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Good morning, and welcome to SNC-Lavalin's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]I would now like to turn the conference over to Denis Jasmin, Vice President, Investor Relations. Please go ahead.
Thank you, Ariel. Good morning, everyone, and thank you for joining the call. I hope you and your families are safe and well. We appreciate you taking the time to listen in today.Our Q3 earnings announcement was released this morning, and we have posted a corresponding slide presentation on the Investors section of our website. The recording of today's call and its transcript will also be available on our website within 24 hours.With me today are Ian Edwards, President and Chief Executive Officer; and Jeff Bell, Executive Vice President and Chief Financial Officer. [Operator Instructions]I would like to draw your attention to Slide 2 and 3. Comments made on today's call may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on SEDAR. These documents are also available on our website.Also during the call, we may refer to certain non-IFRS measures. These measures are defined and reconciled with comparable IFRS measures in our MD&A, which can be found on SEDAR and on our website. Management believes that these non-IFRS measures provide additional insight into the company's financial results, and certain investors may use this information to evaluate the company's performance from period to period. And now I'll pass the call over to Ian Edwards. Ian?
Thanks, Denis, and thank you all for joining us.Please turn to Slide 5. We continue to move forward on our strategic path, including building out our pipeline and delivering consistent performance and remain focused on exiting LSTK as effectively as possible. Firstly, we have continued to deliver solid results in SNCL Engineering Services, in line with our expectations. We continue to benefit from a diverse business mix, public sector work and long-term contracts and relationships.Secondly, the transformation of the Resources Service business is on track, and we have moved quickly to restructure and reduce overhead while winning new services contracts. In SNCL Projects, infrastructure LSTKs continue to be affected by productivity losses due to COVID-19 and some reforecasts. Current Resources LSTK projects performed well with a minimal loss. However, projects overall loss was disappointingly driven by an unfavorable arbitration ruling on a completed LSTK legacy resources project.Finally, our financial position remains strong. We have $1.1 billion in cash and successfully issued a $300 million bond in the quarter.Turning to Slide 6 and highlights from SNCL Engineering Services. This was another quarter of solid results for Engineering Services, underscoring the strength and resilience of the business, which delivered an adjusted EBIT margin of nearly 10% and $186 million in cash flow. Segment adjusted EBIT was slightly up compared to Q2, and EDPM, Nuclear and Infrastructure Services performance has remained consistent over the past 6 months. This demonstrates the essential and long-term nature of the Services contracts within our Engineering Services business.Please turn to Slide 7. EDPM continue to perform well in our core areas of U.K., Canada and the U.S. Revenues from the U.K. and Europe transportation and defense markets were particularly strong, and we continue to win new business. We were recently chosen to be the commercial delivery partner for the U.K.'s High Speed Rail 2 project. This is a state-of-the-art high-speed line, critical for the U.K.'s low carbon transport future.Winning work continues in the U.S., where we've recently won several advisory and design service contracts for the State Department of Transport. In the Middle East, where the market is currently slower, we're winning new work also and recently have been awarded the master planning work for the new leisure park with Six Flags. Overall, Q3 backlog was solid $2.8 billion, slightly higher than Q2, in line with Q3 2019. Our prospect pipeline remains robust at $27 billion.Please turn to Slide 8. Nuclear continues to perform well with results for Q3 ahead of Q2. The segment benefited from a good mix of long-term contracts, field services, ongoing engineering, which have helped deliver enhanced EBIT. The U.S. has been a strong growth market for Nuclear, with 2 contracts moving forward with the Department of Energy, both relating to decommissioning and waste management work at the Hanford Site in Washington State. Our proprietary nuclear technology has also been well recognized with a number of contract and industry awards.Moving to Slide 9. Infrastructure Services also saw higher performance in Q3 compared to Q2, with revenues and margin on target. Our operation and maintenance contract were at full service levels as deemed essential, and we're active with both health care and power service contracts. Revenues from Linxon, our substation JV with ABB, increased for the U.K. and Europe. We saw a number of awards for infra services in Q3, including scopes relating to the ongoing pandemic and master service agreements in the hydro space.Turning to Slide 10 and the capital highlights. In Q3, the phased reopening of the Ontario province and the Greater Toronto area meant that the 407 ETR reported an improvement in traffic compared to Q2. SNC-Lavalin received a dividend of $16.9 million from Highway 407 on September 3. All the concessions are performing very well, with contracts based on an availability model.Moving to Slide 11 and SNCL Projects. We generated a loss of $25 million in segment adjusted EBIT for infrastructure EPC projects, reflecting the continued impact on productivity as a result of COVID-19 and certain reforecasts. Negotiations continue to recoup these losses from our clients. We continue to expect that these Canadian light rail projects will be cash