Atkinsrealis Group Inc.

Thank you for standing by. This is the conference operator. Good morning and welcome to Atkins Realis' fourth 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 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then zero. I would now like to turn the conference over to Denis Jasmine, Vice President, Investor Relations. Please go ahead.

Thank you again. Bonjour tout le monde. Good morning, everyone, and thank you for joining us today. For those signing in, we invite you to view the slide presentation that we have posted in the investor section of our website, which we'll refer to during this call. So this call is also webcast. With me today are Ian Edwards, Chief Executive Officer, and Jeff Bell, Chief Financial Officer. Before we begin, I would like to ask everyone to limit themselves to one or two questions to ensure that all of you 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 with companies relevant to filing some SIDAR plots. These documents are also available on our website. Also during the call, we may refer to certain non-IFRS financial measures. Reconciliation of these amounts to the corresponding IFRS financial measures are reflected in our earnings release and MD&A, which can be found on SIDAR plots and on our website. And I'll pass the call over to you in a voice. Ian?

Thank you, Denis. Good morning, everyone, and thanks for joining us today. was an exceptional year at Atkins Realis and represented a pivoting point for the repositioning of our company. The new brand that we announced last year is synonymous with a dynamic company that is focused on building a strong culture and delivering excellence for our clients. We cap the year off with a robust fourth quarter results that reinforce the substantial demand for our engineering, project management and nuclear expertise across the globe. We continued to de-risk the company and significantly grew our revenues. Atkins Riales Services saw revenue growth of 20%, with an organic revenue growth of 18%. Segment-adjusted EBIT to segment revenue ratio was approximately 9%, driven by the robust top-line performance across our businesses. Backlog at the end of the year was approximately $14 billion, and represents another record high for the company. We also continued to successfully add high-quality talent in 2023, indicative of our core purpose and values. Our total headcount increased by 4,200, excluding the impact of the sale of the Scandinavian engineering business. Turning to slide four, we're proud of our results last year as we met or exceeded each of our most recent guidance targets. Of particular significance was our ability to generate positive cash flow during the second half of the year. This exceeded our expectations. Results from the third and fourth quarters offer an indication of the cash flow generation capabilities of our business in 2024 and beyond. From an employee perspective, we are highly focused on continuing to build the best-in-class culture at Atkins Realis. This is paying off as the measure of our employment engagement grew 300 basis points, so 87% at the end of 2023. We were also recognized in several publications, including top 50 employers in the UK for gender equality. We released our 2022 sustainability report in the fall which highlighted numerous accomplishments against our core purpose of providing a better future for the planet and its people. These include the elevation of our TCFD framework reporting and our announcing of the Global Parity Alliance, which is focused on advancing equality, diversity and inclusion. As we take a look back on 2023, our achievements would not be possible without the hard work and dedication of our employees. I am very proud and humbled to lead such an amazing group of talented professionals. Finally, we are introducing our 2024 full-year financial outlook, which Jeff will review in more detail shortly. We anticipate that 2024 will be another good year with continued revenue growth and strong profitability, but with stronger and more consistent positive cash flow generation. Turning to slide five, I want to focus on a few highlights from our fourth quarter. Our Atkins Realist Services business reached a quarterly record high with revenues of $2.2 billion. Organic revenue growth and segment-adjusted EBIT increased by 25% and 29%, respectively. We achieved another record backlog this quarter, totaling $13.7 billion at the end of the year, a testament to the demand for our services and our ability to continue capturing high policy wins in our core end markets and geographies. We generated strong net operating cash flow of $273 million in the fourth quarter, driven by continued growth across our Atkins Realis services businesses and strong working capital management. We ended the year with a 1.8 times net debt to Ibiza, within our target range of 1.5 to 2 times, and we delivered this result a year earlier than we forecasted when we launched our pivoting to growth strategy. We're a little more than two years since the introduction of this strategy, and the results this past year prove that this is working. It has enabled substantial growth across our businesses and positions as well for further long-term value creation. We have taken measured steps to becoming a premier fully integrated professional services and project management company. I'm extremely proud of our achievements this year and excited to prove and provide you with an update of our strategy at the investor day in June. On slide six, we highlight our backlog growth across Atkins Realis services. Our 16% growth in the fourth quarter versus the fourth quarter of last year was driven by key wins across our core engineering services and nuclear business. We continue to capture these key wins across many of the end markets in which we operate, including Can Do Life extension nuclear work in Romania, airport runway safety work in the US, transportation work in the UK, social buildings in Canada, and our recent appointment to plan the world's largest modern downtown in Riyadh, Saudi Arabia. These projects represent just a small component of the vast opportunity pipeline for Atkins Realis in the end markets in which we operate. Turning to slide seven, our engineering services business continues to drive robust organic revenue growth as we witnessed a 27% increase year over year in the fourth quarter. Our revenue generation was driven by the continuation of our ability to secure new wins across our geographic scope. Segment-adjusted EBIT margin and segment-adjusted EBITDA over net revenue margin were 9.6 and 16% respectively during the quarter. We continue to increase our backlog, which now stands at approximately $5.4 billion, representing a 16% increased growth versus our backlog as at December 31, 2022. On slide 8, we provide further insight into the engineering services growth of each of our core geographies, the UK, the US, and Canada, as well as our other targeted geographies. We continue to see strong demand for our services, fuelled by the need to replace ageing infrastructure and provide clean, affordable, and secure energy solutions. In the UK and Europe, we continue to capture key wins, utilizing our end-to-end capabilities, supporting defense, growth through infrastructure, and water facility development. Opportunities for contracts in the development of transportation, digital and technology projects, in addition to several design and project management projects remain robust. Our foothold in the marketplace, especially Our leading edge in the UK positions us well to capture bigger, higher revenue projects as our capabilities are recognized across the geography. In the US, we're seeing a high volume of work orders as major metropolitan areas seek out services