Aecon Group Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2024

There are 12 speakers on the call.

Operator

Please be advised that today's conference is being recorded. I would now like to hand this over to our first speaker today, Adam Borgatti.

Operator

Adam, please go ahead.

Speaker 1

Thank you, Mark. Good morning, everyone, and thanks for participating in our Q1 results conference call. With me today are Jean Louis Servanc, President and CEO Jerome Jullier, Executive Vice President and CFO and Alistair McCallum, Senior Vice President, Finance. 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 the call. Following our comments, we'll be glad to take questions from analysts and we ask that analysts keep to one question and a follow-up before getting back into the queue to ensure others have a chance to contribute.

Speaker 1

As noted on Slide 2 of the presentation, listeners are reminded that 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. Although Aecon believes the expectations reflected in these statements are reasonable, we can give no assurance that these expectations will prove to be correct. Now before I turn over the call, I'm pleased to welcome Jerome Julien as Aecon's Executive Vice President and Chief Financial Officer effective April 8, 2024. With nearly 20 years of finance, strategy and capital markets experience, particularly in construction, engineering and utility services, Jerome has been a trusted advisor to us and many of our clients and partners.

Speaker 1

Notably, he played key advisory roles in some of Aecon's most transformative transactions, including the divestiture of Aecon Transportation East and the strategic investment by Oaktree Capital Management in Aecon Utilities last year. With that, I'll hand the call over to Jirov.

Speaker 2

Thanks, Adam, and good morning, everyone. I'm excited to have joined Aecon. This is day 14 for me and I've already found the passion, dedication and innovative spirit that defines this business. A huge thank you to the team for their warm welcome and strong support during my onboarding. It's been critical for me that I'm eager to collaborate with the leadership team and the balance of the business to develop and execute our strategies that are going to optimize our financial performance and create value for shareholders.

Speaker 2

With that, I'll now touch briefly on Aecon's consolidated results, review results by segments and then address Aecon's financial position before turning the call over to Zhongli. Turning to Slide 4. Revenue for the 3 months ended March 31, 2024, of $847,000,000 was $261,000,000 or 24% lower compared to the same period in 2023. A table has been included on Slide 16 of the conference call presentation to help contextualize our Q1 revenue performance. Adjusted EBITDA of $33,000,000 a margin of 3.9 percent compared to $25,000,000 or a margin of 2.2% last year and operating loss of $4,000,000 in the quarter compared to an operating profit of $6,000,000 last year.

Speaker 2

Lower operating profit was attributed primarily to gain on sale of property, plant and equipment of $11,000,000 recognized in the same period of 2023. Diluted loss per share in the quarter of $0.10 compared to dilutive loss per share of $0.15 in the same period last year. Reported backlog of $6,300,000,000 at the end of our quarter compared to backlog of $6,000,000,000 at the end of the Q1 in 2023. New contract awards of $963,000,000 were booked in the quarter compared to $812,000,000 in the prior period. I'll now look at the results by segment.

Speaker 2

Turning to Slide 5. Construction revenue of $844,000,000 in the first quarter was $247,000,000 or 23 percent lower than the same period last year. Revenue was lower in industrial operations, primarily due to decreased activity on mainline pipeline work following the achievement of substantial completion on a project in the Q3 of 2023 and Urban Transportation Solutions from a lower volume of light rail transit work, civil operations from a lower volume road building construction work as a result of the sale of Aecon Transportation East in the Q2 of 2023 and utilities operations from a decreased volume telecommunications and oil gas distribution work, partially offset by an increased volume of high voltage electrical transmission and battery storage system work. Partially offsetting these decreases was higher revenue in our nuclear operations, driven by more volume of refurbishment work at nuclear generating stations in Ontario and the United States. New contract awards of $960,000,000 in the Q1 of 2024 compared to $795,000,000 in the same period last year.

Speaker 2

Backlog at the end of the Q1 was $6,200,000,000 compared to $5,900,000,000 at the end of the Q1 of 2023. Turning now to Slide 6. Adjusted EBITDA of $28,000,000 a margin of 3.3% compared to $22,000,000 a margin of 2% last year. Adjusted EBITDA increased by 6,000,000 dollars due to higher volume in gross profit margin in Nuclear Operations and higher gross profit margin in Urban Transportation Solutions and Utilities. These increases were offset by a decrease in gross profit and industrial operations.

