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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the SNC-Lavalin's First Quarter 2018 Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Denis Jasmin. Please go ahead, sir.
Thank you. Good afternoon, everyone, and thank you for joining us today. With me today are Neil Bruce, President and CEO; and Sylvain Girard, Executive Vice President and CFO.Our earnings announcement was released this morning, and we have posted a slide presentation on the Investors Section of our website. If you are not using today's webcast, please ensure to open the presentation as we will refer to it during this call. The recording of today's call and webcast will also be available on our website within 24 hours. [Operator Instructions] I would also like to draw your attention to Slide 2 of the presentation. Information in this presentation and remarks made by the speakers today will contain statements about expected future events and financial results that are forward-looking and, therefore, subject to risk and uncertainty. These forward-looking statements represent our expectation as of today, and accordingly, are subject to change. We disclaim any obligation to update any forward-looking statements except as required by law. A description of the risk factors that may affect future results is contained in the company's MD&A available on our website and in our filings with the Canadian Securities Administrators. During today's call, we will also discuss certain non-IFRS financial numbers. You can find reconciliation of these numbers with comparable IFRS measures in the presentation and in our MD&A.With that, I will turn the conference over to Neil Bruce. Neil?
Thank you, Denis, and good afternoon, everyone. I will briefly review our Q1 results and discuss the sectors' highlights and trends, Sylvain will then cover the Q1 financial aspects in more detail.Let me start by saying, I'm pleased overall with our first quarter results, which were in line with expectations. As you can see on Slide 4, our revenues were up 32% to $2.4 billion and our adjusted net income from E&C was $90 billion -- $90 million, representing a 47% increase compared to Q1 of 2017. This represents $0.51 E&C adjusted EPS, which is a 28% increase over the same quarter last year.We also delivered a total segment EBIT growth of 42% and an overall EBITDA margin for E&C of 7.5% compared to 5.6% in Q1 2017.The remaining performance obligations, or RPO, which is a new term under IFRS 15 for backlog totaled $13.5 billion at the end of Q1. New awards were strong in the first quarter totaling $2.1 billion. This excludes the 2 recently awarded projects for the Montreal REM, which will be booked into RPO in Q2 and will add approximately $1.9 billion.Q1 results give us confidence to maintain our ambitious 2018 outlook for an adjusted diluted EPS from E&C in the range of $2.60 to $2.85.So if we turn to Slide 5, the Infrastructure sector had another good quarter, with a 12% increase in revenues. Our 4 ongoing major projects continue to progress well, and our revenue backlog and our list of prospects are of high quality. The Infrastructure sector continues to be very active, especially in North America. And our bidding activities continue to be strong. With the addition of Atkins, we believe that SNC-Lavalin is well positioned to win more work in the U.S. We were particularly pleased with the recent awards for the design-build project management of the Federal Way Link Extension in the Seattle area.We have further de-risked the business post quarter as Infrastructure Canada issued an update on the construction of the Champlain Bridge on April 13, confirming that a settlement agreement was reached for $235 million. We are now solely focused on delivering the bridge by December 21.Our Oil & Gas sector had another good performance this quarter, with an EBIT margin of 7.4%. Bidding in Q1 continued at a very robust rate. We are continuing to see positive market sentiment due to good fundamentals across the market for upstream, LNG and downstream. Customers are increasingly optimistic, driving strong demand for Oil & Gas services that are expected to be awarded in the next 9 to 12 months.Our diversified portfolio has allowed us to sustain a strong business as the market evolves through the current cycle. Through 2017 and going into 2018, a large number of our awards were longer-term framework and master services agreements, which create sustainable revenues. But on the other hand, most of these cannot be included in the RPO as they don't meet the new IFRS 15 definition.As Sylvain will explain in a minute, we have divided Power into 2 global sectors: Nuclear and Clean Power. We are also disclosing the Thermal Power separately until we complete our last ongoing EPC project as we decided to exit this unprofitable part of our business. This last ongoing project is still expected to be completed by mid-2018.We are pleased with the performance of our Nuclear business and continue to see major opportunities, particularly in Canada, Europe, the United States and South America. The Nuclear market continues to be an important priority for us, and we're ready to assist our wide client base having integrated Atkins capabilities in consultancy, EPCM, field services, technology services, reactor support and decommissioning. We are also continuing to grow our clean energy portfolio in Renewable Energy, Hydro and T&D. We expect these markets to continue to grow significantly.Turning to Slide 6. We're very pleased with EDPM sector results. It had another strong quarter delivering in Q1 a 10.3% EBIT margin. EDPM has booked $1 billion in new awards, including procurement advisory services from the Kingdom of Saudi Arabia-owned National Water Company to provide water distribution services; an Infrastructure Management Study, which will shape the development of the rail network across the Baltic region; and a 30-month Autonomous Vehicle Study project across the U.K.EDPM revenue backlog totaled $2.2 billion at the end of Q1. The operational integration of the Atkins business is complete, and we continue to deliver the cost synergies that we anticipated. Our Mining & Metallurgy sector is continuing on its path to growth, focusing on an increasing number of emerging business opportunities. Despite delays of some contract awards, we are optimistic as our clients restart significant investments in their capital expenditures for the end of 2018 and early 2019. We see a wide variety of attractive prospects and opportunities in copper, gold, fertilizers and in commodities related to batteries for electric vehicles, mobile phones and other electric devices.We are currently working on bids and awaiting responses on a significant portfolio projects, particularly in the Middle East, Latin America and Australia regions. Considering the current increase in market demand and a promising pipeline, this sector seems poised for a continued growth into the future. And lastly, we're very pleased once again with the results on Highway 407, which reported, in Q1, increases of 11% in revenues and 2.5% in traffic. As for SNC-Lavalin Infrastructure Partners vehicle, we continue to expect that one more asset, the McGill Hospital, will be transferred into the vehicle by the second half of 2018.In summary, we are pleased with our Q1 2018 performance and we're starting 2018 with an enhanced global structure. This strategic realignment, which allows us to serve our clients worldwide even more effectively combined with our high quality and diversified project pipeline, better service mix and extensive digital expertise, position us well to achieve our growth agenda. We continue to de-risk our business and position ourselves for growth across our sectors. With that, I'll pass the call over to Sylvain to go over our financial results in more detail.
