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Good afternoon, ladies and gentlemen, and welcome to Secure [ Energy's ] First Quarter 2024 Results Conference Call. [Operator Instructions]This call is being recorded on Thursday, April 25, 2024.I would now like to turn the conference over to Alison Prokop. Please go ahead.
Thank you. Welcome to Secure's conference call for the first quarter of 2024. Joining me on the call today is Rene Amirault, our Chief Executive Officer; Allen Gransch, our President; Chad Magus, our Chief Financial Officer; and Corey Higham, our Chief Operating 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 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 first quarter of 2024 and our outlook for the remainder of the year.I will now turn the call over to Rene for his opening remarks.
Thank you, and good afternoon, everyone. We are pleased to report a fantastic start to 2024, with first quarter results meeting our expectations, allowing us to narrow our adjusted EBITDA guidance to CAD 450 million to CAD 465 million for the year. Our strong financial performance continues to underscore the stability and growth potential of our waste management and energy infrastructure business.During the quarter, we were extremely pleased to close the CAD 1.15 billion asset sale to an affiliate of Waste Connections. Proceeds from the sale transaction as well as continued strong free cash flow generation provides the corporation with significant capital allocation optionality for 2024 and beyond, facilitating our ability to execute on all of Secure's strategic priorities.With a solid foundation and clear direction, we're confident in our ability to protect the base business and seize new opportunities to create value for our shareholders.We also remain committed to enhance shareholder returns through our CAD 0.40 per share annualized dividend and share repurchases, all while maintaining low leverage.Over the past few months, we have materially strengthened our capital structure with debt repayment and financing. In February, we repaid the entire amount drawn on the CAD 800 million revolving credit facility and redeemed the senior second lien secured notes due 2025. In March, we closed the offering of the 6.75% 5-year senior unsecured notes, with an aggregate principal balance of CAD 300 million. Net proceeds from the offering along with cash on hand were used to redeem the outstanding principal amount of the 7.25% senior unsecured notes due June 2026.At March 31, '24, the corporation had CAD 254 million of cash and unused debt capacity of approximately CAD 750 million, subject to covenant restrictions, providing ample liquidity for shareholder returns and funding of growth initiatives.During the quarter, we repurchased and canceled approximately 12.1 million shares under the normal course issuer bid at a weighted average price per share of CAD 10.47, for a total of CAD 126 million, reducing our shares outstanding by 4%. The corporation repurchased an additional 2.8 million shares subsequent to the quarter-end.We also paid our quarterly dividend of CAD 0.10 per common share, which currently represents an attractive yield of 3.5% on our common shares compared to peers.And finally, today we announced an increase to our expected capital spend of CAD 24 million, to CAD 75 million, up from the CAD 50 million previously announced. The increase relates to customer agreements for a produced water pipeline to a waste processing facility as well as processing equipment for Phase 3 at the Clearwater Heavy Oil Terminal.We continue to have a solid pipeline of organic growth opportunities, and we'll consider acquisitions that meet its investment criteria and enhance its core operations in waste management and energy infrastructure.I believe this is only the beginning for Secure. We are well positioned with the right people, the asset network and financial flexibility to take us on our next phase of growth. As previously announced, I will retire as CEO on May 1, 2024. The leadership transition with Allen Gransch assuming the role of President and CEO marks the beginning of an exciting new chapter for the corporation. I am proud of what we have accomplished together and even more excited about our future. Allen's proven leadership capabilities, extensive experience and diverse skill set will allow for a seamless succession and guide Secure as it moves forward. I look forward to continuing to support Secure's strategy as Vice Chair of the Board.I'll now pass it over to Chad to provide some additional first quarter highlights.
