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spk06: Greetings and welcome to CVS Corporation third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is my pleasure to introduce your host, Regan Yeltsin, Senior Director, Investors Relations. Thank you, Mr. Nielsen. You may begin.
spk08: Thank you, and welcome to CIVIO's third quarter 2022 earnings conference call.
spk04: Today, our call will be led by Bradley Dawson, CIVIO's President and Chief Executive Officer, and Carolyn Stone, CIVIO's Senior Vice President, Chief Financial Officer, and Treasurer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain anything other than historical information, please note that we're relying on the safe harbor protections afforded by federal law. Any such remarks should be read in the context of the many factors that affect our business, including risks and uncertainties disclosed in our forms 10-K, 10-Q, and other SEC filings. I'll now turn the call over to Bradley.
spk05: Thank you, Reagan, and thank you all for joining us today on our third quarter earnings call. I'll start with the key takeaways for the third quarter and then give a brief summary of our third quarter 2022 performance, after which Carolyn will provide a financial and segment level review. And I will conclude with our updated full year 2022 guidance and the regional assumptions underlying that guidance. I will also provide preliminary comments regarding our 2023 outlook. And then we will open the call for questions. Key takeaways from our call are we had strong third quarter and year-over-year revenues up 19% and adjusted EBITDA up 34%, driven by increased activity across all three geographic segments. Our occupancy related to pipeline construction is expected to continue into 2023. which will result in continued Canadian mobile camp activity through the end of 2022 and into 2023. This development will push our demobilization costs of those camps into 2023. The strong third quarter performance coupled with the deferral of the Canadian mobile camp demobilizations from 2022 into 2023 drove the increase to our full year guidance, which I will detail later in the call. We generated $38.6 million of free cash flow in the quarter, which led to a significant milestone of us reducing our net leverage to below 1.0 times. We committed to investors that we would prioritize deleveraging, and this achievement would not have been possible without the efforts of the entire CVO team over the last few years. Our continued debt reduction provides us with flexibility to both weather the current market volatility and further evaluate opportunities to deploy capital. Lastly, after repurchasing approximately 715,000 shares since September 2021, including 475,000 shares in the third quarter of 2022, we announced that our board of directors has renewed its share purchase authorization for Cibio to repurchase up to 5% of its total common shares outstanding over the next 12 months. Let me take a moment to provide a business update across the three segments. In Canada, our revenues and adjusted EBITDA increased year over year, driven by an increase in lodge occupancy, as well as increased Canadian mobile camp activity. We experienced a sequential decrease in revenues and adjusted EBITDA due to typical seasonal wind down in the third quarter of turnaround activity. In Australia, revenues and adjusted EBITDA were in line with our expectations, increasing year-over-year and sequentially. This was primarily driven by increased year-over-year and sequential integrated services activity due to the recently announced contract awards starting in the third quarter. Increased occupancy in several bow and basin villages also contributed to a strong third quarter performance. Turning briefly to the U.S., Revenues in adjusted EBITDA increased year-over-year due to increased activity positively impacting our well site and offshore businesses, partially offset by the sale of our West Permanente Lodge, which we did in the fourth quarter of last year. In September, we sold our well site business. While the business was improving with increasing drilling activity in the U.S., we unfortunately were unable to create scale in the business despite the sales and service efforts of our team. And with that, I'll turn it over to Carolyn.
