Q1 2022 SNC-Lavalin Group Inc Earnings Call
Thank you for standing by this is the conference operator, good morning, and welcome to S&P Loveland first quarter 2022 results Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation there'll be an opportunity to ask questions to join the question.
Q 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 then zero I would now like to turn the conference over to Denise Jasmine Vice President Investor Relations. Please go ahead.
Thank you yes.
Good morning, everyone and thank you for joining the call. Our Q1 earnings announcement was released this morning, and we have posted a corresponding slide presentation on the investors section of our website a recording of today's call. It and it's transcript will also be available on our website within 24 hours with.
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 us have an opportunity to participate you are welcome to return to the queue for any follow up questions.
I would like to draw your attention to slide two comments made on today's call may contain forward looking information. This information by its nature is subject to 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 relevant filings on SEDAR. These documents are also available on our website.
Also during the call we may refer to certain non <unk> measures and ratios.
Measures and ratios are defined calculated and we consult with comparable <unk> measures in our MD&A, which can be found on SEDAR and our website.
Management 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 frankly, I got to tell yet.
And now I'll pass the call over to you in other words, yes. Thank.
Thank you Tony and good morning, everybody.
Before we begin I'd, just like to take a minute to recognize the tireless efforts of our 31000 employees worldwide and delivering every day for our customers every one of them continues to take pride in being part of the SMC leveling community account thank them enough.
So that's dedication and positive impact.
So I'd like to begin today on slide four.
During the first quarter, we saw continued growth in top line performance as total revenues increased three 8% year over year to $1 9 billion.
Driven by our <unk> services business, where revenues were up six 8% over the first quarter last year to $1 $7 billion.
Excluding the impacts of foreign currency, we achieved a robust organic growth of eight 4%.
<unk> services segment, adjusted EBIT of $127 million.
Rented a seven 6% margin.
Over the first three months of wireless TK backlog decreased by $210 million. So just under a billion dollars and we remain on path to substantially closing out these projects over the next several quarters.
Following our first quarter results, we are reaffirming our 2022 outlook, including <unk> services revenue growth of between four and 6% versus 2021 with a segment adjusted EBIT to segment revenue ratio of 8% to 10% and <unk>.
Overall company positive net cash from operating activities.
Our solid start to 2022 reinforces our optimism and regaining the sustainable progress on our journey to align the company on key growth trends such as government funded infrastructure programs digital innovation climate change today zero, all of which leverage our <unk>.
Nice end to end solutions from design through to decommissioning.
Turning to slide five.
Our engineering services business capitalized on momentum from the fourth quarter 2020, while delivering strong results for the first quarter of 2022.
Leveraging the depth and breadth of our services the capabilities of our team and the long standing relationships with our client base, we continue to take strides in achieving above market growth.
Revenues were up 10% on an organic revenue basis over Q1 last year to just over $1 1 billion driven by strong growth in the U S, Canada and the U K.
Segment, adjusted EBIT was flat year over year as the continued strong performance in the UK was offset by increased business development costs to win new projects and expenses related to executing on our pivoting to growth strategy.
The quarter witnessed key wins across the U S and Europe , such as our recent contract extension for our work on the expansion of southwest Florida's International Airport in Fort Myers.
Our near term growth trajectory is on track against our plan.
We continue to execute on our land and expand strategy in the U S, particularly Colorado and New York.
As a result backlog increased 7% compared to the prior year to $3 9 billion.
And gives us confidence in delivering our revenue targets for the full year.
On slide six is a key element of our strategy I'd like to highlight some of the recent wins that demonstrate our journey to delivering engineering net zero.
First I want to reemphasize, our goal of achieving net zero carbon emissions by 2030, a critical component of our purpose.
To that end in March we committed to the science based targets initiative, joining over 2000 companies globally to say emission reduction targets in line with the Paris agreement.
Beyond our own efforts, we can enable a step change in this arena by assisting our clients with broad range of net zero solutions.
In the U K, we're working with and supporting the National grid and Decarbonization of the energy system, which is required for the U K net zero targets, we're providing design and project management services across the entire construction cycle to assist national grid and delivering a transmission network.
Capable of supporting the transition to net zero.
This project is a prime example of our ability to utilize the broad capabilities of S&P level of network to deliver multiple solutions for the client and the decarbonization efforts.
And Dubai SSA leveling has successfully been selected by five holdings to investigate how the design of the award winning <unk> village Dubai can be redefined to deliver net zero carbon.
Lastly at home here in Canada, our successful track record of delivering trusted solutions for the major component of Bruce Power's can do react to redesign has led to additional request for our services across additional reactor units.
Work on this project will allow Bruce power to continue to generate residential power, that's 30% of the cost and extend the life of the units by another 30 years.
Advancing net zero projects around the world for our clients, making continued strides in our path to achieving net zero carbon emission is critical to our purpose.
Like to move to slide seven and the results of our nuclear business.
