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Aecon Group Inc
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Good morning. My name is Roche, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aecon 2019 Second Quarter Results Conference Call. [Operator Instructions] Thank you. Mr. Borgatti, you may begin your conference.
Thank you, Roche. Good morning, everyone, and thanks for participating in our second quarter 2019 results conference call.This is Adam Borgatti, Senior Vice President, Corporate Development and Investor Relations, speaking. 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 website which we will refer to during this call. Following our comments, we will be glad to take questions from analysts.As noted on Slide 2 of the presentation, listeners are reminded that the information we are 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 David.
Thank you, Adam. Good morning, everybody.I'll touch briefly on Aecon's consolidated results and then review results by segment before turning the call over to Jean-Louis.Turning to Slide 3. Revenue for the 3 months ended June 30, 2019, of $867 million was $113 million or 15% higher compared to the same period in 2018, with increases in each of Aecon's 2 segments. On a like-for-like basis, excluding the contract mining business sold in November 2018, revenue was 22% higher in the quarter. Slide 4 outlines the impact on results of the sale of the contract mining business.Adjusted EBITDA for the second quarter of 2019 of $57.3 million, a margin of 6.6%, increased by 38% compared to adjusted EBITDA of $41.4 million, a margin of 5.5%, for the second quarter of 2018. Adjusted EBITDA on a like-for-like basis increased by 26% in the quarter. Likewise, second quarter operating profit of $28.1 million and diluted earnings per share of $0.31 all showed considerable improvement compared to the same period last year on the back of higher volume and improved margins. Reported backlog at the end of the quarter of $6.8 billion compared to backlog of $6.4 billion a year earlier.Now turning to results by segment. As noted in Slide 5, Construction revenue of $847 million in the first quarter (sic) [ second quarter ] was $115 million or 16% higher than the same period last year. This increase was driven by higher revenue in urban transportation systems and civil operations in both Eastern and Western Canada as well as from nuclear operations related to refurbishment work. These increases were partially offset by lower volume in the conventional industrial sector following the sale of the contract mining business in November last year and from utilities work.Adjusted EBITDA in the Construction segment of $44.4 million, a margin of 5.2%, was up by $12 million compared to $32.3 million, a margin of 4.4%, in 2018. This was primarily due to a combination of higher volume and improved gross margin; as well as from the sale of the contract mining business, which contributed adjusted EBITDA of negative $4 million in the second quarter of 2018.New contract awards of $848 million in the second quarter of 2019 was significantly lower than the same period last year, as 2 large projects, the Finch LRT and Montréal REM LRT, were awarded in the second quarter of 2018. Construction backlog at the end of the quarter was $6.8 billion, which is $287 million higher than the same time last year.Turning to Slide 6. Concessions revenue for the second quarter was $60 million, an increase of $7 million or 13% compared to the same period last year. This was primarily a result of the Bermuda International Airport Redevelopment Project, including the impact of increased construction activities related to the new airport terminal. Adjusted EBITDA in the Concessions segment of $23.2 million, a margin of 38.5%, was up by $4 million compared to $19.2 million, a margin of 36.5%, in the same period last year. The increase was due to higher revenue from Bermuda operations and increased contribution from management and development fees of Canadian Concessions.At this point, I'll turn the call over to Jean-Louis.