spk02: Thank you, Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the third quarter of $184.2 million, with gap net income of $5.2 million, or 32 cents per diluted share. During the third quarter, we generated adjusted EBITDA of $35 million, operating cash flow of $38.7 million, and free cash flow of $38.6 million. As Bradley just mentioned, The increased adjusted EBITDA that we experienced in the third quarter of 2022, as compared to the same period last year, was largely due to increased billed rooms in our Canadian lodges and increased Canadian mobile camp activity, coupled with increased Australian village billed rooms and integrated services activity. The quarter-over-quarter increase in operating cash flows and free cash flow was primarily due to these same factors. Let's now turn to the third 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 third quarter of 2021. Revenues from our Canadian segment were $103 million, as compared to revenues of $84.1 million in the third quarter of 21. Adjusted EBITDA on Canada was $25.6 million, an increase from $19.8 million in the third quarter of last year. Results from the third quarter of 2022 reflect the impact of a weakened Canadian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by 3.7 million and 0.9 million, respectively. On a constant currency basis, the increase in both revenues and adjusted EBITDA was largely driven by a 19% year-over-year increase in billed rooms related to the recovery in oil prices and increased turnaround activity coupled with increased mobile camp activity. During the third quarter, billed rooms in our Canadian lodges totaled $731,000, which were up 19% year-over-year from $613,000 in the third quarter of 2021 due to the factors I just discussed. Our daily room rate for the Canadian segment in U.S. dollars was $99, which is relatively flat year-over-year, largely due to a weakened Canadian dollar relative to the U.S. dollar. Turning to Australia, during the third quarter, we recorded revenues of 73.8 million, up from 65.1 million in the third quarter of 2021. Adjusted EBITDA was 16.9 million, up from 14.8 million last year. Results from the third quarter of 2022 reflect the impact of a weakened Australian dollar relative to the U.S. dollar, which decreased revenues and adjusted EBITDA by 5.5 million and 1.3 million, respectively. On a constant currency basis, the increased results were driven by both increased build rooms at our villages and increased integrated services activity. Australian build rooms in the quarter were 525,000, up 7% from 491,000 in the third quarter of last year, due again to the recovery of customer maintenance activity at our villages, resulting from a more muted impact of the China-Australia trade dispute. While the average daily rate for our Australian villages in U.S. dollars was $73 in the third quarter, down from 78 in the third quarter of 2021, the decrease was entirely driven by the weakened Australian dollar. Moving to the U.S., revenues for the third quarter were $7.4 million, as compared to $5.9 million in the third quarter of 2021. The U.S. segment adjusted EBITDA with a loss of $33,000 in the third quarter, up from the loss of $544,000 during the same period last year. The increase in adjusted EBITDA was primarily due to increased activity positively impacting our well site services and offshore businesses, offset by the impact of the sale of the West Permian Lodge in the fourth quarter of 21. On a consolidated basis, capital expenditures for the third quarter of 2022 were $8.8 million, compared to $3.4 million during the same period in 2021. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages. Our total debt outstanding on September 30, 2022, was $126.2 million, which is a $28.4 million decrease since June 30. The decrease consisted of $19.5 million in debt payments from cash flow generated by the business, and favorable foreign currency translations of $8.9 million. And our net leverage ratio for the quarter decreased 0.9 times as of September 30th from 1.2 times as of June 30th. As of September 30th, we had total liquidity of approximately $117.3 million, which consists of $108.9 million available under our revolving credit facilities and $8.4 million of cash on hand. Bradley will now discuss our updated guidance for the full year 2022 and preliminary comments on our 2023 outlook. Bradley?
spk05: Thank you, Carolyn. I would like to discuss our updated full year 2022 guidance on a consolidated basis, including the underlying outlook for each of the segments, as well as the underlying assumptions related to the guidance. I'll provide a few preliminary comments regarding our 2023 outlook. Based on our third quarter results and the deferral of the majority of our Canadian mobile cam demobilization costs into 2023, we are raising our full year 2022 revenue and EBITDA guidance to $675 to $685 million of revenues and $110 to $115 million of adjusted EBITDA. We are maintaining our full year 2022 capital expenditure guidance, which is $24 million to $29 million. Based on this EBITDA and CapEx guidance, expected interest expense of $10 million to 2022 and minimal expected cash taxes, we expect our 2022 free cash flow forecast is expected to be in the range of $71 million to $81 million. The increase to our revenue and EBITDA guidance is primarily driven by the deferral of our mobile camp demobilization costs into 2023. Our Canadian mobile camp activity is primarily related to the construction of the coastal gas link and other pipelines. This pipeline construction is now expected to continue into 2023 and should require the use of our mobile camps supporting that project. Construction of this pipeline is nearing completion, so we expect to see a reduction in our occupancy and profitability related to mobile camps as this activity winds down into 2023. And we recognize the majority costs