Q2 2023 ATCO Ltd Earnings Call
Thank you for standing by this is the conference operator welcome to the co Ltd second quarter 2023 results conference call and webcast.
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I would now turn conference over to Mr. Colin Jackson, Senior Vice President Finance Treasury and sustainability.
Please go ahead Mr. Jackson.
Thank you. Good morning, everyone. We're pleased you could join US for <unk> second quarter 2023 Conference call with me today is executive Vice President and Chief Financial and investment Officer, Eddie Patrick.
Before we move into our formal agenda I would like to take a moment to acknowledge the numerous traditional territories and homeland.
In which our global facilities are located.
Today, we're speaking to you from our Alco Park head office in Calgary, which is located in the Treaty seven region.
This is the ancestral territory of the Blackfoot Confederacy comprised of the Zika kind of eye, but Ghani nations.
So in the nation and the Estonian Dakota Nations that include Nicky Bearish Pas and gets Tony first nations. The city of Calgary is also home to the Macy nation of Alberta region three.
We honor and respect the diverse history languages ceremonies and culture of the indigenous people, who called these areas home.
Eddie 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 the transcript will be available on our website at <unk> dot 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 <unk>.
With the Canadian Securities regulators.
And finally I'd 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 ifr S and as a result, they may not be comparable to similar measures presented.
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 for our second quarter 2023 conference call.
<unk> achieved adjusted earnings of $87 million or <unk> 77 per share in the second quarter of this year.
While this is slightly down on a year over year basis. These results really highlight the benefits of our diversified portfolio of investments.
This diversification allowed us to partially offset the downward earnings pressure associated with the Alberta distribution utilities Rebased <unk> with a phenomenal outperformance in recent years is being shared with our customers.
When we look more specifically, where these all cities offsetting earnings came from we see that our results were driven by exceptional growth from our structures and logistics business combined with great performance across our broader portfolio of investments.
Collectively the performance of our investments outside of Canadian utilities served to offset approximately $15 million of earnings pressure for the quarter.
And that cost structures and logistics, we delivered adjusted earnings of $26 million in the quarter $7 million higher than the same period last year.
Continuing the trend from previous quarters, a key driver of our earnings growth in the second quarter was the strong performance of our base businesses.
Both our space rentals business and our newly acquired Triple in housing Division delivered exceptional results in the period.
Compared to the second quarter of 2022 we grew our space rental fleet size by 13% and our average rental rate by 14% all while achieving an average utilization rate of 75%.
Moving on to tripling the business continued its strong positive earnings momentum from the first quarter into the second and is integrating well into our existing such as business.
We continue to believe this integration will allow for opportunities to incorporate various manufacturing process efficiencies as well as unlocking potential customer synergies across our businesses.
During the quarter. We also reached substantial completion of the Bechtel Pluto train two project.
This project was a significant driver of project based earnings for us over the last year and highlights our continued ability to successfully execute large scale multifaceted workforce housing projects globally.
I'm also very proud to say that this project was completed approximately four months ahead of schedule, an amazing feat given the current economic and supply chain environment.
Our plan to grow our base business globally continues to take for them and we have had success securing new contracts as well as supplemental additions to existing contracts.
This included the previously announced 116 unit project in Texas with T I C where.
Where we were recently awarded a contract for an additional 31 units by the company.
The U S market represents a strong repeatable growth platforms, and we look forward to increasing our presence in this just jurisdiction.
Okay.
As I've mentioned in the past our base business typically accounts for two thirds to three quarters of a stake of our segment earnings.
The strong performance from these base earnings at structures I'll set the project based earnings pressure, we experienced at <unk> in the quarter.
The team at <unk> continues to be active in pursuing new contracts to support earnings moving forward.
Particularly we see opportunities in the defense and government spaces, where a deep indigenous relationships can be leveraged alongside our core remote services expertise.
Yeah.
I don't know too many ports the business continued to deliver stable and dependable earnings.
During the quarter the business increased its ownership of Twitch on Gameloft.
And terminal right now, there's still no to some 40% to 50% helping to expand our earnings base moving forward.
Favorable foreign exchange impacts also served to push second quarter adjusted earnings higher when compared to 2022.
As expected our Canadian utilities investment so adjusted earnings declined by approximately $19 million when compared to the second quarter of 2022.
This decline was primarily due to the impact impact every basing Alberta, Alberta based distribution utilities, which I previously had mentioned.
