Aecon Group Inc

TSX:ARE

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Q3 2023 Aecon Group, Inc.'s earnings conference call. [Operator Instructions] Please be advised today's conference is being recorded.I would now like to hand the conference over to your speaker today, Adam Borgatti. Please go ahead.

[Adam Borgatti, executive]

Thank you, Kevin, and good morning, everyone. 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.Our earnings announcement was released yesterday evening and we posted a slide presentation on the Investing section of our website, which we will refer to during this call. Following our comments, we'll be glad to take questions from the analysts and we ask that analysts keep to one question and a follow up before getting back into the queue to ensure all have a chance to contribute.As noted on Slide 2, listeners are reminded that the information we're sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. 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, executive]

Thank you, 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 third quarter of $1.2 billion with $81 million or 6% lower compared to the same period last year, primarily due to the impact of the sale of Aecon Transportation East, or ATE, in the second quarter of this year. Adjusting for the sale of ATE, revenue increased on a like-for-like basis by $46 million or 4% in the quarter.Adjusted EBITDA of $32 million, a margin of 2.6% compared to $93 million, a margin of 7% last year. And operating profit of $140 million compared to an operating profit of $61 million in the third quarter of 2022. Excluding the impact of the 4 legacy projects on results in the third quarter, adjusted EBITDA from the balance of the business was $123 million, a margin of 11.6%. Diluted earnings per share in the quarter of $1.63 compared to diluted earnings per share of $0.45 in the same period last year.Improvement in operating profit and diluted earnings per share was largely due to a gain related to the sale of 49.9% interest in the Bermuda International Airport concessionaire of $139 million, including a fair value remeasurement gain of $80 million on Aecon's 50.1% retained interest. A reported backlog of $6.2 billion at the end of the quarter after removing $447 million of backlog in Q2 related to the sale of ATE compared to a backlog of $6.3 billion at the end of the third quarter of 2022. New contract awards of $591 million were booked in the quarter compared to $991 million in the prior period.Now looking at results by segment, turning to Slide 4. Construction revenue of $1.2 billion in the third quarter was $83 million or 6% lower than the same period last year. This was due to lower revenue in civil operations driven by lower volume of road building construction work in Eastern Canada as a result of the sale of ATE in the second quarter of 2023, partially offset by an increase in major project work in Western Canada.After adjusting for the impact of the sale of ATE, Construction revenue was $41 million or 3% higher than the same period last year. New contract awards of $563 million in the third quarter compared to $966 million in the same period last year. Backlog at the end of the quarter of $6.1 billion compared to $6.2 billion at the same time last year.Turning to Slide 5, adjusted EBITDA in the Construction segment of $17 million with $65 million unfavorable compared to the third quarter of last year. The decrease was driven by a negative gross profit of $42 million from a fixed price legacy project in civil operations versus a gross profit of $1 million in the same period last year from the same project, and by a negative gross profit of $50 million from one of the 4 fixed price legacy projects in Urban Transportation Solutions compared to a negative gross profit of $23 million in the same period last year from the same project.Other than the impact of fixed price legacy projects in the quarter, lower operating profit in the balance of the Construction segment was driven by lower operating profit from road building construction work due to the sale of ATE in the second quarter of this year and was largely offset by higher gross profit margin in nuclear operations and urban transportation solutions and lower MG&A in utilities operations.At September 30, the remaining backlog to be worked off on the 4 legacy projects was $528 million compared to $1.1 billion at the end of 2022. These projects comprised 14% of consolidated revenue in the third quarter compared to 16% in the full year 2022 and 9% of backlog at September 30 compared to 17% at the end of 2022.Turning to Slide 6. Concessions revenue for the third quarter was $26 million compared to $22 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, but continued to recover in the first 9 months of 2023 from the more severe impacts experienced in 2020, 2021. This recovery was evidenced by the fact that traffic in the third quarter averaged 75% of the pre-pandemic level in the third quarter of 2019 compared to average traffic in the third quarter of 2022 being 63% at the pre-pandemic levels.Adjusted EBITDA in the Concessions segment of $27 million compared to $21 million in Q3 last year, primarily due to results from the Bermuda Airport and an increase in management and development fees. As noted previously, operating profit in Concessions reflects a gain on sale in the quarter of $139 million.Turning to Slide 7. At the end of the third quarter, Aecon had net cash of over $400 million, including cash in joint operations. On December 31, 2023, convertible debentures with a face value of $184 million will mature and we expect to repay these debentures at maturity or before.At this point, I'll turn the call over to Jean-Louis.

