Q4 2022 SNC-Lavalin Group Inc Earnings Call
Speaker 2: Thank you for standing by. This is the conference operator. Good morning and welcome to SNC Lavalin's fourth quarter 2022 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded.
Speaker 2: After the presentation, there will be an opportunity to ask questions.
Speaker 2: To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then 0. I would now like to turn the conference over to Denny Jasmin, Vice President Investor Relations. Please go ahead.
Speaker 3: Thank you, Adia. Good morning, everyone, and thank you for joining the call. Our Q4 earnings announcement was released this morning, and we have posted a corresponding slide presentation on the investors section of our website.
Speaker 3: The recording of today's call and its transcript will also be available on our website within 24 hours. With me today are Ian Edwards, President and Chief Executive Officer, and Jeff Bell, Executive Vice President and Chief Financial Officer.
Speaker 3: Before we begin, I would like to ask everyone to limit themselves to one or two questions to ensure that all NNAs have an important piece of space. You are welcome to return to the queue for any follow-up questions.
Speaker 3: I would like to draw your attention to slide two. Comments made on today's call may contain forward-looking information. This information by its nature is subject to risk and uncertainty and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the...
Speaker 3: in our DNA which can be found on CIDR and our website.
Speaker 3: Management believes that these non-RFRAS measures provide additional insight into the company's financial results and certain investors may use this information to evaluate the company's performance from period to period. And now I'll pass the call over to Guillermo Guertin.
Speaker 4: Thank you, Jenny. Good morning, everyone, and thank you for joining us today.
Speaker 4: 2022 was a good year for S&C Laughlin as we achieved many of the goals we laid out at the beginning of the year.
Speaker 4: The tireless effort of our 34,000 employees worldwide is what drives the company every day.
Speaker 4: Our core purpose is engineering a better future for the planet and its people. And we're only able to do so through the hard work and dedication of our employees. I can't thank them enough.
Speaker 4: On slide three, we outline our accomplishments against our Pivoting to Growth strategy that we introduced during our investor day in 2021. As a reminder, our goal was to wind down our LSTK projects and pivot into growing our S&CL services businesses. Crossing the repeat developing line with more advanced and emerging capabilities. warmth, growth, width, and openness.
Speaker 4: in our chosen geographies to drive long-term value creation.
Speaker 4: 2022 was a year of strong progress against this strategy.
Speaker 4: We are now largely physically complete on our two Ontario LSTK projects.
Speaker 4: and will remain on schedule to hand these over to clients in 2023. And REN continues to progress well.
Speaker 4: We expect that this will result in positive tree cash flow in the second half of the year.
Speaker 4: We also remain focused in pursuing all monies owed due to the increased project cost.
Speaker 4: expanding organically our revenue by 9% year on year. We achieved record backlog for the third consecutive quarter as demand for our services remains very strong in our chosen markets.
Speaker 4: We continue to be recognized as leaders in the nuclear sector.
Speaker 4: Governments and public entities around the globe are making strides towards a greener power grid and to build new nuclear, and S&C Lavalin is well positioned to win its fair share of these opportunities.
Speaker 4: We have been intentional in our pivot into specific core geographies and our chosen end ought case.
Speaker 4: Successes passia further emphasizes the strengths of our new strategy.
Speaker 4: and our growth opportunities are unfolding as planned.
Speaker 4: We continue to believe the strategy put in place represents the best opportunity for S&C Lavalin and we expect to continue to deliver on our stated goals.
Speaker 4: The macroeconomic environment is challenging.
Speaker 4: and is projected to be so for the foreseeable future.
Speaker 4: But our business model, which is focused on geographies and end markets that we have intentionally chosen, remains resilient, driven by public sector's focus on sustainable infrastructure and long-term energy solutions.
Speaker 4: As we continue to deliver on our strategy, we are undertaking a strategic review to optimise our portfolio of businesses.
Speaker 4: to ensure that capital and human resources are prioritized to the areas of the business with the highest value creation potential.
Speaker 4: On slide four, we highlight our achievements in the past year versus our stated targets.
Speaker 4: Continued demand for our SNCL services, coupled with our focus on operational initiatives across the businesses.
Speaker 4: led us to hit the top end of our target range for organic revenue growth, and in the middle of our segment adjusted EBIT to segment revenue ratio range.
Speaker 4: In 2022, developing our people and attracting new talent was a key focus area. As a result, we successfully grew our headcount by approximately 3,000 people.
Speaker 4: and we increased our focus on training and development.
Speaker 4: This resulted in an engagement score of 6% from our previous Vox survey done in 2019.
Speaker 4: While I'm truly proud of this achievement, we will continue to focus on employee engagement and the development as we grow S&C Leveling.
Speaker 4: We also continue to grow the sustainability of our operations.
Speaker 4: and I'm proud to say that our sustainable revenues now represent almost half of our total revenues.
Speaker 4: In addition, we are partnering and supporting indigenous socioeconomic development in Canada and extended our credit facilities through a sustainability linked framework.
Speaker 4: We remain on track to deliver our 2030 Net Zero Roadmap and our 2025 EDNI targets.
Speaker 4: 20 to 255, I want to focus on a few of the highlights from the 4 of the quarter.
Speaker 4: We ended the year on a strong footy as SNCL Services had an organic revenue growth of 7%.
