Aecon Group Inc.

David Smales - CFO John Beck - President & CEO

Yuri Lynk - Canaccord Genuity Jacob Bout - CIBC Michael Tupholme - TD Securities Derek Spronck - RBC Capital Markets Frederic Bastien - Raymond James Maxim Sytchev - National Bank Financial Neil Linsdell - Industrial Alliance Securities Ben Jekic - GMP Securities

Thank you, Pamela and good morning, everyone and thanks for participating in our second quarter 2018 results conference call. With me this morning is John Beck, Aecon's President and CEO.

Our earnings announcement was released yesterday evening and we've posted a slide presentation on the investor section of our website which we will refer during this call. 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.

I'll touch briefly on Aecon's consolidated results and then review results by segments before I will now turn the call over to David Smales. I'll touch briefly on Aecon's consolidated results before turn the call over to John.

Turning to Slide 3 as previously disclosed, commencing in 2018 Aecon's formal Energy and Mining segments or combined into a single Industrial segment to align with Aecon's new operating management structure under capitalize on combine the strengths and synergies of our capabilities across the industrial sector. We believe this will create great operating efficiency and contribute the margin performance in the segment as we move forward.

Turning to Slide 4, revenue of $755 million for the second quarter of 2018 was $69 million or a 10% higher than the same period last year driven by strong volume in the infrastructure segment. Adjusted EBITDA of $41.4 million on the margin of 5.5% for the quarter compared to $33 million on the margin of 4.8% in the same period last year.

And likewise operating profit of $12.8 million and diluted earnings per share of $0.13 both showed considerable growth comparable to the second quarter of 2017 on the back of higher volume and in improved margins. Reported backlog as of June 30, was $6.4 billion is 48% higher than backlog of $4.4 billion at the same time last year but also represents a 52% increase since the beginning of 2018.

This backlog position is a new record level for Aecon, significantly exceeding the previous record of $4.9 billion reported in the second quarter of 2016. Driving this record backlog with new contract awards of $2.6 billion booked in the second quarter of 2018 compared to $687 million in the same period last year.

Turning to Slide 5, results are presented with adjustments for one-time expenses incurred during the quarter which includes severance cost of $1.5 million and $0.8 million of expenses incurred as a result of the now terminated sales process. Turning to Slide 6, the impact of these one-time adjustments on adjusted EBITDA and adjusted EBITDA margins for the quarter in the last 12 months is illustrated.

On a pro forma basis, reflecting these adjustments diluted earnings per share would have improved from $0.13 to $0.16 in the second quarter of 2018 and from $0.56 to $0.81 over the last 12 months. Now turning to results by segment.

As noted on Slide 7, Infrastructure revenue of $320 million was 83 million or 35% higher than the same period last year. This increase in Infrastructure revenue is broken down further on Slide 8 and includes $47 million in major project east due to increased activity in larger projects in the Bermuda Airport redevelopment, $25 million in major projects West due to increased activity in Hydroelectric and waste water projects and $11 million in transportation due to increased road building activity in Western Canada.

Adjusted EBITDA in the Infrastructure segment of $18.1 million and margin of 5.7% was up by $9.5 million compared to $8.6 million, a margin of 3.6% in the same period last year. New contract awards in the Infrastructure of $$1.9 billion in the second quarter were $1.7 billion higher compared to the same period in 2017 as two major project projects were booked in the quarter the Montréal REM light rail projects and the Finch West light rail project in Toronto.

As a result of new contract awards, Infrastructure segment backlog of $4 billion as of June 30, 2018 was $1.9 billion higher than the same time last year. Turning to Slide 9, in the Industrial segment, revenue in the quarter of $420 million was $22 million lower than the same period last year.

Higher revenue from utilities work were offset by a lower volume in nuclear operations and construction projects in Western Canada. Adjusted EBITDA of $14.1 million a margin of 3.3% was up $4.8 million lower than the prior year $18.9 million a margin of 4.3%.

This was driven by the decrease in volume from nuclear, a decrease in conventional Industrial operations due to lower volume, and gross profit margin, and a lower gross profit margin for utilities work in the quarter. New contract awards in the Industrial segment of $695 million in the second quarter were $175 million higher than the same period in 2017.

