Atlas Corp. (ATCO) Q2 2020 Earnings Call Transcript

Welcome to the Atlas Corp. second quarter 2020 conference call. I would like to remind everyone that this conference call is being recorded today, August 11, 2020. I would now like to turn the call over to Ryan Courson, Chief Financial Officer of Atlas.

Good morning everyone and thank you for joining us to discuss Atlas’ second quarter earnings. On the call with me today is Atlas’ President and CEO, Mr. Bing Chen, Seaspan’s Chief Commercial Officer, Mr. Peter Curtis, and also available during the Q&A session is Seaspan’s Chief Operating Officer, Mr. Torsten Pedersen, and Atlas’ Chairman, Mr. David Sokol. I would like to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from those stated or implied due to the risks and uncertainties associated with our business. Our known risk factors are discussed in our Form 20-F and our reports on Form 6-K filed from time to time in connection with our quarterly financial results, both of which are available on our website for review. To start, this quarter we have introduced new non-GAAP metrics. We believe these non-GAAP metrics will provide our investors a clear understanding of the financial performance of our businesses. I will touch on these new metrics in more detail during the review of our financial performance. For these definitions and reconciliations to the most closely comparable U.S. GAAP metrics, please refer to our earnings release or the appendices at the back of this earnings presentation. In addition, we have also provided historical reconciliations for these non-GAAP metrics through 2018 which are also available on our website for review. For today’s call, Bing will start by providing highlights on our operating performance and corporate recent developments, and Peter will then provide commentary on Seaspan and the containership industry, including impacts from COVID-19. I will then wrap with a review of our recent financial results, including an overview of our new non-GAAP financial metrics, I will provide an update on our balance sheet, liquidity and capital allocation initiatives. With that, I will now pass the call over to Bing.

Thank you Ryan, and good morning everyone. Please turn to Slide 4. A lot has happened since our last earnings call and this is the first full quarter combining APR performance. Overall, Atlas’ performance continues to be strong amid COVID-19 due to our resilient business model. We have experienced several macroeconomic downturns in the past and throughout each cycle, and our business continues to deliver strong financial results and quality growth. During this time, we have focused on four initiatives: first, maintaining asset utilization and expanding our contracted revenue profile; second, ensuring the health and safety of our global team; third, deepening our trusted customer partnerships; and fourth, continuing our disciplined approach to balance sheet management and liquidity. I will highlight these discussions during my update on the development about Seaspan and APR Energy. In terms of our asset utilization and the long term contracted revenue, we have demonstrated resiliency, especially over the last two quarters among the unprecedented market conditions. We’ve grown long-term contract revenue to $4.6 billion, which provides stability and predictability for our businesses. Over 98% of our 2020 midpoint revenue guidance is currently under contract, which is why we are able to tighten our guidance positively this quarter. At Seaspan, we are continuously focusing on expanding existing charter with customers while strategically acquiring new vessels on long-term charters, as we have demonstrated with our recent acquisition of two high quality 13,000 TEU vessels. At APR, like at Seaspan, we are focused on operational excellence on existing plans, we are executing on new projects such as the three Mexicali sites which achieved commercial operations since acquiring APR, and focusing on building a pipeline of new quality long-term projects. These achievements drove our strong financial performance in Q2. Atlas delivered record quarterly revenue of $363.8 million with Seaspan contributing record containership leasing revenue of $303.8 million. After removing our formal adjusted financial metrics in 2018 to simplify reporting, we are now introducing funds from operations and adjusted EBITDA. These two new performance metrics will better reflect our business performance in addition to our standard GAAP reporting. We achieved funds from operations per share of $0.64 and adjusted EBITDA of $238.9 million this quarter. Ryan will discuss the importance of these metrics later. The 60th consecutive dividend distribution we announced last month reflects our commitment to long-term shareholder value creation. Yesterday, we announced that Seaspan achieved an investment-grade issuance rating of triple B-minus related to its cornerstone portfolio financing program and a corporate rating of double-B. To achieve this during a time when COVID-19 is impacting the global economy is truly a testament to the resiliency of our business model and the dramatic credit improvements we have made since 2018. Please turn to Slide 5. We delivered record quarterly revenue while ensuring the health and safety of our global employees. The wellbeing of our staff remains our top priority. In addition to new business continuity plans, we have implemented new processes and protocols that enable us to continue to deliver our operational excellence. Despite the unprecedented pandemic, we facilitated over 800 crew changes in the month of July and integrated 11 vessels into Seaspan’s fleet during the last eight months. We completed 10 vessel scrubber retrofits on time and on budget despite project complexities and COVID-19. We also completed 18 vessel dry dockings. We continue to focus on environment and safety, receiving our ISO 14001 certification, improving our LTIF, receiving a U.S. Coast Guard award for environmental protection, and being awarded outstanding service and operational excellence by our top global liner. Our people are at the core of our success. The fortitude and resourcefulness of our people in unprecedented working conditions has been truly remarkable. I’m extremely proud of our seafarers and want to give our special appreciation for all their hard work and sacrifices they have made to operate 125 vessels 7/24 across the globe through their uncompromised services to our liner customers. Please turn to Slide 6, where I will highlight Seaspan’s development for the quarter. Seaspan’s performance has been minimally affected by COVID-19 as we have proactively adjusted our operations to mitigate potential impacts. Seaspan continues to benefit from transformative improvements, long-term partnerships and disciplined growth while delivering solid financial performance on the back of our solid balance sheet and liquidity management. We continue our execution on growth opportunities with the recent acquisition of two high quality 13,000 TEU containerships for $146 million, which are backed by long-term charter with a leading global liner. This was an attractive acquisition from a risk-adjusted return perspective which increased our long-term contracted revenue by over $150 million and a contribution of approximately $7 million and $20 million EBITDA for 2020 and 2021 respectively. This acquisition was made possible through our long-term partnership approach. As liners are becoming more dominant, they increasing demand scalable, reliable and flexible partners who provide thoughtful solutions instead of simply supplying tonnage. We expect to continue to create those opportunities through our trusted partnerships. While we have been growing over the past year, including 13 acquired vessels with Seaspan and the acquisition of APR Energy, we have remained disciplined and have not sacrificed our balance sheet nor liquidity simply for the sake of growing. We ended the quarter with strong liquidity of over $380 million and a pro forma for the acquisition will maintain a strong net debt to equity ratio of approximately 1.2 times. Our debt profile remains conservative with no significant maturities until the end of 2022. I want to reiterate that we have been and will continue to take a disciplined approach to deploying our capital. These investments were all backed by long term charters with leading global liners as well as meeting our quantitative and qualitative criteria. In July, we expanded Seaspan’s $150 million unsecured revolving credit facility by two year, which is important to our liquidity management and a testament of our access to global capital markets through the cycles. Just yesterday, Seaspan achieved an investment-grade credit rating for its cornerstone financing program, which is a major milestone in our efforts to reduce our cost of funding and scale our asset base. I’m also pleased to announce the appointment of Torsten Pedersen as Chief Operating Officer of Seaspan. Torsten has demonstrated world-class leadership in delivering Seaspan’s operational excellence over the last two years, and I’m confident that he will excel in his new role as we continue to set the frontier for operational excellence. On the commercial side, despite a very challenging market our team has proven again the strength of our platform by delivering a best-in-class Q2 utilization rate of 97.4%. As of today, all 125 vessels in our global fleet have secured charters in place. Please turn to Slide 7, where I will provide APR developments for the quarter. As we communicated at our 2019 investor day, we see tremendous upside potential in APR and are working towards transforming the business to the next level. I’m very pleased to announce the recent appointment of Brian Rich as the President and COO. Brian has deep expertise and networks in the global energy and power sector and was formerly President and COO of APR between 2012 and 2015. Brian is well aligned with APR’s priority focus going forward and we are confident in his leadership to drive APR’s operational excellence and sustainable growth. APR’s power fleet utilization for Q2 was supported by mobilization of eight turbines across three power plants in Mexicali. These eight turbines contributed $12 million of revenue to Q2 and we expect these projects to contribute approximately $41 million of adjusted EBITDA during 2020. Due to the mobile and fast power nature of APR’s fleet, we expect the utilization to fluctuate as these turbines are put on different contracts around the world; however, we are confident in our ability to maintain a strong utilization. While COVID-19 has impacted APR’s business through a reduction in overall global power consumption, we continue to structure the business as a long-term oriented energy solution provider. Our priority is to sustain and improve asset utilization while focusing on extending the duration of existing contracts. This will require a shift in focus of our partnerships and solution offerings. In addition, we will continue to be more selective on potential deployment opportunities around the world that meet our risk management criteria. We also continue to execute on our business strategy with strong commitment to ESG by divesting idle diesel generators and making operational improvements. Just to highlight, during Q2 APR’s overall plant availability was maintained at over 98% and an LTIR of 0.72. With that, I will now hand over to Peter.

