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Civeo (NYSE:CVEO)
Q3 2021 Earnings Call
Oct 28, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to the Civeo third quarter 2021 earnings call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Regan Nielsen, senior director, corporate development and investor relations. Please go ahead.

Regan Nielsen -- Senior Director, Corporate Development and Investor Relations

Thank you, and welcome to Civeo's third 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 third quarter earnings call. For today's call, I'll provide a brief summary of our performance for the quarter. Carolyn Stone, our CFO, will then provide a financial and segment-level review. And I'll conclude with our commentary on our expectations for the balance of the year and moving into next year before we move to the question-and-answer portion of the call.

At a high level, we are seeing encouraging signs related to COVID-19 as the Delta wave has begun to retreat in Canada and the pace of vaccinations in Australia has improved significantly. As always, we are thankful to our operations team who continue to be vigilant in following our safety protocols, which aim to mitigate the risk of the virus spreading. In the third quarter, we made significant progress toward our financial objectives, maintaining our commitment to free cash flow generation and leverage reduction. To this end, during the quarter, we replaced and refinanced all of our debt and extended its maturity out to September 2025 and also announced the board's authorization of a share repurchase program for up to 5% of the total common shares outstanding.

Encouraged by these accomplishments but continued uncertainty related to the pandemic and its after-effects as well as continued geopolitical uncertainties led us to remain conservative in our approach to value creation, cash generation, and debt reduction. The key takeaways from our call today are: our business is reliably generating free cash flow despite the uncertainty of the -- and difficult operating environment that we're currently in. In the third quarter, Civeo delivered $31 million of free cash flow and made debt repayments of $25 million. As a result, our net leverage ratio was reduced to 1.86 times as of September 30, 2021, down from 1.98 times as of June 30, 2021.

As I mentioned earlier, we replaced and refinanced our entire credit agreement during the quarter with a four-year tenor providing for more flexibility for our business. To be clear, our primary focus remains to continue to generate free cash flow and reduce debt. But this new agreement has given us additional flexibility. And we will remain open to other capital allocation priorities as they materialize, such as our recently announced share repurchase program.

We are encouraged by the improvements in commodity prices recently, namely crude oil and metallurgical coal. But we do not expect to see an outsized impact from these shifts during the near term as our customers remain focused on capital discipline and their capital decisions typically lag fluctuations in commodity prices. Again, our focus is on positive free cash flow generation, leverage reduction, and those remain top of mind. And we expect to deliver on both fronts through the end of the year.

Now let me take a moment to provide a business update on our three segments. In Canada, turnaround activity in the oil sands region continued through the majority of the third quarter, albeit, as usual, at lower levels than seen in the second quarter due to customer project scheduling and their struggle to get labor. However, we did see a sequential increase in mobile camp activity in the quarter as pipeline construction activity picked up. In our Australian business, it continued to face challenges due to continuing impact of the COVID-19 travel restrictions, driving higher labor costs, particularly impacting our Western Australia integrated services business as well as lingering uncertainty related to the China-Australia trade dispute impacting the Bowen Basin.

Sequentially, we saw a modest uptick in billed rooms in the Bowen Basin, but this was offset by an increased cost in our Integrated Services business. Turning to the U.S. Our U.S. lodges continue to perform well in the third quarter with a sequential increase in occupancy.

The strength of our lodge business was partially offset by sequentially lower offshore work. And in the second quarter of this year, we leased out the entirety of our Western lodge to a third party under the contract. With that brief overview, I'll turn it over to Carolyn for some more detail. Carolyn?

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

Thanks, Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the third quarter of $155.1 million, with net income on a GAAP basis of $0.1 million or $0.00 per diluted share. During the third quarter, we generated adjusted EBITDA of $26.2 million, operating cash flow of $33.9 million, and free cash flow of $31 million. The decrease in revenues and adjusted EBITDA experienced in the third quarter of 2021 as compared to the same period in 2020 was largely due to increased labor costs and lower customer maintenance activity in our Australian business, along with the end of Civeo's qualification for Canadian emergency wage subsidy proceeds.

