AtkinsRéalis Group Inc.

Thank you for standing by. This is the conference operator. Welcome to SNC-Lavalin's first quarter 2021 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 and zero. I would now like to turn the conference over to Denis Jasmine, Vice President, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining the call. Our Q1 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 Ian Edwards, President and Chief Executive Officer, and Jeff Bell, Executive Vice President and Chief Financial Officer. Before we begin, I would like to ask everyone to limit themselves to one or two questions to ensure that all analysts have an opportunity to participate. You are welcome to return to the queue for any follow-up questions. I would like to draw your attention to slide two. Comments made on today's call may contain forward-looking information. This information, by its nature, is subject to risk 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 in 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. Now, I'll pass the call over to Ian Edwards. Ian?

Thank you, Denis, and good afternoon, everyone. First, turning to slide four, well, we're off to a good start in the year with a solid performance across all three segments of engineering services. Engineering services generated revenues of $1.5 billion last and a segment adjusted EBIT margin of 8.8%. Revenues are essentially on par with Q1 2020, while margins have rebounded to their traditional levels. The backlog also remains robust, with $1.7 billion in new bookings in the quarter. On SNCL projects, we continue to make good progress reducing the LSTK backlog, bringing the total outstanding backlog down to $1.6 billion. Overall, it was a really solid quarter. Turn into slide five, and the Q1 results for EDPM. EDPM had a strong quarter, generating $81 million in segment-adjusted EBIT. Margins increased year over year to 8.6%. The strong performance was due to a combination of factors, which includes strong revenue growth in the U.K., in project management, transport, and defense, successful efforts to right-size the business and reduce costs in the Middle East, and recovery in certain markets impacted by COVID in Q1 2020. The backlog also continued to grow at a really impressive pace. In Q1, EDPM added $1 billion in new wins, an increase of just over 10%. This is in addition to the nearly 9% growth in Q4 2020. and puts the EDPM backlog at a three-year high of just under $3 billion. New wins include rail, road, water projects in the core geographies of UK, Canada, and the US. This includes an engineering services for the US State of Georgia Department of Transport and the long-term renewal of a master services agreement with Intel for project and program management. Looking ahead, the pipeline remains strong at $27 billion, and we remain optimistic across our core markets as governments look to invest in infrastructure to support the twin goals of economic recovery and carbon net zero targets. Turning to slide six and the nuclear segment, nuclear revenues were broadly in line with last year, with the EBIT in line with expectations, albeit lower year on year, due to a lower contribution from our Canadian refurbishment works. We continue to see good demand for reactor engineering, for field service work, waste management, as well as for our proprietary tools and technologies, including robotics and digital twins. Having completed our work on the first reactor at Darlington, we've now ramped up and are progressing well on the second unit. And we're moving into 2021 with several really significant opportunities and growth catalysts on the horizon. These include continued demand for reactor support and decommissioning, intensified tendering by the U.S. Department of Energy for environmental management work across a number of nuclear sites, and continued momentum in the U.K. with the Hinkley Power Station and the proposed new nuclear sizeable seed project. Moving to slide seven on infrastructure services, The segment had a solid quarter and a segment-adjusted EBIT margin ratio of 5.8%, an increase compared to Q1 2020, resulting from improved profitability and increased activity in O&M and health services. Infrastructure services won a number of new mandates in the quarter, including a first-of-its-kind contract to retrofit the 100-year-old dam in Pennsylvania, with three hydroelectric power stations to generate renewable energy. It also won an additional five-year renewal of a logistics and project management program in Canada. At just over $7 billion, Backlog remains strong, underscoring both the long-term and essential nature of infrastructure services. Looking ahead, we see a number of opportunities in Canada and the US in rail and transit and social infrastructure. Major projects will be a key focus as we pursue new collaborative liability-capped contracting models like the East-West Rail project in the UK that we were awarded in February. We also see a strong pipeline of opportunities for links in transportation and offshore wind. Turning to slide eight and the capital segment, the segment continued to be impacted by the lockdown in Ontario, which has resulted in reduced traffic volume on the Highway 407 ETR. As a result, there was no dividend payment in the quarter. Our other concessions continue to perform well. Looking ahead, we see an interesting pipeline of new public-private partnership opportunities where we can leverage our engineering and O&M capabilities. These include several PPPs in Canada and the UK in the sewage and water treatment and hospital space. Moving to slide nine, an infrastructure EBC projects. We continue to make good progress reducing the LSTK construction backlog by over $200 million in the quarter. The LSTK backlog, which is comprised of the three remaining Canadian LRC projects, is $1.5 billion at the end of March. The segment recorded a negative adjusted EBIT for the quarter of $11 million, turning to slide 10 and the resources segment. We continue to target completion of the sale of our oil and gas business in Q2. Our M&M services business is performing well. We are seeing growth in revenue and profitability, which is really being driven by increased demand for the materials used in clean energy storage, including electric vehicles. Moving to slide 11, as you may have seen earlier today, we released our ESG targets and commitments, including a commitment to reaching carbon net zero by 2030. We've developed a detailed plan to achieve this ambitious target, which brings a low-carbon lens to everything we do, from our travel policy and electric vehicle leasing to reduced energy consumption within our real estate footprint. To reach our goal, we have set annual targets that will be verified by third parties and published to the Carbon Disclosure Project. Overall, we've identified 12 ESG priority areas, including protecting and enhancing human rights, corporate integrity, and diversity and inclusion. With regard to EDI specifically, we've set clear targets to increase the representation of women at all levels of the company. And as you can tell from our commitments, we see ESG as an integral part of the company's future growth and sustainability. With that, I'll now turn the call over to Jeff.

