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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the SNC-Lavalin Fourth Quarter 2017 Earnings Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Mr. Denis Jasmin, Vice President, Investor Relations. Please go ahead, sir.
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 3 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, accordingly, are subject to change. We disclaim any obligation to update any forward-looking statements except as required by law. A description of the risk factors that may affect future results is contained in the company's MD&A available on our website and in our filings with the Canadian Securities Administrators.During today's call, we will also discuss certain non-IFRS financial numbers. You can find reconciliation of these numbers with comparable IFRS measures in the presentation and in our MD&A.With that, I will turn the conference over to Neil Bruce. Neil?
Thank you, Denis, and good afternoon, everyone.I will briefly review our Q4 results and discuss our 5 sectors then Capital. Sylvain will then cover the Q4 financial aspects in more detail.Before I get into the details of the quarter, let me start by saying that I am very pleased with what we've achieved overall in 2017. We delivered $382 million in net income, representing a 50% increase compared to 2016. This represents $2.15 E&C adjusted EPS, which is an increase of 42% over 2016. We also delivered an overall EBITDA margin for E&C of 6.9% compared to our long-term target of 7%, which we set for to be achieved by the end of 2017.We created the SNC-Lavalin Infrastructure Partners vehicle to monetize our mature capital investments, transferring 4 mature assets into it. We divested and discontinued certain noncore and low-growth businesses, further de-risked our business model and applied tighter governance mechanisms to proactively manage our project portfolio. And of course, we also successfully acquired Atkins, the largest and most transformative acquisition in our history.The integration of the Atkins business continues to progress well and we will be fully completed in 2018. By bringing Atkins into the fold, we've created a compelling life-of-asset service with deep technological expertise that's geared for greater project and technical complexity across higher-margin businesses. We are now one of the world's few professional services and project management companies able to take on large multibillion-dollar projects from concept to reality.Looking ahead, our strategic objectives remain the same: Continuing our progress in operational excellence, building a client-centric organization with a performance-driven culture, organically growing our business and delivering superior shareholder returns. In 2017, we made significant progress against our strategy and we plan on continuing to consistently deliver on these objectives to deliver on our 2020 vision.Let's now look at our Q4 results. Let's start on Slide 4. Our adjusted net income from E&C for Q4 2017 was $138 million, a significant increase of 88% compared with Q4 2016. The revenue backlog totaled $10 billion at the end of December 2017 and total new project awards were strong at $1.9 billion for the fourth quarter.It is important to note that the following key projects have not been included in the year-end backlog. Montreal's REM project or the EPC work on the operations and maintenance contract for which SNC-Lavalin was recently selected as the preferred proponent as well as the Stockyard Hill Wind Farm contract in Australia. Upon finalization, these would add approximately $2 billion to the backlog.Also, if you add to this the fact that under IFRS 15 we now have to recognize our long-term O&M signed contracts to the backlog, these could take the company's total backlog to over $15 billion in 2018. And this does not include a considerable number of other large Canadian infrastructure projects that could also be awarded towards the front end of 2018.The liquidity was good in quarter 4 2017 and Sylvain will review this in a minute. Given the company's liquidity profile, long-term outlook and revenue backlog level, we are raising our quarterly dividend today by 5%, sustaining a 17-year trend of increases.We are also today introducing our 2018 outlook. We are targeting a significant increase with an adjusted diluted EPS from E&C in the range of $2.60 to $2.85. While we anticipate some seasonality in our E&C business and lower adjusted diluted EPS in Q1, we expect a gradual increase throughout the remainder of the year. We are also targeting an adjusted consolidated diluted EPS in the range of $3.60 to $3.85, which nicely positions us to deliver on our 2020 vision.Let's now look briefly at each of the sectors, starting on Slide 5. Our Oil & Gas sector performed -- performance had another good quarter with an EBIT margin of 11.2%, closing the year with 7.2% compared with 5% in 2016. Our efforts to focus on client delivery through an efficient delivery model helped us in raising margins against lower revenues. Margins have been improved by creating innovative, technical and commercial solutions for clients and reducing our SG&A costs. We're optimistic about the near future as we are seeing rising levels of customer engagement, market sentiment and overall greater confidence across the Oil & Gas industry. Our recent increased levels of bidding activity demonstrate what we believe to be a progressive uptick in demand for Oil & Gas services.Considerable strength has also been added to our engineering services through the addition of Atkins' offshore upstream technology and capabilities. We are seeing good interest in our newly combined engineering and consulting services and we're already seeing positive signs from clients of both legacy organizations and as the offshore space to pick up again. We believe to be well-positioned to grow in that area.As for the backlog, it is important to note that our Oil & Gas business mix in terms of services and commercial offerings has significantly changed over the last 2 years. The offerings in this segment, as planned, have grown more towards services, including engineering and consulting services, and developed into longer-term framework