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Edited Transcript of TEV.TO earnings conference call or presentation 2-Aug-19 1:00pm GMT

Q2 2019 Tervita Corp Earnings Call

Aug 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Tervita Corp earnings conference call or presentation Friday, August 2, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John William Cooper

Tervita Corporation - CEO, President, COO & Director

* Linda Dietsche

Tervita Corporation - CFO

* Robert P. Dawson

Tervita Corporation - EVP of Strategy & Corporate Development

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Conference Call Participants

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* Elias A. Foscolos

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Greg R. Colman

National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst

* Jeffrey Eric Fetterly

Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst

* Jon Morrison

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research

* Keith MacKey

RBC Capital Markets, LLC, Research Division - Analyst

* Michael William Urban

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Tim Monachello

AltaCorp Capital Inc., Research Division - Analyst of Institutional Research for Energy Services

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Presentation

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Operator [1]

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Good morning. My name is Denise, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Tervita Corporation second quarter results conference call. (Operator Instructions)

I'll now turn the call over to Mr. John Cooper, President and CEO. You may begin your conference.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [2]

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Thank you, Denise, and welcome to Tervita's conference call for the second quarter of 2019. Joining me on the call today is Linda Dietsche, our Chief Financial Officer; and Rob Dawson, our Executive Vice President of Strategy and Corporate Development.

During the call today, we will make forward-looking statements related to future performance, and we will refer to certain financial measures that do not have any standardized meaning prescribed by GAAP. Forward-looking statements reflect the current views of Tervita with respect to future events and are based on certain key expectations and assumptions used by Tervita. Although Tervita believes that the expectations and assumptions on which forward-looking information is based are reasonable, undue reliance should not be placed on the forward-looking statements as Tervita cannot give any assurance that they will prove to be correct.

Since forward-looking information addresses future events and conditions, by their very nature, they involve inherent risks and uncertainties. Actual results could differ materially from these -- those anticipated due to numerous factors and risks. Please refer to our continuous disclosure documents as they identify factors which may cause actual results to differ from any forward-looking statements and identify and define the non-GAAP measures.

Well, today, we will review our results for Q2 2019 and our outlook for the business for the remainder of the year. We are very pleased with Tervita's strong second quarter results, demonstrating the resiliency and stability of our production-focused business and expanded network as well as our continued focus on cost.

So first off, Linda will walk us through the key highlights from our Q2 results. Rob will then review our capital program, and then I will move into a review of our outlook for 2019.

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Linda Dietsche, Tervita Corporation - CFO [3]

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Thanks, John. In the second quarter, revenue increased 9% over prior year to $590 million, reflecting higher waste and oil volumes associated with our acquisition of Newalta.

Second quarter adjusted EBITDA was $53 million, a 61% improvement over prior year, primarily due to increased divisional EBITDA contributions of $19 million offset by $1 million of higher G&A expense associated with the larger organization.

G&A expenses in Q2 continued to trend downward as a percentage of revenue excluding energy marketing.

Adjusted EBITDA margin for the quarter was 32% compared to 27% for the same quarter of 2018, reflecting the higher contribution from divisional EBITDA relative to G&A expense.

Divisional EBITDA in our Energy Services segment grew 63% compared to Q2 2018. Factors that contributed to the increased results include a 26% increase in production-related waste volumes at our Energy Services facilities primarily associated with the acquired facilities, a 38% increase in drilling-related revenue despite decreased drilling activity due to a shift to higher revenue waste stream, a 52% increase in soil volumes at our landfills from customer remediation activity and a 37% increase in marketed oil volume with the inclusion of our acquired Newalta facility volumes, an improvement that more than offset the lower price environment.

In our Industrial Services segment, Q2 divisional EBITDA of $6 million was 33% lower than Q2 2018, as growth in our waste services and increased ferrous volumes were more than offset by decreased rail-related project activity and lower ferrous prices.

Q2 2019 net profit of 0 was unchanged from the prior year as the increase in adjusted EBITDA was offset by higher depreciation and amortization and finance cost.

