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Edited Transcript of ACO.X.TO earnings conference call or presentation 27-Feb-20 5:00pm GMT

Q4 2019 Atco Ltd Earnings Call

Calgary Mar 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Atco Ltd earnings conference call or presentation Thursday, February 27, 2020 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dennis A. DeChamplain

ATCO Ltd. - Executive VP & CFO

* Myles Dougan

ATCO Ltd. - Director of IR

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Conference Call Participants

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* Linda Ezergailis

TD Securities Equity Research - Research Analyst

* Mark Thomas Jarvi

CIBC Capital Markets, Research Division - Director of Institutional Equity Research

* Maurice Choy

RBC Capital Markets, Research Division - MD & Analyst

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the ATCO Limited Year-end 2019 Results Conference call and Webcast.

(Operator Instructions)

I would now like to turn the conference over to Mr. Myles Dougan, the Director of Investor Relations. Please go ahead, Mr. Dougan.

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Myles Dougan, ATCO Ltd. - Director of IR [2]

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Thank you. And hello, everyone. We're pleased you could join us for our fourth quarter 2019 conference call. With me today is Executive Vice President and Chief Financial Officer, Dennis DeChamplain; Senior Vice President and Controller, Derek Cook; and Vice President, Finance, Treasury and Risk, Colin Jackson. Dennis will begin today with some opening comments on our financial results and recent company developments. Following his prepared remarks, we will take questions from the investment community.

Please note that a replay of the conference call 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. And for more information on these risks and uncertainties, please see the reports filed by ATCO with Canadian securities regulators.

And finally, I'd like to point out that during this presentation, we may refer to certain non-GAAP measures, such as adjusted earnings, adjusted earnings per share, funds generated by operations and capital investment. These measures do not have any standardized meaning under IFRS. As a result, they may not be comparable to similar measures presented in other entities.

And now I'll turn the call over to Dennis for his opening remarks.

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Dennis A. DeChamplain, ATCO Ltd. - Executive VP & CFO [3]

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Thanks, Myles, and good morning, everyone. Thank you very much for joining us today on our fourth quarter 2019 conference call.

ATCO achieved adjusted earnings of $365 million in 2019 or $10 million higher than 2018. ATCO's ability to grow its adjusted earnings during a period of slowing global economic activity and significant political, economic and social change is a testament to ATCO's diversified portfolio and resiliency. Higher 2019 earnings were partially due to incremental earnings from ATCO Structures, which was busy working on the LNG Canada, Cedar Valley Lodge contract. ATCO Structures has also successfully repositioned its business to capture new opportunities and customers. ATCO Structures continued to grow its global space rental and workforce housing rental earnings in 2019 by adding to the existing rental fleet. They also opened a new space rental branch office in Colorado to supplement the established workforce housing business and growth in permanent modular construction in the United States. They have diversified their customer base in the last few years by expanding into permanent modular construction of multifamily housing, schools, hospitals and other institutional buildings. In 2019, permanent modular construction of hotels was added to the expanding list of diverse structures they can manufacture. They completed the manufacturing supply for Marriott Fairfield Inn located near Oakland, California. Manufacturing work for a second Marriott hotel in California is already underway and will be completed in 2020. These diversification opportunities supplement the ongoing workforce housing projects we are well-known for and continue providing for our global natural resource customers.

ATCO Frontec generated higher earnings in 2019 from additional North American camp services and maintenance contract, which include the Tuscan Ridge contract in Chico, California and a contract expansion at the BC Hydro Site C Two Rivers Lodge in Northern British Columbia. ATCO Frontec also continues to be busy with various facility operation and maintenance contracts for government and military organizations. In 2019, Frontec secured a contract extension with NATO in Bosnia and won a contract rebid with NATO in Kosovo.

2019 was also ATCO's first full year of ownership in Neltume Ports. Neltume recorded adjusted earnings of $15 million in 2019, $11 million higher than in 2018. Neltume completed another acquisition in 2019. In February of that year, they acquired an additional 15% ownership in the Terminal Puerto Arica port, bringing the total ownership to 50%. This acquisition gave Neltume operational control of the port and strengthened its port operator role in the concession. More recently, in January 2020, Neltume entered into a 50-50 joint venture partnership with Terminal Zarate to build and operate a roll-on/roll-off automobile terminal in Mobile, Alabama. This port is in construction now and is expected to be in operation in 2021. Their partner, Terminal Zarate, operates the largest roll-on/roll-off automobile terminal in Latin America. This investment opportunity in Alabama, allows Neltume to work with an experienced and respected partner while growing and diversifying by both geography and product type. Neltume Ports has been a steady earnings performer for us so far in our short ownership tenure. In 2019, there were some headwinds to increasing cargo volumes because of global trade disputes. But we see these issues as temporary and believe our investment thesis will hold true in the medium and long term.

