Aecon Group Inc.

David Smales - EVP and CFO Terrance McKibbon - President and CEO

Frederic Bastien - Raymond James Sara O'Brien - RBC Yuri Lynk - Canaccord Genuity Benoit Poirier - Desjardins Capital Markets Jacob Bout - CIBC Bert Powell - BMO Capital Markets Mike Tupholme - TD Securities

Good morning everyone and thank you for joining our third quarter 2016 conference call. This is David Smales speaking in Toronto and joining me this morning from Calgary is Terrance McKibbon, Aecon's President and CEO.

I'd like to remind listeners that the information we are sharing with you today includes forward-looking statements. These statements are based on assumptions 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. I’ll touch briefly on Aecon’s consolidated results and then review results by segment before turning the call over to Terry.

Revenue of $838 million for the three months ended September 30, 2016 was $37 million or 4% lower than the same period in 2015, primarily driven by lower revenue in the energy segment. For the first nine months, revenue grew by 16% or $324 million when compared to the same period last year.

Adjusted EBITDA of $60 million, a margin of 7.2% for the third quarter compared to $76.1 million, a margin of 8.7 % for the third quarter of 2015. The reduction was caused by a combination of lower revenue and gross profit margin as well as higher MG&A costs in the third quarter of 2016, mainly due to particularly strong performance in all three of those areas in the same period last year.

For the first nine months of 2016, adjusted EBITDA of $93.6 million, a margin of 4.0% improved from $88 million, a margin of 4.3 % last year on a like for like basis. It is also worth noting that year-to-date results in 2016 have been adversely affected by the second and third quarter impacts of the wildfires in Alberta and by the 6.7 million one-time charge in Q2 relating to resolution of a long outstanding legal dispute.

Otherwise, year-to-date progress would have been pronounced. We remain confident that through relevant insurance policies, much of the wildfire impact will be recovered in due course.

New contract awards of 500 million were booked in the third quarter compared to 1.7 billion in the same period last year. This period over period decrease is due to the 1.275 billion Eglinton Crosstown LRT project award in the third quarter of 2015.

Backlog at September 30 was 4.6 billion, an increase of 1.2 billion or 34% compared to the same time last year. Turning to results by segment, infrastructure revenue of 322 million in the third quarter was 2 million or 1% lower than the same period last year.

Revenue was higher in transportation operations due to a higher volume of work in Ontario offset by lower revenue from water, due to less mechanical work in Western Canada and lower revenue from heavy civil operations. Operating profit in the infrastructure segment decreased by 8.2 million from the same three month period last year resulting from lower margin and higher bid costs in transportation operations in the quarter.

New contract awards in the infrastructure segment totaled $78 million in the third quarter of 2016 compared to 1.3 billion in the same period last year, a decrease resulting from the Eglinton Crosstown LRT project award being booked in the third quarter of 2015. Backlog at the end of the quarter was 1.9 billion which was 442 million lower than the previous year reflecting the work off of projects over the past twelve months in transportation and heavy civil operations.

In the energy segment, revenue in the third quarter of $325 million was 16 million or 5% lower than the prior year, driven by lower industrial revenue partially offset by higher volume from utilities operations. Third quarter operating profit in the energy segment of $12.8 million decreased by 4.9 million compared to the same period in 2015.

In industrial operations, higher operating profit in Eastern Canada from higher volume was largely offset by a revenue driven decline in operating profit in Western Canada. Operating profit in utilities operations declined as a result of lower gross profit margin in the quarter.

New contract awards of $259 million in the third quarter of 2016 were $27 million lower than the same period in 2015. Backlog at September 30 of $2.5 billion was $1.7 billion higher than the same time last year primarily driven by awards in the gas distribution and power generation sectors including the execution phase of the Darlington nuclear refurbishment project which was awarded in the first quarter to 2016.

In the mining segment, revenue of $209 million in the third quarter was $5 million or 3% lower than the same period in 2015. Lower volume from civil and foundation's work related to mining projects in Western Canada and from contract mining operations which continue to be impacted to some extent by the after effects of the wildfires in Alberta in the prior quarter were largely offset by higher volume of site construction work in commodity mining.

Operating profit of $17.5 million for the third quarter of 2016 decreased by $0.7 million compared to the third quarter of last year. Similar to revenue, operating profit was impacted by increases in the commodity mining sector being offset by lower operating profit in contract mining and civil and foundations work.

