SNC-Lavalin's (SNCAF) CEO Neil Bruce on Q1 2017 Results - Earnings Call Transcript

| About: SNC Lavalin (SNCAF)

SNC-Lavalin Group Inc. (OTCPK:SNCAF) Q1 2017 Earnings Conference Call May 4, 2017 1:30 PM ET

Executives

Denis Jasmin - IR

Neil Bruce - Chief Executive Officer

Sylvain Girard - Chief Financial Officer

Analysts

Benoit Poirier - Desjardins

Michael Tupholme - TD Securities

Sara O'Brien - RBC Capital Markets

Jacob Bout - CIBC

Yuri Lynk - Canaccord Genuity

Devin Dodge - BMO

David Silver - Morningstar

Frederic Bastien - Raymond James

Maxim Sytchev - National Bank Financial

Operator

Good day, and welcome to the SNC-Lavalin's First Quarter 2017 Earnings Conference Call. Today's conference is being recorded.

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

Denis Jasmin

Thank you. Good afternoon, everyone, and welcome to SNC-Lavalin 2017 first quarter earnings conference call. Our earnings announcement was released this morning, and we have posted a slide presentation on the Investors section of SNC-Lavalin website, which we will refer to during this call. Today's call is also being webcast. You can find a 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. [Operator Instructions].

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 risk and uncertainties and assumptions. These risk factors are set out in the company's 2016 MD&A as updated obviously for the Atkins proposed transaction in the first quarter 2017 MD&A 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 best expectation as of today, and accordingly, are subject to change. We disclaim any intention or obligation to update any forward-looking statements except as required by law.

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

Neil Bruce

Thank you, Denis, and good afternoon, everyone. On today's call, I will briefly review our Q1 results and discuss our segments performance, then Sylvain will go over the Q1 results in more detail. But before I get into Q1 results, let me repeat how pleased I am with the announcement of the proposed acquisition of WS Atkins and why we believe it is the right acquisition for our stakeholders, employees and clients.

As shown on slide four, this acquisition will combine two highly complementary businesses and increase both our geographic reach and customer diversification globally and will deepen SNC-Lavalin's project management, design, consulting and engineering capabilities to create more comprehensive end-to-end value chain for the combined entity. In addition, it would add further stability to our cash flow profile and decrease our business risk profile through increasing reimbursable-type work.

The acquisition would create growth opportunities in key geographies, creating a more balanced global footprint. We're also expecting cost and revenue synergies as well as anticipating very limited revenue cannibalization given both organizations have essentially no overlap in our service offerings and mostly working complementary geographies. The transaction is scheduled to close in Q3 this year, and we are limited in what we can say from now until closing. Sylvain will give you a brief update on the financing later in the call.

Moving to slide five, on our Q1 financial performance, I am pleased to report that we have delivered another solid quarter. Our net income attributable to shareholders for Q1 2017 reached $90 million. Our adjusted net income from E&C grew by 6% compared to Q1 2016 to $61 million or $0.40 per diluted share. Our SG&A expenses decreased by 6.5% in the quarter compared to Q1 2016 with a decrease of 12% in general and administrative expenses whilst our selling expenses increased mainly due to higher business development, spending on a number of key major bids here in Canada and abroad. We also maintained a stable diversified backlog of just over $10 billion, which included $1.2 billion of bookings in the quarter.

Let's now look at each of our segments, starting at Slide 6. Our Oil & Gas sector continues to perform well, delivering a 6.5% EBIT margin in the first quarter of 2017. We are particularly pleased to have recently signed additional long-term framework and master services agreements with established clients with whom we have a long-term relationship, which is a testament to their confidence in us. We continue to see many large EPC and sustaining capital projects and opportunities ahead, particularly in the Middle East and the United States.

Turning to Slide 7. We continued to see positive signs in our Mining & Metallurgy sector, which delivered another strong quarter in new work and a growing backlog. The backlog is 53% higher than at the end of December 2016 and now stands at a level not seen since 2015. We're also pleased with the sector's sustained EBIT percentage performance delivering 10.7% for the last 12 months. We see many prospects and opportunities ahead of us, particularly outside of Canada.

