Aecon Group Inc

TSX:ARE

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, and thank you for attending today's Aecon Group Q1 2022 Earnings Call. My name is Nate and I will be your moderator for today's call. [Operator Instructions] I'd like to now pass the conference over to our host, Adam Borgatti with Aecon Group. Adam, please go ahead.

[Adam Borgatti, executive]

Thank you, Nate. Good morning, everyone, and thanks for participating in our first quarter 2022 results conference call. This is Adam Borgatti speaking. Presenting to you this morning are Jean-Louis Servranckx, President and CEO; and David Smales, Executive Vice President and CFO. Our earnings announcement was released yesterday evening, and we posted a slide presentation on the Investing section of our website, which we will refer to during this call. Following our comments, we will be glad to take questions from analysts. And we ask that analysts keep to 1 question before getting back into the queue to ensure others have a chance to contribute.

As noted on Slide 2 of the presentation, listeners are reminded that the information we are sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties. Although Aecon believes that the expectations reflected in these statements are reasonable, we can give no assurance that these expectations will prove to be correct.

With that, I will turn the call over to Dave.

[David Smales, executive]

Thank you, Adam, and good morning, everyone. I'll touch briefly on Aecon's consolidated results, review results by segment and then address Aecon's financial position before turning the call over to Jean-Louis.

Turning to Slide 3. Revenue for the first quarter of $986 million was $232 million or 31% higher compared to last year. Adjusted EBITDA of $21 million and an operating loss of $10 million in Q1 were both in line with the first quarter of 2021. However, after adjusting for the impact of amounts related to the Canada Emergency Wage Subsidy, or CEWS, in the first quarter of last year, adjusted EBITDA and operating loss each improved by $8 million for the quarter compared to the same period in 2021. Diluted loss per share of $0.29 in the quarter compared to a diluted loss per share in the same period last year of $0.31 or $0.40 after adjusting for the impact of CEWS in 2021. Reported backlog of $6.4 billion increased by $510 million compared to $5.9 billion a year ago.

Now looking at results by segment. Turning to Slide 4. Construction revenue of $972 million in the first quarter was $228 million or 31% higher than the same period last year. Revenue was higher in industrial operations, driven by work related to pipeline, mining and chemical projects in civil from an increase in major projects and road building work, in nuclear from an increased volume of refurbishment work and in utilities operations driven by gas distribution, electrical transmission and telecommunications work.

Adjusted EBITDA in the Construction segment of $19 million, a margin of 2% compared to $22 million, a margin of 3% in Q1 last year. After adjusting for the net impact of CEWS in the first quarter of 2021, adjusted EBITDA increased by $5 million, primarily from higher volume and gross profit margin in civil operations and higher volume in the nuclear and utility sectors. These increases were partially offset by lower gross profit margin in Urban Transportation Solutions and Industrial operations. New contract awards of $1.2 billion in the first quarter were $992 million higher than the same period in 2021. Backlog at the end of the quarter of $6.4 billion compared to $5.8 billion at the same time last year.

Turning to Slide 5. Concessions revenue for the first quarter was $14 million, an increase of $3 million compared to the same period last year, primarily due to operations at the Bermuda International Airport. Commercial flight operations in Bermuda continue to operate at a reduced volume due to COVID-19 compared to pre-pandemic levels by recovering from the more severe impacts experienced in 2020 and 2021. Adjusted EBITDA in the Concessions segment of $14 million increased by $4 million versus Q1 2021, primarily due to results from Bermuda Airport.

Turning to Slide 6. At the end of the first quarter, Aecon had a committed revolving credit facility of $600 million, of which $105 million was drawn and $3 million utilized for letters of credit as well as a $900 million facility provided by EDC to support letters of credit. Aecon's committed facilities for both working capital and letter of credit requirements totaled $1.5 billion. Aecon has no debt or credit facility maturities until the second half of 2023, except equipment and property loans and leases in the normal course. March 31st, Aecon was in compliance with all debt covenants related to its credit facility.

At this point, I'll turn the call over to Jean-Louis.

[Jean-Louis Servranckx, executive]

Thank you, Dave. Turning to Slide 7. Despite the ongoing impacts of COVID-19 on Aecon's operations, including having to manage productivity and supply chain disruptions driven by the latest Omicron variant and other external economic factors, we continue to deliver solid results in the quarter. Aecon's balanced and diversified portfolio and continuous improvement culture are significant strengths that position well for the market opportunities across Canada today. The Construction segment is well aligned to the significant infrastructure investment commitments by all levels of government across Canada, the U.S. and on a select basis, internationally as well as by the private sector across the market sectors in which we participate.