On the energy side, Canadian Utilities continues to be a steady earnings contributor for ATCO in 2019. Maintaining stable year-over-year earnings was quite an achievement considering that 2018 adjusted earnings included $18 million associated with the Alberta Balancing Pool's termination of the Battle River unit 5 PPA. Canadian Utilities also recorded $6 million in earnings in 2018 due to an early energization incentive at Alberta PowerLine for completing construction ahead of schedule. Due to all the great work of Canadian Utilities' employees, they closed that earning gap in 2019.

In January, we declared a first quarter 2020 dividend with a 7.5% increase over the dividends paid in 2019. ATCO has increased its common share dividends every year for 27 consecutive years. We're very proud of that track record of dividend increases. ATCO's dividend payout ratio continues to be lower than the average of Canadian utility peer payout ratios. That lower payout ratio gave ATCO some additional room to grow the dividend while maintaining its financial strength. Going forward, we will continue to work to create additional value and create the right environment for future dividend increases.

That does conclude my prepared remarks, and I'll now turn the call back over to Myles.

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Myles Dougan, ATCO Ltd. - Director of IR [4]

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Thank you, Dennis, and we'll turn the call over to the conference coordinator now for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our very first question comes from Linda Ezergailis with TD Securities.

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Linda Ezergailis, TD Securities Equity Research - Research Analyst [2]

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I'm wondering if you could give us some context beyond just some of the trade dispute headwinds that you saw emerging last year related to your ports investment. Are you seeing any impact of the coronavirus on your ports business? And might you see some prospectively, how are you adjusting your outlook to reflect this development?

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Dennis A. DeChamplain, ATCO Ltd. - Executive VP & CFO [3]

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Thanks, Linda. There's been very limited impact that we've seen so far in our ports business. It's a diversified 16 ports that we have, but there's been no material impact yet on the -- as a result of the coronavirus.

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Linda Ezergailis, TD Securities Equity Research - Research Analyst [4]

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Okay. And that would be your expectation going forward? Or I guess it's a dynamic situation but...

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Dennis A. DeChamplain, ATCO Ltd. - Executive VP & CFO [5]

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Yes. Who's to know? I mean Europe went up in flames in just a few days. So we'll see, don't worry, we have our pandemic plans. Neltume has their pandemic plans. We're continuing to operate. And right now, we're -- our operations are not materially impacted.

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Linda Ezergailis, TD Securities Equity Research - Research Analyst [6]

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Let's all hope they continue not to be.

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Dennis A. DeChamplain, ATCO Ltd. - Executive VP & CFO [7]

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Yes.

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Linda Ezergailis, TD Securities Equity Research - Research Analyst [8]

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Yes. So furthermore, on your Neltume business, very interesting toehold into Alabama and a different type of roll-on/roll-off terminal. Can you talk about what sort of additional opportunities there might be in North America and what the cadence of those might be? And then can you comment on the roll-on/roll-off? Is that expected to be a significant new line of business for Neltume? Or is this more of maybe an opportunistic partnership?

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Dennis A. DeChamplain, ATCO Ltd. - Executive VP & CFO [9]

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Thanks for the question. In terms of North America, and I -- you talked about cadence. I mean the deal flow at Neltume is, I'll say, relatively high. They're continuing to operate -- to examine opportunities in North America, South America as well. They're kind of like the home base. So including ports in Canada, like there -- we're looking at opportunities there. The cadence in North America, in terms of partnerships -- or sorry, is a roll-on/roll-off of kind of a new element that we want to get into. I mean Terminal Zarate, they are the -- they operate the largest roll-on/roll-off in LATAM.

So to be able to partner with them kind of helps to potentially open doors for us with future roll-on/roll-offs as the business progresses.

Cadence, we -- when we made our investment in Neltume, there was -- a sizable amount of that purchase price was on Neltume's balance sheet to finance growth. They have eroded into some of that cash. They still have very healthy cash balance to fund their growth efforts. So right now, they haven't -- there hasn't been a cash call, so to speak, to fund new growth. They do have their growth funds and finances in place to continue to execute on a lot of these transactions that we've been seeing from Neltume.

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Operator [10]

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Our next question comes from Maurice Choy with RBC Capital Markets.

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Maurice Choy, RBC Capital Markets, Research Division - MD & Analyst [11]

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The first question I want to speak on is on structures and logistics, obviously, a fairly strong close to the year. I wonder if, firstly, you could give us a little bit of insight in -- as to the progress on the project related to Coastal GasLink, if any recent headlines and activities have caused your work there to change and if there is any earnings or cash flow impact into 2020.

