Civeo Corp Q1 FY2024 Earnings Call

Thank you, and welcome to Civeo's First Quarter 2024 Earnings Conference Call. Today, our call will be led by Bradley Dodson, Civeo's President and Chief Executive Officer; and Barclay Brewer, Civeo's Interim 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 first quarter earnings call. I'll start with the key takeaways for the first quarter and provide a brief summary of our first quarter 2024 performance. Then Barclay will go through the financial and segment level review, and I'll conclude with our updated comments on full year 2024 guidance, and the underlying regional assumptions. We'll then open the call for questions. The 3 key takeaways. One, the first quarter and the full year outlook for 2024 were in line with expectations. As a result, there's no change to our full year guidance. Secondly, Australia adjusted EBITDA was up 43% compared to first quarter of 2023 due to particular strength in our build rooms in our own villages. We also benefited from recent contract wins, and year-over-year improvement in Australian-owned villages and integrated services business in terms of margin. Lastly, we continue to return capital to shareholders through our quarterly dividend and opportunistic share repurchases. Let me take a moment to provide a business update across the 2 segments. Our Australian segment performed exceptionally well during the quarter, and our team continues to execute on our plan to grow our Australian integrated services business to $500 million of top line by 2027. We experienced year-over-year growth in both our own villages business and our integrated services business, including the benefit of our recent contract wins that reflect improved customer spending across Bowen Basin diligence and our integrated services business. During the quarter, our Australian-owned villages continue to experience significant year-over-year growth, while metallurgical coal prices have recently declined, prices remain at very healthy levels that support these customer activity levels. Additionally, we are seeing the impact of metallurgical coal mines being sold to producers who are more focused on increasing production levels. These macro factors, coupled with the impact of our recent contract wins in the region, have driven the substantial year-over-year growth. In the first quarter, our Australian integrated services business experienced year-over-year margin improvement, as our inflation mitigation plan continues to demonstrate positive results. We should continue to see this benefit from our team's efforts throughout 2024. With the improved margins, we believe the integrated service business is particularly attractive given contract terms and the outlook for additional opportunities in this area. As expected, our Canadian segment revenues and adjusted EBITDA decreased year-over-year due to the planned wind-down of LNG-related activity, particularly in our mobile camp business, including $1.8 million of mobile camp demobilization costs in the first quarter. As we touched on during our February earnings conference call, we completed the sale of our McClelland Lake lodge in Canada earlier this year and received all proceeds. The majority of the net proceeds were recognized in the fourth quarter of 2023, with the remainder recognized in this quarter. As a reminder, the entirety of the sale proceeds, and associated costs as well as other related reimbursements are excluded from our adjusted EBITDA calculation. As a result, the sales transaction does not impact our full year 2024 adjusted EBITDA guidance. The transportation of these assets is now complete, and we continue to pursue other business-related opportunities related to the assets. I'll now turn it over to Barclay Brewer, our interim CFO. I would like to thank him for stepping up into the interim CFO role.

Thank you, Bradley, and thank you all for joining us this morning. Today, we've reported total revenues in the first quarter of $166.1 million with a GAAP net loss of $5.1 million or $0.35 per diluted share. During the first quarter, we generated adjusted EBITDA of $17.3 million. Again, this is exclusive of the financial impact of the dismantlement and sale of the McClelland Lake lodge assets. Operating cash flow of $6 million and free cash flow of $7.2 million. First quarter adjusted EBITDA increased year-over-year due to the increased build rooms at our Australian owned villages and improved margin in the Australian integrated services business, partially offset by the expected wind-down of LNG-related Canadian mobile camp activity, including $1.8 million in mobile camp demobilization costs. Let's now turn to the first quarter results for our 2 segments. I'll begin with a review of the Australian segment performance compared to its performance a year ago in the first quarter of 2023. First quarter revenues from our Australian segment were $91.7 million, up from $77 million in the first quarter of 2023. Adjusted EBITDA was $20.3 million, up 43% from $14.2 million last year. The significant increase to adjusted EBITDA was due to increased build rooms at our owned villages, increased integrated services activity and improved margins. Results for the quarter were strong despite the headwind of a weakened Australian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by approximately $3.7 million and $800,000, respectively. Australian build rooms in the quarter were a source of strength, with 614,000 rooms up 17% from 523,000 in the first quarter of 2023. This is due to increased customer demand at our owned villages as demonstrated by our recent contract awards. The average daily run rate in Australian dollars was up 3% year-over-year. Due to the weakened Australian dollar, the average daily run rate for our Australian villages in U.S. dollars was $77 in the first quarter of 2024, down modestly from $78 in the first quarter of 2023. Turning to Canada. We have recorded revenues of $67.2 million as compared to revenue of $89.5 million in the first quarter of 2023. Adjusted EBITDA in Canada was $5.5 million, a decrease from $12 million in the first quarter of 2023. The year-over-year revenue and adjusted EBITDA decrease was primarily driven by the sales of the McClelland Lake lodge and the expected wind-down of LNG-related mobile camp activity, including $1.8 million of mobile camp demobilization costs. During the first quarter, build rooms in our Canadian lodges totaled 610,000, which was down from 643,000 in the first quarter of 2023, primarily due to the sale of McClelland Lake lodge, our daily room rate for the Canadian segment in U.S. dollars was $98, which increased slightly from $96 in the first quarter of 2023. On a consolidated basis, capital expenditures for the first quarter of 2024 were $5.6 million compared to $4.8 million during the same period in 2023. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages, coupled with spending to activate additional Australian village rooms with increased customer demand. Additionally, the first quarter of 2024 included $2.4 million in capital expenditures on the Australian customer funding infrastructure upgrades that we have discussed on prior quarter conference call. Our net debt on March 31, 2024, was $61.8 million, which was down slightly since December 31, 2023. Our net leverage ratio for the quarter remained flat at 0.6x as of March 31, 2024. As of March 31, 2024, we had total liquidity of approximately $136.9 million, consisting of $120.1 million available under our revolving credit facilities, and $16.8 million cash on hand, giving us the strength and flexibility to opportunistically pursue growth factors in 2024 and beyond while maintaining prudent leverage ratios. Turning to capital allocation. In the first quarter of 2024, we repurchased approximately 133,000 shares through our share repurchase program for a total of approximately $3.2 million. This morning, we announced that our Board of Directors have declared our fourth quarterly dividend payment. Shareholders of record as of May 27, 2024, will receive a $0.25 per share cash dividend payable on June 17, 2024.

