Aecon's (AEGXF) CEO Terrance McKibbon Q2 2016 Results - Earnings Call Transcript

| About: Aecon Group (AEGXF)

Aecon Group Inc. (OTCPK:AEGXF) Q2 2016 Earnings Conference Call August 4, 2016 10:00 AM ET

Executives

Terrance McKibbon - President and Chief Executive Officer

David Smales - Executive Vice President and Chief Financial Officer

Analysts

Yuri Lynk - Canaccord Genuity

Anthony Zicha - Scoitabank

Benoit Poirier - Desjardins Capital Markets

Frederic Bastien - Raymond James

Ben Jekic - GMP Securities

Bert Powell - BMO

Chris Murray - AltaCorp Capital

Operator

Ladies and gentlemen, thank you very much for standing by. And welcome to Aecon’s Second Quarter Results Conference Call. During the presentation participants are in a listen-only mode. And afterwards we will conduct a question-and-answer-session. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, August 4, 2016.

It’s my pleasure to turn the conference over to David Smales, Executive Vice President and Chief Financial Officer. Please proceed sir.

David Smales

Thank you, operator and good morning everyone. And thank you for joining our second quarter 2016 conference call. This is David Smales speaking and with me this morning is Terry McKibbon, Aecon’s President and CEO.

I’d like to remind listeners that the information we’re sharing with you today includes forward looking statements. These statements are based on assumptions subject to significant risks and uncertainties. Although, Aecon believes that the expectations reflected in these statements are reasonable, we can give no assurance that these expectations will prove to be correct. I’ll touch briefly on Aecon’s consolidated results and then review results by segment before turning the call over to Terry.

Aecon’s results for the second quarter of 2016 saw strong growth in both revenue and like for like Adjusted EBITDA, set a new backlog position $4.9 billion, rounding out a solid first half of the year. Revenue of $839 million for the three months ending June 30, 2016 was $172 million or 26% higher than the same period in 2015, with increases in each segment.

Adjusted EBITDA of $29.4 million, a margin of 3.5% for the second quarter of 2016 compared to $29.9 million or margin of 4.5% for the second quarter of 2015 or $18.9 million, margin of 2.8% on a like for like basis, which excludes Aecon’s previous ownership of IST and investment in the Quito Airport construction.

Adjusted EBITDA and operating profit in the second quarter of 2016 were impacted by $6.7 million one-time charge relating to resolution of legal dispute dating back to 2012. In addition to progress on revenue and margin, new contract awards of $1.1 billion were booked in the second quarter of 2016 compared to $469 million in the second quarter of last year.

Including new awards this quarter with the previously announced contracts awarded by Ontario Power Generation to an Aecon joint venture for turbine generator refurbishment and engineering procurement and construction at a Retube Waste Processing Building both at Darlington nuclear generating station. These awards are in addition to Aecon $1.375 billion share at the Darlington Nuclear refurbishment execution phase contract awarded in the first quarter of 2016.

The above mentioned awards along with other energy awards received during the second quarter helps Aecon achieve a new record backlog of $4.9 billion as at June 30, an increase of $2.3 billion or 89% compared to backlog of $2.6 billion at the same time last year.

Turning to results by segments, Infrastructure revenue of $269 million was 45 million or 20% higher than the same period last year, primarily driven by heavy civil operations, due to continued ramp up on projects in Ontario and Western Canada. Transportation revenues were also up in the quarter, due to higher volume of road building work in Ontario.

Operating profit decreased $0.2 million from the same period last year. An improvement in operating profit from higher margin in water operations was offset by lower margin from transportation operations in Ontario.

New contract awards in the infrastructure segment totaled $198 million in the second quarter of 2016, compared to $190 million in the same period of 2015. Backlog at the end of the quarter was $2.1 billion which was $826 million higher than the previous year. The largest driver of this increase was the Eglinton Crosstown LRT Project impacting both heavy civil and transportation backlog.

