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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 Second Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Denis Jasmin. Please go ahead, sir.
[Foreign Language] 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 Q2 results and discuss the sectors' highlight and trends. Sylvain will then cover the Q2 financial aspects in more detail. Let me start by saying that I'm very proud that we recently ranked as the third leading international design firm by ENR. This recognition demonstrates our continued derisking and repositioning in the business and strengthens our company's position as one of the top companies in the world for both small- and large-scale design projects. This result reflects the broad strengths and dedicated efforts of our teams around the world. We're also very pleased with the results for the first 6 months of 2018, which are in line with our expectations and reached a milestone of over $15 billion of backlog. As announced in today's press release, we have also launched a process to potentially sell 6.76% of our investment in Highway 407, and we've engaged CIBC and RBC as our financial advisers. The reason for the 6.76% is that we wish to retain 10% under position as a strategic investor. We believe that the value realized through this potential transaction will demonstrate and augment the valuation of our capital investments and will concurrently help the market to value SNC-Lavalin's E&C business more accurately as alluded to in Q1. To be clear, we believe that the 407 is currently undervalued. We believe that its value is in excess of the current analyst consensus. This is the only way to truly demonstrate the value.As you can see from Slide 4, we've had 2 nonoperational items this quarter. First, we recorded a net expense of $88 million as we settled the legacy class action lawsuits brought back in 2012. So this is now behind us, and note that the new DPA legislation called the Remediation Agreement Regime in Canada crossed an important step in Q2, receiving Royal Assent on June 21 and coming into force 90 days later towards the end of September. The second nonoperational item, which we're very pleased with, is a gain of $63 million on the successful transfer of our investment in the McGill hospital to the SNC-Lavalin Infrastructure Partnership. Our revenues were up 31% to $2.5 billion. And our adjusted diluted EPS from E&C was $0.65, which represents a 51% increase compared to Q2 2017. We also delivered an EBITDA margin from E&C of 7.7%, which was 0.2% up on Q1 and higher than the 4.6% in Q2 2017. Our new awards were strong in the second quarter, mainly from Infrastructure, which included the [ IDM ] project awards, as well from EDPM, which included many new reimbursable service contracts. The results for our first 6 months in our backlog level give us confidence to maintain our 2018 outlook on an adjusted diluted EPS from E&C in the range of $2.60 to $2.85, which in turn is on track to deliver our 2020 vision. Let's now look at our sector starting on Slide 5. Our Mining & Metallurgy sector strategy of diversification in the studies, sustaining capital services and major projects as well as its use of innovation and technology on its business offerings reinforce the path to growth. There are increased numbers of emerging business opportunities in this market. As we started Q3, we have received a detailed engineering mandate and study mandates from 2 Tier 1 mining clients. We also expect to secure a major project during Q3. Despite delays in some contract awards, we remain optimistic as our clients restart significant investments in their capital expenditures for the end of 2018 or early 2019. We see a wide variety of attractive prospects and opportunities in copper, gold, fertilizer and commodities related to batteries for electric vehicles, mobile phones and other electronic devices. We're currently working on bids or awaiting responses on a significant portfolio of projects, particularly in the Middle East, North Africa, Latin America and Australia. Considering the current increase in market demand and a promising pipeline, this sector seems poised for continued growth into the future.Our Oil & Gas sector signed a multiple services agreement during the quarter, which we expect to yield revenues in future quarters. This year, a larger number of our awards were long-term frameworks and Master Services Agreement, which create sustainable revenues with clients in addition to project contracting in our midstream [ book-and-burn ] businesses. Bidding activities in Q2 continued at a very robust rate and were in a single-source negotiation on several significant contracts.We are continuing to see positive market sentiment due to good fundamentals across the market for upstream, midstream and downstream opportunities. The addition of Atkins' complementary design and consultancy capabilities last year to create our enhanced engineering and consulting services is driving customer interest and contract awards. Customers are looking for efficiency, innovation and collaboration to improve economics, and we're well-positioned to deliver. This includes the offshore market through our field development, offshore wind, asset integrity expertise and digital solutions. Our diversified portfolio has allowed us to sustain a strong business as the market evolves through the cycle.We are very pleased with the performance of our Nuclear business. Revenues were up 83% compared to Q2 2017, and EBIT margin was up to 17% in Q2. We were awarded some projects in the quarter, such as fuel channel and feeder replacement contract from Bruce Power. Our order book reflects work on the first reactor. There is potentially 5 more in addition to go. We were also recently formed -- or we recently formed with Holtec a U.S.