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Edited Transcript of SNC.TO earnings conference call or presentation 1-Aug-19 12:30pm GMT

Q2 2019 SNC-Lavalin Group Inc Earnings Call

CALGARY Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Snc-Lavalin Group Inc earnings conference call or presentation Thursday, August 1, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Denis Jasmin

SNC-Lavalin Group Inc. - VP of IR

* Ian L. Edwards

SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director

* Sylvain Girard

SNC-Lavalin Group Inc. - Executive VP & CFO

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Conference Call Participants

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* Christopher Allan Murray

AltaCorp Capital Inc., Research Division - MD of Institutional Research for Diversified Industries & Senior Analyst

* Derek Spronck

RBC Capital Markets, LLC, Research Division - Analyst

* Devin Dodge

BMO Capital Markets Equity Research - Analyst

* Frederic Bastien

Raymond James Ltd., Research Division - MD & Equity Research Analyst

* Mark Neville

Scotiabank Global Banking and Markets, Research Division - Analyst

* Maxim Sytchev

National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst

* Michael Tupholme

TD Securities Equity Research - Research Analyst

* Yuri Lynk

Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the SNC-Lavalin Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Denis Jasmin.

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Denis Jasmin, SNC-Lavalin Group Inc. - VP of IR [2]

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Thank you. Good morning, and thank you for joining us today. 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 open the presentation, as we will refer to it during this call. The recording of today's call and webcast will also be available in our website within 24 hours.

With me today are Ian Edwards, Interim President and Chief Executive Officer, and Sylvain Girard, Executive Vice President and Chief Financial Officer.

(Operator Instructions)

Please note that comments made on today's call may contain forward-looking information. And 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.

And now I'll pass the call over to Ian Edwards.

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [3]

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Thanks, Denis. Good morning, everyone, and welcome to SNC-Lavalin's Second Quarter 2019 Conference Call, and thank you for joining us today. So as you know, this is my first quarter as leader of SNC-Lavalin since being promoted 7 weeks ago. You may also remember that I was promoted to Chief Operating Officer in January of this year. So during my time as COO, I had the opportunity to spend several months traveling the company to visit all of our business segments, many of our offices, and many of our projects across the globe. Having had the opportunity to do that, it's given me a deep understanding of the business, the capability of the company, and the extent of the talent in our people, but also an understanding of the risks contained in the business and the projects.

And the first thing I want to make clear is that I'm actually really proud to be leading this company, which has strong capabilities embedded in many parts of the business. For example, we are a Tier 1 operator in many segments of the industry, including our EDPM and nuclear business. This could not have been accomplished without the talented and dedicated employees around the world, the relationships we've built and the support of many stakeholders who we appreciate and value.

However, there is no question that SNC-Lavalin is experiencing some difficult challenges. In recent quarters, we have provided guidance on our financial results that we did not deliver. This is unacceptable and it's unacceptable to me, and it is unacceptable for our stakeholders who place their trust in the company to do what we say we will do. This is why in the past 7 weeks, I have taken decisive action and we'll continue to do so for the long-term success of the company.

On the 22nd of July, we announced the first step in a new strategic direction, geared towards creating a simplified and more predictable business with a lower risk profile. I believe this new direction will position the company for sustainable success, as well as more consistent earnings and cash flow generation. To achieve this, we have taken several measures, most notably exiting lump-sum turnkey construction and reorganizing the company into 2 clear separate lines of business. One additional aspect is exploring all options available for our Resources business, especially the oil and gas business, including a transition to a services-based business or divestitures.

Our revised business focus is based on 4 key pillars that allow us to concentrate on what we do best and leverage our strengths to grow from the solid foundation. The 4 pillars are focus, simplify, grow and right-size. We will focus and reduce risk throughout our business by no longer bidding on lump-sum turnkey construction projects in order to allow the strong parts of our business to reach their full potential.

Secondly, we will simplify the organization into 2 parts, SNCL Engineering Services to become a leading global integrated professional services and project management company, while SNCL Projects will focus on the successful completion of our LSTK projects, fulfilling all of our obligations to our stakeholders and managing risk to ensure a successful outcome.

Third, we will grow the business where we already operate as a strong Tier 1 company, specifically in EDPM and Nuclear segments by focusing on key market positions and maintaining capital segment strong performance.

And finally, we will continue to right-size the company by delivering on our current CAD 250 million cost-out saving program. In addition, we will look at reducing our geographic footprint by exiting unprofitable geographies and concentrating on our growth areas. We will also be focusing on the recovery of claims receivables with dedicated teams being allocated to execute this.

Our decision to exit lump-sum turnkey construction projects was a decision I made to optimize strategic review of the business. Looking at our results, it's clear that volatility and unfavorable cost reforecast stemming from LSTK construction projects were the root cause of the company's financial underperformance. And thus, I took the decision to exit this type of project and contracting model.

Generally speaking, the large LSTK construction projects has been value-destructive in our industry. Over the past 5 years, firms in our peer group, with a greater percentage of EPC work have generally shown a lower total shareholder return and generally poor financial metrics. We are seeing in the industry as a whole, moving away from this contracting model.

While we've taken action to reduce risk and simplify our business, we will remain a leading global international professional services and project management company. And we will continue to provide high-quality services to our clients, covering the full spectrum of the asset life cycle.

We've provided a list on Slide 10 of the accompanying presentation, just to illustrate the types of contracting structures we will continue to apply, while limiting our financial exposure and risk. These include consulting services, design and engineering services, fee-for-service contracts, framework agreements, target cost and alliance-based contracts, management services such as project management and construction management, and operation and maintenance.

