Good morning, and welcome to SNC Lavalin's Fourth Quarter twenty twenty Earnings Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Denis Jasmin, Vice President, Investor Relations. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining the call. Our Q4 earnings announcement was released this morning, and we have posted a corresponding slide presentation on the Investors section of our website. The recording of today's call and its transcript will also be available on our website within twenty four hours. With me today are Ian Edwards, President and Chief Executive Officer and Jeff Bell, Executive Vice President and Chief Financial Officer.
Before we begin, I would like to ask everyone to limit themselves to one or two questions to ensure that all analysts have an opportunity to participate. You are welcome to return to the queue for any follow-up questions. I would like to draw your attention to Slide two. Comments made on today's call may contain forward looking information. This information, by its nature, is subject to risks and uncertainties, and as such, actual results may differ materially from the views expressed today.
For further information on these risks and uncertainties, please consult the company's relevant filing on SEDAR. These documents are also available on our website. Also during the call, we may refer to certain non IFRS measures. These measures are defined and reconciled with comparable IFRS measures in our MD and A, which can be found on SEDAR and our website. Management believes that these non IFRS measures provide additional insight into the company's financial results, and certain investors may use this information to evaluate the company's performance from period to period.
And now I'll pass the call over to Ian Edwards. Ian?
Thanks, Denise, and, good morning, everyone. So turning to slide four. 2020 really has been a transformative year for S and C Lavalin on many fronts. We took a series of actions focused really on two objectives. One, reducing the company's risk profile as it relates to our legacy LSTK business and two, accelerating SNC Lavalin's transition to a leading professional services and project management company.
The actions we took included the closure, sale, and strategic divestment of a vast majority of the resources business, including a binding agreement to sell the oil and gas business announced on February 9, a review of all significant litigation matters and claims receivable in order to provide the most fulsome assessment of outstanding risk, and the continued wind down of the LSTK project's backlog by approximately a billion dollars. We also demonstrated through COVID nineteen pandemic both our agility in responding to unprecedented global events and the resilience of our engineering services business. We quickly pivoted to respond to the challenging environment triggered by the pandemic, moving to remote working, reducing costs, and enhancing our digital transformation. We have also collaborated with our clients to develop new risk capped contracting models, and we have leveraged our public sector expertise and diverse service offering in our core markets to win new and, in many cases, groundbreaking work that reflects our ability to meet the changing needs of a post COVID world. These include some major nuclear transport infrastructure and social housing projects.
And as we move to 2021, engineering services is strongly positioned to meet the needs of our clients for renewed infrastructure investment and the development of low carbon assets. Turning to slide five, I'll now walk you through the Q4 highlights and the 2021 outlook for each of the engineering services segments, starting with EDPM. EDPM finished the year strongly across all regions, underpinned by robust performance in our roads, railway, and defense service offering. Overall, EDPM generated strong cash flow and backlog grew by 8.9% in 2020, fueled by road and rail winds in The UK, rapid transit in The US, and new water and O and M projects in Asia Pacific amongst others. With our robust pipeline of 27,000,000,000 ahead to 2021, combined with government's commitments to infrastructure spending, we are really optimistic about the return to growth in our core geographies, particularly in the second half of the year.
We have an ambitious growth plan focused on areas where we anticipate increased investment and where we have deep deep expertise, specifically in transportation infrastructure, water, environment, and defense. In terms of geographies, The US is a central focus. We see significant potential to deepen our penetration into The US market, And we believe there could be much larger infrastructure spending bill passed under the new Biden administration. Turning to slide six and highlights of the recent EDPM project wins. In February, SNC Levelling and its partners won a $1,300,000,000 contract to design and build phase two of the East West Rail project, one of the largest rail projects in The UK.
This project features a new alliance contracting model in which all partners work as an integrated team, and the risks are shared and caps capped amongst them. It signals a new collaborative way of working with partners and clients and it's the model that we hope to replicate for other projects in other countries. Moving to slide seven and highlights from our nuclear segment. Nuclear continued to perform well through q four. A number of multiyear project extensions were awarded on contracts in The US and Canada during the quarter.
And as we head into 2021, the pipeline is strong. We see significant opportunity for nuclear going forward fueled by market demand and our own market leading position. These opportunities include nuclear new build and reactor support, a number of projects coming up for tender by the US Department of Energy, where S and C Leveling already has a strong track record of wins, and nuclear decommissioning and environmental opportunities. Turning to slide eight, you can see some of the recent wins and industry awards, which include contracts in Canada and The US as well as service support for the Candu fleet in Canada and internationally. Moving to slide nine and infrastructure services.
The segment had a strong quarter reflecting the essential nature of infrastructure services in supporting critical infrastructure through the pandemic. Operations and maintenance continued to operate at full service levels with strong activity in power, grid, and industrial solutions. Ling Song was also a strong contributor to the quarter and saw a healthy intake of orders. As we move to '21, we see a strong pipeline of opportunity for LinksOn, particularly in the transportation and transmission sectors. We are also focusing our business development in O and M in The US, The UK, and Canadian transportation sectors as governments continue to invest in new infrastructure.
Turning to slide 10, you can see the breadth of work in the infrastructure services backlog ranging from design, building, and refurbishment of hydro plants to defense work and COVID nineteen related contracts, including a medical supply contract and the delivery of mobile health units. Turning to slide 11 and the capital segment. With traffic volumes down by 44% on the 04/2007 in q four due to return to lockdown, there were no dividend payments in the quarter. As the province comes out of lockdown, we anticipate an increase in traffic levels and continue to believe in the long term fundamentals of the highway in the country's largest city and economic hub. Our remaining concessions continue to perform well and have not been significantly impacted by the pandemic.
