Aecon Group Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

Key Takeaways

  • AECON reported Q2 revenue of $1.2 billion (+4% YoY) and operating profit of $56 million (EPS $0.38) driven largely by one-time gains from the sale of its Transportation East business and property disposals, which offset a $53 million negative impact from legacy fixed-price projects.
  • The four fixed-price legacy joint ventures dragged the construction segment into a $4 million adjusted EBITDA loss, with negative gross profits of $31 million and $50 million on two major projects, representing 10% of backlog and expected to be completed by mid-2024 and 2025.
  • New contract awards jumped to $2 billion in Q2 (vs. $1.3 billion a year ago) and reported backlog grew to $6.9 billion, while concessions revenue rose 42% (to $27 million) and EBITDA climbed to $28 million, led by traffic recovery at Bermuda International Airport.
  • Proceeds from the ATE sale and the imminent CAD 170 million Bermuda transaction will boost liquidity to repay the CAD 104 million convertible debentures maturing in December, supporting what management expects to be positive free cash flow in 2024.
  • AECON’s pipeline includes large-scale energy transition projects such as the 250 MW/1 GWh Oneida Energy Storage EPC contract, Scarborough Subway Extension, Darlington nuclear and future small modular reactors, and recurring revenues are up 40% YoY, positioning the company for further growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Aecon Group Q2 2023
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good morning. Thank you for attending today's 222023 Aegon Group Incorporated Earnings Call. My name is Lauren, and I will be your moderator for today's call. There will be an opportunity for questions at the end of the presentation. It is now my pleasure To pass the conference over to our host, Adam Borgatti, Senior Vice President of Corporate Development and Investor Relations.

Operator

Mr. Borgatti, please proceed.

Speaker 1

Thank you, Lauren. Good morning, everyone, and thanks for participating in our Q2 results conference call. Presenting to you this morning are Jean Louis Servranx, President and CEO and David Smales, Executive Vice President and CFO. Our earnings announcement was released yesterday evening, and we've posted a slide presentation on the Investing section of our website, which we'll refer to during this call. Following our comments, we'd be glad to take questions from analysts.

Speaker 1

And we ask that the analysts keep to one question before getting back into the queue to ensure others have a chance to contribute. As noted on Slide 2 of the presentation, Listeners are reminded the information we're sharing with you today includes forward looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. And although Aecon believes these expectations reflected in these statements are reasonable, we can give no assurance these expectations will prove to be correct. With that, I'll turn the call over to Dave.

Speaker 2

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 Q2 of $1,200,000,000 was $44,000,000 or 4% higher compared to the same period last year and is 8% higher on a year to date basis. Adjusted EBITDA of $17,000,000 a margin of 1.4% compared to $39,000,000 a margin of 3.4% last year And operating profit of $56,000,000 compared to an operating profit of $5,000,000 Diluted earnings per share in the quarter of $0.38 compared to a diluted loss per share of $0.10 in the same period last year.

Speaker 2

The improvement in operating profit And diluted earnings per share was largely due to an increase in other income of $70,000,000 Driven primarily by a $38,000,000 gain on the sale of Aecon's Transportation East Business or ATE And a $31,000,000 gain on the sale of certain property and equipment, which more than offset the $53,000,000 negative impact of larger period over period margin adjustments relate to legacy fixed price projects. Reported backlog of $6,900,000,000 at the end of the quarter after removing $447,000,000 of backlog in Q2 related to the sale of ATE compared to backlog of $6,600,000,000 at the end of the Q2 of 2022. New contract awards of $2,000,000,000 were booked in the quarter compared to $1,300,000,000 in the prior period. Now looking at results by segment. Turning to Slide 4.

Speaker 2

Construction revenue of $1,100,000,000 in the Q1 was 35,000,000 or 3% higher than the same period last year. Revenue was higher in civil operations driven by an increase in major projects in both Eastern and Western Canada and road building construction work in Western Canada, partially offset by a lower volume of road building construction work in Eastern Canada as a result of the sale of ATE in the quarter. In industrial operations, higher revenue was primarily due to increased activity on mainline pipeline work in Western Canada. And in utilities operations, higher revenue was driven by an increase in telecommunications and high voltage electrical transmission work. Partially offsetting these increases was lower revenue in nuclear operations from a lower volume of refurbishment work And in Urban Transportation Solutions, primarily from a decrease in LRT project work.

