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

Good day, and thank you for standing by. Welcome to the Q3 2026 Aecon Group Inc. earnings conference call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Adam Borgatti Senior Vice President of Corp Development and Investor Relations. Please go ahead.

Thank you, Lisa. Good morning, everyone, and thanks for participating in our call today. Joining me are Jean-Louis Servranckx, President and CEO; Jean, Executive Vice President and CFO; and Alistair MacCallum, Senior Vice President, Finance. . Our earnings announcement was released yesterday evening, and we posted a slide presentation on our website, which we'll refer to during this call. Following comments, we'll be happy to take questions from analysts, and we ask that you keep to 1 question and a follow-up if necessary before getting back into the queue. As noted on Slide 2 of the presentation, listeners are reminded that the information we are having with you today includes forward-looking statements based on assumptions that are subject to significant risks and uncertainties. All Aecon believes the expectations reflected in these statements are reasonable, we can give no assurance that these expectations will prove to be correct. Turning to Slide 3. I'm pleased to share key highlights and accomplishments from the quarter. Aecon delivered record quarterly revenue of $1.9 billion, increasing 26% and over the same period last year. 71% of the revenue growth in the quarter was organic. Adjusted EBITDA improved significantly in the quarter to $130 million compared to $93 million last year. an increase of 40%, driven by strong revenue growth and year-over-year margin improvement in the Construction segment. Aecon was awarded contracts and joint ventures with an aggregate value of $3 billion for the Pickering Nuclear Generating station refurbishment execute should face. Our $1.75 billion share of the contract was added to backlog in the quarter and represents the largest nuclear award in Aecon's history. The award, along with continued investments in fabrication capacity, reinforces Aecon's position as Canada's Nuclear builder, supported by an established record of delivering complex nuclear projects across the full nuclear value chain. Backlog at September 30 was $14.6 billion, up 39% over last quarter, representing the highest reported backlog in Aecon's history and underpinned by a diversified mix of long-term projects with appropriate risk balance. Over 80% of Aecon's backlog tied to nonfixed price or collaborative fixed price contract models. We're extremely proud to achieve gold partnership accreditation in indigenous relations status, becoming the first construction company with nationwide operations to achieve the highest level of certification. Building strong respectful relationships with indigenous peoples and communities has long been part of how Aecon operates. This recognition reflects its history and our commitment to meaningful indigenous partnerships. We also continue to advance our strategic priorities and concessions, including the launch of Maple Fiber, a strategic alliance to finance, design, build and own next-generation network infrastructure. Aecon reinforces its positive outlook supported by the expectation for double-digit revenue growth for the full year 2026 based on our strategic positioning in sectors with attractive demand profiles, growing referring revenue programs and a healthy pipeline of project opportunities. With that, I'll hand the call over to Jerome.