Thanks, Rene, and good afternoon, everyone. Strong execution across all business units continues to underscore the stability of our cash flow generation capabilities.As the sale transaction with Waste Connections decreased the number of our overall facilities, this reduced most of our financial metrics on an absolute basis when comparing the first quarter of 2024 to a year earlier. However, thanks to our opportunistic share buybacks over the past year, we have decreased our weighted-average outstanding shares in the first quarter of 2024 compared to the first quarter of 2023 by 8%, partially offsetting the impact of the reduced number of facilities to our results on a per share basis.To be clear, we have not prepared any financial highlights on a pro forma basis. Corey, however, will provide some volume information on a pro forma basis.Net revenue of CAD 360 million decreased 13% from the first quarter of 2023, primarily related to the impact of the sale transaction and the divestiture of 2 noncore oilfield service business units in 2023, partially offset by higher volumes and improved margins across the corporation's remaining infrastructure network.Net income of CAD 422 million, or CAD 1.50 per basic share, increased CAD 367 million, or CAD 1.32 per basic share, compared to the first quarter of 2023. The increase was primarily driven by the CAD 520 million gain recognized on the sale transaction, net of the [ incurred ] and deferred tax expenses resulting from the gain.Adjusted EBITDA of CAD 132 million, or CAD 0.47 per basic share, decreased 13% from the first quarter of 2023, or 4% on a per basic share basis, as a result of the sale transaction.Funds flow from operations of CAD 108 million, or CAD 0.38 per basic share, decreased 21% from the first quarter of 2023, or 14% on a per basic share basis, as a result of lower operating profit resulting from the sale transaction.Discretionary free cash flow of CAD 93 million, or CAD 0.33 per basic share, decreased 24% from the first quarter of 2023, or 18% on a per basic share basis. The lower adjusted EBITDA was partially offset by reduced spending on sustaining capital due to the reduced facility count following the sale transaction.As the sale transaction utilized a significant amount of Secure's tax pools, the corporation is reporting current tax expense in 2024, the majority of which is expected to be actually paid in the first half of 2025.I'll now turn it over to Corey to provide some operational highlights from the first quarter.
Thanks, Chad. In the quarter, our facilities handled, on average, 114,000 barrels of produced water per day and 51,000 barrels of slurry waste and emulsion. Through our processes, we were able to recover over 315,000 barrels of oil from customer waste.On a pro forma basis, produced water volumes were up 11% from the first quarter of 2023. The increase was a result of higher same-store volumes due to industry trends, resulting in increased water volumes.On a pro forma basis, waste processing volumes were up 3% from the first quarter of 2023 due to production growth as well as increased drilling and completion activity, driving incremental volumes in certain regions. Across our landfill network, we safely disposed 940,000 tons of contaminated solid waste in the quarter. On a pro forma basis, landfill volumes were relatively flat quarter-over-quarter, supported by disciplined drilling and completion activity and mandatory abandonment remediation and reclamation spending.Overall ferrous metal recycling volumes increased 48%, due in part to incremental scrap volumes associated with project work driving higher volumes to Secure's facilities as well as strategic investments made in 2023 and process improvements which resulted in improved operating capabilities and efficiencies.In our Energy Infrastructure segment, crude oil and condensate [indiscernible] pipeline volumes were up to 115,000 barrels a day in the first quarter, a 23% increase from the same period in 2023, driven by the Clearwater Heavy Oil Terminal which commenced operations in the fourth quarter of 2023.Turning now to our capital program. Our CAD 75 million growth capital plan for 2024 relates primarily to brownfield infrastructure expansion projects to manage incremental production volumes for our customers. Major [indiscernible] projects are backstopped by new commercial agreements, providing reliable volumes and recurring cash flows over the life of the contracts.In the first quarter, we incurred CAD 11 million as we progressed our investment in the second phase of the Clearwater Terminal and spent some additional capital at our metal recycling locations. The Clearwater Terminal expansion is backstopped by both existing and new customers and will approximately double the terminal capacity to over 60,000 barrels per day. Construction activity is expected to be completed and the expanded capacity operational in the second quarter of 2024.We also closed a small acquisition in our specialty chemicals business during the quarter, expanding our product offerings for fluid optimization within the water treatment production remediation and drilling fluid chemical segments.Sustaining capital of CAD 8 million for the quarter related to landfill cell expansions, well maintenance and asset integrity programs for processing facilities and asset replacements for our waste management operations. We continue to expect to spend approximately CAD 50 million on sustaining capital in 2024 and approximately CAD 15 million on settling Secure's [ abandoned ] retirement obligation.I will now turn it over to Allen.
