Q4 2021 SNC-Lavalin Group Inc Earnings Call
Thank you for standing by this is the conference operator, good morning, and welcome to <unk> fourth quarter 2021 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.
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I would now like to turn the conference over to Denise Jasmine.
Vice President of Investor Relations. Please go ahead.
Thank you.
Good morning, everyone. Thank you for joining the call.
Q4 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 the transcript will also be available on our website within 24 hours with me today are getting that word president and Chief Executive Officer, and Jeff Bill exactly.
He was 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 been approaching a puts in Pittsburg state yeah. Welcome to return to the queue do you follow up questions I.
I would like to draw your attention to slide two comments made on today's call may contain forward looking information.
Formation by its nature is subject to risks and uncertainties and as such actual results may differ materially from the views expressed today.
For further information on these risks and uncertainties. Please consult the company's relevant filings on SEDAR. These documents are also available on our website.
Also during the call we may refer to certain non I'm, sorry, that's measure and ratios. These measures and ratios I define calculate there then we consult with comparable RF, Florida measure in our MD&A, which can be found on SEDAR and our website.
There's been believes that these measures provide additional insight into the company's financial results and certain investors may use this information to evaluate the company's performance and now I'll pass the call over to you to do it again.
Thank you Tony and good morning, everyone.
Let's start on slide four 2021 was the milestone yet so I can say level and that's what we executed on our strategy and delivered on our plan and targets with a strong underlying performance from our coal <unk> engineering services business.
Through dedicated focus and strong execution, our global team delivered on all financial metric targets and our outlook and exceeded on our cash flow generation.
We announced and clearly articulated are pivoting to growth strategy at our Investor day in 2021.
Our roadmap for delivering long term shareholder value creation.
We continued to take a series of strategic actions towards focusing on the strengths of our core business going forward.
<unk> unique end to end services.
Decarbonization and sustainable solutions long term relationships and strong public sector focus.
Our actions have included the continuation of winding down of disposing of noncore businesses.
And exiting underperforming geographies, while focusing on accelerating our growth in the professional services and project management space.
This wind down included.
The successful closure on the sale of the oil and gas business, an important strategic milestone for the company and our effort to Derisk the business well.
We also made progress towards the completion of our L. S teekay projects, including reaching a claim settlement on the L. S. Teekay exiting some project.
While we made progress towards completion of the Alice Teekay projects during the fourth quarter.
Unfortunately, we incurred a $231 million loss, which I will cover in detail later in my remarks.
On the sustainability from we announced.
Net zero carbon by 2030 roadmap.
Identified primary ESG objectives, notably and diversity equality and inclusion.
We joined the UN framework convention on climate change as rates zero Global campaign.
All in all it was a year of significant momentum and achievement.
Turning to slide five.
We highlighted a pivoting to growth strategy at our Investor day in September .
Outlining the three key pillars to gross.
Graphic footprint executing our capabilities.
Accretive capital allocation to drive value creation.
We have a leading presence in our core markets of Canada U S and the U K.
I'm focused on seven specific customer end markets.
So our strategy is the strong growth in backlog for a D. P M, which grew 15% between the end of June 2019, and the year end 2020 to $3 $1 billion.
We are focused on deploying our global capabilities locally to our clients leveraging our end to end services and engineering that zero expertise.
We are consistently captured market share and growing relationships with our robust client base.
Part of our KOL strategy.
Derisking the portfolio through the winding down of our L. S. Teekay projects, we've made significant progress as we ended 2021.
With a $1 $2 billion backlog of 65% reduction versus the end of June 2019.
With the forecast completion of the majority of the remainder noticed ITK projects in the next year we.
We have greater visibility into the remaining future additional potential financial risks.
And I will just go stays in much greater detail in a few minutes.
Turning to slide six I'll now walk you through the Q4 highlights on the 2022 outlook for engineering services and SNCF projects.
Engineering services continued to deliver solid results in the fourth quarter 'twenty, one leveraging the depth and breadth of our services the capabilities of our teams on the long standing relationships with our client base.
Revenues were up nine 7% over Q4 last year to $1 $7 billion.
Excluding the impacts of foreign currency, we achieved robust organic growth of 11, 9%.
Segment, adjusted EBIT of $237 million was 55% higher year over year and represented 14, 2% margin.
But notice that growth in this quarter was aided by a favorable outcome of $93 million from a confirmed arbitration decision related to unpaid additional services performed on a completed contract in E. D. P M.
The engineering services backlog remained strong at $10 $9 billion.
Alright L S TK backlog decreased by $671 million year over year to just over $1 billion.
We have clear visibility to the conclusion of these projects over the next several quarters.
During the fourth quarter, we incurred additional losses on these projects primarily due to unfavorable cost re forecast driven by COVID-19 impacts supply chain disruptions and inflation.
In 2022, we anticipate continued progress on our journey to align the company on key growth trends such as climate change our net zero government funded infrastructure programs and digital innovation.
Value proposition in this arena remains compelling.
And we anticipate SNCF services organic revenue growth between four and 6% to be well within our reach.
With with adjusted EBIT to segment revenue ratio of 8% to 10% and delivered positive net cash generated from operating activities.
Next I'd like to move to our business lines, starting with slide seven and the results for a D. P M.
Edp on revenues surpassed $1 billion. This past quarter. The first instance, in our history and was up 15, 2% compared to the fourth quarter in 2020 based on organic revenue growth.
The increase was primarily driven by continued strong growth in the U K transportation and water defense markets and includes the $93 million favorable outcome arbitration decision referenced earlier.
Segment, adjusted EBIT of $179 million increased more than 100%.
