Q3 2024 ATCO Ltd Earnings Call
Speaker Change: Thank you for standing by. This is the conference operator. Welcome to the ADCO Limited third quarter 2024 results conference call and webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded.
Speaker Change: After the presentation there will be an opportunity to ask questions. To join the question queue you may press star then one on your telephone keypad. Should you need assistance during the conference call you may signal an operator by pressing star then zero.
Speaker Change: 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.
Speaker Change: We are pleased you could join us for ACCO's third quarter 2024 conference call.
Speaker Change: On the line with me today, we have Katie Patrick, Executive Vice President and Chief Financial and Investment Officer of ATCO, and Adam Beattie, President of ATCO Structures.
Speaker Change: And joining us for the Q&A portion of the call, we have Rebecca Kalmachov, the Chief Financial Officer of Akron Structures.
Speaker Change: 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.
Speaker Change: This is the ancestral territory of the Blackfoot Confederacy, comprised of the Siksika, the Kainai, and the Pagani Nations.
the Tsutinu Nation, and the Stony Nakota Nations.
Speaker Change: This includes the Chinooki, Bear's Paw, and Good Stony First Nations.
Speaker Change: I want to also acknowledge that the City of Calgary is home to the Métis Nation of Alberta, Districts 5 and 6.
Speaker Change: During the quarter, employees across Canada recognized the National Day for Truth and Reconciliation by walking together to honour Indigenous communities and their experiences.
Speaker Change: They will continue to reflect, learn, and respect the diverse history, languages, ceremonies, and cultures of Indigenous peoples as we move toward understanding, healing, and reconciliation.
Speaker Change: Today we'll hear from Katie, who will deliver opening comments on ACCO's financial results and recent company developments, followed by an update from Adam on ACCO's structures.
following today's remarks.
The ACWA team will take questions from the investment community
Speaker Change: Please note that a replay of the conference call, a copy of the presentation and today's transcript will be available on our website at ACO.com following the call.
Speaker Change: Materials can be found in the investor section under events and presentation.
Speaker Change: Today's remarks will include forward-looking statements that are subject to important risks and uncertainties.
Speaker Change: For more information on these risks and uncertainties, please refer to our filings with the Canadian Securities Regulators.
Speaker Change: During today's presentation, we may refer to certain non-GAAP and other financial measures, including adjusted earnings.
Speaker Change: 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.
Speaker Change: And now, I'll turn the call over to Katie for her opening remarks.
Katie Patrick: Thanks, Colin, and good morning, everyone. Thank you all very much for joining us today.
Katie Patrick: This quarter's results highlight our continued focus on our strategic growth objectives.
Katie Patrick: These $10 million of growth came primarily from the strong performance of our Canadian Utilities business and resiliency across our other investments.
Katie Patrick: At Canadian Utilities, growth in the quarter was driven by an increase in allowable ROE from 8.5% in 2023 to 9.28% in 2024, as well as continued rate-based growth across our regulated utilities.
Katie Patrick: Our non-regulated assets at CU also contributed to this growth, driven by increased demand and strong seasonal spreads in natural gas storage.
Katie Patrick: When considering this, and that we will not carry forward the 50 basis points of outperformance under the efficiency carryover mechanism into 2025, we expect earnings growth to moderate for utilities next year.
Katie Patrick: Over the long term, we continue to be bullish on the outlook of our utilities businesses.
Katie Patrick: Moving to Structures and Logistics, adjusted earnings were modestly lower compared to last year, primarily due to a provision for bad debt at Ad Cofonte.
Katie Patrick: This was partially offset by continued growth of the ACTLA structures, where we delivered adjusted earnings of $29 million, $1 million higher than the same period last year.
Katie Patrick: AdcoStructure's strong base business performance was driven by increased global space rental activity in addition to improved workforce housing trade sale performance across the U.S. and Australia.
Speaker Change: Before I turn the call over to Adam to discuss ATCO Structure's results, I want to speak to the overall ATCO portfolio and our strategy of investing in businesses in the essential services space.
