Civeo Corp (CVEO) 2019 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Civeo Fourth Quarter 2019 Earnings Call. Please note, today's conference is being recorded.

At this time, I would like to turn the conference over to Regan Nielsen, Director, Corporate Development and Investor Relations. Please go ahead, sir.

Thank you, and welcome to Civeo's Fourth Quarter and Full Year 2019 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 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.

Thank you, Regan, and thank you all for joining us today on our fourth quarter earnings call. I'll begin with a summary of our fourth quarter performance. Carolyn will then provide a detailed financial and segment-level review, and I'll conclude by offering some commentary on our 3 business segments and providing our initial 2020 guidance before we move to the question-and-answer portion of the call.

The key takeaways from our call today are our focus on execution to deliver free cash flow and reduce debt. We delivered on that in the fourth quarter. In the fourth quarter, we generated adjusted EBITDA of $29.9 million, exceeding our expectations on a consolidated basis, and reduced our total debt by $34 million. Full year adjusted EBITDA and operating cash flow were both up 41% and 37%, respectively, compared to full year 2018 due to strong occupancy year-over-year at both our lodges and villages, coupled with full year contribution from the Noralta acquisition and 6 months of contribution from the Action acquisition.

Fourth quarter adjusted EBITDA was better than expected and stronger year-over-year. Strong fourth quarter occupancy in both Canada and Australia, which exceeded our expectations in the prior year, coupled with strong performance from the Action business and our Sitka Lodge, generated robust EBITDA and cash flow for the quarter. The increased occupancy in our oil sands lodges and Australian Bowen Basin villages was driven by continued strong turnaround and maintenance activity in both regions.

It's important to note that we significantly reduced our leverage ratio to under 3x at year-end from 3.52x as of September 30, 2019. Less than 50% of our full year 2019 gross profit stems from oil-related activity, with the majority of that oil-related profits coming from the Canadian oil sands. Our Canadian oil sands occupancy is relatively stable, backed by multiyear contracts and customer resource life measured in decades.

Lastly, we expect to deliver free cash flow in 2020 of approximately $60 million and continue to reduce our leverage further. We'll provide further details on our initial outlook and the first quarter and full year guidance in a few minutes.

During the fourth quarter of 2019, Civeo generated revenues of $148.7 million, a 30% increase from $114.5 million in the fourth quarter of 2018; adjusted EBITDA of $29.9 million versus $19.9 million in 2018; operating cash flow was $41 million. We reported a net loss of $32 million compared to a net loss of $14 million in the fourth quarter of 2018.

Turning to our balance sheet. The robust operating free cash flow from our business generated in the fourth quarter facilitated a reduction of $34 million in debt during the quarter, reducing our leverage ratio, again, to 2.98x from 3.52x in -- as of September 30, 2019.

With that, I'll turn the call over to Carolyn for a detailed review of our financial performance.

Thank you, Bradley, and thank you all for joining us this morning. I'll begin with a review of the consolidated performance compared to the prior quarter before providing more detail on our 3 business segments.

Today, we reported total revenues in the fourth quarter of $148.7 million, with a net loss on a GAAP basis of $32.1 million or $0.19 per share. This compares to third quarter revenues of $148.2 million, with net income on a GAAP basis of $4.5 million or $0.02 per share.

During the fourth quarter, we generated adjusted EBITDA of $29.9 million, operating cash flow of $41 million and free cash flow of $37.1 million. This compares to third quarter adjusted EBITDA of $36.2 million, operating cash flow of $23.6 million and free cash flow of $20.3 million.

Moving to our segment review. Revenue from our Canada segment was $89.7 million, which was a slight decrease compared to revenues of $91.1 million in the third quarter of 2019. Adjusted EBITDA was $20.9 million, a decrease from $25 million in the third quarter of 2019. Revenues and adjusted EBITDA for the quarter were impacted by seasonal holiday downtime as well as the roll-off of fall turnaround activity.

