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Civeo Corporation (CVEO) Q4 2018 Earnings Conference Call Transcript

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Civeo Corporation (NYSE: CVEO)
Q4 2018 Earnings Conference Call
February 26,2019, 11:00 a.m. ET

Contents: four

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Civeo Fourth Quarter Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Regan Nielsen, Manager, Corporate Development and Investor Relations. Please go ahead.

Regan Nielsen-Manager, Corporate Development and Investor Relations

Thank you, and welcome to Civeo's Fourth Quarter and Full-Year 2018 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.

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 are 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.

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I will now turn over the call to Bradley.

Bradley Dodson -- Chief Executive Officer

Thank you, Reagan, and thank you all for joining us today on our fourth quarter earnings conference call. I'll begin with an overview of our fourth quarter performance and highlights before we offer instant commentary on our three business segments. Frank will then provide detailed financial and segment level review, and I'll conclude with our updated guidance before we move to the Q&A portion of the call.

We made good progress in the fourth quarter which was highlighted by strong performance in the Australian and US segments, new contracts in Canada and Australia, and another quarter of debt reduction. During the fourth quarter of 2018, we generated revenues of $114.5 million, an increase from $101.3 million year-over-year and $19.9 million in adjusted EBITDA, up from $13.3 million. Revenue was in line with expectations, and adjusted EBITDA results were at the upper end of our guidance for the fourth quarter.

Turning to our cash flow and debt reduction, we generated $28.5 million in operating cash flow and $21.9 million in free cash flow, both more than double our cash flow generation from the fourth quarter of 2017. We also repaid $22.9 million of debt during the quarter.

As you likely saw in our press release, we announced multiple contract awards during the fourth quarter. At our Sitka Lodge, we secured an 18-month room commitment from LNG Canada, bringing our total LNG related contracted revenues to approximately $170 million Canadian which extends through 2021. We are pleased to grow our partnership with the LNG Canada project and the local First Nation and will continue to pursue other LNG related opportunities including the possible further extension of our Sitka Lodge in Kitimat beyond the previously announced expansion to 1100 rooms. We view the development of Canadian LNG is a significant driver of growth for our Canadian business over the next couple of years.

In addition to the LNG related contract awards, we continued to win work at our current lodges while expanding our hospitality services to customer-owned facilities. In the first quarter of 2019, we secured two additional contracts awards totaling approximately $90 million of revenues. This includes a contract renewal at our Boggabri and Narrabri villages and Australia and the hospitality services contract to operate a 1500 room facility for an oil sands operator in Canada. We are particularly pleased with this hospitality award with further validates our strategy to expand Civeo's service offering to key customers in our core end markets.

Now let me take a minute to walk to the performance across each of our segments. We experienced a slower than expected quarter in Canada impacted by extended holiday downtime which led to lower-than-expected room nights. These challenges were partially offset by a strong performance at our McClellan Lake and Wapasu lodges which exceeded our expectations. We are also very pleased with the continued integration of the Noralta assets, and we are confident that we will meet our goal of $10 million Canadian in synergies for the full year 2019.

We are actively monitoring the implications of the provincially imposed oil production curtailment on Canadian oil sands producers and their activity, and we'll manage our business accordingly. While policy decisions can negatively impact our performance in Canada in the first quarter 2019, we do not believe that this issue will persist throughout 2019.

Shifting to Australia, the fourth-quarter benchmark meant coal prices settled about above $220 per ton which supported solid seasonal occupancy, particularly given the usual holiday downtime. Supply disruptions from exporting producers and Australia and the United States and domestic producers in China underpinned the robust business environment during the fourth quarter. And although the spot met coal prices are expected to drift modestly lower during 2019 due to supply growth and anticipated demand moderation in China, the environment should remain very conducive to additional capital project spending from our major customers. In fact, we expect that business to continue to generate improving occupancy throughout 2019.

Lastly, moving to the US segment, it continues to generate positive adjusted EBITDA benefiting from an offshore fabrication project in the fourth quarter. We will continue monitor market conditions in the US, but we expect continued improvement in the financial performance of this business in fiscal 2019, particularly as the segment no longer is burdened by the well site mobilization cost, we experienced in 2018.

