Civeo Corporation (CVEO) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day and welcome to the Civeo Corporation Second Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I'll turn the conference over to Mr. Regan Nielsen, Senior Director, Corporate Development and Investor Relations. Please go ahead, sir.
Regan Nielsen: Thank you and welcome to Civeo's Second Quarter 2021 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.
Bradley Dodson: Thank you Regan and thank you all for joining us today on our second quarter earnings call. For today's call, I'll provide a brief summary of our performance for the second quarter, Carolyn will then provide some color on the consolidated and segment-level financials, I'll conclude with some directional commentary on our expectations for the remainder of the year, before we move into the question-and-answer portion of the call. We continue to focus on safety and well-being of our guests and employees. We saw an increase in COVID-19 cases in Canada in the second quarter and an increase in COVID-19 cases in July in Australia. Our operational protocols continue to help stem the spread of the virus effectively. Financially, our focus is to generate free cash flow and reduce leverage. Operationally, our focus is on maintaining our high level of service standards and capturing market share in a turbulent market environment. The key takeaways from our call today, despite a strong third wave of COVID-19 in Canada and a lingering China-Australia trade dispute, our business continue to generate cash which we allocated to debt reduction. In the second quarter, Civeo reported $32.2 million of EBITDA, $13.7 million of free cash flow and we paid -- we repaid $14.4 million of debt. We continued to reduce our leverage ratio to 2.0x at March 31, 2021 from 2.1x -- sorry we reduced leverage ratio to 2x at June 30 from 2.1x at March 31. We continue -- we are increasing our free cash flow guidance for the full year which I'll describe after Carolyn. And we view labor supply issues and subdued customer activity in Australia as trajectory problems, as we expect to have those resolved by the end of 2021. In the second quarter Civeo delivered $32.2 million of adjusted EBITDA $13.7 million of free cash flow and reduced debt by $11 million to $226.8 million. These results reflect sequential improvement in revenues and EBITDA in the second quarter compared to the first quarter, largely due to higher billed rooms in Canada. In line with our continued push to de-lever our balance sheet our leverage ratio declined to 2.0x at June 30 and 2.1x at the end of the first quarter. Diving into the segments. In Canada we saw a sequential improvement as a result of increased activity in our core oil sands region as well as sequentially increased occupancy at our Sitka lodge as the COVID-19 health orders in British Columbia began to be lifted towards the end of the second quarter. Our year-over-year performance in Canada was relatively flat with the increased oil sands activity offsetting the impact of several onetime items realized in the quarter a year ago which as you may remember included proceeds from the Canadian Emergency Wage Subsidy, as well as a gain on sale from sale of some of our assets at the Henday lodge.
Carolyn Stone: Thanks Bradley and thank you all for joining us this morning. Today we reported total revenues in the second quarter of $154.2 million with a net loss on a GAAP basis of $0.5 million or $0.03 per diluted share. As Bradley just mentioned, during the second quarter we generated adjusted EBITDA of $32.2 million, operating cash flow of $16.5 million and free cash flow of $13.7 million. The increase in revenues and adjusted EBITDA experienced in the second quarter of 2021 as compared to the same period last year was largely due to an increase in billed rooms in the oil sands lodges and Canadian mobile camp activity. Results from the second quarter of 2021 were also favorably impacted by a strengthened Canadian dollar and Australian dollar relative to the US dollar. Let's now turn to the second 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 second quarter of 2020. Revenue from our Canadian segment was $83.3 million, as compared to revenue of $53 million in the second quarter of 2020. Adjusted EBITDA in Canada was $22.6 million, an increase from $15.3 million in the second quarter of last year. Results from the second quarter reflect the impact of a strengthened Canadian dollar relative to the US dollar, which increased revenues and adjusted EBITDA by $9.6 million and $2.7 million respectively. The remaining increase in revenues and adjusted EBITDA was largely driven by increased billed rooms in the oil sands lodges, coupled with increased mobile camp activity. These factors were partially offset by decreased billed rooms at our Sitka lodge, due to British Columbia's health order protocol affecting the vast majority of the quarter.
Bradley Dodson: Thanks, Carolyn. Based on our outlook moving into the second half of the year, we're maintaining our previous revenue and adjusted EBITDA guidance for the full year 2021 at a range of $555 million to $850 million for revenues and $90 million to $100 million for adjusted EBITDA. In regard to CapEx guidance, we're lowering our full year 2021 capital expenditure guidance to a range of $15 million to $20 million. Based on the EBITDA and CapEx guidance just outlined, expected interest expense of $15 million, no expected cash taxes and roughly $5 million of cash inflow from working capital, we are raising our expectations for 2021 free cash flow to a range of $60 million to $75 million. I'll now provide the regional outlooks for our business with corresponding market assumptions. In Canada, we expect turnaround activity to begin to tail off, as we progress through the third quarter. We are encouraged by the decline in COVID-19 cases in Canada and hope this trend allows our customers to continue to normalized operations. The British Columbia health order, which temporarily limited occupancy at all industrial projects in the province including our Sitka Lodge was lifted late in the second quarter. Now that that order has been lifted, we have seen an uplift in occupancy as our customer works to catch up on their project time line. These expectations are in line with the EBITDA guidance that we are maintaining from the last quarter. In Australia, we anticipate that the prolonged travel restrictions related to the COVID-19 pandemic will continue to pressure our performance in the region with increased labor costs anticipated to be a factor that we can continue to -- that will continue to impact our margins. The outlook for metallurgical coal markets in Australia for 2021 has continued to be impacted by the Chinese trade policy. So, increased interest in Australian met coal outside of China has built some of the negative impacts. We expect a supportive commodity price environment to remain for the rest of the year with met coal currently trading above $200 per ton. The met coal prices are at much healthier levels than we had last provided revenue and EBITDA guidance. We have chosen not to increase our expectations for the back half of the year for the Australian segment. Our customers continue to be hesitant to increase activity in light of the lingering China-Australia trade dispute. Our current guidance does not assume a material improvement or degradation in the Australian-Chinese trade dispute nor does it assume a material improvement or degradation in labor costs.
