Foraco International SA (FAR) Earnings Call Transcript & Summary

Good morning, and welcome to the Foraco International SA's Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded on Friday, February 16, 2024. I would now like to hand the call over to Tim Bremner, CEO. Please begin.

Thank you, Mark. Good morning, everyone, and thank you for joining us on the Q4 2023 Results Conference. I am Tim Bremner, CEO of Foraco and joining me today is Fabien Sevestre, CFO. The news release of our results was issued this morning prior to the opening of the TSX through CNW. If for some reason, you didn't receive a copy of the release, please visit our website at www.foraco.com. After the overview of the results and our comments on the quarter, we'll open up the call for questions moderated by Mark. We're pleased to report yet another excellent quarter, which is the highest Q4 and full year revenue ever. Fabien will provide a full overview of the financial performance shortly. We continue to deliver excellent performance across all of our operations globally. And despite the pullback in West Africa and our exit from Russia, utilization rates remained stable at 54% for the quarter and 56% for the full year 2023. This is a direct result of improved utilization rates in other regions that provided a full offset. We would again like to stress that none of this would have been possible without the dedication and competence of our teams, who we warmly thank for their contribution. During the quarter, the macroeconomic in climate has been relatively stable. Recession fears have eased, inflation rates improved and interest rates held. With respect to the metals market, after a mixed year, the IMF Metals Index improved slightly in the last quarter, but was still down about 5% over the full year. Gold prices led the index and copper prices have showed improvement and we're optimistic that this trend will translate into improved confidence in the equity markets, particularly for the juniors. In line with the year's financial performance, we continue to refresh many of our long-term contracts and we posted yet another record order book for 2024 of $236.1 million, up from $217 million from the year prior. This is an increase of 9%. It seems that a 2-tier market has emerged, whereby feasibility and life of mine projects remain stable, while junior markets continue to deal with some significant headwinds. I'll now pass the conference to Fabien, who will walk us through the financials in more detail. Fabien?

Thank you, Tim, and good morning, everyone. First of all, and as a reminder, Foraco reporting full IFRS and in U.S. dollars. Revenue for Q4 '23 quarter amounted to $87 million compared to $85 million for the same quarter last year, a 2% increase. The solid revenue was driven by the continued performance of main contracts and the provision of value-added drilling services, which more than compensated for the reduced activity in CIS, as Tim mentioned. By reporting segment, Mining represented 88% of Q4 revenue and Water represented 12%. In Q4, the geographical activities split was North America, 30%; South America, 37%; Asia Pacific, 19%; EMEA 14%. In North America, revenue amounted to $26 million in Q4 '23 compared to $28 million in Q4 '22. This decrease was mainly due to the delayed start on 2 significant projects now scheduled for 2024 and the preparation and the relocation of rigs for our new U.S.-based contracts, which started in February '24. Revenue in South America increased by 8% at $32 million compared to $29 million in Q4 '22. At $16 million, revenue in Asia Pacific increased 17% compared to $14 million for the same quarter last year, reflecting quarter-over-quarter increased demand and the commissioning of new rigs. Revenue in EMEA for the quarter was $12 million compared to $13 million in Q4 '22, with 6% decrease. Revenue in Southern Europe and Africa remained stable compared to Q4 2022, while activity in the CIS decreased by 15% due to the unstable situation in the region. During this quarter, the gross margin, including depreciation within cost of sales as per IFRS rules was a profit of $20 million or 23% of revenue versus $80 million or 22% of revenue for the same quarter last year, an 8% increase. This reflects the solid operating performance of our projects. SG&A was stable compared to the same quarter last year at 7.4% of revenue compared to 7.6% in Q4 2022. The EBIT amounted to a profit of $13 million versus $12 million in Q4 '22, a 12% increase. EBITDA amounted to $18.7 million or 22% of revenue compared to $17.1 million or 20% of revenue in '22. On a full year basis, revenue amounted to $370 million compared to $331 million in 2022, a 12% increase. The uptick in revenue in both segments can be attributed to favorable market dynamics, coupled with the company's proven capacity to deliver. This has generated significant growth and a new record for Foraco. In full year '23, the geographical activity split was North America, 32%; South America, 36%; Asia Pacific, 18%; EMEA, 14%. Compared to 2022, we recorded a 26% growth in South America, 28% in Asia Pacific, 14% in North America, while EMEA decreased by 26%. Revenue in Southern Europe and Africa experienced a slight increase compared to full year 2022. And operation in the CIS country witnessed a 42% decline primarily attributable to unstable situation in the region. By commodity, energy transition now represents 52% of the full year revenue, it was 42% in 2022. The full year '23 gross profit was $94 million versus $71 million in 2022, a 32% improvement. The full year '23 EBIT was a positive $67 million or 18% of revenue compared to $46 million or 40% of 2022 revenue. And the full year '23 EBITDA was a positive $86.7 million, 23% of revenue compared to $66.5 million or 20% of revenue in the full year 2022, or increase of 30%. In full year 2023, we managed to control our working capital with the requirement of $5 million compared to $10 million for the same period last year. During the period, CapEx totaled $26 million in cash compared to $20 million in full year 2022, driven by the increased activity. CapEx relates essentially to the acquisition of 7 new rigs, major rigs overhauls, ancillary equipment and rods. As of December 31, 2023, cash and cash equivalents amounted to $34.3 million compared to $29.4 million as of December 31, 2022. During the period, we also managed to prepare our long-term debt and refinancing. Postponing the maturity and cutting the interest charge by 50% with an interest rate at 7% approx. Our net debt was reduced to $65 million at year-end, and our leverage ratio to 0.75. Despite financial achievement, along with notable improvements in our EPS, expense our options for capital allocation. I will now return the call to Tim for his closing remarks. Tim?

