Foraco International SA (FAR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Foraco International second quarter results conference call. [Operator Instructions] I would now like to hand the call over to your speaker for today, Daniel Simoncini. Thank you. Please go ahead.

Thank you. Thank you for joining us on our Q2 2020 results conference. I am Daniel Simoncini, Chairman and CEO of Foraco, and with me today is Vice CEO and CFO, Jean-Pierre Charmensat. The news release of this result was issued this morning prior to the opening of TSX through CNW Newswire. If you did not receive a copy of the release, please visit www.foraco.com. After the outline of financial results, we will open the call for questions. When we last addressed Foraco quarterly results back on May 1, the world total reported case of COVID-19 contaminated people were just above 3 million. As we speak, we have passed the 17 million-mark 90 days later or 155,000 new reported infections per day. Over the quarter, 34 Foraco employees have been reported tested positive, 32 of them being in Russia. Out of this 34, all have recovered, except 2 who are still under medical monitoring. We maintain a very strict sanitary protocol throughout our different branches, and we work closely with our customers to maintain the highest barriers against the virus spread. The impact of the pandemic on our activity in Q2 was relatively limited in our main operation centers. And overall, we continue to outperform the market growth with a 3% decrease adjusted for currency fluctuations when compared to Q2 2019, and we posted revenue of USD 47.4 million this quarter. Some operations were suspended throughout April. But as soon as May started, we were able to resume some operations and did not receive any significant cancellation orders during the quarter. Our utilization rate was 47% this quarter compared with 50% a year ago. We continue to steadily grow our water-related business in Canada, Australia, Chile and Africa. And this now represents 15% of our quarterly revenue. Foraco expertise is now fully recognized, and many customers rely on us for the monitoring of the use of their groundwater resources. The profitability of our operation was quite satisfactory this quarter, and we reached a 23% gross margin, which is an 8-year high. I will now pass the conference to Jean-Pierre, who will walk us through the financials in more detail. Jean-Pierre?

Thank you, Daniel. Good morning, everyone. Revenue for this quarter amounted to USD 47.4 million compared to $54.1 million for the same quarter last year, a 12% decrease, but only 3% excluding the effect of foreign exchange fluctuations. By reporting segment, we recorded a 40% increase in the water segment, mainly in Africa, Australia and Canada. Water represented 15% of Q2 revenue. The impact of COVID-19 on the Q2 '20 revenue has been uneven between regions. The pandemic particularly affected the activity in North and South America, but the activity remains solid in other areas. EMEA, North America and Asia Pacific were the most active regions. In EMEA, revenue for the quarter was $17.8 million compared to $15.9 million in Q2 '19, an 11% increase. Africa increased 5%, thanks to the continuation of deepwater wells contracts. And Europe, mainly Russia, 15% in the mining segment. In North America, Canada, the activity decreased at USD 11.6 million in Q2 '20 compared to USD 15.4 million in Q2 '19. This is mainly due to disruptions affecting a certain number of contracts linked to the COVID-19. This we resume in Q2 -- in Q3 '20. Asia Pacific recorded a 14% increase in revenue and 24% at constant exchange rates. Revenue in South America decreased by 48% compared to Q2 '19 or 31%, excluding the adverse foreign exchange impact. The activity in Brazil was particularly affected by the effect of the pandemic, which disrupted the commercial and operational activities and was also affected by the foreign exchange rate. In Q2 '20, the geographical activity split was: EMEA, 38%; North America, 24%, Asia Pacific, 24%; and South America, 14%. During this quarter, all the financial indicators improved compared to the same quarter last year. The gross margin, including depreciation within cost of sales as per IFRS rules was a profit of USD 11.2 million, 23.6% of revenue versus $8.5 million or 15.7% of revenue for the same quarter last year. This increase is mainly due to improved performance on contracts. SG&A decreased to $5.1 million, minus 7% compared to the same period last year. The EBIT, our operating result was $6.1 million profit versus $3 million in Q2 '19. And the EBITDA amounted to $10.2 million compared to $7.3 million in Q2 '19. As a percentage of revenue, 21.5% in Q2 '20 versus 13.6% for the same quarter last year. Now on a 6-month basis, revenue amounted to $97 million compared to $99.3 million in H1 2019, a 2% decrease, but a 6% increase after adjusting for currency fluctuations. Revenue increased 9% in Asia Pacific and 31% in EMEA, while South America and North America, respectively, decreased by 30% and 13% due to disruption of the commercial and location activities in Q2 '20. The year-to-date 2020 gross profit was $16.4 million versus $12.7 million for the same period last year, a 29% improvement mainly due to the increased performance on contract and strong cost control. Year-to-date 2020 EBIT was a positive $6.2 million compared to $2.1 million for the same period last year, mainly as a result of the increased gross margin. And the year-to-date 2020 EBITDA for the 6 months period was a positive $14.6 million compared to $10.8 million in the same period last year. In H1 '20, the cash flow generated for operating activities was $14.6 million compared to $10.8 million during the first 6 months of '19 mainly due to the increased margin. Working capital requirement was $2.2 million versus $0.2 million for the same period last year. During this 6-month period, CapEx amounted to $4.1 million in cash compared to $5.7 million in cash in H1 '19. This CapEx relates to major rigs overhauls, rods, and ancillary equipment. The free cash flow before debt servicing was USD 7.4 million positive in H1 '20 compared to $3.3 million positive in H1 '19. As of June 30, 2020, our net debt, including the effect of IFRS 16, amounted to $127.7 million compared to $131.3 million at the end of Q1 '20 and $128.9 million at 2019 year-end. We met our covenant as at June 30, 2020. So during Q2, to strengthen our cash position, in addition to the internal measures taken, we have secured the low interest credit lines guarantee by the French government. The drawing of these funds are still subject to an agreement with our lenders on certain additional conditions. I will now return the call to Daniel for his closing remarks. Daniel?

