Q2 2022 SNC-Lavalin Group Inc Earnings Call

Thank you for standing by this is the conference operator, good morning, and welcome to FMC Loveland second quarter 2022 results Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation there'll be an opportunity to ask questions to join the question queue. You May Press Star then 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 out here.

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

Q2 earnings announcement was released this morning, and we have talked to the corresponding slide presentation on the investors section of our website.

A recording of today's call and its transcript will also be available on our website within 24 hours with me today are using it.

President and Chief Executive Officer, and Jeff <unk>, 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 them. Unfortunately deposit state you are welcome to return to the two 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 tough.

The risks 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.

Arguments are also available on our website.

Also during the call we may refer to certain non <unk> measures and ratios. These measures and ratios are defined calculated and we can start with comparable <unk> measure in order to DNA, which can be found on SEDAR and on the car.

What's like manner.

Management believes that these measures provides additional insight into the company's financial resource and certain investors may use this information to evaluate the company's performance.

And now I'll pass the call over to you know what yeah. Thank.

Thank you Denise and good morning, everyone and thank you for joining us today.

I Wanna, Scott as I do every quarter to take a minute to recognize the tireless efforts of our 32000 employees worldwide from those who have been with us for their entire Korea. So the employees, who have joined us since the beginning of this year. They continue to take pride in being part of the efficacy of Loveland community and we're appreciative that dedication.

So our growth and took us to engineer a better future for our planet and its people.

With that let's start on slide four.

During the second quarter, we saw a continued uptake in top line performance as total revenues increased four 1% year over year to $1 $9 billion driven by continued acceleration of our engineering services business.

During the second quarter, our wireless Teekay project backlog decreased by $128 million from the first quarter to $828 million.

I'll speak further to this a little bit later, but our visibility remains clear.

To close now with these projects over the next several quarters and we remain confident in our initial assessment.

Impact from now until completion.

Essence services revenues were up 42% over Q2 last year to $1 6 billion, excluding the impacts of foreign currency, we achieved a robust organic growth of 6%.

Segment, adjusted EBIT was $146 million and represented a nine 1% margin.

In our engineering services business, we achieved a record high U S backlog during the second quarter and a total backlog rose to $4 $2 billion, which represented an 11% increase year over year.

We have the talent to deliver this backlog.

Net head count increase and we continue to make strategic hires in areas that support our pivot to growth strategy.

Our purpose driven strategy is influenced our deliberate approach to long term value creation with a focus on expansion and strong and growing markets, mainly Canada. The U S and the U K driven by a long standing customer relationships and a focus on public sector entities.

While the macroeconomic environment is challenging and is projected to be for the foreseeable future our business model and our approach remains resilient.

Depend by multiyear investment trends by our customers and our operational focus on what we can control.

Turning to slide five our engineering services business capitalized on the momentum from the last few quarters delivering strong results during the quarter.

Business remains robust in our core geographies, leading to 8% year over year organic revenue growth to $1 1 billion.

Segment, adjusted EBIT margin and segment adjusted EBITDA over net revenue margin was eight 5% and 15% respectively in our target ranges.

We witnessed key wins in the quarter across Europe , Canada, and the U S, including in Denmark, where we recently won a contract to design a new high speed rail line, while at home in Canada, We captured a key win for a multi disciplinary design work unless you go to any hospital.

We continue to generate wins in the U S. That's highlighted by our recently awarded three year contracts to provide program management and design criteria professional services.

Florida's Pensacola International Airport, which follows the recent contract extension, we were awarded for our work on the expansion of Southwest, Florida International Fort Myers. These two projects demonstrate the general re imagines the project in the aviation sector and the commitment from the U S government to spend on infrastructure.

As outlined in the one trillion dollar infrastructure build.

These wins I know those elevated backlog to $4 $2 billion, another record level and 11% higher as of June 32021, which gives us confidence.

Our revenue target for the full year.

I'd like to move to slide six and the results for our nuclear business.

During the second quarter nuclear revenues and segment adjusted EBIT was similar to the prior year with slightly lower revenue being offset by slightly higher segment adjusted EBIT margin.

We continue to make progress across the Canadian refurbishment projects at Darlington and Bruce Bruce.

Bruce Power. In addition, the life extension opportunities on the global tend to react to react to fleet remains robust and we recently announced that $64 million contract for the engineering and procurement services for retooling work for the Sonoma unit, one reactor in Romania.

We see this type of work is a key driver of long term value creation in the nuclear segment over the coming years.

We're also well positioned to capitalize on major upcoming newbuild projects and small modular reactors, where we're beginning to dedicate a greater number of highly skilled engineers to billable projects as we position our new build business for growth.

The market conditions for new nuclear are looking more and more positive driven by government commitments on climate change and an increasing desire, particularly in Europe to improve energy autonomy and security of supply.

The opportunity to participate in new nuclear projects is robust, including Hinkley point and size will see in the U K and the potential for Nevada units, three and four and Romania.

Moving to slide seven and our O&M segment, which generated a $105 million in revenue during the second quarter in line with second quarter 2021.

