Aecon Group Inc. (ARE.TO), a prominent Canadian construction company, has experienced a pivotal year marked by strategic transactions that have enhanced shareholder value and fortified the company's financial position. In 2023, Aecon generated over $0.5 billion from the divestiture of its Transportation East and Skyport businesses and an investment by Oaktree in Aecon's utilities sector. Despite a modest 1% dip in annual revenue to $4.6 billion due to these sales, the company's adjusted EBITDA reached $143 million, and earnings per share were reported at $2.10. The year concluded with a robust $6.2 billion backlog, and Aecon is poised to continue its disciplined capital allocation strategy, focusing on long-term shareholder value and growth in decarbonization, energy transition, and international markets.
Key Takeaways
- Aecon Group had a transformative year, with over $0.5 billion in strategic transaction proceeds.
- Revenue slightly decreased by 1% to $4.6 billion, mainly due to the sale of the Transportation East Business.
- Adjusted EBITDA stood at $143 million, and diluted earnings per share were $2.10.
- The company's year-end backlog was substantial at $6.2 billion.
- Aecon is committed to a disciplined capital allocation and growth in decarbonization and energy transition sectors.
Company Outlook
- Aecon anticipates further revenue growth and improved profitability in future years.
- The company focuses on leveraging self-performed capabilities and expanding in decarbonization, energy transition, and international markets.
- Aecon aims to diversify geographically and sees strong demand in recurring revenue programs.
- Development projects in Ontario, such as the GO Expansion and the Scarborough Subway Extension, are set to move into construction by 2025.
Bearish Highlights
- Revenue experienced a slight decrease due to strategic sales.
- The company is working through issues on the Eggington and Finch projects, particularly with timing.
- Challenges remain with the completion of legacy projects, including arbitration processes.
Bullish Highlights
- Aecon's backlog is robust at $6.2 billion, indicating potential for future revenue.
- 64% of the company's revenue in 2023 was tied to sustainability projects.
- The company is not facing increased competition from international firms in the Canadian market.
Misses
- The slight decrease in revenue is attributed to the sale of key business segments.
Q&A Highlights
- The search for a new CFO is nearing completion.
- Aecon is actively negotiating claims and disputes on legacy projects.
- EBITDA margins are expected to remain stable or improve, excluding legacy project impacts.
- The company is considering acquisitive growth, particularly in the utilities sector in the US.
Aecon Group's strategic moves in 2023 have set the stage for continued growth and diversification. The company's strong backlog and focus on projects that support the energy transition and sustainability demonstrate a forward-looking approach amidst a stable competitive environment. With ongoing negotiations and the settlement of legacy projects, Aecon is positioning itself for a future of profitable expansion, both organically and through potential acquisitions, particularly in the utilities sector. The company's commitment to a disciplined capital allocation strategy and its pursuit of growth opportunities in new markets and sectors suggest confidence in its ability to navigate the challenges ahead and capitalize on the evolving demands of the construction industry.
Full transcript - None (AEGXF) Q4 2023:
Operator: Good day, and thank you for standing by. Welcome to the Aecon Group Fourth Quarter 2023 Earnings Conference call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Adam Borgatti. Please go ahead.
Adam Borgatti: Thank you, Abigail. Good morning, everyone, and thanks for participating in our year-end 2023 results conference call. This is Adam Borgatti speaking, Senior Vice President, Corporate Development and Investor Relations. Joining me today are Jean-Louis Servranckx, President and CEO; and Alistair MacCallum, Senior Vice President, Finance. 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. 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 the expectations reflected in these statements are reasonable, we can give no assurance that these expectations will prove to be correct. I'll touch first on highlights from Aecon's year-end review, and Alistair will then review our consolidated and segment results for the year and address Aecon's financial position. We would normally then turn the call over to Jean-Louis for our operational review and outlook, but unfortunately he's lost most of his voice at this time, so I'll read his prepared remarks and we'll save what voice he has left for your questions following the presentation. On that note, following our comments, we'll be glad to take questions from analysts and ask that analysts keep one question before getting back into the queue to ensure others have a chance to contribute. Now turning to Slide 3. 2023 was a transformational year for Aecon, driven by three strategic transactions, which allowed us to capture unlocked value for shareholders, partner with respected institutions with significant experience to help Aecon grow in alignment with our strategy, and strengthen Aecon's balance sheet and capital position. Through the tremendous efforts of our teams, we were able to realize over $0.5 billion in proceeds through the sale of Aecon Transportation East at 49.9% sale in Skyport and Oaktree’s investment in Aecon utilities, all at attractive and accretive valuations. The transactions strengthened Aecon's capital position, including through the repayment of $184 million in convertible debentures at the end of the year and will provide financial flexibility to capitalize on attractive growth opportunities ahead. Aecon's free cash flow in 2023 of $123 million improved by $258 million compared to a negative $135 million in 2022, and we continue to focus on de-risking our business with 58% of 2023 revenue on a non-fixed price basis, compared to 49% non-fixed price work in 2022. Finally, interim agreements were reached on the four legacy projects with one reaching substantial completion in 2023, two expect to be substantially complete by the end of 2024, and the final one expected to be substantially complete during 2025. The four legacy projects represent 7% of backlog at December 31, 2023, compared to 17% at the end of 2022. We would be the first to acknowledge that despite the progress made to date, risk remains if assumptions, estimates and/or circumstances change. But we and our joint venture partners are focused on project completions, pursuing further recoveries and putting these legacy projects behind us. Every day, we are getting closer to the end. And with that, I'll turn the call over to Alistair.