-based, 40-60 JV called CDI to pursue nuclear reactor decommissioning work in the U.S. And we're very pleased that this JV was awarded this week some significant contracts to decommission U.S. nuclear plants. The unique contribution of our respective companies bring a complete solution to reactor decontamination and decommissioning, bringing technology and innovation to fuel management and facilities dismantlement. With an aging nuclear power plant fleet and a rise of lower-cost means of energy generation in the U.S., decommissioning has become a rapid growth market with a forecast value exceeding USD 14 billion in the next 10 years. Note that about 1/3 of our year-to-date nuclear revenues relates to decontamination, decommissioning and waste management projects.Our last ongoing thermal power project continues to be a challenge, but we're glad to report that the plan is now in commercial operations, and the client is selling power. We are continuing to grow our clean energy portfolio in renewable energy, hydro and T&D. And we are pleased with the recent contract award from the design and delivery of 3 substations in the UAE. We expect these markets to grow significantly into the future. Turning to Slide 6. The Infrastructure sector had another good quarter, with $0.5 billion in revenues and $26 million EBIT. New awards were very strong in the quarter with a book-to-bill ratio of 4:1, bringing this ratio to 2.5 for the year. And our backlog ended the quarter at $9 billion. Our ongoing major projects continued to progress well. The Eglinton project in Toronto is advancing well. And the Confederation Line project in Ottawa is on track to open later this year. The Champlain project face some challenges in the quarter due to some recent law changes. We are currently discussing this with our client. The company remains committed to completing this project as soon as practically possible. As for the REM project, it is in an early phase, but it is starting well, and we're currently working mainly on advance works such as design, demolition and site investigations. We continue to be bullish on the infrastructure sector as it continues to be very active. Our bidding activities continue to be strong, and we have a lengthy list of projects, especially here in North America.Our EDPM sector continues to show strong results delivered in Q2 of 12% EBIT margin. EDPM has booked $1 billion in new contracts, which include a master planning agreement for a new economic city in Oman, our contract to design the first crossing in London's Thames River in 20 years from Rotherhithe to Canary Wharf and reselection as engineering consultant for a seventh consecutive term by Florida's Turnpike Enterprise. This is a 5-year work program covered in Florida's user-financed transport system. EDPM revenue backlog totaled $2.4 billion at the end of Q2. We continue to deliver the cost synergies anticipated, and we are seeing new revenue opportunities. We recently announced an award from BP for services for the now-integrated SNC-Lavalin and Atkins businesses. And we have a great program running to embed across our whole company a number of technology platforms and solutions with which EDPM in particular has had success already with clients. And lastly, our Capital sector had a strong quarter with a $63 million gain on the disposal I've mentioned earlier and strong results from Highway 407, which reported in Q2 increases of 10% in revenues, 2% in traffic and 9% in dividends.In summary, we're pleased with our performance so far this year as it is in line with our expectations. We are entering Q3 2018 with over $15 billion of backlog, a number of recently signed Master Services Agreements and a high-quality list of prospects across key sectors and geographies. This positions us well for a strong second half in 2018. And 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, let me remind you that we made some of the changes to our segment disclosure on January 1 of this year. For your information and ease of comparison, we have included again this quarter on Slides 15 and 16 in the appendix the comparative 2017 restated quarterly numbers for the new segment disclosure. That being said, let's look at the financials for this quarter. Let me start by commenting on the 2 nonoperational items that Neil just mentioned. Firstly, we recorded an $88 million pretax or $65 million after-tax charge for the 2012 class action lawsuit settlement, which agreement was announced on May 22. Note that the related cash disbursement is expected in late Q3 or early Q4. Secondly, we have recorded a gain on disposal of $63 million pretax or $58 million after tax relating to the successful transfer or investment in the McGill hospital to the SNC-Lavalin Infrastructure Partnership, of which we own 20%. The relating proceeds of $92 million were received in Q2. Now moving to the operational metrics. Total revenues for Q2 2018 increased by 30.6% and totaled $2.5 billion. 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 and Thermal Power as we are closing down the activity. It is also important to note that, due to our Atkins acquisition and the master service agreements that we have been awarded, our revenue mix is significantly changing. Our 6-month, year-to-date revenues were composed of 75% of reimbursable and engineering services contracts and 25% of EPC fixed price contracts compared to a mix of 68-32 for the corresponding period in 2017. Total segment EBIT totaled $221 million, an increase of 43% compared to Q2 2017. The Nuclear segment had a strong second quarter with 17% segment EBIT margin as well as the EDPM segment delivering a $94 million segment EBIT.On the other hand, the Thermal Power segment recorded another negative segment EBIT of $11 million in Q2 2018 mainly due to an unfavorable cost reforecast of the company's last ongoing fixed price EPC thermal power plant project. As we mentioned before, we're exiting this part of the business and have adjusted our structure to focus on growth and higher-margin areas of the power market. This thermal power plant is now in commercial operations and we have now significantly demobilized. Our adjusted EBITDA from E&C amounted to $190 million in Q2 2018 with a margin of 7.7%, significantly higher than Q2 2017. Our financial expenses increased mainly due to the financing of the acquisition of Atkins in Q3 2017. Note that we continued to refinance some of our debt in 2018, which is reducing our financing costs. And we'll shortly get into the liquidity and debt ratios in more details. Adjusted net income from E&C amounted to $114 million or $0.65 per diluted share in Q2 2018. The increase was mainly due to a higher segment EBIT partially offset by an increase in financial expenses and income taxes. Backlog reached $15.2 billion at the end of June 30, 2018, with $4.1 billion booking in the quarter mainly from infrastructure and EDPM. Our book-to-bill ratio is now 1.3 for the year. Note that our backlog at the end of the quarter was composed of 72% of reimbursable and engineering service contracts versus 28% EPC fixed price contracts. Now moving to Slide 9. We see that Oil & Gas had a lower segment EBIT in the quarter compared to Q2 2017, driven by lower revenues. For the