Foraco International SA (FAR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Foraco International SA Third Quarter 2024 Earnings Call. [Operator Instructions] This call is being recorded on Wednesday, October 30, 2024. I would now like to turn the conference over to Mr. Tim Bremner. Please go ahead, sir.

Thank you, Laura. Hello, everyone, and thank you for joining us on our Q3 2024 results conference call. I am Tim Bremner, CEO of Foraco. And with 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 Newswire. If you did not receive a copy of the release, please visit our website at www.foraco.com. After the overview of the results and our comments in the quarter, we'll open the call for your questions moderated by Laura. Earlier today, we reported revenue for the quarter at $78 million compared to a record $95 million for Q3 2023 and with an EBITDA of $16.1 million, representing 21% of revenue compared to $25 million in Q3 2023, equating to 26% of revenue. For the second consecutive quarter, our 2 main regions, North America and Australia, exceeded last year's record performance with revenue for the quarter of $35.8 million for North America, an 11% increase and $25 million for Australia, a 27% increase. Additionally, both achieved solid margin performance in line with our expectations. Our strategy of focusing on long-term contracts for Tier 1 customers in prime mining jurisdictions is a sound one as this segment of our business grew by 2% compared to Q3 last year and now represents 91% of our business. Our Water business continues to perform well and has increased to the same level as Q3 '23 or 14% of revenue. This increase is a result of the full deployment of our NGBF rotary drill in Western Australia, where it has been extremely well received by our customer and crews alike. In fact, earlier this month, Foraco won the Australian Drilling Industry Association Innovation of the Year Award for the NGBF, not only because it's a reliable, state-of-the-art, hands-free remote controlled rig, but also because it's compact designed, much smaller footprint relative to other drills with some even with less capacity. This award has garnered a lot of attention from our customers as we now prepare the second NGBF, which is in Australia, and we continue with our plans for the third rig to arrive as scheduled later this year. I really look forward to providing you with further updates as this integral part of our business develops. I'll now turn the call over to Fabien, who will provide a complete overview of our financial performance for the quarter. Fabien?

Thank you, Tim, and good morning, everyone. First of all, and as a reminder, Foraco reports in full IFRS and in U.S. dollars. Revenue for Q3 '24 amounted to $78 million compared to $95 million for the same quarter last year, an 18% decrease. By reporting segment, the Mining segment represented 86% of Q3 '24 revenue and Water represented 14%. Asia Pacific and North America recorded their second consecutive record performances. Revenue in Asia Pacific increased 27% at $25 million, reflecting increase in demand and the deployment of new rigs. In North America, revenue amounted to $36 million in Q3 '24, an 11% increase, driven by long-term contracts with Tier 1 clients. Revenue in South America decreased from $30 million to $13 million. The region is primarily affected by a drop in demand from the Juniors and unanticipated delays by some customers after a particularly long winter season. Revenue in EMEA for the quarter was $4 million compared to $14 million in Q3 '23. The company exited from Russia and some unstable West African countries. In Q3 '24, the geographical activity split was: North America, 46%; Asia Pacific, 27%; South America, 17%; EMEA, 5%. During this quarter, the gross margin, including depreciation within cost of sales, was $17 million or 22% of revenue versus $27 million or 28% of revenue for the same quarter last year. Most projects generated solid operating performances. Lower revenue affected the gross margin because of fixed operational costs included in the gross margin. SG&A decreased by 20% to $5.4 million compared to $6.7 million for the same period last year. As a percentage of revenue, SG&A was stable at 7%. As a result, the EBIT was $12 million versus $20 million in Q3 '23. The EBITDA amounted to $16 million or 21% of revenue compared to $25 million or 26% of revenue in Q3 '23. I remind you, there is no adjustment to the IFRS figures in our financials. On a 9-month basis, revenue amounted to $233 million compared to $284 million in year-to-date Q3 '23, an 18% decrease. Revenue increased 2% in North America and 18% in Asia Pacific. In South America and EMEA, revenue decreased by 43% and 50%. The year-to-date '24 gross profit was $52 million versus $74 million for the same period last year. The year-to-date '24 EBIT was $36 million compared to $53 million for the same period last year. And the year-to-date '24 EBITDA was $50 million compared to $68 million in the same period last year. For the 9-month period ended September 30, '24, the working capital requirement was $23 million, same as last year. This increase is the result of increased activity in North America and Asia Pacific. CapEx amounted to $14 million in cash compared to $21 million in cash last year. This CapEx is mainly related to the acquisition of 3 large rotary rigs for Australia [indiscernible]. At September 30, '24, our net debt, including lease obligation, IFRS 16, amounted to $78.3 million versus $65.2 million at December 31, '23. I will now hand the call back to Tim for his closing remarks. Tim?

