Q3 2023 Aecon Group Inc Earnings Call
Good day, and thank you for standing by walking through the Q3 2023 acre Group, Inc. Earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the special need to press Star one on your telephone you will then hear an automated message advising your hand this race to Australia.
Question. Please press Star one again, please be advised today's conference is being recorded I would now like to hand, the comps over to your speaker today, Adam Borgata you. Please go ahead.
Thank you, Kevin and good morning, everyone.
That I'm forgetting speaking presenting to you. This morning are John <unk>, President and CEO, David snails, Executive Vice President and CFO.
Our earnings announcement was released yesterday evening, and we posted a slide presentation on the investing section of our website, which we will refer to during this call.
Following our comments, we'll be glad to take questions from the analysts and we ask that analyst keep to one question and a follow up before getting back into the queue to ensure all had the chance to contribute.
As noted on slide two 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 econ believes the expectations reflected in these statements are reasonable we can give no assurance that these expectations will prove to be correct with that I'll now turn the call over to Dave.
Thank you Adam and good morning, everyone I'll touch briefly on <unk> consolidated results review results by segment, and then address stakeholders financial position before turning the call over to you on the week.
Turning to slide three revenue for the third quarter at what point 2 billion with 81 million or 6% lower compared to the same period last year.
Due to the impact of the sale of a cold transportation East.
H E in the second quarter this year.
Adjusting for the sale of H E.
The increase on a like for like basis by $46 million or 4%.
Gotcha.
Adjusted EBITDA of 72 million a margin of two 6%.
Compared to 93 million a margin of 7% last year.
Don't bring profit.
$2 million compared to an operating profit of 61 billion in the third quarter of 2022.
Excluding the impact of the four legacy projects on results in the third quarter adjusted EBITDA from the balance of the business was $123 million a margin of 11, 6%.
Diluted earnings per share in the quarter.
63 cents compared to diluted earnings per share was 45.
In the same period last year.
The improvement in operating profit and diluted earnings per share.
Due to the gain.
The $49, 99% interest in <unk>.
<unk> International Airport concessionaire.
$39 million.
<unk>.
We mentioned from gain of $18 million on a 51% retained interest.
Reported backlog at $6 2 billion at the end of the quarter after removing $447 million of backlog in Q2 relate to let's say with HCA compared to backlog of $6 3 billion at the end of the third quarter of 2022.
New contract awards at $591 million were booked in the quarter.
Compared to 900 million in the prior period.
Now looking at results by segment.
Slide all construction revenue of $1 2 billion in the third quarter was $83 million or 6% lower than the same period last year.
This was due to lower revenue in civil operations, driven by a lower volume of product building construction work in Eastern Canada as a result of the sale of the second.
Second quarter 2023.
Actually offset by an increase in major project work in Western Canada.
After adjusting for the impact of the sale of the AG construction revenue was 41 million or 3% higher than the same period last year.
You contract awards of $563 million in the third quarter compared to 966 million in the same period last year.
Backlog at the end of the quarter at $6 1 billion compared to $6 2 billion at the same time last year.
Turning to slide five.
Adjusted EBITDA in the construction segment of $17 million with $65 million unfavorable compared to the third quarter of last year.
The decrease was driven by negative gross profit of $42 million on a fixed price legacy projects and civil operations, especially the gross profit of $1 billion in the same period last year on the same project.
Gross profit of $60 million from wireless for fixed price legacy projects.
Expectations solutions compared to a negative gross profit of $23 million in the same.
Period last year from the same project.
So does that mean impacts of fixed price legacy projects in the quarter.
Our operating profit in the balance of the construction segment.
Driven by lower operating profit from road building construction work due to the sale of <unk> in the second quarter. This year.
Lastly, offset by higher gross profit margin in nuclear operations.
Transportation solutions, and LOE, and G&A and utilities operations.
At September 30th the remaining backlog to be worked off on the four legacy projects was $528 million compared to $1 1 billion at the end of 2022.
These projects comprised 14% of consolidated revenue in the third quarter compared to 16% in the full year 2022 nine.
9% of backlog at September 30, compared to 17% at the end of 2022.
Turning to slide six.
Revenues third quarter was $26 million compared to $22 million in the same period last year, primarily due to an increase in airport operations.
International Airport.
<unk> continues to operate reduce volume compared to pre pandemic levels. The continued to recover in the first nine months of 2023.
The most severe impacts experienced in 2000 22021.
This recovery was evidenced by the fact that traffic in the third quarter averaged 75% at the pre pandemic level.
Third quarter of 2019 compared to average traffic in the third quarter 2022, being 63% pre pandemic levels.
Adjusted EBITDA in the concessions segment of $27 million compared to $21 million in Q3 last year.
Q2 results from it could be the airport, but an increase in management and development fees.
Previously operating profit in concessions reflects the gain on sale in the quarter of $139 million.
Turning to slide seven.
At the end of the third quarter.
Net cash of over $400 million, including cash in operations.
On December 31 2023.
Convertible debentures with a face value of 184 million will mature and we expect to repay these debentures mature it's equal before.
At this point I will turn the call over to Yahoo.
Thank you, Dave and good morning.
The impact of the full fixed price legacy projects being performed by joint ventures in which <unk> is a participant.
Again in our third quarter results.
However.
We have made significant progress during 2023 on driving these projects toward completion.
One of the full projects, which substantial mechanical completion in the third quarter as committed with our client.
With the remaining suite projects currently expected to be substantially complete by date between late 2020 suite in mid 2024.
The final one currently expected to be substantially complete during 2025.
Acorn any joint venture partners remained focused on dedicating all necessary resources to compete through small legacy project.
In the meantime continue to pursue fair and reasonable settlement agreements with the respective clients in each case.
In this respect we have also made progress in recent quarters.
The most recent settlements reached had agreed to between the relevant joint venture that the respective clients.
Each of the four projects.
Including one into the second quarter, two we just third quarter of 2023 outgrowth additional clarity on schedule compensation.
Compensation construction costs and all the potential liabilities.
Okay.
We would be the first to act on it.
Despite this progress and the adjustments we've taken in recent quarters.
The risk remains in the Evans assumptions estimates and also constancy of J&J.
But we and our joint venture partners are fully focused on completion.
First wins further recoveries and putting his legacy project.
Yes.
Every day, we are getting closer to the A&P.
Okay.
Turning to slide nine demand for <unk> services across Canada continues to be strong.
While all the time local and Canadian economy conditions are impacting inflation interest rates and overall supply chain efficiency lose factor that stabilize to some extent.
And largely been and will continue to be reflected in the pricing and commercial details of E. Comm the reset of the prospective project awards and bids.
Despite wizards, having being impacted by the four legacy project inquiries and periods.
They're all positive revenue and profitability trends in the <unk>.
Balance of E com business.
Does that reflect the underlying demand dynamics in the market and strong execution.
Across the balance of our project.
Turning to slide 10.
Backlog of $6 2 billion.
<unk> two solid 23 recurring revenue programs continuing to see robust demand.
<unk> believes it is positioned to achieve further revenue growth over the next few years.
As a reminder, the major scopes of the GOR rail expansion on corridor works project.
Copper all subway extension project, the Darlington nuclear project.
We will only be reflected in backlog.
The successful conclusion of the Lindsay development phases.
Acorn, including joint ventures in which we are participating so pre qualified on a number of project beats due to be awarded during the next 12 months.
And I have a considerable pipeline of opportunities to further add to backlog over time.
Trailing 12 months' recurring revenue of $1 1 billion was up 40% versus the prior year period, and 69% versus two years ago.
Utilities operation and contributions from the <unk> expansion corridor works since copper or subway extension projects during the respective development phases, whereas the primary drivers of this growth.
