Q3 2023 SNC-Lavalin Group Inc Earnings Call
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I would like to join FNC leveling earnings call.
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Sorry can you repeat that.
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F N C level in.
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Your name.
David Brown.
Can you spell your last name to me please.
Brown B R O W N.
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And the compound you're calling from.
Hey, I E on a.
Mhm.
Okay. Thank you our journey the corner.
Mentioned steps to become the Premier fully integrated professional services and project management company.
We have chosen specific geographies and segments that are growing fast.
Within them technological capabilities. Our people then scale lead to our ability to grow above the market.
We help our customers provide secure clean it up.
Foldable solutions to solve the global energy trial ever.
We are hiring the right people and we're operating more collaboratively.
This is all happening as public entities increased their focus.
Settlement of the planet and its people.
I am extremely proud of our achievements to date this year and are excited to do detailed available today.
On slide four we highlight our backlog growth across Atkins reality services.
7% growth in the third quarter versus the third quarter of last year was driven by wins across all regions and end markets. We continue to see key wins across many of the markets in which we operate including transportation work in the U S and securing a large patrick contrary.
In Quebec.
Further wins emphasized the demand for our services across the globe.
Turning to slide five our engineering services business continues to drive robust organic growth for Atkins realistic as witnessed a 23% increase during the third quarter.
Our second consecutive quarter of record revenue generation was driven by securing new wins across our geographic footprint.
Segment, adjusted EBIT increased 35%, representing a margin and segment adjusted EBITDA over net revenue margin of eight 7% from 14, 4% respectively during the quarter.
We continue to elevate our backlog, which now stands at approximately $5 1 billion.
Representing an 11% growth versus our backlog as at September 32022.
On slide six we provide further insight into our engineering services growth in each of our core geographies of the U K the U S and Canada as well as other targeted geographies with strong potential with.
We continue to see exponential demand for our services in these markets fueled by the need to replace aging infrastructure and provide clean affordable solutions for the built environment.
In the UK and Europe capability and supporting growth through infrastructure awards of facility development as well as defense are driving wins for our business mix.
This comes on the heels of the UK announcing its intent to double its investment in water infrastructure over the next five years. We also secured a key win with the UK Ministry of defense this quarter, which further strengthens our position as a trusted partner with the government.
In the U S. The government's commitment to construction safe and carbon neutral infrastructure is leading to continued strong performance the capital infusion from the infrastructure investment and jobs Act and the inflation reduction it remains in the early days.
We have a significant number of bids for additional work, particularly in the transportation minerals and metal sectors, highlighting the elevated demand for our services and the opportunities that persist for Atkins railroads.
Your line of sight to further opportunities remains fast as the U S will continue to invest in lowering the carbon footprint Palmer ageing infrastructure.
In Canada, our value proposition is being recognized as we continue to accelerate our backlog with higher quality contracts. These wins have been secured across power and renewables industrial and transportation end markets.
Our focus on investing in our people and our technology will continue to yield robust growth in Canada.
Our proven ability to provide end to end engineering services will continue to bring other key wins in our core geographies.
Infrastructure projects related to net zero in sustainability, we will continue to drive government spending with growth of the renewables energy market the delivery of cleaner modes of transport and industrial projects that support the growing trends of decarbonization and ratios.
We are successfully attracting and retaining top talent to support our growing pipeline and the engineering services business across all of our operating regions.
I would now like to move on to slide seven and the results for our nuclear business.
We continue to demonstrate solid growth with an organic revenue increase of 20% this quarter compared to the third quarter of 2022.
Nuclear backlog is $1 1 billion, which.
Which represents a 23% growth versus our backlog at September 32022.
Segment, adjusted EBIT increased 6%, while margin fell two 4% mainly due to the business mix of the nuclear segment this quarter.
On slide eight we highlight achievements in each of the nuclear services that we provide.
The market outlook for new build new nuclear opportunities is gaining more positive traction quarter on quarter.
In Ontario, the energy Minister announced the proposal to expand the Bruce power station, which will come in addition to the work we're already performing on this contract in the U K the government announced.
So the plan.
Drilling projects and in the pipeline of opportunities in life extension work remained robust.
And Ontario, we continue to be actively support an extension work on LPG Darlington and can do life extension work that Bruce power.
Earlier this year, the Ontario government gave its official stamp of approval to the extension of Pickering nuclear until 2026, which could pave the way for a full refurbishment.
And in Romania, We received the award letter for the engineering technology, and procurement of tooling and react to components and support the life extension of hitting 100% of the power plant.
Our waste management and decommissioning, we're seeing continued progress on our projects in the U K the UAE and in the U S. We have a strong pipeline of prospects. In addition to our recent waste management contract extension at the handset into 2024.