Thank you, Neil, and good afternoon, everyone. I'll start on Slide 8. Before I get into the financial details, I would like to explain the changes that we made to our segment disclosure, which took effect on January 1.First, we have revised our segments and divided Power into 2 new global segments: Nuclear and Clean Power. And we decided to disclose the Thermal Power separately until we complete our last ongoing EPC project. We then reallocated the Atkins Energy business into the Nuclear and the Oil & Gas segments. Lastly, we transferred SNC-Lavalin's Rail & Transit engineering business to the newly named segment: Engineering, Design and Project Management, or EDPM, which is largely the former Atkins segment.The other change we made -- the other change we implemented was to transfer certain Corporate SG&A cost to the segment EBIT. These costs are mainly related to information technology as well as employee benefits and incentives. The allocation of the information technology costs is based on a per-employee basis, while the allocation of the benefits and incentives is determined employee by employee. We believe that such allocations improve the measure of profitability of our operations by better reflecting the overall costs incurred to support each segment. For your information and ease of comparison, we have included in the appendix of this presentation on Slide 17 and 18, the comparative restated numbers for the new segment disclosure by quarter for the full year 2017. These changes have no impact on the overall EBIT of the company.Turning to Slide 9. Total revenues for Q1 2018 totaled $2.4 billion compared to $1.8 billion for Q1 2017, an increase of 31.5%. This growth was due to the revenue increase from EDPM and Nuclear, largely attributable to the incremental revenues from Atkins, which was acquired in Q3 2017. This was partially offset by a decrease in Oil & Gas, mainly due to the near completion of major projects.Note that the decrease in Oil & Gas is partially offset by higher revenues from sustaining capital projects that were awarded in 2016 and 2017 primarily in the Middle East.Total segment EBIT totaled $234 million, an increase of 42% compared to Q1 2017. The EDPM segment had a strong quarter and delivered $81 million segment EBIT in Q1 2018. The Thermal Power segment recorded a lower negative segment EBIT of $11 million in Q1 2018 compared to $27 million loss in Q1 2017, mainly due to an unfavorable cost reforecast on the company's last ongoing fixed price EPC thermal power plant project. As we mentioned before, it was decided in 2017 to exit this part of the business.Our adjusted EBITDA from E&C amounted to $177 million in Q1 2018 with a margin of 7.5%, significantly higher than Q1 2017.Our financial expenses increased mainly due to the financing of the acquisition of Atkins in Q3 2017. Adjusted net income from E&C amounted to $90 million or $0.51 per diluted share in Q1 2018 versus $61 million or $0.40 per diluted share in Q1 2017. This is mainly due to a higher segment EBIT, partially offset by an increase in income taxes and financial expenses.Effective January 1, 2018, the company's revenue backlog was replaced by the measure of remaining performance obligations, RPO, which is based on IFRS 15 without restatement of the prior periods. Applying the new RPO measure created a positive adjustment of $3.4 billion as of January 1, 2018 compared to the December 31, 2017 revenue backlog closing balance. This is mainly due to 2 significant changes: The first change is the inclusion of the full term of the company's O&M signed long-term contracts, which can cover a period up to 40 years; the second change relates the exclusion of anticipated volume of work done under signed Master Service Agreements for which no formal purchase orders or work orders have yet been issued within their long-term agreements.We also modified the classification methodology relating to the contracting type in order to provide a better risk profile this quarter and allow for a better comparison with our peers. We have separated all EPC fixed price contracts from contracts that do not have procurement and fixed price construction components. Based on this new classification, 76% of our remaining performance obligations and 75% of our Q1 2018 revenues represented reimbursable and engineering service contracts, including operations and maintenance.I will shortly get into the liquidity and debt ratios in more details. Now turning to Slide 10. You see that the Q1 2018 Nuclear segment was lower than Q1 2017, but this was mainly due to a favorable reforecast in Q1 2017. Note that the normalized EBIT margin from Nuclear sector should be around 15%. As just mentioned, the Thermal Power segment recorded a lower negative segment EBIT in Q1 2018 due to an unfavorable cost reforecast on the company's last ongoing fixed price EPC thermal power plant project. We continue to expect this project to be completed by midyear. The EDPM segment delivered another strong quarter with a 10.3% segment EBIT margin.Turning to Slide 11. As we can see, our cash flow from operations usually negative in the first quarter of the year, but it is trending well. Our operations essentially used $147 million of cash in Q1 2018. This usage was primarily driven by higher working capital requirements on certain major projects, which often well aligned to quarterly reporting periods and an increase in interest paid. This was partially offset by higher EBIT from E&C and Capital and increase in cash tax received and a decrease in restructuring costs paid. Other than the cash flows from operations, we see on the right-hand side that the cash movements were mainly caused by quarterly dividends and our CapEx spend mostly related to projects. This was partially offset by a net increase in recourse debt as we issued on March 2, 2018, 3 series of new unsecured debentures of $525 million. The net proceeds of these