AtkinsRéalis Group Inc.

Thank you for standing by. This is the conference operator. Good morning and welcome to SNC-Lavalin's first quarter 2022 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then zero. I would now like to turn the conference over to Denis Jesmin, Vice President, Investor Relations. Please go ahead.

Thank you, Ariel. 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 transcripts 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-RFRS measures and ratios. These measures and ratios are defined, calculated, and reconciled with comparable IFRS measures in our MD&A, which can be found on CDAR and our website. Management believes that these non-IFRS measures provide additional insight into the company's financial results, and certain investors may use this information to evaluate the company's performance from period to period. And now I'll pass the call over to Ian Edwards. Ian?

Thank you, Denis, and good morning, everybody. Before we begin, I'd just like to take a minute to recognize the tireless efforts of our 31,000 employees worldwide in delivering every day for our customers. Every one of them continues to take pride in being part of the S&C Leveling community, and I can't thank them enough for their dedication and positive impact. So I'd like to begin today on slide four. During the first quarter, we saw continued growth in top-line performance as total revenues increased 3.8% year-over-year to $1.9 billion, driven by our SNCL services business, where revenues were up 6.8% over the first quarter last year to $1.7 billion. Excluding the impacts of foreign currency, we achieved a robust organic growth of 8.4%, SNCL services segment adjusted EBIT of $127 million represented a 7.6 percent margin. Over the first three months, our LSTK backlog decreased by $210 million to just under a billion dollars, and we remain on path to substantially closing out these projects over the next several quarters. Following our first quarter results, we are reaffirming our 2022 outlook, including SNCL services revenue growth of between 4 and 6 percent versus 2021, with a segment-adjusted EBIT to segment revenue ratio of 8 to 10 percent, and overall company-positive net cash from operating activities. Our solid start to 2022 reinforces our optimism in regaining the sustainable progress on our journey to align the company on key growth trends, such as government-funded infrastructure programs, digital innovation, climate change to net zero, all of which leverage our unique end-to-end solutions from design through to decommissioning. Turning to slide five, our engineering services business capitalized on momentum from the fourth quarter 2021. delivering strong results for the first quarter of 2022. Leveraging the depth and breadth of our services, the capabilities of our team, and the long-standing relationships with our client base, we continue to take strides in achieving above-market growth. Revenues were up 10% on an organic revenue basis over Q1 last year, to just over $1.1 billion, driven by strong growth in the U.S., Canada, and the UK. Segment-adjusted EBIT was flat year over year as the continued strong performance in the UK was offset by increased business development costs to win new project and expenses related to executing on our pivoting to growth strategy. The quarter witnessed key wins across the US and Europe, such as a recent contract extension for our work on the expansion of Southwest Florida's International Airport in Fort Myers. near-term growth trajectory is on track against our plan we continue to execute on our land and expand strategy in the US particularly Colorado and New York as a result backlog increased seven percent compared to the prior year to three point nine billion dollars and gives us confidence in delivering our revenue targets for the full year on slide six As a key element of our strategy, I'd like to highlight some of the recent wins that demonstrate our journey to delivering engineering net zero. First, I want to reemphasize our goal of achieving net zero carbon emissions by 2030, a critical component of our purpose. To that end, in March, we committed to the science-based targets initiative, joining over 2,000 companies globally to set emission reduction targets in line with the Paris Agreement. Beyond our own efforts, we can enable a step change in this arena by assisting our clients with broad range of net zero solutions. In the UK, we're working with and supporting the national grid in decarbonization of the energy system, which is required for the UK net zero targets. We're providing design and project management services across the entire construction cycle to assist National Grid in delivering a transmission network capable of supporting the transition to net zero. This project is a prime example of our ability to utilize the broad capabilities of SNC-Lavalin network to deliver multiple solutions for the client in their decarbonization efforts. In Dubai, S&C Leveling has successfully been selected by Five Holdings to investigate how the design of the award-winning Five Jumeirah Village, Dubai can be redefined to deliver net-zero carbon. Lastly, at home here in Canada, our successful track record of delivering trusted solutions for the major component of Bruce Power's CANDU reactor redesign has led to additional requests for our services across additional reactor units. Our work on this project will allow Bruce Power to continue to generate residential power at 30% of the cost and extend the life of the units by another 30 years. Advancing net zero projects around the world for our clients and making continued strides in our path to achieving net zero carbon emission is critical to our purpose. I'd like to move to slide seven and the results of our nuclear business. We recently announced the appointment of Joe St. Julian as the new president of our nuclear business. Succeeding Sandy Taylor, Joe brings an exceptional background in strategic and commercial management in the nuclear sector, and I really look forward to working with Joe to deliver our plans for the business. I'd also like to take this opportunity to thank Sandy for his leadership over the last years, and in particular, the role of bringing together all of our full lifecycle capabilities in the nuclear sector. During the first quarter, nuclear revenues had 2 percent organic growth compared to the first quarter, 2021, increasing to $232 million as we continue to witness strong demand for our reactor support services in particular. Segment adjusted EBIT was $34 million, with segment adjusted EBIT margin increasing 90 basis points to 14.8 percent. During the quarter, We made significant progress across a number of projects, including Darlington and Bruce Power. Our pipeline for can-do reactor upgrades remains robust, and our portfolio is well-positioned to capitalize on new-build projects should they materialize. At the same time, our proprietary technology-related nuclear products are increasingly in demand by our customers globally. Overall, our nuclear segment provides a predictable and stable base of work that is highly profitable for S&C Loveland. Our position in the marketplace drives our right to win and captures our high-quality, substantive, near-term prospects that will deliver long-term value creation and supporting our pivoting to growth strategy. Moving to slide eight and our O&M segment, which generated $137 million in revenue during the first quarter, slightly below first quarter 2021 performance. Segment-adjusted EBIT of $12 million was in line with last year's 6.8 percent margin. We continue to see stable financial performance and strong operational metrics across the O&M portfolio with robust projects in the pipeline over the next 12 months. We remain focused on increasing the pipeline with strategic partnerships across the industry while leveraging the expertise of our capital group to maximize bidding opportunities. On slide nine, our links on business generated robust top line growth during the quarter, increasing revenues to $151 million represented organic growth of 21.3% compared to the first quarter of 2021. Year-over-year growth was mainly due to an increased level of activities in the U.S. and the Middle East. Much of this demand is driven by the net carbon zero agenda as the growth in renewable power generation and the increasing electrification of transport and infrastructure is driving additional demand for LinksOn's offerings. We recorded a segment-adjusted EBIT loss of $5 million in the quarter. mainly resulting from project delays and higher costs on one European project installation, partially offset by high contributions from projects in the US and the Middle East. This European project will be commissioned in the second quarter this year, and we expect the business to return to its forecasted EBIT margins of 4% to 6% for the remainder of the year. Our backlog ended the first quarter at $920 million, slightly below the first quarter 2021 backlog, but we remain really confident that our solid pipeline of prospects will continue to allow us to deliver on our growth targets. We have a strong standing in the marketplace and see robust growth opportunities across our key markets, underpinned by decarbonization trends and grid infrastructure investments. Turning to slide 10 and capital, First quarter revenues declined to $16 million, mainly due to the successful disposal of InPowerBC in February. We remain committed to the recycling of capital investments when opportunities arise. No dividend was received from Highway 407 ETR in Q1 2021 and 2022. Amidst the easing of COVID-19 restrictions by the province of Ontario, traffic pattern trends on the 407 improved 37% versus the first quarter of 2021. And looking forward, we remain active on the business development front, and we continue to make progress on our new strategy and close alignment with our O&M business. Moving to slide 11. I'd like to provide more color on the pace of the wind down of our LSDK projects before turning it over to Jeff to discuss our financial performance in the quarter. Year to date, we continued to take strides towards completion of our three remaining LSDK projects. Our backlog decreased more than 40% compared to the first quarter of 2021 and now stands at $957 million, This represents a decline of 18% compared to the end of December 2021. Last quarter, we outlined some of the unprecedented factors that we've been managing through as we work to complete these projects. These included supply chain disruption, elevated inflation in building and construction indices, and COVID-19 absenteeism on our sites. These remain impactful from a productivity and a cost management standpoint. That being said, we remain confident in our potential future financial risk projection and our forecasted timeline of the completion of these projects. Throughout this process, we will continue to have discussions with our customers regarding certain recoveries, which we believe we are entitled to and will pursue vigorously. With that, I'll now turn over to Jeff to discuss the financial highlights.

