Q3 2021 SNC-Lavalin Group Inc Earnings Call

Thank you for standing by this is the conference operator, good morning, and welcome to FMC Loveland third 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 one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star and zero.

I would now like to turn the conference over to Denise Jasmine Vice President Investor Relations. Please go ahead.

Thank you.

Good morning, everyone and thank you for joining the call.

Q3 earnings announcement was released this morning, and we are close to the corresponding slide presentation on the investors section of our website a recording of today's call and its transcript will also be available on our website within 24 hours.

With me today are yen Edwards, President and Chief Executive Officer, and Jeff Bell Executive Vice President and Chief Financial Officer.

Before we begin I would like to ask everyone to limit themselves to one or two questions to ensure that all of that is having a puts and pizza hut's speeds.

Welcome to return to the queue for any follow up questions.

I'd like to draw your attention to slide two comments made on today's call may contain forward looking information. This information by its nature subject to risks and uncertainties and as such actual results may differ materially from the views expressed today.

Further information on these risks and uncertainties. Please consult the company's but I've been filings on SEDAR. These documents are also available on our website.

Also during the call we may refer to certain non I'm, sorry that measures.

These measures are defined and reconciled with comparable Arden as far as measures in our MD&A, which can be found on SEDAR and on our website.

It's been believes that these non <unk> measures provide additional insight into the company's financial results and certain investors may use this information to evaluate the company's performance until you have to go yet.

And now I'll pass the call over to getting into it yet.

Thank you Tony and good morning, everyone.

Starting on slide four.

C O engineering services delivered another steady performance with good segment, adjusted EBIT growth and sound results across all three segments with one quarter to go we remain on track to achieve our 2021 outlook.

The wind down of a relic teekay projects continues to advance with significant reductions in backlog and continued constructive discussions with our clients on recoveries the additional costs related to COVID-19 impacts.

Additionally, we closed the sale of the oil and gas business, 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 two 2% over Q3 last year.

Excluding the impacts of foreign currency, we straws, we saw strong organic growth of four 2%.

Segment, adjusted EBIT margin of nine 8% was consistent with the prior year.

Bookings were strong for the quarter with a book to Bill ratio of essentially work with backlog growing to $11 $1 billion up three 7% over the prior year.

S NCL projects the L. S. Teekay contract backlog was reduced by approximately $240 million, bringing the remaining backlog down to just over a billion.

In summary.

Another solid quarter.

Demonstrating the execution of our strategic initiatives to transform this company are generating results.

We remain on a journey to transform and aligning the loveland.

Three fundamental gross mega trends.

Addressing climate change.

Governments infrastructure development programs.

Rising digital innovation.

And all of these areas, we have distinct capabilities and a compelling value proposition.

Now, let me review, our three pillars of success on slide five.

As we disclosed during our Investor day last month.

And first is where we play.

We are positioned with a leading presence across Canada. The U S and the U K with target operations, you know the key geographies.

We have seven specific end markets deliberately focused on infrastructure, what governments are investing heavily to achieve net zero.

Second is how we win.

We are focused on deploying our global capabilities locally to our clients leveraging our end to end services and engineering zero expertise.

Winning market share and growing relationships with our clients as an integrated partner.

The combination of operating in these strategically selected markets with this focused approach.

Drives how we will grow and create long term value.

We will continue to leverage our capabilities across our markets to deliver high quality services while it.

Testing in both organic and inorganic opportunities.

Turning to slide six I'd like to talk to you about a critical element for our success and that is our people.

The growth, we envisage will only be realized through the hard work of our teams of talented people.

With the drive and skills to recognize audition.

We're laser focused on attracting retaining and developing the people we need to grow the organization.

This broad based effort is characterized and three themes to provides an inspiring set of professional development opportunities to retain our employees and attract new talent to ensure our success.

The first theme is the strength of our data and technology capability to meet the demands of the future which include.

Our advanced Engineering Global Technology Center in India, which continues to grow now with more than 2000 employees all supporting the organization.

Providing a source of highly technical professionals.

The advancement of World Class Technical digital.

Yeah.

Professional training programs for our people through which we have trained approximately 10000 people to date.

The next thing is the development of our people.

The talent management process continues to evolve and supports in depth succession and career planning.

In collaboration with Oxford.

<unk>, we have developed a signature leadership development program.

Our business is global.

Talent deployment deployment in Korea development is encouraged through a mobile itchy program.

And we also remain focused on employee satisfaction I said two to reduce turnover.

We've conducted a number of measures, including regular surveys to understand and listen to the needs of our employees. So that we can implement improvements to address what we hear.

Our most recent feedback tells us that 88% of our employees.

<unk> to work in essence, the Loveland and 85% would recommend the company as an employer.

Both of which we believe to be industry, leading figures.

The final phase is to build talent to provide the capacity for growth.

This is by injecting the organization with us.

And so far this year, we've on boarded approximately 750, new hires through a graduate apprentice development programs.

Unimportant sources tell them to complement our most senior engineers.

And perhaps most importantly diversity is embedded in our culture and we're working to leverage that through strong median or any programs to meet gender diversity targets.

Yeah.

Next I'd like to move to the business lines and start with slide seven on the results for E. D. P M.

D. P M generated revenues of $917 million up 2% compared to the same quarter last year.

But four 1% on a constant currency basis.

This increase was primarily driven.

Strong performance in the U K transportation water and defense markets.

Segment, adjusted EBIT of $86 million increased six 6%.