The focus on providing clean affordable and secure energy by public entities made significant growth for Atkins realists showcased with our extensive backlog and accelerating revenues.
We are constantly harnessing our capabilities across the globe to be a trusted partner to public entities as they seek to achieve that net zero goals.
We believe we are well positioned as an industry leader to generate long term value in the nuclear sector.
Now moving to slide nine and our O&M and links on businesses.
Our O&M segment generated $115 million in revenue during the third quarter.
On April four.
4% organic revenue decreased as higher revenues from our Rem project were more than offset by the completion of a large contract outside Canada.
Segment adjusted EBIT margin was very strong in the quarter of 14, 2% well above our long term target of 5% to 7% EBIT.
EBIT growth was driven by a closeout of the previously mentioned contract.
We continue to see opportunity for growth and expansion in our core geographies through infrastructure improvements such as wastewater facilities and highway projects.
We remain focused on leveraging strategic partnerships with key industry players.
Our capital group.
<unk> bidding opportunities for the future.
Our strategic review regarding linked some remains ongoing and we will provide an update when applicable.
<unk> increased 58% to $1 2 billion at the end of the quarter with continued strong demand for transmission and distribution services.
The improvement in quality of backlog gives us confidence to expand margins in the near future.
Moving to slide 10, and our LST K projects and capital business.
We recognized $13 million in the quarter in line with our expectations.
Less project ramp continues to progress well with the cynosure portion operating while testing and commissioning on our Ontario projects is continuing as planned.
Our backlog decreased by more than 50% to $305 million, primarily representing around.
As we finalize the Alice Teekay projects for our clients, we continue to pursue recoveries that we are out and.
And discussions remain ongoing with our customers.
Turning to our capital business third quarter revenues were flat, while EBIT saw a slight year over year decline, we received $10 million in dividends this quarter compared to $14 million in the third quarter of 2022.
In October we received $44 million in dividends the traffic volume continued to improve compared to the prior year period.
Before turning over to Jeff I, just wanted to highlight our 2022 ESG report that we published on September 25.
Ah report emphasizes our core purpose.
To engineer, a better future for the planet and its people by.
By utilizing our end to end capabilities, we are helping customers reached a net zero carbon targets.
Across the globe, we are a critical partner to governments focused on providing affordable and clean energy Decarbonize and the built environment and building resiliency to climate change impacts report highlights that approximately 50% of our revenues are from projects.
But directly solve these global challenges.
Our purpose.
<unk> sustainability and our continued focus on building, an inspired inclusive and equitable workforce.
Talented individuals to help us succeed.
Our goals are achieving through their hard work and dedication I'm really proud.
Of the individuals that Atkins realize.
Our ability to attract strong employees.
A direct translation into our revenue growth, which has proven out year to date across our businesses.
Our purpose built position across our chosen geographies and our end markets fueled our near term and long term growth trajectory.
But we are really pleased to have organically grown our head count this year.
By over 3500 employees, if we don't take into consideration divestment the Scandinavian business.
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 13, total revenues for the quarter increased 17% to $2 2 billion.
Compared to Q3 2022.
Atkins rehab services revenue totaled $2 billion.
24, 4% higher than the same quarter in 2022 or 19, 5% on an organic revenue growth basis.
Total segment adjusted EBIT for the quarter was $197 million up 47% increase compared to Q3 2020 and was comprised of $187 million for Atkins Railroad services $23 million for capital.
A negative $13 million for ALS teekay projects.
Atkins Realists services adjusted EBIT margin was nine 2% in line with our target range of 8% to 10%.
Corporate SG&A expenses from <unk> for the quarter were $47 million.
Compared to $25 million in Q3 2022.
The increase is mainly due to the company's rebranding expenses and the impact of the significant year to date share price increase on the long term employee incentive estimates.
The rebranding costs are expected to total around $30 million made up primarily the brand development costs themselves.
Finance and media and public awareness campaigns.
We expect approximately two thirds of this spend.
To be in 2023, and the remainder in the first half of 2024.
As a result, we now expect that the corporate SG&A expenses from <unk> to be between 130 and $140 million for the full year 2023.
We also recorded this quarter, an accounting gain on the disposal of our Scandinavian engineering services business of $46 million.
Following the closing of the transaction on August 31.
Net financial expenses for the quarter were $50 million.
The previous year due to a higher level of gross debt and higher interest rates on variable rate debt.
The <unk> net income from continuing operations this quarter was $105 million.
Compared to $45 million in Q3 2022.
This was composed of a net income from PSTN of $91 million and a net income from capital of $14.
Adjusted EPS from <unk> for the quarter increased by 27% to 38 cents per diluted share.
