Atco Ltd

Thank you for standing by. This is the conference operator. Welcome to the ATCO Limited First Quarter 2024 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 1 on your telephone keypad. To do need assistance during the conference call, you may signal an operator by pressing star, then 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 the ATCO's first quarter 2024 conference call. With me today is Executive Vice President and Chief Financial and Investment Officer, Katie Patrick, and our President of ACCO 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 are speaking to you from our ACCO 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, the Kainai, and the Pagani Nations, the Tsitsinu Nation, and the Stony Lakota Nations, which include the Chukniki, Beerspah, and Good Stony First Nations. The city of Calgary is also home to the Métis Nation of Alberta, Districts 5 and 6. We honor and respect diverse histories, language, 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 supplementary presentation, and a transcript will be available on our website at ATCO.com and can be found in the investor 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 first quarter 2024 conference call. ATCO achieved adjusted earnings of $148 million in the first quarter this year. This is $11 million, or 8% higher than the first quarter last year. This $11 million of growth came primarily from the strong performance of our structures business, and the Alberta utility businesses. Collectively, this more than offset the expected downwards earnings pressure associated with the normalizing inflation profile in Australia, along with a decline in merchant power pricing and weather challenges that impacted Acton Power. I won't go into too much detail on Canadian utilities as we spoke to their performance on this morning's call, but I do want to reiterate that we continue to focus on delivering growth in 2024 and beyond. This year, we have an increase to our allowable ROEs from 8.5 to 9.28% across our Alberta-based utilities. We have strong regulatory prospectivity as our distribution utilities enter their third performance-based regulation cycles. Our gas transmission utility confirmed their two-year rate application, and electric transmission currently has rates set to the end of 2025. Transitioning to our other investments, ACCO Frontec delivered first quarter earnings that declined nominally from 2023 levels, primarily due to the closure of the Trans Mountain Expansion project camps. Now, two may continue to drive a strong quarterly level of earnings contributing $5 million in the quarter. ACCO Structures continued to deliver exceptionally strong results with adjusted earnings of $24 million in the quarter. over 25% higher than the prior year. Structures continues to deliver growth from the expansion of our base business and the optimization of our fleet, with major projects being a supplement to these earnings. To speak to this success of driving repeatable base business earnings and to provide an update on the Structures business overall, I'll now turn the call over to Adam.

Thank you, Katie, and good morning, everyone. As Katie alluded to, we had a great quarter and were able to build on our solid 2023 performance. Though our typical earnings pattern has a seasonal low in Q4 that carry into Q1, this quarter we were able to deliver performance more in line with the seasonal peaks we experienced in 2023. Moreover, we've delivered year-over-year improvement in first quarter results for five consecutive years now. 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, increasing the number of units we have on hire while improving our average rental rates by 12%. To reiterate, this is a strong first quarter result from our teams as we now move into the more active construction seasons in North America. Our expansion into residential housing sector by the triple M housing acquisition continues to perform with another great quarter. We see continued demand for housing coupled with recent federal government interventions to reduce the mortgage burden on first home buyers with changes to the home buyers plans and extending amortization on new home mortgages as continued evidence of improved opportunities in this business line for us. The residential housing segment has been a valuable strategic addition to our base business growth. Growth in our base business continues to be exceptionally meaningful to our overall results, as it contributes upwards of three quarters of our total earnings in a given period, providing earning stability and a platform to offer our other products and services. Our continued investment in our base business has enabled us to reliably backfill earnings from major projects with sustained quality earnings. To emphasise again, this quarter is a great starting point for the year and is reflective of our continued execution on our strategy to expand our business with a combination of base reliable earnings balanced with access to high growth markets that foster longer term growth potential. such as residential housing and permanent modular construction applications. As we look to the future, there continues to be a solid pipeline of real projects in Australia, Canada and the United States that we believe will drive additional opportunities and support further growth for structures. I'll now pass the call back over to Katie.

Thank you, Adam, and congratulations on another strong quarter of ACCO Structures. Overall, ACCO had a great first quarter. Colin and I appreciated speaking to many of our investors last week about our portfolio of businesses. We continue to highlight information to the investment community, which we will hope will bring light to pockets of unrealized value in our businesses. We look forward to keeping you updated as we progress on our growth plans throughout the year. That concludes my prepared remarks. I will now turn the call back to Colin.

Thank you, Katie and Adam. In the interest of time, we ask that you limit yourself to two questions. If you have an additional question, you are welcome to rejoin the queue. I will now turn it over 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 Rob Hope with Scotiabank. Please go ahead.

Good morning, everyone. I want to start off on actually two questions on active structures. As you kind of pointed out in your prepared remarks, the seasonality of this business was not quite what we would normally see here. So when you take a look at what areas Now, is this a situation where we're going to be moving away from that normal seasonality? Sorry, Rob. Rob, it's Colin. I'm sorry to cut you off. We're having a very hard time hearing you. You're cutting in and out. Could you maybe just try moving closer to your microphone and try again? Yeah, sorry about that. Is that better? That does seem better. Okay, sorry about that. Just in terms of the rateability of the structures business, it does seem like the seasonality is not quite what it was. Is this a situation where the base business is just growing at such a clip that you could be moving away from some of the more seasonal and cyclical parts of the business?

Hi, Rob. How are you? I think there will always be the seasonality cycle in our base business in North America, purely because of the weather conditions and how they impact the construction season. So there'll always be some seasonality. We've certainly tried to balance the structure of our business so we can reduce that seasonality impact in Q1 and Q4. And so I guess reducing the spread there is the main objective. And I think that's certainly an intention and we hope that that'll be seen further forward.