issuances was used to repay in full the term facility and part of the revolving facility, which overall reduces our future financing costs.Moving to Slide 12. As of March 31, 2018, the company continues to maintain adequate liquidity to pursue its growth strategy. We closed the quarter with $647 million in cash and cash equivalents, $898 million in net recourse debt and $2.1 billion in unused capacity under our $2.6 billion committed revolving credit facility. The net recourse debt to adjusted EBITDA ratio was 1.1. Recourse debt over total capital is now 25:75, in line with the company's objective of maintaining an efficient balance sheet.On April 30, 2018, we amended and restated our credit agreement for the purpose of making available a new 5-year nonrevolving term loan of $500 million for which the proceeds have been used to repay tranche B of our CDPQ loan. This new term loan has a lower interest rate COG in the CDPQ loan, therefore reducing even further our future financing cost. This refinancing will not have any impact on our current credit rating.And moving to my last slide, Slide 13. We are maintaining our 2018 outlook for an adjusted diluted EPS from E&C in the range of $2.60 to $2.85 and our adjusted consolidated diluted EPS of $3.60 to $3.85. We also continue to expect our -- an overall tax rate for adjusted E&C business of 20% to 25%. This concludes my presentation. We can now open the lines for questions. Thank you.
[Operator Instructions] And your first question will come from the line of Yuri Lynk of Canaccord Genuity.
Atkins had a pretty good quarter from a margin perspective. Can you shed some light on whether that's a typical -- what a typical first quarter looks like for that business? Or was there something that might have positively impacted the results? And related to that, given the new reporting structure and allocation of SG&A to the segments, what should we be looking for, for a typical full year run rate to EBIT margin for that segment?
So I think -- so the -- answering your first question, was there something in there that positively affected it? No. So that's the base business basically with the benefits of the cost synergies and increased productivity. So from that perspective, there was nothing special in there that bumped the number up. We're always looking at -- people considered the business overall to be an 8% business, when it was a stand-alone business. If you take the $120 million synergies and you take a bit of improvement in there about utilization, then we'd expect it to be a couple of points higher than that. So I think the business has still got to settle down a bit. I mean, this is the third quarter. So I think we need that to run through the full cycle of 4 complete quarters, but we're expecting it to be in that range going forward.
Even though you are allocating more...
Yes. Just on that, Yuri, the core G&A had very little impact on EDPM. So by the nature, this was kind of -- these costs were preacquisition rolling into Corporate SG&A. Once we did the acquisition, we did not change -- so -- the allocation per se. So very little impact on EDPM from this change.
Okay. Second question. Just on the working capital cash usage, what should we expect for the rest of the year? Will we see that unwind? And any kind of estimate in terms of what the full year investment in noncash working capital would be helpful.
Yes. So for the operating cash flow for the year, we are looking at a positive number. As you -- as we said before, we're actually looking to do a bit of deleveraging as well in the tune of $100 million. So I think when you add all that in, we need to generate enough cash to, obviously, pay different obligations such as dividend and all that stuff and some deleveraging. So we see a positive OCF for the full year. Q1 has historically been a negative quarter for us. And in that number, the other thing I'd like to point out is, there is nearly, I guess, in the range of 40% of the cash usage coming from the OCF -- negative OCF coming from the Thermal wind down. So as we close that project, obviously, it's been using cash.
Okay. Is there like $12 million -- there is $12 million left in backlog with that project. Is that going to be -- is that kind of $12 million of revenue for that segment in Q2?
Well, it should be. Yes. You're still lying pretty much with the backlog number that we have for that. Yes. Absolutely.
And your next question will come from the line of Mark Neville of Scotiabank.
I just want to follow up on some of those questions. There is a lot of moving parts. I just want to make sure I'm -- I guess, I'm understanding everything. In terms of the margin guidance, your targets that you've talked about, I think the only one sort of missing, I guess, would be Clean Power. If we use, I think you said 15% for Nuclear and we had some older sort of goalpost for the other businesses, so maybe just help us sort of think about Clean Power, if the 12% to 13% you did last year is a reasonable run rate for that business?
I mean, just to be absolutely clear. I mean, we haven't given margin targets per se or margin guidance per se, but in terms of what you see in the first quarter, do we expect that to continue? No. We'd expect the Clean Power piece to come down a bit through the year.
I'm sorry. The 12.8% you did last year, was that sort of a reasonable number to think for that business?
No. It's a bit too high. I mean, the -- [indiscernible] project completion advancement. So if you look at the backlog in that business, it's come down a bit. So margin will come down from the 12.8% and will come down from the 12.8% this quarter as well.
Yes. And just on the -- so the business that moved out of Atkins or I guess, out of the EDPM into Oil & Gas and Nuclear, I'm just trying to ballpark the sort of the revenue numbers. Out of those $400 million, $500 million of revenues that have -- would have moved on an annualized basis?
