Atlas Corp. (ATCO) Q1 2022 Earnings Call Transcript

Atlas Corp.  (NYSE: ATCO) Q1 2022 earnings call dated May. 12, 2022

Corporate Participants:

Will Kostlivy — Head of Investor Relations

Bing Chen — President and Chief Executive Officer

Graham Talbot — Chief Financial Officer

Analysts:

Liam Burke — B. Riley — Analyst

Chris Wetherbee — Citi — Analyst

Peter Curtis — Chief Commercial Officer

Ken Hoexter — Bank of America — Analyst

Presentation:

Operator

Welcome to the Atlas Corp First Quarter 2022 Earnings Conference call. I would like to remind everyone that this conference call is being recorded today, May 12th, 2022.

I would now like to turn the call over Will Kostlivy, Head of Investor Relations at Atlas Corp.

Will Kostlivy — Head of Investor Relations

Thank you. Good morning everyone, and thank you for joining us today to discuss Atlas Corp’s First Quarter 2022 Earnings Report. We issued our earnings — released yesterday evening after market close. We will refer to our quarterly earnings release, accompanying earnings presentation and earnings supplemental workbook today in this conference, which all can be found on the Investors tab of our website atlascorporation.com.

I would like to remind you that our discussion today contains forward-looking statements and I draw your attention to the disclaimer on Slide 2 in the accompanying earnings presentation. Please note that we report non-GAAP measures, which we believe provide investors a clearer understanding of the performance of our businesses.

The earnings release contains supplemental financial tables and information pertaining to our quarterly earnings report and includes definitions of non-GAAP financial measures and reconciliations of such non-GAAP measures to the most closely comparable US GAAP measures. These definitions may also be found in the appendices at the back of the earnings presentation, which we may refer to in our call, and can be found on our website.

Please turn to Slide 3. On the call with me are Bing Chen, President and CEO of Atlas Corp; and Graham Talbot, Chief Financial Officer of Atlas Corp. Joining us on the call during the Q&A session is Seaspan’s Chief Commercial Officer, Peter Curtis; and Seaspan’s Chief Operational Officer, Torsten Petersen. Following our prepared remarks we will open up the forum to a question-and-answer session.

With that, I’m pleased to now turn the call over to Atlas Corp’s CEO, Bing Chen.

Bing Chen — President and Chief Executive Officer

Thank you Will, and good morning everyone, and thank you for joining our call. Today, my comments will focus on key developments at Seaspan and APR, and then I will hand over to Graham Talbot to present our Q1 2022 results and financial updates.

Please turn to Slide 4. I would like to start by reviewing our major developments at Seaspan. In the quarter, we continued to benefit from a robust market, as up to a 15% of our fleet is based on floating index rates and we continued to develop our long-term strategic partnerships with our customers.

Leveraging our creative customer solutions, we forward-fixed 18 vessels with a global liner customer, contributing over $150 million to our gross contracted cash flow of $18.1 billion. This leads to no charter roll-offs in 2022, only eight in 2023 and 16 in 2024 as of the quarter end. We continue to diligently execute our newbuild program. In April, we delivered the fourth vessel of our 40 vessel newbuild program of which have been delivered ahead of the schedule.

With our track record of successfully delivering 114 newbuilds since our IPO in 2005, we are confident in delivering this unprecedented program on schedule and on budget, with possibilities of some early deliveries, despite all the logistic challenges. We also continued to taking advantage of the current market to recycle capital through the divestment of non-strategic assets.

We completed one vessel sale in Q1 and three additional vessel sales are in advanced stages of divestment as of the quarter end. Going forward, we will continue to seek opportunities to optimize our fleet and recycle capital, which Graham will share more about later.

During the first quarter, our vessel utilization rate was 98.5%, slightly below our average historical rate. This is due to the unplanned off hire of one vessel and minor COVID cases on three vessels. We also achieved historical low lost time injury frequency of 0.26 as we continued to focus on the safety of our people. Our team’s seamless execution, differentiated business model, together with our consistent operational excellence and a strong container-shipping fundamentals drove our strong performance in this quarter.

Please turn to Slide 5. Now let’s review some key developments at APR. In the first quarter APR entered into three new deployments, which includes a renewal of APR’s IID contract in California of three turbines for 74 megawatts, a new market contract for eight turbines in Brazil for 226 megawatts and the dry leasing of five turbines for 120 megawatt for a total of 16 turbines deployed.

We continued to transform the business by strengthening APR business development focus on long-term contracts. The recent extension of APR’s Brazil contract from 12 months to 44 months evidences the successful execution of its strategy to migrate to long-term cash flow contracts.

