Aecon Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 9 speakers on the call.

Operator

Good day and thank

Speaker 1

you for standing by. Welcome to the Q3 2023 Aecon Group Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Speaker 1

Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Borgatti. Please go ahead.

Speaker 2

Thank you, Kevin, and good morning, everyone. This is Adam Orgatti speaking. And presenting to you this morning are Jean Louis Servance, President and CEO and David Smales, Executive Vice President and CFO. Our earnings announcement was released yesterday evening, and we posted a slide presentation on the Investing section of our website, which we will refer to during this call. Following our comments, we'll be glad to take questions from the analysts and we ask that analysts keep to one question and a follow-up before getting back into the queue to ensure all have a chance to contribute.

Speaker 2

As noted on Slide 2, listeners are reminded that the information we're sharing with you today includes forward looking statements. These These statements are based on assumptions that are subject to significant risks and uncertainties. Although Aecon believes the expectations reflected in these statements are reasonable, We can give no assurance that these expectations will prove to be correct. With that, I'll now turn the call over to Dave.

Speaker 3

Thank you, Adam, and good morning, everyone. I'll touch briefly on Aecon's consolidated results, review results by segment, and then address Aecon's financial position Before turning the call over to Jean Louis. Turning to Slide 3, revenue for the Q3 of $1,200,000,000 With $81,000,000 or 6% lower compared to the same period last year, primarily due to the impact of the sale of Aecon Transportation East by $46,000,000 or 4% in the quarter. Adjusted EBITDA of $32,000,000 A margin of 2.6% compared to $93,000,000 a margin of 7% last year and operating profit of $140,000,000 compared to an operating profit of $61,000,000 in the Q3 of 2022. Excluding the impact of the 4 legacy projects on results In the Q3, adjusted EBITDA from the balance of the business was $123,000,000 a margin of 11.6%.

Speaker 3

Diluted earnings per share in the quarter of $1.63 compared to diluted earnings per share of $0.45 in the same period last year. The improvement in operating profit and diluted earnings per share was largely due to a gain related to the sale The 49.99 percent interest in the Bermuda International Airport concessionaire of $139,000,000 including a fair value remeasurement gain of $80,000,000 on Aecon's 50.1% retained interest. We reported backlog of $6,200,000,000 at the end of the quarter after removing $447,000,000 of backlog in Q2 2 related to the sale of ATE compared to backlog of $6,300,000,000 at the end of the Q3 of 2022. New contract awards of $591,000,000 were booked in the quarter compared to $991,000,000 in the prior period. Now looking at results by segment.

Speaker 3

Turning to Slide 4. Construction revenue of $1,200,000,000 in the 3rd quarter It was $83,000,000 or 6% lower than the same period last year. This was due to lower revenue in civil operations, driven by a lower volume of road building construction work in Eastern Canada as a result of the sale of ATE in the Q2 of 2023, partially offset by an increase in major project work in Western Canada. After adjusting for the impact of the sale of ATE, Construction revenue was $41,000,000 or 3% higher than the same period last year. New contract awards of $563,000,000 in the 3rd quarter compared to $966,000,000 in the same period last year.

Speaker 3

High fog at the end of the quarter is $6,100,000,000 compared to $6,200,000,000 at the same time last year. Turning to Slide 5. Adjusted EBITDA in the construction segment of $17,000,000 With $65,000,000 unfavorable compared to the Q3 of last year, the decrease was driven by negative gross profit of $42,000,000 From a fixed price legacy project in civil operations versus a gross profit of $1,000,000 in the same period last year from the same project and by a negative gross profit of $50,000,000 from 1 of the 4 fixed price legacy projects in Urban Transportation Solutions compared to a negative gross profit of $23,000,000 in the same period last year from the same project. Other than the impact of fixed price legacy projects in the quarter, lower operating profit in the balance of the construction segment This is driven by lower operating profit from road building construction work due to the sale of ATE in the Q2 this year, largely offset by higher gross profit margin in Nuclear Operations and Urban Transportation Solutions and lower MG and A in Utilities Operations. At September 30, the remaining backlog to be worked off on the 4 legacy projects was 528,000,000 compared to $1,100,000,000 at the end of 2022.

