Good morning, and welcome to SNC Lavalin's Third 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, Ariel. Good morning, everyone, and thank you for joining the call. I hope you and your families are safe and well. We appreciate you taking the time to listen in today. Our Q3 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.
Session.
I would like to draw your attention to Slide two and three. 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 filings on SEDAR. These documents are also available on our website.
Also during the call, we may refer to certain non IFRS non measures. These measures are defined and reconciled with comparable IFRS measures in our MD and A, which can be found on SEDAR and on 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, Denis, and thank you all for joining us. Please turn to Slide five. We continue to move forward on our strategic path, including building out our pipeline and delivering consistent performance and remain focused on exiting LSTK as effectively as possible. Firstly, we have continued to deliver solid results in SNCL Engineering Services, in line with our expectations. We continue to benefit from a diverse business mix, public sector work and long term contracts and relationships.
Secondly, the transformation of the Resources Service business is on track, and we have moved quickly to restructure and reduce overhead while winning new services contracts. In SNCL projects, infrastructure LSTKs continue to be affected by productivity losses due to COVID-nineteen and summary forecasts. Current Resources LSTK projects performed well with a minimal loss. However, projects overall loss was disappointingly driven by an unfavorable arbitration ruling on a completed LSTK legacy resources project. Finally, financial position remains strong.
We have $1,100,000,000 in cash and successfully issued a $300,000,000 bond in the quarter. Turning to Slide six and highlights from SNCL Engineering Services. This was another quarter of solid results for Engineering Services, underscoring the strength and resilience of the business, which delivered an adjusted EBIT margin of nearly ten percent and $186,000,000 in cash flow. Segment adjusted EBIT was slightly up compared to Q2 and EDPM, Nuclear and Infrastructure Services performance has remained consistent over the past six months. This demonstrates the essential and long term nature of the services contracts within our engineering services business.
Please turn to Slide seven. EDPM continued to perform well in our core areas of UK, Canada and The U. S. Revenues from The UK and Europe transportation and defense markets were particularly strong and we continue to win new business. We were recently chosen to be the commercial delivery partner for The UK's High Speed Rail two project.
This is a state of the art high speed line critical for The UK's low carbon transport future. Winning work continues in The U. S, where we've recently won several advisory and design service contracts for state Department of Transports. In The Middle East, where the market is currently slower, we're winning new work also and recently have been awarded the master planning work for the new leisure park with Six Flags. Overall, Q3 backlog was solid $2,800,000,000 slightly higher than Q2, in line with Q3 twenty nineteen.
Our prospects pipeline remains robust at $27,000,000,000 Please turn to slide eight. Nuclear continues to perform well with results for Q3 ahead of Q2. The segment benefited from a good mix of long term contracts, field services, ongoing engineering, which have helped deliver enhanced EBIT. The US has been a strong growth market for nuclear with two contracts moving forward with the Department of Energy, both relating to decommissioning and waste management work at the Hanford site in Washington State. Our proprietary nuclear technology has also been well recognized with a number of contract and industry awards.
Moving to slide nine. Infrastructure Services also saw higher performance in Q3 compared to Q2 with revenues and margin on target. Our operation and maintenance contract were at full service levels as deemed essential and we were active with both healthcare and power service contracts. Revenues from links on our substation JV with ABB increased for The UK and Europe. We saw a number of awards for infra services in Q3, including scopes relating to the ongoing pandemic and master service agreements in the hydro space.
Turning to Slide 10 and the capital highlights. In Q3, the phased reopening of the Ontario province and the Greater Toronto Area meant that the 407 ETR reported an improvement in traffic compared to Q2. S and C Lavalin received a dividend of $16,900,000 from Highway 407 on September 3. Other concessions are performing very well with contracts based on an availability model. Moving to Slide 11 and SNCL projects.
We generated a loss of $25,000,000 in segment adjusted EBIT for infrastructure EPC projects, reflecting the continued impact on productivity as a result of COVID-nineteen and certain reforecasts. Negotiations continue to recoup these losses from our clients. We continue to expect that these Canadian light rail projects will be cash flow positive over their life. With two quarters already completed under COVID restrictions and as we move through October, we have greater clarity on the impacts to productivity. We're now seeing industry productivity impacts of between 1025% depending on the project and the activities involved.
The highest impacts tend to be on projects with extensive activities, including manual handling of materials or working at height or in confined spaces, where the necessary safeguards to social distance during the pandemic have had impact on productivity. On all sites, additional hygiene breaks and the constraints on travel to site have also affected productivity. Despite the lower productivity, we continue to run down the LSTK backlog, which stood at $1,900,000,000 at the September. Turning to Slide 12 and the resources projects, the combined loss for resources LSTK and services was $75,000,000 for the quarter, primarily due to an unfavorable arbitration ruling on a completed legacy LSTK project. Obviously, I am disappointed with this ruling, which was outside our internal and external experts' assessment.