In the Energy segment, revenue in the second quarter of $358 million was $58 million or 19% higher than the prior year driven by utilities in industrial operations, second quarter operating profit of $14 million decreased by $4.7 million over the same period last year. The decrease was due to the $14.1 million gain on sale of IST reported in the second quarter of 2015. Excluding the impact of IST operating profit increased in both industrial and utility’s operation.

New contracts awards in the energy segment was $688 million in the second quarter, an increase of $570 million over the same period of last year. Increase in new awards was primarily driven by additional fund transfer in nuclear and gas distribution work in Ontario. Additional awards along with Aecon share of the Darlington nuclear refurbishment project awarded in Q1 led to a record energy backlog of $2.5 billion as of June 30, $1.7 billion higher than at the same time in 2015.

In the mining segment, revenue of $220 million was $72 million, or 49% higher than the same period in 2015. The majority of this increase was from a higher volume of site installation work in the commodity mining sector. Revenue growth was somewhat offset by lower volume in contract mining operations, primarily as a result of the Alberta wild fires during the second quarter.

Operating profit of $11.8 million for the second quarter of 2016, was $7.4 million higher than the second quarter of 2015, with a majority of the improvement coming from higher volume in gross margin in the commodity mining sector.

New contract awards in the mining segment in the quarter was $241 million, $77 million higher than the same period in 2015. Backlog at June 30 was $228 million; $254 million lower than at the same time last year. Backlog decreased in the commodity mining sector as work off on existing site installation project outpaced new awards.

In the construction segment, revenue was $1 million in the second quarter of $2016 compared to $0.7 million in 2015. Operating loss of $0.7 million compared to an operating profit of $3.6 million in the same period of last year. This decrease was due to the impact of the sale of Aecon’s investment in the Quito Airport construction in December 2015.

At this point, I'll turn the call over to Terry.

Terrance McKibbon

Thank you, David. As David mentioned, Aecon’s strong second quarter results saw increased revenue across all our segments, an improved adjusted EBITDA performance on a like for like basis. At the end of June of 2016, the company’s backlog reached another new record of $4.9 billion. Backlog resilience, creditability continue to increase 66% of backlog work expected to be performed beyond the next 12 months versus a year ago on just 30% of backlog was to be performed beyond 12 months.

Increased infrastructure spending to address Canada’s significant infrastructure deficit and combat slower economic growth is a key area of focus for all levels of government. We expect this incremental federal spending to start in late 2016 with mid-sized municipal and provincial projects and that larger more complex projects will continue with the additional support federally into ‘17 and beyond. While Aecon expected to be a beneficiary of this increased infrastructure investment, competition in this space continues to be strong.

Backlog in energy segment was $2.5 billion at the end of the second quarter of 2016 driven by new awards in Ontario in the first half of 2016 in the gas distribution and power generation sectors. Revenue from Aecon’s fabrication, modular assembly sources in Western Canada are expected to climb in the second half of 2016 with a completion of a major project and additional oil related works, or works are not expected to be significant during the current environment. Aecon expected increased backlog in ongoing demand for gesture distribution facilities, utilities work, power and nuclear refurbishment in 2016 while offset lower related volume.

In the mining segment, while commodity prices generally remained soft there has been improvement and most metal prices since the first quarter of 2016 leading to further interest in projects linked to a variety of different commodities including gold and copper. Aecon is involved in a number of pursuits related to these potential projects with new backlog in the process installation sector of Aecon’s mining segment required for the second half of 2017 and beyond. Other than the second quarter impact of the Alberta wild fires, contracts at mining operation continue to be relatively stable.

The construction segment continues to partner with Aecon’s other segments to focus on other private partnership opportunities and is actively pursuing a number of large scale infrastructure projects that require private client solutions or participating at the concessionaire in the Waterloo, Eglinton Crosstown LRT projects.