Speaker 3

These projects comprised 14% of consolidated revenue in the 3rd quarter compared to 16% in the full year 2022 and 9% of backlog at September 30, compared to 17% at the end of 2022. Turning to Slide 6. Concession revenue for the 3rd quarter was $26,000,000 compared to $22,000,000 in the same period last year, primarily due to an increase in airport operations at the Bermuda International Airport. Bermuda continues to operate at a reduced volume compared to Pre pandemic levels, but continue to recover in the 1st 9 months of 2023 from the more severe impacts experienced in 2020, 2021. This recovery was evidenced by the fact that traffic in the Q3 averaged 75% of the pre pandemic level In the Q3 of 2019 compared to average traffic in the Q3 of 2022 being 63% of the pre pandemic levels.

Speaker 3

Adjusted EBITDA in the Concessions segment of $27,000,000 compared to $21,000,000 in Q3 last year, primarily due to results from the Bermuda Airport and an increase in management and development fees. As noted previously, Operating profit and concessions reflected a gain on sale in the quarter of $139,000,000 Turning to Slide 7. At the end of the Q3, Aecon had net cash of over $400,000,000 including cash in joint operations. On December 31, 2023, convertible debentures with a face value of $184,000,000 will mature and we expect to repay these debentures at maturity or before. At this point, I'll turn the call over to Jean Louis.

Speaker 4

Thank you, Dave, and good morning all. The impact of the Forpix Price legacy project being performed by joint ventures, in which Aecon is a participant, was felt again in our Q3 results. However, we have made significant Progress during 2023 are driving these projects toward completion. 1 of the 4 projects Reached substantial or mechanical completion in the Q3 as committed with our client, with 2 of the remaining 3 projects currently And the final one currently expected to be substantially complete during 2025. Aecon and its joint venture partners remain focused on dedicating all necessary resources to complete those 4 legacy projects And in the meantime, continue to pursue fair and reasonable settlement agreements with the respective clients in each case.

Speaker 4

In this respect, we have also made progress in recent quarters. The most recent settlements reached and agreed to between the relevant joint ventures of the respective clients on each of the 4 projects, Including 1 in the Q2 and 2 in the Q3 of 2023 have brought additional clarity on schedule, We would be the first to acknowledge that despite this progress and the adjustments we've taken in recent quarters, The risk remains in the event that assumptions, estimates and all circumstances change. But We and our joint venture partners are fully focused on completion, pursuing further recoveries and putting those legacy projects behind us. Every day, we are getting closer to the end. Turning to Slide 9, demand for Aecon Services across Canada continues to be strong.

Speaker 4

While volatile global and Canadian economic conditions are impacting inflation, interest rates and overall supply chain efficiency, These factors have stabilized to some extent and have largely been and will continue to be reflected In the pricing and commercial tales of Aecon's recent and prospective project awards and bids. Despite results having been impacted by the 4 legacy projects in recent periods, there are positive revenue and profitability trends It's a balance of Aecon's business that reflects the underlying demand dynamics in the market and strong execution across the balance of our project. Turning to Slide 10. With backlog of $6,200,000,000 at September 30, 2023 and recurring revenue programs Continuing to see robust demand, Aecon believes it is positioned to achieve further revenue growth over the next few years. As a reminder, the major scopes of the Gorehill Expansion on Corridor Works project, the Scarborough Subway Extension Project, The Darlington new nuclear project will only be reflected in backlog at the successful conclusion of the Landsea development phases.

Speaker 4

Aecon, including joint ventures in which we are a participant, is also prequalified on a number of project bids Due to be awarded during the next 12 months and have a considerable pipeline of opportunities to further add to backlog over time. Failing 12 months recurring revenue of $1,100,000,000 was up 40% versus the prior period and 69% versus 2 years ago. Utilities operation From the GO Expansion on Corridor Works and Scarborough Subway Extension Projects during the respective development phases We are the primary drivers of this growth. Utilities operation and further advancement from this project As we continue through the development phases, are expected to contribute to future growth in recurring revenue. The Concessions segment is also expected to see airport traffic in Bermuda continue its recovery in 2023 2024.

