Civeo Q4 2023 Earnings Call Transcript

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February 29, 2024

There are 7 speakers on the call.

Operator

Greetings. Welcome to the Civeo Corporation's 4th Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow today's formal presentation. Please note this conference is being recorded.

Operator

At this time, I'll turn the conference over to Regan Nielsen, Vice President, Corporate Development and Investor Relations. Regan, you may now begin.

Speaker 1

Thank you, and welcome to Civeo's 4th quarter and full year 2023 earnings conference call. Today, our call will be led by Bradley Dodson, Civeo's President and Chief Executive Officer and Carolyn Stones, 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 are 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 Brandon.

Speaker 2

Thank you, Reagan, and thank you all for joining us today on our Q4 and full year earnings call. We had a solid end to the year, having reached and exceeded our target leverage ratio. We are entering into 2024 with financial strength and flexibility to execute on our capital allocation strategy, including looking to identify and execute on growth opportunities. This morning, I'll review our Q4 2023 performance, then Carolyn will provide a financial and segment level review, and I'll conclude with our initial full year 2024 guidance and the underlying regional assumptions. Lastly, we'll open up the call for questions.

Speaker 2

I'll begin with a few important highlights. Our Q4 2023 revenues, adjusted EBITDA and free cash flow exceeded our expectations. Australian adjusted EBITDA increased 64% compared to the Q4 of 2022 due to particular strength in our build rooms at our owned villages where we posted our 3rd consecutive quarter of record performance. We also saw margin improvement in our Australian Integrated Services business as a result of our inflation mitigation efforts. And both our owned villages and our integrated services benefited from recent contract wins.

Speaker 2

Moving to Canada, subsequent to the end of the quarter, we completed the previously announced sale of the McClellan Lake Lodge and we are currently performing the associated transportation services contract for those assets. During 2023, we returned 23% of our free cash flow to shareholders through both our recently initiated dividend and continued opportunistic share repurchases. I'll now make a few comments on the business segments. Our Australian segment performed exceptionally well during the quarter as we experienced sequential and year over year growth in both our owned village business and our integrated services business. During the quarter, we experienced a sequential increase in Australian owned village occupancy, setting again a 3rd consecutive quarterly record for that side of our business.

Speaker 2

In the Q4, our Australian Integrated Services business experienced significantly improved margins as our inflation mitigation efforts started to demonstrate positive results. We should continue to see this benefit from our team's efforts as we move into 2024. Our team continues to execute on our growth plans for our integrated services business with a goal to reach AUD 500,000,000 in top line revenues out of integrated services in Australia by 2027. With improved margins, we believe the integrated service business is particularly attractive given contract terms and the outlook for additional opportunities in the business. As expected, our Canadian segment revenues and adjusted EBITDA decreased year over year due to the wind down of LNG related mobile camp activity, including US5.6 million dollars in mobile camp demobilization costs in the 4th quarter.

Speaker 2

Regarding the sale of our McLoughlin Lake Lodge in Canada, we completed the sale in January of 2024 and we have received all proceeds. The majority of the net proceeds were recognized in the Q4 with the remainder here in January 2024. As a reminder, the entirety of the sale and associated costs as well as other related reimbursements are excluded from our adjusted EBITDA calculation. As a result, the sales transaction does not impact our full year 2024 adjusted EBITDA guidance. The transportation of these assets is progressing well and we continue to pursue other related business opportunities.

Speaker 2

And with that, I'll turn the call over to Carol.

Speaker 3

Thanks, Bradley, and thank you all for joining us this morning. Today, as Bradley noted, we reported financial results that exceeded our guidance. Total revenues in the Q4 were $170,800,000 with GAAP net income of $23,000,000 or $1.55 per diluted share. During the Q4, we generated adjusted EBITDA of $17,400,000 Again, this is exclusive of the financial impact of the dismantlement and sale of the McClellan Lake Lodge asset. Operating cash flow of 40,000,000 and free cash flow of $39,200,000 4th quarter adjusted EBITDA increased year over year due to increased Australian owned villages and improved margins in the Australian Integrated Services business, partially offset by the expected wind down of LNG related Canadian mobile camp activity, including $5,600,000 in mobile camp demobilization costs.

Speaker 3

For the full year 2023, we reported revenues of $700,800,000 and net income of $30,200,000 or $2.01 per diluted share. In 2023, we generated adjusted EBITDA of $102,000,000 a decrease from our 2022 adjusted EBITDA of $112,800,000 Results for the full year of 2023 reflect the impact of a stronger U. S. Dollar, which decreased both revenues and adjusted EBITDA by $28,800,000 $5,700,000 respectively. The decrease in adjusted EBITDA was largely driven by the wind down of LNG related activity in Canada and the impact of weakened Canadian and Australian dollars, but partially offset by significant improvement across our Australian business.

