Good morning, and welcome to SNC Lavalin's First Quarter twenty twenty Earnings Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Denis Jasmin, Vice President, Investor Relations. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining the call. 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 twenty four hours. With me today are Ian Edwards, President and Chief Executive Officer and Jeff Bell, Executive Vice President and Chief Financial Officer. Before we begin, I would like to ask everyone to limit themselves to one or two questions to ensure that all analysts have an opportunity to participate. You are welcome to return to the queue for any follow-up questions. I would like to draw your attention to Slide two.
Comments made on today's call may contain forward looking information. This information, by its nature, is subject to risks and uncertainties, and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on SEDAR. These documents are also available on our website. And now I'll pass the call over to Yunav Lutz.
Yunav?
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 first quarter, 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-nineteen 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.
So our infrastructure services, operations and maintenance, and nuclear work continues. Our real estate 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 governments in tackling COVID-nineteen. We've won contracts to support governments managing projects related to COVID-nineteen, and we're using logistics field and project management expertise to help deliver responsive health facilities in both Canada and The UK.
We were a first mover in taking actions to secure our financial standing. Our liquidity remains strong, and we believe we have financial flexibility to deal with the impacts of COVID-nineteen. 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, and we have key capabilities here. I'll walk you through how this looks for each sector in more detail.
But 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 entered 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 UK, The U. S. And Canada continued to perform well.
We did experience impacts in Asia Pacific and The Middle East as COVID 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-nineteen 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 in 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 UK 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. LYNXON 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 and how we're 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-nineteen. 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.
LYNXON 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. So first off, the temporary dip in four zero seven traffic has some failures obvious impacts on both $4.00 7 dividend and the contingent sales fund. On our other concessions, we are not seeing a similar impact with a different contract types based on availability rather than end user demand. Our expertise in capital and the financing structure of major projects remains of value, particularly as governments may look to quickly finance and push through large projects in the recovery.
So let's look at Slide 14 and the infrastructure LSTK projects. The controlled management of the infrastructure projects continues to progress well. And as noted earlier, these actually contributed a small positive EBIT in the quarter. Most of these projects continued and when projects experienced temporary suspensions, we've worked with our clients to minimize cost of both demobilizing and returning to work safely. It's worth also noting that on the REM project, engineering and planning work continued.
In relation to COVID-nineteen, we are well protected by contract clauses such as change of law and force majeure. And 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 can continue to assess these with our clients. On Slide 15, we will take a look at resources. We are now down to $300,000,000 of backlog remaining for LSTKs in resources, and these projects are largely scheduled to complete this year.
A swift action in the restructuring was to initiate withdrawal from the Valaris 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. So 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 risk the remaining backlog. Of the remaining 2,900,000,000 only $300,000,000 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 phase out of these projects. From July 2019 to the March 2020, we progressed $05,000,000,000 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 he's 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, but 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, and 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 and C, Professional Services and Project Management, or PS and PM. If you could turn to Slide 20, I will firstly summarize the first quarter results. While total revenues fell 6% to $2,200,000,000 from the prior year, driven primarily by reduced revenue from SNCL projects as the LSTK backlog runs down, segment EBIT of $99,000,000 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 and A costs compared to quarter one twenty nineteen as a result of additional provisions and onetime reversals in the prior year, was $25,700,000 or zero one five dollars per share. On an IFRS basis, which included a fair value revaluation of the Highway four zero seven ETR contingent consideration receivable of $50,000,000 post tax, the company had a net loss of $66,000,000 or $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 $1,500,000,000 an increase of 6.4%. EDPM segment revenue fell 3.9%, mainly due to shortfalls in The Middle East and the impact of COVID-nineteen in Asia Pacific.
This is 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 LinksOn joint venture continued to expand its activities. Segment EBIT results year on year showed the resilience of the Engineering Services portfolio. EDPM segment EBIT margin fell to 6.1% compared to 8.2% in quarter one twenty nineteen, primarily due to lower gross margin from the fall in revenues just mentioned. However, the Nuclear and Infrastructure Services segment EBIT increased in the first quarter to $37,000,000 and $17,000,000 respectively, with EBIT margins of 15.54.9%. These were driven by underlying growth in services and a non repeat of a one off charge in nuclear taken in quarter one twenty nineteen.
