Aecon Group Inc

TSX:ARE

Earnings Call Transcript 2021-Q3

[Operator]

Hello, and a warm welcome to today's Aecon Group's Third Quarter 2021 Earnings Conference Call. My name is Melissa, and I'll be your operator. [Operator Instructions] I now have the pleasure of handing over to our host today, Adam Borgatti to begin. Adam, over to you.

[Adam Borgatti]

Thank you, Melissa. Good morning, everyone, and thanks for participating in our third quarter 2021 results conference call. It's 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 analyst keep to one question and a follow-up before getting back into the queue. 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 these expectations reflected in these statements are reasonable, we can give no assurance that these expectations will prove to be correct.I will now turn the call over to Dave.

[David Smales, Executive VP & CFO]

Thanks, Adam, and good morning, everyone. I'll start by summarizing 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 third quarter of $1.2 billion was $124 million or 12% higher compared to Q3 last year. Adjusted EBITDA for the third quarter of $96 million, a margin of 8.2% was $42 million lower compared to reported adjusted EBITDA in Q3 last year of $137 million. However, adjusting for the impact to the Canada Emergency Wage Subsidy, or CEWS program, for $69 million included in the third quarter of 2020, adjusted EBITDA this quarter increased by $27 million or 40% compared to last year. Diluted earnings per share of $0.56 in the quarter was $0.43 lower compared to diluted EPS of $0.99 in the same period last year. After adjusting for the impact of CEWS last year, diluted EPS this quarter increased by $0.23 compared to Q3 2020. New awards in the quarter of $682 million compared to $448 million in Q3 2020 and backlog of $6 billion compared to backlog of $6.7 billion a year earlier.Now turning to results by segment. As noted on Slide 4, construction revenue of $1.1 billion in the third quarter was $108 million or 10% higher than the same period last year, driven by nuclear refurbishment work in Ontario, oil and gas distribution and telecommunications work in the utility sector and a higher volume of work at gas and chemical facilities, partially offset by less activity on mainline pipeline work in industrial operations.Adjusted EBITDA from construction of $82 million, a margin of 7.2% increased by $20 million when adjusting for CEWS recorded in Q3 last year due to higher volume and gross profit margin in nuclear and utilities, partially offset by lower volume from civil operations and urban transportation systems. New contract awards of $657 million in the third quarter compared to $439 million in the same period last year, primarily driven by strong demand across Canada in smaller and medium-sized projects.Turning to Slide 5. Concession revenue for the third quarter of $22 million was $13 million higher compared to the same period last year, primarily due to an increase in operations at the Bermuda International Airport. Commercial flight operations in Bermuda continue to operate at reduced volume due to COVID-19 compared to pre-pandemic levels by gradually recovering to the more severe impacts experienced in 2020. Adjusted EBITDA in the Concessions segment of $22 million was $14 million higher than last year, driven by improving revenue in Bermuda.Turning to Slide 6. At the end of Q3, Aecon had a committed revolving credit facility of $600 million, of which $50 million was drawn and $8 million utilized for letters of credit as well as $900 million facility provided by EDC to support letters of credit. Aecon's committed facilities for both working capital and electric 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. As at September 30th, 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]

