Foraco International SA

TSX:FAR

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the Foraco International SA First Quarter 2021 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Daniel Simoncini, Chairman and CEO. Please go ahead.

[Daniel Simoncini, Chairman & CEO]

Thank you, Lindsey. Thank you all for joining us on our Q1 2021 result conference. I am Daniel Simoncini, Chairman and CEO of Foraco, and with me today is Vice CEO and CFO, Jean-Pierre Charmensat. The news release of this result was issued this morning prior to the opening of the TSX through the CNW Newswire. If you didn't receive a copy of the release, please visit www.foraco.com. After the outline, we're going to get to a Q&A session.The first quarter of 2021 has seen a surge in COVID cases across the planet, unfortunately, and that has impacted some of our operations. As we speak, we still have 5 employees who are still under medical monitoring in Russia, Brazil and Canada out of the 260 Foraco employees who tested positive since the beginning of the pandemic. Be assure, we are doing all we can to get our people vaccinated, but the different countries we're operating in are not on the same pace or the same protocols. So it will take few months more before we reach a sufficient protection for our employees. Meanwhile, we continue to maintain a very strict sanitary protocol throughout our different branches in the world.Despite these adverse sanitary conditions, metal prices have continue to raise, supported by a solid demand and we have been very busy to remobilize our project after the Christmas break. We glad to report 2021 Q1 revenue of USD54.6 million in revenue, up 10% year-on-year, which is a 8 years high and a positive EBIT and rig utilization rate of 48%, up 4% compared to a year ago. During the quarter, all our regions performed well and our sustainable economy-related segments were strong again this quarter.I will now pass the conference to Jean-Pierre, who will walk us through the financials in more detail. Jean-Pierre?

[Jean-Pierre Charmensat]

Thank you, Daniel, and good morning, everyone. So despite the COVID-19 pandemic, which continues to affect the logistics worldwide, revenue for the Q1 '21 quarter amounted to USD54.6 million compared to USD49.7 million for the same quarter last year, a 10% increase, the Q1 being generally the lowest quarter of the year. By reporting segment, we recorded a 12% increase in the Mining segment and 2% in the Water segment. Water represented 17% of Q1 '21 revenue. All regions contributed to this increase. EMEA and North America were the most active regions. Revenue in EMEA for the quarter was USD18.8 million compared to USD15.1 million in Q1 '20, the 25% increase mainly in Africa, thanks to new contracts mobilized at the end of 2020. The activity in Russia was stable at a sustained level compared to Q1 '20.In North America, mainly Canada, revenue amounted to USD18.6 million in Q1 '21, the 2% increase compared to Q1 '20. The activity in North America continues to be driven by a strong demand. At USD7.5 million, revenue in Asia Pacific increased 4% compared to the same quarter last year. Revenue in South America increased by 5% at USD9.6 million compared to Q1 '20. The activity in the region continues to be particularly impacted by the effect of the pandemic, which disrupts the logistics and operational activity since Q2 '20.In Q1 '21 the geographical activity split was EMEA 35%, North America 34%, South America 17%, Asia Pacific 14%. During the quarter, the gross margin including depreciation within cost of sales as per IFRS rules was a profit of USD6 million versus USD5.3 million for the same quarter last year. Ongoing contracts reported solid performance, while some new contracts in mobilization phase generated lower percentage of gross margin.SG&A increased by 2% to USD5.2 million compared to the same period last year. The decrease as a percentage of revenue from 10.3% to 9.6%. EBIT, our operating result was USD0.8 million profit versus a USD0.12 million profit in Q1 '20. The EBITDA amounted to USD5.1 million or 9.4% of revenue compared to 5 -- to USD4.5 million in Q4 '20 or 9% of revenue.Working capital increased by USD7.7 million versus USD2 million in Q1 '20, mainly due to increased activity and mobilization of new contracts. During the period, CapEx amounted to USD4.4 million in cash compared to USD2.8 million in cash in Q1 '20. This CapEx relates to major rigs overall, ancillary equipment and rods. As a result of the above, the free cash will before debt servicing was a negative USD8.2 million compared to USD1 million negative in Q1 '20.At March 31, 2021, our net debt including the effect of the IFRS 16 amounted to USD140.1 million compared to USD136.2 million at year-end 2020. We met our covenants at March 31, 2021. So we are pleased to report this Q1 '21 improved results and our activity in the first quarter is characterized by significant mobilization and phasing of contracts, relatively high capital expenditure and additional working capital requirement. Thanks to our improved results and the sustained demand for commodities, we are progressing with existing lenders and new lenders to refinance the outstanding bonds due in May 2022 in order to deleverage our balance sheet and improve and extend the terms of the debt.I will now return the call to Daniel for his closing remarks. Daniel?

[Daniel Simoncini, Chairman & CEO]

Yes. Thanks, Jean-Pierre. Many metals are up over the quarter as you have noticed and some breaking decade long records like copper and iron ore. This translates into a solid activity in the mining space and we are observing an increased effort of our customers in term of production management as many of them are increasing progressively their drilling budgets, asking either for an extension of contracts or additional rigs.There is also a growing inflation as far as wages and supplies are concerned across the board, as many people left the industry during the downturn and there is a big disturbance into the shipping marine business. Foraco being considered as a company of choice for employees. This makes our talent one of the best in the industry and we managed to keep the turnover at reasonable level for the time being. All that makes our life a bit more challenging more than we'd like to, but as we share the same conditions with our customers, they understand very well the global mining space situation and all of us are proactively supporting to -- each other to overcome these temporary conditions. It seems 2021 has started on a good foot for us, especially for EV metals and water, which amounted to 50% in our activity last year and we are confident that our business model is one of the most resilient in industry and that we will continue to improve our performance by many metrics going forward.As Jean-Pierre mentioned, we are making progress to refinance our existing debt and we'll disclose any material development in due course as per the TSX disclosure policy. Thanks for your listening. I will now turn the call to Lindsey, who will take the first question. Lindsey?

