Aecon Group Inc
TSX:ARE
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Aecon Group Inc
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Good morning. Thank you for attending today's Q4 2022 Aecon Group Incorporated Earnings Call. My name is Glenn, and I'll be the moderator for today's call. [Operator Instructions]
It is now my pleasure to pass the conference over to our host, Adam Borgatti, Senior Vice President of Corporate Development and Investor Relations. Mr. Borgatti, please proceed.
Thank you, Glenn. Good morning, everyone, and thanks for participating in our year end 2022 results conference call. Presenting to you today are Jean-Louis Servranckx, President and CEO; and David Smales, Executive Vice President and CFO.
Our earnings announcement was released yesterday evening and we have posted a slide presentation on the Investing section of our website, which we'll refer to during this call. Following our comments, we'll be glad to take questions from analysts and we ask that the analysts keep to one question before getting back into the queue to ensure others have a chance to contribute.
As noted on Slide 2 of the presentation, listeners are reminded that the information we're sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. Although Aecon believes the expectations reflected in these statements are reasonable, we can give no assurance that these expectations will prove to be correct.
And with that, I'll now turn the call over to Dave.
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, record revenue for the year of $4.7 billion was $719 million or 18% higher compared to 2021. Adjusted EBITDA of $219 million, a margin of 4.7% compared to $239 million, a margin of 6% last year. An operating profit of $97 million compared to operating profit of $119 million in 2021.
Both adjusted EBITDA and operating profit in 2021 benefit from a positive impact related to the Canada Emergency Wage Subsidy or CEWS of $32 million. Diluted earnings per share for the year of $0.47, compared to diluted earnings per share of $0.78 last year. We reported backlog of $6.3 billion at the end of 2022, compared to the backlog of $6.2 billion a year ago. New contract awards of $4.8 billion were booked in the year compared to $3.7 billion a year ago.
Now looking at results by segment and turning to Slide 4. Construction revenue of $4.6 billion in 2022 was $706 million or 18% higher than the previous year. Revenue was higher in civil operations, driven by an increase in major projects, road building construction and foundations work.
Revenue was also higher in utilities from an increase in telecommunications and high-voltage electrical transmission work in nuclear, driven by a higher volume of refurbishment work at generating stations located in both Ontario and the U.S. and in industrial operations, driven by increased activity on mainline pipeline work in Western Canada and an increased scope of work at mining and water treatment facilities.
In addition, higher revenue in Urban Transportation Solutions was primarily due to commencement of the development phase of the rail electrification project in Ontario. In addition to 18% revenue growth in 2022, contract awards totaled $4.7 billion, up 29% compared to $3.6 billion in the prior year. And construction backlog at the end of 2022 was $6.2 billion, compared to $6.1 billion at the end of 2021.
Adjusted EBITDA in the construction segment of $193 million, a margin of 4.2% compared to $212 million, a margin of 5.4% in 2021. Construction segment adjusted EBITDA in 2021 included a favorable impact related to the CEWS program of $32 million.
Excluding the impact of CEWS in 2021. The remaining year-over-year adjusted EBITDA variance was favorable by $12 million, driven by higher volume in civil operations and higher volume and margin in utilities and nuclear.
Offsetting these favorable variances to some extent, in addition to the year-over-year CEWS impact with lower gross profit in industrial operations due in part to lower margin from pipeline projects, including Coastal GasLink, as well as lower gross profit in urban transportation solutions, driven by negative gross profit of $118 million on two LRT projects in 2022, compared to a negative gross profit on those two projects of $67 million in the prior year.
Turning to Slide 6. Construction revenue for the year was $76 million, compared to $69 million in 2021. Higher year-over-year revenue was primarily due to an increase in commercial flight operations at the Bermuda International Airport.
Bermuda continues to operate at a reduced volume compared to pre-pandemic levels and continue to recover in 2022 from the more severe impacts experienced in 2020 and 2021. In 2022, passenger traffic levels in Bermuda averaged 59% of 2019 pre-pandemic traffic compared to 33% in 2021. Adjusted EBITDA in the Construction segment of $71 million, increased by $7 million versus last year, primarily due to results from the Bermuda Airport.