Thanks, Corey. Secure is looking forward to releasing our fifth annual comprehensive Sustainability Report and our second Task Force on Climate-Related Financial Disclosures report in May, demonstrating our ongoing commitment to transparent reporting. These reports showcase the advancements we made in our ESG priorities in 2023.We are especially proud of substantial progress Secure made in reducing our emissions intensity, as we have experienced a decrease of nearly 13% on our overall emissions intensity from 2021 to 2023. We are on track to reach our short-term goal of 15% reduction over 3 years in our greenhouse gas emissions intensity by the end of 2024.We introduced new technology to ensure compliance and standardization of waste and recyclable documentation.We also continued to deliver on our commitment to supporting the communities where we live and work through more than CAD 1.3 million in contributions.The solutions Secure provides are designed not only to help reduce costs, but also lower emissions, increase safety, manage water, recycle byproducts and protect the environment.In 2023, we avoided 28,000 tonnes of CO2 by recovering crude oil from waste, when compared to producing the same barrel from extraction of virgin resources. And similarly, by prospecting scrap metal for recycling, we avoided 94,000 tonnes of CO2, when compared to creating the same tons of metal from resource extraction. Combined, this is enough to offset all our Scope 1 emissions in 2023.Additionally, we displaced 140,000 truckloads because of our pipeline infrastructure network, resulting in 13,000 tonnes of CO2 reduction of our customers' Scope 3 emissions.The company's success is a testament to the hard work and dedication of everyone on the Secure team. As we look at 2024, some of our key objectives include progressing on our journey to net zero with ambitious safety targets, fostering our indigenous partnerships with the completion of our Progressive Aboriginal Relations Program Certification and working to develop a protocol for carbon credits generated from recovery of products from waste, which will be a critical milestone in achieving our net zero by 2050.Turning now to the outlook for the remainder of the year. Secure is extremely well positioned for success, with a strong industry backdrop, growth opportunities and the financial capacity to execute on our strategic initiatives and deliver enhanced shareholder returns.With the Trans Mountain Pipeline expansion scheduled to begin operations in the second quarter, our customers can gain takeaway capacity and stronger pricing with access to global markets, paving the way for sustained and expanded activity levels in years ahead. We expect industry fundamentals will drive increased volume and overall demand for Secure's infrastructure.With our waste processing facilities currently operating at 60% utilization, we have ample capacity to accommodate growing customer needs for processing, disposal, recycling, recovery and terminalling, all with minimal incremental fixed costs or additional capital investment.Over the last quarter, the corporation successfully refinanced its long-term debt and continues to deliver shareholder returns through dividends and share buybacks while maintaining significant financial flexibility. Given our positive operational results in the first quarter, the board of directors and management continue to believe that a significant gap exists between Secure's current market valuation and that of the peers in the waste management and energy infrastructure sector.In light of these factors, alongside ongoing initiatives, we intend to initiate a substantial issuer bid next week as a key element of Secure's capital allocation strategy.I also invite you all to attend tomorrow's Annual General Meeting of Shareholders. At this meeting, among other things, shareholders will be voting on Secure's board of directors. I am pleased to be on the ballot for the first time, with 7 other highly qualified and experienced directors. Brad Munro, longtime director of Secure, will not be seeking reelection at the meeting, and we offer him a sincere thank you for his 15 years of valuable service.Lastly, I want to wish Rene congratulations on his well-deserved retirement from management. Thanks to Rene's visionary leadership, Secure has established itself as a trusted industry partner, showcasing remarkable accomplishments in growth and operational excellence.The corporation is extremely well positioned to advance our strategy as a leader in waste management and energy infrastructure, prioritizing value creation for our customers through reliable, safe and environmentally responsible infrastructure. I am very privileged to be taking over as CEO at this time, and I'm excited for this opportunity for continued growth and innovation. I look forward to Rene's continued support as Vice Chair of the Board of Directors and working with him and the entire board to help guide Secure into the future.That concludes our prepared remarks. We would now be happy to take your questions.