While we believe our current litigation risk assessment processes are appropriate, we're undertaking a further review of the remaining legacy LSTK litigation matters to provide additional assurance. On a positive note, the services side of the business performed better than expected and the loss on active LSTK projects was down to approximately $3,000,000 The enhanced performance of the services was as a result of our ongoing efforts to rightsize the business through divestment and overhead reductions, combined with work winning and better execution. As previously stated, we remain on track to largely complete the backlog of Resources LSTK by the end of the year. Moving to Slide 13, we can see a significant reduction in LST backlog since our strategic direction in June 2019 to stop bidding on this form of contract. You can also see that the resources services backlog that is currently contained within this sector has remained stable at around $1,000,000,000 This provides further confidence that our resources services transformation.
Our goal, as you know, is to exit LSTK and we continue to focus on that. Moving to Slide 14 and the transformation of our Resources business announced in Q2. As stated, we have made significant progress in Q3 as we move towards profitability in the 2021. In Q3, we announced the sale of the South African Resources business, divested our European Fertilizer business, reduced the overhead and headcount to approximately 10,000, strengthened the order backlog with renewed of key service contracts in core countries. We remain on track to breakeven by the 2021 and turn a profit next year.
With that, I'd like to move to Slide 15 and conclude my remarks before Jeff takes you through more detail on the Q3 numbers. Our performance in the quarter continues to underscore the strength and resilience of the Engineering Services business and our continued closeout of legacy LSTK business. Currently, we are focused on four priorities to unlock value for all stakeholders. One, closing out LSTK business successfully. Two, ensuring continued consistent performance across our core markets and geographies in Engineering Services.
Three, positioning the company for a sustainable future, driving organic growth by sharing capabilities across our core markets, including looking at those capabilities that can help us enable clients to deliver sustainable infrastructure and clean energy and leveraging technology and collaborative working to apply our major project expertise in new contract models that benefit our clients and the outcomes of projects. And lastly, four, we are building a connective, collaborative organization to efficiently deliver our overall strategic direction. I firmly believe that we have the business focused on the right markets in the right geographies, and we're taking the right road to achieve our future. With that, I'll thank you, and I'll pass on the call to Jeff.
Thank you, Ian, and good morning, everyone. Starting on Slide 17, the company reported an IFRS net loss attributable to SNC Lavalin shareholders of $85,000,000 or $0.48 per diluted share in Q3 twenty twenty compared with a net income of $2,800,000,000 or $15.7 per diluted share for the corresponding period of 2019. Q3 twenty nineteen included a significant gain on the disposal of a 10.1% stake of Highway four zero seven ETR of $2,600,000,000 or $14.74 per diluted share. Note that the Q3 twenty twenty income tax expense of $45,000,000 included a $53,000,000 reduction of deferred income tax assets resulting from a reassessment of the future recoverability of loss carry forwards in The U. S.
While the Q3 twenty nineteen income tax expense of $3.00 $9,000,000 included $83,000,000 of income tax recoveries on capital losses related to the capital gain on the Highway 407 ETR disposal proceeds. The Q3 twenty twenty net loss also included restructuring costs of $33,000,000 before taxes, mainly related to the Resources Services transformation. Year to date, we have recognized $58,000,000 in connection with the Resources segment transformation, which is in line with management's expectation of between 50,000,000 to $60,000,000 for the year. The adjusted net loss from PS and PM in Q3 twenty twenty amounted to $58,000,000 or $0.33 per diluted share compared with an adjusted net income of $165,000,000 or $0.94 per diluted share in the corresponding period in 2019. The variance was mainly due to lower segment adjusted EBIT in both Engineering Services and Projects segment and a negative variation in income taxes.
The company continues to maintain a strong financial position. At the September, we had $1,100,000,000 of cash on hand and an additional $2,000,000,000 available to be drawn on the revolver credit facility. Now looking at the segments in more detail, on slide 18, we can see SNCL Engineering Services delivered solid results and continues to be resilient through COVID-nineteen with $1,400,000,000 of revenue in the quarter, in line with the second quarter, but lower by 3.6% when compared to Q3 twenty nineteen. Segment adjusted EBIT was 142,000,000 representing a margin of 9.8%, in line with our expectations. The EDPM segment revenue totaled $899,000,000 a decrease of 7.3% compared to Q3 twenty nineteen as strength in several sectors, including transportation and defense within the segment core region of The United Kingdom and Europe was more than offset by the adverse impact of COVID-nineteen in some other markets, notably Aviation and Commercial Property.
EDPM segment adjusted EBIT was strong at $81,000,000 a 9% margin in line with our long term target range of 8% to 10%. Note that the Q3 twenty nineteen margin of 10.6% included some positive project settlements. In Nuclear, segment revenue increased by 5.5% to $225,000,000 mainly due to higher volumes across the geographies. Segment adjusted EBIT was strong at $36,000,000 a 16.1% margin above our long term target range of 13% to 15%. Infrastructure Services experienced a 1.6% revenue increase, mainly due to the growth in LinksOn's revenue in The UK and Europe region.
