Civeo Corp (CVEO) 2018 Q4 法說會逐字稿

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

At this time, I would like to turn the conference over to Regan Nielsen, manager of corporate development and investor relations. Please go ahead.

Thank you, and welcome to Civeo's fourth quarter and full year 2018 earnings conference call. Today, our call will be led by Bradley Dodson, Civeo's president and chief executive officer; and Frank Steininger, executive 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 over the call to Bradley.

Thank you, Regan, and thank you all for joining us today on our fourth quarter earnings conference call.

I'll begin with an overview of our fourth quarter performance and highlights before offering some commentary on our 3 business segments. Frank will then provide a detailed financial and segment-level review, and I'll conclude with our updated guidance before we move to the Q&A portion of the call.

We made good progress in the fourth quarter, which was highlighted by strong performance in the Australian and the U.S. segments, new contracts in Canada and Australia, and another quarter of debt reduction. During the fourth quarter of 2018, we generated revenues of $114.5 million, an increase from $101.3 million year-over-year, to $19.9 million in adjusted EBITDA, up from $13.3 million. Revenue was in line with expectations, and adjusted EBITDA results were at the upper end of our guidance for the fourth quarter. Turning to our cash flow and debt reduction, we generated $28.5 million in operating cash flow and $21.9 million in free cash flow, both more than double our cash flow generation from the fourth quarter of 2017, and we also repaid $22.9 million of debt during the quarter.

As you likely saw in our press release, we announced multiple contract awards during the fourth quarter. At our Sitka Lodge, we secured an 18-month room commitment from LNG Canada, bringing our total LNG-related contracted revenues to approximately CAD 170 million, which extends through 2021. We are pleased to grow our partnership with the LNG Canada project and the local First Nation and will continue to pursue other LNG-related opportunities, including the possible further extension of our Sitka Lodge in Kitimat, beyond the previously announced expansion, to 1,100 rooms. We view the development of Canadian LNG as a significant driver of growth for our Canadian business over the next couple years.

In addition to the LNG-related contract awards, we continued to win work at our current lodges while expanding our hospitality services to customer-owned facilities. In the first quarter of 2019, we secured 2 additional contract awards totaling approximately $90 million of revenues. This includes a contract renewal at our Boggabri and Narrabri Villages in Australia and a hospitality services contract to operate a 1,500-room facility for an oil sands operator in Canada. We are particularly pleased with this hospitality award, which further validates our strategy to expand Civeo's service offering to key customers in our core end markets.

Now let me take a minute to walk through the performance across each of our segments. We've experienced a slower-than-expected quarter in Canada, impacted by extended holiday downtime, which led to lower-than-expected room nights. These challenges were partially offset by a strong performance at our McClelland Lake and Wapasus Lodges, which exceeded our expectations. We are also very pleased with the continued integration of the Noralta assets, and we are confident that we'll meet our goal of CAD 10 million in synergies for the full year 2019.

We are actively monitoring the implications of the provincially-imposed oil production curtailments on Canadian oil sands producers and their activity and will manage our business accordingly. While policy decisions can negatively impact our performance in Canada in the first quarter of 2019, we do not believe that this issue will persist through all of 2019.

Shifting to Australia, the fourth quarter benchmark met coal prices settled about to above $220 per ton, which supported solid seasonal occupancy, particularly given the usual holiday downtime. Supply disruptions from exporting producers in Australia and the United States and domestic producers in China underpin a robust business environment during the fourth quarter. And although the supply met coal prices are expected to drift modestly lower during 2019 due to the supply growth and anticipated demand moderation in China, the environment should remain very conducive to additional capital project spending from our major customers. In fact, we expect that business to continue to generate improving occupancy throughout 2019.

Lastly, moving to the U.S. segment, it continues to generate positive adjusted EBITDA, benefitting from an offshore fabrication project in the fourth quarter. We will continue to monitor market conditions in the U.S., but we expect continued improvement in the financial performance of this business in fiscal 2019, particularly as the segment no longer is burdened by the wellsite mobilization costs we experienced in 2018.

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

Thank you, Bradley, and thanks, everyone, for joining us this morning.

I'll start off with a review of our fourth quarter results by segment before moving into the full year. Today, we reported total revenues in the 2018 fourth quarter of $114.5 million, with a net loss on a GAAP basis of $12.8 million, or $0.08 per diluted share. During the fourth quarter, we generated adjusted EBITDA of $19.9 million, operating cash flow of $28.5 million, and free cash flow of $21.9 million.

