SNC-Lavalin's (SNCAF) CEO Neil Bruce on Q2 2016 Results - Earnings Call Transcript

| About: SNC Lavalin (SNCAF)

SNC-Lavalin Group Inc. (OTCPK:SNCAF) Q2 2016 Earnings Conference Call August 4, 2016 3:00 PM ET

Executives

Denis Jasmin – Vice President, Investor Relations

Neil Bruce – President and Chief Executive Officer

Sylvain Girard – Chief Financial Officer.

Analysts

Yuri Lynk – Canaccord Genuity

Michael Tupholme – TD Securities

Anthony Zicha – Scotia Bank

Sara O'Brien – RBC

Frederic Bastien – Raymond James

Benoit Poirier – Desjardin Capital Markets

Bert Powell – BMO Capital Markets

Operator

Good day, and welcome to SNC-Lavalin’s Second Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Denis Jasmin, Vice President of Investor Relations. Please go ahead, sir.

Denis Jasmin

Thank you. Good afternoon, everyone, and welcome to SNC-Lavalin’s 2016 second quarter earnings conference call. Our earnings announcement was released this morning and we are posted the slide presentation on the Investors section of SNC-Lavalin’s website which we will refer to during this call. Today’s call is also being webcast, you can find the link on our website and a replay will be available within 24 hours. With us today are Neil Bruce, President and Chief Executive Officer; and Sylvain Girard, Executive Vice President and Chief Financial Officer,.

Before we begin, I would like to ask everyone to limit themselves to two or three questions to ensure that all analysts have an opportunity to participate. You are welcome to return to the queue for any follow up questions. I would also like to remind you that as detailed on slide three, certain statements made during today’s call and slide presentation about expected future events and financial results may be forward-looking, and therefore, subject to risks, uncertainties, and assumptions. These are described in our financial documents and could cause actual results to differ materially from what may be inferred from the forward-looking statements.

Such forward looking statements represent management’s expectations as of today and, accordingly, are subject to change. We disclaim any intention or obligation to update any forward-looking statement, except as required by law. You will find more information about the risks and uncertainties associated with our business in our financial documents filed with the Canadian security commissions, which can also be found on our website.

I would now like to turn the conference over to Neil Bruce.

Neil Bruce

Thank you, Denis. Good afternoon, everyone and thank you for joining us today. On today’s call, I’ll briefly review our Q2 results and discuss our segment’s performance -. I will then ask Sylvain to talk about the Q2 results in more detail. So let me start with slide four with a brief comment on our Q2 financial performance. Despite the turbulent markets and the persistent softer commodity prices, our efforts in delivering consistent execution continue to drive financial performance and sustained earnings improvement across the company. For the fourth quarter in a row, we have delivered solid Q2 earnings with an adjusted net income from E&C of $71 million or $0.48 per diluted share. Our SG&A decreased by 10% in the second quarter compared to Q2 2015 building upon the 19% reduction in the first quarter.

We continue to expect to deliver $100 million SG&A benefits for the financial year. These reductions are mainly the results of the successful implementation of the STEP Change program launched in Q4 2015. Our backlog and cash position remains solid with $12.5 billion and $1.1 billion respectively. We are also pleased with the progress of our operational excellence program which we launched at the end of the first quarter of this year. We are already seeing an impact across the organization in making a simpler, more agile and client focused. We are committed to our strategy and actions to deliver consistently improving financial performance which will include a target on the annualized adjusted E&C EBITDA margin of 7% in 2017. As previously indicated, we will continue to take all additional measures throughout the year if required to ensure we meet this goal.

Let’s now look at each of our segments beginning with slide five. Our oil and gas sector continues to perform well, delivering a 7.9% EBIT margin in the second quarter of 2016 and kept a consistent strong backlog of $4 billion. We continue to see many prospects and opportunities ahead particularly in the Middle East region. We’re also starting to see some opportunities in Canada, in – activities where clients are trying to maximize their production. Our capabilities across all phases of the project lifecycle make us the right choice for these clients. But as you all know, the oil and gas industry continues to see steady challenging global marketing conditions, including volatile oil prices.

