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

Good day, and thank you for standing by. Welcome to the Q2 2026 Aecon Group, Inc. Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Adam Borgatti, Senior Vice President of Corporate Development and Investor Relations. Please go ahead.

Thank you, Didi. Good morning, everyone, and thanks for participating in our Q2 2026 results conference call. Joining me are Jean-Louis Servranckx, President and CEO; Jerome Julier, 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 will refer to during the call. Following our comments, we'll be happy to take questions from analysts, and we ask that you keep to one 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're sharing with you today includes forward-looking statements based on assumptions that are subject to significant risks and uncertainties. Although Aecon believes these 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 from the quarter. Aecon delivered an all-time record for revenue in any quarter with second quarter revenue of $1.6 billion, increasing 25% over the same period last year. Adjusted EBITDA improved significantly in the quarter to $82 million compared to $41 million last year, driven by year-over-year margin improvement in the Construction segment. Aecon entered into an agreement to purchase the convertible preferred equity investment held by Oaktree Capital in Aecon Utilities. The $320 million purchase price implies a $1.2 billion equity value and a $1.5 billion enterprise value for Aecon Utilities. Backlog at June 30 was $10.5 billion, underpinned by a diversified mix of long-term projects with appropriate risk balance and does not yet include Aecon's share of significant awards, including those under collaborative and progressive models within or post quarter that will be added to future backlog. The Gordie Howe International Bridge reached substantial completion in the second quarter and opened to traffic earlier this week on July 27, a remarkable achievement by Aecon and its partners. And an amicable and mutually agreeable settlement was reached in the second quarter on one of the remaining legacy projects to resolve disputes fully and finally. 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 recurring revenue programs and a healthy pipeline of project opportunities. And 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 address Aecon's financial position, then close with a summary of the utilities pref share purchase transaction. Turning to Slide 4. Revenue for the 3 months ended June 30, 2026, of $1.6 billion was up $329 million or 25% compared to the same period in 2025. This represents the highest recorded revenue by Aecon in any quarter in its history and approximately 80% of the revenue growth in the quarter was organically generated. Adjusted EBITDA of $82 million doubled compared to $41 million last year, and operating profit of $36 million compared to an operating profit of $2 million in the same period last year. The improvement in the period was driven by higher gross profit of $78 million compared to the same period in 2025. Q2 2026 diluted loss per share of $1.58 is driven by a fair value adjustment on the preferred shares of Aecon Utilities of approximately $128 million recorded upon reaching the agreement to purchase the shares. This adjusted the carrying value to the agreed purchase price of $320 million. Adjusted diluted earnings per share in the quarter, excluding this fair value adjustment, was $0.33, an improvement compared to the adjusted diluted loss per share of $0.10 in the second quarter of last year. Financial results in the quarter were impacted by negative gross profit of $4.5 million from the legacy projects. On an LTM or trailing 12-month basis, the negative impact from legacy projects was $36 million. Backlog of $10.5 billion at the end of the second quarter compares to backlog of $10.7 billion at the same time last year. New contract awards of $1.3 billion were booked in this quarter and $2.7 billion were booked year-to-date. Now looking at the results by segment. Turning to Slide 5. Construction revenue of $1.6 billion in the second quarter was $335 million or 26% higher than the same period last year. Revenue was higher in all sectors, with the largest increase of $138 million in utility operations, driven by a higher volume of electrical, gas and telecommunication work in Canada and the U.S., including contributions from the acquisitions of KPC and Arc completed in the first quarter of 2026. Urban Transportation Solutions increased $93 million, driven by a higher volume of subway and rail system work as well as closeout activities on Ontario light rail transit projects that achieved