Foraco International SA (FAR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Foraco International SA Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded on February 18, 2025. I would now like to turn the conference over to Tim Bremner, CEO. Please go ahead.

Thank you, Joanna. Good morning, everyone, and welcome to Foraco International's Q4 2024 Earnings Call. I am Tim Bremner, CEO of Foraco; and joining me today is Fabien Sevestre, our CFO. Earlier this morning, we released our fourth quarter and full year 2024 financial results via CNW Newswire prior to the opening of the TSX. If for some reason, you did not receive a copy, you can find it on our website at www.foraco.com. Following our prepared remarks, we will open the call for questions, which will be monitored by the operator. In Q4 2024, Foraco reported revenue of $61 million compared to a record $86.6 million in Q4 2023. EBITDA for the quarter came in at $13.9 million, representing 23% of revenue before one-off costs compared to $18.7 million in the prior year period or 22% of revenue. Further, our debt has been reduced from $65.2 million to $60.9 million at 2024 year-end. 2024 was a year of resilience and strategic execution. We achieved record performance in our core markets, North America and Australia despite headwinds in other regions, primarily due to a decline in the junior segment activity, our strategic exit from unstable jurisdictions and adverse foreign exchange fluctuations. Nevertheless, we're very pleased to report that net income attributed to shareholders remained stable year-over-year. I'll now turn the call over to Fabien who will provide more detailed and in-depth overview of our main figures. 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 '24 amounted to $61 million compared to $87 million for the same quarter last year. This decrease is mainly due to continued absence of junior activity due to lack of financing for $7 million, the exit from unstable jurisdiction for $5 million, projects delayed with majors for $11 million and negative foreign exchange for $3 million, which only impacts the top line. Conversely, Asia Pacific delivered its third consecutive record performance. By reporting segment, the Mining segment represented 83% of Q4 '24 revenue and Water represented 17%. Revenue in Asia Pacific increased 38% at $22 million, reflecting increases in demand and the deployment of new rigs. In North America, revenue amounted to $23 million in Q4 '24. 7% decrease mainly attributed to project delays with majors and 3% for foreign exchange. Revenue in South America decreased from $32 million to $10 million, mainly due to an absence of junior activity and unforeseen delays on confirmed projects. Revenue in EMEA for the quarter was $5 million compared to $12 million in Q4 '23. The company exited from unstable countries. In Q4 '24, the geographical activity split was North America, 39%; Asia Pacific, 37%; South America, 16%; EMEA, 8%. During this quarter, the gross margin, including depreciation within cost of sales was $11 million or 19% of revenue versus 26% -- 30% of revenue for the same quarter last year. The company proactively adjusted its cost structure to align with market conditions, representing a one-off cost of $3.5 million. SG&A decreased by 20% to $5.1 million compared to $6.4 million for the same period last year. As a percentage of revenue, SG&A was stable at 8%. As a result, EBIT was $6 million versus $13 million in Q4 '23. EBITDA amounted to $14 million, excluding one-off cost or 23% of revenue compared to $19 million or 22% of revenue in Q4 '23. On a full year basis, revenue amounted to $293 million compared to -- sorry, on a full year basis, revenue amounted to $293 million compared to $370 million in full year '23. This change is primarily driven by the continued absence of junior activity due to lack of financing for $40 million, the impact of exit from nonstable jurisdiction for $23 million, and adverse foreign exchange rates for $9 million. Conversely, our 2 main regions, North America and Australia delivered excellent performances, [ up 23% ] in Asia Pacific and stable in North America, offsetting performances in South America and EMEA, which decreased by 49% and 52%, respectively. Full year '24 gross profit was $63 million or 22% of revenue versus $94 million for '23 or 25% of revenue. As a reminder, our gross profit includes depreciation as a cost of sales. Full year '24 EBIT was $43 million or 15% of revenue compared to $67 million in '23, 18% of revenue. Full year '24 EBITDA was $60 million (sic) [ $60.5 million ] or $66 million (sic) [ $66.6 million ] 23% of revenue excluding one-off costs compared to $87 million in '23 or 23% of revenue. As at December 31, '24, the working capital requirement was $10 million compared to $5 million last year. Delays in collection of receivables at closing date represented USD 10 million. CapEx amounted to $19 million in cash compared to $26 million in cash in full year '23. This CapEx is mainly related to acquisition of 3 large proprietary rigs for Australia and [indiscernible]. At December '24, our net debt, including lease obligations, amounted to $60.9 million versus $65.2 million at December 31, 2023. I will now hand the call back to Tim for his closing remarks. Tim?

