SNC Lavalin Group Inc.A (SNCAF) CEO Neil Bruce on Q1 2018 Results - Earnings Call Transcript

SNC Lavalin Group Inc.A. (OTCPK:SNCAF) Q1 2018 Results Earnings Conference Call May 3, 2018 3:00 PM ET

Executives

Denis Jasmin - VP, IR

Neil Bruce - CEO, President and Director

Sylvain Girard - CFO and EVP

Analysts

Mark Neville - Scotiabank

Jacob Bout - CIBC

Mona Nazir - Laurentian Bank

Derek Spronck - RBC.

Benoit Poirier - Desjardins Capital Markets

Maxim Sytchev - National Bank Financial.

Michael Tupholme - TD Securities

Operator

Good day, everyone, and welcome to the SNC-Lavalin First Quarter 2018 Earnings Conference Call. Today's conference is being recorded.

And 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 thank you for joining us today. With me today are Neil Bruce, President and CEO; and Sylvain Girard, Executive Vice President and CFO.

Our earnings announcement was released this morning and we have posted -- a slide presentation on the Investors section of our website. If you are not using today's webcast, please ensure to open the presentation as we will refer to it during this call. The recoding of today's call and webcast will also be available on our website within 24 hours.

Before we begin, I would like to ask everyone to limit themselves to two or three questions to ensure that all [Indiscernible] to participate. You are welcome to return to the queue for any follow up question.

I would also like to draw your attention to Slide 2 of the presentation. Information in this presentation and remarks made by the speakers today will contain statements about expected future events and financial results that are forward-looking and therefore subject to risk and uncertainties. These forward-looking statements represent expectation as of today, and accordingly, are subject to change.

We disclaim any obligation to update any forward-looking statements except as required by law. A description of the risk factors that may affect future results is contained with the company's MD&A available on our website and in our filings with the Canadian securities administrators.

During today's call, we will also discuss certain non-IFRS financial numbers. You can find reconciliation of these numbers with comparable IFRS measures in the presentation and in our MD&A.

With that, I will turn the conference over to Neil Bruce. Neil?

Neil Bruce

Thank you, Denis, and good afternoon, everyone. I will briefly review our Q1 results and discuss the sectors highlights and trends. Sylvain will then cover the Q1 financial aspects in more details.

Let me start by saying I'm pleased overall with our first quarter results which were in line with expectations. As you can see on slide four, revenues were up 32% to $2.4 billion and our adjusted net income for E&C was $90 million, representing a 47% increase compared to Q1 of 2017.

This represents $0.51 in E&C adjusted EPS, which is a 28% increase over the same quarter last year. We also delivered a total segment EBIT growth 42% and an overall EBITDA margin for the E&C of 7.5% compared to 5.6% in Q1, 2017.

The remaining performance obligations are RPO, which is new term under IFRS 15 for backlog total of $13.5 billion at the end of Q1. New awards were strong in the first quarter totaling $2.1 billion this excludes two recently awarded projects for the Montreal REM, which will be booked into RPO and Q2 are approximately $1.9 billion.

Q1 results give us confidence to maintain our ambitious 2018 outlook for an adjusted diluted EPS from E&C in the range of $2.60 to $2.85. So if you turn to slide five, the infrastructure sector had another good quarter, with a 12% increase in revenues. Our four ongoing major projects continue to progress well and our revenue backlog under list the prospects of high quality.

The infrastructure sector continues to be very active, especially in North America and our bidding activities continue to be strong. With the addition of Atkins, we believe the SNC-Lavalin is well-positioned to win more work in the U.S.

We were particularly pleased with the recent awards for the design build project managements of the Federal Way Link Extension in the Seattle area. We have several derisk the business post quarter as Infrastructure Canada issued an update on the construction of the Champlain Bridge on April the 13th, confirming the settlement agreement was reached for $235 million. We are lying solely focused on delivering the bridge by December 21.

Our oil and gas sector had another good performance this quarter with an EBIT margin of 7.4%. Bidding in Q1 continued at a very robust rate, we are continuing to see positive market sentiment due to good fundamentals across the market for upstream LNG [Indiscernible] stream.

Customers are increasingly optimistic driving strong demand for oil and gas services that are expected to be awarded in the next 9 to 12 months. Our diversified portfolio has the wide – that sustain a strong business. As the market evolves to see the current cycle.

Through 2017 and going into 2018, a large number of awards were longer-term framework and master services agreement, which creates sustainable revenues. But on the other hand, most of these cannot be included in the RPU as we don’t meet the new IFRS15 definition.

Sylvain will explain in a minute we have divided power into two global sectors, Nuclear, and Clean Power. We are also disclosing the thermal power separately until we complete our last ongoing EPC project, as we decided to exit this profitable part of our business.

This last ongoing project is still expected to be completed by mid-2018. We are pleased with the performance of our nuclear business and continue to see major opportunities particularly in Canada, Europe, United States and South America. The nuclear market continues to be an important priority for us and are ready to assist a wide client base having integrated Atkins capabilities in consultancy, EPCM, field services, technology services, reactor support on the commission.

We have also continued to grow our Clean Energy portfolio in renewable energy, Hydro and T&D. We expect these markets to continue to grow significantly.

Turning to slide six, we are very pleased with EDPM sector results. It had another strong quarter delivering in Q1 at 10.3% EBIT margin. EDPM is big $2 billion and new awards including procurement advisory services from the Kingdom of Saudi Arabia and National Water Company to provide water distribution services, an infrastructure management study which will shape the development of the rail network across the Baltic region for effective months autonomous vehicle study project across the U.K.