Segment adjusted EBIT of $25,000,000 drove a 7.8% EBIT margin, also higher than our long term target range of 5% to 7%. If you turn now to slide 19, the SNCL Engineering Services backlog continues to demonstrate resilience against the backdrop of COVID-nineteen and at the September was $10,700,000,000 including awards for the third quarter of $1,200,000,000 EDPM had a particularly good quarter with an ending backlog of $2,800,000,000 up 1.6% versus the end of Q2. Bookings in the quarter of $943,000,000 resulted in a booking to revenue ratio of 1.05, in line with the year to date ratio. If you turn now to SNCL projects on Slide 20, in line with our LSTK exit strategy, revenues for Q3 twenty twenty continued to decrease. Infrastructure EPC project revenues fell by 18% to $237,000,000 mainly due to the continuing backlog runoff of our major LSPK construction projects.
The Infrastructure EPC Projects segment delivered a negative segment adjusted EBIT of $25,000,000 compared to a small profit of $2,000,000 in Q3 twenty nineteen. This quarter's loss was mainly due to some cost forecast adjustments and lower productivity due to revised working conditions caused by COVID-nineteen. Note that during the quarter, the Husky White Rose project backlog has been reclassified from LSTK construction to reimbursable and engineering services, as this project has been derisked following the changes in contractual terms. The Resources segment recorded a negative segment adjusted EBIT of $75,000,000 as you heard from Ian. The LSTK project business recorded a $61,000,000 loss due to the $58,000,000 provision taken for the unfavorable arbitration ruling.
The Resources Services business, which is currently being transformed to complement engineering services, recorded a loss of $14,000,000 slightly better than management's expectations as non primary operations continue to be wound down. Turning to Slide 21, the decrease in capitalist segment adjusted EBIT was mainly due to reduced contributions from certain concessions and lower dividends from our Highway four zero seven ETR investment, for which we received $17,000,000 of dividends in Q3 twenty twenty compared to $42,000,000 in Q3 twenty nineteen due to our reduced ownership stake. Traffic volumes continue to be affected by the COVID-nineteen situation, but we believe these are exceptional circumstances. And with seventy eight years remaining on the concession, we continue to strongly believe in the long term value of our investment. Moving to slide 20 two, net cash used for operating activities was $136,000,000 in Q3 twenty twenty compared to $51,000,000 in Q3 twenty nineteen.
The variance was mainly due to a timing difference between the $200,000,000 payment for the first wave of claims in the Pyratite case and the receipt of insurance coverage proceeds expected in Q4 twenty twenty, which should cover a substantial portion of the $200,000,000 SNCL Engineering Services generated cash flow from operations of $186,000,000 due to strong EBIT conversion and working capital positions, while SNCL projects continued to consume cash with a cash outflow from operations of $73,000,000 While SNCL Engineering Services should continue to see strong EBIT conversion to operating cash flow in Q4, SNCL projects will continue to consume cash including the arbitration settlement payment. Combined with some unwinding in Q4 of the temporary working capital balance benefits related to COVID-nineteen government payment terms and sales tax deferrals outlined in our Q2 results earnings call, net operating cash flow in Q4 is expected to be slightly negative. During the quarter, we have successfully issued $300,000,000 of debentures due in 2024, for which the proceeds were used to fund the repurchase of a portion of our Series one debentures and repay certain outstanding indebtedness under our revolving credit facility. At the September, the net recourse debt to EBITDA ratio on the revolver credit facility calculated in accordance with the terms of the company's credit agreement was 1.7 times, well below the required covenant level of 3.75 times.
And finally, turning to Slide 23, with respect to Q4 twenty twenty outlook, we expect assuming no significant deviation from the current COVID-nineteen worldwide situation that SNCL Engineering Services revenue should decrease by a low to mid single digit percentage compared to Q4 twenty nineteen. And we have tightened the outlook for segment adjusted EBIT as a percentage of revenue between 8.59.5% for the same period. This concludes my presentation, and we can now open the line for questions. Thank you.
Thank you. We will now begin the question and answer session. Our first question comes from Jacob Bout of CIBC. Please go ahead.
Good morning.
Good morning. My
first question here is, so you're indicating that you're undertaking a further review of the remaining LSTK legacy litigation matters. How many of these projects could subject to this?
Okay. Yes. Thanks, Jacob. I mean, let's just walk through how these things come about first and then put some context around what the number is in the whole. I mean, clearly, closing out LSTK is a priority for us and exiting the business.
The intent of doing that is to complete all the live projects and close out anything that's from a a legacy perspective. Now, generally, projects, they get settled in terms of the the accounts get settled pretty quickly after we've we've finished the job in in relative terms. That's what we would expect to do by working with our clients and negotiating them out. In some cases, those actually turn to dispute. Obviously, we're not in the business of not getting paid for the work that we've done, and we're not about to leave money on the table.
