AtkinsRéalis Group Inc.

Thank you for standing by. This is the conference operator. Good morning and welcome to SNC-Lavalin's second quarter 2021 conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Denis Jesmin, Vice President, Investor Relations. Please go ahead.

Thank you, Aria. Good morning, everyone, and we appreciate you joining the call. A Q2 earnings announcement was released this morning, and we have posted a corresponding slide presentation on the investor 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 and our website. Management believes that these non-RFRS 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?

Thank you, Denis, and good morning, everyone. Starting on slide four, we're pleased to have delivered a strong second quarter, and combined with the first quarter's performance, have reported solid results for the first half of 2021, and we remain on track to meet our 2021 outlook. SNCL Engineering Services delivered another robust performance with segment-adjusted EBIT growth and strong profitability across all three segments. Our LSTK projects continue to progress well, and discussions with our clients on compensation for the additional costs related to COVID-19 impacts have been constructive. Also, today, we've announced the substantial close of the sale of our oil and gas business. This represents an important strategic milestone for the company. Quarterly performance was driven primarily by engineering services, which generated revenues of $1.5 billion, an increase of 2.4% on Q2 last year. Excluding the impacts of foreign currency, we saw robust organic growth of 6.8%. Segment-adjusted EBIT increased 9.5 percent, resulting in an adjusted EBIT margin of 9.6 percent. Backlog also remains robust at $11.1 billion, with a $1.5 billion in new bookings in the quarter, up 1.1 percent over the prior year. In SNCL projects, the LSDK contracts backlog reduced by approximately $200 million bringing the remaining backlog down to $1.4 billion. In summary, having delivered a solid second quarter, our first half 21 performance shows that our strategic initiatives to transform this company are generating results. Now let me share with you the progress we've been making in each of our strategic initiatives, and I'm on slide five. First, As I mentioned before, we've achieved the substantial close of the oil and gas business, a significant step forward in our transformation. The transaction has received all regulatory approvals except for one jurisdiction, Saudi Arabia, which is expected towards the end of Q3. Secondly, we have been successfully running off the LFTK projects, where the backlog has fallen from $3.4 billion in June 2019 to just $1.4 billion in June 21, over 58% since we launched our transformation plan. Third is driving consistent financial performance within engineering services. In the first half of this year, revenue has grown year on year. EBIT margins are in the upper half of our target levels. Operating cash flow was $275 million and we see a robust pipeline that gives us confidence in the continued performance going forward. Fourth, we are focused on building a connected, collaborative organization. We see significant opportunity to leverage our capabilities and product offerings more broadly across our core markets. Our world-class global technology center in India and growing digital capabilities allow us to deliver for our customers across all time zones and geographies, while providing an attractive set of professional development opportunities to retain our employees and attract new talent. Finally, we continue to transform and align S&C Leveling with two fundamental growth trends, where we have clear capabilities and a compelling value proposition. One is climate change, and the other is digital transformation. On climate change, Governments around the world, including Canada, are increasingly enacting regulations around achieving net zero carbon. We are well positioned to be a leader in engineering a sustainable society with our engineering net zero initiative and providing clean and affordable solutions to our clients. As governments in our core geographies continue to prioritize infrastructure spending, we see significant opportunity for S&C Labeling in the months and years ahead. With respect to our digital transformation, we continue to leverage our digital expertise and invest in further fortifying our capabilities in this space. Digital is an enabler for all we do and a way to differentiate our core services. And it focuses on design transformation, program management, digital twinning, and provides the infrastructure and services required for a globally connected and data-driven engineering business. Turning to slide six and an update on our sustainability strategy, we have proactively positioned ourselves to be a leader in engineering a sustainable society, and we have been growing our portfolio work in this area. A great example of this is our recent award from the UK government where we will be ensuring that over four million square feet of public sector office space meets enhanced sustainability standards as part of a UK government investment to accelerate its net zero agenda. In May, we also communicated our goal of being net zero carbon by 2030. Next, I'd like to move on to our business lines, starting with slide seven and the results for EDPM. EDPM generated revenues of $935 million, broadly flat to the same quarter last year. However, excluding the impact of foreign exchange, revenue growth was up 5.3%, driven by strength in our UK, Middle East, and US businesses. Segment-adjusted EBIT of $85 million increased 8.5%, resulting in a 9.1% EBIT margin. Backlog grew 12% to just over $3 billion, a record high for EDPM, driven by major wins in the UK, Middle East, and Australia, where we recently logged a major award supporting the Sydney Metro project. We see this as a key step to realizing our growth ambitions in Australia. Additional awards included rail, road, transportation, and solar projects, and looking ahead, the pipeline remains strong at $27 billion. Turning to slide eight, nuclear segment increased 6.1% on a reported basis and 9.6% on a constant currency basis. Growth was driven by increased support of assets for North America and European clients. Canada showed particular strength as we saw increased demand for our engineering field services. Segment adjusted EBIT of $33 million increased 7.5% over the prior year, resulting in 14.2% margin. Profit improvement was driven primarily across the US, Canada, and Europe, partially offset by a reduction in Asia Pacific. We continue to see several significant opportunities and growth catalysts on the horizon. These include continued demand for reactor support, can-do refurbishments and decommissioning, intensified tendering by the US Department of Energy for environmental management work, as well as continued momentum in the UK. We also see opportunities for new bill work and decommissioning activities within Canada, the US, and the UK. A key component to our continued success is our nuclear products and technology, which is a portfolio of physical software and licensing rights for the nuclear reactor designs and operational support licenses, as well as waste management reduction and process technologies. Our capabilities are differentiated, and in many cases, unique, enabling us to secure contracts like the expansion for medical isotope extraction at our overage facility. Moving to slide nine, an infrastructure services, the segment had a solid quarter with revenues of $334 million. representing growth of 6.3% compared to Q2 2020. On a constant currency basis, revenue increased by 9.2%, driven by increased levels of activity in links on because of significant new orders in the U.S. and the EMEA region. Segment-adjusted EBIT of $26 million increased 15.8% and resulted in an EBIT margin of 7.9%. We remain very optimistic about the numerous opportunities ahead, including growth in renewables such as wind, solar, and hydro, as well as data centers, rail and transit, and social infrastructures in the Americas and Europe. Turning to slide 10 and capital, the segment continued to be impacted by COVID restrictions in Ontario, which has resulted in reduced traffic volume on Highway 407 ETR, As a result, there was no dividend payment in the quarter. However, we do see increased volumes as a result of easing restrictions that really started in earnest at the end of June, and we remain optimistic for increasing traffic volumes over the short to medium term as more people return to offices. Our other concessions continue to perform well, And looking ahead, we are building a 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 water treatment and hospital space. Moving to slide 11 and the infrastructure EPC projects, we continue to make good progress reducing the LSTK construction backlog. Comprising three Canadian LRT projects, this portfolio's backlog is down 45% versus a year ago and down 13% since the end of Q1. The segment recorded an adjusted segment EBIT loss for the quarter of $22 million compared to a loss of $19 million a year ago. We are also proactively monitoring potential macroeconomic challenges including potential inflationary pressures on labor and materials, supply chain issues, and labor constraints. While we have not seen any material impact on our LSTK project so far, we are tracking these very closely. Turning to slide 12 in the resources segment, we continue to target full completion of the sale of our oil and gas business by the end of Q3. Our mining and metal services business is performing well. we are seeing growth in revenue and profitability driven primarily by increased demand for the materials used in clean energy storage, including electric vehicles. With that, I'll now turn the call over to Jeff.