Moving to slide 12, an infrastructure EPC projects. As discussed during our February 9 update, the three remaining Canadian light rail projects continue to progress well. We expect to continue to reduce the backlog by approximately $1,000,000,000 by the 2021. Two of the projects are expected to be complete by the 2022 with the last remaining one, the REM, to be delivered in 2024. While these LSTK projects wind down, we do see light rail as a significant growth opportunity as governments invest in low carbon rapid transit.
S and C Leveling will continue to leverage its expertise in the light rail space, but with a focus on collaborative and risk capped project management and construction management services. Turning to slide 13 and the resources segment. With the agreement to sell the oil and gas business, our remaining resources business is focused on services in the mining and metallurgy sector. We have a long history in M and M, which generates revenues of $163,000,000 in 2020 and will be part of the ongoing engineering services offering. Moving to slide 14, I'd like to conclude my presentation by focusing on S and C Lavalin's strategic priorities for 2021.
As I mentioned at the beginning of this call, we are focused on derisking the business and generating consistent earnings and cash flow. This remains our focus, and we have five key priorities. Closing the oil and gas sale, successfully running off the LSTK projects, continuing to drive consistent performance in engineering services, building a connected, collaborative organization that can work and support clients remotely from anywhere in the world, and most importantly, driving growth and sustainable outcomes for our clients across the company. Turning to slide 15, we are focused on a number of growth drivers. The first is centered on our core markets, The US, The UK, and Canada, where we can leverage our expertise in nuclear and transportation infrastructure amongst other areas to expand our market penetration across our full service offering.
The second, as I mentioned earlier, is to expand our major projects business in Canada, US, and UK through risk capped opportunities. We're also focused on expanding our operations and maintenance business, our water, environment, and defense in core geographies where we see opportunity to build our footprint. These efforts are underpinned by enhanced digital capabilities with improved productivity and delivery and lower the carbon footprint for our clients. The focus on digital transformation is closely connected to another key growth driver and the priority of the company, which is sustainability. As engineers who design, build, and service the built environment, we have an integral role in enabling countries and companies to meet their carbon reduction targets.
As part of that effort, we have a comprehensive range of services around helping our clients in engineering net zero. Additionally, we are further developing our own ESG strategies, and we will be sharing our targets with you in q two. In the second half of the year, we'll also be ready to share the specifics around an overall growth strategy for the business as we head into '22, and we really look forward to sharing that with you. With that, I'll now pass the call to Jeff.
Thank you, Ian, and good morning, everyone. Turning to Slide 17. As expected, the fourth quarter included a strong performance from SNCL Engineering Services, while SNCL projects experienced a significant loss. As announced on February 9, Q4 twenty twenty SMTL projects included an aggregate amount of $480,000,000 in charges, adjustments to provisions and claims receivable reduction and a cost reassessment of the remaining Canadian LSTK infrastructure projects. Capital segment adjusted EBIT totaled $19,000,000 compared to $32,000,000 as no dividend was received in the quarter from Highway four zero seven.
Corporate SG and A expenses totaled $96,000,000 and included $48,000,000 of negative adjustment to the provision for the pyrite case litigation, $4,000,000 of pension equalization provision, and $6,000,000 invested in digital transformation initiatives. All of this resulted in an IFRS net loss from continuing operations of $323,000,000 or $1.84 per diluted share in Q4 twenty twenty compared with a net loss of $180,000,000 or $1.03 per diluted share for the corresponding period of 2019. The adjusted net loss from PSPM in Q4 twenty twenty amounted to $269,000,000 or $1.53 per diluted share compared with an adjusted net income of $110,000,000 or $0.62 per diluted share in the corresponding period of 2019. Now looking at the segments in more detail, on Slide 18, we can see that SNCL Engineering Services delivered solid results and continues to be resilient through COVID-nineteen. The Q4 revenue totaled $1,500,000,000 representing a 3% decrease compared to Q4 twenty nineteen, in line with our expectations, but was 5% higher than Q3 twenty twenty.
Segment adjusted EBIT was $153,000,000 lower than Q4 twenty nineteen, but 7.5% higher compared to Q3 twenty twenty and represented a margin of 10.1%, higher than our expectations. Backlog remained strong and totaled $10,900,000,000 The EDPM segment revenue totaled $943,000,000 and its segment adjusted EBIT amounted to $85,000,000 representing a margin of 9%, in line with our long term target range of 8% to 10%. The EBIT amount was lower than q four twenty nineteen, mainly reflecting the impact of COVID nineteen across some markets such as aviation and commercial property and lower revenue from The Middle East. This was partially offset by the strength of transportation and defense markets within the core region of The UK and Europe. The EDPM backlog remained strong at the end of the year at $2,900,000,000, an increase of nearly 9% compared to the 2019.
The Nuclear segment revenue totaled 245,000,000, and the segment adjusted EBIT amounted to $36,000,000, representing a margin of 14.8%, in line with our long term target range of 13% to 15%. The EBIT amount was lower than Q4 twenty nineteen, mainly due to a decreased level of activity on certain major Canadian projects that reached major delivery milestones earlier in 2020, partially offset by a higher contribution from The U. S. And Europe. The infrastructure services revenue totaled $334,000,000 largely in line with Q4 twenty nineteen.
The segment adjusted EBIT amounted to $32,000,000 an increase of 5827% compared to Q4 twenty nineteen and Q3 twenty twenty, respectively. The EBIT increase was mainly due to a higher level of revenue from certain operation and maintenance contracts, from higher activities on project management and construction management services, lower overhead costs and a higher contribution from Linksong. Turning now to SNCL projects on Slide 19. In line with our LSTK exit strategy and the expected continuing backlog runoff of our major LSTK construction projects, revenues for Q4 twenty twenty continued to decrease. SNCL projects revenues fell by 57% compared to q four twenty nineteen to a $152,000,000.