Speaker 2

Higher operating profit in Civil Operations was primarily due to a lower seasonal operating loss, contribution from our road building, construction work following the sale of Aecon Transportation East in the Q2 of last year and partially offset by lower gross profit margin from major projects in Western Canada. Now over to Slide 7. Concessions revenue for the Q1 was $3,000,000 compared to $17,000,000 in the same period last year. Decrease in revenue was largely driven by the sale of 49.9 percent adjusted Skyport to Bermuda International Airport concessionaire and use of equity method of accounting on a prospective basis for Aecon's retained 50.1% interest in Skyport. Adjusted EBITDA in the Concessions Assessment segment $18,000,000 compared to $50,000,000 last year, primarily due to improved results from the Bermuda airport and an increase in management and development fees.

Speaker 2

Passenger traffic for Bermuda continues to improve, with an average of 81% in the Q1 of 2024 versus the pre pandemic level in the Q1 of 2019 and compared to an average traffic in the Q1 of 2023 of 72% of the

Speaker 3

pre pandemic level. Turning now to

Speaker 2

Slide 8. At the end of the first quarter, Aecon held cash and cash equivalents of $123,000,000 excluding cash and joint operations. In addition, at March 31, 2024, Aecon had committed revolving credit facilities of $850,000,000 of which $76,000,000 was drawn and $7,000,000 was utilized for letters of credit. Aecon has no debt or working capital credit facility maturities until 2027 except equipment loans and leases in the normal terms. At this point, I'll turn the call over to Jean Louis.

Speaker 4

Thank you, Jerome. I speak first to the 4 legacy projects before addressing our business performance and outlook. Aecon and its joint venture partners remain focused on driving those legacy projects to completion, while pursuing fair and honorable settlement agreements in each case. The most recent interim settlement reached between the relevant joint ventures and the respective clients on each of the 4 projects and the cumulative adjustments made to forecast to date reflect the progress we are making toward completion. Every day we are getting closer to the end.

Speaker 4

However, we acknowledge that despite the progress made today, risk remains if assumptions, estimates or circumstances change. At March 31, 2024, the remaining backlog to be worked off on this project was €330,000,000 compared to backlog of €420,000,000 at December 31, 2023 €801,000,000 at March 31, 2023. The 4 legacy projects comprised 9% of consolidated revenue in the Q1 of 2024 and 5% of backlog at March 31, 2024 compared to 16% of consolidated revenue in the full year 2023 and 7% of backlog at December 31, 2023. Turning to Slide 10, Aecon's goal is to build a resilient company through a balanced and diversified work portfolio, while enhancing critical execution capabilities and project selection to play to our strengths. We continue to leverage our self perform capabilities and one Acorn approach to maximize value for clients through improved cost certainty and schedule, while offering a broad range of services from development, engineering, investment and construction to longer term operations and maintenance to cover the full infrastructure value chain.

Speaker 4

While we pursue and deliver the majority of our work in established markets, we are embracing new opportunities to grow in areas linked to decarbonization and energy transition and in U. S. And international markets. These opportunities are intended over the long term to diversify Aecon's geographic presence, provide further growth opportunities and deliver more consistent earnings through economic cycles. Turning now to Slide 11.

Speaker 4

Demand for Aegon Services across Canada continues to be strong With backlog of €6,300,000,000 at March 31, 2024, recurring revenue programs continuing to see robust demand and a strong bid pipeline. Aecon believes its position to achieve further revenue growth over the next few years and is focused on achieving improved profitability and margin predictability. We are pursuing a balanced portfolio of work delivered through both fixed and non fixed price contracting models with the goal of reducing fixed price work to balance risk with acceptable return. Trailing 12 months recurring revenue of €1,100,000,000 was up 30% versus the prior year period and 54% versus 2 years ago. Contributions from the GO Expansion on Corridor Works and Scarborough Subway Extension projects during the respective development phases were the primary drivers of this growth.

Speaker 4

Turning to Slide 12. Development phase work is underway in 5 consortiums in which Aecon is a participant to deliver the GO Expansion on Corridor Works project, the Scarborough Subway Extension Stations, rail and system projects, the Darlington New Nuclear project, the Contrekar Terminal Expansion in Water Works project and most recently the U. S. Virgin Islands Airport Redevelopment Project, which is under a collaborative design, build, finance, operate and maintain model. These projects are being delivered using progressive design build models and each project is expected to move into the construction phase in 2025.

