Civeo Corporation (CVEO) Q3 2014 Earnings Report, Transcript and Summary

Welcome to the Civeo Corporation Third Quarter 2014 Earnings Conference Call. My name is Alexandra, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Carolyn Stone, Vice President, Controller and Corporate Secretary. Carolyn, you may begin.

Thank you, Alexandra. Welcome to Civeo's Third Quarter 2014 Earnings Conference Call. Our call today will be led by Bradley Dodson, Civeo's President and Chief Executive Officer; and Frank Steininger, Senior Vice President and Chief Financial Officer. Before we begin we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain information other than historical information, please note that we are relying on the Safe Harbor protection afforded by federal law. Any such remarks should be weighed into the context of the many factors that affect our business, including those risks disclosed in our Form 10 and other SEC filings. I will now turn the call over to Bradley.

Thank you, Carolyn. Good morning to all of you, and thank you for joining us today for Civeo's Third Quarter 2014 Earnings Conference Call. On the call today, I will provide an overview of the third quarter results. Frank will walk through the specific results of the quarter, and then I will discuss each segment and the near-term outlook. I will conclude with an update on our strategic initiatives. We are pleased with our third quarter results, which exceeded our previously announced guidance. Our third quarter results for our Canadian segment reflected sequentially improved lodge revenues as we increased capacity in our new McClelland Lake Lodge. Our Australian segment reported sequentially flat revenues as expected with improved margins. And our U.S. segment's revenues were sequentially lower, primarily due to lower open camp revenue, but adjusted EBITDA was up slightly, primarily due to lower SG&A expenses. On consolidated basis, we reported revenues of $243 million, $92 million of adjusted EBITDA and adjusted EPS of $0.31 per diluted share. At this time I'd like to turn it over to Frank to take you through the details of our consolidated results and financial position. Frank?

Thank you, Bradley. During the third quarter of 2014, we reported operating income of $46 million on revenues of $243 million. Our net income for the third quarter 2014 totaled $32.4 million or $0.30 per diluted share. This included a $0.01 per diluted share after-tax reduction from transition-related costs. Excluding these costs, adjusted operating income, net income and earnings per share would've totaled $47 million, $33.3 million and $0.31 per diluted share, respectively. These results compare to operating income of $53.4 million on revenues of $245 million in the third quarter of 2013. Our net income for the third quarter of 2013 totaled $39.6 million or $0.37 per diluted share. We recognized a tax expense of $9 million that resulted in an effective tax rate of 21.6% in the third quarter of 2014, which compared to an effective tax rate of 22.2% in the third quarter of 2013. The difference in the effective tax rate from the prior year was largely due to the reduction in our estimated effective tax rate for the full year 2014 to 17.5% resulting from a change in earnings mix between our different tax jurisdictions and the impact of changes in our corporate structure as a result of the spin-off from Oil States. Moving on to the balance sheet. Our gross and net debt levels totaled $775 million and $533 million, respectively, at September 30, 2014, representing a debt-to-capitalization ratio of approximately 39%. Our leverage ratio was 2.1x at September 30. During the first 9 months of 2014, we reported strong cash flows from operations of $208 million, and we invested $208 million in capital expenditures, the largest component of which related to our newly constructed McClelland Lake facility in Canada. As of the end of the third quarter, we had total liquidity of approximately $885 million. That's comprised of $643 million of available -- availability under our credit facilities and $242 million of cash on hand. As reported yesterday, we announced that our Board of Directors declared our second quarterly dividend payment. Shareholders of record as of November 17 will receive a $0.13 per share cash dividend for each share of Civeo common stock that they own, payable on December 2. In terms of our fourth quarter 2014 consolidated guidance, we expect depreciation and amortization expense to approximate $48 million and net interest expense to approximate $5 million. We expect that our fourth quarter 2014 consolidated effective tax rate to be approximately 17.5%. We plan to spend $280 million to $300 million in total capital expenditures for the full year 2014, down from our prior guidance of $300 million to $350 million. The majority of the spending is in Canada, with a major component being the McClelland Lake Lodge project. The reduction in capital spending is due to both the timing of expenditures and timing of our customers' commitments for additional rooms. At this time, I would like to turn the call over to Bradley, who will begin with the discussion of our segments and more comprehensive outlook for the fourth quarter this year and an update of our strategic initiatives. Bradley?

