Foraco International SA (FAR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Foraco International Third Quarter 2021 Earnings Call Conference Call. [Operator Instructions] This call is being recorded on Wednesday, November 3, 2021. I would like to turn the conference over to Mr. Simoncini. Please go ahead.

Thank you, Grant. Thank you all for joining us on our Q3 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 this result was issued this morning prior to the opening of the TSX through CNW Newswire. If you didn't receive a copy of the release, please visit our website, www.foraco.com. After the outline of the financial results, we will open the call for questions. From the COVID 19 pandemic perspective, the third quarter has been overall much less problematic for us than the previous ones. As of today, we have 3 employees who are under medical monitoring and 71% of our employees are fully vaccinated. We continue to work hard. So all of our people can be vaccinated, but this not depends only on us. Meanwhile, we continue to maintain very strict sanitary protocols with our different branches. Even if metal prices index has eased 6% over the quarter, the metal prices are still well above their multiyear average levels, and we continue to enjoy a growing demand for our services. Q3 2021 was one of the best quarters of Foraco in terms of activity, and the company achieved a revenue of USD 70.6 million for the quarter, up 26% year-over-year, while the reutilization rate reached 60% compared to 49% a year ago. All geographical areas once again ended the quarter with significant growth, and there were even remarkable performances in Canada, Russia and Brazil. Our financial performances have been somewhat impacted by the general economic context, including supply chain disruption, labor constraints and inflationary cost pressures, which are deemed to continue in the upcoming quarters. We are working on mitigating the impact of these factors and on passing additional costs through price increases upon renewal of our long-term contracts, but there is often a lag effect before it comes fully effective. 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. So revenue for Q3 '21 amounted to USD 70.6 million compared to $55.9 million for the same quarter last year, a 26% increase. By reporting segment, the Mining segment represented 88% and water represented 12%. Double-digit growth was recorded in all geographic regions. North America and EMEA were again the most active regions. In North America, revenue amounted to $25.1 million, a 23% increase compared to $20.4 million in Q3 '20. The activity in North America continues to be driven by a strong demand. Revenue in EMEA for the quarter was $19.7 million compared to $17.1 million in Q3 '20, a 15% increase mainly linked to new significant contracts in Russia secured in Q1 '21. Revenue in South America increased by 71% at USD 14.1 million compared to $8.2 million in Q3 '20. The activity in the region recovered after the disruption last year due to the effect of the COVID-19 pandemic. At $11.7 million revenue in Asia Pacific increased 12% compared to the same quarter last year. New contracts were mobilized in 2021 and will continue in 2022. So during this quarter, the geographical activity split was North America, 35%; EMEA, 28%; South America, 20%; and Asia Pacific, 17%. During the quarter, the gross margin, including depreciation within cost of sales as per IFRS rules was a profit of USD 14.9 million versus $12.8 million for the same quarter last year, a 16% increase. Ongoing contracts, reported solid performances, while pressures on supply chains and procurement as well as the tight labor market generated inflation in cost, and this cost increase were not yet compensated in our selling prices. SG&A increased by 13% to $5.9 million compared to $5.2 million for the same period last year, that decreased as a percentage of revenue from 9.3% to 8.3%. The EBIT or operating result was a $9 million profit versus $7.6 million in Q3 '20. The EBITDA amounted to $13.8 million or 19.6% of revenue, a 19% increase compared to $11.6 million in Q3 '20 or 20.7% of revenue. We do not report adjusted EBITDA or any other adjustment to the IFRS figures. On a 9-month basis, revenue amounted to $200.8 million compared to $152.9 million for the same period last year, a 31% increase. This increase results from the combination of favorable market dynamics and the lower impact of the COVID-19 and the 2021 operations. Revenue increased in all geographic regions, 38% in North America, 52% in South America, 26% in EMEA and 11% in Asia Pacific compared to the 9-month period in 2020. Year-to-date '21 gross profit was $36.7 million versus $29.3 million for the same period last year, the 25% improvement, mainly due to increased activity, performance of contracts and tight cost control, while inflationary pressures on prices and salaries were not yet passed on through selling prices. The year-to-date '21 EBIT was a positive $19.8 million or 10% of revenue compared to $13.8 million or 9% of revenue for the same period last year, mainly as a result of increased gross margin. And the EBITDA for the 9 months period was a positive $33.6 million compared to $26.2 million in the same period last year. On a TTM basis, our revenue amounts to $255 million and our EBITDA amounts to $41.5 million. For the 9 months period, working capital requirement was $5.6 million versus $1.6 million for the same period last year, mainly due to the increased activity. During the 9 months period, CapEx amounted to $14.7 million in cash compared to $7.3 million in cash in 2020. 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 already disclosed, we finalized on July 7, 2021, our financial reorganization and raised USD 100 million of new bonds to repay our previous bonds. As at September 30, 2021, our net debt, including these obligations as per IFRS 16, amounted to $86.1 million versus $141.7 million at December 31, 2020. Thanks to this financial reorganization, we deleveraged or derisked our balance sheet, but also extended the debt maturity through the end of 2025, eased our financial constraints and covenants. This transaction is significantly accretive for our shareholders. At the end of this third quarter, our leverage ratio was 2.1 and our net debt-to-equity ratio, 1.3. We are pleased to note that the financial community started to recognize our track record and our capacity to pursue profitable movement. I will now return the call to Daniel for his closing remarks. Daniel?

