Atco Ltd

Thank you. Good morning, everyone. We're pleased you could join us for ACCO's second quarter 2024 conference call. With me today is Executive Vice President and Chief Financial and Investment Officer Katie Patrick. 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. Today we're speaking to you from our Ackle 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 Dakota Nations, which includes the Chikniki, Bearspaw, and Good Stony First Nations. I also want to recognize that the City of Calgary is home to the Métis Nation of Alberta, Districts 5 and 6. During our second quarter, we proudly celebrated National Indigenous History Month, a time to honor the stories, achievements, and the resilience of Indigenous peoples. We carry this message beyond the month of June in respect to the diverse language, history, ceremonies, and cultures of the Indigenous peoples who call these areas home. In terms of today's call, we'll hear from Katie, who will deliver comments on our financial results and recent company developments. Following today's remarks, we will take questions from the investment community. Please note that a replay of the conference call, a short supplementary presentation, and today's transcripts will be available on our website at adco.com following the call. The materials can be found in the Investors section under Events and Presentations. Today's remarks will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please refer to our filings with the Canadian Securities Regulators. During today's 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 investments. adjusted earnings before interest, taxes, depreciation, and amortization, or adjusted EBITDA, for ACCO structures and ACCO end power. These non-GAAP 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. 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. I'm pleased to report that AXA achieved adjusted earnings of $96 million in the second quarter this year. This is $9 million or 10% higher than the second quarter of last year. This $9 million of growth came primarily from the strong performance of our structures and Alberta utility businesses. During the quarter, and as part of our ongoing drive for operational efficiencies, we took steps to streamline our cost structure. We took a hard look at our corporate overheads and business units to ensure our teams are fit for purpose and aligned to our renewed growth ambitions. Heading into the second half of the year, our teams are refreshed, nimble, and laser-focused on executing our project pipeline. Moving to Canadian utilities, where I won't go into too much detail as we spoke about their performance on this morning's CU call. I want to reiterate that we continue to focus on delivering growth in 2024 and beyond. Our confidence to deliver growth within the utilities was reinforced in early May as we increased our Canadian rate-based compound annual growth rate to 3.5 to 4.3 through 2026. We continue to see very strong fundamentals in our core Alberta markets and opportunities to deliver even higher rate-based growth over the long term. In June, we announced our decision to move forward with Phase 1 of the Atlas Carbon Storage Hub, alongside our partner Shell. This multi-phase, open-access carbon storage hub is a major milestone in our commitment to advancing products and services which may contribute positively to society's goal of reducing emissions. This is the first step in AtoN Power's work to create a full value chain for hydrogen development. from production and carbon abatement to transport and export. The Atlas Carbon Storage Hub is integral to ADCO's long-term strategy and sustainability aspirations. For those who were unable to make this morning's CU call, the replay will be available on our website shortly. ADCO structures continue to deliver strong results, with adjusted earnings of $30 million per quarter, or 15% higher than the prior year. Structures continues to deliver growth for the expansion of our base business and the optimization of our fleet, with major projects being a supplement to these earnings. 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. This has increased the number of units we have on rent while improving our average rental rate by 10%. In Q2, Structures announced the strategic acquisition of NRV Modular Solutions. NRV is a leading manufacturer of modular multifamily residential, industrial, education, and commercial buildings. Structures will integrate NRV into an existing modular business operation, allowing us to service an extended market with additional manufacturing capacity in Ontario and British Columbia. This transaction increases our capacity in growing markets complementing our strategy for continuous fleet expansion. Further, the acquisition provides access to a large existing customer base and skilled employees, which NRV has built in these markets over decades of operation. Structure's proven history as a leading innovator and highly competitive global modular manufacturer will create invaluable synergies for NRV's future performance. The purchase price of $40 million represents the book value of NRB and includes the normalized working capital. Synergies will be created through ATCO's existing manufacturing expertise, enhanced sales from our retail grass networks of growing fleet assets, and our proven ability to improve operational processes. Operational improvements can include strategic sourcing, automation, process improvement, and economies of scale. We expect the transaction to close in the third quarter of 2024, and we're excited for the opportunity to maximize the value and synergy that NRB brings to our structures business as a market leader in modular construction across Canada. We have a proven track record in our structures business of successfully integrating acquisitions into the ACO portfolio. Modular manufacturing is a core competitive advantage, that structures have expanded over decades of continuous improvement. A recent example of this is our strategic expansion into the residential housing sector through our Triple M housing acquisition in 2023. The residential housing segment has been a valuable strategic addition to our business growth. Triple M housing continues to deliver strong results year over year. and it's developed a large pipeline of new opportunities, and it continues to provide synergy and value positioning us for future growth. Complementary additions like NRV will work conjunctively to build our industry-leading expertise across all of our modular platforms. As we look to the second half of 2024, we continue to focus on delivering sustainable earnings, driven by the growth of our base business and structures, While we anticipate a small dip in activity in Q3, we have line of sight to new projects in Australia that are expected to drive growth in Q4. We remain confident that there continues to be a solid pipeline of projects in Australia, Canada, and the United States that we believe will drive additional opportunities and support further growth for structures in 2024 and beyond. Overall, ASTHO had a great second quarter and first half of 2024. Across our portfolio of investments, we continue to focus on executing our growth plans. We believe that the unique combination of investments in our portfolio and the work we've done to expand the earnings from these investments create the foundation to support our growth aspirations going forward. We look forward to keeping you updated as we progress on our growth initiatives throughout the year. That concludes my prepared remarks. I will now turn the call back to Gollum.

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 now turn it over to the conference coordinator for questions.

