Greetings. Welcome to the Civeo Corporation Second Quarter 2023 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. At this time, I'll now turn the conference over to Regan Nielsen, Vice President, Corporate Development and Investor Relations. Regan, you may begin..

Thank you and welcome to Civeo's second quarter 2023 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 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 Form 10-K, 10-Q and other SEC filings. I'll now turn the call over to Bradley..

Thank you, Regan, 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 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, second quarter 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 the quarter as expected, resulting in reduced Canadian mobile camp activity for us and contributing to lower Canadian lodge billed 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 McClelland 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 our progress to date, but cannot discuss the details of the proposed deal at this time.

In addition, the demobilization process for McClelland Lake is underway. The related customer room demand from that former lodge has moved to other similar 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 demobilization 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 $4 million capital allocation framework that incorporates our strong balance sheet position and our solid free cash flow outlook, as 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 billed rooms. The decline was also exacerbated by the weakened Canadian dollar relative to the U.S. dollar.

Sequentially, however, revenue and adjusted EBITDA increased substantially due to the seasonal increase in turnaround activity.

For Australia, we saw a significant year-over-year increase in revenues and adjusted EBITDA, driven by increased billed rooms at our owned villages and increased integrated service revenue from 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 reported 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, our 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 to 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 GAAP net income of $4.5 million or $0.30 per diluted share.

During the second quarter, we generated adjusted EBITDA of $31.6 million, operating cash flow of $19.4 million and free cash flow of $12.9 million.

As Bradley just mentioned, the 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 and EBITDA and lower LNG-related Canadian lodge occupancy.

These decreases were partially offset by increased billed rooms in our Australian 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 in 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 billed rooms in our Canadian lodges. Adjusted EBITDA also declined year-over-year due to the aforementioned dynamics.

During the second quarter, billed rooms in our Canadian lodges totaled $724,000, which was down from $771,000 in the second quarter of 2022. Our daily run 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 run rate in Canadian dollars was up year-over-year. Turning to Australia. During the second quarter, we recorded 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 contracts.

Australian billed 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 our 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 mothball Australian village rooms with increased customer demand. Our total debt outstanding on June 30 was $136.1 million, a $6.5 million decrease since March 31.

Our net leverage ratio for the quarter remained flat at 1.2x as of June 30, 2023, since March 31, 2023. As of June 30, 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 2023.

Bradley?.

Thank you, Carolyn. I'll now turn to a 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 million to $95 million for adjusted EBITDA. We are decreasing our full year 2023 CapEx -- capital expenditure guidance to $35 million 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 upfront. Therefore, any increase or decrease to our capital expenditure guidance is 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. The 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 million to $58 million.

I will now provide the regional outlooks and corresponding underlying assumptions. In Canada, 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 McClelland 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 Civeo 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 costs 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 Civeo.

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 USD 10 million of demobilization expense this year and USD 6 million of demobilization expenses next year. Turning to Australia; we continue to see encouraging signs of growth in customer demand for our owned villages and integrated services businesses.

In our owned villages, we experienced an uplift in customer activity, as evidenced by the 16% year-over-year increase in billed rooms 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 are focused on.

As a reminder, we've been attacking inflationary pressures through a 3-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 realize 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 -- as our free cash flow outlook for 2023 and beyond [indiscernible], we continue to evaluate our 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.

We continue to prioritize the safety and well-being of our guests, employees and communities.

We 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..

[Operator Instructions] And our first question today comes from the line of Stephen Gengaro with Stifel..

I think, Brad, maybe the first one, when you mentioned the McClelland 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..

Okay. When we look at your historical seasonal patterns for the business in general and maybe geographically, we can 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 numbers -- generally, I think it's about 60-ish, maybe 65%.

Is that pattern similar to this year? Or given the comments you made about Australian margins progressing throughout the year? Could it be a bit different?.

No, I think it will stay the same. We're going 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, but -- 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 -- won't surprise you that everyone's having trouble finding labor and that impacted some of the turnaround activities here in the second quarter. But you're exactly right, 65% 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 uptick, as you mentioned, and some of the margins in Australia. So some pluses and minuses, but the historical average will remain the same..

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..

