Aecon Group Inc

TSX:ARE

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Aecon Group Third Quarter 2018 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Friday, October 26, 2018. It is now my pleasure to turn the conference over to Adam Borgatti, Senior Vice President and Corporate Development and Investor Relations. Please go ahead.

[Adam Borgatti]

Thanks, Kathie. Good morning, everyone, and thanks for participating in our third quarter 2018 results conference call. This is Adam Borgatti speaking. Presenting to you this morning are Jean-Louis Servranckx, President and CEO; and David Smales, Executive Vice President and CFO. John Beck, Aecon's Executive Chairman is also with us in the room for a subsequent Q&A session.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 doing this call. Following our comments, we'll be glad to take your questions. 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 that 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 Smales.

[David Smales, Executive VP & CFO]

Thank you, Adam, and good morning, everyone. 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. This previously disclosed, commencing in 2018, Aecon's former Energy and Mining segments were combined into a single-industrial segment to align with Aecon's new operating management structure and to capitalize on in combined and strengthen synergies in our capabilities across the Industrial sector. Turning to Slide 4. Revenue of $1 billion for the third quarter of 2018 was $260 million or 34% higher than the same period last year, driven by strong performance in each of our segments. Adjusted EBITDA of $89.5 million and a margin of 8.8% for the quarter grew significantly compared to $58.7 million and a margin of 7.7% in the same period last year. Likewise, operating profit of $56.2 million, net profit of $42 million and diluted earnings per share of $0.60, all showed considerable growth compared to the third quarter of 2017 on the back of higher volume and improved margins. Reported backlog as of September 30, 2018, is $7 billion, is 62% higher than backlog of $4.3 billion as of the same time last year and represents a 65% increase since the beginning of 2018. This record backlog position surpasses the previous record of $6.4 billion achieved in the second quarter of 2018.Continuing to drive this strong growth in backlog, with new contract awards of $1.6 billion booked in the third quarter of 2018, compared to $714 million in the same period last year.Turning to Slides 5 and 6. Results are presented with adjustments for one-time items in prior periods. No such adjustments were noted in the third quarter of 2018. On a pro forma basis, reflecting these adjustments for the last 12 months, diluted earnings per share would have improved from $0.83 to $0.98.Now turning to results by segment. As noted on Slide 7, Infrastructure revenue of $440 million with $128 million or 41% higher than the same period last year. This increase in Infrastructure revenue is broken down further on Slide 8, and was driven by increased activity in both the Transportation and major projects sectors and geographically in both Eastern and Western Canada, reflecting the balanced growth in backlog achieved over the last 12 months. Adjusted EBITDA in the Infrastructure segment of $33.2 million, and margin of 7.5%, was up by $10.4 million, compared to $22.8 million, and a margin of 7.3%, in the same period last year. New contract awards in Infrastructure of $1.2 billion in the third quarter were $799 million higher compared to the same period in 2017 and included the Gordie Howe International Bridge project and Section 1 of the Gardiner Expressway Rehabilitation Project in Toronto. This resulted in Infrastructure backlog of $4.7 billion as of September 30, 2018, $2.6 billion higher than at the same time last year.Turning to Slide 9. In the Industrial segment, revenue in the quarter of $566 million was $129 million or 30% higher than the same period last year. Again, this reflect growth in both Eastern and Western Canada and was driven by power, mining and utilities work. Adjusted EBITDA in Industrial of $43.3 million, a margin of 7.6%, was $13.2 million higher than the prior year of $30.1 million, a margin of 6.9%. New contract awards in the Industrial segment for $410 million in the third quarter was $62 million higher than the same period in 2017.Turning to Slide 10. In the Concessions segment, increased activity at the Bermuda Airport project was the primary reason for growth in both revenue and adjusted EBITDA in the period.At this point, I'll turn the call over to Jean-Louis.

