Q4 2023 Civeo Corp Earnings Call
Participants
Regan Nielsen; Director & Corporate Development & IR; Civeo Corporation
Bradley Dodson; CEO, President & Director; Civeo Corporation
Carolyn Stone; Senior VP, CFO & Treasurer; Civeo Corporation
Stephen Gengaro; Analyst; Stifel
Stephen Ferazani; Analyst; Sidotui & Company, LLC
David Storm; Analyst; Stonegate Capital Markets, Inc
Presentation
Operator
Greetings. Welcome to the Civeo Corporation's Fourth Quarter 2023 earnings call. At this time, all participants are in a listen only mode. The question and answer session will follow today's formal presentation. If anyone should require operator assistance during the conference today, please press star zero from your telephone keypad. Please note that this conference is being recorded. At this time, I'll turn the conference over to Regan Nielsen, Vice President, Corporate Development and Investor Relations. Brian, you may now begin.
Regan Nielsen
Thank you, and welcome to Civeo's Fourth Quarter and Full Year 2023 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 anything 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 and uncertainties disclosed in our Forms 10K, 10Q and other SEC filings.
So I'll now turn the call over to Brandon.
Bradley Dodson
Thank you, Ryan, and thank you all for joining us today on our fourth quarter and full year earnings call, we had a solid end to the year having reached and exceeded our target leverage ratio. We are entering into 2024 with financial strength and flexibility to execute on our capital allocation strategy, including looking to identify and execute on growth opportunities.
This morning, I'll review our fourth quarter 2023 performance, and Carolyn will provide a financial and segment-level review, and I'll conclude with our initial full year 2024 guidance and the underlying rate regional assumptions. Lastly, we'll open up the call for questions.
I'll begin with a few important highlights. Our fourth quarter 2023 revenues, adjusted EBITDA and free cash flow exceeded our expectations. Australian adjusted EBITDA increased 64% compared to the fourth quarter of 2022 due to particular strength in our billed rooms at our own villages, where we posted our third consecutive quarter of record performance. We also saw margin improvement in our Australian integrated services business as a result of our inflation mitigation efforts and build our own villages and our integrated services benefited from recent contract wins.
Moving to Canada, subsequent to the end of the quarter, we completed the previously announced sale of the McClelland Lake Lodge, and we are currently performing the associated transportation services contract for those assets during 2023, we returned 23% of our free cash flow to shareholders through both our recently initiated dividend and continued opportunistic share growth.
I'll now make a few comments on the business segments. Australian segment performed exceptionally well during the quarter as we experienced sequential and year-over-year growth in both our own village business and our integrated services business. During the quarter we experienced a sequential increase in Australia and on village occupancy sitting on, again, a third consecutive quarterly record for that. This for that fiber business in the fourth quarter, Australian and Reis Services business experienced significantly improved margins as our inflation mitigation efforts started to demonstrate positive results we can so we should continue to see this benefit from our team's efforts as we move into 2024. Our team continues to execute on growth plans for our integrated services business with a goal to reach $500 million Australian dollars in top-line revenues out of integrated service in Australia by 2027 with improved margins. We believe the integrated service business is particularly attractive given contract terms and the outlook for additional opportunities in the business as expected, our Canadian segment revenues and adjusted EBITDA decreased year-over-year due to the wind down of LNG related mobile camp activity, including $5.6 million in the U.S. and mobile camp demobilization costs in the fourth quarter regarding the sale of our Flat Lake Lodge in Canada from completed the sale in January of 2024 ever have received all proceeds. The majority of the net proceeds were recognized in the fourth quarter with the remainder here in January 2024. As a reminder, the entirety of the sale proceeds and associated costs as well as other related reimbursements are included are excluded from our adjusted EBITDA calculation as a result to sales transaction does not impact our full year 2024 adjusted EBITDA guidance. Transportation of these off assets is progressing well, and we continue to pursue other related business opportunities.
