Civeo Corp (CVEO) 2020 Q1 法說會逐字稿

Good day, and welcome to the Civeo Corporation First Quarter 2020 Earnings Call. 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 First Quarter 2020 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 first quarter earnings call. We hope you and your families are staying safe and healthy. Given how dramatically the world has changed in recent weeks due to the COVID-19 pandemic and a simultaneous implosion of the global oil markets, we'll devote less time to discussing our first quarter 2020 results in favor of updating you on what we are seeing in our business today and our plans to navigate the current environment.

Let me start by saying that at Civeo, the safety and wellbeing of our employees, guests and contractors is always our top priority. Accordingly, over the last several months as the COVID-19 pandemic has evolved, we've been working in close consultation with medical professionals, government health authorities, third party experts and our customers to implement enhanced safety measures at all of our facilities. The crisis management plan which we successfully used during the Fort McMurray fires in 2016 and have since revised and refined, enabled us to quickly and effectively put in place protocols to manage the situation. We remain in continuous dialogue with key stakeholders during the duration of the pandemic and we extend our profound gratitude to our employees, guests, customers and vendors for their continued vigilance as we work through this together in this very difficult time.

The highlights and key takeaways from today's call, they are as follows. Our first and foremost important priority in this tumultuous time is to protect the health and wellbeing of our employees and guests. Despite the economic disruption and subdued activity in March in North America, the company still delivered improved year-over-year financial and operational results for the first quarter of 2020. We significantly reduced our leverage to 2.54x as of March 31, 2010 from 2.98x at yearend 2019. We expect that the remainder of 2020 will bring reduced EBITDA as the significant drop in oil prices has impacted our oilsands lodges' occupancy and overall activity in the U.S. However, we believe the company's diversified geographic and commodity end market footprint coupled with our relentless focus on positive free cash flow generation will help us manage through this period of uncertainty. We are focusing on factors within our control as we navigate the challenges ahead, including previously announced cost containment initiatives.

As we announced on April 14th in our business update, we have withdrawn our 2020 guidance. Lastly, we expect to remain free cash flow positive in 2020 and continue to pay down debt.

Now for some overall comments on the business, I'll provide a brief summary of our performance for the quarter and the business update as we contend with the COVID-19 pandemic and the dislocations in the global commodity markets. Carolyn will then provide a financial and segment-level review, and I'll conclude with some directional commentary on our expectations for the second quarter before we move into the question-and-answer portion of the call.

Our team has performed admirably under rapidly evolving circumstances during the quarter. Civeo's first quarter results were punctuated by a significant reduction in our leverage ratio and year-over-year occupancy gains, both in Canada and in Australia, despite a significantly weaker Canadian activity in March. We generated revenues of $138.8 million and adjusted EBITDA of $20.3 million and $18.3 million of free cash flow during the first quarter of 2020.

Turning to our balance sheet, our leverage ratio declined to 2.54x at the end of the first quarter from 2.98x at the end of the year 2019. Maintaining a healthy balance sheet and liquidity profile will continue to be among the top priorities in 2020 as we confront the challenges ahead.

Let me take a moment to provide a business update on our three segments. Our business in Canada is continuing with headwinds related to the pandemic and an exceedingly difficult oil price environment. Most customers are limiting their employee and contractor headcounts to essential personnel only resulting in reduced occupancy in Canada. Although work continues on the oilsands and LNG projects there, our customers are proceeding at a noticeably slower pace than the first two months of the year.

Moving to Australia, COVID and commodity price related disruptions to our business thus far has been less pronounced than we've seen in Canada. Owing in part, in large part, to the more constructive underlying fundamentals for metals for coal and iron ore than there are for oil right now. Occupancy was better than expected in the first quarter and has remained relatively buoyant in April. And we are pleased to report that since the beginning of 2020, Civeo has been awarded four contracts with three Western Australia mining customers for our Action Catering business. These contract terms vary from one to three years and have anticipated aggregate revenues totaling $36 million Australian that will extend through 2023.