The REE resources and infrastructure EPC project segment had negative segment adjusted EBIT of $93,000,000 and $319,000,000 respectively, mainly due to charges, adjustments to provisions and claims receivable reductions as well as the cost reassessment of the remaining Canadian LSPK infrastructure projects as we announced on February 9. Moving on to Slide 20. Net cash generated from operating activities was $122,000,000 in 2020 compared to a use of $355,000,000 in 2019. Net cash generated from operating activities was $105,000,000 in the quarter compared with $312,000,000 in Q4 twenty nineteen, with the lower cash generation primarily driven by a usage of cash from discontinued operations in Q4 twenty twenty. SNCL Engineering Services continued to generate strong cash flow from operations with $250,000,000 in the quarter due to strong EBIT conversion and a low day sales outstanding in the EDPM segment of sixty four days, a nine day improvement compared to 2019.
For 2021, the strong operating cash flow attributes of SNCL Engineering Services are expected to be partially offset by our return to a more normalized day sales outstanding level as the early government payment programs related to COVID nineteen are expected to wind down during the year. In addition, SNCL projects are expected to see a usage of operating cash flow as a result of the significant backlog to be run off during the year and the timing of the collection of COVID nineteen related claims. As a result, operating cash flow is expected to be largely breakeven this year. At the December 2020, the company had $933,000,000 of cash and its recourse debt remained stable with December 2019. The company's net recourse debt to EBITDA ratio on the revolver credit facility calculated in accordance with the terms of the company's credit agreement was 2.1 times, well below the required covenant level of 3.75 times.
And finally, turning to slide 21, the company expects that SNCL Engineering Services revenue for 2021 should increase by a low single digit percentage compared to 2020. As the COVID-nineteen pandemic only started to significantly impact the business in Q2 twenty twenty, the company expects a low single digit percentage contraction Engineering Services revenue for q one and then year over year revenue increases in the second, third and fourth quarters this year. We also expect SNCL Engineering Services segment adjusted EBIT margin to be between 810% and continue to target the same long term EBIT margin percentage for each segment. This concludes my presentation. We can now open the line for questions.
Thank you.
Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys.
To withdraw your question, please press star then 2. Our first question comes from Yuri Lynk of Canaccord Genuity.
Good morning.
Ian, just on the on the outlook for for '21, as you as you I think, Jeff mentioned, the margin guidance pretty much in line with what we've seen the last the last few years out of engineering services, which is great in this environment. But but wondering what levers, you can pull going forward to improve the margins of of engineering services and and maybe tie that question in with some of the digital initiatives that that you mentioned on the call and how that might translate into into better margins going forward.
Yeah. Yeah. Thanks, thanks for the question. So, I mean, I think the key thing for us as we have now kind of moved from derisking the business into focus now on growth, particularly focus on organic growth, I I I think that maintaining margin levels is important. And, obviously, ongoing optimization of cost is important, particularly through the things that we've learned in COVID, such as, you know, remote working and digital technologies that that reduce, the amount of people content.
But we we really are focused on channeling our efforts into leveraging from that into organic growth. So, I mean, beyond this year, that that's what we see as as as one of our one of our key priorities. I mean, that that isn't to say that, of course, you know, we're not looking at making efficiencies. Of course, we are. But, but margin expansion is not particularly, our core focus.
Okay. You you also mentioned that that EDPM has a has a growth focus in The US, so I think you'd like to be be bigger. Does that plan is that a solely organic plan at this point? Or when when might you start contemplating some, acquisitions tuck in or or otherwise to grow in some of the markets that you might be at subscale?
Yeah. Yeah. Good question. So well, for sure, it's both. The key right now for us is is organic growth.
I mean, we we and it's not just it's it's not just EDPM. I mean, we see our business primarily, focused in infrastructure in the Southern States, and we have a drive to look to build on that through growth in the Northwest and the the Northeast in in California. We have obviously a very strong nuclear environmental management business with Department of Energy, and we see, you know, really strong growth potential, from that. And then from an that's obviously all from a from an organic perspective. I mean and and we see great kind of potential, from federal government investment, particularly, you know, the rhetoric around the new the new administration.
So beyond that, we we we will be putting together towards the second half of this year, capital allocation plan and our on our longer term plan that we'll communicate at that moment. But our priorities really right now, you know, is is is is organic growth, closing the oil and gas, continuing to run off our LSTKs, you know, continuing to perform and, and and continuing to to to to to have good cash conversion from the businesses we've got.
Okay. That all makes sense. I'll turn it over. I'll back in the queue. Thanks, guys.
Thank you. Thank you.
Our next question comes from Chris Murray of ATB Capital Markets.
Just thinking about 2021, and thank you for the detail on the guidance and the pattern. But just thinking about the $1,000,000,000 that you talked about consuming in terms of a backlog for the remaining LPSK project, how should we think about that now that you've made the adjustments and the write downs? How should we think about that through the through '21? And in terms of both, you know, either margin or cash use and just the pattern of revenues.
So so so so okay. So so you mean from specifically the sector of the LFTK business. Right?
Exactly. Yeah. We're do I'm just trying
to make sure
that Yeah. That we're this that
we kinda have the surprises behind us.
Yeah. Yeah.
Okay. So let me let me let me get Jeff to to explain about the, the cash flow. But, clearly, from a from a from a margin perspective and a, you know, a risk perspective, I think as we said on the night for these three jobs I mean, we're down to three jobs now. We're down to the the Trillium, the RAM, and and Eglinton. We are, you know, working through these jobs.