In addition to the above, there are some unique profitable, low-risk standardized solutions that we operate in, for example, district cooling plants and substations through the Linxon joint venture that will also remain part of the SNC-Lavalin service offering.

In further detail for SNCL Engineering Services, we will now -- it will now encompass high-performing businesses and high growth areas, including EDPM; advisory design and project management services; nuclear services, including life extension, decontamination, decommissioning and remediation; Infrastructure services, which includes operation and maintenance and Linxon; and capital, provision of ownership of infrastructure assets in Canada. Examples of where we hold a market-leading position within the light rail and transit market, where we believe there will be significant growth globally. Another example would be our well-established position in Nuclear, including holding the exclusive license to CANDU technology. This portfolio includes CANDU-related services and nuclear products, as well as a leading capability in nuclear power life extensions and decommissioning. We see a very strong market in the Nuclear sector, both from an ongoing need for clean energy and the need for environmental remediation.

SNCL Projects will know house a lump-sum turnkey construction contract business, which represents less than 1/3 of our growing backlog, and was clearly the root cause of our performance issues.

On Slide 13, you can see the backlog for SNCL Engineering Services is strong totaling approximately CAD 11.1 billion at the end of the June 2019, which included CAD 1.8 billion of bookings in the second quarter of 2019. The contract bookings for SNCL Engineering Services amounted to CAD 3.7 billion for the first 6 months of 2019, CAD 1.8 billion of that in EDPM segment and CAD 1.4 billion of that in the Infrastructure Services segment.

We continue to win high-quality work for SNC-Lavalin services. And earlier this month, we launched our new services-based contract for the construction management of the future renovation at Montreal-Trudeau International Airport. In the quarter, we also won a design contract with Network Rail in the UK, and in the Resources space, we've also shown our strength in services work with a Master Service Agreement with Emirates Global Aluminium, an engineering design subcontract for a closing production unit in Australia.

Slide 14 provides some more details around the revenue breakdowns for each separate business, while the simplified, streamlined structure of the business will result in lower topline revenue. It will be more consistent, profitable and cash flow generating. Also you can see this newly reorganized business model, also better manages our geography list and the revenues breakdown gives you a sense of which geographies we will operate in and how much revenue each geography accounts for.

As I said, the root cause of our past performance has been in the execution of LSTK contracts. In addition to this, we had exposure to geopolitical risk in the Middle East. I believe our new strategic direction significantly reduces the risk in both of these areas. As I mentioned, by ceasing to bid on large lump-sum construction projects, we will see a backlog in these projects decrease over time, as projects are completed.

Our lump-sum turnkey construction projects totaled CAD 0.6 billion in Resources backlog and CAD 2.8 billion in Infrastructure backlog, as of June 19. To put the remaining LSTK backlog into context, it is contained within 6 Infrastructure projects and 5 Resources projects. This is a low number compared to the past, as the number of projects to be completed during the first half of this year. Over [80%] of this backlog will be executed before the end of 2021, including all the Resources projects.

And I think what I'd really like to note here, is that CAD 2.5 billion of the CAD 2.8 billion of backlog in Infrastructure is in light rail projects, where SNC-Lavalin's historical performance has been strong. The successful execution of the remaining backlog here is of paramount importance to all our stakeholders and ourselves. We will be applying all focus necessary to achieve this through dedicated leadership and teams.

The Project Oversight group formed in March earlier this year and led by the newly appointed Executive Vice President, Nigel White, will provide an independent oversight of this execution. Nigel will report directly to me.

A full breakdown of our lump-sum turnkey construction projects in backlog is shown on Slide 18. Also the time line of the expected phase-out schedule is shown on Slide 18. This shows us completely exiting lump-sum construction projects by 2024. Slide 19 gives even further detail on this.

Turning to geographical risk on Slide 20, our revised business focus significantly reduces Resources segment's exposure to Middle East and Latin America.

So lastly, on Slide 21, which relates to guidance, as you know, on July 22nd, we announced the withdrawal of 2019 guidance. As I mentioned earlier in the call, in the past, we provided guidance that we simply did not meet. However, the performance of SNCL Engineering Services business line is not, and will not be impacted by the reorganization and is expected to deliver segment EBIT margin consistent with prior periods.

Before I turn the call over to Sylvain, I want to add that this was a really tough and disappointing quarter. In my view, however, it also marked a turning point for SNC-Lavalin, one that I'm committed to be part of to create the long-term sustainable success of the future. The challenges we announced and the decisions I've made are necessary to build a stronger SNC-Lavalin. We are building towards being a company with sustainable predictable earnings. This new strategic direction allows us to focus on cash flow, while simultaneously working to reduce risk.

I'd like to turn the call over to our Chief Financial Officer, Sylvain Girard, will provide more detail on our second quarter 2019 financial performance. Sylvain?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [4]

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Thank you, Ian, and good morning, everyone. Before I get into the financial details, just a quick note on the changes we've made this quarter to our segment disclosure. The segment disclosure note in the company's financial statements now reflect the reorganization that we have announced on July 22nd. We have split the company into 2 separate business lines being SNCL Engineering Services and SNCL Projects. We have also split infrastructure in 2 segments; Infrastructure Services and Infrastructure EPC Projects. This will allow us to differentiate the financial performance of each business line going forward, as we complete the lump-sum turnkey construction projects with the last one expected to be completed in 2024.

For your information and ease of comparison, we have included in the appendix of this presentation, the comparative restated numbers for the new segment disclosure by quarter for the full year 2018 and for the first quarter of 2019. These changes have no impact on the overall EBIT of the company.

