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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Good day, and welcome to the SNC-Lavalin's Third 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 would like to turn the conference over to Neil Bruce. Neil?
Thank you, Denis. I will briefly review the Q3 highlights and discuss the sector's highlights and trends. Sylvain will then cover the Q3 financial aspects in more detail. So please turn to Slide 4.Before I get into the detail for the quarter, let me start by saying that we're very disappointed by the decision of the Director of Public Prosecution Services of Canada not to invite us to negotiate a remediation agreement. That makes no sense. The government of Canada passed legislation this year to allow companies to settle charges via a remediation agreement. And yet a new law is not being made available to SNC-Lavalin for unknown reasons. A new law that we thought was designed to encourage transparency, protect innocent stakeholders [indiscernible] for Canadian companies to stand equal with international competition. Therefore, we have filed an application with the Federal Court of Canada for a judicial review on this decision.In parallel, the preliminary inquiry commenced before the Court of Quebec this week. Depending on the outcomes of this inquiry, a trial may commence in 2019 or 2020. This will not be a quick process. Remember, these events are dated back to between 6 and 60 years ago, a completely different era.Despite the political issues we've had to contend with, our business is solid. This quarter is our first direct comparison that has Atkins included like for like. And we're very proud that our EPS from E&C was 39% above the same quarter last year.On Atkins, I can proudly say the integration has been very successful, enhancing and diversifying our services, delivering $124 million of cost synergies, $4 million above the original plan; and we're starting to realize revenue synergies.We're also pleased with the quarterly results, which are slightly better than our expectations. We delivered a strong EBITDA margin from E&C of 8.9%. That's 1.2% higher than Q2 and higher than the 7.6% in Q3 in 2017.Our new awards were strong again this quarter, with $2.6 billion at a book-to-bill ratio of 1, totaling $8.9 billion in bookings for the year; with our broader Services types of contracts, our repeat businesses and our Services mandates, contributed to the strong backlog. Remember, without a large lump-sum contract announced in the quarter, our strong bookings in Q3 were mainly in the Oil & Gas, Clean Power and EDPM segments. This helps with having a lower-risk services backlog, which, due to the nature of the contracts, came to be understated in terms of what they will eventually generate.We also formed 2 important joint ventures in the quarter. First, CDI, a new U.S. JV between SNC-Lavalin and Holtec, [indiscernible] to pursue nuclear reactor decommissioning work in the U.S. CDI has already been awarded 3 major decommissioning contracts worth hundreds of millions. Because of the nature of the JV, we will not see this reflected in the backlog. However, these are huge, long-term contracts where we expect work to start once the assets are transferred to Holtec.Secondly, Linxon, a new JV between SNC-Lavalin and ABB from the execution of turnkey electrical AC substation projects. Linxon already recorded $400 million in backlog, and we expect more to come.Regardless of the external unfortunate developments beyond our control, our strong 9-month performance coupled with our high-quality backlog across our sectors allow us to maintain our 2018 outlook. Remember, our guidance is adjusted EPS only. We do not give guidance on revenues or margins.Let's now look at our sectors starting on Slide 5. Our Mining & Metallurgy sector had a strong quarter on the revenue side with some challenges on the EBIT side. This was primarily due to various change items that are being finalized in projects and release of the start of various new projects.The market, while unproven, is still experiencing delays or postponements of various major projects, which is having an effect on our plan for the year. Despite delays on some contract awards, we remain optimistic as we expect our clients to significantly restart investing in the capital expenditures for 2019. We expect to secure 1 major project in Q4, as well as our various midsized projects.Our Oil & Gas sector had a really good quarter, with an 8% segment EBIT and a new award booking of $800 million, representing a great book-to-bill ratio. We are continuing to see positive market segment sentiment due to good fundamentals across the service chain for the upstream, midstream and downstream services. Customers are increasingly optimistic, driving strong demand for oil and gas services that are expected to be booked in the next 9 to 12 months. We are also observing signs of recovery in CapEx, especially in the upstream and LNG.As for Saudi Arabia operations, we continue to monitor the situation closely, and we're engaged with our clients. Our 9,000 employees in-country continued to support and deliver their projects to client and to our expectations.The Infrastructure sector had another good quarter, with a 21% increase in revenues. Backlogs have been strong at $8.7 billion. Our ongoing major projects continue to progress well.The Montreal Light Rail project had a good start and remains in the early phase. We are currently working on advance works, such as design, demolition, site investigation and mobilization. The Eglinton project in Toronto is advancing well, and the Confederation Line project in Ottawa is on track to open later this year.As for the New Champlain Bridge project, unforeseen events beyond our control have occurred and have resulted in delays that have not yet been recovered. The bridge structure will be completed by December the 21st. But with the winter at our doorstep, some permanent finishing work including the waterproofing in the bridge deck and [ peering ] will have to be [ cut again ] over the spring.Our consortium is working with our client to open for traffic as early as possible in the spring. We don't expect to incur any penalties, as the delays were caused by issues out of our hands. 