Aecon Group, Inc. (OTCPK:AEGXF) Q3 2022 Earnings Conference Call October 27, 2022 10:00 AM ET
Company Participants
Adam Borgatti – SVP, CD&IR
Jean-Louis Servranckx – President, CEO
David Smales – EVP, CFO
Conference Call Participants
Yuri Lynk – Canaccord
Jacob Bout – CIBC
Frederic Bastien – Raymond James
Chris Murray – ATB Capital Markets
Michael Tupholme – TD Securities
Benoit Poirier – Desjardins Securities
Naji Baydoun – iA Capital Markets
Maxim Sytcheve – National Bank Financial
Ian Gillies – Stifel
Operator
Good morning. Thank you for attending today’s Q3 2022 Aecon Group, Incorporated Earnings Call. My name is Elliot and I will be your moderator for today’s call. [Operator Instructions]
It is now my pleasure to pass the conference over to our host, Adam Borgatti, Senior Vice President of Corporate Development and Investor Relations. Mr. Borgatti, please proceed.
Adam Borgatti
Thank you, Elliot. Good morning, everyone, and thanks for participating in our third quarter 2022 results conference call. This is Adam Borgatti speaking and 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 posted a slide presentation on the Investing section of our website, which we’ll refer to during this call. Following our comments, we’ll be glad to take questions from analysts and we ask that analysts keep to one question before getting back into the queue to ensure others have a chance to contribute.
As noted on Slide 2 of the presentation, listeners are reminded that the information we’re 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.
And with that, I’ll now turn the call over to Dave.
David Smales
Thank you, Adam, and good morning, everyone. I’ll touch briefly on Aecon’s consolidated results, review results by segment and then address Aecon’s financial position before turning the call over to Jean-Louis.
Turning to Slide 3. Revenue for the third quarter of $1.3 billion was $157 million or 14% higher, compared to last year. Adjusted EBITDA of $93 million, a margin of 7% was $3 million lower, compared to reported adjusted EBITDA in Q3 last year.
However, adjusting for the impact of the Canada Emergency Wage Subsidy or CEWS program of $7 million included in the third quarter 2021, adjusted EBITDA this quarter increased by $5 million or 5%, compared to last year.
Diluted earnings per share of $0.45 in the quarter compared to diluted earnings per share in the same period last year of $0.56 or $0.48 after adjusting for the impact of CEWS. Reported backlog of $6.3 billion increased by $232 million, compared to $6 billion a year ago. The new awards continue to be strong at $991 million in the quarter and $4.8 billion over the last 12 months.
Now looking at results by segment, turning to Slide 4, construction revenue of $1.3 billion in the quarter was $156 million or 14% higher than the same period last year. Revenue was higher in civil operations driven by an increase in both major projects and road building work in utilities operations due to an increase in telecommunications and electrical transmission work and in nuclear operations, driven by a higher volume of refurbishment work in Ontario.
Partially offsetting these increases was lower revenue in industrial operations driven primarily by decreased activity on mainline pipeline work in Western Canada and in urban transportation solutions from a decrease in LRT work in Ontario.
Adjusted EBITDA in the Construction segment of $82 million, a margin of 6.3%, compared to $82 million, a margin of 7.2% in Q3 last year. After adjusting for the net impact of CEWS in the third quarter last year, adjusted EBITDA increased by $7 million, driven by an increase in gross profit due to increased revenue, as well as lower MG&A costs, partially offset by lower gross profit margin, primarily from pipeline activity in industrial operations.
New contract awards of $966 million in the third quarter, compared to $657 million in the same period in 2021 and new awards of $4.7 billion over the last 12 months, compared to $3.3 billion in the prior twelve months period. Backlog at the end of the quarter of $6.2 billion was $214 million higher than backlog at the same time last year.
Turning to Slide 5 concessions revenue for the third quarter was $22 million, unchanged compared to the same period last year. Commercial flight operations in Bermuda continue to operate at reduced volume due to COVID-19, but are recovering from the more severe impacts experienced in 2020 and 2021 and averaged 63% in Q3 compared to pre-pandemic levels. Adjusted EBITDA in the Concessions segment of $21 million was broadly in line with the same period last year.
Turning to Slide 6, at the end of the second quarter, Aecon had a committed revolving credit facility of $600 million, of which $210 million was drawn and $3 million utilized for letters of credit, as well as the $900 million facility provided by EDC to support letters of credit.
