Atco Ltd

Thank you for standing by. This is the conference operator. Welcome to the second quarter 2025 results conference call and webcast for ADCO Limited. 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. To do your 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, Financial Operations. Go ahead, Mr. Jackson.

Thank you, and good morning, everyone. We are pleased you could join us for ACCO's second quarter 2025 conference call. On the line today, we have Katie Patrick, Chief Financial and Investment Officer, and Adam Beattie, President of ACCO Structures. 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, I am speaking to you from our Aqua Park head office in Calgary, which is located in the Tree 7 region. This is the ancestral territory of the Blackfoot Confederacy, comprised of the Sissica, the Kainai and the Pekani Nations, the Tsutina Nation and the Stony Nakoda Nations. which include the Chiniki, Bears Paw, 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 in Canada, a time to honor the stories, achievements, and resiliency of Indigenous peoples. May we continue to respect and celebrate the diverse history, languages, and culture of Indigenous peoples beyond the month of June. Today, we'll hear from Katie, who will deliver opening comments on our financial results and recent company developments, followed by an update from Adam on ACCO Structures. Following today's remarks, the team will take questions from the investment community. Please note a replay of the conference call, a copy of the presentation, and today's transcript will be available on our website at atco.com following the call. The materials can be found in the investor section under events and presentation. 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, including adjusted earnings and adjusted EBITDA. 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. And now, I'd like to turn the call over to Katie for her opening remarks.

Thanks, Colin, and good morning, everyone. Thank you all for joining us today. ATCO achieved adjusted earnings of $101 million, or 90 cents per share, in the second quarter, up $5 million compared to the same period in 2024. Steady growth in our Canadian utilities investment was driven primarily by growth in our rate base, across our regulated utilities at Energy Systems, combined with Higher Rates and ROE and Atco Gas Australia as they moved into their new five-year access arrangement. This growth more than offset the reset in the allowable ROE at our Alberta utilities and the conclusion of the efficiency carryover mechanism, which ended in 2024 for our Alberta distribution utilities. I want to highlight and congratulate the teams on our ability to find efficiencies and overcome these headwinds to still achieve growth. We also saw strong seasonal spreads in natural gas storage services at ACCO Empower over the quarter. ACCO Structures had another strong quarter, delivering adjusted earnings of $32 million, up $2 million compared to the same period in 2024. Higher adjusted earnings this quarter were driven by increased permanent modular construction activity in Canada and increased workforce housing sale activity in Australia and Chile. Structures delivered adjusted EBITDA of $70 million in the second quarter, and we are on track to exceed last year's annual EBITDA of $241 million. In our view, structures continue to be undervalued in the market when you assess our actual sum of the parts trading value. Its implied value is a significant discount compared to our peers, which traded 8 to 10 times EBITDA. We continue to successfully execute our strategy at AquaStructures, resulting in very strong and reliable growth for the business. A focus on fleet rental and sales, geographic diversity, and a reduced dependence on large projects continues to drive this growth. Adam will discuss the structures business further in his updates. Moving to ACCO Frontect, year-over-year adjusted earnings are up compared to the same period in 2024. This was primarily driven by operating efficiencies that have been implemented throughout the business. Within ACCO investments, our Nel Tumei Ports investment delivered adjusted earnings growth of $1 million compared to Q2 2024. In May, Nel Tumei broke ground on the Vancouver Bulk Terminal, a joint venture between Nel Tumei Ports, and Nautilus International Holding Corporation. This facility will have the capacity to export 3 million tons of soda ash annually and is expected to be operational by late 2026. As a reminder, our Nelzume investment benefits from its diversification with 17 multipurpose bulk cargo and container port facilities and five port operation services. Since our investment in 2018, we have already seen a series of significant geopolitical events, including COVID and trade uncertainty. Our results in this business have remained very resilient, and this investment is a strong proxy for the types of other investments we would look to make within this new investment segment. Looking at our cash flows, our standalone ATCO businesses, which excludes Canadian utilities, reported cash flow from operating activities of $192 million year-to-date, up over 30% compared to the previous year. This growth allows us to increase our capital spend and investment in the business, setting us up for success now and into the future. Year-to-date, the act with standalone businesses reported capital expenditures of $117 million, up $43 million year-over-year. Higher expenditures were primarily due to increased capital spending on rental fleet additions in AptoStructures, largely in the United States. With that, I will now pass it over to Adam to further discuss our AptoStructures business, including our performance across the key geographies we operate in.