Alistair MacCallum: Thanks, Adam, and good morning, everyone. Turning to Slide 4. Revenue for the year of 4.6 billion was 52 million or 1% lower compared to 2022. The lower revenue is largely attributable to the sale of Aecon's Transportation East Business in the second quarter of 2023, which generated 51 million of revenue in 2023 compared with 326 million of revenue in 2022. Adjusting for the sale of Aecon’s Transportation East Business revenue increased on a like for like basis by 223 million or 5% in the year. Adjusted EBITDA of 143 million, a margin of 3.1% compared to 219 million a margin of 4.7% last year, and operating profit of 241 million compared to an operating profit of 97 million in 2022. Excluding the impact of the four legacy projects on results in 2023, adjusted EBITDA from the balance of the business was 359 million, a margin of 9.1%. Diluted earnings per share for the year was $2.10 compared to diluted earnings per share of $0.47 in 2022. The improvement in operating profit and diluted earnings per share was largely due to a gain related to the sale of 49.9% interest in the Bermuda International Airport. Concessionaire of 139 million, including a fair value remeasurement gain of 80 million on Aecon, 50.1% retained interest in the concessionaire, a gain of 37 million from the sale of ATE and higher gains on the sale of property, buildings and equipment of 39 million. Reported backlog of 6.2 billion at the end of 2023 compared to backlog of 6.3 billion at the end of 2022. Backlog at the end of 2022 included 391 million from Aecon Transportation Ease Business. New contract awards of 4.5 billion were booked in the year compared to 4.8 billion a year ago. As announced yesterday, Aecon's Board of Directors approved an increase to the quarterly dividend to $0.19 per share from $18.05 per share previously with a next payment to occur on April 3rd, 2024. Now, looking at results by segment, turning to Slide 5, construction revenue of 4.6 billion in 2023 was 48 million or 1% lower than the previous year. The largest decrease in revenue occurred in civil operations driven by lower volume of road building construction work as a result of the sale of ATE discussed earlier and partially offset by a higher volume of major projects work. Revenue was also lower in nuclear operations driven by a lower volume of refurbishment work and in industrial operations driven by a lower volume of work primarily at chemical facilities in Eastern Canada, and partially offset by increased activity on mainline pipeline work. In the utilities operations, lower revenue resulted primarily from a decrease in gas distribution work. Partially offsetting these decreases were higher revenue in urban transportation solutions, primarily from an increase in rail expansion and electrification work in Ontario. New contract awards of 4.4 billion in 2023 compared to 4.7 billion in the previous year. Construction backlog at the end of 2023 of 6.1 billion compared to 6.2 billion at the end of 2022. Turning to Slide 6, adjusted EBITDA of 99 million, a margin of 2.2% compared to 193 million a margin of 4.2% in 2022. The largest driver of the decrease was negative gross profit of 215 million in 2023 from three of the four fixed price legacy projects versus a negative gross profit of 120 million last year for a negative year-over-year impact on operating profit of 95 million. Other than the impact of fixed price legacy projects in 2023, higher operating profit in the balance of construction segment was driven by higher volume and gross profit margin and urban transportation solutions, higher gross profit margin and industrial operations, and higher gains on sales of property, plant and equipment and utilities operations. However, these gains were partially offset by lower operating profit from road building construction work due to the sale of Aecon transportation east business and lower volume and gross profit margin in nuclear operations. At the end of 2023, the remaining backlog to be worked off on the four legacy projects was 420 million, compared to 1.1 billion at the end of 2022. These projects comprise 16% of consolidated revenue in both 2023 and 2022, while comprising 7% of backlog at the end of 2023 compared to 17% at the end of 2022. Turning to Slide 7, concessions revenue for the year was 74 million compared to 76 million in 2022. The decrease in revenue was largely driven by the sale of a 49.9 interest in the Bermuda International Airport concessionaire and the use of equity method of accounting on a prospective basis for Aecon’s retained 50.1% interest in Skyport. In 2023, passenger traffic levels in Bermuda averaged 75% of 2019 pre pandemic traffic compared to 58% in 2022. Adjusted EBITDA in the concession segment of 90 million compared to 71 million in 2022, primarily driven due to improved results from the Bermuda Airport and an increase in management and