for design and project management. The pipeline of transportation infrastructure projects in particular continues to look strong. There is a concerted drive on investing in water infrastructure and renewable energy through the IIJA and the IRA government spending programs, which also benefited us. Additionally, we view the minerals and metals market to have strong tailwinds, and our position gives us a competitive advantage, sets us up to capture additional revenue from this industry. In Canada, We strengthened our backlog this quarter through higher quality wins and Master Service Agreement renewables with long-standing clients. To deliver our higher backlog, we have been focused on attracting and retaining strong talent. The culture that we are developing remains a valuable attractor to candidates, which has resulted in growing our employee base in Canada. Our current client base and pipeline of prospects remains overweight in the energy transition agenda. And our strong history of delivering in the power and industrial end markets continues to help us win new mandates. I'd like to now move to slide nine and the results of our nuclear business. We continue to demonstrate robust growth with an organic revenue increase of 22% last quarter compared to the fourth quarter of 2022. Our nuclear backlog is $1.9 billion, which represents a 98% growth versus our backlog as of December 31, 2022. This is driven by new build and refurbishment contracts signed in the year and highlights the substantial long-term growth opportunities for our nuclear business. Operating margin was 15% in the quarter at the top end of our 13 to 15% target. On slide 10, we highlight achievements in each of the nuclear services that we provide. We made exceptional strides in generating new bill contracts during 2023. Our capabilities continue to be recognized across the globe by public sector entities focused on a cleaner energy future. We made a major announcement to the world in November when we introduced our latest reactor design, the 1,000 megawatt Candu Monarch reactor. We did this at the World Nuclear Exhibition in Paris. Large-scale nuclear reactors are increasingly sought to decarbonize power grids, produce stable baseload power, and increase energy security. Monarch is the evolution of the proven can-do technology that provides affordable, reliable carbon-free power and has decades-long global track record of consistent delivery and operational effectiveness. As a follow-up to our Monarch introduction, we announced last week an agreement with AECL to collaborate for the purposes of successfully deploying CANDU reactors in Canada and internationally. As we look across our core markets, we see a continued increase in the pipeline of opportunities for large and small nuclear renewables, both domestically and internationally. For example, in January, the UK government announced it will invest an additional $1.7 billion for early work to continue on the size we'll see nuclear plant. another indication of their intent to invest in a more sustainable energy future. Current projects and the pipeline of opportunities on the life extension work remains really robust. In Ontario, we continue to actively be working on the can-do life extensions at Darlington and Bruce Power. And in Europe, we are engaged in the engineering tooling procurement for the can-do retube and refurbishment program at Cernavola in Romania. We continue to see strong pipeline of opportunities on CAMDU reactor life extensions at home and abroad. On waste management and decommissioning, we're making further progress on projects in the UK and in the UAE. And in the US, we have a strong pipeline of prospects in conjunction with National Security Administration. The near-term and the long-term growth Opportunity for action and reality is significant in nuclear. And the demand for our services continues to grow year over year. We are constantly harnessing our capabilities across the globe to be a trusted partner to public entities as they seek to achieve net zero goals. Now moving to slide 11 and our O&M and LinkedIn businesses. Our O&M segment generated $130 million in revenue during the fourth quarter, relatively in line with our fourth quarter of 2022, as higher revenues from the commencement of a portion of the round project were offset by the completion of a contract in 2023. Segment adjusted even margin was 9.5% and continues to be above the long range target of 5% to 7%. Even growth was driven by lower costs and increased efficiencies across several of our contracts. Our links on segments saw a 29% year-over-year organic revenue growth in the fourth quarter and ended the full year revenues 1% higher than 2022. Backlog of $1.4 billion at the end of the quarter was 63% higher than the fourth quarter of last year. Results this quarter, particularly the backlog improvement, highlight the current and long-term growth potential of this business across many of its geographies. We've now completed our strategic review of Linksum and with our joint venture partner with Atashi Energy. We continue to be able to view that the market for the supply and installation of electrical substation equipment is attractive and growing as countries look to decarbonise and electrify. Linksum is one of only a handful of global suppliers and is well positioned to win work, as evidenced by the success in 2022 in growing both the amount and quality of its backlog. However, LinkedIn's business model for fixed-priced installation projects no longer fits with the strategy of the go-forward business of Atkins Reality. And therefore, we have agreed with our partner, Itachi Energy, that we will look to exit our shareholding in LinkedIn by exploring the sale to a third party, one that can better benefit from the value creation opportunity that the market in LinkedIn's position represents. We are actively engaged in pursuing this exit with our partners' support, but it's too early to comment on how long a successful exit will take. In the interim, we will continue to work to improve the operational delivery and resilience and capabilities of this business. Moving to slide 12 and our LSTK projects in capital business. Commissioning and testing on our Ontario LSTK projects is continuing as planned. Our backlog decreased this year by approximately 50% to $365 million, primarily representing the REM project, which continues to progress well. As we finalize the LFTK projects for our clients, we continue to pursue claims that we believe we are owed, and these discussions remain ongoing with our clients. Turning to our capital business, fourth quarter EBIT increased by $10 million, or 22%, mainly due to high dividends received from the ownership of Highway 407. As we have shown in 2023, it was an inflection point for Actions Realis. We see in 2024 another strong year of growth. We're also expecting strong operating cash flow and earnings delivery, in this final year of our pivoting to growth strategy. And to have a more effective deployment of our global capabilities locally to our clients, we have implemented a new operational structure. Under the new structure, the formerly known segments, engineering services and O&M, will be merged and managed by four regions, Canada, United States and Latin America, United Kingdom and Ireland, in Asia, Middle East, and Australia. In addition, we've also created a permanent COO office, which will be led by Phil Voll, former head of engineering services. And I'm very excited to have Phil in this role to successfully optimize our operating model across the company. This will help us fully harness our capabilities and drive operational excellence on our path to margin expansion. With that, I'll now turn it over to Jeff to discuss our financial results.

