AtkinsRéalis Group Inc. (ATRL) Earnings Call Transcript & Summary

Good morning, and welcome to AtkinsRealis First Quarter 2024 Results Conference Call. [Operator Instructions] 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 us today. For those dialing in, we invite you to view the slide presentation that we have posted in the Investors section of our website, which we will refer to during this call. Today's call is also webcast. With me today are Ian Edwards, Chief Executive Officer; and Jeff Bell, Chief Financial Officer. Before we begin, I would like to ask everyone to limit themselves to 1 or 2 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 2. Comments made on today's call may contain forward-looking information. This information, by its nature, is subject to assumptions, risks and uncertainties, and as such, actual results may differ materially from the views expressed today. For further information on these assumptions, risks and uncertainties, please consult its relevant filings on SEDAR+. These documents are also available on our website. Also during the call, we may refer to certain non-IFRS financials. Reconciliations of these amounts to the corresponding IFRS financial measures are reflected in our earnings release and MD&A, which can be found on SEDAR+ and our website. And now I'll pass the call over to Ian Edwards. Ian?

Thanks, Denis. Good morning, everyone, and thanks for joining us today. I'm going to begin by providing an overview of our performance in the first quarter, our growing backlog and the success we are seeing in our 4 Engineering Services regions and Nuclear businesses. I'll then pass it over to Jeff to provide more detail on our financial results and our updated guidance before we open it up for Q&A. So let's get added on Slide 3. We started 2024 on a strong note. The first quarter results driven by the growing demand for our services to address the energy transition at aging infrastructure. The measures we have taken to derisk the company and focus on our core strengths is continuing to bear fruit. This was proven again this quarter by our top line and bottom line improvement over the first quarter of last year. AtkinsRealis services revenue increased 19% with segment adjusted EBIT increasing 19.5% to approximately $187 million, driven by robust demand across businesses. Backlog at the end of the first quarter of 2024 was approximately $15 billion and represents another record high for the company as it grew 26% year-over-year. Operating cash flow was $37 million, a significant improvement compared to the first quarter of 2023 and in line with our expectations of delivering over $400 million for the full year. Net limited recourse and recourse debt to adjusted EBITDA ratio at the end of the quarter was 1.7x, remaining in our 1.5 to 2x target range. Our recent results reinforce our position in the marketplace. The demand for our services is fueled by the need to replace an aging infrastructure and provide clean, affordable and secure energy solutions. Our historical execution track record makes us the partner of choice for public and private entities achieving their Net Zero goals. On Slide 4, we can see the progression of our backlog growth for AtkinsRealis services over the last year. Our 26% growth year-over-year was driven by key bookings across our core Engineering Services and Nuclear businesses. The most significant contribution to the backlog in the quarter was due to taking over the CHUM O&M contracts, one of the largest hospital centers in Canada. We will be maintaining all of the hospital systems in support of medical operations as well as the life cycle replacement management of all of the equipment until 2050. Additionally, we saw strong backlog growth in the U.K. and the U.S. engineering services regions in the quarter. We also continued to capture subjects across many of the end markets and regions in which we operate. In the U.S., we continue to strengthen our relationship with the Georgia Department of Transportation. And in the U.K., we continue to provide design and construction management services for the rail network signaling. Turning to Slide 5. Our Engineering Services business continues to generate robust organic top line growth as we witnessed an 18% increase year-over-year in the first quarter. Our revenue generation was driven by the continuation of our ability to secure new wins across our geographic scope. Segment adjusted EBITDA of net revenue margin improved 15% during the quarter. We continue to reach our backlog, which now stands at just below $12 billion, representing a 19% growth versus our backlog as of March 31, 2023. And as mentioned on our last earnings call, we have changed our operational structure. And therefore, starting on Slide 6, we will provide an overview of each of our 4 regions and of their performance. So starting with Canada. Organic revenue grew 22% year-over-year as we saw continued strength in our ability to service the transportation, industrial and power renewables end markets. Segment adjusted EBITDA was $22 million, representing approximately 12% margin. We're having success in attracting and retaining high-quality employees, bolstering our position in the marketplace with deep expertise across our talent base. Looking ahead, we continue to see a pipeline full of opportunities. Our leading position provides a strong foundation as we continue to grow customer relationships and capture additional wallet share through our end-to-end capabilities across the entire life cycle of projects. As we focus on enhancing the depth and breadth of our team in Canada, we see an opportunity to increase our position in provinces across the country that are focused on bolstering their transport properties and Net Zero goals. In the U.K. and Ireland, we continue to capture key wins, particularly in the defense, water, transportation and power and renewables end markets. Organic revenue grew to 5% versus the first quarter of 2023, while segment adjusted EBITDA grew to $74 million, representing a margin over net revenue of 15.5%. We saw continued backlog growth during the first quarter to $1.7 billion, primarily through new work orders in the transportation end market. This was particularly the case in the network rail projects, which is the key transportation line for more than 20% of U.K. citizens in their daily commute. In addition to this project, we also had key wins in aviation, water infrastructure and climate resiliency, where our long-standing relationships with the government enabled our continued growth. We continue to add to our market share and