New contract awards of a 181 million in the third quarter of 2016 were $131 million higher than in the same period last year. Backlog at September 30 of $200 million was $118 million lower than at the same time last year.

Backlog decreased in the commodity mining sector as work off on existing sign installation projects outpaced new awards and contract mining backlog also decreased due to completion of site development projects in Alberta with equipment transitioning back into recurring revenue mining work. In the concession segment, revenue was $0.8 million in the third quarter of 2016 compared to $1.2 million in 2015.

Operating loss of $0.1 million compared to an operating profit of $0.9 million in the same period last year largely due to higher bid cost this quarter. At this point, I’ll turn the call over to Terry.

Thank you David. As David mentioned, Aecon’s solid third quarter and year-to-date results highlight the resiliency of our business model.

Lower demand from commodity and resource related sectors, delays and commitments and approvals of new pipelines, slower than anticipated rollout of new infrastructure investments and the impact of the Alberta wildfires have all presented challenges through 2016 that we are overcoming through an increased transition into market segments that provide significant opportunity and play to Aecon’s strength namely power, transit and water infrastructure. At the end of September 2016, the Company's backlog was $4.6 billion.

This longer term backlog provides greater visibility and stability with 67% of backlog work expected to be performed beyond the next 12 months versus a year ago when 49% of backlog was to be performed beyond 12 months. Increased infrastructure investment to address Canada’s significant infrastructure deficit and to combat slower economic growth is a key area of focus for all levels of government.

Benefit of this investment should start to be seen later in 2017 as larger projects with longer procurement cycles begin to roll out. While Aecon expects to be a beneficiary of this increased infrastructure investment, competition in this space continues to be strong.

Backlog in the energy segment was $2.5 billion at the end of the third quarter of 2016, driven by new awards in the first half of 2016 in the gas distribution and power generation sectors including the execution phase of the Darlington nuclear refurbishment project. Revenues derived from Aecon’s Western Canadian fabrication and modular assembly services will be lower in the first quarter compared to the prior year due to the completion of fabrication and field work on a major project.

Securing additional oil-related backlog will be a challenge in the current environment, but we expect an increased backlog and ongoing demand for gas distribution facilities, utilities work and power and nuclear refurbishment will offset lower oil-related volume in 2017. In the mining segment, commodity prices generally remained soft which is reducing the number of new projects being developed but Aecon is actively involved in several pursuits that may lead to potential projects.

New backlog in the process installation sector of Aecon’s mining segment is required for the second half of 2017. Other than the impact of the Alberta wildfires in the first half of 2016, contract mining operations continued to be relatively stable.

The concession segment continues to partner with Aecon’s other segments, the focus on public private partnership opportunities and is actively pursuing a number of large scale infrastructure projects that require private finance solutions or participating as a concessionaire on the Waterloo and Eglinton Crosstown LRT projects. Aecon’s balance sheet and financial capacity remain key advantages for us and our ability to continuing to grow and benefit from the significant infrastructure investment including P3s expected in coming years.

Aecon continues to be disciplined in responding to requests for its services becoming prequalified, bidding, negotiating and carrying out work. This overall outlook for the fourth quarter - the overall outlook for the fourth quarter of 2016 and into ’17 remains generally positive with areas of strength and Aecon’s business expected to outweigh the impact of softness in certain markets.

Thank you and we’ll now turn the call over to analysts for questions.

I understand that delays in timing differences will influential your topline, so I wasn't particularly surprised to see your infrastructure revenue stay flat year-over-year, but I was somewhat disappointed with the margin that you delivered which is bit unusual especially considering that Q3 is usually a strong quarter for that segment. Can you provide a bit more color on what happened?

So on the infrastructure side, I think we say regularly don't take any one particular quarter versus another quarter as an indicator. The longer term trends around infrastructure we think is still in play and still continue to see progress in terms of the margin we have in backlog around infrastructure.

And just the number - really a mix issue more than anything else in Q3. Transportation operations had higher volume than heavy civil and water from a mix perspective and generally margins tend to be a little lower in that segment of the infrastructure business.

So mix is much as anything but nothing underlying that that would suggest that longer term trend of improving margins and infrastructure is not still in place.

Is that a business where you're comfortable, I recall you saying that 5% EBITDA margin was achievable in that particular segment, is that still the case?

Yeah, we talked about infrastructure being a kind of 5% to 6% EBITDA margin business and that still you know we still think that's the right goal for the business and still feel that’s achievable.