We pursue recovery through a dispute or a litigation where we feel that we can get recovery. So that's that's a much smaller number of of instances than than the whole. I mean, this particular case, it it goes back to the early part of last decade. So so this is a a long outstanding, project that's been through an arbitration. And as we go through those arbitrations, we we make the assessment of what the outcome is gonna be.
And obviously, this case, we're pretty disappointed. So the answer to your question is in context to the closeout of the whole of LSTK, we're talking about a relatively small number of projects here.
Okay. And then my next question is just on the margin guidance you gave for EBITDA margin between 8.59.5%. I think that's at the higher end of your previously disclosed H2 guidance range. Is this just a mix issue, a bit more nuclear? Or what's going on there?
I'll let Jeff answer. I mean, it's a bit more of a kind of stronger fix as we close out the year. But but Jeff? I think you're on mute, Jeff. Jeff?
Really sorry. I was on mute. So our previous guidance was 8% to 9%. And as I said in my script, we've tightened that to 8.5% to 9.5%. Now you'd be correct in observing that the middle point of both those ranges is effectively 9%.
I think the difference though at this point versus where we were at our Q2 earnings result is that we've got another quarter in a sense of the COVID backdrop against the business under our belt. And therefore, I think we have better visibility on the impact that it's having and how the business is responding. And as a result, with one quarter to go, we feel confident about tightening that range to eight point five percent to nine point five percent versus eight percent to ten percent. So I think that's where we think our guidance is comfortable.
Okay. As we go forward here and we do more of a ramp in the nuclear work, is that a higher margin work
for you?
Yeah. I mean I think as we've guided, as you've seen us guide, we guide to 13% to 15%. Now I think what we would say is obviously that is a higher margin business. It has to do with some of the very unique capabilities that we can provide to the market in that business, and the importance of the quality and effect of the supply chain, within the nuclear industry itself. I think over time as well, some of our growth areas particularly in The US will come through joint venture net equity or income pickups where we'll effectively be picking up revenue and margin in the same amount.
So theoretically over time you might see an increase as well in the reported margin percent although that will has much have to do with us picking up the net income as opposed to revenue.
Okay. I'll leave it there. Thank you.
Okay. Thank you.
Our next question comes from Mark Neville of Scotiabank. Please go ahead.
Hi. Good morning, Good morning, Mark. Good morning. Good morning.
If I could just follow-up on Jacob's question on the litigation. I appreciate your comments. I understand it's a small number of additional projects, but is there any way to sort of quantify the potential risk and or sort of give us some comfort that this is really a one off event? Yeah.
Yeah. I mean, clearly, you know, we're really disappointed. I mean, that's the first thing I'd say. This is a 58,000,000 deviation from where we expected this to land. So so we're disappointed.
I'd probably explain like I said, I mean, this arbitration has been running for over a decade. And the way that we assess the outcome of these kind of arbitrations and litigations is obviously with external counsel, external legal advice and external quantum analysis. We use our internal assessment process and risk assessment process to make a position that we either provide for and that we report on based on all the information. And that's a live process. I mean, as it will go through its hearings and as we get further information, that process is updated and we adjust any provisions or any reporting against that as the case unfolds.
Now in this particular case, hearing was some time ago and the actual award was in Q3. So we do think, having kind of got this, which was disappointing, it's important to to look at the few cases that we've got and do a a rereview of those cases. We we will kind of expect from that little change because the process we have is pretty robust already, but we will do that to give us absolute additional assurance that, that there's nothing there that, that needs updating.
K. And in those particular cases,
is there an appeal on your end, or
is this is there this
Well, sometimes. I mean, it depends on the Yeah. It depends it depends on the stage of the litigation, and it depends on the actual process itself. In this case, it's somewhat binding. So obviously, that's why we've taken the loss.
Right.
Okay. And just moving on, just within the projects backlog and infrastructure, I appreciate you guys sort of now have a better handle on where the inefficiencies exist. But is there any sort of remediation or actions that you could take to sort of get this to a breakeven sort of business in the current environment, or we just sort of need sort of more normalized, quote, unquote, normalized working conditions before you sort of can stem the losses there?
Well, no. For sure. I mean, we are actively looking to recover our losses from COVID. I mean, the the contracts I mean, we're down to three contracts, basically. We're we're down to Trillion, the REM project, and Eglinton.
And in in all those contracts, and they're all slightly different, and obviously, clients are different, there is avenues of recovery through the contract, and we will pursue those. And we have yet to recover, anything, to be frank, but the discussions and the kind of contractual case is being put forward based on the impacts as we see them. So in the fullness of time, we would expect to recover, certainly the loss that's specific to COVID and we will pursue that.
Okay. Maybe just one last one to Jeff. I just I didn't catch your comments around Q4 cash flow expectations. There is a you mentioned a few sort of discrete items. I just didn't catch all.