Yes. Thanks, Jean-Pierre. Mid-October, Standard & Poor's published a non-ferrous exploration budget report for 2021, which is a good proxy for our business base. In short, the estimate that the global nonferrous exploration budget will increase 35 years -- 35% year-over-year to $11.2 billion in 2021 from $8.7 billion in 2020. Gold and copper will account for 55% and 28%, respectively, while majors represent 50% of the spending, which is remarkable at the time when the junior company have full access to capital market. Standard & Poor's forecast 2022 at an even higher level. We hope this trend will continue in the next quarters, and we are very busy to train the next generation of crews, which will help us to satisfy our customer increasing demand. We have interesting discussions with our customers who, in general, require more rigs for next year now that the budget season is in full swing. Currently, and due to logistics and supply chain constraints, our most sophisticated rigs are now delivered with a year lead time, which indeed has an effect of our potential growth rate. This is why we are discussing with our customers to double shift operations whenever possible and move idle rigs where the demand is high when we can. We are confident our business model, which is based on risk mitigation. We continue to show its financial efficiency and that we have ample capacity to deliver our best-in-class profitable growth in the long term. Thank you for listening. I will now turn the call to Grant, who will take the first question. Grant?

[Operator Instructions] Your first question comes from Gordon Lawson from Paradigm Capital.

You mentioned that you're working on passing additional costs and new contracting, but is there any flexibility in existing contracts?

Yes. Some have risen [ for ] clauses, some don't. So it's a kind of patchwork. And -- because most of the anniversary dates are going now, even for multiyear contracts. We have a lot of doors open to renegotiate that. So bottom line, we are not stuck in long-term contracts with no way to renegotiate prices.

Okay. And also your Q4 tends to be a seasonally weak quarter. Can you comment on how this year is shaping up, particularly as it relates to improvements in COVID cases as well as additional higher-margin drill rig contracts?

Gordon, we usually don't give any forward-looking statements. Our order book is full and we don't see any difference from the, let's say, the last Q4, irrespective of the COVID impact. The most -- the biggest impact on Q4 is just the Christmas and holiday season where clients and contractors are just shutting down for 2 and 3 weeks. So we don't have any, let's say, more comment than that.

Okay. But could you -- is there any color you can provide in terms of your specialized drill rigs and how the utilization rates are ramping up in that field.

At the difference of some other contractors, we do not split our utilization rate by specialized rigs or large diameter coring rigs or deep directional rigs, et cetera, et cetera. But what I can tell you is that quasi all our deep directional rigs are busy. The only exception is 3 or 4 rigs in Australia, which are in between contracts. But we are running at full capacity in this category of services. If that is your question, Gordon.

Yes, that is.

Your next question comes from Steven Green from Ordinance Capital.

I noticed that your CapEx increased a lot this quarter. Is that a sign in confidence? Or is that repair -- is that new rigs? Or is that old rigs you're repairing?

I will let Jean-Pierre answer that. It's kind of a mix between rods, new rigs and overall. Jean-Pierre, can you comment that?

We have 8 new rigs since the beginning of the year and some overhauls of rigs. If we compare the amount of CapEx with -- or as a percentage of revenue, we are not that far compared to last year. And you must remember that a big portion of our CapEx relates to rods, okay, drilling rods. And these are really, let's say -- have a direct relation to the number of meters that we drill. So the more activity, the more drills and the more CapEx. So this explains...

Steven, bear in mind that I think we are the only drilling contractor in the space to report in full IFRS, where the other guys don't do that. And so our CapEx category is a bit more inclusive than the competition.

I see. And so 60%, that's quite a bit of utilization. Are we going to go higher than that? Are we going to go to 70% or 75% before you reach full capacity?

We wish we can do as well as back in 2012 when we hit 70-ish percent, 72%, 73%. We still have the capacity to put more rigs at work. But again, I'm just flagging that the industry is having human resources issues, and today, it's very, very complicated in certain countries, especially Canada and Australia to cool a rig. So the limiting factor to the growth today as we speak, is a crew, okay? But yes, in theory, we can easily get another 10%.

That's great. And I noticed that a lot of the new materials like lithium and stuff, are those the same contracts? Are those the same players who are playing in that market or they're new -- they're different -- are they different miners that you're working for in some of the new chemicals -- the new minerals for electric vehicle?

No. Normally, it's not because we go lithium that we find a new competition, for instance. Lithium is on 2 types. You have the brine, the salty form and the rocky form. The rocky form is something that we treat like any kind of ore, can be copper or whatever. And the salt form is treated as in-situ leaching, which is what we call solution mining and it's very, very close to the water well technology. So all in all, we don't have more or new competitor for new battery metals, such as lithium, for instance.

But -- how do the customers, like it's not the traditional valet or -- the traditionality...

Sorry, sorry. Yes, yes. Okay. Yes. But you have already very big players in place in the lithium for the last, let's say, 4, 5, 10 years. And mainly the main guys are the South American guys like SQM, the Chilean one and which produce, let's say, a good 40% of the world's production. And yes, there are newcomers now in terms of junior company who are moving fast to open lithium mines. You are correct.

And you have relationships with those as well now.

Well, Steven, we're fully booked quasi. We have a hard time to satisfy the growing demand of our existing customers. And marginally, we have gained market share in the lithium space, especially in Argentina.

Well, I think it's -- so I'm excited where this is going and it's been a long time, and it's great to see we're on the cusp of a real up cycle here, which is exciting. Thanks for all the hard work.

Yes. Crossed-fingers.

[Operator Instructions] There are no further questions at this time. Please proceed.

Thank you, Grant. Thank you, everybody, for listening, and speak to you -- talk to you next quarter. Bye-bye. Have a good day.

Thank you. Bye-bye.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.