ATCO Ltd. (ACOX) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the ATCO Second Quarter 2024 Results Conference Call and Webcast. [Operator Instructions]. I would now like to turn the conference over to Mr. Colin Jackson, Senior Vice President, Financial Operations. Please go ahead, Mr. Jackson.

Thank you. Good morning, everyone. We're pleased that you could join us for ATCO's Second Quarter 2024 Conference Call. With me today is Executive Vice President and Chief Financial and Investment Officer, Katie Patrick. Before we move into today's remarks, I would like to take a moment to acknowledge the numerous traditional territories and homelands on 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 of the Blackfoot Confederacy, comprised of the Siksika, the Kainai, the Piikani Nations; the Tsuut'ina Nation; and the Stoney Nakoda Nations, which includes the Chiniki, Bearspaw and Goodstoney First Nations. I also want to recognize that the city of Calgary is home to the Metis Nation of Alberta, Districts 5 and 6. During our second quarter, we proudly celebrated National Indigenous History Month, a time to honor the stories, achievements and the resilience of indigenous peoples. To carry this message beyond the month of June, respect the diverse language, history, ceremonies and cultures of the indigenous peoples who call these areas home. In terms of today's call, we'll hear from Katie, who will deliver comments on our financial results and recent company developments. Following today's remarks, we will take questions from the investment community. Please note that a replay of the conference call, a short supplementary presentation and today's transcript will be available on our website at atco.com following the call. The materials can be found in the Investors section under Events and Presentations. Today's remarks will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please refer to our filings with the Canadian securities regulators. During today's presentation, we may refer to certain non-GAAP and other financial measures, such as total segment measures, adjusted earnings, adjusted earnings per share and capital investment. Beginning this quarter, we have also provided adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, for ATCO Structures and ATCO EnPower. These non-GAAP measures do not have any standardized meaning under IFRS, and as a result they may not be comparable to similar measures presented by 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. I'm pleased to report that ATCO achieved adjusted earnings of $96 million in the second quarter this year. This is $9 million or 10% higher than the second quarter of last year. This $9 million of growth came primarily from the strong performance of our Structures and Alberta utility businesses. During the quarter and as part of our ongoing drive for operational efficiencies, we took steps to streamline our cost structure. We took a hard look at our corporate overheads at business units to ensure our teams are fit for purpose and aligned to our renewed growth ambitions. Heading into the second half of the year, our teams are refreshed, nimble and laser-focused on executing our project pipeline. Moving to Canadian Utilities, where I won't go into too much detail, as we spoke about their performance on this morning's CU call, I want to reiterate that we continue to focus on delivering growth in 2024 and beyond. Our confidence to deliver growth within the utilities was reinforced in early May as we increased our Canadian rate-based compound annual growth rate to 3.5% to 4.3% through 2026. We continue to see very strong fundamentals in our core Alberta markets and opportunities to deliver even higher rate based growth over the long term. In June, we announced our decision to move forward with Phase 1 of the Atlas Carbon Storage Hub alongside our partner, Shell. This multiphase open-access carbon storage hub is a major milestone in our commitment to advancing products and services which may contribute positively to society's goal of reducing emissions. This is the first step in ATCO EnPower's work to create a full value chain for hydrogen development, from reduction and carbon abatement to transport and export. The Atlas Carbon Storage Hub is integral to ATCO's long-term strategy and sustainability aspirations. For those who were unable to make this morning's CU call, the replay will be available on our website shortly. ATCO Structures continued to deliver strong results, with adjusted earnings of $30 million for the quarter or 15% higher than the prior year. Structures continues to deliver growth from the expansion of our base business and the optimization of our fleet, with major projects being a supplement to these earnings. Continued investment in our base business, particularly in our space rentals business, has allowed us to expand both our footprint of operating locations and our customer base. This has increased the number of units we have on rent while improving our average rental rate by 10%. In Q2, Structures announced the strategic acquisition of the NRB Modular Solutions. NRB is a leading manufacturer of modular multifamily residential, industrial, education and commercial buildings. Structures will integrate NRB into its existing modular business operations, allowing us to service an extended market with additional manufacturing capacity in Ontario and British Columbia. This transaction increases our capacity in growing markets, complementing our strategy for continuous [ fleet ] expansion. Further, the acquisition provides ATCO with access to a large existing customer base and skilled employees, which NRB has built in these markets over decades of operations. Structures' proven history as a leading innovator and highly competitive global modular manufacturer will create invaluable synergies for NRB's future performance. The purchase price of $40 million represents the book value of NRB and includes the normalized working capital level. Synergies will be created through ATCO's existing manufacturing expertise, enhanced sales from our retail branch network of growing fleet assets and our proven ability to improve operational processes. Operational improvements can include strategic sourcing, automation, process improvements and economies of scale. We expect the transaction to close in the third quarter of 2024, and we're excited for the opportunity to maximize the value and synergies that NRB brings to our Structures business as a market leader in modular construction across Canada. We have a proven track record in our Structures business of successfully integrating acquisitions into the ATCO portfolio. Modular manufacturing is a core competitive advantage that Structures has expanded over decades of continuous improvement. A recent example of this is our strategic expansion into the residential housing sector through our Triple M Housing acquisition in 2023. The residential housing segment has been a valuable strategic addition to our business growth. Triple M Housing continues to deliver strong results year-over-year and has developed a large pipeline of new opportunities, and it continues to provide synergies and value, positioning us for future growth. Complementary additions like NRB will work conjunctively to build our industry-leading expertise across all of our modular platform. As we look to the second half of 2024, we continue to focus on delivering sustainable earnings driven by the growth of our base business at Structures. While we anticipate a small dip in activity in Q3, we have line of sight to new projects in Australia that are expected to drive growth in Q4. I remain confident that there continues to be a solid pipeline of projects in Australia, Canada and the United States that we believe will drive additional opportunities that support further growth for Structures in 2024 and beyond. Overall, ATCO had a great second quarter and first half of 2024. Across our portfolio of investments, we continue to focus on executing our growth plans. We believe that the unique combination of investments in our portfolio and the work we've done to expand the earnings from these investments creates the foundation to support our growth aspirations going forward. We look forward to keeping you updated as we progress on our growth initiatives throughout the year. 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 now turn it over to the conference coordinator for questions.