Speaker 4: if we exclude the positive $93 million outcome from an arbitration in the engineering services in the fourth quarter 21.
Speaker 4: Signal electricity bit was $156 million and represented a 9% margin. Total backlog for SACL services rose to $11.8 billion, which represented a 5% increase year over year over further strong roles in engineering services.
Speaker 4: During the fourth quarter, segment adjusted e-bits for our LSTK projects was negative $150 million.
Speaker 4: following what management expects is the last material cost-reforecast on these projects.
Speaker 4: Today, we're introducing the 2023 Outlook, which Jeff will provide in more detail shortly.
Speaker 4: We anticipate SNCL services organic revenue and profitability to remain strong, and in similar ranges as our latest 2022 guidance.
Speaker 4: We have largely physically completed our two Ontario LSTK projects and are on track to hand these over to clients in 2023.
Speaker 4: We expect the operating cash flow to be positive in the second half of the year.
Speaker 4: Turning to slide six, our engineering services business continues to drive robust growth for S&T Lovelace and delivered strong results again during the fourth quarter.
Speaker 4: The business remains resilient and is accelerating in our core geographies.
Speaker 4: as evidenced by the 2% year-over-year organic revenue growth during the quarter, or 11%, excluding the $93 million favourable outcome from the arbitration.
Speaker 4: Our year-over-year improvement highlights our ability to capture growth and provides a clear roadmap for the growth prospects for a sustainable infrastructure demand in 2023 and beyond.
Speaker 4: Signal adjusted EBIT and EBITDA margins were 9.6% and 16% respectively during the quarter, at the high end of our target ranges.
Speaker 4: with particularly strong margin performance in the UK and the US.
Speaker 4: We achieved a record backlog during the fourth quarter, marking our third consecutive quarter of backlog growth.
Speaker 4: Backlog now stands at approximately $4.7 billion, which represents a 24% increase versus our backlog as of December 31, 2021.
Speaker 4: The strong backlog increase in the US was achieved through several government contract lens.
Speaker 4: Notably, through delivering management services for Hurricane Ian and highway design services.
Speaker 4: In addition, for further support against future natural disasters, we were recently awarded a design and engineering contract to replace the Shepherd Broad Causeway Bridge in South Florida, which will increase safety and enhance hurricane evacuation capabilities. These wins, in addition to others, elevated our US backlog to another record level.
Speaker 4: and 30% higher than where we stood as of December 31.
Speaker 4: 2021.
Speaker 4: Our outlook for continued growth in the US through our engineering services business remains bright.
Speaker 4: fueled by infrastructure governmental programs, such as the Infrastructure Investment and Jobs Act and the Inflation Reduction Act.
Speaker 4: In the UK, our diverse project portfolio, as well as our presence in all seven of our primary end markets, highlight the resiliency of our demand generators in uncertain economic environments.
Speaker 4: Our backlog is at an all-time high and this past November the UK Autumn Statement signals a commitment to $600 billion in infrastructure spend, providing good visibility for near-term revenues. Over the past few years, we have focused on improving our position in these growing regions and in markets through digital investments.
Speaker 4: and increased hiring and use of our Global Technology Centre in India, and training all our business development and engineering teams.
Speaker 4: Results this year and are outlook for the future highlight these investments are proving fruitful and for the long term.
Speaker 4: Looking out into 2023, our pipeline remains robust and we are well positioned to continue growing.
Speaker 4: I'd now like to move to slide 7 and the results of our nuclear business.
Speaker 4: During the fourth quarter, nuclear revenues in segment adjusted EBIT were similar to prior with a continued uptick in segment adjusted EBIT margin across all geographies.
Speaker 4: Our backlog stood at $937 million as at December 31st, and we saw bookings growth in all of our geographers during 2021.
Speaker 4: This level represents double digit growth versus 2021.
Speaker 4: As we continue to see growth across all of our core geographies, we are also witnessing accelerating activity in each of our core nuclear end markets. We remain bullish on the nuclear sector as several countries around the world continue to make commitments to net zero.
Speaker 4: Government entities see nuclear as a low carbon way to produce electricity, creating new build opportunities to deliver base load power into an evolving and greener power grid.
Speaker 4: We are very excited about our recent award with Gee Itashi to build the Darlington Nuclear Generation Station small modular reactor.
Speaker 4: This SMR is the first to be built in North America and could become a game changer for the nuclear industry.
Speaker 4: This is a great example of the substantial opportunity for our full lifecycle services business in our core geographies.
Speaker 4: Additionally, a recent decision by the UK government to form the Sizewall C new build is another example of our capabilities being in demand for new build opportunities needed to deliver a greener baseload power.
Speaker 4: We remain active in reactive support and life extension projects, as indicated by our work in Europe and Canada.
Speaker 4: In the US, there are a number of opportunities with the National Nuclear Security Administration and potential projects that would utilize our learnings from the work we have become on the Ontario Power Generation SMR.
Speaker 4: The high quality prospects across our three nuclear sub-sectors show the potential growth opportunities happening now and for years to come.
Speaker 4: Our track record and technology expertise has put us in an enviable position and we continue to make strides to be the partner of choice.
Speaker 4: Moving to slide 8, then our own empecment, which generated $132 million in revenue during the fourth quarter and the 12% organic increase year-over-year.
Speaker 4: Segment adjusted event margin mass quarter was 7.8% above our long-term target of 5-7%.