Aecon’s committed facilities for both working capital and letter of credit requirements totaled $1.5 billion. Aecon has no debt or credit facility maturities until the end of 2023, except equipment and property loans and leases in the normal course. As of September 30th, Aecon was in compliance with all debt covenants related to its credit facility.
At this point, I’ll turn the call over to Jean-Louis.
Jean-Louis Servranckx
Thank you, Dave. I would like to take a moment to address the four large fixed-price legacy projects laid out in our Q3 disclosure documents. As a reminder, those four projects entered into in 2018 or earlier by joint ventures, of which Aecon is a participant are being negatively impacted due to additional costs for which the joint venture assert that the owners are contractually responsible, including, among other things and foreseeable site conditions, third-party delays, COVID-19, supply chain disruptions and inflation related to labor and materials.
Aecon and our partners continue to work vigorously towards resolution of compensation for those impacts with the respective owners of those projects. And we are fully focused on pursuing all avenues for adequate and timely compensation with the objective to reach fair and reasonable settlement agreements and to move forward towards project completion in each case.
As I noted on our last quarterly call, our industry has been working hard to develop a model that properly addresses the challenges and needs of all stakeholders. The multi-billion dollar Go Expansion and electrification project in Ontario, awarded to an Aecon joint venture under a progressive design build, operate and maintain contract model is a welcome evolution designed to benefit all stakeholders and the first phase of the two year joint development phase is advancing quite well.
Turning to Slide 8, demand for Aecon services across Canada continues to be strong, particularly in smaller and medium-sized projects, as evidenced by year-to-date revenue growth of 19% and higher new project awards of 42%. While volatile global and Canadian economic conditions are impacting inflation, interest rates and overall supply chain efficiency, these factors have largely been and will continue to be reflected in the pricing and commercial terms of Aecon’s recent and prospective project awards and bids.
Turning to Slide 9, with backlog of $6.3 billion and recurring revenue programs continuing to see robust demand, driven by the utility sector and ongoing recovery in airport traffic in Bermuda, Aecon is confident in strong revenue growth over the next few years.
The fixed price share of backlog at September 30, 2022 was 58% versus 68% fixed price share at the same time last year. As a reminder, the GO rail expansion on corridor works project is not yet reflected in backlog.
Aecon is also prequalified on a number of project bids due to be awarded during the next twelve months and have a strong pipeline of opportunities to further add to backlog over time.
Trailing twelve months recurring revenue was up 18% versus the prior period and up 65% versus two years ago, primarily from growth in utilities operations. Recurring revenue is expected to continue to grow and driven by demand in the utility sectors and the Concessions segment is expected to see airport traffic in Bermuda continue its recovery in the balance of 2022 and in 2023.
The fixed price share of trailing 12-month total revenue was 51%, versus 59% fixed price share in the prior period, demonstrating ongoing progress in balancing our activities.
Turning to Slide 10, Aecon released its inaugural reconciliation action plan, reaffirming its commitment to think meaningful ways to engage in reconciliation by working in unison with indigenous people.
Support our GHG strategy, Aecon’s sustainability solutions were established as a collaborative business model to provide a single point of entry to Aecon’s diverse capabilities as we advise and work with clients enriching their sustainability and energy transition goal. And to engage our employees in our sustainability journey, we continue to grow our Green Home Energy business through a residential solar pilot program for Aecon employees in select markets, further demonstrating the importance of sustainability at Aecon.
Turning to Slide 11, with strong demand, growing recurring revenue programs, and diverse backlog in hand, Aecon is focused on ensuring solid execution on its projects and selectively adding to backlog through a disciplined bidding approach that supports long-term margin improvement in the Construction segment.
In the Concessions segment, in addition to expecting a gradual recovery in travel through the Bermuda Airport during the balance of 2022 and through 2023, there are a number of opportunities to add to the existing portfolio of Canadian and international concessions in the next 12 to 24 months including in innovative projects with private sector clients that support a collective focus on sustainability and the transition to a net zero economy.
Thank you. We will now turn the call over to analysts for questions.
Question-And-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Yuri Lynk from Canaccord. Your line is open.
Yuri Lynk
Good morning, gentlemen.
David Smales
Good morning.
