Aecon Group Inc

TSX:ARE

Earnings Call Transcript 2021-Q4

[Operator]

Good morning and thank you for attending today's 2021 year end results for Aecon Group, my name is Jason, and I'll be your moderator for today's call. All lines will be mute during the presentation portion of the call with an opportunity for questions and answers at the end.

[Operator Instructions]

I would now like to pass the conference over to our host Adam Borgatti. Adam, please proceed.

[Adam Borgatti]

Thank you, Jason. Good morning everyone and thanks for participating in our year end 2021 results conference call. This is Adam Borgatti speaking, and 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'll be glad to take questions from analysts. And we ask that analysts keep to one 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 these expectations reflected are reasonable, we can give no assurance that the expectations will prove to be correct.

And with that, I'll now turn the call over to Dave.

[David Smales]

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 year of CAD 4 billion was CAD 334 million or 9% higher compared to 2020. Adjusted EBITDA of CAD 239 million, a margin of 6%, compared to CAD 265 million, a margin of 7.3% last year. And operating profit of CAD 119 million compared to operating profit of CAD 150 million in 2020. After adjusting for the impact of amounts related to the Canada Emergency Wage Subsidy or CEWS reported in both years, adjusted EBITDA of CAD 207 million and operating profit of CAD 87 million for 2021 increased by CAD 22 million and CAD 17 million, respectively, compared to last year.

Diluted earnings per share for the year was CAD 0.78 compared to diluted earnings per share of CAD 1.29 in 2020, both announced before adjusting for the impact of CEWS. Reported backlog was CAD 6.2 billion at the end of 2021 compared to backlog of CAD 6.5 billion a year ago and CAD 6 billion at the end of the prior quarter. As announced yesterday, Aecon's Board of Directors approved an increase in the quarterly dividend with this being the 10th increase in the last 11 years. The quarterly dividend will increase to CAD 0.185 per share from CAD 0.175 per share previously, with the first increased quarterly payment to occur on April 4, 2022.

Now looking at results by segment. Turning to slide 4. Construction revenue of CAD 3.9 billion in 2021 was CAD 301 million or 8% higher than last year. Revenue was higher in nuclear driven primarily by an increased volume in refurbishment work in Ontario and in utilities driven by gas distribution and telecommunications work. Partially offsetting these increases was lower revenue in industrial operations driven by decreased activity on mainline pipeline work in Western Canada and in civil operations driven by lower road building construction and foundations work.

Adjusted EBITDA in the Construction segment of CAD 212 million, a margin of 5.4%, compared to CAD 262 million, a margin of 7.2% in 2020. After adjusting for CEWS in both periods, adjusted EBITDA of CAD 180 million decreased by CAD 2 million compared to 2020, primarily driven by lower volume and gross profit margin in civil, urban transportation solutions and industrial. These decreases were largely offset by higher volume and gross profit margin in nuclear and utilities operations.

New contract awards in 2021 totaled CAD 3.6 billion compared to CAD 3.3 billion in the prior year, and Construction backlog at the end of 2021 was CAD 6.1 billion compared to CAD 6.4 billion at the end of 2020.

Turning to slide 5. Concessions revenue for the year was CAD 69 million compared to CAD 98 million in 2020. This lower year-over-year revenue was primarily due to decreased Construction activity related to the Bermuda International Airport Redevelopment Project, which was completed in the fourth quarter of 2020. This decrease was partially offset by an increase in airport operations as commercial flight movements continue to recover from the more severe impacts of COVID-19 on passenger volume experienced in 2020.

Adjusted EBITDA in the Concessions segment of CAD 64 million increased by CAD 22 million versus 2020, primarily due to results from Bermuda Airport.

Turning to slide 6. As of the year end, Aecon had a committed revolving credit facility of CAD 600 million, of which CAD 23 million was drawn and CAD 3 million utilized for letters of credit as well as the CAD 900-million facility provided by EDC to support letters of credit. Aecon's committed facilities for both working capital and letter of credit requirements total CAD 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 December 31, Aecon was in compliance with all debt covenants related to its credit facility. Capital expenditures in 2022 are expected to be similar to 2021.

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

[Jean-Louis Servranckx]

Thank you, Dave. Turning now to slide 7. Despite the ongoing impact of COVID-19 on Aecon's operations, we continued to deliver solid results in 2021. Aecon's balanced and diversified portfolio and agile culture continue to be significant strength and are well-suited to the market opportunities across Canada today.

The Construction segment is aligned to the significant infrastructure investment commitments by all levels of government across Canada 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 with a P3 and alliance model and is also targeting innovative development and private finance opportunities in power, green tech and other related markets, as well as participating as a concessionaire on the five P3 projects identified on this slide.

Turning to slide 8. Backlog, recurring revenue program and the pipeline of bidding opportunities for new work remain at strong levels across Canada. New awards of CAD 3.7 billion in 2021 exceeded 2020 by CAD 413 million. And early 2022 has already seen a number of new projects awarded, but not included in our year-end backlog, including the Interstate-90/State Road-18 interchange improvement project in Washington State; and the Annacis Water Supply Tunnel project in British Columbia.