This re basing pressure was compounded by year over year earnings pressure in the Australian natural gas distribution business is inflation levels began to recede from 'twenty to 'twenty two highest.
As Brian spoke about Canadian utilities in detail in this morning's earnings call I won't go into those details again here.
I would however highlight how the expected performance foresee will impact the remainder of 2023 graco.
Looking ahead to the second half of 2023.
We still expect to see year over year earnings pressure at Alco and the third quarter driven by the same rebased enforces we're seeing this quarter.
By the fourth quarter. However, we expect this pressure to ease for C U E.
Seasonal benefits and growth within our nonregulated businesses as you combine with combined with growth in our remaining portfolio of investments.
Should provide opportunities for continued growth year over year.
Overall, I still delivered a second quarter that was in line with our expectations and highlighted the strength of our diversified portfolio.
Our non C. You investments delivered strong results that helped soften the earnings impact of re basing in a downward trending Australian inflation.
Although these headwinds are expected to continue through the remainder of the year, we continue to be proactive across our portfolio to deliver long term shareowner value. During this key transition year at our largest investments Canadian utilities.
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 two questions. 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 we will now begin the question answer session to join the question queue. You May Press Star then one on your telephone keypad.
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Withdraw from the question queue. Please press Star then two.
Once again anyone on the conference call, who wishes to ask a question press star one at this time.
The first question comes from Maurice Choy with RBC capital markets.
Please go ahead.
Thank you and good morning. My first question is just a follow up on the themes from Mr. You call specifically the potential at empower our separation and a comment that was made that skews open to selling assets and it sounds like that.
It doesn't preclude selling regulate you took the assets.
From a portfolio standpoint, and your position as a controlling shareholder of <unk>, how should we view your guardrails with regards to regulate utopian nonregulated earnings.
Exploration that's a great question. Thanks for that question.
I kill them.
Really values the stability of the earnings and the cash flows that we receive from our regulated utilities business and going forward that is something that.
We will continue to be a very significant portion of our portfolio.
So you know as we think about I think Brian mentioned I'm sort of at the consideration that is C level. We would expect maybe maybe earnings to go up to 20% from the nonregulated side.
But as I said I think we you know we continue to value the stability of those utilities and when we do talk about capital recycling alternatives.
You know those would be.
Probably more at the margin rather than a significant recycling opportunity within the utilities.
And just to be clear, but those recycling opportunities at the margin does that include utility assets.
Sorry could you repeat that.
But part of that question, Mike you mentioned that and.
Capital recycling.
But you do it's on the margin.
Just to be clear does that include selling utility assets.
Yeah, No as Brian mentioned, we're still at we're exploring all options at this point, but I would say like as I said before.
And so as a shareholder really values the stability of those earnings and cash flows from from the utilities. So long term I don't expect our portfolio to deviate meaningfully from that 80 20 split that Brian had mentioned.
Got it.
And then just.
Staying with the theme of funding.
And obviously she is seeking funding options to fund its energy transition growth and intuitively I would think that our equity raise at the SKU level remains on the table can you speak to at COSE range of options to raise funds to support Cu, including you know all of these options what is your back end.
All right.
Sure No I mean I you know we will he has been a longtime shareholder in Seattle, we intend to maintain a similar owners.
Ownership stake as a meaningful owner of C U.
Actual has ample access to liquidity through the debt capital markets to various different financing alternatives that the ACA level. So as we look forward you know, we probably will look at that the comparison between the cost of capital of all of our turnover, but we.
Pain and vary.
<unk> strong balance sheet as a standalone basis at the opco level, including cash and access to the debt capital markets. So I think we'll look to use the balance of those to fund initiatives as well as you mentioned to help finance some of these options for echo empower and ethical energy systems, we look externally.
As well for those entities to be able to access capital.
Thanks, if I could just do a quick clean up question on the asset sales.
So fix that are ultimately acquired can you just discuss how much was spent and how much cash does help you may still have on its balance sheet.
No no to me Oh, Sorry Hill to me yeah. The.
There's still a significant amount of cash on the balance sheet, we still have over $100 million are on the balance sheet at now to me and that 10% stake we took out a.
The minority partner that was in those investments. So the we actually financed that no with directly cash on the balance sheet at the corporate level. So there still remains a substantial amount of liquidity with meeting at the corporate level not to me.
Great. Thank you very much.
The next question comes from Robert Hope with Scotiabank.
