Foraco International SA (FAR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Foraco International Fourth Quarter 2021 Earnings Call Conference Call. [Operator Instructions] This call is being recorded on Thursday, March 3, 2022. I would like to turn the conference over to Mr. Simoncini. Please go ahead.

Thank you, Grant. Thank you for joining us on our Q4 2021 results conference. I am Daniel Simoncini, Chairman and Co-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 our financial results, we will open the call for questions. When we last spoke, the world was not aware of the omicron COVID variant wave. We stormed the planet starting early December and became dominant in less than 2 months, luckily without causing much sales damages. But still, it caused a lot of disruption on work sites. Despite of this, we had a good and busy quarter on the operations side on our business. Jean-Pierre will tell us about this. And our utilization rate reached 56% over the quarter, 3% higher than a year ago. On the commercial front, we have booked the highest order book ever, with a total of orders amounting to $420 million at year-end, out of which $270 million are to be delivered for 2022. This remarkable performance shows how well Foraco is regarded by our customers, who are eager to consolidate our relationship over the long term as tensions keep rising in the supply side of the mineral drilling services sector. Meanwhile, the metal prices index didn't move too much over the quarter, with gold eroding a little bit, nickel skyrocketing and iron ore yo-yoing. 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 fourth quarter '21 amounted to USD 68.9 million compared to $54.2 million for the same quarter last year, a 27% increase. This increase is the result of the favorable market dynamics and our capacity to deliver. By reporting segment, the mining segment represented 88% of Q4 '21 revenue and water represented 12%. The growth was recorded in all geographic regions. North America and EMEA were the most active regions. In North America, revenue amounted to $22.8 million in Q4 '21 with a 32% increase compared to $17.3 million in Q4 '20, driven by new long-term contracts. Revenue in EMEA for the quarter was $18.9 million compared to $18.2 million in Q4 '20, a 4% increase, mainly due to new significant contracts secured in Q1 '21. Revenue in South America increased by 80% at $16.3 million compared to $9.1 million in Q4 '20. The activity in the region continued to be impacted by the effect of the COVID-19 pandemic. In Asia Pacific, revenue was $10.9 million, a 14% increase compared to the same quarter last year, reflecting quarter-over-quarter ongoing improvement on -- of the activity. In Q4 '21 the geographical activity split was North America, 33%; EMEA, 27%; South America, 24%; and Asia Pacific, 16%. During the quarter, the gross margin, including depreciation within cost of sales as per IFRS rules, was a profit of USD 10.1 million versus $9 million for the same quarter last year, a 13% increase. Ongoing contracts reported solid performances while some cost increases were not yet compensated in our selling prices. SG&A increased by 4% to $5.8 million compared to $5.6 million for the same period last year, but decreased as a percentage of revenue from 10.3% to 8.5%. The EBIT or operational result was a $4.3 million profit versus $3.4 million in Q4 '20. The EBITDA amounted to $9.4 million or 13.7% of revenue, a 20% increase compared to $7.8 million in Q4 '20 or 14.5% of revenue. We do not report adjusted EBITDA or any other adjustment to the IFRS figures. On a full year basis, revenue amounted to USD 269.7 million compared to $207.1 million in 2020, a 30% increase. This increase results from the combination of a steady stream of demand and the capacity of the company to deliver. We largely exceeded the pre-COVID levels of activity, both in terms of revenue and profitability. We recorded a double-digit growth in all geographical regions: plus 37% in North America; plus 59% in South America; 20% -- plus 20% in EMEA; and plus 12% in Asia Pacific compared to 2020. The full year '21 gross profit was $46.8 million versus $38.2 million for the same period last year. The 22% improvement mainly due to increased activity, performance and contract and tight cost control, while all regions faced inflationary pressures on prices and salaries. These increased costs are now passed on to the new selling prices in the renewal or renegotiation of contracts, which were carried out at year-end. The full year '21 EBIT was a positive $24.1 million or 9% of revenue compared to $17.2 million or 8.3% of revenue last year, mainly as a result of the improved gross margin. And the full year '21 EBITDA was a positive $43.0 million compared to $34.1 million in the full year 2020, an increase of 26% compared to 2020 and 47% above our 2019 pre-COVID EBITDA. For the 12-month period, we managed to keep control of our working capital. The requirement was $4 million, mainly linked to the increased activity. CapEx amounted to $18.6 million in cash compared to $13.3 million in cash in 2020. This CapEx is driven by the increased activity. It relates to the acquisition of 9 rigs, major rigs overhauls, ancillary equipment and rods. As we already disclosed, we finalized, in July '21, our financial reorganization and raised USD 100 million of new bonds to repay our previous bonds. At year-end '21, our net debt, including lease obligations as per IFRS 16, amounted to $85.7 million versus $141.7 million at December 31, 2020. At 2021 year-end, our leverage ratio is 2.0. So with our operating performance, backlog, our reinforced balance sheet, we believe that we now have the strength to satisfy our clients' increasing demand and are well positioned to greatly enhance shareholders' value while financing our development. I will now return the call to Daniel for his closing remarks. Daniel?

