GSI Technology Inc (GSIT) 2018 Q2 法說會逐字稿

Good day, and welcome to the Civeo Third Quarter Earnings Call. Today's conference is being recorded.

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

Thank you, and welcome to Civeo's Third Quarter 2017 Earnings Conference Call. Today, our call will be led by Bradley Dodson, Civeo's President and Chief Executive Officer; and Frank Steininger, Senior Vice President and Chief Financial Officer.

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

I will now turn the call over to Bradley.

Thanks, Regan, and welcome to everyone joining us today on our third quarter earnings call. I'll begin with an overview of our performance for the quarter with some commentary on our regional markets. Frank will then provide a detailed financial and segment level review, and I'll finish off by providing fourth quarter and 2017 guidance before we move on to the question-and-answer portion of the call.

Our business continues to perform in line with our expectations in a very difficult market environment. During the third quarter, the company reported revenues of $97.5 million, above our guidance range with EBITDA $16.1 million within our guidance range. We generated $31.1 million of operating cash flow, $29.6 million of free cash flow and paid down $4 million of debt during the third quarter.

In our Canadian segment, sequential revenues were up 11%, primarily due to improved occupancy at our lodges and the strengthening Canadian dollar. We are pleased to announce that during the quarter, we were awarded a 5-year catering contract to operate a 450-room customer-owned facility in Canada, with the expected revenues totaling approximately CAD 32 million over the contract period. This contract is consistent with our operational strategy of increasing our service revenue profile in a low commodity price environment and is a testament to our best-in-class customer offering in our catering business.

During the third quarter, crude -- U.S. crude oil prices remained in mid- to upper-40s per barrel moving above $50 per barrel towards the end of the quarter. Our U.S. segment recorded revenues of $6.1 million, which is an increase of over 100% year-over-year and 7% sequentially, due to higher occupancy in our Permian and Bakken camps and improvement in our wellsite services business.

With oil prices slightly above $50 a barrel currently, business conditions in U.S., light tight oil plays continues to be resilient, enjoying a completion activity in the Bakken, Rockies and Texas has much improved over last year. However, the pace of U.S. onshore rig count growth began to flatten in the third quarter, and some of the large independent E&Ps appeared to be considering a heightened emphasis on capital discipline rather than strictly production growth, which is a trend we'll need to continue to monitor during our 2018 budgeting process.

In the interim, we remain focused on operational quality, increasing our wellsite services market share and EBITDA improvement.

Moving to Australia. In our Australian segment, met coal prices continue to be constructive with the macroeconomic question being where will met coal prices stabilize? The spot met coal price remains relatively strong at approximately $180 per tonne. However, many forecasts are calling for met coal prices to retreat to approximately $130 to $140 per tonne. In the meantime, Australian met coal producers are generating significant cash flow at either of those price levels.

With approximately 80% of our Australian rooms located in the Bowen basin, servicing met coal mines, we are optimistic that this could lead to increased customer activity levels. Anecdotally, some major customers in the region have begun to publically discuss the attractive returns associated with opportunities to unlock latent capacity within their respective met coal portfolios and the desire to potentially pursue expansionary projects.

To summarize, from a macroeconomic perspective, oil prices above $50 per barrel is conducive to continued production and positive cash flow from our oil sands customers as well as fairly good drilling and completion activity in the U.S. oil shale plays.

Met coal prices of about $180 per tonne generate significant cash flow for Australian met coal customers. Generally, what is missing from both the U.S. and Australian markets is conviction on the long-term prices for oil and met coal.

In Canada, the prospects for greenfield and expansionary programs are generally less vibrant. However, with the oil above $50 per barrel, our customers are generating positive free cash flow from existing oil sands projects.

While we are encouraged by the macroeconomic trends in our core end markets and the recent modest occupancy and utilization improvements in Canada and the U.S., we remain committed to our strategy of positioning the business to succeed in any commodity price environment. Our priorities remain unchanged. We continue to focus on working safely, delivering unmatched service, generating free cash flow, delevering the balance sheet and driving strong operational performance across all segments while pursuing strategic growth opportunities.

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

Thank you, Bradley, and good morning, everybody.

Today, we reported total revenues of $97.5 million with a net loss on a GAAP basis of $22.3 million or $0.17 per diluted share. During the third quarter of 2017, the company generated operating cash flow of $31.1 million, adjusted EBITDA of $16.1 million and free cash flow of $29.6 million.