And Adam, if I may ask, the cyclicality that we once saw with the large camps, can you address that as well?

Yes, with the large camps, certainly we're doing a lot more in terms of other business lines outside of camps. That is what we call sale trade activity that is selling product that balances out that cyclicality of the workforce housing stream of business line as well. Whether that's education product, whether that's commercial industrial applications, residential housing, that certainly contributes to balancing out some of the peaks and troughs that we've seen in the major project activity in the past.

Thanks for that. And then maybe as a follow up, you know, just taking a look at the average rental rates, you know, global space was up 12%, workforce was down 35% year over year. Can you just talk to kind of what the key factors are that are driving that difference for each individual movement?

Certainly. So when you get workforce housing rentals come off, they come off on a larger scale of products at one particular time. So a lot of that is driven by Canada, where we've seen off-hires on Trans Mountain pipeline project and also the coastal gas link project. So a portion of that product has returned and that will need to be redeployed. So that's why that volatility in the utilisation rate tends to occur at a larger scale than what you would see in space rentals. Thank you.

The next question comes from Maurice Choi with RBC Capital Markets. Please go ahead. Please go ahead. The next question comes from- Hi, Maurice.

Hi, Maurice. We can't hear you. Not sure if you're on mute.

The next question comes from- Maurice. Sorry. I'll go to the next questioner. The next question comes from Ben Palm with BMO. Please go ahead.

All right, thanks. Can you hear me okay? Yes. Okay, great. First question I wanted to ask, your peers so far from a Canadian energy infrastructure landscape, they've been highlighting parallel data center potential opportunities. I'm curious from ACCO's perspective or through CU, your franchises, Alberta, Australia, is there any conversations you're having on that front where it's interconnects or power generation that you're at least having some discussions about?

Yeah, I can take that. Thanks, Ben. I think it's definitely an interesting trend for the industry as a whole. We all know the statistics around the need for power to drive some of the AI technology. And a lot of our peers have, candidly, a lot of our peers have strong U.S. portions of their business, which I think is where the majority of that action is currently coming from. That said, there's nothing to say that Alberta wouldn't be a good market for that. And in previous time, we did have inbound discussions related to Bitcoin data facilities, which have a similar profile of a high need for energy, a high need for space, and the cooler conditions actually in Alberta were conducive to that. So nothing to report as yet. Interesting something to watch. The one thing I will say is that for the most part, obviously Alberta's energy market is different in the sense of it not being within our regulated rates. So it would be a different profile should we look for those type of opportunities.

Okay. I'm not sure if someone asked this on this call here, the Alberta Power Generation segment and the native earnings coming from that. Are you able to share from an EBITDA perspective instead? Are you tracking or expecting to track in that initial range that you had previously highlighted?

Yeah, I may have you take that one offline with Colin and team on specifics on the modeling. I can point to, I don't think you were on the CU call, but generally we did highlight that we had a rough quarter for the renewables business. There's a number of conditions in Alberta, including drought, historically low wind averages, as well as the merchant pricing given the turbulence in the market were very low. So those all contributed to a difficult quarter for our renewables business.

Yeah, and Ben, maybe I'll just add that we can certainly take the EBITDA offline. The investor relations team and the Empower team are in discussions currently to see if there's perhaps some additional disclosure we can make in Q2. to help people understand the wind, hydrolysis, solar profiles, and the EBITDA a little bit better in those businesses. So stay tuned, and hopefully we'll have some slightly additional disclosure in Q2.

Okay, understood. Thank you.

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

Yeah, hi, everyone. On structured logistics, we saw a lower capex this quarter than we've seen the last couple of quarters. Is there something there where you're running a little lower and that business starts to generate more free cash flow or is it an expectation that investments will ramp up in the next quarter as you get back to sort of that capex profile we saw for the last couple of years?

Yeah, hi Mark, Adam here. Certainly, so what happened there is we obviously self-perform a lot of our fleet manufacturing and we manufactured a number of sale trade projects during that period. So it slowed down a little bit of our capital. We redirected our priority into those sale trade projects. So that capital will catch up back up over the next few quarters.

Understood.

Okay. And we're still forecasting to spend on our annualized budget. Okay.

And then when it comes to Triple M, can you just kind of, you know, maybe outline how that business is tracked since you bought it in terms of whether it's earnings, revenues, and just sort of the housing policy aspect here in Canada, what sort of the upside case could be and, you know, when that would, you know, sort of like relative to what you see as a base business in terms of, than maybe the upside scenario on that business?

Look, I think the business has been quite reliable quarter over quarter in their performance. They have a consistent backlog that's been quite realised, probably above what our expectations were on initial acquisition. So they've outperformed expectations so far today. We certainly think the activity in the market or the demand, the housing supply and demand gap, we'll see that continue over the next few quarters as we see more demand coming into their pipeline and also other external factors like some encouragement from the federal government around modular as a solution to part of the housing crisis, financial mechanisms that support first-time mortgage buyers and then also permitting and adjustments in policy municipal and local that could also encourage modular as a fast-term solution for some of the housing gaps that we've seen.

So is there like an LTM earnings that you can share to the carve-out of Triple M and then share what you think a reasonable earnings trajectory and growth rate should be?

No, not at this time.

Thanks.

Okay.

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

Thank you so much, and thank you to all of you for participating today. We appreciate your interest and echo, 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.