Speaker 4: Revenue this past quarter was promoted by transit projects and our LSTK projects moved towards operation.
Speaker 4: We are mobilizing for the OEM startup at Wren, South Shore, Eglinton and Trillium.
Speaker 4: We continue to see opportunity for growth in the UK through building and road infrastructure improvements.
Speaker 4: We're also utilizing our strategic partnerships with key industry players and leveraging our capital group to maximize bidding opportunities for future growth in core markets.
Speaker 4: On slide nine, our links on business revenue was impacted by low bookings and prior periods in Europe and Asia Pacific.
Speaker 4: which was only partially offset by significant revenue growth in the Middle East.
Speaker 4: And as a result, organic revenue decreased 17%, compared to the fourth quarter of 2021.
Speaker 4: We also needed to take an additional charge on certain European projects that were completed or nearing completion.
Speaker 4: to reflect cost re-forecast, resulting in a $14 million EBIT loss in the quarter and a $10 million EBIT loss for the full year.
Speaker 4: We have already taken action to improve profitability of the business.
Speaker 4: And we're also undertaking a further strategic review. Turning to slide 10 and capital, fourth-quarter revenues decreased to $49 million and segment EBIT fell to $45 million mainly due to decreased contribution from InPAL BC.
Speaker 4: following its disposal in the first quarter of 2022 and lower contribution from a power asset due to a plan of maintenance shut down.
Speaker 4: We continued to see opportunities to release value from the capital portfolio, and in the fourth quarter we exited our investment in a fund of the Carlisle Group.
Speaker 4: We continue to see opportunities to release value from the capital portfolio and in the fourth quarter we exited our investment in a fund of the Carlisle Group. We will continue to assess our portfolio of investments.
Speaker 4: to determine long-term strategic fit and to look to release value where we see opportunities to realize additional value.
Speaker 4: Our capital concessions remain consistent sources of income for the business, most notably our stake in the Highway 407 ETR, yielded dividends against this past quarter in the amount of $37 million.
Speaker 4: Looking out, we remain very active on the business development front and progressing on our new strategy and alignment with the O&M segment.
Speaker 4: Moving to slide 11 and an update on the LSTK projects.
Speaker 4: We achieved a major milestone during the fourth quarter as our two Ontario projects, Eglinton and Trillium, are now largely physically complete.
Speaker 4: A significant step towards our goal of being a professional services and project management company.
Speaker 4: Our last project, REN, continues to progress well and is more than 75% complete as of December 31st.
Speaker 4: SEGMA adjusted EVIC continued to be impacted by the macro factors that we've been managing over the past several quarters, including supply chain disruption, elevated inflation, and material rates, labour shortages.
Speaker 4: that even continued to be impacted by the macro factors that we've been managing over the past several quarters, including supply chain disruption, elevated inflation, and material rates, labour shortages. This led to a four year impact.
Speaker 4: of $217 million of the $300 million risk envelope we outlined at this time last year to complete these projects.
Speaker 4: As I indicated earlier, we see this as the last material cost re-forecast for the LSTK head project.
Speaker 4: As was previously outlined, we believe a significant portion of these additional costs related to the pandemic, supply chain disruption, inflation and labour strike action is recoverable.
Speaker 4: And ongoing discussions are in progress to recover these losses. With that, I'll now turn it over to Geoff to discuss the financial highlights.
Speaker 4: Thank you, Ian, and good morning, everyone.
Speaker 4: Turning to slide 13, total revenues for the quarter were $1.9 billion in line with last year.
Speaker 4: Total segment adjusted EBIT for the quarter was $51 million, which was comprised of $156 million for SNCL services, $45 million for capital,
Speaker 4: and negative $150 million dollars for LSTK projects.
Speaker 4: EthnCL services adjusted EBIT margin was 9% in line with our target range of 8% to 10%.
Speaker 4: The negative EBIT for LSTK projects resulted from recognizing $140 million in the quarter of the $300 million risk envelope, and $10 million, primarily from the segment overhead costs, needed to manage the completion of the LSTK projects.
Speaker 4: and pursue the material cost reimbursement claims that management believes we are entitled to under the contracts.
Speaker 4: Corporate SG&A expenses from PSNPM for the quarter was $24 million.
Speaker 4: and restructuring and transformation costs were $54 million, mainly due to higher than forecasted non-cash charges incurred to right-size the office real estate footprint to align with new working practices.
Speaker 4: Net financial expenses for the quarter were $47 million, higher than last year due to the increase in interest rates experienced during the year and a higher level of gross debt.
Speaker 4: The IFRET net loss from continuing operations is $54 million, compared to $15 million in Q4 2021.
Speaker 4: and was composed of a net loss from PSNPM of $91 million and a net income from capital of $36 million.
Speaker 4: The Q4 2022 adjusted net loss from PS&PM was $33 million, or 19 cents per diluted share, as a result of the losses in LSTK projects.
Speaker 4: On slide 14, you can see the selected financial metrics for the full year.
Speaker 4: Total revenues for the year increased by 2% to $7.5 billion compared to 2021.
Speaker 4: SNCL services revenue totaled $6.6 billion.
Speaker 4: 4.9% higher than 2021 or 6.8% on an organic revenue growth basis at the top end of our most recent outlook.
