Thank you for standing by. This is the conference operator. Good morning, and welcome to SNC-Lavalin's Q1 2020 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. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Denis Jasmin, Vice President, Investor Relations. Please go ahead.
Thank you. Good morning, everyone, thank you for joining the call. These are very difficult and uncertain times for all of us, and I very much hope that you and your family are safe and well. I do appreciate you taking the time to listen in today. Our Q1 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 webcast will also be available on our website within 24 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 filings on SEDAR. These documents are also available on our website. Now I'll pass the call over to Ian Edwards. Ian?
Thanks, Denis. Thank you all for joining us, and I hope you're all managing well through the current situation and working safely. Please turn to slide four. Before we walk through the Q1, I want to make two points considering the unprecedented nature of the current situation and the company's evolution over the course of the last year. Firstly, the pandemic. We have moved quickly to safeguard our people, business, and financial flexibility. Secondly, solid results today for Q1 that demonstrate that our new strategic direction is proving effective even in the current backdrop. The reshaping of our organization remains on track. We have a diversified business across engineering services in essential sectors such as infrastructure, transport, and nuclear, with key skills that are in demand. Most of all, our employees have shared the same mindset and approach.
I'd like to thank all our employees for this and their continued resilience and the innovation shown on a daily basis. I'm very proud to lead this organization. If you would turn to slide five, I'd like to outline the COVID-19 impacts on our business and the actions taken. Our number one priority remains the health and well-being of all our employees. In the main, our physical projects are deemed essential services. Our infrastructure services, operations and maintenance, and nuclear work continues. Our LSTK projects continue with a couple of exceptions. More than 30,000 people in our professional services moved to fully working remotely very quickly, and we've retained all our capabilities. In a very short space of time, we've moved from dealing with the immediate effects of safety and business resilience factors to being able to offer innovative and value expertise directly to government in tackling COVID-19.
We've won contracts to support governments managing projects related to COVID-19. We're using logistics, field, and project management expertise to help deliver responsive health facilities in both Canada and the U.K. We were a first mover in taking actions to secure our financial standing. Our liquidity remains strong. We believe we have financial flexibility to deal with the impacts of COVID-19. With our role as the economy restarts already beginning, we will be at the forefront of this alongside our government clients. Infrastructure planning and engineering will be key to stimulating economies and adjusting to new ways of living. We have key capabilities here. I'll walk you through how this looks for each sector in more detail. First, if you turn to slide six, we delivered a solid Q1. Revenue is up for engineering services, excluding capital.
This business remains the future of the organization and continues to deliver a strong EBIT. The project's backlog is progressing well, and it's reassuring that the Infrastructure EPC contributed a small segment EBIT and resources projects are now only 10% of the LSTK backlog left. Crucially, we enter Q2 with a strong financial position. I'll let Jeff talk in more detail later on the full Q1 and our liquidity and financial flexibility. I'll now talk about each part of the business, starting with EDPM on slide seven. In Q1, the core EDPM business in the U.K., the U.S., and Canada continued to perform well. We did experience impacts in Asia-Pacific and the Middle East as COVID-19 hit these regions earlier.
Business winning in Q1 remained active with a number of transportation and infrastructure wins across the world. As a key part of our future growth in Engineering Services, EDPM is driving our digital future strategy. Across the organization, our investment in digital technologies and ways of working has proven valuable through the current situation, and the insights we can provide clients by harnessing data will form the next generation of our projects. If you turn, please, to slide eight. For EDPM in Q2, remote working was swift and included nearly all employees, so our productivity rates are stable, although we do expect to see revenue reduce in Q2 due to the current uncertainties. We're actively supporting governments in our core geographies, and we are winning business in every region.
Our government and client relationships are key as COVID-19 restrictions are gradually lifted, and we are ready, and we'll be there to support governments as crucial projects and infrastructure are put in place to ensure a positive recovery. Nothing changes in our strategy for EDPM. Our focus is on having our capabilities active now and ready to grow as the recovery starts. We are seeing many opportunities for expansion in core services, including cybersecurity, defense, innovative housing solutions across the regions. On slide nine, we'll look at nuclear. This is a great business, and our position is enviable. In nuclear, we have a strong global position, and our work here proves to be resilient. In Q1, we won a number of diversified contracts across decommissioning, cleanup, and a framework agreement to support an existing nuclear fleet.
