Civeo Q2 2024 Earnings Call Transcript

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July 30, 2024

There are 6 speakers on the call.

Operator

Ladies and gentlemen, good morning, and welcome to the Sabio Corporation Second Quarter 20 24 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Regan Nielsen, Vice President, Corporate Development and Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, and welcome to Civeo's Q2 2024 Earnings call. Today, our call will be led by Bradley Dawson, Civeo's President and Chief Executive Officer and Barclay Brewer, Civeo's Interim 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

Speaker 2

the call over to Bradley.

Speaker 1

Thank you, Reagan, and thank you all for joining us today on our Q2 earnings call. I'll start with some key takeaways from the Q2 and then give a brief summary of our Q2 2024 performance. Then Barclay will provide a financial and segment level review, and I'll conclude our prepared comments with updated comments on our full year 2024 guidance and the underlying regional assumptions. Then we'll open the call for questions. Key takeaways from our call today are: our 2nd quarter results demonstrate the initiatives that we have undertaken to position the company for growth That can be seen in our Australian results.

Speaker 1

Our Q2 2024 revenues and free cash flow improved year over year with adjusted EBITDA relatively flat despite the expected headwind that we experienced from Canadian LNG mobile camp activity, which decreased our adjusted EBITDA by $6,900,000 year over year. Australian adjusted EBITDA increased by 10% compared to the Q2 of 2023 due to continued strength in our build rooms at our owned villages and increased activity in our integrated services business as we expand existing customer relationships. Our Canadian segment performance was stronger than we expected for the quarter due to the pull forward of some customer turnaround activity from the Q3 of 2024 into the Q2 of 2024. We also returned $10,300,000 of capital to shareholders through our quarterly dividend and share repurchases during the Q2 of 2020. Lastly, we will maintain our revenue and adjusted EBITDA and CapEx guidance for the full year 2024, and I'll discuss that later in our prepared comments.

Speaker 1

Let me take a brief moment to provide a business update across our 2 segments. Australian segment performed well during the quarter, and the team continues to execute on our previously stated goal to grow our Australian Integrated Services revenues to AUD 500,000,000 by 2027. We experienced year over year growth in both our owned villages business and the integrated services business.

Speaker 3

Our integrated services business growth was

Speaker 1

particularly strong due to the impact of recent competitive wins as well as expansion the expansion of an existing customer relationship. In Canada, as expected, our Canadian segment revenues and adjusted EBITDA decreased year over year due to the wind down of LNG related activities, specifically the mobile camp activity in the Q2 of 2024. Our Q2 Canadian results were actually stronger than we And with that, I'll turn it over to Barclay for some financial review and segment level comments.

Speaker 2

Thank you, Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the Q2 of $188,700,000 with net income of $8,200,000 or $0.56 per diluted share. During the Q2, we generated adjusted EBITDA of $31,300,000 operating cash flow of $32,400,000 and free cash flow of $30,900,000 2nd quarter adjusted EBITDA increased year over year due to increased activity at our Canadian lodges, Australian Owned Villages and Australian Integrated Services Business, partially offset by the expected wind down of LNG related Canadian mobile camp activity, which decreased adjusted EBITDA by $6,900,000 year over year, including $1,400,000 in mobile camp demobilization costs. Let's now turn to the 2nd quarter results for our 2 segments. I'll begin with a review of the Australian segment performance compared to its performance a year ago in the Q2 of 2023.

Speaker 2

2nd quarter revenues from our Australian segment were $108,600,000 up from $82,500,000 in the Q2 of 2023. Adjusted EBITDA was $21,600,000 up 10% from $19,600,000 last year. The increase to revenues and adjusted EBITDA was due to increased building rooms at our own villages and increased integrated services activity related to recent competitive wins as well as the expansion of existing client activity. This shows our continued and steady growth in the segment. Australian built rooms in the quarter were 625,000 rooms, up 6% from 588,000 in the Q2 of 20 23.