EDPM revenue backlog totaled $2.2 billion at the end of Q1. The operational integration of the Atkins business is complete and we continue to deliver the cost synergies that we anticipated. Our Mining & Metallurgy sector is continuing on its path to growth, focusing on an increasing number of American business opportunities. Despite delays and some contract awards, we are optimistic as our clients restart significant investments in their capital expenditures for the end of 2018 and early 2019.

We see a wide variety of attractive prospects and opportunities in corporate gold, fertilizers and in commodities related to batteries for electric vehicles, mobile phones and other electric devices. We are currently working on beds and we are awaiting responses on a significant portfolio of projects particularly in the Middle East, Latin American, Australia regions.

Considering the current increase in market demand and a promising pipeline, this sector seems poised for a continued growth into the future. And lastly, we are very pleased once again with the results on Highway 407 which reported in Q1 increases of 11% in revenues and 2.5% in traffic.

[Indiscernible] SNC-Lavalin infrastructure partnership grows and continue to expect that one more asset -- hospital will be transferred into the vehicle by the second half of 2018.

In summary, we are pleased with our Q1, 2018 performance and we are starting 2018 with an enhanced global structure. This strategic realignment which allows us to serve our clients worldwide even more effectively combined with our high quality and diversified project pipeline better service mix and extensive digital expertise position us well to achieve our growth agenda. We continue to derisk our business and position ourselves for growth across our sectors.

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

Sylvain Girard

Thank you Neil. And good afternoon everyone. I’ll start on slide eight. Before I get into the financial details, I would like to explain the changes that we made to our segment this quarter which took effect on January 1st. First we have revised the segments and divided power into two new global segments; Nuclear and Clean Power. And we decided to disclose the thermal power separately until we complete our last ongoing EPC project. We then reallocated the Atkins Energy business into the nuclear and the oil and gas segments.

Lastly, we transferred SNC-Lavalin’s Rail & Transit Engineering business to the newly named segment, Engineering, Design and Project Management or EDPM which is largely the former Atkins segment.

The other change we make, the other change we implemented was to transfer certain corporate G&A cost to the segment EBIT. These costs are mainly related to information technology as well as employee benefits and incentives. The allocation of the information technology cost is based on a per employee basis, while the allocation of the benefits and incentives is determined employee by employee.

We believe that such allocations improve the measure of profitability of our operations, by better reflecting the overall cost incurred to support each segment. For your information and ease of comparison, we had included in the appendix of this presentation on slide 17 and 18, the comparative restated numbers for the new segment this quarter, by quarter for the full year 2017. These changes have no impact on the overall EBIT of the company.

Turning to slide nine, total revenues for Q1, 2018 totaled $2.4 billion compared to $1.8 billion for Q1, 2017 an increase of 31.5%. This growth was due to the revenue increase from EDPM and nuclear largely attributable to incremental revenues from Atkins which was acquired in Q3, 2017. This was partially offset by a decrease in oil and gas, mainly due to the near completion of major projects.

Note that the decrease in oil and gas was partially offset by higher revenues from sustaining capital projects that were awarded in 2016 and 2017, primarily in the Middle East. Total segment EBIT totaled $234 million, an increase of 42% compared to Q1, 2017. The EDPM segment had a strong quarter that delivered $81 million segment EBIT in Q1, 2018.

The thermal power segment recorded a lower negative segment EBIT of $11 million in Q1, 2018 compared to $27 million loss in Q1, 2017, mainly to an unfavorable cost we forecast on the company’s last ongoing fixed price EPC thermal power plant project.

As we mentioned before, it was decided in 2017 to exit this part of the business. Our adjusted EBITDA from E&C amounted to $177 million in Q1, 2018 with a margin of 7.5% significantly higher than Q1, 2017. Our financial expenses increased mainly due to the financing of the acquisition of Atkins in Q3, 2017.

Adjusted net income from E&C amounted to $9 million or $0.51 per diluted share in Q1, 2018 versus $61 million or $0.40 per diluted share in Q1, 2017. This is mainly due to a higher segment EBIT partially offset by an increase in income taxes and financial expenses.

Effective January 1, 2018 the company’s revenue backlog was replaced by the measure of remaining performance obligations. RPO, which is based on IFRS 15 without statement of the card periods. Applying the new RPO measure created the positive adjustment of $3.4 billion as of January 1, 2018 compared to the December 31, 2017 revenue backlog closing balance.

This is mainly due to two significant changes. The first change is the improvement of the full term of the company’s O&M time long-term contract, which can cover a period of upto 40 years. The second change relates to the exclusion of anticipated volume of work done under a signed master service agreements for which no formal purchase orders or work orders had yet been issued within their long-term agreements.

We also modify the classification methodology relating to the contracting type in order to provide a better risk so far this quarter and allow for a better comparison with our peers. We have separated our EPC fixed-price contracts from contracts that do not have procurement and fixed-price construction components.

Based on this new classification, 36% of our remaining performance obligations and 75% of our Q1 2018 revenues represented reimbursable and engineering service contracts including operations and maintenance. I will shortly get into the liquidity and debt ratios in more details.

Now turning to slide 10, we see that the Q1, 2018 nuclear segment was lower than Q1, 2017 but this was mainly due to a favorable reforecast in Q1, 2017. Note that a normalized EBIT margin for nuclear sector should be around 15%. As just mentioned, the thermal power segment recorded a lower negative segment EBIT in Q1, 2018 due to an unfavorable cost we forecast on the company’s last ongoing fixed-price EPC thermal power plant project.

We continue to expect this project to be completed by mid-year. The EDPM segment delivered another strong quarter with a 10.3% segment EBIT margin.

Turning to slide 11, as we can see our cash flow from operations usually negative in the first quarter of the year, but it is trending well. Our operations essentially use $147 million of cash in Q1, 2018. This use was primarily driven by higher working capital requirements on certain major projects, which often don’t align to quarterly reporting periods and an increase in interest paid.