And Aecon partnership was also selected as a preferred proponent on the Montreal-Trudeau Airport REM Station in Québec. And most recently, an Aecon consortium was named First Negotiation (sic) [Negotiations] Proponent for the transformative GO Rail Expansion – On-Corridor Works project in Ontario, and there are collaborative model with Infrastructure Ontario and Metrolinx. This potential award would be the largest project undertaken by Aecon in its history.

These awards clearly demonstrate the strong demand for Aecon services for project of all sizes and across our operating sectors and geographic areas of focus. Aecon is also pre-qualified on a number of large project bids due to be awarded over the next two years, including several procurements for the Ontario subway line and, most recently, the Scarborough Subway Extension station rail and systems.

We expect demand for our services to remain healthy for the foreseeable future as the federal government and provincial governments across Canada have identified investment in infrastructure as a key source of stimulus as part of economic recovery plan, and an essential part of the transition to a net zero carbon economy through more sustainable infrastructure.

Recurring revenue was up 28% in 2021 versus last year, primarily from growth in utilities operation. Recurring revenue is expected to continue to grow, driven by demand in the utilities sector, and the Concessions segment is expected to see airport traffic in Bermuda continue its recovery during 2022 from the impact of the COVID-19 pandemic.

I would also like to formally welcome our new employees from Pacific Electrical Installation, or PEI, which we had acquired in November 2021. PEI is the largest independent full-service power line contractor in British Columbia, providing maintenance, construction and emergency restoration services for critical electrical infrastructure to the majority and the master service agreements and recurring revenue arrangements. PEI is a designated powerline service provider for BC Hydro for the Lower Mainland South and Okanagan regions, and also works with a variety of private sector customers.

Turning now to slide 9. We are continuing our drive to be an industry leader in sustainability. Last year, we announced our GHG reduction target of 30% by 2030 and net zero by 2050. In 2021, we focused on operationalizing these targets by integrating new technology to reduce emission across our portfolio. And we are the first construction company in Canada to trial an electric mini excavator. We also trial technologies such as battery-powered tools, solar powered equipment and battery packs to replace diesel use on our project sites.

We further cemented our ESG commitment by becoming the first Canadian construction company to incorporate the sustainability-linked credit facility tied to ESG objectives. We plan to release our next Sustainability Report in April 2022, and look forward to highlighting our achievements and opportunities as we continue to focus on building what matters to enable future generation to thrive.

Turning to slide 10. 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 sector, 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 number of opportunities to add to the existing portfolio of Canadian and international concessions in the next 12 to 24 months, including in the US and innovative projects with private sector clients that support a collective focus on sustainability and the transition to a net zero economy.

The overall outlook for 2022 is positive as construction continues on a number of projects that ramps up in 2020 and 2021, the strong level of backlog and new awards during 2021 and the strong demand environment for Aecon's services, including recurring revenue programs.

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

[Operator]

Thank you.

[Operator Instructions]

Our first question is with Yuri Lynk from Canaccord Genuity. Yuri, please proceed.

[Yuri Lynk, Analyst, Canaccord Genuity Corp.]

Thank you and good morning, everyone.

[Jean-Louis Servranckx]

Good morning Yuri.

[Yuri Lynk, Analyst, Canaccord Genuity Corp.]

Good morning guys. I don't know who wants to take this one but you mentioned the outlook for 2022 is positive, but I struggle to see how the Construction segment EBITDA grows this year. Your 12-month backlog is down almost 5% and the margin comps are really tough, at least, through Q3 especially in light of the weakness we saw in the fourth quarter. So, how do we get to growth in the Construction segment in 2022?

[Jean-Louis Servranckx]

Yeah. Yuri, I will take this one. I would have two vectors to answer your question. The first one is about the quality of our backlog. So, as you know and as I have been repeating, the quality of backlog is not an issue. The issue is about selectivity of projects and it's about going on de-risking our portfolio, our backlog. As you have seen, all the indicators of what we decided to do go in the right direction. Indicators about the kind of projects, decreasing the part of lump sum and fixed price to unit price, about the size of project. We have not even – from September 2018, I mean we have not taken a project superior to CAD 1 billion because we just want to go on with CAD 1 billion at the moment. We are more and more diversified geographically. Our sectors, I mean, are quite stable and equally weighted. And our backlog is staying between CAD 6 billion and CAD 7 billion.

So, no real issue with the quality. It's a problem of selectivity and quality of backlog and contracting mode. We're not doing extreme swing to the left or to the right. I mean, it's – we have decided quietly but firmly – I mean, we are shaping the activity of tomorrow knowing and convinced that this will drive better profitability. If I take, for example, the RER 3 OnCorr project, I mean it's transformational for Ontario but also for Metrolinx and Infrastructure Ontario and of course for Aecon. I mean – it's when you calculate about what share Aecon can have, I mean it's about works around CAD 3 billion and operation we have 28% of operation for 25 years between 2024 to 2050. I mean, the cumulative value is around CAD 6 billion.

