Q3 2022 Aecon Group Inc Earnings Call
Due to additional cost which is a joint venture.
Is that the owners are contractually responsible.
Including among other things the unforeseeable side conditions.
Third party delays.
COVID-19.
Supply chain disruptions and inflation related to labor and materials.
Are you calling out what partners continue to work vigorously toward resolution of compensation, whose impact with respect to the owners of those projects.
And we are fully focused on pursuing all avenues for adequate and timely compensation.
With the objective to reach fair and.
And reasonable settlement agreements and to move forward towards project completion.
Each case.
As I noted on our last quarterly call. Our industry has been working hard to develop a model that appropriately addresses the challenges and needs of all stakeholders.
The multibillion dollar go expansion and electrification project in Ontario.
Awarded to an equal in joint venture and the Progressive design build operate and maintain contract model.
He said what do you call me evolution.
Designed to benefit all stakeholders.
And the first phase of the two year joined development phase is advancing quite well.
Turning to slide eight demand for Aegon services across Canada continues to be stronger.
Particularly smaller and medium sized projects.
Evidenced by year to date revenue growth of 19%.
And I, a new project award of 42%.
While volatile global and Canadian economy conditions, I infecting inflation.
Interest rates.
Overall supply chain efficiency.
These factors have largely been and will continue to be reflected.
And the pricing on commercial terms of equal on the recent and prospective project Award.
And bid.
Okay.
Turning to slide nine.
We have a backlog of $6 3 billion and recurring revenue programs continuing to see robust demand driven by the utility sector and ongoing recovery in Apple traffic in Bermuda.
Acorn is confident in strong revenue growth over the next few years.
The fixed price share of backlog at September 30th 2022, well.
58% versus 68%.
Fixed price share at the same time last year.
As a reminder, the GOR rail expansion on corridor works project.
He is not yet reflected in backlog.
Acorn is also pre qualified on a number of project bids due to be awarded during the next 12 months and have a strong pipeline of opportunities to further add to backlog all the time.
Trailing 12 months recurring revenue was up 18% versus the prior period and up 65% versus two years ago.
Primarily from growth in utilities operations.
Our recurring revenue is expected to continue to grow driven by demand in the U T effectors.
And the concession segment is expected to see airport traffic in Bermuda, continuing recovery in the balance of 2022 and in 2023.
The fixed price share of trailing 12 month total revenue was 51%.
Versus 59% fixed probably share in the prior period.
Demonstrating ongoing progress in balancing out activities.
Turning to slide 10 eight.
<unk> released its inaugural reconciliation action plan.
Affirming its commitment to think meaningful ways to engage in real time simulation.
By working in unison with indigenous peoples.
Support our G H E strategy.
E Comm sustainability solutions, well established as a collaborative business model.
To provide a single point of entry to Aegon with diverse capabilities.
As weird wise and work with clients in reaching their sustainability and energy transition goals.
And to engage our employees and our sustainability journey, we continue to grow our green energy business.
Residential solar pilot program.
On employees in select markets.
Further demonstrating the importance of sustainability at a cold.
Turning to slide 11, with strong demand and growing recurring revenue program and diverse backlog in hand.
Kony is focused on ensuring solid execution on these projects and selectively adding to backlog through a disciplined bidding approach that.
Supports long term margin improvement.
Construction segment.
Yeah.
The concession segment in addition to expecting a gradual recovery in travel through the Bermuda Airport during the balance of 2022 and through 2023.
And there are a number of opportunities to add to the existing portfolio of Canadian and international compression.
The next 12 to 24 months.
Including an innovative project with private sector clients that support our collective focus on sustainability.
The transition to a net zero economy.
Thank you we will now turn the call over to out of these four questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad now.
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Our first question comes from Yuri Lynk from Canaccord. Your line is open.
Good morning, gentlemen.
Good morning.
Good morning.
Wondering how you would characterize.
How you feel in your position on the on the four contracts.
Compared to a few months ago.
Do you feel more.
Comfortable in the position it seems like a lot of.
Inflation pressures of kind of.
It looks like the top dose starting to perhaps come the other way.
I think labor labor availability has been has been better. So just broadly how do you feel in and can you give us an update on when these are going to to complete.
Okay. So.