Speaker Change: Some on the call may have heard me speak about this investment strategy in the past, but I thought it would be a good time to reorient our investors around our ASCO strategy and how it is distinct from the operational strategy of our core businesses, namely structures and CU.
Speaker Change: Essential services underpin our portfolio and our strategy consideration of continued investment in the energy, logistics and transportation, shelter and real estate segments.
Speaker Change: These segments are tied to infrastructure, providing us a source of recurring cash flows and earnings that have proven to be resilient to changes in global macroeconomic cycles.
Speaker Change: When we look at ATCO today, our investment portfolio provides customers with integrated and sustainable solutions.
Speaker Change: To maintain our exceptional dividend resiliency, our portfolio has been constructed to provide a balance between yield and long-term growth.
Speaker Change: As you'll see on the slide, we've stratified our investment focus between three primary areas.
Speaker Change: At the base of our portfolio, we look for a stream of stable and reliable earnings and cash flows for Acto, which supports new investments and provides surety to our dividends.
Speaker Change: We expect these investments to provide a consistent and stable yield.
Speaker Change: Our actual energy systems and utility businesses in Australia have these characteristics.
Speaker Change: Moving up in the pyramid, our middle category, we expect these investments to provide a balance between yield and growth.
Speaker Change: These have some cyclicality, but generally have the ability to outpace overall economic growth and drive better returns.
Speaker Change: Our structures and No Too Many Ports businesses are good examples of this profile of investment.
Speaker Change: And finally, at the top of our pyramid, we look for contributions to our portfolio that are more growth-focused, typically with less ability to contribute to the current dividend because of their need for growth capital.
Speaker Change: Our Atco N-Power business, for example, continues to generate adjusted earnings while having a large pipeline of opportunities within the renewable and clean energy businesses.
Speaker Change: These investment opportunities are expected to create meaningful growth within their own business and for our portfolio over the longer term.
Speaker Change: Naturally, as the top growth-focused businesses mature, we would expect them to start contributing additional cash flows to the parent as they evolve down the pyramid and we add more growth businesses.
Speaker Change: As you can see, this will allow the cycle to carry on.
Speaker Change: With that, I'll now pass the call over to Adam to further discuss our Atco Structures Businesses results.
Adam Beattie: Thank you Katie and good morning everyone. As Katie alluded to, ACCO Structures delivered another strong quarter with adjusted earnings of $29 million.
Adam Beattie: I'm proud to announce this is our ninth quartet in a row of delivering year-over-year adjusted earnings growth.
Adam Beattie: Structures has a proven track record of delivering upon our business strategy of sustainable based business growth and capitalizing on opportunistic major project opportunities to supplement this strong earning space.
Adam Beattie: We continue to invest in and outperform in our base business and have expanded this base into new disciplines such as multiple forms of modular residential products built within our industry-leading manufacturing operations.
Adam Beattie: Year to date we have seen our base business adjusted earnings grow over 20% compared to the prior year and we are expecting to maintain this growth percentage through to year end.
Adam Beattie: This growth continues to be driven by the expansion of our base business.
Adam Beattie: Major projects continue to be a strong supplement to these earnings and Structures continues to secure and build a healthy pipeline of work.
Adam Beattie: as evident in our recent project wins, including an $87 million and $78 million revenue projects in Australia.
Adam Beattie: Continued investment in our base business, particularly in our space rentals business, has allowed us to expand both our footprint of operating locations and our customer base.
Adam Beattie: Over the last nine months, we have opened five new locations, all of which we are seeing instant demand for our core products.
Adam Beattie: Looking at the year-over-year trends, our global space rentals business saw an increase in our total fleet size by 4% to just under 25,000 units.
Adam Beattie: that are well diversified geographically across the five countries that we operate. The number of units on rent increased by over 400 units, with growth in our average rental rate of 7%.
Adam Beattie: The average utilisation stayed around our targeted 75%, even with this pace of growth, which confirms we are able to move our new fleet onto contracted rental terms in a timely manner.
Adam Beattie: Our results in the quarter were also strengthened by the consistent performance that Triple M Housing continues to deliver. Since acquiring Triple M, the residential housing segment has been a valuable strategic addition to our business growth and capabilities that we can offer customers.