As usual first half of 2016 is expected to be weaker than the second half reflecting the seasonality of our work. While oil and commodity markets across Canada remain challenging in the current resource quite environment, Aecon’s strong backlog position and diverse and flexible business model combined with a strong commitment to infrastructure spending by all levels of government across Canada, board well for Aecon’s ability to continue to make progress. Aecon continues to be disciplined and responding to request for services becoming qualified bidding, negotiating in carrying out work.

The overall outlook for 2016 remains solid based on our results to date, strong backlog, recurring revenue, agreements and strong market profile in each operating segment.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Gentleman, our first question comes from line of Yuri Lynk from Canaccord Genuity. Please proceed.

Yuri Lynk

Hey good morning.

Terrance McKibbon

Good morning Yuri.

Yuri Lynk

Guys, strong quarter once again, Terry when you look at the results, I mean how would you characterize performance year-to-date specifically in the second quarter versus your initial expectations and in line with that have your full year revenue expectations changed all in late of recent performance?

Terrance McKibbon

To answer that, I think the key to success on the first half of 16 is really the business model we have and the obviously number of years ago we implemented an initiative five years ago, collaborative style management with the various units, structured in such a way that they work very seamlessly together on a number of projects and we are really seeing the traction on that, we are seeing traction over the last sort of 18 to 24 months. And that creates the ability for the business to be resilient and to shift capacity and maintain the 12,000 person employee base that we have and keep that stable. We did see certainly stronger first half performance in revenue, I wouldn’t say it was unexpected with workload we have, but there is certainly some timing of some of that work. As we have indicated the very significant amount of oil related work coming off in the first half of ‘16 and slowly coming off in the third quarter and - but the timing of some of the news things - oil and gas or gas related - specifically gas related activity and nuclear power related activity and power generation seems to be nicely backed on that. This is bit of the unique year where you have strong first half revenue performance and obviously will variable to come into play with in the back half of the year. But we feel good about where the business is at and feel the good about the way they’re performing and make the key to that is integrate model that we have.

Yuri Lynk

And then maybe does Dave want to jump in on any kind of revenue expectations for the year, I mean I think we - I think kind of soft guidance was maybe flat to slightly up, where do we stand with that because I mean that’s been very strong obviously.

David Smales

Yeah, I think we talked earlier in the year about the normal seasonality not being quite this year given the nature of some of the work we have underway. I think that still stand, I think the growth rates you’ve seen in the first half of the year which the first six months I think was just over 30% higher than the first six months of 2015, we don’t expect to see that kind of the year-over-year performance or growth rate in the second half of the year. We expect to see decent volumes year-over-year, but certainly will level off to some extend in terms of year-over-year growth. Again as Terry mentioned, we have quite a bit loyal work coming off in second half, and so a lot of the growth in the first half was in the energy space and that will level off. So I don’t think it really significantly changes view of the full year. I think to some extend a little bit of a shift between first half and second half based on not quite of pronounced seasonality as we’ve seen in the past.

Yuri Lynk

Okay. Last quick one for me guys, looks like mining had some better award activity then I was looking for anyway I mean any color on what got booked in mining and maybe a little more detail on where you are looking for more meaningful booking opportunities in mining. Do you feel you have to go outside of Canada to capture more work or the opportunities you are looking at within the country?

David Smales

Yuri I will answer the first piece of that and then I hand it over to Terry for the second piece and towards the future work. In terms of awards in the quarter, nothing - we were quite pleased with and encouraged by the level of awards in the quarter, but nothing - no one big project within that numbers and scope growth in some smaller project included in that, but no one big project made of significant portion of those awards, so really just a combination of those two factors and then Terry can speak to the business going forward.