substantial completion in 2025 and are now fully operational. Nuclear operations increased $80 million due to a higher volume of refurbishments, decommissioning, new build and engineering services work at nuclear generating stations across North America. In Civil operations, higher revenue of $22 million was mainly from an increase in the civil component of power and rail projects, foundations work and international major project work. Turning now to Slide 6. Construction segment adjusted EBITDA of $90 million compared to $40 million last year, with an adjusted EBITDA margin of 5.5% compared to 3.1% in 2025. The increase was primarily driven by an improvement in gross profit margin in Urban Transportation Solutions and Civil and the gross profit impact of higher volumes in utilities. These increases were partially offset by lower gross profit margin in industrial and nuclear operations and higher MG&A to support our ongoing growth in operations. Turning to Slide 7. Concessions adjusted EBITDA for the quarter was $11 million compared to $16 million in the same period last year, driven by lower management and development fees on concession projects that achieved substantial completion in 2025, partially offset by improved operating results at Skyport in Bermuda. The book value of our concessions portfolio at quarter end was over $0.25 billion. Turning to Slide 8. At June 30, 2026, Aecon held core cash and cash equivalents of $129 million, which excludes $500 million of cash representing Aecon's proportionate share of cash held in joint operations. In addition, at June 30, 2026, Aecon had committed revolving credit facilities of $1 billion, of which $302 million was drawn and $4 million was utilized for letters of credit. Combined with our $960 million EDC performance security guarantee facilities, our total committed credit facilities for working capital and letters of credit requirement totaled $2 billion. Net debt at June 30, 2026, was $672 million. Aecon has proactively opted to include the $320 million repayment agreement for the preferred shares of Aecon Utilities in this figure. Net debt to trailing 12-month adjusted EBITDA was 2.2 or 2x, excluding the negative earnings impact from legacy projects. Aecon has no debt or working capital credit facility maturities until 2029, except equipment loans and leases in the normal course. Aecon generated free cash flow of $301 million in the trailing 12-month period ending June 2026 compared to negative $10 million in free cash flow in the same period last year, a significant improvement in cash generation. In the second quarter, Aecon's Board approved a quarterly dividend of $0.1925 per share or an annualized dividend level of $0.77 per share. The dividend will be paid on October 2, 2026, to shareholders of record on September 22, 2026. Now before I turn the call over to Jean-Louis, I'd like to briefly comment on the announced buyout of the pref shares in Aecon Utilities on Slide 9. Partnering with Oaktree in the fall of 2023, Aecon Utilities has delivered significant growth through organic expansion and 4 strategic acquisitions, strengthening our capabilities across electrical transmission and distribution, substations, metering, telecommunications and utilities infrastructure. During that time, electrical infrastructure has grown from approximately 1/4 of the revenue to nearly half today. The business has expanded from almost exclusively operating in our core Canadian market to 25% of the revenues now being generated in the United States. Aecon Utility now generates over $1.2 billion of pro forma annual revenue with over 70% derived from recurring long-term master service agreements and has established a platform positioned to benefit from long-term investments in grid modernization, electrification, digital infrastructure and data center work. The transaction allows Aecon to fully participate in the future growth of Aecon Utilities while significantly simplifying our ownership structure, enhancing financial flexibility and strengthening the integration across our business. Upon closing, Aecon will have full economic and strategic control of a large and diverse utility infrastructure platform, supporting our comprehensive power and utility services offering across Canada and the United States. Finally, on a personal note, I'd like to thank the Oaktree Capital team for their partnership and support over the last several years. It's been an absolute pleasure working with you, and together, we've built a stronger, larger and more diversified utility services platform. We're excited to continue that momentum forward. At this point, I'll turn the call over to Jean-Louis to address our business performance and outlook.