Turning to Slide 7. As of year-end, Aecon had a committed revolving credit facility of $600 million, of which, $121 million was drawn and $3 million utilized for letters of credit. On December 31, 2023, convertible debentures with a face value of $184 million will mature and the company expects to repay these debentures at maturity or before. Aecon's next quarterly dividend of $0.185 per share will be paid on April 4, 2023 to shareholders of record on March 24, 2023.
At this point, I will turn the call over to Jean-Louis.
Thank you, Dave.
I would like to take a moment to address the four large fixed price legacy project laid out in our latest disclosure documents. As a reminder, those four project entered into 2018 or earlier by joint venture, in which Aecon is a participant are being negatively impacted, due to additional cost for which the joint venture assert, that the owners are contractually responsible, including four among other things, unforeseeable site conditions, third-party delays, COVID-19, supply chain disruptions and inflation related to labor and materials.
In 2022, due to the factors noted that impacted this project during the year, Aecon recognized an operating loss of $120 million related to these four projects. Aecon and our partners continue to work vigorously towards resolution of compensation for this impact with the respective owners of this project.
And we are fully focused on pursuing all avenues for adequate and timely compensation with the objective to reach fair and reasonable settlement agreements and to move forward towards project completion in each case. As I've said before, this will take some time, but we are on it constantly.
Turning to Slide 9. In 2022 and early 2023, we have made good progress in our goal to derisk Aecon's business through collaborative models that properly address the challenges associated with major projects, while balancing the needs of all stakeholders. Three projects are anticipated to be added to the Aecon's backlog over the next two years, that present significant opportunities for long-term sustainable growth non-fixed price contracting model.
In the second quarter of 2022, the GO expansion and electrification project in Ontario was awarded to an Aecon joint venture under a progressive design build, operate and maintain contract model. The project is in the initial phases of the two year joint development phase and is advancing well so far.
In the fourth quarter, Scarborough Transit Connect consortium, in which Aecon holds a 50% interest and is a lead partner, executed an agreement with Metrolinx and Infrastructure Ontario to deliver the Scarborough Subway Extension Stations, Rail and Systems project in Ontario, using a progressive design build model. An 18 month collaborative development phase to finalize the scope, cost and schedule of various elements of the project is now underway, including certain early works activities.
This is another example of the lower-risk progressive design build model, which has been developed to deliver complex transit projects in Ontario. And finally, subsequent to year end, a partnership in which Aecon is a participant, executed a six year alliance agreement with Ontario Power Generation to deliver North America's first grid-scale Small Modular Reactor through the Darlington New Nuclear Project in Ontario, under an integrated project delivery model.
Turning to Slide 10. Demand for Aecon services across Canada continues to be strong, particularly in smaller and medium-sized projects as evidenced by year-over-year revenue growth of 18% and higher new project awards of 31% in 2022.
While volatile global and Canadian economic conditions are impacting inflation, interest rates and overall supply chain efficiency, these factors have stabilized to some extent and have largely been and will continue to be reflected in the pricing and commercial terms of our recent and prospective project awards and bids.
Turning now to Slide 11, with a backlog of $6.3 billion as of December 31, 2022, and recurring revenue programs continuing to see robust demand, driven by the utility sector and ongoing recovery in airport traffic in Bermuda.
Aecon believes its positioned to achieve further revenue growth over the next few years. As a reminder, the major scope of the GO Rail Expansion On-Corridor Works project, the Scarborough Subway Extension project and the Darlington New Nuclear project will only be reflected in backlog at the successful conclusion of the lengthy development phases.
Aecon, including joint 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 $850 million was up 25% versus the prior period and 61% versus two years ago, primarily from growth in utilities operations. Recurring revenue is expected to continue to grow, driven by demand in the utility sector and the Concessions segment is expected to see airport traffic in Bermuda continue its recovery in 2023 and '24.
Turning to Slide 12. Aecon continues to support the energy transition to build and operate sustainable infrastructure. In February 2023, Aecon announced that the Oneida Energy Storage, a consortium in which Aecon Concessions will be an approximately 10% equity partner upon financial close, executed an agreement for the Oneida Energy Storage project to deliver a 250 megawatt, 1,000 megawatt hour energy storage facility in Ontario, which would currently represent the largest battery storage project in Canada.