Would you have a timeframe as to when you would expect to reach that target?

Well, obviously we don't want to get into giving specific guidance as we head into ’17, but we've been tracking in the mid-fours or moving into the mid-fours. We expect to see that to continue to move forward over the short to medium term.

On page 15 of your MDA report, you show that your cash balance mainly consists of cash held in joint operations that you can access directly. What will be the approximate share of that balance that is Aecon’s?

That is our share, the number you see there is Aecon’s share.

And lastly one for me, a quick on the concession segment, when should we expect earnings to start flowing to this division, I recognize that Eglinton and Waterloo are going to be contributing at some point. Does that start at the moment that the concession is takes over ownership or how does that actually work out?

So, with Eglinton and Waterloo, the concession period really begins once the asset is constructed and we take over the operations or the maintenance of those assets and start to generate operating income in the concession segment. Along the way based on certain milestones there are fees that trigger that you will see periodically, but not a constant system stream of operating income from those assets until we're beyond construction and into operations.

The one area that we've spoken to in the past also will impact concessions in terms of operating income will be, the development of the project in Bermuda, so the new airport project in Bermuda and we’re working hard on bringing that to fruition, things looking very positive on that right now. And if it all goes to plan, we should start to see income from operations from that asset during 2017.

The structure of that is very similar to Quito and we will take over the operation of the existing airport while we’re constructing the new terminal. And so, as soon as we start operating that existing airport, we will see the results of that in the concession segment.

Can you comment on the margin pressure, would you qualify it is more of a mix issue in terms of the types of projects running for revenge or was ramp up an issue on productivity and utilization rates to staff. Just trying to think how much was Q3 specific versus perhaps a new trend of mix of projects.

I think it’s a combination of the two factors you let in with which is a little bit of mix and I talked about on the infrastructure side for example, and a little bit of ramp up. When you’re talking about these larger size projects and we have those in both the energy and the infrastructure segment, you do - you have a lot of work that goes into ramping these projects up and getting to a full run rate.

Until you hit that full run rate you've obviously got a lot of overhead and things like that attributed to those projects that until the revenue really starts to flow you’re not recovering at the same rate that you will once you've got all that topline at full run rate. So it's a combination of both mix and ramp up on some of these larger projects.

So would you expect into Q4 and the first half of ’17 that the ramp up would be there or is it uncertain in terms of how fast that comes out?

No, I mean certainly in terms of those larger projects, as we move into Q4 and certainly into next year, we will be hitting full run rate sooner rather than later. So, for example, at Darlington the first reactor is now open and we were able to get access to reactors so we'll be on that mobilization setup preparation phase and actually into the reactor.

And then just turning back to infrastructure there is some commentary about - there is a good pipeline of bidding going on but increased competition, just wondering is the full margin expectation particularly given the pipeline of transportation projects, which were commented on as being lower margin. Is that expected to do a mix shift in favor of lower margin infra work going forward and how do you view ’17 in terms of revenue run rate for infrastructure division?

The lower margin piece I was referencing early in terms of mix is really the more seasonal road building type work as opposed to larger infrastructure projects around transit, some of the water and waste water opportunities that we're seeing out there. And so, no I don't think when we look at what's coming in the infrastructure segment in terms of the profile or mix of that work, so that will have a negative impact on our margins.

In terms of run rate for infrastructure, I think we go into 2017 with pretty solid backlog in that segment and expect to be not too dissimilar to this year. All things being equal, the one area we would flag is still around the timing of some of these projects coming through the federal funding initiatives and timing on those which as we said in our comments earlier we expect now to be kind of back end or second half of 2017 and if that timing holds then we'll be in decent shape.

And I guess it seems like that's a bit of a shift from a prior expectations at Aeco in terms of the flow of infrastructure dollars. Is that a fair assessment that just you're just seeing it shifted further into ’17 and ’18 both for large project awards as well as smaller project.

Yes, [indiscernible] it's well known the federal infrastructure funding is further out than originally thought and expect to see that. What's unique about the federal piece for us is the mix of mid-sized projects that are part of that as opposed to everything in large piece redelivery and that really suits our portfolio quite well in terms of balance of risk and balance of diversity in those projects.

But it is taking longer to release through the federal government.

Terry or Dave, I just want to drill in on the outlook for next year in the MD&A. Your noting that for ’17 positives expected [indiscernible] softness in some of the markets presumably mining and energy.