Now turning to Slide 23. As disclosed in our July 22nd press release, we have recorded in Q2, a CAD 1.8 billion non-cash goodwill impairment charge and an intangible asset impairment charge of CAD 73 million, relating to the Resources segment.

Total revenues for Q2 2019 amounted to CAD 2.3 billion. The SNCL Engineering Services business line totaled CAD 1.6 billion, an increase of 11% compared to Q2 2018, due to revenue increases ranging between 4% to 37% across all of its segments.

E&C revenues from the SNCL Project business line for Q2 2019, decreased by 36% to CAD 710 million, mainly due to a 40% decrease in the Resources segment and a 28% decrease in the Infrastructure EPC Projects segment. The decrease in revenue from the Resources segment is mainly due to the completion or near completion of certain major lump-sum turnkey oil and gas construction projects, the termination of a major mining and metallurgy project, and challenges in replenishing the revenue backlog. The decrease in revenue from Infrastructure EPC Projects was mainly due to the completion or near completion of certain major construction and clean power projects.

The SNCL Projects business line, which includes the Resource and Infrastructure EPC Projects segments, recorded a negative segment EBIT totaling CAD 308 million in Q2 2019. This negative segment EBIT was mainly due to the unfavorable reforecast on certain major lump-sum turnkey construction projects for a combined net unfavorable impact totaling approximately CAD 280 million. This was mainly due to higher forecasted costs to complete on 2 infrastructure lump-sum turnkey construction projects, namely the Ottawa LRT and Champlain Bridge, both of which have now reached substantial completion, as well as on 2 oil and gas and 1 mining and metallurgy lump-sum turnkey construction projects in the Middle East.

In contrast, the SNCL Engineering Services business line recorded a positive segment EBIT of CAD 193 million, representing a 12.2% EBIT to revenue ratio or 8.2% if we exclude capital. Adjusted net loss from E&C in the second quarter of 2019 was CAD 300 million or a CAD 1.71 per diluted share, compared with an adjusted net income from E&C of CAD 140 million or CAD 0.65 per diluted share for the corresponding period in 2018. The adjusted net loss from E&C in Q2 2019 was due to a negative segment EBIT for SNCL Projects business line.

The increase in the financial expenses in the second quarter of 2019 compared to the second quarter of 2018 was mainly due to a CAD 34 million charge related to the amendment of the CDPQ loan in connection with the agreement to sell 10.01% of the shares of Highway 407 ETR, as well as increased level of indebtedness.

Our backlog was CAD 15.7 billion at the end of June, with a backlog of CAD 11.1 billion for SNCL Engineering Services and CAD 4.6 billion for SNCL Projects. Q2 bookings for SNCL Engineering were CAD 1.9 billion, representing a 1.2 book-to-bill ratio. SNCL Projects backlog decreased by 7.4% compared to the end of Q2 2018, and we expect this trend to continue as we are exiting lump-sum turnkey construction contracts.

As of June 30, 2019, the company had recourse debt of CAD 3 billion and CAD 1 billion of limited recourse debt as well as CAD 1.1 billion of unused capacity under the company's CAD 2.6 billion committed revolving credit line -- credit facility. The net recourse debt-to-EBITDA ratio calculated according with the terms of the company's credit agreement as amended, was 2.5x. Note that our covenant and ratio calculation with our lenders has been temporarily increased to 4x. Also note that the Q4 forecasted loss on the Chilean mining and metallurgy project is considered as a non-recurring item, up to a maximum of CAD 310 million, and the CAD 3 billion proceeds from the sale of the 10.01% of the shares of the Highway 407 ETR are considered on a pro forma basis.

As we await the completion of the 407 transaction, the company and a group of financial institutions entered into a new secured -- unsecured bridge facility, in the amount of CAD 300 million, with a maturity of 1 year. The proceeds were used to repay part of the revolving facility. The new bridge facility is payable in full, upon receipt of the proceeds from the sale of the 10.0% interest in Highway 407.

Turning to Slide 24. The operating cash flow for the second quarter of 2019 were negative, totaling CAD 368 million. This was mainly due to disbursement of approximately $152 million on the Chilean mining project, timing of milestone payments, cost overruns on large Infrastructure projects, as well as certain delays in claim settlements on some oil & gas projects. If we compare to Q2 2018, the increase in cash outflows was mainly driven by lower EBIT from E&C segments, an increase in restructuring cost and interest paid, partially offset by lower income tax paid.

In order to allow the company to strengthen its balance sheet, while implementing its new strategy, we decided to reduce the company's quarterly dividend from CAD 0.10 per share per quarter to CAD 0.02 per share per quarter.

Now moving to the last slide, 25. When looking at the segments within SNCL Projects, Resources had a negative segment EBIT of CAD 182 million. This was mainly due to a net unfavorable reforecast on certain major projects totaling CAD 150 million from higher forecasted costs and partial de-scoping primarily from 3 lump-sum turnkey projects in oil and gas and mining and metallurgy in the Middle East.

Infrastructure had a negative segment EBIT of CAD 126 million, which was mainly due to a net unfavorable reforecast on certain major projects totaling CAD 130 million from higher forecasted costs, primarily on 2 lump-sum turnkey projects nearing completion and smaller clean power projects.

With regards to the SNCL Engineering Services business line, all segments performed in line with expectation, despite a decline in the EBIT margin percentage. Our EDPM, Nuclear and Infrastructure Services segments are strong and stable businesses as evidenced by the new segmentation financial numbers provided in the appendix. The SNCL Engineering Services business line is expected to perform in line with prior periods.

