ATCO Ltd. (ACOX) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the ATCO Limited First Quarter 2023 Results Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Mr. Colin Jackson, Senior Vice President of Finance, Treasury and Sustainability. Please go ahead, Mr. Jackson.

Thank you. Good morning, everyone. We're pleased you could join us for ATCO's First Quarter 2023 Conference Call. With me today is Executive Vice President and Chief Financial and Investment Officer, Katie Patrick. Before we move into our formal agenda, I would like to take a moment to acknowledge the numerous traditional territories and homelands in which our global facilities are located. Today, we're speaking to you from our ATCO Park head office in Calgary, which is located in the Treaty 7 region. This is the ancestral territory in the Blackfoot Confederacy comprised of the Siksika, Kainai and Piikani Nations; the Tsuut'ina Nation and the Stoney Nakoda Nations, that include the Chiniki, Bearspaw and Goodstoney First Nations. The city of Calgary is also home to the Metis Nation of Alberta Region 3. We honor and respect diverse history, languages, ceremonies and culture of the indigenous peoples who call these areas home. 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 under the heading, Events & 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 also like to point out that during this presentation, we may refer to certain non-GAAP or other financial measures, such as total of segment measures, 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 first quarter 2023 conference call. ATCO achieved adjusted earnings of $137 million or $1.21 per share in the first quarter this year. This is $3 million or $0.04 per share higher than the first quarter last year. This $3 million of growth came primarily from the strong performance of our structures business, combined with great performance across our broader portfolio of investments. Collectively, this more than offset the expected downwards earning pressure associated with the rebasing of our Alberta distribution utilities within the Canadian Utilities investment. Having gone through PBR rebasing 5 years ago, we have been really focused on driving growth throughout other areas of our portfolio to help mitigate this pressure. You can see the results of this with the strong results in the quarter.  Jump into ATCO Structures, we delivered adjusted earnings of $19 million in the quarter, $3 million higher than the same quarter last year. As you've heard Adam and I talk about many times now, a key strategic priority within our structures business is the expansion of our base business earnings. The successful execution of this strategy was a key driver of our earnings growth in the first quarter. Both our core space rentals business and our newly acquired Triple M Housing division delivered exceptional results in the period. Compared to the first quarter of 2022, we grew our space rental fleet size by 14% and our average rental rate by 19%, all while achieving an average utilization rate of 75%.  Moving on to Triple M. This business performed exceptionally well in the quarter, which helped offset the contribution last year from our LNG Canada project, which is now complete. As Triple M is a newer business line for us, I thought it may be helpful to touch briefly on the seasonality of this business and how this interacts with the profile of our overall structures business. Generally speaking, Triple M sees its strongest earnings in the first and fourth quarters of the year as it works with dealers to lock in orders and construct the units necessary to support dealer inventories. This quarter's results likely represent half or more of the full year expectations for this business. In contrast, our broad structures business sees a stronger earnings correlation to periods of high construction and economic activity. In Canada, this tends to be in the warmer second and third quarters. This countercyclicality is important to note when looking at the performance of our overall structures business and further reinforces the strategic alignment of this acquisition.  As I've mentioned in the past, our base business typically accounts for 2/3 to 3/4 of our segment earnings. In addition to this, we saw strong project activity further supporting our earnings growth. At ATCO Frontec, first quarter earnings declined nominally from 2022 levels as the Trans Mountain Clearwater Camp contract was completed and start-up costs on the recently signed Pogo Mines project graded earnings pressure. Frontec has, however, been very active in signing new contracts that will support earnings moving forward. One notable example of these efforts was the signing of a camp services contract with BHP Janssen. The 3.5-year contract will see ATCO Frontec, alongside our indigenous partner, George Gordon developments, provide camp support services for the BHP Jansen Discovery Lodge in Saskatchewan. The transition of camp services was completed on April 1 of this year. As discussed previously, our Frontec business continues to see great opportunities in the defense and government spaces where our deep indigenous relationships can be leveraged alongside our core remote services expertise.  Now touching on Neltume Ports, the business continued to deliver stable and dependable earnings with favorable foreign exchange impacts pushing first quarter adjusted earnings higher when compared to 2022. As you will have seen in our news release, Neltume just signed a significant contract 2 days ago at the Port of Vancouver in Washington State. This will see Neltume with our partner, Nautilus, operate Terminal 2 in this port for a 30-year period with 2 10-year extension options. We are really excited about this opportunity as it is another milestone and Neltume's focus on expansion into North America. As expected, our Canadian Utilities investments saw adjusted earnings declined nominally in the first quarter of 2023 when compared to the first quarter last year. This decline was due to the sharing of efficiencies generated in the second PBR cycle with customers as the Alberta distribution utilities enter a single year cost of service period in 2023.  As Brian spoke about Canadian Utilities Q1 results on this morning's CEU earnings call, I won't go into these details again here. I would, however, like to reiterate that while the earnings pressure related to BPR rebasing was somewhat muted in the first quarter, we continue to expect more downward pressure throughout the year. More specifically, first quarter CU results benefited from a few specific items. Favorable timing of costs within the distribution utilities, the proactive advancement of work into 2022 that would have otherwise been completed in the first quarter of this year, strong performance of CU's nonregulated businesses and continued outsized earnings from the Australian gas utility. Collectively, these factors muted the earnings decline related to rebasing for the first quarter of 2023. Overall, ATCO had a great first quarter. The acquisitions that we've made contribute to short-term earnings. These new investments, along with the proactive decisions we've made across our diverse portfolio will help to partially offset the cyclical earnings pressure that we expect in 2023 related to our PBR utilities. That concludes my prepared remarks.  I will now turn the call back to Colin.