The Concessions segment is purpose built for the large scale infrastructure projects being developed and brought to market by governments through P3 and other collaborative models and is also targeting development and private finance opportunities in transit, power, clean tech and other related markets as well as participating as a concessionaire on the 5 P3 projects identified on this slide.

Turning to Slide 8. Backlog recurring revenue programs and the pipeline of bidding opportunities for new work remain at strong levels across Canada. New awards of $1.2 billion in the first quarter, we're close to the $1 billion more than the first quarter last year. And we anticipate a number of new projects to be added to backlog in the coming months. including the Montreal-Trudeau Airport REM Station in Québec and the Kingstown Port Modernisation Project in Saint Vincent and the Grenadines. Aecon is also prequalified on a number of large project bids due to be awarded over the next 2 years, including several procurements for the Ontario subway line and the Scarborough subway extension stations, rails and system.

We expect demand for our services to remain healthy for the foreseeable future as federal and local governments across Canada and the U.S. have identified investment in infrastructure as a key economic driver and an essential part of the transition to a net 0 carbon economy through more sustainable and resilient infrastructure. Trailing 12-month recurring revenue was up 36% versus the prior period, primarily from growth in utilities operations. Recurring revenue is expected to continue to grow, driven by demand in the utility sector and the Concessions segment is expected to see airport traffic in Bermuda continue its recovery in 2022 from the impact of the COVID-19 pandemic.

Turning to Slide 9. We were very pleased to announce in April that an Aecon consortium was officially selected for the transformative multibillion dollar GO Expansion and electrification project in Ontario under a progressive design, build, operate and maintain contract model. Aecon's 50% share in the civil joint venture undertaking construction and 28% share in the 25-year operations and maintenance partnerships are anticipated to be the 2 largest projects undertaken by Aecon in its history. The contract begins with a 2-year collaborative development phase to finalize the scope, commercial structure and pricing of various elements of the project. Certain construction and early works activities will commence during this phase with operations and maintenance anticipated to commence in the second quarter of 2024. Further information on the contract value and schedule will be disclosed once the development phase is completed.

It is worth noting that this complex project extending across several regions and with multiple external interfaces, stakeholders, utility and operational elements is being delivered under a progressive and collaborative model. This is a welcome evolution from what was traditionally procured under a fixed price lump sum contract structure for such large, complex and multiyear projects. This collaborative target price approach between ONxpress and Metrolinx is designed to benefit all stakeholders. I want to express my sincere thanks for the tremendous efforts and incredible work by our team to secure this landmark project for Aecon, and we look forward to transforming transit together with our partners and clients.

Turning to Slide 10. The GO Expansion project is also a significant step in our continuing journey to be an industry leader in sustainability. Aecon proudly released its third sustainability report, building innovation on Earth Day last week, outlining our progress and key accomplishments in responsible ESG practices. The report highlights Aecon's initiatives to embed sustainable innovations and work towards net 0 construction throughout its operations.

Aecon is pleased to report significant progress towards its target to achieve a 30% reduction in direct CO2 emission by 2030, with a 15% year-over-year emissions reduction already achieved in 2021 on an intensity basis. Sustainability is part of our DNA at Aecon and a key consideration in every decision we make as we continue to focus on building what matters to enable future generations to strive.

Turning to Slide 11. The trends that I've spoken to already in terms of the strength of the construction market in Canada, both in the public and private sectors, continue to be positive and well aligned to Aecon's diversified Construction segment. In the Concessions segment, in addition to expecting continued recovery in travel through the Bermuda Airport during 2022, there are a number of opportunities to add to the existing portfolio of Canadian and international concessions in the next 12 to 24 months, including in the U.S. and in innovative projects with private sector clients that support a collective focus on sustainability and the transition to a net zero economy.

And of course, our Concession group will be a key player in the development and long-term operations and maintenance contracts for the GO Expansion project ramping up over the next several years and ultimately driving a generational change that will significantly improve transit in Canada's larger metropolitan area. The overall outlook for 2022 is positive with construction continuing on a number of projects that ramped up in 2020 and 2021, a strong level of backlog and a robust demand environment for Aecon services, including recurring revenue programs.

