ATCO Ltd. (ACOX) Earnings Call Transcript

Thank you for standing by. This is the conference operator. Welcome to ATCO's Special Event Conference Call and Webcast. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the floor over to Mr. Colin Jackson, Senior Vice President, Financial Operations. Please go ahead, Mr. Jackson.

Thank you, and good morning, everyone. We appreciate you joining us this very special ATCO call. With me today is Nancy Southern, our Chair and Chief Executive Officer; and Katie Patrick, our Executive Vice President and Chief Financial and Investment Officer. Many of you will have joined the earlier Canadian Utilities and America. We will briefly recap the proposed transaction means for ATCO shareowners that spend most of our time on ACCO's next chapter. The businesses, the people and the opportunities that will define its future. For inquiries specific to this morning's merger announcement, we encourage you to refer to the materials available on the ATCO, Canadian Utilities and Emera websites with more information to be published in the forthcoming joint circular. Before we begin, I would like to acknowledge the traditional territories and homeland on which our global facilities are located. We are speaking to you our ATCO 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 sick, the Kainai, the Pagani Nations; the Cortina nation and the Stonicotanations, which include the Tinniki, BaresPaw and Godstone, First Nations. We'd also like to recognize that the City area is home of the May Nation of Alberta, District 5 and 6. We honor and respect the histories, languages and cultures of indigenous peoples. Today's remarks include forward-looking information, including expectations about the proposed transaction and future growth. Actual outcomes may differ materially. Please review the risks, assumptions and qualifications in the presentation, announcement and our securities filings. We will also discuss non-GAAP and other financial measures, including adjusted earnings and adjusted EBITDA. These measures are not standardized under IFRS and may not be comparable with measures used by other companies. Please refer to the definitions and reconciliations identified in the presentation. Unless otherwise stated, financial amounts are in Canadian dollars. And with that, I'll turn the call over to Nancy.

