Secure Waste Infrastructure Corp.

Good morning, ladies and gentlemen, and welcome to the Secure Energy Q3 2023 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. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, November 1st, 2023. I will now turn the conference over to Alison. Please go ahead.

Thank you. Welcome to Secure's conference call for the third quarter of 2023. Joining me on the call today is Rani Amiro, our Chief Executive Officer, Alan Grant, our President, and Chad Magus, our Chief Financial Officer. During the call today, 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 CEDAR 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 third quarter of 2023 and our outlook for the remainder of the year in 2024. I will now turn the call over to Rennie for his opening remarks.

thank you allison and good morning everyone q3 was another strong quarter for our business showcasing secure's ability to generate significant free cash flow across our infrastructure network we record recorded adjusted ebitda of 158 million or 54 cents per share up eight percent from the prior year this robust performance enabled us to convert 66 percent of that ebitda into 104 million of discretionary free cash flow which we use to execute on our capital allocation priorities. Year to date, we have delivered an annualized 12% return to shareholders achieved through our 40 cents per share annualized dividend payment and the repurchase of 7% of our outstanding shares under the normal course issuer bid. These actions underscore our commitment to enhance returns to our shareholders complimented by our growth capital program this year. We were pleased to bring into service our clear water oil terminal and gathering infrastructure, and our Montney water disposal infrastructure expansion at the end of the third quarter, both of which are backstopped by commercial agreements. These growth projects were completed and safely commissioned on time and on budget and provide critical infrastructure for the handling of production volumes for our customers. Our infrastructure network maintains significant capacities for customers, accommodating increased volumes for processing, disposal, recycling, recovery, and terming with minimal incremental fixed costs or additional capital. We also continue to see strong opportunities with customers seeking further expansions based on reducing their costs and environmental footprint. Turning now to an update on the Competition Tribunal of Canada decision early this year ordering the divestiture of 29 facilities acquired from Terbita in 2021. The strategic combination of Secure and Terbita enabled The combined company to better serve our customers provided significant synergies and enhanced value to our shareholders and elevated our position to deliver on environmental and social sustainability initiatives. Despite the significant benefits brought to our customers, shareholders, and the communities where we operate, we received the decision of the Federal Court of Appeal in August that our appeal of the competition tribunal decision has been dismissed. Following the decision, we have proceeded with an appeal to the Supreme Court of Canada and are pleased that we've been granted a stay while the Supreme Court determines whether to appeal to hear the appeal. As a prudent course of action, Secure has also engaged an advisor with respect to a sales process of the 29 facilities in the event a hearing is not granted or the corporation is not successful in its appeal. Due to the uncertainty with respect to the timing of a hearing being granted or resolution of the matter, our board of directors and management continue to consider all options with respect to the tribunal's order to best serve our customers and other stakeholders. I'll now pass it over to Chad to go through financial highlights from the third quarter.