Again this quarter this impacted our production processing solutions in the U.S. However, our other oil and gas business is made up for this and continue to do well. We expect this sector to continue to perform well in 2016 and be one of the main contributors to our net income. I am also very pleased with our July announcement of Christian Brown to newly created position of Corporate Development Officer and the appointment of Martin Adler of President, Oil and Gas. Both positions will become effective on the August 15 and will report directly to me. Chris’s new position is a sign of our future ambitions deliver on our strategy to grow our profitability, size and geographic presence even further by 2018.

As strong leadership and business exceeding, makes him the right person to steer ahead mergers and acquisitions activities, inorganic growth implementations and further drive operational excellence. Chris will also ensure that an in-depth and thorough handover is completely with Martin through the remainder of 2016. Martin has 25 years of experience in the oil and gas, refining, petrochemical engineering and construction, transportation industries. He understands and brings with him customer relationships, sector knowledge and operational excellence. He’s a great addition and I welcome him to the team.

Now turning to slide six, we continue to remain cautious about the mining and metallurgy market as it continues to be affected by our lower level of activity due to lower commodity prices. And as we’re seeing some good opportunities, particularly outside Canada in the fertilizer sectors, approximately $100 million of new contract awards were during the quarter. These are mainly contracts such as pre-feasibility studies some of which will eventually turn into larger projects. Moving to slide seven, the power sector continues to do well sustaining their EBIT margins.

We are pleased that we have been awarded further contracts in the highly attractive nuclear sector in the second quarter. This sector has huge potential for other large projects as governments and power companies refurbish existing reactors or build new reactors in order to meet electricity demand. We are also enthusiastic about the MOU signed in July between China and Argentina, reaffirming their plans to reconstruct two new nuclear power reactors in Argentina. At the end of the quarter, the power revenue backlog remains solid at $2.8 billion.

Now turning to the infrastructure segment on slide eight. We continue to see some tangible results from our STEP Change and operational excellence program, including our efficiency processes and execution. As you can see, the trailing 12 months EBIT percentage continues to improve and we are delivering sustainable results quarter after quarter. We also continue to see many opportunities for our infrastructure sector particularly in Canada, here in Quebec and in Ontario. Total backlog for the infrastructure segment was $5.4 billion at the end of the quarter. Please note that while the infrastructure backlog levels fluctuates on a quarterly basis, it is steadier over the longer period as many of our projects are completed over several years and many new projects are worth more than $1 billion dollars.

On June 29, the company was pleased to announce that a notice of substantial completion was issued for the turnkey construction component of the Sainte-Justine project, slightly ahead of our revised schedule. This completes our last challenging legacy project. On June 30, we were also pleased to announce that we have reached the agreement to sell the company’s non-core Real Estate Facilities Management business in Canada for $45 million, which includes facilities, property management, realty management. This business generated approximately $260 million in revenues in 2015 and had a backlog of approximately $550 million at the end of the quarter. This sale is a result of the current data under -- operational excellence program which identified these activities as non-core to the business strategy. This will allow us to better align our operations and maintenance business in Canada with SNC’s core sectors.

We will now focus on providing operations and maintenance services in transportation, social infrastructure, P3s, industrial power, defense, logistics and oil and gas. And lastly, capital on slide nine, the new structure that we are planning to put in place for a certain number of our matured North American concessions is progressing well, but it is taking slightly longer than we expected. This is mainly due to the variety and complexity of the assets. We also want to ensure that we structure the transaction properly for the potential partner. We are now targeting an [indiscernible] in the third quarter of this year. We are pleased with Highway 407’s very good results with increases in Q2 compared to Q2 last year of 13% in revenues and 14% in EBITDA. We were also pleased with an 11% increase in the quarterly dividend.

So in summary, we maintain a strong cash balance and backlog and achieved good results in all four sectors. Our efforts in delivering consistent execution continue to drive financial performance and sustainable earning improvements across the company. For the fourth quarter in a row, we are delivering good results and we are seeing many opportunities across all of our sectors, but particularly in infrastructure, power and oil and gas. Therefore, we are maintaining our guidance with regards to the adjusted E&C EPS of $1.50 to $1.70 and EBITDA margin.