This sector continues to deliver strong segment adjusted EBIT was $11 million, representing an 11% EBIT margin above the long term target of 5% to 7%.

Year to date, we continue to see sustained financial performance with strong operational metrics across the O&M portfolio with a healthy pipeline of project opportunities, including roadway transit and health care work. Our teams have also been mobilizing to Stockholm on Eglinton Trulia and the ramp project.

We also see opportunity for growth and our strategic partnerships with key industrial players by leveraging our capital group to maximize bidding opportunities for future growth in our core markets.

On slide eight a link on the lithium business generated robust year over year top line growth for a second consecutive quarter.

Increasing revenues to $154 million, representing an organic revenue growth of 13, 7% compared to the second quarter 2021.

Year over year growth was aided by an increased level of activity in the U S and the middle East.

As expected the business returned to profitability in the quarter with segment adjusted EBIT totaling $7 million and operating margins in line with our targets.

This quarter. We are also disclosing segment adjusted EBITDA net revenue for the first time, which we believe is a better reflection of the project management and execution profitability of this business.

Our backlog ended the second quarter at $823 million below our second quarter 2022 backlog as we saw a delay in awards. We continue to see significant opportunity ahead as demand for linked some services and growing and enhancing electricity transmission and distribution.

<unk> networks remain high.

Turning to slide nine and capital second quarter revenues declined to $14 million and segment adjusted EBIT was $11 million, mainly due to the disposal of an investment and empower the D. C. During the first quarter of 2022.

Amidst the easing of COVID-19 restrictions by the province of Ontario traffic patent trends on the highway 407 grew by 56% versus the second quarter of 2021.

We did not receive a dividend from highway 407, ETR during the second quarter.

Subsequent to the quarter, we received $14 million in July which will be recognized in the third quarter.

So moving to slide 10, and the update on Alice Teekay projects second quarter revenue grew $15 million or 6% year over year to $249 million due largely to better than expected progress on our project.

Backlog continues to decrease at a robust pace with year over year decline from $1 $4 billion to $828 million, representing a 41% decrease.

Essentially the backlog so a 13% reduction from Q1 as we continue to make steady progress on each of our projects.

Segment adjusted EBIT continues to be impacted by the unprecedented factors that we've been managing as we work to complete these projects, including including elevated inflation and building and construction indices supply chain disruptions and absenteeism due to labor strikes in Ontario.

As you can see on slide 11, we've provided more detailed update on the wind down of the Alice Teekay projects.

Overall, we saw a 29% decline in backlog during the first half, while recognizing close to $465 million in revenue over the same period.

Of the three largest Canadian projects aggregates and in Trillium, we remain on track to be largely complete by the end of 2022.

As mentioned earlier <unk> continues to progress well and is over 65% complete at the end of the second quarter.

We've recognized $67 million in EBIT losses during the first half of the year with.

With $46 million of these losses relating to the $300 million, a total potential financial risk scenario to complete the Alice Teekay projects. This is represented in the chart on the right hand side of the slide.

With each passing quarter, we gain increased visibility into the completion cost and the timeline of these projects and we remain confident that any further additional financial risk should be contained within the $300 million envelope.

Before passing it over to Jeff.

Just to discuss the financial highlights of the second quarter I want to take a moment to discuss our sustainability efforts.

We will be releasing our annual sustainability report towards the end of September which will provide a deeper analysis on our progress across E. S. Angie as highlighted on the slide.

A few points to point out.

50% of our global revenues were assessed as sustainable revenues, which contribute to a sustainable future and a carbon free economy.

A major milestone and evolving our ESG is totally with the launch of Decarbonize. This year.

This is a data driven solution for builders and real estate owners and operators that can help decarbonize the built environment.

We've increased our target as it pertains to female representation and we continue to make inroads in building mutually beneficial relationships with Aboriginal and first nation vehicles.

I'm delighted to share with you also that as per the most recent results of our third party employee engagement survey.

People told us have proudly ought to work for instance, the Loveland and how enthusiastic they are about the purpose driven strategy to deliver a more sustainable future, scoring higher than last year and the industry benchmark.

On the governance side, we always see it in positive recognition by third party rating agencies for our achievements. We've also strengthened our ESG commitments by adding new oversight responsibilities for the gold.

And later this year, we have plans to tell you more about how we're effectively managing material ESG risks and seizing significant opportunities to provide sustainable solutions to our customers.

So with that I'll now turn it over to Jeff to discuss the financial highlights.

Thank you Ian and good morning, everyone.

If you turn to slide 14 total revenues for the quarter increased by 4% to $1 9 billion compared to Q2 2021.

S and field services revenue totaled $1 6 billion.

Ending in organic revenue growth of 6% driven primarily by engineering services and link Sun.

Teekay projects revenue totaled $249 million.

Total segment adjusted EBIT for the quarter was $120 million, which was comprised of $146 million for FMC health services.

$11 million for capital and negative $37 million for L. S Teekay projects.