During the fourth quarter, billed rooms in our Canadian lodges totaled 837,000, which was down sequentially from 876,000 in the third quarter, due to the holiday slowdown and turnaround activity I just mentioned. Our daily run rate for the Canadian segment in U.S. dollars was $92 compared to $91 in the third quarter.

Turning to Australia. During the fourth quarter, we recorded revenues of $48.9 million, which was up from $47.7 million in the third quarter due to continued improvement in our customer maintenance activity in -- primarily in the Bowen Basin. Adjusted EBITDA was $15.7 million, down sequentially from $17.2 million, primarily due to a third quarter gain on sale of $2.5 million related to the sale of our Calliope village.

Billed rooms in the quarter were 463,000, up from 455,000 in the third quarter due to the aforementioned drivers. The average daily rate for our Australian villages was USD 72 in the fourth quarter, down slightly sequentially from USD 73, reflecting a weakened Australian dollar during the quarter.

Moving to the U.S. Revenues for the fourth quarter were $10 million, which were up $9.3 million in the -- from the third quarter. The U.S. segment saw an adjusted EBITDA loss of $0.2 million in the fourth quarter, down from income of $0.3 million in the third quarter. This decline was largely due to subdued customer drilling and completion activity, which negatively impacted our wellsite services business, partially offset by lower margin offshore fabrication revenue.

On a consolidated basis, capital expenditures were $4.3 million in the fourth quarter, flat sequentially. Our total debt outstanding on December 31 was $359.1 million, which was a $34.5 million decrease since September 30. The reduction resulted primarily from debt repayments of $41.9 million from cash flow generated by the business, partially offset by negative foreign currency translation movement of $7.4 million. As Bradley mentioned, our leverage ratio for the quarter decreased from 3.52x as of September 30, 2019, to 2.98x as of December 31, 2019. And as of December 31, we had total liquidity of approximately $124.1 million, which consists of $120.8 million available under our revolving credit facilities and $3.3 million of cash on hand.

As we look towards the rest of the year and into 2020, we are continuing to focus on generating free cash flow and reducing our aggregate leverage, while monitoring the capital markets for opportunities to term out our current debt.

Bradley will now provide some additional commentary on the performance of our 3 segments. Bradley?

Thank you, Carolyn. Carolyn just walked through our sequential performance. I'd like to take a moment and highlight the progress we've made on a year-over-year basis due to the seasonality in both our Canadian and Australian businesses.

Our business in Canada finished the year on a high note, generating revenues of just under $90 million and adjusted EBITDA of $20.9 million compared to $69.4 million of revenues and $11.3 million of EBITDA from the fourth quarter of 2018. The impressive year-over-year revenue increase in our business was driven by a 22% uplift in room nights related to robust turnaround activity and occupancy for LNG-related work at our Sitka Lodge. Our team has done a commendable job managing costs in our supply chain demand to enhance customers' experience while maintaining strong profitability.

Turning to Australia. Our team delivered another outstanding quarter. In the fourth quarter, Australian segment generated revenues of $48.9 million and adjusted EBITDA of $15.7 million versus revenues of $29.7 million and adjusted EBITDA of $11.8 million in the fourth quarter of 2018. Strong customer maintenance activity in the Bowen Basin and the contribution from the Action Catering acquisition drove the substantial year-over-year improvements in revenues and adjusted EBITDA.

Our business in the U.S. continued with muted customer drilling and completion spending during the fourth quarter of 2019 and the roll-off of a contracted Canadian acres earlier in the year posed as an additional year-over-year headwind. U.S. segment generated revenues of $10 million and adjusted EBITDA loss of $200,000 in the fourth quarter of 2019 compared to revenues of $15.5 million and adjusted EBITDA of $1.9 million in the fourth quarter of 2018. We are encouraged by our strong fourth quarter and look to continue this positive momentum as we move into 2020.

