Aecon Group Inc.

Thank you, Julie-Ann. Good morning everyone, and thanks for participating in our third quarter 2019 results conference call.

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

Our earnings announcement was released yesterday evening and we have posted a slide presentation on the Investing section of our website, which we will refer to during this call. Following our comments we will be glad to take questions from analysts.

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 will now turn the call over to David.

Thank you, Adam, and good morning everyone. Before addressing our quarterly results, last night, Aecon announced receipt of regulatory approval from the Toronto Stock Exchange to make a Normal Course Issuer Bid or NCIB commencing November 5, 2019.

Under the NCIB, Aecon will be able to purchase for cancellation up to a maximum of approximately 6 million common shares on the open market, representing approximately 10% of Aecon's public float. We believe that the repurchase of common shares at certain market prices is beneficial to Aecon and its shareholders, and intend to make any purchases on an opportunistic basis, taking share price and other considerations at the time into account.

I'll now touch briefly on Aecon's consolidated results and then review results by segment, before turning the call over to Jean-Louis. Turning to Slide 3; revenue for the three months ended September 30, 2019 of CAD1 billion was CAD6 million or 1% higher compared to the same period in 2018.

On a like-for-like basis, excluding the contract mining business sold in November 2018, revenue was 7% higher in the quarter. Slide 4 outlines the impact on results of the sale of the contract mining business.

Adjusted EBITDA for the third quarter of CAD91.1 million, and margin of 8.9%, increased by 2% compared to adjusted EBITDA of CAD89.5 million, and margin of 8.8% for the same period last year. Adjusted EBITDA on a like-for-like basis increased by 11% in the quarter.

Third quarter operating profit of CAD58.8 million increased by 5% compared to the prior period of CAD56.2 million, and diluted earnings per share of CAD0.60 was unchanged compared to the third quarter of 2018. Reported backlog at the end of the quarter was CAD6.6 billion, compared to backlog of CAD7 billion a year earlier.

Now turning to results by segment; as noted on Slide 5, Construction revenue of CAD1 billion in the third quarter was CAD7 million or 1% higher than the same period last year. This increase was driven by higher revenue in civil operations and urban transportation systems in both Eastern and Western Canada.

Revenue was also higher from nuclear operations related to refurbishment work in Ontario. These increases were partially offset by lower revenue in the conventional industrial sector, following the sale of the contract mining business in November last year, and in the utility sector from reduced mainline pipeline volume.

Adjusted EBITDA in the Construction segment of CAD73.1 million and margin of 7.3%, decreased by CAD3.4 million compared to CAD76.5 million, a margin of 7.7% in 2018. This was due to the sale of the contract mining business, which contributed adjusted EBITDA of CAD7.3 million in the third quarter of 2018.

New contract awards is CAD798 million in the third quarter, or significantly lower than the same period last year, as two large projects, the Gordie Howe International Bridge and Section 1 of the Gardiner Expressway rehabilitation were awarded in the third quarter of 2018. Construction backlog at the end of September was CAD6.5 billion, which is CAD475 million lower than the same time last year.

Turning to Slide 6; Concessions revenue for the third quarter was CAD62 million, a decrease of CAD9 million or 13% compared to the same period last year, primarily as a result of lower construction activity related to the new airport terminal in Bermuda. Adjusted EBITDA in the Concessions segment of CAD25.2 million was up by CAD2.2 million compared to CAD23 million in the same period last year.

The increase was primarily due to a higher contribution from management and development fees in the quarter related to Canadian Concessions. At this point, I'll turn the call over to Jean-Louis.CAD

Thank you, David. Turning now to Slide 7, Aecon's diverse and resilient business model is well positioned to deliver continued strong and stable results.

The Construction segment is aligned to the significant infrastructure investment commitments by all levels of government across Canada, as well as by the private sector. The Concessions segment is actively pursuing a number of large scale infrastructure projects, that require private finance solutions, and participating of the concessionaire on the five P3 projects identified on the slide.

Turning now to Slide 8, as David mentioned earlier, backlog at the end of the quarter was CAD6.6 billion. Backlog to be worked off in the next 12 months of CAD2.5 billion, increased CAD444 million over last year, and over 60% of backlog is for work of beyond the next 12 months, providing significant visibility and stability to Aecon's longer term outlook.

Trailing 12 months recurring revenue was up 3% on a like-for-like basis over last year, reflecting the significant ongoing revenue from recurring work and the long-term agreements and concession agreements. We remain very focused on the strong execution of our backlog, while ensuring we continue to build capacity and flexibility for further growth.

