Aecon Group Inc. (ARE) Earnings Call Transcript & Summary

Hello. I hope you enjoyed that video and that it gave you a pictorial caption of some of the key focus areas for Aecon's sustainability program which we'll be discussing in more detail today. For those of you tuning in from outside of Aecon, I'm Gordana Terkalas, Senior Vice President of Human Resources, and I'm pleased to be moderating today's panel. Before we get started, I want to say right off the top that if we do run into any technical difficulties, we ask for your patience and understanding. We'll do our best to ensure a smooth event, but if we do run into something, we'll keep you posted either here or through your inbox. [Operator Instructions] For anything we can't get to today, we'll try our best to follow up at a later point. Additionally, I want to also acknowledge that Aecon's head office in Toronto is located on the traditional territory of many nations, including the Mississaugas of the Credit, the Anishnabeg, the Haudenosaunee the Wendat Peoples and is now home to many diverse First Nations, Inuit and Métis communities. We also acknowledge that Toronto was covered by Treaty 13 with the Mississaugas of the Credit. In addition to the land acknowledgment, we do want to also highlight that Aecon is very much focused on action, and we'll be talking about our reconciliation action plan throughout the course of this session. We are Aecon proud to announce the release of our fourth sustainability report, Building a Sustainable Future. The report focuses on what we build and how we build it, focusing on projects to support the energy transition and ways in which we're reducing our own impact. For today's panel, I'm joined by a few of my colleagues who are ready to have a fruitful discussion and answer some of the questions around sustainability at Aecon: Adam Borgatti, Senior Vice President, Corporate Development and Investor Relations; Prabh Banga, our Vice President of Sustainability, who spearheaded Aecon's 2022 Sustainability Report, which we're here to talk about today; and Eric MacDonald, Head of Aecon's Utilities operating sector, which is doing some of the most innovative work across the company when it comes to sustainability and the energy transition. Aecon has long been a sustainable organization. From connecting communities to clean energy projects, working around endangered species for decades and spearheading forward-looking programs focused on diversity and inclusivity, we have been working sustainably day in and day out. As we've evolved though, we now have a true consciousness of sustainable practices. Backed by specific targets and goals, we are now more clearly defining who we are as a sustainable company. So let's dive in.

My first question is for Prabh. Prabh, could you start by giving us an overview of sustainability at Aecon?

Thanks, Gordana. Aecon's sustainability strategy is based on our company's vision, building what matters for future generations to thrive. This encompasses 2 focus areas: it's the what we build and how we build it. Aecon is building infrastructure projects that are driving the transition to a net zero energy future from advanced transit networks and utility-scale sustainable energy systems, all of which Eric will be discussing in more detail. In addition to the what we will build, we are also focused on the how and how we build. We continue to integrate sustainable construction practices across our operations in support of our GHG emission reduction goal which is a 30% reduction by 2030 in our direct emissions and net zero by 2050. For us, sustainability is a business approach to creating long-term value by taking into consideration how we operate in the ecological, social and economic environment.

Thanks, Prabh. Adam, turning to you now. Can you tell us about your role as SVP, Corporate Development and Investor Relations. How do you see it intersecting with sustainability? And also give us a sense of what's the word on the street when it comes to ESG.

Thanks, Gordana. Hi, everyone, and thanks for joining us today. Look, there's no surprise that the confluence of ESG has been so pervasive in terms of the investor community, how that's been intersecting over the years and the increasing focus on it. So at Aecon, we wanted to make sure that sustainability had a mandate that received the highest level of our executive focus. So in 2022, our sustainability expertise, Brad's team and the like were shifted all under the umbrella of a larger group that oversees and addresses all of our stakeholder relations, which created a lot of cohesion and organizational communication and relationship management. I think first and foremost, our sustainability report this year was much smoother in terms of our processes, working with external vendors and internally, and it was a real eye-opener to see the power of Aecon's communications focus across our various verticals and how that translated through to the report. So it was a start of something, I would say, very important because with the formulation of the Canadian Sustainability Standards Board under the guidance of the International division, we're now going to see great regulation when it comes to sustainability reports and more emphasis on the emissions and diversity and inclusion, which we welcome.

Thanks, Adam. And we, Aecon, we just released our fourth annual sustainability report called Building a Sustainable Future. Why did you choose this theme?

Well, the future is moving to net zero and that's exactly where we are. We're there to support that from the projects that we undertake and how we're reducing our own impact across our operations and supporting clients. So we work with governments, utilities and clients across the private sector as they navigate the complexities of the synergy transition that we're all focused on. And so delivering essential infrastructure for a sustainable future is really an expression of our purpose. And as Prabh addressed earlier, it's building what matters for future generations to thrive, the theme of the report being what we're building, which of course, is a sustainable future but also how we're building it and it's by reducing our own impact.