Under the agreement, Aecon was also awarded $141 million EPC contract by Oneida LP. The project will provide much needed capacity to the Ontario grid, while prioritizing local indigenous partnerships and environmental benefits.
We also continue to grow our green home energy business within our utility sector, which includes residential solar programs, EV charger and battery storage solutions. We seek to provide dependable and convenient energy solutions to help home owners, developers and commercial customers reduce greenhouse gas emission and energy costs.
Initiatives such as this and projects such as Oneida Energy Storage, GO Expansion On-Corridor Works, Scarborough Subway Extension and the Darlington New Nuclear project, all demonstrate the path Aecon is on to embrace the opportunities and the increasing focus on energy transition, decarbonization and sustainability present. This is very much the future direction for Aecon, and we are excited by the progress made to date in establishing ourselves in this space.
Turning now to Slide 13, with strong demand, growing recurring revenue programs and diverse backlog in hand. Aecon is focused on achieving solid execution on this project 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 at the Bermuda Airport through 2023, there are a number of opportunities to add to the existing portfolio of Canadian and international concessions in the next 12 months to 24 months, including projects with private sector clients that support a collective focus on sustainability and the transition to net-zero economy.
The GO Expansion On-Corridor Works project and the Oneida Energy Storage Project, our examples of the role Aecon's Concessions segment is playing in developing, operating and maintaining assets related to this transition.
Finally, on Slide 14, as disclosed this morning, Aecon has entered into a definitive agreement with Green Infrastructure Partners or GIP, to sell its Aecon Transportation East or ATE, road building, aggregates and materials businesses in Ontario for $235 million in cash. ATE provides road building infrastructure solutions throughout Ontario to the provincial government, municipalities and private clients through a workforce of over approximately 1,000 employees.
As I've said, Aecon's targeted growth initiatives are increasingly focused on helping meet our clients' sustainable infrastructure needs and harnessing the opportunities that are expected to come from the transition to a net-zero economy through decarbonization.
This transaction is consistent with our goal of targeting prudent balance sheet leverage and liquidity and also reduces the overall capital intensity of Aecon's business. Upon closing of the sale, Aecon and GIP will enter into a strategic cooperation agreement for certain major projects and per suites in Ontario that leverage both Aecon's heavy civil construction services and GIP's road building capabilities. I would like here to extend my sincere thanks to all of the ATE employees for their hard work and dedication over the years, and wish them continued success with GIP.
Thank you. We'll now turn the call over to analysts for questions.
[Operator Instructions] We have our first question coming from Yuri Lynk from Canaccord. Yuri, your line is now open.
Good morning, gentlemen.
Good morning, Yuri.
Good morning, Yuri.
Dave, can you help us out with the EBITDA impact of the sale of the Ontario road building assets?
Yes. So we haven't disclosed the EBITDA attached to that business, but I think you take a 7% revenue and think about this business as being fairly down the middle of the fairway in terms of Aecon's kind of average construction margins, and that would give you a good sense of where this business is. I think we've talked in the past to the fact that, road building is kind of middle of the pack in terms of risk profile. It's mainly unit price type work.
And the margin that goes along with that is, fairly commensurate with being kind of middle of the pack in terms of margin profile as well. So if you look at construction margin in 2022, excluding the four legacy projects, gives you a good sense of where the average margins are and road building would be, not too dissimilar, maybe a little lower than that.
Okay. So that would imply like a double-digit EV EBITDA multiple on the sale? Just wondering if that's reflective.
No. I'm not saying that.
Okay. I'll check on that.
I think, the average margin this year and construction was around 8% to 9%.
8% to 9%, okay. Can you just -- and I'll hop off after this one, what's the CapEx profile of the company pro forma?
Yes. So on average, normalized CapEx of that business is in the range of about $15 million a year. It fluctuates year-to-year, but it would be in that kind of range at the top end.
Okay. I'll hop back in the queue.
Thank you, Yuri. We have our next question comes from Jacob Bout from CIBC. Jacob, your line is now open.
Hi, good morning. This is Rahul for Jacob. So a couple of weeks ago, there were some press reports that Aecon is looking at monetizing part of the Bermuda concession. Could you share your thoughts on this and the progress that you've made?