Speaker 2

New contract awards of $2,000,000,000 in the 2nd quarter compared to $1,300,000,000 in the same period last year. Backlog at the end of the quarter of $6,800,000,000 compared to $6,500,000,000 at the same time last year. Turning to Slide 5. Adjusted EBITDA in the construction segment was negative $4,000,000 with $38,000,000 unfavorable compared to the Q2 of The decrease was driven by negative gross profit of $31,000,000 in the 2nd quarter From a fixed price legacy project in civil operations versus a gross profit of $4,000,000 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 $33,000,000 from one of the other fixed price legacy projects in urban transportation solutions in the same period last year. Other than the impact of these fixed price legacy projects in the quarter, higher gross profit in the balance of the construction segment was primarily driven by improved results in urban transportation solutions.

Speaker 2

At June 30, the remaining backlog to be worked off on these Four projects was $699,000,000 compared to $1,100,000,000 at the end of 2022. The 4 legacy projects comprised 13% of consolidated revenue in the 2nd quarter and 10% of backlog at June 30 compared to 16% of consolidated revenue in the full year 2022 and 17% of backlog at December 31. Turning to Slide 6. Concessions revenue for the Q2 was $27,000,000 compared to $19,000,000 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 2020 to and into the first half of twenty twenty three from the more severe impacts experienced in 20202021.

Speaker 2

This recovery was evidenced by the fact that traffic in the 2nd quarter averaged 73% of the pre pandemic level in the Q2 of 2019 compared to average traffic in the Q2 of 2022 being just 43% of the pre pandemic level. Adjusted EBITDA in the Concessions segment of $28,000,000 compared to $17,000,000 in Q2 last year, primarily due to results from the Bermuda Airport and an increase in management and development fees. Turning to Slide 7. At the end of the Q2, Aecon had a committed revolving credit facility of $600,000,000 of which $188,000,000 was drawn And $11,000,000 utilized for letters of credit. On December 31, 2023, convertible debentures with a face value of 100 and $4,000,000 will mature and we expect to repay these debentures at maturity or before.

Speaker 2

At this point, I'll turn the call over to Jean Louis.

Speaker 3

Thank you, Dave. The significant impact On the 4 large fixed price legacy projects being performed by joint ventures in which Aegon is a participant continue to be felt in our results. Aecon and our partners are working toward resolution and compensation for the impact These projects are faced with the respective project owners focused on reaching fair and reasonable settlement agreements As we move towards project completion in each case. As I've said before, this will take some time, but we are only constantly and making progress. 3 of the 4 projects are currently expected to be substantially complete by date between late 2023 and the middle of 2024 and the 4th is currently expected to be substantially complete during 2025.

Speaker 3

Turning to Slide 9. Demand for Aecon's services across Canada continues to be strong. While volatile global and Canadian economic conditions are impacting inflation, interest rates and overall supply chain efficiency. Those factors have stabilized to some extent and have largely been and will continue to be reflected In the pricing and commercial terms of Aegon's recent and prospective project awards and bid. However, results have been negatively impacted by the full legacy projects in recent periods, Undermining positive revenue and profitability trend in the balance of Aegon's business.

Speaker 3

Turning to Slide 10. With backlog of $6,900,000,000 at June 30, 2023, And recurring revenue programs continuing to see robust demand. Aecon believes it's positioned To achieve further revenue growth over the next few years. In the Q2, Aecon was awarded a number of projects That were added to backlog, including delivery of the Deerfoot trade improvements project in Alberta.

Speaker 2

The Scarborough Subway Extension Project And the Darlington new nuclear project will only be reflected in backlog and the successful conclusion of the lengthy development phases. Aecon, including joint ventures in which we're a participant, is also prequalified on a number of project bids Due to be awarded during the next 12 months and has a considerable pipeline of opportunities to further add to backlog over time.

Speaker 3

Coming back, sorry for this. Trailing 12 months recurring revenue of EUR 1,100,000,000 was up 40% versus the prior period and 74% versus 2 years ago. Utilities operations and contributions 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. Utility operations and further advancement from these projects as we continue through the development phases I expect it 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 3

Turning to Slide 11. Aecon continues to support the energy transition to build and operate sustainable infrastructure. In the Q2, the Oneida Energy Storage Project achieved financial close with Aecon Concessions as an 8.35% equity partner. Earlier this year, Aegon was awarded a $141,000,000 EPC contract by Oneida Limited Partnership To build this 250 Megawatt, 1000 Megawatt Hour advanced stage grid connected battery storage project, We're presenting the largest clean energy storage project in Canada. Projects such as Oneda Energy Storage, Co Expansion on Corridor Works, Scarborough Subway Extension and the Darlington Unuclear Project Demonstrate the path Aegon is on to embrace opportunities linked to decarbonization, Turning to Slide 12.

