Civeo Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 28, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Civeo Corporation First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. 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.

Operator

Thank you, Reagan. You may begin.

Speaker 1

Thank you, and welcome to Civeo's Q1 2023 earnings conference call. Today, our call will be led by Bradley Dawson, 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 ks, 10 Q and other SEC filings.

Speaker 1

I'll now turn the call over to Bradley.

Speaker 2

Thank you, Reagan, and thank you all for joining us today for our Q1 earnings call. I'll start with the key takeaways for the Q1 And then give a brief summary of our Q1 2023 performance. 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.

Speaker 2

The key takeaways from our call today are the Q1 2023 results We're in line with our expectations and reflect the normal seasonality of our business. To remind everyone, again, the 2nd 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 175,000,000 Raising our revenue visibility in our own villages 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 twenty twenty three.

Speaker 2

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 MacFarlane Lake assets after the expiry of our current contract. Canadian turnaround activity is shaping up well for the 2nd and third quarters of 2023. We continue to execute on the share repurchase program in the Q1 and we'll continue to opportunistically buyback shares. Lastly, as we've disclosed on previous calls, we have divested majority of our U.

Speaker 2

S. Segment over the last 18 months have reached the point where the remainder of the U. S. Business is immaterial. Moving forward, we will no longer report the U.

Speaker 2

S. Business as a separate segment and 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 but declined year over year, While the revenue decrease was primarily driven by a weakened Canadian dollar relative to the U. S.

Speaker 2

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 Sibyo owned villages. Due to inflationary pressures primarily associated with the Integrated Services business, adjusted EBITDA declined year over year, however. I will speak to how we're handling the inflationary pressures later in the call.

Speaker 2

1st quarter results in Australia were also adversely impacted by weakening of the Australian dollar relative to the U. S. Dollar. With that, I'll turn the call over to Karen.

Speaker 3

Thank you, Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the first of $167,600,000 with a GAAP net loss of $6,400,000 or $0.42 per diluted share. During the Q1, we generated adjusted EBITDA of $20,200,000 operating cash flow of 400,000 and negative free cash flow of $2,100,000 As Bradley just mentioned, the decline EBITDA we experienced in the Q1 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.

Speaker 3

These decreases were partially offset by $1,700,000 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 $15,600,000 increase in working capital in the quarter, which was largely driven by typical seasonality of our cash flows. Let's now turn to the Q1 results for our 2 segments.

Speaker 3

I'll begin with a review of the Canadian segment performance compared to its performance a year ago in the Q1 of quarter of 2022. Adjusted EBITDA in Canada was $12,000,000 a decrease from $17,200,000 in the Q1 of last year. Results from the Q1 of 2023 reflect the impact of a weakened Canadian dollar relative to the U. S. Dollar, which decreased revenues and adjusted EBITDA by $6,000,000 $800,000 respectively.

Speaker 3

On a constant currency basis, revenues remained relatively 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 Q1, build rents in our Canadian lodges totaled $643,000 which was modestly up from $636,000 in the Q1 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 a weakened Canadian dollar relative to the U.

Speaker 3

S. Dollar. Turning to Australia, during the Q1, we recorded revenues of Australian dollar, which decreased revenues and adjusted EBITDA by $4,600,000 $900,000 respectively. On a constant currency basis, the increase in revenue was largely driven by increased occupancy at our owned villages in the Bowen and Gunnedah 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.

Speaker 3

Australian build rooms in the quarter were 523,000, up 10% from 474,000 in the Q1 of 2022 due to increased customer demand at our own villages as well as recent contract wins. The average daily rate for our Australian villages in U. S. Dollars was $78 in the Q1, which was down modestly from $79 in the Q1 of 2022. The decrease was entirely driven by the weakened Australian dollar as the Australian dollar average daily rate was actually up year over year.

Speaker 3

On a consolidated basis, capital expenditures for the Q1 of this year were $4,800,000 compared to 3 point $6,000,000 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 $142,600,000 a $10,600,000 increase since December 31. And our net leverage ratio for the quarter increased slightly to 1.2 times as of March 31 from 1.1 times as of December 31. As of March 31, 2023, we had total liquidity of approximately 90 point $6,000,000 consisting of $78,200,000 available under our revolving credit facilities and $12,400,000 of cash on hand.

Speaker 3

And in the Q1 of 2023, we repurchased approximately 169,000 shares through our share repurchase program for a total cost of approximately $3,800,000 Bradley will now discuss our updated guidance for the full year 2023. Bradley?

Speaker 2

Thank you, Carolyn. I'd 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 two regions related to that guidance. We are maintaining Our previously provided full year 2023 revenue and adjusted EBITDA guidance ranges of $630,000,000 to $650,000,000 of revenues and $85,000,000 to $95,000,000 adjusted EBITDA. However, we are increasing our full year 2023 capital expenditure guidance to a range of $45,000,000 to $50,000,000 It's important to note this increase in capital expenditure guidance is entirely driven I had previously announced contract win in Australia, where the customer has requested specific upgrades to 3 of our Bowen Basin villages. These upgrades will be fully funded by the customer upfront.

