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Aecon reports third quarter 2023 results

Press Release

Toronto, Ontario – October 25, 2023: Aecon Group Inc. (TSX: ARE) (“Aecon” or the “Company”) today reported results for the third quarter of 2023.

“With backlog of $6.2 billion and recurring revenue programs continuing to see robust demand, we believe we are well positioned to achieve further revenue growth over the next few years,” said Jean-Louis Servranckx, President and Chief Executive Officer, Aecon Group Inc. “We continue to pursue and reach settlements with our respective clients as we make progress to close out four challenging legacy projects that are undermining positive revenue and profitability trends in the balance of Aecon’s business. We remain focused on projects and opportunities procured and delivered under more collaborative models that support long-term margin improvement and predictability and that are linked to decarbonization, sustainability, and the energy transition.”

HIGHLIGHTS

All quarterly and YTD financial information contained in this news release is unaudited.

  • Revenue for the three months ended September 30, 2023 of $1,240 million was $81 million, or 6%, lower compared to the same period in 2022, primarily due to the impact of the sale of Aecon Transportation East (“ATE”) in the second quarter of 2023. ATE contributed revenue of $126 million for the three months ended September 30, 2022. Adjusting for the sale of ATE, revenue increased on a like-for-like basis by $46 million, or 4%, in the quarter.
  • Adjusted EBITDA(1)(2) of $32.0 million for the three months ended September 30, 2023 (Adjusted EBITDA margin(3) of 2.6%) compared to Adjusted EBITDA of $92.6 million (Adjusted EBITDA margin of 7.0%) in the same period in 2022 and operating profit of $140.1 million compared to operating profit of $61.0 million in the same period in 2022.
  • Net profit of $133.4 million (diluted earnings per share of $1.63) for the three months ended September 30, 2023 compared to a net profit of $34.5 million (diluted earnings per share of $0.45) during the same period in 2022.
  • Four large fixed price legacy projects being performed by joint ventures in which Aecon is a participant (see Section 5 “Recent Developments”, Section 10.2 “Contingencies” and Section 13 “Risk Factors” of the Company’s September 30, 2023 Management’s Discussion and Analysis (“MD&A”), are being negatively impacted due to additional costs for which the joint ventures assert that the owners are contractually responsible, including for, among other things, unforeseeable site conditions, third party delays, impacts of COVID-19, supply chain disruptions, and inflation related to labour and materials. Aecon recognized an operating loss of $91.1 million in the third quarter of 2023 (operating loss of $30.1 million in the same period of 2022) from these four legacy projects. At September 30, 2023, the remaining backlog to be worked off on these projects was $528 million.
  • Reported backlog at September 30, 2023 of $6,202 million compared to backlog of $6,275 million at September 30, 2022. New contract awards of $591 million were booked in the third quarter of 2023 compared to $991 million during the same period in 2022.
  • On September 20, 2023, Aecon announced the closing of the previously disclosed agreement with Connor, Clark & Lunn Infrastructure (“CC&L Infrastructure”) to sell a 49.9% interest in the L.F. Wade International Airport (Bermuda International Airport) concessionaire, Bermuda Skyport Corporation Limited (“Skyport”). The final sale price was $162.3 million (US$120.0 million) in cash following certain closing adjustments. Aecon recorded a gain on sale of $139.0 million, including a fair value remeasurement gain of $80.4 million related to Aecon’s 50.1% retained interest in the third quarter.
  • Aecon announced that it has achieved Silver Certification in Progressive Aboriginal Relations from the Canadian Council for Aboriginal Business. Aecon was one of the four companies recognized at the silver level. As a silver-certified company, Aecon has demonstrated its Indigenous business plan through its established Indigenous business partnerships, active contributions of Indigenous Peoples across its workplace, and investments in communities and people to support a sustainable future.
  • Subsequent to quarter end, on October 23, 2023 Aecon announced a strategic investment by Oaktree Capital Management, L.P. (“Oaktree”) in an Aecon subsidiary, Aecon Utilities Group Inc. (“Aecon Utilities”), creating an enhanced growth vehicle focused on providing utility infrastructure services across North America. The investment subsequently closed on October 24, 2023. Oaktree acquired a 27.5% ownership interest by way of a net $150 million convertible preferred equity investment (the “Investment”) in Aecon Utilities and based on an enterprise value for Aecon Utilities of $750 million. The Investment creates a vehicle to address attractive industry growth opportunities across utility end-markets in Canada and the U.S., provides financial flexibility to accelerate Aecon Utilities’ acquisition strategy, introduces a recognized value-added partner in Oaktree with a successful track record in utilities infrastructure investing, and strengthens Aecon’s consolidated balance sheet, providing Aecon the financial flexibility to fund strategic growth initiatives.

