Good day and welcome to the Civeo Corporation First Quarter 2020 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Regan Nielsen, Director, Corporate Development and Investor Relations. Please go ahead, sir..

Thank you and welcome to Civeo's first quarter 2020 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 information 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 disclosed in our Form 10-K, 10-Q and other SEC filings.

I will now turn the call over to Bradley..

Our first and foremost important priority in this tumultuous time is to protect the health and wellbeing of our employees and guests. Despite the economic disruption and subdued activity in March in North America, the company still delivered improved year-over-year financial and operational results for the first quarter of 2020.

This significantly reduced our leverage to 2.54 times as of March 31, 2020 from 2.98 times at year-end 2019. We expect that the remainder of 2020 will bring reduced EBITDA as a significant drop in oil prices has impacted our oil sand lodges' occupancy and overall activity in the U.S.

However, we believe the company's diversified geographic and commodity end-market footprint, coupled with our relentless focus on positive free cash flow generation will help us manage through this period of uncertainty.

We are focusing on factors within our control, as we navigate the challenges ahead, including previously announced cost containment initiatives. As we announced on April 14 in our Business Update, we have withdrawn our 2020 guidance. Lastly, we expect to remain free cash flow positive in 2020 and continue to paydown debt.

Now, for some overall comments on the business. I'll provide a brief summary of our performance for the quarter and a business update as we contend with the COVID-19 pandemic and the dislocations in the global commodity markets.

Carolyn will then provide a financial and segment level review, and I conclude with some directional commentary on our expectations for the second quarter before we move into the question-and-answer portion of the call. Our team has performed admirably under rapidly evolving circumstances during the quarter.

Civeo's first quarter results were punctuated by a significant reduction in our leverage ratio and year-over-year occupancy gains, both in Canada and Australia despite a significantly weaker Canadian activity in March.

We generated revenues of $138.8 million, and adjusted EBITDA of $20.3 million and $18.3 million of free cash flow during the first quarter of 2020. Turning to our balance sheet. Our leverage ratio declined 2.54 times at the end of the first quarter from 2.98 times at the end of the year 2019.

Maintaining a healthy balance sheet and liquidity profile will continue to be among the top priorities in 2020 as we can confront the challenges ahead. Let me take a moment to provide a business update on our three segments. Our business in Canada is continuing with headwinds related to the pandemic and an exceedingly difficult oil price environment.

Most customers are limiting their employee and contractor headcounts to essential personnel only, resulting in reduced occupancy in Canada. Although, work continues on the oil sands and LNG projects there, our customers are proceeding at a noticeably slower pace than the first two months of the year. Moving to Australia.

COVID and commodity price related disruptions to our business thus far have been less pronounced than we've seen in Canada only in part -- in large part to the more constructive underlying fundamentals for metallurgical coal and iron ore than there are for oil right now.

Occupancy was better than expected in the first quarter and has remained relatively buoyant in April. And we are pleased to report that since the beginning of 2020, Civeo has been awarded four contracts, three -- with three Western Australia mining customers for Action Catering business.

These contract terms vary from one year to three years and have anticipated aggregate revenues totaling AUD36 million that will extend through 2023. The environment in our U.S. business is far more challenging than we expected coming into 2020.

Our E&P customers are facing an unprecedented period of oil demand destruction due to the global economic recession caused by COVID-19 against the backdrop of a highly contentious OPEC plus alliance. The industry's collective response in the U.S.

has been meaningfully reduced -- has led to meaningful reduced drilling and completion capital spending activity. Occupancy levels across our U.S. onshore portfolio have declined from already subdued levels, and this has compelled us to temporarily shutter certain lodges and move toward consolidating our wellsite district locations.

As we navigate this difficult and uncertain environment, our priorities are to keep our employees and guests safe -- the most safe as possible, maximize our free cash flow generation, preserve our financial flexibility and reduce our costs without compromising our service quality. With that, I'll turn it over to Carolyn..

Thank you, Bradley. And thank you all for joining us this morning. Today, we've reported total revenues in the first quarter of $138.8 million, with a net loss on a GAAP basis about $146.5 million or $0.87 per share.

The net loss included a goodwill impairment charge of $93.6 million in our Canadian reporting unit, as well as asset impairment charges totaling $38.1 million in Canada and $12.4 million in the US. During the first quarter, we generated adjusted EBITDA of $20.3 million, operating cash flow of $20.8 million, and free cash flow of $18.3 million.