Thank you, Katie, and good morning, everyone. Atco Structures delivered another strong quarter with adjusted earnings of $32 million, representing the 12th straight quarter in a row of delivering year-over-year adjusted earnings growth. Our global space rentals business continues to be a strong proxy of overall Structures' performance. Over the last five years, this business has seen an increase in their total fleet size by 54% to over 25,700 units that are well diversified geographically across the five countries that we operate. Strong growth has also been achieved in our average rental rate, all while maintaining an average utilization rate of 75%. In our first half of the year, growth within Arco Structures was driven by strong performance in Canada and Australia. In Q2 2025, we continued growing our market presence through organic strategic initiatives and investment in our base business. This included the expansion and optimisation of our global rental fleet and the addition of a new manufacturing facility in Australia. This new location in Brisbane will alleviate capacity constraints, enable our planned fleet expansion and provide capacity to meet demand for new infrastructure projects in the region. This further illustrates the resiliency and diversity of our business, the industries we serve and the geographies we operate in. As we look towards the second half of 2025, we see ourselves well positioned. Stimulated from our recent strategic acquisition of NLB, which expanded our modular manufacturing and housing delivery capabilities across Canada, combined with our market entry in multiple key locations within the US, we expect to see a number of project opportunities awarded before the end of the year. Expected market tailwinds combined with our increased market share and a continued prioritisation of our base business growth is encouraging. Beyond 2025, we continue to execute on securing a robust pipeline of new opportunities across our key product lines. Our long-term growth strategy is focused on housing expansion, base business growth via our rental fleet growth, new branch locations, and advanced manufacturing, which focuses on incorporating process technology advancement and new product lines in our operating geographies. We are confident in our market position and our ability to deliver our business growth objectives. I'll now pass the call back over to Katie.

Thank you, Adam. Overall, we had a strong first half of the year, driven by growth across our portfolio of investments. As we look to the second half of 2025, we will continue to focus on executing the strategy we set out for ourselves while capitalizing on opportunities when available as we drive continued share on our value. That concludes our prepared remarks. I will now turn the call back to Colin. Thank you, Katie.

We encourage you to join our Q&A queue. In the effort of time, we ask that you Limit yourself to two questions and rejoin the queue should you have another question.

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. Once again, anyone on the conference call who wishes to ask a question may press star then one at this time. The first question comes from Ben Pham with BMO. Please go ahead.

Hi, thanks. You referenced the aquastructures business in terms of implied multiple versus what we're seeing out there from peers. Can you comment? Is this the widest discount you've seen structures relative to? some of the comps you're looking at and maybe level set a conversation around like what are the key differences between your business and others?

Yeah, I can comment on the market activity. I would say no, I don't think this is the widest discount that we've seen. I think we have been working hard to narrow that discount and the business itself and the performance it's seen has really helped to make it clear to the market about the value that is in structures. But that being said, it is still in our minds trading at a discount. It's obvious, as I was saying, it's not, you can't just see exactly what structures it's trading at, but you can do the implied, some of the parts to realize the value there. So from a, you know, maybe I'll let Adam talk to some of the differential between the peers, but I would say we view ourselves as the global market leader in this sector, and Adam can maybe address that a bit.

Hi, Ben. Good morning. Look, I think key differences compared to other listed companies is the diversity and scale of our modular fleet. of where it's located but also the added value that we have within our organization of having 12 manufacturing locations globally that allow us not only to execute rental contracts but also a significant amount of sale trade contracts which is manufacturing new products and delivering turnkey solutions to customers which most of our peers that are listed do not have that capability. So I think that's a significant advantage in terms of your ability to unlock next phases of growth.

May I follow up? You highlighted a couple of projects on your press release, the structures. Are you able to comment, because in the past you've given some dates associated with some of these projects, restructures project, but this list here doesn't reference that at all. Are you able to share in terms of timeframe or expecting revenue benefit?

Yeah, most of the, I can quickly answer. I think most of the projects that we listed were projects that we were awarded during the quarter, and it's a non-exhaustive but indicative list of the types of projects that we are going after. So the majority of those are some smaller projects, but I think you would see the benefit of those within the year. But they are, for the most part, sort of run rate, just a good demonstration of the diversity of our project list.

And most of our projects, as soon as they're awarded, they move pretty instantaneously into execution phase.

Okay, understood. Thank you.

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

Good morning, everyone. Just wanted to chat about FONTEC. Obviously, since we last chatted on the Q1 call, Canada has committed to increasing its defense investments to the 5% of GDP by 2035. In the press release that you put out this morning, the contract wins that you have largely relates to structures and less so on FONTEC. So assuming this, you know, increased defense spending is optimistic for FONTEC, when do you anticipate seeing new contracts for this segment and any color you could give in terms of timing, pace, quantum, and nature of contract?

Thank you. Yeah, thanks, Maurice. You know, I think like many parts of the new federal government, we're very optimistic about some of the things that are being said around nation building projects within Canadian utilities and around defense spending in particular and housing for infrastructure. So there's three areas that we really think that we are very poised to benefit from as the federal government rolls out their political agenda. I think like most Canadians, we are waiting to see the actions come from the words and we're ready to act when it starts happening. So in particular, as it relates to defense spending and in the north, I think we are one of the best positioned Canadian companies that there is to benefit from that. Frontec has a long history of operating in the north, as does many of our other businesses, structures and Canadian utilities as well. So we are waiting for some of the contracts to start coming out. You know, I think it's difficult to give a specific timeline because it is in the hands of the federal government, a lot of these. But you did see that we did have a win already for the polar over the horizon radar in the north, a small win, but indicative of people acknowledging the strength of our business there. So I think, you know, we'll expect over the course of the rest of this year to start seeing some of those contracts where we could participate come out.