Thank you, Dave. I would like to take a moment to a moment to address the update on the Coastal GasLink Pipeline project laid out in our disclosed document. This project has been delayed and impacted by even clearly beyond SA Energy's control and for which Coastal GasLink is contractually responsible. We are frustrated by CGL not appropriately administering its change management process and its decision to stop paying amounts that previously agreed to pay on an interim basis, pending agreement on the quantification of those changes. I want to stress SA Energy has strong contractual entitlement to additional compensation that CGL is not addressing on a timely basis. We were left with little choice but to commence an arbitration pursuant to the terms of the contract to resolve the matter, but we are also continuing to engage in an ongoing dialogue with CGL to reach an amicable resolution that addresses SA Energy's cash flow requirement. As you will appreciate, even we are still in negotiation and an active arbitration process, we are somewhat limited as to the amount of detail we can go into, but we are certainly hopeful a resolution can be found quickly so that we can complete our work on this important project for the benefit of all stakeholders.Turning to Slide 7. Despite the ongoing impacts of COVID-19 on Aecon's operations, we continue to deliver solid results in the quarter. Aecon's balance and diversified portfolio and agile culture continue to be significant strength in our way to the market opportunities across Canada today. The Construction segment is aligned with significant infrastructure investment commitments by all levels of government across Canada as well as by the private sector across the market sector 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 the P3 model and is also targeting innovative development and private finance opportunities in industrial, power, FinTech and other related markets as well as participating as a concessionaire of the 5 P3 projects identified on the slide.Turning now to Slide 8. Backlog, recurring revenue programs and the pipeline of bidding opportunities for new work remain at strong levels across Canada. Through the first 9 months of 2021, new awards of $2.4 billion were similar to the same period last year and results from steady demand for Aecon's services across Canada, in smaller and medium-sized projects and also incorporated a number of multi-year projects in the nuclear, civil, urban transportation and industrial sectors. Aecon is also prequalified on a number of large project bases due to be awarded over the next 2 years.Despite certain projects being delayed in the short-term, we expect demand for our services to remain healthy for the foreseeable future as the federal government and provincial governments across Canada are identifying investment in infrastructure and a key source of stimulus as part of economic recovery plans. Trailing 12 months recurring revenue was up 40% versus the prior period, primarily from growth in utilities operations. Recurring revenue is expected to continue to grow based on the capital investment plan of a number of key clients, particularly the telecommunications and power sectors as well as from the recovery of aviation traffic at the Bermuda International Airport.Turning to Slide 9. We are continuing our drive to be an industry leader in sustainability as we undertake initiatives to harness innovation, reduce emissions, boost efficiency and improve business performance. An ongoing focus of our sustainability program is to pilot new technologies to reduce emissions on our construction sites and in our facilities. We recently became the first construction company in Canada to trial an electric excavator.While this may seem small in itself, it's another step in being a leader in sustainable operations in the construction space and working with innovative partners to deliver on our environmental commitments. We are also currently undergoing trials to utilize solar energy to replace construction equipment like fossil fuel generators, line towers, road signs as well as to power our training and innovation center in Ontario.Turning to Slide 10. The trend that I've spoken to already in terms of the strength of the construction market in Canada, both in the public and private sector continue to be positive and well aligned to Aecon's diversified Construction segment. In the Concession segment, an increase in vaccination rates and the easing of travel restrictions during the year have provided signs of a rebound from very low levels in passenger traffic for the innovation industry. This is expected to lead to a corresponding ongoing gradual improvement in travel to the Bermuda airport during the remainder of the year and in 2022.Thank you. We'll now turn the call over to analysts for questions.

[Operator]

[Operator Instructions] So our first question today comes from Frederic Bastien of Raymond James.

[Frederic Bastien, MD & Equity Research Analyst]

I know you're limited in the comments you can make around the Coastal GasLink arbitration process. But is the situation that is being experienced replicated with other contractors that are looking potentially on -- that are working under those sections of the pipeline?

[Jean-Louis Servranckx]

Okay. Evidently, we can speak about our works, not that much about the works of others. In total, Coastal GasLink Pipeline, they are wide spread. We have been awarded to spread early 2018, so what is interesting to understand is that spreading a pipeline has to be a very organized machine. I mean, it's a phased activity beginning with clearing and deforesting, then getting the right-of-way to enter heavy equipment, then grading is right-of-way then ditching than treating the pipe along the way, then welding elements of pipe, then laying the pipe within the tranche and backfilling the tranche then hydro testing and then at the end, cleaning it. Everything has to be organized as a clock work, I mean if you want to reach productivity, and what happened on our present is that we have encountered heavy modification in the condition of execution of our works. It's about right-of-way delivery. It's about a geotechnical condition. It's about new and extremely stringent constraints in terms of erosion and sedimentation control, it's about adverse whether it's about convenience. And at the end of the day, what happened is that when we have studied and given our offer to execute 2x 100 kilometer, we have been executing 100x 2 kilobit. So in [indiscernible] modification, Coastal GasLink issued a change directive tax acknowledging a change.The problem now is to go from the modification in the condition of execution to the modification in the condition of payment. First, in terms of quantum, about the compensation for the qualification and then time of payment, what you probably notice is that the real issue is a cash flow stress regarding SA Energy. Just means that this RBS with our partner pushed out and they say, they will do within the first quarter of 2022, we might not be able to complete the project within the parameters of our current catheter spectrum. So we have entered in an arbitration process with CGL, we are also actively discussing, and we are also negotiating with CGL. All this is a work in progress, and this is what we can say at this stage.