This concludes my presentation. We can now open the line for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Yuri Lynk of Canaccord Genuity.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [2]

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I'm trying to get an idea of when these -- the projects that hit the quarter, when they're going to run off. And I just want to make sure that the ones in Resources, are they, in fact, listed on Slide 18?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [3]

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Go back.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [4]

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One is 85% finished, one is 25%, one is 50%?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [5]

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Yes, that's correct. Yes.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [6]

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Okay. That helps. You're talking about achieving margins in Engineering Services similar to prior periods. Can I assume that that's code for the 10% that you achieved in 2018?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [7]

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Not code. But yes, I think as a performance from a dollar perspective and where we see these businesses from a percentage of EBIT margin is consistent with what we've performed in '18 here.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [8]

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Okay, but your -- your half year margins are 7.6% down from 10% in the half year of '18. So what happens in the back half to make up that delta?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [9]

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Yes, there might be -- I mean, there might be a bit of leakage as we close the year. I think generally speaking, those businesses should perform in line with what you've seen in the last trailing 12 months. I think there is a bit of seasonality when you look at the first half in the results, when you compare first half this year to first half last year. That's -- a lot of that will get resorted into the second half. I mean we had a lower Q1 for example, in Nuclear. I think we see that continuing to improve as we close the year.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [10]

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Okay. So you think you can approximate the 10% on a full year basis?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [11]

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We might be a bit underneath that because of where we close the first half, but the trend is positive towards that, you know.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [12]

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Okay. And then, what should we be assuming for corporate overhead to get to a consolidated EBIT figure for the business?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [13]

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I think for -- yes.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [14]

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(inaudible) CAD 70 million?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [15]

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Yes, I think, that's a fair assumption. That's a fair assumption.

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [16]

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CAD 70 million for E&C and CAD 28 million for capital?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [17]

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Yes. Fair assumption of the value.

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Operator [18]

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Our next question comes from Mark Neville of Scotiabank.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [19]

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I just want to dig in a bit to the strategic review and sort of what's happening there, sort of appreciate everything you've done so far, again, the re-org, exiting lump sum turnkey work, but I'm just sort of, again, curious, sort of next steps, this -- the winding down of businesses can obviously -- it can be costly, it can take some time. Is there anything sort of you considering or anything you can do, sort of, expedite the derisking? I mean you're talking about potential divestiture of resources. Any expressions of interest there, anything you can do in Infrastructure, again to sort of, just expedite the derisking areas?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [20]

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Yes, I mean for sure, as I said, for the oil and gas business, we're looking at all options. I mean we haven't got anything specific to add to that at this time, but of course, as soon as we land on something, we'll be communicating that straight away. So that's in progress, that's something which is pretty high on the next steps in terms of going forward. I mean working through the Infrastructure backlog is -- it's clearly important for us, and -- but as I would stress, the majority of that backlog going forward is in light rail projects where we are in multi-JVs, consortiums, and we feel that we will run that backlog off under kind of normal circumstances. And 2 of the 6 in Infrastructure are almost at completion, which is Ottawa and Champlain, which I'm sure you're aware of. And clearly, we've got a clear line of sight to the end of those.

So I think the other parts of the strategy and -- that are really important going forward is, a real focused effort on claims receivables, which we have undertaken and focused [within the team] and allowing our SNCL Engineering Services as we call it now, to actually to grow and flourish. I mean clearly, the issues of the past are distracting from focus but allowing the better part of this business to reach that potential. So I know that I didn't specifically answer the question, but that's where we are.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [21]

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Okay. Maybe just on the cash flow generally, I reckon you've booked these losses in Q2 and soon there is going to be some cash coming out in the second half related to this. And sort of just thinking if you've got sort of all these losses or everything is fully captured. Sort of how we think about cash flow over the next 3, 6 months and then even into 2020.

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [22]

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Yes. So like you said, first half, we had the negative reforecast. We also had a lot of cash out from the Chilean project. We also had cash out related to this lower performance. There is some more to come in Q3 as we work through the losses and the cash-out. Overall, second half should see a positive cash flow, however. So that's good. So we see a turning point happening during the second half of the year, and those should -- these losses that we recorded shall pretty much be all worked through by the time the year is over, positioning us for the next year where with the Engineering Services, which has been providing positive cash flow all of last year, and so far this year, contributing more favorably to the bond cash flow line basically.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [23]

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So operating cash flow, second half, will be positive even with cash coming out related to these losses in Q2, and I guess, maybe even Q1 to some of these projects [specifically]?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [24]

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That's currently the expectation, yes.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [25]

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Okay. But maybe just one last one before I get back in queue. Just on the 407, just maybe some time lines. I know it's not in your control, but maybe some time lines or sort of what's just a quick update there? Thanks. I'll get back in queue.

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [26]

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Yes, well as you say, Mark, it's not in our control. I think we're still awaiting for the court decision. I mean we entered into an expedited process back in June with the hearing towards the, I think it was 21st of June or 20th of June. So we're just waiting for the decision at this point. It's taken a bit longer than what we expected, but it should materialize hopefully soon.