Moving to Slide 8. The Power sector continues to do well, improving its EBIT margins to 8.6% in Q1. Looking ahead, we see global nuclear and renewable opportunities. We believe that there is a significant growth in nuclear investments and that we are well positioned. We expect to enhance our addressable market in nuclear, and we expect to win nuclear maintenance and decommissioning projects that are nearing the end of their life cycles with subsequent capacity replacement projects.

Now turning to Infrastructure segment on Slide 9. We're very pleased with Q1 2017 EBIT margin of 6.6%, an improvement of over 1% from this time last year. This is down to stable executional performance in this sector. Our major projects continue to progress well, bidding activities continue to be strong and we continue to see many opportunities, particularly throughout Canada.

And last, turning to Slide 10. Our Capital team continues to work closely with all 4 sectors to develop business development opportunities. And as for Highway 407, we are again very pleased with the quarterly results. Revenues increased by 16% in Q1 2017 compared to Q1 2016 and the corresponding EBITDA increased by 18% during the same period.

In summary, we delivered solid results in Q1 2017. All 4 sectors and the Capital group have performed slightly ahead of our expectations, and we're on track to meet our 2017 outlook. We also look forward to close the Atkins acquisition in Q3, which will position SNC-Lavalin well for our long-term growth strategy, creating a global, fully integrated professional services and project management company.

With that, I'll pass the call over to Sylvain to go over our financial results in more detail.

Sylvain Girard

Thank you, Neil. Good afternoon, everyone.

Turning to Slide 11. E&C revenues for Q1 2017 totaled $1.8 billion, lower than Q1 2016. The decrease was mainly due to lower revenues from Infrastructure following the sale in the fourth quarter of 2016 of the company's noncore real estate facilities management business in Canada and of its local French operations. Excluding the impact of these transactions, revenues from E&C were in line with the corresponding period of 2016 as the increase in revenues from Infrastructure and Oil & Gas was offset by a decrease in Mining & Metallurgy and Power.

Revenues from Capital for Q1 2017 totaled $61 million compared with $57 million for Q1 2016, primarily due to higher dividends received from Highway 407 ETR. E&C SG&A expenses in Q1 2017 amounted to $147 million, 7% lower than Q1 2016. This decrease was mainly due to the successful implementation of the STEP Change program in 2015 and the Operational Excellence program launched in 2016. As Neil mentioned, we have reduced our total G&A by 12%, which was partly offset by investments in business development activities in Q1 2017 essentially due to higher proposal costs for bids on large-scale projects in the Infrastructure segment. The adjusted EBITDA from E&C amounted to $100 million in Q1 2017, in line with Q1 2016, but with a higher margin of 5.6%, reflecting higher EBIT margin across all segments.

Net income from E&C was $45 million or $0.30 per diluted share in Q1 2017, up 45% versus Q1 2016. The higher net income from E&C was mainly attributable to an increase in contributions from Oil & Gas and Power combined with lower restructuring costs. Adjusted net income from E&C in Q1 2017 was $61 million or $0.40 per diluted share compared to $57 million in Q1 2016 or $0.38 per diluted share. The 6% increase was mainly due to higher gross margin to revenue ratio and lower SG&A, partially offset by higher financial and tax expenses.

Net income from Capital was $45 million in Q1 2017 compared to $91 million for the corresponding quarter in 2016, mainly due to a $54 million net gain on disposal of the company's ownership interest in the Malta airport in the first quarter of 2016. Also, as mentioned earlier, the dividends received from Highway 407 ETR have increased by 10.5% in the first quarter of 2017 compared with the corresponding quarter last year, reflecting the continuing strong performance of this asset. Our revenue backlog remained strong at $10.1 billion, and our cash and cash equivalents stood at $811 million. I will shortly get into these in more details.

Now turning to Slide 12. Before I comment the numbers, please note that we have made a change in our segment presentation. Starting this quarter, we have combined the financial results of our Infrastructure & Construction and Operations & Maintenance sub segments. These sub segments were combined following the disposal of our noncore real estate facilities management business in Canada and our local French O&M operations in the fourth quarter of 2016. This combination in our reporting is a logical step given the interdependencies that exist between Infrastructure & Construction and Operations & Maintenance. Note also that both sub segments are under the responsibility of our Infrastructure President, Ian Edwards. As result of the combination, comparative figures have been adjusted.