Let me dig that number up, Mark, for you.
I mean, generally...
Generally, I think so, but...
But generally, in the business. I mean, the Oil & Gas piece is pretty negligible. It's really the Nuclear piece.
Okay. I can follow up. And just -- maybe just last one on the infra margin in the quarter. It was a bit weaker. Just maybe if you can talk to that, and I guess, specifically, I guess, on the Champlain Bridge. As you're working through that in Q1, were you still able to earn a margin on that even though the -- I guess, the change in the agreement you made this post-quarter?
I'm sorry, what's your question?
Do you think of margin from the Champlain Bridge in the first quarter, that's the question.
Yes. So the answer -- yes, the -- we did not take a pickup from the settlement, if that's what you mean. And the project is still at margin so...
No, I guess, my question, again, it was a bit -- infra margin was a bit weaker in the quarter. Just wondering was there sort of -- or did -- it was...
No, not linked. It's not linked to that. I think the infra business will tend to be -- I mean, it is a lumpy business because of the nature of some of these large projects. So you will at times have settlement that move -- settlements that move the margin up and down and so forth. So I think it's more of a timing issue of what you see in the first quarter.
Okay. So there wouldn't be bump ups in Q2, Q3, Q4, talk directly...
We do expect -- sorry, we do expect -- not associated with Champlain Bridge, but overall in the infrastructure, we expect -- we absolutely are expecting that to come back up to a more what we would -- what we've described before as normal margins. I mean, we absolutely expect that.
Your next question will come from the line of Jacob Bout of CIBC.
A couple of questions here on the Oil & Gas sector. So you talked about revenue being down as some of the major projects come to completion. Is there a bleed that happens into the second quarter? And then maybe you can just talk about the impact of that 5-year deal that you signed with KJO. How does that change the back half of the year?
I mean, I think -- so in terms of the revenues coming down, I mean, in that sense, we successfully complete or get near the completion on the impacts work in Australia and also the other projects ramp up. So I think one of the things we were sort of trying to highlight is that with IFRS 15 in terms of looking at backlog as a measure, the bunch of contracts and, in fact, the majority of contracts that we picked up recently will never be counted into backlog in terms of their call of nature. So the stuff that we talked about with Shell, with Chevron, a couple of the Saudi Aramco contracts. I mean, from our perspective, we internally are looking more at, say, work on hand in terms of meeting our expectations for the year, and we are well over 80%.
Okay. Maybe just a question on Nuclear. So margins a little lower than what you saw in 2017. Just talk about seasonality or mix. And maybe comment on the CANDU margins on the CANDU work versus some of this refurbishment work.
Yes, it's not really a seasonality. I mean, last year, we did a good deal on some of the more technology things on a project, and we got really good return in Q1 last year. So it's not seasonality. It was -- that was a one-off. A good piece of business, but not the sort of thing that happens every quarter. So if you look at where we are this quarter, we are sort of even and expect that, hopefully, that will be fairly typical within the sector.
And then the last question here, just from the divestment of Thermal. So you're saying, mid-2018 is similar or running a process and how should we think about valuation on that?
We're not running a process. We are just looking to chop business time as quickly and as efficiently as possible. So we had effectively -- this is our last project. This is a project that was in the backlog over -- well over 2 years ago. We need to complete it. And I mean, effectively, we're at a stage where by May, we should be in a position where the vast majority of the cost exposure in terms of the construction elements are complete. And then we'll be into completions on commissioning, which is far, far, far lower levels, and we expect to complete all of that by half year, and then effectively, the Thermal business as such will just be shut down and closed and we're finished with it.
Next question will come from the line of Mona Nazir of Laurentian Bank.
So the first question just has to do with some of the re-segmentation. I'm trying to piece together the full Atkins as you've kind of incorporated it into some of the other divisions. I understand that EDPM is the significant portion of it, but just reading in the MD&A, it seems like some of it is in Nuclear and Clean Power. So I'm just wondering if we add up all of the pieces, what was the total Atkins sales contribution and related margins, if you have that?
No. I mean, actually, we don't -- let me just sort of explain to you at a very high level what we've done. I mean, the main changes is before we moved the Oil & Gas interest, it was tiny. It was a few people in the U.K. and a few people in Houston that was merged in within the Oil & Gas group. It was pretty insignificant. The Clean Power piece as well in terms of anything to do wind power was tiny as well. So the only real significant things that happened -- and it was really linked with us trying to keep the integration as simple as possible -- was effectively we took the Nuclear business, which was a predominantly consulting business in the U.K. and a decommissioning business in the U.S. together with our SNC-Lavalin Nuclear business and we put it together. And then the second thing we did is, we took the Rail & Transit, a piece of E&C infrastructure business in the U.K. and put it in with Atkins Rail & Transit. But again, in comparison, that really wasn't a -- it really wasn't a massive business either. So the real -- the only real sort of big change here and that really affects the numbers in any way is moving Nuclear out of Atkins into a combined or out of EDP of what would have been EDPM and moving it into the combined Nuclear business.
Okay. That was very helpful. And then just secondly, you are reiterating your guidance and I understand that there is quarter-to-quarter volatility. I'm just wondering if you could provide any color on how Q2 had been progressing? Is the Montreal REM to contribute to results? And I know you just spoke about Oil & Gas side of things as we moved through the year, but I just wanted to give you the opportunity to highlight certain areas of importance, particularly given the wide net that SNC casts.