Thank you, Ian, and good morning, everyone. Turning to slide 13, total revenues for the quarter increased by 4% to $1.9 billion compared to Q1 2021. SNCL services revenue totaled $1.7 billion, representing an organic revenue growth of 8.4%, driven by growth in engineering services and links on. while LSTK projects revenue continued to decrease, as expected, and totaled $214 million. Total segment adjusted EBIT for the quarter was $109 million, which was comprised of $127 million for SNCL services, $12 million for capital, and negative $31 million for LSTK projects. The negative EBIT for the LSTK projects resulted from recognizing $20 million in the quarter of the $300 million potential future financial risk disclosed at our Q4 2021 results, and from the segment overhead costs needed to support the projects. SNCL services adjusted EBIT margin was 7.6%, slightly lower than our full-year outlook range, which, as Ian has explained, was mainly due to a small loss in links on and higher bidding and business development expenses in engineering services. corporate SG&A expenses from PS and PM for the quarter was $25 million in line with our expectations. Note that Q1 2021 included a revision to certain estimates and cost accruals that reduced the expenses last year. We continue to expect that our corporate SG&A expenses for PS and PM would be about $100 million for full year 2022. Capital had $7 million of corporate SG&A in line with last year and our expectations. The IFRS net income from continuing operations was $25 million for the quarter, which was composed of $17 million from PS and PM and $8 million from capital. The adjusted net income from PS and PM was $39 million, or 22 cents per diluted share, compared to 48 cents per diluted share in Q1 2021. The decrease was mainly due to the lower segment adjusted EBIT, as just explained, and a more normalized level of corporate SD&A expenses. backlog ended the quarter at $12.2 billion, compared to $13.2 billion at the end of Q1 2021, primarily due to the continued runoff of the LSTK construction contracts backlog. SNCL services backlog totaled $11.2 billion at the end of the quarter, which included a 6.7% increase in the engineering services segment backlog compared to the first quarter last year. This segment was awarded $1.2 billion of work in the quarter, representing a 1.08 book-to-bill ratio. The nuclear, O&M, and links on backlogs remain solid at $802 million, $5.6 billion, and $920 million, respectively. If we now turn to slide 14, at the end of March 2022, the company had $506 million in cash. and the net limited recourse and recourse debt to adjusted EBITDA ratio was 2.3 times, slightly above our 2024 target range of 1.5 to 2 times, but continuing a trend of strengthening the balance sheet over time, one of our core financial priorities. Our day sales outstanding for engineering services was 61 days at the end of the quarter, largely similar to what we saw throughout 2021. We now move on to slide 15 and free cash flow, Net cash used for operating activities was $134 million in the first quarter. SNCL services continued to generate positive cash flow from operations with $59 million for the quarter, while capital generated $15 million. After cash taxes, interest, and corporate items, you can see that we generated $31 million of operating cash flows. As expected, LSTK projects had an operating cash flow usage which totaled $165 million in Q1, mainly from the payment of a portion of the LSTK provisions recognized in Q4 and the working capital requirements for the projects. We continue to expect that the company's operating cash flow should be in the range of $0 to $100 million for the full year 2022. We expect that operating cash outflows related to LSTK projects should decrease over the coming quarters, and be more than offset by the operating cash inflows from SNCL services and capital. And finally, turning to slide 16, the company is reaffirming all full-year 2020-22 outlook items and continues to expect that EBIT and EBITDA to revenue ratios and net cash generated from operating activities to be weighted to the second half of the year. This concludes my presentation, and I'll now hand back to Ian.