[Jean-Louis Servranckx]

Thank you, David, and good morning. Turning to Slide 11. As David mentioned earlier, Aecon ended the third quarter of 2018 with a record backlog of $7 billion. As shown, not only as backlog to be worked off in the next 12 months increased 39%, but 71% of backlog is for work off beyond the next 12 months, providing indeed significant visibility and stability to Aecon's longer-term outlook. This is especially so when combined with Aecon's annual recurring revenue, which has grown by 12% in the last 12 months, driven primarily by utilities work in telecommunications, gas and hydro distribution.Given this significant backlog position, a key focus for me and the team at Aecon is clearly on, first, continued strong execution; and second, capacity for further growth. With this in mind, we recently announced the sale of Aecon's contract Mining business to North American Construction Group for $199 million and hope to close the transaction in the coming months following regulatory approval.Referencing Slides 12 and 13, the company's balance sheet, financial capacity and cash generation remain key advantages for Aecon, and its ability to grow and take advantage of increased Infrastructure investments by Canadian federal, provincial and municipal governments in coming years, including public-private partnerships as well as select international projects. Aecon is well positioned to respond to gradually improving oil and commodity markets and continues to be disciplined in all segments, responding to request for our services, becoming prequalified, bidding, negotiating and successfully carrying out work.Referencing Slide 14, we expect another strong year of growth in 2019. Our current backlog coupled with the robust pipeline of future opportunities is expected to support the goals of revenue growth and improving adjusted EBITDA margin as we move forward.Finally, I would like to end my remarks by expressing my sincere thanks to all of Aecon's employees, customers and partners who have welcomed here since arriving on September 4. I've had the pleasure of meeting many of our employees and other stakeholders across the country by touring a number of our offices and projects over the past 2 months, and I'm very impressed with what I've seen to date.Again, and as I previously noted, Aecon is fully focused on executing the record level of backlog in place and continuing to pursue a robust pipeline of opportunities ahead of us. My commitment to all of Aecon's stakeholders is to leverage my experience in the industry, to continue to build out our strong management team and safely and profitably perform our work to deliver sustainable results and growth for the long term.Thank you, and I will now turn the call over to analysts for questions.

[Operator]

[Operator Instructions] Our first question comes from Yuri Lynk of Canaccord Genuity.

[Yuri Lynk]

Jean-Louis, maybe I'll start you off with a bit of a low ball, but easy -- early impressions so far in your first 1.5 months at Aecon, and maybe can you share with us your focus for the first 100 days on the job?

[Jean-Louis Servranckx]

Okay. I'm not new to this industry, but I have to say that I'm extremely impressed by the operational capacity of Aecon. I've been touring most of our projects, most of our offices during those first 60 days. I've been meeting most of our partners, most of our clients, and it's evident that Aecon is a partner of choice for our partners and is a contractor of choice for our clients. So far, I'm extremely impressed with this capacity. As I told you, my key focus for the months to come is continued strong execution of the record backlog we have now with us and capacity for further growth. This is where I am.

[Yuri Lynk]

Okay. And do you see -- or do they do things in terms of execution and risk management in line with what you've seen in other companies? Do you see room for improvement?

[Jean-Louis Servranckx]

Okay. Aecon is at the same time a quick decision-making company with not that much of unnecessary hierarchal level, and I think it's good in our industry. On another hand, Aecon with those large complex project is building up on tools and processes along with quite a very good team of operational people. That means that I'm not that much worried about our capacity to execute our backlog today.

[Yuri Lynk]

Okay, that's fair. Last question from me on the outlook. Just some clarification, outlook calls for an improvement in adjusted EBITDA margin for next year. Assuming that the Mining business is successfully sold, are you -- does this imply that your margins would still be up in, say, the Industrial segment in '19, even though, this year would have almost a full year of the Mining business, which is much higher margin?

[David Smales, Executive VP & CFO]

Yes. So I mean, those comments are really on an overall consolidated basis, and I think that holds. When you talk about industrial, specifically, obviously, our comments today or the business as is today, as you say, the contract Mining business is a higher-margin component of the business at the EBITDA level, and so that will have some moderating impact on the Industrial segment. But in terms of the overall volume of Industrial versus the volume of contract Mining. It's not that significant a driver. And actually when you look at operating profit margins, the operating profit margin of the contract Mining business isn't one of the stronger businesses. It's in the pack, but it's certainly not one of the stronger operating profit margin areas. So I think overall, it has a little bit of a moderating impact to the EBITDA level in Industrial, but not that significant.

[Operator]

Our next question from Jacob Bout, CIBC.

[Jacob Jonathan Bout]

So clearly, you won a lot of work this past quarter. Can you talk a bit about your capacity utilization, and maybe break out the outlook in Industrials and in the Infra group?

