Civeo Corp Q2 FY2025 Earnings Call

Greetings, and welcome to the Civeo Corporation Second Quarter 2025 Earnings Call. Please note that this conference is being recorded. I will now turn the conference over to your host, Regan Nielsen. Please go ahead.

Thank you, and welcome to Civeo's Second 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. These forward-looking remarks speak only as of the date of our earnings release and this conference call. We undertake no obligation to update or revise these forward-looking statements, except as required by 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 2025 earnings call. I'll start by highlighting some of the key takeaways before walking through a brief summary of our second quarter 2025 financial results. Then Collin will provide a financial and segment-level review. I'll conclude with our 2025 guidance and the underlying regional assumptions. Turning to our key takeaways, I'll start with the significant progress that we've made towards completing our expanded share repurchase authorization. We capitalized on equity market softness earlier in the second quarter to repurchase 883,000 common shares, which is approximately 7% of Civeo's common shares outstanding. These repurchases made since the announcement of our new capital allocation plan equate to 30% of that new buyback authorization as of June 30, 2025. Civeo has now repurchased approximately 27% of its common shares outstanding since we began our share repurchase program in August of 2021. We believe that share repurchases represent a compelling use of capital, especially during broad market volatility. Given the accelerated buybacks and the recently completed acquisition, we have now reached the upper end of our target net leverage ratio of 2x. We are comfortable with that ratio as we continue to execute under our share repurchase program. We remain committed to completing the 20% share repurchase authorization as soon as practicable and intend to use no less than 100% of the annual free cash flow to achieve that goal. Now moving to some comments on the regional results. In Australia, we remain focused on growing our integrated services business and integrating the recent acquisition. Revenue in the region increased 4% year-over-year or 7% on a constant currency basis, and adjusted EBITDA grew by 10% or 12% on a constant currency basis. Contributions from the newly acquired Bowen Basin Villages and growth in our integrated services business are driving the strong margins that we experienced in the second quarter. Based on current customer discussions and our base of contracted nights, we expect our current Australian occupancy levels to continue through the rest of the year despite the weakening in met coal prices recently experienced. We completed the acquisition of 4 villages in May and began integrating them into our operations. Approximately 2 months of those results were included in our second quarter 2025 results. We are pleased with their early contributions, and we look to realize further margin leverage going forward. Additionally, we recently announced 2 contracts in Australia in the Bowen Basin. Our renewal of a contract with an existing customer is a 4-year take-or-pay agreement at our owned villages, with expected revenues over the contract term of AUD 250 million. The second contract previously announced is a 3-year integrated services contract worth approximately AUD 64 million in revenue. These awards validate our winning strategy and position us for continued momentum in growth in Australia. In Canada, the second quarter saw the typical seasonal increase in occupancy relative to the first quarter, driven by turnaround activity in the core oil sands region. However, on a year-over-year basis, turnaround occupancy remains subdued. Conditions in Canada remain challenging given the macroeconomic headwinds, which include low oil prices and our customers' fiscal conservatism. Customers remain steadfast in their singular focus on cost reductions in response to oil price and political uncertainty and investor pressure to return capital to shareholders. We remain focused on controlling what we can control. We continue to take steps to optimize our cost structure in Canada and align our business with the realities of the current environment without sacrificing our ability to capitalize on opportunities to diversify our business away from the oil sands region. Overall, we are executing on our strategic priorities in each region. In Australia, our Australian business is hitting on all cylinders. While the Canadian headwinds remain, we know this market well and we are working with our strategic partners to understand how we can continue to support them as we capitalize on the volume opportunities in the region. We are taking decisive action to apply our resources to position Civeo for long-term resilience and cash generation. With that, I'll turn it over to Collin.