Thank you, David. And good morning, everybody.Turning now to Slide 7. Aecon's diverse and resilient business model is well positioned to deliver continued strong and stable results. Our Construction segment is aligned to the significant infrastructure investment commitments by all levels of government across Canada as well as by the private sector.Our Concessions segment is actively pursuing a number of large-scale infrastructure projects that require private finance solutions as well as participating as a concessionaire on the 5 P3 projects identified on the Slide 7. In June, we were pleased to announce that GrandLinq Contractors, the construction consortium for which Aecon was the lead design/build partner, reached substantial completion and turnover for revenue service for the ION stage 1 LRT project in Waterloo, Ontario. The GrandLinq consortium, in which Aecon Concessions has a 10% equity interest, will now manage operations and maintenance over the 30-year concession period.Turning now to Slide 8. As David mentioned earlier, our backlog at the end of the quarter was $6.8 billion. Backlog to be worked off in the next 12 months of $2.4 billion increased $400 million over last year. And approximately 2/3 of backlog is for work-off beyond the next 12 months, providing significant visibility and stability to Aecon's longer-term outlook.Trailing 12 months recurring revenue was down 10% on a like-for-like basis over last year, as certain projects typically performed through the recurring revenue model in our utilities and nuclear operations were undertaken as defined-scope backlog contracts in the period. Total revenue in both utilities and nuclear operation were nevertheless higher versus the same period last year and demonstrates the flexibility Aecon has in our contracting model to meet our clients' [ need ]. We remain, of course, very focused on the strong execution of our backlog while ensuring we continue to build capacity and flexibility for further growth.Now referencing Slides 9 and 10. Aecon's balance sheet, financial capacity and cash generation remain key advantages in our ability to grow in the coming years both in Canada and on select international projects.Turning to our outlook on Slide 11. Aecon's strong program of work as well as new opportunities supports an expectation of like-for-like revenue and adjusted EBITDA growth in 2019 and in 2020.In the Construction segment, bidding activity is expected to be solid during the remainder of 2019, although new awards are not likely to match the record level of new awards achieved in 2018, with many of the company's larger pursuits expected to be awarded in 2020. With strong and diverse backlog in hand, Aecon is focused on ensuring strong execution and selectively adding backlog through a disciplined bidding approach that supports continued like-for-like margin improvements in the segment. Our Concessions segment continues to partner with Aecon's Construction segment to focus on the significant number of P3 opportunities in Canada and on a selective basis internationally.Thank you. And we will now turn the call over to analysts for questions.
Roche, can we please get the first analyst question in the queue?
Yes. Your first questions come from the line of Jacob Bout with CIBC.
A question on the Ontario market. So a number of peers on the equipment side and on the design side talking about a slowing in the Ontario market. Clearly, your results are not indicating this. What are you seeing right now in Ontario?
Okay. In Ontario, we do not see any slowing paths for the bidding activity, neither for the actual construction, especially in Infrastructure which is Aecon's business. So we do not have the same view.
Okay. Maybe my second question here: So with SNC exiting the lump-sum turnkey business, how does this change the Canadian construction industry? And is this a positive for win rates for you?
Okay. It's difficult to say if it is negative or positive. We have taken good note about SNC position. Frankly speaking, I mean we are working on 4 projects with SNC. 2 are in the nuclear industry. Those are the refurbishments in Darlington and Bruce, and SNC has decided to go along with those project. We have no particular problem with these projects. They are on time and on budget. We are also working on 2 urban transportation projects with them, the REM in Montréal and Eglinton in Ontario. Those 2 projects also develop quite well, as they are on schedule and on budget. So what can we add on this? In Aecon, we are builders. And we are extremely focused on our clients, on our people, on our projects. It means that we work extremely hard on how to better integrate design and construction within our projects. We work extremely hard on how to optimize our contract management. We work extremely hard on how to gain better control on our schedules of work on those complex projects and how to improve our cost control and cash management within the life of those projects. It means that we are focused, and it's our job. In addition, Aecon has a particularity, its capacity to have boots on the ground. I mean we are not dependent on a subcontracting industry that may overheat during periods. We have our people. We have our superintendence. We have our workforce. And it is for us extremely important on those projects. This is what I can say at this stage.
Okay. Last question was just on labor availability. I mean it seems like the pipeline is -- you have a very strong pipeline. I know you commented about $30-plus billion in project pursuits. Is -- will that be a headwind for you on a go-forward basis?
I think, as of today, we have no problem with our capacity. As you may see, our backlog is well integrated between East and West between industrial, civil and urban transportation. And so far, we do not expect problems at this stage.
Your next question, from the line of Yuri Lynk with Canaccord Genuity.