Nothing is really changing on those four legacy projects from.
Our Q2.
Georgia.
So there is a clear and tied to the mine on whose full projects.
Regarding.
The modifications in the condition of execution of our contract.
We have allocated to this project.
Too many professional teams I mean internally and externally we are vigorously pursuing it.
Fair and reasonable compensation.
Works are proceeding forward.
And this is where we are at the moment as you have seen I mean, the rest of Aegon activity, which is more than 80% of the backlog it is very robust and balanced and resilient.
And then an update on the timing of each of the.
Projects and when they might complete.
So.
It kind of varies by project, but Sn.
Essentially one of them should be complete.
By the Middle of next year, one by the end of next year.
Another one into early 2024.
Another way to 2025.
Okay. That's helpful I'll turn it over there thanks.
Our next question comes from Jacob bout from CIBC. Your line is open.
Good morning.
Given the increasing likelihood of a recession in 2023, maybe just comment on changes that you're seeing in customer behavior.
Whether it's reworking of existing projects or or you know kind of re <unk> four.
And then maybe.
Talk about any project cancellations.
Yes, Jacob I E.
A tool I mean during last quarter.
Not <unk>.
Any of our client pronouncing the word recession in terms of interrupting trumping. The two drivers are demography and financial capacity.
Canada as both of them I mean, Canada is about more than all familiar newcomers.
Every year and then newcomers.
Leading protection they need new roads Newbridge is.
New transportation mode clear water.
Energy and this is all what is a calling about.
In addition to the financial capacity here I mean, Canada is a rich country.
In terms of energy in terms of crop I mean in terms of potash in terms of the round me too so.
There's no there's no recession and nobody's talking about recession.
And in the infrastructure segment.
At the moment, so we have not seen really anything abnormal.
Is the pipeline of project and we have not seen any cancellation.
Project.
Ah the Dia food, our design build finance and and maintain one that will be immediately re tender and a different contracting mode.
How about any delays or potential delays in projects.
The project is re scope due to higher costs due to inflation.
It's not really the case I mean, the inflation, even the hyper inflation Z.
Disturbance here.
Light chain of just a stabilizing and part of what we could see I mean during the last 10 months.
It means that we have been negotiating with our clients when he 12 necessary eventual expansion on time, but all the rest all our works are progressing.
Progressing well and in accordance with the contractual schedule.
Okay.
Thank you I'll leave it there.
Our next question comes from Patrick <unk> from Raymond James Your line is open.
Good morning, gentlemen, I was monetary.
Has better.
Better color on the contract that you announced in the U S for the savanna seven I'm sorry.
Nuclear plant.
And the decommissioning how would I how it came about.
And whether there's opportunities for you to do more work in the U S on the nuclear side, because that's quite encouraging.
Yes, Frederic it's quite encouraging.
<unk> Riva plant.
We acquired a contract of around $100 billion above dismantling of nuclear and building and provisioning.
Ventilation of the same building it it's very important for a few reason I mean, the first one you remember that we had quite walks at the end of 2018 at this moment our walks well the.
Specialized welding company, we have been extremely happy with this acquisition because its the lowest to ramp up our capabilities of all of the major component a refurbishment program in Canada, and we have gradually.
<unk> ramped up the capacity of eight going to work because they see the name now to become a project company. The U S is very important in terms of nuclear that's by far the most important.
Of reactors in the world as he rehabilitation and refurbishment program.
I'd be quite slow down during the COVID-19 period to protect the operation of the same reactors, but now it's coming back onto the market.
And it's coming back with project.
I would say a very interesting size between 50 million and 300 million.
We will we will ramp up with these projects and we are very happy with this first I would say a nuclear integrated job that we acquired in the U S.
And on that note can you discuss or talk about the risks that are associated with that particular job and the margin profile.
No.
No undue risk on those jobs because it was all very long job with a very long.
Long preparation period.
What are they see what we like so there is no special.
The risk element that we cannot tackle on Google.
In addition, I mean these job. These are I would say a few kilometers from our eight carnival at office.
And all our labor capacity can be dedicated without any I'm sure you won't people.
And margin potential.
Very similar to nuclear work are generally not nothing.
Particularly different to work we do are typically in the nuclear sector.
Thank you both I'll pass it over thanks.