Thank you, Bradley. Thank you all for joining us this morning. Typically, I would first focus on expanding more on the underlying drivers of the results in the income statement. However, the real story for this quarter relates to the balance sheet and the impact of our recent capital allocation. As Bradley mentioned, we made significant progress on our buyback authorization, completing 30% of the program in the second quarter. In addition, we executed on accretive growth through our acquisition in Australia. As a result, our net debt increased by $95 million in the second quarter, primarily driven by $65 million deployed for our recent Australian acquisition and $19 million deployed for share buybacks. Consequently, our net debt was $154 million as of June 30, 2025, resulting in a net leverage ratio of 2x. Turning to the income statement, today we reported total revenues in the second quarter of $162.7 million with a net loss of $3.3 million or $0.25 per diluted share. During the second quarter, we generated adjusted EBITDA of $25 million and negative operating cash flow of $2.3 million. Our free cash flow was burdened by working capital build in the quarter and the expected payment of Australian income taxes, which included a large payment related to the prior year. The decrease in adjusted EBITDA in the second quarter of 2025 compared to the year-ago period was primarily due to the decreased build rooms at the Canadian lodges. We expect this lower level of customer spending to continue as producers in the region remain keenly focused on reducing costs. As we mentioned, we are taking action to cut costs and streamline the business while identifying additional opportunities across the region. Second quarter revenues from our Australian segment were $112.7 million, up 4% from $108.6 million in the second quarter of 2024. Adjusted EBITDA was $23.7 million, up 10% from $21.6 million in the second quarter of 2024. The increase in revenues and adjusted EBITDA was primarily driven by the recently completed acquisition of 4 owned villages, as well as margin improvement in the integrated services business. The year-over-year increase was offset by the impact of a weakened Australian dollar relative to the U.S. dollar, which decreased revenues and EBITDA by $3.2 million and $0.7 million, respectively. Australian-owned village build rooms in the quarter were 690,000 rooms, up 10% from the second quarter of 2024, primarily due to our recently completed acquisition. Our daily room rate for Australian owned villages in U.S. dollars was $76, which decreased from $78 in the second quarter of 2024, primarily due to the weakening of the Australian dollar. Turning to Canada, we reported revenues of $50 million compared to revenues of $79.5 million in the second quarter of 2024. Adjusted EBITDA for the segment was $7.5 million, a decrease from $17.3 million in the second quarter of 2024. The year-over-year revenue and adjusted EBITDA decreases were driven by lower build rooms as our customers focused 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 second quarter, billed rooms in our Canadian lodges totaled 450,000, down from 752,000 in the second quarter of 2024. Our daily room rate for the Canadian segment in U.S. dollars was $94, which decreased from $96 in the second quarter of 2024, primarily due to the weakening of the Canadian dollar. Looking at our capital structure, as mentioned earlier, Civeo's net debt as of June 30 was $154 million, a $95 million increase since March 31, 2025, attributable to our recent acquisition as well as significant progress made on our share repurchase authorization in the quarter. Our net leverage ratio for the quarter was 2x, with total liquidity of approximately $73 million. Given the accelerated buybacks and recently completed acquisitions, as mentioned, we have now reached the high end of our targeted leverage ratio at 2x. We have allocated $22.5 million to share repurchases in the first half of 2025 and assuming current valuations, we expect to utilize free cash flow to remain active in repurchasing shares in the back half of the year. We will target a year-ending leverage ratio of approximately 2x. Turning to capital allocation, I'll start with CapEx. On a consolidated basis, capital expenditures for the second quarter of 2025 were $4.5 million, down from $5.3 million during the second quarter of 2024. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages. As noted during the second quarter of 2025, we repurchased approximately 883,000 shares through our share repurchase program for a total cost of approximately $19.1 million. With our recently increased share repurchase authorization and commitment to accelerating the return of capital to shareholders, we continue to believe that repurchasing Civeo shares presents a value-enhancing opportunity. Second quarter market softness gave us an excellent buyback opportunity. We've made great progress on our current share repurchase authorization, and we will continue to opportunistically execute on our plan moving forward.

