Foraco International SA (FAR) Earnings Call Transcript & Summary

Good morning and afternoon, ladies and gentlemen, and welcome to Foraco International SA Second Quarter Results Conference Call. [Operator Instructions] Also note that this call is being recorded on Friday, July 30, 2021. And I would like to turn the conference over to Daniel Simoncini. Please go ahead.

Thank you, Sylvie. Good morning. Thank you all for joining us on our Q2 2021 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 us on www.foraco.com. After the call -- after the financial results, we will open the call for answers -- for questions. The first quarter of 2021 had seen a surge of COVID. But luckily enough, we have been able to mitigate this in the Q2. Just a sec. I've got an issue with my computer here. Apologies for that. The second quarter of 2021, COVID pandemic impact has been overall less problematic for us than Q1, although some countries have been seriously hit with the delta variant. As of today, we have 2 employees who are under medical monitoring, and we are glad to report that 41% of our employees are fully vaccinated. We continue to work hard so all our people are vaccinated. But the different countries we are operating in are not on the same vaccine availability status or same eligibility rules, which may make that it will take a few more weeks before we reach a sufficient protection of our employees. Meanwhile, we continue to maintain a very strict sanitary protocol throughout our different branches. Over the quarter, metal prices have continued to raise supported by a solid demand, which led to a 10-year high IMF metal price index, up 12% from Q1. Thanks to these favorable market conditions, our Q2 2021 was one of the best ever quarter for Foraco in terms of activity. The company achieved a revenue of USD 75.6 million for the quarter, up 60% year-on-year, while the rig utilization rate reached an average of 60% in Q2 compared to 47% in Q2 2020. All geographical areas once again ended the quarter with significant growth, and there were remarkable performances in Canada, Russia and Africa, while South America and Australia were still somewhat affected by the impact of COVID-19 restrictions and a tighter labor market. 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 the revenue in Q2 '21 amounted to USD 75.7 million compared to USD 47.4 million for the same quarter last year, a 60% increase as Daniel mentioned. By reporting segment, we recorded a 61% increase in the Mining segment and 51% in the Water segment. Water represented 14% of Q2 '21 revenue. All geographical areas contributed to the growth. North America and EMEA were the most active regions. In North America, revenue amounted to $25.7 million in Q2 '21, 122% increase compared to $11.6 million in Q2 '20. This increase is mainly due to new contracts and less disruptions linked to the COVID-19 pandemic. The activity in North America continues to be driven by a strong demand. Revenue in EMEA for the quarter was $24.5 million compared to $17.8 million in Q2 '20, a 38% increase thanks to new contracts in Africa and in Russia, which will continue through the year. In Russia, activity increased by 24% compared to Q2 '20. At $12.7 million, revenue in Asia Pacific increased 12% compared to the same quarter last year. New contracts were mobilized and will continue through the year. Revenue in South America increased by 91% at $12.8 million compared to $6.7 million in Q2 '20. The activity in the region was particularly impacted by the effect of the pandemic, which disrupted the logistics and operational activity in Q2 '20. In Q2 '21, the geographical activity split was: North America, 34%; EMEA, 32%; South America, 17%; and Asia Pacific, 17%. During this quarter, the gross margin including depreciation within cost of sales as per IFRS was a profit of $15.8 million versus $11.2 million for the same quarter last year, a 42% increase. Ongoing contracts reported solid performances, while some new contracts in mobilization phase generated lower percentage of gross margin. Tight labor market and pressures on supply chains and procurement generate inflation on costs, and there is a time lag before these cost increases can be passed through selling prices. SG&A increased by 13% to $5.8 million compared to $5.1 million for the same period last year but decreased as a percentage of revenue from 10.3% (sic) [ 10.8% ] to 7.6% last year -- quarter last year. The Q2 '21 SG&A includes $0.5 million of one-off costs linked to the early redeemed bonds. The EBIT, our operational result, was a $10 million profit versus $6.1 million in Q2 '20. The EBITDA amounted to $14.7 million, a 45% increase compared to $10.2 million in Q2 '20. On a 6-month basis, revenue amounted to $130.2 million compared to $97 million in H1 '20, a 34% increase. This increase results from the combination of favorable market conditions and the lower impact of COVID-19 on the 2021 operations. Revenue increased 49% in North America, 42% in South America, 31% in EMEA and 9% in Asia Pacific compared to H1 '20. The year-to-date profit was -- the gross profit was $21.9 million versus $16.4 million for the same period last year, a 33% improvement mainly due to increased activity, good performance on contracts and tight cost control. The year-to-date '21 EBIT was a positive $10.9 million compared to $6.1 million for the same period last year mainly as a result of increased gross margin. And the year-to-date 2021 EBITDA for the 6-month period was $19.8 million compared to $14.6 million in the same period last year. Regarding cash, working capital requirement was $3 million versus $2.2 million in H1 '20. CapEx amounted to $10.5 million in cash compared to $4.1 million in cash in H1 '20. This CapEx is driven by the increased activity. It relates to the acquisition of 8 new rigs, major rigs overhauls, ancillary equipment and rods. As a result of the above, the free cash flow before debt servicing was a positive $3.2 million compared to $7.4 million in H1 '20. On July 7, 2021, we finalized our financial reorganization and raised USD 100 million of new bonds to repay our previous bonds maturing in May '22. The early repayment of these bonds, which amounted to $146.8 million, has been completed by way of repayment of USD 91 million in cash, resulting in a $55.8 million debt reduction, and the issuance of 9.3 million ordinary shares in favor of the former bondholders. This financial reorganization also includes the early repayment or rescheduling of certain other loans, the renegotiation of the corporate guarantee lines and some amendments to the corporate governance of the company. Thanks to this financial reorganization, we deleveraged and derisked our balance sheet, but also extended the debt maturity through the end of 2025 and eased our financial constraints and covenants. This transaction is significantly accretive for our shareholders. Our net debt after the financial reorganization is USD 89.1 million, the equivalent of 2.3x of TTM EBITDA, $39.2 million, and our debt-to-equity ratio is reduced to 1.3x. Finally, we are proud to note that our share price has already started to integrate our operational performance and our financial reorganization and this to the benefit of our shareholders and stakeholders who have continued to retain confidence in the company. I will now return the call to Daniel for his closing remarks. Daniel?

