Aecon Group Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2024

There are 10 speakers on the call.

Operator

Thank you for standing by, and welcome to Aecon Group's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. I would now like to hand the call over to Adam Borgatti. Please go ahead.

Speaker 1

Thank you, Latif. Good morning, everyone, and thanks for participating in our results conference call. This is Adam Borgatti speaking, Senior Vice President of Corporate Development and Investor Relations. Joining me are Jean Louis Servranck, President and CEO Jerome Julier, Executive Vice President and CFO and Alister McCallum, Senior Vice President, Finance. Our earnings announcement was released yesterday evening, and we posted a slide presentation on the Investing section of our website, which we'll refer to during this call.

Speaker 1

Following our comments, we'll be glad to take questions from analysts, and we ask that those keep to one question and a follow-up before getting back into the queue. As noted on Slide 2 of the presentation, listeners are reminded that the information we're sharing with you today includes forward looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. Although Aecon believes the expectations reflected in these statements are reasonable, we can give no assurance that these expectations will prove to be correct. And with that, I'll hand the call over to Jerome.

Speaker 2

Thanks, Adam, and good morning, everyone. I'm going to touch briefly on Aecon's consolidated results, view the results by segment and address Aecon's financial position before turning the call over to Jean Louis. Consistent to last quarter, we've added additional information to help clarify the underlying results, excluding the fixed price legacy projects and divestitures. We provide detailed reconciliation tables on Slide 15, 16 and 17 of the conference call presentation. Turning now to Slide 3.

Speaker 2

On a reported basis, revenue for the 3 months ended September 30, 2024, dollars 1,300,000,000 was $36,000,000 or 3% higher compared to the same period in 2023. Adjusted EBITDA of $127,000,000 a margin of 10% compared to $32,000,000 a margin of 2.6% last year. The increase was largely due to an improvement from the legacy projects, which recognized negative gross profit of $91,000,000 in the Q3 of 2023 compared to nil in the Q3 of 2024. Operating profit was $81,000,000 in the quarter compared to an operating profit of $140,000,000 last year. The decline in operating profit was primarily driven by the net impact from the legacy losses in Q3 of last year and the gain from the sale of a 49.9 percent interest in Skycorp of $139,000,000 in the Q3 of 2023.

Speaker 2

As a reminder, gains on divestitures or normal course equipment sales are not included in MACON's adjusted EBITDA measures. Excluding the impacts from the legacy projects, acquisition related costs and divestitures, as adjusted revenue for the 3 months ended September 30, 2024, of $1,200,000,000 compared to $1,000,000,000 in the same period in 2023 and adjusted EBITDA of $127,000,000 compared to $117,000,000 last year. Adjusted diluted earnings per share in the quarter of $0.86 compared to $1.63 last year. Reported backlog of $6,000,000,000 at the end of the quarter compared to backlog of $6,200,000,000 at December 31, 2023, and $6,200,000,000 at the end of the Q3 of 2023. New contract awards of $1,100,000,000 were booked in the quarter compared to $591,000,000 in the period prior.

Speaker 2

Now to look at results by segment. Turning to Slide 4. Construction revenue of $1,300,000,000 in the 3rd quarter was $57,000,000 or 5% higher than same period last year. Revenue was higher in nuclear operations from an increased volume refurbishment work at nuclear generating stations in Ontario and the United States. And civil operations from a higher volume of major projects and road building construction work in Western Canada and utilities operations from a higher volume of electrical transmission work driven by U.

Speaker 2

S. Operations following the acquisition of Extreme PowerLine in the Q3 of 2024 and from an increase in utility scale battery energy storage system work. Partially offsetting the increases was lower revenue in industrial operations from the increased activity on the mainline pipeline work and in urban transportation solutions primarily from the decrease in LRT work in Ontario and Quebec as 3 LRT projects near completion. On an adjusted basis, construction revenue was $1,200,000,000 compared to $1,000,000,000 in the same period last year. New contract awards of $1,100,000,000 in the Q3 of 2024 compared to $563,000,000 in the same period last year.

Speaker 2

Backlog at the end of the Q3 of 5 $900,000,000 compared to $6,200,000,000 at the end of the Q3 of 2023. Turning now to Slide 5. Adjusted EBITDA of $114,000,000 compared to $17,000,000 last year. As previously noted, the increase was primarily due to an improvement in the legacy projects with recognized negative gross profit of $91,000,000,000 in the Q3 of 2023 compared to nil in the Q3 of 2024. On an as adjusted basis, adjusted EBITDA was $114,000,000 this quarter compared to $108,000,000 in the same period last year.

Speaker 2

We would note that adjusted EBITDA last year benefited from reduced MG and A levels, whereas the current period reflects a more typical pattern of personnel costs within MG and A. Turning to Slide 6. Concessions revenue for the Q3 was $3,000,000 compared to $26,000,000 in the same period last year. This decrease in revenue was driven by a sale of a 49.9 percent interest in Skyport and commencement of the equity method of accounting for Aecon 13 50.1 percent interest in Skyport. Adjusted EBITDA in excess of $22,000,000 in the 3rd quarter compared to $27,000,000 last year and operating profit of $5,000,000 compared to $153,000,000 last year.

