ATCO Ltd. (ACOX) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the ATCO Limited Fourth Quarter and Year-End 2021 Results Conference Call and Webcast. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Colin Jackson, Senior Vice President, Finance, Treasury, Risk and Sustainability. Please go ahead, Mr. Jackson.

Thank you. Good morning, everyone. We're pleased you could join us for ATCO's Fourth Quarter 2021 Conference Call. With me today is Executive Vice President and Chief Financial and Investment Officer, Katie Patrick. Katie will begin today with some opening comments on recent company developments and our financial results. Following these prepared remarks, we will take questions from the investment community. Please note that a replay of the conference call and a transcript will be available on our website at atco.com and can be found in the Investors section under the heading Events and Presentations. I'd like to remind you all that our remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reports filed by ATCO with the Canadian securities regulators. And finally, I'd like to point out that during this presentation, we may refer to certain non-GAAP or segment measures such as adjusted earnings, adjusted earnings per share and capital investment. These measures do not have any standardized meaning under IFRS, and as a result, they may not be comparable to similar measures presented in other entities. And now I'll turn the call over to Katie for her opening remarks.

Thanks, Colin, and good morning, everyone. Thank you all very much for joining us today for our fourth quarter 2021 conference call. As it's been a few years since we've hosted a quarterly conference call for ATCO, I'd like to provide a quick overview of ATCO's strategy and also introduce myself and the role that I hold at ATCO. Specifically, I think it would be helpful for the audience here to touch on ATCO's core strategy and how this differs from the strategy of our largest investment, Canadian Utilities Limited. And just for clarity, when I'm talking about Canadian Utilities, I'll often refer to it as CU. ATCO is a globally diversified holding company with a multigenerational investment horizon and a focus on investments in the essential services space. More specifically, we target investments across 6 central service categories: energy, shelter, real estate, water, agriculture and logistics and transportation. The maturity and scale of our investments in each of these categories varies with energy, shelter and transportation logistics being the most advanced; and water, agriculture and real estate being longer-term strategies for us. Collectively, investments across these categories provide economic resilience and stability through business cycles and allow us to demonstrate our corporate values in the market. Investments in these categories are also well in line with our core capabilities and provide a pathway to the returns and growth profiles that we demand from our investments. While we continue to explore new investments in support of this strategy, it's worth talking through the current composition of our portfolio and how these investments align with this strategy. Currently, ATCO's core investments include a controlling interest in CU, 40% interest in Neltume Port and a 100% interest in ATCO Structures & Logistics. These investments provide our portfolio with direct exposure to the energy, shelter, real estate and transportation and logistics segments. Critically, these investments also place our business adjacent to activity and key players in other segments of our strategy where we see further growth opportunities. As most here are aware, our largest investment is our controlling interest in CU. This investment serves as our portfolio's primary energy investment vehicle and provides exposure to the Alberta, Australia and Puerto Rican utilities, along with energy transition investments in the renewable generation, clean fuels and energy start segments. This investment provides a stream of stable and reliable earnings and cash flow for ATCO, which supports new investment at the ATCO level and the funding of our dividends. With that overview, I wanted to quickly touch on the joint role I hold as ATCO's Executive Vice President and Chief Financial and Investment Officer. This role is a nod to the diversified holding company strategy of ATCO. In this role, I have traditional financial oversight responsibilities, but I also oversee ATCO's portfolio composition and help drive its growth strategy. Moving on to the 2021 year. I wanted to touch briefly on a few of our recent achievements. 2021 was a busy year, and our business delivered year-over-year earnings growth despite lingering market pressure related to the COVID-19 pandemic, completed work across our businesses, which span multiple years and allowed for the issuance of formal ESG targets in January of this year, participated in the competitive bidding process for the Government of Canada's North Warning System operations and maintenance contract, secured key Australian contracts in our ATCO Structures business for the construction of workforce housing and saw our CU investments make significant strides in both energy transition strategy and delivery of electricity transmission and distribution services for the people of Puerto Rico through its LUMA Energy business, which Brian spoke more fully about during the CU call. We're truly proud of these results and of our people who live the values of our company to deliver service excellence across the portfolio in 2021. Taking this discussion back to our financial