Thank you, Ian, and good morning, everyone. Turning to slide 14, total revenues for the quarter increased by 8% to $1.8 billion compared to Q2 2020. SNCL engineering services revenue was higher by 2.4%, in line with our outlook range for the year. SNCL projects revenue was higher by 62%, as the comparator period in 2020 was impacted by a temporary shutdown on some projects due to the initial wave of the COVID-19 pandemic and a client dispute in resources. Segment adjusted EBIT for the quarter was $140 million, which was comprised of $145 million for SNCL engineering services, $16 million for capital, and negative $21 million for SNCL projects. This latter negative EBIT was mainly due to the infrastructure EPC project segment, which had a loss in the quarter due to reduced gross margin, including the ongoing impacts of COVID-19 and closeout costs on certain projects. Corporate SG&A expenses totaled $27 million in the quarter, in line with our expectations. On a year-to-date basis, corporate SG&A expenses totaled $43 million, lower than we expected, mainly due to a slower phasing of our digital spending program, which we now expect to be weighted to the second half of the year. The adjusted net income from PS&PM was $54 million, or $0.31 per diluted share, representing a significant improvement compared with Q2 2020. Note that the effective income tax rate related to the adjusted PS and PM net income was higher this quarter at about 33% compared to our normal range of 20 to 25%. This was mainly due to one-time adjustments related to the revised estimate on certain income tax liabilities and the impact of the enacted UK tax rate changes on deferred income tax balances. Backlog ended the quarter at $13 billion compared to $13.8 billion last year primarily due to the continued runoff of the LSTK construction contracts backlog, which totaled $1.2 billion over that period. SNCL engineering services backlog, on the other hand, increased by 1% during the same period, with an increase of 12% in the EDPM segment, totaling a record high of $3 billion at the end of June 2021. In nuclear, backlog decreased by 17% over the last 12 months, mainly due to the progress on the company's long-term refurbishment contracts in Canada. As for infrastructure services, the backlog remained solid at $7.2 billion in line with the end of June 2020, and continued client deliveries and strong contract wins over the last 12 months, particularly in Lynxon. Turning to slide 15 and the balance sheet, Our day sales outstanding continued to improve, reaching 58 days at the end of the quarter for EDPM, a 13-day improvement as compared to Q2 2020. This improvement is mainly the result of our continued focus on cash collection and early government payment programs related to COVID-19. The strong operating cash flow attributes of SNCL Engineering Services are expected to be partially offset by our return to a more normalized DSO level in the second half of the year. At the end of June 2021, the company had $663 million in cash. 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 16, net cash generated from operating activities was $78 million in Q2 2021, compared to $130 million in Q2 2020. SNCL Engineering Services continued to generate strong cash flow from operations with $157 million in the quarter due to strong EBIT conversion and a low DSO in the EDPM segment, while capital generated $4 million. After cash taxes, interest, and corporate items, you can see that we generated $102 million of operating cash flow in the quarter. SNCL projects had an operating cash flow usage of $27 million, while discontinued operations contributed $3 million. 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. Regarding capital allocation priorities, we are primarily focused on reinvesting in our core portfolio. and we look forward to communicating more details on our capital allocation plans at the upcoming Investor Day. And finally, turning to slide 17 in our 2021 outlook. As it pertains to 2021 outlook, we are reaffirming our SNCL Engineering Services revenue expectation of low single-digit percentage growth year-on-year, including the impact of a weaker U.S. dollar. And we are maintaining our SNCL Engineering Services segment-adjusted EBIT margin outlook of 8% to 10%, We also continue to target the same long-term EBIT margin percentages for each segment. This concludes my presentation, and I'll now hand back to Ian. Thanks, Jeff.

