ATCO Ltd. (ACOX) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Second Quarter 2026 Results Conference Call and Webcast for ATCO Ltd. [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, Financial Operations. Please go ahead, Mr. Jackson.

Thank you, and good morning, everyone. We are pleased you could join us for ATCO's Second Quarter 2026 Conference Call. On the line today, we have Katie Patrick, Chief Financial and Investment Officer; and Adam Beattie, the President of ATCO Structures. . Before we move into today's remarks, I would like to take a moment to acknowledge the numerous traditional territories and home lands on which our global facilities are located. Today, I am speaking to you from our Aqua Park head office in Calgary, which is located in the Treaty 7 region. This is the ancestral territory of the Black [ ClickConfederacy ] comprised of the 6 [indiscernible] I also want to recognize the city of Calgary is home to the Manati of Alberta Districts 5 and 6. During our second quarter, we proudly celebrated national indigenous history month in Canada, the time to honor the stories, achievements and resiliency of indigenous people. May we continue to respect and celebrate diverse history, languages and culture of indigenous people beyond the month of June. 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 security regulators. During today's presentation, we may refer to certain non-GAAP and other financial measures, including adjusted earnings and adjusted EBITDA. These 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 for joining us today. I'll start today with some perspective on our current operating environment and the strong tailwinds for our businesses, and then Adam and I will provide some detailed quarterly performance updates. . We're operating in a significant period of opportunity for ATCO, one shaped by shifting geopolitics, growing demand for secure and resilient infrastructure and a renewed focus on the essential services that support communities and economies. Anyways, this moment dates to the company's early days when ATCO's ability to move quickly, build boldly and solve complex challenges was foundational to creating the business we are today. The critical concerns that face the communities and the countries we operate in include housing, energy and defense. These sectors are being shaped by economic demand and geopolitical factors and will result in significant opportunities, creating a growing need for resilient infrastructure and services for industries, partners and governments. With decades of experience operating across each of these sectors, in diverse locations, including Canada's challenging northern environment, ATCO is well positioned to benefit from these tailwinds as the investment in these areas continues to accelerate. Our experience in key partnerships across housing, energy and defense over the past 80 years aligns to what the world needs. Our purpose-built strategy supports sustainable growth in these key areas and will drive stable earnings and dividends to share owners in the years to come. Focusing on Canada's North, we remain optimistic about the significant growth opportunities in this region. Specifically those tied to the defense sector. In recent months, the federal government has publicly committed a sizable investment in Canada's Defense sector with a focus on Arctic sovereignty. The funding announced to date is specifically earmarked for developing, modernizing and building up key infrastructure projects, including $32 billion for defense infrastructure upgrades over the next 10 years and $2.7 billion to build on a network of support sites and hubs. In addition to this, there is approximately $80 billion in government defense infrastructure spending between the modernization of the North American Aerospace Defense Command and the United States proposed Golden Dome for the America project. While we view these projects as critical developments, contracting for these opportunities is still very much in its early stages. As these projects materialize, we believe ATCO is well positioned to capitalize on current and future opportunities in the North for several reasons. We have executed and supported operations, including defense specific projects in Canada's Arctic since 1987 that is almost 40 years of operational expertise, demonstrating our long history and success in the north. Importantly, over that period of time, we have developed indigenous partnerships, which has led to meaningful participation. This is a fundamental part of our history, culture and our ongoing commitments to partner and collaborate with indigenous communities. And lastly, we have the construction knowledge needed to successfully build in Canada's North. As you see on the slide, we have unique Arctic expertise from coast to coast in the north. We're a trusted defense partner who maintains and operates mission-critical infrastructure. Earlier this year, we announced a $10 million investment in West [ Caticmia ] Resources, who will develop the Grays Bay road and port project in Nunavut. The Gray's Bay Road and port project is a critical piece of infrastructure in the north and will include a deepwater port with access to the Northwest Passage shipping quarter. We are optimistic this development will grow into a strong foundational investment for the ATCO portfolio longer term. The project has been referred to Canada's major projects office. And at the end of June, was named as one of the first of 3 projects to be considered under the Federal Government's Build Canada Act. As I said, we are very excited for the opportunities ahead, the backfill positioned to play a central role in some of these nation-building initiatives. With that, I will now turn it over to Adam.