The environment in our U.S. business is far more challenging than we expected coming into 2020. Our E&P customers are facing an unprecedented period of oil demand destruction due to the global economic recession caused by COVID-19 against the backdrop of a highly contentious OPEC Plus alliance. The industry's collective response in the U.S. has been meaningfully reduced, has led to meaningfully reduced drilling and completion capital spending activity. Occupancy levels across our U.S. onshore portfolio have declined from our end subdued levels and this has compelled us to temporarily shutter certain lodges and move towards consolidating our wellsite district locations.

As we navigate this difficult and uncertain environment, our priorities are to keep our employees and guests safe, the most safe as possible, maximize our free cash flow generation, preserve our financial flexibility and reduce our costs without compromising our service quality. With that, I'll turn it 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 $138.8 million with a net loss on a GAAP basis of $146.5 million or $0.87 per share. The net loss included a goodwill impairment charge of $93.6 million in our Canadian reporting unit as well as asset impairment charges totaling $38.1 million in Canada and $12.4 million in the U.S.

During the first quarter we generated adjusted EBITDA of $20.3 million, operating cash flow of $20.8 million and free cash flow of $18.3 million.

Turning to the first quarter results for our three segments, I'll begin with a review of the Canadian segment performance compared to the performance a year ago in the first quarter of 2019. Revenue from our Canadian segment was $79.3 million, as compared to revenues of $66.8 million in the first quarter of 2019. Adjusted EBITDA in Canada was $11.4 million, an increase from $10.2 million in the first quarter of 2019. Revenues and adjusted EBITDA for the quarter were both impacted positively by year-over-year billed rooms growth.

During the quarter, billed rooms in our Canadian lodges totaled 708,000, which was up 13% year-over-year from 626,000 in the first quarter of 2019. This was due to increased billed rooms from our expanded Sitka Lodge serving LNG activity in British Columbia as well as increased oilsands activity in January and February partially offset by the decline in Canadian occupancy in March. Our daily run rate for the Canadian segment in U.S. dollars was $92, essentially unchanged year-over-year.

Turning to Australia. During the first quarter, we recorded revenues of $49.1 million, up from $28.4 million in Q1 2019. Adjusted EBITDA was $16.2 million, up from $9.9 million during the same period of 2019. These results were positively impacted by the acquisition of Action Catering in July last year as well as increased village occupancy partially offset by a weakened Australian dollar. Billed rooms in the quarter were 472,000, up from 383,000 in the first quarter of 2019 due to continued improvement in met coal activity across the Bowen Basin. The average daily rate for Australian villages in U.S. dollars was $69 in the first quarter, down from $74 year-over-year primarily due to the weakened Australian dollar.

Moving to the U.S., revenues for the first quarter were $10.3 million, as compared to $13.4 in the first quarter of 2019. The U.S. segment adjusted EBITDA was $400,000 in the first quarter, down from adjusted EBITDA of $2.8 million during the same period last year. These year-over-year declines were primarily due to broadly lower drilling and completion activity coupled with the expiration of our Arcadian Acres contract in June, 2019.

On a consolidated basis, capital expenditures were $2.7 million in the first quarter, down from $9.7 million in the first quarter of 2019 due to expenditures related to the Sitka Lodge expansion last year. Our total debt outstanding on March 31, 2020 was $314.9 million, which represents a $44.2 million decrease since December 31, 2019. The decrease consisted of $14.2 million in debt payments during the quarter, some free cash flow generated by the business, as well as a favorable foreign currency translation impact of $30 million. As Bradley mentioned, our leverage ratio for the quarter was reduced to 2.4x as of March 31, from to 2.98x as of December 31, 2019. And as of March 31, we had total liquidity of approximately $149.6 million, which consists of $144 million available under our revolving credit facility and $5.6 million of cash on hand.

Due to historically low oil price levels and the resulting impact on our North American operations, it is likely that we will not remain in compliance with our leverage ratio, particularly beginning with the period ending December 31, 2020 when our maximum leverage ratio under our credit agreement reduces to 3.5:1. In order to avoid violating this covenant, we intend to pursue an amendment to our credit agreement to increase that maximum leverage ratio for several quarters. We believe it is probable that we will be able to obtain an amendment to our credit agreement or alternative solutions such as a waiver or replacement financing. However, we can give no assurance that we will be able to obtain such amendment, waiver or replacement financing on favorable terms or at all.