Speaker 2

Lower operating profit in the quarter was primarily due to the previously noted Skyport transaction, which resulted in a period over period decrease in gains on sale of $139,000,000 dollars Now on Slide 7, we brought together the as adjusted information to exclude impacts of legacy projects, acquisition related costs and divestitures to provide insight into the underlying performance of our business. On an as adjusted basis, revenue for trailing 12 month period ended September 30, 2024 was $4,000,000,000 compared to $3,800,000,000 for the same period last year. Adjusted EBITDA was $348,000,000 in the trailing 12 month period compared to $351,000,000 in the same period last year. For the construction segment, on an as adjusted basis, adjusted EBITDA was $311,000,000 for the trailing 12 month period, representing a 7.9% margin. Turning to Slide 8.

Speaker 2

At the end of Q3, Aecon held cash and cash equivalents of $197,000,000 excluding cash and joint operations. Cash balances at September 30, 2024 were atypically strong due to timing related project payments and receipts as well as the continuation of strong cash balances from the start of the year. Typically, cash balances at the end of the 3rd quarter are seasonally lower due to projects and working capital funding requirements. In addition, as of September 30, 2024, Aecon had committed revolving credit facilities of $850,000,000 of which $166,000,000 was drawn and $4,000,000 was utilized for letters of credit. Drawing credit is entirely at the Aecon Utilities level.

Speaker 2

Aecon has no debt or working capital credit facility maturities till 2027 except equipment loans and leases in the normal quarters. At this point, I'll turn the call over to Jean Louis to address our business performance and outlook.

Speaker 3

Thank you, Lero. Turning to Slide 9, Aecon's goal is to build a resilient company through a balanced and diversified work portfolio, while enhancing critical execution capabilities and project selection to play to our strengths. Over the trailing 12 months period, roughly 45 percent of Aecon's construction revenue was generated from the utilities and nuclear sectors compared to 42% for the comparative period in 2023. We continue to leverage our self perform capabilities and one Acorn approach to maximize value for clients through improved cost certainty and schedule, while offering a broad range of services from development, engineering, investment and construction to longer term operations and maintenance to cover the full infrastructure value chain. We are embracing new opportunities to grow in areas linked to decarbonization and the energy transition and in U.

Speaker 3

S. And international markets. And these opportunities are intended to diversify Aecon geographic presence, provide further growth opportunities and deliver more consistent earnings through economic cycles. Turning to Slide 10, demand for Aecon services across Canada continues to be strong With backlog of €6,000,000 at September 30, 2024, recurring revenue programs continuing to see robust demand and a strong bid pipeline, Aecon believes its position to achieve further revenue growth over the next few years and is focused on achieving improved profitability and margin predictability. Remaining backlog to be worked off on the 3 remaining legacy project was 182,000,000 dollars or 3 percent of total backlog at September 30, 2024.

Speaker 3

We remain focused on driving those projects to substantial completion with 2 currently expected to be substantially complete in early 2025 and the final project by the end of Q3 of 2025. Trailing 12 months recurring revenue was €1,000,000,000 in the quarter comparable to the prior trailing 12 months period and up over 50% versus 2 years ago, taking into account the divestitures of ATE and the 49.9% interest in Skyport in prior periods on a like for like basis. Recurring revenues are typically executed on a non fixed price basis with the majority being over and above to our reported backlog figures. Turning to Slide 11, development phase work is underway on a number of major project in which Aecon is a participant, including the GO Expansion on Corridor Works project, the Scarborough Subway Extension, the Darlington New Nuclear Project, the Contrekar Terminal Expansion, the U. S.

Speaker 3

Virgin Island Airport Redevelopment Project and new additions, The Winnipeg North and Sewage Treatment Plant Biosolids Facilities Upgrade Project, the Howard Anson Dam Additional Water Storage Fish Passage Facility and Highway 8 Project. These projects are being delivered using collaborative progressive design build models with the majority expected to move into the construction phase in 2025 or 2026. The Goh expansion project also includes an operations and maintenance component over a 23 year term commencing January 1, 2025. As a reminder, none of the anticipated work from this progressive design build project is yet reflected in backlog, but could in aggregate increase our backlog in 2025 and into 2026 to approximately double the level of our current backlog. Turning to Slide 12, with strong demand, growing recurring revenue programs and diverse backlog in hand, Aecon is focused on achieving solid execution on its projects and selectively adding to backlog through a disciplined bidding approach that supports long term margin improvement in the construction segment.

Speaker 3

In the Concessions segment, there are a number of opportunities to add to the existing portfolio of Canadian and international concessions in the next 12 to 24 months, including projects with private sector clients that support a collective focus on sustainability and the transition to a net zero economy as well as private sector development expertise and investment to support aging infrastructure, mobility, connectivity and population growth. Revenue in 2024 will be impacted by the sales of ATE and 49.9% interest in Skyport completed in 2023. The substantial completion of several large projects in 2023, the legacy project and the major projects I described currently in the development phase being delivered using the progressive design build or Alliance models, which are expected to move into the construction phase in 2025 or 2026. AECOM believes its position to achieve further revenue growth commencing in 2025 and over the next few years. The completion and satisfactory resolution of claims on the remaining 3 legacy projects remains a critical focus, while the remainder of the business continues to perform as expected, supported by the strong level of backlog and the strong demand environment for our services as we continue to make strategic investments in our operations to support access to new markets and increase operational effectiveness.