[Operator Instructions] First question comes from Cole Pereira, at Stifel.
I just wanted to start on the SIB. Obviously, there's some questions around what the size and price may be. Can you just talk about how you're thinking about what the right level might be for most of these factors, whether it's a certain valuation multiple, a certain leverage that you want to be at after? How are you guys thinking about that?
Cole, Rene here. I'm sure that's going to be the #1 theme until we press-release our intentions. And those are great questions around the SIB. All we can tell you is that next week we'll get that all figured out and take a look at a bunch of different factors that go into the various criteria and ultimately get signed off by our board of directors. But stay tuned. We'll press-release it once we get it all together, and it should happen next week. That's our intent.
Got it. Fair enough. And then -- so obviously, you're effectively debt-free now. The business is generating a lot of free cash. How do you guys think about what the right level of growth spending is for this business, going forward?
Cole, it's Allen here. Great question. If you look at 2023, we spent over CAD 100 million in growth projects, primarily in the Montney for a water disposal infrastructure and then our Nipisi Terminal, which has great economics and great growth projects. And a lot of our projects are a result of our customers wanting to work with us, to partner up to get there. Whether or not it's waste products into our waste processing facilities or whether they want clean oil onto a mainline system, we're there to help them.And I think as we think about growth here for 2024, we just announced another CAD 25 million, and part of that is we're going to complete Phase 2 for Nipisi and we're going to add Phase 3, which will add some processing capacity, some treating capacity, to get a total terminal output of around 70,000 barrels a day. That will be complete by the end of this year. So a great growth project.We also announced that we're doing another Montney water disposal pipeline. That's backed by an anchor tenant.And these are all very similar sort of take-or-pay and [indiscernible] dedication arrangements that we have with our customers.And as I said in the past, we'll come to announcing these projects when we've got signed agreements. And when we do that, we'll roll out the project and what it relates to.We've been focusing a lot on brownfield growth expansion. Those are great return projects because you have your base infrastructure, and the more infrastructure that you add, the higher rate of return.So my expectation here -- I think we spent CAD 100 million last year. I could see that number, the CAD 75 million that we've announced so far, trending upwards to CAD 100 million. But again, that will be predicated on when we get agreements signed. Some of it might roll into 2025.But ultimately, I'd say our offer of opportunity is pretty robust. And when you have a strong backdrop in the sector like we're seeing, more opportunities start to present themselves. And so as those opportunities are vetted and we see where that infrastructure is added, again, we'll come to market.
Okay. Got it. And then just one more quick one. Chad, you mentioned you'll be cash taxable in 2025. Any bookends you want to put around this in terms of a dollar amount, percentage rate, something like that?
Cole, I think the best thing to do is our year-end [indiscernible], we'll have a taxable income and then I would knock that down for the divestiture and the percent, or rough percentage, of what the cash flow we lost for the divestiture and then just apply that 25% rate. But giving you ballpark dollar numbers on a go-forward basis, it's probably in the CAD 60 million to CAD 75 million range.
Okay. Got it. Congrats again, Rene, on your retirement.
Next question comes from John Gibson, of BMO Capital Markets.
Again congrats, Rene, on your strong career at Secure and best wishes in your retirement. Just one thing that's kind of gone under the radar is your dividend. I guess when the dust settles on the SIB, could we expect a similar payout level for the dividend? Obviously, this would imply an increase, just given where your share count falls to.
John, it's Allen here. I think, obviously, in our capital allocation decision making, share buybacks are really paramount. I mean, if you look at what we've done in the first quarter, we bought back over 12 million shares. We've used about 70% of that NCIB because we continue to believe the stock is undervalued. And it's a real value when you see what we transacted and sold in a distressed situation to Waste Connections. So that's a real discount. And so we've been taking advantage of it, and that's why next week when we come out and put out terms on the SIB, you'll get an understanding of what that looks like.But as I go through the other elements of capital allocation in terms of growth, which we've now announced and there's a little bit of parameters around it, our balance sheet is in fantastic shape. The deal that Chad restructured in March I think sets us up well for the future here.So I do believe as the dust settles here and we get through Q2, we will take another look at the dividend and our current yield. Because you're right, as you buy back stock there will be contemplation, are we getting the value for the dividend? And what do we want to do? Do we want to increase it? But that will be our optionality. And I think we will take a look at it as we progress through the year.