Additionally, SG&A in the quarter was up year over year, due in part to higher share based compensation expense resulting from a relative increase in our stock price during the third quarter of 2021 compared to the third quarter of 2020. Partially offsetting these impacts was an increase in build runs in the Canadian oil sands lodges and an increase in Canadian mobile camp activity. Let's now turn to the third quarter results for our three segments. Revenue from our Canadian segment was $84.1 million, an increase compared to revenue of $71.8 million in the third quarter of 2020.

Adjusted EBITDA in Canada was $19.8 million, which was a decrease from $21.3 million in the third quarter of 2020. Results from the third quarter of 2021 reflects the impact of a strengthened Canadian dollar relative to the U.S. dollar, which increased revenues and adjusted EBITDA by $4.4 million and $1 million, respectively. On a constant currency basis, the revenue improvement was largely due to an increase in the amount of billed rooms as well as increased activity in Canadian mobile camps.

The year-over-year decline in adjusted EBITDA was largely attributable to the aforementioned $3.6 million of proceeds related to CEWS, which were received in the third quarter of 2020. During the third quarter, billed rooms in our Canadian lodges totaled 613,000, which was an increase of 21% year over year from 508,000 in the third quarter of 2020. Our daily room rate for the Canadian segment in U.S. dollars was $98, up slightly from $96 in the third quarter of 2020.

Turning to Australia. During the third quarter, we recorded revenues of $65.1 million, up $0.4 million from $64.7 million in the third quarter of 2020. Adjusted EBITDA was $14.8 million, a decrease from $21.5 million during the same period of 2020. Results from the third quarter of 2021 reflect the impact of a strengthened Australian dollar relative to the U.S.

dollar, which increased revenues and adjusted EBITDA by $1.6 million and $0.3 million, respectively. The decrease in adjusted EBITDA was largely driven by a significant increase in labor costs in Australia due to COVID-19-related travel restrictions, coupled with less customer maintenance and capital project related occupancy in the Bowen Basin due to uncertainty around the China-Australia trade disputes. Billed rooms in the quarter were 491,000, down from 514,000 in the third quarter of 2020, largely influenced by the aforementioned hesitancy of Bowen Basin customers to invest in maintenance and other capital projects. Our daily room rate for the Australian segment in U.S.

dollars was $78, up slightly from $77 in the third quarter of 2020, which increase was driven by the impact of the strength in Australian dollar. Moving to the U.S. Revenues for the third quarter were $5.9 million as compared to $6.4 million in the third quarter of 2020. The U.S.

segment generated adjusted EBITDA of negative $0.5 million in the third quarter, up from adjusted EBITDA of negative $1.5 million during the same period last year. These year-over-year increases were primarily due to increased occupancy in our U.S. lodges. On a consolidated basis, capital expenditures were $3.4 million in the third quarter, up from $2.4 million in the third quarter of 2020.

Our total debt outstanding on September 30, 2021, was $195.2 million, a $31.6 million decrease since June 30 of this year. The decrease consisted of $25.1 million in debt payments from the strong cash flow generated by our business as well as a favorable foreign currency translation of $6.5 million. During the quarter, we also replaced and refinanced our debt agreement, extending the maturity of all of our debt to September 2025, which allows us more financial flexibility to execute on our strategic plan. Furthermore, our covenants are now tied to net debt, which represents debt reduced by cash on hand as opposed to total debt.

With that said, our net leverage ratio for the quarter decreased to 1.86 times as of September 30 from net leverage of 1.98 times as of June 30. As of September 30, 2021, we had total liquidity of approximately $78.2 million, consisting of $73.3 million available under our revolving credit facilities, and $4.9 million of cash on hand. Bradley will now provide some closing commentary and discuss our outlook as we look into the remainder of 2021 and into 2022. Bradley?

Bradley Dodson -- President and Chief Executive Officer

Thank you, Carolyn. Based on our improving outlook for the remainder of the year, we are raising the lower end of our existing full year 2021 revenue and adjusted EBITDA guidance to a range of $570 million to $580 million for revenues and $95 million to $100 million for EBITDA. We are maintaining our full year 2021 capital expenditure guidance at a range of $15 million to $20 million. Due to the strong free cash flow in the third quarter and a more positive outlook for the fourth quarter, we are raising our full year free cash flow guidance.

