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Civeo Corp (CVEO 0.65%)
Q3Â 2019 Earnings Call
Oct 25, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, everyone. Welcome to the Civeo Third Quarter 2019 Earnings Call. [Operator Instructions]
At this time, I would like to turn the conference over to Regan Nielsen, Director, Corporate Development and Investor Relations. Please go ahead.
Regan Nielsen -- Investor Relations
Thank you, and welcome to Civeo's third Quarter 2019 earnings conference call.
Today, our call will be led by Bradley Dodson, Civeo's President and Chief Executive Officer; and Frank Steininger, Executive Vice President and Chief Financial Officer; and Carolyn Stone, Vice President and Chief Accounting Officer.
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.
Bradley J. Dodson -- Chief Executive Officer & Director
Thank you, Regan, and thank you all for joining us today on our third quarter earnings call. I will begin with the summary of our third quarter performance before offering some commentary on our three business segments. Carolyn will then provide a detailed discussion of our consolidated and segment quarterly financials; and Frank will discuss our current market outlook, our updated financial guidance for 2019 and preliminary views of 2020 before we move on to the question and answer portion of the call.
Key takeaways today from our third quarter earnings are the third quarter earnings demonstrated that diversity -- diverse activity drivers of our business with strong revenues from our Australian Bowen Basin driven by met coal related occupancy, the benefits of an expanded Sitka Lodge serving Canadian LNG, robust occupancy in our core oil sands lodges and the first quarter of contributions from the Action Catering acquisition in Western Australia, which primarily serves the iron ore industry.
In the third quarter, we generated adjusted EBITDA of $36.2 million, which exceeded our expectations on a consolidated basis. We significantly reduced our leverage ratio from 4.26 times as of June 30, 2019 to 3.52 times as of September 30, 2019. We are also raising our previously disclosed full year 2019 adjusted EBITDA guidance on the basis of our strong performance in the third quarter, partially offset by a weakening U.S. market.
Lastly, our Sitka Lodge expansionary capital expenditures are complete. We expect to generate increased free cash flow in the fourth quarter of 2019 and going into 2020 which we will use to reduce debt.
Moving on to the quarter. Our third quarter performance was punctuated by stronger-than-expected billed rooms in Canada, Australia and demonstrates the significant operating leverage of our lodge and village operations as our occupancy increases. This quarter also highlights the diverse geographic and resource-based revenue profile of our business. We experienced sequential growth driven by LNG in Canada, the oil sands in Canada, metallurgical coal in Australia, thermal coal and iron ore activities in Australia, partially offset by lower activity in the U.S.
We also continue to secure contract awards in the third quarter. We are pleased to announce two major coal producers in Australia have awarded Civeo contract extensions to provide rooms and hospitality services at our Coppabella and Dysart facilities with expected revenues of approximately AUD37 million. Both contract extensions provide a multi-year term and increased take or pay room commitments.
These contract extensions reinforce Civeo's high service delivery and strong long-standing customer relationships in Australia as well as the increase in mining activity in the Bowen Basin of Queensland. Additionally, we were pleased to amend and extend our bank agreement which covers all of our outstanding debt extending the maturity for the majority of the debt to November 2021 and providing some near-term financial flexibility. Carolyn will go into further detail on the amendment and extension later in the call.
During the third quarter, we generated revenues of $148.2 million up from $120.5 million year-over-year and up sequentially from $122 million in the second quarter of 2019. Adjusted EBITDA of $36.2 million grew sharply from $22.4 million in the third quarter of 2018 and was up from $26.5 million on a sequential basis. Both revenue and adjusted EBITDA results were above the high end of our guidance range for the third quarter.
Now I'll take a minute and walk through the performance across each of our segments. Our Canadian business produced a solid third quarter with billed rooms up 18% sequentially driven by robust seasonal maintenance and turnaround activity and the contributions for our newly expanded Sitka Lodge, which serves the LNG construction activity in British Columbia.
Activity in Australia continued to strengthen in the third quarter and our team delivered excellent results with billed rooms up 9% sequentially, particularly again in the Bowen Basin and a full quarter's contribution from the recently completed Action Catering acquisition. Healthy met coal prices continue to drive improved occupancy and growing contract coverage at our villages.
Our U.S. segment experienced softer market conditions in the third quarter stemming from the expiration of our contract at Acadian Acres and continued reduction in drilling and completion activities in the Permian and Mid-Con regions.
With that, I will now turn the call over to Carolyn for a more detailed review of our financial performance.