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 prospects, especially here in North America. We are also very bullish in the long-term fundamentals of our Nuclear segment. As we expect this sector to win above its fair share of market share.In the decommissioning industry, we renewed for the CDI [ Jaden ] previously mentioned. CDI's vision is to become the leading decommissioning contractor in this market. With an aging nuclear power plant fleet and the rise of lower-cost moves of energy generation in the U.S., we believe that the decommissioning is a rapid growth market. Note that 35% of our year-to-date Nuclear revenues relate to decontamination, decommissioning and waste management projects.Turning to Slide 7. Our EDPM sector continues to show strong results, delivering 3% organic growth this quarter compared to Q3 2017, [ $77 ] million of EBIT and a 10% EBIT margin. This sector recently signed one of the biggest projects in recent times through the Aurora Engineering partnership, which has been appointed by the U.K. Ministry of Defense as their engineering delivery partner for defense equipment and support.And lastly, our capital sector. We're pleased with our capital sector, which delivered in the quarter $44 million of net income or $0.25 EPS. We recently sold our stake in Astoria II, a Thermal power plant in New York, for $54 million, demonstrating once again the value creation we can generate by engineering, building and investing in such assets. Our process for the potential sale of the portion of the interest in Highway 407 continues to progress.We continue to believe that this asset is currently undervalued. Bidders are still in the due diligence process, so we have not yet received formal offers. You can be assured that we will do, as always, what we believe is in the best long-term future of SNC-Lavalin. And if we believe that the bidders are not meeting our expected value, we will not hesitate to decline the offers.This concession still has 80 years remaining and has not yet reached its maturity. Again this quarter, 407 ETR had a strong quarter, with 10% increases in revenues, 1% increase in VKT and 9% increase in dividends compared to Q3 2017.In summary. We are pleased with our performance so far this year. We have been awarded many Services projects in the quarter on strong joint ventures, which should support our organic growth going forward and reverse the cash from operations trend. Q3 results also demonstrated EDPM revenue organic growth, which showcases the growth potential of the sector. Despite all the noise on external unfortunate developments beyond our control, our employees are active on projects and are focused on delivering. We continue to deliver great services to our clients all around the world.With that, I'll turn the call over to Sylvain.
Thank you, Neil. And good afternoon, everyone. I'll start on Slide 9.Total revenues for Q3 2018 amounted to $2.6 billion, which is slightly below Q3 2017. The variation was mainly due to lower revenues in Oil & Gas and Internal Power due to completion of major projects. I remind you that the company made the strategic decision to exit the Thermal market. This was mostly offset by increases in the Infrastructure, Mining & Metallurgy and EDPM segments. Note that the EDPM revenues increased by 10%, which includes organic growth at a constant foreign exchange rate of 3%.Our year-to-date revenues for the last 9 months were composed of 74% of reimbursable and engineering service contracts and 26% of EPC fixed-price contracts, compared to a mix of 71%-29% for the corresponding period in 2017.Total segment EBIT amounted to $246 million compared to $253 million in Q3 2017. The Nuclear segment had another strong quarter with a 17% segment EBIT margin. The EDPM and Oil & Gas segments also had strong margin ratios for the quarter, delivering 10% and 8% respectively. On the other hand, the Thermal Power segment recorded another negative segment EBIT of $6 million for Q3 2018.We continued to complete the remaining work and finalizing of any commercial discussions on this last fixed price EPC Thermal Power Plant project in the U.S. The project has been in commercial operation since late spring.Our adjusted EBITDA from E&C increased by 14% to $223 million in Q3 2018, representing a margin of 8.9%; compared to $196 million in Q3 2017 and a margin of 7.6%. Note that in this quarter we had to recognize a $16 million favorable impact from revised estimates on legacy sites environment liabilities. This reversal was reported in our corporate selling, general & administrative expenses. Excluding this reversal, our corporate SG&A expenses would've been $15 million, an improvement on Q3 2017, mainly due to lower employee-related costs.Adjusted net income from E&C in Q3 2018 amounted to $124 million or $0.71 per diluted share, an increase of approximately 40% over Q3 2017. This increase was mainly due to lower corporate selling, general and administrative expenses and a decrease in income tax expenses, partially offset by a slightly lower total segment EBIT.Our backlog, at $15.2 billion remained strong and at the same level that it was at the end of June 2018, as we had a book-to-bill ratio of 1 in the quarter. Our bookings for the quarter were $2.6 billion, which includes $0.8 billion in Oil & Gas, $0.7 billion in EDPM and $0.5 billion in Clean Power. Our backlog remains heavily weighted in reimbursable and engineering service contracts, with 70% versus 30% for EPC fixed price contracts. I will shortly cover the liquidity in more details.Now moving to Slide 10. We see that the segment EBIT for Oil & Gas was mainly in line with Q3 2017. Nuclear segment EBIT was lower than Q3 2017, mainly due to a lower level of activity. And we expect this to be only temporary as we should begin working on decommissioning projects through our CDI joint venture in the coming quarters.Clean Power had lower activity this quarter compared to Q3 2017, mainly due to the near completion