Turning to the fourth quarter results for our segments, I'll begin with a review of the Canadian segment performance compared to the prior quarter. Revenues from our Canadian segment were $69.4 million, decreasing from $76.8 million in the third quarter. Revenues for the quarter were impacted by slowdown around the holiday season and turnaround activity in the Canadian oil sands rolling off, as well as an unfavorable impact from foreign exchange. Adjusted EBITDA in Canada was $11.8 million, down from $16.5 million in the third quarter, driven by the items I just mentioned.

During the fourth quarter, build rooms in our Canadian lodges totaled 687,217, down 16% sequentially, impacted by the aforementioned dynamics. Our daily room rate for the Canadian segment in U.S. dollars was $91, compared to $89 in the third quarter, and this was driven by increasing occupancy at our Sitka Lodge in British Columbia, supporting the LNG project.

Turning to Australia, during the fourth quarter, we recorded revenues of $29.7 million, down slightly from $31.1 million in the third quarter, primarily driven by a lower average daily rate resulting from less casual room use rentals. Adjusted EBITDA was $11.7 million, down sequentially from $12.4 million. The average daily room rate for our Australian villages in U.S. dollars decreased to $74 in the fourth quarter, compared to $77 in the third quarter. Village room nights remained relatively flat sequentially at just over 397,000.

Now moving to the U.S., revenues for the fourth quarter increased sequentially from $12.6 million to $15.5 million, primarily driven by a large offshore fabrication project. We continued to experience relatively healthy market conditions, driven by stable drilling and completion activity in the Permian and Mid-Con. Adjusted EBITDA in the U.S. decreased to $1.9 million, from $2.4 million in the third quarter. This decrease was driven by holiday seasonality, lower wellsite EBITDA and increased SG&A.

For the full year ended December 31, 2018, the company reported revenues of $466.7 million, a net loss of $130.8 million, or $0.83 per share. We generated $54.4 million in operating cash flow, $43.1 million in free cash flow, and $76.8 million in adjusted EBITDA. These results, compared to full year 2017 results, with reported revenue of $382.3 million, a net loss of $105.7 million, or $0.82 per share. During the prior period, the company generated $56.8 million in operating cash flow, $47.5 million in free cash flow, and $63.2 million in adjusted EBITDA.

Now I will comment on capital expenditures and our current liquidity position. During the fourth quarter, we invested $8.4 million in CapEx, up from $2.7 million in the third quarter, and a total for the year of $17.1 million of capital expenditures, compared to $11.2 million in 2017.

Our total outstanding debt as of December 31, 2018, was $379.2 million, a $43.9 million decrease since September 30, 2018. The decrease resulted primarily from debt repayments of $22.9 million from cash flow generated by the business and foreign currency translation.

As of December 31, 2018, we had total liquidity of approximately $102.7 million, consisting of $90.3 million available under our revolving credit facilities and $12.4 million of cash on hand. Looking ahead, we continue to focus on generating free cash flow and de-levering our balance sheet.

I will now turn the call back over to Bradley, who will provide some closing comments and talk about our guidance for the first quarter and full year of 2019. Bradley?

Thank you, Frank.

I'll start with an overview of the factors that will impact our first quarter and full year 2019 and then provide our financial guidance before opening this call for Q&A.

The start of 2019 thus far has been punctuated by oil price uncertainty; and continued global trade strife; and political as well as regulatory uncertainty in each of the U.S., Canada, and Australia. These exogenous forces could negatively impact the global supply-demand dynamics for oil or met coal, the commodity prices for those, and ultimately our customers' willingness to spend money and remain active in our major markets. With this backdrop, we have modestly reduced our full year 2019 guidance from that given on the third quarter earnings call.

In Canada, the cadence of work in oil sands region should pick up after the slow start to the year, after the holidays, and what we believe will be a temporary Alberta oil production curtailment. We expect this early weakness in Canada to impact both the first quarter results for the region and our consolidated results.

For the balance of 2019, we expect a relatively normal turnaround schedule for the second and third quarter of '19 in Canada. However, this activity in our core Canadian oil sands market could be negatively impacted by further government intervention or future downward pressure on WTI or WCS oil prices. Our guidance includes uncontracted turnaround work in the second and third quarters, as well as normal activity levels in the oil sands regions for the second half of 2019.