Turning to slide 19, I'd like to conclude my remarks with a few key takeaways. We continue to execute on our transformation strategy with a focus on two main priorities, to de-risk our portfolio and accelerate growth in engineering services. On our first priority, we continue to make consistent progress on unwinding the LSTK backlog, while the substantial close of the oil and gas business represents a significant strategic milestone in our transformation. On our second priority, we are seeing a strong pipeline of new business opportunities across all our core markets as governments invest in new infrastructure and sustainability initiatives. We are pleased with the strong performance of the first half of the year, and we remain focused on executing our strategy. We look forward to sharing more about our vision for the future and our growth opportunities at our upcoming Investor Day in September. And lastly, I'd like to thank all our employees around the world for their ingenuity and their continued dedication to the company. Thank you. I'll now open the call for 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. Once again, to join the question queue, please press star then 1 now. Our first question comes from Jacob Bout of CIBC. Please go ahead.

Good morning. Good morning. First question is just on your 8% to 10% margin guidance. If we look at what happened in the first half of the year, over 9%, and considering seasonality, where second half margins stronger than first half, you know, is it more likely you're going to be at the higher end of that or how should we be thinking about that?

Yeah, I mean, clearly it's been a good first half of the year. We're pleased with the first half of the year and from a, you know, from a specific profitability perspective, I think that's a fair takeaway. We're not about to change the range as we've reaffirmed in this quarter, but I think that's a fair takeaway and And clearly, we're pushing as hard as we can to make sure we stay at that level and push to the higher end of the range.

And then how about your thoughts on discretionary SG&E increase in expenses as employees head back to work and labor cost inflation?

Yeah, it's Jeff Jacob. I mean, maybe I'll take that one. I mean, I think, as you saw from a corporate SG&A expense perspective, a bit of phasing, particularly around our digital transformation and spend program. So we do expect a bit more of that in the second half of the year than the first half of the year. But I think that's just phasing. Expect the overall of the year to be in line with our expectations. I think so far, more generally, we haven't seen a lot of labor inflation. Attrition has started to come back up, I would say, to more kind of pre-COVID levels. But as I think you heard Ian say, we continue to think we've got a really attractive business and opportunity for employees to be a part of. And I think at this point, that's absolutely turning out to be true from an attraction and retention perspective. And we'll keep our eye closely on labor inflation and materials inflation. But so far, all that's been manageable.

That's my two. Thank you.

Thanks, Jacob. Thank you.