Speaker 3

Turning to Slide 13, on October 28, Aecon entered into a definitive purchase agreement to acquire United Engineers and Construction Inc. Or United, a nuclear and conventional power contractor headquartered in New Jersey for a purchase price of $33,000,000 payable in cash at closing. United's strong technical expertise in the nuclear sector will advance our continued diversification and growth with a strategic focus on the energy transition. Aecon and United are currently engaged as joint venture partners in executing steam generator replacement work and fuel channel and feeder replacement on all 6 units at the Bruce Nuclear Generating Station in Ontario. United's management and operational teams will join Aecon on closing of the transaction, which is subject to customary adjustments and closing conditions, including obtaining all necessary regulatory approvals.

Speaker 3

Finally, each year during Safety Week, we highlight and strengthen our commitment to safety by focusing on the importance of safe work practices. This year marked the 20th anniversary of Aecon's annual safety event and we emphasized our shared responsibility to manage unexpected events and last minute changes that emerge while we work. Safety always is deeply embedded into our corporate culture and we thank our employees for their active participation and contribution to this very important initiative. Thank you. We will now turn the call over to analysts for questions.

Operator

Our first question comes from the line of Yuri Lynk of Canaccord Genuity. Please go ahead, Yuri.

Speaker 4

Thank you and good morning everyone.

Speaker 1

Good morning, Yuri.

Speaker 4

Nice quarter guys. Jean Louis, just maybe an update on the cadence of bringing the progressive design build and alliance contracts into backlog. I heard you referencing 2026 a lot more in your prepared remarks. And I don't know if that's indicating a bit of a delay in bringing these contracts in or the fact that you've added a few more to the original 5 that you had last quarter. So just any kind of help on the cadence of bringing these into backlog?

Speaker 4

Do we start to see that in Q1, 2025 or is it more back end loaded?

Speaker 3

Yes, you're right, Yuri. We have added a few new projects on progressive design build. The development phases of those projects is usually between 18 24 months, and that's good. You probably remember this is why we like and we have been advocating with our client for this model because we need this time to finalize the design and have much better certainty on the construction costs and schedule. So nothing special.

Speaker 3

I mean, there are still quite a few that are going to emerge as construction phase in 2025. For example, Scarborough, I mean, where we are at the end of the development phase. Encore, as I told you, I mean, it's going to be phased, but we will begin construction in 2025. The SMR is finalizing at the moment its licensing activities. So early works have already begun, but the real construction will begin something like mid-twenty 25.

Speaker 3

Obviously, I mean Winnipeg that we won a few weeks ago requires its 1.5 years of development phase. Over Ansem, I mean, which is a dam that we just been awarded for development phase with the U. S. Corp of Engineers will require, again, 18 months of development phase. So nothing special.

Speaker 3

This is exactly the phasing that you are mentioning in your question.

Operator

Okay.

Speaker 4

And just as a follow on to that, I mean, how do we think about the so you're going to bring them into backlog starting in 2025, some of them in the back half. So I mean, how do we think about the revenue contribution next year? Is it going to be more of a back half where we see the growth from these projects?

Speaker 3

Yes. I mean, I will begin and maybe Jerome can add a little more details. Those works are complex. This is why we didn't want to do them on a lump sum 20 basis. It means that there is a certain ramp up with early work preparation of the work.

Speaker 3

What is sure is that 2024 has been a transition year because we have lost revenue, but we are very happy having lost revenue because that was revenue from legacy projects that are coming to an end. It was revenue from CGL and it was revenue from AATE that we divested because it was not meeting our threshold about operational profit. So what I mean the revenue we will present in 2024 is nothing unexpected. We will ramp up with those progressive design build that will be a nice timing up of our revenue in 2025.

Speaker 2

Yes. It's Jerome here. Nothing really further to add on that one, Yuri. Progressive Design Build projects will generally follow similar production cadence to most projects. So the revenue gets recognized as the costs get booked, which means that at the initial opening phases will not be as heavy on the revenue.

Speaker 2

And then as we get into full production, ramping new ramps up and then at the back end of the project, it tails off again. So a bit of a bell curve style cadence to it.

Operator

That's helpful. Okay, I'll get back

Speaker 4

in the queue guys. Thanks.

Speaker 1

Thanks Yuri.

Operator

Thank you. Our next question comes from the line of Jacob Bout of CIBC. Your question please Jacob.

Speaker 5

Good morning.

Speaker 6

I had a question on the United acquisition. It enhances your nuclear and some of your conventional power, but also gives you exposure to the U. S. So maybe just talk through what is your long term vision for nuclear and what does this mean for expansion into the U. S?

Speaker 2

Okay.

Speaker 3

We are very happy about this acquisition for a few reasons. I mean, it's perfectly aligned with our strategic plan. It's about energy transition. It adds a lot of non fixed price contracts. It's about U.