[David Smales, Executive VP & CFO]

So obviously, we talked a little bit in the past about how these long-term projects add a significant amount of backlog when you book them into backlog, but we're very focused on how that works out over that period of time. And just about all of these large projects go over a kind of 4 to 5-year time horizon, and then the nuclear work on the Industrial side is typically over a 8 to 10 years cycle, if not longer. So we're focused on continuing to add capacity and build capacity, and I think, Jean-Louis commented on that in his remarks. Very comfortable with where we're at today in terms of the program ahead of us, and we're also comfortable with the pursuits we've got underway that, that will fit nicely with the work we already have, and we continue to look adding further capacity to meet the demand we see coming. So I think from that perspective, yes, we're very comfortable from where we are today, and we'll keep adding capacity as we go. So we don't really see any boundaries at this point based on what we see ahead of us.

[Jacob Jonathan Bout]

Maybe just turning to the growth that you saw in the Industrial side, so strong year-over-year growth. How do you think about the sustainability of the growth we saw in the quarter? And then, I know you also made the comment about nuclear revenues actually being down. What happens as Bruce starts to ramp, and maybe comment a bit on the margin as well with the nuclear ramp?

[David Smales, Executive VP & CFO]

So on the nuclear side, Bruce, doesn't really get going in terms of the reactor refurbishment until 2020. We are doing some work there on the first steam generator replacement, but that doesn't drive the same volume as the reactor refurbishment will, once we get going on that. On Darlington, we did have, if you go back a year ago, a number of ancillary projects on that site in addition to the main reactor refurbishment, and those projects are the kind of things you do once you're on site, and there are other things that need to be done, and there are other opportunities on site at Darlington as we go through the life cycle of this refurbishment, but they will fluctuate over time, and that's why volume was down a little bit versus where we were a year ago. But the main reactor work is now well underway and will be the core of our work at Darlington for the next 10 years. From a margin perspective, we talked about this in the past, any nuclear work we do tends to have a positive overall mixed impact. But we don't expect to see big growth on the nuclear side next year. That's more a 2020 factor once we get going at the Bruce on the main reactor refurbishment there.

[Jacob Jonathan Bout]

And then on the sustainability of the growth in the Industrial side? Being this morning a one-off quarter?

[David Smales, Executive VP & CFO]

Yes, I think, longer term through 2019, we've got good backlog in Industrial today. If you look at where our backlog is versus historical backlog in industrial, it's a strong position. I think that will support growth in 2019 but maybe not as dramatic as the building backlog on the Infrastructure side. Q3 did have a couple of areas that will roll off early in Q4. So the Q3 to Q4 comparison, you won't see as much activity on the Industrial side for sure, the biggest component of that is the Enbridge Line 3 work that we announced earlier this year. That was predominantly carried down through Q3, and there's just not much of that remaining in Q4. So that will have an impact. We also had a very strong quarter in Industrial on the utility side, and utilities is the most seasonal business, and that really winds down here in Q4 as the weather gets colder, so that will have a moderating impact in Q4 as well. So certainly, Q3 was a -- had a few things going on that won't be repeated in Q4. But as we look at the full year next year, we go into that with strong backlog and demand on the Industrial side.

[Operator]

Our next question comes from Michael Tupholme of TD Securities.

[Michael Tupholme, Research Analyst]

Dave, you've been asked a couple of questions about Industrial. I just want to circle back on one point. So in the response to Jacob's question there, you'd suggested that given the backlog in Industrial, you do see that as supportive of Industrial growth in 2019? Just to be clear, is that even after eliminating the contract Mining revenues that will go as part of the sale?

[David Smales, Executive VP & CFO]

No. I'm talking about apples-to-apples comparison. Obviously, the timing of that sale isn't certain yet. We still have to get competition authority and regulatory approval. So until that happens, my comments are kind of apples to apples. Obviously, I think there's an understanding that we do, kind of, anywhere in the range of up to $200 million of revenue in that business in any given year, and so that will clearly come out as and when that sale closes.

[Michael Tupholme, Research Analyst]

Okay, perfect. And then just sticking with Industrial, I mean, the backlog is in good shape there. You will be adding the Coastal GasLink award in the fourth quarter, so additional work, even though, I realized that doesn't sort of fully begin to contribute really until 2020 in a more meaningful way. But nevertheless, you did make some comments in the MD&A about oil and commodity prices not yet being up to kind of levels that would really support a pickup in activity in oil and gas and mining. Just wondering, what you're hearing from your clients these days? Are they sort of -- what's the tone or what are they thinking with respect to possibly accelerating or moving forward on some projects?

[Jean-Louis Servranckx]

I'm Jean-Louis. Our clients stay prudent about the oil and commodity futures prices. As you have been told, I mean, our backlog in Industrial is quite good. So we will take care of this segment of the business knowing that for the moment it is not crystal clear about how it can grow as quickly.