Utility operation and further advancement from this project as we continue through the development phases.
Are expected to contribute to future growth in recurring revenue.
The concessions segment is also expected to see airport traffic in Bermuda continue its recovery in 2023 and 'twenty four.
Okay.
Turning to slide 11.
E Comm continues to support the energy transition to build and operate sustainable infrastructure.
In the second quarter of 2023.
<unk> storage project achieved financial close with Acorn concessions has an 875% equity profit.
Earlier this year <unk> was awarded.
$241 billion EPC contract by <unk> Limited partnership.
To build these 250 megawatt 1000 megawatt hour advance page grid connected battery storage project.
We are presenting the largest clean energy storage project in Canada.
Project.
We'll need that energy storage go expansions copper all subway extension Darlington ASMR.
Demonstrate the past Acorn is on to embrace the opportunities linked to decarbonization.
Sustainability and the energy transition.
Turning to slide 12.
With strong demand growing record.
Net revenue program.
Backlog in hand.
<unk> is focused on achieving solid execution on these projects and selectively adding to backlog.
Through a disciplined bidding approach.
The board's 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 the remind us can solve in 'twenty three.
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 our collective focus on sustainability and the.
The transition to a net zero economy.
The <unk> expansion on Corrigo works project and Youll Nita Energy storage project noted the board are examples of the role <unk> concession segment is playing in developing it.
Operating and maintaining assets related to this transition.
Finally on slide 13 of these closed on October 23rd.
<unk> announced their strategy investment by Oaktree capital management.
<unk> utilities.
The investment closed on October 24th <unk>.
We acquired a 27, 5% ownership interest in <unk>.
By a way of a net 150 million dollar investment.
This equates to a valuation of $750 million.
Trailing 12 months adjusted EBITDA multiple of nine three times.
The investment position the business to address attractive industrial growth opportunities across utility end markets in Canada and in the U S.
Provides financial flexibility to accelerate Acorn utility acquisition strategy.
Introduces a recognized value added partner you don't treat.
A successful track record in utility infrastructure investing it.
And strengthens <unk> balance sheet.
<unk> <unk>, the financial flexibility to fund our strategy growth initiatives.
We are delighted to partner with an experienced and value added investments in all three.
To continue to grow econ utilities across North America.
Thank you we will now turn the call over to analysts for questions.
Thank you ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered you were seeing with yourself from the queue. Please press star one again, we will pause for a moment, while we compile the Q&A roster.
Our first question comes from Yuri Lynk with Canaccord Genuity. Your line is open.
Hey, good morning, guys.
Dave maybe just.
Give us your thoughts on when we might see the or how we should expect in terms of the cash impact of the the $92 million write downs taken in the corner.
You did have over $110 million of positive operating cash flow in the quarter. So.
What should we expect in terms of operating cash flow in the next couple of quarters. Thanks.
Yes.
In terms of.
The agreements we breached.
Joey referred to ramp Q2.
And in Q3.
The positive outcome from those agreements as it deals with.
Settling all of that spending claims.
And compensation on a number of items were to some extent.
Cost has already been incurred and so.
Compensation, we're now receiving is positive from a cash flow perspective, so you.
You saw some of it back in Q3.
The 100 million.
The improvement in working capital in what is usually a seasonally.
Bob.
Seasonal quarter that draws on working capital.
Some of that will also.
<unk>.
In Q4.
In the first half.
2024 also based on the various agreements.
Upfront payments and then some.
Cash to milestones along the way, but they effectively compensates the working capital build up on the balance sheet prepared at times, and we will be cash flow positive over the next.
Six to nine months.
Okay.
So the cash.
Cash impact.
This quarter's write downs was largely reflected it in.
In past quarters.
From a cash perspective, yes, okay.
And then just a clarification.
On the on your liquidity position.
Okay.
Your operating lines been expanded from 600 to 850.
How much of that $8 50 is available to agi.
Yes.
Ts.
That's split into two so the previous $600 million sale teasdale, a $450 million facility the hei level.
$400 million.
Utilities level.
So the.
<unk>.
The 400 at the utilities level is not accessible to agi.
Alright.
First of all to a subsidiary of ATI in terms of Acorn utilities, but no the rest of it.
Balance of Hei's business doesn't draw on that facility.
Obviously, as we generated cash flow from the utilities business, we can distribute.
From utilities to Hei Pgi.
Draw directly on <unk> utilities facility.
And it's on that $4 50, agi facility that youre going to put the.
The converts right.
Yes, correct.
So pro forma your.
Call it under just under $300 million on that facility available.
At the end of the year.
All else equal format.
Pro forma rate right now since the end of September and Q3.
Physician doesn't reflect the $150 million investment from Oaktree and doesn't reflect the just over $200 million distributed from utilities to hei as part of that transaction.
And so.
That cash effectively.
We will fund the redemption of the convertible debentures.
And the balance will be cash on the balance sheet.
Okay I'll.
I'll get back in the queue. Thanks.
One moment for our next question.
Our next question comes from Jacob bout with CIBC. Your line is open.
Good morning.
Sure.
Okay.
520, $528 million backlog left of the CT legacy fixed price projects can you just remind us.
How you expect to work down.
And the balance of 'twenty three in 2025 and then.
And then maybe just as a follow on there.
How are you thinking about the risk of further.
The negative cost re forecast.
When do you expect that to subside.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2023 Aecon Group Inc, earnings conference call. At this time, all participants are on the listen only mode.
Okay, maybe I'll take this one Jacob so.
Yes, we are around $500 million remaining backdrop for legacy project.
Operator: After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again.
In terms of declared backlog of $6 two.
<unk> present, a little less than 10%, but when you add to the backlog what's going to come most probably from the progressive design build it it's not even 5%.
Operator: Please be advised that these conferences are being recorded.
Operator: I would like to end the conversation over to you speaker today.
Adam Borgatti: Adam Borgatti, please go ahead. Thank you, Kevin, and good morning, everyone. This is Adam Borgatti speaking. I'm presenting to you this morning, our General Reserve Honks, President, and CEO, and David Smales, Executive Vice President, and CFO. Our earnings announcement was released yesterday evening, and we posted a slide presentation on the investing section of our website, which we will refer to during this call. Following our comments, we'll be glad to take questions from the analysts, and we ask the analysts keep to one question and a follow-up before getting back into the queue.
As you know.
On the full project one out to reach mechanical completion.
We are the ones I mean, two will be completed in 2024.
Really nearing completion and the other one.
Around 2025.
It just means that this suite.
<unk> decreased it.
In the two to three quarters to come.
On another hand, let's maybe come back a little on the of the situation.
Adam Borgatti: To ensure all have a chance to contribute. As noted on slide 2, 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. While the way Con believes the expectations reflected in these statements are reasonable, we can give no assurance that these expectations will prove to be correct.
Legacy projects. So you have noted we reach three major.
Settlement agreements.
The <unk> project.
Lewis contract negotiation I could be complex with a lot of parameters.
But what is important is that they are low to have a much better clarity on scheduled to completion and eventual attach liquidity damages.
David Smales: With that, I'll now turn the call over today. Thank you, Adam, and good morning, everyone. I'll touch briefly on eight comments.
David Smales: Ones Consolidate Results, Review Results by Segment, and then Address Acons Financial Position, before turning the call over to Jean-Louis. Turning to slide 3, revenue for the third quarter of 1.2 billion, with 81 million or 6% lower compared to the same period last year, primarily due to the impact of the fail of Acons Transportation East, or ATE in the second quarter of this year. Adjusting for the sale of ATE, revenue increased on a like-for-like basis by $46 million or 4% in the quarter.
They are low to add additional revenue with much more clarity in the weight could it be distributed.
The cash associated with it and date spoke about <unk>.