Thank you, Jerome. Turning now to Slide 10. Aecon continues to drive growth through a balanced and diversified work portfolio across the nuclear, civil, utilities, industrial and urban transportation sectors. In the second quarter, the Construction segment saw a broad-based increase in revenue across all sectors. Power and utility services collectively represent over 55% of Aecon's nearly $6 billion in trailing 12 months construction revenue. Our concessions portfolio also continues to grow and diversify. The Gordie Howe International Bridge now is operational and Aecon holds a 20% interest in its equity and 30-year operations, maintenance and rehabilitation activities. And earlier this week, an Aecon partnership announced it has executed an agreement for the 150-megawatt CIMCO battery energy storage system project in Ontario in which Aecon Concession is an equity partner. Aecon will also serve as the exclusive EPC provider for the balance of plant works. The project complements our ownership position in the Oneida Energy Storage project and demonstrates Aecon's credentials in grid-scale battery delivery with completed and ongoing work represented approximately 1 gigawatt of Ontario's delivered or planned battery energy storage capacity. Turning to Slide 11. Demand for Aecon services remains strong. With a strong secured backlog, growth in recurring revenue programs in utility services and a healthy bid pipeline, Aecon maintains its focus on improved profitability and margin predictability while continuing to improve the risk profile of our business. Trailing 12 months recurring revenue was over $1 billion at June 30, 2026, with recurring revenue from utility services increasing to $868 million from $668 million last year, an increase of 30%. Turning to Slide 12. I would like to take a moment to recognize a truly historic achievement for Aecon. The Gordie Howe International Bridge project achieved substantial completion on June 9, marking the successful delivery of one of the most significant infrastructure projects in North America. Just last week, Aecon had the opportunity to participate in the official opening celebrations culminating with the opening of the bridge to traffic earlier this week. Together, the entire project team successfully navigated complexity and overcame challenges, including a global pandemic, always remaining focused on safety, perseverance and world-class execution excellence. It is the first new Canada-U.S. border crossing in more than 60 years, spans 2.5 kilometers, required over 20 million work hours by close to 16,000 workers and showcases Aecon's ability to deliver complex infrastructure projects. On behalf of our leadership team, I want to thank the thousands of Aecon employees, partners, suppliers and stakeholders who contributed to making this project a success. It is an incredible accomplishment and a significant milestone in Aecon's history. Turning to Slide 13. We've recently announced several significant project awards and strategic developments that strengthen our multiyear growth profile and reinforce Aecon's position in some of North America's most attractive infrastructure markets, spanning nation building, defense, power generation, transportation and water infrastructure. These include the 932-megawatt Greenlight electricity Center in Alberta, which will support a major data center for Meta. The Roberts Bank Terminal 2 in British Columbia, a priority nation building project that will increase container capacity at the Port of Vancouver, the Winnipeg Biosolids facilities project and the Mactaquac Life Achievement project in New Brunswick. These projects align directly with our strategy of pursuing complex infrastructure programs with appropriate risk allocation, long-term visibility and strong partnership structures. We continue to advance a broad portfolio of major projects, including the Arctic Over-The-Horizon Radar program, the Pickering nuclear refurbishment, the Darlington new nuclear project, the Cascade Energy facility in Washington State, the GO Expansion civil works program, the Hamilton LRT and urban redevelopment and the U.S. Virgin Island Airports. These are progressing under collaborative and progressive delivery models that support improved risk allocation and execution certainty. This project represents billions of dollars of potential work and when layered with Aecon's $10.5 billion of backlog and recurring revenue program provide long-term growth visibility unmatched in Aecon's over 150-year history. Turning to Slide 14. 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 the major projects in development that I just spoke to, contributions from strategic acquisition in the industrial and utility sectors, ongoing strength from an extensive portfolio of small and midsized work programs and the ramp-up of projects under multiyear lower-risk contract models in new nuclear construction and mass transit and mobility. In the Concession 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 a stabilization and gradual improvement of adjusted EBITDA margins in the Construction segment in 2026. Our overall outlook for 2026 continue to be very positive. We are excited about the momentum we have built in the first half of the year and remain focused on executing our strategy to drive long-term shareholder value. In closing, I want to thank our teams across all our operating sectors for their unwavering safety always mindset as we deliver critical infrastructure projects across Canada, the United States and internationally. Thank you. We will now turn the call over to analysts for questions.