Speaker 3

S. Expansion. I remind you that United is made of 2 blocks, I would say. Up, I mean, of the activity of United is about an activity where we are already engaged in and we know perfectly, which is FCF arm in fuel channel and feeder replacement at Bruce and steam generator replacement. They are well I mean United is well embedded with Chromatome in the SGT partnership steam generator.

Speaker 3

So we know very well this activity and we are very comfortable. The second part of United is about engineering and mostly in the U. S. And we like it. You probably know that U.

Speaker 3

S. Is a country with the largest number of reactors in operation, if I'm not wrong, something like 96 reactors at the moment. United will be our entry door in a lot of big utilities through their engineering works. So it's why I mean we are very comfortable with this acquisition. There's a lot of work to do in the nuclear field in United States.

Speaker 3

Refurbishment is a little late in front of what has happened in Canada, but it will come. All those reactors, I mean, we see their lifetime extended by something like 20 to 30 years. There will be a lot of work in major component replacement. Plus the new unit, I mean, the SMR is going to be, I mean, a growing activity in United States. And United has also some engineering capacity in the conventional power, and we like it.

Speaker 3

This is energy transition. This is why I would say it was a perfect fit and a very nice acquisition.

Speaker 6

And if you think about capital allocation over the 12 to 18 months, how important is M and A and is U. S. The focus for M and A?

Speaker 2

Hey, Jacob, Jerome here. It's a good question. M and A is a tool that we use to action our strategic plan. With regards to Canada versus the U. S, it's all going to depend on the availability of opportunities that fit our parameters with regards to returns, capabilities and also pricing.

Speaker 2

As you know, in some sectors where we operate, the valuations are extraordinarily robust. And so we need to find clever ways to expand into those markets, whether it's organically or through M and A. And generally speaking, capital allocation, just to hit it on the head, the focus is really on core operations and trying to keep our balance sheet as conservative as possible to support our ongoing business. We do want to invest in the business to improve resiliency. So that includes people, assets, potentially M and A.

Speaker 2

We do have ongoing capital return programs for our shareholders. We've got the dividend, which is obviously a very important part of their shareholder return strategy within Aegon. But also as you've seen, we started to be a little bit more active with regards to share repurchases just because we see that as an opportunity to use capital as well. M and A, we wouldn't discount additional activity there. We just don't think it's going to be an enormous push from our perspective.

Speaker 2

Again, we're trying to be pretty thoughtful and tactical with regards to how that capital gets allocated. And it could be across Canada or the United States, like we're not necessarily they'd be biased one to the other. Within utilities, obviously, M and A is an important program. So I'd say just a scenario that

Speaker 3

will continue to be active in.

Operator

Okay. That's helpful. Thank you. Thank you. Our next question comes from the line of Chris Murray of ATB Capital Markets.

Operator

Your line is open, Chris.

Speaker 6

Thanks, folks. Good morning. First question, turning maybe to the some of the legacy issues and legacy projects. We're another quarter down the road. This was in the Q1 and a few where we haven't seen a write down.

Speaker 6

I know last quarter you took the $110,000,000 reserve, but you also made the commentary around if you think about, call it, not the downside scenario, maybe worst would be $125,000,000 to complete. Just wondering where you're sitting right now. Has anything really changed in the last little while that maybe gives you a better view on the outlook? Is there any way to think about the possibility of that $125,000,000 being necessary? And is it the number maybe a little bit less in sort of a downside scenario right now?

Speaker 2

Hey, Chris, it's Jerome here. No change since our Q2 disclosures. So, we're currently satisfied with our positions on the projects. So that relates to the estimates that led to the $110,000,000 write down. And then consistent with the prior disclosures, we still believe there's potential for additional risks to Aecon, if any, to complete these 3 projects, not to exceed or should not exceed $125,000,000 to the end of 2025.

Speaker 2

So basically to answer your question, appreciate the hopefulness, but we're basically steady to where we were in Q2 on the topic.

Operator

Okay.

Speaker 3

I may add some information about where we are because we are pushing all of those jobs over the line. I was yet today on Gordie Howe Bridge. All our targets are being met. I mean, we had to install the first overlay, which is a mix of concrete and latex on the top of the bridge before the winter and it's going to be done. Point of entry are going quite well.

Speaker 3

The Canadian one that was an important date that had to be ended over to the border of Solriti at the end of November will be ended over on time. The rest of the program is going well. So I'm rather confident with this one. The 2 LRT, we are also making good progress. I mean, at Finch, we finalized the stress test with 14 vehicles full speed ahead last Friday.

Speaker 3

It's now over to TTC, I mean, to take over the line because they will be the operator and bring this project to substantial completion to 1, 2025. Eglinton also we are extremely close to finalize the stress test with TCC and so we are also expecting Q1 2025.

Speaker 6

Okay. That's helpful. My other question is just maybe a little bit thinking about 2025. You did talk about your outlook, further revenue growth commencing in 2025 and over the future years. And there is to some of the earlier questions, there's lots of puts and takes about the timing of certain contracts starting.

Speaker 6

For 2025, I guess a couple of pieces of this. When we think about the construction business, what should we be thinking about in terms of year over year growth? I know the commentary has been, don't be thinking that it's going to be massive. But at the same point, I think there's some sizable backlog growth coming into new awards. And then the other piece of the question is around concessions.