We recently announced the appointment of Joseph Julien as the new President of our nuclear business, succeeding Sandy Taylor, Joe brings an exceptional background and strategic and commercial management in the nuclear sector and I really look forward to working with Joe to deliver our plans for the business.
I'd also like to take this opportunity to thank sandy for his leadership over the last years and in particular, the role of bringing together all of our full lifecycle capabilities in the nuclear sector.
During the first quarter nuclear revenues had 2% organic growth compared to the first quarter 2021, increasing to $232 million as we continue to witness strong demand for our react to support services in particular.
Segment, adjusted EBIT was $34 million with segment adjusted EBIT margin, increasing 90 basis points to 14, 8%.
During the quarter, we made significant progress across a number of projects, including Darlington and Bruce power.
Our pipeline for can do react to upgrades remains robust and our portfolio is well positioned to capitalize on newbuild projects should they materialize at.
At the same time, our proprietary technology related nuclear products are increasingly in demand by our customers globally.
Overall, our nuclear segment provides predictable and stable base of work that is highly profitable for us and C level at <unk>.
Our position in the marketplace drives our right to win and captures a high quality substantive near term prospects that will deliver long term value creation and supporting our pivoting to growth strategy.
Moving to slide eight and our O&M segment, which generated a $137 million in revenue during the first quarter slightly below first quarter 2021 performance.
Segment, adjusted EBIT of $12 million was in line with last year's.
Six 8% margin.
We continue to see stable financial performance and strong operational metrics across the O&M portfolio with robust projects in the pipeline over the next 12 months, we remain focused on increasing the pipeline with strategic partnerships across the industry, while leveraging the expertise of our capital group.
To maximize bidding opportunities.
On slide nine our linked some business generated robust topline growth during the quarter, increasing revenues to $151 million, representing organic growth of 21, 3% compared to the first quarter of 2021.
Year over year growth was mainly due to an increased level of activities in the U S and the middle East most of this demand is driven by the net.
<unk> zero agenda as the growth in renewable power generation and the increasing electrification of transport and infrastructure is driving additional demand for linked songs offerings.
We recorded a segment adjusted EBIT loss of $5 million in the quarter, mainly resulting from project delays and higher costs on one European project installation, partially offset by higher contributions from projects in the U S and the middle East This European projects will be commissioned in the second quarter of this year.
And we expect the business to return to its forecasted EBIT margins of 4% to 6% for the remainder of the year.
Our backlog ended the first quarter at $920 million slightly below the first quarter 2021 backlog, but we remain really confident that our solid pipeline of prospects. We will continue to allow us to deliver on our growth targets, we have a strong standing in the marketplace.
The robust growth opportunities across our key markets underpinned by decarbonization trends and grid infrastructure investments.
Turning to slide 10, and capital first quarter revenues declined to $16 million, mainly due to the successful disposal of empower BC in February we remain committed to the recycling of capital investments when opportunities arise.
No dividend was received from highway 407 ETR in Q1.
2021 and 2022.
Amidst the even if COVID-19 easing of COVID-19 restrictions by the province of Ontario traffic pattern trends on the 407 improved 37% versus the first quarter of 2021.
And looking forward, we remain active on the business development front and we continue to make progress on our new strategy in close alignment with our O&M business.
Moving to slide 11, I'd like to provide more color on the pace of the Wayne wind down of our L. S. Teekay projects before turning it over to Jeff to discuss our financial performance in the quarter.
Year to date, we continue to to take strides towards completion of our three remaining LST K projects are.
Our backlog decreased more than 40% compared to the first quarter of 2021 and now stands at $957 million.
This represents a decline of 18% compared to the end of December 2021.
Last quarter, we outlined some of the unprecedented factors that we have been managing through as we work to complete. These projects. These included supply chain disruption.
Elevated inflation and building and construction indices and COVID-19, absenteeism on our sites. These remain impactful from a productivity and cost management standpoint.
That being said, we remain confident in our potential future financial risks projection and our forecasted timeline of the completion of these projects throughout this process. We will continue to have discussions with our customers regarding certain recoveries, which we believe we are entitled to and we'll pursue.
Vigorously.
With that I'll now turn over to Jeff to discuss the financial highlights.
Thank you Ian and good morning, everyone.
Turning to slide 13, total revenues for the quarter increased by 4% to $1 9 billion.
Compared to Q1 2021.
<unk> services revenue totaled $1 7 billion.
Representing an organic revenue growth of eight 4% driven by growth in engineering services and link zone, while the L. S. Teekay projects revenue continued to decrease as expected and totaled $214 million.
Total segment adjusted EBIT for the quarter was $109 million, which was comprised.
Price of $127 million for us in sales services.
$12 million for capital and negative $31 million for Alice Teekay projects.
The negative EBIT for the <unk> Teekay projects resulted from recognizing $20 million in the quarter of the 300 million potential future financial risk disclosed at our Q4 2021 results.
And from the segment overhead costs needed to support the project.
S NGL services adjusted EBIT margin was seven 6%.
Slightly lower than our full year outlook range, which as Ian has explained was mainly due to a small loss in link sun and higher bidding and business development expenses and engineering services.
