SNC-Lavalin Group Inc. Q1 2023 Earnings Call
Thank you for standing by this is the conference operator, good morning, and welcome to S&P of Loveland first quarter at 2023 results Conference call.
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I would now like to turn the conference over to Denise Jasmine, Vice President Investor Relations.
Please go ahead.
Thank you Sir.
Hello, Good morning, everyone and thank you for joining us today.
And we invite you to view the slide presentation, that's posted in the investors section of our website, which we will refer to during this call. Today's call is also lift yet.
With me today.
[noise], 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.
Oh, and then there's been a bunch it takes up space. They are welcome to return to the queue for any follow up questions.
I would like to draw your attention to slide two comments made on today's call may contain forward looking information. This information by its nature is subject to assumptions risks and also Duffy and as such actual results may differ materially from the views expressed today.
Further information on these assumptions risks and uncertainties. Please consult the company's relevant filings on SEDAR. These documents are also available on our website also during the call we may refer to certain non <unk> financial.
Potential measures reconciliation of these amounts to the corresponding <unk> financial measures are reflected in our earnings release, and MD&A, which can be found on SEDAR and on our website.
And now I'll pass the call over to get other words.
Thank you Tony Good morning, everyone and thank you for joining us today.
We began the year on a strong footing as Q1 results was solid across our S and see our services businesses.
Core purpose is engineering, a better future for the planet and its people and we were only able to do so through the hard work and dedication of our employees, whose contributions help us achieve our long term growth aspirations I'm very proud of this growing team.
On slide three we outline our accomplishments in relation to our pivoting to growth strategy as we have become a professional services and project management company.
As a reminder, our goal was to wind down the road ITK projects and grow our <unk> services businesses, and our chosen geographies to drive long term value creation.
Our results in Q1 further emphasize that our plan is not working.
S. NCL services continue to grow expanding its revenue by 10, 8% year on year, while segment. Adjusted EBIT grew 23, 4% as we were able to deliver strong margin percentages.
We achieved another record backlog this quarter totaling $12 1 billion at March 31, as demand for our services remains very strong and our core end markets and geographies.
We purposely pivoted into these geographies when we developed our strategy and we are excited by the progress we've made in these markets.
We continue to be recognized as leaders in the nuclear sector.
During the first quarter, our backlog grew 23% year over year, So just under $1 billion.
This quarter's growth.
It represents the largest backlog growth since 2016 and highlights the long term potential of this business.
As we indicated last quarter, our two Ontario, SDK projects are largely physically complete testing and commissioning is proceeding as planned and they remain on track to be handed over to our clients later this year.
Our success this past quarter further emphasizes the strength of our new strategy. The resilience of the business through times of uneconomic certain certainty and our growth opportunities are unfolding as planned we continue to have great confidence in our forward trajectory.
We are well on track to deliver our stated goals for 2023.
On slide four we highlight our backlog growth across essentially all services, our 8% growth in the first quarter of 2023 versus the first quarter of last year was mainly driven by wins across our engineering services and nuclear businesses.
The public sector focused on converting to a greener grid for base load power for Greener infrastructure has resulted in continued key wins across our core geographies as well as in other markets such as Saudi Arabia.
Turning to slide five.
Our engineering services business continues to drive robust growth for SSC, Loveland and outperformed year over year during the first quarter.
Acceleration across our core geographies led to a 17, 5% organic revenue growth versus the first quarter of 2022.
Our year over year progression highlights our ability to capture market share and provides a clear roadmap for near term and long term growth prospects for sustainable infrastructure demand.
Segment, adjusted EBIT margin and segment adjusted EBITDA over net revenue margin was eight 4% and 14% respectively during the quarter.
We continue to achieve record backlog results with another quarter of growth it.
It now stands at approximately $4 8 billion, which represents 25% growth versus our backlog as at March 31 2022.
On slide six we provide further insight into each of our core geographies of the U K, the U S and Canada and.
In addition to organic revenue growth. We also had several key wins across these markets that touch all of the engineering services that SMC Loveland provides.
In the U K in Europe , we saw continued revenue growth, which speaks to the focus of governments to spend on defense and energy.
<unk> this quarter emphasizes the resiliency of.
Our business as market dynamics appear positives.
Despite underlying uncertainty and global economies.
Key wins this quarter.
<unk> a contract to upgrade railways in the South of England over the next five years and lead in the design of the New Dublin Metro Link in Ireland.
In the U S. We continue to achieve record high backlog in this growing market.
Our positioning in the U S is a key pillar of our pivoting to growth strategy.
Our robust pipeline and long term commitment by the government to expand infrastructure spending as evidenced by wins this quarter sets us up well to maintain and accelerate our recent revenue and margin performance.
