Civeo Corporation (CVEO) Earnings Call Transcript

All right. Good morning, everyone, and thank you all for continuing to join us during the Lytham Partners Fall 2021 Investor Conference. My name is Robert Blum, Managing Partner of Lytham Partners. Our next presentation comes from Civeo, ticker symbol of C-V-E-O on the NYSE. Presenting from the company is Bradley Dodson, Chief Executive Officer; and Carolyn Stone, the company's Chief Financial Officer. A copy of the slide presentation is available on your webcast screen. Today, I've asked the company to briefly run through the slide presentation, and we will then engage in a short fireside chat-like Q&A session. As a reminder, the company will be available for one-on-one virtual meetings during the event. If you've not already signed up, you can send me an e-mail at Blum, and again, that's B-L-U-M, blum@lythampartners.com or visit the website lythampartners.com/virtual and there are instructions on how to access a one-on-one meeting there. With that said, let me turn the presentation over to Bradley Dodson, Chief Executive Officer of Civeo. Bradley, please proceed.

Robert, thank you, and thank you to Lytham Partners for allowing us to present. We're pleased to tell you a little bit about Civeo today. I'm Bradley Dodson, Civeo's President and CEO. Today, I'd like first to give you, those more familiar with our story, an overview of the key operational, financial and strategic themes over the last few months. Then we'll step back to those less familiar with the business and provide an overview of our operations, what we do, where we do it, who we work for and then some depictions of our locations to give you a feel for what our facilities look like. And then I'll pass it over to Carolyn Stone, our CFO, who will run through the second quarter highlights and provide a brief regional and financial overview, and then she'll close with our investor takeaways. Moving to Slide 2. We'll caution listeners that if we make forward-looking statements that you please read those in the context of the many factors that affect our business, including those disclosed here on this slide as well as disclosed in our Form 10-K, 10-Q and other SEC documents. Moving to Slide 3. Civeo provides a full suite of hospitality services to our guests who are working in remote areas for natural resource companies. As Robert mentioned, we're traded on the NYSE under the ticker symbol, C-V-E-O, and we've been public since May of 2014 when we spun off from our former parent, Oil States International. As of the date of this presentation, we had a market cap of approximately $382 million and an enterprise value of $609 million. We provide food services, housekeeping and maintain the facilities. We predominantly work in some of the largest oil, LNG, metallurgical coal and iron ore companies and regions of the world, with operations in Canada, Australia and the U.S. As I'll show you here in a couple of slides later, the vast majority of the guests that we take care of day in and day out are the operating personnel for our customers that are producing the natural resources as well as those personnel working on maintenance activities related to those natural resource projects. In the bottom right of Slide 3, you can see the last 12 months ended June 30, 2021, we had $556 million of revenues split 55% North America, 45% Australia, and $108 million of adjusted EBITDA with approximately a 50-50 split between the 2 areas. Moving to the next slide, just some investor themes about us. Obviously, in the COVID environment but really as a cornerstone of our values is keeping our employees and guests safe in a COVID environment and outside of the COVID environment. From a financial perspective, our focus has been on generating free cash flow and reducing leverage. Over the last several years, we have significantly diversified our revenue such that over 50% of our gross profit is generated from underlying global steel demand, 35% from global oil demand and 9% from Canadian LNG demand. In Australia, steel demand through metallurgical coal and iron ore mining drives the occupancy for our Bowen Basin villages, which are in Queensland as well as our integrated services business in Western Australia. As I mentioned, we have exposure to Canadian LNG and expect to see a good contribution related to those assets through rest of this year and going into 2022. As I mentioned, from a financial perspective, we have been focused on -- we've been free cash flow positive throughout our history. We expect to remain free cash flow positive this year and going into next. Just as an example, we generated $111 million of free cash flow in 2020, which was a difficult year certainly in our North American markets. Flipping a couple of slides to Slide 6. We operate in 3 geographic regions: Canada, Australia and the U.S. In Canada, we serve customers in Western Canada, both Alberta and British Columbia. In Australia, we