<unk> 30 in Q3 2022.
Backlog at the end of the quarter totaled $12 8 billion.
An increase of 4% compared to September 32017 Atkins.
Packaged reality services backlog increased by 7% to a record high and included an 11% increase in the engineering services segment, and a 23% increase in our nuclear segment.
If we now turn to slide 14 at the end of September 23, the net limited recourse and recourse debt to adjusted EBITDA ratio decreased to two seven times at the Companys net limited recourse and recourse debt decreased to $1 6 billion.
And adjusted EBITDA increased to $570 million.
Note that our net debt to EBITDA ratio calculated as per our credit agreement also decreased to two seven times at the end of the quarter.
Due to our continuing efforts on cash collection, our days sales outstanding for engineering services continued to be strong and stood at 59 days at the end of the quarter.
We now move on to slide 15, and free cash flow with.
We generated positive net cash flows from operating activities. This quarter due to strong results in our Atkins, we our services businesses and lower LLS Teekay project cash outflows as the projects continue to wind down.
Atkins Royale services generated operating cash flows of $184 million.
After cash taxes interest corporate items on capital you can see that we generated $84 million of operating cash flow in the quarter and.
And including Analyst Teekay project $6 million.
We then add back the federal and provincial charges.
Remove the capex and the payment of lease liabilities are free cash flow stood at negative $28 million.
This amount was more than offset by the receipt of $181 million from proceeds of sales, which was composed of $147 million from the sale of our Scandinavian engineering services business and $34 million from the deferred consideration from the sale last year of <unk>.
Interest in our Carlisle investment fund.
Considering other cash flow items, such as dividend payment, we generated a total of $117 million of positive net cash in the quarter.
We used $106 million to maintenance reduce our limited recourse debt and recourse debt to that one.
One $6 billion level and mix among the previous slide.
We anticipate that Q4 is it also delivered positive net cash from operating activities as we expected the Atkins, we add on services business.
Should deliver higher cash inflows than the Alice Teekay project cash outflows.
With that I'll now hand, the presentation back to you. Thank.
Thank you Jeff.
<unk> positive cash flow generation this quarter further emphasize the resiliency of our business in the face of uncertain economic headwinds.
Pivoting to growth strategy is working.
We are strongly positioned with a leading presence across our courtyard geographies and markets of Canada, The U S and the U K.
Having specifically targeted these high growth geographies.
Teams on the ground are winning key contracts.
Chosen end markets to set us up for long term growth.
Consistent cash flow generation.
We are winning through our unique competitive differentiators and our ability to fully service the <unk>.
Tire lifecycle of an asset.
We're a proven trusted partner with our clients, which bodes well for our future opportunities to capture key contract wins across our core businesses as the world positions itself to lower its carbon footprint through sustainable infrastructure and clean energy solutions.
The pipeline of opportunities for Atkins realists.
Bigger than ever.
And as public entities continue to focus on solving the energy trilemma.
Lastly, we have a strong dedicated global workforce.
Helps us achieve these goals.
I am thankful everyday for their loyalty.
Diligence.
And proven to the world.
Expansive capabilities of Atkins realists.
New name to notice an inflection point for the repositioning of the company.
The fresh identity fraud dynamic organization.
Just getting started.
With that I'll now open for questions.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad Youll hear a tone acknowledging your request.
If you are using a speakerphone please pick up your handset before pressing any keys.
Draw. Your question. Please press Star then two.
We'll pause for a moment of callers join the queue.
Our first question comes from Jacob bout of CIBC. Please go ahead.
Good morning.
Got it.
So looking across your engineering services business in Europe, and the U S and Canada.
Obviously.
Strong quarter, but as you move into 2020, what do you view as the weakest link.
And how are you thinking about growth longer term industry areas.
Well.
I think I don't see a weak link.
Firstly on se.
And that's not to say, we don't realize and understand.
We're economic macro geopolitical effects could be.
But it plays to some of the things that we've been saying.
Over the last few quarters, and particularly in the space today as well.
We're deliberately positioning the company.
While we believe markets are at their most resilient.
And those.
Resilient markets.
Fueled.
Bye.
Real strong essential demands.
Two.
Maintain replace.
Sure.
They continue to function and infrastructure.
Thats about water, it's about resiliency infrastructure is about transport.
And we're seeing obviously in our chosen geographies.
Investment and continued investment by governments.
Secondly, it's the it's the energy trilemma, which is which is fuel and the need to replace.
The electrical generation from fossil fuels to.
So it's a clean energy.
But what we've got to remember is that.
In order to have a clean world, which is driven from electricity and not burning fossil fuels.