As mentioned at our Investor Day, APR completed its five-year contract in Argentina in January and added the Zappalorto plant and as of today, demobilization is materially completed. Our other plant in Matheu will commence demobilization upon finishing its contract in late May. We expect successful demobilization and redeployment of all Argentina turbines by the second half of this year.

And similar to Seaspan’s strong safety culture, APR achieved a historically low lost time injury frequency rate of 0.23. With the increasing demand of grid stability, APR continues to enhance its platform by expanding its customer base with turnkey solutions and remain disciplined in evaluating potential long-term power opportunities across multiple geographies and industry sectors.

Thank you for your time today. I will now turn the call over to our CFO, Graham.

Graham Talbot — Chief Financial Officer

Thanks Bing, and good morning everyone. I hope you area all well, and thank you for joining us today. Could you please turn to Slide 6. So, in Q1 2022, we continued to deliver strong results, following on from our record year in 2021. During the quarter, Atlas achieved the following performance relative to Q1 2021.

Our revenue growth was 9.5% to $408.1 million. Adjusted EBITDA growth of 16.5% to $277.1 million. FFO growth of 28.1% to $204 million. FFO per share growth of 21.7% to $0.73 per share and adjusted EPS growth of 56% to $0.39 per share. At the end of the quarter we had liquidity of $951.3 million. Performance continues to demonstrate the resilience of our fully integrated business model, by delivering these strong results alongside the operational challenges presented by both the pandemic and the ongoing supply chain disruption.

Thanks to the diligent efforts of our operations team and our seafarers. We continue to navigate the ongoing supply chain disruptions with minimal impact. Our service to our customers and operational efficiency remained at a high level with asset utilization of 98.5% in the quarter.

Please turn to Slide 7. So we continue to focus on strengthening and optimizing our balance sheet throughout the quarter, both in terms of our asset composition and our capital structure. As we monitor the industry and how our fleet composition is positioned, we look to enhance our fleet to align with our long-term strategy.

As we communicated at Investor Day, we’re actively recycling capital through the sale of our 4,250 TEU vessels. These vessels are non-core to our long-term strategy due to their age, design, and predicted future demand. We sold one vessel in Q4 2021. We sold another one in Q2 2022. In addition, at the end of Q1, we had an additional three vessels contracted impending handover, scheduled to close in Q2 2022. These four vessels are forecast to generate approximately $80 million in proceeds. We have a further six vessels under contracts, but subject to closing conditions, which we expect to close in Q2, Q3 of 2022.

As the market continues to evolve, we’ll continue to look for opportunities, optimize our fleet and recycle capital into higher-risk adjusted return opportunities. As previously communicated, we are continually working to optimize our capital structure. In Q1, we closed our new $250 million unsecured revolving credit facility, this was upsized by $100 million from $150 million and it’s tenure extended from two to three years.

The facility includes several new lenders and improvements, driven by Seaspan’s improving credit quality, greater liquidity, longer term debt profile and improving cost of capital. We continually monitor our interest rate exposure with the aim of aligning our fixed revenue and interest rate exposure.

We of course locked in a significant amount of long-term fixed rate contracts over the last year and in parallel, we have locked in a significant amount of fixed rate debt, about $1.8 billion of fixed rate debt secured and unsecured notes in 2021 alone. Given the acceleration of inflationary pressure and rights, we entered into an additional $500 million long-term floating to fixed, interest rate swap at the end of January in 2022.

In addition, we are closely monitoring our residual floating to fixed rate position and we’ll continually proactively manage our exposures. We’re pleased to see a strong vote of confidence from our strategic shareholder Fairfax Financial, who exercised warrants to purchase 25 million common shares of Atlas in April.

This resulted in proceeds of over $200 million, which will be used to repay outstanding debt and for other general corporate purposes. This is yet another demonstration of our shareholders’ continued confidence in our capital allocation platform and their commitment to our long-term growth strategy.

We place a high importance on quality growth and strengthening our financial profile. We’ll continue to actively manage our balance sheet as we remain focused on our goal of achieving an investment-grade credit rating.

Please turn to Slide 8. I’d like to summarize our strong quarterly performance by leaving you with four key takeaways. Number one, Atlas continued to deliver strong financial results and quality growth in the first quarter with strong performance across all metrics with $18.1 billion of high quality long-term gross contracted cash flows.

Number two, we’ve consistently delivered operational excellence across our businesses, despite the challenges presented by the pandemic and supply chain congestion.

Number three, our newbuild program is fully financed through innovative structures with favorable terms. And we continue to diligently execute construction and delivery of vessels to our customers. To-date, we’ve delivered four vessels under our newbuild program, all ahead of schedule. The remaining 66 vessels are progressing as planned, with seven more deliveries scheduled for 2022.