With that, I’ll pass the call over to Sylvain to go over our financial results in a little more detail. Sylvain?

Sylvain Girard

Thank you, Neil. Good afternoon, everyone. Let's now turn to slide 10. E&C revenues for Q2 2016 totaled $2 billion slightly lower than Q2 2015 reflecting a decrease from the mining and metallurgy segment as it continues to be affected by a lower level of activity due to the lower commodity prices and the completion or near completion of certain major projects. Q2 2016 total SG&A expenses amounted to $201 million, $23 million below Q2 2015. Business development activities increased compared to Q2 2015 but were more than offset by a G&A expenses decreases compared to the same period last year. This resulted in a total SG&A expenses reduction of 10% year-on-year. E&C SG&A over E&C revenues came in at 9.3%, 0.6% lower than Q2 2015 despite a decrease in volume. This improvement, as Neil said, is mainly due to the successful implementation of the STEP Change program in late 2015.

We therefore remain confident on delivering the already announced $100 million of benefits for this fiscal year. For the fourth quarter in a row, EBIT margins were positive for all segments. The adjusted EBITDA margin from E&C improved to 5.8% compared to 2.2% in Q2 2015 driven by an increase in the gross margin to revenue ratio and lower SG&A expenses. The adjusted EBITDA amount from E&C increased to $118 million compared to $49 million reflecting increased contribution versus prior year from infrastructure by $60 million; oil and gas by $6 million and power by $4 million.

Adjusted net income from E&C in Q2 2016 was $71 million or $0.48 per diluted share compared to $8 million in Q2 2015 or $0.05 per diluted share. Net income from capital decreased to $36 million in Q2 2016 compared to $45 million in Q2 2015 reflecting an increase in business development expenses on new prospects and other SG&A expenses. Our cash balance and backlog remains strong at the end of June 16, with a balance of $1.1 billion and $12.5 billion respectively.

Now moving on to slide 11, this slide shows the main drivers of the variances in the segment EBIT for E&C. As you see, all sectors have improved their EBIT margin ratio versus Q2 2015. Let me comment on two of those. First, the oil and gas segment; the EBIT increase in Q2 2016 was $71 million which represents a $7.9% EBIT margin compared to 7.3% in Q2 2015. The increase in EBIT was mainly due to lower SG&A expenses as well as the higher volume of activity and gross margin ratios on project, excluding our Valerus division. The activities of that division based in the United States, continues to be challenged from difficult global market conditions.

We have taken steps to adjust to these market conditions, recently making some structural changes such as consolidating certain of their facilities together. In addition, the major project awarded and announced in March in Saudi Arabia will have a significant Valerus component. The capabilities of Valerus were a critical advantage for us in the selection process. Secondly, the infrastructure and construction segment delivered a positive $14 million EBIT in Q2 2016. This represents an EBIT margin of 3.4% compared to a loss of $43 million or a negative EBIT margin of 9.8% in Q2 2015. This improvement is the result of a higher gross margin from improved project efficiency and execution and lower G&A.

Now moving on to slide 12, our revenue backlog at quarter-end remains solid at $12.5 billion which is slightly up versus Q2 2015. Our backlog was composed of 45% in reimbursable contracts and 55% in fixed price contracts in line with Q1 2016. Bookings for the second quarter were $1.2 billion. Overall, we have maintained a high quality diversified backlog. Note that the June backlog includes $2 billion for our O&M segment. Following our agreement in June to sell our non-core Real Estate Facilities Management business in Canada, we expect the resulting decrease of approximately $550 million in the backlog once the transaction is completed.

Turning to slide 13, year-to-date our operations essentially used $322 million in cash. This usage is primarily driven by an increased working capital requirement of approximately $290 million on certain major projects. Additionally, the completion of our legacy projects and the cash outflows related to STEP Change, contributed to this operating cash consumption. Compared to the same period last year, we have been able to reduce our operating cash flow usage. We expect that the situation would continue to improve by year-end and that we will close the year with deposited operating cash flow contribution.

