Civeo Corp

NYSE:CVEO

Earnings Call Transcript 2023-Q4

[Operator]

Greetings. Welcome to the Civeo Corporation's Fourth Quarter 2023 Earnings Call. [Operator Instructions] Please note this conference is being recorded. At this time, I'll turn the conference over to Regan Nielsen, Vice President, Corporate Development and Investor Relations. Regan, you may now begin.

[Regan Nielsen, executive]

Thank you, and welcome to Civeo's Fourth 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 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 Form 10-K, 10-Q and other SEC filings. 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 fourth quarter 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 fourth quarter 2023 performance and 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.

I'll begin with a few important highlights. Our fourth quarter 2023 revenues, adjusted EBITDA and free cash flow exceeded our expectations. Australian adjusted EBITDA increased 64% compared to the fourth quarter of 2022 due to particular strength in our build rooms at our owned villages where we posted our third consecutive quarter of record performance. We also saw a 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.

Moving to Canada, subsequent to the end of the quarter, we completed the previously announced sale of the McClelland 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. 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 third consecutive quarterly record for that side of our business.

In the fourth quarter, our Australian integrated services business experienced significantly improved margins as our inflation mitigation efforts started to demonstrate positive results. We continue -- 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 million 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 USD 5.6 million in mobile camp demobilization costs in the fourth quarter. Regarding the sale of our McClelland 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 fourth quarter with the remainder here in January 2024. As a reminder, the entirety of the sale proceeds and associated costs as well as other related reimbursements are included -- 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. And with that, I'll turn the call over to Carol.

[Carolyn Stone, executive]

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 fourth quarter were $170.8 million with GAAP net income of $23 million or $1.55 per diluted share.

During the fourth quarter, we generated adjusted EBITDA of $17.4 million. Again, this is exclusive of the financial impact of the dismantlement and sale of the McClelland lake Lodge assets. Operating cash flow of $40 million and free cash flow of $39.2 million. Fourth quarter adjusted EBITDA increased year-over-year due to increased build runs at our 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 $5.6 million in mobile camp demobilization costs.

For the full year 2023, we reported revenues of $700.8 million and net income of $30.2 million or $2.01 per diluted share. In 2023, we generated adjusted EBITDA of $102 million, a decrease from our 2022 adjusted EBITDA of $112.8 million. Results for the full year of 2023 reflects the impact of a stronger U.S. dollar, which decreased both revenues and adjusted EBITDA by $28.8 million and $5.7 million, 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.

Let's now turn to the fourth 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 fourth quarter of 2022. Revenues from our Canadian segment were $72.7 million as compared to revenues of $88 million in the fourth quarter of 2022. Adjusted EBITDA in Canada was $3.4 million, a decrease from $11.8 million in the fourth quarter of last year. Revenues and adjusted EBITDA decreased 17% and 72%, respectively, primarily driven by the wind down of LNG-related mobile camp activity, including $5.6 million of mobile camp demobilization costs.

During the fourth quarter, build rents in our Canadian lodges totaled $617,000, which was modestly down from $622,000 in the fourth quarter of 2022. Our daily run rate for the Canadian segment in U.S. dollars was $95, which increased slightly from $93 in the fourth quarter of last year.

Turning to Australia. During the fourth quarter, we recorded revenues of $89.3 million, up from $73.1 million in the fourth quarter of 2022. Adjusted EBITDA was $21.5 million, up 64% from $13.1 million last year. The significant increase to adjusted EBITDA was due to increased billed rooms at our owned villages, increased integrated services activity and improved margins due to our inflation mitigation efforts. Australian billed rooms in the quarter were a source of strength, 638,000 rooms, up 23% from 519,000 in the fourth 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.S. dollars was $74 in the fourth quarter, up modestly from $73 in the fourth quarter of 2022.

On a consolidated basis, capital expenditures for the full year 2023 were $31.6 million compared to $25.4 million 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 million in expenditures for the Australian customer funded infrastructure upgrades that we have discussed on prior quarter conference call.

Our total debt outstanding on December 31, 2023, was $65.6 million, a $37.7 million decrease since September 30, 2023. We were pleased to reach and exceed our net leverage ratio target in 2023. We ended the year at 0.6x, down from 0.9x as of the September quarter end. And as of December 31, 2023, we had total liquidity of approximately $136.4 million, consisting of $133.1 million available under our revolving credit facilities and $3.3 million 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. 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 due to cycle.

However, we are open to increasing our leverage ratio up to 2.0x to pursue accretive growth opportunities where appropriate, and we may also occasionally drop below 1.0x as we have at December 31 as we carefully assess growth opportunity.

During the fourth quarter of 2023, we repurchased approximately 121,000 shares through our share repurchase program for a total of $2.4 million. And earlier this month, we announced that our Board of Directors has declared our third quarterly dividend payment. Shareholders of record as of February 26 will receive a $0.25 per share cash dividend payable on March 18. With that, I'll turn it over to Bradley to discuss our initial guidance for the full year 2024. Bradley?