It's all collaborative. It will begin with the development phase of two years where we will, with the client, fix together what will be the service level for the trade, what strategy are we going to use in line with our offer. And from this, detect what kind of works, how are we going to do this, what will be the price. I mean, it's a totally transformative way for Aecon to work and this is the way to drive profit up.

My second answer, my second vector will be about execution. Execution is key. We are extremely happy with our continuous improvement program. A lot of enthusiasm within the company on most of our job site. I'll just give you an example. You can see – I mean, on the investor presentation is a picture is about Gordie Howe Bridge and you can see the two pillars in the Canadian side. In those pillar, you just cast segment per segment. We have something like 75 segment to do. We were stuck at around 14 days per segment, then we implemented our continuous improvement. We went rather quickly to 10, then 7, and a few days ago we reached 5 days per segment. I mean, this is money. This is profitability. It goes directly to the bottom line.

We are investing a lot in our Aecon University project management group. I mean, all this is important because this is money at the end of the day. And last but not least, I mean, we have totally reorganized our procurement and we are much, much more efficient. So, this is why we say that construction, I mean, is on a good trend.

[Yuri Lynk, Analyst, Canaccord Genuity Corp.]

Okay.

[David Smales]

Yuri, if I can just add to that. So you can tell from Jean-Louis' answer, the strong focus on profit growth. But in terms of the revenue, I think if you look at the comparison of 2020 to 2019 where we came into 2020 with exactly the same amount of backlog to be worked on over the next 12 months as we had in 2019, and yet we still grew by 9% top line coming into this year, so it's really driven by recurring revenue. It's driven by a lot of new awards within the year and we've already had a significant number of wins early this year. It didn't happen in the months earlier, that year-end position of backlog that you're looking at, which is very similar to the position at the end of last year. Yeah, we look very different. So we're not too worried about the revenue side and as Jean-Louis spoken about, the big focus is on ensuring that revenue growth is possible.

[Yuri Lynk, Analyst, Canaccord Genuity Corp.]

Okay. So the margin weakness – sorry, the margin weakness that we saw in the fourth quarter, you don't see that spilling into 2022? That's my last question and I'll hop off.

[David Smales]

Yeah. No, I mean, if you look at the fourth quarter, I mean, we're really talking about impacts confined to civil and urban transportation space, a small handful of projects, where we come through a pretty tough operating environment, the resurgence of Omicron late in 2021. Obviously, supply chain disruptions and we made a lot of progress in settling some significant claims in the quarter and the impact of all that coming together. There's no one particular issue that is only significant out of those factors, but combined they cause the numbers to be a little lower in Q4.

But we don't see that moving over. Obviously, there were some Omicron impact early in January, but we're through that now. We're very much back to normal from COVID. It's something we've been living with for two years, but that Omicron additional waves did have some impacts for a space of about a month or so.

And now in terms of supply chain issue, it's always when you get some shift, some disruption. We've been living with it, the impacts of supply chain now for long enough. But in all our new work and our new bids and contractual arrangements, we're able to factor that in. So we don't expect that to be something that impacts our numbers going forward.

[Yuri Lynk, Analyst, Canaccord Genuity Corp.]

Thank you.

[David Smales]

[indiscernible]

(00:23:48)

[Operator]

All right. Thank you for your question. Our next question is with Jacob Bout with CIBC. Jacob, please proceed.

[Jacob Bout, Analyst, CIBC World Markets, Inc.]

Good morning.

[Jean-Louis Servranckx]

Good morning.

[Jacob Bout, Analyst, CIBC World Markets, Inc.]

I want to continue on with the Construction margin question, maybe just help us understand what the biggest drivers were, how much was Omicron impact. And then as far as the civil, urban transportation projects, you talked about claims adjustments, is there any – could there be any positive adjustments to offset this in later quarters?

[David Smales]

Yeah. So, taking those together, I mean, if you look overall, I mean put this into context to the full year, our Construction segment over the full year so – on a like for like basis, excluding CEWS, saw progression from 2020 in an environment, again, which was subject to a lot of

[indiscernible]

(00:25:15). So we think the Construction segment across the year actually performed well.

With Omicron, as I said earlier, if you look at what people are looking at EBITDA, we reported in the quarter just over CAD 60 million versus consensus of just over CAD 80 million. I would say the fact that I talked about in terms of Omicron, supply chain, and projects roughly very similar kind of impacts in terms of that difference.