Let me now turn to Chris Murray from <unk> capital markets. Your line is open.
Thanks folks can we just turn back maybe talking a little bit of a coastal gasoline for a second.
Certainly it looks like you know the two spreads Iran. Their commentary anyway suggests that you're done with one spread.
And then do another.
But you also mentioned in your disclosure.
That they had actually countersued in the quarter around some issues I guess, what I'm trying to figure out is.
Is there any way that or whats the timing like for finishing up the remaining spread.
And is does this new lawsuit complicate the.
The completion of that or change the timing of anyway.
Okay I'm going to take this one so effectively we have two.
Two contracts, both spread three and it's quite full and Italian agreement between boss.
A pretzel or has it been mechanically completed.
It's interesting to note that we were the first spread to be mechanically completed mid 2022.
Regarding the comment on the counter claim I mean, theres nothing absolutely nothing special like we'd seen any formal dispute process.
The arbitration of the procedural time table that is setting a deadline for both parties have to take certain steps I mean C. G N out a deadline to make a counterclaim that team we have the same one and and we and we meet our deadlines. So there's nothing special that we are now exclusively.
King on spread three it.
Expected mechanical completion before the end of the year 2023.
Okay. That's helpful. Thank you folks.
Our next question comes from Michael took home from TD Securities. Your line is open.
Thanks, Good morning.
Good morning.
Good morning, just want to go back maybe build off some of the questions that you received from Jacob.
And I guess, what I'm really wondering as we approach the end of 2022, if you can provide any early thoughts around.
How you see overall company revenue evolving in 2023 versus this year.
And this is with with your comments around customer.
Customer behavior and thought process doesn't seem to have changed much.
No exactly I mean oh.
Talks about expecting good revenue growth.
Over the next few years, but I think that's that's unchanged.
Jacob's question, specifically about recession.
Yeah, I would remind you that in the last two downturns, we've seen or major downturns, we've seen kind of 2008 2009, the financial crisis, and then and then through Covid governments have seen.
Infrastructure investment is vital to.
The economy.
Stimulus has been a big part of our approach we don't see.
Anything slow down in the pipeline and so if you look at.
For the next 12 months backlog.
Significantly higher than it was 12 months ago.
Some of the.
Strength in our New awards over the last 12 months.
And in the strength of the pipeline you know I think we expect to.
The revenue progression to continue to be.
Pretty healthy over the next few years.
Certainly this year.
They were 19% and we don't expect to continue at that kind of great but still.
Thing.
<unk>.
Kind of high single digit range going forward.
Okay. That's very helpful. Dave Thank you.
And then just a follow on.
You've talked for some time now about targeting margin improvement over time.
There's not really been sort of a what I would characterize as a typical year in the last few years, there's been a lot of noise with.
Susan and some of the other.
Things going on so I guess, if we think about.
The margin potential.
What's embedded in the backlog what you see in terms of the opportunities and the projects that you're pursuing.
Can you talk a little bit about the ability to drive margin improvement over the shorter term again, recognizing that it is a longer term objective, but but what are we thinking about here in the next 12 to 18 months.
Yes.
Yeah. So.
I think all else being equal Jean-louis said things have stabilized.
To some extent in terms of supply chain inflation.
And so barring any.
So the evolution negatively in those kind of trends.
We do think the backlog profile supports.
The ability to to expand margins.
Clearly as we close out the four legacy projects.
Obviously booking those projects very conservatively.
Which is a drag on margins.
As we've seen.
Over the over the course of the last few quarters.
And that talks about the timeline to complete those so that that will continue.
Continue to be.
Hum.
Something we work on over over the course of completing those projects, but outside of that.
The rest of the backlog, which is 80% plus of the backlog.
Healthy bidding environment.
It's been one.
One where we feel.
Margins have been improving and the ability to put.
Good teams on the right projects and execute well and so we should see margins.
Certainly are improving as we execute on that backlog.
Okay, great. Thank you.
Our next question comes from Ben <unk> from <unk> Securities. Your line is open.
Yes, good morning, everyone.
Just with respect to Bermuda concession you I thought you I lighten up their report that you've been dealing with higher operating costs in the quarter. So I was just wondering if you could provide more color.