Speaker 6

As a lot of these concessions now start to move from a build to a kind of an operate, how should we be thinking about the EBITDA contribution from the Concessions business in 2025?

Speaker 3

Yes. I will take the first part of the question about revenue. Construction and Infrastructure Building is a delicate industry. I mean, we are not governed by market share. We are governed by good execution, extreme discipline in acquiring new projects and the way we can manage some outliers when they arrive.

Speaker 3

This is why I'm always very cautious when we decide to put a bid, how do we I mean, how do we enter in the market about, I would say, yes, we like growth, but we have to be careful. I don't know any construction company that has doubled revenue in 1 or 2 years that has not finished into the wall. So there will be revenue growth. Zoos' progressive design build are very nicely phased and we are very happy about the way we have been able to acquire them. So that the growth is going to be, I would say, absolutely manageable by the company.

Speaker 3

Concession, Jerome, up to you.

Speaker 2

Yes. Look, with regards to concessions EBITDA, so it's always a bit of a tricky one because we really do think of the concessions portfolio as an equity value portfolio of quite valuable assets. But the way that we would think about it would be the Canadian concessions are availability based and will generally be starting operations in the next 12 to 24 months. We'll have the LRTs, we'll have Corie Howe, we'll have Oneida. So as these phase ins, it will be obviously relatively positive.

Speaker 2

That being said, while they're in construction, the Concessions Group does earn a fee against it. So that will actually be a headwind going into 2025 on the current basis of that portfolio. The Go Rail business, we'll actually move with our partner, be taking over operations of the network on January 1, 2025. So that will be a positive. So on a net basis, we think there's probably a little bit more takes than put a little bit more takes than it gives with regards to EBITDA contribution on the Canadian portfolio.

Speaker 2

And then the question just becomes with regards to USVI and as that layers in that obviously be a positive, but we need to see if that one moves into actual construction phase.

Speaker 6

Okay. So I mean maybe to frame it, if you were thinking about I think we're $90,000,000 trailing in EBITDA to Q3, would be down a little bit, down 20%. How would you kind of frame it for us?

Speaker 2

As you know, Chris, we don't provide guidance. So I think the generalized disclosure I've just given you is probably as much as we can get, which is on the Canadian side, probably a headwind. And then if we see USVI move into operations, that would be a positive. All right. I'll

Operator

leave it there. Thank you. Thank you. Our next question comes from the line of Michael Tupholme of TD Cowen. Please go ahead, Michael.

Speaker 5

Thank you. Good morning. First question is about your margins in the construction segment. I've seen them in the 8% range for the last few quarters on a trailing basis. Wondering if you can comment on how you think about the sustainability of that level of margin?

Speaker 5

And are there any opportunities to drive those higher over time? And if so, what does that look like?

Speaker 3

I think, I mean, on the operational side, we have made a lot of efforts during the last 3 years on what we call continuous improvement, excellence in execution to be able to master much better schedule adherence, cost adherence and I'm happy with the results, although it's always a battle on the table. In terms of discipline in getting projects, you have just seen that we have no issue with our backlog. We are as I always say, I mean, anything above €5,000,000,000 I'm comfortable with because we are in addition to have the recurring revenue something like €1,000,000,000 And we have the PDBs in our backpack. So we are not starving. We are extremely disciplined to go in the direction where we think that we can optimize or maximize the operating profit.

Speaker 3

So everything is, yes, I would say is on the right direction. Now construction, as I used to say, is a difficult business. We are all focused on making it better every day. So I'm happy with the level of EBITDA that we have in construction. And we are all working, I mean, on margin predictability, not to come back to what have happened during the last years that has been very painful for us.

Speaker 2

Yes. Just to layer on, there's a lot of indicators on the dashboard, EBITDA margins, certainly one of them. But as we think about EBITDA margin and kind of positive or negative variances to it, we have to layer on the risk associated with the project, the sector balance that we just seek to achieve for diversification purposes, importantly, the capital intensity, right. So, with high margins, if there's very high investment that could actually be a negative from our perspective and we're very mindful of that. And then finally, as John mentioned, the stability and recurring nature of some of the work streams and how that influences EBITDA margin.

Speaker 2

So there's actually a lot of ingredients that go into the stew on that one. But that being said, maybe to go back to the initial part of the question is 8% overall EBITDA margin given the level of capital intensity of the business as it stands today is a strong outcome and we're going to look to kind of preserve that while reducing risk and increasing stability.

Speaker 5

Okay. That's helpful. Thank you.

Speaker 2

And maybe just a quick follow on. Does

Speaker 5

the ramp up of some of these collaborative projects, does that have any shorter term impact on margin performance as those projects begin to ramp? Or is that not really something we need to think about and this idea that you hope to be able to sustain that level is the target regardless of the impact of those projects?

Speaker 3

Yes. I mean, it's mainly about predictability rather than that increase. I mean, after 18 months to 24 months of common development phase with our clients and our engineers, we reach, I would say, a knowledge of the project and the future execution, which is extremely interesting. So I'm working on predictability through those jobs.

