Orbit Garant Drilling Inc. (OGD) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Orbit Garant Drilling's Fiscal 2021 First Quarter Results Conference Call and Webcast. [Operator Instructions] Please be aware that certain information discussed today may be forward-looking and that actual results could differ materially. Certain non-IFRS financial measurements will also be discussed. Please refer to the company's SEDAR filings for additional information on both risk factors and non-IFRS measures. This call is being recorded on Thursday, November 12, 2020. I would now like to turn the conference over to Mr. Eric Alexandre, President and CEO of Orbit Garant. Please go ahead, sir.

Thank you, Colin, and good morning, ladies and gentlemen. With me on the call is Alain Laplante, CFO. Following my opening remarks, Alain will review our financial results, and I will conclude with comments on our outlook. We will then welcome questions. Our domestic drilling business regained substantial momentum during the quarter as we continue to gradually ramp up our operations following the project shutdowns and drilling activity reduction that we experienced due to the COVID-19 pandemic. Canada revenue was $31.4 million, only $4 million less than we reported in Q1 last year. Our ramp-up in Canada is still ongoing, and our utilization rates have not reached pre-pandemic levels. However, we are encouraged by the solid demand we are seeing from junior, intermediate and senior mining companies. With current gold prices at historically high levels and with the easing of COVID-related business restrictions, our customers are steadily reengaging their exploration and mine development programs. The ramp-up of our international operation has not moved as quickly as in Canada as these countries are facing more heightened COVID-related restriction. However, we are seeing increased project opportunities in these markets. We responded to challenging market condition by reducing our cost and capital expenditures at the outset of the pandemic. We lowered our general and administrative costs by approximately 20% in the first quarter compared to Q1 last year, which contributed to the increased profitability we generated in the quarter despite reduced drilling activity. We believe that some of the cost-reduction measures we have implemented will have a sustained positive impact on our financial performance. And importantly, we have maintained the flexibility to continue ramping up operation as customer demand improves. As we continue to ramp up our existing drilling projects and pursue new project opportunities, both in Canada and internationally, we continue to monitor COVID-19 and overall market conditions closely, while prioritizing the health and safety of our employees and the communities in which we operate. I will now turn the call over to Alain to review our financial results.

Thank you, Eric, and good morning, everyone. Our fiscal 2021 first quarter revenue totaled $35.6 million, down from $43.3 million in Q1 a year ago, reflecting the negative impact of the COVID-19 pandemic on drilling activities. Canada revenue totaled $31.4 million, a decline of approximately 11% from Q1 last year. And international revenue was $4.2 million, a decline of approximately 46% from Q1 a year ago. Our drill utilization rate was 50% in the quarter compared to 62% in Q1 a year ago. As Eric noted, our utilization rates remained below pre-pandemic levels. However, our Q1 utilization rate was well ahead of the 42% that we had in the fourth quarter of fiscal 2020, demonstrating the steady return of drilling activity. We drilled approximately 351,000 meters in the quarter compared to 387,000 in Q1 last year, a decline of 9%. Gross profit for the quarter was $8.7 million or 24.6% of revenue compared to $6.9 million or 16% of revenue in Q1 last year. Adjusted gross margin, excluding depreciation expenses, was 31.3% compared to 21.3% in Q1 last year. Our cost of contract revenue was reduced by $2.4 million in Q1 this year as a result of financial support from the Canada Emergency Wage Subsidy, or CEWS program, which positively impacted gross profit and margins. This positive impact was partially offset by reduced drilling activity as a result of the pandemic. G&A expenses were $3.2 million in the quarter or 9.1% of revenue compared to $4.4 million or 10.1% of revenue in Q1 last year. The decline in G&A expenses reflect a $0.2 million reduction resulting from the financial support we received from the CEWS program and the cost-reduction measure we implemented following the onset of the pandemic, as Eric noted earlier. EBITDA for the quarter increased to $8.4 million from $5.1 million in Q1 last year. The increase reflects $2.6 million of financial support we received from the CEWS program. Net earnings for the quarter increased to $3.5 million or $0.09 a share from $1.1 million or $0.03 a share in Q1 last year. The increase in net earnings reflects improved gross margins, cost-reduction measures and financial support from the CEWS program, partially offset by reduced drilling activity. Turning to our balance sheet. We repaid a net amount of $2.1 million in the quarter on our credit facility compared to a withdrawal of $3.3 million in Q1 last year. Our long-term debt under the credit facility, including USD 1 million drawn from our U.S. dollar revolving facility and the current portion, was $26.6 million as at September 30, 2020, compared to $28.7 million as at June 30, 2020, our fiscal 2020 year-end. Further amendments to the credit facility were executed in March and June of 2020 to modify certain of the financial covenants applicable to Q4 2020 and future quarters. As a result of these measures, we expect to continue to meet our obligations under our credit facilities. As at September 30, 2020, our working capital position was $56.8 million compared to $52.1 million at the end of fiscal 2020. I'll now turn the call back to Eric for closing comments. Eric?