This was partially offset by higher EBIT from the entity and capital, and increased in cash tax receipt and a decrease in restructuring cost base. Other than the cash flows from operations, we see on the right-hand side that the cash movements were mainly caused by quarterly dividends and our CapEx spend, mostly related to projects. This was partially offset by a net increase in reported debt as we issued on March 2, 2018 three series of new unsecured debentures of $525 million. The net proceeds of these issuances was used to repaying for the term facility and part of the revolving facility which overall reduces our future financing cost.

Moving to slide 12, as of March 31,2018 the company continues to maintain adequate liquidity to pursue its growth strategy. We closed the quarter with $647 million in cash and cash equivalents, $898 million in net recorded debt and $2.1 billion in unused capacity under our $2.6 billion committed revolving credit facility.

The net record adjusted EBITDA ratio was 1.1. Records that over total capital is now 25 to 75 in line with the company’s objective of maintaining an efficient balance sheet.

On April 30, 2018 we amended and restated our credit agreement for the purpose of making available a new five-year non-revolving turmoil of $500 million for which the proceeds have been used to repay tranche fee of our CDPQ loan. This new term loan has a lower interest rate COG in the CDPQ loan therefore reducing even further our future financing cost. This refinancing will not have any impact on our current credit rating.

Now moving to my last slide, slide 13. We are maintaining our 2018 outlook for an adjusted diluted EPS from E&C in the range of $2.60 to $2.85 and our adjusted consolidated diluted EPS of $3.60 to $3.85. We also continue to expect an overall tax rate for adjusted E&C business of 20% to 25%.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And your first question will come from the line of Yuri Lynk of Canaccord Genuity. Please go ahead.

Yuri Lynk

Hey good afternoon guys.

Neil Bruce

Hey Yuri.

Yuri Lynk

Hi. Atkins had a pretty good quarter from a margin perspective. Can you shed some light on whether that’s a typical what a typical first quarter looks like for that business or was there something that might have positively impacted the results?

And related to that, given the new reporting structure and allocation of SG&A to the segments what should we be looking for a typical full run year rate EBIT margin for that segment?

Neil Bruce

So the – obviously first question was there something in there that positively affected it? No, so that is –that’s the base business, basically with the benefits and cost synergies and increased productivity so from that perspective there is nothing something special in that bumped the number up.

We are always looking at people considered the business overall to be and 8% business when it was a standalone business to take the 120 million synergies and you take improvement in the utilization then, we’d expect it to be a couple of points higher than March. So I think the business is still got a [Indiscernible] I mean this is the third quarter, so I think we need to run the full cycle of four complete quarters, but we are expecting it to be in that range going forward.

Yuri Lynk

Even though you are allocating….

Neil Bruce

Yes just on that, Yuri, the core SG&A had very little impact on EDPM, so by the nature, this was kind of -- these costs were pre-acquisition rolling into corporate SG&A, once we did the acquisition, we did not change so the allocation process. So very little impact on EDPM from this change.

Yuri Lynk

Okay, second question. Just on the – the working capital cash usage what should we expect for the rest of the year? Will we see that unwind, any kind of estimate in terms of what the full year investment in non-cash working capital would be helpful? Thanks.

Neil Bruce

Yes, so for the operating cash flow for the year, we are looking at a positive number. As you said before, we are actually looking to do a bit of deleveraging as a while in the tune of 100 million. So like when you add all that in, we need to generate enough cash to obviously pay the obligation such as dividend and all that stuff and, and some deleveraging. So we see a positive OCS for the full year. Q1 has historically been the negative quarter for us, and in that number, the other thing I’d like to point out is there is nearly I guess in the range of 40% the -- of the cash usage coming from OCF coming from the terminal wind down. So as we close that project, obviously it’s been using cash.

Yuri Lynk

Okay, if there are like 12 million, there’s 12 million left in backlog with that project, is that going to be – is that kind of 12 million of revenue for that segment in Q2?

Sylvain Girard

Well it should be, yes there’s still a lot pretty much with the backlog number, maybe next to that, yes. Absolutely.

Yuri Lynk

I better turn it over. Thanks, guys.

Operator

And your next question will come from the line of Mark Neville of Scotiabank. Please go ahead.

Mark Neville

Hi, good afternoon guys. Just wanted to follow up on some of those questions. There is a lot of moving parts, just wanted to make sure I’m – I guess I understand everything. In terms of the margin guidance or target, so you’ve talked about the only one sort of missing I guess would be clean power for use, these and 15 for nuclear and gets older sort of goalpost for the other businesses. So maybe just help us sort of think about clean power if the 12%, 13% you did last year is a reasonable run rate for that business?

Sylvain Girard

I mean just to be absolutely clear, I mean we haven’t given margin targets, or margin guidance per say. But in terms of what you see in the first quarter, did that expect that to continue? No, we’d expect the clean power to come down a bit through…

Mark Neville

The 12.8 you did last year, is that sort of a reasonable number to think before that business?

Sylvain Girard

No, it’s a bit too high I mean, we’ve had some project completion, advancement so if you look at the backlog in that business it’s come down a little bit though, and margin will come down from that 12.8 and will come down from the 12.8 this quarter as well.

Mark Neville

So the business that moved out of Atkins or I guess out of ADPM and to oil and gas and nuclear, just trying to ball park the sort of the revenue numbers, that it was $400, $500 million of revenues that would have moved over on the annualized basis.

Sylvain Girard

Let me take that number up Mark for you and….

Neil Bruce

I mean generally in the business, the only other pieces is pretty negligible, it’s really the nuclear piece.