of certain projects. This trend should improve in the short term, as our new Linxon joint venture started operations on September 1, 2018. Note also that Q3 2017 included a favorable outcome from a major project.The Infrastructure segment had a good quarter with a 5% segment EBIT margin. Note that Q3 2017 included a $27 million favorable outcome and [ crossed street ] forecasts on certain major projects. And lastly, the EDPM segment delivered another strong quarter, with almost 10% segment EBIT margin.Turning to Slide 11. Our operations generated $16 million in cash in Q3 2018, an improvement from Q1 and Q2 2018. On a year-to-date basis, our operations use $191 million compared to $612 million for the corresponding period of last year. This improvement was mainly driven by a higher EBIT from E&C, a decrease in restructuring costs and income tax paid, higher dividends and distribution received from capital investments, and lower working capital requirements on projects, partially offset by an increase in interest paid. The year-to-date cash consumption is primarily driven by the closeout of our Thermal business as well as higher working capital usage in our Oil & Gas business in the Middle East and timing on other major projects.Other than the cash flow from operations, we see on the right-hand side that a large amount of cash movement was related to the debt, as we continued to proactively manage our credit facilities. Over the last 3 years, many things have been accomplished at SNC-Lavalin to stabilize our cash flows going forward. Atkins brought us improved stability on cash generation. And we were successful to generate cost synergies and complete our more challenging projects. With that, we believe that our long-term target per cash conversion ratio, being our free cash [ fill ] over the adjusted consolidated net income should be around 70%.Moving to Slide 12. As of September 30th, 2018, the company continues to maintain appropriate liquidity to pursue our growth strategy. We closed the quarter with $736 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.Now turning to my last slide, Slide 13. We're 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 have amended our outlook for 2018 income tax rate for adjusted E&C to approximately 20%, mainly due to a different regional mix of our revenues than originally expected.This concludes my presentation. We can now open the line for questions. Thank you.
[Operator Instructions] We'll now take our first question from Benoit Poirier.
Just to come back on the process around the [ core asset ], I was wondering if you're still confident to close the transaction by year-end given you haven't received any formal bidder, and also whether you could be active in buying back share, or is dependent on the proceeds from the 407.
The process is well on its way. We have the potential bidders fully engaged in the loan process. We have and are considering other non-Canadian bidders that would like to come into the process. So maybe a few weeks' delay or not. But, give or take, towards the end of the year, early next year, we would still expect to conclude the process should the bids be acceptable. And in terms of the second thing, it sort of linked in terms of what we said before, which is that in terms of the proceeds, there's no change to what we've said previously, which is we would look at paying off the [ CVPQ ] loan. And then we would be looking at some form of return to shareholders most likely to be a share buyback type process.
And now my question is maybe more for Sylvain. Could you talk a little bit about the free cash flow expectation? Q3, cash flow from operation was positive, around $16 million. So could you talk a little bit about what we could expect for Q4 for the year, and whether we will see any reversal from the Middle East?
Yes. So as I said, we generated a positive cash flow of $16 million for the quarter, which is good, although we did have some projects that had delayed cash inflows. So this price [ that we ] still manage to be positive. And as we had [ been ] in Q2, these delays kind of are tough to catch up. So when we look at Q4, and when we look at the total year picture, what we've said, I guess all along, was we'd generate a positive cash flow through the year. I think, with these delays, we're still looking at a flat to positive profile before any legal settlements, though. And that's consistent with what I've been saying before. The legal settlements that we had in play right now that is progressing quite well is the class action one, which is for $88 million. So if you assume flat to positive on, let's say, core operations, and then you'd have to take out that $88 million from that number.
And maybe, could you talk -- the last question for me, could you talk a little bit about the prospect in Saudi Arabia and give an update on the situation?
Yes, sure. So I was there last week. I went there to visit with our clients in their operations. So I was [indiscernible] to the investment conference regarding the date. But I was with our clients and our projects and our staff across the multisectors. And basically, as I said before, at the time that we had the unfortunate diplomatic incident between Canada and [ KSA ]. And we had just over 9,000 employees there, actively progressing, working. And to me, [ it would go ] exactly the same. And our clients are really happy, our employees are continuing and deliver, and it's basically all on track. So no effect there.
[Operator Instructions] We'll now take our next question from Mark Neville from Scotiabank.
Just want to follow up on a couple of those questions. I guess, with respect to the 407, or even just generally, with the company not being invited in for remediation agreements, you've talked about other options. Obviously, we can infer what some of those are. Just curious to hear your thoughts on that. And again, I guess, on the 407, when you said you would explore a potential sale, you've obviously thought there be an agreement. So I'm just curious, does your motivation to sell a portion or whatever amount [indiscernible] change at all with that?
