Civeo Corporation

Greetings. Welcome to the Civio Corporation's second quarter 2023 earnings call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that this conference is being recorded. At this time, we'll now turn the conference over to Reagan Nelson, Vice President, Corporate Development and Investor Relations. Reagan, you may begin.

Thank you, and welcome to Cibio's second quarter 2023 earnings conference call. Today, our call will be led by Bradley Dodson, Cibio's President and Chief Executive Officer, and Carolyn Stone, Cibio'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.

Thank you, Reagan, and thank you all for joining us today on our second quarter earnings call. I'll start with the key takeaways for the second quarter and then give a brief summary of our second quarter of 2023 performance. Then Carolyn will provide a financial and segment level review. And I'll conclude with our updated full year 2023 guidance with the regional assumptions that underlie that. At that point, we'll open up the call for questions. The key takeaways from our call today are The second quarter of 2023 financial results were in line with our expectations and highlighted the diversity of our revenue drivers across the business. Our Australian segment performed well during the quarter as we experienced substantial, sequential, and year-over-year growth in both our own villages business as well as the integrated services business. Village guests were up 16% year-over-year and integrated services revenues were up 33%. In both the owned villages and integrated services businesses, we are seeing the benefits of the contract awards that we have announced over the past 12 months. It's important to note that during the quarter, we achieved the highest quarterly Australian owned village occupancy that we've seen since 2014, led by increased Bowen Basin customer activity, with the Gunnedah Basin villages contributing as well. LNG activity in British Columbia, Canada continued to widen down in a quarter, as expected, resulting in reduced Canadian mobile camp activity for us and contributing to lower Canadian lodge build rooms versus the second quarter of 2022. As discussed on the last earnings conference call, our inflation mitigation plan for Australian integrated services is underway, and we are encouraged by the progress to date. The majority of these benefits from our team's efforts are expected to be seen in the second half of 2023 and going forward. Our second priority was regarding the McClellan Lake Lodge in Canada. We've made significant progress towards an attractive commercial alternative for the future of that asset as we are in active negotiations to sell the assets to a third party. We are encouraged by the progress to date but cannot discuss the details of the proposed deal at this time. In addition, The demobilization process for McClellan Lake is underway. The related customer room demand from that former lodge has moved to other civil lodges and is under a take-or-pay contract through January 2024. Through our team's efforts, we expect our net demobilization costs for the assets to be minimal, in part due to reimbursements from our clients. The outlook for our Canadian mobile camps has not changed materially since our last call. As discussed last quarter, we expect the demobilizations to commence in the second half of this year. We continue to execute on our share repurchase program in the second quarter and will opportunistically buy back shares going forward. And lastly, on key points, as we discussed in previous calls, We are in the process of formulating a capital allocation framework that incorporates our strong balance sheet position and our solid free cash flow outlook, which we look forward to sharing with you hopefully later this year. Let me take a brief moment to provide a business update across the segments. In Canada, our revenues and adjusted EBITDA declined year over year. The decrease was driven by the wind down of Canadian mobile camp activity, as well as lower year over year Canadian lodge build rooms. The decline was also exacerbated by the weakened Canadian dollar relative to the U.S. dollar. Sequentially, however, revenue in adjusted EBITDA increased substantially due to the seasonal increase in turnaround activity. For Australia, we saw a significant year-over-year increase in revenues in adjusted EBITDA driven by increased billed rooms at our own villages and increased integrated service revenue, both of which were largely from new contracts. As I noted earlier, we are encouraged by the substantial increase in customer activity, which resulted in the highest quarterly owned village occupancy that we've recorded since 2014. We also reached key milestones in our inflation mitigation initiatives towards the end of the quarter, and like I said, we'll begin to realize those benefits in the second half of this year. However, the second quarter results were adversely impacted by the weakened Australian dollar relative to the U.S. dollar. Sequentially, we experienced increased revenues and adjusted EBITDA through the aforementioned dynamics, as well as the typical seasonal uptick in the second quarter across the Australian business and some inflationary relief in our integrated services business. It is important to note that while we've made strides in mitigating inflationary pressures in both our Canadian and Australian businesses, We expect that inflation will remain a focus of ours for the foreseeable future. With that, I'll turn the call over to Carolyn.