[Bradley Dodson, executive]

Thank you, Carolyn. Now let's turn the discussion to our initial full year 2024 guidance on a consolidated basis and will include an outlook for each of the regions. We are initiating full year 2024 guidance of revenues of $625 million to $700 million and adjusted EBITDA of $80 million to $90 million. Our initial full year 2024 capital expenditure guidance is $30 million to $35 million. Based on this adjusted EBITDA and CapEx guidance, expected net cash proceeds related to McClelland dismantlement and sale of approximately $6 million, expected cash interest expense of also approximately $6 million, expected working capital inflow of $10 million and expected Australian cash taxes of $10 million. We are expecting our 2024 free cash flow to be in the range of $45 million to $60 million.

I will now provide the regional outlooks and corresponding on our line 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 McClelland Lake earnings, which account for approximately $27 million 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. We are acutely focused on replacing these earnings and growing the company, by 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 McClelland Lake Lodge, we should experience steady to modestly increasing build rooms across the rest of our lodge portfolio. Regarding our mobile camps, the majority of our mobile camp rental activity is complete, and we are continuing to -- continuing the demobilization process in 2024. We expect approximately $6 million of demobilization costs in the first half of this year, which is contemplated in our full year 2024 guidance. 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 owned 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 owned villages in the portfolio in Australia. As it relates to our integrated services business, the story of 2023 was our inflation litigation plan that we executed throughout the year. Our significantly improved margins in the fourth quarter demonstrate the products 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 AUD 500 million of revenues by 2027.

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 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]

[Operator Instructions] And our first question comes from the line of Stephen Gengaro with Stifel.

[Stephen Gengaro, analyst]

I think the first for me is when we think about the strength in Australia that you saw in the fourth quarter 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 suggests for Australia and how we should think about sort of the potential gives and takes with the economic conditions right now?

[Bradley Dodson, executive]

Well, all the indications from our customer base down there on the owned village side is one of -- well, for the new customers about growing production, certainly, some of the majors are looking at cost containment, but our outlook for occupancy and 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 million in revenues in 2024. That's up from about $240 million in 2023, but the big story is the margin improvement there. 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 composite of macroeconomic forces. As of right now, we feel very good about.

[Stephen Gengaro, analyst]

Great. 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 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?

[Bradley Dodson, executive]

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 them.

The integrated services, there are opportunities to expand that business through acquisition, and we're looking to do so. And that would be, again, in the Australian geography.

In Canada, I think one of the big takeaways from the saga that was McClelland Lake is that existing infrastructure has value as the replacement costs are significantly higher today than they have been historically. So reaching a complete newbuild lodge in North America economically is very difficult, in my opinion. So how do we leverage existing underutilized assets, primarily in Alberta to expand into other geographies, specifically Eastern Canada, looking perhaps as the McClelland Lake assets moving into Western U.S. has 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. But that has been more difficult to determine the intro.

[Operator]

Our next question is from the line of Steve Ferazani with Sidoti & Company.

[Steve Ferazani, analyst]

Bradley, Carolyn, obviously 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 maybe you can provide a little bit of color. I'm assuming it's a mix of the new contracts, some using inflationary pressures. I also wanted to ask about if labor constraints are easing and how much more room you've got into 2024 on all those points?

[Bradley Dodson, executive]

Some of it 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 pivoted 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 fourth quarter was a really nice quarter. We can maintain that kind of 9% to 10% gross margin integrated services, that's pretty solid. And now we're going to work on being more efficient on the operational side. Inflation is still an issue. So I don't want to discount it. What I think the team has done by focusing on, 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 than that, but the progress has been good.

[Steve Ferazani, analyst]

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

[Bradley Dodson, executive]

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.

[Steve Ferazani, analyst]

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

[Bradley Dodson, executive]

$45 million to $60 million.

[Steve Ferazani, analyst]

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

[Bradley Dodson, executive]

Right now, I mean we're -- we kind of blew through our target with the strong free cash flow in the fourth quarter. 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, probably frankly been able to, but now building that pipeline or that funnel of growth opportunities that I just highlighted on the past question. And so I'm cautiously optimistic where we able to show some growth and putting capital to work in a growth fashion in 2024.

[Operator]

Our next question is from the line of Dave Storms with Stonegate.

[David Joseph Storms, analyst]

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 [indiscernible] in that?

[Bradley Dodson, executive]

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

[Carolyn Stone, executive]

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

[David Joseph Storms, analyst]

Understood. And then you mentioned the [indiscernible] integrated services up to $500 million in Australia. What do the logistics look like for that? And what is the short-term success look like? Concern, it's a fairly long-term goal.

[Bradley Dodson, executive]

Well, our team has identified tangible contract wins over the next 3 years that should be able to get us to that $500 million 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 million of revenues and last year, it did to [ AUD 239 million ]. So we've made significant progress in 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.

[Operator]

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

[Bradley Dodson, executive]

Thank you, Rob, and thank you, everyone, for joining the call today. We appreciate your interest in Civeo, and we look forward to speaking with you on the first quarter 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.