I will now walk through our segment level performance, beginning with our Canadian segment. But I will be comparing our sequential performance from the third quarter of 2017 to the second quarter of 2017. Revenues from our Canadian segment were $63.8 million, up from $57.7 million in the second quarter of 2017.

The increase in revenues was primarily attributable to higher occupancy related to construction and turnaround work as well as the strengthening of the Canadian dollar. Adjusted EBITDA from our Canadian operations was $15.6 million, up sequentially from $14.7 million, despite the negative impact of approximately $1.1 million of cost overruns associated with a build-for-sale contract in British Columbia.

Our adjusted EBITDA margin of 24% was slightly lower versus the second quarter, which included the benefit from cost containment and more efficient operations, offset by the aforementioned $1.1 million cost overrun.

During the third quarter, average occupancy in our Canadian lodges was 81%, which was flat sequentially and driven by continued occupancy related to construction projects and turnaround-related work.

Our average daily rate for the Canadian segment in US dollars was $92 versus $89 in the second quarter, resulting from increased short-term higher rate room demand and the stronger Canadian dollar.

Turning to Australia. During the third quarter, we recorded revenues of $27.5 million, which were down from $28.6 million in the second quarter. Adjusted EBITDA of $9.7 million was down slightly on a sequential basis from $10.8 million. Our performance in this segment continues to meet our expectations as we have yet to experience occupancy growth as met coal prices remain at elevated levels.

Our customers continue to take a cautious approach to spending and therefore on their demand for accommodations. The average daily room rate for Australian villages was up slightly to $81 in the third quarter versus $80 in the second quarter. Village occupancy decreased slightly by 3% to 42% and our adjusted EBITDA level in Australia was slightly down to 35%.

Now moving to the U.S. Revenues for the third quarter improved to $6.1 million versus $5.7 million in the second quarter. The revenue increase was driven by increased drilling and completion activity in the Bakken, Rockies and Texas markets. During the quarter, we recorded an adjusted EBITDA loss of $1.9 million in the U.S. versus $1.1 million in the second quarter, partially due to the negative impact of a $500,000 cost associated with an unforeseen contract cancellation and increased cost as we continue to reposition our assets to areas with higher activity levels.

Now I will comment on capital expenditures and our current liquidity position. On a consolidated basis, we invested $2 million on CapEx in the third quarter, down from $2.2 million sequentially, primarily for routine maintenance purposes and projects to improve our customer service levels.

During the third quarter of 2017, we made $4.2 million in debt reduction payment. Overall, our total debt increased $7.6 million in the third quarter. This was driven by the strengthening of the Canadian dollar versus the U.S. dollar and accordingly, increasing our Canadian dollar-denominated debt.

As of September 30, we had $105.9 million of available capacity on our revolving credit facility and cash on hand of $54 million with total liquidity of approximately $160 million. We are continuing to focus on generating free cash flow while delevering our balance sheet through the remainder of the year and into 2018.

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

Thank you, Frank. I'll now outline our guidance for the fourth quarter and full year 2017. Starting with Canada, we expect seasonally lower turnaround work in the fourth quarter, partially offset by continued strong demand from construction projects, the startup of pipeline projects contracts, which we mentioned on the second quarter earnings call, and a strong Canadian dollar.

For the fourth quarter, we're assuming Canadian dollar exchange rate of 0.8, and we anticipate segment revenue of $60 million to $62 million and adjusted EBITDA of $12 million to $13.5 million for the fourth quarter 2017. These expectations are based on 9,240 rentable rooms. We expect lodge occupancies between 72% and 74% with a room rate of approximately CAD 115 a night.

We are raising our revenue guidance for the full year for our Canadian segment, primarily on the third quarter performance, and an improved outlook for construction-related occupancy in the fourth quarter. For the full year in Canada, assuming the Canadian dollar exchange rate of 0.77 to the U.S. dollar, we're guiding to revenue of $242 million to $244 million, and we expect full year adjusted EBITDA from Canada to be in the range of $55 million to $57 million.

This full year guidance assumes rentable rooms of 8,735 with lodge occupancy between 76% and 77%, and a room rate of approximately CAD 119 per night, again, for the full year of 2017.

