Civeo Corp Q1 FY2023 Earnings Call

Greetings and welcome to the Civeo Corporation First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. This conference is being recorded. It is now my pleasure to introduce Regan Nielsen, Vice President of Corporate Development and Investor Relations. Thank you, Regan. You may begin.

Thank you and welcome to Civeo's First Quarter 2023 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 for our first quarter earnings call. I'll start with the key takeaways for the first quarter and then give a brief summary of our first quarter 2023 deployments, after which Carolyn will provide a financial and segment level review. I'll conclude with our updated full year 2023 guidance and reasonable assumptions underlying that guidance. The key takeaways from our call today are, the first quarter 2023 results were in line with our expectations and reflect the normal seasonality of our business. To remind everyone again, the second and third quarters are typically our strongest quarters with turnaround activity, our main activity, particularly in Canada. Today, we announced five additional contract awards across several of our Bowen Basin villages in Australia with expected revenues totaling AUD175 million, raising our revenue visibility and our diligence business. In addition, we have increased our market share in integrated services in Australia with recent contract wins. To counter inflationary pressures in the Australian integrated services business, we have a mitigation plan in place and are expecting to see improvement in the second half of 2023. There are no material updates to our outlook for our Canadian mobile camps and expected demobilizations. Encouraged by counterparty interest received to-date, our team is focused on redeploying or selling McClelland Lake assets after the expiry of our current contract. Canadian turnaround activity is shaping up well for the second and third quarters of 2023. We continue to execute on the share repurchase program in the first quarter and we'll continue to opportunistically buy back shares. Lastly, as we disclosed on previous calls, we have divested the majority of our US segment over the last 18 months and have reached the point where the remainder of the US business is immaterial. Moving forward, we will no longer report the US business as a separate segment in our SEC filings and investor materials. Let me take a moment to provide a business update on our two segments. In Canada, our revenues and adjusted EBITDA were consistent with our expectations and declined year-over-year. While the revenue decrease was primarily driven by a weakened Canadian dollar relative to the US dollar, the adjusted EBITDA decrease can also be attributed to a decrease in contribution from our mobile camps and our Sitka Lodge due to the wind down of pipeline construction activity as well as inflationary pressures. Sequentially, revenue and adjusted EBITDA remained relatively flat quarter-over-quarter. For Australia, we saw a year-over-year increase in revenues, driven by increased integrated services revenue from new contracts and increased build rooms in our Civeo-owned villages. Due to inflationary pressures primarily associated with the integrated services business, adjusted EBITDA declined during the year. However, I'll speak to how we're handling the inflationary pressure later in the call. First quarter results in Australia were also adversely impacted by a weakening of the Australian dollar relative to the US dollar. 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 first quarter of $167.6 million with a GAAP net loss of $6.4 million or $0.42 per diluted share. During the first quarter, we generated adjusted EBITDA of $20.2 million, operating cash flow of $0.4 million, and negative free cash flow of $2.1 million. As Bradley just mentioned, the decline in adjusted EBITDA we experienced in the first quarter of 2023 as compared to the same period in 2022 was largely due to the weakened Australian and Canadian dollars relative to the US dollar, the wind down of Canadian pipeline construction activity, and continued inflationary pressures. These decreases were partially offset by a $1.7 million gain on the sale of assets related to the divestiture of certain US assets. The negative free cash flow in the quarter was primarily the result of a $15.6 million increase in working capital in the quarter, which was largely driven by the typical seasonality of our cash flows. Let's now turn to the first quarter results for our two segments. I'll begin with a review of the Canadian segment performance compared to its performance a year ago in the first quarter of 2022. Revenues from our Canadian segment were $89.5 million as compared to revenues of $96 million in the first quarter of 2022. Adjusted EBITDA in Canada was $12 million, a decrease from $17.2 million in the first quarter of last year. Results from the first quarter of 2023 reflect the impact of a weakened Canadian dollar relative to the US dollar, which decreased revenues and adjusted EBITDA by $6 million and $0.8 million, respectively. On a constant currency basis, revenues remained relatively flat due to an increase in Canadian launch revenue, offset by a decline in mobile camp activity. Lower contributions from mobile camps and our Sitka Lodge due to the wind down of Canadian pipeline construction activity, coupled with inflationary pressures, contributed to the decrease in adjusted EBITDA year-over-year. During the first quarter, build rents in our Canadian lodges totaled $643,000, which was modestly up from $636,000 in the first quarter of last year. Our daily run rate for the Canadian segment in US dollars was $96, which declined year-over-year due to occupancy mix and the weakened Canadian dollar relative to the US dollar. Turning to Australia, during the first quarter, we recorded revenues of $77 million, up from $63.5 million in the first quarter of 2022. Adjusted EBITDA was $14.2 million, down from $15.4 million last year. Results from the first quarter of 2023 reflect the impact of a weakened Australian dollar, which decreased revenues and adjusted EBITDA by $4.6 million and $0.9 million, respectively. On a constant currency basis, the increase in revenue was largely driven by increased occupancy in our owned villages and higher activity for our integrated services business related to new contracts. However, inflationary pressures primarily associated with our integrated services business led to a decline in adjusted EBITDA year-over-year. Australian build runs in the quarter were $523,000 and up 10% from $474,000 in the first quarter of 2022 due to increased customer demand at our owned villages as well as recent contract wins. The average daily rate for Australian villages in US dollars was $78 in the first quarter, which was down modestly from $79 in the first quarter of 2022. The decrease was entirely driven by a weakened Australian dollar as the Australian dollar average daily rate was actually up year-over-year. On a consolidated basis, capital expenditures for the first quarter of this year were $4.8 million compared to $3.6 million during the same period in 2022. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages. Our total debt outstanding on March 31st, 2023, was $142.6 million, a $10.6 million increase since December 31st. And our net leverage ratio for the quarter increased slightly to 1.2 times as of March 31st, from 1.1 times as of December 31st. As of March 31st, 2023, we had total liquidity of approximately $90.6 million, consisting of $78.2 million available under our revolving credit facility and $12.4 million of cash on hand. And in the first quarter of 2023, we repurchased approximately 169,000 shares through our share repurchase program for a total cost of approximately $3.8 million. Bradley will now discuss our updated guidance for the full year 2023.

