Foraco International SA

TSX:FAR

Earnings Call Transcript

[Operator]

Good morning, everyone, and welcome to the Foraco International SA Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please also note today's event is being recorded.

I'd now like to turn the floor over to Daniel Simoncini, CEO. Please go ahead.

[Daniel Simoncini, executive]

Thank you, Jimmy. Thank you all for joining us on our Q2 2022 results conference. I'm Daniel Simoncini, Chairman and CEO in 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 CNW Newswire. If you did not receive a copy of the release, please visit our website, www.foraco.com.

We are pleased to report our best quarter since 2012 despite the ongoing macroeconomic headwinds we all observed, with revenue up 14% year-over-year, and a similar utilization rate at 60%, although the mix of rigs employed deferred from a year ago, and we increased our EBIT by 26% year-over-year. Metal prices index retreated 18% from last March all-time high, with copper, nickel and iron ore being still above last year's average. On the commercial front, we noticed some junior explorers having more difficulties to finance their exploration campaign, while our large top-tier customer base didn't change their plan. And on the contrary, some added more rigs to our long-term contracts recently. The commercial activity has been quite satisfactory as our order book stands higher now than January 1, despite USD 150 million delivered in the first half of the year.

I will now pass the conference to Jean-Pierre, who will walk us through the financials in more detail. Jean-Pierre?

[Jean-Pierre Charmensat, executive]

Thank you, Daniel. Good morning, everyone. So revenue for the Q2 '22 quarter amounted to USD 86.5 million, compared to USD 75.7 million for the same quarter last year, a 14% increase, as Daniel mentioned. This increase is the result of the favorable market dynamics with long-term rolling contracts and our capacity to deliver. By reporting segment, Mining represented 85% of Q2 '22 revenue and Water represented 15%.

During the quarter, North America and South America were the most active regions. In North America, revenue amounted to USD 26.6 million in Q2 '22, a slight increase compared to Q2 '21. The region continues to face growing issues. Revenue in South America increased by 95% to USD 25 million, compared to USD 12.8 million in Q2 '21. New long-term contracts were mobilized during the first quarter of 2022. Revenue in EMEA for the quarter was USD 21 million, compared to USD 24.5 million in Q2 '21, a 14% decrease. The activity was stable in Europe and CIS while the activity decreased in Africa due to the phasing of some contracts and logistics challenges. Revenue in Asia Pacific increased 10% at USD 13.9 million compared to the same quarter last year, reflecting the ongoing improvement of the activity, with 2 new significant contracts starting during the period. In Q2 '22, the geographical activity split was North America 31%, South America 29%, EMEA 24% and Asia Pacific 16%.

During this quarter, the gross margin, including depreciation within cost of sales as per IFRS rules, was a profit of USD 18.8 million versus USD 15.8 million for the same quarter last year, a 19% increase. Ongoing contracts reported solid performances. Inflation of costs impacted gross margins, but most of the cost increase were compensated in our selling prices.

SG&A increased by 7% to USD 6.2 million, compared to USD 5.8 million for the same period last year, but decreased as a percentage of revenue from 7.6% to 7.1% in Q2 '22. The EBIT, our operational result, was USD 12.6 million profit versus USD 10 million in Q2 '21, a 26% increase, and the EBITDA amounted to USD 17.9 million or 20.7% of revenue, a 21.5% increase compared to USD 14.7 million in Q2 '21 or 19.4% of revenue. We do not report, as always, adjusted EBITDA or any other adjustment to the IFRS figures.

On a 6 months basis, revenue amounted to USD 154.2 million compared to USD 130.3 million in H1 '21, an 18% increase. This increase results from the combination of favorable market dynamics and the capacity of the company to deliver despite the COVID variants which caused some delays to operations. Revenue increased 9% in North America, 104% in South America and 20% in Asia Pacific compared to H1 '21. Revenue decreased 16% in EMEA, mainly in Africa, due to phasing of contract and logistic challenges, and the activity was stable in Europe and CIS.

The year-to-date '22 gross profit was USD 28.3 million versus USD 21.9 million for the same period last year, a 30% improvement, mainly due to increased activity and performance on contracts despite the tight labor market and cost inflation. The year-to-date '22 EBIT was a positive USD 16.2 million compared to USD 10.9 million in the same period last year, a 50% increase. And the year-to-date '22 EBITDA for the 6 months period was a positive USD 26.4 million, compared to USD 19.8 million in the same period last year, a 33% increase.

In H1 '22, the working capital requirement was USD 12.4 million, compared to USD 3 million for the same period last year. This increase is the result of the activity ramp-up, especially during the end of the quarter. CapEx amounted to USD 8.6 million in cash compared to USD 10.5 million in cash in H1 '21. This CapEx relates to acquisition of rigs, rigs overhauls, ancillary equipment and rods.