Looking sequentially, adjusted EBITDA of $53 million in Q2 2019 was 5% lower than in the first quarter, reflecting normal seasonality in Tervita's operations and lower activity in the WCSB with meters drilled down 45%.

In Energy Services, TRD facility volumes were relatively flat compared to the first quarter due to stable production volume while lower drilling activity drove a 34% decline in total landfill volumes.

In Industrial Services, lower performance in Q2 compared to Q1 was mainly due to reduced contribution from rail services and lower ferrous prices.

For the year-to-date, Tervita generated $42 million of discretionary free cash flow, a 27% increase compared to last year, which more than funded the $25 million of growth capital spend year-to-date.

I will now pass it on to Rob to discuss the capital program.

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [4]

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Thank you, Linda. With capital spending, we continue to expect total 2019 accrued capital spend of $120 million to $135 million comprised of growth and expansion of $90 million to $100 million and maintenance capital of $30 million to $35 million. Year-to-date, we have spent $25 million of growth and expansion capital, including the drilling of new disposal wells, some landfill cell and cavern expansions and the purchase of new rail cars to increase capacity for our metals business. Tervita's capital spending is typically weighted to the second half of the year.

Our growth and expansion capital pipeline remains full, and we have many exciting projects that will contribute to our growth in 2020 and beyond. Our capital program is mainly focused in Energy Services and is increasingly targeted on helping our customers meet their needs in connection with their growing focus on capital discipline.

Our 2019 growth program includes the expansion of our storage and blending capacity at 3 of our TRD facilities for energy marketing, the continued development of a recently announced customer-dedicated water disposal facility comprised of 3 pipeline-connected disposal wells in a facility in the Montney play supported by a long-term customer committed contract. The completion and tie-in of additional water disposal wells at 2 of our active TRD facilities in the Montney and heavy oil areas of operations and the construction of 2 new landfill cells and the continued washing of an additional cavern at Lindbergh.

In addition, we continue to see customer demand for an additional $200 million to $300 million of high potential organic growth projects over the next 2 to 3 years that we expect will continue to fund future growth and provide attractive returns and strong free cash flow growth. We are focused on living within our means while high-grading this growth pipeline and spending out of the list of projects we have in front of us.

I will now turn it back to John to provide operational highlights and our outlook for 2019.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [5]

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Thank you, Rob. I will discuss the operational highlights and the outlook for the year starting with our synergies. We continue to be extremely pleased with the progress and integration of the acquisition, and we have realized our targeted synergies ahead of our plan. With the 1-year anniversary of the transaction behind us, our results to date truly demonstrates that our increased size and scope lessened some of the risk from cyclical volatility for the company as a whole while providing combined upside growth potential.

By the end of the second quarter of 2019, we have executed on an annualized run rate of $45 million of adjusted EBITDA synergies, which is ahead of schedule and at the top of our expected range. We now expect annualized synergies from the acquisition will be at least $46 million of adjusted EBITDA, and our associated onetime cost to the end of Q2 2019 was $22 million. And as a result, we now anticipate total onetime cost of approximately $24 million.

For the full year of 2019, we anticipate realizing approximately $44 million in synergies excluding commercial opportunities. With our synergy target achieved, we are turning our attention to additional opportunities to leverage our expanded infrastructure, strengthening the operating efficiencies of our business and enhance our customer offerings.

Other highlights in the quarter included, in early June, we announced the pipeline-connected water disposal infrastructure project backed by a multi-year contract with a senior producer in the Montney that we expect to be fully commissioned in the first quarter of 2020. We are very excited about this opportunity, and we believe we have more opportunities to develop projects like this with other customers. This business model can create meaningful upticks in our customers' return on capital and health and safety benefits for our customers relative to conventional truck transport while allowing them to prioritize capital spending on their core business.

In May, we successfully launched a normal course issuer bid and had repurchased 518,386 shares, and as at June 30, 2019, for a total value of $4 million. And we are pleased with the Competition Bureau review period for the Newalta transaction ended on July 19, 2019, clearing the transaction of any review.