increase our backlog as leading providers in Engineering Services across the region. Results this quarter and our historical execution highlight the resiliency of our business during times of economic uncertainty. In the U.S. and Latin America, we saw a continued growth trajectory, led by our work in transportation, power renewables, minerals and metals end markets. Organic revenue grew 13% year-over-year, while segment adjusted EBITDA fell slightly to $46 million. The year-over-year decrease in profitability was mainly due to storm recovery work with FEMA during the first quarter of 2023 that did not repeat itself this year. The backlog increased approximately 9% year-over-year from a significant framework wins in transportation, and the pipeline of opportunities continues to look robust. As you will hear more during our Investor Day next month, our land and expand strategy is working. We have deep relationships with several departments of transportation across the U.S., and we are methodically increasing our foothold in high-growth city centers. Looking out, we see steady volume for this business as major cities continue to address their aging infrastructure, particularly in the transportation market. The pipeline of infrastructure construction in the U.S. continues to be very strong and is expected to see significant annual growth over the next several years. And we will be steadfast in our approach to investing for growth to expand across the U.S. to ensure we are winning our share of potential new contracts. Moving to Slide 9 and AMEA region. We welcomed Christine Healy as our new President in the quarter with a mandate to drive Engineering Services growth in the region. She brings a wealth of operational experience at a global perspective, which will enrich our strategic approach to capitalize on growing opportunities we see in Asia, the Middle East and Australia for our services. I'm really excited to have her join our leadership team. In the first quarter, results in the region were really strong as organic revenue grew 58% versus the first quarter of 2023. This performance was mainly driven by an increase in volume of delivered work on major projects for which we are contracted in Middle East. Our performance in the quarter led to a segment adjusted EBITDA of $35 million, an increase of 75% compared to the prior year and represented an 18% margin over net revenue. Total backlog in AMEA grew 23%, as we captured opportunities in buildings and places and transportation end markets. I'd now like to move to Slide 10 and the results of our Nuclear business. We continued to demonstrate robust growth with an organic revenue increase of 21% in the quarter compared to the first quarter of 2023. Our nuclear backlog is $1.8 billion, which represents an 87% growth versus our backlog as at March 31, 2023, driven by higher bookings in the second half of last year related primarily to our CANDU refurbishment and services business. Segment adjusted EBIT as a percentage of segment revenue was 13% in the quarter. On Slide 11, we highlight the achievements in each of the nuclear services that we provide. As we look across our markets, we see a continued increase in the pipeline of opportunities for large and small nuclear new builds. We're seeing strong activity in our U.K. operations through Hinkley Point and Sizewell. In February, we successfully launched the Canadians for CANDU campaign which promotes the deployment of CANDU nuclear technology in support of Canadian and global efforts to reach Net Zero emissions. So far, we have a strong support from Canadian stakeholders, and we're excited about the potential of this campaign. Additionally, we are collaborating with AECL to accelerate the development of the CANDU MONARK Reactor. This intellectual property championed by the Canadian government is on track to be a game changer for the future of nuclear across the globe. Our exclusive rights to this technology sets us up for a long way for us. I am excited for our team to provide you with more information regarding nuclear at our Investor Day in June. In Ontario, we are actively working on CANDU life extensions at Darlington and Bruce Power. We continue to see growth opportunities in Ontario as the government recently announced the program to refurbish the Pickering nuclear power station. This will extend the plant's life by 30 years and help make a projected surge in Ontario's electricity demand. Early work on this project is already underway. In Europe, work on our CANDU retube and refurbishment program at the Cernavoda plant in Romania is progressing well, and we continue to advance the potential opportunity for a new build contract of the Cernavoda 3 and 4 units. This is a pivotal project for the contract as it supplies electricity to approximately 20% of Romanians, and we are thrilled to be engaged in this great work. On waste management and decommissioning, we have a strong pipeline of national security work at the disposal facilities in the U.K. and the U.S. Our long-standing position in these markets and our recognized expertise has allowed us to continue to win new work, near-term and long-term nuclear growth opportunity for AtkinsRealis is significant, and the demand for our services continues to grow quarter-over-quarter. We are constantly harnessing our capabilities across the globe to be trusted partners to governments and utilities as they seek to achieve their Net Zero goals. Now moving to Slide 12 and our Linxon, LSTK projects and capital businesses. Our Linxon segment saw a 30% year-over-year organic revenue growth in the first quarter, continuing its momentum from the first quarter of 2023 and realized an EBIT of $2 million. Backlog $1.5 billion at the end of the first quarter was 47% higher than the first quarter of last year. Commissioning and testing on our Ontario LSTK project is continuing as planned. Our backlog decreased 42% to $299 million at the end of the first quarter, primarily representing the rent project, which continues to progress well. As we finalize the LSTK projects for our clients, we continue to pursue claim recoveries that we believe we are on, and these discussions remain ongoing with our clients. On capital, first quarter EBIT decreased, mainly due to a revised estimate on a financial asset held in one of our investments. We did not receive a dividend from Highway 407 in Q1. However, traffic has continued to increase year-over-year. And they recently announced a dividend in the second quarter, which will be $12 million for AtkinsRealis. I'll now turn it over to Jeff to discuss the financial results.

