Foraco International Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 30, 2024

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Foraco International S. A. Third Quarter 2024 Earnings Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.

Operator

This call is being recorded on Wednesday, October 30, 2024. I would now like to turn the conference over to Mr. Tim Bremner. Please go ahead, sir.

Speaker 1

Thank you, Lara. Hello, everyone, and thank you for joining us on our Q3 2024 results conference call. I am Tim Bremner, CEO of Foraco and with me today is Fabian Svezt, CFO. The news release of our results 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 at www.feraco.com.

Speaker 1

After the overview of the results and our comments in the quarter, we'll open the call for your questions moderated by Lara. Earlier today, we reported revenue for the quarter at $78,000,000 compared to a record 95 $1,000,000 for Q3 2023 and with an EBITDA of $16,100,000 representing 21 percent of revenue compared to $25,000,000 in Q3 2023 equating to 26 percent of revenue. For the 2nd consecutive quarter, our 2 main regions, North America and Australia, exceeded last year's record performance with revenue for the quarter of $35,800,000 for North America, an 11% increase and $25,000,000 for Australia, a 27% increase. Additionally, both achieved solid margin performance in line with our expectations. Our strategy of focusing on long term contracts for Tier 1 customers in prime mining jurisdictions is a sound one, as this segment of our business grew by 2% compared to Q3 last year and now represents 91% of our business.

Speaker 1

Our water business continues to perform well and has increased to the same level as Q3 2023 or 14% of revenue. This increase is a result of the full deployment of our NGBF rotary drill in Western Australia, where it has been extremely well received by our customer and crews alike. In fact, earlier this month, FORACO won the Australian Drilling Industry Association Innovation of the Year Award for the NGBF, not only because it's a reliable, state of the art, hands free, remote controlled rig, but also because it's compact design, much smaller footprint relative to other drills with some even with less capacity. This award has garnered a lot of attention from our customers as we now prepare the 2nd NGBF, which is in Australia and we continue with our plans for the 3rd rig to arrive as scheduled later this year. I really look forward to providing you with further updates as this integral part of our business develops.

Speaker 1

I'll now turn the call over to Fabian, who will provide a complete overview of our financial performance for the quarter. Fabian?

Speaker 2

Thank you, Tim, and good morning, everyone. First of all, and as a reminder, Oraco reports in full IFRS and in U. S. Dollars. Revenue for CO3 2024 amounted to $78,000,000 compared to $95,000,000 for the same quarter last year, a 18% decrease.

Speaker 2

By reporting segment, the Mining segment represented 86% of Q3 2024 revenue and Water represented 14%. Asia Pacific and North America recorded their 2nd consecutive record performances. Revenue in Asia Pacific increased 27% at $25,000,000 reflecting increase in demand and the deployment of new rigs. In North America, revenue amounted to €36,000,000 in Q3 2024, a 11% increase, driven by long term contracts with Tier 1 clients. Revenue in South America decreased from €30,000,000 to €13,000,000 The region is primarily affected by a drop in demand from the juniors and unanticipated delays by some customers after a particularly long winter season.

Speaker 2

Revenue in EMEA for the quarter was $4,000,000 compared to $14,000,000 in Q3 2023. The company exited from Russia and some unstable West African countries. In Q3 2024, the geographical activity split was North America 46% Asia Pacific 27% South America 17% EMEA 5%. During this quarter, the gross margin including depreciation within cost of sale was $17,000,000 or 22 percent of revenue versus $27,000,000 or 28 percent of revenue for the same quarter last year. Most projects generated solid operating performances.

Speaker 2

Lower revenue affected the gross margin because of fixed operational costs included in the gross margin. SG and A decreased by 20% to €5,400,000 compared to €6,700,000 for the same period last year. As a percentage of revenue, SG and A was stable at 7%. As a result, the EBIT was €12,000,000 versus €20,000,000 in Q3 2023. The EBITDA amounted to €16,000,000 or 21 percent of revenue compared to €25,000,000 or 26 percent of revenue in Q3 2023.

Speaker 2

I remind you there is no adjustment to the IFRS figures in our financials. On a 9 month basis, revenue amounted to CHF233 1,000,000 compared to CHF 2 €284,000,000 in year to date Q3 2023, a 18% decrease. Revenue increased 2% in North America and 18% in Asia Pacific. In South America and EMEA, revenue decreased by 43% 50%. The year to date 2024 gross profit was €52,000,000 versus €74,000,000 for the same period last year.

Speaker 2

The year to date 2024 EBIT was €36,000,000 compared to €53,000,000 for the same period last year. And the year to date 2024 EBITDA was €50,000,000 compared to €68,000,000 in the same period last year. For the 9 months period ended September 30, 24, the working capital requirement was €23,000,000 same as last year. This increase is the result of increased activity in North America and Asia Pacific. CapEx amounted to $14,000,000 in cash compared to $21,000,000 in cash last year.