Speaker 3

In addition to large scale energy projects, we continue to And our portfolio with Aecon's green energy services through residential and commercial renewable energy projects. This also includes strategic partnerships with companies to provide electrification and charging infrastructure that enables municipal transit agencies and other corporate fleets to power their vehicles using clean energy. We continue to work towards reducing our own emissions and have been switching our operations Turning to Slide 13. With strong demand, Growing recurring revenue program and diverse backlog in hand, Aecon is focused on achieving solid execution on these projects And selectively adding to backlog through a disciplined bidding approach that supports long term margin improvement in the construction segment. In the Concessions segment, in addition to expecting an ongoing recovery in travel Through the Bermuda International Airport through 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.

Speaker 3

The growth expansion on Corregor Works project and the Oneida Energy Storage project noted above Examples of the role Aecon's concession segment is playing in developing, operating and maintaining assets related Thank you. We will now turn the call over to analysts for questions.

Operator

Thank Our first question comes from Frederic Bastian from Raymond James. Frederic, please go ahead.

Speaker 4

Good morning.

Speaker 3

Good morning.

Speaker 1

Yes, we all knew there were risks.

Speaker 5

Hi. Guys, we all knew there were risks residing in these 4 legacy fixed price projects, but I'm really surprised by the extent of the losses You posted in Q2. So my question is what changed in these, the short 3 months since you last reported to make you take that significant of

Speaker 3

Yes, Frederic. I mean, you're right. These legacy projects are a Challenge and the dynamics of the negotiation, especially when we are reaching up to the end of those projects, are extremely complex. Those are not negotiation about one parameter. I mean, we tell our client Due to modification in the condition of execution of our contract, you owe me X And the client answer, in fact, I'm going to compensate for why.

Speaker 3

I mean, there's a lot of parameters about The risk taken out about eventual modification to the PA, about the trade off between cash And more long term additional revenue. We also have to deal with different partners on each of the joint venture. We are not alone. We are dealing with different clients, with different decision making process. All this is extremely Complex.

Speaker 3

And this explain that the outcome of those negotiation Cannot be perfectly forecasted dollar per dollar. What is sure is that Every day on this whole project, we are negotiating with our clients. And every day, we are progressing Up to the final of those projects, you have probably noticed that the backlog associated with this project now is under €700,000,000 When you compare it, I mean, to our declared backlog, which is 6.9 With our quasi backlog, when you add the 3 progressive design build project, which We'll give us something like €7,000,000,000 to €8,000,000,000 of additional. It has now become A very small portion of our backlog.

Speaker 5

That small portion of the backlog, I mean, it's a bit of a black hole. We just don't Where things will land, it's very difficult for us in The Street to figure out what future projections will be.

Speaker 3

What is sure is that every day that part, I mean, with this project is a victory because we have Less in our backpack to execute.

Operator

Thank you. Our next question comes from Chris Murray from ADB Capital Markets. Chris, please go ahead.

Speaker 6

Yes. Thanks, guys. Good morning. So maybe following on that question, maybe a different way to think about it. What you've been telling us at least for the last few quarters is that you thought you had maybe the re forecast behind you, But we'll be operating at lower margin now.

Speaker 6

Like how should we be thinking about margins through the completion of this At this juncture, Jean Louis, I hear what you're saying about the backlogs outside of these projects, but these projects Feel like they're going to be driving your margin profile for the next year or so. So just how should we be thinking about construction margins on a go forward basis?

Speaker 2

Yes. So Chris, in terms of legacy projects, the position we take The end of each quarter is based on everything we know at that point in time. And so If those forecasts and everything we've taken into account play out the way we, as a joint venture in each Case envisaged them, then the EBITDA margin effectively from those 4 projects should be 0 on a go forward basis if they're in line with projections. And then your overall EBITDA margins, If you look at our numbers over the for Q2 and over the last 12 months excluding The impact of legacy projects, you can see those margins have been progressing quite nicely. The overall margin profile of the backlog is healthy and improving over time.

Speaker 2

We Talked a lot about the fact that we're in a strong demand environment for infrastructure and construction generally, and that's been reflected in not just Building backlog, but also the margin profile of that backlog and you're seeing that in the numbers in the rest of the business. So We expect that trend to continue for the base business. And as I said, the legacy projects in theory should be 0.

Speaker 6

Okay. I guess we'll have to look at that. Yes, I guess moving on the Yamiche, I don't know who wants to take this one, but just the Ontario government has been talking a lot and some of the other folks in Ontario about Additional nuclear development and certainly you're well positioned there. I guess a couple of questions. Can you maybe frame The scale of the opportunity that's here and, I guess, as a piece of this, I mean, if everything that everyone's talking about, Additional small nuclear reactors, large reactors, I mean, if that all kind of comes into play, is there a limit to how large Or how much nuclear exposure you folks can actually accommodate?