[Frederic Bastien, MD & Equity Research Analyst]

Okay. But given that it's a tight labor market out there, and you're seeing -- I mean, we're all seeing natural gas prices spike, it would be in everyone's best interest to get that thing sorted out as quickly as possible. That's -- I'm not trying to put stuff in your mouth, but it's kind of what my takeaway would be here.

[Jean-Louis Servranckx]

You're totally right, Frederic, time is the judgment for Coastal GasLink, I mean.

[Frederic Bastien, MD & Equity Research Analyst]

Okay. Just quickly switching gear on the nuclear side. We saw a nice lift in the revenue. And then obviously, that's probably driven a lot of the profitability improvement we saw year-over-year. Can you give us a sense of where in terms of level of activity, the Darlington and the Bruce Power projects are at? Are we -- are you guys are going full steam ahead on those in the quarter or were you kind of ramping up into a certain -- up to a certain level of activity?

[Jean-Louis Servranckx]

Yes. I mean, during the year 2019 and 2020, we were working on only one reactor at Darlington and preparing the Boost Power reactor #6. Now we are working at the same time on reactor #6, Bruce and #3 at Darlington. So it means that we are too reactive, as I say, moment in full, I would say, full steam in terms of refurbishment. In addition, we are working on the steam generator of the first unit of groups. A little later, I mean in 2022, we may also work on a surge unit at the same time. So we are still growing, and we are extremely happy with the pace of the work. We are extremely happy with the learning curve they have been able to develop. I would say, cross fertilizing our experiences with OPG in Bruce Power and to explain, I mean, the steady revenue of this sector.

[Frederic Bastien, MD & Equity Research Analyst]

Can we think this week these 2 businesses or these 2 particular projects as ongoing or will we see some seasonality like we normally see with Aecon's construction business?

[Jean-Louis Servranckx]

Not that much. When you work on the refurbishment of a reactor, you are within a nuclear power plant. I mean you are not subject to inclement weather though or temperature. This being said, all those work are phased with preparation phase and power refurbishment phased. And then you remember that the utilities have a phase to bring back those reactors to the grid. It just means all this follow a very specific and a very strict organization schedule that we do not control.

[Frederic Bastien, MD & Equity Research Analyst]

Okay. But there's no real seasonality in the business. It's just depending on timing of these projects being approved and going ahead. I'll turn it to over.

[Operator]

We'll now move on to our next question, which will be from Michael Tupholme of TD securities.

[Michael Tupholme, Research Analyst]

Supply chain issues have been an area of focus for many companies recently. Have you had any difficulty procuring building materials or other components for use on your job site thus far or do you see any risks on that front going forward? And if this is an area of concern, how do you see such issues affecting scheduling and productivity on your job sites?

[Jean-Louis Servranckx]

Evidence disturbances of the supply chain due to COVID is a challenge, and we're working on it. As you know, one of the beauty and the strength of Aecon is being able to work on a very diversified portfolios of projects in terms of size, in terms of timing and different, I mean, when we have a short lead time to procure one on major projects, we have quite a low lead time to procure. But this being said, it's evident that the fact that Aecon kept a real capacity to self-perform, it's just giving us a much better control of labor, of schedule and our budget, and we are quite happy about it.

[Michael Tupholme, Research Analyst]

Okay. That's helpful, Jean-Louis. I guess, maybe more specifically, though, on -- I appreciate your comments about self-perform and labor availability. More specifically on the availability of materials and components you need to complete and move forward your projects, are there any issues on that front that you're concerned about?

[Jean-Louis Servranckx]

The market is moving. For example, I mean, last month, it was more difficult than in normal times to be able to get hydraulic fans or labor to get -- it could be polyethylene or it could be only coating metallic hues. And then it comes back to normal, and it may go to other kind of supply, probably remember that end of 2020, was extremely difficult in terms of being able to get the capacity. I mean the quality of concrete, we need it because of a shortage of cement, [indiscernible] but it's an ongoing, I would say, phenomena, it's rather cyclical. And so far, we are navigating I mean [indiscernible]

[Michael Tupholme, Research Analyst]

Okay. That's helpful. And then perhaps somewhat related to that, if we just think about material costs, obviously, a lot of concern at present about inflationary pressures across the board. I think you were asked about this subject last quarter, but material cost inflation and your ability to protect Aecon's margins in the face of those pressures. Can you speak to that and provide an update on what you're seeing there?