With that, I'll turn it over to Frank who will give a detailed review of our financial performance.

Frank Steininger -- Executive Vice President and Chief Financial Officer

Thank you, Bradley and thanks everyone for joining us this morning. I'll start off with a review of our fourth-quarter results by segment before moving into the full year. Today, we reported total revenues in the 2018 fourth-quarter $114.5 million with a net loss on a GAAP basis of $12.8 million or $0.08 per diluted share. During the fourth quarter, we generated adjusted EBITDA of $19.9 million, operating cash flow of $28.5 million, and free cash flow of $21.9 million.

Turning to the fourth-quarter results for our segments, I'll begin with a review of the Canadian segment performance compared to the prior quarter. Revenues from our Canadian segment were $69.4 million, decreasing from $76.8 million in the third quarter. Revenues for the quarter were impacted by slowdown around the holiday season and turnaround activity in the Canadian oil sands rolling off as well as an unfavorable impact from foreign exchange. Adjusted EBITDA in Canada was $11.8 million, down from $16.5 million in the third quarter driven by the items I just mentioned.

During the fourth quarter, billed rooms in our Canadian lodges totaled 687,217, down 16% sequentially impacted by the aforementioned dynamics. Our daily room rate for the Canadian segment in US dollars was $91.00 compared to $89.00 in the third quarter, and this was driven by increasing occupancy at our Sitka Lodge in British Columbia supporting the LNG project.

Turning to Australia, during the fourth quarter we reported revenues of $29.7 million, down slightly from $31.1 million in the third quarter primarily driven by lower average daily rate resulting from less casual room use rentals. Adjusted EBITDA was $11.7 million, down sequentially from $12.4 million. The average daily room rate for Australian villages in US dollars decreased to $74.00 in the fourth quarter compared to $77.00 in the third quarter. Village room nights remained relatively flat sequentially at just over 397,000.

Now moving to the US. Revenues for the fourth quarter increased sequentially from $12.6 million to $15.5 million primarily driven by a large offshore fabrication project. We continue to experience relatively healthy market conditions driven by stable drilling and completion activity in the Permian and MidCon. Adjusted EBITDA in the US decreased $1.9 million from $2.4 million in the third quarter. This decrease was driven by holiday seasonality, lower well site EBITDA and increased SG&A.

For the full year ended December 31, 2018, the company reported revenues of $466.7 million, a net loss of $130.8 million or $0.83 per share. We generated $54.4 million in operating cash flow, $43.1 million in free cash flow and $76.8 million in adjusted EBITDA. These results compared to full year 2017 results with reported revenue of $382.3 million, a net loss of hundred and $5.7 million or $0.82 per share. During the prior period, the company generated $56.8 million in operating cash flow, $47.5 million in free cash flow and $63.2 million in adjusted EBITDA.

Now I will comment on capital expenditures in our current liquidity position. During the fourth quarter, we invested $8.4 million in CAPEX, up from $2.7 million in the third quarter and a total for the year of $17.1 million of capital expenditures compared to $11.2 million in 2017. Our total outstanding debt as of December 31, 2018, was $379.2 million, a $43.9 million decrease since September 30, 2018. The decrease resulted primarily from debt repayments of $22.9 million from cash flow generated by the business in foreign currency translation. As of December 31, 2018, we had total liquidity of approximately $102.7 million consisting of $90.3 million available under our revolving credit facilities and $12.4 million of cash on hand.

Looking ahead, we continue to focus on generating free cash flow, and deleveraging our balance sheet. I will now turn the call back over to Bradley who will provide some closing comments and talk about our guidance for the first quarter and full year of 2019. Bradley?

Bradley Dodson -- Chief Executive Officer

Thank you, Frank. I'll start with an overview of the factors that will impact our first quarter and full year 2019 and provide our financial guidance before opening the call for Q&A. The start of 2019 thus far has been punctuated by oil price uncertainty and continued global trade strive and political as well as regulatory uncertainty in each of the US, Canada, and Australia. These exogenous forces could negatively impact the global supply demand dynamics for oil or met coal, the commodity prices for those, and ultimately our customer's willingness to spend money and remain active in our major markets. With this backdrop, we have modestly reduced our full year 2019 guidance from that given on the third quarter earnings call.