Thank you, Ian, and good afternoon, everyone. Turning to slide 13, total revenues for the quarter amounted to $1.8 billion, which is slightly lower than the corresponding quarter in 2020. SNCL engineering services revenue was lower by 1.3%, and at the low end of our outlook range for the quarter, as the COVID-19 pandemic did not significantly impact Q1 2020. Segment adjusted EBIT for the quarter was $143 million, which included a segment adjusted EBIT of $133 million for SNCL Engineering Services, $19 million for Capital, and negative $8 million for SNCL Projects. This latter negative EBIT was mainly due to the infrastructure EPC project segment, which had a reduction in gross margin, as the first quarter of 2021 included costs in closing out certain projects nearing completion and the impacts of COVID-19, partially offset by a reduction in overhead expenses. Corporate SG&A expenses totaled $16 million in Q1 2021, compared to $37 million in the first quarter of 2020. This quarter included a revision to certain estimates and cost accruals that reduced the expense in the quarter, while Q1 2020 included a $10 million additional provision adjustment for the pyrotype litigation. The adjusted net income from PS and PM in Q1 2021 amounted to $83 million, or 48 cents per diluted share, representing a 37% increase compared with Q1 2020. Both periods benefited from a lower-than-normal effective quarterly tax rate. Q1 2021's low tax rate was primarily driven by the reversal of certain provisions for tax liabilities, which had an impact of $0.07 per share. Backlog ended the quarter at $13.2 billion, compared to $13.9 billion at the same time last year. The decrease was primarily due to the continued runoff of the SNCL project's backlog related to LSTK projects, which decreased by $824 million. SNCL Engineering Services backlog, on the other hand, increased by 1% during the same period, with an increase 10% year-over-year in EDPM to $2.9 billion. In nuclear, backlog decreased by 17% over the last 12 months, mainly due to the progress on the company's major long-term refurbishment contracts in Canada. The business continued to be awarded extensions to ongoing contracts in Canada and other long-term contracts in the U.S. and U.K. regions. As for infrastructure services, the backlog remained solid at $7 billion, in line with the end of March 2020, mainly due to strong contract wins over the 12-month period. Turning now to slide 14, our day sales outstanding reached 61 days at the end of the quarter for EDPM, a 12-days improvement as compared to Q1 2020. This improvement is mainly the result of our continued focus on cash collection and early government payment programs related to COVID-19. For full year 2021, the strong operating cash flow attributes of SNCL Engineering Services are expected to be partially offset by our return to a more normalized BSO level later in the year. At the end of March 2021, the company had $703 million of cash. The recourse debt decreased by $175 million compared with December 2020, as we repaid in full the Series 3 debentures, which reached maturity during the quarter. The company's net recourse debt to EBITDA ratio on the revolver credit facility, calculated in accordance with the terms of the company's credit agreement, was 1.8 times, well below the required covenant level of 3.75 times. Moving on to slide 15. Net cash generated from operating activities with $6 million in Q1 2021 compared to $23 million in the same period last year. SNCL Engineering Services continued to generate strong cash flow from operations with $118 million in the quarter due to strong EBIT conversion and a low DSO in the EDPM segment, while capital generated $21 million. After cash taxes, interest, and corporate items, you can see that we generated $97 million of operating cash flow in the quarter, which was offset by $124 million cash usage from SNCL projects. Note that the cash profile of SNCL projects can be very lumpy during a year, depending on the progress and specific milestones achieved for each project compared to the more consistent quarterly cash flow profile in engineering services. And we don't consider SNCL projects cash flow usage in Q1 representative of the remaining quarters in the year. For 2021, we continue to expect the company's operating cash flow to be largely breakeven as a result of a return to a more normal DSO profile in engineering services by the end of the year and a usage of cash in SNCL projects. And finally, turning to slide 16, the company is maintaining its SNCL engineering services revenue growth and segment-adjusted EBIT to revenue ratio outlook. We also continue to target the same long-term EBIT margin percentage for each segment. This concludes my presentation. I'll hand it back to you, Ian.