and master services agreements. While the lifetime of such agreements are very valuable, these do not always fit within our recognition of backlog. Therefore, we are seeing much more book-and-burn scopes of work within this sector.Turning now to Slide 6. We continue to see improving signs of growth in our Mining & Metallurgy sector. We believe that this sector is on the edge of renewed demand and we are optimistic to see our clients restart significant investments in their capital expenditures for the second half of 2018.Looking ahead, we see a wide variety of attractive prospects and opportunities in copper, gold, fertilizers and in commodities related to rechargeable batteries for cars, mobile phones and other electronic devices, particularly in the Middle East, Australia and Latin America.We are pleased to be recently selected as an Alliance Partner on the Clean TeQ Sunrise project in Australia, which will be delivered through a combination of our Mining and Oil & Gas teams together, demonstrating how we can pool our expertise and capabilities across sector.Now moving to Slide 7. Following a review of the company's organizational structure in both integrating Atkins and more effectively serving our clients worldwide, it was decided to make an important change to our Power sector effective from the 1st of January 2018.The previous Power sector of SNC-Lavalin and the power sector elements of Atkins' Energy business create the foundation for 2 new sectors to be called Nuclear and Clean Power. It was also decided to exit the unprofitable EPC part of the Thermal business, therefore eliminating very competitive pressures and execution risk.The Atkins and SNC-Lavalin Nuclear business will be combined into a single Nuclear sector under the leadership of Sandy Taylor. This sector will leverage the unique skills of the respective teams, creating market-leading capabilities in this fast-growing sector. We will now be able to serve our clients across the full spectrum of 6 main business lines: Consultancy, EPC, EPCM, field services, technology services, reactor support and decommissioning.The Clean Power activities are being led by Marie-Claude Dumas and will incorporate our activities in Hydro, Transmission & Distribution, renewables and energy storage. The renewables market is growing at an unprecedented rate throughout the world and we have the skills and capabilities to deliver a fully integrated life-of-asset service to our clients.Underpinning this growth is the recently -- is the recent award of the Stockyard Hill Farm project in Australia where SNC-Lavalin, with our joint venture partner, will undertake the project. When completed, this project is expected to be the largest wind farm in the southern hemisphere, generating approximately 530 megawatts of clean energy. We are also pleased with the recent agreement signed to form a joint venture with ABB for the delivery of substation projects globally at 66 kV AC and above, which could provide us with a backlog of over $350 million.Now turning to the Infrastructure sector on Slide 8. This sector has again performed very well this quarter. We're very pleased with the stable execution performance and the EBIT margin increase as well as the recent REM contract announcements. Our selection as a preferred proponent of the Montreal light rapid transit system underscores the quality of our organic prospects and bolsters our reputation as the leader in infrastructure in Canada. Our 4 major projects, Ottawa LRT, West White Rose in Newfoundland, Eglinton and the New Champlain Bridge, continue to progress well.Revenue backlog and our list of prospects continue to be strong. The Infrastructure sector is very active around the globe, but especially in Canada. With the addition of Atkins, we believe SNC is well-positioned to win its fair share of these exciting multibillion-dollar opportunities and we're continuing to identify new prospects in our new key geographies.Based on the review of the company's organizational structure we mentioned earlier, it was also decided to create a new sector called Engineering, Design and Project Management effective January 1, 2018, which is being led by Nick Roberts, formerly CEO of Atkins U.K. and European business. He will oversee all infrastructure engineering and design services around the world except for the Canadian market, which will remain fully integrated within our Infrastructure sector.Now turning to Slide 9. We are very pleased with Atkins' results. We had another strong quarter delivering $132 million of EBIT in Q4 2017 with a 13.2% EBIT margin, mainly due to excellent core business performance and earlier-than-scheduled cost synergies. Atkins delivered $1.8 billion of revenue and an EBIT margin of 11.4% for the 6-month period as part of SNC-Lavalin while maintaining a stable revenue backlog of $2 billion. The company delivered cost synergies of approximately $40 million related to the acquisition of Atkins in 2017 and remain on track to deliver cost synergies of $120 million by the end of 2018.And lastly, let's turn to Slide 10. I am very pleased with Capital's results, particularly with Highway 407, which reported important increases in revenues, traffic, net income and dividends in 2017 compared to 2016. As for the SNC-Lavalin Infrastructure Partners, we expect that one more asset, the McGill Hospital, will be transferred into the vehicle by midyear.In summary, we are very pleased with our 2017 performance. Through the acquisition of Atkins, the largest and most transformative in our history, we continue to deliver on our strategic growth objectives while positioning the company for future opportunities. We began 2018 with an enhanced structure, both with the addition of Atkins' operations and the reorganization of our sectors that will further leverage our expanded capabilities in markets with strong growth opportunities. I am confident that our new Nuclear, Clean Power and Engineering, Design and Project Management sectors will enable us to better seize these opportunities and serve our clients worldwide. We have a positive outlook on growth and confidence in delivering on our 2020 vision.With that, I'll pass the call over to Sylvain to go over our financial results in more detail.