Turning to our outlook. Our Energy Services business remains resilient despite lower activity in the WCSB as the market adjusts the production curtailments imposed by the Alberta government and lack of certainty with respect to egress solutions the oil and gas industry needs for renewed confidence.

For the remainder of the year, we anticipate relatively stable WTI prices with some widening of Canadian oil price differentials, and although we expect to see improving drilling and completion activity, levels will remain lower than in the second half of 2018. Our focus remains on delivering solutions to our customers and executing on our planned growth capital spend.

We remain on track to deliver double-digit EBITDA growth in 2019, supported by expected improvements in market activity compared to the first half and a full year contribution from synergies, which will drive higher results in the second half of 2019.

Looking forward to 2020, we anticipate the contributions from our 2019 growth and expansion projects will continue to grow Tervita's annual adjusted EBITDA in the double digits even in the absence of any market tailwinds.

In closing, our strong results in Q2 demonstrate that the steps we have taken since 2016 to strengthen our business have significantly improved our stability and resiliency. With attractive margins, stable and growing discretionary free cash flow and a well-capitalized balance sheet, we are taking advantage of our many opportunities to generate strong growth from our expanded network.

That concludes our prepared remarks. We would be happy to now take questions regarding our results and outlook for the remainder of the year.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Craig (sic) [Greg] Colman with National Bank Financial.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [2]

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That's reasonably close. Congratulations on the quarter. Great quarter, guys. I just had a handful of questions here because a lot of it was pretty self-explanatory. Firstly, how should we be thinking about the $200 million to $300 million that you guys talked about in potential growth going forward? Is that the sort of thing where it could go beyond 2020? Is it over a 10-year period, like, is it a multi-year? I'm just trying to get a feel for -- you haven't obviously announced formal capital budgets for 2020. But when you think about your growth capital, how should we be slicing up that pie?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [3]

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Well, thanks, Greg. This is John. I guess first thing is we will continue to live within our cash flow means. So our growth and expansion capital is basically in that $100 million or less range per year, and we expect that on a going-forward basis. So the inventory of our projects, which is the number that you alluded to, we see being able to implement that over the next 2 to 3 years. They are predominantly and we would lean towards more of our contracted revenue basis projects was the first kick at the cat, if I could call it that. So that's how we would kind of look at prioritizing it.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [4]

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Got it. Okay. And if we're thinking about the style of work you're doing there or the geographic location, is it more of the kind of things that's right down your fairway and you've done so far? Or is there a new geography or a new -- or sort of derivative type of business that you'd be moving into?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [5]

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So Greg, it's Rob here. It's a good question. I'd say, on the risk side, the risk is quite low in this inventory, mainly because it's right up our fairway. It's at facilities we already own and operate, and it's in service lines that we're -- we've been operating for many, many, many years. So on the operational and execution side, we feel pretty comfortable. As far as geographic location, there's a couple of themes. Water obviously is a big theme. And we see, through the Duvernay and the Montney, a lot of opportunity there. And then in energy marketing, we do see addition of storage and blending facilities across our network where we see opportunity to do that. That's the 2 major themes we'd say for that pipeline to grow.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [6]

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Got it. And if you just broadly think of sort of your core business as being closer to the drill bit or closer to the midstream size of the world, where -- is it pretty evenly dispersed amongst those 2? Or is it weighted more on one side or the other?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [7]

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It's probably more related on the production waste environmental services side versus the D&C side.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [8]

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Got it. Okay. So moving on, on the Industrial Services side, I'm still very much getting used to this part of the business, which is relatively new for the legacy Newalta analyst. Can you give us any thoughts on the seasonal cadence for either margin or revenue? Or is it actually the sort of thing that you guys are a little surprised too? And it can bounce around quite a bit because it did catch us off guard in Q2 and obviously, the quarter was still amazing, but we're just trying to get a feel for how we can more accurately forecast that.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [9]

