Atkinsrealis Group Inc.

Thank you for standing by. This is the conference operator. Good morning and welcome to SNC-Lavalin's second 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 0. I would now like to turn the conference over to Denis Jasmin, Vice President, Investor Relations. Please go ahead.

Merci, Ariel. 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 Ian 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 participate. 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-RFRS financial measures. Reconciliation of these amounts to corresponding RFRS financial measures are reflected in our earnings release and MD&A, which can be found on CDAR+, and our website. And now I'll pass the call over to Ian Edwards. Ian?

Thank you, Denis. Good morning, everyone, and thanks for joining us today. We are very pleased with our performance during the first half of the year, as results were strong across all our businesses. Our pivoting to growth strategy, which has been our guide as we grow into a premier professional services and project management company, is really taking shape. Performance this past quarter reinforces the benefits of this strategy, and positions as well for long-term value creation. SNCL services continued to grow, expanding revenue by 22% year-on-year, significantly outperforming our four-year outlook range of 5% to 7%. Segment-adjusted EBIT grew 15%, or $21 million, as we continue to manage our costs to deliver our targeted margin percentage. We achieved another record backlog this quarter, totaling $12.4 billion as at June 30, as demand for our services remains very strong in our core and end markets and geographies. Given our strong year-to-date performance, robust backlog, and the pipeline of prospects, we are raising our SNCL services organic revenue growth outlook for the full year to between 12% and 15%. We also continue to successfully add high-quality talent in the quarter, increasing our headcount by approximately 2,400 employees since the beginning of the year. Subsequent to quarter close, we made progress against our strategic review through the sale of the Scandinavian Engineering Services business to Systra Group, a France-based engineering and consulting group specialized in public transport and mobility solutions. We expect the transaction to close before the end of the year. Our success this past quarter and the opportunities we see ahead further emphasize the strength and resilience of our business and is driven by the global focus on sustainable infrastructure, energy sources for the built environment. We continue to have great confidence in our forward-looking trajectory and we are well on track to achieve our newly elevated outlook. for 23. On slide four, we highlight our backlog growth across SNCL services. Our 9% growth in the second quarter of 2023 versus the second quarter of last year was mainly driven by wins across our engineering services and nuclear businesses. We are seeing key wins across many of the markets in which we operate, including transportation work in the US, building infrastructure development in Saudi Arabia, and asset management and nuclear life extension work at home here in Canada. The wins highlighted on this slide demonstrate our ability to deliver growth now and in the future. Turning to slide five, our engineering services business continues to drive robust organic growth for SNCL and saw significant year-over-year revenue growth of 25% during the second quarter. Our record revenue generation for this quarter was driven by continued growth in the US, one of the pillars of our pivoting to growth strategy, along with strong performance in the UK, Canada and the Middle East. We also saw sustained performance in Australia and Asia, further demonstrating the resilience of our business in the region. Increased volume and productivity across the UK and Europe contributed to the profitability improvement in the quarter. Segment adjusted EBIT margin and segment adjusted EBITDA over net revenue margin were 8.5% and approximately 14% respectively during the quarter. We continue to achieve record backlog results, which now stands at approximately $5.1 billion, representing 22% growth versus our backlog as at June 30, 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 Laughlin provides. In the UK and Europe, we saw continued revenue growth, which speaks to our position as strategic partners to governments as they focus on transportation, defense, and water. Performance this quarter in these markets was driven by increased volume, productivity and profitability. In the U.S., we continue to reap the benefits of our increased foothold in the market and the government's commitment to infrastructure spending. This past quarter, we secured key wins in transportation, building and places and defense. And looking out, these opportunities in the U.S. are plentiful. backed by the US commitment to spend more than $100 billion over the next five years. We have strong confidence for near-term and long-term opportunities in Canada, as the government plans to spend close to $15 billion until 2029 in reliable, fast, affordable, and clean public transport. We are also at the forefront of supporting projects related to the development of EV batteries as proven by a key win this quarter. Long-term, there is a focus on reducing GHG emissions by 90% by 2050, which will lead to further contract opportunities for S&C Lavalin. Global demand for our end-to-end services remain robust, driven by generational investments in infrastructure and climate resiliency and reshoring of manufacturing and the energy transition. We are successfully attracting and retaining top talent to support our growth pipeline. Future opportunities and our focus on operational excellence sets us up for top line and bottom line growth in our engineering services business across each of our geographies. I'd like to now move to slide seven and the results of our nuclear business. We demonstrated strong growth in the quarter. with an organic revenue increase of 11% compared to the second quarter of 2022. Our nuclear backlog has also grown to $1.1 billion, which represents a 38% growth versus our backlog at that June 30, 2022. Operating margins fell to 13% due to changes in the business mix of nuclear segment this quarter. Nuclear represents a significant opportunity for S&C Loveland and our position in the marketplace. Our robust revenue and backlog growth further confirms that we are well positioned to capture long-term benefits as leaders in this thriving nuclear energy space. On slide eight, we highlight achievements in each of the nuclear services that we provide. Nuclear new build represents a near-term and long-term revenue-generating opportunity for S&C Loveland. The recent announcements by the Ontario government in which they plan to build three small modular reactors at the OPG Darlington site and their proposal to expand the Bruce Power Nuclear Station are just two examples of how governments are acting on their commitments to net zero. We remain active in reactor support and life extension projects, as indicated by our work across many of the core geographies. In Ontario, we continue to be actively supporting can-do life extension work at the Bruce Power Site, where we recently signed a 10-year commitment to life extend the remainder of the reactors. Our can-do technology and proven success in life extension allow us to capture new opportunities such as the recent announcement by Ontario provincial government approving the extension of Pickering Nuclear for a further two years. On waste management and decommissioning, we're seeing continued progress on our projects in the UK and in the UAE and have a strong pipeline of prospects in the US. We are increasingly excited about the long-term growth potential of our nuclear business, given our expertise, and our recognition as a trusted engineering and delivery partner. We are consistently harnessing our capabilities across the globe to continue to set SSE leveling up for further nuclear contract wins. Now moving to slide nine and our O&M and links on businesses. Our O&M segment generated $99 million in revenue during the second quarter, a 7% organic revenue decrease mainly due to the completion of a large contract that offset revenue generated from new projects. Segment adjusted EBIT margin was 8%, above our long-term target of 5% to 7%. We continue to see opportunities for growth and expansion in Canada and the UK through wastewater facilities and building and road infrastructure improvements. We're also utilizing our strategic partnerships with key industry players and leverage in our capital group to maximize bidding opportunities for future growth in core markets. Our strategic review regarding LinksOn remains ongoing, and we will provide an update when applicable. Backlog increased by 16% to approximately $1 billion at the end of the quarter, and the quality of the backlog should lead to an increase in revenue over the back half of the year and a segment-adjusted EBIT margin percentage closer to the low end of our outlook range in Q4. This market actually remains very strong with good opportunities, particularly in the Middle East and the U.S. Moving to slide 10 and our LSTK projects and capital business, we recognize $13 million in losses in the quarter in line with our expectations. As we finalize the LSTK projects for our clients, we continue to pursue recoveries that are owed to us. A significant portion of additional costs related to the pandemic, supply chain disruption, inflation, 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. Testing and commissioning on our two Ontario projects is proceeding as scheduled. Our last project, REM, continues to progress well with the South Shore portion having successfully opened on July 31. Turning to our capital business, second quarter revenues and segment-adjusted EBIT both grew significantly versus the second quarter of 2022 as we received $10 million in dividends from our holding interest in the Highway 407 compared to no payment received this quarter of last year. In July, we received another $10 million in dividends. Traffic volumes continued to accelerate as more workers returned to the office. Volume grew by 18% compared to the second quarter of 2022. So with that, I'll now turn over to Jeff to discuss the financial highlights.