Thank you, Neil, and good afternoon, everyone.I'll start on Slide 11. Total revenues for Q4 of 2017 totaled $2.9 billion compared to $2.2 billion for Q4 of 2016. The increase was mainly due to the $1 billion incremental revenues from the acquisition of Atkins, partially offset by decreases in Oil & Gas and Power segments. The decrease in Oil & Gas was mainly due to lower revenues in the LNG sector, partially offset by higher revenues from sustaining capital projects in the Middle East and modularized gas solutions in the United States. The decrease in Power was mainly due to the lower revenues from the Thermal subsegment as the company decided to exit the EPC part of this business, partially offset by an increase in the Nuclear business. Note that the Infrastructure segment revenues was mainly in line with Q4 of 2016 despite a significant decrease in revenues due to the disposal in December 2016 of SNC-Lavalin's noncore E&C business in France and the Real Estate Facilities Management business in Canada.Total SG&A expenses in Q4 of 2017 amounted to $417 million compared to $214 million in Q4 of 2016. The increase was mainly due to the incremental SG&A from the acquisition of Atkins. Excluding the impact of this acquisition, SG&A expenses were actually about 31% lower, mainly due to the ongoing success of the Operational Excellence program and cost synergies.Adjusted EBITDA from E&C amounted to $246 million in Q4 2017 with a margin of 8.6%, significantly higher than Q4 of 2016. This increase was mainly -- this increase mainly reflects an incremental EBIT from Atkins and a higher EBIT from Infrastructure, partially offset by a negative EBIT from Power in Q4 of 2017 compared to Q4 of 2016.Total reported net income amounted to $52 million for Q4 of 2017 compared to $2 million in Q4 of 2016. Note that Q4 of 2017 net income included a noncash charge for the estimated net impact of the revaluation of the company's U.S. deferred tax assets and liabilities as a result of the U.S. corporate tax reform. This amount, which totaled $43 million, has been included in our adjustments for the quarter since we don't expect this item to reoccur in the near term.Overall, we view this reform positively for the company. The reduction of the U.S. federal tax rate from 35% to 21% should benefit us as we are expecting increased future revenues and profits in the United States, mainly due to less volatility in oil prices and Infrastructure revenue synergies with Atkins.Adjusted net income from E&C amounted to $138 million or $0.78 per diluted share in Q4 of 2017 versus $73 million or $0.49 per diluted share in Q4 of 2016, mainly due to the higher segment EBIT, partially offset by an increase in income taxes and financial expenses, which were largely attributable to the Atkins acquisition financing.Our net recourse debt to adjusted EBITDA ratio at December 31, 2017 stood at 0.6 and our revenue backlog totaled $10.4 billion at the end of December. I will shortly get into the backlog, capital structure and debt ratios in more details.Now turning to Slide 12. We see that the Q4 of 2017 Infrastructure EBIT performance was higher than in Q4 of 2016, Power was lower, while M&M and Oil & Gas remained stable. Infrastructure had another very good quarter with an EBIT margin of 7.5% and a $43 million EBIT. This increase was mainly due to an increase in gross margin to revenue ratio and lower SG&A, partially offset by lower revenues due to the sale of certain noncore businesses at the end of 2016. On the other hand, Power had a challenging quarter as we had to record more losses on our last fixed price gas-fired combined-cycle thermal power project. We expect this project to be completed by midyear.Moving on to Slide 13. Our revenue backlog continues to be well-diversified and totaled $10.4 billion at year-end compared to $10.7 billion at December 31, 2016. This amount does not yet include the REM project for which we have been recently been selected for as well as the Stockyard Hill Wind Farm contract in Australia. It also does not include the impact of IFRS 15. As Neil mentioned, once these items are added, we expect our revenue backlog to be over $15 billion.Turning to Slide 14. Our operations essentially generated $376 million of cash in Q4 2017 for a total usage of $236 million in 2017. This yearly usage was mainly driven by higher than anticipated working capital requirements on certain major projects, nonrecurring payments for liabilities related to employee benefits that were triggered by the acquisition of Atkins, nonrecurring acquisition cost payments and an increase in interest paid. This was partially offset by cash received from the settlement with the MUHC and a higher EBIT from E&C and a decrease in taxes paid.Other than the cash flows from operation, you see on the right-hand side that the cash movements were caused by the acquisition of Atkins and its financing, CapEx spend mostly related to projects and our quarterly dividend. This was partially offset by a $173 million proceeds from the disposal of our head office building and a $91 million in proceeds from the transfer of the initial 4 seed assets to the Infrastructure partnership fund.Moving to Slide 15. As of December 31, 2017, the company continues to maintain adequate liquidity to pursue its growth strategy. In November, we issued $300 million of unsecured debentures at an interest rate of 2.69%, which allowed us to repay more expensive outstanding debt and, therefore, reduce our future financing costs. We closed the year with $707 million of cash and cash equivalents, $641 million of net recourse debt and $2.4 billion in unused capacity under our $2.75 billion committed revolving credit facility. If we incorporate a 12-month pro forma for Atkins and DTS adjusted EBITDA, the net recourse debt to adjusted EBITDA ratio was 0.6. Recourse debt over total capital is now 21:79, in line with the company's objective of maintaining an efficient balance sheet while not surpassing a ratio of 30:70.Now moving on to the last slide. We are introducing our 2018 outlook. We anticipate an adjusted diluted EPS from E&C in the range of $2.60 to $2.85, which is based on a weighted average number of outstanding shares of approximately 175 million. We also expect the tax rate for adjusted E&C business of 20% to 25%.Before I conclude my presentation, I would like to mention that we will, over the next few weeks, post on our Investor Briefcase website the 2017 segmented EBIT according to the new organizational structure referred by Neil and announced in November 2017. We are finalizing the remapping exercise and we'll advise you when it is available so that you can update your models accordingly.This concludes my presentation. We can now open the lines for questions. Thank you.
