Civeo Corporation (CVEO) Q1 2022 Earnings Report, Transcript and Summary

Greetings and welcome to the Civeo Corporation’ First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I’ll now turn the conference over to Regan Nielsen, Senior Director of Corporate Development and Investor Relations. Thank you. You may begin.

Thank you, and welcome to Civeo's first quarter 2022 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 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.

Thank you, Reagan. And thank you all for joining us today on our first quarter earnings call. I'll start today with a few key takeaways for the first quarter, and then give a brief summary of our first quarter 2022 performance. After which Carolyn will provide a financial and set overview and I’ll conclude our prepared comments with an updated full year 2022 guidance and the regional assumptions underlying that guidance, and then we'll open up the call for questions. The key takeaways from our call today are we had strong first quarter with year-over-year revenue growth of 32% and adjusted EBITDA growth of 57%, primarily driven by increased occupancy in our Canadian lodges and Australian villages, coupled with increased Canadian Mobil camp activity. The strong first quarter performance coupled with an improving customer demand drove our upward revision to our full year guidance. While our customers continue to be focused on capital discipline, and returning capital to shareholders, we're having more encouraging customer conversations, especially in Canada related to increased maintenance and turnaround spending for the remainder of the year. Due to these recent customer conversations and updated customer forecasts in terms of headcount, as well as our strong first quarter results, we are raising our full year 2022 revenue adjusted EBITDA guidance, which I will detail later in the call. Earlier this month, we announced a stock purchase agreement between Lance Torgerson, one of our largest shareholders on a fully diluted basis and conversing capital. The transaction encompassed all of Mr. Torgerson’s CVEO common shares available for sale. Under the agreement Mr. Torgerson sold approximately 958,000 CVEO common shares to Conversant. And now CVEO and Conversant Capital have the rights of first refusal on Mr. Torgerson’s common shares that are expected to be released from escrow in June of 2022. Absent early conversion of Mr. Torgerson’s preferred shares into common, Mr. Torgerson will not have any unrestricted CVEO common shares to sell into the open market until at least April 2023. While deleveraging our balance sheet remains our top capital allocation priority, our secondary focus continues to be returning capital to shareholders through our share repurchase program. As you will see in our first quarter Q, we only repurchased handful of shares in the first quarter. This was largely due to the time and focus required by our team to facilitate the execution of the stock purchase agreement with Mr. Torgerson and Conversant that we just discussed. We expect to continue to opportunistically repurchase shares under the program through the balance of the year. In total, we're pleased with our first quarter results compared to our expectations and we have seen some encouraging signs related to room demand and customer spending as we look out to the balance of 2022. Let me take a moment to provide a business update across our three segments. In Canada, our revenues and adjusted EBITDA were above our expectations and increased year-over-year, driven by a significant recovery in large billed rooms and increase Canadian mobile camp activity. We did experience a sequential decrease in adjusted EBITDA primarily due to increased operational costs related to colder than expected winter weather and a lower star to the year in terms of occupancy in the central oil sands area. In Australia, our revenues and adjusted EBITDA were also above our expectations increasing both sequentially and year-over-year. This was driven by increased year-over-year occupancy and average daily rate at our Bowen Basin villages due to recovering demand and sequentially higher average daily rates on modest increase in billed rooms. Turning briefly to the US benefit from increased drilling and completion activity, which resulted in year-over-year increase in revenues and adjusted EBITDA. Our offshore and wellsite businesses were the primary contributors to the increase due to higher rig count and higher customer activity. With that, I'll turn it over to Carolyn.

