AEGXF - Aecon Group Inc. (AEGXF) Q1 2023 Earnings Call Transcript
2023-04-26 13:56:02 ET
Start Time: 09:00
End Time: 09:41
Aecon Group Inc. (AEGXF)
Q1 2023 Earnings Conference Call
April 26, 2023, 09:00 AM ET
Company Participants
Jean-Louis Servranckx - President and CEO
David Smales - EVP and CFO
Adam Borgatti - SVP, Corporate Development and IR
Conference Call Participants
Michael Tupholme - TD Securities
Chris Murray - ATB Capital Markets
Gabriel Moreau - IA Capital Markets
Jonathan Lamers - Laurentian Bank
Frederic Bastien - Raymond James
Maxim Sytchev - National Bank Financial
Presentation
Operator
Good morning. Thank you for attending today's Q1 2023 Aecon Group Incorporated Earnings Call. My name is Bailey, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for question-and-answer at the end. [Operator Instructions].
It is now my pleasure to pass the conference over to our host, Adam Borgatti, Senior Vice President of Corporate Development and Investor Relations. Mr. Borgatti, please proceed.
Adam Borgatti
Thank you, Bailey. Good morning, everyone, and thanks for participating in our first quarter results conference call. This is Adam Borgatti speaking. And presenting to you this morning are Jean-Louis Servranckx, President and CEO; and David Smales, Executive Vice President and CFO.
Our earnings announcement was released yesterday evening and we have posted a slide presentation on the Investing section of our Web site, which we will refer to during this call. Following our comments, we'll be glad to take questions from analysts. And we ask that the analysts keep to one question before getting back into the queue to ensure others have a chance to contribute.
As noted on Slide 2 of the presentation, listeners are reminded 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.
With that, I'll now turn the call over to Dave.
David Smales
Thanks, Adam, and good morning, everyone. I'll touch briefly on Aecon's consolidated results, review results by segment and then address Aecon's financial position, before turning the call over to Jean-Louis.
Turning to Slide 3. Revenue for the first quarter of $1.1 billion was 121 million or 12% higher compared to the same period last year. Adjusted EBITDA of 25 million, a margin of 2.2% compared to 21 million, a margin of 2.1% last year and operating profit of 6 million compared to operating loss of $10 million.
Diluted loss per share in the quarter of $0.15 compared to diluted loss per share of $0.29 in the same period last year. Reported backlog of $6 billion at the end of the quarter compared to backlog of $6.4 billion at the end of first quarter of 2022. New contract awards of 812 million were booked in the quarter compared to 1.2 billion in the prior period.
Now looking at results by segment, turning to Slide 4, Construction revenue of $1.1 billion in the first quarter was 119 million or 12% higher than the same period last year. Revenue was higher in each sector, with the largest increase being civil operations, primarily from an increase in major projects in both Eastern and Western Canada.
In industrial operations, higher revenues due to increased activity on mainline pipeline work and highest field construction work at mining and wastewater facilities in Western Canada, partially offset by lower volume in field construction work at chemical facilities in Eastern Canada.
Higher revenue in nuclear operations was driven by an increased volume of refurbishment work in Ontario and the U.S., in utilities from an increased volume in telecommunications and electrical transmission work partially offset by a lower volume of oil and gas distribution work, and in urban transportation solutions, driven primarily by a higher volume of work related to rail electrification in Ontario.
New contract awards of $795 million in the first quarter were 398 million lower than the prior period. Backlog at the end of the quarter of 5.9 billion compared to 6.3 billion at the same time last year. Adjusted EBITDA in the construction segment of $22 million, a margin of 2% compared to $19 million, also a margin of 2% in Q1 last year. Adjusted EBITDA increased by $3 million, primarily from higher volume and gross profit margin in industrial and urban transportation solutions and from higher volume in nuclear operations.
