Earnings Call Transcript - CVEO Q3 2023

Operator, Operator

Greetings, and welcome to Civeo Corporation Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Regan Nielsen, Vice President, Corporate Development and Investor Relations. Thank you. You may begin.

Regan Nielsen, Vice President, Corporate Development and Investor Relations

Thank you, and welcome to Civeo's third quarter 2023 earnings conference call. Today, our call will be led by Bradley Dodson, Civeo's President and Chief Executive Officer; and Carolyn Stone, Civeo's Senior Vice President, Chief Financial Officer and Treasurer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain anything other than historical information, please note that we're relying on the safe harbor protections afforded by federal law. Any such remarks should be read in the context of the many factors that affect our business, including risks and uncertainties disclosed in our Forms 10-K, 10-Q and other SEC filings. I'll now turn the call over to Bradley.

Bradley Dodson, President and CEO

Thank you, Regan, and thank you all for joining us today on our third quarter earnings call. I'll start with the key takeaways for the third quarter and then give a brief summary of our third quarter 2023 performance. Then Carolyn will provide a financial and segment-level review, and I'll conclude with our updated full-year 2023 guidance with its underlying assumptions, and I'll also provide a preliminary outlook for 2024. The four key takeaways from our call today are: the third quarter 2023 financial results exceeded our expectations, strong operational execution in both Canada and Australia, with Australia demonstrating strong year-over-year growth. During the quarter, we secured an economically attractive solution for our McClelland Lake assets, which we are optimistic will also lead to additional opportunities. We announced our capital allocation framework, including initiating a $0.25 per share quarterly dividend to provide a consistent form of capital return to our shareholders, and we renewed our share buyback program. The last key point is we'll provide a qualitative assessment of our initial outlook for 2023. Let me now take a moment to discuss the third quarter in our segments. Our revenue in the third quarter reflected a diverse customer base from traditional oil and gas production, LNG, project construction and wildfire response in Canada to metallurgical coal and iron ore production. Our Australian segment performed exceptionally well during the quarter as we experienced sequential and year-over-year growth in both our owned villages business and our integrated services business. During the quarter, we experienced a sequential increase in Australian owned-village occupancy, setting a second consecutive quarterly record for Australian build rooms. On a constant currency basis, the Australian Village revenues were up 25% year-over-year, led by increased occupancy in both our Bowen Basin and Gunnedah Basin villages. Assuming constant currency, revenue from our Australian Integrated Services business grew both sequentially 12% and year-over-year 23% as recent contract awards began to contribute. During the quarter, we also saw tangible results from our inflation mitigation plan for the integrated services business. We should see the benefit from our team's efforts more fully in the fourth quarter of this year and into next year. However, it is important to note that while we've made strides in mitigating inflationary pressures in both our Canadian and Australian businesses, we expect inflation to remain a focus of ours for the foreseeable future. Our Canadian segment delivered strong quarterly results in the third quarter, driven by turnaround and wildfire activity. This was partially offset by lower LNG-related activity in British Columbia, Canada, as pipeline construction activity continues to wind down, resulting in reduced Canadian mobile camp activity for us compared to the third quarter of 2022. We also began demobilizing our mobile camps in this third quarter of 2023. Regarding the sale of our McClelland Lake Lodge in Canada, we have secured in addition to the sale of the transportation contract for the assets, and the demobilization and transportation work is underway. During the third quarter of 2023, we incurred approximately $4.9 million of demobilization expenses related to the McClelland Lake Lodge assets. The majority of the net proceeds from the McClelland sale will be recognized in the fourth quarter of 2023 and into the first quarter of 2024. In regard to the financial impact of this sale, the entirety of the sales proceeds and associated costs will be accounted for in the other income line item on the income statement, and are excluded from our adjusted EBITDA calculation. As a result, this transaction does not impact our full-year 2023 adjusted EBITDA guidance. Lastly, we announced a new capital allocation framework simultaneously with the initiation of a $0.25 per share quarterly dividend policy. This provides flexibility to use our strong cash flow generation on our existing operations, fund growth opportunities, and return capital to shareholders. We also continue to execute on our share repurchase plan in the third quarter and will opportunistically buy back shares moving forward. With that, I'll turn the call over to Carolyn.