I'll now provide initial commentary and guidance for the first quarter and full year of 2020 before we move to Q&A. Assuming that issues like the coronavirus and climate change do not materially negatively impact the global economy and therefore, the demand for commodities, the overall outlook for our business in 2020 remains constructive, based on the growing contributions from LNG activity in Canada and steady turnaround work also in Canada, coupled with continued improvement in Australian activity. The primary headwinds we envisioned in 2020 stem from U.S. oil and gas capital spending constraints.

I'll reiterate the strategic mandate that will remain our top priorities in 2020. We will continue to execute through high customer service and cost control and capital discipline, focusing on maximizing free cash flow and using that cash to reduce our leverage. We will monitor the capital markets for an opportunity to term out our debt and continue to look for ways to enhance our best-in-class service quality. We will also continue to operate as responsible citizens and trusted partners in our communities and be responsive to our key stakeholders. We believe these priorities present the clearest path to creating long-term shareholder value.

Our business is off to a solid start in 2020, despite some of the notable uncertainties in our core end markets. In Australia, the macroeconomic environment in metals and mining complex remains very constructive. Met coal prices are forecast to remain above $150 per metric ton this year. And as a result, our customers are generating healthy cash flows, and we expect that maintenance activity will remain strong as 2020 progresses.

Although we do not see any customers greenlight any meaningful capital to growth projects in the mining space, we are tracking a few opportunities that could come to fruition in 2020, and we will remain watchful for any indicators of softening met coal or iron ore demand from Asia.

In Canada, it's been a very busy January, as customers have accelerated some turnaround activity that typically were incurred later in the year. As such, the seasonal cadence of revenue and EBITDA generation from our oil sands business might deviate somewhat from historical norms, but we'll keep you updated as 2020 progresses. With our Sitka Lodge currently at relatively full occupancy levels, our LNG-related work should continue to be at a steady pace this year.

The initial 2020 prognosis for the U.S. upstream oil and gas bidding is subdued due to the industry's heightened progress on capital efficiency and the recent drop in crude prices. With the outlook in the U.S. being considerably less constructive than our other regions, our team will be focusing on controlling costs and other interesting opportunities to generate occupancy that are less reliant on upstream budgets. Accordingly, our focus will be on operating efficiently and capturing occupancy-related projects downstream from the low end.

For the first quarter of 2020, we expect consolidated revenues of $139.5 million to $143.5 million and adjusted EBITDA of between $20 million and $22 million. For the full year of 2020, we are projecting consolidated revenues of $560 million to $576 million and adjusted EBITDA of $100 million to $108 million. When compared to our 2019 results, our full year 2020 guidance contemplates another strong year of occupancy in Canada, along with increased occupancy in Australia. These are tempered by impacts of weakness in both the Canadian and Australian dollars relative to U.S. dollars as well as gains recognized in 2019 related to $2.6 million of income associated with insurance claim and $2.5 million related to the gain on the sale of Calliope village that Carolyn mentioned earlier, and these won't reoccur in 2020.

We have consistently reiterated our focus on generating free cash flow in recent years. I'm pleased to report that 2019 was the sixth consecutive year that Civeo delivered positive free cash flow for our shareholders. In our view, these results speak to the benefits of our diversified end market exposure, which minimizes our reliance on any one region or commodity, and our focus on being responsible stewards of capital as we continue to look for ways to grow and enhance our business.

With the market's focus on free cash flow, we'd like to go ahead and walk you through what we see as the free cash flow for 2020. Starting with the midpoint of our initial 2020 adjusted EBITDA guidance range of $104 million. We anticipate cash interest expense of approximately $20 million. We don't expect to pay any cash taxes. We are forecasting a $4 million use of working capital. And then using the midpoint of our full year CapEx guidance of $18 million to $22 million, we ultimately arrive at free cash flow of approximately $60 million.

