Civeo (CVEO) Q1 2021 Earnings Call Transcript

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Civeo (CVEO -1.00%)
Q1 2021 Earnings Call
Apr 30, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Civeo Corporation first-quarter 2021 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.

Regan Nielsen -- Director, Corporate Development and Investor Relations

Thank you and welcome to Civeo's first-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. I'll now turn the call over to Bradley.

Bradley Dodson -- President and Chief Executive Officer

Thank you, Regan, and thank you all for joining us today on our first-quarter earnings call. We hope that you and your loved ones are staying safe and well. On today's call, I'll provide a brief summary of our performance for the quarter, Carolyn will provide a financial and segment-level review, and I'll conclude with some directional commentary on our expectations for the second quarter as well as our updated full-year guidance, before we move to the question-and-answer portion of the call. I'll start, as I have on each of our earnings calls, emphasizing that at Civeo, the safety and wellbeing of our employees, guests and customers is always our top priority.

Our team continues to be vigilant in following our safety protocols, which aim to mitigate the risk of the virus spreading. The key takeaways from our call today are despite governmental restrictions in Canada and a slow start to the year in Australia's Bowen Basin region, our business continued to generate cash, which we allocated to debt reduction. In the first quarter, Civeo reported $16.2 million of adjusted EBITDA and $16.1 million of free cash flow, and we repaid $14.6 million of debt. Our leverage ratio was sequentially flat at 2.1 times.

Delevering our balance sheet remains among the most important strategic mandates that we have and we should see our leverage ratio continue to decrease throughout 2021. Consolidated adjusted EBITDA of $16.2 million was in line with our expectations. As anticipated, EBITDA in both Canada and Australia declined sequentially in the first quarter due to a slow start from year-end holidays, coupled with the impact of headcount and travel restrictions related to COVID-19. The British Columbia COVID-19 Public Health Order, which limits the allowable headcount at industrial projects in the province, continued to negatively impact the occupancy at our Sitka Lodge in Kitimat, British Columbia as well as the occupancy in our mobile camps supporting the coastal gasoline pipeline project.

Our Australian business was negatively impacted in the first quarter by a slow start to the year in the Bowen Basin villages and continued difficulty in sourcing labor in both our village operations and our integrated services business due to the COVID-19 related interstate travel restrictions. Nevertheless, we're cautiously optimistic that the outlook for the business remains healthy for the remainder of 2021. We're focused on operating safely, generating free cash flow, reducing leverage and containing our costs. We expect to continue to generate positive free cash flow in the second quarter and for the full-year 2021.

Let me take a moment to provide a business update across our three segments. In Canada, we saw a sequential improvement in occupancy despite the British Columbia public health order, which impacted the Sitka location. Lodge occupancy in the oil sands started the year off consistent with our expectations as we prepare for turnaround season that's set to start here in the second quarter. The BC health order, however, impacted our occupancy more than we anticipated during the quarter as we had expected it would be lifted by now.

Our Australian business experienced a sequential and year-over-year decline in occupancy and margin due to an especially slow start to customer operations in the Bowen Basin, coupled with labor supply issues due to further COVID-19 travel restrictions, which impacted margins. Turning to the U.S., our team continued to navigate a challenging fundamental environment due to subdued U.S. E&P drilling completion activity, which was compounded by temporary disruptions related to the Texas-Oklahoma freeze. Adjusted EBITDA was down from pre-pandemic levels a year ago, but improved modestly on a sequential basis.

At Civeo, our near-term strategy remains consistent to what we've said for the past two years. Our priorities are, one, to keep our employees and guests safe. And then financially, maximize our free cash flow generation, reduce our debt to enhance our financial flexibility and reduce our costs without compromising service quality. With that, I'll turn it over to Carolyn.

Carolyn Stone -- Senior Vice President, Chief Financial Officer, and Treasurer

Thank you, Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the first quarter of $125.4 million, with net loss on a GAAP basis of $10 million or $0.70 per diluted share. During the first quarter, we generated adjusted EBITDA of $16.2 million, operating cash flow of $12.8 million and free cash flow of $16.1 million. The lower adjusted EBITDA we experienced in the first quarter of 2021 as compared to the same period in 2020, was largely due to a better pre-COVID operating environment in January and February of last year.

