ATCO Limited (ATCO) has announced a 12% increase in adjusted earnings for the third quarter of 2024 during its earnings call on October 30, 2024. The company, led by Senior Vice President Colin Jackson and Executive Vice President Katie Patrick, reported strong performance in its Canadian Utilities segment and growth in the Structures and Logistics segment, attributed to increased global space rental activity and strategic acquisitions.
The acquisition of NRB Modular Solutions is poised to enhance ATCO's manufacturing capabilities, making it a national leader in Canada. The company is focusing on sustainable growth across its diversified portfolio, with a strategic emphasis on essential services in energy, logistics, and real estate.
Key Takeaways
- Adjusted earnings for Q3 2024 rose to $91 million, a 12% increase from the previous year.
- Canadian Utilities' allowable Return on Equity (ROE) increased to 9.28% in 2024, with a slight projected decrease for 2025.
- Structures and Logistics segment reported adjusted earnings of $29 million, bolstered by increased space rental activity and the NRB Modular Solutions acquisition.
- ATCO is finalizing the acquisition of NRB by the end of 2024, enhancing its manufacturing capacity.
- The company remains committed to diversification, maintaining strong credit ratings, and focusing on sustainable earnings growth.
Company Outlook
- ATCO is optimistic about growth opportunities, particularly in structures and utilities.
- The company aims to focus on sustainable earnings growth driven by its core business and a strong project pipeline across Canada, Australia, and the U.S.
- Growth is expected across all business segments, with structures likely to outpace the growth of Canadian Utilities.
- ATCO is committed to maintaining strong communication with stakeholders and focusing on long-term dividend support.
Bearish Highlights
- A projected decrease in allowable ROE for Canadian Utilities to 8.97% in 2025.
Bullish Highlights
- ATCO's Structures and Logistics segment saw significant growth due to increased global space rental activity.
- The acquisition of NRB Modular Solutions for $40 million is expected to deliver value and enhance manufacturing capabilities.
Misses
- The workforce housing segment is experiencing shifts due to the conclusion of major contracts.
Q&A Highlights
- Discussions included the balance between dividend profiles and investment returns across ATCO's portfolio.
- Confidence expressed in the sustainable growth of the U.S. residential housing market through strategic execution.
ATCO Limited's third quarter earnings call revealed a company on a strong growth trajectory, with a strategic focus on diversification and sustainable growth. The acquisition of NRB Modular Solutions is a significant step in bolstering the company's manufacturing capabilities and positioning it as a leader in the Canadian market. While there are shifts in the workforce housing segment, ATCO's broad portfolio and strategic focus on essential services are expected to drive long-term growth and support dividends. The company's leadership has conveyed a clear commitment to stakeholder communication and a balanced investment approach as it navigates the future.
InvestingPro Insights
ATCO Limited's (ACLLF) strong performance in Q3 2024 is reflected in its current market position and financial metrics. According to InvestingPro data, the company boasts a market capitalization of $3.86 billion USD, indicating its significant presence in the market. This aligns with ATCO's reported growth and strategic acquisitions, such as NRB Modular Solutions.
The company's P/E ratio of 13.79 suggests that investors are willing to pay a reasonable premium for ATCO's earnings, which could be attributed to its consistent performance and growth prospects across various segments. This valuation appears justified given the company's reported 12% increase in adjusted earnings for Q3 2024.
InvestingPro Tips highlight ATCO's strong dividend history, noting that the company "has raised its dividend for 31 consecutive years" and "has maintained dividend payments for 44 consecutive years." This impressive track record underscores ATCO's commitment to shareholder returns, which was emphasized during the earnings call discussion on balancing dividend profiles with investment returns.
Moreover, ATCO's dividend yield stands at 4.16%, which is particularly attractive in the current market environment. This yield, combined with the company's dividend growth history, supports management's statement about focusing on long-term dividend support.
Another relevant InvestingPro Tip indicates that ATCO "operates with a moderate level of debt," which aligns with the company's strategy to maintain strong credit ratings while pursuing growth opportunities. This conservative financial approach may provide ATCO with flexibility to fund future acquisitions and expansions, such as the NRB Modular Solutions deal.
For investors seeking more comprehensive analysis, InvestingPro offers additional tips and insights that could further illuminate ATCO's financial health and growth prospects. There are 7 more InvestingPro Tips available for ATCO, which could provide valuable context for the company's performance and outlook.
Full transcript - Atco Ltd (TSX:ACOx) (ACLLF) Q3 2024:
Operator: Thank you for standing by. This is the conference operator. Welcome to the ATCO 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. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Mr. Colin Jackson, Senior Vice President, Financial Operations. Please go ahead, Mr. Jackson.