Resulting in a nine 4% EBIT margin approximately 40 basis points above the prior year.

Our backlog grew.

A strong 15.3% just a $3 $2 billion.

New record high for E D P M.

Driven by major wins across all co geographies in Canada, the U K and the U S.

We also continue to leverage our digital expertise fortifying our capabilities in digital transformation and enabler for all we do this.

This further demonstrates differentiation in our core service offerings through increased focus on design transformation program management and digital twin.

We are focused to provide the engineering expertise required to evolve the world towards a globally connected and data driven operating system for the built environment.

Our recent digital twin project wins in the U K validate this part of our strategy.

A reimbursable contract model as well as our strategic shift to contraction muddles to collaborate on a risk balanced approach of providing benefits in a period of disruption and potentially inflation in wage rates.

That one is to work with our customers on the best outcomes for all.

Looking ahead, our pipeline of opportunities remains strong and our strengths in backlog provides good visibility and suppose we got a positive outlook for the balance of the year as well as for the longer term financial targets.

On slide eight two recent wins illustrate and demonstrate our leadership and applied sustainability and deliver in low carbon outcomes on both retrofit and new build spaces.

I shouldn't say loving it has been a pioneer in engineering zero, the adoption of dedicated government and private sector initiatives to address climate change opens a substantial opportunity to utilize our expertise in the game to gain market share.

An example of our global leadership is a flagship project. When we recently received two design and manage the delivery of net zero retrofit for almost 4 million square feet of U K government office space and we're really pleased to partner with the government to Decarbonize this entire estate.

I'd also points out this is a recent award and the value has not yet been added to our backlog.

The second project, we would like to discuss is a new build program for the design and ongoing maintenance of a pioneering net zero emissions power plant.

This is a one of the current design, which will eliminate old air emissions, including traditional pollutants and C O two emissions.

In response to climate change government around the world are accelerating their pursuit of reduce carbon footprints through regulation incentives and investment.

We maintain our leadership position.

Engineering, net zero initiatives, providing clean and affordable solutions to our clients and engineering a sustainable society.

We see significant opportunity for us and C level in the months and years ahead with the governments in all geographies, whose focus is on infrastructure spending.

These remarkable projects demonstrate that as let's say loveland is at the forefront of carbon neutral designs and delivery.

Turning to slide nine and a nuc on nuclear segment continues.

Revenues decreased by.

Two 1% on a reported basis and were in line on a constant currency basis.

The decrease was as a result of the strengthening of the Canadian dollar versus the U S. Dollar.

Lower volumes in Asia, and lower volumes of activity refurbishment projects in Canada.

This was partially offset by higher volume in Europe, where we continue to work on the Hinkley point C power station and the U K.

Segment, adjusted EBIT was $36 million was essentially flat with prior year with EBIT margin.

Hosting approximately 20 basis point improvement above our target range.

We remain encouraged by the significant opportunities ahead as our team continues to pursue a number of development prospects, particularly in decommissioning and waste management in the U S.

In the near term, we're seeing strong activity in engineering and field services with general market conditions positive due to government support for carbon zero.

These decisions are expected soon.

Several U S D O environmental management programs and we see continued positive momentum in the U K.

Longer term, we believe nuclear will be a beneficiary of the stimulus funds in the U S. The U K and Canada.

Our proprietary portfolio of software licensing rights for the nuclear reactor designs and operational support license is a key element to our continued success.

Along with waste management reduction and process technologies.

Capabilities are differentiated and in many cases unique in England knows to secure contracts.

Okay.

Moving to slide 10, and infrastructure services segment had a solid quarter with revenues of $343 million representing growth of five 9%.

<unk> Q3 2020.

On a constant currency basis revenue increased by seven 6% driven by increased levels of activity in hydro power linked something where backlog totaled over $1 billion due to new orders in the U S and the demand for grid modernization and support growth.

In renewable energy and electrification.

Segment, adjusted EBIT of $23 million with slightly low with reduced each EBIT margin of six 6%.

Results in primarily from higher procurement costs on several projects.

We see opportunities in renewables, such as wind solar and hydro as well as data centers rail and transit and social infrastructures in the Americas and Europe that causes to remain excited about the numerous opportunities ahead.

Turning to slide 11 and capital.

Segment continues to be impacted by persistently lower levels of traffic on the highway 407.

We continue to experience the effects of COVID-19 disruptions.

The increased COVID-19 vaccination rates in the third quarter.

Allows the province of Ontario, So and step three of the reopening of nonessential businesses.

So our activities in public spaces in schools, which resulted in an increase in 24% and traffic levels compared to Q3 2020.

We therefore remain cautiously optimistic that we will see increasing revenues over the short to medium term. That's why it's gradually returns to more normal patterns.

Our other concessions continued to perform well.

And looking ahead, we're building a pipeline of new public private partnership opportunities to leverage our engineering and O&M capabilities, including several P. P. Pes in Canada, and the U K as well as in the wastewater treatment and hospital spaces.

Moving to slide 12.

On the infrastructure EPC projects, we continue to substantially worked down the L. S. T K construction backlog to $1 $1 billion or 42% a year ago level of $1 $9 billion.

Like many of the companies in our industry, we continue to navigate the headwinds in relation to the COVID-19 pandemic.

Increasing pressures from the ripple effects of labor shortages and inflation and it's a flat supply chain disruption all out to these challenges.

Our team has effectively managing these issues across the organization and we're tracking the impacts closely.