Thanks, Rennie, and good morning to everyone on the call. We were pleased with the strong performance of the business during the third quarter, driving record financial results. Net revenue of $427 million in the quarter, the highest in Secure's history, increased 2% in the third quarter of 2022 due to continued demand for our critical services and strong utilization across our infrastructure network. Our 8% increase in adjusted EBITDA per share that Rennie mentioned was driven by higher revenue and a lower share count. We have repurchased 7% of our outstanding shares this year, maxing out the normal course issuer bid implemented in December 2022. Our board of directors has also approved us to move forward with renewing our NCIB in December 2023. We maintained our industry-leading adjusted EBITDA margin of 37% as we continue to diligently manage inflationary costs through price increases and operational efficiencies. Net income for the quarter was $47 million, or 16 cents per basic share, down 3 cents per share from the third quarter of 2022. primarily due to a gain on asset sales recorded in the prior year period. We generated $130 million of funds flow from operations for $0.45 per share, a 5% increase from the prior year. This drove our discretionary free cash flow of $104 million, or $0.36 per share, an increase of 3% from prior year. With respect to returns of capital, during the third quarter, we repurchased 4.6 million common shares for $33 million, and paid our quarterly dividend of $0.10 per common share, amounting to $29 million. We also incurred $33 million of growth capital, primarily related to clear water, oil terminal and gathering infrastructure and our Montney water disposal infrastructure expansion. These assets came into service at the end of the third quarter and will begin contributing to the corporation's results in the fourth quarter. Adjusted EBITDA and cash generation supported our capital priorities in the third quarter while maintaining our total debt to EBITDA covenant ratio of 1.9 times. At September 30th, 2023, our debt consists of $153 million U.S. of 2025 senior secured notes, $340 million of 2026 unsecured notes, and a draw on our revolving credit facility net of cash held of $362 million. We maintain a considerable liquidity position of $394 million on our $850 million of facilities maturing in 2025. Overall, SECURE maintains a constructive outlook for volumes, activity levels, and infrastructure demand throughout the remainder of 2023 and 2024. Looking ahead, we expect to continue to direct our significant discretionary free cash flow to our four capital allocation priorities. For 2024, This includes capital structure improvements through the repayment of high-interest debt, paying our 40 cent per share dividend, growing our base infrastructure with customer-backed contracts, and opportunistically repurchasing shares. I will now pass the call over to Alan to provide financial and operational highlights by segment.

Thanks, Chad. Good morning, everyone. Throughout the third quarter, our core business operations continue to demonstrate strength and consistency, underscoring our strong results. The most significant contributor to results in the quarter was our environmental waste management infrastructure segment, generating at Justadiva Dobb $114 million, a 12% increase over Q3 last year. The increase was driven by strong produced water volumes and higher prices across waste processing facilities and landfills, along with higher contributions from metal recycling due to improved efficiency and operating capabilities driving higher volumes and higher ferrous prices compared to the prior period. Delving into the key drivers of these segment results, our produced water processing and disposal volumes averaged 156,000 barrels per day, a 7% increase over the prior year quarter, driven by solid industry fundamentals with strong commodity pricing and field activity, supporting steady production levels. Meanwhile, oil recovery volumes were down marginally due to lower waste processing volumes, partially offset by higher produced water processing and disposal. Waste processing volumes remained consistent with the prior year at 65,000 barrels per day, Our industrial landfill saw project delays resulting from weather and the ongoing impact of wildfires experienced in the second and third quarter, impacting reclamation and remediation volumes. Consequently, landfill volumes were down by 10% to 1.2 million tons. At our metal recycling facilities, various volumes increased by 14% due to operating efficiencies and enhanced rail capabilities, improving our recycling operations. Ferris prices were also up by 4%. Our strategic investments included the purchase of new rail cars in the third quarter, having increased our handling capacity, supporting further optimization at these facilities. Throughout our entire infrastructure network, we hold significant capacity to accommodate any increased volumes resulting in the growing demand for our services. Our utilization rate stood at 62% in Q3, slightly up from the year-to-date average of 61%. The energy infrastructure segment generated adjusted EBITDA of $37 million, a decrease of $9 million over the same period in 2022, which saw higher benchmark oil prices and wide differentials, which created favorable conditions for blending and resulted in higher than normal blending profits. Pipeline and terminaling volumes for Q3 increased by 3% to 105,000 barrels per day compared to 2022, driven by commercial agreements and reoccurring crude oil volumes from our oil gathering pipelines. Overall, the contracted nature of the volumes from these oil gathering pipelines, along with the location of secure crude oil terminals close to the customer's production, continues to drive strong and consistent volumes for terminaling and optimization. The addition of Clearwater Oil Terminal will further drive volumes in this segment. Finally, our oil field services segment contributed $20 million of EBITDA, $1 million higher than the third quarter of 2022, as a lower rate count and reduced field activity was more than offset by revenue mix and inflationary price increases over the past year. Turning now to our capital program, we are extremely pleased to bring on our two major growth projects for the year. Both the Clearwater Terminal and Montney Water Disposal expansion projects provided reliable volumes and reoccurring cash flows through customer partnerships with long-term take-or-pay contracts. Our planned $100 million in growth capital for 2023 has been committed, with the significant growth project now operational. Sustaining capital of $23 million for the quarter related to landfill expansions, well maintenance, and asset integrity programs for processing facilities recycling and waste management operation we continue to expect to incur approximately 60 million of sustaining capital and 25 million of capital related to landfill expansions in 2023 with similar spending expected for next year as well the additional landfill expansions are anticipated and in anticipation of increased abandonment spending obligations driven from government regulations and as the liability management programs in British Columbia, Alberta, and Saskatchewan seek to speed up the rate in which inactive wells and facilities are abandoned and reclaimed. For our longer-term outlook, the continued need for energy security has placed a renewed focus on the enduring role we play in Canadian oil and gas and will play in responsibly meeting the growing demand for energy. We are encouraged by the long-term investments undertaken by energy producers from exploration and appraisal to production, development and capacity expansion, highlighting the extension and robust nature of the energy industry in Canada. Our organic growth strategy remains focused on increasing volumes across our infrastructure network through long-term contracts backed by partnerships. We currently expect to spend $50 million in 2024 that corresponds to equipment purchases and higher higher probability opportunities that build upon or leverage our existing infrastructure. We intend to update our growth plans and provide further details upon signing agreements with our customers. SECURE is well positioned for the long term due to the critical services provided to the energy and industrial customers through our infrastructure network located in key areas across Western Canada and North Dakota. Diverse waste streams and ongoing demand from our industrial customer base further enhance the stability and resilience of our operations. I will now turn it back to Reddy for closing remarks.