Yes. No, that's fine. What I effectively said was we expect to see continued good EBIT conversion to EBITDA and operating cash flow in Q4. We will continue to see a use of cash in the SMCL project space. And as Ian was saying, there's a few contributing factors to those, including the need eventually to recover on some of the COVID-nineteen sort of productivity impacts.
There's also an element and I talked about this in Q2 of government support programs where we see prompt payment terms that are advantageous to us. We see sales tax deferrals for instance in The UK, all of which have been effective in terms of providing us with positive working capital, but will unwind to some extent through the end of this year, but also into 2021. So the combination of all those means that our best view is that operating cash flow will be slightly negative in Q4.
Okay. Does that also include the $50,000,000 settlement? Yes. Yes, exactly.
I think I said that in my script as well, but that's obviously a contributing factor also. And I think the other observation I'd make is nine months into the year, we're actually just about breakeven from an operating cash flow perspective. We're slightly positive, think about $17,000,000 So obviously, where we end up in Q4 is effectively where we'll end up for the full year as well. Sure.
All right. Thanks guys. I'll turn it over.
Thank you. Thanks.
Our next question comes from Sabat Khan of RBC Capital Markets. Please go ahead.
All right. Thanks and good morning.
Good morning.
Maybe just looking at the Resources segment maybe outside of this arbitration ruling against you, now that you've got about one quarter and a little bit of work left, how are you feeling about the remaining Resources LSTK work that you're doing?
Yes. I mean, think on the presentation, it shows $200,000,000 of remaining backlog. It actually showed that in Q2. And it's not that we haven't had any movement in the quarter. It's just a rounding.
We've burned about $60,000,000 in the quarter of backlog. And as you can see, the loss is pretty minimal, from those projects. And as we get through to the end, then, obviously, we're looking forward to putting the the whole of the resources LSTK business behind us. Now I would you know, we've always said that there's there's no you know, it's not zero risk going forward, but I think we've got a pretty good handle on the rundown to the end. And we we should be on track to put put this behind us certainly, by by by the early part of next year.
So I think it's a good quarter in terms of progress and a good quarter in terms of closing out.
Thanks. And then we've seen quite a few headlines coming out of The U. K. With the government focus on nuclear. Canada government, I think, is investing a little bit in some SMRs here.
Can you maybe talk about the pipeline of nuclear and kind of where you're involved or where some of those opportunities might be for you?
It's specific in the nuclear or just generally?
Nuclear more so, but just generally as well.
Yeah. Yeah. So I think our range of capability in nuclear is really expensive because it comes from several origins. So we we have decommissioning capability. We we have, you know, cleanup nuclear waste remediation capability.
We have new build capability that's being applied to, the Hinkley Point Power Station in in The UK. We own the CANDU technology. We have lots of vendor support to existing CANDU reactors. And we have a technology business, which really is quite innovative in providing technology solutions to the nuclear industry globally. We see really good opportunity in absolutely our core markets, which is The UK, who are committed to build new nuclear.
There's a lot of rhetoric at the moment about Seizwell and whether the the Sizwell project will go ahead. We we will be there with the the client EDF if that goes ahead. We have a great relationship with with EDF. There's significant opportunity in decommissioning. I mean, all the power plants, you know, in The US, The UK, and to some extent in Canada are coming to the end of life.
And and our expertise in in decommissioning and remediating existing power plants to the natural environment is something which we're obviously very proud to have as capability and that we would expect to obviously grow our market from. So I mean, obviously, I could talk for quite a long time about this because it's a pretty exciting part of our business, but I think that gives you a bit of a flavor.
And then just one last one for me maybe on the infrastructure APC side. You called out three big buckets, I guess, REM, Trillium and the Eglinton project. And we've seen some headlines around some litigation started on the Eglinton project. If we were to think about where you're looking to get your recoveries or some cost offsets going forward, I guess, there one we should focus on more so than the others? Or are your cost headwinds through COVID spread evenly among the three big ones?
No. I think the productivity issues that we're facing are pretty even. And it depends on the absolute specific nature of the activities on the job. So tunneling, for example, is a confined space, and it's very difficult to social distance, and there's a bigger impact. You know, traveling to heights in in an elevated platform is difficult because you can only get two people in a platform, you know, in a platform, and, normally, you'd get 20.
It's it's that kind of thing that leads to the productivity loss. But but we're absolutely experiencing it on on all three jobs, and we're absolutely, pursuing our recovery on all three jobs. And as you rightly say, we felt on Eglinton that the right step to take, having tried to pursue this for quite some time, is is to file a claim, in into court. And and that job, we really need to get alignment with our client as to the impact, for many reasons, not just recovery for time reasons. I'm sure we will absolutely get there.
But these things take time and they obviously take demonstration.
Great. Thank you. Thank you.
Our next question comes from Yuri Lynk of Canaccord Genuity. Please go ahead.