performance and as alluded to previously, 2021 was a great year for ATCO. We achieved adjusted earnings of $382 million or $3.35 per share for 2021. This is $30 million and $0.27 per share higher than 2020. This growth in year-over-year earnings was primarily driven by our CU investments, though many of our other businesses had significant project wins. And we made continued progress in our strategic diversification within the Structures business. CU saw its own adjusted earnings grow $51 million from $535 million in 2020 to $586 million in 2021. At the ATCO level, this translated to year-over-year earnings growth from our investment in CU of $30 million. The strong performance from CU was primarily driven by its LUMA Energy business and continued strong performance from its ATCO Gas Australia business, which benefited from favorable inflation trends and low dynamics through 2021. I know Brian spoke in detail about LUMA's operations during CU's conference call earlier, but I would encourage anyone who isn't familiar with LUMA to take a look at both disclosures within our CU financial statements and MD&A and also look at the LUMA Energy website for a better sense of the great work that the team in Puerto Rico is doing. Moving on to our Structures & Logistics business, which comprises both ATCO Structures and ATCO Frontec. The team had a number of project successes in 2021. In the fourth quarter of 2021, ATCO Structures was awarded a contract for the construction of a workforce housing facility in Carapa Australia. This project, with long-term partner Bechtel, will provide accommodations for 2,500 workers involved in the Pluto Train 2 LNG expansion. This brownfield expansion will see the construction of a second natural gas processing train, significantly increasing the capacity for this facility. While the business has done a great job of backfilling project earnings with more diversified and stable fleet and trade sales earnings, major projects will continue to provide a strong supplement to the segment's earnings. The advancement of this project signals restarting of major projects that were largely postponed due to the COVID-19 pandemic and suggest strengthening economic activity levels. On the Frontec side of the business, the team actively participated in the Government of Canada's North Warning System RFP process through 2021. I'm happy to report that these efforts executed through our Nasittuq joint venture with the Pan Arctic Inuit Logistics Corporation were successful and were awarded a 7-year contract to operate and maintain the North Warning System beginning in April of 2022. The 7-year contract, which is valued at $592 million, includes 4 2-year extension options and represents an incredible opportunity for Frontec to demonstrate their technical expertise, both in the northern territory and as a trusted contractor to the Government of Canada. This contract also reinforces our commitment to Inuit and First Nations within Canada and demonstrates the importance we place on truth, reconciliation and the creation of economic opportunities. This portfolio-wide commitment was a driving factor in our inclusion of an indigenous economic benefits target within our recently announced ESG targets. And this project is a key stepping stone in advancing this objective. Next, I'd like to touch on our Neltume Ports investment, which overall continues to provide a solid base of earnings to ATCO amidst the challenging economic environment. Neltume had an active fourth quarter that saw the business acquire a 70% interest in Tidal Transport & Trading USA, a provider of full-scale marine operation services in the United States. This acquisition fits well within Neltume's overall strategy and highlights our desire to further strengthen our presence in the U.S. Significant drive powder remains in the Neltume business to support new investment and drive growth. While the pandemic slowed our deployment of capital in the business, we're optimistic about the investment opportunities we're seeing already for 2022, as global trade and economic activity continues to improve. Overall, ATCO had a great 2021 that saw us deliver strong year-over-year earnings growth while also advancing numerous aspects of our corporate strategy, including the issuance of ESG targets. Our team has done a great deal of work not only to weather the COVID-19 pandemic, but to drive performance despite these factors and to prepare each of our businesses for growth as economic conditions improve. We're well positioned heading into 2022, and I'm excited to leverage the work we've done to date as we continue advancing our portfolio strategy at ATCO. That concludes my prepared remarks, and I will now turn the call back to Colin.

Thank you, Katie. [Operator Instructions]. I will now turn it over to Claudia, the conference coordinator, for your questions.

Thank you. [Operator Instructions]. The Investor Relations team will follow up with you by e-mail after the call. [Operator Instructions]. Our first question is from Maurice Choy with RBC Capital Markets.

My first question is on the Structures & Logistics segment. Obviously, ATCO has had another year where earnings were above $50 million [indiscernible] from the single-digit earnings result in 2017. And I recognize that the contract earnings can be lumpy. But would you say that the business has reached a point where earnings are now sustainable at these levels? And if not, what portion do you think is a reliable run rate, particularly when you think about the rental business or maybe your Frontec business where the terms tend to be a little bit longer?