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

[Operator]

[Operator Instructions] Our first question goes to Frederic Bastien with Raymond James.

[Frederic Bastien, analyst]

Can you comment on the competitive environment you're seeing today? It seems like you're going against fewer global and domestic contractors, many have exited Canada. So wondering if that does allow you to be more selective when bidding for work? And is that being reflected in the contract awards that you're being able to earn?

[Jean-Louis Servranckx, executive]

Frederic, I will take this one. Yes, you've seen the pipeline of construction opportunities for the future. As you know, Aecon is able to develop, finance, engineer, build and also operate assets and it's quite good perspective. I would tend to say that there is more and more to build. And yes, you're right, it seemed less and less constructors. But at the end of the day, shortlisted -- I mean, shortly, are made of 3 players. So there is still competition. What we have to try to achieve is discipline and innovation within our bid. As I tend to say, and I'm used to say, backlog definitely is not an issue for Aecon. We are quietly but surely going on our journey to derisk our backlog. And as you've been able to see, I mean, we are at $6.4 billion at the end of Q1 2022. We have not taken one major single job on lump sum superior to $1 billion during the last 3 years, and our backlog is very comfortable. Everything is about selectivity. It's about quality of what we can acquire. You have also seen that new award during the quarter were at $1.2 billion, which is quite good.

So what's important rather than, I think, trying to assess if there will be less or more competitors. And it's about going on our objective of balancing our activity. And this is what makes Aecon at the same time, unique in the Canadian market when you see the diversity of our activity and our organization that allow us to be focused with the best team, and we think the best strategy on each of this sector. It gives us resilience, and this is what we are looking at for the years to come.

[Frederic Bastien, analyst]

Jean-Louis, did I hear you right when you said you hadn't taken a single lump sum contract of over $1 billion in the last 3 years?

[Jean-Louis Servranckx, executive]

Yes. You have heard me right, Frederic. And our backlog has been $6.4 billion.

[Frederic Bastien, analyst]

That's great. Okay. Great. The question or the topic here is, inflation. I think you've historically shown that you've done well when inflation is ramping and when commodity prices are elevated. So I was just wondering what -- can you share your thoughts here? A lot of investors are actually wondering about that?

[Jean-Louis Servranckx, executive]

Yes. Execution is key. I mean, this is always my key point. So we deal with this through our continuous improvement. I'm extremely happy with the result and the enthusiasm around the company. We deal with it about education. Our Aecon University has never been that strong about the way we procure. And here, we arrive to the disruptions that we may face. On the first quarter, I mean, Omicron was important. Thanks to the vaccine that was a game changer. I mean it's not as dangerous as the first COVID-19 virus and the following variants were. But we still have to isolate entire teams when we have a positive case. So this has been a disruption.

On the supply chain, yes, we have some issue with inflation or what we call from time-to-time hyperinflation and volatility because sometime it goes up and it goes down very quickly. So we have now a very strong centralized procurement team that can deal better with this. We also have to deal, I mean, in terms of disruption of the supply chain with scarcity or even absence of some materials -- key materials. For example, you will not find today in Canada, one single kg of stainless rebar steel. We have a lot of issues to get polyethylene pipes or some valves for our industrial jobs. So this creates some issues. All our clients are well aware about the inflation issues, and we are discussing with them either to find alternative or to find solution or through our procurement department, be able to cope with it as much as we can.

[Operator]

Our next question goes to Jacob Bout with CIBC.

[Jacob Bout, analyst]

I want to continue on with the supply chain issue discussion there. And maybe you can comment on how should we be thinking about project delays? Are you seeing any and where due to these supply chain issues? And then specifically on the inflationary pressures, is your expectation that you will see some margin pressure through 2022?

[Jean-Louis Servranckx, executive]

Yes, you're right. When I'm speaking about disruption of the supply chain, this has some consequences on our schedules, and we have to find alternatives. We have to find new ways of being able to deliver on time. I mean it's part of our effort on continuous improvement, what I call the religion of the critical path on each of our jobs. We may come back to this a little later. So what is also to be noted is that Aecon has been keeping a strong capacity to build with at home components. It means that we are not a company used to subcontract everything, everywhere. It means that, first, it makes us stronger, but much more reliable with our own workforce, what we call, our boots on the ground that we can control much better than having to go to the market. And this has definitely helped us, I mean, during the last month.