year, we expect that the segment will deliver an EBIT margin in line with our historical levels, between 6.5% and 7.5%, as we rebuild the backlog with new awards, such as the recently announced contracts in Kuwait, Oman and UAE. Nuclear segment EBIT was higher than Q2 2017 mainly due to the Atkins incremental revenues coupled with a strong profitability. Clean Power had lower activities this quarter mainly due to the near completion of certain projects coupled with lower EBIT margin as Q2 2017 included a favorable outcome from a major project. We expect that the segment EBIT for Clean Power to be around 6% for the year. As just mentioned, the Thermal Power segment recorded an unfavorable cost reforecast on the company's last ongoing fixed price EPC thermal power plant project. The Infrastructure segment had a good quarter, and we continue to expect the segment EBIT margin to be between 4% and 6% for the year. The EDPM segment delivered another strong quarter with an 11.7% segment EBIT margin. Turning to Slide 10. Our operations used $60 million of cash in Q2 2018, which was less than in Q1 2018 and Q2 of last year. Year-to-date, our operations used $207 million compared to $269 million for the corresponding period. The improvement was mainly driven by a higher EBIT from E&C and a decrease in restructuring cost paid, partially offset by an increase in interest paid and higher working capital requirements on projects, more specifically, caused by the close-out of Thermal Power and timing of milestones and settlement in a few Oil & Gas projects in the Middle East. Other than the cash flows from operations, we see on the right-hand side that a large amount of cash movements was relating to the debt as we are proactively managing our credit facility. So far this year, we issued unsecured debentures of $525 million, and used the proceeds to repay in full tranches 2 and 3 of our term facility for approximately $397 million and to repay certain indebtedness outstanding under our revolving credit facility. We issued new unsecured debentures of $150 million and used the proceeds to repay certain outstanding debt. We also 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. These debt issuances were achieved at lower interest rates than the debt we have repaid and, therefore, will reduce our future overall financing costs. Moving to Slide 11. As of June 30, 2018, the company continues to maintain appropriate liquidity to pursue its growth strategy. We closed the quarter with $721 million in cash and cash equivalents, $1.5 billion 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 1.6. Lastly, concerning today's announcement regarding a potential sale of a portion of our 407 stake, let me give you our current thoughts on the use of proceeds. First, there are 3 items that will need to be covered if a transaction takes place. Those are: the repayment obligations under the CDPQ loan agreement, the execution of our deleveraging plans as defined at the time of the Atkins acquisition and funding potential settlements for which we have no indication of being worse than expectations. Then regarding the remainder of the proceeds, we will be evaluating which capital allocation strategy, such as share buyback and M&A, would be the most attractive to shareholder value. These sources will be heavily dependent on where our share price is at the time of the transaction and if we feel that we are still undervalued. In terms of timing, we're still in the early phase of the sale process and expect a closing in the fourth quarter. Now turning to my last slide, Slide 12. 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. As a result of product activity level and award timing, we expect a stronger adjusted diluted EPS from E&C in the second half of 2018 than in the first half. We also expect that the adjusted diluted EPS from E&C in Q4 will be stronger than Q3, which should be similar to Q2.This concludes my presentation, we can now open the lines for questions. Thank you.
[Operator Instructions] We now take our first question from Mona Nazir from Laurentian Bank.
So I just wanted to touch on the Thermal Power. I'm just wondering, given your comments regarding the final project ramping down, do you expect some remnant flow-through into Q3 or Q4, or has it concluded?
Well, the project itself has -- it's coming to commercial operations. The client is selling power. So that's a good place to be. We still got a few final commissioning items that we need to complete. But I think, to give you a sense, we are -- that was in July. And ultimately, the team size that we've got on site is now 1/10 of what it was previously. So I mean, if there is anything there, it will be pretty small.
Okay. And just looking at the quarter, given Atkins, it's still a little bit hard to break out the organic growth and especially with the strong sequential backlog improvement. I'm just wondering, were you in positive organic growth territory in the quarter?
Well, I think you can -- I mean, you could get a sense of -- I mean, most of the EDPM is quite intact, so that's -- EDPM itself had a good quarter. Then when you look at Nuclear, we did have some growth in that space as well, and those were the main changes of how Atkins got broken out. I mean, there's a small piece that went to Oil & Gas. But overall, Oil & Gas did not have organic growth, as you can tell. So.
Okay. So net-net, it might have been a slight positive on our organic growth, or do you think it was neutral or maybe negative?
Well, it wouldn't be net-net. I think Oil & Gas would have offset that if you exclude all of Atkins. But it is hard to, of course, to break down as well [ stage ].
I think the really important thing for us -- I think the important for us sort of setting ourselves up for the remainder of the year is the book-to-bill ratios are actually really good and continue to improve across a -- all of the ongoing sectors. So -- and I think it's a little bit of -- I think I referred to it in Q1. I mean, we now feel like in terms of all the sectors, apart from the thermal sector, that we're seeing positive business development growth and pipeline, and we're continuing to convert a number of these. But we actually see a really positive pipeline, probably the best we've seen it in the past 3 or 4 years.
Just to precise, Mona, I think, in Mining, we are seeing organic growth, but the Thermal is clearly as it's -- is declining. So the core, or the legacy SNC, if you want to call it that way, is declining because of that and because of Oil & Gas. So.