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It's John. Generally speaking, our Industrial Services business, a couple of things about it. It would -- we think of it as aligning and growing with GDP. It does get lumpy in the second quarter and our -- due to the seasonality. And our second quarter was -- lower results was primarily due to the lower rail projects and ferrous pricing. However, we do expect for the year, the business results from Industrial Services will be higher in '19 than it was in 2018. And we've taken steps to combine our field service groups to create efficiencies. We've eliminated some redundancies and providing a more thorough offering to our customer base there. The other thing that is notable is that business supports our standard waste service business and infrastructure, primarily in the landfills and cavern. So it's really waste, environmental services and metals is the components of the Industrial Services business.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [10]

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Okay. When you say seasonality in Q2, I mean, just being totally frank, last year's Q2 was materially up in industrial from Q1.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [11]

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Yes.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [12]

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Is this a normal thing for Q2? Or is this the sort of thing where it can be -- any given quarter it can be weird?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [13]

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No. We would consider it more a one-timer thing with the ferrous pricing, the rail projects, but we consider it -- no, we wouldn't think of it that way.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [14]

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Okay. And then just lastly for me. In your prepared remarks, you mentioned about growing EBITDA, I guess, half over half from Q1 -- from H1 in 2019 to H2 in 2019. I don't suppose you'd be willing to quantify that growth, would you?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [15]

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No.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [16]

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You got to give it a shot. Sometimes you get lucky.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [17]

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Yes, yes. No.

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Operator [18]

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Your next question comes from Keith MacKey with RBC.

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Keith MacKey, RBC Capital Markets, LLC, Research Division - Analyst [19]

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Just one question for me. Now that the Competition Review period has passed, just wondering if you can give us an update on your thought process around acquisitions, divestitures, potentially in the context of current financial leverage.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [20]

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Well, it's John. That's a good question. I mean, first of all, we are pleased that the review is done and it's behind us. I guess we would look in terms of our growth projects. As Rob is aligned to, we've quite an inventory of growth projects to implement. They're primarily brownfield and greenfield projects. There are smaller tuck-in acquisitions in that but not substantial. So we would look at acquisitions if it continues to be accretive to our shareholders, solves a customer problem and provides synergies. So we would look at that. If it lives within our annualized free cash flow means, we would execute on that.

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Keith MacKey, RBC Capital Markets, LLC, Research Division - Analyst [21]

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Got you. And anything on the disposition side?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [22]

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No. Nothing of a material nature. We've done small things from yellow iron as an example, but nothing of a material nature.

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [23]

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Keith, it's Rob here. I'd say over the last 2 years, any facility that doesn't provide full free cash flow, and that's cash flow after all planned capital spending, has either been suspended or closed or a few have been disposed as well. At the moment now every facility we have is contributing to the business should we plan to continue to operate them.

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Operator [24]

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(Operator Instructions) Your next question comes from Mike Urban with Seaport Global.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [25]

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So a great quarter in a tough environment. I think you did a great job of kind of demonstrating the stability of the business. I just -- kind of a general question. I don't know that you've ever thought of it in terms of kind of framing the upside opportunity, the operating leverage in the business. So clearly a production-focused business in energy, but have you thought about or tried to frame or quantify the upside opportunity from that roughly, call it, 1/3 of the energy business that is leveraged to the D&C market for every X percent and meters drilled or rig count or completions that could mean certain amount of revenue or EBITDA for your business?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [26]

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Tim, it's Rob. Your voice wasn't coming through very loudly, but I think we got that question. If you're looking for a sensitivity for what kind of meters drilled might drive what level of revenue, we haven't provided or are we in a position to provide that kind of guidance to the market at this stage. I will say though that when you look at where that increase is likely to occur, it's already busy in the resource play areas. But the LNG developments in Northeastern British Columbia for the next 3 to 5 years as well as, in our opinion, the return of incremental capital into the heavy oil region, we've got a lot of facilities there that have latent capacity and would receive the full effect of that without any new required capital. So not only would the torque be reasonably strong, it would also be immediate and there'd be no requirement for capital to get in the ground for us to benefit from that.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [27]