On the right hand side of the page, we provide a simplified cash balance analysis which highlights the main variances for the first six months of the year. We see that the cash generated by the sale of capital investments, mainly Malta, was more than offset by various outflows, particularly $58 million of project related capital expenditures, $43 million of net increase from long-term concession arrangements, $114 million of repayment for project financing loans and $78 million of dividends to shareholders.

Now let’s turn to slide 14 which presents our financial position. Other than for cash, for which the variation was explained on the prior slide, we see a resulting decrease of over $750 million in current liabilities. This decrease was mainly due to working capital requirements on ongoing projects, repayments of project financing and a decrease in restructuring provisions. Lastly, note that our recourse debt-to-capital ratio remain low at 9%. And lastly on slide 15, we have maintained our 2016 outlook which is an adjusted diluted EPS from E&C in the range of $1.50 to $.170.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And we’ll take our first question from Yuri Lynk of Canaccord Genuity. Please go ahead.

Yuri Lynk

Hey guys. Good quarter. I guess the obvious question how do we square away the guidance at the midpoint, kind of implies about $0.74 in the backhalf of the year versus $0.86 in the first? So I think you did like $0.90 in the backhalf of last year, so just being conservative or do you feel the bottom half is probably unlikely or just any color on how we can square that away?

Neil Bruce

Thank you very much. I mean the way that we always look at this or we certainly have from the past year or so is that we are constantly looking at our risk analysis against our sectors and our major projects. And we look and we carry our diagnosis on a quarterly basis and basically when we’ve done that that confirms that we are still within our range. So therefore, that’s what we’re – that’s basically what we are confirming. I mean there’s still a number of projects of work to do and so we feel that the ranges still represents where we will be at the end of the year.

Yuri Lynk

I get that, I mean so, is it some projects that you’re not sure? If there’s things that are up in the air in terms of contingencies or the uncertainty in terms of when projects might start up or wrap up or is that a timing thing or they just can’t square away, you’d be looking at kind of a 15% drop in earnings vis-à-vis the first half just to get to the midpoint and I know the lower end would be even below that. So just trying to figure out what has to happen to get to kind of the low end of guidance?

Neil Bruce

I don’t think we’re seeing anything above for we are within the guidance. If we think, we’ve had a particularly strong quarter, this quarter and I’m trying to look at the full year, we’re just maintaining the guidance. It’s pretty difficult to give really anymore than that.

Yuri Lynk

Okay. Just want to switch to cash, cash generation I get the working capital investment but just operating cash flow before we even get to the working capital changes was only $9 million. Can you just talk to what impaired the kind of cash conversion into operating cash specifically around some of the changes in provisions for contract losses that were rather chunky in the quarter?

Sylvain Girard

Yeah we had the completion on Sainte-Justine that basically consumes quite a bit of that cash. So the legacy project because you know they were zero EBIT, they don’t contribute to EBIT but they just are cash users. So that would be for that. On the rest of it, on the working capital uses I mean we have had some significant growth in Saudi since the beginning of the year and that from a working capital perspective, this doesn’t work like some of the other EPCs that are cash deposit at the start. So on that, we’re just cashing our rhythm on this and we should see that kind of convert to cash a little bit faster in the second half.

Yuri Lynk

Okay. And in your prepared remarks, you mentioned something about kind of breakeven by the end of the year. Are you talking about working capital will be kind of a neutral drag on cash flow by year-end or do you still anticipate there’ll be an investment in working capital when all is set and done by year-end?

Sylvain Girard

No, what I meant was by year-end we should have a breakeven to positive operating cash flow. So, that’s what I meant. So from net income including working capital and the other items that were in the operating cash flow. So right now we closed the second quarter with the users 322, so we see that 322 becoming zero or plus by the end of the year, that’s what I mean.

Yuri Lynk

Okay. Thank you. I’ll turn it over.

Operator

Thank you. And we’ll take our next question from the line of Michael Tupholme of TD Securities. Please go ahead.