Thank you, Collin. I would now like to turn our discussion over to the full year 2025 guidance on a consolidated basis, including our underlying macroeconomic and regional assumptions. We are maintaining our full year 2025 revenue and adjusted EBITDA guidance. We continue to look for revenue this year to be in a range of $640 million to $670 million and adjusted EBITDA to be in the range of $86 million to $96 million. We're also maintaining our full year capital expenditure guidance, which was a range of $20 million to $25 million. I'll now provide the regional outlook and corresponding underlying assumptions. In Australia, customer activity in our owned villages remains very strong. Three of our Bowen Basin villages continue to operate effectively at full capacity, and we are seeing strong occupancy across the remainder of our owned-village portfolio. Despite the weakening met coal prices in the first half of the year, we expect continued strength in our owned villages throughout the balance of the year. As it relates to our integrated services business, we are encouraged by the top-line growth as well as the year-over-year margin improvement experienced in the first half of the year, and we will continue to focus on executing cost effectively as we are on our recent contract awards. We expect to build on this through the remainder of 2025 and beyond as we work towards our goal of achieving AUD 500 million of Australian integrated services revenues by 2027. In Canada, we continue to navigate the difficult operating environment in the oil sands and lower demand for temporary turnaround activity, which has been exacerbated by broader macroeconomic uncertainty. We expect billed rooms in the second half of the year to be more in line with the second half of 2024, with a more balanced outlook between the third and fourth quarters. Lastly, we do not currently foresee any meaningful near-term rebound in upstream oil sands spending. As a result, our focus remains squarely on managing what we can control, executing on our cost reduction initiatives, enhancing operational efficiency, and aligning our resource base with demand realities. During the second quarter, we took steps to streamline our large footprint, including the cold closure of 2 lodges. We are actively working with a third-party consulting partner to identify additional opportunities to lower our cost structure in Canada. While 2025 is clearly a transitional year for our Canadian segment, we believe we are executing the decisive actions that will orient the business to capitalize on growth opportunities and position it for long-term growth and improved cash flow generation. I want to take a moment to thank the hardworking Civeo team for their continued focus on operational excellence. That, together with disciplined capital deployment, is what's driving long-term shareholder value creation. With that, we're happy to take questions.

Our first question will come from Dave Storms with Stonegate.

I wanted to start by discussing some of the factors influencing your guidance at a macro level. Recently, there have been a few trade deals announced in the U.S. Do any of these deals provide you with confidence regarding that guidance? Is there a possibility that it could lean towards being optimistic or pessimistic? I'm interested in hearing your thoughts on this.

We have been watching the international trade situation very closely. Thus far, the impact of the trade uncertainty has not significantly affected our business either in Canada or Australia, although we watch it closely. The impact primarily to food costs has been felt very minimally in Canada. We're keeping an eye on it to make sure that doesn't accelerate. Most of our focus has been on whether trade uncertainty or disruption will impact our customers and how that might influence their need for rooms or their spending. But thus far, we've not seen any material impact either previously or with recent announcements.

Understood. That's very helpful. And then just want to turn to the acquisition that you completed in the quarter. I know you mentioned that you're expecting maybe a little bit of additional margin increase as you continue to integrate that. I did want to double-check though about the $4.9 million in roughly 2 months. Does the $30 million run rate sound fair for that property on the full year? Or are there other maybe synergies that could be squeezed out of that?

On the run rate, we originally discussed an $11 million impact in 2025 in terms of EBITDA, which was based on the expectation of closing at the beginning of April, while we actually closed at the beginning of May. However, the fundamentals remain unchanged. Currently, we do not anticipate any changes to our outlook. Operationally, the team is effectively integrating this into our operations despite the recent volatility in met coal prices. At this point, it is too early to predict any improvements.

Our next caller's question comes from Steve Ferazani with Sidoti & Company.

Bradley, your guide would seem to imply even if we add in the full 6 months of the 4 villages that the second half does look from a profit standpoint to be better than the first half. Can you walk through, is that better turnaround activity in 3Q? Is that more impact from the cost cuts? Can you get us to what gets the second half to at least be moderately better than your first half?

In the second quarter, the third quarter appears to be stable overall, both in terms of revenue and adjusted EBITDA. We anticipate that in Canada, the fourth quarter will experience typical seasonal downtime for the holiday season. In Australia, the third quarter is expected to improve compared to the second quarter because of the full quarter contribution from the four acquired villages, along with continued strength in the base business, particularly in the owned villages and the level of integrated services.

Great. That's helpful. Obviously, we're all looking at the met coal prices and thinking that could be a concern, but then you announced a large contract renewal for 4 years. I don't want to ask if you were surprised by that. What's your gauge on your customers in Australia given the extreme volatility in prices and recent weakness you're seeing with those lengthy extensions, especially with larger customers?