Just trying to get a handle on how we should be thinking about the back half of 2019. Clearly, Q3 last year is a very tough comp with line 3 was a quick book-and-burn project in there. And then in Q4, you had some success fees, so maybe just broadly talk about how the seasonality of the business might have changed a bit now that your backlog is completely different than it was a little while ago. And do you feel that most of the increase in EBITDA you expected for this year, most of that -- did that occur in the first half?
Yes. I think your comments are all fair, Yuri, in terms of our profile year-over-year. I mean in addition to the pipeline work we were doing in the second half of last year that was a fair amount of volume in a fairly short period of time, we had additional nuclear work on the Darlington site over and above the ongoing long-term refurbishment project. We had a number of other projects on that site in the second half of last year that won't be in the second half of this year. And if you think about the timing of our backlog build on the civil side with a lot of these large multiyear infrastructure projects, including P3s, a lot of that was happening early in 2018. So we had those projects in the second half of last year. And we'll also have them in the second half of this year, and a couple of others in addition, like Finch and Gordie Howe that only got going more recently. So there are some puts and takes, but overall the first half of this year benefited from a lot of those new projects, whereas the second half will be in terms of profile much more similar to the second half of last year.
That's fair. And I think the Coastal GasLink project was supposed to commence around this time. Any update on that project?
Yes, Yuri. We have begun the preparatory works. You know that we have been awarded 2 spread on this coastal gas line, and the works are perfectly in line with what was expected.
Okay. And one last one from me. I thought bookings were pretty strong in a quarter that was kind of lacking any big contract awards. What -- anything you can call out to provide some color on the nature of those new awards and the backlog?
There was one significant announcement in Q2, Yuri, right at the very start of the quarter, when we were awarded the Highway 401 project in Ontario. So that was a $640 million project which we are 50%. So that was the one bigger item in the quarter. And then the rest are kind of small and medium projects, kind of normal kind of turnover of projects that we would expect in a quarter.
Your next question, from the line of Frederic Bastien with Raymond James.
My question relates to the Bermuda airport. Can you tell us if we're at the peak of construction there? Or I'm just wondering where -- at which stage we are with respect to the redevelopment.
Yes. I mean at the moment, on the Bermudan airport we are focused on finalizing the construction of the new terminal. That should happen in the middle of the year 2020. And subsequently to shift the operation from the old airport to the new airport. This is our focus at the moment. Then we will ramp up operation in the new airport, and we will decide what will be the next steps after this ramping-up.
And I think, in terms of revenue profile, as we move towards the tail end of construction, we will through the second half of this year the oxymoron, commissioning and finalization. So the revenue profile will start to slow down a little in the second half of this year. And through the second quarter of next year will be when it really starts to kind of tail off more significant.
Okay. That's helpful. And my other question relates to the Edmonton valley line for which you're -- you've been shortlisted, but the other 2 consortiums that have also been shortlisted have actually stepped down, obviously SNC being one of them. But wondering if you could give us sort of an update on that particular project or bid.
Okay. You have the most recent news from yesterday. Yes, we have been shortlisted. Yes, the owner have announced that these 2 other shortlisted participants have decided to pull out. So we are waiting from our owners about the next steps of the process, and we will follow this pursuit accordingly.
Okay, but no indication so far as to what they have in mind.
No, no indication and regarding either sole-source procurements or coming back to a prequalification process.
Your next question, from the line of Michael Tupholme with TD Securities.
Wondering if you can talk a little bit more about your 2020 outlook commentary that you included in the MD&A and specifically just wondering about the year-over-year revenue growth you expect to deliver next year. To what extent is that underpinned by the work you already have in backlog and what I'd call sort of normal-course project wins versus having to be successful in winning certain large -- new large projects that you're pursuing?