Resulting in a 16.9% EBIT margin.
Excluding the $93 million the EBIT was consistent with a strong quarter in 2021, while full year EBIT grew 12%.
Our backlog grew a robust 10% to $3 $1 billion, representing a full year book to bill ratio of 1.07.
This is supporting our growth expectations.
Growth was driven by major wins across all cold geographies in Canada, the U K and the U S.
Which is a five year contract to perform engineering and technical services.
Themis National flood insurance program.
A five year agreement with network rail in the UK.
And islands motorway into carriage.
Network.
We also continued to utilize our development in the digital landscape, which is called differentiator and our suite of offerings, we focused on providing our engineering expertise through digital and program management capabilities that we anticipate will continue to expand throughout 'twenty two and beyond.
Our pipeline of opportunities in 'twenty, two remains robust and our strong backlog provides good visibility and supporting a favorable outlook for the year as well as for our long longer term financial targets.
You can see on slide eight some of our recent wins that demonstrate our journey to delivering engineering net zero.
With recently won two projects and the built environment and the green area of hydrogen and in the transmission and distribution consultancy services.
While our expertise in Calvin has substantial sustainably is broad and deep we continue further development across the organization with a target to provide training to everyone.
And employees have been trained in the last quarter.
We've also refreshed our approach to the whole lives carbon management, a global community of practitioners and specialists, which has been brought together to support the most strategic programs and projects.
We are committed future to deliver an engineer and net zero on these projects and our continuous investment in people and capabilities demonstrate that S&P Loveland is at the forefront of carbon neutral design and delivery.
Yeah.
Yeah.
Turning to slide nine our nuclear segment Q4 revenues decreased by 9% based on our organic revenue growth.
And were down approximately 1% for the full year.
Segment, adjusted EBIT of $35 million was driven by a higher profit contribution from our Canadian projects.
Despite the lower revenue base, we successfully drove EBIT margin to 15, 8%.
Representing approximately 100 basis points of improvement.
Backlog sequentially increased in Q4 with contract extensions from Bruce power incentive Ona.
As well as additional field services with the U S Department of energy.
A flourishing global agenda focused on carbon net zero provides us with a promising pipeline, leaving.
Leaving us well positioned to capture additional potential work should they emerge.
Driving our performance and confidence for continued success in this arena is a proprietary suite of software and licensing rights for the nuclear reactor designs and operational support licenses.
<unk>.
Moving to slide 10 and infrastructure services.
Segment had another solid quarter.
With revenues of $397 million, representing growth of 18, 1% compared to the fourth quarter 2020.
Again based on organic revenue growth.
Segment, adjusted EBIT of $23 million with slightly lower resulting in reduced EBIT margin of 6%.
This segment ended the year with a backlog approximating to $7 billion in line with the backlog as of a year end of 'twenty 'twenty.
We continue to see opportunities with a record number of bids submitted in the fourth quarter by linked zone <unk>.
Decarbonization trends to support our work in renewables, such as wind solar and hydro for which we see numerous infrastructure services opportunities over the next several years.
Turning to slide 11, and capital fourth quarter revenues grew by more than 188% to $65 million.
Including $41 million of dividends received from highway 407.
The traffic pattern trends on highway four O seven are rebounding in recent.
This takes orange are encouraging.
We continue to execute on our strategy of releasing value in the portfolio where opportunity arise with recent transactions on jump.
On the Mcgill University hospital being good examples of this.
Moving to slide 12, I'd like to provide more color.
As to how the external environment continues to impact our remaining L. S teekay contracts and how we are responding to this.
There are three substantial headwinds that are impacting our cost to complete estimates on these projects.
The COVID-19 pandemic.
Supply chain disruptions.
And inflation.
Productivity impacts due to COVID-19 increased significantly with the Homochrome Varian, resulting in absenteeism levels as high as 50% at times.
This impacted the productivity on the Alice Teekay projects, resulting in additional costs.
With project completion delays.
Furthermore, supply chain disruptions have created equipment and material delivery delays, while inflation in materials equipment and trade costs led to increases as much as 10% to 20%.
These factors have had a significant impact on the estimated cost to complete the projects.
You may recall in the fourth quarter of 2020, we recorded losses on these projects of approximately $90 million.
These were based on assumptions that included COVID-19 impact.
With that subsiding in Q2 2021.
And with vaccine rollout the supply chain would remain relatively stable uninflated would continue in the range of low single digits.
So to cut some sort of estimate revisions.
Resulted in additional losses through the three quarters of trying to work.
Now given our experience to date, along with our revised expectations for the timing of a return to normal operations.
In Q4, we develop new estimates for the cost to complete the remaining L. S Teekay projects.
Hum.
This has resulted in the recording of additional losses in the fourth quarter totaling $231 million.
These losses reflect our current estimates of the future expected cost necessary to fully complete the last remaining L. S. T K projects.
And with a significant majority of these costs being related to post 2021 to project completion.
These estimates reflect our current assessment of the environment as well as management and project site experiences from the last two years of the pandemic we.
We also continue to have discussions with our customers regarding certain recoveries, which we believe we are entitled to receive.
Moving to slide 13, we illustrate some of the unprecedented factors that we've been managing as we work to complete these projects as you can see from the chart on the left is an example.
How many workers were absent from work on one of our project sites during the last pandemic wave compared to the previous wave.
Leading to absenteeism of almost 50% at times on certain projects.
You can also see from the chart on the right.
That we've gone from low single digit inflation in the building and construction indices across Canada to 11, 2%.
The composite index up to 17, 2% and the author and got no market.
These events caused significant productivity losses delay and cost increases.
Now on to slide 14.