We are focused on partnerships and being a leader in technology for our clients, alongside enhancing our own operational excellence to ensure we grow and build on a strong market position. Let's go to slide 10, and I'll talk more on opportunities and COVID. Nuclear has generally been deemed an essential service in our key geographies, and while there is some natural slowdown with COVID, the demand for nuclear services remains strong. Already in Q2, we have delivered the Darlington Unit 2 refurbishment, and this is part of our refurbishment work running through to 2026. We have a number of new opportunities across our diversified nuclear business, and in our core geographies of the U.S., the U.K., and Canada, we are seeing multiple small medium reactor projects requiring ongoing support. Our nuclear business is resilient, continues to deliver, and is positioned for growth. Please turn to slide 11.
Infrastructure services continues to be successful and gives us an important presence in the North American infrastructure and transportation markets. Such services in these markets are key to the ongoing transformation of our company, and the contracts in this area can often run for multiple decades as we operate and maintain facilities. Additionally, our infrastructure services business has a number of differentiated offerings in niche markets around the world. Linxon has expanded in geographic reach, and our leading district cooling business, alongside facility and program management services, continues to grow organically in the MENA region. We are developing our project integrator model, and this is where we will take our major project expertise and bring them to our clients as an integrated project and portfolio management service. Moving to slide 12 on how we are able to react quickly to the current climate with infrastructure services.
Our infrastructure services business has already seen new business in directly supporting the efforts to tackle COVID-19. We have a JV that is providing mobile health facilities to the Canadian government, and we are working in the pharmaceutical space to adjust production facilities towards testing kits. As with our nuclear business, the physical sites that we provide services on are primarily deemed essential. We are continuing our provision of services to hospitals, transit, power plants, defense, and civil administration. Linxon has seen delays in contracts awards. However, we expect demand for power distribution to remain strong. This is simply a matter of timing. This is also the case for those projects where we're providing services to civil construction projects. We are standing with governments and across Canada and globally.
We will be a champion of infrastructure, contributing our project integrator, project management, engineering services, and helping shape the social and transportation infrastructure solutions for the recovery. Finally, in engineering services on slide 13, we have capital. First off, the temporary dip in 407 traffic has some fairly obvious impacts on both 407 dividend and the contingent consideration receivable. On our other concessions, we are not seeing a similar impact with the different contract types based on availability rather than end-user demand. Our expertise in capital and the finance and structure of major projects remains of value, particularly as governments may look to quickly finance and push through large projects in the recovery. Let's look at slide 14 and the infrastructure LSTK projects. The controlled management of the infrastructure projects continues to progress well. As noted earlier, these actually contributed a small positive EBIT in the quarter.
Most of these projects continued, where projects experienced temporary suspensions, we have worked with our clients to minimize cost of both demobilizing and returning to work safely. It's worth also noting that on the REM projects, engineering and planning work continued. In relation to COVID-19, we are well protected by contract clauses such as change of law and force majeure. While there are obviously slower rates of progress on these projects that remain open, we currently have not foreseen forecast completion dates move significantly, and we continue to assess these with our clients. On slide 15, we will take a look at resources. We are now down to CAD 300 million of backlog remaining for LSTKs in resources, these projects are largely scheduled to complete this year.
A swift action in the restructuring was to initiate withdrawal from the Valerus business, and we successfully completed that closure within Q1. Services within resources are under pressure, and we are taking further actions to reduce cost. Please turn to slide 16. As you've seen, the backlog of LSTK projects has been reduced by 20% at this time last year, and we have additional project control measures in place which further de-risks the remaining backlog. Of the remaining CAD 2.9 billion, only CAD 300 million remains in resources, and the majority of the infrastructure projects relate to light rail transit systems. If we move to slide 17, then we can see the phaseout of these projects. From July 2019 to the end of March 2020, we progressed CAD half a billion of LSTK backlog.
The resources element is now a minimal portion, and we're working with all our clients to maintain good visibility of the phasing out of each project. Nigel White's team remains very active in all these projects and is working closely with sector presidents and the project teams directly in ensuring tight management of schedule and delivery. Please turn to slide 18. The company is well positioned. We have moved rapidly to protect our employees, our business, and we have financial flexibility. We're able to maintain our services capability through this period, and we're already seeing new demand for our expertise as governments and clients address the pandemic itself and transition to the phase beyond. Our strategic direction remains on track and unchanged, and today's solid Q1 demonstrates our continued progress down this path.
The fact that we have already been tested over the past year has played to our favor, as we have been able to demonstrate our ability to be agile and responsive in changing circumstances. I'd like again to thank our employees for their resilience, collaboration, and positivity through this time. I'll now pass to Jeff for more detail on the Q1 financials. Thanks, Jeff.