I mean, I think, you're right. I mean, if you look at infrastructure and going back to, I think, it was Jacob's question, I mean, if you look at the sort of on the margin start for infrastructure in Q1, I mean, we're expecting that margin to go back to -- and the margin that we enjoyed last year. We fully expect that. And that will come through from the mobilization, both the mobilization of REM, which originally that contract could have been awarded at the back end of last year and then moved into Q1 and then effectively, it wasn't signed until Q2, but we've got 200 people in that job line. So it's not a slow start. It's a very rapid start and that will be contributing towards both revenues and relevant margins from day 1 of Q -- pretty much from day 1 of Q2. I think from an Oil & Gas perspective, again, we see -- we are -- we really are having to look at it from an operational and delivery perspective. We're having a look at it from how much confidence do we have in terms of the work on hand, not necessarily the IFRS 15 RPO definition, how much work on hand have we got that gives us confidence to be able to deliver EBIT, not necessarily revenues, but EBIT for the full year. And as I said before, we're sitting here one quarter and thinking we're above 80% on that, which actually is so pretty -- it's pretty good. It's not the best I've ever seen, but it's not the worst either. It's a good position. We see mining sort of drifting slightly to the right in terms of some of the bigger capital awards, but we still expect a large jump in terms of our RPO and our backlog in mining as we get into Q3, Q2 -- towards the back end of Q2 and Q3.And of course, we still don't have -- we still haven't included anything in the backlog for a -- the JV with ABB, that we are currently working on finalizing that joint venture. I mean, hopefully, we'll have that in a position where it starts to kick in -- it was initially in the third quarter and then sort of early in the fourth quarter. So there's a number of areas across the business. And ultimately as well, we're really, really looking forward to shutting down Thermal and completing that project and not having to carry the drag of the Thermal business. And that's something that we planned back, I think, we talked about that well back in 2017, but this last project was something that was in the backlog well over 2 years ago, and we just need to get it complete. But effectively, the majority of that will be done this month, and then we look to close the business then -- fully then by half year.
And your next question comes from Derek Spronck of RBC.
Could you provide some color, and you just did with Mona's question, but around organic growth. I mean, if we strip out acquisitions and the benefit from acquisitions, were you able to generate positive organic growth this quarter? And how do you see that progressing over the course of 2018?
Well, I think if we look at it from the revenue perspective, so fairly flat. If we look at it from a bottom line and EBIT perspective, we are generating organic growth in EBIT and EPS. And that is our priority over everything else. I mean, we want to maintain the growth in EPS, maintain the growth in margin. And once we get that, we'd also like to -- the -- we'd like for the revenues to also kick in and for us to grow in terms of the top line, but that's our order of priority.
Okay. When you look at your backlog and -- oh, sorry, go ahead.
Yes. I was just going to add, as I said in my remarks, we had Oil & Gas that was down year-on-year as we mentioned, but we did have growth in the M&M sector -- segment and the infra segment as well.
Okay. And when you look at your backlog and as you're working through, as you're converting your backlog over the next 12 months, you have pretty good visibility around it, and are you comfortable that, that backlog of work, the quality of it should improve as you convert more and more of it? Or any color around that would be helpful.
Yes, I mean, it's been a continuous process. So a company with $10 billion or $12 billion of backlog, that goes back a couple of years through to could be 8 years ago, it takes a long time to sort of work it through and replenish it and get that and get to a place where you would really like to be if you could start the whole thing from scratch again. And we're now in a -- we are in place that once we -- and I think we talked about it a bit in -- through 2017 that once we exit Thermal and once we have the Atkins integration complete from an operational perspective, which we have now completed, then we've got the sectors, and we've got the businesses that we feel confident about in terms of growth potential in the sector and good quality customers and good backlog.
So it sounds like you're pretty comfortable with your regional and vertical footprint as it stands outside of the Thermal part. What's your -- and you've also won a couple nice contracts in the U.S., infrastructure contracts. Is that a growth opportunity for you? And what's your strategy towards growth into the U.S. infrastructure transportation vertical?
Yes, no. I mean, we are incredibly excited about the potential of infrastructure and Rail & Transit, in particular, in the U.S. because we -- I mean, hopefully, people can see that the strategy in Canada over the last few years has been paying, paying off really well. Great, great dividends on that, that we'll focus into Rail & Transit primarily but having that capability of capital engineering construction partners through into the long-term O&M. And pretty much all of the contracts that we do on that basis are our best contracts within infrastructure and perform really well. So in the U.S., what we were missing was that engineering capability. And basically, Atkins has given Ian Edwards from the Infrastructure Group, in particular, that engineering capability, almost as big as the capability in Canada in terms of the numbers. So we're now able to link capital actually, whether it's in the U.S. or Canada. So it doesn't really matter too much. We've got the engineering capabilities. We are partnering up with construction companies that we do business with even in Canada or elsewhere, and we've already got the O&M capability effectively in the U.S., albeit a smaller number than we have in Canada. So we are really looking to replicate that model in the U.S and getting Atkins predominantly infrastructure engineering capabilities in the U.S. really is the differentiator or the thing that allows us to replicate the Canadian model.