Thanks, Jeff. Turning to slide 18, I'd like to conclude my remarks with a few key takeaways. We are really proud of the work that our S&C Leveling colleagues are doing to continue to make strides in executing our strategic transition and future growth. Our core business is executing well and delivering strong financial performance. We have a solid backlog and a strong pipeline of new business opportunities. positioning as well across all our core markets, fueled by governments investing in new infrastructure and sustainability initiatives. We remain focused on executing our pivoting to growth strategy and optimizing our delivery of sustained revenue and free cash flow generation. And I want to reemphasize two primary focuses to drive value creation this year. accelerating growth in engineering net zero through the rich capabilities we have and developed to provide sustainable end-to-end solutions to our customers, and executing the de-risking of the business through further progress in rolling off the LSTK backlog. We were successful in both during the first quarter. Finally, we remain laser-focused on our ESG initiatives and achieving our targets, Our commitment to the science-based targets initiative further cements our belief that we can achieve carbon net zero emissions by 2030. Additionally, we have and will continue to invest in our people to create a culture focused on the diversity, the development, health, and the well-being of our employees, all of whom are integral in achieving our pivot to growth strategy. Thank you, and we'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. We will pause for a moment as callers join the queue. Our first question comes from Jacob Bout of CIBC. Please go ahead.

Good morning. Morning. Morning. My first question is on SNCL services margins. EBITDA margin came in at 7.6%. I think it was a little bit lower or a little lighter than what we were looking for. The written commentary you call it the elevated bidding and business development expenses. So I guess a few questions on this. Do you expect this bidding expenses to continue into second quarter and the rest of the year. How did Omicron related absences issue impact the first quarter? And then maybe just comment on any wage inflation or cost inflation impacting margins.