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And just to add into that, with our footprint in the basin, any of the egress solutions that would be implemented in the basin, we will benefit from any of them. So our upside, any one of them, whether it's LNG or Trans Mountain or whatever happens, we would benefit from any of them with our footprint.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [28]

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Got it. That's helpful. And then just in terms of the outlook. Again, good quarter, beat pretty solidly here in what is typically your seasonally weak quarter. Since you're maintaining the full year outlook on, I guess, double digit, could be a pretty wide range, I was just wondering if it's kind of maybe slightly higher within the scope of double digit or if there's something that you're seeing emerging as a headwind in the second half of the year that's causing you to essentially keep the guidance unchanged.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [29]

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It's John. I think we'll keep the guidance as it is. It's not going to be the high double digits. And I guess our business model with -- now that we've completed our integration of the business, we're now moving on to managing the business on a continued go-forward basis, and we've really just begun. So we would -- we're very pleased with the results. I think we've demonstrated that in this market, external market that is down that we can produce results, and we have a very good inventory of projects. And in spite of any tailwinds, we still believe that we will be growing, whether it's free cash flow, return on invested capital or EBITDA, we're very excited about that. So that's really all we can kind of give you on that guidance.

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Operator [30]

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Your next question comes from Tim Monachello with AltaCorp Capital.

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Tim Monachello, AltaCorp Capital Inc., Research Division - Analyst of Institutional Research for Energy Services [31]

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Just 2 questions from me. On the IS side, just hoping you might be able to help me understand the downtick in revenue in the project-based services. I know you mentioned smaller rail activity and ferrous metal prices being down. But I thought the ferrous portion would be in the commodity-based sales which were roughly flat quarter -- or year-over-year. So any color there would be helpful for me.

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [32]

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It's Rob here. On the ferrous side, we mentioned in our growth capital note that we've been adding some railcars to our fleet. That's essentially for the metals business adding to our egress capacity there. So volumes are up quite a bit and has offset the cost of those volumes -- not the cost, the revenue decline from the lower ferrous metal prices. You see stable revenues there. There's a little higher cost, so the margins are down. That's our comment on lower ferrous metal price.

With projects, we have 2 main project businesses. We got the rail services, one, and you saw in Q1 that was a really big quarter for rail services there. Couple of tragic accidents, that was pretty large number of steady rail accidents that were called out. So that's down quite a bit in Q2, and it is also down from last year. We do believe that business on average is still going to continue to grow. And then there is -- the more seasonality that John referred to earlier in our traditional environmental services business, which is generally quite low through the cold months and through breakup and it start -- and it's really a summer/fall season business and early winter. So we see the second half of the year already doing a bit stronger on that business' project revenue side.

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Tim Monachello, AltaCorp Capital Inc., Research Division - Analyst of Institutional Research for Energy Services [33]

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Okay. That's helpful. And then on the CapEx side, are you guys able to quantify how much is -- of the growth CapEx in the quarter was associated with opening landfill cells at existing sites and cavern washing resources saving CapEx projects?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [34]

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In the first half of the year, those are all a very low proportion of what's been spent, mainly for the reasons I just stated there. The landfill projects, in particular, are summer projects.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [35]

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Yes. Typically we spend about 2/3 of our capital in the second half of the year due to seasonality that Rob just talked about.

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Tim Monachello, AltaCorp Capital Inc., Research Division - Analyst of Institutional Research for Energy Services [36]

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Okay. Got you. And then just on the M&A commentary there, John, just thinking about the fact that you're looking at mostly smaller tuck-ins that look to be accretive or provide synergies. Does that mean that you're really not looking at the U.S. market today?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [37]

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No. We are in the U.S. We are working with our U.S. business to continue to improve that, and we are examining opportunities down there.

