CA - ATCO Ltd (ACLLF) Q3 2023 Earnings Call Transcript

2023-10-26 16:46:06 ET

ATCO Ltd (ACLLF)

Q3 2023 Results Conference Call

October 26, 2023 12:00 PM ET

Company Participants

Lawrence Gramson - Director, Corporate Finance

Katie Patrick - Executive VP and Chief Financial & Investment Officer

Conference Call Participants

Rob Hope - Scotiabank

Maurice Choy - RBC Capital Markets

Mark Jarvi - CIBC Capital Markets

Linda Ezergailis - TD Securities

Presentation

Operator

Thank you for standing by. This is the conference operator. Welcome to the ATCO Ltd. Third Quarter 2023 Results Conference Call and Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Mr. Lawrence Gramson, Director, Corporate Finance. Please go ahead, Mr. Gramson.

Lawrence Gramson

Thank you, and good morning, everyone. We're pleased you could join us for ATCO's Third 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 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 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 Métis Nation of Alberta Region 3. We honor and respect the 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, a short supplementary presentation 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 also like to point out that during this 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. 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.

Katie Patrick

Thanks, Lawrence, and good morning, everyone. Thank you all very much for joining us today for our third quarter 2023 conference call. ATCO achieved adjusted earnings of $81 million or $0.71 per share in the third quarter of this year. Our nonutility investments delivered exceptional performance, helping to offset the earnings pressure associated with the rebasing of our Alberta distribution utilities and the normalizing inflation profile in Australia. ATCO Structures & Logistics delivered adjusted earnings of $28 million, $10 million higher than the same period last year.

Building on the trend we've been speaking about for a number of quarters now, the key drivers of this earnings growth was the strong performance of our base businesses. Both our space rentals and workforce housing businesses delivered exceptional results in the period. Compared to the third quarter of 2022, we grew our space rentals fleet size by 9% and our average rental rate by 15%. Our workforce housing division has been successful in refining our fleet and tailoring it to the specific needs of our customers, allowing us to grow our average rental rate by 28% compared to the third quarter of 2022.

Supporting the communities in which we operate is core to our values. During the quarter, we provided support to some of the communities impacted by this summer's wildfires. One of the projects saw us remobilize an existing workforce housing camp in Valemount, BC to help support the evacuees displaced by the fires. As we look ahead to the fourth quarter of this year, we continue to expect our Structures business to deliver year-over-year earnings growth but with moderation compared to what we have delivered in recent quarters this year. This softening is due to the typical seasonality the businesses experience in Canada in the later months of the year and the completion of key projects including the Bechtel Pluto Train II accommodations and our Trans Mountain camps. On a full year basis, the strong performance the business has locked in so far this year will allow Structures & Logistics to deliver significant year-over-year earnings growth.

At Neltume Ports, the business delivered strong results, including adjusted earnings of $7 million in the quarter, $3 million higher than the same period last year. Favorable foreign exchange and increased ownership at Puerto Angamos and Terminal Graneles del Norte pushed third quarter adjusted earnings higher when compared to 2022.

Subsequent to quarter end, our joint venture with Nautilus referred to as the Vancouver Bulk Terminal, announced an agreement with Solvay. This opportunity will see us work with Solvay, a global leader in the soda ash market, on a newly designed terminal that will have the capability to annually export more than 2.5 million tonnes of soda ash. Construction on this terminal is expected to begin in 2024 with completion in 2026. This is an exciting opportunity and reiterates our focus on growth and the deployment of capital in Neltume.

As expected, our Canadian Utilities investment saw adjusted earnings decline by approximately $90 million when compared to the third quarter of last year. This decline was primarily due to the impact of rebasing at Alberta-based distribution utilities as previously mentioned. This rebasing pressure was compounded by year-over-year earnings pressure in the Australian natural gas distribution business as inflation levels have moderated in 2023 compared to the highs experienced in 2022.

Looking ahead to the fourth quarter. For our Canadian Utilities investment, we expect many of the same things experienced through the first 9 months of the year to continue. While I won't go into too much detail on this point, as Brian spoke about it earlier in CU's call, October saw CU receive 2 key regulatory decisions that helped provide regulatory certainty moving forward. AUC's decisions on both the generic cost of capital to COC and the third performance-based regulation, PBR framework.

Our Canadian Utilities investment provides ATCO a stream of stable and reliable earnings and cash flow, and these announcements reinforce the prospective and constructive nature of the regulatory system in Alberta as they enter 2024. Overall, ATCO delivered a third quarter that was in line with our expectation and highlighted the strength of our diversified portfolio. Our non-CU investments delivered very strong results that helped soften the impact of rebasing and downward trending of Australian inflation.