We want to be perfectly clear.
The L S teekay charges, we booked in Q4.
Reflect our best estimate of the cost to complete.
Are these projects.
It's important to point out that the issues that caused us to record. These additional losses are mainly the result of macro factors that will lead to higher costs to conclude the remaining projects.
Our execution remains strong.
And we are effectively managing the variables within our control.
We expect two of the three remaining Canadian allowed two projects to be concluded over the next year.
Physical work is expected to be complete by the end of 'twenty two.
This provides us with greater clarity for our forecast to complete.
In fact engineering and design is essentially complete.
Which provides more certainty on material quantities.
And the trains are running on a test basis on all three L. L T infrastructure projects.
On this slide we've detailed the assumptions used to develop our estimate.
And formed by what we know today.
We firmly believe our estimates to be accurate as of today.
However, we performed a downside risk analysis in the event that the assumptions that we've made to change.
And potentially impacts our cost to complete these projects.
With the forecasted completion of the majority.
Of the remaining Alice Teekay projects in the next year.
And the greater visibility that provides.
We believe that the remaining potential for future additional financial risk if any.
To complete these projects should not exceed $300 million.
Again.
We believe our current estimates to be accurate.
Presented this analysis to help size any future risk.
Meanwhile, we continue our strong execution winding down these legacy projects and.
And anticipate that conclusion as we focus on our core engineering business and now pivoting to growth strategy.
As I mentioned earlier, we continue to aggressively pursue all potential recoveries, which will take some time to work through the process.
Turning to slide 16 on the resources segment, our fourth quarter revenue was negatively impacted by commissioning challenges COVID-19 supply chain headwinds and inflationary pressures on our last remaining resources L. S. Teekay project.
However, our mining services business continued to show growth in Q4, and it's winning new work successfully and building backlog.
With that I'll turn it over to Jeff to discuss the financial highlights.
Thank you Ian and good morning, everyone.
Turning to slide 18, total revenues for the quarter increased by 15% to $1 $9 billion compared to Q4 of 2020.
P. S N C. L engineering services revenue totaled $1 $7 billion compared to $1 $5 billion in Q4 of 2020.
With year on year growth driven by E P M and infrastructure services.
Cynthia L projects revenue totaled $209 million compared to $152 million in Q4 of 2020.
Total segment adjusted EBIT for the quarter was $67 million, which was comprised of $237 million restaurants, you'll engineering services.
$61 million for capital and negative $231 million wrestling shale projects.
As Ian mentioned the S. N C. L Engineering services EBIT included a $93 million favorable outcome from an arbitration settlement.
Well as Cynthia L projects included unfavorable cost re forecast on the remaining Alex Teekay projects.
The idea for US net loss from continuing operations was $50 million for the quarter, which was composed of a loss of $68 million from P. S. N P M and a profit of $53 million from capital.
The adjusted net loss from P. S. N P M was $26 million or <unk> 15 per diluted share.
Compared to a net loss of $1 53 per diluted share in Q4 of 2020.
This improvement was mainly due to a lower loss in essence, you're all projects and higher EBIT in essence C. L Engineering services.
Backlog ended the quarter at $12 $6 billion compared to $13 $2 billion at the end of Q4 2020, primarily due to the continued run off of the L. S. Teekay construction contract backlog.
S T L engineering services backlog totaled $10 $9 billion at the end of the year drove.
Driven by a nearly 10% increase year over year in the ETP EMS segment.
The nuclear and infrastructure and services backlogs remained solid at $835 million and $7 billion respectively.
From a full year perspective, slide 19 shows total revenues for the year increased by 5% to seven $4 billion.
Compared to 2020.
S N T L Engineering services revenue totaled $6 2 billion, three 3% higher than 2020 and in line with our most recent outlook.
Excluding the impacts of foreign currency.
C. L Engineering services achieved an organic revenue growth of five 5% driven by growth in E. D. P M and infrastructure services.
Total segment adjusted EBIT for the year was $489 million, which is comprised of $660 million for the S. N C. L engineering services $119 million for capital and negative $290 million for S. NGL projects.
Corporate SG&A expenses from P. S N P M was $117 million.
Slightly higher than we expected as the decrease in corporate function expenses was more than offset by higher insurance provisions and transition services costs related to the disposed oil and gas business.
We expect 2022 corporate SG&A to be about $100 million for P. S. N P M.
Capital had $28 million of corporate SG&A in line with last year, and we expect a similar level of expenses for 2022.
Note that in 2022, we also expect between 35 and $45 million of restructuring and transformation costs a.
A reduction from the $70 million in 2020 , one as restructuring activities begin to wind down.
<unk> net income from continuing operations was $100 million for the year, which was composed of $27 million from P. S. N P M $73 million from capital.
The discontinued operations net income amounted to $566 million as a result of a net gain on the disposal of our oil and gas business.
The adjusted net income from P. S. N P M was $152 million or <unk> 87 cents per diluted share representing a.
A significant improvement compared with Q4 of 2020.
The improvement was mainly due to losses lower losses from the resources and infrastructure EPC project segment.
Combined with a higher contribution from the E. P M segment.
If we now turn to slide 20.
Our days sales outstanding continued to improve reaching 53 days at the end of the quarter for ETP EM and.
An 11 day improvement as compared to Q4 2020.
This improvement was mainly the result of our continued efforts on cash collection and early government payment programs, particularly in the U K related to COVID-19.
At the end of December 2021, the company had $608 million in cash and the company's net limited recourse recourse debt to adjusted EBITDA ratio was one seven times.
Already within 2024 target range of one five to two times.
If we now move onto slide 21 and cash flow.