Thank you, Fabien. This quarter concludes a truly record year for Foraco, led by continued strong financial performance. As Fabien mentioned, debt refinancing and reduction in our debt servicing costs, our return to normal commercial banking relationships and the change in senior leadership. The groundwork for such a successful year was well prepared under the leadership of Daniel Louis Simoncini here. And for this, we are truly grateful. It's made for a seamless transition for Fabien and I as we look forward to their continued support and leadership at the Board level. Going forward, we will continue to develop our strategic positioning in 3 key markets: energy transition metals, gold and water services. We will maintain our long-term presence and focus in key mining regions, including North America, South America, specifically Chile, Brazil and Argentina as well as Australia. More recently, Foraco has reestablished operations in the U.S. It's a key market for us that's aligned with our strategic positioning, and we will focus on this market actively in 2024 and beyond. With respect to ESG reporting, as many of you know, Foraco is required to report under the EU standard in accordance with Corporate Sustainability Reporting Directive of 2022. We're pleased to report a decrease of our global climate footprint as captured by Scope 1 and 2 reporting. Year-over-year, we've reduced our carbon intensity by about 7% and net water consumption by about 9%. We continue to refine our methodology and improve the accuracy of our reporting. With respect to health and safety, [ TRIF ] rates have also improved to 1.26 for 5.8 million man hours down from 1.31 in the year prior. In Q3 of 2023, Foraco adopted the 4-stage health and safety management plan globally. This was first adopted in Australia and the 4-states has proven very effective in improving HSE performance in the underperforming regions around the world. This has contributed to the improved trend. The demands for our services remain strong. And on this solid foundation, we will continue to develop relationships with new Tier 1 customers and new markets such as the U.S., especially as they relate to energy transmission metals and gold. Water services remain a key focus, not only for human consumption, but as they relate to mining. We will continue to develop these services across all jurisdictions as Mining and Water services intersect virtually on every mining operation globally. To conclude this record year, I'm very pleased to announce that the Board of Directors, reflecting on its confidence in the company's strength and outlook, has decided to propose a dividend of $0.06 per share at the next shareholders' meeting. This dividend represents a return on investment for shareholders of about 3.4%. On behalf of the Board and management team, I extend our deepest thanks to each member of the Foraco family for their invaluable contribution to our success. Thank you for listening to our remarks. I'll now turn the call over to Mark, who will take the first question from our listening audience. Mark?

[Operator Instructions] And our first question comes from the line of Gordon Lawson at Paradigm Capital.

Congratulations on another great quarter. Can you please elaborate on the delayed projects in North America in terms of size and scope and what we should expect for the first quarter 2024?

Well, the delayed projects were mainly in North America, and these were delayed by our customers for a variety of reasons, the biggest one being big permitting. There were significant water projects and they will be resuming in 2024. They are signed commitments that we have from this customer. It was really just a scheduling situation for them relative to their permits. With respect to how that's going to impact the first quarter of 2024, as you know, Gordon, we don't give guidance. But I've got full confidence that this work will proceed. In fact, we're preparing for the mobilization of those deferred projects now.

