Q2 2024 Secure Energy Services Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to.

It is secure energy Q2, 'twenty 'twenty four results conference call at this time all lines are in a listen only mode.

During the presentation, we will conduct a question and answer session. If at any time during this call.

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It does.

This call is being recorded on Tuesday July 30th.

Before.

I'd like to turn the conference over to Chad. Please go ahead.

Thank you and good morning to everyone, who is listening to the call. Welcome just curious conference call for the second quarter 2020 for joining me on the call today is Alan Graf, our President and Chief Executive Officer, and Corey Hi, I'm 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 should not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures our 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 are involve inherent assumptions risks and uncertainties and actual results could differ materially from those.

As stated due to numerous factors and risks.

Please refer to our continuous disclosure documents available on SEDAR plus identify risk factors applicable to secure factors, which may cause actual results to differ materially from any forward looking statements 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.

Now I'll turn the call over to Alan to provide second quarter highlights.

Thank you and good morning, everyone.

We're pleased to report another strong quarter. This morning, achieving adjusted EBITDA of $114 million or <unk> 43 cents 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 do a substantial issuer bid for 259.

The 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 continue 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.

In total we can repurchase up to $6 3 million common shares on the open market prior to the renewal of the bid.

Alright period in December 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 divestiture 29 facilities with.

It was completed in February.

We also announced today that we closed a strategic tuck in acquisitions during the quarter of a privately owned group with metal recycling yards based on just gas one 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 and just as gasoline with residential commercial and industrial feedstock in an area. We believe is poised for growth.

Infrastructure enhancement, including that 2500 horsepower, shredder, which broadens our operational scope and enhances our ability to offer comprehensive recycling solutions.

Relaxed asked at the SaaS <unk> provides logistics optimization to complement our ret year stacks will hop expanding our distribution strategy.

Overall, we will continue to look at the smaller scale acquisitions that fit within our core business segments.

Our core competencies.

Speaker Change: 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 have doubled the capacity of crude oil that we handle at that facility.

At Clearwater project is a great example of critical infrastructure to help our customers backstopped 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 and waste management and energy infrastructure. Our investment approach, we will remain disciplined focusing on growth that half and half.

Speaker Change: As operational efficiencies.

Speaker Change: Spans our network density fosters long term customer partnerships and diversifies the types of waste we match.

We have maintained our quarterly dividend of <unk> 10 cents per common share, which represents an attractive yield up three 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 will expect 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.

Thanks, Alan we.

Chad: We delivered a comparable performance year over year. Despite the divested 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 2023 was negatively impacted by wildfires, which resulted in temporary facility shutdowns and impacted overall.

Activity levels volumes and demand for security infrastructure and services.

Chad: As Alan mentioned on a per share basis, we are improving on all our financial metrics compared to the prior year period as a result of the factors about 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 noncore <unk> 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.

Yeah.

We earned net income of $32 million or <unk> 12 per basic share.

A decrease of $2 million compared to the second quarter of 2023, while net income per share increased by one set for 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.

Chad: On a per share basis. However, adjusted EBITDA was up 8% to 43 cents per basic share.

The 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 funds flow from operations of $91 million, an increase of 14% compared to the second quarter of 2023, lower interest payments due to reduce 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 cash taxes.

We recorded discretionary free cash flow of $53 million or 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.

The first half of 2024, we have materially strengthened our capital structure with proceeds from our facility divestitures or any debt repayments and refinancing.

Our capital structure is comprised of $300 million unsecured notes paying 675% and not due until 2029.

The $800 million senior secured revolving credit facility maturing in May 2027, and $50 million letter of credit facility.

As at June 32000 type for the Corporation had drawn $121 million, excluding letters of credit on our revolving credit facility, providing significant capacity ample liquidity for our operational requirements funding of growth initiatives and incremental shareholder returns.

Chad: We remain well positioned with maximum financial flexibility for our capital allocation decisions over the coming years.

I'll now turn it over to Corey to provide some operational highlights from the second quarter.

