Civeo Corp Q4 FY2022 Earnings Call

Greetings. Welcome to Civeo Corporation Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Regan Nielsen, Senior Director of Corporate Development and Investor Relations. Thank you. You may begin.

Thank you, and welcome to Civeo's fourth quarter 2022 earnings conference call. Today, our call will be led by Bradley Dodson, Civeo's President and Chief Executive Officer; and Carolyn Stone, Civeo's Senior Vice President, Chief Financial Officer, and Treasurer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain anything other than historical information, please note that we're relying on the safe harbor protections afforded by federal law. Any such remarks should be read in the context of the many factors that affect our business, including risks and uncertainties disclosed in our Forms 10-K, 10-Q and other SEC filings. I'll now turn the call over to Bradley.

Thank you, Regan, and thank you all for joining us today on our fourth quarter earnings call. I'll start with the key takeaways and then give a brief summary of our fourth quarter and full-year 2022 performance. Carolyn will then provide a financial and segment level review, and I'll conclude with our initial full-year 2023 consolidated guidance and regional assumptions. Then we'll open up the call for questions. The key takeaways from our call today are that the business continued to generate cash, which is supporting our ongoing capital allocation priorities of reducing debt and returning capital to shareholders. For the full-year 2022, Civeo generated $83 million in free cash flow and made debt repayments of $34 million. During 2022, we also used over 50% of our free cash flow to repurchase the equivalent of 1.5 million common shares for $45 million. This included a repurchase of 40% of the then outstanding preferred shares, which coupled with the conversion of the remaining preferred shares into common shares in December, resulted in only one class of shares outstanding at year-end and are just the common shares. In the fourth quarter, Civeo delivered $15.1 million of adjusted EBITDA and $25.8 million of free cash flow. We recently announced two significant five-year contracts with existing customers in Australia. This is a signal of our strong customer relationships and operational execution. We are encouraged by our customers' willingness to commit to longer-term contracts and to secure their room supply with Civeo. In both cases, Civeo expanded its market share with the customer. The diversity in revenue drivers is a key component to Civeo's free cash flow generation strategy. We will continue to seek opportunities to expand our customer base and geographic footprint to reduce volatility in our free cash flow generation. Despite high commodity prices for natural resources extraction that we support, our customers continue to be focused on capital discipline and returning capital to their shareholders at the expense of increased maintenance and production spending. This capital spending is ultimately what drives occupancy at Civeo's Canadian lodges and Australian villages. As we've mentioned on past earnings calls, inflationary pressures throughout our business continued in the fourth quarter as winter weather conditions in Canada increased utility costs and the progress we've made on Australian labor issues began to reverse. Even with the severe inflationary headwinds, Civeo continued to generate free cash flow in the fourth quarter, which almost completely offset $31 million preferred share repurchase made in the quarter. Let me take a moment to provide a business update across our three segments. In Canada, our fourth quarter revenues and adjusted EBITDA decreased year-over-year, primarily related to several items that benefited the fourth quarter of 2021, coupled with cost inflation across Canada. Carolyn will walk you through these items later in the call. As expected, our lives experienced a lower build rooms sequentially related to the wind down of seasonal turnaround activity at the end of the third quarter and typical holiday downtime in the fourth quarter. Our Australian results in the quarter were in line with expectations despite higher-than-expected labor costs in our integrated services business. Our Bowen Basin occupancy was better than expected, but did reflect some typical holiday downtime sequentially. Adjusted EBITDA in the fourth quarter modestly decreased year-over-year as a result of the weakness of the Australian dollar and increased labor costs in our integrated services business, partially offset by increased occupancy in the Bowen Basin. In the fourth quarter, our Australian business was awarded two five-year contract renewals, one for our Civeo-owned villages in the Bowen Basin and one for our integrated services business in Western Australia. In both cases, these contract renewals retained Civeo's previous work with the customer and granted us additional locations and additional room commitments while taking share from competitors. Turning briefly to the U.S. We completed the divestiture of our U.S. offshore business in the fourth quarter. We were unfortunately unable to create scale in the business despite the sales and service efforts of our team. Our U.S. business now consists of our Killdeer Lodge in North Dakota and the Bakken and our Acadian Acres lodge near Lake Charles, Louisiana. Turning to our balance sheet. Our net leverage ratio was 1.1x at year-end, down from 1.5x at the year-end 2021, but increased slightly from the third quarter net leverage ratio of 0.9x. The sequential increase was largely due to the preferred share repurchase in the quarter as well as a year-over-year decrease in our fourth quarter adjusted EBITDA. With that, I'll turn the call over to Carolyn.

