ATCO Ltd. (ACOX) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Third Quarter 2026 Results Conference Call and Webcast for ATCO Limited. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Colin Jackson, Senior Vice President of Financial Operations. Please go ahead, Mr. Jackson.

Thank you, Clovy, and good morning, everyone. We are pleased you could join us for ATCO's Third Quarter 2026 Conference Call. Joining us on the line today is Nancy Southern, Chair and Chief Executive Officer; and Katie Patrick, Executive Vice President and Chief Financial and Investment Officer. 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 are 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 and the Piikani nations, the Tsuut'ina Nation and the Stoney Nakoda Nations, which include the Chiniki, Bearspaw and Goodstoney First Nations. I would also like to recognize the City of Calgary is home to the Métis Nation of Alberta, Districts 5 and 6. During the quarter, employees across Canada recognized the National Day for truth and reconciliation by walking together to honor indigenous communities and their experiences. May we continue to reflect, learn and respect the diverse histories, languages and ceremonies and cultures of indigenous peoples as we move towards understanding, healing and reconciliation. 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, 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 Nancy for her opening remarks.

Thank you, Colin, and good morning, everyone. Thank you for joining us today. Now because it is top of mind for me, I'd like to begin today by speaking about our recently announced landmark merger with Emera and what it means for the shareowners of ATCO. It's an exciting new chapter for ATCO shareowners for each ATCO share, ATCO shareowners will receive 0.865 of a share in the merged utility and energy infrastructure company and 1 share of the new ATCO entity. In other words, if you own 100 ATCO shares, you'll receive 100 new ATCO shares and 86.5 shares in Emera. So this represents the opportune time to create a Canadian utility and energy infrastructure champion. The combined company will be positioned to meet the significant need for investment in critical energy infrastructure. Its greater scale and financial capacity will ensure safe, reliable and affordable energy is delivered to our customers for generations to come. ATCO's shareowners will also benefit from continued ownership in New ATCO, which will emerge as a focused, growth-oriented stand-alone platform. New ATCO will continue with ATCO Structures, our market-leading manufactured housing and structures business with a proven track record of operational excellence and growth and established defense services platform in ATCO Frontec with differentiated capabilities in North America's harsh Arctic environment, with our indigenous partners and a portfolio of investments anchored by Note 2 reports. ATCO shareowners will continue to participate directly in Canadian Utilities next chapter with Emera, on a broad range of growth opportunities. By combining capabilities, the merged company will have the scale, expertise, geographic diversity and financial flexibility to improve efficiency, compete more effectively and pursue growth opportunities that drive long-term value creation. The merged company is expected to continue its commitment to annual dividend growth and improvement in the dividend payout ratio. Another significant strength of this combination is the people behind it. The partnership brings together 2 industry-leading management teams from Canadian Utilities and Emera, combining deep operational expertise, strong execution capabilities, and a proven track record of creating long-term shareowner value. Importantly, this transaction comes after a period of exceptional performance at Canadian Utilities. Over the past year, that strong performance has helped bring Canadian Utilities valuation multiple inline with its peers, creating what we believe is an opportune backdrop for a merger of equals. At its core, this transaction brings together complementary strengths to create greater value for share owners, broaden opportunities for employees and reinforce our commitment to the regions where we operate. With approximately $45 billion in rate base and operations across some of the most attractive jurisdictions in North America and beyond. We're positioned to meet the growing demand for investment in critical energy infrastructure such as pipelines and electric interties. The scale of the combined company strengthens our ability to invest in these systems and networks that customers and communities will increasingly rely on in the years ahead. The combined company will have 12 regulated utilities across a diversified geographic footprint and benefit from a larger and more balanced earnings base. Further, diversification enhances resilience by reducing reliance on any single asset, customer group or market while providing greater stability through economic cycles. The transaction also broadens the portfolio across leading regulatory and high-growth jurisdictions. Together, the Alberta and Florida jurisdictions are expected to contribute approximately 80% of adjusted earnings. The merger is designed to deliver tangible value for share owners. ATCO shareowners are expected to receive approximately 20% higher dividend income through ownership in the combined company, in addition to the dividend approved by New ATCO's Board following the close of the transaction. While the financial benefits are compelling, they're only part of the opportunity for ATCO shareowners. Looking at the future of ATCO, there are some key tailwinds that I would like to draw your attention to. We find ourselves at a pivotal moment of opportunity driven by changing geopolitical realities and a growing need for housing and defense services. This environment reflects the spirit that defined ATCO in its earliest days, when bold thinking entrepreneurial action and a willingness to tackle complex challenges help shape our growth and establish the business we know today. New ATCO