Q2 2022 Atco Ltd Earnings Call

Thank you for standing by this is the conference operator welcome to the co Ltd second quarter 2022 results conference call and webcast.

As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation, there will be an opportunity to ask questions.

Joined the question Queued Me Press Star and one on your telephone keypad.

If you need assistance during the conference call you may signal, an operator by pressing star zero.

I would now like to turn the conference over to Mr. Colin Jackson, Senior Vice President Finance Treasury risk and sustainability.

Please go ahead Mr. Jackson.

Thank you.

Good morning, everyone. We're pleased.

Pleased you could join us for <unk> second quarter 2022 conference call with me today is executive Vice President Chief Financial and investment Officer, Patrick <unk>.

We 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 <unk> dot com and can be found in the investors section under the heading events.

Reservations.

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 <unk> with the Canadian Securities regulators.

And finally I'd also like to point out that during this presentation, we refer to certain non-GAAP or segments measures such as adjusted earnings adjusted earnings per share and capital.

These measures do not have any standardized meaning under IRS and as a result, they may not be comparable to similar measures presented in other entities.

Now I'll turn the call over to Katy for opening remarks.

Thanks, Tom and good morning, everyone.

Thank you very much for joining us today for our second quarter 2022 conference call.

Absolute adjusted earnings of $92 million.

Or <unk> 81 per share in the second quarter of 2022 is this $12 million or 11 cents per share higher in the second quarter last year.

$12 million year over year growth was driven by the strong performance of our utilities combined with great results across our broader portfolio.

Our Canadian utilities investment. So it's adjusted earnings were $21 million from $150 million in the second quarter of last year to $136 million this year.

This strong performance was driven by sea use Alberta based distribution utilities.

We continue to deliver exceptional results in the final year of their second PBR cycle.

Our actual gas Australia investments also benefited from CPI indexing.

Their earnings higher in the period.

Speaking to CPI and inflation more broadly it's worth reiterating that we have today is well insulated against these pressures.

Across our portfolio, we have been successful in leveraging our operating expertise and experience managing through challenging financial condition to provide this installation.

As an example, we've been working with suppliers to fixed cost and then paying forward forecast on key input materials.

They have also leverage escalation mechanisms in our contracts to manage this exposure.

For utility investments, we have structural protection that is regulatory.

Regulatory regime.

That said, we continue to closely monitor inflationary impacts to our businesses.

Utilize the expertise of our teams and long held relationships to manage through this period.

Before I move on to the performance of our Atco structures business. It is worth checking me back to the point that Brian covered during this morning's CEO , Paul which will also impact the actual for 2023.

As Brian mentioned all of our utilities performed well this year, but in particular, our Alberta based distribution utilities have delivered exceptional earnings growth in the year.

This growth is due to efficiencies they have unlocked during the second generation of their performance based regulation or PBR two.

Looking ahead to 2023, however, we expect to see a reset of earnings for the Alberta distribution utilities as we exit the current PBR cycle.

Resetting is normally within a P b, our regulatory framework, which at its heart is designed to incent utilities to find efficiency.

The earnings benefit of these efficiencies are retained by the utility during the PBR term before being passed on to customers in the form of long term cost savings.

Acknowledging the above you still have expectations for outperformance across our utilities next year.

The drive of our leaders to deliver top tier performance, our operating expertise and our historical track record all support a view.

Outperformance above the allowed ROE will be attainable or 2023.

This is further reinforced by the regulatory mechanisms embedded in the PDR frame framework aimed at improving earning stability.

Including the efficiency carryover mechanism Bryan touched on this morning.

Turning to ask the structures, we delivered adjusted earnings of $16 million in the quarter, which was comparable to the prior year.

Stability is worth highlighting is the second quarter of last year included significant earnings from the LNG, Canada project.

This project was substantially completed in the second quarter of this year and despite lower earnings from the project overall earnings structures remain consistent as we said before this stability comes largely from our focus.

Core fleet rental businesses, which performed well across all geographies.

The structures team remain focused on growing and expanding this core business.

<unk> rentals.

Of course housing these product categories typically account for two thirds to three quarters of our segment earnings and.

And deliver stable and less cyclical earnings for the business.

Year to date.

Key performance metrics here, including higher unit counts utilization and average rental rates.

Beyond the core business, we continue to supplement our earnings with larger projects.