[Michael Tupholme, Research Analyst]

Okay, that's helpful. Just 2 others here. Just in terms of the working capital, Dave, we saw that act as a source of cash again this quarter, driven by increases in payables and deferred revenue. Can you talk a little bit about how we should be thinking about that changes in noncash working capital for the fourth quarter and then also for 2019 as a whole?

[David Smales, Executive VP & CFO]

Yes. So the biggest impact on working capital, kind of year-to-date and in the third quarter, is really the new awards on the Infrastructure side where the joint ventures performing that work receive large upfront payments. And that's why you see the increase in deferred revenue and the increasing cash in joint ventures. That will start to work off as we move through 2019. And so it does distort a little bit than normal seasonality of our business, which is that we typically build working capital through Q2 and Q3 and start to see it unwind in Q4 and Q1. I think this year, that normal unwinding Q4 will be offset a little bit by the fact that we'll be starting to work down some of this deferred revenue and these advanced payments, and that will continue next year, although, having said that, I think normal working capital cycle will be a beneficiary of the fact that a lot of the work that we're doing now is in those joint ventures and is funded by upfront payments. So the normal working capital that we would be putting into smaller-type Infrastructure projects won't be needed. And as well on the Industrial side, the nuclear work tends to be fairly working capital positive as well. So all to say, I think we'll see Q4 being relatively flat. And through 2019, I think, we'll be positive on the working capital side. Not as much as it would be normally because we'll be working down some of these big advanced payments.

[Michael Tupholme, Research Analyst]

Okay, that's very helpful. And then just lastly, with respect to the recently announced sale of your contract Mining business, wondering to what extent you would expect the net proceeds received to vary from the disclosed $199 million sell price?

[David Smales, Executive VP & CFO]

So the main mechanism for changes to that price are really around utilization of the equipment over the period of time, and that -- because we don't know yet when it will close. It's hard to say how much of an adjustment that will be. But it won't be material to the overall proceeds, but that's the only adjustment of any, kind of, real note.

[Michael Tupholme, Research Analyst]

Okay. Just to clarify, it wasn't so much focused on an adjustment to the $199 million in terms of what the purchaser would actually pay on a gross basis. But more, any leakage, if you will, tax implications and things like that, that will result in the net amount that you realized at the end of the day differing from whatever you realized on a gross basis?

[David Smales, Executive VP & CFO]

No, not really. There's no significant leakage. The -- there's no real -- advisory fee, some legal fees and a little bit of tax but not particularly material number either, so no, generally most of the proceeds will be turned into cash. There are some finance leases attached to that equipment, and we're still working through the assignment of those or otherwise, and whether we will pay them out, or whether, they'll be just assigned, so that can have a net impact. But it's just a cash-versus-debt equation. There's about $30 million of debt on those assets, so that would be the other piece.

[Operator]

Our next session comes from Frederic Bastien of Raymond James.

[Frederic Bastien, Senior Vice President]

I wanted to go back to the momentum you're enjoying in the Industrial market. It's obvious that you're at leadership position in the pipeline, utilities and nuclear markets is yielding above average growth for you guys. But I was hoping you could comment on the overall strength of the markets there. Certainly feels like, we got a mixed bag here in the West with Canadian crude not getting any respect and positively getting LNG Canada the green light. So hoping you could comment a little bit on that, please?

[Jean-Louis Servranckx]

Okay. At the moment, we are finalizing the execution of Enbridge Line 3. We have 2 spreads working, Spread 8 and Spread 9, and we are getting ready for the next one, the coastal one, the LNG project with 1 Spread. As you also know, we operate through a joint venture, and this joint venture gives us some more flexibility. So we do not see at this stage any problem or an issue with our capacity to go on building on with this pipeline activity.

[Frederic Bastien, Senior Vice President]

Okay. How -- could you please provide some color on the overall strength of the markets. I mean, obviously, there is -- you're doing really well there, but it doesn't seem like competitors are doing as well. So I was wondering if you could speak to that difference we're seeing?