Thank you, Ian, and good morning, everyone. Turning to slide 12, total revenue for the quarter increased 14% to $2.1 billion compared to Q2 2022. SNCL services revenue totaled $2 billion, 21.8% higher than 2022, or 17.7% on an organic revenue growth basis. Total segment adjusted EBIT for the quarter was $178 million, a 48% increase compared to Q2 2022, and was comprised of $167 million for SNCL services, $24 million for capital, and negative $13 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 PSMPM for the quarter were $29 million, while restructuring and transformation costs were $7 million. Net financial expenses for the quarter were $43 million, higher than Q2 2022 due to a higher level of gross debt and higher interest rates on variable rate debt. We expect this level of quarterly expense to continue for the next two quarters. The IFRS net income from continuing operations this quarter was $64 million compared to $2 million in Q2 2022. This was composed of a net income of $50 million from PS and PM and $14 million from capital. Adjusted net income from PS and PM for the quarter increased by 34% to $72 million, representing $0.41 per diluted share, compared to $0.31 in Q2 2022. Backlog at the end of the quarter totaled $12.8 billion, an increase of 5% compared to June 30, 2022, as the $1 billion increase in SNCL services backlog was partially offset by a $400 million decrease in the LSTK projects backlog, as we continue to progress on our LSTK exit strategy. SNCL services backlog increased by 9% and included a 22% increase in the engineering services segment and a 38% increase in the nuclear segment. Engineering services and nuclear were awarded $1.7 billion and $376 million of work in the quarter, representing a book-to-bill ratio of 1.17 and 1.53, respectively. If we now turn to slide 13, at the end of June 2023, the company's net limited recourse and recourse debt was $1.7 billion. and the net limited recourse and recourse debt to adjusted EBITDA ratio was 3.1 times. 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 agreements, the net debt to EBITDA ratio is calculated differently, and at the end of June 2023 was approximately 3.0 times. Due to our continuing efforts on cash collections, Our day sales outstanding for engineering services continues to be strong and stood at 61 days at the end of the quarter, broadly in line with the past quarters. If we now move on to slide 14 and free cash flow. As expected, net cash generated from operating activities was negative in the second quarter, mainly due to the cash outflows from the LSDK projects. As previously disclosed, we expect a positive net cash from operating activities in the second half of the year. with the expectation that it will be more weighted towards the fourth quarter, as the LSTK projects supply chain continues to be paid out and testing and commissioning activities continue in Q3. We are also actively pursuing claims associated with the increased costs we've experienced on the LSTK projects. SNCL services generated cash flows of $70 million in the quarter. After cash taxes, interest, corporate items and capital, You can see that we used $46 million of operating cash flow in the quarter and including LSTK projects, $156 million. With that, I'll now hand the presentation back to Ian. Yeah, thank you, Jeff.