Referencing now to Slide 9 and 10, Aecon's balance sheet and financial capacity remain key advantages in our ability to grow in the coming years, both in Canada and on select international projects. Turning now to Slide 11, our overall outlook for 2019 remains solid, as our current strong backlog, robust pipeline of future opportunities and ongoing Concessions are expected to lead to improve the like-for-like results compared to 2018.

Aecon expects to have another strong year of results in 2020, as construction continues on a number of previously awarded projects that have ramped up during the year 2019. In the Construction segment, bidding activity continues to be solid with many of the company's larger pursuits expected to be awarded in 2020.

We have strong and diverse backlog in hand, Aecon is focused on continuing to pursue a balanced portfolio of work, and on ensuring solid execution on all of our projects. Our disciplined bidding approach supports an expectation of continued like-for-like margin improvement in this segment.

The Concessions segment continues to partner with Aecon's Construction segment, to focus on the significant number of P3 opportunities in Canada, and on a selected basis internationally, as well as preparations for a smooth transition from the existing to the new terminal in Bermuda in 2020. Thank you.

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

Maybe for David. Can - good quarter by the way, but obviously a big investment in working cap.

Can you just comment on the increase in your DSOs and your days of WIP outstanding in the context of how your projects are progressing and how you feel your execution is so far?

Yes. So, I mean, obviously, we see a seasonal build in working capital through Q2 and Q3, and we had obviously significant volume in Q3 this year.

Last year, that seasonality was masked a little bit by the fact we had the award of a number of projects in that Q3 phase, where we got big advance payments that kind of offset the normal seasonality. So, it's what we typically see.

I would say this year, just from a pure timing perspective, we had some significant amounts come in right after the quarter end. And so if you would normally expect to see in Q4, with a bit of a reversal in working capital.

We think that trend obviously continues this year and probably a little bit more than in previous four quarters, because just because of the timing between the end of Q3 and early Q4. So, nothing other than kind of a normal seasonality with a few timing issues right at the end of the quarter.

And for '19 as a whole, do you think that that reversal can get - would we get back to breakeven on working cap, or should we expect an investment this year?

I think overall, it will be a small investment. I mean, overall, I think the way we're trending on revenue for the full year and on a trailing 12 months basis, is obviously growth in revenue overall.

And so that will be a factor. And the nature of some of the ins and outs on the milestones on these big projects can swing it kind of quarter-to-quarter.

So certainly by the time we hit the end of Q1, it will have fully reversed. By the end of Q4, I still think it would be a slight investment on a full year basis.

And secondly, can you just give us some more color on what we should expect for CapEx in 2020? You mentioned in the outlook section, plans to build an asphalt plant in Western Canada.

Is that part of the Yellowline JV and what's that going to cost? Thanks.

No, it's not part of Yellowline. The reference to the asphalt plant is for 2019, in terms of an uptick in CapEx in '19 versus '18, so that won't go into 2020.

For 2020 we expect CapEx to be lower than 2019. 2019 will probably be - if you look at history, assuming an elevated level of CapEx and it returned back to kind of more normal levels in 2020.

So I think 2020 will be somewhat similar to '18, with '19 being a bit of an outlier.

David, I was wondering or Jean-Louis, if you could talk a little bit, you talk about the international opportunities. I was wondering if you was - if you were referring more for a Construction or Concession.

And as the Bermuda construction activities are winding down, I was wondering if there is any color you could provide, related to the timing to bring another concession opportunity, and if there is any color about the timing on that? Thanks.

We are looking for both, opportunities in the Concessions sector and the Construction sector. Evidently replicating project like Quito Airport or Bermuda Airport would be quite an interesting fit for the company.

We have a small development team working on this. It's a problem of opportunity and when we find the good opportunities, I mean we are able to focus on it on them and to go forward.

And with respect to the NCIB, I was just curious to have your thoughts or reason behind the launch. I assume that it was valuation driven.

Is there kind of - what you can provide in terms of color with respect - if we should expect Aecon to be active, with respect to your NCIB?

Yes, I mean I think, it will depend on how things play out over the next 12 months. I think the thought process is that, despite a fairly consistent track record over the last little while and good execution, the share price has seen a little bit of a disconnect in terms of industry issues elsewhere.

And so, we just want the flexibility to be able to use any opportunities to capitalize on that disconnect. I guess.

So we'll see how things play out. We've got no set minimums or maximums in mind.

We'll just play, as we see over the course of the next 12 months.

And Jean, for the international opportunities on the construction front, would it be fair to say it's more U.S.-focused rather than a global basis?

It can be both. Obviously, we are looking at U.S.

