Foraco International SA (FAR) Earnings Call Transcript & Summary

Good morning, and welcome to Foraco International's Second Quarter 2026 Results Conference Call. [Operator Instructions] I will now turn the call over to Tim Bremner, Chief Executive Officer. Please go ahead.

Thank you, Joanna, and good morning, everyone. Thank you for joining us today to discuss Foraco International's results for the second quarter ending June 30, 2026. Joining me on the call is Fabien Sevestre, our Chief Financial Officer, who will review the financial results and the key drivers of our performance. Before we begin, please note that our remarks and presentation may include forward-looking information, which is subject to unknown and known and unknown risks and uncertainties. The market backdrop entering the second half of 2026 remains constructive. Global nonferrous exploration budgets reached approximately $12.4 billion in 2025, recovering from multiyear lows, and drilling activity has continued to build momentum in 2026. Gold prices near record levels are supporting a significant increase in exploration spending with gold representing approximately half of global exploration budgets. At the same time, customers remain focused on near-mine and brownfield programs, which now account for a record share of exploration investment. These programs generally offer lower geological risk, shorter development time lines and strong demand for technically capable drilling services providers. Longer-term fundamentals also remain supportive. Structural supply constraints in copper, cobalt and silver, together with demand associated with electrification, energy infrastructure and artificial intelligence are encouraging customers to invest in resource expansion. Improving access to capital for junior and intermediate mining companies is also contributing to a broader recovery in drilling activity. Foraco is well positioned in this environment through a diversified portfolio of Tier 1 and junior customers, exposure to attractive commodities and a broad range of mining and water drilling applications. Turning to the quarter. Foraco delivered strong year-over-year growth. Revenue increased 22% to $84.5 million compared to $69.1 million in the second quarter of 2025. The increase was driven by higher activity in Canada, the United States and South America. EBITDA increased 7% to $15 million, reflecting the significantly higher level of activity across the group. Rig utilization increased to 51% compared with 35% in prior year quarter, demonstrating strength of the recovery and the operating leverage available in the business. With that brief overview, I'll now turn the call over to Fabian for the financial review. Fabien?

Thank you, Tim, and good morning, everyone. As a reminder, Foraco reports under IFRS and all financial figures are presented in U.S. dollars. Revenue for the second quarter reached $84.5 million compared with $69.1 million in the prior year period. This represents the strongest quarterly revenue since the second quarter of 2023. Gross margin was 15.5% compared with 20.5% in Q2 2025. The year-over-year reduction primarily reflects higher labor and consumable costs, mobilization expense and lower operating efficiency during the early stage of several significant contract start-ups. EBITDA was $16 million (sic) [ $15 million ] or 17.8% of revenue compared with $14 million or 20.3% of revenue in the second quarter of 2025. Our record backlog provides strong revenue visibility through the second half of 2026 and beyond. Profitability remains our key focus and margin recovery is underway, while quarterly trends show accelerating momentum. Mining revenue increased 23% year-over-year to $70.5 million, while Water revenue increased 21% to $14 million. The reporting segment mix remained stable with mining representing 83% of revenue and Water representing 17%. By geography, North America generated revenue of $32 million, an increase of 28% compared with the prior year period. The improvement reflects strong activity and the ramp-up of new contracts in both Canada and the United States. South America increased 94% to $22 million. This performance was supported by the successful mobilization of several projects across the region. Our overall geographic mix remains well diversified with 38% of revenue generated in North America, 27% in Asia Pacific, 26% in South America and 9% in EMEA. Our commodity exposure was also diversified. Precious metals represented 34% of revenue, copper 18% iron ore, 12% nickel, 9%; coal, 8% and other commodities 2% and water 17%. Tier 1 customers represented 82% of revenue and juniors -- looking at the first 6 months of the year, revenue reached $161 million compared with $124 million in the first half of 2025, representing growth of 22%. For the 6-month period, gross margin was 13% compared with 18% in the first half of 2025, reflecting the same temporary factor discussed earlier. Year-to-date EBIT was $10 million compared with $12 million in the first half of last year, while EBITDA represented 15% of revenue compared with 17% a year ago. Turning now to cash flow and the balance sheet. Working capital increased to $15 million, reflecting the higher level of activity, the ramp-up of new contracts and the associated timing of receivables and project mobilization. This increase is consistent with the significant growth of the business during the period. Capital expenditures was $16 million during the first half related to the addition of 6 new drilling rigs and the supporting equipment required to execute our record $404 million order book announced at the beginning of the year. These investments are fully aligned with our long-term growth strategy and position the company to deliver this expanding backlog efficiently. As expected, net debt increased to $85.7 million, reflecting both the temporary working capital investment associated with our growth and our capital expenditure program. Importantly, our financial position remains strong, supported by $22 million of undrawn committed credit lines, providing ample financial flexibility to support future growth. With that, I will turn the call back to Tim. Tim?