Thanks, Adam. Prabh, can you give us some key highlights from the report? And what would you say were Aecon's major sustainability achievements in 2022?

Yes, for sure. So the performance highlights slide here shows our achievements across the multiple areas of environment, social and governance. And the report itself is organized into the 2 pillars of our sustainability strategy with just the what we build and how we build. So in terms of the what we build, we highlight our projects across the energy transition, which again, Eric will talk about more later. In addition to the what, we are focused on the how. So Aecon continues to build expertise in sustainable construction practices, focusing on environmental, social and governance pillars. So the report itself is organized within these 3 pillars in our performance across them. Within environment, we continue to focus on our emissions reduction goal, and we achieved a 14% reduction since 2020. We've achieved this by implementing a lot of different technologies and innovation and trialing new technologies such as electric construction equipment. We also had a greater focus on using a framework called Envision, which is a leading sustainable construction guideline and framework. And actually, 2 of our projects achieved Envision certification, one of them being Gordie Howe. In terms of the social pillar, we released our inaugural Reconciliation Action Plan, outlining its commitment to engaging in reconciliation across our operations together with indigenous peoples and established a new indigenous joint venture. We also procured about $233 million of indigenous goods and services. This was our highest total to date. Aecon also implemented our Fatal 8 safety program and continue to implement it, focusing on a specific activities workers perform that present elevated risk. And lastly, in the governance pillar, our ESG commitment was extended to our supply chain, and we introduced an ESG screening survey for our preferred suppliers with the goal of having 100% of our preferred suppliers go through this ESG screening by 2025. Also on the government side, we -- the oversight of sustainability matters moved from the Risk Committee to the entire Board of Directors. And lastly, we're Aecon proud to win a couple of key prestigious awards in 2022, such as the sustainable -- Most Sustainable Infrastructure Company of the Year, one of Canada's Best 50 Corporate Citizens by Corporate Knights, won Best of the Best award in the Green Building Culture Award category and Platinum recognition from a New Canada for delivering 6 of Canada's 10 largest infrastructure projects. So Gordana, I'm going to turn the table on you for a minute to talk about some of the achievements under the diversity inclusion umbrella. A big part of leading Aecon's people initiatives is the equity, diversity and inclusion function. Can you expand a bit on Aecon's project -- progress this past year in these important areas?

Sure. Thanks, Prabh. I'd love to. So I'll highlight a couple of interesting and important initiatives that we saw come to fruition in 2022. First, we focused -- we decided to focus our efforts a lot in training new workers from 2 historically underrepresented and important groups in construction, those being women and indigenous people, amongst others. But we focused in these 2 areas, and with the support of the Ministry of Labor Training and Skills Development Fund, we formed a partnership that supported the training of an expanded number of cohorts through the Aecon Limited Trades program, which we talk a lot about. And that's a collaboration with our union partners and Aecon's Training and Innovation Center in Holland Landing. And we were really pleased with the heroic effort by the HR and ED&I groups here at Aecon, where we were able to bring 150 women into the trades through the AWIP program and a huge foundational push on some important outcomes for our indigenous people in 2023, which we'll talk about next year for the 2023 report. Another key initiative that I'm really proud of is something that has been emerging and evolving since 2021, and that's the Champions for Diversity in Leadership program. And this is a small sort of organic program that is prestigious and unique in that it engages our most senior executives at Aecon to sponsor and be champions for 12 diverse and high-potential mid-career employees. And this shift away from general mentorship to focused sponsorship is really powerful in creating exciting opportunities for our diverse community. I think I'd also be remiss if I didn't acknowledge the great work done by Aecon's employee resource groups. In 2022, we took huge steps to ensure the continued engagement and efficacy of our ERGs. We introduced executive sponsors for each group. We've been promoting the group's activities to facilitate recruitment of new members, and we're working to formalize their mandates to support clear, achievable and measurable outcomes. And 1 important outcome, I'd say in 2022, came out of the employee resource group that is focused on disabilities, people with disabilities, and that was the creation of a new workforce -- workplace accommodation policy, sorry, which is a more formal and detailed policy that comes with a specific role in shaping the policy, came through our ERG and we expect that this will be formally adopted very shortly at Aecon. And the last thing I'll mention, we are just about to close out actually our fourth diversity census in 2023, and that's coming off of a very successful census that we ran in 2022. For the third consecutive year, we're seeing growing completion rates of the census, which signals trust, increasing trust in the survey and more importantly, the activities that come out of that survey. And a critical area of focus is how we're progressing in the diversity of our workforce relative to the availability of diverse talent in construction, which I know and we all know there is availability of talent. We just need to be mindful and deliberate about inviting new participants into the industry. And as most organizations are DEI practices remain works in progress, and we continue to take steps to accelerate our gains. So it's a journey ahead and we are well on our way. But I'm going to take my facilitation role back here, and I'm going turn to Eric now. And Eric, as Prabh mentioned, sustainability at Aecon is not only about how but about the what we build. In 2022, Aecon made great strides on projects to support the energy transition. As Head of Aecon Utilities sector and lead on energy transition, could you highlight some of the energy transition projects we're undertaking?