We experienced decreased year-over-year billed rooms in both our Canadian and Australian segments as well as labor supply issues affecting operating costs, which were partially offset by proceeds from the Canada Emergency Wage Subsidy program as well as a favorable foreign currency translation impact. Let's now turn 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 2020. Revenue from our Canadian segment was $61.9 million as compared to revenue of $79.3 million in the first quarter of 2020.

Adjusted EBITDA in Canada was $10.8 million, a decrease from $11.4 million in the first quarter of last year. The decline in revenues and adjusted EBITDA was largely caused by the protracted decline in oil prices as well as the effects of the COVID-19 pandemic. Adjusted EBITDA in the 2021 quarter for our Canadian segment included $2.8 million related to proceeds from the CEWS program and $0.9 million from a gain on sale of our Canadian manufacturing facility. During the first quarter, billed rooms in our Canadian lodges totaled 480,000, which was down 32% year over year from $708,000 in the first quarter of 2020, due in large part to the factors just discussed.

Our daily room rate for the Canadian segment in U.S. dollars was $97, which is a 5% year-over-year increase and is primarily due to the appreciation of the Canadian dollar. Turning to Australia, during the first quarter, we recorded revenues of $59.6 million, up from $49.1 million in the first quarter of 2020. Adjusted EBITDA was $12.8 million, representing a decrease from $16.2 million during the same period of 2020.

These results were driven by lower village occupancy due to extended customer holiday downtime in January and COVID-19 related travel restrictions that necessitated the use of more expensive temporary labor, especially in our integrated services business. These factors were partially offset by the impact of a strengthened Australian dollar relative to the U.S. dollar. Billed rooms in the quarter were $425,000, down from $472,000 in the first quarter of 2020, due again to a slower start to the year for some of our customers' operations.

The average daily rate for Australian villages in U.S. dollars was $79 in the first quarter, up from $69 in 2020. This increase was entirely driven by the impact of the strengthened Australian dollar. Moving to the U.S., revenues for the first quarter were $3.9 million as compared to $10.3 million in the first quarter of 2020.

The U.S. segment generated negative adjusted EBITDA of $1.2 million in the first quarter, down from adjusted EBITDA of $0.3 million during the same period last year, but sequentially up from negative adjusted EBITDA of $1.4 million in the fourth quarter of 2020. The year-over-year declines were primarily due to a challenging fundamental environment caused by subdued U.S. E&P drilling and completion activity, compounded by temporary disruptions relating to the Texas-Oklahoma freeze in February.

On a consolidated basis, capital expenditures were $3.4 million in the first quarter, up from $2.7 million in the first quarter of last year. capex in both quarters was predominantly for maintenance needs. Our total debt outstanding on March 31, 2021, was $238.1 million, a $13 million decrease since December 31. The decrease consisted of $15.6 million in debt payments from cash flow generated by the business, partially offset by an unfavorable foreign currency translation impact of $2.5 million.

Our leverage ratio for the quarter was sequentially flat at 2.1 times as of March 31 compared to 2.11 times as of December 31, 2020. As of March 31, Civeo had total liquidity of approximately $112.4 million, consisting of $107 million available under our revolving credit facilities and $5.5 million of cash on hand. Bradley will now provide some closing commentary and discuss our outlook as we look into the remainder of 2021. Bradley?

Bradley Dodson -- President and Chief Executive Officer

Thank you, Carolyn. Based on our improving outlook for the remainder of the year, we're adjusting the high end of our full-year 2021 revenue and adjusted EBITDA guidance up. Revenue is expected to range between $555 million to $580 million with adjusted EBITDA ranging from $90 million to $100 million. We are maintaining our 2021 capex guidance of $20 million to $25 million.

