Civeo Corp

NYSE:CVEO

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to Civeo Corporation Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Regan Nielsen, Vice President, Corporate Development and Investor Relations. Thank you. You may begin.

[Regan Nielsen, executive]

Thank you, and welcome to Civeo's Third Quarter 2023 Earnings Conference Call. Today, our call will be led by Bradley Dodson, Civeo's President and Chief Executive Officer; and Carolyn Stone, Civeo's Senior Vice President, Chief Financial Officer and Treasurer.

Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain 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-K, 10-Q and other SEC fillings.

I'll now turn the call over to Bradley.

[Bradley Dodson, executive]

Thank you, Regan, and thank you all for joining us today on our third quarter earnings call. I'll start with the key takeaways for the third quarter and then give a brief summary of our third quarter 2023 performance. Then Carolyn will provide a financial and segment-level review, and I'll conclude with our updated full year 2023 guidance with its underlying assumptions, and I'll also provide a preliminary outlook for 2024. Then we'll open up the call for questions.

The 4 key takeaways from our call today are the third quarter 2023 financial results exceeded our expectations, strong operational execution in both Canada and Australia. Australia demonstrating strong year-over-year growth. During the quarter, we secured an economically attractive solution for our McClelland Lake assets, which we are optimistic will also lead to additional opportunities. We announced our capital allocation framework, including initiating a $0.25 per share quarterly dividend to provide a consistent form of capital return to our shareholders, and we renewed our share buyback growth. The last key point is we'll provide a qualitative assessment of our initial outlook for 2023.

Let me now take a moment to discuss the third quarter in our segments. Our revenue in the third quarter reflected a diverse customer base from traditional oil and gas production, LNG, project construction and wildfire response in Canada to met coal and iron ore protection [indiscernible]. Our Australian segment performed exceptionally well during the quarter as we experienced sequential and year-over-year growth in both our own villages business and our integrated services business.

During the quarter, we experienced a sequential increase in Australian owned village occupancy setting a second consecutive quarterly record for Australian build rooms. On a constant currency basis, the Australian Village revenues were up 25% year-over-year, led by increased occupancy in both our Bowen Basin and Gunnedah Basin villages. Assuming the constant currency revenue from our Australian Integrated Services business grew both sequentially 12% and year-over-year 23% as recent contract awards began to contribute.

During the quarter, we also saw tangible results from our inflation mitigation plan for the integrated services business. We should see the benefit from our team's efforts, more fully in the fourth quarter of this year and into next year. However, it is important to note that while we've made strides in mitigating inflationary pressures in both our Canadian and Australian businesses. We expect inflation to remain a focus of ours for the foreseeable future.

Our Canadian segment delivered strong quarterly results in the third quarter from turnaround and wildfire activity. This was partially offset by lower LNG-related activity in British Columbia, Canada, as pipeline construction activity continues to wind down as is expected. Resulting in reduced Canadian mobile camp activity for us compared to the third quarter of 2022. We also began demobilizing our mobile camps in the third quarter -- in this third quarter of 2023.

Regarding the sale of our McClelland Lake Lodge in Canada, we have secured in addition to the sale of the transportation contract for the assets and the demobilization and transportation work is underway. During the third quarter of 2023, we incurred approximately $4.9 million of demobilization expense related to the McClelland Lake Lodge assets. The majority of the net proceeds from the McClelland sale will be recognized in the fourth quarter of 2023 and into the first quarter of 2024.

In regard to the financial impact of this sale, the entirety of the sales proceeds and associated costs will be accounted for in the other income line item on the income statement. And they are excluded from our adjusted EBITDA calculation. As a result, this transaction does not impact our full year 2023 adjusted EBITDA guidance.

Lastly, we announced a new capital allocation framework simultaneously with the initiation of a $0.25 per share quarterly dividend policy. This provides flexibility to use our strong cash flow generation or our existing operations, fund growth opportunities and returning capital to shareholders. We also continue to execute on our share repurchase plan in the third quarter and will opportunistically buy back shares moving forward.

With that, I'll turn the call over to Carolyn.