Net cash generated from operating activities was $115 million in the fourth quarter.
On a full year basis, we have generated $134 million.
Better than the company's outlook are broadly breakeven, mainly due to a good conversion rate of EBIT to operating cash flow in essence C. L Engineering services.
Essent scale engineering services continued to generate strong cash flow from operations with $544 million for the year, while capital generated $100 million.
After cash taxes interest and corporate items, you can see that we generated $362 million of operating cash flow for the full year.
As expected S. N T. L projects had an operating cash flow usage, which totaled $266 million, mainly due to the L. S. T K losses in the Q4 results and working capital requirements.
Discontinued operations generated $38 million.
For the full year 2022, we expect the company's operating cash flow to be in the range of zero to $100 million.
As we expected operating cash flows related to the L. S. Teekay construction contracts, including the losses taken in Q4 should be more than offset by S. N C. L services and capital operating cash flows.
Note that we also expect between 80 and $100 million of acquisition of property and equipment in 2022.
And finally, turning to slide 2022 for our 2022 outlook.
As Ian indicated and in line with our 2022 to 2024 financial targets presented during our latest Investor day.
In 2022, we expect S. N C L engineering services revenue to grow between four and 6% for the segment adjusted EBIT margin in the range of 8% to 10%.
We also expect our engineering services segment, which is mainly composed of our Formula E. D. P. M segment to deliver a segment adjusted EBIT just segment net revenue ratio between 14 and 16%.
Let me also remind you that starting in Q1 2022, we will present, our segmented information based on the new structure presented at our Investor Day in September .
To help with your financial modeling you'll find in the appendix of this presentation, the 2020 , one restated segmented numbers by quarter.
On this new basis.
This concludes my presentation and I'll now hand back to Ian.
Thanks, Jeff turning to slide 23.
I'd like to conclude my remarks, with a few key takeaways.
First we're proud of the work the SEC leveling colleagues as we execute on our strategic transition to future growth.
Process is ongoing and we will continue and requires steadfast dedication by our team to achieve the ambitious goals we set.
Our coal business is executing well and delivering strong financial performance, we have a solid backlog a strong pipeline of new market business opportunities.
Turning as well across our core markets.
By governments investing in new infrastructure and sustainability initiatives.
We remain focused on executing our pivot pivoting to growth strategy and optimizing our delivery of sustained revenue and free cash flow generation.
In 2022, we have two primary focus is to drive growth.
Accelerating growth in engineering net zero through the rich capabilities, we've developed as a sustainability solutions company.
And executing the derisking of the business through further progress enrolling off the L. S T K backlog.
Finally, we remain laser focused on our ESG initiatives and achieving the targets we outlined in our three to five year strategy.
We believe we can achieve a carbon net zero emissions by 2030, and we will continue to invest in people to create a first class workplace culture.
Focused on the development health and safety of our employees without whom our strategic goals would not be attainable.
With all that I. 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 one on your telephone keypad.
I'll hear atone acknowledging your request.
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To withdraw your question. Please press Star then two 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.
I wanted to start off with the <unk>.
230 million.
And cost re forecast in the quarter.
Is that weighted among.
Among the.
The remaining LST teekay projects.
Like if I look at Slide 14, you is the read here that.
Given that training, they're going 10, a little further along as more of those weighted towards a drummer.
Yeah.
Yeah. It's a good question I mean the.
The impacts.
Oh, Oh, Oh really across all of the remaining.
L S Teekay that we've got now.
Having said that.
Clearly if you look at the four out of CK projects. We got the first are in the Middle East is complete and is in commissioning.
So you know very very much at the end of the process.
Second.
Two of them are truly on the magnitude.
Uh huh.
Expected to be complete this year 2022 with physical works now what that means is that the construction activities will be complete in 2022 and.
When the commissioning activities certainly for Trillium, a roll on into 'twenty, three but actually the exits and we will go into operation This year.
And then ramp up asleep.
It's the latter part of all of the backlog and the graphs that you see as the backlog comes down.
You can also see.
Yeah.
Backlog is really diminished through the latter part of this.
Yes.
So with the different impacts.
That we've re forecast and I would I would also stress that the re forecasting the.
<unk> has taken in.
And in the Covid the supply chain and the inflation is in N forecast cost. So those forecast are actually assessing what the new completion dates.
The new cost to complete the projects.
And.
It's very difficult to give you a precise answer.
Without going into.
Several layers of detail as to how each one of those components.
It was affected each job.
So really I mean other than kind of.
Saying that the that the assessment has been done in a great amount of detail.
I'm not really sure I can break it down further than that for you.
Yeah.
Okay.
Maybe a follow up here just on you know any any recourse that you may have on somebody's report.
Forecasted numbers, but.
So you've given three main impacts.
COVID-19 supply chain inflation as we think about you know possible compensation going forward you know what part of it should we be looking is it primarily Copa Dor, and then and then how much of that.
If you break it down into the buckets for that future potential risk of a $300 million, how much would be omnicom versus supply chain versus inflation.
So.
I think I'd probably.
Probably need to walk through maybe the best way of updating with it because I'm a recognized is gonna be numerous questions with respect to both the loss and the <unk>.
Q4.
And also the assessment of risk.
Going forward.
And maybe if you just give me a little bit of time, everybody. Let me just walk through how do we think about these two things and how we think about the effect and also how we think about our entitlement for recovery. So it's gonna be a long answer, but I think it's probably beneficial to future questions that want to pick off specific parts of this and I recognize.
The need for clarity so.
If you take the two city.
Loss, which is N forecasted loss, which we've.