We concluded the first half of the year on a positive note with strong revenue and operating profit generation as we continue to execute on our pivoting to growth strategy. We're strongly positioned with a leading presence across our core markets of Canada, the US, and the UK. And we continue to see multiple opportunities for long-term value creation for S&C Loveland across all of these core geographies and our end markets. And we are winning through our unique competitive differentiators and our ability to fully service the entire lifecycle of an asset from consulting to design all the way through to O&M and decommissioning. We are a proven, trusted partner with our clients, which bodes well for our future opportunities to capture key contract wins across our core businesses as the world positions itself to lower its carbon footprint through sustainable infrastructure and clean energy solutions. And lastly, we successfully increased our headcount by approximately 2,400 employees since the beginning of the year. And we have a strong, dedicated, and growing workforce that helps us achieve these goals. I am thankful every day for their loyalty and their diligence. So with that, let's open up for questions.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one 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 two. We will pause for a moment as callers join the queue. Our first question comes from Jacob Bout of CIBC. Please go ahead.

Good morning. Morning. Morning. So strong organic growth in the quarter and I guess in first half and it appears you're outperforming your peers. What do you think is driving this outperformance? Is this a mix or are you seeing higher win rates or what would you attribute that to?

Yeah, thanks for the question and clearly we're pleased with the results that we're getting. It's all about our strategy and it's all about the pivoting to growth strategy that we've put in place and communicated back in 21 when we had the investor day. We positioned this company deliberately in markets where we believe that governments are going to invest in the replacement of aging infrastructure and the investment in new cleaner infrastructure. in addition to assets that are needed for the energy transition to net zero 2050. And when you think about those geographies that were particularly focused on 80% US, Canada, and the UK, the budgets from those countries and the commitment to spend on those issues has really increased since we actually put the pivoting to growth strategy in place. I think there's a couple of other key elements here in that we are weighted towards government work deliberately because we see that as a resilient strategy and we see that as less cyclical, particularly with the need to meet net zero. But also the nuclear resurgence and nuclear power that is coming back as a true alternative to clean power is really boosting our nuclear business. So all in all, I think the deliberate position of the company and our Pivot to Growth strategy is working and we're pleased with the results that we're getting.

Okay. thank you for that. I guess on the nuclear side, though, I mean, it doesn't appear that the revenue growth is keeping up, keeping pace with the, you know, the sequential increases in backlog. It looks like, you know, nuclear organic growth is lagging the overall company. You know, are you expecting, you know, acceleration here on a go-forward basis?

For sure. And I think I think there's a few contextual points here. From a services business, the business is kind of stable and has been stable and growing as you would expect a services business to grow. But on the new nuclear side, we go through this process of pre-feasibility, engineering and feasibility, engineering design, and then into projects themselves. And a good example of that would be the life extension projects at Bruce and Darlington in Ontario, Canada, that the ramp up needs to go through those engineering processes. So whilst the backlog obviously improves as you win those contracts, the ramp up towards them is a bit slower. What you will see, particularly from the life extension projects, is a ramp up of revenues 24, 25 from the work that we can already see, both one work and work that we believe we're going to win.

And just one last quick one. Maybe just talk through the organic revenue growth you saw in the UK versus Canada and the US.

Yeah. UK business, very strong. The specific sectors are shifting a little bit. We're seeing more defense work. We're seeing more water work. Historically, our business has always been strong in transport, and it's still strong. But I think the growth is really coming out of more defense and more water work. Resilient business, obviously, you know, a business that's been around for over 100 years, and is proven to still grow in the market that we have in the UK.

Thank you.

Our next question comes from Yuri Link of Canaccord Genuity.

Please go ahead.

Good morning, guys, and congrats on a nice quarter. Good morning. Yeah, so... Growth surprised to the upside, particularly in engineering services, but maybe just dig in a little bit on the margin there. I was surprised that the EBITDA margin on net revenue dropped. was down about 130 beeps despite the strong revenue growth. So what's offsetting the, I guess you would assume there'd be some natural operating leverage in that business, but it doesn't seem to be pulling through.