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Dennis A. DeChamplain, ATCO Ltd. - Executive VP & CFO [12]

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Thanks, Maurice. We've got a couple of projects up in Northern BC. We do have -- we have, I'll say, completed the project for Coastal GasLink. And those camps are operating, so to speak, to the extent that our element is done and they're -- can't remember if that's -- was a sale or a rental for those Coastal GasLink projects. In terms of -- our other main project up in Northern BC is for LNG Canada, that progress -- that project is progressing, let's say, ahead of schedule. And I think that's what helped to give Structures maybe a bigger boost than where we were tracking throughout the year. The manufacturing has been going, I'll say, exceedingly well to date, and that allowed us probably a little bit more of a kind of an earnings uplift than what people were expecting. And that is unimpacted by any of the social unrest associated with Coastal GasLink.

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Maurice Choy, RBC Capital Markets, Research Division - MD & Analyst [13]

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I suppose, as a follow-up, are you expecting 2020 Structures and Logistics to be as strong as this year? Or should we think about it as being some of the 2020 results that would have been recorded has been pushed to 2019?

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Dennis A. DeChamplain, ATCO Ltd. - Executive VP & CFO [14]

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Yes, there's a little bit of kind of advancement from those 2020 earnings into 2019. We continue to secure new contracts in our ATCO Structures business, particularly in Australia and in the United States. They have a strong lead list. Say, we do expect 2020 to be a similar type of year for ATCO Structure in 2019 and perhaps even better if we can secure some of those additional leads.

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Maurice Choy, RBC Capital Markets, Research Division - MD & Analyst [15]

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Great. And my final question, just to finish off and perhaps a follow-up from the conference call that you just had. It's about dividend and dividend payout ratio. As you mentioned, there is some room in the ATCO payout ratio to rise a little bit further, and hence, there was a higher percentage of increase for 2020. What do you see as an appropriate payout ratio for an infrastructure company like ATCO? And to that end, who are the kind of peers that you think of when you set your mark?

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Dennis A. DeChamplain, ATCO Ltd. - Executive VP & CFO [16]

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Yes. Right now, given the heavy weighting of ATCO's portfolio in Canadian Utilities, I think ATCO probably around 80% regulated earnings through its investment in CU, that's where we're kind of -- those are my comments of -- compared to utility peers. And compared to conglomerates, what we're looking at for -- we're looking for growth at ATCO. Our dividend income in ATCO is kind of far in excess of its dividend outflow. So we are retaining cash in order to help the financial strength and fund growth prospects at ATCO. I think right now, we're -- we say, we're comfortable with that -- the payout ratio in ATCO in those -- in the 50% -- the 50s, I'll call them, for ATCO.

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Operator [17]

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(Operator Instructions)

Our next question comes from Mark Jarvi with CIBC Capital Markets.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [18]

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Just wanted to clarify a little bit on the commentary around the bit of the pull forward in Structures and Logistics? And just looking at the timing on some of the contracts in California and Australia, is the expectation then, even just for 2020, that the front half will be stronger than the back half? Or do you guys have a line of sight on potentially backfill in the back half of 2020 to kind of smooth out the earnings and growth at Structures and Logistics?

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Dennis A. DeChamplain, ATCO Ltd. - Executive VP & CFO [19]

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Yes. Good question, Mark. I don't have a quarterly forecast in front of me for Structures. We were slow out of the gate in 2019 in Structures, kind of back-end weighted into Q3 and Q4, especially as LNG Canada got rolling. So we'll continue to see LNG Canada rolling through Q1 and Q2. Given the -- my earlier comments about -- we expect a relatively similar year in ATCO Structures, maybe a little bit better if we can get some of the new leads, then the new leads would fill the back end of the year, and you'll see kind of more of a levelized -- a much more levelized earnings in 2020 than we saw in 2019.

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Mark Thomas Jarvi, CIBC Capital Markets, Research Division - Director of Institutional Equity Research [20]

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Okay. And then going back to the comments about opportunities in the port business and terminals and interestingly, first one here, North America through Neltume and -- but what about ATCO itself and taking maybe outside of Neltume, whether maybe you partner yourself with Neltume? Or what's the options for ATCO to put more of its own capital to work, maybe not directly through Neltume in that segment?

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Dennis A. DeChamplain, ATCO Ltd. - Executive VP & CFO [21]

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Yes. I mean, if it comes to ports, I mean, we'll -- I think the opportunities really come through Neltume. I mean we do have provisions if Ultramar, our partner, does not want to proceed, we could proceed. And vice versa, if they want to proceed and us not to proceed, then they could go for it kind of outside of Neltume. We haven't faced any of those issues yet, but the potential is there for us to -- either of us to go it alone, should we choose. That being said, we're probably not up the curve yet on our port operatorship expertise given our short run now.

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Operator [22]

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This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Myles Dougan for any closing remarks.

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Myles Dougan, ATCO Ltd. - Director of IR [23]

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Thank you, Anastasia. And thank you all for participating today. We appreciate your interest in ATCO, and we look forward to speaking with you again soon. Bye for now.

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Operator [24]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating. And have a pleasant day.