Thank you, Bradley. And thank you all for joining us this morning. Today, we reported total revenues in the second quarter of $178.8 million, with gap net income of $4.5 million, or 30 cents per deleted share. During the second quarter, we generated adjusted EBITDA of $31.6 million, and operating cash flow of $19.4 million and free cash flow of $12.9 million. As Bradley just mentioned, decline in adjusted EBITDA that we experienced in the second quarter of 2023 as compared to the same period in 2022 was largely due to the wind down of Canadian pipeline construction activity and therefore our mobile camp revenues in EBITDA and lower LNG related Canadian lodge occupancy. These decreases were partially offset by increased billed rooms in our Australian and Bowen Basin villages and increased Australian integrated services activity from our recent contract wins. Let's now turn to the second quarter results for our two segments. I'll begin with a review of the Canadian segment performance compared to its performance a year ago in the second quarter of 2022. Revenues from our Canadian segment were $95.5 million as compared to revenues of $109 million in the second quarter of 2022. Adjusted EBITDA on Canada was $19.8 million, a decrease from $28.7 million in the second quarter of last year. Results from the second quarter of 2023 reflect the impact of a weakened Canadian dollar relative to the U.S. dollar which decreased revenues and adjusted EBITDA by $5.1 million and $1.1 million, respectively. On a constant currency basis, revenues decreased 8%, primarily due to a decline in mobile camp activity as pipeline construction continues to wind down, coupled with lower build rooms in our Canadian lodges. Adjusted EBITDA also declined year over year due to the aforementioned dynamics. During the second quarter, build rooms in our Canadian lodges totaled $724,000, which was down from $771,000 in the second quarter of 2022. Our daily room rate for the Canadian segment in U.S. dollars was $100, which declined year over year, but that was entirely due to a weakened Canadian dollar relative to the U.S. dollar. The average daily room rate in Canadian dollars was up year over year. Turning to Australia, during the second quarter we reported revenues of $82.5 million, up from $67.8 million in the second quarter of 2022. Adjusted EBITDA was $19.6 million, up from $15.5 million last year. Results from the second quarter of 2023 reflect the impact of a weakened Australian dollar relative to the U.S. dollar which decreased revenues and adjusted EBITDA by $5.7 million and $1.3 million, respectively. On a constant currency basis, the increase in revenue and adjusted EBITDA was largely driven by increased occupancy at our owned villages and higher activity for our integrated services business, both related to the new contract. Australian build rooms in the quarter were 588,000, up 16% from 505,000 in the second quarter of 2022, due to increased customer demand at our own villages driven by our recent contract awards. The average daily rate for Australian villages in U.S. dollars was $75 in the second quarter, down modestly from $77 in the second quarter of 2022, and entirely driven by the weakened Australian dollar. The average daily room rate in Australian dollars was up year over year. On a consolidated basis, capital expenditures for the second quarter of 2023 were $6.9 million, compared to $5.1 million during the same period in 2022. Capital expenditures in both periods were predominantly related to maintenance spending on our lodges and villages, coupled with spending to activate mothballed Australian village rooms with increased customer demand. Our total debt outstanding on June 30th was $136.1 million, a $6.5 million decrease since March 31st. Our net leverage ratio for the quarter remained flat at 1.2 times as of June 30th, 2023, since March 31st, 2023. As of June 30th, 2023, we had total liquidity of approximately $89 million, consisting of $77.6 million available under our revolving credit facility and $11.4 million of cash on hand. In the second quarter of 2023, we repurchased approximately 212,000 shares through our share repurchase program for a total cost of approximately $4.2 million. Bradley will now discuss our updated guidance for the full year of 2023. Bradley? Thank you, Carolyn.

