Foraco International SA (FAR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Foraco International SA First Quarter 2022 Earnings Call. [Operator Instructions] Also note that the call is being recorded on Tuesday, May 3, 2022. And I would like to turn the conference over to Daniel Simoncini. Please go ahead, sir.

Thank you, Sylvie. Thank you all for joining us for our Q1 2022 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 did not receive a copy of the release, please visit www.foraco.com. The first quarter of 2022 was another successful step for Foraco, and we are pleased to report that our revenue for the period was up 24% at roughly $68 million compared to the same quarter last year. This performance is remarkable given the highly contiguous COVID Omicron wave, which hit a lot of regions in the quarter and disrupted many operations worldwide. The rigs utilization rate reached an average of 53% in Q1 compared to 48% a year ago, a rather good level for a first quarter, which is generally seasonally lower. Meanwhile, metal prices were generally on the rise, even before Ukraine invasion, and we continue to witness a strong demand for our services. Inflation and scarce manpower continue to impact somehow the industry, and we were very busy to renegotiate our prices with our customers in order to protect our profitability, while our efforts to train, retain and recruit talented people increased. I will now pass the conference to Jean-Pierre, who will walk us through the figures. Jean-Pierre?

Thank you, Daniel. Good morning, everyone. So revenue for the first quarter '22 amounted to USD 67.7 million compared to $54.6 million for the same quarter last year, a 24% 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 Q1 '22 revenue and Water represented 12%. During the quarter, North America and South America were the most active regions. In North America, revenue amounted to $21.6 million, a 16% increase compared to Q1 '21. Thanks to the rolling of long-term contracts. Revenue in South America increased by 116% at $20.7 million compared to $9.6 million in Q1 '21. New contracts were mobilized during the first quarter. Revenue in EMEA for the quarter was USD 15.2 million compared to $18.8 million in Q1 '21, a 19% (sic) [ 18% ] decrease. The activity was stable in Europe and CIS when the activity decreased in Africa due to the phasing of some contracts. And revenue in Asia Pacific increased 37% at $10.3 million compared to the same quarter last year, reflecting the ongoing improvement of the activity. In Q1 '22, the geographical activity split was: North America, 32%; South America, 31%; EMEA, 22%; Asia Pacific, 15%. During the quarter, the gross margin, including depreciation within cost of sales was a profit of USD 9.6 million versus $6 million for the same quarter last year, a 58% increase. Ongoing contracts reported expected performances and most of the costs increase were compensated in our selling prices. SG&A increased by 14% to $5.9 million compared to $5.2 million for the same period last year but decreased as a percentage of revenue from 9.6% to 8.8%. The EBIT or operating result was $3.6 million profit versus $0.8 million in Q1 '21. And the EBITDA amounted to $8.5 million or 12.6% of revenue, a 67% increase compared to $5.1 million in Q1 '21 or 9.4% of revenue. We do not report adjusted EBITDA. In Q1 '22, the working capital requirement was $12.6 million compared to $7.7 million for the same period last year. This is mainly linked to the increased activity requiring higher inventories and resulting in higher receivables at quarter end. CapEx amounted to $5.2 million in cash compared to $4.4 million in cash in Q1 '21. This CapEx relates to acquisition of rigs, major rigs overhauls, ancillary equipment and rods. At March 31, 2022, our net debt, including lease obligations, IFRS 16 amounted to $100.8 million versus $85.7 million at December 31, 2021. Our leverage ratio is 2.2. So finally, we increased our activity and our profitability, thanks to the strong performance of our operations. We have the capacity to finance our CapEx and development program while we continue to focus on deleveraging our balance sheet. I will now return the call to Daniel for his closing remarks. Daniel?

Thanks, Jean-Pierre. As you know, the world is facing an increasing set of threats from a reported accelerating climate change, driving geopolitical tensions following Russia aggression in Ukraine, surging inflation or lasting supply chain disruptions, which render our prospective planning and operation more complex. The commodity space and especially the metal space are under high scrutiny as there are some widening gaps between demand and supply, not mentioning gold demand, which is meant to grow as a safe haven. Most of our clients have so far reacted calmly to these rising tensions and confirm their drilling plans, if not increase them like in the battery metal market. At Foraco, we remain very focused to deliver the service quality as expected by our customers in this environment and are very active to set our workforce level at the right size, both in terms of expertise and number. We think we have succeeded to do the heavy lifting last year on that point. And now that COVID constraints are receding, we feel a little bit more comfortable. But indeed, wages remain a central question depending on the local market conditions. Our customers who have the same issue are very accommodated. And similarly, as we kept -- we keep getting hit with rising supply cost, fortunately, we are able to pass that to our clients as well. Now we are focusing on mitigating the impact of delivery times, which are rising and keep getting unreliable. Thank you for listening. I will now turn the call to Sylvie, who will take the first question. Sylvie?

[Operator Instructions] And your first question will be from Gordon Lawson at Paradigm Capital.

Congratulations on another great quarter. Talking about South America, it's quickly becoming one of your largest segments. Has there been a recent focus on securing contracts in this region? And are you able to comment on the current political environment, specifically Peru and Chile?