Does that mean that you were going to see just enough to offset the negatives and so are you saying flat EBITDA next year or are we are - your pointing to some growth, I'm just not clear on the direction there.

So I think those comments are really drive around topline areas from a volume perspective, we don't expect as much revenue from in 2017. I think those are well documented and we've talked about commodities and resources and where those areas are at.

And then obviously areas of strength include the parasite including nuclear water and waste water and some of transits stuff that will be fully ramped upon. I think from a revenue perspective, obviously a long way to go before we get through ’17.

But as we see things today, I mean I think most of that stuff is offsetting from a topline perspective. I think from a bottom line perspective though when we look at mix of work and the margin profile of our backlog today, we do see opportunities to move margins forward in 2017.

So that doesn't necessarily mean flat EBITDA obviously. I mean one of the areas of strength for example which has been an area of weakness is here is contract mining, contract mining has had a tough year with the wildfires and everything else.

And that's the highest margin business. The prospects for that business in 2017 looks pretty good today based on the conversations we're having with clients around winter work packages that go all the way through Q1 and then even their longer term plans through the balance of ’17.

So from a margin perspective, I think we expect to see progress in ’17.

And in that progress - I mean in the infrastructure business and applying to Sara’s question I think you mentioned that we’d kind of hold the line on margin, I don’t if misunderstood or if there room for improvement in infrastructure from that kind of 4.5% level you’ve been at [indiscernible]?

Yeah, I think I was saying in response to Frederic’s question earlier that infrastructure margins we still think 5% to 6% is the right range for that business and that we expect to continue to move towards that over the kind of short to medium term. So, yeah, I think there is upside from where we are today on infrastructure margins.

Do you still expect in energy a doubling of your nuclear revenue in ’16 or has some of that been pushed out to next year?

I think some of that is being pushed out to next year. I think that was part of the timing in Q3 and some of that ramp up I talked to, so yeah, some of that is being pushed down into next year.

Last question from me guys, on the contract mining side, one of your competitors announced some nice work on a new greenfield oil sands mine starting up next year. Are you guys involved in that and just any implications on that potentially if you're not involved directly sopping up some excess capacity in the industry and just kind of that growth rate you might see in contract mining next year?

This is Terry, didn't pick up the point about it being a new Greenfield opportunity. So can’t clarity what one of our competitors is referring to.

Fort Hills. Our demands are high across that space and they're higher than we've seen in a number of years.

We're feeling optimistic about the demand going through 2000 you know the winter ramp up of December ’16 into 2017. Our…

You’re not involved in Fort Hills?

We’ve extensively involved in Fort Hills as well as other projects so we typically don't speak specifically to any specific assignment we have without further clarifications from clients and what not, so but - let's leave it at this, we have a very strong demand for our services and our businesses and performance extremely well across the opportunities we've had including a very large assignment that we recently completed at Fort Hill [indiscernible] and expect that performance continues to drive the opportunities across the piece.

Just to come back on the bidding cost for the piece we [indiscernible] for the opportunities, I understand it impact kind of your marketing and G&A expense line. Could you maybe quantify what it is the year-over-year impact and what we could expect going forward especially in 2017 as there are a still plenty of P3 opportunities to be awarded.

Hi, Benoit. So, as we look at bidding cost, I mean they can certainly quarter to quarter move around, I don't think over a longer term there's as much of a change, if you look at kind of year-to-date or a 12-month run rate, I don’t think there is much of a change, there is still lot of activity in that large infrastructure space in terms of RFQs and RFPs and what we’re pointing out in the quarter is timing mismatch versus the third quarter a year ago where the bidding cost were a little lower and they were higher this year but really just timing in those two specific quarters over the longer piece bidding costs are fairly stable.

And the impact in Q3 specifically wasn't hugely material, but it did when you break it down to an individual segment like infrastructure or concessions, it did have an impact in the low millions of dollars type range, less than $5 million type impact in the quarter.

And I assume it will probably continue to remain at the higher levels going through next year but again there are sizable opportunities out there.

Yeah, I mean there's still lots of those large projects that we are now qualified for and will be bidding over the next three, six, nine months and a pipeline of projects behind that. But as I said the trend over time, we've been active on these large project pursuits for some time now, so I'm not saying that we're going to see a big increase in bidding costs going forward.

I think overall over a longer period they're fairly stable, it was just timing of some of those costs in Q3 this year versus Q3 last year that caused the impact in Q3.

