Waste Connections, Inc. (WCN) Earnings Call Transcript & Summary

Welcome to SECURE's conference call. [Operator Instructions] I would now like to turn the conference over to Allen Gransch, President of SECURE. Please go ahead, Mr. Gransch.

Thank you, operator. Good afternoon, ladies and gentlemen, and welcome to the conference call related to the sale of SECURE facilities identified in the Competition Tribunal's divesture order resulting from the acquisition of Tervita Corporation. We are pleased to announce that we have signed a definitive agreement with Waste Connections for the sale of these facilities for a total cash consideration of $1.15 billion. With me today, we have Rene Amirault, Chief Executive Officer; and Chad Magus, Chief Financial Officer. We will provide some prepared remarks about the divestiture before opening the call to Q&A. As a reminder, all statements made during this call are subject to reader advisories included in this morning's news release. All dollar amounts discussed today are in Canadian dollars, unless otherwise stated. There are a few key highlights to this transaction that I would like to briefly touch upon. Total sales proceeds of $1.15 billion, inclusive of certain adjustments as provided in the agreement, are expected to materially strengthen our financial position and provide us with capital allocation flexibility for shareholder return and growth. The transaction is accretive to SECURE approximately 2 turns higher than our trading multiple prior to announcement based on the facility's adjusted EBITDA of $154 million for the trailing 12 months to September 30, 2023. We are confident the multiple achieved in the face of an order sale process provides compelling evidence that the company's value far surpasses this benchmark valuation. The transaction, including the counterparty being a large North American integrated solid waste services company, begins to highlight the underlying value of SECURE's business and represents another meaningful step towards the pursuit of our strategy of one of Canada's sector-leading waste management and energy infrastructure organization. The corporation expects to generate between $440 million to $465 million of adjusted EBITDA next year, approximately 70% of which is anticipated to be tied to the Environmental Waste Management Infrastructure business segment. Following the close of the transaction, SECURE will continue to hold 2/3 of the assets obtained in the $1.3 billion acquisition of Tervita in 2021. We have had the benefit of earning significant free cash flow from the divested assets over the past 2.5 years and are now selling them for a substantial return while maintaining a large network of the waste management assets for continued growth. Following the transaction, SECURE remains the market share leader in Western Canada, and we expect to continue to deliver robust margins and stable cash flow profile, underpinned by our reoccurring volumes driven by industrial waste, metals and energy markets. The transaction is subject to approval by the Competition Bureau. We are committed to working with the Bureau to target a successful close in the first quarter of 2024. And with that, Rene, over to you.

Thank you, Allen, and thank you, everyone, for joining us this afternoon. We have made this proactive decision to divest the facilities as we continue to provide significant value to our shareholders, customers and employees. Management and the Board of Directors have carefully considered the strategic implications of the transaction. While we continue to believe there are strong grounds for appeal of the Competition Tribunal's decision, given the uncertainty with respect to timing the likelihood of the Supreme Court hearing our case and a successful outcome of any such hearing, we were unanimous that this transaction is the right path forward for our stakeholders. It brings strong proceeds, provides us with significant capital allocation flexibility and provides resolution to the competition matter, which we expect will remove any overhang on the stock that may have resulted from the Competition Tribunal's order. For our employees, Waste Connections shares our core values and is committed to an employee-centric culture with a focus on ESG, safety and customer service. We are confident that the approximately 250 SECURE team members who will be joining Waste Connections upon closing will be well supported in a positive work environment. A sale to Waste Connections, a company with substantial managerial, operational and financial capability and a track record for successful acquisitions and integration, also allows for seamless support to our customers for their processing and disposal requirements in Western Canada. Turning now to the allocation of transaction proceeds. Following the payment of tax and transaction costs, we anticipate net cash of over $1.1 billion, a substantial balance providing immediate liquidity for debt repayment, while maintaining significant leverage capacity and a surplus of cash available for, among other things, shareholder returns and funding of growth initiatives. While our leverage will reduce significantly at close of the transaction, longer term, we intend to continue to manage debt levels in the 2x to 2.5x EBITDA range, supported by the reoccurring stable cash flow profile of this business. The corporation intends to continue paying its quarterly dividend of $0.10 per share or $0.40 per share on an annualized basis, offering an attractive yield to our peer group. The Board of Directors and management believe there's a substantial disparity between SECURE's share price leading up to the announcement and the fundamental value of the business. As Allen discussed, the transaction, despite being an order sale, underscores this disconnect and provides compelling evidence that the stock should be valued above this benchmark. As such, the corporation intends to move forward with a normal course issuer bid to repurchase shares, and we'll evaluate other methods available to return capital to shareholders following closing, which may include consideration of the merits of a substantial issuer bid. Finally, SECURE plans to execute on growth opportunities following closing, both organically and through acquisitions that align with the corporation's investment criteria and complement its core Environmental Waste Management and Energy Infrastructure business operations. In connection with the announcement of the transaction, we have revised our previous guidance on sustaining capital, including landfill expansions, from $85 million to $60 million; and asset retirement obligation spend from $20 million down to $15 million. I'll now turn the call back over to Allen to provide an update on some of our other strategic initiatives.

