Good day, and welcome to the Civeo Corporation second quarter 2020 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Regan Nielsen, senior director of corporate development and investor relations. Please go ahead, sir.

Thank you, and welcome to Civeo's second-quarter 2020 earnings conference call. Today, our call will be led by Bradley Dodson, Civeo's President and Chief Executive Officer; and Carolyn Stone, Civeo's Senior Vice President, Chief Financial Officer, and Treasurer. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain information other than historical information, please note that we're relying on the safe harbor protections afforded by federal law. Any such remarks should be read in the context of the many factors that affect our business, including risks disclosed in our Form 10-K, 10-Q and other SEC filings. I will now turn the call over to Bradley.

Thank you, Regan, and thank you all for joining us today on our second-quarter earnings call. We sincerely hope that you and your loved ones are staying safe and healthy. The format for today's call will be to briefly review the second-quarter performance before updating you on what we see in our business today and providing an outlook for the balance of the year. Let me start by saying at Civeo, the safety and well-being of our employees, guests and contractors is our top priority. As we continue to monitor the virus in Canada, Australia and the U.S., we are continuing to adhere to the policies and procedures that are designed to ensure the health and safety of everyone at our locations. We'll remain -- we remain in continuous dialogue with all key stakeholders for the duration of the pandemic, and we extend our profound gratitude to our employees, guests, customers and vendors for their continued vigilance as we work together through this difficult time. There are two key takeaways from our call today. First is the resiliency and diversification of our business. Our second-quarter results demonstrate the resiliency of our business model and the benefits of our diversified exposure to multiple geographies and multiple end markets. Although our second-quarter performance benefited from a few onetime items, the Australian and Canadian segments both performed much better than we initially expected and particularly in light of the market environment. Secondly, our safe operations and our business model delivered differentiated financial results in this market. These differentiated financial results support our financial focus, which has not changed: drive free cash flow and reduce our debt. We generated 25 million of free cash flow in the second quarter and reduced our total debt outstanding by 15 million. We also reduced our leverage ratio…

Thank you, Bradley, and thank you all for joining us this morning. Today, we reported total revenues in the second quarter of $114.7 million, with net income on a GAAP basis of 6.1 million or $0.03 per diluted share. Net income includes 4.7 million of income associated with the settlement of a representation on warranty claim related to the Noralta acquisition. During the second quarter, we generated adjusted EBITDA of 28.1 million, operating cash flow of 24.5 million and free cash flow of 25.1 million. Let's now turn to the second-quarter results for our three segments. I'll begin with a review of the Canadian segment performance compared to their performance a year ago in the second quarter of 2019. Revenue from our Canadian segment was $53 million as compared to revenues of $78.1 million in the second quarter of 2019. Adjusted EBITDA in Canada was $15.3 million, a decrease from 16.3 million in the second quarter of 2019. Revenues and adjusted EBITDA for the quarter were both negatively impacted by a year-over-year decrease in billed rooms related to reduced customer activity due to the decline in oil prices and the COVID-19 pandemic. Adjusted EBITDA was also impacted by COVID-19-related increases in operating costs of $1.9 million in the second quarter of this year. However, the effect of these items on adjusted EBITDA was muted by 6.2 million of other income related to proceeds from the Canada Emergency Wage Subsidy, or CEWS, as well as a $1.7 million gain from the sale of a portion of our assets at our Henday Lodge. During the second quarter, billed rooms in our Canadian lodges totaled 410,000, down year over year from 740,000 for the same quarter of last year. This decline was related to significantly lower customer activity as discussed earlier due to…