Yes, good question, Mike. So in terms of 2020, I'll call out a few of the specific projects that kind of underpin expectation of revenue growth. I mean more broadly, if you look at our backlog profile that we just -- at the end of Q2, you'll see that, that work-off in the next kind of 12 months and 13 to 24 months is considerably higher than it was at this time a year ago. So the backlog profile kind of speaks to the work period between now and the end of next year, and you can see higher work-off in those periods from backlog. Some of the things that are contributing to that would be Bruce, for example, where the refurbishment of the first reactor starts up in 2020. We have a number of pipeline, some pipeline awards already and then another -- a number of other pipeline opportunities that we expect to be working on in 2020. We'll have a full year of the Gardiner project and a full year of the 401 project, so they will both contribute good growth in 2020. And then there is also -- we've said we expect the big pursuits we have right now to be more kind of 2020 awards than 2019. And some of those should have an impact on revenue in 2020, assuming we will have our fair share of those pursuits. So it's a bit of a combination, but even without any big awards, we have the backlog that we feel supports that expectation.
Okay. And then related to that, can you talk about the margin profile of the backlog and to what extent you expect that to be a contributing factor in terms of driving improved year-over-year EBITDA next year versus simply being a function of a higher revenue driving EBITDA higher?
Yes. So I think we still expect improvement in margin, I mean I think we're seeing over a period of time now moving in the right direction. And we still think it has a -- some positive momentum really from the mix of work and some of the things I talked about that kick in, in 2020 and certainly positive from a mix perspective when we look at margin. And then just from the general bidding environment and the amount of work that is out there in terms of people's backlogs, ours and the others', and the strength of the pipeline, our feeling is margins continue to move up. And that's certainly our focus is we're bidding pursuits.
Okay. And then lastly, there was some commentary on the Coastal GasLink earlier in the call, but wondering if you can also talk about Trans Mountain and the opportunity for Aecon there.
Okay. We have been awarded 3 spread with Trans Mountain. You are aware of the recent development. So we are just expecting in the next few weeks a limited notice to proceed on our first spread, so we are getting ready for this.
And the timing that you would expect, Jean-Louis, would be for work to commence at what point this year?
Work to commence middle in Q3 2019 if everything goes as we have been told a few days ago.
Your next question, from the line of Derek Spronck with RBC.
Just on the working capital. We're starting to see a bit of a reversal in the first part of the year versus the last 2 years where it's been a pretty big positive build. Should we continue to expect the continued reversal of working capital in the back half of the year and into 2020? Or how should we be thinking about that?
Yes. So the working capital in 2019 is kind of following our normal seasonality. Last year in particular but also a little bit the year before, it was destroyed a little bit by the fact that, that was a period where we were mobilizing on 2 or 3 very large projects where the funding model is to receive significant advance payments. So they kind of destroyed the working capital profile a little bit, and you will have seen the JV cash that we report spike on the back of that. And so that was all within those large joint ventures. This year, without the -- a similar profile in terms of mobilizing on big new joint ventures, the seasonality is more typical, which is as we ramp up through the busy season in Q2 and through Q3, we have a building working capital. And that typically unwinds in the kind of latter part of Q4 and through Q1. So we expect that profile this year without the distortion of the significant JV cash coming in.
Okay. Just moving on to the Bermuda airport. And any progress or any update around replicating that model into other potential Caribbean locations?
Yes. I mean it would be quite a good fix. We have quite a good knowledge of the industry of airport construction as well as the concession. So as we have been telling you, we have created a small business development team which has begun to work on those future projects, but yes, if we could duplicate what we are doing in Bermuda, we will do it.
Yes. And these have that support of a -- the Canadian government as well.
I mean if we can have the support of the Canadian government, we are quite used with working on this scheme, and of course, we will take it.
Okay. But no major progress to date to report on, though, on that front, right?
No special major progress. We are working on it.
Okay. And just in terms of the Bermuda airport, as you're coming closer to completion on the construction side, would you say that it by and large has met or exceeded expectations? And maybe lastly before I turn it over, maybe you can talk a little bit about just some of the general airport trends that you're seeing there.
So I will say from a Construction perspective we're very happy with how that project has gone to date. And I think, as Jean-Louis referenced earlier, we're still very targeted on opening the new terminal midway through next year, so that's very much on time and on budget and a very successful Construction project today. On the Concessions side, we had a very conservative model going in. Passenger traffic and ancillary revenues have performed well. We've done a lot to improve the existing terminal while we're building the new terminal, and I think that has been positive in terms of ancillary revenues. And then I think, from a traffic perspective, the numbers we've been disclosing in our investor deck show a positive trend, a little bit of a moderation in the last quarter or so with some flights kind of moving around, which is fairly typical, but we still think that the long-term trend is moving in the right direction. So from a concession perspective, yes, it's performing in line with expectations, for sure.