Now let's look at the numbers. We see that the Mining & Metallurgy, Oil & Gas and Power segments EBIT performance were higher than in Q1 2016 while Infrastructure was slightly lower. The $14 million increase in Oil & Gas was mainly due to an increase in gross margin-to-revenue ratio, driven by favorable project performance and cost reforecast as well as a decrease in SG&A expenses. The Power segment benefited from a positive business mix, while Mining & Metallurgy successfully managed to offset the negative impact of lower revenues. Note that every segment has delivered a better EBIT margin percentage versus Q1 2016.

Moving on to Slide 13. Our diversified revenue backlog at quarter end remained solid at $10.1 billion, slightly lower than in December 2016. The breakdown by contract types remains in line with 2016 with 45% in reimbursable contracts and 55% in fixed price contracts. Bookings for the first quarter were $1.2 billion with an impressive book-to-bill ratio of 2.6 in the Mining & Metallurgy segment. Overall, we are pleased that we continued to maintain a high-quality, diversified backlog from quarter-to-quarter.

Turning to Slide 14. Compared to Q1 2015 and Q1 2016, we have been able to reduce our operating cash flow usage. Our operations essentially used $187 million in cash compared to $240 million in Q1 2016. The improvement was primarily driven by a reduced working capital requirement of approximately $42 million on certain major projects, partially offset by tax paid in Q1 2017 compared to taxes received in Q1 2016.

The right-hand side of the page identifies the main component of the decrease in cash, which are mainly our CapEx spent, mostly related to projects, and our quarterly dividends.

Moving to Slide 15. As you know, we expect to finance the WS Atkins with a $1.5 billion loan from CDPQ, a new £ 300 million unsecured term loan with a syndicate of North American banks and a £ 350 million draw from our existing credit facility, which will be adjusted as necessary.

We also announced on April 27 the closing of an $880 million public offering and a $400 million private placement, representing a total of 24.9 million subscription receipts. Credit agencies have also issued reports after that announcement affirming SNC-Lavalin's BBB rating or anticipating confirmation of the rating once the acquisition is closed.

We are very pleased with the positive reactions from investors and credit agencies. We believe that this financing package improves our balance sheet efficiency and takes advantage of our equity in the Highway 407 ETR while retaining our full equity ownership.

Now moving on to the last slide, Slide 16. We're still targeting an adjusted diluted EPS from E&C for 2017 in the range of $1.70 to $2. While we anticipate our revenues to decline year-over-year due to the continued market challenges this year in some of our segments, we expect to benefit from our recent restructuring savings and Operational Excellence programs.

We expect increased segment EBIT margins from all segments in 2017 compared to 2016 except for Mining & Metallurgy, which is expected to remain flat with 2016.

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

Question-and-Answer Session

Operator

[Operator Instructions]. We'll go to our first question and it's from Benoit Poirier with Desjardins.

Benoit Poirier

I was wondering just when we talk in terms of cash, what is kind of the surplus cash you need to, or the surplus cash you need to deal with, given the acquisition of Atkin and also the requirement in light of significant opportunities that are upcoming?

Sylvain Girard

Let me try to answer that and let me know if that properly answers your question. I think we closed the quarter with a little bit above $800 million. We didn't draw on our credit facility from that. So we've been able, over the last year, to be a little bit more efficient, so to speak, in terms of how we repatriate cash. So we think we can operate down to around $700 million without having to draw on the facility. Now as it relates to the acquisition of Atkins, I mean, we still have plenty of capacity in our revolver and we described how we intend to finance it. So a portion of that financing will come from the revolver, but the rest is the term loan as well as the CDPQ loan.

Benoit Poirier

Okay. Perfect. Yes. And could you maybe talk a little bit about the risk around the closing of the transaction and the way you manage the risk including the FX?

Sylvain Girard

Including the FX?

Benoit Poirier

Yes.

Sylvain Girard

Yes. So for U.K. transaction, you need to be, you need to achieve fund certainty. So we essentially have achieved that, that's a prerequisite to be able to announce a transaction. Therefore, when you do that, if you have financing that is not in British pounds denominated, you do have to have an FX hedge in place and we have put that in place prior to the announcement.

