Atkinsrealis Group Inc.

Thank you for standing by. This is the conference operator. Good morning and welcome to Atkins-Realis third 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'll be an opportunity to ask questions. To join the question queue, you may press star then one 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 Jasmine, Vice President, Investor Relations. Please go ahead.

Thank you, Ariel. Good morning, everyone, and thank you for joining us today. For those dining in, we invite you to view the slide presentation that we have posted in the investor section of our website, which we will refer to during this call. So this call is also webcast. With me today are Jim Edwards, President and Chief Executive Officer, and Jeff Kell, 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 set-out blocks. These documents are also available on our website. Also during the call, we may refer to certain non-RFRS financial measures. The conciliation of these amounts to the corresponding RFRS financial measures are reflected in our earnings release and MD&A, which can be found on SEDAR Plus and our website. And now I'll pass the call over to Ian Boyd.

Ian? Thank you, Denny. Good morning, everyone, and thank you for joining us today. We're extremely pleased with our performance during the third quarter, which led to robust results, including record revenue in Actions Realist services and another record backlog. Our Atkins Realis services business revenue expanded organically by 19.5% year-on-year, outperforming our 2023 outlook range that we increased last quarter to 12% to 15%. Segment-adjusted EBIT grew 23% as we continue to actively manage our costs to deliver our targeted margin percentage. We achieved another record backlog this quarter, totaling $12.5 billion as of September 30, as demand for our services remains very strong in our core end markets and geographies. Given our strong year-to-date performance, robust backlog, and a pipeline of prospects, we are raising once again our Atkins Realis Services Organic Revenue Growth Outlook for the full year to between 15% and 17%. We generated positive cash flow following the resilient performance of our businesses and the closing on the sale of our Scandinavian engineering services business. We also continued to successfully add high quality talent in the quarter indicative of our engaging core purpose, values and strong culture. We increased our headcount by an additional 1,200 employees this quarter. This further highlights the current and future strengths of Atkins Realis as we strategically enhance our capabilities, while many companies across the globe shrink in the face of economic uncertainty. Performance this quarter emphasizes the underlying strengths of our pivoting to growth strategy, which has enabled substantial growth across our businesses. We have taken measured steps to become a premier fully integrated professional services and project management company. We have chosen specific geographies and segments that are growing fast. Within them, our technological capabilities of people and scale lead to our ability to grow above the market. We help our customers provide secure, clean and affordable solutions to solve the global energy trilemma. We are hiring the right people and we are operating more collaboratively. This is all happening as public entities increase their focus for the betterment of the planet and its people. I am extremely proud of our achievements to date this year and I'm excited to detail them out today. On slide four, we highlight our backlog growth across Atkins Realis services. Our 7% growth in the third quarter versus the third quarter of last year was driven by wins across four regions and end markets. We continue to see key wins across many of the markets in which we operate, including transportation work in the U.S. and securing a large battery plant contract in Quebec. The further wins emphasize the demand for our services across the globe. Turning to slide five, our engineering services business continues to drive robust organic growth for Atkins Realest, as witnessed a 23% increase during the third quarter. Our second consecutive quarter of revenue generation was driven by securing new wins across our geographic footprint. segment-adjusted EBIT increased 35%, representing a margin in segment-adjusted EBITDA over net revenue margin of 8.7% and 14.4%, respectively, during the quarter. We continue to elevate our backlog, which now stands at approximately $5.1 billion, representing an 11% growth versus our backlog as at September 30, 2022. On slide six, we provide further insight into our engineering services growth in each of our core geographies of the UK, the US, and Canada, as well as other targeted geographies with strong potential. We continue to see exponential demand for our services in these markets, fueled by the need to replace aging infrastructure and provide clean, affordable solutions for the built environment. In the UK and Europe, our capability in supporting growth through infrastructure and water facility development, as well as defense, are driving winds for our business. This comes on the heels of the UK announcing its intent to double its investment in water infrastructure over the next five years. We also secured a key win with the UK Ministry of Defense this quarter, which further strengthens our position as a trusted partner with the government. In the US, The government's commitment to constructing safe and carbon-neutral infrastructure is leading to continued strong performance. The capital infusion from the Infrastructure Investment and Jobs Act and the Inflation Reduction Act remains in the early days, and we have a significant number of bids for additional work, particularly in the transportation, minerals, and metal sectors, highlighting the elevated demand for our services and the opportunities that persist. for Atkins Realis. The line of sight for further opportunities remains vast as the U.S. will continue to invest in lowering the carbon footprint on their aging infrastructure. In Canada, our value proposition is being recognized as we continue to accelerate our backlog with higher quality contracts. These wins are being secured across power and renewables, industrial and transportation end markets. Our focus on investing in our people and on technology will continue to yield robust growth in Canada. Our proven ability to