Despite the economic disruptions we are facing, we will continue to maintain the financial discipline that has seen us through difficult environments in the past. As we disclosed in our April 14 business update, we have already implemented several cost containment initiatives including salary and total compensation reductions of between 10% and 20% for the board of directors, our executive leadership team, as well as other senior management. Headcount reductions in North America of 25% have been made in the last few weeks and an approximate 25% cut to our 2020 capital spending program has been implemented. We expect to incur costs of between $1.5 million to $2 million in the second quarter related to these headcount reductions.

Bradley will now provide some closing commentary and discuss our outlook for the remainder of the year. Bradley?

Thank you, Carolyn. As we indicated in our April 14 business update, the dual impacts of the COVID-19 pandemic and a severe downward pressure on oil prices have begun to negatively impact our financial performance primarily in Canada and to a lesser degree in the U.S.

Due to rapidly evolving market environments, we have withdrawn our previously announced revenue and EBITDA guidance and are lowering our full year 2020 capital expenditure guidance to approximately $15 million.

Moving to the segments, in Canada, the oilsands region has been noticeably affected as customers began to announce reduced capital spending and operating budgets in late March. To illustrate this, at the beginning of March, 2020, we were serving about 8,600 guests per day in Canada. By the end of March, we were serving roughly only 3,000 guests per day. Although we continue to host essential personnel in our lodges, occupancy has declined markedly in recent weeks and we are not anticipating recovery in oilsands occupancy for the rest of the year. We did open our lodges to approximately 1,100 evacuees from the Fort McMurray town as that was flooded this week and continue to work collaboratively with global officials to assist the community in its recovery efforts.

In Canada, our LNG directed work should be more resilient this year on our Canadian portfolio. While the LNG Canada related workforce has also gone to central personnel, we expect the activity in personnel levels to normalize in the second half of 2020 as the impacts of the COVID-19 pandemic retreat.

Moving to Australia, Civeo's business has been remarkably resilient in recent weeks which is a trend we expect to continue in the second quarter. The diversification of our portfolio across different geographic and commodity markets is a key element of Civeo's strategy. Although the global oil markets are in turmoil, our metals and mining customers are staying active in Australia. However, in this difficult environment we anticipate our customers to delay any growth projects until 2021. With metal and tool coal and iron ore prices remaining relatively strong and the emerging Asian economies slowly coming back online from the worst of the corona outbreak, we are cautiously optimistic about the 2020 outlook for our Australian business.

The outlook in our U.S. business is considerably less constructive. As has been well documented, the U.S. E&P industry is continuing with meaningful financial distress, physical onshore storage -- oil future prices have unthinkably gone well into negative territory at times, and dozens of companies across the oil and gas supply chain are already immersed in financial restructurings. The challenges stemming from these conditions that are well beyond our control are not unusual for our U.S. business in recent years. Although the drilling and completion activity across the Niger tight oil plays has been volatile in the wake of the 2015 downturn, our team has made significant strides to reduce fixed costs, allocate capital efficiently, and relocate assets into more active regions. During the second quarter, these initiatives along with further cost reductions should mitigate the negative impact from the dramatic reduction in upstream spending.

These are extraordinary times. For our team, we'll apply the lessons we've learned from prior downturns to navigate the challenges ahead. Our focus will continue to be on matters over which we can control and our key priorities will remain as follows. We prioritize the safety and wellbeing of our employees, guests and vendors. We will manage our cost structure in line with the current occupancy outlook. And we will allocate capital prudently to maximize free cash flow generation and financial flexibility. With that, this is the end of our prepared comments and we're happy to take questions.

(Operator Instructions) We'll take our first question from Kurt Hallead with RBC.