Speaker 4: And excluding the 93 million positive impact of a successful arbitration outcome in engineering services in 2021, the underlying revenue growth was even higher. Total segment adjusted EBIT for the year was $413 million, which was comprised of $581 million for SNCL services.
Speaker 4: $93 million for capital, and negative $261 million for LSTK projects.
Speaker 4: Corporate SG&E expenses from PS&PM were $99 million, in line with our outlook of approximately $100 million, and we expect a similar level in 2023 as cost efficiency will be largely offset by inflationary pressures. Restructuring and transformation costs for the year totaled $83 million.
Speaker 4: higher than our original 2022 outlook due to the same reasons I explained for the Q4 variant. We expect these costs to decrease and be around $30 million for the full year 2023.
Speaker 4: primarily driven by our ERP system implementation and further functional cost transformation.
Speaker 4: Net financial expenses for the year were $116 million.
Speaker 4: Due to the higher debt level and increased interest rates, we expect the interest expense to be higher this year with a quarterly run rate in 2023, similar to that of Q4 2022. IFRS net income from continuing operations was $10 million for the year and the adjusted net income from PSNPM was $113 million.
Speaker 4: or 64 cents per diluted share. Backlog ended the year at $12.6 billion.
Speaker 4: A similar level than last year, with the roughly half billion dollar increase in SNCL services backlog being offset by a decrease in the LSTK project backlog as we continue to execute our exit strategy.
Speaker 4: SNCL Services Backlog increased to $11.8 billion at the end of the year, which included a 24% increase in the Engineering Services segment backlog.
Speaker 4: This segment was awarded $5.6 billion of work in the year, representing a 1.19 book-to-bill ratio.
Speaker 4: It is also noteworthy to mention that the nuclear backlogs had a very solid fourth quarter with a book to Bill Ratio of 1.4 ending year at $937 million.
Speaker 4: If we now turn to slide 15, at the end of December 2022, the company's net limited recourse and recourse debt was $1.3 billion and the net limited recourse and recourse debt to adjusted EBITDA ratio was 2.9 times.
Speaker 4: While this ratio is above the company's end of 2024 target range of one and a half to two times, balance sheet strength and financial resilience remain a core financial priority.
Speaker 4: and we remain confident that we would be meeting the target at that time. Note that under our credit agreement, the net debt to EBITDA ratio is calculated differently, and at the end of 2022 was approximately 2.5 times.
Speaker 4: Due to our continuing efforts on cash collection, our day sales outstanding for engineering services remains strong and stood at 57 days at the end of the quarter.
Speaker 4: If we now move on to slide 16 and free cash flow. Net cash generated from operating activities was strong in the quarter and totaled $176 million, driven by SNCL services EBITDA delivery and improved working capital management, including the reduced DSO level I just mentioned.
Speaker 4: As a result, the full year netcast usage from operating activities was $245 million, better than our latest outlook.
Speaker 4: For the full year, SNCL Services had another strong year generating cash flows of $552 million while Capital generated $28 million. After cash taxes, interest and corporate items, you can see that we generated $180 million of operating cash flow for the full year.
Speaker 4: SMCL projects had an operating cash flow usage of $425 million due to the cash outflows needed for the progression of the remaining LSTK projects.
Speaker 4: As the two Ontario projects have reached the major milestone of being largely physically complete, we expect that the LSTK project's cash outflows will reduce in the second half of 2023, as the supply chain has paid out and testing and commissioning activities wrap up.
Speaker 4: Therefore, we expect that operating cash flows should be negative in the first half of the year, while they should be positive in the second half of the year. Also note that we continue to actively pursue claims associated with the increased costs we've experienced on the LSTK projects. While it is difficult to forecast exactly when these claims will be resolved, we will continue to pursue claims associated with the LSTK projects.
Speaker 4: When they do, the related inflow of cash will be incrementally positive to the company's cash position. With the expectation that the operating cash flow profile of the company will improve later this year, and the potential for settlements on LSTK claims, and the potential for settlement on LSTK claims, the company will be able to
Speaker 4: capital allocation priorities are aligned with our 2021 Investor Day framework.
Speaker 4: We remain committed to ultimately achieving investment grade financial metrics over time, but also see the ability to deploy free cash flow for the benefit of our strategy and our shareholders.
Speaker 4: Therefore, as you would have seen earlier today, we have filed and announced an NCIB share buyback program, which allows the company to repurchase up to 1.5 million shares over the course of the next 12 months.
Speaker 4: I'd like now to turn to my final slide, slide 17, and summarize our 2023 outlook.
Speaker 4: Given our robust backlog and strong pipeline of opportunities in SNCL services, we are expecting our organic revenue growth to be between 5 and 7% in 2023, compared to 2022.
Speaker 4: slightly higher than our 2022 to 2024 annual financial target. SNCL services should also continue to deliver strong segment-adjusted EBIT and segment-adjusted EBITDA in net revenue margins in the range of 8 to 10% and 14 to 16% respectively.
Speaker 4: And as mentioned, we expect net cash from operating activities to be positive in the second half of the year.
Speaker 4: With that, I'll now hand the presentation back to you. Thank you, Jeff. Our core business is executing well. We continue to do what we said we would do. And we remain laser focused on executing our pivoting to growth strategy.
Speaker 4: We are delivering strong financial performance with notable backlog expansion in engineering services and have a strong pipeline of new opportunities in nuclear.