[Operator Instructions] And we will take our first question from the line of Yuri Lynk of Canaccord Genuity.
Sylvain, just on the guidance. Can you clarify if that guidance for 2018 is given as per IFRS 15 or is it IAS 11, which I think you've been reporting under?
Yes. No, it's under IFRS 15.
Okay. And I'm just trying to -- in the notes, it talks about under IFRS 15, the 2017 numbers, there would have been, I think, a $200 million after-tax restatement. So is that $200 million being re-recognized, if you will, in 2018 and thereby boosting the bottom line?
No. I think it's not quite what it says in the note. I think what the note has meant to say is that the $200 million is really about timing. So what IFRS 15 will do is it will go -- it will change the recognition of claims and chain orders that were done on a, let's say, on a probable basis. It will move that to highly probable. So what we -- the way we look at this is we will have a permanent cycling of these claims and change orders. And with the adoption of the new standards, you basically have a permanent kind of delay in revenue recognition. So I wouldn't look at the 2017, what we reported in note 2 essentially, as a reduction of our 2017. It's really rolling. So if you were to position yourself at the beginning of '17, you'd have similar adjustments to the opening retained earnings. So it just keeps cycling through as time goes on. So does that make sense?
Okay. Yes. It's just a big number. And, I guess, another way to ask the question is what would the guidance be if you hadn't changed the accounting standards?
Well, it wouldn't be necessarily that dissimilar because, like I said, this is all timing. So some of the items, you would say, in the $200 million will materialize, some will not because it's all booked on a probable basis. But then, you will have new items coming from projects being executed in '18 that you would have otherwise recognized pre-adoption that you will not be able to recognize post-adoption. So that's why this whole thing is really more about timing.Now what it does -- what it will at times do is from a quarter to another, we might be in situations where we've not reached the highly probable state, allowing us to book a change order, for example, and we'll achieve that in the next quarter or so. So that's why, from period-to-period, you might see some volatility caused by this adoption.
And ultimately -- yes, ultimately, the end result's the same.
Yes. The end result's the same and cash is the same obviously so...
Okay. So just to clarify, the reversal of the $200 million after-tax, that won't, in any way, be rebooked on kind of a onetime basis in '18 or '18 and '19?
No, no, no. It will be -- over time, these things will reach a different state where they can be booked or they don't materialize and then you'll have other ones that follow the same -- on other projects that will have the same treatment.
Okay. That's helpful. Just a quick housekeeping and I'll turn it over. What -- just looking to trying to gauge the free cash flow of the E&C business. Can you help us out with what CapEx should be in 2018 vis-à-vis the $125 million spent in 2017?
It will be a little bit higher because we will have the full year of Atkins and we've got a couple of IT project-related spend in '18 so...
Like, under $200 million?
This will increase it a little bit. Yes, under $200 million, yes.
We'll move to our next question from the line of Mona Nazir of Laurentian Bank.
Firstly, just wanted to touch on the Atkins and the significant margin appreciation of over 13% in the quarter. It's a big variance from the 9% level. I'm just wondering is that mostly synergies or was there any anomaly in Q4? And how should we expect the Atkins margin to trend into 2018? Is the 13% kind of sustainable? Or could it come down from that?
I think it's a -- I mean, it's definitely higher than we see the -- we see a trending for the full year in 2018. And that really is due to a mix of operational excellence in the business themselves, but also because we secured the cost synergies quicker, faster than we had originally planned in the investment criteria. So looking at -- I think we talked before around, it was an 8% business. When you take the synergies into account, that takes you up maybe a couple of points. And if the business performs like-for-like, that's what we'd be looking for. And hopefully, we're going to push it up a little bit more than that. But I don't -- I wouldn't say -- I wouldn't take 13% and extrapolate that across 2018.