Thanks, Jeff. Turning to slide 18, I'd like to conclude my remarks with a few key takeaways. We're really encouraged by the strong start to the year. We continue to make important progress on our two main priorities, which are to de-risk the business and accelerate growth in engineering services. And we're seeing a strong pipeline of new business opportunities across all our core markets, as governments invest in new infrastructure and green initiatives. We're doing our part, both as a company and as a partner to governments and private clients, through our Engineering Net Zero offering, which provides a broad range of sustainable solutions in energy, transport and infrastructure. We see this as an integral part to our future growth. We look forward to sharing more about those growth opportunities at our Investor Day in September. Thank you. I'll now open the call to questions.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. We will pause for a moment as callers join the queue. Our first question comes from Jacob Bout of CIBC. Please go ahead.

Good afternoon.

Hi. Hi. Hi, Jacob.

A question on your engineering service, the low single-digit revenue growth guidance. You know, given that revenue was down just 1% in Q1, and I would point out, you know, it appears that you've outperformed your peers on an organic revenue growth perspective. you know, are you building in a level of conservatism? And I guess, secondly, you know, how back-end loaded is this guidance for the year?

Well, I don't think we're building in an extra level of conservatism. I mean, clearly, we are being prudent because we still see that although we've had a very strong... booked a bill in Q4 and Q1, we're still in the pandemic. So we're also seeing very, very, you know, strong indications of kind of future commitment. And we really, you know, expect those to kind of hit the revenues probably more in 22 than 21. So we've looked at it, obviously. I mean, we've thought about this and we've looked at the pipeline. And we felt keeping the guidance outlook the same was prudent at this time. But obviously, we'll keep kind of looking at that as we progress through the year.

And then I guess my second question here, just about the rapid rise in material costs. Is this changing client behavior at all?

Yeah, that's a good question. I mean, I think the answer is no. I mean, you know, the activity that we see in our core markets and in our kind of core end markets as well as geographies, commitment's still there. And, I mean, you know, I think the supply chain and the flow of materials and demand could be short-term once we get back to normal. post-COVID, but absolutely not. We're not seeing any kind of downturn from that.

Okay. That's my cue. Thank you.

Thank you.