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

Hey, good morning, guys. Yeah, good morning, Yuri. Good morning. Ian, were you surprised by the delay in getting approval in Saudi Arabia for the sale of the oil and gas business?

No, I don't think surprised. I mean, obviously, these things are a process. We went through a process which needs certain specific submissions, which we've completed. But through the process of those submissions, there's always a bit of to and fro and clarification and update of further information. But we're at a point now where they've confirmed they've got all the need. So it's really a question now of just process and and getting the response. So it's not something we can really influence. I mean, it's regulatory. It's a government process. So pretty confident now, having answered all the questions, that we will see that within Q3. So pretty confident that's going to come through soon.

Okay. And this is just... in this to and fro, it's just a clarification issues or the terms of the sale agreement changing in any way?

No, not at all. Not at all. It literally, you know, regulatory bureaucracy, more documents, more clarification, that kind of thing. But I think the key point that I would make is they have confirmed they've got everything they need and they're satisfied with what they've got. So, Like I said, we're confident we're at the right place. Just got to wait now to get the response back.

Okay. For my second question, I'd just like to shift to the projects segment. Sorry, would you just speak up a little bit? Sorry. Okay. Can you hear me better now? Yeah, yeah. Much better. Yeah. Thank you. Okay. Thank you. When you talk about operating cash flow being break even for the year, Does that anticipate any recapture of additional costs that you're talking about with your clients on COVID?

So, Jeff, why don't I take that one? I think within it, and you will have seen in my statement that we are expecting just the way DSO is within engineering services, some of that to start to normalize in the second half of the year. We are expecting to see continued cash usage in S&CL projects, and therefore, we're not anticipating much in terms of additional monies back related to COVID. We've got a bit in there, but not a lot. And all of that is just recognizing that the discussions, which are constructive and are ongoing, often take time. If we can close those out before the end of the year, great. But if that needs to sort of fall into the beginning of next year, we've stayed that way.

Okay. I'll turn it over. Thanks. Thank you.

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

Yeah, good morning, everyone. Good morning. With respect to this segment, EBIT loss for SNCL project in the quarter, could you maybe provide more color about what drove the cost for closing out certain projects and whether this is something we might see as you run down the three other infrastructure projects?

Yeah, thanks, Benoit, for sure. I mean... I think the first point I'd make is projects are going well. We've got some strong execution on these last three jobs in Canada. I mean, as you saw, you know, the backlog for the Canadian projects is down to 1.3. So 200 million reduction in the quarter. So I think you can appreciate that COVID is still affecting these three jobs. I mean, you know, we've said in the past that productivity is affected and on different activities anything in the range of 15 to 25 percent and unfortunately as the the pandemic you know is still evident that's still the case um we we might see uh some inflation through labor and materials we're not seeing that yet there could be some post-pandemic so it's it's i think the message i'm trying to send here is we're not through the pandemic yet and and Obviously, we're very hopeful that in the fall, certainly as we go through Q3, Q4, everything's going to get back to normal and we're going to execute back to normal productivity levels. That's what we're expecting. So, I mean, specifically, the loss is really a combination of COVID and overhead. I mean, obviously, we're carrying an overhead to execute the closure of these three jobs and indeed just tidying up everything else from the the exited business line of LSTK. So that's really where that comes from. Benoit. Okay.

And for my second question, looking at operating cash flow, Jeff provides some great color about the expectation for the second half, the normalized DSOs and also the use of cash for certain LSTK projects. Beyond 2021, could you talk a bit about the use of cash, whether it will reverse in the positive territory for the remaining LSDK project, how we should be thinking beyond 2021 with respect to the use of cash for LSDK projects? Thank you.

Yeah, happy to take that, Benoit, Jeff. I think what we'd say is, and we continue to be of the view that over you know, the life of infrastructure projects as a portfolio for the remaining projects. We expect them to be cash flow neutral, you know, maybe slightly positive. That'll clearly, you know, vary, you know, period to period and year by year as we've talked about. So, I think we, you know, clearly would intend to see post-2021 a more normalization of that. I think it's, frankly, too early and we'll talk a bit more at the investor day about how we see cash flow post 2021 and our thoughts around that. But I think I'd leave our outlook and statements largely the way we've talked about them previously.

Okay. Thank you very much for the thought. Thank you.

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

Thanks, folks. Good morning. Jeff, maybe you want to take this one. But just, you know, you did start calling out currency as a bit of an issue in terms of revenue growth just the other year. So I guess a couple questions on this, just to confirm, you know, one, this is just really a translation impact. There's no real FX risk in this. And then two, you know, just trying to understand and making sure I understand the mix of currencies that impact you in the different segments so we can maybe try to forecast this a little better on a go-forward basis?