Speaker 2

To reiterate, this increase in capital expenditure guidance relative to our initial guidance We'll not have a material impact on our 2023 free cash flow guidance. As a result, to run through the guidance, Based on this EBITDA guidance and CapEx guidance, expected interest expense of $12,000,000 for the full year 2023 And expected working capital inflow of $20,000,000 and minimal cash taxes, We are maintaining our expected 2023 free cash flow guidance of $43,000,000 to 58,000,000 I'll now provide regional outlooks by region. In Canada, We'll look at the remainder as we look at the remainder of 2023, we are expecting to experience Solid oil sands turnaround activity in the 2nd and third quarters of the year with oil sands build rooms increasing year over year. This will be partially offset by lower build rooms at our Sitka Lodge as well as lower Mobile Camp activity as the CGL and TMX Construction pipeline construction projects near completion. As it relates to the expiry of The LaFolone Lake Lodge contract in June of 2023 and the underlying customer demand for that lodge, there is no change in our 2023 guidance As we believe, the city lodges will be needed to support demand from this customer through 2023.

Speaker 2

Our team is focused on strategic alternatives for McLuhan Lake Lodge assets beyond the expiry of the current contract, and we are encouraged by the counterparty interest that we've received to date. In the interest of protecting ongoing negotiations, we cannot provide any further details as it relates to how the McClellan 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 US20 $1,000,000 of demobilization expense In 2023 sorry, dollars 10,000,000 of demobilization expense in 2023, excuse me, And US6 $1,000,000 of demobilization expense in 2024.

Speaker 2

We will continue to update shareholders as we progress through the year. Turning to Australia. We continue to see encouraging signs of growth customer demand for our owned villages and our integrated services business. In regards to our owned villages, We continue to experience an uplift in customer activity as well as growing customer interest In securing room supply moving forward, this is evidenced by our today's announcement of the initial contract awards across the Bowen Basin. Specific to these contract awards, there were 5 Australian contract awards, which comprised of a 2 year $90,000,000 contract award Renewal, a 5 year $45,000,000 contract renewal and 3 short term contracts totaling 35,000,000 In 2023, all of which derisk our current outlook and our current guidance, all those numbers were in Australian dollars.

Speaker 2

As noted above, in conjunction with the previously announced contract win 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 over the last two quarters, but continued to be burdened by severe inflationary pressures. We have a plan in place To attack this, it's a 3 pronged approach. 1st, on labor, we have a focused HR recruitment Effort in place.

Speaker 2

Our supply chain is making efforts to work on food and freight cost inflation, And we're seeking contractual adjustments to provide relief in flexibility given the extreme inflationary environment. We're making strides in all three fronts and our Australian team is laser focused on these initiatives. The upper end of our guidance includes mitigating certain inflationary impacts by the second half of twenty twenty three 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.

Speaker 2

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 occupancy outlook across Canada and We will continue to allocate capital prudently to maximize free cash flow generation, while we continue to return capital to shareholders and manage our debt. We also seek opportunities to further our revenue diversification. With that, we're happy to take questions.

Operator

Thank you. We will now be conducting a question and answer session. One moment please while we poll for questions. And our first question comes from the line of Steve Sarazani with Sidoti and Company. Please proceed with your question.

Speaker 4

Good morning, everyone. Appreciate all the detail on the call. Brad, can you provide any detail or you have any further information in terms of the cadence of the mobile camp wind down that sort of help us think about this?

Speaker 2

So at this point, we have 4 camps running, 3 for Coastal GasLink and 1 for the Trans Mountain expansion. Right now, we expect that 2 out of the 4 will demobilize this year and the other 2 will demobilize next year. So we're expecting that the largest portion of demobilization We ended the Q4 of this year with again, and I mispronounced I missed earlier, it's $10,000,000 of denobilization costs in the 2023 guidance. And for 2024, we'll have $6,000,000 of denobilization costs, but the rent or activity on all of the assets are expected to conclude In 2023 as of what we know right now.

Speaker 4

Okay. Okay. It'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 and year over year. Moderately, you could argue more than moderately if you add in the decline in Sitka.

Speaker 4

All signs point to much higher CapEx in Canada this 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?

Speaker 2

Fair point. There's certainly conflicting I would say we continue to be optimistic on Canada. Last year, we did 2,760,000 room nights in total for the year 2022 And the guidance assumes $2,780,000,000 So modest increase, but I would say that we're more optimistic on turnaround activity in Canada, which would be Which we feed into your comment around CapEx, but there are a lot of conflicting signs because you've had several 2 specifically Major oil sands players made public comments that they're looking to reduce headcount 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.

Speaker 2

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 the guidance To the tune of, let's say, 10% of room nights being up, but we're getting offset by sicker. 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

Speaker 4

there. Okay. That's fair. Thanks. And then turning to Australia, obviously, revenue up very nicely.