Thank you, Ian. Good morning, everyone. Before I begin, I'd like to draw your attention to a change that we have made in our terminology. To better reflect the company's new strategic direction and activities, we are now calling Engineering and Construction, or E&C, Professional Services and Project Management, or PS&PM. If you could turn to slide 20, I will firstly summarize the Q1 results. While total revenues fell 6% to CAD 2.2 billion from the prior year, driven primarily by reduced revenue from SNCL Projects as the LSTK backlog runs down, segment EBIT of CAD 99 million was in line with the prior year, as growth in engineering services from strong nuclear and infrastructure performance and reduced losses in SNCL Projects offset the reduction in capital from lower Highway 407 dividends. Engineering services EBIT margins rose slightly to 7.3%.
Adjusted net income after including higher SG&A costs compared to quarter one 2019 as a result of additional provisions and one-time reversals in the prior year was CAD 25.7 million, or CAD 0.15 per share. On an IFRS basis, which included a fair value revaluation of the Highway 407 ETR contingent consideration receivable of CAD 50 million post-tax, the company had a net loss of CAD 66 million, or CAD 0.38 per share. Turning to slide 21, we saw SNCL Engineering Services, excluding capital, grow revenues, EBIT, and EBITDA year-on-year. Revenue totaled CAD 1.5 billion, an increase of 6.4%. EDPM segment revenue fell 3.9%, mainly due to shortfalls in the Middle East and the impact of COVID-19 in Asia Pacific.
This was more than offset by a 5.9% increase in nuclear segment revenues, which had a strong performance across its key markets, and a 49.8% increase in infrastructure services segment revenue, where our Linxon joint venture continued to expand its activities. Segment EBIT results year-over-year showed the resilience of the engineering services portfolio. EDPM segment EBIT margin fell to 6.1% compared to 8.2% in Q1 2019. Primarily due to lower gross margin from the fall in revenues just mentioned. The nuclear and infrastructure services segment EBIT increased in the Q1 to CAD 37 million and CAD 17 million respectively, with EBIT margins of 15.5% and 4.9%. These were driven by underlying growth in services and a non-repeat of a one-off charge in nuclear taken in Q1 2019. Engineering Services EBITDA increased 7% to CAD 143 million.
Capital segment EBIT fell CAD 23 million from quarter one 2019 to CAD 42 million as a result of lower dividends received from our reduced stake in the Highway 407 ETR. Turning now to SNCL Projects on slide 22, revenues for Q1 2020 decreased by 24% to CAD 648 million, mainly due to the continuing backlog runoff of certain major LSTK construction projects and a reduction in services revenue and resources as business win rates have slowed. Infrastructure EPC projects delivered a segment EBIT of CAD 3.8 million, compared to a loss of CAD 6 million in quarter one 2019, following solid delivery in the Q1 on key projects and limited impact of COVID-19. Resources recorded a negative segment EBIT of CAD 58 million due to unfavorable LSTK project forecasts and a cost base misaligned to the reduction in services revenue and backlog. Acceleration of cost reduction measures and business closures and/or sales are underway.
Turning to slide 23, cash flows from operating activities have significantly improved in the quarter, totaling CAD 23 million in quarter one 2020, compared to a use of CAD 249 million in the same period last year. SNCL Engineering Services, excluding capital, generated cash flow from operations of CAD 142 million, an increase of 27% on the prior year from strong EBIT conversion and working capital efficiencies and timing initiatives. SNCL Projects continued to consume cash with a cash outflow from operations of CAD 152 million, although this was an improvement on the Q1 last year. On slide 24, the company's focus on improving financial flexibility and liquidity can be seen. At the end of the Q1, the company had CAD 2.1 billion of cash on hand and an additional CAD 1 billion available to be drawn on the revolver credit facility.
The company's debt profile and maturities are spread over the next four years, with CAD 300 million maturing later this year. 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 2.3 times at the end of March, well below the required covenant level of 3.75 times. Finally, on slide 25, as previously communicated, the 2020 financial outlook that was provided in the 2019 Q4 financial results press release is no longer valid due to the uncertainty created by the ongoing COVID-19 pandemic. The company does not intend to provide any further outlook for 2020 at this time. This concludes my presentation. We can now open the line for questions. Thank you.
Certainly. 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 will 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 two. To join the question queue, please press star then one now. Our first question comes from Chris Murray of AltaCorp Capital. Please go ahead.
Thank you, gentlemen. Good morning. Just starting, maybe thinking about the resources group and how to manage some of these losses on a go-forward basis. You talked a little bit in your script about accelerating some cost reductions or maybe some changes in the business. Can you elaborate a little bit on the pace of what you think you're going to be able to do and the magnitude of getting that to at least stop being as much of a drag as it's been for the last few quarters?
