Earnings Call Transcript - CVEO Q3 2022

Operator, Operator

Greetings, and welcome to the Civeo Corporation Third Quarter 2022 Earnings 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 my pleasure to introduce your host Regan Nielsen, Senior Director, Investor Relations. Thank you, Mr. Nielsen. You may begin.

Regan Nielsen, Senior Director, Investor Relations

Thank you, and welcome to Civeo's third quarter 2022 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 2022 performance, after which Carolyn will provide a financial and segment level review. I will conclude with our updated full year 2022 guidance and the regional assumptions underlying that guidance. I will also provide preliminary comments regarding our 2023 outlook. Key takeaways from our call are we had a strong third quarter and year-over-year revenues up 19% and adjusted EBITDA of 34% driven by increased activity across all three geographic segments. Our occupancy related to pipeline construction is expected to continue into 2023, which will result in continued Canadian mobile camp activity through the end of 2022 and into 2023. This development will push our demobilization costs for those camps into the end of 2023. The strong third quarter performance, coupled with the deferral of the Canadian mobile camp demobilizations from 2022 into 2023, drove the increase in our full year guidance, which I will detail later in the call. We generated $38.6 million of free cash flow in the quarter, which led to a significant milestone of us reducing our net leverage to below 1.0 times. We're committed to investors that we would prioritize deleveraging, and this achievement would not have been possible without the efforts of the entire Civeo team over the last few years. Our continued debt reduction provides us with the flexibility to both weather the current market volatility and further evaluate opportunities to deploy capital. Lastly, after repurchasing approximately 715,000 shares since September 2021, including 475,000 shares in the third quarter of 2022, we announced that our Board of Directors has renewed its share repurchase authorization for Civeo to repurchase up to 5% of its total common shares outstanding over the next 12 months. Let me take a moment to provide a business update across the three segments. In Canada, revenues and adjusted EBITDA increased year-over-year, driven by an increase in large occupancy as well as increased Canadian mobile camp activity. We experienced a sequential decrease in revenues and adjusted EBITDA due to the typical seasonal wind down in the third quarter of turnaround activity. In Australia, our revenues and adjusted EBITDA were in line with our expectations, increasing year-over-year and sequentially. This was primarily driven by increased year-over-year and sequential integrated services activity due to the recently announced contract awards starting in the third quarter. Increased occupancy in several Bowen Basin villages also contributed to a strong third quarter performance. Turning briefly to the U.S. Revenues and adjusted EBITDA increased year-over-year due to increased activity positively impacting our wellsite and offshore businesses, partially offset by the sale of our West Permian Lodge, which we sold in the fourth quarter of last year. In September, we sold our wellsite business. While the business was improving with increasing drilling activity in the U.S., we unfortunately were unable to create scale in the business despite the sales and service efforts of our team. And with that, I'll turn it over to Carolyn.

