Aecon Group Inc
TSX:ARE
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Aecon Group Inc
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Good morning. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Aecon Q4 2018 and Year End Financial Results Conference Call. [Operator Instructions]Adam Borgatti, Senior Vice President, Corporate Development and Investor Relations, you may begin.
Thank you, Christina. Good morning, everyone, and thanks for participating in our year-end 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 our 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 will 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 will now turn the call over to David Smales.
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 key highlights on Slide 3 of the presentation, Aecon's 2018 results saw revenue, adjusted EBITDA, and backlog reach record levels. As announced yesterday, Aecon's board of directors approved an increase to the quarterly dividend on the basis of continued financial strength and positive outlook. The quarterly dividend will increase to $0.145 per share from $0.125 previously, with the first increased quarterly dividend to be paid in early April.Turning to Slide 4, record annual revenue for the year is $3.3 billion, with $461 million, or 16%, higher compared to 2017, with increases across each of Aecon's three segments.Record annual adjusted EBITDA of $207 million and a margin of 6.3% grew significantly, compared to $156.5 million and a margin of 5.6 percent last year. Slide 5 outlines adjustments for one-time items in the first half of 2018. No such adjustments were noted in the third and fourth quarters. On a pro forma basis reflecting these adjustments, 2018 adjusted EBITDA would have been $213.4 million with a margin of 6.5%.Likewise, operating profit of $89.4 million, net profit of $59 million, and diluted earnings per share of $0.94 all showed considerable growth compared to 2017, on the back of higher volume and improved overall margins.Reported backlog as of December 31, 2018, of $6.8 billion was 61% higher than backlog of $4.2 billion as of the same time last year and represents the highest year-end backlog in Aecon's history. Driving this strong growth in backlog were record new contract awards of $5.8 billion booked in 2018, compared to $2.8 billion in 2017.Now turning to results by segment, as noted on Slide 6, Infrastructure revenue of $1.3 billion in 2018 was $358 million, or 37% higher than 2017. This increase in Infrastructure revenue is broken down further on Slide 7 and was driven by increased activity in both the transportation and major project sectors, and geographically in both eastern and western Canada, reflecting the balanced growth in backlog achieved during the year.Adjusted EBITDA in the Infrastructure segment of $56 million, a margin of 4.2%, was up by $15.8 million, compared to $40.2 million, a margin of 4.2 percent in the same period last year, driven by the growth in revenue.New contract awards in Infrastructure of $3.8 billion in 2018 were $2.5 billion higher compared to 2017 and included the Site C generating station, the Montreal REM, Finch West LRT, and the Gordie Howe International Bridge. This resulted in an Infrastructure backlog of $4.5 billion at the end of 2018, $2.5 billion higher than at the end of 2017.Turning to Slide 8, in the Industrial segment, revenue of $1.9 billion in 2018 was $63 million, or 3%, higher than in 2017. Again, this reflects growth in both eastern and western Canada and was driven by utilities, power, and mining work, largely offset by lower volume in nuclear.Adjusted EBITDA in Industrial of $112.3 million, a margin of 5.9%, was $1.8 million lower than the prior year of $114.1 million, a margin of 6.2%, with lower profit from Contract Mining prior to its sale in November being the primary factor. New contract awards in the Industrial segment of $1.9 billion in 2018 were $383 million higher compared to 2017, resulting in year-end backlog of $2.3 billion, compared to $2.2 billion at the end of 2017. Turning to Slide 9, in the Concessions segment increased activity at the Bermuda Airport project was the primary reason for growth in both revenue and adjusted EBITDA in 2018. Higher management and development fees, including from the commencement of new concessions in the year, also contributed to higher EBITDA.At this point, I'll turn the call over to Jean-Louis.