flow positive over their life.With 2 quarters already completed under COVID restrictions and as we move through October, we have greater clarity on the impacts to productivity. We're now seeing industry productivity impacts of between 10% and 25%, depending on the project and the activities involved. The highest impacts tend to be on projects with extensive activities, including manual handling of materials or working at height or in confined spaces, where the necessary safeguards to social distance during the pandemic have had impact on productivity. On all sites, additional hygiene breaks and the constraints on travel to site have also affected productivity. Despite the lower productivity, we continue to run down the LSTK backlog, which stood at $1.9 billion at the end of September.Turning to Slide 12 and the Resources projects. The combined loss for Resources LSTK and services was $75 million for the quarter, primarily due to an unfavorable arbitration ruling on a completed legacy LSTK project. Obviously, I am disappointed with this ruling, which was outside our internal and external experts' assessment. While we believe our current litigation risk assessment processes are appropriate, we're undertaking a further review of the remaining legacy LSTK litigation matters to provide additional assurance.On a positive note, the services side of the business performed better than expected, and the loss on active LSTK projects was down to approximately $3 million. The enhanced performance of the services was as a result of our ongoing efforts to rightsize the business through divestment and overhead reductions combined with work winning and better execution. As previously stated, we remain on track to largely complete the backlog of Resources LSTK by the end of the year.Moving to Slide 13. We can see a significant reduction in LSTK backlog since our strategic direction in June 2019 to stop bidding on this form of contract. You can also see that the Resources Services backlog that is currently contained within this sector has remained stable at around $1 billion. This provides further confidence with our Resources Services transformation. Our goal, as you know, is to exit LSTK, and we continue to focus on that.Moving to Slide 14 and the transformation of our Resources business announced in Q2. As stated, we have made significant progress in Q3 as we move towards profitability in the second half of 2021. In Q3, we announced the sale of the South African Resources business, divested our European fertilizer business, reduced the overhead and headcount to approximately 10,000, strengthened the order backlog with renewed of key service contracts in core countries. We remain on track to break even by the first half of '21 and turn a profit next year.With that, I'd like to move to Slide 15 and conclude my remarks before Jeff takes you through more detail on the Q3 numbers. Our performance in the quarter continues to underscore the strength and resilience of the Engineering Services business and our continued closeout of legacy LSTK business. Currently, we are focused on 4 priorities to unlock value for all stakeholders: one, closing our LSTK business successfully; two, ensuring continued consistent performance across our core markets and geographies in Engineering Services; three, positioning the company for a sustainable future, driving organic growth by sharing capabilities across our core markets, including looking at those capabilities that can help us enable clients to deliver sustainable infrastructure and clean energy and leveraging technology and collaborative working to apply our major project expertise in new contract models that benefit our clients and the outcomes of projects; and lastly, four, we are building a connective, collaborative organization to efficiently deliver our overall strategic direction. I firmly believe that we have the business focused on the right markets and the right geographies, and we're taking the right road to achieve our future.With that, I'll thank you and I'll pass on the call to Jeff.
Thank you, Ian, and good morning, everyone.Starting on Slide 17, the company reported an IFRS net loss attributable to SNC-Lavalin shareholders of $85 million or $0.48 per diluted share in Q3 2020 compared with a net income of $2.8 billion or $15.70 per diluted share for the corresponding period of 2019. Q3 2019 included a significant gain on the disposal of a 10.1% stake of Highway 407 ETR of $2.6 billion or $14.74 per diluted share. Note that the Q3 2020 income tax expense of $45 million included a $53 million reduction of deferred income tax assets, resulting from a reassessment of the future recoverability of loss carryforwards in the U.S., while the Q3 2019 income tax expense of $309 million included $83 million of income tax recoveries on capital losses related to the capital gain on the Highway 407 ETR disposal proceeds.The Q3 2020 net loss also included restructuring costs of $33 million before taxes mainly related to the Resources Services transformation. Year-to-date, we have recognized $58 million in connection with the Resources segment transformation, which is in line with management's expectation of between $50 million to $60 million for the year.The adjusted net loss from PS&PM in Q3 2020 amounted to $58 million or $0.33 per diluted share compared with an adjusted net income of $165 million or $0.94 per diluted share in the corresponding period in 2019. The variance was mainly due to lower segment adjusted EBIT in both Engineering Services and Projects segments and a negative variation in income taxes. The company continues to maintain a strong financial position. At the end of September, we had $1.1 billion of cash on hand and an additional $2 billion available to be drawn on the revolver credit facility. Now looking at the segments in more detail. On Slide 18, we can see SNCL Engineering Services delivered