Operator: Thank you. Our first question comes from Steve Ferazani from Sidoti. Please go ahead.
Steve Ferazani: Good morning everyone. I wanted to follow-up on your last comments about the met coal markets. When you can see where prices are, as you talk to your customers in Australia, what do you think will drive activity if it isn't price right now?
Bradley Dodson : It's a good question. Right now, I think certainty is what will drive customer spending. The markets have rebalanced. The flows of exported met coal seem to be moving to different markets than historically that they've been. Our customers are certainly making a lot of profit and free cash flow at these levels. But in terms of green lighting either maintenance spending or expansionary spending, I think we need more certainty in the market. So as of right now, we're not really expecting -- while we'll see modest improvements, our guidance assumes modest improvements in occupancy Q2 to Q3, and quite frankly, Q3 and Q4, we're still not at levels that we were expecting coming into the year.
Steve Ferazani: Okay. And then on the Australian side. Is it reasonable to think that turnaround activity should be a lot happier given that probably a lot -- it was a lot lighter during the COVID year and is that what you're thinking and is that what you're seeing?
Bradley Dodson : Well, in Canada, yes. Yes, we've seen much better turnaround activity. Second quarter was in line with expectations despite the fact that we had one customer push some of their activity from Q2 to Q3. But it appears that that activity will come through, but turnaround activity in Canada is clearly much improved year-over-year.
Steve Ferazani: Great. Great. If I could just get one more in. You noted lower CapEx now expected. You're down to two times leverage sounds like reasonable free cash flow this year. Any other thoughts on uses of cash given that leverage is probably down to an area you're comfortable with?
Bradley Dodson: It's getting there. I think for our business our target is to get to 1.5 times levered. That being said to your point, capital allocation decisions have a little bit more freedom now and we will be assessing, whether or not a share repurchase program is prudent but that is on the to-do list for Q3.
Steve Ferazani: Great. Thanks so much. Appreciate the time.
Bradley Dodson: Thank you. Appreciate the call.
Operator: We will now take our next question from from Stifel.
Unidentified Analyst: Hey good morning everyone. So looking at Civeo over the next one to two years could you talk about key potential growth drivers for the overall business?
Bradley Dodson: Sure. I'll go region by region. In Canada, there's still some recovery just that we expect to presuming that the pandemic starts to get behind us. There's a recovery to near pre-pandemic levels although, we're not expecting at least in our internal forecast a recovery to -- fully to pre-pandemic levels. And that's based on some projects that our customers are going to need to do and that's going to drive some occupancy for us, as well as the benefits from the pipeline work which will really start to impact us in the second half of this year as we're supporting the coastal gasoline pipeline as well as the Trans Mountain pipeline and those mobile camp assets are in place and starting in the third quarter to earn some money. In Australia, with steel prices at near all-time highs or all-time highs with met coal and iron ore at very -- quite frankly levels that are not necessary to drive our forecasted occupancy we can hit -- our forecast occupancy actually expects lower prices than, where we are right now. So to the earlier question I think once customers start to feel comfortable with the outlook there's a pent-up demand here in terms of occupancy in our Bowen Basin locations. There are potential growth projects for our customers that could drive further occupancy and if we can open up the borders or taking up some orders in Australia to help alleviate the labor issues that would improve our margins in Western Australia. Beyond that, there are a handful of things we'd like to do organically. We'd like to expand our integrated services business and continue to capture market share there. I think we've got an interesting value proposition to the customer in terms of our service delivery and execution. And we'd like to build on that.
Unidentified Analyst: That's great. Thank you so much. I have one more follow-up, if you don't mind.
Bradley Dodson: Of course.
Unidentified Analyst: So in Australia, how are you managing COVID issues, personnel issues and cost inflation? And how has it impacted margins?
Bradley Dodson: So in terms of COVID, knock on wood, we've not had a positive case at any of our villages to-date. The protocols that we globally put in place have worked successfully. We continue to work with our customers to ensure that we're keeping their people safe and their operations going. But that being said, for the better part of the last 18 months the travel -- there have been effectively travel restrictions inside the country which have limited movement of personnel and labor. We've seen some margin impact in our Bowen Basin locations because of higher labor costs. But where we've really felt it is in our Western Australian operations where labor availability is difficult. And we've been, having to rely on temp labor, which is both more expensive and less productive. So we're managing it. The guidance for 2021, while last time, we spoke with you all on the first quarter call, we were expecting that the labor issue would be largely resolved by the second half of the year. We're effectively not assuming that anymore. We've backed off of that. We're assuming we're going to have higher labor costs in Western Australia for the balance of the year as well as in the Bowen Basin although it's less of an impact there. We do -- as I mentioned in my earlier comments, we do expect that, occupancy will continue to sequentially improve throughout the year just not getting to where we had expected coming into the year because of the Chinese-Australian labor dispute.
Unidentified Analyst: Great, great. Thank you so much.
Operator: It appears there are no further questions at this time.
Bradley Dodson: Well, thank you all for joining us on the second quarter call. We hope you and your families are all safe and healthy. And we look forward to speaking to you on the third quarter call.
Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