Thanks, Alain. Market conditions remain uncertain. We cannot predict how long it will take for customer demand to reach pre-pandemic levels or what impact the current resurgence of COVID-19 cases in certain regions of Canada could have on our business. But we have managed the crisis effectively so far, and I am confident that we will continue to do so. We are generating improved profitability despite reduced drilling activity, maintaining a solid financial position, and we are well positioned to continue ramping up our operation as demand improves. There are now more opportunities emerging from both our domestic and international operations. With the price of gold currently above USD 1,800 an ounce, gold mining has become highly profitable even for higher cost producers. We would expect demand for gold drilling to accelerate as market conditions stabilize. We generated approximately 3/4 of our revenue from gold-related drilling in the first quarter, so we are well positioned to capitalize. It is also important to note that copper prices have rebounded strongly since dropping in the spring as a result of the pandemic. Copper is currently close to a 5-year high, and the underlying supply-demand fundamentals of the commodity remains solid. This should support customer demand in our Chilean operation. Before opening up the line to questions, I want to note that Bill Gula has decided to retire from our Board of Directors and will not be standing for reelection at our Annual Meeting of Shareholder next month. Bill has been a Director since 2011 and a major contribution to our company. Paul Carmel also retired from our Board earlier this year. We wish them the best in their future endeavors. We recently appointed 2 new independent directors, Pierre Rougeau and Nicole Veilleux. They are both highly skilled and experienced, ensuring continued strong leadership going forward. That concludes our formal remarks. Alain and I will now be pleased to answer any questions. Colin, please begin the question period.

[Operator Instructions] So your first question comes from James Moore from J.R. Moore Association -- or Associates.

First, congrats on a nicely profitable quarter. It's great to see. Can you talk a little bit about the gross margins? They look pretty good even with the government benefit. It seems like specialized drilling is still down a little bit relative to historical. So can you just talk a little bit about where the good margins are coming from? And is there anywhere government assistance that's expected in coming quarters?

So first of all, James, I would like to answer to this question about the gross margin. As we have explained in our yearly end results conference call, we had start a revision of all of our procedures internally and how we can reduce cost and be more cost effectively as a company. So we are talking about being like a new way to go -- or let's call it the Orbit 2.0. So we have been able to revise those procedures, and we have reduced, first, some costs about the administration, but as well as the way we manage operation. And these measures have been implemented from there, and this is one of the explanation why today, we are able to improve profitability in terms of the gross margin, that's one point. Second, we have been also some kind of with the, let's call it, the tailwind right now with the market is more busy. And we're starting to be able to increase prices with certain clients moving forward. And this is about the demand we have -- we are facing right now, especially in Canada, where we have a lot more demand that put us in a position where we have more torque, I would say. For the -- to answer to your question about the subsidiary, I will let Alain just to complete this one.

Yes. Thanks, Eric. In fact, in regards of the subsidy, the CEWS program is based on the level of revenue that the company is generating during the current period compared to last year. So as our business is ramping up, we expect it would be a minimal amount that would be -- that we will receive in coming months. So it won't be as much as we received already. So as long as the situations remain the way it is right now, so we not expect to receive that much money in coming quarters. Our operations will just improve as level of activity is increasing.

Okay. Great. And just maybe a higher level, can you go a little more into detail in just the market generally, what you saw maybe September-October and the first little bit of November, I guess, here in terms of where the junior drillers really are -- or where the junior explorations coming in now? Is there any -- are you starting to see the impact of the earlier fundraising from the summer kick-in yet? Or is that still expected to be more in the winter?

You touched a good point, James. Usually, there's a lag between the time that the company finance themselves and when this money goes to the ground for drilling. Usually, we have the lag, let's say, 6, 8 months. But now especially in Canada, we have more demand day over day. If you were asking me this question in September, I would say it's the beginning. Now I can say today, October-November, that it's there. We receive more demand for drilling, and we're starting to see the drill utilization rate in Québec and Ontario being very busy. So that's giving us a little bit more torque about negotiating the price. But on the other hand, there would be, at some point, a lack of experienced driller availability that we will have to address that would put pressure on our cost for manpower. For having said that, it's a good problem for us because that means that we have more demand than offer, so that it's a perfect environment to increase our prices and margin/our margins. So that's all good. Actually, we see this demand going up -- continue going up in Canada, which is reflecting the capacity of the majors, the intermediate and juniors to finance. So right now, we are seeing more and more juniors from the bid process out there. In terms of the international operation, we lag some kind of a little bit more from Canada operation, but we are starting to see more positive signs right now. We have very good discussions with the potential customers that could be translate into more business internationally. So that's a good environment for us, and we do foresee improvement moving forward.

Okay. Yes, that sounds great. Is that international, specifically -- is that a general statement? Or is that Africa, South America or any one or the other more opportunity in any specific area?