At home in Canada, We're also seeing increased government spending on infrastructure.
Growth end markets, including the focus on energy transition energy storage and mining operations, we secured a number of key wins in Canada across the industrial power and EV battery markets as well as road improvements.
Looking out demand remains robust for our services driven by generational investments and infrastructure and climate resiliency re shoring of manufacturing and the energy transition.
Here in Canada for example, the $190 billion infrastructure investments program spread over 12 years and established in 2016 by the government of Canada still has more than half of the budget left to spend.
In the U S. The infrastructure investment and jobs Act and the inflation reduction act provide a strong tailwind for future growth opportunities.
Our robust pipeline sets us up well to topline and bottom line growth in our engineering services business across each of the geographies for the foreseeable future.
I would now like to move to slide seven and the results of our nuclear business.
Our positioning and the expanding nuclear marketplace continues to bear fruit as we achieved approximately 5% organic revenue growth versus the first quarter of 2022, and see strong demand trends across each of our core geographies with particularly.
Where the growth in Europe .
Our nuclear backlog now stands at $986 million.
Which represents a 23% growth versus our backlog at March 31, 2022. This.
This backlog growth further confirms that sell evidenced position.
And the nuclear services marketplace.
Results this quarter highlight the long term growth trajectory of this business as public and it's continued to seek alternative energy sources for a cleaner planet.
Commitments to net zero carbon by 2050, we will significantly increase demand for low carbon sources of reliable baseload power, where nuclear facilities are poised to meet that demand.
On slide eight we highlight achievements in each of our nuclear services business that we provide.
Nuclear new builds represents a significant potential opportunity for <unk>.
Across the globe nuclear facilities are being seen as low carbon energy source alternatives.
We are underway on small modular reactor projects in the UK and Canada, while we are well positioned for upcoming major newbuild projects in Romania, and the U K.
We remain active and react to support life extension projects as indicated by our work across many of our core geographies.
In Ontario, we continue to be actively supporting can do life extension work at Darlington and Bruce power sites, where we're making excellent progress.
In Romania, we signed our second pre engineering contracts for the <unk>, one can do reactor life extension program.
The primary contributes to the increased nuclear backlog this quarter.
While the U K, we are providing support to the ETS fleet reactors. Furthermore, we see opportunity for continued work on life extensions in the coming years.
On waste management and decommissioning, we're seeing continued progress in the UK and the UAE on two major projects in the U S. Our subsidiary Isoetec continues to remediate nuclear waste and produce correct critical medical isotopes.
Pipeline in the U S from decommissioning and waste management services remains robust.
And now moving to slide nine.
Our O&M and linked some business.
O&M segment generated a $126 million in revenue during the first quarter, a 9% organic revenue decrease due to lower additional services year over year on existing contracts.
Segment, adjusted EBIT margin was seven 5% above our long term target of 500% to 7%.
And we're well prepared for our Eglinton Trillium and <unk>.
South shore branch projects moving into operation this year.
We continue to see opportunity for growth and expansion in the U K through building on road infrastructure improvements.
We're also utilizing our strategic partnerships with key industry players and leveraging our capital group to maximize bidding opportunities for future growth in our core markets.
Our linked some business saw growth in new orders across the U S.
Middle East, which added to the backlog in Q1, which now stands at just under $1 billion.
<unk> 31.
However, revenue was lower compared to the same period last year due to lower backlog generated in 'twenty, two and equipment supply chain delays in Q1.
Our strategic review to optimize our portfolio of businesses, including Lynx zone remains ongoing and we will provide an update when applicable.
Moving to slide 10, and I'll, let teekay projects and capital business.
As we announced in March two Ontario projects eight brands in Australia.
Largely physically complete.
Last project ramp continues to progress really well and it's more than 75% complete at the end of March 23.
The quarterly loss is in line with our outlook.
We believe a significant a significant portion of the additional costs related to the pandemic supply chain disruption.
Inflation and labor strike action.
Should be recoverable under the contracts, we have with our customers.
Discussions remain ongoing as we.
Vigorously pursue recovery of these losses.
Turning to our capital business first quarter revenues and segment adjusted EBIT was flat as we did not receive any dividend from a holding interest in the highway 407 ETR.
However in April 23, we received $10 2 million and.
And dividend payments.
Levels lower than pre pandemic as traffic volume grew 28% compared to the first quarter 2022.
With that I'll now turn it over to Jeff to discuss the financial highlights.
Thank you Ian and good morning, everyone.
Turning to slide 12, as Ian said, we had a strong start of the year with total revenues for the quarter, increasing 7% to $2 billion compared.
Compared to Q1 2022.
<unk> services revenue totaled $1 8 billion.
