Atco Ltd

Thank you for standing by. This is the conference operator. Welcome to the ATCO Limited fourth quarter 2023 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. 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 and zero. I would now like to turn the 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 ACCO's fourth quarter 2023 conference call. With me today is Executive Vice President and Chief Financial and Investment Officer Katie Patrick, and the president of aqua structures adam beattie 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 aqua park head office in calgary which is located in the treaty 7 region this is the ancestral territory of the blackfoot confederacy comprised of the siksika Kainai and Pagani Nations, the Tsitsinu Nation, and the Stony Dakota Nations that include the Chikniki, Bearspaw, and Good Stony 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. The call today will begin with some opening comments from Katie on recent company developments and financial results, followed by an update from Adam on our global structures business. After these prepared remarks, we will take questions from the investment community. Please note that a replay of the conference call, a short supplemental 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 or other financial measures, such as total of 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.

Thanks Colin and good morning everyone. Thank you all very much for joining us today for our fourth quarter 2023 conference call. Before we move into more detailed discussion on our results, I wanted to touch on a few significant achievements we had this year. In 2023, our business delivered adjusted earnings growth of approximately 2%. This highlights the strength of our diversified portfolio as we more than offset the impact of rebasing and the Australian inflation in our largest investment, Canadian Utilities. Structures had an absolutely incredible year. They impeccably executed on the strategy we have reinforced consistently to aggressively grow the base repeatable business. Prontech continued to backfill the project pipeline and as always were exemplars of our corporate values through their operation of two fire relief accommodation villages in DC and Alberta during the challenging 2023 wildfire season. And Natumi Ports increased ownership in a number of existing ports and entered into a JV with Nautilus known as the Vancouver Bulk Terminal. These are truly exceptional achievements and testament to the operational and management expertise that we have across our portfolio. Moving to our overall financial performance, ATCO achieved adjusted earnings of $432 million, or $3.82 per share for 2023. As I alluded to earlier, the diversity of our portfolio really showed its worth this year, with our non-utility investments more than offsetting the earnings pressure experience at our Canadian utilities investments. I won't go into too much detail on Canadian utilities as the team just spoke about these points on this morning's call, but I do want to reiterate that we entered into the year knowing that rebasing would create significant cyclicality for CU in 2023. So while the business did see earnings reset downward from 20 to 22 levels, CU delivered great performance and was well in line with our expectations for the year. Looking ahead to 2024, the Alberta distribution utilities within our CU investment moved into their third PBR performance-based regulation cycle. Consistent with the strategy utilized in the business's first two PBR cycles, the focus is on unlocking efficiencies that drive both premium returns and long-term customer savings. 2024 will also be supported by the recent generic cost of capital decision that increased our approved ROE to 9.28% versus the previous rate of 8.5% for all of the Alberta-based utilities within the portfolios. CU continues to provide ATCO a stream of stable and reliable earnings and cash flows, and these regulatory decisions reaffirm our view of the prospective and constructive nature of the regulatory system in Alberta. Moving to our other investments, ATCO's structures had an unprecedented year. Structures delivered adjusted earnings of $89 million in 2023, $35 million higher than 2022. This growth was driven by a number of items including the continued expansion of our base business, the successful integration of Triple M Housing, further optimization of our fleet, and the successful execution of a number of key projects. To speak to some of these successes and provide an update on the Structures business, I'll turn the call over to Adam.

Thank you, Katie, and good morning, everyone. As Katie alluded to, our Structures business continued to build year-over-year memento. and in 2023 realised significant earnings growth. At the centre of this growth was the continued realisation of our global base business expansion. We grew our global space rentals business significantly in 2023, while also increasing our branch network by six additional locations. This contributed to an increase in our fleet size, number of units on rent, and growth of 15% in our average rental rates. Space rentals remains the cornerstone of our base business and is a foundation for delivering not only sustained performance in this sector but also as a retail and operational medium to expand our offerings in workforce housing, manufacturing, residential housing, permanent modular construction, site construction activities and operations and maintenance activities. Growth in this base business is especially meaningful to our overall results. as it contributes between two-thirds to three-quarters of our total earnings in a given period, providing earning stability. Structures from this basis has been able to service the markets in which it operates with our other diversified products, services and capabilities. This geographical diversification and unique core competency mix sets us apart in the markets where we operate. 2023 also marked our first full year of operations in the residential housing sector, following the successful acquisition and integration of Triple M Housing, the largest modular residential housing provider within Canada. It is well known that attainable housing supply has a current and long-term shortage, and high demand has resulted in a significant housing crisis in Canada and elsewhere in the world. We continue to believe that modular housing is a necessary part of the solution to bridge the supply and demand imbalance. Modular housing provides the speed, quality and affordability that the traditional housing sector has been unable to accommodate in response to this demand. This business has made meaningful contributions since being acquired and its success in integrating and growing this segment displays our ability and commitment to excel in new business lines as we execute on our strategic growth ambitions. In addition to the success we saw in our base business and new market entry during the year, we continue to focus on securing and executing meaningful major projects. This includes the successful execution of the Bechtel Pluto 2 project, a 2,200 person accommodation village and supplemental parallel modular facilities in Australia. ACCO Structures continues to be a market leader in major workforce housing accommodation projects and other scalable accommodation needs, such as disaster response facilities and affordable multifamily facilities. In 2023, we delivered a 375-person accommodation village to support the critical recovery of a northern Alberta First Nation community that was devastated by wildfires. As we look to the future, there continues to be a solid pipeline of real projects in Australia, Canada, Latin America and the United States that we believe will drive additional opportunities and support growth. Our recent focus on both the United States and Eastern Canadian markets continue to deliver growth for us in the year, with signs of continuing demand to both secure new work and competitively position us to disrupt existing supplies in these markets. We continue to complement our ongoing organic growth with opportunities for inorganic plays, including those similar to Triple M housing acquisition, which allowed us to accelerate our position in a growing and complementary business line and added additional capabilities to further enhance our competitive offering to the market. Actostructures is potentially the only multifaceted modular provider in the market able to leverage its diverse capabilities globally. This affords us the ability to offer numerous products beyond fleet to a global customer base. Our structures business delivered fantastic results in 2023. featuring sustainable growth and the opening up of new markets via acquisition with the successful integration of Triple M housing into our business. We continue to distinguish ourselves from peers throughout our segment, diversity, geographical footprint and expertise in a variety of modular capabilities, including manufacturing, which completes us across our eight global production facilities. This manufacturing prowess is complemented by expertise in fleet management, project management, and the custom design and engineering of modular products. Collectively, these skills help differentiate us from peers and create the foundation for growth moving forward. And we look forward to sharing further accomplishments throughout the 2024 year. I'll now pass the call back to Katie.

