Civeo Corp Q2 FY2024 Earnings Call

Ladies and gentlemen, good morning, and welcome to the Civeo Corporation Second Quarter 2024 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Regan Nielsen, Vice President, Corporate Development and Investor Relations. Please go ahead.

Thank you. And welcome to Civeo's second 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 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 second quarter earnings call. I'll start with some key takeaways on the second quarter, and then give a brief summary of our second quarter 2024 performance. Barclay will provide a financial and segment-level review, and I'll conclude our prepared comments with updated comments on our full year 2024 guidance and the underlying regional assumptions. Key takeaways from our call today are that our second quarter results demonstrate the initiatives that we have undertaken to position the company for growth, as evidenced by our Australian results. Our second quarter 2024 revenues and free cash flow improved year-over-year, with adjusted EBITDA relatively flat despite the expected headwind we experienced from Canadian LNG mobile camp activity, which decreased our adjusted EBITDA by $6.9 million year-over-year. Australian adjusted EBITDA increased by 10%, compared to the second quarter of 2023, due to continued strength in our billed rooms at our own villages, and increased activity in our integrated services business as we expand existing customer relationships. Our Canadian segment performance was stronger than we expected for the quarter, due to the pull forward of some customer turnaround activity from the third quarter of 2024 into the second quarter of 2024. We also returned $10.3 million of capital to shareholders through our quarterly dividend and share repurchases during the second quarter of 2024. Lastly, we will maintain our revenue and adjusted EBITDA and CapEx guidance for the full year 2024, which I will discuss further later in our prepared comments. Briefly, I want to provide a business update across our two segments. The Australian segment performed well during the quarter, and the team continues to execute on our previously stated goal to grow Australian Integrated Services revenues to AUD500 million by 2027. We experienced year-over-year growth in both our own villages business and the integrated services business. The growth in our integrated services business was particularly strong due to the impact of recent competitive wins, as well as the expansion of an existing customer relationship. In Canada, as expected, our Canadian segment revenues and adjusted EBITDA decreased year-over-year, due to the wind down of LNG-related activity, specifically the mobile camp activity in the second quarter of 2024. Our second quarter Canadian results were actually stronger than we expected initially, due to the shift of the timing of turnaround activity in the Oil Sands region. And with that, I'll turn it over to Barclay for some financial review and segment-level comments.

Thank you, Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the second quarter of $188.7 million, with net income of $8.2 million, or $0.56 per diluted share. During the second quarter, we generated adjusted EBITDA of $31.3 million, operating cash flow of $32.4 million, and free cash flow of $30.9 million. Second quarter adjusted EBITDA increased year-over-year, due to increased activity at our Canadian Lodges, Australian own villages, and Australian Integrated Services business, partially offset by the expected wind-down of LNG-related Canadian mobile camp activity, which decreased adjusted EBITDA by $6.9 million year-over-year, including $1.4 million in mobile camp demobilization costs. Let's now turn to the second quarter results for our two segments. I'll begin with the review of the Australian segment performance compared to its performance a year ago in the second quarter of 2023. Second quarter revenues from our Australian segment were $108.6 million, up from $82.5 million in the second quarter of 2023. Adjusted EBITDA was $21.6 million, up 10% from $19.6 million last year. The increase in revenues and adjusted EBITDA was due to the increased billed range at our own villages and increased integrated services activity relating to recent competitive wins as well as the expansion of existing client activity. This shows our continued and steady growth in this segment. Australian billed rooms in the quarter were 625,000 rooms, up 6% from 588,000 in the second quarter of 2023. This is due to increased customer demand in our own villages, as demonstrated by our recent contract awards. The daily room rate for our Australian own villages in U.S. dollars was $78, which increased from $75 in the second quarter of 2023, due to CPI escalation in the recent contract. Turning to Canada, we recorded revenues of $79.5 million, compared to revenues of $95.5 million in the second quarter of 2023. Adjusted EBITDA in Canada was $17.2 million, a decrease from $19.8 million in the second quarter of 2023. The year-over-year revenue and adjusted EBITDA decrease was primarily driven by the expected wind down of LNG-related mobile camp activity. During the second quarter, billed rooms in our Canadian Lodges totaled 752,000, which was up from 724,000 in the second quarter of 2023, despite the sale of the McClelland Lake lodge. This increase was primarily driven by stronger turnaround activity during the quarter related to a shift of customer activity from the third quarter of 2024 into the second quarter of 2024. The daily room rate for the Canadian segment in U.S. dollars was $96, which decreased from $100 in the second quarter of 2023, due to the mix of occupancy between lodges and contracted rate incentives for increased occupancy at select lodges. On a consolidated basis, capital expenditures for the second quarter of 2024 were $5.3 million, compared to $6.9 million during the same period in 2023. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages. Our net debt on June 30, 2024, was $40.1 million, a $21.8 million decrease since March 31, 2024. Our net leverage ratio for the quarter decreased to 0.3 times as of June 30, 2024. As of June 30, 2024, we had total liquidity of approximately $159 million and $151.5 million available under our revolving credit facilities, and $7.4 million of 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 line with our previously stated goals for 2024, in the second quarter of 2024, we've repurchased approximately 274,000 shares through our share repurchase program for a total of approximately $6.6 million. As Bradley mentioned, we recorded $10.3 million of capital returned to shareholders through the quarterly dividend and share repurchases in the quarter, bringing our total year-to-date return of capital to shareholders to $17.2 million. This morning, we announced that our Board of Directors has declared a quarterly dividend payment. Shareholders of record as of August 26, 2024, will receive a $0.25 per share cash dividend payable on September 16, 2024. With that, I'll turn it over to Bradley to discuss guidance for the full year 2024.