As I've always said in the previous call, I mean prudently, U.S. is a major market, which will probably go through an acquisition.

We are contemplating, I mean, every month various opportunities, and if we find a good opportunity, we will be ready to face it. And on the global international, I mean it's more about Caribbean or maybe South America, in terms of construction, on selected topics where we are performing well at home.

That's great color. And last question for me, when we look at the pricing or the contract, now that there are some players that are exiting the lump sum project, I was wondering if you could talk about the overall pricing environment, whether we should expect a more favorable pricing environment, given - it seems that the risk will shift differently than it used to be in the past.

And also, I've seen that Ontario launches a new procurement model with Union Station RFQ. I was wondering if there are any implication for you guys in terms of what you're seeing in terms of a shift yet?

Yes. We are extremely disciplined and you've probably noticed it on our pursuits and on the way, we price our bids.

The issue is not to be polemic, as you - as you have just said, I mean there is a lot of opportunities. And we just have to carefully select and focus on our targeted opportunities that fit best with our capacity and this is very important.

So the fact that some players have little shifted back from infrastructure projects, just makes the competitive situation a little better, but competition is still exciting.

Maybe just to build on Benoit's question with respect to Ontario. Obviously, the sector has experienced a bit of a low this year in terms of new procurement.

Are you seeing any changes heading into 2020?

We see that there is a lot of project coming. It was just the time for the new government of the province and to - as usually, make an audit of what was on the table, and then to assess and then to define their own priorities.

I mean there had been a conference two months ago, with an extremely important program of infrastructure in Ontario, mainly mass transit, but also, we could see some roads and bridge jobs. So I'm not that much worried.

It's about electoral cycles. Ontario, I mean is active.

Growth of the population is strong, and we just think that all this led to a good pipeline for infrastructure projects where we are.

And maybe moving to a national scale. Obviously, Aecon has operated through various forms of government over its long history, what do you make of the next couple of years in terms of opportunities in a minority level government?

Can you repeat the question, please?

Yes. I mean, you obviously have worked through various forms of government over your 50 years of history.

Just wondering, what you kind of make of the opportunities going forward in a minority level government? Do you expect priorities towards infrastructure spending to shift materially, or is it business as usual from your perspective?

I would say business as usual. I mean in Aecon, we don't make politics, we are builders.

And the main driver is about the growth of the population. This population needs a mass transit, and needs motorways, need water treatment plant, need power supplies, and also, you have micro-cycle depending on political cycles.

At the end of the day, we just see that the opportunities are there, because the needs are there, and the politicians are all there to serve the citizens of this country. So we are not that much worried with a minority government.

So, another strong quarter here. If we think about the fourth quarter, it's going to be similar to what we saw over the past couple of quarters or should we be thinking about a kind of a flattish type quarter after backing your contract mining?

If we compare your...

Yes. Hi, Jacob.

So obviously, we will see the normal seasonality. I think, when we talked a quarter ago, we talked in a context of the second half of the year, and our view of the second half relative to the second half of last year.

I would say that view hasn't really changed. We said that in the second half of the year, last year is a tough comp.

Still the case going into Q4 and last year, we had a bit of a pick up on the Concessions side too, which we would normally expect to see seasonally softer in Q4, because there is less traffic through Bermuda and it's not the high - the tourism season. But that was up more than offset in the Concessions segment in Q4 last year by some one-time development and success fees related to the new projects, we've been awarded.

So outside of that Concessions noise, yes, I mean a similar Q4 this year to last year, last year being a good quarter.

And then your thoughts on margin expansion going into 2020, how should we be thinking about that as some of these newer projects are ramping?

So it's true that most of the projects we've been awarded in 2018, are finalizing their engineering phase. So - and also some of the early work, so we are now ramping up for construction.

As you know, early construction is done on the open air. So there is seasonality about winter, but definitely, 2020, we will see most of our major project award in 2018 beginning a strong phase of execution.

Yes.

And what are you targeting right now for margins?

We don't give EBITDA margin targets, Jacob. So our consistent message is being, we expect to see margins steadily over time improve, based on the nature of backlog and the environment we're bidding in right now and the types of projects we're pursuing.

But we don't put specific margin guidance out to the market.

I guess turning back to the Concessions segment for a bit. So just a few moving parts here, David, I think and thanks for calling out Q4, maybe, you've had some one-time items in there.

But how do we think about - I guess two pieces to this, the EBITDA generation from the business, I expect the revenue will drop next year, just because you've finished the construction in Bermuda. But how do we think about this segment going forward?