Thank you, Adam. An exceptional year for Structures and definitely something to be proud of. Congratulations and a special thank you to you, Adam, and the Structures team for showing us just how strong our ATCO businesses can be. Overall, ATCO had an exceptional 2023 that saw us deliver year-over-year earnings growth despite meaningful cyclicality in our utilities investments. Our targeted capital allocation to non-utility investments and exceptional operating results truly help mitigate this cyclicality by growth in other portions of our portfolio. As we head into 2024, our Canadian utilities investment has the key regulatory decisions needed for prospectivity. Combined with numerous exciting strategic developments across our greater portfolio, I'm excited for 2024 and look forward to sharing our achievements as the year develops. Before wrapping up, I do want to give my sincere appreciation to Brian at CU. I truly enjoyed working with you and wish you all the best on the beach. I have big shoes to fill. 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 are welcome to rejoin the queue. I will now turn it back to the conference coordinator for questions.

Thank you. To join the question queue, you may press star, then one on your telephone keypad. You will 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 two. The first question comes from Maurice Choi with RBC Capital Markets. Please go ahead.

Thanks, and good morning, everyone. Katie, I know this morning CU called. There was a mention of the company needing additional equity to support its rate-based growth. Given that Atgo owns about 53% of CU, how should we think about your commitment to keep this ownership interest level? And if there is that commitment, how do you see yourself funding that?

Yeah, thanks, Maurice. Great question. You know, CU is absolutely a cornerstone investment for ATCO, and we will always be a meaningful participant in CU. To be blunt, we're not exactly wedded to the 53% ownership stake that we have, and as equity needs arise for CU, we will weigh those against the other investment opportunities we have in front of us at the time.

And then maybe just as a follow-up to that, you know, whether it's at 52%, but is there a minimum level, 25% or 40%, whatever the number is, that you are more comfortable as being your minimum holding?

No, I don't think we have a specific minimum holding. As I said, we will always be a very significant part of the ownership structure of Canadian utilities. So, you know, it will not be – I don't see ourselves becoming a minority participant in CU.

Thanks for the clarity. And just to switch over to Adam, I think you mentioned that an acquisition like Triple M helped improve your market position or add a capability to your competitive offering. If you look at the SNL business today, and obviously that's running pretty well, What areas do you think will warrant taking another action to improve your market offering or even add a capability?

Thanks Maurice. Well I guess we can probably look at it in a couple of angles. Number one, geographic dispersion. We've got a very good position geographically where we operate in Latin America, Australia, USA and Canada. We're obviously going to look at continuing to grow and be competitive in the markets where we exist to operate and we always look at project opportunities and new geographic positions as they come about. Secondly, probably more on the M&A side where I think you're alluding to, look, we will always look at strategic acquisitions in the markets where we see an acceleration potential to enter or a new opportunity where we can value into our existing products and services. So I guess the market is fairly open in terms of where we'll look, but we'll primarily look in the places we have existing operations already.

Understood. And just before I take that a little bit further, is there a specific business line that you would have always wanted to get into that, you know, current market valuations would help justify that?

I think we really like the existing business lines that we have. We module as obviously the primary function of what we do, be that manufacturing, fleet, workforce, housing, residential, housing, is obviously a new market for us. It's a very attractive market for us. We like it. We've successfully integrated the recent acquisition, so we have organic potential to expand that. And then we'll always look at alternatives to modular, whether that be componentised form of building products, alternative building products. We manufacture in timber, steel, containerised products, flat pack around the world. So anything that has a solution in that product line or services associated with it, I think is always attractive to us. We wouldn't move too far from that field, I wouldn't think, as we think we do those activities quite well.