[Carolyn Stone, executive]

Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the third quarter of $183.6 million with GAAP net income of $9 million or $0.61 per diluted share. During the third quarter, we generated adjusted EBITDA of $32.9 million, operating cash flow of $36.8 million and free cash flow of $31.7 million. As Bradley mentioned earlier, the decline in adjusted EBITDA we experienced in the third quarter of 2023 as compared to the same period of 2022 was largely due to the wind down of Canadian pipeline construction activity, and therefore, our mobile camp revenues and EBITDA. This decrease was partially offset by increased build rooms in our Australian Bowen Basin Villages and increased Australian integrated services activity due to our recent contract wins.

Let's now turn to the third quarter results for our 2 segments. I'll begin with a review of the Canadian segment performance compared to its performance a year ago in the third quarter of 2022. Revenues from our Canadian segment were $95.1 million as compared to revenues of $103 million in the third quarter of 2022. Adjusted EBITDA in Canada was $23 million, a decrease from $25.6 million in the third quarter of last year. Results from the third quarter of 2023 reflect the impact of a weakened Canadian dollar relative to the U.S. dollar which decreased revenues and adjusted EBITDA at $2.6 million and $0.7 million, respectively.

On a constant currency basis, revenues decreased 5% and primarily due to a decline in mobile camp activity as pipeline construction continues to wind down. Adjusted EBITDA also declined year-over-year due to the aforementioned dynamics. During the third quarter, billed rents in our Canadian lodges totaled $726,000, which was modestly down from $731,000 in the third quarter of 2022. Our daily run rate for the Canadian segment in U.S. dollars was $98, which declined slightly year-over-year, entirely due to the weakened Canadian dollar relative to the U.S. dollar. The average rate in Canadian dollars was up slightly year-over-year.

Turning to Australia. During the third quarter, we reported revenues of $87.9 million up from $73.8 million in the third quarter of last year. Adjusted EBITDA was $18.8 million, up 11% from $16.9 million in 2022. Results from the third quarter of 2023 reflect the impact of weakened Australian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by $3.8 million and $0.8 million, respectively.

On a constant currency basis, the increase in revenue and adjusted EBITDA was largely driven by increased occupancy in our owned villages as well as higher activity for our integrated services business related to new contracts. Australian build runs in the quarter were $623,000, up 19% from $525,000 in the third quarter of 2022 due to increased customer demand at our owned villages driven by our recent contract awards. The average daily rate for Australian villages in U.S. dollars was $74 in the third quarter up modestly from 73 in the third quarter of last year. The increase was moderated by the weakened Australian dollar. The average daily rate in Australian dollars was up 6% year-over-year.

On a consolidated basis, capital expenditures for the third quarter of this year were $9.5 million compared to $8.8 million during the same period 2022. The Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages, coupled with spending to activate mothball Australian village rooms with increased customer demand. Additionally, the third quarter of 2023 also included $3.6 million in expenditures for the Australian customer funded infrastructure upgrades that we've discussed on prior quarter conference calls.

Our total debt outstanding on September 30 was $103.2 million, a $32.9 million decrease since June 30. Our net leverage ratio for the quarter also decreased to 0.9x as of September 30 from 1.2x as of June 30. And as of September 30, we had total liquidity of approximately $110.6 million, consisting of $102.8 million available under our revolving credit facilities and $7.8 million of cash on hand.

I'd like to turn now to capital allocation. In the third quarter of 2023, we repurchased approximately 62,000 shares through our share repurchase program for a total of approximately $1.3 million. And in September, we announced our new capital allocation framework, which included the initiation of a $0.25 per share quarterly dividend. After paying our first dividend in late September, this morning, we announced that our Board of Directors has declared our second quarterly dividend payment. Shareholders of record as of November 27, will receive a $0.25 per share cash dividend payable on December 18.

Our new capital allocation framework allows our strong cash flow generation to support our existing operations, return capital to our shareholders through a consistent dividend and opportunistic share repurchases. Use excess cash flow to fund growth opportunities and maintain our target leverage ratio at 1x to 1.25x due the cycle. We do believe it is prudent, however, to provide flexibility to increase our leverage ratio up to 2x to pursue accretive growth opportunities where appropriate.

With that, I'll turn it over to Bradley to discuss our updated guidance for the full year 2023. Bradley?

[Bradley Dodson, executive]

Thank you, Carolyn. I'd like to turn our discussion to our updated full year 2023 guidance consolidated basis, and we will look at the outlook for each of the regions. We are increasing our full year 2023 revenue and adjusted EBITDA guidance ranges, resulting in the ranges of 675 to 885 -- sorry, $635 million to $685 million for revenues and $95 million to $100 million for adjusted EBITDA. We are maintaining our full year 2023 capital expenditure guidance of $35 million to $40 million.

