Civeo Corp (CVEO) 2018 Q1 法說會逐字稿

Good day, and welcome to the Civeo first quarter earnings call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Regan Nielsen, Manager, Corporate Development, Investor Relations. Please go ahead.

Thank you, and welcome to Civeo's First Quarter 2018 Earnings Conference Call. Today, our call will be led by Bradley Dodson, Civeo's President and Chief Executive Officer; and Frank Steininger, Senior Vice President and Chief Financial Officer.

Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain information 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 disclosed in our Form 10-K, 10-Q and other SEC filings.

I will now turn the call over to Bradley.

Thanks, Regan, and welcome to everyone joining us today on our first quarter earnings call. I'll begin with an overview of highlights in our performance for the quarter before offering some commentary on our regional markets. Frank will then provide a detailed financial segment review, and I'll conclude by offering guidance and a brief strategic overview before we open the call for questions.

The start of this year for Civeo was punctuated by the completion of 2 significant acquisitions. The addition of Noralta and the Louisiana accommodation facility strengthens our respective offerings in the Canadian Oil Sands region as well as the U.S. Gulf Coast market. We are excited to welcome these new teams to Civeo as we continue to focus on providing best-in-class service quality to our customers and solidifying our competitive position. Both of these transactions were immediately accretive to operating cash flow. We're delevering on day 1, and we'll -- and going forward, we'll accelerate our debt reduction ability significantly.

We also amended our -- and restated our credit facility, extending the maturity date by 18 months to November 2020. As we emerge from the downturn, we remain committed to optimizing our capital structure while maintaining financial and strategic flexibility. This amendment is another important milestone in our pursuit of those objectives. While we are pleased with these substantial accomplishments, the first quarter got off to a softer-than-expected start in our Canadian lodges, coupled with lower rates with a contract extension out of McClelland Lake location. In addition, margins in Canada were impacted by revenue mix, with lower margins from an underperforming mobile camp contract, which was completed in the first quarter.

In Australia, we also saw a greater holiday downtime in the first quarter than expected. However, the business picked up by quarter-end in both Canada and Australia. Canadian occupancy improved noticeably exiting the quarter, and the outlook for April and May is very encouraging as we anticipate robust turnaround activity at both our lodges and the former Noralta lodges. Australia also finished the first quarter well and the big-picture prognosis remains solid with current met coal prices.

Lastly, our U.S. business continued to strengthen in the quarter, highlighted by robust drilling activity in the Permian Basin and the addition of the new Gulf Coast location.

During the first quarter, Civeo generated $101.5 million in revenues, which was in line with our guidance of $100 million to $105 million; reported a net loss of $55.5 million or $0.42 per share, which represents a $56 million pretax loss resulting from a $28.7 million impairment charge as well as roughly $1 million in costs associated with the Noralta acquisition.

Adjusted first quarter EBITDA of $10 million was below our guidance range of $11 million to $13 million, but during the first quarter, we generated operating cash flow of $2.8 million and free cash flow of $2.9 million.

In our Canadian segment, revenues were $63.4 million, essentially flat with the fourth quarter of 2017 as reduced -- reduction in billed rooms was offset by increased catering, mobile and open camp revenue. On a year-over-year basis, revenues were modestly up due to the impact of a stronger Canadian/U. S. dollar exchange rate. On a constant currency basis, revenues were flat due to a decline in daily average rates, which was largely offset with increase in catering, mobile camp and open camp revenues. Adjusted EBITDA in the first quarter benefited from a $2.1 million gain on sales asset related to unused units.

Although the year got off to a slower start than anticipated, we are encouraged by improvement activities that took place in March. With turnaround work in Canada accelerating seasonally, we anticipate noticeable improvements in occupancy and revenues during the second quarter. The addition of Noralta to our portfolio will further enhance our ability to address turnaround opportunities as well as ongoing operation-focused activities in the Oil Sands.

In our Australian segment, met coal prices averaged more than $225 per ton in Q1, with benchmark prices settling in at $237 per ton, both of which were up on a sequential basis. Mining and shipping disruptions, strong Chinese sea-borne import demand and competition for resources from India and Japan, all contributed to the upward pricing action during the first quarter. Despite the strong fundamental pricing backdrop, Australian activity was subdued in January due to extended summer holiday break. However, we experienced a strong finish to the first quarter, and the second quarter is off to a promising start.

From a big-picture perspective, our major clients appear to be allocating additional capital to maintenance and growth projects based on their expectations for a continued strong demand growth out of emerging markets, such as India, and the concentration of Chinese blast furnace capacity in coastal regions. Accordingly, we anticipate steady performance from our Australian segment as 2018 progresses.