And then the second part of this question, and you look at one of the Concessions now, now that you're moving into that operation side. As you go forward and go through 2020 into the next decade, what are your thoughts around asset recycling?

So basically, selling the concessions that you've got up matured as you move on to other new concessions?

Yes, so, to the first piece of that question, if you look at our Concessions segment, overall, we have a few ins and outs over the next little while. We have some of the Canadian concessions coming on stream over the next couple of years, and we have Bermuda from an operations perspective, relatively stable, it's moving from an existing terminal to a new terminal, some upside potential in terms of earnings from that operation, which will grow over time.

But nothing dramatic in 2020 when we switch terminals. So overall, you're right, revenue will come down a little bit, as construction winds down, but the construction margin is all in the Construction segment.

The impact of that on earnings in Concessions is relatively small. And so, overall, concessions will be a fairly stable business over the next couple of years from an earnings perspective certainly an EBITDA perspective.

But growing modestly until the Canadian concessions really kick in, but that's still few years away. We are still heavily into the construction cycle on those.

So no dramatic changes in the Concessions profile from an earnings perspective over the next kind of 12 to 24 months.

And then the concept of starting to think about recycling some of these assets once they are mature?

Yes, I mean, I think we've taken the approach, certainly with Bermuda that we will look at that value proposition over time. We certainly don't feel any pressure to divest our interest in Bermuda.

We think that's an attractive long-term opportunity, that we will potentially want to stay involved in. We have the option to sell a piece, potentially.

We are 100% of that operation today, but that will be purely value-driven and we'll kind of look at that as we go - as we go forward. But obviously, our focus right now is on finishing construction, gearing operations ramped up to the new terminal.

And I wouldn't expect anything imminent in Bermuda. As far as the Canadian ones, again no pressure to do anything with those.

We will get them built and up and running from an operations perspective, and we'll see in the future, how things look. But at this point, our mindset is, we are long term operators of these assets to the extent that there is no more interesting opportunity out there.

And then just one other question. So, I think last quarter you talked about the fact that you were expecting to start construction of the TMX pipeline.

Just any update you can give us on that? And then certainly, there has been some commentary from the new federal government that they want to get a built, and it feels like they want to get it built right away.

So I guess two parts of that. So first of all the update.

But second, if possible, can you accelerate your activity on that project, if needed?

Well, as stated by the Prime Minister, you're right. I mean this government is committed is to execute this pipeline.

I remind you that we have been awarded three spreads. We have just kicked off of the spread number one in Alberta, it's about installation and early works.

We are on it at the moment. And in terms of acceleration, I mean, we did depend on the notice to proceed from the owner and, but we are perfectly ready.

We have the capacity to do it, in addition to the job we have already been awarded on coastal pipeline. So we are ready to do it and that's good, because it's one of our core competencies, where we have just proven we can be extremely efficient.

Jean-Louis, maybe a question for you. As you talk about contemplating the strategy around the U.S.

expansion. Given some of the very difficult execution issues that - like a lot of peers faced in the U.S., how do you think about due diligence, risk assessment on anything that you guys are kind of looking at right now, potentially?

So, maybe the first part of the question about U.S. expansion.

As I've always said - it's a major market, so it's good to have a look at it through an acquisition. We are at the moment contemplating every month, some opportunities, which are rather small.

And we have a team totally dedicated to due diligence, thorough examination of the accounts, of the activities, of the backlog, of the relation with the clients, with the trade unions. So yes, it's important for us.

There is no rush, as I've always said. It's a problem of opportunity and as I said at the beginning of this call, we are not going to be polemic.

It means that we just want to be extremely serious and focused on new awards or new acquisitions.

And then David, if I may, given the fact that - as I think Jean-Louis talking about the staging of the major projects that for one, in 2018 are really going to be ramping up in 2020 from a construction revenue generation perspective. So should we expect a pick-up in terms of revenue generation year-on-year in 2020 versus '19, or can you help us out a little bit there?

On construction sector?

No, I think, I think it's fair to say, we expect to see revenue growth in 2020 on the back of just the - I mean if you look at that backlog position today in the next 12 months’ worth of backlog versus that same position 12 months ago, it has gone up significantly. So that feeds the revenue for 2020.

And so, yes, I mean it's fair to say we expect to see solid growth in 2020.

Just related somewhat to that last question, you've talked about bidding activity continuing to be pretty solid, and the prospect of some awards coming through in 2020 based on the bidding opportunities that you're pursuing right now. Do you see that possibly leading to a step function change in backlog, similar to what you saw in '18, assuming you win your fair share of awards?

Or is this going to be more of a situation whereby it's simply going to be kind of replenishing the backlog that you work off?