Engineering Services EBITDA increased 7% to $143,000,000 Capital segment EBIT fell $23,000,000 from quarter one twenty nineteen to $42,000,000 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 twenty twenty decreased by 24% to $648,000,000 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 $3,800,000 compared to a loss of $6,000,000 in quarter one twenty nineteen, following solid delivery in the first quarter on key projects and limited impact of COVID-nineteen. Resources recorded a negative segment EBIT of $58,000,000 due to unfavorable LSTK project reforecasts 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 $23,000,000 in quarter one twenty twenty compared to a use of $249,000,000 in the same period last year. SNCL Engineering Services, excluding capital, generated cash flow from operations of $142,000,000 an increase of 27% on the prior year from strong EBIT conversion and working capital efficiencies and timing initiative. SNCL projects continue to consume cash with a cash outflow from operations of $152,000,000 although this was an improvement on the first quarter last year.
On Slide 24, the company's focus on improving financial flexibility and liquidity can be seen. At the end of the first quarter, the company had $2,100,000,000 of cash on hand and an additional 1,000,000,000 available to be drawn on the revolver credit facility. The company's debt profile and maturities are spread over the next four years, with $300,000,000 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 March, well below the required covenant level of 3.75 times. And finally on Slide 25, as previously communicated, the 2020 financial outlook that was provided in the twenty nineteen Q4 financial results press release is no longer valid due to the uncertainty created by the ongoing COVID-nineteen pandemic, and 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. 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. I guess the question you talked a little bit in your script about accelerating some cost reductions or maybe some changes in the business. Could 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?
Yes. Thanks for the question on that. I mean 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. I mean, there's volatility in in the oil prices we know, and there's COVID, and that brings also regional, kind of stress within within The Middle East.
So, 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. I mean, it is in two components. We have the LSTK, which we're we're working our way through. We always, said that the LSTK portion, didn't have any major kind of elements in there of risks such as, we experienced on the Codelco, but it's not without risk. And as you've seen, there's been some project reforecast, not of large magnitude over the last three quarters.
But we are getting through the backlog, and we're down to $300,000,000 there. And by the end of this calendar year, the backlog in the LSTK will be done. The remaining is $1,000,000,000 of backlog in the services sector. And clearly, have to fulfill the obligations there, Much lower risk activity, and and we don't see any issues in running down, that backlog and running through that that backlog. But the key issue for us is cost and and making sure that we get cost out in line with the activity levels that we see and we're working on that.
And what about I mean, it might be a bit challenging, but I mean, have talked previously about even divesting of the group. Is there any opportunity to look at something like that?
Well, think if 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 the whole business. There may be opportunities to divest parts of the business that that have a a specific benefit to to other other potential purchases. And clearly, we're looking at that, and clearly, we're looking at those opportunities.
Okay. Fair enough. And then interesting commentary around your free cash flow and operating cash flows. The fact that the engineering services business seemed to be a pretty positive contributor, but then the whole projects business has been a bit of a drag offsetting a lot of that. The thought though I thought always was that the on the whole, the LSTK projects should, as they wind down, contribute some cash flow.
So 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?
So 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. And 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. But let Jeff just expand on that, if you would, Jeff.
Yeah. Happy to. And and you've hit it right on the 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 on operating cash flow here in 2020. I think the other element you referred to was, we made the observation back at the February that in terms of our view pre COVID-nineteen 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. But certainly before that, on an overall basis, weighted to the second half, absolutely, as you said.
Okay. So 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. 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?
So I think we'll myself and Jeff will give this some color. Let me go first. It is our EDPM business does go through a cycle during the year. And for sure, the first half of the year and specifically, the first quarter has always showed less performance than the back half of the year. And there's a few reasons for that.
But one of the primary reasons for that is our business is is obviously quite strong in in The UK and is obviously also located in other jurisdictions where the the end of the the financial year is our first quarter. So that the way that the work is awarded in that the first quarter is like a bidding cycle. And then it's those get awarded in Q2, the work is executed in Q3 and Q4. And you'll probably seen that historically through the numbers. So that's one issue.