Benoit Poirier

Okay, perfect. And the last one for me, could you maybe give an update on the, about your big projects such as the Champlain Bridge and also the Eglinton?

Neil Bruce

I mean, generally, across-the-board, everything is on track. You know with these big projects, they're not straightforward. There's multiple things that have to be rescheduled on a regular ongoing basis in order to make sure that we get to the right end date, and there's nothing at the moment that's out of the ordinary or gives us concern.

Operator

We'll take our next question from Michael Tupholme with TD Securities.

Michael Tupholme

You delivered quite strong EBIT margins within the Power segment, 8.6%, which I think is the best we've seen since early 2015. Anything in particular that you can sort of call out that would have accounted for that margin strength? And is that kind of level sustainable?

Neil Bruce

I think in the, in a minute, it's benefiting from the increased marketing within the nuclear sector. And I think we talked -- so previous quarters last year, we talked about how we believe that as nuclear became a bigger portion of the Power portfolio, we would expect, naturally expect, the margins to increase with that. So that's fundamentally what it is.

Michael Tupholme

Perfect, that's helpful. Thank you. And then, Neil, maybe just sticking with nuclear, you sounded quite upbeat, I guess, in your prepared remarks about the opportunities in nuclear, not that -- not that SNC hasn't been in the past, but is there any update with respect to new nuclear opportunities or just developments in general in that sector that gives you increased confidence at present?

Neil Bruce

Yes, I'm always slightly wary about the nuclear sector. These things do tend to -- business development in nuclear can take a long time. But we are particularly pleased about the fact that we have a solid backlog in terms of the material work that we're doing, both at Darlington and Bruce Power with the really key important customers. And that gives us a platform to work off of, so it's a lot easier to then invest into business development for other opportunities like the opportunities in China, the opportunities in Argentina, Romania, some of the work that we are looking in terms of adviser work that both in China and in South Korea.

So it just -- it's -- there's a lot of opportunities coming up, and it's just easier to invest in the business development when you've got a big backlog and a solid capability and workforce. So therefore, that's why the optimism is a lot higher than previously been a couple of years ago. But the opportunity in Argentina is absolutely real. We've been given a pre-engineering contract to work through the details of how the new facilities, which are CANDU facilities funded by the Chinese, but high [ph] the supply chain but actually delivered that. So this is more than just looking at feasibility. This is looking at precontract start work.

Michael Tupholme

Okay, thank you . And then, just lastly, it was talked about on this call and in the past, the significant pipeline of opportunities within the Canadian infrastructure sector. Can you provide a bit of an update there? I guess, as we look out over the next, I don't know, next quarter, next couple of quarters, some of the opportunities that you're pursuing, should we expect to see possibly some announcements in the upcoming quarters?

Neil Bruce

Yes. Well, I think as we discussed before, the Infrastructure investment is large in, well, a number of countries, but in Canada specifically. And our main focus is very much around Rail & Transit, which is our specialty. And that, in the last count, I think it was 22 Canadian rail and transit opportunities that were in our business development hopper, and we're in a place where we have -- we're in the shortlist effectively, either the last 2 or the last 3 on at least 5 and we would expect that these are all capable, might not be awarded this year, but they're all capable of being awarded this year and we would hope to win our fair share. So I'd be really disappointed if we didn't win at least 2.

Operator

We'll take our next question from Sara O'Brien with RBC Capital Markets.

Sara O'Brien

Can you comment on your Oil & Gas pipeline of bidding activity right now? Just wondered what the profile of these projects is like in terms of size and also risk, meaning fixed bid versus cost reimbursable right now?

Neil Bruce

Well, I think the backlog is at $3.4 billion. Our big effort has been effectively to replace the big project, Gorgon, in particular in Australia, which finished at the back end of last year plus, at some point, the Ichthys project will also run down in the future. And we're very mindful of the fact that the biggest business development pushing Oil & Gas is to make sure that as that project completes and as the Ichthys project completes, then we replace that. So we're pretty happy at the moment with the order book being at $3.4 billion. I think, overall, the -- we're still in the 80-20 split, so 80% reimbursable, 20% lump sum. And again, quite happy with that. And I would say that the number of MSAs or call off type agreements has gone up.

