Civeo Corp (CVEO) 2023 Q1 法說會逐字稿

Greetings, and welcome to the Civeo Corporation First Quarter 2023 Earnings Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you, Regan Nielsen, Vice President of Corporate Development and Investor Relations. Thank you, Regan. You may begin.

Thank you, and welcome to Civeo's First Quarter 2023 Earnings Conference Call. Today, our call will be led by Bradley Dodson, Civeo's President and Chief Executive Officer; and Carolyn Stone, Civeo's Senior Vice President, Chief Financial Officer and Treasurer.

Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain anything other than historical information, please note that we're relying on the safe harbor protections afforded by federal law. Any such remarks should be read in the context of the many factors that affect our business, including risks and uncertainties disclosed in our Forms 10-K, 10-Q and other SEC filings.

I'll now turn the call over to Bradley.

Thank you, Regan, and thank you all for joining us today, for our first quarter earnings call. I'll start with the key takeaways for the first quarter and then, give a brief summary of our first quarter 2023 deployments. After which, Carolyn will provide a financial and segment level review. I'll conclude with our updated full year 2023 guidance and reasonable assumptions underlying that guidance. And then, we will open the call for questions.

The key takeaways from our call today are, the first quarter 2023 results were in line with our expectations and reflect the normal seasonality of our business. To remind everyone again, in the second and third quarters are typically our strongest quarters with turnaround activity, or maintenance activity, particularly in Canada. Today, we announced 5 additional contract awards across several of our Bowen Basin villages in Australia with expected revenues totaling AUD 175 million, raising our revenue visibility and our own diligence business.

In addition, we have increased our market share in integrated services in Australia with recent contract wins. To counter inflationary pressures in the Australian integrated services business, we have a mitigation plan in place, and are expecting to see improvement in the second half of 2023. There are no material updates to our outlook for our Canadian mobile camps and expected demobilizations.

Encouraged by counterparty interest received to date, our team is focused on redeploying or selling our McClelland Lake assets after the expiry of our current contract. Canadian turnaround activity is shaping up well for the second and third quarters of 2023. We continue to execute on the share repurchase program in the first quarter, and we'll continue to opportunistically buy back shares.

Lastly, as we disclosed on previous calls, we have divested the majority of our U.S. segment over the last 18 months and have reached the point, where the remainder of the U.S. business is immaterial. Moving forward, we will no longer report the U.S. business as a separate segment in our SEC filings and investor materials.

Let me take a moment to provide a business update on our 2 segments. In Canada, our revenues and adjusted EBITDA were consistent with our expectations and declined year-over-year. While revenue decrease was primarily driven by a weakened Canadian dollar relative to the U.S. dollar, the adjusted EBITDA decrease can also be attributed to a decrease in contribution from our mobile camps and our Sitka Lodge due to the wind down of pipeline construction activity, as well as inflationary pressures. Sequentially, revenue and adjusted EBITDA remained relatively flat quarter-over-quarter.

For Australia, we saw a year-over-year increase in revenues, driven by increased integrated services revenue from new contracts and increased build rooms in our Civeo-owned villages. Due to inflationary pressures primarily associated with the integrated services business, adjusted EBITDA declined during the year, however. I'll speak to how we're handling the inflationary pressures, later in the call. First quarter results in Australia were also adversely impacted by a weakening of the Australian dollar relative to the U.S. dollar.

With that, I'll turn the call over to Carolyn.

Thank you, Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the first quarter of $167.6 million with a GAAP net loss of $6.4 million, or $0.42 per diluted share. During the first quarter, we generated adjusted EBITDA of $20.2 million, operating cash flow of $0.4 million and negative free cash flow of $2.1 million.

As Bradley just mentioned, the decline in adjusted EBITDA we experienced in the first quarter of 2023, as related to the same period in 2022, was largely due to the weakened Australian and Canadian dollars relative to the U.S. dollar. The wind down of Canadian pipeline constructive activity and continued inflationary pressures. These decreases were partially offset by a $1.7 million gain on sale of assets related to the divestiture of certain U.S. assets. The negative free cash flow in the quarter was primarily the result of a $15.6 million increase in working capital in the quarter, which was largely driven by typical seasonality of our cash flows.