Thanks very much, Colin, and good morning, everyone. This is definitely a watershed moment for ATCO, and I wanted the opportunity to speak directly with our share owners about what it means for the company that you have all had confidence in and helped build. Today's agreement has 2 equally important outcomes. It brings Canadian Utilities and Emera together in a merger of equals to create a Canadian utility and energy infrastructure powerhouse. It's capable of succeeding in an era of unprecedented demand for secure, safe, reliable and affordable energy infrastructure. But just as importantly, it opens an exciting new chapter for ATCO as a new publicly traded company focused on providing industrial services to our global customers through our housing, defense, and investment business segments, which includes our ports and our retail energy business. For nearly 80 years, our people have built businesses that provide these essential infrastructure and services to communities and to countries. ATCO has earned, I believe, trust by doing very difficult work exceptionally well, often in places where distance, weather and other complexities make delivery especially demanding. These capabilities are central to the ATCO we are introducing today. As governments and industry look for partners to help provide more housing strengthened defense readiness and build resilient infrastructure, we see an opportunity to put that experience to work with greater focus and flexibility, complemented by an exceptionally strong balance sheet. I'll continue to serve as the Chair and Chief Executive Officer of ATCO after the separation is complete. And I'm genuinely excited about leading this next chapter with the people and businesses that have already demonstrated what they can achieve. We'll begin with the transaction and the 2 investments our shareowners will hold. We'll then look at the opening and investment record of ATCO before discussing where we see the opportunities ahead. So the purpose of this transaction is to get both companies a clear path forward. Canadian Utilities and Emera gain the scale and the capabilities as well as geographic diversification to pursue major energy investments together. ATCO maintains leadership with sharper capital and strategic focus for its own growth agenda. Our shareowners will participate in the success of both companies. At closing, ACCO shareowners will hold 2 separately investable positions, shares in the combined energy powerhouse operating at Emera and shares in the new distinct ATCO. Under the proposed arrangement, Emera will acquire all outstanding ATCO shares and the Canadian utility shares that are not held by ATCO so the publicly traded shares. In connection with the transaction, ATCO's housing, defense and industrial businesses will be spun off into the new public company, still named ATCO. The transaction is structured principally as an all-share combination. So for each existing ATCO share, you will receive 0.865 of an Emera common share and you'll see receive one share of ATCO. So that means direct participation in a larger, more diversified utility and energy infrastructure company alongside direct ownership of our housing, defense and investment businesses in ATCO. Each can be assessed on its own merits with a distinct strategy and a clear investment proposition. The combination creates a significantly larger and more diversified Canadian utility and energy infrastructure company with approximately $45 billion in rate base and operations anchored in exceptional jurisdictions, including 2 of North America's fastest-growing economies, Alberta and Florida. And of course, Australia, the Caribbean and Puerto Rico. For ATCO shareowners, the important point is that you continue to participate directly in the utility and energy infrastructure business, but through a larger platform with greater scale and financial capacity. For ATCO shareowners, that means continued participation in Canadian Utilities next chapter. Based on the terms announced today, you will also have approximately a 20% higher dividend income through the Emera shares you received, along with the dividend approved by new ATCO's Board following the close of the merger. Importantly, this combination comes after a period of exceptional performance at Canadian Utilities, which has brought its valuation multiple in line with peers. And we believe this is an optimal time to bring these two companies together. These are important benefits, but they are only one part of the opportunity for ATCO share owners. The other opportunity is continued direct ownership of ATCO. After separation, ATCO will have 3 complementary areas of business. Our housing business ATCO structure provides space rentals, workforce housing and permanent modular construction, including residential and community solutions across the housing and manufacturing continuing. Our defense services through ATCO Frontec and its Northern infrastructure, brings remote logistics facility operations emergency response and mission-critical support to defense contracts with deep experience in Canada's North and Alaska and long-established indigenous partnerships. And finally, our investment segment includes Neltume Ports, ATCO Land and Development and ATCO Energy, our retail energy company, giving us exposure to new ports, transportation and logistics, real estate, retail energy and the related services applied to those businesses. And what connects these businesses is our ability to build, deploy and operate in remote areas, in urban areas, essential infrastructure and services supported by patient ownership disciplined capital investment, and if I may say so myself, exceptional governance. These established businesses have clear mandates to pursue and the opportunities are extraordinary. This transaction enables our ability to invest in the Grays Bay road and port project, Arctic training camps, including long-term workforce accommodation and other military infrastructure such as hangers for the F-35. As the Canadian government and our Prime Minister have announced, security in Canada's Arctic is critically important to our cognition and ATCO will be there to support that. Importantly, following the close of the transaction, ATCO will proudly continue to be headquartered in Alberta. Now let me turn to the company behind that opportunity. After separation, ATCO will be a new listing, but the experience customer relationships, operating capabilities and leadership behind it, have been built over generations. We're giving those capabilities a clear place in the market. For nearly 80 years, ATCO has worked in more than 100 countries through different market cycles and in very different operating environments. The common red as being people who understand their customers find practical solutions and deliver on their commitments. As shown on this slide, the total shareholder chart reflects the value created through that approach without outperforming both the TSX and the TSX Utilities Index by a pretty large margin, I might add. That is a record built by generations of employees and supported by shareowners who have taken a long-term view with us. Our indigenous relationships are also an important part of that history. Across ATCO, we have built more than 70 partnerships, memorandums of understanding and relationship agreements with indigenous communities in Canada and internationally. We bring the same long-term perspective to this new ACO. It's pride in the businesses, our people have built discipline in how we invest and the ambition to keep creating value, true entrepreneurial spirit. Katie will now walk through the financial and operating foundation behind our next chapter.

Thank you, Nancy, and good morning, everyone. These businesses already have meaningful earnings and revenue base. This slide shows ATCO's historical results, excluding Canadian utilities. On that basis, 2025 revenue was approximately $1.5 billion, and adjusted earnings were $173 million. Adjusted earnings increased from $72 million in 2021 to $173 million in 2025, representing a compound annual growth rate of approximately 25%. These historical figures demonstrate an existing operating and investment record on which the new company will build on. At those 33-year record of consecutive dividend increases also reflects our long-standing focus on returns to shareowners. As it relates to future ATCO dividends, we intend to continue to be a dividend-paying company with the dividend being subject to approval from the Board at close and reflects characteristics of our new businesses. Structures will be the largest business in ATCO and an important part of the value recognition opportunity. It generated $274 million of adjusted EBITDA in 2025 and now has delivered 16 consecutive quarters of year-over-year earnings growth. It is a global business. 44 branches and 13 manufacturing locations across 5 countries. The valuation comparison on the slide illustrates the opportunity. Applying the peer multiple shown to structure trailing earnings applies approximately $2.4 billion of value compared with only $1.1 billion of current implied market value for all of the businesses outside of Canadian Utilities. The valuations for structures alone is a $1.3 billion positive valuation opportunity. When we factor in our other businesses, the positive valuation opportunity could be as high as $3 billion. While this is not a guaranteed valuation outcome, we believe that separation gives investors a much more transparent opportunity to value the ATCO businesses on their own performance and against relevant peers. ATCO brings a different but complementary capability, supporting operations where reliability, access and logistics are critical. It has a 42-year history of serving government and defense clients. This experience is particularly relevant in Canada's North and Alaska. The work includes supporting critical radar and military infrastructure where weather, distance and access all add complexity. Long-standing indigenous partnerships are integral to delivery in these regions. For investors, the distinction is that ATCO is not entering defense for the first time in response to current spending priorities. We already have significant contracts with Canada's Norad modernization the complementary Elasto radar system, Nano experience and has acted as a U.S. prime contractor on the USDA's worldwide expeditionary multiple award contracts. Our investment portfolio broadens the business and reflects the same discipline and long-term ownership. It is anchored by our 40% interest in Neltume Ports, alongside ATOCO land and development and ATCO nergy. Together, these investments provide exposure to ports and logistics, real estate and energy, all of which we believe are in central services going forward. With that, I'll turn the call back to Nancy to discuss how this portfolio is post for the opportunities ahead.