Sure. Yeah, Chris, happy to. I think my first observation would be it's absolutely been the difference between the strength of the Canadian and U.S. dollar that's impacted Q2. We saw a fairly significant move in that with Canadian dollar strengthening, as I'm sure you're aware, back in sort of April, early May. And so it was just to call out the point. Effectively, our reported results are in line with our guidance around revenue outlook, low single-digit. But the reality was that if currencies had stayed constant to the previous year from an underlying organic growth in local currency, the organic growth was stronger. It was more in the mid-single-digit range. So I was just calling that out. The two currencies primarily that affect us are the U.S. dollar to the Canadian dollar and the British pound to the dollar. Those are the two largest ones by far. The rest are fairly minor. It's really those two.

Okay. No, that's fair. And it all really is just translation. There's no material balance. Okay, great. No, absolutely. Okay. And then just my other question for you, just going back to the capital business maybe for a second. In the quarter, I saw a bit of a sizable step up in the book value of the capital business. Just wondering if there's any kind of additional color you can give us on what actually resulted in what looks like about a $60 million plus increase in the net assets of the capital portfolio.

Yeah, I think that's just related to a couple of things, Chris. One is around some investments that we make as part of some of our joint venture investment, and it really just has to do with the point at which we're moving capital into those investments in terms of our cash flows. So I wouldn't call anything out there in particular, just a bit of the normal movement in terms of how we account for those investments.

Okay, fair enough. All right, folks, that's my questions. Thank you very much. Thanks. Thank you.

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

Hi, good morning, everybody. A quick question on sort of your business development approach. I mean, the Metro Sydney Award shows that you're still able to participate in very large-scale projects, but without taking on due risk. So I was wondering, what are you telling clients differently than you were perhaps two years ago that is convincing them to give you a shot at these projects and your ability to perhaps team up with

local domestic contractors to pursue the work so how fundamentally have you changed your approach to uh you know to to um bidding on these jobs yeah very fundamentally changed and and the first thing i'd say is we're very very clear that we're we're out of lftk contracting i mean and and and making that clear uh to our customers globally um and we're not alone i mean a lot of our peers have indicated similar strategies, maybe not as definitive as ours, but certainly indicated similar strategies. I think the laws of supply and demand are such that our customers are having to find new ways to develop and build their infrastructure. And we're seeing a change in the way that that procurement is being undertaken. And we're seeing a change significant enough, I think, to fuel the growth demands that we have such that we can be selective. And we're working on kind of numerous prospects in Canada, the UK, and Australia where we're seeing this type of collaborative, you know, non-fixed price style of delivering major projects. is evident. So we're really optimistic about building our capability from the past where we used to deliver LSDK projects to delivering collaborative projects with our customers. So very, very optimistic about that kind of part of our business future.

Thanks, Ian. And then secondly, We're seeing good progress in the U.S. with respect to Congress potentially approving an infrastructure bill in some shape or form. So can you remind me how well positioned you are to potentially participate in any future work related to this stimulus bill?

Yeah, for sure. when we acquired Atkins, one of the, you know, very attractive parts of that acquisition was the, the, the start that made on growth in the U S and we've been able to continue the organic, um, growth of that growth in the U S and it's been very, very successful in very specific States, such as Florida, Georgia, North Carolina, Texas, Colorado, Nevada. And recently, in our strategic planning, we've identified the white space areas, which are primarily northeast, northwest, California. And we started opening offices. And we have an organic approach to building more capacity and building more connectivity to the states. That's going well for us. And we would also... clearly will add to that through inorganic growth, and we'll give a bit more flavor around that in our investor day. But it's a very key part of our strategy for growth. And what we're seeing, obviously, even without the Biden trillion dollars, what we're seeing is good opportunities, a good pipeline, and strong growth areas without the trillion dollar. Because the trillion dollar is additional. I mean, once this bill is passed, that's additional funding that we're going to see flow through in 22 and 23 and beyond. So very, very key to our future, and I think we're really well positioned for it. Thank you very much.

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

Great. Thanks, and good morning. I guess I want to talk a little bit about the infrastructure services segment. It's a bit smaller, and we don't talk about it a lot, but it seems to have done quite well through H1. Can you maybe talk about just the opportunities set there, the kind of work you're doing, and is it just a lot of opportunity out there in that segment? Just some commentary there, please. Yeah, for sure, for sure.