[Jean-Louis Servranckx, executive]

Thank you, Dave, and good morning all. The impact of the 4 fixed price legacy projects being performed by joint ventures in which Aecon is a participant was felt again in our third quarter results. However, we have made significant progress during 2023 on driving these projects towards completion. One of the 4 projects reached substantial or mechanical completion in the third quarter as committed with our client, with 2 of the remaining 3 projects currently expected to be substantially complete by date between late 2023 and mid-2024, and the final one currently expected to be substantially complete during 2025. Aecon and its joint venture partners remain focused on dedicating all necessary resources to complete those 4 legacy projects, and in the meantime, continue to pursue fair and reasonable settlement agreements with the respective clients in each case. In this respect, we have also made progress in recent quarters. The most recent settlements reached and agreed to between the relevant joint ventures of the respective clients on each of the 4 projects, including one in the second quarter and 2 in the third quarter of 2023 have brought additional clarity on schedule, compensation, construction costs and other potential liabilities.We would be the first to acknowledge that despite this progress and the adjustments we've taken in recent quarters, the risk remains in the event that assumptions, estimate and also circumstances change. But we and our joint venture partners are fully focused on completion, pursuing further recoveries and putting those legacy projects behind us. Every day we are getting closer to the end.Turning to Slide 9. Demand for Aecon services across Canada continues to be strong. While volatile global and Canadian economic conditions are impacting inflation, interest rates and overall supply chain efficiency, those factors have stabilized to some extent and have largely been and will continue to be reflected in the pricing and commercial sales of Aecon's recent and prospective project awards and bids. Despite results having been impacted by the 4 legacy projects in recent periods, there are positive revenue and profitability trends in the balance of Aecon's business that reflect the underlying demand dynamics in the market and strong execution across the balance of our projects.Turning to Slide 10. With a backlog of $6.2 billion at September 30, 2023, and recurring revenue programs continuing to see robust demand, Aecon believes it is positioned to achieve further revenue growth over the next few years. As a reminder, the major scopes 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 ventures 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 $1.1 billion was up 40% versus the prior period and 69% versus 2 years ago. Utilities operation and contributions from the GO Expansion On-Corridor Works and Scarborough Subway Extension project during the respective development phases were the primary drivers of this growth. Utilities operation and further advancement from this project as we continue through the development phases are expected to contribute to future growth in recurring revenue. The Concessions segment is also expected to see airport traffic in Bermuda continue its recovery in 2023 and '24.Turning to Slide 11. Aecon continues to support the energy transition to build and operate sustainable infrastructure. In the second quarter of 2023, the Oneida Energy Storage project achieved financial close with Aecon Concessions as an 8.35% equity partner. Earlier this year, Aecon was awarded the $141 million EPC contract by Oneida Limited partnership to build this 250-megawatt 1,000 megawatt hour advanced stage grid-connected battery storage project, representing the largest clean energy storage project in Canada.Projects such as Oneida Energy Storage, GO Expansion, Scarborough Subway Extension and Darlington SMR demonstrate the path Aecon is on to embrace the opportunities linked to decarbonization, sustainability and the energy transition.Turning to Slide 12. With strong demand, growing recurring revenue programs, 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 CONCESSIONS segment, in addition to expecting an ongoing recovery in travel through the Bermuda International Airport through the remainder of 2023, there are a number of opportunities to add to the existing portfolio of Canadian and international concessions in the next 12 to 24 months, including projects with private sector clients that support a collective focus on sustainability and the transition to a net zero economy.The GO Expansion On-Corridor Works project and the Oneida Energy Storage Project noted above are examples of the role Aecon's Concessions segment is playing in developing, operating and maintaining assets related to this transition.Finally, on Slide 13, as disclosed on October 23, Aecon announced a strategic investment by Oaktree Capital Management in Aecon Utilities. The investment closed on October 24. Oaktree acquired a 27.5% ownership interest in Aecon Utilities by way of a net $150 million investment. This equates to a valuation of $750 million and a trailing 12-month adjusted EBITDA multiple of 9.3x.The investment positions the business to address attractive industry growth opportunities across utility end markets in Canada and in the U.S., provides financial flexibility to accelerate Aecon Utilities acquisition strategy, introduces a recognized value-added partner in Oaktree with a successful track record in utility infrastructure investing and strengthens Aecon's balance sheet, providing Aecon the financial flexibility to fund our strategic growth initiatives. We are delighted to partner with an experienced and value-added investor in Oaktree to continue to grow Aecon Utilities across North America.Thank you. We will now turn the floor over to analysts for questions.