[Operator Instructions] And our first question comes from Sabahat Khan of RBC Capital Markets.

I just wanted to get maybe starting with a high-level one. You noted a lot of larger projects. There have been a lot of headlines around the Canada national building stuff. Can you just talk about maybe as you're having discussions with these customers, are you able to get a bit of a cadence on time line just in terms of how those projects will come along? Will you be able to staff for them, get the right people in the right places? Like are you starting to get some level of visibility on how that work might start to flow? And then maybe just talk about how from a preparation side, getting the right staff in the right regions, et cetera. So maybe just an update on how those bigger projects are building up for Aecon?

Yes, I will take this one. Yes, we can. Most of these projects are progressive design-build, collaborative projects. So they just begin with the development phase that can be I mean, from 12 months to 24 months. And we have -- when we advance those development phase, more and more visibility about the real execution of the work, the time frame, the scope, the budget. So yes, we are just getting, I mean, more and more secured with those projects, what we call the sovereignty projects. We are extremely careful and focused on our capacity to deliver those projects. You probably have noticed that we are very careful on not having all those projects on the same geography, on the same sectors, on the same time frame. It's a balancing tactic. And we think we are quite well about being able to execute those projects perfectly.

Then just for my follow-up, I guess, maybe as you -- it might be a bit one more for Jerome, but just in terms sort of the margin profile as these larger projects are building up, your outlook commentary shared a bit more specifics this time. Just talk about your confidence in sort of the margin progression through H2, what you're seeing and then what you guys are seeing in the backlog that you built around the margin profile? And I know it's early, but any sort of directional commentary you can share on that for '27. I think your commentary notes growth into '27 on the top line, but curious on the margin side as well.

Yes. Tons to unpack there, Sabahat. I'll -- before I start talking about the margin profile, I think it's always critical to reground around the risk associated with the work that's being executed because the 2 go hand in hand. So starting on that point, we are working on much better quality programs from a risk perspective than we've ever had. So if you look at the LTM period, the amount of work that we've done, roughly 7% of the work was on non-fixed price. And then the fixed price work that we're executing is increasingly under more collaborative models. So I think the overall risk in the enterprise is dropping. And what we committed to with regards to margin in our outlook, which started in Q4 of 2025 was a stabilization. And we had an adjusted construction margin, excluding the legacy projects, was roughly 6% at the end of Q4, 6% on a trailing 12-month basis in Q1 and then again, 6% on a trailing 12-month basis in Q2, all while significantly growing revenue and all while shedding risk against the programs that we're working on. So that is like just a clear net positive with regard to risk-adjusted returns for Aecon. As far as the guidance on gradual improvement, like we really mean that trying to improve things in a very slow and measured way given the bulk of work that we have in front of us and where we stand on the programs that we're executing. We're very early on in programs in nuclear and urban transportation solutions and the traditional construction excess curve means that you will generally see the benefits accrue later on in program life. I'd also note that gross margins and backlog margins are improving. And one of the areas that's an offset today is MG&A, which we're doing as far as investments to improve our delivery capacity, which Jean-Louis mentioned. So I'll just say margins have been stabilized. We've done a great job with that. Revenue growth is improving. The risk is improving. So it's just a net positive. With regards to 2027, we're not providing an outlook on that one. So we're not going to front run it. I think the general direction of travel is probably consistent with what we've seen in 2026 as outlook, which is stabilization followed by improvement. Just given the bulk and size of work, we're really focused on maintaining the appropriate risk cadence across the entire portfolio. So not a perfectly direct answer on the last part of the question, but hopefully, a little bit of color on where we're thinking things could go.

And our next question comes from Frederic Bastien of Raymond James.

I have a couple of questions. First one regarding the Evergreen project that you secured. It's a fairly sizable project. Congratulations on winning it. But I was wondering if you could discuss the risk profile associated with that project. I did notice that it was an EPC project, so fixed price projects. And I would love to get your -- some comments on your comfort level around that particular project.

Okay. Frederic, I'm going to check this one. I imagine you're speaking about the green light project with Tina, I mean, the combined cycle gas turbine.

My apologies.