Thank you Bing. Please turn to Slide 9 where I will comment on developments in the global container shipping industry and the impact on Seaspan. Overall, the container shipping industry continues to operate in somewhat challenging conditions. While these are not ideal, Seaspan’s position and performance is mitigated by our long term contracted business, leading position, attractive fleet, and relationships with our leading global partners. We have both retained and secured charters for our whole fleet against a global idle fleet that peaked 12% in May and has contracted since then to approximately 8% or less. Combine this with the disciplined approach displayed by our customers, our performance to date is a testament to our business model. We remain very closely engaged with our customers globally in order to retain business and to seek opportunities to insert ourselves into the niche areas where they have required [indiscernible] solutions during a volatile period of time. In fact, through this COVID affected period, we have only increased dialogue with customers in support of our style of full scope service delivery, and this is proving to enhance our position further. COVID’s near term impact is clear with global annualized TEU volumes expected to decline approximately 8% to 10% year-on-year from 2019, with pressure primarily on the main lane Asia-Europe and Asia-North America trades that each comprise approximately 13% of global TEU moves. In contrast, Asian countries have steadily been recovering, resulted in intra-Asia volumes improving, a trade segment which represents approximately 30% of global TEU moves. As we have moved through the first half of 2020, we have seen the most significant dip in volumes having been in March, followed by improvements month-on-month since then. We anticipate a global trade recovery through 2021 as North America and Europe recover. While pressure was experienced on charter rates through the first half, Seaspan’s position has been mitigated by our relatively small spot exposure and attractive fleet, with over 70% of our vessels being over 9,000 TEU capacity. We remain focused on managing our short-term exposure during this time, which comprises approximately 10% of Seaspan’s fleet by TEU or approximately 2% by revenue for the remainder of 2020. Please turn to Slide 10. The decline in volumes has driven the elevated idle fleet as liners both redelivered vessels and idled portions of their own or chartered fleets. The idle fleet levels peaked at about 12% mid-Q2 and has declined to the current level of just above 7%. A large proportion of the idle fleet is sub-3,000 TEU plus 2% in scrubber refits, and the balance is mostly made up of larger vessels on blank sailings. Against these current challenges, we are optimistic about long-term industry prospects not only from a supply and demand side, but also from a commercial standpoint. As Bing mentioned, during these difficult times customers increasingly look for providers that offer value-added services, a significant competitive advantage provided by Seaspan’s fully integrated operating platform and keen sense of collaboration with our customers. We believe we have witnessed somewhat of a paradigm shift in liner behavior in stressed times. This year, they exercised a great degree of discipline through capacity supply control and have managed to support freight rates and have performed much better financially than was expected. We expect their discipline will sustain into the future and the stability of the industry shall be improved. In parallel, liners shall seek stronger tonnage providers more than before in support of their service delivery quality and reliability improvement aspirations. On the supply side, the order book remains at historically low levels of below 10% with discipline expected to persist. Deliveries are expected to continue to moderate into 2020 and 2021 with current builds experiencing slippage. This along with the pick-up in scrapping will continue to provide support towards supply and demand equalization. Freight and charter rates have remained well above 2008 and 2016 downturn levels. Even during the height of COVID, we have seen profitable charter rates. Our customers have also done relatively well supported by their alliance partners, lower bunker prices, and government support where needed. We have been in close dialogue with all of our customers to remain strong throughout this difficult time, and we remain confident in our customer mix which is composed of the world’s leading liners. Finally, we remain disciplined in engaging in risk-adjusted accretive vessel acquisition activities contingent on mutually benefiting both ourselves and customers. We recently announced agreements to acquire two 13,000 TEU vessels which will be deployed on long-term time charters with a leading global liner. We continue to find optimal solutions for our customers and take advantage of strategic opportunities to grow during this time while simultaneously maintaining our strong balance sheet. I now hand over the call to Ryan to discuss financial performance.