[Operator]

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

[Yuri Lynk, analyst]

Dave, maybe just give us your thoughts on when we might see the -- or what we should expect in terms of the cash impact of the $92 million write-downs taken in the quarter. You did have over $110 million of positive operating cash flow in the quarter. So what should we expect in terms of operating cash flow in the next couple of quarters?

[David Smales, executive]

Yes. So in terms of the agreements we've reached, as Jean-Louis referred to, in Q2 and 2 in Q3, the positive outcome from those agreements is it deals with settling all the outstanding claims and compensation on a number of items where, to some extent, cost has already been incurred. And so the compensation we're now receiving is positive from a cash flow perspective. So you saw some of that in Q3 with the $100 million improvement in working capital in what is usually a seasonally -- a seasonal quarter that draws on working capital. Some of that will also be in Q4 and some of it in the first half of 2024. Based on the various agreements, there's some upfront payments and then some attached to milestones along the way. But they effectively compensate the working capital that's built upon the balance sheet for a period of time and will be cash flow positive over the next 6 to 9 months.

[Yuri Lynk, analyst]

Okay. So the cash impact of this quarter's write-downs was largely reflected in past quarters?

[David Smales, executive]

From a cash perspective, yes.

[Yuri Lynk, analyst]

Yes. Okay. And then just a clarification on your liquidity position. I think your operating line has been expanded from $600 million to $850 million. How much of that $850 million is available to AGI?

[David Smales, executive]

Yes. So the facility is now split into 2. So the previous $600 million facility is now a $450 million facility at the AGI level, $400 million or so to the Aecon Utilities as well.

[Yuri Lynk, analyst]

So the $400 million at the utilities level is not accessible to AGI?

[David Smales, executive]

It's accessible to a subsidiary of AGI in terms of Aecon Utilities. But no, the rest -- the balance of AGI's business doesn't draw on that facility. Obviously, as we generate cash flow from the Utilities business, we can distribute from Utilities to AGI, but AGI doesn't draw directly on Aecon Utilities' facility.

[Yuri Lynk, analyst]

Okay. And it's on that $450 million AGI facility that you're going to put the converts, right?

[David Smales, executive]

Yes. Correct.

[Yuri Lynk, analyst]

So pro forma, you're, call it, under -- just under $300 million on that facility available at the end of the year, all else equal?

[David Smales, executive]

Pro forma right -- I mean, right now -- obviously, at the end of September, the end of Q3, the position doesn't reflect the $150 million investment from Oaktree and doesn't reflect the just over $200 million distributed from Utilities to AGI as part of the transaction. And so that cash effectively will fund the redemption of the convertible debentures and the balance will be cash on the balance sheet.

[Operator]

Our next question comes from Jacob Bout with CIBC.

[Jacob Bout, analyst]

There's about $528 million backlog left of the four legacy fixed-price projects. Can you just sort of remind us how you expect to work down that in the balance of '23 and '24 and '25? And then maybe just as a follow-on there. How are you thinking about the risk of further negative cost reforecast? When do you expect that to subside?