Terrance McKibbon

On the new stuff, certainly the pace has picked up considerably with some re-strengthen in gold. We had some projects that were on the shelf that we spent a long time on that seem to be getting dusted off now, so we are cautiously optimistic about that. One of the nice things about our business in our portfolio is that we got our full blown active manufacturing activity that is taking us right through the downturn and we can, it is sometimes when you got big team available that we can plan around coming off some work in ‘17, the time is nice and we have that team, it is not like that we can go and build it, like many of our competitors we have to do. So we are very attractive to anyone that has been a go ahead and either starting Greenfield opportunity or refurbishing existing opportunity to increase production and we do know that inventory levels are dwindling some of these larger entities have not put investment into given CapEx into expanding facilities, and now are getting close to end of life so. So we are excited about fact that there is some strengthening and some opportunities that we are engaged in as we speak.

Yuri Lynk

Okay. I’ll turn it over guys, thanks.

Operator

Thank you, Mr. Lynk for your question. Our next question comes from the line of Anthony Zicha from Scoitabank. Please proceed with your question.

Q - Anthony Zicha

Hi, good morning.

Terrance McKibbon

Good morning

Anthony Zicha

Terry could you give us some color on the competitive landscape in the P3 market, is it intensifying and do you think that there is any potential pressure on margins on your long term objectives down the road?

Terrance McKibbon

I see the competitive landscape again has a lot of business, lot of projects, does that mean that there is more international companies to it, yes [ph], but the scale and the number of projects that are being procured sort of picks up some of that capacity. The competitive side of it is coupled with in the sense that even these larger international companies that are in Canada need global partners, there helps companies like us because we have set a such a track record and we have a dependable track record going forward. What that allows us to do is to have sort of a pickup we’d like to work with and that helps us and I say that there's a pretty definitive track record of major failures across hydroelectric, across the tunnels, across complex oil projects of international companies moving to Canada and trying to do things without local knowledge. I think that record is well known by international companies. As they come in, I think they either end up partnering with larger scale companies like us or they obviously have to be very cautious about the learning curve and doing these large local market opportunities.

Anthony Zicha

Okay and second question. You had stellar results despite disruptions from the fire impact on the Fort Mc area. Do you have any upside in terms of claims that - can you give us some color on a potential recovery?

Terrance McKibbon

Yeah, we have an impact on production in contract mining in second quarter. We lost in a range of six to seven weeks of production as a result of that, we do have a business interruption insurance covers an event such as this and we're in the process right now quantifying that claim and working through with our insurers. We do expect some recovery from that claim. It's still in process, but the important thing is we didn't book any anticipate recovery at Q2 result. Anything we do recover will be upside as and when we - we realize it. In terms of confiscation, that's an ongoing process through the insurance piece so valuable to firm dollar number on it today, but it's in the range of six to seven weeks of contract mining value.

Anthony Zicha

Okay, excellent. Well, thank you very much.

Terrance McKibbon

Thank you.

Operator

And thank you Mr. Zicha. Our next question comes from the line of Benoit Poirier from Desjardins Capital Markets. Mr. Poirier, [indiscernible].

Benoit Poirier

Hey, good morning, gentlemen and congrats for the great result. Just coming back on the free cash flow, obviously huge drag in the working cap driven mostly by 100 million increase in unbilled revenue year-to-date. So I understand your ramping up sizable contract, but I was wondering if you could provide some color on how it will play out in the next couple of quarter given the increased backlog.

Terrance McKibbon

Yes, a couple things to call out in the quarter on that - the first is just the fact that revenue has grown around 30% year-over-year. So that obviously have a working capital impact and as you said we are ramping up on a number of large projects, which is - which is part of that. We do expect as we go through the year for that to moderate as we get into a regular flow on these - on these larger projects and because of the size of these projects, a couple of days can make a big difference in terms of receipts and billing and - yeah, I think it was moving the very day after we closed the quarter. This time we received $45 million in cash the very next day. So these things can change you very quickly based on a one or two significant payments. Nothing other than timing and normal seasonality along with the growth we've seen in revenue.