provide end-to-end engineering services will continue to bring other key wins in our core geographies. Infrastructure projects related to net zero and sustainability will continue to drive government spending with growth of the renewables energy market, the delivery of cleaner modes of transport, and industrial projects that support the growing trends of decarbonization and reshoring. We are successfully attracting and retaining top talent to support our growing pipeline in the engineering services business across all of our operating regions. I'd now like to move on to slide seven and the results for our nuclear business. We continue to demonstrate solid growth. with an organic revenue increase of 20% this quarter compared to the third quarter of 2022. Our nuclear backlog is $1.1 billion, which represents a 23% growth versus our backlog that's at September 30, 2022. Segment-adjusted EBIT increased 6%, while margin fell 2.4%, mainly due to the business mix of the nuclear segment this quarter. On slide eight, we highlight achievements in each of the nuclear services that we provide. The market outlook for new build and new nuclear opportunities is gaining more positive traction quarter on quarter. In Ontario, the Energy Minister announced a proposal to expand the Bruce Power Station, which will come in addition to the work we're already performing on this contract. In the UK, the government has announced an allocation of more than £340 million for additional development work at the Sizewell Sea project. And last month, Canada and Romania signed a $3 billion development deal for two new reactors joining the existing CANDU fleet reactors at the Cerna Voda plant. Current projects and in the pipeline of opportunities on life extension work remain robust. In Ontario, we continue to be actively supporting extension work on OPG Darlington and Can Do Life extension work at Bruce Power. Earlier this year, the Ontario government gave its official stamp of approval to the extension of Pickering Nuclear until 2026, which could pave the way for a full refurnishment. And in Romania, we received the award letter for the engineering technology and procurement of tooling and reactor components in support of the life extension of Unit 1 at the Cernoboula Power Plant. On waste management and decommissioning, we're seeing continued progress on our projects in the UK, the UAE, and in the US, we have a strong pipeline of prospects in addition to our recent waste management contract extension at the Hanford into 2024. The focus on providing clean, affordable and secure energy by public entities means significant growth for Atkins Realis, as showcased with our extensive backlog and accelerating revenues. We are constantly harnessing our capabilities across the globe to be a trusted partner to public entities as they seek to achieve their net zero goals. We believe we are well positioned as an industry leader to generate long-term value in the nuclear sector. Now moving to slide 9 and our O&M and links on businesses. Our O&M segment generated $115 million in revenue during the third quarter. An 8.4% organic revenue decreases higher revenues from our REM project were more than offset by the completion of a large contract outside Canada. Segment-interested EBIT margin was very strong in the quarter at 14.2%, well above our long-term target of 5% to 7%. EBIT growth was driven by a closeout of the previously mentioned large contract. We continue to see opportunity for growth and expansion in our core geographies through infrastructure improvements, such as wastewater facilities and highway projects. We remain focused on leveraging strategic partnerships with key industry players and our capital group to maximize bidding opportunities for the future. Our strategic review regarding LinkedIn remains ongoing, and we will provide an update when applicable. The backlog increased 58% to $1.2 billion at the end of the quarter, with continued strong demand for transmission and distribution services. The improvement in quality of backlog gives us confidence to expand margins in the near future. Moving to slide 10 in our LSDK projects in capital business, we recognized $13 million in the quarter in line with our expectations. Our last project, REM, continues to progress well with the South Shore portion operating while testing and commissioning on our Ontario projects is continuing as planned. Our backlog decreased by more than 50% to $305 million primarily representing the grant. As we finalize the LSTK projects for our clients, we continue to pursue recoveries that we are owed, and discussions remain ongoing with our customers. Turned into our capital business, the third quarter revenues were flat while EBIT saw a slight year-over-year decline. We received $10 million in dividends this quarter compared to $14 million in the third quarter of 2022. In October, we received $44 million in dividends. The traffic volume continues to improve compared to the prior year period. Before turning it over to Jeff, I just want to highlight our 2022 ESG report that we published on September 25. Our report emphasizes our core purpose, to engineer a better future for the planet and its people. By utilizing our end-to-end capabilities, we are helping customers reach their net zero carbon targets. Across the globe, we are a critical partner to governments focused on providing affordable and clean energy, decarbonizing the built environment, and building resiliency to climate change impacts. Our report highlights that approximately 50% of our revenues are from projects that directly solve these global challenges. Our commitment to sustainability and our continued focus on building an inspired, inclusive, and equitable workforce attracted talent individuals to help us succeed. Our goals are achieving through their hard work and dedication. I'm really proud of the individuals that act into us. Our ability to attract strong employees is a direct translation into our revenue growth. which has proven out year-to-date across our businesses. Our purpose-built position across our chosen geographies and our end markets fuels our near-term and long-term growth trajectory. And we are really pleased to have organically grown our headcount this year by over 3,500 employees if we don't take into consideration the investment of Scandinavian business. With that, I'll now turn it over to Jeff to discuss the financial highlights.