Speaker 4

Turning to Slide 11. Aecon continues In the Q2 of 2023, The Oneida Energy Storage Project achieved financial close with Aecon Concessions As an 8.35 percent equity partner, earlier this year, Aecon was awarded The $141,000,000 EPC contract by Oneida Limited Partnership to build this 250 Megawatt, 1,000 Megawatt Hour Advanced stage grid connected battery storage project, representing the largest clean energy storage project in Canada. Projects such as Oneida, Energy Storage Go Expansion, Scarborough Subway Extension and Darlington SMR demonstrate the path Aecon is on to embrace the opportunities linked to decarbonization, sustainability and the energy transition. Turning to Slide 12. With strong demand, growing recurring revenue programs Diverse backlog in hand, Aecon is focused on achieving solid execution on its projects and selectively adding to backlog through a disciplined bidding approach that supports long term margin improvement in the Construction segment.

Speaker 4

In the Concession segment, in addition to expecting an ongoing recovery in travel through the Bermuda International Airport Through the remainder of 2023, there are a number of opportunities to add to the existing portfolio of Canadian And international concessions in the next 12 to 24 months, including projects with private sector clients that support a collective focus on sustainability and the transition to a net zero economy. The GO Expansion on Corridor Works project and the Oneida Energy Storage project noted above Our example of the role Aecon's concession segment is playing in developing, operating and maintaining assets related to this transition. Finally, on Slide 13, as disclosed on October 23, Aecon announced a strategic investment by Oaktree Capital Management in Aecon Utilities. The investment closed on October 24. Oaktree acquired a 27.5 percent ownership interest in Aecon Utilities By way of a net $150,000,000 investment, this equates to a valuation of $750,000,000 And a trailing 12 months adjusted EBITDA multiple of 9.3 times.

Speaker 4

The investment positions the business to address attractive industry growth opportunities across utility The end markets in Canada and in the U. S. Provides financial flexibility to accelerate Aecon Utilities acquisition strategy, Introduce is a recognized value added partner in Oaktree with a successful track record in utilities infrastructure investing And strengthens Aecon's balance sheet, providing Aecon the financial flexibility to fund our strategic growth initiative. We are delighted to partner with an experienced and value added investment Thank you. We will now turn the call over to analysts for questions.

Speaker 5

Thank you.

Speaker 1

We'll pause for a moment while we compile our Q and A roster. Our first question comes from Yuri Lynk with Canaccord Genuity. Your line is open.

Speaker 5

Hey, good morning, guys. Dave, maybe just give us your thoughts on when We might see the or how do we what we should expect in terms of the cash impact of the $92,000,000 write downs taken in the quarter. You did have over $110,000,000 of positive operating cash flow in the quarter. So what should we In terms of operating cash flow in the next couple of quarters? Thanks.

Speaker 3

Yes. So in terms of The agreements we've reached, as Jean Louis referred to, were in Q2 and 2 in Q3. The positive outcome from those agreements is it deals with settling All the outstanding claims and compensation on a number of items were to some extent cost has already been incurred. And so The compensation we're now receiving is positive from a cash flow perspective. So you saw some of that in Q3 with The $100,000,000 improvement in working capital in what is usually a seasonally Seasonal quarter that draws on working capital, some of that will also In Q4 and some of it in the first half of twenty twenty four, so based on the various agreements, There's some upfront payments and then some attached milestones along the way that they effectively compensate us for Working capital is built upon the balance sheet for a period of time and will be cash flow positive over the next 6 to 9 months.

Speaker 5

Okay. So the cash impact of This quarter's write downs were was largely reflected in past quarters?

Speaker 3

From a cash perspective, yes.