Thanks, Adam, and good morning, everyone. I'll speak to Aecon's consolidated results, review results by segment and then address Aecon's financial position. Turning to Slide 4. Revenue for the 3 months ended September 30, 2026 of $1.9 billion was up $390 million or 26% compared to the same period in 2025. Adjusted EBITDA of $130 million increased 40% compared to $93 million last year, while operating profit of $83 million compared to an operating profit of $61 million in the same period last year. . The improvement in the period was driven by higher gross profit of $7 million compared to the same period in 2020. Adjusted diluted earnings per share was $0.86 in the quarter, an improvement compared to $0.49 in the third quarter of last year. Financial results in the quarter were impacted by negative gross profit of $9 million from the legacy projects. The final legacy project reached substantial completion in June and commenced operations in July of this year. cons joined operations partners to continue to pursue commercial resolution on the matter. Backlog of $14.6 billion at the end of the third quarter was the highest reported backlog history and compares to block of $10.8 billion in the same time last year. New contract awards of $6 billion were booked in the quarter and $10.1 million is booked over the trailing come. Now looking at results by segment. Turning to Slide 5. Construction revenue of $1.9 billion in the third quarter was $410 million or 27% higher than the period last year. Construction revenue growth in the quarter was 72% organic and was broad-based with higher revenue in all sectors. The largest increase of $184 million was registered in utilities operations driven by a higher volume of electrical, gas and telecommunications work including contributions from acquisitions completed in the first quarter of 2026. Nuclear operations increased $130 million due to a higher volume of core refurbishment, decommissioning and engineering services at nuclear generating stations in Ontario and the United States. Revenue in civil operations increased $45 million, primarily from higher work volume on power and rail projects and in foundations work partially offset by a lower volume of highway road and bridge construction activity. And Industrial Operations revenue increased $42 million, primarily from a higher volume of field construction work in the United States with most of the revenue growth attributable to businesses acquired in the third quarter of 2025 as well from an increase in the industrial components of power generation projects. Urban Transportation Solutions increased $9 million, driven by a higher volume of subway and commuter rail system work, partially offset by lower volume on LRT projects that achieved substantial completion or became operational in 2025. SP1674730870 Turning to Slide 6. Construction segment adjusted EBITDA of $132 million compared to $88 million last year, with an adjusted EBITDA margin of 6.8% compared to 5.8% in 2025. The -- the increase was primarily driven by an improvement in gross profit margin in civil and nuclear operations. More broadly, and Jane will further discuss. The improvements reflect the continued shift towards a lower risk work mix stronger execution and the gradual normalization of earnings as legacy project exposure winds down. Turning now to Slide 7. Concessions adjusted EBITDA for the quarter was $12 million compared to $15 million in the same period last year, largely due to the deferral of intercompany construction profit related to network assets under development. Turning to Slide 8. At September 30, 2026, Aecon held core cash and cash equivalents of $529 million, which is over and above the $537 million of cash, representing Aecon's proportionate share of cash held in joint operations. In addition, at September 30, 20, 26, Aecon had committed revolving credit facilities of $1 billion, of which $342 million was drawn and $4 million was utilized for letters of credit. Combined with our $960 million EDC performance security guarantee facilities, Aecon can access total remitted credit facilities, working capital and better credit requirements, tolling approximately $2 billion. Net debt at September 30, 2026 was $338 million. This includes only our core cash balances and also recognizes the $320 million repayment agreement for the preferred shares of Aecon Utilities debt. The repayment continues to be anticipated to close in the fourth quarter. Net debt to trailing 12 months adjusted EBITDA was Aecon generated free cash flow of $645 million in the trailing 12-month period ended September 30, 2026 compared to negative $41 million in free cash flow in the same period last year. Cash performance was driven by a relentless focus on working capital management and contract structure. At this point, I'll turn the call over to Jean-Louis to address our business performance and outlook.