[Operator Instructions] And our first question comes from Maurice Choy of RBC Capital Markets.

Just first question is on the NRB acquisition. Thanks for the color and the logic behind it. Can you just discuss what the cost is for this transaction and your expectations in terms of annual earnings contribution from this deal?

Yes. Thanks, Maurice. So as I mentioned, it was a $40 million acquisition, which includes the normalized working capital level. And as I mentioned, that is at the low value of the current assets held on the balance sheet [indiscernible]. We're not going to provide at this moment a forecast for the future earnings contribution. But as I said, we think there are very strong synergies as well as the strategic expansion into the new markets that we think should help drive growth next year into our earnings base.

Got it. And maybe just besides the slightly different -- difference between this deal and Triple M's businesses, can you just elaborate on how you approach this deal? And should we kind of use the Triple M contributions in terms of the growth and the upside from the deal and using that as a blueprint for NRB?

Yes. I would see the 2 acquisitions actually quite differently. Triple M, while we did have residential manufacturing prior, really leveraged us into the new business segment. And we've largely kept the 2 businesses separate in the sense that they have a bit of a distinct dealer network and way that they operate. NRB is quite a different proposition in that we are in this business. We are -- this gives us new locations and a strong set of new employees, as we said. But this is very much our core business. And it's a bit of a different, as I said, value proposition strategy in terms of creating operational efficiencies and synergies as well as expanding the footprint.