I think if you go back to what we've said, after the disappointment of the remediation agreement -- and also being really clear, we will always be ready to go back in and negotiate a settlement at any possible time. Because it is just the timing, the timing involved in this. If you go back to these events, it's 6 years past 2012. Some of these events we're talking about is almost 18 years ago. And it's the time, it's the uncertainties here. So we are very keen to find a solution through the remediation agreement or any other way to try and bring this to an end and protect all the innocent employees, clients, shareholders and the like. Our priority at this stage, after getting the puzzling decision, is basically to protect our employees and our clients in terms of work we do, and also protect and enhance their shareholder value. So from that perspective, we will be looking to hopefully maximize on the 407 transaction or not. If it's not going to give us what we expect, then we wouldn't do that. The 407 and the remediation agreement piece is not linked. I mean, I think I've said that before. I mean, they're in no way linked. And the 407 sale is all about maximizing shareholder value and making sure that we return it to shareholders in the most efficient manner. So that's really our aim in all of this.
Given [ the ] decision doesn't change the motivation to do or not do anything with the 407?
No, we want to maximize shareholder value, whether we've got a remediation agreement or not.
And Sylvain, on the working cap and the free cash flow, just first so I understand, the flat to positive, that's operating cash flow after working capital for the year?
Yes.
And I think you previously talked about $100 million of debt repayments. I guess if you're now flat here, that probably means it doesn't happen, I guess the math doesn't work. But does the -- I'm just curious, the Champlain Bridge being pushed out to spring or Q1, Q2 of next year, is that having a significant impact on the working cap? And if so, sort of curious the milestone payments that might be pushed out, if you can get into that, or if not?
Yes, it does have an impact. I mean, any project that you have completion delays that are typical EPC lump sum will have final payment. So obviously, those payments get delayed along with the completion date. And then, we also have these situations. You'll have acceleration [ netters ] that are taken, not yet full agreed with the client. So those also don't get paid. So as part of the drag and my commentary on certain large projects, this is the kind of situation I'm referring to.
Just one thing in addition. So in terms of the dates being bandied about, I mean, we are absolutely -- the consortium is absolutely focused on: 1, a structural completion of the bridge by the 21st of December, and then opening to traffic as soon as possible, probably early Spring. And then after that, we want to minimize our cost through to completion of the overall contract. So we will stop any acceleration or any double shifting or anything else associated with the completion after the [indiscernible].
And just to understand the working cap for next year, then, is there any way you can help us sort of understand how much or what, from the Champlain Bridge, just that loan, what the sort of cash flow, working cap impact in the second half versus first half of this year might be; i.e., how much -- like the milestone payment that's sort of missing from the second half of this year?
No, I wouldn't disclose those details. But I think the mechanics are such -- I think you understand the mechanics, that there's clearly the delayed time frame. And that is [indiscernible] part of the drag in our 2018 OCF. That is [indiscernible].
We'll now take our next question from Michael Tupholme from TD Securities.
Maybe just shifting gears a little bit. You mentioned that you're starting to see some revenue synergies associated with the Atkins acquisition. And you'd indicated that this quarter you saw 3% year-over-year organic growth on a constant FX basis. Just wondering if, I guess, first of all, that 3% was at all a function of some of those revenue synergies or if those are yet to come, and if you can just provide a little bit more color about the opportunities?
So principally is revenue synergies. And it's coming up in a number of areas now. So we are working together on a number of things. So for instance -- looking for an example. So there's a nuclear facility, Horizon nuclear facility, in the U.K. And basically, we are -- we've been awarded a number of contracts against that, against that project. And these are contracts that effectively Atkins would never have been considered for in the past, on their own. And SNC-Lavalin, as a Canadian company not really sort of well entrenched in the U.K., would never have won there, either. So from that perspective, we've been selected for 3 contracts there that we would never have got as individual companies. If you look at the input in terms of looking at the work in the U.S., we're pretty optimistic about the developments going on at the JFK Airport. We're well positioned in there with Carlisle in terms of the agreements that we have previously told you about. So that's very much an SNC-Lavalin and an Atkins and a [indiscernible] place in all of that. And we are seeing quite a lot of prospects, obviously, within the nuclear decommissioning in the U.S. So if you take the 2 projects that CDI have effectively, or Holtec and CDI have been selected for to date in terms of decommissioning in the U.S. That's a combination of a JV that SNC-Lavalin had and the relationship with Holtec on the fuel side, but also, the decommissioning capabilities [ into ] decommissioning capabilities that came from Atkins. So it was an acquisition Atkins had made a number of years ago. So again, that's another piece where the combination of the companies is providing us with real, tangible revenue synergies. But when you look at EDPN 3% in the quarter, that is purely EDPN. That's not really anything to do with SNC and Atkins direct. That's just good organic around Atkins EDPN, with strong position with key customers, specifically around government and Ministry of Defense work.