Thanks, Alan. In closing, we remain committed to our vision of being the leader in environmental and energy infrastructure, prioritizing value creation for our customers through reliable, safe, and environmentally responsible infrastructure. This approach allows our customers to operational excellence, and leading ESG standards. So far in 23, we have made significant progress in our ESG initiatives. Some of the highlights include improving our corporate CO2 emission intensity with a decrease of 2.7%, reflecting our ongoing efforts in energy management, efficient equipment investments, and landfill operation improvements. We continue to be on pace to meet our near-term target of a three-year 15% reduction in CO2 emissions, by the end of 2024. Establishing an Indigenous employee resource network accessible to all employees, providing valuable resources for our Indigenous staff. Conducting our employee engagement survey, which results in a 75% engagement rate and will guide our action plans for improvement. Furthermore, our commitment to workplace safety has resulted in four quarters without a lost time injury with improvements and our total recordable injury frequency in the second half of 23 to date. At the heart of this company lies a collective spirit of responsibility towards our shareholders, customers, and our communities. Our ESG initiatives demonstrate our commitments to doing the right thing and making a positive difference. We have made significant progress on this journey, and we are committed to continue these efforts. As we move forward, we remain focused on our shared goals, embracing the challenges and opportunities that lie ahead. That concludes our prepared remarks. We would now be happy to take your questions.

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from John Gibson from BMO. Please go ahead.

Morning all, congrats on the strong quarter here. First for me, I'm hoping you can answer, although I understand if you don't want to disclose much around the process, but on a recent conference call, a large U.S. waste player was asked pretty directly about potential interest in the Terbita assets. I guess what I'm wondering is what types of parties have expressed interest so far? There's obviously a big multiple disconnect with where you are trading at relative to more traditional waste companies. And do you feel that potential proceeds could surprise the upside relative to what the street is expecting?

Yeah, at this point, John, all we can tell you is that we've had strong interest from North American parties. And, you know, as we go down this dual path, we'll have a little better idea, you know, late Q4, early Q1, as to what path we take. But all we can tell you is that extremely strong interest right across North America.

Okay, fair enough. Second for me, with the addition of the Montney and Clearwater facilities, what percentage of your EWM segment would be backstopped by take-or-pay contracts heading into Q4 versus prior?

Yeah, thanks, John. You know, the Montney asset, that's all in our EWM segment, so that obviously increases. It's probably... The contract amount there is probably still in the 25% to 30% range. The Nipissi terminal right now, that's in our energy infrastructure segment. Obviously, that's all contracted.