Speaker 2

This is due to increased customer demand at our own villages as demonstrated by our recent contract awards, the day length room rate for our Australian owned villages in U. S. Dollars was $78 which increased from $75 in the second quarter of 2023 due to CPI escalation in the recent contract. Turning to Canada. We recorded revenues of $79,500,000 as compared to revenues of $95,500,000 in the Q2 of 2023.

Speaker 2

Adjusted EBITDA in Canada was $17,200,000,000 a decrease from $19,800,000 in the Q2 of 2023. The year over year revenue and adjusted EBITDA decrease was primarily driven by the expected wind down of LNG related mobile camp activity. During the Q2, build rooms in our Canadian lodges totaled 752,000, which was up from 724,000 in the Q2 of 2023, despite the sale of the Collins Lake Lodge. This increase was primarily driven by stronger turnaround activity during the quarter related to a shift of customer activity from the Q3 of 2024 into the Q2 of 2024. The daily room rate for the Canadian segment in U.

Speaker 2

S. Dollars was $96 which decreased from $100 in the Q2 of 2023 due to the mix of occupancy between lodges and contracted rate incentives for increased occupancy at select lodges. On a consolidated basis, capital expenditures the Q2 of 2024 were $5,300,000 compared to $6,900,000 during the same period in 2023. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages. Our net debt on June 30, 2024 was $40,100,000 a $21,800,000 decrease into March 31, 2024.

Speaker 2

Our net leverage ratio for the quarter decreased to 0.3x as of June 30, 2024. As of June 30, 2024, we had total liquidity of approximately $159,000,000 consisting of $151,500,000 available under our revolving credit facilities and $7,400,000 of cash on hand, giving us the strength and flexibility to opportunistically pursue growth factors in 2024 and beyond while maintaining prudent leverage ratios. Turning to capital allocation. In line with our previously stated goals for 2024 and the Q2 of 2024, we repurchased approximately 274,000 shares through our share repurchase program for a total of approximately 6,600,000 As Bradley mentioned, we returned $10,300,000 of capital to shareholders

Speaker 1

through the

Speaker 2

quarterly dividend and share repurchases in the quarter, bringing our total year to date return of capital to shareholders to $17,200,000 This morning, we announced that our Board of Directors had declared a quarterly dividend payment. Shareholders of record as of August 26, 2024, will receive a $0.25 per share cash dividend payable on September 16, 2024. With that, turn it over to Bradley to discuss guidance for the full year 2024. Bradley?

Speaker 1

Thank you, Barclay. I'll now talk about our full year 2024 guidance on a consolidated basis and look into the outlook for each of the two regions. We are maintaining our full year 2024 revenue and adjusted EBITDA guidance ranges of $625,000,000 to 700,000,000 dollars for revenues and $80,000,000 to $90,000,000 for adjusted EBITDA. We are maintaining our full year 2024 capital expenditure guidance of $30,000,000 to $35,000,000 Based on these adjusted EBITDA and CapEx guidance, coupled with net proceeds related to the Mclellan Lake Lodge that's made on the sale, which totaled about $6,000,000 in the Q1, expected full year cash interest expense of $6,000,000 expected working capital inflow for the full year of 10,000,000 dollars and expected Australian cash taxes of $10,000,000 for the full year, we are maintaining our 2024 free cash flow expectation of $45,000,000 to $60,000,000 I'll now provide regional outlooks and corresponding underlying assumptions. In Canada, I'd like to acknowledge the forest fires that are impacting Western Canada, including our Canadian operating region.

Speaker 1

I want to thank our employees who have been working around the clock to ensure the safety of our guests, the first responders staying with us and the safety of our assets. While this is a fluid situation, we do not currently anticipate any material financial impact, positive or negative, from the current fires. Wildfire situation around Fort McMurray and our operations has significantly improved over the last few days, but we will remain vigilant throughout the balance of the fire season. During the second quarter, in Canada, as we discussed earlier, our quarter was stronger than expected due to planned 3rd quarter consumer customer turnaround occupancy shifting into the 2nd quarter. We expect more modest results in the latter half for Canada due to that shift of turnaround activity.

