Foraco International Q3 2023 Earnings Call Transcript

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October 30, 2023

There are 5 speakers on the call.

Operator

Good morning and afternoon, ladies and gentlemen, and welcome to the Foraco International S. A. Third Quarter 2023 Earnings Conference Call. At this time, all lines are in a listen only mode. But following the presentation, we will conduct a question and answer session.

Operator

Also note that this call is being recorded on October 30, 2023. I now would like to turn the conference over to Tim Bremner. Please go ahead, sir.

Speaker 1

Thank you, Sylvia. Good morning, everyone, and thank you for taking the time to join us on our Q3 2023 results conference. I am Tim Bremner, CEO of Foraco International and joining me today from France is Fabienne Sevestre, our CFO. The news release of these results was issued this morning prior to the opening of the TIA through CMW Newswire. If you didn't receive a copy for some reason, it will add our website www.feracruid.com.

Speaker 1

After the outline of the financial results, we'll open the call for your questions moderated by our operator, Sylvia. Q3 was another good quarter with revenue of US96.1 million dollars up 4% from the same quarter last year, making it the 19th consecutive year over year quarterly increase. Our trailing 12 month revenue now stands at $368,000,000 with an EBITDA of $85,100,000 up 17% 45% respectively compared to 1 year ago. These results are a direct result of the ongoing excellent performance across all of our regions globally. Our utilization rate for the quarter remained flat at 58% compared to a year ago and TTM net profit now stands at 38,000,000 dollars up 79% year over year.

Speaker 1

Once again, this performance is a direct result of the dedication and confidence of our teams around the world, especially the men and women in the field, who we wish to thank for their ongoing commitment and contribution. Our outlook for the business remains unchanged. The metals price index, which earlier this year decreased by 8% since January, has been relatively stable for the last 4 months. We continue to experience a sustained demand for drilling services, both in mining and water, against again, mainly related to EV Metals in the primary mining jurisdictions globally. It seems that our customers see it the same way as well as we continue to work through and in some cases renew our long term contracts.

Speaker 1

I'm now pleased to pass the conference over to Fabian, who will walk you through the financials in more detail. Fabian?

Speaker 2

Thank you, Tim, and good morning, everyone. First of all, and as a reminder, Provarco reports in full IFRS and in U. S. Brands. Revenue for Q3 'twenty three amounted to $5,000,000 compared to $91,000,000 for the same quarter last year, a 4% increase.

Speaker 2

By reporting segment, the Mining segment represented 88% of Q3 'twenty three revenue and Water represented 12%. Asia Pacific and North America recorded the highest increase in revenue. Revenue in Asia Pacific increased 28% at $19,000,000 reflecting quarter over quarter increase in demand and the capacity of the company to acquire and commission Neweggs. In North America, revenue amounted to $32,000,000 in Q3, a 15% increase driven by long term contracts renewed last year with senior customers. Revenue in South Africa remained stable at $30,000,000 Revenue in year over quarter was €14,000,000 compared to €19,000,000 in Q3 2022.

Speaker 2

The activity was stable in Europe and Africa, but the activity decreased in Sea area due to the political and economic uncertainty in the region. In Q3 'twenty three, the geographical growth was North America 34%, South America 31%, Asia Pacific 21%, EMEA 14%. During this quarter, the gross margin including depreciation within cost of sales as per our fares was $27,000,000 versus $24,000,000 for the same quarter last year, a 10% increase. Ongoing contracts continued to report solid performances. SG and A increased by 6% to $6,700,000 compared to $6,300,000 for the same period last year that was stable as a percentage of revenue at 7thas.

Speaker 2

The EBIT of operating result was $20,000,000 profit versus €80,000,000 in Q3 2022, an 11% increase. The EBITDA amounted to €25,000,000 dollars or 23 percent of revenue, a 9% increase compared to $23,000,000 in Q3 2022 or 8% of revenue. I would like to take the opportunity to stress that we do not report adjusted EBITDA or any other adjustment to the IFRS figures. On a 9 month basis, revenue amounted to €284,000,000 compared to 240 6,000,000 in year to date Q3 2022, 15% increase. This increase in revenue is due to favorable market dynamics with the company having renegotiated and extended its long term running contracts since the previous year, coupled with the company's proven capacity to deliver.