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

Good quarter, guys. Ian, wondering how you're feeling with regards to you know, looking to pivot more to growth and when you think S&C would be ready to do that, especially as it pertains to potential acquisitions like a lot of your peers are involved in?

Thanks, Rui. I mean, we still are very aware we have two priorities here. I mean, we... still have the LSTK backlog to work our way through, which we're highly focused to do that successfully. However, we've spent a lot of time in the last few months looking at our strategic plan and building on the decisions that we've already made. And, you know, you've seen the decisions we've made around, you know, our core geographies, around the focus around our end markets, geographies being US, Canada, then UK, our end markets being transport infrastructure, social infrastructure. and nuclear. And we're really focused on how do we grow those? What are the growth drivers? Where do we put the energy, both organically and inorganically? What does our capital allocation look like over a longer period of time? And we're going to share all of that in the investor day in September. I mean, the exercise is somewhat ongoing still, but we'll be pretty fixed on it and give you quite a bit more detail then.

Okay. And my second question is for is for Jeff. I guess if I had to nitpick on the quarter, you know, it looks like much lower than expected SG&A certainly didn't hurt the EBITDA. Can you explain a little more detail what drove that? And then is there anything that that you can do to make that line item a little more predictable going forward? Because it's, you have to admit, it's kind of all over the place quarter to quarter.

Yeah, so I think, I think my first observation would be, you know, there were a few items in there. Now, to be fair, it's, it's particularly with our investment in digital transformation, which we're holding as a as a central cost. So we can, you know, we can keep an eye on that and deploy it most appropriately. And you know, that does give us a run rate per quarter of, you know, probably in the $25 million range. So, it doesn't take much in one given quarter, you know, a few million, you know, one way or the other, just in terms of timing or in the case of, you know, the first quarter this year, you know, as we looked at some of our or look further at some of the provisions that we had, there were some true ups to that, which in the quarter were accredited. So, So, you know, it's essentially one-off. It's not something we would expect to repeat, you know, as part of that cleanup. But, yes, you're right. It was about $7 or $8 million, you know, therefore lower than what we think the kind of normal run rate would be for this year anyways. I'll turn it over. Thanks. Thank you.

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

Thanks, guys. Just a couple of quick ones here. First of all, just for the close of the oil and gas sale, anything that we should be expecting that will change? I know you indicated that we'll probably see some one-time gains in Q2 just to clean that all up. But any other color or update you can provide would be great.

Well, certainly on the timing, we're focused on trying to get this done in Q2. Highly motivated buyer, and we're highly motivated to get it done. These things, you know, somewhat getting consent and approvals, you know, depends on some third parties. So it wouldn't be beyond the bounds of possibility that it slips into Q3, but no red flags. I mean, just on the financials, the mechanics of the deal itself, Jeff, do you want to just talk to that?

Yeah, I would say nothing material has changed at all. We still expect significant, you know, non-cash, you know, revaluation of the currency translation account in particular. But, you know, the rest of the, you know, kind of net assets in our view of the business is, you know, is largely the same as it was a few months ago.

Okay, that's helpful. Thank you. And then I don't know who wants to take this one, but, you know, one of the questions I've been getting asked a lot is, you know, as you've been transitioning away from being constructors of assets and being more designers of assets, you know, is the thought process around the capital group? And I know you've got some good assets there, and we've talked about the 407 in the past as being, you know, a good use of capital. But just the question is about creating additional assets and I guess the non-407 capital business. How do you think about that fitting into the company on a go-forward basis?