Turning to Slide 6. Concessions revenue for the first quarter was $17 million compared to $14 million in the same period last year, primarily due to an increase in airport operations at the Bermuda International Airport. Bermuda continues to operate at a reduced volume compared to pre-pandemic levels that continued to recover in 2022 and the first quarter of 2023 from the more severe impacts experienced in 2020 and 2021.
It's recovery was evidenced in the first quarter of 2023 by the fact that traffic averaged 72% at the pre-pandemic level in the first quarter of 2019 compared to average traffic in the first quarter of 2022 being just 43% of the pre-pandemic level. Adjusted EBITDA in the concession segment of $15 million compared to $14 million in Q1 2022, primarily due to results from the Bermuda Airport.
Turning to Slide 7. At the end of the first quarter, Aecon had a committed revolving credit facility of $600 million, at which $240 million was drawn and $10 million utilized for letters of credit. On December 31, 2023, convertible debentures with a face value of 184 million will mature and the company expects to repay these debentures at maturity or before.
At this point, I'll turn the call over to you Jean-Louis.
Jean-Louis Servranckx
Thank you, Dave. I would like to take a brief moment to address the four large fixed price legacy projects laid out in our latest disclosure documents. As a reminder, these four projects entered into in 2018 or earlier by joint ventures in which Aecon is a participant are being negatively impacted due to additional costs for which the joint ventures assert that the owners are contractually responsible, including for, among other things, unforeseeable site conditions, third party delays, COVID-19, supply chain disruptions, and inflation related to labor and materials.
In the first quarter, Aecon recognized an operating loss of 2.8 million related to these four projects, which comprised 25% of consolidated revenue in the quarter and represented $801 million or 30% of backlog at March 31, 2023. Aecon and our partners continue to work toward resolution of compensation for the impacts with the respective project owners, and we are focused on pursuing all avenues for adequate and timely compensation with the objective to reach fair and reasonable settlement agreements and to move towards project completion in each case. As I said before, this will take some time but we are on it and constantly.
Turning to Slide 9. Demand for Aecon services across Canada continues to be strong, particularly in smaller and medium-sized projects. While volatile global and Canadian economy conditions are impacting inflation, interest rates and overall supply chain efficiency, these factors are stabilized to some extent and have largely been and will continue to be reflected in the pricing and commercial terms of our recent and prospective project awards and bids.
Turning to Slide 10. With backlog of $6.0 billion at March 31, 2023 and recurring revenue programs continuing to see robust demand driven by the utility sectors and ongoing recovery in airport traffic in Bermuda, Aecon believes it is positioned to achieve further revenue growth over the next few years. As a reminder, the major scope of the GO Rail expansion On-Corridor Works project, the Scarborough Subway Extension project and the Darlington New Nuclear Project will only be reflected in backlog at the successful conclusion of the lengthy development phases.
Aecon, including joint venture in which we are a participant, is also prequalified on 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 over time. Trailing 12 months recurring revenue of $895 million was up 24% versus the prior period and 69% versus two years ago, primarily from growth in utilities operations. Recurring revenue is expected to continue to grow driven by demand in the utility sector and the concession segment is expected to see airport traffic in Bermuda, continue its recovery 2023 and '24.
Turning to Slide 11. Aecon continues to support the energy transition to build and operate sustainable infrastructure. In February 2023, Aecon announced that the Oneida Energy Storage LP executed an agreement for the Oneida Energy Storage Project to deliver a 250 megawatt, 1000 megawatt hour energy storage facility in Ontario. Aecon concession will be an equity partner in Oneida LP upon financial close as Aecon was also awarded an EPC contract by Oneida LP to construct the facility.
Projects such as Oneida Energy Storage, GO expansion On-Corridor Works, Scarborough Subway Extension, and the Darlington Nuclear Project demonstrate that the path Aecon is on to embrace the opportunities at the increasing focus on energy transition, decarbonisation and sustainability present. This is a very much the future direction for Aecon, and we are excited by the progress made to-date in establishing ourselves in this space.