Re forecasted based on a change of events that we've seen in Q4 and those change of events are obviously COVID-19 supply chain disruption and inflation.
And.
Covid.
We've said you know for the last two years has had a productivity loss of 15% to 25% what's different I think with the only from Varian is that we were seeing absenteeism.
Up to 50% on some of the jobs and we had a very significant spike in productivity loss and in actual fact I was on both job segmenting them and Trillium recently to see and feel just how impactful.
Productivity losses been in and when you think about these jobs at the end of that stages.
Social distance requirements. It restricts the number of people you can put on the job with absenteeism. It obviously means we're struggling to get labor on the job.
Supply chain is also disrupted these jobs.
Reasonably significantly so just a unique things for example in Trillium.
Most of the stations the concrete and steel is finished.
Weighted on glass, so we call them actually and close the station and work inside the station in winter because of waiting on glass. So that's you know components from China.
Post pandemic.
And then all of these things out to delay and delay is cost. So obviously, we've refocused the cost based on the <unk>.
The actual completion that we see now ahead of us.
And as you can see inflation has been pretty significant.
So.
Anything.
We believe.
Anything that stems from an origin of COVID-19 , whether it be supply chain or even post pandemic inflation, we would look to recover from our customers now clearly these are difficult negotiations on their end and these are difficult.
Disputes are resolved.
We clearly have a different outlook to our customers otherwise we would've resulted in by now, but we will continue to pursue recovery of these losses.
But all all way of dealing with this is to be prudent in our reporting.
And if you look at the unfocused cost.
Get it into our reported figures.
On a real time basis as we see these things happening.
So let me just put that that that that's the Q4 loss of 230.
And again bear with me, a little bit because I want to be a bit more clear.
About $300 million risk assessment.
We are acutely aware the.
The forecasting we did a year ago.
Has not gone to plan.
Clearly things have changed macro effects of change that's had an effect.
On a.
Reported numbers and therefore, those the 230 loss.
So what we want wanted to do here with the 300 million is to say well, what's the worst thing that can happen.
Let's assume that.
The the assumptions that we've made.
For.
Forecasting are wrong.
What's the worst thing that can happen if those assumptions are wrong.
And again.
Stress.
But with only a year out.
On two of the bigger jobs and Trillium in England.
Our ability to get a lens on this even if things are different even if only from happens again, even if inflation spikes again.
Our ability to assess that risk is stronger than it's been in the past.
So.
We're trying to be very clear here.
The if you take absenteeism for example.
We've assumed that things are going to return back to normal in Q2, maybe some residual.
Covid impact and generally things are going to go get back to normal in Q2, now if that doesn't happen.
Then with muddled a real worst case scenario, maybe another on the omnicom barrier.
Maybe sustained productivity loss and that's what this represents.
For inflation if we.
See continued spikes in inflation.
An increase in inflation.
What's the worst case scenario that that would lead to another and that's been muddled in the 300 million. So we're really trying to give a fix here of what what is the what ifs.
You know what what's the worst thing that can happen here in one of those if those macro factors kind of get worse for my modeling for Q4.
So I hope that's helpful and I know, there's probably going to be follow on questions to that.
I appreciate the color I'll turn it over thank you.
Our next question comes from Yuri Lynk of Canaccord Genuity. Please go ahead.
Hey, good morning.
Yeah.
Morning.
So just on the current assumptions, you're making on on slide 14.
I mean, we're we're well into the first quarter. So I mean, how is you're expecting productivity to improve in Q2, how is it tracking.
This quarter am I assume that you're seeing inflation stabilize and the disruptions alleviate themselves a little bit.
But maybe any color you can provide on that yeah, yeah for sure for sure.
I think the answer is in line with our expectation from the re forecasting in Q4 I mean.
Clearly we.
We've been doing that refocusing and absolutely real time based on what we've been seeing as we've been coming out of the omicron I mean, not some team season levels have fallen down.
That's what probably.
Stage of if you can call normal pandemic levels.
But we're even we're even coming out of that now I mean, some restrictions around social distancing.
Some restrictions around.
Around hygiene, and and mask wearing and et cetera, et cetera, we're seeing the intuit and that's having a you know that's having a positive impact.
And you know with muddled inflation as you said based on what we have seen and that certainly that there was sort of exponential kind of inflation growths in the backend of 2021, but we've you know we've seen that stabilize out a bit.
So.
Long story short I think.
Certainly from a forecasting but we believe we're going to produce.
The project's too in the Q4 results is in line with our with our expectation.
The 300 million downside.
Can you just describe.
The cash portion of that or how we should think about cash versus noncash.
So I'm going to let Jeff answer that.
You already have this question.
I'm, just I'm going to say this a few times of probably just repeating it is risk you know what we're trying to muddle risky. So we're trying to model a worst case risk.
But we have thought about that.
Impact and I'll, let Jeff just respond to that.
Yeah.
As you would imagine in the context of the drivers we've talked about.
The majority of that potential risk what it would have a cash impact not all of it. So you know probably.
Obviously, it depends on kind of relative weightings, but we would say a majority of that is cash but not all of it.
Okay. That's my two.
Our next question comes from Sibat Kim of RBC capital markets. Please go ahead.
Great. Thanks, and good morning, just on the update that you provide on each of the projects in terms of the the remaining backlog and kind of.
So I guess the cost or the timing to complete it looks like the dollar amounts are generally in the same ballpark as the last quarter and the Trillium I guess it was pushed out a little bit I guess gives us backlog go up what are your views on inflation net of the work. They are complete how should we think about these numbers and the directions, and then kind of a puts and takes there.
Yeah.
Jeff why don't I, why don't I take that one yeah.