And just in terms of seasonality, obviously that should be a little bit smoother, looking at 2015 almost 20% of your EBITDA came in the first half. So just looking at 2017, what kind of EBITDA generation we might see in the first half in terms of percentage versus the total year.

Well, I think it will you know we've talked about the seasonality kind of moderating over time. I think, we certainly saw a bit of or have seen so far this year a bit of a shift in seasonality from what we've seen historically.

I think that will continue into ’17, but I think it's gradual, I don't you know there wouldn't be a huge step change it's just a gradual shift over time out. I don't put a specific percentage on it but it's incremental kind of gradual not a huge step change one year to the next.

Could you discuss the bidding pipeline against the opportunity to replace K+Ss in the mid-2017, what are kind of the opportunities right now?

So the mix of work obviously being in the mining segment where we're processing and building processing facilities sort of an acre build up, sort of mindset in what we call our mining services business. That group has had a number of opportunities that have been evolving that take considerable time.

I think we're taking some confidence in the sense that the specialized mining engineering entities are considerably busy than they've been in a few years, so that's a good sign for us. So we're starting to see developments happening in that regard in sectors where there is some strengthening commodity space.

The other big piece that’s evolving for us is with those long-term established mining clients, there are other environmental projects that we're in pursuit of, we've done a few of those, you’ll recall in 2015, and ’14, we had a large when we did for Lafarge that was on the environmental side, one of their enlargement facilities. So we have a series of environmentally oriented projects that aren't as sensitive to money prices that are well underway and providing strength.

So we see that that evolving and we also take up with them the [indiscernible] that we have, we pick up overflow in areas where typically would be constrained if we've got pumping station or gasification plants or gas compressions. So the mining guys right now have got resources that are part of some of those projects that are underway as well.

So across that space, we have a void to fill in the back half of 2017 and we’re reasonably confident that we'll be able to fill that.

Okay. And just for Bruce Power, I understand it's a different mine set versus Darlington, just wondering if you could give us an update on the potential opportunities for Aecon down the road.

Yeah. Bruce Power has been a client of ours for many years.

We continue to do different types of assignments. If you think about Bruce as being about four years behind Darlington and the mix of work that will be done in Bruce is a different mix of work.

Obviously, they are early days in terms of where that is evolving. It is a -- continues to be an important pursuit for us and -- but our focus is also ensuring that we've got a strong performance on our Darlington assignment, but I mean it is really interesting force as it evolves and we'll see how those pursuits evolve competitively.

Okay. And last one for me, just in terms of cash deployment opportunities, obviously very solid balance sheet, just wondering if you could give us an update on the cash deployment strategy, whether it’s in terms of share buybacks, M&A, so what's happening on that front.

Thanks. Yeah, I think we've talked a bit in the past about M&A in terms of open to opportunities, but not something that is huge driving force.

I think in terms of returning capital to shareholders, we look at that in the first quarter every year and that's been when we've announced our dividend policy, for example, in prior years and we'll do the same again this year. But in terms of overall mindset, nothing particularly different at this point in time.

The business is still performing well we still have a very strong backlog and we'll take that all into consideration when we look at dividend policy and their options in Q1.

Okay. Thank you very much for the time.

Good morning. Can I get your thoughts here on this update that we had overnight and maybe talk a little bit about how you think about Aecon being positioned, especially when you think about the large amount that's going to be spent on the green and social infrastructure?

Jacob, it’s Terry. So we -- obviously I think the most important part of those announcements is the confidence long term, the various facilities that they are setting up in the infrastructure bank conversion issues around clarity and commitment and I think what's most important is the mix that the federal government is, not just in green related activity as your reference, but also just the variability for the scale of various projects.

This current government in terms of how it looks at P3s is not as definitive as the prior government where everything had to be delivered in a P3s. So that's a nice mix for our portfolio that balances our portfolio.

On the various initiatives around different types of green activity clearly, we're very active in renewables. Across the country, especially in hydroelectric, lots of opportunities there.

So obviously further clarity in funding for renewable development of energy, clearly hydroelectric has got the biggest impact in provinces energy mix. So and it's something we've been a leader in for fifty years.

So it's our longer -- so that mix is good, so I’d say the hydroelectric mix in transit LRT, electrification type opportunities that are the big tickets in the mix of all that are good for Aecon.

Can you quantify perhaps what the welfare impact was in the third quarter?