I now turn to the discussion of our updated full-year 2023 guidance on a consolidated basis, including the outlook for each of the regions, as well as the underlying assumptions related to our guidance. We are increasing the lower end of our full-year 2023 revenue and EBITDA guidance range, resulting in tightened ranges of $640 million to $650 million for revenues and $90 to $95 million for adjusted EBITDA. We are decreasing our full year 2023 capital expenditure guidance to $35 to $40 million. The decrease from our prior guidance is entirely driven by scope changes by a customer-funded infrastructure project in Australia. The requested scope was adjusted downward, and a portion of that spend will be deferred into 2024. which will reduce the overall capital expenditure outlook for this year. As a reminder, these upgrades will be fully funded by the customer up front. Therefore, any increase or decrease for our capital expenditure guidance as related to the project will be cash flow neutral. To reiterate this point, the decrease in 2023 expected capital expenditures relative to previous guidance will not impact 2023 free cash flow guidance. Based on this EBITDA and CapEx guidance, expected interest expense of $12 million for 2023, an expected working capital inflow of $10 million related to that customer reimbursement, and minimal cash taxes, we are adjusting our expected 2023 free cash flow to a range of $48 to $58 million. I will now provide the regional outlooks and corresponding underlying assumptions. In Camino, as we look at the remainder of 2023, we are expecting to experience sequential decline in Canadian mobile camp activity and lodge turnaround activity in the third quarter of this year. As it relates to the expiry of the McClellan Lake Lodge contract and the underlying customer demand for that lodge, we are raising the lower end of our guidance range, in part to securing a take-or-pay contract for the customer's room demand at other Civio lodges for the remainder of the year. As I mentioned earlier on the call, we are in active negotiations to sell the assets to a third party later this year. We expect our net demobilization cost to be minimal, in part due to reimbursements from a client. We are encouraged by the progress to date and expect this to be a positive outcome for Civio. In the interest of protecting ongoing negotiations, we cannot yet provide any further details. Regarding the Canadian mobile camps, there are no material changes in our outlook for these assets since our first quarter earnings call. We continue to expect the camps to wind down in the second half of this year as pipeline construction is completed. with approximately $10 million U.S. of demobilization expense this year and $6 million U.S. of demobilization expenses next year. Turning to Australia, we continue to see encouraging signs of growth in customer demand for our own villages and integrated services businesses. In our own villages, we experienced an uplift in customer activity as evidenced by the 16% year-over-year increase in billrooms in the second quarter. Our integrated services business is benefiting from increased revenue from our recent contract awards over the last few quarters and the inflation mitigation plan that we have focused on. As a reminder, we've been attacking inflationary pressures through a three-pronged approach of HR recruitment optimization, supply chain efforts, and work scope adjustments, and seeking contractual adjustments to provide relief and flexibility in this environment. The team made substantial progress with this approach, and we expect to rely on the majority of these benefits from the mitigation plan in the second half of this year and beyond. We expect to generate margin improvement throughout the second half of 2023 in Australia, and our progress to date is another key factor for increasing the lower end of our full year 2023 revenue and adjusted EBITDA guidance. As we look at our free cash flow outlook for 2023 and beyond street funds, we continue to evaluate a capital allocation framework. We're in the final stages of this process and look forward to discussing that with you later this year. I will conclude by underscoring the key elements of our strategy as we navigate 2023. Continue to prioritize the safety and well-being of our guests, employees, and communities. Continue to enhance our best-in-class hospitality offerings. Manage our cost structure in accordance with the occupancy outlook. prudently allocate capital to maximize free cash flow generation while we continue to return capital to shareholders and maintain a strong balance sheet. We will also seek opportunities to further our revenue diversification. With that, we're happy to take your questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, please press star 1 on your telephone keypad. and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you.

Thank you, and our first question today comes from the line of Stephen Gengaro with Stifel.

Please proceed with your questions.

Thanks. Good morning, everybody.

Good morning.

I think, Brian, maybe the first one, when you mentioned the McClellan Lake asset, is when you think about capital allocation, are the comments you made on capital allocation, would they be the same if there was any kind of lump sum if you sold those assets?

Yes.

When we look at your historical seasonal patterns for the business in general, and maybe geographically, we could talk about them a little bit separately, but you clearly generate the bulk of the EBITDA in the second and third quarters of the year. I think the number is generally, I think it's about 60-ish, maybe 65%. Is that pattern similar this year, or given the comments you made about Australian margins progressing throughout the year, Could it be a bit different?

I think it'll stay the same. To put a little more meat on the bone, we did see an uptick. I'll start with Canada. We did see an uptick in turnaround activity sequentially, and it was slightly up year over year, but it did not meet our expectations coming in. There are anecdotal points that Our customers, as it won't surprise you, that everyone's having trouble finding labor, and that impacted some of the turnaround activity here in the second quarter. But you're exactly right. Sixty-five percent of the EBITDA comes out of Q2 and Q3 every year. This year doesn't appear to be different. There are some pluses and minuses, but that should be the same. We'll see the wind down. of the mobile camps, but we'll see an uptake, as you mentioned, in some of the margins in Australia. So some pluses and minuses, but the historical average will remain the same.