Yeah. Okay. Thanks for the question. I mean, I will get to the specific points there, but before I do that, We are seeing a really, really strong demand for our services in our core geographies that we've positioned ourselves in and the end markets within the entirety of SNCL services. So the go-forward part of this business, we believe we've positioned it really well, and we spend a lot of time positioning in markets where we think we can be successful and grow, and obviously enacting our pivoting to growth strategy that we tabled in September, we're feeling good about because, as you can see from the revenue year over year growth, inorganic growth, organic growth, you can see that the fruits of that are beginning to take. Now, there are two components which have contributed to what you rightly say is a slightly lower EBIT margin than our normal range that we've, and able to stay within over the last few years in this particular part of the business, the go-forward part of the business. And one is the higher bid cost, which I'll come back to, and the other is the loss that we indicated in links on. With respect to the engineering part of the business and the services part of the business, we are not seeing an impact from Omicron absenteeism And we're not seeing an impact from the race for talent, if you like, and the inflation that that brings. Because generally speaking, people are working remotely, whether they're sick or whether they're healthy. So all the way through the pandemic, that is in the services part of the business, given us a sustainable productivity. But the The wage and the kind of inflation that we're seeing, because the services part of the business is on a short cycle, generally speaking, we always experience that being passed on through the rebidding and the re-winning of work. And remember, a lot of this work is reimbursable. So as the wages increase, then the reimbursement comes. What we have seen is an enormous amount of opportunities and pipeline that we've experienced across all three core geographies, the UK, the US, and in Canada. And we will see that normalizing, and we'll see the margins. particularly second half of this year, becoming really, really strong within the range. And we are not worried that this is a trend at all. In fact, you know, we've reissued, as you heard from Jeff and myself, that we're confident of being in the range for the year.

Do you recoup any of these bidding expenses, you know, as you win some of these projects?

Well, it really depends. I mean, For some of the bigger projects that we're seeing across Canada, yes. Not all of them, but yes. In the services part of the business, where we're obviously land and expand strategy in the U.S., we're investing more in BD so that we can actually, you know, carry out that land and expand strategy. So there's no single answer to that, but like I say, it's – It's a particularly busy time, and we don't see that that will sort of sustain itself through the year, and we should return to normal levels.

Thank you for answering my questions.

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

Hey, good morning. Yeah, morning. Morning. Morning. Ian, I wonder if you could put a little more color on the LSTK charges. I have to admit I'm a bit surprised that, you know, so close after taking a pretty large write-down in the fourth quarter and, you know, presenting that $300 million as kind of a, you know, if we need to take it, type of scenario and then, you know, a month later we're taking another $20 million. So what went wrong there and do you think that you've got it all captured in the quarter in terms of cost reforecast?

Yeah, thanks for the question. I think it's a fair question. The first thing I would say, just to be clear, The quarter, considering it's a winter quarter where we've put $210 million of revenue in the ground, so to speak, on these lump sum jobs, is – progress has generally been good and supportive of the statements that we made in Q4, which were basically – Two of the projects in Ontario, we would see them reaching physical completion by the end of 2022 with only the one remaining project in Quebec. And that remains the case. So we are, you know, confident of that. But the loss itself has two components to it. One is the overhead cost. to run the business. And if you remember, we did actually say Q4, we're probably going to get a run rate of that overhead cost of about $10 million a quarter. So that's one component that you will see quarter on quarters for the rest of this year until we kind of burn off the majority of the backlog. The other $20 million, you're right, we see it as $20 million of the risk that we identified at the end in Q4 as being realized. So we indicated that worst-case scenario, if things didn't go quite as we presented in our assumptions, we would see some risk evidence itself, but it would never exceed $300 million. That remains the case, and we have experienced some of the risks beyond the assumptions we made. And if you recall back to Q4, There was one slide that we put in the deck there in Q4 which clearly set down under absenteeism, productivity, supply chain disruption, and inflation, what the assumptions around the Q4 loss were. And what we've seen in Q1 is continued absenteeism, for example, through the BA2 variant that we was over and above that we expected when we presented the Q4. So, we've re-forecast that. And I think you've also got to remember that we are constantly re-forecasting the endpoint so that we're not just putting losses in here that we see in the quarter. We're putting losses that we will update to complete these jobs. So, I understand the question. I think the key point here is, We are confident that we're going to finish these jobs, the two Ontario jobs, primarily physically by the end of the year and then into commissioning the following year. And the last thing I would say is that we still believe that much of the COVID-related and post-COVID inflation and supply chain issues are recoverable through the contracts, and we will vigorously pursue those recoveries in the medium term.

Okay. Just a follow-up, just on the engineering services business as a whole, you know, rough math to get to the midpoint of your margin guidance for 2022, you're going to need to exceed the midpoint for the next three quarters. And just given the weak start in Q1, which you've explained pretty well, just, you know, what gets us you know, swinging the other way? And is it, should we be expecting more back half-weighted and perhaps further weakness in the second quarter? Just trying to get expectations aligned here for Q2.