[Jean-Louis Servranckx]

Maybe, I can add a few words on Omicron. Omicron has hit Aecon I mean from December up to the end of January. And as we all know, it was not as strong as the Delta variant, but it was spread over – I mean much quicker and we had – I mean from December, in some occasion, more than 50% of our people isolated, I mean, at all level of the company. I got Omicron with very mild symptoms, but I had to isolate myself for seven days. And on all our job, I mean it was like this. So, yes, it has affected us. On the good side of it, I mean, we are closing little by little all our emergency centers for COVID because of the situation is just getting better and better extremely quickly.

[Jacob Bout, Analyst, CIBC World Markets, Inc.]

And then do you get back to pre-pandemic levels as far as margins in 2022?

[David Smales]

Yeah, we're actually – and again going back to kind of pre-COVID days as you say, looking in 2019, and this is my comments regarding Construction segment because as you know, the Concessions will continue to ramp-up as traffic recovers. But looking at the Construction segment alone, yeah, we do expect to get back to pre-pandemic levels for sure.

[Jacob Bout, Analyst, CIBC World Markets, Inc.]

Okay, I'll leave it there. Thank you.

[Operator]

Thank you, Mr. Bout, for your question. Our next question is with Jean-François Lavoie with Desjardins Capital Markets. Please proceed.

[Jean-François Lavoie, Analyst, Desjardins Capital Markets]

Yes, thank you very much. Good morning. So David, just wanted to come back on the question for margin on the Construction segment in 2022, you mentioned, for sure, would go back to pre-pandemic level. But would it be achievable to go beyond the 6% level? I know you don't like to provide – you don't provide specific guidance. But looking at consensus with the actual revenue target and the visibility that you have in the backlog, I was just wondering if you could provide a bit more color on the potential for margin in Constriction, please?

[David Smales]

Yeah. No problem, Jean. I mean you probably answered your own question by saying we don't give specific margin guidance. But I think if you go back to Jean-Louis' comments at the beginning in answer to the first question, the focus is very much on the margin profile, the work we're bidding, the execution of that work, and we feel pretty confident about the mix of work we have for 2022. We feel very confident about the progress we're making on productivity and execution. All subject to any other surprises, we think we've we dealt with everything we know about right now. But we're in an environment where things change quickly. But absent any surprises, then yes.

[Jean-François Lavoie, Analyst, Desjardins Capital Markets]

Okay. That's great color. And then, moving on the free cash flow standpoint, should we expect the positive reversal of working capital in 2022, given the significant consumption we saw in 2021 or the ramp-up of key project will continue to consume some working capital?

[David Smales]

Yeah. So we do expect – there's always some seasonality in our cash flow where we normally see an unwinding of working caps over the generation of cash flow in Q4 and Q1. And sometimes it's more Q4 and less Q1, and sometimes it's the reverse. We expect the reverse this time around.

The biggest impact in Q4 was the issue we disclosed at the end of Q3 around the Coastal GasLink Pipeline and impact that had on our cash flow. As we've noted, we've made a lot of progress on that front. So that will help in Q1 2022 as we formalize those agreements. So that will benefit the first quarter as well the normal seasonal unwinding. So we should start to see that position improve in 2022, and you get back to a more normal cash flow profile that we've seen historically.

[Jean-François Lavoie, Analyst, Desjardins Capital Markets]

Okay, very helpful. And maybe one last from me. Considering that the outlook for 2022 looks quite positive, you increased your dividend once again. I just wanted to pick your brain on your preference for M&A versus share buyback in the current context with the share price that is unjustifiably being punished this morning?

[David Smales]

Yeah. I mean, obviously, dividend has been a focus for a long period of time now, over a decade. And we continue to see that as a predictable and consistent approach, and that's our focus on that side of things. We do see opportunities on the M&A side, and we are focused on looking at where we can continue to grow the business. Jean-Louis talked about a focus on recurring revenue and continuing to look at the profile of the type of work we do. So we're looking for M&A opportunities that help us achieve that.

[Jean-François Lavoie, Analyst, Desjardins Capital Markets]

Thank you very much.

[David Smales]

Thank you.

[Operator]

Thank you for your question. Our next question is with Frederic Bastien with Raymond James. Please proceed.

[Frederic Bastien, Analyst, Raymond James Ltd.]

Thanks. And good morning, everybody. Would you mind discussing more the collaborative nature of the GO Rail Expansion project that you recently secured, and how we should think about how the development phase will transpire over the next few years?

[Jean-Louis Servranckx]

Yes, I will do it, Frederick. We have been advocating and working with all our clients about changing the contracting mode of the big and complex project. I mean basically speaking, estimating those major complex projects, especially the one where there is system integration, on lump sum price is extremely difficult. So we have been exploring all those ways with our client to say we need to define much more together what we want to do and what is going to be the cost of it. And this is what we call the development phase.

So we have been chosen on the OnCorr expansion program. I would say we have been chosen on the capacity of our team. I would say the way we have explained and put on the table the various strategy for service operation during the 25 years and hours of service operation, I mean, could after drive the CapEx for Metrolinx and Infrastructure Ontario.