10, 8% higher than 2022, or 10, 1% on an organic revenue growth basis.
Total segment adjusted EBIT for the quarter was $159 million.
46% increase compared to Q1 2022 and was comprised of 156 million for <unk> services $12 million for capital and negative $9 million for Ellis Teekay projects.
<unk> services adjusted EBIT margin was eight 5% in line with our target range of 8% to 10%.
Corporate SG&A expenses from <unk> for the quarter was $29 million and restructuring and transformation costs were $15 million.
We continue to expect that these expenses should be about $100 million and $30 million respectively for the full year 2023, as the first quarter had a slightly higher phasing of the total expected full year costs.
Net financial expenses for the quarter were $47 million higher than Q1, 2022, due to a higher level of gross debt and higher interest rates on variable rate debt.
We expect a similar level of quarterly expense to continue for the rest of the year.
The <unk> net income from continuing operations this quarter was $28 million.
Compared to $25 million in Q1 2022.
And was composed of a net income from <unk> of $26 million and a net income from capital of $2 million.
Adjusted net income from <unk> for the quarter increased by 41% to $55 million Rep.
Representing 32 per diluted share.
Backlog at the end of the quarter totaled $12 6 billion, an increase of 4% compared to March 31 2022.
S&P all services backlog increased to $12 1 billion at the end of the quarter, which included a 25% increase in the engineering services segment backlog.
It is also noteworthy to mention that the nuclear backlog had another solid quarter with a book to bill ratio of one to one <unk>.
Ending the quarter at $986 million.
If we now turn to slide 13 at the end of March 2023, the company's net limited recourse and recourse debt was $1 4 billion.
And the net limited recourse and recourse debt to adjusted EBITDA ratio was two nine times at the same level as at the end of 2022.
This ratio is above the company's target range of one five to two times at the end of 2024, but we remain confident that we will be meeting the target at that time.
Note that under our credit agreement the net debt to EBITDA ratio was calculated differently and at the end of March 2023 was approximately two five times.
Due to our continuing efforts on cash collection, our days sales outstanding for Engineering services remains strong and stood at 62 days at the end of the quarter.
If we now move on to slide 14, and free cash flow.
As expected net cash generated from operating activities was negative in the first quarter due to the cash outflows from the LST K projects.
We expect slightly higher cash outflows for the <unk> projects in the second quarter.
These cash outflows should then reduced in the second half of 2023 as the supply chain is payday and testing and commissioning activities wrap up.
We also continue to actively pursue claims associated with the increased cost we've experienced on the <unk> teekay projects.
<unk> services had another strong quarter generating cash flows of $94 million.
After cash taxes interest corporate items and capital you can see that we generated $46 million of operating cash flow.
We continue to expect the total operating cash flow should be negative in the first half of the year, while they should be positive in the second half of the year.
With that I'll now hand, the presentation back to you. Thank you Jeff.
So we began the year on a high note with robust results in engineering services showcasing the strength of our businesses.
Our LST UK projects are progressing in line with our expectations and we continue to pursue recoveries relating to outstanding payments due on these projects.
We remain focused on executing our pivoting to growth strategy with the objective to deliver consistent earnings and cash flow to fuel value creation in the long term success of the company.
We are winning through our unique competitive differentiators and our ability to fully service the entire lifecycle of an asset from design to decommissioning.
A generational effort will continue to be taken to offset the negative impacts of climate change and we are well positioned to utilize our capabilities to enhance our footprint and the new infrastructure for low carbon future.
We are strongly positioned with a leading presence across our core markets of Canada. The U S and the UK and we continue to see several opportunities for long term value creation for SSC Loveland across these core geographies and our end markets.
So with that let's open it up for your questions. Thank you.
We will now begin the question answer session.
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The first question comes from Chris Murray with ATB capital markets.
Please go ahead.
Yes, thanks folks.
Yeah, and I guess thinking about some of the stuff you've talked about.
And where you want to go in terms of the pivoting to growth strategy. One part you didn't touch on.
Once M&A and as we get closer I think to the and develop the K can you just talk about where youre, where youre feeling in terms of.
Accelerating growth it sounded like it looks like organic growth has certainly been very very strong probably stronger than we thought it was going to be.
Can you just maybe give us an idea.
If organic growth is where youre going to stay for now given the rate of growth.
Or is that as we get past Q2.
We could be looking for more for you.
Hopefully some more questions here.
Yes.
Yes, thanks for the question a moment so.
We're obviously really pleased with where we've positioned the company.
We've deliberately positioned ourselves in fast growing markets and we see those markets continuing to be sustainable.
Fast growing fueled by infrastructure investments and fueled by the energy transition.