[David Smales, Executive VP & CFO]

So I think, Industrial business relative to some of the other people in the Industrial space is a bit more diversified in that we, obviously, have the nuclear side of Industrial. Utilities would be a very significant component of our Industrial space. And obviously, we've talked about how strong those 2 markets have been for us. Our pipeline capacity being utilized is another big plus, and our ability to move resources around and go to where the opportunities are, given the diversity of what we do has certainly helped us, kind of, mitigate that downturn in oil and gas to a large extent. I think, as we look at the market going forward, in those markets, we're active in right now that I've just mentioned. We see continued strong demand in those areas for the foreseeable future. Nuclear is pretty much secured for a number of years. Utility demand -- we don't see any slow down there, and there are a number of other pipeline opportunities. Oil and commodity markets at this point in time really represent an upside opportunity, we're not doing very much work at all in those areas, but to the extent that things do start to improve, and capital investment by our clients starts to grow, that's all upside for us from where we are today.

[Frederic Bastien, Senior Vice President]

That's helpful. So you got part of the Coastal GasLink project in the bag. I was wondering if you could touch on the opportunities that you may be presented with and get them at proper over time?

[Jean-Louis Servranckx]

Okay. This is a very big project, something like $40 billion. So we are extremely focused on what Aecon is going to do within this big project. As you know, I mean, some activities may be outsourced away from Canada but some cannot. Everything related with installation, with civil work will have to be done on site. So we will take our part of this big project. We know Fluor quite well because we have been already working in refinery project with them, and I remember you -- that they are our partners on the Gordie Howe Bridge project between Windsor and Detroit. So we'll take our part of this project.

[Operator]

Our next question comes from Benoit Poirier of Desjardins Capital Markets.

[Benoit Poirier]

And welcome aboard, Jean-Louis. Just to come back on the pipeline opportunity, aside the big LNG project, could you talk a little bit about, obviously, the opportunities with the Keystone XL and also with TMX? And would there be any capacity issues, or given the different timelines, it's something that you could work at the same time?

[Jean-Louis Servranckx]

No. As I already mentioned, I mean, I'm not that much worried about capacity for future pipeline works. I mean, we have the capacity. We are working in joint ventures. Projects are just coming up one after another, so we are getting ready to take our part of this market with not that much of worries from my part.

[Benoit Poirier]

Okay, perfect. And when we look at the, obviously, your backlog, all the submissions and bid in progress, the market, obviously, is very, very robust. But could you talk a little bit about the margins that are baked inside your backlog? And also comment about whether the pricing is going up, or any color on where the pricing could go based on the solid fundamentals we see these days?

[David Smales, Executive VP & CFO]

Yes. I think we -- in our current survey, we said -- talked about the backlog and the mix of backlog. Certainly, a project mix within that today, that is higher margin than we've seen historically, and that supports our comments around continued gradual margin growth as we go forward. John, I think, last quarter talked about a seller's market today in terms of a demand that's out there. And without, kind of, being able to quantify it, we certainly see that continuing to give opportunities to improve margins, and we're very focused on that as we bid in these projects, and we'll continue to be selective, and that's the other nice thing about having this high level of backlog is we can be selective about the types of projects we want to go after and the margin profile of those projects. So we're in a very positive environment. The onus on us is to capitalize on that by going after the right projects and executing on the ones we have.

[Benoit Poirier]

Okay. And looking at your balance sheet, you gave some thoughts on the working capital, obviously, it remains strong, a lot of bidding activities. So aside the cash that you need to deploy for the project, is there any other opportunities you see aside or you prefer to keep the balance sheet strong, in light of all the potential opportunities you see right now?

[Jean-Louis Servranckx]

Yes, of course, we prefer to keep our balance sheet as strong as possible. As I told you, the main focus at the moment is on continuous strong execution of our main backlog and capacity for further growth, I mean, capacity is both financial capacity, and here we speak about the strength of our balance sheet, financial capacity and cash generation and also operational capacity. And here we speak about people, tools and processes. But it is our real point of focus, and we will go on this line for the future.

[Operator]

Our next question comes from Chris Murray, AltaCorp.

[Christopher Allan Murray]

Just turning back to the Mining business. A couple quick questions on this one. So first of all, David, maybe you can help me understand this. I mean, you made the comment that the operating margin on that business is a little bit lower. We would have expected higher capital spending, but you made the comment in your outlook statement that CapEx should be in '19 somewhere to '18 and '17 levels. I just -- I guess a couple of pieces of those: one, why wouldn't it be coming down if you're getting rid of fairly capital intensive piece of the business; and then two, where are those company investments targeted?