I mean, it's really – you could think about the segment in three parts. There's the Links on Par, which is this joint venture with ABB that does substation and transmission distribution work. It has the O&M business in it, which are the very, very long-term Canadian O&M contracts, primarily one through the PPP market. And we have services part of really all these legacy S&C levelings, such as Hydro, and clean energy and industrial. So when you think about those three components, they're pretty buoyant end markets all around. And the key in our growth strategy going forward is really to take those beyond Canada and think about where we can position those capabilities in the US and the UK. So very strong growth strategy. specifically in the first half of the year out of LinksOn. We've seen some good wins in the LinksOn business. And we're seeing from the services side in certainly the hydro market and the clean energy side of power, quite a strong demand there too. So good capabilities that gives us this platform for growth in the future.

Great. And then just a second, I want to talk a little bit about the backlog and particularly the nuclear backlog. Maybe a two-parter there, I guess. Can you maybe comment on the opportunities out there as you kind of wind down the existing work? What kind of work you're looking at? And then just the second part, we've talked a little bit in the past about how nuclear fits into kind of the future of clean energy. Should we expect that until that debate is settled, more of the work in your backlog will come from cleanup and remediation? Just kind of a look on that side, please.

Yeah, yeah. Okay. And I think the answer is basically yes. Very many components to our nuclear business. And that's obviously the key strength in the fact that we've got a diverse range of capabilities. But if we try and think about it, probably in three parts, what one is environmental, so cleaning up nuclear waste and decommissioned power plants, which about 40% of the business. Very, very strong pipeline ahead, both in the UK, the US, and to some extent in Canada. Very strong Department of Energy in the US. Lots of opportunity where we're already supplying that service. Again, in the UK, in Sellafield and the cleanup through there. So probably one of the key growth drivers in the short term. Another component is basically life extension to reactors or new-build reactors. Obviously in Canada, with OPG and Bruce, we have successful business with them on the extension of their nuclear plants. Those contracts are going well. They're a bit lumpy, frankly, because they're big contracts. When they get awarded, they're big jobs. It adds a lot to the backlog. and then obviously it takes a long time to burn that backlog off. UK new market, very, very important to our future. We're very prevalent in Hinkley in a design and technical services capacity with almost 700 engineers on that job. And interesting to see what happens next. Sizewell is the next one. The government does have a nuclear program there. They're fairly committed to it for clean energy. Obviously, something we'd like to see across the globe, but other countries are kind of sitting on the fence at the moment with that. And then we've got all of the third leg to the business, which is really all of the reactor support, the technology, even that little component I threw into the presentation, where we actually have the technology to extract medical isotopes from nuclear waste, which are used in the medical sector. So, you know, very interesting from a technical perspective and book and burn type work. So we're really bullish on the nuclear sector, not all dependent on seeing new builds, a lot of opportunity, even just what we see, you know, as nuclear status quo.

Great. Thanks very much. Thank you. Thank you.

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

All right. Thanks. Just give me a couple questions on the EDPM segment. The MD&A mentioned settling a number of project final accounts in Q2. Just can you provide some color there on how meaningful those closeouts were? I think we recognize that these can occur from time to time. I'm just trying to get a sense. if the margin performance in the quarter was sustainable or if 12 months from now, we'll be talking about EDPM having, you know, a difficult margin comp.

Yeah, Jeff, why don't I take that one, Devin? So, yes, you're absolutely right. As part of EDPM, there are, you know, true ups and settlements of different projects as they close out, both on the positive and negative side. On the positive side, It was effectively something that was in the sort of $10 million range in and of itself. But I would say there were a couple going the other way. So the net impact of the positive contract closeout versus a couple of small ones, you know, was kind of low, you know, single million. So I think from a comp perspective, as we move forward, I think it'll be fine. And I think the results themselves reflect well the underlying operating performance of the business, you know, notwithstanding at the margin, there's a few ups and downs.

Okay. Okay. That's good color. Okay. The second question on EDPM, look, I was a bit surprised to see some restructuring costs in the EDPM business in Q2. I think it was, you know, in the $9 to $10 million range. Can you provide some color on the nature of those restructuring charges?

Sure. Yeah. So as a part of continuing to bring What was effectively the Atkins business and the SNCL business together, particularly in Canada, we've looked to streamline the organization, have it very focused, and redesign how it goes to market so that it's well set up to drive growth. And as a result of that, we've also taken out some spans and layers and layers of management to streamline the organization that way. And so what you're seeing there are primarily severance costs related to doing that.

Okay. Okay. Thanks for that. I'll turn it over. Okay. Thank you.

