Foraco International Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 16, 2024

There are 7 speakers on the call.

Operator

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

Operator

This call is being recorded on Friday, February 16, 2024. I would now like to hand the call over to Tim Bremner, CEO. Please begin.

Speaker 1

Thank you, Mark. Good morning, everyone, and thank you for joining us on the Q4 2023 results conference. I am Tim Bremner, CEO of Foraco and joining me today is Fabienne Savest, CFO. The news release of our results was issued this morning prior to the opening of the TSX through C and W. If for some reason you didn't receive a copy of the release, please visit our website at www.voraco.com.

Speaker 1

After the overview of the results and our comments on the quarter, we'll open up the call for questions moderated by Mark. We're pleased to report yet another excellent quarter, which is the highest Q4 and full year revenue ever. Fabian will provide a full overview of the performance shortly. We continue to deliver excellent performance across all of our operations globally. And despite the pullback in West Africa and our exit from Russia, utilization rates remained stable at 54% for the quarter at 56% for the full year 2023.

Speaker 1

This is a direct result of improved utilization rates in other regions that provided a full offset. We would again like to stress that none of this would have been possible without the dedication and confidence of our teams who we warmly thank for their contribution. During the quarter, the macroeconomic and climate has been relatively stable. Recession fears have eased, inflation rates improved and interest rates held. With respect to the metals market, after a mixed year, the IMF Metals Index improved slightly in the quarter, but was still down about 5% over the full year.

Speaker 1

Gold prices led the index and copper prices have showed improvement and we're optimistic that this trend will translate into improved confidence in the equity markets, particularly for the juniors. In line with the year's financial performance, we continue to refresh many of our long term contracts and we posted yet another record order book for 2024 of $236,100,000 up from $217,000,000 from the year prior. This is an increase of 9%. It seems that a 2 tier market has emerged whereby feasibility and life of mine projects remain stable, while junior markets continue to deal with some significant headwinds. I'll now pass the conference to Fabian, who will walk us through the financials in more detail.

Speaker 1

Fabian?

Speaker 2

Thank you, Tim, and good morning, everyone. First of all, and as a reminder, Foraco reports in full IFRS and in U. S. Dollars. Revenue for Q4 2023 quarter amounted to €87,000,000 compared to €85,000,000 for the same quarter last year, a 2% increase.

Speaker 2

The solid revenue was driven by the continued performance of main contracts and the provision of value added drilling services, which more than compensated for the reduced activity in CIS, as Tim mentioned. By reporting segment, Mining represented 88% of Q4 revenue and Water represented 12%. In Q4, the geographical activity split was North America 30% South America 37% Asia Pacific 19 percent EMEA 14%. In North America, revenue amounted to 20 €6,000,000 in Q4 2023 compared to €28,000,000 in Q4 2022. This decrease was mainly due to the delayed start on 2 significant projects now scheduled for 2024 and the preparation and relocation of rigs for our new U.

Speaker 2

S.-based contract which started in February 24. Revenue in South America increased by 8% at €32,000,000 compared to $29,000,000 in Q4 2022. At $16,000,000 revenue in Asia Pacific increased 17% compared to $14,000,000 for the same quarter last year, reflecting quarter over quarter increased demand and the commissioning of new rigs. Revenue in EMEA for the quarter was €12,000,000 compared to €13,000,000 in Q4 2022, a 6% decrease. Revenue in South Tern, Europe and Africa remained stable compared to Q4 2022, while activity in the CIS decreased by 15% due to the unstable situation in the region.

Speaker 2

During this quarter, the gross margin, including depreciation within cost of sales as per IFRS rules, was a profit of €20,000,000 or 23 percent of revenue versus €80,000,000 or 22 percent of revenue for the same quarter last year, a 8% increase. This reflects the solid operating performance of our projects. SG and A was stable compared to the same quarter last year at 7.4% of revenue compared to 7.6% in Q4 2022. The EBIT amounted to a profit of €13,000,000 versus €12,000,000 in Q4 2022, a 12% increase. EBITDA amounted to $18,700,000 or 22 percent of revenue, compared to $17,100,000 or 20 percent of revenue in Q4 2022.