Thanks, Rene. Following the merger with Tervita Corporation in July of 2021, the corporation conducted a thorough review of its businesses, intending to capitalize on its core competencies and strategic advantages, ultimately aiming to enhance value for shareholders. In connection with this review, business units that did not have a fit into the corporation's core Waste Management and Energy Infrastructure strategy were identified for divestment. We are pleased to announce today that we've successfully executed on this strategic initiative, with various noncore divestitures completed over the last 2 years. Since the beginning of 2022, the corporation has successfully sold 3 noncore oilfield service-focused business units and various redundant or unused assets for aggregate gross proceeds of approximately $73 million. With the final disposition expected to close on December 15, 2023, our portfolio rationalization under this initiative will be complete. These divestitures were part -- or a key part of our strategic review and market repositioning as a leading waste management and energy infrastructure company. I'd like to thank the 400 employees associated with these business units for their contributions to SECURE and wish them and their new organizations all the best. The decision to divest these assets align with our commitment to optimize our portfolio and allocate resources to infrastructure-based businesses that provide stable reoccurring revenue while generating significant free cash flow. With a streamlined portfolio, we can focus on our core strengths, enhance operational efficiencies and position ourselves for growth in the industrial and energy waste markets. With that, I'll turn it back to Rene for closing remarks.

Thanks, Allen. Our management team and the SECURE Board is confident this sale will unlock significant value for SECURE and its shareholders. In summary, it affirms our position as a leading waste management company that highlights the value of our infrastructure assets, and we will continue to be the market leader in this space. The proceeds provide us significant capacity to enhance returns to our shareholders and grow in the industrial and energy waste markets. We are committed to working with Waste Connections, the Competition Bureau and other regulatory bodies to ensure a smooth transition for our customers, employees and other stakeholders. This transaction is the culmination of dedicated hard work from the entire team. I would like to take this opportunity to personally acknowledge all members of my team, including the dedicated members of my management team, as well as our Board of Directors and their invaluable contribution in getting us to this stage. With that, we have concluded our formal remarks. I would now ask the operator to open the call for questions.

[Operator Instructions] Your first question comes from the line of Patrick Kenny from National Bank Financial.

And congrats on the deal. Just maybe back to the allocation of proceeds, you'll still have, call it, $900 million after paying off the 11% notes. You're already sub-2x leverage versus, like you said, your 2x to 2.5x target. So just wondering how we should be thinking about the allocation split between an SIB versus accelerating growth? And ideally, maybe how much dry powder would you like to have for acquisition opportunities, based on what you're seeing out there right now?

Yes. Thanks, Patrick. Short term, obviously, we're going to take advantage of paying down the revolver and minimizing any interest costs that we can. But when you look forward into the next 12 months, there's a lot of different factors that are going to play into -- something, obviously, the NCIB is going ahead here shortly. I think that will be effective on Thursday this week. And then really, until we get to closing, we're not going to even think about the SIB, just so that as we move forward here, we'll obviously want to see how we're trading and what valuation. But along with that, obviously, we've been able to always have organic opportunities in the offer. And then over the next 12 months, obviously, with this kind of cash, it would make sense for us to look at accretive acquisitions. So it's probably pretty fluid in terms of timing and when that all rolls out, but I think we'll be able to update you a lot more on our next quarterly conference call.

And I think to -- Patrick, it's Allen here. I think to -- we've said that this business, with the strength of its cash flows, the balance sheet really is an area where we think we can put on 2x to 2.5x leverage. So that gives us a lot of flexibility here to make the right decisions. But I think on a capital return basis, if the stock continues to trade at such a meaningful discount from its fundamental value, it makes your decision a lot easier.

And I guess on the acquisition front, I mean, you've highlighted the sharp 25% increase in metal recycling volumes over the past year or so. Is this an area where you'd like to beef up your exposure through M&A? And maybe you can just talk about what other verticals or regions across North America might look compelling to you going forward?

Well, I think that's the great thing of the assets that we're keeping. I think everyone gets focused on the environmental waste management facilities. But there was a lot of other business units like the metal recycling and some of the waste transfer stations that we've broadened our customer base into the industrial side as well. So we're going to be looking at all those different units. And obviously, there's some great opportunities in that business. We like the industrial space. Obviously, there's still a lot to be done left in the energy side of the business. But I think there's going to be some great opportunities over the next 3 years in some of the new business units that we got as well.