Speaker 5

Okay. No, that makes sense. Second question, just regarding the changes in non cash working capital source of cash in the Q3. I think you mentioned that strong cash position for Q3. I'm just wondering what that means as far as how to think about the Q4 for changes in non cash working capital?

Speaker 5

And also if you can comment on how you see 2025 playing out from a working capital perspective given the projects and the work program you see out of you?

Speaker 2

Yes. It's a good question. Look, we're quite intentional on calling out the atypically strong cash position that we have at September 30. It is clearly not usual for Aegon to have $197,000,000 of cash outside of joint operations. And as noted, it's really a matter of just timing related cash inflows and cash outflows, right?

Speaker 2

You pay your balance sheet as of the moment in time. The way we think about Q4 is, obviously, we've got anticipated closing on our M and A program, which will be a draw on capital. We've got additional investments into working capital that's going to be coming through the quarter as well, both legacy projects, but also just other projects. So I just think the a little bit of a non standard working capital cadence this year. So obviously, that means just to cut through all the CFO talk, cash usage going into the Q4.

Speaker 2

For 2025, we're hopeful from a return on more normal cadence outside of any legacy impacts, right? So the normal cadence in our sector would be kind of investments going into the Q3 and then cash coming out through the back half of the year. So I'd say, hopefully, our anticipation as it currently stands is a more typical cadence in 2025.

Speaker 5

Okay, perfect. And then just one clarification, Jerome, on 2025, I appreciate the comment about more normal cadence. But in terms of full year, with some of these larger projects ramping up, what is the implication as far as where you could land on a full year basis for changes in non cash working capital in 2025?

Speaker 2

But that's a tricky one to provide specificity on the one of the areas we have a strong focus on is ensuring that our projects have stable funding through the contract structure. So the hope is that Aecon does not pour cash into these projects, but rather the project owners and us work collaboratively to ensure that the projects are appropriately funded. So that we're not drawing on Aecon Resources to build through projects.

Speaker 5

Okay. Makes sense. Thank you.

Operator

Thank you. Our next question comes from the line of Sabahat Khan of RBC Capital Markets. Your question please, Sabahat.

Speaker 7

Great. Thanks and good morning. Just maybe if you can just walk us through maybe some of the shorter term project bidding that's going on, just some of the visibility any visibility you can provide on top line momentum through 2025? I know the backlog obviously is still at a good level, but just trying to get a bit more visibility into the kind of the next 12 months and just kind of the amount of in year work that you could win to sort of support the top line growth there? Thanks.

Speaker 3

Yes. As I've already said, I mean, 2024 was a transition year after the divestiture of Aegon Transportation, plus the fact that our legacy projects are coming to an end. So it was expected. We're going to grow, I mean, in 2025. We are also very interesting prospects.

Speaker 3

For example, preparing the refurbishment of the 4 reactors, we think that the decision can be made at the province level very early in 2025. So a nice, I would say, growth in 2025 and margin predictability is more important.

Speaker 7

Great. And then just sort of following up on the questions earlier around working capital and cash. And I know Jerome you noted that you've done some share buybacks recently as well. Can you maybe just sort of talk a little bit more about at what levels you'd start to maybe do that again? Obviously, M and A is on the table.

Speaker 7

Maybe I know you gave a little bit of capital allocation color earlier, but is there a leverage ratio target that you want to sort of hover around? Maybe if you can provide some details on what we can expect on that front as you work towards sort of more highersustained margins over the next couple of years? Thanks.

Speaker 2

Yes, it's a good question. So leverage ratiostargets, we don't have an official posture on that. But what I'll say is the Aecon group level, so excluding utilities, we do seek to maintain what I described almost as a very strong balance sheet and so very limited leverage. Whereas at the Aecon Utilities area, obviously, that's smaller ticket, shorter cycle work, more amenable to taking on a certain degree of leverage is where we'd likely be a little bit more aggressive. And so on balance, we view whether it's dividends, NCIB, investments in growth, investments in people, processes or investments in additional M and A, it's really all going to be returns focused from our perspective.

Speaker 2

And so look, as the MCIB stands, we're not in a wealth of capital generation as we stand today given the closeout of these projects, but certainly something we'll be turning an eye towards as cash flow frees up in the business.

Speaker 7

Great. Thanks very much for that.

Operator

Thank you. Our next question comes from the line of Frederic Bastien of Raymond James. Your line is open Frederic.

Speaker 8

Good morning and thanks. Guys, I'd like to go back on the margins you delivered in Q3. On a like for like basis and after adjusting for the losses last year, they came in a bit down on a year over year basis. Now there could be a number of reasons for that, including mix, but I was hoping you could help us unpack sort of the variables that were at play here.

Speaker 2

Yes. Good question, Frederic. So the margin performance that we posted this quarter on let's maybe just focus on the constructions business, 9.5% margin, That reflects a relatively strong level of production and productivity with pretty normal levels of costs associated to MG and A. If you kind of dig through it, you'll see our MG and A figures did move up a little bit versus last year. Last year was clearly a very noisy quarter that we're lapping against $91,000,000 of losses, $139,000,000 of gains, relatively complicated overall cost baked into MG and A at that point.