Yes. No problem. Power is a strategic focus at Aecon. You have noticed, I mean, we are now a little more than 55% of our revenue. It's about distribution. It's about transmission. It's about substation. It's about battery storage. You have noticed the CIMCO 150 megawatts that we have just disclosed a few days ago, power generation now. So the power generation market, on one side, you have the nuclear. We are extremely present and strong in nuclear. I may come back to this after. On the other side, you have the renewable projects where we have attacked this through battery storage and some transmission. We are not in solar panels, and we are not in wind machine. We think that this has been commoditized and it was not the right time to enter it. In between nuclear and renewable, you have a spot, which is gas turbine generation. This is going to be the strong spot during the 10 years to come. And Aecon had to be within this spot. On another hand, we are not speaking about first of a kind when we speak about gas turbine. I mean, there is something like 500 gas turbine projects under construction every year. So the contract model is EPC. So what we decided to do a few years ago when we realized that we needed to be there was to strengthen our capacity to be able to get this kind of projects. Different way of doing it. We have acquired United in United States, specialist in power generation and in EPC delivery. If you go to their track record, it's impressive. We have secured partnership with one of the best engineering company with combined cycle, which is Tecnicas Reunidas. They have built more than 60 of those kind of projects. In addition, this project is in Edmonton, quite close from our industrial base. The client Pembina is quite well known from us. I mean we have been working with them. We know them perfectly. And the output of this power plant is secured by a power purchase agreement with Meta. Last point, long development phase. We have been working in perfect collaboration with our clients and our engineering partner during more than 12 months. So we -- before we closed this job, we had a very, very good knowledge of the scope, the price and the risk. In addition, most of the long lead equipment have been ordered and are going to be supplied with the corresponding warranty and liability by the owner. So this was the target and the product to catch. We have been patiently building capacity and core competency to be able to execute it securely. And we just consider that it's a very good catch for Aecon. Have I answered your question?

Yes. Thanks for the very detailed answer. Appreciate it. Next question is on labor availability. Obviously, you were quite successful winning several contracts in recent months that provide good visibility into future growth. How are you thinking about scaling your workforce to meet this expected demand? And what risk do you see around labor availability going forward?

I would say there are 2 different issues. I mean, the staff and the management teams and the trade. So far, we have not seen shortages of trades. We have a mid- and long-term agreement with major trade unions. When we are open shop, I mean, we also have a very strong geographical presence. So we do not see at this stage issues so far. As I've said a few minutes ago, we are always extremely focused on the balance of our activity geographically sectors, time for execution so that we don't unduly overload, I mean, one aspect. Regarding staff and management, I mean, it's a constant fight. You probably remember, we have created Aecon University a few years ago. We have a project management academy. We are training, we are recruiting. We are trying to reward as good as we can all our management. It's a constant fight, but it's one of my most important 5, I mean, on my desk to ensure that we always have the capacity to execute this backlog that is growing.

Our next question comes from Benoit Poirier of Desjardins.

Just on the Concession side, obviously, you've been successful to secure the agreement with CIMCO, so currently in predevelopment. But I was just curious to know maybe a little bit more about the pipeline of opportunities for Concession these days. So obviously, you've been quite successful to grow construction, but I'm just curious whether -- what are the kind of the opportunities you see on the concession side to grow this segment?

Benoit, Jerome here. We really -- the Concession business continues to perform really quite well. So as noted, CIMCO was successfully secured that builds on our expertise with regards to battery ownership, but also execution of battery projects. Jean-Loius mentioned in his prepared notes, under delivery or delivered, Aecon's had roughly a full gigawatt of battery storage systems in Ontario, which I think is probably something akin to a market-leading position. So we have a lot of confidence in that aspect of the execution. The team is continuing to work on the airports in the U.S. Virgin Islands with regards to progressive development. So that's going according to expectations. Additionally, you would have seen in the notes, Aecon Concessions is developing a network asset for a third-party client. And on that front, the construction side of the house will be building the asset for Concessions ownership, there will be an intercompany elimination. So there'll be a negative drag on Concessions EBITDA. But then Concessions will be able to then onward use that asset to generate long-term income against a strong credit counterparty. So from our perspective, we're really pleased with the work that Concessions is doing, very much aligned with the long-term vision of that platform, which is to grow, diversify, generate long-term cash-generating assets, be able to get development style returns, all while generating also construction revenue and profitability from Aecon and provide an additional source of capital unlock for our clients. So I think overall, the $0.25 billion of book value of equity is obviously worth more than that, but we'll continue to look to invest in this platform because it generates a normal and unique returns for Aecon and shareholders.

That's great color, Jerome. And maybe on the CapEx side, you mentioned that we should see a slight uptick in terms of CapEx as you grow revenue. What about the kind of CapEx we might see going forward as you further grow the construction revenue?