Yeah. Thanks for the question on that. We said in our strategy going back that we look at all options with the resources business, and clearly, the resources sector is under pressure. There's volatility in the oil prices we know, and there's COVID, and that brings also regional kind of stress within the Middle East. Yeah, we're absolutely thinking at how we accelerate or take measures to ensure that we minimize any losses within the whole of this business. It is in two components. We have the LSTK, which we're working our way through. We always said that the LSTK portion didn't have any major kind of elements in there of risk, such as we experienced on the Codelco, but it's not without risk.
As you've seen, there's been some project reforecast, not of large magnitude over the last three quarters. We are getting through the backlog, and we're down to CAD 300 million there. By the end of this calendar year, the backlog in the LSTK will be done. The remaining is CAD 1 billion of backlog in the services sector. Clearly, we have to fulfill the obligations there. Much lower risk activity. We don't see any issues in running down that backlog and running through that backlog.
The key issue for us is cost and making sure that we get cost out in line with the activity levels that we see, and we're working on that.
What about, it might be a bit challenging, but you have talked previously about even divesting of the group. Is there any opportunity to look at something like that?
Well, I think for sure we were looking hard at that. I think to be realistic in the current climate, it would be unlikely that we'd be able to divest the whole business. There may be opportunities to divest parts of the business that have a specific benefit to other potential purchasers. Clearly we're looking at that, and clearly we're looking at those opportunities.
Okay, fair enough. Interesting commentary around your free cash flow and operating cash flows. The fact that the SNCL Engineering Services seemed to be a pretty positive contributor, but then the whole SNCL Projects has been a bit of a drag offsetting a lot of that. The thought, though, I thought always was that on the whole, the LSTK projects should, as they wind down, contribute some cash flow. It's a bit of a project cycle thing. As these wind down, do you think that the cash flow drag from projects will either slow or reverse through the back half of the year?
Let me pass this on to Jeff, but you're right in saying that what we expect is positive cash flow through the life of the project. I think in the last quarter, we were clear in saying that we would expect, during the course of this calendar year, to have a negative drag from projects, but over the life of the projects, it'd be positive. Let Jeff just expand on that, if you would, Jeff.
Happy to. You hit it right on the head. We absolutely said that over the life of these projects, we would expect them to be cash flow neutral to positive, but that they would be a drag on operating cash flow here in 2020. I think the other element you referred to was, we made the observation back at the end of February that in terms of our view, pre-COVID-19 and withdrawing our outlook, that we saw operating cash flow overall for the group, so obviously with engineering services and projects being weighted to the back half of the year. Clearly in the current environment we're in, it's extremely difficult to quantify or estimate how exactly that's now going to shake out over the next two or three quarters, hence our withdrawing of the outlook.
Certainly before that, on an overall basis, weighted to the H2, absolutely, as you said.
Okay, the expectation is that, again, we'll have to see how the performance of the business actually goes, but at this point, no real change in your thoughts around the shape of cash flows.
I think it's fair to say we'll have to see how it goes. I think that that shape and its absolute amounts will clearly be impacted by what happens as a result of COVID.
All right. Fair enough. Thank you.
Thank you.
Our next question comes from Yuri Lynk of Canaccord Genuity. Please go ahead.
Hey, good morning. I'm wondering if you can provide a little more color on EDPM and the performance in the quarter. I was a bit surprised by the decline in EBITDA and EBIT. I understand there was less FEMA work. Maybe you can quantify what that was, and then just your expectations for how that business should perform in the current quarter.
I think myself and Jeff will give this some color. Let me go first. Our EDPM business does go through a cycle during the year, and for sure, the H1 of the year, and specifically the Q1, has always showed less performance than the back half of the year. There's a few reasons for that. One of the primary reasons for that is our business is obviously quite strong in the U.K. and is obviously also located in other jurisdictions where the end of the financial year is our Q1. That the way that the work is awarded in that the Q1 is like a bidding cycle, and then those get awarded in Q2. The work is executed in Q3 and Q4. You'll probably have seen that historically through the numbers. That's one issue.
Our expectation was much lower for this quarter than it would have been for Q4, for example. The second component is really actually around the Middle East and Asia. Asia Pacific, our downturn in business there hit at the Chinese New Year. Basically we had an impact through February and March. For sure, we saw an impact in business in March in the Middle East. Obviously, clients have also held back awards in the Middle East because of the whole volatility around the oil price. Primarily the impact that you see in Q1 is there. We're not concerned about the business other than our overall concern on COVID. Jeff, I don't know if you want to add a little bit more to that, or?