[Jean-Louis Servranckx, executive]

Yes, we are around $500 million of remaining backlog for the four legacy project. In terms of declared backlog of $6.2 billion, it represents a little less than 10%. But when you add to this backlog, what is going to come, most probably from the progressive design build, it's not even 5%. As you know, on those four projects, one has reached mechanical completion. The three are the ones, I mean, two will be completed in 2024, and we are really nearing completion and the other one around 2025. It just means that this will steadily decrease in the two to three quarters to come.On other hand, let's maybe come back a little on the situation of those legacy projects. You have noted we reached three major settlement agreements on three of these projects. Those contract negotiation are extremely complex with a lot of parameters. But what is important is that they allow to have a much better clarity on schedule to completion and eventual attached liquidity damages. They allow to have additional revenue and much more clarity and the way it's going to be distributed, I mean the cash associated with it. And Dave spoke about it. I mean we are favored in those agreements, a quick disposal of the cash from our client. And then it gives us a better knowledge of the cost to come.On the last one, you remember, we have reached mechanical completion and we were protected from early 2023 in terms of cash because our costs were covered on those one. So to come back to your risk question, cash is preserved on those jobs for the quarters to come, and it is important.Maybe, my third point will be about -- what else? What else on -- when you take out those legacy projects from our results, I mean you have noted the EBITDA for Q3 would have been 123. I mean, trailing 12 months, 375. I mean, I don't know a lot of companies with the structure of Aecon that can deliver 12% EBITDA. It just means that the large majority of our business is very strong and it is very strong in a world where there is less and less contractors. And this is what is important. I mean, we just have to stick to our strategy. We just have to stick to our discipline. You have noticed that the name of legacy project has not been invented by chance.From September 2018, we have not entered in any tenders project at Aecon. We have limited the size of our lumpsum job. We have convinced a lot of our clients to go to progressive design build. And this is important. I mean we have invested money in our project management academy, in our continuous improvement program, in our net zero to understand when we decide to pursue a new job, what are the risks associated and how can we tackle correctly those risks. So I think it is important also to note it.

[David Smales, executive]

Jacob, just one other the point of reference going back to the part of the question on working off that backlog. By the middle of next year, we expect that backlog number to be roughly half of where it is now. So that kind of gives you a sense of the work off of that over the next three quarters.

[Operator]

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

[Benoit Poirier, analyst]

Just in terms of charges around the legacy projects, you took almost $300 million over the last 1.5 years. Could you talk about kind of the worst case scenario on what we might be looking forward, especially given the better disclosure that you've made in your MD&A and the fact that you were successful to reach a few settlements already.

[David Smales, executive]

So obviously, a big factor in the last couple of quarters has been the agreement reached on a number of these projects. Jean-Louis said in his comments, that gives us a lot of clarity around compensation for past issues, schedule going forward. Another kind of terms and conditions around these settlements that mean while we've had to make some adjustments in the last couple of quarters we do feel that that takes a lot of uncertainty off the table. It positions us well to execute going forward. From an overall comfort level in terms of the amount of variability in our forecast, we think that's been reduced by each one of these settlements. So we certainly expect it to be less noisy going forward, and we're very focused on just on execution.We really don't expect there to be any big developments on these projects in terms of further significant agreements or changes to what we've recently agreed with our clients in the foreseeable future. The positions we have at the end of Q3 based on everything we know at this stage, and we think those positions are reliable and based on all the information we've got on our fingertips based on those settlements in the last two quarters.

[Benoit Poirier, analyst]

Just in terms of capital deployment, when we look at your leverage, you were at 2.3x at the end of Q3. I understand the leverage will come down with the proceeds from Oaktree. Just wondering about what kind of optimal level you see Aecon operating, the covenant, the cushion you have and also in terms of capital deployment, what about the availability to deploy that capital towards M&A around Aecon Utilities, which was a reason why you strike a deal with Oaktree.

[David Smales, executive]

As you say, at the end of Q3, we're at 2.3x, including the convertible debentures, pro forma for the Aecon Utilities transaction, that will be around 1.2x. We're very comfortable in a leverage range up to kind of 2x to 3x in terms of the long-term support of bonding companies and performance security requirements. We think we have plenty of room to invest in the business. We have significantly strengthened the balance sheet this year and we are very focused on growing the utility business M&A. We expect to play a role in there. We're already active in terms of opportunities in the U.S. for the utilities business, and we're very comfortable that we can deploy capital to support our M&A alongside our partner.