And then maybe just on the noncore asset sales. So can you just clarify how much of the $73 million of proceeds was already embedded in the balance sheet as of September 30? And then it looks like you're keeping the drilling fluids business, but maybe no longer reporting the oilfield services segment separately. I guess, if that's correct, what segment will it be included in? And roughly what percentage of that segment's contributions would come from the fluids business?

Okay. Good question. So on the noncore asset sales, we did one in 2022, and then we've done 2 this year, for a total gross proceeds of $73 million. The Projects business is going to close here on Wednesday, and so we'll get the proceeds for that on Wednesday, but it's included in the $73 million. When you look at the business itself, all those 3 businesses, they generated about $15 million in EBITDA and about $6 million in free cash flow. And approximately 400 of SECURE's staff have gone with these buyers. This would be our Water Pumping business, our Projects business and then our Environmental Consulting business. And really, when you think about the fluids on the chemical side, it's no longer material, given the 3 divestments of businesses that we've already conducted. So given it's not material, it doesn't make sense to include it in its own. So we're going to move that into our Environmental Waste Management segment. We do have some chemicals in that business, production chemicals, where we're treating a lot of our waste to break it down. And so it just makes a lot of sense to include it into that grouping. And you'll see that in our Q1 structure, it will just be 70% environmental waste management and then 30% energy infrastructure going forward.

Right. Okay. Yes, I fully agree. Cleaning up the business mix is going to help that valuation gap close. And I think you guys have done a good job highlighting your superior EBITDA margins, your strong cash conversion rates, all that good stuff. But I guess one piece that might be missing, curious to get your thoughts, to close that gap. It might be just a bit more transparency on the pro forma cash flow quality breakdown. And I'm not sure if you're able to distill that for the market today or maybe some time over the near term, but just in terms of, say, your 2024 EBITDA guidance, what percentage is take-or-pay versus fee-based versus linked to commodity prices or your margin-based activities? Is that something that you're looking at?

I think, originally, in a premerger, we were going down that path. But post-merger, I'm not sure that's a relevant metric. I mean the great thing about the combined business in a go forward, even post divestiture is, these are the businesses we've hung on to is all about maximizing free cash flow. And I can honestly say that there's a lot of these businesses that have low sustaining capital, a lot of reoccurring revenue and create a great free cash flow that ultimately creates shareholder value. So whether it's contracted, take-or-pay versus reoccurring revenue, I don't think we're going to go down that path of trying to be transparent because, at the end of the day, our shareholders just want free cash flow. And as long as we can show the EBITDA margins, the free cash flow in terms of our relative size and the investments that we make, that's how we're going to get rewarded, Patrick.

And we've said all along that the majority, we're talking 80% of our revenue, is generated from production, which production has slightly grown here over the last 10 years. And so that's where you get that stable cash flow. I think if you go back over the last 4 quarters, excluding Q2, obviously, with spring break up, we've consistently shown 150-plus in EBITDA each quarter, showing that stability. And you look at 2 different environments. You look at 2022, WCI was 95 as an average. And you look this year, we're hovering below 75 as an average, and yet the cash flow remains the same. And that's really your fundamental principle here of reoccurring cash flows, and so we're going to continue to drive that message home.

[Operator Instructions] Your next question comes from the line of Cole Pereira from Stifel.

Congrats on the transaction. There were some commentary in the release about M&A or potential M&A. Just wondering if you could unpack that a little bit. If you were to do an acquisition, what type of businesses might you find attractive?

Yes. No, great question, Cole. Just like we're talking to, Patrick, I think, over the next 6 months, we're going to be high grading our opportunities when it comes to acquisitions. And I think we'll be able to give you a little bit more definitive color around that in the next couple of quarters. But for now, our focus is on closing this, making sure we get all the approvals and taking care of our employees as Waste Connections integrate them. So I should be able to give you some updates next quarter and the quarter after on that kind of color.

Your next question comes from the line of John Gibson from BMO Capital Markets.

Congrats on the transaction here. Can you maybe put some goalposts around divested EBITDA? I mean, I know Waste Connections put a revenue number out there. And if you look at the implied margins, it's -- I'm just trying to get to a transaction multiple. But if you look at your expected EBITDA in 2023, it's maybe a little bit smaller than this. So I don't know. Maybe could you just try to reconcile the divested EBITDA, if you're able to put that out there?

Sure. John, it's Chad here. Just want to clarify, you're asking for the divested EBITDA?

Yes.

Yes. Okay. Yes, we didn't put it in the press release, but Allen did mention it in the prepared remarks. But on a trailing 12-month basis to the end of September is $154 million of adjusted EBITDA.

Again, congrats.

Okay. Thank you.

[Operator Instructions] There are no further questions at this time. Rene, please continue.

Thanks, everyone, for calling in. We have posted an updated investor presentation on our website. We look forward to a successful closing in Q1. Thanks, again, and goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.