Michael Tupholme

Thanks. I was wondering if you can quantify the impact of the close-out benefits you saw in the mining and metallurgy segment and then possibly also the unfavorable cost you forecasted in the power segment?

Neil Bruce

Yeah, I think the mining sector is high because of the lower revenues and the – getting near the closed out on couple of the bigger projects. So, from that perspective the good news is we’re closing the light, we’re releasing some contingency but with the overall revenues that’s what’s driving -- effectively driving the margin up in mining. And we expect it’s going to stay high probably not at the levels it was after the quarter, but it’s still going to see high rates throughout the year until mining picks up some time in the future.

Michael Tupholme

Okay. Sorry just to be clear there Neil, you expect the margin in the mining sector to remain high for the foreseeable future, is that…

Neil Bruce

For the remainder of the year as a percentage, it will remain high for the remainder of this year as we continue to close out some of these contracts and the revenue stay barely flat to low.

Michael Tupholme

Got it. I guess just within Q2 itself, it seems like there was may be a put and a take in terms of the close-out benefit in mining but possibly since some sort of an offsetting unfavorable reforecast in power. Just wondering if we look at those same aggregate, would they have been of similar orders of magnitude or would one have been much bigger than the other one?

Neil Bruce

No, not quite. I think the power I think you’re referring to the MD&A discussion I guess. I think we had some unfavorable in 2015 as well as we had mentioned or reported at the time, we had something similar but yet of smaller size in 2016. So yeah

Michael Tupholme

Okay. And then with respect to the oil and gas margins, they were quite strong in the quarter, a nice pick up versus where you were in Q1 and now it sounds like it was notwithstanding the fact that Valerus continues to have some challenging conditions. Is there anything unusual there or is this a level we should think about as being sustainable for the foreseeable…

Neil Bruce

I think it was same in Q1 we did talk about the fact that we expected the margins to recover on some of the larger projects got kicked off and we began to make progress within that. Again, we are cautious about the oil and gas sector on the basis that there continues to be cost pressures and throughout the market with the customer base. But I think we’re really pleased with the response that we’ve had so far so we’ve been able to effectively protect margins by reducing our G&A within the sector at the same time, maintaining the basic gross margins in these particular contracts.

Michael Tupholme

Okay, great. Thank you. And then just a last, somewhat of a housekeeping question, in the past you’ve provided color around the amount of your cash balance that you felt that you needed to hold to run the business. I’m wondering if you can update us on what that amount is and whether or not that has changed at all in the view of comments that Sylvain made around working capital and completion of your last legacy project etcetera?

Neil Bruce

I think at this stage from a balance standpoint, we still think the billion dollar market is still good considering our projects whether at the JVs that we have. I think that number is still good for now.

Michael Tupholme

Okay. Thank you.

Operator

Thank you. [Operator Instructions]. And we’ll take our next question from Anthony Zicha of Scotia Bank. Please go ahead.

Anthony Zicha

Hi. With reference to your guidance, you mentioned that oil and gas and power will be the main contributors to net income in 2016. Could this be the case in 2017? And Neil could you give us some of your prospects in Middle East?

Neil Bruce

- certainly oil and gas in ‘17 will and power -- and I think as we’ve said before, the continual increase in performance, the improvement of performance with an infrastructure that is also contributing towards that. And I think we see that these sectors are going to drive our earnings this year and highly likely in next year. We’re not really counting on the mining sector contributing a great deal next year. And I think in terms of the prospects we are particularly pleased with the amount of prospects that are beginning to come forward particularly in nuclear and again, it’s a highly attractive market.

We are – the work that we do and the margins associated tend to be a bit higher on the average. And in oil and gas, it is very much the prospect side is very much dominated by a number of things that we are continuing to do in the Middle East. So some of the projects are completing or getting near to completion in Australia, the likes of Gorgon, but ultimately there’s a number of projects in the Middle East and a variety of countries that we see in the business development prospect list, so we’re pretty upbeat about our --

Anthony Zicha

Okay, great. And my last question, could you give us some color with reference to M&A targets, like are there any domestic opportunities or would you have to look at the U.S.? And would you be willing to increase your exposure to infrastructure? And are there certain sectors that you would want to avoid at this time?