We've got a a a good line of sight into these jobs. They've been affected by COVID. We chose not to take revenues, against COVID even though we feel we've got entitlement. So we we actually believe these jobs are in good shape for us, as we move through this year and obviously move to to to close them out. Specifically, to the the cash profile, and I'll just ask Jeff to talk to that as we work through them.
Yeah. So I think the first thing I'd say, from a revenue perspective, they're they're broadly equal over the four quarters, slightly more weighted to q two and q three because it's the summer months, and it it's easier to deploy, you know, more of particularly the, you know, the construction elements of them, in the summer months. So a bit waiting a bit of a waiting that way. From a cash flow perspective, as you heard me say, we do expect them to be, at an operating cash flow level, to be a usage of cash in 2021. And that's that's really driven by two things.
Because overall, you know, of those remaining projects, we do expect them to be, you know, as a portfolio, you know, cash flow neutral to positive over their life. But in 2021, the combination, as we talked about in February 9, of continuing to have a prudent demeanor around COVID related costs and our ability to claim those back from the from the clients, which we think we're contractually entitled to, but, you know, staying prudent in terms of not recognizing those revenues until we've got better clarity, you know, through either, you know, commercial negotiations or, you know, or or third party arbitrations if if that's what's necessary. And we'd expect that to continue, you know, at least certainly through the, you know, the first half of of this year as well. And putting that much, you know, delivery of backlog to work during the during the year also means that, you know, at different points in the year, we'll be, you know, our our cash usage will be running ahead of, you know, the the actual, you know, payment, re we profile from the from the joint ventures or the or the customers themselves. That obviously works out over time, but bit of a bit of a timing, drag on that in 2021 as well.
So I think, you know, that's that's what the cash flow, you know, will continue to look like.
Okay. Fair enough. And then just turning back to some of your commentary around even Q4's infrastructure services margin. You did talk a little bit about the fact that Linksan a big contributor. Maybe even a little bit to Yuri's question about thinking about M and A and growth.
How open are you to looking at maybe additional joint ventures? I know you've got a few of them right now as a way to maybe generate some additional growth, but keep the risk kinda more manageable.
Yeah. That's a good question. So that, the LinxOn joint venture as a specific kind of business venture has been been a a real success for us because we've used the best of our project management skills with the the ABB's and now attach the ABB equipment. So it offers a total solution for our customers. So, you know, one plus one is equal three, so to speak.
I think one of the key areas that we we see joint venturing going forward is in major projects. So we we really were pleased to to see the win on the East West Rail, in The UK because this is exactly where we wanna be positioning our capability to deliver major projects in the future. You know, it's a it's a liability liability capped contract for us, so it's not an LSTK. You know, we get paid, based based on a on a on a on an alliance kind of target cost basis. We work with two other joint ventures, companies on that project to offer the customer the the the best solution and and we win on that basis.
And I think what's, you know, what's exciting about that kind of arrangement is we're actually seeing that this collaborative, risk capped approach for delivering major infrastructure is being adopted in in many, many other, countries and and with many other clients and governments. Not not least of which is is, you know, it's Canada, Australia, some places in The US, and and and across The UK. So so what I think is that by repositioning ourselves into into this kind of project, you know, we can fill the space that's been left by exiting the LSTK and use our capability.
Okay. That's interesting. Thank you very much.
Thanks. Our
next question comes from Frederic Bastien of Raymond James. Please go ahead.
Thank you. Ian, just wondering if you're happy with the management team that you have in place to lead, the three businesses that make up engineering services, or do you need to, go out and recruit some some additional talent?
Yeah. Well, obviously, as you will have seen, in the last eighteen months since I've I've I've I've I've been leading the company as CEO, We've we've developed both both talent within the business and and brought that up to the leadership team and the and the team that reports to the leadership team. But we've also brought talent in external externally at a senior level and, and and talent, you know, just below the senior level. So for me, particularly, in our in our in our growth plans going forward, having the best talent to be able to win and deliver, work is is is really important. And and I don't see it as a as like a static environment.
I see this as dynamic. And as and as we, you know, as we build other parts of the company, then we'll we'll look to develop our own people and and still bring in the best talent. So I'm very happy with the leadership team that we have in place right now, but it's a it's it's a it's a, you know, it's a it's a moving and evolving and growing kind of, environment for me.
Okay. Thanks. Thanks for that that input. My second question relates to the $6,000,000 investment that you made into new digital transformation initiative. And would you mind speaking to that investment?
And more more broadly, what are your goals for the company when it comes to developing or acquiring new technologies? Is it is it a mix of sort of developing that internally and and potentially acquiring, more businesses through tuck ins?
Yeah. So so so the way I see technology is a is an enabler to deliver projects, for our customers in a in a more efficient and effective way. And, actually, you know, when you think about design, you think about that design moving through to build and you think about the build moving through to the operation of of assets, you know, whether the power assets, nuclear assets, or railways or or infrastructure assets, technology is is really the the the golden thread that that runs through the whole process to enable us to deliver successfully. So the way we look at this as SNC Lavalin is is in marrying that technology to our ability that we've developed, you know, over many decades to to to work with customers to deliver a whole asset. So it's slightly different perhaps than you might have heard, but for us, it's an enabler.
So where we put the investment is actually in in building teams and, and onboarding tools and developing people to be able to, deploy those tools. So it's not it's not you know, we're not trying to be and invent new technologies because, you know, we believe that the the technologies already exist, that they're already there. It's the adoption of them and being very capable in the application of them to benefit our customers that we see the the real real market and benefit for us.
Thank you. Much appreciated.