The performance of our U.S. segment continued to improve during the first quarter as a result of robust occupancy in our U.S. open camps and 1 month of contribution from our new location near Lake Charles, Louisiana. U.S. segment EBITDA achieved breakeven run rate during March, which is the trend we fully expect to continue during the second quarter as customers accelerate their drilling and completion campaigns amidst a backdrop of higher oil prices and improving weather. Modest pricing improvements also should be achievable this -- as the year progresses in this increasingly favorable environment.

Overall, we're exceptionally pleased with the process we made during the start of 2018. Our businesses generally performed in accordance with our expectations despite some seasonal timing impacts to operations, with the exception of the 1 mobile camp contract performance. And perhaps more importantly, we successfully closed on 2 meaningful acquisitions and -- while we completed an amendment to our credit facility.

With that, I'll turn it over to Frank for a detailed review of our financial performance.

Thank you, Bradley, and thanks, everyone, for joining us this morning. I'll start with a review of our first quarter results across our 3 segments. Today, we reported total revenues in the first quarter of $101.5 million, with a net loss on a GAAP basis of $55.5 million or a $0.42 per diluted share net loss.

During the first quarter, the company generated adjusted EBITDA of $10 million, operating cash flow of $2.8 million and free cash flow of $2.9 million. These results were impacted by a $28.7 million impairment charge in our Canadian segment as well as roughly $1 million in costs associated with closing the Noralta acquisition.

I will begin with a review of our Canadian segment performance compared to the prior quarter, Q4 2017. Revenues from our Canadian segment were $63.4 million, down modestly from $63.6 million in the fourth quarter. Revenues for the quarter were impacted by a decrease in our lodges' billed rooms, partially offset by an increase in catering, mobile camp and open camp revenues.

Adjusted EBITDA in the Canadian segment was $9.3 million, down sequentially from $11.4 million. The decrease was primarily a result of a shift in revenue mix towards lower-margin catering revenue and, as previously mentioned, an underperforming mobile camp contract.

During the first quarter, average occupancy in our Canadian lodges was 75%, down 4% sequentially. But as Bradley stated earlier, we are encouraged by the turnaround activity experienced to date in the Oil Sand in April and expected for the remainder of the second quarter and look for billed rooms to noticeably increase. Our average daily rate for the Canadian segment in US dollars was $88 versus $90 in the fourth quarter, driven largely by the start of the new McClelland Lake Fort Hills contract in January.

Turning to Australia. During the first quarter, we recorded revenues of $27.9 million, down slightly from $28.1 million in the fourth quarter of last year. Adjusted EBITDA of $9.1 million decreased sequentially from $10.3 million, and this was primarily due to labor inefficiencies from changing occupancy levels at the villages. We are pleased to see the pickup throughout the quarter after a slower start to the year associated with Australian holiday season, punctuated by a strong March performance. The average daily room rate for Australian villages increased to $81 in the fourth quarter compared to $79 in the fourth quarter -- I'm sorry, increased to $81 in the first quarter compared to $79 in the fourth quarter. Village occupancy for the quarter was flat sequentially at 44%.

Now moving on to the U.S. Revenues for the [fourth] quarter improved $0.5 million sequentially to $10.2 million. The revenue increase was driven by increased occupancy in the U.S. unconventional plays as well as 1-month results from our new facility near Lake Charles, Louisiana, which we acquired at the end of February.

During the quarter, we recorded adjusted EBITDA -- an adjusted EBITDA loss of $700,000 in the U.S. versus $1.2 million in the fourth quarter, primarily driven by the revenue increase we experienced.

Now I will move on to capital expenditures and our current liquidity position. During the first quarter, we invested $2.7 million, down from $3.2 million sequentially, and billed expenditures were related to capital -- maintenance capital -- maintenance-related capital. We also invested $23.5 million in cash on the Louisiana acquisition in the first quarter.

In the first quarter of 2018, our total debt outstanding increased by $23.2 million to $320.8 million, primarily resulting from partial borrowings to fund the Noralta acquisition and was also offset by debt repayments of $4.1 million for the quarter. In April, we amended our credit facility to extend the facility for 18 months as well as reducing aggregate loan commitments by $35.5 million to a maximum principal amount for our revolving credit facility of $239.5 million.

As of March 31, 2018, we had $201.7 million of available capacity on our revolving credit facility and cash on hand of $42 million for total liquidity of approximately $247.3 million, and that includes $30 million of cash from our credit facility borrowings in late March to fund a portion of the cash consideration in the Noralta acquisition.