Yes..

Okay. Just wanted to make sure, I was correct..

That's correct. No, that's a very good point, Stephen. That's right. We'll certainly see a or -- I mean, we expect to see a material improvement in the integrated services margin in the second half percentage. And we are seeing significant -- a strong occupancy in our owned villages in Australia.

The market is really starting to tighten up, particularly in the Bowen Basin, although we're seeing some uplift in Canada. Percentage-wise is going to grew the most sequentially, but at the Bowen Basin is significantly larger; so in terms of our total number of volumes. So the -- but Australia is looking good. I think we're in both markets.

If you look at the local currency average daily rate, so how much we paid per person per day versus the average daily costs. Generally, pricing has -- if not, beating 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 has been going away. So there's still work to do there, but we're making good progress..

Great. And then just one more for me. I wanted to clarify, you -- I think you said $6 million of demobilization costs in 2024 around Coastal Gaslink. 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 US$10 million, and we are pursuing opportunities for those assets, some of which maybe carry-on work not related to the initial construction of said pipelines, but made follow-on work. And I won't say there's an abundance of other opportunities, but there are other opportunities..

Our next question is from the line of Steve Ferazani with Sidoti & Company..

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 -- that's some of the -- well, I've been working with the business for over 10 years now. This is the highest rate that I've seen.

We're running AUD180 -- AUD109 a night toward the village 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, and specifically in the Bowen Basin.

And their ability to lock up on a take-or-pay basis, even small increments of peaking needs for turnarounds and maintenance work. And typically, if they offer a take-or-pay that we won't get 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 a customer will commit to or multiyear contract, they're going to be casual rates, and those typically tend to be much higher than the blended rate..

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

We locked in a big chunk of our Bowen Basin rooms in the last 6 months on a 5-year basis with -- I'm specifically thinking about 2 clients. And so I don't have the specific number in front of me, but I can think of only one 400-room contract that will roll over midyear next year in the Bowen Basin that we need to work on.

There are certainly odds and ins 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 that are locked up for 5 years..

Great. Okay. And then the other side of that, which has been the labor costs that you talked last quarter and you mentioned it on wider recruitment efforts.

I know the difficulties and pieces and getting it to 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 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 we're -- I'd 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. And then if you could provide a little bit more color on how turnaround activity is playing out this year versus last year in Canada. Because we look at your billed rooms and obviously that includes Sitka, so it kind of high -- is 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, turnaround versus last year in terms of rooms?.

Yes. I mean we had -- we came in thinking we were going to be up 10% to 15% in 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..

Okay.

And you think that's labor costs, no issues with wildfires?.

Well, our safety team stays on at 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 the evacuates that we can help where needed. And so -- but actual fires endangering our asset not since we had a 48-hour evacuation of customer asset that we were on back in April, May. But we haven't had anything that serious since then, not onward..

But you don't think that affected customers' decisions on whether to do further?.

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..

[Operator Instructions] The next question is from the line of Dave Storms with Stonegate..

Just want to start with the client that's adjusting their scope.

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 try to bring the rooms that we own and run in line with the security enhancements they've done at their own villages -- that their own villages. And they decided to change the scope on that.

I guess, because of the way the costs came in, to be honest. So -- but the whole thing is fully funded by them..

Got it. Got it. I just want to make sure that wasn't -- macro [ph]..

It's not -- no, that was not -- it's not a read-through to macro..

Perfect. And then I know we 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 Canada and Australia markets other than just like the tightening in the Bowen Basin?.

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

Also CPI adjustments..

And then CPI adjustments related -- it's part of what's covering the inflation..

Perfect..

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 movements 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 -- if that 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 is what's in Australia..

Our next question is from the line of Stephen Gengaro with Stifel..

Just one for me. Would you be willing to give us a stab, 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..

Yes. I understand. I figured I would try. 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? Or is it something that you potentially could move to an extraordinary issuer bid at some point?.

At this point, it's -- we think it's an important part of the capital allocation. We've been doing it for 2 years now, and it will come up in September -- late August, September for renewal, subject to Board approval. And so I would say, unless there's something that changes, we would renew..

At this time, we 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 Civeo. 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..