Moving to Australia, the macroeconomic environment appears to be stabilizing. Met coal prices have been volatile this year, but remain at constructive levels. With this volatility, as we've mentioned, our customer continue to take a cautious approach to spending and therefore their demand for our accommodations. As such, the outlook for incremental demand for rooms remains opaque and we'll continue to be contracted on a shorter-term basis.

We've incorporated these expectations for demand into our guidance for the fourth quarter of 2017. For the fourth quarter, we're assuming that it's an Australian dollar exchange rate of 0.78, and we're guiding to segment revenues of $27 million to $29 million and an adjusted EBITDA of $9 million to $10 million for the fourth quarter of 2017.

These expectations are based on 8,800 rentable rooms with the expected village occupancy to be between 43% and 45% with a room rate between AUD 101 and AUD 102 per night. For the full year in Australia, we're assuming Australian dollar exchange rate of 0.77 to the U.S. dollar. We anticipate revenue of $110 million to $112 million, and we expect full year adjusted EBITDA from Australia to be in the range of $40 million to $41 million. This full year guidance assumes rentable rooms of 8,764 with lodge occupancy between 43% and 44% with a room rate of approximately AUD 104 per night for the full year of 2017.

On a consolidated basis, for the fourth quarter, we have raised our fourth quarter guidance. We expect revenues to be in the range of $95 million to $99 million and adjusted EBITDA in the range of $13 million to $16 million. For the full year, we're raising revenue guidance to be in the range of $376 million to $380 million, and raising the lower end of our adjusted EBITDA guidance for the full year to $63 million with the upper end being $66 million.

To conclude, we remain focused on our principles of customer service, generating free cash flow, reducing debt, and enhancing our operations while pursuing strategic growth opportunities, opportunistically, as we wait for the next upswing in our industry.

We are confident that our business is well positioned to respond to what market conditions dictate going into the fourth quarter and into 2018 and beyond.

With that, I'll turn it over for the question-and-answer session.

(Operator Instructions) And we'll take our first question from Blake Hancock with Howard Weil.

Bradley, first, maybe wanted to touch on the catering contract on the 450 rooms. It's probably a little bit different than working on an owner-operated lodge. But can you maybe talk about that contract a little bit? And then, on the operated room side, how that could fit into the portfolio approach, if you could manage to take over some of your owner-operated rooms, especially in Canada?

Sure, Blake. I think it's important, when we highlighted this contract, this is part of our strategic push to have a greater exposure to customer-owned rooms. Customer-owned rooms in both of our markets -- here we're talking about Canada, but in both Canada and Australia -- are approximately 50% of the total capacity workforce accommodation. So getting access, getting revenue out of that piece of the market has been a major strategic push for us.

We are pleased to win this contract. Their asset is close to our Wapasu Creek location. So in reference to your comment about the portfolio, we do have some opportunities here to have some efficiencies across the 2 locations, from a managerial standpoint.

Also we're pleased to win this contract. Again, it's a [a caring-only] contract, which is lower margin, but lower capital deployed. But it demonstrates that we can compete head-to-head with some of the largest caterers in the business, effectively. And both from a food cost standpoint and from a labor cost standpoint. In addition, we can bring in our best-in-class service to the location and there are some efficiencies we can gain from that as we go forward.

That's helpful, appreciated. Congrats on bumping the 4Q guide here. Can you maybe just walk through all the -- maybe a little bit more granular details on the kind of bump here that we're seeing in 4Q? And how much of that may be sticky as we head into 1Q? That would be helpful.

Sure, Blake. As we had this call last quarter, there wasn't lot of visibility at that time in late July or early August in terms of what the demand was going to be. And here, we're particularly talking about Canada, what was going to be the demand from the Fort Hill project -- Fort Hills project as they move towards the first oil at the end of the year. How much of the turnaround work was going to bleed from the second quarter into the fourth quarter? And as we moved through the quarter, we got much better visibility that the demand on the -- for construction rooms is going to be strong in the fourth quarter. And that the turnaround work would have some benefit of doubt here in the month of October, but that would be winding down.

So generally speaking, visibility is better. These are -- again, the excess rooms we're getting in Canada are under short-term contracts. So the visibility was not there when we gave the guidance initially on the second quarter call. But it's looking better now.

