Yahoo Finance Civeo Corp (CVEO) Q2 2019 Earnings Call Transcript
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Civeo Corp (NYSE: CVEO)
Q2 2019 Earnings Call
Jul 29, 2019, 11:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Civeo Second Quarter 2019 Earnings Call. [Operator Instructions]
At this time, I would like to turn the conference over to Regan Nielsen, Director of Corporate Development and Investor Relations. Please go ahead, sir.
Regan Nielsen -- Director of Corporate Development and Investor Relations
Thank you, and welcome to Civeo's second quarter 2019 earnings conference call. Today our call will be led by Mr. 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'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 will now turn the call over to Bradley.
Bradley J. Dodson -- President and Chief Executive Officer
Thank you, Reagan, and thank you all for joining us today on our second quarter earnings call. I'll began with a summary of our second quarter performance before offering some commentary on our three business segments; Frank will then provide a detailed discussion of our consolidated and segment quarterly financials; and I'll conclude our prepared remarks with our current outlook and updated financial guidance before we move to question-and-answer portion of the call.
Before it, again, I'd like to highlight a few takeaways from our call today. First, second quarter adjusted EBITDA exceeded our expectations in each region and on a consolidated basis. During the second quarter, we completed the expansion of our Sitka Lodge to serve the LNGC project in British Columbia, and the occupancy and earnings from this location will have a meaningful impact on our second half 2019 EBITDA. With the Sitka expansion behind us, we expect to generate significant operating and free cash flow in the second half of 2019, which we will use to reduce debt.
We are maintaining our previously disclosed full-year adjusted EBITDA guidance as second quarter performance and the Action acquisition are largely offset by decreasing drilling and completion activity in the US. Lastly, we completed a strategic acquisition at Australia, which expands our service offering, commodity exposure and geographic footprint, while opening up future organic growth opportunities. Our second quarter performance was punctuated by strong sequential improvement in Canada and Australia. Both regions benefited from higher occupancy from turnaround activity, and in Canada, we also benefited from increased LNG related occupancy in British Columbia.
We were also pleased with our recent progress on the contracting front. During the second quarter, we announced a four-year contract renewal with BHP to provide rooms and hospitality services from the Company's existing Coppabella and Nebo villages in Australia. And today, we can confirm that we secured a two-year contract extension to provide rooms and hospitality services to a major oil sands producer at our Fort McMurray Village and Grey Wolf locations in Canada with take-or-pay revenues totaling approximately CAD62 million. We believe these awards demonstrate the strength of Civeo's competitive position as we deliver best-in-class hospitality services to our customers.
After the end of the second quarter on July 1st, we completed the acquisition of Action Industrial Catering in Australian. This acquisition strengthens our presence in Western Australia and with -- iron ore producers expands our service offering and it's immediately delevering to our balance sheet. This transaction is a great strategic step forward for Australian business.
During the second quarter, we generated $122 million of revenues, which was mostly down from $130 million year-over-year, but up from $109 million in the first quarter of 2019. Adjusted EBITDA $26.5 million, grew from $24.5 million last year, it was up sharply from the $16 million on a sequential basis. Both revenue and adjusted EBITDA results were at the high end of our guidance range for the second quarter.
Now let me take a minute to walk through the performance across each of our segments. Market conditions in Canada continue to be impacted by limited takeaway capacity, oil price volatility, and provincially mandated production curtailments in the second quarter. As we expected, maintenance and turnaround activity in the oil sands region was relatively subdued in the second quarter of 2019 compared to the second quarter of 2018. However, we saw significant sequential increase in build rooms in the region, coupled with the continued emergence of LNG driven contracted occupancy in British Columbia. Despite the persistent headwinds in the oil sands, the two-year contract renewal with the major oil sands producer that we secured earlier this month underscores the strength of our customer relationships and the value our customers derive from our service offerings.