This past quarter, we advanced our project with Bechtel a longtime partner.

To provide accommodations for the 2500 workers involved in the construction of the Pluto to LNG expansion.

This project, which is in Australia displays our ability to execute large scale multifaceted workforce housing project and will continue to be a significant driver of earnings for us in the next 18 months.

On the co products out of the business, we delivered earnings of $3 million approximately $1 million higher than the same quarter last year.

This increase was due to higher occupancy at our Trans Mountain counts along with New project work for the defense threat reduction agency and organization within the U S Department of defense.

This project utilized context expertise and rapid response scenarios to support the field accommodation requirements for this exercise and the United Kingdom.

Our proven ability to execute these highly complex projects demonstrates our versatile skill set and create future opportunities in this key market segment.

It's our first also marks the commencement of Frontex North warning system contract.

As discussed last quarter from tech through its another type joint venture when a seven year contract from the government of Canada to operate and maintain the north warning system.

Now as a token expects to assume full custody and control of the system by August 1st.

Moving on to an alternate ports.

Business continues to provide a solid base of earnings and.

Amidst the current economic environment and ongoing global supply chain turmoil.

Now to me had a strong second quarter that saw the business increase earnings of $1 million year over year.

This increase in earnings was driven by higher activity across the portfolio of course.

Growth in the deployment of capital is a key area focus for it not to me.

Our pipeline of opportunities in the business is strong and we're confident this will create meaningful opportunities for new investments in the future.

Overall auto had a great second quarter I'm excited to see the work that our businesses have been doing to secure new projects execute on their long term strategies and drive earnings stability.

You can see this in our results and I believe we're well positioned heading into the remainder of the year.

That concludes my prepared remarks, I will now turn turn the call back to Colin.

Thank you Katie.

The interest of time, we ask that you limit yourself to two questions if.

If you have additional questions you're welcome to rejoin the queue.

I will turn it over to the conference coordinator now for questions.

Thank you.

Now begin the question answer session.

Once again in the interest of time, we ask you to limit yourself to two questions.

I have additional questions you are welcome to rejoin the queue.

To join the question queue you May Press Star then one on your telephone keypad.

You will hear a tone acknowledging your request.

We're using a speakerphone please pick up your handset before pressing any cheese.

It's dropped in the question queue. Please press Star then two.

The first question comes from Mark Jarvi with CIBC capital markets.

Please go ahead.

Thanks, everyone.

First question is on structures.

It seems like you're expanding the fleet or some more invested capital going in but utilization was down a little bit year over year and quarter over quarter or can you help us reconcile those two things is that just a lag on it.

Nation that you'll essentially see that tick higher are you rollout the Spanish flu.

Yeah. Thanks, Mark Great question, and you use them hit it quite clearly the you know we expanded our fleet and we expect our utilization will take a little time just to catch up to that rapid expansion that we have so we're not concerned about the slight downtick in utilization just because as you say we did have some expansion of fleet size.

So as those units come on rent throughout the remainder of the year you should see an improvement of that overall.

So it would be around the year end that we would start to see that sort of normalize out.

And it should start to normalize out over the next few quarters here because we had we are well, we're continuing to expand our fleet size, though.

But you should see it over the next couple of quarters start to improve.

And then turning to know what you mean, obviously lots of headlines chatter around recession.

I think if you go through some sort of technical.

Technical recession, we'll talk about that underlying real growth was down how would you see that playing out in terms of yeah look Fresnel to me and just remind us again sort of the I guess the volume sensitivity if that business sort of a GDP sensitivity.

If if there is a bit of a softening in 'twenty three.

Yeah generally speaking we have said in the past, but now to me as volumes kind of track with GDP growth in the region and which is obviously predominantly in South America.

But that being said throughout the pandemic, we've been very strong even when there was a little softening overall GDP growth.

And a lot of that is attributable to the the diverse portfolio that we have within no to me of different types of cargo. So while there is some sensitivity in particular, you'll see containers in those type of ports are more sensitive to the economic environment. There is a broad range of different.

Cargoes that we are servicing so you'll see some resiliency and we have seen resiliency since we've purchased into that investment as.

As we move forward through various economic cycles.

And how would you characterize recent months in terms of activity and how the business is performing.

Now if you need them to perform very well to be honest, we have as I. Just mentioned you know like we have seen some strong results from all of our container ports picking up on excess volume.