Thank you, Ian, and good morning, everyone. Turning to slide 15, total revenues for the quarter increased 20% to $2.3 billion compared to Q4 2022. Atkins Riala's services revenue totaled $2.2 billion. 24% higher than the same quarter in 2022, or 25% on an organic revenue growth basis. Total segment adjusted EBIT for the quarter was $232 million, significantly higher than Q4 2022, and was comprised of $201 million for Atkins Rialis Services, $55 million for Capital, and negative $24 million for LSTK Projects. Atkins Rialis Services adjusted EBIT margin was 9.4%, nearly 44 basis points higher than Q4 2022, and in line with our target range of 8% to 10%. Corporate STMA expenses from PSNPM for the quarter increased to $35 million, compared to $24 million, mainly due to the company's rebranding expenses, as indicated on our last earnings call. We continue to expect that the remaining one-third of the total rebranding spend of $30 million will be incurred in the first half of 2024. As a result, we anticipate that the corporate SG&E expenses from PSMPM to be approximately $110 million for full year 2024. The IFRS net income from continuing operations this quarter was $90 million, compared to a loss of $54 million in Q4 2022. This is composed of a net income from PS and PM of $46 million and a net income from capital of $44 million. Adjusted EPS from PS and PM for the quarter was 45 cents per diluted share compared to negative 31 cents in the fourth quarter of 2022. On slide 16, you can see the selected financial metrics for the year. Total revenues for the year increased by 14% to $8.6 billion. compared to 2022. Atkins Riala's services revenue totaled $8 billion, 20% higher than the prior year, or 18% on an organic revenue growth basis, above the top end of our most recent outlook. Total segment adjusted EBIT for the year increased by 85% to $766 million, which was comprised of $712 million for Atkins Riala's services, $113 million for capital, and negative $59 million for LSDK projects. Restructuring and transformation costs for the year decreased to $49 million, compared to $83 million in the prior year. We expect these costs to continue to decrease in 2024. Net financial expenses for the year were $186 million, mainly due to higher interest rates. We anticipate these expenses to be lower in 2024 largely as a result of lower forecasted debt levels over the coming year. IFRS net income from continuing operations was significantly higher than in 2022 at $287 million. Adjusted net income from PS and PM was $274 million, or $1.56 per diluted share. Our income tax rate on our adjusted PS and PM net income for 2023 was approximately 19%. We expect this rate to be higher in 2024, closer to the Canadian statutory income tax rate of 26%, driven by a number of changes, including the expectation to be subject to the Pillar 2 global minimum tax rules from January 1st, 2024. Backlog ended the year at $14.1 billion, 13% higher than at the end of 2022, with strong book-to-bill ratios in the engineering services nuclear, and links on segments. And we now move on to slide 17 in free cash flow. Net cash generated from operating activities was strong in the quarter and totaled $273 million, resulting in positive cash generation for the second half of 2023 as expected. The cash flow generation in the quarter permitted us to decrease our debt by $311 million compared to the end of September 30th, 2023. This was mainly driven by strong services EBITDA delivery and working capital management. Atkins Rial Services generated operating cash flows of $804 million in 2023. After cash taxes, interest, corporate items, and capital, you can see that we generated $477 million of operating cash flow for the year and $66 million after cash used by LSTK projects. If you then add back the federal and provincial charges, remove the capital expenditures and the payment of lease liabilities, our free cash flow stood at negative $28 million for 2023. Additionally, we generated $179 million from proceeds of business and investment sales in our engineering services and capital segments, primarily from the sale of our skin and evening business. As we expect continued revenue and EBITDA growth in 2024 from the services businesses and significantly lower cash outflows from the LSTK projects, we anticipate that the net cash generated from operating activities for the company should be in excess of $400 million for the full year 2024. Note that we expect the cash generation to be more significantly reweighted towards the second half of the year. We are also anticipating a higher level of CapEx for 2024 in the range of $140 to $160 million, as we believe we will be investing in the Kanju Monarch nuclear reactor development. We believe this investment will lay the foundation for future nuclear revenue growth, as the demand for low-carbon, reliable power generation continues to be a high priority for many governments around the world. With the expectation that the operating cash flow profile of the company will continue to improve in 2024, we remain committed to achieving investment-grade financial metrics, but also see the ability in 2024 to begin deploying free cash flow for the benefit of our strategy and our shareholders, as outlined in our Pivoting to Growth Capital Allocation Framework. Moving then on to slide 18 in the balance sheet, with our stable level of gross debt and a significantly increased level of EBITDA in 2023, our leverage ratio decreased to 1.8 times in our targeted range of 1.5 to 2 times a year earlier than our original 2022 to 2024 guidance. Due to our continuing efforts on cash collection, our game sales at standing friends nearing services continue to be strong and stood at 52 days at the end of the quarter. I'd like to now turn to my final slide, slide 19, and summarize our 2024 outlook. Given our robust backlog and strong pipeline of opportunities, we are expecting an organic revenue growth rate between 8 to 10% for the engineering services regions and between 12 and 15% for our nuclear business compared to 2023. We are also expecting that the engineering services will be between 15% and 17%, while the nuclear segment adjusted EBIT margin should remain in the range of 13%, 15%. And we do expect, similar to 2023, that our cash flow and profitability will be more weighted towards the second half of the year. With that, I'll now hand the presentation back to you.