Next question
Thank you. Our
next question comes from Benoit Poirier of Desjardins Capital Markets. I
appreciate the color about the free cash flow outlook for 2021, the fact that SNCL Engineering Services will be largely offset by EPC. But if we look beyond 2021, could you provide maybe more color about what we should expect for the whole entity and specifically for service engineering, in terms of free cash flow capabilities, beyond 2021?
Yeah. Jeff, why why don't I why don't I take that one? I think you're I think you're absolutely right, Benoit. I think 2021 is a bit of a transition year, and there are, you know, there are a couple of things within there that we wouldn't expect necessarily to see going forward in 2022 and beyond. One is, I I talked about the, you know, the day sales outstanding or the, you know, the benefit we've seen from, from some of those early payment programs, where some of that will unwind in 2021, the, You know, sales tax deferrals we saw in a couple of countries, you know, will unwind.
And I think we've talked previously about, you know, that being in the neighborhood of a 100 to a $150,000,000. So you would think about that not being there in in 2022 and beyond. And, therefore, the EBIT conversion percent, you know, naturally should be, you know, should be fairly high, you know, based on the you know, our normal tax rate of, you know, low 20%. You'd expect a pretty high, you know, EBIT percentage conversion, you know, in 2022 going forward. And, obviously, as the, you know, as the LSTK on the project side, run down and we get more clarity on, on, you know, claims related to COVID that we think we're entitled to and how and how that will play out.
Again, when you get into 2022, you'd expect to see that much more normalized.
Hope that helps.
Yeah. That that's great color, Jeff. And maybe any thoughts about the seasonality in terms of free cash flow? Let's say, not on a quarterly basis, but between first half and second half in terms of overall expectation for 2021?
Yeah. I think I think it will it will be more weighted to the second than the first half. Obviously, we'll be doing you know? And and as we have been through 2020, highly focused on cash flow. But the the nature of it is such that it's, we expect it to be, more weighted to the second half than the first half.
Okay. That that's great. And now given the big announcement on the, February 9 with respect to the, divestiture of the oil and gas business, how should we be thinking with respect to your remaining mining services business? I'm just wondering whether it would make sense to divest it and focus on core engineering services now that it's a much smaller portion of your business now.
I'll start I mean, currently, we're we're looking to continue to, to grow that business as as a as a services business in the the mining and metal sector. And and if you think about it, SNC level in kind of for for a long, long time as as as being more kind of stronger and and more weighted into mining than it than it ever was in oil and gas. So it's kind of part of the the DNA of the business. But you're right. I mean, it's you know, we're we're very, focused on specific clients.
We're very focused on on specific geographies. It's not a, you know, it's not a it's not a very, very major component of our engineering services businesses, but it is profitable. And, currently, we remain supporting that and, intend to to grow it, organically.
Okay. Okay. That's great, Ian. And last question for me. When we look at your, leverage ratio, you were able to, to to to get it toward 2.1 time at year end.
And as we look through 2021 with EBITDA improvement in light of free cash flow expectation, how should we be thinking about your net recourse debt to EBITDA ratio in 2021 and what you would consider your optimal balance sheet, longer term in terms of leverage ratio and the opportunity to eventually, deploy capital.
Yeah. I think I think I'd answer that with with two components then. Well, I think the first is that, certainly, we continue to, you know, to see our with the with the outlook that we've given to remain well within our our covenant ratio metrics, you know, throughout the year. It it as it did in 2020, know, will likely vary around somewhat, but, but should be well below any of our threshold. I think longer term and, you know, we'll come back to this in the second half, as Ian said, when we talk more about our longer term growth strategy and, you know, the capital allocation that, that goes with that, and that will include, you know, the capital, what we see as the optimal capital structure of the, you know, of the business going forward.
But I think, you know, as you've you've heard us say a number of times, I think we would continue, to want to move towards having financial metrics that are consistent with with being an investment grade company, for instance, from a from a balance sheet perspective. But, you know, the the how that how that fits in with our overall growth strategy and how we think about the deployment of capital that we'll come back to that later in the year for sure.
Okay. That's great. Thanks for the time. Thank you. Thank you.
Our next question comes from Michael Tupholme of TD Securities. Please go ahead.
Thanks. My question relates to the twenty twenty twenty one outlook you provided for SNCL Engineering Services. You're calling for low single digit revenue growth this year. Wondering if can take that one step further and just talk a little bit about the subsegments and how you expect those to perform in terms of EDPM, Nuclear and Infrastructure services.
Yeah. I mean, clearly, the low single digit is a is a reflection of of where we are right now. I mean, we're we're still in the pandemic, and it and it's it's somewhat what you know, difficult to understand exactly when, normality will prevail, but we would expect that growth will start returning to to something a little bit more normal in the in the second half of this year. And we we also see that in our core geographies, and our and our core geographies are are Canada, US, and The UK where almost 75% of our business is currently located, the go forward business. And and all of those geographies, you know, have a very, very, you know, high commitment from governments to invest in infrastructure, and there's a a high commitment to invest in certainly nuclear, in different in in a different way in each geography.
I mean, nuclear new build in The UK as well as environmental management, nuclear environmental management in The US, and and life extension and environmental management in Canada. So so our end markets in our core geographies, we we see, you know, pretty solid commitment and pretty strong growth opportunities. And I wouldn't pick, particularly any any difference in in how we see those kind of an you know, those particular segments, in terms of the low single digit for this year. But what we will do when we, you know, when we come back with our longer term, growth plan in the second half of this year, we will be clear about that and where we see the most growth potential and and to subsegments to those sectors, if you like.
Okay. No. I appreciate that. Thank you. And just similarly in terms of the the outlook for 2021 in terms of the the margin expectations, I think if we look at 2020, EDPM came in around the 8% level, so sort of toward the bottom end of the range you provided for 2021.