Neil Bruce

I think in general terms, I mean we’re not particularly looking at the reserve sector but I think as I’ve mentioned probably in the last couple of quarters, if we were to move on looking at M&A, then it would be probably be a bit different these days than may be three years ago when all four sectors were fairly in a bus. So it would be a lot more interesting looking at either sectors or geographies that had good visibility around the capital spent. So I think infrastructure is a possibility but it’s just one of a number of possibilities.

Anthony Zicha

Okay. Well thank you.

Operator

Thank you. And we’ll take our next question comes from Sara O’Brien of RBC. Please go ahead.

Sara O’Brien

Hi. Good afternoon. Can you comment on, are there any revenue concerns that you might have into the backhalf of the year or 2017 based on backlog duration as you see it now? I mean the run rate has been kind of $2 billion-ish for the last couple of quarters, I’m just wondering if you expect any significant change from that going forward based on current backlog?

Neil Bruce

No, I don’t think so.

Sara O’Brien

Okay. And then in terms of M&A readiness, in your prepared comments four quarters of profitable E&C, is this the right time to make an acquisition in 2016, is that something we can talk about now that profitability is well on its way?

Neil Bruce

I think we say quarter by quarter our priority is very much around sustainable earnings about predictability. So we’re pleased with our fourth quarter under our belt but we’re not going to immediately jump off and say four quarters done now for we are really – off and do a transaction. We continue to look at any opportunities available and if the right thing came along and we felt it was strategically and was going to be accretive, then we would consider that. But I don’t think you should look at it four quarters done therefore, the next thing we do is going to be M&A.

Sara O’Brien

Okay. And maybe if you can talk in terms of the 407 sale, I’m just wondering if there’s any kind of update on that and should we think of that completely separately as the monetization of the other Canadian assets?

Neil Bruce

Again, I think we’ve been fairly clear for a number of quarters that the 407 and the monetization of our assets are separate, they are two different subjects. And I think I also clarified past couple of quarters that we don’t see any potential M&A activities in the future necessarily being linked to the sale of 407. And we don’t have a process or plans at this stage to have a process to monetize the 407 and that’s still the position today.

Sara O’Brien

Sorry, could you just clarify, you don’t have a process or planned process to monetize 407, meaning it’s not for sale right now?

Neil Bruce

That’s correct, seem as – blessed three quarters.

Sara O’Brien

Okay. One last question, Neil you commented, you’re still looking for 7% annualized EBITDA margin for core E&C. Is that for the full year 2017 or is that mean within 2017 you look to achieve the 7%?

Neil Bruce

I mean first of all it’s not guidance, it’s a target. So we are still working on all of the things that we need to do to get there. I think we’ve made really, really good progress to-date and operational excellence is certainly one of the other key components that we are looking to implement through the remainder of this year in order to get to that target. But the aim would be as we’ve said in the document, an annualized 7%.

Sara O’Brien

Okay. So at some point within ‘17 to reach 7%, is that the way we should think about it?

Neil Bruce

An annualized 7%, yes.

Sara O’Brien

Okay. Thank you.

Operator

Thank you. I will take the next question from the line of Frederic Bastien of Raymond James. Please go ahead.

Frederic Bastien

Hi, good afternoon, just wanted to circle back on the power opportunities. When you sold Altalink, you mutually agreed with MidAmerican to pursue transmission and distribution development opportunities. Is this an initiative that SNC is still actively pursuing? And if so, could you provide any related commentary?

Neil Bruce

I mean it was not an exclusive agreement, it was an opportunity -- if good opportunities arose and is mutually beneficial, then yes. I think we’ve said before, that’s been nothing much has actually commented as to-date, but the agreement is still in place, so they’ve got an opportunity that they would like our help with, but if we generated opportunity that we can give to them, then that’s still an option – but we haven’t done very much to-date.

Frederic Bastien

Okay. But if we look at more broadly speaking I guess investments in particular space are fairly healthy, particularly in U.S. is this a market that’s of interest to you guys?

Neil Bruce

Yes, yes, we’re definitely interested in that market.