Okay. Great. And then last one for me. Thanks for providing the pro forma metrics or volume metrics on the call. And obviously, impressive to see the [indiscernible]. Could you maybe speak to what the drivers were more specifically? Was it more production volume-related? Or more due to the infrastructure you've built over the past few years?
It's Corey here. I think it's a combination of all. We saw steady activity through the quarter on drilling completions and production. So when you combine all those 3 together, you get those results of produced water being up 11% quarter-over-quarter, our waste processing volumes up 3% quarter-over-quarter. We've been very successful on our recycling project work, which has increased 40% quarter-over-quarter. So I think it's just a little bit of everything and great execution by our team.
And what type of organic growth does you guidance this year incorporate?
So [ John ], we've announced that the CAD 75 million, most of that capital will likely be spent throughout, call it, Q3 and Q4, a little bit here in Q2. So the expectation is the contribution of EBITDA from that CAD 75 million will be added on to what would be our 2025 guidance. And as you know, because of our CAD 10 million above the numbers here in Q1, we've tightened our guidance range to CAD 450 million to CAD 465 million of EBITDA for 2024. So any of the organic spend and then contribution will be 2025.
The next question comes from Keith MacKey, at RBC.
Just wanted to start out on the TMX expansion. So pipeline is hopefully becoming towards the commissioning very shortly here. Can you just talk about your exposure, whether it's direct exposure or not, to the improved operating environment with this pipeline in effect? It has certainly got some ability to flow crude, and it looks like it did some in Q1. Can you just talk about your revenue opportunity and the overall business environment pre and post the TMX expansion commission?
Sure. Yes, you're absolutely right there. We've always said that we'll optimize differentials and obviously help our customers to get the best net price. And obviously, having the ability to source some crude in select months enhances both the customers' net price and our bottom line.Think of TMX as coming on, you've got a lot of our customers who have indicated to us and shared some of those long-term forecasts, obviously, when it comes to making sure they have the right infrastructure. If that -- I think you'll be a little bit more aggressive in terms of bringing on new production. Because let's face it, since 2008, we've been pipeline-constrained. And so it kind of opens the door for a lot of the volumes that maybe wouldn't have been as aggressively drilled to obviously be drilled and new production come on.So what we're seeing in that Western Canadian Basin is there's a lot of new start-ups. There's a lot of smaller companies that go under the radar that are private a lot of the time, who have a lot of landholdings and are starting to drill up with some of the new drilling techniques. And traditionally, some of these areas just weren't economical at that $70 to $75. Now with the new drilling techniques, you're seeing them getting a 6-month payback, a 3-month payback. And that just opens up a whole new door in terms of bringing new production and new waste and new water into our facilities. And the great thing about our network is that we've got pretty well most of Western Canada covered where this new drilling is happening and the new production, incremental production, is coming on.So I think what you'll see, Keith, over the next 3 years is I think you're not going to see a whole bunch of apportionments and maybe there's a little less of the volatility in differentials, but you also have a customer base that wants to take advantage of that higher net back and actually bring on new production.So all in all, we just think it's really positive for not only Secure, but for our customers.
Got it. That's very helpful. And just secondly, on acquisitions. So you've talked about potentially doing acquisitions, but sticking with your core competencies and things like that and strict return targets. But can you talk a little bit about your readiness to be able to execute on anything you need? Is there any particular new capabilities you have to stand up to be able to evaluate potential deals and things like that? Or is that pretty much all ready to go and now it's just a matter of finding the right deals that meet your criteria?