Let's now turn to the first quarter results for our 2 segments. I'll begin with a review of the Canadian segment performance compared to its performance a year ago, in the first quarter of 2022. Revenues from our Canadian segment were $89.5 million as compared to revenues of $96 million in the first quarter of 2022. Adjusted EBITDA in Canada was $12 million, a decrease from $17.2 million in the first quarter of last year. Results from the first quarter of 2023 reflects the impact of a weakened Canadian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by $6 million and $0.8 million, respectively.

On a constant currency basis, revenues remained relatively flat, due to an increase in Canadian launch revenue, offset by a decline in mobile camp activity. Lower contributions from mobile camps and our Sitka Lodge due to the wind down of Canadian pipeline construction activity, coupled with inflationary pressures, contributed to the decrease in adjusted EBITDA year-over-year.

During the first quarter, build rents in our Canadian lodges totaled $643,000, which was modestly up from $636,000 in the first quarter of last year. Our daily run rate for the Canadian segment in U.S. dollars was $96, which declined year-over-year due to occupancy mix and the weakened Canadian dollar relative to the U.S. dollar.

Turning to Australia. During the first quarter, we recorded revenues of $77 million, up from $63.5 million in the first quarter of 2022. Adjusted EBITDA was $14.2 million, down from $15.4 million last year. Results from the first quarter of 2023 reflects the impact of a weakened Australian dollar, which decreased revenues and adjusted EBITDA by $4.6 million and $0.9 million, respectively.

On a constant currency basis, the increase in revenue was largely driven by increased occupancy and our own villages in the Bowen and Canada Basins, and higher activity for our integrated services business related to new contracts. However, inflationary pressures primarily associated with our integrated services business led to a decline in adjusted EBITDA year-over-year.

Australian build runs in the quarter were 523,000 up 10% from 474,000 in the first quarter of 2022 due to increased customer demand at our owned villages as well as recent contract wins. The average daily rate for Australian villages in U.S. dollars was $78 in the first quarter, which was down modestly from $79 in the first quarter of '22. The decrease was entirely driven by a weakened Australian dollar as the Australian dollar average daily rate was actually up year-over-year.

On a consolidated basis, capital expenditures for the first quarter of this year were $4.8 million compared to $3.6 million during the same period in 2022. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages. Our total debt outstanding on March 31, 2023, was $142.6 million, a $10.6 million increase since December 31. And our net leverage ratio for the quarter increased slightly to 1.2x as of March 31, from 1.1x as of December 31.

As of March 31, 2023, we had total liquidity of approximately $90.6 million, consisting of $78.2 million available under our revolving credit facility and $12.4 million of cash on hand. And in the first quarter of 2023, we repurchased approximately 169,000 shares through our share repurchase program for a total cost of approximately $3.8 million.

Bradley will now discuss our updated guidance for the full year 2023. Bradley?

Thank you, Carolyn. I would like to turn our discussion now to the updated full year 2023 guidance on a consolidated basis, including looking at the underlying assumptions for each of the 2 regions, related to that guidance.

We are maintaining our previously provided full year 2023 revenue and adjusted EBITDA guidance ranges of $630 million to $650 million of revenues, and $85 million to $95 million of adjusted EBITDA. However, we are increasing our full year 2023 capital expenditure guidance to a range of $45 million to $50 million. It's important to note, this increase in capital expenditure guidance is entirely driven by a previously announced contract late in Australia, where the customer has requested specific upgrades to 3 of our Bowen Basin villages. These upgrades can be fully funded by the customer upfront.

To reiterate, this increase in capital expenditure guidance, relative to our initial guidance, will not have a material impact on our 2023 free cash flow guidance. As a result, running through that guidance, based on this EBITDA guidance and CapEx guidance, expected interest expense of $12 million for the full year of 2023 and expecting working capital inflow of $20 million and minimal cash taxes, we are maintaining our expected 2023 free cash flow guidance of $43 million to $58 million.