Thank you, Carolyn. We'll go through each of the segments, and then I'll summarize what we're thinking about for the full year of 2020. In Canada, the outlook for the remainder of 2020 is stabilizing. Although customers continue to limit their employee headcounts to essential personnel, we are anticipating modestly higher occupancy in the third quarter from second-quarter levels. The third quarter started off with improved occupancy in Canada due to oil sands turnaround activity, and occupancy at our Sitka Lodge is also a source of modest sequential improvement in the third quarter as room nights should be up relative to the second quarter. But Sitka's occupancy will be subject to social distancing and related headcount constraints. All of the above should translate into a roughly 10% increase in occupancy in the third quarter from the second quarter. Regarding the Canadian Emergency Wage Subsidy program, the government of Canada recently indicated its continued support of this program through the end of the year. We currently expect to apply in the third and fourth quarters of 2020, and we should qualify and expect to receive some subsidies in the second half of the year. However, we have not included any of the forecasted proceeds from the CEWS in our full-year guidance. But due to the CEWS proceeds and a gain on sale in Q2, we are currently estimating sequentially reduced EBITDA in the Canadian business in the third quarter despite increased billed rooms. The outlook for the Australian business in the third quarter is very constructive. As the economic and supply chain impacts the steel production received in China and India, demand for seaborne metallurgical coal imports should recover modestly as 2020 progresses. Iron ore supply disruption due to worsening pandemic in Brazil should benefit Australia with a healthy price environment,…

[Operator Instructions] Our first question today comes from Stephen Gengaro of Stifel. Please go ahead.

Thanks, and good morning everybody. The -- so when I look at the guidance that you gave for the second half of the year on the EBITDA side, it's clearly better than where I think we were and where the consensus was after a really good second quarter, but the second half looks better. When you look at the second half and I think about free cash flow generation, what are the puts and takes? And how does working capital -- how do you think working capital acts in the second half of the year?

We should remain, as I mentioned, we should remain free cash flow positive. We can have some working capital shift kind of Q2 to Q3, particularly around -- we have our insurance renewals for the entire program, both cash flow and financial and property. And we also have property tax payments that are due, primarily in Canada. So there may be some use of working or working capital will be a cash outflow in the third quarter. I'd say on balance, it might be a slight outflow in the second half, but it's less than $5 million, I would say, in total.

And then you -- in a better spot here, obviously, from an EBITDA perspective, the leverage ratio has come down a bit. When you are having conversations now with the banks, and it doesn't appear you need any amendments, does that -- how does it change the conversation or does it when you're talking about extensions or redoing the bank agreements going forward?

Carolyn, do you want to tackle that?

Sure. Thanks, Bradley. Stephen, well, as you can imagine, as you alluded to, despite the fact that we don't think we need covenant relief and we don't intend to pursue covenant relief at this point, we do have a maturity coming up in November of 2021. So we will be working with our bank group over the next few months to address that maturity. And I'm not sure that it changes the conversation significantly other than the fact, obviously, it's better for all of us that we are looking at having lower leverage over the current term, as well as the potential -- any potential extension. So we have a very supportive bank group and we fully expect to support us as we enter into those discussions in -- over the course of the next few months.

Okay

And I'll just add to that that Carolyn and her team are in -- as you can imagine, there's some uncertainty in a lot of conversations with the banks, not necessarily weekly, but very often. And so our lenders have seen the progression of the forecast. So obviously, we're moving in the right direction. Being free cash flow positive is differentiating among many oilfield service credits that they have in their portfolio. Continue to reduce aggregate leverage is also a positive. So they're fully informed. They're fully aware that -- of our situation. And generally, our story has played out better than we initially expected. And the cash flow generation profile of the business, I think, is obviously important to the lenders.

[Operator instructions] Our next question comes from Kurt Hallead of RBC.

Good morning. Just on the guidance, Bradley, just want to get a little bit more clarity on it. In your reference on the guidance, you said that the EBITDA numbers do not include any additional benefit from the Canadian dynamic, Canadian benefit dynamic. In the second quarter, your EBITDA -- adjusted EBITDA number did include, as you mentioned, over $7 million of kind of onetime items. So I guess my frame of argument here is when you look at the full year EBITDA, does that $80-plus million of EBITDA include that onetime benefit in the second quarter?

It does. So we reported 20.3 million of adjusted EBITDA in Q1. And then you're right, we had 28.1 million of adjusted EBITDA in the second quarter. So that 48.4 million would be the first half number that would go into the 80 to 85 for the full year.