Now, that we have been chosen – I mean, during two years, in addition to do some early works, I mean, that will happen and that are important to enable when we begin after the two years the main works, I mean, to go quicker and to go better. I mean, during the two years, we are going to finalize the operation strategy with Metrolinx; and from this, finalize what are the infrastructure that are necessary and the equipment that are necessary for this. And together, we will define what can be the budget for this. And we will work with our client on the cost-plus basis during execution with the target price.

So, at this stage, we are negotiating with our client, I would say, the detailed rule of the project, and then we will begin with the development phase. So it's what we call progressive design build, it's what we call collaboration, and we are extremely happy. I mean, at Aecon, this has been a three-year long pursuit. And to have won this pursuit, I mean, we are extremely happy because these are the projects of the future. The risk profile is totally different as you can imagine.

[Frederic Bastien, Analyst, Raymond James Ltd.]

Okay. Thanks for that additional color, Jean-Louis. Second question relates to sort of the progress you are making entering the US markets. I know it's been earmarked or identified as an opportunity a few years back. But you won a recent contract in Washington State, and then you're shortlisted for another one Michigan. And I don't think it's a coincidence that these states are bordering Canada, but I just wanted to know maybe is this the combination of many years of business development? Or have these opportunities kind of presented themselves more recently?

[Jean-Louis Servranckx]

Yeah. You probably remember what I told you I mean a few months ago. We cannot ignore United States although we know there's a huge pipeline for infrastructure in Canada when we have a neighbor of this size, of course the US infrastructure bill. So, we have been working a lot during the last four months. What we have discovered is that it's not only about roads and bridges, it's also a lot about activities of our network, about telecommunications, about increased capacity. And so, we those two vectors we will go, I would say, prudently but steadily we are going to enter the US market.

In terms of civil, we have decided that we will enter this market from our bases in Vancouver and go down the West Coast progressively. So, this is why the first job we took it in Washington State. It's a relatively small job. It's CAD 125 million. It's a job, I mean, extremely classical for Aecon. This is the bread and butter that we do, I mean, on all our divisions. We are studying this extremely carefully. We think we have with us a very good team of local companies and designers. And then we will expand on job maybe a little bigger, maybe different kind of application with bigger companies, and go down the West Coast to go at least up to California where there it's probably the one of the biggest part of this infrastructure bill. There's a lot to do. So, this is the plan in civil.

In utilities, we are looking at the market, looking at the alliances we can do. But as always – I mean, for these two examples, it's what I always told. We're not going to have a new country and add it to a new activity. I mean, we have a new country, okay, but we do it on, I would say, our core businesses so that we don't have any surprise.

[Frederic Bastien, Analyst, Raymond James Ltd.]

Okay. Thanks a lot. Appreciate it.

[Operator]

Thank you for your question. Our next question is with Chris Murray from ATB Capital Markets. Please proceed.

[Chris Murray, Analyst, ATB Capital Markets, Inc.]

Yeah. Thanks folks. Good morning. Maybe turning back to the margin question just a little bit. Just trying to understand a little bit of the disclosure on Q4. Dave, just what was the huge contribution in Q4? And you didn't call it out, but I got to expect that there has got to be some revenue that you've probably lost in the quarter just due to Omicron. I'm just trying to get a sense of what the normalized margin would have been for the quarter.

[David Smales]

Yeah. This huge impact was around CAD 4 million in Q4, so that's that piece. I mean, in terms of revenue as Jean-Louis said, we had some impacts through December. I wouldn't say the revenue impact was hugely significant. It was more of a productivity impact that impacted us through December. So, revenue may be kind of in the CAD 20-million range, but not that significant in the overall revenue. It's just tougher to schedule work and get the right crews with the right number of people. So, it was a bit more of a scramble in December in terms of availability of workforce.

[Chris Murray, Analyst, ATB Capital Markets, Inc.]

Okay. And so just – I guess what I'm also trying to understand as we go into 2022, I mean, I think the first thing I'm assuming is that there'll be no more CEWS payments next year and if we think about the – call it the CAD 32 million of CEWS that were in earnings this year, should we be thinking about that – backing out that CAD 32 million as a contribution and kind of – but then I think you also mentioned – thinking about 2022 maybe kind of like a pre-COVID year. I'm just trying to – so is the assumption that you'll overcome the loss of the CAD 32 million in margin type of thing, is that the right way to be thinking about this directionally?

[David Smales]

Yeah, so, you're right. The CEWS program has ended now so there won't be any contribution from that in 2022. We've obviously been impacted by COVID throughout the year including early in the year, including impacts on Bermuda as well obviously that we expect to see recovering through 2022. So, when we look at CEWS and COVID impact together assuming we continue in the operating environment we're in right now, which is really having no impact on the business in terms of the current COVID situation, yeah, we think those two kind of offset and allow us to get back to kind of a pre-COVID type of margin performance.

[Chris Murray, Analyst, ATB Capital Markets, Inc.]