Okay. South America, I'm speaking [indiscernible] is Brazil for us, it's Brazil, Argentina and Chile. Brazil is the biggest, by far, the biggest piece of it. Yes, we have been able to secure long-term contracts with a lot of prestigious customers in Brazil like Vale, Anglo Gold to name some of them. We are also very active in, let's say, large junior well-funded. We have no comment on the political situation there. Argentina is the fastest-growing market for us, but we have put the feet on the brake because of the -- our inability to export hard currencies from this country for the moment. So we ramp up in Argentina, especially in the lithium and gold space. But we ramp up slowly because we are compliant with the local laws, and we are expecting that Argentina and IMF will soon reach a deal whereby we could freely send money and get money from this country. Last one, which is Chile. Chile is a country who's major as far as the copper production is concerned. We are working with the big names there like [ Codelco ] [indiscernible]. We follow the political news there and especially the constituent assembly, which will define the future of this country as far as one of the main mining jurisdiction in the planet. There, the market is more, let's say, fractioned. And so everybody is more or less on the waiting line. And we are not, as we speak, involved in any operation in Peru or in Bolivia.

Okay. Great. And moving over to your European division. It seems to be the only one that declined in revenue year-over-year. Can you comment on that, please?

Yes. We had a contract last year in Africa, a mining contract, Europe and EMEA, yes. And this one has been -- we start again in Q2. So this explains the main difference between Q1 '21 and Q1 '22. The rest in Europe and CIS, it's -- the revenue is very similar compared to last year.

Next question will be from Steven Green at Ordinance Capital.

Once again, I echo the last person's comment about a great quarter, and thank you for everything you've done for this company. Two quick questions. One is, you mentioned in one of your releases recently that you were thinking about considering dividends, I was considering -- I was wondering if that would be a special dividend or that will be something that will be ongoing?

No, maybe I have not been clear. What we are saying is that we -- our first priority as far as the cash management is concerned is to deleverage our balance sheet and pay off as much debt as we can. And then we would have a second priority, which was going to be shared between a potential dividend, not special. And probably an acceleration in the CapEx investment because the market demand is very high. And most of our long-term contracts and long-term customers are increasing their own program. So first priority is deleveraging. And number 2 is the kind of arbitration between dividend and/or accelerated CapEx, but this will not be in the coming year, okay?

Okay. And then but on that note, the leverage went -- the debt went up a little this year -- this quarter, right?

Yes. But this is due mainly because of working capital, Steven. This is just seasonal.

We strongly increased our activity. So this is why our working capital has increased and mainly in March compared to last year.

Right, right. And do you -- I mean, I always want to know like where do you think this can go like -- this cycle can go to. Can you -- I guess, your gross margins are getting towards 20% now and the revenues are growing. I mean can you get over $400 million of revenues, you think, in this cycle with gross margins over 20%?

In terms of possibility of our fleet and the company, of course, we can, whenever we're going to do that, nobody knows. There are too many variables out there. Our, let's say, strategy is to increase first profitability and get more margin from our prices and businesses by working on pricing and secondly, to increase our efficiency and productivity. And the second one is to gain activity. So we have the fleet. And as I -- we already outlined that in the past quarters, the limiting factor for the moment for the industry in general and for Foraco, in particular, are the people, okay? So as we speak, I mean, we're declining a ton of jobs because basically, we [indiscernible] accrue the rigs and we don't want to screw up a job or hurt an employee, which is going to be a rookie guy or a green hat as we call them, because it is not simply the experience. So we are very cautious and conservative on this approach.

Right. Yes. No, I know. I'm sure it's frustrating losing business because of...

It is. It is. But this is something which is beyond our reach, right? So we do like all our colleagues in the space we do as much as we can, but I mean, you need time. Remember, drilling is -- I mean, mineral drilling is a people business. It's not a process or a patent issue. So we have to take care and train the guys. You don't put a rookie into a Dreamliner cockpit, right?

No. I wouldn't want to fly on that plane. But I mean, this is -- you have a great business. You've done such a great job. The one question I always have is the liquidity of the company in terms of the share trading and ability to buy and sell shares. I mean people looking at the EV market and the battery metals and the growth in that industry, this company will be a fabulous way for investors to invest in that area and to leverage up their bets in the EV and battery metals. So I don't know why -- are we ever going to get a listing in the United States and NASDAQ listing? Or just the stock is [indiscernible]. No one gets -- you don't have a chance to buy into it because you know how difficult and how liquid it would be to hold it forever.

Yes. That's a central point as for the share value is concerned, our liquidity. As you know, we are pushing as much as we can on the market and having regular webinars and to talk to as many institutional investors as we can. We hold one last week. We had a very good turnaround. It takes time, Steven. And it's very, very frustrating. And we share your frustration in that respect. But remember, this stock went up to $5 or $5.50 in the good days, and we don't see why -- and the liquidity at that time was slightly better, but not that high. So we think that once the -- COVID was a kind of issue, our debt -- former debt was kind of issue. We cleared that. Now there is Mr. Putin wrecking the world. So we are very confident that we can turn this around and get the stock at the right value, okay? But don't get me wrong. We are really focused on doing whatever we can to increase the liquidity.

Okay. Right. I appreciate that. You guys have done a great -- an unbelievable job. And like you just outlined, you've managed through so many different crisis. And now this is the time -- this is the time...

We share that. Thanks, Steven.

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

Thank you, Sylvie. So thank you, everyone, for listening for this first quarter of the year. So talk to you end of July for next one. But stay tuned. Okay. Have a good day. Bye-bye.

Bye-bye.

Thank you. 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.