Colin Jackson: Thank you, and good morning, everyone. We are pleased you could join us for ATCO’s third quarter 2024 conference call. On the line with me today, we have Katie Patrick, Executive Vice President and Chief Financial and Investment Officer of ATCO and Adam Beatty, President of ATCO Structures. And joining us for the Q&A portion of the call, we have Rebecca Kalmacof, the Chief Financial Officer of ATCO 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 ATCO Park head office in Calgary, which is located in the Treaty seven region. This is the ancestral territory of the Blackfoot Confederacy, comprised of the Siksika, the Kainai, and the Piikani Nations, the Tsuut'inu Nation and the Stoney Nakota Nations. This includes the Chiniki, Bearspaw and Good Stoney First Nations. I want to also acknowledge that the City of Calgary is home to the Metis Nation of Alberta, Districts 56. During the quarter, employees across Canada recognized the National Day for Truth and Reconciliation by walking together to honor indigenous communities and their experiences. Maybe continue to reflect, learn and respect the diverse history, languages, ceremonies and cultures of indigenous peoples as we move toward understanding, healing and reconciliation. Today, we'll hear from Katie, who will deliver opening comments on ATCO’s financial results and recent company developments, followed by an update from Adam on ATCO Structures. Following today's remarks, the ATCO team will take questions from the investment community. Please note that a replay of the conference call, a copy of the presentation and today's transcript will be available on our website atco.com following the call. The materials can be found in the Investors 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 non-GAAP and other financial measures, including adjusted earnings. 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'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. This quarter's results highlight our continued focus on our strategic growth objectives. I'm pleased to report that ATCO achieved adjusted earnings of $91 million in the third quarter this year. This is $10 million or 12% higher than the third quarter last year. These $10 million of growth came primarily from the strong performance of our Canadian Utilities business and resiliency across our other investments. At Canadian Utilities, growth in the quarter was driven by an increase in the allowable ROE from 8.5% in 2023 to 9.28% in 2024, as well as continued rate-based growth across our regulated utilities. Our non-regulated assets at CU also contributed to this growth, driven by increased demand and strong seasonal spreads in natural gas storage. As discussed on this morning's CU call, we do expect a reset in our utilities allowable ROE from 9.28% to approximately 8.97% or specifically 8.97% for 2025. 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. Over the long term, we continue to be bullish on the outlook of our utility’s businesses. As population and industrial needs continue to grow, we expect to see very strong fundamentals in our core Alberta markets and opportunities to deliver even higher rate base growth. Moving to structures and logistics, adjusted earnings were modestly lower compared to last year, primarily due to a provision for bad debt at ATCO Frontec. This was partially offset by continued growth at ATCO Structures, where we delivered adjusted earnings of $29 million $1 million higher than the same period last year. ATCO Structures 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. 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. 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 ATCO strategy and how it is distinct from the operational strategy of our core businesses, namely Structures and CU. Essential Services underpin our portfolio and our strategy consideration of continued investment in the energy, logistics and transportation, shelter and real estate segments. 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. When we look at ATCO today with integrated and sustainable solutions, to maintain our exceptional dividend resiliency, our portfolio has been constructed to provide a balance between yield and long-term growth. As you'll see on the slide, we've stratified our investment focus between three primary areas. At the base of our portfolio, we look for a stream of stable and reliable earnings and cash flows for ATCO, which supports new investments and provides surety to our dividends. We expect these investments to provide a consistent and stable yield, protection from cyclicality and growth in line or slightly above GDP. Our ATCO Energy Systems and Utility businesses in Australia have these characteristics. Moving up in the pyramid, our middle category, we expect these investments to provide a balance between yield and growth. These have some cyclicality, but generally have the ability to outpace overall economic growth and drive better returns. Our structures and Neltume Ports businesses are good examples of this profile of investment. 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. Our ATCO EnPower business, for example, continues to generate adjusted earnings while having a large pipeline of opportunities within their renewable and clean energy businesses. These investment opportunities are expected to create meaningful growth within their own business and for our portfolio over the longer term. 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. As you can see, this will allow the cycle to carry on. We continue to have significant growth aspirations across these existing investments and shareowners can expect the new investments we make will be tied to this proven strategy of investing in companies within the essential services space. With that, I'll now pass the call over to Adam to further discuss our ATCO Structures business' results.