development fees. As noted previously, operating profit and concessions reflects a gain in the sale in the year of 139 million. Turning to Slide 8, at the end of 2023, Aecon held cash and cash equivalents of 259 million excluding cash in joint operations. In addition, at December 31st, 2023, Aecon had committed revolving credit facilities of 850 million of which 112 million was drawn and 6 million was utilized for letters of credit. On December 29th, 2023, convertible debentures with a face value of 184 million were repaid in cash. Aecon has no debt or working capital credit facility maturities until 2027, except equipment loans and leases in the normal course. Aecon plans to maintain a disciplined capital allocation approach focused on long-term shareholder value through acquisitions and divestitures, organic growth, dividends and capital investments. Capital expenditures in 2024 are expected to be similar to previous years. At this point, I'll turn the back, the call back over to Adam.
Adam Borgatti: Thanks, Alistair. Turning to Slide 9, Aecon continues to build resilience through a balanced and diversified portfolio of work while enhancing critical execution capabilities and project selection to play to our strengths. Moving forward, we remain focused on leveraging our self-performed capabilities and one Aecon approach to maximize value for clients through improved cost certainty and schedule, while offering a broad range of infrastructure services from development, engineering, investment, and construction to longer term operations and maintenance. We will continue to pursue and deliver the majority of our work in our established markets while embracing new opportunities to grow in areas linked to decarbonization and the energy transition as well as in the US and international markets. These opportunities are intended over the long term to diversify Aecon geographic presence, provide further growth opportunities, and deliver more consistent earnings through economic cycles. Turning to Slide 10, demand for Aecon services across Canada continues to be strong with backlog of 6.2 billion at the end of 2023. Recurring revenue programs seeing robust demand and a strong bid pipeline, Aecon believes it is positioned to achieve further revenue growth over the next few years and is focused on achieving improved profitability and margin predictability. Revenue from recurring revenue programs increased to 1.1 billion in 2023 from 896 million in 2022, representing growth of over 27% over last year, and 67% versus two years ago. In addition, development work is ongoing in consortiums in which Aecon is a participant to deliver the go expansion on corridor works project, the Scarborough Subway Extension, Stations Rail and Systems project, and the Darlington New Nuclear project all in Ontario. These projects are being delivered using progressive, design build models and each project is expected to move into the construction phase in 2025. The Go Expansion project also includes an operations and maintenance component over a 23 year term commencing January 1, 2025. As a reminder, none of the anticipated work from these three progressive design build projects is yet reflected in backlog. Turning to Slide 11, Aecon continues to support the energy transition to build and operate sustainable infrastructure, projects such as the United Energy Storage Project, Co-Expansion, the Scarborough Subway Extension, and the Darlington SMR demonstrate the path Aecon is on to embrace the opportunities linked to decarbonisation, sustainability and the energy transition. Revenue tied to sustainability projects represented 64% of 2023 revenue versus 60% in 2022. Turning to Slide 12, and in conclusion, 2023 was a transformational year for Aecon, driven by significant transactions aligned with our strategy and the strengthening of our capital position, all paving the way for growth. We want to thank our employees for their contributions to the achievements this year, and we look forward to the years ahead as we continue to build resilience through a balanced and diversified portfolio of work. 2024 revenue will be impacted by the three strategic transactions completed in 2023, the substantial completion of several large projects in the year, and the three major projects currently in the development phase being delivered under progressive design build models, which are expected to move into the construction phase in 2025. The completion and satisfactory resolution of claims on the four legacy projects with the respective clients remains a critical focus for Aecon and our partners, while the remainder of the business continues to perform as expected, supported by the strong level of backlog and new awards during 2023. And the strong demand environment for Aecon services, including recurring revenue programs. Thank you. And we'll now turn the call over to analysts for questions.
