Foraco International SA (FAR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Foraco International SA Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Friday, October 28, 2022. And I would now like to turn the conference over to your host, Daniel Simoncini. Please go ahead, sir.

Thank you, Michelle. Good morning, everyone. Thank you for joining us on our Q3 2022 result conference. I'm Daniel Simoncini, Chairman and CEO. 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. We are pleased to report our best quarter since 2009, with revenue up 30% year-on-year, and our bottom line, up 70%. We were able to deliver this bottom line, thanks to an excellent execution of our contracts by our teams and our renewed prices, which now offset the inflation we have been hit with for the last 15 months. We recorded a similar utilization rate at 57%, but with more heavy rigs being at work now. During the quarter, the metal prices index retreated another 15% from last June, with only nickel and lithium rising over the period. Meanwhile, our crewing issues did soften somehow as a growing number of juniors within the industry stopped their exploration programs due to the lack of funding. That freed some workforce mainly in Canada and Australia, which was of a great help. In the same time, our large top-tier customer base confirmed their plan and kept on adding more rigs to our long-term contracts. I will now pass the conference to Jean-Pierre, who will walk through the financials. Jean-Pierre?

Thank you, Daniel, and good morning, everyone. So revenue for the Q3 '22 quarter amounted to USD 91.4 million compared to USD 70.6 million for the same quarter last year, a 30% increase. The increase in the Mining, plus 28%, and Water, plus 41%, segments is the result of the continued favorable market dynamics with long-term rolling contracts and our capacity to deliver. By reporting segment, the Mining segment represented 86% of Q3 '22 revenue and Water represented 14%. During this quarter, South America and North America were the most active regions. Revenue in South America increased by 109% to USD 29.4 million compared to USD 14.1 million in Q3 '21. New long-term contracts were mobilized during the first quarter of 2022. North America revenue amounted to USD 27.9 million in Q3 '22, an 11% increase compared to Q3 '21 despite continuing crewing issues. Revenue in EMEA for the quarter was $19 million compared to $19.7 million in Q3 '21, a 4% decrease which is a combination of stable activity in CIS, increasing activity in Europe and decreased activity in Africa due to the euro-U.S. dollar adverse foreign exchange variance. Revenue in Asia Pacific increased by 30% at $15.2 million compared to the same quarter last year, reflecting the ongoing improvement of the activity. During this quarter, the geographical activity split was: South America, 32%; North America, 30%; EMEA, 21%; and Asia Pacific, 17%. During this quarter, the gross margin, including depreciation within cost of sales as per IFRS rules was a profit of USD 24.4 million versus USD 14.9 million for the same quarter last year, a 65% increase. Ongoing contracts reported solid performances despite crewing issues and inflationary pressure. Most of the cost increases were compensated in our selling prices. SG&A increased by 7% to $6.3 million compared to $5.9 million for the same period last year, but decreased as a percentage of revenue from 8.3% to 6.9% compared to last year. EBIT, our operating result, was $18.2 million profit versus $9 million in Q3 '21, a 102% increase. The EBITDA amounted to $23 million or 25.2% of revenue, a 67% increase compared to $13.8 million in Q3 '21 or 19.6% of revenue. We do not report adjusted EBITDA or any other adjustment to the IFRS figures. Financial expenses amounted to $2.9 million compared to $2.1 million in Q3 '21, linked to the 3.1% increase in the 3-months LIBOR interest rate. On a 9-month basis, revenue amounted to $245.7 million compared to $200.8 million in year-to-date 9 months 2021, a 22% increase thanks to favorable economic context for the industry and the capacity of the company to deliver. Revenue increased 10% in North America, 106% in South America and 24% in Asia Pacific, compared to the same 9 months period in 2021. Revenue decreased 12% in EMEA, mainly in Africa, due to the phasing of contracts, logistics challenges and adverse foreign exchange euro-U.S. dollar. The activity was stable in Europe and CIS. Margins continue to improve. The year-to-date '22 gross profit was $52.8 million versus $36.7 million for the same period last year, a 44% improvement mainly due to the increased activity and performance of contract. Year-to-date '22 EBIT was $34.4 million compared to $19.8 million in the same period last year, a 73% increase. And the year-to-date EBITDA for the 9 months period was a positive $49.4 million compared to $33.6 million in the same period last year, a 47% increase. For the 9 months '22 period, the working capital requirement was $18.5 million compared to $5.6 million for the same period last year, mainly due to the activity ramp up. CapEx amounted to $14.1 million in cash compared to $14.7 million in cash during the same period in 2021, relates to acquisition of rigs, major rigs overhauls, ancillary equipment and roads. At June 30, 2022, our net debt including these obligations, IFRS 16, amounted to $86.9 million compared to $91.1 million at June 30, $100.8 million at March 31 and $85.7 million at December 31, '21. Our leverage ratio improved to 1.5. Finally, we posted an $11.1 million net profit in Q3 '22, a 70% increase compared to Q3 '21, despite the 3.1% increase in interest rate. Our profitability and the strong fundamentals of our industry give us headroom for future improvement of our financial structure. I will now return the call to Daniel for his closing remarks. Daniel?

