Earnings Transcript for SECYF - Q2 Fiscal Year 2024

Operator: Good morning, ladies and gentlemen, and welcome to the Secure Energy Q2 2024 Results Conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, July 30, 2024. I would now like to turn the conference over to Chad. Please go ahead.

Chad Magus: Thank you, and good morning to everyone who is listening to the call. Welcome to Secure's conference call for the second quarter of 2024. Joining me on the call today is Allen Gransch, our President and Chief Executive Officer; and Corey Higham, our Chief Operating Officer. During the call, we will make forward-looking statements related to future performance and we will refer to certain financial measures and ratios that do not have any standardized meaning prescribed by GAAP and may not be comparable to similar financial measures or ratios disclosed by other companies. The forward-looking statements reflect the current views of Secure with respect to future events and are based on certain key expectations and assumptions considered reasonable by Secure. Since forward-looking information addresses future events and conditions, by their very nature, they involve inherent assumptions, risks and uncertainties and actual results could differ materially from those anticipated due to numerous factors and risks. Please refer to our continuous disclosure documents available on SEDAR+ as they identify risk factors applicable to Secure, factors which may cause actual results to differ materially from any forward-looking statements and identify and define our non-GAAP measures. Today, we will review our financial and operational results for the second quarter of 2024 and our outlook for the remainder of the year. I'll now turn the call over to Allen to provide the second quarter highlights.

Allen Gransch: Thank you, and good morning, everyone. We were pleased to report another strong quarter this morning, achieving adjusted EBITDA of $114 million or $0.43 per basic share ahead of our expectations as robust industry fundamentals and favorable weather conditions drove higher customer demand. We have increased our full-year adjusted guidance to $470 million to $490 million to reflect strong results from the first half of 2024 and ongoing market dynamics driving a constructive remainder of 2024. During the quarter, we successfully executed on our share buyback plan, repurchasing nearly 14% of our outstanding shares through a substantial issuer bid for $250 million, a direct acquisition from our largest shareholder and continued repurchases under our normal course issuer bid. We completed these buybacks at a weighted average price of $11.41, which we believe provides an excellent return for the corporation. We will continue to view a significant disparity between our market valuation and the underlying business based on the following factors. Our critical infrastructure network provides reoccurring cash flows that have proven year-over-year, our growth opportunities, the strength of our balance sheet and capital allocation flexibility and the large trading valuation gap to our waste and energy infrastructure peers. Because of this valuation disparity, we expect to continue to repurchase our shares under the normal course issuer bid over the course of the back half of the year. In total, we can repurchase up to 6.3 million common shares on the open market prior to the renewal of the bid period in December of 2024. Since we started buying back shares at the end of 2022, we have reduced our shares outstanding by 22%. As a result of the buybacks over the course of the past year, our weighted average shares outstanding in the second quarter decreased by 11% over the prior year comparative period, improving every single one of our financial metrics on a per share basis despite the divestiture of 29 facilities, which was completed in February. We also announced today that we closed a strategic tuck-in acquisition during the quarter of a privately owned group of metal recycling yards based in Saskatchewan for cash consideration of $31 million. This acquisition expands our network into new operating region, diversifies our supply base and bolsters our processing capabilities and logistics strategies. Key highlights of the acquisition include market expansion into Saskatchewan with residential, commercial, and industrial feedstock in an area we believe is poised for growth. Infrastructure enhancement including a 2,500 horsepower shredder, which broadens our operational scope and enhances our ability to offer comprehensive recycling solutions and rail access at the Saskatoon yard provides logistics optimization to complement our Red Deer central hub, expanding our distribution strategy. Overall, we will continue to look at these smaller scale acquisitions that fit within our core business segments and our core competencies. In addition to the acquisition noted, we incurred $11 million of growth capital in the quarter, which included an expansion at the Clearwater heavy oil terminal. Phase II was brought into service in June and has doubled the capacity of crude oil that we handle at that facility. The Clearwater Project is a great example of critical infrastructure to help our customers batched off by commercial agreements with multiple customers providing contracted values and reoccurring cash flows over the life of the contract. The facility was designed for expansion and we will see multiple phases of growth to support our customers in the region in the future. We continue to have a solid pipeline of organic growth opportunities and we will consider strategic acquisitions that meet our investment criteria and enhance our core operations in waste management and energy infrastructure. Our investment approach will remain disciplined, focusing on growth that has enhances operational efficiencies, expands our network density, fosters long-term customer partnerships and diversifies the types of waste we manage. We've maintained our quarterly dividend of $0.10 per common share, which represents an attractive yield of 3.5% on our common shares as of yesterday's closing price. The Board of Directors and management continue to evaluate the merits of increasing the dividend. We expect increases will be modest over time and in alignment with increasing cash flows and other capital allocation priorities. Our balance sheet remains incredibly strong and we have significant capacity on our credit facility to facilitate all Secure strategic priorities for 2024 and beyond. We will achieve this while successfully maintaining low leverage, positioning us well for the future. I'll now pass it over to Chad to provide some further financial highlights from the quarter.