Operator: [Operator Instructions]. Our first question comes from Jacob Bout with CIBC.
Jacob Bout: Question on how are you thinking about revenue growth in 2024? I know there's a number of moving parts with the strategic investments and completion of projects, but can we expect revenue growth to be similar to the year-on-year performance we saw in the fourth quarter? And then, what are your thoughts on the U.S. utilities contribution in 2024 and are you still targeting kind of longer term a 100 million to 200 million revenue?
Jean-Louis Servranckx: I will take this one as much as I can. Sorry for my voice. The revenue in 2024 is about pure math. Taking into account the three transaction of last year, the fact that most of our major lump sum turnkey project are getting completed. The fact that we have decided not to take any more bing lump sum job I had spoken with you about a limit around 1 billion, and the fact that we have embarked in a few progressive design build contract. I mean, this is our strategy, which is totally focused on margin predictability, not on ballooning revenue. It means that we are extremely comfortable with our backlog. You remember that in our 6.2 billion backlog, we don't have the progressive design bill. We are always speaking about three, which is a small modular reactor Scarborough System and Stations, and the GO train expansion, you have seen a few days ago that we have added a fourth one, which is harbor of Contrecoeur in Montreal. So this is our strategy. It's exactly what we wanted. You probably also have noticed that we have gone the way we wanted to go in terms of transiting from fixed price contract to non-fixed price contract. We're representing the non-fixed price contract 49% two years ago, 58% this year. We are targeting for the years to come 65%. We are de-risking our activity. We are focused on margin predictability, not only improving, the revenue per se, this is without taking into account the 1.1 billion of recurring revenue that you have seen in our presentation. So this is what is going to happen in 2024. This being said, most of our progressive design build big job will ramp up during the two last quarter of the year to be ready for work on a much bigger scale from early 2025.
Alistair MacCallum: And I think Jacob, the second part of your question was about U.S. utilities expansion. Yes, still very much on track and very keen to get our strategy in place with our partners at Oaktree. So far it's gone very well. Very like-minded group and great access and experience in exactly what we're looking for. We expect 2024 to be a growth year in that business and leveraging all of the efforts that we've put into date, into success moving forward. I think you had mentioned a number about 200 million though. Was that in reference to the sizes we were looking at?
Jacob Bout: I think you had given out some guidance in the past as far as, which we're targeting and just curious what you're thinking today as far as the US utilities group.
Adam Templeton: About consistent with that, if we were to take on kind of new investments, let's say, kind of low, hundreds of millions, if you will, plus or minus, depending on what we're finding.
Operator: Our next question comes from Yuri Lynk with Canaccord Genuity.
Yuri Lynk: Maybe, I mean, obviously, the balance sheet's as strong as we've ever seen it almost no net debt there. And the underlying EBITDA of the business appears very strong. So how do we think about capital allocation here? And does the arbitration process, that's coming up in the third quarter on CGL, does not knowing how that's going to go play a big role in maybe preventing you from going out and doing a buyback or something like that might benefit shareholders.
Alistair MacCallum: Exactly. I think, you saw a small dividend increase reflective of our improved balance sheet, improved cash position and with the general business improved outlook we still have to complete the legacy projects and we also have the arbitration with CGL later in the year, which Jean we will talk about in a minute. But yes, we want to really get through the two UTSLRT projects and then also get through the CGL arbitration before we make any decisions on really what to do with the cash on the balance sheet, as you know, with regards to an NCIB or something like that. So, we're kind of in a wait and see mode and 2024 will be a bit of a transition year. But as in construction, we need a strong balance sheet, and we're going to maintain that and make sure we' get through this year.
Jean-Louis Servranckx: To add some color. I mean, we are extremely happy with our almost 1 billion of liquidity at the end of the year, 2023. This is what is needed and this will allow us, I mean, a lot of different alternatives in front of the opportunity we can see.
Yuri Lynk: How are your clients adapting to your, this push for progressive design and a more collaborative approach? How has business changed and kind of the discussions around contract structure? You had some great success last year. You won the contract in Montreal. I mean, it appears on the surface that it's being well accepted by the market, but any additional color there?