Thanks Bradley. And thank you all for joining us this morning. Today, we reported total revenues in the first quarter of $165.7 million, with GAAP net income of $0.9 million or $0.06 per diluted share. During the first quarter, we generated adjusted EBITDA of $25.6 million, operating cash flow $2 million, and free cash flow of $700,000. The increased adjusted EBITDA we experienced in the first quarter of 2022 as compared to the same period in 2021 was largely due to increased build rooms in our Canadian lodges and increase Canadian mobile camp activity, coupled with increased Australian village billed rooms. The year-over-year decrease in operating cash flow and free cash flow was primarily due to an increase in working capital in the first quarter of 2022 as a result of timing of payments, and receipts that is expected to unwind in the second and third quarters of this year. Let's now turn to the first quarter results for our three segments. I'll begin with a review of the Canadian segment performance compared to its performance a year ago in the first quarter of 2021. Revenues from our Canadian segment were $96 million as compared to revenues of $61.9 million in the first quarter of 2021. Adjusted EBITDA in Canada was $17.2 million and increase from $10.8 million in the first quarter of last year. The increase in both revenues and adjusted EBITDA was largely driven by a 32% year-over-year increase in billed rooms related to the recovery in oil prices, and the reduced effects of the COVID-19 pandemic coupled with increased mobile camp activity. During the first quarter, billed rooms in our Canadian lodges totaled 636,000, which was up 32% year-over-year from 480,000 in the first quarter of 2021 due to the factors we just discussed. Our daily room rate for the Canadian segment in US dollars was $106, a 9% year-over-year increase, primarily a result of increased occupancy at our Sitka Lodge. Turning to Australia, during the first quarter, we recorded revenues of $63.5 million, up from $59.6 million in the first quarter of 2021. Adjusted EBITDA was $15.4 million, up from $12.8 million during the same period of last year. These results which represent a 14% period over period top line increase on a constant currency basis, were driven by both increased billed rooms as well as increased daily room rates at our villages. The adjusted EBITDA increase was partially offset by increased labor costs, which were largely the result of COVID related travel on border restrictions. Our US dollar results were also negatively impacted by a weakened Australian dollar relative to the US dollar. Australian billed rooms in the quarter was 474,000, up 12% from 425,000 in the first quarter of 2021, due again to the recovery of customer maintenance activity in our villages, resulting from a more muted impact at the China Australia trade dispute. The average daily rate for Australian village in US dollars was $79 in the first quarter consistent with the first quarter of 2021. However, on a constant currency basis, our Australian village day rate increased approximately 6% primarily driven by increases in uncontracted room nights which are billed at a higher rate. Moving to the US, revenues for the first quarter were $6.2 million as compared to $3.9 million in the first quarter of 2021. The US segment adjusted EBITDA was breakeven in the first quarter and improvement from negative adjusted EBITDA of $1.2 million during the same period last year. These year-over-year increases were primarily driven by increased activity in the wellsite and offshore businesses. On a consolidated basis, capital expenditures for the first quarter of 2022 were $3.6 million, which was relatively consistent with the $3.4 million invested during the same period last year. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages. Our total debt outstanding on March 31, 2022 was $177.9 million, which represents a $2.8 million increase since December 31, 2021. The increase was the result of an unfavorable foreign currency translation of $3.1 million. Our net leverage ratio for the quarter decreased to 1.4x as of March 31, 2022, from 1.49x as of December 31, 2021. As of March 31, we had total liquidity of approximately $83.1 million consisting of $76.7 million available under our revolving credit facilities, and $6.4 million of cash on hand. Bradley will now discuss our updated guidance for the full year 2022. Bradley?

Thank you, Carolyn. I'd like to discuss our updated full year 2022 guidance on a consolidated basis including the underlying outlook for each of the regions as well as the underlying assumptions related to our guidance. Based on the first quarter results and our improving outlook for the remainder of the year, we are raising our full year 2022 revenue and EBITDA guidance to $660 million to $675 million of revenues and $95 million to $102 million of adjusted EBITDA. We are maintaining our full year 2022 capital expenditure guidance of $20 million to $25 million. Based on the increased EBITDA and the consistent CapEx guidance that I just outlined, expected interest expense of $10 million for the full year 2022, minimal to cash taxes this year. And raising, we're raising our expected 2022 free cash flow forecast to a range of $60 million to $72 million from the previous free cash flow guidance of $55 million to $65 million. This free cash flow guidance range assumes the first quarter working capital increase unwinds again in the second and third quarter of this year. The increase to our revenue and EBITDA guidance is primarily driven by recent customer conversations and contract negotiations related to increased maintenance activity across our Canadian lodges and Australian villages. While our customers are still prioritizing capital discipline and return of capital of shareholders, they're also increasing their maintenance plans for the year due to sustained commodity prices at very healthy levels. The single largest uncertainty in our 2022 guidance continues to be the timing and duration of our Canadian mobile camp activity related to pipeline projects in British Columbia. Regarding this matter, as we outlined last quarter, we have not changed our assumption related to the demobilization of three Canadian mobile camps, which are set for the fourth quarter of 2022. Should any of these projects extend into 2023, we could see a 2022 adjusted EBITDA improve anywhere from $3 million to $10 million should all of three move into 2023. I’ll now provide the regional outlooks and corresponding underlying assumptions by region. In Canada as we look at the remainder of 2022, we are encouraged by the recent customer conversations surrounding, increased demand for maintenance and turnaround, related rooms for the summer and early fall. We are experiencing an increase in Canadian oil sands lodge billed rooms from 2021 levels. We expect one in the second and third quarter this year. There is a risk that customer labor availability in the region could dampen our customers’ ability to execute these turnarounds. And we have made a portion of that risk into our guidance. As we mentioned earlier, we're still expecting a majority of our Canadian mobile camp activity wind down by the end of the year and we've included the related demobilization costs in our guidance for the full year. Now turning to Australia, we're seeing encouraging signs of improvement in customer demand, albeit not at the same level of our Canadian business. Australian customers remain more focused on capital discipline through the volatility in coal prices, anemia weather and the lingering China Australia trade dispute. Iron ore prices remain at constructed levels and customer activity in Western Australia remains strong. But the COVID related travel and border restrictions continue result in increased labor costs in WA. We're starting to see gradual progress as it pertains to COVID related labor issues that we experienced last year coming into this year. But it is a slow process and we expect labor shortages, and higher labor costs remain a factor for the remainder of 2022. For our US business, oil and gas price environment has improved significantly over recent months and we're starting to benefit from the increased drilling and completion activity in the US. We expect our wellsite and offshore businesses to continue to improve throughout this year. I will conclude by underscoring the key elements of our strategy as we navigate this extraordinary market climate. Our mandates are as follows. We will prioritize the safety and well-being of our guests, employees and communities. We will maintain our cost structure in accordance with the occupancy outlook across each of the three regions. We will continue to focus on enhancing our best-in-class hospitality services. We will allocate capital prudently to maximize cash flow generation, while we continue to reduce debt and return capital to shareholders through the share repurchase program. And lastly, we will seek opportunities to further our revenue diversification and free cash flow generation through organic and M&A opportunities. With that, we're happy to take your questions.