Okay. And yes, I'm aware you don't give guidance, but I'm going to prod a little here. The Euro segment outperformed this quarter relative to the past 2 years. So now that Russia has been exited, should we start to model some growth for that segment in 2024? Or are there other factors to account for?

Sorry, for which segment were you referring to?

EMEA.

EMEA is not as much of a focus for Foraco as other jurisdictions, I mean, we're looking for growth opportunities in Southern Europe, Spain and Portugal. They are mature markets. They're not as big as some of the other ones. So I wouldn't model too much increase from EMEA, Europe and CIS. Russia represented about $17 million, that won't be in 2024, and the offset is going to come from the other regions.

Next question comes from the line of Ahmad Shaath at Beacon Securities.

Tim, congrats on a solid quarter. I guess just to go back on your earlier commentary on the delayed start for those projects. Just to make sure I got that right. Were they on the Water segment or in the Mining segment that delay?

Mining-related Water services. There is a couple of significant projects in Canada that were delayed because of permitting, but now are signed and ready to go. So we would be reporting it as Water segment.

Sorry, I didn't catch it. In the Water segment, you will be reporting it?

Yes, we would be reporting it in Water segment, correct.

Okay. Fair enough. That's very helpful. And I guess you 1 on capital allocation. You guys are proposing a dividend, but there is a good chunk of free cash flow as well left. So how should we think about capital allocation beyond that? And I guess what I'm trying to get at is, should we expect you to resume fleet growth? And if so, how should we think about fleet growth plans for '24 and beyond, if you guys have decided on that?

So as we've mentioned before, number one for capital allocation is ongoing debt reduction, which we're continuing to do. The capital plan, the CapEx plan for 2024 does allow for an increase in the number of rigs, approximately 10. And the net rig count will remain about the same once we factor out of Russia. The dividend represents about 15% of our free cash and about 15% of our net profit.

Got it. That's helpful. And I guess back to those contracts. So you said the contracts you have it like signed and you're ready to mobilize. Do you have a soft launch date for these contracts? Is it going to fall within Q1? Or should we -- is it more of a Q2 event?

It will be a second -- it will be a little bit in Q1. They're mobilizing the second half of March.

Second half of March. That's very helpful. Then congrats again on a solid quarter.

[Operator Instructions] The next question comes from the line of Steven Green at Ordinance Capital.

Great. Really, I can't complain about anything really. So I just have a couple of questions about the future. You guys are doing all the great things. I'm so glad. You're getting the debt down to manageable levels. Just on the utilization rate, it's at 55%, I think, for the year. With the new -- when you replace older rigs with the new rigs, I guess you said you're going to replace 10 of them. How will that -- are we going to get the utilization rate up to the mid-60s? I think it's been there before.

It has, Steven, and good to hear from you again, by the way. It has been over 60%. Like I mentioned, in 2023, there was some decrease in utilization rate from the CIS and also from West Africa. And we've seen that offset in the other jurisdictions. Where we see improvement in utilization rate is into the new U.S. market. There, we took idle assets, moved them from Canada, into the Upper Midwest, which was a relatively easy thing to do. And we still have more assets in Canada that we could put into the U.S. market very easily. So that's our #1 priority to get the utilization rate up there. We see the utilization rate improving in Latin America, in part because of the ongoing demand in Chile, which is improving. And the opportunity for us to reposition assets in Argentina as the market demand there remains fairly strong. And those assets are moved from Chile and Brazil into the country. The assets that we have pulled out of Russia are moving -- have moved to Kazakhstan and they will improve as the seasonality allows us to resume operations there. And then some of the underground equipment that we moved out of West Africa, we will put to work in Canada. A lot of those assets have already been repositioned. So yes, we see some opportunity for the utilization rate to improve.

That will help margins. Great. And what I was just curious, when you -- the competition in the market seems pretty stable. The players are pretty stable. What is -- what's your win rate, say, when you go against Major drilling or the -- forgot the other one, Boart Longyear. What is your win rate? Or is it just a matter of that you guys don't bid on the same projects because it's only limited capacity?

I don't want to be giving you my impression because I really -- we don't really track the win rate against our competitors. But all I can say is that we've got good competitors. I mean both Boart Longyear and Major are value companies. They're not low-cost leaders. They have a similar operating style and philosophy to us. So we're pretty evenly compared. Most of our revenue is coming from the renewal of our existing contracts. 70% of that has come from customers, who have renewed contracts that were in year 3 and they've taken the second year -- sorry, the 2-year option to go to 5. And that's been the source of most of our revenue. So it's not a -- it's not a super active and competitive bidding space for us really.

