Civeo Q3 2023 Earnings Call Transcript

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October 27, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Civeo Corporation Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Reagan Nielsen, Vice President, Corporate Development and Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, and welcome to Civeo's Q3 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 ks, 10 Q and other SEC filings.

Speaker 1

I'll now turn the call over to Bradley.

Speaker 2

Thank you, Reagan. Thank you all for joining us today on our Q3 earnings call. I'll start with the key takeaways for the Q3 and Then give a brief summary of our Q3 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.

Speaker 2

Four key takeaways from our call today are the Q3 2023 financial results exceeded our expectations, Strong operational execution in both Canada and Australia, with Australia demonstrating strong year over year growth. During the quarter, we secured an economically attractive solution for our McClellan 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 program. The last key point is that we'll provide a qualitative assessment of our initial outlook for 2020. Let me now take a moment to discuss the Q3 and our segments.

Speaker 2

Our revenue in the Q3 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 in Australia. Our Australian segment performed exceptionally well during the quarter as we experienced sequential and year over year growth Setting a 2nd 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 a constant currency, revenue from our Australian Integrated Services business grew both sequentially 12% 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 Q4 of this year and into next year.

Speaker 2

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 3rd 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 Q3 of 2022. We also began demobilizing our mobile camps in the Q3 in this Q3 of 2023. Regarding the sale of our Macon Lake Lodge in Canada, we have secured in addition to the sale, the transportation contract for the assets And the demobilization and transportation work is underway.

Speaker 2

During the Q3 of 2023, We incurred approximately $4,900,000 of demobilization expense related to the McClellan Lake Lodge assets. The majority of the net proceeds from the McClellan sale will be recognized in the Q4 of 2023 and into the Q1 of 2024. In regards to the financial impact of this sale, the entirety of the sales proceeds and associated costs will be accounted for And 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.

Speaker 2

This provides flexibility to use our strong cash flow generation Our existing operations fund growth opportunities and return capital to shareholders. We also continue to execute on our share repurchase plan in the Q3 and will opportunistically buy back shares moving forward. With that, I'll turn the call over to Carolyn.

Speaker 3

Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the Q3 of $183,600,000 with GAAP net income of $9,000,000 or $0.61 per diluted share. During the Q3, we generated adjusted EBITDA of $32,900,000 Operating cash flow of $36,800,000 and free cash flow of $31,700,000 As Bradley mentioned earlier, the decline in adjusted EBITDA we experienced in the Q3 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 Let's now turn to the 3rd 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 Q3 of 2022.

Speaker 3

Revenues from our Canadian segment were $95,100,000 as compared to revenues of $103,000,000 in the Q3 of 2022. Adjusted EBITDA in Canada was $23,000,000 a decrease from $25,600,000 in the Q3 of last year. Results from the Q3 of 2023 reflect the impact of a weakened Canadian dollar relative to the U. S. Dollar, which decreased revenues and adjusted EBITDA by $2,600,000 $700,000 respectively.

Speaker 3

On a constant currency basis, revenues decreased 5%, primarily due to a decline in mobile camp as pipeline construction continues to wind down. Adjusted EBITDA also declined year over year due to the aforementioned dynamics. During the Q3, build rooms in our Canadian lodges totaled 726,000, which was modestly down from 7 31,000 in the Q3 of 2022. Our daily run rate for the Canadian segment in U. S.

Speaker 3

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.

Speaker 3

During the Q3, we reported revenues of $87,900,000 up from $73,800,000 in the Q3 of last year. Adjusted EBITDA was $18,800,000 up 11% from $16,900,000 in 2022. Results from the Q3 of 2023 reflect the impact of weakened Australian dollar relative to the U. S. Dollar, which decreased revenues and adjusted EBITDA by $3,800,000 $800,000 respectively.

Speaker 3

On a constant currency basis, The increase in revenue and adjusted EBITDA was largely driven by increased occupancy at our owned villages as well as higher activity for our integrated Australian build rooms in the quarter were 623,000, Up 19% from 525,000 in the Q3 of 2022 due to increased Customer demand at our own villages driven by our recent contract awards. The average daily rate for our Australian villages in U. S. Dollars was $74 in the 3rd quarter, up modestly from $73 in the Q3 of last year. The increase was moderated by the weakened Australian dollar.

Speaker 3

The average daily rate in Australian dollars was up 6% year over year. On a consolidated basis, capital expenditures for the Q3 of this year were $9,500,000 compared to $8,800,000 during the same period 2022. Capital expenditures in both periods were predominantly related to maintenance Spending on our Lodges and Villages, coupled with spending to activate mothball's Australian Village Rooms with increased customer demand. Additionally, the Q3 of 2023 also included $3,600,000 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 $103,200,000 a $32,900,000 decrease since June 30.

Speaker 3

Our net leverage ratio for the quarter also decreased to 0.9 times as of September 30 from 1.2 times as of June 30. And as of September 30, we had total liquidity of approximately $110,600,000 consisting of $102,800,000 available under our revolving credit facilities and $7,800,000 of cash on hand. I'd like to turn now to capital allocation. In the Q3 of 2023, we repurchased Approximately 62,000 shares through our share repurchase program for a total of approximately 1,300,000 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 2nd quarterly dividend payment.