Carolyn Stone
And with that, I'll turn the call over to Bradley and thank you all for joining us this morning today. As Bradley noted, we reported financial results that exceeded our guidance. Total revenues in the fourth quarter were $170.8 million, with GAAP net income of $23 million or $1.55 per diluted share.
During the fourth quarter, we generated adjusted EBITDA of $17.4 million. Again, this is exclusive of the financial impact of the dismantlement and sale of the McClelland Lake Lodge assets, operating cash flow of $40 million and free cash flow of $39.2 million. Fourth quarter adjusted EBITDA increased year over year due to increased build brands at our Australian villages and improved margins in the Australian integrated services business, partially offset by the expected wind down of LNG. related Canadian mobile camp activity, including $5.6 million in mobile camp demobilization costs for the full year 2023, we reported revenues of $700.8 million and net income of $30.2 million or [$2.91] per diluted share. In 2023. We generated adjusted EBITDA of $102 million, a decrease from our 2022 adjusted EBITDA of $112.8 million results for the full year of 2023 reflects the impact of a stronger US dollar, which decreased both revenues and adjusted EBITDA by $28.8 million and $5.7 million, respectively. The decrease in adjusted EBITDA was largely driven by the wind down of LNG-related activity in Canada and the impact of weak and Canadian Aastra and Australian, but partially offset by significant improvement across our Australian.
Let's now turn to the fourth quarter results for our two segments. I'll begin with a review of the Canadian segment performance compared to its performance a year ago and the fourth quarter of 2022. Revenues from our Canadian segment were $72.7 million as compared to revenues of $88 million in the fourth quarter of 2022. Adjusted EBITDA in Canada was $3.4 million, a decrease from $11.8 million in the fourth quarter of last year. Revenues and adjusted EBITDA decreased 17% and 72%, respectively, primarily driven by the wind down of LNG related mobile camp activity, including $5.6 million of mobile camps. Demobilization costs during the fourth quarter billed rents in our Canadian lodges totaled [617,000] which was modestly down from [622,000] in the fourth quarter of 2022. Our daily run rate for the Canadian segment in U.S. dollars was $95, which increased slightly from $93 in the fourth quarter of last year.
Turning to Australia, during the fourth quarter, we recorded revenues of $89.3 million, up from $73.1 million in the fourth quarter of 2022. Adjusted EBITDA was $21.5 million, up 64% from $13.1 million last year. A significant increase to adjusted EBITDA was due to increased billed rents at our own villages increased integrated services activity and improved margins due to our inflation mitigation efforts. Australian billed rooms in the quarter were a source of strength with [638,000], up 23% from [519,000] in the fourth quarter of 2022. This is due to increased demand at our other villages as demonstrated by our recent contract awards. The average daily rate for Australian villages in US dollars was $74 in the fourth quarter, modestly from $73 in the fourth quarter of 2022 on a consolidated basis, capital expenditures for the full year 2023 were $31.6 million compared to $25.4 million during the full year 2022. Capital expenditures in both periods were related to maintenance spending on our lodges and villages. Additionally, the full year 2023 also included $10 million in expenditures for the Australian customer funded infrastructure upgrades. As we have discussed on prior quarter conference call, our total debt outstanding on December 31, 2023 was $65.6 million and $37.7 million decrease in September 30 of 2023. We were pleased to reach and exceed our net leverage ratio target in 2023 we ended the year at 0.6 times, down from 0.9 times as of September quarter. And as of December 31, 2023, we had total liquidity of approximately $136.4 million, consisting of $133.1 million available under our revolving credit facilities and $3.3 million of cash on hand, giving us the strength and flexibility to opportunistically pursue growth vectors in 2024 and beyond, while maintaining prudent leverage ratios.
