our backlog at March 31, 2022. This backlog growth further confirms SNC-Lavalin's position as a leader in the nuclear services marketplace. Results this quarter highlight the long-term growth trajectory of this business as public entities continue to seek alternative energy sources for a cleaner planet. Commitments to net zero carbon by 2050 will significantly increase demand for low-carbon sources of reliable baseload power, where nuclear facilities are poised to meet that demand. On slide eight, we highlight achievements in each of our nuclear services business that we provide. Nuclear new bills represent a significant potential opportunity for SNC-Lavalin. Across the globe, nuclear facilities are being seen as low carbon energy source alternatives. We're underway on small modular reactor projects in the UK and Canada, while we are well positioned for upcoming major new bill projects in Romania and the UK. We remain active in reactor support and life extension projects, as indicated by our work across many of our core geographies. In Ontario, we continue to be actively supporting can-do life extension work at Darlington and the Bruce Power sites, where we're making excellent progress. In Romania, we signed our second pre-engineering contract for the Cernavoda-1 can-do reactor life extension program. the primary contributor to the increased nuclear backlog this quarter. While in UK, we are providing support to the EDF fleet reactors. Furthermore, we see opportunity for continued work on life extensions in the coming years. On waste management and decommissioning, we're seeing continued progress in the UK and the UAE on two major projects. In the US, our subsidiary, Isotec, continues to remediate nuclear waste and produce critical medical isotopes. The pipeline in the US for our decommissioning and waste management services remains robust. And now, moving to slide nine, and our O&M and links on business. Our O&M segment generated $126 million in revenue during the first quarter, a 9% organic revenue decrease due to lower additional services year over year on existing contracts. Segment adjusted evening margin was 7.5% above our long-term target of 5% to 7%. And we're well prepared for our Eglinton, Trillium, and REM South Shore branch projects moving into operation this year. We continue to see opportunity for growth and expansion in the UK through building and road infrastructure improvements. and we're also utilizing our strategic partnerships with key industry players and leveraging our capital group to maximize bidding opportunities for future growth in our core markets. Our links on business saw growth in new orders across the US and the Middle East, which added to the backlog in Q1, which now stands at just under a billion dollars at March 31. However, revenue was lower compared to the same period last year, due to lower backlog generated in 22 and equipment supply chain delays in Q1. Our strategic review to optimize our portfolio of businesses, including LinksOn, remains ongoing, and we will provide an update when applicable. Moving to slide 10 and our LSDK projects in capital business. As we announced in March, our two Ontario projects, Eglinton and Trillium, are largely physically complete. Our last project REM continues to progress really well and is more than 75% complete at the end of March 23. The quarterly loss is in line with our outlook. We believe a significant portion of the additional costs related to the pandemic, supply chain disruption, inflation and labour strike action should be recoverable under the contracts we have with our customers. and discussions remain ongoing as we vigorously pursue recovery of these losses. Turning to our capital business, first quarter revenues and segment-adjusted EBIT were flat as we did not receive any dividend from our holding interest in the Highway 407 ETR. However, in April 23, we received $10.2 million in dividend payments. Traffic volumes continue to accelerate albeit at levels lower than pre-pandemic, as traffic volume grew 28% compared to the first quarter 2022. With that, I'll now turn it over to Jeff to discuss the financial highlights.