Yeah, okay. Jeff and I both answered this question. Maybe I'll take it from the strategic point of view. When we analyze our EBITDA to net revenue margins across the whole business, which obviously has been part of the strategic review. Major parts of our business operate at peer level margins. And we have areas of the business, such as Scandinavia that we announced we're going to divest, that we're operating below those margins. So the strategic review for us is all about ensuring that all of our business in our portfolio is operating at peer level or above. So we are on that journey and we are acutely aware that in parts of the business, we are below. But we see no reason why we won't get to the same place. Jeff, I don't know if you'd add anything to that.

Yeah, I think the only other thing I'd add is, you know, we continue, you know, to drive the business on EBIT margins, which we think is the best representation of our business from an operating perspective. And, you know, those are very consistent year over year. We did see a bit of change in mix just in terms of the amount of flow through revenue between gross revenue and net revenue. And that really drove the difference on EBITDA to net revenue. but we are largely looking at EBIT margins and continuing to drive those margins over time. We see opportunity to continue to improve those as we work through some of our cost transformation activities and continue to optimize the portfolio in terms of our businesses. But we're pleased with where we saw our operating margins in the second quarter.

Right, those for engineering services, if I recall, those would have been flat year on year, right?

Yeah, 8.5 to 8.5. Yeah.

Okay. You're still calling for positive operating cash flow in H2. Positive, that's a wide range. Is that dependent in any way on these settlements? And can you quantify it at all? Because the leverage is... Pretty, pretty high. So wondering how to model that leverage ratio in the back half of the year is really what I'm trying to get at.

Yeah, I mean, as we've talked about before, you know, very much the first half was in line with our expectations. We did expect to be negative because of that LSTK projects cash flow drag. As that winds down in the second half of the year, as we've said, expect to be positive operating cash flow in the second half of the year. That's not dependent on the settlements. Yuri, we will very much expect and will deliver positive operating cash flow will be weighted towards the fourth quarter as we said, you know, there is a natural transition to that drag from LSTK through Q3 and Q4. I don't think we provide any more specific guidance around that at this stage, but very much, you know, by the end of the year, we will have the, you know, a business on a go-forward basis and that we think will generate strong cash flows. From a balance sheet perspective, therefore, you know, we do see this as, you know, the high watermark in terms of our leverage ratios, you know, and therefore as we drive operating cash flow positive over the second half of the year. We expect, you know, the leverage ratios to fall and, as I said, be very much on a trajectory to, you know, to hit our targets in 2024. You know, I'm very comfortable with our liquidity and where we are from a balance sheet perspective. So, you know, I have no concerns that way.

Okay. Thanks for the call, guys. Thank you. Thanks.

Our next question comes from Chris Murray of ATB Capital Markets. Please go ahead.

Yeah, thanks, folks. Good morning. Maybe following on the cash flow discussion a little bit, you know, part of what we talked about at the investor day was once we're past the, I guess, the more challenged LSDK projects, you start to look at maybe M&A and deployment of some of that available cash flow into M&A. I guess the question is, you know, how are you feeling about, you know, your ability to start executing on that? And do you have, you know, the structure and people in place now, or that's probably, you know, feasible as we move into 2024?

Yeah. I mean, thanks for the question. Clearly, M&A has got to be part of our growth strategy in the mediums of long term. I mean, that's clear. I mean, we have very... clear aspirations of moving from a top 20 player in the US to a top 10 player in the US. That's key to our pivoting to growth strategy. We are obviously doing well on organic growth and the time will come when we enter into an M&A program. We obviously have always said about capital allocation is we strengthen the balance sheet. and then consider M&A or returning to shareholders. When we reach the point, which we would expect during the course of next year, where we can look at M&A and actually carry out transactions, we'll take a very methodical approach to this and start with talking acquisitions to build our capability ensure that we're able to exploit synergies and integrate those businesses, both financially and culturally, into our business. And then we will continue and be at the cadence of our peers in M&A moving beyond 24. So, yeah, very much in the plan, but we're not quite there yet.

Okay, fair enough. And maybe my other question is around strategic review. So, you know, we've kind of touched on a couple of different pieces of this through the call today. You know, I guess in aggregate, what are your thoughts around kind of the final timing of this review? I appreciate, you know, you're probably constantly evaluating the business on a normal course, but I guess the whole strategic review piece, you know, you've got links on, there's been some discussions about divestitures and margin expansion or lines of business maybe or areas that you don't want to be in. You know, what's left to do in terms of your evaluation at this point? And do you think you couldn't have it wrapped by year end, as I think you kind of indicated previously?

Yeah, yeah, yeah. That's a good question, and we are on track, and it's progressing really well. I mean, if we think about, you know, what was the intention here? The intention is to look at all parts of the portfolio, businesses and business, to make sure that we are on a path. to be at peer margins or exceed peer margins. And as you've seen in the Scandinavian divestment, we felt that that was a drag, and we felt that we'd had that business for some time on an improvement plan, and the right decision for us was to divest it. Now, if we take a look at all the other engineering services businesses, we have finished that review. So you would not expect to see further divestments from the engineering side through this particular review. On the links-on side, we are still evaluating our options. We expect to have developed a conclusion to those options and to conclude the actions that are necessary to deal with links-on by the end of the year. So in the main, that would include close out this particular strategic review by the end of this year.