Thank you, Ian, and good morning, everyone. Turning to Slide 14. Total revenues for the quarter increased 12% year-over-year, totaling $2.3 billion. AtkinsRealis' totaled $2.2 billion, representing an organic revenue growth of 19% compared to the same quarter in 2023. Total segment adjusted EBIT for the quarter was $175 million, 10% higher than last year and was comprised of $187 million for AtkinsRealis services, and negative $15 million for LSTK projects. AtkinsRealis Engineering Services adjusted EBIT was 19% higher than last year. And operating margins, segment adjusted EBITDA to net revenue, increased 50 basis points compared to Q1 2023, as the business continues to drive productivity improvements and cost efficiencies. Nuclear EBIT increased 18%, while margins were relatively flat year-on-year at 13%. We expect full-year profitability to be somewhat weighted to the second half. Corporate SG&A expenses from PS&PM totaled $40 million in the quarter compared to $29 million last year, mainly driven by higher long-term compensation costs, primarily as a result of the recent significant share price rise. As a result, we anticipate the corporate SG&A expenses from PS&PM will be approximately $130 million for full year 2024. Net financial expenses for the quarter were $38 million, $9 million lower than Q1 2023 due largely to a lower level of gross debt and favorable foreign exchange variations. We expect this level of quarterly expense to continue for the rest of the year. Note that our income tax rate on our adjusted PS&PM net income for the year was 24%. We continue to expect this rate for full-year 2024 to be closer to the Canadian statutory income tax rate of 26%. The IFRS net income this quarter was 64% higher than Q1 2023 and totaled $46 million. This was composed of a net income from PS&PM of $53 million and a net loss from capital of $7 million. Adjusted EPS from PS&PM for the quarter was $0.42 per diluted share, a 31% increase compared to $0.32 in the first quarter last year. And backlog ended the quarter at $15.6 billion, 10% higher than at the end of last year and 23% higher than at the end of March 2023, with a strong book-to-bill ratio in Engineering Services, particularly in the U.K. and U.S. If we now move on to Slide 15 and free cash flow and leverage. Net cash generated from operating activities totaled $37 million for the quarter. This was mainly driven by strong EBITDA delivery and working capital management in AtkinsRealis Services. AtkinsRealis Services generated operating cash flows of $271 million in the first quarter. After cash taxes, interest, corporate items and capital, we generated $137 million of operating cash flow, and including LSTK projects, $37 million. After CapEx and the payment of lease liabilities, our free cash flow stood at negative $11 million for the quarter. As indicated during our last earnings call, we expect continued revenue and EBITDA growth in 2024 from the Services businesses and significantly lower cash outflows from the LSTK projects compared to full-year 2023. As a result, we anticipate that the net cash generated from operating activities for the company should be in excess of $400 million for the full year, but weighted to the second half as LSTK outflows reduce and Services cash flows grow. Capital expenditure was $25 million in the quarter, and we continue to forecast full year expenditure in a range of $140 million to $160 million as the investment in our CANDU MONARK nuclear reactor development ramps up over the year. I'd like now to turn to my final slide, Slide 16, and updates to our full-year guidance. With respect to nuclear, the demand for our services continues to grow and our backlog is strong. And therefore, we are increasing our nuclear organic revenue growth for full-year 2024 from between 12% and 15% to between 15% and 20%. Also in line with my previous comments, we are adjusting our 2024 outlook on corporate SG&A from PS&PM to approximately $130 million. All other financial metrics for full year 2024 remain unchanged. With that, I'll now hand the presentation back to Ian.

