Foraco International Q2 Earnings Call Highlights

Key Points

• Q2 revenue rose 22% to $84.5 million, driven by increased drilling activity in North and South America; EBITDA grew 7% to $15 million, but margins declined due to inflation, higher labor and consumable costs, and contract startup expenses.
• Management expects margin recovery in the second half of 2026 as new projects mature and pricing adjustments begin reflecting higher costs. Mining and water revenue both advanced, while rig utilization improved to 51% from 35% a year earlier.
• Foraco said its order book remains at record levels, providing visibility beyond 2026, although first-half free cash flow was negative $13 million and net debt rose to $85.7 million due to capital spending and working-capital needs.

Foraco International TSE: FAR reported second-quarter revenue growth as drilling activity increased across North America and South America, while management said pricing actions and maturing contract startups should support margin recovery in the second half of 2026.

Revenue for the quarter ended June 30 rose 22% year over year to $84.5 million, compared with $69.1 million in the prior-year period. Chief Executive Officer Tim Bremner said higher activity in Canada, the United States and South America drove the increase. The company said the result marked its strongest quarterly revenue since the second quarter of 2023.

EBITDA increased 7% to $15 million, though EBITDA margin declined to 17.8% of revenue from 20.3% a year earlier. Gross margin fell to 15.5% from 20.5% in the second quarter of 2025.

Startup Costs and Inflation Weigh on Margins

Chief Financial Officer Fabien Sevestre said the margin decline primarily reflected higher labor and consumable costs, mobilization expenses, and lower operating efficiency during the early stages of several large contract startups.

During the question-and-answer session, Bremner said the year-over-year margin gap was about 5 percentage points and resulted from a combination of project ramp-up costs and inflation. Growth in Australia, which he described as traditionally one of the company’s higher-margin regions, was relatively flat year over year.

Bremner said labor costs were up more than 10% to 15% in some regions, while drilling consumables, including cutting tools and drill bits, have faced significant price increases. He cited silver and tungsten as major cost drivers for those tools.

Management said it is negotiating pricing adjustments on certain existing projects and pricing new work to account for higher costs. Bremner said the anticipated cost-related price increases had not been reflected in first-half results and would be double-digit in some cases, depending on the project, region and geology.

“Our immediate priority is margin improvement,” Bremner said. He added that recently mobilized projects should become more efficient as they mature, while pricing changes are progressively catching up with higher labor, consumable, fuel and transportation costs.

Mining and Water Revenue Both Advance

Mining revenue increased 23% year over year to $70.5 million, while water revenue rose 21% to $14 million. Mining represented 83% of quarterly revenue and water accounted for 17%.

• North American revenue increased 28% to $32 million, supported by activity and new-contract ramp-ups in Canada and the U.S.
• South American revenue rose 94% to $22 million, reflecting the mobilization of several projects.
• North America represented 38% of revenue, followed by Asia-Pacific at 27%, South America at 26% and EMEA at 9%.
• Precious metals accounted for 34% of revenue, followed by copper at 18%, iron ore at 12%, nickel at 9%, coking coal at 8%, other commodities at 2%, and water at 17%.

The company said 82% of revenue came from Tier 1 customers, while junior customers represented 18%. Rig utilization climbed to 51% from 35% in the prior-year quarter, which Bremner said demonstrated both stronger demand and the operating leverage available in the business.

For the first six months of 2026, Foraco generated revenue of $151 million, up 22% from $124 million in the first half of 2025. First-half gross margin declined to 13% from 18%, while EBIT fell to $10 million from $12 million. EBITDA represented 15% of first-half revenue, compared with 17% a year earlier.

Backlog Remains at Record Levels

Management said its order book remains at record levels, providing revenue visibility through the second half of 2026 and beyond. The company previously disclosed a $404 million order book at the beginning of the year, with about $230 million earmarked for 2026.

Bremner declined to provide an updated order-book figure, noting that Foraco reports it once annually. However, he said that despite executing $151 million from the backlog during the first half, the company still has a record order book after adding new business.

He said the tender pipeline is “very robust” across commodities and customer types, including junior, intermediate and senior mining companies. The company is selectively pursuing opportunities based on equipment availability, project lead times, customer fit and its strategy of securing longer-term projects with Tier 1 customers.

In Asia-Pacific, Bremner said revenue declined year over year because two major customers reduced activity while their projects were being renewed through tender processes. He said both projects have now been renewed and described the Australian market as “as healthy as it ever has been.”

Investment and Debt Expected to Moderate

Foraco invested $16 million in capital expenditures during the first half, including six new drilling rigs and related equipment intended to support its order book. Sevestre said approximately $8 million of that investment related to contracts scheduled for the second half of the year.

Working capital increased to $15 million, reflecting higher activity, new contract ramp-ups, receivable timing and project mobilizations. Net debt rose to $85.7 million, while the company maintained $22 million in undrawn committed credit lines.

Sevestre said second-quarter free cash flow was $7 million, while first-half free cash flow was negative $13 million due to capital investment and working-capital needs. He said working capital is expected to reverse in the second half as part of normal seasonality, capital spending should decline, and the company expects to recover the investment before year-end.

Management said debt reduction remains the company’s top capital-allocation priority, though it does not intend to eliminate debt entirely. Bremner said Foraco seeks a more manageable leverage level and plans to continue investing in growth.

Looking ahead, Bremner said utilization could improve if market demand remains sustained, although seasonal winter conditions in the Andes may temporarily moderate activity in Latin America. He said the company generally targets a payback period of less than two years, ideally about 18 months, for new-rig investments.

About Foraco International (TSE:FAR)

Foraco International SA is the business of providing mineral and water drilling services and hydraulic drilling. It specializes in drilling in harsh environments and isolated locations including desert, and mountainous regions. The principal sources of revenue consist of drilling contracts for companies involved in mining and water exploration. The group has its operations in Europe, the Middle East and Africa, North America, South America and the Asia Pacific.

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