Aecon Group Inc.

Thank you, Christina. Good morning, everyone, and thanks for participating in our year-end 2018 results conference call.

This is Adam Borgatti speaking. Presenting to you this morning are Jean-Louis Servranckx, President and CEO; and David Smales, Executive Vice President and CFO.

John Beck, Aecon's Executive Chairman is also with us in the room for a subsequent Q&A session. Our earnings announcement was released yesterday evening, and we have posted a slide presentation on the Investing section of our Web site, which we will refer to during this call.

Following our comments, we will be glad to take your questions. As noted on slide two of the presentation, listeners are reminded that the information we are sharing with you today includes forward-looking statements.

These statements are based on assumptions that are subject to significant risks and uncertainties. Although Aecon believes that the expectations reflected in these statements are reasonable, we can give no assurance that these expectations will prove to be correct.

With that, I will now turn the call over to David Smales.

Thank you, Adam, and good morning everyone. I'll touch briefly on Aecon's consolidated results and then review results by segment before turning the call over to Jean-Louis.

Turning to key highlights on slide three of the presentation, Aecon's 2018 results saw revenue, adjusted EBITDA, and backlog reach record levels. As announced yesterday, Aecon's Board of Directors approved an increase to the quarterly dividend on the basis of continued financial strength and positive outlook.

The quarterly dividend will increase to $14.05 from $12.05 previously, with the first increased quarterly dividend to be paid in early April. Turning to slide four, record annual revenue for the year of $3.3 billion was $461 million or 16% higher compared to 2017, with increases across each of Aecon's three segments.

Record annual adjusted EBITDA of $207 million, and a margin of 6.3%, grew significantly compared to $156.5 million and a margin of 5.6% last year. Slide five outlines adjustments for one-time items in the first-half of 2018.

No such adjustments were noted in the third and fourth quarters. On a pro forma basis, reflecting these adjustments, 2018 adjusted EBITDA would have been $213.4 million, with a margin of 6.5%.

Likewise, operating profit of $89.4 million, net profit of $59 million, and diluted earnings per share of $0.94, all showed considerable growth compared to 2017 on the back of higher volume and improved overall margins. Reported backlog, as of December 31, 2018, of $6.8 billion, was 61% higher than backlog of $4.2 billion as of the same time last year, and represents the highest year in backlog in Aecon's history.

Driving this strong growth in backlog were record new contract awards of $5.8 billion booked in 2018, compared to $2.8 billion in 2017. Now, turning to results by segment, as noted on slide six, Infrastructure revenue of $1.3 billion in 2018 was $358 million or 37% higher than 2017.

This increase in infrastructure revenue is broken down further, on slide seven, and was driven by increased activity in both the transportation and major project sectors, and geographically in both Eastern and Western Canada, reflecting the balanced growth in backlog achieved during the year. Adjusted EBITDA in the Infrastructure segment, of $56 million, a margin of 4.2%, was up by $15.8 million compared to $40.2 million, a margin of 4.2% in the same period last year, driven by the growth in revenue.

New contract awards in Infrastructure of $3.8 billion in 2018 were $2.5 billion higher compared to 2017, and included the Site C generating station, the Montreal REM, Finch West LRT, and the Gordie Howe International Bridge. This resulted in infrastructure backlog of $4.5 billion at the end of 2018, $2.5 billion higher than at the end of 2017.

Turning to slide eight, in the Industrial segment, revenue of $1.9 billion in 2018 was $63 million or 3% higher than in 2017. Again, this reflects growth in both Eastern and Western Canada, and was driven by utilities, power, and mining work, largely offset by lower volume in nuclear.

Adjusted EBITDA in Industrial of $112.3 million, a margin of 5.9%, was $1.8 million lower than the prior year of $114.1 million, a margin of 6.2%, with lower profit from Contract Mining prior to its sale in November being the primary factor. New contract awards in the Industrial segment, of $1.9 billion in 2018, were $383 million higher compared to 2017, resulting in year-end backlog of $2.3 billion, compared to $2.2 billion at the end of 2017.

