Foraco International SA (FAR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Foraco International SA First Quarter 2023 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, Joelle. Thank you all for joining us on our Q1 2023 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 our website, www.foraco.com. And after the outline of the results, we will open the line for questions. We are pleased to report that in Q1, we set an all-time high revenue record of USD 88.4 million in the first quarter of 2023 or an increase of 30% year-on-year. Our last 12 months revenue reached a new high of USD 351 million. We are proud to see the results of the strategy we have designed and consistently deployed over the past few years. We believe we offer an optimal range of services, particularly well adapted to the commodities that we target, including gold, battery metals and water. And we operate mostly in stable countries which offer great potential for long-term growth. Our utilization rate remained stable at 53% in Q1 compared to Q1 '22. And the growth in revenue comes from inflation, improved prices, higher added value drilling services during the prior year and an excellent performance of our operation. As always, we remain focused on the long term and actively search opportunities to reinforce our business model. Meanwhile, the refocusing of our operation in Africa and the completion of the sale of our Russian subsidiary are progressing as planned. I will now pass the conference to Jean-Pierre, who will walk us through the financials. Jean-Pierre?

Thank you, Daniel, and good morning, everyone. So the revenue for the Q1 quarter was USD 88.4 million compared to $67.7 million for the same quarter last year, a 30% increase. Long-term contracts were remobilized earlier than last year and reported solid performances. And this increase in revenue with a utilization rate stable at 53% in Q1 '23 compared to Q1 '22 also reflects increased prices and better productivity of operations. By reporting segment, the Mining segment represented 84% of revenue and Water representing 16%. The increase in the Mining segment amounts to 26%, and water services increased by 65%. By geographic regions, North America and South America were the most active regions. In North America, revenue amounted to $29.7 million in Q1 '23, a 38% increase compared to $21.6 million in Q1 '22. This increase is linked to the early remobilization long-term contracts renewed last year with majors. Revenue in South America increased by 51% at USD 31.1 million compared to $20.7 million in Q1 '22. All countries, Brazil, Chile and Argentina, increased their level of activity driven by new long-term contracts with the majors. At $16 million, Asia-Pacific recorded the highest increase, 56% compared to the same quarter last year, reflecting quarter-over-quarter increased demand, new long-term contracts and gain of market share. The revenue in the EMEA for the quarter was $11.5 million compared to $15.2 million in Q1 '22, a 24% decrease. Revenue in LatAm, Europe and Africa, slightly increased compared to Q1 '22. But the activity in Russia decreased by 48% due to the political and the economic uncertainties. In Kazakhstan, the activity decreased by 50% due to delays in mobilization of contracts. In Q1 '23, the geographical activity split was South America, 35%; North America, 34%; Asia Pacific, 18% and EMEA 13%. During the quarter, the gross margin, including depreciation within cost of sales as per IFRS rules was a profit of $21.2 million or 23.9% of revenue versus USD 9.6 million or 14.1% of revenue for the same quarter last year, meaning a 121% increase. And this reflects the combination of solid operating performance on ongoing contracts and better productivity. SG&A increased compared to the same quarter last year, mainly due to the level of activity. As a percentage of revenue, SG&A decreased from 8.8% in Q1 '22 to 7.8% in Q1 '23. The EBIT or operating result was multiplied by 3 at $14.2 million versus $3.6 million in Q1 '22. The EBITDA amounted to $19.1 million or 21.6% of revenue, a 124% increase compared to $8.5 million or 12.6% of revenue in Q1 '22. As always, we do not report adjusted EBITDA or any other adjustment to the IFRS figures. In Q1 '23, the working capital requirement was $10.5 million compared to $12.6 million in the same period last year. The working capital requirement is a result of the seasonality of the activity and the ramp-up of the activity. During the period, CapEx totaled $8.6 million in cash compared to $5.2 million in Q1 '22. CapEx relates essentially to the acquisition of rigs, major rig overhauls, ancillary equipment and rods. 2 large rigs were added to the fleet during the quarter and 2 rigs were retired from service. As at March 31, '23, the net debt, including operational lease obligation, IFRS 16, amounted to USD 85.3 million compared to $76.2 million as of December 31, '22. The net debt-to-EBITDA ratio as of March 31, '23 was 1.1, and it was already 1.1 at year-end '22. Despite the increase in interest rates, we posted a net profit of $8 million in Q1 '23 versus $0.8 million in Q1 '22. On April 5, '23, we're reporting the signing of the preliminary agreement to sell our 50% share in the Russian joint venture to our Russian partners subject to the approval of the Russian authorities expected in -- at the end of the second quarter. In the upcoming quarters, we have strong balance sheet and our excellent financial performance. We will continue to explore alternatives to further reduce our cost of capital. I will now return the call to Daniel for his closing comments. Daniel?