Thank you, Barclay. I'll now talk about our full year 2024 guidance on a consolidated basis, and look into the outlook for each of the two regions. We are maintaining our full year 2024 revenue and adjusted EBITDA guidance ranges of $625 million to $700 million for revenues and $80 million to $90 million for adjusted EBITDA. We are maintaining our full year 2024 capital expenditure guidance of $30 million to $35 million. Based on these adjusted EBITDA and CapEx guidance, coupled with net proceeds related to the McClelland Lake lodge dismantlement and sale, which totaled about $6 million in the first quarter, expected full year cash interest expense of $6 million, expected working capital inflow for the full year of $10 million, and expected Australian cash taxes of $10 million for the full year. We are maintaining our 2024 free cash flow expectation of $45 million to $60 million. I'll now provide the regional outlook and corresponding underlying assumptions. In Canada, I'd like to acknowledge the forest fires that are impacting Western Canada, including our Canadian operating region. I want to thank our employees who have been working around the clock to ensure the safety of our guests, the first responders staying with us, and the safety of our assets. While this is a fluid situation, we do not currently anticipate any material financial impact, positive or negative, from the current fires. The wildfire situation around Fort McMurray and our operations has significantly improved over the last few days, but we will remain vigilant throughout the balance of the fire season. Prior to the second quarter, in Canada, as we discussed earlier, our quarter was stronger than expected due to planned third quarter customer turnaround occupancy shifting into the second quarter. We expect more modest results in the latter half for Canada, due to that shift around activity. But overall, our full year Canadian forecast is largely in line with what we expect to come into this year. Starting with mobile camps, the majority of our mobile camp rental activity is complete, and we're continuing the demobilization process. We expect the demobilization to be completed in the third quarter, adding to our third quarter adjusted EBITDA approximately $1.5 million for the final demob costs. As a reminder, this was all anticipated in our full year 2024 guidance. Turning to Australia, customer activity in our own villages remains very strong, and we expect that to continue at similar levels moving forward. We are currently full at three of our five Bowen Basin villages and have very healthy occupancy across the rest of the portfolio in Australia. Regarding our Integrated Services business, we are continuing to experience increased demand from recent contract wins, as well as expanding existing customer relationships. We have continued to see substantial growth in recent years in the integrated services business, and we're excited about further growth potential in Western Australia for that business. Now that we have made strides in our inflation mitigation plan, we can now shift back to winning work and growing the business. Again, to repeat, our team has set goals to grow our Australian Integrated Services Business to AUD500 million by 2027. Before I wrap up our prepared comments, I'd like to thank Barclay for stepping into the Interim Financial Officer role for the past few months. Thank you for all your efforts and for working seamlessly during this transition period. As previously announced, Collin Gerry will transition into his new role as CFO on August 1, and Barclay will serve as Chief Accounting Officer moving forward. Collin has been with Civeo since May of 2014, serving in various executive positions across our Canadian operations and our corporate development and business development teams. I look forward to working with him in this new role. So in closing, we continue to execute operationally and on our strategic growth initiatives, and our results are demonstrating solid progress on these initiatives as we have laid out previously this year. With that, we're happy to take questions.

Thank you. Our first question comes from the line of Stephen Gengaro with Stifel. Please go ahead.

Hi. Thanks. Good morning, everybody. And congrats, Collin, on the new role. So I have a couple of questions. First, can you talk a little bit about what you're seeing in Australia as far as the back half of '24 and '25? What should we pay most attention to from a potential growth perspective in Australia right now?