[David Smales, Executive VP & CFO]

So as I said earlier, comments at this stage in terms of outlook is still very much on an apples-to-apples basis. Having said that, when we talk about the capital intensity of that business, it's -- we're talking as much about the amount of capital invested in the business already. And so the gear that's already there. The amount we spend every year in additional CapEx, at this point is really just maintenance CapEx, and a lot of that spend is expensed. So it's not as big a driver of the CapEx number as maybe you're thinking. I mean, certainly, it's in the kind of mid-teens range from a CapEx perspective, but it's not -- certainly, not the lion's share of our CapEx. The rest of our CapEx really comes from our utilities and roadbuildings business and all the equipment that supports those businesses. But the Mining business in and of itself has a lot of capital deployed and operating, but it's certainly not the lion's share of our CapEx in any given year.

[Christopher Allan Murray]

All right, fair enough. And then thinking about this, so to your point about, call it, plus or minus $200 million in revenue but really feel -- falls into that recurring bucket. One of the things we've seen over the last few years is trying to find bit of a balance between project work and recurring revenue work, MSA work. With that coming out, probably your percentage of revenue drops down a few percentage points, probably into the 20% range. Just thinking about, or how do you think about recurring revenue and looking for those type of contracts versus more project-oriented work? And is it just one of those things that proportion of the business is going to -- is -- will drift lower because of the opportunities in other areas in Infrastructure and Industrial?

[David Smales, Executive VP & CFO]

Yes, you're right. Most of the contract Mining business does fall into that recurring revenue category and that will come out. The big component of recurring revenue and by far the largest component is our utilities business, and that will continue on. We don't have a set target. We have certain businesses that have a lot of stability to them because they do generate revenue every year under these long-term Master Service Agreements, but it's not something where we have a threshold that we have to be at or we're targeting. Having said that, the one feature of our business is developing nicely as we go forward to the number of concessions we have, and they will generate a long-term stream, 30 years in virtual cases of ongoing maintenance in all cases and in some cases, also operations. And that will be a nice stream of ongoing revenue that we'll be adding to the business as those concessions get through the construction phase and into operations. So we like that model. We like some of the predictability of the recurring revenue and the concessions we'll add to that.

[Christopher Allan Murray]

Okay. And then I think that briefly on my question, which is around capital location; now that you've done the refinancing on the debentures and with the -- well, let's just assume of the sale of the Mining business gets closed by the end of the year or shortly thereafter. You look at your balance sheet, your -- you've talked about wanting financial capacity to participate in P3s, but it's not really been a capital-intensive business, really. So when you think about capital allocation, how should we be thinking about how you use your free cash flow? Do start thinking about M&A as a way of shaping the portfolio, and how does that thinking go into your divestitures? And to -- Or should we think about perhaps dividends, or do you even start looking at a share buyback?

[David Smales, Executive VP & CFO]

So Chris, there's one comment you made that I'll address before moving on to the rest of the questions. You said, "P3s aren't, really, capital-intensive part of the business." But from a balance sheet perspective, those P3s are underpinned by performance security requirements that can be quite significant. So we're talking letters of credit, in particular, and so that's where we need the strong balance sheet for further -- for ongoing growth is the capacity to provide letters of credit and performance security on these large projects. So that's the focus when we talk about balance sheet strength. I think in terms of dividends and other methods of allocating capital, that's something we discuss with the board usually around the time we release our year-end results. And obviously, at that point, we'll know whether the Mining sale has happened or not. And that'll all be factored into our regular discussions around dividend policy and other things. So way too early to talk about that at this stage. And I think you asked about M&A, and Jean-Louis can comment as well, but I think he's already laid out, kind of, 2 immediate near-term focus areas, and we're at that right now. Jean-Louis, anything to add?

[Jean-Louis Servranckx]

Yes. Mainly speaking, as I told you, I mean, strong execution of the backlog is of the essence, so we are all focused on this. It doesn't mean that we are not going, and we are going to have a look at some eventual bolt-on on specialty business, that could help us either to decrease our risk or to operate beta in our core business. But mainly at the moment, we are focused -- thanks to Canada market, are focused on organic growth.

[Operator]

[Operator Instructions] Our next question comes from Maxim Sytchev of National Bank Financial.

[Maxim Sytchev, Managing Director and AEC]

Just maybe a follow-up question, in relation to the balance sheet, and maybe, David, if you want to address this. In terms of what do you think is the appropriate leverage for this type of business right now that's, obviously, hitting sort of all the strides. Because again, post the Aecon Mining sale, there's going to be quite a bit of cash in the balance sheet, plus the working capital is helping as well. So I just -- how should we think about on -- over the medium term?