CONSOLIDATED FINANCIAL HIGHLIGHTS(1)

Three months ended Nine months ended
$ millions (except per share amounts) September 30 September 30
2023 2022 2023 2022
Revenue $ 1,239.6 $ 1,320.5 $ 3,513.7 $ 3,429.7
Gross profit 45.7 118.6 157.7 257.3
Marketing, general and administrative expense (28.7) (42.5) (126.0) (148.3)
Income from projects accounted for using the equity method 5.2 5.0 13.3 11.8
Other income 138.2 3.6 220.9 6.0
Depreciation and amortization (20.3) (23.8) (64.4) (70.2)
Operating profit 140.1 61.0 201.3 56.5
Finance income 2.3 0.6 5.5 0.9
Finance cost (16.6) (15.1) (49.6) (40.1)
Profit before income taxes 125.8 46.5 157.2 17.2
Income tax (expense) recovery 7.6 (12.0) (5.0) (6.5)
Profit $ 133.4 $ 34.5 $ 152.2 $ 10.7
Gross profit margin(4) 3.7% 9.0% 4.5% 7.5%
MG&A as a percent of revenue(4) 2.3% 3.2% 3.6% 4.3%
Adjusted EBITDA(2) $ 32.0 $ 92.6 $ 73.2 $ 151.7
Adjusted EBITDA margin(3) 2.6% 7.0% 2.1% 4.4%
Operating margin(4) 11.3% 4.6% 5.7% 1.6%
Earnings per share – basic $ 2.16 $ 0.57 $ 2.47 $ 0.18
Earnings per share – diluted $ 1.63 $ 0.45 $ 1.94 $ 0.16
Backlog (at end of period) $ 6,202 $ 6,275

(1) This press release presents certain non-GAAP and supplementary financial measures, as well as non-GAAP ratios to assist readers in understanding the Company’s performance (GAAP refers to Canadian Generally Accepted Accounting Principles). Further details on these measures and ratios are included in the “Non-GAAP and Supplementary Financial Measures” section of this press release.

(2) This is a non-GAAP financial measure. Refer to the “Non-GAAP and Supplementary Financial Measures” section of this press release for more information on each non-GAAP financial measure.

(3) This is a non-GAAP ratio. Refer to the “Non-GAAP and Supplementary Financial Measures” section of this press release for more information on each non-GAAP ratio.

(4) This is a supplementary financial measure. Refer to the “Non-GAAP and Supplementary Financial Measures” section of this press release for more information on each supplementary financial measure.

Revenue for the three months ended September 30, 2023 of $1,240 million was $81 million, or 6%, lower compared to the third quarter of 2022. In the Construction segment, lower revenue of $83 million was driven by decreases in civil ($106 million) due to the sale of ATE during the second quarter of 2023, nuclear ($11 million), and utilities ($2 million), partially offset by higher revenue in industrial operations ($30 million) and urban transportation solutions ($6 million). In the Concessions segment, higher revenue of $4 million for the three months ended September 30, 2023 was primarily due to the increase in commercial flight operations at the Bermuda International Airport. Intersegment revenue eliminations increased by $2 million due to higher revenue between the Construction and Concessions segments.

Operating profit of $140.1 million for the three months ended September 30, 2023 increased by $79.1 million compared to an operating profit of $61.0 million in the same period in 2022. The improvement in quarter-over-quarter operating profit was largely due to an increase in other income of $134.6 million compared to the same period in 2022. This increase was primarily due to a gain related to the sale of a 49.9% interest in the Bermuda International Airport concessionaire of $139.0 million, including a fair value remeasurement gain of $80.4 million on Aecon’s 50.1% retained interest in the concessionaire, partially offset by a $1.5 million reduction in the gain on sale of ATE after certain closing adjustments, lower gains on the sale of equipment ($1.5 million), and a decrease in foreign exchange gains ($1.5 million).

The above increase in operating profit from an increase in other income was partially offset by lower gross profit in the third quarter of 2023 of $72.9 million. In the Construction segment, gross profit decreased by $75.7 million largely as a result of negative gross profit related to four fixed price legacy projects in the quarter of $91.1 million, arising from two of the four projects, one of which was in urban transportation solutions and the other in the civil sector, compared to negative gross profit on the fixed price legacy projects of $30.2 million in the third quarter of 2022. These four fixed price legacy projects are discussed in Section 5 “Recent Developments” and Section 10.2 “Contingencies” in the September 30, 2023 MD&A, and Section 13 “Risk Factors” in the 2022 Annual MD&A. Other than the impact of these fixed price legacy projects in the quarter, lower gross profit in the balance of the Construction segment was largely due to lower gross profit in civil operations primarily due to the sale of ATE in the second quarter of 2023. In the Concessions segment, gross profit increased by $2.7 million, primarily from an improvement in results from airport operations at the Bermuda International Airport.

Marketing, general and administrative expense (“MG&A”) for the three months ended September 30, 2023 decreased by $13.8 million compared to the same period in 2022. Lower MG&A in the third quarter of 2023 was primarily due to lower personnel costs and from a decrease due to the sale of ATE in the second quarter of 2023. MG&A as a percentage of revenue for the third quarter decreased from 3.2% in 2022 to 2.3% in 2023.

Reported backlog at September 30, 2023 of $6,202 million compares to backlog of $6,275 million at September 30, 2022. New contract awards of $591 million were booked in the third quarter compared to $991 million in the same periods in 2022.

REPORTING SEGMENTS

Aecon reports its financial performance on the basis of two segments: Construction and Concessions, which are described in the Company’s September 30, 2023 MD&A.

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