Bradley, appreciate the color commentary and the kind of reticence of providing specific, levels of specific guidance given the uncertainties at play. So maybe I'll just ask you to give us some directional context, maybe start off the Canadian front as you had mentioned significant drop-off in residency during the quarter. So from the end of March until where we kind of are today in recovery so we can kind of get a sense of the magnitude on that. In LNG you expect to be a little bit more resilient. So when you kind of put them into a shake and bake bag and kind of throw them onto the table, what kind of overall kind of directional decline in Canadian revenue could we expect maybe as we get into the second quarter? And then if you can give us some general sense again just broadly directionally whether or not the second quarter could mark the low point to the full year for Canada, that would be very helpful. Thanks.

Sure, happy to do that, Kurt. As we outlined in the prepared comments, occupancy generally in Canada went from about 8,600 guests a day in early March to close to 3,000 and a little bit below. And in April, it's bounced back up as we're taking care of the evacuees from Fort McMurray. I don't think that's going to last very long. As we mentioned and you highlighted in your question, in Canada we do expect that the LNG Canada project will start to ramp back up in the second half back to initially planned levels that were in our original guidance. But at this point, our current forecast, we're not assuming that oilsands occupancy improves from where we are today. Maybe a little bit, but not materially. So to put that in perspective, in total Canada last year had about 3.1 million room nights. I expect that number is going to be under 2 million room nights in total. That's global oilsands and LNG related. So that will produce materially lower revenues and EBITDA to Canada. And that quite frankly is the crux of the difference between our original guidance which was about $100 million, and while we're not giving guidance today, while we're expecting significantly lower EBITDA year-over-year. That being said, the other major assumption in our outlook right now is that Australian occupancy remains at levels that it is today. We're not expecting any sort of hockey stick increase in occupancy in Australia, but we are expecting it to stay at current levels. If we were to see that change, then that would be a downside for us. I think the U.S. team has done an admirable job over a multiyear period, but certainly in the last 60 to 90 days, in addressing the cost structure. So while it's not material to us, I think they've done a very good job in mitigating what would otherwise be a significantly negative market for us as we see rig count falling close to historic levels as of last week and expect it to go to historically low levels in the future and completion activity in the U.S. to effectively come to a halt. So that's kind of the picture we have today. I would say that upside for us would be likely if we're overly conservative or pessimistic around Canada. We've seen a couple of operators who are starting to look at bringing forward their turnaround and maintenance work in the oilsands region. Imperial has publicly announced it and we're working with several other customers who are contemplating it. That would not be in our guidance numbers of the commentary I just gave. So that's the picture that we have today and happy to answer any follow-on questions.

No, that's great color. I really appreciate you going through that detail. My follow-up question would be on the leverage ratio. Appreciate the candor about the risk of tripping that come fourth quarter this year. I do know that you have a number of adjustments, bank adjustments that are related to EBITDA and just kind of curious as to what that level of adjustment might be for maybe on a full year basis or as the rest of the year kind of plays out. If we do our baseline EBITDA calculation, I know that sometimes we don't always kind of capture what those additional adjustments are, so any color on that would be helpful.

Sure, Kurt, I'll take that. With respect to our bank adjusted EBITDA, the most significant adjustment is for noncash stock-based compensation. So it's approximately $10 million-ish a year that we add back to reported adjusted EBITDA to get to bank EBITDA. There was and there is an adjustment for acquisitions where we pro forma in the historical. So currently we're pro forma-ing in the Action EBITDA on periods prior to owning them. That obviously, once we get to the third quarter, there no longer will be that adjustment because we'll have included their results for a full year in our results. So that, the stock-based comp is the big one.

I appreciate that detail. Then on the stock-based comp, so despite the recent events and stock price dynamics and everything else, that's a pretty, that stock-based comp is a pretty static number?

Well, we have not issued any shares this year, so it will all be grants that are still amortizing. It is, as we disclosed in the proxy, the board is not taking any shares, they've reduced their comp and they're taking all of their comp in cash. And I don't expect on a go-forward basis at least for the rest of 2020 that we'll see any shares issued. So it's a longwinded way of saying yes, it will start to go down, but I don't think it will go down materially from where it is right now for the next 12 months. You'll start to see the impact of not issuing any shares in 2020 in kind of 2021/2022.

Next we'll move to Stephen Gengaro with Stifel.