Jean-Louis Servranckx: Yes, I mean, I consider it is a win-win for clients and for contractors in term of de-risking, in a progressive design bill, you don't have lengthy and proactive negotiation dispute claim. I mean, I just can see the level of collaboration, for example, on the go expansion. It's astonishing the way we can optimize the project working together. So little by little, I would say our clients that have been pushed, I mean to this new mode of contracting, because of lack of competition, are just discovering that it's also de-risking their way of investing. And they are, I would say they are embracing this new way of contracting. As you noticed, I mean, during the first one year and a half, it's a development phase and we don't have the revenue that we could have on other schemes of contracting. But all in all, that's better for us. To conclude, I don't think we have to go toward 100% progressive design bill. I mean, the whole resilience of Aecon is about balance. It's about balance between recurring revenue, between unit price, job between some lump sum job provided. They, I mean the contractual condition, okay. Provided the client is okay, provided the size is okay, and some progressive design bill, and we will navigate balancing each of those contractual modes.
Operator: Our next question comes from Chris Murray with ATB Capital Markets.
Chris Murray: I am kind of looking at Slide 14, which was the normalized earnings profile for the company for last year. I guess what I'm trying to figure out, is that you've taken write downs and adjustments on all the projects so far through ‘23 and also ‘22. But we're getting pretty close to the end here. Can you maybe walk us through in terms of pacing, how, like realistically, or should we just start, keep assuming kind of the run rate that we saw in Q4 in terms of losses until we get past the LRT contracts? But any color you can give us on how to think about what to expect as we go into ‘24 would be helpful.
Jean-Louis Servranckx: Okay. We still have our full legacy project on our shoulders, but the situation is getting better and better. I mean, you have noticed, we have something like 420 million of backlog, which represents 7%. So it's a steep decrease. On this 420 million of backlog, I mean, 60% is about [Indiscernible], which is not the most difficult one. There's something like 90 to 95 on CGL, but most probably we are not going to execute it, because the client has other alternative to finalize a cleanup. So it's remaining rather weak on [Eggington], on Finch. So where are the issues basically, on Eggington and Finch? One of the main issue is not about finalizing the job, it's not about testing and commissioning. We are extremely advanced there. For example, next Friday in a few days, we will have three trains integrating up and down the whole finish line. We just mean that all the signaling and train control systems are perfectly adequate. The issue we are facing is that we are not totally in control of the timing for the operator, which is CTC, to take over the operation. All this I mean as contractual implications. So we are working with our client on that. So it just means that, we are not totally finished. So mainly it has not changed. First of all, we need to finish construction. Second, we need to protect our cash to the moment we are over. And third, we need to finalize all dispute claim and conciliation eventually arbitration as quick as we can and as good as we can.
Chris Murray: I guess my question is, in terms of the magnitude of anything that we should maybe allow for in 2024, I would assume under accounting rules the last adjustment that we saw for Q4 take you to your best estimates. Is that the right way to think about it, or will the other overhead costs or other things that we should allow for?
Alistair MacCallum: Dair point, Chris. I mean, the projects are positioned as we expect them to be completed currently. In the fourth quarter, you would've seen some more impacts on the LRTs, which from Q3 to Q4 reflected some of the changes to scheduling and requirements to complete those. And so when those things come up in the future, we will adjust accordingly. But from what we know currently, the projects are all positioned properly and based on all the interim settlements that we had last year from an operational perspective, we feel much better this year going through to completions. And as Jean have noted more of the potential impacts down the road could come from the ultimate arbitrations and settlements.
Chris Murray: And then the other quick question I had for you is just any update on as much as I'm sure you guys are enjoying doing the call, any update on the CFO search and that process and does that actually impact your, tying your hands a little bit on any sort of capital deployment?
Alistair MacCallum: So the CFO search is, well, on its way, we are exploring internal possibilities and external possibilities. What I can tell you is that I've just discovered during these the two last months, how strong is the team that that had been created by David. We should be over with the search probably within the next few weeks. And this is what is important. I mean, an extremely strong team all focused on closing out our legacy project, all focused on growth for Aecon and being able to tackle the opportunities around this.
Operator: Our next question comes from Ian Gillies with Stifel.
Ian Gillies: With respect to the competitive environment, obviously margins are getting much better. The outlook's much healthier. Are you seeing any increased competition from international firms that may have exited the market previously? Or are you seeing anyone trying to come back into Canada at this juncture?
Jean-Louis Servranckx: If some big international firm wants to reenter Canada on huge lum sum some job, good luck. I mean, we're not going to compete with them on those ones. We know what it means. So I don't think that the competition is really increasing. I mean, Aecon is a partner of choice of most of our clients on most of our projects. It's extremely rare. I would say that we are not pre-qualified on a job. And then after, I mean, we have our priorities. We can decide, I mean, in front of our strategy, in front of our workload, where do we want to go and where we are ready to pass. But Aecon in terms of infrastructure is extremely well positioned. On another hand, I mean, as you have noticed from our slide on page 24, the underlying business without the Legacy project is extremely strong. I mean, I have been interested in looking at the result just by a few of our competitors and peers that seems to be very happy with an EBITDA at the mid-10. I mean, we are extremely strong outside of our legacy project. Our strategy is right. We are focused on it margin predictability and we are going forward.