Thank you, Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the fourth quarter of $162.2 million with a GAAP net loss of $13 million or $1.31 loss per diluted share. During the fourth quarter, we generated adjusted EBITDA of $15.1 million, operating cash flow of $29.4 million, and free cash flow of $25.8 million. The decreased adjusted EBITDA we experienced in the fourth quarter of 2022 as compared to the same period in 2021 can be categorized in four buckets. First, there was approximately $8.5 million of non-operating items such as the impact of a stronger U.S. dollar relative to the Canadian and Australian dollars, and increased stock-based compensation expense due to a higher stock price in the fourth quarter of '22, as well as larger gains on sales of assets in the fourth quarter of 2021. Next, we have $3.3 million of customer and insurance settlements, which positively impacted the fourth quarter of 2021. We also saw a further approximately $2.9 million increase in SG&A expense, largely related to higher information technology expenses as well as professional fees. And finally, approximately $4.7 million of increased operating costs, which were largely driven by inflationary pressures for labor, food, and utilities, partially offset by increased Australia village occupancy. For the full-year 2022, we reported revenues of $697.1 million and a net loss of $2.2 million or $0.21 per diluted share. In 2022, we generated adjusted EBITDA of $112.8 million, a modest increase from our 2021 full-year adjusted EBITDA of $109.1 million. Results from the full-year of 2022 reflect the impact of a weakened Australian and Canadian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by $38.2 million and $8.1 million, respectively. On a constant currency basis, increased build rooms in Canada and Australia, and stronger Canadian mobile camp activities were partially offset by continued cost inflation across the business. The divestitures in the U.S. business, and increased stock-based compensation expense related to the increase in our shares. Let's now turn to the fourth quarter results for our three segments. I'll begin with a review of the Canadian segment performance compared to its performance a year ago in the fourth quarter of 2021. Revenue from our Canadian segment was $88 million as compared to revenue of $92.2 million in the fourth quarter of 2021. Adjusted EBITDA in Canada was $11.8 million compared to adjusted EBITDA of $23.1 million in the fourth quarter of 2021. Results from the fourth quarter of 2022 reflect the impact of a weakened Canadian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by $6.9 million and $1.0 million, respectively. The decrease in adjusted EBITDA was driven by the weakened Canadian dollar as well as certain aforementioned customer and insurance settlements that benefited the fourth quarter of 2021 and cost inflation affecting food, labor, and utilities in the fourth quarter of 2022. During the fourth quarter, billed rooms in our Canadian lodges totaled $622,000, which were up 6% year-over-year from $588,000 in the fourth quarter of 2021. Our daily room rate for the Canadian segment in U.S. dollars was $93, which is down from $106 year-over-year due to a weakened Canadian dollar relative to the U.S. dollar and the impact of a lower rate in our 12-year contract renewal. Turning to Australia. During the fourth quarter, we recorded revenues of $73.1 million, up from $62.3 million in the fourth quarter of 2021. Adjusted EBITDA was $13.1 million, down from $13.6 million during the same period of 2021. Results from the fourth quarter of 2022 reflect the impact of a weakened Australian dollar relative to the U.S. dollar and the impact of a lower rate in our 12, which decreased revenues and adjusted EBITDA by $8 million and $1.5 million, respectively. In addition to the weakened Australian dollar, the decrease in adjusted EBITDA was driven by an increase in labor costs, especially in our Western Australia integrated services business. This was partially offset by an increase in billed rooms in the Bowen Basin. Australian build rooms in the quarter were 519,000, up from 465,000 in the fourth quarter of 2021. The average daily rate for Australian villages in U.S. dollars was $73 in the fourth quarter, down from $77 in the fourth quarter of 2021, which was entirely due to the weakened Australian dollar compared to the U.S. dollar. On a consolidated basis, capital expenditures for the full-year 2022 were $25.4 million, up from $15.6 million during 2021. This increase was primarily due to increased lodge and village maintenance, coupled with a more fulsome refurbishment program in our Australian villages in preparation for increased contracted revenues in certain villages. Our total debt outstanding on December 31, 2022, was $132 million, a $6 million increase from September 30, 2022, and a $43 million decrease from year-end 2021. Our net leverage ratio for the quarter increased to 1.1x as of December 31 from 0.9x as of September 30. As Bradley mentioned, the increase was due to a combination of lower fourth quarter adjusted EBITDA compared to the fourth quarter of 2021 as well as debt incurred to finance the $31 million preferred share repurchase in the fourth quarter of 2022. As of December 31, 2022, we had total liquidity of approximately $104.1 million consisting of $96.1 million available under our revolving credit facilities and $8 million of cash on hand. Bradley will now discuss our outlook for the full-year 2023.