What are what is the main driver of whether it's temporary or shouldn't change did that kind of margin profile longer term.
Yeah, so what you've seen versus the same quarter a year ago is obviously much higher volume.
Than we were seeing through the airport back in Q3 2021.
So obviously that means we have to ramp back up in terms of staffing at the airport.
The ability to deal with greater passenger and.
Slight volume so that increases the costs you don't see the same step up in the revenue because as you recall.
We have a minimum revenue guarantee that kicks in once we go below a certain level of traffic.
And so 2021 the revenue was supported by the the revenue guarantee but we didn't have.
The same kind of offering costs, we have now, but as we move past the kind of mid 60% range.
Which is where we were operating through Q3 that will start to see that incremental revenue and that will obviously more than offset the.
The normal cost base for to the airport. So we're kind of right in that transition period, there with crossing that minimum revenue guarantee threshold.
And as revenue increases and we should see profitability from Bermuda improving commensurately.
Okay, that's great and for concession you mentioned that there was a fortunate to be in Canada international to add some projects over the next 12 to 24 months. So could you maybe provide more color about the.
The size of those proportionate, but also the capital require to size those unfortunate piece.
Yeah, it's been a while I would tell you on this one.
We would be delighted to be able to duplicate with G. Two G operation like Bermuda and we are working on in Q1. So this is what we have in mind about international opportunities are weird Quad Quad Ah Ah interesting knowledge.
All of those kind of contracts on another hand.
In Canada aside from the I would say the infrastructure piece suite type, which is rather going down.
Energy transition I mean, it is a topic at.
At the moment, so more private clients, it's about battery storage, it's about storage, it's about oldest whose final.
Of jobs.
And we are pursuing a few prospects that seem to us quite interesting regarding capital needs, maybe David you can add a few words.
Yeah I think.
Nothing particularly out of the ordinary obviously as we've seen historically.
Anything on the concession side has been fairly capital friendly in terms of.
The size of equity investments are relatively small in terms of the overall funding of the projects.
They go in at the end of constriction typically.
So you were able to make you a constriction profit.
To fund the.
Any any equity requirements, so nothing particularly out of the ordinary you expect to do that for them.
Okay, that's great color and related to the four legacy projects that you have.
Provide color on Ah you mentioned color about the timing I was just curious what are you you would disclose whether there was any negative impact on the EBITDA coming from those four projects in the quarter.
Yeah I think.
We called out obviously, the we had a lower gross profit margin does food group.
Permanently from pipeline activity.
And so you know.
I think that should indicate to oversee our we talked about the CTO project.
Out of that.
Material to call out.
Okay. Okay, that's great and last one for me in light of the current market environment, a higher interest rate environment.
Sure right now how does it impact your capital deployment strategy and more specifically on the M&A and with respect to your dividend policy.
Yeah, So I think from an M&A perspective, obviously.
We've been active over a number of years with small tuck in acquisitions are I think we are we talked a lot about the diversity and balance in our business. We I think we were very happy with the.
How are we positioned today around all the growth segments of the market I think organically we would.
Talked about our ability to.
Slowly, but surely expand into the U S and in certain select international opportunities. So there's there's really nothing.
<unk>.
Driving is oh on the M&A front right now.
We really need.
And so our focus is on continuing to be able to.
Grow the business, which requires obviously.
Our performance security and a healthy balance sheet.
That's that's the focus.
Yeah.
Okay. Thank you very much for the time.
Okay.
We know Sanjay <unk> from <unk> capital markets. Your line is open.
Hi, good morning, just.
Couple of questions wanted to go back to the topic of margins. Thank you.
So it's several quarters now back to Buck are grappling with issues.
The industry is doing with them I'm just wondering.
When you look at I guess, the next few quarters or the next year, where do you think margins should kind of normalize or or bottom out.
Barring no.
Incremental major issues from the legacy projects.
Yeah. So obviously, we don't give specific margin guidance.
Particularly on a quarter to quarter basis.
I think if you look at it.
The trend.
Through the first three quarters of this year.
Excluding the one write down we called out in Q2, you've seen it trend.
Our higher revenue.
Than than the previous year is being offset a little bit by a lower margin.
We expect that trend probably to.
Be the similar in the next few quarters.
But we do think as we go through.