Benoit Poirier

Okay, perfect. Thank you very much. That's what my question. Thanks, guys.

Operator

Thank you, Mr. Poirier. Continuing on, our next question comes from the line of Frederic Bastien from Raymond James. Please proceed with your question.

Frederic Bastien

Good morning, guys.

Terrance McKibbon

Good morning Frederic.

Frederic Bastien

That’s on share buyback at these levels. I know that's for another conflict. Good, you are getting my sense of humor. Just wondering M&A what are your thoughts right now and are you still - comfortable with the business you are running in Canada, obviously would assume so but any incremental sort of services that either you would like to add on, maybe on a from attacking perspective and just like to get your views there.

Terrance McKibbon

I mean we continue to evaluate the opportunities in front of us, continued to look for entities that can enhance, what we are doing, I think with the style of business we have today, so vertically integrated and it's working as a collaborative work force. We are adding people as oppose to companies and that's working very well for us in terms of that approach is of some areas we'd like to expand our scope inside of a mining business or an energy business or in construction business for sure. But is there anything that’s, we're spending a lot of time on, not at this point continue to look for longer term growth outside Canada, potentially U.S., but again we - model the style of discipline that we have is working very well for us and if we were to enter US for growth opportunity would be, with same model that we have year success we had here so. So that answer your question or I would say there's anything that's got us interested at this point.

Frederic Bastien

Okay great and you recently opened a corporate office in Vancouver, presumably good place to be in, can you speak to that initiative and on so comment on sort of the pipeline of work that you're seeing in the province.

Terrance McKibbon

So - just to add a bit of clarity to that - obviously BC has been a very long term market for us for many, many years going way back to projects three four years ago and hydroelectric and things like that and rail systems in 90s. Vancouver, BC is a very important market for the company. What we did with our new Pacific headquarter was to consolidate three entities, three centers that we had in the Vancouver area into one. After that the developments and this is not capability, BC has a very strong program on both infrastructure, hydroelectric and obviously with mining recovering our clients are predominantly there in terms of the operations side of the parties we would be pursuing so it is all designed around the larger strategy and efficiency of moving three centers into one and finding that to be very, important for us for business it goes for.

Frederic Bastien

Okay that’s all I had. Thanks, great quarter.

Terrance McKibbon

Thanks Frederic

Operator

Thank you, sir. Continuing on, our next question comes from the line of Jacob Bout from CIBC. Please proceed.

Unidentified Analyst

Hi, good morning this is [indiscernible] for Jacob.

Terrance McKibbon

Good morning.

David Smales

Good morning.

Unidentified Analyst

Just had a couple of question, your infrastructure margins were a little weak this quarter. How much of that is due mix or relatively lower margin transportation projects and how much of that would be due to higher competition and how do you see this in the second half of the year going in to 2017.

Terrance McKibbon

Infrastructure EBITDA margin in the quarter was 3.2% versus 3.5% in the same quarter a year. I think I usually comment on margins in any one quarter you get a lot of noise, mix of work in different versus 12 months ago, ramping up on certain new projects finishing other projects. So it is very hard to draw direct comparisons for one would cause a very similar we like to look a more on a rolling basis over time and I think if you look at infrastructure margins over the last twelve months there 4.7% versus 4.1% in the previous twelve month period. So we continue to see good dynamics around our infrastructure business in the margins that they are achieving and I wouldn’t read anything into very slight difference in one quarter versus 12 months ago. Overall we expect infrastructure margins to continue to perform well and the backlog we have supports that view.

Unidentified Analyst

Okay and how do margins on nuclear projects such as Darlington was like, are they consistent with margins for the rest of there in a few segment?

Terrance McKibbon

Sorry, I didn’t hear that question, could you just repeat the question again please.

Unidentified Analyst

Sure, I was just asking how do margins on nuclear projects such as Darlington look like and are they consistent with the margin for the rest of the energy group.