Speaker 2

This has generated significant growth. Revenue increased 22% in North America, 33% in South America and 33% in Asia Pacific compared to year to date Q3 2022. Revenue decreased 31% in EMEA due to the political and uncertainties in TIS. The year to date 23 gross profit was €74,000,000 versus €53,000,000 for the same period last year, a 40% improvement mainly due to increased activity and the capacity of the company to deliver good performances on contract. The year to date 23 EBIT was a positive €53,000,000 compared to €34,000,000 in the same period last year, a 55% increase.

Speaker 2

And the year to date 23 EBITDA for the 9 months period was positive €68,000,000 compared to €49,000,000 in the same period last year, a 38% increase. For the 9 months period ended September 30, 2023, the working capital requirement was $23,000,000 compared to $18,000,000 for the same period last year. This increase is mainly the result of a ramp up of our activity. REX amounted to $21,000,000 in cash compared to $14,000,000 in cash in year to date Q3 2022. This CapEx is related to the acquisition of rigs, major rigs overall and steel equipment and robots.

Speaker 2

At September 30, 2023, our net debt including legal lease obligation amounted to $79,500,000 versus 76,000,000 dollars at September 31, 2020 2. Our leverage ratio improved to 0.93. Dollars Finally, the TPN net profit of $38,000,000 translates to an earnings per share of $0.44 which is doubled last year. I will now hand the call back to Tim for his closing remarks. Tim?

Speaker 1

Thank you, Fabian. Another great quarter. 3 weeks ago, we held our 1st global senior management meeting under the new leadership team here in France. During the course of the meeting, we prepared our plans for 2024, but also took the opportunity to review and update our 5 year strategic plan with very meaningful input from all of the regional VPs and senior managers. No question that the global demand for primary EV Metals and water remains strong and we continue to see the demand for our services from our main customers in both of these areas.

Speaker 1

In addition, we look forward to concluding the refinancing arrangement that will significantly reduce the lending costs as we work to further deleverage the balance sheet, enabling us to fully execute our 5 year strategic plan. I really want to thank you for your time and interest in FERACO today. I'll now turn the call over to Sylvia, who will take the first question. Sylvia?

Operator

Thank And your first question will be from Stephen Green at Ordnance Capital. Please go ahead.

Speaker 3

Yes. Hi. How are you? Welcome to your first call. Glad to see that you're continuing, Daniel, is great numbers really.

Speaker 3

These are really great numbers. The question I had first question I had was, is I see your utilization rate is up 58% now. And I think is there further growth ahead as you improve the utilization rate? And also as you improve the utilization rate and get revenues up, will the model will the margins increase? I see that as your volume goes up, your margins increase.

Speaker 3

So it seems like you're right at the tipping point of really accelerating the model. So I was hoping 2 things was, you tell us if you're going to increase utilization rate and if there's room to grow here?

Speaker 1

Hi, Stephen, it's nice to hear from you again. Yes, the utilization rate is relatively flat. But you have to take into consideration the changes in the market that we've experienced primarily in the CIS where the utilization rate has been significantly and also in Africa because of the challenges that we all hear about in that. So in those two areas, there's been some decrease in the utilization rate. The other regions have seen improvements in utilization rates, which is creating the offset and bringing us back to 58%, 15% to 9%.

Speaker 1

The increase in revenue can be attributed to a couple of things. In Australia primarily where we have a lot of rotary rigs doing water work, Many of these rigs have on to double shifting now versus the single shift operation. And that dramatically increases the revenue within the utilization rate. That also means that the mix of rigs that to generate more revenue is increasing. So that's one of the biggest increases seen.

Speaker 1

There have increases in rig utilization in North America. It's improving in Latin America as well. Chile and Argentina, we come out of the winter and go back into the season. So I think we're going to see it relatively stable. I don't see it decreasing or increasing slightly.

Speaker 1

But that's where we are with the utilization. And what was the second part of your question? I'm sorry.

Speaker 3

No, I was saying that as you increase revenues, it seems like the model is really accelerating because it seems like your gross margins go up quite significantly as the revenue goes up.

Speaker 1

Well, they're improving for a couple of reasons. If you a year ago or maybe even a little bit longer, we were launching a lot of new long term projects and starting them up is difficult, but we were coming out of COVID. A year ago, we had some significant labor shortages. And now we've worked through a lot of those individuals that were really on the B and the C team and we've optimized field operations. So getting as we said in the call, the operational performance in the field is really being fine tuned and improved.

Speaker 1

And that's where we're getting the majority of the margin increase and the increase in revenue. The fewer missed shifts, more productivity, fewer mistakes, all of the above drive the top line in them.