Yeah, that's a really good question, Chris, and hopefully I can help. I mean, certainly we see ourselves as partners of customers, to deliver an asset. So that means to me, designing the asset, it means consulting and advising on, you know, what assets should look like. It means overseeing the construction of an asset and it means operating an asset as well. So all of those capabilities, as you know, have historically been very strong in S&C Leveling and we're not about to, you know, stop doing those things. We don't do lump sum construction anymore, but we do all the other things. to help our customers realize their kind of aspirations to deliver efficient assets. So interestingly, the kind of PPP market is changing a little bit. What we're seeing in the middle portion of the construction element, in some countries, the more collaborative contracts even. And if we see that, then for sure, you know, we're going to leverage our capital capability. and invest in assets so that we can obtain the design project management oversight and operation work from it here in canada for example we're now partnering with construction companies so that we can be the designer and the operator and we can hold part of the concession as an investor and and obviously leverage again all the capability that we've built over many years at actually being pretty good at you know financially engineering these things and uh and delivering the whole project. So we've thought about that quite a bit since we exit on LSTK, so it's a good question.

Okay, thanks. That's helpful.

Thank you.

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

Yes, thank you very much, and good quarter. Just on the nuclear side, there's been a lot of discussion around nuclear energy in the context of the green transition. Could you talk about the pipeline of opportunities in front of you across key geographies?

Yeah. Yeah. Thanks, Benoit. I can. I think the first thing I'd say is our strategy on nuclear doesn't see new nuclear as kind of the focal point of the strategy. I mean, if that happens, that's a plus. And perhaps I'll come back to that. Because where we play, obviously, is in support to the can-do reactors around the world. That's an important part of the business. Extending the life of reactors, such as Darlington and Bruce, but also in decommissioning and waste cleanup. And actually... Where we see the biggest kind of short-term growth, short-term three years, is in actually the waste and environmental management, environmental cleanup of nuclear waste, particularly in the U.S. The Department of Energy is really pumping a lot of funds into that with some very, very big programs to clean that up. But we're also seeing that particularly in the UK, where decommissioning of the Aegean Fleet and waste cleanup at the Sellafield plant in the north of England is pretty big also. So the real growth plan that we've got, the biggest driver, I would say, is in actually waste remediation and cleanup. Now, if, and I think it's an if, as you said, the question marks out there, if nuclear becomes an acceptable form of clean energy, in the global forum, then we will be absolutely there to sell our services and potentially even sell our can-do technology. But I think that's a little off yet.

Okay, okay, perfect. And specifically on LSPK project, could you talk in particular if there's any key elements to monitor, especially as you run down the resource backlogs?

No, I mean, I think the jobs, you know, the three jobs we've got, Eglinton, Trillium and Ram, the jobs are going well, but they're still being impacted by COVID. I mean, you know, we were assessing that we're going to be out of COVID around about the summer. If you remember in the updates from previous quarters, we're still optimistic about that. You know, we're hoping that the vaccines will and Canada will bring us back to normality, and we can get people for the projects and reduce social distancing and reduce the kind of number of outbreaks on the projects where we have to isolate part of the project. But certainly what we're seeing so far in Q2, obviously the impact is ongoing. But apart from that, we continue to negotiate with our customers to try and resolve problems you know, the whole settlement around COVID, no real update there. It's going to take some time, you know, no red flag, but it just takes, these things take time to kind of pursue.

Okay, thank you very much for your time.

Thank you.

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

Thanks. Maybe just picking up on that last question and answer regarding LSDK and how you had planned for resumption of activity more closely aligned with what you would have historically seen as it relates to COVID. To what extent do you think you will then need to take additional provisions if this does get extended?

Well, obviously, there's a few unknowns. and a few things to play out here. I mean, first of all, we kind of got to see what happens this summer in terms of productivity. We assess that going into the summer. So, you know, no issue right now. But we need to see what happens in the summer. I mean, I would say that from a productivity perspective. And then, you know, there's the recovery, a loss from our customers. As you know, we've taken a very prudent view to that recovery. We're absolutely confident we're entitled to recover that loss. We know it takes time. I mean, this is quite complex. And, you know, the proof of loss is on ourselves. You know, the burden of proof is on us. So we've got to kind of make sure that we, you know, we pursue that and demonstrate the loss. So we don't expect it to kind of take, you know, weeks. It's more of a month's exercise. But if we start seeing some resolution there, then, you know, that could be a positive. So, you know, there's a few moving parts there, but no concerns right now.