[Operator Instructions] Our first question is from Stephen Gengaro with Stifel.

Thanks. Good morning, everybody. I guess a few things if you don't mind. The first, when you are talking about the Australian business, one of the things that struck me is and I might heard this wrong. But I think some of the increased occupancy that you're seeing, I think it was related to some maintenance versus kind of growth. A, did I hear that right and, b, it does sound like you're seeing some growth. I'm just kind of curious what the conversations have been and how you think Australia evolves as the year progresses from an occupancy perspective?

Sure, it is primarily today, the increase in normal operating and maintenance activity in Australia that we're seeing the increase in occupancy. There are some I would say early signs seen into your question, that there are some growth opportunities during -- either during the quarter or certainly year-to-date there was the announcement that Pembroke is moving forward with the Olive Downs project, which is one of the first expansionary projects we've seen in the Bowen Basin in quite some time, our assets are well positioned to serve that project. And we're cautiously optimistic that we will serve them as they ramp up their headcount to go into construction mode. But I would still say as we sit here today, will all the macro signs point to increasing activity increased spending. Most of our customers are focused on production maximization and not necessarily terribly focused on increased spending. So most of it is focused on operations. So it's a nice backdrop, but not the kind of tailwinds that you might expect, given where commodity prices are.

Okay, great. Thanks. And I think, Carolyn, you mentioned sort of the mix and the impact that had on the ADRs in the quarter. Is that mix normalized going forward? I think it was more sort of non-contracted rooms that pushed the average rate up. How should we think about, maybe in both regions, how the ADR evolves?

Sure. That's certainly true in Australia, kind of on the backdrop of your previous question. Most of the customers are well, the overwhelming majority of the customers are above their minimums. And while they've been running above their minimums, they haven't committed to increasing those minimums to capture the lower contracted grades. So as a result we are benefiting from the over performance. Typically, a contracted block of rooms in Australia will run between $95 and $105 a night, on the excess rooms above that commitment, those can be as high as $125 to $135. In Canada, there's not quite the same contract dynamic, it is more of a mix issue. Specifically, as you'll recall, if we're comparing year-over-year, there was a British Columbia health order put in place late in 2020 that impacted first quarter of 2021. So we were running 100 that limited headcount at industrial projects in British Columbia, not specifically targeting the LNGC project, but certainly did impact the LNGC project. And we were running 100 guests in Sitka first quarter last year compared to 500 to 650, as arranged in this year, and as you know, the rates at Sitka are higher than we typically get in the oil sands region. That being said, I would say from an overall pricing comment, there is upward, there's more of an upward bias on pricing, both in Canada, Australia, generally speaking, which is not purely inflationary in nature.

Okay, great. Thanks. And just there's two more for me if you don't mind. The first on the your LNG is obviously been a big topic, our LNG analysts talking about the golden age of LNG here and one of the, I was curious if you had any thoughts or updates on what you're hearing or seeing in Western Canada and expansions there.