Mark Neville

Okay, I think that’s all up. And just – maybe just one last one on the inter margin in the quarter, that was a bit weaker, just maybe if you can talk to that I guess specifically like some of the – the Champlain Bridge. As you are walking through that in Q1, are you still able to run margin on that even though I guess the change or the agreement you made this post quarter?

Neil Bruce

I’m sorry what’s your question?

Sylvain Girard

Did you think the margin on the Champlain Bridge in the first quarter? That’s the question mark.

Neil Bruce

Yes, we did not take a pick up from the settlement that you mean on the project is still at margin. So…

Mark Neville

I know, I guess my question, I think it was a bit in for margin was a bit weaker in the quarter, I’m just wondering was it sort of….

Neil Bruce

It’s not linked to that. I think we’re in for a business that tends to be, I mean this is a lumpy business because of the nature of some of these large projects, so you will have time to have settlement that moved the margin up and down and so forth. So I think it’s more a timing issue obviously in the first quarter.

Mark Neville

Okay, so there wouldn’t be a bump up in Q2, Q3, Q4….

Neil Bruce

Sorry, we do expect, not associated with Champlain Bridge -- expect to be absolute we are expecting that to come back up to a more what we described before us normal margins, I mean we absolutely expect that.

Mark Neville

Right. Okay, thank you. I’ll get back in queue.

Operator

The next question will come from the line of Jacob Bout of CIBC. Please go ahead.

Jacob Bout

Good afternoon. Couple of questions here on the oil and gas sector, so you talk about revenue being down some of the major projects come to completion. Is there a [bleet] that happens into the second quarter. And then maybe you just talk about the impact of that five year deal that you signed with KJO. How does that change at the back half of the year?

Neil Bruce

I mean, I think so in terms of the revenues coming down, I mean not so as we successfully complete or get near the completion on the impacts work in Australia. And I saw the other projects ramp up. So I think one of the things we were sort of trying to highlight is that with IFRS 15 in terms of looking up backlog as a measure, the bunch of contracts and in fact the majority of contracts that we picked up recently will never be painted into backlog in terms of their call of nature, so the stuff that we talked to buy with Shell, with Chevron and a couple of the Saudi Aramco contracts. I mean from our perspective we internally are looking more at say work on [Indiscernible] in terms of meeting our expectations for the year and we are well over 80%.

Jacob Bout

And maybe just a question on nuclear. So margins a little bit lower than what you saw in 2017, just talk about seasonality or mix and maybe comment on the Candu margins on the Candu workforce or some of this refurbishment work?

Neil Bruce

Yes, that’s probably seasonality. I mean, last year we did a good deal on some of the more technology things on a project and we got really good return in Q1 last year. So it’s not seasonality, it was – that was a one-off a good piece of business but not the sort of thing that happens every quarter. So if you look at probably this quarter we are sort of expect that hopefully that will be finally could become within this sector.

Jacob Bout

And then the last question here just on the divestment of thermal. So you are seeing mid-2018 same year running out your process and how should we think of evaluation on that?

Neil Bruce

Well not really on a process, we are just looking to check business time as quickly and as efficiently as possible. So, we had effectively – this is our last project. This is a project that was in the backlog, well over two years ago and we need to complete it. And I mean effectively with our stage we are by May we should be in a position where the vast majority of the cost exposure in terms of the construction elements are complete and then we’ll be into completions on commissioning which is far, far, far lower and leveled and we expect to complete over that by half year. And ineffectively the thermal business is such we will just be – enclosed and we are finished with that.

Jacob Bout

Okay. Thank you.

Neil Bruce

Okay.

Operator

Next question will come from the line of Mona Nazir of Laurentian Bank. Please go ahead.

Mona Nazir

Good afternoon and thank you for taking my questions. So the first question just had to do with some of the re-segmentation and trying to piece together the full Atkins as you kind of incorporated it into some of the other divisions. I understand that EDPM is the significant portion of it, but just reading in the MD&A it seems like some of it is in nuclear and clean power. So I’m just wondering if we add up all of the pieces, what was [the Tudo] Atkins sales contribution and related margins we have that.

Neil Bruce

I mean actually we do it. Let me just sort of explain, it’s at a very high level what we’ve done. I mean, the main change is the oil and gas interest, it was timing. It was a few people in the U.K. and a few people in Houston that was merged in oil and gas pretty insignificant. And the clean power pieces were all in terms of anything to do when power was tiny as well. So the only real significant things that happened and it was really linked with of trying to keep the integration as simple as possible was effectively we took and the nuclear business which was predominantly consulting business in the U.K. and a decommissioning business in the U.S. together with SNC Lavalin nuclear business and put it together.

And then the second thing we did is we took the role in transit piece of infrastructure business in the U.K. and put it in with Atkins really trying to dug in, in comparison that really wasn’t a, it really wasn’t a master business either. So, the real, the only real sort of big change here and that really affects the numbers in any way is moving nuclear out of Atkins into a combined or -- or would have been EDPM moving it into the combined nuclear process.

Mona Nazir

Okay, that was very helpful. And then just secondly, you are reiterating your guidance and I understand that there is quarter-to-quarter volatility. I’m just wondering if you could provide any color on how Q2 has been progressing, is the Montreal REM to contribute to results and I know you just spoke about oil and gas side of things as we move through the year. But I just wanted to give you the opportunity to highlight certain areas of importance particularly given the wide net [Indiscernible] cap.