Thank you, Barclay. I want to discuss our full year 2024 guidance on a consolidated basis, along with the updated outlook for each region. Despite the weakening Australian dollar compared to earlier this year, we are keeping our full year 2024 revenue and adjusted EBITDA guidance at $625 million to $700 million for revenues, and $80 million to $90 million for adjusted EBITDA. We're also maintaining our full year 2024 capital expenditure guidance of $30 million to $35 million. With this adjusted EBITDA and CapEx guidance, along with net cash proceeds of around $6 million from the dismantling and sale of McClelland Lake lodge, an adjusted cash interest expense of $6 million, an expected working capital inflow of $10 million, and anticipated Australian cash taxes of $10 million, we are holding our 2024 free cash flow expectation at $45 million to $60 million. Now I will provide the regional outlooks and the corresponding underlying assumptions by region. In Canada, we are in the early stages of the turnaround season for our Canadian oil sands lodges, and early activity is aligning with our expectations. We'll provide further updates during the second quarter call, but the build rooms across our portfolio remain consistent with our prior 2024 guidance. As for our mobile camps, most of our rental activity has concluded, and we are continuing the demobilization process, which we expect to complete in the second quarter of 2024. This will impact our second quarter adjusted EBITDA with around $4 million in demobilization costs, which is included in our full year 2024 guidance. Moving on to Australia, customer activity in our owned villages is very strong, and we expect this trend to continue. Currently, three of our Bowen Basin villages are fully occupied, with healthy occupancy across the rest of our portfolio in Australia. Regarding our integrated services business, we expect our improved margins to persist for the remainder of the year. We are encouraged by our progress thus far and are focused on our inflation mitigation strategy. Exciting growth potential exists for our Western Australian integrated services business, and now that we have made progress on our inflation plan, we can concentrate on winning work and expanding the business. Our team aims to grow our integrated services business to AUD 500 million in revenue by 2027. In closing, I want to emphasize key aspects of our strategy. We will always prioritize the safety and well-being of our guests, employees, and communities. We will invest in operational improvements and innovations to continue enhancing our best-in-class hospitality offerings. Additionally, we will allocate capital carefully to maximize free cash flow generation while returning capital to shareholders and exploring growth opportunities. Now we are happy to take your questions.

So just to kick us off here, a few from me. Just so when we were looking at the full year guidance, can you just talk about some of the drivers between the low and the high end? And also, should we expect to see normal seasonality with roughly about 65% of full year EBITDA in 2Q, 3Q?

Thank you. The answer to the second part of the question, yes, seasonality should continue again the amount of EBITDA coming in Q2 and Q3 is largely driven by the turnaround season in Canada, and we expect that to be the case this year. The upper end and the lower end is actually linked to the same issue, which is what does the Canadian turnaround season look like. Right now, it looks as expected. We're obviously only 1 month into it. So we'll see how it plays out. That's probably the biggest driver for us. Inflation continues to be an issue, largely across the globe. Most impactful right now in Australia around food costs and, more importantly, labor. The team has done a great job in terms of trying to improve, increase our full-time labor as opposed to using temporary labor, which has a negative impact on costs and productivity. So those are primarily the largest drivers of the issue. Currency has gone against this, but we've had a few things go for us year-to-date. We've had better occupancy in our Kitimat, Sitka Lodge. We've seen better occupancy in the core Canadian area, coupled with really just really strong occupancy in Australian Bowen Basin villages. And clearly, very good execution on the integrated services side in Australia.