Frederic Bastien

Okay. Thanks. I’ll leave it there, I don’t have any more questions. Thank you.

Neil Bruce

Thank you.

Operator

Thank you. And we’ll take our question from the line of Benoit Poirier of Desjardin Capital Markets. Please go ahead.

Benoit Poirier

Yeah, good afternoon gentlemen and congrats for the solid results. Just come back on the M&A could you provide may be Neil or Sylvain more details on the metrics you will be looking for in terms of size, either geographies or kind of evaluation metrics?

Neil Bruce

I mean it’s pretty difficult to do. Again, we are looking at, we’re constantly looking at opportunities by sector and by geography and ultimately by capabilities. I think the only real shift in our thinking over the last year or so has been couple of years ago when we were looking at M&A, we were looking very much at sectors because all four sectors really to a greater or lesser extent were attractive and more stable than they are today. And I would say that the change in thinking is very much around we would like to invest in geographies or in sectors where we saw a good output in terms of capital spend. So that’s a slightly different sort of take on future M&A. And it’s pretty difficult to say anything more than that.

Benoit Poirier

Okay, perfect. And just for two key projects for you, could you may be give an update on the Champlain Bridge and Eglinton LRT, Neil?

Neil Bruce

Champlain Bridge is going pretty well. We’ve got certainly as of this morning we’ve got three of the foundations set in the water and things are going pretty well there, going along, making good progress. And on Eglinton as well I think everything’s pretty much on track, but it’s very, very early days even earlier in terms of Eglinton, but pretty much on track.

Benoit Poirier

Okay. Thank you very much for the time.

Neil Bruce

Thank you.

Operator

[Operator Instructions]. And we’ll take our next question from the line of Bert Powell of BMO Capital Markets. Please go ahead.

Bert Powell

Thanks. Neil, oil and gas in the second half will have more of the products coming out of Valerus and you’ve rationalized some of the facilities there. Does that have more than positive impact or disproportionate impact on the margins to be expected in the oil and gas, in the second half?

Neil Bruce

What we’re finding specifically with the market that Valerus addresses is that things have been drifting a bit to the right. So it’s not necessarily things, we’re not seeing lots of things being canceled but we are seeing things being delayed and moving to the right not necessarily going away. So, that does really do part of what’s affected us in the first half of this year and clearly, if couple of these contracts that were pretty well progressed on in terms of negotiations actually get kicked off, then that will have a positive impact in the second half of the year.

Bert Powell

Okay. And what’s – this is a and I guess maybe it’s not overly surprising, bookings in the oil and gas space were, it was – been for a while, how’s the opportunities are looking for you going forward?

Neil Bruce

I think overall probably suffering a little bit from the pretty extraordinary bookings we made in Q1 I think.

Bert Powell

Oh yeah for sure.

Neil Bruce

We sort of tend to look at the business and particularly pleased about the fact that we’re staying at $4 billion which is a good place to be. So, a number of our contracts I think in – cost through sectors in terms of oil and gas, power and infrastructure, maybe even infrastructure in particular. The contracts that we are pursuing are particularly large and lumpy, so, I think it’s all about a longer consistent trend. So being at $12 billion for the last, an average of $12 billion for the last 12 months is a good place to be. We look at the oil and gas business, $4 billion in oil and gas we’re really happy with that. So we do see – quarter by quarter particularly in these sectors.

Bert Powell

Okay, thank you. And on O&M, 550 comes out of backlog for the sale of facilities business, what would that mean for -- what would be the duration of that? Does that revenue come out in one year, just how to think about factor that in?

Sylvain Girard

The revenue impact on an annual basis is 260

Bert Powell

260, that’s exactly what I was asking. Okay, that’s great. Thank you.

Operator

Thank you. It appears there are no further questions at this time. Mr. Jasmin, I’d like to turn the conference back to you for any additional or closing remarks.

Denis Jasmin

Thank you all for having joining us today. If you have any further questions, please do not hesitate to contact me. Have a good day. Bye now.

Operator

This concludes today’s call. Thank you for your participation. You may now disconnect.

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