Thank you, Ian. Good morning, everyone. Turning to slide 13, total revenues for the quarter increased 17% to $2.2 billion compared to Q3 2022. Atkins Rial services revenue totaled $2 billion, 24.4% higher than the same quarter in 2022, or 19.5% on an organic revenue growth basis. Total segment adjusted EBIT for the quarter was $197 million, a 47% increase compared to Q3 2022, and was comprised of $187 million for Atkins Realis services, $23 million for capital, and negative $13 million for LSTK projects. Atkins Realis services adjusted EBIT margin was 9.2%, in line with our target range of 8 to 10%. Corporate SG&A expenses from PSMPM for the quarter were $47 million compared to $25 million in Q3 2022. The increase is mainly due to the company's rebranding expenses and the impact of the significant year-to-date share price increase on the long-term employee incentive estimates. The rebranding costs are expected to total around $30 million, made up primarily of the brand development costs themselves, sign-ins, and media and public awareness campaigns. We expect approximately two-thirds of this spending to be in 2023 and the remainder in the first half of 2024. As a result, we now expect that the corporate SG&A expenses from PSMPM to be between $130 and $140 million for the full year 2023. We also recorded this quarter an accounting gain on the disposal of our Scandinavian engineering services business of $46 million following the closing of the transaction on August 31st. Net financial expenses for the quarter were $50 million higher than the previous year due to a higher level of gross debt and higher interest rates on variable rate debt. The IFRS net income from continuing operations this quarter was $105 million compared to $45 million in Q3 2022. This was composed of a net income from PSPM of $91 million and a net income from capital of $14 million. Adjusted EPS from PSMPM for the quarter increased by 27% to $0.38 per diluted share, compared to $0.30 in Q3 2022. Backlog at the end of the quarter totaled $12.8 billion, an increase of 4% compared to September 30, 2022. Atkins Rialis Services' backlog increased by 7% to a record high, and included an 11% increase in the engineering services segment and a 23% increase in the nuclear segment. If we now turn to slide 14, at the end of September 23, the net limited recourse and recourse debt to adjusted EBITDA ratio decreased to 2.7 times as the company's net limited recourse and recourse debt decreased to $1.6 billion and the adjusted EBITDA increased to $587 million. Note that our net debt to EBITDA ratio calculated as per our credit agreement also decreased to 2.7 times at the end of the quarter. Due to our continuing efforts on trash collection, our day sales outstanding for engineering services continued to be strong and stood at 59 days at the end of the quarter. We now move on to slide 15 in free cash flow. We generated positive net cash flows from operating activities this quarter due to strong results in our Atkins Realis services businesses and lower LSTK project cash outflows as the projects continue to wind down. Atkins Realis services generated operating cash flows of $184 million. After cash taxes, interest, corporate items, and capital, you can see that we generated $84 million of operating cash flow in the quarter and including LSTK projects, $6 million. If you then add back the federal and provincial charges, remove the CapEx and the payment of lease liabilities, our free cash flow stood at negative $28 million. This amount was more than offset by the receipt of $181 million from proceeds of sales, which was composed of $147 million from the sale of our Scandinavian Engineering Services business and $34 million from the deferred consideration from the sale last year of our interest in a Carlisle investment fund. Considering other cash flow items, such as dividend payments, we generated a total of $117 million of positive net cash in the quarter, for which we used $106 million to mainly reduce our net limited recourse debt and recourse debt to the $1.6 billion level I mentioned on the previous slide. We anticipate that Q4 should also deliver positive net cash from operating activities, as we expect that the Atkins Rehabilitation Services business should deliver higher cash inflows than the LSTK project's cash outflows. With that, I'll now hand the presentation back to you.

Thank you, Jeff. Results and positive cash flow generation this quarter further emphasize the resiliency of our business in the face of uncertain economic headwinds and that our pivoting to growth strategy is working. We are strongly positioned with a leading presence across our core geographies and markets of Canada, the US, and the UK, having specifically targeted these high growth geographies. Our teams on the ground are winning key contracts in our chosen end markets to set us up for long-term growth and consistent cash flow generation. We are winning through our unique competitive differentiators and our ability to fully service the entire lifecycle of an asset. 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. The pipeline of opportunities for Atkins Realis is bigger than ever, and as public entities continue to focus on solving the energy trilemma. Lastly, 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, and proving to the world the expansive capabilities of Atkins Realis. Our new name denotes an inflection point for the repositioning of the company and a fresh identity for a dynamic organization, and we're just getting started. With that, I'll now open 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.