So I think as these two big Australian projects come out and get worked off and come out in the backlog and come out in the revenues, then it's likely that we will have a lot more smaller contracts that will be replacing that. So in terms of numbers, it's more challenging in terms of a business development opportunity because we need to win more individual contracts to replace these. But I'm pretty comfortable at the moment at $3.5 billion and an 80-20 split.

Sara O'Brien

When you talk about more challenging because you have to go and win more of these contracts, does that bidding cost eat into your margin of the segment going forward?

Neil Bruce

It probably does to a degree. It's fantastic to have a multibillion project that goes on for years and -- that you've bid and you've won and you're just executing. So yes, I would expect that business development, the investment into business development actually across all four of our sectors, not just Oil & Gas, but -- and you see a little bit of a trend to that in Q1 if we are -- our SG&A overall has come down, but actually our S -- our sales has actually gone up. So that, again, we see that as a really good sign. I mean, we want to reduce some of our ongoing G&A, but we want to invest more in business development to win more work. So I wouldn't be surprised if the S went up a bit in Oil & Gas.

Sara O'Brien

Okay. And just a couple of questions for Sylvain. In terms of working capital needs, I noticed there was pretty big build in the contracts in progress in the quarter. I just wondered if you can help us understand, with the number of large chunky projects in Infrastructure, how we should see that inventory versus cash flow working through the year? Do you expect being net cash flow positive at the end of the year in terms of changes in working capital? Or do we see a drag because of the stage of projects?

Sylvain Girard

I think, for the full year, I mean, there's a bit of seasonality that happened in Q1 and we've seen that in prior years as well. So in terms of full year, we do expect to be cash flow positive from an operating standpoint. I think the WIP, or the in-progress, we call it WIP internally, I guess, the in-progress buildup that you're calling is more of a timing within some of those contracts that we have, especially not so much in the Infrastructure space, but a little bit more in Oil & Gas and the other segments.

Sara O'Brien

Okay. Had there been any collection issue in Oil & Gas contracts?

Sylvain Girard

The collection per se, once we turn the WIP into AR is not a problem. I mean I think it follows normal cycle. So I think the real task for the team in terms of converting is to convert the WIP into a billing and that's usually takes some time, you've got to hit certain milestones and sign off on the work being done before you can do that. So that's what's caused the buildup.

Sara O'Brien

Okay. And just the last question, in the guidance for the year, the $1.70 to $2, what's the inherent effective tax rate expected on the core E&C business for that?

Sylvain Girard

For core E&C, it's kind of, say, low 20s. So we're calling below the statutory tax rate, slightly below, I would say. So slightly below the 26.5%.

Operator

And we'll take our next question from Jacob Bout with CIBC.

Jacob Bout

Can you just comment on your 7% EBITDA margins for your legacy business? Just maybe comment about how achievable that still is?

Neil Bruce

Well, I think, as we said before, the 7% is a target and we are still aiming for that. So ultimately, I think in this quarter you will see a favorable progression towards that, and that's still our internal target. We're still aiming to do that.

Jacob Bout

By what time period?

Neil Bruce

This year.

Jacob Bout

Okay. And you made some comments during your outlook section there where you talk about challenging market conditions and, maybe just elaborate a little bit more on that.

Neil Bruce

It's just a general global statement, which is a global world full of next to no growth, and I think we've got to be very aligned to the fact that we need to play to our strengths in certain sectors or geographic markets where there is growth. But it's really reflecting on the fact that everybody knows the mining industry, mining sector is challenging and the oil and gas sector for the number of our competitors has been incredibly challenging. I mean, the whole cost focus piece within Oil & Gas has been challenging for us, too. So that's really what we're referring to.

Jacob Bout

And specifically, on the infrastructure side, are things becoming less competitive?

Neil Bruce

No, I think the infrastructure side is probably, I mean, there is more, I think there's more projects in infrastructure than E&C companies to do them. So from that perspective, we would expect our ability to be able to be a lot more focused on our core skills and the types and projects that we want to do whereas a couple of years ago, I guess, we were probably bidding for most of the infrastructure contracts that were available.