Adam Beattie: We expect the current backlog of opportunities in front of us to continue into 2025 as demand continues to increase for this product line.
Adam Beattie: During the quarter we were pleased to close the acquisition of NRB modular solutions.
Adam Beattie: As a reminder, NRB is a leader in manufactured modular multifamily residential, industrial, education and commercial buildings.
Adam Beattie: Since close, we have begun integrating NRB into our existing modular business operations.
Adam Beattie: This acquisition will play a key role in our long-term growth strategy as we continue to expand our fleet and other modular offerings across the country.
Adam Beattie: Structures views manufacturing as a key differentiator to our competitors in our market, particularly to those who only offer fleet assets.
Adam Beattie: who have limited control over supply and pricing of new products and the skills and capabilities in design, engineering, manufacturing and construction to solve customers' needs.
Adam Beattie: The purchase price of $40 million represents the book value of NRB.
Adam Beattie: subject to normal closing adjustments which are expected to be finalised by the end of 2024. The acquisition provides a viable and cost-effective alternative for structures to gain instantaneous manufacturing capacity and capability.
Adam Beattie: Accelerating Structures' position as a pan-Canadian modular solution provider. ACCO Structures is now the only national modular competitor that has fleet manufacturing and site construction capabilities across Canada.
Adam Beattie: As shown with our recent triple M housing acquisition, we have a proven track record of successfully integrating acquisitions into our structures business and are confident that our NRB acquisition will deliver value to ATCO structures.
Adam Beattie: I look forward to sharing additional updates on NRB over the coming quarters.
Adam Beattie: As we look at the remainder of 2024, we continue to focus on delivering sustainable earnings at Structures, driven by growth of our base business and the continued improvement of our skills and capabilities and as an innovative leader in global modular solutions.
Adam Beattie: We remain confident that there continues to be a solid pipeline of projects across Canada, Australia and the United States and we believe ACCO Structures is very well positioned and equipped to secure additional opportunities and continue to grow as we move into 2025.
I'll now pass the call back over to Katie.
Thank you, Adam.
Overall, ATCO had a great third quarter.
Speaker Change: Across our portfolio of investments, we continue to focus on executing our growth plans.
Speaker Change: As discussed earlier, we believe that the unique combination of investments in our portfolio and the work we've done to expand the earnings from these investments creates the foundation to support our growth aspirations going forward.
Speaker Change: That concludes our prepared remarks. I will now turn the call back to Colin.
Speaker Change: Thank you, Katie. In the interest of time, we ask you to limit yourself to two questions. If you have additional questions, you're welcome to rejoin the queue. I will now turn it over to Gaylene for questions.
Speaker Change: Thank you. To join the question queue, you may press star then 1 on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2.
Speaker Change: Once again, if you have a question, please press star then one. The first question is from Ben Pham with BMO.
Please go ahead.
Speaker Change: Can you talk or compare contrast these three buckets in terms of returns?
Speaker Change: how you structure the balance sheet between all the three. Obviously, the utility side, we're quite aware of.
Speaker Change: Yeah, I think, you know, rather than, you know, focusing necessarily on the returns, the important differentiator for HUSP here really comes back to...
Speaker Change: and they have a very stable earnings base that support a payout ratio north of 65% at least.
Speaker Change: As we move up into the next bucket, and as I kind of mentioned, I think you can look for generally the returns in these businesses to start to inch in towards the double digits.
Speaker Change: But because of the maturity that they're in and their cash flow profile, they do have the ability to pay out a dividend with a reasonable payout ratio, below 50%.
Speaker Change: But sort of north of that, probably north of that 20% depending on the maturity level of them. And then at the top...
Speaker Change: You know, some of these returns can definitely be more volatile, but we certainly look for these to deliver returns in that double-digit type of category. And in the interim, because of their growth trajectory, as I said,
Speaker Change: They they need the capital that they are generating to continue to fund their growth
Speaker Change: So, I don't know if that helps a bit to clarify. You know, obviously, as we look at our balance sheet, I mean, this is all, you can see it there. Right now, we are obviously quite weighted towards
Speaker Change: our utilities businesses, but over time, we want to generate a little bit more balance between the three categories that we have on the slide.