We haven't.
Induce agreement.
Quick.
Portion of the cash from our clients and then it gives us a better knowledge of the cost.
The cost to call.
On the last one I mean, you remember we have reached mechanical completion and we are protected.
Early 2023 in terms of cash.
David Smales: Adjusted EBITDA of 32 million, a margin of 2.6%, compared to 93 million, a margin of 7% last year. A operating profit of 140 million, compared to an operating profit of 61 million in the third quarter of 2022. Excluding the impact of the four-legacy projects on results in the third quarter, adjusted EBITDA from the balance of the business was $123 million, a margin of 11.6%. Diluted earnings per share in the quarter of $1.63 compared to diluted earnings per share of 45 cents in the same period last year.
Because our cost of about call it.
Well.
So.
To come back to your question.
Kashi has preserved the loose jewel but.
Towards the quarters to come.
<unk> <unk>.
<unk> is important.
Okay.
May be my third point will be about.
What is what it is.
When you.
When you take out the.
Okay.
Those legacy projects from our resort.
David Smales: The improvement in operating profit and diluted earnings per share was likely due to again related to the sale of a 49.90% interest in the Bermuda International Airport Concessionaire, $139 million, including a fair value remissioned again of 80 million on Acons 50.1% retained interest. Report back log of $6.2 billion at the end of the quarter after removing $447 million of back log in Q2 related to the sale of ATE compared to back log of $6.3 billion at the end of the third quarter of 2022.
I mean you.
You have noted the EBITDA for Q3 would have been 123.
Trailing 12 months 375, I mean, I don't know a lot of company with the structure of a call it.
Majority of our business is very strong.
And.
And it is very strong in a world, where there is less and less.
Contractors.
And this is this is what is important I mean, we.
David Smales: You contract awards of $591 million were booked in the quarter compared to $991 million in the prior period. Now looking at results by segment, turning to slide four, constriction revenue of $1.2 billion in the third quarter, with $83 million or 6% lower than the same period last year. This was due to lower revenue in civil operations driven by a lower volume of road building construction work in eastern Canada as a result of the sale of ATE in the second quarter of 2023, partially offset by an increase in major project work in western Canada.
We just have to stick to our strategy, we just have to stick to our discipline you have noticed that.
The name of legacy project has not been invented by by chance I mean from from September 2018.
We have not entered into any.
<unk> project at Econ, we have limited the size of our lump sum job that.
We are convinced a lot of our clients who go to progressive design build it.
And.
This is important I mean, we have we have invested more in our project management Academy in our continuous improvement program in our gate zero to.
To understand that when we decide to pursue new job, but what are the risks what are the risk associated and how can we tackle it correctly there was a risk.
David Smales: After adjusting for the impact of the sale of ATE, constriction revenue was $421 million or 3% higher than the same period last year. You contract awards of $563 million in the third quarter compared to $966 million in the same period last year. Before I get the end of the quarter of $6.1 billion compared to $6.2 billion at the same time last year. Turning to slide five, adjusted EBITDA in the construction segment of $17 million was $65 million unfavorable compared to the third quarter of last year.
I think it is important also to note it.
Okay. Just wanted to thank you for your reference.
As a point of reference going back to that.
The question on.
Working off that backlog by the middle of next year, we expect that backlog number to be roughly parcel where is there.
So that kind of gives you a sense of.
The work off of that over the next three quarters.
David Smales: A decrease was driven by negative gross profit of $42 million from a fixed price legacy project in civil operations versus a gross profit of $1 million in the same period last year from the same project. And by a negative gross profit of $50 million from one of the four fixed price legacy projects in urban transportation solutions compared to a negative gross profit of $23 million in the same period last year from the same project.
Yes.
That's helpful. Thank you.
Okay.
One moment for our next question.
Our next question comes from Ben Rob per Air with Desjardin capital markets. Your line is open.
Yes, good morning, everyone.
Just in terms of charges around the legacy project, you took almost $300 million over the last year and a half.
David Smales: Other than the impact of fixed price legacy projects in the quarter, lower operating profit in the balance of the constriction segment was driven by lower operating profit from road building construction work due to the sale of ATE in the second quarter of this year. Largely offset by higher gross profit margin in nuclear operations and urban transportation solutions and lower NGNA utilities operations. At September 30, the remaining backlog to be worked off on the floor legacy projects was $528 million compared to $1.1 billion at the end of 2022. These projects comprised 14% of consolidated revenue in the third quarter compared to 16% in the full year 2022 and 9% of backlog at September 30 compared to 17% at the end of 2022.
Could you talk about the kind of the worst case scenario on what we might be.
Looking forward.
Specially given the better disclosure that you've made in your MD&A and the fact that you were successful to reach a few.
Settlements already.
So obviously.
Okay.
Factor in the last couple of quarters.
The agreement reached on.
A number of these projects.
As Joey said it in his current set gives us.
A lot of clarity around.
Compensation for past issues schedule going forward.
Another kind of terms and conditions around these settlements that mean.
David Smales: Turning to flight 6. Confession revenues at the third quarter was $26 million compared to $22 million in the same period last year, primarily due to an increase in airport operations that the computer international airport. The computer continues to operate a reduced volume compared to pre-pandemic levels but continue to recover in the first 9 months of 2023 from the more severe impacts experienced in 2020-2021. This recovery was evidenced by the fact that traffic in the third quarter averaged 75% of the pre-pandemic level in the third quarter of 2019 compared to average traffic in the third quarter of 2022 being 63% of the pre-pandemic levels.
While we've had to make some adjustments in the last couple of quarters. We do feel that that takes a lot of uncertainty off the table eight positions us.
Well to execute going forward.
And that.
From an overall.
Comfort level in terms of the amount of variability in our forecast we think thats.
Being reduced by each one of these settlements so.
Ill.
Gil.
Certainly.
Soon we expect it to be less noisy going forward and we're very focused and just on execution.
It really we really don't expect it to be.
Bob.
Any developments on these projects in terms of.
David Smales: Just an e-bidar in the concession segment of $27 million compared to $21 million in Q3 last year. I readily due to results from the Bermuda Airport and an increase in management and development fees. There's no it previously, operating profit and concessions reflected again on sale in the quarter of $139 million.
Further significant agreements or <unk>.
Changes too.
What we've recently agreed with our clients.
In the stable future so.
The positions we have at the end of Q3 based on everything we know at this stage and we think those positions.
Reliable.
David Smales: Turning to 5.7. At the end of the third quarter, Aecon had net cash of over $400 million, including cash and joint operations. On December 31, 2023, comparable adventures with a face value of $184 million will mature, and we expect to repay these adventures out of maturity or before.
Based on all the information.
I'm, saying it takes based on those settlements in the last two quarters.
Okay, Okay, and just in terms of capital deployment and when we look at your leverage.
We're at two three at the end of Q3.
I understand the leverage will come down with the proceeds from poultry.
Jean-Louis: At this point, I'll turn the call over to Jean-Louis. Thank you Dave, and good morning all. The impact of the four fixed price legacy projects being performed by joint ventures in which Aecon is a participant was felt again in our third quarter results. However, we have made significant progress during 2023 on driving these projects toward completion. One of the four projects reached substantial or mechanical completion in the third quarter as committed with our client.
Just wondering about what kind of optimal level you see E Con operating.
And then the cushion you have and also in terms of capital deployment.
What about the availability to deploy that capital towards.
M&A around a common utilities, which was a reason why you are.
You strike a deal with the Oak tree.
Yes so.
As you say at the end of Q3.
Two three times, including the convertible debentures pro forma for the.
Hey, Tony utilities transaction that will be.