With this being a key transition year at our largest investment, CU, we continue to look for opportunities to outperform across our portfolio of investments. I look forward to sharing our full year 2023 performance on our next call in early 2024. That concludes my prepared remarks, and I will now turn the call back to Lawrence.

Lawrence Gramson

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Rob Hope with Scotiabank.

Rob Hope

First question is on the Structures business. So can you maybe speak a little bit more in depth on kind of what the key factors are that are driving the average rental rate upwards and whether you could see some additional upward pressure there? And then secondly, we have also seen kind of utilization tick down a little bit. So is this a price over volume situation?

Katie Patrick

Yes. Thanks, Rob. I'll start just first with the pricing. I mean, we are seeing strong demand throughout many of our geographies for our units, so I think that is definitely contributing. And another factor that we're seeing is we have, as you see in the numbers, been increasing our overall fleet size. So we do have a number of new products that we've had that allows us to basically escalate some of the overall rent rates that we're seeing.

And the benefit of that is that does apply across the fleet so the average rate would come up. So that is a strong -- I think we'll continue to see as we continue to grow that business and provide new products into the market that we'll be able to continue with that, provided that we do continue to see the strong demand spurred by the economic tailwinds that we have.

On the utilization, the corollary of that build-out of the fleet is that you do see a bit of a dip as you're expanding your overall fleet size and utilization. As it takes, first of all, some time to get those units on rent, there is transit in there. There's a few things that -- but we're really happy with that number that we have for utilization. And we think it allows us to adequately serve all of our customers' needs as well by having a little bit of excess capacity in there to provide our customers units when they need them.

Rob Hope

Appreciate that. And then secondly, the environment is seeing some infrastructure assets valuations come down, and it does seem like there's a number of assets out there for sale. Can you maybe speak about kind of what the appetite is there on the corporate side to maybe look at M&A? And if so, are there any kind of geographies or asset critical that make -- are most attractive to you right now?

Katie Patrick

Yes. As we talked about on the CU call, we do have a strong balance sheet, and we want to use that opportunistically to advance our growth. In previous quarters, I have said that we hadn't yet seen the private market valuations fall in line with what we're seeing in the public markets. But we are starting to see, as you've mentioned, a bit of a reversal of that trend, which was expected.

So I think we remain open and looking at potential opportunities to acquire some assets. And I think the biggest areas of our focus across the whole company right now remain our core markets in Australia and Canada as well as potentially U.S. in terms of opportunities that may arise there within the infrastructure categories.

Operator

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

Maurice Choy

Maybe I'll stick with the capital allocation discussion since you mentioned a few geographies. Now on the CU level, the utility obviously have amassed quite a bit of clean energy opportunities over the last 2, 3 years. And even though the direction of travel towards clean energy hasn't changed, it does feel like the pace is being impacted by a higher cost of capital and higher cost overall. So any thoughts on that? And more broadly, what does that mean for ATCO as you allocate capital across the 6 essential service categories?

Katie Patrick

Yes. Thanks, Maurice. At the CU level, we've kind of stated publicly, both for our CU and for ATCO investments, a percentage of nonregulated assets that is a bit higher than we currently have in our portfolio. And so for some time, we have significant investment in our utilities, which has served us very well. And we played a bit of catch up, particularly with the acquisition of the energy with the renewables portfolio.

That said, we still continue to be, across our portfolio, very focused on investment in utilities when it makes sense and growing that, what we already have in the energy transition portfolio going forward. So I think particularly this year, when you saw that significant acquisition's probably a little outsized in terms of the capital allocation towards energy transition activities, but you should see a bit more balanced return between the 2 as you go forward back to the utilities.

Overall, I think we -- as I said, we're -- with Structures doing so well though, we are starting to see that percentage of earnings contribution from the nonregulated side start to inch up, which you can see in the ATCO results is very positive. So we will continue to focus on a balance between that reinvestment in utilities as well as some of our nonregulated assets.

Maurice Choy

And maybe finishing off on S&L, and thanks for the color on the rental business earlier. However, I didn't notice any material new contracts being signed at S&L as part of your announcement today. Can you speak to your pipeline of potential projects, types of customers that are advancing towards signing? And maybe just more broadly, what tends to be the top reason why some of these counterparties may be holding back?

Katie Patrick

Yes, sure. Thanks, Maurice. It's a great question. I'll start just by reiterating what I mentioned in my opening remarks, but our focus on really building that base business so we do have some stability in our earnings profile, which has advanced a lot. I think a strong portion of our now ever-increasing earnings are coming from that base business we're very happy with. That being said, we, of course, like the large projects. They provide meaningful earnings uplift when we can get them.

And the pipeline is very strong. I know that we have not announced. I think the reality is just as the -- our customers are taking a little longer to make some of these decisions on these large asset builds. And I think that is a function, of course, of the current economic times in terms of the volatility we're seeing in the capital markets and a lot of the other -- the markets in general.