[David Smales, Executive VP & CFO]

Yes. You're right. We talked about it last quarter. We said not a lot has changed on that front. It's -- as we talked about, materials make up around 25% of our cost base at the project level, the lion share is labor. That 25% breaks down further into projects where the client might be procuring the materials or we have a locked in price with suppliers or subcontractors or index to inflation adjustments built into the contract. So it ends up being some specific projects where it's more of a challenge there is. I would say where that's been the case, most of it is being shifting timelines caused by COVID. So it all wraps in kind of the COVID compensation discussions that are either being concluded or are ongoing with a handful of projects. But overall, the impact isn't pervasive across the business.

[Operator]

We'll now move on to our next question from Benoit Poirier from Desjardins Bank.

[Benoit Poirier]

First question, could you maybe provide more color about the level of visibility you have entering into 2020 in the backlog? And also, what are the key large project awards? It seems that the pipeline is getting very busy in terms of 2022. So if you could provide any color about the large project awards we should monitor next year?

[Jean-Louis Servranckx]

Okay. I usually say I'm quite comfortable with the backlog between $6 billion and $7 billion. It's -- it was something around 18 months of activity. I mean, that's good. On this, you add a recurring revenue that is backlog, I mean you have noted that we are around $700 million. This is not an issue. I mean, what is important for us is the quality of the backlog, the balancing of the backlog within our different activities and the balancing of the backlog they want different kind of projects. And this client we have been working with for the last 2 years, it's just helping for all this. So Canada -- a big driver of Canada is almost 0.5 million new comers every year so for infrastructure I mean, 0.5 million people. I mean, they just need everything we built. What we can say is that there is a very large amount of urban transportation system on the market under study at the moment. We speak about Ontario line, we speak about young foundation, we speak about Scarborough foundation, we speak about hanging to the West Nation, speak about major refurbishment item, but we also speak about [indiscernible], which is [indiscernible] with a very important tunnel with elevated [indiscernible] station and that system and where we have [indiscernible] I mean, Edmonton or Vancouver or Calgary has their whole project.So this is quite interesting. There's quite a number of very nice bridge also coming to the market on -- which for each of them, most often, we are quite high. So this is also interesting. And in the backlog, where there's a normal utility business. I mean, you have probably noticed our utility business is very strong. Our clients are very strong in telecommunications, within energy, I mean in power distribution or power transmission. All this sector is quite strong. So I don't know if it is sufficient to give you more color, but I'm not worried about pipeline coming and our capacity to pick a project that represents the best fit for Aecon.

[Benoit Poirier]

That's great color. Yes. And with respect to the Bermuda airport, could you maybe provide more color about the level of utilization right now? And what we might expect by the end of this year and next year, Jean-Louis?

[David Smales, Executive VP & CFO]

Yes, Benoit, I'll speak to traffic in Bermuda. I think if you recall earlier in the year, through the first half, we were kind of closer to the 20% level in terms of traffic compared to a normal year for 2019, for example, as a base year. In Q3, we saw that increase to closer to 40% on average over the quarter. Obviously, there's still some uncertainty around how that will progress going forward given that COVID continues to come in different ways, in different jurisdictions at different times. So we're still seeing good overall dynamics. But it will depend very much on the COVID situation on the island of Bermuda as well as in the main traffic areas, such as the U.S., the U.K. and Canada. We see probably 2021 -- sorry, 2022, progressing to a point where we're going to kind of 60% to 70% of normal traffic and then 2023, 2024 getting back towards more normal levels. That's fairly consistent with, I think, what the International Air Travel Association and other forecasters are looking at. And we don't think Bermuda will be massively different from what those forecast show.

[Benoit Poirier]

Thanks, David, for the update. And last one for me, could you talk about the initiatives to grow organically or to expand in the U.S.? And what about the pipeline opportunity and the timing around those potential milestones?