Okay, that's helpful. Thanks, folks.

Thank you.

Our next question comes from Sabahat Khan of RBC Capital Markets. Please go ahead.

All right, great. Thanks, and good morning. You made a comment about just kind of the nuclear opportunity out there, and then you also talked about having added a decent amount of staff. I'm just thinking particularly in that market, which is very specialized, how are you thinking about staffing up ahead of this opportunity? And given some of the timelines for these projects are very long, when do you start looking and hiring and bringing those people on board?

Could you just repeat the last question? I'm sorry, we had a bit of an IT problem. You tuned out for a second. I got the nuclear question.

Yeah, so just in terms of the timeline, just given how long-dated some of these projects could be, when do you start to look and hire and onboard these people, and just given how specialized and maybe potentially hard to find they could be?

Yeah, okay, great question. Now, we gave a fairly short answer on the nuclear side previously. Let me give you a longer answer, and I'll kind of apologize for letting you answer, but I think it's a good question, and it's good to try and understand what the growth is going to look like here. I mean, the world has changed in terms of attitude to new nuclear power generation, and it needs to, because if we are going to reach net zero, we need nuclear power as a baseload to that clean energy future. And I see our business in three parts, certainly three parts in terms of how the growth will flow through the business. Then the three parts are our services business, our new nuclear business, not can do. and our nuclear business, CanDo, where we own the sole rights to the Canadian technology. The services business has been the backbone of our business for years, and it's been stable, and it's good margins, and it is now starting to incrementally grow as we do decommissioning, waste management, and support kind of nuclear clients and facilities in our core geographies. The new nuclear, not CanDo, Projects like the SMR at Darlington for OPG, the work we're doing with Rolls-Royce in the UK on SMR, the vast amount of work we're doing at Hinkley in the UK to support EDF, and that will move to Sizewell as Sizewell gets underway and built. And this is growing now. We're seeing backlog come in here now, and we will see engineering studies and a flow-through of work actually within the short term. And then on the can-do side, there's two parts to this. One is extending the life of existing can-do reactors around the world, which we've been doing at Bruce and OPG, and you will see further announcements for even further reactor life extension projects at Bruce and Pickering. We would hope to win that work, and we would expect that that will bring in significant revenues, 24, 25, 26, And then there's the absolute new build can do that. We're in discussions with numerous clients domestically and internationally. Now you will see actually execution probably of those contracts towards the end of the decade, but pre-engineering priesthood is feasibility. We will see in the, in the short to medium term. So all in all, this is a pretty exceptional time for, for the nuclear business. And we're primarily positioned with the sole rights to the can do technology and our capability. Now, clearly, we have to grow the number of people, and we have to train regular engineers into being nuclear engineers. And we're in that process. We have upskilled many people to take on the backlog that we already have in the nuclear business. And with our value proposition, our talent value proposition, where we're able to increase the number of people by nearly 2,500 people in the first half of this year, We think that, you know, complementing the demand for nuclear and our ability to upskill people is the answer. So I'm sorry it was a bit of a long answer, but I think the question deserved it.

No, that was good color. And then I guess maybe just along those lines, you know, there was a question earlier on the margin profile. I guess as you're bringing all these folks just into the organization, is there some element of maybe underutilization or inefficiencies that you expect should sort itself out over the next 12, 18 months? as those new hires become more productive, or is margin improvement more of kind of the mixed stuff that you talked about a little bit earlier on? And just what's your outlook on that front?

Yeah, that's Jeff. Why don't I take that? It's not really a utilization factor within there. The utilization within the nuclear sector has remained quite consistent. It really is that mix of businesses. Between services, new build, you know, and the waste management, it does fluctuate around a bit quarter by quarter, just depending on the mix that we have in there. And so it can create, you know, sort of small changes or, you know, small elements in terms of the nuclear mix. Over the long term, you know, we absolutely expect to continue to deliver the sorts of margins we have on average in the past. And indeed, you know, could, you know, could see further opportunities. But on a quarterly basis, we get a bit of a bit of movement from one to the next.

Okay, just if I could squeeze in one just on the organic growth, like the number of the last two quarters have obviously been north of 20%, very good. Was this cadence of backlog burn sort of expected based on timelines or, you know, just what should we think about, you know, as we go into kind of 24 and onwards? Because these numbers are very strong, but just wondering if there's some acceleration of work, new sort of book and burn type of business, or just what kind of drove these numbers relative to kind of recent quarters?