Okay. And just lastly for me, I really appreciate your discussion on what you're hoping to establish from the potential divestment of the 407 or a portion of it. I'm just wondering if you could speak a little bit about timing because, at last year's Analyst Day, you were highlighting the potential value appreciation to 6% to 7% by 2026. So I thought perhaps you have maybe looked to divest further out. Was there any like pull factor for the asset or expressed interest from any parties? Or did it have anything to do with the timing of the DPA in that monetary sense?
Yes, I mean, it's got nothing to do with the DPA. I mean, we don't need to sell any assets in order to be able to cover that. I mean, our financing and our capital structure can deal with all of that, so these 2 things are not linked. In terms of timing, as Sylvain said, it's going to be sort of -- it's going to be Q4. The real thing is, if you sort of remember back to Q1, I mean, one of the things that we did talk about, and it was more in the Q&A rather than in the presentation itself, is that we felt like we -- as we continued to work through things which are being described, I guess, by the market as overhangs on the stock, we certainly felt there was 2 things to go. There was one which was an E&C business and the settlement of the federal charges. And I think there is potentially a path forward to settlement on that, but that's clearly something that we're not in control of. We need to be invited into that process, but we're more optimistic now that legislation's in place. But also, the second thing was really about the -- what is the valuation of -- true valuation of the 407. And we talked about a number of ways of trying to find a way to really demonstrate what the value was. And we clearly think that the 407, if you take it in terms of analyst consensus, we think the 407 is undervalued as well. So we're looking at a way of remaining a strategic partner, hence keeping the 10%, but also finding a way of demonstrating the true value of the 407. So that would be another way of, I think, of taking the second piece out of the way. And then after that, the market value is SNC level and based on what it thinks it's worth.
[Operator Instructions] We'll take our next question from Frederic Bastien from Raymond James.
We saw lots of contract awards in the Middle East for your Oil & Gas division, but it was fairly quiet elsewhere. I was wondering if there are any opportunities that you're excited about elsewhere in the world and if you could share that with us.
Yes, I think -- so you're right, there was a number of contract awards. And in fact, there's a number certainly that we signed to -- we're looking to announce through August as well, a lot of them being Master Services contracts, [ book-and-burn ] contracts, which don't really translate into the traditional long-term order book under the new IFRS 15 guidelines in terms of what you put into a backlog. But it's good, sustainable work and long-term work. I think we had some good contract wins in Infrastructure. We certainly did again a -- on more of a consultancy, as we said, within DPM. And actually, the most positive sector, certainly within the last month, has been the Nuclear sector and particularly in the U.S. and the decommissioning program and the work that ultimately we have access to and we will be performing with the Holtec JV that I referred to. That's been a huge, huge pickup just in the last couple of months. And the potential there is very, very strong.
Great. Well, that actually dovetailed nicely into my second question about those contract awards in the Nuclear. [indiscernible] multiyear contracts, big dollar values, but the press releases weren't very clear as to the timing of it all and what sort of revenues you could anticipate from these contracts. You did mention however, that about 1/3 of your revenues year-to-date were coming from those kinds of activities. Does that -- do these contracts sort of double that business or potentially grow the business even more?
Yes, so the third so far clearly is work that we're doing in other areas, and this is all in addition to that. You're right as well, I mean, they are long-term contracts, typically sort of circa 10-year-type contracts. We are doing them in a -- from a risk perspective and from a management and capability perspective. We're doing them in a joint venture with Holtec in the U.S. And the JV that we formed for that is 40 -- SNC-Lavalin, 40%; Holtec, 60%. And as we begin to kind of mobilized [ and get started ] these contracts, again, we'll give a bit more clarity, I think, around the longevity and also how we account for them because we're still looking at whether it's equity accounted or not. So we will give more clarity around all of that so that you can actually see what the activity levels are for the remainder of this year and into 2019.
Okay. My last question, just going back to the 407, you did address the use of -- potential use of the proceeds. My question refers to more like a buying interest, and I know it's been kicked around a couple of times already. What makes you confident that -- it's a complex [ shovel ] agreement. But what makes you confident that this can be -- a portion of it can be sold this time around?
Well, I think -- I mean, it is a great asset that has such a long time to go still. I think the performance of the asset, as you can see, has just been phenomenal. And I think if you look at -- the market has started over the last 3, 4 years to really appreciate that it was undervalued. And you see that when you look at the evolution of the -- in our stock price the valuation by the [ gallons ] of our stock price. So I think there will be quite a bit of an interest to get to that in the marketplace and take a stake in it. So I really think it's a great asset. That's a feedback we get all the time, and I think others will want to participate.
Yes, and I wasn't debating the quality or the great business that 407 is. It was more like the timing. And I know it is a fairly complex project -- [ shovel ] agreement. So that -- those were more where I was going to.
Yes, I mean, we've -- so just on that, I mean, we, of course -- I mean, prior to launching the program, I mean, we had detailed discussions with our partners within that. So that gave us added confidence in terms of support and, ultimately, about this process being successful in all aspects of it. So from that perspective, we haven't launched of this program without consultation with our partners. We've had full consultation with our partners on this.
We'll now take our next question from Jacob Bout from CIBC.
More along the lines of the proceeds from the 407. From an M&A perspective, what would interest you? What areas would you be thinking about right now?