Thank you, Ian, and good morning, everyone. Turning to slide 12, as Ian said, we had a strong start of the year with total revenues for the quarter increasing 7% to $2 billion compared to Q1 2022. SNCL services revenue totaled $1.8 billion, 10.8% higher than 2022, or 10.1% on an organic revenue growth basis. Total segment adjusted EBIT for the quarter was $159 million, a 46% increase compared to Q1 2022, and was comprised of $156 million for SNCL services, $12 million for capital, and negative $9 million for LSTK projects. SNCL services adjusted EBIT margin was 8.5%, in line with our target range of 8% to 10%. Corporate SG&A expenses from PS and PM for the quarter was $29 million, and restructuring and transformation costs were $15 million. We continue to expect that these expenses should be about $100 million and $30 million respectively for the full year 2023, as the first quarter had a slightly higher phasing of the total expected full year costs. Net financial expenses for the quarter were $47 million higher than Q1 2022 due to a higher level of gross debt and higher interest rates on variable rate debt. We expect a similar level of quarterly expense to continue for the rest of the year. The IFRS net income from continuing operations this quarter was $28 million compared to $25 million in Q1 2022 and was composed of a net income from PS and PM of $26 million and a net income from capital of $2 million. Adjusted net income from PS and PM for the quarter increased by 41% to $55 million, representing 32 cents per diluted share. Backlog at the end of the quarter totaled $12.6 billion, an increase of 4% compared to March 31st, 2022, as the significant increase in SNCL services backlog was largely offset by a decrease in the LSTK projects backlog. SNCL services backlog increased to $12.1 billion at the end of the quarter, which included a 25% increase in the engineering services segment backlog. This segment was awarded $1.5 billion of work in the quarter, representing a 1.13 book-to-bill ratio. It is also noteworthy to mention that the nuclear backlog had another solid quarter with a book-to-bill ratio of 1.21, ending the quarter at $986 million. If we now turn to slide 13, at the end of March 2023, the company's net limited recourse and recourse debt was $1.4 billion, and the net limited recourse and recourse debt to adjusted EBITDA ratio was 2.9 times, the same level as at the end of 2022. This ratio is above the company's target range of 1.5 to 2 times at the end of 2024, but we remain confident that we will be meeting the target at that time. Note that under our credit agreement, the net debt to EBITDA ratio was calculated differently and at the end of March 2023 was approximately 2.5 times. Due to our continuing efforts on cash collection, our day sales outstanding for engineering services remained strong and stood at 62 days at the end of the quarter. If we now move on to slide 14 in free cash flow, as expected, net cash generated from operating activities was negative in the first quarter due to the cash outflows from the LSTK projects. We expect slightly higher cash outflows for the LSTK projects in the second quarter. These cash outflows should then reduce in the second half of 2023 as the supply chain is paid out and testing and commissioning activities wrap up. We also continue to actively pursue claims associated with the increased costs we've experienced on the LSTK projects. SNCL services had another strong quarter, generating cash flows of $94 million. After cash taxes, interest, corporate items, and capital, you can see that we generated $46 million of operating cash flow. We continue to expect that total operating cash flows should be negative in the first half of the year, while they should be positive in the second half of the year.

With that, I'll now hand the presentation back to Ian. Thank you, Jeff. So we began the year on a high note, with robust results in engineering services showcasing the strength of our businesses. Our LSDK projects are progressing in line with our expectations, and we continue to pursue recoveries relating to outstanding payments due on these projects. We remain focused on executing our pivoting to growth strategy. with the objective to deliver consistent earnings and cash flow to fuel value creation and the long-term success of the company. We are winning through our unique competitive differentiators and our ability to fully service the entire lifecycle of an asset, from design to decommissioning. A generational effort will continue to be taken to offset the negative impacts of climate change. and we are well positioned to utilize our capabilities to enhance our footprint in the new infrastructure for low carbon future. We strongly are positioned with a leading presence across our core markets of Canada, the US, and the UK, and we continue to see several opportunities for long-term value creation for S&C Lavalin across these core geographies and our end markets. So with that, let's open it up for your questions. Thank you.

We will now begin the question-answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. We will pause for a moment as callers join the queue. The first question comes from Chris Murray with ATB Capital Markets. Please go ahead.

Yeah, thanks, folks. You know, Ian, I guess thinking about some of the stuff you've talked about and where you want to go in terms of the pivoting to growth strategy, one part you didn't touch on was M&A. And as we get closer, I think, to the end of LSDK, Can you just talk about where you're feeling in terms of, you know, accelerating growth? It sounds like it works like organic growth. It's certainly been very, very strong, probably stronger than we thought it was going to be. Can you just maybe give us an idea, you know, if organic growth is where you're going to stay for now, given the rate of growth or that as we get past Q2, we could be looking for more, for you folks to become more acquisitive?