Yeah. I think I'd make two observations. I think you're absolutely right, Ian. The decrease in revenue is in Asia Pacific and the Middle East, for sure, and we've talked about the impact of COVID and I think there's no question that the fall-off we've seen and the challenging environment, in the oil and gas world, and obviously in that end of the world, does tend to have a knock-on impact to some of the infrastructure projects and civil engineering projects that EDPM does out there as well, and we saw some of that. There was, as you pointed out and we talk about in the MD&A, a fall in our revenue from FEMA in the U.S. It wasn't a massive number, but it's more the absence of that in the Q1 this year versus last year, where we had some work related to Hurricane Maria.
The Middle East and Asia would be what percentage of your EDPM revenue?
It's clearly a minority of our business. If we can have a quick look, I don't have the percentage right to hand.
Okay.
It would be a minority. It was definitely the part that was impacted most dramatically, as you imagine, although if I think of Asia Pacific overall for the group, between our Hong Kong and Chinese offices, it's around one, 1.5%. Of course, when you shut the offices down for a period of time, then it has a more dramatic effect, at least on the EDPM segment.
I would also add, on the Asia Pacific business, it's bounced back very quickly. Our business is getting back to normal in Asia Pacific. As you can see, we've been awarded a fairly significant new contract in Macau. We're actually seeing the recovery through our business there quickly as well.
Should we expect maybe a bit muted but still the same seasonal uptick in EBIT, in EDPM for Q2?
It progressively has an uptick through the course of the year. For sure, you should see that being repeated. The only caveat I'd put on that is the impact of COVID-19. Whilst we feel our business, particularly our EDPM business, which is primarily in the public sector, where 75% of our business comes out of the governments that primarily we work for in Canada, the U.S., and the U.K. We're not making any kind of definitive statement about what we think the impact of COVID-19 is through the rest of this year.
Okay.
I think we talked about the fact that, and you can see that in the press release as well, that we are seeing through the first month here of Q2, some fall off in revenue in the EDPM segment and in the engineering segment. Even though a lot of it is government-backed, we are seeing some reduction.
Okay. Thanks, guys.
Our next question comes from Frederic Bastien of Raymond James. Please go ahead.
Thank you. I was just wondering on the resources sector, how are you approaching services opportunities? I appreciate right now there might not be a lot of opportunities to bid on, but is your strategy to still pursue service opportunities in that particular sector?
For sure, we were having success pre-COVID-19, developing our services offering to the major clients, kind of government-sponsored clients in the Middle East and North America. There has absolutely been a drop-off that we've seen during this crisis. Well, it's a double impact, obviously, from oil price volatility and COVID-19. For us, our concentration here is making sure that we adjust our cost base to match and accommodate revenue fluctuations that we see within that sector. Obviously burn off the LSTK as effectively and efficiently as possible. That's the current focus right now.
Right. Our margins, the discussions around margins, going in margins and all that stuff, are they adequate for you to say, "Okay, let's go with it," and it's worth pursuing?
Well, what we saw for sure pre-COVID-19 was, yeah, adequate margins in the services sector of that business, the engineering and the professional services part of it. We saw a good opportunity, like I say, that landscape is definitely changing now.
Okay. Thanks for that color. Now on the infrastructure services with the addition of Linxon, we get better revenue, better margins. Is the performance that you delivered in Q1 sort of a good run rate to use on a go-forward basis?
Yeah, I think so. Yeah. Linxon and the O&M part of the business and the project management part that we're trying to grow within infrastructure services, I think what you see is pretty much representative, yeah.
Okay.
Yeah, I'd add to that, Ian, that it's a repeatable type of product that they sell and install. I'd make the observation they do that in a fair number of different geographies. Some of their sites, as part of local government restrictions, have had to be suspended here into the Q2 because of that. Again, I think in a non-COVID world where there's no restrictions, I think what you saw in the Q1 is good representation. We're going to see some impact here in Q2 for the fact that some of their sites have been suspended for a period of time.
Okay. Thank you. That's helpful.
Our next question comes from Maxim Sytchev of National Bank Financial. Please go ahead.
Hi, good morning, gentlemen.
Hey.
Quick question in terms of oil and gas business. Is it fair to assume that the services part of the business right now is also generating a negative EBIT?
Yeah, why don't I take that one, Ian.
Sure.
Yeah, it is. As Ian said, it is primarily related to the cost base that we are carrying, which is why we are taking accelerating action on reducing that and realigning that. To the extent we are bidding on new business, we are bidding on business with growth margin thresholds that we are comfortable with, but it is taking the associated operating costs and overhead out as a part of that. If you looked at resources overall in the Q1, about half of that EBIT loss was related to services, effectively because of the misalignment of the cost base. There is a bit of Valerus in there, and then the other half is related to projects.