Speaker 1

But overall, our full year Canadian forecast is largely in line with what we expected coming into this year. Regarding our mobile camps, the majority of our mobile camp rental activity is complete, and we're continuing the demobilization process. We expect the demobilization to be completed in the Q3, earning our Q3 adjusted EBITDA by approximately $1,500,000 for the final demote costs. As a reminder, this was all contemplated in our full year 2020 guidance. Turning to Australia.

Speaker 1

Customer activity in our owned villages remains very strong, and we expect that to continue at similar levels moving forward. We are currently full at 3 of our 5 Bone Basin villages and very healthy occupancy through the balance of the portfolio in Australia. As it relates to our Integrated Services business, we are continuing to experience the increased demand from recent contract wins as well as expanding existing customer relationships. We have continued to see substantial growth in recent years in the integrated service business, and we're excited about further growth potential in Western Australia for that business. Now that we have made strides in our inflation mitigation plan, we can now shift back to winning work and growing the business.

Speaker 1

Again, to repeat, our team has set a goal, growing our Australian Integrated Services business to AUD 500,000,000 by 2027. Before I wrap up our prepared comments, I'd like to thank Barclays for stepping into the interim financial officer role for the past few months. Thank you for all your efforts and working seamlessly over this transition period. As previously announced, Colin Gary will transition into his new role as CFO on August 1, and Barclay will serve as Chief Accounting Officer moving forward. Colin has been with Civeo since May of 2014, serving in the various executive positions across our Canadian operations and our corporate development and business development teams.

Speaker 1

Look forward to working with him in his new role. So in closing, we continue to execute operationally and on our strategic growth initiatives, and our results are demonstrating solid progress on these initiatives as we have laid out previously this year. With that, we're happy to take your questions.

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer Our first question comes from the line of Stephen Gengaro with Stifel. Please go ahead.

Speaker 4

Thanks. Good morning, everybody, and congrats, Colin, on the new role. So I think a couple of things for me, probably. First, can you talk a little bit about what you're seeing in Australia as far as sort of the back half of 'twenty four, 'twenty five and kind of what we should be paying most attention to kind of from a potential growth perspective in Australia right now?

Speaker 1

Absolutely. In terms of the back half of the year in Australia, I expect occupancy in our own villages remain relatively consistent through the Q3. And then as always, we'll see a slight downtick in occupancy in the Q4 with the holiday downtimes. But generally speaking, expecting occupancy in our own villages in Australia to remain fairly consistent throughout the year. On the integrated services side, I've been very pleased We've been very pleased with the operational execution of the team.

Speaker 1

You can see that in the margins of the integrated services business. And the expectation is that will continue through balance of the year. You saw a big uptick in terms of top line in the integrated services business, Q1 to Q2 in 2024. And then I expect the performance from a top line perspective in integrated services to remain fairly consistent through Q3 and Q4. So then the attention for that business kind of transitions to winning additional work.

Speaker 1

So the team has several prospects that we're working on. And again, this is all moving towards our goal of $500,000,000 top line by 2027 and believe there's a tangible pathway to achieving that. And so as we look into 2025 for Australia, I expect the trends to continue. We see selective opportunities to enhance our existing operations, and they're really twofold by the business line. And we own villages looking to potentially add a little bit of capacity on the order of magnitude of maybe 100 rooms to the Bowen Basin.

Speaker 1

That's contingent on a couple of things. One, we get the customer commitments to support the investment and 2, we get through the permitting process. So hopefully, we can get that teed up late in the second half of this year and benefit us in 2025. In the integrated service business sorry, go ahead, Steve.

Speaker 4

No, go ahead. Please go ahead.

Speaker 1

And then in the Integrated Services business, it's continued what the team is doing. We've got to go out there and win additional work. I think we've established ourselves as a Tier 1 operator in Australia, where the customers own the assets and we provide the hospitality services for them. And I think the team has done a great job there.