Jean-Louis: We still have the remaining three projects currently expected to be substantially complete by date between late 2023 and mid 2024. And the final one currently expected to be substantially completed during 2025. Aecon and its joint venture partners remain focused on dedicating all necessary resources to complete some four legacy projects. And in the meantime, continue to pursue fair and reasonable settlement agreements with the respective clients in each case. In this respect, we have also made progress in recent quarter.
Graham one two times, we're very comfortable.
Average range.
Up to kind of two to three times.
Terms is.
The long term.
So Paul.
Hi.
Bonding companies.
Performance security requirements. So we think we have plenty of room to.
Investing in the business we.
Significantly strengthened the balance sheet this year.
We are very focused on.
Growing utility business M&A, we expect to play a role in that.
Jean-Louis: The most recent settlements reached and agreed to between the relevant joint ventures and the respective clients on each of the four projects. Including one in the second quarter and two in the third quarter of 2023 have brought additional clarity on schedule, compensation, construction costs, and other potential liabilities. We would be the first to acknowledge that despite this progress and the adjustments we've taken in recent quarters, the risk remains in the event that assumptions estimate and also constancy is changing. But we and our joint venture partners are fully focused on completion, first ring further recoveries and putting those legacy projects behind us. Yes, every day we are getting closer to the end.
We're already.
Yes.
In terms of.
It's opportunities.
In the U S. The utilities business.
We're very comfortable that we can do.
<unk> deployed capital to support our M&A alongside alongside a part of it.
Okay and last one for me.
<unk> been successful in selling hassle Bermuda twice the street expectation. If you look at the road building business that was less strategy.
And also margin dilutive you've sold close to nine times EBITDA.
The economy utilities also you monetize that my time Doug.
Trading below three times in terms of EBITDA for the rest of the business. So are there any reason that do not allow a comp to look at creating further value given the valuation at these levels then.
Jean-Louis: Turning to slide 9, a demand for Aecon services across Canada continues to be strong. While all the time global and Canadian economy conditions are impacting inflation, interest rates and overall supply chain efficiency, those factors have stabilized to some extent. It continues to be reflected in the pricing and commercial sales of Aecon's recent and prospective project awards and bids.
Your track record in it.
Monetizing some of those assets over the last years.
But.
My answer would be that we are we are very comfortable with the divestiture. We have been doing I mean, there was a reason for a conference quotation east.
In terms of an extremely competitive market.
Jean-Louis: Despite results having been impacted by this whole legacy project in recent periods, there are positive revenue and profitability trends in the balance of Aecon's business. That we select the underlying demand dynamics in the market and the strong execution across the balance of our project. Turning to slide 10, with backlog of 6.2 billion at September 30, 2023 and recurring revenue programs continuing to see Robert's demand, Aecon believes it is positioned to achieve further revenue growth over the next few years.
Capital intensive.
And it was a clear decision.
As promise and we are.
Very happy with the valuation we could get.
<unk>.
It was a rather different way of looking at it I mean, we we consider that E comm that we can be.
Be successful and make money on the toxicity of the value chain.
People are being fined and seeing it engineering building and operating our assets when the contract to lose it.
Is a normal rotation of our assets.
Sorry to lose us to go to other project that will create more value, which was important for us was to keep at least 51% and the management contract at the end of the day.
Jean-Louis: As a reminder, the major scopes of the Gore-Rail expansion on corridor works project, the Scarborough Subway extension project, the Darlington Unuclear project, will only be reflected in backlog as a successful conclusion of the lengthy development phases. Aecon, including joint ventures in which we are participating, is also required to find a number of project bids due to be awarded during the next 12 months and have a considerable pipeline of opportunities to further add to backlog of a time.
We have to go on.
Building and developing infrastructure.
And we think that the balance of activity that we have at the moment, it's perfectly fit with what we needed in terms of the markets that we envisage.
Okay.
The valuation these days how is the how.
How do you look at the buyback.
Given the valuation these days.
So I think our focus is.
Jean-Louis: Failing 12 months recurring revenue of 1.1 billion was a 40% versus a prior period and 69% versus two years ago. Utilities operation and contributions from the Gore-Rail expansion on corridor works and Scarborough Subway extension projects during the respective development phases, where the primary drivers of these growths. Utilities operation and further advancement from this project as we continue through the development phases are expected to contribute to future growth in recurring revenue.
On a few areas when it comes to capital deployment obviously.
We need to do with the convertible debentures at the end of this year.
We've been very consistent.
Our dividend program.
And as we've talked about we see significant growth opportunities both organic.
And.
M&A, particularly focused on the utilities business, so thats the focus right.
Right now from a capital perspective, obviously the disconnect you.
Jean-Louis: The Confession segment is also expected to see airport traffic in Pabuda, continue its recovery in 2023 and 2024.
Right.
Sure.
In your initial question around the.
Valuation of that.
Dispositions that we've done this year and where the share price is trading.
Jean-Louis: Turning to slide 11, Aecon continues to support the energy transition to build and operate sustainable infrastructure. In the second quarter of 2023, the Oneda Energy Storage Project achieved financial closure with Aecon Confessions as an 8.35% equity partner. Earlier this year, Aecon was awarded the $141 million EPC contract by Oneda Limited Partnership, to build this 215 megawatt, 1000 megawatt hour, advanced stage, grid-connected battery storage project, representing the largest clean energy storage project in Canada. Project such as O'Neill, Energy Storage, Go Expansion, Scarborough Subway Extension, Dilington SMR, demonstrate the path Aecon is on to embrace the opportunities linked to decarbonisation, sustainability and the energy transition.
We feel that the best way to.
Highlight future value is to continue to execute on the balance of the business.
<unk> continued to highlight the fact that the underlying business is generating.
$375 million of EBITDA on a trailing 12 month basis and get these legacy projects behind US I think once we've we've done all that then.
We would hope that that would be reflected in valuation.
And then obviously, we would look at.
Share buybacks or anything else that made sense, but that is some.
Strategic.
<unk>.
Immediate uses of capital that we're more focused on right now.
Okay. So thanks for that.
Yeah.
One moment for our next question.
Our next question comes from Chris Murray with ATB capital markets. Your line is open.
Yeah. Thanks, good morning.
Maybe following on.
Thank you.
Jean-Louis: Turning to slide 12, with strong demand, growing revenue programs, divers backlog in hand, Aecon is focused on achieving solid educational and projects and selectively adding to backlog through a disciplined bidding approach that supports long-term margin improvement in the construction segment. In the Confession segment, in addition to expecting an ongoing recovery in travel through the Bermuda International Airport through the reminder of 2023, there are a number of opportunities to add to the existing portfolio of Canadian and international concessions in the next 12 to 24 months, including projects with private sector clients that support a collective focus on sustainability and the transition to an Aecon. The Go Expansion on Corridor Works project and the O'Neill Energy Storage project, Naughty Dubov, are examples of the role Aecon's Concession segment is playing in developing, operating and maintaining assets related to this transition.
Dave I don't know if you want to try to take us one or as Ron Louie, but I'm thinking about the business on a go forward basis with the.
With the projects I guess, maybe ring fenced or at least kind of stabilized now from a financial perspective, and the cash flows coming in.
You talked a little bit about at call it.
A low teens type EBITDA margin with the remaining business.
Can you talk a little bit how we should think about what the margin profile is going to look like in 2024, and let's assume that you run off the first half of the.
Of that.
A legacy project backlog, probably at a zero margin.
But is it fair to think that the.
That those margins you've been talking about are sustainable as we go into 2025.
We'll begin maybe in may.
<unk>.
Two other comments I mean, what is important for us.
The predictability of our margins.
And we think we are relentlessly positioning a carbon toward a better predictability of our margins we have been advocating with our clients.
This is progressive design build.
Project, which are the kind of valuable that.