Carolyn Stone, Senior Vice President, CFO and Treasurer

Bradley, thank you all for joining us this morning. Today, we reported total revenues in the third quarter of $183.6 million, with GAAP net income of $9 million or $0.61 per diluted share. During the third quarter, we generated adjusted EBITDA of $32.9 million, operating cash flow of $36.8 million, and free cash flow of $31.7 million. As Bradley mentioned earlier, the decline in adjusted EBITDA we experienced in the third quarter of 2023 as compared to the same period of 2022 was largely due to the wind down of Canadian pipeline construction activity, and therefore, our mobile camp revenues and EBITDA. This decrease was partially offset by increased build rooms in our Australian Bowen Basin Villages and increased Australian integrated services activity due to our recent contract wins. Let's now turn to the third quarter results for our two segments. I'll begin with a review of the Canadian segment performance compared to its performance a year ago in the third quarter of 2022. Revenues from our Canadian segment were $95.1 million, as compared to revenues of $103 million in the third quarter of 2022. Adjusted EBITDA in Canada was $23 million, a decrease from $25.6 million in the third quarter of last year. Results from the third quarter of 2023 reflect the impact of a weakened Canadian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by $2.6 million and $0.7 million respectively. On a constant currency basis, revenues decreased 5% primarily due to a decline in mobile camp activity as pipeline construction continues to wind down. Adjusted EBITDA also declined year-over-year due to those dynamics. During the third quarter, billed rents in our Canadian lodges totaled $726,000, which was modestly down from $731,000 in the third quarter of 2022. Our daily run rate for the Canadian segment in U.S. dollars was $98, which declined slightly year-over-year, entirely due to the weakened Canadian dollar relative to the U.S. dollar. The average rate in Canadian dollars was up slightly year-over-year. Turning to Australia, during the third quarter we reported revenues of $87.9 million, up from $73.8 million in the third quarter of last year. Adjusted EBITDA was $18.8 million, up 11% from $16.9 million in 2022. Results from the third quarter of 2023 reflect the impact of a weakened Australian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by $3.8 million and $0.8 million, respectively. On a constant currency basis, the increase in revenue and adjusted EBITDA was largely driven by increased occupancy in our owned villages as well as higher activity for our integrated services business related to new contracts. Australian build runs in the quarter were $623,000, up 19% from $525,000 in the third quarter of 2022 due to increased customer demand at our owned villages driven by our recent contract awards. The average daily rate for our Australian villages in U.S. dollars was $74 in the third quarter, up modestly from $73 in the third quarter of last year. The increase was moderated by the weakened Australian dollar. The average daily rate in Australian dollars was up 6% year-over-year. On a consolidated basis, capital expenditures for the third quarter of this year were $9.5 million compared to $8.8 million during the same period of 2022. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages, coupled with spending to activate mothballed Australian village rooms with increased customer demand. Additionally, the third quarter of 2023 also included $3.6 million in expenditures for the Australian customer funded infrastructure upgrades that we've discussed on prior quarter conference calls. Our total debt outstanding on September 30 was $103.2 million, a $32.9 million decrease since June 30. Our net leverage ratio for the quarter also decreased to 0.9x as of September 30 from 1.2x as of June 30. And as of September 30, we had total liquidity of approximately $110.6 million, consisting of $102.8 million available under our revolving credit facilities and $7.8 million of cash on hand. I'd like to turn now to capital allocation. In the third quarter of 2023, we repurchased approximately 62,000 shares through our share repurchase program for a total of approximately $1.3 million. And in September, we announced our new capital allocation framework, which included the initiation of a $0.25 per share quarterly dividend. After paying our first dividend in late September, this morning, we announced that our Board of Directors has declared our second quarterly dividend payment. Shareholders of record as of November 27 will receive a $0.25 per share cash dividend payable on December 18. Our new capital allocation framework allows our strong cash flow generation to support our existing operations, return capital to our shareholders through a consistent dividend and opportunistic share repurchases. And to use excess cash flow to fund growth opportunities and maintain our target leverage ratio at 1x to 1.25x. We do believe it is prudent, however, to provide flexibility to increase our leverage ratio up to 2x to pursue accretive growth opportunities where appropriate. With that, I'll turn it over to Bradley to discuss our updated guidance for the full-year 2023.