Speaker 4

The Goh Expansion project also includes an operations and maintenance component over a 23 year term commencing January 1, 2025. None of the anticipated work from those 5 progressive design build projects is yet reflected in backlog. Turning to Slide 13. This week, Aecon released its 5th sustainability report, Advancing the Energy Transition, showcasing our unwavering commitment to sustainability in our projects and the innovative methods we use. This report highlights Aecon's initiatives to embed sustainable innovations and work towards net zero construction throughout its operation.

Speaker 4

Aecon is pleased to report continued progress towards its target to achieve a 30% reduction in direct CO2 emissions by 2,030 with a reduction of 20% to date in Scope 1 and 2 emissions since 2020 based on revenue intensity. Sustainability is part of our DNA at Aecon and a key consideration in every decision we make as we continue to focus on building what matters to enable future generations to thrive and transition to a net zero economy. Turning now to Slide 14, with strong demand, growing recurring revenue programs and diverse backlog in hand, Aegon 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. In the Concession segment, there are a number of opportunities to add to the existing portfolio of Canadian and international concessions in the next 12 months to 24 months, including projects with private sector clients that support a collective focus on sustainability and the transition to a net 0 economy as well as private sector development expertise and investment to support aging infrastructure, mobility, connectivity and population growth. Our revenue in 2024 will be impacted by the 3 strategic transactions completed in 2023, the substantial completion of several large projects in 2023 and the 5 major projects currently in the development phase by consortiums in which Aecon is a participant being delivered using the progressive design build models, which are expected to move into the construction phase in 2025.

Speaker 4

The completion and satisfactory resolution of claims on the 4 legacy projects with the respective clients remains a critical focus for the company and its partners. While the remainder of the business continued to perform as expected, supported by the strong level of backlog and the strong demand environment for Aecon Services, including recurring revenue programs. Thank you. We will now turn the call over to analysts for questions.

Operator

Thank you. At this time, we will conduct the question and answer session. And now our first question will come from Yuri Lynk of Canaccord Genuity. Please go ahead, Yuri.

Speaker 5

Good morning, gentlemen.

Speaker 4

Thanks.

Speaker 6

Nice clean quarter. And I'd love to not lead off on an LSTK question, but I have to. When I look at your DSOs and your WIP days, materially higher year on year despite the lower revenue. In fact, I don't think I've seen your WIP this high. So you're not billing.

Speaker 6

And I'm just wondering what's behind the rise in WIP and DSOs in the quarter?

Speaker 3

So Yuri, it's Alistair. So as you see, we have a negative working capital in Q1. It's very similar to what we had in Q1 2023. I think part of that was we had a very strong Q4 in terms of bringing in our AR and collections. And so I think that had a negative impact on where we're sitting at the end of Q1.

Speaker 3

But I mean overall, like our liquidity is at $890,000,000 This time last year, we were at $372,000,000 So we're in a much stronger place than we were last year. And certainly, unbilled is always a critical focus for us and it's something that we continue to work on every day.

Speaker 6

Okay. Second one for me. Just on the backlog, like you've got a bunch of these progressive design builds. I personally haven't been through a cycle with these type of contracts. So just what should we expect backlog?

Speaker 6

How does it evolve over the next couple of years here as these projects move into the construction phase, specifically the on corridor works project. I think the 2 year development phase ends in Q3. So does that go into backlog and does the whole thing go in at once or is backlog kind of phased in over time?

Speaker 4

Yes. I'm going to take this one, Yuri. So we have now 5 projects under progressive design build mode. We are very happy about it. I mean, we have been working on it for the last 3 years to modify the contractual mode that was prevalent, I mean, in the industry.

Speaker 4

Encore, Scarborough, Darlington SMR, Antroquette and now U. S. Virgin Islands. So there are different, I mean, first one are with Metrolink. The third one, I mean, we are in charge of all construction services.

Speaker 4

It's an alliance between OPG, GI Dachi, Acin Realix for the engineering and ourselves. The 4th one is a joint venture with POMELO, I mean, in Contrekar for the In Water Works. And the 5th one, I mean, you heard about it a few weeks ago is the refurbishment, rehabilitation and a design build progressive finance operator maintenance, which is a very innovative model and we are quite happy. I mean, we have been working on it during the last 1 year with the client to set this model. So what can we expect in terms of backlog?