Carolyn Stone, Senior Vice President, CFO and Treasurer

Thank you, Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the third quarter of $184.2 million, with GAAP net income of $5.2 million, or $0.32 per diluted share. During the third quarter, we generated adjusted EBITDA of $35 million, operating cash flow of $38.7 million and free cash flow of $38.6 million. As Bradley just mentioned, the increased adjusted EBITDA that we experienced in the third quarter of 2022 compared to the same period last year was largely due to increased build rents in our Canadian lodges and increased Canadian mobile camp activity, coupled with increased Australian village billed rooms and integrated services activity. The quarter-over-quarter increase in operating cash flows and free cash flow was primarily due to these same factors. Let's now turn to the third quarter results for our three segments. I'll begin with a review of the Canadian segment performance compared to its performance a year ago in the third quarter of 2021. Revenues from our Canadian segment were $103 million, as compared to revenues of $84.1 million in the third quarter of '21. Adjusted EBITDA in Canada was $25.6 million, an increase from $19.8 million in the third quarter of last year. Results from the third quarter of 2022 reflect the impact of a weakened Canadian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by $3.7 million and $0.9 million respectively. On a constant currency basis, the increase in both revenues and adjusted EBITDA was largely driven by a 19% year-over-year increase in billed rooms, related to the recovery in oil prices and increased turnaround activity, coupled with increased mobile camp activity. During the third quarter, billed rooms in our Canadian lodges totaled 731,000, which were up 19% year-over-year from 613,000 in the third quarter of 2021 due to the factors I just discussed. Our daily run rate for the Canadian segment in U.S. dollars was $99, which is relatively flat year-over-year, largely due to a weakened Canadian dollar relative to the U.S. dollar. Turning to Australia. During the third quarter, we reported revenues of $73.8 million, up from $65.1 million in the third quarter of 2021. Adjusted EBITDA was $16.9 million, up from $14.8 million last year. Results from the third quarter of 2022 reflect the impact of a weakened Australian dollar relative to the U.S. dollar, which decreased revenue and adjusted EBITDA by $5.5 million and $1.3 million, respectively. On a constant currency basis, the increased results were driven by both increased billed rooms in our villages and increased integrated services activity. Australian billed rooms in the quarter were $525,000, up 7% from $491,000 in the third quarter of last year, due again to the recovery of customer maintenance activity in our villages resulting from a more muted impact of the China-Australia trade dispute. While the average daily rate for our Australian villages in U.S. dollars was $73 in the third quarter, down from $78 in the third quarter of 2021, the decrease was entirely driven by the weakened Australian dollar. Moving to the U.S. Revenues for the third quarter were $7.4 million as compared to $5.9 million in the third quarter of 2021. The U.S. segment adjusted EBITDA was a loss of $33,000 in the third quarter, up from the loss of $544,000 during the same period last year. The increase in adjusted EBITDA was primarily due to increased activity positively impacting our wellsite services and offshore businesses, offset by the impact of the sale of the West Permian Lodge in the fourth quarter of '21. On a consolidated basis, capital expenditures for the third quarter of 2022 were $8.8 million compared to $3.4 million during the same period in 2021. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages. Our total debt outstanding on September 30, 2022, was $126.2 million, which is a $28.4 million decrease since June 30. The decrease consisted of $19.5 million in debt payments from cash flow generated by the business and favorable foreign currency translation of $8.9 million. Our net leverage ratio for the quarter decreased to 0.9 times as of September 30 from 1.2 times as of June 30. As of September 30, we had total liquidity of approximately $117.3 million, which consists of $108.9 million available under our revolving credit facilities and $8.4 million of cash on hand. Bradley will now discuss our updated guidance for the full year 2022 and preliminary comments on our 2023 outlook.