Good morning.

So, looking across your engineering services business in Europe and U.S., obviously you know, strong quarter, but as you move into 2024, what do you view as the weakest link? And how are you thinking about growth longer-term in these three areas?

Well, I think I don't see a weak link. I mean, that would be the first thing I'd say. And that's not to say we don't realize and understand where economic and macro geopolitical effects could be. But it plays to some of the things that we've been saying over the last few quarters, and particularly in the speech today, is that we're deliberately positioning the company where we believe markets are at their most resilient. And those resilient markets are being fueled by real strong essential demands to maintain, replace, ensure that they continue to function in infrastructure. And that's about water, it's about resiliency infrastructure, it's about transport. And we're seeing obviously in our chosen geographies investment and continued investment by governments. Secondly, it's the energy trilemma, which is fueling the need to replace electrical generation from fossil fuel to clean energy. But what we've got to remember is that in order to have a clean world, which is driven from electricity and not burning fossil fuels, that electricity grid has got to increase its capacity by two to three times So the combination of both of these things is where we've positioned our services in our chosen geographies. And obviously, I could go into more detail in each geography. But from a macro perspective, we think we're positioned well. Now, that's not to say that it's recession-proof. I mean, nothing is recession-proof. But it's pretty resilient in the face of what we believe we're going to see over the next few years.

So you're not seeing any smuggling in any particular region at this point?

Well, no, because we're pivoting to where, you know, so-called, you could say where the hook's moving from a Canadian expression. We're pivoting our businesses to where we know the markets are going to be strong, fast-growing, and needing our services.

That's good to hear. Maybe just moving on to nuclear. You know, you were seeing solid Ws building backlog there. You were seeing, you know, kind of 20% growth in each. You know, what's your expectations in growth over the next 12 to 18 months? And then I noticed margins were down year on year. You know, what is your view on normalized margins? And how does mix play into this as you think about, you know, this book of business on the, you know, bills and refurbs coming up?

Yeah, yeah, yeah. And obviously we are seeing attached to this energy trilemma, we're seeing a very strong renaissance in the nuclear sector, very strong. And the way we think about it is the way on the slide there is new build support to the candidate technology and waste. And perhaps Just to give an overview answer, and I'm sure there will be a further more detailed question later, we're seeing now nuclear energy as part of the solution for a net zero electrical generated grid. And because of that, there are certain proof points that I think you've seen announcement around. For sure, Bruce has announced that they are expanding their project and their site with new nuclear. You've seen OPG in Ontario also committing to the SMR technology, which we are a part of with GE, actually. And we're also... you may have seen the commitment of the federal government in Canada to support new-build CANDU reactors in Romania for the Cernovada plant. So they're all proof points of the way that this is moving. For life extension of CANDU, I mean, obviously this has been a great business for us at Bruce and Darlington. You've seen that we've got an award of a $750 million engineering and procurement contract. again at the Cernavoda plant to extend the life there. And there are more reactors around the world in CANDU that will be extended. So if you put all those things together, obviously we're going to see some pretty significant growth over the future of the business. Now, the way this will flow is in engineering and procurement to start with and then actual deployment. So it is going to be a gradual process. through the very short-term growth, but into the medium-term, it's going to be fairly significant. With respect to the margin itself, I mean, the margin this quarter is still within the range that we believe is the right range at 13% to 15% EBIT. That's a good range. I mean, that's above our engineering services business, and it's good for our business. And that's because of the high barriers to entry of nuclear. I mean, the decline from year over year is some specifics that were above the range in 2022. So we're happy with the work we're onboarding. We're happy with the margin. We think it's sustainable through the growth of the business. And we're pretty excited about having the sole rights to the Canadian technology in Canada.

Thank you. Thank you.

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

Yeah, thanks, folks. So just maybe following up to the growth question, because when you start thinking about, you know, organic growth numbers in that kind of range, I mean, those, you know, kind of low 20s or even high teens numbers, you know, I guess the question is the sustainability of those, just from a perspective of even staffing and doing it organically. Can we talk a little bit about, I mean, even despite, you know, I hear what you're saying about pivoting, but, you know, there's got to be, I guess, a moderation at some point before, you know, we start worrying about, you know, for lack of a better word, you sort of trip on your own success as you go forward. So how are you guys thinking about kind of normal growth as we go into 24?