That makes sense. And Katie, congratulations on your additional responsibility this year and look forward to working with you.

Thanks, Brian.

The next question comes from Linda with TD Cohen. Please go ahead.

Thank you. Just wanted to expand on Maurice's question about minimum level of ownership, recognizing that at this point, the expectation is that ATCO will remain a majority owner of CU. Beyond the financing demands that CU has, might there be some risk of energy transition opportunities potentially crowding out the resources beyond just capital needs and other non-energy at co-business platforms? Or do you see the synergies between your energy platform in the form of CU and other platforms just getting more compelling as you transition? to a lower carbon future?

You know, I think, Linda, I mean, to start, it would be, it's a great problem to have if we have so much growth that we're thinking about how we allocate our capital. And we're looking forward to it, and that's absolutely what we are expecting, that we have capital allocation decisions to make amongst the various businesses that we have. But, you know, to be clear that ASTHO wants all of our businesses to grow, and we will set up and structure and consider alternatives for how they finance their growth to make sure that there is no constraints on those growth. So that's really what we're focused on. And obviously, at the end of the day, there will be, from the ACCO perspective, decisions to be made about where we allocate our capital. But we will not constrain the growth of our portfolio investments to continue to access other forms of debt and equity to grow. I hope that answers the question.

Yeah, but beyond just the financing considerations, like what about other synergies in terms of cross-selling to various customers or stakeholder relationships in various geographies? Do you see maybe synergies becoming more compelling across your platforms between CU and ATCO over time or maybe diluting a bit? Can you comment on that as well?

Yeah, no, we've always had a one-at-co approach in terms of really trying to meet all of our customer needs, and I think we continue to see those opportunities across all of our business lines. You know, there's numerous examples where, you know, Frontec, for example, will go in, and they were early in Puerto Rico, just as an example, and that helped create the LUMO opportunities. So I think there's many areas where we can work collectively as businesses and share opportunities. And I think those, you know, we see those now and those should continue to be there as we move forward.

Okay, thank you. And just as a follow-up, maybe a little bit more of a pedestrian question. In your Niltuni ports, one of your terminals in Uruguay had its concession extended to 2042. Are there any other concessions that might be expiring in the next few years and at risk of not being extended? Or how do we think about the the tenor of your franchises on the Nel Tumi side in the ports?

Yeah, we have a number of different extensions and expiry of contracts that come up over time. And we continue to work, that's a big focus of what they're working on in terms of getting those extensions or creating new opportunities. So there's nothing that I would bring to note as a an important change coming forward in the near term, but certainly that is part of the business model of having to continuously look at the concessions that we have and continue to get the extensions. Great.

Thank you, Katie, and congratulations on your expanded role. Thanks, Linda.

The next question comes from Mark Garvey with CIBC Capital Markets. Please go ahead.

Yeah, thanks. Good morning, everyone. So, given the strength in instructional logistics business this year, good results, just curious how you think that translates and moves forward into 2024. Can you keep that business flat, or do you expect some contraction after a big year, and just give them where you think the backlog and the bulk of business is today?

Thanks, Mark. I'll let Adam handle this, but I think we're very optimistic about its ability to continue to grow, and we're very excited about the results in 2023, and we don't see those starting to contract in 2024. But I'll let Adam expand a little more.

Yeah, thanks, Mark. Good morning. Look, I think we've done a very good job from 2022 to 23 of backfilling our project business with some reliable, sustainable learning, some of that through organic growth, then also through the addition of Triple M. So I think our strategy warrants our ability to sustain and possibly expand on our growth prospects. And we feel that the market is quite opportunistic at the moment to continue on a solid and reasonable growth platform.

Okay. And then we talked earlier in this call about the equity needs at the CU level. How would you say the balance sheet is right now at ATCO when you think about doing tuck-in deals or expanding on the port business? How do you frame the position of the balance sheet today? ability to fund everything internally, and whether or not there'd be a funding gap over the next couple of years, depending if you did some M&A in the next couple of years.

Yeah, I think we have a very strong balance sheet, and we have the ability to finance the growth that's in front of us. From our experience in tapping the public markets for the hybrid for Natume, we do feel that there's good support for various forms of debt financing or hybrid-type instruments. And as needed, if we have growth opportunities in the ASCO-specific businesses, we would look to access those to fund that.

Just on your base funding plan today, do you see a need for hybrids or anything else like that in the next year or two?

It would be really dependent on non-organic growth, to be honest, if we are able to secure some inorganic growth opportunities. then we may need to access the public markets, but obviously those are not necessarily predictable at the moment.

Understood. Okay, thanks, everyone. Congrats, Katie, to the added rules.

Thanks. This concludes the question and answer session. I would like to turn the conference back over to Mr. Colin Jackson for any closing remarks.

Thank you, and thank you all for your participation today. We appreciate your interest in ATCO 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.