Yeah. So what we've seen in Q4 is the fact that with the.
Cost forecast and the cost forecast going up.
That obviously impacts our our percentage of completion, which drives our backlog. So in essence in Q4, we saw relatively flat.
Flat level of backlog and you know in reality that that's made up of the fact that we continue to make good progress in terms of delivering on the project.
But we've got higher cost and therefore, a delay in terms of.
From a percentage of completion of continuing to work that revenue amount down I would also say that.
We do get change orders and directives from the client where they ask us to do some additional work you know either regulations have changed so they need more you know more of particular items or they make slight changes to you know to the project itself and obviously that leads to some additional revenue. It's the smaller portion for sure but that contributes to it as well.
I think what I would say is that the profile of the remaining backlog that we've put out in the results today that shows that you know continuing to strongly decrease over 2022.
Such that by the end of 2022 in line with Aeons comment I've been bugging, you know largely physically complete, particularly I'm trillium in Eglinton, we'd expect that.
Backlog to be less than half than what it is today.
Alright, Great and then maybe a question away from the Teekay stuff you provided guidance that looks to be in line with what for the engineering services side that looks to be in line with what you noted at our Investor day last year. So just anything to give us some buildup of that and how you're thinking about growth across maybe geographies and maybe any contribution do you expect this.
Here from the U S infrastructure, Bill and anything you want to call out on end markets kind of trying to get a little bit more color on your expectation for this year, given where we are in a pandemic.
Yeah.
For sure.
Yeah.
As you know we've deliberately positioned the company with 80% to 85% now of our revenues coming out of Canada, The U S and the U K.
And we're feeling really good about the pipeline of opportunities ahead of us and those three core geographies I mean, obviously three the three companies are committed to.
Two infrastructure spend and as you rightly called out.
Biggest opportunity in those three for ourselves for growth as the U S.
They are also committed to sustainability, our infrastructure and sustainability of energy. So our offering specifically around those components are really led to a lot of project wins.
Through the second half.
2021 and if you look at the book to Bill ratios. The backlog growth you know our revenues in 2021 I mean every cent indicates.
We can be really confident of the outlook that we gave for growth on an organic basis, 4% to 6% in 'twenty two and beyond.
So we're feeling really good about it I mean, the the the U S market as you called it out I'll speak to that directly I mean, we have.
Yeah.
Four to 5000 people in the U S, which is significantly less than some of our larger.
He is.
We have a very very specific plan of how we're going to organically grow and inorganically grow.
U S business, it's a it's a state to state.
Play I'm very much in line with how we communicated in the Investor day. So all in all we're feeling we're feeling we're feeling pretty good about the engineering services business going forward.
I think Jeff I think the only thing I'd add to that is I think with the infrastructure Bill you know our expectation is we will see more of that in the second half of year than the first half of the year and there is a natural seasonality in the business. So I think our view would be very confident on hitting those revenue growth targets, but as we've seen in the last couple of years.
Tends to be a little bit stronger in the second half.
Versus the first half.
Okay and then just maybe this is more of a higher level. One and then you talked a little bit about the nuclear segment and the outlook there, but I think over the last few months of a crown interesting release around some work on.
I got the fusion side of energy, which seems to be you know I put ends up working out and maybe even more accepted than nuclear I can't talk about the role you're playing there and you know.
The fate of nuclear within clean energy discussion or I guess, it's TBD, but this seems like something that might be more acceptance and want to get an idea of how involved you are here and what this could mean in terms of dollars over the coming years.
I think.
The nuclear agenda is pretty much.
In play across many many countries.
The most advanced is obviously, the U K, where the committed to nuclear energy.
I the build we're very very active in building hinkley, and we're positioned really well to build side as well.
And I think we will see further on a newbuild work.
I think you know with recent events I think a lot of our energy.
Policies countries will will potentially change and I actually think they were on the change anyway to to think about nuclear is really one of the strongest options for clean energy.
The Canada is obviously certain provinces are committed to it with life extension and even the potential for new build so I think in the longer term.
I think we're going to see a.
A resurgence.
Nuclear energy in it and I think we're really excited about that having our own technology and having our own capability.
In the short to medium term.
Suddenly opportunities and feasibility studies.
Certainly opportunities in the U K P.
Potential opportunity in Canada.
And then really on the fusion side you know we are involved in the initiative in the south of France, which is looking at fusion technology.
I mean, I think it's a long way from being at about.
A proposition that we can generate electricity from but but actually being part of it gives us.
That sort of technology, the technology advantage and the technology giant knowledge.
Hum.
Thank you.
Yeah.
Our next question comes from Mark Neville of Scotiabank. Please go ahead.
Hey, good morning.
Good morning.
Maybe just to go back on the projects.
I assume I mean, I can appreciate that yeah.
Just try to put a number on this.
Nobody wants these losses, you are way more than you guys, but I'm I guess I'm just curious.
Maybe why leave so much downside risk on the table and should have them.
I guess, maybe why I took a bigger provision I guess is my question.
I'll start there.
Well.
The Q4.
Forecasts are forecast as I've said I mean.
That is a.
Reflection through sound logic unsound assumptions.
Of what we believe the attitude cost to.
The completion of these projects off.
But I think we have to recognize.
We said that a year ago.
And.
Things have changed since a year ago.
So we wanted to be clear.
The worst case could be.
If.
A whole bunch of things.
From a macro environment macro trend environment occurred again in 2022.
And obviously as we get closer to the end they the impact and the the influence and the ability to model those risks becomes much much stronger. So we haven't felt and our position is strong as is to be able to muddle the risks before but with our with most of this kind of from.