Neil Bruce

I mean, I think you are right. If you look at infrastructure and going back to I think Jacob’s question, I mean if you look at the sort of margins, stocks that are infrastructured in Q1, I mean we are expecting that margin to go back to and the margin that we enjoyed last year. And we fully expect that and that will come through from the mobilization, both the mobilization of REM which originally that contract could have been validated by the back end of last year and then moved into Q1 and then effectively it wasn’t signed into Q2, but we’ve got 200 people on that leg. So it’s not a slow start, it’s a very rapid start that now will be contributing towards both revenues and relevant margins from day one of Q1 pretty much been day one of Q2.

I think from an oil and gas perspective, again we see, we are, we really are having to look at it from an operational and delivery perspective. We are having a look at it from a how much confidence do we in terms of the work on hand not necessarily the IFRS 15 definition how much work on hand have we got that gives us confidence to be able to deliver EBIT not necessarily revenues but EBIT for the full year.

And as I said before we are saying here one quarter and thinking with above 80% now, which actually is sort of pretty it’s pretty good that’s not the best I’ve ever seen but it’s not the worst either, I mean it’s a good position. And we see mining that are drifting slightly to the right in terms of some of the bigger capital awards, but we still expect they are last jumping in terms of our RPO or our backlog in mining as we get into Q3, Q2 to walk back into Q2 and Q3.

And of course we still don’t have – we haven’t included anything in the backlog for the JV with ABB and that we are currently working on finalizing that joint venture. I mean hopefully we’ll have that in a position where it starts to kick in atleast initially in the third quarter and in sort of fully in the fourth quarter. So know there’s a number of areas across the business. And ultimately as well – really really looking forward to shutting down thermal and completing our project and not having to carry the drag of the thermal business. And that's something that we planned back, I think, we talked about that well back in 2017, but this last project was something that was in the backlog well over two years ago, and we just need to get it complete. But effectively, the majority of that will be done this month, and then we look to close the business then fully by half year.

Mona Nazir

Okay. That was a lot of good information. Thank you.

Neil Bruce

Thank you.

Operator

And your next question comes from Derek Spronck of RBC. Please go ahead.

Derek Spronck

Good afternoon. Could you provide some color, and you just did with Mona's question, but around organic growth. I mean, if we strip out acquisitions and the benefit from acquisitions, were you able to generate positive organic growth this quarter? And how do you see that progressing over the course of 2018?

Neil Bruce

Well, I think if we look at it from the revenue perspective, so fairly flat. If we look at it from a bottom line and EBIT perspective, we are generating organic growth in EBITDA and EPS. And that is our priority over everything else. I mean, we want to maintain the growth in EPS, maintain the growth in margin. And once we get that, we'd also like to -- we'd like for the revenues to also kick in and for us to grow in terms of the top line, but that's our order of priority.

Derek Spronck

Okay. When you look at your backlog and -- sorry, go ahead.

Sylvain Girard

Yes. I was just going to add, as I said in my remarks, we had Oil & Gas that was down year-on-year as we mentioned, but we did have growth in the M&M sector -- segment and the infra segment as well.

Derek Spronck

Okay. And when you look at your backlog and as you're working through, as you're converting your backlog over the next 12 months, you have pretty good visibility around it, and are you comfortable that, that backlog of work, the quality of it should improve as you convert more and more of it? Or any color around that would be helpful.

Neil Bruce

Yes, I mean, it's been a continuous process. So a company with $10 billion or $12 billion of backlog, and it goes back a couple of years through to could be eight years ago, it takes a long time to sort of work it through and replenish it and get that and get to a place where you would really like to be if you could start the whole thing from scratch again. And we're now in a -- we are in place that once we -- and I think we talked about it a bit through 2017 that once we exit thermal and once we have the Atkins integration complete from an operational perspective, which we have now completed, then we've got the sectors, and we've got the businesses that we feel confident about in terms of growth potential in the sector and good quality customers and good backlog.

Derek Spronck

So it sounds like you're pretty comfortable with your regional and vertical footprint as it stands outside of thermal part. What's your -- and you've also won a couple nice contracts in the U.S., infrastructure contracts. Is that a growth opportunity for you? And what's your strategy towards growth into the U.S. infrastructure transportation vertical?

Neil Bruce

Yes, no. I mean, we are incredibly excited about the potential of infrastructure and Rail & Transit, in particular, in the U.S. because we -- I mean, hopefully, people can see that the strategy in Canada over the last few years has been paying, paying off really well. Great, great dividends on that and that we'll focus into Rail & Transit primarily but having that capability of capital engineering construction partners through into the long-term O&M. And pretty much all of the contracts that we do on that basis are best contracts within infrastructure and perform really well.

So in the U.S., what we were missing was that engineering capability. And basically, Atkins has given Ian Edwards from the Infrastructure Group, in particular, that engineering capability, almost as big as the capability in Canada in terms of the numbers. So we're now able to link capital actually, whether it's in the U.S. or Canada. So it doesn't really matter too much. We've got the engineering capabilities. We are partnering up with construction companies that we do business with even in Canada or elsewhere, and we've already got the O&M capability effectively in the U.S., albeit smaller number than we have in Canada. So we are really looking to replicate that model in the U.S and getting Atkins predominantly infrastructure engineering capabilities in the U.S. really is the differentiator or the thing that allows us to replicate the Canadian model.

Derek Spronck

Could it be as big as the Canadian footprint, eventually?

Neil Bruce

Well, I mean, the market is sort of 10 times plus. So it could be. It'll take time to work through that because everybody knows that these projects do have a life in terms of concept to starting in the project, they do have a life of an average of sort of 18 months. But if you look at it from a market expect -- if you look at it from a market perspective, I mean, it's far, far bigger than Canada. So that's why we are pretty excited about the prospects.

Derek Spronck

No, no, that's great. And just one more quickly from myself. Did your experience with P3 contracts in Canada? Did you see that helping you in the U.S.? And if do you anticipate them relying more on a P3-type structure going forward?