Yes. I mean, I think we've been asked this question, if not every quarter since we started operating Bermuda, then certainly every other quarter. No change really in our philosophy around Bermuda, which is, as we've said from the get-go, we're always mindful of the fact that we had 100% equity ownership of that project, selling a minority interest in the airport would be something that at some point would make sense for us.
And then during COVID, obviously, that wasn't something that was particularly feasible. We said during that period that we would look for recovery and a good track record in Bermuda and then look at that again, and nothing is really changed from that perspective. So we're open to a minority interest, but that's consistent with what we've said from day 1.
Okay. Thanks, Dave. And maybe just a question on the four legacy projects and your thoughts on cost inflation and project productivity in general. I know you've highlighted that three of those four projects should be completed by late '23, early '24, but it would be helpful if you could directionally point to the impact of these projects to operating profit and free cash flow over the next couple of years? And whether you think that would -- whether it be higher or lower than '22?
Okay. I will take the first part, I mean, of your question regarding our four legacy project. You -- within our disclosures, I mean, we have just said that they represent now just a little more than $1 billion of backlog. It means something like 17% of the declared backlog.
If we add to these backlog doing the projects that have been awarded under progressive design build scheme with backlog is not yet within the declared one. And if we add the recurrent [technical difficulty] you have seen that, we once again increased them. It's $850 million during the year 2022. I mean, this project represent less than 10% of the expected backlog.
Among those jobs, three are going to be finished between the end of 2023 and I would say, mid-2024, which is a good point. We are working continuously to find solution. And if you just do your math now that we have disclosed this $120 million during the year 2022, you will immediately feel the robustness of our business outside of those four legacy projects and the adequacy of our strategy, which is around operational excellence on our job, which is about derisking the business, which is about reallocating capital to growth eras.
In terms of productivity, maybe I can speak about CGL. We are now perfectly aligned with our clients and happy with the arrangement, to work toward completion -- mechanical completion of those job before the end of 2023 going forward. And we are working hard to resolve in parallel the past issues.
David, maybe a little more detail on the economy?
Yes. I mean, in terms of thinking about operating profit, obviously, as you can see from the disclosure, you can see that those projects in a loss position or breaking even from the perspective of construction accounting, that means, we've taken all the losses that we forecast to have on those jobs through to the end of the project.
So from that perspective, we should see no impacts from those projects based on year end positions through to the end of those jobs. That doesn't mean to say, there isn't still risk attached to completing those projects. Our disclose in the MD&A and the financial statements call out the risk that we still have on those projects through to the end.
So from a year end position, we feel that the projects are appropriately positioned, but there'll be ongoing risk on those projects through to the end until all the backlog is worked off. In terms of cash flow, as you can see in 2022 cash flow, a lag in working capital compared to what we would normally see, that's largely attributed to those projects.
We would expect that as we resolve some of the issues, as we go through this year that some of that will unwind and will be a net benefit to working capital. And so overall, for the year, we expect positive free cash flow with some contribution from those projects unwinding in terms of the lag we've seen over the last 12 months to 18 months.
Great. Thank you, guys. That's very helpful. I'll turn it over.
Thanks, Rahul.
Thank you. We have our next question comes from Benoit Poirier from Desjardins Securities. Benoit, your line is now open.
Yes, thank you very much and good morning, everyone. Jean-Louis, could you talk a little bit about where do you see the greatest opportunity to deploy cash right now, especially with the proceeds that you're going to receive from this transaction? And looking at your outlook, you also talked about the opportunities that you're seeing in terms of concession perspective for the next 12 months to 18 months. I would be curious to know about the potential investment required to capitalize on this opportunity and whether any of your current concessions need to be sold in order to capitalize on these new potential projects?
Okay. I will take the first part, a little more general of this question. Let's come back a few minutes on the sale of our road building business. I mean, evidently, we are extremely proud of the work that has been executed by this group within Aecon. You can imagine there are some emotion this morning, because those are the routes of the Aecon company. This being said, and we are extremely consistent on this.