Electricity grid is going to increase its capacity by two to three times.
So the combination of both of these things.
Where we positioned our services in our chosen geographies and obviously I could go into more detail in each geography.
Macro.
Spec sales, we think we're positioned well.
That's not to say it.
It's recession proof I mean, nothing is recession proof, but it's pretty resilient.
Most of what we believe we're going to see over the next few years.
So youre not seeing any slowing in any particular region at this point.
Well no because we're pivoting to weather.
You could say, where the folks moving from a Canadian expression with pivoting our business to where we know the market sector with a strong fast growing and needing our services.
That's good to hear.
Maybe just moving on too.
Onto nuclear.
You will see solid.
Built a backlog there.
And we're seeing kind of 20% plus in each.
<unk>.
What's your expectations in growth over the next 12 months and then.
And that is margins were down year on year, what is your view on normalized margins and how does mix play into this as we think about this.
The business.
On the rebuilds.
He builds and reports coming out.
Yes, yes, yes.
And obviously, we are seeing attached to this energy trilemma, we're seeing a very strong Renaissance in the nuclear sector is very strong.
And the way we think about it is the way on the slide there is new build.
<unk> supports a accounting technology and waste.
Perhaps just to give a like an overview answer and I'm sure there'll be a further more detailed questions later.
We are seeing now nuclear energy as part of the solution for a net zero electrical energy electrical.
<unk> generated bread and.
And because of that that there are certain proof points that I think you've seen announcement around for sure Bruce has announced that they are expanding.
Project on that site with nuclear you've seen LPG.
And also we're also committing to the SMA technology, which we are proud of with GE et cetera.
Also you may have seen the commitment of the federal government in Canada to support Newbuild Candy reactors in Romania.
Nevada plan. So they are all proof points of the way that this is moving.
For life extension can do I mean, obviously this has been a great business far as Bruce in Darlington, you've seen that we've got an award of a 750 million.
Engineering and procurement contract.
Again at the Senate vote, a plan to extend the life.
And there are more reactors around the world in Canada that will be extended.
So if you put all those things together, obviously, we're going to see some pretty significant growth.
<unk> of the business now the way this will flow as well as an engineering and procurement start with and the natural deployment. So it is going to be gradual.
Very short term.
Growth, but into the medium term, it's going to be fairly significant.
With respect to the mountain itself I mean, the margin this quarter is still within the range that we believe is the right range of 13% to 15% EBIT. That's a good range I mean, that's the both our engineering services business and it's good.
Sure.
For our business and Thats because of the high barrier to entry of mix there.
The decline from year over year, some specifics that were.
Above the range in 2020, and so we're happy with the work on board and we're happy with the margin we think it's sustainable through the growth of the business.
Pretty excited about covering the sole rights to the Canadian technology in Canada.
That's helpful. Thank you.
Thank you.
Our next question comes from Chris Murray of ATB capital markets. Please go ahead.
Yeah. Thanks, Ron So just maybe following up to the growth question, because when you start thinking about organic growth numbers and that kind of range I mean in essence.
It's kind of low <unk> or even high teens numbers I.
I guess my question is the sustainability of those just from a perspective of even staffing.
And doing it organically can you talk a little bit about I mean, even despite.
Hear what you're saying about pivoting, but.
There's got to be I guess, a moderation at some point before we start worrying about.
Keith.
Lack of a better or do you sort of trip on your own success.
As you go forward. So how are you guys thinking about.
In normal growth as we go into 'twenty four.
No thats, a very very good point.
Obviously, something we're very mindful of and when I was talking about the resilience and the markets I'm not trying to suggest the growth is going to run at the same rate that it was this quarter I mean this quarter was pretty exceptional what I was trying to emphasize is that while we have positioned the company we will.
Continue to see growth now, obviously I don't want to get into what is the 24 outlook look like now and we'll get to that obviously in the next quarter and communicate that.
But the point around.
The.
The resiliency of the business and growing at this pace is not lost on us at all.
Obviously, we're onboarding new staff.
Obviously.
There's two parts of our business one is winning work and the other is delivered is and we're very mindful that we have to deliver this work in the.
Is the right way for our customers to be able to get repeat work, what I would say.
Basically we're very focused on our top customers.
Analysis on our top customers and a lot of this growth is actually coming from existing customers. While we're pleased with our performance.
We've been able to grow our revenues through existing customers.
So I think the point is a good point, it's on our mind.
We will obviously communicate what we believe is the right amount of growth for 24 at the right time.
But we're definitely pleased with what we're seeing so far.
Okay, that's fair.
Not to beat a dead horse.
The loss in the quarter was I guess for Rick.
Normally think of it as just being your SG&A costs and your cost to complete.