Thank you Peter. If you could all please turn to Slide 12. As mentioned at the beginning of the call, we are introducing new non-GAAP metrics into our financial disclosure to coincide with the first full quarter of consolidated Seaspan and APR financial results. These metrics include adjusted EBITDA, funds from operations or FFO for short, and FFO per share. We have chosen to introduce these non-GAAP metrics for a number of reasons. These financial performance metrics align Atlas’ external financial disclosure with our internal management evaluation of financial performance, which is focused on long-term cash flows and return on invested capital. In the past, our focus on the cash flow generation of Seaspan and now APR with FFO and FFO per share aligning how we internally view cash flow generation available to common shareholders. As a result, FFO per share will be our headline reporting figure going forward instead of earnings per share. Adjusted EBITDA also provides a way for our investors to evaluate our cash flows, pre-financing or capital structure initiatives. This is particularly relevant for the Seaspan business as EBITDA is a very good proxy for cash flows available for servicing principal and interest as the business pays very minimal income taxes. This selection of metrics also allows us to provide a clear picture of our financial performance across time periods unobscured by non-cash and one-time items, ultimately allowing investors a more comparable view of performance across these time periods. Finally, our new disclosures provide comparable performance metrics between Atlas’ business segments across similar peers as adjusted EBITDA and FFO are performance evaluation metrics across many similar hard asset businesses like Atlas. To close our review of these new performance metrics, we want to highlight that we have chosen FFO as our key reporting metric going forward as it represents on a gross and per-share basis the value that is available to our common shareholders. By adjusting out the non-cash swings that have historically impacted our EPS and non-core business items, this metric represents cash available for management to allocate to create value for our shareholders. Our objective is to grow this metric both on an absolute and per share basis which will allow us to allocate capital for further strategic growth while continuing to return capital to our shareholders through our dividend. Please turn to Slide 13, where I will provide a summary of our financial results. Overall, we are pleased with our performance for this quarter. We achieved record financial results despite the challenging macroeconomic environment, demonstrating the resiliency in our business. We are confident in the long term stability of our business with $4.6 billion of contracted revenue and both APR and Seaspan businesses being fully funded with no major maturities until the end of 2022. Seaspan’s vessel utilization remains strong at 97.4% for the quarter. This is notable despite the broader containership leasing industry second quarter experiencing the highest idle fleet levels seen in the past decade. We also note that the number of unscheduled off-hire days was limited to only 90, less than 1% of ownership days across the fleet, further demonstrating our ability to effectively manage our short term charter exposure. APR’s power fleet utilization for the quarter was 68.4% as APR’s turbines were mobilized and installed for our Mexicali projects. A full quarter of these turbines will be reflected in our Q3 utilization. Revenue increased 32% to $363.8 million for the quarter when compared to the same period in 2019, with the majority of this increase due to the full quarter of APR’s revenue contribution. Seaspan’s revenue increased 10% to $304 million, primarily due to the delivery of 11 vessels year to date resulting in Seaspan achieving a record quarter in revenue. Adjusted EBITDA was $239 million, a 37% or $65 million increase relative to the same period in 2019 driven by the contribution of APR and increased Seaspan contribution from the delivery of the 11 vessels noted above. FFO was $161 million for the quarter, a 76% or $70 million increase when compared to the same period in 2019 primarily due to the contribution from APR and improved Seaspan operating performance noted above. FFO represents Atlas’ performance post interest and tax, with these items driving the remaining difference. Improvements in our capital structure and decreases in LIBOR drove approximately $9 million in interest savings comparable to the same period in 2019. These interest savings were partially offset by the inclusion of APR’s taxes. Finally, FFO per share of $0.64 increased 53% relative to the same period in 2019 and was up 21% on a quarter-over-quarter basis. If you could please turn to Slide 14, I will provide an update on our guidance. Given our strong performance in quarter two, we are providing an update to our previously provided guidance. As Bing highlighted, on a consolidated basis over 98% of the midpoint of 2020 guidance is contracted as of today, highlighting the minimal spot exposure of our business. The full breakdown of Seaspan and APR’s contracted revenue is included in our quarterly filings. For Seaspan, we are tightening guidance on both the revenue side by increasing the bottom end of our revenue guidance and also improving the expense side by decreasing the top end of our operating expense and operating lease expense guidance. For APR, we are reaffirming our previously provided guidance and continue to track well to this guidance. I would like to again note that the APR guidance is for the 10-month consolidation period of February 29 to December 31, 2020. APR is a business secured by medium term contracts with strong upside as additional capacity is deployed either on additional long term projects or lucrative short term fast track power solutions. While the decline in power consumption from COVID has slowed down our pipeline of potential projects, Brian Rich and his team are focused on deploying our assets and building a high quality pipeline of global opportunities. For both companies, we are also introducing guidance for adjusted EBITDA. With the implementation of non-GAAP reporting, we will continue to guide to adjusted EBITDA. We also provide relevant disclosures to the investor community to allow you to forecast FFO and FFO per share. Please turn to Slide 15, where we will discuss developments in our capital structure and financial position. We continue to be focused on creating shareholder value through capital allocation, as demonstrated by our significantly expanded operating fleet while improving our liquidity position and credit profile and maintaining our preferred and common dividends. Last night, we announced that Seaspan achieved an investment-grade senior secured issuance rating from Kroll Bond Rating Agency for Seaspan’s portfolio financing program on the back of a double-B corporate rating. As we have discussed, this portfolio financing program has grown to over $1.7 billion in commitments and represents the central piece of our capital structure. We intend to diversify our sources of funding through the institutional credit markets and continue to reduce our overall cost of funding and improve flexibility and amortization profile. Over the past 12 months, we have added 13 vessels to our fleet alongside the acquisition of APR, during which we have also reshaped our balance sheet, lowering our cost of capital and improving both our maturity and liquidity profile. This has been accomplished through a relentless focus on maximizing Atlas’ cash flow generation. On a trailing 12-month basis, Atlas has delivered approximately $500 million of FFO. As a result of this pursuit of cash flow optimization and the improvement in our debt capital structure, both Seaspan and APR are fully funded to the end of 2022. Atlas as a platform and despite challenging economic conditions continues to enjoy access to the global capital markets. The renewed Seaspan $150 million unsecured corporate credit facility on a two-year term is a testament to the business’ capital market relationships and their belief in our capital structure strategy. Alongside our introduction of non-GAAP metrics, we would also like to introduce our balance scorecard for evaluating Atlas’ leverage position. These are metrics that we focus on internally and metrics that we consider when executing new acquisitions and various capital allocation decisions. While there is no one metric to properly evaluate our capital structure and credit positioning, we believe these four metrics in concert provide a holistic view of our leverage profile. Net debt to adjusted EBITDA and contracted revenue to net debt demonstrates cash flows available to service debt obligations and provide returns to our shareholders. While adjusted EBITDA to cash interest represents our interest coverage. Finally, dividends per share to FFO per share provides a view to the cash flows available to our shareholders, which we return through dividends and reinvestment into the business for growth on our credit profile improvement. Lastly, if we could turn to Slide 16, while I often discuss our focus on improving our balance sheet and credit profile, I’d like to end off today by discussing our growth over the last two and a half years. Since the beginning of 2018, we have deployed $3.4 billion of capital towards acquisitions, including the acquisition of GCI in 2018 and APR in 2020. While deploying capital, we aim for strong risk-adjusted returns on invested capital. Although we don’t disclose this metric or internal targets specifically, with the introduction of our new non-GAAP metrics we are able to provide investors with the adjusted EBITDA contribution and the capital deployed for these various acquisitions. We believe these new disclosures will help demonstrate our track record across our various capital allocation initiatives over time. We continue to be pleased with the growth in financial performance that Seaspan and APR exhibited over the second quarter despite industry headwinds. It is a testament to the resilient business models and the hard work of our global team. We have and will continue to remain steadfast in our focus on disciplined growth and value creation for our shareholders. With that, I will hand the call back over to the Operator for questions.