Speaker 3

Let's now turn to the Q4 results for our 2 segments. I'll begin with a review of the Canadian segment performance compared to its performance a year ago in Q4 of 2022. Revenues from our Canadian segment were $72,700,000 as compared to revenues of $88,000,000 in the Q4 of 2022. Adjusted EBITDA in Canada was $3,400,000 a decrease from $11,800,000 in the Q4 of last year. Revenues and adjusted EBITDA decreased 17% 72%, respectively, primarily driven by the wind down of LNG related mobile camp activity, including $5,600,000 of mobile camp demobilization costs.

Speaker 3

During the Q4, build rooms in our Canadian lodges totaled 617,000, which was modestly down from 622,000 in the Q4 of 2022. Our daily run rate for the Canadian segment in U. S. Dollars was $95 which increased slightly from $93 in the 4th quarter of last year. Turning to Australia, during the Q4, we recorded revenues of $89,300,000 up from 73 $100,000 in the Q4 of 2022.

Speaker 3

Adjusted EBITDA was $21,500,000 up 64% from $13,100,000 last year. The significant increase to adjusted EBITDA was due to increased build rooms at our owned villages, increased integrated services activity and improved margins due to our inflation mitigation efforts. Australian build rooms in the quarter were a source of strength with 638,000 rooms, up 23% from 519,000 in the 4th quarter of 2022. This is due to increased demand at our owned villages as demonstrated by our recent contract awards. The average daily rate for our Australian villages in U.

Speaker 3

S. Dollars was $74 in the 4th quarter, up modestly from $73 in the 4th quarter of 2022. On a consolidated basis, capital expenditures for the full year 2023 were 31 point $6,000,000 compared to $25,400,000 during the full year 2022. Capital expenditures in both periods were related to maintenance spending on our lodges and villages. Additionally, the full year 2023 also included $10,000,000 in expenditures for the Australian customer funded infrastructure upgrades that we have discussed on prior quarter conference calls.

Speaker 3

Our total debt outstanding on December 31, 2023 was $65,600,000 a $37,700,000 decrease since September 30, 2023. We were pleased to reach and exceed our net leverage ratio target in 2023. We ended the year at 0.6 times, down from 0.9 times as December 31, 2023, we had total liquidity of approximately 136 $400,000 consisting of $133,100,000 available under our revolving credit facilities and $3,300,000 of cash on hand, giving us the strength and flexibility to opportunistically pursue growth factors in 2024 and beyond, while maintaining prudent leverage ratios. And turning to capital allocation. As you are aware, we updated our capital allocation priorities in September.

Speaker 3

Our new capital allocation framework is designed to allow our strong cash flow generation to support our existing operations, return capital to shareholders through a consistent dividend and opportunistic share repurchases and use excess cash to fund growth opportunities, all while maintaining our target leverage ratio in the range of 1.0x to 1.25x through the cycle. However, we are open to increasing our leverage ratio up to 2.0 times to pursue accretive growth opportunities where appropriate. And we may also occasionally drop below 1.0 tons as we have at December 31 as we carefully assess growth opportunities. During the Q4 of 2023, we repurchased approximately 121,000 shares through our share repurchase program for a total of $2,400,000 And earlier this month, we announced that our Board of Directors has declared our 3rd quarterly dividend payment. Shareholders of record as February 26 will receive a $0.25 per share cash dividend payable on March 18.

Speaker 3

With that, I'll turn it over to Bradley to discuss our initial guidance for the full year 2024. Bradley?

Speaker 2

Thank you, Carolyn. Now I'd like to turn the discussion to our initial full year 2024 guidance on a consolidated basis and I'll include an outlook for each of the regions. We're initiating full year 2024 guidance of revenues of $625,000,000 to 700,000,000 dollars and adjusted EBITDA of $80,000,000 to $90,000,000 Our initial full year 2024 capital expenditure guidance is $30,000,000 to $35,000,000 Based on this adjusted EBITDA and CapEx guidance, expected net cash proceeds related to Maclaur and Lake dismantlement and sale of approximately 6,000,000 expected cash interest expense of also approximately $6,000,000 expected working capital inflow of $10,000,000 and expected Australian cash taxes of $10,000,000 we are expecting our 2024 free cash flow to be in the range of $45,000,000 to $60,000,000 I will now provide the regional outlooks and the corresponding underlying assumptions. As we mentioned on our last conference call, the primary reason for the year over year EBITDA decline in 2024 is the wind down of Canadian Mobile Camp activity and the loss of the MacDon Lake earnings, which account for approximately $27,000,000 of the year over year change between 2023 adjusted EBITDA and 2024 EBITDA guidance. These are partially offset by year over year increases in revenues and margins in our Australian Integrated Services business and modestly improved performance in the Australian villages and Canadian lodges.