[Jean-Louis Servranckx]

Yes. I will take this one. I mean, due to the infrastructure bill that most probably will be resolved I mean, within the weeks or the months to come, we have created a working group at Aecon, have given 3 months to this team to help us define what is going to be our strategy in U.S. and how can we take advantage of the spend in terms of infrastructure. This can be in heavy civil, it may be in urban transportation or in industrial. So we are working on it. We should be a little more precise within 3 months from now. Evidently, I mean there is still a lot of work to do in Canada. So we have to be careful, I mean, not to be distracted, but we also need to look toward our neighbor to try to imagine for each of our sector. If we feel that it's going to be good to go there by which means in terms of alliance, some of association partnering or eventually acquisition, we can go there.

[Operator]

We'll now move to Ian Gillies of Stifel GMP.

[Ian Brooks Gillies]

I wanted to follow on Benoit's questions with respect to backlog. When you look out to the second half of 2022 right now, do you have enough in the backlog to show year-over-year organic growth right now or do you think you have to go win more projects between now and then to be able to do so?

[Jean-Louis Servranckx]

Yes. We said have decent visibility into next year. We always win a certain amount of work within the year, it's a normal part of our business, some of our market sectors have kind of short turnaround in terms of project bid award and work off sort of transportation sector, for example, would be a great example of that. But as we look at our next 12 months backlog as it sits today, the recurring revenue profile and what we're expecting next year and that normal kind of book and burn type business within the year. I think we are fairly comfortable saying that from an organic growth perspective, we're probably looking at something in the mid-single digits in terms of percentage growth next year, which is probably not as strong as it would have been without the disruption in being processed caused by COVID, pushing some of the larger projects to the right, but it is obviously continued progress from a growth perspective, while some of those larger projects awards work their way through the process and get awarded over the next 12 months or so.

[Ian Brooks Gillies]

That's great detail. And maybe diving in a little bit there, can you maybe highlight a little bit what you're seeing on the mining side in Canada? I mean, we're certainly seeing an uptick in expansions and spending in that particular end market. It's been quite some time since that's happened. So could you maybe highlight some of the positive trends you're seeing there and how Aecon may participate?

[Jean-Louis Servranckx]

Yes. I mean, we are very happy about the mining prospects and the chemical prospects. There's a lot of new projects coming within the pipeline. I mean, you heard about potash, but there's also [indiscernible] and in chemical, I mean there's a sort of rush on polyethylene and also kind of products. We are quite used with this industry. So our bidding team is busy at the moment. And our industrial sector, I mean, is strong. We have expectation to be even stronger in the future.

[Operator]

We'll now take our next question from Chris Murray of ATB Capital Markets.

[Christopher Allan Murray]

I guess my first question is maybe going back to the Coastal GasLink issue. And I guess a couple of pieces of this. One, can you give us any idea of how long you believe this might take to resolve, particularly as it seems like there's some kind of urgent timelines to move this forward? And then my second question, and this is maybe a broader question, is looking at over the last couple of years, we seem to have you -- I guess, your contingencies growing worth a lot of different issues K&S or the tunnel in BC. I'm just wondering if there's been something in the environment that's led you focusing on more of these problems, appreciating that COVID certainly is a complicating factor, but I just wondering if there's something else going on? I think more importantly, what are you guys doing maybe to protect yourselves on future contracts as you're bidding stuff now?

[Jean-Louis Servranckx]

I will take the first part of your question, and David will go with the second one. Coastal GasLink has Frederic noted, timing of the assets. I mean it's all the essence for Coastal GasLink you know that this is an increased Energy Canada project and it's also of the essence for us. So do we know the timeframe for resolution of our problems? No. But I assure you that we work intensively with our clients I mean to resolve it as soon as we can. We have dedicated the best team we have within our company to deal with issues and we have a certain optimism that this process is going to go at a reasonable speed to acquire a solution.

[David Smales, Executive VP & CFO]

I think on the second part of the question, Chris, I don't know that the environment has shifted significantly. I mean, obviously, we've seen a number of contracts where we've overcome hurdles and challenges and got very reasonable outcomes in terms of resolution. That's part and parcel of the industry. I mean, change is a constant on these projects. You're bidding a scope of work that evolves over a number of years, and there are changes along the way. And the vast majority of those, they are resolved between the various clients to everyone's satisfaction and we drive on. We obviously have a couple of situations that we're still working on. As we've talked about, we're hopeful CGL will be resolved sooner or later. Due to more legal process that will take a while to play out so those 2 will stick grounds with until they're resolved. But overall, we have to do there, we're executing. And we just -- we'll work through a couple of outstanding issues.