You will see the fruits of that come through from the organic growth as you correctly kind of identified that we have executed on I mean clearly.
And the transformation of the company.
From what it was to this professional services project management organization.
We will ultimately be producing positive free cash flows and we're looking forward to that towards the back half of this year as Jeff articulated.
But we also are very very fixed on our capital allocation strategy that we articulated in the Investor day going back to the end of 'twenty wall.
We have a process to further strengthen the balance sheet.
Second.
Look at how we create values or potential M&A.
And third look how we might return value to shareholders. So that's still the case.
Clearly when we get to the right point.
We want to accelerate our growth through M&A.
We've talked about that.
Previously as well so yeah, we're definitely on that journey.
But it's still a work in progress so to speak.
Alright fair enough.
And then I know youre, probably going to kick us down the road a little bit but you did talk about your strategic review a little bit I guess, a couple of questions on that first of all the book to Bill and Thanks onward was remarkably strong.
And you did allude to some new contract wins.
But revenue was down so I'm just trying to maybe square how you guys are treating that business.
Where it is today.
<unk> got a lot of volatility in it.
Where you are maybe in the strategic review process in terms of timing.
Yes.
Let's perhaps pick up on that specifically on the on the link some.
The strategic review.
Late summer.
We've been holding this chatter.
<unk> in this business now for years.
In three years. The first three years were positive positive on cash flow positive and getting the profitability and the range that we want but 2022 was disappointing.
And we are looking at.
Why that was disappointing we are looking at.
If we can get this business to a consistent place of profitability and cash flow and growth.
And.
We're also looking at.
Its suitability for our portfolio going forward, which would mean all options are on the table for the linked some business.
It has improved I mean, the performance has improved backlog has grown its still under review, we're doing quite a lot of work to look at that.
Fairly shortly.
The early pilot in the second half of this year and the and communicate that out.
Alright Thats helpful. Thank you I'll leave it there.
Thank you.
The next question comes from Yuri Lynk with Canaccord Genuity.
Please go ahead.
Good morning, guys nice quarter.
Thank you.
Yeah.
17, 5% organic growth in engineering services are quite strong.
Wondering if there was.
Any particularly lumpy award in there.
Or.
One end market.
Any more color on the strength that you saw there because it was on a very tough comp to I think 10% in the same quarter last year.
And related to that.
How is how does pricing play in to your ability to outgrow the market on organic growth how aggressive are you being on on price.
Hi.
Yes.
And I think.
It's always it goes back to what I said about the markets.
Where we are deliberately positioned ourselves.
Markets are fast growing markets.
And across the board the U K, the U S and Canada.
We're seeing.
Very strong investment in infrastructure.
We're seeing significant opportunities in.
The energy transition, which is also bringing in the private sector investment in solar energy transition.
And there's no to you.
Question I mean, there is no single project, which has fueled the growth it's just.
Good work winning.
Across a range of size of business from very small projects two medium sized engineering service type projects, but we have also been pretty successful in the middle East.
Of the last sort of couple of quarters, which is feel some of the growth, but most of it.
Coal regions, where I would state that 80% of the business.
Profitability.
Let's see is an improvement trend.
So we are not being aggressive and outfitting.
We are still.
On a margin improvement process in parts of the business.
So we're not putting that at risk at all and in order to win this backlog. So it's really about market strength and why.
We've positioned ourselves.
Okay.
Lot of your competitors or peers are also in the U K the U S, Canada and Theyre not growing 17, 5%.
Got you.
And you're obviously in some pretty good pretty good niche is there.
How do you feel about about the full year I mean, you did leave.
Organic growth guidance in the 5% to 7% range.
How should we square that with our first quarter performance.
Yes, yes.
We.
Obviously, it is Q1 right so.
<unk>.
It's still early in the year.
Very pleased.
Start to the year and.
We're very pleased with obviously the growth that we've achieved what I want to say and what we want to see before we kind of move that guidance.
As more development of the pipeline through the year. So so.
We have certain visibility of work ahead of us from a defined perspective, we're confident in the markets, we see strong markets, but we need to see our own pipeline be developed a little bit further into the year before we start looking at the full year outlook that so clearly if we.
Which will continue the trajectory that we've got and it looks for sure.
That is going to be the case as we move into Q2.
We'll have to look at that look at becoming Jeff would you add anything to that no I think that I think that's very fair in the second quarter has got off to a good start similar to Q1, but as you say in we want a bit more visibility on future contract awards, the filling out of the pipeline for the rest of the year and then I think.
We will have a chance to kind of revisit where we are the things.
Yeah.
Okay, guys Thats my two ill hop back in the queue. Thanks.
Thank you.
The next question comes from Ben Walk Jorge with Deutsche Arden Capital markets. Please go ahead.