[Operator instructions] Our first question comes from Chris Wetherbee with Citi. Your line is now open.

Hey, thanks and good morning guys. Maybe I could start on the container shipping side. From a big picture perspective, it appears that liners are getting a bit more disciplined using blank sailings and other capacity management tools to be able to manage rate and supply demand within the business. When you think about that consolidation that’s occurred and that freighter discipline on the liner side, what do you think that means for tonnage providers as we think out over the course of the next couple of years? Does the pool get a little bit more selective? Are there other things that we’re not thinking about? Just want to get a sense of how you guys think about that.

Good morning Chris, this is Bing. To answer your question, it is absolutely true - liners today I think through this COVID-19 is further proof that, I think from an industry standpoint, is much more sustainable because I think through the consolidation liners have been more focusing on delivering the quality service, meanwhile I think they are also focusing on vertically integrating. For example, I think yesterday CMA acquired a port and today Maersk acquired a port, and also I think they acquired--you know, some other liners acquired the land transportation, so from that perspective I think the liners are increasingly focusing on the quality of their services and therefore for the tonnage providers, I think what they’re looking for is the scale, the quality and reliability. I think this is exactly what Seaspan is building, is through this COVID-19 as an example, while we’ve been impacted through the charter rates, however if you’re looking at our utilization, we have been able to maintain over 97% throughout the past quarters, and this is really a testament of even during this unprecedented market situation, I think liners are looking to companies like a tonnage provider at Seaspan, where we provide the quality service, at the same time we provide flexibility in terms of our scale. For example, when the liners, they have different needs on the vessel size or location, we were able to swap these vessels by size, by location, and between the customers, which is also the reason why I think we were able to maintain such a high utilization rate. So in general, I think going forward as a tonnage provider, as we said before, we need to provide the solution, we need to have the scale and we need to have the flexibility and quality, and that’s what the liners are looking for. By simply providing a vessel itself, definitely that’s not what they’re looking for. They are looking for a partner to support them to grow their business, meanwhile be able to work with them on a variety of needs with the vessel being one of the solution providers, whether it’s the technology, whether it’s the operations, whether it’s the commercial, financing, accounting, so all aspects. I think that’s why we are building the business as a true partner and solution provider to them.

Okay, that’s helpful. Then in terms of operating on the containership side during the quarter, should we assume that this quarter from a cost perspective, with some of the COVID disruptions, is what we should expect, this type of cost performance in 3Q and 4Q? Some operators have suggested that things were actually fairly clean from a cost standpoint in 2Q, so maybe you might actually see some step-up; but I think you’re suggesting that you guys were moving assets around and doing some interchanges of crews during this process, so maybe it’s sort of the consistent run rate. Just want to get a sense of how clean these results are from a cost perspective and how we should think about maybe the back half.