At June 30, '22, our net debt, including lease obligations, IFRS 16, amounted to USD 91.1 million versus USD 100.8 million at March 31, '22 and USD 85.7 million at the end of December '21. Our leverage ratio improved to 1.8. All of this confirms our capacity to finance our ambitious CapEx and development program. We benefit from a higher proportion of long-term contracts, which provide us with visibility on our financial perspectives. We, nevertheless, remain focused on cost control, and we are convinced that this is a vital issue securing long-term relationships with our clients.

I will now return the call to Daniel for his closing remarks. Daniel?

[Daniel Simoncini, executive]

Thank you, Jean-Pierre. Over the last 3 months, the climate change impact, the macro economy and geopolitical environment have continued to deteriorate. And people now talk openly about the growing recession risk, which may be already there as the latest statistic of the U.S. GDP came out an hour ago. Central banks are raising rates broadly, and this has been coupled with the new COVID-19 wave, and the rest of it is a great uncertainty for the near future, which markets hate.

Yesterday, Bloomberg published an opinion on the U.S. economy, which I don't resist in quoting. They say, "The word recession seems to be in every other headline these days, but a shift in how U.S. consumers are spending just landed in the Wall Street echo chamber. Shoppers are returning to store, traveling and going to concerts, but they are spending less on remodeling and entertaining themselves at home. Partway through the latest U.S. earnings season, corporate results, some good, some bad, are feeding the debate about just how much damage the U.S. economy has really sustained in recent months. Job creation is healthy and unemployment extremely low, but prices are rising, eroding consumers' buying power. In other words, nobody seems to know what happens next." I'd like to share that because we share this opinion. Nobody knows.

At Foraco, we observed that the inflation that everybody talks about is made of 3 components, which are not necessarily synchronized, goods, wages and energy. For us, as far as we are concerned, prices of industrial goods seem to have now stabilized after surging as soon as Q4 2021. And we see now them stabilizing somehow, even if delivery times are still over the roof. Wages have been adjusted according to local market conditions, and we can't do much on the energy prices, which we pass to our customers; we are not taking, as we speak, any specific measure to fight inflation more than that, and we are keeping our prices in a fair range, on the contrary of certain other economic actors which do not hesitate to apply revenge pricing. Just look at the hotel prices in Canada.

Most of our top-tier clients have recently acknowledged publicly these tensions and prices softening for metals, but they all show excellent balance sheets, above par operating profits, and most have confirmed their drilling plans, if not increase them like in the battery metal segment. This is why we are still cautiously optimistic, and we remain very focused to deliver the service quality as expected by our customers in this environment, and we are very active to comport our resilience in the current circumstances.

Thank you for listening. I will now turn the call to Jimmy, who will take the first question. Jimmy?

[Operator]

[Operator Instructions] And our first question today comes from Steven Green from Ordinance Capital.

[Steven Green, analyst]

Dan, Jean-Pierre, after that economic feat, I realize you guys are in a great position because you guys can pass on your cost and you have long-term contracts. So that's probably a good thing for you, but I'm glad you are doing so well. My first question is, in the South America, you had a huge increase. Was that a lithium -- a start of a lithium contract in South America?

[Daniel Simoncini, executive]

Partly, yes, in copper as well.

[Steven Green, analyst]

And is in -- the lithium market seems to be -- everybody's looking for lithium. Is that a real growth area for you now?

[Daniel Simoncini, executive]

Yes. It's -- the demand for lithium drilling is raising in both -- in 2 areas. One is Argentina, Chile, I mean South America. And the second one is in Australia. And as we speak, we start small programs in both regions, and we hope they are going to be promising. In South America, it's the brine version of lithium, whereas in Australia is a rock version. But yes, it's -- we are happy to add lithium to our metal portfolio growth.

[Steven Green, analyst]

And so did your expertise in water help you with the brine in South America, gives you an advantage there?

[Daniel Simoncini, executive]

Yes. Of course, of course. The fact that we're able to explore with small piezometers and then transform these exploration wells into production wells or injection wells is a great advantage we have.

[Steven Green, analyst]

Well, that's great. That's exciting because if -- the battery metals are obviously -- and the environmental metals are the ones that are really going to be exploding in the future. My real question and concern is I think the only -- you guys are doing an amazing job. And by next year, you guys could be doing $100 million in EBITDA. And the only people who seem to care are you, me and Jean-Pierre. It can't be -- I mean your company is going to be selling 1x EBITDA. I mean it's already selling at 2x EBITDA. And if you put in the debt at $90 million, your enterprise value to EBITDA is 3:1. This company should be -- I mean you're growing and your growth -- I know people lump you in with industrial, but this is really a growth company, and you should be selling at 8, 9, 10x EBITDA.