That's very helpful. And just secondly for me and turning to the Power and the EBIT loss that we saw. You had said that you expect the U.S. thermal project to wrap up by mid-2018. Can we expect the same magnitude of drag on results in Q1 and Q2?
Well, we should see more drag. I mean, the way we've accounted for the re-forecast is basically based on a forecast to go. So bar any more execution problem on that, it should kind of not have any major impact in the next couple of quarters.
[Operator Instructions] We'll move to our next question from the line of Jacob Bout of CIBC.
I had a couple of questions on the Oil & Gas sector. So in the Oil & Gas sector, during the Investor Day, you're pretty optimistic about your pipeline of projects. I think you quoted something like $70 billion of a prospective pipeline. Maybe talk a bit about your win rates there. And then maybe a part b, talk a little bit about the recurring revenue versus backlog, what the percentage looked like in the fourth quarter of '17 versus a year ago?
I think in terms of the backlog, yes, we see a big uptick in available projects in terms of the projects that are coming to market to be bid. Now of that multibillion pipeline, we also select the ones that are most appealing to us in terms of where we have differentiation and where we have a good chance of winning. I mean, all of our models at the moment are based on us winning 1 in 4. And ultimately, the business improvement and the ability to overachieve would be if we could get a win rate back to 1 in 3, which is where it was back in 2014, 2015. So from that perspective, we don't see a shortage of projects. The projects are still competitive, but we've realigned our business, and particularly, our SG&A over the last year in order to be more competitive. So from that perspective, we are pretty bullish about both our backlog and our ability to bid and win work in order to deliver through 2018.
And maybe just getting back to the -- your backlog being down. You talked a bit about a lot more of this MSA-type work. How do we think about that? So these master service agreements are not being booked in backlog, so that's recurring revenue? And what would that percentage look like when you compare it year-on-year?
Yes. I mean, unfortunately, we don't publish that in that much detail. But that's -- that is the sort of missing piece around -- if you look at our backlog, if you look at our revenues. And ultimately, our confidence is raised by the third component, which is our book and burn work. And like I said, from an 2018 perspective, we are reasonably comfortable with where we're sitting at this point in time because we've got a number of contracts that are book and burn.
Maybe just lastly, comment a bit on your acquisition strategy.
It is complete for -- as far as 2018 is concerned. 2018 is a year of organic growth for us. So we will continue to -- in '17, we completed the integration of Atkins, the restructuring of our organizational sectors. We are now -- we've now got the business that sort of 3 years ago I really wanted. Really happy with the business going forward. But it's an organic growth play certainly for 2018, likely to be for part of 2019. And as we pay our debt down, we will then be looking to move more into the market again for future growth to deliver the 2020 Vision.
We'll move to our next question from the line of Derek Spronck from RBC Capital Markets.
Any update on the deferred prosecution implementation? And how do you see it playing out, if you have some color around that? And if a deferred prosecution regime doesn't get enacted, what sort of workaround plans do you have to your disposal?
Yes. I mean, on the whole subject, as everybody knows because we've talked about this for a while. None of this is in our control. I think we are pleased. I think the business community in Canada is pleased that the government commenced and completed the consultation process in 2017. From that, hopefully, there will be sort of positive feedback on that, and hopefully, again, the government will look to enact legislation to bring a DPA-type arrangement for Canadian business. So from that perspective, we're looking for that. We hope that, that happens. And then we would like to be able to engage with the relevant authorities around potentially a form of DPA. However, as I said, that's not in our gift. That's not in our control. So from that perspective, we really just have to wait and see what happens.
If a DPA regime doesn't get enacted, are there workaround plans that you have available to your disposal?
I think there's alternatives that we could and we do look at, but basically, we'd prefer the first option.
And if they decided to pursue changes or enact legislation to change a criminal code, could that defer the trial or put that on hold if the DPA regime was being enacted? Or are they 2 separate series from a timing perspective?
Yes, like I said, we're not in control of that. That's not in our gift, so I'd prefer not to comment on that.
Okay, fair enough. And then just finally. The last, I guess, 3 years, you've had a negative working capital -- noncash working capital draw of, say, $1.3 billion. Does not start reversing at all?
Yes, I think we -- we've had a -- like you said, we've had a number of quarters that were difficult from that perspective. I think there's been quite a bit of shift in our makeup of the business, and that's caused the usage of working capital in 2017, which a lot of it was actually in our Oil & Gas sector with the shift of our work towards the Middle East, where we had to -- when you go from U.S. and Australia volume moving into the Middle East, your working capital requirements are quite different. So we think we've reached a place now that it should have been rebaselined by now, and we should not see the kind of usage that we've seen over the past year or 18 months on that front. The other piece is really the discussion on the thermal business. The thermal business, aside from being very competitive, it does have a good cash profile from a project standpoint. So that's -- as we're running off the projects that we've had in there, we've been also using up the working capital balances that we had on those projects. And because we did not find new work, we did not get new advances on that work. So those are 2 big dynamics that increased our working capital in '17. So when we look at '18, we see working capital's usage or generation to be more linked to growth as opposed to portfolio shift. So that's what I'd say about '18.