That we'd like so you can see that we have it.
Jean-Louis: Finally, on slide 13, have disclosed on October 23rd, Aecon announced a strategic investment by Oak Tree Capital Management in Aecon Utilities. The investment closed on October 24th, Oak Tree acquired a 27.5% ownership interest in Aecon Utilities by a way of a net $115 million investment. This equates to a valuation of $715 million and a trailing 12 months-adjusted heavy-down multiple of 9.3 times. The investment positions a business to address attractive industrial growth opportunities across utility and markets in Canada and in the US.
We haven't been awarded.
I would say just suite first wont be the small modular reactor to go train expansion.
And this couple but.
A lot of other projects.
Also and then progressive schemes for example, or the debt.
As I mentioned, we have.
<unk> to $141 million.
EPC contract, which is at a fixed price.
It was progressive I mean, we spent two years being beef being awarded to.
To optimize the project with the battery suppliers with all our transformer suppliers.
It just means that this was progressive I mean that with <unk>. We have now entered into the execution phase of the junk up rehabilitation project. Following nine months of co development with our client.
Jean-Louis: Provides financial flexibility to accelerate Aecon Utilities acquisition strategy, introduces a recognized value added partner in Oak Tree with a successful track recording in utility and craft track train investing and trains Aecon's balance sheet providing Aecon the financial flexibility to fund our strategy growth initiatives.
Predictability is also of course, given by our recurring revenue would be do you have noted it's more than 40%.
23 against.
Against 22.
Jean-Louis: We are delighted to partner with an experienced and value added investment in Oak Tree to continue to grow Aecon Utilities across North America.
It's also given by by the fact that our backlog that was in 2018, almost 70% fixed price.
It is now around 47% fixed price. So this is Keith.
Operator: Thank you.
Predictability.
Operator: We will now turn the phone over to analysts for questions. Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 111 on your telephone. If your question has been answered, you will receive it yourself from the queue. Please press star 111 again. We'll pause for a moment while we compile our Q&A roster.
And.
And I'm asking you to look at the new <unk> called that is emerging.
I just gave you.
Other example, I mean, we need a few weeks, we must properly we will embark in the transition period.
The gold train operation you remember that we have a joint venture with Deutsche Bahn, which is it.
Yuri Lynk: Our first question comes from Yuri Lynk with Ken Accord genuity. Your line is open. Good morning, guys.
Probably.
I mean, one of the best European Operator specialty foods, it was kind of network and with our joint venture will begin to operate trains and to optimize it.
David Smales: Dave, maybe just give us your thoughts on when we might see the, or how to what we should expect in terms of the cash impact of the $92 million write-downs taken in the quarter. You did have over 110 million of positive operating cash loan in the quarter. So what should we expect in terms of operating cash loan in the next couple of quarters? Thanks. Yep. So in terms of agreements we've reached as Jean-Louis referred to rank Q2 and Q3, the positive outcome from those agreements is it deals with settling all outstanding claims and compensation on a number of items were to some extent cost has already been incurred.
The operation of those trades.
There are cost reimbursable.
Let's see schemes so all of this.
Just I mean is there a relentless effort from the last years to bring a con toward a much more.
Predictable.
The.
Margin profile, David do you want to add something yes, and in terms of.
Thinking about.
The underlying margin.
<unk> talked about.
And how that looks going forward.
Obviously, we always say don't look at one quarter in isolation, but look kind of over the last 12 months and I think if you do that.
You can see a very healthy margin ex the legacy projects close to 10% I think other than the impact.
David Smales: So the compensation we're now receiving is positive from a cash flow perspective. So you saw some of that in Q3 with the $100 million improvement in working capital. It was usually a seasonally, a seasonal quarter that draws a working capital. So some of that will also being Q4 and some of it in the first half of 2024. So based on the various agreements there's some up front payments and then some attached to milestones along the way.
Bermuda.
On the disposition of possibly muted I think you'll get just a constriction segment basis.
<unk> as we go through 'twenty for that kind of margin level is sustainable.
Okay. That's helpful. Thank you folks.
One moment for our next question.
Our next question comes from Ian Gillies with Stifel. Your line is open.
Good morning, everyone.
David Smales: But they effectively compensate us for working capital as bill upon the balance sheet for a period of time and will be cash flow positive over the next six to nine months. Okay. So the cash impact of this quarter's write-downs was largely reflected in past quarters. From a cash perspective, yes. Yeah. Okay.
Okay.
Yeah.
The dividends, obviously been a core part of the story for a long time, but can you maybe talk a little bit about the merits of keeping the level, where it is now given some of.
The cash requirements, perhaps going forward and some of the growth opportunities and whether perhaps that could be better allocated elsewhere, whether it be through M&A or new growth projects et cetera.
Yes, as you say it's been a.
The long term.
A component of our capital allocation.
David Smales: And then just a clarification on the on your liquidity position, I think you're operating lines been expanded from 600 to 850. How much of that 850 is available to AGI? Yeah. So the facilities, and that's split to so the previous 600 million facilities now $450 million to fill to the AGI level, $400 million to the Acorn Utilities level. The 400 at the utilities level is not accessible to AGI. It's accessible to a subsidiary of AGI in terms of ACon utilities, but no, the rest, the balance of AGI's business doesn't draw on that facility.
Okay.
And very consistent tried to be very consistent over a long period of time around how we think about dividends.
We think it brings.
Yes.
Disciplined.
To the business.
When it comes to capital allocation.
And as we think about it going forward.
We're focused on on the long term.
We're focused on the fact that.
The vast majority of the business is producing.
EBITDA.
We had good cash flow dynamics, we talked about earlier, the fact that we feel we turned the corner from a working capital perspective.
The legacy projects.
And so.
Okay.
The dividend is.
A key part of.
The capital allocation program.
David Smales: Obviously, we generate cash flow from the utilities business. We can distribute from utilities to AGI, but AGI can't, doesn't draw directly on ACon utilities facility. Okay, and it's on that 450 AGI facility that you're going to put the, the converts, right? Yes, correct. So, pro forma, you call it under, just under 300 million on that facility available at the end of the year. All else? Pro forma, right now, at the end of September, the NQ-3, the position doesn't reflect the $150 million investment from Oak Tree and doesn't reflect the, just over $200 million distributed from utilities to AGI as part of the transaction. And so, that cash effectively will fund the redemption of the convertible to ventures, and the balance will be cash or balance sheet. Okay, I'll get back on the queue. Thanks.
We have plenty of other options.
Operator: One more for our next question.
Growing the business and M&A.
Not worried about constraints in the context of a dividend policy.
Okay.
With respect to deal announced with Oaktree on Monday.
There is a fair bit of leverage being put on the utilities business on a trailing 12 month basis for.
What's been.
For what is expected to be a growth business can you maybe talk a little bit about the thought process about how much leverage you wanted to put on that business.
Why why you chose to go that route.
Yes so.
A big component of this is thinking about.
Free cash flow profile of the utility business the utility business is a.
As we've talked about before kind of a different profile of business to a lot of what we do in the construction segment, it's very much recurring revenue long term msas predictable.
Web programs predictable margins and along with that is predictable cash flow.
We believe the cash flow profile of that business will draw down that leverage.
As we move forward and we're very comfortable.
Oaktree that we have see.
Capacity.
<unk> utilities, and the hei level to make the investments.
Jacob Bout: Our next question comes from Jacob about with CIBC. Your line is open. Good morning. There's about 528 million backlog left of the four legacy fixed price projects. You sort of minus how you expect to work down that in the balance of 23 and 2425, and then, and then maybe just as a follow on there. You know, how are you thinking about the, the risk for their negative costs, reforecasts? When you expect that to subside?
We're looking to make to grow that business. So.