Is it reasonable to think about the midpoint of that range and think about expecting some improvement in EDPM in 2021? And what would it be, what would be the factors that would sort of drive that improvement, that's the case?
It's Jeff here. Maybe I'll take that one. I I think I'd point you to in 2020, EDPM had a had quite a challenged first quarter, from an EBIT percentage perspective. If if you looked at quarters two, three, and four, those would be much more representative of, you know, what we would consider to be the quarter on quarter, you know, EBIT percentages and and much more in the, you know, in the mid part of the range of the of the eight to 10%. So I think I think 2020 overall was was impacted by that first quarter, which we wouldn't necessarily see repeating this year.
Okay. Thanks for that, Jeff. And then just one last one. I didn't see anything in particular mentioned about this in terms of any changes, but can you just provide an update on the last remaining mining metallurgy LSTK project? I think it's supposed to be done in q two, but just any update there and whether or not you see any areas of remaining risk there.
No. It's progressing well. It's, yeah. It's 75,000,000, I think, from the end of the year backlog, which, which we look to close in q two with the middle of this year. So so far, yes, there's nothing, nothing unusual to report about that project.
It's it's it's going well.
Okay. Thank you.
Our next question comes from Devin Dodge of BMO Capital Markets. Please go ahead.
Thanks. So I wanted to come back to infrastructure services. The March performance in q four was really strong, I mean, nearly 10%. I'm just trying to better understand, you know, what's driving that margin performance, in q four and just generally in 2020 and why the guidance of five to 7%, next year essentially implies some margin compression next year.
Yeah. I mean, it's InfraServices has got a few different components to it, which links on it to the joint venture company with ABB. The all our operations and maintenance, businesses within InfraServices. And then we've got the the services part of it, which really provide services to, to the to to hydro and power to the medical industries and to industrial solutions. So in fact, you know, all of those kind of performed very, very well, and have been very resilient if if not even, you know, received good wins through through the through the COVID period because of the very nature of of those businesses.
So so for sure, they they are, performing very well, and as you rightly said, performed particularly well in in the last quarter. Just on the specifics of the quarter margin, I've just asked Jeff to, to talk to that.
Yeah. And it and it was very strong. And and and you're right, Devin. We wouldn't expect necessarily to see that, you know, on an ongoing basis. And it was a combination of a few things.
It's it's a business that has a a smaller overhead, base, and, you know, they were they were particularly effective at reducing costs, that we saw in the quarter. And, you know, some of that was was COVID related, so that, that was good to see. Not not sure that we would see that, you know, carrying on, particularly as the, you know, as hopefully we come out of COVID, you know, later through the year. And we also saw some some good delivery on some of our o and m projects where we realized better margins on a few of those key projects. Again, that was, you know, specifically related to circumstances in 2020.
On an ongoing basis, we'd expect those to return to a more normalized level in that in the five to seven percent range.
Okay. Got it. Thanks. That was good color. Maybe just another one for you, Jeff.
You know, continues to be a lot of cash on the balance sheet. You know, I think it was just under a billion dollars, at year end. Just can can you provide some color on, you know, that cash balance? You know, is that the right amount, or is there an opportunity to streamline that cash position and and maybe put that capital to work in other areas of the business?
Yeah. I think I think it's it's a good question. It's and you wouldn't be surprised. You know, our, you know, our demeanor in 2020 has been around financial flexibility and liquidity, particularly in in in a COVID environment. I think as we look going forward, though, we we see more confidence in terms of being able to to maximize the efficiency of our cash on the balance sheet.
I I made a couple of observations. There's a natural level of cash, particularly, you know, with the the large infrastructure projects that we have as well as, you know, the oil and gas business and and, you know, this and the scope and breadth of that, that I would say are kinda natural cash balance, you know, is naturally in the, you know, sort of somewhere between, you know, 600 around 600,000,000 ish is is what we would normally expect because of the ways, you know, some cash is tied up in joint ventures or is in different parts of the world or is needed for the working capital requirements of things like info projects. Therefore, you know, we do have some level of excess cash, but we'll be looking, you know, to see, for instance, how we deploy that. You know, in the first quarter here, we have a, you know, a small debenture bond coming due. You know, at this point, we we wouldn't necessarily see, you know, retaking that into the market.
So there's different ways we may look to, you know, bring that cash balance down, you know, to optimize where we are. But but the business does have a, you know, a reasonable level of working capital in terms of cash that it requires. Hopefully, helps.
That that was helpful.
Thank you very much. I'll turn it over.
Thank you.
Our next question comes from Mark Neville of Scotiabank. Please go ahead.
Hey. Good morning,
Good morning.
I I just wanna follow-up on the cash flow conversation. Just I wanna make sure I'm sort of understanding all the puts and takes. Jeff, you mentioned, I think, a 100 to a $150,000,000. Was that tax? Was that was that just tax, or was that sort of the working cap investment for the year?
Yeah. No. It's it's a combination of working capital, primarily related around day sales outstanding. So I think as we noted in the MD and A and I noted in my script, we were about nine days better. We were down at sixty four days in EDPM, for instance, whereas, you know, more normalized, we'd expect to be in the low seventies.
So, we do expect that to return to a more normalized level in the low seventies. Don't get me wrong. You know, we're looking at all opportunities, you know, to improve that sustainably over time. So if we can, you know, find and and are working on, you know, working capital initiatives to try and, you know, release cash from the balance sheet. But I think our view is to be prudent, you'd assume that would would return to something that's more normalized.