Okay. That's helpful. Thank you. Second question is regarding the backlog in the EDPM segment. Obviously, very strong backlog growth. Year over year up 10%. Can you talk about the composition of that backlog and has the duration of that backlog extended because that's obviously very strong year over year growth and thinking about the fact that you're guiding to sort of low single digit top line growth and EDPM for the year as well as the other parts of SNCL engineering services. Just wondering how you should think about the backlog and the composition.

Yeah, I mean, so for sure, We're seeing the UK as a strong market with some wins, some good wins. And we're seeing the US as a strong market and some good wins in the US. I think if you remember, we kind of adjusted our view of what we would be able to win in the Middle East going back to Q1 last year. Actually, the Middle East is doing quite well now also. but I think the majority of what you see in there is very strong backlog at this time will be the UK and the US and this you know the US business is up without the Biden investment you know I mean it's up just year over year in terms of volume in our specific end market I mean we're pretty focused on transport infrastructure in the US and we see that as being quite strong So I think those are the key areas.

Right. Okay, perfect. And maybe just to clarify to your answer there, Ian, the work you've been adding, does that stretch over a longer period of time in terms of sort of months of backlog relative to maybe what you've historically seen? Are these larger projects that will occur over longer periods of time?

Not really. I mean, the mix of business – You know, our EDPM business is a pretty even mix between consultancy design and kind of project management. And most of those back durations, you know, are less than a year. And we've seen something similar to that. I mean, not specifically, no. Okay. That's all. Thank you. Thank you.

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

All right, thanks, and good afternoon. You made a comment earlier around thinking about how to grow in the future, kind of quarters and years in some of your core markets, whether it's the geographies or the end markets you're in. What are your thoughts, I guess, on potentially considering some new end markets, you know, the ones where you may not have a presence through M&As, focused really on kind of focusing on things that you already have a good presence in. And, you know, is this something you're thinking as part of your strategic plan or just long-term?

Well, I mean, I can give you a flavor of how we think about it rather than perhaps, you know, a lot of detail. We'll come to more detail in September. I mean, we spent a lot of time simplifying our business and de-risking it from, you low profitable business lines and loss-making business lines, frankly. And that's been a high part of our focus over the last 18 months to two years. Where we find ourselves primarily is three core geographies, UK, Canada, US, highly focused on nuclear, social infrastructure, transport infrastructure, and government clients. And we think the decisions we've made to get down to those are the right decisions, because that's where we see, you know, growth from the market size, but also growth from SNC-Lavalin's market share. I mean, you know, if you take even – if you take the U.S., our market share is quite small, and we've developed a pretty detailed plan on how we're going to build our market share there. If we even think about Canada, you know, this period that we've been through to not take on LSTK work, you know, it's reduced our other services slightly. So we've got runways to go back there. So I think, you know, for our focus, I think we've got the right focus. Do we need more capacity through inorganic growth? Yes, you know, and we're absolutely looking at that. But it's more of what we've already got, I would say, at this time, rather than looking at, you know, alternative markets and capabilities.

Great. Thanks. And then just a second question. A lot of your peers have been talking about the outlook for growing demand and the need to ramp up hiring. I just want to understand the efforts you're making on that front and your plans to grow your workforce as demand picks up.

Yeah, really good question because in the strategic planning that we're doing, the talent plan and the capacity plan is very, very important to the growth plan and to the strategy of growth. So we think about it in three ways. We think about it in terms of growing the talent, what talent do we need, how do we attract more talent, and obviously we've done a lot of work on the culture, we've done a lot of work on our purpose, and we've done a lot of work to improve the employee experience within the business, and that's paid off for us both in not losing employees but also being able to attract employees. But we also think about it, in terms of building capacity through the move to digital tools and automated design and increasing our capacity from digital transformation. So that's been an interesting journey over the last few years as well. And then lastly, we have been quite successful in building a very, very capable ecosystem global technology center out of India, which supports our businesses globally from a design and a 3D and a modeling perspective. So we think the answer is, you know, not just more people. We think that it's actually, you know, digital tools, offshoring, and doing things more efficient as well as more people.