Understood. And if I could just finish off with a structured question. You've called out the multiple award schedule contract by the US GSA that was awarded to you, which enables you to sell directly through the GSA. Just trying to understand what this means tangibly for your earnings. Does it open you up to a larger pipeline, or is it about improving margins as you're cutting out like a middle person?

Yeah, it's early days in the accreditation. And like any of these government contracts, there's no specific specification of award volume at this point, but it's an access point to supply directly to the government. So it can be grown over a period of time. So the key is the relationship and the ability to supply direct to government. So I would say it's not focused on margin. It's focused on volume growth of activity, dealing directly with the government, with the US, and that's where we saw the aggression on.

Just to understand, what kind of products and services are we speaking about? It's modular building supply. Perfect. Thank you very much.

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

Thanks. Back in May, you issued some debt at the ACO limited level. Just curious in terms of the quantum that came, was raised, just where it all kind of went, and then just future capital needs, I guess, to keep growing structures and logistics, or where else you might be needing capital at the ACO limited level going forward?

Yeah, no, I mean, that was a... We issued $250 million of notes at the ACCO Limited level. We saw very, very strong demand for that offering, so we do know that there's appetite for continued capital to help fund our business. That was a bit of a clean-up of some of our credit facilities, including we had made the acquisition of ACCO Energy from Canadian Utilities, a few other items where we were cleaning up the corporate-level credit facilities. We also do have a facility in place at the structures level, where they have lots of room to continue to grow off that. And we would access continued external public funding, mostly in connection with larger investments that we might make or larger investments that structures may make requiring equity.

But on an organic basis, don't see a need to top up anything at this point in the foreseeable future? Yes.

On an organic basis, we don't, and structures will continue to draw on its facility to fund its organic growth.

Okay. And then just in terms of the federal policies, when you think about affordable housing, community housing, the northern and sort of defense spending, do you have a sense of what would be more of a needle mover overall for your company in the next sort of three to five years?

Yeah, like I can, I think, to be honest, the one that has the most momentum at the moment, there certainly is something to be said for the defense spending. But I think the one that has the most momentum at the moment, and we're actually seeing tangible progress is on the housing front. And, you know, we had, we were in the front page of the Calgary Herald yesterday. So I think I'll let Adam kind of talk to where we see some of that potential demand.

Yes, certainly I think the key there or the opportunity of the committed government spending around affordable housing presents and the specific recognition of prefabricated and modular, our physical manufacturing capacities and locations spread across Canada. I think is a viable opportunity for the government to rapidly expand the housing supply in that affordable attainable housing space and using the experience we have in delivering modular housing. Over 3,000 in the past seven years we've delivered of modular housings, low-cost affordable modular housing. So I think that's a significant opportunity and it's a capability that we have that aligns with the government's defined objectives there.

Is there any potential to provide more operating and disclosures around that sub-segment and sort of make it more standalone from the rest of of the structure and logistics, or at least more obvious, if you view that it becomes a high growth in an area that investors might reward you for? Is there an opportunity to highlight that better?

Yeah, absolutely. We'll take that one away and see how we progress in the coming quarter and take that away as a potential improvement to our disclosure. Okay. Thanks, everyone.

Once again, if you have a question, please press star then 1. The next question comes from John with TD Corn. Please go ahead.

Hi, morning, everyone. Maybe just picking up on that last question on the modular housing side. If that opportunity does pan out in Canada, as you're hoping, or maybe to the upside of maybe the mid-range, you know, scenario you're contemplating, Have you got the scale you need on the manufacturing side to fully capture that opportunity? Have you got a straightforward path to adding capacity if needed? How should investors understand your positioning there?

Yeah, so number one, I think the easiest way to put this is there's significant existing capacity on a single shift to supply to that opportunity immediately at scale. And then with manufacturing or modular manufacturing production capacities, then you can move to double shift production that rapidly increases your production output. And that's a very easy and accessible escalation of capacity before you even have to start moving on to new facility locations. Okay, that's great. Thanks for that. To put it into context, that's about 5,000 additional modules per annum, just on a single shift we have capacity for.

Okay, got it. Thank you. And then just more broadly on organic investment, you commented on that focus on organic strategic initiatives and flagged that new manufacturing facility in Australia, where else are the key focus points for you at this stage to make further investments along that line? You should be thinking of the U.S. as a key focus, just given that market's relevant fragmentation and maybe an update on the level of competition you're seeing in the U.S. right now on the structure side more broadly.

Definitely. Look, I think at our three primary markets of the US, Canada and Australia, still we feel have significant growth opportunities for us organically and inorganically. And certainly our footprint in the US, I think I've specified that before, is quite small in comparison to the market. I think the very encouraging thing for us in the US, we have a very good performing business model, we feel. There's been a lot of consolidation in that at the top end of that market. and it's rife for new competitors. And you're looking at some of the smaller regional competitors that are probably limited in their capacity to grow within those markets. So strategically, obviously, fleet growth, the housing market in the U.S., and manufacturing, additional manufacturing capacity in the U.S. will be areas that we look at sort of progress over our long-term strategic pathways.

Okay, 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. Please go ahead.

Thank you. And 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.