Corporate SG&A expenses from <unk> for the quarter was $25 million in line with our expectations.
Note that Q1 2021 included a revision to certain estimates in cost accruals that reduce the expenses last year.
We continue to expect that our corporate SG&A expenses for <unk> would be about $100 million for full year 2022.
Capital had $7 million of corporate SG&A in line with last year and our expectations.
<unk> net income from continuing operations was $25 million for the quarter, which is composed of $17 million from <unk> and PM and $8 million from capital.
The adjusted net income from <unk> and PM was $39 million or 22 per diluted share compared to 48 per diluted share in Q1 2021.
The decrease was mainly due to the lower segment adjusted EBIT as just explained and a more normalized level of corporate SG&A expenses.
Backlog ended the quarter at $12 2 billion.
Compared to $13 2 billion at the end of Q1 2021, primarily due to the continued runoff of the LST K construction contracts backlog.
SNCF services backlog totaled a $11 2 billion at the end of the quarter.
Which included a six 7% increase in the engineering services segment backlog compared to the first quarter last year.
This segment was awarded $1 $2 billion of work in the quarter, representing a 1.08 book to Bill ratio.
The nuclear O&M and links on backlogs remained solid at 802 million $5 6 billion and $920 million respectively.
If we now turn to slide 14 at the end of March 2022, the company had $506 million in cash and the net limited recourse and recourse debt to adjusted EBITDA ratio was two three times slightly above our 2024 target range of one five to two times, but can.
<unk> a trend of strengthening the balance sheet over time, one of our core financial priorities are.
Our days sales outstanding for Engineering services was 61 days at the end of the quarter largely similar to what we saw throughout 2021.
If we now move on to slide 15, and free cash flow.
Net cash used for operating activities was $134 million in the first quarter.
SNCF services continued to generate positive cash flow from operations was $59 million for the quarter, while capital generated $15 million.
After cash taxes interest and corporate items, you can see that we generated $31 million of operating cash flows.
As expected LST K projects had an operating cash flow usage, which totaled $165 million in Q1, mainly from the payment of a portion of the <unk> Teekay provisions recognized in Q4, and the working capital requirements for the projects.
We continue to expect that the company's operating cash flow should be in the range of zero to $100 million for the full year 2022.
We expect that operating cash outflows related to L. S. Teekay projects should decrease over the coming quarters and be more than offset by the operating cash inflows from asset sales services and capital.
And finally, turning to slide 16.
Company is reaffirming all full year 2022, and <unk> outlook items and continues to expect that EBIT and EBITDA to revenue ratios and net cash generated from operating activities to be weighted to the second half of the year.
This concludes my presentation and I'll now hand back to Ian.
Thanks, Jeff turning to slide 18.
To conclude my remarks with a few key takeaways.
We are really proud of the work that our STC leveling colleagues are doing to continue to make strides in executing our strategic transition and future growth.
Our core business is executing well and delivering strong financial performance.
We have a solid backlog and a strong pipeline of new business opportunities positioning us well across all our core markets fueled by governments investing in new infrastructure and sustainability initiatives.
We remain focused on executing our pivoting to growth strategy and optimizing our delivery of sustained revenue and free cash flow generation.
And I want to reemphasize too primary focus is to drive value creation. This year.
Accelerating growth in engineering net zero through the rich capabilities, we have and developed to provide sustainable end to end solutions to our customers.
And executing the derisking of the business through further progress in rolling off the LST K backlog.
We were successful in both during the first quarter.
Finally, we remain laser focused on our ESG initiatives and achieving our targets.
Amendment to the science based targets initiative further cements, our belief that we can achieve carbon net zero emissions by 2030. Additionally, we have and will continue to invest in our people.
To create a culture focused on the diversity the development health and the wellbeing of our employees all of whom are integral in achieving our pivot to growth strategy. Thank.
Thank you and we'll now open the call for questions.
Thank you we will.
I'll now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad Youll 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 we will pause for a while.
As callers join the queue.
Our first question comes from Jacob bout of CIBC. Please go ahead.
Good morning.
Good morning, Mike.
My first question is on <unk> service.
Services margins EBITDA margin came in at some 0.6% I think it was a little bit lower.
Lighter than what we were looking for.
The written commentary you call out the elevated bidding and business development expenses.
So I guess a few questions on this do you expect of us.
Bidding expenses to continue into second quarter and the rest of the year.
How did omicron related options absences issue.
The impact of the first quarter and then maybe just comment on any wage inflation of cost inflation.
In constant margins.
Yeah. Okay. Thanks, Thanks for the question.
I will get to the specific points that bill.
Before I do that.
We are seeing a really really strong demand for our services than our core geographies that we've positioned ourselves in and.
And the end markets within the entirety of <unk> services. So the go forward part of this business. We believe we've positioned it really well and we spent a lot of time positioning in markets, where we think we can be successful and grow and obviously enacting are pivoting to growth strategy that we took.
Bold in September we're feeling good about because as you can see from the revenue year over year growth.