Could it be as big as the Canadian footprint, eventually?
Well, I mean, the market is sort of 10x plus. So it could be. It'll take time to work through that because everybody knows that these projects do have a life in terms of concept to starting in the project, they do have a life of an average of sort of 18 months. But if you look at it from a market expect -- if you look at it from a market perspective, I mean, it's far, far bigger than Canada. So that's why we are pretty excited about the prospects.
No, no, that's great. And just one more quickly for myself. Did your experience with P3 contracts in Canada, did you see that helping you in the U.S.? And if do you anticipate them relying more on a P3-type structure going forward?
Yes. I mean, for us, it's a bit of a plus and minus, I think. It's -- would we prefer the legal framework in Canada to the U.S.? Yes, we would because we think it's -- we do think it's less litigious, and it's -- and is more stable generally, but our experience in P3 absolutely is -- I'm not sure anybody else has got truly, truly got our experience. It doesn't mean to say that others have not done these contracts. But we are the ones, and I think we are really the only ones that have the life cycle capability and knowledge that operates from investment to engineering, procurement, construction management through into the long-term O&M. Others do it, and others compete, but they compete as consortiums in the main. I think we do have a differentiated capability there.
And your next question, that will come from the line of Devin Dodge of BMO Capital Markets.
I just wanted to come back to the Oil & Gas business. I apologize, I may have missed it, but I just want to make sure I get this clear. But, I mean, there's a pretty sizable step down in your revenues this quarter, both from last year and from last quarter. I know LNG was mentioned as part of the difference, but just were there other factors behind the decline? And how should be thinking about the revenue run rate for this business going forward?
Well, I say -- I mean, I do think we've been sort of clear for quite a while, probably well over a year that at a point in time, the Gorgon projects in Australia is going to come to completion, and we are looking in terms of how do we replace that going forward. And we've been very, very clear around the INPEX projects, of which we've got 2 projects there also are going to come to completion, and they're going to step down. So that's -- it's that large step down partly compensated by the contracts that we're winning in a number of other areas throughout the world. And like I said earlier, our focus is delivering EBIT. It's not necessarily about delivering revenues because we don't -- we won't have Gorgon and INPEX with 4,000 people sort of everyday coming through the revenue line and -- but we've known that. We've known that for a long time. So the challenge really is about how can we get a broad base of customer contracts, including long-term call-off contracts or operations and maintenance contracts in order to be able to consistently deliver on our EBIT, regardless of a higher margin and regardless of the revenue numbers.
Okay. I mean, that makes sense. But, I just -- I guess, your comments earlier about there's a lot of activity for quoting, but it might be at 9 to 12 months out. Should we expect for the balance of the year to kind of run maybe at this level or maybe creeping up higher? Just -- and I get your comment about EBIT, but, I mean, you run into some pretty tough comps, I think, in the back half of the year.
Yes. I mean, we're not expecting it to go down. But like I said, the real focus for the guys -- because a number of contracts that you've seen us announce, and again, I know it's really difficult because of the type of contracts they are, we can't announce a value and the -- actually it will go into the RPO. But they do tend to be more sort of pure value-added -- the completions, commissioning, services work on a global basis for 2 of our key customers. That's more a value-added service attracts a higher margin than having 4,000 people working on a construction site in Australia. So from that perspective, what we're trying to balance here is a downturn on a couple of big projects together with winning more higher-value services within the Oil & Gas arena. And in Oil & Gas, the one thing that we do see is there's probably 2 things going on, which is it's not just about the fact that the oil price is back at $70-ish because that can always move. But I think what's also gives us even more confidence is the fact that over the last 2 years, our customers have realigned themselves in terms of their cost base, and ultimately, the cost base of the supply chain to be able to sanction projects in terms of economics at a far lower rate than we were 3 years ago.
Okay, okay. That's helpful. And then maybe just to finish with a question for Sylvain. Just on the refinancing of the CDPQ loan, can you talk about how much interest cost savings you expect to realize? I believe this effectively transitioned some of your limited recourse debt to full recourse? Just can you remind us what your comfort level is for leveraging the E&C business?
Yes. So yes, that's effectively what it does. It goes from limited recourse to normal recourse debt. Now we, obviously, worked through this and had numerous discussion where -- with the rating agencies to make sure, and the bank syndicate and all that, to make sure everybody was on board with it, feels very comfortable about that operation. From a cost-saving standpoint, we're looking at about $20 million of pretax savings coming out of the interest rate differential on an annual basis. So that's very good. And then in terms of, as I said earlier, we're still looking to about $100 million of deleveraging versus the position at year-end. So that's kind of where we are on that. Now you have to add the 500 to that, obviously, when you do the math. But on a comparable basis, $100 million down.
Right, okay. So if you're at 1.1 leverage now, where do you expect -- where does that take you at the end of the year with all these, the $100 million? I guess just where you do think you'll end up at the end of the year?
Well, the way we tend to look at our leverage, I guess, is we base this level on what we call the S&P calc typically. So we're trying to come down on that calc about -- and that's to EBITDA as well as the debt reduction I mentioned about. So let me think. I think our calc we had at about 50 bps of turn, let me just -- just give me one second here so I give you the right number. No, sorry about that. More like 30, 30 bps of turn, 30 -- .30 of turn, 30 to 40. Yes, so I know the calc is different, but it should translate somewhat.