Now I'll provide the regional outlooks by region. In Canada, we'll look at -- as we look at the remainder of 2023, we are expecting to experience solid [well] down oil and sands turnaround activity in the second and third quarters of the year with oil sands billed rooms increasing year-over-year. This will be partially offset by lower billed rooms in our Sitka Lodge, as well as lower mobile camp activity as the CGL and TMX construction pipeline construction (inaudible) are near completion.

As it relates to the expiry of McClelland Lake Lodge contract in June of 2023 and the underlying customer manage in that lodge, there is no change in our 2023 guidance, as we believe the Civeo lodges will be needed to support demand from this customer through 2023. Our team is focused on strategic alternatives for McClelland Lake Lodge assets beyond the expiry of the current contract, and we are encouraged by the counterparty interest that we perceived to date.

In the interest of protecting ongoing negotiations, we cannot provide any further details, as it relates to how the McClelland Lake Lodge could contribute financially moving forward.

In regards to the Canadian mobile camps, there are no material changes in our outlook for these assets, since our last earnings call. We continue to expect the camps to wind down during 2023, as pipeline construction activity nears completion or is completed. Our guidance includes approximately USD 20 million of demobilization expense in 2023. -- sorry, $10 million of demobilization expense in 2023, excuse me, and USD 6 million of demobilization expense in 2024. We will continue to update shareholders, as we progress through the year.

Turning to Australia. We continue to see encouraging signs of growth in customer demand for our own villages and our integrated services business. In regards to our own villages, we continue to experience in the uplift in customer activity, as well as growing customer interest in securing room supply moving forward. This is evidenced by today's announcement of the initial contract awards across the Bowen Basin.

Specific to these contract works in the 5 Australian contract awards comprised of a 2-year $90 million contract award with renewal; a 5-year, $45 million contract renewal; and 3 short-term contracts totaling $35 million in 2023, all of which derisked our current outlook and our current guidance. All of those numbers were in Australian dollars. As noted above, in conjunction with the previously announced contract land in Australia, the customer expected specific upgrades to 3 of our Australian villages. These upgrades, which we expect to complete in 2023, will be fully funded by the customer upfront.

Turning to our Australian integrated services business, it's benefiting from increased revenue from recent contract awards over the last 2 quarters, but continued to be burdened by severe inflationary pressures. We now have a plan in place to attack this, it's a 3-pronged approach. First, on labor, we have a focused HR recruitment effort in place. Our supply chain is making efforts to work on food and freight cost inflation. And we're seeking contractual adjustments to provide the relief and flexibility given the extreme inflationary environment.

We're making strides on all 3 fronts and our Australian team is laser focused on these initiatives. The effort of our guidance includes mitigating certain inflationary impacts by the second half of 2023 in our integrated services business.

I will conclude by underscoring the key elements of our strategy, as we navigate through 2023. Our mandate is as follows: we prioritize the safety and well-being of our guests, employees and communities; we focus on enhancing our best-in-class hospitality offerings; we will manage our cost structure in accordance with the opportunity outlook across Canada and Australia; we'll continue to allocate capital prudently to maximize free cash flow generation, while we continue to return capital to shareholders and manage our debt growth. We also see opportunities to further our revenue diversification.

With that, we're happy to take your questions.

(Operator Instructions) And our first question comes from the line of Steve Ferazani with Sidoti & Company.

I appreciate all the detail on the call. Brad, can you provide any detail -- or do you have any further information in terms of the cadence of the mobile camp line down to sort of help us think about this?

So at this point, we had 4 camps running, 3 for the Coastal GasLink and one for the Trans Mountain expansion. Right now, we expect that 2 out of the 4 will demobilize this year, and the other 2 will be mobilized next year. So we're expecting the largest portion of demobilization be in the fourth quarter of this year.

With -- again, and I mispronounced -- I missed it earlier, it's USD 10 million of demobilization costs in the 2023 guidance. And for 2024, we'll have $6 million of demobilization costs. But the [grid] or activity on all of the assets are expected to conclude in 2023, as of what we know right now.