[David Smales, executive]

In terms of your question on margin, Jacob, obviously, we've been in this environment for a while now. This isn't a just a 2022 issue, it was happening through certainly the back half of last year as well. And so it's not a step change in 2022. We managed through the challenges with that. I think it certainly reduces our potential to increase margins. But I think compared to last year, when you exclude CEWS, we still expect to see good margin performance this year relative to last year. But certainly, it takes the edge off some of the upside potential for sure.

[Jacob Bout, analyst]

Okay. And maybe just a follow-up here. So looking at your backlog for the next 12 months, I think you're at just over $3.1 billion. How much of that backlog do you think is at risk due to future supply chain issues i.e. pushed out?

[David Smales, executive]

We don't really see any risk to that backlog in terms of the current schedule. Obviously, building on my comments on the previous question, this is a new phenomenon that's just happened today. These are all projects we've bid in the last -- a lot of this is projects we bid in the last little while where we built this into -- with the client into schedules, into procurement processes and projects that were already underway. Most of the procurement is done early in the project. So it's not a case of projects moving wholesale to the right, it's just dealing with individual challenges on certain aspects of the project as we go along, but it's not a case of whole projects moving to the right.

[Operator]

Our next question comes to Benoit Poirier with Desjardins.

[Benoit Poirier, analyst]

Yes. It seems that we are seeing increased momentum for -- from the U.S. with recent contract awards. Could you talk maybe about your bidding pipeline in the U.S.? And how important do you see the U.S. down the road?

[Jean-Louis Servranckx, executive]

Yes, you're right. Our strategic plan that we have renewed during the first quarter of 2022 for the 3 years to come is about growth, and it's about profitable growth. So after some of the points, I mean, with the first question by Frederic this morning, but U.S. and international is going to be an important point. We have acquired a new job in the Washington state. I mean, it's USD 126 million job. It's perfectly within our core competency. You probably remember a few months ago, I was telling you, I mean, we cannot change country and change activity. So it goes quite well. The idea is to strengthen our presence in this Washington state and then slowly going south along the West Coast, but also trying to find the right opportunities. We also have been prequalified on a medium-sized P3 in United States, a Construction one. So there is a very important pipeline, not only in civil. When we have a look at it, I mean, utilities is at least 50% of what is coming out in the near future in the United States. So we are extremely, extremely attentive to this.

[Benoit Poirier, analyst]

Okay. That's great. And when we look at your overall booking activity, it's great so far when we look at Q1 with the gold train expansion and you still have $50 billion bidding opportunities on the table. So could you talk a little bit on about how do you manage the risk with the labor these days?

[Jean-Louis Servranckx, executive]

Okay. Just to finish on the last question, I have no time to tell you about what are the opportunities in U.S. I mean, we have very strong partnerships. You probably know that we have been prequalified on the job in California, another one where we are the preferred bidder on Oregon State, and we are finalizing under a progressive design build scheme. That's very important because I think it will be part of the future.

Regarding the pipeline and the $50 billion, as I said, I mean, the issue is not to select everything. We will select only the project where our core competency gives us a real competitive advantage. So far, thanks to our boots on the ground, we have no issues about scarcity of labors. But we are -- I mean, we are extremely prudent when we select the job that will become target to be able to execute them properly.

[Benoit Poirier, analyst]

Okay. And obviously, REM is a key project for Aecon. There's discussion about the next leg, the project leg. Given the recent news flow in Montreal, how confident are you that the timing of the contract award could still be made in 2023 value?

[Jean-Louis Servranckx, executive]

So first of all, our point of focus today in Montreal is a present REM job. I mean we still have 3 years. We are extremely focused on the rich food delivery, you probably can see, I mean, in Montreal, some trains running up and down. We are well advanced in all our testing programs. I'm extremely happy with the pace of the works, I mean, on this job. So this is, at the moment, our main point of focus.

Yes, it seems to be that there will be some delay for the next phases. I would tend to say that we have activity -- I mean, strong activity during the 2 years to come. You probably also know that we have been awarded this rail station at the Montreal-Trudeau Airport. It means that we are not starving. We will see how our luck is going to develop those new programs, and we will be able to apply with the best possible group to be prequalified and then eventually to be awarded.