Well, I'd probably refer back to the question on where we position the company and how the demand for our services within that positioning of the company, both from a geographical and a service line and a market of energy transition, transport, defense, water. They contribute to all that. Now, clearly, when we set out into the year, We had a growth guidance that was much lower than where we've landed in the first half. Year-to-date, 14% growth. We can put the two quarters together. Really pleased. We felt it was necessary to extend that through to the rest of the year because we see a fairly consistent kind of pipeline for the second half of this year that we've seen in the first half, and that's quite easy to predict. I mean, obviously, we are focused on growth. And we would hope to see growth 24 and beyond. But whether they're at this level, I mean, this is pretty exceptional. I would probably temper down a little bit until we get further towards the end of the year and we can see the pipeline and we can see the specific opportunities. And obviously, we will guide at that point at the end of the year.

Thanks very much for all the color.

Thank you.

Our next question comes from Benoit Poirier of Desjardins Capital Markets. Please go ahead.

Yeah, good morning, Jeff, Ian, and congratulations for the strong results.

Thank you.

Yeah, just to come back on the organic growth question, obviously strong performance in the first half, 16%. You are now guiding for 12% to 15%. Does it signal some softness or return to a more normalized level in the second half, or are you being conservative right now?

Well, we're looking at year-to-date for the H1, which is 14%. I mean, we had a great quarter Q2. I mean, no doubt, right? I mean, I'm really pleased. You know, the work-winning machine and the position that we've talked about has really played for us. But we've taken a H1 view, 14%. We see that that's in the pipeline. We see the visibility that supports that sort of range of growth between 12 and 15. So I don't think it's conservative. I think it's accurate. It's obviously done from analysis of the work we see ahead. So that's why we fixed on that range.

Okay. And just in terms of operating margin, you were able to achieve 8.5% in the second quarter, comparable to last year, despite the strong organic growth. You added about 2,500, 400 people in the first half. I was wondering about what kind of ad count addition we should expect in the second half, but Also, the question is around the operating leverage, the room for margin improvement, especially as you deliver on the organic growth side.

Yeah, okay. So let me answer the talent question, and Jeff can go to the margin question. Our goal this year was to kind of have a cadence of headcount improvements around the thousand person mark per quarter. That's an improvement on 22. 22, if you remember, we had a 3,000 over the year. I think Q2 is pretty exceptional at 1,400. There are some seasonal effects on the recruitment because obviously we have big graduate programs as well and we have big intern programs. So there is some effect. We expect that we'll get to where we set out around the 4,000 increase in people during the course of the year. So we wouldn't see the sort of cadence of 1,400 for the next two quarters. I think that would be a little bit too ambitious.

Yeah, and maybe to chat a bit further about the operating margin profile, as we've seen in previous years, the second half tends to be a bit stronger than the first half as we work through our backlog and we tend to have slightly better and stronger utilization in the second half. But I would also say overall, we continue to kind of see that as we deliver on our cost transformation activities. We've talked previously about the common sets of tools and systems and standardized processes that we're driving through the organization. We continue to improve and rationalize our real estate footprint, and we'll continue to look to drive those sorts of cost opportunities as well. So I think we expect to continue to see, as we have in previous years, a stronger second half on operating margins than the first half.

Okay. And would it be fair, Jeff, to say that all those efforts will likely pay off beyond 2023 and 2024? It will take a few quarters before we see that on the margin side, right?

Yeah, I think what we've talked about previously, Ben, is that over the medium term, we do see the opportunity to continue to realize improvements in operating margins for those factors I've talked about. And as we continue to grow the business and manage our utilization. And there's no question, as Ian said, with such a strong revenue growth in the second quarter, there's a bit more business development experience. expenses as we've continued to drive that higher backlog, but we would expect that to continue to normalize itself out and for us to be in a stronger position in the medium to long term from that combination of cost transformation activities and the strategic review where we look to exit lower margin businesses. Overall, when we look at our business, we see it either currently at a level of or in the short to medium term, an ability to reach peer-comparable operating margins.

Okay, okay, that's great, Collar. And on the 407, obviously, a jewel. If we look at the traffic growth, it's been recovering very nicely. But you also announced the recent refinancing at 4.86%. So I was just wondering how it impacts the cost of debt and whether the traffic growth is kind of offsetting the higher refinancing costs and how it impacts the valuation as you might consider a potential divestiture longer term.

Yeah, I think from a valuation perspective, Benoit, that business is continuing to operate strongly, as you've said. We continue to see improvements in the traffic growth. I think in line with our expectations as traffic and improves in the greater Toronto area as more workers are coming back to the office and more organizations are asking their employees to come back. So we certainly continue to see and believe that The demographics of the greater Toronto area and the working arrangements in that area very much support getting to the long-term traffic levels that we would expect in terms of the valuation. I think the second piece would be, from a cost of capital perspective, any of that debt, you know, further debt that's been renewed, you know, very much in line with what we see as the long, you know, the long-term assumptions around, you know, cost of debt and the weighted average cost of capital for that business. You know, so, you know, we frankly, you know, see it from a valuation perspective to continue to be a very valuable asset, you know, and not dissimilar in terms of its valuation to what we've seen in the past.