Turning to the first quarter results for our three segments. I'll begin with a review of the Canadian segment performance compared to the performance a year ago in the first quarter of 2019. Revenue from our Canadian segment was $79.3 million as compared to revenues of $66.8 million in the first quarter of 2019.

Adjusted EBITDA in Canada was $11.4 million, an increase from $10.2 million in the first quarter of 2019. Revenues and adjusted EBITDA for the quarter were both impacted positively by year-over-year billed rooms growth.

During the quarter, billed rooms in our Canadian lodges totaled 708,000, which was up 13% year-over-year from 626,000 in the first quarter of 2019.

This was due to increased billed rooms from our expanded Sitka Lodge, serving LNG activity in British Columbia, as well as increased oil sands activity in January and February partially offset by the decline in Canadian occupancy in March. Our daily room rate for the Canadian segment in U.S. dollars was $93, essentially unchanged year-over-year.

Turning to Australia. During the first quarter, we recorded revenues of $49.1 million, up from $28.4 million in Q1, 2019. Adjusted EBITDA was $16.2 million, up from $9.9 million during the same period of 2019.

These results were positively impacted by the acquisition of Action Catering in July last year, as well as increased village occupancy, partially offset by a weakened Australian dollar. Billed rooms in the quarter were 472,000, up from 383,000 in the first quarter of 2019 due to continued improvement in met-coal activity across the Bowen Basin.

The average daily rate for Australian villages in U.S. dollars was $69 in the first quarter, down from $74 year-over-year primarily due to the weakened Australian dollar. Moving to the U.S. Revenues for the first quarter were $10.3 million as compared to $13.4 million in the first quarter of 2019. The U.S.

segment adjusted EBITDA was $400,000 in the first quarter, down from adjusted EBITDA of $2.8 million during the same period last year. These year-over-year declines were primarily due to broadly lower drilling and completion activity, coupled with the expiration of our Acadian Acres contract in June 2019.

On a consolidated basis, capital expenditures were $2.7 million in the first quarter, down from $9.7 million in the first quarter of 2019 due to expenditures related to the Sitka Lodge expansion last year. Our total debt outstanding on March 31, 2020, was $314.9 million, which represents a $44.2 million decrease since December 31, 2019.

The decrease consisted of $14.2 million in debt payments during the quarter, some free cash flow generated by the business, as well as a favorable foreign currency translation impact of $30 million. As Bradley mentioned, our leverage ratio for the quarter was reduced to 2.4 times as of March 31, from 2.98 times as of December 31, 2019.

And as of March 31, we had total liquidity of approximately $149.6 million, which consists of $144 million available under our revolving credit facilities and $5.6 million of cash on-hand.

Due to historically low oil price levels and the resulting impact on our North American operations, it is likely that we will not remain in compliance with our leverage ratio, particularly beginning with the period ending December 31, 2020 when our maximum leverage ratio under our credit agreement reduces to 3.5 to one.

In order to avoid violating this covenant, we intend to pursue an amendment to our credit agreement to increase that maximum leverage ratio for several quarters. We believe it is probable that we will be able to obtain an amendment to our credit agreement or alternative solutions such as a waiver or replacement financing.

However, we can give no assurance that we will be able to obtain such amendment waiver or placement financing on favorable terms forward all. Despite the economic disruptions we are facing, we will continue to maintain the financial discipline that has seen us through difficult environments in the past.

As we disclosed in our April 14 Business Update, we have already implemented several cost containment initiatives, including salary and total compensation reductions of between 10% and 20% for the Board of Directors, our executive leadership team as well as other senior management.

Headcount reductions in North America of 25% have been made in the last few weeks and an approximate 25% cut to our 2020 capital spending program has been implemented. We expect to incur costs of between $1.5 million to $3 million in the second quarter related headcount reductions.

Bradley will now provide some closing commentary and discuss our outlook for the remainder of the year.

Bradley?.

We prioritize the safety and wellbeing of our employees, guests and vendors; we will manage our cost structure in line with the current occupancy outlook; and we allocate capital prudently to maximize free cash flow generation and financial flexibility. With that, those are -- the end of our prepared comments and we're happy to take questions..

Thank you. [Operator Instructions] And we will take our first question from Kurt Hallead with RBC..

Hey, good morning everyone, and hope your respective families are safe and well..

Thank you, Kurt..

Bradley, I appreciate the color and commentary and kind of reticent to provide any kind of specific -- levels of specific guidance given the uncertainties at play. So, maybe I just ask you to give us some directional context.