Right. But you mentioned that you guys have a lot of extension of your contracts and a lot of -- you've transitioned to a lot more long-term contracts than you used to have, which is great. And I think one of the things maybe that these companies are perceived is so cyclical, and that's why we're still as great as the stock price has been over the last couple of weeks or months, we're still selling at such a low multiple of EBITDA, like under -- under 3x EBITDA. And maybe it's because we're perceived as such a cyclical company. I mean can you talk about how with these long-term contracts and the renewals and so forth that you've taken the cyclicality out of the business and it's much more predictable going forward? I know there's some juniors that are not predictable, but it seems like on the whole that the business is becoming much more predictable?

It is. And as we move our business into -- we've intentionally moved our business into the life of mine, which is pre-feasibility and feasibility work. So this is project-based work that our customers have versus exploration dollars. So it's a capital allocation to a specific project to bring it to the mining stage. And that sets us up with a good relationship with that customer, so that when they do go into production, we're already there. We've established a relationship with them. And we -- that gives us, in many cases, an advantage to continue into the production phase. When you're in the production phase and the pre-feasibility stage, usually the feasibility stage, the capital is committed to that project. So even with metal prices fluctuating, they're relatively unscaled. And the same with the producing mine. Drilling in a producing mine is a lot like insurance. You provide that information to the customer. It really helps them optimize their mining operations. And while they may reduce the insurance a little bit, they don't pull back, if the metal prices are decreasing. In mine drilling is not a huge amount of their operating cost, but the value of the information that we provide is huge. So you tend to get some cyclicality out of the business by concentrating on that market. And then there's the Water business, which is not cyclical at all and is mostly related to the operating mines. I mean there, we help our customers understand what their operations are doing to the water table by doing monitoring wells. And as they move around, we need to put in new wells. And in some places, we help them remove the water from the operations that they're about to mine. So we're directly linked with the producing mine on the water side. And again, that is not cyclical.

Well, you guys have done an amazing job, and I'm happy you guys continued what Daniel started, and I look forward to a great time in the future, maybe even an uplisting to the NASDAQ one day.

That has been talked about for a while.

Just one last question I got you. What -- you guys are reducing debt. And obviously, like the last caller mentioned, you have a lot of cash flow. Is there an optimal level that you guys want to get down to or target?

Well, there's we have not got a target defined, but we want to reduce -- I mean, the debt is manageable now. But we would like to have the debt to a point, where it is manageable under all circumstances. I guess a benchmark that our gross debt would be no more than 1 year's full EBITDA would be a target, I suppose.

Well, you're under that now?

Yes, we are -- we are. We are. But I mean, we've got long memories. It was a difficult time when the market was very bad a number of years ago. And we want to pay the debt down a little bit further.

Yes. No, I agree with you because I think the stock will look a lot more valuable with that -- with a little less debt. Well, congratulations again.

And we have one further question on the line. It's a follow-up from Ahmad shaath at Beacon Securities.

Just a couple of follow-ups. First, Tim, how has been the start of the year following the holiday season? Is it a normal ramp up? Have you seen the late start? Or how would you describe it as?

I would say it's been a normal start. I mean it's never perfect. There's always a couple of bumps in the road. But no, the start for this year has been quite normal, nothing anomalous.

That's very helpful. And secondly, on the bidding front. Any big contracts or any anything out there that you are bidding on that you're hopeful that could provide a material lift to 2024 or 2025 numbers? Or how would you describe the bidding activity for you guys?

The pipeline is choppy. In some regions, it's better than others. The junior pipeline in North America is pretty quiet, for example. We know there are some other multiyear projects in North America that are coming out that we will be tendering on. But the other thing that we're doing, Ahmad is looking to develop relationships with key customers one-on-one. We've identified Tier 1 customers that we know would benefit from using our services and we're working on cultivating that relationship and we know that those tenders are coming out. And by cultivating the relationship ahead of time, it helps them look at our proposal once the bidding is completed in a different light as if they didn't comparative, not knowing this. So we're working on that as well. But the tender pipeline is quiet at the moment and optimistic that, that will improve.

Got it. That's very helpful. And just to clarify, quiet on the junior side, but you're hopeful on a multiyear contract that are coming up with some tier 1 clients, right?

Correct.

That was great. And then secondly, I'm not sure, if you mentioned this and I missed it, but it's not -- so this dividend is going to be quarterly dividend, annual dividend or just a one-off?