Yeah, thanks for the question of the morning. So we're obviously really pleased with where we've positioned the company. I mean, we've deliberately positioned ourselves in fast-growing markets, and we see those markets continuing to be sustainable and fast-growing, you know, fueled by infrastructure investments and fueled by the energy transition. And you're seeing the fruits of that come through from the organic growth, as you correctly kind of identified, that we've executed on. I mean, clearly, in the transformation of the company from what it was to this professional services and project management organization, we will ultimately be producing positive free cash flows, and we're looking forward to that. towards the back half of this year, as Jeff articulated. But we also are very, very fixed on our capital allocation strategy that we articulated in the investor day going back to the end of 21. In that, you know, we have a process to first strengthen the balance sheet. Second, you know, look at how we create value through a potential M&A. And third, you know, look how we might return value to shareholders. So that's still the case. And clearly, when we get to the right point, we want to accelerate our growth through M&A. And that would be, for sure, part of our land and expand strategy in the U.S. And we've talked about that, you know, previously as well. So, yeah, we're definitely on that journey, but it's still a work in progress, so to speak.

All right, fair enough. And then I know you're kind of probably going to kick this down the road a little bit, but you did talk about your strategic review a little bit. I guess a couple of questions on this. I mean, first of all, the book to build and links on was remarkably strong. And you did allude to some new contract wins, but revenue was down. So I'm just trying to maybe square how you guys are treating that business, where it is today. You know, you've got a lot of volatility in it. and where you are maybe in the strategic review process in terms of timing.

Yeah, I mean, let's perhaps pick up specifically on the LinkedIn part of the strategic review. I mean, LinkedIn, we've been holding this, sharing this business now for four years. And three years, the first three years, we're positive, you know, positive on cash flow, positive in getting the profitability in the range that we want. But 2022 was disappointing. And we are looking at why that was disappointing. We're looking at if we can get this business to a consistent place of profitability and cash flow and growth. And we're also looking at its suitability for our portfolio going forward, which would mean All options are on the table for the links on business. It has improved. I mean, the performance has improved. Backlog has grown. It's still under review. We're doing quite a lot of work to look at that. And we'll communicate, you know, when we come to a rounding on that. And we expect to actually get to a position fairly shortly in the, you know, the early part of the second half of this year and communicate that out.

All right. That's helpful. Thank you. I'll leave it there.

Thank you.

The next question comes from Yuri Link with Canaccord Genuity. Please go ahead.

Good morning, guys. Nice quarter. Thank you. Yeah, Ian, 17.5% organic growth in engineering services, quite strong. Wondering if there was any particularly lumpy award in there or, you know, one end market, just any more color on the strength that you saw there, because it was on a very tough comp too, I think 10% in the same quarter last year. And related to that, how is, how does pricing play in to your ability to outgrow the market on organic growth? How aggressive are you being on, on price?

Thanks. Yeah, and I think in some ways it goes back to what I said about the markets. Where we've deliberately positioned ourselves, the markets are fast-growing markets. And across the board, UK, the US, and Canada, we're seeing very strong investment in infrastructure We're seeing significant opportunities in the energy transition, which is also bringing in the private sector investment into energy transition. And there's no, to your question, I mean, there is no single project which has fueled the growth. It's just very good work winning across a range of sides of business from very small projects to, you know, medium sized engineering service type projects. But we have also been pretty successful in the Middle East of the last sort of couple of quarters, which has fueled some of the growth, but most of it's in our core regions where we stay at 80% of the business. Profitability is on an improving trend, so we are not being aggressive in our bidding. We are still on a margin improvement process in parts of the business. So we're not putting that at risk at all in order to win this backlog. So it's really about market strength and where we've positioned ourselves.