Yeah, it's Jeff. Why don't I take that one? We will absolutely, you know, see improvement as we go through the year, not dissimilar to what we've seen in previous years. You know, and I think we'd expect to see incremental improvement, you know, as we go quarter by quarter. As you heard Ian say, the second half typically is stronger for us than the first half. So, you know, we will continue to be, you know, and expect to be, you know, well into our 8% to 10% range by the end of the year.

Okay. I'll turn it over. Thanks.

Thank you.

Thanks.

Thanks.

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

Hey, good morning, guys. Good morning. Yes, good morning. Maybe just to follow up on Yuri's question, just on the losses, the $20 million, I understand a lot of work goes into that, but is that sort of a blanket number to cover all of those three buckets, inflation, absenteeism, supply chain, and sort of across the three projects, or is it sort of focused on one in particular? Sure.

No, that's a good question, and it's quite specific in the way that we look at the re-forecasting of each of the projects. Specifically, the majority of that is in relation to one of the Ontario projects, and even more specifically, it's in relation to absenteeism. On that particular job, you might be Interested to hear that 62% of the people on the job, whether that's labor or supply chain labor or subcontract labor or our own staff, 62% since the 1st of January have taken some time off. Now, obviously, those days vary from days to weeks. But that's two-thirds of everybody on the job has either contracted COVID or been in contact with somebody with COVID and felt it necessary to stay at home. And obviously, we need people physically on the job. I think on that project also, specifically, again, we've got a supply chain issue with some glazing housing to the above-ground stations. And that's a China-supplied project. item and we've experienced some some delay to that and then the problem with that is this consequential kind of knock-on delays because we obviously can't fit out the station we can't finish it we can't do the the mechanical and electrical work so those are those are kind of two examples which are very specific and and we obviously do very detailed re-forecast on all the projects on a constant basis and review them on a monthly basis. I think the last thing I'd say, perhaps to just put this out there, the supply and demand dynamics of labor and equipment and materials, particularly with energy costs rising and wages rising, on the lump sum projects, is leading to a situation where our subcontractors, who most of the work is done through, are requiring that we need to support them to get these jobs finished. And that's a dynamic situation that we'll just monitor through. But all of these aspects do not change our view that we communicated in Q4, and particularly around the worst-case scenario around risk. does not change that view.

Okay. And maybe just two follow-ups on that, Ian. On the absenteeism, has it gotten sequentially better through the quarter and into April and May, I guess?

Yeah. Good follow-up. I think so. And I think as we get into the summer months, I think that that particular issue will improve. And obviously the productivity that goes with it, which is

is really the key um i can't say we've specifically seen it yet but my sense is that it will yeah okay and on the inflation um obviously difficult to answer but you still are you mark the market now um sort of in your opinion in terms of what you've put in your budget for inflation and where it's trending

So, so it's Jeff. So, so we obviously, you know, having some have assumptions within our budgets and to Ian's point, because we re forecast the jobs each quarter, of course, we're as a part of that. you know, looking at where our latest forecasts are for subcontractor costs, for materials, et cetera. So, you know, we do in a sense, you know, mark that as we go along. I think what you, you know, I think what Ian was highlighting was that, you know, we're continuing to see both an elevated level of inflation But also in some instances, whether it's in the subcontractor labor force, you know, significant labor inflation or just ability to get a hold of the trades that we need. Or in the case of things like, as you said, glazing that's coming from far away. I think we've all seen, you know, the lockdowns and the impacts in China. And that's, you know, that's absolutely impacting some of our ability to, you know, to get the glazing or some of the remaining materials in the time that we want.

I think probably one last comment. Sorry, just one last comment as well, but I'll just leave as a thought. There's a table in the backup information to the presentation deck which shows the evolution of the backlog burn-off, you know, the backlog execution through this year and then into the 23 and 24 for the final remaining projects in Quebec. $200 million in the first quarter is a good set of progress on actually working our way through these jobs. And perhaps just draw your attention to that slide.

Yeah, no, I see that. All right. I'll pass it over, but thanks for the time. Good luck. Thank you. Thank you. Thanks.

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

Thanks. I wanted to start with a question on the links on business. You know, Ian, you gave some color on the EBIT loss in Q1, and then it relates to a single project in Europe. I'm just trying to understand, you know, what makes that one project different? And like, what gives you confidence that this is not going to spread to maybe other projects across the portfolio there?