Speaker Change: Oh, interesting. And in terms of balance, I guess one-third, one-third. Is there any...
Speaker Change: situations to think about with the credit rating view on that, or...
and how your balance sheet could also change over time.
Speaker Change: driving its earnings contribution. So that is a, you know, the positive thing that we continue to have some diversification. But we are, as you noted, we're very mindful of our credit rating and trying to remain those strong investment grade ratings at the ACA level.
Okay, got it. Thank you
Speaker Change: The next question is from Rob Hope with Scotiabank. Please go ahead.
Rob Hope: Morning everyone. I want to stick with the strategy pyramid there. Maybe, you know, highlighting Frontech. Can you outline what...
Rob Hope: Successful look like at that business as it has had you know a negative negligible earnings impact over the last couple years
Rob Hope: Is there an opportunity to improve returns there or could we see you jettison some of the parts of the business that are not directly tied to the structures?
Yeah, I...
Speaker Change: Thanks Rob. I think the front tech business, particularly in the quarter you saw and a few things this year, has had some headwinds against it. I see it as a nice complement to our existing structures business in terms of the camp operations that we have. You know, we've been successful in...
Speaker Change: and being able to jointly bid in certain circumstances for some of those camps businesses.
Speaker Change: and we continue to remain optimistic that that will allow for growth opportunities in the future. But as I said, I think it is really a complement in the most part. The earnings base largely comes from the synergies with our structures business and that's sort of how I view it over the longer term.
Speaker Change: Thanks for that. And then maybe going back to your prior comments on balance between the three groups there.
Speaker Change: The CU call went on about how strong and improving the growth outlook is for the utility business.
Speaker Change: And as you take a look at ADCO specifically, like if there is to be balanced, you know, can you do it organically? Or if this is a real focus, would you have to rely on M&A and potentially some other, we'll call it growth and value investments?
Speaker Change: Sorry, just to clarify, do you mean on the utilities or generally like for the pyramid if we would need to do inorganic opportunities? Yes, generally for the pyramid, just to balance out the utilities.
Yeah, no, I think, you know, to...
Speaker Change: As I said, I think the structures business, as you've seen at the ACLA level, because of the, you know, 53% contributions from Canadian Utilities, has really picked up its momentum.
Speaker Change: the proportion of earnings of the ACCO when you look at the ACCO level. So I think there is the opportunity to be honest to see some of that balance come you know inorganically. That said you know as we look.
Speaker Change: we wouldn't shy away from inorganic opportunities, but our existing businesses are generating strong opportunities and so that would obviously be our first preferences for those businesses to generate additional growth options within their portfolio.
Thank you.
Speaker Change: The next question is for Maurice Choi with RBC Capital Markets. Please go ahead.
Speaker Change: Thanks and good morning. Maybe just speaking with SNL here for a moment. I just wanted to touch on the global workforce housing.
Speaker Change: and the fleet performance for that segment. Obviously, a little bit of a downward trend here that continues from the first half of the year, and I know it's got to do with
Speaker Change: What is the outlook for Canada and the U.S. and your ability to secure long-term rental contracts again?
Adam Beattie: Yes, hi Maurice, it's Adam. Yeah, the dip in utilisation there is directly related...
Adam Beattie: to quarter over quarter the Trans Mountain Pipeline project coming off.
Adam Beattie: been reduced or managed to a smaller portion of her overall fleet size, so we don't see
significant exposure on that. What we are seeing...
There's a lot of activity.
Adam Beattie: on some sale trade activity or the sale of camps that we manufacture both as noted with the two projects within Australia that are workforce housing and some other larger style, mid-larger sort of style contracts particularly around renewable projects within Australia.
Adam Beattie: There's always going to be an element within the US, but it's not as prevalent in the workforce housing market.
Adam Beattie: sell or redeploy rental contracts, some of that smaller portion of workforce housing fleet we have there. But the activity in that space is, I would say, solid going forward.