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Operator [27]

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Our next question comes from Derek Spronck of RBC.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [28]

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Part of your cost reforecasting and the EBITDA impact, will that carry forward in subsequent quarters? And when should -- we should have kind of followed the commentary that you talked about the cash flow impacts in the cadence there?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [29]

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No, it wouldn't. I mean the way -- the way we account for these reforecast and like we do every quarter, but clearly this quarter we had a number of projects impacting as we -- we look at everything we know about these projects and we make an assessment of what needs to be recorded and that's what we do. So based on everything we know at the moment, as we close the quarter, we recorded the appropriate level of costs and provisions into the project forecast. So we don't -- out of what we know, we don't expect new reforecast of that. Now obviously things evolve in these projects, good or bad, and we restate these projects on an ongoing basis.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [30]

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Okay. Just moving on to the write-down, it seems like effectively it's -- you're writing down the Resource base business to 0. Is that accurate, and is the write-down largely attributable to the fact that you're planning on exiting that business or was the write-down an actual operational impairment of the business or maybe some combination of both?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [31]

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Yes. So it's a combination of both. I mean clearly, when we look at the Q2 results of the Resource segment, it created a number of impairment indicators as we call them, basically requiring us to relook at the impairment test. So that's 1 item. The other item that is a big cause of the impairment as well is the new strategic direction. So the 5-year plan -- the future plans that we've had in the Resource sector over time -- over the past years, has been predicated on being an EPC player or a lump-sum turnkey player in the construction work and full EPC type on a fixed price basis projects. The new decision to exit that, a large chunk of the addressable market, was removed from the Resource sector, as well as then impacting future backlog, future revenue that we have. And then when you take that into account, it also affects the impairment model quite significantly.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [32]

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Okay. Great. And then just one last from myself, your leverage ratio is around 2.5x. It sounds like incrementally in the back half of the year, you're going to be -- it's not going to be a free cash flow negative period. When the sales, of course, does occur, the proceeds of that sale, arguably you might be in a relatively decent position, and you have enacted on your NCIB. Any potential of using some of those proceeds towards your NCIB in the near future?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [33]

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Right now, the answer is no. Right now the focus on the use of proceeds is deleveraging. Yes, deleveraging the balance sheet.

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Derek Spronck, RBC Capital Markets, LLC, Research Division - Analyst [34]

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Okay. Ian, do you feel comfortable that you'll be able to maintain that 2.5x ratio over the next few quarters?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [35]

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Yes. So what we have in the ratio, what we're going through right now with the ratio is essentially, we had a few bad EBITDA quarters, right. And we had cash outflow as well increasing the debt, but one of the big driver of the ratio right now is the fact that we had difficult quarter. So it's creating a bit of a pinch. It is manageable and we are continuing to manage pretty tightly our inflows and outflows, and just improving the performance of business. So I think at this point we're just, working through bad quarters. Once we get beyond that, I mean, things are just going to get back to a more normal level, especially with the sale concluding. I mean that's already reflected in the ratio as we say in the remarks, but I think it will just also just generally lower the debt levels, which will be good.

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Operator [36]

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Our next question comes from Michael Tupholme of TD Securities.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [37]

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Yes. I just want to follow up on that -- on the last question there about the leverage ratio in the balance sheet. So you've talked about negative cash outflows in the third quarter albeit improving, I guess, in the fourth quarter to get you to positive for the second half. But when we look at the balance sheet and the leverage ratio over the next, I guess, over the next couple of quarters, any concerns vis-a-vis the covenants in the credit agreement and needing to seek further relief?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [38]

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Well, I think at this point we're -- like I said in the prior question, the pinch comes from the lower EBITDA that we've had in Q4 and Q1 in this last Q2. So it is creating a bit of pressure on the covenant rate. We have a lot of levers, however, to address that as we go through Q3 and that's what we're working on. We have a good relationship with our banking syndicates, so if it comes to that, I think we'll be able to work on something there. But at the same time, we have a number of settlements that are being worked on. We -- and then we see a recovery as well in the performance. I mean Q2 was quite unusual in our mind in terms of the number of reforecasts that we've had. So we see a turnaround from that situation, especially as a lot of the reforecasts were on projects that are really at the end of their completion. I mean we had 2 or 3 in Resources are nearly and are done, 1 is not actually. and then on Infrastructure, the 2 of are Ottawa and Champlain, which are also done.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [39]

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So just a clarification or addition on that. The sort of 2 parts, are you adding back any of the losses you incurred in Q2 as you did with the losses on the Codelco project to get to this 2.5x ratio? And then secondly, how important is the company's investment-grade credit rating for the business going forward? Or is it important to maintain an investment-grade credit rating?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [40]

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So we're not adding back any of the reforecast losses other than the mining one, okay, which we're adding back since the end of the [big year] last year. So that's the first question. On the investment grade, I mean, we do value our investment-grade rating and from the use of proceeds, that's exactly why we are so focused on deleveraging. We believe that once we do that, we will be close to what we believe is our optimum debt level, maybe a little bit more deleveraging to come, but pretty close to where we'd like to be. The investment-grade impact, it has the further credit agreement. It does have a 25 bps increase on our financing costs as both ratings are below investment grade. So that's more of the immediate impact that would come from that. But as we work through this, our intentions would be to maintain our investment grade.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [41]

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Okay. Question about the margin performance in the EDPM segment, it was 8.4% in the quarter. That was not materially different from what we saw in Q1, but it was down from 10.8% in the prior year's second quarter. I know you've talked about sort of the margins for the Engineering Services business as a whole, being comparable to the prior year, but maybe just what is it that's pressuring the margins a little bit in EDPM and what is it that you see happening that's going to cause those to come back up?

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [42]

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So there's a couple of specific things, which creates seasonality around the fourth quarter. One of them is the EDPM have had a long program of bringing about 300 graduates on board in the second half of the year. And those efficiencies hit the fourth quarter and have always improved the profitability in the fourth quarter. So -- and that's a trend from a number of years. And then, there is another specific around the way that the provision -- the cost in that and charge-out decelerates, which also has a seasonal effect in the fourth quarter. So I'm sure you can probably point to that from previous years.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [43]

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Okay. And then just one last one on the lump-sum turnkey projects. I guess sort of 2 parts really. You -- do have some lump-sum turnkey work in the Nuclear segment? Wondering if you can just talk a little bit about that? Is that all related to the Nuclear project, where you've had some higher forecasted costs in the first half of the year, or are there other lump-sum Nuclear contracts as well beyond where you've been experiencing some higher cost on in the first half? And then separately, beyond the projects that caused some additional cost this quarter, in the second quarter, when we look at the lump-sum turnkey backlog, are all of the other projects still in a profit position or they -- have they also experienced losses and are therefore breakeven at this point?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [44]

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So you want to take the first one?