Neil Bruce

Yes. I mean, for us, it's a bit of a plus and minus, I think. It's -- would we prefer the legal framework in Canada to the U.S.? Yes, we would because we think it's -- we do think it's less litigious, and it's -- and is more stable generally, but our experience in P3 absolutely is -- I'm not sure anybody else has got truly, truly got our experience. It doesn't mean to say that others have not done these contracts. But we are the ones, and I think we are the only ones that have the life cycle capability and knowledge that operates from investment to engineering, procurement, construction management through into the long-term O&M. Others do it, and others compete, but they compete as consortiums in the main. I think we do have a differentiated capability there.

Derek Spronck

Okay. Thanks very much.

Operator

And your next question, that will come from the line of Devin Dodge of BMO Capital Markets. Please go ahead.

Devin Dodge

I just wanted to come back to the Oil & Gas business. I apologize. I may have missed it, but I just want to make sure I get this clear. But, I mean, there's a pretty sizable step down in your revenues this quarter, both from last year and from last quarter. I know LNG was mentioned as part of the difference, but just were there other factors behind the decline? And how should be thinking about the revenue run rate for this business going forward?

Neil Bruce

Well, I say -- I mean, I do think we've been sort of clear for quite a while, probably well over a year that at a point in time, the Gorgon projects in Australia is going to come to completion, and we are looking in terms of how do we replace that going forward. And we've been very, very clear around the INPEX projects, of which we've got two projects there also are going to come to completion, and they're going to step down. So that's -- it's that large step down partly compensated by the contracts that we're winning in a number of other areas throughout the world.

And like I said earlier, our focus is delivering EBIT. It's not necessarily about delivering revenues because we don't -- we won't have Gorgon and INPEX with 4,000 people sort of everyday coming through the revenue line and -- but we've known that. We've known that for a long time. So the challenge really is about how can we get a broad base of customer contracts, including long-term [Indiscernible] contracts or operations and maintenance contracts in order to be able to consistently deliver on our EBIT, regardless of a higher margin and regardless of the revenue numbers.

Devin Dodge

Okay. I mean, that makes sense. But, I just -- I guess, your comments earlier about there's a lot of activity for quoting, but it might be at nine to 12 months out. Should we expect for the balance of the year to kind of run maybe at this level or maybe creeping up higher? Just -- and I get your comment about EBIT, but, I mean, you run into some pretty tough comps, I think, in the back half of the year?

Neil Bruce

Yes. I mean, we're not expecting it to go down. But like I said, the real focus for the guys because a number of contracts that you've seen us announce, and again, I know it's really difficult because, because of the type of contracts they are, we can't announce a value and the -- actually it will go into the RPO. But they do tend to be more sort of pure value-added, the completions, commissioning, services work on a global basis for two of our key customers. That's more a value-added service attracts a higher margin than having 4,000 people working on a construction site in Australia.

So from that perspective, what we're trying to balance here is a downturn on a couple of big projects together with winning more higher-value services within the Oil & Gas arena. And in Oil & Gas, the one thing that we do see is there's probably two things going on, which is, it's not just about the fact that the oil price is back at 70-ish because that can always move. But I think what's also gives us even more confidence since the fact that over the last two years, our customers have realigned themselves in terms of their cost base, and ultimately, the cost base of the supply chain to be able to sanction projects in terms of economics at a far lower rate than we were three years ago.

Devin Dodge

Okay, okay. That's helpful. And then maybe just to finish with a question for Sylvain. Just on the refinancing of the CDPQ loan, can you talk about how much interest cost savings you expect to realize? I believe this effectively transitioned some of your limited recourse debt to full recourse? Just can you remind us what your comfort level is for leveraging the E&C business?

Sylvain Girard

Yes. So yes, that's effectively what it does. It goes from limited recourse to normal recourse debt. Now we, obviously, worked through this and had numerous discussion with our -- with the rating agencies to make sure, and the bank syndicate and all that, to make sure everybody was on board with it, feels very comfortable about that operation. From a cost-saving standpoint, we're looking at about $20 million of pretax savings coming out of the interest rate differential on an annual basis. So that's very good.

And then in terms of, as I said earlier, we're still looking to about $100 million of deleveraging versus the position at year-end. So that's kind of where we are on that. Now you have to add the 500 to that, obviously, when you do the math. But on a comparable basis, $100 million down.

Devin Dodge

Right. Okay. So if you're at 1.1 leverage now where do you expect -- where does that take you at the end of the year with all these, the $100 million? I guess just where you do think you'll end up at the end of the year?

Sylvain Girard

Well, the way we tend to look at our leverage, I guess, is we base this level on what was called the S&P calc typically. So we're trying to come down on that calc about, and that's to EBITDA as well as the debt reduction I mentioned about. So let me think. I think our calc we had at about 50 bps of turn, let me just -- just give me 1 second here so I give you the right number. No, sorry about that. More like 30, 30 bps a turn, 30 -- .30 of a turn, 30 to 40.

Devin Dodge

Okay. Thanks, Sylvain.

Sylvain Girard

Yes, so I know the calc is different, but it should translate somewhat.

Devin Dodge

Okay. Thanks.

Operator

Your next question will come from the line of Benoit Poirier with Desjardins Capital Markets.

Benoit Poirier

Yes. Good afternoon gentlemen. Could you maybe provide some color about your bidding prospect in Canada? And what do you foresee in 2018 to 2019 aside the REM that you've been awarded?

Neil Bruce

Well, I mean, there's a number of great prospects in Canada. I mean, the Gordie Howe Bridge, for instance, the Trillium Line in terms of Rail & Transit, we see opportunities in for Oil & Gas in the services side, in some of the upgrades and the brownfield work that's being done. Towards the back end of the year, there's the RER contract, which is a massive contract in Ontario, in Toronto, in terms of the electrification. We are looking at a number of infrastructure projects in the U.S., both in Rail & Transit and airports, both in terms of the Northeast and also over in the West Coast.