Thank you, Frank. I'll start with our Canadian segment. Our new McClelland Lake Lodge continues to ramp up. At the end of the third quarter, we had 1,561 rooms operational, and we continue to expect to have 1,997 rooms available by year end. Consistent with our investment strategy, the McClelland Lake Lodge investment is supported by a 3-year contract, the majority of that initial capacity. Moving to operations. The Canadian segment revenues were up sequentially by $18 million from the second quarter of 2014 to $174 million. Adjusted EBITDA increased from $51 million in the second quarter of 2014 to $67 million in the third quarter. The revenue increase primarily relates to revenue from the McClelland Lake Lodge as well as a $4 million related to the sale of the wastewater treatment plant. The EBITDA increase was driven by McClelland Lake as well as lower SG&A expense. The SG&A expense reductions were driven by lower compensation and benefit expenses. The Canadian dollar exchange rate was relatively unchanged sequentially, so the FX impact on our Canadian results was fairly limited. RevPAR was relatively flat on a sequential basis, and as a result, lodge revenue increase was almost entirely due to the increase in available rooms. Lodge occupancy in Canada was in line with our expectations for the third quarter. In Australia, third quarter revenues were relatively flat sequentially, with improved EBITDA margins. Our Australian segment revenues were down less than $500,000 sequentially, which is largely attributable to a weakening Australian dollar. Adjusted EBITDA was $27 million, an increase of $1.4 million as compared to the second quarter of 2014, largely due to improved earnings from the Gunnedah Basin. We continue to manage operational capital spending in Australia in line with the current met coal pricing and customer spending outlook. In the U.S, revenues were down $1 million due to lower open camp activity. However, adjusted EBITDA was modestly up. During the third quarter, we recognized $1.4 million of recovery of previously reserved receivables, which benefited adjusted EBITDA. Moving to guidance. In terms of consolidated guidance, we expect our fourth quarter 2014 revenues to range between $200 million and $210 million on a consolidated basis, with EBITDA margin expected to be in the range of 32%, 34%. In the fourth quarter, the Canadian segment is expected to have lower revenues and EBITDA margins due to lower occupancy and a weaker Canadian dollar. With our outlook for lower occupancy, we have closed our Athabasca lodge and will serve client room demand in that area of the oil sands region with our Beaver River location. While we maintain the ability to reopen the Athabasca lodge when demand improves, the current demand outlook does not support keeping both locations open. We are ramping up our operations at the McClelland Lake Lodge and expect to reach occupancy levels that allows for operational efficiency in the fourth quarter of 2014. In Australia we expect fourth quarter results to be slightly lower than the third quarter results, due to a weaker Australian dollar and modestly lower occupancy. That's coupled with lower demand with the holidays. In the U.S we expect fourth quarter to be in line with the third quarter after adjusting third quarter results for the receivables recovery I mentioned. I'd now like to turn to our strategic plan and provide an update on the initiatives we are taking to improve our financial results and emphasize yield as the core component to Civeo's value proposition. As we previously announced, our strategic plan focuses on becoming a yield vehicle, executing on growth initiatives and implementing the appropriate capital allocation plan that we believe will drive enhanced value for our shareholders. With respect to organic growth, we are pursuing expansion on core markets with the near-term focus on Canada. We are pursuing opportunities in the In Situ region of the oil sands play and those in the British Columbia LNG market. Longer term, we also expect to capitalize on organic growth opportunities in Australia. Further to our announcement on October 23, management and the board are focused on implementing and executing a dividend policy that will deliver on our commitment to be a yield vehicle. This is under review by the board, and we expect that the board will complete its analysis and we will be in a position to announce our policy in 2015. In addition, we are focused on properly managing the business through this period of lower occupancy and earnings. We are aggressively working to fill rooms. We're pursuing incremental work for our mobile fleet and are working to rightsize our cost structures in Canada and Australia. We continue to monitor customer spending as we look for more clarity on 2015 activity levels. We have already begun efforts and are making progress on self-directed re-domiciling to Canada and expect to make the necessary initial filing with the SEC in the fourth quarter and complete the migration to Canada in the second or third quarter of 2015. Lastly, in summary, we are making the appropriate changes to our cost structure and continue to seek ways to improve our financial results in spite of the macroeconomic environment. In addition, we have clearly affirmed our strategy as being a yield vehicle for shareholders and expect to announce details of that strategy this year. We have ample free cash flow and liquidity to address our growth opportunities and to fund our current capital return program. We remain a leader in the workforce accommodation in our markets and have a strong financial position to weather this downturn activity as well as capitalize on opportunities it may present. That completes our prepared comments. Alexandra, would you please open the call for questions at this time.

[Operator Instructions] And the first question comes from Stephen Gengaro from Sterne Agee.

I wanted to ask a little bit about the room demand in Canada and how you go about this from a pricing perspective. And I know generally, you have a lot of long-term contracts in place. But when you have available rooms in Canada, how do you think about pricing it in the market, which seems to be a bit oversupplied right now?

Well, there are certain areas of the overall Canadian oil sands region that are oversupplied. And there are -- more customers now have the ability, which they historically have not, to be able to go out to what they call an RFP for their room needs. What we see is it has had a pricing impact on things. It's also had an impact on contract structure. The customers do not have to and are not -- do not want to take room commitments, and so the structure of the contract in certain areas, and specifically around the Athabasca Beaver River region for us, there is pricing competition, and we have seen pricing pressure there.