Yes, I will give a general update and then Ryan and Torsten, you can give more details. On the cost side, we are very proud to say that given the COVID-19 impact, it does create a lot of limitations on operations; however, I think we are extremely proud, and that’s why I want to answer your question, because I’m extremely proud of our team. Given these limitations our team, whether it’s onshore and also the seafarers, they’ve been able to demonstrate our operational excellence. In general, I think the number speaks for itself in a way that our cost on the operational side actually has been minimally impacted. The only impact to us due to this COVID is really on the revenue side, and with that I think that Ryan and Torsten, you can add more.

Yes, thanks for the question. If you go to Page 17 of the earnings release, you’ll see incremental disclosure on an operating cost per day. As we’ve discussed before, we don’t provide specific commentary on run rates or what the back half will look like specifically, but I think looking at the implied guidance for the full year provides a helpful view of what we think opex will be for the back half of the year. I’ll turn it over to Torsten, but what I will say is that Torsten and the operations team have done a fantastic job of managing cost during this environment, and there have been a number of cost saving element as it relates to COVID, whether it’s crew optimization or working with various repair and maintenance programs. With that, Torsten, I turn it over to you.

Yes, thanks Ryan. As Ryan said, we are not disclosing run rates as such, but the model we have is robust to short and medium term fluctuations, even as severe as these. We have been trying to reduce cost wherever to mitigate our COVID impact. We will see bits and pieces come back in Q3 and Q4, but that’s all included in our guidance.

Okay, that’s helpful. Last question, just bigger picture, you’ve obviously been busy on the containership side. You did the APR deal about a year ago. I guess I just want to get a sense as you’re thinking about putting capital to work, where you see attractive opportunities, whether that be on the shipping side, if it’s beyond container shipping or if it’s elsewhere, just trying to get a sense of where you guys are thinking about opportunities and putting capital to work going forward.

Thank you Chris, I will answer the question. Just to clarify, on the APR side we actually just acquired at the end of February this year, so we actually just recently acquired APR. We did announce the APR acquisition last year. In terms of the capital allocation, that is an excellent question because looking forward, I think what we can say is that we will continue to focus to be the best-in-class asset operator and selectively we own the assets and operating the assets. What we can say going forward is that what we will do and what we will not do. What we will do going forward, first of all, we’re going to continue to strengthen our management team. I think that’s evidenced by what we have done and what we have built as a management team over the past years, where we were able to focus on execution and deliver the results, and that’s why we were able to transform Seaspan and that’s why we intend to do the same with APR going forward. Going forward, I think for us we’re going to continue to build the team because with the dynamic team that we have, I think whenever there’s opportunities that we will be able to realize those opportunities and create value for our shareholders. The second thing that we would do definitely is we’re going to continue to grow because we have the financial strength, we have the management expertise, and I think we have the ability to create as we have done so far in those type of growth opportunities, because all those opportunities have been created with our partners and the customers. We will leverage those trends and continue to expand our business and create the value going forward. The third part I think we’re definitely going to do in terms of allocating capital is that we’re going to continue focusing on our existing business of containership and also the power energy, these two platforms that give us the base and leverage because they are the market leaders in their respective area. We have the customers, we have the financial strength, and we have the industry networks that support us to continue to lead our business, so therefore we will continue to allocate the capital in those areas. Fourthly, I think as we said, the things that we don’t do is that we will not allocate any capital for the sake of allocating capital. We will never go into any kind of a growth opportunity just because we think it’s interesting or we’re going through any of type of, for example, auction process. Also, we will not let ourselves be distracted because we will only grow if we see that it’s the right opportunity that can create long term, sustainable value, and we’re going to continue focusing on growing, whether it’s organically [indiscernible] of our existing business, which is the container shipping business, and also the power business.

Okay, well thanks very much for the time. I appreciate it.

Thank you.

Thank you. Our next question comes from Michael Goldie with Bank of Montreal. Your line is now open.

Hey guys, good morning. Thank you for taking my question. My first question revolves around guidance, especially Seaspan. It seems fairly unchanged despite the new vessel acquisitions. Can we get a sense of the puts and takes in this updated guidance? Are slightly lower charter rates being offset by the new acquisitions?

Thanks Mike, and happy to walk you through some puts and takes. On the revenue side, we do have the new acquisitions that are flowing in, in the back half of the year, and that impacts obviously revenue and then operating expense. Then you do have, to your point, the offset of some lower charter rates on the back end of the year related to the COVID-19 environment. That said, as Bing mentioned in his remarks at the beginning of the call, 98% of our revenue for 2020 at this point is contracted, and so we feel very comfortable with the tightening of guidance that we provided going back for the rest of the year.

Okay, perfect. Then looking at your conversations with your customers, how are those negotiations going? How are they looking relative to your existing contracts that are beginning to roll off? Are customers acknowledging the recovering environment?

It’s Peter. That’s a good question. I think as both Bing and I have said in the presentation, we work very closely with our customers and we have only become closer as we’ve gone through this trying period, the result being that we’ve maintained utilization of the vessels, so in other words we’ve been the one to get the employment versus others. We can’t really control rates in the spot market. As Ryan says, the spot area of our business accounts for 2% of our business, of our revenues. We engaged very early with our customers. It’s not a case of simply getting the employment but we engage earlier than when the vessel rolls off. For example, we’ve done an earlier dry docking on a couple of our large vessels with one of the main liners. We anticipated that they would also be suffering from low container volumes during this period. By advancing that, we were able to negotiate out of that an extension to that contract of over three years, so we seek these kinds of opportunities and we have the flexibility and the capability to perform along those measures.

Okay, that’s really helpful.

Just to add to what Peter said, in terms of our fleet of 125 vessels, for 2021 about 85% of our revenue on Seaspan is already contracted, so we have about 15% of spot, spot meaning those vessels uncharted and less than one year, so our exposure is rather limited. In addition to that, because we can provide those integrated solutions and services with our customer, we are working very closely with our customers and we are very confident in terms of continued rolling these vessels into the long term contracts. It’s part of the nature of our business and as a matter of fact, right now because of the rate is relatively low, it’s not in our top priority to actually enter into a long term charter at this point because I think that the rate as we speak right now, it’s recovering.