[Benoit Poirier, analyst]

And last one for me. You've been successful in selling half of Bermuda at twice the street's expectation. If you look at the road building business that was less strategic and also margin dilutive. You've sold it close to 9x EBITDA. Aecon Utilities also you monetize that 9x, stock still trading below 3x in terms of EBITDA for the rest of the business. Are there any reasons that do not allow Aecon to look at creating further value given the valuation at these levels and your track record in monetizing some of those assets over the last years?

[David Smales, executive]

My answer would be that we are very comfortable with the divestiture we have been doing. I mean there was a reason for a Aecon Transportation East in terms of an extremely competitive market, capital intensive, and it was a clear decision from us and we are very happy with the valuation we could get. Bermuda, it was a rather different way of looking at it. I mean we consider at Aecon that we can be successful and make money on the totality of the value chain. It means developing, financing, engineering, building and operating our assets when the contract closes. This is a normal rotation of our assets. It's necessary. It allows us to go to other projects that will create more value. What was important for us was to keep this 50.1% and the management contracts. At the end of the day, we have to go on building and developing infrastructure. We think that the balance of activity that we have at the model is perfectly fit with what we need in front of the market that we envisage.

[Benoit Poirier, analyst]

Given the valuation these days, how do you look at the buyback given the valuation these days?

[David Smales, executive]

So I think focus is on a few areas when it comes to capital deployment. Obviously, we need to deal with the convertible debentures at the end of this year. We've been very consistent around our dividend program. As we've talked about, we see significant growth opportunities, both organic and through M&A, particularly focused on the utilities business. So that's the focus right now from a capital perspective.Obviously, the disconnect -- to highlight -- in your initial question around the valuation of the dispositions that we've done this year and where the share price is trading, we feel the best way to highlight future value is to continue to execute on the balance of the business, continue to highlight the fact that the underlying business is generating $375 million of EBITDA on a trailing 12-month basis and get these legacy projects behind us.I think once we've done all that, then we would hope that that would be reflected in valuation. If it's not, then obviously, we will look at share buybacks or anything else that made sense. But there is some strategic and immediate uses of capital that we're more focused on right now.

[Operator]

Our next question comes from Chris Murray with ATB Capital Markets.

[Chris Murray, analyst]

Maybe following on, Dave, I don't know if you want to try to take this one or Jean-Louis, but thinking about the business on a go-forward basis, with the projects, I guess, maybe ring-fenced or at least kind of stabilized now from a financial perspective and the cash flows coming in. You talked a little bit about a, call it, a low teens type EBITDA margin with the remaining business. Can you talk a little bit how we should think about what the margin profile is going to look like in 2024? Let's assume that you run off the first half of the legacy project backlog probably at a zero margin. But is it fair to think that those margins you've been talking about are sustainable as we go into '24 and '25.

[Jean-Louis Servranckx, executive]

Will begin maybe and Dave may add a few other comments. I mean what is important for us is the predictability of our margins. We think we are relentlessly positioning Aecon toward a better predictability of our margins. So we have been advocating with our clients about this progressive design build project which are the kind of animal that we like. You do think that we have been awarded, I would say, just three first ones, the small modular reactor, the coal trade expansion and Scarborough. But a lot of other projects are also and then there is progressive schemes. For example, Oneida, as I've mentioned, we have been awarded a $141 million EPC contract, which is at a fixed price, but it was progressive. I mean, we spent two years being awarded to optimize the project with the battery suppliers with all our transformer suppliers. It just means that this was progressive. I mean, with Hydro BC, we have now entered in the execution phase of the John Hart rehabilitation project following nine months of co-development with our client. Predictability is also, of course, given by our recurring revenue, you have noted it's more than 40%, '23 against '22. It's also given by the fact that our backlog that was in 2018, almost 70% fixed price is now around 47% fixed price. This gives predictability. I'm asking you to look at the new Aecon that is emerging. I mean, just to give you another example. I mean, within a few weeks, we most probably will embark in the transition period for the GO Train operation.You remember that we have a joint venture with Deutsche Bahn, which is probably, I mean, one of the best European operator, especially for this kind of network. And with our joint venture, we'll begin to operate trains and to optimize the operation of those trains under a cost reimbursable plus fee scheme.So all this I mean, is a relentless effort from the last year to bring Aecon toward a much more predictable margin profile. David, do you want to add something?

