Atlas Corp (ATCO) Q3 2022 Earnings Call Transcript

Atlas Corp (NYSE:ATCO) Q3 2022 Earnings Call dated Nov. 02, 2022.

Corporate Participants:

Will Kostlivy — Investor Relations

Bing Chen — President & Chief Executive Officer

Graham Talbot — Chief Financial Officer

Analysts:

Liam Burke — B. Riley Securities — Analyst

Presentation:

Operator

Welcome to Atlas Corp.’s Third Quarter 2022 Earnings Conference Call. I’d like to remind everyone that this conference call is being recorded today, November 2, 2022. I would now like to turn the call over to Will Kostlivy, Head of Investor Relations at Atlas Corp.

Will Kostlivy — Investor Relations

Good morning, everyone, and thank you for joining us today to discuss Atlas Corp.’s third quarter 2022 earnings report. We issued our earnings release 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 Investor 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 earnings presentation. Please note that we report non-GAAP measures, which we believe provide investors a clear understanding of the performance of our business. 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 discussion.

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 Operating Officer, Torsten Pedersen.

Following our prepared remarks, we will open up the forum to a question-and-answer session.

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

Bing Chen — President & Chief Executive Officer

Thank you, Will, and good morning everyone. Thank you for your joining our call. To begin, I would like to quickly cover the developments in the acquisition proposal received by our Board of Directors on August 4, 2022 from affiliates of Fairfax, the Washington Family, David Sokol and O&E. Yesterday, we announced that following the recommendations of the independent special committee that was appointed by the Board of Directors to review and negotiate the proposal, Atlas has entered into an agreement to be acquired by the Poseidon Consortium. The transaction is subject to several conditions including approval of a majority of our affiliated shareholders, regulatory approvals and consensus consents.

We expect the transaction to close in the first-half of 2023. For more information regarding the transaction, please refer to our public disclosures. In the meantime, management is focused on business-as-usual and continuing to successfully execute on our strategy. Today, my comments will focus on our key developments in our business, then I will hand it over to Graham Talbot to present our Q3 2022 results and provide a financial update.

Please turn to Slide 4. I would like to start by reviewing the key developments at Seaspan. Leveraging our creative customer solutions and partnerships, we forward fixed 14 vessels in the third quarter. These forward fixtures contribute over $1.1 billion of gross contracted cash-flow to our total current balance of $18.6 billion. This leads to our fleet having an average TEU weighted charter duration of 6.9 years and being a 100% contracted for the remainder of 2022; 99.6% for 2023 and 96.8% for 2024 on a TEU basis.

In the quarter, we continued to diligently execute our new-build program with the delivery of two 11,800 TEU newbuilds, which commenced 5-year charter upon delivery. In October, we delivered another 11,800 TEU newbuild and our first 15,000 TEU newbuild, both of which commenced 5-year charters. To date, the large majority of the 11 deliveries from our 70 vessel newbuild program have been ahead of the schedule delivering incremental value to our customers and shareholders. This further demonstrates our consistent operational excellence and our confidence in delivering the remaining newbuilds on-time and on-budget subject to third-party circumstances.

In September, we announced the contracts related to our order of four 7,700 TEU dual-fuel LNG newbuild become null and void. This was due to the shipyards failing to obtain refund guarantees. In-line with our no-risk discipline, refund guarantee are a required condition in all our newbuild contracts and therefore no capital was deployed.

During the third quarter, we continue to maintain a strong vessel utilization rate of 98.6%. We also maintained our industry-leading safety record with a lost-time injury frequency of 0.22 delivered through a continued focus on safety of our people.

Our team’s diligent execution coupled with our consistent operational excellence continued to drive our performance in the quarter.

Please turn to Slide 5. Now let’s review some key developments at APR. APR successfully completed its 4 months Imperial Irrigation District power generation contracts in September and Mexicali dry lease contract in October with demobilization of a total 7 turbines currently underway across both sites.

APR also completed mobilization and installation of 8 turbines in October under its 44-month contract in Brazil and APR’s Lifecycle contracts’ continuing successful operation until early 2023. APR completed its 5-year contract in Argentina earlier this year. And as of today, demobilization of the turbines at both sides is complete. During the third quarter of APR, achieved an asset utilization of 80% and achieved a perfect lost time injury rate of zero.

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

Graham Talbot — Chief Financial Officer

Thank you, Bing, and good morning everyone, and thank you very much for joining us today.

Please turn to Slide 6. So in Q3 2022, we maintained our consistent operational and financial results. During the quarter, Atlas achieved the following performance relative to Q3 2021. Our revenue decreased by 2.7% to $439.6 million. This is primarily driven by a seasonally high asset utilization in APR in Q3 2021. Seaspan delivered a small revenue increase over the same period.

Our adjusted EBITDA decrease was 9.7%, down to $291.1 million, and FFO decrease of 17.2% to $205.4 million. And at the end of the quarter, we had liquidity of just under $1.3 billion. So amongst the backdrop of macroeconomic headwinds, I’m proud of the team’s consistent high performance and execution. These results exhibit the strength and resilience of our fully integrated operating model and focus on operational excellence, providing predictable through-cycle returns to all stakeholders.