I think, John, it's Alan here. Morning. I think, too, over and above the contracts, and this is something that we've been discussing at length over the past few years, is that a lot of the revenue that comes into our facilities is production-related. Over 80% is production, and when you look at the production profile over the last few years, very stable, which is why we continue to see stability in our numbers. is because a lot of our volume is derived for production. Now, when we think about capital investment, we are tying a lot of our capital investment decisions to contracts because when we outlay the capital, we want to make sure there's that guaranteed rate of return for ourselves and our shareholders. And so there is a bit of a different look in terms of the capital decisions we place. But when you think across the broad business, a lot of it is production related, which is that stability.

Great. I really appreciate the responses. I'll turn it back here.

Your next question comes from Patrick Kenny from National Bank Financial. Please go ahead.

Good morning, guys. I appreciate the update on your four capital allocation priorities for next year. It looks like dividend growth isn't one of them. Is that just because you see better organic growth opportunities in front of you right now or Are you just waiting until you can fully retire the 11% notes before considering a rateable increase in the dividend?

Yeah, I mean, you look at our yield today, it's a pretty healthy 5.2%. You know, the way we're looking for it here is we think our shares are extremely undervalued. So our number one priority really has to obviously be buying back more shares and again, when we're allowed to, December 15th. So that's our number one priority. You're absolutely right. We've got some inherited high interest U.S. notes that would want to get retired at some point. They're callable here December 1st. So those are all priorities before the dividend. It's not saying that we won't increase the dividend down the road, but really want to take advantage and use those type of priorities right now.

Got it. And I guess on top of the base case priorities, Renny, just with the balance sheet where it is today, sitting below two times, assuming you are successful in divesting the 29 facilities for, call it a decent price tag, how should we be thinking about the pecking order for allocating those net proceeds between further debt repayment, accelerating growth, maybe an SIB, all those options.

Yeah, but the tough part of trying to give you even a pecking order, never mind what percentage of that is, what is our share price at the time we want to allocate some of this capital? So think of it this way is there's four levers. And part of that is we have the lever of debt reduction, We obviously can buy back shares. We can obviously grow our organic businesses, as you've seen Alan describing, two great projects that we executed on time and on budget. And then you have acquisitions. And those four levers are going to be pretty fluid going into 24 and 25, just based on where do we get our best bang for a buck as a shareholder. So hard to prioritize, nevermind even give you a percentage allocation because there's so many moving parts.

Got it. Fair enough. Um, and maybe just last one for me, just, uh, you know, looking at the rig count being down relative to last year. Um, but it looks like you're still expecting, you know, modest production growth around your facilities. Just wondering if you could help square up, uh, you know, some of the key factors supporting your outlook there.

Yeah, no, good question, Patrick. I think, you know, when we look at the environmental waste management business, you know, very, very positive quarter. Our same store sales up 7% and that's purely based off of the production water that we see and process at our facilities. And so even when you think about production being flat to slightly up, and we're still having conversations with our customers as they set their priorities for 2024, but we believe that that segment will have growth again in that same store sales in that 6% to 7%. When we think about production water, that's been very consistent. The trend on that, if you go back five years, remains very, very consistent. I think we're going to get some higher contribution from our metals recycling. You know, we bought some rail cars, which improves our efficiencies on transporting out rail in a more cost-effective manner and helps us process quicker and get the inventory turns faster. So we're continuing to see improved efficiencies. When I look at our waste processing, you know, it remains relatively consistent. And I said that, you know, in the opening remarks that, you know, kind of flat, I would expect it's going to be flat. I do think Our landfill volumes will continue to pick up here. I think they did have some challenging weather conditions with the wildfires and some of these delays on some of the reclamation projects where they were maybe focused more on the downhole and not so much on the cleanup of the dirty dirt and some of the facilities that need to be cleaned up. When I think about our energy infrastructure, you're going to see in 2024, obviously, the NIPC volumes come online and we'll be handling, you know, more than 160,000 barrels of oil on a daily basis. So we're going to see that throughput increase. And, you know, given now we're starting to see some apportionment, that always creates arbitrage opportunities as well and helps. you know, the bottom line profit when you can take a look at your infrastructure and take advantage of it. So when I think, you know, when we think into 2024 and the increases we've seen here in Q3 and consistent quarters, I think that trend will continue into 2024.