solid results and continues to be resilient through COVID-19, with $1.4 billion of revenue in the quarter, in line with the second quarter but lower by 3.6% when compared to Q3 2019. Segment adjusted EBIT was $142 million, representing a margin of 9.8%, in line with our expectations. The EDPM segment revenue totaled $899 million, a decrease of 7.3% compared to Q3 2019, as strength in several sectors, including transportation and defense within the segment core region of the United Kingdom and Europe, was more than offset by the adverse impact of COVID-19 in some other markets, notably aviation and commercial property. EDPM segment adjusted EBIT was strong at $81 million, a 9% margin, in line with our long-term target range of 8% to 10%. Note that the Q3 2019 margin of 10.6% included some positive project settlements.In Nuclear, segment revenue increased by 5.5% to $225 million, mainly due to higher volumes across the geographies. Segment adjusted EBIT was strong at $36 million, a 16.1% margin, above our long-term target range of 13% to 15%. Infrastructure Services experienced a 1.6% revenue increase, mainly due to the growth in Linxon's revenue in the U.K. and Europe region. Segment adjusted EBIT of $25 million drove a 7.8% EBIT margin, also higher than our long-term target range of 5% to 7%.If you turn now to Slide 19, the SNCL Engineering services backlog continues to demonstrate resilience against the backdrop of COVID-19 and at the end of September was $10.7 billion, including awards for the third quarter of $1.2 billion. EDPM had a particularly good quarter with an ending backlog of $2.8 billion, up 1.6% versus the end of Q2. Bookings in the quarter of $943 million resulted in a booking-to-revenue ratio of 1.05, in line with the year-to-date ratio.If you turn now to SNCL projects on Slide 20, in line with our LSTK exit strategy, revenues for Q3 2020 continued to decrease. Infrastructure EPC Project revenues fell by 18% to $237 million, mainly due to the continuing backlog runoff of our major LSTK construction projects. The Infrastructure EPC Projects segment delivered a negative segment adjusted EBIT of $25 million compared to a small profit of $2 million in Q3 2019. This quarter's loss was mainly due to some cost forecast adjustments and lower productivity due to revised working conditions caused by COVID-19. Note that during the quarter, the Husky White Rose project backlog has been reclassified from LSTK construction to Reimbursable & Engineering Services as this project has been derisked following the changes in contractual terms.The Resources segment recorded a negative segment adjusted EBIT of $75 million, as you heard from Ian. The LSTK project business recorded a $61 million loss due to the $58 million provision taken for the unfavorable arbitration ruling. The Resources Services business, which is currently being transformed to complement Engineering Services, recorded a loss of $14 million, slightly better than management's expectations as nonprimary operations continue to be wound down.Turning to Slide 21. The decrease in Capital segment adjusted EBIT was mainly due to reduced contributions from certain concessions and lower dividends from our Highway 407 ETR investment, for which we received $17 million of dividend in Q3 2020 compared to $42 million in Q3 2019 due to our reduced ownership stake. Traffic volumes continued to be affected by the COVID-19 situation, but we believe these are exceptional circumstances. And with 78 years remaining on the concession, we continue to strongly believe in the long-term value of our investment.Moving to Slide 22. Net cash used for operating activities was $136 million in Q3 2020 compared to $51 million in Q3 2019. The variance was mainly due to a timing difference between the $200 million payment for the first wave of claims in the pyrrhotite case and the receipt of insurance coverage proceeds expected in Q4 2020, which should cover a substantial portion of the $200 million.SNCL Engineering Services generated cash flow from operations of $186 million due to strong EBIT conversion and working capital position, while SNCL Projects continue to consume cash with a cash outflow from operations of $73 million. While SNCL Engineering Services should continue to see strong EBIT conversion to operating cash flow in Q4, SNCL Projects will continue to consume cash, including the arbitration settlement payment.Combined with some unwinding in Q4 of the temporary working capital balance benefits related to COVID-19 government payment terms and sales tax deferrals outlined in our Q2 results earnings call, net operating cash flow in Q4 is expected to be slightly negative. During the quarter, we have successfully issued $300 million of debentures due in 2024, for which the proceeds were used to fund the repurchase of a portion of our Series 1 debentures and repay certain outstanding indebtedness under our revolving credit facility. At the end of September, the net recourse debt-to-EBITDA ratio on the revolver credit facility, calculated in accordance with the terms of the company's credit agreement, was 1.7x, well below the required covenant level of 3.75x.And finally, turning to Slide 23. With respect to Q4 2020 outlook, we expect, assuming no significant deviation from the current COVID-19 worldwide situation, that SNCL Engineering Services revenue should decrease by a low to mid-single-digit percentage compared to Q4 2019, and we have tightened the outlook for segment adjusted EBIT as a percentage of revenue between 8.5% and 9.5% for the same period.This concludes my presentation, and we can now open the line for questions. Thank you.
[Operator Instructions] Our question comes from Jacob Bout of CIBC.
My first question here is, so you're indicating that you're undertaking a further review of the remaining LSTK legacy litigation matters. How many of these projects could be subject to this?