One of your partners also bought some pretty significant losses, I guess within that with the settlement agreement.
But we didn't see anything from you this quarter just wanted to double check.
I just didn't get appointed <unk> got all the all the reserves already booked.
For auto and Eglinton at this point.
And now, let's just a matter of the closeout of the projects.
<unk> any recoveries that might come down the road in future years.
Yes.
Completely confirm what you've just said.
We are proceeding as planned and as communicated at the end of 2022.
And if you remember.
What we said at the end of 2022 is that the projects were completed to a point.
Physical work.
We felt that we could sure.
Forecast than volume.
And.
If you also reflect back in 2021 and 2022.
We were very transparent on a quarterly basis as said, we are having difficulty and forecasting a point because of the pandemic because of productivity issues with the supply chain issues because of strikes. So we declared all of that in real time through 'twenty one 'twenty two.
So what we did say at the end of 2007.
What's left on these projects.
In terms of cost it's far less than the cost that we've experienced before because it's associated to.
Administrative tasks and closing our documentation administrative tasks and getting occupation permit.
Getting OLED proclamation documentation to handover to the customer, but also in defect closeout reinstatement of a kind of road infrastructure around the projects testing and commissioning training the city's drivers and putting them into operation. So so we're comfortable with what we said at the.
End of 'twenty two.
We put a run rate out there of $7 million to $12 million a quarter.
We're in line with that.
And the projects are going well.
Probably not going to open when we expected them to open the declines provinces.
Those delays in opening again don't attracts material cost for ourselves.
We're focused on closing out work out and the expectation that we set out at the beginning of the year. So obviously can't comment on any of our partners, but thats the way we see it.
Alright Thats helpful. Thank you.
Our next question comes from Yuri Lynk of Canaccord Genuity. Please go ahead.
It's the second quarter in a row that you've you've increased the guidance for the year, which is which is great to see but.
Where where is the growth surprising you.
I know you talked about water transportation and infrastructure resiliency, but those are pretty broad strokes I mean could you share with us a little bit in terms of geographies and more precise.
Okay.
Yes, yes for sure because it's there's no.
One thing frankly.
That I can point to to say that was.
In excess of our expectation and there was one market or one walnut space I mean, it's pretty much.
Across the board.
And.
Perhaps I'll just cancer.
We think about it I mean in the UK, which.
I think we would.
Acting.
Perhaps the biggest slowdown to our business than we've seen actually a business has been growing really really well.
And we're really pleased with the way the businesses pivoted to where the funding is going I mean remember in a majority of our business across the whole portfolio is scope of work about 70% to 75%.
There has been a bit of.
Slowdown in the transport sector.
We've kind of focused on opex, rather than capex in the transport sector. They canceled the high speed rail extension, but in having this framework agreements to keep the railroad move in framework agreements to keep the loads cooperating with been able to maintain a pretty good level of transfer work.
But it is also a big pivot in the UK to water and energy and defense, we've been picking contracts up in defense, we're getting ready for the water market.
We're obviously in the energy sector, particularly supporting nuclear growth, including sizable. So that's kind of an example, the U S pretty much.
Pretty good.
Pretty busy on the basis of the funding that's going through now JA and the IRI, but also it's just the central world and replacing infrastructure this failing or aging.
Canada very similar picture.
Quite a lot in the renewables in the energy sector from industrial plants that have been.
Supported by the federal government and provincial governments transport again.
And a lot of the cities and provinces is fueling.
So it's kind of across the across the globe.
Across the core geographies now and somewhere like the middle East we've been very very careful because the the business out of the property is moving so much that we've actually focused more on sustainable wellness and resilient market. So that we don't kind of grow that sort of proportion of the business, which is more than around about 7%.
So so some areas we're also careful.
Account, one thing and then obviously new players we talked about.
Okay.
And then.
In that vein looking at engineering services.
Really phenomenal growth year on year.
I thought we would see a bit more operating leverage in the business.
And more margin expansion on the EBIT line.
Why isn't that the case and specific we are any of those rebranding costs and higher comp costs.
Allocated.
So engineering services in any way.
Yes, Jeff why don't I take that one.
So first of all on the second question no we have left.
Those rebranding costs. So the vast majority of them in our corporate SG&A, because we're running that as you'd imagine.
From a corporate perspective to make sure we're getting that the brand out there in a very consistent way I mean, I think in terms of the operating margins. We did see operating margin improvement in the quarter. As you would expect and we were pleased with that and that is very much.
In line with the expectations and the journey that we're on.
I think we.
Discussed previously around some of those levers. The first is as we gain scale and at the same time as we continue to drive some of our cost efficiency improvements, including both common systems and tools that we're putting in place including rationalization of costs like real estate that is over time drive.