Okay. I mean, a lot of your competitors or peers are also in the UK, the US, Canada, and they're not growing 17.5%. But you're obviously in some pretty good pretty good niches there how do you feel about about the full year I mean you did leave organic growth guidance in the five to seven percent range how should we square that with the first quarter performance yeah yeah and we obviously it is q1 right so you know it's it's it's it's still early in the year we're very pleased

at the start to the year, and we're very pleased with, obviously, the growth that we've achieved. What I want to see and what we want to see before we kind of move that guidance is more development of the pipeline through the year. So, you know, we have a certain visibility of work ahead of us from a defined perspective. We're confident in the markets. We see strong markets, but we need to see our own pipeline be developed a little bit further into the year before we start looking at the full year outlook there. So clearly, if we continue the trajectory that we've got, and it looks for sure that that is going to be the case as we move into Q2, we'll have to look at the outlook. I mean, Jeff, would you add anything to that?

No, I think that's very fair. And, you know, the second quarter has got off to a good start, similar to Q1. But as you say, Ian, you know, we want a bit more visibility on future contract awards, you know, the filling out of the pipeline, you know, for the rest of the year. And then I think we'll have a chance to kind of revisit where we are.

But thanks. Okay, guys. That's my two. I'll hop back in the queue. Thanks. Thank you. Thank you.

the next question comes from benoit poirier with desjardins capital markets please go ahead yes good morning everyone and congrats for the quarter results uh just just in terms of free cash flow um could you maybe provide some color about what we should be looking for uh in terms of free cash flow for q2 uh the magnitude of the the loss versus q1 and maybe dsos still remain very low at 62 days. I'm just wondering how sustainable it is.

Yeah, thanks very much. Maybe I'll take that one. You know, so I think in terms of the second quarter, as I was talking about in my presentation, And we've talked about before, we really see the first half of the year from an operating cash flow perspective being negative, driven by the LSTK projects. And as we said at Q4, we see that cash flow drag from LSTK in the first half of this year being similar to the first half of 2022, where in the first half it was a cash flow usage of $250, $260 million. We still think that's true for the first half this year, so that definitely implies that Q2 will be a bit more of a drag in terms of LSTK in the second quarter as we pay a supply chain and really begin to finish off testing and commissioning and those sorts of things. But as we've said, as we move into the second half, that LSTK drag will come down, and the the natural cash generative ability of the go forward business as we get later in the year, I think will become much more apparent.

Okay. That's great. And just which.

I think I didn't talk to the DSO. Sorry. I apologize for that. So, yeah, it is, it is at a strong level. You know, we've done a lot actually within the business to really focus on cashflow generation and the conversion of EBITDA into operating cashflow. And we're seeing the fruits of that. So we remain very focused on it. There's always some pressure on that, as you say, in terms of it moving a bit higher. But so far, we've been successful, and we expect to continue to be successful in that range in the near future.

Okay, perfect. And just with respect to capital, net book value was up sequentially. Could you maybe provide some color on what drove the increase? And what are the timing to revisit your stake in the Highway 407, still a second-half story?

Yeah, I think that increase is really related to the building of Trillium and how we kind of build that asset in the build phase before it's handed over to the customer. So nothing out of the normal there, Benoit. That's really what's driving it from a book value perspective. Okay. You know, I think in terms of the 407, you know, more generally, we saw traffic, you know, year on year improve. It's up about 28%, still, you know, below pre-pandemic levels. You know, but as 407 management has said, they expect, you know, revenue and traffic to improve over the course of 2023. Obviously, we consider it, you know, a great asset, has a lot of life left in it. And we're a happy holder of the asset here in the short to medium term. As we've said previously, in the longer term, we'll consider how it fits within the portfolio more broadly. But in the near term, pleased to see traffic improving.

Thank you very much. Congrats again.

Thank you.

Thanks. The next question comes from Devin Dodge with BMO Capital Markets. Please go ahead.