No, that's a very, very good point, and obviously something we're very mindful of. When I was talking about the resilience in the markets, I'm not trying to suggest that our growth is going to run in the same way that it was this quarter. I mean, this quarter was pretty exceptional. What I was trying to emphasize is that when we position the company, we will continue to see growth. Now, obviously, I don't want to get into, you know, what does the 24-hour outlook look like now? And we'll get to that, obviously, in the next quarter and communicate that. But the point around the resiliency of the business in growing at this pace is not lost on us at all. I mean, obviously, we're onboarding new staff. Obviously... There's two parts to our business. One is winning work and the other is delivering it. And we're very mindful that we have to deliver this work in the right way for our customers to be able to get repeat work. What I would say is that we're very focused on our top customers. We've done analysis on our top customers. And a lot of this growth is actually coming from existing customers where they're pleased with our performance. And we've been able to grow our revenues through existing customers. So I think the point is a good point. It's on our mind. We'll obviously communicate what we believe is the right amount of growth for 24 at the right time, but we're definitely pleased with what we're seeing so far.

Okay, that's fair. You know, not to beat a dead horse too much, but the LSBK projects, you know, the loss in the quarter was, I guess, what you would normally think of as just being your SG&A cost and your cost to complete One of your partners also booked some pretty significant losses, I guess, with the settlement agreement. But we didn't see anything from you this quarter. Just wanting to double check, you know, at this particular point, do you feel you've got all the reserves already booked for Ottawa and Edmonton at this point? And now it's just a matter of the closeout of the projects and or any recoveries that might come down the road in future years?

Yeah, I completely confirm what you've just said. We are proceeding as planned and as communicated at the end of 2022. And if you remember, what we said at the end of 2022 is that the projects would complete to a point of physical work that we felt that we could accurately forecast the endpoint. If you also reflect back in 2021 and 2022, we were very transparent on a quarterly basis and said, we're having difficulty in forecasting that point because of the pandemic, because of productivity issues, because of supply chain issues, because of strikes. So we declared all of that in real time through 21, 22. So what we did say at the end of 22 is that what's left on these projects In terms of cost, it's far less than the cost that we've experienced before because it's associated to administrative tasks and closing out documentation, administrative tasks and getting occupation permits and getting all that documentation to hand over to the customer, but also in defect, closeout, reinstatement of a kind of road infrastructure around the project, testing and commissioning. training the the city's drivers and putting them into operation so so we're comfortable with what we said at the end of 22 and we put a run rate out there of circa 12 million a quarter um we're in line with that um and the projects are going well now that they're probably not going to open when we expected them to open but that's the client's prerogative And those delays in opening, again, don't attract material costs for ourselves because we're focused on closing our work out in the expectation that we set out at the beginning of the year. So obviously can't comment on any of our partners, but that's the way we see it.

All right. That's helpful. Thank you.

Our next question comes from Yuri Link of Canaccord Genuity. Please go ahead.

Hi, Ian. Just wondering if you could... Yeah, good morning. It's the second quarter in a row that you've increased the guidance for the year, which is great to see, but where is the growth surprising you? You know, I know you talked about water, transportation, and infrastructure resiliency, but those are pretty broad strokes. I mean, could you share with us a little bit in terms of geographies and more precise on...

Yeah, yeah, for sure. Because there's no one thing, frankly, that I can point to to say that was in excess of our expectation and it was one kind of market or one aspect. I mean, it's pretty much across the board. And perhaps I'll just canter quickly through some of the areas and the way that we think about it. I mean, in the U.K., which I think we were expecting perhaps a bigger slowdown to our business than we've seen. Actually, our business has been growing really, really well, and we're really pleased with the way that the business has pivoted to where the funding is going. I mean, remember, the majority of our business across the whole portfolio is government work at about 70 to 75 percent. There is been a bit of slowdown in the transport sector, but we've kind of focused on OPEX rather than CAPEX in the transport sector. I mean, they canceled the high-speed rail extension, but in having these framework agreements to keep the railways moving and framework agreements to keep the roads operating we've been able to maintain a pretty good level of transport work. But there's also a big pivot in the U.K. to water and energy and defense. And we've been picking contracts up in defense. We're getting ready for the water market. And we're obviously in the energy sector, particularly supporting nuclear growth at Hinkley and Sideswell. So that's kind of an example. The U.S., pretty busy on the basis of the funding that's going through now, the IIJA and the IRA, but also it's just essential work in replacing infrastructure that's failing or aging. Canada, very similar picture. Quite a lot in the renewables and the energy sector from industrial plants that have been supported by federal government and provincial governments here. Transport, again, in a lot of the cities and provinces is fueling So it's kind of across the globe. I mean, across the core geographies. Now, in somewhere like the Middle East, we've been very, very careful because the business there in property is moving so much that we've actually focused more on sustainable work and resilient markets so that we don't kind of grow that to a proportion of the business. which is more than around about 10%. So some areas we're also careful. But I can't point to one thing, and then obviously nuclear, as we talked about.

