Foraco International SA (FAR) Earnings Call Transcript & Summary

Good morning and afternoon, ladies and gentlemen, and welcome to the Foraco International SA Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Also note that this call is being recorded on October 30th, 2023. I now would like to turn the conference over to Tim Bremner. Please go ahead, sir.

Thank you, Sylvia. Good morning, everyone, and thank you for taking the time to join us on our Q3 2023 results conference. I am Tim Bremner, CEO of Foraco International. And joining me today from France is Fabien Sevestre, our CFO. The news release of these results was issued this morning prior to the opening of TSX through CNW Newswire. If you didn't receive a copy for some reason, it is available at our website, www.foraco.com. After the outline of the financial results, we'll open the call for your questions moderated by our operator, Sylvia. Q3 was another good quarter with revenue of USD 96.1 million, up 4% from the same quarter last year, making it the 19th consecutive year-over-year quarterly increase. Our trailing 12-month revenue now stands at $368 million, with an EBITDA of $85.1 million, up 17% and 45%, respectively, compared to 1 year ago. These results are a direct result of the ongoing excellent performance across all of our regions globally. Our utilization rate for the quarter remained flat at 58% compared to a year ago, and TTM net profit now stands at $38 million, up 79% year-over-year. Once again, this performance is a direct result of the dedication and confidence of our teams around the world, especially the men and women in the field who we wish to thank for their ongoing commitment and contribution. Our outlook for the business remains unchanged. The metals price index, which earlier this year decreased by 8% since January has been relatively stable for the last 4 months. We continue to experience a sustained demand for drilling services, both in mining and water again, mainly related to EV metals in the primary mining jurisdictions globally. It would seem that our customers see it the same way as well as we continue to work through, and in some cases, renew our long-term contracts. I'm now pleased to pass the conference over to Fabien, who will walk you through the financials in more detail. Fabien?

Thank you, Tim, and good morning, everyone. First of all, and as a reminder, Foraco reports in full IFRS and in U.S. dollar. Revenue for Q3 '23 amounted to $95 million compared to $91 million for the same quarter last year, a 4% increase. By reporting segment, the mining segment represented 88% of Q3 '23 revenue and water represented 12%. Asia Pacific and North America recorded the highest increase in revenue. Revenue in Asia Pacific increased 28% at $19 million, reflecting quarter-over-quarter increase in demand and the capacity of the company to acquire and commission new rigs. In North America, revenue amounted to $32 million in Q3, a 15% increase, driven by long-term contracts renewed last year with senior customers. Revenue in South America remained stable at $30 million. Revenue in EMEA for the quarter was $14 million compared to $19 million in Q3, '22. The activity was stable in Europe and Africa, but the activity decrease in CIS due to the political and economic uncertainty in the region. In Q3 '23, the geographical [indiscernible] was North America, 34%; South America, 31%; Asia Pacific, 21%; EMEA, 14%. During this quarter, the gross margin, including depreciation within cost of sales as per IFRS was $27 million versus $24 million for the same quarter last year, a 10% increase. Ongoing contracts continued to report solid performances. SG&A increased by 6% to $6.7 million compared to $6.3 million for the same period last year, that was stable as a percentage of revenue at 7%. The EBIT or operating result was $20 million profit versus $18 million in Q3 '22, an 11% increase. The EBITDA amounted to $25 million or 23% of revenue, a 9% increase compared to $23 million in Q3 '22, 40% of revenue. I would like to take the opportunity to stress that we do not report adjusted EBITDA or any other adjustment to our IFRS figures. On a 9-month basis, revenue amounted to $284 million compared to $246 million in year-to-date Q3 2022, 15% increase. This increase in revenue is due to favorable market dynamics with the company having renegotiated and extended its long-term running contracts since the previous year, coupled with the company's proven capacity to deliver. This has generated significant growth. Revenue increased 22% in North America, 33% in South America and 33% in Asia Pacific compared to year-to-date Q3 '22. Revenue decreased 31% in EMEA due to geopolitical and uncertainties in CIS. The year-to-date '23 gross profit was $74 million versus $53 million for the same period last year, a 40% improvement mainly due to increased activity and the capacity of the company to deliver good performances on contract. The year-to-date '23 EBIT was a positive $53 million compared to $34 million in the same period last year, a 55% increase. And the year-to-date '23 EBITDA for the 9-month period was a positive $68 million compared to $49 million in the same period last year, a 38% increase. For the 9 months period ended September 30, 2023, the working capital requirement was $23 million compared to $80 million for the same period last year. This increase is mainly the result of the ramp-up of activity. CapEx amounted to $21 million in cash compared to $14 million in cash in year-to-date Q3 '22. This CapEx is related to the acquisition of rigs, major rigs overall and ancillary equipment overall. At September 30, 2023, our net debt, including lease obligations amounted to $79.5 million versus $76 million at September 31, 2022. Our leverage ratio improved to 0.93. Finally, the TTM net profit of $38 million translates to an earnings per share of $0.44, which is double last year. I will now hand the call back to Tim for his closing remarks. Tim?