And turning to capital allocation. As you are aware, we updated our capital allocation priorities in September. Our new capital allocation framework is designed to allow our strong cash flow generation to support our existing operations, return capital to shareholders through a consistent dividend and opportunistic share repurchases and use excess cash to fund growth growth opportunities, all while maintaining our target leverage ratio in the range of 1.0 times to 1.25 times through the cycle. However, we are open to increasing our leverage ratio up to 2.0 times to pursue accretive growth opportunities where appropriate and we may also occasionally drop below 1.0 times as we have at December 31.
As we carefully assess growth opportunities during the fourth quarter of 2023 we repurchased approximately [121,000] shares through our share repurchase program for a total at $2.4 million. And earlier this month, we announced that our Board of Directors has declared our third quarterly dividend payment to shareholders of record as of February 25, will receive a $0.25 per share cash dividend payable on March 18, with that, I'll turn it over to Bradley to discuss our initial guidance for the full year 2024 Bradley.
Bradley Dodson
Thank you, Karen. Now I'll turn the discussion to our initial full year 2024 guidance on a consolidated basis include an outlook for each of the regions. We are initiating full year 2024 guidance of revenues of $625 million to $700 million and adjusted EBITDA of $80 million to $90 million. Our initial full year 2024 capital expenditure guidance is $30 million it's $35 million based on this adjusted EBITDA and CapEx guidance, expected net cash proceeds related to McClelland Lake dismantlement and sale of approximately $6 million, expected cash interest expense of also approximately $6 million effective working capital inflow of $10 million and expected Australian cash taxes of $10 million. We are expecting our 2024 free cash flow to be in the range $45 million to $60 million.
I will now provide the regional outlooks and corresponding underlying assumptions. As we mentioned on our last conference call. The primary reason for the year-over-year EBITDA decline in 2024 is the wind down of Canadian mobile camp activity and a loss at the Buffalo Lake earnings, which account for approximately $27 million of the year-over-year change between 2023 adjusted EBITDA and 2024 EBITDA guidance, partially offset by year-over-year increases in revenues and margins in Australia and integrated services business and modestly improved performance in the Australian villages and Canadian margins. We are acutely focused on replacing these earnings and growing the Company, but 2024 will be a transition year for our Canadian business in Canada.
As we look into 2024, the macroeconomic environment for oil sands is improving with increased customer capital spending and the Trans Mountain Pipeline expansion coming online this year, with the exception of the loss of occupancy at the McClelland Lake Lodge, we should experience steady to modestly increasing build rooms across the rest of our large portfolio.
Regarding our mobile camps. The majority of our mobile camp rental activity is complete, and we are continuing to demobilize continuing the demobilization process. In 2024, we expect approximately $6 million of demobilization costs in the first half of this year, which is contemplated in our full year 2024 guidance. Again, this will be a transition year for our Canadian business moving forward, we have identified promising opportunities and expect to leverage our brand and scale to expand in additional Canadian geographies and end-market.
Turning to Australia, customer activity in our own villages improved throughout 2023, and we expect that to continue into 2024 at similar levels to the end of the year. We are currently expecting, but we are currently full at three of our Bowen Basin villages was had very healthy occupancy at the rest of our own diligence in the portfolio in Australia. As it relates to our integrated services business. The story of 2023 was our inflation mitigation plan that we executed throughout the year. Our significantly improved margins in the fourth quarter demonstrate the progress that has been achieved, and we should continue to see the benefit of our efforts through 2024, resulting in increased EBITDA year over year. We are excited about the growth potential of our Western Australia and great services business. And we now mine and now that we have executed on our inflation mitigation plan, we can shift our focus back to winning work and growing the business, our team has set a goal to grow our Australian integrated services business to $500 million of revenues Australian by 2027.
I will conclude by underscoring the key elements of our strategy. We will prioritize the safety and well-being of our guests, employees and communities. We will invest in operational improvements and innovation to continue to enhance our best-in-class hospitality offerings. We will allocate capital prudent prudently to maximize free cash flow generation while we continue to return capital to shareholders and evaluate growth options.