Chad Magus: Thanks, Allen. We delivered a comparable performance year-over-year despite the divestment facilities in Q1. Thanks to improved weather conditions, driving higher demand, same-store sales growth and strategic investments. It's worth noting that the second quarter of 2023 was negatively impacted by wildfires, which resulted in temporary facility shut-ins and impacted overall activity levels, volumes and demand for Secure’s infrastructure and services. As Allen mentioned, on a per share basis, we have improved on all our financial metrics compared to the prior year period as a result of the factors above and share buybacks over the past year, reducing our weighted average shares outstanding by 11%. We reported revenue of $337 million for this quarter, excluding well purchase and resale. This represents a modest 5% decline compared to the second quarter of 2023. The decline is primarily attributed to divestitures in February and the sale of a non-core oil field service business unit in late 2023. However, this decrease was partially offset by several positive factors, higher volumes that are remaining facilities pricing increases. Increased demand for specialty chemicals and contributions from the Clearwater heavy oil terminal, which commenced operations in the fourth quarter of 2023 helped offset the impact of divestitures. We earned net income of $32 million or $0.12 per basic share, a decrease of $2 million compared to the second quarter of 2023 while net income per share increased by $0.01 per basic share over the same period. We achieved adjusted EBITDA of $114 million, a decrease of 4% from the second quarter of 2023 due to the same factors impacting revenue. On a per share basis, however, adjusted EBITDA was up 8%, $0.43 per basic share. Adjusted EBITDA margin was 34% in the quarter consistent with the prior year as the impact of the divestitures was offset by higher activity levels, improving utilization and fixed cost absorption across the remaining infrastructure network. We generated fund flow from operations of $91 million, an increase of 14% compared to the second quarter of 2023 with lower interest payments due to reduced debt and the timing of fixed debt payments along with interest income generated on cash held during the quarter collectively offset the impact of lower adjusted EBITDA and higher current taxes. We recorded discretionary free cash flow of $53 million, a 26% increase in the second quarter of 2023 as a result of the factors above, along with reduced spending on sustaining capital due to fewer facilities following the divestitures. In the first half of 2024, we have materially strengthened our capital structure with proceeds from the facility divestitures supporting debt repayment and refinancing. Our capital structure is comprised of $300 million, unsecured note spending 6.75% and not due until 2029. The $800 million senior secured revolving credit facility maturing in May 2027 and a $50 million letter of credit facility. As at June 30, 2024, the corporation had drawn $121 million excluding letters of credit on the revolving credit facility, providing significant capacity and ample liquidity for our operational requirements, funding of growth initiatives and incremental shareholder returns. We remain well positioned with maximum financial flexibility for capital allocation decisions over the coming years. I'll now turn it over to Corey to provide some operational highlights for the second quarter.