Yeah, yeah, good. Yeah, thanks for that question. It's, Let me start by just talking about LinksOn for a minute, if I can, and then come back to the specific question. LinksOn is a joint venture initially with ABB and now through the Hitachi acquisition of that part of ABB. It's an S&C Hitachi. And the deal is that they provide the equipment and we install it. But it's a fully integrated joint venture company. I mean, we've organically grown this company to $600 million of revenue, so it's been a successful journey in the company, and I'm acutely aware that the first time we've actually externally reported this company is this quarter, and we've had a problem on a project. The growth we're very excited about, and the market we're very, very excited about, because Electrical distribution, as countries go to cleaner energy and they need to increase the amount of electrical energy to meet the demands of net zero, the market's really strong. I mean, we've seen 21% growth quarter over quarter from last year, year over year. Generally, the projects that we execute in this business, they range about $35 million projects. And at any one time in the business, we would have about 60 of those jobs on the go, starting, full execution, completion. And through the portfolio effect of having many small jobs, we've had consistency in the margins. Now, this particular project is one of the largest we've done, and we have fallen into some delays with some cost overruns, but it's very isolated to this project. And the project is being commissioned next year. So we feel good about the remainder part of this year and the growth for the future of the links on business. That's why we've kind of restated that we'll be back in the range Q2, Q3, Q4.

Commissioning Q2?

Yeah. What did I say? Next year. Oh, sorry. Commissioning Q2. Sorry. Sorry. Commissioning Q2 for that one project.

Okay. Okay. Okay, that was good color. I appreciate that. My next question, I was going to ask you about nuclear and specifically some U.S. federal work. Of the last couple of years, I think there was a lot of contracts out for re-bed, and I think there was some optimism within S&C that you could gain a greater share of this work. I think we've seen some contracts get awarded by the DOE, but I don't believe S&C has been in any of these winning consortiums yet. You know, just can you talk about the opportunities still in procurement and whether you still expect S&C, you know, to grow its presence in this market?

Yeah. So, I mean, first of all, really pleased to have Joe as the new president. Obviously, Joe's a U.S. citizen. He's from the nuclear sector, worked for one of our peer companies. and brings a wealth of knowledge both from the U.S. but also from the nuclear sector as a whole. Now, I'll answer the question specifically, but generally we're very excited about the nuclear business, particularly with the current sort of energy thoughts that different governments have taken around the world. We are under a secured agreement, a supplier to the department of energy in the U.S., and we currently have some fairly significant business in large contracts and also in small services type work. You're right to say there was a couple of jobs last year that were out for bid. We bid them, and we didn't win them. There are also more of those long-term large decommissioning or waste management type, sorry, waste management type projects which we're bidding, and we would expect to win our fair share of that market. I mean, we generally, because we're already operating in that field, you know, we have a reasonable market share now. Now, obviously, we want to grow that market share. So, it's a very important and exciting part of the business.

Male Speaker Okay, thanks. I'll turn it over.

Thank you.

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

Thank you. First question is regarding the elevated bidding and business development expenses and the impact that that had on margins. I know you've reiterated your full-year margin expectations for SNCL services, but were these elevated bidding costs, were they contemplated in the original guidance do you expect them to carry on into future quarters? I think you sort of addressed that earlier, but it wasn't quite clear if they're going to be there in Q2 and beyond. And I guess, does this change your perception of where you land on a full year basis within the margin range? I realize, again, you've reiterated the range, but just wondering if this in any way kind of alters where you expect to land relative to where you thought you'd be at the start of the year.

Well, obviously the short answer to the beginning is no, we don't expect that this changes our view of the full year. And in actual fact, the first half of this year was always slightly softer than the second half of the year. We knew that when we went into the year and we knew that when we budgeted. What we have seen in Q4 last year and Q1 this year is a significant amount of pipeline opportunities. And the actual dollar value, when you think about the overall revenue and the dollar value to be above the range or slightly under the range, is actually quite small. So we're not talking about, you know, large dollar value investments here. But obviously, we need to control that cost, and we need to balance that with the benefit of the growth. So absolutely do not see this as an issue to the year, and absolutely don't see it as a trend. I don't know, Jeff, if you would add anything to that or

Yeah, no, I think that's absolutely right. We incorporated and envisioned this when we gave our guidance back at the beginning of March, and we would expect that to certainly normalize over the next couple of quarters.

Okay, that's helpful. Thank you. And then on the LSTK side, all of the discussion has been around the three major infrastructure projects, but if we go back to last year, the resources segment, which was a standalone segment, it's – at least on the restated basis, that was folded into the infrastructure LSTK projects segment now. I know that the one resources project that was an LSTK project that was supposed to be wrapping up fairly soon, but did that in any way contribute to the losses in the quarter, and what is the status of that project?

Not really is the answer. The project is in commissioning. We are working through the commissioning and the handover to the client, so we would expect to be out of that job end of Q2, early Q3. So, yeah, you're right. It isn't quite over yet, and it still is an LSTK job, but no significant impact in that number this quarter. Okay. Thank you. Thank you.