Speaker 4: Recent results further demonstrate the resiliency of our go-forward business and the ability to grow in the current macro environment.
Speaker 4: We are strongly positioned with a leading presence across our core markets of Canada, the US and the UK.
Speaker 4: We continue to see several opportunities for long-term value creation for S&C Lavalin across these choreographies and our end markets. Infrastructure investments by governments and the resurgence of the nuclear market around the globe show continued signs of growth.
Speaker 4: And as I previously noted, we are undertaking a strategic review to optimise our portfolio of businesses, including Renzon.
Speaker 4: We will be diligent in our approach and we will provide an update when applicable on the development of our review.
Speaker 4: We achieved a major milestone for our company with our two Ontario LSDK projects now largely physically complete.
Speaker 4: REM continues to progress well, and we're also continuing our discussions with our customers to recoup the total cash owed for the work we have completed. I say this every quarter, but it really is an exciting time to be part of Equity Leveling. Thank you, and we will now open the call for questions. Thank you. We will now begin the question and answer session.
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Speaker 2: Our first question comes from Yuri Link of Canaccord Genuity. Please go ahead.
Speaker 5: Good morning gentlemen.
Speaker 5: Ian, on LSTK, can you put a little more meat on the bone in terms of the milestone? I'm asking this question in the context of looking over the last couple of quarters on Eglinton, for example, you've been 90-95% complete with...
Speaker 5: you know, 100 some odd million in backlog for three or four quarters now. So, and suffered, you know, write downs along the way. So, what's changed such that we're going to see that backlog actually go to zero and this thing finally be put to bed.
Speaker 4: Yeah, yeah, that's a good question and I actually see the way forward really, really clearly. And I'll try and explain why we expect.
Speaker 4: not to have any more material risk going forward.
Speaker 4: But when I said the physical work is largely complete.
Speaker 4: What that means to us is that
Speaker 4: the risk element of the job, the construction work, where we've seen these issues unfold in the post-pandemic world as far as, you know, cost overruns in inflation and labour and materials.
Speaker 4: supply chain disruption in trying to get materials over from overseas, the strikes that we've had, and all of those productivity issues that we've had through the pandemic and post-pandemic, I see that as dumb.
Speaker 4: over from over seed, the strikes that we've had, and all of those productivity issues that we've had through the pandemic and post-pandemic, I see that is done. And...
Speaker 4: That was all attributed to the construction element of these projects.
Speaker 4: And what we did in this last three forecasts...
Speaker 4: And what we did in this last three forecasts is assess...
Speaker 4: obviously the impact of all of that in Q4 but also it says the small remaining part of the construction work and as we're at the end that's pretty easy to predict and reforca to the end point. Now.
Speaker 4: As you rightly say, these projects are not 100% complete. But the remaining work on these projects I see as professional services work.
Speaker 4: And that work includes the testing and commissioning. It includes putting all the documentation together and handing that documentation over to the client.
Speaker 4: It includes getting the safety permits for the operation of the railways.
Speaker 4: You know, it includes all the regulatory approvals and getting occupation permits for the stations. And then we have to agree with the client, hand the asset over, train over all their drivers, because we don't drive these trains.
Speaker 4: and get the system bedded down into an operation and maintenance.
Speaker 4: So all that work is not construction work, that's professional services work, and you'll see these assets going into operation in the second half of this year.
Speaker 4: So for that reason, we feel we're in a very different situation.
than we've been in the past on these two projects. Okay, so all we should see going forward for this year is the overhead losses about 40-45 million negative EBIT. That's what you're saying.
Yes, and clearly the overhead is to support everything I've just said.
But it's also to support the recovery of our losses in the negotiations and the rigorous kind of pursuit of getting our money back from our claims. So that kind of run rate that you'll see is 10 million-ish every quarter is to enable those.
to make sure we close out the projects, both from an operational perspective, but also from a commercial perspective.
Okay, thank you for that. The second question just on engineering services, you know, good results outside of LinksOn, but just a bigger picture. I mean, almost all of your peers in engineering services have increased their EBITDA margins over the last.
2, 3, 4, 5 years with plans for continued improvement in 23. You seem to be a bit of an outlier in that respect, so can you just talk about the reason for that and how we should think about the ability to improve margins over time?
Yes, yes, for sure. I mean we certainly have significant parts of our services, engineering services business that operate at the same level of margins and operate at the same level of cash conversion etc.
But there are parts of the business which don't. And part of the strategic review is looking at that and making sure that we have a very achievable plan to get those parts of the business to the same or exceed our peer groups.
or take another decision on them and take a different route. So we're really, really focused and committed into getting the whole of the engineering services business up to the same or better metrics that you'll see through our peer group.
take another decision on them and take a different route. So we're really, really focused and committed into getting the whole of the engineering services business up to the same or better metrics that you'll see through our peer group. Thanks guys.
Our next question comes from Jacob Out of CIBC. Please go ahead. Hi, good morning. This is Rahu, going for Jacob. Hey, Mohan. Hi, everyone. This is Rahu, going for Jacob.
I just have a question on the strategic review and it would be helpful if you could shed some more color on this. You mentioned specifically that links on this is part of the review. Should we read that as you're considering a potential sale of this business or exiting certain regions?