Speaker 4

So some of all the project is something, let's say, I mean, around sales. It may be even more. I mean, it will depend on the development phase. If we come back to the first one, which is the Encore, our development phase will go up to the end of the year 2024. At this moment, we will most probably have set up with the client the target price and the condition of execution of the 2 first bundle of the works.

Speaker 4

So you we could expect in terms of backlog for those 2 first vendor around 2,000,000,000. Those works will happen during a period of 3 to 4 years more or less. You probably remember, you have noted that in parallel, we have entered into a preparation phase for the operation during 23 years from the 1st January 2025. We are very well advanced. So we are at the moment, we are quite happy with the development and the quality of the collaboration with Metrolinx on this very big and very important project.

Speaker 6

That's helpful, Jean Louis. So it sounds like you book these in stages. And am I right in assuming that you're taking some fixed price risk on these smaller phases and then you renegotiate on each phase as it progresses and thereby reducing the risks, you're not on the hook for the entire scope of the project at once?

Speaker 4

Two questions here. The first one about the phasing. So Go Train and Encore is a huge program of electrification. It just means that we have decided to go for bundles rather than for the totality and to fix everything now for the totality of a program that may last more than 8 years in terms of construction. Scarborough, for example, will not have any bundle.

Speaker 4

It will be the full project. The SMR will not have neither any bundle. I mean from the moment before the end of the year that we will get in the contraction phase and no bundle of the job. Controcur, same thing. U.

Speaker 4

S. Virgin Island, there may be a phasing because those are 2 airports. There may be a phasing, but we most probably will not do any better. So the bundling effect is for the moment only on Encore because of the complexity and because of the time. 2nd question, how do you unlock a development phase?

Speaker 4

We have a few I mean, there are a few ways of unlocking it at the end on Encore. In addition to the fact that we bundle and we both decided, I mean, with and our consortium to bundle it, I mean, it's not going to be a lump sum, it's going to be a target price with a gain share, paying share. And we will finalize the negotiation on this target price and the gain share paying share before the end of the year. Some of them, for example, at the moment, Contractor is on a scheme where at the end of the development phase, you go into a lump sum price. But you probably know that the in water works of Contractor in terms of scope and magnitude have nothing to do with Onco.

Speaker 4

So it depends on the project and we stay firm on our strategy to be extremely cautious on any lump sum price superior to EUR 1,000,000.

Speaker 6

Dollars Okay. That's very helpful. I'll turn it over guys. Thanks.

Operator

Thank you for the question. Please stand by one moment while we bring up our next question. And our next question will come from Jason Bau with CIBC. Go ahead, Jacob.

Speaker 2

Good morning.

Speaker 4

I had a question just

Speaker 7

on revenue growth. And I know you're saying recurring revenue is up year on year for the quarter. But when we take a look on a consolidated basis, it's down 24%. And I know the divestment of ATE and CGL was a big contributor last year. But when do you expect to see that consolidated revenue returning to top line growth?

Speaker 7

Also looking at your backlog here and the potential additions with these 5 development projects, I mean, that's I'm assuming primarily a kind of a 2025 sort of thing,

Speaker 3

but Yes.

Speaker 2

Hey, Jacob, it's Jerome here. So you're right. Current quarter, if you look on a like for like basis, effectively flat to last year, a little bit down. Positive book to bill in the quarter. 2024, we've been consistent saying is there's no expectation for big growth here.

Speaker 2

It's really a repositioning here. And so I think the way to think about it would be relatively flattish or low growth in 2024 and then 2025 as John Lee just mentioned, as these projects kind of move into execution, we'd expect to see a reengagement on the growth front.

Speaker 7

So kind of backs into my follow-up question here. But so how are you planning for this growth in 2025? Are there going to be any labor availability issues? Or how should we be thinking about that?

Speaker 1

Well, I think, Jacob, the way we look at it is you have a lot of these projects that we've been working on in this progressive phase. So take the 2 transit projects like the GO program in Ontario and the Scarborough. You've got a lot of availability of people coming off the former projects, for example, Eglinton and Finch. We're able to kind of effectively transition lots of the labor and project management resources among them. Similar with our international work coming off of Bermuda and elsewhere, we've been able to build a presence in the Caribbean to adequately staff these projects.