Okay, okay. That's fair. When I look at your Canadian build rooms and obviously, the mobile camp wind downs affecting Sitka. Having said that, your build rooms were up sequentially in year-over-year. Moderately, you could argue more than moderately if you add in the decline in Sitka.

All signs point to a much higher CapEx in Canada this year, with Trans Mountain coming. I'm trying to get a sense of why you still sound somewhat cautious -- your sense on how much better things could get in terms of accommodations in that market with all signs pointing to higher CapEx?

Fair point. There's certainly conflicting -- I would say, we continue to be optimistic on Canada. Last year, we did 2.76 million room nights in total for the year 2022, and guidance assumes 2.78 million. So a modest increase.

But I would say that we're more optimistic on turnaround activity in Canada, which would be -- which would feed into your comment around CapEx. But there are a lot of conflicting signs, because we've had several, 2 specifically, major oil sands players made public comments that are looking to reduce head count in the oil sands region.

Should that occur, that if they play that out, that would be a risk. But right now, we're not assuming that because none of the current occupancy indicates, that's the case. So I would say, while the mix is unfavorable because Sitka is down, I would say right now, the oil sands activity is up modestly year-over-year in your guidance, to the tune of, let's say, 10% of room nights being up, but we're getting offset by Sitka.

So I -- we obviously follow it very closely in terms of what the CapEx announcements are, but there's certainly some conflicting signs. Right now, I'd say I'm more optimistic than some of the data points that are out there.

Okay. That's fair. And then turning to Australia, obviously, revenue up very nicely. There's a mix of larger service contracts, which I know are lower margin. But generally speaking, and I know labor costs are the biggest piece to this, how much better can that get?

We would have thought it would have been better at this point, right, as COVID restrictions came out. What's holding that back, in terms of labor availability? And you addressed this on your remarks, how quickly you can address that? Because I mean the revenue -- the growth is there, and you announced new contracts again this morning.

Yes. So on the -- I think the key to focus in on Australia is the vast majority of the EBITDA generation is out of the owned villages. And so there, quite frankly, with the renewals and the additional short-term contracts that we announced today in the own villages, we're running pretty strong occupancy.

Coppabella is effectively going to be full by the end of the second quarter, so more about 2 of our major locations. That's almost 50% of the total number of owned rooms that we have. Dysart is doing quite well. And then the Gunnedah Basin are starting to pick up with the announcement of Whitehaven's vickery project. We expect that to start to pick up -- start to pick up in the second half, which grew the upside to the guidance.

So that's where -- that's the key for Australia is the own villages. Now the growth, as you mentioned, is likely going to come from the integrated services business. And the team has done a great job of building that business over the last 3 years. Unfortunately, because of COVID largely, the inflationary pressures in Western Australia where the majority of our integrated services businesses are fairly significant.

So, we're starting to see the influx of foreign brokers into Australia, but it's been very, very slow, because a lot of the federal policies to help facilitate that have been in place, for the better part, of 2 years now, almost 2 years now. And -- but the bureaucracy has kept things -- made it difficult.

But we're starting to see -- we're starting to get -- we've gotten 10 foreign cooks in the last 3 months, we've got a number coming in that are in process. That chefs are a big sticking point. The other piece on the labor side is that it's been very difficult to hire full-time employees on house keeping and the hospitality side other than the chefs.

So the team is making progress. We expect it to improve in the second quarter. It improved throughout the first quarter, month-to-month. But, we only had 1 extra month the last time we spoke. So should that trend continue, that will support our guidance and the second -- second quarter forward in the balance of the year. We see a material improvement in the second half of the year to meet the upper end of our guidance.

Our next question comes from the line of Stephen Gengaro with Stifel.

First, Bradley, can you talk a little bit about -- I know we've talked a little bit in the past about this. But the source gas in Canada for LNG Canada, I know you haven't played there historically. Is there an opportunity there that you're looking into?

Yes, we're -- so we don't plan right now on any locations in the Montney. We have a really looking for (inaudible) in there. It could be an opportunity to redeploy mobile camp assets as they come off the pipeline construction projects. That's really been the major focus. It is seen for -- looking for opportunities for the mobile camps to work.