Looking forward into 2018, we remain focused on generating free cash flow and delevering our balance sheet while continuing to provide best-in-class service quality for our customers. The 2 acquisitions we just closed will accelerate our ability to reduce our debt levels.

I will now turn the call back over to Bradley, who will provide some closing comments and talk about our guidance for the second quarter and the remainder of the year. Bradley?

Thank you, Frank. I'll now provide a brief outlook for our business segments, outline our guidance for the second quarter and full year of 2018 and make some closing remarks before we open up the call for questions.

In Canada, the improvement in turnaround work that we witnessed during March should accelerate in April and May. We will also benefit from a full quarter's contribution from the Noralta assets, with solid occupancy related to operations-focused contracts with 2 major investment-grade Oil Sands producers.

Integration of the Noralta team and assets is well underway, and we are confident in the previously announced annual synergies of CAD 10 million.

Our full year guidance for Canada includes the following: contributions expected from Noralta assets for the period from April through December, the sequentially increasing impact of the expected synergies from the Noralta transaction, the impact of slowing occupancy from the Fort Hills project, and increasing mobile camp activity as well as increasing catering-only revenues. For the second quarter, we're assuming a Canadian dollar exchange rate of $0.78, and we anticipate segment revenues of between $95 million and $100 million and adjusted EBITDA from this segment of $23 million to $25 million. These expectations are based on 15,150 rentable rooms. We expect lodge billed rooms to be between $1,020,000, and $1,070,000, with a room rate of approximately CAD 103 per night.

For the full year, in Canada, we're assuming the Canadian dollar exchange rate of $0.78, and we're guiding to revenues of $326 million to $339 million, and we expect full year adjusted EBITDA from Canada to be in the range of $73 million to $77 million. This assumes full year rentable rooms of 13,500 and lodge billed rooms between 3.175 million and 3.325 million and a room rate of approximately CAD 108 per night for the full year of 2018.

Moving to Australia. The macroeconomic environment continues to provide justification for cautious optimism. Although met coal prices are currently near multiyear highs, customers are allocating capital to new projects judiciously and committing to rooms on a short-term basis as they monitor the impact of fresh environmental restrictions in China. We anticipate stronger sequential occupancy during the second quarter, but we do not envision opportunities to gain meaningful traction -- pricing traction until later in the year.

For the second quarter, we're assuming Australian dollar exchange rate of $0.77, and we're guiding to segment revenue of $32 million -- $30 million to $32 million and adjusted EBITDA of $10 million to $11 million. These expectations are based on 8,800 rentable rooms, and we expect lodge billed rooms to be between 360,000 and 370,000, with a room rate between AUD 109 and AUD 111 per night.

For the full year, in Australia, we're assuming an Australian dollar exchange rate of $0.77, and we anticipate revenues of $124 million to a $131 million. We expect full year adjusted EBITDA from Australia to be in the range of $43 million to $46 million. This assumes full year rentable rooms of 8,780, with lodge billed rooms between 1.46 million and 1.53 million, with a room rate of approximately AUD 110 for the full year -- per night for the full year of 2018.

So pulling all that together on a consolidated basis, for the second quarter, we expect revenues to be in the range of $136 million to $144 million, adjusted EBITDA to be in the range of $28 million to $30 million. For the full year, we're issuing revenue guidance of $490 million to $512 million and adjusted EBITDA guidance for the full year of 2018 of $93 million to $100 million.

To conclude our prepared comments, the industry-wide downturn that persisted for much of the past 3 to 4 years was nothing short of devastating. But I firmly believe that we have emerged from it as a stronger company that is better positioned to thrive in any commodity price environment. As the underlying fundamentals of our business continue to improve, we remain steadfastly committed to the strategy that has enabled us to successfully navigate the worst of the downturn. We'll pursue organic and inorganic growth opportunities that generate strong financial returns. We'll work safely and efficiently. We'll deliver unmatched service to our customers, and we'll allocate capital prudently, with the goal of maximizing free cash flow and continuing to reduce debt.

Lastly, I'd be remiss not to mention the dedication and professionalism exhibited by our global workforce at Civeo throughout the past few years. Your unyielding commitment to the comfort and safety of our customers is what gets us most excited about the road ahead as we welcome the Noralta and Louisiana teams to the Civeo family. On behalf of the entire management team, thank you for all that you do.

With that, I'll turn the call over for questions.

(Operator Instructions) We'll go first to Blake Hancock with Howard Weil.

Bradley, let's -- starting in Canada here, obviously, there were some drags in 1Q you called out. 2Q looks to be progressing nicely, not only just from a top line but also the margins. Can you kind of help us think about the back half of the year? Do we have visibilities to further turnaround work? And then maybe talk about some of the pipelines and how Noralta can help you fit into that with some of their First Nation relationships.