Turning to Slide 10. In the Concessions segment, increased activity at the Bermuda Airport Project was the primary reason for growth in both revenue and adjusted EBITDA in the period.

At this point, I will turn the call over to John.

Thank you, David and good morning everybody. Turning to Slide 11.

As David mentioned earlier, Aecon ended the second quarter of 2018 with a record backlog of $6.4 billion. As shown not only has backlog to be worked out in the next 12 months increased by 40%, but 69% of backlog is for work off beyond the next 12 months providing significant visibility and stability to Aecon's longer term outlook.

This is especially so when combined with Aecon's annual recurring revenue which as noted on Slide 12 has grown by 27% in the last 12 months and consist primarily of utilities work, and telecommunications, gas and Hydro distributions, as well as contract mining in the oil Sands. Referencing Slide 13 and 14, the company's balance sheet, financial capacity, and cash generation remain key advantages for Aecon's and its ability to grow and take advantage of increased infrastructure investments by Canadian federal, provincial, and municipal governments in the coming years, including public-private partnerships, as well as select international projects.

Aecon is well positioned to respond to gradually improving oil and commodity markets and continues to be disciplined in all segments responding to requests from our services, becoming pre-qualified, bidding the work, negotiating the work and successfully carrying out the work. Turning to Slide 15, Aecon's overall outlook for 2018 and 2019 is increasingly strong with record backlog of $6.4 billion expected to drive both top and bottom line growth and we continue to see a strong pipeline of opportunities ahead of us.

Now I would like to take a moment to address the recently initiated legal claim with K+ S laid out in our MD&A and the financial statements. While the numbers are laid out in those documents I want to talk to about what is essentially a fairly unique situation and I say that with a benefit of over 50 years of the industry where I thought I had seen everything.

Aecon successfully completed what is essentially a cost reversible project on schedule in a professional and skillful manner notwithstanding major issues and delays caused by the client. Two points of detail here, but were they clearly impacted just about every aspect of what we had to do to perform this job.

Then having requested that we accelerate our work to address these impacts and full recognition possibility of acceleration, they are not refusing to pay for work that was done despite clear contract terms and having received and enjoyed the full benefit of that work. We believe they breached not just the contractual terms but also their duty of honesty and good faith.

We're very confident in our position and have not seen anything from K+ S to undermine that level of confidence and we fully expect at the end of the process to be paid in full. I would like to end by noting that earlier this work week Aecon was pleased to announce that its Board of Directors has appointed Jean-Louis Servranckx as President and Chief Executive Officer effective September 4, 2018.

This was the culmination of an extensive global search process. The Board and I are exceptionally pleased that we found a leader of Jean-Louis capabilities in the long and successful track record in the construction industry around the world.

As I revert back to my previous role as Executive Chair on Jean-Louis's arrival I look forward to working with him and the rest of the management team to drive ongoing success for all of Aecon's stakeholders. Thank you now I will now turn the call over to analysts for questions.

Just in the Infrastructure segment, very strong numbers obviously. Curious how much the REM and the Finch projects may or may not have contributed to quarterly revenue and margin.

As soon as we strive to get under way in the second quarter, Montréal a little bit ahead of Finch but not really huge drivers in the quarter. We're talking about early stages of ramp up where you know we're near full run rate and not full quarter either on both either of those.

So, that helped a little bit on topline but they weren't the biggest drivers in the growth quarter-over-quarter.

So then begs the next question what was – was it just increased burn on Eglinton and some of the other large jobs in the backlog?

Yes, so, you've hopefully got projects like Eglinton, projects like Bermuda and the transportation business, all seeing higher volume in Q2 versus a year ago. And then some projects in the West as well.

We sightsee just getting underway. We have a large wastewater project that was in Q2 this year that is relatively new, [indiscernible] wastewater project.

So just a number of projects of which Finch and Montréal contribute but it was a little wider than just those two.

So fair to say Q3 and Q4, will the same thing will hold with those existing projects and will get the new ones layered in? How do we think about the first quarter of the year for Aecon now that these large projects, are they likely to carry on for the most part through the seasonally weak first quarter where I know most of your smaller road building stuff would typically come to almost a complete halt.