Thank you, Jerome. Turning to Slide 9. Aecon continues to drive broad-based growth across our nuclear civil, utilities, industrial and urban transportation sectors. In the third quarter, the Construction segment generated record revenue with increases across all sectors. Power and Utility services collectively represent 58% of Aecon's $6.4 billion in trailing 12-month construction revenue. Nuclear is a key part of that position and [indiscernible] differentiator for Aecon Canada's Nuclear builder. Our capabilities span engineering in reactor construction, nuclear qualified fabrication and modularization, refurbishment, decommissioning and new build in North America. We are acquiring additional fabrication capacity in Ontario, which will expand Aecon's nuclear fabrication network to 4 facilities in Canada and the United States to support some of the largest nuclear refurbishment and new build projects in North America. Our concessions portfolio also continues to grow and diversify, leveraging our unique project development, financing and integrated construction capabilities. We recently launched Maple Fiber, a majority control strategic alliance with a Tier 1 telecommunication operator to finance, design, build and own next-generation network infrastructure. Aecon Concessions hold a majority interest in the partnership and Aecon utility has commenced construction for make fiber in Ontario. Turning to Slide 10. I want to spend a moment on the strength of our current positioning and the visibility we have into future growth. We ended the quarter with a record backlog of $14.6 billion. The backlog tells an important story, but it's really only part of the story. On the right-hand side of the slide, we showed 10 major projects where Aecon is currently in development or collaborative delivery phases, but where significant future scope is not yet reflected in backlog. In Nuclear, for example, our backlog includes the recently announced Picking Unit 5 refurbishment and full turbine generator replacement award, while future opportunity associated with the refurbishment of Unit 6, and is not yet reflected. Similarly, at Darlington, Unit 1 of the new nuclear SMR project is under construction while the future 3 units represent additional opportunity and the development to work beyond our current backlog. The same dynamic applies across other major projects and programs shown here, including the Cascade Advanced Energy facility, SMR, the hydroelectric [indiscernible] life extension project the Board and marine construction project at Robert Bank Terminal 2 in Vancouver. The defense project for Arctic over Verizon a Phase 1 and the regional rail network go expansion program where additional programs under development are opportunities to convert to new work over time. And -- the backlog we do report is long-dated. Approximately 2/3 extends beyond the next 12 months and about 40% or $6 billion beyond 24 months. Taken together, our reported backlog represent only the fully contracted portion of a much broader portfolio of secured and developing work providing significant visibility into future growth. Turning to Slide 11, trailing 12 months recurring revenue was over $1.1 billion at September 30, 2026. With recurring revenue from utility services increasing $987 million from $695 million last year, an increase of 42%. Importantly, this recurring revenue is also not reflected in our reported backlog. Our MSA programs have a weighted average contract term of approximately 3 years and a near 100% renewal rate, providing significant multiyear visibility beyond the backlog we report today. Aecon Utility is generating nearly $1 billion of recurring revenue today with continued growth across Canada and the U.S. It is an integral part of our growth platform. with capabilities spanning power, transit electrification, battery storage, data center, electrical infrastructure, airports and nuclear development. Turning now to Slide 12. We have an unwavering focus on risk-adjusted profitability, highlighted by the relationship between our contract mix and our margin performance. At September 30, approximately 64% of our backlog was comprised of variable price contracts, which covers cost plus or unit price work. Of the remaining 36% classified as a fixed price, close to half of this was booked following collaborative and fully integrated development phases. Taken together, approximately 81% of our EUR 14.6 billion backlog is derived from collaborative model or loan fixed price work. On a trailing 12-month revenue basis, approximately 69% of construction revenue was generated from collaborative or nonfixed price contracts. As our backlog converts into revenue over time, we expect the lower risk profile of our backlog to continue to support greater predictability in our results. This evolution in our risk profile is particularly important when looking at margin. This is the right part of Slide 12. Construction trailing 12-month adjusted EBITDA margin has increased from 3.7% in the third quarter of 2025 to 5.6% today. While we have maintained a consistent lower-risk revenue profile throughout the period. This slide of our presentation is extremely important, and we'll come back to it probably during the question. As we have said previously, our focus is on stabilizing and gradually improving margins. We've done it and are focused on driving further improvements in risk-adjusted profitability. Our strategic position in key sectors, lower-risk contract mix stronger execution and the continued wind down of legacy project exposure provide a stronger foundation for more predictable performance. Turning to Slide 30. Aecon expects double-digit revenue growth in 2026. Our expectation for a broad-based revenue increase in 2026 and further revenue growth in 2027 is underpinned by secured backlog exceeding $14 billion, recurring revenue programs, recent acquisitions and the pipeline of project opportunities tied to nuclear and conventional power, critical result development, mass transit, water, defense and digital infrastructure. This clearly positions Aecon at the center of many of the infrastructure priorities Canada needs to deliver over the coming years. while our growing U.S. and international presence provides additional diversification and avenues for growth. In the Concessions segment, there are several opportunities to add to the existing portfolio of Canadian and international concessions in the next 6 to 12 months to support trends in aging infrastructure mobility, connectivity, energy and population growth. Aecon's deliberate shift toward a greater weighting of improved risk-adjusted work programs in combination with a strong focus on operational excellence, is anticipated to support the gradual improvement of adjusted EBITDA margins in the Construction segment in 2026 and 27. Our outlook for 2026 continues to be very positive. We are excited about the momentum we have built so far this year and remain focused on fully executing our strategy to drive long-term shareholder value. Turning now to Slide 14. I want to congratulate our indigenous relations team for achieving gold partnership accreditation in indigenous relations stages. This achievement reflects the dedication of teams across Aecon and the strength of the relationships we have built with indigenous communities, businesses and partners over many years. We are proud of what we have accomplished and invite our partners to join us in advancing sustained action with lasting benefits for generations to come. In closing, I would like to thank our outstanding team at Aecon. In the quarter, over 14,000 team members across all our operating sectors delivered on our potential with an unwavering safety always mindset and commitment. We will now turn the call over to analysts for questions.