In follow-up to Kurt's question, you guys have a history over the years I think of managing lower occupancy levels pretty well and maintaining a positive EBITDA contribution for really, clearly since you guys spun out of Oil States, but even before then. When I think about the margin degradation on what looks a second quarter room count which is down 50% in Canada or more, can you stay EBITDA positive in Canada in 2Q? Are there enough variable costs to get you there, or how should we be thinking about that just in a general sense?

I think Canada in the second quarter will be close to breakeven plus or minus. That will be after the COVID related costs and some restructuring costs. But I think in total, right now I think Canada is plus or minus breakeven. The U.S. will be slightly negative, and Australia, probably the two biggest variables are holding on the occupancy and what the currency is going to do. But thus far they've been kind of our bedrock to keep us going.

Thanks. And when you mention the Australian room count being pretty stable from these current levels, is it currently at around where the first quarter was? Or has there been a drop-off since the end of first quarter?

It's stayed relatively consistent. There are certainly from time to time some customer specific issues that will influence things, but generally speaking, Australia feels like it's in line with our expectations in April.

Great, then just as a follow-on for me for now, and we can sort of triangulate where they all flow out from an EBITDA perspective, which I know is tough. But when I think about the model and the EBITDA contribution, your CapEx is about $15 million, your interest is about $25 million, maybe a little bit less, so that's about $40 million. So if you do $50 million or $60 million in EBITDA, you're going to be $10 million to $20 million free cash flow positive plus some working capital? Am I thinking about that right? And how should we think about working capital?

That's spot on. I'll ask Carolyn to give you some overview comments to confirm the numbers, but that feels right. CapEx is $15 million, interest expenses is $25 million, plus or minus, and so that's $40 million. And then working capital should move in our favor here in the second quarter presuming that the baseline assumption is that we'll have some recovery in Canada, all LNG related, in the second half of the year. But in total, I expect about $14 million, $15 million worth of cash flow coming from working capital, specifically in the second quarter. Carolyn, any corrections or adjustments?

No, that was spot on.

(Operator Instructions) We'll hear a follow-up from Stephen Gengaro with Stifel.

Figured I'd jump back on. Bradley, the Action acquisition has seemingly gone very well since you guys closed it in middle of last year. Can you give us an update on what you're seeing there? I know it's a tough market right now, but kind of the expectations for that business over the next sort of 3 to 6 quarters and how it's evolving and how the deal has gone?

Sure. So we closed the Action Industrial Catering business in July of 2019. Just as a backdrop for the balance of people on the call, Action provides management services, integrated services to customer-owned rooms in Western Australia, predominantly serving iron ore customers, but also serving gold, lithium and other customers there. It's a service only business, so a lower margin business, but the business has been growing significantly since we acquired it. We had four nice renewals, the contract renewals we mentioned in our prepared comments were all Action related. There were three wins and one renewal. We're working very closely with our customers on a couple of material renewals that will happen in July 2020. But I would say in general, the EBITDA coming out of Action is going to be about double to triple what we were initially anticipating out of the business. We've seen business continue to grow and iron ore prices are holding in there quite nicely, they're in the $80 range and that's where they started the year. The two major commodities that we serve in Australia are iron ore with Action and met coal with our legacy business. And those both go into steel manufacturing, so we're very, very -- watching very closely at global steel demand and how things are coming back. But thus far, things have stayed relatively buoyant in Australia, so we're optimistic that continues for the rest of the year.

That will conclude today's question and answer session. At this time, I would like to turn the call over to Mr. Bradley Dodson for any additional or closing remarks.

Thank you, everyone, for joining us today. These are incredible times to have to manage through. I do want to say thank you to our team. As you can imagine, we are all dealing with a lot of anxiety. For our frontline workers, our operations team, the protocols that our safety team have put in place to keep people safe, and to mitigate the impact of the COVID-19 virus in all locations, has been unbelievable. And I can't possibly thank them enough. Thank you to our global office staff who have been working from how for close to 2 months. It hasn't been easy, but you've done an incredible job. To our finance team who closed the quarter in a completely remote environment, that was incredible. So thank you, everyone, and we'll get through this together. Thank you.

And that will conclude today's call. We thank you for your participation.