But how do we think about any change in seasonality given this entirely new backlog?

There will still be some of that seasonality but it'd be more muted. We'll still have the impact on the road building and our utilities business, but they won't be as bigger proportion of the total business, and some of these larger projects do have the ability to continue on to some extent through the winter, but also some of the work in the nuclear space and things like that now that we're into the long term execution, is all in dollars and so these different elements of work that can continue through the winter, more so than in the past.

There will still be seasonality but it should be a bit more muted than it has been.

Just last one from me and then I'll turn it over. But talking to investors recently, there is still a perception that the consensus estimates suites for this year are a little bit stale given the sale process.

Dave, are you able to express your level of comfort one way or the other with the current 2018 EBITDA consensus of about $185 million? I mean you view it as aggressive, conservative, just how should we think about that number?

Obviously, we don't give guidance and so we don't really comment on the consensus numbers. I would point you to the fact that we're talking about strong growth in the second half of this year.

I'm increasingly confident in that view. I think that consensus number certainly contains an element of growth in the second half year over year.

Whether it's in line with our latest outlook which I say is increasingly strong, I think people will probably go back and look at their models and look at that. I think our outlook has improved in uncertainty around that outlook over the last three months or so.

But your trailing EBITDA number is about 185, right through Q2?

Yes, if you exclude one times.

If you include one times, yeah, and these one times, the outlook for those that will be lower going forward?

It will be. I mean not all of those one-time items relate to the sale process.

Right.

And some restructuring we did back in almost 9 to 12 months ago primarily in the mining sector as we restricted energy in mining and combined those businesses.

Given this record backlog that you just reported, can you talk a bit about past utilization and the ability to take on new projects?

Sure, it's John, Jacob. So, the new work that we've picked up, generally speaking, has been in joint ventures and so the capacity needs are diluted because our partners also contribute when we talk about the human capacity.

So we're very comfortable. The Montréal project is being supported by our Montréal organization that has been there for years.

The Finch project is being supported a lot by the payments on Waterloo. So, we're able to rotate existing teams to the new projects.

We've been and I think I was clearer more than a year ago, we've been building up our resources significantly over the last 18 months two years in expectation of the wins that we're now experiencing. And so, we've increased bench strength of what we had.

On the financial side, there is lots of capacity. And so no concerns about that.

David can talk about some more. So, capacity for us today is not an issue, but will as we possibly win more projects over the next few months.

We'll be looking at that. We will not enter into any projects where we're not fully confident that we've the right human resources and the financial resources for that.

And maybe talk about your appetite to take on work outside of Canada. I know the outlook here for the next couple of years in Canada.

Within Canada is obviously quite robust, but how are you thinking of taking on work or growth outside of Canada currently?

We've always had some international work ongoing, mostly Concessions. As you know, we're full speed ahead now on Bermuda which is going very well.

And we're definitely thinking about what will follow on Bermuda. I'm not sure that we would layer on another one on top of it, but Bermuda will be finished in less than two years and we're looking at other international opportunities now.

First question. In spite of being very successful in winning a number of a larger projects in recent months.

I'm seeing the backlog up to a level never experienced before. You still sound quite positive on the outlook for further new awards and I just wanted to ask if you can provide a little bit more information about the kinds of additional project opportunities you're seeing in front of the company right now?

We're bidding on projects all the time. I can tell you right now that there is a project in BC called Portola Bridge.

We'll be bidding on that. The Surrey light rail project.

We're looking at the greenline project and then Calgary which is a big new LRT projects. We've bid on the second narrows.

There are a lot of supply tunnels in Vancouver. Metro links has planned a series of RER projects.

We'll see how quickly they move. We expect further pipeline opportunities depending on whether that coastal project of the LFG plant with shale will close that are not, we would get the piece of that.

On the highway 401, there is more work to be done. There is work at Montréal as well.

Just a lot of work across the country and so, we've the capacity for more and we're bidding on more and we expect that to flow to continue and I should add that the Canada Infrastructure Bank are just getting their acting as of now. They've got their CEO in place and I would expect to see things come out in addition to the provincial and municipal projects that are just with them.