Thank you, Foraco delivered strong second quarter revenue growth, reflecting a broad-based recovery across both our mining and water segments. The increase in rig utilization from 35% to 51% confirms that demand is translating into substantially higher activity across the group. Our record backlog provides strong visibility through the second half of '26 and beyond. Importantly, this growth is diversified across commodities, customers, geographies and drilling applications with 82% of the revenue coming from our Tier 1 customers. Our immediate priority is margin improvement. Pricing adjustments are progressively catching up with higher labor, consumable, fuel and transportation costs. At the same time, recently mobilized projects are moving through their start-up phases and should become more efficient as they mature. The operating leverage in the business remains intact. At 51% rig utilization, we retain meaningful capacity to support additional growth with relatively limited incremental fixed cost. Further utilization gains, combined with better pricing and stronger project execution should support progressive EBITDA margin recovery towards the levels achieved in 2023 and 2024. The market outlook remains supportive. Gold prices are near record levels, structural supply deficits in copper and cobalt, increasing near-mine investment and improving financial conditions for junior and intermediate companies are all supporting sustained drilling demand. Water-related drilling also remains strong and continues to provide an important diversification. We will remain disciplined in how we pursue this opportunity. Our focus is on operational execution, pricing, margin improvement, capital allocation and cash generation while continuing to invest selectively in our fleet and our people to meet the long-term customer demand. In summary, Foraco enters the second half of 2026 in strong -- with strong revenue momentum, record backlog visibility, significant operating leverage and a clear path towards margin recovery. We believe these factors position the company to deliver substantial earnings and cash flow growth and create long-term value for our shareholders. Operator, we can now open the call for questions.

[Operator Instructions] First question is from Donangelo Volpe at Beacon Securities.

Congratulations on the results. I just wanted to hone in on the margins a little. So when we're looking at the year-over-year compression, I'm just wondering if it's possible to quantify how much is coming from labor and consumables inflation versus kind of lower initial productivity on new projects? Just trying to get a better perspective on how to look at the margin ramp-up through the remainder of the year and into 2027.

It's a mix of both Donangelo, depending on the geography. And it's also a factor that the growth has not kicked in, in Australia yet, which is traditionally one of our higher-margin regions. That was more or less flat year-over-year. But it's a combination of the ramp-up of new projects in all regions, North America, particularly in the U.S., some in Canada and some in Latin America. But throughout the first half, there's been a serious inflection in pricing that's really outpaced cost increases for bits and other consumables and some labor that has really outpaced inflation. And we're seeing the drag-on effects of that. And as I mentioned earlier, we're in the midst of adjusting pricing on some existing projects and certainly pricing new projects at the appropriate level to accommodate these new increases. So the gap between now and last year was about 5%. And as I said, it's a combination of both. And as we work through the ramp-up on all the projects, particularly in South America, which were through, that cause of effect would be eliminated, and we're catching up on pricing. So you can -- we -- as I said, we're focusing on margin improvement, and we expect that to improve for the second half.

Okay. I appreciate the color there. And then I guess just pivoting a little bit to the outlook. So we've been tracking kind of stronger mining equity markets, which kind of began at the end of last year. Just wondering if you're starting to see increased tendering from juniors and intermediates at this moment and which commodities or regions are you seeing the greatest improvement?

The tender pipeline is still very -- it's actually overflowing in some areas. It's very robust across all commodities, all customer profiles, juniors, intermediates, seniors. It's a pretty frothy market.