Understood. If I can move on to another deal that I think was disclosed on the CU side. The ATCOenergy that was sold from CU to ATCO parent. Again, similar question, what's the logic here, cost and earnings contribution, if you don't mind?

Yes. So when we took a look at our portfolio of businesses, this really had a greater strategic alignment to the ATCO level in terms of its focus on the customer, on the home. And we just made the decision to move ATCOenergy from CU utilities to ATCO Ltd. Obviously, that was done with full independent valuations, especially evaluating that transfer. In terms of earnings contribution, I think we've seen a good growth trajectory in that business. It has grown in the Alberta marketplace. We continue to see opportunities for growth there, and we obviously have some different product lines that we hope will continue to drive our [ growth ] as we go forward. We don't specifically segment or disclose that segment at this time. But we may think to do that moving forward.

Would it be quite similar to the net book value that you have in the CU balance sheet in terms of what assets and liabilities are for sale? About $100 million?

Yes, in a similar range, yes.

Got it. And just to step up on this one. I suppose philosophically speaking, CU was -- always used to be the energy and energy infrastructure side of ATCO's essential services pillar. With ATCOenergy kind of moving to the ATCO side, it feels like there's a little bit of a change in that separation between CU and -- what's CU and what's -- what's CU within ATCO family. Can you just highlight where that has changed? Or is this more of an anomaly and one-off?

It's an interesting question. I think we view ATCOenergy, which we collectively call the group of businesses that fall under that ATCO retail. That also includes our Blue Flame Kitchen, that's all managed under the same banner, and our Fresh Bites acquisition, the small Fresh Bites acquisition that we made last year. And really, that to us, is a retail [indiscernible] customer oriented, customer-facing play. As we look to grow other businesses in there, particularly some of the product and service offerings there, there's a bit of a divergence away from just direct typical energy portfolio. So I think it's not as clear cut as just a pure energy services provider.

[Operator Instructions] Our next question will come from Rob Hope with Scotiabank.

Just on the Structures business, with another kind of roll-up MA on the manufacturing side, how do you think about your footprint and the potential for further roll-ups, whether it be in your core geographies or in new geographies?

Yes. I think, Rob, thanks for the question. The -- this acquisition, I think, as I said in my prepared remarks, I think this really positions us well, particularly in Eastern Canada, where we do have a branch network, but we do -- we did not previously have any manufacturing capacity. So we're really excited about adding that on to the footprint. We obviously have a strong position across Canada, and this really augments that. If you think about our other geographies, we do have a good -- obviously another very strong business in Australia, and I think we could continue to look for opportunities for inorganic growth there. As we continue to build in the U.S., I think we will look both for organic and inorganic opportunities there. But we've been relatively successful growing that business from an organic perspective in the United States. So I think we will continue down that track and look for opportunities, continued opportunities in Canada and Australia in particular, for acquisition growth.

Okay. And then maybe more broadly, just with the kind of volatility in the global workforce housing and I guess a smaller size relative to the global space rentals, how do you prioritize capital between the 2 businesses? And could we continue to see a more focused global space rentals versus workforce?

Yes, that, we continue to focus on driving that, as we've talked about often, that net base business of earnings that we have that comes mostly from our space rentals business but also from our smaller workforce housing projects. So when we talked about our, so to speak, non-base business, that's really from those large projects that we've seen in the past that will come not necessarily in a very predictable manner. It can be a strong benefit to our earnings when they do come. So in terms of the ongoing capital allocation, the priority, as we say, is continuing to build our fleet and continuing to build that base business offering. You'll see some of the announcements we've made this quarter around some of the projects that we're looking at. Those wouldn't be mega workforce housing projects. We would continue -- we would see those as part of our base business. And they are very strong contributors to earnings with the solid pipeline that we continue to have in that area. So we will target to continue to build the space rentals business but, as the opportunities come, look to execute on the workforce housing opportunities as well.

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

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

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