Secondly, I just wanted to ask about the contract mining business and how we should think about the ramp up of work in that particular area especially with the new operating site coming online this year?

Yes, so contract mining, we're expecting a strong second half of this year. Q2 is always the seasonally slowest quarter, and no difference in that this year.

We really expect to be adding additional volume at the full hillside in the second half of this year and we already have good visibility into the work programs that we will be performing there through the balance of the year into Q1, Q1 being typically a very strong quarter. So we've a good visibility and for the next 9 to 12 months and expect volume to step up quite nicely in that business relative to where it has been for the last kind of 9 to 12 months and obviously that should help margins in our Industrial segment given that that is typically a higher margin area of the business.

And Dave, is there any way to, maybe not quantify precisely but provide some context for the extent to which that business will increase in terms of revenue contribution to this additional work? Perhaps just sort of the percentage increase due to the new site in particular?

Yes, so contract mining is a business that typically does a couple of hundred million dollars a year. I think over the last little while, it's been running a little bit below that level and I think over the next 12 months, we expect it to be more into the kind of the mid 200s type of range in terms of run rate.

And then finally from me, we saw the working capital. Working capital act is a significant source of cash this quarter driven by a very significant increase in deferred revenue.

Dave, just wondering how we should think about changes in non cash working capital in the second half of the year and where you think sort of that sits by the end of the year?

Yes, so, you're right. The buildup in cash inflows, the working capital is to a large extent the deferred revenue build up which reflects to be in nature of these larger infrastructure projects that we've just got going on in Q2, where you get advance payments at the start that you opened and then work those down to some extent before the next milestone payments.

So it's kind of a little bit up and down through those projects. But you do kind of maintain a cash balance throughout on those larger projects.

So we are working capital friendly. In terms of the overall profile as we go through the year, Q3 is usually the quarter where we effectively invest more in working capital.

It's kind of the peak of the season and that kind of extends through into much of Q4 and then starts to unwind a little bit in Q1 and Q2. So we would expect the working capital to be a use of cash in the second half, and then start to unwind again in Q1 and Q2 next year.

So the normal kind of seasonality. You just get a little bit of distortion every now and then if you're ramping up on a couple of large projects at the same time in the Infrastructure Space.

And so that makes a lot of sense. So just a follow on from that.

Would you expect that by year end on a full year basis? You are into a position where changes in working capital is actually still a source of cash or you think you would get right back?

No. We still expect it to be a source of cash in the year.

We're generating good cash flow overall. If you take out the seasonality from quarter to quarter and you look at expectations of EBITDA where we're in terms of our normal CapEx spend and then cash interest and cash taxes, we do expect overall positive cash flow, and I think from working capital perspective, as I said, most of the growth is coming from areas where we're cash positive on those jobs and so we expect working capital to be a little positive in the year.

It's not we're those because we're growing, working capital is going to be a drag. The areas we're growing in are actually working capital positive for us.

Just around cost inflation, I mean you have a lot of work ahead of you and arguably there is a lot of work in general in Canada. Are you seeing any sort of cost inflation with regards to labor or equipment sourcing?

So we've not had any issues with respect to labor or equipment at all. We have very close relationships with the unions across the country.

We've a preferred relationship I would think and so that has been very helpful in terms of sourcing the labor force so no issue there. The entire industry will have to be careful as the workforce ages to make sure that there are training programs and apprenticeship encouraging of high school graduates to considering working in the construction industry so those kind of macro issues are for sure exist but we're not sensing any difficulties or pressures on those labor and equipment problems at all.

Do still tariffs impact you at all and in terms of some of your fixed price contracts that you won just in terms of sourcing material or the cost of steel with the steel tariffs.

Well minimal effect so far we've provisions at some of our contracts that allow us to claim for some of those differences very specific clauses that address those things. But it's really here and there and very small so I would say overall no.