[Operator Instructions] Frederic Tremblay from Desjardins.

I just wanted to ask first on the -- just the pricing dynamics. Can you comment on the magnitude of the price escalation that you're targeting? And if you believe that, that will fully cover your inflation pressures that you're seeing?

Well, Fred, I can't comment on any specific ones because those ones are confidential. But what I can say is some of the cost inputs that we're seeing and the inflation that we're seeing in the sector, labor is up over 10%, 15% in some regions. The biggest price increases we've seen in drilling consumables is coming from our cutting tools, drill bits, whether it's core bits or destructive drilling tools, Silver, tungsten are the biggest drivers of that. So in order to offset that, we have to look at increases that are going to cover that. They're going to be double digit. And depending on the project, the region, the geology that we're going through, there's some variance in that. What I can state is that none of those cost increases have been recognized in the first half, so they're yet to come.

Okay. Yes, that's super helpful. And just in terms of, I guess, your expectations for timing, you say nothing was recognized in the first half. How should we think about the price increases playing out in the second half and into 2027?

So those discussions with our customers who are certainly understanding of our situation as they are of the entire industry. They're getting it from other suppliers as well. So those discussions are ongoing and with some earnest because they want to make certain that they can get their work done. And that means being able -- that means for us to be able to supply the people and to be able to deliver the work safely and efficiently. And they certainly understand that dynamic of our business and are working with us very collaboratively.

Okay. And the last one, if I may, just on the cash flow dynamics. Can you speak to working cap trends as we head into the second half as well as CapEx needs to support the growth and implications for free cash flow generation going forward?

So the free cash flow for the second quarter was $7 million. We're still running since the beginning of the year with a minus $13 million in free cash flow, but with a huge investment because the investment was $16 million, of which $8 million is related to contract to perform on the second part of the year. And in addition, we have our $14 million working capital linked to the increase of the level of activity. So the working capital is the seasonal working capital will be reversed in the second part of the year. And the investment will be lower for the second half of the year. So all of that will recover all the investments during -- before year end.

Stephen Green with [indiscernible].

Look, I won't dwell on -- I guess everybody dwelled on the profit, and I guess you've explained what's happening. And hopefully, these investments pay off. Can you just talk about -- did you get any new contracts or extensions of existing contracts in the first half of the year?

So there's been a combination of extensions, renewals and new projects, all 3. And some of those don't meet the threshold for materiality for a press release, Stephen. So that's why there hasn't been any. And some have yet to be formalized. We have a letter of intent. We have a letter to proceed, but the documents actually have not been signed. So the ones that are material, we have not been in a position to put out a press release. So what I tried to convey is the fact that our order book continues to grow. We stated an order book of $404 million at January 1 or on our first results call for the full year of 2025. And despite burning through $151 million of that order book in the first half, we still have a record order book. So there is -- there have been a significant amount of new business that we've put into the order book. And we continue to receive a lot of tenders. We can't respond to all of them. In some cases, it's because we don't have the right equipment available in certain regions. or they don't fit the profile of the crews that we have available. So there's a lot of work that is being tendered that we're not able to respond to. But the absence of announcing new projects does not mean that the business -- the order book has not increased significantly.

All right. And then I was going to ask about the debt. The debt went up pretty much significantly this quarter. Is that just borrowing for investment, and we're going to start paying that down again?

The debt will be reduced before year-end. We are impacted by our working capital that we need to finance. So this will reduce automatic the debt, improve the cash flow. And with the EBITDA that we are generating now, there is a lot of room to decrease our debt as we stated in our financial statement.

Okay. And what's your -- I mean, do you have a goal to get to $50 million? Or I mean what's the ideal ratio?

We don't have a specific target, Stephen. We want to get the leverage ratio to acceptable level. We're going to -- we're not looking to repay all the debt. The debt today is manageable. We want it to be more manageable for sure. And debt reduction remains the #1 pillar of our capital allocation policy. But that doesn't mean we're going to pay the debt down to 0. Absolutely not. So we'll get it to a more manageable level before year-end and continue growing the business.