Bradley Dodson, President and CEO

Thank you, Carolyn. I'd like to turn our discussion to our updated full-year 2023 guidance on a consolidated basis, and we will look at the outlook for each of the regions. We are increasing our full-year 2023 revenues and adjusted EBITDA guidance ranges, resulting in the ranges of $675 million to $685 million for revenues and $95 million to $100 million for adjusted EBITDA. We are maintaining our full-year 2023 capital expenditure guidance of $35 million to $40 million. Based on this EBITDA and CapEx guidance, expected net cash proceeds from the McClelland Lake demobilization and sale of those assets of approximately $20 million. Expected cash interest expense of $12 million for 2023. And expected working capital inflows of $5 million, largely related to customer reimbursement of capital associated with Village upgrades. Limited cash taxes, we are adjusting our expected 2023 free cash flow range to $68 million to $78 million for the full-year. I'll now turn to regional outlooks and the underlying assumptions. In Canada, as we look into the fourth quarter of 2023, we are expecting to experience a sequential decline in Canadian mobile camp activity with the Coastal GasLink pipeline continuing to wind down coupled with the typical fourth quarter sequential decline in large build rooms due to the end of turnaround season and normal holiday downtime at the end of the year. In Canadian mobile camps, there are no material changes in our outlook. The camps began winding down in the third quarter, and the fourth quarter will be burdened with approximately $10 million of demobilization expense. We continue to expect approximately $6 million of demobilization expenses in 2024 related to the mobile camps. In regards to the McClelland Lake lodge sale, we expect to receive the majority of the net proceeds currently estimated to be $20 million in the fourth quarter of 2023, with the remainder of the net proceeds in early 2024. We are pleased to announce that we have secured the transportation contract associated with this sale, and the demobilization and transportation of these assets is underway. We are actively pursuing other opportunities associated with the sale and will update you as we know more. Turning to Australia, we continue to see encouraging signs of growth in customer demand for both our owned villages and our integrated services business. Our integrated services business is benefiting from increased revenue from our recent contract wins over the last few quarters, and our efforts in the inflation mitigation plan that we've been focused on. We began to see the benefits of our inflation mitigation efforts in the third quarter and expect to see additional benefits in the fourth quarter and into 2024. As it relates to our 2024 outlook, I'll provide a few preliminary comments. As we've discussed throughout the year, 2024 is expected to be a transitional year for our Canadian business, resulting in a year-over-year decline in EBITDA. With the sale of the McClelland Lake Lodge and the wind down of Canadian mobile camp activity, we are acutely focused on replacing these earnings and growing the company. While we continue to monitor market dynamics as we work through our 2024 budget process and we'll provide a more detailed outlook on our 2023 year-end conference call in February. We are gaining more optimism around the ability to offset a material portion of this decline. I'd like to touch on a few of these opportunities and positive trends that we're seeing. In Canada, we are pleased with the outcome of the McClelland Lake Lodge sale and securing the transportation contract for those assets. We're actively pursuing additional opportunities related to this transaction that could contribute in 2024. While we will lose the build rooms from our former McClelland Lake Lodge customer, the remainder of our oil sands portfolio remains solid, and we should see improved performance from our lodge portfolio. In Australia, we are encouraged by the outlook for both our owned villages and integrated services business. Our own villages are currently at record high occupancy, and we're expecting higher build rooms in 2024. Our integrated services business should continue to benefit from the inflation mitigation plan and the margin improvement experienced in the second half of this year, and we expect it to also grow top-line in 2024. Regarding free cash flow, while we're currently anticipating a decline in EBITDA in 2024, we should see relatively consistent free cash flow due to the wind down of mobile camp activity resulting in significant associated receivables that we expect to be collected in the first half of 2024. I will conclude by underscoring the key elements of our strategy. We will prioritize the safety and well-being of our guests, employees, and communities. We'll continue to enhance our best-in-class hospitality offerings. We will continue to manage our cost structure in accordance with our occupancy outlook, and we will allocate capital prudently to maximize free cash flow generation while we continue to return capital to shareholders and focus on growth opportunities. With that, we're happy to take your questions.

Operator, Operator

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. Our first question comes from the line of Steve Ferazani with Sidoti. Please proceed with your question.

Steve Ferazani, Analyst

Good morning, Bradley and Carolyn. Thanks for all the color on the call. I just want to ask a couple of questions on Canada. Did the Canadian accommodations margins significantly improve? Is that around McClelland in the sale, or are there significant costs you're taking out or any margin improvement that's sustainable there, because it was much better?