We'll move to our next question from the line of Benoit Poirier of Desjardins Capital Markets.
Could you provide some color around the sustainability of Power if you would strip out the loss in the quarter? And also what we should expect going forward in terms of revenue and margin once it will be split between nuclear and Power?
Yes. I mean, I think we said -- I think Sylvain said in his opening statements that effectively, we will publish more details and restate the details around nuclear and clean power together with EDPM within the next week or so within the investor's briefcase there. So we will provide details on that. A bit difficult to sort of give this out at this point.
Okay. And could you provide some color about the ramp-up with Bruce, Darlington and Eglinton also, Neil?
Yes. Well, I mean, OPG at Darlington, the refurbishment of the existing reactor is going pretty much according to schedule. The good news in the last few days is that the government body has approved the refurbishment of reactor 3, which is the second reactor to be refurbished. So that's fantastic news. So that provides sort of ongoing repeatable -- complex, but repeatable work into the future. Bruce Power are going through a process at the moment. And we and others are engaged in that competitive process. So it is ongoing, but I can't really say anything about that because it is a competitive process.
Okay. And lastly for me, Infrastructure. So you reported a good performance for 2017, an EBIT margin of 7.4%. Long-term target in the past, you kind of mentioned 4% to 6%. So I was just wondering what type of sustainability should we expect from the Infrastructure segment going forward.
Yes. I mean, we're targeting. I think we've said before that internally, we're really targeting all of our sectors to provide a path towards 7%. In Infrastructure, I think we'd be pretty pleased if we could maintain above 6% in the short term.
We'll move to our next question from the line of Michael Tupholme of TD Securities.
Wanted to ask you about the Atkins business. Strong quarter from a revenue perspective there, very strong. I just wonder if you can talk a little bit about the seasonality, so -- in that business. So we've seen the results for the second half of the year. Overall, you did $1.9 billion of revenue. Just trying to get a sense for how we should think about that over the course of next year. I mean, is annualizing that amount too aggressive of an assumption? Or is that reasonable?
Well, I think -- well, just to start with the seasonality point, from a revenue, I guess, it's not as seasonal, but what -- if you look at their history actually, the EBIT has been more seasonal. So typically, they used to have their strongest quarter in what is our Q1, essentially, which was also linked to the fiscal year in the U.K. So as they became part of our portfolio, obviously, there's some dynamics that were maybe self-inflicted by them that have kind of probably shifted a little bit, which made Q4, our Q4, strong as you saw it. So I think we'll see a bit of a shift of their seasonality, but typically, Q1 for them was quite strong. We think it'll still be strong in the basis of the U.K. business that they do, but a bit of that shift happened in -- towards Q3. So I would suspect Q4 and Q1 would be their stronger quarter in the year and the other 2, a little bit less strong. So from a growth standpoint, we do expect some growth year-on-year in total for them. So you could probably look at where they were at on a full year basis before acquisition, and we do expect some organic growth from them.
Okay. That's helpful. Second thing, I wanted to ask about the synergies. You mentioned that you delivered $40 million of Atkins-related synergies in 2017. And I just wanted to clarify if that was the run rate level that you were at, at the end of 2017? Or if you actually realized $40 million worth of synergies in the 6 months that you owned the company?
Yes. So in the P&L of 2017, there is $41 million of cost synergies. So the run rate is higher than that, depending on the timing of those synergies. And then as we look at 2018, we are looking to get $90 million in the P&L of 2018. And by the time 2018 is over, we are looking to have the full $120 million of run rate identified, basically. And starting to pay out, right? Identified and executed, I guess, is what I'd say, yes.
Okay. So the $90 million for 2018, that number has not changed? That's consistent with, I think, what you had previously guided to?
Yes. Yes, absolutely. And then the progress is -- good progress has been made obviously with what you see with the $41 million, and I think the team is continuing to work at it. So we feel good about that.
Okay. And then, Sylvain, you talked about the thermal power project that gave you some issues again in the fourth quarter. I know you gave us the full year value of the cost provisions you took, but can you give us a sense for what actually hit in the fourth quarter? What that amount was in Q4?
Q4 was around $30 million. We'll dig up the exact number, but it's close to $30 million in Q4. So when you look at the whole year, we had some issues in Q1 in the thermal business, and then in Q3, if you recall, and then Q4. $32 million. Yes, $32 million.
And we'll move to our next question from the line of Devin Dodge.
Just wanted to start with Infrastructure. Just can you talk about the approach you're taking in developing a greater presence in the U.S. Infrastructure market? Just what sort of opportunities are you looking at? And can you give us a sense for what we should be expecting in terms of timing for when you expect to bid on this work?
