Foraco International SA (FAR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen and welcome to the Foraco International SA Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, February 16, 2023. I would now like to turn the conference over to Daniel Simoncini. Please go ahead.

Thank you. Thank you all for joining us on our Q4 2022 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 the 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 our website, www.foraco.com. We are pleased to report a remarkable quarter with revenue up 23% compared to the same quarter last year at $84.9 million, which allow us to reach new high for the full year with revenue of $330 million, up 23% equally year-on-year. We are also pleased to report an excellent global performance of our operation and our utilization rate stands at 58% this quarter, but 2% year-on-year, which resulted in a $6.7 million net profit, up 3x year-on-year. We would like, obviously, to stress that none of these performances would have been possible without the dedication and competence of our team, who we warmly thank for their contribution. During the quarter, the macro environment has been somewhat less chaotic than previous quarters, as recession fears eased, somehow bank's policy got a clearer path forward and the IMF metal index gained 12% from its yearly low in last October. Despite record high order book we posted a year ago when we signed a lot of multiyear contracts and as most of them have 1 year less to go now, we have been able to maintain our running year order book at historic highs with $216 million in hand to be delivered in 2023 as of December 31, 2022, and this is 6% higher than last year. I will now pass the conference to Jean-Pierre, who will walk us through the financials in more details. Jean-Pierre?

Thank you, Daniel, and good morning, everyone. So revenue for the fourth quarter of '22 amounted to $84.9 million compared to $68.9 million for the same quarter last year, a 23% increase. This increase is the result of the favorable market dynamics with long-term rolling contracts, which were renegotiated and extended since 2021, coupled to our capacity to deliver. By reporting segment, the Mining represented 87% of Q2 '22 revenue and Water, 13%. The increase in the Mining segment amounts to 22% and is a combination of the resilient gold market and the continuing and growing demand for battery metals leaning to energy transition. By geographic regions, North America and South America were the most active regions. In North America, revenue amounted to $28.3 million in Q4 '22, a 24% increase compared to $22.8 million in Q4 '21. The increase is linked to long-term contracts renewed during 2021 and 2022 and continued activity throughout the quarter. Revenue in South America increased by 81% at $29.4 million compared to $16.3 million in Q4 '21. Small countries, Brazil, Chile and Argentina increased their levels of activity, mainly thanks to the new long-term contracts with majors. In Asia Pacific, revenue amounted to $14 million, a 28% increase compared to the same quarter last year, reflecting quarter-over-quarter increased demand and gain of market share. Revenue in EMEA for the quarter was $13.1 million compared to $18.9 million in Q4 '21, a 30% decrease. The activity in this region is affected by the political and economic uncertainties in Russia, minus 49%; and Africa, minus 50% and by extreme weather condition in CIS. These decreases were partially offset by increased activity in Western Europe, plus 42% and Kazakhstan plus 99%. So in Q4 '22, the geographical activity split was South America, 35%; North America, 33%; Asia Pacific, 16%; EMEA, 16%. During this quarter, the gross margin, including depreciation within cost of sales as per IFRS rules, was a profit of $18.5 million or 21.8% of revenue versus $10.1 million or 14.7% of revenue for the same quarter last year, an 83% increase. This reflects the combination of solid operating performances on ongoing contracts and better productivity. SG&A increased 11% compared to the same quarter last year, mainly due to the level of activity. As a percentage of revenue, SG&A decreased from 8.5% in Q4 '21 to 7.6% in Q4 '22. The EBIT, our operating result amounted to $12 million profit versus $4.3 million in Q4 '21, a 180% increase. And the EBITDA amounted to $17.1 million or 20.2% of revenue, a 92% increase compared to $9.4 million or 13.7% of revenue in Q4 '21. I remind that we do not report adjusted EBITDA or any other adjustment to the IFRS figures. On a full year basis, revenue amounted to a record of $330.6 million compared to $269.7 million in '21, a 22.6% increase. This is the result of the combination of the steady stream of demand for battery metals and water services and the capacity of the company to deliver despite logistics and staffing issues. In 2022, commodities mix was battery metals 42%, a strong increase compared to 30% in '21; gold, 28% versus 38% in '21; water-related drilling services, 13% versus 14% in '21; and iron ore, stable, 10% compared to '21; and other, 7% stable also. In the fiscal year '22, the geographical activity split was: North America 32%; South America 32%, EMEA 21%; and Asia Pacific 16%. Compared to '21, recorded 98% growth in South America, 25% in Asia Pacific, 13% in North America, while EMEA decreased to 17%. The activity in this region is affected by the political, economic uncertainty in Russia and Africa. These decreases were partially offset by the increased activity in Kazakhstan. The full year '22 gross profit was $70.3 million (sic) [ $71.3 million ] versus $46.8 million for the same period last year, a 52% improvement mainly due to increased activity, performance on contracts and tight cost control. All regions faced inflationary pressures on prices and salaries. Since 2021, we successfully renegotiated most of our long-term contracts, including inflation protection clauses. The '22 EBIT was a positive $46.4 million or 14% of revenue compared to $24 million or 9% of revenue in the same period last year. And a full '22 EBITDA was a positive $66.5 million, 20% of revenue compared to $43 million or 16% of revenue in 2021, an increase of 55% compared to '21. In '22, we managed to keep control of our working capital. The working capital requirement was $9.7 million compared to $4 million in the previous year and this increase is the result of the activity continuing ramp-up. During '22, CapEx totaled $20 million in cash compared to $18.6 million in '21, driven by the increased activity. CapEx relates essentially to the acquisition of new rigs, major rigs overhauls, ancillary equipment and rods. In '22, we continued to deleverage our balance sheet and significantly improve our leverage ratio. The net debt, including operational lease obligation, IFRS 16, amounted to $76.2 million, it was $85.7 million at the end of '21. The net debt-to-EBITDA ratio at December 31, '22 was 1.1x versus 2x at year-end '21, and our net debt-to-equity ratio was 1x. It was 1.24x in '21. So despite the increase in interest rate, posted a net profit of $25.8 million in '22, we consider that our profitability and the strong fundamentals of our business give us ground to proactively work on improving our capital structure. We have a clear vision of the opportunities and challenges ahead and continue to systematically address our strategic priorities and make the company stronger. I will now return the call to Daniel for his closing remarks. Daniel?