[David Smales, executive]

Yes. In terms of thinking about the underlying margin that you talked about and how that looks going forward. Obviously, we always say that don't look at one quarter in isolation, but look at kind of in the last 12 months. And I think if you do that, you can see very healthy margin ex the legacy projects of close to 10%. I think below than the impact of Bermuda and the disposition of half of Bermuda. I think if you look at just our construction segment basis, we think as we go through '24,that kind of margin level is sustainable.

[Operator]

Our next question comes from Ian Gillies from Stifel.

[Ian Gillies, analyst]

The dividend has obviously been a core part of the story for a long time. But can you maybe talk a little bit about the merits of keeping the level where it is now, given some of the cash requirements perhaps going forward and some of the growth opportunities and whether perhaps that could be better allocated elsewhere, whether it be through M&A or new growth projects, et cetera?

[David Smales, executive]

As you say, it's been a long-term component of our capital allocation has been very consistent and tries to be very consistent over a long period of time around how we think about dividends. We think it brings a certain amount of discipline to the business when it comes to capital allocation. As we think about it going forward, we're focused on the long term. We're focused on the fact that the vast majority of the business is producing significant EBITDA with good cash flow dynamics. We talked about earlier the fact that we feel we turned the corner from a working capital perspective on the legacy projects. Our view is if the dividend is a key part of the capital allocation program, and we have plenty of other options around growing the business and M&A, and we're not worried about constraints in the context of the dividend policy.

[Ian Gillies, analyst]

With respect to the deal announced with Oaktree on Monday, there's a fair bit of leverage being put on the Aecon Utilities business on a trailing 12-month basis for what is expected to be a growth business. Can you maybe talk a little bit about the thought process about how much leverage you want to put on that business and why you chose to go that route?

[David Smales, executive]

Yes. A big component of this is thinking about the free cash flow profile of that utility business. The utility business is as we've talked about before, a kind of different profile of business to a lot what we do in the construction segment in it's very much recurring revenue, long-term MSAs, predictable work programs, predictable margins, and along with that is predictable cash flow. We believe the cash flow profile of that business will draw down that leverage as we move forward.And we're very comfortable at Oaktree that we have the capacity within Aecon Utilities and at the AGI level to make the investments we're looking to make to grow that business. So obviously, as we look at the balance between AGI and AUGI, we felt that the best approach was to bring some capital back to Aecon to pay off the convertible debentures. We're very comfortable that going forward, we can grow the utilities business from the balance sheet and the facility it has.And obviously, from an Oaktree perspective, they're coming into this investment with the same goal as us, which is to grow the business, create significant value and M&A is part of that. And if they weren't comfortable with everything I've just talked about in terms of capacity and cash flow profile and utilities, then we wouldn't have done the distribution that we did. So both us and Oaktree are very comfortable with how the business is positioned.

[Jean-Louis Servranckx, executive]

Maybe I can add something. Of course, we can discuss about the 12%, the return, the leverage. I mean, but what we have to focus on it is the strategy behind this. It has been a long selection process. And I have to say that we are extremely happy with the partner with where we are now. I mean it was our favorite partner. It was by far the one with the best knowledge of this industry, of the different networks in United States, but also in Canada.And by far, I mean, strategically, it was our preferred future partners. And I think this is important. Our life is about agility, it's about detecting it where we can put our core competency at work, where we can make more money, be more profitable, be more predictable. And definitely, we think it is an excellent move, and we are extremely happy about it.

[Ian Gillies, analyst]

Maybe if I could just reframe the question a little bit, just to understand. There's been a lot of transition in the business over the last 12 months with respect to asset sales. Could you maybe highlight a little bit of where you think the right net debt-to-EBITDA metric is for the business fully consolidated? And then maybe where you think the right metric is for Aecon Utilities or where you think that max metric is if you were to do some M&A?