Thanks. And just quickly, the comment you made about Australian margins improving throughout the year, that's a seasonally adjusted comment, right? I mean, the fourth quarter margin is still probably down from the third. Okay. Just wanted to make sure.

That's correct, Stephen. No, that's a very good point, Stephen. That's right. we'll certainly see a or we expect to see a material improvement and the integrated services margin in the second half percentage percentage and we are you know we are seeing significant are strong occupancy in our own villages in Australia and You know, the market is really starting to tighten up, particularly in the Bowen Basin, although we're seeing some uplift in the Gunnedah. Percentage-wise, the Gunnedah grew the most sequentially, but the Bowen Basin is significantly larger, so in terms of our total number of rooms. So the, but Australia's looking good. I think we're in both markets. You know, if you look at the local currency average daily rate so how much we get paid per person per day, versus the average daily costs. Generally, pricing has, if not beaten that in the second quarter, it got very close. And so we are seeing some covering of the inflation, and I think the teams are making very good progress on that. I just wanted, as I mentioned at the end of my introductory comments, that inflation isn't going away. And so there's still work to do there, but we're making good progress.

Great. And just one more for me. I wanted to clarify. I think you said $6 million of demobilization costs in 2024 around coastal gas link. I missed the 2023 number. I'm just curious if there's been any opportunities for those assets that you've been looking at.

So the number for 2023 is $10 million U.S., and we are pursuing opportunities for those assets, some of which may be carry-on work not related to the initial construction of said pipelines, but may follow on work. And I won't say there's an abundance of other opportunities, but there are other opportunities.

Okay, great. Thanks for the details.

Our next question is from the line of Steve Ferrazani with Sidodian Company. Please proceed with your question.

Good morning, Bradley, Carolyn. Just some follow-up on the Australian margins question. How much pricing power are you starting to see there, and how much can margins be expected by timing of contract rollovers?

Let me address the first part. I would say that we're seeing average daily rates for Australia.

Well, I've been working with the business for over 10 years now. This is the highest rate that I've seen. I'm running $108, $109 Australian a night for the villages. And what we're seeing which we'll put somewhat, I mean, we'll mitigate that, but it's a good thing, is that customers are beginning to be worried about availability of rooms in Australia, specifically in the Bowen Basin. And they're willing to lock up on a take-or-pay basis, even, you know, small increments of peaking needs for turnarounds and maintenance work. And typically, if they offer a take-or-pay, we won't get, you know, top-line pricing, but it's good pricing. Where we're seeing some of the incremental is always on the casual rooms, where if a customer won't commit to a multi-month or multi-year contract, they're going to get casual rates, and those typically tend to be much higher than the blended rate.

Yep. And then on contract rollovers and how that can affect top line?

We locked in a big chunk of our Bowen Basin rooms in the last six months on a five-year basis. I'm specifically thinking about two clients. And so I don't have the specific number in front of me, but I can think of only one 400-room room contract that will roll over mid-year next year in the bullen basin that we need to work on there's certainly odds and ends in between that but there's a big chunk of rooms order of magnitude i think is about 3 000 of the 6 000 that are occupied today um that are you know locked up for five years right okay

And then the other side of that, which has been the labor costs, you talked last quarter and you mentioned it on wider recruitment efforts. I know the difficulties and visas and getting into Australia. Can you talk about progress there? And are you finding any more success or is it still challenging?

I would say we're trending in the same direction, but I would not say that it's moved materially yet. We still have a fair amount of vacancies. We're still struggling with temporary labor, as we've mentioned in the past. It costs more, it's less productive, it's less safe, and it also puts pressure on the full-time staff because they end up having to pick up the slack. So the team is acutely focused on it. I think we're putting the right people in place to manage that, but I would say we're pretty much in the same spot we were at the end of the first quarter. And so we'll have to continue to improve that. I'm cautiously optimistic we'll get some contract relief as it relates to labor on some of that that will help mitigate it.

Perfect, thanks. And then if you could provide a little bit more color on how turnaround activities playing out this year versus last year in Canada. Because we look at your built rooms, and obviously that includes Sitka, so it kind of hides what the actual trend is. Can you give us any kind of a clearer sense on what you'd say, even if it's not a hard number, you know, turnaround versus last year in terms of rooms?