Your next question will come from the line of Benoit Poirier with Desjardins Capital Markets.
Could you maybe provide some color about your bidding prospect in Canada? And what do you foresee in 2018 to 2019 aside the REM that you've been awarded?
I -- well, I mean, there's a number of great prospects in Canada. I mean, the Gordie Howe Bridge, for instance, the Trillium Line in terms of Rail & Transit, we see opportunities in -- for Oil & Gas in the services side, in some of the upgrades and the brownfield work that's being done. Towards the back end of the year, there's the RER contract, which is a massive contract in Ontario, in Toronto, in terms of the electrification. We are looking at a number of infrastructure projects in the U.S., both in Rail & Transit and airports, both in terms of the Northeast and also over in the West Coast. If you look at Nuclear, clearly, we are hopeful that we will be successful on the refurbishments of the first reactor on Bruce, don't know yet whether we can compete on that, but clearly, that is 1 of 6. So that's a 15-year cycle. We're also bidding on decommissioning opportunities in the Nuclear arena in the U.S., which is a massive market. And in terms of Nuclear, the market is huge in terms of the runoff and the decommissioning obligations, both in terms of the U.S. and Europe and some other areas, too, but we see massive opportunities in the U.S. and in Europe. So I talked about some of the stuff that we're doing with [indiscernible]. We see the JV around -- with entering power with ABB as a major opportunity. So from that perspective, we really do believe that from a business development and ultimately RPO, our backlog, we see this year as probably about the best year we've seen since I joined.
Your next question will come from the line of Maxim Sytchev of National Bank Financial.
Neil, you provided some very nice color on Atkins. So I was wondering right now if you are getting a bit more comfort around talking about the top line synergies just in terms of potentially quantifying those?
Not really, but we do expect to generate them because I, again, as I think as you know, we're very clear about the step process that we were going through, which was completion of the acquisition halfway through last year then delivery of $30 million of cost synergies, which we delivered sort of over $40 million then ultimately delivered $120 million. And we are in a place where not only did we confirm this quarter that effectively all operational integration is absolutely complete, but we are highly confident though in terms of delivering on the original synergy numbers. So then, as you would expect, the next piece that we're rolling into is the regionalization, the regional support of our businesses throughout the world. So do we need functional support that came from Atkins and SNC-Lavalin? Well, probably not. There's probably a more efficient way of doing that. And then the last piece of that exercise that we'll be running through this year really is all about how do we really generate more value, more revenues for the company through the coming together of the 2. And I -- the reason that we are, I mean, reasonably positive about the revenue synergies is there is next to no crossover on overlap -- the 2 businesses. Part of the reason we were so keen on Atkins is because it provides -- 95% of it is complementary so with about 5% overlap. And that 5% overlap really was in the Rail & Transit piece really in the U.K. And so if we got that complementary business then we want to be able to really go after some of the revenue synergies. And maybe an example to give is so this week has been OTC down in Houston. Our Oil & Gas guys have been there. Atkins, through the acquisition they made in terms of -- they bought a company called Houston Offshore, which was very much in the upstream offshore arena. Upstream offshore is coming back to life, right? So companies are beginning to invest again in offshore deepwater. We, SNC before Atkins, didn't have any capability in offshore upstream or in deepwater. We do have capabilities there. And the guys have been at OTC talking to all the customers about how can we enter and provide a bigger, wider service than Houston Offshore would have. And now that they're part of SNC-Lavalin, obviously, with the legacy [indiscernible] capabilities. So again, we see lots of opportunities in that arena.
Okay, that's helpful. And given your commentary in terms of the awards potential pipeline, the $5 consolidated EPS in 2020, I assume it still stands correct?
It does.
And then the last question from me, I mean, obviously, we all do sort of our own math in terms of how much the hard assets are worth, and you're back into the core business, but given the disconnect versus the peers from a valuation perspective, I'm wondering again if from a capital allocation perspective, if there are some incremental thoughts right now in terms of doing something from a share price perspective, if a buyback is potentially under consideration? Or if right now, it's just the focus is on the balance sheet?
I mean, we are fundamental. So we do talk consistently about capital allocation strategy and what changes, and we had discussions this week on that. I think the other element of what we, as a management team, are absolutely focused on as well is this whole piece about derisking the business and taking away things that you guys and shareholders do flag up to us in terms of things that could be potential overhangs. Because yes, I mean, we are -- I think the E&C business is undervalued. But you've got -- we've got to get to the point of -- I think the easiest way of proving all of that is to basically to move the overhangs. So I think we have -- I did say before, I thought Champlain was a bit overplayed, but never mind. We've removed that as an overhang. If you look at the federal charges then who knows where that is going to go, but actually it is looking a lot more positive than it was before. And then there is a piece around, I guess, around valuation in the 407. So we do get lots of data about how about people value the 407, but doesn't invest or really valuate in the same way as the analysts are valuing the 407. So there's no reapproving these things until you really remove the overhangs and get to a place where people have got that clarity around a clear E&C business and a clear view on the capital assets. And we are progressing towards that because we see that as the solution to basically give people the opportunity to see or see and the proof around whether we're actually undervalued or not.
And so just to build on the thought of the 407, are you saying that you are thinking about showing something to market that would sort of converge the valuation -- potentially valuation discrepancy on that asset? Or are you referring just to the E&C business?