Thanks, Chad during the quarter. So at least handle on average 92000 barrels of produced water per day, and 39000 barrels of slurry waste and Im sure. Our processes, we were able to recover over 315000 barrels of oil from waste.

Our landfill network, we safely disposed 612000 tons of contaminated solid waste in the quarter.

Excluding the divested assets same stores on a comparable basis for waste processing and NGL volumes were up over 10% from the second quarter of 2023.

Prior year comparative period. These volumes were impacted by wildfires in the corporations 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 to the second quarter of 2023, which did not see the same slowdown as waste processing and solid disposal from wildfires.

Chad: 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.

And our energy infrastructure segment crude oil and condensate Terminalling and pipeline volumes averaged 120000 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 one two.

24.

Chad: Our $75 million growth capital plan through 2024 relates primarily to brownfield infrastructure expansion projects to manage incremental production volumes for our customers.

Your 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 on sustaining capital in 2024, and approximately $15 million on selling secures a batman retirement obligations.

Chad: 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 to participate in the growing up.

<unk> business economy, I will now hand, it back to Alan Thanks.

Alan: Thanks Corey.

Turning now to the outlook for the remainder of the year and beyond secures 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.

Alan: The successful commissioning of the Trans mountain pipeline expansion in May along with the anticipated completion of the LNG, Canada is export terminal by early 2025 and future future approved LNG products.

Projects demonstrates positive tailwind 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 rising volumes and overall demand for secures infrastructure services are waste processing facility are averaging approximately 60% to 65% utilization, providing ample capacity to accommodate growing customer needs for processing disposal recycling <unk> recovery.

Internally, all with minimal incremental fixed costs or additional capital investment.

With our critical infrastructure and network supporting stable on higher reoccurring cash flows and.

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.

Speaker Change: Our remarks, we will now be happy to take your questions.

Thank you ladies and gentlemen, thank you do you have a question. Please press star one on your telephone keypad.

A question Chris start Q1 moment. Please for your first question.

Your first question comes from John Gibson from BMO. Please go ahead.

Good morning, and congrats on the strong quarter here, especially post asset sale.

John Gibson: First can you maybe talk about the <unk>.

Same store sales number which references.

So is this more a factor of higher utilization across your footprint or where there's some pricing increases mixed in there.

Speaker Change: Hi, good afternoon, 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.

Impact on where volumes were going to different locations.

We do our 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 some fundamentals that we're driving increased value you had TNX startup 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 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.

The pro forma growth years, whereas Corey had mentioned we saw water volumes that were higher amongst some volumes were higher I'd say, probably the biggest impact on volumes with at our landfills and again I think part of that was because of some of the wildfires, but an exceptional quarter. Nonetheless.

When you look at the <unk>.

Speaker Change: Capacity that we have the 60% to 65% utilization, we can continue to grow and what we see is very strong and robust fundamentals in the sector and not have to add a lot of capital to the facility.

Speaker Change: So overall I think for us solid quarter, adjusted EBITDA of $1 14, compared to 2019 with those 29 locations phenomenal results.

Speaker Change: And then obviously you were very happy with the same store sales growth increase as well.

Speaker Change: Sure and agreed on all fronts.

Second for me transportation costs were up a little bit this quarter wondering could.

Could we see this normalized given a higher percentage of your volumes are coming from production type facilities are you still seeing some pressure on the cost side or is it more of a onetime thing this quarter.

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

Okay, Great last one from 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 are youre looking at as well.

Yes, I think first.

I've talked a lot about our core business segments is where we're focusing on in and obviously in our core competencies I think when you look at the acquisition that $31 million is a great tuck in.

Given that it's a privately owned yard and not a bunch of yards in Saskatchewan. It allows us to expand our operating network and.

It helps us diverse or 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.

Was that strat here, which we can obviously process quicker with the shred or less labor intensive.

Speaker Change: 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 we are.

There's a huge disparity between the current share price with each rate out 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 2020 to work here.