Speaker 3

And so now it's just what's next. And so, we've

Speaker 1

got a handful of opportunities we're working on right now, and we'll have to see how those play out.

Speaker 4

Great. Thank you. And the other big question was really your leverage is down again, your cash flow is really strong. You're obviously buying back stock. But when you think about the M and A landscape or the potential at least, how should we think about sort of what you're looking for kind of from a financial terms perspective?

Speaker 4

And also should we be thinking about it geographically? I mean is Canada or Australia better or worse than the other in your mind? Or how do we just sort of think about what kind of could happen over the next 3, 4, 5 quarters?

Speaker 1

Sure. So I'll start with Australia. On the owned villages side, there are a handful of opportunities to acquire additional villages that are owned by 3rd parties that would augment our portfolio and would be additive to our portfolio. So we're looking at a handful of opportunities there. In the Integrated Services business, it would be similar to what we did with the Action acquisition.

Speaker 1

It would be buying a market position in a geography or end market that we don't currently serve and building off of that based on what we see is starting to build some critical mass in that business where we're starting to get some efficiencies in terms of having the overall volumes, the overall top line support the back office and the infrastructure to effectively be serving over 10,000 people a day. And so that's really the focus for Australia. In Canada, the base oil sands or Western Canadian business remains very steady, but there's not a ton of growth in that market. So we're looking to leverage our assets and our capabilities across North America to serve a broader group of industrial projects, both end markets and geographies, with our current asset and service delivery model. You've heard us talk about it in the past.

Speaker 1

The process of marketing the McClellan assets really opened up our eyes to the value of modular combinations. And our core competency of owning them, installing them, running them for customers where it's not their core competency. So, cautious we're optimistic we'll see some growth opportunities there in the next 12 months.

Speaker 4

Great. Thanks. I'll turn it over and get back in line here. Thank you, Bradley.

Speaker 1

Thanks, Steve.

Operator

Thank you. Our next question is from the line of Steve Farazani with Sidoti and Company. Please go ahead.

Speaker 5

Good morning, Bradley, Barclay. The strength in 2Q on the Canadian build rooms, I think you indicated a couple of times, there was a clear pull forward from 3Q. So I'm trying to figure out how lopsided turnaround season might be this year or how turnaround season in general is playing compared to a year ago, which was also very, very healthy considering your build rooms were up even though you've sold McClellan Lake, I mean, that was extremely strong.

Speaker 1

Yes. So a couple of things there. 2nd quarter 'twenty four, Q2 of 'twenty three, in the Q2 of 'twenty three, we had the full benefit of McAllen. We sold that or dismantled that in July of 2023. So this is kind of the last clean quarter historically of having McClelland in there.

Speaker 1

The replacement asset that the customer is putting to work is in the process of getting commission. So we had some overflow benefit from the Fort Hills project into other city locations in the Q2. So we'll see the full impact of the sale of McClellan in the back half of twenty twenty four. In terms of turnaround activity, quite frankly, 2024 is playing out generally in line with what we expected on a full year basis. Some of the timing, as we indicated, shifted from Q3 to Q2.

Speaker 1

But in general, overall turnaround activity in 2024 is up probably about 150,000 rim nights from 2023 on a full year basis. So it's playing out as we expected, just timing between Q2 and Q3 at shipment. So that coupled with we had expected all the demote costs to be completed in the first half of twenty twenty four. And as we mentioned, we've got about $1,500,000 slipping into the second half, specifically the Q3. So we've got some turnaround activity pulling forward.

Speaker 1

We've got some chemo costs being pushed back and net net, a stronger second quarter and full year in line with what we're expecting to flat to up from our expectations for Canada, but the back half will be softer for sure.

Speaker 5

Fair enough. That's helpful. Even if I consider that and that 3Q will be down from 2Q in Canada, given your guidance for Australia, fair to say that your outlook sort of gets you to the higher end of your guidance range right now unless something would have changed on the revenue side?