Okay, perfect. Then my final question has to do with APR. Utilization was around 68% for the quarter and it sounds like those Mexicali contracts didn’t really kick in or they weren’t realized for the full quarter. How can we think about getting utilization up closer to that mid-70 range that we’ve seen historically? Will those Mexicali contracts being in full effect for Q3 get us closer to that mark?

Yes Michael, I think the way to--that’s why I think the way we look at the APR business to a certain extent is similar to Seaspan’s, is that we’re going to work on both opportunities to improve the utilization. One is through the extension, the other one is through the new business opportunities. As you know, APR’s fleet, more than half is under long term contract. The current COVID obviously has certain impacts in terms of the reductions to overall--you know, the power consumption, however I think we believe it’s temporarily slowing down the decision making process and also of course results in some, I think, cancellation of the projects. For example, back in May the Puerto Rico [indiscernible] did a demand for about 350 megawatts of power, but due to this COVID and for the peak season, they did not need to have this power, so therefore there are certain impacts. However, I think as we continue working on both existing type of opportunities, that the management team are working on other opportunities such as--we started looking at other opportunities such as flare gas, LPG, and other grid stabilization, so to broaden our portfolio of offerings so therefore that we will have more opportunities to get the turbines utilized. So over the period, I think we are still confident we will be able to improve the turbine utilization through the extension and also the new opportunities.

Then Michael, just as a clarification, for the third quarter pro forma for Mexicali, what you’ll see is 80% utilization for the APR power utilization fleet.

Okay, perfect. Thank you very much.

Thank you. Our next question comes from Ben Nolan with Stifel. Your line is now open.

Hey, good morning. Let me start by saying I appreciate the enhanced metrics that you guys put out. Any additions to visibility is certainly helpful for my job. I have a handful of questions. The first one is pretty easy for you, Ryan. With the addition of the rating here, I’m curious - it’s a little non-traditional, it’s not S&P or Moody’s, why’d you decide to go that direction? Not that it matters a lot, just curious.

Hey Ben, good morning. Thanks for the question, and it’s a good one. Kroll actually has a dominant position in the rating of industrial transportation companies, and as we think about potential institutional credit access for our business going forward, we think it’s an incredibly important relationship and one that we’re quite excited to continue to develop.

Okay, perfect. Then I’ve got one Seaspan type question and one maybe multi-faceted APR question, if I can. On Seaspan as it relates to this most recent transaction, I had seen that it was actually from another vessel owner, as in a liner that might not be right. Maybe you can help me, but I’m curious if there are maybe thematically more opportunities from maybe people like yourselves, who are owner but maybe don’t have the same financial position and might be looking to take advantage of maybe equity that they have in their existing assets to improve their balance sheets.

Yes, thanks Ben. I think if you look at the fragmentation that exists, and we talk about this in a variety of settings, there is ample opportunity for further consolidation in the owner space, and whether it’s in the near term or over a longer period of time, we expect that consolidation to play out. As Bing mentioned during his commentary, our drive for consolidation isn’t for the sake of consolidation, it’s for strategically growing our business with the right risk-adjusted returns behind it, so we expect these opportunities on the owner side to continue to be available. But it’s important for us to not only think about what opportunities exist but how to match and marry those with our customers.

Okay.

It’s also just tied up to the previous question that we were talking about, is that there really is--you know, if we’re looking at these opportunities, not only I think you need to have the equity but also you need to have the customer needs. All these growth opportunities we have had so far is all driven by our customers’ demand. Our liners, they value our services and they want us to provide a service to them, and that is--I think that’s also one of the primary drivers for these type of opportunities.

Then if I could switch over to APR and ask a multi-faceted question, I guess looking at the fleet, a little bit less than half of it is still diesel from what I see, with the balance being gas. I’m curious, number one, what’s the strategy in terms of the shift towards more gas-fired power generation internally, and is that something where there are opportunities just to buy? Any color on what the global position of that might look like, or order book of new capacity? Then tying in with that, it was interesting, Bing, that you mentioned looking at other tangential opportunities. Something that we’ve been hearing a whole lot about lately is hydrogen, possibly hydrogen for power generation. I’m curious if you guys have looked at all at that, and I realize it’s early stages but is that an area that you might, would, or are investigating possibly delving into in conjunction with what you’re doing on the gas generation side?

Sure Ben, I will try to answer the first question, and I think Peter and Torsten would be able to answer the second question on the hydrogen side. It’s funny that we actually had some discussions this morning--yesterday. But with regard to APR, currently yes, we still have about 500 megawatts of capacity, but over the--to answer your question, over the time we are actually intend to divest in all these DPMs and focusing on gas turbines because we want to be in the forefront of environmental compliance, so therefore going forward we’re going to be more focusing on gas turbines and divest the diesel generators. In terms of the business going forward, as you just mentioned, I think with the existing fleet that we have, we are going to be focusing on increasing the utilization, and that’s the first and foremost priority before we further consider growing the business, because I think there’s a lot more that we can improve from the existing business. Then as the market, because you know right now the energy and power market is still evolving, I think that we are very well attuned to the market development, so therefore as the market develops and since I mentioned earlier whether it’s flare gas, whether it’s LPG and other technology requirements, and also the transition from traditional power to those alternative power with the wind and solar, I think that they are more increasing demand, for example, the grid stabilization, so we’re going to grow our business as the market evolves and as our customers demand, so I think that that is something that we are confident that we’re going to continue to follow the demand of the market and our customer. But first and foremost, we’re going to focus on increasing the utilization of the existing fleet.

Thanks Bing. I’ll let Torsten jump in if he has any thoughts on the hydrogen ship side. I think that that’s an area that we definitely evaluated. As it relates to APR, Ben, and hydrogen opportunities, as Bing mentioned earlier in the Q&A, we evaluate a whole host of different technology applications to the various projects that we’ve engaged in, hydrogen being one of the many, and I think as we go forward, it will be a mix of evaluating these different technologies as well as different asset and project length combinations from a total growth perspective for APR.