EBIT for the L. S. Teekay projects was $11 million lower than Q2, 2021, and resulted from recognizing $26 million in the quarter up to $300 million potential financial risks disclosed in our Q4 2021 results.

And from this segment overhead costs needed to support the project.

Capital EBIT was $6 million lower than last year, mainly due to the disposal of our investment in empower BC to F. N C. L infrastructure partnerships in the first quarter Atkins.

That's M field services' adjusted EBIT was slightly below Q2, 2021 and totaled $146 million.

Representing a margin of nine 1% in line with our target range of 8% to 10%.

Corporate SG&A expenses from <unk> and PM for the quarter was $25 million in line with our expectations.

We continue to expect that our corporate SG&A expenses for <unk> should be about $100 million for the 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. This quarter was $2 million, which was composed of a small net loss from <unk> P M and net income of $2 million from capital.

The small loss in P. S. N P. M was mainly due to the recognition of an expense of $27 million.

Following the approval of our remediation agreement with the Quebec Crown prosecutors office in May as well as the higher segment adjusted bought an L. S Teekay projects.

The adjusted net income from <unk> was $54 million or <unk> 31 per diluted share in line with Q2 2021 as the lower tax expense was mainly offset by the higher losses and Alex Teekay projects.

Backlog ended the quarter at $12 2 billion.

Compared to $13 billion at the end of Q2 2021, primarily due to a decrease in Alex Teekay projects as we continue to run off the LST K construction contract backlog.

S&P, our services backlog totaled $11 $3 billion at the end of the quarter, which included an 11% increase in the engineering services segment backlog compared to Q2 2021.

This statement was imported one $4 billion of work in the quarter, representing a one two book to Bill ratio.

The nuclear O&M and lengthening backlogs remained solid at 808 million $5 5 billion and $823 million respectively.

If we now turn to slide 15 at the end of June 2022, the company had $567 million in cash and the net limited recourse and recourse debt to adjusted EBITDA ratio was two eight times.

Management continues to focus on strengthening the balance sheet over time, one of our core financial priorities.

We remain confident to meet our 2024 target range of one five to two times as we execute our strategy.

Our days sales outstanding for engineering services continued to be lower than our pre pandemic level and stood at 60 days at the end of the quarter largely similar to what we saw throughout the last four quarters.

We are also very pleased to have extended our credit facilities during the quarter to 2025 and have introduced a sustainability linked framework further strengthening our ESG commitment.

We now move on to slide 16, and free cash flow.

Net cash used for operating activities was $129 million in the second quarter.

S&P health services continued to generate positive cash flow from operations with $94 million for the quarter, while capital generated $13 million.

After cash taxes interest and corporate items, which include the payments for government find restructuring and transformation costs amongst others.

You can see that we used $69 million of operating cash flows while Ellis teekay projects 60 million.

On a year to date basis, FMC health services generated $153 million in capital of $28 million of cash flow from operations.

With TK project had a usage of 225.

After cash taxes interest and corporate items total net cash usage for the first half of the year was $263 million.

As Ian said, we are progressing well on the L. S. Teekay projects, but these continued to be affected by several external challenges such as supply chain disruption in.

Inflation and recently provincial labor strikes obliging us to fund the increased cost, resulting from these events in advance of potential claim recoveries.

We continue to vigorously pursue claims associated with the increased costs, we've experienced and discussions with our L. S. Teekay project clients remain constructive and ongoing.

However, it may take some time to come to final resolution at which point the related cash receipt will be incrementally positive to the companys net cash from operating activities.

We do expect cash flow from operations to improve in the second half of the year.

Which brings me to our 2022 outlook, which is on slide 17.

In line with my previous comments, we're making one adjustment to our 2022 outlook being the net cash from operating activities, which we are now expecting to be between negative $50 million and negative 159.

All other financial metrics for full year, 2022 are being reaffirmed including full year S&P health services organic revenue growth.

Adjusted EBIT margin and engineering services segment, adjusted EBITDA margin target.

And with that I'll now hand back to Ian.

Thanks, Jeff.

Turning to slide 19, I'd like to conclude my remarks with a few key takeaways.

First we are proud of the work our FC leveling colleagues as we continued to make strides in executing our strategic transition to future growth.

We remain focused on executing our pivoting to growth strategy.

Optimizing our delivery the sustained revenue and free cash flow generation.

Our core business is executing well and delivering strong financial performance with notable engineering services backlog expansion in high growth potential markets.

On top of that we have 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.

Revenue generation for agency Loveland is primarily driven through government entities that are steadily allocating budget dollars to these extensive projects through the ups and downs of the macro economic conditions.

This further demonstrates the resilience of our business and our ability to grow and our supply chain challenged inflationary environment such as the one we could be entering.

Through it all we remain focused on operational excellence and productivity improvement and have identified multiple levers to pull in a downside scenario to help maintain our bottom line execution.

Before turning to questions I want to thank our people who continue to work day in day out focused on executing our long term strategy of being a leading sustainable solution to companies and as the government anywhere in the world are looking to generate clean energy decarbonize, the built environment or build new infrastructure responsibly, we have to tighten.