And just following on with a question about nuclear. As far as the CDI JV, it was mentioned that the work that that JV wins will not hit your backlog. But maybe a question for Sylvain. How should we think about the volumes coming from that JV ramping up, timing, and exactly how you will report that workflow?
Yes, we see this work starting in the next quarter. Then it'll ramp up over time. We are looking at providing some disclosure on that in our MD&A to help you guys figure out size of backlog and if we were consolidating, so to speak. So we will provide some additional information to help you. It will be recognized as an equity pickup. So the pure reporting of it won't tell you a whole lot. So that's why we'll complement that a little bit in the MD&A in the Nuclear section, most likely.
And then, just lastly, in terms of the Oil & Gas segment, is it possible to provide a little bit of additional information about and ideally quantify some of the various items that were running through there this quarter, so that the project settlement and reforecast amounts that you mentioned?
Well, it's hard to give these details beyond what we provide already, to be honest. I mean, it's clear that the Oil & Gas business, with the nature of the projects, especially in the Middle East, have tended to be lumpy over the past quarter. So I wouldn't take the margin shown in the quarter as a run rate margin. I think we're still within the range we've been providing, the 6.5 to 7.5 kind of percentage for the year. And I'd kind of stay aligned with that.
Yes. [indiscernible] things [indiscernible] certainly in the quarter, was the book-to-bill ratio. I mean, it really stepped up in terms of the smaller and more Services type contracts that we had secured and included within the quarter. And bear in mind what we said before, which is the Oil & Gas sector and the types of contracts, probably more than most of the other sectors, really sort of understate -- a little bit like the Nuclear piece -- really understate the work in hand and what the contracts are probably going to end up have in terms of the IFRS 15 backlog definition. So we would expect to get even more out of these contracts than we necessarily could in the backlog number.
Our next question is from Chris Murray from AltaCorp Capital.
Can you just talk a little bit about the 3% organic growth in EDPM? And I'm just wondering if you're starting to think about what a health growth rate is in that business. And is there anything that you need to do to kind of hit those targets, be it tuck-ins or just moving forward on some other initiatives?
Yes, so just dealing with the tuck-in first. Obviously, with the position we're in with the remediation agreement, basically we will not be acquiring anything. So we're not looking at tuck-ins of any other acquisitions until we get through that phase. In terms of organic growth, though, I think, as we previously said, when we look at our long-term 2020 vision, in terms of the targets for EPS, that requires -- in '19, that requires us to start generating the organic move of the business. And we want to make sure. I mean, we are pretty confident around EDPM, we're confident about the Nuclear side. And we really need to get an average of in the sort of 3%-plus organic growth through the future in terms of delivering our long-term strategic aim.
Is there anything that you think you have to do differently in order to be able to maintain that? Or you think you're in good shape with the mix of services that you offer today?
No, I think we're in good shape. I mean, as we said before, we're now in the sectors with clients with differentiators within our sectors. I mean, once we flush out the Thermal Power piece, then we'll be guiding to the sectors that we believe will give us good, organic growth and stability into the future. So I think we're in good shape [indiscernible].
And then, just turning to Mining, it sounds like there seems to be a fair amount of pent-up demand. So I guess 2 pieces of this question. The first is, can you give us any sort of idea of, call it, the bidding pipeline or the opportunity pipeline that maybe you, sort of sitting out there, even relative to where you are with your current backlog? And then, the question is, 2, how fast would some of those projects materialize and start turning into revenue for you? And do you have the capacity today to start managing that content?
Yes. I mean, in terms of the pipeline, we've got a number of bids submitted. We've got quite a few large projects submitted. So there's in excess of $3 billion in terms of bids submitted. The disappointing thing at this stage is that we actually [ thought ] that 1, maybe 2, would've been awarded this year. And in terms of the process of clients making their overall investment decisions, they are taking a bit longer than -- they're taking a lot longer than they did previously. And they're taking a bit longer than we had thought they would. So there's still a lot of work going into [ pre-investment ] decisions around the economics and making sure that the right solutions are being selected. So from that perspective, we expect 1 major project this year. Originally, we thought it would be 2. In terms of converting into real revenues, I would say that's probably a second half of next year. And the good thing about it being -- so bad thing is, delayed a bit. The good thing is that gives us time to make sure that we start off and [ recruit ] the necessary talent in order to deliver this here. And we know where all that talent is.
We will now take our next question from Jacob Bout from CIBC.
Could you comment on that judicial appeal process, maybe talk a bit about the timing; how does it work? And is there anything, any timing aspect that we have to think about with the other court hearing going on?