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [45]

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Yes. So there are 2 projects in the Nuclear sector. One, which is approaching completion, which I think you're referring to, there was an adjustment made in Q1, which is project D2O, and that project is coming to completion. So the other is the Bruce Power, which is in part, lump-sum. It's actually -- there are elements of it which are target cost and we are an element of it, which is already in the backlog, that needs to be -- needs to be executed. The model going forward and for the majority of the backlog in Nuclear, is under tidy cost arrangement, which basically the downsides are kept. Therefore, they are absolutely not what we would call lump-sum turnkey construction projects and they are not where the root cause of our issues that stem from.

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [46]

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So on the second question relating to the LSTK backlog and whether those are still in the profit position. For Infrastructure, for the ones that are not complete or near complete, they are and they're performing. And we are, obviously, very intent to maintain that from an execution standpoint. On the Resources side, the one listed on Page 18, are, except for the mining one which I cannot tell you really -- which one that is, but among those, there is 1 another loss in there.

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [47]

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I mean -- I would just add that from the 6 in Infrastructure, as I said, 2 of them are almost a completion, and the other 4 contracts are healthy contracts and primarily we have IT space.

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Operator [48]

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Our next question comes from Devin Dodge of BMO Capital Markets.

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Devin Dodge, BMO Capital Markets Equity Research - Analyst [49]

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What options are available to SNC to reduce or transfer risk on some of the lump-sum Infrastructure projects to other parties? And have other consortium partners shown a willingness to absorb some of SNC's roles on these projects?

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [50]

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So our focus right now, as we've said, is to really look at the oil and gas business and look at how we might divest parts or all of that business or how we might reinvent it as a services business that could add value to the overall SNCL Engineering Services part of the company. Specifically, on the 4 ongoing Infrastructure projects, they're obviously in consortium with other partners, we wouldn't rule out looking at other options, but currently the plan is to execute those successfully.

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Devin Dodge, BMO Capital Markets Equity Research - Analyst [51]

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Okay. Look, with you guys exiting the fixed price business both in oil and gas and Infrastructure, are there measures that need to be taken to kind of efficiently wind down this business? I'm just thinking that employee turnover seems like it could be set to rise here, just given maybe the limited line of sight on activities for within SNC. I guess is -- are there other measures that you're doing to kind of maintain the workforce, ensure efficient wind-down of that business?

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [52]

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Yes. For sure, for sure. I mean clearly, the majority of the people who are actually on the projects and the people who work on projects, even sells those project, people, they are working in consortiums and they're kind of identities to the consortium even though they are (inaudible) from ourselves. So and they all have specific arrangements to -- specific to the project. So we're less concerned about that, but we obviously have overheads and support staff that support projects. And we have taken specific measures to make sure we retain those staff that support it.

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Devin Dodge, BMO Capital Markets Equity Research - Analyst [53]

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Okay, that's helpful. And maybe just a couple of quick questions. Just the JV with Holtec, what contract types are those?

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [54]

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So they are recapped downsized contracts. So the projects and we're obviously in the process of selling these open security, the first one of these. And so I can't give you the actual kind of specifics. But the intent is that there'll be the caps downside contract model without time penalty. So in effect, there are absolutely no on LSTK contract.

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Devin Dodge, BMO Capital Markets Equity Research - Analyst [55]

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Okay. And then just a question for Sylvain. The Carlyle Group I think you had a CAD 100 million commitment into one of their funds, have you seen any capital calls on this? And are there opportunities to back out of the commitments, that would -- and will they provide maybe -- because I don't believe you're going to be going after those kind of projects anymore? Just any update there would be helpful.

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [56]

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So far in that entire program, we funded about CAD 10 million of the CAD 100 and we don't see -- we don't see at the moment the remaining funding happening this year. As it relates to our exit and how that impacts the program itself or our involvement in the program, I think it's too early to say.

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Operator [57]

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Our next question comes from Chris Murray of AltaCorp Capital.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Research for Diversified Industries & Senior Analyst [58]

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As I went through your process of looking at your strategic review, I'm just wondering as enter -- as you exit the lump-sum turnkey projects, how does that play into your thoughts around the longevity of the capital business? Historically, a lot of the projects you've done create those assets to build that pool. With the 407, should we be thinking about that business essentially kind of winding down over time?

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [59]

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No, because where we would position ourselves in the P3 market going forward is to provide services on the design, which is a place we already play on all of the P3 jobs and we would provide services and the operation and maintenance through the 30-year ongoing kind of from the lifecycle operation. So in doing that, we would also look to form a place in the concession and the play-out of the capital [glued] to that. An actual fact, I think the expertise that we've got kind of goes beyond just providing capital injection. It goes to the whole process of getting to -- through the modeling and through bringing the various components of the concession together. So I think we have a pretty unique capability in bringing this all together on P3 jobs, especially in Canada. So the only part that we exit is the lump-sum turnkey construction bid in the middle.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Research for Diversified Industries & Senior Analyst [60]

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Okay, fair part. And then my next question is with the projects that are still left and the runoff on them, you're taking the cost reforecast as, I think as you've said, you've got the one that will probably still show some negative margin. But from a cash flow perspective, and if you can also talk a little bit about your expectations for recoveries in this? As these projects runoff, what's your expectation for the net cash flow impact before these are all -- these projects are all run down?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [61]