Speaker 2

So I would just maybe look at the level that we produced this year as a more typical level as the business currently operates versus last year, which had some certain exceptionalities baked into it given the variety of factors influencing that particular quarter. Okay. Next would not have

Operator

been a

Speaker 2

major contributor here. I think it's more just the noise in the prior period.

Speaker 8

And next one Michael touched on it a bit, but around the progressive design builds like kind of moving into construction, does that is that beneficial to margins or is the margin you're kind of recording on the development side or development phase kind of I mean it's hard to predict, but just wondering what the dynamics will be once these projects go into construction and extracting that you got a base business that's obviously going well. One would assume that the margins built into the backlog is also better than what you're delivering today. So just wanted to get a bit more clarity here.

Speaker 3

Once again, it's more predictable. Of the margin in construction is for us at Aegon extremely important. And this is what we are looking for is to have a very clear view about the margin and completion on those jobs, more than a step up in the level of margin itself.

Speaker 8

Thank you. That's all I have. Good quarter

Operator

guys. Thank you. Our next question comes from the line of Benoit Poirier of Desjardins. Your line is open, Benoit. Go ahead.

Speaker 9

Yes. Thank you very much and good morning everyone. Just to come back on the margin question, as you move away from fixed price and you're going to be impacted positively by progressive design build, I'm just wondering about from a margin standpoint, given those projects are less risky, does it put a cap on margin given the lower risk? How should we be thinking about the fact that there will be a bigger contribution from those big projects going forward, which is positive?

Speaker 3

Just to come back a little to the theory about progressive design build. You have a development phase between 18 24 months, where more or less you finalize your design and you ensure that you design to build it means that you the design you are finalizing it can be built efficiently. From this moment, you define how you're going to work during construction. So it may be most of those jobs are with a development phase that go to a target price, very few, but they exist. It's a development phase that go to lump sum.

Speaker 3

If we go to the target price, for example Scarborough is a development phase that go to target, the nominal margin is fixed, even it's a cost plus. And then you have a paying share and a gain share. What is interesting in the PDB is that even at the worst of the worst of the paying share, it means if the costs are growing much more than what was forecasting, you're not going to enter into negative margin universe. But you have gained share. I mean, if at the end of the day, you manage to get your job earlier and with a lower cost, you have gained share.

Speaker 3

It means that you can have also your margin improving before the end of the project.

Speaker 2

This is the way it works.

Speaker 9

That's really great color, Jean Louis. And given the important ramp up ahead of you, obviously, with the those projects that will contribute to the backlog in 2025, should we expect Aecon maybe to slow down a bit in terms of RFP work and be more selective? Just wondering in terms of booking activity, how do you see 2025 given the ramp up or the big contribution that will come?

Speaker 2

What is showing, as I was saying, I

Speaker 3

mean, we are not starting out. I mean, so we can select very carefully with a lot of discipline our new project. As I told you before and you have noticed that we have given you, I mean, this 45% figure of our trailing 12 months revenue, 45% in utilities and nuclear. I mean, obviously, from the moment, I mean, I arrived in 2018, Aecon is going to become much more electrical and then probably less civil than concrete. This being said, you can be number 1, I mean, in infrastructure without being able to master civil works.

Speaker 3

And we are working a lot on this. So there's not going to be a halt. I mean, we are still pursuing all activities that goes toward margin, predictability and obviously a good level of margin.

Speaker 9

Okay. This is very helpful. And again, congrats for the very good quarter guys.

Operator

Thank you. Our next question comes from the line of Maxim Sytchev of MBS. Please go ahead Maxim.

Speaker 6

Hi, good morning gentlemen. Just had a couple of quick ones, if I may. In terms of I realize you don't disclose multiples on the recent transactions, but can you maybe talk about sort of the broader contribution from these assets whether it comes to accretion, whether on EPS or potentially EBITDA? I guess whether it's accretive diluted like anything you can tell us would be great. Thanks.

Speaker 1

Trey, Max, it's Adam here. I mean, in the case certainly of United, as Jerome talked about earlier, this business has got specialty nuclear. It's one we know quite well in Canada. It's an opportunity for us to grow along with our partner, collaboratively in the U. S.

Speaker 1

And so we view that as good margin accretion on EBITDA and earnings, but also one that has lots of flexibility on capital. It's not a very capital intensive business. So it's a high quality type of EBITDA that's got low capital requirements. Extreme, obviously, we've got more of an investment given its utilities business and stuff, but the opportunities to have synergies across our utilities platform in Canada, the U. S, they've been quite responsive to lots of the unfortunate storm work that's come through the U.

Speaker 1

S. Since we've acquired the business. And so that capital is being deployed quite effectively and we're able to optimize between the two businesses on fleet. So in each case, I'd say good margin and earnings accretion and reasonable to good capital employed metrics. Okay.

Speaker 2

Okay. That's great. And then

Speaker 6

because I think most of kind of your discussion centered around, let's call it, sort of horizontal infrastructure. I'm wondering if it's possible, Jean, we'd have like any update on the industrial side of things, what opportunities you are seeing or not in the marketplace right now? Thanks.