Yes, Maurice. Thanks very much for that question. I think in short, the answer is, I think we have reached that point where there's a relatively stable trajectory underlying our Structures business. As we know, we had a large contribution in 2020 from LNG Canada. And in 2021, we more than overcame that through the base business growth. So I think that, yes, that's been the focus to try and get some stability behind that earnings and have a predictable go-forward based business. That will be substantive though, just to be clear, from some of those large projects from time to time, such as the Pluto project that I mentioned. So I think, yes, in short, I think we have reached a point of having a relatively stable base business, and we'll continue to grow that through additional fleet within Structures.

Great. And my second question relates to Neltume Ports. Globally, there obviously has been supply chain issues and some ports has seen record-setting volumes. I recognize that Neltume Ports has a wide range of ports with different contracts, volumes, products. And the diversity here should generally mean predictable results. That said, under what market conditions would we see this business do greater than, say, the $3 million to $4 million per quarter run rate?

Yes. That's a great question. I think that you could see a very diversified portfolio, which is great because it gives us that stability of earnings that we have seen since making our investment. It's exposed to a number of different industry factors, geographies, economic cycles. But as you say, what would drive higher returns for that. There's a few things that I can quickly say certainly, it still remains -- it's predominantly based in Chile, which has strong exposure to the commodity cycle. So upswings in commodities would certainly help drive higher earnings. But the #1 thing that we're going to see drive growth from within Neltume is the deployment of that capital that we provided as part of our equity investment. And there's a healthy pipeline, and I think we should be seeing some of the efforts they have come to fruition shortly to help bolster and grow that earnings that we've seen come from the Neltume investment.

And just as a quick follow-up. How do you compare returns that Neltume Port sees for these capital deployment opportunities versus, say, the types of opportunities that ATCO as a whole has right now?

Yes. I mean I think we -- our internal lingo, we call Neltume one of our beta investments, which is that it's got a very good stability of earnings and cash flows coming from it. And the returns are comparable to other, call it, infrastructure-type investments. We also are seeking to add some faster earnings growth. And some of the energy transition projects would fall into that category. But I think the returns are relatively comparable to, say, our investment in overall in the utility segment. It's obviously got some benefits from being exposed to potentially some higher growth geographies. So should those start to grow faster than we could see some better returns than Neltume investment.

Our next question is from Linda Ezergailis with TD Securities.

I have a question about your Structures & Logistics approach to managing and mitigating risk. There was an unfortunate incident at another work camp, the Coastal GasLink site last week. And I'm just wondering whether you view that as somewhat of a unique circumstance? Or do you see that as potentially a data point, suggesting that there might be more risk in terms of work -- remote work locations? How might that affect your business way? And might that reflect -- be reflected in maybe more resilient structure design or operations? Can you comment on what changes, if any, might be coming? And what sort of costs might be associated with that?

Yes. That was a very unfortunate incident that no one in Western Canada is super happy about. And I think at ATCO safety of our employees and our contractors and the people on our site is absolutely our #1 priority. So that is always in the forefront of our mind. We are -- we have a 75-year history, probably, of working in remote locations and dealing with the challenges that are faced there. So I think it's a very unfortunate incident, and we obviously will continue to monitor our security protocols in any of the remote areas that we work. So I think we have very good experience, as I said, in dealing with that, and we will continue to prioritize the safety. In terms of any specific modifications to the structures or our materials, I don't think there's anything necessarily there on the table at the moment. It's figure -- it's always going to be difficult when someone is trying in that specific situation like that to try and necessarily 100% protect your assets and the people are the most important part.

Yes, agreed. And maybe moving back to Neltume. There have been some geopolitical developments and potential implications for trade of goods globally. And obviously, that is influencing how you approach, where you invest. And I think your South American focus serves you well in that regard. But I'm just wondering how that might influence the activity in your businesses that you have right now? And how you approach what sort of investments you make, not just in South America, but in the U.S., I guess, and potentially elsewhere over time in terms of goods flow of trade globally?

Yes. I mean I think we're all adjusting to the overnight news and then what that's going to mean for the world as a whole in terms of go forward. Generally speaking, ATCO, we are -- the majority of our assets, as you know, are in very well developed and stable countries where we see the risk to be relatively low. That being said, we have -- we do have the Neltume Port investment. But even then Chile is one of the leaders in South America in terms of its long-term stability. So I think we're very mindful of the current geopolitical environment. We continue to focus on our core geographies, being Canada and Australia. And the United States is well as one of our growth areas. But I don't -- I think at the moment, we don't have any plans for new endeavors and new geographies beyond what we've already talked about. And obviously, like the whole world, we're going to have to watch and monitor what the implications of the current geopolitical issues in Russia and Ukraine are for our business.