Well, the 2 things are running separately. In terms of appeal, I mean, that's sort of fairly public. All that information's available if you look it up. And I don't think there's much point in giving a time line here, because it's part of the core process. So we don't really know. But anyway, we are going to take that to its full conclusion. And on the preliminary process that's going on in Quebec, I mean, that's likely to be going to be a 3-, 4-week thing. And bear in mind, I mean, it's not a trial. I mean, it's findings, it's looking at some of the evidence. And like I said before, looking at stuff that could be 12 years ago. I mean, the time I did my NBA at Newcastle University, to try and put it into perspective. So that will go on. And then, at the end of 4 weeks, we'll know what the next steps are.
And we talked a little bit about a plan B. But at what point in the process would you look at potential breaking the company apart or selling more assets?
Yes, I don't think we've actually said breaking the company apart. Or we haven't been specific about plan B. And ultimately, we're not going to tell anybody what our plan is. Just be reassured that we are very focused on both protecting and generating shareholder value. That, along with looking after our employees, is top of our list. So from that perspective, we've already started on looking at all the options. But we're not going to be drawn into talking about what they are and making all that public.
And then, speaking with your clients, is this impacting or do you expect not being invited to participate in the [ DPA ], has that had an impact with your clients or win rates at all?
It hasn't had any impact whatsoever on our ability to bid and win work, although it has regenerated a whole bunch of conversations where we need to go and talk to clients about stuff that, frankly, we'd rather not talk about. We'd rather talk about what we could offer them in terms of value-added services and solutions for their projects and ongoing operations. And for us, we've had to step up. I mean, it's like going back to 2015 all over again, or going back to 2012 all over again. We've had to step up our team. We go and explain what all this means. And ultimately, we have had no clients whatsoever changing their approach. They're thankful for the updates. And there's been nothing in terms of our ability to bid and win. And that, of course, includes the government of Canada. So we are still operating under the integrity agreement that we signed, and that will [indiscernible].
We'll now take our next question from Yuri Lynk from Canaccord.
Maybe one for Sylvain. Can you just clear up the SG&A? I think there was a $16 million gain in there. Was that all in the E&C portion of SG&A? Or was it split between the 2 segments?
No, this is all impacting our E&C business. I mean, it's a historical item, to be honest. We had a provision for years, actually, that's been evolving as we were developing different technical solutions around it. And we're getting pretty near to the final solution on that from a technical standpoint. That's what triggered the revised provision. And that's why it's in corporate, because it's a legacy type of item.
So I guess, to get a normalized SG&A for the E&C business, we should add that back?
Yes, just like we said in the commentaries. Yes.
So around $20 million to $25 million a quarter?
Yes.
And just to be clear, in the adjusted E&C EBITDA that you reported of $223 million, that $16 million is included in that, right?
Yes, it is. We've not adjusted it out of our earnings. We tend to -- I mean, as a practice -- I know fully all of you appreciate that -- we try to keep our adjustments simple and logical. So we tend to be all around the intangible amortization, the structuring charges and acquisition-related costs. Particularly, we don't get into unusual type of recurring/nonrecurring discussions too much.
Last one, maybe for Neil. In the Oil & Gas outlook, I think you mentioned some LNG opportunities that you're seeing. Can you just help us narrow down geographically where you're seeing these, and if they might be 2019 potential awards?
So I mean, 2 principal -- I mean, there's a number of areas. But I mean, the 2 highest profile at the moment is East Africa and Western Canada. And highly likely that we will kick off in 2019, albeit the ramp-up would be further down, probably more like 2020. But we expect our candidates to start next year.
Obviously, the LNG Canada, the project's actually started. So very late in the game, what kind of role do you envision potentially playing? Or what kind of packages might you go after as they come up for subcontract?
We're a major strategic partner to one of the main contract holders. And we worked with them previously on the Australian projects and a number of other projects. So from that perspective, we expect to be a major player in the delivery of the Services, similar, very similar, to the work we did in Australia.
We will now take our next question from Mona Nazir from Laurentian Bank.
So firstly, I'm just wondering, aside from the initial decision from the Director of Public Prosecution Office, have you had any subsequent discussions to try and gain a greater understanding of why you were not invited in for a settlement? Are you actively in discussions with them? Or has it been relatively quiet since you've received the decision and you're commencing the appeal process?
No, I mean, part of commencing the appeal process is that, 1, we did not get a decision; why not? And, 2, they refuse to speak to us.
And then, just secondly, I think someone else touched on this, but there's been a number of discussions and talking points about your next steps and means to extract value from the story. And some of those discussions have been around privatization, potential divestiture part of the business, 407 partial sale, buyback, appeal. And I know you just said that you did not want to make the process public. But I'm wondering if all the options are being weighed equally or if they're all on the table, and if there are higher priorities in one aspect over another.
Yes, I think, I'm not trying to be evasive. But I mean, in terms of maximizing shareholder value and being too open about our plans probably don't go hand-in-hand. So all we can see is be assured we're looking to maximize shareholder value in terms of the next steps, and probably want to keep the plans to ourselves in order to be able to get on with that and ultimately provide the best value back to shareholders.