[David Smales, Executive VP & CFO]

Sorry Max, I missed -- I didn't quite catch the first part of the question. Can you...

[Maxim Sytchev, Managing Director and AEC]

Sorry, Just..

[David Smales, Executive VP & CFO]

I'm not sure I follow your question.

[Maxim Sytchev, Managing Director and AEC]

Given the fact that you are selling Aecon Mining, I mean, there's cash coming, working capital as well is helping you right now, and there is an overall positive spending trends from industry perspective. What is the reasonable net debt to EBITDA that you think you should be targeting over the medium term, from a balance sheet perspective?

[David Smales, Executive VP & CFO]

Yes, so we've been operating in and around net debt-to-EBITDA position close to neutral for the last little while. Anywhere between there and 1x EBITDA based on the seasonality of cash and things like that. Obviously, very comfortable in that range. I think that is important to us in terms of being able to continue to grow our capacity on the performance security side as I've said. I think anywhere up to 2x leverage is fine. But we're certainly trying to stay comfortably below that at this point in time with the size of the opportunities ahead of us and the need for capacity for those.

[Maxim Sytchev, Managing Director and AEC]

Okay, that's helpful. And then maybe going back to the commentary around the bolt-on potential additions. Is there anything that you feel is necessary, to be added to your platform right now? I mean, is this on Industrial side or is it a function of commodities picking up, and then you're looking at certain things, or is it further strengthening the infrastructure expertise? Just so that we have an idea in terms of where -- what are you guys thinking about going?

[Jean-Louis Servranckx]

We are looking at some opportunities in both segments, Industrial and Infrastructure, knowing that they may be required to better our capacity to perform our backlog.

[Maxim Sytchev, Managing Director and AEC]

Okay, and is this more from a process or technology perspective or people, maybe, anything that you can share with us?

[Jean-Louis Servranckx]

We're not a process company, we are a contractor. So we're going to have a better look at contracting opportunities in some specialty business that we need to execute our more complex projects, basically.

[Operator]

Our next question comes from Derek Spronck, RBC.

[Derek Spronck, Analyst]

My first question is, Jean-Louis, you're bringing a lot of experience. You've done a review of the business, and you've touched on a few things. But is there anything specific that you're looking to enact, or any processes you're looking at bringing over from your past experience in order to minimize the execution risk?

[Jean-Louis Servranckx]

As you've seen our backlog has developed, and quite an important part of it are about big and complex projects. We are not speaking only about heavy civil but integrated projects and the quality of execution from the first moment up to the last moment with integration of system is of the essence. So I will focus on our capacity to execute properly, do the big projects. On another hand, as David told you regarding our recurrent businesses, I mean, we have to keep quite a close look at those businesses because those are the businesses where we train our people on the ground in utilities, for example, they can go to big pipeline projects after, or in our local transportation business, they go to our big civil works projects after. So we need to keep those recurrent activities to train and to create capacity for our more complex projects.

[Derek Spronck, Analyst]

Well, when you look at your capacity longer term, are you looking at it holistically across the organization and a roadmap of what your resources are in order to execute on that backlog? Or is it more on a project-to-project basis?

[Jean-Louis Servranckx]

I mean, of course, we are extremely focused on being able to execute our backlog. Aecon is a very strong company, and we have a solo process within the company to be sure that everybody can develop skills and to have sufficient agility so that depending on what the market rewards us, we are more able to execute it.

[John M. Beck, Executive Chairman]

I'll just add something to the -- that Derek, it's John Beck. What we've been able to do successfully and want to continue to do successfully, is to be able to assess what's coming at us in the market, and there are a significant number of large highly integrated projects that Jean-Louis was referring to earlier in the transportation field and transit. And so we want to continue to build. When Jean-Louis was talking about building capacity to be able to execute on the people side, it's assessing the market as it comes at us and being ready when it comes in front of us with those developed capabilities, and teams to be able to execute these larger, more complex projects. So I think that's a focus as we continue to build our human capacity.

[Derek Spronck, Analyst]

Okay, no, that's great. In -- just on that note, your MG&A costs have been fairly consistent the last few years over -- around $180 million a year. On an absolute basis, should we be kind of looking at that going forward? Or should we be looking at it as more of a percent of sales and as sales moves higher the MG&A line will move up proportionally?