next year. I will provide the regional outlooks, guidance on the regional outlooks, and corresponding assumptions. In Canada, as we look to the remainder of 2022, we are expecting to experience a decrease in billed rooms due to turnaround activity winding down, coupled with typical holiday downtime. We are also experiencing inflationary pressures on our utility costs, which will be exacerbated by winter weather. Turning to Australia, we continue to see encouraging signs of improvement in customer demand for our integrated services activity as well as our village business. The fourth quarter of 2022 will also be burdened by the typical fourth quarter seasonality that will negatively impact our village occupancy. Iron ore prices remain at constructive levels and customer activity in Western Australia remains strong. While we are seeing gradual progress as it pertains to COVID-19-related labor issues that we've experienced in the last two years, it's a slow process. And we expect labor shortages to remain a factor for the remainder of this year and into next. I'll now move to the 2023 outlook, and I'll provide some preliminary comments. Customer spending, specifically customer capital spending, drives our occupancy at our Canadian lodges and our Australian villages. While commodity prices for oil, natural gas, met coal, and iron ore continue to be constructive, our customers continue to be focused on cash flow generation, capital discipline, and returning capital shareholders. So, as a result, at this point, we do not see a material increase in occupancy in 2023 for either the Canadian lodges or the Australian villages. In Canada, we are expecting relatively flat occupancy in our Canadian lodges, perhaps with some modest upsides. As we've discussed on previous calls, we expect Canadian mobile camp activity to significantly decline as we near the completion of the coastal gasoline pipeline, as well as others. This decline in mobile camp activity profitability will be exacerbated by the recognition of demobilization costs in 2023. In Australia, we're expecting a modest increase in occupancy in our villages due to customer expansionary activity. We're also expecting an increase in Australian integrated services business due to some internal contracts the team has won. However, we are expecting margin depression due to labor shortages and food inflation. While this has improved over several quarters, we're expecting only a gradual improvement in 2023. Given the significant progress that we've made in reducing our total leverage, We expect capital allocation going forward to focus on opportunistically repurchasing our stock under our authorized buyback plan and weighing those returns against the expected returns of growth opportunities, both organic and inorganic. With that, I'll conclude our prepared remarks by underscoring the key elements of our strategy as we navigate this market climate. Our mandate remains as follows. We will prioritize the safety and well-being of our guests, employees, and communities. We'll manage our cost structure and importance with our outlook across all three segments. We will continue to enhance our best-in-class hospitality offerings. We will allocate capital prudently. And we'll seek opportunities to further our revenue diversification and free cash flow generation through organic growth and M&A opportunities that have a superior anticipated return.
spk08: With that, we're happy to take questions.
spk06: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press the star one on your telephone keypad. A confirmation tone will indicate your lines in the question queue. You may press the star two if you would like to remove your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the Start key. One moment, please, while we pose our questions. Our first question comes from . Please go ahead.
spk00: Good morning, everybody. So a couple of things for me. I think the first, The first would be around the fourth quarter. When we think about your revenue guidance, and I know you mentioned some of the margin headwinds in the fourth quarter, but if you look at the two segments, where do you see the bigger kind of margin degradation in the fourth quarter because of seasonality?
spk08: Canada. It'll be in Canada.
spk05: Right now, based on customer labor, It looks like we're going to have a significant downturn in terms of occupancy, both at the pipeline camps as well as at the lodges. So I would say, based on guidance, as well as, you know, we start going into winter and we start to see increased propane and diesel costs as we have to heat the lodges. So it'll be a combination of both. Australia will see some holiday downtime, but it's much more muted.
spk00: Gotcha. Great. Thanks. And then you mentioned the demote costs. I mean, if you had a crystal ball right now, which I know it's tough, would you see that? Any sense for when that occurs next year? Is it first quarter? Is it still too early to tell?
spk05: Unfortunately, Stephen, it's too early to tell. I think we feel confident that all – well, we've moved – since last quarter, we've moved to be confident, although we kind of hinted that it would happen, that demo costs and activity would continue to 2023. But how long it continues into 2023 is still very opaque. And so we'll look forward to giving, hopefully, some better guidance on our fourth quarter earnings call as we get better insight from the customers.
spk00: Okay, great. Thank you, and then Just one final one for me, and as I look back historically, I mean, you guys have always done a good job sort of managing cost pressures, and I know we're in an unusual cost environment right now. Can you talk about, you know, both what you guys, the levers you have to pull operationally and maybe the contractual discussions and terms that you have with customers to help offset that impact?