With this amount of free cash flow, we expect to reduce debt meaningfully from the initial starting total debt balance of $359 million. So we expect debt to go down meaningfully in 2020. As we navigate the macro cross-currents that 2020 may present, we will stand by our commitments to generate cash, reduce debt, deploy capital prudently and continue the focus on operational excellence and stakeholder engagement.

Finally, I'd like to take a moment to recognize our employees around the globe for their continued dedication and professionalism. It is their focus on safety and customer service on a daily basis that has made and will continue to make Civeo successful. On behalf of the Civeo management team and Board of Directors, I'd like to thank you all for all that you do.

Lastly, I'd like to thank Frank Steininger for his service as our CFO for the last 6 years. His contributions to the company have been tremendous, and welcome Carolyn into her new role as CFO.

With that, we're happy to take questions.

(Operator Instructions) Our first question today will come from Stephen Gengaro with Stifel.

We're going to miss you, Frank. The -- one of the things, Bradley, when you look at the business in aggregate, there has been, I think, a pretty good level of consistency to the -- just clearly EBITDA and the free cash flow. As we look at 2020, and obviously, you provided some guidance when you sort of strip out some onetime items that's flat to up a bit year-over-year, where are the puts and takes as we look at 2020? Because you seem to have a pretty good level of confidence based on prior guidance and you've given full year guidance at the beginning of the year, the last couple of years. Where do you think things move around as you go through 2020 that could be either positive or negative to expectations?

Well, thanks, Stephen. Let's start with Canada. We are -- we feel pretty good about the turnaround activity as we see it today, but we'll have to see how that plays out. We have good customer relationships. So if the customers move forward with turnarounds, we feel good we'll capture that occupancy. It will depend both on the magnitude and the length of those turnarounds, depend on how they'll compare against next year. We feel better about them. They'll likely be slightly lower than 2019 in aggregate. But relative to the way we felt, let's say, 90 or 120 days ago, it feels more constructive than it did back then.

We feel like the LNG activity is going to be fairly good this year, both at our Sitka Lodge, and then we'll have to see how the CGL pipeline moves forward. We've got some camps that will support that. But obviously, it's been fairly public. There've been some delays related to those pipelines.

In Australia, I would say the atmosphere feels very good. We've got good activity starting off the year, much better than we did last year, and that's reflected in our guidance. But people came back to work quicker than certainly we saw in January and February of 2019. We certainly need that activity to continue to strengthen, and we'll see if any of the mining growth projects get greenlighted. But at this point, whether the growth projects get greenlighted or not, we expect that our occupancy in Australia will be up year-over-year.

We're facing a little bit of currency headwind in Australia. I don't know, I'm sure everyone has watched the currency movement, but the Aussie dollar has been fairly weak over the last 60 days. Now I have read some thesis that said that seasonally the Australian dollar is weak in January, February and then tends to recover in sort of March, April, May time frame. If that happens, then we should be back in the position that will show good growth in Australia.

The U.S. is going to be a tough market. But the team has done a really good job of maintaining customer relationships, building new customer relationships. So our expectation is we can remain profitable in the U.S. It will certainly be down from an EBITDA perspective year-over-year. But I think the team has done a really good job of maintaining utilization and occupancy there. And it's been a fairly good start to the year on the occupancy side at our West Texas and North Dakota lodge locations.

So that's kind of where we feel like things are. We like the performance that we have. We had a very strong ending to 2019. And as I mentioned in our prepared comments, you kind of strip out the onetime items in the '19 numbers, then the EBITDA in 2020 is flat to slightly up. I would say that we've got more upside as we stand today in Australia than we do in Canada. And that's consistent with where those commodities are. Met coal prices are very constructive in the kind of $150 a tonne range and our customer costs are in the $70 range, so they're making good free cash flow there. We have to be mindful of what happens to the Asian economies, and what happens to steel demand because ultimately, that will fall through to met coal.

