Atlas Corp. (ATCO) Q1 2022 Earnings Call Transcript

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 12, 2022. I would now like to turn the call over to Will Kostlivy, Head of Investor Relations at Atlas Corp.

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 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 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 and 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 U.S. 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, 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 Pedersen. Following our prepared remarks, we will open up the floor to a question-and-answer session. With that, I am pleased to now turn the call over to Atlas Corp.'s CEO, Bing Chen.

Thank you, Will, and good morning, everyone. 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 continue to benefit from a robust market as up to 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 forwarded fixed 18 vessels with a global liner customer, contributing over $115 million to our gross contracted cash flow of $18.1 billion. This leads to no charter wrote 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 vessels of our 40 vessel newbuild program all 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 taking advantage of the current markets to recycle capital through the divestment of non-strategic assets. We completed one vessel sale in Q1 and three additional vessel sales are in advance 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 rates. This is due to the on plan 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 continue 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 containershipping 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 APRs IID contract in California of three turbines for 74 megawatts, a new market contract for eight turbines in Brazil for 226 megawatts and the leasing of five turbines for 120 MW for a total of 16 turbines deployed. We continued to transform the business by strengthening APR’s business development focus on long-term contracts. The recent extension of the 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 at its 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 industrial sectors. Thank you for your time today. I would now turn the call over to our CFO, Graham.

Thanks, Bing, and good morning, everyone. 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 15.5% 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. Our 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 for the diligent efforts of our operation team and our seafarers, we continued 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 at 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 are actively recycling capital through the sale of our 4,250 TEU vessels. These vessels are non-core to our long-term strategy due to the age, design and predicted future demand. We sold one vessel in Q4 2021, and we sold another one in Q2 2022. In addition, at the end of Q1, we had an additional three vessels contracted and pending handover scheduled to close in Q2 2022. These four vessels are forecasted 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 to 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 its tenor extended from two to three years. The facility includes seven year maintenance 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 spread 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 rates, we entered into an additional $500 million long-term floating fixed interest rate swap at the end of January in 2022. In addition, we are closely monitoring our residual floating fixed rate position and we’ll continually proactively manage our exposures. We are pleased to see 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 perhaps the 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 will continue to actively manage our balance sheet as we remain focused on our goal of achieving an investment-grade crediting rating. Please turn to Slide 8. I’d like to summarize our strong quarterly performance by leading you with four key takeaways. Number one, Atlas continued to deliver strong financial results and quality growth in the past 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 have 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 number four, we are 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.

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

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

Thank you, Mr. Burke.

Thank you.

The 40 to 50 TEU vessel classes, you announced the sale of 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?

Yeah, Liam, I answer this question. The demand in general, I think is, as we expect it, people are looking at what the remaining contract of the charter that with the vessel. So, one thing that we want to highlight is this, all the vessels that we are selling or we are going to sell, they all have long-term contract attached to it. So these are not the spot vessel. And secondly, we are looking at as opportunistically to sell these vessels with those future owners that who will be able to provide a kind of service to our customer that meet 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 have actually always evaluated that based on the situation what happen if we will continue to operate these vessels, because one of the key strength of Seaspan is our ability to be able to continue to deploy these vessels under all circumstances, which is why we have a – on average 99% historical utilization rate through all the market cycles and that’s the base line that we are looking at in terms of continued operating. On the demand side, the current market I think is roughly about the same with 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 in make sure that we maximize the value.

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

Yeah, for APR, the deployment that we have secured over the past quarter is one as we said is IID which is a repeat of what we have done last year, because the strong customer trusts and relationships 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 a 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 started at the beginning of the year, those are the 12 months contract for now.

Great. Thank you, Bing.

You are welcome.

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

Hey. Thanks guys. This is on for Chris. So, let me get a clarification on the containership side, did you have any deliveries this quarter? Maybe I missed that. Just quickly clarify that there.

You are talking about the cycle...

The one delivery cycle.

You are talking about a newbuild delivery, right?

Yeah, yeah.

Okay. There was one – there is one newbuild in April and 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 the remaining three to be delivered throughout the year.

Okay. Got it. And then, so, the cadence of early deliveries, obviously, it’s harder to look out between 2023 and beyond, but can that extend into the out years as well where everything gets pushed forward just a little bit?

This is a good question. What we would like to highlight is, so far 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 say just now, we still expect possible early deliveries ranging from this initially was – for example, one of the vessels supposed to be delivered in October this year and because our team and yards cooperation that we were able to advance them to June and we see potentially there will be further advance them to May. 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 – the later delivery, this is your question. If we are 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 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.

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?

Maybe, Graham if I can chime in here, it’s Peter. Hi, Eli, look, with sort of volatility in the first part of this year in rates, they fall very high, I am talking about trade rates, which then trickle 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 it from China 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 are not helping unlock anything right now. Until we saw getting these supply chain unlocked and moving again, I think we are going to see continued high demand for tonnage. That said, it will happen and I expect that probably this is something maybe we’ll start seeing coming into 2023.