Obviously.
As we look at the balance between ATI and <unk>, we felt that.
Best approach was to.
Bring settlement.
Capsule back to E com.
I also convertible debentures that were very comfortable.
Going forward, we could grow the utilities business from the balance sheet.
The facility has and obviously.
Jean-Louis: Okay, maybe I'm, I take this one, Jacob. So, yes, we are around 500 million of remaining backlog for the four legacy project. In terms of declared backlog of 6.2 million, it's represent a little less than 10%. But when you add to this backlog, what's going to come most probably from the progressive design bill? It's not even 5%. As you know, on the full project, one of the rich mechanical completion, the three are the ones. I mean, two will be completed in 2024, and we are really nearing completion, and the other one around 2025. It just means that this will steadily decrease in the two to three quarters to come.
Joe It's from an Oaktree perspectives that coming into this investment with the same goal as those which is to grow the business.
Create significant value.
M&A is part of that would you say were comfortable with.
If you can just talk to there in terms of capacity.
Our cash flow profile utilities then.
We wouldn't have done the distribution that we did so both us and <unk> been very comfortable with how that business is positioned.
And maybe I can add something.
We of course, we can discuss about the 12% return the leverage I mean.
But.
What we.
We have to focus on is the strategy behind it.
That's been a long selection process.
And I'd have to say that we're extremely happy.
Jean-Louis: On another end, let's maybe come back a little on the situation of those legacy projects. So you have noted we reach three major seven-minute agreements on three of those projects. Those contract real negotiation like extremely complex with a lot of parameters, but what is important is that they allow to have a much better clarity on schedule to completion and eventual attach liquidity damages. They allow to have additional revenue and much more clarity and the way it could have been distributed.
With a partner we are now I mean, it was our favorite partner.
It was by far the one with the best knowledge of this industry of the different networks in United States, but also in Canada and by far I mean strategy can eat.
It was our preferred future partners and I think this is important.
Our.
Our life is about agility, it's about detecting it where we can.
Our our core competency at work, where where we can make more money be more profitable.
Jean-Louis: I mean the cash associated with it and they spoke about it. I mean we have a favor in in in those agreements, a quick disposal of the cash from our client and then it give us a better knowledge of the cost of the cost to come. On the last one, I mean you remember we have reached mechanical completion and we were protected from early 2023 in terms of cash because our cost were covered on those ones.
To be more predictable and definitely.
We think it is an excellent move and we will be happy about it.
Okay.
And.
That's helpful and maybe if I could just reframe the question a little bit just to understand theres been a lot of transition in the business over the last 12 months with respect to asset sales.
Could you maybe highlight a little bit of where you think the right net debt to EBITDA metric is for the business fully consolidated and then maybe where you think the right metric is for Aegon utilities, or where do you think that Mad Max metric as if you were to do some M&A.
Jean-Louis: So to come back to your risk question, cash is preserved on those jobs for the quarters to come and it is important. Maybe my third point will be about what is on when you when you take out the those legacy projects from our research, I mean you you have noted the EBDA for Q3, we have been 1223. I mean trailing 12 months, 375. I mean I don't know a lot of company with a structure of ACOL that can deliver 12% of EBDA.
Yes.
At the <unk> level.
So it's a little bit earlier, we've always said, we're comfortable with leverage.
Two to three times.
Typically aim to keep it in that kind of one to two times range.
But we are comfortable going above that.
T J.
Investments.
We believe we will.
Being able to Delever the business again.
Going forward so.
Typically we try and stay networks two times range.
On group level.
From a utility perspective, as I talked about earlier, a very different profile of that business.
Jean-Louis: It just means that the large majority of our business is very strong and it is very strong in a world where there is less and less contractors and this is this is what is important. I mean we we just have to stick to our strategy, we just have to stick to our discipline. You have not seen that the name of legacy project has not been invented by chance. I mean from September 2018 we have not entered in any dangerous project at ACOL.
Part of the rationale for creating a separate vehicle for growth in.
In the U S through that utilities business.
The separate balance sheet separate facilities, we think.
The utilities model can support higher leverage if needed to fund M&A.
With.
Strong operating cash flow below that to bring that leverage back down again as we.
Operate the business.
<unk> synergies from the M&A that we we look to do so so I don't want to put a max number on the utility side, but certainly.
So a bit higher than that we're comfortable with at the acre level. Okay. Thanks, very much that's helpful. I'll turn the call back over.
Jean-Louis: We have limited the size of our lump sum job. We have convinced a lot of our client to go to progressive design builder and this is important. I mean we have we have invested money in our project management academy in our continuous improvement program in our gate zero to understand them when we decide to pursue new job. What are the risks? What are the risks associated and how can we tackle correctly? So I think it is important also to know.
One moment for our next question.
Our next question comes from Jonathan Lamers, with Laurentian Bank Securities. Your line is open.
Good morning.
Earlier this year David.
You had indicated that free cash flow for the full year could be positive depending on the outcome of.
Some of the settlements so following the settlements in Q2 and now Q3.
David Smales: Jacob, just one of the point of reference, one of the point of reference going back to the question on working off that backlog by the middle of next year, we expect that backlog number to be roughly half of where it is now, so that kind of gives you a sense of the work off of that over the next three calls.
Would you expect positive free cash flow for the year.
Yes.
I think we will certainly be.
Close to it and there's always a few things at the end of the year.
Come in next week, one way if they don't come in.
It comes in early the next year slightly swings either way, but I think we will be.
At least relatively close to free cash flow breakeven this year.
Operator: One moment for our next question.
With a few.
The scope for it to be a little bit either way, but fairly close to free cash flow neutral for the year.
Benoit Poirier: Our next question comes from Benoit Poirier with Desjardins Capital Markets, your line is open. Good morning, everyone. Just in terms of charges around the legacy project, you took almost 300 million over the last year and a half.
As I said part of the.
Cash flow from these recent agreements will come in in the first half of 2020 also.
Yes.
That trend should continue as we go into next year.
David Smales: Could you talk about kind of a worst case scenario on what we might be looking forward, especially given the better disclosure that you've made in your MDNA and the fact that you were successful to reach a few settlements already. So obviously, you're a big factor in the last couple of quarters. It's been the agreements reached on a number of these projects. As Jean-Louis said in his comments, that gives us a lot of clarity around compensation for past issues, schedule going forward, another kind of terms and conditions around these settlements that mean, well, we've had to make some adjustments in the last couple of quarters.
In terms of the unwinding of working capital from some of those projects.
Do you have an estimate for the cash from the recent agreements that will come in 2024.
Apologies if I missed that.
No we haven't we haven't disclosed specific numbers on.
Settlement agreements, obviously, each one of these.
Agreements is confidential in terms of.
David Smales: We do feel that that takes a lot of uncertainty off the table, positions as well to execute going forward, and from an overall comfort level in terms of the amount of variability in our forecast, we think that's been reduced by each one of these settlements. We certainly expected to be less noisy going forward, and we're very focused on execution. We don't expect that to be any big developments on these projects in terms of further significant agreements or changes to what we've recently agreed with our clients in the civil future.
Pause and cause et cetera, So we haven't quantified that.
Exact demands.
Okay, one more topic if I can.
Just on the.
Legacy projects.
If these so I understand that the backlog related to those is expected to be roughly half by mid next year.
My understanding is there could be arbitration processes.
Continue longer.
As the larger risk at this point.
Okay.
From <unk> to the income statement really related to those.
Arbitration is now.
It comes there.
Just help us sort of.
Ranked.
The magnitude of the potential.
Risks remaining.
Four.
I would say that there are there a few weeks I mean, the first one on which.
All our teams are focusing your execution and the completion of the project to get them substantially completed.