As in the past, when we decided to divest the contract mining activity at the end of 2018, we just consider that there are other places that present for us better opportunity to grow and where we are confident that we have been able to create better competitive advantage.
Especially you have -- in my introduction, you have heard about the energy transition and this is quite important. I mean, the magnitude of the oncoming project and the associated forecasted CapEx to decarbonize the whole industry and reach a net-zero world are just huge. And you have noticed in the recent awards, I mean, we have been speaking about the Oneida Battery project, very important project for us, I mean, associated with 25 years of operation.
We have a few pump storage also under study. You probably have noticed in the rehabilitation work of John Hart, the SMR job nuclear, all this is energy transition. And you may not know, but in our geothermal activity, we are just forecasting to drill more than 2,000 holes in 2023. I mean, it's quite an interesting growth. So this is where we are focusing, and this is what we have been telling you.
Now David, maybe --
Yes. In addition to that, Benoit, obviously, a strong balance sheet goes hand-in-hand with being able to capitalize on the opportunities Jean-Louis talked to. The other piece of this, obviously, is historically, we've partied ourselves on having a prudent balance sheet with low leverage. It has ticked up over the last 18 months or so with some of the working capital impacts that we talked about earlier. So the ability to reduce that leverage again and position the company well for growth opportunities is important to us. And we think this transaction helps us do that.
And to your -- the other piece of your question, do we need to sell concessions to fund new concessions? No. That's not a requirement at all. I mean, the concessions we're looking at and are entering into, on the whole, don't require huge amounts of equity. And we fund them on the basis that they're kind of self-financing to some extent. All of these concessions that we enter into, we're involved in the construction of those assets, generating construction profits, some of which we recycle into the equity investment in the concession. So no, we don't need to sell concessions.
Okay. And maybe just a quick one. What kind of margin profile are you aiming at once those four large big priced projects are completed, and once we see an impact from the three collaborated projects at a more, let's say, a regular pace?
Well, I think you can see the strength of the margins in the underlying business in 2022, which -- I think we've talked for a while about the fact that we've been very selective on projects that we've pursued and added to backlog that we think the demand-supply balance has been favorable in the bidding environment we've seen over the last little while. And our execution on all that work, that's been added in the last couple of years is going well.
So I think the margin performance you've seen in 2022, again, excluding the impacts of the four legacy projects, is something that we think is higher than we've seen historically and something we would be looking to at least maintain going forward. I think that's certainly feasible. And as we add new projects, then clearly, we'll look to enhance margins wherever we can. So I think we're already operating at a pretty good level.
That's great color. Thank you very much.
Thank you. We have our next question comes from Chris Murray from ATB Capital Markets. Chris, your line is now open.
Yes. Thanks, folks. Dave, maybe just going back to the margin profile and just maybe trying to get a better understanding. You talked about where the backlog is. Is it fair to think that -- and I'm just trying to parse your comments a little bit around this. So should we expect that these contracts are going to be essentially a zero margin drag through '23? Is that the right way to think about your comments? And could you also maybe give us the revenue impact from '22? Or how much of the backlog you burn down over 2022?
So yes, I mean, in terms of margin or operating profit in 2023, again, implied in the accounting positions we have on all of those jobs is the fact that we have to forecast those jobs to the end. And the forecast has to reflect our current estimates of cost and revenue on those projects. And to the extent there's a loss, you have to book all that at the time you forecast that.
So if everything played out to the end of those jobs, exactly how we foresee them along with our joint venture partners and that's the implication that there would be zero impact on margin. As I said earlier, that's our view and how we position them, but as everybody knows, until large complex projects reach a finish line, there's going to be residual risk and we've disclosed that.
So it's an implied assumption in our positions that these will have zero impact going forward. The last piece of your question about backlog was work off in 2022 related to those four projects. I missed the last question.
Yes. Yes. So I just was curious about how much of the backlog you worked off against that -- of that $120 million in loss. So if you were about 17% of the backlog, I guess at the end of this year, where were you about a year ago with the same -- on the same metrics?
So a year ago, with similar level of backlog, we would have been around $700 million higher than that, this time a year ago.