Bradley Dodson, President and CEO

Thank you, Carolyn. I'd like to discuss our updated full year 2022 guidance. On a consolidated basis, including the underlying outlook for each of the segments as well as the underlying assumptions related to the guidance. Based on our third quarter results and the deferral of the majority of our Canadian mobile camp demobilization costs into 2023, we are raising our full year 2022 revenue and EBITDA guidance to $675 million to $685 million in revenues and $110 million to $115 million of adjusted EBITDA. We are maintaining our full year 2022 capital expenditure guidance, which is $24 million to $29 million. Based on this EBITDA and CapEx guidance, we expect interest expense of $10 million for 2022 and minimal cash tax expense. We expect our 2022 free cash flow forecast to be in the range of $71 million to $81 million. The increase to our revenue and EBITDA guidance is primarily driven by the deferral of our mobile camp demobilization costs into 2023. Our Canadian mobile camp activity is primarily related to the construction of the Coastal GasLink and other pipelines. This pipeline construction is now expected to continue into 2023 and should require the use of our mobile camps supporting that project. Construction of this pipeline is nearing completion, so we expect to see a reduction in our occupancy and profitability related to mobile camps as this activity winds down into 2023, and we will recognize the majority of the expected demobilization cost next year. I will provide the regional outlook, guidance on the regional outlooks, and corresponding assumptions. In Canada, as we look to the remainder of 2022, we are expecting to experience a decrease in billed rooms due to turnaround activity winding down, coupled with typical holiday downtime. We are also experiencing inflationary pressures on our utility costs, which will be exacerbated by winter weather. Turning to Australia. We continue to see encouraging signs of improvement in customer demand for our integrated services activity, as well as our village business. The fourth quarter of 2022 will also be burdened by the typical fourth quarter seasonality that will negatively impact our village occupancy. Iron ore prices remain at constructive levels, and customer activity in Western Australia remains strong. While we are seeing gradual progress as it pertains to COVID-19-related labor issues that we've experienced in the last two years, it's a slow process, and we expect labor shortages to remain a factor for the remainder of this year and into next. I'll now move to the 2023 outlook and provide some preliminary comments. Customer spending, specifically customer capital spending, drives our occupancy at our Canadian lodges and our Australian villages. While commodity prices for oil, natural gas, met coal, and iron ore continue to be constructive, our customers continue to be focused on cash flow generation, capital discipline, and returning capital to shareholders. As a result, at this point, we do not see a material increase in occupancy in 2023 for either the Canadian lodges or the Australian villages. In Canada, we are expecting relatively flat occupancy in our Canadian lodges, perhaps with some modest upside. As we've discussed on previous calls, we expect our Canadian mobile camp activity to significantly decline as we meet our completion of the Coastal GasLink pipeline as well as others. This decline in mobile camp activity profitability will be exacerbated by the recognition of demobilization costs in 2023. In Australia, we are expecting a modest increase in occupancy in our villages due to customer expansionary activity. We are also expecting an increase in the Australian integrated services business due to some internal contracts the team has won. However, we are expecting margin compression due to labor shortages and inflation. While this has improved over several quarters, we're expecting only a gradual improvement in 2023. Given the significant progress that we've made in reducing our total leverage, we expect capital allocation going forward to focus on opportunistically repurchasing our stock under our authorized buyback plan and weighing those returns against the expected returns on growth opportunities, both organic and inorganic. With that, I'll conclude our prepared remarks by underscoring the key elements of our strategy as we navigate this market climate. Our mandate remains as follows: We will prioritize the safety and wellbeing of our guests, employees, and communities. We'll manage our cost structure in accordance with our outlook across all three segments. We will continue to enhance our best-in-class hospitality offerings. We'll allocate capital prudently. We will seek opportunities to further our revenue diversification and free cash flow generation through organic growth and M&A opportunities that have a superior anticipated return. With that, we're happy to take your questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Stephen Gengaro with Stifel. Please go ahead.

Stephen Gengaro, Analyst

Good morning, everybody.

Bradley Dodson, President and CEO

Good morning, Stephen.

Stephen Gengaro, Analyst

So a couple of things from me. I think the first would be around the fourth quarter. Like when we think about your revenue guidance, and I know you mentioned some of the margin headwinds in the fourth quarter, but if you look at the two segments, where do you see the bigger kind of margin degradation in the fourth quarter because of seasonality?

Bradley Dodson, President and CEO

Canada. It will be in Canada. Right now, based on customer labor curves, it looks like we're going to have a significant downturn in terms of occupancy, both at the pipeline camps as well as at the lodges. So I would say based on guidance, as we start getting into winter, we will see increased propane and diesel costs as we have to keep the lodges warm, so it will be a combination of both. Australia, we'll see some holiday downtime, but it's much more muted.

Stephen Gengaro, Analyst

Got you. Great. Thanks. And then you mentioned the demo cost. I mean if you had a crystal ball right now, which I know it's tough, would you see that? Any sense for kind of when that occurs next year? Is it first quarter? Is it still too early to tell?

Bradley Dodson, President and CEO

Fortunately, Stephen, it's too early to tell. We feel confident that since last quarter, we have become more assured, although we hinted that it would happen. The demo costs and activity will continue into 2023. However, how long it will last in 2023 remains unclear, and we look forward to providing hopefully better guidance on our fourth quarter earnings call as we gain more insight from the customers.

Stephen Gengaro, Analyst

Thank you. I have just one final question. Historically, you have effectively managed cost pressures, and I recognize that we are currently in a unique cost environment. Could you discuss the operational leverage you have and the discussions you are having with customers to help mitigate that impact?