Adam Beattie: Thank you, Katie, and good morning, everyone. As Katie alluded to, ATCO Structures delivered another strong quarter with adjusted earnings of $29 million. I'm proud to announce this is our ninth quarter in a row of delivering year-over-year adjusted earnings growth. Structures has a proven track record of delivering upon our business strategy of sustainable base business growth and capitalizing on opportunistic major project opportunities to supplement this strong earnings base. 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. 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. This growth continues to be driven by the expansion of our base business, primarily in the U.S, Canada and Australia and the optimization of our global fleet performance, which has a direct effect on increasing sale activity that is associated with the rental of a fleet unit, such as transportation, site construction activities to set up modular units and add on products and services. Major projects continue to be a strong supplement to these earnings and Structures continues to secure and build a healthy pipeline of work, as evident in our recent project wins, including an $87 million $78 million revenue projects in Australia. 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. Over the last 9 months, we have opened five new locations, all of which we are seeing instant demand for our core products. 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 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%. The average utilization 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. 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 sector has segment has been a valuable strategic addition to our business growth and capabilities that we can offer customers. We expect the current backlog of opportunities in front of us to continue into 2025, as demand continues to increase for this product line. During the quarter, we were pleased to close the acquisition of NRB Modular Solutions. As a reminder, NRB is a leader in manufactured modular multifamily residential, industrial, education and commercial buildings. Since close, we have begun integrating NRB into our existing modular business operations. We are supplying products to our existing operations based in Ontario and British Columbia, where we did not previously have manufacturing capability and extending our capabilities to service existing and new markets with a specialized manufacturing expertise. 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. Structures views manufacturing as a key differentiator to our competitors in our market, particularly to those who only offer fleet assets. We have limited -- 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. The purchase price of $40 million represents the book value of NRB, subject to normal closing adjustments, which are expected to be finalized by the end of 2024. The acquisition provides a viable and cost-effective alternative for Structures to gain instantaneous manufacturing capacity and capability, accelerating Structures position as a Pan-Canadian modular solution provider. ATCO Structures is now the only national modular competitor that has fleet manufacturing and site construction capabilities across Canada. 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. I look forward to sharing additional updates on NRB over the coming quarters. 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 as an innovative leader in global modular solutions. We remain confident that there continues to be a solid pipeline of projects across Canada, Australia and the United States. And we believe ATCO 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.
Katie Patrick: Thank you, Adam. Overall, ATCO had a great Q3. Across our portfolio of investments, we continue to focus on executing our growth plans. 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. That concludes our prepared remarks. I will now turn the call back to Colin.
Colin Jackson: 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 [Indiscernible] for questions.
Operator: Thank you. [Operator Instructions]. The first question is from Ben Pham with BMO. Please go ahead.
Ben Pham: Hi, thanks. Good morning. My first question is on Slide 6, the triangle and can you talk or compare contrast these three buckets in terms of returns, how you structured the balance sheet between all the three? Obviously, the utility side we're quite aware of.
Katie Patrick: Yeah. I think rather than focusing necessarily on the returns, the important differentiator for us here really comes back to Ben around the difference between the dividend profile of these companies. Obviously, as we look down at the bottom, when we think about our yield investments, they have very stable earnings base that supports a payout ratio north of 65% at least. As we move up into the next bucket and as I kind of mentioned, I think you can look for generally these the returns in these businesses to start to inch in towards the double digits. 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%, but sort of north of that probably north of that 20% depending on the maturity level of them. And then at the top, some of these returns, they 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, they need the capital that they are generating continue to fund their growth. So, I don't know if that helps a bit to clarify. 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 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.
Ben Pham: Interesting. And in terms of balance, I guess, is there any situation to think about with the credit rating view on that or and how your balance sheet could also change over time?
Katie Patrick: I should clarify. I don't think necessarily it would be 1/3, 1/3, 1/3, more generically balanced between the three. And as you've seen, structures has been an increasingly has become a much bigger portion of the ATCO portfolio in the last few years based on its driving its earnings contribution. So that is a 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 ATCO level.
Ben Pham: Okay, got it. Thank you.
Operator: The next question is from Rob Hope with Scotiabank (TSX:BNS). Please go ahead.
Rob Hope: Good morning, everyone. I want to stick with the strategy pyramid there. Maybe highlighting Frontec, can you outline what success would look like at that business as it has had a negligible earnings impact over the last couple of years? Is there an opportunity to improve returns there or could we jettison -- see you jettison some of the parts of the business that are not directly tied to the structures?
Katie Patrick: Yeah. I, thanks, Rob. I think the Frontec business, particularly in the quarter you saw and a few things this year has had some, 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. We've been successful in being able to jointly bid in certain circumstances for some of those camps businesses. We also have a good rather strong presence in the defense sector related to our North warning system contract and some of those items that I think have positioned us well over long periods of time. And we continue to remain optimistic 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.
Rob Hope: Thanks for that. And then maybe going back to your prior comments on balance between the three groups there. The CU call went on about how strong and improving the growth outlook is for the Utility business. And as you take a look at ATCO specifically, like if there is to be balance, 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?
Katie Patrick: Sorry, just to clarify, do you mean on the utilities or generally like for the pyramid if we would need to do inorganic opportunities?