We are primarily raising the upper end of this range due to potential upside in Canada from turnaround activity and mobile camp activity, while still recognizing the uncertainty of the current macroeconomic environment. Our primary financial objective is free cash flow generation based on the EBITDA and as just was outlined. And with expected interest expense of $15 million for 2021 and no expected cash taxes or working capital investment, we expect our 2021 free cash flow to range between $50 million and $65 million. I'll now provide the regional outlooks for our business with corresponding market assumptions.

The prognosis for the remainder of 2021 in our Canadian segment is improving despite the enduring uncertainties from the pandemic and pandemic-related restrictions. The extension of the BC health order is expected to temporarily constrain occupancy at our Sitka facility for most of the second quarter of 2021. Additionally, travel restrictions in the Eastern Maritime provinces which are an important source of contract labor for the oil sands, remain in place, negatively impacting our customers' ability to secure turnaround personnel. While we are mindful of these limitations, we are encouraged by the potential expanded work on the CGL contract, improving turnaround activity and a more constructive oil and gas price environment, which will equate to higher revenues and adjusted EBITDA relative to the first quarter for the balance of 2021.

In Australia, we anticipate improved revenues and adjusted EBITDA for the remainder of the year. Iron ore prices, which impact Western Australian activity, are hovering near 9-year highs due to easing COVID restrictions and off-line Brazilian production. Metallurgical coal prices, which impact our village operations in Eastern Australia, have recovered some ground previously surrendered due to Chinese import restrictions. The outlook for met coal and iron ore markets in Australia for 2021 is generally constructive.

But we continue to monitor the potential impacts to our business with the COVID-19 related labor restrictions, Chinese trade policy, delayed reopening of India and the timing of customer capital deployment on major projects. Given the supportive commodity price environment, we nonetheless remain optimistic that our team will deliver another strong year in 2021. Moving to the U.S., after an exceedingly difficult 2020 in our U.S. segment, we're beginning to see signs of recovery of demand for occupancy in our facilities.

Oil and gas operators are selectively adding rigs and completion activity in response to higher commodity prices, and we've picked up a 1-year contract for our Pecos location in the Permian. As a result, we expect to return to positive EBITDA for the U.S. segment in the second half of 2021. As we continue to navigate these uncertain times, we remain focused on the key elements of our strategic playbook, which are as follows.

We will prioritize the safety and wellbeing of our guests, employees and customers. We will manage our cost structure in accordance with the outlook region by region. We will continue to enhance our best-in-class hospitality offerings. And financially, we will maximize free cash flow generation and allocate capital prudently while we continue to reduce debt.

Before we proceed to the Q&A section of the call, I would like to recognize the unyielding dedication of our employees around the world. Your commitment to keeping guests safe, comfortable and healthy is the foundation of our business, and we thank you for all that you do. With that, operator, we're happy to take questions at this time.

Questions & Answers:

Operator

[Operator instructions] We start with our first question, Stephen Gengaro from Stifel. Please go ahead. Your line is open.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

Thanks. Good morning, everybody.

Bradley Dodson -- President and Chief Executive Officer

Good morning, Stephen. How are you?

Stephen Gengaro -- Stifel Financial Corp -- Analyst

I am good. Thanks. A few things I wanted to ask you about and I'll start with -- you just noted capital allocation. How are you thinking about -- and I know debt reduction has been a big focus.

And as free cash flow continues and as you continue to be able to reduce your debt levels, have you thought about using a portion of the proceeds to buy back stock, as opposed to reduce debt, especially given pretty good outlook here?

Bradley Dodson -- President and Chief Executive Officer

Certainly. I mean, we're in the beginning portions of those conversation internally. I would say that at this point, given the level of uncertainty related to a couple key assumptions, one, we need to see the turnaround activity in Canada materialize. Given the level of infection rate recently, that is a concern.

