Atlas Corp. (NYSE:ATCO) Q2 2022 Earnings Conference Call August 10, 2022 8:30 AM ET
Company Participants
Ashton King – Manager, Investor Relations
Bing Chen – President and CEO
Graham Talbot – Chief Financial Officer
Peter Curtis – Seaspan’s Chief Commercial Officer
Torsten Pedersen – Seaspan’s Chief Operational Officer
Conference Call Participants
Liam Burke – B. Riley
Adam Czakanski – Bank of America
Ben Nolan – Stifel
Operator
Welcome to the Atlas Corp. Second Quarter 2022 Earnings Conference Call. I would like to remind everyone that this conference call is being recorded today, August 10, 2022.
I’d now like to turn the call over to Ashton King, Manager of Investor Relations.
Ashton King
Good morning, everyone. And thank you for joining us today to discuss Atlas Corp.’s second 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 in the Investors tab of our website, atlascorporation.com.
I would like to remind you today that our discussion contains forward-looking statements and I draw your attention to the disclaimer on slide two in the accompanying earnings presentation.
Please note that we report non-GAAP measures, which we believe provide investors a clearer understanding of the performance of our businesses. The earnings release contains supplemental financial tables and information pertaining to our quarterly earnings report and includes definitions of non-GAAP financial measures and reconciliations of such non-GAAP measures to the most closely comparable 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 three. 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.
Bing Chen
Thank you, Ashton, and good morning, everyone. Thank you for joining our call. To begin, I would like to quickly cover the tape private proposal that was received by our Board of Directors on August 4, 2022. We cannot comment on the proposal. For more information concerning the proposal please refer to our public filings.
As stated in our filings, the company does not intend to provide updates, the proposed transaction until appropriate or required. In the meantime, management is absolutely focused on business as usual and continuing to successfully execute on our strategy.
Today, my comments will focus on key developments at Seaspan and APR during the second quarter. Then I will hand it over to Graham Talbot to represent our Q2 2022 results and provide a financial update.
Please turn to slide four. I would like to start by reviewing the major developments at Seaspan. We continued delivering strong quarterly results driven by healthy industry fundamentals and further developments of our long-term strategic partnerships.
We continue to take advantage of current market conditions by recycling capital through strategic vessel divestments. In the second quarter, we sold nine Panamax vessels that were no longer aligned with our long-term fleet strategy and continue seeking opportunities to optimize our fleet portfolio to meet the needs of our customers.
In response to our customer’s demand, we leveraged our fully integrated platform to continue driving quality growth, executing agreements to build four 7,700 TEU dual fuel LNG newbuilds, but the subject to closing conditions. If completed, these vessels will commence 18-year charter with a leading global liner contributing nearly $1 billion of future gross contracted cash flows. Including these four vessels, Seaspan now has 29 dual fuel LNG newbuilds in this portfolio.
Leveraging our creative customer solutions we forward-fixed three vessels in the second quarter, in the third quarter we forward-fixed another 14 vessels with leading global liners. These forward-fixtures contribute over $1.3 billion to our total current gross contracted cash flow balance of $18.9 billion, not including the four newbuilds I previously mentioned. This leads to our fleet being 100% contracted to the remainder of 2022, 99.6% for 2023 and 96.9% for 2024 on a TEU basis.
We also continue diligent execution of our newbuilds. In the second quarter, we delivered four fourth and fifth 12,200 TEU newbuild vessels, which commenced 18-year charter with another leading global liner upon delivery. These deliveries mark Seaspan completing the full newbuild order of five 12,200 TEU vessels, which received from a customer in late 2020.
In June, we also delivered our first and second 11,800 TEU vessels, which commenced the five-year charter with another leading global liner upon delivery, with a running total of 117 newbuilds since our IPO in 2005, materially derisking execution. We are working diligently to deliver our newbuild program on time and on budget, despite the challenges presented by the pandemic.
During the second quarter, we maintained a strong vessel utilization rate of 98.3%. We also achieve a historically low lost time injury frequency of 0.26, as we continue to focus on the safety of our people. Together with our highly differentiated business model and consistent commitment to operational excellence, these successes drove our continued strong quarterly performance.
Please turn to slide five. Now let’s review some key developments at APR. In the second quarter, APR entered into a contract with a Mexico-based counterparty providing the dry-lease of four turbines with a capacity of 120 megawatts.
In May, APR’s new 44-month Brazil contract commenced, followed by the IID contract in June. The expansion of APR’s Brazil contracts on a 12-month to 44-month is evidence of our strategy to migrate the business to long-term contracted cash flow.