Terrance McKibbon

So don’t call out specific margins for individual projects, but I think what we have said is that the way our energy backlog is evolving. We think that has a positive overall impact on our average margins for energy. So typically it is very early projects of a complex if it became a nature they have good margin profile and obviously the nuclear work that we are doing at Darlington is - I would say into that kind of a catch group.

Unidentified Analyst

Great, got you. And last question for me. And as reported an accident a few weeks ago at their legacy mine, which may delay their start up. How do you see that affecting Aecon’s work on the project.

David Smales

So I will take this one. The first and foremost safety on any sight is our first priority and as a result of that accident we were very lucky that it was no one injured and we had one of our workers had first aid. But that basically - from the perspective of the accident itself we really can't comment on what K+S’s plans are. There is an investigation under way that we're obviously participating in providing any information you need. There - from the perspective of how it affects us we don't see it having any material effect. We have very significant workforce on that project across many, many areas and this failure occurred in on one specific area. Once the investigation is completed the work will resume in that area but it hasn’t had any material impact on us in terms of our activity or efforts or workforce on the project.

Unidentified Analyst

Right, thank you and congrats on a good quarter

David Smales

Thank you.

Operator

Thank you sir and our next question comes from the line of Ben Jekic from GMP Securities. Please proceed with your question.

Ben Jekic

Good morning. Congratulations on the quarter. I do have a question, either Terry or David just bigger picture and you sort of answer that I think Yuri was asking that similar question but with two consecutive very, very strong quarters in a row and obviously both in the first half is there anything structural that's changing in terms of your seasonality. Or is it just going to affect this year. How should we model that going forward?

Terrance McKibbon

I think, there are some developments that will seasonality moderate on a more consistent basis going forward. I think this is the first real year of it. You think about projects like Darlington for example new seasonality attached to that, we work on that year around. Again in Crosstown would be the same kind of profile, no seasonality to that, we will work on that year around. So it is really a nature of some of these larger most specific projects and unlike the seasonality of a road construction business or a utility business where we have seasonality to these larger projects. So we will - this will be more of a sustained front over time on the back of the way that makes a shifting.

Ben Jekic

Okay. Thank you.

Operator

[Operator Instruction] Thank you. And our next comes from the line of Bert Powell from BMO, please proceed with your question.

Bert Powell

Thanks Terry, just in your commentary you talked about the energy business and oil weaker in the second half. But still some activity in Q3 can you give us a sense of how that scales down, is it going to be a month of Q3 or a budget or a figure, how to think about the Q3 and Q4. Do we step down hard in Q3 level there or does the oil business kind of get down in Q3, and it is kind of what we are trying to communicate in terms of the impact that is done by Q4.

Terrance McKibbon

So to answer your question, the oil side Aecon is the combination of ongoing production work that we do some of that is in our mining business, some of it is in our energy business. We have a maintenance activity; we have done some site turn around in the first half of 16. Our oil guys are working on as we announce are in the year program with some larger gas projects in Eastern BC. We have a very large fabrication and marginable program that is basically winding down on this month. But we still have a fairly heavy workforce installing those modules, in [indiscernible]. So that will continue through into early fourth quarter. Anyways, there is a maintenance stuff goes on for virtually. There's other things that happen periodically, but the model we have allows us to move at significant number of our oil and gas management team to some of our activity in Ontario. It's very unique as we have always pulled from Ontario, Eastern Canada for growth in Western Canada and now we’re going in the way. So that's the diversity of the company and the model we set up with a lot of people that have moved east to support our activity on projects like that is Eglinton and Darlington, and things like that. So that's a bit of color. Dave do you want to add?

David Smales

Obviously on the oil side, the contract mining business, types of production, we expect to continue to be pretty stable. We have a large program on the fabrication and modular assembly side which really concluded and wrapped up in Q2. And Terry said some build work will continue on through the third quarter and drop of in the pool.