Yes, good morning, everyone and congrats.
First quarter results.
Just in terms of free cash flow could.
Could you maybe provide some color about what we should be looking for in terms of free cash flow for Q2, the magnitude of the loss versus Q1, and maybe Dsos still remains very low at 62 days I'm just wondering how sustainable it is.
Yes, thanks, very much so maybe I'll take that one.
So I think in terms of the second quarter as I was talking about in my presentation, and we've talked about before we really see the first half of the year from an operating cash flow perspective being being negative.
Driven by the <unk> Teekay projects and as we said at Q4, we see that that cash flow drag from Alice TK in the first half of this year being similar to the first half of 2022 were in the first half it was a.
Cash flow usage of $250 million to $260 million. So we still think that's true for the first half of this year. So that definitely implies that Q2 will be a bit more of a drag in terms of Alice TK in the second quarter as we pay a supply chain.
Really begin to add to.
To finish off testing and commissioning and those sorts of things.
But as we've said as we move into the second half.
That Ellis Teekay drag will come down.
<unk>.
The natural cash generative ability of the go forward business as we get later in the year I think will become much more apparent.
So yes. It is it is at a strong level, we've done a lot actually within the business to really focus on cash flow generation and the conversion of EBITDA into operating cash flow and we're seeing the fruits of that.
So we remain very focused on it.
As always there's always some pressure on that.
As you say in terms of it moving a bit higher but so far we've been successful and we expect to continue to be successful in that in that range in the near future.
Okay, perfect and just with respect to capital net book value was up sequentially could you maybe provide some color on what drove the increase and what are the timing to revisit your stake in the highway 407 still a second half story.
Yes, I think that I think that increase is really related to the building of trillium and and how we kind of build that that asset in the build phase before it is hand, it over to the customer so nothing out of the normal there Ben why that's really what's driving it from a book value perspective.
I see.
In terms of the $4 seven more generally.
We saw traffic year on year improve its up about 28% still below pre pandemic levels.
But as for seven management has said they expect revenue and traffic to improve over the course of 2023.
Obviously, we consider it.
A great asset has a lot of life left in it.
And we're happy holder of the asset here in the short to medium term as we've said previously in the longer term.
Consider how it fits within the portfolio more broadly, but in the near term pleased to see traffic improving.
Thank you very much congrats again.
The next question comes from Devin Dodge with BMO capital markets.
Please go ahead.
Thanks, Good morning.
So I wanted to start by picking up on one of them.
<unk> earlier questions on organic growth in engineering services.
I think clearly there was.
As had been a lot of progress in expanding the workforce in 2022.
Just wondering how youre thinking about.
Or should we be expecting a similar pace of hiring in 2023 or do you think esol, maybe moderate a little bit.
Yes, you should you should you should see that.
We're very very pleased.
With our ability to increase.
The net.
Level of people in the business.
From an organic perspective, I mean, obviously, we are a people business people drive growth.
The ability to attract good people to the company as is key to fueling that growth.
We've done several things.
In the last few years to recreate the culture in the company.
To be an employer of choice I mean, our purpose to engineer a better future for the planet and people really resonate with our employees.
Really a point of being able to attract employees.
DNI programs our development programs.
Collaborative approach.
Doing business.
Two working together internally are all helped and being an employer of choice.
We've now been able to together our attrition levels down to pre pandemic levels. After a spike after the pandemic, which is which is great news.
In Q1, we actually increased our head count by over 1000 employees in Q1. So that's.
That's a great run rate.
Fueling.
Our organic growth so.
Very very pleased.
Our company is people and we value obviously all of our employees very much.
Okay. Good color. Thanks for that and then again you mentioned that the prospects.
The U S Department of energy remained strong for nuclear cleanup work yet.
Yes, I think we've continued to see projects get awarded to others, including a large.
Project Award.
In a quarter, where since he was one of the incumbents just can you elaborate a bit on what's driving the optimism there.
Yes, yes for sure.
It's a very very big market.
First thing I would say.
Generally these projects.
Our bids and undertaken in joint venture.
And joint ventures further projects, you're right to say.
<unk>.
Big cleanup projects at Hanford.
We didn't win in the quarter is disappointing.
I guess you can't win them all.
<unk>.
The other prospects out there.
I mean that win in itself and it was a fairly large project because but because these things are done through joint ventures, each loss is not material.
So the whole so we do have great expertise.
In the sector, we have our own.
IP technology.
Terms of Fitch refining nuclear waste into glass, we are a technology that brings out these medical isotopes from nuclear waste into.
Into medical.
Isotopes and the market's huge.
The Doe is spending.
A significant amount of.