Thank you, Carolyn. I would like to turn our discussion now to the updated full year 2023 guidance on a consolidated basis, including looking at the underlying assumptions for each of the two regions related to that guidance. We are maintaining our previously provided full year 2023 revenue and adjusted EBITDA guidance ranges of $630 million to $650 million of revenues and $85 million to $95 million of adjusted EBITDA. However, we are increasing our full year 2023 capital expenditure guidance to a range of $45 million to $50 million. It's important to note that this increase in capital expenditure guidance is entirely driven by a previously announced contract in Australia, where the customer has requested specific upgrades to three of our Bowen Basin villages. These upgrades can be fully funded by the customer upfront. To reiterate, this increase in capital expenditure guidance, relative to our initial guidance, will not have a material impact on our 2023 free cash flow guidance. As a result, running through that guidance, based on this EBITDA guidance and CapEx guidance, expected interest expense of $12 million for the full year of 2023 and expecting working capital inflow of $20 million and minimal cash taxes, we are maintaining our expected 2023 free cash flow guidance of $43 million to $58 million. I'll now provide the regional outlooks by region. In Canada, as we look at the remainder of 2023, we are expecting to experience solid oil sands turnaround activity in the second and third quarters of the year with oil sands billed rooms increasing year-over-year. This will be partially offset by lower billed rooms in our Sitka Lodge, as well as lower mobile camp activity as the Coastal GasLink and Trans Mountain expansion projects are nearing completion. As it relates to the expiry of the McClelland Lake Lodge contract in June of 2023 and the underlying customer management of that lodge, there is no change in our 2023 guidance, as we believe the Civeo lodges will be needed to support demand from this customer through 2023. Our team is focused on strategic alternatives for McClelland Lake Lodge assets beyond the expiry of the current contract, and we are encouraged by the counterparty interest that we have received to-date. Regarding the Canadian mobile camps, there are no material changes in our outlook for these assets since our last earnings call. We continue to expect the camps to wind down during 2023, as pipeline construction activity nears completion or is complete. Our guidance includes approximately $10 million of demobilization expense in 2023 and $6 million of demobilization expense in 2024. We will continue to update shareholders as we progress through the year. Turning to Australia, we continue to see encouraging signs of growth in customer demand for our owned villages and integrated services business. As for our owned villages, we continue to experience an uplift in customer activity as well as growing customer interest in securing room supply moving forward. This is evidenced by today's announcement of the initial contract awards across the Bowen Basin. Specific to these contract wins, the five Australian contract awards comprised of a two-year AUD90 million contract with renewal; a five-year, AUD45 million contract renewal; and three short-term contracts totaling AUD35 million in 2023, all of which de-risk our current outlook and our current guidance. All of those numbers were in Australian dollars. As noted above, in conjunction with the previously announced contract in Australia, the customer has requested specific upgrades to three of our Australian villages. These upgrades, which we expect to complete in 2023, will be fully funded by the customer upfront. Regarding our Australian Integrated Services business, it's benefiting from increased revenue from recent contract awards over the last two quarters, but continues to be burdened by severe inflationary pressures. We now have a plan in place to address this, which is a three-pronged approach. First, on labor, we have a focused HR recruitment effort in place. Our supply chain is making efforts to work on food and freight cost inflation. And we are seeking contractual adjustments to provide relief and flexibility given the extreme inflationary environment. We're making strides on all three fronts and our Australian team is laser-focused on these initiatives. The effort of our guidance includes mitigating certain inflationary impacts by the second half of 2023 in our Integrated Services business. I will conclude by underscoring the key elements of our strategy as we navigate through 2023. Our mandate is as follows: we prioritize the safety and well-being of our guests, employees and communities; we focus on enhancing our best-in-class hospitality offerings; we will manage our cost structure in accordance with the opportunity outlook across Canada and Australia; we continue to allocate capital prudently to maximize free cash flow generation while we continue to return capital to shareholders and manage our debt. We also see opportunities to further our revenue diversification. With that, we're happy to take your questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Steve Ferazani with Sidoti & Company. Please go ahead with your question.