The supply chain shortages.

But across the whole portfolio of most of our most of the ports are doing very well with them.

Commodities are driving that we obviously have a lot of exposure to the.

Just some of the commodities in Chile, and those have all been doing quite well so the portfolio is doing well.

As well as you've seen some benefit from the way that the exchange rates work in our favor from an operations perspective.

That's good to hear thanks for the time Covid kidding.

Okay.

The next question comes from Maurice Choy with RBC capital markets.

Please go ahead.

Thank you and good morning.

Like what are some of the Gpus.

A question and maybe your thoughts on the outlook of new contracts for them.

The workforce housing and permanent modular construction, obviously, you know there's a rich.

As such and with some customers might want to hold back from committing to new projects, but on the other half.

And the energy sector.

Meanwhile, given the high oil and gas prices.

It looks like there was a big portion of your customer base. So your thoughts on your contracts.

Yeah, I think we still have a very strong pipeline of new opportunities within structures as we've talked about before we really have tried to transition that business do you have the core stability of the space of the smaller projects, but that being said, we do have some of the large.

Ah projects still in the mix and bye bye designed they are not as predictable in terms of when they will come into our earnings stream.

And they're obviously dependent on large capital expenditures largely projects around the world moving forward.

But we have a good global footprint in that business. So you know to the extent not even within Alberta, but other jurisdictions.

It's large projects moving forward, we're obviously very well positioned.

To capitalize on those so I think.

But all overall, we have a good outlook.

You know potentially for some large projects.

And also for the core business remained stable.

And just as a follow up and see strong pipeline like Covid seamless.

Pipeline, whether that's by way of.

Our small size all of them.

Liberty have you seen goes.

Enjoy the last three or four months.

Hum.

Think we're pretty consistent over the through this year.

Of the pipeline and the and what we're seeing it from an economic perspective.

You know, obviously inflation continues and the interest rate environment.

Continues to be a challenge.

But I don't think we've seen significant changes in the most recent period of that the pipeline of potential activity.

Got it.

And just last.

Last question on sticking with stretch some logistics.

If you look at your contracts to help build new infrastructure for our customers. What generally is your ability to pass through.

Higher costs due to inflation or supply chain issues too.

Customer.

The the Pluto contract industrial as an example, when inflation Oh.

Brian's comments this morning Australian CPI is running quite high.

Oh expose hopper.

That's cool.

Yeah, No I mean, we to date, we've actually done a pretty good job of passing on some of those costs to our customers, but then the structures business and we've utilized a number of different tools short validity periods for our contracts are quotes as.

As I mentioned in my prepared remarks, we have line of sight with their suppliers in terms of the long term costs.

And we do have various mechanisms to them.

Increase the prices in some of our contracts as well.

So to date, we have done a pretty good job, but obviously inflation is and persistent inflation.

Is something we have to continue to work.

Monitoring and inevitably it will be you know it will change and we'll have to work hard to maintain that.

Ability to pass it on.

Perfect. Thank you very much.

Thanks Marni.

The next question comes from Ben Pham with BMO capital markets. Please.

Please go ahead.

Hi, Thanks, good morning.

I'm wondering up my my first question is it sounds like I mean, you mentioned that the theory that the reset of earnings in the utility side.

But it sounds like there's some good tailwind and structures heading into 2020 through next 18 months do you have enough earnings increases ramp to backfill some of the that the C U reset.

I mean, I think you know as you saw in the last reset of P. D. R E D.

It's a there is a pretty meaningful change in the in the ongoing win for a distribution utilities. So there is quite a bit of a reset there that we didnt manage last time to make up over time.

At least in the outset, it's pretty hard to overcome some of that with the other businesses just due to the magnitude and.

How much our distribution utilities to account for our overall earnings at Agco.

We are hopeful that the obviously, there's a strong tailwind.

But I think it would be you know we would have to have cigna.

Significantly straw.

Stronger results within structures to overcome that.

And maybe maybe just to stay on that point when you think about P. B R. Three versus two do you anticipate the same tried on ROE is it's lower more lower in the front end in the Bakken and then anything else to add on on really the base O&M year there.

Regulators looking to the Capex is there a kicker on ROE is it.

Is it similar to the second period or is there. Some some subtle differences you can comment on.