spk05: I would say that, so I'll start with contractually. All of our multi-year contracts will have annual adjustments for inflation, but they're annual. So there's going to be a lag. Historically, they have done an adequate job of managing inflation. This is certainly an atypical situation. So I would say we're probably losing 200 basis points on margin because of inflation, both labor and food costs. And in Canada, the power or utility costs are more exacerbated. But I think the team has done a good job. So operationally, what do we do? So in Canada, as it relates to utility costs, we work on loading. ask customers to move their occupancy from one location to another so we can increase the loading on a given location and improve efficiencies there. We have and will do that. On food costs, it's around managing to scope, but looking for opportunities where we can change the exact food that we're offering, specifically protein, to manage that cost. On the labor side, it's around managing shifts and making sure as efficient as we can be. In Australia, I think the team has done a great job around trying to get labor. We're in a much better position now on a labor situation in Australia than we were at the beginning of the year, but we're not back to where we want to be. We're trailing in terms of labor costs to budget, but it's within within a margin that I think is less than the inflationary pressures. So on the food cost side, we've got to get better on procurement and we're working on that. So, you know, overall, and you still have the same scope discussion that I mentioned on Canada. So I think in light of where we are from a global economy standpoint, I think the team's doing a good job. It's just not, it's not, we could be doing better given where activity levels are. after the inflation.
spk00: Great. That's very good color. I appreciate it. Thank you.
spk08: Thank you, Stephen.
spk06: The next question comes from Steve Sarazani with T-DOTI. Please go ahead.
spk01: Morning, Bradley. Morning, Carolyn. I did want to follow up Stephen's question on the winding down of the mobile camps, and just do you have any ability to quantify how quickly some of that revenue comes out? Just because when I'm thinking about your fourth quarter revenue guidance or sort of backing into it, it's year over year down. Is that primarily on starting to see that decline in mobile camps, or are there other pieces to that?
spk07: Bear with me.
spk05: It's some mobile camp activity, which is not really a wind down. It's more of a holiday downtime issue. We have a partial demo, but one of the camps in the fourth quarter just contributed to it. But the biggest piece is just overall oil sands activity in the fourth quarter, which as of right now, the labor curves look like it's going to be a pretty significant downturn in occupancy in the oil sands region. I think it's exacerbated by FX. So there's a little bit of that going on. But in terms of where the mobile camps land, in terms of occupancy for next year, I wish I had a better answer, quite honestly.
spk01: I understand.
spk05: But right now, as close as we are to our customers, there's not a clear picture of how long those camps are going to be active. The good news is that our team, operationally and from a sales perspective, the customers have choices. The pipeline construction is winding down. They can choose which camps to keep or demode. I think the team's done a good job of operating and staying close to the customers such that our camps are being chosen to continue into next year. So it's a win for us, but eventually we're going to have to find a replacement for those earnings. I'm hoping it's later in 2023, but we'll see. Okay.
spk01: When you gave your early look at Canadian expectations for 2023, not super positive or bullish. I'm just trying to think about the fact that Trans Mountain comes online late 2023. Labor availability should be getting better. we're still not, turnaround's still not back to pre-COVID levels. There seem to be reasons, and I know day-to-day oil prices don't matter much, but certainly the differential should narrow next year. I mean, there would seem to be a lot of reasons to be more bullish, but you're not.
spk05: No, well, I think what we need to see from here is what are the CapEx plans for the customers? You know, we're kind of treading water the last couple of years in terms of total Canadian CapEx. It also applies to Australia on the eastern side of the business. But CapEx is what's going to drive our occupancy in both the Canadian lodges and the villages. So as we start to see CapEx plans by our customers come out, we'll adjust accordingly. We've got a little bit of a tailwind in Australia because there are a couple of extensionary projects that are driving incremental occupancy there. It's getting eaten up a little bit. I would say exacerbated inflation there. But overall, it's going to be CapEx. So I'd like to be more bullish. You would certainly say sitting here at high 80s oil prices and the other commodity prices that we would see more activity. But again, it's customer discipline and returning capital shareholders that are enjoying higher commodity prices and they're not spending the money. that we would see historically. So until that changes, it's hard to say. Now, I think the good news is that we're largely supporting day-to-day operations. So we're not seeing the volatility as it relates to that. I think the other piece, which I didn't mention earlier, is we'll have to see how Canadian turnaround activity is next year. I think right now, I believe it will be relatively consistent with this year. So I would say that we're, in Canada, in terms of build rooms, kind of flat with some modest upside. In Australia, with the extensionary projects, we've got some upside there. The team has done a good job on the integrated services side in Australia of winning new work. And so we're cautiously optimistic that will continue. But again, that's lower margin business. It's good work. We want to win it. And it should add to the results.