Speaker 3

Yes, I can take this one. Nuclear is a long term industry. It means that you don't decide on Friday that you're going to build a reactor and begin the works on Monday. I mean, The land has to be ready, all the environmental license, I mean, the technological license, the capacity To design, build and operate, everything is a lengthy process. So what we know at the moment is that You've seen that we have booked a little more than €1,000,000,000 I mean of new orders during the quarter for Bruce.

Speaker 3

We now have the totality of the 6 reactors under Aegon Execution. At OPG, we still have 2 units to go, Each unit being more or less 3 years of work, but they can interlap just as a signal of Lessons learned and the way we are progressing. You probably noticed that the second unit at OPG, U3, was just delivered and substantially completed by Altium, 169 days ahead of schedule, which Just so the way we master now all this rehabilitation, evidently, There is a decision coming about the refurbishment of 4 units at Pickering. It's probably going to come During the Q3 2023, then there is 1 year to 1.5 years of preparation And early works and then we will begin to work if we are awarded to the job. All this take time.

Speaker 3

Regarding the small modular reactor, we have entered in a 6 year alliance with the GI, Apache and SNC for the first one. You probably have noticed the announcement that there will not be 1 but 4th molar modular reactor, the OPG in Ontario. All this will be phased and will take time. So only for this, we are speaking up an horizon Or something like 15 years without even talking about the big units that can be developed at Pru. So we are not Worried about a sort of ceiling in our capacity.

Speaker 3

What is more important for us is to be sure that All the teams that we have been training, recruiting, developing are going to stay with us and that they will not be all Within the development of all those, I would say, nuclear program.

Speaker 6

Okay. That's helpful. Thank you.

Operator

Thank you. Our next question comes from Benoit Pulria from Desjardins Securities.

Speaker 2

Yes. Good morning, everyone. I was wondering if you could provide details about the potential charge to be taken in the second half, the risk behind that on those Four legacy projects given that historically you've been more heavy in the second half and also more granularity about the Potential settlements that you're looking for and maybe the remaining 40% exposure to your backlog to fixed price, The risks behind the I know projects are much smaller in terms of size, but wondering if there's Any risk with respect to the 40% remaining exposure to the backlog? Thanks. So, yes, I mean, if you go back to my Previous answer, in terms of the position on each of these projects at the end of Q2, It factors in everything we know at this point in time.

Speaker 2

The write downs in the second quarter Take all of those factors into account and they're all based on forecast through to the end of the job. So With that positioning, the it's not A case of being able to say, okay, now expect this or this. If those forecasts are correct, then The impact on those projects on a go forward basis from a profitability perspective should be 0. Having said that, as we flag now for a fairly lengthy period of time, there will remain risks Until we get to the end of these projects, it's just the nature of the complexity of the situation as Jean Louis described earlier. In terms of the balance of the backlog, as you've seen, the mix of work has been shifting Fairly significantly over the last 12 to 18 months away from fixed price into more non fixed price work.

Speaker 2

As you know, there is still backlog in fixed price. We're very comfortable With those projects, we've called out those 4 legacy projects for a reason. But the rest of the Work that we're doing, execution is going well, and it's all reflected in the margins you're seeing over the last Few quarters, which, as I said earlier, we expect that trend to continue in terms of positive margin development. So no, we don't see risk in the rest of the portfolio. Thank you.

Operator

Thank you. Our next question comes from Najee Baidu from Industrial Alliance Securities. Najee, please go ahead.

Speaker 7

Hi, good morning. Can you maybe talk a little bit more about what additional Compensation measures that you're pursuing for these fixed price projects, I understand it might take a bit of time and how that might impact the margin outlook for the rest of this year. I think your previous commentary was that margins could potentially be up year over year for 2023. I'm just wondering if that's still

Speaker 3

You're speaking about the legacy project. The question is about this.

Speaker 8

Correct, yes.

Speaker 3

Yes. We are finalizing the execution of 3 of those projects. The 4th one We'll go up to 2025. We are negotiating with our clients. There is no doubt in with all our clients that Those projects have suffered from heavy modification and needs to be compensated.

Speaker 3

Now as I have explained, the dynamic of the negotiation are extremely complex, but I can tell you that on 2 of those projects, the amount on the table under negotiation are quite substantially. The issue are all the parameters attached to the additional revenue, And this is where we are still working and we expect some further settlements In the future, in the near future. But they are extremely difficult and complex negotiations.

Speaker 7

Okay. And just Maybe if we sort of look at the underlying business ex these projects, can you just maybe confirm what the Revenue and EBITDA would have been on a normalized basis outside of the impact from these projects. Just trying to get a sense of what How the rest

Speaker 9

of the construction business is performing?