At this stage, it's going to be a one-off. That it's going to be [indiscernible] at the shareholders' meeting sometime in Q2 I believe.

That's very helpful. And are you able to give us any color on this mobilization into the U.S. in terms of how many rigs, maybe potential for expansion there? What are you hoping for and commodity exposure?

Well, as I mentioned, it's going to be the energy transition first, and that's the sector that we're working in. The new customer that we have is right in the sweet spot. It's energy transition metals. It is relatively close to home in the Upper Midwest. And it's right at the project feasibility stage. So it ticks off all the boxes for us. At the moment, it's a 3-rig project, then it's not a long-term one, but we're optimistic that there will be follow-on work from this. In fact, we're virtually certain of it. And then we're going to proceed with staffing the business, looking for a country manager, looking for operations leadership and developing that market with customers that we already know. And that includes the Water business and includes the coring business. So there are idle assets in Canada that we can move into the country. We've been able to move some of our Canadian employees into the country, which was a bit of an undertaking, but they will quickly be replaced with [ non-quantity ] American employees as soon as we can. It would not be a good idea to launch a new operation into the U.S. with field crews that were largely unknown entities and damage our reputation in terms of performance. So that's why we use [ no quantities ] in Canada. But the HR department is pretty busy right now for restaffing all those rigs.

That's great. And I guess, if we have time, a couple of follow-ons on that. So you said you're looking to mobilize more rigs out of Canada into the U.S. Are you able to give us color on how many unencumbered rigs that we'll be able to move from Canada to the U.S., assuming business comes and you won some business in the U.S.? Just trying to get an idea how big this can be for you.

Yes. So the limiting factor really is going to be on how quickly we can staff these with qualified people, but in terms of rigs. We have at least another 5 core drills that would be available for surface. We've got another 6 underground rigs that we could send to the U.S., and we have 2 heavy rotary rigs that we could send to the U.S. We're not going to deploy all of those. We can't in terms of ramping up and finding people and developing it. We'd much rather go carefully and make certain that we deliver the project the way that our customer expects. So the core -- surface core drills will be increasing as we can. The 2 rotary rigs, we're looking for work for them in Mining-related Water services. And they're available. They're relatively easy to import into the country. And again, then we would staff them with known quantities and transition to local employees.

That's very helpful, Tim. And I guess, with all that said, it seems that you guys are looking to establish a base in the U.S. and make that sort of a part of your business over the next 3, 5 years. That's -- is that a fair statement?

Yes. We've been in the U.S. a number of times before, but really operating a U.S. subsidiary managed from Canada, and we're going to be transitioning from that to a permanent base in the U.S. with the right people and develop the business as a stand-alone U.S. operation.

That's great. That's very helpful. I really appreciate it.

And we've had one further question come through, that's from the line of John Bair at Ascend Wealth.

Following up on the staffing issues coming into the U.S. I was wondering what kind of capabilities, traditional oil and gas field hands might have and with the rig count for the energy industry being way down, I would imagine there's a fair number of qualified personnel that are used to working out in the field and so forth that you might be able to encourage to join your fleets as you move them into the U.S. Could you talk about that at all?

Sure. There is some cross-pollination between the oil and gas and our rotary business. We see that in Canada all the time. But that is really in the supporting positions of like a floor hand or a roughneck or whatnot. When it comes to the more senior positions as a driller or as a poster or drill supervisors, we call it in Mining, that's a little bit more challenging because the Water business requires a full skill set of the crew. I mean drilling the hole is really only one portion of it. Then there's the installations, the development of the well, installing the pumps and whatnot, and you need to be a lot more than just a driller. And in that business, we're left to our own devices, unlike the oil and gas business, where you have the client representative assisting all of these operations we're on our own. So it's -- to answer your question, there is some crossover, but not at the key positions. So we're -- those people exist in the U.S. don't get me wrong there's a tremendous capability in the U.S. in terms of Water well work. It's just a matter of us attracting those people to our company.

Very good. And then what would you say would be sort of a ramp-up time to get -- bring somebody, let's say, that's not experienced in that area, to train them to where you felt capable that they were capable of handling the operations that they were entrusted to?

A minimum of 2 years, yes.

And there are currently no further questions in the queue at this time. So I'll hand the floor back to Tim for the closing comments.

Thank you, Mark. Well, we appreciate your time and interest, everybody. And thank you for listening, and we look forward to seeing some of you in Toronto with PDAC. Have a nice day.

This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.