Speaker 2

This CapEx is mainly related to acquisition of 3 large rotary rigs for Australia and abroad. At September 30, 2024, our net debt including lease obligation, IFRS 16 amounted to $78,300,000 versus $65,200,000 at December 31, 2023. I would now hand the call back to Tim for his closing remarks. Tim?

Speaker 1

Thank you, Fabian. With the easing of inflation and fears of a recession having all but disappeared, geopolitical tensions are on the rise and they're a contributing factor that impacts the exploration industry, especially for juniors, who continue to face challenges attracting financing. And this has an impact on FORACO. Despite this, we're confident in the outlook for our business, but this might require some patience. Critical metals, especially copper and other EV transition metals remain high on the political agenda, as demand forecasts continue to grow, indicating a potential deficit in the supply in the near future.

Speaker 1

Therefore, this demand can only be met cannot be met without significant new discoveries, all of which will require drilling. Similarly, as gold reserves decline and prices surge, it's only a matter of time before we see a significant increase in financing that will fund the exploration needed to find these new discoveries. In fact, in recent weeks, there have been some signs of this easing for the juniors. While we anticipate and look forward to a resurgence in pure exploration, Viroqua remains focused on its strategy of developing long term contracts with Tier 1 customers in prime jurisdictions, which will require drilling to support their mining operations. We are actively involved in a number of new opportunities as we work to extend or renew existing projects, all of which we look forward to reporting on in the coming weeks.

Speaker 1

And finally, I want to emphasize the importance of our Rotary business, particularly as it relates to water services for mining. These are exciting times for our team in Australia, which will no doubt help create new opportunities for us in other regions of the Farrakoo world. Thank you for listening. And I'll now turn the call over to Lara, who will take the first question from our listening audience. Lara?

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from the line of Don Angelo Volpi from Beacon Securities. Go ahead please.

Speaker 3

Hey, good morning guys and thank you for taking my question. Just wanted to highlight the impressive results out of North America and Asia Pacific. Can you touch on these pipelines are looking there for new business? And how we're going to continue the record numbers that we've been seeing?

Speaker 1

Hi, Don Angelo. It's nice to hear from you. Well, as you know, we don't provide guidance. But what I can say is that this has been a very sustainable part of our business. And as I indicated, the market drivers, the fundamentals for our business would lead one to suspect that this would be sustainable going forward.

Speaker 1

We're going to we're working on new opportunities and we're working on extending existing contracts. These are long term opportunities and we'll report out when those opportunities come along and meet the threshold for news.

Speaker 3

Okay. Thank you. And then just for SG and A, it was down about 20% year over year. I think you guys held around 7% of revenues. Can you guys go over some of the optimization efforts that have been made so far and kind of where there's some for additional improvement.

Speaker 3

Would you anticipate remaining around the 7% mark?

Speaker 1

That's been a pretty historical figure and a benchmark for us. We're very prudent about cost management. And as our top line is impacted, we need to react. We're not going to react to the point where it jeopardizes the business, absolutely not. But we are particularly efficient in that regard.

Speaker 1

And I would see that that ratio of SG and A remaining around the 7%.

Speaker 3

Okay. And then final question on my end. I just wanted to highlight the gross margins of the Water business. I think you guys are approaching 32% for this quarter. It was good like great improvement.

Speaker 3

Can you touch on some of the factors there? Was it just better contract wins or what was it a function of? And do we anticipate those maintaining around 32% or kind of normalizing around the 25% market?

Speaker 1

Well, there has been no the water business has been relatively stable for us. And the margins that we have been achieving are consistent with what we've been achieving in the past for the water business. And I don't see that particularly changing.

Speaker 3

Okay. Thanks for taking my questions. I'll hop back in the queue.

Speaker 1

Thanks, Don Angelo.

Operator

Our next question comes from the line of Stephen Green from Ordnance Capital. Go ahead please.

Speaker 4

Hey Tim, how are you? I guess I'm glad that the business has stabilized. So I guess that without the juniors, the business has stabilized because you have a lot of long term contracts. So that's a good news. I was curious, the utilization rate is still quite low at 40%.

Speaker 4

I know you're getting these new rigs and I guess one rig probably is a lot more efficient than the older rigs, so you may have to not employ as many. But what do you see if there's utilization rate? It seems like it I know that in the past crews were a limiting factor in terms of your growth, but now it seems like you have the crews, but you don't have the utilization of the rigs. Can you comment on that?

Speaker 1

Sure. Stephen, it's nice to hear from you. First of all, utilization rate really varies from region to region around the world. For example, you can appreciate that in North America and in Australia, it's much higher. And in South America, it's the opposite.