Got it. Appreciate the color. And then just as a second question, I was just curious if you could flesh out just how you think about uses of cash. What are your key criteria when you're looking at potential M&A?

We have several uses for our cash, including a dividend of $0.25 per share, or $1 for the entire year for shareholders, which is very important. Additionally, we are buying back shares when the opportunity arises. However, our main focus needs to shift back to business growth. We need to ensure that the returns from growth opportunities are greater than those from share buybacks. We have some organic growth opportunities in terms of contracted lodge and village rooms, whether that involves bringing them back online or a modest increase in the number of rooms. On the M&A front, we are looking at integrated services and geographic expansion in Canada and Australia.

I wanted to ask about Australia, another really impressive quarter in terms of accommodations, and food revenue. You had announced so many new contracts or renewed contracts at better rates. Have we seen it all now? Is there more near-term growth? Or does this level off near term?

We expect further growth, especially in integrated services. The team is actively pursuing various opportunities and is successfully developing that segment. To put it in perspective, this business was valued at $70 million five years ago, and now we have reached $230 million in local currency. This year's budget was set at $250 million, and we anticipate surpassing that significantly. This has been incorporated into our guidance, and we are making excellent progress. It’s a unique service, and in the face of competition, we are gaining market share. Thus, we are feeling more than cautiously optimistic about this business.

Great. What are the risks there given the number of contracts you have renewed already? Anything near term we should be concerned about? Or in what kind of term do you have that you've derisked sort of what's in place right now?

There are no significant renewals until 2027. However, in the integrated services business, all contracts are subject to cancellation. Therefore, we must consistently provide excellent service. Our team maintains strong relationships with major customers, ensuring transparency and ongoing communication. When serving 8,000 to 9,000 people daily, mistakes are inevitable. Yet, with open conversations and a commitment to exceptional service every day, we can succeed.

Fair enough. Turning to the other side, in Canada, food and service have experienced two consecutive quarters of over 20% year-over-year growth in revenue. Can you share what is driving that? I understand the margins are relatively thin, but this revenue growth is significant considering the overall situation in Canada.

Well, the major driver for Canada are as discussed. I mean, one, we sold the McClelland asset. So year-over-year, we're losing those build rooms. We've got a good value for the assets that we sold. And the second is wind-down in the LNG Canada activity, right? Those were the major drivers for Canada, both top line and EBITDA. Now the focus is for us and for our team is to find additional projects to build back up the profitability of Canada. I think through the process of selling McClelland, we recognize that our modular assets both permanent and mobile, there are a lot of industrial and mining projects that need assets that are remote. A lot of them are driven by power transmission and, effectively, resources that are used in EV batteries. And so we're working very diligently to expand the Canadian business into other geographies, specifically east of Alberta and down into the U.S.

And any update on McClelland Lake, is that transportation contract completed within Q1? And where are you on any follow-up?

Right. The transportation contract is complete, and it was all recognized in the first quarter. And we are continuing to pursue the reinstallation of those assets at the new location in the Western U.S., and the potential to operate those assets long term for the new client.

Just hoping we kind of start with the dividend. I know you've been paying it for a couple of quarters now. Your stock has gone up since you started paying it. Just could you give us a sense of what your process is like, how often do you revisit that to make sure it remains competitive? Anything on that front would be very helpful.

Sure. Well, we'd like to get a year underneath our belt. This would be the fourth payment, so we'll readdress it in the fall. And again, it's a key component to our capital allocation framework. And so, as you know, cash flow for us is also seasonal. EBITDA is seasonal, we covered that in the first question. But cash flow is better in the back half of the year. So we'd like to see how things play out. Certainly, dividend growth is a possibility, but one that we'll address in the back half of this year.

Understood. Very helpful. And then just touching back on kind of some of your levers that you have to kind of recoup some of those mobile camp losses. You mentioned maybe expanding into Alberta, maybe into the U.S. a little bit. What would that look like logistically? And what would be some of the hurdles to get over that?

Well, right now, the hurdles are twofold. They're not surprising. Which is, one, we need the client project to move forward. So we need green light on projects and then we need to win the work. We've got a handful of projects we're actively pursuing. But that's simply what needs to happen. We've got a team in Eastern Canada on the business development side that are pursuing opportunities, and they're largely mining, and transmission related. The U.S. is initially going to be dependent on can we get more work ultimately related to the McClelland assets. Thank you so much, and thank you, everyone, for joining the call today. We appreciate your interest in Civeo, and we look forward to speaking to you on our second quarter earnings call planned for July.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.