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

Good morning, ladies and gentlemen, and welcome to the Orbit Garant Drilling Fiscal 2022 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 measures will also be discussed. Please refer to the company's SEDAR filings for additional information on both risk and factors and non-IFRS measures. This call is being recorded on Friday, November 12, 2021. And 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, operator, and good morning, ladies and gentlemen. [Foreign Language] With me on the call today is Daniel Maheu, CFO. Following my opening remarks, Daniel will review our financial results, and I will conclude with comments on our outlook. We will then welcome questions. We reported record first quarter revenue and meter drilled yesterday, reflecting strong customer demand. Revenue totaled $50.6 million, up from $35.6 million in Q1 last year. And we drilled approximately 464,000 meters in the quarter compared to 351,000 in Q1 2021. The capacity utilization of our drill fleet increased significantly year-over-year as we worked to meet demand. Our utilization rate was approximately 64% in the quarter compared to 50% in Q1 last year, when our business was gradually ramping up following project shutdowns and suspension due to COVID-19-related restrictions. This was the third consecutive quarter in which our drill utilization rate was at least 60%. Our drilling activity in Canada and West Africa has surpassed prepandemic levels. Our drilling activity in Chile has not yet reached prepandemic levels but began to ramp up. Our margin in the first quarter continued to be impacted by increased driller training, project ramp-up and mobilization costs as we adjusted this sustained high level of customer demand. We also absorbed increased costs for materials and supplies in Q1 due to supply chain issues, which are currently impacting the entire global economy. We believe our margins will strengthen over the course of the fiscal year as worker productivity improves, the mobilization costs fall away and we offset other cost pressures through price increases on our contracts. We also expect the supply chain challenges to be largely resolved in early -- in the 2022 calendar year. There continues to be a shortage of experienced driller in Canada, which is impacting worker productivity. But as I noted in our last conference call in September, we are well positioned to manage this issue through our driller training program and our computerized drill technology, which accelerates the learning process for less experienced drillers. Looking forward, our focus is on expanding margins as this positive business cycle progresses. I will now turn the call over to Daniel to review our first quarter financial results in more detail. Daniel?

Thank you, Eric, and good morning, everyone. Our fiscal 2022 first quarter revenue totaled $50.6 million, a record for the first quarter and an increase of 41.9% compared to $35.6 million in Q1 a year ago. Canada revenue totaled $37.9 million in the quarter, up 20.7% from $31.4 million in Q1 last year, reflecting strong domestic demand. International revenue was $12.7 million, up from $4.2 million in Q1 last year, attributable to an increase -- to increased drilling activities. Gross profit for the quarter was $3.8 million compared to $8.7 million in Q1 last year. Adjusted gross margin, excluding depreciation expenses, was 12.3% compared to 31.3% in Q1 last year. Gross profit and margins were impacted by increased driller training and project ramp-up costs in Canada, mobilization costs related to new long-term contracts in Guinea and Chile, and higher material costs due to the supply chain disruption in all the regions in which we operate. In addition, the year-over-year decline in gross margins was attributable, in part, to financial support received in Q1 last year from the Canadian Emergency Wage Subsidy program or the CEWS. Our cost of contract revenue was reduced by $2.4 million in Q1 last year due to support from the CEW program. We were no longer eligible for the program in Q1 this year. G&A expenses were $3.8 million in the quarter or 7.4% of revenue compared to $3.2 million or 9.1% of revenue in Q1 last year. The increase in G&A expenses reflect greater drilling activity. G&A expenses in Q1 last year were also reduced by $0.2 million due to the financial support from the CEWS program. As I just noted, we were not longer eligible for the program this fiscal year. EBITDA for the quarter was $2.7 million compared to $8.4 million in Q1 last year. Net loss was $1.3 million or $0.04 per share compared to net earnings of $3.5 million or $0.09 per share in Q1 a year ago. The negative variance were principally attributable to increased driller training and project ramp-up cost, new project mobilization costs and the reduction of financial support from the CEWS program partially offset by increased drilling activities. Now turning to our balance sheet. We drew down a net amount of $1.4 million on our credit facility in the quarter compared to a repayment of $2.1 million in Q1 a year ago. Our long-term debt under the credit facility, including the current portion and the USD 1 million drawn from our USD 5 million revolving facility, was $25.7 million as of September 30, 2021, compared to $24.3 million as of June 30, 2021, or fiscal 2021 year-end. The debt was used to support working capital requirements and the acquisition of capital assets, property, plant and equipment. As of September 30, 2021, our working capital position was $53.5 million compared to $54 million at the end of fiscal 2021. I now turn the call back to Eric for closing comments. Eric?