Okay, great. And then just to make sure too, I know in previous years you've sort talked about the fact that just the first half of the year might not be as substantially down to the second half just kind of the nature of some of the work. But we should still be thinking that there will be some seasonality impacts in the Q1 and Q2 again in 2022, is that also fair to think?

[David Smales]

That's right. This Q3 and Q4 are typically the highest revenue quarters. That has moderate to some extent over time, but it's still definitely the case and we don't expect that seasonality to be any different this year really.

[Chris Murray, Analyst, ATB Capital Markets, Inc.]

All right. That's helpful. Thanks guys.

[Operator]

Thank you for your question. Our next question is with Troy Sun from Laurentian Bank Securities. Please proceed.

[Troy Sun, Analyst, Laurentian Bank Securities, Inc.]

Great, thank you. Good morning. Maybe just quickly on the Coastal GasLink project here, obviously noticed the change in language in the disclosure. It sounds pretty positive here. I'm just trying to get a sense from you in terms of how, I guess, comfortable that you're feeling in terms of de-risking the free cash flow exposure there on that project if possible, please. Thank you.

[Jean-Louis Servranckx]

Maybe, I'll begin about CGL. So, CGL is a very complex project by its nature but also by the massive change in all the regulation about erosion and segmentation control. So, it's not only a problem at CGL, I see everybody is aware. I mean, not the same kind of issue that have been encountered in Trans Mountain in terms of cost overrun, in terms of schedule being pushed on to the right. So, those are complex projects.

We have developed at the highest level, I mean, with our clients, a very good relation based on trust and transparency to make the best out of this difficult situation. We have been – during the last quarter, we have reached some agreements with our clients, all those agreements have been formalized during Q1. So, they have just fixed the cash position for Aecon. You know that in addition, we have begun an arbitration to decide later on what is going to be the final value for this project. In between, we are also working with our client to try to settle some – a list of discrete issues because arbitration is time and money consuming. So we are also advancing well on the issues. So this is at the moment where we are on an operational way at CGL. Maybe, David, you can take the more financial part of it?

[David Smales]

Yeah. I mean, I think just building on what Jean-Louis said obviously, the disclosure at the end of Q3 was focused on cash flow and we've obviously – as disclosed now with Jean-Louis' comment to what progress on that front, we've obviously been working on this project for quite a period of time now and we've reflected the challenges we've had on the project and obviously other contracts facing similar challenges. We've reflected that in how we position the project. And so from that perspective, that was never the number one concern. It was really around cash flow, and we've made good progress on that front.

[Troy Sun, Analyst, Laurentian Bank Securities, Inc.]

Okay, great. That's helpful. And maybe just also, I guess, a big picture question for Jean-Louis here, just in terms of the infrastructure spending potential, let's call it, in Canada, I think, people largely were expecting a meaningful tick-up post-COVID. I guess just based on what you're seeing now, like, where are we now in terms of that progress from a spending perspective for 2022? Are we still in the early days of seeing the full potential of government funding or like it's quite mature at this point?

[Jean-Louis Servranckx]

You probably remember, I mean I told you more than one year ago, I don't believe in shovel ready progress in infrastructure. So, the fact we said on Friday we're going to invest a lot on infrastructure, it doesn't happen on Monday morning. So, yes, I'll just give an example. For example, in Toronto, there's been a lot of works done in the streets, rehabilitation of bridges during the COVID because there was no more trucks and no more cars because everybody was at home, so we got the loaders to work there.

But mainly, the program on which our teams at the moment are preparing themselves, the pursuit. Our pursuit that we have been knowing and we knew – they were on our radar the last two to three years we were ready for this. So, I would say it's steady, the pipeline and infrastructure is strong.

Is there a strong correlation with COVID and with recovery plan? Maybe not that much. It is not the main driver. The main driver is that you have something like 0.5 million newcomers in Canada and those people, I mean, are smart immigrants. They need better highways, they need better telecommunication, they need better source of power, better source of communication, and all this drive what we are seeing at the moment on the backlog to comeback to something extremely positive for us. I think you have noticed this CAD 680 million in recurring revenue.

I mean, telecommunication is booming. I mean fiber-to-the-home to rural places, alternative energy also, so we're extremely happy to be well-positioned. I was this morning reviewing with one of my operational leader about Voltage. You probably remember this company that we acquired a few months ago. So, now that it is well integrated, you cannot imagine the prospect, the pursuits and the awards. I mean, we are now working extremely strongly with Hydro One on the GTA. We're working with Hydro BC (sic) [BC Hydro]. We're working in Fort McMurray with some private clients. We're working with Manitoba Hydro. I mean, there is a boom which of course I mean maybe partly a consequence of COVID, but it's not the main driver. The main driver is that Canada is growing and where the need and [indiscernible] (00:49:23).

[Troy Sun, Analyst, Laurentian Bank Securities, Inc.]

Okay, great. Awesome. That's super helpful color. That's it for me. Thank you.

[Operator]

Thank you for your question. Our next question is with Naji Baydoun with iA Capital. Please proceed.

