Foraco International SA (FAR) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Foraco International SA First Quarter 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Wednesday, April 30 of 2025. I would now like to turn the conference over to Mr. Tim Bremner, CEO of Foraco. Please go ahead.

Good morning, everyone, and welcome to Foraco International's Q1 2025 Earnings Call. I am Tim Bremner, CEO of Foraco. And joining me today is Fabien Sevestre, our CFO. Earlier today, we released our first quarter 2025 financial results via CNW Newswire prior to the opening of the TSX. If you have not yet received a copy, you will find it at our website at www.foraco.com. Following our comments, we will open the call for questions, which will be monitored by the operator. As expected, Foraco reported Q1 2025 revenue of $55 million compared to $77 million in Q1 2024. However, this result is not indicative of the outlook for the year ahead. Q1 is historically Foraco's weakest quarter due to the seasonality of the mining business. While many projects in Australia and North America, we started after the break as expected, this was not the case in South America, where most had already wrapped up before year-end. This was followed by the staggered start of new projects throughout the quarter, which when considering the reduction in revenue during mobilization and project ramp-up resulted in the shift in financial performance for the quarter. We continue to ramp up operations in South America, which will no doubt continue to an improvement in the coming months. Our Water business remains strong and continues to present opportunities for stable growth. We will soon deploy 2 additional industry-leading NGBF rigs, which has performed exceptionally well from day 1. Fabien will now provide a detailed overview of the financial performance region by region 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 Q1 '25 amounted to $55 million compared to $77 million for the same quarter last year due to delays in restarting our project with senior clients for $11 million. The exit from Russia and some African countries for $5 million and negative foreign exchange, which only impacts the top line, for $4 million. By reporting segment, Mining represented 80% and Water represented 20%. Revenue in Asia Pacific increased 39% at $20 million reflecting the successful deployment of new proprietary rigs. In North America, revenue amounted to $18 million in Q1 '25, 33% decrease mainly attributed to project delays with Tier 1 clients. Revenue in South America decreased from $26 million to $10 million, the start of new contracts during this quarter, including mobilization and the ramp-up impacted revenue and margins. In EMEA, revenue was $6 million in Q1 '25 compared to $10 million in Q1 '24. Excluding Russia, revenue in Africa and Europe grew by 28%, supported by the start of contracts that are significant for the region. In Q1 '25, the geographical split was Asia Pacific, 37%; North America, 32%; South America, 18%; EMEA, 12%. During the period, gross margin, including depreciation was $8 million or 14% of revenue versus $17 million or 22% of revenue for the same period last year. Gross margin in the Mining segment was primarily driven by the phasing and the ramp-up of new contracts and the relative weight of fixed operational costs. The gross profit in the Water segment was almost 3x better than last year, driven by the deployment of new proprietary rigs on long-term contracts. SG&A decreased by 23% to $4.8 million compared to $6.3 million for the same period last year. As a percentage of revenue, SG&A was stable at 8%. As a result, EBIT was $3 million versus $13 million in Q1 '24. EBITDA amounted to $7 million compared to $17 million in Q1 '24. And at March 31, '25, the working capital needs improved to $7 million compared to $27 million for the same period last year. CapEx amounted to $3 million in cash compared to $6 million in cash in Q1 '24. This CapEx is mainly related to the construction of new proprietary rigs and the acquisition of ancillary equipment and rods. At March 31, '25, our net debt including lease obligation, improved to $69 million versus $85 million at March 31 '24. I will now hand the call back to Tim for his closing remarks. Tim?

Thank you, Fabien. The current geopolitical climate and the uncertainty of its impact on the global economy is unprecedented. How this will impact our industry in the short term is impossible to predict, but we believe the outlook for our business remains positive. Growth will come primarily from copper, gold and water, combined with the need to increase domestic production in prime mining jurisdictions where Foraco operates. With respect to copper, although the conversation has shifted somewhat from EVs and energy transition, the appetite for more copper remains strong. This is driven by industrial demand, and a seemingly insatiable need for more AI, while the threat to security of supply is driving demand for increased production at home. All this means more drilling. Gold prices continue to soar as geopolitical uncertainty lingers, resulting in record buying by central banks, declining reserves and like all commodities, the increased need for a secured domestic supply. Similarly, this trend can only be addressed by increased drilling activity to identify not only new reserves at existing mine sites, but also the future development of new discoveries. Foraco's decision to concentrate on stable jurisdictions was correct, both in terms of strategy and timing despite the impact to our financial performance. Similarly, our commitment to top-tier clients remains unwavering, and this has provided the foundation enabling us to grow. 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 are well positioned for continued success in 2025 and beyond. With that, I'll now turn the call over to the operator for questions. Operator?

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

The year-over-year decline in North America was a bit of a surprise. Can you help us understand how much of that is the slow rollout of the new contracts versus any lost contracts compared to last year?