Hey, good morning, guys. Wanted to follow-up on the three Canadian LRT projects, just to be clear. In your pursuit of these to get these COVID losses back, if you're not successful in recouping these costs, do we see a cost reforecast in the future because of that? Or do the numbers already assume that you're not going to get these recoveries?
I think what I would say is we're making a prudent assessment of where we think the outcome is going to land because, obviously, we're in the business of exiting this business line. We don't want to carry risk forward into the future. So I think we're being prudent is the way I would answer that.
Yes. Think that is Jeff. I think that's right. I mean obviously we take
our best
assessment as we've done it at the end of Q3 on that, where we're concerned or see, you know, see a position where we think, you know, we think we need to reflect that in the financial statements we, you know, we have. But as Ian said earlier, you know, we think under the different contracts, you know, we're entitled, you know, we're entitled to recover, with significant amounts of COVID-nineteen impact.
Okay. And to circle back on the arbitration issue, Is there a way to quantify the number of projects that might be that you're still in arbitration on? And I guess a follow-up to that is why if you want to have a robust process, why wouldn't you just book a loss, assume you're going to lose these process? And if you do, then you don't have to report anything. It's already in the numbers.
And if you win, then it could be a positive reforecast. I'm just trying to understand what's still left out there in terms of tail risk and, if there's any change to your approach warranted.
Yes. I mean, it's Jeff. Maybe I'll take your view respond to that. As you heard us say, there's a small number of these. We generally settle out and negotiate commercially on these.
But there are a small number of any significant value that are there in some form of litigation from many years past. And that's where this one is. As you heard Ian say, I mean, employ expert advice, internal views, external views to try and make the best assessments. And part of the reason for that is in some of these cases you can get quite a wide range. That often ends up in litigation.
One side asks for a larger number. Another side asks for a smaller number. And therefore, you have no choice but to try and take your best assessment of what you think the outcome will be based on the best input that you can get. We've obviously had a look at that as part of receiving this arbitration settlement. We think our provisions where necessary are appropriate.
But we'll absolutely essentially double check that and triple check-in terms of how we got the best view on all of them. So we think that's the right way forward and that's the process we'll undertake here over the next few months.
Okay. I'll sneak in one more for Jeff while I've got you.
Sure.
Think we've had a change to the calculation of your net debt to EBITDA ratio. And I don't think we've had an update in a while on that. So can you just give us the covenant of it still 3.75 and where you peg your current ratio in relation to that?
Yes. I mean, think as always the slightly tricky part is that the calculation under our covenant ratio for the revolver credit facility isn't a straight net debt to EBITDA. There are a number of adjustments that happen within there. And therefore as we go forward, we are thinking about certainly as we get into the first half of next year, how we can be clear in terms of our thinking going forward as the LSTK projects have continued to run down further and we have better visibility on what cash flows look like going forward and our ability to forecast those without some of the variability that comes with the LSTK projects. I think it will be easier to link a net debt to EBITDA from the financial statements so to speak as opposed to just the covenant ratio calculation.
But as you saw in what we were doing, certainly at the with the level of cash and financial flexibility that we have, our focus on cash flow and our level of net debt, we are well within that covenant ratio at the current time.
Okay. I'll turn
it over. Thanks.
Thank you.
Our next question comes from Benoit Poirier of Desjardins Capital Markets. Please go ahead.
Yes. Good morning, everyone. Morning. My first question, yes, with respect to the loss of productivity around the pandemic, could you maybe quantify the amount that has been lost so far and the potential amount that you're looking to recover from clients and any thoughts about the opportunities around the government subsidies?
So I think so as we've incurred these losses, as we've incurred them through Q2 and Q3, I think we've been clear what our assessment of that is. Now obviously, we are in somewhat discussion negotiation proof of loss with all the clients. So we don't actually want to get into the finite numerical details of that. But what I mean, just to maybe, Jeff, if you can perhaps just add to that from what we posted in Q2 and Q3?
Yes. So we so for Q3, there was about $22,000,000 of benefits in one of the notes to our financial statements, Note 16. I guess I'd make a couple of observations. The first is that's globally. So that's not just Canada for instance.
There's a government support program for instance in The UK around retaining furloughed workers. So the observation I'd make is that's the government grants we've received. But really that is there and has been used to offset the increased costs we've seen from either holding on to workers and employment levels that otherwise we would not have or returning workers from furlough or temporary leave. So we it in that way.
Okay. And for Resources Service business, could you talk about the ongoing restructuring efforts and whether you have more clarity visibility on the potential margin profile of this business in the long term?
I think the first thing I would say is what we said we would do in Q2 is on track. I mean, I think we gave guidance for the services business in for Q3 and for Q4 and then into 2021, returning to profit. So actually, we've come in slightly ahead in terms of loss than we said. So we're slightly better than what we put out there for progress in Q3. So obviously, we're pleased about that.