Corey Higham: Thanks, Chad. During the quarter, our facilities handled on average 92,000 barrels of produced water per day and 39,000 barrels of slurry waste and emulsion. Through our processes, we were able to recover over 315,000 barrels of oil from waste. Across our landfill network, we safely disposed 612,000 tons of contaminated solid waste in the quarter. Excluding the divested assets, same-stores on a comparable basis for waste processing and landfill volumes were up over 10% from the second quarter of 2023. In the prior year comparative period, these volumes were impacted by wildfires in the corporation's operating region. Additionally, production growth as well as increased drilling and completion activity and mandatory abandonment, remediation and reclamation spending drove incremental volumes in certain regions. Produced water volumes were also marginally higher on a pro forma basis through the second quarter of 2023, which did not see the same slowdown as waste processing and solid disposal from wildfires. Ferrous metal volumes recycled increased 4% driven by continued strong demand for recycled metals, consistent feedstock and increased processing and logistics capabilities due to investments made in the past year. In our Energy Infrastructure segment, crude oil and condensate terminalling and pipeline volumes averaged 120,000 barrels per day in the second quarter, a 24% increase from the same period in 2023, driven by the addition of the Clearwater heavy oil terminal, which commenced operations in the fourth quarter of 2023 and approximately doubled capacity on June 1, 2024. Our $75 million growth capital planned for 2024 relates primarily to brownfield infrastructure expansion projects to manage incremental production volumes for our customers. Major growth projects are backstopped by new commercial agreements providing reliable volumes and recurring cash flows over the life of the contract. We continue to expect to spend approximately $60 million of sustaining capital in 2024 and approximately $15 million of selling Secure's abandonment retirement obligations. Our exceptional operating teams continue to work safely, make progress in improving energy efficiency, reducing emissions, building community relations and monitoring ethical standards within our supply chain. In 2024, we will also be completing the Progressive Aboriginal Relations program certification to continue to broaden our efforts and participate in the growing aboriginal business economy. I will now hand it back to Allen.

Allen Gransch: Thanks, Corey. Turning now to the outlook for the remainder of the year and beyond. SECURE is in an excellent position for continued success with a strong industry backdrop, growth opportunities and the financial capacity to execute on our strategic initiatives and enhance shareholder value. The successful commissioning of the Trans Mountain pipeline expansion in May, along with the anticipated completion of the LNG Canada's export terminal by early 2025 and future approved LNG projects demonstrates positive tailwinds for our business and enhances our proposition. These projects offer our customers increased takeaway capacity and stronger pricing through access to global markets, which is expected to sustain and boost activity levels in the coming years. As industry fundamentals strengthen, we anticipate a rise in volumes and overall demand for Secure's infrastructure services. Our waste processing facility are averaging approximately 60% to 65% utilization, providing ample capacity to accommodate growing customer needs for processing, disposal, recycling, recovery and terminalling, all with minimal incremental fixed costs or additional capital investment. With our critical infrastructure network supporting stable and higher reoccurring cash flows and strategically positioned to benefit from multiple growth drivers, along with the balance sheet strength and financial flexibility to execute on our strategic priorities, the corporation is extremely well positioned to advance our strategy as a leader in waste management and energy infrastructure, ensuring our ongoing success in these sectors. That concludes our prepared remarks. We will now be happy to take your questions.

Operator: Thank you. [Operator Instructions] Your first question comes from John Gibson from BMO. Please go ahead.

John Gibson: Good morning and congrats on a strong quarter here, especially post asset sale. First, can you maybe talk about the same-store sales number, which reference is up double digits? Was this more a factor of higher utilization across your footprint? Or were there some pricing that increases mixed in there?