And when we think about -- I guess, two other things. One is the balance sheet, right? You have for years generated a lot of free cash flow, you delevered. Where do you stand on your thoughts on allocating capital more towards buybacks versus debt reduction? Is there a point at which you get more aggressive there? How do you weigh those 2 options, particularly, as your leverage ratio continues to come down?

So the leverage ratio is in a good spot at 1.2x. I would like to keep it in that range. Certainly for certain capital allocation opportunities, we would look -- we can look to increase the leverage ratio, but I wouldn't want to increase it significantly.

As we think about the returns on capital deployment, certainly -- unfortunately, where the stock price has trended. The returns on buybacks were attractive, very attractive. And so -- we have not come out with a formal capital allocation policy. It's something that we're working on. And hopefully, by the end of the year, we'll have a formal capital allocation policy out.

It's a little bit difficult to -- very impressive for us in the first half just because of the seasonality of our cash flow. To remind everyone, the first half of every year for the last 4 years has been not as strong in the second half. That's a combination of coming out of the fourth quarter, which is a softer quarter for us, ramping up into the first quarter, ramping up into the second and third quarters for turnaround activity. So you have an increase in receivables typically.

And also the first half is weighted in several annual cash flow outflows, namely property taxes and insurance premiums. So as you see receivables go up, we're seeing payables or cash flows going out. And then, at the back half the year, cash flows tend to be much stronger. So we're going to be conservative, but certainly the opportunity exists there to be buying back stock.

Great. And just one final one. The CapEx increase that you've mentioned that I believe the customer is basically paying the entire increase ahead of a contract. How does that show up on the income statement?

So the customer is paying for approximately USD 20 million of capital improvements at 3 locations: Coppabella, Dysart and Moranbah, upfront. They've already prepaid a portion of that. And then, when we start to work, we should be in the second quarter, we'll make a second payment, which make us prepaid the entire amount.

The revenues from that will be amortized over the length of the 5-year contract. So, there was some recognition in the first quarter. And then, we'll be amortizing it for the balance of the 5-year contract.

And the next question comes from the line of Dave Storms with Stonegate.

Thank you, and good morning. A quick question from the U.S. divestitures standpoint. I saw you had the $1.7 million increase. Was that from some of the Killdeer and the Canadian acres? Or is that on one of them? Any color you could give there would be helpful.

Sure. We sold the housing units off of the Canadian acres. We still have the land in the Canadian acres that we are planning to sell and we still have Killdeer, both of which are held for sale. .

Killdeer is not.

Killdeer is not held for sale, sorry.

Perfect. And then, also great to see you announced a couple of wins, a couple of new contracts this quarter. Any further information you can give us on the current bidding environment would be helpful as well, please.

I'm sorry, would you repeat that?

Yes. Sorry. Just any color you could give us on the current bidding environment, especially after seeing you announced new wins in Australia?

Well, as I mentioned in the prepared comments, we've got 2 locations that are effectively going to be fall through for the second half of the year as Moranbah and Coppabella. There's clearly a shift. We're trying to emphasize this.

The customers have moved to being concerned about surety of supply of rooms. And so, 3 of the announced wins are really drive that home, in that they are securing supply for their turnaround activity. So these are 3, 6, 9-month contracts, that's in AUD 35 million of the total that are really making sure that they have the rooms available for their turnaround staff.

With the announcement of the Whitehaven vickery project, we expect the Gunnedah Basin also to start picking up in activity. That's more of the back half of '23 opportunity and a '24 and beyond opportunity, as they build that project. So I would say that in Australia, it's very upbeat.

In Canada, turnaround actually is a big question mark. It looks like it's going to be a good year. I would say that I'm optimistic that there's upside there, but '24 could be even better.

There are no further questions at this time. And now I would like to turn the floor back over to Bradley Dodson for any closing comments.

Thank you, John. Thank you, everyone, for joining the call today. We truly appreciate your interest in Civeo. We look forward to speaking to you on our second quarter earnings call at the end of July.

And that concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.