predominantly serve the Bowen Basin, as I mentioned, in Queensland, with Gunnedah Basin just south of that in New South Wales and the Pilbara Basin in Western Australia. Moving to Slide 7, we'll talk a little bit about operations. As I mentioned at the outset, we predominantly serve the day-to-day operating personnel that produce the natural resources as well as the associated annual maintenance and turnaround activity that typically happens in the second and third quarters, both in Canada and Australia. This makes up the vast majority of the guests we take care of day in, day out, year in and year out. As it relates to construction activity, we are currently working with 2 customers on expansionary construction projects: the LNG Canada project in British Columbia, which is operated by Shell; and various smaller iron ore mine expansions in Western Australia make up the vast majority of the construction guests that we serve. Again, in the past, the majority of our occupancy -- the vast majority of our occupancy is driven by day-to-day operations and maintenance on these projects. It's also important to note that our customers' oil sands, LNG and Australia mining projects have resources -- resource lives that span decades, providing us with an outlook towards longer-term demand. Moving to the next slide, just to build on the comment I made earlier about diversity of operations, certainly, over the last 18 months, 24 months, diversity of revenue source has been very valuable. In 2020, the North American oil market was hit very hard. But the Australian market, because of COVID spread as well as commodity prices underlying met coal and iron ore, held up very well. So the majority of our gross profit is driven by global steel demand that's Australian-based, with only 35% of our gross profit tied to oil demand. Moving to Slide 9. We provide accommodations to blue-chip international resource companies such as subsidiaries of Exxon, Suncor, BHP and Fortescue under multi-month or multi-year contracts. Typically, our customers are looking for a block of rooms that is consistent with whatever project that those rooms will be supporting. If they're day-to-day operations, those contracts can be multi-year. If it's for the maintenance work, that's typically a several-month contract. What we're providing to the customer is we give their employees or subcontractors a room and 3 meals a day. So typically, we are billing our customers on a per-person-per-day basis. In some cases, our contracts do have a take-or-pay provision and in other cases, we'll have an exclusivity provision. In an exclusive situation, the customer is guaranteeing that all personnel that need rooms off-site will be staying with us. If they're multi-year contracts, we'll have escalation provisions to mitigate food and labor cost increases that we might face. And on the services-only contracts, which are predominantly in Western Australia, we charge on a per-person-per-day basis for the hospitality services provided. Moving on to the next couple of slides now to step back for those less familiar with the company. Wanted to show a few slides that help visualize our operations and locations. On Slide 10, this is a depiction of one of our Canadian lodges. As you can see, our lodges and villages offer all of the amenities that you would expect from an urban hotel, food service, fitness facilities, recreational facilities, in some locations, made-to-order food service. On the next slide, you can see some pictures of spacious lobbies or check-in, workout facilities, comfortable rooms and spacious dining areas. On Slide 12, one of the innovations we've made over the last several years as typically, accommodations provider -- workforce accommodations provider, the food service would be buffet style. We innovated to provide cook-to-order menus and meals and à la carte menus to move away from that historical buffet service. Guests use their room key and an iPad to order their meals that will be hot and ready within 6 to 8 minutes. And it's pretty amazing that we can serve 800 guests an hour moving through the system and still give them hot and timely food. On Slide 13, just some of the recreational facilities as well as in certain locations, we'll have a pub and then movie theaters in certain locations, and that's true both in Canada and Australia. Moving on to Slide 14. The Australian operations work identically to our Canadian operations. Obviously, the climate is much more accommodating and so there's more landscaping and an outside walking between the central facilities buildings in your room. Also on Slide 15, you can see, from a recreational standpoint, the environment allows us to have outdoor recreational amenities, including pools, sports courts and other outdoor fitness areas. At this time, I'll turn it over to Carolyn, our Chief Financial Officer, to take you through the second quarter overview and give you a quick update on each region.