With that, we're happy to take your questions.
Question and Answer Session
Operator
Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, please press star one from your telephone keypad. A confirmation tone will indicate your line from the question queue. You may press star two, if you'd like to withdraw your question from the queue For participants using speaker equipment, it maybe necessary to pick up your handset before pressing the star keys. One moment, please while we poll for questions. And once again, that's star one.
Thank you.
Thank you. And our first question comes from the line of Stephen Gengaro with Stifel. Please proceed with your questions, too.
Stephen Gengaro
Thanks. Good morning, everybody, Malik. And I think the the first for me is when we think about the strength in Australia pays off in the fourth quarter was very strong. And you think about the outlook for Australia, I mean one of the things that we keep hearing about is kind of concerns about economic growth in China. And I'm just curious, sort of what your what your outlook and guidance sort of suggest for Australia and how we should think about sort of the potential gives and takes what are the economic conditions right now.
Bradley Dodson
All the indications from our customer base down there on the own diligence side is one of them well for the further new customers and by growing production. Certainly some of the majors are looking at cost containment, but our outlook for occupancy in the owned villages is nicely up year over year, 24% from 23. We're seeing a big uplift and our integrated services business. So that's top line where we're expecting to hit over $250 million in revenues in 2024. That's up from about [$240 million] and 2023. But the big story is the margin improvement there. And the vast majority of that integrated service business is iron ore related. So we're quite constructive on the Australian business and certainly always cognizant of macroeconomic forces. But as of right now, we feel very good about.
Stephen Gengaro
Great. Thanks. And when you think about use of cash and you've obviously done a tremendous job over the last several years, right, deleveraging and returning capital what types of of acquisitions, if you are thinking about acquisitions, what should we think you would be pursuing? Would it be geographic expansion or would it be things like the sort of on the on the logistics and catering side, that would be more likely in current geographies.
Bradley Dodson
we will focus on current geographies, Australia and North America. I'll start with Australia. There are a handful of one-off properties that would be nice additions to the portfolio, primarily in the Bowen Basin. So we're pursuing that. It's the integrated services. There are opportunities to expand that business through acquisition, and we're looking to do so. And that would be again in the Australian geography in Canada.
I think one of the big takeaways from the Saga that was McClelland Lake is that existing infrastructure has value because the replacement costs are significantly higher today than they have been historically. So reaching a complete newbuild Lodge in North America economically is very difficult in my opinion.
So how do we leverage existing underutilized assets primarily in Alberta to expand into other geographies, specifically Eastern Canada? I'm looking perhaps as the McClelland Lake assets moving into Western U.S. as an opportunity to expand into the U.S. in a fashion that more It reflects or resembles mirrors what our Canadian operations are today. So we certainly are also looking in Canada to find an entry point into the Montney, which we see long term activity there that it's been more difficult to determine the entry point Craig.
Stephen Gengaro
Yes, thank you for the color.
Operator
Our next question is from the line of Steve Ferazani with Sidoti & Co., please proceed with your question.
Stephen Ferazani
Morning, proudly and Caroline. Obviously, finished up a very busy year when I think about 2024 and the margin improvement you've already seen in Australia, and I'm assuming and maybe you provide provide a color I'm assuming it's a mix of the new contracts, some easing inflationary pressures. Also wanted to ask about if labor constraints are easing and how much more room you've got into 2024 on all those on outlook points.
Bradley Dodson
And so that is gaining scale, although I don't think we've seen the improvement on getting scale in the integrated services business quite yet. That will be part of what we pivot to focus on is to have more improve our processes and to really bring more of it to the bottom line.
I think as you look at kind of gross margins and integrated services, the fourth quarter was a really nice quarter. And if we can maintain that kind of 9% to 10% gross margin integrated services. That's pretty solid now going to work on being more efficient on the operational side, on the inflation still issue, I'm so I don't want to discount it flat, but I think the team has done by focusing and as we mentioned in our inflation mitigation plans was work on human capital and how can we be more efficient there? And we've seen improvements it location by location in terms of reducing turnover and reducing the reliance on temporary employees. And so we're early stages in that, but the progress has been good.