Right. In your opinion, how long do you think it's going to take to see the revenue and cut up on costs get to the point where at least it's break even? Is this a number of quarters, years? How should we think about this?
Oh, sorry. I thought Jeff was going to answer that one. We're acting quickly. We certainly undertook to act quickly around the Valerus, and we've now closed that out. There are other components of the business that we're looking at very closely now. It's an ongoing effort to ensure that we balance the backlog that we have and the revenues that flow through from the services side of this to the cost base. We're going at this really actively, and we'll be adjusting through Q2. We'll certainly be making quite further adjustments through Q2 to get to a place as quick as we possibly can so that the cost base matches the revenues that we've got in the services business to get it to at least a break-even perspective. I think Jeff's been dropped off the line, that's okay.
Okay. Maybe because my next question was really around the non-cash working capital. I don't know, Ian, if you are comfortable to comment on that. The fact that we had positive operating cash flow in Q1, which historically hasn't happened in years.
Yeah
get better understanding in terms of the moving parts there. If there is some unusual items that help you out, is this dynamic going to unwind in Q2? Just again, trying to get a better sense in terms of how I should be thinking about this.
Okay. Obviously, everything we're doing is to produce cash, operating cash flow and free cash flow. The whole strategy, the way that we set the company up in the middle of last year, the exit of the LSTK, is because we know that our services business that now are in SNCL Engineering Services, have historically produced good cash flows, and we also know that the LSTK has been very, very volatile. I think what you see is, as we're working through some of the LSTK, is a gradual stabilizing of that, but not a complete elimination of it. There are some timing issues within Q1 that you'll see from the positive cash flow there. In the main, it's an improved cash flow performance through the LSTK and some timing issues. I think Jeff's back on the line there.
I don't know, Jeff, if you got that question. It's really about the operating cash flow positivity that we saw, which is significantly better than the past in Q1.
My apologies, my line cut off there. Year on year, it's a combination both in SNCL Projects. SNCL Projects, although still a cash drain on an operating cash flow level in the Q1, is better than last year. That's partly a function of the fact that we have fewer ongoing projects, which helps from that perspective. We've been taking very proactive measures, particularly in resources, to ensure that we're more closely matching revenue receipts from customers with payments that are going out related to those projects. That has helped, although clearly not completely eliminated the operating cash flow drain on SNCL Projects. On the SNCL Engineering Services business, which is a more naturally operating cash flow generative business, again, we've been closely monitoring that, closely managing that so that we would expect to hold on to some of the efficiencies there.
We are benefiting from some timing as well through the end of the quarter. We will see some reversal in the Q2 as a natural result of that.
Okay, here you're making a reference specifically to the non-cash working capital, I presume, when you talk about?
Yeah
the timing of things.
Yes, exactly.
Okay.
The other thing I should say is that there's a small amount in there around things like FX and those sorts of things.
Okay
That's the general story.
We still have not received anything on the Champlain, right?
No.
No. Okay. Last question. I just want to go back to EDPM because revenue declined 3% year-over-year, but EBITDA is down 23% year-over-year. There is a pronounced negative margin dynamic. I'm just curious to see exactly, was there an execution issue that arose? Because, again, obviously, I appreciate the seasonality, but people look at these things year-over-year. I'm just a bit confused about that mismatch between revenue and EBITDA drop off.
I'm glad you asked another question on EDPM because the one thing I think that Clearly this business it's very similar in its nature to other peers in the business. We feel that our particular EDPM is robust. There's nothing underlying within the business other than its seasonality that has changed from the performance that we've seen in the past years, apart from COVID-19. We particularly feel that our blend of customers and work primarily being from the government sector or government clients, public sector, at 75%, will ensure that our business is robust. I would further say that the majority of the revenues from this business is in Canada, the U.S., and the U.K. Clearly, we've got North American revenues, Middle East, and Asia Pacific, but by far the majority comes out of three geographies. There's nothing underlying here.
Now, what we have to do as we enter this crisis and we see revenues adjust, is we've got to be really agile in adjusting the cost base of the business to match the adjustments in revenue. We've taken numerous measures that we announced in our press release to undertake a menu, if you like, of how we would go about those cost measures. They're from general pay cuts, reduction of hours, furloughs, and where we don't see any business coming back, redundancies. Now, when we hit this crisis in Asia Pacific, and to some extent in the Middle East, we were probably slower than we would like to have been to make those adjustments, and you'll have seen some, certainly profitability downside from that.
I think that kind of gives you the whole story and where we're feeling about where we're moving from here into the year. I'd have to caveat everything by saying we don't really know what the impact on revenues will be in Q2 and Q3. We're seeing work winning going forward. We're able to still win work. The scenarios that we'd planned, we're ahead of that. It's feeling pretty good, but I would just put an overrider on that it's still yet to be seen.