Speaker 1

We can't easily move rigs from one jurisdiction to the other. And nor would we necessarily want to from the Latin American region, which is still a prime jurisdiction for us. So we're going to keep them there, while we while that market improves. So the maximum utilization rate that we've had is about 75%. So I think that we've got very, very good utilization rate in some regions.

Speaker 1

We need to improve in others. And right now, we're sitting at 40%.

Speaker 4

Okay. So we shouldn't really use that as a measure anymore? I mean, we see that as a measure all the time of how the business is growing. So we shouldn't use that as a measure?

Speaker 1

It is one measurement, Steve, and it's I wouldn't say it is the optimal measurement. For example, we could add another NGBF in Western Australia, which we're going to be doing shortly. And that won't move the utilization needle, but it does move the top line significantly as compared to per se a couple of small underground rigs, which don't have the ability to generate the same amount of revenue. It's one metric for sure, but I wouldn't hang my hat on it for everything.

Speaker 4

And you have the crews to support growth going forward?

Speaker 1

Sorry. Could you repeat that?

Speaker 4

You and the crews to support growth going forward? I know you have strong crews.

Speaker 1

Yes. That's certainly eased from a couple of years ago. So the labor market is nowhere near as tight. Even in Australia, there's been some improvement in the labor market. We've all read about some of the closures in the nickel business and there's been some easing there.

Speaker 1

So we're quite comfortable with our labor position.

Speaker 4

All right. So just a couple of questions. I know that South America was some you had some issues down there internally and I guess and that's the growth of copper is down there and I know we need copper and the price of copper seems fairly stable and fairly strong right now. Do you see your expansion going there with I guess some of the senior or the Tier 1 miners, new contracts or?

Speaker 1

Yes, definitely, definitely. I mean, the tender pipeline in Latin America is very robust. And we see that improving. We don't have any particularly internal issues that need to be resolved. Just for us, this is really just a market dynamics and timing and some internal decisions by our customers to defer certain projects.

Speaker 1

But the fundamentals for Latin America are fantastic. It's a great mining market. We've done there extremely well there before and we intend to do extremely well there going forward.

Speaker 4

And the weather is easing there. So we're getting into the drilling summer season, so that won't be an issue next couple of quarters?

Speaker 1

No, not at all. No, we're mobilizing rigs in all three countries that we operate there.

Speaker 4

And are we winning contracts against like MegaJear and Longyear, Fullyear? Are we able are we winning contracts or just strictly these are price issues with contracts?

Speaker 1

We're winning our fair share for sure. I mean, we win contracts based on a combination of price and performance. We're not low price leaders. So it's a matter of us getting out and demonstrating that to our customer. And we've been quite successful at that.

Speaker 4

And the last question I want to ask you about gold. The price of gold is obviously high and seems to be strong. And I know you're pushing into North America, United States, Canada. Is that still going on? And is that something we should look forward to in the near future is introduction to the United States?

Speaker 1

We've built a very strong management team in the U. S. There's an awful lot of interest in Foraco's arrival into the U. S. The existing projects that we've completed have gone very well.

Speaker 1

And we see that as a great market for us. And you know that I'm quite interested in it. So we look forward to reporting more on that going forward.

Speaker 4

All right. Well, I know it's been a tough couple of quarters and hopefully this is the bottom of the cycle and we can start getting back to growth that we had in 2023. But thanks for all the effort and I just hope we get back to growth because that's what we needed some new business. Thanks.

Speaker 1

Yes, it's coming.

Operator

Thank you. Our next question comes from the line of Steve Kammermeier from Clarus Securities. Go ahead please.

Speaker 5

Good morning guys. Just with the success of the rigs new build rigs move to Australia, I wondered if you could give us an update on any new build plans for 2025?

Speaker 1

So, hi Steve, it's nice to hear from you. The as I mentioned, I believe in my comments, the second rig is in Australia being readied for the field. And the third one is here with me in our facility in France. I'm going to be shipped out later this year. I would say that based on the success and the acceptance by the customer and the crew in Australia that there is certainly room for more.

Speaker 1

And it's not only in Australia. That's a well proven design that has been part of a proprietary design for Foraco for many years. And the new generation rig has really stands out as being a very innovative product. I see it as having application in virtually all the regions that we work in around the world. And it's just a matter of us now sorting out where the best opportunities are with the correct customers, and supplying the rigs according to that demand.

Speaker 1

It could be more in Australia, it could be some in Latin America, it could be some in North America. So far so good. So I can see us building more.

Speaker 5

Okay. And then maybe just an update on the U. S, you've moved some rigs there going to work. Do you plan to how many are there now working and what are the future plans for going into 2025?