Speaker 3

That's great. My last question is one of, I guess, the frustration. I've been a shareholder here for 10 years or so. And we can't why can't we get any recognition for what we're doing? We're trading basically real earnings now, you're $0.44 in earnings.

Speaker 3

You're selling basically a 3 times real earnings and you're basically 1 times EBITDA. I mean, how do we get the market to realize what you're doing here and how much cash you're generating? And pay all your debt down shortly, I'm sure you're going to try to pay to restructure it and you're going to have a stable a great balance sheet go forward. I don't how do we get the market to realize what we're doing here?

Speaker 1

So as we mentioned 3 months ago, the microcap market is tough. The metals market is mixed. The interest hasn't been where it should be and we are undertaking to change that. I've begun to do some marketing in Toronto and meeting with some investors. If you look at the volume, the volume recently has been much, much better.

Speaker 1

So that to me in my limited view would mean that we are working through perhaps some negative overhang, if you will. Now more significantly than ever before that negative overhang was there, but now it's moving out. And I'm optimistic

Speaker 3

that we're near

Speaker 1

the end, I hope. I certainly had some very positive feedback from the calls that I have had. There's been some genuine interest. And

Speaker 2

the next press release that we put out soon,

Speaker 1

hopefully, we'll add to that optimism. So we sincerely appreciate your patience. We're with you as shareholders and understand the frustration.

Speaker 3

Would you guys return capital to shareholders through dividends or a special dividend or I guess buying back a debt is great too, but would you ever think about increasing the term, instituting a dividend?

Speaker 1

Certainly on our radar and we certainly know that that is of significant interest to shareholders. But the first thing to do once this refinancing is completed and we continue to deliver good results is to revisit our capital allocation policy and that is part of it. But at the moment, Stephen, I'm not aware of any pending discussion on beginning of restarting the dividend payment, but sufficient to say that we're going to be reviewing the capital allocation policy soon.

Speaker 3

Last question, is the refinancing with the same lender, the same Marathon Capital or is everything going to different lenders now?

Speaker 1

No. No, there's going to different lenders and commercial banking relationships at much more favorable rates.

Speaker 3

All right. Good. Well, thank you for doing everything you're doing. The numbers were amazing. So I really this thing should be be so exciting to investors.

Speaker 3

I don't know why, but they'll get it there, I hope.

Speaker 2

Yes. Thanks.

Speaker 1

That's our job.

Operator

Thank you. And your next question will be from Steve Kammermeier at Clarus Securities. Please go ahead.

Speaker 2

Good morning, guys. Hi, Steve. Good morning.

Speaker 4

Hi. Just on the utilization here at 58% heading in maybe flat or even a little bit above next year. How much of that utilization currently is covered by these long term contracts? And how does that change heading into the New Year?

Speaker 1

So if you look at our revenue distribution between the majors and or the senior mining companies and the juniors, we're at about an 8614 split. So 86% of that 58% utilization rate would be linked to the long term contracts. And it's looking with a long term contract, it's pretty much a rollover of next year. There certainly could be some upside with those customers, all results dependent. But I think that a baseline of 58% is pretty solid.

Speaker 1

We are going to be introducing additional heavy rotary rigs in the future and that will help with the revenue per shift. But unless there's a change in the junior market, I don't see us really getting out a bunch of our lighter smaller rigs that are more suited for Greenfields operation. This includes the fly rigs. Those are kind of single purpose rigs that you can't use on every project. So I see the utilization rate as being relatively constant.

Speaker 4

Okay. No, that's a fantastic answer. I appreciate that. And just heading back to the debt refinancing, I assume you're still hoping for that sometime before year end. And assuming that it does get done, on our numbers, it seems like it could be a a significant amount of cash annually.

Speaker 4

What do you have immediate plans for that? Or are we waiting for sort of the capital allocation update you expect in a few weeks?

Speaker 2

In terms of further refinancing, we are working with Commercial Bank, as Tim mentioned some minutes ago. We are close to the deal, but after you have all the target and hopefully before the end of the year, we will be in a good position to close the refinancing.

Speaker 4

Okay. That's fantastic guys. Thanks. That's all the questions I had.

Operator

Thank you. And at this time, Mr. Brevner, it appears we have no other questions. Please proceed with any additional comments.

Speaker 1

Thank you, Sylvia. Well, we really appreciate you attending the call and thank you very much for the great questions. We continue to be speaking to you again at the end of Q4. And again, thank you very, very much for your interest in FERACO and enjoy the rest of your day.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your

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Earnings Conference Call
Foraco International Q3 2023
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