Gordon, it's Tim here. So there are no lost contracts. We are in a situation in North America where some of our current contracts like elsewhere, didn't restart as they expected. There's been a number of customers that are -- have temporarily suspended drilling as a result of various internal factors unique to each of our customers. But we have not lost any significant contracts.

Okay. And similarly, your senior clients are still over 80% of your revenue. So how much of the decline in these segments are related to junior financing versus other factors?

I would say very little because the junior segment has not made up a big part of our portfolio. So there's been a little bit, but it's not material.

Okay. So in South America, what would you recommend we forecast as your growth rate for the remainder of the year?

Well, as you know, Gordon, we don't give guidance. But for the -- what I can state is we knew that Q1 was going to be difficult -- difficult. It was going to be down. And I think if you recall our comments from the prior quarter, we had indicated that it was really going to be a weaker first half in 2025 than we planned. We're really thinking now that the decline that we've seen year-over-year is more weighted to the first quarter and things are going to improve, and that includes South America.

Our next question comes from the line of Donangelo Volpe from Beacon Securities.

So first question for me, I guess, just regarding North and South America. There were drags on the top line on a year-over-year basis. Can you guys just talk to the overall pipeline of activity you guys are seeing throughout the first month of Q2?

So the pipeline of activity is still good, especially in the gold sector. And it also depends on jurisdictions. The pipeline in the U.S. is good. The pipeline in Latin America is quite good. The junior sector has not improved, and we are not anticipating it to prove because that's been quiet for so long, despite the improvement in gold and copper prices, we're not anticipating and we're not banking on getting anything from the junior sector.

Okay. Perfect. And then just pivoting, on the press release, you guys mentioned taking proactive measures to adopt the cost structure. Can you guys just go into a little bit more detail regarding the levers available to the company to help preserve margins?

Sure. So I mean, we pay attention to the business. When -- we know when projects are going to end, and we prepare. We are aware that we cannot carry labor when we don't have the revenue to offset those costs. So when a project shuts down, we prepare early and time the reduction in cost right in line when the project ends without impacting the performance of the project. We do the same thing with support costs, be it people in our shops or people in administration. And unfortunately, we need to adjust those. Foraco has always been very prudent and very aware and proactive in managing costs in line with the rhythm of the market as it changes.

Okay. Perfect. And then a final one, if I may. Can you just provide what the revenue by commodity was for the quarter?

Sure. Just give me 1 second. Sure. So Water -- for the first quarter, Water was 21%; gold was 18%; copper, 24%; nickel was 17%; iron, 15%; steelmaking coal, 3%. And other, 2%. And lithium, 1%.

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

I guess I was expecting this quarter after you kind of forecasted the first quarter, it was [indiscernible]. But 30% utilization rate seems awfully low. And also, can you -- I know you only announce contracts for $50 million and above. But can you talk about any contracts that you've won in other regions that are less than $50 million? And also about the U.S. I know they're trying to ramp up gold in the U.S. Are we getting anything from the majors in the U.S.?

So you've got lots of questions there. So let's talk about the utilization rate first. The lower utilization rate is directly linked to the slowdown that we had in Latin America where projects wrapped up, and they literally stopped. And the restart of new projects, which was heavily weighted with the restart happening in March. So January, February were pretty quiet. We didn't have any rigs -- those rigs turning. And by our definition of utilization rate, if a rig is not generating revenue, we don't include it in the utilization rate. We see that increasing and improving to much more reasonable levels as we progress through Q2. So the utilization rate is going to come up. That being said, some parts of our business like the Water business are enjoying great utilization rates. We're adding more rigs to our Water business. We're putting 2 more to work this year as quickly as we can because there is demand for that. So the overall utilization rate is down. I get that, and it's for the reasons that we stated and the -- but that's not happening in all segments. With respect to winning contracts, absolutely, we are winning contracts. They are not at the threshold where we press release them. And I think if we were to press release every little bit of activity, it might get a little bit annoying or stale. So we're maintaining the discipline on our threshold for materiality for reporting new projects. In addition to that, we need to get clearance from our customer to be able to disclose those contracts, and we're not always able to get that permission. So some of that they prefer to -- us not to disclose that, and we have to respect that. With respect to your question regarding the U.S., we are making progress in the U.S. We have a base established, a facility now in Salt Lake City, a sign on the door, we have equipment in the yard. And that tender pipeline is very robust. We've not picked up a significant project -- and -- but I'm absolutely certain that it's only a matter of time. I can appreciate all of our customers looking at us, we're relatively new to the area. And I can understand some of our customers' reluctance to go first, if you will. We are very close. We're shortlisted right now on 2 current projects. We're offering our full services offering. And once someone goes first, I'm very confident in my team's -- our team's ability to execute very, very well. And then we're going to have some immediate traction and away we go. It's taken longer than I thought, Steve, it honestly has, but I have got more confidence in the U.S. market than I had a while ago, especially when we read about the need for increased production in the U.S., we hear about some of the bigger projects being given the green light, it's going to use up the capacity in the U.S. market, and we're there now. So we're going to get traction.

