Civeo Corp Q1 FY2025 Earnings Call

Greetings and welcome to the Civeo Corporation First Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Regan Nielsen. Please go ahead.

Thank you, and welcome to Civeo's First Quarter 2025 Earnings Conference Call. Today, our call will be led by Bradley Dodson, Civeo's President and Chief Executive Officer; and Collin Gerry, Civeo's 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 first quarter 2025 earnings call. I'll start by highlighting some key takeaways before providing a brief summary of our first quarter 2025 financial results. Then Collin will give a financial and segment-level review, and I'll conclude with our updated 2025 guidance and underlying regional assumptions. Afterwards, we will open the call to questions. The key takeaways today include the changes we've made to our capital allocation strategy to accelerate the return of capital to investors and enhance long-term shareholder value. Under our updated framework, the Board has increased our share repurchase authorization from 10% to 20% of the total shares outstanding and suspended the quarterly dividend. We plan to allocate 100% of our annual free cash flow to share repurchases until this expanded authorization is completed. We expect to primarily use open market purchases while continuing to evaluate quicker methods of repurchasing shares. In the first quarter of 2025, we returned $6.8 million of capital to shareholders through a combination of our quarterly dividend and share repurchases, bringing our total share repurchases since the program's inception in 2021 to approximately 22% of Civeo's common shares outstanding. Following the newly increased share repurchase program, we intend to utilize 75% of annual free cash flow to fund share repurchases. This reflects Civeo's strong ability to generate free cash flow, having done so consistently for the past 10 years. As previously noted, our free cash flow is historically weighted towards the second half of the year. Now, turning to regional observations. In Australia, we continue to see strong occupancy levels. Revenues increased by 13% year-over-year and 18% on a constant currency basis compared to the first quarter of 2024, mainly due to increased activity in our integrated services business, supported by a recently announced AUD 1.4 billion contract renewal and expansion. We are pleased with the progress on our acquisition of four Villages in the Australian Bowen Basin, which will expand our footprint in that area. We expect this transaction to close in the second quarter and be immediately accretive to operating cash flow. In Canada, we saw a decline in billed rooms as customers reduced capital spending amid investor pressure to return capital and ongoing economic and political uncertainty. During the quarter, we reduced our Canadian employee headcount by about 25% and recorded a restructuring charge of approximately $1 million, which was excluded from adjusted EBITDA. As our customers face macroeconomic challenges such as lower oil prices, new export tariffs, and pressures to reduce costs, we are taking steps to optimize our cost structure and align our business with the current environment. We remain committed to controlling what we can control. In the second and third quarters of 2025, we expect to continue implementing cost reduction measures while focusing on operational execution to enhance performance across our Canadian lodges. Given our emphasis on improving operational efficiency, we have engaged a leading independent consulting firm to review our North American cost structure. This initiative is part of our commitment to identifying sustainable opportunities to enhance shareholder value, streamline overhead costs, and align costs with strategic priorities. Before handing it over, I want to remind you of the supplemental disclosure we introduced in the last quarter's earnings call, which we will provide on a quarterly basis going forward. This disclosure aims to better illustrate the evolution of our business and our current asset mix, showing revenues from our asset-light business, which includes hospitality services at both owned assets and those owned by our customers, and our asset-intensive business, including accommodations revenue from our lodge and village assets and our Canadian mobile camp business. The supplemental data schedule is available in our earnings press release. Now, I'll turn it over to Collin.