Yeah. Jacob, obviously the majority of impact was in Q2.

The Q3 impact is more just a hangover from that with clients kind of reorganizing their production schedules and to some extent a little bit of cash flow preservation because obviously they took a cash flow hit in Q2, we’ve been down from a production perspective and so we saw them kind of deferring some work that we would traditionally be doing in Q3. I wouldn't want to overstate it in terms of our Q3 numbers.

There are a number of smaller items all impacting in the quarter, none of which individually hugely significant, but when you add them together, those three or four areas all have an impact and I talked a bit in costs earlier. The welfare impact would be not dissimilar in the kind of low single millions of dollars.

And then, so you talked a bit about the master service agreements that were secured, how does that impacted fourth quarter, are we going to see a margin bump as a result of that.

Yes. Certainly, those MSAs that continue through the winter, some of them just based on the traditional seasonality of some of the work we do in the utilities business will not be as active in Q4 and Q1, just because in winter, some of that utilities work winds down.

So it will be more of a 2017 full year impact that it will be necessarily a Q4 impact, but certainly the margin expectations from those MSAs line up with the positive margin movement that I talked to earlier that we expect to see going forward.

And last question here just on the potash work, so your expectation right now is even with the accident at K+S, the majority of that work still rolls off in the second quarter?

Yes. At this point, that's the expectation we have.

There's other work obviously evolving and early days to see how that gets assigned, but we have very large workforce there, it's been a very large program for us and our safety and quality and performance have been very high, very complex plans, as for sure Jacob. But I’m really, really pleased with the team’s performance and the effort that we made there with that project.

Sorry to be clear, this is work with another producer?

No, this is K+S, the K+S work as you referenced, based on the current backlog and our expectation scales up in the second quarter of ‘17.

Okay. You're just talking about some incremental work, I wasn't sure if that was?

No. There will be incremental work on that site that we would pursue, but our point is more around based on the current load of backlog we have there that tails off in the second quarter and but there is either other activity that could evolve there that takes a longer.

But based on our current backlog, that's where we set up.

Thanks. I want to understand near term the energy comments, the fab stuff is coming or has come to an end.

The nuclear stuff that gets pushed out, but you've also referenced gas distribution and power, so are we likely to see bear term that we're below where we were in Q3 for revenue perspective or is there enough in nuclear power and gas to offset the waning business in the fab side?

So. Yeah.

In terms of timing on the stuff, I mean, you're right in terms of identifying those areas that will back fill lower oil related volume, most of which is fabrication and modular assembly type work. That really came to an end in Q2 and so we had very little if any of that type of revenue in Q3 and as Terry referenced in his comments, it will be challenging to secure more work in our area in the foreseeable future.

So those three areas, power primarily for the energy segment being nuclear, utilities and gas distribution. What we're really saying is when we look at the start of the year, we thought the timing of replacing that lower oil volume would line up very nicely in Q3 with things coming on stream, like the nuclear program, like some of these utilities MSAs and the timing didn't quite work as smoothly as we would have liked.

So some of that nuclear revenue as we said earlier is pushed out a little bit, but now we are ramped up. Utilities, likewise, some of the MSA programs, we were a little later in getting going than we originally envisaged, but really just timing related.

So as we move into Q4 and 2017, that offset should be now in place, so that when you look at prior quarters and the oil volume we had in there, we should have the offset for that in future quarters.

Okay, but not quite for Q4?

No, I think all things being equal, it’s probably more fully realized in ’17 and maybe not quite although in Q4, but we’re kind of swinging a little bit, it’s not huge difference.

Okay. The next question Dave I had and I wanted to just look into the impact, your subcontractor costs have been higher this year, both on an absolute dollar and as a percentage of revenue or percentage of costs and I don't know how to think about how that factors into each of your segments, but intuitively I would think that that having more subcontractors would be a drag on margins and so just wondering, is there something in the mix that you're going through right now that says you have to use more subcontractors just by virtue of the nature of the work you're doing, just want to try to understand that shift in costs because that's kind of how I'm thinking about it, but I want to get your insights on that?

Yes. So I think there's two things that play in to that increase in subcontractor costs year-over-year or certainly year-to-date, partly just the fact that top line revenue is up 16% year-to-date.

So there's just a general increase in volume. And then as you say, it’s the mix of work that really drives that split between personnel costs, which are our own labor forces, our sales work versus work that’s subcontracted out.