Please go ahead.
Good morning, everyone I just wanted to turn my attention to the base business of the structures business. We're just taking a look at the global space rental income.
This quarter, both on a quarter over quarter basis, more so on a year over year basis, we're seeing strong growth with it up.
14% of the average rental rate can you maybe speak to what's driving this.
This rental rates and how do you see this stabilizing at this level or could we even see it softening depending on how that mix works.
Oh, Yes, basically question it's structures as you saw had an exceptional quarter and there are we've been able to benefit from you know overall rising demand in that sector, which saw the eventual rates increase.
I would say I can't point to any one area I would say that we are executing on our strategy to grow that business globally, and you will see that particularly in the U S. We've had some success in growing our fleet there, but also our core markets in Canada, and Australia continues to perform very well going forward you know I think we've.
You know theres been significant growth in our fleet size and you can probably see the the level of that growth tempering a bit because we probably have a significant.
It's not capacity right now in some of our existing fleet that we probably can continue to grow the business in our earnings through deploying some of those assets.
So hope that answers your question a bit.
Yeah. That's helpful. So I guess the continued strong.
Results in our base business and then you know.
As you take a look at the back half figure you have some larger contracts rolling off or have already rolled off.
What are the conversations been with for some of the larger projects out there to help backfill a we'll call it that the large project backlog.
Yeah, No I think we're still very optimistic for the back half of the year I think we'll continue to see a lot of the same strong performance that we saw in the start of the year through the year. As you noted there are some there's some projects from the larger projects that have come off normally the bechtel Pluto project in Australia that has come to substantial completion.
But we do have a strong pipeline of additional potential opportunities as well as the resilience of that base business that I mentioned to carry us through the year.
Yeah.
Alright, thank you.
The next question comes from Mark Jarvi CIBC capital markets.
Yeah. Thanks, I wanted to come back to the discussion of empower and there's discussion on a few call in terms of range of options. If they did spin it out as a standalone entity.
Any commentary in terms of what it goes ownership levels could be I mean, obviously, you know relative to where you are now or willingness to even maybe increase your positioning around that business, depending on the range of of Ah I.
Got solutions or financing options put out there.
Yeah as Brian mentioned, we're you know we're still very early in exploring the options. The you know as we noted in the press release, the Spinout as one of many options under consideration and.
And it would be too early to speculate exactly where auto we'd see ourselves long term and that obviously as opportunities arise in both actual LNG systems and in empower I still would consider its options for capital allocations between the two based on the best use of our funds to maximize shareholder value at that time.
Okay.
There's been a handful of a I guess two different M&A deals and things that I've seen across different trade magazines and news articles on the on the port space.
In prior calls you guys indicated you'd look at a number a range of opportunities. There how would you say the deal flow looks right now in terms of I guess level of interest competition pricing just in terms of I guess, what are not economic outlook and are you on the impact of higher rates like how would you say asset values are trending right now.
Yeah, No I mean, it's a very interesting space, obviously, there's been a lot of action with strikes in Canada and in other events that highlight the benefit and the need for.
A diverse portfolio in terms of the ports and we are seeing a very strong pipeline there in terms of the range of opportunities.
Now to me as I've discussed in the past tends to target I'm not necessarily the large you know heavily sought after container type opportunities as those continue to trade at the infrastructure.
Type levels.
And the Port of Vancouver in Washington State is a great example of kind of the type of opportunity that fits well within our sweet spot that's a bulk port.
And you know.
As you know there was obviously some competition, but we did manage to get that.
It was an attractive profile going forward so.
There is there's definitely a lot of interest in that space and but we continue to look for more of those niche opportunities, where we can really add value is known to me to the opportunity.
And then I guess, maybe just how you would say that the competitive environment to find those opportunities is it you know moderated at all in terms of where you're seeing activity or in terms of valuations and how you're seeing.
It's priced or evaluated.
No candidly not I mean, it's the same themes across the sector right I don't think that on in the private markets and the M&A environment. There has been a significant moderation in the multiples that are being paid.
So you know we continue to see strong demand for.
Most of those those larger opportunities that I've mentioned them, but as I said no to me is looking at a slightly different field, which tends to have not as much.
Interest from some of those the infrastructure type players and in the opportunities we look at.
Got it okay. Thanks Kelly.
And the next question comes from Linda ASIC analyst with TD Securities.
Please go ahead.