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

Thank you. A bit of a follow-up question on the nuclear segment further to some of the comments you made earlier in the call on that segment. So another quarter with solid performance in nuclear. And you sound quite positive on nuclear's outlook. I'm just wondering, though, the backlog in nuclear, it's been coming down for the last six quarters or so. And I know, Ian, you just mentioned a moment ago that it can be lumpy, particularly in the life extension work. But I'm just wondering if we look at that segment, do we need to see the backlog start to turn higher relatively soon to sustain the kind of performance you've been delivering in nuclear? Or can you maintain what you've been doing without necessarily seeing any kind of a near-term uptick in backlog?

I think the answer is both, really. Because the parts of the business are quite different. I mean, there is a book and burn element to this, which is short cycle you know we we win those band-aids we execute them quite quickly and you won't see a particular you know build up a backlog it's going to be fairly consistent however if you think then about the the longer term contracts which are both in cleanup and in canada um for example on bruce you know, the reactors there are issued one by one. I mean, we have an option that is an optionable bump both ways for the client and ourselves for reactors two, three, four in the series. We're working on the first reactor, but that's not in the backlog. So we're currently negotiating the second one. We would hope to secure that. That will go into the backlog, and you'll see a bump. Similarly, these big jobs in the U.S., and they are, you know, multi-billion dollar projects in the u.s for cleanup um when we award one of those you again you'll see a you know you know you'll see a significant bump in the backlog so i think the most important thing for me is the the strength of the pipeline i mean and and you know the barriers to entry i mean there's limited competition here because the you know the barrier to entry having the technical capability is quite high hence its profitability is high, and the pipeline is strong. So I'm not worried. I'm really kind of optimistic about the future.

Okay, that's helpful. And just in terms of tracking this going forward and having these opportunities in the pipeline translate into awards and seeing an upturn in the backlog, do you have some visibility on that? Is that something we should look for over coming quarters, or are these longer-term opportunities that could take longer to materialize?

Yeah. I mean, and if you, if you think back to the, you know, the specific investor, um, day that we had in the nuclear facility, we try to give a bit more transparency around that pipeline and we'll do that again in the investor day. We'll, we'll, we'll show a bit more of the, of the pipeline and the difference kind of components of this sector.

Okay. That's helpful. And then in terms of the, uh, my second question on the EDPM business, um, good reported year-over-year revenue growth and even better on a constant currency basis. You've talked a fair bit about your views around regionally where you're seeing strength, but I'm wondering from an end market or sector perspective, can you speak a little bit about that and which areas are driving that growth and maybe which areas you know, are lagging in terms of the sector and market.

Yeah.

Yeah. Yeah.

I mean, and it is a varied picture. For ourselves, the U.S. is a key, key growth market for us. And our business in the U.S. is really road and bridge, rail and buildings. And, you know, all of those components are strong state by state. um we're only in a handful of states so the the growth for us there is let's keep doing the same thing let's take it to more states expand our geography we're seeing very very strong um growth in the uk and a lot of that growth currently is coming from new business i mean and obviously we're very you know we're we're We're almost the market leader in terms of rail and transit and road. So we've been looking at digital work. We've been looking at how we sell our digital capability. We're bringing in new revenues from our digital capability. And we're bringing in revenues such as the government property agency work, which is using our knowledge of buildings, using our O&M knowledge, using our digital capability to apply it to buildings net zero and and that that's a almost like um you know a flagship project for us because we're actually helping the uk government bring down the carbon footprint of the the national government buildings and and that's by you know analysis consultancy it's by bringing our design and technical and operation capability all to the client to do that so so so So I think there's two things there. I mean, geographical growth in the U.S. and then bringing more digital and technology capability to the needs of our customers. That's probably a flavor. I mean, markets that are not buoyant, they're pretty obvious, you know, like aviation. We're obviously seeing a contraction in the aviation. Apart from that, you know, we're focused on our core geographies, you know, which is the UK, Canada, the US.

Okay, that's helpful. Thank you.

Thank you.

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

Hi, good morning. I just wanted to start with a kind of high-level question. You mentioned digital services as something that you are trying to grow. Do you mind maybe providing a bit more flavor in terms of how material this business is and the kind of the go-to-market strategy, whether it's dramatically different versus kind of the typical RFP thing that you do? So maybe any color on that business, please.