If you look at Nuclear, clearly, we are hopeful that we will be successful on the refurbishment of the first reactor on Bruce, hopeful during new year, where we can compete on that, but clearly, that is one of six. So that's a 15-year cycle. We're also bidding on decommissioning opportunities in the Nuclear arena in the U.S., which is a massive market. And in terms of Nuclear, the market is huge in terms of the runoff and the decommissioning obligations, both in terms of the U.S. and Europe and some other areas, too, but we see massive opportunities in the U.S. and in Europe.

So I talked about some of the stuff that we're doing with [Indiscernible]. We see the JV around -- with entering power with ABB as a major opportunity. So from that perspective, we really do believe that from a business development and ultimately, RPO, our backlog, we see this year as probably about the best year we've seen since I joined.

Benoit Poirier

Okay. Very good. Thank you very much for the time, Neil.

Operator

Your next question will come from the line of Maxim Sytchev of National Bank Financial. Please go ahead.

Maxim Sytchev

Hi. Good afternoon, everybody.

Neil Bruce

Hey, Maxim.

Maxim Sytchev

Neil, you provided some very nice color on Atkins. So I was wondering right now if you are getting a bit more comfort around talking about the top line synergies just in terms of potentially quantifying those?

Neil Bruce

Not really, but we do expect to generate them because I, again, as I think as you know, we're very clear about the step process that we were going through, which was completion of the acquisition halfway through last year then delivery of [Indiscernible] of cost synergies, which we delivered sort of over 40 then ultimately delivered 120. And we are in a place where not only did we confirm this quarter that effectively all operational integration is absolutely complete, but we are highly confident though in terms of delivering on the original synergy numbers.

So then, as you would expect, the next piece that we're rolling into is the regionalization, the regional support of our businesses throughout the world. So do we need functional support that came from Atkins and SNC-Lavalin? Well, probably not. There's probably a more efficient way of doing that. And then the last piece of that exercise that we'll be running through this year really is all about how do we really generate more value, more revenues for the company through the coming together of the two. And I -- the reason that we are, I mean, reasonably positive about the revenue synergies is there is next to no crossover on overlap the two businesses. Part of the reason we were so keen on Atkins is because it provides -- 95% of it is complementary. so with about 5% overlap. And that 5% overlap really was in the Rail & Transit piece really in the U.K.

And so if we got that complementary business then we want to be able to really go after some of the revenue synergies. And maybe an example to give is so this week has been OTC down in Houston. Our Oil & Gas guys have been there. Atkins, through the acquisition they made in terms of -- they bought a company called Houston Offshore, which was very much in the upstream offshore arena. Upstream offshore is coming back to life, right? So companies are beginning to invest again in offshore deepwater. We, SNC before Atkins, didn't have any capability in offshore upstream or in deepwater. We do have capabilities there. And the guys have been at OTC talking to all the customers about how can we enter and provide a bigger radar service than Houston Offshore would have, and now that they're part of SNC-Lavalin, obviously, with the legacy [Indiscernible] capability. So again, we see lots of opportunities in that arena.

Maxim Sytchev

Okay, that's helpful. And given your commentary in terms of the awards potential pipeline, the $5 consolidated EPS in 2020 I assume it still stands correct?

Neil Bruce

It does.

Maxim Sytchev

And then the last question from me, I mean, obviously, we all do sort of our own math in terms of how much the hard assets are worth, and you're back into the core business, but given the disconnect versus the peers from a valuation perspective, I'm wondering again if from a capital allocation perspective, if there are some incremental thoughts right now in terms of doing something from a share price perspective, if a buyback is potentially under consideration? Or if right now, it's just the focus is on the balance sheet?

Neil Bruce

I mean, we are fundamental. So, we do talk consistently about capital allocation strategy and what changes, and we had discussions this week on that. I think the other element of what we, as a management team, are absolutely focused on as well is this whole piece about derisking the business and taking away things that you guys and shareholders do flag up to us in terms of things that could be potential overhangs. Because yes, I mean, we are -- I think the E&C business is undervalued.

But you've got -- we've got to get to the point of I think the easiest way of proving all of that is to basically to move the overhangs. So I think we have -- I did say before, I thought Champlain was a bit overplayed, but never mind. We've removed that as an overhang. If you look at the federal charges then who knows where that is going to go, but actually it is looking a lot more positive than it was before. And then there is a piece around, I guess, around valuation in the 407. So we do get lots of data about how about people value the 407, but doesn't invest or really valuate in the same way as the analysts are valuing the 407.

So there's no way of proving these things until you really remove the overhangs and get to a place where people have got that clarity around a clear E&C business and a clear view on the capital assets. And we are progressing towards that because we see that as the solution to basically give people the opportunity to see or see and the proof around whether we're actually undervalued or not.

Maxim Sytchev

And so just to build on that thought of the 407, are you saying that you are thinking about showing something to market that would sort of converge the valuation, potentially valuation discrepancy on that asset? Or are you referring just to the E&C business?

Neil Bruce

No. We are always looking at ways of trying to get -- I mean, a more accurate or a more consolidated view on what that's what because there is quite a large, I mean, if you look at all of the analysts and sort of news on the 407, and yes, it's easy to get a consensus, well, if you add it all up and divide it by 10 or whatever it is. So -- but is that really the number? And I -- we are constantly looking at say, Well, yes, okay, that's the available. We are calculating it. But do investors actually see it in that way?