Hopefully, if I have 4 hours, Gordana. Do I have that long? I'm kidding. Lots of good news in that area in 2022 so I'll try to focus on just a few of them. One of the big ones is our Green Home Energy team that we stood up. So for those of you who may not be aware of it, think of Aecon grouping. We work across a wide spectrum of construction but rarely did work within the home and within businesses. We've now stood up a business focused on things like residential battery and geo exchange and geothermal solutions for homes and businesses, EV charging, hybrid heating in the HVAC realm, so important steps we've taken there to strengthen that team so that we can offer turnkey solutions there. And the highlight of that is we've got really what I think are forward-looking partnerships that we formed with the likes of Enbridge, who has stood up a new business called Enbridge Sustain. As well, we've created a center of excellence around grid scale batteries. I'll speak a little later about how that vision is coming to fruition now. We're working closely with our customers who are in the thermal energy markets so that we can bring solutions in renewable natural gas. And of course, for 20-plus years, we've been working with our customers like Enwave on district energy systems and that area or that sector of construction is now accelerating.

Excellent. Thank you. You talked about geoexchange. It's becoming rapidly the go-to technology for commercial institutional industrial clients seeking to reduce their carbon footprint, optimize energy costs, lower eliminate fossil fuel dependence and meet their ESG targets. Can you expand on what Aecon is doing in this market?

Sure. So I don't think I'll go into much detail on geoexchange. I think at this stage of the conversation across the industry, I think people are aware of that technology where we use ground-sourced heat to help reduce a building's carbon footprint. But a little bit about that industry and where Aecon believes that we're bringing an important solution is that was very much a small niche market for many, many years. And so as you go to start to scale that up because you remember, across -- if you just look at Canada, there's something, and I'm sure someone will fact-check me on this, but there's something in the order of magnitude of about 10 million homes across Canada, many of which get their thermal energy needs from natural gas. And of course, renewable natural gas will help address some of that, but there certainly is an increasing demand for geoexchange solutions. And so we've taken steps to build up our fleet and build up our competency, find the right partners including GSC, which is a certified aboriginal business in Cochrane, Alberta. So we started doing work with that group. And so we're very proud of that in an effort to make sure that we have a national solution. Everything that I talk about here and all the services we provide are on a national and, soon in international scale.

Excellent. Thanks, Eric. Adam, back over to you. The report -- our sustainability report discussed how Aecon is making progress towards its emissions reduction goals. Can you talk about those goals and where we are?

Yes, you bet. So in 2021, we were the first construction company in Canada to set a GHG target with very aspirational targets in mind. We're also set up a sustainability-linked loan for our credit facility, again, quite aspirational and measurable targets that we're trying to achieve. We've got -- one of our main targets, obviously, is to reach carbon neutrality by 2050, with a first milestone to achieve a 30% reduction in direct CO2 emissions by 2030, starting from a 2020 base. And this is all on an intensity basis. So we think we're well on our way to achieving the first target for sure. 14% reduction, as was mentioned earlier, in these direct emissions since we started measuring in 2020. Slight increase in those emissions in '22, which was expected as projects started to ramp up after COVID, and we had significant growth in revenue and volume at Aecon, but still very much on a downward trend with these emissions, expecting it to hit our 30% target by that expected date, if not earlier. And lots of the things we're doing are continuing to push in those areas to focus our business on areas with lower emissions.

Excellent. Thanks, Adam. Prabh, a key highlight from Aecon's 2022 report is the comprehensive GHG inventory from all of Aecon's operations, which is a best-in-class practice. Can you tell us about the results of this inventory?

For sure. So we undertake an emissions inventory on an annual basis, and the purpose is really to understand where our emissions are coming from. The inventory includes our facilities, offices and major projects as well. And it enables us to identify our emission sources and really track the changes over time and the progress towards our emission reduction goal. From the inventory, we learned that over 60% of our emissions are associated with fuel and diesel usage across our operations. We also learned which pieces of equipment on job sites use the most amount of fuel, which really helps to prioritize our GHG emissions reduction strategy. Every year, we build on our inventory. In 2002 [ 2022 ], we further expanded our inventory to include Scope 3 emissions, which are indirect emissions. These emissions are from our supply chain. And from this, we learned that Scope 3 emissions are our highest source of emissions, which is very true for the construction industry in general. So we're -- as I mentioned, in 2022, we expanded our ESG screening to include suppliers as well. And the motivation is really to build on our Scope 3 emissions and understand our emissions associated with our supply chain.

Interesting. And what initiatives did we implement in 2022 to help reduce our emissions?