So our expectation was much lower for this quarter than it would have been for Q4, for example. I mean, second component is really actually around The Middle East and Asia. I mean, Pacific, our downturn in business there hit the Chinese New Year. So basically, we had an impact through February and March. And for sure, we saw an impact in business in March in The Middle East.
And obviously, clients have also held back awards in The Middle East because of the whole volatility around the oil price. So primarily, the impact in in that you see in q one is there. Going forward, we're we're not concerned about the business, other than our overall concern on on COVID. Jeff, I mean, I don't know if you wanna add a little bit more to that. Or
Yeah. I mean, I think I'd I'd make two observations. I I think you're absolutely right, Ian. You know, the the the decrease in revenue is in Asia Pacific and and The Middle East, for sure, and and we've talked about the impact of COVID, and, you know, I think there's no question that, you know, the the falloff we've seen and the challenging environment, you know, 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. And there was, as you pointed out and we talked about in the MD and A, a fall in our revenue from FEMA in The U.
Wasn't a massive number, but it's more the absence of that in the first quarter 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?
Would be it's clearly, it's a minority of our business. If I hope we can have a we can have a quick look. I haven't had don't have the percentage right to hand, but it would you
know,
it would be a minority. But it was it was definitely the the part that was impacted most dramatically as you imagine, although it's a you know, if I think of Asia Pacific overall for the group, you know, between our Hong Kong and Chinese offices, it's, you know, it's around one, one and a half percent. But, of course, when you shut the offices down, you know, for a period of time, then it has a more dramatic effect, at least on the EDPM segment.
I mean, I would also add on the Asia Pacific business, it's bounced back very quickly. I mean 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. So we're actually seeing the recovery through our business there quickly as well.
So do you 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. So for sure, I mean, you should see that being repeated. The only caveat I'd put on that is the impact of COVID. 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 the the the governments that primarily we work for in Canada, The US, and The UK. You know, we're we're not making any, kind of definitive statement about what we think the impact of COVID is through the rest of this year.
Mean Okay.
And 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.
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. And we were having success pre COVID developing our services offering to, the major clients, kind of government sponsored clients in The Middle East and, in North America. But there has absolutely, been a drop off that we've seen, during this, this crisis. Well, I mean, it's a it's a double impact, obviously, from from oil price volatility and and COVID. So for for us, you know, our our concentration here is making sure that we adjust our cost base to match and accommodate revenue fluctuations that we see within that sector and obviously burn off the LSTK as effectively and efficiently as possible.
That's the current focus right now.
Right. But our margins I mean, the discussions around margins, going in margins and all that stuff, does that mean is that 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 was, yeah, adequate margins in the services sector of that business, the engineering and professional services part of it. We saw good opportunity, but like I say, mean, that landscape is definitely changing now.
Okay. And now on the infrastructure services with the addition of LinksIn, we get better revenue, better margins. Is the performance that you delivered in Q1 sort of a good run rate to go to use on a go forward basis?
Yes, I think so. Yes. I mean, yes, Linksong and the o and m part of the business and the the the the project management part that we're trying to grow, within infrastructure services, I think what you see is is, is pretty much representative. Yeah.
Okay.
Yeah. And I'd I'd add I'd add to that, Ian, that it's a it's a repeatable type of product that they they, you know, sell and install. But I, you know, I'd make the observation. They do that in, you know, a fair number of, you know, different geographies, you know, and some of their sites as part of local government restrictions, you know, have had to be suspended, you know, here into the second quarter because of that. So, again, I think in a non COVID world where there's no restrictions, I think what you saw in the first quarter 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. Time.
Our
next question comes from Maxim Sytchev of National Bank Financial.
Quick question in terms of oil and gas business. So is it fair to assume that the services part of the business right now is also generating a negative EBIT?
Yes. Why don't I take that one, Ian? Sure. Yes, it is. As Ian said, it's primarily related to the cost base that we're carrying, which is why we're taking accelerating action on reducing that and realigning that.
We are to the extent we're bidding on new business, we are bidding on business with gross margin thresholds that we're comfortable with, but it's taking the associated operating costs and overhead out as a part of that. But if you looked at resources overall in the first quarter, about half of that EBIT loss was related to services effectively because of the misalignment of the cost base, there's a bit of a virus in there, and then the other half is related to projects.