<unk>.
<unk> margin and will continue to drive improved margins in our view. We've also talked about the fact that in areas like engineering services.
We have to.
Sell in this case, a scandinavian businesses that were below our target margins and we didn't feel we would be able to get them to those target margins.
Reasonable period of time.
A lot of our geographies and our end markets are very much operating at.
Talk to your margins and margins that we would aspire for the rest of the business and where we don't have that we have some of that we have those businesses on improvement plan and that will take some time to unfold.
But as a result, we would expect over the short to medium term to continue to not only be able to grow the top line, but over time also be driving improved margins as well.
Okay. Thanks for the color guys.
Thank you.
Okay.
Our next question comes from Ben Wildfire of Desjardin capital markets. Please go ahead.
Yes, good morning.
Gentlemen, and thanks for taking the time.
Just to come back on the SG&A 47 million in the quarter higher than expected as expected in guidance. It is increasing for the year could you maybe break down the impact of the rebranding in the quarter versus Earl cribs, and what kind of run.
Run rate, we should be using going forward.
Yes sure.
<unk>, so and as you heard me say this the $30 million, we're expecting around the rebranding of that two thirds of that this year most of that in the second half so that would be about $20 million.
In the third quarter as you said are our SG&A costs were about $20 million higher than our normal run rate.
Around half or so of that with the rebranding costs I was talking about kind of half of that $20 million you would expect to spend this year, maybe a bit more.
And the other half is related to.
As I said, the long term incentive schemes we have.
And frankly with the rapid rise in the share price.
The catch up in that in the expense related to that.
That is why we changed the guidance for the full year from around 100 million to that 130 to 140, obviously.
Most of that increases the rebranding we expect in the second half this year.
With the other portion being around the long term incentive scheme.
Obviously as we get into 2024.
We expect of them.
$10 million of the tail end of the rebranding.
See you expect to be slightly higher in the first quarter or two next year to our normal run rate. So hopefully that gives you a bit more color on that.
Yes, that's great color, Jeff and looking at the capital employed.
<unk> strategy, you've been successful with the divestiture of Scandinavia.
You're also thinking about links then.
If you look also at some milestone leverage came down.
You get more confidence about pls TK backlog ramping down we've seen a name change just wondering about the higher interest rate environment, how does that change your capital deployment strategy and what we could expect in terms of financing expense on a run rate basis going forward.
Yeah, So I think.
Our guidance very much.
Similar for this year that we put out at the at the beginning of the year, so around that sort of $45 million.
Or so level per quarter.
But you're absolutely right our capital allocation strategy that we talked about at our Investor Day back in September 2021 is our first priority.
Free cash flow or net cash flow is driving the leverage on the business towards our target of one five to two times by the end of 2024.
Clearly in a higher higher rate environment like we're in that paying down of debt.
We think is also a good use of capital both in terms of getting to our target leverage but obviously.
That will do in terms of driving that interest cost as well.
Now as we and we said at that time to the extent that as we move through 2024, we're able to consistently be.
Getting to that leverage level.
And generating consistent positive net cash flow that may give us the opportunity to.
Small tuck in acquisitions or return money to shareholders.
I think we will continue to go quarter by quarter as we see that with the balance sheet is the priority.
Okay, great. Thanks, very much for the time.
Thank you. Thank you.
Our next question comes from Saldanha Kim of RBC capital markets. Please go ahead.
Great Thanks, and good morning.
Wanted to dig into a little bit more into the U S. I think over the last couple of quarters. One of the patterns. We've seen as you know quite a bit of a uptick.
Uptick in head count.
Or is this sort of obviously the organic growth has been fairly good as well as just trying to understand is this sort of hiring to catch up to the demand that's in the pipeline.
The sort of foreshadowing good growth looking ahead, and how hard or easy is a defined the flavor on kind of the right I'm just trying to get to understand it looks like there's a bit of a buildup in or should we read that others.
More work in the pipeline or more just catching up.
Yes. It is.
All about our strategy really that we have.
<unk> talked about in the past.
Land and expand strategy.
And also looking at.
Markets both geographically.
From a market perspective.
<unk>.
Really the sustainable.
Beyond any sort of political changes.
So.
We are stronger in some very specific states.
And just to remind what we said in the past, Florida, Texas, South Carolina, and Georgia, we offer a tier one.
We're in there with all of the major major U S players.
We've also expanded.
Into California, and New York, Nevada, and Washington State, we're bidding work now and those expanded areas.
We're beginning to build relationships with customers and obviously building the teams.
Our goal.
