Greetings. Welcome to the Civeo Corporation Second Quarter 2023 Earnings Call. Please note that this conference is being recorded. At this time, I'll now turn the conference over to Regan Nielsen, Vice President, Corporate Development and Investor Relations. Regan, you may begin.

Thank you and welcome to Civeo's second 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 Form 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 second quarter earnings call. I'll start with the key takeaways for the second quarter and then give a brief summary of our second quarter 2023 performance. Then Carolyn will provide a financial and segment level review, and I'll conclude with our updated full year 2023 guidance with the regional assumptions that underlie that. At that point, we'll open up the call for questions. The key takeaways from our call today are, second quarter 2023 financial results were in line with our expectations, and highlighted the diversity of our revenue drivers across the business. Our Australian segment performed well during the quarter as we experienced substantial sequential and year-over-year growth in both our own villages business as well as the integrated services business. Village guests were up 16% year-over-year, and integrated services revenues were up 33%. In both the owned villages and integrated services businesses, we are seeing the benefits of the contract awards that we have announced over the past 12 months. It's important to note that during the quarter, we achieved the highest quarterly Australian-owned village occupancy that we've seen since 2014, led by increased Bowen Basin customer activity, with the Gunnedah Basin Villages contributing as well. LNG activity in British Columbia, Canada continued to wind down in the quarter as expected, resulting in reduced Canadian mobile camp activity for us and contributing to lower Canadian lodge billed rooms versus the second quarter of 2022. As discussed on the last earnings conference call, our inflation mitigation plan for Australian Integrated Services is underway, and we are encouraged by the progress to date. The majority of these benefits from our team's efforts are expected to be seen in the second half of 2023 and going forward. Our second priority was regarding McClelland Lake Lodge in Canada. We've made significant progress towards an attractive commercial alternative for the future of that asset, as we are in active negotiations to sell the assets to a third party. We are encouraged by our progress to date, but cannot discuss the details of the proposed deal at this time. In addition, the demobilization process for McClelland Lake is underway. The related customer room demand from that former lodge has moved to other similar lodges and is under a take-or-pay contract through January 2024. Through our team's efforts, we expect our net demobilization costs for the assets to be minimal, in part due to reimbursements from our clients. The outlook for our Canadian mobile camps has not changed materially since our last call. As discussed last quarter, we expect the demobilization to commence in the second half of this year. We continue to execute on our share repurchase program in the second quarter and will opportunistically buy back shares going forward. And lastly, on key points. As we discussed in previous calls, we are in the process of a $4 million capital allocation framework that incorporates our strong balance sheet position and our solid free cash flow outlook, as we look forward to sharing with you hopefully later this year. Let me take a brief moment to provide a business update across the segments. In Canada, our revenues and adjusted EBITDA declined year-over-year, the decrease was driven by the wind down of Canadian mobile camp activity as well as lower year-over-year Canadian lodge billed rooms. The decline was also exacerbated by the weakened Canadian dollar relative to the U.S. dollar. Sequentially, however, revenue and adjusted EBITDA increased substantially due to the seasonal increase in turnaround activity. For Australia, we saw a significant year-over-year increase in revenues and adjusted EBITDA, driven by increased billed rooms at our owned villages and increased integrated service revenue from both of which were largely from new contracts. As I noted earlier, we are encouraged by the substantial increase in customer activity, which resulted in the highest quarterly owned village occupancy that we reported since 2014. We also reached key milestones in our inflation mitigation initiatives towards the end of the quarter. And like I said, we'll begin to realize those benefits in the second half of this year. However, our second quarter results were adversely impacted by the weakened Australian dollar relative to the U.S. dollar. Sequentially, we experienced increased revenues and adjusted EBITDA to the aforementioned dynamics as well as the typical seasonal uptick in the second quarter across the Australian business, and some inflationary relief in our integrated services business. It is important to note that while we've made strides in mitigating inflationary pressures in both our Canadian and Australian businesses, we expect that inflation will remain a focus of ours for the foreseeable future.