[David Smales, Executive VP & CFO]

Yes. There's certainly some operating leverage, where some of that is, obviously, fixed cost. Though we do expect MG&A as a percentage of revenue to continue to trend in a positive direction. Absolute dollars will increase as top line increases. A part of that capacities, human resources capacity, is in support functions whether it's information systems, whether it's project controls capacity and risk management capacity. Those all go hand-in-hand with continuing to build out capacity for future growth so that will contribute to a growth in absolute dollars but coming down in percentage terms.

[Derek Spronck, Analyst]

Okay, great and just a couple additional questions, if I could. When you look at your backlog right now and the cadence of the project timing, at what point do you see you reaching your highest risk level? Is it -- because arguably, you're starting out a few contract right now -- that in the first few quarters of starting out the contract is bit of a honeymoon period. Do you think as the backlog stands right now the high-risk period will be 2019 or 2020, or is it fairly consistent throughout the next 2 to 3 years?

[Jean-Louis Servranckx]

Okay. As you probably have noticed, we are focused on keeping a well-balanced backlog. In terms of product line, I told you about local civil work, heavy civil, LRT and integrated project but also nuclear pipeline, utilities and pure Industrial. On another hand, geographically, we are trying to balance between East and West. Also in kind of -- type of contract, I mean, unit price, cost splits and reimbursable or fixed price, we are extremely cautious on our balance. And about duration, you have noticed that also this backlog is a record, 70% is at more than 1 year. It means that -- I do not see any peak in the risk profile of our backlog. I mean, we have to work hard. I mean, construction is a business where you have to work hard, and I think, I mean, building capacity consistently will be the key.

[Derek Spronck, Analyst]

Okay. And then just one last one, the...

[Adam Borgatti]

Derek, we're going to have to cut you there. Let's go to one more question I think because we're almost at the hour mark. Operator, could you move to the next?

[Operator]

Our final question comes from Neil Linsdell of Industrial Alliance Securities.

[Neil Linsdell]

Was going to ask you about the capacity, but we seem to have gone into that a lot, so maybe I can just ask Jean-Louis, looking at your experience, obviously, it looks like your bringing some fantastic skill set and context into Aecon. Can you talk about where you think you're going to be able to bring that, I guess, experience into what Aecon does? Is it going to be working with International partners already in Canada, and Aecon is not a stranger to working internationally obviously but is there the potential to do more work internationally and more concessions with your contacts in your experience?

[Jean-Louis Servranckx]

Okay, it's true that I'm a builder. I've done this all my life, and building major projects or small projects is the same in Europe, in North America or in any other continents. I mean, the basic to make it successful are the same. Regarding International activity, I mean, yes, we are always looking for the next international opportunities, replicating what we're doing in Bermuda, in Caribbean or in Latin America would be a good fit for us. We also have to consolidate on our extremely good relation with the Canadian government to go international, but it's true that within the months to come, we will have a thorough brainstorming and to be able to define our strategy on international activity for the future.

[Neil Linsdell]

Okay. And with your interactions, as I said, with a lot of the international players that are currently trying to work in Canada, does that -- do you think gives you a leg up now, or Aecon a leg up with you on board?

[Jean-Louis Servranckx]

At the moment, we have a group of partners that we are used to work with and we do it well. So yes, I know most of the European companies. But so far, I mean, where we are at the moment in Canada, we are able to cope with our backlog.

[Neil Linsdell]

Okay. And maybe just lastly, are there any kind of constraints that you're looking at in your comfort level on being able to deliver on the backlog comfortably. Are there certain types of skill sets in the labor or raw materials or materials on the supply chain that you think might be a little bit problematic, and how far out can your comfort level really go, is it 6 months, 2 years, 3 years?

[Jean-Louis Servranckx]

Raw materials and equipment is not a problem, you have everything you want in this world. People is a key focus point. I mean, people is a scarce resource to build at the moment. This is why we are making so much effort, I mean, to recruit, to train, to motivate, to retain what we want to be the best workforce for executing those projects that we have in our backlog.

[Neil Linsdell]

And just how far do you think you've -- can feel comfortable right now with your visibility on your projects and your staff?

[Jean-Louis Servranckx]

I mean, what could I tell you. I mean, I feel comfortable. I know there's a lot of work, and we have to be focused on executing it well, but I don't feel uncomfortable with either our current backlog or the future growth that we will probably experience.

[Operator]

Thank you. We have no further questions at this time. I'll turn the call back over to our presenters for any closing remarks.

[David Smales, Executive VP & CFO]

Okay, thank you, operator, and thanks to everybody for joining us today. And hope everyone has a great day.

[Operator]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a good day.