Yes. Thanks, Jean-Pierre. Now our balance sheet is repaired, we can focus on the company development with more peace in mind. We have added $100 million to our market cap over the last quarter, and we thank our shareholders for their support and patience. In this overall dynamic metal demand, there is still room for increasing our fleet utilization rate, but we are currently facing a tightening labor market and upward pressure on procurement and supply chains, which may temporarily hinder our growth. We don't know if this inflationary event is temporary or structural, but we have already provided for 2021 and 2022 estimated cost increase in our pricing with limited pushback from our customers who fully understand the situation as they have really made so much money thanks to the metal price inflation. On the labor market front, we are battling on a severe shortage of workers, which is a legacy of the last depression, combined with consequences of the COVID pandemic and the global economy revival. We are very active to train and recruit a new generation of crews to mitigate the shortage of skilled workers. We are confident our business model will continue to show its resilience during the rest of the COVID pandemic, I hope it's going to be ending soon, and that we have ample capacity to pursue profitable growth on the long term. Thank you for listening, and we'll now turn the call to Sylvie and we'll take the first question. Sylvie?

[Operator Instructions] And your first questions will be from Steven Green at Ordinance.

I'm so happy to see these numbers were just a real [ vindication ] of what you guys have been doing in the last 7 or 8 years. So congratulations on really turning a corner, and also thank you to everybody who's worked with the crews. I know that's difficult, and I know that you guys have lost a lot of people. And hopefully, you will get more people to come on board. I was curious, 2 things. One thing is with the covenants that you guys negotiated with the new bondholders, do they allow you to pay dividends?

Yes.

Yes. The answer is yes. We can pay dividend provided we -- our leverage is below a certain amount.

I see. I see. And one other question I have is do you guys plan on listing anything in the United States, either NASDAQ or any New York listings -- or any U.S. listings?

Not for the moment, Steven.

Okay. Because it would really -- I know that a lot of people would like to buy or interested in the company, but they just can't. They have to buy U.S. listings...

Well, on the contrary, Steven, we had a webinar a few weeks ago organized by our IR company in Toronto. And if I remember well, a vast majority of our listeners and participants were from the U.S. So it seems that there is a population of investors and institutions who are entitled to buy in Canada for the moment, which was kind of a surprise for me, which is good.

Yes. Well, it would be nice to get the liquidity up a little bit, though.

Yes, you're right. Okay. One step after the other.

So the model looks like it's really hitting some leverage. I mean do you -- does this -- your current financial conditions and your current operations, do you think it allows you to do -- you could probably do $300 million or $400 million in revenue and generate $100 million in EBITDA at some point.

Well, depending on the model and what kind of assumption -- primary assumption you take, I mean, if you look in the details, on one quarter -- and don't forget, our business is seasonal. But on one quarter, we turned around [ $75 million ], which is a kind of, if everything was flat, kind of USD 300 million, right, at 60% utilization rate. This will never happen because we have seasonality. So what we have to do is to increase our utilization rate, providing we find good crews and -- so we can operate safely, right? And then you got another factor, which is the pricing net of inflation. We are not yet done on the pricing improvement. It's not going to be 30% indeed, but high single digit is something achievable and we're working on that.

Right. Well, I assume that all the other companies are having similar issues with getting workers. So I'm sure that all the big companies...

Of course.

They value your services above all and needs them obviously.

Yes. Yes. The competition is on the quality of service now and reliability of delivery.

Well, you guys have always been, I think, the top of the food chain in terms of quality and service. So I think that you have -- that's going for you guys in a good direction.

It's becoming -- yes. It's a hard -- tough job, but it's becoming to show, right?

It sure is. Yes, well, I can't -- I'm so happy for you guys that you turned the corner. And one last question is like the growth areas, are you -- you're finding -- the growth areas in the "environment," the metals and the -- the metals for EVs and for water, you're finding that to be a growth area for you?

Definitely, Steven. The last stat we published was about 50% of our business or half of it is linked to EVs, battery metals and water. And we are steadily investing in this kind of segment and the demand is growing very rapidly. Gold is kind of up and down. It's a good run, but we don't go above 35% in average. So yes, I mean, the traction is coming from EVs, in energy transition, sustainable material and water, water management, yes.

That's great. Well, I think it's up to your IR company to get your story out even more because your numbers have been -- the numbers are really going in the right direction. They really were impressive this quarter, so congratulations on that. And I've supported the company for a long time, and I'll continue to do so.

Thank you, Steven, for your patience and trust in the company.

[Operator Instructions] And at this time, Mr. Simoncini, we have no other questions. Please proceed.

Thank you. Well, I'm glad to have started with Steven and stopped with Steven. I think it's the heart of the summer season. So have a great summer season and talk to you in November for our Q3, and thank you for your attendance. Bye-bye.

Thank you. Bye-bye.

Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good weekend.