So the first point, as you probably recall from the last call, I have always said that we are comfortable with the backlog between CAD6 billion and CAD7 billion, and with an amount of around 60% to be executed after 12 months. This is exactly where we are today.

So I am paying a lot of attention on developing a diverse and balanced backlog. We have small projects and just remind you that for example, little more than 500 projects executed by Aecon are inferior to CAD15 million in total revenue.

We have medium projects, and we have big projects. We have construction projects and concession projects.

We work in the Civil, we work in urban transportation, we work in industrial. I also want to be balanced in industrial between nuclear utilities, conventional, industrial.

We also need to be balanced between West and East Canada. And this all this makes Aecon stronger and I pay a lot of attention about the talk.

There should not be a different shift in our backlog. We are looking at this diversity and this balance.

And this is exactly what has happened during the last month, I mean 2018 has been quite a strong year in terms of big awards. And as you have seen, I mean we haven't taken that much of big awards during the last 14 months.

I mean it was only the Highway 401, for a total amount of CAD600 million and we still have a CAD6.6 billion backlog, although we have executed something like CAD3.3 billion of activity during the last 12 months. So we are perfectly in line with our strategy of discipline and focusing on what we think we do better than the other competitors on this market.

And maybe just a follow on from that Jean-Louis. When you talk about the balance that you referred to, be it in terms of geographic regions or across different project types, do you feel like your backlog is - has a balance that you'd like to have right now, or are you pursuing a shift in any particular way?

I have to say I'm very much satisfied with - at the same time, the diversity of the backlog - it is the focus of this backlog on our core competency and the balancing. I mean, in terms of activity, if you just come back to Slide 7, I mean it's remarkably balanced and this is good, and this is what makes Aecon stronger.

And then just one additional question. I think in the past you've been asked about prospective opportunities to be involved in some capacity in the LNG Canada project as that construction moves along.

Is there anything that you could possibly say about, whether we're getting closer to the point where there may be an opportunity or if anything has evolved on that front?

On LNG Canada, we are already working on coastal pipeline, which is part of this major project. We are waiting for a second run of bidding activities on these jobs.

It may come, I mean our industrial - I would say conventional industrial activity for years to come, may come from LNG Canada, but may come also for other clients and other location in terms of new plants to be built in Canada.

This is Kyle on behalf of Derek. We know there was some direct - the direct costs were up a little bit year-over-year, despite similar activity levels, and we are hoping you could provide a bit of color on what's driving that?

Sorry, I missed it. Did you say, indirect or direct costs?

Direct costs.

Yes, it's just, I mean a function of the mix of revenue, really. I mean obviously at the end of the day, what we're focused on is, is the margin profile and overall, when you take care, when you look at margins even with the impact of mining, but particularly when you take the impact of mining out, margins have continued to look strong, and so the mix of work can drive some variability.

But overall, we're pretty happy with the margin performance of the business. There's nothing particularly unusual in that number that I would call out.

And with respect to the NCIB, how should we be thinking about potential share repurchases as part of your broader capital allocation strategy moving forward?

Well, I think as I said earlier, the idea here is that we certainly feel there has been some disconnect in the last little while between the way the business is performing and is positioned and has a - how the stock prices have played out with bigger market or infrastructure overlay. So, it's really a question of being opportunistic, but with an eye to have been able to create shareholder value when the opportunity arises and as I said earlier, there is no particular overriding goal that we have to spend a certain amount, or we have to achieve a certain outcome.

It really is going to be driven by how things play out between now and the next 12 months. But we - as you can see, we've got lots of financial flexibility, and if the disconnect continues and we think we're undervalued, then we want to be able to take advantage of that for the benefit of shareholders, and we think that's the right thing to do.

And with respect to the concession assets, was the Bermuda Airport impacted at all by Hurricane Dorian in the quarter?

Yes. I think Humberto was the big hurricane that hit Bermuda in September.

So that did have an impact on a number of flights that were canceled in September. I think the number is something like 20 to 22 flights were canceled through that period of time.

So that did have a little bit of an impact on the Q3 results. But as you can see, the results were still pretty strong in the Concessions segment, and didn't have a material overall impact.

Maybe I can add something in terms of Construction. We experienced through this hurricane, winds around 125 miles per hour.

All our construction has been calibrated on a little more than 170 miles per hour. The response of all the building has been remarkable through this hurricane, and we are extremely happy about it.

Very good. Well, thank you all for joining us.

And once again, if you have any follow-up questions, feel free to reach out at any time and have a great rest of the day and into the weekend.