Thank you, Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the second quarter of $178.8 million, with GAAP net income of $4.5 million or $0.30 per diluted share. During the second quarter, we generated adjusted EBITDA of $31.6 million, operating cash flow of $19.4 million and free cash flow of $12.9 million. As Bradley just mentioned, the decline in adjusted EBITDA that we experienced in the second quarter of 2023, as compared to the same period in 2022 was largely due to the wind down of Canadian pipeline construction activity, and therefore, our mobile camp revenues and EBITDA and lower LNG-related Canadian lodge occupancy. These decreases were partially offset by increased billed rooms in our Australian Bowen Basin Villages and increased Australian integrated services activity from our recent contract wins. Let's now turn to the second 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 second quarter of 2022. Revenues from our Canadian segment were $95.5 million as compared to revenues of $109 million in the second quarter of 2022. Adjusted EBITDA in Canada was $19.8 million, a decrease from $28.7 million in the second quarter of last year. Results from the second quarter of 2023 reflect the impact of a weakened Canadian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by $5.1 million and $1.1 million, respectively. On a constant currency basis, revenues decreased 8%, primarily due to a decline in mobile camp activity as pipeline construction continues to wind down, coupled with lower billed rooms in our Canadian lodges. Adjusted EBITDA also declined year-over-year due to the aforementioned dynamics. During the second quarter, billed rooms in our Canadian lodges totaled $724,000, which was down from $771,000 in the second quarter of 2022. Our daily run rate for the Canadian segment in U.S. dollars was $100, which declined year-over-year, but that was entirely due to a weakened Canadian dollar relative to the U.S. dollar. The average daily run rate in Canadian dollars was up year-over-year. Turning to Australia. During the second quarter, we recorded revenues of $82.5 million, up from $67.8 million in the second quarter of 2022. Adjusted EBITDA was $19.6 million, up from $15.5 million last year. Results from the second quarter of 2023 reflect the impact of a weakened Australian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by $5.7 million and $1.3 million, respectively. On a constant currency basis, the increase in revenue and adjusted EBITDA was largely driven by increased occupancy at our owned villages and higher activity for our integrated services business, both related to the new contracts. Australian billed rooms in the quarter were $588,000, up 16% from $505,000 in the second quarter of 2022, due to increased customer demand at our own villages driven by our recent contract awards. The average daily rate for our Australian villages in U.S. dollars was $75 in the second quarter, down modestly from $77 in the second quarter of 2022, and entirely driven by the weakened Australian dollar. The average daily room rate in Australian dollars was up year-over-year. On a consolidated basis, capital expenditures for the second quarter of 2023 were $6.9 million compared to $5.1 million during the same period in 2022. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages, coupled with spending to activate mothball Australian village rooms with increased customer demand. Our total debt outstanding on June 30 was $136.1 million, a $6.5 million decrease since March 31. Our net leverage ratio for the quarter remained flat at 1.2x as of June 30, 2023, since March 31, 2023. As of June 30, 2023, we had total liquidity of approximately $89 million, consisting of $77.6 million available under our revolving credit facility and $11.4 million of cash on hand. In the second quarter of 2023, we repurchased approximately 212,000 shares through our share repurchase program for a total cost of approximately $4.2 million.

Thank you, Carolyn. I will now discuss our updated full year 2023 guidance on a consolidated basis, including the outlook for each region and the underlying assumptions. We are increasing the lower end of our full year 2023 revenue and EBITDA guidance ranges, resulting in tightened ranges of $640 million to $650 million for revenues and $90 million to $95 million for adjusted EBITDA. We are reducing our full year 2023 capital expenditure guidance to $35 million to $40 million. This reduction is entirely due to scope changes in a customer-funded infrastructure project in Australia, with a portion of that spending deferred into 2024. As a result, the overall capital expenditure outlook for this year is lower. These upgrades will be completely funded by the customer upfront, which means that any changes to our capital expenditure guidance will be cash flow neutral. To reiterate, the decrease in 2023 expected capital expenditures compared to previous guidance will not impact our 2023 free cash flow guidance. Based on this EBITDA and CapEx guidance, along with expected interest expenses of $12 million for 2023 and expected working capital inflow of $10 million related to customer reimbursements, we are adjusting our anticipated 2023 free cash flow to a range of $48 million to $58 million. I will now provide the regional outlooks and underlying assumptions. In Canada, for the remainder of 2023, we expect a sequential decline in Canadian mobile camp activity and lodge turnaround activity in the third quarter. Due to the expiry of the McClelland Lake Lodge contract and customer demand for that lodge, we are raising the lower end of our guidance range, partly as a result of securing a take-or-pay contract for room demand at other Civeo lodges for the rest of the year. We are in active negotiations to sell the assets to a third party later this year and expect minimal net demobilization costs, partly due to client reimbursements. We are optimistic about the progress made so far and believe it will yield positive results for Civeo. However, to protect ongoing negotiations, we cannot provide further details at this time. Regarding Canadian mobile camps, there are no significant changes in our outlook since our first quarter earnings call. We anticipate winding down operations in the second half of the year as pipeline construction is completed, with approximately $10 million of demobilization expense this year and $6 million next year. Turning to Australia, we see encouraging signs of growth in customer demand for our owned villages and integrated services businesses. In our owned villages, we witnessed a 16% year-over-year increase in billed rooms in the second quarter, indicating an uplift in customer activity. Our integrated services business has benefited from increased revenue from recent contract awards and our inflation mitigation plan. We are addressing inflationary pressures through a three-pronged approach involving HR recruitment optimization, supply chain adjustments, and contractual modifications for relief and flexibility. The team has made significant progress with this strategy, and we expect the majority of these benefits to be realized in the second half of this year and beyond. We anticipate margin improvement throughout the second half of 2023 in Australia, contributing to the increase in the lower end of our full year 2023 revenue and adjusted EBITDA guidance. As we assess our free cash flow outlook for 2023 and beyond, we continue to review our capital allocation framework. We are in the final stages of this process and look forward to sharing more information later this year. In summary, our key strategies for navigating 2023 include prioritizing the safety and well-being of our guests, employees, and communities, enhancing our hospitality offerings, managing our cost structure based on occupancy outlook, prudently allocating capital for maximum free cash flow generation, returning capital to shareholders, and maintaining a strong balance sheet. We will also seek opportunities to diversify our revenue streams. We are now ready to take your questions.