Okay, great. Last one. Frank, maybe you can kind of help us out on the onetime items and the increased stock comp here that we saw in 3Q? And how we should think about that in 4Q?

Yes, the onetime item, as we reported, related to a build-for-sale contract that we had -- construction contract that we had in British Columbia. We identified some issues with snow load on the roof. We were forced to go in and needed to fix that roof -- and basically, it's resulted in the increased cost associated with correcting the design matter that we noted on the -- for the roof. So we had to get in there quickly for -- to basically, from a safety standpoint for the people that are staying in the accommodations and get the roof fixed.

That -- we've estimated, basically, what the total cost is to complete that repair work and that was booked in the third quarter. We don't expect any other costs to come through as a result of this matter. So, simple as that.

Stock-based compensation, really, that increase is largely driven by the increase in the stock price to -- at the end of the third quarter. And we have some phantom shares that basically move up and down with the stock price. So a good news, stock price went up, but it did have an impact on EBITDA.

And there was one onetime item in the U.S. operations where we had, after we had mobilized some wellsite units to a location to serve a downstream project, a turnaround, we had our customer cancel our contract due to a dispute that they had with the ultimate owner of the downstream facility. That was disappointing. But that shouldn't repeat as well.

And next we'll hear from Stephen Gengaro of Loop Capital.

I guess, 2 things. One, just quickly on the U.S. market. You -- I know you've moved some assets around. You mentioned on the call to kind of areas of stronger demand. It looks like that kind of may hurt the quarter a little bit relative to the second quarter. Where does that stand as far as your kind of excess cost in the U.S. business? And that business getting close to breakeven on EBITDA basis in 4Q?

I don't think -- as we mentioned on the last call, I don't think we're going to get all the way to breakeven in the fourth quarter. That was the goal. Some of this -- the cost, as you mentioned, are to move assets out of the northern markets. Here, we're talking about the Bakken and Rockies into the Permian and the Midcon. Some of them have been installed at our Pecos location, which is our open camp in West Texas. And then we're also penetrating the wellsite market in the Permian and the Midcon. So we've picked up some rig sets in both markets. We continue to look to penetrate those markets.

We're only moving assets where we have a customer commitment to use them. Now, as all of you know, the wellsite business is a spot business, but we're not moving units on a speculative basis. So we do have a commitment from a customer to move the asset down there. And that's giving us exposure to the 2 of the wells, the Permian's largest market, and onshore business in the U.S. and then Midcon is right up there. So that's been the strategy.

I don't think -- at this point, we're still completing our budgeting process. I don't know that we're going to get to breakeven in the first quarter. I think we'll get much closer. But for the full year, the expectation is, we will be EBITDA-positive in the U.S. business for 2018.

Okay. And then another quick one and then sort of a bigger picture question. On the corporate side, Frank, you talked about the stock-based comp. Should that corporate-and-other line go back closer to 2Q numbers in 4Q, back to like $5.5 million or $6 million of negative?

What did we have in -- let me just. We're sorry Stephen. Well, we've been running a little bit higher than that, right? I mean it should be somewhere -- we've been between $6 million and $7 million for the year. So that's where we should be for the year.

Okay. And then, just finally, and I know it's early, but as we think about just kind of a bigger picture look at 2018, it sounds like you think Australia potentially has some positives; in Canada, I know you go from -- you go kind of into production mode on -- I think it's the McClelland occupancy, so that probably goes down. Any thoughts on kind of how we look -- you kind of gives and takes as we go into '18? I'm just trying to frame how we think about '18, maybe relative to even the back half of '17?

Sure. That's a very good question.

We're still working through our budgeting process. And we're still in conversations with customers to have a better understanding of what their needs are going to be as we try and budget for '18, and as they budget for '18.

In Canada, we'll just go region by region. That's okay. In Canada, you highlighted, what we're working on with our customer is what is the room demand from the Fort Hills project. Again, as I mentioned, they are moving towards first oil by the end of the year. And so we're in conversations with the customers to determine what their room needs are going to be going into 2018.