Turning to slide nine, in the Concessions segment, increased activity at the Bermuda Airport project was the primary reason for growth in both revenue and adjusted EBITDA in 2018. Higher management and development fees, including from the commencement of new concessions in the year, also contributed to higher EBITDA.

At this point, I'll turn the call over to Jean-Louis.

Thank you, David. Turning to slide 10, as David mentioned earlier, record revenue in 2018 was generated across our segments, and Aecon's business continues to benefit from our diversification across geographies and core capabilities.

Turning to slide 11, Aecon ended 2018 with record year-end backlog of $6.8 billion. Of note, backlog to be worked off in the next 12 months, of $2 billion, increased 34% over last year, and approximately 70% of this backlog is for work of beyond the next 12 months, providing significant visibility and stability to Aecon's long-term outlook.

This is especially so when combined with Aecon's annual recurring revenue, which grew by 4% over last year, driven primarily by utilities work intercommunications, gas, and hydro distribution, as well as operations at the Bermuda Airport. We remain focused on strong execution of our backlog, while ensuring we continue to build capacity and flexibility for further growth.

Referencing slide 12 and 13, the company's balance sheet, financial capacity, and cash generation remain key advantages for Aecon in its ability to grow and take advantage of the significant level of expected infrastructure investments by Canadian federal, provincial and municipal governments in coming years, including public-private partnerships as well as select international projects. Our financial strength and flexibility were further enhanced by the completion of the sale of our Contract Mining business, in November 2018, as well as the successful convertible debenture refinancing completed in the fourth quarter.

Turning to our outlook on slide 14, bidding activity in the Infrastructure segment is expected to continue to be solid in 2019, although new awards are not likely to match the record level of 2018. With strong backlog in hand, the focus has shifted to the ramp up and execution of this project in this sector.

In the Industrial segment, Aecon expected steady demand for nuclear refurbishment, utilities, pipelines, and conventional industrial work in 2019, while the sale of the Contract Mining business will have an offsetting impact on revenue in 2019. Aecon's capabilities in Utilities continues to be a strength that should lead to growth from the increased demand for utility services, pipelines, and power work over the long-term, although timing of pipeline work remains susceptible to delays given the political and regulatory environment for major pipeline development in Canada.

While oil and commodity prices are improving, they have not reached a level to support a pickup in significant new oil and mining construction projects. As a result, it is expected that 2019 conventional industrial fabrication and field work revenue will be similar to 2018.

The Concessions group continues to successfully develop and operate the Bermuda Airport, as well as overseeing the development of the growing portfolio of domestic concessions. They also continue to partner with Aecon's other segments to focus on the significant number of P3 and private finance opportunities in Canada, and on a selling basis internationally.

The overall outlook for 2019 remains solid, as our current strong backlog, robust pipeline of future opportunities, and ongoing concessions are expected to lead to improved margins. Thank you.

And we will now turn the call over to analysts for questions.

And over to you to lead the questions.

Hey, good morning, guys.

Good morning, Yuri.

Good morning.

Morning. Just a quick one off the top, curious if you can let me know how much the success fees in the Concessions segment might have boosted EBITDA in the quarter.

So, when we closed there in the quarter it's a combination of a number of things, but it's primarily a lot of this is now ongoing management fees. Obviously, once you've been awarded the concession there's kind of two phases.

The first fast is the concessioner is managing the construction process and receiving an ongoing management fee as part of that service, as well as the financing and everything that goes around that concession, so those are ongoing. And then at the time of award or shortly afterwards there's some recovery of bid costs, but this is really just reflecting a recovery of costs already incurred.

So, it's not material in the quarter, but it's just a reflection of the growing portfolio of domestic concessions that we have now.

Okay. So we shouldn't be making any, other than the normal seasonality exhibited in that segment -- good run rate?

Yes, that's right. I mean, yes, other than the seasonality that's right, yes.