Turning to Slide 12. Aecon released its full sustainability report, building a sustainable future last week, outlining our progress and key accomplishments in responsible ESG practices. This report highlights Aecon's initiative to embed sustainable innovations and work towards net zero construction throughout its operations.
Aecon is pleased to report continued progress towards its target to achieve a 30% reduction in direct CO2 emissions by 2030, with a 14% direct reduction already achieved to-date by the end of 2022 on an intensity basis. Sustainability is part of our DNA at Aecon and a key consideration in every decision we make as we continue to focus on building what matters to enable future generations to thrive and transition to a net zero economy.
Turning to Slide 13. 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.
In the concession segment, in addition to expecting an ongoing recovery at the Bermuda Airport in 2023, there are a number of opportunities to add to the existing portfolio of Canadian and international concessions in the next 12 to 24 months, including projects with private sector clients that support a collective focus on sustainability and the transition to a net zero economy.
The GO Expansion On-Corridor Works project and the Oneida Energy Storage Project are examples of the role Aecon's concessions segment is playing in developing, operating and maintaining assets related to this transition. As previously announced on March 1, Aecon announced that it has entered into a definitive purchase agreement with Green Infrastructure Partners under which Aecon has agreed to sell its ATE roadbuilding, aggregates and materials business in Ontario for $235 million in cash.
In addition, on March 15, Aecon announced that it has entered into an agreement with CC&L Infrastructure to sell 49.9% interest in the Bermuda International Airport concessionaire for US$128.5 million in cash. Closing of these sales transactions is expected in the second quarter of 2023. Upon closing, Aecon expects to use the net proceeds from the transactions to pay down debt on its revolving credit facilities. Thank you.
We will now turn the call over to analysts for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. Our first question today comes from the line of Michael Tupholme from TD Securities. Michael, please go ahead. Your line is now open.
Michael Tupholme
Thank you very much. For the GO Expansion On-Corridor Works Project and the Scarborough Subway Extension Project, I know neither of those is included in backlog. Two questions. I guess first off, can you talk about how we should think about the expected revenue contribution from those two projects this year? And was there anything from those projects that contributed in Q1? And if so, can you quantify that for us?
Jean-Louis Servranckx
Yes, I will give some elements of answers to this question. We are in the middle of the development phases for these two projects, it's been for GO Transit, electrification and modernization and for Scarborough, just to give you some color about it, I mean on the GO Transit, there are at the moment more than 1,000 full time employees working during the development phase. Scarborough, I would say around 300 people working. Each time, Aecon will present between 25% and 50% of those people. In terms of revenue also, this is what we are studying during the development phase. What was forecasted by the contracting authorities was to have construction work around 8 billion during a period of eight years, more or less. And you will remember that we have a 28% participation in the operation during 25 years, which would make something like between 300 million and 400 million a year of operations of the network. All this will be confirmed at the end of the development phase that will probably take place for this big project at the end of 2024. For Scarborough, I would say it's too early to announce other CapEx between 2 billion and 3.5 billion by the owner. And we are just ramping up into development phase, so we will know a little more later.
Michael Tupholme
Okay. Thanks for that. That's helpful. Second question -- sorry, just a follow-up second question here regarding -- hello?
Adam Borgatti
Yes, we can hear you now. Go ahead.
Michael Tupholme
Okay, thanks. Just a question about the recurring revenues within the company. So you've seen strong growth in recurring revenues on a TTM basis for some time now. Just wondering how we should think about the growth potential in recurring revenues over the next couple of years, I guess this year as we move through the year and then also into next year, if possible?
Jean-Louis Servranckx
We basically are optimistic and those recurring revenues are driven first by our utility sector with constantly growing. It's quite amazing to see -- there's not one single month without brainstorming about new business line, new activities, new initiatives, new innovation in this utility sector, so the sector is growing. And for the rest, by our airport operation, as you have noticed, during the first quarter of 2023, we reached 72% of the activity pre-pandemic, and it's still growing and we expect by the end of 2024 to have come back to this pre-pandemic level. So, yes, we are expecting some growth in addition to this.