Stephen Ferazani
Okay. And then turning to the U.S. market, you noted looks like another year of rising CapEx. We have the Transmountain coming. How is that going to how are you thinking about that translating into turnaround activity? And is it too early to get a sense? Are you hearing much right now from customers about both?
Yes, occupancy this summer spring, I guess starting in spring?
Bradley Dodson
Yes. I'm still a little early to really call that Canadian turnaround activity for 2024 guidance assumes a slightly softer turnaround period in Q2, Q3 this year. And so we'll have to see how it plays out. But right now, guidance is a little bit softer on turnaround activity, but we'll see we've seen some improved margin, some locations in Canada because of our some of our inflation mitigation efforts, and we expect that to continue into 2024.
Stephen Ferazani
I think you covered a lot territory return the call. I didn't hear did you provide guidance on free cash flow,
Bradley Dodson
$45 million to $60 million.
Stephen Ferazani
Any changes to your your target range or other uses of capital beyond acquisitions on the net leverage
Bradley Dodson
Right, now, right. I mean, we've kind of blew through our target with the on free cash flow in Q4, but it's really kind of a timing issue and certainly expect to be returning the same kind of capital to our shareholders in 2024. But we do need to pivot and allocate more to growth than we have well, quite frankly, been able to, but now building that pipeline or that funnel of growth opportunities that I just highlighted on the past question. And so I'm cautiously optimistic where we'll have showed some some growth and putting capital to work in a growth fashion in 2024.
Stephen Ferazani
Right.
Thanks, Brent.
Bradley Dodson
Thank you.
Operator
Thank you. Our next question is from the line of Dave storms with Stonegate Please proceed with your question.
David Storm
Good morning and good morning. Just hoping we could start with kind of the cadence of the guidance. Should we expect it to follow pretty typical seasonal patterns? Or is there anything else, but you think might throw a wrench thinks.
Bradley Dodson
right now for 2024. We expect to be fairly typical where historically 65% of the annual EBITDA comps in Q2 and the combined Q2, Q3. And that's largely driven by a couple of factors that we've highlighted previously. One, certainly turnaround activity in Canada, Q4 and Q1 are usually softer because of the holidays, either at the beginning of the year or ending the year.
Carolyn Stone
So I think it will be a fairly typical in terms of cadence, we expect to see the kind of cadence on cash are not thinking on cash flow, the same historical payment on cash flow, where first quarter is our assets, lowest cash flow because of various timing and buildup of revenues and such an outcome, we'll get more cash and as the year progresses.
David Storm
Understood. Thank you. And then you mentioned the goal of getting integrated services up to $500 million in Australia. What are the logistics look like for that. And what is short term success look like concerned fairly long-term goal?
Bradley Dodson
Well, our team has identified tangible book contract wins over the next three years. That should be able to get us to that $500 million mark. As many of you may recall, we entered into an integrated services in Western Australia in 2019 with the action industrial catering acquisition, which at the time we bought it, it does assume about $40 million Australian dollars of revenues and last year [$239 million]. So we've made significant progress and we see a very tangible pathway to get to $500 million. It's not without a lot of work by the team and continuing to demonstrate the value proposition to the customer base to it to achieve new contract wins.
David Storm
Understood. Thank you for taking my questions.
Bradley Dodson
Absolutely. Thank you.
Operator
Thank you.
At this time, we have no additional questions. I'd like to hand the floor to Bradley Dodson for any closing remarks.
Bradley Dodson
Thank you, Rob, and thank you, everyone, for joining the call today. We appreciate we appreciate your interest in Civeo and oil forward to speaking to you on the first quarter earnings call expected in April.
Operator
Thank you.
This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