2023 and into 2020 full relative margins.
Should be should.
Should be improving.
You know I talked about earlier in terms of the backlog and what we see in terms of bidding environment.
Maybe Joe Louis you have some additional comments.
Yeah.
Yes.
I'll have a few and I think they are important.
It's evolved to discipline on new contracting mode. So you probably remember from op arrive at these job the mid 2018.
And I immediately.
We spoke with you about the fixed price job.
And the fact that we have to be extremely careful.
The first decision problems. These time was not to take any job superior to $1 billion and six by job and you have seen that when we say something we do it I mean.
The backlog I mean is that the fixed price portion of the backlog has gone down from 68% to 58%.
At the end of Q3 2022, the revenue I mean, the trailing 12 month on fixed price have gone down from 59%.
251% and it's very important because it.
It gives us a much better predictability of our margin in the future and yeah, we'll come to what.
We have been commenting about the new contracting mode, what we call. These progressive.
System progressing design build where we are selected on.
The robustness of our capacity our schedule of our Mcdonald, who as you know have work our group of company and then we enter once we have been awarded in a development phase that maybe 18 months, maybe 24 months and only at the end.
My faith, we fix with our client in the Scoop, we seek the schedules we see the price. So you have no teeth and does east mode.
We haven't been awarded the gold transit I mean multibillion job.
Drunk tool we.
We are in the discussion and negotiation with O P. J about the small modular reactor same kind of contract.
And we would be extremely happy at the end of the process and.
Metro links Nio could award is the Scarborough station and system job.
What is sure is that the new.
Eight Congress, a new profile of Aegon.
Now firmly set up and it's going to be much more predictable at the top.
The only acquire well maintained sizing through major derisk.
Project.
As much as we can and does a one a con at to be able to use all the capacities of our company.
This new model of collaborative progressive.
Procurement mode.
At I would say the other end of our activity will be the recurrent non six project, mainly Sweden, TD Ts will probably not tease that once again, we have increased our in our in our activity and our backlogs are recurring revenues and each.
Very important it's very important for us and he's between we have mid sized projects, where we work a lot on professionalism on our risk management and where we can each time that we all well centered within our pool competency I mean, we cannot acquire his new job.
So this isn't you wake him if he's the Acorn off tomorrow and this will give much more predictability.
Two our activity and to the margin associated with our activity.
Yeah.
Thank you for that that's really great detail no doubt a lot of progress has been made and you are trending in the right direction.
The spud, maybe the near term challenges I.
I guess, you know on the topic of the new Acorn.
Then ask question about capital allocation dividends.
Maybe just if you can give us a bit more of a detailed set of updates just given where the valuation of the stock.
Our dividend's still a priority.
Do you feel about your leverage profile.
Do you think you need to be doing something differently.
To try to.
Maybe get to the stock price.
It's a more stabilized Ohio.
I think in the current environment that you the keys.
Execution.
So obviously what.
What we're totally focused on you know what I think are clearly two markets more broadly.
Challenge by a wide variety of factors right now that are outside of our control what we can control is continuing.
Continuing to add good projects to backlog and executing.
Those projects are.
Affectively as as possible and that's the focus.
I said earlier, our focus from a capital allocation is to support the ongoing organic growth potential that we see as being very strong in the current environment.
And as far as dividends, obviously, that's been a long term feature.
Uh huh about business in.
Nothing nothing new to report on that front.
Okay. So the focus remains on organic growth first maybe some tuck in acquisitions, but.
You don't feel the need to change your sort of dividend policy or kind of pause.
Just given where what the I guess, the leverages or what you expect going forward.
He has just said nothing new to report on that when we do that and obviously, we'll report that to to everyone at the.
Same time, if we were ever to change to change policy.
There's no change in policy, so nothing really to say.
Okay. Thank you.
Our next question comes from Maxim <unk> from National Bank Financial Your line is open.
Hi, good morning, gentlemen.
Good morning.
David I, just wanted to circle back on the balance sheet and I guess I mean, one of the reasons why Leverages three times is due to working capital.
Can you provide.
Maybe your views on one.
The working capital in a difficult project is going to be freed up and I guess your confidence around that.
That dynamic.
Yeah, So I think.
If you look at.
Q3, specifically.