Got it. Thank you. One more from me. Liquidity of $951 million, asset value still have, what does it look like here from that cash side? That’s why mixing on cash being opportunistic any other plans, any way we should be thinking about that that extra liquidity right now?

I think, 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 are going to be doing development to that scale. But there is still quite a bit of activity in the market and customers have still got the challenges in terms of transitioning their fleets both to newer more modern vessels, but also meeting the upcoming compliance requirements. So, there is still a lot of opportunities in the marketplace and I think certainly together with management, lot more comfortable carrying more liquidity than required rather than this, given the financial volatility in markets that remain on this well. So I just think it’s prudent and I’d like us to be in a position to be able to move faster should a lot of opportunities present themselves.

Of course. Thank you all.

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

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

I’ll chime in here again. Ken, hope you are doing well. So, look, shipyards, essentially is a slot machine, but one of the things that you may or may not break in as Seaspan is when we ultimately do the contract with the yard, we have done a very mature specification and outline design with the yards. So, we don’t have a lot of changes. What happens in the yards is, everything being equal it would actually be tough to accelerate our production, but what we see during these times of somewhat volatility, few other things speculative orders is they are subject to many changes and that actually presents opportunity for us to jump ahead. So, generally speaking , that’s how that would lay out. Also you look at where we are 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 to find opportunities for essentially earlier slots to move our slots again is advantageous to us. That gives you some color, Ken?

No, it does and then, Graham, you want to throw your thoughts on – or bring on in terms of what that means for the market? And I know, again, your fixed contracts I am just wondering if that means we see the supply moving a little faster of if it really is just Atlas jumping ahead of line?

I think, so far, it’s Atlas, that’s what we are aware of as what Peter explained that, 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 as all such machine every effectively, efficiently and that is why we have this confidence. In terms of the implication to the market, if we are looking at the total newbuild is it 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 newbuilds coming into the market, for sure that will be able to alleviate some of these demand and supply of balance. So as the consequences we will see, we would anticipate the rate it will be in terms of the charter rate that it 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 of our newbuilds are fixed into the long-term charter and which is why, I think our business model is different. Also, if you are looking at our existing fleets, as I said earlier, we had zero wrote off in terms of existing charter expire for 2022, we only have eight recharter in 2023 and 16 in 2024. So, this is exactly what we anticipate the demand supply going forward in a 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 delivery. And I think from a market perspective, we are yet to see how the rate is going to evolve and gradually normalizes.

Great. Peter, that was great insight and Bing, appreciate the follow-up. So, just maybe two more from me, one for Graham. There was a gain from currency swap, maybe talk about the hedging activities and how we should think about 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 powergen? I guess, is it just, once you get Argentina reset then it’s at a 100% or is there a kind of a target utilization we should think about for that business over a period of time?

Maybe if I start at some of the interest rate exposure piece, Ken the first bit was, we continually monitor our fix positions that we have in terms of our charter agreements which obviously gets fixed income in and we’ve got a mix of fixed and variable debt. 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 manage to get in fairly early on that and we would have probably saying in the earnings release is this, around $46 million worth of unrealized mark-to-market on our hedge positions at the moment. We will continue to manage that as it is. I mean, we are not going to – don’t want to hit to a gross EBITDA. The Board is very focused on making sure that we balance our exposures here and we don’t get overhedged. But in terms of the outcomes, in terms of the guidance we gave back in Investor Day on our financials that all still holds true and given it was only a short period ago, I think that’s good that it does hold true. So, our guidance is still very much in line with what we presented there including on rates and they are all holding. We don’t really have currency exposure. We had through Argentina and that’s indemnified under a structure with the FX. So, currency issues there, done an impact on us and of course they are winding up as we exit Argentina going forward. I think, Bing mentioned earlier the portfolio in APR is and we touched on Investor Day, it’s really going through a big transition this year with the 15 turbines, 14 turbines coming out of Argentina. And that’s a big demob and then remobilization of those. So, you might recall back in Investor Day, we’ve provided a fairly detailed chart, which 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 are running at around 67% utilization rate forecast currently. We would expect that to get higher, but that’s still, as we have 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 does means that you’ve got material downtime. But that’s what we starting to change in the contract structure.

Yes. Great stuff, Graham. Appreciate the insight as always. Thanks.

Just one other point I just want to make before the next caller, in the earnings release that at the beginning of this year, we adopted a new accounting policy which applies to our convertible notes under this accounting policy. It means that we now account for these and so that all converted in terms of our issued shares. So there is an 15.5 million shares that you’ll see in the share build up for the EPS calculation and FFO calculation. That equates to approximately $0.02 per share lower as a result of that additional dilution. It’s a conservative approach, but I just want to make it clear to people, when you are benchmarking and against our previous EPS and also your consensus models, you need to take that into consideration.

I am showing no further question at this time. I would now like to turn the conference back to the company.

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 or myself. We look forward to our Q2 call and in the mean time, please stay safe and healthy and you have a great day. Thank you all very much.

Thank you, everyone.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.