Yes. So on M&A, our -- what we've said previously hasn't changed at all. So we won't be doing any M&A this year. We probably won't be doing any for the vast majority of '19, so it may kick in back in '20. And the M&A, I mean, presuming that's a -- and it's part of the theoretical work. I mean, presuming that we can take away the -- these overhangs and if we get a [ rerating ], then the whole capital allocation strategy might support M&A further down the line. If we don't get that, then in terms of the allocation strategy, may be more accretive to actually do potentially share buybacks with any surplus that we have. So that piece of it, I think, is quite fluid at this stage. I mean, we are looking at this very much in terms of working our way down the list, as Sylvain had said, which is the CDPQ loan is the first thing, the deleveraging is the second. If we are in a position to be invited in and we can reach a settlement under the DPA agreement, then clearly, that's another one. I mean, we've settled up as well with the -- on the class actions in the 2 -- for the 2 provinces, supporting the dividend strategy. And then after that, I think, come the end of the year and moving into '19, then if there was additional funds there together with whatever we're generating from the operations, then we would look at the capital allocation strategy then based on our valuation and whatever was most accretive.
Has there been any communication with the government at all as far as working towards a settlement?
We have -- we've approached the government around timings, and they've been very clear that there is the 90-day period after Royal Assent. And then after that, they will consider whether they will invite us in for discussions or not. So they're very much by the book, and we're in their hands on that particular item.
Okay. Give you a last question here just around the -- some of the decommissioning work that you're doing. Can you talk a little bit about how the relationship between SNC legacy and at WS Atkins nuclear is progressing, what doors has that opened up for you? It might be...
Well, the...
Sorry, go ahead.
Yes, I mean, that's -- so if we look at it in terms of -- we -- so you look at the acquisition of Atkins, you look at the cost synergies we have, and we're on track to deliver all of that, but really, the important piece is the revenue synergies. And 2 main areas in terms of where we think we are really going to generate significant revenue synergies, one was the Rail & Transit side to the business. But really, the biggest one is in the nuclear arena. So if you look at our nuclear capabilities now, so we brought the nuclear group together under Sandy Taylor. And we'd really have capabilities that flow from new build design architect engineer, owner engineer consultancy, which has come principally from Atkins U.K. capabilities. Although, they operate more than in the -- more than just the U.K., but that's principally the origins of it. We've then got the reactor upgrade life extension capabilities. Again, that is specifically around can do in terms of the work that we're performing at the moment, but we do have the capabilities to do it with other technology. But -- so there is a long, long program in terms of OPG, the first reactor that we're working on at the moment, and potentially, 3 more together with Bruce Power in terms of the first one. And then there's 5 in addition to that. We're also around the -- looking after the waste management. We were at -- I believe it was a 22% partner in Chalk River as SNC-Lavalin. Atkins were a 25, I think, percent partner. So I mean, effectively, we are now really the management interest thereof of 50% within that facility obviously here in Ontario. And then the other piece was an acquisition that Atkins had made in terms part of energy solutions that is very U.S.-based and very -- and decommissioning -- decontamination, decommissioning, waste management orientated. Now the neat piece was that the SNC-Lavalin and SNC-Lavalin Group within the Canadian operations were also and have been working with Holtec for a long time around various elements of technology. Holtec, a specialist company in terms of handling fuel and fuel in terms of the safe extraction and storage. So finally, we were able to complete on Atkins, look at the former energy solutions in the U.S., bring all of that together. That's really where we came together in terms of Holtec and ourselves forming CDI in the U.S., specifically around the decontamination and in the decommissioning piece. And we've been in the process of less than a year to put that together. And as you've seen, there's a -- the -- Holtec, as a company, and then the JV in turn has already secured some major long-term decommissioning work. And this is start-to-finish work. This is not a piece of services at the beginning. This is the full decommissioning of these facilities in the U.S. So I mean, we're incredibly excited about that. It's the sector that we've got the best margins. It's the sector that we truly believe that we're completely differentiated in. And when we're pursuing these contracts, we're basically either sole sourced or we're 1 of 2. So we're not in a big bid process. So we're incredibly excited about the potential within nuclear.
Assuming a pretty robust bidding pipeline as well?
Oh, absolutely. No, there is a huge amount. The thing about nuclear is, it's -- or the Nuclear sector, is ultimately there's a lot of aging plants. I mean, [ wells ], whether they are being shut down and decommissioned for environmental reasons or whether they're being shut down and decommissioned because they're at the end of life, they're also fully funded in terms of the dowry schemes that they have, where they have to keep paying into them in order for the decommissioning to be fully funded. And these are coming to market now. And clients are looking for opportunities to be able to get contractors like ourselves, who are capable of doing all of this, to actually then commit to doing that and moving on into the decommissioning program.
Our next question is from Maxim Sytchev from National Bank Financial.
Just wanted to touch on in terms of Oil & Gas because you're talking about EBIT being flat year-over-year, but the first half is weaker relative just from a seasonality perspective. So what gives you the confidence that we're going to see a pretty significant lint -- lift in the back half for Oil & Gas?