[Christopher Allan Murray]

Okay. That's helpful. And then maybe just a follow-up to the comment about backlog and what it translates into revenue growth next year. But thinking about what you have embedded in backlog today. Are there any thoughts that there should be any sort of incremental improvement or change in margin profile as we move into next year?

[Jean-Louis Servranckx]

Yes. I think this is driven by 2 factors. I mean, first of all, the discipline we have at the moment of selecting projects and billing. We are extremely focused on it about phasing for each of our specialty team. The fact we -- I mean, how we can ramp-up in productivity from 1 job to another one similar. So we are trying to build the most consistent backlog and this -- maybe just drive economic efficiency performance. The second one is about the major effort we have implemented from the beginning of the year 2021, about continuous improvements about Lean management, about increasing our productivity on site. This also is a -- it should lead our economic efficiency. I'll just give you an example, within the last 6 months, we have divided by 4 the time to execute a segment on each of the 2 [indiscernible] of the massive Gordie Howe bridge. End of the day, we have more than 75 segments to build. Our theoretical learning curve was to divide it by 2. The results are [indiscernible] and this is money. At the end of the day, this is money. For the one on the call, we have more travels for Calgary. You can see our Bow River Bridge, where we have been able to slow to span before we can come in. This also is not [indiscernible] In terms of improvement of our productivity, we like extremely serious about it. We're extremely serious about improving the professionalism of our team, improving the quality of our project director, and it evidently will have some consequences at Q1.

[Christopher Allan Murray]

Okay. Anything you're comfortable in putting out that's quantifiable at this point?

[Jean-Louis Servranckx]

Sorry? We've not heard the question.

[Christopher Allan Murray]

Sorry. Is there anything that you'd be willing to put on like a target out there or sort of a number that we should be thinking about for next year?

[David Smales, Executive VP & CFO]

As you know, Chris, we've never gone into detailed margin guidance for the following year. Obviously, we don't -- not intending to provide any particular specifics the next year in terms of EBITDA margin.

[Operator]

We'll now move on to our question from Sabahat Khan of RBC.

[Sabahat Khan, Analyst]

Just a question on kind of the cash flow side. And some of the prior year, Q3 has been a bit of a cash flow recovery on CFO. Just wondering if there was a bit of a negative amount for cash flow from operations this quarter. Just your thoughts on cash flow for the full year and what we might expect in Q4 on that front?

[David Smales, Executive VP & CFO]

Yes. So Q3 is seasonally these for a working capital perspective, obviously, we see our highest revenue in the third quarter each year, and that's usually what's behind that. Obviously, Q3 last year lowest impacted because of COVID that had an impact on revenue, but it also had an impact -- if you look at the change in working capital this year for the first 9 months compared to last year, the biggest change is on the payables side. And that's because similar labor-intensive projects last year were some of the ones that were mostly impacted by COVID. And those are the projects where we don't have a significant amount around the working capital. So there's a few trade-offs year-over-year, but we should see the normal seasonal turnaround in Q4, where that starts to unwind a little bit and then unwinds further in Q1. I would say Q4 is still subject, obviously, to some of that turnaround as subject to resolution on the CGL cash flow impact that we've talked about as well. So that's still have a potential impact in Q4, perhaps it should be normal seasonal in Q4.

[Sabahat Khan, Analyst]

Okay. Great. And then just, I guess, there's been a bit of a discussion on the backlog earlier, but as you kind of think over the next few quarters, you did indicate that you were prequalifying for some projects, but do you kind of have visibility on, is it later this year in Q4? Is it early next year when you maybe start to maybe grow that on a year-over-year basis or is that just TBD, depending on how those projects shape out?

[Jean-Louis Servranckx]

Mainly, it depends on our clients and how the way the projects arrive on the market and the way they sit with our strategy at the moment of billing. But as I say, I mean, with 18 months of backlog coming in all of us and the pipeline, we can see, I'm not worried at the moment for productivity for the next year.

[Operator]

Our next question comes from Naji Baydoun of IA Capital Markets.

[Naji Baydoun, Senior Equity Research Analyst]

Just had a couple of questions on growth and profitability. But starting with growth, I guess, to your earlier comment, the pace of new awards has been relatively in line with 2020 and even 2019. I guess the question is, is that still the same pace that you see going into next year or does it actually accelerate? And then that translates into maybe higher growth into 2023 and beyond?