As we progress through the year, we expect to benefit from accelerating contributions from the LNG Canada and Coastal GasLink contracts, particularly as we move into the back half of 2019. Taking into account the softness in the first quarter, we expect Canadian room nights for the full year to be modestly down year-over-year, and adjusted EBITDA year-over-year to increase 10% to 15% from 2018.

The outlook for Australia remains constructive for 2019. Met coal and iron ore prices are supportive of robust cash flows for our clients, which should cause them to continue to pursue potential expansion projects which have been absent from the Bowen Basin and Gunnedah Basins for several years. We anticipate 2019 likely will be our year of transition in Australia to a substantially healthier environment.

In preparation for this ramp-up in activity, we are selectively allocating capital to refurbish and upgrade rooms for which we anticipate increased demand for 2019 and beyond. We expect continued improvement in occupancy, primarily through our Bowen Basin locations, generating year-over-year increase in build rooms of approximately 10%, which should largely translate to corresponding year-over-year growth in EBITDA.

Moving to the U.S., while we keep an eye on drilling completion activity in the Permian and Mid-Con markets, we're encouraged by the prospects for our U.S. business in 2019. Our guidance for the full year of 2019 in the U.S. is predicated on activity in the Permian and Mid-Cons to remain relatively close to where that is today. The optimization of our wellsite footprint, where we have the assets, will be a key driver of our growth throughout the year. In total for our U.S. segment, we expect its EBITDA to double year-over-year.

Our team understands that we cannot control commodity price and cyclicality and other exogenous forces. As such, we continue to focus on our strategic priorities-- executing on work we've won, generate free cash flow, improve the balance sheet by paying down debt, investing in high-returning opportunities in each of our 3 segments, expanding our service offerings, and lastly, continue to provide the best in class hospitality while serving as a trusted partner to all of our stakeholders.

In terms of guidance for the first quarter of 2019, we expect revenues of $105 million to $110 million and adjusted EBITDA of $13 million to $16 million. For the full year of 2019, we expect revenues of $470 million to $490 million, adjusted EBITDA of $95 million to $105 million, guiding to a 24% to 37% increase in adjusted EBITDA from the full year results of 2018. Lastly, we expect full year 2019 CapEx to be in the range of $40 million to $45 million.

In conclusion, as we begin 2019, we believe it'll be another year of positive transition for the company. We feel that our recent contract awards emphasize our strategy of winning work at our current lodges, expanding our hospitality service platform to customer-run facilities, and securing other work in other end markets, such as Canadian LNG.

The team is acutely focused on executing our work in a safe and efficient manner with unmatched service to our customers. We continue to pursue the highest financial return for investment opportunities and allocate capital prudently, with the goal of maximizing free cash flow and reducing debt. With that, we'd like to turn it over for questions.

(Operator Instructions) We'll take our first question from Stephen Gengaro of Stifel.

I guess a couple things, to just start with. When you're looking at your utilization levels and room rate expectations over the course of 2019 versus '18, any guidance on how we should think about that in Canada and in Australia?

Sure. Let's start in Canada. For the full year 2018, in U.S. dollars -- or I'm sorry, in Canadian dollars, I think we ended up around CAD 115 a room night. Now, with the mix of rooms and the occupancy as we go into 2019, I think that'll be modestly up a couple bucks here or there. And yes, as we mentioned, we think room nights, though, because of the softness we're seeing at the start in the Canadian oil sands region, will actually be modestly down in total '18 to '19, despite the ramp-up at Sitka. In Australia, we ended up in Australian dollars, I believe, around AUD102. We don't expect anything to change next year. The variable in Australia, much more of an impact than we see in Canada, can be our casual room usage. A lot of our customers will contract for a base level of rooms, which that base level will be priced at a -- largely will be take-or-pay and will be priced at a certain level. Typically mid- to high-AUD90s per room night in Australian dollars. Depending on how much they want to expand over that base level of rooms and the amount of time for advanced notice that we get on that, the prices can be higher than that. So presuming that the casual usage remains relatively consistent with what we've seen over the last 12 months, we think pricing is fairly flat year-over-year in Australia. Anything, Frank, you wanted to say?

No. No, that's exactly right, [build rooms] in Australia.