Yeah, I mean, we had a, we came in thinking we were going to be up 10 to 15 percent on turnaround activity, 23 versus 22. So I believe we're going to be up, but more in the 5% to 7% range, so about half of what we were expecting.

Wow, okay. And you think that's labor cost, no issues with wildfires?

Well, our safety team stays on it almost 24-7. None of our assets thus far have been, well, this quarter, have been at risk. However, what has been at risk is supply chain and communications. And so we have been watching that closely. We've been working with the local municipalities and our clients to make sure that if there are evacuees that we can help where we're needed. And so the actual fires endangering our asset, not since we had a 48-hour evacuation of a customer asset that we were on, back in April, April, May. But we haven't had anything that serious since then, knock on wood.

But you don't think that affected customers' decisions on whether to do full-time?

No, I'm sorry. No, I don't think that impacted. It's more, well, we have one customer that's very cost-focused right now. So that's impacting their spending. Another major customer, I believe it was availability. Okay.

Thanks, brother. Thank you.

Thank you. As a reminder, to ask a question today, you may press star 1 from your telephone keypad. The next question is from the line of Dave Storms with Stonegate. Please just hear your questions.

Good morning.

Hey, Dave, how are you?

I'm good. I hope you're doing well, too. I just want to start with the client that's adjusting their scope. I'm wondering if you could touch on kind of what drove them to adjust that scope and reduce their CapEx. Is that something that's an indicator of the macro demand, or is that more customer-specific?

Okay, that is specifically related to the village security improvements that we're doing down in Australia. These were done at the request of the customer. as they tried to bring the rooms that we own and run in line with the security enhancements they've done at their own villages, and they decided to change the scope on that, I guess because of the way the cost came in, to be honest.

But the whole thing is fully funded by them.

Got it. I just wanted to make sure that wasn't a macro.

No, it's not a read-through to macro. Perfect.

And then I know we've kind of touched on it already, but just if you could talk a little more about the rates coming up, both seasonally, sequentially, and on a constant currency basis. Is there anything specific that's driving the average daily rates in both the Canada and Australian markets other than just like the tightening in the Bowen Basin?

Clearly the tightening in the Bowen Basin for there is the most significant factor.

Also CPI adjustments.

And then CPI adjustments related, that's part of what's covering the inflation.

Canada, I would say the base rates are kind of flat before CPI adjustments.

Understood. I appreciate that. And then just one more, if I could, on the M&A and acquisition front, are you seeing anything in either of the markets, I guess more specifically the Australian markets, are things starting to soften? Any movement there?

No. We're looking at, in Australia, more one-off asset opportunities, and given the activity levels, it is not softening. So we'll have to see how that plays out. We continue to pursue it. We'll see if we can reach a reasonable transaction. In Canada, I would say that we're starting to see some asset transactions available, but nothing as significant or as potentially near term as what's in Australia.

Very helpful. Thank you for taking my questions.

Absolutely. Thank you.

Our next question is from the line of Stephen Giancarlo with Stifel. Please proceed with your questions.

Hi, thanks for taking the follow up. Just one more for me. Would you be willing to give us a stab at what 2024 looks like? I know it's early.

It's too early. We've got a lot of moving parts and Our teams have not put pen to paper yet, and so I know it's important. We'll certainly, as soon as you know, as soon as we have some clarity on outlook, we try to be as transparent as possible, but it's too early at this point.

Yep, I understand. I figured I would try. Thanks. And I will ask one more since I'm in queue here. You've done this normal issuer bid up in Canada for the last, I guess you've been through now, you're in the midst of your second round. Is that one of the capital allocation things that you're alluding to? Is it something that you potentially could move to an extraordinary issuer bid at some point?

At this point, we think it's an important part of the capital allocation. We've been doing it for two years now. and it'll come up in late August, September for renewal, subject to board approval. And so I would say unless there's something that changes, we would renew.

Okay, great. Thank you.

Thank you. At this time, we've reached the end of the question and answer session, and I'll turn the call over to Bradley Dodson for closing remarks.

Thank you. And thank you, everyone, for joining the call today. We appreciate your interest in CIVIO. We look forward to speaking to you on the third quarter earnings call expected in October.

This will conclude today's call. You may disconnect your lines at this time, and thank you for your participation.