And when you look at the results in the third quarter, the margins were better than we had expected, I imagine. Maybe a little better than you expected, too, based on guidance. What was the driver? Was that just occupancy?

It was primarily the lower SG&A, as you'll see in the 10-Q, which we'll file here later today, early tomorrow. We did have some lower SG&A, primarily related to some medical benefits, recoveries as well as some lower compensation expenses that were both tied to the lower outlook, which impacted incentive compensation, as well as the lower stock price, which impacted equity compensation. Those would be rather transitional expenses that impacted the third quarter that were more onetime in nature.

The next question comes from Jeff Spittel from Clarkson Capital Markets.

Maybe if we could start off on the Athabasca lodge. It's more of a modeling question, Bradley. Was that closure effective as of the beginning of the quarter? Or should we expect some sort of partial contribution in the fourth quarter from that facility?

It was open effectively for the month of October. Last meal there was on Monday. We did have some guests there that we have notified and moved over to Beaver River. And in totality, the 2 -- closing that facility was the right decision in terms of the demand outlook and trying to maximize the earnings out of the combined property.

That makes sense. And with regard to Canadian LNG, with the new tax proposal in British Columbia, how are you thinking about the prospects moving forward for there? Do you think, hopefully, that presents a little bit of an opportunity if PETRONAS and some of the other partners move forward on these projects?

We were pleased to see that. We're also pleased to see that several of the major players responded favorably publicly to that announcement by the province. I would say that our position is we're cautiously optimistic on the prospects there. We are focused really on -- in order of opportunity. First, lodge opportunities on the coast. We have land bank in both the Prince River -- Fort Edward area as well as the Kitimat area, so we have a land position. And as we look for opportunities, we would look to execute on that. So we're also working to capture some of the -- primarily the pipeline work that will end up taking the gas from the Eastern part of the province to the coast for export. And then lastly, looking at some of the opportunities around the drilling activity.

The next question comes from Blake Hutchinson from Howard Weil.

Just kind of connecting some of the dots with regard to guidance. First of all, I would take it your currency assumptions sequentially are, maybe for both regions, probably in the area of maybe a 4% to 5% negative translation decline.

Yes, I think the Canadian piece is probably on the lower end of that range, and the Australian piece is on the upper end of that range. If not, maybe a little bit higher.

Okay. And then, I guess, sticking to Canada. If that's kind of where the assumption we're under with regard to currency, my math would suggest that you would expect something either to express itself beyond that, either in the RevPAR line or in terms of utilization decline to the magnitude of perhaps 10% or -- and RevPAR or maybe 1,000 basis points of utilization decline. Is that good math?

We haven't delineated anything to that degree. But we do have roughly about 4% related to FX, and then we will see an additional decline in Canada that's incorporated into that consolidated guidance.

And I guess, probably the reason I ask is I don't know -- I mean, versus historically, utilization, I guess, is somewhat of a new metric that has been brought about on the split. If I historically thought about your businesses outside of kind of seasonal periods or quarterly periods of adjustment, one that you can start to build back and kind of change your variable cost structure. But it sounds like from the nature of some of the contracting, that may be a little more difficult as we turn the page into 2015. Or can the adjustments be made during 4Q to kind of build back from the margin guidance, hopefully?

Well, we're continuing to complete our budgeting process. And to your question, we're very much focused on giving the outlook of lower occupancy, appropriately adjusting both the -- obviously, the variable costs will come down, but then also the necessary changes to the fixed cost structure. We've not completed that process. The teams have been working tirelessly on that, which is a difficult process, in which we will complete that in the coming couple of months and work through that with the board and be in a position as of the next conference call to hopefully provide a little more clarity around 2015.

Okay. And then, just finally, guidance has -- near-term guidance had, had been pretty flat for the Canadian mobile camp business. I mean, has part of that been concern about perhaps some more intertwined competition between fixed asset base and mobile asset base? Was there something abnormal running through that, that kind of gave the usual seasonality versus your flatter guidance? And any thoughts on where that business might be in 4Q? And I'll hang up.

Sure. Well, in terms of the third quarter results, the Canadian mobile camp or the Canadian non-lodge business included that sale of the water treatment plant of about $4 million. So once you back that out, the -- we are expecting -- as you mentioned, we have thought that we'd have a fairly flat Canadian lodge -- non-lodge revenue base third quarter to fourth quarter. So that expectation is consistent once you make the adjustment for the water treatment sale in the third quarter.

[Operator Instructions] We have question from Chuck Minervino from Susquehanna.