Jacob Bout

Okay. And then just last question just on renewables, maybe talk about how strategic that is in your Power group. And as a percentage of backlog, what would that be currently?

Neil Bruce

Well, today it's a very small percentage. But if you look at the, if you look at where is the industry going to be in North America in 2, 3, 4, 5 years' time, then renewables is going to be a big percentage. So for us, we think we have all the skills and capabilities to be able to do that. And we some of, we look at some of our competitors in terms of what they are doing and we certainly are as good if not better than them, so therefore we should be able to access that. So it's really an opportunity that we think, particularly in North America.

And I think there's also, one of the differentiators we have is our Capital group who can also look at prospects that are bigger than just sort of one-off, whether it's in solar or wind power, and potentially even invest in some of that. So that's a bit of a differentiator. So what we see is a growing market, therefore, an attractive market to be involved in.

Operator

We'll take our next question from Yuri Lynk from Canaccord Genuity.

Yuri Lynk

Neil, I wanted to circle on the Power, your Power business and good results out of that group. The backlog's been coming down for the last couple of quarters and I'm wondering if any of that decline is purposeful on SNC's behalf in terms of your pursuit of natural gas-fired power plants? Is that still a market that's robust? Or is that a market that's, there's opportunities, but maybe you're not pursuing them the way you did maybe a few years ago.

Neil Bruce

I mean, it's a good question and the backlogs at $2.2 billion. You know, generally, if you look at it from a pure outcome performance perspective, then we prefer nuclear to that sector. But there's plenty of opportunities. I would say that we are being a lot more selective then we might have been, maybe, 2 or 3 years ago in that arena. So it's a market that we, it's a part of the market that we're still very much interested in, but we're being highly, highly selective in terms of what we're doing within that whole thermal power piece.

Yuri Lynk

Okay. Probably early days, also in Power, but in parts of the world where some of the Westinghouse products might have been more competitive like in China, are you seeing -- do you see any implications for your new build business in parts of the world like China, given what's happened with that competitor?

Neil Bruce

In theory, yes, but we haven't really seen anything come through in practice. Like I said, the whole business development activities within nuclear, the cycle is so much longer. But again, I think previous quarters, we had talked about the exciting opportunities for us with CANDU in China, and simplistically, it was because of the dual-purpose piece, which is the fact that CANDU is a proven technology not just for power generation, but also to use spent fuel from other reactors. So it deals -- generates power, but also deals with the nuclear waste problem that is building up. So that's the -- that's probably the key differentiator for us around why we would be doing nuclear work in China.

Yuri Lynk

Got it, that makes sense. Okay, last one for me, just on your SG&A. Given the dispositions in the fourth quarter and the fact that you've been active taking costs out mostly in the last 2 years, is this kind of -- is the Q1 number kind of a good run rate to use as we try to model over the next couple of quarters?

Neil Bruce

I'd say, I think, generally, in terms of our very well announced programs, they are essentially, essentially complete. But the one thing that we're really clear about is that if we see any opportunities to take waste out of system and reduce that overhead, we will continue to that on a continuous basis. But in terms of big programs, that's pretty much done.

Yuri Lynk

Perfect. I will turn it over. Thanks very much.

Neil Bruce

Thank you.

Operator

And we'll take our next question from Devin Dodge of BMO.

Devin Dodge

In your Atkins deal, I thought it was interesting that you highlighted U.S. infrastructure as one of the growth opportunities when it seemed like previously you were pretty selective in bidding on U.S. projects. Can you talk about how Atkins changed your thinking on the U.S. market, if at all? Or if we should be expecting a greater willingness to grow in the U.S. going forward?

Neil Bruce

Well, I think Atkins and ourselves, together, are just a bigger proposition in the U.S. market, but actually, the real revenue opportunities in the short term is giving Atkins access to the Canadian market under our ownership. So they don't do a great deal here, and as we said earlier, there are huge opportunities in the Canadian market. And from a competitiveness, from a pricing perspective, for us, the Canadian market is more attractive generally than the U.S. market. And once the deal is completed, then we intend to make sure that Atkins get full access to all of their service offerings within the Canadian market, which is probably the most attractive market in the world today in infrastructure.