If I could just sneak in one, I guess, just as a follow-up to your comment. I think in your ESG announcement this morning, you indicated that rationalizing buildings and facilities is part of the kind of strategy there. Is that a review you're doing right now that we should expect an update on, or how far along are you there?

Of the real estate? Yeah, the real estate, yeah. Yeah, yeah, yeah, for sure. Yeah, I mean, we started before COVID. I mean, we were moving to a more flexible work arrangement and a higher density in our offices before COVID. In fact, two of our biggest offices in the UK had already transitioned to that more flexibility, more density. So, you know, like all companies, I mean, COVID's accelerated remote working, and we are going to, you know, continue to increase density in our offices and look to work in offices that have got a greener footprint to reduce our running costs and the overall, you know, carbon footprint of the business. Thank you.

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

All right, thanks. So just a couple of cash flow questions maybe for Jeff. First, I believe there was a favorable resolution to a claim in the legacy oil and gas division during Q1. I'm just trying to understand, did S&C get to retain that benefit or would that payment get transferred to the buyer as part of, we'll say, working capital adjustments when the transaction closes?

Yeah, so that benefit stays with us as kind of the current owner of the business. So it was good to see that. We did have a – yeah, it was partially offset by some continued true-ups in the remaining legacy oil and gas business. But, yes, you're right. We did have a positive settlement to that project, and that benefit stays with us.

Okay, okay. Good to hear. Okay. And then another one, you know, last quarter, you talked about, you know, roughly like $150 million cash flow headwind from DSOs and, and EDPM normalizing and the payment of deferred taxes. And I think you mentioned, you know, Q1, we saw DSOs move, you know, even lower from where they were in Q4. Just, you know, how should we think about that cash flow headwind now versus when you guys reported Q4?

Yeah, so I think we would continue to see it largely similar to how we saw it in Q4. You're right, you know, ended up in a good position at Q1. You know, I would say even slightly better than our expectations. And, you know, a lot of that continues to be the strong focus on cash flow and cash flow management that we've been driving into the business. But we will see whether it's the VAT reversal, which is more in the remaining nine months of the year, and the natural expectation of seeing some of that DSO unwind back into – We do think it would end up back in the low 70s, roughly. Therefore, we think that headwind is still largely the same as it was that we talked about at the end of the year. Obviously, we'll need to see how the quarters continue to go forward and how governments react, but I think that would be our view currently.

Okay, thanks. I'll turn it over.

Thank you.

Our next question comes from Mark Neville of Scotiabank. Please go ahead.

Good afternoon, guys. Nice to see all the hard work going on. Maybe on the – just a few follow-up questions, actually. On the sale of the oil and gas business, I'm less concerned about the timelines, but I'm just curious, is there any significant hurdles or risk or milestones that we need to be aware of before this gets done?

No, it's Jeff here. Maybe I'll add a bit of color to that. I think our view on that is no. As Ian was alluding to earlier in terms of what we said back on February 9th as well, there are clearly a number of hurdles regulatory-wise and filing-wise in particular, not to mention the actual operational work that we do to carve the business out. But I think our view would be all of that remains – on track um and while it's a lot of work we you know we haven't seen any particular you know red flag or you know or issue that um you know that we hadn't anticipated before so i think it's mostly about you know the amount of time and we continue to target you know, the end of Q2. But as Ian said, part of that in terms of those regulatory filings aren't completely within our gift, you know, so to the extent that because of COVID or otherwise it takes a little longer, you know, that could slip. But we and the buyer are highly focused on trying to do this, you know, during the quarter.

Okay. In terms of the cash flow, I appreciate the lumpiness within projects, but Is there a period of time where these cease being uses of tasks, or is it going to be quarter to quarter, you know, kind of this lumpiness?