Yuri Lynk
Morning. Wondering how you would characterize – how you feel in your position on the four contracts compared to a few months ago? Do you feel more comfortable in the position? It seems like a lot of inflation pressures have kind of – it looks like they’ve topped out starting to, so perhaps come the other way. I think labor availability has been better. So just broadly, how do you feel, and can you give us an update on when these are going to complete?
Jean-Louis Servranckx
Hey, it’s Louis. Nothing is really changing on those four legacy projects from our Q2 disclosure. So there is a clear entitlement on those four projects regarding the modifications in the condition of execution of our contracts. We have allocated to those projects, extremely professional teams. I mean, internally and externally, we are vigorously pursuing fair and reasonable compensation.
The works are proceeding forward and this is where we are at the moment. As you have seen, I mean, the rest of Aecon activity, which is more than 80% of the backlog is very robust, balanced and resilient.
Yuri Lynk
And an update on the timing of each of the four projects and when they might complete?
David Smales
So, it kind of varies by project. But essentially, one of them should be complete kind of by the middle of next year, one by the end of next year, another one into early 2024 and another one out to 2025.
Yuri Lynk
Okay. That’s helpful. I’ll turn it over there. Thanks.
Operator
Our next question comes from Jacob Bout from CIBC. Your line is open.
Jacob Bout
Good morning. Given the increasing likelihood of a recession in 2023, maybe just comment on changes that you’re seeing in customer behavior, whether it’s reworking of existing projects or kind of re-scope or – and then maybe talk about any project cancellations?
Jean-Louis Servranckx
Yes. Jacob, as I told, I mean, during last quarter, I’ve not heard any of our clients pronouncing the word recession. In terms of infrastructure, I mean, the two drivers are demography and financial capacity. Canada of them I mean, Canada is about more than 0.5 million newcomers every year and the newcomers need infrastructure they need new roads, new bridges and new transportation modes, clear water, energy, and this is all what is Aecon about.
In addition, the financial capacity in here, I mean Canada is a rich country in terms of energy, in terms of crop, I mean in terms of potash, in terms of rare metal. So there is no recession and nobody is talking about recession in the infrastructure segment at the moment. So we have not seen really anything abnormal in the pipeline of projects and we have not seen any cancellation of project except the Deerfoot, design/build, finance and maintain one that will be immediately retender and a different contracting mode.
Jacob Bout
And how about any delays or potential delays in projects as the project is re-scoped due to higher cost due to inflation?
Jean-Louis Servranckx
It’s not really the case. I mean, the inflation and even the hyperinflation, the disturbances on the supply chain are just stabilizing in front of what we could see, I mean, during the last ten months. It means that we have been negotiating with our clients when it was necessary eventual expansion of time. But for the rest, all our works are progressing well and in accordance with the contracted schedule.
Jacob Bout
Thank you. I leave it there.
Operator
Our next question comes from Frederic Bastien from Raymond James. Your line is open.
Frederic Bastien
Good morning, gentlemen. I was – I wanted to have better color on the contract that you announced in the U.S. for the Savannah sorry – Savannah nuclear plant and the decommissioning, how it came about and whether there is opportunities for you to do more work in the U.S. on the nuclear side, because that’s quite encouraging?
Jean-Louis Servranckx
Yes, Frederic. It’s quite encouraging. It’s Savannah River plant. We acquired a contract of around $100 million about dismantling of a nuclear building and provisional ventilation of the same building. It’s very important for a few reasons. I mean the first one you remember that we acquired Wachs the end of 2018. At this moment, Wachs was a specialized welding company.
We have been extremely happy with this acquisition because it allows us to ramp up our capabilities on the major component refurbishment program in Canada and we have gradually ramped up the capacity of Aecon-Wachs because it is the name now to become a project company. The U.S. is very important in terms of nuclear. This is by far the most important fleet of reactors in the world.
The rehabilitation and refurbishment program had been quite slowed down during the COVID period to protect the operation of the same reactors. But now it’s coming back on the market. And it’s coming back with projects. I would say, of a very interesting size between $50 million and $300 million and we will ramp up with this project and we are very happy with this first, I would say, nuclear integrated job that we acquired in U.S.
Frederic Bastien
And on that note, can you discuss or talk about the risks that are associated with that particular job and the margin profile?
Jean-Louis Servranckx
No undue risk on those jobs. Those are very long job with a very long preparation period. This is what we like. So there is no special risk element that we cannot tackle on those jobs. In addition, I mean, this job is, I would say a few kilometers from our Aecon-Wachs head office and all our labor capacity can be dedicated without any issue on this one.