Devin Dodge

Okay, that makes sense. Then switching to the Mining & Metallurgy segment here, it's good to see a pickup in activity levels, but maybe not quite as strong as what we expected previously. Do you think some of the project awards that you expected maybe in Q1 got pushed out into Q2? And can you talk about the nature of the projects in that backlog and maybe the pipeline of opportunities? Just are we starting to see a shift from maybe shorter duration of work to longer term EPC type?

Neil Bruce

Yes. I mean, some of the projects have moved slightly to the right, not dramatically, but they have moved slightly to the right. But we're incredibly pleased about the number of contracts we've been picking up in South America, Chile in particular, around some increased activities and prices around copper. But also, again, one of our, I think, key differentiators is our process capabilities in a number of areas rather than our mining capabilities and that bodes well in the whole fertilizer, sulfuric acid type facilities, which we're seeing more and more of that in terms of the opportunities.

Plus, the big project that we got, the first phase of -- in Russia is actually an environmental project. I mean, it's not a mining project, as such. It's more of an environmental project. So we're seeing -- we're not seeing a return to a few years ago generally and we're not seeing some of the base metal prices increasing or the activity increasing, but we are seeing in very selective areas, so I said fertilizer, sulfuric acid, copper and general process activities, together with sustaining capital, which we continue to grow. But we still expect to see the M&M backlog continue to increase full year this year.

Devin Dodge

Okay, okay. And then one last one for me, and I apologize if I missed this, but in the MD&A you talked about favorable reforecast in the Oil & Gas segment. Did you guys quantify the impact there?

Sylvain Girard

No. No, we didn't. I mean, I think, I guess, it's almost more of a general comment and we do have a process by which we have to look at our project forecast on an ongoing basis. And I think all this was meant to say is that the -- generally speaking, those have worked out positively, which is good, so we feel good about that. But no specific quantum disclosed.

Devin Dodge

Okay, thank you.

Operator

We'll go to our next question from David Silver with Morningstar.

David Silver

I wanted to ask Sylvain a question, maybe coming back to the first quarter cash flow. And we're just wondering philosophically if you could you speak to why, on a recurring basis, there's such a large draw on first quarter cash flow. I would have thought that cash flows maybe might be tied more to on a project by project basis. But if there's a particular issue or two that you could highlight that, that would be helpful.

Neil Bruce

I think you're really hard to hear there, but I think you're asking about the seasonality of the cash flow and why would Q1 be more of a usage. Is that the question?

David Silver

I apologize and that'll be all. But yes, I was just wondering why, on a consistent basis, there's a relatively large draw on cash flow in each of your first quarters. And just any detail on that would be helpful.

Sylvain Girard

Yes, I think it's, I mean, it's just really, just general seasonality. I mean I think when we close, what you'll see as well is Q4 tends to be a stronger quarter across the year for us and for many players, I guess, where I think you try to, as you close the year, you try to reach some milestones, you try to get cleaned up, so to speak on your acceptance of the work and so forth, your billings. I think there's a bigger push from everybody and I think on the customer side as well as to resolve matters.

I think when you get into Q1, you do have a bit of a, I guess, a bit of an opposite effect to that where I think we're ramping up for the year and we're executing work, but we don't quite get there on the billing activities and the collection activities, although we did quite okay on collection in the quarter, but maybe a little bit less on converting the in-progress into billing. So nothing very scientific to it. I think it's just a trend that we see and Q4 is a better quarter and Q1 tends to be not as good.

David Silver

Okay. And then I just did want to ask one question about the award you announced for the ammonia plant. So I mean, my understanding is that obviously an ammonia plant is more than USD 1 billion and I don't know if any EPC contract covers 60% as you referred to that. I mean, that continues to be a very large percentage of your bookings in the first quarter. So I was just wondering if that's a correct assumption? Or is that a different scale or a different type of project that you booked?

Sylvain Girard

Can you repeat, which award you're talking about, David?

David Silver

Yes. Many apologies. It was the anhydrous ammonia project in Oman.

Neil Bruce

Oman.