[Benoit Poirier, analyst]

Okay. That's great. And maybe last one for me, Jean. We -- you've talked about the Concession opportunities that you see these days. How would you -- where do you see the -- where would you see the greatest opportunities over the next 2 years between Concession and M&A?

[Jean-Louis Servranckx, executive]

So there are still a few projects under urban transportation for our Concession. I mean, for example, the Ontario line, what we call the RSSOM, which is the Rolling Stock Systems Operation and Maintenance. I mean we have a very strong team prequalified. We have delivered our technical offer a few days ago, and we will deliver our financial offer at the end of Q2. So transportation still have some opportunities.

In the energy sector with private developers, we can see very, very interesting project coming on the table. Internationally, I mean, we are extremely happy with our operation in Bermuda, and we are trying to replicate this operation. So we have a development team extremely active on this one. You had a second question within your last question, Benoit.

[Benoit Poirier, analyst]

Just so about the M&A opportunities, whether there's any update or -- yes.

[David Smales, executive]

Yes, nothing to update other than what we've said consistently, which is we're certainly open to M&A opportunities, not just the tuck-in type opportunities that we've seen over the last few years, but something on a larger scale as well. And so we're active on that front, but nothing to update at this point in time, but we certainly believe M&A plays a role in our ongoing growth.

[Operator]

Our next question goes to Chris Murray with ATB Capital Markets.

[Chris Murray, analyst]

Maybe, Jean-Louis, just turning back to your commentary around maybe the GO Rail Expansion and the progressive design build. And thank you for the comment about the -- about where you guys have been on fixed price contracts in the last little while. Thinking about that and thinking about the go forward in the portfolio, right now, you're running about, call it, 2/3 fixed price versus variable price or, I guess, cost plus unit price. How do we think about that mix when we think about the stability in your backlog going forward? Are you starting to aim to try to bring that fixed price component down to maybe 50%? Or just how should we think about what the backlog maybe looks like in 2 or 3 years?

[Jean-Louis Servranckx, executive]

Yes, you're right. This is our strategy, and it has been our strategy. I mean, for a few years now to derisk our backlog. So mechanically, the proportion of fixed price within this backlog is going to go down. So you have spoken about 50%. That can be a good target. And this is going to happen. You probably see, I mean, the increase up to $722 million, I mean, trailing 12 months Q1 2022 of recurring revenue. I mean, this is also part of the equation. And this is what we are, I would say, working on.

It's -- we have been advocating and discussing with our main clients for the last 20 months about those new ways of procuring jobs. So it doesn't mean that all fixed price jobs are bad and all unit price or MSA or time and materials are good. I mean it's a little more complex. What is sure is that certain projects due to their complexity, I mean we do not want anymore to go through fixed price procurement method.

And the GO Rail Expansion, I mean, the new name now, we have to be all used with this is Encore like Ontario corridor, and our group name is ONxpress, is very interesting because, I mean, it's based -- the heart of it is about operation, it's about economic benefit for the greater Toronto area and the commuter. And we are going to define commonly with Metrolinx, the exact strategy of operation we want and we have been talking a lot about it. And part of the award is about this. And with this, we are going to build together with Metrolinx, the scope of the CapEx of the construction and the price of the CapEx. So it's a very interesting model. I would say it's a game changer in our industry. And I think we are on the right way for this.

[Chris Murray, analyst]

Okay. Along the complexity around this, but is it fair to think that the better way to think about the margin profile, it's not necessarily that these types of contracts will carry a higher margin that's maybe just a -- there's a chance of having a more certain margin. Is that the better way to think about it?

[Jean-Louis Servranckx, executive]

Yes, I think you're right. I mean it's exactly -- and I say it's not all bad on one side, all good on the other side. I mean it's about selectivity. And it's about not being trapped under an environment where you have very little capacity in case of problem to find the adequate solution.

[Chris Murray, analyst]

Okay. My next question, just thinking about the Bermuda Airport. A number of the U.S. airlines have talked about moving back certainly the capacity numbers, call it, 70% to 80% of 2019 levels as we move into the summer. I know you talked a little bit about -- you had some issues early in the quarter, but I guess some improvement through the quarter. Could you just give us an idea of how you folks are seeing operations at the airport today relative to maybe 2019 levels? And what your expectations are as we move into the summer period on the recovery?