[Operator Instructions] Our first question will be coming from Yuri Lynk of Canaccord Annuities.

Just want to go back to the margin discussion. And if you could maybe go through some of the puts and takes on how the Construction segment margin improves from here, particularly if you could address the operating leverage because there has been a notable increase in SG&A. And also if mix has anything to do with it?

Okay. I'm going to begin on a general basis, and then Jerome will probably address the last point of your question. So Obviously, I mean, we at Aecon, we have been patiently and steadily preparing for this moment and the path forward role. I used to give to my team the image of the way the helicopter pilots are being trained in the Army. They have to get the left eye totally focused on the instruments, which is for us executing project by project the best we can and the right eye pointing 2 or 3 miles ahead, which is about our strategy. It's exactly the same thing that we have -- I mean, our management team level at Aecon. We consider that we have acquired a strategic and unique positioning on the infrastructure market. We acquired a derisk project mix, which is very important. And that will give us a much better margin predictability. This Page 12, as I announced it, I mean, a few minutes ago is extremely important. I mean if you see the pure economic figures of the quarter, it means EUR 1.9 billion of revenue, EUR 130 million of EBITDA, a backlog of EUR 14.6 billion and creation during the last trailing 12 months or EUR 645 million free cash flow, all this is linked together. And this Page 12 is quite important. This 80% -81% of nonfixed price contract or collaborative fixed price contracts is the global answer to your question. And it's quite important. Jerome, maybe on the 2, 3 additional question?

Yes. So can follow up for sure. On the margin profile, Yuri, further to what Jean-Louis just mentioned, margins are increasing when you include the legacy projects, obviously, as the losses is move to the rearview mirror. So if you exclude those losses, what we've seen is a stabilization of the construction margin profile with the overall risk balance of the business improve. So I would describe that almost because the best of both world's situation. That was the objective across 2026. Your question is where we continue to see opportunities to enhance the merchant profile that's informed by the work that we have in backlog and the embedded margins that we see there. But I think one thing that's important is not to get ahead of ourselves a contacting on a very broad and large long-term portfolio of with very strong risk balance. And so we view these things as incremental and over time. So just a teens better. at ahead of themselves. On the operating leverage, I'd make the observation that SG&A growth in the quarter, quarter was tied to incentive compensation M&A costs and ERP program implementation and then additional SG&A from companies that we've acquired over the last 12 months. So on that basis, there's a decent level of control there. Some of this has to do with where you want to book the cost, whether you bill them back up into gross profit, where we've obviously seen a large expansion in margin or whether you maintain them in the SG&A bucket, which is what we do. At the end of the day, overall, we're seeing an increase in the operating profit margin or adjusted EBITDA profit margin, which I think is the indicator that you want to track against. And then on the mix front, I mean, the overall execution mix that we have in front of us is balanced by client type, by region, by contract model and by sector. That was the case in the last 12 months. That's the case what we see coming in the future in the next 12 months. So I wouldn't see mix as being a determinative banner here.

Okay. And last, just a clarification question. Did I hear you say there was $9 million of legacy costs in the construction EBITDA this quarter?

That's right.

Our next question is coming from the line of Chris Murray of ATB Cormark Capital Markets.

