Foraco International SA (FAR) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Foraco International SA Fourth Quarter 2020 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Mr. Daniel Simoncini. Please go ahead.

Thank you, Amy. Thank you all for joining us on our Q4 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 these results was issued this morning prior to the opening of the TSX through CNW Newswire. If you did not receive a copy of the release, please visit our site, www.foraco.com. 2020 has been incredibly challenging for billions of people and now more than 150 million people got infected. 2.5 million died of it. Despite all precautions in place, our teams lost it's first member from COVID, early last month, in Brazil. And we still have 11 employees who are still under medical monitoring in Russia and Brazil, out of the 178 Foraco employees who tested positive since the beginning of the pandemic. We hope with start vaccination campaigns will soon [indiscernible] COVID much less worrisome. And meanwhile, we continue to maintain a very strict sanitary protocol throughout the company to maintain the highest barriers against the virus transmission, but the last most detected contamination occurred outside our workplaces. During 2020, many sectors of the world economy has been badly impacted. But fortunately, we at Foraco have fared well these difficult times. And after a good Q3, we're glad to report a 2020 Q4 revenue at USD 54.2 million in revenue, which is a 9-year high, and a rig utilization rate of 53% compared to 45% a year ago. This put the full year 2020 revenue at $207 million, 8% above 2019 at constant exchange rates. During the quarter, all our regions performed well, and our sustainable economy related segment were strong again this quarter. Foraco main exposure to commodities in 2020 are 30% to EV Metals, 19% to water and 31% to gold. I will now pass the conference to Jean-Pierre, who will walk us through the financials in more detail. Jean-Pierre?

Thank you, Daniel, and good morning, everyone. So revenue for the Q4 '20 quarter amounted to USD 54.2 million compared to USD 48.4 million for the same period last year, a 12% increase. By reporting segment, recorded a 54% increase in the water segment, mainly in Africa and Australia. Water represented 17% of Q4 '20 revenue versus 12% in Q4 '19. By geographic region, EMEA and North America were the most active regions. Revenue in EMEA for the quarter was $18.2 million compared to $12.9 million in Q4 '19, a 41% increase, mainly in Africa. Thanks to the deepwater wells long-term contracts, which will continue in 2021. In North America, mainly Canada, the activity increased at $17.3 million in Q4 '20 compared to $16.2 million in Q4 '19. This is mainly due to new contracts, which will continue throughout 2021. At $9.6 million, Asia Pacific was stable compared to the same quarter last year. Revenue in South America decreased by 10% compared to Q4 '19, but a 6% increase, excluding the adverse foreign exchange impact. The activity in Brazil was particularly impacted by the effect of the pandemic, which disrupted the activity since Q2 '20. In Q4 '20, the geographical activity split was EMEA, 33%; North America, 32%; Asia Pacific, 18%; South America, 17%. During the quarter, the gross margin, including depreciation within cost of sales as per IFRS rules was a profit of $9 million versus $8.9 million for the same quarter last year. This increase is mainly due to the solid performance on ongoing contracts, partially offset by mobilization costs on some new contracts, which impacted the gross margin. SG&A increased by 5% to $5.6 million compared to the same period last year, but decreased as a percentage of revenue from 11% to 10%. The EBIT or operating result was a $3.4 million profit versus $3.6 million in Q4 '19. The EBITDA amounted to $7.8 million or 14.5% of revenue compared to $8.2 million in Q4 '19. On a full year basis, we are pleased to report improved results. In 2020, despite the impact of the COVID-19 pandemic in the first part of the year, revenue amounted to $207.1 million compared to $205.4 million in 2019, a 1% increase and 8% increase after adjusting for currency fluctuations. Revenue increased 30% in EMEA, mainly in Africa and Russia; and 6% in Asia Pacific. In South America, revenue decreased by 29% or 11% at constant exchange rates due to the impact of the COVID-19, which continued to disrupt the activity throughout the year. Revenue in North America decreased by 4% linked to the COVID-19 pandemic. The full year 2020 gross profit was $38.2 million versus $32.1 million for the same -- for last year, a 19% improvement, mainly due to the contribution of the water segment and the solid performance on contracts. The 2020 EBIT was $17.2 million compared to $11.0 million in 2019, mainly as a result of increased gross margin and stable SG&A expenses. And the 2020 EBITDA was a positive $34.1 million or 16.4% of revenue compared to $29.3 million or 14.2% of overall revenue in 2019. In 2020, the cash flow generated by operations was $34.1 million compared to $29.2 million in 2019, mainly due to the increased margin. Working capital decreased by $3.3 million versus $0.6 million in 2019. During the period, CapEx amounted to $13.3 million in cash compared to $12.5 million in cash in 2019. The CapEx relates to major rigs overhauls, ancillary equipment and rods. The free cash flow before debt servicing was $20.1 million in 2020 compared to $11.4 million in 2019. At December 31, 2020, our net debt, excluding the effect of IFRS 16 amounted to $136.2 million compared to $128.9 million at 2019 year-end. The net debt is penalized by the adverse foreign exchange variations, $15.1 million and cost of financing, including capitalized interest, $6.7 million. At year-end, we met our covenants. Now our focus for the next quarters, we need to continue to generate free cash flow and to deleverage the company's balance sheet, and we are making progress with our lenders to refinance our outstanding secured bonds due in May '22 in order to improve the terms and extend the maturity of the debt. I will now return the call to Daniel, sorry, for his closing remarks. Daniel?

