AtkinsRéalis Group Inc.

Thank you for standing by. This is the conference operator. Good morning and welcome to SNC-Lavalin's second quarter 2020 earnings 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 and zero. I would now like to turn the conference over to Denise Jasmine, Vice President, Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining the call. I hope you have all been keeping safe over the past few months. We appreciate you taking the time to listen in today. Our Q2 earnings announcement was released this morning, and we have posted a corresponding slide presentation on the Investors section of our website. The recording of today's call and its transcript will also be available on our website within 24 hours. With me today are Yen Edwards, President and Chief Executive Officer, and Jeff Bell, Executive Vice President and Chief Financial Officer. Before we begin, I would like to ask everyone to limit themselves to one or two questions to ensure that all analysts have an opportunity to participate. You're 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 risks and uncertainties, and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on CDAR. These documents are also available on our website. Also during the call, we may refer to certain non-IFRS measures These measures are defined and reconciled with comparable IFRS measures in RMDNA, which can be found on CDAR and our website. Management believes that these non-IFRS measures provide additional insight into the company's financial results, and certain investors may use this information to evaluate the company's performance from period to period. And now I'll pass the call over to Ian Edwards. Ian?

Thanks, Denis. Thank you all for joining us. and I hope you're all well and managing safely through the current situation. Please turn to slide five. You'll have seen this morning we announced the transformation plan for the resources services. I'm pleased to say we have concluded both the review of all options and finalized the business plan for its transformation and restructure. We've already moved into the implementation of this plan that expects to see the resources as a profitable services offering complementing our engineering service capabilities in primary markets. I'll cover more about this later. SNCL Engineering Services has been resilient through COVID-19 and delivered strong results and cash flow from operations. However, SNCL projects has been impacted by COVID-19, resulting in losses. While no one quite know what to expect as lockdown started, we quickly took action to transition to remote working and adjust our cost base. Our decisive actions, underpinned by the strategic direction we launched a year ago, have seen the business we're taking forward well positioned both for resilience in the pandemic and for growth in the future. Our SNCL engineering services business is a broad business mix, and the essential nature of our long-term contracts, particularly with governments, make this business resilient. For SNCL projects, we continue to reduce our LSTK backlog and the resources LSTKs remain on track to be largely completed by the end of the year. This gives us greater visibility as we enter the final phases of the projects. COVID-19 did impact negatively on our SNCL projects with resulting project re-forecasts. In addition, we adjusted for approximately 70 million on a resources LSTK project where we've had ongoing warranty and claims disputes that have escalated in the quarter, and COVID has impacted our ability to mobilize resources to site, rectify issues, and negotiate a satisfactory conclusion. We do not consider this to be representative of the general performance of the LSTK rundown. Our financial position is strong, generating $130 million of operating cash flow in the quarter with total cash on the balance sheet of 1.6 billion and a low debt level. Turn into slide six and our plan for the transformation of the resources business. This has been a priority since I took over as CEO a year ago. At the time, I said we would explore all options with regard to this business. And as such, we undertook a strategic review to thoroughly assess the most effective path to deal with this underperforming business. This review was extensive and took into account both the shift in the oil industry and COVID-19. We now have a comprehensive plan in place to transform and restructure the resources business. Our conclusion is that the best return for the long-term shareholders is to transform and reposition resources as a services offering that complements our engineering capabilities in primary markets. With clients where we have a track record of executing profitable work. This means we will focus on markets in the Americas and Middle East where we can work together with our other professional services and project management businesses. We will wind down all of the geographies through closures and sales. We have recently agreed to the sale of South Africa resources business with 1,800 employees and the divestment of our European fertilizer business. This follows the closure in March of Valeris in the U.S. Revenues for the transformed services business are expected to represent circa 10% of the overall company's 2021 revenues. This contrasts 23% in 2019. Turning to slide seven, you can see some of the projections for transitioning the resources services offering to profitability. We expect the business to break even in the first half of 21 and turn to a profit for that year. This forecast is based on a number of elements, including a rigorous approach to project selection with stronger opportunities for new business wins, a significant reduction in overhead