Allen Gransch: Good morning, John. Yes. So I think when we look at the quarter compared to 2023, I think the number one factor we recognized is the wildfires did have an impact on where volumes were going to different locations. We do, or we have seen our utilization increase. I mean it's still in that 60% to 65%. I believe it was a bit lower in 2023. I think you also have some fundamentals that were driving increased value. You had TMX start-up in May, which allowed a lot more takeaway capacity for our customers. And as we think about the facilities, I know we're showing in the MD&A with our locations that were included in those results in 2023. But in Q1 and partway through the end of 2023, we did provide the percentage of EBITDA at which those 29 facilities contributed. So really, if you take that same percentage on a pro rata basis, you would be able to kind of come to the same conclusion in terms of where the pro forma growth is where, as Corey had mentioned, we saw water volumes that were higher, our emulsion volumes were higher. I'd say probably the biggest impact on volumes without our landfills. And again, I think part of that was because of some of the wildfires. But it's been an exceptional quarter, nonetheless, I mean I think when you look at the capacity that we have, the 60% to 65% utilization, we can continue to grow in what we see as very strong and robust fundamentals in the sector and not have to add a lot of capital to the facility. So overall, I think for us, a solid quarter. Adjusted EBITDA of 114 compared to 119 with those 29 locations, phenomenal results. And then obviously, we're very happy with the same-store sales growth increase as well.

John Gibson: Sure. And I agree on all fronts. Second for me, transportation costs were up a little bit this quarter. Wondering could we see this normalize given a higher percentage of your volumes are coming from production tie-in facilities. Are you still seeing some pressure on the cost side? Or is it more of a one-time thing this quarter?

Corey Higham: Yes. That's a great question. I think from a normalization perspective, I think it's probably – you can look at it as a one-time cost for this quarter and start to flatten out as we progress through the remainder of the year.

John Gibson: Okay. Great. Last thing for me. In terms of M&A, nice to see a tuck-in. Is metals recycling the main focus right now? Or do you have other areas or end markets that you're looking at as well?

Allen Gransch: Yes, I think for – I talked a lot about our core business segments is where we're focusing on and obviously, in our core competencies. I think when you look at the acquisition, that $31 million is a great tuck-in given it's a privately owned yard in a bunch of yards in Saskatchewan. It allows us to expand our operating network and helps us diversify our customer base. We've got more industrial customers, residential customers, commercial customers, it's obviously going to help with our processing capabilities and logistics. I talked a little bit about having that rail access and being able to use Red Deer as a central hub. It came with a shredder, which we can obviously process quicker with the shredder less labor-intensive. But I would say we're going to continue to have these smaller kind of tuck-in opportunities that fit within our core business segments. And that will be the way we're going to continue to look through 2024 and 2025. I think our main focus from capital allocation was really around that stock buyback in June and buying back our stock was a phenomenal return for our shareholders because we still believe, there's a huge disparity between the current share price which we trade at in our peer group. And so I think we're going to balance our capital allocation priorities in terms of acquisitions, organic growth and stock buybacks as we think about where the business trades and how it looks as we get to the back half of 2024 year.

John Gibson: Got it. Thanks. I'll turn it back.

Operator: [Operator Instructions] Your next question comes from Patrick Kenny from National Bank. Please go ahead.

Patrick Kenny: Hey. Good morning, guys. Maybe just sticking with the tuck-in acquisition here. Sorry if I missed it, but are you able to disclose any financial contributions out of the gate here from the assets, maybe perhaps a run rate EBITDA multiple for the transaction? And then also, just curious what sort of runway of organic growth opportunities you might be able to go after in the Saskatchewan market.