Okay. That's helpful. And then just one follow-up to kind of all of the challenge projects. You're also going to end up as a concessionaire on some of these. Does you being the concession there and this is maybe more of a conceptual question. Does that change your approach to how you think about the construction risk on these types of projects or even how you would manage? What you would normally do on a construction project that you wouldn't normally be the part owner or the owner of the asset at the far end of the process?
I would tend to say that the answer is no. I mean, we separate the way we look at construction and the way we assess risk to -- the way we look at concession and we assess the associated risk. I mean, we have done enormous efforts within the last years to derisk our backlog. You have seen in terms of figures, I mean, we have now six price share within our backlog or revenue for 2022, around 50% coming from a little above 65%. So what we are saying, we do it.
We have installed within the company, a very robust, what we call a gate zero process, now endorsed by the whole company to be sure that we have a solo analysis on our construction and concession project before to decide to bid and at which level we are going to bid. So we are in a good path on this, and we will always assess risk in construction apart from risk in concession. I mean, it's not a sort of mix where we try to be at the level we would like to be. We have to be extremely disciplined to assess it on each segment.
Okay, that's fair. Thank you.
Thanks, Chris.
Thank you. We have our next question comes from Michael Tupholme from TD Securities. Michael, your line is now open.
Thank you. I guess, my first question relates to the ATE roadbuilding business sale announced today. I guess, is there anything further you can add just on the strategic rationale and maybe beyond that, though, and arguably more importantly, curious if there are any other businesses you are or would consider selling to fit within the parameters of the strategic profile you're looking to achieve going forward?
I think we have been clear, I mean on the ATE business, I mean, the sale this morning. We want to be more focused on the energy transition. It strengthened our balance sheet. It allows us to get away from a very capitalistic industry. As we have always said, I mean, in the past, we are looking at all opportunities to go within our strategy. And this is where we are going to act in the future.
Okay, that's helpful. Thank you. And then just in terms of the strategic cooperation agreement with GIP. Is there any sort of a base level of revenue that you would expect at this point to realize from that? Or is it very much project specific, and it would vary greatly year-to-year depending on what happens in the market?
Yes. No, it's very project specific, Mike. It's essentially replicating what we previously had internally where we had internal joint ventures between our roadbuilding group and our heavy civil group on major projects. We will just replicate that between our major projects group and GIP going forward. The pursuits that makes sense to have those two combined skill sets come together.
So it will be project specific in terms of which projects it makes sense for us to pursue together and how successful we are in securing those projects. So it's really just allowing us to continue to participate in major projects where roadbuilding is a significant component of a larger project.
Right. Fair enough. Okay. Thanks, Dave. And then just for modeling, can you share with us what the depreciation and amortization associated with that roadbuilding business, what that has been?
Yes, in the $15 million to $20 million range.
Okay. So similar to the CapEx number you gave us earlier?
A little higher than the CapEx, typically. Yes, I think we've got a fairly conservative depreciation policy on that business.
Okay, great. I'll turn it over. Thank you.
Thanks, Mike.
Thank you, Michael. We have our next question comes from Naji Baydoun from Industrial Alliance Capital Markets. Naji, your line is now open.
Hi, good morning. I just wanted to ask a few questions about the Oneida Storage project. Can you just help us quantify the equity investment in that project? And it is something a bit different for you a newer type of opportunity. Maybe if you can give us a bit more of a sense of -- if you're looking at concessions in the more, I guess, traditional power side of the business going forward, is that something you're considering?
Yes. We are working on this project at two levels. At the EPC level, it's a $141 million job, which is a balance of plant. I remind you that the battery provider and the performance of the battery provider is another contract. And at the top level, our plan to be -- is to have 10% share of the equity, which represents more or less of $15 million of investment.
Okay. And just generally, are you looking at more storage opportunities or more traditional kind of power investments from a concession perspective? Or is this more of a one-off?
No. I mean it's not a one-off, because there's a lot coming. So it may be battery storage. You are aware that DSO has launched a request for interest on proposal on this battery storage, but there are also quite a number of water pump storage and the study at the moment in Canada. So we are building up our capacity in this business line.
Yes. That's why I was asking. I think, we also had a massive procurement on the way for storage in Alberta [indiscernible] seems to be picking up. Okay. Okay, that's good. And maybe one last question. No dividend increase announced this time around, probably a prudent move given everything that's going on. But just maybe an update on your payout expectations for this year?