Expertise the global experience and an inspired team members to make this happen.

So thank you and we'll now open the call for questions.

Thank you.

We'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.

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 moment as callers join the queue.

Okay.

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

Good morning.

My first question is around the TK.

Delighted that $46 million in Washington in the first half.

As it stands today and we look at absenteeism supply chain inflation losses can be higher or lower in the second half and then can you just talk about the timing of potential claim recoveries.

And how much of this lost do you think is recoverable.

As you look at it today.

Yeah, Yeah. Thanks, Thanks for the question.

Probably a reasonably long answer I'm afraid, there's quite a few pilots.

So that questions will impact.

I mean.

I think the first thing I'd say is.

We have made really good progress.

On the three projects.

We are on track to largely complete.

The two remaining Ontario projects.

We are having the most challenge by the end of this year.

Those challenges as you say.

Primarily as we've discussed previously.

The post pandemic kind of outflow of absenteeism.

Productivity losses, which are subsiding.

Supply chain disruption, which again, we're getting a reasonable handle on the supply chain disruption.

Uniquely in Q2.

We suffered from labor strikes in Ontario.

The three year bargaining agreements were due for renewal I think the good news there.

Is that are those announced settled and the latest back to work.

So it is pretty much the same as we've experienced in Q1 and the details that we experienced.

It's likely we will face some challenges through to the end of this year as we complete these jobs.

However, as you said.

What is the progress we're making on recovering these losses.

Our own view.

Recoverable losses under the contract from our customers.

And.

We are in negotiation on.

On the Ontario projects to recover that lost and I can't obviously go into the detail.

But principally.

There are.

There are abilities in the contract to recover the pandemic and post pandemic losses.

And the impact.

Our.

Mainly driven through the restrictions and the changes in law that was enacted through the course of the pandemic now obviously pursuing these titans, we would want a negotiated outcome and the reason that we've taken a different view on our cash flows as we believe.

Is that a negotiated outcome is unlikely to come in 2022 more likely to come beyond 'twenty two.

If we're unable to pursue and agree a negotiated outcome, we will litigate because we feel very strongly that we are entitled to recover part of this loss. So I don't know if that answers the whole question, but a reasonably long answer.

And then how much did the interior strike.

Impacting the quarter from the <unk>.

Yes, Jeff Jacobs, so it would've been it would it would have been part of that $25 million that we talked about.

Not not solely because as Ian said, they would have been inflation there was supply chain disruptions as well and there had more of an impact on the trillium protect just because it's not far.

5% complete.

As Eglinton is for instance, so.

Yeah, that's how I would think about that.

And my second question just you maintain your services margin guidance, maybe just talk about how you're managing through the inflationary pressures labor inflation other cost and what employee turnover has been like recently.

So again, a couple a couple of components to that question.

I think as we've said before.

<unk> side.

It really is about the LLS teekay and it's not about our services business in the services business.

A few reasons why.

We don't believe that it will have a margin impact.

One is a lot of the services business projects are on the short cycle. So they get repaid on a regular basis.

The second is many of those projects are actually Reimbursable. So we got reimbursed the cost plus plus a fee on top of that.

And then the last is that some components of our <unk> services, such as O&M and some of the larger master services agreements, we have ive actually got inflation indices built into them. So generally we're feeling pretty good that the mountain levels will be sustainable through a heavy inflationary.

And I think what we've seen that in past cycles within the services business. So overall.

I think we feel pretty good about the range that's out there and our ability to meet that range.

Thank you.

Okay.

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

Hey, good morning, everyone. Good morning.

Yeah Ian.

As we get close to the end here on the LST can I just wanted to make sure that where we are on the same page in terms of timing. So when you talk about physical completion of.

Eglinton and Trillium this year.

Can you just talk a bit about the tail risk that might remain into 2023 following.

The physical work being completed I'm, assuming there's there's a warranty period to get through in a ramp up and all that stuff. So just maybe talk about the tail risk if any yes.

So yes.

Yeah. Thanks for the question, let me try and approach that.

First of all by.

Give me a little status update on each project. So you can get a feel for what.

Where we are.

I think the first thing I'd say is the rent project is going really well and we're pleased in all respects and you have recently seen the train rollover the Champlain bridge, which is a great moment.

A phenomenal achievement considering the duration has taken to get part of that rollout into operation.

The Eglinton project again.

You will see trains running into and arguments and so.

Our work there is really about completion of the stations getting access into the stations and getting the permits and regulatory approvals in place and pushing the system into operation next year. So a lot of the physical world.

Approach completion by the end of this year.

Trillium, we've got a reasonable amount of work to do.

Our assessment is that we can get the majority of the physical work done by the end of this year. It may roll into Q1 next year.

But again.

Largely speaking trains are running on the track we will get that project into operation next year. The challenges we've faced in terms of the lawsuits that we've posted.

In connection with cost overrun and cost overrun to the physical construction work on the projects.

So we see that the majority of risk in terms of cost overrun being connected with physical completion of these works.