I think the other positive is that to get this business profitable, it's about rightsizing the overhead and winning work. Certainly, the rightsizing of the overhead is going well. We're we're down to about 10,000 staff now, which was, a significant decrease over 2019 where we were around about 15,000 staff. So we've continued to push ahead with the restructuring and the right sizing. In terms of winning work, we're really pleased to have picked up a framework agreement in the quarter from BP.
This is exactly the kind of project that we want, exactly the kind of mandate that we want, which gives us the framework to do engineering services and inspection work on a number of their assets. And as we said, I think when we put this together last quarter, working for IOCs and NOCs is the way forward for this business. And I think before we get ahead of ourselves, obviously, we've got to continue this effort to get it into profitability during 2021. But what we're looking beyond that is to get the profitability up to a complementary level to the other services businesses. And obviously, that's the intent beyond 2021.
Okay. And very quick one for me, pyruvate case, could you provide additional details on the case and maybe share your level of confidence that this payment will be reimbursed? And any color about the timeline, with respect to the case? Sure. It's Jeff.
Why don't I take that one, Ian? So I think, what you've seen, and as we mentioned in the presentation, so the first wave of claims related to pyrocyte required a payment, or at least our share of the payment of $200,000,000 And we have clarity having actually gone through the Quebec court system that we will be paid $140,000,000 It should be this quarter from the insurance group. And in fact there's another $33,000,000 on top of that. So there's about 175,000,000 of the 200,000,000 that we would expect to receive back on that. And the rest we had already provided and provisioned for in prior periods.
So we don't see a change from a P and L perspective as a result of that. Obviously there are there's a second wave of claims going on but that settles out the first wave.
Thank you very much. Thank you. Our
next question comes from Devin Dodge of BMO Capital Markets. Please go ahead.
All right. Thanks.
You have a number of framework agreements with clients in your Resources Services division. Just wondering, have you seen or has there been any movements toward revisiting the pricing under these agreements? On the one hand, the pandemic may have impacted your cost performance, but on the other end, may be getting squeezed by lower commodity prices. Is there any color that you can provide there?
No. I don't see that on the framework agreements that we've got in the in the resources business. I mean, I think that the the LSTK part of the resources business, which obviously we're in exit, is is probably becoming more competitive as as the market tightens, and, there's obviously been a, you know, oil price fluctuation. But no. No.
I I don't think we're we're we're seeing that kind of pressure yet. We're we're very comfortable with the level of profitability and the framework that we won from BP. So no signs yet.
And then maybe a question for Jeff and picking up on an earlier question on the leverage. But I guess what are you targeting in terms of financial leverage for the business? Does it change as those LSTK projects wind down? And then I guess at what point would you feel more comfortable being more active on the capital deployment front, other buybacks or M and A?
Yes. No, I think it's a fair question. I mean, I think I'd start with 2020 in my view has about has been about building financial flexibility and resilience. I think the first catalyst for this was just coming off everything from 2019. But then obviously COVID has put us in the same situation.
So as a result, very focused on cash flow, converting earnings to cash flow, preserving cash flow and really getting the business highly focused on that. I think as we go forward, the and particularly it's the LSTK portfolio that creates generally variability to our cash flow delivery and our cash flow forecasting. And you can just see that over the last few quarters. But as I think we've said previously, as we get into the first half of next year, we will have delivered a significant amount of the LSTK runoff. You saw from Ian's slide, we started back in mid-twenty nineteen around $3,400,000,000 between infra projects and resources.
We're down to just over two by the end of the year. We would forecast to be just under two and have delivered a fair number of those projects. So I think as we get into the first half of next year we have a lot better confidence in our ability to project that. And I think our demeanor generally at this point is to have a balance sheet that would be consistent with investment grade financial metrics. But we'll take our we'll have to take a view on how fast and how long it takes to get back to that.
And as a result, would expect that our kind of gross debt would be at a similar or lower level than where we are now. And I think at the same time, that starts to give us some opportunity to think in 2021 about where we have positive cash flow, how we would appropriately deploy that. But we'll need to come back and give more visibility on that as we get closer to that point in the first half of next year.
Helpful. Thank you.
Thank you.
Our next question comes from Frederic Bastien of Raymond James. Please go ahead.
Yes. Thank you and good morning. I was wondering if you could please go back to the comment you made about the Husky White Rose project being removed from the LSTK backlog. What's behind that?
Yes. Well, firstly, the the the project's gone through two postponements. As we as we hit COVID, the client was pretty quick to postpone the project for a year. And as we've gone through COVID and it's prolonged, currently, our understanding is that the project's not gonna restart until 2022, although I do believe that's under review. In addition to that, the contract was somewhat not a traditional lump sum contract anyway.
It had some risk sharing in it. And and and at the beginning of this year, we we we went through a period with the client of of kind of re relooking at the contract and and and recasting the contract to to the point that it it's it's not something we would class as an LSTK now. The risk share in it is is not not under that profile. So if the project does come back and we are not clear about that right now, but if it does, it'll be a good project for us with limited risk.