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Operator [38]

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Your next question comes from Jeff Fetterly with Peters & Co.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [39]

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Just trying to understand a couple of pieces. So the growth projects that you listed, the addition of storage at the TRD facilities and the disposal well additions, is any of that supported by formal contracts or commitments? Or are you tying any of it physically in with pipelines?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [40]

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Jeff, it's Rob here. On the addition of storage and blending, we do have purchase commitments for clean oil from customers, but they're not directly backstopped to those. And then those come and go as the years go. So there's no direct connection to those. They're very low-risk projects, though, those storage and blending projects, I would say. On the TRD expansion, so those are TRD -- the disposal wells -- those are disposal wells that we believe can be backstopped, but currently are not backstopped by customer contracts, but we're in discussions with several customers at the moment to add additional infrastructure to the exact -- to those exact TRDs that we are growing. So not at the moment, but we see lots of opportunity in the windshield.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [41]

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And beyond the new Montney facility, are there any locations where you are tying in disposal volumes or water volumes into them out of operator sites?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [42]

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Not at the moment, but we do have 2 other sites that are connected and like I said I think we're going to start to add a few of those to the list as well.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [43]

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And the washing of the additional cavern at Lindbergh, is that just an expansion of the existing business or capacity? Or are you adding any incremental services in conjunction with that?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [44]

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It's more of the former.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [45]

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Yes.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [46]

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And John, just to follow up on your U.S. comment, so when you're looking at opportunities in the U.S., is that in the context of the existing business lines that you have there? Or are you trying to expand the scope and scale of what you have?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [47]

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No. It will be within the existing business lines, and we've used the geographic platform to grow into the waste and environmental side.

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Operator [48]

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Your next question comes from Jon Morrison with CIBC Capital Markets.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [49]

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Just talk about core pricing trends right now you're seeing across the oilfield waste management business in the last few months. And is it something where you're seeing pricing largely kind of hold across services and geographies?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [50]

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Hello, Jon? Jon? Are you still there, Jon?

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Operator [51]

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This is the operator. He's still connected.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [52]

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Okay. I think -- it's John here. I think, Jon, you were talking about pricing in our waste and energy side so -- and is it holding. So the answer is yes, the pricing levels in our fluids and our waste business have kind of flattened out this year, and we have -- expect it to remain at those levels, would slightly not -- uptick in the second half of this year. That would be our expectations. It is -- we deal with many waste sheds. So you see activity varies by waste shed. In the higher-growing areas like the Montney, we do see more aggressive pricing as our customers look to internalize or more competition. And in other lower areas, it's flat, if not growing up. But overall for our business, we see it flat and slightly growing in the second half.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [53]

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Perfect. That's helpful. Can you hear me better now?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [54]

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Yes, yes. We can, yes.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [55]

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Rob, you talked about having already optimized the facility network and closed anything down that didn't make sense. But if you think about the curtail impacted regions that have obviously shut in volumes, are any of those facilities more questionable or on the line right now based on the volumes that are coming in? And if you didn't see a major rebound in production in some of those facility areas in the next 12 months that you'd perhaps have to reconsider some of those facilities as being economic?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [56]

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Jon, it's Rob here. It's a good question. I would say the impact of curtailment, while there has been an impact, I think it's more of an opportunity cost impact. When you look at and when we look at our volumes at all those facilities year-on-year, even pro forma, they're actually flat to up from the prior year. And if you look at just overall production in the basin, it's actually been flat, too. It's really just Q3 when it starts to diverge, I believe. So those facilities are actually one of our higher-performing areas at the moment, our East Central region, which is our heavy oil region, is doing very, very well.

And the synergy of operations between the primarily disposal facilities that the legacy Tervita business used to have and the primarily treatment facility that Newalta has, I think the combination of those 2 businesses has exceeded what we thought would be the complement of that. So that business is actually doing very well. So I don't think we have any facilities on that list that's ready to fall off, at least not in the near term. But we're always looking at it, and we're always going to be making sure that every business we're running is adding cash to the bottom line.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [57]

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That's helpful. John, sorry to keep coming back to this, but can you just talk about the magnitude of CapEx that you're comfortable spending over the next few years in relation to your deleveraging plans? Is it as simple as CapEx could go as high as cash flow in any given year if the investments provide the proper rate of return? Or is there some level of absolute deleveraging that you would like to see unfold where it's just not a function of the cash flow growing and therefore the ratio's coming down?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [58]