Thank you, Fabien. While the industry faces ongoing market pressures, which Foraco are not immune to, we've successfully preserved earnings and maintained strong operational performance. Our commitment to fostering enduring relationships with top-tier clients in stable regions remains unwavering. This strategy has been instrumental in maintaining our financial health and will continue to be the cornerstone of our operations. Looking ahead, we remain optimistic about the long-term fundamentals of our industry. Gold prices are testing record levels, driven by central bank buying and declining reserves. These reserves can only be replaced through increased drilling activity. Critical minerals and EV transition metals remain a strategic priority. Although recent geopolitical events have temporarily shifted market attention, the long-term need for secure mineral supply has never been stronger. And finally, copper demand continues to strengthen, fueled by the growth in AI, clean energy technologies and ongoing infrastructure development. Some of our key customers have opted to extend our contracts for only 1 year, allowing them time for longer renewal periods -- to prepare for longer renewal periods of up to 5 years. And correspondingly, our order book remains robust, reflecting the confidence in our services and industry positioning. Foraco remains committed to delivering value to our shareholders and stakeholders by executing our strategy, maintaining operational excellence and navigating market fluctuations with discipline. With a strong foundation, a high-quality customer base and long-term industrial tailwinds, we're well positioned for continued success in 2025 and well beyond. With that, I'll now turn the call back over to Joanna, and she will take your first questions. Joanna?

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

You mentioned around $200 million in backlog and a longer-term contract expected to ramp up in 2025. So looking at South America, past 3 quarters of average around a 60% year-over-year decline. So I'm tempted to model the remaining losses in Q1 of '25, but a gradual turnaround to positive gains in the second half of the year. Would that be a fair assumption?

Gordon, it's nice to hear from you. The challenges that we faced that we've experienced in Q4 are going to spill over in Q1. And I think we've given some direction on that. The challenges that are in Latin America are mainly a result of the annihilation of the junior market. And as we past reported, the challenges of the winter season for our high-altitude projects. But 1 thing that we have not highlighted and is impacted Q4 is the postponement of confirmed projects that Foraco has been awarded that for a variety of reasons, our customers have not started to execute on yet. This could be permitting delays and a variety of things. So we feel very strongly and believe very much in the market in Latin America, and we expect that to improve as the year progresses.

Okay. Fair enough. And just a quick one here. The debt reduction program seemed to be on hold through 2024. But if things do turnaround and I get some cash flows similar to what we saw in 2022 and 2023, should I model around a $10 million to $20 million reduction in debt this year?

So according to the terms of our loan agreements, we are limited to repatriating -- or sorry repaying $14 million in debt per year, and that's as per our capital allocation policy. If there is any excess funds available that will be discussed at the Board level to determine whether there's further debt reduction or not.

Okay. Okay. I believe you said that before.

The next question comes from Steven Green at Ordinance Capital.

So the results are, of course, disappointing. But I guess you're comping against really strong 2023. But you guys -- I'm glad you guys did a great job of getting the money back down to the bottom line, which you guys are really good at. But 2 things. Where is the growth going to come from? Gold prices are almost $3,000. And are we going to get any new gold contract coming this quarter?

Well, certainly, that's -- as we've reported in the past, Steven, increasing the representation of gold in our portfolio is very much part of our strategy. And we have seen an increase in gold tenders in our tender pipeline. That has definitely increased. And we're responding to those. Some of those are in our sweet spot of deep directional projects, which allows us to differentiate service quality versus price. So the answer to your question is yes, I'm optimistic that we're going to see an increased weighting in gold from mid-tiers and senior customers very soon.

Is that including the U.S. market or just outside the U.S. market?

That includes the U.S. market.

And with the receivables you guys didn't get in the fourth quarter, you reported 2 months ago, does that money come in now? Is there a problem with it?

No, that money has come in now. That was just a hangover from year-end.

All right. Just like you guys are doing a really great job, but we need growth. We need some growth. And it seems like I know the comps are going to be better this year because you will comp against 2024 which was a down year. But where do you see the growth coming from?

So the growth is going to come from new markets that we are entering in. I can see growth coming from Latin America, where we have restructured the business, reorganized and we've seen improvement in performance already in Latin America. So those are 2 areas that we're expecting growth to come from. We have got a great business in Australia, and we can see some planned growth in that jurisdiction as well.

All right. But the U.S. market. Anything in the U.S. market?

The U.S. market is quite good. I mean we've got a robust tender pipeline in the U.S. We are a new start-up operation. But because of our pretty significant positioning in the adjacent market in Canada and the fact that we're a leading provider, it only stands to reason, Steven, that it's only a matter of time that we're going to get some serious traction in the U.S.

All right. And the last question I have is you guys are now selling at basically 2x EBITDA. Your stock is $1.50, and you're selling basically 2x EBITDA. What about -- because you're talking about consolidation with another major drilling who sells at least 3x your multiple.

We have not had that conversation, no.

All right. Because we need some growth and you guys are -- I mean you're selling 2x EBITDA. It seems like it would be a no-brainer for them to want to take your fundamentals and put them on their multiple. But anyway, well, thanks for all you do, and we really do need some growth. I mean it just seems like you're doing a great job getting everything to the bottom line, but we just seem to be going in the wrong direction and getting success in getting new contracts. So thanks again, and hopefully, a turn around quarter.