Carolyn J. Stone -- Vice President & Chief Accounting Officer
Thank you, Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the third quarter of $148.2 million with net income on a GAAP basis of $4.5 million or $0.02 per diluted share. During the third quarter, we generated adjusted EBITDA of $36.2 million, operating cash flow of $23.6 million, and free cash flow of $20.3 million.
Turning to our third quarter segment results, I'll begin with a review of the Canadian segment performance compared to the prior quarter. Revenue from our Canadian segment was $91.1 million this quarter, an increase compared to revenues of $78.1 million in the second quarter of 2019. Adjusted EBITDA in Canada was $25 million, an increase from $16.3 million in the second quarter of 2019. Both the revenue and adjusted EBITDA sequential improvement resulted primarily from increased maintenance and turnaround activity in our oil sands lodges and increased LNG related occupancy at our Sitka Lodge in British Columbia.
During the third quarter, billed rooms in our Canadian lodges totaled 876,000, and increased sequentially from 740,000 in the second quarter of 2019 due to the aforementioned dynamics. Our daily run rate for the Canadian segment in U.S. dollars was $91 compared to $89 in the second quarter. This increase in daily rate was primarily related to the increased occupancy at our Sitka Lodge where rates are higher than our oil sands lodges.
Turning now to Australia. During the third quarter, we recorded revenues of $47.7 million, up from $31 million in the second quarter due to increased revenues of $14.7 million from the acquired Action Catering business, as well as increased activity in our Bowen Basin villages. Adjusted EBITDA was $17.2 million up sequentially from $13 million. The adjusted EBITDA increase included a gain on sale of $2.4 million related to the sale of our Calliope village, which had been closed for several years.
Looking at our results, you will note lower sequential EBITDA margins, which was the result of adding the lower margin Action Catering business in July 2019.
The average daily rate for our Australian villages was $73 in the third quarter, slightly lower sequentially from $74 in the second quarter which was negatively impacted by a weakening Australian dollar during the quarter. Billed rooms increased from 416,000 in the second quarter to 455,000 in the third quarter due to continued increase in customer activity in the Bowen Basin.
Moving to the U.S., revenues for the third quarter declined sequentially to $9.3 million from $13.1 million in the second quarter. Adjusted EBITDA in the U.S. declined to $0.3 million compared to $2.6 million in the second quarter. This decline was driven by an approximate 10% sequential decline in the U.S. rig count, as well as the expiration of a contract at Acadian Acres at the end of the second quarter.
On a consolidated basis, capital expenditures were $4.3 million in the third quarter, a reduction from $11.5 million in the second quarter as we completed the expansion of our Sitka Lodge to support the LNG Canada project in Kitimat, British Columbia.
Our total debt outstanding as of September 30th was $393.5 million, an $11.8 million decrease since June 30. The decrease resulted primarily from free cash flow generated by the business as well as a positive foreign currency translation impact at $4.9 million partially offset by borrowings related to the Action Catering acquisition.
As Bradley noted, our leverage ratio for the quarter was reduced from 4.26 times as of June 30 to 3.52 times as of September 30. Also as of September 30, we had total liquidity of approximately $88 million consisting of $79.9 million available under our revolving credit facilities and $8.1 million of cash on hand.
As noted, we recently amended and extended our entire credit agreement. Among other things, the amended credit facility extends the maturity date of both the revolving commitments and our term loan commitments for the majority of lenders by 12 months to November 30, 2021. Additionally, it adjusts the permitted leverage ratio to a maximum of 4.25 times for the third quarter of 2019, 4 times in the fourth quarter of 2019, 3.75 times in the first, second and third quarters of 2020, and 3.5 times in the fourth quarter of 2020 and thereafter.
Additionally, in conjunction with this amendment, we added a new lender to our facility, thereby increasing the total commitment level by approximately $24 million as of September 30. We are very pleased to complete this amendment and extension to our credit agreement and appreciate the continued support of our key bank relationships, as well as our new lender.
As we look toward the rest of the year and into 2020, we will continue to focus on generating free cash flow and reducing our leverage while monitoring the capital markets for opportunities to term out our current debt.
Frank will now provide some closing commentary and discuss our guidance for the fourth quarter and full year 2019, as well as preliminary comments on 2020. Frank?
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
I will now outline our guidance for the fourth quarter of 2019, provide an outlook for our business segments and make some preliminary comments on 2020 before we open up the call for your questions.
Our outlook for the remainder of 2019 is generally consistent with what we articulated on the second quarter call, albeit with some moving parts to consider. In Canada from typical seasonality we expect maintenance and turnaround activity in the oil sands to subside as the fourth quarter progresses.