Thank you, Katie. In the interest of time, we ask that you limit yourself to 2 questions. If you have additional questions, you are welcome to rejoin the queue. I will turn it over to the conference coordinator now for questions.

[Operator Instructions] The question to the first question comes from Linda Ezergailis from TD Securities.

My first question is related to the Neltume opportunities in front of you. I see that you acquired an additional 5% ownership in [ Sagres ]. I don't know if I pronounced that correctly, raising your ownership in that facility to 95%. Are there more opportunities in the near term to incrementally add to your ownership in facilities or for Neltume to incrementally add ownership into facilities you already have a presence in? And how significant might that be? And can you also comment on whether those incremental ownership acquisitions are expected to be potentially more accretive versus an outright new facility ownership?

Sure, Linda. Thanks for the question. Yes, we did increment that was part of an acquisition we made quite a time ago where the owner is still involved in the operations. And so we just took out an additional percentage of that in [ Sagres ]. But we do operate in 17 different ports where we have varying ownership interests and partners in almost all of them. So I think we're constantly evaluating whether there are opportunities for us to take a greater stake or even sell down our stake in some of those ports. So there's nothing specific I can point to.  In terms of whether they would be more accretive than other opportunities, I think it really all depends obviously it depends on the purchase price that we could negotiate. But I think the benefit of making moves like that, of course, is that we'd be pretty familiar with the operations. So that does happen actually relatively frequently that we're able to change our ownership. But really, the Neltume business development efforts are focused on growing our portfolio of ports into new areas. We've talked in the past, we're exploring opportunities in Brazil. And of course, the recently announced one in the U.S. just shows our progress in trying to get a better footprint in North America.

And just as a follow-up, when you sign a contract, such as in Washington State, do you see any opportunity to potentially parlay that into ownership? Or is that just an outright operating contract? And when you look to grow in other regions, do the opportunities relate more to outright ownership or more operating contracts?

Thanks, Linda. Yes, I think it's a bit of a mix of both. In the Port of Vancouver, we're really excited about that because we have secured the operating contract for Terminal 2, but we do have line of sight to invest capital, as you note, to expand the capacity in that port in the near term. And I think that would be the model that we would take in many different locations as well, which is first entering through either a stevedoring or operating contract and looking to take invest capital and take a bigger position. There's also meaningful -- it positions us well in Vancouver for additional ability to enter into some of the other terminals there. So we do like that model. We can go in also just directly into an ownership capital arrangement in any given port. It all depends on sort of the circumstances of the port.

The next question comes from Rob Hope with Scotiabank.

Two questions on the ports as well. Sticking with Vancouver, maybe can you talk to how that opportunity came about, I know title does have operations there. Does that help facilitate the conversations there? And then maybe just can you clarify kind of what quantum of earnings you're expecting or how much capital you think you could put to work there?

Yes. Thanks, Rob. This -- we have a very strong BD effort and presence, both through our partner who operates the agency business around the world. And sometimes we see opportunities coming through that network, as you noted, potentially through our partnership network. And then obviously, we're constantly monitoring any public RFP or other – other ways that we may get it. So we have a very strong ability to come across those opportunities and usually find unique opportunities that aren't necessarily broad auction processes. So that's anything in regards to that port. Now I can't really -- we're still working on signing some contracts for that port. We're very close. So I think -- and we have a very strong we believe strongly we will be able to send those contracts shortly.  So we won't be able to give earnings guidance necessarily, but I can give you an order of magnitude that right now, there's about 400,000 tons that moves through that terminal. But we can expect through some capital investments that we could basically triple that capacity to -- for movement of product through that terminal. And right now, it's mostly copper concentrate and clay that's moving. So it is a bulk facility that could carry a number of different types of materials.