That's not to say the risk is completely over when that physical work is done but in the main that's why we feel very confident of the outcome of these projects now and Thats why we actually put.

So my outlook at Q4 on the table because we can see an end to this now and start really faded and the prediction of the cost to the end and we feel good about the outlook of 300 million that we did in Q4 and as you can see that the burn rate against that so far is $46 million. So so.

We actually do feel pretty good about seeing the end to this.

Okay, that's very helpful.

My second question I, just wanted to dig into the engineering services business a little bit.

Can you just describe the type of work you do in that segment that would be subject to the type of project settlements.

That you realized in the in the quarter.

It sounds like you're doing more than just you know selling engineering hours in there if youre getting these projects settlement. So just.

What where and how do you do that type of work and what type of volatility might represent in that segment going forward. Yeah. Okay. Yeah, yeah, Yeah, I think well.

The first thing I'd say is if you look at the track record of the engineering services business, it's been pretty consistent since we separated it out as a segment on its own over the last three years. So in the main margins of.

<unk> remained in the same range.

And it's been a consistently performing business.

That it.

<unk> that we would get into large disputes of large settlements because primarily most of the work is coming from government entities that are either master service agreement with short cycle projects or small projects.

There are some larger projects that we do on design build contracts some major projects.

That was the one that gave rise for example to the settlement in Q4 on the goal line, but those are more the exception than the rule.

So you wouldn't normally see.

Issues such as that in this business.

That's what I thought okay, I'll turn it over.

Okay.

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

Thank you good morning.

My first question relates to your updated 2020 to cash from operating activities guidance. Your your revised guidance implies second half net CFO of about positive 100 million to positive $200 million.

Just wondering if you can talk about what gives you the confidence that you'll see.

Cash from operating activities turned positive in the second half and how we should think about cash flows in both Q3 versus Q4.

Yes, it's Jeff Michael why don't I take that.

So first of all you're absolutely right and I think as we indicated in Q4, we did see the second half of the year being stronger than the first half of the year and there is theres two drivers of that.

Both from an S NPL services side.

There continues to be a rebound in that part of the business to a more normalized or approaching pre pandemic levels of working capital. So we could see some of that phasing in the first half of the year, but we see most of that having normalized largely now.

And therefore, much less of a drag in the second half of the year. So I would expect to see a stronger EBITDA and operating cash flow conversion in the second half of the year. So that would be one element of it and then I think you know as Ian has said on the project.

While we continue to see cash flow usage in those <unk>.

Do you expect to see an improvement in the second half of the year and part of that is as we as we approach the end of the year, we will be approaching physical completion and so.

By its nature, our spend on the projects will start to we'll start to reduce so to your point about Q3 to Q4, I think we will progressively.

Tim you do expect improvement over the year.

And in that second half in that way.

Okay. That's helpful. Maybe just one follow up or clarification. There on the project side are you in that 100 to 200 million overall net CFO being positive for the second half on the project side are you assuming negative or positive <unk> CFO .

We continue to probably see a drag on operating cash flow usage from the from the project in the second half of the year, but as I said, our expectation is we would see an improvement on that from where we are in the first half of the year.

Okay. Thanks, and then second question strong essence health services backlog growth in the quarter.

But you also talked about the economic environment being challenging recognizing that much of your work is with public sector entities can you talk about.

What sort of conversations you've been having with clients over the last month or two in particular.

How the more uncertain economic outlook may be influencing their thinking around moving projects forward.

Well I think that's a good question I think a lot to be positive about a lot to feel positive about where we positioned the company and specifically where we have positioned our engineering services business. As you know is over 80% of the revenues coming from Canada. The U S and the U K, but over 70% of the revenues.

Coming from government entities.

And if we think about those three geographies or all three.

Very significant infrastructure investment programs.

Over a five or even a 10 year period.

Biden Warren.

One two trillion.

It Hasnt even started kicking in yet I mean, we're not even seen the effects of that.

And our revenues, yet and with our customers. So the states will be getting more support and we'll be investing more in infrastructure. The U K and many large capital projects, which are being committed to certainly energy transition to nuclear and clean energy transport investment.

Very very strong long term commitments, which is making us feel really good not just about the immediate future, but also the medium term future and them back here at home in Canada, Ontario, Quebec Big programs of investment in infrastructure, we're obviously seeing those opportunities flow through.

And there are long term projects I mean, the commitment for these projects is once it once the once the commitment there is it's a five year commitment so I think.

We're feeling pretty good about where we positioned the company and the markets that we're operating.

Great. Thank you very much.

Yeah.

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

Hi, Good morning, gentlemen, good morning morning Mack.

I just had a quick question in terms of how we should be thinking about O&M profitability going forward basically because as you provision on some of the construction occupancy completing.

The impact we see on both of those projects come on on O&M perspective. Thanks.

And do you mean, the sorry, just to be clear about the O&M question.

Do you mean, the O&M component of the large projects such as Rem Trillium and Eglinton.

Correct, Yes, yes, so obviously.

When we complete these projects and when we put them into operation.

That transfers into O&M entities.