Congratulations on probably a record backlog build, certainly very positive, and as you noted, a lots more to come. I know we're talking about a double-digit number, which I think was sort of expressed to me is higher than 11% less than 98%. But I think that if we think about the level of growth that you're going to see over the -- probably the next call it, decade. Can you talk a little bit about your ability to manage that growth, both in terms of your staffing both at the construction management level and also at the trade level?

Yes. I think I can add this. I mean, obviously, we are extremely focused on our capacity to perfectly execute this -- we have been investing during the last years a lot on operational excellence, recruiting training, motivating our workforce at all level, bringing as much loyalty as we can in a rather top market. We have been extremely cautious about the mix of our different activities between our different sectors. I mean, you don't have the same people renovating tracks or building industrial facilities or working in the nuclear or laying part of electrical grids or pipeline. Those are different kind of people and our balance of activity helps us on this one. It just means that we do not see so far a danger in being able to perfectly execute our backlog.

Okay. That's helpful. And then the other question is more around nuclear. I guess we're expecting some sort of decision, I would think, towards the end of the year, maybe from Bruce, maybe from OPG. Can you explain or kind of lay out what would be involved depending on how those decisions go. There's also some debate about technology selection. Can you talk about your exposure to both [indiscernible] and if they decide to go Westinghouse, how that would change? And could you maybe elaborate a little bit on what you've acquired in the Nuclear business in Ontario for additional support?

So first of all, we are not the ONE making the decision. I mean, obviously, but what is extremely important for us is the position we have been building in nuclear, where I think we are extremely strong. I mean we are going to refurbish the totality of the 14 Candu units in Ontario. There is not one single general contractor except Aecon. We are in association with [ Atkin Realis, ] who has a kind of different scope, but notone1 single generic contractor was entered into a Candu reactor for us. So if the decision is for Candu, obviously, we are extremely well positioned. This being said, I mean we are also a part of the team to build this small modular reactor #1, which is a [indiscernible] 300-megawatt boiling water technology. We are one of the only North American contractor were fabricated already for Westinghouse. The very important as modules. And we are also in full steam ahead in our development phase of the Cascade Energy project, which is under another kind of reactor energy. It means that whatever the decision because we are technology agnostic and because we have an incredible workforce at all level, I mean, this will obviously stable Aecon. And when I read, I mean, Aecon Canada, nuclear builder, I tend to say Canada, come, nuclear builder is Aecon. Fabrication is important. It's one of the key success factor of the generation to come it's about modularization. And SMR, I used to say, okay, it's more modular reactor, and it should be standalone reactor. It means that this is a key of success. And we are getting stronger and stronger. This is why we have been acquiring an additional facility in Ontario. Maybe, Jerome, you can speak a little about it. This is why we are investing a lot in robotics, and this is why we're extremely focused on tracking it all our productivity report it day after day because it's part of the future. Jerome, you want to speak a little bit about acquisition in fabrication capacity.

Yes. So in the release, we announced that Aecon agreed to acquire additional fabrication capacity for the nuclear sector in Ontario provide a little bit more detail on that. So it's going to close in the fourth quarter. Expectation is in the rough area of $50 million. We look to own assets that are reviews kind of critical and strategic and this would certainly be 1 of them. The footprint on the facility is larger than our current Cambridge facility, which is continuing to operate and will continue to produce by roughly 40%. It has additional acreage at an expansion capability as well. these 2 facilities in Ontario. We have an additional leased facility where we're executing work and then an additional facility that we have in the United States. So fabrication capacity is what we view as a differentiator of Aecon's capability. candidly, if we're going to meet the needs of what's required here, some of the work absolutely needs to be taken off site just to manage peaking levels. So that's 4 facilities on the nuclear side of the house. And then we have an additional 2 facilities on the industrial side, 1 in Alberta and then 1 in Texas, where we're also looking to expand. So this is all part of a long-term plan. Your first question was just around execution capacity. We're thinking about it from a technology standpoint, thinking about it from a system standpoint, we're thinking about it from a real asset standpoint. And as Jean-Louis mentioned, most importantly, we're thinking about it as a people standpoint.