Thanks. Good morning. So I wanted to start by picking up on one of Yuri's earlier questions on organic growth and engineering services. I think clearly you guys have made a lot of progress in expanding the workforce in 2022. Just wondering how you're thinking about, or should we be expecting a similar pace of hiring in 2023, or do you think this will maybe moderate a little bit?

Yeah, you should see that. And we're very, very pleased with our ability to increase the net level of people in the business from an organic perspective. I mean, obviously, we are a people business and people drive growth. And the ability to attract good people to the company is key to fueling that growth. We've done several things in the last few years to recreate the culture and the company and to be an employer of choice. I mean, our purpose to engineer a better future for the planet and people really resonate with our employees. And it's really a point of being able to attract employees. Our AD&I programs, our development programs, our collaborative approach to doing business and to working together internally have all helped in being an employer of choice. And we've now been able to get our attrition levels down to pre-pandemic levels after a spike after the pandemic, which is great news. And in Q1, we actually increased our headcount by over 1,000 employees in Q1. So that's a great run rate and a great fueling of our organic growth. So, you know, very, very pleased. You know, our company is people, and we value, obviously, all our employees very much.

Okay, good call there. Thanks for that. And, Ian, you mentioned that the prospects with the U.S. Department of Energy remain strong for nuclear cleanup work, yet I think we've continued to see projects get awarded to others, including a large project award in a quarter where S&C was one of the incumbents. Can you elaborate a bit on what's driving the optimism there?

Yeah, yeah, for sure. I mean, it's a very, very big market. I mean, that's the first thing I'd say. Generally, these projects are bid and undertaken in joint venture. We are in joint ventures for other projects. You're right to say there was a big cleanup project at Hanford that we didn't win in the quarter. That's disappointing. I guess you can't win them all. There are other prospects out there. I mean, that win in itself, and it was a fairly large project, but because these things are done through joint ventures, each loss is not material to the whole. So we do have great expertise. in the sector. We have our own IP technology in terms of vitrifying nuclear waste into glass. We have a technology that brings out these medical isotopes from nuclear waste into medical isotopes. And the market's huge. I mean, the DOE is spending a significant amount of money on cleaning up the historical nuclear waste. So we still see it as a good pillar to the business.

Okay, understood. Okay, and then maybe just take one last one in. I think this might be for Jeff, but just trying to understand or better understand some of the restructuring costs in the quarter, particularly in engineering services. It just seems to us that the business is performing well, so it isn't really clear to me why there's much restructuring or severance costs that should be considered non-recurring.

Yeah, just as we've been looking at that business, those additional restructuring costs were in our Hong Kong and China business, where we've repositioned and restructured the business in line with our work rate there. So it was in a fairly small part of the business, but that was something that we needed to do in the end of last year and in the first quarter this year. So that's what drove the slightly higher amount in the first quarter.

Okay, thank you. I'll turn it over. Thank you.

The next question comes from Michael Tupoum with TD Securities. Please go ahead.

Thank you. Good morning. Morning. Just a quick question on the links. I realize, well, first of all, nice to see that segment return to positive even in the quarter, although it was still quite modest relative to, I think, what you would like to see that segment doing. Um, obviously remains to see what happens with that business as you work through your strategic review. But, um, as long as it's part of the results, just wondering how we should think about performance in that business, um, overcoming quarters.

Yeah, it's, it's, it's Jeff Michael. Why don't I take that? So, um, as you say, it was good to see it back into profitability in the first quarter. Um, and as Ian said earlier, we've been doing, you know, lots to strengthen the operational capability within that, that business. Um, I think we'll see Q2 improving on Q1, not at the level probably we'd like it ultimately to be, but in the second half of the year with the backlog growth that they've been growing and the win rate that they have, we would see it back into its target range in the second half of the year. So that's how I think the profile looks like through the year. Okay.