The contract structure for these it's.

Very very different.

And the link to the SPV.

Concession is et.

Et cetera, albeit with the same company so.

There's no overhang from the kind of construction phase of the project and to the O&M. So we generally as you can see.

Operate this business with very consistent performance and consistent kind of margins within our range. There is a couple of exceptions, which have pushed the range of.

This particular quarter actually not from those kind of phase III projects.

From some of the projects, but not concerned about that rolling those into into operation and obviously these contracts. So 30 of 2007 year.

Contracts.

Okay. So we should still expect obviously positive contribution from EBIT that's helpful.

Okay perfect. Thank you.

Then.

In your prepared remarks, you talked about some initiatives that you're putting into place too.

To drive further efficiency margin and so forth do you mind maybe.

Expanding on this on how that could.

Potentially provide some upside to the engineering services margins over the medium term.

Yeah, I think we both visibly this I mean, obviously.

<unk>.

We've had a transformation office and the.

Transformation function in the company as we restructured the company and as we have changed the emphasis into a project management and professional services company from what it was three years ago.

Function in that office remains and it is continually looking at operational efficiencies, how we support the business.

And how we can become more efficient.

And supporting the business clearly.

One of those.

The technology and tools that we use to both support the business, but also to execute the business in terms of design and in terms of using data driven solutions and digital solutions, which will help our productivity.

I think the second component which were.

Very proud of is the <unk>.

Global Technology Center that we have in India.

With two and a half thousand very very smart engineers in that center. If this is not a back office and I think you probably heard me say that before.

Very.

Advanced sophisticated digital data driven capability, which supports our businesses globally, particularly in engineering services and consulting and design and project management.

Our intention is to continue to increase the amount of work that is carried out by the center with an ambition to grow that sensor even more so those accounts from the engineering and execution operational perspective, and Jeff maybe.

<unk> from any overhead perspective, and from a functional perspective or an overhead perspective Mac.

We would be doing a number of things as a part of that program. So as an example, we had multiple ERP systems. We're now on a path to one and are moving into the pilot stage on that so that will help over time drive down our cost base, we've been rationalizing our real estate, which is.

And giving us good improvements.

In terms of cost reduction.

And we've been utilizing the centralization of functional services using offshore service centers, where possible all in terms of driving that towards.

Ultimately top quartile benchmark. So clearly there is there is some cost pressures against that wage inflation in other areas, but it's not.

That sort of continual process improvement and cost reduction.

That over time, we'll we'll aspire us to head towards the top end of our target margins as opposed to.

The lower to mid part of that and we have some important partner.

Right. Okay Super helpful. Thanks, so much all of them.

Thank you.

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

Okay.

Good morning.

I was wondering if you could spend a bit of time on the performance of links and during the quarter. We saw a nice improvement sequentially. I was wondering if that's just a sort of.

Run rate that we should be expecting on a go forward basis.

Yeah, Yeah for sure I mean.

I think I think the first thing about <unk>.

We see a very strong demand for the services that we sell and lane zone.

And as countries move to.

To our clean energy transition.

The substation work that we do through <unk> and the installation of substation work.

<unk> seen a real kind of positive market.

And we have been.

Busy.

Focusing.

The linked some business primarily to match the geographical footprint.

Footprint of the rest of the C level.

We do see consistency in the margin profile and would put the range out a 46% and I think the other thing that we would tell you that there's a lot of flow through work from our partner.

Hitachi in terms of equipment. So we've also started putting in an EBITDA to net revenue. So you can actually see the profitability against project management element the actual execution element of billions on it itself.

So I think we are.

Bidding.

Strongly across we're waiting for a number of awards.

There's no reason that we feel we wouldn't see a consistent outcome for this business and good growth potential for it.

Okay.

Thanks, Dan.

Second question I mean, we haven't heard much from our SMT capital in last 12 months. So I'm, just wondering where it sits right now within the business and if its still part of the SMC long term game plan.

Yes, it's Jeff.

Don't take that yes, we absolutely see S&P capital is that is it.

Core part of the strategy.

As Ian mentioned earlier in his script, there's actually a very good overlap.

And for instance, the O&M business.

And therefore, continuing to source and make.

Investments, where we see an opportunity not only to earn a good return.

But also to encourage our engineering services and have a link to our O&M business. We've found both historically and currently to be something of interest to a lot of customers. So we continue to see that we don't see it as a large call on our on our capital and it does have the ability to.

Recycle capital and you saw us do that earlier in the year, we took the empower VC investment and John Hart investment and sold that down into the infrastructure fund that we're involved in and so it's a lot of the capital that we think we can invest going forward. There is really recycling the capital into good returns.

Earned historically, so that's how we see the business at least at the moment.

Okay, but is it fair to say that the value proposition of SMT capital will improve as you're your own balance sheet.

It was as well.

So we see the first part of that question again.

I was just wondering if it's fair to assume though that the value proposition of S&P capital will probably appreciate as you.

The strength of your balance sheet improves.