Your next question, from the line of Jean-Francois Lavoie with Desjardins Capital Markets.
Earlier in 2019, you did lots of preparation work to ramp up on key Infrastructure projects such as the REM, the Finch West LRT and the -- and Gordie Howe, so I was wondering if you could provide an update on this, the progress made with these key contracts, please.
Yes. It's true that on those major projects usually the first year is dedicated to the design. So for example, in Finch we have just finalized the design and we will begin the work during this summer. It is the same thing but with a few months more for Gordie Howe. I could say that we are now around 60% of design completion and we are getting ready for the first preparatory works. The REM is more advanced. It's a fast-track program, and we will have a strong summer 2019 in terms of works executed. So all those major projects today are on time and on budget. We do not have special problem with it.
Okay. So on the REM site, is -- everything is going quite good with the activities, so everything on budget like you said.
Yes. Probably as you can hear in the streets of Montréal because of the works we are doing everywhere, the citizens are probably not very happy, but we are very happy with the pace of the work. It goes perfectly as scheduled, and we are very happy with the ramp progress.
Your next question, from the line of Chris Murray with Alla Corp Capital (sic) [ AltaCorp Capital ].
David, going back to your comment about seasonality, and I'm just trying to make sure I understand this correctly. So Q2, of course, significantly better than I think anyone was expecting, part of that I think driven maybe by the mix of projects where you're able to avoid some of the normal seasonal weather issues, but as we go into 2020, should we be thinking that the pattern persists as we go; and that your -- some of these contracts, call it some of the big Infrastructure stuff [ you're ] working underground, lets you continue at a more normalized pace? Or you called out a couple that maybe -- things like 401 or the Gardiner project where you may have some more weather or seasonal issues to be thinking about?
Yes. I mean I certainly think this, the -- so the moderation of seasonality that we've seen to some extent will be the same in 2020. I mean all of the projects we have underway right now in terms of the major projects will be continuing through 2020, so that, the moderation that they bring through Q1 and Q2, will still be there. I mean Q3 and Q4 will still be the strongest quarters, no doubt about it, but certainly -- and the nuclear work continue year-round. Pipeline work tends to continue year-round. So yes, projects -- some of the projects, 401 and things like that, can have an impact, but there's always a few of those. So I think, what you've seen this year -- what you've seen so far this year and what we talked about in terms of expectations for the second half, I don't see that changing that much next year in terms of that profile.
Okay. Good. And then maybe -- I don't know who wants to take this one, but one of the pieces of feedback, particularly after SNC has announced that they're moving away from fixed-price contracting and we've seen some issues with other U.S. contractors and some paying contractors, is about the concern around fixed-price contract and risk management which has really kind of impacted a lot of players in the industry. I guess how do you address investor concerns about your ability to manage construction risk? I mean your -- looking at your backlog, about 60% is fixed-price contract, but how do you think that you would describe Aecon as different than some of the other peers who seem to have run themselves into some issues?
Yes. As I've already told, I mean at the beginning of this conference, in Aecon we are builders. So it's our job. We're extremely focused on this job. We are extremely focused on their execution. And with the backlog we have, we have a very strong bidding discipline. So it's one part of the answer. The second part may be to say that it's not as easy to say fixed price is bad and unit price is good. I mean you have very good fixed-price job, and you can have poor unit price jobs. So in addition, in those major projects and -- we embed in the selling price more contingency to take care about the particularity of the contracts and more margin. The third part of my answer is also to note that, although the term, I mean used for those contracts is fixed and lump sum, we are extremely cautious in the negotiation of our contracts before being awarded, especially on the definition of the release even that can open compensation in case they happen during the course of the execution of our contracts. It's a very important point. We take a lot of care about defining them. And this is why we are pursuing those activities and this is why we are serious about them.