All right. Another poor question. So ATCO/CU and Kansai have signed -- are developing or potentially going to develop a clean hydrogen hub in Alberta with the expectation for export to Japan, there was talk about potential port facilities there as well. Can you maybe speak to how that could work for ATCO specifically if there was going to be a port initiative, would that be a third party or could Neltume may be involved there as well?

Yes. Great question, Rob. Thanks. And yes, absolutely. I think that there obviously will need to be some type of port logistics in that. And we're in early days in that Kansai arrangement, but we're very committed to try and find the right export value chain to make this happen for our partners. And as you note, it could be any one of the above in terms of a third-party port. It could be an opportunity for Neltume we are working and talking with them about that. And they have very strong operating expertise, obviously, in terms of ports. So we're still working that through. But like any opportunity in ATCO, we're always going to try and look for ways that we can use our relationships and our internal businesses to bring it all to there.

The next question comes from Maurice Choy with RBC Capital Markets.

Would just for that and expand the discussion a little bit here. So no time ports was the last addition, and that was in 2018. And I know that ATCO identifies 6 essential services categories. So maybe a broader question to ask here is recognizing in the role that's gone quite a bit of change, be that COVID or war. Which of these 6 essential services categories do you see the biggest opportunities that could be your next addition to that at the ATCO level?

Sure. Thanks, Maurice. Yes, I mean, I know Neltume was our last acquisition of a new business, but we did make the Triple M acquisition as well. So -- and I note that just because we're looking at both acquisitions that would be outside of our core, but we're always looking for opportunities to augment our existing business and grow those businesses, be it obviously, so structures or Frontec within not many opportunities to deploy more capital. But in terms of new business areas, we have 6, and we participate in many of them already. The 2 notable exceptions would be water and ag. But I think we see opportunities in both of those sectors, and we continue to monitor to see if there's an appropriate entry opportunity into either one.

Sorry, just to recap as you mentioned at a you're not there, which of the other 4 ones do you see the biggest opportunity?

Well, the other 4, we already are present. We do have a real estate portfolio, be it small in Alberta, shelter. Obviously, most things that we do there would be through our structures business. Transportation and logistics, we do have the ports as well as Frontec participates in that space. But -- so any one of them could present opportunities. I think the one probably that's the highest that we're not yet involved in is probably water, though we do have -- we have a presence to see you, but for -- in a meaningful way, that could be an area of interest.

Got it. And maybe my second question here and just a quick question about your stock repurchases. You spent about $23 million in this quarter, and it looks like the average cost is about $40 to $42 per share. Thoughts on how you've gone about with that position, how you size that up? Or is it based purely on where the share price was. And should we think about possibly you allocating some of your capital to buybacks this year?

Yes. From time to time, we know that our share price may not reflect what we believe to be the true intrinsic value of our shares, so we may engage in buybacks. But we also generally will look to offset the dilutive impact of options issuance each year. And we are opportunistic in terms of the timing of when we execute on those purchases. So we saw a window to advance fast forward a bit of our share buybacks in the early part of our NCIB time frame. And I think we obviously weigh the decision of buybacks versus other opportunities that we see in the portfolio on a constant basis. So I think I can't say whether there would be more or less. But at the moment, we're happy with getting what we see as an attractive price in this early part of the year.

And recognizing that there's obviously some balance sheet capacity at the Neltume ports level. Are you anticipating having to allocate some money into that venture in the near term?

I think in the near term, they have pretty decent capacity to fund some of the things, particularly the opportunity we already talked about in Vancouver. In the future, we hope that they are successful. We've been very happy with that investment. And if they are, and it requires more capital. I think it's something that we would very seriously consider and likely to continue to participate in that partnership.

The next question comes from Ben Pham with BMO.

On ATCO Structures, would you characterize the stage of your strategic efforts there moving more towards execution from derisking? And then can you maybe fair context on what percent of earnings last year was you'd characterize as ratable or base?

Yes, sure. Thanks, Ben. We generally -- we -- I said on my call, its warning too, that about 2/3 or 3/4 of the earnings of structures would be considered that base reliable earnings. So I think that holds true and that continues to be where we are. In terms of whether we're in execution mode, I think we are going to continue to try and grow in a consistent proportion of the size of that of our space rentals, which comprises the majority of our base business. We have significant opportunities probably to grow in the U.S. where we have a relatively small footprint. But we also see opportunities to continue to get market share in Canada and Australia. So I think we're always in execution mode in that business, to be honest and always looking for new opportunities to expand.