Speaker 1

So we think we've got the right amount of people kind of moving to the next phase of projects. And as I said, as Jerome said, it's a little bit of a transition timing between 2023 and 2024. Another big contributor to revenue last year would have been the Site C project where we've got lots of those people coming off moving to John Hart Hydro in BC. So I think we're adequately staffed. It's always top of mind for sure on the labor side, but we don't feel any real main pressure points that are giving us more concern than normal.

Speaker 1

Yes, maybe I jump in here at this moment.

Speaker 4

I mean, we have finalized our strategic plan 2024, 2027. The focus is on profitability and margin predictability. Over hyper growth, I mean, of revenue, as I've been saying during the last quarter, we were extremely disciplined in terms of pursuits and in terms of bidding. And we are very happy to see that those efforts are just beginning to bear fruit. So we but the revenue stabilization in 2024 is pure math and there's nothing special about it.

Speaker 4

And we have a lot, I mean, in our backpack, as you have noticed, that will drive growth, profitable growth in the year to come.

Speaker 1

Thank you.

Operator

Thank you. One moment for our next question. And our next question will come from Frederic Bastien with Raymond James. Go ahead, Frederic.

Speaker 8

Good morning and welcome, Julien. There are a couple of items below the EBITDA line that I'd like you guys to shed some light on if possible. The first one relates to construction amortization, which rose year over year despite the sale of ATE and the lower volumes. So that's the first one. I'm wondering if you could provide a bit more color there.

Speaker 8

And then second one relates to the interest expense. Overall, it was lower. You did include the accrued interest from Oaktree's preferred shares, but there was also a fair value gain reported. So if you could provide a bit color there, that would also be appreciated. Thank you.

Speaker 3

Hey, Frederic, it's Alistair. So the first one I'll answer the second one first on the preferred share. So every quarter, we fair value the preferred share. And basically, there's about 4 or 5 different factors such as volatility, credit risk, risk free rates. And so when we do that this quarter, there was a $4,900,000 gain on the preferred share.

Speaker 3

So that's really the answer to the first question. Part of that went to 4.3 went to the P and L and the remainder went to OCI. On your first question around depreciation, so I think when you look at concessions, you'll see depreciation went down because of the equity accounting through the sale of 49.9% of Bermuda. And then on the construction side, yes, we had the positive impact from the sale of ATE and then we had additional amortization and depreciation on the rest of the construction business, which offset that. So those are that's the reason.

Speaker 2

And Fred, it's Jerome here. Maybe I'll just put an extra layer of context on the preferred shares. We really accounting side, we really do just think about them on the basis of their terms, right? So 27.5% of the equity value of utilities business or effectively the 12% PIC accrual. The rest of it, I just do as accounting.

Speaker 8

Okay. I'm still not clear on the construction or amortization because I would have expected it would have gone lower, would come in lower, but it actually crept up year over year despite the sale of ATE and also you had recorded lots lower volumes. So I don't know if it's impacted amortization should be impacted by volumes. But anyway, something that I found was interesting. But we can take that offline.

Speaker 8

I appreciate that. I recognize I asked 2 questions, so I'll just pass it over. Thank you.

Speaker 1

Great.

Operator

Thank you. Thank you for your question. Please standby for our next question. And our next question comes from Jonathan Lamars with Laurentian Bank. Please go ahead, Jonathan.

Speaker 9

Good morning. Thank you. Just another question on revenue. So Slide 16 in the package showing that pro form a revenue was down 1% year over year. That's very helpful.

Speaker 9

Yet demand is clearly very strong with new awards up 21% year over year. So my question is, as more of the overall business shifts to progressive design build contracting models that have longer development phases, Would you say it's taking longer for new project awards to translate into revenue?

Speaker 4

Okay. One of the key element of our strategy is balancing our activity. I mean, we are balanced within sectors. We could for example, between sectors, we could push nuclear and utilities. But we what we have decided that our 5 sectors have to be balanced.

Speaker 4

Same thing for contractual mode. I mean, we can do MSA, we can do unit price, we can do target price, we can do lump sum. I mean, there's not such a world where we can say every lump sum is bad and we will only go for a progressive or time and material. I mean, I gave, I mean, an example, for example, kicking off. It was a job under a lump sum, very complex job that we won in front of the 2 best company in North America and in Europe.