David Smales
The only thing I'd add is obviously the sale of half our interest in Bermuda will reduce the Bermuda piece even though underlying traffic will continue to recover. But otherwise, as you already said that the growth will really be driven by the utilities business, which continues to be very strong and see good opportunities. All have been built on the back of some of the small tuck-in acquisitions we've done over the last five or six years, where we're starting to see some real traction in areas like electricity, transmission and distribution, as well as expanding our telecommunication work into the region. So still lots of very positive tailwinds.
Michael Tupholme
All right, that's perfect. Thanks very much.
Operator
Thank you. The next question today comes from the line of Chris Murray from ATB Capital Markets. Please go ahead, Chris. Your line is now open.
Chris Murray
Yes, thanks, folks. So just following maybe on Mike's question a little bit, just thinking about revenue contribution from these projects not in backlog? Is it fair to think in the development phase that this is going to be fairly de minimis revenue over the next little while, or is somehow this the work there getting some blended into the recurring revenue puts a lot of -- it will be things like utility moves and things like that in advance [ph]?
David Smales
So it's not part of the recurring revenue, Chris, on the basis that this isn't a long-term master service agreement type arrangement, like we have in utilities where these agreements go out for many years, and we do the same type of work year-in, year-out. This will sort of won't go through recurring revenue. It is relatively small compared to when we get into the execution phase of both those projects. They will still catch some reasonable revenue in 2023 and 2024, just based on recovery in terms of the people we have working on those projects, working through all the scoping and pricing and engineering, that's all being paid for and creates revenue. But it's, as you say, relatively small compared to or against the execution phase, so more in the tens of millions and hundreds of millions, let's put it that way.
Chris Murray
Okay, that's helpful. And then just one quick kind of modeling follow-up question. On the divestitures that you guys have planned for Q2, I'm sure you've had a chance now to take a look at how you're going to do well on the financial structure. Just tax, I assume the airport, that's always been a lower zero tax jurisdiction. So am I right to think that there should be no tax impact on that one? And are there any -- do you have any tax deferrals or other pools that maybe you could draw from that we should be thinking about with the sale of ATE?
David Smales
Yes, so for both the tax implications are relatively minor compared to the overall proceeds. As you mentioned, virtually all of Bermuda will have no tax impacts. And then on ATE, yes, in terms of how that's structured, there will be taxed, but it won't be a huge number.
Chris Murray
Okay, that's helpful. Thanks, folks.
Operator
Thank you. The next question today comes from the line of Gabriel Moreau from IA Capital Markets. Please go ahead, Gabriel. Your line is now open.
Gabriel Moreau
Hi. Good morning. You state in your MD&A that you will be using the proceeds from the asset sale to reduce the leverage and repay convertible debt. Can you comment on your other capital allocation priorities?
Jean-Louis Servranckx
Yes. So in addition to that, we continue to be focused on the opportunity to add to the business in terms of smaller tuck-in type acquisitions. We've been particularly active on that in the utility space, and I think we've seen benefit there in terms of the numbers we talked about recurring revenue. And I've referenced the fact that we're starting to see some real synergy from those tuck-in acquisitions now, and I think we see lots more opportunities in that space. So that will continue to be a focus as well as maintaining the dividend policy which has been a feature for us over the last decade or so, that remains important. So those plus reducing leverage would be the main considerations.
Gabriel Moreau
Okay. So you could potentially use the proceeds for other short-term priorities?
Jean-Louis Servranckx
I've not saying short-term priorities. The growth of the business in areas like utilities through tuck-in M&A is part of our long-term strategy as is the dividend policy. So I think they're all part of the theme of where we see the business going and the huge opportunities we see in the market ahead of us.
Gabriel Moreau
Thank you. That's it from me.