Good morning everyone. I appreciate all the details shared on the call. Brad, could you provide any information regarding the cadence of the mobile camp line to help us better understand this?

At this point, we had four camps operating, three for the Coastal GasLink and one for the Trans Mountain expansion. We currently expect that two out of the four will demobilize this year, while the other two will demobilize next year. Therefore, we anticipate the largest portion of demobilization to occur in the fourth quarter of this year, with $10 million of demobilization costs included in the 2023 guidance. For 2024, we expect $6 million in demobilization costs. However, we anticipate that all activities on the assets will conclude in 2023 based on current information.

That's understandable. When I consider your Canadian build rooms, along with the impact of the mobile camp wind downs on Sitka, it's evident that your build rooms have increased both sequentially and year-over-year. You could even argue the increase is significant if you take into account the decline in Sitka. All indications suggest a much higher capital expenditure in Canada this year, particularly with Trans Mountain on the horizon. I'm trying to understand why you maintain a cautious tone regarding the potential improvements in accommodation options in that market, despite the clear signals pointing to increased capital expenditure.

Fair point. We remain optimistic about Canada. Last year, we achieved 2.76 million room nights for 2022, and our guidance suggests a modest increase to 2.78 million. We are particularly hopeful about the turnaround activity in Canada, which relates to your comment on CapEx. However, there are mixed signals; specifically, two major oil sands companies have indicated they may reduce their workforce in the oil sands sector. If that happens, it could represent a risk, but currently, we do not anticipate this, as the existing occupancy does not suggest it. Although the mix is unfavorable due to a decline in Sitka, oil sands activity is up modestly year-over-year, about 10% in room nights, though this is being offset by the situation in Sitka. We are closely monitoring CapEx announcements, and while there are conflicting signs, I would say I am more optimistic than the data might imply.

Okay, that's fair. Thanks. Now turning to Australia, it's clear that revenue has increased nicely, with a combination of larger service contracts, which tend to have lower margins. Generally, given that labor costs are the primary factor, I’m wondering how much improvement we can expect. We thought conditions would have improved more by now, especially after the easing of COVID restrictions. What are the obstacles regarding labor availability? You mentioned this in your remarks, so how quickly can we expect to see a resolution? The revenue growth is evident, and you announced new contracts again this morning.

Yes. The main focus for Australia is that most of the EBITDA generation comes from our owned villages. With the renewals and additional short-term contracts we've announced today in those villages, we're seeing strong occupancy. Coppabella is expected to be fully booked by the end of the second quarter, which should drive strong performance from two of our major locations, representing nearly 50% of our total owned rooms. Dysart is also performing well, and the two basins are beginning to improve with the announcement of Whitehaven's Bakery project, which we expect will have a positive impact in the second half, enhancing the upside to our guidance. Thus, the key for Australia's owned villages lies here. Growth is anticipated to come from our integrated services business, which the team has effectively developed over the past three years. However, due to COVID and significant inflationary pressures in Western Australia, where most of our Integrated Services operations are located, challenges remain. We are seeing a gradual influx of foreign brokers into Australia, but the process has been slow due to federal policies that have been in place for about two years, compounded by bureaucratic hurdles. Nonetheless, we have brought in 10 foreign cooks over the last three months, with more on the way. Hiring full-time staff in housekeeping and hospitality, aside from chefs, has proven challenging. The team is making headway, and we expect improvement in the second quarter. We saw month-to-month progress in the first quarter, and if that trend continues, it will support our guidance for the second quarter and the remainder of the year. We anticipate significant improvement in the second half of the year to achieve the upper end of our guidance.