Rob Hope: Yes, generally for the pyramid, just to balance out the utilities.
Katie Patrick: Yeah. No, I think, to as I said, I think the structures business as you've seen at the ATCO level because of the 53% contributions from Canadian Utilities has really picked up its proportion of earnings at the ATCO when you look at the ATCO level. So, I think there is the opportunity to be honest to see some of that balance come organically. That said, as we look, we wouldn't shy away from inorganic opportunities, but our existing businesses are generating strong opportunities and so that would obviously be our first preference is for those businesses to generate additional growth options within their portfolio.
Rob Hope: Thank you.
Operator: The next question is from Maurice Choy with RBC Capital Markets. Please go ahead.
Maurice Choy: Thanks, and good morning. Maybe just sticking with S&L here for a moment. Just wanted to touch on the global workforce housing 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 the conclusion of a long-term contract last year. It does look like Australia is strong, but can you speak to the outlook for Canada and U.S. And your ability to secure long term rental contracts again?
Adam Beattie: Yes. Hi, Maurice, it's Adam. Yeah, the dip in utilization there is directly related to quarter over quarter the Trans Mountain pipeline project coming off. I would say, if you look at the workforce housing market, our fleet size has obviously been reduced or managed to a smaller portion of our overall fleet size. So, we don't see significant exposure on that. What we are seeing is a lot of activity 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 midlarger sort of style contracts, particularly around renewable projects within Australia. There's always going to be an element within the U.S, but it's not as prevalent in the workforce housing market, mainly because their work is around certainly the Gulf region with some project activity there as they look for some expansion and then some disaster relief projects. But our fleet in Canada, we think there's a solid pipeline of opportunities to either 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.
Maurice Choy: Maybe as a quick follow-up. I know in the past there was a 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 would be helpful.
Adam Beattie: Okay. So certainly, diversifying customer base for workforce housing style product, I think, has there's been some emerging industries rather than just mining and oil and gas and some diversification, I guess, in 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, 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 compared to what it was once previously regionally, particularly in places like Canada, into spreading that out into other provinces. And in the U.S, 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.
Maurice Choy: Understood. Thank you very much.
Operator: The next question is from Mark Jarvi with CIBC (TSX:CM) Capital Markets. Please go ahead.
Mark Jarvi: Hi, everyone. I'm not quite sure exactly the takeaway in the HoldCo strategy. It's not obvious to me that the yield investments are growing at the utility. You're also doing more at EnPower. So, at CU, you're seeing growth on both fronts. So, the differentiation of the HoldCo strategy, I'm just trying to understand how the mix is evolving here. Is the idea here that you think structures growth continues at a higher rate than historically? Or do you think there's some other elements that come into the growth bucket at the top outside of what's happening at Canadian Utilities?
Katie Patrick: Thanks, Mark. I should be -- I just want to be super crystal clear that when I talk about balance on this that we're not talking about a third, one third in that sense. 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. So, I think as we look forward, we absolutely expect all three elements of this pyramid to grow. And as I mentioned, really the differentiation comes down to the ability of some of these different buckets provide support for our dividend, which is absolutely obviously a paramount consideration for us in the long term. So, I think that we'll have -- we will continue to have structures most likely continue to outpace the growth that we have seen in some of our utilities businesses. They continue to grow strongly, and our outlook for EnPower also has a very strong forward growth trajectory that over the long term will allow it to become a bigger contributor to our dividend. So, I think, I don't know if that helps to clarify at all, but --
Mark Jarvi: I think it does. A couple of thoughts on that. Is the idea that earnings growth overall at the holding company should be at a higher rate than what you would see at Canadian Utilities? And I don't know if there's items 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?
Katie Patrick: Yeah. As you've seen, ATCO has had a stronger growth trajectory because of the mix of businesses that we have, than Canadian Utilities. There's obviously with greater growth, some sometimes comes more cyclicality and risk, associated with it. But we would expect over the longer term that some of those businesses that we have would grow faster. I don't know, Adam, if you want to comment, we won't provide specific guidance, but give a brief comment on kind of the long-term sustainable earnings growth that we have and our ability to continue to do that at structures?
Adam Beattie: Yes, I think -- good morning, Mark. I think we've really stabilized our base business in structures and that has room for stable growth, possibly not at the level of say 2023 that was quite an extreme level of growth as we position certain parts of the business. But I think what we're continually trying to do and we're effective in doing it is filling that project work year over year with increased sustainable base level growth return. So, I think that 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 U.S. To continue we have a profile for growth in Residential Housing at a steady rate of growth.
Mark Jarvi: Understood. Okay. Thank you, Katie.
Operator: 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, Elaine, and thank you all for participating today. We appreciate your interest in ATCO. We look forward to speaking with you again soon.
Operator: This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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