Thank you, Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the first quarter of $144 million with a net loss of $9.8 million, or $0.72 per diluted share. During the first quarter, we generated adjusted EBITDA of $12.7 million and negative operating cash flow of $8.4 million. As a reminder to listeners, seasonally, the first quarter tends to see a negative working capital impact on cash flow. The decrease in adjusted EBITDA in the first quarter of 2025 compared to 2024 was primarily due to decreased billed rooms at the Canadian lodges. This lower level of customer spending is expected to continue as producers in the region remain keenly focused on reducing costs in response to uncertainty in the current operating environment. Let's now turn to the first quarter results for our two segments. I'll begin with a review of the Australian segment performance compared to its performance a year ago. First quarter revenues from our Australian segment were $103.6 million, up 13% from $91.7 million in the first quarter of 2024. Adjusted EBITDA was $20.5 million, relatively flat year-over-year. The increase in revenues was primarily driven by increased integrated services activity related to our recent contract announcement. Adjusted EBITDA did not increase proportionately to revenues year-over-year, primarily due to increased power and staffing costs in the quarter. Operating cost management will continue to be a focal point throughout 2025. Australian billed rooms in the quarter were 625,000 rooms, modestly up from the first quarter of 2024. Our daily room rate for our Australian-owned villages in U.S. dollars was $75, which decreased from $77 in the first quarter of 2024, primarily due to the weakening of the Australian dollar. Turning to Canada, we recorded revenues of $40.4 million as compared to $67.2 million in the first quarter of 2024. Adjusted EBITDA for the segment was negative $0.2 million. The year-over-year decrease in adjusted EBITDA of $5.9 million was driven by the wind-down of LNG-related activity, including the completion of pipeline activity for our mobile camps and lower billed rooms as a result of our customers' recent focus on cost and headcount reductions, as well as the loss of Fort Hills related occupancy from the sale of our McClelland Lake Lodge. During the first quarter, billed rooms in our Canadian lodges totaled 359,000, which was down from 610,000 in the first quarter of 2024 due to the factors just mentioned. Our daily room rate for the Canadian segment in U.S. dollars was $93, which decreased from $98 in the first quarter of 2024, entirely due to the weakening of the Canadian dollar. Looking at our capital structure, Civeo's net debt as of March 31, 2025, was $59 million, a $21 million increase since December 31, 2024. Our net leverage ratio for the quarter was 0.8x as of March 31, 2025. As of March 31, 2025, Civeo had total liquidity of approximately $162 million. Our liquidity position continues to support our ability to return capital to shareholders, close our previously announced Australian acquisition and maintain a prudent leverage ratio. Finally, I'll turn to capital allocation. I'll start with CapEx. On a consolidated basis, CapEx for the first quarter of 2025 was $5.3 million, down from $5.6 million in the first quarter of 2024. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages. During the first quarter of 2025, we repurchased approximately 153,000 shares through our share repurchase program for a total cost of $3.3 million. As Bradley mentioned, this brings our total return of capital to shareholders in the first quarter of 2025, including quarterly dividends and share repurchases, to $6.8 million. With our newly increased share repurchase authorization and commitment to accelerating the return of capital to shareholders, we continue to believe that repurchasing shares is a high-return, value-enhancing opportunity. This new capital return framework reflects that, and we look forward to reporting on our progress repurchasing shares next quarter.