Operator
Thank you. [Operator Instructions]. Our next question today comes from the line of Jonathan Lamers from Laurentian Bank. Please go ahead, Jonathan. Your line is now open.
Jonathan Lamers
Good morning. Thank you. Following the sale of the minority interest in the Bermuda Airport, could you comment on the types of new infrastructure opportunities you plan to pursue in terms of which end markets are of interest or geographies?
Jean-Louis Servranckx
Yes, mainly speaking, as we have announced, we are extremely interested with the energy condition. It represents in different end segments, but the opportunities here are huge. Just to take an example. For Ontario, after the last ISO we bought, it's becoming clear that decarbonizing the grid by, let's say, 2050 requires a system capacity of 8,000 megawatts. I just remind you that at the moment, Ontario has something like 40,000 megawatts. So the CapEx associated to this is about 400 billion, so it will take time, but it's on the way. Just in nuclear where Aecon is extremely strong, it's 18,000 megawatts additional that has to be built during the next 25 years. So we are speaking about refurbishing. Evidently, you probably have noticed that the refurbishment program where Aecon is working and doing quite well. The second unit of [indiscernible] connected to the grid during the summer, earlier and forecasted perfectly. And the budget, the [indiscernible] before the end of the year, so they there is now a little more knowledge about what could be done between them. The decision will be taken during the year 2023. But it's also about new build. When you know about the SMR contract on which we are engaged on in Alliance model with OPG, GE Hitachi and SNC but also new large reactors. There's a lot to do to come back to Ontario on what we call the new Northern idle [ph] project. There's a lot to do in storage. It may be pump storage, it may be battery storage. Aecon is very active in this field. Construction and concession, it's also got [indiscernible]. So this is really where Aecon wants to be and it's one of the main reasons for our diverse job ATE. We just think that we can develop much better competitive advantage in this energy transition, and we are working on this.
Jonathan Lamers
Okay. Thanks for your comments.
Operator
Thank you. The next question today is a follow-up question from Michael Tupholme from TD Securities. Please go ahead, Michael. Your line is now open.
Michael Tupholme
Thank you. I wanted to ask you about the margin profile of the backlog. Wondering if we exclude the four legacy fixed price projects that have been negatively impacted by additional costs and we look at the remainder of the backlog, can you talk about what the margin profile of that remainder of the backlog looks like versus what it looked like about a year ago?
David Smales
Yes. We obviously don't give detailed margin guidance. But in terms of the overall profile, it's positive versus a year ago. If you kind of look at the areas where we're growing and the kind of projects we've been adding to backlog over the last year or so, they tend to be in areas where there's a bit more predictability. So we've seen that kind of fixed price level of backlog come down fairly significantly over the last 12 months. So that gives us a good view as to where we expect margins to be over the next little while. We certainly expect them to be stronger over the next 12 to 24 months than they were over the previous 12 months.
Michael Tupholme
Okay. Perfect. And then one additional question. When we look at the backlog expected to be executed over the next 12 months, it currently sits around $3.1 billion, which I think is up slightly on a sequential basis. Is it possible to break that figure down between how much of that work is coming from the four fixed price legacy projects versus all of the other work that would fall outside of those in terms of the composition of that $3.1 billion of next 12-month backlog?
Jean-Louis Servranckx
Maybe I can add some elements for all these. To come back to your previous question, it has to be clear that for Aecon, the top line is not an issue. We have a strong backlog of 6 billion. I've always said that we are comfortable at this level of backlog plus our three progressive jobs, which are under development phases that will add something similar to 6 billion. So we our focused -- and your question was about margins of backlog, we are absolutely focused on the quality of our backlog. It means the bottom line to increase the predictability of this bottom line. So this is our work every day. When we come back to this full legacy project, as announced, we still have something like 800 million in backlog of projects. Of the total indicated of 6,000 million, it's something like 13% on the most probable backlog after addition of the progressive job, and it's around 6%. Three of these four projects are expected to be substantially completed before the end of 2023 or in the first quarter of 2024, with one remaining up to mid 2025. So this gives you more or less an idea of what is the share of revenue that will come from these projects.