Speaker 3

Yes. So maybe

Speaker 2

one minute on Xtreme, I mean, on the acquisition

Speaker 3

and the activity. We are extremely I mean, on the acquisition and the activity. We are extremely happy with this acquisition. It's a wonderful platform, I mean, for U. S.

Speaker 3

Growth. And there's nothing better than a war to test. And our teams, I mean, our common teams are just coming back from Florida, Carolina and Georgia. We had more than 140 combined crews from Extreme and Akorn Utilities working there. They have learned to work together.

Speaker 3

And really we are extremely happy with this acquisition. Regarding industrial, industrial is very strong in the West at the moment. We are finalizing the award of the medium sized project in the East. But in the West, it's very strong. We are strong at BHP.

Speaker 3

I mean, the potash mine in Saskatchewan, but also, I mean, with other contract in the West and the final negotiation, We always go with the same manner. Probably you remember, we arrived with the civil, with the foundation, then we do the slab, then the client just begins to know us and realize that we are on time and that we are committed to our targets. Then after we go to the prefabrication of most of the modules in our yard and then we go to electrical works and then we go to instrumentation and testing and commissioning and our clients are usually divided with the quality of the work that we are giving. So industrial is a real good sector in terms of activity and profitability at Aegon.

Speaker 6

Okay. That's great color. Thank you so much, Jean Louis.

Operator

Thank you. Our next question comes from the line of Ian Gillies of Stifel. Please go ahead, Ian. Good morning, everyone. Good

Speaker 1

morning, Ian.

Operator

There's been a lot

Speaker 2

of conversation around revenue growth for next year. I was wondering if you could maybe coming out a bit of a different angle. Are the IPD contracts taking longer to get going or start up than you would have anticipated 6 12 months ago? And that's what's creating some of the interim uncertainty?

Speaker 3

Not really. Development phase are long, and we'd like them to be long because it improves margin predictability. At the end, there is, of course, a few weeks of negotiation with our client about the right level of target and about the way we are going to ramp it up. For example, on core, this Gold Train expansion, I'm very happy that we have been able to divert it from a one shop to a different bundle, each bundle around €1,000,000,000 much easier to work. So there's nothing special in the ramping up of these projects.

Speaker 3

This is the way they work and it's probably better like this. So no real change.

Speaker 2

Okay. And Ian, I just also just let it in some of these situations, we are also getting paid during the development phase as well, right? So I understand that there's an extension in the development phase. We don't view that as a major concern, right? Understood.

Speaker 2

Thanks very much. That's all I had.

Speaker 1

Thank you.

Operator

Thank you. We have a follow-up from Sabahat Khan of RBC Capital Markets. Please go ahead, Sabahat.

Speaker 7

Okay, great. Just one quick follow-up. Just on the nuclear side, as I think you detailed out some of the opportunities ahead over the next few years on the nuclear side. Obviously, a small acquisition here recently. When you look at your capability set relative to the opportunities out there over the next 3, 5, 7 years, do you have all the tools available to partake fully in those opportunities?

Speaker 7

Are there other capabilities you may need to add or develop? Just thinking about new builds, refurbishments and potential decommissionings. Just how do you feel about your ability to service those needs and the potential growth in demand? Thanks.

Speaker 3

I will take this one. In terms of major refurbishment, I mean, we have everything in hand. We are working on all reactors at the moment at Darlington, all reactors open to refurbish manner at Bruce. Of course, we are aiming go and work at Pickering. It would be very nice because it goes perfectly with the end.

Speaker 3

N. We are working with the 4th reactor at the moment in Darlington. So we have here we have everything in hand. We have the most efficient and skilled team, I mean, in the country and no worries about it. It was important to get United.

Speaker 3

It was important to increase our capacity, not of design engineering, but of pre construction engineering. I think it will help us to be better and better in the construction. We are well in SMR and the alliance it's perfectly defined. I mean between OPG, GI Hitachi with the technology provider, we are not the technology provider, we are the constructor. Acin Realis was part of the design.

Speaker 3

I would say on the SMR, we also have everything in hand. You probably have noticed that we have begun to work for the Department of Energy, I mean, the federal in United States. Our teams are growing in, I would say, in quality and quantity. I'm not worried. Last part, new big build.

Speaker 3

Yes, we will have to find partnership. I mean, I'm talking about the kind of reactor something like 1,000 megawatt, I mean, which are above the SMR. The SMR are usually between 103 100 megawatts. The one at Darlington is a 300 megawatt boiling water technology. For the big build, we are thinking about what kind of partnering and where would we go.

Speaker 3

Those are difficult jobs. We will also be extremely careful about the contract mode. Obviously, I'm not ready by any way to put Aecon in a lump sum job to build a new nuclear power plant. So it's I don't know if I answered your question about the landscape in nuclear and what we are needing and what we already

Speaker 9

master quite well.

Speaker 7

That covers it. Thank you.

Operator

Thank you. I would now like to turn the conference back to Adam Borgatti for closing remarks. Sir?

Speaker 1

Thanks very much everybody for joining. As always, feel free to reach out with any follow-up questions to me and have yourself a wonderful rest of the day, good weekend and we'll speak to you on the next quarter.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Aecon Group Q3 2024
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