As mentioned last quarter, APR completed its five-year contract in Argentina earlier this year. As of today, demobilization of the turbine is substantially complete. The turbines previously at our Zappalorto plant were deployed in APR’s new dry-lease contract and we are working diligently to redeploy the remaining Matheu turbines. Upon successful full size demobilization of the Matheu plant, we will receive the remaining indemnification proceeds set out in APR purchase agreement.
Similar to Seaspan’s strong safety culture, APR achieved a perfect lost time injury rate of zero for the last 12 months. Alongside the strong market conditions for grid stability, we continue to transform the business by strengthening APR’s business development team, developing creative customer solutions and remaining focused on transitioning the company to long-term power opportunities with predictable cash flows.
Thank you for your time today. I will now turn the call over to our CFO, Graham Talbot.
Graham Talbot
Thanks, Bing. Good morning, everyone, and thank you for joining us today. Please turn to slide six. So in Q2 2022, we maintained our strong operational and financial results, reflecting our team’s continued high performance. During the quarter, Atlas achieved the following performance relative to Q2 2021.
Revenue growth of 4.9% to $413.3 million, adjusted EBITDA growth of 2.6% to $279.5 million and FFO growth of 4.2% to $201.7 million. At the end of the quarter, we had liquidity of $1.1 billion.
I’m proud of the team’s performance during the ongoing operational challenges caused by the COVID pandemic and supply chain disruptions. Our consistently strong performance demonstrates the resilience of our platform that provides through-cycle returns to all stakeholders and maintains our industry leading utilization rate of 98.3% in the quarter.
At this time, we can confirm our revenue, EBITDA and interest expense is tracking well to the guidance we issued during our Investor Day presentation. However, for net earnings, we had included a profit on sale of vessels in our guidance of approximately $60 million as shown in the footnotes of that presentation.
Although, we have divested 10 Panamax vessels since the beginning of the year, the composition of that investment portfolio was different than originally planned due to market conditions. Year-to-date, the divestments have resulted in a cumulative book loss of approximately $10 million.
Please turn to slide seven. During the second quarter, we continued our focus on strengthening and optimizing our balance sheet. Due to the age, design and predicted future demand, we completed the sale of nine 4,250 TEU vessels in the second quarter, generating approximately $224 million in cash proceeds. Year-to-date, we’ve sold 10 vessels for gross proceeds of $257 million. Going forward, we’ll continue to look for opportunities to optimize our fleet and recycle capital through vessel divestment.
Our strategic shareholder Fairfax exercise warrants to purchase 25 million common shares of Atlas in April. This resulted in cash proceeds of over $200 million, which will be used to repay outstanding debt and for other general corporate purposes. This is yet another demonstration of our shareholders continued competence in our platform.
A key element in the advancement of our capital structure is continuing to develop relationships with a global base of institutional investors. In this regard, we closed a $500 million sustainability linked U.S. private placement of non-amortizing notes with an 11.6-year weighted average maturity and a 5.3% weighted average fixed interest rate. Proceeds of the transaction will be directed to pay down existing debt and find quality growth opportunities.
We’re also continuing to monitor our interest rate exposures with the aim of aligning our fixed revenue and interest rate exposure. Seaspan is well-positioned in the current inflationary and rising interest rate environment, with approximately 70% of Seaspan debt on fixed rates as of quarter end.
Alongside locking in a significant amount of fixed rate debt to fund our newbuilds in 2021, securing $500 million of additional long-dated debt in the second quarter and entering into a $500 million long-term floating fixed rate swap in the first quarter will continue to proactively manage our exposure. Going forward, we’ll continue to assess opportunities to strengthen and simplify our balance sheet, as we progress towards our goal of an investment grade credit rating.
Please turn to slide eight. I’d like to summarize our strong quarterly performance by leaving you with five key takeaways. Number one, Atlas continued to deliver solid financial results in the second quarter, with strong performance across all metrics and $18.9 billion of high quality long-term gross contracted cash flows, ensuring through-cycle performance amid a normalizing industry environment.
Number two, we remain focused on quality growth through disciplined capital allocation by optimizing our vessel portfolio through strategic investments and in-demand newbuild orders.
Number three, APR is enriching its platform by strengthening its business development team, redeploying assets out of Argentina and focusing on securing long-term power opportunities that generate predictable contracted cash flows.
Number four, we continue to diligently execute on the construction and delivery of our newbuild vessels for our customers. Today, we’ve delivered seven newbuilds, all ahead of schedule. The remaining vessels are progressing as planned with four deliveries scheduled for the remainder of 2022.
Number five, we’re continuing to strengthen our balance sheet in line with our target of achieving an investment grade credit rating, in addition to proactively managing our interest rate position.
Thank you for your interest today. Operator, we would now like to open the line to questions. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Liam Burke with B. Riley. Your line is now open.
Liam Burke
Thank you. Ben, Graham, how are you today?
Graham Talbot
Good. Thanks, Liam.