And it is something that we will go into one year the cost of service all while we are still figuring out. The final logistics is the next P. B R. Three so we don't have all those details yet, but I think you can expect a similar trajectory of Roe's as you saw through P b or two in that sort of.

Glide path upward throughout the course of the PBR term. The next few years, but we don't have all the details yet, but those will be coming shortly.

Okay, and maybe lastly, when you think about somebody's. These trends you know obviously, we're coming off of a good year, Australia, helping out but how do you think about the your payout ratio your dividend ankle I know the slower it awkward in and see you at maybe maybe more a reminder of your targets and.

And then thought process going forward on your dividend.

Yeah, we don't we haven't set a you know a public target on the payout ratio. We are relatively at the academic were relatively comfortable with our current payout ratio and overall, we do aim to grow our dividend consistent with the base sustainable earnings of our business.

So you know even if we have a significant outperformance a year, we're not necessarily going to.

Let me start our dividend on a 110 basis consistent with those earnings are we do look for the long term sustainable growth in that dividend that you've seen over the past are not little continued to be our policy going forward.

Yes.

Okay got it okay. Thank you.

Once again, if you have a question. Please press star one at this time.

Next question comes from Andrew Hughes with Credit Suisse.

Please go ahead.

Thanks, Good morning, maybe just coming back to the structures business given some of the work you've done.

We continue to do with LNG related customers.

Did you see an interesting business opportunity or a niche that you don't pop up for future potential given just some of the global LNG dynamics that we're seeing.

Yeah for sure I mean, just generally things under the Atco structures is a global leader in workforce housing if not the global leader.

Certainly amongst them so I think.

To the extent you know we have a lot of expertise LNG, Canada and a lot of relationships with that community. So I think we do have a very strong advantage for <unk>.

Future Global LNG.

<unk> you know when they do tend to be obviously more of a moat, hence the need for the workforce housing. So I think that's certainly an area that we would look to.

Continue to capitalize on.

How have the conversations changed meaningfully with the clientele in the last few months or couple of quarters, just as the LNG market has really tightened up.

Okay.

I wouldn't say that we you know obviously these are long lead time projects. So you know, we can't you're not going to see an immediate jump to getting new.

New projects there, but there is certainly I guess tangentially more chatter more interest more discussion around some of.

These projects given the global dynamics and the need for it.

But if gas so yeah.

Yes, I think there is there is an increase but it will take a while obviously before these come to fruition.

That's helpful context, and then.

Maybe just at the top of the house as you for out coal and you think about the cash position of just the balance sheet, you've got you've got a lot of flexibility.

How do you think about capital deployment, there's some market dislocations happening just given the concerns on a recession and rising interest rates inflation theres, a whole cluster of things happening in your you sort of sit there very well positioned.

With capital to deploy to choose to do that.

Or just how do you think about market opportunities at this point.

Yeah No. That's that's a great question I think we you know we have.

We have great pride in our historical we've been conservative and we can prove.

Prudent with our balance sheet and maintain a strong cash balance.

And I think that that mentality will hold through this current turbulence, but at the same time as you say it does position us well to look for specific opportunities, where there could be a value.

Accretive.

Opportunity for ichor in any one of our companies. So we we are looking broadly and there's lots of activity going on to look for new growth.

But we will be prudent in how we manage that capital and our balance sheet. Throughout these times you know what we haven't we haven't necessarily seen yes, it's still it's a pretty new still a softening in the in the valuations of some.

Some of the growth opportunities, we're looking at so but you know one would expect with the rising interest rate environment et cetera that we will that will come in and you should remain well positioned to capitalize there.

If I can sneak it in because you've kind of opened the door are there certain opportunities that are more interesting than others at this point in time.

Sure I mean, I think you know Brian touch on it and we've been pretty consistent that the energy transition and the opportunities we're seeing through clean fuels renewables are obviously, we've announced quite a few initiatives in that in that world and energy storage.

I've probably high on our list if we can get some policy clarity those would be the areas certainly a key focus for the organization as a whole.

Okay, I want to make anymore and thank you for that.

Thanks very much.

As there are no more questions from the phone lines. This concludes our question and answer session I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.

Thank you operator, and thank you all for participating today. We appreciate your interest in Agco 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.

Okay.

[music].

Okay.

Okay.

Okay.

Okay.

Yeah.

[music].

Hum.

Okay.