Speaker 4

It was a lump sum job. We were perfectly on time, perfectly on budget and our side is extremely happy. I mean, tomorrow morning, 10 we are our TBM machine on Edlington West is getting out of the first tunnel perfectly on time, perfectly on budget. With that, it was an lump sum job. So we don't say we don't want to do any more lump sum job, but we are extremely cautious and from some, I would say some kind of work in terms of size and in terms of complexity.

Speaker 4

For example, when there is system integration, we don't go anymore for lump sum and we go for progressive design wins. On those ones, there is a development phase, but you don't have to forget either that the progressive design build scheme is just a 5 months preparation pre bid period when before it was between 1 year and maybe 15 months. So all in all, yes, there may be a little push down the line, but it's a real difference in terms of margin predictability.

Speaker 9

Yes. Okay. Thank you. And on the legacy project backlog that's remaining, the $330,000,000 can you provide a sense of how much of that relates to Gordie Howe Bridge and maybe the cadence of how you see that being worked off over the next 2 years?

Speaker 4

So on the 330,000,000 the majority now is on Goli Hao. It means around twothree of the backlog is on Gordie Howe. Gordie Howe is forecasting to be substantially completed in September 2025. In terms of execution, it goes quite well. Just to give you an example, this bridge, which is the longest span in North America, 8 51 Meters, Across the river from north to south, 53 segments or 15 meters each, remaining 3 segments.

Speaker 4

Then we have support the form of entry, I mean, Canadian side and American side, the interchange I-seventy five, I mean, on the Michigan side. Everything is on time. So I would say I'm rather happy with the execution of this project. What else? I mean, CGL, from our perspective, the project is now substantially complete.

Speaker 4

Our team is focused on preparing for the upcoming arbitration, which you have noted. It starts imminently, I mean, Q3 2024. Given the proximity to the start of the arbitration, we just prefer to let the arbitration process play out rather than commenting, I mean, any further. The 2 other ones are Eglington and Finch, I mean, LRT job in Toronto, construction is complete. We are now testing and commissioning and most.

Speaker 4

I would say the issue remaining are the interfaces with Metrolinx and TTC with the operator. I just remind you that we are the maintener, but we are not the operator. And we are just under testing and commissioning with those 2 jobs, pushing toward what we call revenue service demonstration that should happen before the end of the year 2024.

Speaker 9

Thank you. That's very helpful. I have one other question on sustainability, if I can. I noticed that you'd highlighted in the slides the benefits to carbon reduction from the sustainability projects you're undertaking. With 75% of the backlog now tied to sustainability projects, will the benefits from those show up in the reduction to emissions that you report, including the 20% reduction year to date at some point?

Speaker 1

Yes, for sure. We're on a pretty good path to achieve our targets and feel very confident in our ability to do so. A lot of that is being done through renewable and more sustainable fuels, electrifying our fleet, adding more electrification and alternative generation type assets on our project sites. So certainly on the path, we're very proud of the fact that we're working with some of the largest providers of equipment and fleet in the world on testing their newest equipment in Canada being among the first to procure them and trying to get as much as we can. And that includes even our staff and fleet vehicles here trying to electrify those.

Speaker 1

So well in the path to achieve our goals and hopefully sooner than anticipated.

Speaker 9

Okay. Thanks for your comments.

Speaker 3

Thanks.

Operator

Thank you for the question. Please stand by for our next question. Our next question will come from Michael at TD Securities. Go ahead, Michael.

Speaker 10

Thank you. Good morning. My question is related to the Aecon Utilities business. I know earlier in the call you talked about this being a transition year and the focus is really around margin improvement and earnings predictability. But just as it relates to the revenues, it looks like the utilities business, where I think has been described as a fairly important growth area, it looks like you were flattish year over year on a revenue basis.

Speaker 10

Wondering if you can just kind of talk a little bit about what you're seeing to start the year in that business and how we should also think about the year unfolding as it relates to acon utilities and the revenues?

Speaker 2

Hi, Mike, it's Jerome. Good question. So Q1 is the seasonally least significant quarter for the utilities business, given the amount of outdoor work that they tend to perform in the Canadian market. And the story there is just simply a little bit slower work programs on the telecom and oil and gas distribution side of the business, partially offset by more high voltage transmission distribution work and as well, doing some work on kind of large battery storage projects. So we're not concerned with the year over year performance or quarter kind of quarter to quarter performance on this one.