Terrance McKibbon

Our guys will do an pressure pipeline pumping stations which is still far amount of that activity and also move to energy like power generation project as well and few of those that are evolving some.

Bert Powell

I get that, I know Terry you mentioned a number of times in the call around the diversification of the model and what intakes and all that sort of stuff but just you guys know that what your production schedules are or your bookings and what not. Our challenge is to turn that into to a forecast that somehow looks like what you report. So I just try to look for some guidance or some clarity around how it falls out to be. Those are all interesting things. It's very difficult to them to translate all that those words into a number without giving us just a little bit more how to think about the big chunk this way. It would be helpful - if I'm just expressing a little bit of a frustration on that.

Terrance McKibbon

So I guess the two pieces to that, one is our comment in the outlook, the decline in oil will be offset by the ramp up in these other areas. So we expect that to be really revenue neutral in the second half of the year and then my earlier comments in the call about strong growth in the first time being driven by the Energy segment that will be flattening often second half. So year-over-year in second half we have that dynamic where oil is coming off and then new stuff is coming on but we expect that to be basically producing second half, broadly in line with where our revenue walked in second half of last year for energy. So that’s the big picture in terms of how the energy segment is folding.

Bert Powell

Okay that’s helpful there. Thank you.

Terrance McKibbon

Thanks Bret.

Operator

Thank you, Mr. Powell. Gentleman our next question comes from the line of Chris Murray from AltaCorp Capital. Please proceed with your question.

Chris Murray

Thanks guys. Good morning, just keeping it in contacts I guess you asked a little bit of production, when you talk about recurring revenues on a go forward basis the numbers continues to sort of drop down a bit, but with the new MSAs, how should we think about revenue develops over the next call it a year to 18 months.

Terrance McKibbon

We think that businesses is being - during the twelve months is a little below $600 million obviously impacted in the second quarter by the loss of volume in contract mining, while our impact was all on our recurring revenue type work. That's why you see a bit of a gap over the prior twelve months and that also a little bit of the four hills [ph] effect still in that year-over-year comparison with that mining we doing work on our backlog contracts. So there is a couple of timing things in that - in the most recent twelve months is impacting that year-over-year comparison. As we look forward with the contract mining business, as we stabilizing and taking out that impact out for health and wild fires we expect to see weaker revenues as growing. And then with the new MSA in the utility side of the business we expect to see a good growth there. We think about recurring revenue more in the high $600 million to $700 million basis on a sustainable rate going forward with QMSA as opposed to kind of in the high $500 million to $600 million range where is today.

Chris Murray

Okay well just think about that. I mean that's a pretty substantial growth rate from we're you're at right now then does that mean that you're going to have to take resources out of planed work or project work or would this be kind of built on top of that project give where the backlogs are today?

Terrance McKibbon

I think there's some flexibility to certain growth. No question growth in areas like growth of five across the country, specific resources that would be organic growth. Think about some of the other areas that we are in with growth and maintenance activity most of Canada, surplus capacity coming off oil construction so that ultimately would be growth based on earlier comments about sort of energy being neutral with increase gas and nuclear activity. So that makes the thing to answer your question. Chris it is a bit of a mix.

Chris Murray

Okay, that’s helpful. Just thinking about [indiscernible] but on working capital the number, you are kind of digging a bit more of a hole. I know you had previously talked a little bit about this, but the mix of projects and stuff like - is it still fair to think that working capital and for this year even despite the increased revenue - I think the thought process really was to be slightly positive on a working capital on by year end. We are still sort of and that still kind of in line with what your thoughts are at this point?

Terrance McKibbon

Yes, Chris and it’s subject to timing at year end, but generally yes we do expect that to be to be the trend if you

Chris Murray

Okay, great. Thanks guys.

Terrance McKibbon

Thank you.

Operator

Thank you. Thank you for the final question. Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Thank you once again. Have a wonderful day.

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