Has major drilling been more rational with their pricing? I know they were trying to get a lot of business by lowering prices. Is that going to end -- has that ended? Or is that -- are they still scorching the market?

I can't comment really on what our competitors do. I don't know their cost base. I don't know what their strategy is. They are running their business the way that they see best. And some of our -- they've got excellent relationships with their customers and the projects that they win, I think that's great. What I will also add, however, and I'm not commenting on major strategy, but we have an intentional strategy, Steven, to make certain that any project, any work that we get, we make a return that doesn't -- that is significant enough that we don't damage our shareholders. It is -- I've been doing this for a very long time as a lot of our team, and there's no secret sauce that enables us to lower our prices to the point where we're underwater normally, and all of a sudden, now we can make money. It doesn't work that way. So if we lower them too much and a lot of these projects are long term, with no opportunity to increase prices, it's going to damage us over the long term. I'd rather be patient, keep the equipment and the people in good condition, wait for the right opportunity that we can make a good return. This situation that we're in is temporary. And I really encourage everybody to another quarter or 2, and it's going to be a different conversation.

Just, it's frustrating because you see the price of gold, you see -- all you hear about in the news is shortage of copper and we don't really see any pickup in our activity, in our drilling and where we should be at the [ leading edge ] of that.

We are seeing that, though, Steven. I mean it's -- there is a lot of demand for drilling services in Latin America. And -- we've -- as I mentioned, we came through a quiet period in Latin America, and we are getting those projects ramped up. We have a good tender pipeline in Latin America. We are waiting on significant awards, the same as we are in Canada and the U.S., and it's going to come.

And my last question is, I know you probably don't want to go out right now with more campaigns and press -- and you really have things to press release and to get investors excited about. But we're -- even at the lower revenue rates, we're selling at 1x revenue and it seems like on the Investor Relations front, we should be able to get somewhat of a -- more of a premium or more people interested in the company that's selling at 1x -- revenues and even our multiples of EBITDA are like, I don't know -- they're down now, but they were in the 2 and 3 range when as a private company, you'd probably be selling in the 6 to 7x EBITDA range. So hopefully, we'll get something going there. You guys [indiscernible] shareholder -- you're looking for shareholder value, but you have really created any in the last 2 years.

Well, I am still marketing, and I'm happy to report that I was through New York a couple of weeks ago, around Easter and very good reception. These are with the new potential shareholders. There's a lot of interest. And that's also tempered with a little bit of wait and see because of what's going on in these crazy times that we're in with the tariff, trade wars and everything. So -- but there is a lot of interest in Foraco. I mean, it's easy for us to book a meeting and that says something.

Our next question comes from the line of Frederic Tremblay from Desjardins.

I wanted to get your thoughts on capital allocation priorities, including your 2025 thoughts on CapEx and leverage reduction.

So the capital allocation policy remains unchanged, prioritizing our debt reduction, which is at $14 million this year, followed by CapEx. And the -- we've announced that there will not be a dividend and that was approved by the Board for 2025. So the -- but largely, the capital allocation policy remains unchanged.

And maybe moving to labor availability as you eventually see more of a ramp-up in drilling demand. How confident are you that you'll have access to qualified labor to meet that demand?

I don't -- we don't see any issues with labor demand for our company. In certain parts of the world, we've certainly had -- well, we've really reduced our labor force and shed some of the people in the field and some of our support teams. But we're quite confident that -- well, not quite confident, we are getting people back as we begin to ramp up. In my view, Foraco is a very desirable company to work with in our -- in the sector. We treat our people very fairly. We have good equipment. We have good projects. And from the perspective of a field employee, we're a very desirable company to work with. So people want to come back to Foraco, and they are. So I don't see it as an issue.

Okay. Great. And last one for me. Are you seeing an opportunity to maybe move some rigs around perhaps from Canada to regions where there's a bit better prospects near term for drilling demand?

Yes. We -- I'm sitting in our facility in France and looking at 1 rig, which is shipping out here to Latin America in the coming days, a brand-new rig. We have 2 rigs that have left Canada also for Latin America. And we have a number of underground rigs that are staged and ready to go to Latin America pending a new award. So the answer is yes. We do that quite a bit.

There are no further questions at this time. Mr. Bremner, please continue.

Thanks very much. This concludes our call unless there's no other questions. And thank you very much for your time and your interest, everyone. We will talk to you next quarter.

This concludes today's conference call. You may now disconnect.