Okay. Infrastructure segment, I got to admit, I was a little disappointed with the margin performance in the quarter.

And then flat for the year versus '17. So, what happened in the quarter, firstly, and secondly, why do you think you can improve those margins after being flat for two years.

Okay. What has happened is mainly due to a mix issue.

It means that we were a little over-weighted in small works, more affected by seasonality and high competition. As I have already told you, I mean we need a few of them to train our young coordinators or your young field engineering, and very important to this.

On another hand, I mean those small jobs are of small duration, it means that the one on which we experience some difficulties in 2018 will not be there anymore in 2019. Second point, I mean we are just moving now with 2019 toward preparatory works of Gordie Howe, works on Gardiner [ph], and probably a couple of decent-sized projects that are at the moment under study.

It means that those medium jobs of a few hundred million are also very important, and they have a better profile in terms of margin. Third point, I mean what do we do for the future.

I mean, we are extremely careful about our big projects, the ones that we have been gaining during the last months. And especially as one example, we have just created a new sector, which name is Urban Transportation System, where we are going to larger [ph], for example, the REM in Montreal, Finch, and Crosslinx in Eglinton.

We just feel those projects are special. We want to be the first-in-class in terms of execution of these projects, and we are getting ready to be there.

So this is our answer to your question, Yuri.

Okay. I will get back in the queue.

Thanks guys.

Yes, thank you very much, and good morning everyone. If we look at Industrial and we remove mining contract, what should we expect going forward in terms of revenue growth and margin expansion for Industrial?

So with Industrial, and I think Jean-Louis touched on this a little bit in his comments, we expect the utilities side to continue to show good growth potential. Nuclear should be fairly consistent year-over-year.

And the industrial conventional side should be fairly consistent year-over-year as well. Any growth that we see in that segment from those three areas overall will be offset by the fact we don't have the Contract Mining business, so net-net Industrial, we don't expect a significant change in the revenue profile in 2019, although there should be underlying growth if you take mining out of that equation.

From a margin perspective, obviously the EBITDA margin level at Contract Mining was one of the higher margin businesses, so that will have some impact in 2019 for sure. But at the operating profit margin, and I think we've put the numbers in the deck that you can see, it wasn't having much of a positive impact at all.

So the operating profit margin level will actually be positive overall, and we expect to see progress on that front in 2019.

Okay, perfect. And specifically for Infrastructure, could you give an update on how those contracts are going with REM, Gordie Howe, if it's tracking inline with expectations in terms of costs and in terms of margins?

Okay. As those big jobs are perfectly online at the moment, I remind you that most of them just begin with almost one year of detailed engineering, so this is where we are, and some preparative works.

But so far on none of those big jobs we have experienced during the first year problems during the beginning of the execution.

Okay, perfect. And with respect to telecommunication, do you see any opportunities for Aecon given the difficulties experienced by one of your competitor?

I mean utilities be an area where we've been performing well. We've been growing that business, whether that's because one particular competitors has had challenges or not it is hard to say, but I think we've always been seen as very reliable and trustworthy partner in the telecommunications sector, and I said earlier, I expect our industrial side to see some growth from utilities in '19.

How the impact of anybody struggling plays out in terms of how that work gets allocated, if it does, remains to be seen. But even without that we see good growth in that sector.

Thank you very much for the time.

Yes, good morning. Can you comment at all on the IFRS 16 impact for 2019?

Yes, overall we don't expect it to be a particularly material impact. Obviously the requirements of IFRS 16 will lead to some leases that were previously treated as operating leases to be capitalized, which as the impact of kind of increasing depreciation decreasing some of the SG&A expense, kind of rental pipe expense.

But I think in terms of overall impact, you're talking single figures in terms of EBITDA impact, obviously no operating profit impact or very little. And then from a margin perspective, I mean it's really just rounding, it's not expected to have any significant impact.

Okay, thank you for that. And then the revised Enbridge guidance on L3, how does that impact you the first-half of the year?