costs, and deep relationship with specific international oil companies and national oil companies in our primary markets. On slide eight, we'll look at our progress on the LSDK backlog, a key milestone in our future success. Firstly, on backlog, we are on track to complete most of the resources LSTKs by the end of the year. On the right hand graph, you can see a significant increase in Q2 losses over recent quarters. This was due to taking a $70 million charge on a completed project in the Middle East, as noted earlier. We don't see this representative of current performance, and we have much clearer line of sight on all outstanding completion risks. We would highlight, however, there are still uncertainties around COVID impacts. Turning to slide nine, we've recorded a $19 million loss in infrastructure as projects have been affected by postponement, suspension, and productivity losses. Even with the impacts of COVID-19 in the last quarter, you can see over a 12-month period, we've actually achieved a slight positive segment EBIT on these projects. For the infrastructure projects, we expect that these will be cash flow positive over their remaining project life as these continue to phase out. We remain on track to complete this infrastructure backlog in 2024. Turning to slide 10, the performance of SNCL engineering services was strong, with a solid segment adjusted EBIT margin compared to Q2 2019. and only a modest revenue decrease in what was an unprecedented quarter. The resilience in engineering services is seen through nuclear, EDPM, and infrastructure services. It's largely due to the strong weighting to government work, long-term contracts, and uninterrupted services for essential operation and maintenance activities. Please turn to slide 11. The resilience of EDPM in COVID-19 is a key element in this quarter's results. COVID impact is primarily in the Middle East and specific business lines such as aviation and commercial buildings. However, through quick mitigation actions, EDPM has performed well. In March, we were able to quickly transition to remote working with little impact on productivity. We've continued to invest in our digital future, which is driven by EDPM, but central to the whole company as we transform. Business winning has continued across all geographies, and we have a clear line of sight through 2020. Strong relationships with governments have seen us supporting efforts around COVID-19, and we're seeing opportunities in the UK, US, and Canada for innovative and digital solutions as countries make investment plans for COVID-19 recovery. Please turn to slide 12. The portfolio of nuclear services that we offer, combined with cost controls, has delivered target EBIT margins despite some projects being slowed with COVID-19. The level of new contracts and long-term nuclear contracts gives us firm belief and visibility in nuclear's continued strength. Our nuclear business has been strong and winning business in all core geographies and across the breadth of markets, such as nuclear technology, and decontamination and decommissioning. Moving to slide 13, our infrastructure services business also proved resilient through COVID-19 with many essential O&M and services contracts operating as normal. The government of Canada awarded to scope to provide 100 bed mobile care units to be deployed across the country to add flexibility to healthcare system. We've won an award to provide services to refurbish and expand the hydro generating station in Ontario. And as an example of another innovative solution through collaboration with teams across the world, we identified and developed our ASRI concept, Accelerating Shovel-Ready Infrastructure, to help governments expedite post-COVID infrastructure investments. We are in positive discussions with a number of governments on how we can bring our expertise as a project integrator and drive rapid, collaborative developments using ASRI. Turning to slide 14, 407 ETR announced earlier this month that it was seeing modest but steady improvements in traffic volumes. We continue to strongly believe in the long-term value of Highway 407 ETR. Our other concessions saw minimal impact from COVID-19. On slide 15, I want to take a minute and highlight the release of our 2019 sustainability report and our goals here. To align with our business strategy, we've focused on three UN sustainability development goals as priorities. Affordable and clean energy, sustainable cities and communities, and climate action. I'd invite you to read more on these in our sustainability report on our website. Across environmental, social, and governance elements, we have plans aligned to the UN goals and good performance in terms of ESG. Safety and integrity are core values, and we have active programs addressing diversity and inclusion across our business. So I'd like to move to slide 16 and conclude my remarks before Jeff takes you through more detail on the key two numbers. We are a year into our transformation journey, and I'm extremely proud of the achievements we've made as a company through this period. As a leading global professional services and project management company, S&C Lavalin is strongly positioned to meet and deliver growing demands for engineering services, in the post-COVID stimulus, particularly in innovative solutions for infrastructure. In Q2, we've performed well on engineering services, continued to strengthen our position, and announced our plans for the resources business. I'm disappointed to have the loss in LSTK, but we have continued to progress the backlog down, and the resources LSTKs are in the final quarters. I'm really excited about our future, and with that, I'll pass to Jeff. Thank you.