Sylvain Girard

We're really sorry, we're looking at each other wondering, which project you're talking about so --.

Neil Bruce

Oman, you said?

Sylvain Girard

The mining.

David Silver

So on the Mining & Metallurgy page at the bottom, an EPC award for the anhydrous ammonia facility.

Sylvain Girard

Okay. The ammonia.

Neil Bruce

Yes, so that's the EPC contract. Okay. Sorry, your phone line is really cutting in and out and it's really difficult to follow. But yes, I mean, that, at the beginning, is, that's still, that's one project within the backlog of sort of $450 million, so it's still a relatively small piece compared to some of the other projects, but there are further phases to all of that. So that's more of an early piece of work we're doing there.

Operator

We'll take our next question from Frederic Bastien from Raymond James.

Frederic Bastien

I don't want to put the cart before the horse, but would a successful acquisition of Atkins take you where you want to be strategically in terms of geographical footprint and also service offering?

Neil Bruce

Pretty much so, yes. I mean, it's, I think we, on quite a few occasions, this time last year, when we were talking about the theoretical, the strategy and the ideal acquisition when we're asked the question, I think I said that it would be a combination of something that went across, at least went across Infrastructure and Power and that gave us a better balance geographically and certainly, that will, upon completion, in terms of our European-Scandinavian balance, together with increasing our presence in the Middle East and in Asia. And the third element of it all in terms of the balanced portfolio was the whole thing to do with the business model. And there effectively, a reimbursable model, which so, so that will push our overall business more towards, a lot more towards reimbursable than lump sum.

Frederic Bastien

Okay, that's great. Last one for me, would you be able to provide an update on the Oil & Gas jobs in the Middle East that suffered from cost overruns last year and that you took a provision in Q3 and then you reversed some in Q4. Just wondering where this project stands at.

Sylvain Girard

I think from a, it continues to perform well. I think we managed to recover a little bit further in the quarter from actually our own productivity level on the projects. So I think we're continuing to work with the customer on more recovery, but I'm pleased to say that it's continuing and we saw it in the quarter as well.

Frederic Bastien

And Sylvain, can you remind me when these projects are due to be complete?

Sylvain Girard

These were originally expected for five years, but they could go for longer. So we're probably now two years into them, I would say.

Neil Bruce

And there's no, these are more of a call-off work, so this is not us being late. This is good extensions on a call-off basis by adding more scope.

Operator

And we'll take our next question from Maxim Sytchev with National Bank Financial.

Maxim Sytchev

Had a very quick question, a follow-up on Oil & Gas. Neil, I think in the past, we talked about maybe 100 basis point compression in terms of EBIT margin relative to Kentz's legacy run rate. And right now with obviously a still competitive environment, is this still the run rate that you think is maintainable? Or should we think about sort of a different plateau from a margin perspective for that division?

Neil Bruce

I mean, our target is still the same. So I think you sort of see with the latest results that we are at 6.5% and what you're referring to is back in 2014, with oil price at $100-plus, Kentz's margins were right at about the 7.5%. So we've seen probably, again in very rough terms, we've seen a 3% decline in gross margin, but we've been able to take the G&A down as well. And the net effect has been about 1% on EBIT and that's our -- that continues to be our target going forward.

Maxim Sytchev

Okay, that's helpful, thank you. And last question, I'm not sure if you can answer at this juncture, but any maybe broad strokes in terms of revenue synergies that you could be thinking about with Atkins as part of our combined platform? Anything you can share with us right now.

Neil Bruce

Yes. Unfortunately, not. We've got ideas, but we are -- because of the period we're in between the agreement offer and the closing work, actually not allowed to -- not just talk about, we're not allowed to actually sit down with Atkins and talk about future business until it closes.

Maxim Sytchev

Okay. Now fair enough, thank you. That's it from me.

Neil Bruce

Thanks

Operator

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

Denis Jasmin

Okay. Thank you, everyone, for joining us today. If you have any further questions, please do not hesitate to contact me. Thanks very much. Have a good night, everyone.

Neil Bruce

Thank you.

Sylvain Girard

Thank you.

Operator

Ladies and gentlemen, this does conclude today's call. Thank you for your participation, and you may now disconnect.

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