We obviously don't give guidance on earnings. So I kind of give you a payout ratio, because that would mean you back into a number -- we don't give guidance on. But I think, as you said, the dividend level is something that we have been focused on over the years and have seen a fairly decent uptake over a period of time, and we thought that right now is -- the level of dividend is -- in terms of yield is pretty attractive. And that was kind of played into the decision to hold it where it is.
Okay, that makes sense. I'll get back in the queue. Thank you.
[Operator Instructions] We have our next question comes from Jonathan Lamers from Laurentian Bank. Jonathan, your line is now open.
Good morning, and thank you for taking my question. On the four identified --
Good morning, Jonathan.
Good morning. On the four identified legacy projects, it sounds like the losses related to those stepped up sequentially in Q4 from Q3. Is that accurate? And could you tell us a bit about what drove the increase sequentially from Q3 to Q4?
Yes. So I mean, obviously, we look pretty hard across all our projects every quarter. And again, as I said earlier, in conjunction with our joint venture partners on each of these projects, but also on any other joint ventures we're involved in, and that involves a full assessment of where those projects are, our assessment of what we still have to go and the cost to complete, as well as the status of any negotiations with clients.
So really, Q4 just reflects things that we saw in the quarter in terms of agreements with clients, in terms of schedule, in terms of things that we agreed to do together to hit schedule. And obviously, we'll be pursuing the appropriate compensation for those areas, but we've taken a view as to what that might look like.
And that's kind of what drives the positioning. As we get closer to the end of these projects, schedule is obviously top of mind. And something that going into 2023 has been part of an active discussion with our clients, and that's given us some visibility as to how these projects will unfold in 2023.
Okay, thanks. And in terms of the underlying issues, which I understand are related to labor inflation, materials inflation, scheduling challenges. Maybe just on the labor and material inflation, could you update us on how those have trended since the Q3 call in November and whether you see any risks from inflation to your margins over the upcoming quarters?
Yes, I would tend to say that inflation is getting quieter. We don't speak anymore about hyperinflation. I mean, it's much more control. And the supply chain disruption from China and all the places of the world, I would say, are also decreasing.
In terms of labor, you probably know that most of the labor that are working on our project work under multiyear agreement, so we had quite a visibility on this. It just means that the situation is coming back, I would say, slowly but to something more manageable.
Okay, thank you.
Thanks, Jonathan.
And maybe just last on the balance sheet, if I could. I believe you have some convertible debentures that are maturing by the end of this year. Clearly, the balance sheet has been deleveraged with the transaction this morning. I guess, how are you thinking about the balance sheet overall in terms of refinancing options? And at what point you would be comfortable to get increasing the dividend again?
So obviously, we're kind of watching how deals are getting done in the market today and keeping a watching brief on that any -- to the extent we need to access that market. I think deals are getting done. And there is market access, whereas maybe a period last year, that wasn't the case. We'll see how things unfold here over the next little while, before making any final decisions. But we're very focused on the maturity of the debentures at the end of the year.
And I think we have lots of flexibility to take the solution that works best, given how markets might play out over the course of the year. And as I talked about earlier, that's part of our philosophy behind having the low leverage balance sheet and available liquidity is giving ourselves options. So we're not locked into one particular need or requirement. So we'll see how things unfold.
Sorry, the second part of your question again?
Sorry, I asked about the dividend as well.
Sorry, I mean, talked to it even earlier. There's no forecast or predictions when it comes to what we'll do in the future. We've been very consistent in our approach to dividends. And we'll continue to maintain a balanced view of where we go going forward, but I'm not forecasting when the next increase might be. We'll make that decision based on factors at the target.
Thanks for your comments.
Thank you. We have our next question comes from Sabahat Khan from RBC Capital Markets. Sabahat, your line is now open.
Great. Thanks and good morning. Just wanted to get a bit of clarity on that $120 million that you referenced. I guess, is it fair to assume that if that hadn't occurred, some of your operating profit would have been kind of higher by the entire amount? Or is some of -- or are you expecting maybe a bit of a recovery on some portion of that through the ongoing discussion? So maybe the head to number of days in that one? I just want to make sure I understand kind of what 2022 numbers were impacted by?