And then it would appear to me there's going to be a substantial drop-off in Canadian EBITDA in the back half of the year. Probably having to run less than 5 million a quarter to kind of keep you in the range of that 80 and 85 million. So I just wanted to just try to kind of make sure I was understanding the progression correctly.

Well, so in the Canadian EBITDA in the second quarter, we had the 7 million plus, let's call it, 8 million of onetime items. So you take those out of the 15.3 million, about $8 million of EBITDA in Canada in the second quarter at an operational level. And while that's -- that's significantly higher than what we were thinking 90 days ago. So what happened in the second quarter, occupancy at the Sitka Lodge was materially better than we were anticipating. And as we talked about a little bit in our prepared comments, we saw the turnaround activity start to kick in, in June primarily, and that will continue into the third quarter. So implicit in the guidance for Canada is essentially flat EBITDA from there for the rest of the year, both third quarter and the fourth quarter. So I don't think that's herculean in terms of an assumption. I think there are probably some opportunities. As I mentioned, we should get some CEWS proceeds. So the reported adjusted EBITDA should be better. And should we see occupancy, particularly on the turnarounds, extend longer, we could have some upside there. So I think five is too low.

I appreciate that additional info. Just one last thing. So you mentioned that you expect to be free cash flow positive during the course of the second half of the year. And also just want to make sure I heard you expect still to spend -- have capital spending, about $15 million on a full-year basis?

That's right. We've got a handful of projects, particularly in Australia, in order -- as we see occupancy continue to stay strong there that we need to put some money to work there. That's the biggest piece of it. We'll have a little bit of capex in the second half for Canada as it relates to the coastal gasoline pipeline and our mobile camp work that we're doing to support that.

Got you. And any plan for that cash flow to continue to reduce debt?

That's right. Yes, we need to continue to move the aggregate leverage lower and continue to delever the company.

Right, I appreciate that color. Thank you.

Thank you.

Our next question comes from Stephen Gengaro of Stifel.

Thanks. Just two quick follow-ups. One is on the Australian side, I know Australia has, clearly had a good trend in the second quarter as well. Can you give us an update, just any more details on how that plays out in the back half of the year? And it seems like just from the breakout in the press release that the Action acquisition showed a really nice improvement in the second quarter. Can you add some color there?

Sure. I was very pleased with the -- on the base business in terms of the room nights in Australia and our villages there. I was very pleased with the performance there. We're being conservative in our second half guidance for Australia. We had -- a couple of things happened. We had customers taking more rooms above and beyond the take-or-pay minimums. We also had, in conjunction with that, some billed but unused rooms. We're assuming that as they tried to control availability there, and so we're being conservative in terms of our margins for the second half in Australia. I think there could be upside on that. But I think it's -- one of the things is, we could see margins come in a little bit if the rooms are occupied. So I think Australia's doing very well. I think one risk that we've got to continue to watch, the pandemic impact in Australia is not on the same scale as what we're seeing in other countries, particularly the U.S., in Texas, on its own. And so we need to see the COVID impact continue to be minimal. We've not had any reported cases at any of our locations there, knock on wood, and that could really impact occupancy if they were to see an outbreak there. I think the government has done a very good job in containing things. I don't think that's likely, but it certainly is a risk to the profitability of that business in the second half. Action's done exceedingly well. Again, this is a catering business we bought in July of last year with predominant operations in Western Australia, serving the iron ore markets there. We've seen customer occupancy still above our initial expectations in the first half, and we expect that to continue in the second half. The team has done a very good job in both winning new work and renewing contracts. So our expectations for that business are double what we budgeted for the year. And the team has done a very good job, and it's largely on volume and contract rewards.

As there are no further questions at this time, I would like to hand the call back to Mr. Dodson for any additional or closing remarks.

Thank you, Kevin. Thank you all for joining the call today. I hope you all remain -- stay safe and healthy as we continue to work through this as a country and a globe. And we look forward to speaking to you on the third-quarter call.

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.