And like before, we’re continuing to optimize our capital structure and strengthen our balance sheet in line with our target of achieving investment grade credit rating and further improving our cost of capital.

So thank you once again for your interest today. And operator, we’d now like to open the line to questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Liam Burke with B. Riley. Your line is now open.

Liam Burke — B. Riley — Analyst

Thank you. Bing, Graham, how are you today?

Bing Chen — President and Chief Executive Officer

Well, thank you Mr. Burke.

Graham Talbot — Chief Financial Officer

Good, thank you.

Liam Burke — B. Riley — Analyst

The 40 to 50 TEU vessel classes, you announced the sale of a roughly 10, you have more to go. This is not a strategic asset anymore. What is the demand for that particular vessel in the market?

Bing Chen — President and Chief Executive Officer

Yeah. Liam, I answer this question. The demand in general, I think is as we expected, people looking at what the remaining contract of the charter with the vessels. So one thing that we want to highlight is, all the vessels that we are selling or we are going to sell, they all have long-term contracts attached to it. So these are not the spot vessel.

And secondly, we are looking at opportunistically to sell these vessels with those future owners that who will be able to provide the kind of service to our customer that meets their requirements. We have currently about 11 vessels in the process to be concluded in terms of the sale process. For the remaining, we were looking at them on a case-by-case basis.

We actually always evaluate that based on the situation, what happen if we will continue to operate these vessels, because one of the key strengths of Seaspan is our ability to be able to continue to deploy these vessels under all circumstances where — which is why we have a, on average, 99% historical utilization rate through all the market cycles and you know that’s the baseline that we’re looking at in terms of the continued operating.

On the demand side, the current market, I think is roughly about the same. It was slight. I think a slight less interest than before which is correlated to the freight rate in general. But overall, I think that there is still demand, but we are very selective, we make sure that we maximize the value.

Liam Burke — B. Riley — Analyst

Great, thank you. And on the APR, you announced some new projects and deployments, are those — what are the term of those contracts, are they longer, more in line with what you are trying to do or more of the existing type of arrangements?

Bing Chen — President and Chief Executive Officer

Yeah, for APR, the three deployment that we have secured over the past quarter is, one, as we said, it’s IID, which is a repeat of what we have done last year because the strong customer trust and relations has been built with their demand, we meet their requirement to have this repeat of three months contract that is with IID.

For the Brazil contract, this is the new market and this is the 44 months. And initially we signed for 12 months and our team was able to demonstrate our ability and as a result of our turnkey solution, our customer actually demanded for longer of our service. So as a result that this 12 months contract has been extended to 44 months.

And the other five turbines which has started at the beginning of the year, those are the 12 months contract for now.

Liam Burke — B. Riley — Analyst

Great, thank you, Bing.

Bing Chen — President and Chief Executive Officer

You’re welcome.

Operator

And your next question comes from the line of Chris Wetherbee with Citi. Your line is open.

Chris Wetherbee — Citi — Analyst

Hey, thanks guys. This is Eli working on for Chris. So maybe just a quick clarification on the Containership side. Did you have any deliveries this quarter, maybe I missed that, just quickly clarify that there?

Bing Chen — President and Chief Executive Officer

[Indecipherable] You’re talking about the newbuild delivery, right?

Chris Wetherbee — Citi — Analyst

Yeah, yeah.

Bing Chen — President and Chief Executive Officer

Okay. There was one — there is one newbuild in April, in the month of June we actually will have a delivery supposed to be three, but some, one or two of the vessel might be early delivered. So for this year, 2022, that we have three to be delivered in June, and then remaining three to be delivered throughout the year.

Chris Wetherbee — Citi — Analyst

Okay, got it. And then, so the cadence of early deliveries, obviously it’s harder to look out when it is 2023 and beyond. But cannot extend into the out years as well where everything is pushed forward just a little bit?

Bing Chen — President and Chief Executive Officer

And this is a good question. What we would like to highlight is that, so far we have taken four deliveries since last year, until this April. All of these vessels has been between two to four months ahead of the schedule.

Looking at the rest of the delivery for this year, as I said just now, we still expect possible early deliveries ranging from, initially was, for example, one of the vessels supposed to be delivered in October this year. And because our team and Beyonce Corporation, we were able to advance them to June and we see potentially that will be further advanced them to me. So these are the possible early delivery.