Speaker 1

So there are a couple of rigs in the U. S. Which are about to restart. And I have been spending some time in country with our new country manager developing that business. And like our strategy for the U.

Speaker 1

S. Is similar as Australia and other parts of North America. We're going after Tier 1 customers with long term opportunities. And those are ongoing.

Speaker 5

And just maybe a little more current here. Q4, how is Q4 trending so far? We're a month in. How is it trending versus Q3?

Speaker 1

Well, you know that we don't give guidance. And so I can't really comment on that. So I guess we're going to have to wait until when we report in February.

Speaker 5

Okay. So just maybe of the rigs that we're working at the end of September have some dropped off in just the past month, not looking for guidance just current over October here?

Speaker 1

There's some seasonality for Q4, there is for everybody. But I don't see any early end to the season this year where we're working. In fact parts of the company are picking up. I mean we're back to work in Latin America after a particularly tough winter and some delays by customers. So

Speaker 4

it's

Speaker 1

that's kind of the current state.

Speaker 5

Okay. That's great. That's all I had. Thanks guys.

Speaker 1

Thanks, Steve.

Operator

Our next question comes from the line of George Melas from MKH Management. Go ahead please.

Speaker 6

Thank you. Good morning gentlemen. Thanks for taking my question. Tim, can you give us a little bit more color on the challenges in Latin America and your country three countries there? Try to help us understand by country, maybe by commodity and also maybe your mix of business there between juniors and majors?

Speaker 4

So

Speaker 1

I prefer not to go country by country because it's going to get really too much into probably into too much detail. But so my comments are really relevant to all of the jurisdictions that we work in, in Latin America. Most of the commodities that we work for are copper and gold. And in as we reported during Q2 and Q3, there was a considerable retraction in our activity because of the winter and the inability to work at high altitude. And that includes all the work that we do in the Andes.

Speaker 1

In the southern part of Latin America and Brazil, we were impacted by primarily by juniors. There's a bigger mix of juniors in Brazil than the other areas that we work in. And it was really just a very large combination of a number of factors. There's not one particular thing that I could point to that would be defined as a problem. And we see the situation in Latin America for us as very positive.

Speaker 1

We've got extremely good management. We've got lots of equipment and we've got good crews. And nothing has changed in the market. It's still very robust. The tender pipeline is there and we're ready to go to work.

Speaker 6

Okay, great. That's helpful. And maybe just can you give us like a mini tutorial on the rotary bags? You're adding some new ones. You said it's an important part of Ferroco Business.

Speaker 6

Just help us understand and in which geographies are you primarily deploying the rotary rigs and help us understand that a little bit maybe. Thank you.

Speaker 1

Sure. So the biggest demand for our new NGBF rotary rig is Western Australia. This rig has a very small footprint relative to other rigs that we have in our fleet and other rigs from our competitors. And it has a capacity that is significantly greater than those rigs. And by capacity, I mean, it can drill a larger diameter well deeper using less energy.

Speaker 1

It is completely remote controlled. It is hands free and has complete hands free operating. So it's the rig, it's the support equipment, it's the control system. It's really a very well done combination of all aspects of a drilling operation that keep the people safe, require a much smaller footprint for our customer to do the work on, which makes permitting easier. And it's a more efficient rig.

Speaker 1

For example, we drill with the truck engine. We don't have a deck engine on the rig. And the truck manufacturers are expert at providing an optimum engine that uses the least amount of fuel and emits far less carbon than what an older engine would. So we take advantage of that technology and then combine that with our rig. So there's a number of factors that really all add up together to make this a particularly unique rig and we're quite proud of it.

Speaker 6

And you have just one deployed right now, correct?

Speaker 1

Correct. We deployed the first one about 3 months ago. It takes quite a bit of time to deploy these because the rig is only one component and then there's all the tooling and support equipment to go with it. And we need to make it tailor made for the Australian market. So it's built in France in our facility, then completed in Australia retrofitted, because the constraints that are and the rules and regulations for the Australian market are quite specific and the best place to do that is in country.

Speaker 1

So that's the way of deploying them. The second rig is there being prepared. It should be out, I would think, early in 2025 deployed and then we'll be sending the 3rd one from France in approximately 6 weeks. Okay, great. And then we have another one in the pipeline after that.

Speaker 6

Okay, very good.

Operator

Thank you. And there are no further questions at this time. I'd now like to turn the call back over to Mr. Bremner for any final closing comments.

Speaker 1

Thanks very much, Lara. Well, we appreciate your interest in our in Foraco, everyone, and thank you very much for the time and attention and the good questions. And we look forward to speaking to you in February for Q4. Thank you very much. Have a good day.

Speaker 4

Thank you.

Operator

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.

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