Thank you, Jean-Pierre. Thanks to the vaccination campaign, which is underway on the planet. There is much more hope to get to an end of the pandemic sometime late 2021 or early 2022. Many say the recovery economically shall be gradual. But we are confident the jurisdictions where we operate will be amongst the first to get out of this sanitary crisis. In parallel, the energy transition, which was not really slowed down last year, is poised to accelerate. And the world will need much more resources to reach the climate protection target, and especially EV Metals, which already amount to 30% of our activity. This is why we are cautiously confident, our sector will embark on a growing part of the cycle, sooner than later. During the last bidding season, which comes to an end, we have seen a solid demand for our services with some subsegments growing, lately, like copper, nickel and gold, while water drilling remains remarkable driver of our activity. As at December 31, 2020, our order backlog was USD 270 million, out of which USD 174 million are to be executed in 2021 versus USD 158 million last year. This is a 10% increase. This makes us to expect a good 2021 activity, if everything goes up as per the plan, which is not done deal indeed. However, we remain confident that our business model is one of the most resilient in the industry and that we will continue to improve our performances by many metrics. One of the main 2020 goals was to initiate discussions with our existing lenders, and other potential lenders to explore few scenarios of refinancing our long-term debt at better terms, as Jean-Pierre said, and extended maturity. We are currently making progress, and we will communicate in due time according to the TSX's closing rules. In conclusion, Foraco is closing a good financial year despite one of the most global adverse events in modern history, and we start 2021 with one of the strongest order book ever. We will now focus on the safe execution of these contracts, and we are hopeful the coming year will be better than 2020 for everybody. Thank you for listening. I will now turn the call to Amy, who will take the first question. Amy?

[Operator Instructions] Your first question today comes from the line of Nicholas Cortellucci with M Partners.

Nicholas from M Partners. Congrats on a great quarter. Just had a quick question. We know the Junior miners have been raising money through the last 6 to 9 months. I was just wondering, when you guys think you're going to start seeing the impact of that on your revenue and backlog?

That's true. We have already seen the impact of that on the later part of the year. As you know, we are not that exposed to the Junior space, which accounts to 12% or 13% for all activity. And the juniors we are working with are fully cashed. And we are hopeful that we will see a marginal effect of this in the coming quarter, starting now, in certain regions, such as Africa, Canada and in another, let's say, in a lesser extent, Brazil and Argentina. So the money is already flowing to the drill rig, but we are not that focused on the junior side because our Tier 1 major miners customers are already booking us a lot.

[Operator Instructions] Your next question comes from the line of Steven Green with Ordinance Capital.