Inorganic growth.
Organic growth you can see the fruits of that are beginning to take now.
There is there are there are two components, which have contributed to.
What you rightly say is a slightly lower EBIT margin than normal range that we've been able to.
Stay within over the last few years in this particular part of the business to go forward part of the business and one is the higher bid costs, which I'll come back to and the other is the loss that we indicated and Lynx zone.
With respect to the.
The engineering part of the business and the services part of the business.
We are not seeing an impact from Homochrome absenteeism.
We're not seeing an impact from the race for talent if you like in the inflation.
That brings because generally speaking people are working remotely whether the sick or weather.
The healthy so all the way through the pandemic that has been the services part of the business.
Given as a sustainable productivity.
But the.
The wage and the.
The kind of the inflation that we're seeing because the services part of the business is on the short cycle generally speaking, we always experienced that being passed on through the rebating in the re winning of work and remember a lot of this work is reimbursable. So.
The wages increase.
The reimbursement comes what we have seen is an enormous amount of opportunities in pipeline that we've experienced across all three co geographies. The U K the U S and an earning Canada.
We will see that normalizing and we will see the margins, particularly second half of this year, becoming really really strong within the range and we are not worried.
This is a trend at all in fact.
We've re reissued as you heard from Jeff and myself that we're confident being in the range for the year.
Do you recoup any of these bidding expenses.
When some of these projects are.
Well it really depends.
I mean.
For for some of the bigger projects that we're seeing it across Canada, yes, not all of them, but yes.
<unk>.
And the services part of the business, where we're obviously land and expand strategy in the U S. We're investing more in BD. So that we can actually.
Carryout that land and expand strategy. So there's no single answer to that but like I say.
It's it's just particularly.
Busy time, and we don't see that that will.
To sustain itself through the year and we should return to normal levels.
Thank you for answering my questions.
Our next question comes from Yuri Lynk of Canaccord Genuity. Please go ahead.
Hey, good morning.
Yes, good morning, good morning.
If you could.
Put a little more color on on the LST K charges I have to admit I'm a bit surprised.
So close after taking.
Pretty large write down in the fourth quarter.
And presenting that $300 million is kind of.
If we need to take it.
Type of scenario and then you know.
A month later.
We're we're taking another $20 million so.
What.
What went wrong, there and do you think that you've got it all captured in the quarter in terms of cost forecast.
Yes. Thanks for the question I think that's a fair question.
The first thing I would say.
Just just to be clear.
The quarter, considering as a winter quarter, where we've put $210 million of revenue in the ground. So to speak on these lump sum jobs.
<unk> progresses.
As generally being good and supportive of the statements. We've made in Q4, which were basically two of the projects in Ontario, we would see them, reaching physical completion by the end of 2022 with only the one remaining project in Quebec and that.
The case, so we are.
Confident of that.
The lawsuit itself has two components to it.
One is.
The overhead cost to run the business.
If you remember we did actually say Q4, we're probably going to get a run rate of that overhead cost of about $10 million a quarter.
So thats one component that you will see.
Quarter on quarter for the rest of this year until we can burn off the majority of the backlog.
The other $20 million.
We see it as $20 million.
The risks that we identified.
At the end in Q4 as being realized.
We indicated that worst case scenario if things didn't go quite as we presented.
Assumptions, we would see some risk evidenced itself, but it would never exceed 300 million that remains the case.
And we have experienced some of the risks beyond the assumptions we made.
And if and if you recall back to Q4.
There was one slide that we put in the deck there in Q4, which clearly set down under absenteeism.
Road activity.
Supply chain disruption.
Inflation, what the assumptions around the Q4 loss.
And what we've seen in Q1.
Is.
Continued absenteeism for example through the VA to Varian that.
With over and above that we expect what we expected when we presented the Q4, so we've re forecast that.
And I think you've also got to remember.
Yeah.
We are constantly re forecast in the endpoint so that we're not just.
Putting losses in here that we see in the quarter were putting losses that we will update to complete these jobs.
So I understand the question.
I think the key point here is we.
We are confident that we're going to finish these jobs.
The two Ontario jobs, primarily.
Basically by the end of the year, and then into commissioning and the following year.
And.
The last thing I would say is that we still believe.
The March of the Covid related.
And.
And post Covid inflation and supply chain issues are recoverable through the contracts and we will vigorously pursue those recoveries.
In the medium term.
Okay.
Just a follow up just on the on the engineering services.
Business as a whole.
Rough math to get to the midpoint of your margin guidance for 2022, youre going to need to exceed the midpoint for.
For the next three quarters.
And just given the weak start in Q1, which you've explained pretty well just what gets us swinging the other way.
And is it should we be expecting more.
Back half weighted and perhaps further weakness in the second quarter, just trying to get expectations aligned here for for Q2.
Yes, it's Jeff one Tonight, why don't I take that one.
We will absolutely see improvement as we go through the year not dissimilar to what we've seen in previous years.
And I think we would expect to see incremental improvement as we go quarter by quarter.