Because we won a number of contract awards and been really successful in terms of the -- we've -- I mean, the whole -- the picture in Oil & Gas, which I think you understand, is that, for a couple of years, there was a large portion of it being generated with the LNG projects in Australia in terms of completion of Gorgon and the completion of INPEX. And these were big projects where they were very visible within the backlog because they were -- they are projects, start to finish. And there was a fair bit of scope growth on them, all done on a reimbursable or a unit rate type basis. I mean, at the same time, we've had the visibility of the completion of them. So we've been working really hard on business development across the Middle East and North America but, principally, the Middle East. And we've got visibility in the pipeline there. We have been winning a lot of contracts in the Middle East. But it becomes less apparent in terms of the backlog because they are MSA call-off contracts where we are sort of ramping up there. So we do have visibility that really doesn't fit within the backlog numbers in terms of how we're going to ramp up and how we price these contracts. So that's the reason that we're confident that, by the end of the year, we'll end up in a place that is pretty much consistent with previous years.
Okay, that's very helpful. And then another question. In terms of -- as the business is becoming more cost reimbursable, which in my understanding is less working capital intensive, when do you think -- see the shift where the drain that we've seen on noncash capital is going to subside? Any visibility on that front, please.
Yes, I think what we've seen in Q2 is a bit of -- is a lot of timing, actually. There's 2 drivers, right? One is the Thermal business, as it completes, has been using quite a bit of cash in the completion. So I think, on a year-to-date basis, it's been consuming about $75 million plus of working capital on its own. And then on the Oil & Gas side, I think we're dealing with 2 things, really. I mean, there are some settlements that did not materialize in the second quarter as we were hoping for. But we see those coming in, in Q3, so that also [ consume ]. And there were some milestone issues. So those were projects that were not in the reimbursable space but more EPC type, which the milestone of some of the spend just didn't match us hitting the customer milestone for getting paid. So I think you're right. As we wash through some of these more, I guess, challenging working capital situation in the Middle East, we should see a more normal rhythm. So that will take a bit of a while, I mean, for stability, probably not this year. But like we said in prior calls, we do expect to get a positive OCF this year.
There's one other factor in terms of that sort of rebalancing shift away from a regional perspective is we're moving from heavy IOC perspective in terms of the Australia piece to an NOC perspective in the Middle East. And whilst we don't have any concerns about payment, it is longer payment terms.
Right. And so then, I just wanted to clarify, the positive OCF, after working capital, right?
Yes, including -- yes, absolutely.
Yes. And then trying to get sort of the sequencing right in terms of your approach to think about the 407 and the DPA and so forth. I mean, was it just the thought process to get the ball rolling on that? Because, correct me if I'm wrong, but originally, the thought process was around how you'd -- you get the DPA, you get the legal overhang sort of sorted. You get the multiple and then you can do [ all ] kinds of other stuff. And what was the decision that made you change the mind in terms of pulling that process a bit more forward? So maybe if you don't mind just kind of explaining the thought process around that, please.
Yes, I'm not sure we've necessarily pulled it forward. And certainly, I think I saw something today about the theoretical -- well, the possibility of us actually completing a transaction, which actually as we said, is more likely to be Q4 at the time of settlement. And basically, we don't need -- as I said before, we don't need the transaction with the 407 in order to fund the settlement should that happen. And likewise, the Canadian government or the prosecution service I'm pretty sure understands the value of the company and the value of our assets. And they're not going to sit there and look and determine something on the basis of where our cash balance is. So I'm not sure the 2 things are really -- from that perspective, they're not really related. I mean, what I alluded to, and in fact, I think you were looking for ideas in terms of how do you actually -- how do you get a market price, really, for the 407 to indicate that. We've always been working on the basis and working down the line of taking away all of the things that we feel are detractors to SNC-Lavalin's true or theoretical valuation. And we just believe that we're down to the last 2, and we'd like to -- we'd really like to get them completed and out the way as soon as possible, Q3, Q4 this year.
Our next question is from Mark Neville from Scotiabank.
Just first on the 407. Sorry, I just want to make sure I'm understanding. You said it was -- did you say, sorry, it was -- there was a necessity or, I guess, your choice to repay the full loan from the case, assuming there was a sale? I guess...
Yes, the...
Go ahead, sorry.
Yes, the loan agreement contains basically -- because the loan is secured by the cash flow of the 407. So it was already included in the loan agreement that if we were to sell portions of the 407, there would be an amount that would have to be repaid on the loan. And it turns out, because we refinanced a portion already, that we would have to, basically, pay the outstanding balance at this stage.
Okay, but I guess, correct me if I'm wrong, the dividends on the remaining portion would still more than cover the interest dividend payments, and then, I guess, I just thought that was sort of the agreement. But I guess, you answered my question. And I guess, maybe this answers the next one as well. But I guess, I sort of understand the rationale for wanting to mark to market the asset in helping devalue the E&C business. I'm just curious as to the amount of the size that you decided to sell. Something this big, I guess just based on our math, it's probably netting north of $2 billion. And sort of, if you repay the loan, but your balance sheet again is sort of close to almost debt free or net debt free at that point, and you're suboptimal again. You're not really looking at doing M&A. At least, it doesn't sound that way through '18 and '19. So I'm just, again, curious on the size. Then again, maybe having to repay the full case loan is partially the answer too.