Okay, that's great, Keller. I'll leave it there, guys. Thanks.

Thanks, Patrick. Thanks, Patrick.

Your next question comes from Keith Mackey from RBC. Please go ahead.

Hey, good morning. Just first wanted to start off on the growth capital expectation for 2024 at that $50 million. It sounds like that doesn't include any larger projects similar to the ones you brought on stream most recently. Can you just speak to what you're seeing in the market for larger terminal or water handling projects? What's the relative opportunity out there these days? And if you could even potentially put some bookends around then what 2024 capital on the growth side could ultimately be given what you see in the market and in any projects you're contemplating whether they do meet your return profiles as you see them.

Morning, Keith. Yeah, so when we think about the $50 million that we've allocated for 2024, It's a bit of a balance between some of the projects that we know are getting closer to having a contract signed and some of these projects actually may start to kick off here late Q4 and start some more capital spend into Q1, which will announce these projects. Once we release our quarters and give you more color around it. But we've got some equipment purchases and we've got some water disposal and kind of pipeline infrastructure that we're going to start working on here through Q4 and Q1. But we've left it, you know, at 50. That's our target right now. Obviously, we did 120, 23. And when you think about the hopper of opportunities that, you know, I would call it greater than, you know, 200 million plus in opportunities that, you know, we see as great expansion brownfield opportunities, both on the oil energy infrastructure side and on the production water in tying in, because obviously the transportation costs and taking it off a truck and putting it on a pipe have great returns for not only our customers, but ourselves. But as we think about our 2024 spend, you know, these contracts take a long time to negotiate. They can be upwards of a year to get a contract signed. We also need to protect against rising costs on equipment for these projects and making sure that you're managing the inflation costs and making sure your numbers are tied through. So we spent a lot of time making sure we have our nails Our numbers nailed down such that we can protect our returns as we sanction these projects. And so we're more likely to announce these projects once the contract has been signed. At this point, we're comfortable with the 50, but yes, it could be higher. And when you look at our discretionary free cash flow, with our dividend, with our buybacks, we've got flexibility there to spend on some of these great organic projects, which we feel very, very comfortable with.

Okay, thanks for that. And just to follow up, on Q4, it looks like the The street numbers have EBITDA going down maybe $8 or $9 million sequentially. I know there's some seasonality quarter to quarter, but you have brought on a couple of larger projects that may start to contribute. Can you just talk through how we should be thinking about the sequential EBITDA, either growth or decline from Q3 to Q4?

Good morning, Keith. Typically, when we... Look back over the years, you see, the last several years at least, we have seen that slow down. Q3 has usually been kind of the high water mark for us in the year, and then Q4 is usually slightly lower. And it is usually due to just less activity with the Christmas seasonal slowdown. We see rigs starting to fall off before Christmas, and some volumes just not move as much as they otherwise would. So I think that's the main reason.

Got it. Appreciate the comments, Chad. Thanks very much. That's it for me. Thanks, Keith.

Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question comes from Cole Pereira from Stifel. Please go ahead.

Good morning, all. Just a quick point of clarity on the divestitures. Is the plan to wait until you hear back from the Supreme Court about whether you can get a hearing? or could you theoretically sell the assets prior to that if you got a really attractive bid?

Yeah, the way the process works is that we have the ability, anything that we do is subject to the Competition Bureau approval. So as we go down this dual path, obviously whatever path we take will be engaged with the Competition Bureau because obviously they're... fulfilling the tribunal order. So hard to say at this point in time how that all plays out, but do keep in mind that this is not just a secure decision. This is a secure decision along with approvals from the Competition Bureau.

Okay, got it. That's all for me. Thanks. I'll turn it back. Thanks, Cole.

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

Thank you, and thank all of you for being on the conference call today. We do have a tape broadcast of the call, which will be available on SECURE's website. So thanks again, and look forward to Q4.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.