Thank you, Jeff. I'm extremely proud of our accomplishments in 2023. We had a great year. with key wins across the businesses in all of our core geographies. Our record backlog highlights are a long runway for growth and a significant demand for our services. As public entities drive change through clean, secure energy and replace aging infrastructure, they will continue to think of Atkins Realist as their trusted partner. Most importantly, we have a strong, dedicated and growing workforce that helps us achieve our goals. I'm thankful every day for their loyalty, diligence, providing to the world expansive capabilities of Atkins Realis. And our new organizational structure will let us bring all these global capabilities locally to our clients. And our new brand highlights our fresh identity as a dynamic and transformed organization. We look forward to providing you with more details of the long-term outlook at our Investor Day in Toronto in June. And we hope that you can join us for that. So with that, let's open up to questions. Thank you.

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 Michael Dumet of Scotiabank. Please go ahead.

Hey, good morning, guys. Truly in awe of these results, so nicely done. I wanted to maybe start with the LSDK, just to square a few items. Maybe just comment on the reasons why there's a little bit of a higher loss there this quarter. You know, the driver is behind the increase in the backlog. And lastly, you know, whether we should think the losses there should, you know, wrap up wisely in 2024. Sure.

Sure. And there was a slightly higher loss in Q4 than the run rate that we've been having through the year. But nothing's really changed. I mean, what we said at the end of 2022, that the projects in Ontario were physically complete and that the remaining works on those two challenging projects were mainly in engineering services and administration type of work, is the case. And what we have found as we call it, got to the end of 2023, is that actually the opening of those two railways is moved back. And it's moved back for a multitude of reasons, many of which are the choice of the customers. We don't decide when they go into operation, but we have to close everything out on the job, including all the paperwork, testing and commissioning. And that additional... loss within Q4 is a forecast of where we now believe that those projects will go into service and a forecast of all the costs that we will need to complete those jobs. We are now very focused and will be on recovering our loss. As we've always said, we believe that the issues that we face through COVID and other kind of non-contractual obligations that we had to face as challenges are recoverable losses and we will need to continue to pursue those and if you look in the outlook we've said that we'll incur an overhead cost running through 24 of approximately 10 million a quarter so that's how we see it but largely speaking what we said a year ago has played out as we expected we still have the REM project which has always progressed very well And almost all of the backlog now that you see is actually renovated and not on the Ontario projects. Incidentally, I actually spent a day on each of those projects a couple of weeks ago. And they're fantastic projects. I mean, all the stations are complete. The trains are running. I actually rode the train end-to-end on the Trillium project. And it's going to be a magnificent asset. in Ottawa, as is the Eglinton project in Toronto.

Thank you.

And then just if I move along to the additional disclosures that were provided on slide 24, you can clearly see that the margins based on our maps more than doubled in the second half versus the first half in Canada. So just wondering, you know, how much of the overall 100 basis points in margin improvement and the engineering services that you're guiding for in 2040 is Canada-driven versus maybe, you know, some of the more broad operational excellence initiatives that you're undertaking?

That's a good question and actually helps me explain how we think about this. So, first of all, margin expansion is incredibly important to optimizing this business going forward, and we are very focused on doing just that. We are on an improvement journey, and our areas of improvement are actually quite specific geographically and business related. We've got many areas of this business that are operating at very, very good margin levels. I mean, nuclear, for example, you know, is industry best. But we have some areas of our business, and Canada is one that you called out, that is on an improvement program. And that improvement program is very targeted around the specifics that we know we need to do differently. And those could be profitability, could be win rates, could be the clients. It could be improvement of capability in a certain sector. And we're focused on doing just that. I'll probably add another comment, is that if we have business that we see cannot be put on an improvement program and get to where we want it to be. We will make decisions around that. And you saw that with the Scandinavian business, and you've now seen that with the links on business. So we are very focused on getting to the right place here.