I wouldn't say that's a big driver of margin, I mean the way we look at projects is really the overall margin profile of the project whether that’s sales perform projects or projects that will be using some subcontractor forces on. We’re still targeting those projects that meet our overall margin aspiration.

So it's really just a mix of work that we don't expect to have a margin impact because there's a slightly higher proportion of subcontractor versus sales perform. It is the bigger influence on margin mix is just the type of work, whether it’s contract mining, whether it's heavy civil as opposed to road building, those kind of things, but subcontractor doesn’t really -- isn’t really big driver for us.

And I wanted to go back to Terry's comments on infrastructure, I know Dave, you talk about getting the EBITDA margin to 5% or 6%, but then the comments are, there's a lot of people focused on this space, there is a lot of capacity chasing what seems to be fewer projects and then it seems a little bit, if I think about some of the water kind of projects, these are smaller kind of things, at least you think about in the context of federal infrastructure spending. So you can actually have more competition for those kinds of projects.

I'm just trying to square the size of the projects, the intense competition and getting those margins to that 5% or 6% on the infrastructure side, I’d like to kind of square that up?

Yeah. I think obviously in this life project space, we have, it’s competitive space.

It’s always been a pretty competitive space and that remains the case. I think Terry talked earlier about the federal program and how we expect to see more mid-sized products and also how it lines up with the competitive forces that we see, we definitely see a lot of competition in the smaller projects space, so kind of $700 million, where there is lots of contractors who can play in that space and then lots of competition in that very large product space, but that mill suite, we tend to see good margin opportunity in that space.

Okay. Thanks, guys.

Just I guess a couple of pieces of this and more turning back to the energy margins in the energy business. If we look at the margins in the quarter, you said the fact that part of it was related just to the timing of having a nuclear work start a little bit later as the fab shops came off.

Still and I guess very similar to your comments around infrastructure.

Yes. The timing on that is certainly more challenged when you don't have a full run rate on the oil side, fabrication and modular assembly in particular.

So timing wise, it’s more of a challenge to get there in the near term, but certainly once we fully ramped up on nuclear, which we expect to be through ’17, that certainly helps the mix. And so yes 7 to 8 is still the target, but certainly we face that headwind of lower oil volume, which would be a positive contributor if we had work in that sector too.

Okay. Along those lines I guess and I'm not sure Terry is back online yet or not, but I know the comment has been made in the past, I think, if you go back about a year ago, I think the comment at that point was, for the first time in several years, the fab shops are actually running at capacity.

Does that beg the question in terms of margin profile on whether or not the work isn't going to be there for the foreseeable future? Do you just have too much capacity in that market and is that something that you can either reallocate say to nuclear requalify or is there some way maybe to reduce that capacity, just to take some of the margin pressure off?

Yes. It's Terry.

That piece is accordingly to a large extent. We have certain assets that we own and certain assets that we have on shorter term or project related leases.

So we’d expand and contract quite significantly, depending on assignments and when it's a run of oil in Alberta will shift some production in the eastern Canada. And right now, these Eastern Canadian shops are very busy and we've got expanded capacity there.

We haven't got to a point where we’re utilizing Western capacity, but never say never just depending on the types of projects and some of this relates to the pipeline activity that’s installed. That affects the base capacity and we have some base work that we're doing right now on pipeline and gas compression and whatnot.

So -- but the answer to your question, we have the ability to ramp up the rent down and minimize any long term costs, but we typically have a steady base of business that helps offset any fixed costs.

Okay, great. And then I guess my last question just thinking -- to think about your comment around your backlog profile over the next 12 months, I guess, is there anything that you think that you're forced to do or becomes more concerning about filling as you said the next 12 months of revenue, are there additional jobs that you must have or is it more the mix of work moving back MSA and you sort of alluded to the fact, some of the mining contracts are probably going to be a little bit busier and there are non-backlog type items.

How should we think about revenue mix in to next year? Is it all going to come from that recurring revenue pile or is or are there new awards you guys have to find in order to be fully utilized?

So I certainly think on the recurring revenue side, we expect to see pretty robust growth in that kind of work next year. I talked earlier about contract mining and we expect see good growth in recurring revenue in that business.

We expect the utilities side of the business, which is the other big piece or recurring revenue to be up fairly significantly from this year. So I certainly think that will be a big factor next year and I think that will offset some of those areas where we don't have the same backlog that we've had historically and so I think I had talked about earlier about all these different areas kind of offsetting to some extent so that all things being equal, from a top line 2017, would be more of an offset year with some pluses and minuses.