Thank you, Katie, and good morning, everyone. ATCO Structures delivered $36 million of adjusted earnings in Q2, marking the 16th consecutive quarter of year-over-year earnings growth. Earnings this quarter were driven by Space Rentals activity in the United States, Canada and Australia. Our [ Stibnite ] Gold project and new contracts tied to permanent modular construction as well. While it was an impressive quarter across all our geographies, our rentals and sales business lines in the United States were a key driver and saw significant earnings growth year-over-year. The earnings uptick was driven by 4 of our newer branches, including Phoenix, San Antonio, Louisiana and Seattle, which are now operating at a significantly increased capacity, obtaining optimal targeted utilizations. Our continued success across the business is led by the execution of our industry-leading teams. We are improving fleet performance and have considerable demand favorably positioning us through to the end of 2026. As you can see on the slide, adjusted EBITDA for the quarter was $82 million, up 17% year-over-year along with the average rental rates for our global space rental business, which averaged $896 per month, a 10% increase year-over-year. We continue to progress our [ Stibnite ] Gold project, a key contract for our U.S. business. And during the quarter, we completed manufacturing for Phase 1 of the project and continue to expect the first handover milestone to occur in the later part of fourth quarter of this year. By demonstrating our ability to execute and to deliver complex remote project sites, we put ATCO structures on the map for other major developments across the United States which helps to grow our market share and gain a stronger foothold in the U.S. Last quarter, we were pleased to highlight some additional projects in our queue. I am happy to share more about them today. In Canada, we successfully secured a handful of contracts during the quarter totaling $89 million. These contracts include space rentals, workforce housing and permanent modular construction solutions, encompassing over 365 modular units. In the United States, we secured $23 million in contracts for space rentals and workforce housing solutions, which includes 250 modular units. And in Australia, we successfully secured a $57 million contract to provide workforce housing solutions for a mining project in Western Australia. This contract will include 160 modular units. In addition to these, we have been highly successful in securing space rental contracts for a number of data center projects in New South Wales and Victoria, where we see continued opportunities going forward. These projects have strong economics with high fleet numbers required per project and long rental durations averaging 24 to 36 month terms. We are seeing positive growth across the geographies we operate in. Last quarter, I spoke about the $100 million in limited notices to proceed or LNTP and contracts we received several of which have now materialized into secured projects that I just highlighted. I'm pleased to share that this momentum is continuing. And this quarter, we have received another $80 million in new Notices of Award and LNTP, which we expect to commence in 2026. As Katie mentioned at the outset, ATCO is focused on housing, energy and defense. ATCO Structures is a key pillar of this strategy. We see strong demand for our products in our commercial, industrial and residential sectors. When I look ahead to the back half of this year, many of our manufacturing facilities have strong backlogs through to the end of 2026 and into 2027. Overall, we are experiencing strong demand across our major geographies and sectors, including the emergence of new customer groups particularly in data center construction and as I mentioned earlier, increases in energy and mining sector performance and continued success in urban affordable housing. With that, I'll now pass the call back over to Katie.

Thank you, Adam. Looking at this quarter's results, I'm pleased to share that ATCO achieved adjusted earnings of $114 million or $1.01 per share in the second quarter of this year. This is up 13% year-over-year. Higher adjusted earnings in the second quarter were driven by ATCO Structures increased space rental activity and earnings from the [ Stibnite ] project. As I mentioned on this morning's CU call, inflation indexing on rate base and increased rates at ATCO Gas Australia also supported earnings for our utility business. We see positive momentum across the Apple portfolio as we execute on our strategic road map heading into the back half of the year. Looking at our specific businesses. Active investment in Canadian Utilities delivered adjusted earnings of $74 million for the quarter, up $11 million year-over-year. This is an impressive result and importantly, all 3 of our key businesses within CU delivered strong growth in the quarter. ATCO Structures & Logistics delivered adjusted earnings of $35 million up $3 million compared to the same period in 2025. Looking at our cash flows, our stand-alone ATCO businesses, which excludes Canadian Utilities, reported cash flow from operating activities of $122 million in Q2, up almost 70% compared to the prior year. This increase is reflective of higher fleet sales and ATCO structures and the timing of accounts receivable collection. This growth in cash flow gives us the flexibility need for future growth within the ATCO businesses. Quarter after quarter, we've demonstrated the value of ATCO Structures by continuously driving earnings growth. We are pleased with the progress we've made so far this year and the strong foundation we've built across the business. While there is still a lot of work ahead, our priorities are clear. Our teams are focused, and we remain confident on our ability to execute and look ahead we see consistent earnings growth for the entire ATCO portfolio in the back half of the year. That concludes our prepared remarks, and I will now turn the call back to Colin.

Thank you, Katie. [Operator Instructions]

[Operator Instructions] Our first question today will come from Ben Pham with BMO.

I wanted to -- maybe touch on the regulated CapEx. I know that's not the C level, but I wanted to flesh out a bit. You have the [ Yellowhead ] project in there. That's roughly 1/4 of the backlog, is now complete. When you think about the remaining CapEx, is it mainly mostly a bunch of smaller projects are paying that? Or is there a couple of more [indiscernible] projects in there that drive that?