In Canada, the cadence of work in the oil sands region should pick up after a slow start to the year after the holidays and what we believe will be a temporary Alberta oil production curtailment. We expect this early weakness in Canada to impact both the first-quarter results for the region and our consolidated results. For the balance 2019, we expected relatively normal turnaround schedule for the second, third quarter of 2019 in Canada. However, this activity in our core Canadian oil sands market could be negatively impacted by further government intervention or future downward pressure on WTI or WCS oil prices.

Our guidance includes uncontradicted turnaround work in the second, third quarters as well as normal activity levels in the oil sands regions for the second half of 2019. As we progress through the year, we expect to benefit from accelerating contributions the LNG Canada and in coastal gasoline contrast particularly as we move into the back of 2019. Taking into account the softness in the first quarter, we expect Canadian room nights for the full year to be modestly down year-over-year and adjusted EBITDA year-over-year to increase 10% to 15% from 2018.

The outlook for Australia remains constructive for 2019, met coal and iron ore prices are supportive of robust cash flows for our comp clients which should cause them to continue to pursue potential expansion projects which have been absent from the Bowen basin and Gunnedah basin for several years. We anticipate 2019 likely will be a year of transition and Australia to a substantially healthier environment. In preparation for this ramp-up and activity, we are selectively allocating capital to refurbish and upgrade rooms for which we anticipate increased demand in 2019and beyond.

We expect continued improvement in occupancy primarily through our Bowen basin locations generating year-over-year increase in billed rooms of approximately 10% which should largely translate to corresponding year-over-year growth in EBITDA.

Moving to the US, while we keep an eye on ongoing completion activity in the Permian and MidCon markets, we are encouraged by the prospects for our US business in 2019. Our guidance for the full year of 2019 in the US is predicated on activity in the Permian and MidCon remain relatively close to where it is today. The optimization of our well site footprint where we have the assets will be a key driver of our growth throughout the year. In total for the US segment, we expect EBITDA to double year-over-year.

Our team understands that we cannot control commodity prices and reciprocality and other exogenous forces, as such, we continue to focus on our strategic priorities executing on the work we've won, generate free cash flow, improve the balance sheet by paying down debt, investing in high returning opportunities in each of our three segments, expanding our service offerings, and lastly, continue to provide the best in class hospitality while serving as a trusted partner to all of our stakeholders.

In terms of guidance for the first quarter of 2019, we expect revenues of $105 million-$110 million and adjusted EBITDA of $13 million-$16 million. For the full year of 2019, we expect revenues of $470 million-$490 million, adjusted EBITDA of $95 million-$105 million guiding to a 24% to 37% increase in adjusted EBITDA from the full-year results of 2018. Lastly, we expect full year 2019 CAPEX to be in the range of $40 million-$45 million.

In conclusion, as we begin 2019, we believe it will be another year of positive transition for the company. We feel there are recent contract awards that emphasize our strategy of winning work at our current lodges, expanding our hospitality service platform to customer-owned facilities and securing other work in other end markets such as Canadian LNG. The team is acutely focused on executing our work in a safe and efficient manner with unmatched service to our customers. We continue to pursue the highest financial returned for investment opportunities and allocate capital prudently with the goal of maximizing free cash flow and reducing debt.

With that, we'd like to turn it over for questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing *1 on your telephone keypad. Please ensure your mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press *1 to ask a question. Will take our first question from Stephen Gengaro of Stifel, please go ahead.

Stephen Gengaro -- Stifel Financial Corporation -- Analyst

Thanks, good morning guys. I guess a couple things to just start with when you're looking at your utilization levels and kind of room rate expectations over the course of 2019 versus 2018, any guidance on how we should think about that in Canada and then Australia?