Thanks, Jean-Pierre. Three months ago, we anticipated that our Q2, if you remember well, would be significantly impacted by the diverse lockdowns and social distancing and other procedures and protocols imposed by the government where we operate. But finally, we were able to weather these adverse conditions much better than expected, thanks to the close cooperation we developed with our customers and the dedication and passion of our employees for their work, which allow us to deliver a good execution of our contracts. The situation remains very volatile as the recent outbreaks in Victoria, Spain, Hong Kong and the worrying situation in Brazil and U.S.A. are here to remind us the virus is still circulating at great pace, and nothing is really under control yet. We are focused on our employee health and safety and the best possible execution of our contract pipeline. While it is way too early to get any vision of the type of recovery the world economy will experience, we're confident that our mix of commodities, including water, and our client portfolio will help us to go through the challenging period to come. Thank you for listening. I will turn now the call to the operator, who will take the first question for our listening audience. Operator?

[Operator Instructions] And our first question is from Steven Green with Ordinance Capital.

You're doing -- I got to commend you doing a fabulous job, obviously, in the difficult economic situation, but also keeping your employees safe. I'm sure the one outbreak you had was very concentrated, the one is it was all in one place. So thank you for keeping all the employees safe around the world. Question -- obviously, the big question I have is about the debt. And I know that, obviously, since you had talked to the debtholders about taking on the additional credit lines from the French government, you're in direct negotiation or contact with the debtholders. Have you guys made a plan? Have you guys -- are there any identified lender who can come in and help us solve this debt? And is it -- am I mistaken to think that the debt, which was trading at, I don't know, 20 cents on the dollar or less when they bought it, can be taken out for less than par?

Your question is a kind of double question. Number one, the French government, soft loan facility, something that everybody in France is eligible, providing that you are in corporate and blah, blah, blah, and it's a small amounts, okay? You're talking about USD 3 million, USD 4 million, okay? Under our current major debt lending agreement, we have to get the okay from our existing lenders to take on more debt if we need them. So this is what Jean-Pierre was referring to. And we got the okay from the government, okay from the bank, and we are still chitchatting with our lenders who are a bit, let's say, a bit difficult and greedy on certain aspects of the thing. That's number one. Number two, regarding the main debt. The main debt is still in place. They bought it at whatever the 20, 25 cents on the dollar. And we have to sit down with them and to decide what to do with it. Either we buy them out with new money lenders, or we find a deal with them. Indeed, you understand that the COVID pandemic has frozen a lot of things, obviously, because everybody now is focused on getting a good P&L, restoring the cash position, maintaining the employees' health and safety, blah, blah, blah. So we have been, let's say, freezing this kind of task. And since, let's say, I would say, mid-March. And we don't anticipate to work on it before, let's say, before Q4. But it's not on the back burner and cold. It's -- we have a definite, let's say, ambition to go back to the job, that job by end of Q3 and early Q4. This is dictated also by the general, let's say, the general market condition on the lending side of the financial market where the people are all -- the lenders, potential lenders or debt restructures are also a bit anxious to see how the company is doing through the COVID time, okay? And I think our Q2 and, hopefully, our next Q3 will show them that our business model resilience is good. And therefore, they can look at through the Foraco file with a positive look, okay? But so far, we stopped working on that for the last 5 months. And it's going to take another 2 months or 3 before we go back to that. Have I answered your question, Steven?

Yes. Just do you foresee -- I know that you said the lenders are greedy, but do you foresee them refinancing or being taken out by other people at less than par, less than 100 cents on the dollar? They bought it for $0.25. They wouldn't take 50 or 60 cents on the dollar and move on?

This is yet to be discussed. We -- if we cannot exit at less than the par, then we better stay with them, okay? So it's going to be a negotiation. It's going to be a kind of market situation, whether or not there is some capital available, what kind of pricing, blah, blah, blah, before. But we are, let's say, we're optimistic that we can find deals because, basically, at the end of the day, what everybody does in this business when you are a lender is you want to get your money back and make a profit, okay? So I think reason will prevail at the end, providing that the market is back and providing that Foraco's business model is proven to be resilient.

I think it is.

Your business model is doing well. How does -- the bidding season is coming up, right, in the fall here?

Well, traditionally, yes, Steven. But I can tell you that now it's a kind of standstill in many places. Brazil is starting a bit early. Russia has been late. Canada can be muted, et cetera. So there is a kind of general disconnect between the different mining regions in the world. We don't think that we will have a kind of massive bidding season all compressed between November and February, but rather something which will be more extended. For instance, we are currently discussing with certain customers to extend our current contract another year or 2 because they are stressed by the COVID. They don't want to launch a big, massive bidding tender contest. They are happy with us, and we try to negotiate on a pure amicable basis. So it's yet to be confirmed whether or not we're going to have a bidding season per se. Obviously, when the budget will be -- 2021 budget will be approved within our customers, some tender will go out. But would it be as massive as before? We don't know. And remember, we own over more than 40% to 50% of our business from 1 year to the other one, okay?

So it will be -- there will still be businesses to be less compressed into the bidding season.

Yes. Yes, exactly.

But I feel like Newmont, Vale, STX, their stocks, they're doing great, seems like. The gold prices are up and they seem -- they are increasing their capital investments, do you think? Majors?

I would say if they're not increasing it, they are maintain it -- maintaining it at 2019 level, which was already quite good. So I mean, the sentiment is not bad. Everybody is a bit worried about the virus, of course. But the sentiment as far as the metal prices is not bad to say the least, for the moment.

You're doing good. Do you do silver business as well as gold or just gold?