[David Smales, executive]

Yes. So it's picking up nicely actually in the last couple of months. As you said, January and February with Omicron traffic or another dip we were operating kind of in the high 30% range in January and February versus 2019. That was closer to 50% in March and month-to-date in April, we're in the mid- to high 50% range versus 2019. So it's building nicely. We do expect that trend to continue through the summer announcements from Air Canada and others. In the last few days, they're quickly adding routes back to their network, which should benefit Bermuda because that's one of the flights that hasn't been going in and out. Some of the U.S. airlines that service Bermuda, same thing. So it's building nicely over the last couple of months and the trends look positive through the summer.

[Chris Murray, analyst]

Okay. Do you have an idea where you think you're going to be through the peak season? Would it be 70% to 80% or maybe still a bit below that at this point?

[David Smales, executive]

Yes. I think it can get certainly back to that kind of level. I think we see the average for the year being around 60%. But if you look at -- we're now close to the end of April, and we'd be tracking well below that. We need to be in that 70% to 80% range to get to that 60% on average over the year, and we certainly think we're on track for that.

[Operator]

Our next question goes to Michael Tupholme with TD Securities.

[Michael Tupholme, analyst]

First question is about the backlog. You had a nice sequential improvement quarter-over-quarter in overall backlog. But particularly the backlog, the portion expected to be executed over the next 12 months was up about $400 million or 15%, which was very strong. I'm just wondering if you can comment on particularly that piece, the next 12-month portion? And how we think about that improvement you saw in the quarter because it was just quite strong?

[Jean-Louis Servranckx, executive]

Yes, you're right. I mean it went from $2.7 billion to $3.1 billion. So it gives you an idea, I mean, of what can be the year 2022. And the first element is the revenue increase that we had during the first quarter. As David said, I mean, we don't see a lot of dangers of this backlog that is forecasted to be executed during the next 12 months to be pushed on the right so far. At the moment, I mean, I just consider we have this well in hand so far.

[David Smales, executive]

I think you're saying, Mike, if you go back a quarter, the question was the other way around, which is why is your next 12-month backlog flat relative to 12 months ago. We said then, there's always an element in the first quarter or 2 of the year where we're booking backlog that is going to be worked off in the current year and seasonal businesses like road building and transportation generally fit into that category. So we've seen good pickups in lots of areas. And it's optically unusual that we would see some of that seasonal book and burn in the year-type work coming in, in Q1.

[Michael Tupholme, analyst]

Okay. That's helpful. And then you've had a number of questions about inflation. And I think suggested a couple of times, this is not a case of projects or risk of projects moving to the right, but you mentioned you're dealing with certain challenges. I guess sort of a two-part question. Number one, can you be a little bit more specific about the specific challenges or issues you are dealing with as it relates to inflation?

And then, I guess, secondly, Dave, you mentioned that maybe some of the upside is no longer quite what it was given the inflationary pressures. I guess I'm wondering how has your visibility around margin performance and what you think you can achieve this year? How has that changed or evolved over the last several quarters as a result of inflationary pressures? Is there much more risk around what you think you can accomplish this year in view of these pressures and challenges? Or if you could just kind of comment on that, that would be helpful.

[Jean-Louis Servranckx, executive]

Yes. I will begin more generally and then David may be a little more specific. I mean first of all, you have to understand that it's not as -- we are making more money when price of supplies go down, and we are making less money when price of supplies go up. I mean it's much more subtle than this. We are -- I mean, construction is about cyclicity, and we are used to deal with this sort of phenomena. Although at the moment, I mean, volatility and some -- we can face very quick movement on the price of commodities.

The second part of my answer would be that we have built, during the last 2 years, a very strong procurement team centralized at Aecon, and we have changed a little our way of procuring our supplies. It means that once we get an award and we try to negotiate the best advanced payment or down payment with our clients, we tend to, as quick as possible fix the level of price by procuring much earlier than what we were doing in the years before. So it's a change of mentality. There is much more proactivity in -- on the procurement side, much more professionalism. David?

[David Smales, executive]

Yes. To your question, Mike, about how has visibility improved from a quarter ago, I would say, if we stay in the environment we're in today, then the visibility has improved in terms of we now have the backlog or more of the backlog we're going to be working off this year in place. That allows us, obviously, to lock in pricing with suppliers, lock in index escalation with our clients on those contracts. So from that point of view, a lot more of this now is fixed and in place. But the key here is volatility, and we're in an environment where things can change quickly. And so we can certainly operate in the environment we're in today through the year.