Bradley Dodson -- Chief Executive Officer

Sure, let's start in Canada. For the full year 2018 in US dollars, I'm sorry in Canadian dollars I think we ended up around $115.00 a room night. Now, with the mix of rooms and the occupancy as we go into 2019, I think that will be modestly up a couple bucks here or there. And as we mentioned, we think room nights though will, because of the softness we're seeing at the start in the Canadian oil sands region, will actually be modestly down in total 18 to 19 despite the ramp-up at Sitka.

In Australia, we ended up in Australian dollars, I believe around 102. We don't expect anything to change next year. The variable in Australia, much more of an impact than we see in Canada, can be our casual room usage. A lot of our customers will contract for a base level room which that base level will be priced at a -- largely will be take-or-pay, will be priced at a certain level. Typically, mid to high 90s per room night in Australian dollars. Depending on how much they want to expand over that base level of rooms and the amount of time for advance notice that we get on that, the prices can be higher than that.

So, presuming that the casual usage remains relatively consistent with what we've seen over the last 12 months, we think pricing is fairly flat year-over-year and Australia. Anything, Frank, you want to?

Frank Steininger -- Executive Vice President and Chief Financial Officer

No, that's exactly right.

Bradley Dodson -- Chief Executive Officer

Billed rooms and Australia I think we talked about, right? Up 10%?

Frank Steininger -- Executive Vice President and Chief Financial Officer

Up 10%, yeah.

Bradley Dodson -- Chief Executive Officer

Year-over-year, which with flat pricing then kinda gets us to the concept that we think that will translate into year-over-year increase in EBITDA implicitly and then margins are the same year-over-year and Australia. I think the dynamic there is that we'll have some food cost and labor cost inflation and the team is expecting they'll be able to find efficiencies in order to fight that back and keep margins black year-over-year.

Stephen Gengaro -- Stifel Financial Corporation -- Analyst

Thank you. And then as I think about, I guess two parts the to this, when you think about the cash generation, I mean it sounds like if you use the midpoint of EBITDA fortyish million in CAPEX in your interest costs, you know you're going to generate $20-$30 million in free cash. I assume that goes to debt pay down. Just two questions. One is the CAPEX, the non-maintenance portion; it sounds like it's going toward refurb room, upgrading rooms and Australia plus projects around Canada, is that right?

Bradley Dodson -- Chief Executive Officer

Go ahead, Frank.

Frank Steininger -- Executive Vice President and Chief Financial Officer

Yeah, so I mean I think if you look at where we are, I think we have about 20 million or so Canadian, 20 to 25 million Canadian related to projects on the West Coast. Increase in the room count at Sitka that we talked about and also some starting on the work on coastal gas line. So, that's really where that number is really where the growth capital is this coming year and in the rest of it is really more or less maintenance.

Bradley Dodson -- Chief Executive Officer

Right, with some room refurbs and Australia.

Frank Steininger -- Executive Vice President and Chief Financial Officer

Yeah, but that, in total, at least what we've got in the forecast right now, that might be a year-over-year change of $3-$5 million US.

Bradley Dodson -- Chief Executive Officer

Exactly, right.

Frank Steininger -- Executive Vice President and Chief Financial Officer

So, we believe it's a good thing to get started we see in some of our core Bowen basin locations the potential need, let's say over the next 12 to 18 months for increased occupancy if some of these growth projects move forward and because we've had lower occupancy for several years now, some of the rooms a little spit and polish. So we're going to do some of that and get on the refurb's so that we have blocks of rooms that are available because of some of these projects move forward, they won't need a handful of extra rooms, they could need 200, 400, 600 extra rooms. So, we are trying slowly to prepare for that.

Stephen Gengaro -- Stifel Financial Corporation -- Analyst

Okay, thank you.

Operator

Once again, as a reminder, it is *1 to ask a question. We will now take our next question from Mike Malouf of Craig-Hallum Capital Group; please go ahead.

Michael Malouf -- Craig-Hallum Capital Group -- Analyst

Hi, can you hear me OK?

Frank Steininger -- Executive Vice President and Chief Financial Officer

Yeah, we can hear you, Mike.