Okay. And then, you know, in that vein, you know, looking at engineering services, I mean, really phenomenal growth year on year, right? I thought we would see a bit more operating leverage in the business and more margin expansion on the EBIT line. Why isn't that the case? And specifically, are any of those rebranding costs and higher comp costs allocated to engineering services in any way?

Yes, Jeff, why don't I take that one? So, first of all, on the second question, no, we've left those rebranding costs, so the vast majority of them in our corporate SG&A, because we're running that, as you'd imagine, from a corporate perspective to make sure we're getting the brand out there in a very consistent way. I mean, I think in terms of the operating margins, we did see operating margin improvement in the quarter, as you'd expect, and we were pleased with that, and that was very much in line with the expectations and the journey that we're on. discussed previously around some of those levers. The first is as we gain scale and at the same time as we continue to drive some of our cost efficiency improvements, including both common systems and tools that we're putting in place, including rationalizations of cost at real estate, that is over time driving improved margin and will continue to drive improved margins in our view. We've also talked about the fact that in areas like engineering services, we have looked to sell, in the case of Scandinavia, businesses that were below our target margins and we didn't feel we would be able to get them to those target margins in a reasonable period of time. A lot of our geographies and our end markets are very much operating at top tier margins and margins that we would aspire for the rest of the business. And where we don't have that, we have those businesses on improvement plans, and that will take some time to unfold. But, you know, as a result, we would expect over the short to medium term to continue to not only be able to grow the top line, but over time, you know, also be driving improved margins as well.

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

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

Yes, good morning, gentlemen, and thanks for taking the time. Just to come back on the SG&E, $47 million in the quarter, higher than expected, and guidance is increasing for the year. Could you maybe break down the impact of the rebranding in the quarter versus LTIPS, and what kind of run rate we should be using going forward?

Yeah, sure. I'll do that, Benoit. As you heard me say, there's about $30 million we're expecting around the rebranding, about two-thirds of that. This year, most of that's in the second half, so that would be about $20 million. In the third quarter, as you said, our SG&A costs were about $20 million higher than our normal run rate. Around half or so of that was the rebranding cost I was talking about, so kind of half of that $20 million we'd expect to spend this year, maybe a bit more. And the other half is related to, as I said, the long-term incentive schemes we have and, frankly, with the rapid rise in the share price, the catch-up in the expense related to that. That is why we've changed the guidance for the full year from around $100 million to that $100 30 to 140, obviously, you know, most of that increase is the rebranding we expect in the second half this year, with the other portion being around the long-term incentive scheme. Obviously, as we get into 2024, you know, sort of we expect about, you know, 10 million of the tail end of the rebranding, you know, so you expect to be slightly higher in the first quarter or two next year to our normal run rate. So hopefully that gives you a bit more color on that.

Yes, that's a great caller, Jeff. And looking at the capital deployment strategy, you've been successful with the divestiture of Scandinavia. You're also thinking about LinkedIn. If you look also at some milestone leverage came down, you get more confident about the LSDK backlog ramping down. We've seen a main change. Just wondering about the higher interest rate environment, How does it change your capital deployment strategy and what we could expect in terms of financing expense on a run rate basis going forward?

Yeah, so I think our guidance very much is similar for this year that we put out at the beginning of the year, so around that sort of $45 million or so level per quarter. But you're absolutely right. Our capital allocation strategy that we talked about our investor day back in September 2021 – You know, the first priority of, you know, free cash flow or net cash flow is driving, you know, the leverage on the business towards our target of 1.5 to 2 times by the end of 2024. And, you know, clearly in a higher rate environment like we're in, you know, that paying down of debt, you know, is a, you know, we think is, you know, also, you know, good use of capital both in terms of getting to our target levels, but obviously, you know, what that will do in terms of driving down interest costs as well. Now, as we, as we said at that time, To the extent that as we move through 2024, we're able to consistently be, you know, getting to that leverage level and generating consistent positive net cash flow, that may give us the opportunity to do, you know, small tuck-in acquisitions or return money to shareholders. But, you know, I think we'll continue to go quarter by quarter, you know, as we see that with the balance sheet as the priority.

Okay. Thanks very much for the time. Thank you.

Thank you.

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

Okay, great. Thanks, and good morning. I just wanted to dig in a little bit more into the U.S. I think, you know, over the last couple of quarters, one of the patterns we've seen is, you know, quite a bit of an uptick in headcount. You know, is this sort of, you know, obviously the organic growth has been really good as well. So just trying to understand, is this sort of hiring to catch up to the demand that's in the pipeline? You know, is this sort of foreshadowing good growth looking ahead? And how hard or easy is it to find this labor and kind of the rates? I'm just trying to get to understand. It looks like there's a bit of a buildup. Like, you know, should we read that as there's more work in the pipeline or is it more just catching up?