Speaker 2

On a full year basis, revenue amounted to 370,000,000 compared to 331,000,000 in 2022, a 12% increase. The uptick in revenue in both segments can be attributed to favorable market dynamics, coupled with the company's proven capacity to deliver. This has generated significant growth and a new recourse for Foraco. In full year 2023, the geographical activity split was North America 32%, South America 36%, Asia Pacific 18%, EMEA 14%. Compared to 2022, we recorded a 26% growth in South America, 28% in Asia Pacific, 14% in North America, while EMEA decreased by 26%.

Speaker 2

Revenue in Southeastern Europe and Africa experienced a slight increase compared to full year 2022. And operations in the CIS country witnessed a 42% decline, primarily attributable to a stable situation in the region. By commodity, energy transition now represents 52% of full year revenue, towards 42% in 2022. The full year 2023 gross profit was 94,000,000 versus €71,000,000 in 2022, a 32% improvement. The full year 2023 EBIT was a positive €67,000,000 euros or 18 percent of revenue compared to 46,000,000 or 40% of 2022 revenue.

Speaker 2

And the full year 2023 EBITDA was a positive 86,700,000, 23 percent of revenue, compared to $66,500,000 or 20 percent of revenue in the full year 2022, an increase of 30%. In full year 2023, we managed to control our working capital with a requirement of €5,000,000 compared to €10,000,000 for the same period last year. During the period, CapEx totaled €26,000,000 in cash compared to €20,000,000 in full year 2022, driven by the increased activity. CapEx relates essentially to the acquisition of 7 new rigs, major rigs overhauls, ancillary equipment and rods. As at December 31, 2023, cash and cash equivalents amounted to €34,300,000 compared to €29,400,000 as as at December 31, 2022.

Speaker 2

During the period, we also managed to prepare our long term debt and refinance it, postponing the maturity and cutting the interest charge by 50% with an interest rate at 7% approx. Our net debt was reduced to €65,000,000 at year end and our leverage ratio to 0.75. This financial achievement along with notable improvement in our EPS expands our option for capital allocation. I will now return the call to Tim for his closing remarks. Tim?

Speaker 1

Thank you, Fabian. This quarter concludes a truly record year for Foraco, led by continued strong financial performance. As Fabian mentioned, debt refinancing and reduction in our debt servicing costs, a return to normal commercial banking relationships and a change in senior leadership. The groundwork for such a successful year was well prepared under the leadership of Daniel Luchampierre and for this we are truly grateful. It's made for a seamless transition for Fabian and I as we look forward to their continued support and leadership at the Board level.

Speaker 1

Going forward, we will continue to develop our strategic positioning in 3 key markets: energy transition metals, gold and water services. We will maintain our long term presence and focus in key mining regions including North America, South America, specifically Chile, Brazil and Argentina as well as Australia. More recently, Varaco has reestablished operations in the U. S. It's a key market for us that's aligned with our strategic positioning and we will focus on this market actively in 2024 and beyond.

Speaker 1

With respect to ESG reporting, as many as you know, FORACO is required to report under the EU standard in accordance with corporate sustainability reporting directive of 2022. We're pleased to report a decrease of our global climate footprint as captured by Scope 1 and 2 reporting. Year over year, we've reduced our carbon intensity by about 7% and net water consumption by about 9%. We continue to refine our methodology and improve the accuracy of our reporting. With respect to health and safety, TRIFAR rates have also improved to 1.26 for 5,800,000 man hours, down from 1.31 the year prior.

Speaker 1

In Q3 of 2023, Veraco adopted the 4 stage health and safety management plan globally. This was first adopted in Australia and the 4 states have proven very effective in improving HSE performance in the underperforming regions around the world. This has contributed to the improved trend. The demands for our services remain strong. And on this solid foundation, we will continue to develop relationships with new Tier 1 customers and new markets such as the U.

Speaker 1

S, especially as they relate to energy transmission metals and gold. Water services remain a key focus not only for human consumption, but as they relate to mining. We will continue to develop these services across all jurisdictions as mining and water services intersect virtually on every mining operation globally. To conclude this record year, I'm very pleased to announce that the Board of Directors, reflecting on its confidence in the company's strength and outlook, has decided to propose a dividend of $0.06 per share at the next shareholders meeting. This dividend represents a return on investment for shareholders of about 3.4%.

Speaker 1

On behalf of the Board and management team, I extend our deepest thanks to each member of the Foraco family for their invaluable contribution to our success. Thank you for listening to our remarks. I'll now turn the call over to Mark, who will take the first question from our listening audience. Mark?

Operator

Thank you. And our first question comes from the line of Gordon Lawson at Paradigm Capital. Please go ahead. Your line is open.