Thanks, Bradley. Moving to the next couple of slides regarding our second quarter highlights. So I'll start on Slide 17. Just to note, we continue to follow all the guidelines presented by the local health authorities and our customers in order to keep our employees, vendors and guests as safe as possible and to mitigate the potential spread of the COVID-19 virus in our facilities. So that's the first and most important priority in today's environment. Despite the global economic disruption and subdued activity that we've seen as a result of COVID-19, our diversified business model has remained resilient and continues to generate cash. During the second quarter of 2021, our results included revenues of $154.2 million, which represented a 23% increase from the first quarter of this year, adjusted EBITDA of $32.2 million, which was up 99% from the first quarter of '21. And that all resulted in $13.7 million of free cash flow, which facilitated further debt reduction. We reported a 2.0x leverage ratio as of June 30, 2021. And with respect to our full year guidance, we lowered our full year 2021 capital expenditure guidance to a range of $15 million to $20 million, which resulted in an increase to our free cash flow guidance to a range of $60 million to $75 million for the year. I would like to take this time to highlight a couple of recent announcements which we've made since we -- since the second quarter earnings call. In September, we replaced and refinanced our debt, which resulted in us extending our debt maturities to September of 2025, so we have a 4-year tenor on our -- all of our debt. We also recently announced that our Board of Directors has authorized a share repurchase program for up to 715,000 common shares over the next 12 months. If we turn to Slide 18, this summarizes the sequential financial performance of our Canadian and Australian segments from the first quarter of '21 to the second quarter. Both businesses experienced an uplift in results due to increased occupancy at our lodges and villages during the quarter. For a little more detail, if you'll turn to Slide 19, our Canadian segment was most significantly impacted -- was the segment that was most significantly impacted last year by lower oil prices due to the lower global oil demand and lower global GDP growth as a result of COVID-19. However, we experienced a healthier maintenance and turnaround season in the second quarter of this year when compared to 2020 due to increased oil prices and gradual recovery in customer production and spending. And you can see that by the increased billed rooms in the bottom right of this slide. Our occupancy related to the LNG Canada project was more resilient and consistent with our expectations last year, but was impacted by the local health order which limited headcount at industrial projects in the first half of 2021. This health order has since been lifted and occupancy has recovered to more reasonable levels. If you turn to Slide 20, as you can see, the Australian business held up much better in 2020 despite the uncertainty in the global markets as the COVID infection rate in Australia has been much lower. In the first quarter of 2021, however, we had a slower-than-expected start to the year at our Bowen Basin villages. We also dealt with labor supply issues in our Western Australia integrated service business, which increased our labor costs for the first half of the year. Activity began to recover late in the second quarter of 2021, but the uncertainty of the China-Australia trade dispute and lingering COVID-related labor issues continue in the region. On Slide 21, our U.S. business was impacted by the historic collapse in drilling and completion activity in the second and third quarter of 2020, which is demonstrated by the U.S. rig count graph on the lower right. It was also impacted by the hurricanes which hit Louisiana in the third quarter of 2020. However, more recently, we secured a solid contract in our West Permian lodge. And this, coupled with increased offshore activity, resulted in positive EBITDA in the second quarter of 2021. Moving to Slide 22, I'd like to highlight our success over the last 2 years in reducing both our aggregate leverage as well as our leverage ratio. This is a testament to our focus on free cash flow generation and debt reduction and this will remain a focus going forward. So in summary, on Slide 23, we are a global workforce hospitality company with a diverse exposure to both North America and Australia and also to varying global commodities. We continue to focus first on the health and well-being of our employees and our guests. We expect activity in Australia and the Canadian LNG markets to continue to recover from the subdued activity experienced last year -- I'm sorry, experienced this year -- earlier this year. We expect Canadian oil sands turnaround and maintenance activity to be healthier than it was last year. And we financially remain focused on free cash flow generation and debt reduction. Thank you very much for your interest in Civeo. This concludes our presentation.

All right. Bradley and Carolyn, thank you so much for that overview here on the business. Let's just expand on a couple of topics. First off, congratulations on the recent announcements regarding the credit agreement and share repurchase program. Would you please speak to sort of the rationale around each of these announcements, first off?

Sure. Thank you. With respect to the credit agreement earlier this month, we replaced and refinanced all of our existing debt under the prior credit agreement. The most significant change was to increase the tenor of the agreement such that our revolving credit facilities mature 4 years from now in September 2025. We also shifted some of the borrowings between the prior term loan and the revolving credit facilities and made some other minor changes. But our primary objective here was to extend the maturity of the credit agreement, and we're very pleased with the increased flexibility and longer tenor that this provides us. We also announced that our Board of Directors approved a share repurchase program. This will be a normal course issuer -- is a normal course issuer bid, whereby we can repurchase up to 5% of the outstanding shares, which is approximately 715,000 shares potentially over the next 12 months. While we expect to continue to allocate the majority of our free cash flow towards debt reduction, this program provides us with an opportunity to acquire some shares at an attractive valuation.