will focus on 3 distinct complementary areas of business. Housing represented by ATCO Structures which provides workforce housing, permanent modular construction of apartments and residential homes, offices, clinics, schools, hotels and a fleet of over 27,000 space rental units across the globe. Units that are available for construction sites, temporary offices, classrooms and accommodation. On the defense side, led by ATCO Frontec, our Defense Services and Northern infrastructure business provides urban and remote logistics, facility operations, emergency response and mission-critical support, including the operation and maintenance of the North Warning System and the Alaska Radar system on behalf of Norad, Torngat Fuel Services in the called and operation and maintenance of the Canadian Forces base alert in Nunavut in addition to 15 defense facilities in Alberta to name just a few. Our decades of experience across the Arctic, Combined with long-established strategic indigenous partnerships are what differentiates us as a preferred defense contractor. Defense is a core competitive advantage and a key pillar of our growth strategy moving forward. And finally, our investment segment will consist of our strategic investments in Neltume Ports, ATCO Energy and ATCO Land and Development. Looking specifically at Neltume Ports. This investment gives us ownership in 18 ports throughout South and North America. Exposure to critical port infrastructure and global trade activity across the Americas. During the quarter, the business advanced several important initiatives that reinforce its strong growth trajectory. This quarter, Neltume Ports acquired an additional 50% ownership interest in Porto Cornell, a port in Southern Chile, which increases our ownership to 75%. This acquisition further strengthens the Neltume's portfolio. Alongside this increased ownership interest, Neltume is making meaningful progress on a number of development projects. notably, construction at the Vancouver Bulk Terminal in Washington State. It remains on schedule, and we expect it to be completed in the fourth quarter of this year at the latest very early in the new year. Beyond investments in existing operations, now time is also pursuing new development opportunities. The company formed a joint venture with Chilean Pulp and Paper Group, CMPC to develop a pulp terminal at Brazil's Port of Rio Grande. Planned scope of the project includes 2 ship births, 2 barge berths and warehouse. Together, these initiatives expand Neltume's platform, support future throughput growth and enhance its position in strategically important trade corridors across the region. What connects our businesses across ATCO is our experience building, deploying and operating across these sectors. Current economic demands create a growing need for resilient port infrastructure and services for industries, partners and governments, which ATCO can support. Following the merger, our established businesses will pursue opportunities that maximize their capabilities but will now be assessed on their own merits, creating a distinct investment proposition for share owners. ATCO brings established capabilities to areas where governments, communities and industry are looking for practical solutions. Housing is a clear example. The global need for housing using Quick more efficient ways to deliver quality housing solutions is how our modular business serves these needs across the housing continuum. Delivering contracts on time and on budget, supported by an established global manufacturing footprint. ATCO Structures has demonstrated its ability to build housing solutions 3x faster compared to a traditional conventional wood frame building. And beyond residential housing, ongoing global infrastructure build-outs require temporary workforce housing and work camp solutions, while major projects are constructed. Our workforce housing and space rental capabilities are key to serving those markets. Of note, our ATCO Structures team recently celebrated the grand opening of its expanded modular manufacturing facility in Grimsby, Ontario. 118% larger than the original building. The expanded facility supports faster delivery of our high-quality modular solutions. Another major opportunity is tied to our Defense segment. There's approximately $180 billion in defense procurement opportunities and another $290 billion in defense-related capital investment expected in Canada over the coming decade. The government of Canada has placed significant emphasis on Arctic sovereignty, noting the importance of developing the north as the first line of Continental Defense. This has driven the need for infrastructure, logistics and reliable operations in one of the most challenging environments on earth. Together, housing, defense and our strategic investments reiterate the value of ATCO and signal abundant future opportunities. And on that note, earlier this year, we announced a $10 million investment in West Kitikmeot Resources. This is the company that will develop the Grays Bay Road and port project in Nunavut. The Grays Bay Road and Port Project is a key infrastructure project that will include an all season's 230-kilometer road a deepwater port with access to the Northwest Passage shipping corridor and an AirStrip. Grays Bay has the potential of dual use for military and civilian capabilities. And this project will help us create new opportunities for sustainable Northern development. With our long-standing expertise in Northern operations, the project will also demonstrate ATCO capabilities to build out and service this region over the long term. This multiuse asset has already been referred to Canada's major projects office. And in late June was one of the first projects to be considered under the government of Canada's Build Canada Act. While we are optimistic about the road ahead, we're equally excited about the projects our teams are developing today. with meaningful opportunities ahead and strong momentum across our business. And I'll now pass it over to Katie, who will walk through the quarter's financial results.