Thank you. And then a couple of questions about nuclear. First off, another quarter over quarter improvement in nuclear backlog. I think there's some commentary about this, but maybe we can just touch on the drivers to the improving backlog there. And then the second part of the question is, when we look at the margins for the nuclear segment, 13.4% in the quarter, that is within your 13% to 15% range that you've talked about in the past. But It's certainly lower than we've seen that segment do for quite some time. So I guess just wondering what's pushing the margins down a little bit versus what we've seen in the last few years, and how should we think about nuclear margins going forward here?

Yeah, yeah, thanks. I mean, obviously, we are very excited about the market and the resurgence of new nuclear as part of the clean energy transition. transition solution. And as you write, you know, backlog is up 23% year over year. So I think we've spoke a lot about the potential in the market. And we've spoke a lot about how we see the medium term of this business growing significantly. What we're seeing now is actually real projects and real project wins. And that's fueling the start of what we will see as really good growth in this sector. And examples of that would be, obviously, the SMR OPG project here in Canada at Darlington, the CANDU life extension project for the Cernavoda Romania project. That's the second pre-engineering project. contracts, which came into backlog. Sizewell, we're now seeing the second large nuclear power plant being built in the UK, which we're heavily involved with. So we're seeing work flow through now from Sizewell, and that will continue. But going forward, you know, just a range of opportunity in small modular reactors, a range of opportunities, both domestically and overseas for the can-do technology, range of opportunity to support other technologies such as GE, Hitachi, Rolls-Royce, the French technology, where they really need our project management and nuclear kind of engineering general capability that we have. So we're going to see a lot more fueled here. I think the margins, because of the barriers to entry, will remain in the range that we've got. We're confident that this is a differentiated high barrier to entry business. The work is obviously done under contract conditions, which are favorable to ourselves. And we're in this sort of transition of winning work. There's no real pressure on the margins here. It's really about winning work and catering to customers.

Okay, that's very helpful. Thank you. If you could just clarify one thing from earlier for Jeff on the cash flow side. I know the expectation was always that you'd have negative cash outflows in the first half and then positive in the second, and obviously LSDK, I think the expectation was for that to continue to be a drag in the short term at least. But the comment about expecting a higher cash outflow in LSTK in the second quarter, was that always the expectation or has something changed on that front?

No, well, nothing's really changed in terms of the first half. And, of course, it's largely dependent as we pay out the supply chain. So we just saw a little less of that than we expected in the first quarter. It'll clearly sort of catch up in the second quarter. So it was just a bit of a phasing between the first and the second quarter, but no change to how we sort of saw the first half. Okay, that's helpful. Thank you.

The next question comes from Sabahat Khan with RBC Capital Markets. Please go ahead.

Great. Thanks, and good morning. There was a bit of discussion about the U.S. business earlier. I just want to get an understanding of, you know, in terms of your positioning in that market, And given your current footprint, and obviously M&A is a bit further out, do you think you're well-positioned given a lot of the infrastructure spending that's coming? Do you see yourself doing maybe some smaller M&A in the interim to better position yourself for the IIJA or the IRA spending? Just some thoughts on that.

Yeah. I mean, the plan's going well, but our aspirations for growth in the U.S. is high. As you said, the market, and as I said previously, the market is is very, very strong in infrastructure and energy transition, you know, fueled by the IIJA, the IRA, and the CHIP bills that have been put in place. We've got our land and expand strategy, which is really state to state, which is beginning to yield results, and we're seeing work winds come through in our new entry states in Northeast, Northwest, and California. So that's working, and that's an organic play And that's bringing results. But there are other parts of the market that we have recently reviewed and developed a plan to execute on, basically fueled by the energy transition and the IRA in clean power and the industrial kind of processes and manufacturing units that need to be built. to support that clean power, particularly EV battery manufacturing and processing plants, which we are in discussion with customers and looking hopefully to get some wins through. The resiliency work in the US is strong, both in flood defense, disaster relief, but also in flood mapping and understanding where those areas of risk are. And we've been winning projects through that. Ultimately, we will get to an M&A program. It will be a sensible step-by-step M&A program in the U.S. where we build on the business that we already have with tuck-in type acquisitions to give us a greater reach geographically and capability-wise and relationships with customers to build on our aspirations. But we have 4,200 people. And we want a lot more than that to be equal to our peers. So we have a plan that we're confident in and the market's there, you know, the market's there to support that.