Thank you, Carolyn. I will now discuss our full-year 2023 guidance on a consolidated basis, including the underlying regional assumptions. We are initiating our full-year 2023 guidance of revenues between $630 million and $650 million and EBITDA of $85 million to $95 million. Our full-year 2023 capital expenditure guidance is $25 million to $30 million. Capital expenditures are expected to be relatively flat with 2022 as we continue to normalize our maintenance capital spending for our lots and villages across the business after several years of prioritizing free cash flow. As an example, we are in the process of refurbishing rooms in the Bowen Basin based on our current occupancy outlook to bring rooms back online, where we have seen increased contracted room demand in the coming years. That being said, our primary financial objective continues to be maximizing free cash flow. Based on the EBITDA and CapEx guidance just outlined, expected interest expense for 2023 is $12 million and minimal expected cash taxes and working capital investment, we expect 2023 free cash flow to range between $43 million and $58 million. As we have discussed on previous earnings calls, the significant year-over-year decline in 2023 adjusted EBITDA comes from our Canadian mobile camp business, resulting from the wind down of construction activity for the Coastal GasLink pipeline project in British Columbia and the TMX pipeline expansion. Canadian contract camps contributed approximately $36 million in 2022. We are currently expecting to add 3 mobile camps remaining on the Coastal GasLink project as well as one camp supporting the TMX pipeline expansion projects and are expecting all of them to be completed in 2023. Our 2023 guidance currently includes CAD $13 million in mobile camp deal mobilization expenses. I'll now provide the regional outlooks and corresponding underlying assumptions by region. In Canada, as we look into 2023, we know that our customers are continuing to prioritize returning capital to their shareholders and need to be convinced of longer-term stability across commodity prices and the broader economy before materially increasing investments in Canada. While activity in lounges should remain steady, the 2023 mobile camp activity will be negatively impacted by the completion of the pipeline construction projects throughout the year, including the incurrence of some of the related demobilization costs. We are currently expecting relatively consistent year-over-year turnaround activity in Canada in the second and third quarters of 2023, but as we have discussed in prior years, we don't get an accurate view until customers look to secure turnaround rooms in the second quarter. Canadian mobile camp activity related to the Coastal GasLink pipeline will significantly decline throughout the year as our three mobile camps are currently expected to wind down during the middle part of 2023. Additionally, our mobile camp supporting the TMX expansion is expected to also continue through the third quarter of 2023. When these pipeline-related mobile camp projects roll-off we will incur costs associated with the demobilization of these camps. We currently have two of the four de-mobilizations in our 2023 guidance with, as I mentioned, approximately CAD $13 million of demobilization costs. As we saw last year, however, uncertainty remains around the timing of these projects. To the extent that projects are extended, our 2023 guidance will be positively impacted, both by the deferral of demobilization costs as well as the incremental revenue on the camps. Our 2023 guidance could also be impacted by further clarity from a customer around the room demand for Civeo's lodges in the back half of the year. As we disclosed last quarter, we have agreed not to renew an expiring land lease associated with our McClelland Lake Lodge, which this land lease currently expires in June 2023 in order to support the customers' intent to mine that land where it currently is located. In addition, our hospitality services contract expires in June of 2023. Our 2023 guidance includes customer room demand at other Civeo lodges in the second half of 2023 as the customer transitions to its new solution. If they are to find an alternate solution for room supply, this would negatively impact our guidance. We are marketing McClelland Lake Lodge assets for new opportunities in Canada and the U.S. Based on our current knowledge and understanding of the marketplace, we believe there is demand for these assets for sale or redeployment. In our 2022 revenues, the McClelland Lake Lodge generated 2022 revenues of approximately CAD $60 million. We expect to have further clarity on the customer's 2023 room demand and potential sales or redeployment opportunities for these assets later on in 2023. Turning to Australia. Sustained healthy metallurgical coal prices in 2022 and early 2023 have gradually improved customer activity in our Bowen Basin villages. We expect a modest increase in our village occupancy in 2023. However, our customers continue to focus on capital discipline and are hesitant to commit capital to large expansionary projects. Our current guidance reflects continued capital discipline more than it reflects the current price for met coal. That being said, in early 2023, we have experienced a noticeable uptick in customer activity versus our initial expectations, and there could be upside to our guidance if this trend continues further into 2023. While iron ore prices were treated modestly in 2022, they remain at healthy levels and customer activity in Western Australia remains strong. Although our integrated services business in Western Australia, as evidenced by our recent five-year contract award, we continue to be burdened by inflationary pressures, particularly labor costs. We are expecting these labor costs to slowly subside throughout 2023, resulting in an uplift in our integrated services margin in the back half of the year. However, if these labor issues do not subside, results in the back half of the year could be negatively impacted. I will conclude by underscoring the key elements of our strategy as we navigate the current market climate. Our mandate as are as follows: we prioritized the safety and well-being of our guests, employees, and the communities we work in. We will continue to manage our cost structure in accordance with the occupancy outlook across Canada and Australia. We will continue to enhance our best-in-class hospitality offerings. We will continue to prudently allocate capital to maximize free cash flow generation while we continue to return capital to shareholders and reduce debt. And lastly, we will seek opportunities to further our revenue diversification through organic and M&A opportunities. With that, we're happy to take your questions.