I'm just trying to understand the strategic rationale. Yeah, sure, sure. I mean, the strategic review is really about portfolio optimization, and to the comment I made just a moment ago, clearly we won.
to be performing in all of our businesses at the highest performance that we see in the industry. I mean that's our goal, that's what is at the heart of the review in its entirety.
all of our businesses at the highest performance that we see in the industry. I mean that's our goal, that's what is at the heart of the review in its entirety.
our markets are really strong. So.
markets are really strong. So if you look at the industry as a whole...
you know the markets are almost outstripping supply. So it's really important we see that where we operate and who we operate with as far as clients and governments that we're positioned in the best possible place using our capital and our human resource.
to optimize value creation. I mean, that's really in summary. Now, on the specifics, we will, yes, Lynxon is part of the review. Clearly, we are disappointed in the Lynxon performance. The first thing we need to do with the Lynxon business is get it back to profitability, which we believe we can.
Thank you. And maybe just going back to the LSTK, maybe if you can just update us on how you currently stand in terms of that previously provided maximum risk envelope of 300 million, and is the remaining risk in your view contained within that 300 million envelope?
So the remaining risk absolutely is contained within that envelope. At the end of 2022, we were at 217 million of the 300 million.
But what I would reiterate is what I said in the previous question and also in the presentation. We don't expect any further material risk going forward, other than the overhead run rate that we have articulated.
Okay, thank you. That's helpful. Our next question comes from Devon Dodge of BMO Capital Markets. Please go ahead.
Yeah, thanks. Good morning. Good morning. Maybe a question for Jeff here. Just on the cash flow guidance in 2023, looked negative in the first half, positive in the second half.
Are you able to put some numbers or goal posts around with it what that could mean for the full year? Yeah, let me make a couple of comments to that. I mean I think as you heard us say we expect it to be negative in the first half of the year. We've got to pay out the supply chain on you know construction costs. So there is a delay in that versus
where we are from a P&L perspective and also there's the cost around testing and commissioning and the professional services element. Eden talked about, I would expect that to largely look in the first half of 2023, pretty similarly to what we saw in the first half of 2022 in terms of the LSTK cash flow usage, which was roughly $250 million.
And then as we said, as in the second half of the year, we're turning those, we're wrapping those up, we're turning those over to customers, the natural cash flow generation ability of the go forward business will obviously continue to come through but without the drag of LSTK.
I think the other thing I'd say is that, and you've heard Ian talk about, we're putting a lot of effort into trying to resolve these claims with customers, and that possibly gives us additional upside in the year from a cash flow perspective. So we're not going to provide any specific number of guidance, but that's very much how we see the shape of cash flow over 2023. Okay. No, that's a good color. Okay. Then I was going to ask about the nuclear.
rebidding these DOE contracts in the US. They often come up for renewal and we often rebid them and they're done in consortium with other partners. There is a large one up for rebid right now that we...
We have a great team, a great set of partners and a great value proposition.
But you can never really predict the outcome of these things until the award is done. But they often come up for renewal. And there's several DOE contracts across the country and the different nuclear sites. So as you lose one, you win another. So it generally levels out and we've had a fairly consistent...
waste cleanup business across the US in our Iraq nuclear security business for some time.
be sure as soon as we win what we'll be announcing it. Okay, thanks. I'll turn it over. Thank you. Our next question comes from Chris Murray of ATB Capital Markets. Please go ahead.
Yeah, thanks folks. Good morning. You and just maybe turning back to the US engineering business. Some of your peers have talked about the fact with some of the new funding coming through. You know, they're looking for organic growth in the low double digit type number. And I appreciate you guys have laid out organic growth number cut in the five to seven percent range. But when I think about the.
portfolio and this is maybe kind of near-term and very specific and not a longer-term goal. But is there any reason to believe that you guys shouldn't be able to benefit from some of these new funding sources, particularly in the U.S. or the UK?
Yeah, yeah, no, that's a good question and we've clearly done a lot of analysis on this as our Land and Expand strategy that we talked about in the investor day and following through that Land and Expand strategy, particularly the Infrastructure Investment Jobs Act.
and the Inflation Reduction Act. We're actually seeing funds flowing through the states now.
particularly from the IIGA. And we see this, I mean these are very, very significant sums of money that are committed over a decade. And we see a lot of it flowing through the transport side. We're seeing some of it now flow through the energy transition side. And we're also seeing quite a bit of it flow into what I would call a
like water and environmental programs, not just water quality, but also flood defense and flood...
remediation, drainage, etc. from a resilience perspective. And you might have seen we actually won a few jobs in our core states.
from a flood mapping and a flood control perspective, which were good wins in Q4.
But where we're at is, I've said it before and it still stays the same. In Texas, Florida, Nevada, Colorado, Georgia, North Carolina, we operate at tier one. Our issue is...
That's only a handful of states and our peers, you know, are operating in all states. So we've got to move the business from where it is today to a future place where we're equivalent to our peers. Right, we have landed and expanded.
in the Northeast states, New York, Virginia, Pennsylvania, Illinois. We have landed in Washington state and we've landed in California.
Now, that was the work that we were doing last year. We were winning work and we're seeing growth from that.
So, you know, I think that our plan and our future is
Obviously because of our size, I think it develops a very significant opportunity to get higher growth rates than you would normally see from an organic perspective. So we're pretty pleased with where this is going right now.
And then one other question on LSPK and maybe let's just assume that everything on the two Ontario projects works out and by mid year will kind of kind of where you expect you're going to be. How do we think about the rest of the runoff and I guess it's really only the REM project at this point.