Continue to have discussions with our customers regarding recoveries.

Turning to slide 13 on the resource. This segment, we completed the sale of our oil and gas business during the third quarter.

Jeff will walk you through the numbers on that shortly.

Our mining services business continues to perform well.

So a strong increase in revenue and prospects driven by increased emphasis on sustainability and the demand for materials needed for electrification.

With that I'll now turn the call over to Jeff.

Thank you Ian and good morning, everyone.

Turning to slide 15, total revenues for the quarter increased by one 6% to $1 8 billion compared to Q3 2020.

S M T L Engineering services revenue was higher by two 2%.

In line with our outlook range for the year.

S. NGL projects revenue was higher by two 4%.

Segment adjusted EBIT for the quarter was $139 million, which was comprised of $145 million for S. N C. L Engineering services.

24 million for capital and negative 29 million for S. M C L projects.

This latter negative EBIT was mainly due to the infrastructure EPC project segment, which had a loss in the quarter due to higher closeout costs on certain projects and varying impacts of COVID-19 on productivity and supply chain costs.

Total corporate SG&A expenses amounted to $52 million in the quarter higher than the same period last year.

The increase was mainly due to revised estimates on long term employee incentives certain insurance provisions.

In your phasing of spend on digital initiatives.

The higher costs in the quarter are primarily as a result of in your favor them and we continue to expect corporate SG&A for P. S. M. P M to be about $100 billion for the full year in line with our previously stated expectations.

I have for S. Net income was $601 million for the quarter, which was composed of $19 million from continuing operations.

$582 million from discontinued operations.

The discontinued operations net income included a gain of $578 million on the disposal of our oil and gas business due to the reclassification to net income of the noncash cumulative exchange differences on translating foreign operations.

The adjusted net income from P. S. N P M was $40 million or 23 per diluted share.

Representing a significant improvement compared with Q3 2020.

This improvement was mainly due to a lower income tax expense in Q3 2020 included a $53 million a reduction of deferred income tax assets and lower net financial expenses.

Partially offset by the increase in corporate SG&A that I just mentioned.

Backlog ended the quarter at $12 $8 billion compared to $13 2 billion at the end of Q3 2020, primarily due to the continued run off of the L. S. Teekay construction contracts backlog, which totaled $1 1 billion at the end of the quarter.

S&P L Engineering services backlog increased by three 7% during the same period driven by the strong increase in the E. P. M segment, you had mentioned earlier.

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 backlog remained solid at $7 1 billion, 2% higher than at the end of September 2020.

If we turn now to slide 16, our days sales outstanding continued to improve reaching 56 days at the end of the quarter for E. D. P. M. A 12 day improvement as compared to Q3 2020.

This improvement is mainly the result of our continued effort on cash collection and early government payment programs, particularly in the U K related to COVID-19.

At the end of September 2021, the company had $520 million in cash.

Company's net core recourse debt to EBITDA ratio on the revolver credit facility calculated in accordance with the terms of the Companys credit agreement was one nine times.

Well below the required covenant level of 375 times.

If we move on to slide 17 and cash flow.

Net cash used for operating activities was $65 million in Q3 2021.

Third to our net cash used of $136 million in Q3 2020.

On a year to date basis, we have generated $19 million, mainly due to a good conversion rate I've asked NGL services EBIT to operating cash flow.

S N C. L engineering services continue to generate strong cash flow from operations was $77 million in the quarter while.

While capital generated $34 million.

After cash taxes interest and corporate items, you can see that we generated $55 million of operating cash flow.

As expected SMT, how projects had an operating cashflow usage in Q3 totaling $109 million.

Mainly due to working capital requirements on the remaining L. S. Teekay projects, while discontinued operations had a usage of $11 million.

For full year 2021, we continue to expect the company's operating cash flow to be largely breakeven.

We expect fourth quarter positive cash flows from engineering services and capital to be broadly offset by a continued usage of cash in S. NGL projects.

And finally, turning to slide 18.

With respect to 2021 outlook, we are reaffirming our S. N C. L engineering services revenue expectation of low single digit percentage growth year on year, which reflects the impact of the current weaker U S. Dollar.

Having delivered a nine 4% adjusted EBIT margin year to date, we are tightening our S. NGL engineering services segment adjusted EBIT margin outlook for the full year from a range of eight point is from a range of 8% to 10% to a range of nine to nine 5%.

This concludes my presentation I would like to now hand, the presentation back to you.

Thanks, Jeff.

Turning to slide 20, I'd like to conclude my remarks with a few key takeaways.

We are proud of our global team and the performance they have delivered through the first three quarters of the year.

Our engineering services businesses have delivered another strong quarter.

We have a strong pipeline of new business opportunities in front of us across all our core markets.

Given by governments investing in new infrastructure.

Staying ability initiatives.

We continue to Derisk our portfolio.

The completion of the oil and gas business divestiture represents a significant strategic milestone in our transformation.

While we also continue to make consistent progress on winding the L. S TK backlog.

We remain focused on executing our pivot to growth strategy and.

On optimizing the delivery of sustained revenue and free cash flow growth.

And we can 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 one on your telephone keypad, you'll hear a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.

Our first question comes from Chris Murray of ATB capital markets. Please go ahead.

Good morning folks.

Just maybe if you can give us a little bit of a breakdown on some of these SG&A costs that you took in the quarter and your commentary around still today about 100 million. So just just maybe walk us through kind of what's recurring and what's nonrecurring.