Speaker 2

We are acutely focused on replacing these earnings and growing the company, but 2024 will be a transition year for our Canadian business. In Canada, as we look into 2024, the macroeconomic environment for oil sands is improving with increased customer capital spending and the Trans Mountain pipeline expansion coming online this year. With the exception of the loss of occupancy at the Mill Pond Lake Lodge, we should experience steady to modestly increasing build rooms across the rest of our lodge portfolio. Regarding our mobile camps, majority of our mobile camp rental activity is complete and we are continuing the demobilization process in 2024. We expect approximately $6,000,000 of demobilization costs in the first half of this year, which is contemplated in our full year 2024 guidance.

Speaker 2

Again, this will be a transition year for our Canadian business. Moving forward, we have identified promising opportunities and expect to leverage our brand and scale to expand in additional Canadian geographies and end markets. Turning to Australia. Customer activity in our own villages improved throughout 2023 and we expect that to continue into 2024 at similar levels to the end of the year. We are currently full at 3 of our Bowen Basin villages with very healthy occupancy at the rest of our own villages in the portfolio in Australia.

Speaker 2

As it relates to our Integrated Services business, the story of 2023 was our inflation mitigation plan that we executed throughout the year. Our significantly improved margins in the 4th quarter demonstrate the progress that has been achieved and we should continue to see the benefit of our efforts through 2024, resulting in increased EBITDA year over year. We are excited about the growth potential of our Western Australia Integrated Services business and we now and now that we have executed on our inflation mitigation plan, we can shift our focus back to winning work and growing the business. Our team has set a goal to grow our Australian Integrated Services business to $500,000,000 of revenues Australian by 2027. I will conclude by underscoring the key elements of our strategy.

Speaker 2

We will prioritize the safety and well-being of our guests, employees and communities. We will invest in operational improvements and innovation to continue to enhance our best in class hospitality offerings. We will allocate capital prudently to maximize free cash flow generation while we continue to return capital to shareholders and evaluate growth opportunities. With that, we're happy to take your questions.

Operator

Thank you. We'll now be conducting a question and answer Thank you. And our first question comes from the line of Stephen Gengaro with Stifel. Please proceed with your question.

Speaker 4

Thanks. Good morning, everybody.

Speaker 2

Good morning.

Speaker 4

I think the first for me is, when we think about the strength in Australia that you saw in the Q4 was very strong and you think about the outlook for Australia, I mean, one of the things that we keep hearing about is kind of concerns about economic growth in China. And I'm just curious sort of what your outlook and guidance sort of suggest for Australia and how we should think about sort of the potential gives and takes with the economic conditions right now?

Speaker 2

All the indications from our customer base down there on the owned villages side is one of for the new customers about growing production. Certainly, some of the majors are looking at cost containment, but our outlook for occupancy and the owned villages is nicely up year over year, 24% from 23%. We're seeing a big uplift in our integrated services business. Some of it's top line, where we're expecting to hit over $250,000,000 in revenues in 2024. That's up from about 2402023, but the big story is the margin improvement there.

Speaker 2

And the vast majority of that integrated services business is iron ore related. So we're quite constructive on the Australian business and certainly always cognizant of macroeconomic forces. As of right now, we feel very good about it.

Speaker 4

Great. Thanks. And when you think about use of cash and you've obviously done a tremendous job over the last several years, right, deleveraging and returning capital, what types of acquisitions, if you were thinking about acquisitions, should we think you would be pursuing? Would it be pursuing? Would it be geographic expansion or would it be things like the sort of on the logistics and catering side that would be more likely in current geographies?

Speaker 2

Well, we will focus on current geographies, which would be Australia and North America. I'll start with Australia. There are a handful of one off properties that would be nice additions to the portfolio, primarily in the Bowen Basin. So we're pursuing those. The integrated services, there are opportunities to expand that business through acquisition, and we're looking to do so.

Speaker 2

And that would be again in the Australian geography. In Canada, I think one of the big takeaways from the saga that was McLellan Lake is that existing infrastructure has value because the replacement costs are significantly higher today than they have been historically. So reaching a complete new build lodge in North America economically is very difficult in my opinion. So how can we leverage existing underutilized assets primarily in Alberta to expand into other geographies, specifically Eastern Canada, looking perhaps as the McGlone Lake assets moving into Western U. S.

Speaker 2

As an opportunity to expand into the U. S. In a fashion that more reflects or resembles mirrors what our Canadian operations are today. Certainly, also looking in Canada to find an entry point into the Montney, which we see long term activity there. That has been more difficult to determine the entry point.

Speaker 4

Great. Good. Thank you for the color.

Operator

Our next question is from the line of Steve Farazani with Sidoti and Company. Please proceed with your questions.