Thank you, Collin. I'll provide some additional color on the updated capital allocation framework before I turn to a discussion of our updated guidance expectations for the balance of 2025. In the first quarter, the Board authorized a new share repurchase program for up to 10% of the total common shares outstanding over the next 12 months as part of our commitment to capitalizing on attractive opportunities to enhance shareholder returns. This authorization followed the completion of the prior 5% share repurchase authorization announced in September 2024, which was completed in just 6 months. When we announced the Board's authorization of the share repurchase program last year and reiterated it in the first quarter announcement, we also made it clear that our capital allocation strategy remains under continuous review, consistent with our focus on driving long-term value creation for shareholders. To that end, we are pleased to announce today a revised capital allocation framework resulting from our thorough review of the framework and our engagement with our shareholder base. Under our refreshed capital allocation strategy, we are rebalancing our capital return mix to prioritize share repurchases as the primary vehicle for returning capital to shareholders and eliminating Civeo's quarterly dividend to maximize flexibility. Given the macroeconomic headwinds and tariff-driven uncertainties, we believe maintaining financial flexibility is essential. As we have seen across industries over the last several weeks, trade policy changes and supply chain disruptions have a significant impact. We'll continue to assess more expedited methods for repurchasing shares. Underscoring our commitment to returning capital to shareholders, our Board has approved an increase in the share repurchase authorization we announced in March, increasing the amount of shares available for repurchase from 10% to 20% of the total shares outstanding. We intend to allocate 100% of annual free cash flow to executing repurchases in the open market to complete this authorization as soon as practicable. Given the current valuation of Civeo shares and our outlook, we believe this approach is prudent, value-enhancing and in the shareholders' best interest. This decision demonstrates our Board and management's confidence in Civeo's future prospects, operational resilience and ability to deliver long-term shareholder value despite the current market challenges and pressure on our stock price. Once we have completed this recently expanded share repurchase authorization, our plan is to utilize 75% of free cash flow annually to fund ongoing share repurchases. Our ability to take these important steps to enhance shareholder returns is built on the foundation of work we have done over the last several years to strengthen our balance sheet. Having surpassed our target net leverage ratio of 1x through our disciplined focus on debt reduction and given our strong liquidity position and continued solid cash flow generation, we now have ample financial flexibility. We are confident that this capital return strategy best supports long-term value creation while reducing risks amidst a more uncertain global backdrop. We will remain agile and responsive to market conditions while advancing our objective of delivering superior returns for Civeo shareholders. I would now like to turn our discussion to our full-year 2025 guidance on a consolidated basis, including the underlying macro and regional assumptions. We are lowering our full-year 2025 revenue and adjusted EBITDA guidance to a range of $620 million to $650 million of revenues for 2025 and $75 million to $85 million of adjusted EBITDA for 2025. We are also lowering our full-year 2025 capital expenditure guidance to $20 million to $25 million. To remind everyone, this guidance continues to exclude the contribution from our recently announced Australian acquisition, which is still expected to close by the end of the second quarter and is subject to regulatory approvals and customary closing conditions. We will provide updated 2025 guidance once the transaction has closed. Taking into account our new adjusted EBITDA and CapEx guidance, we are lowering our free cash flow guidance for 2025 to $20 million to $30 million. As a reminder, this 2025 free cash flow guidance is burdened by approximately $10 million of one-time deferred tax payments related to fiscal 2024. I will now provide the regional outlooks and corresponding underlying assumptions by region. In Australia, customer activity in our owned villages remains strong. Three of our Bowen Basin villages are currently operating at full capacity, and we are seeing strong occupancy across the remainder of our owned village portfolio. Based on these trends we are seeing in the market, we expect these levels to continue throughout the balance of 2025. As it relates to our integrated services business, we are continuing to experience increased demand from our recent contract award. We expect to build on the strong increasing momentum in 2025 as we work towards our goal of achieving AUD 500 million of integrated services revenues by 2027. Our outlook assumes modest Australian billed room growth as well as expansion in our integrated services business. In Canada, as I mentioned earlier, we expect performance will continue to be impacted by economic and political uncertainty. As we continue executing on the restructuring actions we announced in the fourth quarter, including cold shutting two lodges in the second quarter, we expect to incur another $1 million in restructuring charges. Moving forward, we are focused on remaining agile and responsive, and we will continue to assess potential opportunities to reduce our cost structure as we navigate a challenging and dynamic environment. We continue to believe that 2025 is a transitional year for our Canadian division as our Canadian division adjusts to lower revenue expectations driven by customers' response to lower oil prices and investor pressure. We expect associated changes to our operations will impact free cash flow performance as a result. However, we believe our consistent free cash flow generation is one of Civeo's strongest financial characteristics, and we will continue to do so going forward. Before we head into the call, I'd like to close by saying we are confident in our team's ability to execute our updated capital allocation framework and generate value for our long-term shareholders. With that, we'll take questions.

The first question we have is from Stephen Gengaro of Stifel.