Bing Chen
Good. Good morning.
Liam Burke
Good morning, Bing. You highlighted on your press release, recharters four vessels in the second quarter and then quite a few in the third quarter. Could you give us some color as to vis-à-vis the current charters and the recharters, whether you’ve benefited in duration or rate or both?
Peter Curtis
Hey, Liam. It’s Peter here. Hope you are doing well.
Liam Burke
Hi, Peter. Thank you. Hope you are doing well too.
Peter Curtis
Good question. Thanks. Look, I just point everybody to our fully integrated operating platform, not only in terms of the design of vessels and suitability of customer — for customers through our newbuild program, but also what we do to existing vessels to ensure their relevance within our customer’s fleet.
So, these forward-fixings have been a mixture of both with the existing customer and moving vessels from one customer to the other. By and large, they are combined with a program of modifications, some small, some not so small.
And also, by and large, with an agreement for customers to either fund the modifications or for a share of the funding into the modifications, which is part and parcel of our operating ethos. So, we partner with them, and we take a longer term view with them and this is what — this is how we realized transactions such as this. Hope that answer…
Graham Talbot
Liam. Sorry, Peter, I didn’t mean to cut you off. But Liam, I just wanted to add that, broadly speaking, these charters were scheduled to finish between 2023 and 2025. And post the forward-fixing that pushes these out to 2026 to 2032. So as we’ve discussed previously, our forward-fixing program is to keep extending the life of our charters into longer term contracts and cash flows and also a moment given where the market is to make sure that we push our charters out through this period when we’ve got quite a bit of new capacity coming into the market.
Liam Burke
Great. Thank you, Peter. Thank you, Graham. On the fleet renewal program, you’ve been very specific as to what vessel classes you want to continue to invest in. If I look at your fleet at the lower end, the 4,000 TEU class have been one that you’ve been divesting pretty steadily. How about vessels that are smaller in the class, so you’re comfortable owning them or is that something you’d look at divesting?
Graham Talbot
I’m happy to take that question, Liam. But anyone else can jump in. I think it’s not so much about the size, I think it’s more about how it relates to our business model. So we don’t mind owning some smaller vessels in that category, because we had customer demand there. But by definition, those vessels are normally on shorter term contracts. And as you’re well aware, our business model is very much geared towards longer term contracts.
So the shorter end of the fleet is not normally the dominant area where we focus. But if there are opportunities that we identify with those smaller vessels and customer demand, we do enter into them, but it’s not our core area of focus.
Bing Chen
Yeah. Just to add what the…
Liam Burke
Thanks.
Bing Chen
… Graham is saying, from our side, really it’s driven by the customer needs and also the vessel itself in terms of efficiency. So those are the two main criteria’s for us to determine our overall fleet strategy.
Graham Talbot
Yeah. And just to be clear, Liam, I’m referring here to smaller than our 40 years to 50 years that we were discussing earlier and we’re very selectively, as you point out, exiting some of those both to generate cash flow, but more importantly, to sort of high grade the fleet over the longer term.
Liam Burke
Right. That’s understood. Thank you.
Operator
[Operator Instructions] Our next question comes from Ken Hoexter with Bank of America. Your line is now open.
Adam Czakanski
Hi. This is Adam Czakanski on for Ken Hoexter. Thank you for taking my question. Maybe, Bing, the newbuilds that you mentioned, they seem to be coming in ahead of schedule, maybe you could just — could you speak to your capacity and what you’re seeing on that end?
Bing Chen
Yeah. The newbuilds so far, what we have delivered is total seven, as I mentioned earlier, five is 12,000 and the other two is 11,800. These are the vessels, I think, it was able to — we were able to do — working very closely with the shipyard overcoming those logistics challenges given the shipyard locked down.
And I think this is actually one of the key strengths of Seaspan the platform that we are able to, we have the knowhow, we have the team, our people that’s able to achieve these kinds of outcome.
Going forward at this — on one hand, we have received the force majeure notice from or for Chinese shipyard for reasons of China lockdown. But we have rejected those force majeure and we are — our team currently are working very diligently, yard-by-yard, vessel-by-vessel in finding the ways to help to improve or mitigate any potential impacts to those deliveries.
And I think that this is what I said earlier in the presentation that we are working diligently to ensure that we are able to continue to delivering these newbuilds on time and on budget and that is our intention.
Adam Czakanski
Got it. Thank you. And then maybe just following up on the vessel sales, you mentioned you still buy in the quarter, maybe just get a sense of vessel pricing in the market right now, kind of where it’s trending, is it maybe exceeding or maybe under pacing, if you will, some of your expectations on that front?
Bing Chen
Yeah. Generally as, I think, the vessel SMP pricing is also correlated to the freight prices, it’s just a matter of timing. So as we all know that freight rate has started decreasing from its peak, it was October 2021. However, the magnitude of that decrease in steel, I think, gradual and still far, far more higher than the pre-COVID level.