Speaker 5

Yes, okay. And then just a clarification on the on your liquidity position. I think your operating line has been expanded from $600,000,000 to $850,000,000 How much of that $850,000,000 is available to AGI?

Speaker 3

Yes. So the facilities Now split into 2. So the previous $600,000,000 facility is now a $450,000,000 facility at the ATI level $400,000,000 sold to the Aecon Utilities level.

Speaker 1

So

Speaker 5

The 400 at the utilities level is not accessible to AGI?

Speaker 3

It's accessible to a subsidiary of ATI in terms of Aecon Utilities, but no, the rest the balance of ATI's business doesn't draw on that facility. Obviously, as we generate cash flow From the utilities business, we can distribute from utilities to AGI, but AGI can't doesn't draw directly on

Speaker 5

Okay. And it's on that 450 AGI facility that you're going to put The converts, right?

Speaker 3

Yes, correct.

Speaker 5

So pro form a, you're Call it under just under $300,000,000 on that facility available at the end of the year. All else equal?

Speaker 3

Pro form Pro form a, right now, we obviously at the end of September, the end of Q3, the position doesn't reflect The $150,000,000 investment from Oaktree doesn't reflect the just over $200,000,000 Distributed from utilities to AGI is part of the transaction. And so That cash effectively will fund the redemption of the convertible debentures And the balance will be cash on the balance sheet.

Speaker 5

Okay. I'll get back in the queue. Thanks.

Speaker 1

One moment for our next question. Our next question comes from Jacob Bout with CIBC. Your line is open.

Speaker 6

Good morning. There's

Speaker 7

about $528,000,000

Speaker 6

backlog left to be 4 legacy Fixed price projects, just sort of minus how you expect to work down that in the balance And then maybe just as a follow on there, How are you thinking about the risk of further negative costs reforecast? When do you expect that to subside?

Speaker 4

Maybe I take this one, Jacob. So yes, we are around $500,000,000 of Remaining backlog for the small legacy project, in terms of declared backlog of 6.2 €1,000,000,000 it represents a little less than 10%, but when you add to this backlog, what's going to come most probably from the progressive design build, it's not even 5%. As you know, on those 4 projects, 1 has reached mechanical completion, The 3 other ones, I mean, 2 will be completed in 2024, and we are really nearing completion. And the other one around 2025. It just means that this will steadily decrease in the 2 to 3 quarters to come.

Speaker 4

On another hand, let's maybe come back a little on the situation Of Zoos legacy projects. So you have noted we reached 3 major settlement agreements On 3 of those projects, those contract drill negotiations are extremely complex with a lot of parameters. But what is important is that they allow to have a much better clarity on schedule to completion And eventual attached liquidity damages, they allow to have additional revenue and much more clarity and the way it's going to be You did, I mean, the cash associated with it and Dave spoke about it. I mean, we have favored in those agreements A quick disposal of the cash from our client and then it give us a better knowledge of the cost to come. On the last one, I mean, you remember, we have reached mechanical completion and we were protected From early 2023, in terms of cash, because our costs were covered So to come back to Yuri's question, Cash is preserved on those jobs for the quarters to come, And it is important.

Speaker 4

Maybe my third point will be about What else? When you take out the Zu's legacy project from our results, you have noted the EBITDA for Q3 We have been 123, I mean, trailing 12 months, 375, I mean, I don't know a lot of company with the structure of ACON that can deliver 12% EBITDA. It just means that The large majority of our business is very strong. And And it is very strong in a world where there is less and less contractors. And this is what is important.

Speaker 4

I mean, we just have to stick to our strategy. We just have to stick To our discipline, you have noticed that the name of legacy project has not been invented by chance. I mean From September 2018, we have not entered in any dangerous project At Aecon, we have limited the size of our lump sum job. We have convinced a lot of our clients to go to progressive design build. And this is important.

Speaker 4

I mean, we have invested money in our Project Management Academy in our continuous improvement program, in our gate 0 To understand that when we decide to pursue new job, what are the risks associated and how can we tackle Correctly, there's a risk. So I think it is important also to note it.