Speaker 3

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 1 times to 1.25 times due to cycle. We do believe it is prudent, however, to provide flexibility to increase our leverage ratio up to 2 times With that, I'll turn it over to Bradley to discuss our updated guidance

Speaker 2

Thank you, Carolyn. I'd like to turn our discussion to our updated full year 2023 guidance On a consolidated basis, 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 $675,000,000 to $875,000,000 to $685,000,000 for revenues $95,000,000 to $100,000,000 for adjusted EBITDA. We are maintaining our full year 2023 capital expenditure guidance of $35,000,000 to $40,000,000 Based on this EBITDA and CapEx guidance, expected net Tax proceeds from the MacCollin Lake demobilization and sale of those assets of approximately $20,000,000 Expected cash interest expense of $12,000,000 for 2023 and expected working capital inflows of $5,000,000 Largely related to customer reimbursement of capital associated with village upgrades. Limited cash taxes.

Speaker 2

We are adjusting our expected 2023 free cash flow range to $68,000,000 to $78,000,000 for the full year. I'll now turn to regional outlooks and the underlying assumptions. In Canada, as we look into the 4th 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 4th quarter sequential decline in lodge build rooms due to the end of turnaround season And normal holiday downtime at the end of the year. Regarding Canadian mobile camps, there are no material changes in our outlook. The camps began winding down in the Q3 and the 4th quarter will be burdened with approximately US10 $1,000,000 of demobilization expense.

Speaker 2

We continue to expect approximately US6 $1,000,000 of demobilization expenses in 2024 related to the mobile camps. In regards to the McLoughlin Lake Lodge sale, we expect to receive the majority of the net proceeds Currently estimated to be $20,000,000 in the Q4 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 demobilization and transportation 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.

Speaker 2

Our Engrade 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 Q3 and expect to see additional benefits in the Q4 and into 2024. As it relates to our 2024 outlet, I'll provide a few preliminary comments. As we've discussed throughout the year, 2024 is It will be a transitional year for our Canadian business, resulting in a year over year decline in EBITDA. With the sale of La Plone Lake Lodge and the wind down Canadian Mobile Camp Activity, we are acutely focused on replacing these earnings and growing the company.

Speaker 2

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 McClellan Lake Lodge sale and securing the transportation contract for those assets. We're actively pursuing additional opportunities related to this transaction that could contribute Our owned villages are currently at record high occupancy and we're expecting higher build rooms in 2024.

Speaker 2

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 free cash flow, While we're currently anticipating a decline in EBITDA in 2024, we should see relatively consistent free cash flow due to the wind down of mode of camp activity, Resulting in significant associated receivables that we expect to be collected in the first half of twenty twenty four. 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 will 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.

Speaker 2

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

Operator

Thank you. Our first question comes from the line of Steve Farizzani with Sidoti. Please proceed with your question.

Speaker 4

Good morning, Bradley and Carolyn. Thanks for all the color on the call. I want to ask a couple of questions on Canada. The Canadian accommodations margins Significantly improved. Just if that was around the McClellan and the sale or if there's anything significant cost you're Taking out any margin improvement that's sustainable there, because it was much better.

Speaker 2

I think it's a handful of things. We had Strong occupancy in Canada in the Q3. 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,

Operator

we had the occupancy that was at McClellan move into the into

Speaker 2

Beaver River, Athabasca. So, that was at McClellan move into that 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 that are paying benefits in terms of labor costs And that really flowed through the Q3 was our first time to really see the benefits of that. In addition, we had some wildfire related response related occupancy at Sitka In British Columbia that helped during the quarter.

Speaker 2

Those are the main components that helped.

Speaker 4

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

Speaker 2

Well, certainly the labor efforts And we put in place will continue. We won't have fire I

Speaker 4

know there's seasonality to it, of course. Right.

Speaker 2

I know there's seasonality enforcement. Yes. But I think the efforts the team has made will be lasting on the labor side in Canada.

Speaker 4

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

Speaker 2

It will be Q4.

Speaker 4

It will still

Operator

be. It will be the Q4.

Speaker 4

But you're still going, but you're expecting some revenue remaining there We're not.

Speaker 2

We'll have some, but it will in terms of EBITDA contribution, Coupled with mobile temp demobilization costs that will start to flow through in the Q4, so the revenues will We'll step down once we get this done. Okay.

Speaker 4

Fair enough. On when you sold McClellan Lake, you highlighted the 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 highlights on what your growth strategies might be, particularly as you try to replace some of that mobile camp revenue?

Speaker 2

Yes. So in Canada, we're looking at And as you point into the Montney, there are also going to be some opportunities to pick up selected properties in Canada that would augment the Those are the 2 main things we're looking at right now in addition to pursuing opportunities related to the McCallum Lake sale.

Speaker 4

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.

Speaker 4

Is there room for occupancies to grow from here?