I don't think Q3 was but nothing particularly.
Different about the profile of the working capital build in Q3 this year versus Q3 in any of the given the seasonality and the increase in revenue which was fully.
14% versus the same quarter a year ago. So nothing really unusual in this quarter, obviously in prior quarters, we've had a builder.
Tied into the things we talked about already on the legacy projects, we don't necessarily expect that too to worsen in terms of.
When that starts to unwind.
That's really kind of what we're focused on negotiating right now across all full projects and so.
I don't think it will necessarily be something that happens.
Immediately it's going to be different times on different projects and so it could be.
Something that leads to overall elevated working capital.
As we go through 2023, but but not necessarily worsening of the situation as we go through 2020 suite.
Okay. So I guess, we should not expect.
The seasonal free up that we typically see in Q4 and because of that dynamic.
Well you will.
Everything else you know about.
80% of our backlog.
Please.
Proceeding as normal and so youll see the seasonal impact from everything else.
We undertake.
But obviously.
Those four projects.
Subject to the approval of negotiations that are ongoing.
Alright, and then in terms of some I think in the past will discuss.
No plans around the convertible debentures and so forth.
In terms of kind of the ability to to use your current facility.
And so forth do you mind, maybe just providing some goalposts in terms of like what needs to happen.
In terms of.
How you think about 2023 maturity for this debt instruments.
Yeah. So.
Obviously as we.
Head towards the end of this year January 1st is where we can.
Begin to.
Redeem the convertible debentures at par so that window is open.
Throughout 2023.
We obviously expect to.
Market conditions to.
Be conducive.
Two a refinancing opportunity.
As we go through the next.
14 months or so and so we'll take advantage of that.
To the extent we are.
Want to do.
Some of the redemption through drawing on the credit facility, we have the capacity to do that too.
So it could be a mix of our approach as it could be a partial refinancing partial use of the critic <unk>.
We will continue to assess that as we move forward.
Okay. That's it for me. Thank you so much.
Our next question comes from Ian Gillies from Stifel. Your line is open.
Good morning, everyone.
Could you is there any chance you could provide a bit of an update on the health of the general health of the subcontractors you were using the availability of that group, whether you're seeing any significant changes just given.
What's transpired with inflation and probably what's happening with that group of people given the importance to your business.
Yes.
Obviously, the I would say the last quarter of two solve in 'twenty, one and the first quarter of 2022 has been very difficult to call the supply chain.
Hey.
Isn't being caught by surprise thinking that at the end of the coffee life will become immediately.
Normal and he did not mean that we had a very strong pressure, what we call the hyper inflation.
<unk> excuse me nine China than at the beginning of 2022, we had a lot of twice I mean, especially in Ontario.
These being said we can see that most of them are now operating quite normally and we are not that much worried about our supply chain, you'll probably also remember that.
A corner.
As a lot of boots on the ground. It means that we have a we are self performing quite are an important part of our scope of work and it has been extremely helpful. During the crisis.
Because we have not this level of shortages that some other company could case.
Okay. That's that's helpful. And then the other thing I wanted to ask on was encore.
You're obviously in the two year development phase in with the sharp changes in a variety of commodity prices and just input cost has there been any change in timeframe of when that project may start to get out into the backlog or can you provide an updated timeframe of when when we may start to see it.
No I'm.
Nothing special I mean in the development phase.
Either two years long so we are fully need at the moment.
We are working with metro links.
Intimately to decide not only the scope are scheduled and the price, but the phasing there's a lot to do.
It is linked at the end of the day.
We have trained programming he's been with the with the operation. So it's quite a I would say a comprehensive.
The development Phase, we we do not see any issue we are still expecting that we could have some early works beginning to be executed during the year 2023, and we are working on bundles of early work.
Then I mean, nothing I would say nothing special are in front of the type of procurement are under which we haven't been awarded.
Okay. That's very helpful. Thanks, very much I'll turn it back over.
Yeah.
This concludes our Q&A I'll now hand over time and broker for final remarks.
Yeah.
Very good. Thank you Elliot and appreciate everyone's time today I feel free to follow up at any point for other questions to us and have a great day rest of your day, we'll speak with you. The next quarterly call take care.
Today's call is now concluded. Thank you for your participation you may now disconnect your lines.