Speaker Change: Maybe as a quick follow-up, I know in the past there was a
Speaker Change: initiative and an intention to diversify the customer base beyond just the resource sector. Just your quick thoughts on where you are in that journey and if you could also comment about diversifying on regions beyond just industry, that'd be helpful.
Okay, so certainly diversifying customer base.
Speaker Change: for workforce housing style product, I think has, there's been some emerging industries rather than just mining and oil and gas.
some diversification, I guess.
new minerals, renewables, some other activity that's occurred.
also other forms where workforces are working remotely.
or needing it, also temporary housing.
requirements, particularly in Canada, disaster relief.
Speaker Change: housing response. So that product line has more diversity in terms of homeless response, diversity in its application to markets. And I think we've been quite successful in sort of spreading that mix of customer base.
Speaker Change: compared to what it was once previously. Regionally, particularly in places like Canada.
Speaker Change: into spreading that out into other provinces and in the US we have quite a small workforce housing fleet and in Australia we have quite a small workforce housing fleet as well but we're very active in new project opportunities there.
Alissa, thank you very much.
Speaker Change: The next question is from Mark Jarvie with CIBC Capital Markets. Please go ahead.
Speaker Change: Hi everyone. I'm not quite sure exactly the takeaway in the whole code strategy. It's just it's not obvious to me. The yield investments are growing at the utility. You're also doing more at Npower, so at CU you're seeing growth on both fronts.
Speaker Change: So the differentiation of the Holocaust strategy, I'm just trying to understand how the mix is evolving here, is the idea here that you can take structures growth...
Speaker Change: continues at a higher rate than historically or do you think there's some other elements that come into the growth buck at the top outside of what's happening at Canadian Utilities?
Speaker Change: Thanks, Mark. No, I should be, I just want to be super crystal clear that when I talk about balance on this that we're not, we're not talking about a third, one third, one third in that sense.
Mark Jarvie: Our utilities business will continue to be the foundation of our businesses over the long run, and we certainly hope that the growth that they provide will continue to be strong and robust.
Mark Jarvie: So I think, you know, as we look forward, we absolutely expect all three elements of this.
Mark Jarvie: to provide support for our dividend, which is absolutely obviously a paramount consideration for us in the long term.
Mark Jarvie: So, I think that, you know, we'll have, we will continue to have
Mark Jarvie: structures most likely continue to outpace the growth that we have seen in some of our utilities businesses.
Mark Jarvie: They continue to grow strongly, and our outlook for NPower also has a very strong forward growth trajectory that over the long term will allow it to become a bigger contributor to our dividend.
Speaker Change: So I think I don't know if that helps to clarify it all but I think it does
Speaker Change: A couple of faults on that is the idea that earnings growth overall at the holding companies should be at a higher rate than what you would see at Canadian Utilities. I don't know if Adam's in a position to say where you think sort of a like a base sort of run rate growth for structures could be absent M&A.
Speaker Change: Yeah, you know, as you've seen, ATCO has had a stronger growth trajectory because of the mix of businesses that we have.
and Canadian Utilities.
You know, there's obviously with...
with
over the longer term than some of those.
Businesses that we have would grow faster
Speaker Change: I don't know if, Adam, if you wanna comment. We won't provide specific guidance, but give a brief comment on kind of the long-term.
Speaker Change: sustainable learning scope that we have and our ability to continue to do that at Structures.
Adam Beattie: Yeah I think, morning Mark, I think we've really stabilised our base business in structures and
But I think what we're continually trying to do...
Adam Beattie: will continue as long as we execute on our strategy, which we've got good confidence around. And I feel we have the markets, particularly in places like the US, to continue, we have a profile for growth and residential housing at a steady rate of growth.
Understood. Okay. Thank you, Katie. They got him.
Speaker Change: This concludes the question and answer session. I'd like to turn the conference back over to Mr. Colin Jackson for any closing remarks.
Colin Jackson: Thank You Eileen and thank you all for participating today. We appreciate your interest in ATCO. We look forward to speaking with you again soon.