I'm glad you're doing well and that the company and the quarter, and I'm sorry for any loss that you had from COVID, even though you seem to have been managed it very, very well. Just one question to follow-up on the debt. You said you're working with the holders. Does any debt plan involve retiring in the debt at a lower than face value?

Steven, we cannot communicate on that yet because we are engaged in complex discussions and conversations with our lenders. So I suggest you wait us to communicate once we are ready to do so. But everything is on the table. And the outcome that we are pursuing is to get a much better balance sheet on that respect. I'm sorry -- cannot be more specific on that, okay, for the moment.

I understand. So the last -- I mean, the company is doing really well. And I think the last time that revenue was at this level was like April 1, I think, 2012. And the stock -- the margin cap of this company was $450 million back then. And I don't think -- I think you thought, at that point, I remember, attending some conference calls you wouldn't sell the company. You thought it was going to go higher, of course, the cycle there if the cycles are. We've gone through a terrible down cycle, but now we seem to be on the upside. What do you -- so right now, the company is selling, the price of the stock is about 2x EBITDA and about 10x actual GAAP EPS, which obviously is very cheap for a cyclical company at kind of getting ready to take off. What do you think this company looks like over the next year? Or do you think -- I mean, can we -- does it look like we can get some press or some investor relations so we can get the true value of this company compared to what the earnings are and the growth potential?

Absolutely, Steven. The -- once we have given comfort to the investors that the company can renegotiate -- I mean, refinance the debt and get an extended maturity, giving some leeway and headroom for growth. I think our job will be to make the necessary and sufficient communication campaigns to the investors to unlock the value of this company. We are absolutely convinced that we can be a very serious challenger of the best in our space, and we are going to do so.

Because we are -- it is cheap, it is cheap. I mean 2x EBITDA is kind of cheap...

It is that cheap. And we cannot buy anymore.

Like you said that you completed the cycle, the bidding season, I guess prices have firmed up a little bit. And questions about the water. Is water -- are you doing water for other companies' mines or just your own reclamation?

No. No. We always have a customer, except in the case of water for people where we are funded by international aid agencies. But our water business is a large majority underlying the mining operation. Would it be dewatering the mine site, dewatering the property or bringing fresh water to the property, et cetera, or helping the local community on that. So...

So you're doing that -- are you doing that to competitors?

Oh, no. No. No. We help our customers like Rio Tinto, like Teck Resources, like -- to manage the ground water they have on the property. So we help them to monitor the groundwater level, the groundwater quality. We help them to dewater a part of the mine site. We help them to extract water from a side, pump it to the other side, to be stored because it's a very precious resource. So we are helping them to manage the resource.

Okay. Good. And the price -- how are the prices -- are the prices -- I guess, copper price is crazy right now. It's double, double...

Yes. And as you know -- as you know, there is a direct or very easy correlation between the commodity prices and the amount of billion-dollar the miners put in the ground in terms of drilling or mining. The surge in prices is a bit too new. I'm referring to copper, I'm referring to nickel, let's say, to -- let's say to trigger a visible and significant positive impact on the market. This is yet to come, okay? However, having said that, the fact that we have one of the best order book for the year to come ever shows that the demand is already there, and that the budget, at least in our client portfolio, the drilling budget are good and slightly growing for the year, okay? But this is not yet correlated to the -- let's say, the last 2, 3 months surge in copper price, for instance, or the late nickel booming. We have yet to see what the impact of that. Similarly, the fact that there has been a little consolidation in the gold price has not at all impacted the level of activity in the gold space. So there is a kind of dampening effect, if I may say so.

Right. But we need -- but the metals you really need are for the EVs and stuff, in all their batteries and stuff, the nickels and the coppers, that's a good growth business for us, and we could be a green energy company. I mean if we need copper, to have the copper -- a lot of copper for those EVs?

Well, if you consolidate our exposure to the green energy or the EV, the EV Metals or the battery metals, depending on how you call them, plus the water, it's over 50% of our business, already. We exited totally from thermal coal. And we -- but we are strong believers in iron ore, because, even if it's a structural commodity, I mean, the need is there. And our customers have a good ride, and they have excellent visibility on that, visibility on value, [ BHP ] or whatever, okay? We're involved in the green energy transition anyway.