Bradley Dodson, President and CEO

Sure. I'll begin by saying that all of our multiyear contracts include annual adjustments for inflation, but these adjustments are annual, which introduces a delay. Historically, these contracts have managed inflation reasonably well, though this situation is quite unusual. I estimate we're losing about 200 basis points on margin due to inflation affecting both labor and food costs. In Canada, the utility costs are particularly high. However, the team has been effective operationally. Regarding utility costs in Canada, we try to adjust by asking customers to transfer their occupancy to different locations, thereby increasing efficiency in those locations. We are actively doing this. In terms of food costs, we focus on managing portion sizes and exploring alternatives for the types of food we offer, especially proteins, to keep costs in check. For labor, we concentrate on optimizing shifts to enhance our efficiency. In Australia, the team has made considerable progress in securing labor, and the situation has improved significantly since the start of the year, although we're still not at our ideal levels. While we're currently behind our labor cost budget, the difference is less than the impact of inflation. On the food cost front, we need to enhance our procurement strategies, and that is a work in progress. Overall, considering the current global economic context, I believe the team is performing well, although there is definitely room for improvement given the activity levels and ongoing inflation.

Stephen Gengaro, Analyst

Great. No. That’s very good color. I appreciate it. Thank you.

Bradley Dodson, President and CEO

Thank you, Stephen.

Operator, Operator

Next question comes from Steve Ferazani with Sidoti. Please go ahead.

Steve Ferazani, Analyst

Good morning, Bradley. Good morning, Carolyn. I did want to follow up Stephen's question on the winding down of the mobile camps. And just do you have any ability to quantify how quickly some of that revenue comes out? Just because when I'm thinking about your fourth quarter revenue guidance or sort of backing into it, its year-over-year down. Is that primarily on starting to see that decline in mobile camps or are there other pieces to that?

Bradley Dodson, President and CEO

It's related to mobile camp activity, which isn't really a winding down but more of a holiday downtime issue. We have a partial demonstration from one of the camps in the fourth quarter contributing to it. The main factor is the overall oil sands activity in the fourth quarter, where current labor trends indicate a significant decrease in occupancy in the oil sands region. This situation is likely worsened by foreign exchange fluctuations. There's a bit of that at play. However, regarding the occupancy of the mobile camps for next year, I wish I had a clearer answer.

Steve Ferazani, Analyst

I understand.

Bradley Dodson, President and CEO

As close as we are with our customers, there's not a clear picture of how long those camps are going to be active. I think the good news is that our team, operationally and from a sales perspective, have clients who have choices. The pipeline construction is winding down, and they can choose which camps to keep or demobilize. I believe our camps are being chosen to continue into next year. So it's a win for us. But eventually, we're going to have to find a replacement for those earnings. I'm hoping it's later in 2023, but we'll see.

Steve Ferazani, Analyst

When considering the Canadian outlook for 2023, it's not particularly positive or optimistic. I'm thinking about the fact that Trans Mountain will start operations in late 2023, and labor availability is expected to improve. However, turnaround times have not yet returned to pre-COVID levels. There are notable reasons to be more optimistic, and while daily oil prices may not be crucial, the differential is expected to decrease next year. Despite these factors, there is a lack of bullish sentiment.

Bradley Dodson, President and CEO

No. What we need to see from here is what are the CapEx plans for the customers. We're kind of treading water the last couple of years in terms of total Canadian CapEx. It also applies to Australia on the eastern side of the business. CapEx is what's going to drive our occupancy in both the Canadian lodges and the villages. As we start to see CapEx plans by our customers come out, we'll adjust accordingly. We've got a little bit of a tailwind in Australia because there are a couple of expansionary projects that are driving incremental occupancy there. It's getting eaten up a little bit on what I would say is exacerbated inflation. But overall, it's going to be CapEx. I would like to be more bullish and certainly say that sitting here at high 80s oil prices and the other commodity prices that we would see more activity. But again, it's customer discipline and returning capital to shareholders. They're enjoying higher commodity prices, and they're not spending money like we would see historically. So until that changes, it's hard to say. The good news is that we're largely supporting day-to-day operations. So we're not seeing the volatility related to that. I think the other piece, which I didn't mention earlier, is we will have to see how Canadian turnaround activity is next year. I believe it will be relatively consistent with this year. So I would say that in Canada in terms of billed rooms, we're kind of flat with some modest upside. In Australia, with the expansion projects, we've got some upside there. The team has done a good job on the integrated services side in Australia of winning new work. It should continue to be cautiously optimistic about that, but again, that's a lower-margin business.