Based on this EBITDA and CapEx guidance, expected net cash proceeds from the McClelland Lake demobilization and sale of those assets of approximately $20 million. Expected cash interest expense of $12 million for 2023. And expected working capital inflows of $5 million, largely related to customer reimbursement of capital associated with Village upgrades. Limited cash taxes. We are adjusting our expected 2023 free cash flow range to $68 million to $78 million for the full year.

I'll now turn to regional outlooks and the underlying assumptions. In Canada, as we look into the fourth quarter of 2023, we are expecting to experience a sequential decline in Canadian mobile camp activity with the Coastal [ GasLink ] pipeline continuing to wind down coupled with the typical fourth quarter sequential decline in large build rooms due to the end of turnaround season and normal holiday downtime at the end of the year.

[indiscernible] in Canadian mobile camps, there are no material changes in our outlook. The camps began winding down in the third quarter, and the fourth quarter will be burdened with approximately USD 10 million of demobilization expense. We continue to expect approximately USD 6 million of demobilization expenses in 2024 related to the mobile camps.

In regards to the McClelland Lake lodge sale, we expect to receive the majority of the net proceeds currently estimated to be $20 million in the fourth quarter of 2023 with the remainder of the net proceeds in early 2024. We are pleased to announce that we have secured the transportation contract associated with this sale and the demonization and transmission of these assets is underway. We are actively pursuing other opportunities associated with the sale, and we'll update you as we know more.

Turning to Australia. We continue to see encouraging signs of growth in customer demand for both our owned villages and our integrated services business. Our integrated services business is benefiting from increased revenue from our recent contract wins over the last few quarters, and our efforts in the inflation mitigation plan that we've been focused on. We began to see the benefits of our inflation mitigation efforts in the third quarter and expect to see additional benefits in the fourth quarter and into 2024.

As it relates to our 2024 outlook, I'll provide a few preliminary comments. As we've discussed throughout the year, 2024 is expected to be a transitional year for our Canadian business, resulting in a year-over-year decline in EBITDA. With the sale of the McClelland Lake Lodge and the wind down of Canadian mobile camp activity, we are acutely focused on replacing these earnings and growing the company. While we continue to monitor market dynamics as we work through our 2024 budget process, and we will provide a more detailed outlook on our 2023 year-end conference call in February. We are gaining more optimism around the ability to offset a material portion of this decline.

I'd like to touch on a few of these opportunities and positive trends that we're seeing. In Canada, we are pleased with the outcome of the McClelland Lake Lodge sale and securing the transportation contract for those assets. We're actively pursuing additional opportunities related to this transaction that could contribute in 2024. While we will lose the build rooms from our former McClelland Lake Lodge customer, the remainder of our oil sands portfolio remains solid, and we should see improved performance from our launch portfolio.

In Australia, we are encouraged by the outlook for both our own villages and integrated service business. Our own villages are currently at record high occupancy, and we're expecting higher build rooms in 2024. Our integrated services business should continue to benefit from the inflation mitigation plan and the margin improvement experienced in the second half of this year, and we expect it to also grow top line in 2024.

Regarding the cash flow, while we are currently anticipating a decline in EBITDA in 2024, we should see relatively consistent free cash flow due to the wind down of camp activity resulting in significant associated receivables that we expect to be collected in the first half of 2024.

I will conclude by underscoring the key elements of our strategy. We will prioritize the safety and well-being of our guests, employees and communities. We'll continue to enhance our best-in-class hospitality offerings. We will continue to manage our cost structure in accordance with our occupancy outlook, and we will allocate capital prudently to maximize free cash flow generation while we continue to return capital to shareholders and focus on growth opportunities.

With that, we're happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Steve Ferazani with Sidoti.

[Steve Ferazani, analyst]

Thanks for all the color on the call. I just want to ask a couple of questions on Canada. The Canadian accommodations margins significantly improved just if that was around McClelland in the sale or if there's anything significant costs you're taking out or any margin improvement that's sustainable there because it was much better?

[Bradley Dodson, executive]

I think it's a handful of things. We had strong occupancy in Canada in the third quarter. We had very strong turnaround activity in the -- what we call our core region of assets, which is the Fort McMurray Village, Beaver River Athabasca area. In addition, we had the occupancy that was at the cloned move into Beaver River Athabasca. So improved occupancy gives us economies of scale and we're able to leverage that. There were also some efforts that have been put in place earlier in the year. They are paying benefits in terms of labor costs. And that really flowed through the third quarter was our first time to really see the benefits of that.