For the fourth one Amit it was extremely important as committed to be mechanically complete at the end offset.
In September so completing those drop is.
As a point of focus for our team.
David Smales: So the positions we have at the end of Q3 are based on everything we know at this date, and we think those positions are reliable and based on all the information we've got our fingertips based on those settlements in the last two quarters.
On another hand, yes, I mean, it will be arbitration and it will be also negotiation there will be other commercial settlements within demand tens of years to come.
As I've told you already we have put the best team.
David Smales: Okay, okay, and just in terms of capital deployment, when we look at your leverage, you were at 2.3 at the end of Q3, I understand the leverage will come down with the proceeds from Oak Tree. Just wondering about what kind of optimal level you see a con operating the covenant, the quotient you have, and also in terms of capital deployment. What about the availability to deploy that capital toward M&A around Aecon Utilities, which was a reason why you try to deal with Oak Tree?
Within our company and.
Also as an external.
External partners. So we are confident that we are aligning very strong team for this.
I can say that.
We.
Mei Mei.
Two negotiation, what we would prefer but also arbitration because we've seen that we have quite strong cases.
I'll leave it there thanks for your comments.
One number for next question.
David Smales: Yeah, so if you say at the end of Q3, we're at 2.3 times, including the Converbal Adventures. Proformer for the Aecon Utilities Transaction, that will be around 1.2 times. We're very comfortable in an average range up to kind of 2-3 times in terms of, you know, the long-term support of bonding companies and performing security requirements. So we think we have plenty of room to invest in in the business. We have significantly strengthened the balance sheet this year, and we are very focused on growing utility business.
Our next question comes from Sean <unk> with Raymond James Your line is open.
Hey, good morning, guys.
Looking forward do you see any opportunities out there to do in Lake JV style project to help grow the utilities business faster or is that something that you guys would need to consider for that line of business.
I think.
Across all of our businesses, including utilities.
We're always comfortable entering into joint ventures for specific projects.
All.
Indigenous groups the longer term relationships.
We have some joint ventures that we worked through.
Great.
Various destinations.
So.
Project by project, that's very usual for us.
In terms of.
David Smales: In terms of M&A, we expect to play a role in that. We're already active in terms of opportunities in the U.S, for the Utilities business, and we're very comfortable that we can deploy capsules to support M&A alongside our partner.
Longer term joint ventures specific opportunities.
Sure we would look at.
Wherever it makes most sense.
Based on the specific circumstances, what clients are looking for.
What were expressed in a particular market et cetera et cetera. So.
Jean-Louis: Okay, and last one for me, you've been successful in selling half of Burmida at twice the street expectation. If you look at the road building business that was less strategic, and also margin diluted, you sold it close to 9 times, Aecon Utilities also you monetize at 9 times. Stocks still trading below 3 times in terms of EVB Duff or the rest of the business. So are there any reason that do not allow Aecon to look at creating further value given the valuation at these levels and your track record and monetizing some of those assets over the last years?
Already in the U S.
Some of the initial work.
Utilities group is doing down there as we've established our presence in it.
Joint venture with.
South link for example, so yes, yes, I mean, we're open to.
We have a structure is best suited for the opportunity.
If it makes the most sense in terms of creating value and growing the business.
Okay.
Okay perfect. Thanks, that's it for me.
And im not showing any further questions at this time I'd like to turn the call back over to Adam for any closing remarks.
That's great. Thanks, Kevin I appreciate everyone's time today have a good balance today and as always if there are follow up questions feel free to reach out to our team we should speak with you all soon.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Jean-Louis: But my answer would be that we are very comfortable with the diversity that we have been doing. I mean, there was a reason for Aecon transportation East in terms of an extremely competitive market, capital intensive, and it was a clear decision from us, and we are very happy with the valuation we could get. Burmida, it was a rather different way of looking at it. I mean, we consider that Aecon that we can be successful and make money on the totality of the value chain in mean developing, financing, engineering, building, and operating our assets when the contract allows it.
Okay.
[music].
Okay.
Great.
Okay.
[music].
Yes.
Thank you.
Jean-Louis: That we create more value, what was important for us was to keep this 50.1% and the management contracts. At the end of the day, we have to go on building and developing infrastructure, and we think that the balance of activity that we have at the moment is perfectly fit. It is what we need in front of the market that we...
David Smales: Okay, and given the valuation these days, how do you look at the buyback given the the valuation these days? So I think our focus is on a few areas when it comes to capital deployment. Obviously, we need to deal with the convertible adventures at the end of this year. We've been very consistent around our dividend program. And as we talked about, we see significant growth opportunities both organic and through M&A particularly focused on the utilities business.
David Smales: So that's the focus right now from a capsule perspective. Obviously the difficulty to highlight in your initial question around the valuation of the dispositions that we've done this year and where the share price is trading. We feel the best way to highlight future value is to continue to execute on the balance of the business, continue to highlight the fact that the underlying business is generating $375 million of EBITDA on a 12 month basis and get these legacy projects behind us.
David Smales: I think once we've done all that, then we would hope that that would do reflected in valuation and if it's not, then obviously we would look at share buybacks or anything else that made sense. But there's some strategic and immediate uses of capital that we're more focused on right now.
Operator: Okay, thanks for the talk.
Operator: One moment for our next question.
Chris Murray: Our next question comes from Chris Murray with ATV capital markets. Your line is open. Yeah, thanks for the morning.
David Smales: Maybe it's following on, I think David, I don't know if you want to try to take this one or Jean Louis, but thinking about the business on a go forward basis with the, you know, with the projects, I guess maybe ring fence, or at least kind of stabilized now from a financial perspective and the cash flows coming in. You talked a little bit about it, call it a low teams type EBITDA margin with the remaining business.
David Smales: Can you talk a little bit how we should think about what the margin profile is going to look like in 2024, let's assume that you run off, you know, the first half of that, of the legacy project backlog, probably at a zero margin. But is it fair to think that those margins you've been talking about are sustainable as we go into 24 and 25?
Jean-Louis: We'll begin maybe and they may add to other comments. What is important for us is the predictability of our margins. And we think we are relentlessly positioning ACON toward a better predictability of our margins. We have been advocating with our clients. It's about this progressive design build project, which are the kind of animals that we like, so you do think that we have been awarded, I would say, the three first ones, the small modular reactor, the core train expansion and scabble, but a lot of other projects are also, and those are progressive schemes.
Jean-Louis: For example, on Ada, yeah, as I've mentioned, we have been awarded a $141 million EPC contract, which is out of six price, but it was progressive. I mean, we spent two years being awarded to optimize a project with the battery suppliers, with all our transformer suppliers, it just means that this was progressive. I mean, with IROBC, we have now entered in the execution phase of the John Art rehabilitation project, following nine months of court development with our client. So this gives credit stability, and I'm asking you to look at the new way called that is emerging.
Jean-Louis: I mean, just give you another example. Within a few weeks, we must probably will embark in the transition period for the gold train operation. You remember that we have a joint venture with Deutsche Bank, which is probably one of the best European operators, especially for those kind of network. And with our joint venture, we'll begin to operate trains and to optimize the operation of those trains. And there are cost-reinversible plus fee schemes. So all this just, I mean, is a relentless effort from the last years to bring a contour of much more predictable margin profile.
David Smales: David, you want to add something? Yeah, and in terms of, you know, thinking about underlying margin that you talked about and how that looks going forward, obviously we always see that don't look at one quarter in isolation, but look at kind of at the last 12 months. And I think if you do that, you can see very healthy margin X or legacy projects have caused a 10 percent. I think other than the impact of the muted and the disposition of half of the muted, I think it will go just on a construction segment basis, and we think as we go through 24, that kind of margin level is sustainable.