Physical work perspective being complete by the end of this year.
We feel first we can forecast the out turn cost $230 million and second the what if scenario.
And what if a whole bunch of things happening now what's the worst thing that that it could be you know how well what is that.
And we assessed that $300 million.
We felt that would kind of help in sizing that.
Okay, well that's helpful. Maybe maybe not a fair question and I appreciate the color there maybe on the operating cash flow for 2022 up to $100 million.
Jeff can you maybe help us understand roughly what's yes versus projects.
Yeah, I think as I think I said in my script, you know, we would expect to continue to see.
Similar levels of EBIT to.
Operating cash flow conversion in the engineering services business and therefore, I think as we look at 2022.
We would expect to continue to see a cash flow usage on the projects.
As they complete out in in 2022, probably not dissimilar to.
What we saw in 2021 based on that you know in particular around the the losses, we booked in Q4, obviously a lot of those costs you know the significant majority of those costs are.
For the future periods beyond Q4, 2021, so we would expect most of those to come through in 2022. So I think from a cash flow perspective, you know the kind of the relative.
Amounts between engineering services, and and a N S. NGL projects, probably doesn't look dramatically different than what we saw in 2021, and therefore not surprisingly we ended up with a with a range that's fairly similar to what we saw in 2021 as well.
Right.
I guess, if you're correct about your current assumptions on the cost to complete the.
The majority of the cash outflow that needs to happen happened in 2022.
Yeah. It would as Ian said, you know most of the physical work as our almost all of the physical work ends up being done on areas like Eglinton in Trillium in the in the current year. So yeah, we would you know or or resources project. So so yeah, we would expect to see that that happening there and as you know and as Ian said I'll be.
We think that.
A significant portion of these costs are recoverable are related to COVID-19 and the secondary impacts and therefore, you know from a cash perspective, we think we have claims for those and we would look to recover those over time.
I think what we've tried to do in 2022 would be quite prudent about that because I think our observation. These are you know these are complicated discussions to have.
And therefore, it may take you know to the final account settlement process on on the projects you know were indeed longer or if there is some you know.
Third party process, we need to go through to try and you know to try and arrive at an answer.
And obviously from a cash flow perspective that would be upside.
You know going forward, we haven't assumed any of that in a in 2022.
Okay, well, it's getting late so I'll turn it over but thanks for the time.
Thank you thanks.
Our next question comes from Maxim <unk> of National.
Bank financial please go ahead.
Hi, good morning.
Importantly.
Jeff I, just wanted to clarify that the opening cash flow guidance because I'm in the MD&A.
So you can see that including the losses taken in Q4.
And then you provide sort of the range. So if you were to exclude those losses would there be a different number or is it just kind of put the language, which is a bit confusing. So I'm just trying to clarify this.
Yeah. So it wasn't an intention to be confusing in the language, obviously as I said within that $230 million of loss that we booked in Q4, you know them.
Minority of that is actually related to Q4 itself.
As we've been talking about you know the significant majority of that is is for future period. So while it would've had some impact on on Q4 cash flow in 2021.
Inefficient majority of that would be in 2022, where we would expect to realize from a cash basis in 2022 and is included within our 2022 operating cash flow guidance.
Does that help Matt.
Yeah, no that drove quite a replenishment appreciate okay. Okay. You want to thank you and then the other question I had in terms of if were to strip out the $94 million from U P. M. Correct me, if I'm wrong, but I think the margin on EBIT would be around 8% for the quarter, which would be a compression versus last year is there anything to read into it or.
How should we think about on a going forward basis.
I don't think we had a number I think if you strip it out Max our number was more around 9%. So very much in line with what we've been doing in previous quarters. So.
I'm happy to happy to take the math offline, but yeah. The under the underlying business. We saw E. D. P. M. In Q4 very much in line with what we've seen over the previous quarters low single digit organic revenue growth quarter, you know year on year, and an EBIT percentage around that sort of 9% level in the middle of it.
Target.
Yeah I.
I agree with that.
Okay. That's helpful. And then maybe you can just if I wasn't.
Listen just just one more in terms of obviously there was a lot of growth anticipated in the west.
Do you mind, maybe just commenting on the ability to recruit to be able to take advantage of this uptick thanks, yeah, yeah yeah.
I mean, it certainly does it does it raise for China, there's no doubt about that.
And I think.
Our view is we have to continually innovate to be ahead of this race now currently our turnover rates are rather than what they were pre pandemic, which is a good thing in our recruitment rates are strong I mean, we've been able to grow our full time.
Equivalent hedge.
To meet the growth two mountains of the the strategy going forward and then on the outlook going forward. So so far where we're able to manage the race so to speak and we're able to recruit.
Recruit what we need to grow the company.
Okay. That's great. That's it for me. Thank you very much. Thank you.
Our next question comes from Sean Francois Liberally of Desjardins capital markets. Please go ahead.
Yes. Thank you very much for taking my question. So I just wanted to come back on the nuclear segment and was wondering if you could provide more color on the one.
One government P. J D with <unk> that was reported by the global Mail and now we can yes, we can position the division to continue to expose yourself and win in the decommissioning market. Please yeah, yeah no no. Thanks for the question so far.
First thing I'd say is it's not a material impact to the business.
And the reason I would say that.
Is because we actually we actually modified our relationship in this joint venture going back to a new strategic direction. Because originally we went into this relationship with lump sum intentions and taking construction in lump sum risk and we had to modify that to take our services approach.
To it and a fee based approach to it so while we've been in this relationship that that's what it is and obviously revenues.
And profits are smaller because of the kind of involvement within the joint venture.