And our first question today comes from Stephen Gengaro with Stifel.

I think, Brad, maybe the first one, when you mentioned the McClelland Lake asset, is when you think about capital allocation, are the comments you made on capital allocation, would they be the same if there was any kind of lump-sum, if you sold those assets?

Yes.

Okay. When we examine your historical seasonal patterns for the business, both generally and geographically, it's evident that you generate most of the EBITDA in the second and third quarters of the year. I believe the numbers are around 60 to 65%. Is this pattern consistent with this year, or considering your remarks about the progress of Australian margins throughout the year, could it vary?

No, I think it will stay the same. We're going to provide more details. We did see an increase in turnaround activity sequentially, starting with Canada. There was a slight year-over-year uptick, but it fell short of our expectations. It's not surprising that our customers are struggling to find labor, which affected some turnaround activities in the second quarter. However, you're correct that 65% of the EBITDA comes from Q2 and Q3 each year, and this year does not seem to be different. There are some ups and downs, but that should remain consistent. We expect to see a decrease in mobile camps, but also an increase in margins in Australia. So, there are some positives and negatives, but the historical average will hold steady.

Just quickly, the comment you made about Australian margins improving throughout the year. That's a seasonally adjusted comment, right? I mean the fourth quarter margin is still probably down from the third.

Yes.

Okay. Just wanted to make sure, I was correct.

That's right. That's a very good point, Stephen. We expect to see a significant improvement in the integrated services margin in the second half. We are experiencing strong occupancy in our owned villages in Australia, and the market is tightening, especially in the Bowen Basin, while we are also seeing some growth in Canada. Percentage-wise, Canada is expected to grow the most sequentially, but the Bowen Basin represents a larger total volume. Overall, Australia is looking promising. If we consider the local currency average daily rate, which reflects what we pay per person per day compared to average daily costs, pricing in the second quarter was close to or even exceeded those costs. We are starting to offset inflation, and the teams are making good progress in that area. As I mentioned at the end of my introductory comments, while inflation is decreasing, there is still work to be done, but we are making good strides.

Great. I wanted to clarify that you mentioned $6 million of demobilization costs in 2024 related to Coastal Gaslink. I missed the 2023 number and I'm curious if there have been any opportunities for those assets that you've been considering.

So the number for 2023 is US$10 million, and we are pursuing opportunities for those assets, some of which may carry-on work not related to the initial construction of said pipelines, but follow-on work. And I won't say there's an abundance of other opportunities, but there are other opportunities.

Our next question is from the line of Steve Ferazani with Sidoti & Company.

Bradley, Carolyn. Just some follow-up on the Australian margins question. How much pricing power are you starting to see there? And how much can margins be expected by the timing of contract rollovers?

Let me address the first part. I would say that we're seeing average daily rates for Australia, and I've been working with the business for over 10 years now, and this is the highest rate that I've seen. We're running AUD180 to AUD109 a night toward the village. What we're noticing is that customers are becoming concerned about the availability of rooms in Australia, particularly in the Bowen Basin, and their ability to secure rooms on a take-or-pay basis, even for small increments needed for turnarounds and maintenance work. Typically, if they offer a take-or-pay arrangement, we may not achieve top line pricing, but it is still favorable pricing. The incremental increases are often seen in casual rooms; if a customer does not commit to a multi-month or multi-year contract, they will end up with casual rates, which are generally much higher than the blended rate.

And then on contract rollovers and how that can affect top line and pricing?