Speaker 5

Good morning, Bradley and Carolyn. Obviously, you finished up a very busy year. When I think about 2024 and the margin improvement you've already seen in Australia, and I'm assuming and maybe provide a little bit color, I'm assuming it's a mix of the new contracts, some easing inflationary pressures. Also wanted to ask about if labor constraints are easing and how much more room you've got into 2024 on all those points?

Speaker 2

Some that is gaining scale, although I don't think we've seen the improvement on getting scale in the integrated services business quite yet. That will be part of what we pivot to focus on is to have more improve our processes to really bring more of it to the bottom line. I think as you look at kind of gross margins in Integrated Services, the 4th quarter was a really nice quarter. If we can maintain that kind of 9% to 10% gross margin in Integrated Services, that's pretty solid. Now we got to work on being more efficient on the operational side.

Speaker 2

Inflation is still an issue, so I don't want to discount it. What I think the team has done by focusing in, as we mentioned in our inflation mitigation plans, was work on human capital and how can we be more efficient there. I think we've seen improvements at location by location in terms of reducing turnover and reducing the reliance on temporary employees. And so we're early stages in that, but the progress has been good.

Speaker 5

Okay. And then turning to the U. S. Market, you noted it looks like another year of rising CapEx and we have the Trans Mountain coming. How is that going to how are you thinking about that translating into turnaround activity?

Speaker 5

And is it too early to get a sense? Are you hearing much right now from customers about occupancy this summer, spring, I guess, starting in spring?

Speaker 2

Yes. Still a little early to really call the Canadian turnaround activity for 2024. Guidance assumes a slightly softer turnaround period in Q2, Q3 this year. And so we'll have to see how it plays out. But right now, guidance is a little bit softer on turnaround activity, but we'll see we've seen some improved margin in some locations in Canada because of some of our inflation mitigation efforts and we expect that to continue into 2024.

Speaker 5

Great. You covered a lot of territory in the call. I didn't hear. Did you provide guidance on free cash flow?

Speaker 2

$45,000,000 to $60,000,000

Speaker 5

Any changes to your target range or other uses of capital beyond acquisitions on the net leverage?

Speaker 2

Right now, right. I mean, we kind of blew through our target with the strong free cash flow in the Q4. But it's really kind of a timing issue. Certainly, expect to be returning the same kind of capital to our shareholders in 2024. But we do need to pivot and allocate more to growth than we have, well, quite frankly been able to, but now building that pipeline or that funnel of growth opportunities that I just highlighted on the past question.

Speaker 2

And so I'm cautiously optimistic we're able to show some growth and putting capital to work in a growth fashion in 2024.

Speaker 5

Great. Thanks, Brian.

Speaker 4

Thank you.

Operator

Thank you. Our next question is from the line of Dave Storms with Stonegate. Please proceed with your questions.

Speaker 6

Good morning. Good morning. Just hoping we could start with kind of the cadence of the guidance. Should we expect it to follow pretty typical seasonal patterns? Or is there anything else that you think might throw a wrench in that?

Speaker 2

I think for right now for 2024, we expect it to be fairly typical, where historically 65% of the annual EBITDA comes in the combined Q2, Q3, and that's largely driven by a couple of factors that we've highlighted previously. 1, certainly turnaround activity in Canada. Q4 and Q1 are usually softer because of the holidays either beginning of the year or ending the year. So I think it will be fairly typical in terms of cadence.

Speaker 3

We expect to see the same cadence on cash or not same cadence on cash flow, the same historical cadence on cash flow where Q1 is our lowest cash flow because of various timing and buildup of revenues and such. And then that will come we'll get more cash in as the year progresses.

Speaker 6

Understood. Thank you. And then you mentioned the goal of getting integrated services up to $500,000,000 in Australia. What do the logistics look like for that? And what does short term success look like?

Speaker 6

Concern it's a fairly long term goal.

Speaker 2

Well, our team has identified tangible contract wins over the next 3 years that should be able to get us to that $500,000,000 mark. As many of you may recall, we entered into integrated services in Western Australia in 2019 with the Action Industrial Catering acquisition, which at the time we bought it, it was about AUD 40,000,000 of revenues and last year it did AUD 239. So we've made significant progress and we see a very tangible pathway to get to 500. It's not without a lot of work by the team and continuing to demonstrate the value proposition to the customer base to achieve new contract wins.

Speaker 6

Understood. Thank you for taking my questions.

Speaker 2

Absolutely. Thank you.

Operator

Thank you. At this time, we have no additional questions. I'd like to hand the floor to Bradley Dodson for any closing remarks.

Speaker 2

Thank you, Rob, and thank you everyone for joining the call today. We appreciate your interest in Civeo and look forward to speaking with you on the Q1 earnings call expected in April.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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