I think it speaks to the service level, which is a combination of the field team doing a good job on food service and housekeeping coupled with an exceedingly strong safety record. That, coupled with a portfolio that can meet the customers' needs across several of their projects in several of our villages. Being close to the customer is key. As they've grown over the last 5 years, we've been able to serve that growth consistently and effectively at an economic price. While that was a great win, I would say that it's relatively shaky. So with our contracted rooms base in Australia, we feel pretty good about the second half of 2025 going into 2026. But as it relates to customers, if they have a contracted minimum of 500 rooms, we have several customers using more than their contracted minimums. What starts to get called into question is how much above the contracted minimums they are going to use. The current met coal commodity price environment adds a layer of uncertainty. So as we sit here today, we feel good about things, but the met coal price puts our antenna up and we must pay attention.

Got it. That's fair. If I can get one more in, just about free cash flow. Obviously, the first half, you've seen an outflow. You talked about using 100% or more of free cash flow for the share buyback. But can you talk a little about how this trends over the next couple of quarters given the outflows from the first half? I didn't hear you update the free cash flow guide.

Yes. In terms of the repurchase program or free cash flow in general, we expect free cash flow to be stronger in the second half. Historically, as you've seen, the first half tends to show weaker free cash flow due to a ramp-up in receivables following the holiday slow period, along with structural factors like insurance and property taxes that typically impact the first half of the year. Additionally, we have started making cash tax payments in Australia from the 2024 fiscal year, including a significant payment this quarter. Free cash flow is projected to improve in the second half. To reiterate, our capital allocation strategy is to utilize at least 100% of free cash flow for the share buyback until we reach our 20% buyback authorization. We plan to remain active in our buyback program during the second half of the year.

And we'll go next to Jawad Bhuiyan with Stifel.

This is Jawad on for Stephen Gengaro. I just had a quick question on the Canadian occupancy. Given the continued weakness in billed rooms and also covered with the turnaround activity that you've seen, could you speak a little bit on what you're seeing so far in 3Q? And then maybe whether there's any signs of stabilization or improvements as we go into the second half of the year?

As it relates to Canadian occupancy in the second quarter and the third quarter, it always depends on turnaround activity. As we sit here today, the third quarter has been a continuation of the second quarter. To hit what's implied in guidance, we will need to see some turnaround activity come to fruition in Canada, particularly in the next couple of months. If that does not come to fruition, we'll miss that part of guidance. But as of right now, it looks like we should see a pickup here from July to August and August to September regarding Canadian occupancy. As always, turnaround activity is uncertain and could run longer into the fourth quarter. That's not currently contemplated in guidance, but there is some stabilization in the Canadian occupancy.

And moving on to John Daniel with Daniel Energy Partners.

Bradley, I got perhaps a basic question, so apologies for the ignorance. But as you look at Australia, today, you've got multiple U.S. service companies there, Halliburton, Liberty HP, can you walk me through the longer-term opportunity set? I'm not looking for specific guidance per se, but just what opportunity exists with supporting that segment of companies coming over there? Just give me that market update, if you don't mind?

Today, our operations in Australia, except for certain regions, have minimal exposure to oil and gas. Our main presence has been at a specific location, which has occasionally facilitated both onshore and offshore LNG activities. Regarding onshore oil and gas development, our involvement dates back over a decade, particularly with ongoing work related to the Curtis Island LNG project in Queensland, which offers opportunities for accommodation services. Looking ahead, potential oil and gas opportunities in Australia are likely to focus on natural gas drilling projects, similar to the Santos project in New South Wales. Our Boggabri and Narrabri sites are well-positioned to support these initiatives if they proceed. There appears to be political support for expanding natural gas drilling as the country contends with rising power prices and becomes increasingly open to natural gas as a solution for electricity supply and cost challenges.

So nothing now, but do you see what these companies are doing to accommodate their workers since it's remote?

A lot of it is in a space that we don't currently operate in, which is mobile camps in Australia. It's something we've explored before and might consider again in the future. I don't view it as a major growth driver for us. I believe the Australian business can expand through specific properties in our core business that would add value if we were to acquire them. Additionally, there is potential for organic growth and acquisition growth in the integrated services sector. However, we remain very mindful that any capital project needs to justify itself against our cost of capital and the expected return from the buyback program.

This now concludes our question-and-answer session. I would like to turn the floor back over to Bradley Dodson for closing comments.

Thank you, Gerry, and thank you, everyone, for joining the call today. We appreciate your interest in Civeo. We look forward to speaking with you on the third quarter earnings call, which we anticipate will be at the end of October.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.