Bradley Dodson, President and CEO

I think it's a handful of things. We had strong occupancy in Canada in the third quarter. We had very strong turnaround activity in what we call our core region of assets, which is the Fort McMurray Village and Beaver River Athabasca area. In addition, we had increased occupancy that was at the cloned move into Beaver River Athabasca. So improved occupancy gives us economies of scale, and we're able to leverage that. There were also some efforts that have been put in place earlier in the year that are paying benefits in terms of labor costs. That really flowed through the third quarter, and it was the first time we truly saw the benefits of that. In addition, we had some wildfire-related response occupancy at Sika in British Columbia that helped during the quarter. Those are the main components that helped.

Steve Ferazani, Analyst

Okay. How much of that do you think is sustainable, the actions you've taken?

Bradley Dodson, President and CEO

Well, certainly, the labor efforts that we put in place will continue, although we won't have wildfire activities in the same way.

Steve Ferazani, Analyst

No, the seasonality to it, of course, I know there is seasonality.

Bradley Dodson, President and CEO

Yes, but I think the efforts the team has made will be lasting on the labor side in Canada.

Steve Ferazani, Analyst

On the cadence of the wind down with mobile camps, I was surprised that it didn't step down this quarter. Can you just help us on anything you know on timing, when you think that the wind down is complete?

Bradley Dodson, President and CEO

It will be fourth quarter.

Steve Ferazani, Analyst

Would you still expect some revenue remaining there or not?

Bradley Dodson, President and CEO

We'll have some, but in terms of EBITDA contribution, coupled with the mobile camp demobilization costs that will start to flow through in the fourth quarter, the revenues will step downward.

Steve Ferazani, Analyst

Okay, fair enough. When you sold McClelland Lake, you highlighted the fact that you can use funding for growth, and that's certainly not something you've had much opportunity for over the last few years. Can you give us a little bit of highlights on what your growth strategies might be, particularly as you try to replace some of that mobile camp revenue?

Bradley Dodson, President and CEO

Yes, in Canada we're looking at an entry point into Montney. There will also be some opportunities to pick up selected properties in Canada that would augment the portfolio. Those are the two main things we're looking at right now, in addition to pursuing opportunities related to the McClelland Lake sale.

Steve Ferazani, Analyst

And then last one for me. Your outlook on Australia, obviously, significant gains. We know that there's investment by the mining industry in Australia. But what's your upside from here? Do you think you've seen the biggest gains? I know you've had some big contracts. Is there room for occupancies to grow from here?

Bradley Dodson, President and CEO

Going into 2024, we'll have the benefit of a full year of the contracts we signed this year that we mentioned on prior calls. There are opportunities to modestly add additional rooms or bring mothballed rooms online in Australia. Both of those, whether they're new build rooms or bringing on mothballed rooms, will only move forward if we have customer commitments that support them. We expect so that's on the own village side. On the integrated services side, we'll have the full-year benefit of the contract wins that we've had this year, and we see a portfolio of opportunities to continue to win additional work and grow that business. It will also benefit from the full-year benefits of the inflation mitigation plan that we put in place. The first half margins out of the integrated services business were not where we wanted them. We had some benefit in the second quarter. We saw some benefit from the mitigation plan in the third quarter, but we didn't see the full benefit until September. So the fourth quarter is when we're expecting to confirm that our efforts played out as we anticipated.

Steve Ferazani, Analyst

Perfect. If I could just ask one last question. Considering the strong dividend you’ve introduced, and understanding that the stock's liquidity makes buybacks challenging, does the dividend somewhat replace the buyback? Or is there still room to be aggressive with the buyback, especially since, with the cash coming in from McClelland Lake, your net leverage is likely to approach the lower end of your target?

Bradley Dodson, President and CEO

That's correct. In terms of timing of reemploying it for growth opportunities, it may dip down lower in the fourth quarter as well. But I expect that we'll have some opportunities to put capital to work in 2024 that we will fund with cash flow and leverage.

Operator, Operator

Our next question comes from the line of Alec Scheibelhoffer with Stifel. Please proceed with your question.

Alec Scheibelhoffer, Analyst

Hi, good afternoon everyone, and thanks for taking my question here. If you can hear me, just to kick us off here. I know you gave a lot of color just in the last Q&A session during the call. But just at a high level, if there's any additional color you could give us to understand the puts and takes when we're thinking about 2024 and maybe some avenues of growth you're pursuing or cost-cutting measures, perhaps a little bit more granular?