We will now take our next question from Devin Dodge from BMO Capital Markets.
I just wanted to start with the Oil & Gas segment. Your outlook for this business was for EBIT to be down in 2018. I think previously you expected earnings in this business to be flat or roughly flat. Should we thinking that some of the recoveries that were expected to be realize in the second half of the year have been pushed into 2019? Or is the amount of those recoveries likely to be less than you produce in volume?
Think it's more a function of the first, more delays into finalizing some of those settlements and completions. I think there's also been a bit of revenue push out, as you can see from the trend. So those are a few things contributing to it as opposed to getting less than expected.
And last week, we saw that Saudi Aramco announced some pretty significant project awards. Just wondering, the new 5-year framework agreement in Saudi Arabia that you referenced in the presentation, is that part of the announcement from Saudi Aramco? And is there other opportunities that you were involved in?
So, no, there's not a direct correlation to the 2 things. I mean, these were -- I think they came very much from the investment conference. These were all sort of fairly high-level partnership type agreements. I mean, what we're winning is contracts that are real and there today, and we are lining up and executing on them. So from that perspective, the prospects, the additional work that we're getting, completion of the existing work we've got, is going very much according to plan.
And then, just switching gears. With the overhang of the legal issues and the DPA, and your commentary about SNC considering all of its options, do you think there's a risk here that this uncertainty involving your Canadian business that labor turnover could become an issue? And, I guess, what can you do to mitigate this risk?
Well, again, I mean, part of all of that is we will take all the appropriate actions in order to protect our assets. And our assets are fundamentally our people. So there's various ways of doing that. And we are not going to wait around. We've already taken a whole bunch of actions on terms of making sure that we protect our people, protect our assets, in order to be able to continually keep the business operating and keep it on track, which I think -- overall, hopefully everything [indiscernible] despite everything else is going on more on the political side. The message continues to deliver, give-or-take, continues to deliver pretty much on track.
Our next question is from Derek Spronck from RBC.
Now that Atkins has been lapped, how should we think about topline growth and your EBIT margin improvement into 2019?
Yes. Well, I think, from what we've said before, what we've delivered in Q3 is actually above our expectation. We were expecting it to be a little bit lower than that in terms of organic growth. Again, in terms of delivering our long-term strategies, we need to deliver organic growth on the top line probably in the lower single digits through '19 and '20 in order to be able to deliver that strategic plan.
Are you seeing the end market demand -- once you consolidate it through all your different segments, are you seeing that environment in place?
We're seeing it in [indiscernible]. So we're definitely seeing it Nuclear, we're seeing it a bit more in Oil & Gas, we're seeing it in Infrastructure. We think we've got a differentiated service offering within Clean Power with the formation of the Linxon JV. In terms of Mining, that's been a bit slower. But ultimately, we do believe in the sector. And we do believe that -- back to what we said before about our sector strategy has been all about having sectors where we got really good -- a client base where investment -- if it's not there today, then it certainly will be there in the shorter term and we have a differentiated offering. So across the sectors, they're not all equal. Nuclear is probably the one that we are most bullish about. And Mining at this stage is probably the one that we are least bullish about in terms of short-term returns. But overall, when you add the whole thing together, I mean, it's supporting our organic growth objectives for the next 2 years.
How much visibility does your backlog give you? Out of the $15 billion that you have on your backlog, how much of that gets converted over the next 2 years? And do you have any visibility around the margin profile within that backlog? Like is it a better margin profile, by and large, than your current margin profile?
I mean, the margin profile is sort of a difficult thing. Because it continues to [indiscernible] depending on what we are sort of bidding and ultimately what we secure. And again, it depends on the mix by sector. Obviously, our margin profile's going to go up if we do a lot more nuclear activities. So it's a pretty difficult thing. I mean, we are always looking at sort of maintaining the margin profile that we talked about before. I think we're doing sort of really well in terms of all of our completion. I mean, I think we're doing really well as a multi-sector E&C company. So if we maintained that and added organic growth, then we'd be very pleased with that.
Just on the amount of the backlog that gets converted over the next few years, do you have any visibility around that? Or can you comment on that?
Well, again, we've got quite a mix in there. Because if you take the change to [ economic ] standards with IFRS 15, I mean, what we ended up sort of [indiscernible] we ended up with a backlog, a number that includes some of the longer-term contracts, typically in O&M or maybe even in some of the Nuclear contracts. The likes of OPG, for instance, is in there. Because OPG has actually made definitive statements within the contract that they've awarded. Whereas with Bruce Power, which is just as long, and in fact has more reactors to be refurbished than OBG. They have not made definitive statements within the contract. Therefore, we've only booked -- we can only book a smaller number on Bruce Power than we get on OPG. And then, the opposite sort of works in terms of our Oil & Gas backlog has actually gone down. Because there's a number of framework agreements and almost sort of [ book and barrel ] type contracts that we have put into backlog. And so it's a pretty complex piece. But $15 billion is [indiscernible]. And this quarter, being able to convert 2.6 without any big projects is really pleasing in terms of heading in the right direction. And ultimately, as Sylvain said earlier, we are looking to put something in the MD&A which is less of that strict financial measure. So we'll have our backlog in accordance with IFRS 15, and then we'll try and give some sort of information there around all of the other work that we have that we're effectively under contract for and that we can't count under the IFRS 15 measure.