So our partner he really wants to move in a different direction and I think he wants to partner that is prepared to take more risk.
So we're in the process of winding down the relationship which I think was reported in the media that that's actually not completed yet so we're in the process of working our way through that.
But what I would stress.
Is that.
The market was only in the U S and we've got decommissioning and life extension opportunities in the U S. The U K and Canada. So we're still you know I have a strong value proposition and we still have existing contracts that are outside of this but the biggest part the biggest part of our revenues actually come.
From waste remediation right now and those are contracts with the department of energy in the U S and they were they were outside the CDI that they were not in this joint venture. So when we finalize everything and we looked at the market and our strategy.
We're very confident in the outlook, we've given in the Investor day, so growth and for performance will not be materially affected by this are this kind of winding down of CDI.
Okay. That's good color and then Jeff I just wanted to come back on the the cash cost impact that we'll see in 2022 term debt L. S. T K losses from a seasonality standpoint would it be fair to assume.
Bigger costs in the first half versus the second half and just wondering how we should play out would be working capital Y century for next year.
Thanks, Yeah, I think yeah, I think that's I think that's I think that's a fair assumption as you can imagine.
We're putting we're putting more of the physical work in place over the course of the first six to nine months.
You know from a full year perspective, because of course in that period.
For instance, we've got Eglinton and Trillium running you know in a sense full tilt.
And then Eglinton, obviously, starting to wind down in the second half of the year as it as it complete.
So yeah, I think if I was needing it you know one half to another I'd I'd wait the cash flow impact more to the first half than the second half.
Okay, and just one follow up there yet, but they are the 300 million of worst case scenario that you've done is it fair to say that it's for the entire completion of these projects, where it's only for 2022 and three.
300 million.
No no no. It's it's it's for the entire completion is for the whole kind of completion of everything.
We looked at.
All the projects all the potential outcomes.
<unk>.
Those risks for all of those potentials outcomes to completion and then you know defined.
Assessment around that.
Okay. Thank you very much.
Our next question comes from Michael <unk> of TD Securities. Please go ahead.
Oh. Thank you I guess the first question is just.
Somewhat of a follow up related to some of the cash flow questions you received Jeff.
But a bit different you've been talking in the past that over the life of these projects you expected them to be.
Cash flow neutral. This is the L. S. Teekay projects is that still the case if.
If you could just provide an update on that front and how the 300 million.
The estimate that you provided if if that comes to fruition how that might change the.
Whatever your answer is with respect to life cash flow neutrality.
Yeah, I mean, I think I I think we still see that as a as a possibility for sure I think the you know going back to my previous comment about when we expect to see some of the cash I think the I think the two elements that make it difficult to completely nailed that number down at this 0.1 is timing so when.
Will we actually be able to resolve.
The claims that we think we are due under the contracts for things like Covid.
Well you know we've had some success on that you know our view is that it it may take a while you know certainly to the end of the projects and potentially beyond in order to get a final resolution to what that looks like it's also a bit dependent on the absolute weighting within those within our estimated cost to complete as part of our.
<unk> you.
Or if indeed any of the future potential financial risk were to come to pass.
The relative weighting of that around.
Covid type issues, which we think you know we are entitled to versus other issues. So so I think it's a bit of color I think it depends obviously on those two vectors, so I'm not trying to be purposefully.
Vague it just it does depend on what those look like we do see a path to that but it will depend on it will depend on both of those over time and it you know it it may be.
Certainly beyond 2022 before we have a you know a final view of that.
Okay that makes sense and then secondly.
Obviously, a lot of discussion and focus on on the the three remaining transit projects and the $300 million restaurant, you've put out there I'd just like to understand with respect to the the resources segment, which I understand is now live.
The engineering.
Going forward, but there was a $40 million adjusted even bought in the fourth quarter in that area was that affected by sort of all of the same factors that you highlighted just broadly speaking for freshmen field projects in the quarter and then with respect to the 300 million dollar estimate does that.
Does that cover potential future issues on that resources project or where how do we think about resources going forward.
Yeah, No. That's a great question. So yeah. So the project was that project was going reasonably well, but also had had so food was.
Suffered through those three kind of key COVID-19 external that the the.
The supply chain issues, particularly in the middle east with supply chain and the.
The movement was quite difficult and also inflation.
We had we had another obstacle in commissioning.
When we put those things together.
It put us in a place where we felt we needed to assess.
Any likely kind of damage from the customer now we would expect to negotiate away from that because we've got you know good claims on one side, we've got risks on the on the other side, but we felt we wanted to put into the Q4 estimate.
A kind of a case, where we were imposed damages.
And that's what leads to that loss now and the 300 risk assessment, there's a little bit more but we're almost close to as bad as it could be you know from unimposing of damage in and et cetera.
So we will keep working with the client to get a better outcome for everybody but.
But we felt we needed to do that in the in the Q4.
Okay, and then just just to clarify on that point. When is this particular resources project actually fully completed and turned over to the client.
Well when negotiating and actually right now with the client to try and give it to them.
Early in in terms of the things that need to be done to commission and produce the product. So I'm not trying to avoid your question, but it's it's it's a round about the end of Q1, but let's just say ballpark. It at the end of Q1, but there's some nuances to that maybe into the beginning of Q2.
Okay. Thank you.
Yeah.
This concludes time allocated for the question and answer session I would like to turn the conference back over to Denny Jasmine for any closing remarks.
Thank you everyone.
Everyone for joining us today I'm, sorry, we were out of time I know what goes where more people are asking the question, but please feel free to contact me directly I'll be. Please go ahead. Sir any question you may have thank you very much everyone and happy to have a good day. Thanks.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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