No. We are always looking at ways of trying to get a -- I mean, a more accurate or a more consolidated view on what that's worth because there is quite a large, I mean, if you look at all of the analysts and sort of news on the 407, and yes, it's easy to get a consensus, well, if you add it all up and divide it by 10 or whatever it is. So -- but is that really the number? And I -- we are constantly looking at say, "Well, yes, okay, that's the available. We are calculating it." But do investors actually see it in that way? So how do we break out of that? Well, try to find different ways of making it more transparent and providing the information for people to be able to valuate it, to be able to value the asset more accurately. So now I'm not saying that I necessarily think that it's completely undervalued, but inside, inside SNC-Lavalin, between the E&C company and the 407 and the other assets, I believe we are undervalued. So we've got to find a way of flushing that out so that people can make up their minds.
And again, sorry, I don't want to belabor the point, but is there a necessity to have a mark-to-market valuation on the 407? I mean, are you -- because at some point, obviously, there was a thought process around having a process around 407 that was put aside. Are you rethinking that thought process?
We're always thinking about these processes, but I'm not saying we're going to do that. I'm just saying we're constantly looking at ways to try and give more valuable information in order for people and investors to make up their mind about what -- how they value and what value they see in the company. We believe it's undervalued, but that's fine. We could sit here and get frustrated about the undervaluation. We've got to find a solution to be able to give the information to let people make up their mind. So that -- so when we talk about derisking, that's a process, when we look at trying to find ways of providing more information, absolutely, that's what we're looking to do in order to let people make up their mind about whether -- what the value of the company collectively is.
Your next question comes from the line of [ Matt ] of Raymond James.
On the Clean TeQ Sunrise project, I don't think this is touched on yet. Based on yesterday's update, it sounds like this is heading towards FID. Is there anymore color you can provide on this project? And what it may do to the second half of 2018 and 2019?
I just want to make sure I understand. So that's the Clean TeQ project in Australia you're talking about?
Yes, the Clean TeQ Sunrise.
Yes, so we're waiting for the FID on this one, right, the final investment decision, which I'm not sure what time should you go...
Well, actually you're more up-to-date than me. I'm really sorry. We will dig out that information and make sure you get it. You've asked us a question that we clearly do not know the answer to.
Oh yes, yes, no problem. And then, I guess, secondly, in terms of seasonality, excluding Atkins, can we expect similar seasonality to your prior years? Or is this kind of evening out as your construction component becomes smaller relative to the rest of your business?
No. I think there's -- I think by the very nature of the -- it's more by the client base that effectively I think you should expect a slower start in sort of Q1, Q2 and ramping up in the second half. But it's difficult to actually see. It is pure seasonality in terms of being affected by location or weather or something like that. It's more of a customer dynamic in terms of -- for the award things or how they release purchase orders or co-ops within framework agreements or completion of budgets and the likes. But generally, you should see it consistently being sort of Q1 stepping up a bit and then Q3, Q4 stepping up again.
Yes. And is it -- is that something that will flatten over the coming years as you do more kind of all-year design consulting-style work?
Well, I think, if we didn't have projects like REM or Ottawa LRT, then I would say yes. But when you get sort of $2 billion in your backlog and a big start and a quick start on something like REM then that really skews the numbers. So it could get divided up into the more engineering services, O&M, then I think you're absolutely right. And then you've got to overlay a number of the -- and where they are at that particular point in time and the big contracts over the top of it.
And your final question will come from the line of Michael Tupholme of TD Securities.
Just a couple of quick ones. Last quarter, Sylvain, you had given us the amount of synergies, cost synergies realized as well also the Atkins acquisition through the first 6 months of $41 million. Just wondering if you can give us an updated number through the 9-month period?
Well, in the quarter, we had about a bit over $20 million in the quarter. We are still well on target for a 9 for the year in P&L and then to hit the run rate of 120 starting beginning next year. So it's all on track, and we're pleased with that.
$20 million realized in Q1?
Yes.
Okay. Secondly, the Thermal Power project or segment, you had an $11 million negative EBIT. Is that the amount of the actual reforecast that you had this quarter? Or was the actual reforecast a larger amount than that?
No, it's pretty much the entire amount because, I mean, this is the only EPC project we have in Thermal left. There's a couple of small service contracts being executed, but that's immaterial compared to the EPC work, and basically, the hit is all coming from the reforecast.
So it would be running at 0 margin, and then this is the impact that we see of the actual reforecast?
Yes, yes. Exactly.
Great. And then this was touched on earlier, but just wanted to circle back quickly. The relatively large investment in noncash working capital in the first quarter, do you expect that to unwind over the course of the year? Just trying to get a sense for specifically that line, the change in noncash working capital, how you think that looks by the end of the year?
Yes. It should unwind to a significant degree, I guess. There is the amount that I mentioned earlier coming from the Thermal. So we have that on Thermal, I answered that earlier. We have the EBIT that you see, but the cash usage has been much higher than that because this was, despite doing a challenged project, it had a -- significant advances in deferred revenue on it. So that won't resolve itself, obviously. So though we do see some of the use we had in Q1 that improving through the year.
Gentlemen, there are no further questions. I'd like to hand it back over to you for closing remarks.
Thank you all for having joining us today. If you have any further questions, please don't hesitate to call me. Thank you very much, and have a good night. Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect your lines, and have a wonderful day.