And how to think about this on a go forward basis, if I can please.

Yeah sure happy to do so Chris.

Well I think I heard you say it let me say in the in the script in terms of a go forward basis.

We're expecting.

$25 million a quarter of $100 million in the year and that also aligns with what we've talked about at Investor Day, I think what you saw in the quarter itself is just some quarter on quarter variability and phasing within the year. So if.

If you look back over the year, you would've seen actually Q1, and Q2, where we're below that that normalized run level. So we had a bit of a catch up on things like long term incentive scheme provisions those really reflect the fact that the share price has been it has been growing significantly over the course of the year. So we have to account for that we had some phasing.

In the year in terms of our digital initiatives spend.

We hold a lot of that centrally.

More in this quarter as opposed to the previous quarter.

And then.

Some other items just around as the business is growing and we've been renewing within the insurance market for instance, we're seeing some higher costs, there, but I think in terms of go forward.

Our our previously stated outlook and guidance would would remain the same of around 25 million a quarter.

Okay. That's helpful. Thank you.

And then the other thing just maybe check in on is this the the wind down of the projects. So I guess two pieces of this question one.

You know again a bit of a loss again this quarter.

Then you also made the comment that you expect the <unk>.

The cash flow to be negative into Q4, I guess two pieces to that one is the run rate that we're seeing now all of that that loss rate is about $25 million a quarter is that.

We should be thinking about for the next few quarters until at least you wrote off the transportation projects.

So any color around how to think about shaping that and then there's the other I guess the other piece to us.

I guess, we're coming to the end of a number of these projects and you have at some point or previously mentioned that you thought that cash flow neutral on these things, but we do seem to be taking a bit of a hole here.

So I'm just trying to maybe get an idea of how the cash flow profile at least for the projects that look to be winding up.

Probably in the next six months it looks like how we should think about us.

So Chris let let's both answer this so I'll pass over to Jeff for the cash flow element of it but give me a bit of an update where we're at.

We're obviously still.

Getting headwinds from Covid.

But as you can see.

We're rapidly declined in the backlog I mean, nearly $250 million of progress in the quarter as he's really good progress from the three lost jobs and.

And as you know.

These are the 2023, we're going to be down to one project.

So we are working our way through it.

There's a few moving parts of course, which which kind of makes it a bit difficult to precisely answer your question because we don't we.

We don't know when things are going to send them back to normal from a COVID-19 perspective.

Because of the productivity loss that we've talked about before and.

We are seeing some post COVID-19.

Sex from labor inflation and supply chain disruption. So what we're trying to do is be as transparent as open as you, possibly can on a quarter to quarter basis.

And let you know how these things are going but another significant moving part here is recovery from the cloud Titans.

And.

You know I know I've said this quarter to quarter.

It is going to take time to establish our entitlement. We we know we've got strong entitlement from a principal perspective, but actually proving the quantum of that is detailed I mean these projects have got lots of kind of moving parts lots of.

Elements that we have to kind of work through and then a lot of details. So we've got very significant teams working on that to recover our entitlement and we're not we're not going to stop until we got back what we think we've lost that we're entitled to from the contracts. So I would say all of that is it is it is a bit of a backdrop, where obviously.

Really pleased with the with the room down there that we've got.

We're not pleased about the losses.

But we are making a lot of progress so Jeff maybe just add to that from the specifics of the cash flow.

Yeah, So maybe I'd make two comments, Chris I mean, I think I think in the in the short term you know we are the pressures that Ian has talked about that we saw in Q3 I think we'd say we continue to continue to experience those in Q4 Q4, so far.

So I think there is I think there's a real possibility.

Could see.

Losses in that in Q4 that way.

But we've obviously got to play that quarter quarter by quarter.

To your longer term point, yes, we do we do believe in in terms of the portfolio of ongoing and recently closed projects that they will be.

Cash flow negative cash flow neutral in the long term.

But to <unk> point that May take some time and so what you. What you are experiencing and are seeing and what we're experiencing is the fact that you know.

As those projects move to completion, we are spending the cash we as Ian has said remain in very constructive discussions to try and negotiate and settle some of that out but ultimately some of that may not be possible until we're settling at final accounts with the clients farther down the road so.

We'll just have to work our way through that as best we can.

Alright, I'll leave it there thanks, Bob Thanks, Chris Thanks. Thanks.

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

Good morning.

Good morning.

Wanted to go back to the engineering services backlog and I know, it's been up year on year, but for the past couple of quarters, it's been relatively relatively flattish.

And it appears that you know we're seeing increases in E. D. P M and I guess to certain extent nuclear but being offset by infrastructure services be worked down.

How do we think about this in the quarters ahead and then.

What does this mean for 2022 as far as.

Organic growth for engineering services I know you gave at Investor day target of 4% to 6%, but you know fairly wide range.

Yeah, Okay. Thanks Jacob.

I mean first of all the backlog is strong and engineering services.

We were up over $11 billion now and then.

That's that's up almost 4%. So if you bring all of the engineering services together backlog.

Strong room, we're actually feeling.

Pretty good shape for the transition through to 'twenty, two and delivering against the 4% to 6% range.

And and and and and and 2022 that we put out at the Investor day.

So.

There's numerous reasons.

We're feeling good about that I mean, obviously you can see the you know our strategy.

Strategy around digital.

And achieving digital work and and more.

Kind of consultancy work around net zero is actually bringing results with the wins that we've announced.