Build rooms in Australia I think we talked about, right? Up 10% --

Up 10%, yes.

-- year-over-year, which, with flat pricing, then gets us to the concept that we'll -- we think that will translate into year-over-year increase in EBITDA. Implicitly, then, margins are the same year-over-year in Australia. I think the dynamic there is that we'll have some food cost and labor cost inflation, and the team is expecting they'll be able to find efficiencies in order to fight that back and keep margins black year-over-year.

And then, as I think about the -- I guess two parts of this -- when you think about the cash generation, I mean, it sounds like if you used the midpoint of EBITDA at $40-ish million in CapEx and your interest costs, you're going to generate $20 million, $30 million in free cash. I assume that goes to debt pay-down. So just 2 questions. One is the CapEx, the non-maintenance portion, it sounds like it's going towards refurb room -- upgrading rooms in Australia plus projects around Canada. Is that right?

Go ahead, Frank.

Yes. So, I mean, I think if you look at where we are, I think we have about CAD 20 million or so, CAD 20 million to CAD 25 million, related to projects on the West Coast, increase in the room count in Sitka that we've talked about, and also some starting on the work on the Coastal GasLink. So that's really -- that number is really where the growth capital is for this coming year, and then the rest of it is really more or less maintenance --

Right.

-- with some room refurbs in Australia.

Yes. But that, in total, at least what we've got in the forecast right now, that might be a year-over-year change of USD 3 million to USD 5 million.

Exactly. Yes. Right.

So it's a good thing to -- we believe it's a good thing to get started. We see in some of our core Bowen Basin locations the potential need, let's say over the next 12 to 18 months, for increased occupancy if some of these growth projects move forward. And because we've had lower occupancy for several years now, some of the rooms need a little spit and polish, and so we're going to do some of that and get them refurbed so that we have blocks of rooms that are available. Because if some of these projects move forward, they won't need a handful of extra rooms. They could need 200, 400, 600 extra rooms. So we're trying to slowly prepare for that.

(Operator Instructions) We will now take our next question from Mike Malouf Craig-Hallum Capital Group.

One of the things that struck me on this quarter is it looks like you're getting some synergies coming through, especially on the SG&A line, and I'm just wondering if you could comment a little bit on that expense line and as you look into 2019. And then second of all, I have a question on the U.S. As we look at the gross profit margins in the U.S., that was down quite a bit sequentially. And maybe it was just because of the 1-time work that you were doing in the fourth quarter, but just a comment on the margins in the U.S. would be helpful. Thanks.

Do you want to start with the SG&A?

Sure. Yes. The SG&A for the quarter was impacted by 2 things. We had less impact from the standpoint of our annual bonus plans, because we didn't reach our target. And as you know, we've got phantom shares, and with the stock price decreasing, that impacted the expense related to the mark-to-market on those shares that are paid out in cash. So those are -- that's really the main driver from an SG&A standpoint.

Certainly from an SG&A standpoint, we made strides on the synergy part of it, and then the fourth quarter got the partial impact for finally being able to turn over the food procurement contract to a consolidated provider that provided some benefit to the Canadian lodges during the fourth quarter, and then, quite frankly, finishing up some final touches on some of the integration work. So made some progress, but to Frank's point, that was less of the impact on the SG&A. As it relates to U.S. margins, you nailed it, Mike, and that is that the offshore fabrication project was a good project for us. The team did a good job in terms of execution, both in terms of timing and delivery of that project in the fourth quarter. But those typically carry lower margins than the segment as a whole. And so with a change in the revenue mix, we saw that impact the segment margins in the quarter.

And then just a follow up. As you look out to 2019 with regards to Australia, obviously the met coal prices have remained pretty strong for a long time here, and I'm just wondering if you could give us some real-time anecdotal commentary on expansion over there and are you seeing some green shoots with regards to chatter. Thanks.

Sure. Well, as you'd mentioned and we've talked about on prior calls, really throughout the 2018 time period and now extending into 2019, it's been a nice, steady improvement, typically sequentially quarter-to-quarter in terms of occupancy and, therefore, profitability of our Australian segment. But also, implicit to your question, we haven't seen -- with constructive met coal prices, we haven't seen any large expansionary projects move forward. We're certainly watching some of the things that the BHP affiliates are doing in the Bowen Basin as well as what Whitehaven might do down in the Gunnedah. If either of those several projects move forward, or any of those several projects move forward, we expect to use existing locations. We're working to get those rooms ready, should any of those move forward. Also looking at some work for Fitzroy and Anglo as well. So it has been a good sequential improvement, but no step change in terms of the occupancy level, and that will largely be driven by any expansionary capital projects.