And not to put words in your mouth, but essentially, a few puts and takes in the different segments, but by and large, you're still tracking towards your $5 EPS vision in 2020?
Yes. I mean, there's nothing changed our outlook on that.
We'll now take our next question from Frederic Bastien from Raymond James.
I just have a couple of straightforward housekeeping questions. How do we think of the revenue ramp up in Clean Power now that you've got the ABB joint backlog?
Yes, what do you mean exactly? Like how much to expect from it, or . . .
Yes. I mean, is it the duration of backlog? Can we expect $1 million, $100 million [indiscernible] next year?
Yes. So the Linxon type of projects are smaller than the typical EPC projects that you would have in like an Infrastructure -- or even with Clean Power, like [ agro ] projects, for example, are much bigger than that. So we're talking range around $30 million, $50 million type of range. Could get a bit higher than that [ occasionally ] and so forth. So that's basically the type of projects that they turn over in months as opposed to multiyear projects.
The other one I have -- EDPM had quite a big Q4 last year. So you're facing tough year-over-year comp. Do you think you can match the performance that you had?
Well, I think it's a [indiscernible] why we have confirms our year-end guidance. So we're well within our year-end guidance for everything adding up, including EDPM.
We will now take our last question from Maxim Sytchev from National Bank Financial.
Just a couple of clarifying questions. In terms of the timing on the 407, the fact that right now you are soliciting international bidders, were these potential bidders not contacted at the beginning of the process? Or I'm just trying to get the timing right here.
Just again for clarity, we're not soliciting. We've had inbounds looking to be included in the process. And because we are not so far through the process, and we are including them into the process, which may add a few weeks to the process.
And then, Sylvain, the question around or the commentary around the 70% of net income to SDF conversion -- can you remind us the timing when you think you're going to be able to hit those levels?
Yes, I think we got to work -- obviously, we got to work through this year. I think we'll still have some headwinds to get to that in 2019. And from a conceptual calculation, 2020 would be a year I would expect to look that way. Now the way we ran the math is we take our adjusted net income on a consolidated basis, and then we take out some of the items, including some growth. So we made some growth assumptions in there of working capital just to support topline growth. There's some headwinds coming from some of the [ tension ] payments backed into that. And that's it, really. So I think as we look into '19, there's still going to be some cash out coming from some of the integration activities. There's still going to be some working capital stabilization going on into '19 as well. But that's the trajectory I see.
And is it fair to assume sort of a straight-line trajectory in 2019 between kind of now the current run rate and the 2020 expectation?
I'm sorry, can you repeat the beginning of the question?
Just in terms of how we should think about, well, 2019, are we aiming for half of that percentage conversion in 2019? Just in terms of if we can visualize the trajectory of improvement next year?
Well, yes, okay. The trajectory should be improving from '18. I can't give you a number as to where we will be between '18 and '20, just because [indiscernible] not sure our budget process. But I assume we get a good way towards the 70%.
And then, on taxes, Sylvain -- so again, I know that you're going through the budgeting for 2019 right now. But taxes in low 20% for core E&C, is that a fair assumption? Or should be modeling more like a 25% for 2019?
It might be a bit of a low assumption. But I wouldn't go as high as necessarily 25%. So I think in between, as we started the year, is probably a good place to be. It is quite volatile. I mean, the thing is, as we [indiscernible] work to our growth plan, it can move quite a bit. And some parts of it were only carrying really low tax rates. So depending on project profiles and stuff like that, that's what makes it [ plain ]. But for your modeling assumption, I'd say between 20%, 25%, the right place.
And the last quarter qualification -- just the fact that Champlain -- obviously, your [ fork ] kind of moving to the right, is there any negative store effect on REM? Because, I mean, obviously those 2 projects are interlinked?
I mean, they're 2 separate contracts. [indiscernible]. Sorry?
Sorry. Just the sequencing. Like if the traffic is going to be flowing by mid-2019, if there's any negative impact on REM, or just based on your kind of [indiscernible]?
No, I wouldn't think so. I mean, there's sort of fairly easy workarounds on that.
Thank you. There are no further questions at this time. Mr. Jasmin, I would like to turn the conference back to you for any additional or closing remarks.
Thank you very much, everyone. Have a good afternoon. Thank you for joining us today, and we'll see you next quarter. Thanks. Bye-bye.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.