We're very confident about the U S market, we think that revenues will flow pretty good through the U S market with the with the infrastructure program. That's there.

So I you know I would say you know, there's some ups and downs I agree across the whole portfolio of business, but on the whole I think.

Feeling pretty good shape going into 'twenty two.

Okay.

Jake Jacobs as Jeff I think the only other thing I'd say is.

And particularly you know with nuclear and infra services, they are a bit lumpy.

The.

Things like refurbishment contracts tend to be in the backlog all at once and then work their way down as you do those units over the next couple of years or similarly on O&M. They tend to be often large contracts that come in so as Ian said, although we've seen some decrease there.

Something that we worry about we think is well positioned for the future.

Okay.

And then the other thing I wanted to ask about was the engineering net zero.

Can you quantify just how big of an opportunity you think this is and maybe you know order of.

Magnitude you know how big the government property agency in the white clean energy ones.

Yeah, I mean I.

So obviously a difficult question because.

It's almost as if some clients going forward as you know the the.

But the differentiation of being able to apply a traditional design or consultancy services in a way that the system.

To reach net zero.

It's almost like the differentiation and the winning edge to get those projects. So.

I.

And then in addition to that you know like the government proxy agency project.

That's a that's a project in itself. So it's obviously a new revenue stream I.

I think the market is changing so.

Happily as we're all seeing.

We can change you know in every field with respect to ESG and achieved.

Achievement of net zero I think it's quite difficult at the moment for us to quantify.

Is the market will will keep kind of monitoring that and observing it and when we perhaps see a better handle on the short to medium term then perhaps we could share that but right now it's a it's a bolt on and we're trying to position ourselves clearly in the best place to win.

Hum.

They are on the specific question around the government property agency contract.

I mean, it's it's one of those projects so you get into <unk> and the partnership with beginning in the consultancy arrangement.

Then we we mogul are remote.

What's necessary and then we grow with it so I can't I can't give you a specific kind of revenue number on that just right there.

That's my two thank you.

Thank you.

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

Good morning, everyone.

Good evening.

Good morning.

Yeah, just wanted to first I wanted to follow up on the on the White tail clean energy project I mean, it's very interesting in the context of the energy crisis in Europe and the UK.

Sure.

So I mean, how many of these type of opportunities are out there.

And your role with them I mean with white tail your your owner's engineer.

That's the strategy going forward and.

Is there not more value in and supplying more technical expertise rather than overseeing the project for the client and any color on that would be helpful.

Okay.

Good question.

Let's go to let me answer the whitesell pop for somebody now.

We all have a role in supporting the they own.

Where we're in that supporting them with design and we're in there with oversight of the construction of the facility.

And.

Traditionally that that's what.

We've been into in the U K from legacy Atkins.

What.

What we all.

Looking at our cross sell three called Yoga is the U K, Canada and U S is going beyond those traditional kind of consultancy and design services.

Actually do more and actually in the execution of the project, but only if the contracting model is.

On a reimbursable basis or.

Risk profile it did snow L. S T K.

So in this particular case.

The construction would not be something that we would want to get involved with because it's more likely to be an L. S. T K and we're very very clear that's when we're going to do that.

However.

There is opportunity in all.

All of these.

Kind of projects where.

Investment is high for clean energy projects as you know.

So there we're seeing a very very large increase of numerous types of low carbon energy or electricity distribution.

Or indeed, you know decarbonization of assets. So it is a very big market and why we're seeing it. The most is in Europe and the U K.

But I think it's a it's definitely coming in North America again quite difficult to quantify them, but very very exciting and that's why we've positioned ourselves through our engine is at zero.

<unk> thought leadership offering.

Okay. That's helpful and then for my second question, just some clarity on the.

E L F. Two K loss in the infrastructure segment, the MD&A refers to.

The COVID-19 impacts that we talked about but it also talks about.

Costs associated with the closeout of certain projects no I thought there was only three projects in that portfolio. So what are you referring to there exactly.

Yeah. It is Jeff why don't I take that there are only three main projects. There are are there are.

Kind of a handful of sort of small ones that have sort of closed or in the process of closing them. You know that we have a bit of a sort of trailing final account settlement on them. So it refers it refers to those debt that we are.

We've closed out so I wouldn't classify them as significant but was was a part of the results in Q3. So we we wanted to we wanted to say that.

Okay are there many more of these tiny yes, okay.

Okay.

Thanks, guys I'll turn it over thank you. Thank you.

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

Hey, good morning, guys.

Morning, maybe just to follow up on that I think it was chris's questions just on I guess supply chain inflationary pressures.

Is there anything sort of written in the contract. So I guess I'm thinking for the L E K.

Before you know that would protect protect you there again I'm, taking labor material inflation.

In terms of recoveries, there and I guess similar type question, and I sort of protection or a risk in.

Caring service business with disinflationary pressures.

I think the short answer is yes, but it's not kind of explicit I mean if.

If you take the.

If you take the case, which is public I mean the.

The challenge that we've made in Ontario, which was public it was around.

It wasn't an emergency.

Like I said in the properties right and I think it came down with us that it was in the consequences are emergency we believe.

Our recoverable through the contract.

So one of the consequences is known.

The delay and disruption.

It was talked about from productivity loss.

One of the consequences of the pandemic.

We also believe.

Is inflation.

Labor shortages.

<unk> associated with those labor shortages.

Supply chain disruption.

So all of those are things that we believe that we.

Well, what we will pursue to get recovery from.