I guess the bottom line, is it fair to say that as you're making these adjustments on the cost side, that we should be still in a typical engineering type margin, even with, obviously, everybody's projected revenue compressions? Is this still something that's what you're targeting?
Yeah. The other element I’d add to this, obviously, is that in the short term, obviously our operating costs are broadly fixed. What you then see where you get a slowdown, like in Asia Pacific or in the Middle East, is that you lose the gross margin. Broadly, the gross margins we’re realizing and targeting are in line with our long-term guidance and aspirations there. Of course, you get a multiplying effect as that sort of moves down the P&L.
All right. Okay. That's it for me. Thank you very much.
Thank you.
Our next question comes from Mona Nazir of Laurentian Bank. Please go ahead.
Good morning. Thank you for taking my questions. First of all, Jeff, congrats on your appointment. I'm just wondering, or I'm interested in hearing your view when it comes to the story from a fresh perspective, I understand that there's significant uncertainty on the back of COVID-19, but I'm just wondering where do your priorities lie? If you could give a pecking order, what's your goal or what would you like to see occur within SNC, whether that's for 2020 and beyond?
Well, first of all, thank you. That's definitely a wide ranging question, but I'll boil it down to something fairly short. I'd have the following observations, having come in. The first is that I think the strategy, and our capability, and I've only been here just under three months, I think are very well-aligned and we're clearly going through, as everyone is, the current pandemic crisis. My observation as one of the reasons I joined SNC is that I thought the excellent capability that the business has, is well aligned to the strategy going forward. I think my second observation is clearly there's a lot of transformation to be done, including, I think as a high priority, transforming the resources business.
With a slightly longer burn rate, obviously running off the LSTK projects, both in resources, and in Canada, which are mostly transit rail lines, and we have a lot of experience in all of that. I think my third observation is that, and you'll continue to see us do that, a real focus on cash flow going forward, in addition to some of the other metrics we have. A real focus on cash going forward, and therefore ultimately as we transform the business and move forward with effectively the engineering services business, putting an appropriate capital allocation framework around that in terms of how we see the ability to invest free cash flow across investing in the business, returns to shareholders, and what's required for the balance sheet. All that will come down the road.
Perfect. That's very helpful. Just lastly, in your prepared remarks, you touched on your heavily weighted public exposure, and we've seen some decline there. I'm just wondering if you could give some insight in regard to the discussions that you're having with your end customers, whether that be on the government side or the private side.
Thank you.
Well, actually, we see being weighted in our EDPM business as an advantage. The reason we think that is because we believe, as in post-crises, post kind of 2008 crisis, that the stimulus will come through investment and infrastructure. The services that we offer, both in infrastructure services and in EDPM, are front-end services. The design, the inception, the working through the planning, the whole front end of development of infrastructure is what we do. Whilst it takes time to get that investment into physical construction, shovel ready, so to speak, actually exiting the construction part of our business as we have, we don't see that we'll have a greater impact because of that. Actually, we think we're really well-placed in those businesses.
What we're actually doing is trying to be really proactive here, to our clients and to governments and actually thinking through how do we help be a partner to get these projects so-called shovel ready as soon as possible to get jobs into the marketplace and dollars into the economy. We think we're a good partner to do that because of our range of capabilities.
Perfect. That's very helpful. Thank you. That's it from me.
Thank you.
Our next question comes from Mark Neville of Scotiabank. Please go ahead.
Hey, good morning.
Hi, Mark.
If I can start with the EDPM, I appreciate the comments around the business longer term, just thinking shorter term. I understand there's typically a seasonal uptick from Q1, now you're layering on sort of COVID. You're talking about, I think, some declines in Q2, just, again, I appreciate you're not providing guides, maybe just ballpark order of magnitude, sort of what to maybe expect for the next couple of quarters just so we're sort of all not way off base on that.
Really difficult to be that precise. Really difficult. What I can say is that we are continuing to win work. We're continuing to make adjustments to the cost base of the business if and where we see revenues decline. We're in the majority of our markets, where we will see the type of work that we do strong, which is North Europe, the U.S., Canada and the U.K. There will be some softening around the Middle East. The Middle East is not a significant part of our EDPM business. What's really encouraging is what we've seen in Asia-Pacific and Australia, in that it's back to business pretty quickly there. The stimulus is coming through. In Hong Kong, they're making a real effort to
To get projects started and to get the business going again. We're trying to be almost deliberately open-minded and agile as to how this thing evolves, because I don't know how we could say it's going to be like this or like that. I mean, the economy's not back to normal. I mean, it's a pretty big impact, and I think it would be wrong for us to sort of be misleading and say it's going to be 10%, 20%, 30%, because we don't know. What I do know is that we're resilient, and having lived through a crisis for the past 18 months, I think it puts us in a good position to actually bolster the company ready for adjustments in a crisis and being agile.