Thank you. Our first question is from Stephen Gengaro with Stifel. Please proceed.

Thanks and good morning everybody. Bradley, you provided a comprehensive overview of the guidance for 2023. I have one quick question. Considering everything, does the wind down impact the typical seasonal pattern of EBITDA? I believe the second and third quarters generally account for 60% to 65% of the full-year EBITDA. Should we anticipate any changes to that based on the current expectations for demobilization costs?

No. I think we'll still have that same kind of 65% of the guidance, EBITDA in the second and third quarters. And then as we typically do it, right now, guidance is softer in the fourth quarter, and that's just due to customer visibility. So we'll have to see how that plays out. A big factor of that is the demob of the contract camps in the back half of the year.

Okay. Thanks. And then two other things for me. The first is when you think about the free cash generation, obviously, you've been buying back stock. I think people have reacted well to that. But what types of M&A would you be looking at and how do you evaluate potential M&A opportunity?

Sure. There are certain properties that we would look at that would be one-off properties, both in Canada and Australia that would be additive to the portfolio as a whole. And as I mentioned, we'll look to continue to diversify building off of our hospitality services into other geographies and other end markets. Based on what we see as our cost of capital, those would have to have strong returns in the upper teens on an unlevered after-tax basis.

Okay. Great. And any it would likely be hospitality services as opposed to hard assets. Is that fair?

Well, adding locations to the portfolio would be hard assets, but it also could be adding service companies in an M&A fashion.

Okay. And then just one final one. The second half sale of U.S. assets. Is the U.S. business close to zero now? I'm trying to think about what exactly you divested?

We've divested everything but chilled beer and Acadian Acres, and we're actively looking to divest those.

Thanks. And one final question. Your debt levels have decreased significantly. They may have increased slightly this quarter, possibly due to foreign exchange. At what leverage ratio do you plan to stop reducing debt and start returning all cash?

I believe we are currently in a good range. A leverage ratio between 1x and 1.25x seems appropriate. This allows us the flexibility to either invest in our own stock or grow the business. If an unexpected adverse macroeconomic situation arises after we make an investment, we won't face a higher leverage ratio. So, I feel confident about our position. Over the next few years, I expect our net leverage to fluctuate around its current level, potentially decreasing when opportunities are limited or increasing slightly for the right investment opportunity, which could involve returning capital to shareholders as well as business growth.

Got it, great. Thank you for the color.