Okay, that's great, Collier. And last one on the nuclear side, the Ontario government announced that they are starting pre-development work at Bruce Power, but also planning to construct three additional SMRs of Darlington. So just wondering how large of an opportunity could this represent to the backlog in the longer term?

Well, we're part, as the announcement says, showed of the SMR program with GE and Hitachi. And those are, you know, that work there at Darlington is likely to run to several units. So that's a significant opportunity for us. The ramp to that is, you know, pre-engineering and engineering. So you'll see even now revenues flow through and those revenues will start increasing 24 beyond. Bruce, obviously, we want to be part of the development of new nuclear. We believe the Canadian technology that we have the sole rights to should be the right technology to complement all of the existing reactors that are there at Bruce. And if that is the case, ultimately, that will be a very, very significant opportunity for SNC-Lavalin.

Okay, that's great, Collar. Thank you very much for the time and congrats again. Thank you.

Our next question comes from Michael Tipholm of TD Securities. Please go ahead.

Thank you. Good morning. You put in place an NCIB earlier this year. Considering your expectations for positive cash from operations in the second half of the year and considering the stock still depressed valuation versus peers, Can you just talk about how you think about the NCIB and your appetite for making use of that going forward?

Yeah, sure, Jeff. Why don't I take that? I think, Michael, you heard us earlier. In line with our capital allocation strategy, as we said back in Q4, we wanted to make sure that we had all elements of that capital allocation strategy available to us. um going forward notwithstanding that you know clearly our priority remains the balance sheet and you know that would be the first call on on surplus cash flow um but we did want to have the opportunity um you know in terms of returns to shareholders and that's why the ncib is in place i think we would you know very much agree with you we continue to see you know the value of the company is undervalued versus what we think its fundamental value is you know and when we get to that point where we see positive cash flow or the expectation of it, then we think there's an opportunity to take advantage of that. We're just not there yet.

And so, yeah, understanding that the expectation is for cash from operations to be more weighted toward Q4 than Q3, so understand that we're not yet in Q4, but do you need to see leverage come down to a certain level before you would consider using the NCIB, or is this something you could do sort of concurrently once you're in a positive cash generating position?

I think it's really about, I think we can continue to do that concurrently, you know, and as we get, you know, closer to that point later in the year, you know, see where our cash flow, you know, is turning out, then, you know, then we look to make those decisions at that time. I just think at this point we're probably a bit too early for that.

Okay, I appreciate that. And then earlier you were asked to talk about sort of what you're seeing in the UK versus Canada and the US, and I think you provided some Good detail about the UK, but can you just talk in a little bit more detail about engineering services and growth in Canada versus the U.S.? Obviously, U.S. backlog is, again, a record level, so presumably there's a lot of good growth coming out of the U.S., but if you could just kind of compare and contrast what you're seeing in Canada versus the U.S., that would be helpful in engineering services.

Yeah, for sure, for sure. very significant growth opportunity for us as the U.S. We're rated in the top 20 for our engineering services business, and we have an aspiration of being in the top 10 in the medium term. The market is very strong in the services that we sell, which is being fueled by the Infrastructure Investment Jobs Act and the IRA, both from the energy transition side and also the replacements. of aging infrastructure, road and bridge, water, industrials around the energy transition, and potentially services work on energy distribution. And all of that outside the nuclear opportunity or within the engineering service opportunity are presenting great kind of markets for us. And just to repeat our strategy here, I mean, very, very strong playing at Tier 1 in some southern states, opened new offices, California, Washington State, and the Washington, D.C., New York corridor, where we see significant investment in new infrastructure. And those offices are now bringing work in and obviously revenues. So the plan's working. The market's strong. and we will keep pushing and obviously add to that within organic when the time is right. In Canada, pretty strong story too with the provinces committed to new transport, clean energy transport solutions in metros and replacement of aging infrastructure also in the road sector. we are seeing good, strong pipelines of work. Our business, obviously, you know, it's where our home is, and we have ambitions to grow in Canada also, in line with all of our other businesses. So from what we see going forward and the commitments that are being made, even, you know, Outside of any party changes, political changes, we see that the replacement and the energy transition will fuel them. Great.

That's great. Thank you. Thank you.

Our next question comes from Frederick Bastian of Raymond James. Please go ahead.

Good morning, and congrats on the solid results. Thank you. Good morning. Thanks. I was wondering if you could drill down on the successes you've had recruiting. I'm just wondering if the new hires are weighted towards graduate students or whether you've had also successes recruiting more seasoned professionals. And likewise, you're seeing growth in specific segments or was that broad-based?