Okay. Great. And then this might have been more a question for at the CU level, but there's some implications for you for colors. The marketable securities that's flowing through. Can you provide us the rationale for that? And what does that tell you about your balance sheet? And maybe clarify how is that being booked in earnings of interest income?

Yes. No, we did make a decision to allocate a portion of our cash balance, both at ATCO and CU into marketable securities, which are a very low risk portfolio of bonds and similar type-high credit quality investments. And really, that was just based on having some excess cash at the moment that we wanted to try and earn a bit of an outsized return. So yes, you will see that as a new line item. But from our perspective, it's a highly liquid investment that we could use for and if and when we need to deploy it for our growth activities within the business.

The next question comes from Mark Jarvi with CIBC Capital Markets.

Just one follow-up question on the Triple M business. Are you going to quantify what the revenue and earnings impact? And then maybe just expand on that business in terms of can you take the sort of IP or for that business model and apply it anywhere else across your sort of broader footprint in the structures and logistics business?

Can I just clip -- did you say IT or IP?

IP. But just sort of like the business model like yes, strategy, all that kind of stuff in.

Okay. Thanks, Mark. Yes, I mean, if you look back when we made the acquisition, we did have fulsome disclosure of the retroactive 1-year impact. So you can get a sense of magnitude of the size of that opportunity, if you look at our notes from last year. And I think that's probably it was a very strong year. There is -- the housing market has been strong, so that was probably reflective of a good year, and we're still in that same territory this year. In terms of leveraging their IP, I think right now, we are focused on that business and how we can expand it in the Western Canadian and parts of the Northern U.S. market in terms of selling some other products into those areas. We have -- we already were and in the past have been many times in residential housing, but I think it does give us a strong opportunity to continue to grow in that area of the economy, which we see has very favorable tailwinds behind it. And we'll continue to look for other opportunities to expand it in the North American market and then across our broader footprint.

So just a quick follow-up. Are you implying then for the foreseeable future, what you acquired from Triple M is kind of a flattish business with some modest growth before you can really start to, I guess, kind of leverage the existing platform and make a more meaningful growth driver?

Yes, I think that's probably fair. I think there is -- as we can all read in the press right now, there is some pressure in the housing market that we could see some modest growth beyond that. But I don't think it's exponential growth that's going to be coming out of that business in the near term, and it's just a very solid addition to our existing operations.

The next question comes from Andrew Kuske with Crédit Suisse.

You've managed to build a pretty interesting business in the structures world around LNG opportunities, whether it be Pluto LNG Canada, the [indiscernible] facility. Just how do you think about that LNG market opportunity on a go-forward basis?

Yes. Thanks. I think we have positioned ourselves as one of the leaders for building the camps around those big projects. But more broadly, I think just our history in that business, we have always been a leader in the workforce housing in remote areas. So I think that extends not to just LNG projects, which lease Canadians or Western Canadians are all hopeful will continue to be built out but also to the mining sector and some of those large projects. We continue to see the demand for key commodities in the mining sector be strong and projects beginning to pop back up. So I think we're well positioned for that entire natural resources space to be the choice in developing those camps.

And maybe just building on that last point. Are you seeing a trend of maybe smaller projects but many more smaller projects as opposed to the mega projects and in part just the effort towards nearshore and friend shoring, wherever we want to call it in the sort of dismantling of long supply chains? Does that change your origination efforts and really a bit of the sales function away from large RFPs with super majors to trying to originate with smaller mining groups?

Yes. No. I mean, I think as we've talked about quite a few times, we're really trying to -- and we would put some of those smaller workforce housing camps into our -- what we call that base business that is a lot more repeatable and diversified in terms of client base and where we're targeting. So we have put a focus on that, which you see in our results. But I would say that, that doesn't preclude us continuing to advance our relationships and our discussions with some of the larger -- for some of the larger projects. And we do continue to do those, but we've just really tried to balance out our earnings so that those large projects are not disproportionately contributing and then falling off shortly thereafter.

Maybe just coming back to large projects. When you think about LNG Canada, is there any color you can provide on the expiration of the contracts, the demobilization decision or an extension of the contract?

Yes. I mean from a structure perspective; we completed that contract. In terms of additional -- the future of that, there's not much color I can provide in terms of when -- but so you won't see any more earnings coming from that particular project from the structure side. But in terms of the long term -- that facility, there's not much more I can provide there.

This concludes the question-answer session. I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.

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

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