As you heard Ian say second half typically is stronger for us than the first half.
Yes.
We will continue to be and expect to be well into our 8% to 10% range by the end of the year.
Okay, I'll turn it over thanks.
Thank you. Thanks. Thanks.
Our next question comes from Mark Neville with Scotiabank. Please go ahead.
Hey, good morning, guys.
Good morning.
Yes. Good morning, maybe just a follow up on <unk> question, just on the on the losses the $20 million.
I understand a lot of work goes into that but is that sort of.
Blanket number to cover all of those three buckets inflation, SMT absenteeism supply chain and sort of cross the three projects or is it sort of focus on one in particular.
No.
Good question.
It's quite specific in the way that we look at the re forecasting of each of the projects.
Specifically the majority of that.
Is in relation to one of the Ontario projects.
And even more specifically.
It's in relation to absenteeism.
That particular job you might be.
Interested to hear that 62% of the.
People on the job and that's whether that's labor or supply chain labor subcontract labor or our own staff, 62% since the first of January I've taken some time off.
Now obviously those days.
Very from days to weeks.
That's two thirds of everybody on the job is either contracted COVID-19 opening contact with somebody with Covid and felt it necessary to stay at home and obviously, we need people physically on the job.
I think on that project also specifically again.
We've got a supply chain issue with some <unk>.
Blazing housing to the above ground stations.
And that's China supplied.
<unk> item and we've experienced some.
Some delay to the.
And then the problem with that is as consequential kind of knock on delays because we obviously count fit out of the station we count finish it we can do that the mechanical and electrical work. So those are those are kind of two examples.
Which are very specific and we obviously two very detailed.
Re forecast on all the projects on a constant basis and review them on a.
On a monthly basis.
I think the last thing I'd say.
Perhaps to just.
This.
Put this out there.
The supply and demand dynamics of labor and.
In equipment.
And materials.
Particularly with energy costs, rising and wages rising on the lump sum projects.
Is leading to.
A situation where our subcontractors.
Most of the work is done through.
Ah requiring that we need to support them to get these jobs finished.
And that's a dynamic situation that we will just monitor through.
But all of these all of these aspects do not change our view that we communicated in Q4.
Particularly around the worst case scenario around risk does not change that view.
Okay, and maybe just two follow ups on that.
The absenteeism.
Sequentially better through the quarter and into April and May I guess is yes, yes, yes, yeah. Good good follow up.
Think so and I think as we kind of as we get into the summer months.
I think that.
That particular issue will improve and obviously the productivity that goes with it which is really the key.
Accounts I would specifically seen it yet, but my sense is that it will yes.
Okay and on the inflation.
Obviously difficult to answer but.
Bill or mark to market now.
In your opinion in terms of what you've put in your budget for installation of where its trending.
So as Jeff said, we obviously, having some have assumptions within our budgets and to <unk> point, because we re forecast the jobs each quarter of course, where as a part of that looking at where our latest forecasts are for <unk>.
Subcontractor costs for materials et cetera. So.
We do we do in a sense.
Mark that as we go along I think what you I think what Ian was highlighting was that we're continuing to see both an elevated level of inflation, but also in some instances whether it's in the subcontractor Labor force.
Hi.
Significant labor inflation or just ability to get a hold of the trades that we need.
Or in the case of things like as he said glazing, that's coming from far away I think we've all seen the lockdowns and the impacts in China and Thats.
That is absolutely impacting some of our ability to to get the the glazing or some of the remaining materials in the time that we'd won.
I think probably less.
Comment.
I'll, just just one last comment as well, but just.
Leave as a thought.
Theres a table in.
And the backup information to the presentation deck, which shows the evolution of the backlog burn off the backlog execution.
Through this year and then into the 'twenty three 'twenty four for the final remaining projects in Quebec.
$200 million in the first quarter is a good is.
A good set.
Set of progress on actually working our way through these jobs.
And perhaps just draw your attention to that slide.
Yes.
Alright, I'll pass it over but thanks for the time good luck.
Thank you. Thank you thanks.
Our next question comes from Devin Dodge of BMO. Please go ahead.
Thanks, I wanted to start with a question on the links on business.
Can you give some color on the EBIT loss in Q1.
And then it relates to a single project in Europe .
I'm just trying to understand what makes that one project.
Different.
And what gives you confidence that this is not going to spread to maybe other projects across the portfolio there.
Yeah, Yeah, yeah. Thanks, Thanks for that question.
Let me start by just.
Talking about <unk> for a minute if I can and then come back to the specific question.
Links on the joint venture with initially.
Initially.
With ABB and now through the Hitachi acquisition of that part of ABB.
It's an SMC potassium.
The deal is they provide the equipment and we install it.
But it is a fully integrated joint venture company.
I mean, we've organically grown this company to $600 million of revenue. So it's been a successful journey in the company.
And I'm acutely aware that the first time, we've actually.
Externally reported this company is this quarter and.
We've had a problem on a project.