Frederic Bastien
And margin potential?
David Smales
It’s very similar to nuclear work generally, nothing particularly different to work we do typically in the nuclear sector.
Frederic Bastien
Thank you, both. I’ll pass it over. Thanks.
Operator
We now turn to Chris Murray from ATB Capital Markets. Your line is open.
Chris Murray
Thanks folks. Can we just turn back maybe talking a little bit about Coastal GasLink for a second? Certainly, it looks like the two spreads you’re on, their commentary anyway suggests that you’re done with one spread and then do another. But you also mentioned in your disclosure that they had actually countersued in the quarter around some issues.
I guess, what I’m trying to figure out is, is there any way that or what’s the timing like for finishing up the remaining spread? And does this new lawsuit complicate the completion of that or change the timing in any way?
Jean-Louis Servranckx
Okay. I’m going to take this one. So effectively, we have two contracts for spread three and spread four and a tying agreement between both. Spread four has been mechanically completed and it’s interesting to know that we were the first spread to be mechanically completed mid-2022.
Regarding the comment on the counter claim, I mean there is nothing, absolutely nothing special, like, I would say, in any formal dispute process. This arbitration has a procedural timetable that is setting out deadlines for both parties to take certain steps. I mean, CGL had a deadline to make a counter claim. They met in. We have the same one and we meet our deadlines. So there is nothing special. We are now exclusively working on spread three, expecting mechanical completion before the end of the year 2023.
Chris Murray
Okay. That’s helpful. Thank you folks.
Operator
Our next question comes from Michael Tupholme from TD Securities. Your line is open.
Michael Tupholme
Thanks. Good morning.
David Smales
Morning.
Michael Tupholme
Good morning. I just want to go back, maybe build off some of the questions that you received from Jacob. And I guess what I am really wondering is as we approach the end of 2022, if you can provide any early thoughts around how you see overall company revenue evolving in 2023 versus this year. And this is with your comments around customer behavior and thought process doesn’t seem to have changed much?
David Smales
No, exactly. I mean, our talks about expecting good revenue growth over the next few years and I think that’s unchanged. Jacob’s question, specifically about recession, I’d remind you that in the last two downturns, we’ve seen or major downturns, we’ve seen kind of 2008, 2009, the financial crisis and then through COVID, governments have seen infrastructure investment is vital to the economy and stimulus has been a big part of their approach.
We’re not seeing anything slow down in the pipeline. And so if you look at kind of next 12-month backlog significantly higher than it was 12 months ago some of the strength in our new awards over the last 12 months and the strength of the pipeline, I think we expect revenue progression to continue to be pretty healthy over the next few years.
Certainly, this year, year-to-date, we were up 19%. We don’t expect to continue at that kind of rate, but still something solidly in the kind of higher single-digit range going forward.
Michael Tupholme
Okay. That’s very helpful, Dave. Thank you. And then just a follow-on, you’ve talked for some time now about targeting margin improvement over time. There has not really been sort of what I would characterize as a typical year in the last few years, there has been a lot of noise with CEWS and some of the other things going on.
So, I guess, if we think about the margin potential, what’s embedded in the backlog, what you see in terms of the opportunities and the projects that you are pursuing, can you talk a little bit about the ability to drive margin improvement over the shorter term, again and recognizing that it is a longer-term objective, but what are we thinking about here in the next 12 to 18 months?
David Smales
Yes. So, I think all else being equal, Jean-Louis said things have stabilized to some extent in terms of supply chain and inflation and so, barring any further evolution negatively in those kind of trends we do think the backlog profile supports the ability to expand margins.
Clearly, as we close out the four legacy projects, we are obviously booking those projects very conservatively, which is a drag on margins as we’ve seen over the course of the last few quarters and I talked about the time line to complete those. So, that will continue to be something we work on over the course of completing those projects.
Outside of that, the rest of the backlog, which is 80% plus of the backlog is very healthy. The bidding environment has been one where we feel margins have been improving and the ability to put good teams on the right projects and execute well and so, we should see margins certainly improving as we execute on that backlog.
Michael Tupholme
Okay. Great. Thank you.
Operator
Our next question comes from Benoit Poirier from Desjardins Securities. Your line is open.