Yes, I'm not sure I directly I'm, sorry, yeah, I'm not sure I directly linked the two from a value perspective.

And I think we talked about at the Investor day historically the investments. We've had there has made mid to high <unk>.

Percentage teams.

The IRR in terms of the return.

So it's created a lot of value for us in the past and we continue to set a high threshold for any incremental investment within that portfolio.

And like the rest of the business as we move forward ultimately with the opportunity to reach our free cash flow positive environment, and then look at our capital allocation. Then you would compete for capital with some of the other opportunities we have as well at that time.

Okay. Thank you both.

Yes.

Thank you.

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

Alright. Thanks, good morning, So I wanted to start with the engineering services business just looking to see if you can give an update on that land and expand strategy.

Just trying to get a sense for how it's going so far.

They're more markets in the U S that you are looking to get into and how we should be thinking of what that margin drag.

That expansion in the back half of this year and into 2023.

Yeah for sure.

In the end.

Clearly we are very pleased with the growth that we're achieving out of the engineering services business.

I mean with the.

Eight 8% growth.

Growth.

In the quarter.

We're making the progress that we set out to make when we communicated the growth plan that you just referred to and the Investor day.

Specifically on the on the London expand and you'll remember.

When we talked about that we said that.

We all successful and play at the top tier level, but only in a handful of States, Texas, Florida, Georgia Carolina, Colorado for example.

But we intend to continue to expand that success.

Two.

New sites, where we've already re established offices, such as Washington State, California, New York State.

And we're seeing contracts come through.

And Youll see.

The awards that we have announced in the quarter.

First quarter, though we've got some good wins and we're also seeing this reemergence of.

The aviation sector and some good wins from that in the U S.

So record backlog in the U S, which is field.

Certainly in part the record backlog in the U S. So that's a forward looking indicator of the.

Good growth that we see and I would also repeat the.

The $1 two trillion dollar commitment as the vaginal administration is yet to flow through the states and we're able to build this business already.

Business as usual in the states. So when we actually see further funds flowing through state to state, we're feeling pretty enthusiastic about our ability to build the business.

Yeah, clearly you had some good success there.

On the margin drag.

As we look forward.

Yeah, I think as we said at Q1, there was a we obviously saw some margin drag in the first quarter around a heightened level of bidding and that is obviously fed into amongst other things the record backlog, we've seen but as you've seen in our results in Q2.

That's largely dissipated as we anticipate as we anticipated.

So.

We're in very much a business as usual perspective, I think going forward.

Okay. Okay. Good color thanks for that.

Second question I wanted to ask about the the West White Rose project.

The clients looking to restart it next year.

Wondering is this going to add another fixed price project that you'll need to wind down or will it evolve into something closer to a cost plus you know given that the restart just any color there would be helpful.

No it's not it's not a fixed price contract.

We converted that some time ago and communicated that and report it under a different segment than LST K then the project got suspended.

And now the project as you rightly say is going to be restarted and it's a great project for us.

It's a it's a profitable project.

It's a it's an iconic.

A project we've got good partners that.

We're actually commencing the preparation work for the restart now.

Should see the revenues flow through in 2003.

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

Thank you.

Our next question comes from Dmitry Kaminsky of very tough. Please go ahead.

Hi, and thanks for taking my call.

My first question has to do with contract assets.

I was wondering whether the.

Increase in contract assets.

It relates to any disputed the mountains.

Yeah, so within that we expect collection on those yeah. So dmitry its Jeff the contract asset naturally build as we build the projects themselves. So there is there is.

<unk>.

Increasing as the contracts and the projects themselves are building up.

There is some element because as you heard Ian say earlier, because some of those elements of cost increases are ones that we think are ultimately should be claim a pullback from the client then.

We would expect some portion of that but we remain quite prudent in terms of in terms of how we book that so that.

Going forward were reasonably prudently based on that.

And.

And so the contract asset does reflect your estimates all of sudden recovery.

Yes.

Yes, yes, yes that would be correct.

And when would you expect to collect.

To start collecting when do you expect the contract assets will start soon.

So within within the contract assets themselves as a complete and then and then turnover into operation.

They will naturally fall.

That piece will naturally fall within within the contract asset class.

Ian said earlier it may take some time in terms of cost that we are believe are recoverable and due to ourselves.

It may take some time to do that we remain in constructive dialog with our clients.

But if we're not able to settle those out in a negotiated way we may need to.

Go down in a dispute resolution process in which case.

It could take it could take.

More than months it could take a few years at the at the outside to try and collected but through that process, we'll try and resolve those.

As as well as we can.

Uh-huh.

But beyond that the cost overruns that you.

So the coverage is.

Is it fair to assume that the contract will start reversing.

As you finish.

Physical construction components. So in other words earlier next year.

Yeah.

Some will as it relates to where we have capital investment.

Others, It will relate to as we actually collect the cash.

Hum.

Okay, Alright, and then.

Okay.

Cash collections related to <unk> next.

Which I think is in the related party note.

Is that.

Expect it to.

The collection.

Alright.

The receivables and contract assets related to that is that it.