Frank, anything you --?

There's chatter, Mike, but we're waiting -- waiting for (inaudible) project.

Yes. That's -- I've been waiting too. So, okay, thanks a lot. Appreciate the help.

Well, I guess to that point, certainly the Boggabri and Narrabri contract extensions, which would foretell potentially some of those projects moving forward, but the base level of rooms that are contracted right now is fairly consistent with what we've had over the last 12 months. But getting those extended hopefully will then translate into those Gunnedah projects moving forward on an expansionary basis.

We will now take our next question from Stephen Gengaro of Stifel.

Just 2 follow-ups, if you don't mind, the first being obviously a slow start to the first -- to the year based on your guidance. As you look at the back half of '19 -- and, obviously, it sounds like there's going to be some of the West Coast Canadian guests, the LNG project impact there. As we think about '20 -- I know it's really early to think about '20, but is that back second half '19 run rate a reasonable place to start? Because I'm just thinking about '20 being a pretty strong cash generation year based on that, plus maybe a return to a more normalized maintenance CapEx level. Is that a reasonable way to think about it as the back half of '19 unfolds into '20?

I would think so. I mean, the biggest driver of second half '19 versus first half of '19 -- and Frank, jump in here -- is really what happens at Sitka. We expect that both our room count and our aggregate occupancy will continue to improve throughout Q1, Q2, into Q3, Q3 and Q4 being fairly consistent in terms of occupancy and revenue and EBITDA coming out of Sitka. That contract goes through the middle part of 2020. So presuming that they will still need rooms at Sitka and that it continues for the full year of 2020, then yes, that will be a tailwind or a positive year-over-year trend. We'll also have greater -- a lot greater input -- or revenue generation and EBITDA generation out of the Coastal GasLink projects.

Exactly.

You throw those factors in, you pull out maybe some holiday downtime if you want to take the fourth quarter and annualize it, and presuming the other markets stay relatively consistent, it should indicate a much better 2020. And to your point, while we'll have some Coastal GasLink CapEx in 2020, the free cash flow should be better because the Sitka CapEx will be behind us.

That's right.

And as you looked -- I look at 2018 as a benchmark, but it's maybe not a great place to compare '18 versus '19. But your EBITDA jumped significantly first quarter to second quarter in 2018, and obviously your '19 guidance suggests a strong second half, but is the ramp going to be seen materially in the second -- it almost has to be seen in the second quarter, I would assume, to get to the full year guidance. Is that fair?

Yes. I mean, we'll see a couple factors there. I'll talk about Canada, and Frank can talk about Australia. But Canada, it's going to be turnaround work.

That's exactly right.

And, yes, I think right now, we factored in a good second quarter turnaround. Last second quarter was a little messy, because of one of our customers having a power outage that impacted their overall activity and activity in the second quarter as a whole. Then on Australia --

The year starts out slow because of the Christmas holidays, and then that just continues to ramp up as we get into February and March, and that'll follow as we get into the second quarter.

And then just one final -- as you look at potential opportunities of expansion and you look at some of these logistics and catering projects, what does the environment look like for those type of deals right now?

If we're talking about inorganic growth around acquisitions, I would say that we've had a fairly steady pipeline of opportunities to look at. I would say that, as with anything, I think valuation is relatively manageable in terms of what the seller's expectations are relative to what our expectations might be, and then it's ultimately due diligence and trying to close the deal. So we remained active. Those are the areas we're looking at, in addition to looking at potentially some consolidating and property acquisitions predominantly in Australia and the U.S. But I would say that the market is relatively constructive.

It appears there are no further questions at this time. I would like to turn the conference back to your host for any additional or closing remarks.

Well, thank you all for joining us on the call today. We were pleased with how we ended off 2018. We know that we anticipated some slow start to 2019, and that is coming to -- appears to be correct. We do expect a much brighter outlook as we move throughout 2019 and look forward to talking to you about it on future conference calls.

This concludes today's call. Thank you for your participation. You may now disconnect.