Right. And so and in your opinion, how long do you think it's going to take to see the revenue and kind of on costs get to the point where, I mean, like, least it's breakeven? Mean, is is this a number of quarters, years? Like, how should we think about this?
Oh, sorry. I thought Jeff was gonna answer that one. We we think we need we're we're acting quickly. I mean, I I we certainly undertook to act quickly around the Valaris, and we've now closed that out. There are other components of the business that we're looking at very closely now.
I mean, it's an ongoing effort to to ensure that we we we balance the the backlog that we have and the the revenues that flow through from the services side of this to the cost base. But we're we're going at this, you know, really, really actively, and we'll be adjusting through Q2. We'll certainly be making further adjustments through Q2 to get to a place as quick as we possibly can so that the the cost base matches the revenues that we've got in the services business to get it to at least a breakeven perspective. I think Jeff's been dropped off the line, but that but that but that's okay.
Okay. And then maybe because my next question was really around the noncash working capital. I don't know, Ian, if you are comfortable to kind of comment on that. I mean, the fact that we had positive operating cash flow in Q1, which is you know, historically, I mean, hasn't happened in years. So just trying to get better better understanding in terms of the moving parts there.
If, you know, there is some unusual items that that help you out, I mean, is is this dynamic, you know, gonna unwind in q two? Just, again, trying to get a better sense in terms of, you know, how should
we be thinking about this. Yeah. Okay. So, I mean, obviously, everything we've tried everything we're we're doing is to produce cash. I mean, operating cash flow and free cash flow.
I mean, the whole strategy, the way that we set the company up in the middle of last year, the exit of the LFTK 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. And 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. So there are some timing issues within, Q1 that you'll see from the positive cash flow there. But in the main, it's an improved cash flow performance through the LSTK and some timing issues. And I think Jeff's back on the line there.
And I don't know, Jeff, if you got that question. It's really about the cash flow positive operating cash flow positivity that we saw, which is significantly better than in the past in Q1.
Yeah. And my apologies. My line cut off there. Yeah. So year on year, it's a it's a combination both in projects.
So projects, although still a cash drain in on an operating cash flow level in the first quarter is better than last year. And that's partly a function of the fact that we have fewer ongoing projects, which helps from that perspective. And, also, you know, we've been taking very, you know, proactive measures, you know, particularly in the in resources to ensure that, you know, we're we're more closely matching, you know, revenue receipts from customers with, you know, with with payments that are going out related to those projects. So, you know, that has helped, although clearly not completely eliminated the cat the operating cash flow drain on projects. And then on the engineering services business, which is a more naturally cash flow operating cash flow generative business, again, we've been, you know, you know, closely monitoring that, closely managing that so that we would expect to hold on to some of the efficiencies there.
But we are benefiting from some timing as well through the end of the quarter. So we will see some reversal in the second quarter as a natural result of that.
Okay. And here you are making a reference specifically to the noncash working capital, presume, when you talk about the timing of things?
Yes, Exactly. And the other thing I should say is that there's a small amount in there around things like FX and those sorts of things. But that's the general story.
And we still have not received anything on the Champlain, right? No. No. Okay. And then last question, I just want to go back to EDPM because
revenue
declined 3% year on year, but EBITDA is down 23% year on year. So I mean there's a fairly pronounced negative margin dynamic. So I'm just curious to see exactly was there an execution issue that arose? Because again, like I mean, I appreciate the seasonality, I mean, look at these things year on year. So I'm just a bit confused about that mismatch between revenue and EBITDA drop off.
So I'm glad you asked another question on EDPM because the one thing I think that we clearly, this business has, you know, has it's very similar in its nature to to other other peers in the in in the in the business. And and we feel that this our particular, EDPM is robust. And there there is absolutely 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. And we particularly feel that our blend of customers and work primarily being from the government sector or government clients, public sector, at 75% will will ensure that our business is robust. And I would further say that the majority of the revenues from this business is in Canada, The US, and The UK.
I mean, clearly, got North American revenues, Middle East, and Asia Pacific, but by far, the majority comes out of of three geographies. So 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 the adjustments in revenue. And 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. And 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 and to some extent in The Middle East, we 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. And I and I think that kinda gives you the whole story and and where we're feeling about where we're moving from here, into the year. But I and I but I'd have to caveat, you know, everything by saying we don't really know what the impact on revenues will be in q two and q three. We're we're seeing work winning going going forward. We're we're able to still win work.