Yes. So one of the fantastic opportunities that Atkins gave us really was that Atkins' strategy prior to the acquisition was they looked at the Canadian infrastructure and U.S. infrastructure and basically decided that they could only concentrate on one, and they chose the U.S. infrastructure, which actually works out really, really well for us. So effectively, what they've got in the U.S. is the equivalent, not quite to the size, but a reasonable presence and the equivalent of our Canadian Infrastructure in the U.S. So what Ian Edwards and the Infrastructure group have been working on is basically looking at how can we use the former Atkins Infrastructure group in the U.S. in order to be able to position and do the front-end engineering and consulting services and -- which is basically part of our key delivery on large Infrastructure work that we currently do in Canada. We also have a presence in the U.S. with our O&M group. So I mean, effectively, if we were looking to -- and we are looking to replicate the successful model that we have in Canada, then basically, we now have the component parts working with construction partners. We now have the component parts that actually participate in big infrastructure projects. The ones that we are specifically looking at is very much around rail and transit. Again, similar to our expertise in Canada. So rail and transit, together with the fact that we also see a big opportunity outside the Infrastructure group in terms of our capabilities and presence in the nuclear sector within the U.S.
Okay. That's helpful. Just when we think about the strong pipeline of projects, how should we think about your ability to onboard this work? I'm just trying to get a sense if you feel there's current spare or underutilized capacity in your existing workforce? Or should we be expecting hiring to ramp-up? Or subcontracting costs to kind of pick up from here? Just any thoughts there would be helpful.
Well, it's certainly not the first one. Otherwise, we would be underutilizing the workforce that we have. So it's not that. But it is a combination of the second 2. So we will have ramp up and hire, and we will be partnering again with companies that we do lots of work within the construction arena in order to be able to bid and win and complete these projects.
Okay. Okay. And then, I guess, the last one for here, just on the nuclear business. It seems like the timeframe for some of the life extension work that you're work -- you're bidding on seems pretty well established. But how should we be thinking about some of the opportunities in your pipeline for newbuilds or decommissioning in terms of timing?
Yes, I mean, we're looking at a number of decommissioning opportunities throughout the world, and they will happen at some point in time. But they need to happen because, ultimately, these facilities do need to be decommissioned. In terms of newbuild, it's still the same. The opportunities that we had and we talked about last year are pretty much still the same ones. I mean, top of the list really is the opportunity to partner up in China for a couple of new reactors, CANDU reactors, and also Argentina. So nuclear, especially newbuild tends to move to the right a fair bit. So in terms of the new opportunities, which we really see as upside to everything we do, these opportunities are pretty much still the same ones.
Okay. So clearly, the rest of these can move out. But could these be -- occur in the next few years, let's say, in our forecast window or in your 2020 plan?
I know they absolutely could. I mean, if the -- in Argentina, if there's an agreement between the governments of Argentina and China fairly soon, then that project, in all likelihood, will kick off this year certainly in the front-end piece of all of that. It's just really about that final sort of government-to-government financing piece being finalized and actually agreed. But once that's done, then the project is live.
We'll move to our next question from the line of Chris Murray of AltaCorp Capital.
Just a couple of quick questions for me. One, in the Oil & Gas business, can you talk a little bit about the framework agreement with Shell and how that's going to work, and what kind of opportunities are there? And along with that, I guess, Shell's got some presentations that they're doing next week around LNG. Can you talk about LNG opportunities that you guys are seeing on the horizon because there has been some discussion about shortages emerging kind of post-2020?
Yes. I think on the LNG, we -- in the short term, so in terms of looking at projects to win and execute in 2018, we really don't have an awful lot in there in terms of LNG as such. I mean, what we are seeing in the shorter term is Middle East is very much around a range of master services-type agreements, call-off type agreements around refurbishing and rehabilitation of existing fields. What we are seeing as well as an uptick in the U.S. around the opportunities, both in terms of downstream and also in midstream opportunities. And we've got some really good prospects there. In terms of the Shell contract, I mean, similar to -- quite similar to the Chevron contract that we announced earlier, we would really like to have relationships with the major IOCs on a regional or a global basis to be able to have call-off services for the things that we're really good at in terms of completions, commissioning, services. Because these contracts are the ones that basically, if you've got it sort of pre-awarded, than effectively, they can call off a number of people. And these contracts tend to increase and grow as the customer needs more help. So these are not big backlog contracts, but could actually turn out to be incredibly important and sizable as the clients basically approve their capital expenditure program for new projects.
Okay. So would you prefer to think they fall more into that MSA category that we were talking about earlier?
No, not necessarily. I think what's new is that we, as SNC-Lavalin, are securing more MSA-type contracts that previously Shell might have selected somebody else. But Shell and Chevron are selecting us.
We'll move to our next question from David Silver of Morningstar.