So 2 questions for me. You went over the capital allocation framework pretty well. But what I was curious about is how much of this is just sort of macro uncertainty on the dividend versus the internal or Board views that it's a better way to create value? And is this something that you think you'll revisit when the macro backdrop becomes clearer?

It's more of the latter, Stephen. Thank you for the question. An extensive shareholder engagement over the last few months made it clear that, based on trading history, we weren't receiving value from the dividend. The goal, historically, with both the dividend and share repurchase was to return capital to shareholders. Since it wasn't being valued, we and others believed that reallocating that capital towards share repurchase was more sensible at this time. As mentioned in our prepared comments, we are continuously evaluating our capital allocation. We will reassess in the future, but in the near term and for the foreseeable future, we believe that buying back stock is the better option.

That's aligned with the feedback I've received as well. I appreciate the comments. There's a broader question I'd like to ask, and I might phrase it incorrectly, but I saw a press release about a week ago regarding a strengthened relationship in Canada, possibly with the 6 Nations. I'm interested in understanding the underlying benefit of that for the business. Additionally, we've previously discussed the source gas for Canadian LNG. Has there been any change in your ability to enter that market?

So we're very pleased to announce the joint venture with the 6 nations. As you know and I think our investors know, First Nation relationships are critically important to winning work in Canada. We have an extensive history, including being gold certified in terms of our indigenous relations efforts. And this is just an extension of that. In many cases, a First Nation relationship is necessary to bid on work, and we're excited about the prospects now that we have this relationship in place on bidding with our partners on new work, particularly in Eastern Canada. So there's some of your second part of your question addressed source gas. This is not related to that.

Is there any change regarding the source gas? I'm not very familiar with the competitive landscape in that region. Are there any opportunities, or is it too difficult to enter due to the established competitors?

Our focus on LNG activity in Canada prospectively is really related around three projects. Obviously, everyone is watching LNG Canada closely to see if they will move forward with Phase 2 of that project that's currently going into initial production. The second piece, we've seen Cedar LNG reach positive FID and that's moving forward. And we have a handful of guests from that project staying with us at our Sitka Lodge, but it is not fully ramped up yet. Then the third project that we're watching closely is the Western LNG project or Ksi Lisims that would utilize the PRGT pipeline, which would need to be built, which would be a great opportunity for our mobile camp business and prospectively, potentially additional work on the coast as they build out their liquefaction capabilities.

The next question we have is from Steve Ferazani of Sidoti & Co.

This is Alex on for Steve. Just to build on that last question, given the completion of the Canadian election, are there any other larger infrastructure projects, which you think could generate revenue in the next few years?

Well, I would say things that have been talked about during the campaign were potential additional pipeline work, pipeline projects were to move forward, that's great opportunities for our mobile camp business. The other big project would be Pathways and carbon sequestration in Alberta around the oil sands projects.

Okay. And you also mentioned hiring a consulting firm to help with cost-cutting measures. Could you talk a little bit about what's on the table, sort of the types of scope and how that might develop across North America?

There has been a significant shift in our outlook for the Canadian business, primarily to address the cost structure. However, this will also have an impact on the overall cost structure across North America.

The next question we have is from Dave Storms of Stonegate.

I know that headcount is likely the largest expense in your foodservice segment. Are there any specific tariff impacts related to foodservice that we should be aware of?

We're primarily focused on our Canadian operations and are working closely with our supply chain and customers to source as many operational consumables, food, and other items locally in Canada to avoid tariffs. If we're unable to achieve that, we want to ensure our customers are aware that those costs will be passed on to them.

Understood. That's very helpful. I appreciate you explaining your updated guidance in detail. I'm still trying to wrap my head around the macro factors that are included, especially since this guidance does not account for the upcoming acquisition expected to close later this year. Would you classify this updated guidance as worst-case scenario, optimistic, or perhaps somewhere in between? How should we approach this?