Thank you for the questions.

Our next question is from Steve Ferazani with Sidoti & Company. Please proceed.

Good morning, Bradley, Carolyn. Great, I appreciate all the detail on the call. I do want to check on some of these numbers just to make sure I got them clear because a lot of moving parts here. The McClelland Lake shutdown. So that's now June. So that was $60 million in annual revenue that comes out after the first half. Did I hear that right?

Correct.

Okay. And then your timing now, how are you thinking about...

For 2023, it's currently being partially balanced by reallocating occupancy to other Civeo locations. The McClelland issue is more relevant to 2024 than to 2023. We want to remind everyone that while we have indicators, we do not have commitments for occupancy in the second half of the year.

Yes, that's fair. Considering the guidance, what are your thoughts on the timing of the mobile camps? We know some of these projects have been extended consistently. What are your current thoughts on the timing? Both projects will probably be completed by the end of 2023, but that doesn't necessarily mean your mobile camps will extend for the entire duration.

So we're expecting that the camps roll-off between Q2, Q3 and Q4, potentially one. So that's when the rent will end and the service revenue will end, not all the demob costs will occur in 2023. We've got CAD $13 million of demob costs in 2023 with another approximately CAD $7 million or so in 2024.

Did that go up from your original estimates last year or over a year ago with inflation, the demob costs? Am I right on that?

No, they've been fairly consistent in that range.

Okay. Okay.

CAD $20 million in total and depending on the exchange rate, it's about USD $15 million.

Okay. Then a couple of numbers on the quarter. I just wanted to check on the Canadian daily rates was there anything to mix there? I'm guessing there was something beyond FX because it looked like the rooms were pretty booked comparably for this time of year, but the ADRs kind of came down.

It was our lodge. We entered into a new contract in July. And as we noted in our release of that, we have lower rates on that going forward that's offset by some cost and scope adjustments.

Okay. Perfect. Thanks. You mentioned that the margin with food and service in Australia was very low due to higher labor and food costs. How do you plan to offset that? What are your intentions considering this is a seasonally slower quarter?

Well, the supply chain team is finding the food cost piece and the freight costs and the HR team is working on trying to increase. As we've talked about in the past, the principal issue in Australia is how much temporary labor are we using as opposed to full-time employees. The temporary labor is a necessity if we can't have full-time employees, but it comes at a higher cost and a lower productivity, which manifests itself in performance. So we're working on scope adjustments with the clients to adjust scope to the new reality. So it's a three-pronged approach, supply chain, HR, and scope adjustments.

Okay, perfect. Thanks Bradley, thanks Carolyn. Appreciate it.

Thank you, Steve. Appreciate it.

Thank you.

Our next question is from John Daniel with Energy Partners. Please proceed.

Hi, Bradley. Thanks for taking the call.

Hi, John.

Just one follow-up on the M&A stuff. When you talk to a lot of people in, say, traditional OFS, they will speak to the volume of deals that they're looking at, Pico, et cetera. Can you just provide some color on how many opportunities are out there for your business? And when you're not doing deals, is it valuation related? Is it quality of property? Just any color on M&A would be helpful.

We have had a wish list that varies between six and ten items. In an M&A context, some of these items are just wishes because the target may not be interested or it may not be the right time for them. Sometimes it's about valuation or what comes up during due diligence. Currently, we have been focused on paying down debt, and fortunately, the items on our wish list haven't been acquired or gone in a different direction. While we've been concentrating on internal matters, at least the wish list items haven't been pursued by anyone else. We're still in the early stages of being able to pivot in this area, and we are definitely aware of the need for careful capital allocation decisions.

Would you say that most of the opportunities you pursue are self-sourced, as opposed to coming from various bankers pitching deals? I'm curious about how these opportunities come to you.

Generally speaking, these are internally sourced. We have a clear understanding of which assets, properties, and service companies we are interested in. While we do occasionally receive outside ideas, most of the opportunities within the scope of our existing business are assets and companies that we are already familiar with.

Okay, thank you for the tutorial and education. I appreciate the help.

Thanks for that.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Bradley for closing comments.

Thank you all for your interest in Civeo, and thank you for joining the call today. We look forward to speaking with you on our first quarter 2023 earnings call planned for the end of April. So thank you all. Take care.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.