[Jean-Louis Servranckx, executive]

Yes. So at the Aecon level, I touched on this a little bit earlier. We've always said we're comfortable with leverage up to 3x. We typically aim to keep that kind of 1x to 2x range, but we're comfortable going above that for strategic investments that we believe will lead to be able to delever the business again going forward. Typically, we try to stay in that 1x to 2x range of the Aecon Group level. From a utilities perspective, as I talked about earlier, a very different profile of that business. Part of the rationale for creating a separate vehicle for growth in the U.S. through that utilities business. With a separate balance sheet, separate facilities, we think the utilities model can support higher leverage, if needed, to fund M&A with strong operating cash flow below that to bring that leverage back down again as we operate the business and create synergies from the M&A that we look to do. So I don't want to put a max number on the utilities side, but certainly a fair bit higher than we're comfortable with at the Aecon level.

[Operator]

Our next question comes from Jonathan Lamers with Laurentian Bank Securities.

[Jonathan Lamers, analyst]

Earlier this year, David, you'd indicated that free cash flow for the full year could be positive depending on the outcome of some of the settlements. Following the settlements in Q2 and now Q3, would you expect positive free cash flow for the year?

[David Smales, executive]

Yes. I mean, I think we'll certainly be close to it. There's always a few things at the end of the year that if they come in next week, if they don't come in, it comes in early the next year, and it slightly swings either way. But I think we'll be at least relatively close to free cash flow breakeven this year with a few -GOTO- 50:25 it to be a little bit either way, but fairly close to free cash flow neutral for the year.

[Jean-Louis Servranckx, executive]

As I said, part of the cash flow from these recent agreements will come in, in the first half of 2024. So that trend should continue as we go into next year in terms of unwinding working capital from those projects.

[Jonathan Lamers, analyst]

Do you have an estimate for the cash from the recent agreements that will come in 2024?

[David Smales, executive]

No, we haven't disclosed specific numbers on settlements and agreements. Obviously, each one of these agreements is confidential in terms of partners and clients, et cetera. We haven't quantified these estimates.

[Jonathan Lamers, analyst]

One more topic, if I can, just on the legacy projects, so I understand that the backlog related to those is expected to be roughly half by mid next year. My understanding is there could be arbitration processes that continue longer. Is the larger risk at this point to the income statement really related to those potential arbitrations now and the outcomes there? Can you just help us sort of rank the magnitude of the potential risks remaining in the four?

[Jean-Louis Servranckx, executive]

I would say that there are few risks. I mean the first one on which all our teams are focusing is the execution and the completion of those projects to get them substantially complete. This is one for the fourth one. It was extremely important as committed to be mechanically completed at the end of September. So completing those jobs is a point of focus for our team. On another hand, yes, I mean, there will be arbitration and there will be other negotiations. There will be other commercial settlements within the months and the years to come.As I've told you already, we have put the best teams within our company and also an external partners. We are confident that we are aligning a very strong team for this second phase, which may lead to negotiation, what we would prefer, but also arbitration because we think that we have quite strong cases.

[Operator]

Our next question comes from Sean Jack with Raymond James.

[Sean Jack, analyst]

Looking forward, do you see any opportunities out there to do like a JD style project to help grow the utilities business faster? Or is that something that you guys wouldn't even consider for that line of business?

[Jean-Louis Servranckx, executive]

I think across all of our businesses, including utilities, we're always comfortable entering into joint ventures for specific projects or with the indigenous groups, the longer-term relationships, and we have some joint ventures that we work through with various First Nations. So project by project, that's very usual for us.In terms of longer-term joint ventures, specific opportunities, I mean, sure, we would look at whatever makes most sense based on the specific circumstances, what clients are looking for, what works best in a particular market, et cetera, et cetera. So already in the U.S., some of the initial work utilities group is doing then there as we've established a presence is in a joint venture with Southland, for example. So yes, I mean, we're open to whatever structure is best suited for the opportunity and whatever makes the most sense in terms of creating value for growing the business.

[Operator]

I'm not showing any further questions at this time. I'd like to turn the call back over to Adam for any closing remarks.

[Adam Borgatti, executive]

That's great. Thanks, Kevin. I appreciate everyone's time today. Have a good balance of the day. And as always, if there are follow-up questions, feel free to reach out to our team. We shall speak with you all soon.

[Operator]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.