Yes, it’s Peter here. Just in regards to the ship side, I can’t speak very much to the power generation other than what Bing has said - you know, the focus is on utilization and opportunities, near to medium term opportunities such as the utilization of flare. On the marine side, there’s a few considerations that we have to take into account. One is the availability of fuel. A second one is we have to carry the stuff wherever we go, and thirdly we have to carry enough of it to complete the voyage. I think we are all aware of the various horizons facing the marine industry in regards to alternative fuels in line with the IMO ambitions on greenhouse gas reduction through 2030 and 2050, so we are very active in considering alternatives. It takes many years in terms of the availability of a sustainable fuel to be available to the market, LNG for instance, over 25 years to become readily available in the margin market as a fuel because the production which is where the LNG tankers go is not necessarily where vessels need to be to tank up as a fuel. So we have been engaged in a number of feasibility projects. We engage with partners in the broader industry, such as oil majors, classification societies, engine makers, etc. to develop our views and potential visions of where we would go. I think one of the talks around town is about LNG as a fuel. Thing is, that’s not a carbon-free fuel, so it is a pathway to improvement but in the end, we’d have to consider alternative fuels such as ammonia - it is one potential, or others that would be carbon neutral by capturing carbon, producing a fuel out of it so you’re not actually increasing the carbon footprint.

Great, I appreciate it. Thanks guys.

Thank you. Our next question comes from Randy Giveans with Jefferies. Your line is now open.

Howdy gentlemen, how is it going? I guess first question, other than container shipping and power generation solutions, what other infrastructure areas might overlap with your customers’ interests as well as ATCO’s interests, and then is there a rule on how maybe diversified the company becomes?

Yes Randy, that’s a very good question. I think that in terms of what we are looking at the synergy in terms of between the container shipping and the power, I think right now it’s more from the business model and I think the--more with the sharing services. Going forward, I think the opportunity will be largely dependent on what kind of further customer demand and also what are the investment opportunities that that brings. We do not set specific silos of target where we’re going to grow into, rather I think right now, given these two platforms that we have and I think we’re going to continue to build on that, and I think vertically and horizontally we will see the right opportunities and will allocate the capital. But whenever we do, if and when we’re going to do that, I think we have to stick to our investment and capital allocation discipline and the criteria, and so that’s in general what we’re looking at future opportunities.

Okay. Focusing on your containership contracts, especially some of the longer term ones, there’s been some recent announcements of maybe a reduction in extension of charters. Have you been in talks with some of your counterparties for similar arrangements?

Yes, you are talking about the modification of the charter contract?

Sure.

Yes, this is actually--this is our normal course of business, because as you know, once you enter into a long term contract, it’s a matter of getting paid for the stream of cash flow. Given the nature of the business that we are in, we are constantly actually working with our customers. It depends on their business and needs, and therefore that we’re going to develop the solutions with them. However, I think with these payments, the term changes, there’s two principles that we’re looking at. Number one is there has to be a win-win situation, meaning it’s a mutually beneficial for us and also for our customer. The second discipline principle that we hold is that these type of modifications, it’s not at any way to compromise the quality, meaning the cash flow qualities. That being said, we are actually constantly working with our customers in looking at their business needs and modify the contract in a way that--you know, what we call less for longer, or more for less. For example in Q1 2019, we modified a contract where we actually received accelerated payment of $270 million, and right now I think due to the market conditions, some of the--for example, the liner customers, their demand has changed, but however they would want to retain Seaspan’s services over a longer period of time, and that’s when we’re going to have these type of opportunity for less for longer. But once again, these less for longer, for us that we will be able to get a longer term of guaranteed utilization, at the same time as long as the rate of the charter and it meets our return requirements, and I think for our customer they will be able to get what they need in terms of the capacity supply as well as their cash flow management. But once again, there’s no circumstances where we will compromise the quality of the cash flow.

Then Randy, maybe just to follow onto that, I think when Bing and I joined in 2018, a big point of inquiry from the investment community was whether Seaspan was able to work through renewed extensions across our fleet, and I think if you go back to 2018 and you look at our long term contracted revenue then versus where we’re at now, I think the management team has been really focused on ensuring that that backlog of contracted cash flows supports not only the liability management program that we have but the scale of the integrated operating platform that we’re participating with. Then if you take a more specific approach to your question for the near term, we’ve had multiple conversations with customers, nearly every one of the leading global liners on contracts between five and up to 18 years over the last several weeks, even, and so we feel very confident that these long term contracts for key supply partners, such as Seaspan, will continue to exist for the foreseeable future, and we’re excited about the opportunity to continue to pursue those.

Perfect. All right, then last quick question in terms of capital allocation, maybe what is the most important part right now, and how does the current dividend fit into that?

Yes, first of all the current dividend, we think it’s appropriate, however myself and the management team, we regularly evaluate our dividend policy and present our recommendations to the board for the final decision. Dividend policy is part of our capital allocation in a sense that we constantly evaluate what is the best use of our cash flow, so therefore for us, I think that this is definitely constantly under our evaluation. Now I think if we’re looking at our current stock price relative to the dividend, I think the yield is high, but the way we see that the current situation attribute to maybe two aspects, one is that the general economic environment and the other one is we are still being valued as a capital intensive and a cyclical business. In reality, I think today we continue to demonstrate that the reality of Atlas is different, different in the sense that we actually--on one hand it’s capital intensive, but we generate a quality risk-adjusted return. In terms of cyclical, I think we are able to demonstrate again and again that through these cycles, that we can generate stable and predictable cash flow. You know, the reality is there is a disconnect, and disconnect is something that I think we believe is temporary. We would also continue--because you know, these situations, I think we will continue focusing on executing and delivering the long term value, and at the same time, and I think that us as the business that we--on one hand, we provide the transparency and we deliver the results, but I think one thing myself and the management team needs to do better is to better articulate and better present ourselves to the investors and market, and we believe that ultimately as we create long term value, the market will recognize that.