When do you expect essentially to answer that.

The collection there to start.

Yeah I think.

Yeah, I think I think that that.

It's going to be fairly dependent on the negotiations and the discussions with clients.

It's hard to pin down on that one with the <unk>.

Exact timing, but we'll continue to try and make as much progress as we can.

But we're looking at 2020, we always looking further years.

It could be in 'twenty three.

But as I said some of the actual timing of that resolution, if we're not able to negotiate an agreeable settlement with a client and we have to use one of the dispute resolution process it could take longer.

Okay, Alright, Thank you and the last question on the nuclear backlog.

You can talk a little bit more.

But what's your expectations as to the trends in the backlog.

If you expect that backlog to rebound that's been shrinking over some time and <unk>.

So that won't contracts, how do you seal.

Optimistic that you believe you have a good chance of obtaining increased backlog.

Yeah, Let me answer this is.

Good question.

Because clearly as.

The world.

Looks towards alternative energy and particularly alternative clean energy than the nuclear proposition is becoming a very real scenario for governments and.

We're seeing that.

<unk> and increased interest in the feasibility.

And actual projects for example in the U K for new nuclear.

So I would say that in our business, we have three strong areas of growth for the nuclear first of all the.

The life extension of can do reactors.

This is trevor.

Probably the most efficient way to create sustainable clean energy.

Our government could invest in now obviously at Bruce power in Darlington, we're already into life extension projects, but what you've also seen in the quarter is that we have engineering studies.

Nevada to look at the life extension and reshaping of the two reactors in Romania, and also Ah projects, England Chevron in China to look at reshaping and life extension. So those initial contracts. So the feasibility that will lead to large contracts, where we will have a large ela.

<unk>.

<unk> technology and services work that we will contribute to those life extension projects.

I think the secondary is newbuild and we're definitely seeing strong demand in the U K with obviously, our Hinckley project that we're currently working on but the next to come off the ranks with the sizable state and we would take a very significant.

Part of that but also what we're actually deploying engineers to assist the UK and Canada and the research and development of the SME reactors for the.

The companies that are primarily.

And then lastly, nuclear it's waste cleanup.

We already have.

Large contracts.

So the dose in the U S and for <unk> in the UK and we see a good strong pipeline of opportunities from both of those customers for continued nuclear waste cleanup. So all in all.

We're feeling pretty good about the future of the nuclear business as it becomes.

Re emerged as an alternative power.

Understood. Thank you.

Our next question comes from <unk> Khan of RBC capital. Please go ahead.

Hi, great. Thanks, and good morning. This was some commentary earlier around the U S and some of the expansion there I guess when you talk about the buyback plan, that's probably got kicks in March 'twenty. Three do you have sort of hiring targets in a number of people you want to get in seats before.

Before the spend from that program really gets going or how are you thinking about it and at this point with winding down the <unk> T. K just thinking about your investments in sort of.

The defense in terms of ramping up these projects once they started kind of accrued AD spend on getting positioned well for those are investments that content.

Yes, yes.

Okay.

Overall, we've got an aspiration to grow the engineering services business within the 4% to 6% range.

I think as you can see.

Through our pivot to growth strategy that we.

<unk> presented at the Investor Day, we've actually already kind of started good growth.

New services and a lot of that is fueled by the U S. As you say one thing that.

Very pleased even in the current kind of professional services.

Labour market.

We are able to.

Increase our net head count.

And.

Our net head count has actually increased by 1300 and Haynesville and this year, so with even in spite of attrition rates going back to pre pandemic levels.

We are able to recruit the people we need to grow the business and I think that's a that's a real positive sign that we're pleased to see.

A lot of that is coming from the U S.

A lot of the growth that you see is also coming from the from the U S.

No.

I think.

I think the plan basically that we've put in place.

To organically grow the business is actually working.

Okay.

Okay, and then just one quick follow up on the organic side, particularly on the engineering services side look to be a good number for this quarter can you just share a little bit of color on.

Price versus volume mix in that and sort of which end markets within the engineering services side really drove that and I guess as you look to the back half of the year.

Or are you expecting to see more of the organic growth to come from in terms of end market or even caught short.

So again.

Yeah, I mean, our strongest market.

We generally play at tier one is in transport, So road and bridges railway I mean, well renowned for being.

A market leader in our core geographies with USC Kate.

And.

In Canada.

So for sure.

As I also said we're seeing.

The resurgence of the aviation sector.

With some good wins in the quarter.

Primarily from the U S. But we're also seeing.

And investment in aviation in the UK.

Canada.

And I think there are also some kind of specific opportunities.

Outside of the three core geographies that we are focused on which it's very targeted such as the need on projects in Saudi Arabia, which is.

The multibillion dollar program.

That we will be looking to provide project management Reimbursable services too.

So generally strong market, so as I said earlier.

And playing to the strengths that we have in our core geographies.

Okay. Thank you.

Thank you.

Thank you very much everyone to joining for joining US today. If you have any questions capabilities take to contact me. Thank you.

Thanks afternoon.

Uh huh.

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

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