Thank you, Jean-Pierre. As you may have noticed, there is currently a curious disconnect between the financial markets and our mining space reality. Why the first are selling metals related stock among others, are they probably fear of worldwide recession, which may cool down the demand? Most of our senior customers are scrambling to locate, develop and make ready for production more energy transition metals deposits. It seems the large mining companies are convinced the energy transition will happen no matter what, as climate change remind them every day, the urgent necessity to accelerate towards the commodity energy. According to a growing number of analysts, world energy source will evolve rapidly from hydrocarbons to metals. We expect the big miners to be right somehow as there are other strange things happening too in the space, like: Large automakers taking stakes in mines; government declaring strategic emergency on certain metals; and mines opening in Europe as an instance, which is the biggest world market with no or negligible metal production as of yet. This is why Foraco, we braced for a sustained and growing activity going forward. Most of our customers are eager to book more capacity earlier than before, and we hope this will translate into another excellent level of our year-end order book. Meanwhile, we'll work hard to keep our profitability at the current level, so we can deleverage our balance sheet quicker. Thank you for listening. I will now turn the call to Michelle, who will take the first question. Michelle?

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

Congratulations on another outstanding quarter. With your NCIB in place and seeing a sharp decline in your share price versus other drillers, could you talk about your priorities in purchasing shares versus paying down debt?

You know that the NCIB is a very strict regulated mechanism whereby we cannot buy more than a certain number. We cannot buy blocks, for instance. So it doesn't help to sustain actually the liquidity and the stock. That's number one. Number two, of course, our top priority is to deleverage our balance sheet. And we do expect the market, sooner or later, would realize that our stock prices is totally disconnected with reality.

Yes. I'm seeing that as well. I just can't make sense of the current share price.

No, it doesn't make sense. We got the liquidity issue, and there are some medium-sized shareholders out there who are having some difficulties elsewhere and who are selling our stock without any bottom. And this is why our stock obviously harmed on a very, very low volume. And that happened during the blackout period when we couldn't buy -- the managers or the insiders, couldn't even buy the stock.

I see, so hopefully you'll be active going forward. So the other question, there was a very large year-over-year gain in the European segment, particularly compared to the previous 2 quarters. So could you elaborate on what's behind that? And if it relates to decreased exposure to Russian drilling?

I mean what we call Europe, I mean EMEA is made of Europe and CIS. And within CIS, now the center of gravity of the activity is moving to Kazakhstan. And therefore, our -- the current contribution I'm speaking [ and Jean-Pierre can tell ], the current contribution of Russia to the quarter consolidated revenue is what, Fabien or Jean-Pierre, 9%?

Is under 10%, yes.

Is under 10%.

So Kazakhstan is growing and Russian is decreasing on a quarterly basis. And we also have -- in EMEA, we also have Africa, which represents a percentage of the EMEA.

Does that answer your question, Gordon?

Yes, absolutely. I appreciate it.

Your next question comes from Steven Green at Ordinance Capital.

Daniel, congratulations. Like -- the last call, I said about -- it was an outstanding quarter. Doing a great job. One, I can tell by your last comments in the closing remarks that you're as equally frustrated as we are, as shareholders, that we -- having the best quarters we're having, and there's still plenty of room to go, and we haven't seen anything in the stock price but a cut in half. I have a couple of questions. I usually plan for 20% margins in my models, but you seem to have like getting close to 25% margins now. Is that sustainable going forward?

Yes. As long as the market demand remain within this current, let's say, robust environment, I would say the norm in our business is more 25% than 20%. If you look back in a similar, not exactly similar, but in a comparable period where we were 2007, 2010, '11, we were largely above that, okay?

That's good.

The drivers are different today. Then it was China, who was absorbing most of the commodity growth. Today is an energy transition. So it's more global, and we think it's much more powerful. That's number one. Number two, the customer base has evolved in terms of choosing the partners. Back then, it was purely a demand/supply balance. So the more demand, the higher prices. Today it's different. Today, the industry is more mature. And our large senior customers, they choose and they accept to pay a premium, even in a not-that-good market just because they want quality and reliability. But to answer your question, 25% is what we should have.

That's better than I thought. And then you did 57% utilization this quarter. I thought I heard before, I remember we could probably go up to like 70% to 75% utilization to be fully -- all your rigs be fully employed to take into account maintenance and that kind of stuff. So are we -- I mean, that seems like a lot of future growth, if we can get our yields fired up to [ 75% ].

Yes. Yes, we -- it's a kind of contrasted patchwork today. The 57% are kind of global. But we have countries like Australia, which are 72% or 75% already. You have a small, small country like Argentina. They are poised to close to 100% and the demand for lithium is sky high. So we can't import. And on the other hand, as an example again, you take Chile. And in Chile, we have 10 rigs idle because the copper guys are not unlocking the drilling program yet, okay? So we have a diversified utilization rates, a set of utilization rates here and there, and the average being 57%. And this changes slowly, slowly from one quarter to another, depending on the seasonality and depending also on the type of risks we roll out. So we can still report 10% growth with 5% more utilization, to give you an example, just because we are rolling out the most expensive rig, which are usually delivering much better margin and higher revenue, okay? So it's a composite ratio. But you asked -- the bottom line, yes, we still have room to grow.