Speaker 3

Hey, good morning, Tim. Congratulations on another great quarter. Can you please elaborate on the delayed projects in North America in terms of size and scope and what we should expect for the Q1 of 2024?

Speaker 1

Well, the delayed projects were mainly in North America. And these were delayed by our customers for a variety of reasons, the biggest one being permitting. There were significant water projects and they will be resuming in 2024. They are signed commitments that we have from this customer. It was really just a scheduling situation for them relative to their permits.

Speaker 1

With respect to that's going to impact the Q1 of 2024, as you know, Gordon, we don't give guidance, but I've got full confidence that this work will proceed. In fact, we are preparing for the mobilization of those deferred projects now.

Speaker 3

Okay. And yes, I'm aware you don't give guidance, but I'm going to prod a little here. The euro segment outperformed this quarter relative to the past 2 years. So now that Russia has been exited, should we start to model some growth for that segment in 2024 or are there other factors to account for?

Speaker 1

Sorry, for which segment were you referring to?

Speaker 2

EMEA.

Speaker 1

That's EMEA is not as much of a focus for FORACO as other jurisdictions. I mean, we're looking for growth opportunities in Southern Europe, Spain and Portugal. They're mature markets. They're not as big as some of the other ones. So I wouldn't model too much increase from EM Europe and CIS.

Speaker 1

Russia represented about $17,000,000 that won't be in 2024 And the offset is going

Speaker 4

to come

Speaker 5

from the other regions.

Speaker 3

Okay. Thank you very much and congrats for listening to you.

Operator

Thank you. Our next question comes from the line of Ahmed Chad at Beacon Securities. Please go ahead. Your line is open.

Speaker 4

Hi, Tim. Congrats on a solid quarter. I guess just to go back on your early commentary on the delayed start for those projects, just to make sure I got that right. Were they on the water segment or the mining segment, that delay?

Speaker 1

Mining related water services. There's a couple of significant projects in Canada that were delayed because of permitting, but now are signed and ready to go.

Speaker 4

So we think it would

Speaker 1

be included we would be recording it as required.

Speaker 4

Sorry, I didn't catch that. In water segment, you'll be reporting it?

Speaker 1

Yes. We would be reporting it in water segment, correct.

Speaker 4

Okay, fair enough. That's very helpful. And I guess you one on capital allocation, You guys are proposing a dividend, but there seems to there is a good chunk of free cash flow as well left. So how should we think about capital allocation beyond that? And I guess what I'm trying to get at is should we expect you to resume fleet growth?

Speaker 4

And if so, how should we think about fleet growth plans for 2024 and beyond if you guys have decided on that?

Speaker 1

So as we've mentioned before, number 1 for capital allocation is ongoing debt reduction, which we're continuing to do. The capital plan, the CapEx plan for 2024 does allow for an increase in the number of rigs approximately 10. And the net rig count will remain above the same once we factor out of Russia. The dividend represents about 15% of our free cash and about 15% of our net

Speaker 4

profit. Got it. That's helpful. And I guess back to those contracts. So you said the contracts are like signed and you're ready to mobilize.

Speaker 4

Do you have a soft launch date for these contracts? Is it going to fall within Q1 or should we be more of a Q3 event?

Speaker 1

It will be the second it will be a little bit in Q1. They're mobilizing the second half of March.

Speaker 4

2nd half of March. That's very helpful. Thanks a lot for answering my questions. Congrats again on a solid quarter.

Speaker 1

Thanks, Amit.

Operator

Thank you. And the next question comes from the line of Stephen Green at Capital. Please go ahead. Your line is open.

Speaker 5

Yes, great. Really, I can't complain about anything really. So I just have a couple of questions about the future. You guys are doing all the right things. I'm so glad you're getting the debt down to manageable levels.

Speaker 5

Just on the utilization rate, it's a 55%, I think, for the year. With the new when you replace all the rigs with the new rigs, I guess you said you're going to replace 10 of them. How will that are we going to get the utilization rate up to the mid-60s? I think it's been there before.

Speaker 1

It has, Stephen, and good to hear from you again, by the way. It has been over 60%. Like I mentioned, in 2023, there was some decrease in utilization rate from the CIS and also from West Africa. And we've seen that offset in the other jurisdictions. Where we see improvement in utilization rate is into the new U.