In addition, we had some wildfire-related response-related occupancy at [ Sika ] in British Columbia that helped during the quarter. Those are the main components that helped.

[Steve Ferazani, analyst]

Okay. How much of that do you think is sustainable the actions you've taken?

[Bradley Dodson, executive]

Well, certainly, the labor efforts that we put in place will continue -- we won't have.

[Steve Ferazani, analyst]

No, the seasonality to it, of course, I know seasonality [indiscernible].

[Bradley Dodson, executive]

But I think the efforts the team has made, we'll be lasting on the labor side in Canada.

[Steve Ferazani, analyst]

On the cadence of the line down with mobile camps, I was surprised that it didn't step down this quarter. Can you just help us out on anything you know on timing when you think that the wind downs complete?

[Bradley Dodson, executive]

It will be fourth quarter.

[Steve Ferazani, analyst]

It will still -- would you still -- but you're expecting some revenue remaining there? Or not?

[Bradley Dodson, executive]

We'll have some, but it will -- in terms of EBITDA contribution, coupled with the mobile temp demobilization costs that will start to flow through in the fourth quarter. So the revenues will -- will step downward.

[Steve Ferazani, analyst]

Okay. Fair enough. On -- when you sold McClelland Lake, you highlighted the fact that you can use funding for growth, and that's certainly not something you've -- there hasn't been a lot of growth efforts the last few years. Can you give us a little bit of highlights on what your growth strategies might be particularly as you try to replace some of that mobile camp revenue?

[Bradley Dodson, executive]

Yes. So in Canada, we're looking at an entry point into the [indiscernible]. There are also going to be some opportunities to pick up selected properties in Canada that would augment the portfolio. Those are the 2 main things we're looking at right now, in addition to pursuing opportunities related to the McClelland Lake sale.

[Steve Ferazani, analyst]

And then last one for me. Your outlook on Australia, obviously, significant gains. We know that there's investment by the mining industry in Australia. But what's your upside from here? Do you think you've seen the biggest gains? I know you've had some big contracts. Is there a room for occupancies to grow from here?

[Bradley Dodson, executive]

Going into 2024, we'll have the benefit of a full year of the contracts we signed this year that we mentioned on prior calls, there are going to be some opportunities, modest opportunities to add additional rooms or bring mothballed rooms online in Australia, both of those, whether they're new build rooms or bringing on mothballed rooms. Those will only move forward if we have customer commitments that support them. We expect that -- so that's on the own village side on the integrated services side, we'll have the full year benefit of the contract wins that we've had this year, and we see a portfolio of opportunities to continue to win additional work and grow that business.

It will also benefit from the full year benefits of the inflation and mitigation plan that we put in place. So as the first past margins out of the integrated sources business were not where we wanted them. We got -- we had some benefit in the second quarter. We had some benefit from the mitigation plan in the third quarter really didn't see the full benefit of it on a clean basis until September. So fourth quarter will be one where we're expecting to see how the true benefit and confirming that our efforts played out as we anticipated them.

[Steve Ferazani, analyst]

Perfect. If I could just get one last one in. Given the very healthy dividend you've introduced, and I know given the liquidity of the stock, the buybacks can be challenging. Does the dividend to some degree, replace the buyback? Or could you still be aggressive with the buyback, given that you're -- with the cash coming in from McClelland Lake, your net leverage is probably going to bump against the low range of your target already.

[Bradley Dodson, executive]

That's correct. And there in terms of timing of reemploying it for growth opportunities. It may bump down lower in the fourth quarter as well. But I expect that we'll have some opportunities to put capital work in 2024 that we will fund with cash flow and leverage.

[Operator]

Our next question comes from the line of [ Alec Seibelhafer ] with Stifel.

[Unknown Analyst]

If you can hear me, just to kick us off here. I know you gave a lot of color just in the last Q&A session during the call. But just at a high level, if there's any additional color you could give us just understand the puts and takes when we're thinking about 2024 and maybe some of the avenues of growth you're pursuing a cost out, maybe a little bit more granular.