Ian Gillies: That's helpful. And then moving to the arbitration with respect to CGL and perhaps the other projects, as we think about some of the losses accrued over the last number of years related to those four projects, would that take into account any potential outcomes from arbitration or will that be incremental either to the positive or negative when eventually finalized?
Jean-Louis Servranckx: Okay. I mean, I will begin, and Alice, I may, we have taken position on all our legacy project, depending on the knowledge that we have of the schedule of our future revenue, of our execution cost, there is still work to do. There are still negotiation. I mean, you mentioned the arbitration on CGL. I mean, just remember that it has begun one year and a half ago. It's ongoing. It's going to accelerate in Q3, 2024. But meanwhile, every week we are negotiating with our client. It means that, we are using the two vectors. We are not totally in control of the result of the arbitration. You remember that, it's a panel of three arbitrator, one, chosen bias, one by CGL and the third one chosen by the two arbitrators. We are working, I mean, the best we can with the best team, that we have on it, but there is still a note about it. Alistair, do you want to add something?
Alistair MacCallum: Yes, Ian, I mean, when it comes to our positions on the legacy jobs, we essentially, we take a position on our claims with our partners and based on legal entitlement and the values. And essentially, if there's an outcome that that differs from that, we could either have a write up or a write down. But our positions are based on the best information that we have based on legal experts and so any difference would arise from an outcome that's different from what the JV partners have on the four legacy projects.
Operator: Our next question comes from Sabahat Khan with RBC Capital Markets.
Sabahat Khan: Thanks for providing the call on the CGL. I guess just thinking about the other three projects, can you maybe just talk through what the process or kind of the road ahead there might be on recoveries and how you go about those? Is there going to be eventual arbitrations there, or is will there be a different mechanism?
Alistair MacCallum: At the moment on --, there is no pending claim, no negotiation. I mean, we are just trying to go perfectly within the schedule that has been agreed upon with the client when we had the last deal at the end of 2023, which is the bridge to be closed around mid 2024 and the project to be substantially completed and ended over before the end of 2025 on the LRT -- two LRT jobs, yes, we have claims, we have ongoing negotiation, I would say every day on the substance of those claims. And it'll go -- I mean, probably a little further after substantial completion as I have failed. I mean, we have gathered the best team within our company and externally to put the outcome of the negotiation and or dispute on the best side for us.
Sabahat Khan: And then I guess, the color you provided on sort of pro forma EBITDA margins understanding it's illustrated, but I guess, is that something we should look at as look, is that kind of the long term potential margins? Is there any sort of, should we expect that over a medium term? Any timeline you can share? Just trying to get an idea of how we should be thinking about those margins as we forecast over the next few years.
Alistair MacCallum: Yes, it is consistent with the last year or two as we've provided some of this color in the past. Excluding the four legacies in ‘22, ‘23, and as we look ahead, we've seen this kind of margin consistency and as we remind everybody not to look at any one quarter in isolation, but to look at it on kind of a rolling 12 month basis, we would not see any reason to believe that those wouldn't be at or above the next levels. And as a reminder, these progressive design build ones have very good floor mechanisms that come into backlog next year. And so we feel comfortable with what the numbers you're seeing on proforma these projects.
Alistair MacCallum: What is also important to note is that from September, 2018, I mean, we have not created any new legacy project. I've drastically reduced the size of the sum key. We have a gate zero process that allows us to evaluate the risk of our per suites. I think, we are getting extremely professional and acute on this. And this is what is important. I mean, there will always be project more difficult or project easier, but what is sure is that we'll never ever come back to the situation where we have been, and we are still, I mean, for real time with too many big, too dangerous fixed price job --
Operator: Our next question comes from Michael Kypreos with Desjardins.
Michael Kypreos: Congrats on the strong results. Maybe switching to cash. You received a pretty significant working capital release in the quarter with some strong contribution from deferred revenue. Can you provide some more details on the drivers of this inflow? It's one time nature and your expectations for working capital and free cash flow in 2024?