Thank you, Jeff. We had a strong start to the year with key wins across our 4 Engineering Services regions and Nuclear business. Our record backlog highlights our long run rate for growth and the significant demand for our services. We continue to purposefully expand our capabilities across our regions and to capture the continued growth we anticipate from the energy transition super cycle and aging infrastructure replacement. We are deploying our global capabilities locally to clients to win new business, and we are deploying operational excellent initiatives across the company through the work of our Chief Operating Officer's office. I'm extremely proud of the work the team continues to do to create a better future for the planet and its people. We are building an authentic culture founded on collaboration and a drive towards excellence. Through this, we are able to hire market-leading talent. I'm grateful for the loyalty of our 38,000 employees and their dedication to achieve in our goals. We look forward to providing you with more details on the work we are accomplishing under our new organizational structure, our future growth plans and our updated long-term financial outlook at our Investor Day on June 13 in Toronto. We really hope you can join us. So with that, let's open it up to questions. Over to Denis.

Yes, we can open the line for the questions.

[Operator Instructions] The first question comes from Yuri Lynk with Canaccord Genuity.

Congrats on the strong start to the year. Just start with the Engineering Services regions segment, strong start, 17% revenue growth. You left the guidance 8% to 10% unchanged. Just wondering the -- so that's -- obviously, that's applying the growth kind of slows to high single digits against some tough comps. But just like the cadence there, I mean, do we see another strong year-on-year comp in Q2 before that really starts to -- the growth really starts to slow down in the second half? Or how do we think about that?

Yes, that's obviously a fair question. I mean, first of all, we're really pleased with our growth in Engineering Services. I think it's a proof point that the measures we've put in place through the pillars into growth strategy are really working. Now clearly, we're in Q1, where we set out and forecast what we believe was the growth trajectory through the 4 regions that we've created. We've obviously had a really good start to the year in Q1, and we will continue to look at the trajectory through Q2, and then, and see how that plays out. I mean, generally, we've got a lot of tailwinds in the markets where we've positioned the business, both geographic markets and also the end markets. But we do want to just see how this plays out through the next quarter before we would make any kind of further prediction for the end of the year.