Moving to Australia. Second quarter results continue to improve sequentially with sufficiently higher occupancy particularly in the Bowen Basin. Our Australian activity levels were supported by sustained level of met coal prices and impressive Chinese steel capacity utilization which in turn are conducive to improving customer activity. As I stated earlier, the acquisition of Action Industrial Catering is an exciting milestone for Australian business, providing Civeo with a critical mass of operations in Western Australia and in the oil -- iron ore industry, as well as a substantial base of managed services operations in a positive commodity environment.
Our US segment generated steadily -- steady financial performance in the second quarter, in spite of, slightly softer drilling and completion activity in the Permian and Mid-Con regions. US business produced results ahead of our expectations and we will continue to focus on solid operational execution and winning work.
And with that, I'll turn the call over to Frank for a detailed review of our financial performance.
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
Thank you, Bradley, and thanks everyone for joining us this morning. Today we reported total revenues in the second quarter of $122.2 million, with a net loss on a GAAP basis of $15.3 million or $0.09 per diluted share. During the second quarter, we generated adjusted EBITDA of $26.5 million, and operating cash flow of $3.6 million.
Turning to the second quarter results for our three segments. I'll begin with the review of the Canadian segments performance compared to the prior quarter. Revenue from our Canadian segment was $78.1 million, an increase compared to revenues of $66.8 million in the first quarter of 2019. Adjusted EBITDA in Canada was $16.3 million, an increase from $12.2 million in the first quarter of 2019. Revenue and adjusted EBITDA sequential improvement resulted primarily from the cadence of maintenance and turnaround steadily increasing throughout the second quarter and increased LNG-related occupancy at our Sitka Lodge.
During the second quarter, build rooms in our Canadian lodges totaled 740,000, which was up from 626,000 sequentially due to the aforementioned dynamics. Our daily room rate for the Canadian segment in US dollars was $89 compared to $92 in the first quarter of this year. The decrease in daily rate was primarily related to occupancy based rate reductions related to higher build rooms in the oil sands.
Turning now to Australia. During the second quarter, we recorded revenues of $31 million, up from $28.4 million in the first quarter, due to increased coal production and maintenance activity across our Bowen Basin villages. Adjusted EBITDA was $13 million, up sequentially from $9.9 million. The average daily rate for a -- our Australian villages was flat sequentially at US dollars $74 in the second quarter, which was negatively impacted by the weakening Australian dollar. Build rooms increased from 383,000 in the first quarter to 416,000 in the second quarter due to increased customer activity to the Bowen Basin.
Moving now to the US. Revenues for the second quarter slightly declined sequentially to $13.1 million from $13.4 million. Adjusted EBITDA in the US declined slightly to $2.6 million compared to $2.8 million in the first quarter. While results were relatively flat sequentially, this was in light of a 5% sequential decline in US rig count. On a year-over-year basis, we realized 30% improvement in adjusted EBITDA in the US, primarily as a result of lower relocation expenses for the well site business -- when we moved well site assets out of the northern markets into the Permian and Mid-Continent regions through most of 2018, and increased utilization this year of those relocated assets.
On a consolidated basis, capital expenditures were $11.5 million in the second quarter and $21.2 million year-to-date as we completed the expansion of the Sitka Lodge to support the LNG Canada Project in Kitimat, British Columbia. Our outstanding debt as of June 30th. 2019 was $405.3 million, a $21.8 million increase since March 31st, 2019. The increase resulted primarily from a negative foreign currency translation adjustment of $8.2 million and capital expenditures related to the expansion of the Sitka Village -- Sitka Lodge.
As of June 30th, 2019, we had total liquidity of approximately $33.2 million, consisting of $19.8 million available under our revolving credit facilities and $13.5 million of cash on hand. Looking ahead, financially, we will continue to focus on increasing our contracted revenues, generating free cash flow and reducing our debt.
I will now turn the call back over to Bradley, who will provide some closing comments and talk about our guidance for the third quarter. Bradley?
Bradley J. Dodson -- President and Chief Executive Officer
Thank you, Frank. I'll now outline our guidance for the third quarter and full year of 2019, provide a brief outlook for our business segments, make some closing comments before we open the call for questions.