Speaker 3

Jacob, just one other point of reference. One other point of reference going back to the part of the question on working off that backlog. By the middle of next year, we expect that backlog number to be roughly half of where it is now. So that kind of gives you a sense of

Speaker 1

That's helpful. Thank you. One moment for our next question. Our next question comes from Benoit Poirier with Desjardins Capital Markets. Your line is open.

Operator

Good morning, everyone. Just in terms of charges around the legacy project, you took almost €300,000,000 over the last year and a half. Could you talk about kind of the worst case scenario on what We might be looking forward, especially given the better disclosure that you've made in Your MD and A and the fact that you were successful to reach a few settlements already.

Speaker 4

Yes. So

Speaker 3

obviously, your big factor in the last couple of quarters It's been the agreements reached on a number of these projects. As Jean Louis said in his comments, that gives us A lot of clarity around compensation for past issues, Schedule going forward, another kind of terms and conditions around these settlements that mean While we've had to make some adjustments in the last couple of quarters, we do feel that that takes A lot of uncertainty off the table, it positions us well to execute going forward. And from an overall comfort level in terms of the amount of variability In our forecast, we think that's been reduced by each one of these settlements. So We certainly expect it to be less noisy going forward, and we're very focused now just on Execution, really don't expect there to be any big developments on these Projects in terms of further significant agreements or changes to Well, we've recently agreed with our clients in the foreseeable future. So The positions we have at the end of Q3 are based on everything we know at this date, and we think those positions are reliable.

Speaker 3

And Based on all the information, we've got our fingertips based on those settlements in the last two quarters.

Operator

Okay. Okay. And just in terms of capital deployment, when we look at your leverage, you were at 2.3 at the end of Q3. I understand the leverage will come down with the proceeds from Oaktree. Just wondering about what kind of optimal level you See Aecon operating, the covenant, the cushion you have and also in terms of capital deployment, What about the availability to deploy debt capital towards M and A around AECOM Utilities, which was a reason why You strike a deal with Oaktree.

Speaker 3

Yes. So as you say, at the end of Q3, we're at 2.3 times, including the convertible debentures. Pro form a for the Acorn Utilities transaction that will be around 1.2 times. We're very comfortable In a leverage range up to kind of 2 to 3 times in terms of The long term support of bonding companies and performance Security requirements. So we think we have plenty of room to invest in the business.

Speaker 3

We Significantly strengthened the balance sheet this year, and we are very focused on Growing utility business M and A, we expect to play a role in that. We're already Yes, active in terms of opportunities in the U. S. For the utilities business. We're very comfortable that we can deploy Capsule to support our M and A alongside our partner.

Operator

Okay. And last one for me. You've been successful in selling half of Bermuda at twice the street expectation. If you look at the road building business that was less strategic and also margin dilutive, you sold it close to 9x EBITDA. The Econ Utilities also you monetize at 9x, stock still trading below 3 times in terms of EBITDA for the rest of the business.

Operator

So are there any reason that do not allow Aecon to look at creating further value given the valuation at these levels and your track record and monetizing some of those assets over the last years.

Speaker 4

Well, my answer would be that we are very comfortable with the diverse We have been doing, I mean, there was a reason for Aecon Transportation East in terms of an extremely competitive market, Capital intensive, and it was a clear decision from us, and we are Very happy with the valuation we could get. Bermuda, it was a rather different way of looking at it. I mean, We consider that Aecon that we can be successful and make money on the totality of the value chain. It means developing, financing, Engineering, building and operating our assets when the contract loads it. This is a normal Rotation of our assets, it's necessary to allow us to go to other projects that will create more value.

Speaker 4

What was important for us was to keep this 50.1% and the management contract. At the end of the day, We have to go on building and developing infrastructures, and we think that the balance of activity that we have at the moment Perfectly fit with what we need in front of the market that we envisage.

Operator

Okay. And given the valuation these days, how is the how do you look at the buyback given the valuation these days.