The growth we're very excited about the market. We're very very excited about because electrical distribution as countries go to cleaner energy and the need to increase the amount of electrical energy to meet the demands of net zero that the market is really strong I mean, we've seen 21%.
Growth.
Quarter over quarter from last year.
Year over year.
Generally the projects that we execute in this business the range about $35 million projects.
At any one time in the business, we would have about 60 of those jobs on the go starting full execution completion.
And through the portfolio effect of having many small jobs.
We have had consistency in the margins now. This particular project is one of the largest we've done.
And we have fallen into some delays with some cost overruns, but it's very isolated to this project and the project is being commission next year. So we feel good about the remaining part of this year and the growth for the future of filling some business. That's why we've kind of restated.
It will be back in the range Q2 Q3 Q4.
In Q2, but what did I say 200 next year. So I will start commissioning Q2, sorry, sorry commissioned in Q2 for that one project.
Okay. Okay.
Okay that was good color I appreciate that.
Last question I was going to ask you about.
Nuclear and Spa.
It's typically some U S federal work.
Over the last couple of years I think there was a lot of contracts out for re bad I think there was some optimism within FMC that you could gain a greater share of this work.
We've seen some contracts get awarded by the daily, but I don't believe FMC has been.
And any of these winning consortiums yet just can you talk about the opportunities.
Still in procurement and whether you still expect <unk> to grow its presence in this market.
Yeah, So Joe.
First of all.
Really pleased to have Joe.
As the new President, obviously Joe's U S citizen these from the nuclear sector.
Worked for for one of our peer companies and brings a wealth of knowledge both from the U S. But also from from the nuclear sector as a whole.
I'll answer the questions.
Specifically, but generally we're very excited about the nuclear business, particularly with the.
The current sort of energy.
So different governments taken around the world.
We are under a secured agreement supplier to the department of energy and in.
In the U S and we currently have.
I'm fairly significant.
Business in large contracts and also in small services type work.
You're right to say there was a couple of jobs last year that were out for bid we bid them and we didn't win them. There are also more of those long term large decommissioning of waste management type sorry, waste management type projects, which we're bidding them.
We would expect to win our fair share of that market.
We generally because we're already operating in that field.
Have a reasonable market share now now obviously, we want to grow that market share.
So it's a very important and.
And part of the business.
Okay. Thanks, I'll turn it over.
Thank you.
Our next question comes from Michael <unk> of TD Securities. Please go ahead.
Thank you.
First question is regarding the elevated bidding and business development expenses.
And the impact that that that that had on margins. So I know you've reiterated your full year margin expectations presidency, all services, but were these.
Elevated bidding costs were they contemplated in the original guidance.
Do you expect them to carry on.
Into future quarters, I think you've sort of addressed that earlier, but I wasn't quite clear if theyre going to.
Be there in Q2 and beyond.
Does this change your perception of where you land.
On a full year basis within within the margin range I realize again, you've reiterated the range, but just wondering if if this in any way kind of.
Alters where you expect to land relative to where you thought you'd be at the start of the year.
Okay.
Well.
Obviously, the short the short answer to the beginning is no no.
We don't expect that.
This changes.
Our view of the full year and in actual fact.
The first half of this year was <unk>.
Always.
Slightly softer than the second half of the year, we we knew that when we went into the year and we knew that when we when we budgeted what we have seen in Q4 last year and Q1 this year.
Is a significant amount of pipeline opportunities.
And on the actual dollar value.
When you think about the overall revenue.
The dollar value to be above the range or slightly under the range is actually quite small so we're not talking about large.
Dollar value investments here.
But obviously we.
We.
We need and.
To control that cost and we need to balance that with the benefit of the growth. So absolutely do not see this as an issue.
To the year and absolutely don't see it as a trend.
Jeff If you would add anything to that.
Yes, no I think that's absolutely right. We we incorporated an envisioned this when we gave our guidance back at the beginning of March.
And we would expect that to certainly normalize over over the next couple of quarters.
Okay. That's helpful. Thank you.
And then on the L S TK side.
All of the discussion has been around the three major infrastructure projects, but if.
If we go back to last year, the resources segment, which was which was a standalone segment.
At least on the restated basis that was folded into the.
Infrastructure Ellis Teekay projects segment, now I know that the.
The one resources project that was that was announced Teekay project that was supposed to be wrapping up fairly soon but did that in any way.
<unk> losses in the quarter and what is the status of that project.
Not really is the answer.
The project is in commissioning.
We are working through the commissioning and the handover to the client.
So we would expect to be.
Out of that job.
The end of Q2 early Q3.
So.
Yes, you are right that it isn't quite over yet.
And unless teekay job, but.
But no significant impact in that number this quarter.
Okay. Thank you.
Yeah.
Thank you.
Our next question comes from Maxim <unk> of <unk>.
National Bank financial please go ahead.
Hi, good morning, gentlemen.
Good morning, good morning.
Maybe just wanted to.
Go back to drilling <unk> and <unk>.
I mean, you say, it's kind of 600 million.