Michael Tupholme
Okay, that's very helpful. Thank you.
Jean-Louis Servranckx
Okay. Thanks.
Operator
Thank you. The next question today comes from the line of Frederic Bastien from Raymond James. Please go ahead. Your line is now open.
Frederic Bastien
Good morning.
Jean-Louis Servranckx
Good morning.
Frederic Bastien
Guys, there is growing momentum for the development of a high speed rail network between Quebec City and Toronto, and that feels to me like the related work would be right in your wheelhouse. Can you comment on how realistic this idea is given that we don't really have the same population density as some European countries? And secondly, whether this is indeed something that you'd be interested in bidding for and participating in?
Jean-Louis Servranckx
Okay, interesting question. So first of all, you have noted that the announcement, it's about high frequency, not high speed. Second, there's still a lot to do from what we understand as a request for qualification is probably just in, so we would know very quickly who has been prequalified and the RSP should be over within one year from now. So that we will have that we know in terms of development. I remind you that at the stages, the organizer has excluded from the process rollingstock or equipment manufacturers and contractors, which means that we are not yet there but we are -- of course we are extremely interested with this project. So what do I see coming from Europe? High speed [indiscernible] our countries in Europe. And it's evident that for me, the aim is to get a safe and reliable, less than two hour trip between Toronto and Montreal. By the way, it's probably not worse. And depending on what -- it depends on dedicated line where the freight is not the priority for the high speed or high frequency rate, and most of the issue to reduce time are the entry and exit to cities. So there's a lot of infrastructure coming in those cases, and I think it's going to be a very interesting project. And there's no reason -- when you see this corridor between Quebec, Montreal, Ottawa, Toronto, there's no reason that high speed or high frequency cannot be perfectly efficient.
Operator
Thank you. The next question today comes from the line of Maxim Sytchev from National Bank Financial. Please go ahead. Your line is now open.
Maxim Sytchev
Hi. Good morning, gentlemen. David, maybe just a financial question for you. When we're thinking about free cash flow generation, kind of the lack of it for the last couple of years, what needs to happen for this metric to turn into a positive territory? And specifically around the pacing of working capital drag, just any color for the next 12 to 18 months please? Thanks.
David Smales
Yes, certainly, it's heavily tied to resolution on the four legacy projects. As you know, we have outstanding negotiations going on in each of those projects and an arbitration scheduled on CTL. So a lot of that working capital build is tied to those four projects. And as we reach resolution on those that will certainly generate cash and reduce some of that working capital. So that's the primary focus. If we look at working capital, excluding those four projects, overall, it continues to be kind of commensurate with the growth in the business. Obviously, we've seen pretty significant top line growth over the last couple of years, which obviously require some working capital along with that. But it's the four legacy projects that really dampened the cash flow profile over the last 18, 24 months.
Maxim Sytchev
But I guess if you settle like half of them this year, do you think positive free cash flow generation is possible in 2023, or it's just difficult to forecast given all the moving parts?
David Smales
Well, if we were to sell to them this year, then I'm fairly confident that we would have positive free cash flow this year. So that's -- we said earlier, that's the goal and that's what we're working on. But it is dependent on the timing of those resolutions.
Maxim Sytchev
Okay. Excellent. Thanks so much. That's it from me.
Operator
Thank you. There are no additional questions registered at this time. So I'd like to pass the conference back over to Adam Borgatti for any closing remarks. Please go ahead.
Adam Borgatti
Well, thanks very much, Bailey, and thanks to all for your participation today. As always, if you have any more questions, feel free to follow up with us. And have a great rest of the day. Thank you.
Operator
This concludes today's conference call. Thank you all for your participation. You may now disconnect your line.
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Aecon Group Inc. (AEGXF) Q1 2023 Earnings Call Transcript