The scenarios that we planned, we're we're we're ahead of that. So it's feeling pretty good, but I would just put an overrider on that. But it's still yet to be seen.
I I I guess the the the bottom line so is it fair to say that, as you're making these adjustments on the cost side that we should be still kind of in a typical engineering type margin even with obviously, I mean everybody's projected revenue compressions. I mean is this still something that's what you're targeting?
Yes. I mean, I think there's the other element I'd add to this obviously is that you know, in the short term, obviously, our, you know, our operating costs, you know, are broadly fixed. And, you know, what what you then see where you get, you know, a slowdown, you know, like in Asia Pacific or in in, you know, in The Middle East is that, you know, we that you you lose the gross margin. And, broadly, the gross margins, you know, we're realizing and targeting are are in line with our, you know, with our long term our long term guidance and aspirations there. But of course, you get a multiplying effect as that sort of moves down the P and
L. Our
next question comes from Mona Nazir of Laurentian Bank. Please go ahead.
Good morning and 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, but I'm just wondering where do your priorities lie and 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. And that's a that's definitely a a a wide wide ranging question, but I'll I'll boil it down to to something fairly short. You know, I I'd have the I'd have the following observations, you know, having come in. The first is is that I think the strategy, you know, and our capability, and I've I've only been here, you know, just under three months, I, you know, I think are very well aligned. And we're clearly going through as everyone is, you know, the the current pandemic crisis.
But my observation is one of the reasons I joined SNC is that I thought that, you know, the the the excellent capability that that the business has, you know, is well aligned to the strategy going forward. I think my second observation is clearly there's a lot of transformation to be done, you know, including, I think, a as a high priority, you know, transforming the resources business, and with a slightly longer burn rate, obviously, running off the LSTK projects both in resources, you know, and in Canada, which are mostly, you know, transit rail ones, and we have a lot of experience in all of that. And I think my my third observation is that and and you'll you'll continue to see us do that, You know, a real focus on cash flow going forward in addition to, you know, some of the other metrics we have, but, you know, a real focus on cash going forward. And, therefore, ultimately, as 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.
But all that will come down the road.
Perfect. That's very helpful. And just lastly, in your prepared remarks, 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.
Yeah. Yeah. I mean, well, actually, we see that we see being, weighted in our EDPM business as a as an advantage. And the the reason we we think that is because we believe, as in post crises, post, kind of, February that the stimulus will come through investment and infrastructure. And the services that we offer, both in infrastructure services and in EDPM, are are front end services.
And, you know, the design, the inception, the the the the working through the planning, the the the the whole front end of development of infrastructure is is what we do. And 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. And actually, we think we're really well placed, in those businesses. So what we've what we're actually doing is trying to be really proactive here, to our clients and, and and to governments and 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, and and dollars into the economy. And and 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 for me.
Thank you.
Our next question comes from Mark Neville of Scotiabank. Please go ahead.
Hey, good morning.
Hey, Mark. Maybe if
I can start with the EDPM and maybe just I appreciate the comments around the business longer term, but maybe just thinking shorter term. Again, I understand there's typically a seasonal uptick from Q1, I know you're layering on sort of COVID. You're talking about, I think, some declines in Q2. I'm just again, I appreciate you're not providing guidance. So maybe just order 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. But what I can say is that we are continuing to win work. We're we're continuing to make adjustments to the cost base of the business if and where we see, revenues, decline. We're in, you know, the majority of our markets, where we will see the type of work that we do strong, which is North America North Europe, The US, Canada, and and The UK. The the there will be some softening around The Middle East, but The Middle East is not a significant part of our of our EDPM business.
And what's really encouraging is what we've seen in Asia Pacific and Australia in that it's back to business pretty quickly there, and the stimulus is coming through. I mean, in Hong Kong, they're they're making a real effort to to get, projects started and to get, the business going again. But I but I we're we're trying to be, you know, almost, deliberately open minded as to and and agile as to how this thing evolves because I I I don't know, you know, I don't know how we could say it's gonna be like this or or like that. I mean, it's you know, the business is back not, you know, not back the economy is not back to normal. I mean, it's a it's a pretty big impact, and I think it would be wrong for us to sort of be misleading and say it's gonna 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 eighteen months, I think it puts us in a good position to actually bolster the company ready for adjustments crisis in and being agile.