Speaker 3

So I think our focus is A few areas when it comes to capital deployment. Obviously,

Speaker 4

we need to deal with

Speaker 3

the convertible debentures at the end of this year. We've been very consistent around our dividend program. And as we've talked about, We see significant growth opportunities both organic and through M and A, particularly focused on the utilities business. So that's the focus right now from a capital perspective. Obviously, the disconnect you Highlighted in your initial question around the valuation of the Dispositions that we've done this year and where the share price is trading, we feel the best way to Highlight future value is to continue to execute on the balance of the business, continue to highlight The fact that the underlying business is generating $375,000,000 of EBITDA on a trailing 12 month basis I think once we've done all that, then We would hope that that would be reflected in valuation.

Speaker 3

And if it's not, then obviously, we will look at Share buybacks or anything else that makes sense, but there's some strategic and immediate uses of capital that

Speaker 7

Okay. Thanks for the time.

Speaker 1

One moment for our next question. Our next question comes from Chris Murray with ATB Capital Markets. Your line is open.

Speaker 7

Yes. Thanks, George. Good morning. Maybe following on, I think Dave, I don't know if you want to Trying to take this one or Jean Louis. But thinking about the business on a go forward basis, with the projects, I guess, maybe ring fenced or at least Kind of stabilized now from a financial perspective and the cash flows coming in.

Speaker 7

You talked a little bit about, call it, A low teens type EBITDA margin with the remaining business. Can you talk a little bit how we should think about what The margin profile is going to look like in 2024. Let's assume that you run off the first half of that legacy project backlog probably at a 0 margin. But is it fair to think that those margins you've been talking about are sustainable as we go into 2024 and 2025?

Speaker 4

We'll begin maybe and Dave may ask a few other comments. I mean, what is important for us is The predictability of our margins and we think we are relentlessly positioning Aecon Toward a better predictability of our margins, we have been advocating with our clients about this progressive design build Projects, which are the kind of animals that we like. So you do think that We have been awarded, I would say, just 3 first ones, the small modular reactor, The gold trade expansion and Scarborough, but a lot of other projects are also And those with progressive schemes, for example, on ADA, as I've mentioned, we have been awarded a $141,000,000 EPC contract, which is at a fixed price, but it was progressive. I mean, we spent 2 years Being awarded to optimize a project with the battery suppliers, with all our transformer suppliers, It just means that this was progressive. I mean, with Hydro BC, we have now entered in the execution phase of the John Arps rehabilitation project, Following 9 months of co development with our client, predictability is also, Of course, given by our recurring revenue, I mean, you have noted it's more than 40%, 23 against 2022.

Speaker 4

It's also given by the fact that Our backlog that was in 2018 almost 70% fixed price is now around 47% fixed price. So this gives predictability. And I'm asking you To look at the new AECOM that is emerging, I mean, just give you another example. I mean, within a few weeks, We most probably will embark in the transition period for the Goldrade operation. You remember that we have a joint venture with Deutsche Bank, which is probably One of the best European operators, especially for those kind of network.

Speaker 4

And with our joint venture, we'll begin to operate trains and to optimize The operation of those trains under a cost reimbursable plus fee scheme. So all this Just I mean, it's a relentless effort from the last years to bring Aecon toward a much more Predictable margin profile. David, you want to add something?

Speaker 3

Yes. And in terms of Thinking about underlying margin that you talked about and how that looks going forward, Obviously, we always say don't look at 1 quarter in isolation, but look at kind of in the last 12 months. And I think if you do that, You can see very healthy margin ex the legacy projects of close to 10%. I think other than the impact of Bermuda and the disposition of half of Bermuda, I think if you look at just on a construction segment basis, we think as we go through 'twenty four, that kind of margin level is sustainable.

Speaker 7

Okay. That's helpful. Thank you, folks.

Speaker 1

One moment for our next question. Our next question comes from Ian Gillies with Stifel. Your line is open.

Speaker 8

Good morning, everyone.