Thanks very much, Ian.

Thank you. Thanks.

Our next question comes from Jacob Bout of CIBC. Please go ahead.

Good morning. Morning. Morning. I had a couple of questions here just on the organic revenue growth guidance you provided. So I guess, you know, first in the engineering services, you're talking about 8% to 10% for 24. You know, fourth quarter was, you know, almost triple that. I guess just trying to understand, you know, how much of this is being conservative. You know, is it just tougher comps in 24? Just maybe a bit more color there would be helpful, and then maybe comment a bit on, you know, what you expect the shaping looks like throughout the year. Does, you know, the margin profile decrease as we move through the year?

Yeah, no, that's a fair question. And clearly, we've put the guidance out there at 8 or 10 for the engineering services business and a lot more bullish on the nuclear business at 12 to 15. We've absolutely had an exceptional year in 2023. Very pleased with that and very proud of it. But we've got to really consider whether that's sustainable long-term. And obviously, we look very closely at our markets. We look very closely at the backlog and the win rates. And I think the way that we see our markets, that they are being fueled by energy transition where we're seeing a big commitment towards increasing the electrical energy grid, particularly with clean energy and affordable energy. We're looking at an energy transition, decarbonizing buildings and transport, which is also fueling that. Replacement of infrastructure in the US, funded by IIJA, and resilience work for weather events and flooding and disaster relief. So those three things are really driving our markets. As we see those things driving our markets, we're also seeing, and we have seen in the UK, a bit of change of focus on government policies in terms of moving away perhaps from transport to energy transition as they refocus their investment and their funds and their budgeting. So what we're doing here is really considering all of those aspects and looking at what we can absolutely deliver through those through those outlooks that we've put there. And I think we're comfortable that those are very deliverable ranges, and obviously we would be looking to perform at the highest end of those ranges.

And then just as far as the question on the shaping, as we move through the year? A little stronger for a second?

Yeah, I think I think we would, you know, we would expect to see, you know, from a revenue perspective, you know, good growth through the first half and have that continue into the second half. I think as Ian said, you know, the farther out in the year, you end up with less visibility into exactly the way projects will shape up. So, you know, factor that into our revenue perspective. And then from a profitability and cash flow perspective, you know, we do see the shape of that similar to what we've seen in the last year or two, you know, you know, where it's weighted towards the second half of the year. And we expect to see that in 2024 as well. Okay.

And then maybe this is a follow-on here. Just from a geographic mix perspective, how much variability are you expecting in 2024 if we look at kind of UK, Europe versus U.S. versus Canada?

Yeah. I mean, different – I mean, actually different – there are different drivers in each of those markets. But we're actually seeing – pretty strong growth potential in each, maybe for different reasons. I mean, the UK, for example, strong water, strong defense, strong nuclear energy transition. The US, strong on resilience, strong on transportation still, replacement of aging infrastructure. And in Canada, energy for sure. the building of the ecosystem around clean energy materials, such as EV batteries, and then transport. So it's slightly different in each geography, but we've got a very targeted approach to our strategies and our tactics to continue our growth in each. So no real difference in each one.

That's helpful. Thank you very much.

Thank you.

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

Good morning, everyone. Good morning. Nice quarter. I'll ask another question on the guidance. Your 2022 to 2024 EBIT margin target for services is 8% to 10%. And I'm just curious if your 2024 outlook implies a move outside of that range.

So, Jeff, why don't I take that? I think, as you saw from our guidance, we're beginning to move that guidance more towards EBITDA to net revenue. And, you know, with respect to the engineering services regions, we have moved that from the original guidance you remember for engineering services, which was 14% to 16%, And, you know, so we definitely see an opportunity, as Ian said, to continue to drive margin improvement. And indeed, if you look at some of the breakdown that we have on that slide 24, the previous caller referenced, you can see indeed that some of our regions are at or slightly above on an EBIT to gross revenue basis, you know, at or above the top end of that range. So, you know, I think We'll continue to see that in 2024 with some of the regions performing at that level, others that have been set on an improvement plan. Obviously, overall, we would expect the weighted average to continue to improve.

I think what I would add, thanks, Jeff, I think what I would add to that is we know exactly at a very granular level where we need to improve. We've done extensive work looking at customers, looking at geographies, looking at end markets to understand where we need to do something different to get to the place that we intend to be at. And what was necessary to drive this into the business was to create this chief operating officer's office such that we've got this horizontal lens and a set of KPIs to drive those improvements. And they're in cost base, it's productivity, it's win rates, it's all sort of metrics at a fairly detailed level that fillable spearhead horizontally. And obviously, the accountability vertically and the geographies still remains without precedence. But we know what we need to do, and we have a plan to do it, I think is the message I want to give.