Speaker 1

Well, I would say that there are probably 2 major factor 3 major factors that could influence kind of the breadth of the guidance range. 1st and foremost, while I think the most important takeaway is that while the fire intensity in Alberta has been significant and more broadly speaking, Western Canada, particularly over the last 3 weeks, has been a 20 fourseven effort for our operations, safety and HR teams. With some rain over the weekend, it's getting better. And while we don't think there's a material impact, it could swing positive or negative a little bit. That's why we didn't tighten the guidance range overall, which we typically would do around this time every year.

Speaker 1

So while we don't think it's material, it could swing things $1,000,000 or $2,000,000 either direction. So that was part of it. Secondly, we could I would say, occupancy in Australia could be upside, but to your question could move us to the upper end of the guidance range. And likewise, occupancy and margin performance in CIS can move us to the upper end of the range. I don't think the demote costs would they're fully baked.

Speaker 1

I don't see that's just a matter of timing. I don't see that impacting full year guidance. So I think overall, those are the kind of 2 or 3 factors that would influence where we end up on the range.

Speaker 5

That's really helpful. Could you get one more in just on the Australian margins? Obviously, you have these new and yet. Do you see some room? Are you seeing any kind of reduction in labor costs?

Speaker 5

Anything you can do to move margins up a bit here? Are you comfortable with where margins came in?

Speaker 1

I've been comfortable with where margins have come in. We are kind of running on a contribution basis at the owned they're really 2 components, right, the owned villages and the integrated services. On the owned villages side, I'd say margin performance has been good. We still haven't gotten the labor situation to pre COVID efficiencies, but we've made some improvements. I would say pricing on the owned villages has clearly has an upward bias overall given that the overall Bowen Basin is running pretty full.

Speaker 1

We're full in 3 of our 5 locations

Speaker 4

and

Speaker 1

overall occupancy of the Bowen Basin is strong. So we'll see how that plays out. In Integrated Services, I would say that pricing is steady, and it's an issue of volume and execution.

Speaker 5

Okay. Great. Thanks, brother.

Speaker 1

Thank you.

Operator

Thank you. Our next question is from the line of Dave Stoms with Stonegate. Please go ahead.

Speaker 3

Good morning.

Speaker 1

Good morning there. I thought I had heard

Speaker 3

in the prepared remarks that one of the suppressors of the Canadian room rates was incentives. I was hoping you could give us a little more color on maybe the duration of the incentives and if we might see a little bit of a rebound in Canadian prices in the back half of the year?

Speaker 1

Yes. So most of the contracts in Canada will have tiered pricing. And so as volume goes up, there are lower prices. So it will just be you actually net net, we're better off with lower prices and higher volumes. So net net, this is a better situation.

Speaker 1

It was turnaround related. So as we see turnaround volumes start to decrease in the second half of the year, prices will go up. But net net, we want the volumes. We're better off the volumes and some discounted prices. It's all contracted.

Speaker 1

It's not a movement in pricing. It's really just a tiered pricing structure that we've always had.

Speaker 3

Understood. Very helpful. Thank you. And then just one more for me. You're about a third of the way to the low end of your CapEx guidance and already halfway through the year.

Speaker 3

Can you give us a sense on what the kind of cadence for CapEx through 3Q and 4Q might look like?

Speaker 1

Yes. We had if you allow me kind of rough numbers, we did about $10,000,000 of CapEx in the first half and below end of the range is $30,000,000 I expect that we'll be $15 ish in the Q3 based on forecasts and then between 5% and 10% in the Q4. Some of it is going to be timing. As I mentioned, we'd like to add 100 rooms to the Bonn Basin. That's dependent on 2 things, permitting and customer commitments.

Speaker 1

If those fall into place, I'd really love to launch that project this year, but that all that spending will get spent. And then we're also looking at reactivating some rooms in the oil sands region that will allow us to capture some smaller clients that we can't always serve because of the commitments we have to some of our larger clients. So we'd like to get that kicked off and spend before the winter season so that we can get those commitments from the smaller players to move them into the village, the Fort McMurray Village.