Thank you, Nancy, and good morning, everyone. Looking at this quarter's strong results, ATCO achieved adjusted earnings of $112 million or $1 per share in the third quarter of this year. This is up approximately 9% year-over-year. Higher adjusted earnings in the third quarter were driven by ATCO Structure increased space rental activity and earnings from the Stibnite Gold project. As mentioned on this morning's CEO call, at ATCO Gas Australia also saw favorable results driven by inflation indexing on rate base and increased rates, which supported overall earnings along with growth in rate base across our Alberta utilities. Our results underscore the strength of ATCO stand-alone businesses, which continued to deliver strong year-over-year earnings growth. Excluding Canadian Utilities, our portfolio generated substantial earnings growth of 15% year-over-year, reflecting the quality of our operations and the consistent execution of our strategy. ATCO Structure & Logistics delivered adjusted earnings of $40 million, up $8 million compared to the same period in 2025. ATCO Structure's earnings growth was driven by the Stibnite Gold project, along with increased base rentals activity and permanent modular construction sales. Equally, SNL's results were driven by ATCO Frontec's quick execution of a fully operational temporary base camp for 350 personnel in Resolute Bay Nunavut. This contract with Defense Construction Canada reiterates Frontec's ability to deliver essential infrastructure in remote northern communities. Looking at our cash flow. Our stand-alone ATCO businesses reported cash flow from operating activities, $109 million in Q3. This increase of $25 million year-over-year is reflective of higher earnings from the Stibnite Gold project increased base rentals activity and higher used fleet sales in ATCO Structures and the timing of accounts receivable collections. To summarize, our year-over-year results highlight the strong performance and momentum of ATCO's stand-alone businesses. Excluding CU, earnings growth remained robust, demonstrating the scale, resilience and earnings power of our diversified operations. With that, I will pass the call back to Nancy for her closing remarks.

Thank you, Katie. Today, ATCO is assessed primarily through its interest in Canadian Utilities, as you all know on the call. which we recognize reduces the visibility into our other businesses growth, earnings and investment profiles. This transaction comes at an optimal time where ATCO shareowners will benefit from exposure to both a pure-play utility and ATCO's other businesses. Following the merger as a stand-alone company, ATCO's performance and valuation will be more meaningful and it will be more meaningfully assessed relative to peers in housing, defense and related industries. This will ultimately provide greater visibility into our assets, their performance and where we see attractive opportunities to invest. As we engage with share owners and investors in the months ahead, our focus for new ATCO will follow 3 key priorities: first, building awareness and understanding amongst investors whose investment interests align with our strategic direction; second, highlighting the strong performance capabilities and growth potential of ATCO Structures while achieving a market valuation more accurately reflects its peer group. And finally, enhancing investor understanding of the value, strategic role and opportunities across the remainder of our portfolio, including our other businesses and investments. The new ATCO will proudly be headquartered in Alberta, and we'll focus on driving growth across all our businesses. building on the relationships and partnerships we've nurtured and forging new ones in the future. This concludes our prepared remarks, and I'll now turn the call back to Colin Paul and for any questions from our investment community.