Revenue run rate business, I mean at a pretty.
Generally speaking of low margin I understand the revenue part of the question, but can you maybe talk about some of the <unk>.
ROIC.
For this business and ultimately sort of free cash generation, because I'm, an ICU with copper.
<unk> working capital and stuff like that.
It feels like a lot of effort quarter, not a huge amount of return, but just curious to see.
In terms of sort of long term plans.
This business on whether you have to scale it or whatever.
Maybe not owning this would be it would be.
A better outcome for our shareholders.
So let's.
Let us both answer that question, Jeff If you can pick up the cash flow generation part of the question.
It's.
It's a good combination of.
It's actually product.
Capability.
And it's a strong market.
20% growth.
And year over year.
Revenue and.
We have only just entered the north American market I mean, historically, we've been centered on Europe and the middle East.
And we see complementary.
Our complementary value proposition to the general net zero engineering services business and we see a business here that we can grow, albeit the margins at 4% to 6% range or less obviously than engineering services.
But we see it as a good complement to the overall business going forward.
Jeff do you want to just talk specifically, yes, I think I think Max it's important.
To look at the.
The cost on the project about 65% or 70% of the costs are effectively the substation equipment and the associated electricals that go around that and the vast majority of that is actually Hitachi as equipment, which we source from with our from our joint venture partner, and therefore kind of the pricing and the availability of that is.
<unk> so in a sense.
The margin is really being earned is on the remaining construction management and implementation so.
The EBIT margins on the whole business.
Don't really reflect the risk in terms of because the risky element in a sense is just the implementation and these are <unk>.
Generally fairly cookie cutter type installations of electrical substations.
I think from a cash flow perspective, and an ROIC perspective. It actually also is.
<unk> is an attractive business a number of these projects, we get upfront advance payments on.
And therefore from a cash flow perspective, while in some quarters, we're working off those advanced payments and you saw some of that in the first quarter from.
From an ROIC perspective, its actually quite an attractive attractive business that way. So in addition to strategically.
What Ian was that was outlining there.
Okay. Okay. That's it for me. Thank you so much.
Alright, thank you.
Our next question comes from Dmitry <unk> of Baird. Please go ahead.
Hi, and thanks for taking my question.
I was just wondering about the nuclear backlog.
Which was.
Indirectly discussed already but I wonder when do you see a turnaround in backlog grow sold that it returns to growth.
That's a that's a very good question.
And a fair question.
Also.
We.
We see both a lot of near term opportunity and.
And we see a lot of longer term opportunity and maybe I answer the question and in that respect.
First of all that.
The kind of rhetoric around the nuclear.
Industry.
Particularly with the energy challenges the different countries are happening right now.
It's very topical and furrows owning a full service.
Nuclear <unk>.
Services offering business, it's really exciting.
I think the future of this piece of this business is considerably exciting.
If we look at near term opportunities.
We have.
The services part of the business that is kind of like book and burn technology offerings.
In solvency work and engineering nuclear work to clients and existing reactors and an existing waste management challenges across the world that's kind of a fairly.
Book and burn reasonably stable flat.
<unk> business.
We've talked about.
The waste management.
Business in the U S, where we've seen some large opportunities that we would.
Intend to win win our fair share.
We're also seeing as you saw with Bruce.
Life extension.
<unk> opportunities, particularly with Bruce and LPG, but potentially in other countries, where energy transition is really important.
And in extending the life of current nuclear reactors.
Is really potentially quite a bit.
A near term opportunity that we could maximize zone.
And then of course there's.
The strong Newbuild program in the U K, where we currently are working on the first which is <unk>, but expect to move to the second which is it's going through its approvals right now which is at Sizewell that will bring very significant increased revenues.
And the last thing I'd say about near term is we're seeing some feasibility work now on new builds.
<unk> for example, and feasibility work on SMS small modular reactors, which is again is bringing near term working.
So I think we will see the growth that we've communicated I think the market is strong enough to support that and we have to win our fair share.
Looking at the longer term prospects of this business.
It's pretty exciting as nuclear is considered as a true green energy alternative.
With the U K for example, announcing a very significant nuclear build program, we would look to be maximizing on that in the medium term.
And again governments, particularly in Canada, the U S. The U K looking at modular reactors as an alternative small.
Small modular reactors and alternative that that again is it's quite an exciting prospect for us so.
This is an important part of our future.
Okay understood.
And claim size well are they already in the backlog.
The backlog Im talking about not the backlog necessarily the 800 million or so.
That is presented in the in the MD&A, but rather.
One extended one that was presented on the Investor day.
So thats the <unk>.
<unk> is in the backlog, but size while he is not.
Uh huh.
Got it Okay Awesome and then do you have any any visibility on.
On dividends from <unk>.
From from 407.
Dmitry, it's Jeff So we don't.
Like like $4 seven management and.
Certainly in their latest statement they've indicated that.
They're.
Continuing to be of the view that over time as government of Ontario restrictions ease they expect to see continued improvement in traffic flows on the $4 7 million.