Benoit Poirier
Yeah, good morning, everyone. Just with respect to Bermuda concession, you highlighted on the report that you’ve been dealing with higher operating costs in the quarter. So I was just wondering if you could provide more color whether what is the main driver, whether it’s temporary or should it change the kind of margin profile longer term?
David Smales
Yes, so what you’ve seen versus the same quarter a year ago is obviously much higher volume than we were seeing through the airport back in Q3 2021. So obviously, that means we have to ramp back up in terms of staffing at the airport and the ability to deal with a greater passenger and flight volume, so that increases the cost.
You don’t see the same step up in the revenue because as you recall, we have a minimum revenue guarantee that kicks in once we go below a certain level of traffic. And so, 2021, the revenue was supported by the revenue guarantee, but we didn’t have the same kind of operating cost we have now.
But as we move past the kind of mid-60% range, which is where we were operating through Q3, then we’ll start to see that incremental revenue and that will obviously more than offset the normal cost base for the airport. So, we’re kind of right in that transition period there where we’re crossing the minimum revenue guarantee threshold and as revenue increases then, we should see profitability from Bermuda improving commensurately.
Benoit Poirier
Okay. That’s great. And for concession, you mentioned that there is opportunity in Canada International to add some projects over the next 12 to 24 months. So, could you maybe provide more color about the size of those opportunity but also the capital required to size those opportunities?
Jean-Louis Servranckx
Yes, Benoit, I will say on this one, we would be delighted to be able to duplicate the G2G operation like Bermuda and we are working on a few ones. So this is what we have in mind about international opportunities. We had quite an interesting knowledge of those kind of contracts.
On another hand, in Canada, aside from the, I would say, the infrastructure P3 type, which is rather going down, energy transition, I mean, is the topic at the moment. So more private clients. It’s about battery storage, it’s about pump storage. It’s about all of those kind of jobs and we are pursuing a few prospects that seem to us quite interesting. Regarding capital needs, maybe David, you can add a few words.
David Smales
Yeah, I think nothing particularly of the ordinary. Obviously, as we’ve seen historically, anything on the concession side has been fairly capital-friendly in terms of the size of equity investments are relatively small in terms of the overall funding of the projects and they go in at the end of construction, typically. So you’re able to make your construction profit to fund any equity requirements. So nothing particularly of the ordinary expected on that front.
Benoit Poirier
Okay. That’s great color. And related to the four legacy projects that you provide color on, you mentioned color about the timing. I was just curious whether you would disclose, whether there was any negative impact on the EBITDA coming from those four projects in the quarter?
David Smales
Yeah, I think we called out, obviously, the – we had lower gross profit margin and industrial grew primarily from pipeline activity. And so, I think that’s an indicator. Obviously, we talked about the CGL project. Outside of that, nothing material to call out.
Benoit Poirier
Okay, okay, that’s great. And last one for me. In light of the current market environment, higher interest rate environment, valuation right now, how does it impact your capital deployment strategy? And more specifically on the M&A and with respect to your dividend policy?
David Smales
Yes, so I think from an M&A perspective, obviously, we’ve been active over a number of years with small tuck-in acquisitions. I think we talked a lot about the diversity and balance in our business. I think we’re very happy with how we’re positioned today around all the growth segments of the market. I think organically, we’ve talked about our ability to slowly, but surely expand into the U.S. and certain select international opportunities.
So there is really nothing driving us on the M&A front right now that we feel we really need. And so, our focus is on continuing to be able to grow the business, which requires obviously performance security and a healthy balance sheet, and that’s the focus.
Benoit Poirier
Okay. Thank you very much for the time.
Operator
We now turn to Naji Baydoun from iA Capital Markets. Your line is open.
Naji Baydoun
Hi, good morning. Just I had a couple of questions. Wanted to go back to the topic of margins. I think you’ve had sort of several quarters now back-to-back grabbling with the issues that the industry is dealing with. I am just wondering, when you look at, I guess, next few quarters or the next year, where you think margins should kind of normalize or bottom out barring no incremental major issues from the legacy projects?
David Smales
Yes. So, obviously, we don’t give specific margin guidance, particularly on a quarter-to-quarter basis. I think if you look at the trend through the first three quarters of this year, excluding the one write-down we called out in Q2, you’ve seen a trend where higher revenue than the previous year has been offset a little bit by lower margin.