So, in general, and I think the — with the newbuild that’s gradually coming in, which including our own ships and also broadly the market, including our liner customer. So from a supply side, I think, the newbuild is started coming in.
From a demand side, I believe that there’s the — with the improvement in large part of the world in terms of the logistics and port — also the port congestions, there are some level of alleviation on the congestion side that actually helps on the demand side.
So therefore, I think, in terms of the newbuild coming in and with the second-hand vessels trading, the speed pace has slowing down. That’s the broader market, I’m talking about now versus maybe six months or nine months before.
Specifically with regard into our nine vessels sale, as Graham has pointed out earlier, really we have looking at the vessel-by-vessel, situation-by-situation, that we make those decisions to sell those vessels.
As you can — as you know that, the value of the vessel, it’s not the vessel itself. The value of the vessel is the vessel itself plus the attached charter value and plus the future expected charter rates.
So that, for us, we actually did an initial forecast, as what Graham mentioned earlier, the forecast the total number of vessels that we’re looking at on a total basis, today we have so far, only divested 11 of them. So that is why we have — whatever the numbers that we have in that has been reported.
Adam Czakanski
Got it. Thank you. I’ll pass it along.
Bing Chen
Thank you.
Graham Talbot
Thanks, Adam.
Operator
Our next question comes from Ben Nolan with Stifel. Your line is now open.
Ben Nolan
Hey, guys. I had a couple. First appreciating that you’re limited on what you can say with respect to the transaction. I was just curious sort of what the catalyst was or is in terms of why now, what’s the motivation for thinking about going private, not asking about sort of timelines or anything else, just sort of where you’re thinking about it?
Bing Chen
Hey. Good morning, Ben. This is Bing. As the press release by the company, our Board received an unsolicited offer and a special committee of independent directors has been formed. The processes within a special committee that is supported by the special committee appointed financial and legal advisors so that to ensure that they follow the proper procedures.
As for the management of the company, I hope that you can understand that we cannot discuss at this point or speculate on any offers nor the special committee’s process. What we can do is that is really that our team are very much focused on managing our business as usual. So I think that’s what the from the management standpoint this is what we can share with you at this point.
Ben Nolan
Okay. That’s helpful. So then going to normal course of business then, Graham could you — you alluded to it, but just in terms of the guidance that you would expect it a $60 million gain on the sale of some of those assets and now it’s a small loss. Is it just an accounting thing? As I look at it, it seems like if anything, the value of those assets, if — just the market value of those assets is roughly twice of what you’re getting for it, I would thought that if anything that the game would be going higher?
Graham Talbot
Hi, Ben. Yeah. So it really is an accounting issue to do the book values of the vessels that we’ve transacted and it actually relates back to three specific vessels in the transaction portfolio. There’s one we were actually negotiating the sale of when we’re compiling the forecast for the year and that was at a fairly mature stage, but that transaction ended up not going through and we’re still working on marketing that vessel and that actually carries quite a high profit on both sale.
And there were two others that we did sell, which weren’t originally in the portfolio that actually had a book loss. So these as you’re aware accounting losses against the depreciated written-down book values that we had carried in our books.
So the cash flow is still generated and everything else works in terms of the economic assessment. But I just wanted to be fully transparent about what the assumptions were — that were included in the footnotes to the long-term guidance and where we are tracking midyear, obviously, we’re still got a way to go. But I just want to make people aware of what the position is, as at this point in time.
Ben Nolan
Okay. That color is helpful. I appreciate it. And then last for me, there is the little footnote or the caveat to the four 7,000 TEU ships that you have recently agreed to build and charter that it’s somehow not finalized. I was hoping that you could maybe just sort of walk through where that stands and if and when you expect it to be formalized or what exactly is happening in that situation?
Peter Curtis
Hi, Ben. It’s Peter here. On that one, the little bit of an atypical thing in the contract is that it is subject to the provision of refund guarantees, which protect installments for the furnishing of refund guarantees for the contract to be valid. So until such time the contract is not yet valid. So we wait on the Korean entity that would provide such a refund guarantee on these both.
Ben Nolan
Okay. That is helpful. I appreciate it. Thank you, Peter.
Operator
That concludes today’s question-and-answer session. I’d like to turn the call back to Bing Chen for closing remarks.
Bing Chen
Well, thank you, everyone, for joining the call. I appreciate your time. And as we said, the business is continues as usual. We — the team focusing on conducting our day-to-day business and if there’s any questions, please again, follow-up questions follow up with our Investor Relations with both Will and Ashton. So thanks again and have a great day.
Graham Talbot
Thank you, everyone.
Bing Chen
Thank you.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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