We will now begin the question and answer session. 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 are using a speakerphone, please pick up your handset before pressing any keys. To withdraw from the question queue, please press star then two. Once again, anyone on the conference call who wishes to ask a question may press star then one at this time. And our first question comes from Maurice Choi of RBC Capital Markets. Please go ahead.

Thanks, and good morning, everyone. Just first questions on the NRB acquisition. Thanks for the color and logic behind it. Can you just discuss what the cost is for this transaction and your expectations in terms of annual earnings contribution from this deal?

Yeah, thanks, Bruce. So as mentioned, it's a $40 million acquisition, which includes the normalized working capital level. And as I mentioned, that is at the low value of the current assets held on the balance sheet for Dextera. We're not going to provide at this moment a forecast for the future earnings contribution, but as we said, we think there are very strong synergies as well as the strategic expansion into the new market that we think should help drive growth next year into our earnings base.

Got it. And maybe besides the slight difference between this deal and Triple M's businesses, can you just elaborate on how you approach this deal and should we kind of use the Triple M contributions in terms of the growth and the upside from the deal and using that as a blueprint for NRB?

Yeah, I would view the two acquisitions actually quite differently. You know, Triple M, while we did have residential manufacturing prior, really leveraged us into a new business segment. And we've largely kept the two businesses separate in the sense that, you know, they have a bit of a distinct dealer network in the way that they operate. NRB is quite a different proposition in that, you know, We are in this business. This gives us new locations, a strong set of new employees, as you said. But this is very much our core business. And it's a bit of a different, as I said, value proposition strategy in terms of creating operational efficiencies and synergies as well as things in a standard footprint.

So if I can move on to another deal that I think was disclosed on the CU side, the ECHO energy that was sold from CU to ECHO parent. Again, similar question, what's the logic here, cost and earnings contribution, if you don't mind?

Yeah, so when we took a look at our portfolio of businesses, this really had all of us greater strategic alignment to the actual level in terms of its focus on the customer, on the home. And, you know, we just made the decision to move Aqua Energy from the community utilities to Aqua Limited. You know, obviously that was done with full independent valuation, especially evaluating that transfer. In terms of earnings contribution, you know, I think we've We've seen a good growth trajectory in that business. It has grown in the Alberta marketplace. We continue to see opportunities for growth there. And, you know, we obviously have some different product lines that we hope will continue to drive our next growth as we go forward. We don't specifically segment or disclose that segment at this time, but we may think to do that moving forward.

Would it be quite similar to the net book value that you have in the CU balance sheet in terms of what's assets and liabilities held for sale? About 100 million bucks?

Yes, it's in a similar range, yes.

Got it. And just to sweep up on this one, I suppose philosophically speaking, CU was always viewed to be the energy and energy infrastructure side of ATCO's essential services pillar. you know, with Atco Energy kind of moving to the Atco side, it feels like there's a little bit of a change in that separation between CU and what's CU and what's CU within the Atco family. Can you just highlight where that has changed or is this more of an anomaly and one-off?

Yeah. You know, this It's an interesting question. I think, you know, we view X-Energy, which we collectively call a group of businesses that fall under that actual retail. That also includes our Blue Flame Kitchen, that's all managed under the same banner. And our Fresh Brights acquisition, that was the small Fresh Brights acquisition that we made last year. And really that, to us, is a retail-based, customer-oriented, customer-facing play. As we look to grow other businesses in there, particularly some of the product and service offerings there. You know, there's a bit of a divergence away from just direct, just typical energy portfolios. So I think it's not as clear-cut as just the Pierce Energy Services providers.

Once again, if you would like to ask a question, please press star, then one. And our next question will come from Rob Hope with Scotiabank. Please go ahead.

Morning, everyone. Just on the structures business, with another kind of roll-up MA on the manufacturing side, how do you think about your footprint and the potential for further roll-ups, whether it be in your core geographies or in new geographies?

Yeah, well, thanks for the question. This acquisition, I think, as I said, I think that it really positions us well, particularly in Eastern Canada, where we do have a branch network, but we did not previously have any manufacturing capacity. So we're really excited about adding that on to the footprint. We obviously have a strong position across Canada, and this really augments that. If you think about our other geographies, We do have a good, obviously another very strong business in Australia, and I think we could continue to look for opportunities for inorganic growth there. As we continue to build in the U.S., I think we will look for organic and inorganic opportunities there. But we've been relatively successful growing that business. from an organic perspective in the United States. So I think we will continue down that track and look for opportunities, continued opportunities in Canada and Australia in particular for acquisition growth.

Okay. And then maybe more broadly, with the kind of volatility in the global workforce housing and I guess a smaller size relative to the global space rentals, how do you prioritize capital between the two businesses and Could we continue to see a more focused global space rentals versus workforce?

Yeah, we continue to focus on driving that, as you've talked about as often, that base business of earnings that we have that come mostly from our space rental system, but also from our smaller workforce housing project. So when we talk about our, so to speak, non-base business, that's really from those large projects. that we've seen in the past that, you know, will come not necessarily in a very predictable manner. There can be strong benefits to our earnings when they do come. So in terms of ongoing capital allocation, you know, the priority, as you say, is continuing to build our fleet and continuing to build that base business frame. But you'll see some of the announcements we've made this quarter around some other projects that we're looking at. Those wouldn't be mega workforce housing projects. We would continue, you know, we would... email is part of our base business, and they are very strong contributors to earnings with a solid pipeline that we continue to have in that area. So, you know, we will target to continue to build this base rental business, but as the opportunities come, look to execute on those workforce housing opportunities as well. Thank you.

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, Andrea. Thank you all for participating today. We appreciate your interest in ACCO and we look forward to speaking with you again soon.

This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.