Our next question is from Andrew Kuske with Credit Suisse.

I guess the question, really to Katie, on the commodity cycle and how we think about that in relation to the Structures business because historically, it's been beneficial when we see more robust market prices on a series of commodities for future development projects in that Structures business. But you also get this dynamic where some smaller regional competitors have drawn into that space, most of which ends badly for the competition. I guess just where do you think we are at this point in the cycle, in particular, in the Structures business?

Yes. I mean I think we have a very healthy pipeline of potential opportunities. The rebound in the commodities, particularly in Western Canada and the more recent rebound though, I think that people are still reluctant to invest significant capital into the commodities or increasing the capacity of the commodities as we know. So I don't -- from a large project perspective, I don't expect there to be an absolute flurry of opportunities there. And really, the size of our pipeline growing is a lot -- can be a lot attributed to our strategy to diversify into smaller workforce housing projects as well as our base business and space rentals. So I think we may see -- we are seeing, obviously, a bit of a spike in the commodity cycle rate here. But I don't think that necessarily will be -- we won't see the same capital investments that we may have seen and it won't necessarily translate into a huge number of massive projects for Structures, but there's still a solid pipeline behind them right now.

Okay. That's helpful color and context. And then maybe related, albeit slightly different, when you think about just the permanent structures, in particular for affordable housing, how big is that market opportunity that you can see deploying capital into, maybe expanding that business to something that's more meaningful in the future?

Yes. That's a bit of a niche business within -- that we've been focusing on within Structures. I certainly -- it's a great skill to have, and we continue to look for opportunities for the permanent modular construction. But it does represent at the moment, a relatively small portion of the overall structures business. And I think it will grow incrementally. I don't think you'll see a significant huge jump in that, that there continues to be a push for looking for new opportunities within that business.

[Operator Instructions] Our next question is from Mark Jarvi with CIBC Capital Markets.

Just going back to Structures & Logistics. In particular, the Q4 top line revenue is pretty good, but EBITDA earning's a little lower. Was there anything in particular with the contract mix? And just thinking about how to go through the subsequent quarters in terms of margin profile?

Yes. No, I think there was a few things that were going on in Q4. The biggest thing is that Q4 2020, we still had some of the impacts of LNG Canada. And even though overall, the margin profile this year was better, it's hard to make up for the volume that we have there. We have some projects that had a little bit more difficulty with as well. That may have contributed to a little bit lower on the earnings side of the equation. But I think going forward, the big thing is trying to exclude that impact of LNG Canada in Q4 2020 on a year-over-year basis to try and get a normalized view of earnings.

And then when you mentioned the word difficulties, is that on costs, on like equipment side? Is it labor? And anything you're seeing that carry through into this year at this point?

Yes. No, we're working -- in some of our international projects we had a bit of difficulty on a few different areas within it. And overall, we're just -- we are trying to make sure that we maintain our commitment to the client. But it probably will result in a bit of some losses related to challenges on costs, COVID-related challenges, just some overall logistical issues with one particular project that hampered the earnings that quarter.

Okay. And then last question, just there was a negative outlook from S&P on the ATCO Limited credit ratings. So wondering how important it is to preserve the A- rating? It is does it hampers your ability to deploy capital or you don't issue a lot of debt at the ATCO Limited level. So would you be comfortable going down [indiscernible]

Yes. No, we've had that we've had that negative outlook on for a couple of years. So we're aware of that. And I think, overall, the impact from a move to -- from A- to BBB+ if that were to transpire, would have limited impact on our overall business. We do have, for lack of a better term, ring fencing in place for CU Inc., which is our primary debt issuer. So that will maintain its strong access to capital markets. But I think even then, I don't anticipate big concerns with accessing capital at either the CU level or the ATCO level, should there be any change to the S&P outlook or rating for us.

[Operator Instructions] There are no further questions registered at this time. I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.

Thank you, Claudia, and thank you all for participating today. We appreciate your interest in ATCO, and we look forward to speaking with you again soon. Thanks again.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.