Yes, thanks for the question. I think -- you're correct that it does become smaller projects when you compare it to the $2.9 billion Yellowhead project, which is obviously very large. So yes, they're smaller in magnitude, the rest of projects that are in there. There's -- we did provide a detailed breakdown of sort of the categories of spending in the appendices to our IR materials. . So you can kind of see the types of spending that there is, including resiliency and IT investments, et cetera. So in short, yes, it is smaller projects, but only when you compare it to a $2.9 billion project, there are still some -- on a relative basis, larger projects included in that including some transmission opportunities, et cetera, that would be on the larger side, but they don't compare to the large yellow head project.

Okay. I got it. I was thinking more the comparison, but I really appreciate that. Maybe just on the structure side, you think over the last couple of years, earnings has had a nice uptick, I think $80 million to $90 million to $100 million and moving higher. When you think about even the past -- correct me I'm wrong, I think structures peaked out at something like $200 million in the past cycle. Is there still ability when you think about your backlog, your manufacturing capacity, the current policy backdrop, market backdrop, is there a boost sky scenario you can theoretically get back to $300 million over.

Thanks, Ben. Our peak wasn't $200 million. So -- but it was probably closer to the $150 million at the structures level. Maybe a little bit less than that, but I'd have to confirm that. Certainly, I think that's a future opportunity very achievable. We have expanded capacity certainly within the business and our fleet sizing. So if you look back to 2017, our fleet size was about 13,000 units, and it's now up to 27,000 units. So if you look at the mix of earnings is different [indiscernible] as well, very driven by large one-off workforce housing camp project opportunities, particularly within the oil sand. That mix of where our revenue or income has come from as highly shifted to our fleet business. So if you both look at the foundational business of our fleet that has over doubled and then you add on the project opportunities that are ahead of us with those kind of resource sector cycles I think you can look at some pretty good indications of where the market could potentially go for us with additional increased capacities in both our manufacturing facilities and our human capital, our resources to execute these large-scale projects as well as that supporting foundational business plus the housing and residential sector that we weren't operating within in that previous times.

Our next question will come from Rob Hope with Scotiabank.

Maybe just sticking with structure. So you mentioned increased space rental activity and rates. When you take a look across your large fleet, where are you seeing the most incremental demand as well as the most incremental kind of price movement upwards? .

Yes. Thanks, Rob. Look, I think we're probably seeing it in all of our sectors. So if you look at it across -- all of our geographies have improved space rentals performance. The ones that are driving significant improvements, I would say, the U.S. We've got high utilization there. We have high utilization in Australia that's performing very well, and there's some very good tailwinds that we're seeing there. . Particularly with some of these new market sectors like the data centers that I mentioned and also Canada is very strong. But not to be under placed is our Chilean and Mexican businesses are also performing extremely well in the space rental sector.

All right. Appreciate that. And then also in the MD&A, permanent modular construction sales in both the U.S. and Canada were kind of called it as being a tailwind, can you provide us an update on kind of the permanent sale, what the strategy is there as well as ballpark, what percentage of the business is that now? .

Yes. So like as we said, it's more of an emerging business, but we've -- certainly, we have seen increased activity in those sectors. And if you give some indication there that probably sits -- I think I've given some previous indication that that's probably about 10% to 12% of our revenue stream in a consolidated -- as a percentage of our consolidation. . And the opportunities there are really we have the affordable multifamily and then we have our [ TripleM ] business arm that is very focused on single-family housing as well. And then we do a lot of other products, education and some community buildings, O&M buildings, some other sort of permanent office establishments, health care facilities, other sectors like that, but they're on the smaller scale to the residential penetration that we're having in the market.

Our next question will come from Maurice Choy with RBC

Over the past few years, SNL has been able to successfully diversify its customer base. But I suppose if you look historically, SNL has fairly focused this business on the resource sector. If you think about the potential growth in the WCSB, I wonder if you could share your outlook on securing space rental, workforce housing or in the modular construction solutions as the energy sector does take off in the coming years.

Yes. Certainly, strategically, if you look at those business lines, they don't cross over to distort resource capacity to service each of those sectors independently. So we're very confident in a where we've built those channels to be resourced and have capacity to service each of those sectors effectively for the future growth that certainly we see in each of those markets.

I guess just a quick follow-up. I suppose historically, you've been able to secure fairly large deals whenever a new pipeline, for example, is built. I assume those sales, those connections, those relationships are still in place such that we do see quite a bit of pipeline growth, for example, SNL should be positioned to secure some contract wins?

Definitely. So we've got very strong relationships within those customer sectors in each of our geographies, and they're only increasing and I think certainly, our ability to execute like it's not lost on any of you that we've gone from basically one manufacturing facility in Canada to five. And so our ability to even service a broader geographic footprint in Canada and in the U.S. and in Australia, 13 manufacturing facilities globally actually increases our ability to service our customer base in a more timely fashion. So we have more capacity available so we can actually execute multiple projects simultaneously.