[Operator]

[Operator Instructions] And we do have a question from Steven Green with Ordinance Capital.

[Steven Green]

Daniel, Steven over here. I'm glad to see things are improving and I am glad you are all safe. One question I have is, first, so the CapEx in this quarter went off the line, I guess that you start new contracts in the first quarter, that's why it's lower usually than the rest of the quarters, the activity, but the CapEx. So does that mean that you're really investing to support strong future growth in revenues?

[Daniel Simoncini, Chairman & CEO]

Steven, good to hear you. Usually, the CapEx, we spend most of them in Q1 and Q2, because they are supporting the order book execution, if I may say so and this year, we had a kind of early good start as you may -- as you saw compared to a year ago and this is why we had to expense and to spend a bit more money than average. But we are very strict and we are very disciplined on our CapEx total, I mean, yearly budget and yes, most of the CapEx will be spend over the first half of the year.

[Steven Green]

But that's also support new start-ups and contracts and stuff, that's what you do it for?

[Daniel Simoncini, Chairman & CEO]

Yes, yes, basically, we are not in the USD8 million that Jean-Pierre mentioned. There is a lot of rods, of course, because under IFRS, we are obliged to amortize them and treat them as CapEx and usually it's about 50% of that and the rest is either in your new rigs that we are mobilizing here and there for new contracts or contracts extension. It's not a massive exercise, but we are supporting and we need to do that to execute our 2021 order book.

[Steven Green]

All right. Good. And then, can you just talk a little bit more about the chemicals, the minerals that you guys are mining for the EV sector and how do you see that growing over the next few years?

[Daniel Simoncini, Chairman & CEO]

Well, we are not mining. We are drilling for miners. Our exposure to EV metals, namely copper, nickel, cobalt, lithium is about 30% -- was 30% last year and we see a very solid demand for our services in these categories of metals indeed because of the energy transition. We don't have any, let's say [Technical Difficulty] growth that, but I can say, when you look at the price of the copper, I mean, there is something happening now. So -- but you never know. I mean, nickel is a kind of very volatile as well, because depending on the Indonesia policy or whatnot, but so far, everybody is relatively bullish on the EV metals and that's good for everybody in the space. Our exposure to EV is about 30%. We don't see that moving a lot, because we are relatively also heavily exposed and we gladly -- to iron ore for instance, to water and so -- and gold is about 30% of what we're doing. So we are pretty well exposed and diversified in that.

[Steven Green]

Okay. On the balance sheet, I guess, this has been going on for a while. I was hoping to get some -- hope to get some resolution, I'm sure, you are as well, but does the de-levering and improving the terms of the balance sheet that you mentioned in your release, does that mean that you're going to get a reduction in the principal of your -- of the USD140 million you carry. I mean, you're going to be able to buy back the debt at a discount to what is on the books for?

[Daniel Simoncini, Chairman & CEO]

Steven, I praise you for your patience at least as -- which is as big as ours. The moment we have a deal, you're going to get every single details of that but for the moment, you understand that we cannot talk about it.

[Steven Green]

All right. I assume you're -- I mean, this is done for so long, I mean, we're making progress as you said.

[Daniel Simoncini, Chairman & CEO]

Yes, we do.

[Steven Green]

Ok. And like the last question, I ask the forward-looking question. I don't maybe ask the question, but the last time we got to the top of the cycle, I guess in 2012 and '13, where would like the -- where were like our peak profit margin and utilization rates and how do you see -- and what do you see revenue at the top of the cycle look like for Foraco?

[Daniel Simoncini, Chairman & CEO]

I think, 2012-2011 -- 2012, we -- I am speaking. I know Jean-Pierre controlled, but we were just above 60% overall.

[Jean-Pierre Charmensat]

Closer to...

[Daniel Simoncini, Chairman & CEO]

Yes. So that was red hot and the revenue is different, because that's 10 years ago, but the profit margin was at least between 5% and 8%, 9% above. So the '11-'12 peak, Steven was kind of singularity, because the space was going totally constraints, totally nuts and everybody wanted to rig and at whatever the price was. As we speak, we are very far from a crazy situation like that was and I am glad it is not, because our customers are very -- and still very disciplined in terms of CapEx allocation, exploration budget, brownfield, et cetera, et cetera, which make the growth much more sustainable, alright? So compared to the peak, the historical peak, we still have like, I don't know 15% utilization plus maybe 10% on prices average. So there is a lot of room to improve the situation but this comes slowly, I mean, I hope.

[Steven Green]

All right. Well, I have been here since that cycle, so I will be there for the next one.

[Operator]

There are no further questions in queue at this time. Mr. Simoncini, do you have any closing comments?

[Daniel Simoncini, Chairman & CEO]

No. I just thank you everybody and especially Steven for his loyalty. So thank you all and talk to you for the next quarter. Have a nice day. Be safe. Bye-bye.

[Jean-Pierre Charmensat]

Bye-bye. Thank you.

[Operator]

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