I mean it doesn't really, Jacob. I mean our work on Line 3 is pretty much complete.

I think the challenges then they have in terms of delay relate to south of the border, which is work that we're not involved, and so, no impact on our business.

Maybe just lastly here just to go back to margin. So the comments on higher 2019 EBITDA margin, with the concession being a higher percentage EBITDA I mean that mix is going to help us as well I am assuming.

Well, I mean to be honest with you in 2019 -- in 2018 obviously saw a big pick up in overall concession EBITDA. The landscape shouldn't change that dramatically for concessions in 2019.

I mean [indiscernible] is now well-established in terms of operations. We brought a lot of new concessions in 2018.

And they will continue through '19. Depends if we pick up new ones and we will be bidding new ones, but outside of that, concessions won't be a game changer in 2019.

It will be fairly consistent.

Thank you very much.

Yes, good morning. Thank you for taking my questions.

Just with regards to working capital, should we expect it to start reversing here in 2019, or is it more of a 2020 type of event?

So overall, 2018 was impacted by the start up on a number of these new large projects where you get fairly significant inflow of cash upfront to fund construction. Now there are further inflows to come as we draw down on that cash and reach milestones.

So those JVs can cause that working capital number to bounce around a little bit. And we kind of think of the JV cash number for example as part of the overall the overall working capital mix until it comes out of the JV into our own bank accounts.

I think if you are looking at working capital outside of that JV cash, then, yes, I think it will start to draw down a little bit as we start to work through construction on some of these project. But outside of that JV impact, I think working capital will be fairly flat year-over-year from our kind of core business.

Okay, thank you. And just moving on to some of your priorities you listed, one of them being employee retention and development.

Are you seeing any sort of cost escalations there, or do you feel it's still fairly manageable under the context of the current environment?

Okay, we just feel that it's manageable up to now. I mean all the projects we are on have been staffed accordingly to the plan.

And we don't see that much of problem in the months to come. I'll just remind you that those jobs mainly are very long job.

You have noticed that more than 70% of our backlog just begins after end of the year 2019. On other hand, we are on those jobs mostly under JV, joint venture, agreements with all the partners so that we can share the load.

And you have also noticed that we have always a very long preparation time before to really enter, I would say, in the whole [ph] work. It means that we have a lot of time to get ready.

So I am not worried about this capacity problem at the moment so far.

Okay, that's great. And then just, finally, on the development team, is this a new team that you are putting together and to pursue U.S.

opportunities? And just I know it's probably early in the process but just thinking of how you would enter the U.S., do you feel at this point it would more of a M&A type strategy, or would you try to do it organically?

Okay, just to come back to our priority I mean our focus is about executing our backlog. It is my focus number one and the one of my leadership team.

The second one is to get more selectivity on new pursuits in Canada. This is what we are working on.

And then about any new opportunity, I mean, the focus is to have a cleaner liquid balance sheet to be able to size any opportunities that fits with our strategy. So U.S.

is for us an important long-term opportunity. But there is no rush.

It means that we are alert, we are working from our teams and we are getting helped when it is necessary. No rush.

We have a look at it.

Okay. Thank you for the color.

I'll turn it over.

Thanks. Good morning.

You've talked about the nuclear outlook for 2019, it sounds like sort of roughly flattish performance in '19, but can you talk about the growth potential as we look beyond '19 in nuclear?

Yes, I mean 2019 will be rather flat because we are not beginning Bruce power reactor refurbishment before the beginning of the year 2020. We are at the moment in preparatory works.

So this is a reason that we do not expect growth in revenue in 2019. From 2020 onwards, we will have at the same moment work in refurbishment in Darlington and in Bruce.

This will lead to growth in revenue and activity. This will lead us up to 2025 more or less with our backlog.

But we are already thinking about other activities like dismantling like small modular reactor some maintenance job, so this is where we are at the moment.

Okay, that's helpful. Thank you.