Yes, the 2022 impact was the $120 million on operating profit.
Okay. So any kind of future recoveries?
Yes, operating profit without that $120 million would have been exactly $120 million higher.
Okay. So then, I guess, if there are any recoveries on that in the future, that would be upside to earnings at that point?
Well, for sure. I mean, in terms of the negotiations we have with our clients, if we have upside through that, then yes. We're not saying that that's what we're forecasting. We're saying, we've positioned the projects, how we think they're going to unfold. And I think as people have seen historically with large complex projects then that they're not doing until we're done and we're more focused on managing the risk right now and getting these projects to the end based on where they're positioned today.
Okay. That makes sense. And then I guess just on the business that was sold, we should think that this is pretty much our transportation business in Ontario ex the LRT work, pretty much all the other roads as transportation related work?
Yes. Transportation, I mean, the word was a sort of a historic word. It's about roadbuilding. This is the title of our press release. It has no impact, I would say, on our, what we call urban transportation project. I mean, the word was this, but it's all related with roadbuilding.
Okay, great. And then just last quick one. On the, I guess, the liquidity position will be in good shape after the sale. I guess, what is the plans for the converts that are maturing at year end? And just some thoughts on the refinancing or how you might go about that maturity?
Yes. So similar to Jonathan's question, we continue to track the market and the key for us is to have a balance sheet that gives us options to do what makes sense based on how we see the market play out this year. If we think there's a good financing option for us, then we'll take advantage of that.
If we don't think there's a deal that we want to do, then we've got the liquidity and leverage that allows to do something through the credit facility. So we'll see how it plays out, but we'll do what kind of makes the most sense based on the kind of terms and other options that we kind of weigh up, because we made that decision. We're not really locked into a particular approach at this point in time. Thanks, Sabahat.
Great. Thanks so much for the color.
Thank you. We have our last question comes from Frederic Bastien from Raymond James. Frederic, your line is now open.
Thank you, guys. I have, I guess, a very simple question for Jean-Louis. And how are you feeling about 2023 versus how you were feeling about 2022, perhaps 12 months ago? How is the year shaping out versus where you were at the same time last year?
I'm happy to see that it's a very simple question for Jean-Louis, Frederic. I'm feeling better. I think we have established now a very disciplined way of looking at our construction projects, and I'm very happy about the endorsement by the whole company.
Second point, execution, which, at the end of the day is the bottom line. We are a project company. And our margin on each project depends on execution is progressing as the quality of execution, the productivity tracking, the benchmarking every day, what we call the operational excellence. I mean, it's progressing very deep within the company. And this, at the end of the day, is good for our performance.
I think we have with the energy transition quite an interesting piece of cake in front of us, and we are making a lot of efforts to be able to take our place and to develop competitive advantage. Globally speaking, as I said a few months ago, none of the clients with I have been speaking during the last six months have pronounced one single time the word, recession.
So it seems that in terms of infrastructure in Canada, it's going well. It's going well, as I used to say, demography is helping us, and Canada is rich in money, rich in minerals, rich in people. So that's good for us.
I'm also encouraged, I mean, about our international activity. You probably have noticed that in addition to the [indiscernible] job we took in the Washington state 12 months ago, we have taken a new job in Savannah River. I mean, it's in the nuclear side in the United States. United States is very important for us in terms of nuclear activities.
It is the most important installed park in the world. There is a lot to do in terms of rehabilitation and major component refurbishment. We are very happy with the small company. We bought there at the end of 2018. You also have seen that we are building a port in the Caribbean. All this, just let me think, in addition to the decreasing part of our four legacy projects within our backlog that I'm optimistic for the years to come.
Great. All the part two of my question, you've effectively answered through your comments here. So I appreciate it. I'll leave it at that. Thank you very much.
Thanks, Frederic.
Thank you.
Thank you. This marks the end of our Q&A session. I will now pass the floor back to Mr. Borgatti for closing remarks.
Thank you, Glenn, and thanks, everyone, for participating today. As always, if you have any questions, feel free to follow up with us at any time and enjoy the rest of your day. Take care.
Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.