Keith, I think we spent so much time in 2022 realizing the synergies. They were such low-hanging fruit. And then I would call it, in 2023, we played defense because we were not only going to battle against the competition [indiscernible], but we were also all-hands-on-deck to try and get as much value as we can through these infrastructure assets, which ultimately very successful considering the distressed situation.So I now have a team in my business development and M&A group that are really ready to go on to the next chapter, which is you've got a great balance sheet and there's lots of good acquisitions. I just don't think we've had enough time, considering we just closed [ step 1 ] and there was lots of things that needed to happen to make sure that was successful. So we're just now starting to get into what type of opportunities within our own core competencies make a lot of sense for us to transact on.I would think we have the current bench strength to go ahead and start vetting through acquisitions. A lot of them are early days, call it, tuck-in acquisitions that kind of fit where the business is growing in terms of that waste management space. But I think as we get through 2024, we'll provide more clarity about what that looks like. But right now, it's really early days, and we're obviously focused on the capital allocation priorities here of just buying back our stock because that's the best return for our shareholders right now.
Okay. Perfect. And of course, Rene, echo all the sentiments on your career and congrats on your, quote-unquote, retirement.
Thank you. I'm trying to go from 8,000 to 7,000 RPMs.
[Operator Instructions] Our question comes from Patrick Kenny, at National Bank.
Just on the EBITDA margins, 37% realized in the quarter. Can you remind us within your financial guidance for the year if you're expecting any material change in margins, going forward? I mean, it sounds like higher customer activity with TMX coming on offsetting any headwinds potentially related to tighter differentials. But I'm just curious with your new high-quality take-or-pay assets coming on this year as well how we should be thinking about your consolidated EBITDA margins trending over the next year or 2.
Pat, it's Chad. Good question. We're very happy with our EBITDA margins obviously at 37%. We do think as we go forward that the trend will be more in that mid-30% range or around 35%. And obviously, we'll do what we can to obviously increase that. But I think over the longer term, that's what we're modeling today and that's what we're seeing and that's what we're managing to.
Okay. Got it. And then maybe just higher level, curious if you could provide a bit of an update on your overall strategy with respect to the metals recycling business. [ That set up ] to be a nice tailwind during the quarter, but just perhaps your outlook for ferrous pricing and overall demand for recycling services and perhaps a bit of a look into what regions across North America that you might be interested in extending your metals franchise.
Pat, I think we've done a very, very successful job at getting the operational aspect of that business turning inventory on a monthly basis. We've upgraded some of the equipment purchases within our facility network. So we purchased 40 rail cars last year. We've got another 40 here on the table here for 2024. Because a lot of the, let's call it, CP and CN aren't leasing cars anymore. So actually to have the rail cars -- and these rail cars can hold 30% more. They're deeper and they're a little bit wider. That allows you to actually ship more efficiently. So there's some operational efficiencies that we're going to get from these new cars. So we have that as an advantage.I know there's a bit of a trend from a decarbonization in how metal is actually created on the ferrous basis. So a lot of the refiners are moving from these blast furnaces to arc furnaces, and arc furnaces just require recycled material. And so we believe the long-term outlook for metals is very strong. I think the demand for recycled material when refiners are only able to use that recycled material I think will help create demand for that market in the long term.And so I think what we've done to set up the business is fantastic. We had some of the benefits of TMX volume throughput through the facilities. We also work up in Fort Mac and help some of our customers up there manage some of the tailings pipe. So we've got a steady state of volume that we see. And given the demand and the backdrop, I think that you can envision a scenario where metal pricing remains relatively robust here.So I think that business is set up for success in the long term.
And it's too early to say what, I guess, percentage of your overall business mix might come from the metals recycling business over time?
Yes, I think it's too early. I mean, we've got pro formas all over the place. We just divested some facilities. Chad is running models all over the place. So I think give us a little bit of time for that one, and we can provide as much clarity as we can on what that looks like in an overall waste management segment of the business.
Okay. Great. Sounds good. And thanks to both of you again on your time, Rene, and your appointment, Allen.
Thank you. We have no further questions. I will turn the call back over to Allen Gransch for closing comments.
Thank you for being on the conference call today. A taped 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 July after the completion of our second quarter.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.