Oh, great. Thanks. And then looking at the UK market, obviously Atkins historically been a pretty large player there. I guess based on your read of the market, is it the kind of base level infrastructure spend that's driving demand in that market? Or are you seeing contribution from some of the larger sort of, you know, whether it's a leveling up agenda or kind of the larger one-time spend program? I just want to understand how that market is doing and maybe any end markets that stand out to the positive or the negative.

Yeah. Yeah. I mean, we've got a very diverse business across the UK, which is helping us, in the resilience and actual fact our business is growing. I mean, and we actually see it growing for the foreseeable future. You'll have seen that the government in March through their budgeting process reconfirmed their sort of 600 billion pound five year infrastructure plan for the country, which is great to see and great to see that investment. But also we're seeing very strong markets from the energy transition and the commitment to nuclear power. I mean, they made a commitment in the UK for 25 gigawatts of nuclear power, which is obviously fueling that part, which is good for us too. Sectors that we're actually seeing good growth in are defense. We've had some good wins from the defense sector and the energy sector generally. leveling up, is still going to invest in the north of the UK. But we're still very confident that we've got this resilient, diverse business and still winning and growing the business, actually.

Great. And just maybe one last quick one. There used to be a project, the White Rose project, a while back. It used to be an LSTK. I think it got cancelled and it came back in under a different contract structure? Could you maybe just talk through sort of the new structure for that contract or for that project and maybe how that project is progressing?

Project's progressing well. It is under a new contract structure. That's not an LSTK structure. I won't get into the kind of details of it, but it's a non-LSTK. It's a profitable project for us. Project's going well. It was restarted. We're doing what we call the slip forming of the principal part of the project, which is 24-hour operation, which is really going well. We've got a good relationship with our client there, good partners on the project. So, yeah, no sort of new news really on that other than the fact that we're pleased with the way that it's going.

Great. Thanks very much for that.

Thank you.

The next question comes from Dimitri Kamelnitsky with Veritas. Please go ahead.

Hi, and thanks a lot for taking my question. I wonder if you can disclose the amount of dispute receivables that are recorded on the balance sheet if possible.

Sorry, say that. The amount of which receivables, Dimitri? The receivables that you'd like to recover.

Ah, no. That are recognized on the balance sheet.

Yeah, yeah. Yeah, no, fair enough. So we haven't disclosed that. As you can imagine, Dimitri, it's commercially sensitive as we look to negotiate and recover the costs that we think are due to us. um but um you know that that process is going well and you know as you've heard us say before we think we're we're due a significant amount of those costs um and naturally you know we're pretty prudent about what we would put on the balance sheet in terms of uh recovery but um you know we think we're owed a significant amount of money from the customers in terms of those additional costs that we've incurred understood okay thank you and i wonder if you can maybe um

talk a little bit about what gives you the confidence as to the ultimate outcome of the recovery. For example, are they under the force majeure provisions and COVID and I guess the ensuing inflation qualifies force majeure. So anything that could indicate what gives you the comfort that most of those will be recovered.

Yeah, thank you. And obviously, we are confident. And we undertake an incredible amount of work to pursue these recoveries from our customers. We have very, very large internal, external teams with external legal and quantum and entitlement analysis. And through those analysis, and through those legal opinions, we develop a view as to what we believe is our entitlement to recover loss. And clearly, through the pandemic, those losses were significant as we posted them in real time as they happened. So many kind of contract provisions, many sort of areas of entitlement that we can recover ranging from changes in law to the specific provisions around force majeure and loss due to strikes or hyperinflation. So without kind of obviously going into too much specific project by project detail, we are confident and we will vigorously pursue recovery of those losses either through negotiation or through litigation. Okay, understood.