Speaker 1

S. Market. There we took idle assets, moved them from Canada into the upper Midwest, which was a relatively easy thing to do. And we still have more assets in Canada that we could put into the U. S.

Speaker 1

Market very easily. So that's our number one priority to get the utilization rate up there. We see the utilization rate improving in Latin America, in part because of the ongoing demand in Chile, which is improving and the opportunity for us to reposition assets in Argentina as the market demand there remains fairly strong. And those assets are moved from Chile and Brazil into the country. The assets that we have pulled out of Russia are moving have moved to Kazakhstan and they will improve as the seasonality allows us to resume operations there.

Speaker 1

And then some of the underground equipment that we moved out of West Africa, we will put to work in Canada. Those assets have already been repositioned. So yes, we see some opportunity for the utilization rate to improve.

Speaker 5

That will help margins. Great. And what I was just curious, when you the competition in the market seems pretty stable. The players are pretty stable. What is what's your win rate, say, when you go against Major Drilling or the other one saying, Bogart, what is your win rate or just a matter of that you guys don't bid on the same projects because there's only limited capacity?

Speaker 1

I don't want to be giving you my impression because I really we don't really track the win rate against our competitors. But all I can say is that we've got good competitors. I mean, both Borrondegar and Major are valued companies. They're not low cost leaders. They have a similar operating style and philosophy to us.

Speaker 1

So we're pretty evenly compared. Most of our revenue is coming from the renewal of our existing contracts. 70% of that has come from customers who have renewed contracts that were in year 3 and they've taken the 2nd year, sorry, the 2 year option to go to 5. And that's been the source of most of our revenue. So it's not a super active and competitive bidding space for us really.

Speaker 5

Right. And you mentioned that you guys have a lot of extensions of your contracts and a lot of and you've transitioned to a lot more long term contracts than you used to have, which is great. I think one of the things maybe that these companies are perceived as so cyclical and that's why we're still as great as the stock price has been over the last couple of weeks or months. We're still selling at such a low multiple of EBITDA like under $3 under 3 times EBITDA and maybe it's because we're perceived as such a cyclical company. I mean, can you talk about how with these long term contracts and the renewals and so forth that you've taken the cyclicality out of the business and it's much more predictable going forward?

Speaker 5

I know there's some juniors that are not predictable, but it seems like on the whole that this business is becoming much more predictable.

Speaker 1

It is. And as we move our business into we've intentionally moved our business into the life of mine, which is pre feasibility and feasibility work. So this is project based work that our customers have versus exploration dollars. So it's a capital allocation to the specific project to bring it to the mining stage. And that sets us up with a good relationship with that customer so that when they do go into production, we're already there.

Speaker 1

We've established a relationship with them and we that gives us in many cases an advantage to continue into the production phase. When you're in the production phase and the pre feasibility stage, usually the at the feasibility stage, the capital is committed to that project. So even with metal prices fluctuating, they're relatively unscathed and the same with the producing mine. Drilling in a producing mine is a lot like insurance. You provide that information to the customer.

Speaker 1

It really helps them optimize their mining operations. And while they may reduce the insurance a little bit, they don't pull back if the metal prices are decreasing. In mine drilling is not a huge amount of their operating costs, but the value of the information that we provide is huge. So you tend to get some cyclicality out of the business by concentrating on that market. And then there's the water business, which is not cyclical at all and is mostly related to the operating mines.

Speaker 1

I mean, there we help our customers understand what their operations are doing to the water table by doing monitoring wells. And as they move around, we need to put in new wells. And in some places, we help them remove the water from the operations that they're about to mine. So we're directly linked the producing mine on the water side. And again, that is not cyclical.

Speaker 5

You guys did an amazing job and I'm happy you guys continued what Danielle started and I look forward to a great time in the future, maybe even an uplifting to the NASDAQ one day.

Speaker 1

That's been talked about for a while.

Speaker 5

Just one last question I got you. What you guys are reducing debt and obviously like the last caller mentioned, you have a lot of cash flow. Is there an optimal level that you guys want to get down to or target?

Speaker 1

Well, there's we have not got a target defined, but we want to reduce I mean, the debt is manageable now, but we would like to have the debt to a point where it is manageable under all circumstances. I guess a benchmark that our gross debt would be no more than 1 year's full EBITDA would be a target, I suppose.

Speaker 5

Well, you're under that now.

Speaker 1

Yes, we are. We are. But I mean, we've got long memories. It was a difficult time when the market was very bad a number of years ago. And we want to pay the debt down a little bit further.