Okay. And just a follow-up there. I mean, last year, that segment delivered very strong growth. But the EBITDA margin, I would -- I think it's fair to say, left us all wanting a little bit more. Now you're delivering the growth and the EBITDA margin expansion. So what's different this year? Like what are you doing to drive that margin higher or is it just operating leverage finally kicking in?

Well, let me -- maybe answer that in a bit of a longer way about our margin expansion plan because we've been very, very deliberate in developing a plan through the Chief Operating Officer's office with the Chief Operating Officer, Phil Hoare, that we really put in place towards the end of last year with the new organizational structure and is now beginning to take effect. You will see, and we will explain this in a lot more detail at the Investor Day. And obviously, we'll put out a longer-range aspiration margin expansion. It's really pleasing to see the 50 basis point improvement year-over-year from 14.5 to 15. And the way I think about this to kind of simplify it. We've got two approaches. The first is really specific business decisions and actions, like the divestment of Scandinavia or like exiting specific business lines that are low-margin businesses, and that particularly has been applied to Canada over the last 6 months or so. And we're seeing margins in Canada returning to a better place. And obviously, that journey needs to continue. But we've also put in group initiatives. And these group initiatives are being driven into the business through the COO around utilization of our resource. I mean, our resources and professional services, we can improve that utilization by basis points, that has a good bottom line improvement. The GTC usage, our global technology center in India, the more usage we get out of that, the more profitable we can be, and we're driving more use out of that. And then overhead reduction, the cost in business. We have a very granular plan to have to drive the costs, both within the businesses and in the corporate overhead to improve our efficiency as much as we possibly can. And as you will see, we're at the bottom of the range that we put out for this year. So we would expect some improvement during the course of the year, and more to come at the Investor Day. So I would say the answer is a really methodical granular approach to margin expansion.

The next question comes from Benoit Poirier with Desjardins Capital Markets.

Congrats for the first quarter results. Yes. Just to come back on the previous question, obviously, impressive organic growth with both Nuclear, Engineering Services, great explanation about the corporate SG&A. And when we look at Engineering Services, you came toward the lower end of the margin range for the year. So could you maybe provide a little bit more details? I know it's an improvement versus the 50 bps versus last year. But is it kind of normal seasonality? Or what can you say about the operating leverage and the opportunity to improve the Canada EBIT margin that stood at 4.3% in the quarter?

Yes, Benoit, it's Jeff. Why don't I jump in on that. So just in answer to a couple of elements of the question there. You're absolutely right. From a seasonality perspective, as we've seen in previous years, it does tend to be a lower set of margins at the beginning of the year, strengthens over the course of the year itself, which to Ian's point, is why we're quite confident of being in the 15% to 17% range that we put as guidance. Obviously, 15% in the first quarter is at the lower end. But as we typically see, we'd expect that to strengthen over the quarter as we go. But particularly in Canada, we are seeing a good year-on-year progress, in particular, for a number of the initiatives that Ian has talked to, both from a group level and from a granular level within the business. And again, obviously, that's the region where we have the most in a sense blue water to go after in terms of getting those margins up to be similar to the rest of the organization. And we have a clear path to do that over the short to medium term.

Yes. I mean, and I would say, again, the new organizational structure is Stéphanie Vaillancourt focused entirely on the Canadian business. You'll see that we've driven margins from 9.4% to 11.7% year-over-year. And that plan is working. And we will expect to see further improvement in that plan through the course of the year. So thanks, Jeff.

Okay. And my second question, when we look at free cash flow, a nice beat in the quarter, so better than typical seasonality. So could you walk us through the cadence of free cash flow generation and the big moving parts are going to the remainder of the year. In terms of leverage, you were also down to 1.6x. So great achievement quarter-over-quarter. So I'm just curious to know, what are the next steps with respect to regain the investment grade as they're typically alike?