Got it thanks, I'll turn it back.

Ladies and gentlemen, as a reminder, if you'd like to ask a question Crestar. One. Your next question comes from Patrick Kenny from National Bank. Please go ahead.

Hey, good morning, guys.

Patrick Kenny: 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.

Might be able to go after in the Saskatchewan markets.

Good morning, Patrick.

Yes, I mean, I think when you look at the $31 million.

Dollar acquisition. It is really a tuck in I would say the EBITDA contribution is not material, but we did raise our guidance here for.

For the back half of the year moving it from the start of the year were $44 65, we're now at $470 million to $490 million. So.

We're very pleased that we're raising guidance and part of that acquisition will contribute to it but what I will say just about the metrics.

Is that we're trading at sub seven times here it was accretive to our current trading multiple so very pleased with all of those.

Operating and processing capabilities and efficiencies that is 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 two of our knit to see our Clearwater terminal, we're now up over 60000 barrels a day in that area. So substantial volume we are actually sanctioned.

Our continued to progress phase III, which will now evolve some waste processing capabilities, where we have district. 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 talk about same store sales growth, we're going to have to putting capital where there are certain areas that it's just driving a lot of water growth and so we look at areas, where we can take volume off the truck put it on a pipeline in the ethanol.

Speaker Change: Next look great.

Great from an efficiency standpoint, with our customers operationally, it's easier for us to manage.

Polity of volumes, 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 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 will be a contributor to the back half of 2025, but we will update as those contracts in progress.

Speaker Change: Got it Thats great color also just.

In terms of how youre thinking about M&A at this stage.

Speaker Change: Would you consider the size of tuck in is the sweet spot for you going forward or.

Are you also considering larger transactions as well assuming the deal terms makes 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 in the back half of the year.

Yes, no. Good question I think whenever you're contemplating larger deal and obviously with the divestments in February at over $1 billion.

That transaction alone took almost a year to put together and there is a ton of due diligence.

Yes.

I do not foresee and we're not looking at any large transactions.

Speaker Change: I would say we're looking at these smaller tuck ins maybe they range from.

Speaker Change: 30 to 82, maybe slightly over 100, nothing that nothing that I would consider substantial or large I think from our perspective right now we really want to focus on optimizing the business fundamentals are great well. There are some of these kind of smaller tuck ins that we'll do as we think about 2025 again it will be.

Our capital allocation, but yes 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 is opportunities in a few of our business segments to do some of these smaller tuck ins.

And you always have.

Always have areas of which youre looking at whether or not you can agree on a price.

With a seller in the valley.

Are you that you are 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, it's why we bought back a substantial part of the company in Q2, and we're going to continue that.

Execute like we have in this quarter and hopefully get rewarded by the market and get rewarded in the evaluation of the business.

That's great makes sense.

And then maybe last one for me.

And it might be for Chad, but I know there is a bit of noise.

This quarter with oilfield services now being.

Speaker Change: Within waste management.

Speaker Change: No.

But it looks like year over year waste management revenues are up.

Call it 15% yet.

Speaker Change: 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.

Speaker Change: A new base for margins going forward.

Yes.

Speaker Change: Yes, there's nothing that jumps out to me.

Yes.

Overall, we're pretty happy with the ACA.

Speaker Change: <unk> in Q2 in that segment and the margins I think.

Speaker Change: And considering where the margins are overall.

About 34%.

Speaker Change: In that range and I think.

I think we can expect there might be some modest uptick in Q3 Q4 just that.

Some seasonality in those quarters, typically being a bit stronger.

But it's not going to be drastically different.

Speaker Change: Okay, that's great I'll leave it there guys. Thanks.

Thank you.

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

Alan: Well, thank you for being on the conference call today I'd take broadcast of the call will be available on Securities website. We look forward to providing you with updates unsecured performance at the end of October after the completion of the third quarter.

Speaker Change: Ladies and gentlemen. This concludes today's conference call you may now disconnect. Thank you.

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