I mean you're in solid foundations. You have everything that people want. You have -- people call that -- talk about subscriptions, you have long-term contracts that give you visibility into the future. You have pricing power. Everything that the market seems to want we have here, and you guys are an amazing management. You've managed through amazingly difficult times. And now you seem to have this company on the basis to really grow, and it doesn't seem to be recognized. And it's just frustrating for me because -- can we give a special dividend? What do we do to make this thing stand out? Because trading a couple of hundred shares a day on the Toronto Stock Exchange -- this thing deserves more.

[Daniel Simoncini, executive]

We cannot agree more, Steven. Just bear in mind that, of course, we cannot go against the market. And I'll tell you, if the Russian aggression on Ukraine and everything which was collateral to that, I mean the high price in energy and then inflation on some part of our day-to-day business would be avoided, we wouldn't be trading at such a low EV to EBITDA ratio. Having said that, if you -- so there is a timing issue, there is a market sentiment issue. You cannot open the press or whatever without being totally depressed, right? Nobody is. And this is weighing a lot on the morale of the investors and the sentiments. And everybody is getting, in my opinion, too much.

I'm not an economist, but I don't see how 3 points of increased rates by the Fed will stop inflation, but not wag the economy. Who knows, right? The issue is that, you look at the space, and you're going to see that, compared to our peers, I think we have the second best EV to EBITDA valuation ratio. I'm talking about analyst 23, okay, forward. And we are in the range of 4.4, 4.7. And I think the top guy is just, just above 5, okay?

So yes, it's very modest. Yes, we have been valued at much, much higher multiple, but that was the market in a good timing and in a good mood. You get me? So we decided to pause for the summer break the Investor Relations effort that we do, but we're going to resume that in September to make sure that nobody is forgetting about us, and we are trying to regenerate some liquidity in the market, and we'll go from there, okay?

But we are totally aligned with you. We are frustrated. But sometimes we have to look at what the market thinks about the space. And you see that we are not that bad in this kind of space, okay? Even if it's far to be satisfactory from a pure shareholder point of view. So just be patient a little bit more. I know you are a big fan of us. But I think if and when the situation -- the general situation stabilizes, we'll have a lot of growth ahead of us.

[Steven Green, analyst]

All right. If next year you do $100 million in EBITDA, I want you to give a special dividend.

[Daniel Simoncini, executive]

We'll see what we -- give us a little bit -- a summer break, and then we can resume this conversation.

[Steven Green, analyst]

Because you will -- you're going to increase your utilization to 70% -- increase your utilization to 10%, you're going to grow -- you're going to get your $100 million in EBITDA next year. I mean that's the way...

[Daniel Simoncini, executive]

Cross fingers. We have some very large contracts which are just starting to ramp up. So you're going to see the impact of that, let's say, I would say, Q3 -- mid Q3 and Q4, but Q4 is already -- I mean, sorry, always a little bit kind of weird because of Christmas break. But H1 next year is going to show the full force of this contract. We are monitoring the market very closely, okay, to see if there is any corner of the market getting cold feet.

And as I said, the only one where we saw some kind of cold feet is on the junior explorer financing with equity because the financial market are really wary nowadays, okay? So that's a specificity of this market. And thank God we are not that exposed to this. Jean-Pierre, how much is it now on Q2? 15%?

[Jean-Pierre Charmensat, executive]

We remain at 15% on junior, Dan, but the...

[Daniel Simoncini, executive]

Okay. And yes, I mean it can be a good place, but it's so volatile. So this is why we prefer to be much more resilient and keep working for the big guys.

[Steven Green, analyst]

Yes. No, no. I think in addition -- it's a great place to be, being with the big guys.

[Daniel Simoncini, executive]

Yes. This is what we feel -- okay, they are not easy customers. They are very professional and very, very tough sometimes, but very good people to work with because they have the vista, they have the visibility and they have the balance sheet.

[Steven Green, analyst]

Right. And then with your IRR, I mean, this really is -- the EVs are going to explode the next 10 years, and this is the place -- you're the place they get the minerals. They need copper, they need lithium. They need everything. Cobalt, all that stuff, you guys make it, but I mean...

[Daniel Simoncini, executive]

Exactly.

[Operator]

[Operator Instructions] And gentlemen, I'm showing no additional questions. I'd like to turn the floor back over for closing remarks.

[Daniel Simoncini, executive]

Thank you, Jimmy. Thank you, everyone. So we talk to you in November next time, and have a good summer break. Bye-bye.

[Jean-Pierre Charmensat, executive]

Thank you. Bye-bye.

[Operator]

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining. You may now disconnect your lines.