And then with respect to LNG Canada, is that an opportunity that could come to fruition for Aecon over the over the relatively near-term?

Okay. LNG Canada is a very big project we have already secured a pipeline job on LNG Canada and that we are also preparatory works of it.

Regarding the plant in itself I mean they are at the moment focused on the preparation work camp installation soil stabilization, it means that this is where we are not because this has to be dedicated to very local companies. One it's come back to more industrial activity, so we will seriously have a look at it and if we can find good opportunities, we'll go for that.

Okay, thank you. David, in terms of corporate costs for 2019, how should we think about those relative to the level in '18?

Very consistent, I mean, I think we are still in the first part of the year, if you will often relate to the sale process and but outside of that, not being there in 2019, and you're in a little bit of an increase of seeing some of that it would be fairly flat year-over-year, like there's no big change.

Okay, thank you. And then just a clarification on your comments about IFRS 16 and the potential impact on EBITDA, when you talk about the single digits, are you talking about dollars of EBITDA or percentage of change?

The top dollars, so from a dollar perspective again no change in the operating profit level but very little change in the operating profit level. There's some interest in tax implications as well but they're relatively minor at EBITDA level, it's some shifting between depreciation rental expense but when I said single digits, I mean dollars and then from a percentage EBITDA margin percentage perspective it is -- my comment was it's really ramping, it's not material level.

Right, and…

At the first slight positive impact but slow.

Okay. And can you give any guidance around the value of the lease liability that we should expect to see when you start reporting under IFRS 16 in the first quarter?

Some disclosure in the financial statements Mike I recall the numbers are on top of my head but the disclosures are again from a balance sheet perspective very much immaterial. I think we are talking around $40 million of additional assets.

It would be on the balance sheet as a result of FY '16. I caveat that by saying -- same thing we say in the financial statements that that's not finalized yet, and obviously I wish to working through the final details of that, but it will be that kind of order of magnitude.

Okay, that's helpful. Thank you very much.

Hi, good morning.

Good morning.

Good morning, Max.

I just had a clarification question in terms of concessions. So David, when you were talking about consistent EBITDA in 2019 versus 2018, were you talking about the margin or the absolute EBITDA generation?

I was talking about the business generally. So I was talking about absolute dollars.

Absolute dollars, okay, and then in terms of -- okay, so year-on-year absolute dollars 2019 versus '18, right? As right now we have kind of reached the new level.

I mean obviously with Bermuda being where it is, but the other concessions at a more sort of steady state, right?

Yes.

Do you mind maybe commenting if it's possible on opportunities outside of the midstream and nuclear on industrial side, were you guys seeing any irons in the fire? Or, is it still pretty slow?

I don't think we have ever said it's slow. So you are talking about infrastructure?

No, no, no, on the industrial.

Okay, industrial. Sorry, yes, yes.

Yes, yes, yes.

So -- yes, sorry. I think from the perspective of opportunities, we said there is not a lot of action in the oil and mining space.

But there are certainly plenty of power projects. There is a big nova facility, petrochemicals as always industrial process plants, so some type on nature, but we are saying it's fairly flat year-over-year in terms of what that looks like for that business.

Jean-Louis, anything to add?

Yes, regarding a conventional industrial what is important to note is that, yes, we see the market will be probably a little flat. We understand that all our main clients are extremely demanding on our reliability.

So we have to keep a capacity to fabricate ourselves and we use the year 2018 to rationalize our workshop. So we just consider now that we are perfectly fit with market size.

Okay. Okay, very helpful.

Thank you very much. That's it from me.

Yes, I was just curious if there was any update with respect to the recent -- the dispute with Cape [indiscernible], is there any update on that front?

No update, Benoit. It's in a process and it will play out over an extended period of time, but there is no update.

Okay, thanks again.

You are welcome.

So thanks everybody for joining us this morning. Obviously, if there are follow-up question, we are happy to take those offline and hope everyone has a great day.

Thanks for joining us.

Bye.