Sure. So as we look at the back half of the year, there are additional turnaround work that has not been awarded yet that is currently the market. So we could see some additional turnaround work in 3Q. As you'll recall, most of the Canadian turnaround work is done in the second and third quarters of the year.

As we look out on the mobile camp side -- let me back up. That turnaround work and our combined portfolio with Noralta does give us a very good position to serve our customers. We have a multitude of location options that can be closer to their projects where we can maximize and optimize our own occupancy to then, hopefully, drive more efficiency and, therefore, margins. Certainly, our combined First Nation relationships in the Oil Sands region help us serve our stakeholders and present a united force to the customer base.

In terms of the pipeline work, that's mostly going to be done by our mobile camp fleet. We're in active decisions with customers on that. We have put some mobile camp work progressing throughout the year. Not all of that has been contracted yet. We do expect that our performance will be much better than it was on the contract we had in the first quarter. So we should see sequentially improving results throughout the year out of the Canadian business, with the question mark really being, as we led off with that, how much turnaround work is there going to be in the third quarter.

That's great. And then I think I heard you right on Australia, saying you might have some pricing opportunities in the back half of the year. Is that -- I don't know, is that more optimism right now? Or are there actually projects out there that you can see that actually could be accretive here and really help push the second half, or more so 2019?

Well, it's been a combination of things. I think the team has done a very good job there of holding pricing through the downturn. And what we're seeing now is customers very focused on committing to a base, as I think we've talked about on previous calls. Committing to a base load of rooms and then flexing up on a shorter-term basis as their needs ebb and flow, again, tied to this maintenance work and some of the preliminary, I guess, feed-type engineering on growth projects.

And so some of that flexing up has 2 impacts to us. One, shorter-term occupancy is at higher prices; and then -- but it has the negative piece of it that shorter-term occupancy generally carries higher cost because we're having to react on a shorter-term basis and we can't be as efficient. So it's a little bit of a double-edged sword, but I do expect that the base level of pricing will continue to move forward. Rough order of magnitude, what we're looking for is maybe a couple dollars per night as we -- at -- by the end of the year. But yes, it would set up for a better '18 -- I mean, I'm sorry, a better '19.

Perfect. One for you, Frank. Now that Noralta is done, I guess, pro forma net debt to EBITDA is somewhere, based on this year's guidance, around 4x. Where are you comfortable? Where would you like to see that migrate to, just given kind of the expansion of the business here?

Yes, I mean, as we've kind of -- as we've said and as we've kind of worked through it, I mean, we -- on a pro forma basis, if you look at it right at the end of March, and we're allowed under the credit agreement be pro forma in the last 12 months of the earnings of Noralta, we're just under 3.5x times, which is, I think, where we kind of said we were going to be when we released the -- told the market about the transaction. If -- just doing nothing, you very quickly, as you work into 2019, get close to 2x levered. And we've always said we want to get under that. We want to get to that 1.5x so that when you go to through periods that are more difficult, you've got room to move up, per se, because of your EBITDA coming down. So I think this transaction really gives us the ability to really start driving that leverage ratio down, and we'll do it very quickly.

Okay. We'll go next to Stephen Gengaro with Stifel.

Two things, if you don't mind. One is, when I think about what you have done over the last couple of years on the kind of efficiency and cost savings side for your legacy business, and then I sort of look at the size of Noralta and the -- I was just curious, as the cost synergies go, how should we think about them over the next several quarters, and kind of you realizing those? And how much have they done? Or relative to what you guys had achieved on the cost-cutting side, which can get you to those numbers or higher. So how should we -- how do you think this plays out over the next couple of quarters?

Well, we're moving, I think, carefully but quickly to implement the synergies that we previously identified, and then, obviously, as we get into operating the business, additional synergies. So we're working quickly to do that. We'll get some benefit in -- there is some benefit baked in to the 2Q guidance. There's -- obviously, that'll be increasing in Q3 and then increasing in Q4, such that we do believe the Q4 -- and the Q4 guidance -- implicit Q4 guidance has an annual run rate of synergies of the CAD 10 million.

Now we are going through -- there is going to be the offset of the higher labor costs at Noralta. As we announced, they were under -- have agreed -- are in the process of agreeing to a collective bargaining agreement. We're working with the union to negotiate that. But we also think that while we're still working through synergies that we're optimistic, we can beat the $10 million number.

And don't forget, we put funds -- there's funds in escrow related to that increased cost that we'll be able to call back once we get the agreement negotiated with the Local 47.