And just one last one from myself. How would you quantify the quality of your backlog you know it's gone up it looks like most of the recent contract wins or your fixed price backlog has grown quarter over quarter just in terms of that aspect are you looking to do more reimbursable or it doesn't matter just the opportunities in front of you and then in terms of the quality how competitive was the bidding process or has there been a little bit more rational bidding due to all the demand and as you look at your backlog you're seeing pretty good contract wins there.

Yes, so Derek I'll talked to the first piece of the question in terms of the fixed price cost reimbursable piece and I'll let John talk to the bidding environment. You are right.

As you look at our back backlog breakdown at the end of Q2, with that growth in infrastructure backlog in particular, the amount of fixed price backlog versus cost reimbursable backlog has grown. Typically we'd have been running at close to 50-50 between the two we're now talking more like 60 40, 65 35 between fixed price and cost plus.

The thing to bear in mind there though is that that didn't necessarily reflect our annual revenue split because a lot of the backlog that we just added is backlog that goes out many years and so will get worked off over many years but will be continuing to pick out cost plus work as we go to. So the best way to kind of assets that is if you look at the back of our financial statements there is actually a breakdown of our revenue between cost plus and fixed price and even though the backlog is being split 50/50 historically two third of our revenue comes from cost reimbursable work and a one third from fixed price work and that's when you layer in things like recurring revenue which is running at $700 million a year that's all cost reimbursable work.

So, backlog is a little bit misleading. Just because of the length of the work off on those fixed price contracts.

But our revenue mix we're pretty comfortable with. The majority of the work that we do in a 12 month period is still cost reimbursable.

Now that two thirds, one third revenue split may move a little bit closer to 50/50 but we don't think it really gets out of balance and there will still be that nice split between the two kinds of work.

I see okay thank you.

In terms of the competitive environment this has definitely become a seller's market and if you just take the REM project as the latest big win as an example there were only two bidders on that project, usually we have three and we just have so much more horsepower in terms of our consortium, the local content that we have and then we've significant contactors in addition to SNC and - it was really a sort of very balanced approach. We're able to build in all of the things lessons learned from many other trends and projects we've been involved with and we're very comfortable obviously.

The client got a fair deal but the competitive environment is definitely kinder now than it has been in the past. There is more demand than there is supply.

I was wondering if you could provide additional color on how the Bermuda Airport Project is progressing from both not just from a construction standpoint but also just wondering how the actual operations are performing. I know that the country has made tourism a key priority just wondering if it is translating into traffic growth at the airport.

Thank you.

so both the construction on the concessions side things are progressing very well I think as John referenced earlier. On the construction side completions sited for 2020 which was the date that we have set and we're still well on track for the timeline.

So station is going well and on schedule. In terms of operations at the airport, we're pretty encouraged by the way that's developing.

So total passenger growth this year is up 5.5%, total air capacity is growing at the same time and that's a year over year by about 12% so lots of initiatives underway and getting traction in Barbara to develop tourism and that's all helping as is the strength of U.S. economy I mean one of the big driver for tourism in Bermuda is typically the U.S.

economy and obviously with strength there that's having a positive impact on Bermuda. So, all in all a very encouraging situation so far.

The beauty of the Bermuda project is for the first time on the international concessions we're 100% owner and the things are going well.

I only have one other question for John. John is this as bullish as you've been on Aecon's outlook.

I have never been more bullish on Aecon's outlook than I am today.

I had a question on the Industrial sector because correct me if I'm wrong I think last year EBITDA run rate is 115.6 and I would expect that there is some one-offs on restructuring and so forth so how should we think about the margin profile in 2018 especially as we've some tougher comps on nuclear in Q2.

Yes, so I think overall margin profile year over year should be quarter by quarter should be similar, i.e. Q2 is usually the lowest margin quarter in Industrial, in large part because contract mining is very seasonally soft quarter in Q2.

So that has an impact on the overall average margin for Industrial. The other side of that seasonal slowdown in Q2 we expect industry margins to follow the same overall pattern of last year and to be improving maybe not as significantly as infrastructure but still to be improving over the next six to 12 months based on the backlog we've that right now.

So we feel pretty bullish about both Industrial and infrastructure moving forward from a margin perspective

So on the industry so it's really a nuclear midstream and oilsands mining which is going to be driving the margin expansion in the back of right.