Thank you, Fabien. With the easing of inflation and fears of a recession having all but disappeared, geopolitical tensions are on the rise, and they are a contributing factor that impacts the exploration industry, especially for Juniors, who continue to face challenges attracting financing. And this has an impact on Foraco. Despite this, we're confident in the outlook for our business, but this might require some patience. Critical metals, especially copper and other EV transition metals, remain high on the political agenda as demand forecasts continue to grow, indicating a potential deficit in the supply in the near future. Therefore, this demand cannot be met without significant new discoveries, all of which will require drilling. Similarly, as gold reserves decline and prices surge, it's only a matter of time before we see a significant increase in financing that will fund the exploration needed to find these new discoveries. In fact, in recent weeks, there have been some signs of this easing for the Juniors. While we anticipate and look forward to a resurgence in pure exploration, Foraco remains focused on its strategy of developing long-term contracts with Tier 1 customers in prime jurisdictions, which will require drilling to support their mining operations. We are actively involved in a number of new opportunities as we work to extend or renew existing projects, all of which we look forward to reporting on in the coming weeks. And finally, I want to emphasize the importance of our rotary business, particularly as it relates to water services for mining. These are exciting times for our team in Australia, which will no doubt help create new opportunities for us in other regions of the Foraco world. Thank you for listening. And I'll now turn the call over to Laura, who will take the first question from our listening audience. Laura?

[Operator Instructions] Our first question comes from the line of Donangelo Volpe from Beacon Securities.

Just wanted to highlight the impressive results out of North America and Asia Pacific. Can you touch on how these pipelines are looking there for new business and how we're going to continue the record numbers that we've been seeing?

Donangelo, it's nice to hear from you. Well, as you know, we don't provide guidance. But what I can say is that this has been a very sustainable part of our business. And as I indicated, the market drivers and the fundamentals for our business would lead one to suspect that this would be sustainable going forward. We're working on new opportunities, and we're working on extending existing contracts. These are long-term opportunities, and we'll report out when those opportunities come along and meet the threshold for news.

Okay. And then just for SG&A, it was down about 20% year-over-year. I think you guys held around 7% of revenues. Can you guys go over some of the optimization efforts that have been made so far and kind of where there's some room for additional improvement? Would you anticipate remaining around the 7% mark?

That's been a pretty historical figure and a benchmark for us. We're very prudent about cost management. And as our top line is impacted, we need to react. We're not going to react to the point where it jeopardizes the business, absolutely not. But we are particularly efficient in that regard. And I would see that, that ratio of SG&A remaining around the 7%.

Okay. And then final question on my end. I just wanted to highlight the gross margins on the Water business. I think you guys are approaching 32% for this quarter. It was great improvement. Can you touch on some of the factors there? Was it just better contract wins? Or what was it a function of? And do we anticipate those maintaining around 32% or kind of normalizing around the 25% mark?

Well, there has been no -- the Water business has been relatively stable for us. And the margins that we have been achieving are consistent with what we've been achieving in the past for the Water business. And I don't see that particularly changing.

Our next question comes from the line of Steven Green from Ordinance Capital.

I guess I'm glad that the business has stabilized. So I guess that without the Juniors, the business has stabilized because you have a lot of long-term contracts. So that's a good news. I was curious, the utilization rate is still quite low at 40%. I know you're getting these new rigs. And I guess, one rig probably is a lot more efficient than the older rigs, so you may have to not employ as many. But what do you see this utilization rate? It seems like -- I know that in the past, crews were a limiting factor in terms of your growth. But now it seems like you have the crews, but you don't have the utilization of the rigs. Can you comment on that?

Sure. Steven, it's nice to hear from you, first of all. Utilization rate really varies from region to region around the world. For example, you can appreciate that in North America and in Australia, it's much higher. And in South America, it's the opposite. We can't easily move rigs from one jurisdiction to the other. And nor would we necessarily want to from the Latin American region, which is still a prime jurisdiction for us. So we're going to keep them there, while that market improves. So the maximum utilization rate that we've had is about 75%. So, I think that we've got very, very good utilization rate in some regions. We need to improve in others. And right now, we're sitting at 40%.

Okay. So we shouldn't really use that as a measure anymore. I mean, I used to see that as a measure all the time of how the business was growing. So we shouldn't use that as a measure?

It is one measurement, Steven. And I wouldn't say it is the optimal measurement. For example, we could add another NGBF in Western Australia, which we're going to be doing shortly. And that won't move the utilization needle, but it does move the top line significantly as compared to per se a couple of small underground rigs, which don't have the ability to generate the same amount of revenue. It's one metric for sure, but I wouldn't hang my hat on it for everything.

And you have the [ crews ] to support growth going forward?

Sorry, could you repeat that?

You have the crews to support growth going forward? I know you have strong crews.

Yes, that's certainly eased from a couple of years ago. So, the labor market is nowhere near as tight. Even in Australia, there's been some improvement in the labor market. We've all read about some of the closures in the nickel business, and there's been some easing there. So we're quite comfortable with our labor position.

All right. Just a couple of questions. I know that South America was some -- you had some issues down there, I guess, internally. And I guess -- and that's the growth of copper is down there, and I know we need copper and the price of copper seems fairly stable and fairly strong right now. Do you see your expansion going there with, I guess, some of the senior or the Tier 1 miners -- new contracts?

Definitely, definitely. I mean, the tender pipeline in Latin America is very robust, and we see that improving. We don't have any particularly internal issues that need to be resolved. Just for us, this is really just market dynamics and timing and some internal decisions by our customers to defer certain projects. But the fundamentals for Latin America are fantastic. It's a great mining market. We've done there extremely well there before, and we intend to do extremely well there going forward.

And the weather is easing there. So we're getting into the drilling summer season, so that won't be an issue in the next couple of quarters?

Not at all. No, we're mobilizing rigs in all 3 countries that we operate there.

And are we winning contracts against like major and -- are we winning contracts? Or is it strictly -- these are price issues with contracts?