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Yes, I mean the most of the projects are positive margins, right. I think there is one I mentioned in the Resource sector that is not so. And then we also have -- as we runoff, we have a number of claims receivable on a few of those projects as well, which we will be working and collecting. So overall, that should be positive over the runoff.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Research for Diversified Industries & Senior Analyst [62]

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So I mean is it fair to think, I mean when we looked at your 2018 number just on some of the numbers, you were basically kind of at a very low kind of level of margin in those projects. Is it fair to think that, that -- I mean I appreciate what you've said about the earnings profile, but I'm thinking more about the cash position and the cash profile. Is it fair to think that the earnings profile actually turns into kind of the cash profile over the runoff period, is that the best way to think about it?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [63]

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For some of the projects absolutely, yes.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Research for Diversified Industries & Senior Analyst [64]

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Okay.

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [65]

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Now just a comment on the loss-making project. I think you said something, you're -- just assuming to make sure everybody is clear, the one that's at a loss, we -- when the project is at a loss, we record the entire loss of that project in the P&L, and then obviously, the cash out happens as the project gets complete.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Research for Diversified Industries & Senior Analyst [66]

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Yes, but I guess my point is, or what I'm trying to do is, from this point forward is, how to understand what caused the net cash flow impact when we're winding down those projects? And I understand, I think if I got this correctly, your position is that they actually should be modestly positive through the end of their life.

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Operator [67]

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Our next question comes from Frederic Bastien of Raymond James.

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Frederic Bastien, Raymond James Ltd., Research Division - MD & Equity Research Analyst [68]

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I just wanted to go back to SNCL Projects. Have you had any indication of interest for that side of the business? Are you really operating with the assumption that you'll be overseeing the execution of the backlog all the way to completion?

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [69]

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For the Infrastructure part, we're working on the assumption that we will oversee the backlog to the completion. And as we said, for the Resources part, all options are open.

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Frederic Bastien, Raymond James Ltd., Research Division - MD & Equity Research Analyst [70]

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And Ian, you have spent the bulk of your career in the construction sector, but as you steer the company now towards an engineering services business only, what lessons can you take with you as you effect the change?

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [71]

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Yes, I mean actually I think that my background ideally places me to understand what to avoid because there's so many procurement models within this industry that we will still participate in, and we will still apply our capability too. The real issue here is avoiding the contract models where the risk reward is not equitable any longer. And personally, I think I'm in best place to lead that and to lead the company to the place where we can actually apply our capability, place supply to our customers, and -- but more importantly, provide predictability in the business and provide predictability in our earnings and cash flow.

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Operator [72]

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Our next question comes from Maxim Sytchev of National Bank Financial.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [73]

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I just wanted to come back to kind of the execution on the legacy EPC contracts. I mean obviously we have a number of provisions over the last couple of quarters, but what exactly are you doing? I mean can you provide a bit of a playbook in terms of making sure that we don't have the same type of surprise in a couple of quarters. So if -- yes, any color, please?

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [74]

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So it might be a reasonably long answer, so bear with me. I mean it's familiar, it's different in the Resources and Infrastructure. I mean the Infrastructure -- the Resources sector, there's 5 projects there. They are not large projects. Most of them are -- pass the halfway point or at the halfway point. We have got a clear line of sight on the risks within those. We have got a new leader in the Resources business, and we have applied the fresh kind of approach to the teams that lead it, and the expectations that we put upon the close-down of that part business.

And in Infrastructure, I mean I kind of repeat that CAD 2.5 billion of the CAD 2.8 billion of backlog is in LRT where we've been successful. And now these projects are in multi-joint ventures with Canadian and international players that we've played with for a long time successfully. And we expect that business to be run-off in a normal kind of way, in a normal environment. But what we've also kind of put upon this, as we've said, that is we have not only looked at all of these projects and we have peer-reviewed some of these projects where we see the high risk and we've created this Project Oversight function, which really reports to me to give me an absolute independent lens in real time of the health of these projects. And I think with all of these measures together, we've really strengthened our ability to successfully execute from where we see them today to the end. Does that help Maxim?

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [75]

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Yes. No, absolutely. Is there -- also maybe a question for Sylvain then, is there a component of the new IFRS accounting rules, which kind of complicates the revenue and the profitability recognition on those projects or there was something truly kind of structural issues on these ones?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [76]

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Well for sure, the IFRS 15 has increased the threshold of recognition of variable revenues. So when you're in a claim position, you have to have a higher probability of recovery then we had before the implementation of this new guideline, right. So that's causing some volatility. And then we've seen that and what you'll see as well is on the projects that we've been taking reforecast since the beginning of the year, a number of those are in claims situation, whether recognized or not recognized, they are the claim situation. So probably had to cover a bit, but it's too early to make a call on.

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [77]

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Yes. I would probably add to that as well, our revenue recognition policy in SNC-Lavalin is pretty prudent. So moving through to IFRS 15, most of the -- the variable threshold is higher. We kind of operate that anyway.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [78]

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Right. And then, your comment around a positive operating cash flow in the back half, are you banking on some clawbacks or claims to come through, or those are externalities that you don't need to make up the numbers?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [79]

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There is some settlements baked into that. Especially as we complete projects, I mean we expect those things to be able to resolve themselves. I mean the problem during the life of the project is oftentimes, the client don't want to fully resolve things until the project is complete. So I think we have assumed a number of conclusions on some of those.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [80]

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Is it fair to say that Champlain is going to be one of them in the back half?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [81]

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Well, we don't comment something that specific, Maxim. So sorry.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [82]

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Okay. Fair enough. And then maybe looking out a little bit, let's call it, medium term, thinking about the appropriate leverage for this business on a going-forward basis, how are you guys thinking about those metrics?