It could impact both the oil sands operations, as well as Sitka and the CGL Pipeline camps. In addition, the team is working diligently to resolve the labor shortage in Australia through recruiting and HR efforts, as well as we need to see some improvement in the occupancy in the Bowen Basin. So what that all comes together as, I'd like to see the second-quarter results, I'd like to see us continue to materialize, I'd like to see the debt number come down. As you know, our busiest time period every year is the second and third quarters, and that's principally because we get out of holiday downtime in the first quarter, we get into turnaround season in Canada and as a result that's usually -- we generally generate 60% to 70% of our EBITDA in the second and third quarters.

I'd like to see at least some of that materialize in the second quarter, and then I think we'll be in a position both from a balance sheet and an outlook and the confidence that I think the financial flexibility to change the capital allocation could be possible in the second half of the year.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

Thanks. And you mentioned -- I think you just said 60% to 70% of EBITDA in the middle two quarters. Looking at historical patterns and it sounds like this is accurate, but there's no change to those historical patterns relative to your full-year EBITDA guidance versus what you've done in prior years as far as EBITDA allocation across the varied quarters?

Bradley Dodson -- President and Chief Executive Officer

No, that's right. That's right, I mean that's why I gave a little bit of a wide range at 60% to 70% of the EBITDA coming from the second and third quarters. Then the question comes to the fourth quarter and whether or not any of the turnaround activity, particularly in Canada, starts to spread into the fourth quarter, which as you recall, we saw that turnaround activity being fairly strong at the beginning of the fourth quarter of 2019, which led to a strong quarter for Canada that quarter. It wasn't as strong last year, obviously largely because of the oil price environment and COVID-19.

But the turnaround activity in the fourth quarter of 2020 wasn't quite as strong. But yes, the seasonal patterns should be consistent.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

OK, great. And then the other thing I just wanted to hit on is in Australia, there's two parts to the question. One is just an update on the Action acquisition and what you've seen on that front. And then just secondly, just given where met coal prices have been and just given the overall inflationary environment we seem to be in for commodities, how the outlook for Australia is evolving both in the back half of this year and also looking forward.

Bradley Dodson -- President and Chief Executive Officer

Sure. On the Action business, which we've rebranded as Civeo Integrated Services, which is again for the listeners on the call, this is the business we acquired in July of 2019. It's in Western Australia, providing managed services to customer-owned assets, predominantly iron ore producers. The business had a very difficult first quarter, and that is largely the basis for the comments that we made around labor availability.

The interstate border to Western Australia has been largely closed for the last year, year and a half. It has briefly opened at times. That has allowed to move relief crews from predominantly Queensland into WA. But it has been open and closed several times in the last two months, which is making operational efficiency difficult.

The team is on top of the situation and addressing it accordingly. Ultimately I'm cautiously optimistic that we will be able to resolve the labor issues that we're having. Casual or temporary labor impacts our operations from the standpoint that it takes longer to onboard people. The turnover of that personnel is higher.

Their productivity is lower. The cost on a per-hour basis is higher, ultimately driving a negative impact to our margins from the integrated services business in the first quarter. But we're expecting that we'll be able to resolve that here in the second quarter, and optimistic for a stronger second half for that business. As it relates to met coal activity, thus far we've not seen a tangible impact of the Chinese trade dispute with Australia as it relates to met coal.

However, we have had one customer that just had a slow start to the year. But that does not appear to be a result of the Chinese trade dispute. So we're cautiously optimistic that activity in the Bowen Basin will improve as we move into the second quarter and particularly in the second half.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

Got it. OK, great. Thank you.

Operator

[Operator instructions] It appears there are no further questions at this time. I'd like to turn the conference back to Bradley Dodson for any additional or closing remarks.

Bradley Dodson -- President and Chief Executive Officer

Thank you. Thank you all for joining us on the call today. We hope that you are staying safe and your families are staying safe and healthy. We'll look forward to talking to you in late July, as we report second-quarter earnings.

Take care.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Regan Nielsen -- Director, Corporate Development and Investor Relations

Bradley Dodson -- President and Chief Executive Officer

Carolyn Stone -- Senior Vice President, Chief Financial Officer, and Treasurer

Stephen Gengaro -- Stifel Financial Corp -- Analyst

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