Speaker 4

And yes, there's a mix of larger service contracts, which I know are lower margin. But generally Speaking and I know labor costs are bigger the biggest piece to this. How much better can that get? We would have thought it would have been better at this Right as COVID restrictions came out. What's holding that back in terms of labor availability?

Speaker 4

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.

Speaker 2

Yes. So on the I think the key to focusing 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 owned villages. We're running pretty strong occupancy. Cabo Bella is Effectively going to be full by the end of the second quarter, so we'll warm up 2 of our major locations that's Almost 50% of the total number of owned rooms that we have, Divesarc is doing quite well.

Speaker 2

And the 2 and then the Gunditabasis is starting to pick up with the announcement of Whitehaven's bakery project. We expect that to start to pick up in the second half, which could be upside to the guidance. So that's where that's the key for Australia is the own diligence. Now the growth, as you mentioned, is likely going to come from the integrated services business. And we the team has done a great job of building that business over the last 3 years.

Speaker 2

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 here we're starting to get we've gotten 10 Florida Cooks in the last 3 months. We've got a number coming in that are in process.

Speaker 2

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 the housekeeping and On the hospitality side other than Chefs. So the team is making progress. We Expected to improve in the Q2. It improved throughout the Q1 month to month, but we only had one extra month from the last time we spoke.

Speaker 2

So should that trend continue, that will support our guidance in the second quarter 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.

Speaker 4

Okay. Thanks, Bradley. Appreciate the detail.

Speaker 2

Thank you. Thank you for the interest in the questions.

Operator

And our next question comes from the line of Stephen Gengaro with Stifel. Please proceed with your question.

Speaker 5

Thanks. Good morning, everybody. First, Bradley, can you talk a little bit about I know we've talked a little 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?

Speaker 2

Yes. So we don't plan Right now, we don't have any locations in the Montney. We have really Looking for an entry point in there, it could be an opportunity to redeploy the Mobile Camp assets as they come off The pipeline construction projects, and that's really been the major focus, is seeing for looking for opportunities for the mobile can store.

Speaker 5

And when we think about, I guess 2 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 of allocating capital more towards buybacks versus Debt reduction, like is there a point at which you get more aggressive there?

Speaker 5

How do you weigh those 2 options, particularly as your Leverage ratio continues to come down.

Speaker 2

So the leverage ratio is in a good spot at 1.2. 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 Look attractive, very attractive. And so we have not come out with a formal Capital allocation policy is something we're working on.

Speaker 2

And hopefully by the end of the year, we'll have a formal capital allocation policy out. It's a little bit difficult to get really aggressive 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 as second half. That's a combination of coming out of the 4th quarter, which is a softer For us, ramping up into the Q1 ramping up into the 2nd and third quarters for turnaround activity. So you have an increase in receivables Typically and also the first half is weighted with several annual cash flow Outflows, namely property taxes and insurance premiums.

Speaker 2

So as you see receivables go up, you're seeing cash flows going out. And in the back half of the year, Cash flow tends to be much stronger. So we're going to be conservative, but Certainly, the opportunity exists there to be buying back stock.

Speaker 5

Great. Thank you. And just one follow The CapEx increase that you 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?

Speaker 2

So the customer is paying for approximately US20 $1,000,000 worth of capital improvements At 3 locations, Cabovela, Dysart and Moranbah. They've already prepaid a portion of that. And then when we start the work, which will be in the 2nd quarter, they'll make a second payment, which will 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 Q1 and then we'll be amortizing it for the balance of the 5 year contract.

Speaker 2

Thank you, Steve.

Operator

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

Speaker 6

Thank you and good morning.

Speaker 2

A quick question from the

Speaker 6

U. S. Divestitures standpoint. I saw you had the $1,700,000 increase. Was that from selling both Kildeer and Acadian Acres?

Speaker 6

Or is that only one of them? Any color you could give there would be helpful.

Speaker 2

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

Speaker 6

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

Speaker 2

I'm sorry, could you repeat that?

Speaker 6

Yes, sorry. Just Any color you could give us on the current bidding environment, especially after seeing you announce new wins in Australia?

Speaker 2

Well, as I mentioned in the prepared comments, we've got 2 locations that are effectively going to be full for the second half of the year, that's more on Cappabella, there's clearly a shift and we try to emphasize this. The customers I have moved to being concerned about surety of supply of rooms. And so 3 of the Announced wins are really drive that home and that they are securing supply for their turnaround So these are 3, 6, 9 month contracts. That's the AUD 35,000,000 of the total that are really making sure that they have the rooms available for their turnaround staff. With the announcement of the Whitehaven Victory project, We expect the Gunnedah Basin also to start picking up an activity that's more of a back half of 'twenty three opportunity and a 'twenty four and beyond opportunity as they build that project.

Speaker 2

So I would say that In Australia, it's very upbeat. In Canada, turnaround activity is a big question mark. It looks like it's going to be a good year. I would say that I'm optimistic there's upside there, but 2024 could be even better.

Speaker 6

That's very helpful. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 2

Thank you, John. Thank you, everyone, for joining the call today. We truly appreciate your

Operator

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

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Civeo Q1 2023
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