Bradley Dodson, President and CEO

Well, let's start with Australia. Year-over-year, we expect to see build rooms and occupancy increase. We'll have the full-year benefit of being fully occupied at Coppabella and Moranbah villages, which were nicely occupied in the first half of 2023, and we expect that to continue into 2024. Another major factor will be top-line growth in integrated services coupled with better margins as we've adjusted pricing for the inflationary environment. Those are the main drivers there. If we can get customer commitments, we'll be able to expand the owned villages if the economics work out. So that's Australia. In Canada, with the loss of the McClelland earnings and the mobile camp earnings, it will shift in 2024. We're working on earnings replacement for Canada, which will take time. One silver lining in the challenging situation with McClelland Lake Lodge was in marketing those assets, we gained valuable insight into the value of modular and mobile camp assets in the broader industrial complex, both in Canada and down here in the U.S. We see an opportunity to leverage underutilized existing assets in Canada to tap into new opportunities over the next 12 months.

Alec Scheibelhoffer, Analyst

Great, thank you for the color there. And then just as a second question here, if you could just remind us or talk a little bit about the mobile camp demobilization that hit in 2023 and how much it lingers into '24. I think you said $6 million, but if you could just refresh my memory on that. That would be great.

Bradley Dodson, President and CEO

Let me be clear for everyone. We had $10 million of demobilization expenses that will run through EBITDA in 2023 and $6 million that will run through EBITDA in 2024. As it relates to the demobilization costs tied to McClelland, that will flow through the other income and expense line item, along with the proceeds from selling those assets. So I know it's a little confusing as we'll talk about demobilization in both cases, but we'll try and be clear.

Alec Scheibelhoffer, Analyst

Great, and that's all for me. I'll turn it back. Thank you.

Bradley Dodson, President and CEO

Thank you very much. Thanks for your questions.

Operator, Operator

Our next question comes from the line of Dave Storms with Stonegate Capital Markets. Please proceed with your question.

David Storms, Analyst

Good morning.

Bradley Dodson, President and CEO

Good morning.

David Storms, Analyst

Just one quick one on McClelland Lake. Are there any contingencies there that we should be aware of, any earnest money that may or may not be material?

Bradley Dodson, President and CEO

There were some deposits that were put in place upon signing the agreement, and they're paid as soon as the units are truck-ready on location in Alberta. As it relates to the sale of the assets, the transportation will start to be recognized in the fourth quarter as we move the assets from Alberta down to the Western U.S.

David Storms, Analyst

Understood. Appreciate it. And then it looks like over the last four quarters, the EBITDA contribution from Australia and Canada has been about a 50-50 split. Is this a trend we should think about going forward? Or do you think there's a potential for that split to diverge a little?

Bradley Dodson, President and CEO

Because of the loss of the McClelland earnings and mobile camp earnings in Canada, it will shift in 2024. As highlighted in my comments, we're working on earnings replacement for Canada, which will take some time.

David Storms, Analyst

Understood. Thank you. And then just one more, and I think you touched on this a little bit earlier, but your leverage ratio is below that 1x target. Is this gearing up for something, or is this just the normal fluctuations of the leverage ratio through the cycle?

Bradley Dodson, President and CEO

I would say it's normal fluctuations. Our free cash flow historically, and we expect this trend to continue, is usually strongest in the second half of the year. The reasons for that are you ramp up in the first half of the year, receivables go up, and you have the start of the turnaround seasons predominantly in Canada but also in Australia in the second quarter. Those receivables begin to unwind in the second half of the year. So we had strong free cash flow in the quarter. We expect to have strong free cash flow in the fourth quarter. Additionally, you've got the net proceeds from McClelland coming through. I would say it's just normal fluctuations that are enhanced by the proceeds from the McClelland sales. So I do expect it to temporarily dip below our range, and then we expect to deploy that towards growth efforts in 2024.

David Storms, Analyst

Understood, that's very helpful. Thank you for taking the questions.

Bradley Dodson, President and CEO

Absolutely. Thank you.

Operator, Operator

There are no further questions in the queue. I'd like to hand the call back to Bradley Dodson for closing remarks.

Bradley Dodson, President and CEO

Thank you and thank you all for joining us on the call today. We appreciate your interest in Civeo, and we look forward to speaking with you on the fourth quarter and full-year earnings call, which we expect to do in February.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.