Speaker 3

Yes. I will begin and maybe David will give you a little more information. I mean, As you have noticed, the EBITDA without those legacy products for Q2 would have been 98 €1,000,000 which is extremely strong and trailing 12 months EBITDA without the legacy project would have been €375,000,000 And when you know the revenue we have, it's extremely High in the industry, it's probably one of the best one. It means that we think that our strategy that we have been developing For the last 4 years is the right one about balancing our activity, about strengthening our execution capacity Because the underlying I mean, the normal business, I would say, has never been that strong. In addition, as I've already explained, we have tightened a lot Everything related with the 1st weeks of new projects, as I said, I mean, we have €6,900,000,000 of backlog.

Speaker 3

We have €7,000,000,000 of additional quasi backlog associated with our 3 progressive design build Project Encore Scarborough and Small Modular Reactor. It just means we're not starving at all. We are in a very favorable position to choose the project, the client, the partner, the timing that best Sit with our capacity. This is why we are quite optimistic with all these parameters about Aecon, after those legacy projects are definitely behind us.

Speaker 2

And Najee, just to add to that, Najee, you also asked about revenue and margin impact To work out the impact on the base business. So as Jean Louis said, the EBITDA impact It was €81,000,000 So excluding those legacy projects, the rest of the business generated €98,000,000 in EBITDA. Revenue attached to those legacy projects in the second quarter was approximately $150,000,000 So if you exclude the legacy projects altogether, then the EBITDA margin On a consolidated basis in the 2nd quarter, would it be 9.6% as opposed to 1.4% reported?

Speaker 7

Yes, that's exactly what I was looking for. It seems like there's some very strong organic growth tailwinds and the margin is pretty healthy on a normalized basis.

Speaker 9

So I guess you just got to work through

Speaker 7

Maybe just one last question for me. So you got the road building Sale completed and the Bermuda minority sale coming up next. Just any updates on use of proceeds and where you expect sort of to end The year in terms of the balance sheet and the leverage profile?

Speaker 2

Yes. So as you noted, the transportation sale closed in Q2, we expect the Bermuda sale to close shortly. We've now received all Final approval. So it's just a question of paperwork basically backwards and forwards between lawyers. It should be closed in the next Couple of weeks.

Speaker 2

So that will contribute 128,500,000 In terms of U. S. Dollars approximately CAD 170,000,000,000 CAD 175,000,000,000 to the cash position in Q3. Obviously, we have the convertible debenture maturing at the end of the year. The proceeds from those two transactions give us So flexibility in terms of options to deal with those converts.

Speaker 2

We'll continue to monitor the market at the same time To decide if we want to do something in terms of a separate issue, but otherwise we'll use the balance sheet to deal with those converts. So I guess in terms of leverage profile at the end of the year, it will depend to some extent Whether we just pay those from existing resources or whether we do any kind of refinancing between now and the end of the year.

Speaker 7

Understood. Appreciate it. Thank you.

Operator

Thank you. Our next question comes from Jonathan Lamers from Laurentian Bank Securities. Jonathan, please go ahead.

Speaker 10

Thank you. Jean Louis, just to follow-up on your Earlier answer about settlement compensation payments on these legacy projects, Recognizing that negotiations are complex, do you have visibility today to whether these Might be received later in 2023 or 2024. And David, if they do fall into 2024, would

Speaker 6

you expect that to be a Positive free cash

Speaker 3

year. I will take the first part of the answer. We are working hard so that part of this negotiation can finalize before the end of the year And part of the payment can be done before the end of the year. It's quite an easy, usually payments are saved. They are not always, I would say, bullet paid.

Speaker 3

But all this It's part of the negotiation. So it's difficult to give more precise answer. What is sure is that we negotiate with our clients Every day, and we are pushing to have the right trade off between early payments and Maximizing additional revenue.

Speaker 2

And Jonathan, in terms of If those settlements were in 2024, then yes, I would expect 2024 to be a Positive free cash flow year. Obviously, the working capital build attached to those projects has impacted cash flow Over the last 18 to 24 months, but as that unwinds, that will be a contributor to cash flow going forward.

Speaker 10

Okay. I just have one follow-up on that. The unbilled revenue balance has also stepped up quite a bit over the first half versus last year. Do you have any visibility yet to that declining over the coming quarters?

Speaker 2

Yes. I mean, some of that is attached to These claims settlements that we're talking about and the 4 legacy projects, and some of it is just attached to Some of the timing of milestones on other projects, as well as just the overall growth In revenue over the last 12 months. So it's a combination. But As we and we'll see some usual seasonality in that number. But as we reach various Settlement agreements and as we hit milestones on some projects that are underway, then yes, that number would we would expect that number to come down over the balance of this year and also into the 1st part of next year.