And our strategy is to get us into a top 10 player in the U S. We're currently from an email perspective around 17, we've got about four to 5000 people in the U S. Obviously over a period of time.
Our long range plan, we want to get to about 10000 people the market is there.
Need to replace infrastructure the need.
Need to energy security.
Is there even regardless of the <unk>.
Because.
The funding model already was quite strong.
In the end to talk about some of those supercharged sort of funding levels.
And that's the only just really starting to get deployed.
Floyd about 20% of the overall $1 two trillion.
So early to say that flow through.
It's a good market.
Without it.
So six quarters of record backlog for us.
We're pleased with progress.
Obviously, we want to do more but we want to do it.
There isn't sort of sustainable areas of the market.
Great. Thanks, and then.
I was hoping to get a little bit of forward looking commentary on just the operating cash flow or just the free cash generation.
Maybe if you can walk us through some of the puts and takes as we head into 'twenty four 'twenty five in it.
Or is there does that is that your cash flow outlook does that change your views on maybe concession disposition or anything like that or are those two separate decisions.
Yeah.
Yes sure.
At first I think my comment would be it's two different two different decisions and then an unrelated but that we would kind of look at them on on their own I think from a cash flow perspective.
If I go back to the guidance and outlook, we gave at the beginning of the year.
Said, we'd be cash flow negative in the first half of the year, primarily driven by.
The cash drag from the Alex Teekay projects, but as that sort of ramped down in the second half of the year we've.
We see the natural cash flow generation qualities.
The go forward business coming through and I think we clearly saw that in Q3, and we will continue to look to see that in Q4.
Obviously as we get into 2024, I think we think that only is more so.
As.
That's maybe a bit of a sort of paying a final part of the L. S. Teekay supply chain, but broadly it will be the cash flow generated from the from the services businesses, which.
Which are which are quite strong and as Ian said, we'll come back in.
Our Q4 results and given us look for for 2024.
A longer term view is the business itself is one that is set up to be strongly cash flow generative, which.
Not only we think allows us ultimately to hit our leverage targets.
With respect to that set of long answer that real quickly just talk about the concessions.
We continue to actively look at the concessions obviously.
<unk> talked previously about 407, but the rest of them.
Where we have the opportunity we look to reduce our stake.
And a stable operating environment.
Awesome.
Realizing value from those that have to be at a lower cost of capital than our than ourselves.
And that's been a value accretive thing to do we will obviously continue to look to do that over time on the road.
Great. Thanks, so much.
Thank you.
Our next question comes from Michael <unk>.
Deutsche Bank. Please go ahead.
Hey, good morning, guys.
Thanks.
Hi, similar questions to the group here, but I'll just ask them a little bit differently. So I wanted to go back to the <unk>.
Ken's reality.
This is organic growth.
You talked about.
The reasons for the upside surprise.
In terms of this upside surprise I guess the question is how confident are you at this point.
This level of revenue likely represents a new baseline versus a tougher comp for next year.
So.
It's Jeff.
I think my my view and I think that's very much builds on <unk> comment is that.
We fundamentally see in our backlog and in the capability, we have in the business and the end markets themselves that we've reached a new a new baseline of activity.
And then obviously as we head into 2024, we would continue to see the opportunity to grow the business, obviously will come back and talk about our.
Our view on that growth in the fourth quarter.
Obviously with the growth we've had this year that that makes for that makes for a tougher comp as you're going forward, but we think it's.
We think that comparative.
We'll be we will be one that is a new baseline for us and we continue to attract the right people and the quantity of people and the quality of people we need.
To deliver against that so.
To build on what Jeff said in some of the things you said.
We're obviously really pleased with the way the posing to grow strategy is playing out this year.
We need to obviously look at 2020 full and develop.
Pipelines in detail and think about the revenue growth so that wouldn't expect something similar to what we've got this quarter nearly 20% being sustainable.
We are confident will position this company in good resilience.
With sustainable markets.
Yeah.
No I appreciate that it's a little bit early but that's helpful color.
So pivoting to free cash flow when asked this question.
Maybe slightly differently, because free cash flow as far as Atkins reality, because it looks to be trending as it should be.
So how much working capital deficit.
Is outstanding at this point as it relates to the LSD key projects.
I believe so.
Or you believe no collateral.
In terms of free cash flow going forward.
Okay.
<unk>.
Teekay drag on cash flow.
Yes, so I would say the LLS teekay drag on the cash flow you can see in the cash flow slide that yes.
$77 million currently.
Coming down from levels in previous quarters that were a 100 or above.
We would expect that to continue to trend down in <unk>.
In Q4 and into Q1 next year so.
I think we are.
We're getting pretty close to the end of that as Ian said, there's still a bit of work we're doing around <unk>.