[Bradley Dodson, executive]

Well, let's start with Australia in terms of year-over-year, we'll have, as I mentioned, we'll see -- we expect at this point still finalizing our budgets that build rooms and the undiligence will be up year-over-year. We'll have the full year benefit of being quite frankly, fully occupied at Coppabella and Moranbah villages, which were nicely occupied in the first half of 2023. But certainly, our full rafters in the second half and expect that to continue into 2024.

The other piece, major piece is going to be just top line growth in integrated services coupled with better margins as we've adjusted pricing for the inflationary environment that we've experienced. So those are the main drivers there. If we can get to customer commitments, we'll certainly expand the own villages if we can make the economics work. So that's Australia.

In Canada, we've got -- we had effectively a full year of McClelland occupancy. The first half was at [ Napoli ], the second half was at Beaver Athabasca. So their Canadian build rooms will be down year-over-year, we're still finalizing what that looks like. And then we'll have mobile camp both top line and EBITDA will be down year-over-year. So what we're looking at is trying to redeploy assets. One of the things that really you look for the silver lining in difficult situations and the McClelland Lake Lodge was a difficult situation. But in marketing those assets, it gave us a very good insight into the value of modular and mobile camp assets in the broader industrial complex, both in Canada and down here in the U.S. and see an opportunity to leverage underutilized asset -- existing underutilized assets in Canada to leverage our way into new opportunities, both across Canada and into the U.S. expect over the next 12 months, we'll have -- be able to put some more meat on that book.

[Unknown Analyst]

And then -- just as a second question here, if you could just remind us or talk a little bit about the mobile demobilization that hit in 2023 and how much lingers into '24. I think you said $6 million, but if you could just refresh my memory on that. That would be great.

[Bradley Dodson, executive]

So let me be clear for everyone. So on the mobile camps, we had $10 million of demobilization expenses that will run through EBITDA in 2023 and $6 million that will run through EBITDA in 2024. As it relates to the demobilization costs related to McClelland, that will flow through other income and expense line item, along with the proceeds from selling those assets. So A little confusing as we'll talk about demo both cases, but we'll try and be clear.

[Operator]

Our next question comes from the line of Dave Storms with Stonegate Capital Markets.

[David Joseph Storms, analyst]

Good morning. Just one quick one on McClelland Lake. Are there any contingencies there that we should be aware of, any earnest money that may or may not be material?

[Bradley Dodson, executive]

There were some deposits that were put in place upon signing the agreement, and we're paid as soon as the units are truck ready on location in Alberta. As it relates to the sale of the assets as it relates to the transportation, those will be -- start to be recognized in the fourth quarter as we move the assets from Alberta down to Western U.S. to the Western U.S.

[David Joseph Storms, analyst]

Understood. Appreciate it. And then it looks like over the last 4 quarters, the EBITDA contribution from Australia and Canada has been about a 50-50 split. Is this a trend we should think about going forward? Or do you think that there's a potential for that split to diverge a little?

[Bradley Dodson, executive]

Well, because of the loss of the McClelland earnings and the Mobile Camp earnings in Canada, it will shift in 2024. And as highlighted in the comments, we're working to -- on earnings replacement for Canada. That will take some time.

[David Joseph Storms, analyst]

Understood. And then just one more, and I think you touched on this a little bit earlier, but your leverage ratio is below that 1x target. Is this gear and up for something? Or is this just the normal fluctuations of the leverage ratio through the cycle?

[Bradley Dodson, executive]

I would say it's normal fluctuations. Our free cash flow historically, and we expect this trend to continue, is usually strongest in the second half of the year. The reasons for that are you ramp up in the first half of the year, receivables go up, have the start of the turnaround seasons predominantly in Canada, but Australia as well in the second quarter. And then those receivables start to unwind in the second half of the year. So we had strong free cash flow in the quarter. We expect to have strong free cash flow in the fourth quarter. And then on top of that, you've got the net proceeds from McClelland coming through.

So I would say it's just normal fluctuations exacerbated or enhanced, not exacerbated enhanced by the proceeds from on the bond sales. So I do expect it to temporarily go below our range, and then we expect to deploy that and growth efforts in 2024.

[Operator]

There are no further questions in the queue. I'd like to hand the call back to Bradley Dodson for closing remarks.

[Bradley Dodson, executive]

Thank you, and thank you all for joining us on the call today. We appreciate your interest in Civeo, and we look forward to speaking with you on the fourth quarter and full year earnings call, which we expect to do in February.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.