But I think the economic support many of these projects moving forward and so we're hopeful that we'll get some of those in the near term here. In terms of where they are and who they are, I think it is the geographies that we see the most activity probably are Australia and in the -- some regions of Latin America that there are some expansion of some of the mining projects in particular that I think could see opportunities for some of those larger camps.

Operator

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

Mark Jarvi

So just coming back to the trends on Structures & Logistics. Top line revenues are down year-over-year but margins are very strong. You talked about rental rates being good, customer activity good. So just with revenues being down, is that just, I guess, mix of types of contracts? Is there something, a conscious decision in terms of what you're looking for in terms of margins, in terms of anything you're bidding on now? Just sort of updated views in terms of how those 2 dynamics play out in terms of revenue and margins now.

Katie Patrick

Yes. No, I think part of the revenue drop is probably largely can be attributed to the Bechtel project, which is obviously a larger project. Overall, I think we are seeing, as you say, an improvement in our margins, which you can see, comes a bit from the average rental rates increasing. So I mean, I think the conscious allocation between the businesses towards our base business continues to be the way that we're heading, which should help in the long term if we're able to maintain the rental rates that we're seeing that margin profile.

Mark Jarvi

Okay. And then you updated the normal course issuer bid parameters, but it doesn't seem like you've acted on it. Share price is weaker. Like what would tip you to kind of be more active on the buyback right now? Is it that you're holding back cash because you're seeing more opportunities around private market new investments? Or just sort of what's sort of informing the decision not to use the NCIB at this time?

Katie Patrick

Yes. No, we updated, we increased. We did use up to our maximum that we had approved. It's a small amount. We're not -- we haven't -- we're not talking about a massive NCIB program. We increased it to 2%. So I think we -- as we said in the past, we continue to -- how we would utilize that at times, we will see a disconnect between what we think is the true value of our assets and the market pricing. And we'll look to opportunistically buy back shares in those circumstances. So won't set a specific price to say when that happens or how, but we certainly monitor all the time.

Operator

[Operator Instructions] The next question comes from Linda Ezergailis with TD Securities.

Linda Ezergailis

I'm wondering if you could just give us an update on what discretionary capital is left at the Neltume level once you notionally allocate this latest expansion that you recently announced, the Vancouver port. And maybe comment on what further investment opportunities you see at Neltume, and if and when and to what extent that would warrant kind of a capital call or infusion from ATCO.

Katie Patrick

Yes. Thanks, Linda. We still -- as we've mentioned in previous quarters, we still continue to have cash on the balance sheet at Neltume. And I think we can get a follow-up on the exact number but it's been around that USD 100 million at the moment that we have or a little bit more on the Neltume balance sheet.

The project in Vancouver, there's a couple of things to note there. We're still working through exactly how we will be financing that, but we will be looking for some -- obviously, some debt financing, considering we have a secured offtake on that. And we are also, I might add, a 50-50 partner with our -- with Nautilus in that venture. So even after the use of the capital there, we will still have a strong amount of cash on the balance sheet at Neltume to pursue new projects.

So the theme remains the same in terms of we're looking at kind of the multipurpose cargo, the smaller ports around the world and particularly in the Americas with a focus on expansion outside of Latin America into the U.S. So they have a number of opportunities in that pipeline. In the near term, I would not say that we see a specific need for a capital injection into that business within the next probably 12 to 24 months. But of course, that can always be dependent on a good opportunity at the right moment.

Linda Ezergailis

That's helpful context. And maybe just following up on your space rental and workforce housing. As you expand kind of into new markets and provide kind of new products, how much would be gaining market share from existing demand versus the market itself growing? And kind of what's the runway for continuing to gain market share versus when you start bumping into a competitive response from other incumbents or entrants?

Katie Patrick

Yes. Thanks, Linda. In no big surprise, in Canada and Australia, in particular, we have a very strong market share position. And we have seen both of those markets grow to an extent. So I think there's a bit of a balance between a small incremental market share gain and overall growth of those 2 markets in particular.

In the other markets that we operate, I would say that there's significant room for us to gain market share in particular. We have seen a good amount of expansion in the U.S. where our market share is very small. And we do have the ability to make headwinds in that and plus you have the growth, obviously, overall in the U.S. market.

Similar situation in some of the other markets we operate, in Mexico and in Chile. There's plenty of room for us to gain share versus our competitors without necessarily impacting too much market response. So I think that the dynamics are different by geography. But as I mentioned, particularly in Canada and Australia, we are reaching sort of the top end of what we think is a good market share for those countries.

Operator

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

Lawrence Gramson

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

Operator

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

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