But you don't have a timeline yet of when you'd expect to make announcements related to recoveries?

No. Obviously, in a negotiation, there are two parties, and we can't speak for the other party. We're working at it hard. We are optimistic that we will get an outcome which is a win-win for ourselves and the customers. And negotiation is the best way to do that. And we are optimistic that we will conclude it that way. Thanks, Ian.

And what are the key variables or, I guess, moving parts related to full-year cash flow guidance that may swing the number significantly? Just trying to understand, you know, why are you – a little hesitant in providing the annual number, obviously understanding there's a lot of moving parts. Some of them are beyond your control, just trying to see what are the key variables there.

Yeah, it's Jeff. Why don't I take that sort of last question, Dimitri? I think there are a few moving parts. I mean, it ranges within LSTK to the actual recovery of the holdbacks receivable that we have and paying out the supply chain that goes with that. There's the claims revenue, as Ian has talked about, in terms of our ability to, you know, to negotiate some of those outcomes this year or not. You know, there's dividends on the 407. So there's a number of kind of operating elements within there that, you know, certainly at this point in the year, we wouldn't get more specific in terms of our outcome around cash flow.

Awesome. Thanks so much, and thanks for taking my question. Thank you.

Thank you. The next question comes from Yuri Link with Canaccord Genuity. Please go ahead.

your line is now open yeah thanks um just a quick one on the um the strategic review as it pertains to the to the capital assets excluding highway 407 how active Are you on that part of the strategic review, and do you envision divesting those assets in a package deal, or would they be piecemealed out? And any idea on timing? Is that something that can happen this year or it's 2024?

Yeah, I mean, the strategic review, in its essence, really, is about fine-tuning, you know, the whole concept here. it is about fine-tuning the whole portfolio, whether that's capital or whether that's portfolio. It's not transformational. There's nothing in there that's going to be very, very significant, and we're very happy with the company we've now built. I mean, specifically on the capital assets, we do recycle. As you've seen in 2022, we recycled John Hart and a fund that we had with with Carlisle. We generally make sure that our assets get into a smooth operation. So obviously we've got three assets that are going into smooth operation this year. Two of those have got a capital content in the Ontario projects. Once the defects are done, they're in a smooth operation, that's the point that we may recycle out. There's nothing that comes to my mind immediately that we would look to recycle out this year, but it's an ongoing process. Obviously, we're in the capital part of our business to win work and to fuel the growth of the company. And we hold a small portion of some of them where we have an operation and maintenance obligation. So nothing that comes to mind specifically. But the strategic review is going well. I mean, it's all really about profitability and fine-tuning, making sure that we push all parts of the business forward to the right place, you know, as we now are a professional services and project management company.

But Ian, I think collectively those assets have a book value around $600 million. Why not look to divest of them and you could immediately put the balance sheet in much stronger footing and potentially accelerate your capital allocation program?

Yeah, Jeff, maybe I would just sort of build to that is You know, we look at all of them. And as Ian had said, some of them are a nature that are on the balance sheet that, you know, aren't at a stage where they can be, you know, effectively, you know, recycled in terms of capital. You know, and some are of, you know, of a nature that our ability to sort of recycle those, you know, in the immediate near term is more constrained. I think the point is that we'll absolutely continue to look at every one. And, you know, if there's an opportunity to realize value, to your point, and as we've done in the past, you know, we'll look to do that as a way of accelerating, you know, particularly on the balance sheet, getting to where we want to be.

Okay. Thanks, guys.

Thank you.

Thank you. This concludes the question and answer session. I would like to turn the conference back over to Denise Jedman for any closing remarks.

Thank you very much, everyone, for joining us today. If you have any further questions, please don't hesitate to contact me. Thank you and have a nice day. Bye-bye.

Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.