Thanks very much, Katie. This next chapter is, I believe, especially compelling because of the connection between our expertise and the macro demands that we see around us. We're bringing established capabilities to areas where governments, communities and industry are looking for practical solutions as the world turns to the newer trends of affordable housing, and defense security. Housing is a clear example, and there is a global need for more homes and a way to deliver quality housing solutions equip more quickly. Our modular business serves the housing continuum from supportive and affordable housing to attainable and market housing, supported by an established manufacturing footprint. On comparable conventional wood frame projects, our factory-built modular approach has demonstrated the ability to build 3x faster. That is a practical advantage when customers are looking for speed, quality and greater certainty in delivery. And beyond residential housing, the ongoing global infrastructure build-out also requires places for people to live and work while major projects are constructed. Our workforce housing and space rental capabilities are extremely relevant to that need. Defense and Northern infrastructure provide a second important opportunity. There's approximately $180 billion in defense procurement opportunities ahead of us and $290 billion in defense-related capital investment over the coming decade, primarily in Canada's Arctic. The emphasis on the Arctic is increasing the need for infrastructure, logistics and reliable operations in challenging environments. Now while many of the defense contracts have been -- had a slight delay in being issued. Together, our housing and defense businesses believe that the timing for ATCO to become this clear, separate and purpose-built company could not be better. We can bring manufacturing, accommodation, logistics, and operating expertise to needs that are closely connected. A more focused company gives us the opportunity to pursue those needs with a clear strategy and a dedicated attention to detail. The transaction also gives investors a clearer way to understand the value of these businesses, as Katie explained. And today, ATCO is often assessed primarily through its interest in Canadian Utilities. That can make the earnings growth and investments in our other businesses harder to see. As a stand-alone company, ATCO can be evaluated against businesses in housing construction services, defense and related industries. It will provide and produce a clearer view of what we own, how the businesses perform and where we see attractive opportunities to continue to invest. There are three steps to that work. First, build understanding amongst investors whose interest aligned with the strategy; second, make the performance and capabilities of structures more visible and comparable with relevant peers. And third, bring the same clarity to the value and opportunities of our other businesses and investments. This transaction and the execution of our plan will showcase that ATCO will be well capitalized on day 1, including expected cash balances of over $700 million, no corporate debt and strong access to capital allowing our businesses to reach their true growth potential. The next chapter for ATCO is focused on 4 key areas. First, a new listing with a proven operating track record. The businesses, customers and leadership are established, supported by nearly 80 years of experience and a record of earnings growth. Second, capabilities built for complexity. Modular construction, remote logistics and mission-critical operations are areas where our teams have demonstrated their ability to deliver when speed, reliability and resilience matters. Third, a clear path to value recognition, direct visibility into the structures, Frontec and other investments allows investors to evaluate each business and the way we deploy capital across our portfolio. And fourthly, continuity and stewardship. Our principal control and family ownership, relationships and reputation have encouraged us to think over generations while remaining accountable for the results we deliver every day. That is the company I'm excited to lead. And today's announcement creates an opportunity to do more with the businesses and capabilities our people have built. At a time when those capabilities are needed, and it gives ATCO share owners 2 distinct ways to participate through the combined energy company and through the next chapter of ATCO in cell. Thank you for your confidence in ATCO and for joining us today. And I'll now turn the call back to Colin.

Thank you, Nancy and Katie. In the interest of time, we ask that you limit yourself to 2 questions. If you have additional questions, you are welcome to rejoin the queue. I'll now turn it back over to our conference coordinator, Jamie for questions.[Operator Instructions] Our first question today comes from John Mould from TD Securities.