Bradley Dodson -- Chief Executive Officer

Hi Mike.

Michael Malouf -- Craig-Hallum Capital Group -- Analyst

Okay, great. Hi, how you doing? One of the things that struck me on this quarter is it looks like you're getting some synergies coming through especially on the SG&A line, and I'm just wondering if you could comment a little bit on that expense line and as you look into 2019. And then second of all, I have a question on the US. As we look at the gross profit margins in the US, that was down quite a bit sequentially, and maybe it was just because of the one time work that you are doing in the fourth quarter, but just a comment on the margins in the US would be helpful. Thanks.

Bradley Dodson -- Chief Executive Officer

Do you want to start?

Frank Steininger -- Executive Vice President and Chief Financial Officer

Sure. SG&A for the quarter was impacted by two things. We had less impact from the standpoint of our annual bonus plans because we didn't reach our target and as you know, we've got phantom shares in with the stock price decreasing that impacted the expense related to the mark to market on those shares that are paid out in cash. So, that's really the main driver from an SG&A standpoint.

Bradley Dodson -- Chief Executive Officer

Certainly, from an SG&A standpoint we made strives on the synergy part of this in the fourth quarter got the partial impact for finally being able to turn over the food procurement contract to a consolidated provider that provided some benefit to the Canadian lodges during the fourth quarter and then, quite frankly, finishing up some final touches on some of the integration work. So, we made some progress, but to Frank's point, that was less of the impact on the SG&A.

As it relates to US margins, you nailed it, Mike, and that is that the officer fabrication project was a good project for us, the team did a good job in terms of execution, both in terms of timing and delivery of that project in the fourth quarter but those typically carry lower margins than the segment as a whole. And so, with the change of the revenue mix, we saw that impact the segment margins in the quarter.

Michael Malouf -- Craig-Hallum Capital Group -- Analyst

Okay, great, thanks. And then just a follow-up. As you look out to 2019 with regards Australia, obviously, the net coal prices have remained pretty strong for a long time here, and I'm just wondering if you could give us some real time anecdotal commentary on expansion over there and are you seeing some green shoots with regard to chatter? Thanks.

Bradley Dodson -- Chief Executive Officer

Sure, well as you mentioned and we talked about on prior calls, really throughout the 2018 time period and now extending into 2019, it's been a nice steady improvement typically sequentially quarter to quarter in terms of occupancy and therefore profitability of our Australian segment. But also, in terms of your question, we haven't seen with constructive met coal prices, we haven't seen in a large expansionary projects move forward. We are certainly watching some of the things that the BHP affiliates are doing in the Bowen basin as well as what Whitehaven might do down in the Gunnedah.

If either of those several projects move forward or any of those several projects move forward, we expect to use existing locations. We are working on getting those rooms ready should any of those move forward also looking at some more for Fitzroy and Anglo as well. So, it has been a good sequential improvement, but no step change in terms of the occupancy level and that would largely be driven by any expansionary capital projects. Do you have anything?

Frank Steininger -- Executive Vice President and Chief Financial Officer

she No. There's chatter Mike, but we're waiting for some project.

Michael Malouf -- Craig-Hallum Capital Group -- Analyst

I've been waiting too, so, OK thanks a lot. Appreciate the help.

Bradley Dodson -- Chief Executive Officer

Well, I guess to that point, certainly the Boggabri and Narrabri contract extensions which would foretell potentially some of those projects moving forward, but the base level of rooms that are contracted right now is fairly consistent with what we've had over the last 12 months. But getting those extended, hopefully, will then translate into those Gunnedah projects moving forward on an expansionary basis.

Michael Malouf -- Craig-Hallum Capital Group -- Analyst

Okay, got it. Thanks.

Operator

We will now take our next question from Stephen Gengaro of Stifel; please go ahead.