The next question comes from Frederic Tremblay at Desjardins.

Just a couple of follow-ups maybe on the U.S. You did touch on it a little bit there. Just wondering if based on your pipeline, do you have any visibility on the timing of securing some potential first meaningful wins there. And then maybe the follow-up would be, are you expecting any impact at all from the tariff uncertainty that we're seeing right now for potential U.S. business?

So on the U.S., we are expecting -- I mean we've got a number of outstanding tenders at the moment, which we have been shortlisted on. And I am expecting a win on a number of those shortly. They're not material enough that they're worthy of a news release, but there's significant enough wins that it's going to give us some traction. And they're in the most important jurisdictions in the U.S. With respect to the tariffs, this is a complex situation. And yes, of course, we do analyze it. And the impact that we're going to experience is unclear because we don't really know what the U.S. administration is going to do. But what I can tell you is most of the drilling products that we source for our operations are sourced everywhere but the U.S. So the majority of drilling consumables for operations in North America, incidentally, which also support Africa and other parts of the world are sourced in Canada, which is good news for us. But certainly, there will be some impact to costs with tariffs. Fuel, for example, will no doubt increase. But we're very careful to mitigate against those cost increases by having our customers supply the energy for us because there's no real value added in us doing that, and also by making certain that our contracts are equipped with annual rate increases that reflect the cost of inflation and as our costs index up from things such as tariffs. So I think we've mitigated against those things should they happen.

Okay. That's great color. And is it fair to say that your competitors would also be impacted by the same types of cost increases over there?

I would say they're in the same boat.

Okay. My next question was more on the pricing side, just generally in the industry. What are you seeing out there? I'm assuming some of your competitors are maybe a bit more aggressive given the current market conditions. Maybe just an overview of what you're seeing on that front industry-wide and sort of a reminder as well on what Foraco's pricing approach is just based on pricing and margin protection because it did look like the margin in Q4 was quite strong. So just maybe a reminder on how you're thinking internally about pricing and margin.

Sure. So this is not the first time we have been in a market that is changing and becoming more competitive. And certainly, in some parts of the world, Canada, in particular, has become far more competitive in the last quarters or so. And I remind everybody that Foraco's strategy is not to gain market share at the expense of margin. It makes no sense for us to load up an order book at work that is underpriced should the market change and we anticipate it to, especially over a long-term contract. So it is -- and a lot of those projects that are particularly competitive, there is -- it's relatively straightforward drilling, and we don't have the opportunity to particularly add value. So again, we're not going to chase underpriced work simply to gain market share.

Okay. Great. And then last question for me. Just on the majors side, you did mention some project delays there. I'm wondering if you could maybe expand a bit on that? And what's sort of driving those delays? And how long should we expect that situation to last?

So the answer to that question depends on the customer, and they have their own unique situation. And it also depends on the jurisdiction. So it's kind of an all of the above, whether it's a permitting issue or a shift in priorities for funding exploration versus other needs. We've had some of our long-term contracts where the scope has changed mid-tier. And a lot of our customers have just said, pause and just have a little bit of a wait and see. There's an awful lot of uncertainty out there. So that is contributing to some of the reductions that we're experiencing. But it's important to note that these are driven by customers and market forces outside of Foraco, and absolutely not related to our service delivery, which we are protecting and maintaining at all levels despite of market conditions.

The next question comes from Donangelo Volpe at Beacon Securities.

Just looking at the first half of 2025. I think in the commentary I saw that we're expecting a somewhat slower start to the first half of the year. I guess primarily, first, can you talk on, we're still expecting a strong performance out of Asia Pacific. It's mostly out of Latin America and North America that a bit of this drag comes from. And b, I was just kind of hoping to quantify the first half outlook. Are we looking at numbers relatively in line with what was presented in the first half of 2024? Or are we expecting weaker conditions than we saw last year?

So we're going to -- Donangelo, so we're going to be a little bit slower out of the gate this year. And I think we have indicated that. But then if you have a look at the order book, which we reported and you discount the first quarter, I think you can have a little bit of insight as to where we see the balance of the year going. So it's -- yes, I think that suffices.

[Operator Instructions] Next question is a follow-up from Gordon Lawson at Paradigm Capital.

The last time I saw this updated was in your March presentation. So just following up on your drilling in the gold sector. You last reported to be 16% of total revenue. How should we expect that to grow or change throughout the next year. I mean we're still getting 51% from battery metals. Is that accurate?

So the combination of copper, nickel and lithium is about 48% with gold at 13%. And we are at a low point with gold, and I'm optimistic that we'll see that commodity increase in weighting significantly in 2025.

Thank you. That concludes the Q&A session. I will turn the call back over to Tim Bremner for closing comments.

Thanks, Joanna. Well, we appreciate your interest in Foraco and your attention to this call today and look forward to speaking to you again after our Q1 2025 results are released. Thank you very much, everybody, and have a good day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.