Hi. Good morning, gentlemen.

Just a quick question in terms of, correct me if I'm wrong but given what you're seeing right now, it looks like sort of flattish revenue in 17 is something that you're comfortable with. And when I look at the buckets of EBITDA generation.

maybe we're going to see a bit of a pickup on infra, but energy I think anything that's coming into the backlog, I would assume it's going to be lower margin just because of the competitive pressures and mining, you have to replace super high volume, very high margin work from K+S and I'm just trying to reconcile this whole dynamic of looking at 200 million EBITDA consensus next year and your comfort level around that and maybe you don’t necessarily have to address the 200 million, but just the ability to grow the EBITDA in ’17 versus ’16, which doesn't look like a [indiscernible] from my perspective.

Hi, Max. So, yeah, I mean, I think we've been through some of those areas already in terms of margin.

You referenced mining, but the biggest contributor to mining from a margin perspective is contract mining. And we expect to see a pretty significant turnaround in that business next year with the challenges it’s had this year with lower volume as a result of the wildfires and the strength of the winter program that we're seeing right now, which goes all the way through Q1 and discussions we're having with our clients around the work for the balance of the year in 2017.

We expect to see considerable strength in that business. We talked about the mix in the energy segment and reaching a full run rate on the nuclear.

So I'm not sure an infrastructure likewise being fully ramped up on some of these larger projects like Eglinton. So all we can tell you is what we see in terms of the backlog margin embedded in the backlog we have today and the nature of the work we expect to be performing next year and the mix of that work and the pursuits that are out there and that underpins confidence around margins.

David, Mike Tupholme. Can you -- having appreciating everything you just ran through there in terms of the margin progression in some of the areas where you can, notwithstanding perhaps flattish revenue season improvement in the margin, is this something that's going to progress gradually or would you expect that in the fourth quarter we're really going to start to see some improvements.

So I mean for example you talked about nuclear and how you really just started to ramp up there several weeks ago. I mean is this a situation where that kind of builds gradually or are you now fully ramped and we'll see the benefits of that in the fourth quarter for example?

Yeah I think we'll see some benefits of that in the fourth quarter. I don't -- given the short term nature of it, I don't want to be assuming anything specific in terms of percentages or the magnitude of that, but certainly the fourth quarter should see margin progression.

I always have to caveat that with all things being equal, the fourth quarter is a quarter where weather can have an impact in some of our businesses and so that's still a variable, but all things being equal, we should see the benefit of the ramp up on some of those programs in Q4.

And does that also apply to contract mining or so I completely understand that there's potential to show good improvement in ’17 versus ’16, but given the discussions you're having, is that something that's set to potentially being done for you in the fourth quarter as well?

Yeah. In theory, yeah, that mining business is heavily concentrated in Q4, and particularly Q1, but those winter work programs do start to ramp up in Q4 and so, if everything goes according to schedule on that work, then, yes, that would start to show up in Q4.

It just depends on exact timing in terms of the freeze that needs to happen, to get really ramped up, but based on what we typically see in that geography and the work that would lead to being performed in Q4, then yes, that would happen.

Okay. Thanks.

And then just lastly, in terms of infrastructure when you make the comment that the federal spending and other infrastructure spending has been slower to progress, which -- I'm not suggesting you're the only ones who have suggested this, but when you make that comment, are you looking at specific projects that you were planning to pursue or are pursuing and those specific projects have been pushed out or is this more of a general comment about the pool of money that's going to be directed to projects in general?

I’d say it’s a mix that and again a mix of projects as you can well imagine, some of these that were in pursuit of a multibillion, some of them are small, I think what we were expecting earlier in the fall, certainly within ’16, we've seen more of the mid-size infrastructure projects that would be a nice fit with our portfolio of activity and we haven't seen that yet. So the larger ones, things like the [indiscernible] bridge, projects like that, they go through quite a lengthy process of development and that's an example of a project taking a long time.

But there are others that come on a more rigid track, I guess you would say. But in ’16, the activity has just had a different mix and we expected to see more mid-size coming out of the roll-out from the federal government.

Operator, any further questions lined up?

Okay. Thank you, operator and thank you everyone for participating today.

Apologies for the technical issues we had part way through that call. And if anyone has any follow up questions, we’re obviously available and feel free to reach out to us and hope everyone has a great day.

Thanks, guys.