Alistair MacCallum: Yes. Thanks, Michael. So you're right. We did have a big inflow of cash from working capital in Q4. Part of that came from one of our large settlements, that we've previously talked about a bridge project. And then really the other component that came through deferred revenue was two other large advances for projects that are starting up. So that certainly helped the quarter, and obviously for the year we were, we had positive working capital and really positive cash. So for the first time in a couple years. So, a great result on the cash flow side. Expectations for ‘24 are similar to ‘23 in that we expect to have a good year. I think it'll follow the seasonal patterns that we've seen in previous years. So using cash in Q1 and Q2 and returning cash in Q3 and mostly Q4, that always seems to be our strong quarter from a cash pers cash perspective. And obviously, as per earlier conversations, it's subject to settlements on our legacy projects. The other thing I'd note is our working capital tends to be a bit lumpy, so take that into account.
Operator: Our next question comes from Jonathan Lamers with Laurentian Bank.
Jonathan Lamers: Just taking a look at your slide with your updated mix of business, looking out, say three years or five years as the work in the backlog and the pending backlog converts. And you continue to grow utilities, like how do you see the mix evolving in a few years? Thanks.
Jean-Louis Servranckx: First of all, you probably remember, we have two vectors. I mean, in terms of development. The first one is that we want to be able to master the totality of the value chain in infrastructure. It means developing our project, financing them, engineering or coordinating the engineering building and operating our assets. This is our strategy because this is where is the value, this is where is the money, for example, Bermuda is a pure example of what I'm saying. The second point, the second vector is about balancing our activities and it's balancing between our different sectors. This being said, I see Aecon becoming more and more electrical and probably less about civil works. We were overweighted, I think in civil works, the huge opportunities on the ground are about energy transition. I mean, it's about decarbonizing and upgrading the grid. It's about being able to produce electricity on a clean way. We are extremely strong in nuclear that our utilities, I mean, is a deep sector is working extremely well. We are extremely ambitious on the growth of this utility business. Although we'll do it prudently, but we'll do it steadily. I mean, to grow in the United States with the utility sector. So probably, I mean, in a nutshell, more electric, less civil.
Jonathan Lamers: And just following-up on that, I believe your earlier comments are that you would expect the underlying margin in the construction business, X the legacy project losses to be sustained or potentially improved as you continue to shift that way.
Jean-Louis Servranckx: Yes, we do. We think our strategy is the right one. We like extremely focused on it, and we are also focused every day on closing out our legacy project. As you probably have noticed. I mean, there are still in our backpack. I mean less and less every day, but there's still work to do to be able to consider that. That's over.
Operator: Our next question comes from Michael Tupholme with TD Securities.
Michael Tupholme: Earlier in the call, there was a question about capital allocation, although I think it was fairly specifically focused on the potential for buybacks. And I think Alistair, you suggested that in some regards. This is a bit of a transition year, transformation year, and you want to see how the legacy projects unfold before contemplating buybacks. I'm wondering if you can maybe talk about capital allocation a little more broadly and specifically thinking about acquisition opportunities. One, would it be fair to say that sort of the comments you made about waiting to see how things play out has no bearing on your thoughts around the utilities business in the US and possible acquisitions there? And then secondly, are you still looking at acquisitions in other parts of Aecon being in Canada or elsewhere outside of the utilities area? And if so, how should we think about the potential there?
Alistair MacCallum: Yeah, Mike. So, we are continuing to look at opportunities for utilities both in Canada and in the US. Also, across our businesses, we continue to look for tuck in businesses that we can add to grow the company. So certainly, the growth side of our strategy is a huge focus for us in ‘24. And really when I was talking about the strong balance sheet and preserving that, it was really in regards to the NCIB and just holding tight there until the outcome of the legacy projects is done. But certainly, our focus is on growth. And the strong balance sheet, we want to put that to work in looking at things that will help strengthen our business in the future.
Michael Tupholme: And then in the question you just received a few minutes ago about working capital, I guess you talked about typical seasonality, but there have been a lot of changes in the business over the last 12 to 18 months. I guess when we're thinking about seasonality, and I can't imagine that things have changed dramatically and that Q1 has always been a weaker quarter seasonally, but I'm just wondering if you can comment on any changes that we should be thinking about from a seasonal perspective given all of the evolution that's occurred in the last 12 to 18 months with the various divestitures and whatnot.
Alistair MacCallum: Sure. Yes. I mean, Q1 continues to be our slowest quarter. And again, while we sold our transportation east business, we still have our transportation west business that's impacted by winter conditions. And obviously our utilities business is heavily impacted by winter conditions. So the seasonality has maybe lessened a little bit, but it still exists in the construction business in Canada and we probably never get away from that because even our civil business to agree to a small degree impacts with winter. I don’t know Jean, if there's anything you want to add to that?