Okay. And then, also, as when we think about the West Coast of Canada, what's going on there that you can tell us as far as I thought there may have been some early occupancy for some additional sort of early-stage analysis by the potential customers out there. Can you kind of give us an update what's happening at Sitka?

Well, I would say that it's been a -- so it's primarily related to the LNG Canada project, which is taking North Eastern BC gas in a new pipeline, called the Coastal GasLink pipeline, across the province to a town called Kitimat. We have the Sitka lodge in Kitimat that has previously served the projects when they were -- before the current delay. And we have been -- our bid teams have been actively engaged with both the project sponsor, Shell, directly with their bidding EPC contractors and then with the pipeline contractors for the mobile camps for the pipeline. We're still in that process. We've not heard anything different than what the -- what has been out there in the public, which is, hopefully, a positive FID later this year. There's certainly been some comments by others that -- about their speculation on that, but we're not in a position to speculate at this point.

We'll go next to Ben Owens with RBC Capital Markets.

Just I wanted to go back to the initial 2018 guidance you gave back in February for EBITDA of flat to slightly up year-over-year. Now that you've layered in the 2 acquisitions to your 2018 guidance, just wanted to know if you've made any changes to that baseline assumption for a flat to up EBITDA, excluding the Noralta and Lake Charles acquisitions?

Well, I think there are probably a couple of pieces to it. One, obviously, as we talked about, we underperformed predominantly in Canada in Q1. So some of it is now, I guess, in the Q1 actuals. Other than that, that's the largest piece. I think one thing to note relative to why we hadn't given any guidance with Noralta is that our guidance does bake in the higher labor costs related to their unionization, which is material. So we'll -- we have to get that negotiation done. But I'd say, predominantly -- in our guidance on a Civeo stand-alone basis or excluding the acquisitions, it's predominantly the first quarter weakness.

Okay. Could you tell us how much that mobile camp contract that underperformed impacted EBITDA in the first quarter?

About $1 million -- about CAD 1 million.

Okay, that's helpful. And then you -- last question for me. Is any of the increase in the full year Capex guidance related to any spend on the recently acquired Lake Charles facility?

No.

No. No, it's really just the addition of Noralta. There'll be some spending in Lake Charles, but it won't be material.

We bought a tractor.

And 2 golf carts.

And 2 golf carts, yes. So not really significant.

Okay. we'll go next to Mike Malouf with Craig-Hallum Capital Group.

If we could just start on -- as we look at Australia, can you give us a little bit of color on some of the feedback you're getting? The price has obviously been up for a while now. And as I look back on your results, when you were doing close to $40 million a quarter, $38 million to $42 million kind of range, you were doing 50% margins. And I'm just wondering if that's -- if those margins are attainable if you were to get a ramp back up to those kind of numbers.

Mike, I think it's a very good question. I think as we have alluded to on the last call and alluded to on this call as well, we do expect Australia to sequentially continue to improve. Now one thing that we are pursuing in that region as well is the integrated service model where we operate other -- our customers' assets. Now that's good business. It expands the portion of market that we can attack, and -- but it does carry a lower margin. So if you look at lodge margins, I do expect them to improve as occupancy improves. The mix issue will be, how much of the integrated services work is in there, which may kind of confuse, if you will, the regional margins.

Okay, that's helpful. And then maybe a little commentary on some of the feedback you're getting from the area. It sounds like prices continue to be pretty robust, and I'm just wondering if you can give us a little color on any kind of expansion plans or growth plans over there.

Well, I think the good news is that we have high-quality assets in good locations. So as the need for rooms increases, I think we're in a very good, competitive position. So I don't expect, other than maybe in 1 selected case, we would need additional capital -- material additional capital to expand the business, that it would just organically improve with occupancy. So I would say feedback from customers has been good. As we mentioned in the comments, it is now on a shorter-term basis. But we're starting to see maybe some additional interest in looking at longer-term deals and for greater amounts of rooms, but it hasn't come to fruition quite yet.

Yes, the attitude and the vibe is really good, and the interaction with clients is very active. We're just waiting, really, for them to start committing to the rooms.

Okay. And when you get those commitments, those will be announceable events?

Depending on size.

Yes. Yes, according to size.

Depending on size. Certainly mentioned on an earnings call, but may not be independently announced, unless they are material.

And this does conclude our question-and-answer session. I'll turn the call back over to Bradley for any additional or closing remarks.

Thank you all for joining us today. We appreciate your interest, and we look forward to speaking to you on the second quarter earnings call. Thank you.

Thank you.

And this does conclude today's call. We thank you for your participation. You may now disconnect.