Thank you, David. Turning to Slide 10, as David mentioned earlier, record revenue in 2018 was generated across our segments, and Aecon's business continues to benefit from our diversification across geographies and core capabilities. Turning to Slide 11, Aecon ended 2018 with a record year-end backlog of $6.8 billion. Of note, backlog to be worked off in the next 12 months of $2 billion increased 34% over last year, and approximately 70% of the backlog is for work off beyond the next 12 months, providing significant visibility and stability to Aecon's long-term outlook.This is especially so when combined with Aecon's annual recurring revenue, which grew by 4% over last year, driven primarily by utilities work in telecommunications, gas, and hydro distribution, as well as operations at the Bermuda Airport. We remained focused on strong execution of our backlog, while ensuring we continued to build capacity and flexibility for further growth. Referencing Slides 12 and 13, the company's balance sheet, financial capacity, and cash generation remains key advantages for Aecon in its ability to grow and take advantage of the significant level of expected Infrastructure investments by Canadian federal, provincial, and municipal governments in coming years, including public/private partnerships as well as select international projects. Our financial strength and flexibility were further enhanced by the completion of the sale of our Contract Mining business in November 2018, as well as a successful convertible [indiscernible] refinancing completed in the fourth quarter.Turning to our outlook on Slide 14, bidding activity in the Infrastructure segment is expected to continue to be solid in 2019, although new awards are not likely to match the record level of 2018. With strong backlog in hand, the focus has shifted to the ramp-up and execution of these projects in this sector.In the Industrial segment, Aecon expects steady demands for nuclear refurbishment, utilities, pipelines, and conventional industrial work in 2019, while the sale of the Contract Mining business will have an offsetting impact on revenue in 2019. Aecon's capabilities in utilities continues to be a strength that should lead to growth from the increased demand for utility service, pipelines, and power work over the long term, although timing of pipeline work remains susceptible to delays, given the political and regulatory environment for major pipeline development in Canada.While oil and commodity prices are improving, they have not yet reached a level to support pick-up in significant new oil and mining construction projects. As a result, it is expected that 2019 conventional industrial fabrication and [ steel work] revenue will be similar to 2018.The Concessions group continues to successfully develop and operate the Bermuda Airport, as well as overseeing the development of the growing portfolio of domestic concessions. They also continue to partner with Aecon's other segments to focus on the significant number of P3 and private finance opportunities in Canada, and on a select basis, internationally. The overall outlook for 2019 remains solid, as our current strong backlog, robust pipeline of [indiscernible] opportunities and ongoing concessions are expected to lead to improved margins. Thank you, and we will now turn the call over to analysts for questions.
Christina, over to you to lead the questions.
Certainly. [Operator Instructions] Your first question comes from Yuri Lynk from Canaccord Genuity.
Just a quick one off the top. Curious if you could let me know how much the success fees in the Concessions segment might have boosted EBITDA in the quarter.
So when we call those out in the quarter, it's a combination of a number of things, but it's primarily a lot of this is now ongoing management fees. Obviously, once you're into the -- once you've been awarded a concession, there's kind of two phases. The first phase is the concession that is managing the construction process and receiving an ongoing management fee as part of that service, as well as the financing and everything that goes around that concession, so those are ongoing. And then, at the time of award or shortly afterwards is some recovery of bid costs, but this is really just reflecting a recovery of costs already incurred. So it's not material in the quarter, but it's just a reflection of the growing portfolio of domestic concessions that we have now.
Okay, so we shouldn't be making any -- you know, other than the normal seasonality exhibited in that segment, that's a good run rate.
Yes, that's right. I mean, yes, other than the seasonality, that's right.
Okay, Infrastructure segment, you know, I got to admit I was a little disappointed with the margin performance in the quarter, you know, and then flat for the year versus '17. So what happened in the quarter, firstly, and secondly, why do you think you can improve those margins after being flat for two years?