Great question. I would say that the current guidance most of the focus and actually implicit in your question is around the conditions in Canada. In Australia, the outlook right now, it's fairly straightforward, obviously subject to change. But most of the focus, at least for us, and I think for investors has been around in Canada. And so I would say current guidance reflects, I think, reasonably conservative outlook for the business as a whole, but also for Canada. If I had to say what's our downside case, we probably lowered the lower end by $5 million to $70 million, but that would be a further rather significant deterioration, specifically in Canada.

We have a follow-up question from Stephen Gengaro of Stifel.

Yes, I wanted to ask quickly about the revised guidance. I have two questions. First, is there any change in how we should view the quarterly cadence of that guidance? Secondly, in previous periods when commodity prices have been volatile, has that typically resulted in more or less turnaround activity? Do customers tend to take advantage of this to do the work, or is it more related to cash flow issues that make them hesitant to engage in more turnaround work?

So I'll answer the first part and ask Collin to comment on the second part. So on the first part in terms of the seasonality of our EBITDA generation, we continue to believe that the second and third quarters will be the strongest. That will be slightly offset by the fact that we'll have the Australian acquisition close. And so it will fully benefit the second half of the year. But generally speaking, we'll continue to see 60% plus or minus of the EBITDA generation in the middle half of the middle two quarters of the year. And then in terms of turnaround activity relative to commodity prices, I'll ask Collin to comment.

Yes, that's a great question, Stephen. Our customers plan their turnarounds several years in advance. Some scopes operate on a 2- to 3-year schedule, while others happen annually. Depending on how much was accomplished last year, there may be some unfinished work that carries over into this year. Historically, the timing of turnarounds is influenced more by the necessary work on the equipment rather than the opportunistic fluctuations in commodity prices. Additionally, regardless of the commodity price environment, speed is crucial because longer turnarounds result in less production of barrels. Although we've considered this internally, we have not observed any significant changes in turnaround behavior strictly in relation to commodity prices aimed at exploiting market volatility.

Most of our customers are planning their operations around a much lower oil price than what we're currently experiencing. The macroeconomic environment, tariffs, and other factors are influencing their decision-making. However, before all this occurred, they were already preparing to operate as if they were in a much lower commodity price environment.

I understand. That's helpful. I have just one more question. I've been reviewing our model, and I noticed that over the past four to six years, your free cash flow has averaged around $70 million. Recently, it seems to have been a bit lower than that. With the guidance you've provided this year for $20 million to $30 million, do you see that as an anomaly due to market conditions? Also, although it's early to consider, do you think next year could be closer to the $50 million to $60 million range based on what you currently know?

There are a few points to address in your question. I'll break it down. First, over the past six years, the main factors have been our status as a cash taxpayer in Australia, which we didn't have five years ago and will continue in 2024 and beyond. This has been a significant change. Second, during the earlier part of this period, we benefited greatly from LNG activity in Canada, which is now approaching completion and moving into production, affecting our Canadian operations. Third, looking ahead, we anticipate that cash taxes will normalize. We do have some timing issues with cash tax payments in Australia that are affecting our cash flow in 2025, but we expect that to stabilize going forward. Overall, we believe that operating cash flow should improve in the future.

Yes, Bradley, I’d like to add that you need to consider the situation with or without the acquisition. Our guidance has not included the acquisition, but we are confident that we will finalize it in Australia, potentially adding that cash flow in the coming years. We are not factoring that into our guidance for 2025, but we are optimistic about closing it soon. Additionally, our team will remain focused on managing expenses, specifically looking at capital expenditures and related items that affect our capital line. Personally, I believe that the estimate of $20 million to $30 million seems low. When accounting for cash taxes and other factors, we might begin to approach some of the figures you mentioned for the later years.

At this time, there are no further questions. And I would like to turn the floor back over to Bradley Dodson for any closing remarks.

Thank you. And thank you, everyone, for joining us today on the call. We appreciate your interest in Civeo, and we look forward to speaking with you on the second quarter earnings call expected in July.

This concludes today's teleconference. Thank you for joining us. You may now disconnect your lines.