Thank you recognizing it's still early days, but I just wanted to step back Big picture and I understand how atco balances you know complexity AR and the potential for subordination.
Of cashflows in any sort of restructuring them either at the CEO level or can you confirm that.
This might not spill into any sort of.
Optimization of our initiatives at the Opco level is that off the table or might that comes obsequent to what youre doing Oh tassio.
I mean as as Brian mentioned again, it's very early days in terms of and power specifically exploring its financing alternatives at the moment. This does not this doesn't impact our actual in terms of how it's evaluating its current structure or its funding alternatives.
So you know we you know if anything and as mentioned that it becomes a separate entity them I think.
You know, we'll continue to evaluate what's the best see you will continue to evaluate what's in the best interest of many utilities shareowners of which actually was one of those obviously so.
I don't see any potential spillover as you noted for frac them at the moment.
Okay, and just maybe I'm looking back I mean at one point atco kind of streamlined and simplified its a kind of ownership and platforms and I'm just wondering how both Atco N C. You consider not just fast access to.
<unk> financing at a given point in time, but also considering them some of the.
Potential implications around potentially introducing a complexity of structures and also the potential for subordination and the debt capital markets.
Yeah. I mean are we you know afterwards, we look to structure our investments are going to take a look at each individual portfolio company and look for what's what's the best way to finance that vehicles. So that the same would hold true for structures for now to me for any one of our particular investments.
We would look to them.
To see how the best way to maintain the ability for them to grow combined with you know maximizing shareholder value for that whatever that particular investment is.
So you know in terms of lead.
We understand that we do have a different structure, but I think that we continue to operate that well and it continues to serve us well in terms of accessing capital are for the various entities.
Thank you.
Once again, if you have a question to Tom.
<unk> done one.
The next question comes from Ben Pham with BMO.
Telehealth.
Hi, Thanks, I wanted to follow up on I know you talked about that.
What's the.
Opportunity and that could be.
Organic.
Can you talk what what else you're probably the most interested in in terms of M&A whether it's.
The Triple M truckers.
Related businesses or even any any other verticals that you have looked at in the past.
Yeah, I mean, let me think about activist groups and I think I've I've said this a few times in the past we look at both you know growth within our existing portfolio of investments, So which you know obviously would be.
You know considering that if we can find areas, where we can have synergies are clear value proposition, that's probably our most preferred route of growth so triple that and it's a great example of how we were able to add on a very complementary business with synergies and Oh forward looking pipeline.
One of our existing businesses, but we also do look at our growth outside of our existing verticals and you know in our materials. We've mentioned interest in some of the other essential services, such as water and agriculture.
And we will continue to explore opportunities within those to add on a new portfolio.
Cool.
Okay. I think also in the past you mentioned one of the constraints.
For for maybe a more M&A side was with valuations and I don't know what what do you Wanna paper valuations has how has that changed now I think that's been somewhat to the earlier question I was that was framed.
And then can you also comment too is this.
Really a good environment for you too.
To expand.
The opportunity of a M in AG and where valuations are at is there's really no change in how you look at the life of mine.
Yeah, I think it's obviously very sector specific I mean, you'll hear from most people I'm sure that.
Probably haven't seen the valuations and the premiums or for M&A transactions.
Come down as much as you would expect considering the public markets are at the moment.
But that is pretty specific to to the sectors that you're talking about I think you know for example, or a triple I mean are we got a very attractive valuation and I think in certain instances and in different opportunities we can still find.
Areas, where we can deploy capital.
Capital and M&A are at attractive valuations, but you know I am sure as everyone's aware that the general theme of.
Current market is still a bit unstable.
We're continuing to watch for opportunities that present themselves.
Deploy capital.
And maybe lastly on your leverage is there.
For him or her to take on and on.
On leverage or them doing profit centers just thinking.
The news on the credit rating.
Agencies, and they May just remind us on on the balance sheet and where you're at.
Yeah, no we still have a pretty a very modest level of holding company leverages. The ACA levels, we still think we do have.
You know capacity to take on additional debt there, we've kind of set ourselves an internal target that we wouldn't go above.
Around 30% debt to total cap.
But we're far below that so there still is a pretty good room on the on a stand alone basis that is at the opco level I'm pretty good room to fuel growth and if we see opportunity.
Okay. That's very helpful. Thank you.
This concludes the question answer session I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.
Thank you Sherry and thank you all for participating today. We appreciate your interest in Alco 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.
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