The areas of closing as the projects testing commissioning et cetera. So there's a bit of cash that goes with that but that that is starting to wind its way down for sure.
Yeah.
Thank you.
Our next question comes from an FX charge of BMO capital. Please go ahead.
Alright, Thanks, good morning, guys.
I wanted to come back to the Edmonton LRT.
I believe there were some progress on claims agreements that came forward differently.
I know you've answered this from a P&L perspective.
We've taken adequate provisions, but from a cash flow perspective, the claims provide much of a benefit in Q3 or will be more meaningful in Q4 and early 2024.
So nothing very significant.
From our perspective, I mean on all the jobs.
We are rigorously pursuing recovery.
Clients.
<unk>.
Through.
Certainly the latter.
That was ticket projects.
Now, we're very little travel pulling the negotiation stage.
That will lead to either settlements substantial settlements forward it'll lead to litigation, where we are.
No letting this go until we get recovery of the losses that we.
'twenty one 'twenty two.
Because we believe we've got entitlement.
There's always a range of clients I mean, some of them are large some of them are small we look to try and sell anything we possibly can so we can get the cash it.
So I would say with some small issues that again and sold on a regular basis that bring small amount of cash flows in.
The big issues around that stuff.
Obviously, when we set of Lowe's.
That is it.
Good cash upside for us.
Interesting thanks for that and then is that the question.
The nuclear business.
I think the design development for the latest utility scale Candy reactor I believe at the generation three times, just can you remind us where that stands currently and can you comment on readiness for deployment.
So.
Yes.
That's a really good question and I don't know Pep. So I'll give you some context of the can do technology, because there's some I think some misperceptions out there.
There are only six.
The licensed large nuclear technologies.
World.
One of them is Russia, one of them Chinese so you're not going to see that deployed in the.
Western World. The other is fringe Korean.
States cannot.
So we have the privilege of this Canadian technology solar rights of IP.
Technology is constantly improved and upgraded to be relevant and licensed and available for deployment.
And.
So it's a misperception somewhere out there. This is an old technology, which is known.
It's got the latest safety features discuss all of the kind of latest regulatory requirements and Thats why obviously, Romania was very keen to see more can do and I believe we're going to see more can do new tender deployed across across many old customers and potential new customers ultimately.
There is a consideration.
We have a range of react to side 600 to 750 is a consideration that we may need to develop something which is more of a megawatt size and we're working our way through that.
This gigawatt side, sorry, gigawatts that.
Okay. Thank you I'll turn it over.
Thank you.
Our next question comes from Maxim CHF of National Bank Financial. Please go ahead.
Hi, good morning, gentlemen.
Right.
I mean, most question honestly have been already asked but one.
One thing I wanted to come back to.
And.
Very robust topline growth with maybe sort of still surprised not seeing as much of a crew.
<unk> two to the margin profile and I'm just wondering.
How do you think about those two things because ultimately it's a utilization game right.
Curious to see what your thoughts on that.
Great.
Very very happy to turn to the question is very much top of mind I mean, clearly from a dollar perspective, we're really happy on the 23% increase in our <unk>.
<unk> business of margin.
<unk>.
Year over year for Q3 so.
Sure.
Let's please now as you say the component of that is growth.
With 95%, which we're pleased with but also margin percent and profitability.
And we're very very mindful and clear about where the business needs to improve.
We know the large parts of the business are operating.
Good margin levels.
And we know that there are areas of the business, where we put the business on an improvement plan and I can tell you in Canada.
For example is one of those geographies, but is in a margin expansion improvement plan and we are seeing quarter over quarter that being delivered.
But there are also areas of the business.
When we put them on our NIM.
Improvement plan.
Just the Scandinavian business.
Because of local dynamics of large competitors or our own scale that we haven't been able to achieve those months of improvements.
We will.
Divest as we help them with Scandinavia. So we're on a very deliberate journey also.
To make sure that the emergence of <unk>.
Landed where the need to expand.
And last comment is on our cost base.
Controlling our costs and oven a transformation office that constantly looks at our cost.
Throughout the business whatever it is in overhead or offices and facilities.
And in many respects havent kind of put in the office that we're looking at this is obviously a key component of all of that as well so for sure.
<unk> for us is growth.
<unk> expansion and cash flow and then those are the three things we're highly focused on.
Okay. That's very helpful. Thank you so much.
Thank you.
This concludes the question and answer session I would like to turn the conference back over to Denis Jasmine for any closing remarks.
Thank you very much for joining us today, if you have any further questions. Please don't hesitate to contact me.
Right.
Friday, everybody and a great weekend, thank you very much.
Right.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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Yeah.
Yeah.
Yeah.
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