Okay. Yes. Thanks, Jacob. I mean let's just walk through how these things come about first and then put some context around what the number is in the whole. I mean, clearly, closing out, LSTK is a priority for us in exiting the business. The intent of doing that is to complete all the live projects and close out anything that's from a legacy perspective.Now generally, projects, they get settled in terms of -- the accounts get settled pretty quickly after we've finished the job in relative terms. And that's what we would expect to do by working with our clients and negotiating them out. Now in some cases, those actually turn to dispute. And obviously, we're not in the business of not getting paid for the work that we've done, and we're not about to leave money on the table. So we pursue recovery through a dispute or a litigation where we feel that we can get recovery.So that's a much smaller number of instances than the whole. I mean in this particular case, it goes back to the early part of last decade. So this is a long outstanding project that's been through an arbitration. And as we go through those arbitrations, we make the assessment of what the outcome is going to be. And obviously, in this case, we're pretty disappointed. So the answer to your question is, in context to the closeout of the whole of LSTK, we're talking about a relatively small number of projects here.
Okay. And then my next question is just on the margin guidance you gave for EBITDA margin between 8.5% and 9.5%. I think that's at the higher end of your previously disclosed H2 guidance range. Is this just a mix issue, a bit more nuclear? Or what's going on there?
I'll let Jeff answer. I mean it's a bit more of a kind of stronger fix as we close out the year. But Jeff?
So our previous guidance was 8% to 9%. And as I said in my script, we've tightened that to 8.5% to 9.5%. Now you'd be correct in observing that the middle point of both those ranges is effectively 9%. I think the difference, though, at this point versus where we were at our Q2 earnings result, is that we've got another quarter in a sense of the COVID backdrop against the business under our belt. And therefore, I think we have better visibility on the impact that it's having and how the business is responding. And as a result, with 1 quarter to go, we feel confident about tightening that range to 8.5% to 9.5% versus 8% to 10%. So I think that's where we think our guidance is comfortable.
Okay. And as we go forward here and we do more of a ramp in the Nuclear work, is that higher-margin work for you?
Yes. I mean I think, as we've guided -- as you've seen this guide, we guided to 13% to 15%. Now I think what we would say is, obviously, that is a higher-margin business. It has to do with some of the very unique capabilities that we can provide to the market in that business and the importance of the quality and effect of the supply chain within the nuclear industry itself.I think over time as well, some of our growth areas, particularly in the U.S., will come through joint venture net equity or income pickups where we'll effectively be picking up revenue and margin in the same amount. So theoretically, over time, you might see an increase as well in the reported margin percent, although that will as much have to do with us picking up the net income as opposed to revenue.
Our next question comes from Mark Neville of Scotiabank.
If I could just follow up on Jacob's question on the litigation. I appreciate your comments. I understand it's a small number of additional projects. But is there any way to sort of quantify the potential risks and/or sort of give us some comfort that this is really a one-off event?
Yes. Yes. I mean, clearly, we're really disappointed. I mean that's the first thing I'd say. This is a $58 million deviation from where we expected this to land, so we're disappointed. And I'd probably explain -- like I said, I mean this arbitration has been running for over a decade. And the way that we assess the outcome of these kind of arbitrations and litigations is obviously with external counsel, external legal advice and external quantum analysis, and we use our internal assessment process, risk assessment process to make a position that we either provide for and that we report on based on all the information. And that's a live process. I mean as it will go through its hearings and as we get further information, that process is updated, and we adjust any provisions or any reporting against that as the case unfolds.Now in this particular case, the hearing was some time ago and the actual award was in Q3. So we do think, having kind of got this, which was disappointing, that it's important to look at the few cases that we've got and do a re-review of those cases. We will kind of expect from that little change because the process we have is pretty robust already, but we will do that to give us absolute additional assurance that there's nothing there that needs updating.
Okay. And in this particular case, is there an appeal on your end? Or is this sort of...
Well, sometimes. I mean it depends on the stage of the litigation, and it depends on the actual process itself. In this case, it's somewhat bounding. So obviously, that's why we've taken the loss.
Okay. And just moving on. Just within the Projects backlog and the Infrastructure, and I appreciate you guys sort of now have a better handle on where the inefficiencies exist. But is there any sort of remediation or actions that you could take to sort of get this to a breakeven sort of business in the current environment? Or we just sort of need sort of more "normalized" working conditions before you sort of can stem the losses there?
Well, no, for sure. I mean we are actively looking to recover our losses from COVID. I mean the contracts -- I mean we're down to 3 contracts, basically. We're down to Trillium, the REM project and Eglinton. And in all those contracts -- and they're all slightly different, and obviously, the clients are different. There is avenues of recovery through the contract, and we will pursue those. And we have yet to recover anything, to be frank, but the discussions and the kind of contractual case is being put forward based on the impacts as we see them. So in the fullness of time, we would expect to recover, certainly, the loss that's specific to COVID, and we will pursue that.