Sure. While the biggest LNG expansion that would impact us in the medium term would be the LNG Canada project that we're currently serving. It is currently constructing trains one and two out in Kitimat, would be if they went up positive FID on train three and four. There is no real update other than I think everyone's cautiously optimistic that will occur. The timing of which I don't have an update on or there is not an update on in terms of when that might occur like everyone thinks given back -- the macro backdrop, as well as the economics of kind of smoothly transitioning from train, phase one of trains one and two phase two or trains three and four, kind of back to back would provide some economic benefit to our customer. And we remain positive that are cautiously optimistic that it will occur. There's not an update on that. Now there are a couple of additional LNG projects in Western Canada that appear to be getting legs, but it's too early to see to really tell how that will play out.

Great, thanks. And then just one final when you think about the balance sheet and the uses of free cash flow, any updates there? And I'm not sure if you could tie this in but as the US land market strengthens dramatically. Could there -- could you do something opportunistically around that?

Well, the capital allocation policies has been, so we announced the share repurchase program in September; August, September of last year, we made a little bit of progress at the end of the year then we ran into first quarter lockout. Most of our open window as relates to share repurchase, we spent working on the Torgerson Conversant transaction. And as we've been in -- we really didn't get as much done as we would have liked as we were tied up working on that. As we look forward, it's a key component of what we want to accomplish. So I think the allocation prioritization remains the same. We pay some debt, we're returning capital to shareholders. And we're moving in although we may not be there quite yet moving into a phase where we need to look at ways to get back to growing the revenue and the company as a whole. And that will require some capital, but certainly remain focused on the first two. So that's where we stand right now.

And our next question is from Steve Ferezani with Sidoti.

Good morning, everyone. I just wanted to follow up on last question on the share repurchase. So the current program expires in August, right, if I'm doing the timing correctly, with the assumption being that you will renew a plan similar terms.

Yes, I mean, we certainly would have to discuss that with our board, those conversations have not occurred, but in terms of our prioritization of capital will remain and as the second priority, so they could be safe assumption and if we complete this program, we would renew it again.

Okay, good. In terms of your commentary around the, like the eventual demobilization. I know you didn't change your guidance today, you talked about what the upside could be. Are you getting a sense now that at least one of those projects extends into ‘23? What are your thoughts around those?

Yes, the guidance assumes that they don't. And that's the best information we have to date. And so as that change, we tried to frame what it would be if one or all, were to shift into 2023. But as of right now, all of the conversations with customers indicate that they will be demob in the fourth quarter.

Okay, good. And is there a cadence to that? Are you running at this rate through the fourth quarter? Or do you expect to wind down? How would we think about that?

In terms of the mobile camp activity basically?

Yes.

Yes. We've been running pretty consistently since the third quarter of last year, in terms of both the revenue coming out of contract camps, and then the gross profit coming out of that work, it should run relatively consistently through the end of the third quarter that's baked into guidance. And then we'll start to see it ramped down in the fourth quarter of this year.

Okay. And then on, you raised your free cash flow, solid guidance, trying to think about and we saw the cash flow this quarter, and you comment there about unwinding of the working capital. But is it reasonable to think as you start seeing higher utilization levels and higher revenue that you're going to carry higher working capital? And then also in terms of is there any more CapEx you are going to have to put back into some of these watches as they start as utilization starts picking up?

Great questions. The -- it comes the final question in terms of, well, on working capital we do. Your point is valid, it will with higher revenues, we would expect higher working capital, this was merely a timing issue in the first quarter. We've hedged our bets that it'll unwind in the middle part of the year, Q2 and Q3. It should unwind in the second quarter. But again, it could be a timing issue, we know that it will unwind by the middle part of the year. In terms of CapEx, we built in some of that from what the guidance is right now. We built in some of that kind of reactivation, if you will, of the rooms into the $20 million to $25 million. There are certain scenarios where if we get customer commitments, we would rate, we would -- it would solidify the outlook, the longer term outlook for our occupancy and may require higher CapEx to support that. But we would only commit to those CapEx increases and increase our CapEx guidance should we get the customer commitments to support it.

We’ve reached the end of our question-and-answer session. I would like to turn the conference back over to Bradley for closing comments.

Thank you. Appreciate it. Thank you everyone for joining the call today. We appreciate your interest in Civeo. We look forward to speaking with you on the second quarter earnings call in a few months. And that concludes our call for today.

Thank you. This concludes the conference. You may disconnect your lines at this time. And thank you for your participation.