Well, I think, on one hand, right, it -- we want to retain a strategic position. So that's why we don't go further, or we don't talk about an amount bigger than the 6.76%. So that's on one side of it. I guess you could ask why are we not...
Yes, I was seeing less...
I think, at this stage, when you look at the process and you start thinking what's the -- you kind of settle the what's the point of selling less if -- I mean, you're kind of still remaining strategic if you go all the way to 6.76%. Like we said, we have a few items we got to deal with, and there will be proceeds beyond that. But I think that's where I think it will allow us to basically make some nice strategic capital allocation decisions based on what happens to our stock price, and that gives us, basically, that flexibility, so which is the value we think.
Okay. And maybe to dovetail on the working cap question. I believe, last quarter or in recent quarters, you were pointing to I think $100 million of debt repayments in '18. Is that still your expectation?
Well, I think it's -- it all gets mixed up now with this process we're going through on the 407.
Sure, maybe if we...
Yes.
Maybe if we're just thinking about the business, yes.
I'm sorry. You're breaking up a little there, Mark.
Yes, but we're just thinking about the business. Yes. No, again, I guess the -- that guidance was given sort of before the potential sale. So again, I was just sort of thinking of the actual business itself.
Right.
Yes. So I mean, that's still the objective, the underlying objective. So if we don't complete something until the end of Q4, for instance, we're lucky to complete earlier than that. But if it was the end of Q4, then we're still on track for delivering the $100 million. I mean, that's our objective.
Okay. Yes. And then maybe just one last one on the Champlain. I know you mentioned some issues in the quarter. Just maybe if you can just provide some more color on that if you could.
Yes. I mean, it's sort of well documented in the Montreal press, I think. It's -- so it's a law change, a provincial law change, which in turn was objected to by a part of the workforce, who were then absent. So we lost a number of productive days. And ultimately, we've talked to the client about that, and we think it's a clear law change, a clear change, and we're working productively with the client around whether -- what's the solution to that. I mean, do we keep going for the 21st of December? Do we accelerate further? Or what do we do? But it's a real -- I mean, a good, positive discussion, collaborative discussion with the customer.
We now take our next question from Michael Tupholme of TD Securities.
Sylvain, you ran through some of your expectations for margins for some of the segments. I don't think you talked about Mining. Just wondering how we should think about that segment. It looked a little bit low, the margin in Mining in the quarter, relative to what we've historically seen. Just wondering about the back half of the year for that segment.
Yes, I think you're right. It is low. I think one of the elements in there is their -- they had some lower-profitability contracts that they're working through at the moment. And you saw them being low in recent quarters as well. So that -- there's some awards that we're hoping to be able to announce in Q3, and those should start to restore some of the profitability that we used to see.
I mean, what we need as well as we need to really put a major project back in the mix there. And we are pretty optimistic in Q3 that we will land one of the contracts that we're in deep dialogue on. But I really think, in terms of getting a stable meaningful margin within that sector at the moment, we need to get a large project in the mix.
Okay. That makes sense. And then with respect to Oil & Gas, I know you indicated you do expect the margins there to rebound. But I'm just wondering, was there anything going on in the quarter that led to the lower level of margins other than, I mean, I guess, you mentioned that you've ramped down on some of the larger projects you've been working on? But was there anything in particular happening in the quarter other than activity levels that would explain the level you did in Q2?
Yes. So you're right. There's the revenue aspects of it, which clearly drives it down. It makes it a little bit lumpy as well. And as I spoke about the cash flows and the -- some timing on settlements, that also had some impact on the EBIT generation. So there's a timing element to it.
But that would be from an EBIT dollar perspective, I guess?
Yes. But those settlements, when you're near completion of the projects and you get a settlement, you get a lot of margin for little revenue, basically. So there's -- yes. So those are expected in Q3 and maybe some in Q4 as well.
Okay. And then with respect to the -- some of the nuclear awards or the press releases you've been putting out recently on the decommissioning work, I know, Neil, you mentioned that you're still working through how you'll actually account for some of that work. But does that go into backlog in the near future, such as Q3? Or is this -- I know some of these projects don't start for some time. So how do we think about it from a backlog perspective?
Well, you should see the backlog going up in Q3 and Q4 as the contracts are fully, fully developed. And once we got the information on the total CapEx piece, then they will end up in -- ultimately, they'll end up in the backlog.
I mean, we're still -- as Neil said, we're still working through the accounting of that. So it is likely this will be equity pickup. And it's unclear still to us how you deal with RPOs or backlog under the new rules, whether you can kind of count that. But if we're not able to report in backlog, we'll figure out a way to give you some indication of the size of business that we're going to be performing and the related revenues coming down to that. So -- but it is likely ultimately in the P&L to be an equity pickup.
Okay. And then just lastly, with respect to EDPM, a very strong level of bookings that you disclosed in the quarter. And I know that segment has -- -- there's a lot of varied activity going on within it. But can you just speak to whether or not much of the bookings are related to infrastructure work, in particularly in the U.S.?
There is some, but the vast majority of the bookings were -- or the major pieces of the bookings were actually in the U.K. I mean, there was a couple of projects that I mentioned that were U.S. related. But the shape of the -- I mean, the shape of the former Atkins business, now EDPM, is pretty consistent over the last 12 months, so in terms of the revenues by region and the bookings by region are still very consistent. So the EDPM business is -- a large chunk of that is U.K. based, and the bookings were U.K.