Speaker 2

That's very helpful. Thank you

Speaker 3

for taking my questions and good luck in 3Q.

Speaker 1

Thank you.

Operator

Thank you. Our next question comes from the line of Sean Mitchell with Daniel Energy Partners. Please go ahead.

Speaker 1

Good morning, guys, and thanks for taking the question. Bradley, can you take a minute maybe I know Stephen at the beginning of the call talked about Australia, but could you take a minute potentially to frame what the opportunities kind of 2 to 3 years out for the next couple of years maybe on supporting kind of future LNG expansions like Cedar LNG? Great question. So I think there are a handful of pieces to it. To the extent that there is additional pipeline work for additional LNG projects that would support opportunities for our mobile camp business, There'll be coastline opportunities for our Cinco Lodge.

Speaker 1

So it would be a nice return to activity for our British Columbia operations. We've had a strong first half in terms of occupancy at Sitka relative to our expectations, but the LNG Canada project is getting very close to first production. So our activity at Sitka is winding down. As we mentioned in the prepared comments, the mobile camp activity, we're just in demobe at this point. So additional LNG projects, if we saw Pathways, Pathways project move forward would add occupancy in Western Canada to existing assets and present opportunities for mobile cam deployment.

Speaker 1

Got it. Thanks. I'll turn it back. Appreciate it. Thanks, Sean.

Operator

Thank you. Our next question is from the line of Stephen Gengaro with Stifel. Please go ahead. Thanks.

Speaker 4

Thanks for taking the follow-up as well, Bradley. Just one quick one. I don't know if you want to talk about this or not, but when we think about '25 and like when we're entering 'twenty four, we kind of understood there were some puts and takes as you entered the year with the postal gasoline pipeline work and some other things. What are the kind of the very high level puts and takes as we think about 2025?

Speaker 1

Well, let's see here. I would say that in Australia, it's going to be capital investment on the owned villages, whether that's buying additional locations or activating or expanding Bowen Basin capacity on the villages side, how much that comes to fruition. As I mentioned, there's some upward bias potentially on pricing on the owned villages. In CIS, it's going to be winning work. And our Australian end grade services is going to be finding or winning the next contract.

Speaker 1

As we set out about 18 months ago, the opportunities we wanted to win, we've won plus some. And you really saw the first full quarter of that flow through in 2Q 2024. But right now, as I mentioned in the comments, kind of I think to your earlier question, Stephen, kind of expect Integrated Services to be on a quarterly basis flat from here to the balance of 24, and it will be dependent on new contract wins. In Canada, I think, 2024 to 2025%, there'll be some puts and takes. As always, in Canada, it will depend on turnaround activity.

Speaker 1

Don't see any major changes to base level occupancy in the oil sands region.

Speaker 2

We'll

Speaker 1

have some headwinds in terms of occupancy, in terms of comparables for 2020 first half of twenty twenty five versus first half of twenty twenty four at Sitka. But net net, I would expect without any additional strategic wins in Canadian business, kind of a flat 24% to 25%.

Speaker 4

Percent. Great. And then just one quick follow-up and that is around we've talked about this in the past a bit. The source gas opportunity for LNG Canada, what's the status of that as far as the combinations? And is there still a chance that there could be involvement on your side?

Speaker 4

Or is I don't have a good update on kind of where that stands?

Speaker 1

I would say on the source gas side, our entry would require an acquisition. It's unlikely we would move into it on an organic or greenfield basis.

Speaker 4

Okay. Great. Thanks for all the details.

Speaker 1

Happy to. Thanks for the interest. Thanks for your questions.

Operator

Thank you. Ladies and gentlemen, this concludes our question and answer session. I would now hand the conference over to Bradley Dodson for his closing comments.

Speaker 1

Thank you, Ryan, and thank you, everyone, for joining the call today. Really appreciate your interest in Civeo, and we look forward to speaking to you on our Q3 earnings call, which we expect to happen late in October.

Operator

Thank you. The conference of CVO Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.

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