Our outlook for 2019 is generally consistent with what we articulated on our first quarter earnings call. In Canada, we anticipate sequentially stronger oil sands, build rooms in the third quarter as customers turnaround and maintenance activity continues to ramp up. Now that our Sitka Lodge expansion is complete, the second half of 2019 will benefit from increased occupancy from -- our roughly 11,000 rooms dedicated to the LNG Canada Project. Overall, we expect our Canadian build rooms to improve sequentially in the third quarter before moderating with holiday downtime in the fourth quarter.
Moving to Australia. The outlook in the region leaves us very comfortable with our competitive position and recent investments in refurbished room capacity. Healthy met coal and iron ore prices should support a solid operating environment for our business during the remainder of 2019. In our recently announced four-year contract renewal with BMC, reaffirms our view that customers are beginning to redeploy capital more opportunistically against the constructive commodity price backdrop.
We are also excited to welcome the team from Action Industrial Catering to the Civeo family as we significantly expand our footprint in Western Australia, as well as our Australian service scope to include managing and serving customer owned rooms. Action's managed services business is an excellent fit for our core competencies in hospitality, and open significant organic growth opportunities over the next couple of years.
In regard to Australian segments performance in the second half of 2019, we anticipate build rooms to massively improve in the third quarter before softening during holiday downtime in the fourth quarter of 2019. While the Action Catering acquisition is strategically important, its EBITDA contribution -- and its EBITDA contribution will be positive but not material in the third quarter of 2019 as we integrate their operations. However, we do expect to reach a good run rate of EBITDA in the fourth quarter from that business. Now that we are including Action's operations into our business in the third quarter, we expect to see lower margin profile from the combined Australian business. While Action's business deploys a very similar service model to that -- that Civeo provides in our own villages, Action's business is a pure service business without room rental revenues or margins, equating to a business model with low to no capital investment at lower EBITDA margins.
Moving to the US. We're seeing steady improvement in our performance over the last 18 months. With the recent trend in the US rig count coupled with pressure on US E&P to operate within cash flow, we expect US drilling and completion activity to decrease in the second half of 2019. We're expecting our business to soften going into the third quarter as our well site service business deals with E&P budget exhaustion and we have a contract at Acadian Acres rolling off. We will continue to be -- watch drilling and completion activity in the Gulf Coast petrochemical market as we manage this business accordingly.
On a consolidated basis for the third quarter of 2019, Civeo expects revenues of $142 million to $147 million, with adjusted EBITDA of $30 million to $33.5 million. On a full year of 2019 basis, Civeo expects revenues of $504 million to $514 million, and adjusted EBITDA of $95 million to $101 million. Despite the outperformance in the second quarter, we did not increase our full year adjusted EBITDA guidance as the second quarter performance and the addition of Action Catering are offset by weaker outlook for US activity in the second half, as well as project delays in Australia. The increase in full year revenue guidance was primarily attributable to the recent acquisition of Action Catering. With the expansion of our Sitka Lodge for LNGC, largely behind us, we expect to significantly improve operating free cash flow in second half of 2019.
As we continue to navigate crosscurrents of our key geographic markets, we believe that our strategy is serving us well. Although maximizing free cash flow and debt reduction remain our primary objectives, we will continue to make growth investments when we see -- identify opportunities to drive strong financial returns and enhance our competitive position. We also believe that evolving as a company without departing from what we do best, providing great hospitality. It is critical to our long term success.
As our end markets has stabilized, our team is focused on ways to improve our already best-in-class offering to our customers. We believe our recent contract renewals validate this element of our strategy and we continue to explore opportunities to complement and expand our service portfolio.
With that, we're happy to take your questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions]. We'll take our first question from Stephen Gengaro. Please go ahead sir.
Stephen Gengaro -- Stifel -- Analyst
Thank you, gentlemen. Two or three things I wanted to touch on. The first being your -- when I look at the balance sheet, the receivables seem to rise a lot in the quarter. So I was curious if you could add some color to that as it pertains to cash generation. I mean, any updates on where you stand as you sort of look at your debt levels in your credit facility going forward?