Okay. Thanks, Bradley. Appreciate the detail.

Thank you. Thank you for your interest and the questions.

And our next question comes from the line of Stephen Gengaro with Stifel. Please proceed with your question.

Thanks. Good morning, everybody. First, Bradley, can you discuss the source gas in Canada for LNG Canada? I know you haven't been involved there historically. Is there an opportunity that you're exploring?

Yes, we don't have any plans right now for locations in the Montney. We're really seeking an opportunity to win there. It could be a chance to redeploy multi-tier assets as they become available from the pipeline construction projects. Our main focus has been on finding opportunities for the mobile camps to operate.

Thanks. When we consider the balance sheet, you have generated a substantial amount of free cash flow over the years and reduced your debt. What are your thoughts on prioritizing capital allocation between share buybacks and debt reduction? Is there a point where you would be more aggressive in this regard? How do you evaluate these two options, especially with your leverage ratio decreasing?

The leverage ratio is currently at 1.2, which is a comfortable position for us, and I would like to maintain it in that range. While we may consider increasing the leverage ratio for specific capital allocation opportunities, I do not wish to raise it significantly. Regarding returns on capital deployment, the stock price trend has been unfortunate, but the returns on buybacks have been very attractive. We are in the process of developing a formal capital allocation policy, which we hope to finalize by the end of the year. It has been a bit challenging for us in the first half of the year due to the seasonality of our cash flows. Historically, the first half has not performed as strongly as the second half, primarily due to the softer fourth-quarter transition into the first quarter and increased activity in the second and third quarters. This results in a typical rise in receivables. Additionally, the first half involves several annual cash outflows, such as property taxes and insurance premiums. Thus, as receivables increase, we also experience cash outflows. In the latter half of the year, cash flows tend to be stronger, so while we will remain conservative, there is still an opportunity to consider stock buybacks.

Great. And just one final one. The CapEx increase that you mentioned that I believe the customer is basically paying the entire increase ahead of a contract. How does that show up on the income statement?

So, the customer is paying for approximately $20 million of capital improvements at three locations: Coppabella, Dysart, and Moranbah. They've already prepaid a portion of that. When we start to work, we should be in the second quarter, we'll make a second payment, which makes us prepay the entire amount. The revenues from that will be amortized over the length of the five-year contract. So, there was some recognition in the first quarter. Then we'll be amortizing it for the balance of the five-year contract.

Great. That’s all from me. Thank you.

Thank you, Stephen.

And the next question comes from the line of Dave Storms with Stonegate. Please proceed with your question.

Thank you and good morning. A quick question from the US divestitures standpoint, I saw you had the $1.7 million increase. Was that from some of Killdeer and the Canadian acres? Or is that on one of them? Any color you could give there would be helpful.

Sure. We sold the housing units off of the Canadian acres. We still have the land in Canadian acres that we are planning to sell and we still have Killdeer, both of which are held for sale.

Killdeer is not.

Killdeer is not held for sale, sorry.

Understood. Perfect. And then also great to see you announced a couple of wins, a couple of new contracts this quarter. Any further information you can give us on the current bidding environment would be helpful as well, please.

I'm sorry, can you repeat that?

Yes. Sorry. Just any color you could give us on the current bidding environment, especially after seeing you announced new wins in Australia?

Well, as I mentioned in the prepared comments, we've got two locations that are effectively going to be full by the end of the second quarter and that's Moranbah and Coppabella. There's clearly a shift. We're trying to emphasize this. The customers have moved to being concerned about surety of supply of rooms. Three of the announced wins are really driving that home, in that they are securing supply for their turnaround activity. These are three-, six-, and nine-month contracts, totaling AUD35 million that are really ensuring they have the rooms available for their turnaround staff. With the announcement of the Whitehaven Vickery project, we expect the Canada Basin also to start picking up in activity. That's more of a back half of 2023 opportunity and a 2024 and beyond opportunity as they build that project. In Australia, it's very upbeat. In Canada, turnaround activity is a big question mark. It looks like it's going to be a good year. I would say that I'm optimistic that there's upside there. But 2024 could be even better.

That’s very helpful. Thank you.

Thank you.

There are no further questions at this time. And now I would like to turn the floor back over to Bradley Dodson for any closing comments.

Thank you, John. Thank you everyone for joining the call today. We truly appreciate your interest in Civeo and look forward to speaking to you on our second quarter earnings call at the end of July.

And that concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.