Thank you, Jean-Pierre. This quarter concluded a great year of consolidation for Foraco as we have clearly benefited from our strategic positioning, mainly in 3 key markets: battery metals, gold and water services. Our long-term presence and focus on key mining regions, including North America, Australia and South America is also a factor of continued performance seen by us. Our main 2022 ESG KPIs are available now in our investor presentation on our website, and we are pleased to report a significant decrease of our global climate footprint. Year-on-year, we reduced our greenhouse gas emission by 6%, our water consumption by 18% and our energy consumption by 10%. We understand and agree that the initial savings are now the low-hanging fruits, but we keep saving more, and it will become harder going forward. We have set up an internal team, who has been tasked with the preparation of a comprehensive plan. On the safety side, we improved our TRIFR at 1.31 for 5.8 million hours reported from 1.69 last year. But unfortunately, we had to report 2 light LTIs when we reported none in 2021. On the governance side, we have no alert from our [ supporting line ] and we have not booked any breach of any sort. The demand for our services remained at high levels, and we get more and more demands from senior corporation and large intermediate for some of our high-tech services from water service to deep service hole for underground mine or lithium solution mining boreholes. We're gearing up to address these high added value segments and others in the near future. Despite an easy international situation, the remaining disruption in supply chain and the tight employment market, we're confident the metal market will continue to grow in the near future, and we are bracing for further expansion. Thank you for listening. I will now turn the call to the questions, who -- our operator will take the first one. Thank you.

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

Congratulations on another excellent quarter. Can you please elaborate on your contract negotiations in terms of where you're seeing the best regional demand as well as any changes in duration with the large caps?

We have not performed a large renegotiation of our main contract, Gordon, because that has been done late '20 and -- late '21 and early '22. So for the moment, we are just managing these long-term contracts and the price adjustment clauses, which cover us for inflations are working very well, and our customers are totally at ease with this. So we do not foresee any major negotiation coming. And the new contract we signed are usually the spot market ones, although we have 2 other long-term contracts in the workings, but I cannot say much about them now. So all in all, things are running okay. And we are not involved in, I would say, lengthy or difficult or I would say, confrontational negotiation with anybody now. That answer your question?