Money on cleaning up the historical nuclear waste. So we still see good pillars of the business.
Okay understood. Okay, and then maybe just sneak one last one and I think this might be for Jeff, but just trying to understand.
I understand some of the restructuring costs in the quarter, particularly in engineering service or is it just seems to us that the business is performing well. So it doesn't really clear to me why there is much restructuring or severance costs that should be considered nonrecurring.
Yes. It was just as we've been looking at that business those restructuring those additional restructuring costs were in our Hong Kong and China business.
Where we've repositioned and restructured the business in line with our our work right. There. So it was a fairly small part of the business, but that was something that we needed to do in the first the end of last year and in the first quarter of this year. So that that's what drove the slightly higher amount in the first quarter.
Okay. Thank you I'll turn it over.
Thank you.
The next question comes from Michael <unk> with TD Securities. Please go ahead.
Thank you good morning.
Good morning.
Quick question on the links and I realize.
First of all nice to see that segment returned to positive EBIT in the quarter. Although it was still quite modest relative to I think what you would like to see that segment doing.
Obviously remains to see what happens with that business as you work through your strategic review, but as long as it's part of the results I was just wondering how we should think about performance in that business.
Over coming quarters.
Yes, it's Jeff why don't I take that so as you.
You say it was good to see it back into profitability in the first quarter.
And as Ian said earlier, we've been doing lots to strengthen the operational capability within that business.
I think we will see Q2, improving on Q1, not not at the level, probably we'd like it ultimately to be but in the second half of the year.
With the backlog growth that <unk> been growing and the win rate that they have.
We would see it back into its target range in the second half of the year. So.
That's how I think the profile looks like through the year.
Okay.
Couple of questions about nuclear first off another quarter over quarter improvement in nuclear backlog.
I guess can you just I think there is some commentary about this but maybe you can just touch on the drivers to the improving backlog there and then.
Part of the question is when we look at the margins for the nuclear segment 13, 4% in the quarter that is within your 13% to 15% range that you've talked about in the past but.
It's certainly lower than we've seen that that segment too for quite some time. So I guess I'm just wondering what what's pushing the margins down a little bit versus what we've seen in the last few years and how should we think about nuclear margins going forward here.
Yes, yes, thanks, I mean, obviously.
We are very excited about the market and the resurgence of new nuclear.
As part of the energy clean energy transition.
Transition solution and as you're right backlog is up 23% year over year.
So I think we spoke a lot about the potential.
Potential in the market and we spoke a lot about how we see the medium term of this business growing significantly what we're seeing now is actually real projects and real project wins.
And Thats fueling.
What we will see really good growth in this sector.
Examples of that would be obviously.
The SME LPG project here in Canada at Darlington.
The can do life extension project.
Set of OTA, Romania projects.
<unk> pre engineering.
Contracts, which are which came into backlog.
<unk> well, we're now seeing.
The second large nuclear power plant being built in the UK, which were heavily involved with so we're seeing workflow through now from.
Some sizable and that will continue.
But going forward.
Just a range of opportunity in small modular reactors a range of opportunities both domestically and overseas for their can do technology.
Range of opportunity to support other technologies, such as GE, Hitachi Rolls Royce, the French technology, where they really need.
Nuclear kind of engineering general capability that we have so we're going to see a lot more fuel to yet.
I think the margins because of the barriers to entry will remain in the range that we've got we're confident that.
This is a differentiated high barrier to entry business.
The work is obviously don't under contract conditions, which.
Which which are favorable to ourselves.
And we're in this sort of transition of winning work and when.
There's no real pressure on the margins here is it's really about some.
Winning work in <unk> and <unk>.
Catering to customers.
Okay.
Very helpful. Thank you.
I think I would just clarify one.
Thank you from earlier for Jeff on the cash flow side.
No the expectation was always that you'd have negative cash.
Cash.
Outflows in the first half and then positive in the second and obviously O S. T. K I think the expectation was for that to continue to be a drag for in the short term at least but the comment about expecting a higher cash outflow in L. S. T. K in the second quarter or was that always the expectation or has something changed on that front.
No nothing has really changed in terms of the in terms of the first half.
And it and of course, it's largely dependent as we pay out the supply chain. So we just saw a little less of that than we expected in the in the first quarter. It will clearly sort of catch up in the second quarter.
So it was just a bit of phasing between the first and the second quarter, but no change to how we sort of saw the first half.
Okay. That's helpful. Thank you.
The next question comes from <unk> Khan with RBC capital markets. Please.
Please go ahead.
Great Thanks, and good morning.
A discussion about the U S business earlier I just want to get an understanding of you know in terms of your positioning in that market and given your current footprint and obviously I mean, there is a bit further out do you think you're well positioned given a lot of infrastructure spending that's coming do you see yourself doing maybe some smaller M&A in the interim to better position yourself for the.