[David Smales, Executive VP & CFO]

Yes. I think overall, we do see the pace accelerating. Some of these -- I mentioned earlier that the larger projects that we're pursuing right now are the ones that kind of moved to the right a little bit due to COVID and we expect more of those to be awarded over the next 12 months and the following years. So that will start to drive acceleration over and above kind of what we've seen right now. We've seen lots of activity in both recurring revenue space and the small and medium-sized job space. So it still -- we'll continue to grow in those areas and then the larger projects will start to accelerate that as we move through 2022 in terms of awards, and that'll come through revenue in '23 and beyond.

[Naji Baydoun, Senior Equity Research Analyst]

And is that [indiscernible] Sorry go ahead.

[David Smales, Executive VP & CFO]

We lost you there. Can you repeat the question?

[Naji Baydoun, Senior Equity Research Analyst]

Yes. I'm just wondering if that includes any expectations on U.S. projects?

[David Smales, Executive VP & CFO]

No, it doesn't. I mean, we are, at the moment, as I told you, I mean, we have created a team to brainstorm and to try to elaborate our strategy for U.S. So at the moment, except the activity we have through our Aecon works company in the United States, it doesn't include any prospects there.

[Naji Baydoun, Senior Equity Research Analyst]

Okay. Excellent. Just maybe 2 questions on profitability. How are you thinking about -- you talked about having a balanced work program. How are you thinking about that balance today when you're trying to bid on new projects and get the backlog higher while also maintaining the margin profile, especially, I guess, given some of the pricing pressures and the environment we're in today?

[Jean-Louis Servranckx]

As I said, I mean, I'm happy with the balance between East and West, between small, medium, big and bigger project. I'm happy with the balance -- with the kind of contract that we may sign between the MSA unit price targets and [indiscernible] I'm also happy about a real trend, I mean, in the industry on a complex project to go toward what we call progressive design-build and not pure Anson 20 job. I think it's good. It's an evolution. So we are getting the company credit for this. It's all about balance and this is what we try to -- this is what we try to achieve at Aecon. Another point, I mean, about the backlog is that I'm amazed to see how we are able to cross fertilize, I mean our different sectors that work more and more together that's having foundation more with industrial, heavy civil and our transportation and the bridge bill also work much better together. We -- I mean we are aligning a strong team to think and that and to prepare the SMR topics, the small modular reactor I mean on this team, I mean you have heavy civil people, you have utilities people, you have transportation people, you have industrial people, you have [indiscernible] people and all this is good for the future in front of us.

[Naji Baydoun, Senior Equity Research Analyst]

Okay. Excellent. And just my last question. I know you don't give specific guidance, but how much more room is there for margins to improve from where you are today? And what will be sort of the main drivers of that?

[David Smales, Executive VP & CFO]

Naji, I'm not going to put a number to it and -- we definitely see lots of opportunity through the various areas, I think does talked to, obviously, execution, continuous improvement and our internal initiatives. There are a big component of that. So doing the right projects, the strength of the end markets, I think all 3 of those areas combined to give us a confident outlook in terms of margin progression as we execute over the next couple of years.

[Operator]

We'll now move to Troy Sun of Laurentian Securities.

[Troy Sun, Industrials Analyst]

Maybe my first question for Jean-Louis. I'm just wondering if you can comment on make a little bit of your business development activities there. I think the last time we spoke, you were saying the team is now back on the rope. So just really trying to get any update or progress there, please?

[Jean-Louis Servranckx]

Can you repeat the first part of your question, please? We have some sounds issues in our room.

[Troy Sun, Industrials Analyst]

Yes, for sure. For sure. No, I was mainly just asking for your international business development activities there. Remember in Q2, you made a comment that the team is now back on the road traveling again, sourcing potential prospects. So just trying to get an update there, if possible, please.

[Jean-Louis Servranckx]

Yes. Yes. I mean, it is true that we have a small business development team back on the road now with some constraints, but much better to be able to meet with clients and to try to select opportunities, as we have said, I mean, if we can duplicate what we have been doing in Bermuda, I mean, we'd be very happy but there are also some other opportunities. So we go prudently, the idea is not to grow exponentially in international activity, just to take advantage of our strength. And each time, we can see a fit, I mean, to target it and to try to get it.