Based on EBITDA and capex guidance just given, and expected interest expense of $15 million for 2021, no expected cash taxes, and roughly $10 million in proceeds from asset sales, we are raising our expectations for 2021 free cash flow to a range of $70 million to $80 million. I'll now provide a regional outlook for our business segments and corresponding market assumptions. For the remainder of 2021 in our Canadian segment, we expect it to remain steady with positive trends in the oil market. As is the case every year, we are expecting to see a modest decrease in billed rooms sequentially in most of our lodges in the fourth quarter related to holiday downtime.

This is typical seasonality and should be partially offset by some recently awarded winter project work in the Southern lodges and expected strong mobile camp activity through the end of this year, and that activity should continue into 2022. As we look into 2022, while we are encouraged by the recent uplift in oil prices, we know that our customers need to be convinced with longer-term stability in commodity prices, COVID-19 dynamics and the broader economy before materially increasing their capital investments. While activity in our lodges should remain steady, 2022 mobile camp activity will be negatively impacted by completion of pipeline construction projects throughout the year as well as the related demobilization costs. We will continue to monitor the market dynamics as we work through our 2022 budgeting process, and we'll provide more detailed outlook in our 2021 year-end conference call in February.

In Australia, we expect the subdued customer spending and increased labor costs to continue for the remainder of the year and into 2022 due to the ongoing geopolitical uncertainty and the COVID-19 travel restrictions affecting the met coal and iron ore markets. While we are encouraged by the significant increase in metallurgical coal prices in the back half of this year, we view this price movement as transitory and believe prices will begin to come down to more reasonable levels as we enter into 2022. Due to the volatility in met coal prices and the lingering China-Australia trade dispute, we are not currently expecting any material increase in our Bowen Basin customer activity for 2022. While it has been strong improvement in vaccination rates in Australia, it seems that the COVID-19-related labor restrictions will continue into 2022, and we don't expect labor supply issues to be resolved next year.

We still view our increased labor costs as temporary, but it unfortunately seems this issue will take longer to work through than we initially anticipated. As is the case in Canada, there's a lot of fluidity in the market dynamics right now supporting our business, and we will provide a more detailed outlook in our February 2022 conference call. In the U.S. segment, we are starting to see signs of gradual recovery related to the recent uplift in oil prices.

But the rig count continues to lag commodity price movements as public producers are still prioritizing living within free cash flow versus drilling. Going forward into 2022, we continue to be focused on cost management and gaining market share where possible. Looking forward to the end of the year and into 2022, we will continue to focus on the key elements of our strategy, which remain unchanged. We will prioritize the safety and well-being of our guests, employees and vendors.

We will manage our cost structure in accordance with the market outlooks across each region. We will continue to enhance our best-in-class hospitality offerings. And we will allocate capital prudently to maximize free cash flow generation while we continue to reduce debt and opportunistically return capital to shareholders. Before we proceed to the question-and-answer portion of the call, I want to once again recognize the unyielding dedication of our teams around the world.

Your commitment to keeping our guests safe, comfortable, and healthy is the foundation of our business, and we thank you for all that you do. With that, we'll be happy to take questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Stephen Gengaro with Stifel. Please proceed with your question. 

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Thanks. Good morning, everybody. So just maybe to build a little bit on your commentary for 2022. When we think about what's going on in Australia, right, there's obviously a lot of moving pieces and you hit on a few of them.

What are some of the things that we should be watchful for that would kind of give you more confidence in sort of an improvement in the Australian markets next year.

Bradley Dodson -- President and Chief Executive Officer

Great question. Generally speaking, what we're seeing both in Australia and more broadly in North America as well is that while commodity prices have recovered, customers are reticent to change their spending plans based on the short-term, medium-term commodity price outlooks. And so I think what we'll have to look for in both markets is announcements from the customer base around their capital spending plans for next year. Obviously, we haven't seen any of those yet, particularly in North America.

But until we see their spending increase, it's hard to see how we're going to see increased occupancy.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Great. Thanks. And then when you painted a picture for this year of $70 million to $80 million in free cash flow. I mean, you've done -- you've generated a lot of cash and paid down a lot of debt over the last couple of years, and you announced this share repurchase program.

When we think about the return of capital to shareholders, how should we think about that evolving as we go forward? I mean, if you keep generating the types of cash that you did this year, you're going to exhaust your share repurchase program pretty quickly, I would think. Is there -- are there plans to increase that level at some point? Are there some mechanics around the size of it and how it works in Canada, but is there a plan to increase it and/or think about other ways to return cash to shareholders?