Okay, what happened is mainly due to a mix issue. It means that we were a little over-weighted in small works more affected by seasonalities and high competition. As I have already told you, I mean, we need a few of them to train our [ young] coordinators, our [ young] [indiscernible] engineers, and very important for this. On another hand, I mean, those small jobs are often small duration. It means that the one on which we experience some difficulties in 2018 will not be there anymore in 2019.Second point, I mean, we are just moving now with 2019 toward preparatory works of Gordie Howe, works on [ Gardener], and probably a couple of decent sized projects that are at the moment under study. It means that those medium jobs of a few hundred million are also very important, and they have a better profile in terms of margin.Third point, I mean, what do we do for the future? I mean, we are extremely careful about our big projects, the ones that we have been getting during the last months. And especially as one example, we have just created a new sector which name is Urban Transportation System, where we are going to larger. For example, the REM in Montreal, Finch, Crosslinx in Eglinton, we just feel those projects are special. We want to be the first in class in terms of execution of these projects, and we are getting ready to be there. So this is our answer to your question, Yuri.
Okay, I will get back in the queue. Thanks, guys.
Our next question comes from Benoit Poirier from Desjardins Capital Markets.
If we look at the Industrial and we remove Mining Contract, what could we -- what should we expect going forward in terms of revenue growth and margin expansion for Industrial?
So with Industrial, and I think Jean-Louis touched on this a little bit in his comments, you know, we expect the utilities side to continue to show good growth potential. Nuclear should be fairly consistent year over year. And the industrial conventionals side should be fairly consistent year over year as well. Any growth that we see in that segment from those three areas overall will be offset by the fact that we don't have the Contract Mining business, so net-net, Industrial, we don't expect a significant change in the revenue profile in 2019, although there should be underlying growth if you take mining out of that equation.From a margin perspective, obviously at the EBITDA margin level, contract mining was one of the higher margin businesses, so that will have some impact in 2019, for sure. But the operating profit margin worked out -- you know, I think we put the numbers in the deck that you can see. It wasn't having much of a positive impact at all, so the operating profit margin level will actually be positive overall, and we expect to see progress on that front in 2019.
Perfect, and specifically for Infrastructure, could you give an update on how those contracts are going with REM, Gordie Howe, if it's tracking in line with expectation in terms of costs and in terms of margins?
Okay, all those big jobs are perfectly online at the moment. I remind you that most of them just began with almost one year of detailed engineering, so this is where we are in some preparatory works. But so far, on none of those big jobs we have experienced during the first year problems during the beginning of their execution.
Perfect, and with respect to telecommunication, do you see any opportunities for Aecon, given the difficulties experienced by one of your competitors?
I don't -- I mean, utilities being an area where we've been performing well, we've been growing that business. Whether that's because one particular competitor has had challenges or not it's hard to say, but I think we've always been seen as a very reliable and trustworthy partner in the telecommunications sector. And, you know, I said earlier, I expect our industrial side to see some growth from utilities in '19. How the impact of anybody struggling plays out in terms of how that work gets allocated, if it does, remains to be seen. But even without that, we see good growth in that sector
Our next question comes from Jacob Bout from CIBC.
Can you comment at all on the IFRS 16 impact for 2019?
Yes, so overall, we don't expect it to be a particularly material impact. Obviously, the requirements of IFRS 16 will lead to some leases that were previously treated as operating leases to be capitalized, which has the impact of kind of increasing depreciation and decreasing some of the SG&A expense, kind of rental-type expense. But I think in terms of overall impact, you know, you're talking single figures in terms of EBITDA impact, obviously no operating profit impact, or very little. And then, from a margin perspective, I mean, it's really just rounding. It's not expected to have any significant impact.
Thank you for that. And then the revised [indiscernible] guidance on all three, how does that impact you the first half of the year?
I mean, it doesn't really, Jacob. I mean, our work on [ Line 3] is pretty much complete. I think the challenges that they're having in terms of delay relate to south of the border, which is work that we're not involved in, and so no impact on our business.