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

Hi. Good morning, gentlemen. Good morning. Good morning. Ian, maybe just wanted to go back to LinksOn. And, I mean, you know, you say it's kind of $600 million revenue run rate business. I mean, at a pretty... you know, generally speaking, low margin. I understand, you know, the revenue part of the question, but can you maybe talk about sort of the ROIC for this business and ultimately, you know, sort of free cash generation? Because, I mean, I assume with, you know, CapEx, you know, working capital and stuff like that, it just, it feels like a lot of effort for, you know, not a huge amount of return, but just, you know, curious to see in terms of sort of long-term plans for this business and whether it you have to scale it or whether maybe not owning this would be a better outcome for shareholders. Yeah, thanks.

So let us both answer that question. Jeff, if you can pick up the cash flow generation part of the question. It's a good combination of Hitachi product and our capability, and it's a strong market. I mean, 20% growth in year-over-year revenue. And we have only just entered the North American market. I mean, historically, we've been centered on Europe and the Middle East. And we see a complementary value proposition to the general net zero engineering services business And we see a business here that we can grow, albeit the margins at 4% to 6% range are less, obviously, than engineering services. But we see it as a good complement to the overall business going forward. Jeff, do you want to just talk specifically?

Yeah, I think, Max, it's important to look at the cost on the projects. about 65 or 70% of the costs are effectively the substation equipment and the associated electricals that go around that. And the vast majority of that is actually Hitachi's equipment, which we source from our joint venture partner. And therefore, kind of the pricing and the availability of that is locked in. So in a sense, the margin that's really being earned is on you know, the remaining construction management and implementation. So, you know, the EBIT margins on the whole business, you know, don't really reflect, you know, the risk in terms of, because the risky element in a sense is just the implementation. And these are, you know, generally fairly cookie cutter type installations of, you know, of electrical substations. I think from a cash flow perspective and an ROIC perspective, it actually also is, you know, is an attractive business. A number of these projects we get upfront advanced payments on. And, you know, therefore from a cashflow perspective, well, you know, in some quarters we're working off, you know, those advanced payments. And you saw some of that in, you know, in the first quarter, you know, from an ROIC perspective, it's actually quite an attractive, attractive business that way. So, you know, in addition to strategically, you know, what Ian was, was outlining there. Okay.

Okay.

That's it for me. Thank you so much. All right, thank you.

Our next question comes from Dimitri Kilminski of Veritas. Please go ahead.

Hi, and thanks a lot for taking my question. I was just wondering about the nuclear backlog, which was indirectly discussed already. But I wonder when do you see a turnaround in backlog growth so that it returns to growth?

That's a very good question and a fair question also. We see both a lot of near-term opportunity and we see a lot of longer-term opportunity. And maybe I answer the question in that respect. First of all, the kind of rhetoric around the nuclear industry particularly with the energy challenges that different countries are having right now, is very topical. And for us, owning a full-service nuclear services offering business, it's really exciting. I mean, I think the future of this business is considerably exciting. If we look at near-term opportunities, we have a services part of the business, that is kind of like book and burn technology offerings, consultancy work, and, you know, engineering nuclear work to clients and existing reactors and existing waste management challenges across the world. That's kind of a fairly, you know, book and burn, reasonably stable flat business. We've talked about the waste management business in the U.S. where we're seeing some large opportunities that we would intend to win our fair share. We're also seeing, as you saw with Bruce, life extension opportunities, particularly with Bruce and OPG, but potentially in other countries where energy transition is really important and extending the life of current nuclear reactors, is really potentially quite a near-term opportunity that we could maximize on. And then, of course, there's the strong new bill program in the UK, where we currently are working on the first, which is Hinkley, but expect to move to the second, which is going through its approvals right now, which is at Sizewell. And that will bring very significant increased revenues. And the last thing I'd say about near-term is, We're seeing some feasibility work now on new builds, Romania, for example, and feasibility work on SMR, small modular reactors, which, again, is bringing near-term work in. So I think we will see the growth that we've communicated. I think the market is strong enough to support that, and we have to win our fair share. Looking at the longer-term prospect for this business, it's pretty exciting as nuclear is considered as a true green energy alternative. And with the UK, for example, announcing a very significant nuclear build program, we would look to be maximizing on that in the medium term. And again, governments, particularly in Canada, the US, the UK, looking at modular reactors as an alternative, small modular reactors as an alternative, that again is... It's quite an exciting prospect for us. So this is an important part of our future.

Okay, understood. And Hinkley and Sizewell, are they already in the backlog? I'm talking about not the backlog necessarily, the $800 million or so that is presented in the MD&A, but rather the bigger one, extended one that was presented on the investor data. So that's there.

Hinkley is. Hinkley is in the backlog, but Sizewell is not. Got it.

Okay, awesome. And then do you have any visibility on dividends from 407?