Yes. Yes. That's fantastic. And you mentioned margins. You've shown some solid increases over the past few years with your margin growth. Can you talk more about your cost sharing nature within your contracts?

We don't do cost sharing, Gordon. We have, I would say, price adjustment formulas, which are usually based on kind of polynomial system with 3 main components. One is the wages component. The second one is the CPI component and the third one, if applicable, is usually the energy component. And this usually is made for covering, I would say, most of our -- the quasi totality of our cost increases. And the only cost we would definitely share or pass to the customers outside this kind of clause are the fuel when it is provided by the customer directly to our rigs.

[Operator Instructions] Your next question comes from Steven Green from Ordinance Capital.

I don't know where to start. This was really -- finally showing the leverage of this model is awesome. One question I had, the debt repayments that you see, I guess, was around $9 million in debt. Was that voluntary, or is that part of the schedule that the debt repay is on?

Yes. Steven, I will let Jean-Pierre answer, okay?

In '22, reimbursed partly the first installment of the mortarium debt and other debts. So the main bond reimbursement was $5 million this year. And it will be $10 million in '23, and $10 million et cetera in '24 and the same.

Okay. So that's the schedule you have. You're not paying any extra?

No.

Depending on our generation of cash flow, we might consider to repay earlier because the interest rate is -- we consider it high, but we have not done that in '22 because we had [indiscernible] anyway.

All right. It's exciting that you're paying down the debt because in the last cycle, we had a lot of debt. We only control our own destiny. But now it's exciting because when you control your debt, you can control your destiny, which is very exciting for this company. Just want to talk about the valuation a little bit. So you're selling basically at 1/3 of your revenues that you're selling 2x EBITDA and I was curious, like what -- how are we going to get the liquidity and people to recognize the story how -- because you're still growing, you grew your EBITDA at 67%. And you have a multiple of 2x EBITDA with 60% growth and make sure it's not going to continue like that, but to have a strong growth profile going forward and to have such a low valuation, I don't -- is there any plans to increase the public relations or to somehow to get the liquidity up. I know you don't want to do a listing in the United States, which I would love you to do. I know it's hard and it requires a lot of effort and money. But how are we getting at the liquidity of this stock up?

Steven, the -- we do believe that if the company is keeping on to delivering the good results that we do, the market cap of the company will eventually exceed the $200 million, which is -- which seems to be a kind of a magic number on the Tier 6 in Canada. And as soon as the stock is above $2.20, then we kick in into the large portfolios and the trading. So we do believe that -- and there are some stock for sales, as you know. So the reserve of stock, I mean, available is there. It will just unlock when the valuation will hit a certain threshold. And we do believe that we are not that far from this threshold. Okay? We don't intend to do any capital raising or to dilute the existing shareholders of any sort. As we mentioned earlier, the plan is to deleverage as quick as possible the balance sheet and reduce the debt to a very soft level. But we do believe the stock market will eventually realize that we are undervalued and put the stock back where it should be, okay?

Just one last question, general question. In the market, when you go out to bid projects, is Foraco considered to be the best operator of the vintage rig in the market?

Well, it would be a kind of pretending to say so, but I would say that everywhere we've gone or in the last 2 years, when we won a substantial, let's say, contract in Canada, Australia, Brazil, whatnot. When we won a contract, we usually don't displace the incumbent, if there is one with pricing. As you know, Foraco is a fair priced company, not a low price, low tech company. And so every time we have been displacing our colleagues on the ground of quality and reliability of performances. So in the fact that most of our customers are keeping us, retaining the contract and transforming the contract into long-term is another sign of they like us and they think we are a good partner.

I know you've had -- I know that you treat your crews great and they've been with you for a long time. So I just think that -- I think you're quite the best operator out there. But thank you, Daniel. I think it's been -- it was an amazing quarter, and it looks like it's not going to stop.

No.

I think you have capacity to increase margins and increase revenue. So it doesn't look like it's going to stop and congratulations. I've had this thing since 2012. So it's nice to see it.

Thank you for your patience.

I'm glad to hear something else on the call, too.

Sorry, there are no further questions at this time. I'll turn it back to you.

Okay. Thanks, everybody, to be with us today, and talk to you for the next quarter. I hope it will be as much as exciting as this one was. Thank you. Have a good day. 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.