Speaker 4

Thanks.

Speaker 8

The dividend has obviously been a core part of the story for A long time, but can you maybe talk a little bit about the merits of keeping the level where it is now given some of The cash requirements perhaps going forward and some of the growth opportunities and whether perhaps that could be better allocated elsewhere, whether it be through M and A or new growth projects, etcetera?

Speaker 3

Yes. As you say, it's been a long term A component of our capital allocation, we've been very consistent and tried to be very consistent over A long period of time around how we think about dividends, we think it brings a certain amount of discipline to the business when it comes to capital allocation. And as we think about it going forward, We're focused on the long term. We're focused on the fact that the vast majority of the business is producing Significant EBITDA, we have good cash flow dynamics. We talked about earlier the fact that we feel we turn the corner From a working capital perspective, on the legacy projects, and so Our view is the dividend is a key part of the capital allocation program and We have plenty of other options around growing the business and M and A.

Speaker 3

We're not worried about constraints In the context of the dividend policy.

Speaker 8

Okay. With respect to the deal announced with Oaktree on Monday, There's a fair bit of leverage being put on the Aecon Utilities business on a trailing 12 month basis for what's being And why you chose to go that route?

Speaker 3

Yes. So a big component of this is thinking about The free cash flow profile of our Utility business. The Utility business is a, as we talked about before, a kind of different Profile of business to a lot of what we do in the construction segment in that it's very much recurring revenue, long term MSAs, predictable Work programs, predictable margins and along with that is predictable cash flow. We believe the cash flow Profile of that business will draw down that leverage as we move forward and we're very comfortable As Oaktree, we have the capacity within Aecon Utilities And at the AGI level to make the investments we're looking to make to grow that business. Obviously, as we look at the balance between AGI and AUGI, we felt that the Best approach was to bring some capital back to Aecon to I offer convertible debentures.

Speaker 3

So we're very comfortable that going forward, we can grow the utilities business from the balance sheet and The facility has. And obviously, from an Oaktree perspective, they're coming into this investment with The same goal as us, which is to grow the business, create significant value And M and A is part of that. And if they weren't comfortable with everything I've just talked about in terms of capacity Cash flow profile at utilities, then we wouldn't have done the distribution that we did. So Both us and Oaktree are very comfortable with how the business is positioned.

Speaker 4

Maybe I can add something. We Of course, we can discuss about the 12% of return, the leverage. I mean, but What we have to focus on is the strategy behind this. I mean, it has been a long Selection process and I have to say that we are extremely happy with the partner with who we are Now, I mean, it was our favorite partner. It was by far the one with the best knowledge of this industry, of the different networks In United States, but also in Canada, and by far, I mean, strategically, it was our preferred Future partners.

Speaker 4

And I think this is important. Our life is about agility, it's about detecting where we can put Our core competency at work where we can make more money, be more profitable, be more predictable and definitely We think it is an excellent move and we are extremely happy about it.

Speaker 8

And That's helpful. Maybe if I could just reframe the question a little bit just to understand. There's been a lot of transition in the business over the last 12 months with Back to asset sales. Could you maybe highlight a little bit of where you think the right net debt to EBITDA metric is for the business, Fully consolidated. And then maybe where you think the right metric is for Aecon Utilities or where you think that max metric is if you were to do some M and A?

Speaker 3

Yes. So at the Aecon level, I touched on this a little bit earlier. We've always said we're comfortable We've leveraged up to 3 times. We typically aim to keep it in that kind of 1 to 2 times range, But we're comfortable going above that for strategic investments that we believe will Leads to being able to delever the business again going forward. So Typically, we try and stay in that 1 to 2 times range at the Aecon Group level.

Speaker 3

From a utility perspective, as I talked about earlier, very different profile of that business, part of the rationale for creating a separate We called for growth in the U. S. Through that utilities business with a separate balance sheet, separate facilities. We think The utilities model can support high leverage if needed to fund M and A with Strong operating cash flow below that to bring that leverage back down again as we operate the business and And create synergies from the M and A that we look to do. So I don't want to put a max number on the utility side, but certainly A fair bit higher than we're comfortable with at the ACO level.