Maybe just lastly here, just to go back to margin, so the comments on higher 2019 EBITDA margin, you know, with Concession being a higher percentage EBITDA, I mean, that mix is going to help as well, I'm assuming.
Well, I mean, to be honest with you, in 2019 -- 2018 obviously saw a big pick-up in overall Concession EBITDA. The landscape shouldn't change that dramatically for Concessions in 2019. I mean, Bermuda is now well established in terms of operations. We brought a lot of new concessions in in 2018, and they will continue through '19. It depends if we pick up new ones, and we'll be bidding new ones, but outside of that, concessions won't be a game-changer in 2019. It will be fairly consistent.
[Operator Instructions] Your next question comes from Derek Spronck from RBC.
Just with regards to working capital, should we expect it to start reversing here in 2019, or is it more of a 2020 type of event?
So overall, 2018 was impacted by the [indiscernible] a number of these new large projects where you get fairly significant inflow of cash up front to fund construction. Now, there are further inflows to come as we draw down on that cash and reach certain milestones, so those JVs can cause that working capital number to bounce around a little bit. We kind of think of the JV cash number, for example, as part of the overall working capital mix until it comes out of the JV and into our own bank accounts.I think if you're looking at working capital outside of that JV cash, then yes, I think it will start to draw down a little bit as we start to work through the construction on some of these larger projects. But outside of that JV impact, I think working capital will be fairly flat year over year from our kind of core business.
And just moving on to some of your priorities you listed, one of them being employee retention and development, are you seeing any sort of cost escalation there, or do you feel it still fairly manageable under the context of the current environment?
Okay, we just feel that it's manageable up to now. I mean, all the projects we are on have been staffed accordingly to the plan, and we don't see that much of problem in the months to come. I'll just remind you that those jobs mainly are very long job. You have noted that more than 70% of our backlog [indiscernible] begin after the end of the year 2019. On another hand, we are on those job mostly in the JV, joint venture agreement, with other partners so that we can share the load. And you have also noted that there is always a very long preparation time before to really enter, I would say, in the [indiscernible]. It means that we have a lot of time to get ready, so I'm not worried about this capacity problem at the moment, so far.
Okay, that's great. And then, just finally on the development team, is this a new team that you're putting together to pursue U.S. opportunities? And just, I know it's probably early in the process, but just thinking of how you would enter the U.S., do you feel at this point it would be more of a M&A type strategy, or would you try to do it organically?
Okay, just to come back to our priority, I mean, our first focus is about executing our backlog. It is my focus number one and the one of my leadership team. The second one is to get more selectivity on new prospects. In Canada, this is what we are working on. And then, about any new opportunity, I mean the focus is to have a clean and liquid balance sheet to be able to seize any opportunity that fits with our strategy. So U.S. is for us an important long-term opportunity, but there is no rush. It means that we are alert, we are working from our teams, and we are getting helped when it is necessary. No rush; we'll have a look at it.
Thank you for the color. I'll turn it over.
Our next question comes from Michael Tupholme from TD Securities.
You've talked about the nuclear outlook for 2019, sounds like sort of roughly flattish performance in '19. But can you talk about the growth potential as we look beyond '19 in nuclear?
Yes, I mean, 2019 will be rather flat because we are not beginning Bruce power reactor refurbishment before the beginning of the year 2020. We are, at the moment, in preparatory works, so this is the reason that we do not expect growth in revenue in 2019.From 2020 onward, we will have at the same moment work in refurbishment in Darlington and in Bruce. This will lead to growth in revenue and activity. This will lead us up to 2025, more or less, with our backlog, but we are already thinking about other activities like dismantling, like small modular reactor, some maintenance jobs, so this is where we are at the moment.
That's helpful. And then, with respect to LNG Canada, is that an opportunity that could come to fruition for Aecon over the relatively near term?