Bradley Dodson -- President and Chief Executive Officer

So you're right. Under a normal course issuer bid in Canada, we are limited to up to 5% -- repurchasing up to 5% of the common shares outstanding during the 12-month period. There are no current plans to expand it beyond that. But should the board and management decided to do so, we would need to flip that into a substantial issuer bid, which is not impossible by any means, but would take additional work.

So we're pleased with our progress thus far on the share repurchase program. It was established in September, so we didn't get as much repurchased in the third quarter as we would have liked, but we'll continue to look at it as we go through the fourth quarter and into 2022. Right now, the focus on -- in terms of returning capital to shareholders, is the repurchase plan. There are no other means that are being currently contemplated.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Great. And then one final, when you look at -- and this may be a longer-term question, but when you look at what's going on in the global gas markets and obviously, your presence on the West Coast of Canada and Kitimat. What's the opportunities there over the next one, two, three years? I mean I guess we're waiting on maybe another train getting FID. But is there anything any insights you have as it pertains to the opportunity on the West Coast Canada?

Bradley Dodson -- President and Chief Executive Officer

Well, we're watching the same thing that everyone else is, which is whether or not the LNG Canada project will approve trains 3 and 4. That would be beneficial, as you mentioned, to our Sitka location, as well as to pipeline construction camp activity. Right now, for 2021, the biggest impact on our BC operations has been the BC Health order reducing the headcount allowable at industrial projects, which impacted LNGC as well as the associated pipelines. That has been relieved here in the third quarter.

So we're back to occupancy levels that we anticipated coming into the year at Sitka. We expect those occupancy levels to continue into next year. The pipeline construction activity in our camps related to that was strong in the third quarter. We expect to be strong again in the fourth quarter and into 2022.

And it will be a matter of how those projects progress and whether or not there is a lengthening of the construction time period which would allow our camps to operate longer.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Thank you. 

Operator

Our next question comes from Steve Ferazani with Sidoti & Company. Please proceed with your question. 

Steve Ferazani -- Sidoti & Company LLC -- Analyst

Good morning. When we think about the remaining labor challenges and costs in Australia, trying to think what you're seeing positive that gets you to go to the higher end of your EBITDA guidance range and move up your cash flow projections for the year.

Bradley Dodson -- President and Chief Executive Officer

It's really largely not related to Australia. It's largely related to the Canadian business, both in the third quarter and higher expectations in the fourth quarter. And a lot of that has to do with -- in the third quarter, it was Sitka occupancy and pipeline construction camp activity, and that trend will continue in the fourth quarter.

Steve Ferazani -- Sidoti & Company LLC -- Analyst

Is what you're seeing in terms of the nice move in the mobile camps in Canada, is that them catching up on last time during COVID and trying to get things back on schedule in terms of ramping that up?

Bradley Dodson -- President and Chief Executive Officer

There's a little bit of that, but this was largely expected kind of coming in. I think it's what changed from, let's say, what we were thinking in terms of pipeline construction activity six or nine months ago is just the -- some scope changes for the project -- the camps that we're working on. So we're seeing a larger number of people that we need to house and a longer duration. And so that is -- that could be considered pickup or kind of catch-up.

But in reality, the camps are going in on the timeline expected from the beginning.

Steve Ferazani -- Sidoti & Company LLC -- Analyst

And when I think about -- obviously, you benefited from much better turnaround activity than the COVID year. But where would you say -- even though Canadian oil sands productions may be back to pre-COVID levels, how would you characterize turnaround activity this year versus pre-COVID years?

Bradley Dodson -- President and Chief Executive Officer

So in rough numbers, we did about, let's call it, 50,000 to 60,000 room nights of turnaround activity last year. So that's the COVID impact. This year, we should do somewhere around 150,000 to 175,000 room nights related to turnaround activity. And in a healthier year, so to your question, a pre-COVID year, it would be closer to 300,000 to 400,000 room nights.

Steve Ferazani -- Sidoti & Company LLC -- Analyst

Still well. Is that due to COVID restrictions versus new projects? Or I mean, can you characterize what sort of picks that back up to that level? It's not just preceding COVID risk, right? You still need to see new projects?