Absolutely. In terms of the back half of the year in Australia, I expect occupancy in our own villages to remain relatively consistent through the third quarter. As always, we'll see a slight downturn in occupancy in the fourth quarter with holiday downtimes. But generally speaking, I'm expecting occupancy in our own villages in Australia to remain fairly consistent throughout the year. On the Integrated Services side, we have been very pleased with the operational execution of the team. You can see that in the margins of the Integrated Services business, and the expectation is that will continue through the balance of the year. We saw a big uptick in terms of the top line in the Integrated Services business from Q1 to Q2 in 2024. I expect performance from a top line perspective in Integrated Services to remain fairly consistent through Q3 and Q4. Therefore, attention for that business will transition to winning additional work. The team is currently working on several prospects, all moving towards our goal of $500 million top line by 2027, and I believe there's a tangible pathway to achieving that. As we look into 2025 for Australia, I expect the trends to continue, and we see selective opportunities to enhance our existing operations. There are two business lines to consider. In our own villages, we might potentially add a little bit of capacity—maybe around 100 rooms in the Bowen Basin. That hinges on two factors: securing customer commitments to support the investment and getting through the permitting process. Hopefully, we can get that lined up in the second half of this year, benefiting us in 2025. Regarding the Integrated Services side, it’s about continuing what the team is doing; we need to focus on winning additional work. We have established ourselves as a Tier 1 operator in Australia, servicing clients who own the assets. The team has done a great job there, and now it’s about identifying what’s next, and we have several opportunities we’re currently working on.

Great. Thank you. The other big question was regarding your leverage. It seems down again, and your cash flow is really strong. You're obviously buying back stock. When you consider the M&A landscape and potential, how should we think about your financial perspective? Should we be considering it geographically? Are there priorities between Canada and Australia?

Sure. Let me start with Australia. On the own villages side, there are a handful of opportunities to acquire additional villages owned by third parties, which would augment our portfolio and be additive to it. We're assessing several opportunities in that area. In the Integrated Services business, we are looking at potential acquisitions similar to what we did with the Action acquisition. That would involve acquiring a market position in a geography or an end market that we don't currently serve. This is aimed at building critical mass in our business where we can create efficiencies and serve over 10,000 people a day effectively. For Canada, our base Oil Sands business remains steady, but there isn't a lot of growth in that market. We want to leverage our assets and capabilities across North America to serve a broader range of industrial projects in various markets and geographies using our current asset and service delivery model. The process of marketing the McClelland assets has opened up our eyes to the value of modular combinations, and we are cautiously optimistic that we will see growth opportunities there in the next 12 months.

Great. Thanks. I'll turn it over to get back in line here. Thank you, Bradley.

Thank you. Our next question is from the line of Steve Ferazani with Sidoti & Company. Please go ahead.

Good morning, Bradley, Barclay. The strength in Q2 Canadian billed rooms was highlighted multiple times. You indicated that there was a clear pull forward from Q3. I’m trying to assess how lopsided turnaround season might be this year compared to a year ago, which was also very strong. Considering that your billed rooms were up even though you've sold McClelland Lake, the performance has been extremely strong?

Yes, there are a couple of factors to consider. In Q2 2024 compared to Q2 2023, we had the full benefit of McClelland in the second quarter of '23, as it was sold or dismantled in July of 2023. So this is somewhat the last clean quarter with McClelland included. The replacement assets customers are putting to work are in the commissioning process. So we had an overflow benefit from the Fort Hills project into other Civeo locations in Q2. We will see the full impact of the McClelland sale in the latter half of 2024. As for turnaround activity, 2024 has unfolded generally in line with what we expected on a full-year basis. Some timing has shifted from Q3 to Q2, but overall, we are looking at an increase of around 150,000 room nights from 2023 on a full-year basis. Timing between Q2 and Q3 shifted, but overall, we expected a stronger second quarter in line with our expectations for Canada, which remains flat to up from our original forecasts for the year, although the latter half will be softer.

That’s helpful. Even if I consider that, and given your guidance for Australia, is it fair to say your outlook puts you at the higher end of your guidance range unless something were to change on the revenue side?

There are probably three major factors that could influence the width of the guidance range. First and foremost, the intensity of the recent forest fires in Alberta has been substantial, particularly over the past three weeks, requiring constant operational and safety focus. While the rain over the weekend improved the situation, it could swing our results positively or negatively a million or two in either direction, which is why we didn’t tighten our guidance range this time around. Secondly, while occupancy in Australia could bring potential upside, increased occupancy and margin performance in CIS can also push us to the upper end of our guidance range. However, demobilization costs are already accounted for; this is simply a timing matter and doesn’t affect our yearly guidance. Overall, those are the key factors influencing where we may land within our guidance range.