Speaker 10

Okay. Thanks for your comments.

Operator

Thank you. Our next question comes from Ian Gillies from Stifel. Ian, please go ahead.

Speaker 4

Good morning, everyone. With respect to the 4 fixed price legacy contracts moving ahead, are you still seeing much in the way of Change orders or incremental work that will drive more unbilled revenue. And if that's the case, can you maybe just talk a little bit about how you're managing that risk, So you can make sure you recover that revenue?

Speaker 3

I would tend to say that we are not expecting additional work or variation order or I mean, it's not the issue anymore. The design of this project is over. The schedule is now stabilized. The issue is just about agreeing on a fair and reasonable compensation And the terms of payment associated with this compensation with our client. But I do not see developing on this whole legacy project Additional work that we should do that we don't know and that would not be recognized.

Speaker 3

We all this now is

Speaker 4

Okay. That's very helpful. The other item I was curious on, I mean, given some of the uncertainty around future write downs or impairments related to these projects, Is it limiting your ability to go pursue new concession contracts, whether it be in North America or internationally? Or Is that moving or is that unimpeded because it's all project specific?

Speaker 2

Yes. I mean, we certainly haven't seen that be an impact. As you know, Some of these large new progressive design build projects that we've been awarded In some cases, we're the same clients we're negotiating with now. And as we Secure work and prequalify on work, we haven't seen any change in the dynamics around our ability to pursue the projects That we think makes sense for us, whether they be in a concessions model or a Progressive Design build model or any other kind of models and Regardless of the client as well. So no, we haven't seen any restrictions on our ability to pursue work.

Speaker 4

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

Operator

Thank you. Our next question comes from Maxim Sytchev, National Bank Financial. Maxim, please go ahead.

Speaker 9

Hi, good morning gentlemen. I had a question Maybe in relation to your good morning, Charlie. In terms of your thoughts when it comes to the dividend payout ratio, whether as a Function of net income or free cash flow because I mean leverage likely is probably going to go up. I mean JV cash Sort of stripped out, I mean, spend alone cash is pretty low despite obviously the influx from Bermuda. So I'm just trying to think how you're balancing that risk on a going forward basis, especially some of the difficult projects You don't have some time to run through.

Speaker 9

So yes, maybe any update on that front? I think it's just a helpful. Thank you.

Speaker 2

Yes. So I mean we expect to see net leverage reduce going forward With the proceeds from Bermuda settlement on claims as they Roll through the numbers and as we generate cash flow in the rest of the business, which as we talked about is performing well. So From that perspective, no concerns with Where we're at in terms of level of dividend payment, we've had a pretty consistent program now over a long period of time, Which has been through various cycles and we try to retain Fairly consistent approach, and there's nothing in our outlook that would cause us to change that philosophy.

Speaker 9

And is that stress tested for, again, another potential sort of negative reforecast The projects or again, how you're thinking about it? Like, I mean, I understand sort of the base case scenario, but yes, maybe an incremental thoughts on that.

Speaker 2

Yes, of course. I mean, whenever we talk about capital allocation or use of balance sheet For any purpose, we're always looking at a range of scenarios. We're always looking at The various ways things can play out, I mean, it's just it's obviously part of Prudent planning and decision making. So yes, you can assume that Any decisions we make around capital allocation are appropriately stress tested.

Speaker 9

Okay. And then maybe just to follow-up on sort of the non cash working capital dynamic. Again, like what is your visibility Maybe for the remainder of the year and in 2024 as sort of the legacy projects are coming to fruition, Maybe any help on that front would be great. Thanks.

Speaker 2

Yes. I mean, as Jean Louis talked about earlier, the timing on these It's harder to predict, but we do expect that any settlements reached will be positive To overall working capital, we should see some benefit from A recent settlement in our Q3 working capital position. We'll also have some seasonality in Q3 because it's our Highest revenue quarter that will offset that to some extent. But if we're able to reach additional Settlements through the balance of the year, then I expect some of the working capital build well, not just expect, but some of the working capital build we've seen in the first 6 months of this year will unwind. And then through 2024, the View is that working capital should be a contributor to overall cash flow.

Speaker 9

Okay. That's great. And then I think, I mean, almost as what we've just seen from the infrastructure related projects, but any updates on Your pipeline and sort of legacy cable assets, sort of negotiations, that would be helpful. Thank you.

Speaker 2

Can you repeat the question, Max? You're just breaking up there.