[Naji Baydoun, Analyst, iA Capital Markets]

Hi, good morning. Just wanted to start off on the nuclear side. A competitor of yours recently ended a joint venture partnership that was focused on nuclear decommissioning work in US. I know you can't comment on that partnership specifically, but how does this event impact or inform your view of the US nuclear market?

[Jean-Louis Servranckx]

So maybe I will begin with what are we doing on the nuclear at the moment in Canada. We are full speed ahead with the refurbishment of the two power plant. And in OPG, we are now working with the second reactor. We are extremely happy with the ramping up, with the lessons learned from the first one to the second one. We are early, a few dozens of day on the schedule. Our client is delighted with our works.

On Bruce Power, you'll see that we are working on the first reactor. We have added to our backlog the second reactor. There are still four to come. There are still three steam generators. So this is good. Our teams are getting better and better.

Second point of importance, small modular reactor. So you have noted that OPG has decided about the technology partner, who is going to be GE. We are part of the team with OPG and GE as a constructor and installer. We are extremely happy with this. I mean, SMR is 300 megawatts. It is the right size. I mean it's, of course, carbon-free energy. I mean the debate is closed on this.

In terms of safety, these new reactors, following Fukushima, are getting much better. I'll just remind you that they are passively cooled for minimum of seven days with power shortage and without operator action. I mean, it's totally innovative. We are extremely happy to work on this.

In United States, we have acquired three years ago a small company specialized in welding that we are using in Canada and United States. I have to say that during the last two years, because of COVID and because of nuclear power plant, we are rather reluctant to let enter within the plant people working on CapEx and mixing with people working on operation. We have not seen a lot of activity during the last two years, but it's coming back and it's coming back rather quickly. I cannot comment, I mean, on the spending of the JV, but it was all about dismantling existing plans. And so far, we are not in this business in the United States.

[Naji Baydoun, Analyst, iA Capital Markets]

I guess, you're also saying maybe that's not a business you want to be in or that's not a market that you're going after at the moment?

[Jean-Louis Servranckx]

In United States, we are not pursuing this. I mean, evidently when the time for Pickering will come – I mean Pickering, it's Toronto, it's our city, it's a client that we know perfectly and we are working in collaboration with them about future packages. But entering into the mega dismantling project in United States is not part of our strategy.

[Naji Baydoun, Analyst, iA Capital Markets]

Okay, understood. That's clear. Just one last quick question. And, obviously, you mentioned this in your opening remarks and then in the MD&A pursuing more transition or sustainability related projects and opportunities. Can you just provide a bit more detail on that and perhaps quantify what the market opportunity is for you in Canada?

[Jean-Louis Servranckx]

It's not easy to quantify, but the wave is coming definitely. I mean, how do we look at ESG? I mean, first of all, as a company, we are a citizen and we have to take care of our planet. So this is why we are the first construction company to have set up target on greenhouse gas emission reduction for 2030 and 2050. So I have to admit, I mean, we have a plan and we know perfectly how we are going to reduce by 30% for 2030. We don't have really a clue about net zero in 2050. It will come. We are working on it.

The second part, I mean, how to look at ESG, it's as a business. I mean, definitely, you have new avenues of growth coming from everywhere mainly in the energy sector – I mean, electrical sector, alternate energy. So you have probably noted that most of our tuck-in acquisition during the last year was about this. And we are extremely focused on this new stream of businesses, so much that we have decided to create a single point of entry at Aecon in order to help our clients with their ambitious program regarding sustainability. This single point of entry will allow us to be more agile in our pursuits, more agile in our solution, and being able to share the work between all the sectors at Aecon from a centralized point of view.

[David Smales]

I mean, Naji, the perfect example would be the On-Corridor project, the RER project that Jean-Louis talked to, I mean, clearly electrification in the rail system in the GTA to replace diesel. These are the types of capital allocation decisions that are being made across all levels of government, with private clients, and we're right in the middle of all the activities. So it will drive our growth and our opportunity here for the foreseeable future. We don't see that trend going anywhere other than continuing over the long period of time.

[Naji Baydoun, Analyst, iA Capital Markets]

Okay. Thank you for those details.

[Operator]

Thank you for your question. Our next question is with Michael Tupholme with TD Securities. Please proceed.

[Michael Tupholme, Analyst, TD Securities, Inc.]

Thank you. Good morning. Just wondering if you can provide an update on traffic levels at the Bermuda Airport through the first part of the year here in 2022. And maybe to put that into some context, just give us a sense for how that's evolved from what you would have seen in the fourth quarter?

[David Smales]

Yeah. So overall, for 2021, traffic was up compared to previous year by about 50%, but it was still only around 30% of 2019 levels. We do see that – and this is based on tracking all the forecast that are out there in the marketplace plus our own knowledge of the plans of the airlines and what's going on in terms of on the ground in Bermuda. We do see that growing to about 60% of 2019 levels on average over 2022.