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Thanks for that. I guess the first thing is we -- our overall debt-to-EBITDA level that we've communicated is 2 to 2.5, we're now at 3.1-ish. We do expect -- we've got a large inventory of growth projects that exceed our financial metrics. And I have a high level of confidence of executing them well and getting the cash flow from them. So given that, we would still spend those within our cash flow means and -- of about $100 million on growth and expansion per year. And that -- our plan would still be out a year. So it'd still be 2 to 2.5. So I guess I would say, to answer your question, we're still implementing our growth projects. We are -- we've imposed our own debt-to-EBITDA leverage metrics, and we're comfortable with that. It's a cyclical business. We will watch it, and it's our job to watch it every quarter and, of course, adjust if we need be.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [59]

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Congrats on the synergies number coming in a little bit high. Just out of curiosity, is this something that we could expect you to keep giving us updates on? Or now that kind of a year has passed, this will be the final update and you'll really only give us updates on kind of the commercial opportunities or cross-selling initiatives that could come through?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [60]

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Yes, that's a good question. Actually, you're correct. This will probably be the last sort of official efficiency synergy chatting. We're now into the business and managing it that way. And as we get commercial opportunities that we feel comfortable communicating externally, we will certainly do that.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [61]

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Just the last one from me on the Competition Bureau review. The time line passed. So it brings it to a close. But when the time line actually passes, do you receive a letter from them saying that they're taking no action? Or is the legal precedent just that it's time has passed, and therefore no action should be taken? And I guess as a follow-up, do you know of any case precedent where they'd ever come back at a later date and ask somebody to make a change that wasn't captured in the initial review period?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [62]

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No. We know of no case precedent that you alluded to there. So that's -- we don't know of any. No, it's just that time passed. We didn't get any formal communication, and we're now managing the business day-to-day.

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Operator [63]

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Your next question comes from Elias Foscolos with Industrial Alliance.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [64]

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I've had to pop on the call a bit late, so hopefully I haven't missed something related to the question I'm going to ask. But focused on the issuer bid, you mentioned you've got a big pipeline of opportunities, and at the same time, you're in the market or have been in the market in the issuer bid. How do you think about the trade-off between allocating capital between projects and repurchasing shares?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [65]

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Well, we implemented the issuer bid because we feel that the value of our share price is not reflective of what it should be, and that is our signal to help support our shareholders in that perspective. The program on an annualized basis would run about $20 million in total. So given that, with all of our growth projects, we do not believe that it would jeopardize any of that.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [66]

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Okay. So you're kind of targeting that number of $20 million. It might happen; it might not. It just depends on the price, correct?

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [67]

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Yes. Right.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [68]

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Okay. And this question regarding potential debt refinancing. Has there been anything contemplated in that regard?

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [69]

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Elias, it's Rob here. Yes, I think we're looking very closely and actively at our debt refinancing opportunities. And while we wouldn't signal when we do plan to refinance that debt, I think it's safe to say that in the next 12 to 18 months, it will have been accomplished at any time within the next 12 to 18 months.

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Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [70]

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Given the performance of the company/stability that you've shown, I think there's probably some free cash flow you could generate. So I thought I would move that way with the question.

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Robert P. Dawson, Tervita Corporation - EVP of Strategy & Corporate Development [71]

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Yes, I mean one of the key considerations is we're inside the first call window right now. It's at 50% of the coupon, so 1 0 3 9. Pretty expensive call on liquidity to do that today, but the next call window drops down on December 1 so...

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Operator [72]

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There are no further questions queued up at this time. I'd turn the call back over to John Cooper for closing remarks.

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John William Cooper, Tervita Corporation - CEO, President, COO & Director [73]

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Thank you, Denise, and thank you, everyone, for being on the conference call today. A taped broadcast of the call will be available on Tervita's website, and we look forward to providing you with updates on our performance after the completion of third quarter of 2019. Thank you, everybody, and have a nice day.

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Operator [74]

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This concludes today's conference call. You may now disconnect.