LNG Canada related occupancy at our Sitka Lodge is anticipated to continue at current levels until early December, when we expect billed rooms to decline for the holidays before we turn it to similar levels in early 2020. The billed rooms should be down sequentially but we expect occupancy to be higher comparison to the fourth quarter 2018 due to the contribution from our Sitka Lodge.
Moving now to Australia. The contract extensions referenced earlier are encouraging sign that our customers intend to stay busy over the next several quarters. Like our Canadian segment, we expect seasonality lower billed rooms in the fourth quarter, due to typical holiday downtime, but we expect occupancy to be higher in comparison to the fourth quarter of 2018 due to increased customer activity levels in the Bowen Basin.
Although met coal prices have declined in the recent months amid uncertainty regarding Chinese trade policy and temporary import quotas, increased [Phonetic] demand remains strong. As such, we do not envision any near-term impact on activity given that our customers are still generating very healthy cash flows.
From a margin perspective, a full quarter's contribution from Action Catering coupled with sequentially lower activity in our villages should equate to moderately lower EBITDA margins for our Australian segment as a whole. Once again, Action Catering model is a pure catering and managed service business without room rental revenues and earnings, which implies a little to no capital investment at lower EBITDA margins.
In the U.S., the continued decline in the active rig count, 2019 E&P budget exhaustion, the industries emphasis on capital -- on reducing capital and holiday downtime will weigh on well site occupancy. Additionally, our Acadian Acres lodge occupancy will continue to stay at lower levels while we pursue additional opportunities related to Gulf Coast LNG activity and petrochemical development. We will continue to manage our cost prudently in the U.S. as we prepare for a subdued start to 2020.
On a consolidated basis for the fourth quarter 2019, we expect revenues of $128 million to $133 million and adjusted EBITDA of $19.5 million to $23.5 million. For the full year of 2019, we expect revenues of $507 million to $512 million and adjusted EBITDA of $98 million to $102 million. You'll note that we are raising the full year 2019 adjusted EBITDA guidance as a result of our outperformance relative to prior expectations in the third quarter. We are also lowering our full year 2019 capital expenditure guidance to the range of $33 million to $37 million.
Shifting to the preliminary views of 2020 now. Our initial outlook for 2020 is cautiously optimistic. We are encouraged by our third quarter results and the outlook for the remainder of 2019 and look to continue this momentum into 2020. Despite weakness in the U.S., we expect the current trends for the other parts of our business to continue into next year.
With capital expenditures related to Canadian LNG activity largely behind us, our 2020 free cash flow should increase significantly and will be used to reduce our leverage. We will provide more detailed 2020 guidance -- we will provide more detailed guidance for 2020 on our fourth quarter 2019 conference call.
That concludes our remarks. And with that, we're happy to take your questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] And we'll take our first question from Stephen Gengaro from Stifel.
Stephen Gengaro -- Stifel -- Analyst
Thank you. Good morning, everybody. Can you comment a little more --
Bradley J. Dodson -- Chief Executive Officer & Director
Good morning, Steve.
Stephen Gengaro -- Stifel -- Analyst
Hi, Bradley. Can you comment a little more on the Action deal in Australia? It seems to be progressing well based on the numbers that we saw, based on some of the commentary. Kind of give us an how update on how that integration is going or how we should think about that going forward?
Bradley J. Dodson -- Chief Executive Officer & Director
I'll be happy to. Yes, we are excited to close the Action Catering transaction acquisition in July of this year. They provide hospitality and managed facility services in Western Australia primarily serving the iron ore industry. At the time that we underwrote the transaction with our Board, we were expecting about $4 million of the EBITDA. As you can see from the third quarter results, we're tracking much better than that already and that's a combination of the team, continuing to serve the existing customer base very well and continue to garner additional work from existing customers.
So the integration of the operations is moving along quite well. It's always a challenge to take a privately held company and put it into a public company environment with the safety and HR, and IT requirements that we have and the standards that we have, but we're well on our way to doing that. We're already starting to see the purchasing synergies that we're anticipating as we combined their buying volumes with ours. Again, to put it in perspective our historical Australian village business has about $1.6 million room nights a year, Action's running on an equivalent basis of about 900,000.
So in terms of adding critical mass in terms of our overall operating business in Australia, it's significant. Not only that, it gives us a significant position in Western Australia where we had some presence, but not nearly the presence that we do now with the Action part of the company, and it certainly expands our customer base to include much several more iron ore companies while we serve the iron ore industry in the past. Action adds a lot of volume on that side of things.
Anything else Frank, that...
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
No. It's a great tuck-in acquisition for us, for our Australian business.
Bradley J. Dodson -- Chief Executive Officer & Director
Cash flow has been good in Australia. We've almost paid off all the debt.