Stephen Gengaro -- Stifel Financial Corporation -- Analyst

Thanks, gentlemen, just to follow-ups if you don't mind. The first being obviously a slow start to the year based on your guidance. As you look at the back half of 2019, and obviously it sounds like there's gonna be some of the West Coast Canadian guests and that sure LNG project impact there. As we think about 2020, I know it's really early to think about 2020, but is that back second half 2019 run rate a reasonable place to start? So, I'm just thinking about 2020 being a pretty strong cash generation year based on that plus maybe a return to a more normalized maintenance CAPEX level. Is that a reasonable way to think about it as the back half of 2019 unfolds into 2020?

Bradley Dodson -- Chief Executive Officer

I would think so. The biggest driver of the second half 2019 versus the first half of 2019, and Frank jump in here; is really what happens in Sitka. We expect that both our room count and or aggregate occupancy will continue to improve throughout Q1, Q2, into Q3. Q3 and Q4 being fairly consistent in terms of occupancy and revenue and EBITDA coming out of Sitka. That contract goes through the middle part of 2020. So, presuming that they will still need rooms in Sitka and that it continues for the full year of 2020, then yes, that will be a tailwind or a positive year over year trend.

We'll also have a lot greater input or revenue generation and EBITDA generation out of the gasoline projects that are coming. We throw those factors in, you pull out maybe some holiday downtime if you want to take the fourth quarter and annualize it and presuming the other markets stay relatively consistent, it should indicate a much better 2020. And to your point, while will have some coastal gasoline CAPEX in 2020, the free cash flow should be better because the Sitka CAPEX will be behind us.

Frank Steininger -- Executive Vice President and Chief Financial Officer

That's right.

Stephen Gengaro -- Stifel Financial Corporation -- Analyst

And as you look at -- I look at 2018 as a benchmark, but it's maybe not a great place to compare 2018 versus 2019, but you're EBITDA jumped significantly first quarter to second quarter in 2018 and obviously your 2019 guidance suggests a strong second half, but is the ramp going to be seen materially in the second -- I made it almost has to be seen in the second quarter I would assume to get to the full year guidance, is that fair?

Bradley Dodson -- Chief Executive Officer

Yes, I mean we'll see a couple factors. I'll talk about Canada and Frank talk about Australia, but Canada, it's good to be turnaround work, and yeah, I think right now, we factored in a good second quarter turnaround. Last second quarter was a little messy because of one of our customers having a power outage that impacted their overall activity and activity in the second quarter as a whole. Then on Australia --

Frank Steininger -- Executive Vice President and Chief Financial Officer

The year starts out slow because the Christmas holiday and then that just continues to ramp up as we get into February and March and that will follow as we get into the second quarter.

Stephen Gengaro -- Stifel Financial Corporation -- Analyst

Okay, good, thank you. And then just one final, as you look at potential opportunities of expansion and you look at some of these logistics in catering projects, what does the environment look like for those type of deals right now?

Bradley Dodson -- Chief Executive Officer

We're talking about inorganic growth around acquisitions; I would say that we've had a fairly steady pipeline of opportunities to look at. I would say that as with anything, I think valuation is relatively manageable in terms of what the seller's expectations are relative to what our expectations might be and then is ultimately due diligence and trying to close the deal. So, we remained active, those of the areas we're looking at in addition to looking at potentially some consolidating and property acquisitions predominantly in Australia and the US, but I would say that the market is relatively constructive.

Stephen Gengaro -- Stifel Financial Corporation -- Analyst

Okay, great. Thank you.

Operator

It appears there are no further questions at this time; I would like to turn the conference back to your host for any additional or closing remarks.

Bradley Dodson -- Chief Executive Officer

Well, I think you all for joining us on the call today. We were pleased with how we ended off 2018. We know that -- we anticipated some slow start to 2019 and that is coming to peer to be correct. We do expect a bench brighter outlook as we move throughout 2019 look forward to talking to you about it on future conference calls.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

Duration: 34 minutes

Call participants:

Regan Nielsen-Manager, Corporate Development and Investor Relations

Bradley Dodson -- Chief Executive Officer

Frank Steininger -- Executive Vice President and Chief Financial Officer

Stephen Gengaro -- Stifel Financial Corporation -- Analyst

Michael Malouf -- Craig-Hallum Capital Group -- Analyst

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