Okay. Again, I'll ask a similar type question, but I might get a similar type answer. Just around the margin. Again, a 6% in Q1. If I'm understanding it correctly, maybe you were a little slower to react on the cost side when the revenue dropped. You've taken pretty swift action across the business now. Just, again, sort of would the anticipation be, again, sort of near term from here, there's more margin degradation in the near term? Again, confident that you can at least offset and maybe keep it flattish or even grow from there near term?
Yeah. Why don't I, Ian, why don't I make an observation? I think what Ian has been rightly signaling is that what we're seeing is a slowdown, in a sense, volumetrically in terms of the gross margin percentages that we're realizing on projects. That's continuing to be strong. I think if you then look at the operating costs, the actions we took early on at the end of March to try and right size and build some flexibility into our cost base in order to ensure that we had flexibility around varying levels of business, that helped. Now, as you do that, you're always running a bit behind, but I think we've generally tried to get to a good point on that. Clearly the operating cost base is always a bit more fixed than the gross margin delivery.
You can end up with a bit of leakage that way.
Okay. Maybe onto the resources. The actions to realign the cost structure, is this really just come down to people? I'm just curious if there's any significant costs that you might incur to bring down.
Yeah
the right size back.
I think primarily it's people, but it's also geography and business lines. I mean, we're looking at all the separate geographies that we've got business in, and we're looking at discrete businesses within the overall business because it's.
there's mining businesses, there's oil and gas businesses, there's engineering businesses, there's operation maintenance support, sustaining capital. We're looking across the whole business and we're looking at what is the backlog on hand, what is the ability to win good work in this environment, and where we don't see that coming back at all, we will take very decisive action. Where we see there's an imbalance between the amount of revenue and the cost, we will take action. The intent is obviously to get this business into at least a break-even position as soon as we possibly can.
outside of the LSTK. The LSTK is all about running those off, managing the risks, and fulfilling our obligations to the customers.
Okay. Then maybe just on the resource service business, I appreciate it could be a good business. Again, I understand that you're still bidding work. I guess maybe the naive question would be why? If it's at this point, would the ultimate objective, again, if you're still bidding work and if you right-size it, presumably it would be fairly small. Would the ultimate objective be to eventually divest it or potentially if you do right-size it, keep it?
Well, I think all of that. I mean, and I know that's not a helpful answer, but the overriding objective is to have a business which operates at a complementary performance level to the rest of our business, which.
from a profitability and a cash flow perspective. That's the objective. If we can't get there, it doesn't belong as part of our future. That's how we're looking at it.
Okay. Maybe just one last question, Jeff. You made some comments, I think in response to Max's question, just around working capital. I missed it. I wasn't sure if you were giving sort of color on what the working capital in Florida looks like in the next couple quarters. I just sort of missed what you said, and maybe just if you could repeat it. Yeah.
Yeah, happy to. The comments that we made was, when you looked at operating cash flow, that we said the projects part of the business would be a cash drain through 2020 at an operating cash flow level, although over the life of the projects would be neutral to positive. We did see a cash drain here in 2020.
We had originally said back at the end of February that for the overall company, we saw that being weighted to the back end of the year, with a use of cash in the H1 of the year. I think our observation is the initiatives and the actions we took in Q1 have been positive overall. I think my additional color to that, though, is it's hard to predict in the current environment as we're still seeing what level of business we're receiving and how COVID is impacting that. While a lot of the working capital improvement or the operating cash flow improvement was related to working capital and non-working capital elements on the balance sheet, some of which we'll retain, some of it is also timing and will naturally expect to reverse over the next quarter or two.
Negative for the year? You're already, I think it was negative CAD 150 million in Q1. I'm not sure, it's negative for the year or sort of negative for the remainder of the year? Just to clarify.
Sorry, for projects, because it was projects.
Yeah.
In a sense, I don't think our view has changed. We had indicated that we would be negative over the year for Projects. I don't expect that to change.
Right. Okay. Thank you. I'll get back to you. Thanks, guys.
No worries.
This concludes time allocated for 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, everyone, for joining us today. I know there's some of it that was still in the queue. We actually have to move to our virtual AGM, by the way. I'm still open and I'm always available to answer any questions, so don't hesitate to call me if you have any further questions. Thank you very much, everyone. Have a good day and stay safe. Bye-bye.
Thank you. Stay safe. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.