Steve Ferazani, Analyst

Great. Thanks. And if I can get one more in terms of capital allocation, obviously, you've done a fantastic job with the balance sheet. You're still generating an awful lot of cash flow, good problem to have. You're limited on the normal course issuer bid. I'm not an expert on Canadian securities rules. But I mean you can couple in a substantial issuer bid, is that correct, if you wanted to, particularly with the share conversion coming or what other possible uses for cash flow are you thinking about next year?

Bradley Dodson, President and CEO

So on capital allocation, we've gotten to a point around 1 times levered. That's where we want to be. I think that gives us flexibility to consider opportunistically buy back stock when opportunities arise and weigh those returns against the expected returns on growth projects that we have. To your point, we're in a relatively strong commodity environment; should that continue, it will present opportunities. We will be very careful in terms of how we look at growth opportunities and weigh those against buying back stock. With a 1 times leverage, we can leverage up a little bit for those two opportunities, and then the shift will be back to paying down that debt. So that's the plan going forward.

Steve Ferazani, Analyst

Thanks, Brad. I appreciate the time.

Bradley Dodson, President and CEO

Thank you.

Operator, Operator

Next question comes from John Daniel with Daniel Energy Partners. Please go ahead.

John Daniel, Analyst

Good morning, Bradley and Regan. Thank you for taking the call. Bradley, I have a question that might seem silly, and you can laugh at me after I hang up. I hope you can hear me okay.

Bradley Dodson, President and CEO

Yes.

John Daniel, Analyst

Okay. Good. I'm driving here. And so I drive a lot around the various basins. And back in the day, go back to, call it, 2011, 2012, whatever, you couldn't find rooms in the Bakken, people were sleeping in Walmart. You go up there today, no trouble finding a room. A lot of the places you end up staying are kind of dumpy, at least where I stay, perhaps. But it would seem like, are there opportunities for opportunistic purchases of some of these places, albeit might be the hotels that you could renovate and use as a growth opportunity, where maybe someone built something up in the hot times? It's now faded, and so perhaps the better valuation could be had? Just a dumb question perhaps, but I'm curious about your thoughts.

Bradley Dodson, President and CEO

Well, I would say our lodge business in the U.S. had a couple of issues. One, others have built out and gotten scale, which has really been our issue in the U.S. for a while. When things were better a decade ago, we were focused on expanding our Canadian and Australian business, and the returns were better there. In the meantime, we missed out on the U.S. opportunities, and so we were left with a portfolio of lodge locations that is tougher to compete against. So, I mean it's difficult for us in the U.S. to augment that because we're behind the curve. Our occupancy, specifically in the Bakken, has improved, we're running better in budget. Again, our lodge occupancy there is driven by completion crews. So we've got a handful of those in our Killdeer location, and it's doing better than expected. But we just don't have the scale there, and I expect that the returns opportunities elsewhere will continue to be better than us looking to build that up.

John Daniel, Analyst

Fair enough. If you build something really nice, I’d be happy to stay there. Good job on the…

Bradley Dodson, President and CEO

You’ll be our guest.

John Daniel, Analyst

Well, there's one particular nasty one in downtown Midland. I'd like someone to fix, but maybe that's for a later date. All right. Look, that's all I got. I'm sorry for the dumb question. But I just was curious.

Bradley Dodson, President and CEO

No. That’s a good question. Appreciate it.

Operator, Operator

There are no further questions at this time. I would like to turn the floor back over to Bradley Dodson, CEO, for closing remarks.

Bradley Dodson, President and CEO

Thank you, and thank you, everyone, for joining the call today. We appreciate your interest in Civeo, and we look forward to speaking with you on our fourth quarter earnings call in February.

Operator, Operator

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