I would just like to follow up briefly on the LNG question first. I guess, I have heard discussion from a number of your competitors during their quarterly conference calls, which caught my attention. And I know that SNC participated in the last round, mainly through Kentz. And I'm just wondering, in terms of your service offering, has the addition of Atkins or other moves that you've made internally, has that enhanced your value proposition for the next round of either debottlenecks or greenfield projects in that area?
Okay. You're absolutely right. I mean, we had a really large position in the Australian LNG projects, and we are still actively performing on the INPEX projects in Australia. I mean, we do you look at -- we are following potential projects in Western Canada, in East Africa. And so we are looking at a number of these. I think what I was saying earlier is that these tend to be longer term. So in terms of bidding and winning any of these that people are talking about, they really wouldn't provide significant work until probably 2019, 2020. And so that doesn't mean to say we're ignoring them. We just don't see it in the -- in terms of the short-term horizon. In terms of Atkins, they have given us a significant new component in the Oil & Gas industry. So I think everybody knows that between SNC-Lavalin and Kentz, our areas expertise did not include offshore upstream. I think in the past 2 years, I don't think we were particularly bothered about growing that in terms of the real downturn in the offshore upstream market. But we always want to grow that capability because, ultimately, that piece of the market will come back. And we are beginning to see some offshore upstream projects attaining capital approvals, particularly with the IOCs. So Atkins does give us a small -- it's not sort of a massive piece. But they do give us a small but very highly rated capability in the offshore upstream arena, very technical safety, structural analysis, marine architecture and the likes. So we have moved that piece under Christian Brown and the Oil & Gas group, and they're looking to build on that.
I have a financial question, and this would be related to I guess deployment of free cash flow in 2018. So when I do a back of the envelope based on the information gleaned here from CapEx and your new dividend, et cetera, et cetera, I mean, it seems like there will be a fair amount of what I'd call excess cash flow potential. And I was hoping you could remind me whether the structure or the financing for the Atkins acquisition has presented any obstacles or any restrictions on your ability to, let's say, repurchase shares at some point in 2018 or anything else we should keep in mind. Or should we just assume that excess cash flow will go 100% towards debt paydown in 2018?
There's no restrictions per se in terms of the financing raise. There is, however -- as we arranged the entire financing package, which included the recourse debt as well as the limited recourse debt with CDPQ, we had the intention to lever up the balance sheet at the time to become more efficient. But we also levered up a little bit of extra just to complete the transaction limit, to the extent reasonable, the amount of equity raise we needed to do. So as a result of that, as now we are integrating and we're increasing our EBITDA and therefore, cash flows, there is a need and I guess a desire for us to deleverage a little bit from where we are today. So that's what you'll see in '18. So you'll see a portion of the cash flows going towards reducing the debt a little bit, so that we can -- I guess, we can meet our rating agencies' requirement, so to speak, in terms of maintaining our BBB rating.
We'll move to our next question from the line of Mona Nazir of Laurentian Bank.
I just had a quick follow-up. I found that there was a very interesting comment on how you now have the business that you really wanted a few years ago. And I'm just wondering if you could share with us how you see or envision the business taking shape to get to that 2020 plan and that $5 EPS. Is part of that growth more weighted towards the capital division or M&A? Or is it just focusing on the margins and organic growth? And is there anything that causes the picture to be different than where it is now?
Okay. In terms of the comment about the business that I wanted 3 years ago, I mean, that's really around -- we've been working through divesting the non-core business. So the businesses that strategically don't really add any value to other parts of the business, or are lower, more competitive environments and margins. Plus, of course, we've added Kentz from an oil & gas perspective, and we've added Atkins from a consulting project management infrastructure perspective, and in reshaping all of that in terms of clean power and nuclear and divesting the thermal business, which was always the plan. So one thing I didn't mention was that we're very disappointed with the thermal results as we neared completion of the last remaining project. I mean, we didn't bid a single thermal project in 2017. So it was our long-term plan. And I now believe we're in a position where lining up with the segments that we started 2018 in the 1st of January, we now have the sectors, I think, that have great customers, have great opportunities for growth, also have differentiated services that ultimately can achieve higher margins within that sector. So from that perspective, that's really what -- it's taken -- it's taken 3 years really to reshape the business, but we're now in a place where the business that we've started with at the beginning of '18 is very much around a business that should generate higher margins. Growth is there within the sectors, and we've got great customer relationships. So that's really what I meant by that. And if you look at Vision 2020, I mean, effectively, what I've said earlier is that 2018 is very much about concentrating on organic growth and maybe part of '19, too. But then as we pay down the debt and we reshape the balance sheet again, then we would also like to get into smaller acquisitions. And if you take the organic growth together with the smaller acquisitions, then effectively that's a path to Vision 2020.
It appears that there are no further questions at this time. Mr. Jasmin, I'd like to turn the conference back to you for any additional or closing remarks.
Thank you very much for having and joining us today. If you have any questions, please don't hesitate to contact me directly. Thank you very much, and have a good night. Bye now.
This concludes today's call. Thank you for your participation. You may now disconnect.