Yeah. That's a good question. I mean, the way I think about this is that There is a talent war. Obviously, the engineering sector is a busy sector. We're not alone. But we've really been hard at work for quite a long time now, looking at our employee value proposition, the purpose of the company, to engineer a better future for the planet and its people, the culture we have, the development and the flexibility we've put in place. And all of those things are working for us. We are able to reduce our attrition, which obviously keeping the employees that we already have is key. Really pleased that the attrition rate now is below pre-pandemic. But we're also able to attract. And we're actually able to attract across the board. I mean, we have enhanced our graduate recruitment process. We've always had a really strong process in the UK, and we've established similar processes now in Canada than in the US. And we feel that that is a really good asset to the company as we grow those graduates into the company. But also across the board, really, in multi-professions and multi-locations as well, multi-geographies. which obviously is needed to fuel the growth. So all in all, it's not something that we can be complacent about in any way whatsoever. But we're pleased with the success that we've gotten. It is helping drive our growth.

Thanks, Ian. My second question about the government measures that are being implemented in the U.S. I'm just wondering if if S&C is best positioned to capitalize, or more excited about the opportunities related to the infrastructure bill, the IRA, or the CHIPS Act, or are you indifferent and you like all these themes?

No, I think the IIJA is actually where we're seeing funds flow through the states into infrastructure work. And our Our strongest capability in the US is really transport, both in rail and road and bridge. We are developing our water capability because we see quite a bit of that IIJA flowing into new water, both the dealing with flood water and also the movement of drinkable, potable water. So we do see good opportunity around there. I mean, the IRA is really aimed at the development of energy assets, and we support customers in that space. But I would say that for ourselves specifically and our own capability, that's probably having less effect than the IIJA.

Great. That's helpful. Thank you.

Our next question comes from Maxim Sichev of National Bank Financial.

Please go ahead.

Hello, gentlemen. Jeff, just a couple of quick questions in terms of the margin profile So the first one is when it comes to the engineering business, I think in the past you've alluded that there's some geographical discrepancy when it comes to the profitability. Is the role of kind of like LSDK work, should that help Canada on a prospective basis or how should we think about this?

I don't think so. The engineering services business as a whole has regions that are operating very, very strongly at peer level. And, you know, as I said, geographies such as Scandinavia were not, and they're dragging the whole down. So we need to deal with that and we need to deal with those on a one by one basis. I don't think the LSTK and the work that we were doing in engineering specifically really has an effect on that. Jeff, I don't know if you would add any further color.

Yeah, I think the only thing I'd add is, as Ian has said, we do see strong margins in the different geographies where we're not, like Scandinavia, exiting that business, and that will help our margin improvement. There are, as we've said, there are a few other geographies or sub-geographies where we are on a margin improvement plan. Part of that is around cost. Part of that is around realizing our full pricing capability. And that does take a bit of time to roll off through the backlog. So what I would say is that, you know, the business we're selling now and the margins we're selling now into the backlog we think are absolutely, you know, at peer levels. But in some business units or sub-geographies, it may take some time over the next six to nine months to roll off, you know, some of the sort of lower margins we've seen. It is why we see over time the opportunity to continue to drive improved operating margins as that works its way through the backlog.

Yeah, makes sense. And then just kind of circling very quickly to the nuclear margin, your compression, because, I mean, like as you're doing more precede, work on some of sort of the potential new builds. Wouldn't that be kind of higher margin or do you mind maybe just providing any call in terms of why the margin came down?

Yeah, so as I said, Max, it does depend a little bit. So there is a range of margin within that nuclear business. you know, all very strong. And I think you can see on average, you know, it's a business that attracts premium margins, you know, even over, you know, the good business we see in engineering services. But it does a bit depend, you know, on the mix of How much of that is services? Sometimes we're doing some, you know, procurement of material for, you know, different, you know, life extensions or other waste commissioning work that we're working on, you know, depends on the level of equity pickup that we're getting in the waste management business in the U.S. And so that does, that business mix fluctuates around a bit quarter by quarter. But, you know, very confident, you know, that we remain well within our, you know, 13 to 15% EBIT margins within that business, which are real premium margins. And, you know, it's just, it moves a bit quarter by quarter max, but don't see any fundamental reason why, you know, we wouldn't continue to deliver, you know, over the medium term, the sorts of margins we've delivered in the past.

Yeah, for sure. And in terms of the risk profile on prospective projects, I mean, everything is going to be done on a cost-wise basis, right? Or an approximation of such.

Sorry, Max, was the question around the lump sum projects?

No, no, the future nuclear projects, like on the new build stuff, like it's all going to be cost plus obviously, right?

Oh, yeah. Yeah, yeah, yeah. I mean, they're engineering contracts that on the pre-feed studies, the engineering studies are all engineering services type. And then if we get into the delivery of the asset, absolutely. We don't take the risk of the costs on these things.

Excellent. Thank you so much, and yeah, strong quarter. Thank you.

Thank you.

This concludes the question and answer session. I would like to turn the conference back over to Denis Jasmine for any closing remarks.

Thank you very much for joining us this morning. As usual, if you have any more questions, please don't hesitate to contact me directly. Thank you very much, and have a good day, everyone. Bye-bye.

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