As it relates to Canada, we've got good contracts in place. And so while oil prices have been quite volatile and certainly have had a downward trend here in the last few days, that oil sands activity is much more resilient in these oil price environments than, let's say, U.S. land activity.

So overall, we feel, today, pretty good about 2020. We've tried to be very clear about what we're focused on, which is executing, delivering profitability, using that to generate free cash flow and further reduce debt. We feel like the strides we've made in the last 6 months, taking the leverage ratio from over 4x to under 3x with a pathway to reduce it even further in 2020, has been -- makes us a very good credit profile than we were 6 or 9 months ago.

Great. And a couple other things. One, I think you -- when you took control of Action, I think it was mid-2019, can you give us just an update on the progress of Action and how that has gone so far? I think it increased your exposure on the other side of Canada. And just kind of what's the status of that transaction? And how has that integration gone?

Sure. So we acquired Action at the beginning of July of 2019. They provide integrated services to the Western Australian mining industry, predominantly iron ore customers but also lithium and gold and other mining companies there. To put it in perspective, we do 1.7 million room nights in our legacy business approximately. They do 900,000 room nights. So it's a substantial increase in our volumes there.

The first 6 months were very strong for Action. We were expecting to do closer to AUD 2 million of EBITDA in the first 6 months, and we did closer to AUD 4 million. And those are in Australian dollar terms. And that was a combination of new contract wins and expansion to existing contracts. So far, it's played out well. Integration is largely complete on an operational basis. We'll be going through the administrative integration here in the first quarter of this year, predominantly kind of back office and finance functions that we needed to get a handle on before we transition them to the Civeo systems.

So overall, we've been very pleased with it. We were targeting an EBITDA multiple in the 4x range -- 4 to 5x range. We expect, based on budget, it will be at least less than 3x and maybe trending towards 2x.

Great. And then just finally, I mean, it sounds like your target free cash, your -- I think your leverage ratio could end 2020 closer to 2.5x. Is that -- are we thinking about that right?

Yes. I don't know if we'll get completely to 2.5x, but we're certainly expecting to get under 2.75, 2.7x levered with the free cash flow.

(Operator Instructions) Our next question will come from Kurt Hallead with RBC.

Frank, have fun in retirement, been a pleasure dealing with you. So in terms of the -- Bradley, in terms of the dynamics of potentially refinancing and getting some longer-term debt on to the balance sheet, it looks like you have a very strong story to tell to a number of different banks here and free cash flow and your leverage ratio coming down. How are the credit markets right now? And I know it's been really tough in overall for energy. So not naive to that. But again, given your free cash flow profile and the prospects of getting your leverage ratio to around 2.7 by the end of 2020, I would like to think that the credit markets could be more open for you than maybe some others. So just looking for some color on that.

Sure. Thanks, Kurt. We do have a much better story today than we did 6 or 9 months ago. I think we always felt comfortable that our business generated free cash flow. Just so happens beginning of last year, we needed to invest in our Sitka Lodge with some growth CapEx in order to capture that market and support the contracts we've won there. So it was kind of free cash flow neutral in the first half of last year. Certainly, the performance in the second half demonstrated different and generated a total of $50 million of free cash flow in 2019. So we had 2 good quarters that kind of remind everyone if they kind of lost sight of the fact that the business really does generate good free cash flow. And we've tried to outline for everybody what 2020 looks like.

So as it relates to the capital markets, the goal is to be ready, everything, all of our advisers and what we can see in the market is -- the windows for refinancing are short. So we feel like we've got the story in the right place. We've got actual results that demonstrate the free cash flow again. We've got a good story on the forecast as well. So it's a matter of getting these results out that helps a lot, get the 10-K published and then look to be ready to hit the capital markets when they open.

So that's the plan. I mean the idea would be to -- as you mentioned, to term out some of the debt, get a little further maturity beyond 2021, and then be in a position where we've got a little bit more permanent debt capital to then start growing the business again. But in the next 6 months, it's all about execution and debt reduction.