Dimitri, Jeff, so we don't. Like 407 management, and, you know, Certainly in their latest statement, they've indicated that they're continuing to be of the view that over time, as government of Ontario restrictions ease, they expect to see continued improvement in traffic flows on the 407. And I think our view is that you know, the dividends coming from the 407 will be linked to that improvement. We did see, I think, as Ian said in his script, you know, year on year, 35, 40% improvement in traffic flows between the first quarter this year and the first quarter last year. But I think it's something we'll have to see quarter by quarter. And I think, you know, I think that will eventually drive the level of dividends from 407. But we don't have any better visibility on that right now.

Got it. Okay, thanks so much for taking my questions.

Thanks, Dimitri. Thank you.

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

Good morning. In your slide deck, you highlight a recovery in the aviation market with key wins in Europe and the USA. Can you spend a bit more time discussing these awards and more broadly How you are positioning the company for future success in that particular sector?

Yeah. I mean, aviation comes in the engineering services part of the business primarily, and our track record has been in providing design consultancy solutions, but also providing in innovating around, for example, biometrics, example, tracking of people flows through airports. So we have a value proposition that we've worked up where the origin of that really came from the Atkins acquisition in the U.K., and we've been spreading that organically around Canada and the U.S., And as you say, we're seeing some reinvestment as we're coming out of the pandemic, where the aviation industry has obviously, you know, been through an enormous amount of pressure and stress as people have stopped traveling. But we're expecting business travel and travel to increase. reemerge back to close or not probably at pre-pandemic, but getting back close to pre-pandemic levels. And we will see reinvestment into airports because of that. And our built environment offering will be applied to that. I think also the whole net zero value proposition for airports that are obviously very, very significant, large, that consume a lot of energy. We see that our decarbonomics platform, where we analyze buildings and take the carbon footprint of a building down, is also an interesting proposition for our aviation customers. So I think we're going to see investment back into this sector, and we're positioning for that. Okay.

Thanks, Ian.

Thank you.

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

Great, thanks and good morning. I just wanted to follow up on a comment you made earlier. Great, thanks. I just wanted to make, just on the comment you made earlier around, you know, the cost on some of these LSTK projects are going up and a lot of the subcontractors are actually performing the work, I guess. I just wanted to understand the contractual agreement that you have with the subcontractors. I guess at the end of the day, is SNC responsible for or call it the fixed bid element? And how much of the risk are the subcontractors taking on? Or are they more on a cost plus basis?

Yeah, that's a good question. The reality is the client's responsible. So all of these additional costs in our consideration and our belief are reimbursable from our clients because the pandemic was not envisaged and the post-pandemic situation supply chain issues and inflation could be reimbursed by the customer and reimbursed by the client. Where we find ourselves, of course, is obligated to complete these jobs. And while we are pursuing our own reimbursement from our customers, we have to support our own supply chain, which are much smaller companies. and much smaller entities. And we have to support them in bringing these projects to a close. So we're somewhat stuck in the middle of the two dynamics there. And that's why one of the components of the four components that lead to increased cost is this. And it doesn't help that demand is very strong for labor and for subcontractors. Because obviously that fuels the inflation part of it. But, yeah, I mean, that's the situation, and I think that's a good question. Okay, great.

And then just as we kind of look forward to the rest of the year, I guess, and I called it the labor concerns now, but I guess as you look toward the demand pipeline and getting people in seats, even if it's on the engineering services side, Where do you think you are in terms of the labor ramp-up? Do you have enough people in seats? Are you still out there looking? Could that be a constraint for the rest of the year to top line?

So there is absolutely a race for talent. The impact of that race for talent is manageable in our business, in the engineering services part of business. So the whole go-forward part of our business is We see the impact currently as manageable, but it's a risk that we continually look to observe and innovate in solutions. And I'll perhaps give some examples. I mean, we believe that the creation of a work environment that is both flexible but gives our workers our teams and our employees, what they need for their personal development, for their life flexibility, whilst giving us the productivity is really important. And there's a few things that are important to people. I mean, the purpose that we define for the company in that we will engineer a better future for the planet and its people, that's really important to people, and particularly our younger staff. The ED&I component of the business is really important, that we create a culture which is inclusive, which people feel proud to work in, is a differentiator. Now, I wouldn't say that we're innovating wildly beyond our peers, but we put a lot of effort into this to stay equal or further ahead than our peers in the creation of this work environment. So far... The talent race is manageable, but it's something that I think all of us, and I think most businesses are experiencing the same thing. We've got to consistently monitor. Great. Thanks very much. Thank you.

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

Thank you very much, everyone, for joining us today. If you have any further questions, please don't hesitate to contact me. Thank you very much and have a good day, everyone.

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