Yes. Thank you, Jean-Pierre. Before last week, we had a very optimistic global vision, both at macro and micro levels. Metals were actively sought by the industry, COVID pandemic was getting lighter, and we all thought we were going towards a better normality. Alas, Mr. Putin decided differently, and we are all shocked by the terrible events occurring in Ukraine. And we're very concerned about how this crisis could [indiscernible] in the coming days or weeks. Everyone is trying to evaluate the impact of this war, the resulting sanctions and inevitable disruptions, which will follow. As of today, we can say that our company is not directly impacted by anything, including the sanction, which do not target the mining sector. Our business in Russia is currently business as usual. Russia, being a major metal producer, the world might seek rapidly for new sources to match the loss of supply, which may have a positive impact on the global mining business. And it is way too early to draw any conclusion or speculate on post-crisis scenarios. This is why we follow, like everybody, the situation on a daily basis, and we do focus our energy to deliver the best possible services to our customers in all regions of the world. We just wish that peace can be restored without delay. 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.

Within your steelmaking segment, are you able to discuss what you're seeing in both the iron ore coal markets in terms of regions and demand volume?

For the moment, we don't see anything beyond normal. All budget has been confirmed. Contracts are underway. Of course, in the Southern Hemisphere, it's still the holiday season. But we -- and we are not traders of these commodities, Gordon, okay? But as far as we are concerned, of drilling services, demand is still very, very solid. And we are gearing up to mobilize the whole fleet.

Okay. And also your utilization in Q4 decreased slightly from Q3. Could you just elaborate on what was behind that?

It's typical seasonality, okay, because basically, the whole world is stopping for holiday seasons and even in both hemispheres. So basically, as of mid-December, we fall down. So it's our typical bell curve with Q1, Q4 being our weakest quarters calendar-wise, and Q3 being our strongest quarters.

Okay. Just historically, I've seen some Q4s being the highest of the year, 2018, for example. So I was just curious if there was something that split out this year.

That was a very, very peculiar moment, okay?

Okay. Fair enough.

Your next question comes from Steven Green from Ordinance.

As usual, you do an amazing job managing through unbelievable crisis as ever since Nigeria and this crisis and all those disasters, but you've done an amazing job. So thank you on behalf of the shareholders. One thing I had was -- let's -- can you talk a little more about your activity in the electric vehicle battery chemicals mineral space because it seems like we need to get a little bit of an evaluation boost here. Like a little more of a -- we're trading at 4x earnings, which is -- for a company that's growing, it's pretty horrible. So it seems like if we can get some kind of recognition that we're really a mineral company for the future of the electrification of the world. I think that might help a little bit. So can you talk a little bit about that?

Yes, of course. The -- let's say -- what we can say is that our exposure to battery metals in 2021 was roughly 30%, okay? And in the battery metals group, we do have copper, nickel, cobalt, lithium. Although, we don't drill especially for cobalt because cobalt is usually a byproduct of nickel mines or different commodity. So it's a pretty important group of metals that we work for. Indeed, we are not producing any of them. We just help our customers. We are making steady progress in the lithium business, and especially in the Latin America space. And we do intend to consolidate our leadership in certain area. Especially in New Caledonia, which is nickel land; Argentina, which is a big lithium booming market. And we do expect that Argentina will solve sooner than later their IMF issues, so to have a kind of open economy, so we can operate and grow from there. And so we are pretty bullish on that. But to be frank, Steven, we are really bullish on all commodities, okay? And as you know, 80% of our business is made with major mining houses. And of course, when the demand is increasing from such big customers, we have to follow them and to make sure that we don't get them down. So we are very, very busy to catch up and to keep up with the growth -- the organic growth we're experiencing with this portfolio. And this is why we cannot, I would say, run after new customers because we're fully booked. Period, right? Now your comments on our valuation, I cannot more agree with you, but market is market. So it's our job to let know the people and the investors that we are a much better stock than the neighbor's. And this is our agenda anyway.

All right. Do you see -- I mean, there is some room for your utilization rate to go higher, right, or do you see you having...

Yes.

So that -- is that where the growth is going to come from, from the utilization rate going higher or do you see [indiscernible] backward, right?

Yes. We think there is room for improvement in our utilization rate. And also, obviously, we have renegotiated the prices. And of course, and this year we'll increase our revenue as well, okay? So yes, yes, we are not at present basically because Q1 is a seasonally low quarter, we are not maxed out, but we anticipate that we may be maxed out down the road, okay? If nothing happened bad in the world, of course.

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

Okay. Thank you, Grant. Thank you, everybody, for listening, and talk to you for the next quarter. Have an excellent day. Be safe. Thank you.

Bye.

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