And I think it's I think our view is is that.
The dividend coming from the $4 seven will be linked to that improvement. We did see I think as Ian said in his script.
Year on year, 35%, 40% improvement in traffic flows between the first quarter. This year in the first quarter last year.
But I think it's something we'll have to see quarter by quarter and I think.
I think that will eventually drive the level of dividends from $4 seven but we don't have that we don't have any better visibility on that right now.
Got it okay. Thanks, so much for taking my questions.
Thanks Dmitry. Thank you.
Our next question comes from Frederic Bastien of Raymond James. Please go ahead.
Good morning in your slide deck, you highlight a recovery in the aviation market with key wins in Europe , and USA can you spend a bit more time discussing these awards and more broadly.
How do you are positioning the company for future success in that in that particular sector.
Yes.
Yes.
Aviation.
The aviation comes in the engineering services part of the business primarily.
Our track record has been in providing.
Design consultancy solutions.
But also.
And innovating.
Around.
For example, Biometrics example, tracking.
Tracking of.
But people flows through through airports. So we have a value proposition that we've worked hope well the origin of that really came from the Atkins acquisition in the UK.
We've been spreading that.
Organically around Canada, and the U S.
And as you say.
We're seeing some reinvestment.
As we're coming out of the pandemic, where the aviation industry is obviously.
Been through an enormous amount of pressure and stress as people have stopped traveling but we're expecting business travel and travel.
To re.
<unk> back to close or not probably at pre pandemic, but getting back close to.
Pre pandemic levels, and we will see reinvestment in two airports because of that Nobel environment offering.
<unk> will be applied to that.
I think also.
The whole net zero value proposition for airports that are obviously very very significant large spaces that consume.
A lot of energy.
We see that our decoupling omics.
That form where we analyze buildings and take the carbon footprint of a building down is also an interesting proposition for.
For our aviation customers.
So I think we're going to see investment back into the sector and we're positioning for that.
Okay. Thanks, Ian.
Thank you.
Our next question comes from Sabatka of RBC capital markets. Please go ahead.
Alright, Thanks, and good morning, I just wanted to follow up on a comment you made earlier alright. Thanks I was wondering just.
Just on the comment you made earlier around the cost on some of these <unk> projects are going up and.
A lot of the subcontractors are actually performing the work I guess I wanted to understand the contractual agreement that you have with the sub contractors I guess at the end of the day.
<unk> responsible for call it the fixed bid element and how much of the risk or the subcontractors taking on are there more on a cost plus basis.
Yes.
That's a good question.
The reality is the client's responsible.
All of these additional costs.
<unk>.
Consideration in our belief a.
Are reimbursable from our clients because.
The pandemic was not envisaged in the post pandemic.
Supply chain issues and inflation.
Could be reimbursed by the customer and reimbursed by.
By the client.
Where we find ourself of course is obligated to complete these jobs.
<unk>.
And we well, while we are pursuing our own reimbursement from our customers we have to support our own supply chain, which are much smaller companies.
And much smaller entities and we have to support them.
Bringing these projects to a close so we're somewhat stuck in the middle.
Of the two dynamics, there and Thats why.
One of the components of the four components that lead to increased cost as this.
It doesn't help the demand is very strong for labor and for subcontractors.
So contractors.
Because obviously that fuels the inflation part of it.
But yes, I mean thats the situation and I think that's a good question.
Okay, Great and then just doesn't kind of look forward to the rest of the year, I guess and I called it the labor.
Right now, but I guess as you look towards the demand pipeline and getting people in seats units on the engineering services side.
Where do you think you are in terms of like the labor ramp up do you have enough people in seats are you still out there looking for that would be a constraint for the rest of the year to topline.
So.
There is absolutely a race for talent.
The.
The impact of that race for talent, it's manageable.
And our business in the engineering services part of the business. So the whole go forward part of our business.
We see the impact currently is manageable, but it's a risk.
We continually look to observe.
Innovate and solutions.
And Ah, perhaps give some examples I mean, we believe that.
The creation of a work environment.
So it is both.
Flexible.
But give some.
Our teams and our employees.
What they need for their personal development for the life flexibility.
Whilst giving us the productivity is really important.
And there's a few things that are important to people I mean, the purpose that we defined for the company.
And that we will engineer a better future for the planet and its people, that's really important to people and particularly our youngest staff.
DNI component of the business is really important that we create a culture, which is inclusive.
People feel proud to work at it.
As a differentiator.
I wouldn't say that Wil.
Innovating.
Wildly beyond our peers, but we put a lot of effort into this.
Stay equal or further ahead than our peers and the creation of this work environment So far.
The the talent races, manageable, but it's something that I think.
All of Us and I think most businesses are experienced the same thing.
Got a consistently monitor.
Great. Thanks very much.
Thank you.
This concludes the question and answer session I would like to turn the conference back over to Denis Jasmine for any closing remarks.
Thank you very much everyone for joining us today. If you have any further questions. Please don't hesitate to contact me. Thank you very much and have a good day everyone.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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