Should we be thinking that there'll be any contribution on CAF flows, or should we kind of be thinking that the back half of 23 and into 24 as you run off the rest of this project, it'll keep digging a bit of a hole that you're going to have to overcome, or should it really get back to neutral? Well, maybe we'll both answer this. I'll kick off by saying...
The REMM project has not been one of our challenging projects. It's always progressed well. We're happy with the performance.
Yes, it does give a contribution. And it's really been about the physical construction work that has given us the challenge in exiting the LSTK work on the two Ontario projects. So that's kind of the overview. I don't know, Jeff, if you want to talk specifically on cash flows again? No, I would just add, I think in...
I don't necessarily want to get into 2024 guidance at this point, but you know, I think the the overhead costs that we have this year that we've talked about, you know, those will clearly reduce you know, towards the end of the year, you know, as those two Ontario projects go away to, you know, I would expect a largely immaterial amount and as Ian has already said, the REM project generates a positive contribution.
I think that probably gives you the sense of where we think that's headed post 2023. Okay, Mr. Furner. Thanks folks. Yes, thank you. Our next question comes from Benoit, Poirier, of Desjardins. Please go ahead.
Yes, good morning gentlemen. If we come back on the strategic review, could you maybe provide some color on what it doesn't include and do you see an opportunity to maybe monetize some assets that you have in your capital portfolio such as the Highway 407?
Good morning, gentlemen. If we come back on the strategic review, could you maybe provide some color on what it doesn't include and do you see an opportunity to maybe monetize some assets that you have in your capital portfolio such as the Highway 407? Yeah, yeah, thanks.
So it really, it's kind of looking at everything. I mean, you'll see from a...
And I won't repeat myself about the portfolio optimization, but the goal here is to maximize profitability, cash flows and growth. That's the goal. Create the most value we can with the capabilities that we have, the strong markets that we see ahead of us, and that's the heart of the review.
So capital is absolutely part of the review. You'll have seen that in 2022 we recycled the John Hart asset. You'll have seen we recycled the Carlisle investment fund that we had. So capital is part of the asset. I mean specifically on the 407 this has been a very valuable asset for the company.
It's obviously clearly a really good asset.
It's been a very important part of the overall portfolio of the company, particularly as we have had challenges with LSTK and challenges with cash flows from executing and exiting the LSTK part of the business.
As we move to normalised free cash flows in the S&T Health Services business and positive free cash flows perhaps the importance of the 407 becomes less.
But when we reach that time and I don't think we're at that time now, when we reach that time, we'll definitely be reviewing the long term counter position that we feel on the 407. I wouldn't say it's in the review immediately, but there will be a time where it will be in the review.
Okay, and just in terms of capital deployment, Jeff, could you maybe talk about how the NCIB compare with other opportunities you might have given your leverage ratio right now and also the higher interest rate environment? Yeah, happy to Benoit.
So first of all, we think the NCIB fits absolutely within the capital allocation framework and priorities that we laid out at our investor day there in September 2021. And just as a reminder, it was about balance sheet strength and improving the balance sheet to financial grade metrics. And then also the potential of either investing to further accelerate our growth strategy or return to our
very much on track to deliver investment grade financial metrics over the time frame that we had envisioned and also gives us the opportunity, we think, to deploy some additional capital. And so the NCIB really ensures that we have the ability to access.
all of those capital allocation priorities that we laid out. And, you know, clearly at current levels of the share price, we see a lot of value in our shares and our company going forward and we think that gives us good optionality going forward.
I'll probably just build on that. The optionality is important not only for the strategic review and any recycled capital that might come out of that. It's also important in case we achieve success on recovering our losses.
a short time frame from our LSTK projects. I mean we are pursuing the recovery of those losses very very vigorously and if we can get a negotiated outcome but all of those will be positive cash inflows. Okay and maybe just a quick one. Any caller about the timing to recover those costs?
Well that's the issue isn't it? I mean you know in any negotiation there's two parties and the parties have got to get to an agreed position so we are in very detailed and collaborative discussions but I can't predict the outcome. I mean I genuinely can't. I mean it could happen.
In the short term it could take longer. At the worst case scenario, you know, it could take some litigation. I would hope not because we feel we've done a great job on these projects and we feel ready to recover the loss.
term it could take longer. At the worst case scenario, you know, it could take some litigation. I would hope not because we feel we've done a great job on these projects and we feel we need to recover the loss. Thank you.
Our next question comes from Michael Tippel of TD Securities. Please go ahead. Thank you, good morning. Regarding the nuclear segment, strong margins in the quarter, I think was about 18%, that is above what you've historically talked about, that segment as sort of being the target margin range.
the change in the nuclear sector.
over the last 12 months has been pretty dramatic. The resurgence of nuclear new build power as a genuine green power and an alternative to other forms of green power is becoming a real realisation to governments.
we're seeing, you know, across the industry increased activity, increased interest
but also, you know, real, real opportunities. And you have seen the announcement that we made on the small modular reactor at Darlington.
real, real opportunities and you have seen the announcement that we made on the small modular reactor at Darlington.
Clearly, the industry is about to take off and launch into a pretty fabulous opportunity, particularly for S&T Levelin because we have the right to the candidate technology. We feel the candidate technology is a good new build technology for large nuclear reactor, but we're also helping.