Our next question comes from Jean-François Lavoie from Desjardins Capital Markets.
I was wondering if you could discuss a little bit about the -- on the cost synergies development that you had with the integration of Atkins, please.
Yes. So I mean, as we said, I think, last year, we delivered $31 million, $31 million, I think, $31 million, $32 million against $30 million. And the cost synergies are working and being delivered sort of really well in the first half. And basically, we are at -- we're just over the $120 million in terms of identified and either completed or within execution within a plan. So the $120 million is no issue. We'll be -- we'll probably end the year slightly above that.
Yes, I was just going to say we had said that we would deliver $90 million in the P&L for 2018, and we're also well on track for that.
Great. And I was wondering if you could discuss the pipeline of opportunity in Infrastructure, especially in Canada with all the big projects that are coming up in the region.
Yes, I mean, the pipeline continues to be really good. I mean, we were disappointed that we were not selected for the Gordie Howe project, but there's a number of other projects that we are continuing to work on. I mean, the next one, really, in terms of progression and submission is the Trillium Line in Ottawa. That one, clearly, we have knowledge and capabilities in terms of rail and transit relocation. The Trillium Line runs north to south below the Confederation Line that we are in the process of finishing off. It's a diesel line rather than an electric line, but we've got a lot of knowledge. We've got a team that is coming off of Phase 1 of the Ottawa Confederation Line, and we are pretty hopeful that we can be successful on that. But there's a number of other projects that are coming to market. And so we see the -- we've seen a little bit of a gap in terms of the bid pipeline process, but that's ramping back up again. And we think there's a great opportunity to continue to grow Canadian infrastructure. The Infrastructure Group as well, I mean, not -- so not just Canada, I mean, we also have been spending a fair amount of time positioning ourself in the U.S. market, both over in the East Coast and over in the West Coast of the States. And that was really another sort of revenue synergy opportunity by bringing together sort of Ian Edwards' Infrastructure capabilities, Canadian capabilities, the O&M together with the full execution of -- with the former Atkins engineering capabilities in the U.S. So we also see, not quite to the same level, but we do see opportunities now, real opportunities, for us to be successful within the rail and transit market and infrastructure market within the U.S.
Our next and final question comes from Devin Dodge from BMO Capital Markets.
Just to get started on the clean energy segment here, can you provide an update on the opportunity that you see with ABB? I believe you were looking to finalize the terms of this JV be sometime around midyear. I guess, just wondering what you see in terms of opportunities and how significant could this be for SNC.
Yes. So that's the JV basically where ABB have the technology, they've got the products. The ideal opportunity of us coming together is that we then take care of the project management and the execution. That JV is still on track. And in fact, we're sort of really aiming for that to be finalized and launched, at least, Phase 1 of that JV in September of this year. With the second phase -- so we're doing it region by region, with the second phase of it being launched at the -- towards the end of the year. And I think we said before there's a significant piece of backlog wait -- or is there that will come into the JV ready to execute. So I mean, from our perspective in terms of -- it's really good, inexpensive BD to begin with. But then I think it's a great opportunity, really, for 2 companies with very different skills and capabilities to be able to come together and to execute in a really great way. But the market is -- I think, if everything comes to expectations by the end of the year, that could easily be a CAD 1 billion backlog business.
Okay, that's helpful. And maybe switching to the Nuclear division, lots of good contract awards recently. Many of these seem to be incremental to like the run rate of that business. Just wondering, how challenging is it to ramp up this -- for these activities? I just wonder, is it difficult to find the labor resources to complete this type of work?
Yes, I think the -- so in terms of -- if we were looking at just do we have all of the specialist capabilities, in terms of the execute -- the field execution of the work, I don't see an issue with that. In terms of the absolute specialist expertise, the engineering, that would be challenging if we're looking to do that purely from an internal current capability. So we are -- we will be going to market to look at how we can attract the skills and the additional skills and capabilities to the organization. But I think the reason we're so confident is because, basically, the skills and capability will go where the interesting projects are. And we believe that we've got, and potentially, we've got the best, the best interesting, challenging, interesting projects. So I -- we're confident that, in terms of attracting in the additional specialist resource that we need, that we'll be successful with all of that.
Okay. And then maybe one last one. In the capital division, can you provide an update on the commitment to invest in the Carlyle infrastructure fund in terms of when you think capital would be deployed? And what type of opportunities look most interesting currently for that fund?
Well, I think we're still committed to that investment and that initiative. We're looking at -- I mean, it's been moving in time a little bit. I think the team has been very active at looking at opportunities. So we're still looking at something this year in that space, but it won't be the entire commitment. But we're still very excited about that program. I think the partnership with Carlyle, and as we look at some of the opportunities that we've been looking at together, we still believe this is a good opportunity for us. So hopefully, something gets funded this year, but it won't be the entire amount, for sure.
It appears there are no further questions at this time. Mr. Jasmin, I'd like to turn the conference back to you for any additional or closing remarks.
Great. Thank you all for having joined us today. If you have any further questions, please do not hesitate to contact me. Have a good night, everyone. Thank you very much. Bye-bye.
This concludes today's call. Thank you for your participation. You may now disconnect.