Jean-Louis Servranckx: No, I mean, the only business we are doing that is not dependent on Q1, and whether it's nuclear basically. So it depend on the, on the way. We are piloting our activity between Bruce and Darlington.
Operator: [Operator Instructions]. Our next question comes from Maxim (NASDAQ:MXIM) Sytchev with National Bank Financial.
Maxim Sytchev: Jean, I was wondering if you don't mind maybe commenting about what's out there in terms of concessions, when it comes to opportunities, how's the market? What are you guys tracking? Yes, maybe any color there. Thanks.
Jean-Louis Servranckx: Yes, I mean basically the former P3 big infrastructure market in Canada is decreasing a lot. There have not been, I mean this kind of schema have not come to the market for the last two to three years. So we are chasing in the energy transition. You probably remember our ADA deal. There are a few other deals that we are looking at about concession. We are also looking at airport, mainly international. We have been just pre-qualified for concession. I mean in Turks and Caicos, which is quite a similar job than the one we did in Bermuda. We have just put our preliminary offer for also kind of DBFOM in U.S. Virgin Island, two airports. So we are very active also on this front. The market is changing, but I think between the energy transition and the airport, which is a little our sweet spot, we are able to find, I mean, new ways of growing with our concession business.
Maxim Sytchev: Okay. And I guess like in terms of the competition, some of the bigger guys would not be, I presume, as interested in some of these smaller assets. Is that the right way to think about it?
Jean-Louis Servranckx: Yes, exactly. I mean, we don't want to go when it's too small. We don't want to go when it's too big. I mean, I'm not going to go to JFK or something like this, but I think we have our sweet spot where the comp -- we can perfectly manage the competition because we have our own competitive advantage for sure.
Maxim Sytchev: And then just one clarification because when I look at floor's results and their references to gory, how I think they had a true up on their EBITDA in Q4, so did you guys have a reversal in working capital or also in EBITDA in your results?
Alistair MacCallum: No, it is interesting. We watched that as well, I guess about a week or so ago. Well, we can't really comment on partners and competitors accounting position policies. We did have a pickup in the quarter based on the -- settlement that we announced basically in Q2 and Q3 and recall, we had provisioned -- downwards in Q2 and Q3 last year. And so our Q4 position reflected all of those adjustments already. So there were no impacts to us in the quarter from that on EBITDA or through the P&L. As also referenced earlier, some of the working capital unwind was from that settlement along with the other projects. So while it was cash positive from the outcome and we think we're now on the path to completion, there were no other impacts flowing through the P&L such as what we saw with --
Maxim Sytchev: I guess, the negative impact from legacy contracts, it's all that LRT related right?
Alistair MacCallum: This quarter, correct. The two LRTs.
Operator: Our next question comes from Sean Jack with Raymond James.
Sean Jack: Just a quick question. Looking at the slide from the newest investor deck on Aecon utilities and just thinking about potential revenue growth for next year, see that you guys did a 13% CAGR over the last five years, is that attainable for 2024? And if you don't mind kind of talking about some of the puts and takes that might go into that would look for next year. We saw a little bit of compression in the last quarter or so of last year in 2023, just as some of the major utilities and telco and gas and others had capital that occurred a little bit to the right. So, that work was all still there and we expect that to pick back up in 2024. So I think from the four main areas that we focus on, we still got pretty good tailwinds in all of them. Electricity transmission, distribution from all of the elements we've talked to so far and the energy transition, the grid hardening, storm response, all those sorts of areas. Telecommunications still quite steady as I said. Some pull back in the fourth quarter, but we expect that to increase again in next year. We've got renewables in home services and other driving good growth and gas as well. So I think across all areas we still see some pretty reasonable outcomes organically and that also includes expansion of our programs in the US. We started from a smaller scale last year growing into a few telco and TD opportunities. And then of course, as we talk to the real key to the strategy or the catalyst would be acquisitive growth along the way. So organically, I'd say what you've seen on a CAGR basis is quite achievable and maybe more and from an M&A or inorganic perspective that could catalyze further.
Operator: That concludes the question and answer session at this time. I would like to turn the call back to Adam for closing remarks.
Adam Borgatti: Great. Thanks very much and thank you all for your attendance and participation today. As always, feel free to reach out to us at any time with further follow up questions. We wish you a great rest of the day, and we'll chat to you next quarter. Take care.
Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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