But there's two people in this.

And in this kind of dispute if you like there are two people as declines in ourselves and we've got to work that out together either through negotiation of a dispute resolution process. So.

And in these type of things. Unfortunately, it takes time.

We have to recognize.

You know most of our clients.

Government or government sponsored organizations and that they've got to be very very clear.

Clear the debt.

The settlements that Theyre, making all the right settlements. So it's it's a bit complex and Ah.

I can understand the continued level of questions around it.

I think all I can tell you is you know.

We think we're gonna entitlement and we're going to work hard to make sure we recover it.

And I think the second part of the second part of the question I'd add to that is outside of L. S. T. K I think you were asking what does that look like.

Broadly in the engineering services business is it it's mostly a time and materials type business. So you know that.

Those inflationary costs tend to work their way through and from a time and materials perspective, because the you know the contract lengths themselves, they're not very not very long so.

So we don't see a huge issue there and you know, particularly as you get into the O&M part of the business where you're signing.

Very long term contracts. They all tend to have a and inflationary clause in there about them. So long as Ian says the it's really in the elastic area that requires the most management.

Yeah, absolutely things Josh.

But I mean, just given how significant and how quick somebody's inflationary pressures have been I guess dropping within engineering services the backlog there's no real.

Concern or ERISA.

I at this point, we're not at this point, we're not seeing it I mean part of it of course is that there's not that much flow through of materials. It's you know it's.

<unk> engineering services business, it mostly about labor rates.

And you know the you know those naturally.

Work through our rate card type process, so I'm, not saying I'm not saying there is nothing but I think at this point, we see it as broadly manageable and not not a significant issue at this point.

Yeah, Okay. Okay fair, maybe just on those recoveries.

I guess is it fair to assume or to think that.

I'll, probably need to close out these projects in order to sort of come to a final determination.

Between yourself and the clients or is this something that could be resolved along the way.

Hi.

I mean again I'm Ana.

It's it's.

You know kind of accounting of the guarantees for the answer but we are hopeful that we will settle.

Before the close out I mean, the there that this is a pretty unusual situation.

And we are but we're hopeful that we will.

To be clear, where I've been very constructive dialogue with declines its not you know.

I think everybody wants to find a solution and move on I mean, so yeah, we do remain hopeful.

And it's different in each job of course as well but.

On the whole Yeah me too.

Okay.

Maybe if I can ask one last question then just on the cash conversion within engineering services. It looked a little lighter this quarter than recent quarters I don't know if there's anything worth mentioning on there just timing.

Yes, just curious your thoughts there. Thanks, so yeah, I mean, no I would right now and I would agree I would agree with that there is really the main driver of that of course is in the use of working capital, which you would have seen on that one slide where we go from engineering services at EBIT to EBITDA less changes in working capital to their OS yet.

So that that drag on the working capital and really had a couple of elements to it one is within Edp M. As we've signaled before some of the deferred payment items from last year like UK VAT payment.

Those payments are now do they give you know kind of a.

Six to 12 month extension.

Yeah. So we're seeing that come through and we're seeing that the natural unwind of some of the more prompt payment codes that are in payment practices at the different geographies had implemented. The second is we've been working down some advance payments, we've seen that where they were a typically large towards the end of last year on our links on business as we actually compete.

The scope of work there so.

That's the reason why you know, we're just seeing a bit of that here in the back end of the year.

The drag on that cash flow conversion, but.

Generally.

Has that normalizes out over the next few quarters, you wouldn't expect that in and of itself to continue.

Okay. Thanks, Thanks for the time guys.

Okay.

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

Thanks, Good morning, guys I'm, just going on to a question that on a couple of questions on E. D. P M.

We notice that some of your European based engineering and design peers.

We're not calling out that utilization levels have been a bit under.

Under pressure I think they're calling out elevated inflation I'm, sorry elevated our vacation times her amongst our employees and a and a slower ramp up on some larger projects just wondering if you're seeing similar trends in your business and if so do you expect this headwind to maybe link around for the next quarter or two.

Okay, Yeah, I think thanks for the question I'm not.

Not really I think it's a short answer.

Our business is primarily in the U K. So the majority of our people are in the U K, we do have a business in.

In northern Europe and Scandinavia.

And I think interestingly for her for ourselves.

So as you can see through some of the wins that we've managed to achieve through the year.

Well, we're into some kind of new kind of areas of business in this kind of.

This digital offering and the listener zero offering them in the last projects of muscle.

The utilities the underground utilities in the U K is a great way.

And with them.

Been able to keep our business on them.

Very positive footing and winning work and.

And keeping revenues up so we're not seeing.

They are the lower end of utilization.

I think we all have to.

Be mindful.

Probably more about making sure we've got the talent to execute on the growth that we are that we need them.

Which which again, we have been able to navigate the market.

To do that.

So no no not at the St Rose I would say I mean, I don't know if that comment comes more from the European side of the businesses, but it's quite small.

Okay. Okay. That's good color thanks for that and.

A quick question for Jeff The MD&A mentioned, a favorable arbitration settlement are from a completed project in the middle East and the D. P. M segment can you give us a sense for how meaningful that was.

Yeah. So it's a it was in the middle East. It was a contract that was completed a few years ago that we've been in arbitration and settlement with I'd I'd kind of have that in in the sort of yeah.

You know the low low kind of $10 million to $20 million range type of type of.

Area.

And I would say you know at the same time.