Okay. Now, I was just asking the question on the consolidated EBIT margin, just to kind of simplify it. because you're adding in the O&M segment with engineering services or mixing net and gross revenues. But it does look like engineering services margin guidance has been taken up because correct me if I'm wrong, O&M is a more like a 10% EBITDA margin business that you're blending in. with engineering services, right? And you're coming out with an even higher margin on the other end.

Yeah. And that's the way we see it as well. I mean, the O&M business has been performing well because we've been transforming that business into more of an engineering-led business rather than a facilities management business. And now it's almost wholly engineering-led. So it really actually does belong in the engineering services business at the same sort of margin levels. So you're absolutely right.

Second and last question. Just your thoughts on the Monarch announcement. I think we can all agree that nuclear is an industry that moves very slowly. Certainly one where playing catch-up is proven to be quite difficult. And I think that that's where you guys are right now with this design. I mean, it's new. There's competitors already in the market. So how does the move from conception phase into actually getting this thing licensed with all its safety certifications and whatnot line up with the most likely buyers of this thing, which are in Ontario?

Yeah. So the great advantage that we have with the CanDo technology is that it's been invested in over seven decades by the Canadian government. And as you know, we bought the rights to the product in 2012, the sole rights to the IP, although it's still owned by Canada. The Monarch is actually a bringing together of investments that were made before we got the rights to the product. So there was a gigawatt reactor. It had been through several stages of development and investment. We're bringing that back. We're adding to it the safety features that are necessary today. We're digitizing it, and we're bringing it all together. And actually the investment in terms of what we see to actually bring that to market and get it licensed, is relatively small compared to starting from a blank piece of paper. So it's almost like a no-brainer to do this. We've done extensive research on what we think is the most competitive scale of large nuclear reactor, and we believe it's a gigawatt. I think further to that, to talk about a domestic market, we know what our customers want in a domestic market, and we need to be ready to deploy it when they need it. And that's what's driving this investment. But as you can see, it's not a big level of investment to get this thing developed on a year-by-year basis. Our timetable, and it will depend somewhat on gaining orders domestically, our timetable is in the order of three or four years to get this through to licensing. But we would hope that we will be gaining orders and earning revenues even before it's licensed.

Does that three to four years assumption require that the regulator to view this as an evolutionary design and what might happen if they view it as an all new design and would it not take long in that case?

Yeah, no. The regulator is very much part of the ongoing process. So you don't develop products and give it to the regulator and then they do the review. It's a parallel process. So we work in parallel with them to get to the point of licensing. And in fact, we're already doing that.

Okay, guys, that's it for me. Thank you. That's good. Thank you.

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

Thanks. Good morning, guys. Morning. Ian, maybe just to follow up on that last question, in your preparedness, you talked about that agreement with ADCL. Can you just provide a bit of background on why the agreement was needed and the benefits that it should bring to Atkins Realis?

Yeah, for sure. First of all, we own the rights to the IP, and we needed to be absolutely sure that those rights and the way that the agreement is drawn up remains in perpetuity to act as reality and remains, you know, accessible and exclusive to ourselves. And we wanted to just revisit the agreement just to, with any agreement, there's always improvements you can make. And we wanted to make sure we make those improvements got full alignment with ACL on the strategy to take the CanDo technology forward before we started investing in the project and the Monarch. And we've got that. I mean, I see ACL as a real asset to develop the product and market the product globally and internationally and indeed the Canadian government who ultimately owns the technology. So that was the intent there. And as you saw, we got a you know, a good announcement out. We got support in that announcement from the federal government. So we're all pretty much aligned to what we need to do here.

Okay, excellent. Okay, and then last night, we saw that the DOE awarded a large cleanup contract to one of your competitors. I think Atkins is on one of the aspiring contracts. Look, we recognize that this type of work is done via consortiums and it's recognized to be a pay down with JV income, but are you able to quantify the you know, how much earnings would derive from the expiring, I guess, the Hanford tank operations contract? Yeah. Was the wind-down of that contract backed into the margin guidance for nuclear in 24?

Yeah, so no. I mean, we're still very comfortable with our outlook, very comfortable with our growth in nuclear, with or without that contract. Of course, we're disappointed. I mean, you know, it's a good contract. And we would have liked to have win it. But we doubled our backlog, remember, in 2023 in our nuclear business, which we're really pleased and gives us that strong kind of confidence of 2024 outlook. And when you lose these jobs, these are like tier one jobs, whether it's straight to the DOE. But when you lose the tier one part of it, the secondary market opens up in supporting that tier one contract. will now focus on Tier 2 work, as we call it, which is, you know, supporting, actually, DOE and the winner. So, all in all, not a material impact through the year, but disappointing, of course.

Okay, good color. I could definitely start and finish the year. I'll turn it over. Thank you. Thank you.

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

Yeah, thanks. Good morning. Turning back to some thoughts around the free cash flow and a couple of moving parts on this one. So first of all, you talk a little bit about the potential sale of Linsong and the idea of the JV. Just to make sure, Jeff, the $400 million that you're talking about in available cash flow, that doesn't anticipate any proceeds from the JV, does it? And then Along those lines, you know, just in terms of the timing of cash flow, can you talk a little bit about, you know, being able to deploy capital and what the timing would look like for an M&A?