[Troy Sun, Industrials Analyst]

Okay. Great. That's very helpful. And maybe just a second question. I'm wondering if you can also provide a little bit of update on Eglinton. If I understood correctly, that contract is coming up into the completion phase in 2022. So just wondering on that project specifically, if you could provide some color on the progress as you're closing on the contract, are you expecting any potential changes in margins from that project specifically for the next year, please?

[Jean-Louis Servranckx]

Yes. As you said, this project is getting close to completion. I mean, within the year 2022. It's -- I mean it is sale, what we call revenue service demonstration because it's not only a civil project or a building project, it's also a [indiscernible] project. So it's a fully integrated transport project.So for the one living in Toronto, when you go at the east part of this interline, I'll say, 1/3 of the East from Kennedy, you will see every day vehicles or sets of two vehicles, I mean, doing the demonstration, proving that all the systems are working perfectly, then we will do it on the West part of the line Mount Dennis. And we will do it in the center, and we will finish with anticipation which was one of the most complex station that we have. So we are getting closer to the end. You also know that there have been some issues, and we are getting closer to a resolution. And I can say, I mean, without entering in too much detail that the parts are broadly aligned now on the major issue, and we are working on it.

[Operator]

We're now going to move on to our next question, which will be from Maxim Sytchev of National Bank Financial.

[Maxim Sytchev, MD & AEC]

I just have one quick clarification question for you in relation to CGL. So are you booking revenue right now on that project? And I guess if there is delays in terms of the payment terms, is there any possibility for reversal? I'm just trying to see if there's a divergence between revenue recognition and the cash flow? So I guess that's the nature of the question.

[David Smales, Executive VP & CFO]

Yes. As we've talked about, this is really a cash flow issue. This is -- as you know, we first disclosed that there was an issue of CGL in Q2. So this has been building up for a while. We've been booking that accordingly in terms of being conservative in terms of how we recognize this project, we feel comfortable with that position. We talked about contractual entitlement in the areas impacted and the nature of change, but also the nature of CGL recognizing that change, by issuing a change directive. So on that side, we're comfortable with how we're positioned and we really see this as a cash flow issue that needs to be resolved to keep both ties moving forward until such time as we get to the end of reconciliation, and we're comfortable that we'll work out in line with where we're at today.

[Maxim Sytchev, MD & AEC]

Right. And so because you mentioned that you were conservatively booking. So does it mean that if there was a positive resolution from a cash flow perspective, there's also a bit of a catch-up on the EBITDA or that's not how we should be thinking about this?

[David Smales, Executive VP & CFO]

Yes. I wouldn't be thinking about it like that right now. I would say, obviously, there's a range of outcomes ultimately in terms of compensation. We think we're in the right range, but there's clearly a band either side in terms of the ultimate resolution. But as I say, we're confident where we are. It's just a question of getting to that reconciliation process at the end, but I wouldn't be assuming this big variation either way at the end of the project.

[Operator]

We'll now take our last question today from Michael Tupholme of TD Securities.

[Michael Tupholme, Research Analyst]

This is a follow-up related to Coastal GasLink as well and appreciate all the detail you provided, I guess, just 2 final clarifications. Number one, are you still currently actively working on that project despite the sort of the ongoing contractual issues still moving that forward? And secondly, can you clarify when exactly the arbitration process commenced?

[Jean-Louis Servranckx]

Okay. I will -- I will take the first part of it. Yes, we are working. We have a little more than 1,000 people working on our 2 spreads, Spreads 3 and 4. I remind you that Spread 4, I would say, something like 85% complete. Spread 3 is something like 20% complete because we couldn't have the right-of-way before. So yes, we are working on all these sections. For the second part, maybe, David, you can take it?

[David Smales, Executive VP & CFO]

Yes. Under the contract, Mike, there's ability to have interim processes through arbitration throughout the life of the contract that deal with discrete issues. So we're taking those issues forward too. So it's not just one process, there's a number of issues that we're working through. So it's underway. I think as we disclosed in Q2, these process underway as well. So there's a number of processes that we're pursuing through arbitration as we move forward.

[Operator]

That was our final question. I would like to take the opportunity to hand back to the management team for any closing remarks.

[Adam Borgatti]

Thanks very much, all. Appreciate your questions and your time today. As always, feel free to call up with any questions to us, and have a great afternoon.

[Operator]

Thank you. This concludes today's call. Thank you all for joining, and have a great rest of your day.