So that that kind of accounts for, you know, 75 to a 100,000,000 ish, in terms of cash flow benefit in 2020 that you'd expect to unwind in 2021. I think the second element is that we did see you know, for instance, there was a UK VAT deferral program, through the 2020 that the government had announced as part of helping businesses around around COVID nineteen and cash flow, and that effectively deferred the payment of that VAT tax out until, you know, 2021 largely. And we saw a bit of that in in The US as well. So that's where the kind of combination of those you get, you know, up into the, you know, approaching 150,000,000.
Okay. So the $1.50 is tax and the working cap. So it just seems to me that, I guess, with sort of neutral operating cash flow, the the drag in the project seems quite significant. I mean, I wonder if you can maybe maybe my math's off, but maybe you can provide some numbers, like, around sort of what you're expecting of the investment for the projects this
Yeah. I mean, I think it it's it's I think our my observation would be that, you know, it is, and and our expectation is it is negative and largely offsetting, you know, what we see in engineering services. Obviously, you know, part of that is, you know, at an early stage in the year here, we're continuing to have, you know, a prudent demeanor around things, as I said, like, our recovery of COVID nineteen claims on those projects. And as the as I think the year unfolds, I think we'll get more clarity on that, and then our ability to, you know, book book the revenue related to those and see the cash coming in, you know, will allow us to then assess where we are as we go through the year. So so I think that's the color I'd provide at this point.
Okay. K. Maybe just on
the leverages, just so I'm I'm clear. The the 2.1 times, are are you making or do you get to sort of exclude all the claims and provisions that you took in q four from that calc, or, is that actually still included in the EBITDA?
So we excluded what we considered to be, you know, the one off items, in that calc, which would primarily be the, the oil and gas, fair value adjustment as well as the adjustments that we made for legacy litigation matters and, claims reassessment. So what we what we didn't exclude because we consider it part of our you know, the ongoing operations of the business is primarily, the 90 charge we took on the on the live projects here in Canada and then a a smaller component that was related to the one remaining, resources project. K. Alright. I'll turn it over.
Thanks. Thank you. Okay. Thanks.
Our next question comes from Sabahat Khan of RBC Capital Markets. Please go ahead.
Hi. Great. Thanks, and good morning. A question on you highlighted this kind of a new JV model that you're undertaking projects in, and I think you highlighted the one here in the in the the East West Rail project. But just trying to understand, I guess, how would this project would have how would this have been done in the past, I guess, if you are on the design side here, would there have been some risk in the past?
And, you know, what does this new project structure mean for the risk profile relative to, you know, what we would have seen in the past on the EPM side?
Yeah. Well, I mean, these alliance or target cost or collaborative contracting models, if you, you know, you want the catch all for all of it. I mean, there's various kind of nuances to the theme, but the the the the the major difference is the liability is capped from a from a from our perspective. So so our fee, would be at risk, but beyond the fee, we would not, have any liabilities for for cost overruns or time overruns or or, you know, or or any sort of events. And and traditional kinda lump sum turnkey contracts, you're you're you're liable for any cost overrun, and and you've obviously got to claim anything that you think is, is recoverable from the client.
So that's why, you know, a lot of these things end in in litigation. So so the model is completely different. I mean and I and I think it's becoming pretty much recognized by a lot of governments and a lot of clients that actually, this, you know, lowest cost wins LSTK model is not delivering the outcomes that that that really we're we're all looking for. You know, we're looking for jobs to be complete on time. We're looking for them to be more sustainable from a from an energy and a and a and a, you know, client impact perspective.
We're looking for them to be innovative. And and this type of model, you know, enables all of that. And it enables companies like SNC Lavalin who have a very, very large breadth of capability to apply all of these capabilities to the to the customer for the for the best outcome. So we're we're seeing a number of them. I mean, we see them here in Canada.
I mean, British Columbia, Ontario. We're seeing contracts come out under this form. The nuclear sector, you know, most contracts are awarded on that basis simply because, you know, in the nuclear sector, the clients don't wanna put time and cost pressure into into the process because safety is paramount. So we we we we see this as a very, very key growth area for SNC leveling. We're we're we're we're quite excited at the prospects of being able to pivot from LSTK to this, lower risk model.
Okay. Great. And then just on the nuclear side, I guess, as we kinda come out, hopefully, at some point this year from the pandemic, you know, can you maybe talk about the progress of work on your existing projects? And and over the course of 2020, did you find continued progress and discussions on the nuclear side, whether it's in The US, UK, Canada? Or how are you kinda feeling about that broader market as we head into '21?
Yeah. So it's it's different in in in each of our three core geographies. It's it's slightly different. So if we talk start with The US first. You know, it's really about environmental management.
You know? It's about cleaning up nuclear waste and decommissioning power plants. And we're seeing that the Department of Energy have a really strong commitment, to continuing to to invest in that cleanup with some very, very significant contracts, not least of which the Hanford one that we won in in 2020, and in fact, an extension to an existing contract in 2020. So we, you know, we'd see that as an an important component. In in The UK, I mean, they're they're obviously, we're involved in the new build in Hinkley, and I think it's, you know, it's it's likely that new build will will continue in The UK through to Sizwell.
And and that's a very significant opportunity for us as well as, decommissioning and and helping, some clients actually keep their power plants, running for for for life extension through engineering contracts. And then Canada is all about our technology and supporting reactors around the world from the CANDU technology, but also the reactor life extension work that we do at Darlington and Bruce. So I think, you know, you think about all of those different components and the market that's out there, the potential for growth in our particular, sectors within the end markets within nuclear is is quite strong.
Alright. Great. And then on the infrastructure EPC side, obviously, you've taken a number of provisions related to some projects where you are having discussions with the client. Can you maybe walk us through, you know, what we could expect if there is a recovery or partial recovery maybe from the accounting side? Would there be a revenue recognition and then the cost and, I guess, you know, the full kind of income statement recognition?