We secured a significant portion of our Bowen Basin rooms over the past six months on a five-year contract, particularly with two clients in mind. While I don't have the exact figures, there's one notable 400-room contract that is set to renew midyear next year, which we need to address. In addition, there are various smaller contracts, but overall, approximately 3,000 of the 6,000 currently occupied rooms are committed for five years.

Great. Okay. And then the other side of that, which has been the labor costs that you talked last quarter and you mentioned it on wider recruitment efforts. I know the difficulties and pieces and getting it to Australia, can you talk about progress there? And are you finding any more success? Or is it still challenging?

I would say we're trending in the same direction, but it hasn't changed significantly yet. We still have a considerable number of vacancies and are facing challenges with temporary labor. As we've noted before, it is more expensive, less effective, and less safe. This situation also adds pressure on our full-time staff, as they have to cover for the shortfall. The team is very focused on addressing this issue, and I believe we are bringing the right people on board to manage it. However, we are essentially in the same position we were at the end of the first quarter, and we need to keep working on improving it. I'm cautiously optimistic that we will receive some relief regarding labor contracts, which should help alleviate the situation.

Could you provide more details on how the turnaround activity is progressing this year compared to last year in Canada? We're looking at your billed rooms, which includes Sitka, so that skews the actual trend. Can you offer any clearer insight, even if it's not a precise figure, about the turnaround in terms of rooms compared to last year?

We initially expected a 10% to 15% increase in turnaround activity this year compared to last year. However, I believe the increase will be more towards the 5% to 7% range, which is about half of our original expectations.

Okay. And you think that's labor costs, no issues with wildfires?

Our safety team operates almost around the clock. None of our assets have been at risk this quarter. However, we are closely monitoring supply chain and communication issues. We are collaborating with local municipalities and our clients to provide assistance if evacuations are necessary. Since we experienced a 48-hour evacuation of customer assets back in April or May, we have not encountered anything that serious since.

But you don't think that affected customers' decisions on whether to do further?

No, I don't think that impacted. It's more that we have one customer that's very cost-focused right now, which is affecting their spending, while another major customer is dealing with availability issues.

The next question is from the line of Dave Storms with Stonegate.

Just want to start with the client that's adjusting their scope. Wondering if you could touch on kind of what drove them to adjust that scope and reduce their CapEx? Is that something that's an indicator of the macro demand? Or is that more customer specific?

That is specifically related to the village security improvements we are implementing in Australia. These improvements were made at the customer's request as they aim to align the rooms we manage with the security upgrades they have made at their own villages. They decided to change the scope due to the incoming costs, to be honest. However, this entire project is fully funded by them.

Understood. I just want to clarify that it wasn't related to the macro aspect.

It's not a read-through to macro.

Perfect. And then I know we kind of touched on it already, but just if you could talk a little more about the rates coming up, both seasonally, sequentially and on a constant currency basis. Is there anything specific that's driving the average daily rates in both Canada and Australia markets other than just like the tightening in the Bowen Basin?

Clearly, the tightening of the Bowen Basin for there is the most significant factor.

Also CPI adjustments.

And then CPI adjustments are part of what's covering the inflation.

Perfect.

The base rates are kind of flat before CPI adjustments.

Understood. I appreciate that. And then just one more, if I could. On the M&A and acquisition front, are you seeing anything in either of the markets, I guess, more specifically, the Australian markets are things starting to soften any movements there?

No. In Australia, we're focused on one-off asset opportunities, and the activity levels haven't softened. We need to see how that develops. We're continuing to pursue it and hope to reach a reasonable transaction. In Canada, we are starting to see some asset transactions, but nothing as significant or as imminent as what we have in Australia.

Our next question is from the line of Stephen Gengaro with Stifel.

Just one for me. Would you be willing to give us a stab, what 2024 looks like? I know it's early.

It's too early. We have a lot of variables to consider, and our teams have not finalized anything yet. I understand it's important. As soon as we gain clarity on the outlook, we will strive to be as transparent as possible, but for now, it's too early to provide details.

Yes. I understand. I thought I would give it a try. Since I'm in the queue, I have one more question. You've been conducting a normal issuer bid in Canada for a while, and now you're in your second round. Is this part of the capital allocation strategy you mentioned, or could it potentially turn into an extraordinary issuer bid in the future?

At this point, we believe it's an important part of capital allocation. We've been doing it for two years now, and it will be up for renewal in late August or September, pending Board approval. So unless something changes, we plan to renew.

At this time, we reached the end of the question-and-answer session. And I'll turn the call over to Bradley Dodson for closing remarks.

Thank you. And thank you, everyone, for joining the call today. We appreciate your interest in Civeo. We look forward to speaking to you on the third quarter earnings call expected in October.

This will conclude today's call. You may disconnect your lines at this time, and thank you for your participation.