So I think about it in two ways. So the first way is complementing our capability with digital tools. So in other words, being more efficient and effective in the services we offer our customers by bringing our design, our consultancy, our delivery, and our commissioning and operation and maintenance expertise to a digital level where we can differentiate how customers see our capability. So that's an important part of our digital strategy. And digital twinning, as you might have heard me say before, is pretty key to that. So we can actually simulate everything for a customer before he actually sees it being built or before he sees it being developed. That's an important part. And our global technology center in India with 3,000 really smart people in it, that's supporting our businesses globally. It's also a key part. That for us is not a back office. It's a very, very advanced technology center with great capability on the digital side. So that's one half of it. The other half is really placed to what I was just talking about, which is new business. It's actually... you know, offering our customers something which is untraditional for ourselves in digital technology. And, you know, an example would be, you know, the modeling of the buildings to bring the carbon footprint back down. And another example of that would be we've been a preferred supplier to Heathrow for quite a long time now, helping them install biometrics across the whole airport and digital tracing of people within the airport to reduce queueing times. And we worked alongside the client to actually, with a technology provider, to project manage that, implement it, understand. So the whole thing really is getting ahead of what our customers want and being able to offer what our customers are looking for ahead of our peer group. That's the way I see it.

Right. Is it high margin business, Ian? Or is it similar?

Currently, I think it complements the margin range that we put out for EDPM. I think over a period of time, if we truly differentiate ourselves, I think we'd have to keep observing that. But we're not about to change the range right now.

Okay, fair enough. And then I have a couple of quick ones for Jeff, if I may. Tax rate was pretty high in Q2, I think it was 41%. How should we think about the rest of the year and for the entirety of the year in terms of the tax rate?

Yeah, so as I said, there were a couple of one-off items in there, which increased the effective tax rate in Q2. I wouldn't expect that to continue in the second half of the year. I'd expect us to be back more in our normal range of 20% to 25%. So I think if you then look at from a full-year basis, Max, It may be towards the top end of our normal 20% to 25% range, but we wouldn't expect Q2 to continue. It was a one-off related to kind of one-time items.

Okay, that's helpful. And then in terms of you collected a government grant in Q2, in Q3 we should expect nothing. Is that a fair assessment?

Yeah, I mean... The government grants that we disclose are global, and there is a bit outside Canada as well. The majority of it is in Canada, and we would expect, as you say, to see very little of that either in Canada or globally in Q3 and going forward. Most countries are winding down those programs.

Okay, that's great. Thank you so much for clarifying. Thank you. Thank you.

Our next question comes from Troy Sun of LBS. Please go ahead.

Good morning, gentlemen. Thanks for taking my question. I'm just wondering, I wanted to go back to the nuclear segment here for a little bit. I'm very intrigued by some of the technology offerings that Ian discussed early on in the call. Just wondering if you can provide some more specific applications on those programs and any early feedback from the client side I'm just trying to understand whether these offerings are specific to individual reactors or they can potentially become transferable to other sites as well.

Well, maybe, yeah, thank you. Maybe the easiest way for me here is to give you an example. So we own the technology and developed technology for vitrifying nuclear waste, and in simple terms, It's a process to put large volumes of nuclear waste into glass, into small glass volumes. I mean, I wouldn't pretend to understand the technology myself, but in simple terms, that's what it is. Now, we currently offer that to the Department of Energy in the U.S., and we actually have, you know, facilities that we've installed in old nuclear facilities to do that. And those, you know, small glass then go into long-term storage. We are currently in advanced conversations in the UK for the nuclear storage facility in the UK in Sellafield to do just that. So to transfer that capability and technology to another customer. And that's obviously a key kind of strand to the nuclear business. And as I said, it's in three components. You know, technology, reactor and vendor support and having the can-do technology is one strand. The life extension new build is another strand. And then the decommissioning and nuclear environmental management and cleanup is another strand. And, you know, I mean, the basis of all of these is our capability and our nuclear capability that we've developed recently. over many, many years, both in Ethnically Loveland and Atkins. So for me, it's a key capability that we have that we're really proud of.

Thank you. And that's super helpful. Maybe just a quick one for Jeff here. Just given where the balance sheet is right now, as well as potentially, you know, operating cash flow coming back in the near future, what's the, you know, I guess the comparable level of leverage that you'd be targeting? And is there any thoughts around potentially putting in an NVID in place in the near future?

I think what I'd say is that we'll talk more about that at the investor day. I think, as you've heard me say before, having a strong balance sheet, we think is important to the company and important in executing on our strategy. And therefore, we continue to have the view that we will move ourselves back towards the having financial metrics consistent with investment grade. We were pleased to see in Q2 that, you know, both rating agencies took off their negative outlook, so to speak. So we are at BB high or BB plus. And, you know, we think that continues to be the trajectory that we're on. But we'll definitely come back more at the investor day and give more clarity on that.

Okay, great. Thank you. That's it for me.

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

Thank you very much, everyone, for joining us today. If you have any additional questions, please don't hesitate to contact me directly. Thank you very much, and have a beautiful day, everyone. Bye-bye.

Thank you. Thank you. Thank you.

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