Or would there just be a EBIT or EBITDA flow through? If you can maybe walk us through what it could look like if there is a positive recovery at some point, and maybe any visibility on timelines there over the course of, you know, the next year or two.
Well, let let me let let me answer half of that and let Jeff come in on the on the specifics of the of the revenue margin recognition. I think the first thing I'd say is you're you're right. You know, we we I think we've taken a prudent approach to COVID recovery on all three of the jobs that that we have going. And clearly, the jobs have been impacted, and clearly, there's, vehicles through the contract for us to to to claim that loss. The the burden of proof is when is on us.
So we we have to go through a process with our clients, hopefully through negotiation, not litigation, to really, you know, pursue those recoveries and pursue those entitlements. And it's complex because, you know, they're they're very, very huge large contracts with with lots of kind of moving parts and and labor, and the the impacts are complex to prove from a productivity perspective. So, you know, I wouldn't wanna get into a commitment as to when we're gonna see those recoveries, but we are in good positive, kind of dialogue with with our with our customers. And then, Jeff, perhaps just on the specific, how you see that?
Yeah. I mean, we would we would expect obviously to book the revenue at the point at which we have, you know, have resolved those with, you know, with the client. It is subject because we account for this project on a percentage of completion basis. Effectively, the revenue goes into the total expected revenue on the project overall, and then, you know, the revenue and the cost and the margin that fall out of that, you know, are are accounted for in that way. So you wouldn't necessarily see that, you know, what if assuming there is a, you know, a settlement at some point, you wouldn't necessarily see all of that in that particular quarter, but you would see it coming through over the remainder of the life of the project.
K. Great. Thanks very much for the color.
Thank you.
Our next question comes from Mona Nazir of Laurentian Bank. Please go ahead.
Good morning, and thank you for taking my questions. So just firstly,
in
in regard to the forecast for SMCL Engineering Services, the low single digit growth, you did touch on federal stimulus in your core markets, The US, Canada, and The UK. I'm just wondering if the guidance has stimulus factored in or a significant amount. Any yeah. Just some color around that.
Yeah. Okay. Yeah. That's a that's a that's a good comment. And and I think you'd probably say no because we're still in the pandemic, and we're still trying to understand what the the exit to the pandemic looks like.
And and and we're still trying to understand when that might be in in each of those core geographies, and it's somewhat kind of dynamic and and somewhat, you know, unspecific at that this time. I mean, for sure, I mean, you look at the the current commitment for the the infrastructure bill in The US, that that will get passed at some point, and that will be very significant. And I would expect that the the improvement and the flow through will probably not happen this year. I mean, if if it is this year, it's gonna be towards the end of this year. In in The UK and Canada, I mean, there's there's an ongoing commitment, and and all the way through COVID, we've seen, you know, new contracts and and new investment.
But likewise, you know, there's some fairly major projects out there, particularly in Canada, that we're I don't think we're gonna see the revenues flowing this year, but we are gonna see revenues flowing, beyond this year. So I I I think, you know, I I think the the real impact and the benefit that we're gonna see is probably beyond this year, just to try and give an overview of that question.
K. That's great. And then just secondly, looking at the pro form a business from a geographic footprint and mix perspective, I do understand that you stated you're working through the capital allocation plan later in the year. But I'm just wondering if we could expect a material shift from here. I mean, could The US be a significant significantly larger percentage of the mix for you going forward?
And I'm just wondering, given the move to sell oil and gas was in fairly rapid order, could we similarly see if that's trigger pulling if you come and act come upon an acquisition opportunity, or is it really just organic growth story at this point?
So for sure, The US is a key focus, undoubtedly. I mean, 20% of our business currently comes out of The US where, you know, it's it's 30% and and the high twenties in in The UK. So so for sure with, with with 5,000 people there, we're we're not at the scale of our peers. We see significant opportunity both in the nuclear and the infrastructure. So, yes, I think the very simple answer in The US is is yes.
You're gonna see, organic growth. As far as our, you know, our our inorganic growth plans and and where we might apply that capital, you know, we will come back and and be a lot clearer about that. But but it's gonna follow. It's it's it's gonna follow the the the the the end markets and the geographies that that we see as as opportunities right now. I mean, it's you know, the the the the trajectory of the company is not gonna change.
It's gonna still enhance it.
Okay. That's great. Thank you for that. And just lastly for me, I know you've spoke about investments on the IT side. I'm just wondering, from your perspective, if you think there's been an acceleration for IT to be married or weaved into the offering with work from home environment.
Do you feel that customers are having, more demands, or is it really capability requirements that you feel are needed, or are competitors offering more forward looking solutions? I'm just wondering if you could speak a little bit more about the current and potential future IT investments and the drivers of such. Thank you.
Yeah. Well, I I think our sector in the the the engineering and construction sector is generally seen as a low a slow adopter of of technology, digital technologies, use of data. And I think, obviously, through COVID, you know, the the the whole remote working and the whole kind of, thought process of how technology can assist the the building process has become a lot more kind of, you know, focused from a both from a, you know, the the the industry itself, but also from what customers are looking for. I I see all of that as an opportunity. I mean, I I see all of that for SNC as a as an opportunity because we we've got the basic abilities certainly within the Atkins acquisition we did in '17 and the way that we've fostered that and and and built upon that within the company.
So so I see this as a as a as a space to, to offer our capabilities. Yeah.
Okay. That's it for me. Thank you.
Thank you.
This concludes the question and answer session. I would like to turn the conference back over to Denis Jasmin for any closing remarks.
Thank you very much for for having joining us today. If you have any further questions, please don't hesitate to contact me. Have a beautiful day, everyone. Thank you very much. Bye bye.
Thank you. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.