Maybe I can add something on nuclear to close this question. Yes, the new build, I mean, is important, but the real strong market for the years to come is what we call enhance our upgrade or life extension of the reactor. This is the best return for the utilities, is to invest in their existing reactor. Just consider that each reactor -- for each reactor, it represents something like EUR 1 billion less. . And we are present. I mean, of course, through this major component refurbishment program in Ontario, but we are now deeper and deeper in the United States on this submarket, which is extremely important. We have more than 1,500 workers in the nuclear industry in the U.S. at the moment, and it's quite important, I mean to highlight this point.

Our next question is coming from the line of Michael Tupholme of TD Cowen.

The first question is just around the outlook. So you continue to call for further revenue growth in 2027. Just given that we're nearing the end of the year here and given the strength of the backlog that you ended the third quarter with and the visibility that, that gives you -- is there any way to provide a little bit more detail around your expectations for top line growth in 2027, how you see those evolving?

I'll talk about one. So Aecon doesn't provide guidance, but maybe I'll give you some of the underlying factors I can always help you give a pretty reasonable assumption. So of the $14.6 billion backlog our expectation is roughly $5 billion will be executed in the next 12 months. In addition, we had something in the order of $1.1 billion of recurrent revenue programs. And then and that's obviously in the LTM has been growing like that to continue to grow. So those 2 together gives you a number $6.1 billion. it kind of has a pretty strong history of one, growing the work program on the revenue side and then additionally securing additional work and then additional change orders and additional scopes on work that we have in progress as well. Historically, there's a broad rate on these items, right? But you kind of try to take somewhere like the 25 to 75, something in the $750 billion to $1.2 billion range, and that gives you an idea that there's something that probably crest the $7 billion mark.

And then just regarding the outlook, I guess, as it relates to new awards. So obviously, very strong backlog, record level. You talked in the prepared remarks about all of the various projects that are in the development phase, which gives you some further visibility as those will eventually convert. Can you just speak about the demand environment today as far as the conversations you're having for that next group of projects that could go into the development phase or future awards. So I understand the backlog is strong, what you've already been awarded that you're working toward getting to execution, but sort of that next group of projects that's going to kind of feed future years. What are you seeing there as far as activity levels discussion pipeline, et cetera.

We will begin. Canada, Globally, have decided to invest, and we have a prime minister who has just decided that it is focused for the for the years to come. So I would tend to say we are optimistic on our capacity to translate to the development phase into execution of real projects. We have extremely strong team dedicated to those development phases. So we think that the rate of translating it is probably going to be quite high. I think it was the first part of your question. The second one was about equity. Just clarify the second part.

Yes. So the second part was just -- it's really a question around the demand environment as it relates to the conversations you're having now that are going to feed into that next round of awards, whether those are awards that get going right away or other projects that enter a development phase for a period of time. So I'm just trying to compare and contrast sort of what you're seeing now versus maybe what you would have seen 12, 18 months ago. Again, I appreciate what you have secured and what you have in the development pipeline is already very robust. I'm looking at sort of other things that have yet to be awarded to you and how robust that looks.

So I think I've covered the answer, probably in my life, I have not seen such a dynamic situation for infrastructure construction in the 5 years to come.

Our next question is coming from the line of Sabahat Khan of RBC Capital Markets.

I guess on the sort of the line of questioning around the backlog and the outlook in Canada that management has been commenting on. I guess when you look at the pipeline opportunities we all see in the headlines, are you sort of comfortable with this level of backlog? And do you look at it as a relatively stable range even before some of those nation-building projects sort of start to get into the mix here? Just trying to think about the ability to sort of sustain it at these levels. And I think like an optimistic look at it is it's at a reasonable level even before we get into the procurement for some of the larger stuff that could come over the next several years. Just curious on how you're thinking about the pipeline of opportunities? And is it fair to assume much of the stuff we've been seeing in the headlines hasn't really even begun to make its way into the system yet.