Okay. That's great. And then as you look out beyond, say, 2020 or 2021, and you look to term out the debt, how do you think about managing the business through cycle from a leverage ratio standpoint? And what do you think is feasible to obtain in that context?

Well, that's a little bit of a moving target. Historically, we've said 1, 1.5x leverage is where we'd like to be. Ultimately, we need to be responsive to what the investors are looking for. I think that's a little bit of a moving target that we may need to move that range down. But I think ideally, being, let's say, plus or minus, 1x levered is the right spot for us. We've got a pathway over the next 24 months that will get us pretty close to that.

Okay. That's good color. And just maybe on the dynamics related to the Canadian markets, you've given some good color about what the dynamics look there. But is there anything that could be a incremental positive catalyst, whether it's more shipments by rail? Obviously, LNG projects look like they are what they're going to be for now. But any other -- I saw that tech was going to pull back on their investment on the heavy oil dynamics up in Canada for environmental-related reasons, so some pluses, minuses. Any thoughts on those?

Sure. That's a good question. Let me tackle the upside-downside first. I would say that in our current guidance, we've been fairly conservative on our occupancy at Sitka Lodge in the back half of the year. There are some opportunities there where we can capture some, what I would call, secondary and tertiary occupancy, i.e., subcontractors of the major firms there, of the major projects that would add incremental occupancy to Sitka. The work we're going to do for CGL remains somewhat of a question mark just because of the timing of putting those camps out as they still face -- that project still face some delays and civil unrest that could impact that. But I would say that our guidance contemplates some conservatism there.

As it relates -- it was disappointing to see that the tech frontier project wasn't going to move forward. It wasn't in our near-term plans to be a contributor to our occupancy. So it's disappointing from the standpoint of it, just difficult to get greenfield projects sanctioned in Canada. But if you take the silver lining on that, that means that existing infrastructure and existing projects now have more value if greenfield projects cannot -- or having difficulty moving forward.

So I think we're cautiously optimistic that, that will portend, that existing customers will have the opportunity to expand their projects, and that may be the only source of growth path for them rather than new greenfield projects. So trying to look at that one more from a silver lining or glass half full.

Okay. Great. And then maybe one more, if I can. Just in terms of pricing dynamics, you kind of gave your outlook, generally speaking. But do you see any opportunities for some pricing improvement? Or is it seeming more and more stable to you as we move throughout 2020?

I would say in Canada, pricing in the oil sands is fairly stable. We have to be responsive to our customers every time we talk to them. But I would say that, generally, that conversation is pretty constructive right now. Sitka provides some pricing opportunities there, for sure. I would say in Australia, there's certainly an upward bias to pricing. That is both a combination of actual price increases coupled with customers willing to pay modest premiums for greater flexibility and so that -- and kind of on a consolidated Australia basis, that puts kind of upward pressure on pricing as a whole.

On the cost side, there's going to be -- there is upward pressure on food costs in Australia. Our team has managed -- that primarily relate to supply chain disruptions related to the fire earlier in this year. Our team has done a good job thus far in January and February managing through that, with little disruption or impact to the overall P&L. I would say labor costs in those markets probably have a modest upward bias, but nothing that can't be managed through.

(Operator Instructions) It appears we have no further questions in our queue at this time. Mr. Dodson, I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you. In closing, I'd just like to point everyone to the fact that despite all the uncertainty in the global markets, all Civeo and our team members can do is focus on the things we can control. I feel good about our contract positions, primarily in Canada and Australia. That will give us some stability in our earnings and revenues. And with that, we'll continue to focus on being good stewards of our shareholders' capital by generating free cash flow and paying down debt, and we look forward to talking to you after the first quarter. Thank you.

Thank you. And that does conclude our conference for today. We thank you for your participation.