J, a or the IRI spending just some thoughts on that.
Yes.
The plan is going well.
But our aspirations for growth in the U S is high.
As you said the market.
As I said previously the market.
<unk> is very very strong in infrastructure and energy transition.
<unk> bye.
JA, the IRI and the chip bills that have been put in place.
We've.
<unk> got our land and expand strategy, which is really state to state.
Which is beginning to yield results and we are seeing work wins come through.
New entry states and northeast Northwest and California, So that's working.
That's an organic play.
And thats, bringing results, but there are other parts of the market.
We have recently reviewed.
<unk> developed a plan to execute on basically fueled by the energy transition.
The IRI and clean power.
The industrial kind of <unk>.
<unk> and manufacturing units that need to be built.
To support that clean power, particularly EV battery manufacturing and processing plants.
Which we are in discussion with customers and looking hopefully to get some wins through.
The resiliency work in the U S is strong both in the flip defense.
Disaster relief, but also in flood mapping and understanding where those areas of risk out and we've been winning projects through that ultimately.
We will get to an M&A program.
B E.
A sensible step by step M&A program in the U S.
Where are we.
Built on the business that we already have with tuck in type acquisitions to give us greater reach geographically and capability wise and relationships with customers.
To build on our aspirations, but we have 4200 people in the U S and we want a lot more than that to be equal to our peers. So we have a plan that we're confident in.
And the markets that the market is that to support that.
Oh, great. Thanks, and then looking at the UK market, obviously, Atkins historically been a pretty large player there I.
I guess based on your read of the market is it the kind of base level infrastructure spend that's driving demand in that market or how you are you seeing contribution from some of the larger sort of whether it's a loving up agenda are kind of the larger.
Onetime spend programs want to understand how that market is doing and maybe <unk>.
Any end markets that stand out to the positive or the negative.
Yeah, Yeah, I mean, we've got a very diverse business.
Cross the U K.
<unk> is helping us and resilience.
And natural fact, as our business is growing.
And we actually see it grow.
For the foreseeable future.
You will have seen that the government.
In March through the purchasing process reconfirmed.
601 billion pound.
Five.
Infrastructure plan for the country, which is great to see and great to see that investment.
But also we're seeing.
Very strong markets from the energy transition.
The commitment to nuclear power I mean, they've made a commitment in the U K, but 25 gigawatts of nuclear power, which is obviously fueling that pump, which is good for us to sectors that we're actually seeing good growth in our defense.
We've had some good wins from the defense sector.
In the energy sector generally.
Leveling up it's still going.
To invest in the north of north of the U K.
But we're still very confident that we've got we've got this resilient diverse business and <unk>.
So winning in growing the business Ashwin.
Great and then just maybe one last quick one are there used to be as project. The White Rose project, a while back you used to be Enel S. T. K I think it got canceled and it came back in under a different contract structure could you maybe just talk through sort of the new structure for that contract then for that project and maybe how that project is progressing.
Projects progressing well.
It is it is under new contract structure.
And now, let's teekay structure or won't get into the details of it but it's so nonetheless TK, it's a profitable project for us projects going well was restarted.
We're up in.
We're doing what we call that yet.
The split forming of the principal part of the project, which is 24 hour operation, which is really go in Barnwell.
We've got a good relationship with our with our clients.
Good partners on the projects so yes.
No no no I'm sort of.
New news really on that other than the fact that we're pleased with the way that it's going.
Great. Thanks, very much for that.
Thank you.
The next question comes from Dmitry <unk> with Barrington.
Please go ahead.
Hi, and thanks, a lot for taking my question.
Wondering if you can.
Disclose the amount of discriminatory receivables.
That are recorded on the balance sheet if possible.
So I would say that the amount of which receivables dmitry.
Receivables that you'd like to recover.
Oh no.
We recognized on the balance sheet.
Thanks Jack.
Yeah, No no fair enough. So we haven't we haven't disclosed that.
As you can imagine dmitry, it's commercially sensitive as we look to.
Negotiate and recover the cost that we think are due to us.
But.
That process is going well and as you've heard us say before we think we're so where do a significant amount of those costs.
And naturally we're pretty prudent about what we would put on the balance sheet in terms of recovery.
Recovery, but.
We think we're owed a significant amount of money from the customers in terms of those additional costs that we've incurred.
Understood. Okay. Thank you and I Wonder if you can may be it.
Talk a little bit about what gives you the confidence.
As to the ultimate outcome of the recovery.
For example are they.
And towards the force majeure provisions in and call that and I guess the.
And seeing inflation.
Qualifies for some offshore.