To answer your question for the future, down into 2023 and 2024, we so far do not anticipate, maybe early or the late delivery, this is your question. If we’re looking at the track record that we have and the ability of our team, that’s where the experience and expertise, and also the partnership that we have with the shipyard where they will be able to allocate their resources and to prioritize the deliveries. As I said it before, we are very confident that we will be able to deliver the rest of the newbuild program on target and on schedule, if not earlier.

Chris Wetherbee — Citi — Analyst

Got it, thanks Bing. And Graham, you and I talked about this before, but you said that the rate environment is maybe not as important for Atlas as maybe some of your competitors. But I am just curious when you guys look out, are you seeing some normalization right now in the market for the rate environment? And if there is normalization, how does that change the way you think about your business?

Peter Curtis — Chief Commercial Officer

Maybe Graham, if I can chime in here, it’s Peter. Hi Eli. Look, with a bit of volatility in the first part of this year in rates, there are still very high, I’m talking about freight rates which then trickles down to charter. So we’ve seen some volatility. But again, it’s on a very high level, almost anything that floats and can carry a container is employed and we see that remaining strong through the rest of the year.

The COVID lockdowns in China are not helping unlock anything. The deployment of tonnage and the back orders also not helping unlock anything right now. So until we thought getting the supply chain unlocked and moving again, I think we’re going to see continued high demand for tonnage. That said, it will happen, and I expect that probably this is something, maybe we will start seeing coming into 2023.

Chris Wetherbee — Citi — Analyst

Got it. Thank you. One more from me. Liquidity $951 million, asset value still high, what does it look like there from that cash, just wanted to be sitting on cash, being opportunistic, any other plans, any way, we should be thinking about that extra liquidity right now?

Graham Talbot — Chief Financial Officer

Yeah, Eli, we touched on this. We always sort of carry fairly high liquidity to be able to be agile in the market and respond. The 70 newbuild program wasn’t a one-off wonder, I mean I don’t think we’re going to be doing development to that scale, but there’s still quite a bit of activity in the market.

And our customers have still got the challenges in terms of transitioning their fleets both to newer and more modern vessels, but also meeting the upcoming compliance requirements. So there’s still a lot of opportunities in the marketplace. And I think certainly together with management, a lot more comfortable carrying more liquidity than required rather than less, given the financial volatility in the markets at the moment as well. So I just think it’s prudent and I’d like us to be in a position to be able to move fast, should the right opportunities present themselves.

Chris Wetherbee — Citi — Analyst

Of course. Thank you all.

Operator

[Operator Instructions] Your next question comes from the line of Ken Hoexter with Bank of America. Your line is open.

Ken Hoexter — Bank of America — Analyst

Good morning Bing and Graham. So, just following up on the newbuild question there, coming in ahead of schedule. Are you — just want to understand, are you saying the yards now have excess capacity or are they moving up Atlas within their order book, just given your scale? And if it is a three-year build process, could we see supply then hit water a bit faster than we all expect and does that put more pressure on market rates, I think that you were just getting asked about Graham or I know that doesn’t affect you in terms of the market rates. I’m just wondering in terms of what backdrop we could be looking at here?

Peter Curtis — Chief Commercial Officer

I’ll chime in here again. Ken, hope you’re doing well. So, look, shipyards essentially is a sausage machine. But one of the things that you may or may not recognize Seaspan is, when we ultimately do the contract with the yard, we have done a very mature specification and outline design with the yard. So we don’t have a lot of changes.

What happens in the yards is, if everything being equal, it would actually be tough to accelerate our production. But what we see during these times of somewhat volatility, few others doing speculative orders, as they are subject to many changes and that actually presents opportunities for us to jump ahead. So generally speaking, that’s how that would layout.

Also you look at where are we building, in yards that typically we’ve done a lot with them before. And therefore our ability to work with them to accelerate design and find opportunities for essentially earlier slots, to move our slots ahead is advantageous to us. That gives you some color, Ken.

Ken Hoexter — Bank of America — Analyst

No, it does. And then, Graham, you want to throw in thoughts on or being on in terms of what that means for the market. I know again, your fixed contracts. I’m just wondering if that means we see the supply moving a little faster or if it really is just Atlas jumping out alone?

Bing Chen — President and Chief Executive Officer

I think so far it’s Atlas, that’s what we are aware of, as what Peter explained, because the experience, the work that — the quality of the work, that experience of anticipation and also the partnership with the shipyard allows us to be able to work this sausage machine very effectively, efficiently, and that is why we have this confidence.

In terms of the implication to the market. If we’re looking at the total newbuild is roughly about 6.5 million TEU and the delivery of these newbuild is roughly about 1 million TEU in 2021, 1 million in 2022, 2.4 million TEU in 2023 and 2.6 million TEU in 2024. So with these newbuild coming into the market, for sure that we’ll be able to alleviate some of these demand and supply off balance.