spk01: Right. Great. Thanks. And if I can get one more. In terms of capital allocation, obviously, you've done a fantastic job with the balance sheet. You're still generating an awful lot of cash flow. Good problem to have. You're limited on the normal course issuer bid. I'm not an expert on Canadian securities rules, but I mean, you can couple in a substantial issuer bid. Is that correct if you wanted to, particularly with the share conversion coming? Or what other possible uses for cash flow are you thinking about next year?
spk05: So on capital allocation, we've gotten to a point around one times lower. That's where we want to be. I think that gives us the flexibility that when there are capital opportunities to either opportunistically buy back stock, we will. We're going to be smart about it and then weigh those returns, expected returns, against the growth projects that we have. And to your point, we're in a relatively strong commodity environment. Should that continue, it'll present opportunities. And so we'll be very smart in terms of how we look at growth opportunities and weigh those against buyback stocks. And so that should, with the one times lever, we can lever up a little bit for either one of those two opportunities. And then the shift will be back to paying down that debt. So that's the plan going forward.
spk07: Thanks, Bradley. Appreciate the time. Thank you.
spk06: Next question comes from John Daniel with Daniel Energy Partners. Please go ahead.
spk03: Morning, Bradley and Reagan. Thank you for taking the call. Bradley, I got a, what might be a dumb question, and you guys can laugh at me after I hang up. The, and hopefully you guys can hear me okay. Yeah. Okay, good. I'm driving here, and so, you know, I drive a lot around the various basins, and, you know, back in the day, you know, go back to call it 2011, 2012, whatever. You couldn't find rooms in the Bakken. People were sleeping in Walmart. You go up there today, no trouble finding a room. And, you know, a lot of the places you end up staying are kind of dumpy, at least where I stay, perhaps. But it would seem like, are there opportunities for opportunistic purchases of some of these places, albeit it might be hotels that you could renovate and as a growth opportunity where maybe someone's, you know, built something up in the hot times. It's now faded. And so perhaps a better valuation could be had. Just dumb question perhaps, but I'm curious your thoughts.
spk05: Well, I would say our lodge business in the U.S. had a couple issues. One, others have built out and gotten scale, which has really been our issue in the U.S. for a while. When things were better a decade ago, we were focused on expanding our Canadian and Australian business, and the returns were better there. In the meantime, we missed out on the U.S. opportunities. And so we were left with a portfolio of lodge locations that is tougher to compete against folks that have a better portfolio and can meet customer needs across a basin as the activity shifts, as you well know. I think it's difficult for us in the U.S. to augment that because we're behind the eight ball. So I would say our activity, our occupancy, specifically in the Bakken, has improved. We're running better than budget. And, again, our lodge occupancy there is driven by completion crews. So we've got a handful of crews in our kill deer location, and it's doing better than expected. But we just don't have the scale there. And I expect that the returns opportunities elsewhere will continue to be better than us looking to build that up.
spk03: Fair enough. Well, if you build something really nice, I'd be happy to stay there. Good job on the balance. You'll be our first guest. Well, there's one particular nasty one in downtown Midland I'd like someone to fix, but maybe that's for a later date.
spk00: All right.
spk03: Look, that's all I got. I'm sorry for the dumb question, but I just was curious. No, no, it's a good question. No, I appreciate it. Okay, guys.
spk07: Thank you very much.
spk06: There are no further questions at this time. I would like to turn the floor back over to Bradley Dodson, CEO for Closing Remarks.
spk08: Thank you.
spk05: Thank you, everyone, for joining the call today. We appreciate your interest in CIVIO, and we'll look forward to speaking with you on our fourth quarter earnings call in February.
spk06: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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