Speaker 9

Sorry, I apologize because I'm in a small discussion obviously around the infrastructure projects. But I was wondering if you can provide any comments, if you can, On the midstream project that you have and the legacy mining K plus S, if there's any updates on the timelines And negotiations with the clients there as well. Thanks.

Speaker 2

So I'll talk to K plus S and Jean Louis will take CGL. So in terms of K plus S, No real update. You'll see the language in the disclosure is the same as the prior quarter. We continue to Go through the legal process with various rounds of discovery and We still expect that to end up in court as a hearing in Late 2024 is our best estimate at this point in time. Other than that, no Nothing changed from previous quarters.

Speaker 3

Yes. Regarding CGL Maxim, What where are we at the moment? You probably remember, we have 2 spreads. We finalized the first one, spread 4. At Spread 3, we have an agreement with TGL, our client, regarding Cash support to finish this job, we are aiming to finish it around the end of September.

Speaker 3

All our I mean, our productivity on-site is doing quite well. We are now running to The last kilometer of this with our client, but also on the discussion and negotiation Ongoing around a certain number of topics. I imagine that if The arbitration is the way that is decided to settle our issues. Then the end of the story is probably going to be between end 2024 2025. But From the moment we reach mechanical completion around the end of September, we may also, if it is The common win of our client and ourselves find a settlement and this could come Much quicker, it means in the first half of twenty twenty four.

Speaker 3

At the moment, we are focused on Working as efficiently as we can and preserving our rights and capacity for the ongoing arbitration.

Speaker 9

Okay. Super helpful. Thank you very much, Emily. Thank

Operator

you. Our next question comes from Michael Tupholme from TD Securities. Michael, please go ahead.

Speaker 8

Thank you. Good morning. Similar to the figures you provided earlier, Dave, on the What the quarter would have looked like had you excluded the impact from the 4 legacy projects. Can you provide that information for Q222, just so we can get a comparison. I don't think we have the revenue impact from last year.

Speaker 8

Maybe you can also just clarify that what the EBITDA would have been?

Speaker 2

Yes. So Q2 last year in terms of EBITDA was reported at $38,500,000 That was after Adjustments on the 4 legacy projects or impact to the legacy projects of $28,200,000 So effectively Around $66,000,000 $67,000,000 of EBITDA. From a revenue perspective, I think the I'm going from memory here, but I think the impact to those projects was around $200,000,000 We can certainly follow-up on that and provide you the exact number, but it was somewhere in that ballpark.

Speaker 8

Okay. That's helpful. Thank you. And then with respect to the revenue contribution from the 4 Legacy fixed price JV projects, the $150,000,000 this quarter, that's a bit higher than the decline in backlog in those projects The decline in backlog quarter over quarter was closer to $100,000,000 I think this was sort of asked earlier and it doesn't sound like you expect The sort of additional revenues over and above what you currently have in backlog, but how do we Sort of understand that the discrepancy there in the Q2, was that all related to one of the projects or was it spread across several? Just trying to get a sense For what happened there in the quarter?

Speaker 2

Yes. It's primarily related to The civil project where, as Jean Louis said, there's lots of different parameters around these negotiations. And as we go through various discussions, there's various Items that the client takes off the table in terms of obligations as things the joint venture Agrees to do and that can be things like acceleration of work Or which means adding more people, more shifts over time. Lots of different factors can go into that, which can increase the cost. And therefore, that's what you see With respect to that civil sector project and the margin adjustment in the quarter.

Speaker 2

So that generate That effectively goes through that backlog number.

Speaker 8

Okay. Got it. And then just lastly for me, the with the Bermuda sale expected to close in a few weeks, I know You've disclosed and then reiterated the sale price, and I think in Canadian dollar It works out to around $170,000,000 Is that a net number that is that how we should think about the net number? Or is there Are there some costs that we need to think about such that the net proceeds would be something lower than that?

Speaker 2

Yes. There's nothing in terms of adjustments for debt or cash or anything like that, Just normal transaction type fees primarily. But yes, no Not like ATE where we transferred all our equipment leases and equipment financing as part of the sale and that impact The proceeds is there's nothing of that nature with Peruvian.

Speaker 8

Okay. All right. Okay. Thank you.

Operator

Thank you. Our final question comes from Sabahat Khan from RBC Capital Markets. Sabahat, please go ahead.

Speaker 11

Great. Thanks and good morning. I guess when just thinking about those 4 projects, you did talk about the midstream one where you're still in discussions. I guess that seems to be the one based on your kind of commentary where Maybe there hasn't been a settlement or detailed discussions. Is that the one where we should think if there is any further unknown risk gets on that project?

Speaker 11

Or is there any And even when you risk rank those 4 projects, how you think about where there might be more risk versus less?