Okay. Maybe just one last one with Jeff. Jeff, I just -- I didn't catch your comments around Q4 cash flow expectations. There was -- you mentioned a few sort of discrete items. I just didn't catch all.
Yes. No, that's fine. What I effectively said was we expect to see continued good EBIT conversion to EBITDA and operating cash flow in Q4. We will continue to see a use of cash in the SNCL Projects space. And as Ian was saying, there's a few contributing factors to those, including the need of SNC to recover on some of the COVID-19 sort of productivity impact.There's also an element, and I talked about this in Q2, of government support programs where we see prompt payment terms that are advantageous to us. We see sales tax deferrals, for instance, in the U.K., all of which have been effective in terms of providing us with positive working capital, but will unwind to some extent through the end of this year but also into 2021. So the combination of all those means that our best view is that operating cash flow will be slightly negative in Q4.
Okay. Is that also with the $58 million settlement?
Yes. Yes, exactly. I think I said that in my script as well, but that's obviously a contributing factor also. And I think the other observation to make is 9 months into the year, we're actually just about breakeven from an operating cash flow perspective. We're slightly positive, I think about $17 million. So obviously, where we end up in Q4 is effectively where we'll end up for the full year as well.
Our next question comes from Sabahat Khan of RBC Capital Markets.
Just looking at the Resources segment, maybe outside of this arbitration ruling against you. I know that you've got about 1 quarter and a little bit of work left. How are you feeling about the remaining Resources LSTK work that you're doing?
Yes. I mean we're -- I mean I think on the presentation, it shows $0.2 billion of remaining backlog. It actually showed that in Q2. And it's not that we haven't had any movement in the quarter, it's just a rounding. We've burned about $60 million in the quarter of backlog. And as you can see, the loss is pretty minimal from those projects. And as we get through to the end, then obviously, we're looking forward to putting the whole of the Resources LSTK business behind us.Now I would -- we've always said that there's no -- it's not zero risk going forward, but I think we've got a pretty good handle on the rundown to the end. And we should be on track to put this behind us, certainly, by the early part of next year. So I think it's a good quarter in terms of progress and a good quarter in terms of closing out.
Okay. And then I was seeing quite a few headlines coming out of the U.K. with the government focus on nuclear. The Canada government, I think, is investing a little bit in some SMRs here. Can you maybe talk about the pipeline of Nuclear and kind of where you're involved or what some of those opportunities might be for you?
It's specifically nuclear or just generally?
Nuclear more so but generally as well.
Yes. Yes. So I think our range of capability in nuclear is really extensive because it comes from several origins. So we have decommissioning capability. We have cleanup nuclear waste remediation capability. We have new build capability that's been applied to the Hinkley Point power station in the U.K. We only can do technology. We have lots of vendor support to existing CANDU reactors. And we have a technology business which really is quite innovative in providing technology solutions to the nuclear industry globally.We see really good opportunity in absolutely our core markets, which is the U.K., who are committed to build new nuclear. There's a lot of rhetoric at the moment about Sizewell and whether the Sizewell project will go ahead. We will be there with the client, EDF, if that goes ahead. We have a great relationship with EDF.There's significant opportunity in decommissioning. I mean all the power plants in the U.S., the U.K. and, to some extent, in Canada are coming to the end of life. And our expertise in decommissioning and remediating existing power plants to the natural environment is something which we're obviously very proud to have this capability and that we would expect to obviously grow our market from.So I mean, obviously, I could talk for quite a long time about this because it's a pretty exciting part of our business, but I think that gives you a bit of a flavor.
And then just one last one for me maybe on the infrastructure EPC side. You called out 3 big buckets, I guess, REM, Trillium and the Eglinton project. And we've seen some headlines around some litigation started on the Eglinton project. If we were to think about where you're looking to get your recoveries or some cost offsets going forward, I guess is there one we should focus on more so than the others? Or are your cost headwinds due to COVID spread evenly among the 3 big ones?
No. I think the productivity issues that we're facing are pretty even. And it depends on the absolute specific nature of the activities on the job. So tunneling, for example, is a confined space, and it's very difficult to social distance and there's a bigger impact. Traveling to height in an elevated platform is difficult because you can only get 2 people on a platform and normally, you'd get 20. It's that kind of thing that leads to the productivity loss. But we're absolutely experiencing it on all 3 jobs, and we're absolutely pursuing our recovery on all 3 jobs.And as you rightly say, we felt on Eglinton that the right step to take, having tried to pursue this for quite some time, is to file a claim into court. And that job, we really need to get alignment with our client as to the impact for many reasons, not just recovery, for time reasons, and I'm sure we will absolutely get there. But these things take time, and they obviously take demonstration.