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Yuri Lynk, Canaccord Genuity Corp., Research Division - Director and Senior Engineering & Construction Equity Analyst [83]

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For E&C, which over time, we are talking about Engineering Services, we're looking at 1 to 1.5 gross debt to EBITDA ratio.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [84]

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Okay. And then -- has there been some thought given to allocating, I don't know, some sort of capital from your balance sheet? Because I mean, unfortunately, it's the same balance sheet that you're going to need to finance, kind of both sides of the business to make sure that we have a better understanding in terms of the free cash flow generation on the part of engineering versus the legacy EPC contracts. Any thoughts there?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [85]

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Yes. So we're thinking through it. I mean I realize that by creating 2 business lines, there is a number of items that are -- kind of fall in the middle, whether we talk about corporate type cost or taxes or interest. So that's still something, we're thinking about how far down -- right now, we're at EBIT level, how far down we go. So it's under reflection. And just to go back to your prior question, just to be clear, the -- I spoke about the E&C leverage and then on that capital side, so to speak. You could at the -- you considered the CAD 400 million that would be left over after the 407 sales. So the CAD 400 million left over at CDPQ has being outside of that ratio, I just quoted you.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [86]

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Yes, right, fair enough. And then just 2 quick ones on EDPM if you don't mind. So in terms of retention there, have you seen any employee departures so far?

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [87]

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No, I mean the sure answer is no. Obviously, we're looking at voluntary turnover pretty closely across the whole company and then we break that down into levels within the organization and businesses within the organization and geographies. So the answer is actually no.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [88]

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Okay. And last question on EDPM, just in terms of, I want to get to the language right, so are you calling for EBIT margin to be stable or for the absolute EBIT to be stable on a like-for-like basis versus 2018?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [89]

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I think we are making, we're not making precise guidance statement in what we said when it would be consistent. So I don't want to be -- take to the exact number. I think if you look at the last trailing 12 months and you consider that as a number, I think you get pretty close to the answer.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [90]

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And in the first half of the year, what is the organic growth rate for EDPM? Because I mean like we've seen a number of reshuffling, right?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [91]

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Yes, overall, we were talking about 11 for the entire engineering services, EDPM -- it's in the segment, and there's very little effect of 9% and with negligible FX impact.

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Operator [92]

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Our next question comes from Michael Tupholme of TD Securities.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [93]

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Just a couple of clarifications. Just, first of all, when you talk about cash flow being positive in the second half so that we are talking about cash flow from operating activities after changes in working capital?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [94]

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Yes.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [95]

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And then I think one of the earlier questions I asked was just about the profitability of some of the remaining lump-sum turnkey projects. And on the -- if I understood correctly, I think we suggested it was in the resources segment. There is only one that is in a loss position, the mining project. Yet if I look at this quarter, the second quarter, there were 3 projects called out as having contributed to the losses in the quarter. And I know some of this may relate to warranty, but can you just sort of square that for me? I'm having trouble understanding how there were 3 that were called out in the quarter, you had only 1 in a loss position of the...

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [96]

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Yes. So one is complete. So that one is at loss and it's complete. The other one -- there's one in there that has the reforecast and it's at a loss, and the other one has a reforecast, but it's still not at a loss.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [97]

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Okay. And then I wanted to ask you about warranty -- thoughts on warranty exposure. So I recognize that we've talked about some of these projects nearing completion, some are already complete. But how do you feel about the warranty, risk and exposure on projects that are near or even complete?

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [98]

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So our warranty provisions are forecasted into the forecast.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [99]

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Okay. So that's not something that would be -- I mean, would that be to say that we shouldn't be overly concerned about that going forward or -- ?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [100]

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No, I mean we've had a couple of smaller headwinds in the quarter linked to that. You are probably picking up on language maybe in the MD&A, but it's not a major item, so yes.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [101]

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And then just lastly the -- again I had asked about this earlier, but when we look at Nuclear in the CAD 162 million of LSTK, I think you mentioned it was split between 1 project that's underway now and then the rest is on Bruce. Is there any way to sort of break that down and correct that the Bruce piece has not yet started?

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [102]

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Well, we won't split it, but the one that incurred the losses is almost complete.

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [103]

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Is almost complete. Yes.

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Sylvain Girard, SNC-Lavalin Group Inc. - Executive VP & CFO [104]

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So the bulk of what you see there would be Bruce and Bruce has started.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [105]

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Okay. The contracts format that has led you to have some portion of Nuclear in LSTK, is this something you expect to continue to contract basis under that kind of a model going forward or are these somehow unique and we shouldn't expect you to be entering into these kinds of contracts going forward?

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [106]

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So clearly that's already in the backlog and we will fulfill all our obligations to our clients to execute that. But it wouldn't be a model going forward now. We'd be looking to execute the Nuclear work under a different model and the market is there and expects that also, clearly because of the kind of risks associated with the life extension and remediation of Nuclear projects. There's not a lot of desire for clients to put that into cost and time pressure.

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Operator [107]

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As there are no further questions at this time, I would like to hand the call over to Mr. Denis Jasmin for any additional or closing remarks.

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Denis Jasmin, SNC-Lavalin Group Inc. - VP of IR [108]

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Thank you very much for joining us today, and if you have any further questions, please don't hesitate to contact me. Thank you very much and have a good day, everyone.

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Ian L. Edwards, SNC-Lavalin Group Inc. - Interim President, CEO, COO & Director [109]

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Thank you.

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Operator [110]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.