Speaker 2

We're still very pleased with the overall development of the business and we're still expecting growth kind of coming through the back end of the year, right? Like this is a business where Q2, Q3, Q4 are where they really demonstrate their metal. And so I think our expectations continue to be aligned with that. Okay.

Speaker 10

That's helpful. Thanks for that. Maybe just a follow on related but different part of the growth strategy. Can you talk a little bit about what's happening with respect to the inorganic opportunities to grow that business?

Speaker 1

Yes. So Mike, it's Adam here. We've got quite a good pipeline ahead of us working through that with our partner in Oaktree focused on U. S, Canada areas that we think we can still plug in geographically and also in new territories where we're trying to establish initial presence with certain small, midsize businesses. We've talked before in that $50,000,000 to $150,000,000 range.

Speaker 1

We're not trying to get this thing too outsized right out of the gate, but really use these as platforms to grow and what we describe as land and expand our strategy. That's often in companies that have 1 or 2 verticals among the 4 that we opportunities across our business into those businesses and really help them grow. So I think we've got a good, as I said, pipeline ahead. We expect this to be a year of lots of activity and so stay tuned.

Speaker 10

Okay, perfect. And then maybe just one more quick one here to follow-up on, I think it was the earlier question you had about working capital investment in the Q1. Can you talk about how you'd expect that to evolve over coming quarters and maybe where you think you'll land on a full year basis in terms of changes in non cash working capital?

Speaker 3

Yes. So it's Alistair, Mike. As we talked about working capital is weakest in Q1 and Q2 and then improves in Q3. And Q4 is really our strong quarter for working capital. So I think overall, we're as I said, Q4 was very strong, Q4 of 2023.

Speaker 3

So that's had an impact on Q1. But expect to be flat kind of on the year. And then obviously, it's subject to some of the settlements and arbitration discussions and results that come from the legacy projects

Speaker 10

as well. All right. Thanks for the detail.

Operator

Thank you for that question. Please stand by for our next question. Our next question will come from Ian with Stifel. Go ahead, Ian.

Speaker 11

Good morning, everyone. This one's directed at Jerome. I mean, the messaging from Aecon as a whole has been pretty consistent around derisking the backlog, EBITDA margin improvement over the last, call it, year to 2 years. I know it's early days for you, but is there anything else at the margin or anything else you'd like to see rounded out for targets you'd like to hit or metrics you intend to focus on that may be a bit different?

Speaker 2

Yes. It's a good question. As I mentioned, it's 14th business day here. Look, it's maybe I'll take a step back and just comment on what my initial observations coming into it. I think what I'll say in is the strength and performance and sophistication of the team, I witnessed it over I am working as an advisor with them in 2023.

Speaker 2

And then kind of coming in and kind of seeing behind the curtain, it's actually exceeded my expectations even more, right? So this is a business where both, I'd say, the corporate group, but also certainly the operating teams and the men and women who are executing the work do extraordinary jobs to kind of make sure that they're very focused on kind of executing the projects and as you cash flow. So at the moment, like I'd love to say that there'd be a magical item out there that was kind of really weekly done that I can just kind of swoop in and claim as my own. But I think this is largely going to be blocking and tackling and then just moving forward thoughtfully, managing capital, managing returns and then allocating that capital in a kind of judicious manner. We do have the benefit of, as we think about things on a go forward basis, Alistair mentioned, we've got lots of liquidity.

Speaker 2

And then also, we've got a very strong partner in OpenView of the Utilities business with its own balance sheet to kind of pursue a slightly differentiated growth approach for that area of the business. So I think like in early days, no concerns or issues and it's really kind of probably pleasantly surprised across the board.

Speaker 11

Okay. Well, I'm going to save that question and re ask it in a year's time. But maybe switching to my second question, there's been a significant amount of announcements regarding EV plants and related activity in that area, specifically in Ontario. Can you maybe talk about your competitive position in that market or how you're thinking pursuing it just given it seems to be going it's likely going to be a high growth area for the next call it decade?

Speaker 4

Yes, I can. Evidently, energy transition, I mean, is a game changer for Aecon, and we are focused on it. We are at the moment in the bidding phase, I mean, of the Umicore plant near Toronto. And then and we are discussing with the client. I mean, there is competition, but we are keen with this job.