Our next question comes from Yuri Lynk of Canaccord Genuity.
I wanted to follow up on the 3 Canadian LRT projects, just to be clear. In your pursuit of these -- to get these COVID losses back, if you're not successful in recouping these costs, do we see a cost reforecast in the future because of that? Or do the numbers already assume that you're not going to get these recoveries?
I think what I would say is we're making a prudent assessment of where we think the outcome is going to land because, obviously, we're in the business of exiting this business line. We don't want to carry risk forward into the future. So I think we're being prudent, that's the way I would answer that.
Yes. I think that -- this is Jeff. I think that's right. I mean, obviously, we take our best assessment as we've done it at the end of Q3 on that, where we're concerned or see a position where we think we need to reflect that in the financial statements we have. But as Ian said earlier, we think under the different contracts, we're entitled to recover with significant amounts of COVID-19 impact.
Okay. And to circle back on the arbitration issue, is there a way to quantify the number of projects that might be -- that you're still in arbitration on? And I guess a follow-up to that is, why -- if you want to have a robust process, why wouldn't you just book a loss, assume you're going to lose these process? And if you do, then you don't have to report anything, it's already in the numbers. And if you win, then it could be a positive reforecast. I'm just trying to understand what's still left out there in terms of tail risk and if there's any change to your approach warranted.
Yes. I mean -- this is Jeff. Maybe I'll take a view and respond to that. As you heard us say, there's a small number of these. We generally settle out and negotiate commercially on these. But there are a small number of any significant value that are there in some form of litigation from many years past, and that's where this one is.As you heard Ian say, I mean we employ expert advice, internal views, external views to try and make the best assessments. And part of the reason for that is in some of these cases, you can get quite a wide range that often ends up in litigation. One side asks for a larger number, another side asks for a smaller number. And therefore, you have no choice but to try and take your best assessment of what you think the outcome will be based on the best input that you can get. We've obviously had a look at that as part of receiving this arbitration settlement. We think our provisions, where necessary, are appropriate, but we'll absolutely, essentially double check that and triple check in terms of how we got the best view on all of them. So we think that's the right way forward, and that's the process we'll undertake here over the next few months.
Okay. I'll sneak in one more for Jeff while I've got you.
Sure.
I think we've had a change to the calculation of your net debt-to-EBITDA ratio, and I don't think we've got an update in a while on that. So can you just give us the covenant if it's still 3.75 and where you peg your current ratio in relation to that?
Yes. I mean I think, as always, the slightly tricky part is that the calculation under our covenant ratio for the revolver credit facility isn't a straight net debt to EBITDA. There are a number of adjustments that happen within there. And therefore, as we go forward, we are thinking about, certainly as we get into the first half of next year, how we can be clear in terms of our thinking going forward as the LSTK projects have continued to run down further and we have better visibility on what cash flows look like going forward and our ability to forecast those.Without some of the variability that comes with the LSTK projects, I think it will be easier to link a net debt to EBITDA from the financial statement, so to speak, as opposed to just the covenant ratio calculation. But as you saw in what we were doing, certainly, at the -- with the level of cash and financial flexibility that we have, our focus on cash flow and our level of net debt, we are well within that covenant ratio at the current time.
Our next question comes from Benoit Poirier of Desjardins Capital Markets.
So first question, with respect to the loss of productivity around the pandemic, could you maybe quantify the amount that has been lost so far and the potential amount that you're looking to recover from clients? And any thoughts about the opportunities around the government subsidies?
So I think -- so as we've incurred these losses, as we've incurred them through Q2 and Q3, I think we've been clear what our assessment of that is. Now obviously, we are in somewhat discussion negotiation and proof of loss with all the clients. So we don't actually want to get into the finite numerical details of that.But what I -- just to -- maybe, Jeff, if you can perhaps just add to that from what we posted in Q2 and Q3?
Yes. So we -- so for Q3, there was about $22 million of benefit. It's in one of the notes to our financial statement, Note 16. I guess I'd make a couple of observations. The first is that's globally, so that's not just Canada, for instance. There's a government support program, for instance, in the U.K. around retaining furloughed workers. So the observation I'd make is that's the government grants we've received. But really, that is there and has been used to offset the increased costs we've seen from either holding on to workers and employment levels that otherwise we would not have or returning workers from furlough or temporary leave. So we use it in that way.
Okay. And for Resources Service business, could you talk about the ongoing restructuring efforts and whether you have more clarity, visibility on the potential margin profile of this business in the long term?