Thank you, Nancy and Katie. In the interest of time, we ask you to limit yourself to 3 questions. If you're going to have additional questions, we welcome you to rejoin the queue. And I'll now turn it over to [indiscernible], our coordinator, our conference coordinator for the questions.

[Operator Instructions] The first question today comes from John Mould with TD Securities.

And I think I heard 3. So I'll try for 3 instead of a 2-part question. Starting with your existing markets for structures. Just wondering how you're thinking about your current manufacturing capacity and its ability to meet the potential growth that you're seeing in the underlying business. You just opened and expanded Grimsby, Ontario facility last week. Under what circumstances would you look to add further capacity in any of your existing markets? And I'm mostly thinking about on the organic side, but potentially on the M&A side as well, if something is interesting.

Thanks, John. Thanks for the question. And yes, definitely. We have a remarkable backlog of manufacturing projects right now. And so we are assessing actually greater expanded manufacturing capabilities I will say that comes particularly in the U.S. market today. We have a state-of-the-art factory in Chile that has been a little bit slow, but now with copper prices and the mining of the rare earth materials in South America, Argentina and particularly in Chile, that factory is starting to actually be at into full capacity today. So we do see expansion in manufacturing as the entire world seems to be shifting towards greater access to the mineral resources that are needed for expansion in security defense tech all of those materials.

Okay. And then maybe secondly, looking beyond your current markets, Europe was topical on the merger call back in October. How should we be thinking about the timing and pacing of potential investments by what we call New ATCO beyond the current market? Should we think about those as more so just around the corner or maybe a little longer dated?

Well, without getting political, I would hope it's just around the corner. We see a tremendous opportunity for the rebuild in Ukraine. However, given the continued ongoing tension and violence created by the Russian attack on Ukraine. That probably will not occur in the immediate future. However, we are seeing a demand starting to percolate from the adjacent countries in Europe, primarily on the defense side, though, for increased housing and accommodation and facilities in the forward operating bases of those countries. So it's not right in front of us, but I don't think it's that far away. We need to see the curtailment of the war in Ukraine first to actually have the confidence to be able to go into Europe and adjacent countries to Ukraine.

Okay. And then maybe just one last housekeeping question on Frontec. $6 million of adjusted earnings this quarter from, I think, the single defense construction in Canada contract. Just how should we think about the repeatability of contracts like that in the Frontec business and the longer-term trajectory of the earnings power of this piece of the structures business?

A little bit like Ukraine, John. We had expected some of the large announced defense contracts for the forward operating bases in Inuvik, Yellowknife, Calumet and Gander. Those have been delayed as a result of restructuring of the agencies and procurement process coming out of Ottawa and the federal department. However, we see these as they will be. They're probably imminent in the next, I would say, half year, and we plan to play a very large role in the development of those operations as well as the construction opportunities they'll present.

Okay. I'll leave it there.

Thanks, John.

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

Maybe I'll start at a very high level on capital allocation. Obviously, the last time we had this call, you mentioned a strong net cash. And on this call, you've also mentioned wanting to continue delivering annual dividend increases as ATCO has done so for many decades. So just curious how you view your priorities for your balance sheet. And if you tend to benchmark your dividend policy in New ATCO with your industrial services peers?

Good morning, Maurice. Nice to chat with you again. We would expect New ATCO to be in line with the peers in terms of their dividend. So -- and again, it is a very different type of business than the utilities business. We see our businesses in New ATCO as -- for the most part, being able to self-fund their new investments. I think you saw Katie's slide on the cash flow and the New ATCO businesses. It is very much a cash. They're both all of them are cash-driven businesses. We would look to stay in line with our peers in terms of payout ratios and dividends. And I certainly would like to see us develop in New ATCO, a history of increasing dividends for many years to come as we develop the value and create greater prosperity for the New ATCO share owners.