Thank you, Jean-Pierre. During the quarter, the macro environment has been overall favorable to the economy as recession fears continue to be moderate. Some [ hold ] bank policies were delivered with a more balanced outlook and inflation slowdown progressing. Meanwhile, the IMF Metal Index closed the quarter flat from 1 quarter earlier. It's worth to note that lithium has lost 60% of the stock price year-to-date without having figured any [ heart ] in the exploration development of the project yet. We at Foraco remain very focused on the delivery of our long-term contracts and the improvement of our productivity as prices have now reached a kind of plateau. We believe our long-term strategic vision, coupled with some high added value niches, will set Foraco as one of the in the industry going forward, if the metals [ stakes ] fulfill its promises. Thank you for listening. I will now turn the call to Joelle, and we'll take the first question. Joelle?

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

Incredible job, really. First, that leads to my frustration on the valuation of the company. But really an incredible job. Is this your last conference call before you guys...

No, no, no. We'll be around, don't worry. But Jean will take the mic. Yes, yes, yes.

Okay. I mean you've done an incredible job. It's just so frustrating because even on trailing earnings, trailing EBITDA, you guys are selling at 1.75x earnings EBITDA. And the stock price is actually down from a year ago when you guys reported. I don't know what we can do. I mean the company is doing great. Hello? [indiscernible]

Yes, yes, yes.

We still can't get this thing -- we can't get anybody to notice. I mean, if I looked at [ Boart ], and they have net debt too, [ $220 million ], but they're doing twice as many revenues as you guys, but they were $500 million -- almost a $600 million market cap. But we have $135 million market cap. How do we get to our recognition?

It's the same question we have been [ shirking ] around for few quarters. We believe that the debt issue and the liquidity are the 2 main breaks. But we are fully convinced that less and less and less market will be able to ignore the numbers. So we -- it's my job and Jean-Pierre job now to hit the road and make sure that the financial space is aware of us. And the market has not been very good for the small cap, right, recently. And depending on who you talk to, whether they are generalists or specialists, you have a different focus, a different knowledge of the dynamics of this market, et cetera, et cetera. So we have a lot of hurdles that we are passing them one by one, and we do believe that is going to pay off some time.

I hope so. Can you just explain a little more your statement where you say in the press release that you're exploring alternatives to capitalize on our strong balance sheet and excellent financial position to further reduce our cost of capital. Can you expand on that? And does the debt not allow you to pay any kind of dividends?

Yes. The point is that we definitely need to restructure our debt and to reduce the cost of it. And Jean-Pierre and Fabien are on deck on that, and they are leading these kind of efforts. So we cannot say more on that, but this is a meaning of this statement, okay? We have to make sure that the debt cost comes back to something which is more reasonable.

Yes, that's a big option. But can you guys pay -- can you pay dividends with the current debt? Or are they going to allow -- the covenants don't allow you to pay debt -- dividends?

We don't have, say, covenants on that, but the gross debt is still too high to be -- to reasonably allow us to pay a dividend. Jean-Pierre, what was our quarter -- end-of-the-quarter leverage ratio?

1.1.

1.1, okay.

We could say -- technically, we could pay dividend, but we prefer for the time being to give priority to the reduction of debt, so the reduction of cost of [ income ]. And this is why we want to really address our -- the structure of our balance sheet, our debt and reduce the cost, let's say. And then we will -- we can consider paying dividends in the future.

Are there other alternatives out there? Or is it still very -- the market very closed?

The market is quite closed. You see the bonds. And given the interest rates journey, we have not that many options, but we think we found some. And so we are working hard to announce something before end of Q2, cross fingers.

Great. I don't want to -- I want to -- I just want to make sure -- I noticed I asked a lot of questions and they sound negative. But I just want to say what a great job you both have done. And the company is really, really humming along. It's exciting to see. So we will get our recognition one day.

Sure. And the sooner the better, for sure.

For sure.

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

Thank you, Joelle. Thank you, everyone, for listening to this conference call, and we'll be on the air again end of July. Have a good day. Thank you. Bye-bye.

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.