Yeah, I think it – I mean, I think it will continue a bit lumpy here, probably through – certainly through 2021. Now, obviously – the more we reduce the backlog, as more as effectively, you know, the remaining work narrows and, you know, and gets lower and lower, then naturally, you know, in a sense, the lumpiness of the variability quarter by quarter is likely to, you know, to narrow as well. I think Q1 was, in our view, you know, at probably the extreme end of what we would normally see in terms of lumpiness and I think going forward, while it may remain lumpy, I think we wouldn't consider Q1 to be typical of the variability to that extent. I think Q1 was a bit unique.

Maybe just on the real estate comments for the question, I appreciate sort of the flexible work arrangement, but it just wasn't clear to me. Do you think there's going to be an opportunity to flank your footprint in a material way or no?

Yeah. I mean, we have a plan. I mean, we have a definitive plan of moving our offices to a higher density. I mean, our model office for density is actually our London office in Victoria. And, you know, it's a really good office. You know, there's flexible working conditions. And, you know, it's hot desking or service seat kind of approach. And it works really well. The employees love it because it's a lot more collaborative. It's a lot denser and, therefore, it's less expensive than the offices we've got around the world. Now, like I said, we've been at this for a couple of years. So it predates COVID. And we've been executing on that plan as leases have come up. And as we've looked to, you know, renew leases and as we've looked to kind of replace offices, we look to go to this model where there's a lot higher density. And to some extent, you know, COVID has accelerated that. Now, you know, it obviously will have some impact on the SG&A, but it's in the whole scheme of things, you know, it's not like grossly significant. I wouldn't put it that way, Jeff, would you?

Sorry, I was on mute. No, I would agree with that. I mean, we have seen savings, we'll continue to see savings in 2021, and we would expect to see savings going forward in terms of the, you know, the multi-year plan we have around our office footprint. So it's, you know, it's a good source of, you know, future cost savings, but as Ian said, you know, it's not, you know, it's not earth shattering in its size.

But, I mean, the real benefit is the employee experience. We've got such positive feedback from our employees. And, you know, we're all going to have to compete for talent. So, you know, these things are really important.

Great. All right. Thanks for that, and congrats again.

Thank you. Yeah, thanks.

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

Hi, good afternoon, gentlemen. Hi, Nelson. Good afternoon. Just a couple of very quick cleanups for me, if I may. I don't know if in the past we discussed this topic, but, you know, obviously the peers present, you know, their revenue on a gross and net basis. And I'm just wondering if at some point you guys thought about sort of harmonizing with that presentation so that – you know, investors can actually see the implied kind of clean EBITDA margin for the business. Or, yeah, maybe any thoughts on that front if it's possible.

Yeah, maybe it's Jeff. Maybe I'll take that, Max. It is something we are aware of, and it is something that we are looking at. You know, we think the – the EBIT to gross revenue metric we have is a good one. You know, not the least of which is, you know, we effectively take risk and profit risk on the gross cost of the project, not just the net cost in a sense. But however, you know, we are looking at a net revenue to EBIT.number as well. And again, you know, would potentially come back, you know, later in the day, you know, around the investor day, you know, might be the right time as we start to think about, you know, multi-year, you know, financial metrics and targets, how that might play into it.

Right. Okay. No, because, yeah, I think that would be obviously helpful because, you know, everybody's, like, talking about, like, 15%, 16%, so... Yeah. Different ballpark. And one... Quick question on the free cash flow slide on page 15. The leases, are they in the consolidated free cash flow, or do I have to adjust for those?

Well, you'd have to, in a sense, the kind of interest component is in the operating cash flow. Effectively, the principal element is not. It's a financing cash flow, and that's where we'd hold it. Right.

Yeah. Okay. No. So it's not adjusted there for the second part. Yeah. Okay. Okay. That's it for me. Thank you very much. Thank you.

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

Thank you very much, Yvonne, for joining us today. If you have any more questions, please don't hesitate to contact me. I wish you a good afternoon and a very nice weekend, and stay safe. 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.