Speaker 8

Okay. Thanks very much. That's helpful. I'll turn the call back over.

Speaker 1

One moment for our next question. Our next question comes from Jonathan Lamers with Laurentian Bank Securities. Your line is open.

Speaker 7

Good morning. Earlier this year, David, you'd indicated that Free cash flow for the full year could be positive depending on the outcome of some of the settlements. Following the settlements in Q2 and now Q3, would you expect positive free cash flow for the year?

Speaker 3

Yes. I mean, I think we'll certainly be close to it. There's always a few things at the end of the year that if they Come in, they swing it one way. If they don't come in, it comes in early the next year and it slightly swings the other way. But I think we'll be At least relatively close to free cash flow breakeven this year with a few Yes.

Speaker 3

It's going for it to be a little bit either way, but fairly close to free cash flow neutral for the year. As I said, part of the cash flow from these recent agreements will come in, In the first half of twenty twenty four, so that trend should continue as we go into In terms of unwinding working capital from those projects?

Speaker 7

Do you have an estimate for the cash from the recent agreements that will come in 2024? Apologies if I missed that.

Speaker 3

No, we haven't disclosed specific numbers on Settlements and agreements, obviously, each one of these agreements is Confidential in terms of partners and clients, etcetera. So we haven't quantified the exact domains.

Speaker 7

Okay. One more topic, if I can. Just on the Legacy projects, if these so I understand that the backlog related to those is My understanding is there could be arbitration processes that Continue longer. Is the larger risk at this point From to the income statement really related to those potential arbitrations now and the outcomes there,

Speaker 3

Can you

Speaker 7

just help us sort of rank the magnitude of the potential risks remaining in the 4?

Speaker 4

I would say that there are a few risks. I mean, the first one on which all our teams are focusing is the execution and the completion of those Project to get them substantially complete. This is one for the 4th one. Amit, it was extremely important as committed to be mechanically completed at the end of September. So completing those jobs It is a point of focus for our team.

Speaker 4

On another hand, yes, I mean, there will be arbitration and there will be other negotiations. There will be other commercial settlements within the months and the years to come. We as I've told you already, we have put the best teams within our company and also as External partners, so we are confident that we are aligning very strong team for this 2nd phase, which may lead to negotiation what we would Prefer, but also arbitration because we think that we have quite strong cases.

Speaker 7

I'll leave it there. Thanks for your comments.

Speaker 1

One moment for our next question. Our next question comes from Sean Jack with Raymond James. Your line is open.

Speaker 7

Hey, good morning guys. Looking forward, do you see any opportunities out there to do like a JV style project to help grow the utilities business faster or is that something that you guys would even consider for that line of business?

Speaker 3

I think across all of our businesses, including utilities, We're always comfortable entering into joint ventures for specific projects, or with indigenous groups, the longer term And we have some joint ventures that we work through with various First Nations. So project by project, that's very usual for us. In terms of Longer term joint ventures for specific opportunities, I mean, sure, we would look at whatever makes most sense Based on the specific circumstances, what clients are looking for, What works best in a particular market, etcetera, etcetera. So already in the U. S, Some of the initial work our utilities group is doing down there as we've established a presence In a joint venture with Southland, for example.

Speaker 3

So yes, I mean, we're open to Where the structure is best suited for the opportunity and whatever makes the most sense in terms of creating value in growing the business.

Speaker 7

Okay, perfect. Thanks. That's it for me.

Speaker 1

And I'm not showing any further questions at this time. I'd like to turn the call back over to Adam for any

Speaker 2

That's great. Thanks, Kevin. I appreciate everyone's time today. Have a good balance of the day. And as always, if there are follow-up questions, Feel free to reach out to our team.

Speaker 2

We shall speak with you all soon.

Speaker 1

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful

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Earnings Conference Call
Aecon Group Q3 2023
00:00 / 00:00