Apologies. Yes, I was muted. Just maybe first for Nancy. ATCO has been involved in CU as a business since the early 1980s. I think it's fair to say progressed in terms of laying out a longer-term vision for the investment opportunity in Alberta, more recently with its latest capital plan disclosures. From your perspective, as ATCO. What made this the right time for this transaction?

Thanks very much for the question, John. The timing is right because the amount of opportunities in the utility sector today require a significant capital investment, as you've mentioned. And we feel that in this complex world, scale is going to matter. Now there's not a lot of synergies when you look at different utility operations in their own jurisdictions. But where the scale will matter is in our supply chain through our customer contacts, our ability to advance new projects. And with the scale that this merger brings gives us the, I believe, the ability to compete worldwide for very large-scale infrastructure projects of the future. We see that in Canada, the Prime Minister wanting to have transnational electrical grid. That's a big opportunity when you look at Nova Scotia to Alberta. Florida, one of the fastest-growing regions for electrification and also natural gas, but not for heating necessarily, but there is also a real push in the maritime region for natural gas distribution to move off oil products. And then when we look at the north, I think the complementary aspect of the utilities requiring to build large-scale electric potentially gas infrastructure to accommodate these new bases that the industrial defense policy as outlined really makes a great opportunity, a business of scale. And so complementary to that is our ability to put in the -- from an ATCO perspective, all of the modular factory built, housing, warehouses, office space, schools, the entire complex required for development in Canada's North. And then I also see a tremendous and we're actually experiencing that all of our factories right now and that's for attainable housing, but also for a large-scale mining camps. The mining industry has been really pushed to start developing in North America and Australia and in South America. -- more and more of the critical minerals required for the data centers, all of those aspects. So we feel that it's the right time to be able to focus on the manufacturing, the opportunities there as well as have the scale for our utility infrastructure powerhouse, we're calling it and truly be Canadian in our ability to compete anywhere in the world.

Okay. And then maybe just one on the future ATCO, maybe more for Katie and the funding side, how do you think about the scale of the platform as it exists today? And what does this transaction do for the business in terms of how that platform could evolve down the road in terms of opportunities for incremental acquisitions? Do you feel that you've got the existing facilities to drive the growth that you see possible? And then how do you think about the funding aspect of that just within what will be at least on a headline basis, a smaller organization structurally than what you've had historically with the CU piece under the broader AGCO umbrella.

Yes. Thanks, John. I think absolutely no doubt, actual will come out of a smaller organization more nimble, more focused on its investment portfolio that it has. But we took a lot of time in how we designed this transaction. And as Nancy noted in the comments, we will come out with no corporate level debt in excess of $700 million in cash. And for a -- on a relative basis to the size of the company, it's a very significant position of liquidity and strength to begin with. We have a number of relationships and partnerships. The investigated opportunities already for the liquidity we'll need to make sure we have the capital to grow. And it is a different company. We won't have the continued need for the large amount of debt and capital in the utility. So we feel very comfortable in the financial position for the company we're going to create and then our ability to find new opportunities for growth and be able to finance sales as we move forward.

Could I just add in -- all of you are way too young to remember where ATCO started. And also the fact that when we acquired Canadian Utilities in the 1980 we did that with $350 million and we built Canadian utilities into the company that it is today represented in this merger. All through all of that, we've been able to grow and build our businesses on the ATCO side, which have been overshadowed by our utilities. What I would like to say is that I actually feel that post the merger and the full transaction closure, you're going to see a very interesting ATCO, entrepreneurial, ready to go and compete not afraid of remote and harsh conditions and a track record of people that have experience, whether you may remember, and we were in Afghanistan. We had 650 people inside the fence at Kandahar Air Force Base. We continue to have contracts in Bosnia under NATO. The North Warning System facilities, operations and maintenance, that is only going to grow with Nora modernization. Over the Horizon polar radar, the ports, the dual dual-use ports at Graves Bay for military naval execution as well as mining and shipping up goods out of the mining sector in the Arctic it's a very large realm of possibility for us. And the fact that we have no debt to start with right now gives me great confidence that these projects that we'll be able to take on will actually -- I think we'll be here 2, 3, 5 years from now, and be amazed at what we've actually been able to accomplish. In our ports business, we're about to commission a new port in Washington state. We have 2 big ports at various stages of FID in Brazil and the Grace Bay project in the Arctic. So there's going to be a need for additional liquidity but having no debt at this point in time gives us tremendous flexibility to do all of these things that we're pursuing.

Okay. Thank you very much for those detailed answers. I'll leave it there. Congratulations on the transaction.