So why do you think that could indicate.
What what Oh.
What gives you the comfort.
Yes, Barry.
Yes, yes.
Thank you Ron obviously.
<unk>.
We are confident.
And we undertake an incredible amount of work to pursue these recoveries from our customers.
We have very very large internal and external teams with external legal and.
<unk> and <unk>.
Document analysis.
And through those analysis done through those.
Legal.
Opinions.
Develop a few.
Two what we believe is our entitlement to recover loss and clearly through the pandemic those losses were significant.
As we as we posted them in real time as they happened.
So many kind of contract provisions many.
Sort of areas.
Of entitlement that we can recover ranging from changes in low so the specific provisions around force majeure.
And last you two strikes or hyper inflation.
So without kind of obviously going into too much specific project by project detail. We are confident we will vigorously pursue recovery of those losses, either through negotiation or through litigation.
Okay understood.
But you don't have a timeline yet, though when you would expect to make announcements related to recoveries.
No obviously in a negotiation there are two parties.
And.
We can't speak for the other party.
We're working on it hard.
We are optimistic that we will get a outcome, which is a win win for ourselves and the customers.
And the negotiation is the best way to do that and we are optimistic that we will conclude it that way.
Thanks, Steve.
Are the key variables.
Or I guess moving parts related to wood.
Full year cash flow guidance that that may swing the number significant niche just trying to understand.
Why are you.
A little hesitant and providing the annual number obviously understanding there was a lot of moving parts.
Some of them are beyond your control just trying to see what are the key variables there.
Yes, it's Jeff why don't I take that sort of last question Dmitry.
I think there are a few moving parts I mean, it ranges within Alice Teekay to the actuals.
Recovery of the hold backs receivable that we have in <unk>.
Paying of the supply chain that goes with that.
There is the claims revenue as Ian has talked about in.
In terms of our ability to to.
To negotiate some of those outcomes this year or not.
Theres dividends on the $407. So theres a number of kind of operating elements within there that certainly at this point in the year.
Wouldn't wouldn't get more specific in terms of our outcome around cash flow.
Awesome. Thanks, so much and thanks for taking my question. Thank you. Thank you.
The next question comes from Yuri Lynk with Canaccord Genuity. Please go ahead.
Hey, guys line is now open.
Yes. Thanks.
Just a quick one on the.
The strategic review.
As it pertains to the to the capital assets Excluding highway 407.
How active are you on that part of the strategic review.
And do you envision.
Divesting those assets and a package deal or would they be.
Piecemeal it out.
Any idea on timing is that something that can happen this year or it's 2024.
Yes, I mean, the strategic review.
And at its essence really it's about fine tuning.
The whole concept here.
Is about fine tuning the whole portfolio, whether that's capital or whether that.
Portfolio, it's not it's not transformational theres nothing in there that's going to be very very significant and we're very happy with the company. We've now built.
Specifically on the capital assets.
We do recycle as you've seen in 2022, we've recycled John .
From that we had with.
With Carlyle.
We generally.
Make sure that our assets get into smooth operation.
So obviously, we've got three assets that are growing and so smooth operation this year.
Two of those of a capital content and the Ontario projects.
Once they're in the defects that they are in a smooth operation that's the point that we may.
Recycle out.
Nothing that comes to my mind immediately.
That we would look to recycle out this year, but it is an ongoing process. Obviously, we're in the capital part of our business to win work.
And to fuel the growth of the company.
And we hold a small portion of some of them, where we have an operation and maintenance obligation. So.
Nothing nothing that comes to mind, specifically, but the strategic review is going well I mean, it's all really about profitability and fine tuning, making sure that we push all parts of the business.
Forward to the right place as.
As we know.
Professional services and project management company.
But I.
I think collectively those assets have a book value of around $600 million.
Why not look to to divest of them and you know you could.
Immediately put the balance sheet and much stronger footing.
Potentially accelerate your capital allocation program.
Yes. It is Jeff maybe I would just sort of build to that is.
We look at all of them and as Ian said some of them are in nature that are on the balance sheet that arent at this stage.
Where they can be effectively recycled in terms of capital.
And some are up.
The nature of that.
Our ability to sort of recycle those in the immediate near term is is more constrained.
I think the point is that we will absolutely continue to look at everyone.
And if there's an opportunity to realize value to your point and as we've done in the past, we will look to do that as a way of accelerating particularly on the balance sheet getting to where we want to be.
Okay. Thanks, guys.
Okay.
This concludes the question answer session I would like to turn the conference back over to Tony Jensen for any closing remarks.
Thank you very much everyone. Joining us today. If you have any critic question. Please don't hesitate to contact me. Thank you that was a nice day bye bye. Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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