So, as a consequences, we will see, we would anticipate the rate, it will be in terms of the charter rate that should be more likely to return to a more normalized rate versus the current rate is historically high. And as you correctly pointed out, very importantly, for Seaspan, actually our — all our newbuild are fixed into the long-term charter and which is why I think our business model is different.

Also, if you’re looking at our existing fleet, as I said earlier, we have zero roll-off in terms of existing charter expired for 2022. We only have eight re-charter in 2023 and 16 in 2024. So this is exactly what we anticipate. The demand supply going forward in the market and that is why we have been able to forward-fixing 86 of our vessels from our existing fleet of 130 vessels and that’s what the — exact is we anticipate the development of the market and we are well positioned in avoiding such a peak of a delivery and I think from a market perspective we will be yet to see how the rate is going to evolve and gradually normalizes.

Ken Hoexter — Bank of America — Analyst

Great. Peter, that was a great insight; and Bing, I appreciate the follow-up. So just maybe two more from me, one for Graham. There was a — again from currency swap, maybe talk about the hedging activities and how we should think about the interest expense for the rest of the year? And then I’ll just throw in my second one which is just the long-term utilization. What’s your target on the power gen, should — I guess it just, once you get Argentina reset, then it’s at 100% or is there kind of a target utilization we should think about for that business over a period of time?

Graham Talbot — Chief Financial Officer

There might be, if I start at sort of the interest rate exposure piece. Ken, the first bit was, we continually monitor our fixed positions that we have in terms of our charter agreements which obviously gets to fixed income coming in and we’ve got a mix of fixed and variable debt. And we try to maintain that within a certain range, generally around 50% to 70% of the fixed revenue range, depending on sort of market conditions. So early in January, I think everyone started to sort of get a bit of a feel about inflation and the fact that the market and the Fed would probably be taking some action on rates. So we managed to get in fairly early on that and you would have probably seen in the earnings release of this around $46 million worth of unrealized mark-to-market on our hedge positions at the moment.

We’ll continue to manage that as is, I mean, we’re not going to, don’t want to hit too aggressive either and the Board is very focused on making sure that we balance our exposures here and we don’t get over hedged. But in terms of the outcomes, in terms of the guidance we gave back at Investor Day, on our financials, that all still holds true and given it was only a short period ago, I think that’s good, but that hold true. So, our guidance is still very much in line with what we presented there including on rates and their holding. We don’t really have currency exposure, we had through Argentina and that’s indemnified under structure with Fairfax, so the currency issues there don’t impact on us and of course they’re winding up as we exit Argentina going forward.

Things Bing mentioned earlier, the portfolio in APR’s and we touched on Investor Day is really going through a big transition this year with 15 turbines or 14 turbines coming out of Argentina and that’s a big mob and then re-mobilization of those. So you might recall back at Investor Day we provided a fairly detailed chart which sort of demonstrated the deployment schedule for 2022.

Once again, that’s holding firm. There might be some opportunities to accelerate some of that. But clearly, we’re running at around 67% utilization rate forecast currently. We would expect that to get higher, but it’s still as we’ve touched on a few times, Ken, it’s a fairly lumpy business and when you’ve got short-term contracts still in the portfolio, the mob and demob, just means that we’ve got material downtime. But that’s what we are striving to change in the contract structure.

Ken Hoexter — Bank of America — Analyst

Yeah, great stuff, Graham. I appreciate the insight as always. Thanks.

Graham Talbot — Chief Financial Officer

Just one other point I just want to make before next caller. People should have noticed in the earnings release that at the beginning of this year we adopted a new accounting policy, which applies to our convertible notes and under this accounting policy, it means that we now account for these just that they are all converted in terms of our issued shares.

So, it’s an additional 15.5 million shares that you will see in the share build-out for the EPS calculation and FFO calculation. That equates to approximately $0.02 per share lower as a result of that additional dilution. And it’s a conservative approach, but I just want to make it clear to people when you are bench-marking it against our previous EPS and also your consensus models, you need to take that into consideration.

Operator

[Operator Instructions] All right. I’m showing no further questions at this time. I would now like to turn the conference back to the company.

Bing Chen — President and Chief Executive Officer

Well, thank you all for joining our call, particularly for those of you asked the good questions. For any further questions, please feel free to reach out to our IR team, and also, Graham and myself. We look forward to our Q2 call. And in the meantime, please stay safe and healthy, and you have a great day. Thank you all very much.

Graham Talbot — Chief Financial Officer

Thank you, everyone.

Operator

[Operator Closing Remarks]