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
Yeah, the -- yeah, Steve, this is Frank. The increase in receivables really was a result of Canada. You see the ramp up in revenue in Canada. That was the largest. That's what really drove that. There was one larger issue that we thought we might collect before the end of the quarter, but we didn't. Most of that has been collected or a big chunk of that increase has been collected here subsequent to the quarter. So again, it's just really -- really just a timing issue related to revenue increase, nothing unusual there.
In regards to the bank situation, the credit facility situation are currently in dialog with the banking group. There's nine banks in that group -- in the group as to an extension of the credit agreement. So that process has been kicked off with current discussions happening. Also talking to a couple of other banks, new banks, that potentially could come in to the credit agreement. We will formally kick off the process to get the acknowledgment [Phonetic] and the extension here in the next week or so with the entire banking group, hoping to completed by the end of August, beginning of September. So hopefully in a month or so, we'll have a -- come back to you guys with the results of that. But the banks have been constructive, even though discussions have gone very well to date.
Stephen Gengaro -- Stifel -- Analyst
Great, thank you. And then as you look at the extension you announced during the quarter -- that was the Australian expansion and then the one you announced today in Canada. You disclosed sort of the pricing? Should we think about the margin profile of those expansions being similar to what we've seen in those two region respectively?
Bradley J. Dodson -- President and Chief Executive Officer
Yes. Yeah. The pricing is consistent with what were on the prior agreements. The -- obviously, the margin side should be consistent. Obviously, we're always trying to work on our cost structure, but nothing in the contrast would indicate lower margins.
Stephen Gengaro -- Stifel -- Analyst
Great, thank you. And then just one final one. I know you alluded to this in the call, Brady, but the strong quarter, the raise in the 3Q guidance versus expectations, kind of muted in that prior third quarter guidance, but expectations were surpassed by your guidance. Is it just sort of a softer fourth quarter when you talked about the US outlook. Is that -- is that all? Is it -- a) is it all US really, then b) is it really just kind of an expectation of what you're -- you're sort of seeing in the market and what E&Ps are are saying, etc?
Bradley J. Dodson -- President and Chief Executive Officer
Well, there are a couple pieces to it, Stephen. I would say that the US does look soft in the back half of this year, we factor that in. The sequential movement from second to third and then third to fourth would be primarily driven by Canadian turnaround activity, we're going to see strong build room improvements second quarter to third quarter, but then see that subside to levels closer to the first quarter level. So in the 600,000 to 650,000 room nights for the fourth quarter in Canada. And then Australia, you'll see a little bit of softness going into the fourth quarter just on seasonality or holiday downtime. Those are the primary drivers. But the big movement, second quarter, third quarter is turnaround activity, and then seeing that reverse into the fourth quarter in Canada, that's the biggest driver.
Stephen Gengaro -- Stifel -- Analyst
And you said -- I missed the number. I'm sorry, did you say about 100,000 rooms -- room nights?
Bradley J. Dodson -- President and Chief Executive Officer
Room nights in the fourth quarter, we're looking about 650,000 room nights.
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
For Canada.
Bradley J. Dodson -- President and Chief Executive Officer
For Canada.
Stephen Gengaro -- Stifel -- Analyst
For Canada?
Bradley J. Dodson -- President and Chief Executive Officer
Yeah.
Stephen Gengaro -- Stifel -- Analyst
Okay. Very good. Thank you.
Operator
Thank you. We'll take our next question from Mike Malouf from Craig Hallum. Please go ahead sir.
Mike Malouf -- Craig Hallum Capital Group -- Analyst
Great. Thanks guys for taking my questions. If we could just start a little bit off on capex. Can you kind of update us on your capex plans here for the back half of the year and into 2020? It seems like you've gotten the bulk of the Sitka side behind you, but just give us some comments on that would be helpful.