Just one follow-up question on the SG&A. Obviously, down quite a bit in 3Q. And I think you mentioned there that there were some onetime items. Can you just help us with how to think about that number in 4Q and in '15? If I'm not mistaken, I thought you guys still had to build out the accounting department and all those things associated with it being a public company, so any help there would be useful.

Sure. For the fourth quarter we're expecting consolidated SG&A to be in the range of about $18.5 million. So that is SG&A that's in Canada and Australia. The divisional level obviously includes a component of the corporate costs, and so it would be up sequentially from the third quarter actuals by about $4.2 million.

Okay. And is that a...

Adjustments that we have.

Yes, I mean, if you take the adjustments that we mentioned in the fourth quarter, it would basically be flat because there was about $4 million, plus or minus. There were some ins and outs in the third quarter that were fairly onetime in nature.

And is that a good number to kind of demodeling as a run rate in '15 as well? Or does it step up a little bit more with some of these internal kind of departments that need to get built out?

So what we've planned on doing in terms of reporting is we will continue to call out those transition costs, although the team is making exceedingly good headway on transitioning out of the spin-off and getting off the transition services agreement. But we'll also be incurring costs related to the re-domiciling. We'll also call those out. So if we exclude those 2 as more transactional costs and look at what the ongoing SG&A is going into 2015, I do expect it to go up. We'll continue to be judicious in trying to manage these costs, but we haven't fully built out our corporate cost structure. We've got increased other costs related to being an independent public company. So we'll continue to manage those as best we can, but I do expect them to go up into 2015.

Okay. And then, I guess, next year around, I guess, middle of the year, you have roughly 3,000 rooms or so rolling off in Australia. I know it's still 6 months away, months away, any read right now? I think, on your September call, you had said that you thought that the -- a good -- a bare case there would be maybe 10% of those rooms don't get recontracted? Is that still the current thought right now? Or is there any updated views on that?

So we're still working through the 2015 budgeting process, as I mentioned here in the prepared comments in reference to the previous question. We'll continue to work through that process, and we'll provide guidance on the next call. So no update on that end.

And then, I guess, also a question on kind of the dividend and the CapEx plans for next year. Is the way to think -- I guess you will be giving us some more color as you get closer, but are you looking at that right now as the baseline being more of a maintenance CapEx number and looking at a dividend payout based on that? Or are you going to have growth CapEx in there and you'll kind of look at a dividend payout based off of that?

Well, the board and management are currently working through that to develop the metric to publicly disclose what the dividend policy will be going forward. And so that deliberation has not concluded, and so I don't have any guidance as to the way we will calculate it. But generally, taking operating cash flow and then some deduction for CapEx and debt requirements, debt service requirements, would generally be the methodology. But we'll have to ought to give better guidance on that once the deliberations have concluded. In terms of the CapEx, that should always be the starting point, is maintenance CapEx. And then layering in growth CapEx as -- and in this environment, it needs to be contracted growth CapEx. And so that is the expectation. We're -- continue to work through and refine our estimates of growth CapEx. We had previously said $50 million to $60 million in growth -- I'm sorry, in maintenance CapEx. And having gone through most of the budgeting process, at least as it relates to capital, maintenance number is closer to $60 million. I think that's a good number to use as you model for maintenance CapEx.

Okay. And I guess my last question is related to -- you mentioned kind of closure of the Athabasca lodge, and I know you have some rooms rolling off in Canada in '15 that are later in the year. What are your views on the prospects of moving a facility in Canada somewhere else where you may be pursuing a contract? Is that feasible? Is that economical? Or is it really not in the cards as you kind of look at maybe LNG or some of these other potential projects out there?

Sure. Well, obviously, we've been in the 15-plus years that we have been operating -- or 20-plus years and 15 years as an owner operator in the oil sands region. We haven't closed such a major lodge as Athabasca, so -- it was done with a lot of thought and a lot of consternation, but it was the right decision for the company. And with that note, all options are on the table. And so if there's an opportunity to relocate some rooms where we can get an appropriate term contract to support the cost of moving it, we'd certainly look at that. And economics, I think that's one where -- I think it is reasonably economic, but ultimately, that is a pricing conversation that has to be discussed with deal to the customer.

And we have a question from Stephen Gengaro from Sterne Agee.

Just a quick follow-up, gentlemen. I believe in the Form 10, the room rollovers, I think it was 6,700 next -- in '15? Is that still the right number?

We do have -- I don't have the specific number with me, Stephen. What we do have next year is the rollover of approximately -- or the roll-off of approximately 3,000 rooms in Canada. That's primarily at Wapasu is the major component of that. There are some room rollovers in Australia. Right now, as we talked about, we'll continue through the budgeting process. And as we get a little clearer picture on that, we'll certainly provide guidance on the next call.

We have no further questions at this time.

Well, thank you, everyone, for dialing in this morning. We appreciate it. We look forward to speaking with you throughout the quarter and on the next quarterly conference call.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.