That's very helpful. Can you provide one additional point on the Australian margins? You have new and upgraded contracts with revenue exceeding expectations, yet margins haven’t seen substantial increases. Do you see room for improvement? Are there reductions in labor costs that could enhance margins?

I'm comfortable with where margins have landed. Our operational model is running on a contribution basis at the own villages and integrated services. Overall margin performance has been solid. However, we still haven’t achieved pre-COVID efficiencies in labor, but we are making progress. Pricing on the own villages has an upward bias. Overall occupancy is currently strong, as we're full in three out of five locations in the Bowen Basin. As for integrated services, pricing is steady, and it’s about volume and execution.

Great. Thanks, Bradley.

Thank you.

Thank you. Our next question is from the line of Dave Storms with Stonegate. Please go ahead.

Good morning.

Hi, Dave.

I thought I heard in the prepared remarks that one of the suppressors of the Canadian room rates was incentives. Could you provide more color on the duration of these incentives, and whether we might see a rebounding of Canadian prices in the back half of the year?

Yes. Most contracts in Canada will have tiered pricing structures. This means that as volume increases, prices decrease. Overall, we're better off with lower prices and higher volumes. While the turnaround volumes will likely decrease in the second half of the year, prices will rise. However, we prefer the higher volumes at a slightly reduced price as all of this is contracted. It's not a pricing movement but reflects our established tiered pricing structure.

Understood. Very helpful. One more for me. You're about a third of the way to the low end of your CapEx guidance, and we're already halfway through the year. Can you give us a sense of what the cadence for CapEx through Q3 and Q4 might look like?

Sure. In rough numbers, we did about $10 million in CapEx in the first half, and with a low end of the range at $30 million, I expect to see about $15 million in the third quarter based on forecasts and then between $5 million and $10 million in the fourth quarter. The timing of this spending can be fluid. As mentioned, we would like to add 100 rooms to the Bowen Basin, which depends on two conditions: permitting approval and customer commitments. If everything aligns, I'd love to kick off that project this year. We're also looking at reactivating some rooms in the Oil Sands region to capture smaller clientele, aligning those projects to start before the winter season.

That’s very helpful. Thank you for taking my questions, and good luck in Q3.

Thank you.

Thank you. Our next question comes from the line of Sean Mitchell with Daniel Energy Partners. Please go ahead.

Good morning, guys. Thanks for taking the question. Bradley, can you take a minute to frame the opportunities for the next couple of years in terms of supporting future LNG expansions like Cedar LNG?

Great question. There are multiple aspects to this. Additional pipeline work for LNG projects would support opportunities for our mobile camp business, and we anticipate coastline opportunities for our Sitka Lodge. This would represent a positive return to activity for our British Columbia operations. We have seen strong occupancy at Sitka in the first half relative to expectations. However, the LNG Canada project is approaching first production, which means our activity at Sitka is winding down. As I mentioned earlier, we are mainly in the demobilization stages regarding mobile camp activities. If any new LNG projects move forward, they would increase occupancy in Western Canada for our existing assets and open doors for mobile camp deployment.

Got it. Thanks. I'll turn it back. Appreciate it.

Thanks, Sean.

Thank you. Our next question is from the line of Stephen Gengaro with Stifel. Please go ahead.

Thanks for taking the follow-up. When we look at 2025, what high-level factors should we be considering as we think about the year?

Let’s look at Australia. We will consider capital investments on our own villages, whether we are buying additional locations or enhancing Bowen Basin capacity. The timing on how much of this comes to fruition will impact our returns. In the integrated services segment, it’s all about securing further contracts; the aim is for consistent performance from here through the end of 2024, contingent on obtaining additional contracts. For Canada, it depends on turnaround activity; we do not anticipate major shifts in base occupancy in the Oil Sands region. There could be headwinds in occupancy levels compared to the first half of 2024 versus the first half of 2025 at Sitka. But overall, without strategic wins in the Canadian segment, I expect it to remain relatively flat.

One more quick follow-up regarding the potential for LNG Canada. Could you provide an update on the status of source gas opportunities?

Regarding source gas, our entry would likely have to come through an acquisition. It’s unlikely we would pursue it were it not for a merger or Greenfield situation.

Great. Thanks for all the details.

Thank you. We appreciate your interest.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now hand the conference over to Bradley Dodson for his closing comments.

Thank you, everyone, for joining the call today. We appreciate your interest in Civeo, and we look forward to speaking to you on our third quarter earnings call, which we expect to happen late in October.

Thank you. The conference of Civeo Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.