Speaker 2

Going into 2024, we'll have the benefit of a full year of the contracts we signed this year As 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 owned villages side. On the Integrated Services side will 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 mitigation plan that we put in place. So because the first half Margins out of the Integrated Services business were not where we wanted them to be.

Speaker 2

We got we had some benefit in the 2nd quarter. We had some benefit From the mitigation plan in the Q3, really didn't see the full benefit of it on a clean basis Until September, so Q4 will be one where we're expecting to see how the true benefit and confirming That our efforts played out as we anticipated.

Speaker 4

Perfect. If I could just get one last one in. Given A very healthy dividend you've introduced. And I know given the liquidity of the stock, the buyback is 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 McClellan Lake, Your net leverage is probably going to bump against the low range of your target already?

Speaker 2

That's correct. And there In terms of timing of redeploying it for growth opportunities, it may bump down lower in the Q4 as well. But expect that we'll have some opportunities to put capital to work in 2024 that we will fund with Cash flow and leverage.

Speaker 4

Perfect. Thanks, Frazee.

Operator

Our next question comes from the line of Alek Seibelhofer with Stifel. Please proceed with your question.

Speaker 5

Hi, good afternoon, everyone, and thanks for taking my question here.

Operator

If you

Speaker 5

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

Speaker 2

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 Capobella and Moranbah villages, which were nicely occupied in the first half of twenty twenty three, It certainly are full of 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 the customer commitments, we'll certainly Expand the owned villages, if we can make the economics work.

Speaker 2

So that's Australia. In Canada, We've got we had effectively a full year of McClelland occupancy. The first half was at McClelland and the second half was At Beaver River Athabasca. So their Canadian build rooms will be down year over year. We're still finalizing what that looks like.

Speaker 2

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 Mahan White 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.

Speaker 2

And see an opportunity to leverage Underutilized assets existing underutilized assets in Canada to leverage our way into new opportunities both Across Canada and into the U. S. And expect over the next 12 months, we'll have be able to put some more meat on that boat.

Speaker 5

Great. Thank you for the color there. And then just as a second question here, if you could just remind us or talk

Speaker 2

a little bit

Speaker 5

about The mobile camp demobilization that hit in 2023 and how much lingers into 24, I think you said $6,000,000 but if you could just refresh my memory on that, That would

Speaker 2

be great. So let me be clear for everyone. So on the mobile camps, We had $10,000,000 of demobilization expenses that will run through EBITDA in $2023,600,000 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, we'll talk about deMov in both cases, but we'll try and be clear.

Speaker 5

Great. And that's all for me. I'll turn it back. Thank you.

Speaker 2

Thank you very much. Thanks for your questions.

Operator

Our next question comes from the line of Dave Storms with Stonegate Capital Markets. Please proceed with your question. Good morning. Good morning.

Speaker 6

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

Speaker 2

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 Q4 As we move the assets from Alberta down to Western U. S. To the Western U. S.

Speaker 6

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

Speaker 2

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

Speaker 6

Understood. Thank you. And then just one more, and I think you touched on this a little bit earlier, but your leverage ratio is Below that one times target, is this gearing up for something or is this just the normal fluctuations of the leverage ratio through the cycle?

Speaker 2

I would say it's normal fluctuations. Our free cash flow historically and we expect this trend to continue It's 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. You 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.

Speaker 2

So we had strong free cash flow in the quarter. We expect to have strong free cash flow Q4 and then on top of that, we've got the net proceeds from McClellan coming through. So I would say it's just normal fluctuations exacerbated or enhanced not exacerbated enhanced by the proceeds from them on sale. So I do expect it to temporarily go below our range, and then we expect to deploy that And growth efforts in 2024.

Speaker 6

Understood. That's very helpful. Thank you for taking the questions.

Speaker 2

Absolutely. Thank you.

Operator

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

Speaker 2

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 Q4 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.

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Key Takeaways

  • Our Q3 revenue of $183.6 million and adjusted EBITDA of $32.9 million exceeded expectations, generating free cash flow of $31.7 million and GAAP net income of $9 million.
  • The Australian segment set a second consecutive quarterly build-room record with constant-currency village revenue up 25% year-over-year and integrated services revenue growing 12% sequentially as inflation mitigation measures began to pay off.
  • In Canada, strong turnaround and wildfire lodgings offset lower LNG and pipeline camp activity, while the sale and demobilization of McClellan Lake Lodge (incurring $4.9 million demob costs) will recognize $20 million in net proceeds in Q4 2023 and Q1 2024.
  • The new capital allocation framework introduced a consistent quarterly dividend of $0.25 per share, renewed the share buyback program, and targets a net leverage ratio of 1.0–1.25× (up to 2× for opportunistic growth).
  • Full-year 2023 guidance was raised to $685 million in revenue and $95–100 million in adjusted EBITDA, with free cash flow of $68–78 million, and a preliminary 2024 outlook anticipates a Canada EBITDA decline offset by Australia growth and stable free cash flow.
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Earnings Conference Call
Civeo Q3 2023
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