Speaker 4

The rest will come. I mean, there are other plants coming. We just won't put a foot on it. I mean, it has been the same strategy for battery storage with Omeida, which is quite an important one and the first one of its kind. And we are truly happy with the way this job is being executed.

Speaker 4

We are next phases with ISO or in the United States or for the next stages with ISO or in the United States or in other provinces of Canada.

Speaker 11

Okay. Thanks very much. I'll turn it back over.

Operator

Thank you for that question. I believe that is our last question for today. We will go ahead and turn this back over to Adam Borgatti for closing remarks. Sorry, we just had one more question come up. Please hang on one moment.

Speaker 1

Okay, the lightning round.

Operator

That's right. So our final question will come from Bennett Poirier. Please go ahead.

Speaker 5

Hey, good morning, gentlemen, and congrats for the solid start. Could you maybe provide more colors? You've been able to book 2 Air Port wins in the quarter. What should we expect in terms of potential contribution going forward in terms of revenue? And maybe timing also probably more of a 20, 25 story, I would believe?

Speaker 1

Yes. Thanks, Benoit, you quoted the 2 airports booked in the quarter. 1 is a smaller construction focused project, so there's no concessions related to the Anguilla Airport. But again, it does sort of solidify our presence and demonstrate the commitment to that area and the geography and the type of work that we do starting to bear more fruit in different types of projects and hopefully more to come there. As it relates to the bigger one that we've discussed, which is U.

Speaker 1

S. Virgin Islands development and rehabilitation of 2 airports there, it's still in the progressive phase. So tricky to talk about revenue contributions and Orkinis at this point. But safer to say that it will be booked into probably the first half of twenty twenty five. And again, it will follow a similar pattern that we've used in the past, which is taking over the operations of the existing airports, while we use that to partially fund construction, take on leverage and ring fence to capital structures associated with those from what we know now.

Speaker 1

But again, the benefit of the progressive sort of approach to these is you've got some time now to really work with the clients to determine best scheduling, what the optimal construction program looks like, any additions or areas that they'd like to tweak in the initial areas. So I think more to come on those, but we do expect more revenue contribution from those as you said in 2025 versus 2024 as they start to scale up a bit.

Speaker 5

Okay. And with respect to the recent REM delay that we've seen, are there any implication for you? Or is it something that you've seen coming?

Speaker 4

So Benoit, good morning. No special implications. I mean, for us, those works are going perfectly, I mean, as per the program. So yes, we have heard that there are some discussion about the phasing between REM and GPMM, which is a group on which we are not in charge of operation and maintenance and rolling stock. But as our contract is concerned, there is no change.

Speaker 5

Okay, perfect. Thanks for the time and congrats again.

Speaker 1

Thanks, Benoit.

Operator

Thank you for your question. At this time, we have no further questions, excuse me. And I'd like to turn it back over to Adam Borgatti for closing remarks.

Speaker 1

Great. Thanks, Mark, and thank you all for joining us today. As always, feel free to follow-up with the team here with any further questions that you have. Appreciate your interest and consideration and have a great rest of the day. We'll speak with you on the next quarter.

Operator

Thank you. This does end our conference for today. It concludes our program and you may now disconnect.

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Key Takeaways

  • Aecon reported Q1 revenue of $847 million, down 24% year-over-year, while adjusted EBITDA rose to $33 million (3.9% margin), although the company recorded a $4 million operating loss and diluted loss per share of $0.10.
  • Backlog increased to $6.3 billion at March 31 and new contract awards reached $963 million, driven by wins in nuclear refurbishments, high-voltage transmission and urban transit projects.
  • The Construction segment saw 23% lower revenue at $844 million but improved its adjusted EBITDA margin to 3.3% on stronger performance in nuclear and utilities, while Concessions revenue slid to $3 million post-Skyport stake sale as Bermuda airport traffic recovered to 81% of pre-pandemic levels.
  • Liquidity remains strong with $123 million cash, an $850 million committed credit facility (only $76 million drawn) and no material debt maturities until 2027, underpinning financial flexibility.
  • Strategic priorities include derisking four legacy projects (remaining backlog €330 million), moving five major progressive design-build projects into construction in 2025, and pursuing a 30% reduction in direct CO₂ emissions by 2030 (20% achieved to date).
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Earnings Conference Call
Aecon Group Q1 2024
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