That's excellent. And then -- so your utility rate went up to 53%. I assume, if you get -- this is really the sweet spot for the leverage of the model, right? Because if you get from 53% to, say, 60% or 65% the gross profit, right? I mean because that was the fixed costs go way down, right? If you get to...

You got it.

So this is a sweet spot in the model. What do you think that -- can you get the utility rate up to 60%? What is it...

I have no idea. We -- you are cutting it short. I don't know exactly what's the yearly average that we had. But you've got the model right. I mean if we can gain 3%, 4% of average yearly utilization, I mean, this goes down straight to the EBITDA.

Yes, that's good. I'm excited. I don't want to ask any more questions to that. Actually, for the first time, somebody else asked the question about 5 years. So that's good...

I hope it will be soon...

I think, one just -- one point of clarification. I think there's a typo on Page 4 of the earnings release under Q4 2020. It says in the last -- second last line. It says, this increase is mainly due to new contracts, which will continue throughout 2020. That should be 2021, right?

Yes. Yes, yes.We noticed that. That's 2021. Sorry.

Okay. Yes.

I just want to make sure.

Okay. Our mistake.

[Operator Instructions] We do have a question from the line of Ray Gibbons, a private investor.

As I look at where you are now and hear the other questions, it just seems like you're on the cusp of being like one of the great survivors of the cycle. The equity elements of your enterprise value is really just a stub. If you can get out of this, you can provide incredible upside. So I guess my question is related to utilization. If we think of -- if we say you're somewhere in the 55% area, like what is the denominator like? The last rig that you would put to work, is that a rig that you would reluctantly put to work? Is that a -- I mean, how do you think about utilization? Is it everything here that we would be happy to send out to a client? Or there's some older stuff that we'd like to hold back? How would you describe that?

Very good question. And when the staff are getting aligned in a sector or in our type of business, you've got a second variable in play, which is the crews, the people. After the depreciation we had, I mean, we -- I mean, the sector, okay, between 2013 and 2016, many, many people have left the industry. And today, one of our biggest bottleneck is to find good crews and safe crews. People who are able to operate a rig and without hurting themself. So when you mix this, plus the fact that the customers are asking for the best of the best week in the beginning, then when you are fully booked, you say, okay, sorry, I go to Tier 2. The guys say, okay, fine. No problem. Then you are scrambling to crew these rigs. And to give you an idea, historically speaking, at Foraco, we never, never went over 66% or 68%. Here, it depends on how you account or you define your convention, as you said, the denominator. We at Foraco, we are calculating our utilization rate in a way that we take each and every week we have out of the [ 302 ]. We look where they are located at the moment. And we observe how many days this week can work for -- according to the climate, according to the rainy season, the winter, da, da, da, the breakup, the freeze up or everything. And so we have a certain number of days allocated as a denominator on a rig per rig basis. So the same rig when it's working in Arctic has maybe, I don't know, 120 days, 150 days worth of work. The same way you put in Australia, here at 310 or 330. So we take that into consideration, and we compound the utilization rate. So it's depending on where you are and what kind of climate you're working with. The top of the top, I think we had -- I'm speaking under Jean-Pierre control was 66 out of my -- of my head, okay? Today, I don't think we were above 50% last year. I think we were in the 48%, 40%, whatever. I need to cross check that. We can gain, let's say, 5, 6, 7 points going forward. And this is what we're going to do. And this is what Steve was saying. I mean as soon as we reach this status, things are very early. The thing we don't want to do, to be compete into and to try to answer your question in full is, we don't want to take any human risk to get out an old rig and put it at work with -- by rookie crew because this is a perfect recipe for disaster. Okay. Do I have -- did I answer your question right?

[Operator Instructions] And there are no further questions in queue at this time. I turn the call back to the presenters for closing remarks.

Thank you, Amy. Thank you, everybody, and talk to you on the next quarter. Have a great day and stay safe. Bye-bye.

Thank you. Bye-bye.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.