But it's an environment where things can change quickly. And as you have seen in our outlook, we've said everything is subject to these external economic factors changing more radically. So I think it's -- I think we have good visibility for 2022 based on backlog in place, everything we know today about the supply chain challenges that are out there. But if things change again, then obviously, we'll have to react to that as we go.

[Operator]

Our next question comes to Naji Baydoun with IA Capital Markets.

[Naji Baydoun, analyst]

Just wanted to go back to the topic of margins in the backlog, maybe just starting with this year. So yes, you have more work that's going to be sort of completed in the next 12 months or so, but the backlog is still mainly fixed price. So good top line growth, but any color on margins going forward as you transition more of the backlog towards different types of contracts?

[David Smales, executive]

Yes. I mean as you know, Naji, we don't give specific margin guidance for any particular year. And so I go back to my comments at the beginning, which is relative to last year, excluding CEWS, we still expect margins to be slightly ahead. But I think as we look further out, we do think with the quality of the backlog and the ability to select the project profile that we're targeting from a margin perspective, we do see opportunities for the margins to improve over time. But yes, I don't want to give a specific margin target for this year.

[Naji Baydoun, analyst]

I understand. That's helpful. But even just thinking about it longer term, as you go through this transition that you're talking about the types of contracts that you've been pursuing on the types of projects that you're going to be working on, where do you see generally sort of the potential for the margins to go over time?

[David Smales, executive]

Yes, same thing. I mean, we don't have a long-term margin target that we disclosed either. Margin -- and as Jean-Louis said, it's not a case of all fixed price jobs are bad and all non-fixed price jobs are good, and the margin profile of one is significantly higher than the other. It's mix in both spaces. So we do think the progression into less fixed price work and more recurring revenue and MSA-type work does lead to more margin stability and predictability over time. And we do -- going back to my previous comments, the type of backlog we're adding even fixed-price backlog, we expect to see good margins. But it's really about the stability and predictability of margins that shift from fixed price to non-fixed price kind of addresses.

[Naji Baydoun, analyst]

Okay. Got it. And I just wanted to discuss a bit the recurring revenue profile. So a nice increase quarter-over-quarter. Some of it from the Pacific Electrical Installations acquisition. I'm wondering if you can just talk about some of the other drivers of the increase in that business and how you could further accelerate the growth of that part of the portfolio?

[Jean-Louis Servranckx, executive]

You're right. I mean, utilities has been a big part, but also Bermuda increasing and some in our road business. So it's a common effort and it's also a strategy. It means that you can see from the last quarters, I mean, what is the trend? This is our strategy to increase our recurring revenue. So it's mixed and balanced. It's exactly what we want to achieve. David any?

[David Smales, executive]

Yes, I think that's right. It's not just coming from utility work, also an increase in recurring revenue in the nuclear space as well, contributing to that. But the biggest driver is utilities. It's the biggest portion of that. I would say it's a function of capital programs that we see with a number of our utility clients where typically the majority of that work, and this year won't be any different in terms of how busy we are in Q2, Q3 and the early parts of Q4. But this year, I think those capital programs, there's so much going on that actually had us starting the year earlier, we've done more winter work in the utility space just because of the volume that exists in both telecommunications, gas distribution and the transmission space. I think we're in a very strong environment for utility-type services right now. And so we expect to see that proportion grow over the next 12 to 24 months.

[Naji Baydoun, analyst]

And just to finish on the topic, are there a lot of tuck-in M&A opportunities to try to really grow this business even faster?

[David Smales, executive]

Yes. I mean we've done half a dozen tuck-in acquisitions over the last few years. Most of those have been in the utility space. We still think there's opportunities for more. We also think there's opportunity for us with utilities projects in the U.S. as well. So for sure, there's further tuck-in opportunities as well as the organic growth opportunities.

[Operator]

There are currently no further questions registered at this time. So I'll turn the conference back over to the management team for any closing remarks.

[Adam Borgatti, executive]

Well, thanks, everyone, for joining us today. And as always, welcome questions that you may have further to the call. Have a great rest of your day.

[Operator]

This concludes today's Aecon Group 2022 Q1 Earnings Call. Thank you for your participation. You can now disconnect your lines.