We expect that trend probably to not be dissimilar in the next few quarters. But we do think as we go through 2023 and into 2024, relative margins should be improving. I talked to that earlier in terms of the backlog and what we see in terms of bidding environment. So maybe, Jean-Louis, you have some additional comments?
Jean-Louis Servranckx
Yes, I have a few and I think they are important. It’s about discipline and new contracting mode. So you probably remember from – I’ve arrived at this job mid-2018 and I immediately spoke with you about the fixed-price job and the fact that we have to be extremely careful.
The first decision from this time was not to take any job superior to $1 billion and a fixed-price job and you have seen that when we say something, we do it. I mean, in the backlog, I mean the fixed price portion of the backlog has gone down from 68% to 58% at the end of Q3 2022. The revenue, I mean, the trailing 12 months on fixed price have gone down from 59% to 51% and it’s very important because it gives a much better predictability of our margin in the future.
And here, I will come to what we have been commenting about the new contracting mode, what we call this progressive system, progressive design build, where we are selected on the robustness of our capacity, our schedule, our methodology of work, our group of company. And then we enter once we have been awarded in a development phase, that maybe 18 months, that maybe 24 months.
And only at the end of this development phase, we fix with our clients, the scope. We fix the schedule. We fix the price. So, you have noticed that under this mode, we have been awarded the GO Transit. I mean, the multibillion job in Toronto. We are under discussion and negotiation with OPG about the small modular reactor, same kind of contract.
And we would be extremely happy if at the end of the process, Metrolinx and IO could award us the Scarborough station and system job. What it show is that the new Aecon, the new profile of Aecon is now firmly set up and it’s going to be much more predictable. At the top, we will only acquire or maintain size through major de-risked project as much as we can under the one Aecon app to be able to use all the capacities of our company.
This is this new model of collaborative, progressive procurement mode. As I would say, the other end of our activity will be the recurrent norm 6 project, mainly with utilities. You probably noticed that once again, we have increased in our activity, in our backlog, the recurring revenue, and it’s very important for us.
And in between, we have those mid-sized projects where we work a lot on professionalism on risk management and where we can each time that we are well centered within our pool competency. I mean we can acquire this new job. This is a new Aecon. This is the Aecon of tomorrow, and this will give much more predictability to our activity and to the margin associated with our activities.
Naji Baydoun
Thanks for that. And that’s really great detail. No doubt, there are lot of progress has been made and you’re trending in the right direction despite maybe the near-term challenges. I guess, on the topic of the new Aecon, Benoit’s question about capital allocation, dividends, and maybe just if you can give us a bit more of a detailed sort of updates just given where the valuation is of the stock, it’s – dividend is still a priority? How do you feel about your leverage profile? Do you think you need to be doing something differently to try to maybe get the stock price a bit more stabilized or higher?
David Smales
I think in the current environment, actually, the key is execution. That’s obviously what we’re totally focused on. I think, clearly, two markets more broadly are challenged by a wide variety of factors right now that are outside of our control. What we can control is continuing to add good projects to backlog and executing on those projects as effectively as possible, and that’s the focus.
I said earlier, our focus for capital allocation is to support that ongoing organic growth potential that we see as being very strong in the current environment and as far as dividends, obviously, that’s been a long-term feature of our business and nothing new to report on that front.
Naji Baydoun
Okay. So focus remains on organic growth first, maybe some tuck-in acquisitions, but you don’t feel the need to change your sort of dividend policy or kind of pause just given where or – what, I guess, the leverage is or what you expect going forward?
David Smales
Yeah, as I said, nothing new to report on that front. And when we do, then obviously, we’ll report that to everyone at the same time if we were able to change policy, but there is no change in policy. So, nothing really to say.
Naji Baydoun
Okay. Thank you.
Operator
Our next question comes from Maxim Sytcheve from National Bank Financial. Your line is open.
Maxim Sytchev
Hi, good morning, gentlemen.
David Smales
Hi, Max. Good morning.
Maxim Sytchev
David, I just wanted to circle back on the balance sheet and I guess, I mean, one of the reasons why leverage is three times is due to working capital. Can you provide maybe your views on when the working capital in the difficult project is going to be freed up? And I guess, your confidence around that dynamic?
David Smales
Yeah. So, I think if you look at Q3 specifically, I don’t think Q3 was nothing particularly different about a profile of the working capital build in Q3 this year versus Q3 in any of the year, given the seasonality and the increase in revenue, which was 14% versus the same quarter a year ago. So, nothing really unusual in this quarter.