Maybe start off on the Canadian front as you had mentioned a significant drop off in residency during the course of -- from the end of March and for where we kind of are today in that recovery, so we can kind of get a sense of the magnitude on that and LNG expect to be a little bit more resilient.

So, when you're going to put them into a shake and bake bag and kind of throw them on to a table, what kind of overall kind of directional decline in Canadian revenue could we expect maybe as we get into the second quarter? And then, if you can give us some general sense, again, just broadly directionally whether or not the second quarter could mark the low point for the full year for Canada? That'd be very helpful.

Thanks..

Sure. Happy to do that, Kurt. As we outlined in the prepared comments, our occupancy in Canada went from about 8,600 guests per day in early March to close to 3,000 and a little bit below. And in April, it's bounced back up as we're taking care of the evacuees from Fort McMurray. I don't think that that's going to last very long.

As we mentioned and you highlighted in your question, in Canada we do expect the LNG Canada project will start to ramp back up in the second half back to initially planned levels that were in our original guidance. But at this point, our current forecast we're not assuming that oil sands occupancy improves from where we are today.

Maybe a little bit, but not materially. So, to put that in perspective, in total Canada last year had about 3.1 million room nights. I expect that number is going to be under 2 million room nights in total, that's both the oil sands LNG and LNG related. So, that will produce materially lower revenues and EBITDA out of Canada.

And that quite frankly is the crux of the difference between our originally -- original guidance, which was about $100 million and while we're not giving guidance today, while we're expecting significantly lower EBITDA year-over-year.

That being said, the other major assumption in our outlook right now is that Australian occupancy remains at levels that it is today. We're not expecting any sort of hockey stick increase in occupancy in Australia, but we are expecting it to stay at current levels. If we’re to see that change, then that would be a downside for us. I think the U.S.

team has done an admirable job over a multiyear period, but certainly in the last 60 days to 90 days in addressing their cost structure.

And so, it's not material to us, I think they've done a very good job in mitigating what would otherwise be a significantly negative market for us as we see rig count falling to -- close to historic levels as of last week and expected to go to historically low levels in the future and completion activity in the U.S. to effectively come to a halt.

So that's kind of the picture we have today. I would say that upside for us would be likely if we're overly conservative or pessimistic around Canada. We've seen a couple of operators who are starting to look at bringing forward their turnaround and maintenance work in their oil sands region.

Imperial has publicly announced it, and we're working with several other customers were contemplating it. That would not be in our guidance numbers of the commentary I just gave. So, that's the picture that we have today and happy to answer any follow-on questions..

No, that's great color. I really appreciate going through that detail. My follow-up question would be on the leverage ratio, and I appreciate the candor about the risk of tripping that come in the fourth quarter of this year. I do know that you have a number of adjustments -- bank adjustments that are related to EBITDA.

And just kind of curious as to what that level of adjustments might be for the -- maybe on a full year basis or as the rest of the year kind of plays out. You do our baseline EBITDA calculation and I know that sometimes we don't always kind of capture what those additional adjustments are, so any color on that would be helpful..

Sure. Sure, Kurt. I'll take that. With respect to our bank adjusted EBITDA, the most significant adjustment is for non-cash stock-based compensation. So, it's approximately $10 million-ish a year that we add back to reported adjusted EBITDA to get to bank EBITDA. There was and there is an adjustment for acquisitions where we pro forma in the historical.

So, for -- currently, we have pro forma in the Action EBITDA on periods prior to owning them, that obviously once we get to the third quarter, there no longer will be that adjustment, because we'll have included their results for our full year in our results. So, that really -- the stock-based comp is the big one..

I appreciate that detail. And then on the stock-based comp, so despite the recent events and stock price dynamics and everything else, that's a pretty -- that stock-based comps are pretty static number..

Well, we're -- we have not issued any shares this year, so it'd all be grants that are still amortizing. It is -- as we disclosed in the proxy, the board is not taking any shares. They've reduced their comp and they're taking all of the comp and cash.

And I don't expect on a go-forward basis at least for the rest of 2020 that we'll see any shares issued. So, it's a longwinded way of saying, yes, it will start to go down. But I don't think it will go down materially from where it is right now.

For the next 12 months, you will start to see the impact of not issuing any shares in 2020 -- in kind of 2021, 2022..

Okay. Great. Thanks for that. Appreciate it..

And next, we'll move to Stephen Gengaro with Stifel..

Thanks. Good morning, everybody. Hope everybody is well..