Thanks, Daniel. We are very encouraged by the current high level of customer demand for our services and believe it will continue to be very strong in the months ahead. Mining companies will be finalizing their budgets for the 2022 calendar year in the coming weeks. Everything we hear from our customers suggests that they will be maintaining high levels of exploration and development spending. Gold and copper prices continue to trade at historically high levels, which is supporting strong profitability for the producers and favorable access to capital across the sector. Declining reserves also continue to be a challenge for many mining companies, which incentivize exploration spending. In short, it would be a very busy year for Orbit Garant and the mineral drilling industry as a whole. We are continuing to monitor the spread of COVID-19 carefully in all of our markets. We are pleased that cases in Canada have been lower than many experts feared so far this fall. But we are not letting our guard down, we are taking every necessary measure to minimize the spread of the virus while maintaining the flexibility to adapt to any potential increase in business restrictions related to COVID-19. As I noted in my opening remarks, our margin had been negatively impacted by short-term cost pressures as we adjust to the current high level of demand. But with our skilled team, strong balance sheet, state-of-the-art technology and presence in leading copper and gold mining markets, we are well positioned to enhance profitability during the strong market cycle while capitalizing on further opportunities to expand market share and build shareholder value. That concludes our formal remarks. Daniel and I will now be pleased to answer any questions. Operator, please begin the question period.

[Operator Instructions] Your first question comes from David Stelpstra from BMO.

I was just wondering if we could get a little wee bit of clarity on the contracts. And you mentioned that there's been some cost pressures and so on. Is there any ability to pass on any of that? Or are you on fixed-rate contracts?

Yes. Yes, there is. But you have to take in account, David, that there is always a gap between the time you adjust to the cost and you renegotiate those price increases there. So there's always an offset out there. So this is happening right now. While our costs have been impacted hard from the supply as well with the cost of manpower, now we are increasing the price per meter drilled there on the new contracts as well as on the actual contract that we adjust to the reality of what is happening right now. And we have a good listening from our clients as well. It's well-received from them. They understand.

Yes. And further to the same sort of question is, would the mobilization costs not be amortized over the length of the contract? Or are you expensing them all?

Well, it's the way we do in the past, and we don't think we're going to change it right now. We will keep just take the costs and put it there and then. Because then you start to play with this on the long term, whatever, so we prefer just to get it done and move on.

Yes. So would it be a fair assumption that because those costs are absorbed upfront and they won't be there then in the longer term so that -- but I'm sure they were factored into the original pricing. Is that fair to say?

It's fair to say. You're right. We do it [indiscernible].

Your next question comes from [ Terry Beelman from Investor ].

Yes. If the company had the crews, how many of the rigs could be utilized if you had no issues with hiring? If you had unlimited crews, how many of the rigs could be utilized?

Well, actually, sir, the industry is probably working at capacity right now. There is more demand than offer, which helped the drilling companies to increase their prices right now. We do not have -- like all the drilling companies doesn't have enough people to run all the machines out there and it is how it is. But our response to that is we are one of the only company that owns its own driller training internally, which is a key differentiator, as well as we combine this with the computerized technology, which accelerate our capacity to train drillers down the road. So right now, we're running in Canada at capacity with the number of people we have. And then we are training, like fast-track, to bring more people to our operation, which impact our costs actually. But we do expect that this will pay back in the quarter to come. In Burkina Faso, it's not the same. We have access to people. It's not a challenge. So we can take more. But right now, we are running close to full capacity in terms of number of machines. In Chile, we're still ramping up right now. So we don't see this challenge of manpower right now. So mainly this challenge now is from the Canadian operations.

In Canada, because of the -- such high demand, are the contracts that are being signed for a longer time frame? For example, maybe 6 months to a year instead of something shorter time frame?

Well, this is something that is really interesting. While prices are going up, some clients want to commit for more long term, that's fair enough. So us and our strategy is to commit on reasonable prices on the time frame. So there is a mix of short term and long term. Also, of course, we do not like to commit on low prices right now for a long-term period. We know that the market will -- is favorable for price increase. So we'll be careful, but we look as well to the long-term stability. But you're right to say that, right now, some clients want to secure for more long term. But our intent is to take the good contracts and strategically position ourselves on long-term profitable contracts.

Okay. Lastly, as a shareholder, I'd like to say how pleased I am on how well the company is positioned for this cycle. I see where, today, you have roughly 220 rigs and the stock is around $1. And in 2010, the company had around 150 rigs and the stock was $4 to $5. So there are almost 50% more rigs and the stock is at $1 versus $4 to $5 in 2010. And management has been able to add all those rigs with only a small amount of dilution to the share count, I have here about 15% was the dilution in the share count. It's right around 37 million now, and it used to be around 33 million in the share count. That is remarkable. And I congratulate -- I think management should be congratulated. So congratulations on being so well positioned for this cycle. Because if management believes as I do, this is just the start of the cycle. And there's only 15% more shares than the last cycle. And you have 50% roughly more rigs. And so I'm very pleased as a shareholder, and I wanted to let you know that, and that was my last comment.

Thank you for the positive comments. And we also believe that we are starting this new chapter as a good momentum right now to take advantage of our strategic position we made. Thank you very much. We really appreciate it.

[Operator Instructions] There are no further questions at this time, you may please proceed.

Okay. So thank you very much. If there is no other questions, we will thank everybody right now for participation today and look forward for next quarter. [Foreign Language]

Thank you.

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