Please turn to Slide 7. As discussed previously, the continued optimization of our balance sheet is part of our operational excellence culture. Furthering our progress towards achieving investment-grade rating, Seaspan had its ratings reaffirmed by Fitch, Standard & Poor’s and Kroll at BB, BB- and BB+, respectively.

In addition to our ratings at Seaspan, we received our first credit rating for Atlas, which is a BB+ corporate rating from Kroll. These agencies referenced Atlas and Seaspan’s improvements in business risk management and our increasingly diversified funding sources as key drivers for their ratings. They also highlighted that our increasing unencumbered asset base and proportion of unsecured debt were supporting factors.

In October, Seaspan upgraded the financing for 15 of its 7,000 TEU newbuilds from a $1.1 billion bank financing facility, up to a $1.5 billion ECA-backed JOLCO structure. The upgraded facility has a significantly lower cost, supported by backing from SINOSURE, the Chinese export credit agency and includes a low-cost fixed rate component. This financing represents the third transaction utilizing our award-winning ECA-backed JOLCO stricture, which is now being used to finance 33 of our newbuild vessels.

At the quarter end, Seaspan remains well positioned in the current inflationary environment with approximately 70% of its debt, including preference shares tied to fixed interest rates as of quarter end. This position was established through issuing a $500 million long-term floating to fixed rate interest swap in Q1 at 1.9%, a $500 million fixed rate U.S. private placement in Q2 used to pay down existing shorter-term floating rate debt and an additional $75 million long-term floating fixed rate swap in Q3 of 2.4%. As of quarter end, the mark-to-market valuation of our hedging position was $125 million positive. We feel this position is appropriate given the current market conditions, and we will continue to actively monitor our interest rate exposure.

Please turn to Slide 8. Now I’d like to summarize our quarterly performance by leaving with 5 key takeaways. Number 1, together with our strong underlying performance in the quarter, we are focused on disciplined quality growth that contributes to our resilient business model. Number 2, we will continue to optimize our fleet to derisk our portfolio and recycle capital.

Number 3, APR continues to focus on generating long-term predictable cash flows through higher asset utilization and redeployment of its fleet. Number 4, we continue to diligently execute construction and delivery of our newbuild vessels to our customers. To date, we have delivered 11 newbuilds from our 70 vessel newbuild program, the large majority ahead of schedule. Number 5, we’re continuing to strengthen our balance sheet in line with our target of achieving the investment-grade credit rating in addition to proactively managing our interest rate exposure amongst inflationary pressures.

Finally, I’d like to briefly address the recent announcement about the agreement from Poseidon Consortium to acquire Atlas. We caution that while an agreement has been reached, as mentioned earlier, it’s subject to closing conditions, and there can be no assurances that any transaction will result. Management is focused on running this business and executing on its strategy. As such, I ask that you keep your questions today focused on our financial results and performance.

With that, operator, we would now like to open the line for questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] And we have a question from the line of Liam Burke from B. Riley.

Liam Burke — B. Riley Securities — Analyst

Yes. Thank you. Graham, I know we’re not supposed to — I’ll tread carefully on this first question. But presuming the transaction, the proposed transaction with Poseidon goes through, the company would go private but you have publicly traded preferred stock, what happens — should this transaction occur, what happens with those preferred shares?

Graham Talbot — Chief Financial Officer

Good morning, Liam, always good to hear from you. Thank you. That’s an excellent question. And we have now communicated to the market that our preferred shares will remain listed on the NYSE. And hopefully that clarifies any questions that anyone has about their liquidity going forward.

Liam Burke — B. Riley Securities — Analyst

Great. Thank you. And Bing, without going into too much detail, you did cancel those 4 vessels. With your current backlog of orders, do you see any problems with deliveries, delays or any sort of related problems to what you saw with these 4?

Bing Chen — President & Chief Executive Officer

Yes. Good morning, Liam. Thanks for the question. For the cancellation of the four 7,700 as we previously announced, this is solely due to the shipyard’s failure to provide the refund guarantee, which is a condition in all of our contracts when we sign any newbuild. So due to the failure of obtaining this refund guarantee, the contract is void. And so therefore, from our side, that there’s no exposure neither to our customer nor to the shipyard.

With regarding to the remaining delivery of the newbuild, as my colleague mentioned earlier, so far this year, we had 11 newbuild delivery ahead of schedule. And as I stated earlier, with the excellent team of our people working with our shipyard and the customer, we expect the remaining of those newbuilds to be delivered on time. Of course, they are subject to external factors, which are beyond our control.

Liam Burke — B. Riley Securities — Analyst

Great. Thank you, Bing. Thank you, Graham.

Operator

This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Bing Chen for any further remarks.

Bing Chen — President & Chief Executive Officer

Thank you. Once again, thank you, Liam, and all the others attending our call. Appreciate your time. You have a great day. Thank you.

Graham Talbot — Chief Financial Officer

Thanks, everyone.

Operator

[Operator Closing Remarks]