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
Yeah, I think -- we're guiding to $40 million to $45 million in capex for the entire year. A lot -- as I said in my comments, you know, we spent about $20 million -- almost $22 million for the first six months. Again, the rest -- there is a little bit more to be spent at Sitka. We do have some expenditures related to the cost of gasoline, which is the pipeline project associated with the LNG project on the West Coast and then it's just normal -- really normal capex, normal maintenance, kind of, capex for the remaining of the year, nothing unusual there. If you go into 2020, you should see that number fall off by $20 million or so -- $20 million or $25 million to get back to the normal levels that we've had in capex. If you look at -- you know, if you go back from -- '16, '17, '18, you're anywhere between $16 million to $18 million of capex during those periods. So that would be kind of the normal level coming down. We'll have a little bit more expenditure on the Coastal GasLink project, the LNG -- pipeline project, but again it'll be normal maintenance capex.
Mike Malouf -- Craig Hallum Capital Group -- Analyst
Okay, great. And then as you look into this extension of the -- on the debt, are we going to see any sort of material change you think, I know it's still early, but on the actual rate?
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
I'm hoping not, Michael. I don't have a clear view yet as to what the so-called demands will be. I think we've gotten comfortable with the aspect of the extension, but I'm not expecting a material increase in the rate based upon the discussions that I've had today.
Mike Malouf -- Craig Hallum Capital Group -- Analyst
Okay, great. And then just a final question. Could you give us a little bit more color on the impact of Action as you sort of -- as we look into 2020. I know that in the third quarter, you're going to get a little bit of a ramp and then into the fourth, but as you sort of look at the synergies and the opportunity next year, can any sense of both top line and EBITDA impact potential would be helpful?
Bradley J. Dodson -- President and Chief Executive Officer
Well, happy to think they've done a really good job of, first of all, it's a great base business, and then they continued to win work there where we're optimistic that with their team and the combination of our team, our ability to continue to win managed services projects will increase. But just from the base Action business, we're expecting about $60 million of Australian revenues next year and about $5 million of EBITDA.
Mike Malouf -- Craig Hallum Capital Group -- Analyst
Okay. And then as you look into the synergies, there's obviously upside to that, it's some of the joint bids you guys have in place or can you talk to us all about the upside there?
Bradley J. Dodson -- President and Chief Executive Officer
We'll continue to drive the upside. It's certainly -- if you think about it as we've noted in the press release for the acquisition about Australian business in rough numbers, we do about 1.6 million room nights a year, that's what we've been running, and that's a good number for 2019. Action alone adds 900,000 room nights of managed services. We're taking care of guests in customer owned rooms. So in -- to your point, it's a material amount of buying power for us, particularly in Western Australia. So we will continue to focus on driving those cost synergies and I think there is upside from those numbers.
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
Yeah, and the other side of it, there could be some upside as -- we do -- we have been doing some bidding on integrated service or catering facility management type of projects on the other side of Australia in the Bowen Basin, with the acquisition of Action that really help strengthen our resume. So we're hoping that we'll see some increased activity also from those type of the catering and facility management of contracts on the eastern side of Australia in our core markets, where we have our villages there, we've been attacking that -- other piece of that market, meaning the catering and facility management piece of it, but this really helps us give us some better resume to win some of that work.
Mike Malouf -- Craig Hallum Capital Group -- Analyst
Okay, great. Thanks for the help. Appreciate it.
Bradley J. Dodson -- President and Chief Executive Officer
Thank you.
Operator
Thank you. [Operator Instructions]. There are no questions at the moment, Mr. Nielsen.
Regan Nielsen -- Director of Corporate Development and Investor Relations
Well, thank you all for joining us on the call today. We appreciate the interest in stock and look forward to speaking to you on the third quarter earnings call. Have a good day.
Operator
[Operator Instructions].
Duration: 28 minutes
Call participants:
Regan Nielsen -- Director of Corporate Development and Investor Relations
Bradley J. Dodson -- President and Chief Executive Officer
Frank C. Steininger -- Executive Vice President, Chief Financial Officer & Treasurer
Stephen Gengaro -- Stifel -- Analyst
Mike Malouf -- Craig Hallum Capital Group -- Analyst
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