Yes, sure. I want to take the last one first, to begin with. Benoit, you will have seen, as others will have, pleased not only where we were at in terms of our leverage ratios at the end of 2023, but obviously, that continued in the first quarter of 2024. And we were pleased to see both S&P and DBRS move us to positive outlook, so BB+ with a positive outlook. So very much feels like we're making the progress we expected towards ultimately achieving those investment-grade credit ratings. Obviously, that's up to the rating agencies themselves in terms of when ultimately we get there. But we feel like we're on a good trajectory there. And certainly, our financial metrics, and our business risk, we think, is now very much in that investment grade range. So I think we're making good progress there. In terms of the cadence of cash flow, you're right, great to see in the first quarter a real improvement year-on-year. That was very much in our expectations and forecast. And it's very much part of what underpins our guidance and outlook for this year to make a material step forward in terms of our operating cash flow generation, so that guidance of over $400 million compared to where we've been in previous years. I would say, however, and as we said in Q4 that, that cash flow generation will ultimately be, as it has been in many previous years, weighted to the second half of the year. So we expect to see improvement here year-on-year in the first half, but the weighting of the overall cash flow for the year to be in the second half.

The next question comes from Jacob Bout with CIBC.

Another question on 2024 targets. You took up your organic revenue growth guidance for nuclear to 15% and 20%. What are you seeing today versus in March when you released your guidance for the year? Specifically what projects are driving this improved outlook?

Particularly in Nuclear?

Yes, Yes.

Yes, yes, yes. I mean, so look, I mean, we can talk a lot about Nuclear. There's so much to say. So -- but let me take a general overview of where we see Nuclear and then come back to the point about this year. And obviously, as the follow-up questions from you or anybody else, we can dive in a bit longer. There's so much strong demand emerging for new nuclear and nuclear power generation. And clearly, owning the sole rights to the CANDU technology, the Canadian technology, is a very differentiated privileged position that we have. And incidentally, we're also seeing very strong demand for waste management, and we're also seeing strong demand for the Services business that supports other nuclear technologies, such as the EDF, probably given the U.K., and the support we give to GE-Hitachi JD here for the SMR in Canada. I mean backlog is up 87%. So forward-looking kind of metric for the year on the backlog is very significantly up. And obviously, the nuclear renaissance is being driven by the need for secure affordable, reliable and clean energy. CANDU is actually only 1 of 6 technologies in the world that are currently licensed, large nuclear technologies. So there are very few players right now today that can actually offer new nuclear. The short-term demand for CANDU is actually being driven by the redoing or the rebuilding of reactors, such as the work that we've done in Bruce and Darlington, and as you've seen the announcements in Pickering here in Canada. And you've also seen that we are retubing in Cernavoda. But that's not the end of the story. There are projects that we are discussing for CANDU reactors around the world to retube them. And that's where getting a real fix on the outlook forward is somewhat a bit difficult because we are negotiating for new contracts, and they're binary as to when they happen. We're confident they will happen, but we need to actually secure them and get them across the line. And a lot of these are complex through government funding and the like. So very, very positive. I mean we're absolutely confident that the guidance that we've increased because that's what we've already secured that we know we will execute in 2024. And we could see if we secure more contracts some upside to that. And in addition to that, we are looking at the new build for Cernavoda 3 and 4, which the Canadian government has supported. And again, we're in heavy negotiations to get that across the line. If we do get that across the line this year, there will be some revenues coming into this year. But it's really quite binary on those awards. What a great market, and this has all turned around in the last couple of years.

So going forward, if you were to characterize the growth in kind of the 3 subsectors you call out, the new builds versus reactor support versus waste management. Obviously, new build is going to be lumpy. But if you look at over the long term, you expect similar growth across those 3 initial areas? Or how would you characterize that?

I mean I think the waste management business is likely to continue at the same level of activity that we've got now. But the CANDU, both the CANDU reactor retubing, life extension work is on an increase. And the potential for reload, both the existing technology that we have in CANDU, which will be deployed at C3, C4. But more importantly, the MONARK technology that we're investing in, in the medium to long term is very significant.

The next question comes from Chris Murray with ATB Capital Markets.

Maybe just talking about the AMEA group a little bit, the segment. Very, very strong growth, up -- on gross revenue, up around 58%. Net revenue up about 47%. Can you talk a little bit about the sustainability of those growth rates and how we should be thinking about the business as it seems to be rebasing a little bit?