Other technologies on the small modular reactor side, notably, it's actually where we've won that contract. I think that there are specific nuances to Q4 which drove the margins up on particular projects. And I wouldn't see that the general run rate of the business in the medium to long term should be different than what we've seen in the past within the range that we've got out there. So I don't know if you would add something to that.
No, I don't think I'd add anything material to that Ian, you're absolutely right. It was closing out some projects at the end and some strong cost control. But to your point, we typically operated to the mid high end of our target range and I think that would be the range, at least at this point, we'd be forecasting going forward. We can turn that up to 23.
Okay, perfect. And then just a couple of additional questions on the LSTK project side. The backlog there was up slightly and I think you explained why that was the case, but with the two Ontario projects being largely physically, largely on physical construction, like at what point do we start to see you get past the point where...
backlog increases in that area or even sort of a possibility? Does the REM project still potentially drive those? Or just trying to think about how we should expect that to play out?
I think it's Jeff. It's certainly around the two Ontario projects. We would expect to see that backlog working down quarter by quarter to the projects wrap up later this year and are handed over. I think on REM we continue to see...
you know, very steady progress on that project and we wouldn't expect any kind of material change to that direction of travel in terms of the backlog work off it. It's a little higher, you know, you do a little more work in some quarters, a little less, you know, cost to move around a little bit, but.
you know, we would expect to see, as it has been, you know, a fairly consistent working off of that backlog as we progress. Okay, that's helpful. Thank you. And then just a clarification on the prospect of claims recoveries. Ian, I take your point that
predicting the timing of that is extremely challenging, but just to be clear, are the recoveries that you're seeking, are these in relation specifically to the two Ontario LSTK projects? Or are there other projects, past LSTK projects that you're still pursuing claims recoveries in relation to? No, there are past projects also.
that we're still pursuing. I mean, I can't really go into the, you know, the finer details of each project, because obviously some of these negotiations are confidential, but it's beyond the two, yeah. Okay, all right, thanks very much. Thank you.
of the pacing of cash flow drag in H1 because we're in commission right now. So why is the drag kind of similar to last year? I mean, is it predicated on the milestone dynamic or how should we think about this?
Yeah, it's a bit about milestones, Max. It's frankly, it's a bit about or it's a lot about just paying out the supply chain for, you know, the construction work that's been done. And it's just around the payment terms of that. So
you know that flows into Q1 and a bit of Q2 and you know then you add in the sort of finishing off of testing and commissioning and punch listing and you know all those things being talked about so that's why it's really that just that delay between you know what you're recognizing from a profit and loss perspective and what you're actually paying out as part of the cash flow of the project.
Okay and RAM has a different cash flow profile? It's one that has a much more you know I would say balanced cash flow profile in terms of the way it's been set up and running so it largely you know hasn't had the same sort of issues and hasn't had the same sort of financial drag just in terms of it.
done, you know, you kind of talk about land and expense strategy, just curious, you sort of thought process around kind of counter-violencing, you know, the investor fatigue, which is represented in the, you know, pretty low trading multiple and, you know, some discussion around M&A and things like that. So, yeah, just curious what your thoughts on there. Thanks. Max, in terms of, in terms of the questions around...
services business. We intend to continue
to improve the performance of the business in all metrics, whether that's growth, profitability, or cash flows. And because we see the markets...
particularly the markets where we have chosen to operate are so strong, we will continue to look to make sure that we are positioned in fast growing markets and that we have the ability to leverage local and global capability.
to customers and governments that we have strong relationships with.
to customers and governments that we have strong relationships with. So...
and governments that we have strong relationships with. So the plan going forward...
For example, the US plan, you know, is a very, very specific plan to maximize our growth potential, stay consistent or improve. And we take that approach to all our geographies. I mean, you know, Canada is very, very focused. The UK is focused on keeping its leadership position.
US is focused on growth, and actually we're seeing some pretty exciting opportunities in the Middle East right now. And you'll see maybe an uptick in our growth and backlog in the Middle East as well. So, all in all, pretty good markets, pretty good capability. I think we've got the right plan. M&A for sure took in perspective to help us
build out some platforms and further relationships when the time's right and the capital's available and it's the right time to deploy that. But it's always a step-by-step process.
Okay, fair enough. Thank you so much. Our next question comes from Frederick Bastian of Raymond James. Please go ahead.
Yes, thank you, good morning. My question revolves around what was just discussed with Max. When do you expect to be in a position to dial up growth by acquisition based on what I heard around the timing of cash flows, the NCIB and the internal review?
It feels like it won't be until next year at the earliest. So I just wanted to get your views here.
It's Jeff. I think we've always said very much linked to our ability to consistently deliver positive operating cash flow. So, I think that opportunity begins to exist in the second half of the year.
But as we've said, we'll look to, you know, look at what has created the most value for Shareholder over that time. And it's partly for having NCID program, it's to make sure that we have, and are available to compare opportunities that way. So...
I think we could see the opportunity later this year, certainly as we move into 2024. Thank you. Thank you. This concludes the question and answer session. I would like to turn the conference back over to Denise Jesman for any closing remarks.
Thank you very much everyone for joining us today. If you have any further questions, please don't hesitate to contact me. Thank you very much and have a good day and a good weekend. Bye bye everyone.
This concludes todayís conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
This concludes todayís conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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