Second piece in Canada, is the amount of turnaround activity. We had good turnaround activity in the second and third quarters of this year, and that makes it 2 years in a row that we have. This is normal maintenance work that our customers do where they need to bring in a fairly substantial amount of personnel to execute the maintenance projects as quickly as they can, as they are taking down the facilities while they're doing this. Typically, it's a 60- to 90-day project where they can need an incremental headcount of anywhere from, let's say, 800 people to 1,500 people for that duration. So that is usually contracted in the fourth and first quarter for next year, and we're hopeful we'll see another good year of turnaround activity. And we will be booking that into our guidances or into our budget as we look at 2018.

Third piece in Canada is what is going to be the mobile camp activity for pipeline work. As we mentioned on the last earnings call, we have won some pipeline projects and we're pleased that we did. We won one for TCPL. And we're getting on several others. Certainly, there's a lot of threats around some of these major pipeline projects. If any of those go forward, we think we are well positioned to win some of that accommodations work.

And lastly, and very materially, as does the LNG Canada project reach a positive FID in 2018? That's becoming more and more like -- if it happens, it looks like it's going to be in the late third quarter or fourth quarter of '18. So it may not be as impactful to 2018 than if it had gone to FID earlier. But certainly, as we move into the back half of the year, and if it -- we reach positive FID, it would be a very positive indication for 2019.

In Australia, as you highlighted, the big question is, we feel like the operations have stabilized, that these levels were effectively serving only operating personnel. There's no expansionary projects. We have seen some turnaround in maintenance occupancy. We do expect that to continue. But we haven't seen any conviction from our customers to really book big blocks of rooms for extended periods of time. So we'll pick up an extra 50 rooms here or 75 rooms there, but the customers aren't launching projects that would equate to a 200-room or 400-room contract for a couple of years. That hasn't happened yet.

Certainly, met coal prices are constructive here. And as we've tried to highlight, the big question is: 180 is a very good price, our customers are very -- making a considerable amount of cash flow on that price deck, because their costs are in the $50 per tonne range. But what -- where does met coal starts to stabilize? Many of the third-party forecasts have it moving down towards the $130 to $140 range. Again, our customers would still be making a lot of positive cash flow, but is that a price level in which they'll launch the incremental expansionary projects? We don't know.

And then lastly, on the U.S., it's going to be a U.S -- we're going to U.S. rig count, drilling and completion activity. We're trying to gain more exposure to, as we mentioned, to the Permian market. And we are seeing some pickup -- modest pickup in our offshore business. Predominantly, our U.S. business is going to be dependent on the U.S. drilling and completion activity.

(Operator Instructions) Next, we'll take a question from Mike Malouf with Craig-Hallum Capital Group.

I'm wondering if we could just explore Australia just a little bit more. No conviction yet, still doing the sort of the small 50- to 75-room orders. When you take a look at some of the projections out there that says, coal will come down, which -- in just sort of in your opinion and your experience, how much weight do you give that? Can you give us any insight into the market over there? Why do you think after all these months of coal being up that high you haven't seen even one of them start to shift on the capacity side?

Okay. Let me try and answer that to the best of the ability. I think at $130 to $140, I don't want people to take away the impression that that would equate to lower occupancy in our locations. So at the movement from where we are today, at $180, if it were to go down to that level, I don't expect that to have a negative impact on our occupancy. That level is still constructive for current operations.

The real question is, is that level constructive for expansionary projects? And that, we don't know. Why do they think the price is going to go down? My understanding is, that gets it closer to the global marginal cost, and that appears to be a level that the Chinese would defend in terms of their own coal mining operations. So that's been the forecast.

Forecasts haven't been right for last 18 months. So just trying to report to the investors what we see out there. But the last 2 years, no one has been right. They've been projecting, coal prices come down to $130 since they went up to $300, starting in September of 2016. Now they've retreated once down to $140 but then they went right back up to $300 after cyclone Debbie. Now they've retreated down first to $200 and now down to about $180. So we continue to watch it, continue to stay close to our customers. But the outlook on the price remains unclear.

Okay, great. And then just a quick question on the catering contract that you announced. When do you expect revenue to start on that?

The 1st of November.

(Operator Instructions) It appears there are no further questions at this time. I would like to turn the conference back to our speakers for any additional or closing remarks.

Thank you, everyone, for joining us on the third quarter call. We look forward to speaking to you in February as we complete the year 2017. And at that point, we'll be in a position to give 2018 guidance. And we appreciate your interest in the stock. Thank you.

Thank you.

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