Sure. So the answer to your first part of the question is no, there's no assumed. to the guidance that we've given. And, you know, I think our view is having reached the level of the balance sheet and leverage metrics that we have at the end of 2023, you know, that's obviously, as I said, you know, our target range that we had originally, you know, forecast to not be there until the end of 2024. We see the natural cash flow generation of the business in 2024 keeping us, you know, below that, you know, around or below that 2.0 leverage ratio for us. And therefore, we think that, you know, allows us to open up, you know, the potential for small tuck-in or bolt-in acquisitions or in deep returns to shareholders. So, you know, I think we see the opportunity to access that, you know, throughout 2024 when we see the right opportunities.

Okay. And so along those lines, I guess what I'm trying to also think about is, you know, in terms of kind of beginning tuck-ins, can you talk a little bit about where the pipeline of potential opportunities are right now I know in some cases you talk about, you know, it may not be the acquisition of somebody. It may actually just be setting up a new office. You talked about, like, there's a lot of white space in the U.S., for instance, to work on. You know, can you just talk about where you think the opportunity set is? And, for instance, if you did have additional capital, say, you could recycle out of something like Linkstone, does that mean that, you know, as opposed to waiting maybe until the second half, you could accelerate, you know, some of those opportunities maybe earlier into the year?

Yeah, thanks. I mean, very much part of the land and expand strategy in the US. And it was always a strategy that needed organic and inorganic growth. And to talk to your point on the M&A front, we are already focused on identifying possible targets for US M&A. Now, they're small token acquisitions in the first instance. We are anticipating that we will be able to convert one or two of those this year. It's likely to be the second half of the year. The good thing about the US market is it's very state-to-state. centred so there are a range of sized or companies that do the work that we do and our intent is to establish a foothold in further states and then join all that up with our greater team where we're operating at at tier 1 and land and expand ultimately our goal is to be a top 5 player in the US with a coast-to-coast business that operates in the engineering services space. Once we got onto this cycle of M&A and built capability and ensure that we can integrate successfully, we will continue to do that at an increasing amount of scale. But we really do want to take a step-by-step approach to it, but we actually want to get on with it this year with the funds that are now forecasted to be available.

Okay, that's helpful. And then my other question, just looking at the breakdown, and I'm looking more at the detail in the MDMA. You know, I think to an earlier question, Canada does really stick out in terms of the engineering services margins being substantially lower than the rest of the regions. And, you know, I guess a couple pieces of this, you know, one is there, was there something, you know, kind of weird, but kind of one time or a particular project that was giving you issues in Canada that maybe we didn't notice because of the way the reporting was happening? And then I guess maybe just to elaborate a little more, your comment about, you know, trying to fix things in the office of the COO, you know, what exactly is it that you think that needs to happen in Canada to get that to, you know, what you would think would be a peer type margin or even a margin profile somewhere similar to the rest of the business?

There's a number of things. I wouldn't be able to put my finger on one sort of specific big sort of item that needed fixing in Canada. There's a number of things, and I'll share a couple of them. Cost base is always important, and we've reorganized the business. You can see now that we've got a dedicated president that looks after all the business in Canada under Stephanie Ballancourt. The type of work and the customers, We were doing a lot of really small jobs at low profitability, and moving from that to focus on larger opportunities that we see in the market, it takes a bit of time because you've got to burn off the backlog that you already had, which is low profitable work, and replace it with better quality backlog. We're very much in progress with that, and the plan is going very, very well on that. productivity. I mean, getting the business up to the same productivity levels as our other business, making sure that the staff and the people have got the right capabilities and support. So no one thing, but we know we're going to get where we need to.

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

Thank you. Thanks.

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

Thank you. Just maybe to pick up on that last question about the margin improvement expectation, you talked about productivity. Can you talk about how you're positioned from a headcount perspective to work through the very significant backlog you have? Are you still in hiring mode here or do you feel like you've got the, for the most part, got the talent you need and really there is an opportunity to leverage productivity gains?

Thank you. Yeah, thanks for the question. I mean, talent and our people are everything. I mean, we are a people business and we cannot drive organic growth without being able to attract the top talent. We've focused on our culture and our employee value proposition going back four or five years ago. And we've developed, I think, a world-class employee experience. And things like our purpose and our values and our approach to ED&I are real differentiators for younger people. we are able to bring in the talent that we need to drive the business. I mean, bringing in or achieving a headcount growth of 4,200 people in 2023 is a combination of lowering our turnover rate, which is constantly reducing, and having that value proposition for employees and building the culture where they want to join us. So we will continue to grow our headcount organically. And it's absolutely essential to grow in the company. Luckily, the way that we do this is a combination of early careers people, 2,000 people from graduates and universities joined us in 2023. We can put them to work very quickly and they're profitable and they produce revenues for us. and we add to that capable and experienced people that also generate revenue as far as very quickly. So I think it's an important part of our whole story.

I think the other thing I'd add to that, Ian, is that we monitor utilization and productivity and match the people that we're bringing in, you know, very much by region and sub-region and customer and market so that, you know, the growth that, as you say, you know, we've been very successful that we've needed to deliver that backlog is very appropriate, you know, in each of the different regions and geographies so that, you know, so we're not building up people in areas where we have less work, but we've got them focused where we've got the most work to be able to do.