Operator: Okay, that's helpful. Thank you, folks.
Operator: One moment for our next question.
Ian Gillies: Our next question comes from Ian Gillies. Let's see if your line is open.
David Smales: Morning, everyone. The dividends obviously been a core part of the story for a long time. Can you maybe talk a little bit about the merits of keeping the level where it is now given some of the cash requirements perhaps going forward and some of the growth opportunities and whether perhaps that could be better allocated elsewhere, whether it be through M&A or new growth projects, etc. Yeah, as you say it's been a long-term component of our capital allocation in very consistent and try to be very consistent over a long period of time around how we think about dividends, we think it brings a certain amount of discipline to the business when it comes to capital allocation.
David Smales: And as we think about going forward, we're focused on the long-term, we're focused on the fact that the vast majority of the business is producing significant EBITDA with good cash flow dynamics. We talked about earlier the fact that we feel we turn the corner from a working capital perspective on the legacy projects and so our view is the dividend is a key part of the cash allocation program and we have plenty of other options around growing the business and M&A. We're not worried about constraints in the context of the dividend policy.
David Smales: Okay. With respect to the deal on Monday, there's a fair bit of leverage being put on the utility business on a trail end 12-month basis for what's been, for what is expected to be a growth business. Can you maybe talk a little bit about the power process, about how much leverage you wanted to put on that business, and why you chose to go that route? Yeah, so a big component of this is thinking about the free cash flow profile that utility business.
David Smales: The utility business is a, as we talked about before, a kind of different profile of business to a lot of what we do in the construction segment, in that it's very much recurring revenue, long-term MSAs, predictable work programs, predictable margins, and along with that is is predictable cash flow. We believe the cash flow profile of that business will draw down that leverage as we move forward, and we're very comfortable as our oak tree that we have the capacity within ACON Utilities and at the AGI level to make the investment.
David Smales: We're looking to make to grow that business. Obviously, as we look at the balance between AGI and AUDI, we felt that the best approach was to bring some caps all back to Aecon, to pay off convertible to benches. We're very comfortable going forward. We can grow the utility business from the balance sheet and the facility it has. Obviously, from an oak tree perspective, they're coming into this investment with the same goals as those, which is to grow the business, create significant value and emanate part of that.
David Smales: If they weren't comfortable with everything just talk to them in terms of capacity and cash flow profile and utilities, then we wouldn't have done the distribution that we did. So both us and oak tree are very comfortable with our business disposition.
Jean-Louis: Maybe I can add something. Of course, we can discuss about the 12% of returns, the leverage. What we have to focus only is a strategy behind this. It has been a long selection process and I have to say that we are extremely happy with the partner with what we are now. I mean, it was our favorite partner. It was by far the one with the best knowledge of this industry, of the different networks in United States, but also in Canada, and by far, I mean, strategically, it was our preferred future partners.
Jean-Louis: And I think this is important. Our life is about agility, about detecting it, where we can put our core competency at work, where we can make more money, be more profitable, be more predictable, and definitely we think it is an excellent move and we like to be happy about it.
David Smales: That's helpful. Maybe if I could just reframe the question a little bit just to understand, there's been a lot of transition in the business over the last 12 months with respect to asset sales. Could you maybe highlight a little bit of where you think the right net debt to EBITDA metric is for the business fully consolidated? And then maybe where you think the right metric is for ACON utilities or where you think that max metric is, if you were to do some M&A?
David Smales: Yeah, so at the ACON level, chips on this a little bit earlier, we've always said we're comfortable with leverage up to three times. We typically aim to keep it that kind of one to two times range, but we're comfortable going above that for strategic investments that we believe will lead to being able to deliver the business again going forward. So typically, we try and stay in that one to two times range of the ACON group level.
David Smales: From a utility perspective, they talked about earlier, a very different profile of that business, part of the rationale for creating a separate vehicle for growth in the US through that utilities business with a separate balance sheet, separate facilities. We think the utilities model can support high leverage if needed to fund M&A with the strong operating cash flow below that to bring that leverage back down again, as we operate the business and increase the energies from the M&A that we look to do. So I don't want to put a max number on the utility side, but certainly a fair bit higher than we're comfortable with at the ACON level.
Operator: Okay, thanks very much. That's helpful.
Operator: I'll turn the call back over.
Jonathan Lamers: One moment for our next question. Our next question comes from Jonathan Lamers with the Renton Vex securities. My line is open.
David Smales: Good morning. Earlier this year, David, you'd indicated that free cash flow for the full year could be positive depending on the outcome of some of the settlements. So, following the settlements in Q2 and now Q3, would you expect positive free cash flow for the year? I think we'll certainly be close to it. There's always a few things at the end of the year that if they come in the swing one way, if they don't come in, it comes in early the next year and it finds the swings either way, but I think we'll be at least relatively close to free cash flow break even this year with a few.
David Smales: It's cold for it to be a little bit either way, but fairly close to free cash flow neutral for the year. As I said, part of the cash flow from these recent agreements will come in in the first half of 2024, so that trend should continue as we go into next year in terms of unwinding working capital from those projects. Do you have an estimate for the cash from the recent agreements that will come in 2024?
David Smales: Apologies if I missed that. No, we haven't disclosed specific numbers on settlements and agreements. Obviously, each one of these agreements is confidential in terms of pannas and clans, etc. So we haven't qualified to the event to names. Okay. One more topic, if I can, just on the legacy projects, if these, so I understand that the backlog related to those is expected to be roughly half by next year. My understanding is there could be arbitration processes that continue longer.
David Smales: Is the larger risk at this point from to the income statement really related to those potential arbitrations now? The outcomes there just help us sort of rank the magnitude of the potential risks remaining in the fore? I would say that there are few risks. I mean, there's the first one on which all our teams are focusing is the execution and the completion of those projects to get them substantially completed. This is one for the fourth one.
David Smales: I mean, it was extremely important, as committed to being mechanically completed at the end of the time. So completing those job is a point of focus for our team. On another hand, yes, I mean, there will be arbitration and there will be other negotiations, there will be other commercial settlements within the months and the years to come. We, as I've told you already, we have put the best teams within our company and also as an external partner.
David Smales: So we are confident that we are aligning a very strong team for this second phase. Neither, which may lead to negotiation what we would prefer but also arbitration because we think that we have quite strong cases.
Operator: I'll leave it there. Thanks for your comments.
Operator: One moment for our next question.
Sean Jack: Our next question comes from Sean Jack with Raymond James, your line is open. Hey, morning guys.
David Smales: Looking forward to seeing opportunities out there to do like a GV style project to help grow the utilities business faster or is that something that you guys would consider for that line of business. I think across all of our businesses, including utilities, we're always comfortable entering into joint venture specific projects or with indigenous groups, the longer term relationships and we have some joint ventures that we work through with various First Nations.
David Smales: So project by project that's very usual for us in terms of longer term joint ventures for specific opportunities. I mean, sure we would look at whatever makes most sense based on the specific circumstances what clients are looking for, what works best in a particular market. So already in the US, some of the initial work utilities group is doing down there as we've established a presence is in a joint venture with Southland for example. So yeah, I mean, we're open to whatever structure is best suited for the opportunity and whatever makes the most sense in terms of creating value going business.
Operator: Okay, perfect. Thanks for it's up to me.
Operator: And I'm not showing any further questions at this time.
Adam Borgatti: I like to turn the call back over to Adam for any closing remarks. That's great. Thanks, Kevin. Appreciate everyone's time today. Have a good balance. But then as always, there are a lot of questions. Feel free to reach out to our team.
Operator: We shall speak with you all soon.
Operator: Ladies and gentlemen, that's conclude today's presentation.
Operator: You may now disconnect and have a wonderful day. Thank you.