Speaker 2

I mean, I think the positions are set. I mean, I don't think Jean Louis was suggesting there aren't ongoing discussions with Yes. A client on that project there are, I think there's a pretty good working relationship with The client around the focus on completing the project and all the elements that feed into Closing this out successfully. I think we're 100% aligned on that. And as part of that, We talk about commercial issues too.

Speaker 2

And as Jean Louis said, this is an arbitration process right now, But it may not end up being resolved through arbitration. It may end up being resolved through discussions and negotiations. So We're as active on that project as we are on any of the others in terms of Risk ranking them, again, if you step back and say, Yes. What do we what do these positions represent at the end of Q2? They represent a best view Every one of these projects, so they're not risk ranked.

Speaker 2

Each one of them has a position that we feel is the right Position as a joint venture and as Aegon as part of that joint venture feel that is going to be the final position.

Speaker 11

Okay, great. And then it seems like in the quarter there were some PP and E sold in Q2. As you look ahead, are there any other sort of excess assets that might be disposed of in future quarters or anything that might be up for sale or should keep an eye on?

Speaker 2

No. I mean, in terms of those gains on a couple of properties, I mean, that was just a coincidence that They were both in Q2. 1 is in our industrial sector, really a consequence of kind of the pre pandemic So post pandemic world where we decided in the industrial group we needed less office space. We had an office in Bramford, Ontario, an office in Cambridge, Ontario. We consolidated those 2 into one location.

Speaker 2

And that freed up a property that we own to be sold. And the other property It's an equipment facility. We historically have been long term leases of that facility. Our landlord was selling the property in 2019. We had a right of first refusal.

Speaker 2

We purchased the property in 2019 to be able to Effectively secure the long term home for that equipment division. And then this year, as part of the sale of ATE, which has The large amount of equipment going with that sale, we decided we may not be Long term in that facility anymore. It may be too big for us long term. And so we took the opportunity to sell the property. We will lease for a period of time while we evaluate our options.

Speaker 2

But no, I mean, Typically, we're not owners of real estate. We don't aim to tie up capital in owned Buildings and properties, really the only real estate we tend to own is aggregates and things like that. So they were both sales that just made sense based on where we are with Those 2 businesses.

Speaker 11

Okay. And then just one last one. You mentioned the Rest of the business excluding these 4 larger projects and the margin indicated it's sort of in the 9%, 9.5% range. That's obviously quite high relative to the run rate margins over the last little while. I guess what's the implication there that these Four projects maybe have been a bit of a drag and when they end the margins for the overall business are a lot higher or is it just like the rest of the base businesses and seeing Maybe lots of that you might have seen in the past.

Speaker 11

Just trying to get context around that 9 plus percent number.

Speaker 2

Yes. No, I mean, Yes. I think you can assume that the 4 legacy projects have been dragging. I mean, even Obviously, this quarter, we've got some larger adjustments. But even in quarters where we haven't had adjustments, they still tended to be Your 0 margin type projects on revenue, so they drag down the overall margin On an ongoing or have been for a period of time now.

Speaker 2

As we look at the rest of the business, It's there's nothing in there, as I talked about earlier, that is really concerning us from Margin or a risk profile perspective. So without those 4 legacy projects, we do expect margins to be, Going forward, more representative of where the base business is today.

Speaker 3

Maybe I can add some more general thoughts about it. I mean, I Obviously, we do understand the concern about the legacy project. And you can imagine that the management team level of Aecon, The focus we have on finalizing those negotiations, those compensation on the job, but I'm inviting you to have a look Not only to what could have been this quarter, Q2 2023, without the legacy projects, we have discussed Among two, three questions, I mean, a few minutes ago about it, I mean, the €98,000,000 equivalent EBITDA and to compare it with Q2 Not only to look at this quarter, but look at everything we have been implementing during the last 2 to 3 years To realize that we are steadily delivering on everything we say we would do To position Aecon for the future on a much more favorable landscape in terms of Contract model in terms of derisking of client, derisking of modes of payment, Fixed price and variable price in terms of recurring revenue. In terms of markets, I think we have done quite a lot of efforts with our tuck in acquisition, and we will go on with this Regarding also our strength in our team in front of the energy transition, in front of the wave of All of these sustainable projects, it means that when you have a look at the backlog we have and all these efforts, which is why I say, I mean, it's Quite interesting to try to imagine what will be Aecon in the years to come.

Speaker 11

Great. Thanks very much for the color.

Operator

Thank you. That is now the end of the Q and A session. I will now hand back over to Adam Bogassi for closing remarks.

Speaker 1

Thank you, Lauren, and appreciate everyone for your time today. Feel free to follow-up as always with any questions and have a great rest of your day.

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