Okay, LNG Canada is a very big project. We have already secured a pipeline job on LNG Canada, and that we are on the preparatory works of it. Regarding the plant in itself, I mean, they are at the moment focused on the preparation work, camp installation, soil stabilization. It means that this is where we are not, because this has to be dedicated to very local companies. One, it's come back to more industrial activity, so we will seriously have a look at it, and if we can find good opportunities, we'll go for them.
David, in terms of corporate costs for 2019, how should we think about those relative to the level in '18?
Fairly consistent. I mean, I think we still in the first part of the year had a few one-offs in there related to the sale process, but outside of that, not being there in 2019, then a little bit of an increase offsetting some of that, it will be fairly flat year over year, Mike. There's no big change.
Okay, thank you. And then, just a clarification on your comments about IFRS 16 and the potential impact on EBITDA. When you talk about single digits, are you talking about dollars of EBITDA or percentage change?
Dollars. So from a dollar perspective, again, no change at the operating profit level but -- very little change at the operating profit level. There is some interest in tax implications as well, but they're relatively minor. At the EBITDA level, it's some shifting between depreciation and rental expense, but when I said single digits, I meant dollars. And then, from a percentage EBITDA margin percentage perspective, my comment was it's really rounding; it's not material level.
Right, and --
It has a very slight positive impact, but small.
Okay, and can you give any guidance around the value of the lease liability that we should expect to see when you start reporting under IFRS 16 in the first quarter?
There some disclosure in the financial statements, Mike. I don't recall the numbers off the top of my head, but the disclosures are, again, from a balance sheet perspective, very much immaterial. I think we're talking around $40 million of additional assets that would be on the balance sheet as a result of IFRS 16.Now, I caveat that by saying the same thing we say in the financial statements, that that's not finalized yet, and obviously we're still working through the final details of that. But it will be that kind of order of magnitude.
Our next question comes from Maxim Sytchev from National Bank Financial.
I've just a [indiscernible] question in terms of concessions. So, David, when you were talking about consistent sort of EBITDA in 2019 versus 2018, were you talking about the margin or the absolute EBITDA generation?
I was talking about the business generally, so I was talking about absolute dollars.
Absolute dollars, okay. And then in terms of -- okay, so year on year, absolute dollars, 2019 versus '18, right? As right now, we kind of reached the new level. I mean, obviously, with Bermuda being where it is, but the other concessions at a more steady state, right?
Yes.
Okay. Do you mind maybe commenting, if it's possible, on opportunities outside of the [ midstream] and nuclear on the Industrial side? What are you guys seeing? Any irons in the fire, or is it still pretty slow?
I don't think we've ever said it's slow. So are you talking about infrastructure?
No, no, no, on the Industrial.
Oh, the industrial. Sorry, yes. So, yes, sorry, I think from the perspective of opportunities, we've said there's not a lot of action in the oil and mining space, but there are certainly plenty of power projects. There's the big [ Nova] facility, petrochemicals. There's always industrial process plants of some type of nature, but we're saying it's fairly flat year over year in terms of what that looks like for that business. Jean-Louis, anything to add?
Yes, regarding conventional industrial, what is important to note is that, yes, we feel the market will be probably a little flat. We understand that all our main clients are extremely demanding on our reliability, so we have to keep the capacity to fabricate ourself, and we use the year 2018 to rationalize our workshops. So we just consider now that we are perfectly fit with the market size.
And our next question comes from Benoit Poirier from Desjardins Capital Markets.
Yes, I was just curious if there was any update with respect to the recent -- the dispute with K+S. Is there any update on that front?
So, no update, Benoit. It's in a process and it will play out over an extended period of time, but there's no update.
There are no further questions at this time. I turn the call back over to the presenters.
So thanks, everybody, for joining us this morning. Obviously, if there are follow-up questions, we'd be happy to take those offline and hope everyone has a great day. Thanks for joining us. Bye.
This concludes today's conference call. You may now disconnect.