Okay. And again, I'll ask a similar type question, but I might get a similar type answer. Just around the margin, I had a 6% in Q1. I'm understanding it correctly, you maybe you're a little slower to react on the cost side when the revenue dropped, but you've taken pretty swift action across the business now. So just again, sort of would the anticipation be, again, sort of near term from here, there's more margin degradation in the near term?
Or, again, confident that you can at least offset and maybe keep it flattish or you can grow from there near term?
Yeah. Why why
don't I, Ian? Why don't why don't why don't I
make I make an observation? I mean, I think I think what Ian has been rightly signaling is is that, you know, what what we're seeing is a is a slowdown in a sense volumetrically in terms of the gross margin, you know, percentages that, you know, we're we're we're realizing on projects, you know, that that's continuing to be to be strong. But, but I think if you then look at, if you then look at, you know, the operating cost, the actions we took, early on in you know, at the March, you know, to try and and, you know, rightsize, you know, and build some flexibility into our cost base in order to ensure that, you know, we we had flexibility around varying levels of, you know, of business, you know, that helped. Now, you know, as you do that, you're always running a bit behind, but, you know, I think we've generally tried to, you know, to get to a a good point on that. But, clearly, the operating cost base is always a bit more fixed than, you know, than the gross margin delivery.
So, you know, you can end up with a 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? And I'm just curious if there's any significant costs that you're that you might incur to to bring down the the right size up.
I think think primarily, it's it's it's people, but it's also it's 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 you know, there's mining businesses. There's, there there's oil and gas businesses. There's engineering businesses. There's, you know, there's operation, maintenance support, sustaining capital.
So we're looking across the whole business, and and we're looking at, what is the backlog on hand? You know, what 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, you know, very decisive action. Where we see there's an imbalance between the amount of revenue and the and the and the cost, we will take action. And the the intent is obviously to to get this business into a least a breakeven position as soon as we possibly can
Mhmm.
Outside of the LSTK. And and the LSTK is is is all about running those off, managing the risks and fulfilling our obligations to the customers.
Okay. And then maybe just on the resource service business. I appreciate it could be a good business.
And again, I understand that you're still bidding work. You know,
I guess maybe the naive question would be why, you know, if it's such you know, at this point. And, you know, 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, you know, potentially, if you do right size it, keep it?
Well, I I think the all of that. I mean, and and I know that's not a helpful answer, but but the the overriding objective is to have a a business which operates at a complementary performance level to the rest of our business, which from a, you know, profitability and a cash flow perspective. That that's the objective. If we can't get there if we can't get there, it doesn't belong in in as part of our future. And and that's that's how we're looking at it.
Okay. Then
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 inflow looks like in the
next couple of quarters. I just sort of missed what you said.
Maybe just so you could repeat it.
Happy to. The comments that we made was when you look at operating cash flow that we said the 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, you know, would be would be neutral to positive. But we did see a cash drain here in in 2020. Mhmm. We had originally said back at the February that, you know, for the overall company, we saw that being weighted to the back end of the year, you know, with a use of cash in the first half of the year.
You know? So so I think our observation is the the initiatives and the actions we took in q one have, you know, have have, you know, been been positive overall. I think my additional color to that, though, is it's it's hard to, you know, it's hard to predict in the current environment as we're still, you know, seeing what level of business, you know, we're we're receiving and how COVID is impacting that. And while a number of while a lot of the working capital improvement was or the operating cash flow improvement was related to working capital and nonworking capital elements on the balance sheet, some of which we'll retain, some of it is also timing and we'll naturally expect to reverse over the next quarter or
two.
Negative for the year or is it because you're already I think it was negative $150,000,000 in Q1. So I'm sure it's negative for the year or sort of negative for the remainder of the year? Sorry, for project
because it was projects.
Yes, that was yes,
I don't in a sense, I don't think our view has changed. We had indicated we would be negative over the year for projects. I don't expect that to change.
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 someone that was still in the queue, but we actually have to move to our virtual AGM, by the way. But I'm still open you know, 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. 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.