Then Randy, maybe just to follow onto that, if you think about near term capital allocation decisions, I would say it’s in line with everything we’ve communicated in the past. We believe that there is great value to improving the credit profile of our business with our long term goal of achieving a corporate investment-grade credit rating, and so as we think about alternatives to deploy capital, there’s always value in improving the credit profile. One of the things that I think is difficult to see at any given point in time, but by improving the credit profile it affords us the opportunity to execute on some of these attractive capital allocation initiatives, so if you go back to some of the information that we disclosed in the earnings presentation, you’ll see we’re able to deploy capital at very attractive rates, but we’re able to do that because we’ve been so relentless on the pursuit of credit profile improvement. I think you’ll continue to see us focused on quality growth, but it will also be with the vein of improving the credit profile because we think that both of those things go hand-in-hand.

Got it. All right, that’s it for me. Thanks so much.

Thank you. Our next question comes from Ken Hoexter from Bank of America. Your line is now open.

Great, good morning. I’ll echo Ben’s comments on thank you very much for the additional information. Maybe Bing, if you could provide more color on the current market for vessel acquisitions. Were these willing sellers, was this from the container ship liner companies? Maybe you can talk a bit about the market for acquisitions.

Yes, good morning Ken. For these acquisitions, once again none of these acquisitions is through any kind of auction process, rather it’s a proprietary opportunity. I think it’s a mix of the opportunities either coming from other--you know, the vessel owners or coming from the liners for a variety of different reasons, where I think we were able to structure in such a--the transaction where the liners that value our service and want to give us a long-term contract, so that is basically the way we construct these type of growth opportunities. In a way, first of all we have to evaluate the type of assets. We want to make sure these are the good assets. They are young, they are large assets, they are fuel efficient, and so therefore these are good assets with a demand and also with good residual value, because we are managing the assets. Then on the back end of it, we need to look at these assets, we never buy any assets on a speculation basis. We only buy the assets when the customer actually needs it and they want to sign a long-term contract with us. These are the type of--the opportunities that we will be able to work with the seller and also with our customer, and therefore we will be able to create these type of attractive opportunities where, again, it’s a win-win situation in the sense that we would be able to provide our services and meanwhile building up our scale and the flexibility and quality. From the customer side, they enjoy our quality, reliability and the skilled services, and that’s something we see. As we mentioned earlier, as the liners continue to focus their end of the services, they are demanding the quality solution provider or the tonnage provider is not a vessel, rather it’s a platform, it’s a solution, it’s a service.

Great, and then I guess I’m going to step back and ask a bigger picture question. We’ve heard a lot about the move from globalization to localization in supply chains. Just want to know how you think about this in terms of your exposure on the containership side and your thoughts on long-term revenue impacts, if any.

Thank you, that’s a good question. Globalization, despite all these political discussions, I think globalization will continue because ultimately I think the consumers or business will be looking at the cost, and that’s one thing. The other thing is the globalization, if you’re looking at it from a supply chain standpoint, and I think that the supply chain systems have been built over the years with serious capital investments over the time, so even though you want to have this localization, I think it number one requires additional capital, number two it would need to take time to build a new supply chain, so therefore I think the globalization definitely is a trend. Now however, is that going to grow as what the globalization has been growing for the kind of speed in the coming years? I think that that is going to be slowing down. I think your question is probably more alert to in terms of global trade. I think global trade definitely will continue, and I think that that just is something I don’t that politics will be able to stop it because, once again, you do have to take into consideration of the reality versus the political agenda. So in general, we are cautiously optimistic in terms of the continued--you know, the growth of the globalization and also the global trade. Now the case in point, for example, even up to this point with the COVID, this is not because of the human, rather it’s a natural limitation of this trade, and I think you see the very quick rebound of the global trade. If you’re looking at last year with the trade war, and I think still if you’re looking at the industry as a whole, I think our business actually had a record year last year utilization-wise, so therefore I think from specifically the impact to the container shipping business today, I believe that the impact is minimal and if and then will be any impact, that’s going to take longer time, and this is not something I think we believe that will have the material impact to the industry, and particularly for the long term contracts we try to secure.

Great points, Bing, appreciate that insight. Last one from me is just a really simple one. I guess maybe Ryan, is there any thought from the cornerstone investors to make the stock more liquid? I think the float’s only 30% now, and obviously that might be a constraint on some larger investors’ ability to move in and out of the stock, so any thoughts to that process?

This is David. Perhaps I should take this question as Chair. I don’t see us increasing the liquidity at this point. I think we--I think both the Fairfax Financial as well as Washington family are happy with their investment, and I don’t see them selling shares. In fact, I think consistent with the prior question regarding capital allocation, again depending on where the stock is and where our capital availability is at any given time, I think we’re probably more likely to be buying shares than issuing shares, at least under the current environment that I would see. I think that a potential share repurchase would be more likely today than a dividend shift, but again those are all speculative. I think at this point through this COVID situation, maintaining our capital and continuing to grow the business is going to be the priority, and dealing with either share purchases or dividend changes would probably be well into the future after COVID is behind us. The only other comment I’d make is obviously if there was an acquisition where we felt we were getting more for the stock than the stock current value, we would certainly consider using stock as an acquisition tool. Depending on the acquisition, that may or may not increase liquidity, but--so I think having said all that, the short answer is I think our shares outstanding are not likely to shift a lot in the near future.

Dave, appreciate you jumping in. Thanks for the thoughts.

Thank you, and I’m showing no further questions in the queue at this time. I’d like to turn the call back to Bing Chen, President and CEO of Atlas for any closing remarks.

Thank you all very much for taking the time to join our call. I appreciate your time and your questions, and wish everyone--you know, stay safe and healthy. We look forward to speaking to you soon. Thank you all very much.

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude your program and you may now disconnect.