Thank you, Fabien. Another great quarter. 3 weeks ago, we held our first global senior management meeting under the new leadership team here in France. During the course of the meeting, we prepared our plans for 2024, but also took the opportunity to review and update our 5-year strategic plan with very meaningful input from all of the regional VPs and senior managers. No question that the global demand for primary EV metals and water remains strong, and we continue to see the demand for our services from our main customers in both of these areas. In addition, we look forward to concluding financing arrangement that will significantly reduce the lending cost as of today. I'll now turn the call over to Sylvia, who will take the first question. Sylvia?

[Operator Instructions] And your first question will be from Steven Green at Ordinance Capital.

Welcome for your first call. I'm glad to see that you're continuing Daniel's great numbers, really, these are really great numbers. I had -- first question I had was, I see your utilization raise about 58% now. And I think is there further growth ahead as you improve the utilization rate, and also, as you improve utilization rate and get revenues up, will the model -- with the margins increase, I see that as your volume goes up, your margins increase. So it seems like you're right at the tipping point of really accelerating the model. So I was hoping 2 things was, can you tell us if you're going to increase the utilization rate and if there's room to grow here?

Steven, nice to hear from you again. Yes, the utilization rate is relatively flat, but you have to take into consideration the changes in the market that we've experienced, primarily in the CIS, where the utilization rate has been significantly. And also in Africa, because of the challenges that we all hear about in Africa. So in those 2 areas, there's been some decrease in the utilization rate. The other regions have seen improvements in utilization rates, which is creating the offset and bringing us back to 58%, 59%. The increase in revenue can be attributed to a couple of things. In Australia, primarily, where we have a lot of rotor rigs doing water work. Many of these rigs have onto double-shifting now versus the single-shift operation. And that dramatically increases the revenue within the utilization rate. That also means that the mix of rigs that -- to generate more revenue is increasing. So that's one of the biggest increases here. There have increases in rig utilization in North America. It's improving in Latin America as well. [indiscernible] we come out of the winter and go back into the season. So I think we're going to see it relatively stable. I don't see it decreasing or increasing slightly. But that's where we are with the utilization. And what was the second part of your question? I'm sorry.

No. I was saying that as you increase revenues, it seems like the model is really accelerating because it seems like your gross margins go up quite significantly as the revenue goes up?

With the improving for a couple of reasons. If you have a year ago or maybe even a little bit longer, we were launching a lot of new long-term projects and starting them up is difficult, but we were coming out of COVID. A year ago, we had some significant labor shortages, and now we've worked through a lot of those individuals that were really on the B and the C team, and we've optimized the field operations. So getting -- as we said in the call, the operational performance in the field is really being fine-tuned and improved, and that's where we're getting the majority of the margin increase and the increase in revenue. And now there are few shifts more productivity, fewer mistakes, all of the above, drive the top line in them.

That's great. My last question is on, I guess, the frustration. I been a shareholder here for 10 years or so. And we -- why can't we get any recognition for what we're doing. We're trading basically -- I mean, you have real earnings now $0.44 in earnings. You're selling basically a 3x real earnings, and you're basically 1x EBITDA. I mean how do we get the market to realize what you're doing here, and how much cash you're generating? And you're going to pay all your debt down shortly, I'm sure. You're going to try to pay to restructure it, and you're going to have a stable -- a great balance sheet going forward. How do we get the market to realize what we're doing here?

So as we mentioned 3 months ago, the microcap market is tough. The metals market is mixed. The interest hasn't been where it should be, and we are undertaking to change that. I've begun to do some marketing in Toronto and meeting with some investors. If you look at the volume, the volume recently has been much, much better. So that, to me, and my limited view would mean that we are working through perhaps some negative overhang, if you will, now more significantly than ever before, that negative overhang was there, but now it's moving out. And I'm optimistic that we're near the end. I hope I certainly had some very positive feedback from the call that I've had. There have been some genuine interest. And the next press release that we put out soon, hopefully, we'll add to that optimism. So we sincerely appreciate your patience. We're with you, our shareholders and understand the frustration.

Would you guys return capital to shareholders or dividends or a special dividend or I guess, buying back the debt is grade too, but would you ever think about increasing or instituting a dividend?