So how do we break out of that? Well, try to find different ways of making it more transparent and providing the information for people to be able to valuate it, be able to value the asset more accurately. So, now I'm not saying that I necessarily think that it's completely undervalued, but inside, inside SNC-Lavalin, between the E&C Company and the 407 and the other assets, I believe we are undervalued. So we've got to find a way of flushing that out so that people can make up their minds.

Maxim Sytchev

And again, sorry, I don't want to belabor the point, but is there a necessity to have a mark-to-market valuation on the 407? I mean, are you -- because at some point, obviously, there was a thought process around having a process around 407. That was put aside. Are you rethinking that thought process?

Neil Bruce

We're always thinking about these processes, but I'm not saying we're going to do that. I'm just saying we're constantly looking at ways to try and give more valuable information in order for people and investors to make up their mind about what -- how they value and what value they see in the company. We believe it's undervalued, but that's fine. We could sit here and get frustrated about the undervaluation. We've got to find a solution to be able to give the information to let people make up their mind. So that -- so when we talk about derisking, that's a process, when we look at trying to find ways of providing more information, absolutely, that's what we're looking to do in order to let people make up their mind about whether -- what the value of the company collectively is.

Maxim Sytchev

Okay. That's it from me. Thank you very much.

Operator

Your next question comes from the line of [Indiscernible] of Raymond James. Please go ahead.

Unidentified Analyst

Good afternoon, guys. On the Clean TeQ Sunrise project, I don't think this is touched on yet. Based on yesterday's update, it sounds like this is heading towards FID. Is there anymore color you can provide on this project? And what it may do to the second half of 2018 and 2019?

Neil Bruce

I just want to make sure I understand. So that's the Clean TeQ project in Australia you're talking about?

Unidentified Analyst

Yes, the Clean TeQ Sunrise.

Neil Bruce

Yes, so we're waiting for the FID on this one, right, the final investment decision, which I'm not sure what time should you go...

Sylvain Girard

Actually, You're more up-to-date than me.

Neil Bruce

I'm really sorry. We will take out that information and make sure you get it. You asked us a question that we clearly do not know the answer to.

Unidentified Analyst

Yes. No problem. And then, I guess, secondly, in terms of seasonality, excluding Atkins, can we expect similar seasonality to your prior years? Or is this kind of evening out as your construction component becomes smaller relative to the rest of your business?

Neil Bruce

No. I think there's -- I think by the very nature of the -- it's more by the client base that effectively I think you should expect a slower start sort of Q1, Q2 and ramping up in the second half. But it's difficult to actually see. It is pure seasonality in terms of being affected by location or weather or something like that. It's more of a customer dynamic in terms of -- for the award things or how they release purchase orders or co-ops within framework agreements or completion of budgets and the likes. But generally, you should see it consistently being sort of Q1 stepping up a bit and then Q3, Q4 stepping up again.

Unidentified Analyst

Yes. And is it -- is that something that will flatten over the coming years as you do more kind of all-year design consulting-style work?

Neil Bruce

Well, I think, if we didn't have projects like REM or Ottawa LRT, then I would say yes. But when you get sort of $2 billion in your backlog and a big start and a quick start on something like REM then that really skews the numbers. So it could be divided up into the more engineering services, O&M, then I think you're absolutely right. And then you've got to overlay a number of the -- and through [Indiscernible] particular point in time and the big contracts over the top of it.

Unidentified Analyst

Yes. Got it. Fair point. Thanks guys.

Neil Bruce

Okay.

Operator

And your final question will come from the line of Michael Tupholme of TD Securities. Please go ahead.

Michael Tupholme

Thanks. Just a couple of quick ones. Last quarter, Sylvain, you had given us the amount of synergies; cost synergies realized as well also the Atkins acquisition through the first six months of $41 million. Just wondering if you can give us an updated number through the nine-month period?

Sylvain Girard

Well, in the quarter, we had about a bit over 20 in the quarter. We are still well on target for a nine for the year in P&L and then to hit the [run rate of 120] starting beginning next year. So it's all on track, and we're pleased with that.

Michael Tupholme

$20 million realized in Q1?

Sylvain Girard

Yes.

Michael Tupholme

Okay. Secondly, the Thermal Power project or segment, you had an $11 million negative EBIT. Is that the amount of the actual reforecast that you had this quarter? Or was the actual reforecast a larger amount than that?

Sylvain Girard

No, it's pretty much the entire amount because, I mean, this is the only EPC project we have in thermal left. There's a couple of small service contracts being executed, but that's immaterial compared to the EPC work, and basically, the hit is all coming from the reforecast.

Michael Tupholme

So it would be running at zero margin and then this is the impact that we see of the actual reforecast?

Sylvain Girard

Yes, yes, exactly.

Michael Tupholme

Great. And then this was touched on earlier, but just wanted to circle back quickly. The relatively large investment in non-cash working capital in the first quarter, do you expect that to unwind over the course of the year? Just trying to get a sense for specifically that line, the change in non-cash working capital, how you think that looks by the end of the year?

Sylvain Girard

Yes. It should unwind to a significant degree, I guess. There is the amount that I mentioned earlier coming from the thermal. So we have that on thermal, I answered that earlier. We have the EBIT that you see, but the cash usage has been much higher than that because this was despite doing a challenged project, it had a -- significant advances in deferred revenue on it. So that won't resolve itself, obviously. So though we do see some of the use we had in Q1 that improving through the year.

Michael Tupholme

Okay. That's all I had. Thank you.

Operator

Gentlemen, there are no further questions. I'd like to hand it back over to you for closing remarks.

Denis Jasmin

Thank you all for having joining us today. If you have any further questions, please don't hesitate to call me. Thank you very much, and have a good night. Thank you.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect your lines, and have a wonderful day.