Obviously, in prior quarters, we’ve had a build-up tied into the things we’ve talked about already on the legacy projects. We don’t necessarily expect that to worsen in terms of when that starts to unwind and that’s really kind of what we’re focused on negotiating right now across all four projects.
And so, I don’t think it will necessarily be something that happens immediately. It’s going to be at different times on different projects. And so it could be something that leads to overall elevated working capital as we go through 2023, but not necessarily worsening the situation as we go through 2023.
Maxim Sytchev
Okay. So, I guess, we should not expect sort of the seasonal free up that we typically see in Q4, right, because of the dynamic?
David Smales
Well, you will on everything else, 80% of our backlog is proceeding as normal and so you’ll see the seasonal impact from everything else that we undertake. But obviously, on those four projects, it’s subject to the outcome of all the negotiations that are ongoing.
Maxim Sytchev
Alright. And then in terms of – I think in the past, we discussed your plans around the convertible debentures and so forth. In terms of kind of the ability to use your credit facility and so forth, do you mind maybe just providing some goalposts in terms of like what needs to happen in terms of how you think about 2023 maturity for this debt instrument?
David Smales
Yes. So, obviously, as we head towards the end of this year, January 1st is when we can begin to redeem the convertible debentures at par and so that window is open throughout 2023. We obviously expect market conditions to be conducive to a refinancing opportunity as we go through the next 14 months or so and so we’ll take advantage of that and to the extent we want to do some of the redemption through drawing the liquid facility, we have the capacity to do that, too.
So it could be a mix of approaches. It could be a partial refinancing, a partial use of the credit facility. We’ll continue to assess that as we move forward.
Maxim Sytchev
Okay. That’s all for me. Thank you so much.
Operator
Our next question comes from Ian Gillies from Stifel. Your line is open.
Ian Gillies
Good morning, everyone.
Jean-Louis Servranckx
Good morning, Ian.
Ian Gillies
Could you – is there any chance you could provide a bit of an update on the health of, like the general health of the subcontractors you’re using, the availability of that group, whether you’re seeing any significant changes just given what’s transpired with inflation and probably what’s happening with that group of people, given the importance of your business?
Jean-Louis Servranckx
Yes, Ian, obviously, the – I would say, the last quarter of 2021 and the first quarter of 2022 have been very difficult for the supply chain. That has been caught by surprise thinking that at the end of the COVID, life will become immediately as normal and it did not. It means that we had a very strong pressure, what we call the hyperinflation issues in China and at the beginning of 2022, we had a lot of strikes, I mean, especially in Ontario.
This being said, we can see that most of them are now operating quite normally and we are not that much worried about our supply chain. You probably also remember that Aecon has a lot of boots on the ground. It means that we have – we are self-performing quite an important part of our scope of work and this has been extremely helpful during the crisis because we have not this level of shortages that some other company could face.
Ian Gillies
Okay. That’s helpful. And then, the other thing I wanted to ask on was Encore. You’re obviously in the two-year development phase and with the sharp changes in a variety of commodity prices and just input costs, has there been any change in timeframe of when that project may start to get added to the backlog or can you provide an updated time frame of when we may start to see it?
Jean-Louis Servranckx
No, nothing special. I mean, the development phase is a two years one. So we are full in it at the moment. We are working with Metrolinx intimately to decide not only the scope, the schedule and the price, but the phasing, there is a lot to do. It is linked at the end of the day with a train program and it’s been with the operations. So it’s quite, I would say, a comprehensive development phase.
We do not see any issue. We are still expecting that we could have some early works beginning to be executed during the year 2023 and we are working on those bundles of early work. Then, I mean, nothing, I would say nothing special in front of the type of procurement under which we have been awarded.
Ian Gillies
Okay. That’s very helpful. Thanks very much. I’ll turn it back over.
Operator
This concludes our Q&A and I’ll hand over to Adam Borgatti for final remarks.
Adam Borgatti
Very good. Thank you, Elliot, and I appreciate everyone’s time today. Feel free to follow up at any point for other questions to us and have a great rest of your day. We’ll speak with you at the next quarterly call. Take care.
Operator
Today’s call has now concluded. We’d like to thank you for your participation. You may now disconnect your lines.
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