Thank you, Stephen. Good morning..

Thanks. So, in follow-up to Kurt's question, you guys have a history over the years I think of managing lower occupancy levels pretty well and maintaining a positive EBITDA contribution for really -- clearly since you guys spun out of oil states, but even before them.

While thinking about the margin degradation, what looks like a second quarter room count, which is down 50% in Canada or more, can you stay EBITDA positive in Canada in 2Q? Are there enough variable cost to get you there, or how should we be thinking about that just in a general sense?.

I think, Canada in the second quarter will be close to breakeven, plus or minus. That will be after COVID related costs and some restructuring costs. But I think in total, right now, I think, Canada is plus or minus breakeven. The U.S.

will be slightly negative and Australia -- prior to the two biggest variables are holding on the occupancy and what the currency is going to do. Thus far, they have been kind of our bedrock to keep us going..

Thanks. And then, you mentioned the Australian room count being pretty stable from these current levels.

Is it currently at around where the first quarter was, or has it been a drop off since the end of the first quarter?.

It stayed relatively consistent. There are certainly from time to time customer specific issues that will influence things. But generally speaking, Australia feels like it's in line with our expectations in April..

Sorry. And then, just as a final one from me for now. And we can sort of triangulate where we all flow out from an EBITDA perspective, which I know is tough. When I think about the models and the EBITDA contribution, your CapEx is about $15 million, your interest is about $25 million, maybe a little bit less, so that's about $40 million.

So, if you do $50 million or $60 million in EBITDA, you are going to be $10 million to $20 million free cash flow positive plus some working capital.

Am I thinking about that right? And how should we think about working capital?.

That's spot on. I'll ask Carolyn to give some overview comments to confirm the numbers, but that feels right. CapEx is $15 million, interest expenses is $25 million plus or minus, and so that's $40 million.

And then working capital should move in our favor here in the second quarter, presuming the baseline assumption is that we'll have some recovery in Canada all LNG related in the second half of the year. But in total, I expect about $14 million, $15 million worth of cash flow coming from working capital, specifically in the second quarter.

Carolyn, any corrections or adjustments?.

No. Spot on..

Okay..

All right. Great. Okay. Thank you..

Thank you, Stephen..

[Operator Instructions] And we'll hear a follow-up from Stephen Gengaro with Stifel..

Thanks. So, I'll jump back on. So, one more, the Action acquisition has seemingly gone very well, since you guys closed in middle of last year.

Can you give us an update on what you're seeing there and sort of the -- I know it's tough market right now, but kind of the expectations for that business over the next sort of three to six quarters, and how it's evolving and how the deal is done?.

Sure. So, we closed the Action Industrial Catering business in July of 2019. Just as a backdrop for the balance of the people on the call, Action provides management service -- integrated services to customer owned rooms in Western Australia, predominantly serving iron ore customers, but also serving gold, lithium and other customers there.

It's a service-only business, a lower margin business, but the business which has been growing significantly since we acquired it. We had four nice renewals -- the contract renewals we mentioned in our prepared comments, were all Action related. There are three wins and one renewal.

We're working very closely with our customers on a couple of material renewals that will happen in July of 2020. But I would say, in general, EBITDA coming out of Action is going to be about doubled to triple what we are initially anticipating out of the business.

We've seen business continue to grow, and iron ore prices are holding in there quite nicely. They are in the $80 range and that's where they started the year. We are ser -- the two major commodities that we serve in Australia, iron ore with Action and met-coal with our legacy business and those both go into steel manufacturing.

And so, we're very, very -- watching very closely the global steel demand and how things are coming back, but thus far, things have stayed relatively buoyant in Australia. So, we're optimistic that continues for the rest of the year..

Great. Thank you..

And that will conclude today's question-and-answer session. At this time, I would like to turn the call over Mr. Bradley Dodson for any additional or closing remarks..

Thank you everyone for joining us today. These are incredible times we have to manage through. I do want to say thank you to our team. As you can imagine, we're all dealing with a lot of anxiety.

For our frontline workers, our operations team, the protocols and our safety team has put in place to keep people safe and to mitigate the impact of the COVID-19 virus in our locations has been unbelievable and I can't possibly thank them enough. Thank you to our global office staff, who have be working from home for close to two months.

It hasn't been easy, but you have done an incredible job, to our finance team, who closed the quarter in a completely remote environment that was incredible. And so, thank you to everyone and we'll get through this together. Thank you..

And that will conclude today's call. We thank you for your participation..