Allen Gransch: Good morning, Patrick. Yes, I mean, I think when you look at the $31 million acquisition, maybe it is really a tuck-in, I would say the EBITDA contribution is not material, but we did raise our guidance here for the back half of the year, moving it from the start of the year at $440 to $465. We're now at $470 million to $490 million. So we're very pleased that we're raising guidance and part of the acquisition will contribute to it. But what I will say just about the metrics is that we're trading at sub-7x here. It was accretive to our current trading multiple. So very pleased with all those operating and processing capabilities and efficiencies that it's going to bring to the table as we think about our smaller tuck-ins. In terms of growth and growth capital, I mean, we maintained the $75 million, and we brought on in Q2. Phase II of our Nipisi or Clearwater terminal. We're now up over 60,000 barrels a day in that area, so substantial volume. We've actually sanctioned or continue to progress Phase III, which will now involve some waste processing capabilities where we have to strip some water out. We're anticipating that will be brought online here at some point in Q4. We're working on quite a pipeline of opportunities for water and water management. I think as we talked about same-store sales growth, we're going to have to put in capital where there are certain areas that is just driving a lot of water growth. And so we look at areas where we can take volume off a truck, put it on a pipeline, the economics look great. Great from an efficiency standpoint with our customers. Operationally, it's easier for us to manage specific quality of volume. So you'll see us continue to update the market as these contracts get signed. And so we're working on a number of opportunities. And so if we do increase our growth capital, it would be predicated on having a signed contract, and I would expect that part of that spend could be in Q4 of this year, but would likely then tail into 2025, and we would be a contributor to the back half of 2025. But we'll update as those contracts progress.

Patrick Kenny: Got it. That's great color. Also just in terms of how you're thinking about M&A at this stage, would you consider the size of tuck-in as the sweet spot for you going forward? Or – are you also considering larger transactions as well, assuming the deal terms make sense. But I'm just curious if you had any color on what the deal pipeline looks like going forward, smaller deals versus some larger opportunities during the back half of the year?

Allen Gransch: Yes. No, good question. I think whenever you're contemplating larger deals and obviously, with the divestment in February of over $1 billion, that transaction alone took almost a year to put together and there's a ton of due diligence, I do not foresee and we're not looking at any large transactions. I would say we're looking at these smaller tuck-ins, maybe they range from 30 to 80 to maybe slightly over 100. Nothing that I would consider substantial or large. I think from our perspective right now, we really want to focus on optimizing the business. The fundamentals are great. There are some of these kind of smaller tuck-ins that we'll do. As we think about 2025, again, it will be a capital allocation. But from an M&A standpoint, not looking at doing substantial acquisitions in the near term. These would be smaller tuck-ins. But I do believe there's opportunities in a few of our business segments to do some of these smaller tuck-ins. And you always have areas of which you're looking and whether or not you can agree on a price with a seller and then the value that you're willing to pay. Obviously, I think if we can get our multiple in our valuation to be more representative of our business, it would open up more opportunities for us, but we're still not there. And that obviously is why we bought back a substantial part of the company in Q2, and we're going to continue to execute like we have in this quarter and hopefully get rewarded by the market and get rewarded in the valuation of the business.

Patrick Kenny: That's great. Makes sense. And then maybe last one for me, and it might be for Chad. But I know there's a bit of noise this quarter with oilfield services now being reported within Waste Management. But it looks like year-over-year waste management revenues are up, call it, 15%, yet segment profit margins are actually down 4% to 5%. Were there any factors in the quarter that might normalize going forward? Or does this quarter kind of establish a new base for margins going forward?

Chad Magus: Yes. There's nothing that jumps out to me, Pat. We're overall, we're pretty happy with the activity in Q2 in that segment and the margins. I think, and considering where the margins are overall, that 34%, we're happy in that range. And I think we can expect there might be some modest uptick in Q3, Q4, just with some seasonality in those quarters typically being a bit stronger, but it's not going to be drastically different.

Patrick Kenny: Okay. That's great. I'll leave it there guys. Thanks.

Chad Magus: Thank you.

Operator: And there are no further questions at this time. I will turn the call back over to Allen for closing remarks.

Allen Gransch: Well, thank you for being on the conference call today. A tape broadcast of the call will be available on Secure's website. We look forward to providing you with updates on Secure's performance at the end of October after the completion of the third quarter.

Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.