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
Yes, that's exactly right. This month, we'll have repaid all the borrowings that we did -- that we took out for the Action acquisition, so business in Australia is doing really well, generating free cash flow and this acquisition really adds to that.
Stephen Gengaro -- Stifel -- Analyst
Speaking of cash flow, I was going to add two other question, one around free cash flow. If I think about 2020, I know you're not giving guidance yet. But if I just look at kind of how we're thinking about EBITDA, and I think with interest cost probably a little under $30 million, what does your capex look like next year because I think, by my numbers, if your capex is $20 million, $25 million, it looks like you're going to generate $50 million to $60 million of free cash next year. Maybe off on that or it seems little more...
Bradley J. Dodson -- Chief Executive Officer & Director
Those -- that's all correct.
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
Yes, you are in the range.
Bradley J. Dodson -- Chief Executive Officer & Director
As you can tell from our 2019 capex guidance, obviously the team continues to be very disciplined and prudent how we manage that process. The spending on Sitka ultimately was lower than we had anticipated in the end, and the maintenance spending we've been able to manage pretty effectively.
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
And we have some spend related to the Coastal GasLink Pipeline work that's -- that were starting up, but again that's all within kind of the numbers that you're talking about.
Stephen Gengaro -- Stifel -- Analyst
So just on that alone, if we're at $20 million of capex for next year, it might be a little bit higher; it might be $25 million because we'll have some Coastal GasLink capex there, but will be $10 million to $15 million of additional free cash flow just on lower capex spending year-over-year.
Okay. Great. Thank you. [Technical Issues] amendment to your credit facility [Technical Issues] total amount of the outstanding debt?
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
Stephen, you broke up there. Can you give us the question one more time please?
Stephen Gengaro -- Stifel -- Analyst
Oh, I'm sorry, Frank. The amendment to your credit facility, I think there was one or two banks that were not involved the extension. But your total dollar amount remained the same. Is that correct?
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
Well, yes, for this first year. So we were able to -- I mean, first of all, step back, I mean, we've got three tranches of revolvers in each of the country, each of the segment, reporting segments, and then we've got the term loan. That's all part of one agreement. So that whole agreement was basically extended -- amended and extended. We were able to bring in one new borrower, one new lender at $50 million, basically which was really positive.
For the most part, most of the banks disagreed to the extension to the credit agreement. And then as you mentioned, we did have two banks that have decided not to extend, and will stay with us until November of 2020. And our candidate wasn't surprised as those two banks were not going to extend and our ability to bring in a new lender was very helpful for that.
So if you look at it overall, we -- basically we went up $24 million as of today in borrowing capacity. Now, when we get to November 2020 when those other two banks leave the credit facility, net will go down about $31 million -- $31 million, $32 million, which really Stephen is not -- we're not troubled by because again as we just discussed, as you look at our ability to continue to increase our free cash flow, reduce our leverage will be in a position and have the borrowing capacity to basically take those banks out at that point.
So, while we didn't like to see two banks go away, it's not -- we're not concerned about that at all. And we've got one new lender to come in. So -- and when you look at it, Stephen, to this -- at this point of the cycle and some of the pressures on the industry, it's a very good outcome from a standpoint, and great support from our remaining banker.
Stephen Gengaro -- Stifel -- Analyst
Great. And just like your -- clearly your target here, however, the free cash that you generate this year or next?
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
You broke up a little bit. I think the question was...
Stephen Gengaro -- Stifel -- Analyst
I'm sorry. I mean, yes. Free cash flow is going to be used to de-lever is that as we go forward?
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
Exactly. Yes, no doubt. And that's -- I mean, you saw what we did here in the third quarter that will continue in the fourth quarter. And then as we push into 2020.
Stephen Gengaro -- Stifel -- Analyst
Great. Thank you.
Operator
[Operator Instructions] And it appears we have no further questions in the queue. I'd like to turn the conference back over to Bradley Dodson for any closing remarks.
Bradley J. Dodson -- Chief Executive Officer & Director
Thank you, and thank you all for joining us today on the third quarter call. We were pleased with the outcome of it. There are a lot of positive things that were accomplished during the third quarter, and we look forward to discussing another good quarter in the fourth quarter with you in sometime in February. Thank you.
Operator
[Operator Closing Remarks]
Duration: 27 minutes
Call participants:
Regan Nielsen -- Investor Relations
Bradley J. Dodson -- Chief Executive Officer & Director
Carolyn J. Stone -- Vice President & Chief Accounting Officer
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
Stephen Gengaro -- Stifel -- Analyst