We saw you know a few additional kind of risk provisions around all of that so I think what I'd leave you with is that we think the underlying operating performance or the performance. We saw from Edp M. In the quarter was with representative of its underlying operating strength. There were some puts and takes that I'd call. It you know.

One off in nature, but they largely netted themselves out, including the including the arbitration settlement.

Okay. Okay, maybe just sneak in one last one here just can you just looking at the L. S. T K a backlog for the last resource as project it feels like.

The burn off of that backlog has been you know.

More gradual than we would've expected just any color there on what's driving that yeah, yeah, Yeah I think that's.

No that's a fair observation.

The job is its in its final stages with 90 odd percent complete.

But it has it has shifted because of Covid I mean, Oh man in.

In the Middle East you know it did suffer quite a quite a bit during the course of this year.

But we're really close to the end, it's about commissioning and handover to the client.

Well, we think we're in pretty.

Pretty good shape on that job, we're not concerned.

Hum.

Reported prudently in the past and we think we get into the end of that and put it behind us.

Okay. Thanks, I'll turn it over.

Yeah.

Thanks, Doug.

Our next question comes from Michel Francois Lavoie with Desjardins capital markets.

Please go ahead thanks for.

Yes. Thanks for taking my question. So I just wanted to come back on corporate costs for it for a minute. So given the phase out of the digital initiatives Youre seeing right. Now I was just wondering if there was an important.

And if we should see a decline in the corporate costs in 2022 or it will be.

So about <unk> million dollars for the year.

Yeah, We said at Investor day that over the 2022 to 'twenty 'twenty four period, we would expect about $100 million now.

Now that that that may have a bit of variability in it.

But I think certainly in the near term, particularly on digital it is it is an area that we think we have some really core capability in it we've been developing what we think there's some really industry, leading IP around with all of that and we do hold some of that at a group level because we think it's important that it has.

Visibility.

And you know and and the ability to drive and make sure that you know we're getting the return from that that we want so well it does flex a little bit any ear as we've seen in the current quarter I think we would continue to see that.

Certainly going out through 2022 and beyond for a bit. So I'm. So I think I think that's how I'd I'd I'd be holding that.

Okay. Okay, and then you mentioned the volatility on the SG&A franchise, just wondering Jeff just there wouldn't be an importunity to smooth. This line over a let's say four quarters to avoid the volatility between there that we're seeing since the beginning of 2021.

Yeah, I think it clearly.

We we look to we look to drive it in that way and you know what we've simply seen over the course of the year is.

Yeah, just the unwind of some provisions related to historical accounts. We've seen you know as we've seen this year a bit of in year phasing differential in terms of our digital spend or some yeah.

Some quite valid increased costs on an insurance premiums while at the same time as part of our cost transformation initiative, we've been driving down some of the underlying functional costs that are in there and seeing good progress. So I couldn't agree more but there are there are some variable factors in there.

They do tend to move it around a bit quarter by quarter.

Okay. Thanks for color and then shifting gears to your M. P. M. B a net organic growth was strong in the quarter and I was just wondering if it would be possible to carve out the performance of the U S business, just sort of the weekend I appreciate all the organic expansion in their countries progressing.

Yeah, I think we were continuing to see good performance from the U S business I think one of the things where we're seeing is a lot of good progress on Master frameworks Master service agreement some of that is taking a little longer to turn.

Into actual revenue so we saw a bit of a headwind on that.

In Q3, but we think the business is really well set up you know both for Q4, but particularly going into 2022 and as we move into 2022, I think there'd be more opportunity for us to in our new organization structure.

Structural and reporting segments to give a bit more visibility on that as well.

Okay, Great and one last for me on the nuclear front, you mentioned that the pipeline of future projects. That's looking good.

That's part of the game.

We.

Expect some awards.

Okay.

Okay.

Two story.

But we were losing you a little bit then, but I think the question was around you know what is the what when does the award is going to come through from from the pipeline that we see ahead.

Exactly.

Yeah.

I think that's quite a question on the there's some you know there's some large contracts which are out there.

We're currently bidding and negotiating in the U S for the time.

Uh huh.

If energy, but also in Canada.

For some you know for power operates and in Canada.

But we would hope that we will secure during the course of 2022.

And but what I would also say is there's a there's a lot of book and burn business here as well.

From a services perspective that you know gives us a good steady flow of revenues.

Through the business, which are not large.

Just kind of engineering and consultancy and technical services kind of mandates.

So so but you should see you should see you should see something certainly in 'twenty two.

Great. Thanks for the time.

Our next question comes from Frederic Bastien of Raymond James. Please go ahead.

Thank you guys I know you can't speak to the highway four seven boards decision to reinstate the dividend earlier. This week, but do you have any comment on the magnitude of the dividend that was declared its it stood out as a big positive to me.

Given the implications on your cash flow is heading to and heading into next year. I was just wondering what your thoughts were there.

Yeah, It's it's Jeff maybe why don't I take that one I mean.

Wouldnt be surprised that that my answer is no.

I don't think we really aren't in a position to.

Comment more directly than obviously, what the $4 seven board or management team has I think what I would say and you heard this in Aeons remarks, we like the other owners, where I'm pleased to see the increase.

This quarter from this time last year was up about 24, 25% I think we're clearly seeing continued improvement in traffic as has restrictions in Ontario are lifted.

As vaccination rates have climbed to the level. They are and we remain I think caution.

Cautiously optimistic was the term that we would continue to see.