Yes. I mean, it's all about our strategy, really, that we... Talked about in the past and land and expand strategy and also looking at markets both geographically and from a southern market perspective to really the sustainable Beyond any sort of political changes so we have we're strong in some very specific states and And just to remind what we've said in the past, Florida, Texas, South Carolina, and Georgia, we operate at tier one. We're in there with all the major U.S. players. And we've also expanded into California, New York, Nevada, and Washington State. We're putting work now in those expanded areas, and we're beginning to build relationships with customers and obviously building the teams. When our goal in our strategy is to get us into a top 10 player in the U.S. We're currently, from an E&R perspective, around 17. We've got about 4,500 people in the U.S. Obviously, over a period of time in our long-range plan, we want to get to about 10,000 people. The market is there. The need to replace infrastructure, the need to have energy security is there. even regardless of the IIJA and the IRA, because the funding model already was quite strong. And to talk about some of those supercharged sort of funding models, I mean, the IIJA is actually only just really starting to get deployed. I mean, they've deployed about 20% of the overall $1.2 trillion. So we're only just seeing that flow through, and it's a good market without it. So six quarters of record backlog for us. We're pleased with progress. Obviously, we want to do more, but we want to do it in choosing sort of sustainable areas of the market.

Great, thanks. And then I was hoping to get a little bit of forward-looking commentary on just the operating cash flow or just the free cash generation. Maybe if you can walk us through some of the puts and takes as we head into 24 and 25 and Is that your cash flow outlook? Does that change your views on maybe concession dispositions or anything like that, or are those two separate decisions? Thanks.

Yes, sure. First, I think my comment would be it's two different decisions. They're not unrelated, but we would look at them on their own. I think from a cash flow perspective, If I go back to the guidance and outlook we gave at the beginning of the year, we said we'd be in cash flow negative in the first half of the year, primarily driven by the cash drag from the LSDK projects. But as that sort of ramped down in the second half of the year, we'd see the natural cash flow generation qualities of the go-forward business coming through. And, you know, I think we clearly saw that in Q3, and, you know, we would continue to look to see that in Q4. Obviously, as we get into 2024, you know, I think we think that, you know, only is more so, you know, as... maybe a bit of sort of paying a final part of the LSTK supply chain. But, you know, broadly, it will be the cash flow generated from the services businesses, you know, which are quite strong. And as Ian said, you know, we'll come back in, you know, at our Q4 results and give a look for 2024. You know, but our, you know, our longer-term view is the business up to be strongly cash flow generative, which not only we think allows us ultimately to hit our leverage targets through next year, but also start to expand the opportunities we have to deploy capital in different ways as well. With respect to that, sorry, bit of a long answer there, but I'll quickly just talk about the concessions. You know, we continue to actively look at the concessions. Obviously, you know, we've talked previously about 407, but, you know, the rest of them, where we have the opportunity, we look to reduce our stake, you know, when they're in a stable operating environment, often, you know, realized in value from those that have a lower cost of capital than ourselves. And that's been a value of creative thing to do. We'll obviously continue to look to do that over time where we can.

Great. Thanks very much. Thank you.

Our next question comes from Michael Dumais of Scotiabank. Please go ahead.

Hey, good morning, guys. I have... Similar questions to the group here, but I'll just ask them a little bit differently. So I want to go back to the Atkins Realis services organic growth. You talked about the reasons for the upside surprise. In terms of this upside surprise, I guess the question is, how confident are you at this point that this level of revenue likely represents a new baseline versus a tougher comp for next year?

It's Jeff.

I think my view, and I think this very much builds on Ian's comments, is that we fundamentally see in our backlog and in the capability we have in the business and the end markets themselves that we've reached a new baseline of activity. And then obviously, as we head into 2024, we would continue to see the opportunity to grow the business. Obviously, we'll come back and talk about our view on that growth in the fourth quarter. Obviously, with the growth we've had this year, that makes for a tougher comp as you're going forward, but we think it's We think that comparative will be one that is a new baseline for us and we continue to attract the right people and the quantity of people and the quality of people we need to deliver against that.

And to build on what Jeff said and perhaps some of the things we've said, we're obviously really pleased with the way the Pivoting to Growth strategy is playing out this year. We need to obviously look at 2024 and develop our pipelines in detail and think about the revenue growth. I mean, certainly wouldn't expect something similar to what we've got this quarter, nearly 20% to be sustainable. But we are confident we position this company in good, resilient and sustainable markets.

No, I appreciate that. I know it's a little bit early, but helpful caller. So pivoting to free cash flow, I want to ask this question maybe slightly differently because free cash flow, as far as Atkins Realis goes, looks to be trending as it should be. So how much working capital deficit is outstanding at this point as it relates to the LSDK projects that you believe meet the lack of in terms of free cash flow going forward?