So I think the first thing I would say is what we said we would do in Q2 is on track. I mean I think we gave guidance for the Services business in -- for Q3 and for Q4 and then into 2021, return it to profit. So actually, we've come in slightly ahead in terms of loss than we said. So we're slightly better than what we put out there for progress in Q3. So obviously, we're pleased about that.I think the other positive is that to get this business profitable, it's about rightsizing the overhead and winning work. Certainly, the rightsizing of the overhead is going well. We're down to about 10,000 staff now, which was a significant decrease over 2019, where we were around about 15,000 staff. So we've continued to push ahead with the restructure and the rightsizing.In terms of winning work, we're really pleased to have picked up framework agreement in the quarter from BP. This is exactly the kind of project that we want, exactly the kind of mandate that we want, which gives us the framework to do engineering services and inspection work on a number of their assets. And as we said, I think when we put this together last quarter, working for IOCs and NOCs is the way forward for this business. And I think before we get ahead of ourselves, obviously, we've got to continue this effort to get it into profitability during 2021, but what we're looking beyond that is to get the profitability up to a complementary level to the other Services businesses, and obviously, that's the intent beyond '21.
Okay. And very quick one for me, pyrrhotite case, could you provide additional details on the case and maybe share your level of confidence that this payment will be reimbursed? And any color about the time line with respect to the pyrrhotite case?
Sure. It's Jeff. Why don't I take that one, Ian? So I think what you've seen as I -- and as we mentioned in the presentation, so the first wave of claims related to pyrrhotite required a payment or at least our share of the payment of $200 million. And we have clarity, having actually gone through the Québec court system, that we will be paid $140 million, it should be this quarter, from the insurance group. And in fact, there's another $30 million on top of that.So there's about $175 million of the $200 million that we would expect to receive back on that. And the rest, we had already provided and provisioned for in prior periods, so we don't see a change from a P&L perspective as a result of that. Obviously, there's a second wave of claims going on, but that settled out the first wave.
Our next question comes from Devin Dodge of BMO Capital Markets.
You have a number of framework agreements with clients in your Resources Services division. Just wondering, are you -- have you seen -- or has there been any movements toward revisiting the pricing under these agreements? On the one hand, the pandemic may have impacted your cost performance, but on the other, I think clients might be getting squeezed by lower commodity prices. Is there any color that you can provide there?
No. I don't see that on the framework agreements that we've got in the Resources business. I mean I think that the LSTK part of the Resources business, which obviously we're going to exit, is probably becoming more competitive as the market tightens and there's obviously been oil price fluctuation. But no, no, I don't think we're seeing that kind of pressure yet. We're very comfortable with the level of profitability in the framework that we won from BP, so no signs yet.
Okay. Okay. And then maybe a question for Jeff and picking up on an earlier question on the leverage. But I guess what are you targeting in terms of financial leverage for the business? Does it change as those LSTK projects wind down? And then I guess at what point would you feel more comfortable being more active on the capital deployment for another buybacks or M&A?
Yes. No, I think it's a fair question. I mean I think I'd start with, 2020, in my view, has about -- has been about building financial flexibility and resilience. I think the first catalyst with this -- for this was just coming off everything from 2019, but then obviously, COVID has put us in the same situation. So as a result, very focused on cash flow, converting earnings to cash flow, preserving cash flow and really getting the business highly focused on that.I think as we go forward, the -- and particularly, the LSTK portfolio that creates generally variability to our cash flow delivery and our cash flow forecasting, and you can just see that over the last few quarters. But I think we've said previously, as we get into the first half of next year, we will have delivered a significant amount of the LSTK runoff. You saw from Ian's slide, we started back in -- mid-2019 around $3.4 billion between Infra Projects and Resources. We're down to just over $2 billion. By the end of the year, we would forecast to be just under $2 billion and have delivered a fair number of those projects. So I think as we get into the first half of next year, we have a lot better confidence in our ability to project that.And I think our demeanor generally at this point is to have a balance sheet that would be consistent with investment-grade financial metrics, but we'll take our -- we'll have to take a view on how fast and how long it takes to get back to that. And as a result, I would expect that our kind of gross debt would be at a similar or a lower level than where we are now. And I think at the same time, that starts to give us some opportunity to think in 2021 about where we have positive cash flow, how we would appropriately deploy that, but we'll need to come back and give more visibility on that as we get closer to that point in the first half of next year.
Our next question comes from Frederic Bastien of Raymond James.
I was wondering if you could please go back to the comment you made about the Husky White Rose project being removed from the LSTK backlog. What's behind that?
Yes. Well, firstly, the project has gone through 2 postponements. As we hit COVID, the client was pretty quick to postpone the project for a year. And as we've gone through COVID and it's prolonged, currently, our understanding is that the project is not going to restart until 2022, although I do believe that's under review.In addition to that, the contract was somewhat not a traditional lump sum contract anyway. It adds some risk sharing in it. And at the beginning of this year, we went through a period with the client of kind of relooking at the contract and recasting the contract to the point that it's not something we would class as an LSTK now. The risk sharing is not under that profile. So if the project does come back, and we are not clear about that right now, but if it does, it will be a good project for us with limited risk.