Improved traffic flows and I think our view is is that it's really the extent of the dividend level going forward is really going to be tied to the four O seven experience.

Traffic level then.

The progress that we're seeing in terms of returning to more normalized patterns, but I think it's hard for us to comment otherwise.

That's fair.

And the way I'd, probably leave that yeah, that's fair now and next one.

You announced a couple of project wins in Texas. This past month I can we read anything into that is it reflective of the momentum you are currently enjoying the state market share gains any any comment you can provide there.

Yeah, I mean, yeah, I think I think you can you can read into it the way we've got established businesses, which as you know some of the southern states like Texas and.

Florida.

And what we are we have you know we have a very very good.

Good track record and a new and a very capable of winning really good programs and on and on projects.

And the expansion that we want in the U S is all about replicating in other states.

And I think if you if you picture the slide that we put out.

And the Investor Day, where we show where we currently are what we're we've actually already established new presence in the white space that were intended to establish our presence wins such as the ones recently in Texas, you know really gives us that confidence.

We can start connecting together.

Across the U S. The capabilities that we've got them in and it's not you know, it's it's a combination of capability, but he is local which is client facing and build those relationships, but also brings in a global capability and.

And applies directly to decline.

The geography is needed so for me, it's a it's a good sign of our strategy going forward.

Great Alright, thank you both.

Thank you.

Our next question comes from Maxim <unk> of National Bank Financial. Please go ahead.

Hi, good morning, gentlemen.

Good morning.

Yes.

Jeff maybe the question for you just on the I think you mentioned a restructuring and nuclear do you mind, maybe talking about specifically what what area was was impacted and how we should be thinking about the payback.

And sort of the margin profile on a going forward basis, if it's possible.

Sorry, I was on mute there on my on my phone what it was going to say Max is if I said restructuring and nuclear I I may have misspoken that wouldn't have been my intent I think what I was referring to.

Was restructuring and the transformation program, we have across the group in terms of realigning to the go forward business and you know a lot of that obviously focuses on functional costs.

And we're making good progress on those functional costs.

What I was trying to indicate I think related to one of the previous questions was in our corporate cost. We are seeing good underlying cost improvement in terms of you know the functional cost of those that sit in corporate but we're seeing that also and to a larger extent across the rest of the businesses themselves. So.

With that with that progress so far to date right.

And so just in terms of kind of going forward restructuring should we still expect some some costs incurred on that line item.

Yeah, I think I think you would.

21 has been a significant year for us on that front, particularly with the disposal of the oil and gas business and what that's allowed us to do and continuing to push that agenda forward and we would certainly see 2022 is another is another core of year of that transformation program I think after that.

I mean will you know we'll never as it.

As an organization looking to always optimize our cost base, there will always be an ongoing element, but I think that we will have felt we've dealt with the large elements by the end of next year and then it's it's it's more not completely but gets more towards the steady state of just continuous improvement in 2023 and beyond.

Okay. No that's fair enough. Thank you and then Ian if I may just as we think about the U S and obviously, hopefully some sort of infrastructure Bill a resolution.

I guess two part question. The first one is just in terms of your anticipated growth profile in that geography would you have a positive outcome from from the Bill and then maybe you know.

You talk about.

The electrification opportunity for links on have you guys quantified it in terms of again, how much growth that could be driving so yes. Thanks, that's it for me Okay, Yeah I mean.

Obviously.

When we've done all of our all of our planning the market analysis across all older cold geographies without capabilities.

We sold four things rise to the surface, which really.

Drive growth beyond GDP growth and the U S was one of them I mean, so if you think about it what we've what we've set out there was four 6% the rest of the business kind of growing at GDP then they're they're obviously you know that those those four things are going to have to.

Grow grow further than that I mean.

And absolutely the U S is a very significant portion of that.

I mean, specifically what we've seen.

Is there's a lot of pent up demand in the U S.

From suddenly.

Some restrictions on cash cash flows going into the store.

Rates during the pandemic, but what they've continued to do is as the world. Most of the framework agreements Award projects Awards.

And as soon as this bill is kind of the past and we see the.

The money flowing through to the states.

We will see you know that.

Pretty pretty bullish outlook I mean, there's a general consensus.

Across.

The U S that was reached to the recent until they consult a recent conference where general organic growth 79% was quoted.

I don't know if that's accurate.

Accurate or not but I'm just relaying what we heard so so I think it's a you know obviously burrows I'm very clear strategy very clear plan.

We think we're going to.

Could you have some good growth from that.

[laughter] zone.

We we have to we have to we have to kind of.

It's a relatively new business three years old it's a great business because it's a contribution of both our own capability is project management, and maybe being new Hitachi mm manufacturing and products.

We are focused on the U S. We're focused on the U K.

Historically, we had been quite strong in the middle East.

Electrification and distribution of electricity is key to net zero Hum.

How can we quantify the market the market is just so so significant.

It's more about.

How quickly do we want to grow this business and how much capability, we got to apply it and we've taken a you know a few and I'll kind of strategy and growth expectations that support 4% to 6% and at that level. So so in other words I don't think the market as a constraint to grow so I think it's a it's the rate that we want to grow it to be.

You know to be sensible.

Okay. Okay. That's it for me thank you very much.

Thanks, Mike.

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

Thank you everyone to join us today.

The nice Friday, if you have any more questions. Please don't hesitate to contact me will be not such a transfer you have a nice Friday everyone.

And a good weekend. Thank you okay. Thank you. Thank you.

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

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