Sorry, I missed, you just cut out there slightly.

It's the LSTK drag on the cash flow.

Yeah, so I would say, you know, the LSTK drag on the cash flow, you can see in the cash flow slide that we have, it's about $77 million, you know, currently coming down from levels in previous quarters that were, you know, a hundred or above. We would expect that to, you know, continue to trend down in Q4 and into Q1 next year. So I think we're getting pretty close to the end of that, as Ian said. There's still a bit of work we're doing around the areas of closing out the projects, testing, commissioning, et cetera. So there's a bit of cash that goes with that, but that is starting to wind its way down for sure.

Thanks very much.

Thank you.

Our next question comes from Evan Dodge of BMO Capital. Please go ahead.

All right. Thanks. Good morning, guys.

I wanted to come back to the Edmonton LRT. I believe there were some progress on claims agreements that came forward recently. I know you answered this from a P&L perspective and you seem like you've taken adequate provisions, but from a cash flow perspective, did the claims provide much of a benefit in Q3 or will it be more meaningful in Q4 in early 2024?

So nothing very significant from our perspective.

I mean, on all the jobs, we rigorously are pursuing recovery. through claims. Through certainly the latter LSTK projects that we're closing out now, we're very much, I would call, in the negotiation stage. That will lead to either settlements, substantial settlements, or it will lead to litigation. We are not letting this go until we get the recovery of the losses that reoccurred in 21 and 22. because we believe we've got entitlement. Now, there's always a range of claims. I mean, some of them are large, some of them are small. We love to try and settle anything we possibly can so we can get the cash in. So I would say there's some small issues that are getting solved on a regular basis that bring small amounts of cash flows in, but the big issues are out there still. And we're obviously... when we settle those, that is a good catch-up sign for us.

Okay, interesting. Thanks for that. And then I was going to ask a question about the nuclear business. I think the design development for the latest utility scale can-do reactor, I believe it's the Generation 3 Plus.

Just can you remind us where that stands currently, and can you comment on its readiness for deployment?

Yeah, that's a really good question, and perhaps I'll give you some context of the can-do technology, because I think there's some misperceptions out there. There are only six licensed large nuclear technologies in the world. One of them is Russian, one of them is Chinese, so you're not going to see that deployed in the Western world. The other is French, Korean... United States and Canadian. So we have the privilege of this Canadian technology, sole rights of IP. And the technology is constantly improved and upgraded to be relevant and licensed and available for deployment. There's a misconception somewhere out there that this is an old technology, which it's not. It's got the latest safety features, it's got all of the kind of latest regulatory requirements and that's why obviously Romania is very keen to see more Candu and I believe we're going to see more Candu, new Candu deployed across many old customers and potentially new customers ultimately. There is a consideration that we have a range of reactor size, 600 to 750. There's a consideration that we may need to develop something which is more at the megawatt side, and we're working our way through that now.

Gigawatt side, sorry, gigawatt side. Okay, thank you. I'll turn it over. Thank you.

Our next question comes from Maxime Suchet of National Bank Financial. Please go ahead.

Maxime Suchet of National Bank Financial. Please go ahead. Maxime Suchet of National Bank Financial. Please go ahead.

Maxime Suchet of National Bank Financial.

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I mean, clearly, from a dollar perspective, we're really happy on the 23% increase in our services business of margin and a year-over-year for Q3. So that's pleasing. Now, as you say, the component of that is growth, which is 19.5%, which we're pleased with, but also margin percent and profitability. And we're very, very mindful and clear about where the business needs to improve. We know that large parts of the business are operating at good margin levels. And we know that there are areas of the business where we have put the business on an improvement plan. And I can tell you Canada, for example, is one of those geographies that is in a margin expansion improvement plan And we are seeing quarter over quarter that being delivered. But there are also areas of the business where we've had them on an improvement plan, such as the Scandinavian business, where because of local dynamics of large competitors or our own scale, that we haven't been able to achieve those marginal improvements. And we will divest, as we have been with Scandinavia. So we're on a very deliberate journey also to make sure that our margins are expanded where they need to expand. And last comment I would make is on our cost base. I mean, clearly controlling our costs and having a transformation office that constantly looks at our costs. throughout the business, whatever it is, in overhead or offices and facilities, and in many respects. Having that kind of permanent office and looking at this is obviously a key component of all that as well. So for sure, I mean, top of mind for us is growth, margin percent expansion, and cash flow. I mean, those are the three things we're highly focused on.

Okay, that's very helpful. Thank you so much. Thank you. Thank you.

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

Thank you very much for joining us today. If you have any further questions, please don't hesitate to contact me. Have a great Friday, everybody, and a great weekend. Thank you very much. Bye-bye.

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