Okay, that's helpful. Thank you. Second question, just circling back on the LSTK projects area, I think you were asked this earlier, but I'm not sure if I caught the answer. The increase in backlog that you saw sequentially, is that also tied to your explanation about the delays in some of these projects? If you can just help clarify what drove that exactly. And I guess the other question or the follow-on would be, how do you see that backlog evolving over the course of 2024 as we move through the year?

Yeah, so, Jeff, why don't I take that one? So, yes, we did see a bit of an increase in backlog, and that really comes, as Ian says, from with our clients re-forecasting out, you know, the completions, particularly of the two Ontario projects here in 2024, you know, and REM. And, you know, as a part of that, there's simply, you know, a view that there's some more work to do than there would have been at the end of the previous quarter. Not a material amount of work. And as Ian said, you know, it doesn't extend the timeline in any material way, but that's, you know, that's a big part of what drove the, you know, the slight increase in backlog at the end of the year. But it is, you know, largely because, as Ian says, we're down to final testing and commissioning documentation, training drivers, you know, and, you know, that has a relatively small component of the overall total. I think there was a second part of that question, Michael, that I answered, the second part.

Not exactly. The second part was just related to how we think about that, you know, progressing as you move through the year.

Yeah, sorry. Yeah, so I think in terms of, you know, we would look to have that backlog largely done by the end of the year. You know, the anticipation is that both the Trillium and Eglinton would be handing those over to the clients this year. You know, and I think as Rem itself has said, you know, they're expecting to be, you know, largely construction complete by the end of this year as well. Okay.

So just does that then mean that as far as the $10 million – per quarter loss that you talked about earlier over the course of 2024, does that, as we look to 2025, should we essentially assume that that loss is no longer occurring at all in 2025?

Well, I think as I said in the last answer, a lot of that is overhead cost to pursue our recoveries in claims and the like, as well as supporting the ongoing jobs. So, That will reduce. I wouldn't say it'll be zero in 25, but it'll be less because we're down to just really trying to recover the loss. I mean, and I would hope still that we can negotiate this at some point and see that coming in.

Okay. Thanks very much.

Thank you. Our next question comes from Maxim Sichev of National Bank Financials. Please go ahead.

Hi, good morning, gentlemen. Morning. What questions have been asked and just a couple of cleanups. Ian, if you don't mind maybe talking a little bit about your Middle East business now that it crested $1 billion in gross revenue. Just wondering how you're thinking about some of those profile for that part of the business. Yeah, maybe you can call it that would be helpful. Thanks.

Yeah, for sure. For sure. I mean, you know, The Middle East is booming, frankly. Demand for services from companies like ours, both in the Kingdom of Saudi Arabia expansion, but now a reinvestment in the United Arab Emirates is really, really fueling the market. So what we have done is really focused on projects that we see have a sustainable future. So those would be the iconic, very heavily committed to projects such as NEO and the downtown of Riyadh and the sort of greening and redevelopment of Riyadh City. So we have won some very good contracts in those type of work. But we're also now, rather than continuing to kind of focus on one area. As we're seeing good opportunities come out of the Emirates now, we're kind of looking at the Emirates as well. And we're up to over 10% of our business now is in the Middle East. But that's about where we want to be, around about the 10%. You know, we don't want to kind of outgrow the Middle East compared to the rest. We're keeping it at a level which is positive. and supporting our customers there. But we will sort of keep that kind of at a proportionate level.

Okay. Makes a lot of sense. And just two quick cleanups, if I may. In terms of kind of like free cash flow conversion of sold net income to free cash flow, like 80% to 90%, I mean, that's still kind of the game plan, right?

Yes, that's correct.

Okay. Okay. And can you be a bit more precise in terms of timing or how should we think about this?

Yeah, I mean, I think as I said, Max, I think in terms of timing, you know, that's our guidance for the full year. As I said in my remarks, it will be weighted to the second half of the year. You know, so we'd expect to see less in the first half and more in the second half. But clearly, you know, year on year, a real step forward. you know, in both hands, frankly.

Yeah, absolutely. Great to see. And then one last thing. In terms of the 407 and thinking about potential sort of congestion payments as pricing has gone up, can you maybe provide any call in terms of how we should be thinking about this, if at all? Thanks.

Yeah, I think my comment to that, Max, I think, you know, broadly I'd refer you to what the 407 itself is saying. Clearly, you know, their view is that, you know, while there may be some congestion payments, the value that comes and the need to reflect the fact that there hasn't been a price rise in four-plus years was clearly what drove their change in pricing that was implemented, you know, at the beginning of February. So I'm not sure I have anything more to add to that at this point.

Okay. But, I mean, like net-to-net, obviously, there should be a positive impact from kind of an in-the-doubt perspective. Yeah. Okay. Okay, perfect. Thank you so much. That's it for me. Thanks. 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.

Great. Thank you very much, everybody. If you have any further questions, please don't hesitate to contact me directly. Thank you very much, and have a beautiful day and weekend. Thank you. Bye-bye.

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