Okay. But did that decision compel
you
to take a provision on the project in the quarter? I'm just curious No. If there was any financial impact on
No. The client has actually been very fair in its approach to shutting the project down. I mean, we've got to have people there to kind of maintain the status of the project so they can be restarted. So we've worked closely with the client, and I think we've got a good relationship there where we've been flexible to what they need. And obviously, we've not incurred any loss from it.
Okay. And can you provide an update on how the Trilium project is going?
Well, it's obviously, it's having some effect through COVID, but pretty much like the rest of the jobs. It's relatively early days in terms of completion. The the big year for for Trillium project is is next year. I mean, we're entering the winter phase now where works are are will become limited until spring next year, but we're we're we've got a big campaign planned for next year, and it's a it's a critical year for the success of of the job. But apart from that, we we're we're we're we're we're pretty much on track.
But as I say, the proof of it is really the next year's work.
Okay. Thanks. I appreciate the color. Thank you.
Yes. Thank you. Thank you.
Our next question comes from Chris Murray from ATB Capital Markets. Please go ahead.
Yes. Thanks, guys. Good morning. Maybe going back to the EPC projects for a second and just trying to understand how we should be thinking about margin profile going forward. Let's assume that I think in your comments, you indicated that you're learning how to work within some of the COVID restrictions now.
And let's assume that your discussions with your clients will be ongoing. But how do we think about the margin profile over the next little while? Because I know you've talked about kind of free cash flow neutral, call it historical margins. Just with the reforecast now done, how do we think about this for Q4 and into 2021?
Ian, maybe I'll sort of Chris, a crack at I think and you're absolutely right. We've talked about them being cash flow positive over their life. As a result, we'd obviously see them as profitable over their life. Part of the reason for the comment, of course, particularly on the cash flow side is that the cash flows can be a bit lumpy. Obviously, we're incurring the costs often on a reasonably ratable way whereas the cash payment profile within the contracts can obviously be a bit more lumpy that way.
As you heard Ian say, we are where we're seeing cost impacts taking those as we go along. We do think with and so that ultimately may drag the margin down a bit. But ultimately, you know, when it comes to COVID, we think that, you know, costs themselves are largely recoverable through time and through money within those contracts. So I think part of it is it's early days. We've been taking this quarter by quarter.
I mean it seems like we've been living in COVID forever. But in reality at least here in Canada with respect to these projects, the impact has really just been in the last two quarters. So we've trying to assess that quarter by quarter. The position we've taken at the end of Q3 is the visibility that we see. And I think that takes us into the winter.
And then as we get into next year, we'll we believe have a chance to have worked through some of these issues with our clients and have a good idea about what that means for the construction period next year.
Okay. That's helpful. And then my other question just is in terms of we talked a little bit about the Resources business and certainly some of the comments I think were more energy focused. But one of the questions or some of the commentary, and maybe it's a different way to think about if you're thinking about oil and gas, but just energy broadly. Part of the transition and the energy transition has also been some discussion around the mining business and resource requirements to build some of this new infrastructure.
Can you just talk a little bit about how you're seeing some of the funding, especially out Canadian of government that's looking to create this transition and how you think that that may impact you in the coming year?
You mean funding of energy and infrastructure, the whole market, Chris?
Yes, exactly.
Yes. Yes. I mean, I think the the the term that it's it's generally being used in our core markets is is shovel ready, shovel worthy. Right? And the shovel worthy, component really means investment in infrastructure that gives an economic benefit, but also is sustainable in in its nature.
And and there's several announcements that obviously you'll be familiar with in Canada, but it's the same it's pretty much the same story, I think, in certainly in The UK and to some extent in some states in The US. And and that that for us is a is is is a very, very big positive because actually delivering sustainable infrastructure and and actually, you you know, how we we think about that and and this that both the type of capabilities that we've got and and how we apply those capabilities are are pretty much in our in our sweet spot of of of the capabilities we have. I mean, if you think about clean energy, obviously, we've got extensive capability around hydro and clean energy wind farms in The UK. We've got a nuclear capability, which is in our consideration clean energy. We just won this mandate in The UK for the the high speed rail, which absolutely because of the net zero twenty fifty legislation has to consider its carbon footprint.
And we've done a lot of work looking at the carbon footprint in partnership with the the client there. So so we see the whole industry moving a bit more towards an outcomes based industry rather than just thinking about let's work on an LSTK basis and get the cheapest price we can. So I think where we're taking the company and the capabilities we got play directly into this.
Okay. That's helpful. Thanks, folks.
This concludes the question and answer session. I would like to turn the conference back over to Mr. Jesmon for closing remarks.
Thank you very much for joining us today. I know there were a few analysts still in the queue there, but we are running out of time. But please don't hesitate to contact me. I'll be pleased to answer any of your questions. Thank you very much everyone and have a beautiful day.
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.