Bradley Dodson -- President and Chief Executive Officer

Yes. It's the same point that we mentioned earlier, which is whether it's our oil sands customers or our Australian customers, many of them have made their spending plans earlier in the year or last year based on commodity prices that had a very different -- that were very much lower than where we are today, and we're not seeing the higher current commodity prices changing their spending habits. And so this was roughly in line with our turnaround activity expected for the year, slightly better, but certainly not reflective of an $80 WTI price deck. I think the other issue, as we've mentioned in the past, is while it's certainly more acute in Australia, Canada is suffering from the same issues in terms of labor availability and labor mobility as different provinces put in place different protocols as it relates to travel into and out of the provinces.

Once that returns back to normal, that should help alleviate some of the labor restrictions that both we face and -- but it's also impacting our customers.

Steve Ferazani -- Sidoti & Company LLC -- Analyst

Gotcha. And what's the key to getting greater labor availability into that Australian market now? And what are you seeing in terms of government policies? Do you see any easing yet?

Bradley Dodson -- President and Chief Executive Officer

So it's going to -- certainly, the vaccination rates that have occurred in the third quarter in Australia were nothing short of remarkable, in my opinion. They've surpassed in terms of first dose and fully vaccinated percentages of the population, they passed the U.S. And so to answer your question, we need to see the international borders open without restriction, we need to see labor temporary and kind of migrant labor starts to come back into the country and the travel restrictions between different states within Australia to be eliminated in order to see that really improve. I read somewhere that there's short about 400,000 temporary laborers that will come in from outside the country.

And that's just a material number for that labor base in Australia, and particularly acute in Western Australia.

Steve Ferazani -- Sidoti & Company LLC -- Analyst

Just last quick question, just for a modeling question in terms of how you're thinking about timing of debt repayments, any thoughts on that?

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

We have scheduled amortization payments under our term loan of CAD 10 million every quarter. So -- and then generally speaking, to the extent you have free cash flow over and above that in the quarter, I would say the majority of that is going to be applied to pay down debt as well. 

Steve Ferazani -- Sidoti & Company LLC -- Analyst

Thanks, everyone. 

Bradley Dodson -- President and Chief Executive Officer

Absolute working capital.

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

Absolute working capital flowover.

Bradley Dodson -- President and Chief Executive Officer

Working capital and/or currency as long as current there aren't any fluctuations in currency.

Steve Ferazani -- Sidoti & Company LLC -- Analyst

Thank you. 

Operator

Our next question comes from Stephen Gengaro with Stifel. Please proceed with your question.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Thanks. Just a follow-up. As I was thinking broadly about what you sort of laid out for 2022 and I know you may or may not want to comment on this, but I figured I'd ask you. Do you think if, give or take, a starting point of sort of flat EBITDA year over year is a reasonable place to be thinking about this?

Bradley Dodson -- President and Chief Executive Officer

It is. It will depend on the factors that we laid out. It will depend on Canadian turnaround activity. That could be upside.

It will depend on the duration of pipeline construction activity and how long our camps are needed to be in place. Should that expand into 2023, that would obviously be helpful because we won't have to face the demobilization costs next year. They'll be pushed into 2023. And then Australia, right now, as we look out, it doesn't look like spending is going to increase.

If we see Australian activity increase or spending increase, we should see that improvement. The team has been working feverishly to address the labor issue in Australia. To the prior question, the government has eased the Visa requirements, and so that should help bring in additional labor specifically related to hospitality. And so that should be helpful.

But I think kind of flat year over year is a good starting point. We still need to go through the heavy lifting on our budgeting process. So we'll certainly give more color on the next call. And we'll certainly have better visibility as it relates to all three or four of those factors in February.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Great. Thank you. 

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Bradley Dodson for closing remarks.

Bradley Dodson -- President and Chief Executive Officer

Thank you, Maria. Thank you, everyone, for joining us on the call. We appreciate your interest and support of Civeo, and we look forward to speaking to you on the next earnings conference call. Thank you.

Operator

[Operator signoff]

Duration: 39 minutes

Call participants:

Regan Nielsen -- Senior 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

Steve Ferazani -- Sidoti & Company LLC -- Analyst

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