And your next question, from the line of Maxim Sytchev with National Bank Financial.
It's been a while, I guess, since we've spoken about mining. I'm just wondering right now, with R&O pricing and gold obviously rallying, if business development is getting a bit easier for you guys. Anything on the horizon there?
We're working on it. We have teams, I mean working on the -- looking for any future growth opportunity. I mean it may be project internationally. It may be tuck-in acquisition. It may be acquisition in major markets. We have the capacity to do it, and with our backlog we can be selective. We're working on it, definitely.
Okay, that's helpful. And is there any update on that K+S situation?
No, nothing to report, Max. It's a legal process now that will take some time. And it's just proceeding through that process but no update at this stage.
Okay. And maybe just last question. A couple of quarters ago, I guess, you started to mention about doing some business development in the U.S. And was wondering if your thought process has evolved around that market specifically and maybe timing, how you guys are thinking about that.
No, there's nothing new to say at this stage. Our eyes and our ears are open. I -- but so far, I mean no news. We are studying a few opportunities. And if one can fit perfectly with Aecon, with what we are looking for, we will be ready to make it.
Your next question, from the line of Neil Linsdell with Industrial Alliance.
Congratulations on the quarter, guys. Just wanted to talk about the business development team that you're talking about for the opportunities with airports and, you mentioned, in the Caribbean area. Just the process that they go across, is it really just looking for governments or projects where they've already decided to do that? Or do you go out and make proposals, as far as "look what we can do as far as improving your airport?" How active or passive is that group?
We are active on both sides. I mean we can answer to requests for proposal from governmental entities or airport administration, but we are also very active trying to replicate the Bermudan model to be able to propose to some airport authorities what we call private initiative and to be able to discuss with them and to prove to them the validity of the model we have experienced in the -- in Bermuda. So both sides are open and active.
Okay. Any insight as to what kind of time line that is? Is it a 1-year conversation typically, 3 year, 5 year?
Okay. We -- I think it's not very useful, I mean to speak about time line on this. And we're working on it. When we find the good opportunities, we'll put the pressure. It may be a few years. I mean I'm not worried about it. We just want to go for the good opportunities.
Yes. No, of course. And geographically is it still in the Caribbean area that you're looking at or focused on? Or are there other areas in the world that you think are -- or you're focusing on now?
Yes. I mean in terms of opportunities, we just consider that for the airport industry, I mean Caribbean is a good playground because the island and the airport is a center of any economic activity. So we are targeting Caribbean. And we may expand also to South America, depending on the opportunity we can find there.
Right. And you already have some experience down there. And we've talked about your opportunities going into the U.S. market. Is there any change or any opportunity to get into other areas of the world outside North America in any kind of significant way? Or does it really just make sense to stay more -- closer to Canada?
Yes, I think it makes sense to get closer to Canada. I mean as you say, we are having a look at the U.S. market, and that's it for the moment.
Your final question comes from the line of Ben Jekic with GMP Securities.
Just one quick question with regards to SNC and the exit from the fixed-price contract on the Construction side. How should we -- should we be thinking about that as creating an opportunity of any significance? And how soon could we start potentially modeling that?
Okay. So I think I've given most of the answer, I mean in my precedent, but what we can say today is that we have 2 common projects in Infrastructure and which are Eglinton and the REM. And we are executing those job in a very robust and strong joint venture with or without SNC. Just in Eglinton, I mean we are with Dragados, the world leader on this type of project. And [ we've done ] a very strong company in -- around Toronto ourselves. In the REM, I mean we are also with Dragados. We are with Pomerleau. We are with EBC. So our consortiums are quite strong, so we are not that much worried. I will say we are not pursuing common project at this stage with SNC. And we will just see with our clients, I mean on the RFP to go what course of actions that we'll decide to take.
And there are no other questions at this time.
Thanks, everybody, for joining us this morning. And if you have follow-up questions, we'll be happy to take them. And with that, we'll wrap up.
This concludes today's conference call. You may now disconnect at this time.