There's a fair bit seasonality to that. Q1 is always the slowest quarter for traffic in and out of Bermuda. So, clearly Q4 was kind of impacted in the last month at December because of Omicron. January 2022, the same kind of impact. Things are now picking up again. So, I think Q1 won't be too dissimilar to Q4, and then we think through the course of the year it will start to ramp up quite nicely.

[Michael Tupholme, Analyst, TD Securities, Inc.]

Okay. Thanks, Dave, and then one follow-up. You were asked earlier about changes in non-cash working capital, and I think most of the comments you made around sort of possible difference in seasonality, Q4 versus Q1 reversal. So, it sounds like you expect more of a reversal in Q1 in 2022 as opposed to what you would have historically seen in Q4. I'm just wondering for the full year of 2022 with – it sounds like an expectation of some revenue growth in 2022, how do we think about the full year for changes in non-cash working capital?

[David Smales]

Yeah. I think overall for the year, we expect working capital to be fairly neutral across the year. As you said, some of that is due to growth and the profile of projects. But all of this can be thrown off by timing close to the end of the year in terms of where you are in terms of ramping up on certain projects and things like that. But all things being equal based on what we see today, we expect it to be fairly neutral in 2022.

[Michael Tupholme, Analyst, TD Securities, Inc.]

Okay. Thanks for that.

[Operator]

Thank you for your question. Our next question is with Sabahat Khan from RBC. Please proceed.

[Sabahat Khan, Analyst, RBC Capital Markets]

Hi. Great. Thanks and good morning. Just I guess looking forward, I think there is a bit of commentary shared earlier on your outlook for 2022 and some of the impact that COVID had through late last year. And then I guess as you think about the outlook, do you think you kind of – in the provisioning that you did going through Q4 taking into account some of the COVID risk earlier in the year, maybe some of the disruptions like – just trying to figure out if there's still larger negotiations or larger projects where there is still discussions on recovery and how your

[indiscernible]

(01:00:27) managing that for kind of the full year looking forward?

[David Smales]

Yeah. I think in terms of those Q4 impacts, we felt – that we dealt with those in Q4, so we don't expect those to carry forward into 2022.

[Sabahat Khan, Analyst, RBC Capital Markets]

Okay. But I guess in terms of like....

[David Smales]

Sorry. Sabahat, sorry. Other than the comments we made earlier, which is the Omicron impact continued through January. January obviously is a pretty slow month for us anyway from a Construction perspective in Canada, but that would be the only thing that kind of carries into the first month of this year. But everything else, we feel we dealt with in Q4.

[Sabahat Khan, Analyst, RBC Capital Markets]

All right, great. And then I think you've noted in the press release and the call around just opportunities for Concessions like outside of Bermuda. I guess, is that something that's sort of opportunistic or you actively looking to build out the Concessions segment and add more assets? Just trying to get an understanding of where that is on the priority list and is that something you compare to the opportunities maybe on M&A or buyback or is that big kind of a focus for you guys?

[Jean-Louis Servranckx]

Generally speaking, I will begin on my side. I mean, our strategy is to work together Concessions and Construction segment. We're not going to invest in brownfield assets only to operate it. We've just sees that our job is to develop a project, is to engineer a project, is to finance it, to build it and to operate it. And we are extremely interested in following this model, and I can say that all the sustainability ways that I was talking about is giving us new opportunities with private sectors, with private companies about all those alternate energy issues. So, this is generally speaking, yes, we want to pursue and we are ready to this. Maybe, David, you can add a little on...

[David Smales]

Yeah. I mean, very much we're focusing on those opportunities. I mean, some of these things that we're working on through government procurement, so Ontario line subway, the P3 opportunity, the Deerfoot Trail improvements in Calgary, the P3 opportunity, and our Concessions group. Sometimes, it's investing equity, but it's always around a long-term revenue stream. And again On-Corridor would be a perfect example of where there's a 25-year operations and maintenance fees attached to the opportunity that our Concessions group is heavily involved in and will be participating in throughout the O&M lifespan.

So, that's a big focus for us. And we're also looking opportunities to replicate what we've done in Bermuda. There are some very interesting discussions going on around that space that I think take time to come to fruition and obviously with all the impacts on air travel over the last little while is being kind of a pullback, but those discussions are back up again and we're looking across the board for how we can continue to evolve that Concessions group. And there's quite a number of very interesting opportunities for us to do that.

[Sabahat Khan, Analyst, RBC Capital Markets]

Okay, great. Thanks very much for the color.

[Operator]

Thank you for your question. There are no further questions waiting at this time. So, I'd like to pass the conference over to the management team for closing remarks.

[Adam Borgatti]

Super. Thanks very much everybody for attending today and as always, feel free to reach out with any further questions. We look forward to connecting again next quarter. Have a great day.

[Operator]

That concludes the 2021 year-end results for Aecon Group conference call. Thank you for your participation. You may now disconnect your lines.