Correct yes, I talked about contract mining being stronger in the second half and that will help from a margin perspective. Nuclear obviously and then obviously pipeline activity as well is good margin work.

So yes, those are three primary.

And then more of - I guess philosophical question on Bermuda. In the past, whenever you had concession assets you try to flip them once construction is completed and the asset or de-risked.

What is your thought process I mean I know early days obvious but in terms of the duration of owning the Bermuda Airport on a going forward basis any initial thoughts there?

So it's John on the Israel Highway a project we sold because we were in a minority position that the project had reached steady state and there really was going to be difficult for us to protect our position comfortably on the long term. In Ecuador there were political risks that think were such that we felt again when it reached steady state it was better to monetize our asset.

Bermuda is very different. It has a very stable political environment.

It is a steadily growing asset. We own 100% of it so there is no partnership issues so this is one that I think given the size of our equity investment and the expected success of the project this could be one we hold on to for the longer term.

No, I guess it means sense specially given the very strong EBITDA generation right John?

Yes.

Just a question; on Jean Louis when he takes over on September 4th obviously he is coming in right after you guys have accomplished a great amount of work building up the backlog. Can you give us any kind of teasers to what we might be able to expect as far as incremental contribution?

In all the interviews that I had with Jean Louis; he always started when he was describing himself the words he used were “I am a builder” and I think that, that is the significant additional strength and depth that he would bring to this organization. The table is set in terms of backlog as you said, that doesn’t mean we won’t be winning more work but certainly significant work ahead.

But he is someone who comes to us with significant international experience on construction projects both Industrial and Infrastructure. And he has done work at levels higher than what we're offering.

So he comes from company that does 16 billion Euros a year, and his share of that was $6 billion, part of that which is doubled will be due today. For all those reasons I think he will add a perspective and a depth of experience that will be value added on the construction side of things.

Yes, and I think when you look at his background with his international experience as you cited, I know you are asked a question before but would you expect to see more international work coming out of his relationships?

There is so much work in Canada today that I don't want to really over-reach all the resources we have to execute with our per mutably now; as I said we would be looking at other opportunities internationally to follow-up on Bermuda that doesn't exclude does in a long term his relationships and his experience will allow us to think more about international but not in the short term

Okay, understood.

Immediate significance Neil of that international experience is obviously he’s pretty broad experience in joint ventures with large international partners and that's the way the market has evolved in Canada today. So he comes in with already having proven his capability around putting together those kind of value add partnerships with large international companies and then executing on those and that fits perfectly with how the Canadian market evolves, so that international experience is hugely relevant in terms of working with our JV partners.

And just on the political side with the federal cabinet we saw new infrastructure minister coming in; Do you think that might change any of your opportunities bring any new work to market faster?

So the new minister of infrastructure was the international trade minister, previously. So we know him from the Bermuda project.

He comes from a construction engineering background. He used work at AMAC and so he will definitely understand.

That probably will help him to move some projects or as I said earlier some for sure through the Canada infrastructure bank, but just generally, he is very positive additional contribution to what the federal government will do?

I do have one question. I think in the last couple of quarters, there were some questions that you were alluding to potential for acquisitions in the future.

I just wanted to see if there is any kind of activity where you feel like you might look at something especially now with the new CEO or Are you leaving that for him to decide? Or where is the thought process right now?

I'm not sure what you're referencing given the last few quarters we've been going through the CCI process and so we haven't really been talking about acquisitions. We were focused on that process.

But on the thought process around that, I think today we have a huge organic growth opportunity ahead of us. We're very focused on that.

So M&A isn't necessarily top of mind right now. And I think obviously Jean Louis will come in and we'll spend some time working with him and paving our path forward, but as John said earlier the focus really is on Canada and what we're doing here.

And to be honest with you, we've - we built the capability to perform across Canada in the way the market has evolved into these larger projects and pretty diverse range of capability and there is not much that we would add to that in the Canadian context. So it's really about maximizing this organic growth opportunity ahead of us.

Thank you, Pamela. I'd just like to thank everybody for joining us today.

And I wish you all a great day. Thank you very much.