Okay. But did that decision compel you to take a provision on the project in the quarter? I'm just curious if there was any financial impact on that.
No. No. No, the client has actually been very fair in its approach to shooting the project down. I mean we've got to have people there to kind of maintain the status of the project, so it can be restarted. So we've worked closely with the client, and I think we've got a good relationship there where we've been flexible to what they need. And obviously, we've not incurred any loss from it.
Okay. And can you provide an update on how the Trillium project is going?
Well, it's -- obviously, it's having some effect through COVID, but pretty much like the rest of the jobs, it's relatively early days in terms of completion. The big year for Trillium project is next year. I mean we're entering the winter phase now where works will become limited until spring next year, but we've got a big campaign planned for next year, and it's a critical year for the success of the job. Apart from that, we're pretty much on track. But as I say, the proof of it is really in next year's work.
Our next question comes from Chris Murray from ATB Capital Markets.
Just maybe going back to the EPC projects for a second and just trying to understand how we should be thinking about margin profile going forward. Let's assume that -- I think in your comments here, you indicated that you're learning how to work within some of the COVID restrictions now. And let's assume your discussions with your clients will be ongoing, but how do we think about the margin profile over the next little while? Because I know you've talked about kind of free cash flow neutral, call it, historical margins, but just with the reforecast now done, how do we think about this for Q4 and into '21?
Yes. Ian, maybe I'll sort of take a crack at that. Chris, I think -- and you're absolutely right, we've talked about them being cash flow positive over their life. As a result, we'd obviously see them as profitable over their life. Part of the reason for the comment, of course, particularly on the cash flow side, is that the cash flows can be a bit lumpy because, obviously, we're incurring the cost often on a reasonably ratable way, whereas the cash payment profile within the contracts can obviously be a bit more lumpy that way. As you heard Ian say, we are where we're seeing cost impacts, taking those as we go along. We do think with -- and so that ultimately may drag the margin down a bit. But ultimately, when it comes to COVID, we think that the costs themselves are largely recoverable through time and through money within those contracts.So I think part of it is, it's early days. We've been taking this quarter-by-quarter. I mean it seems like we've been living in COVID forever. But in reality, at least here in Canada with respect to these projects, the impact has really just been in the last 2 quarters. So we've been trying to assess that quarter-by-quarter. The position we've taken at the end of Q3 is the visibility that we see, and I think that takes us into the winter. And then as we get into next year, we'll, we believe, have a chance to have worked through some of these issues with our clients and have a good idea about what that means for the construction period next year.
Okay. That's helpful. And then my other question just is in terms of -- we talked a little bit about the Resources business. And certainly, some of the comments, I think, were more energy-focused. But one of the questions or some of the commentary -- and maybe it's a different way to think about if you're thinking about Oil & Gas, but just energy broadly, part of the transition -- and the energy transition has also been some discussion around the mining business and resource requirements to build some of this new infrastructure. Can you just talk a little bit about how you're seeing some of the funding, especially out of the Canadian government, that's looking to create this transition and how you think that, that may impact you in the coming year?
You mean funding of energy and infrastructure, the whole market, Chris?
Yes, exactly.
Yes. Yes. I mean I think the term that is generally being used in our core market is shovel ready, shovel worthy, right? And the shovel-worthy component really means investment in infrastructure that gives an economic benefit but also is sustainable in its nature. And there's several announcements that, obviously, you'll be familiar with in Canada, but it's the same -- it's pretty much the same story, I think, in -- certainly in the U.K. and to some extent, in some states in the U.S.And that for us is a very, very big positive because actually delivering sustainable infrastructure and actually -- how we think about that and both the type of capabilities that we've got and how we apply those capabilities are pretty much in our sweet spot of the capabilities we have. I mean if you think about clean energy, obviously, we've got extensive capability around hydro and clean energy wind farms in the U.K. We've got a nuclear capability which is, in our consideration, clean energy. We have just won this mandate in the U.K. for the high-speed rail, which absolutely because of the Net Zero 2050 legislation has to consider its carbon footprint, and we've done a lot of work looking at the carbon footprint in partnership with the client there.So we see the whole industry moving a bit more towards an outcomes-based industry rather than just thinking about let's work on an LSTK basis and get the cheapest price we can. So I think where we're taking the company and the capabilities we've got play directly into this.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Jasmin for closing remarks.
Thank you very much for joining us today. I know there is a few analysts still in the queue there, but we are running out of time, but please don't hesitate to contact me. I'll be pleased to answer any of your questions.Thank you very much, everyone, and have a beautiful day. Bye-bye.
Thank you.
Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.