Speaker 5

Yes. No, I agree with you because think the stock will look a lot more valuable without the debt with that with little less debt. Well, congratulations again. Thank you so much for all you do.

Speaker 1

Well, thanks, Steve. Nice to hear from you again.

Operator

Thank you. And we have one further question on the line. It's a follow-up from Ahmed Shah at Beacon Securities. Please go ahead. Your line is open.

Speaker 4

Just a couple of follow ups. First, Tim, how has been the start of the year following the holiday season? Is it a normal ramp up? Have you seen the late start? Or how would you describe it

Speaker 1

as? I would say it's been a normal start. I mean, it's never perfect. There's always a couple of bumps in the road, but no, the start for this year has been quite normal, nothing anomalous.

Speaker 4

That's very helpful. And secondly, on the bidding front, any big contracts or anything out there that you are bidding on that you're hopeful that could provide a material lift to 2024 or 2025 numbers or how would you describe the bidding activity for you guys?

Speaker 1

The pipeline is choppy. In some regions, it's better than others. The junior pipeline in North America is pretty quiet, for example. We know there are some other multiyear projects in North America that are coming out that we will be tendering on. But the other thing that we're doing Ahmad is looking to develop relationships with key customers 1 on 1.

Speaker 1

We've identified Tier 1 customers that we know would benefit from using our services and we're working on cultivating that relationship and we know that those tenders are coming out and by cultivating the relationship ahead of time, it helps them look at our proposal once the bidding is completed in a different light as if they didn't compare to not knowing this. So we're working on that as well. But the tender pipeline is quiet at the moment and optimistic that that will improve.

Speaker 4

Got it. That's very helpful. And just to clarify, quiet on the junior side, but you're hopeful on a multiyear contracts that are coming up with some Tier 1 clients, right?

Speaker 6

Correct.

Speaker 4

That is great. And then secondly, I'm not sure if you mentioned this and I missed it, but it's not clear. So this dividend is going to be quarterly dividend, annual dividend or just a one off?

Speaker 1

At this stage, it's going to be a one off.

Speaker 4

That is, as I mentioned,

Speaker 1

it's going to be at the shareholders' meeting. Sometimes,

Speaker 4

That's very helpful. Are you able to give us any color on this mobilization into the U. S. In terms of how many rigs, maybe potential for expansion there? What are you hoping for and commodity exposure?

Speaker 1

Well, as I mentioned, it's going to be the energy transition first, and that's the sector that we're working in. The new customer that we have is right in the sweet spot. It's energy transition metals. It is relatively close to home in the upper Midwest, and it's right at the project feasibility stage. So it ticks off all the boxes for us.

Speaker 1

At the moment, it's a 3 rig project. And it's not a long term one, but we're optimistic that there'll be follow on work from this. In fact, I'm virtually certain of it. And then we're going to proceed with staffing the staffing the business, looking for a country manager, looking for operations leadership and developing that market with customers that we already know. And that includes the water business and includes the coring business.

Speaker 1

So there are idle assets in Canada that we can move into the country. We've been able to move some of our Canadian employees into the country, which was a bit of an undertaking, but they will quickly be replaced with known quantity American employees as soon as we can. It would not be a good idea to launch a new operation into the U. S. With field crews that were largely unknown entities and damage our reputation in terms of performance.

Speaker 1

So that's why we use known quantities in Canada. But the HR department is pretty busy right now re staffing all those rigs.

Speaker 4

That's That's great. And I guess if we have time, a couple of follow ons on that. So you said you're looking to mobilize more rigs out of Canada and to the U. S. Are you able to give us color on how many unencumbered rigs that you'll be able to move from Canada to the U.

Speaker 4

S, assuming business comes and you want something that's in the U. S? Just trying to get an idea how big

Speaker 2

this can be for you.

Speaker 1

Yes. So the limiting factor really is going to be on how quickly we can staff these with qualified people. But in terms of rigs, we have at least another 5 core grills that would be available for surface. We've got another 6 underground rigs that we could send to the U. S.

Speaker 1

And we have 2 heavy rotary rigs that we could send to the U. S. We will not we're not going to deploy all of those. We can't in terms of ramping up and finding people and developing it. We'd much rather go carefully and make certain that we deliver the project the way that our customer expects.

Speaker 1

So the core surface core drills will be increasing as we can. The 2 rotor rigs, we're looking for work for them in mining and water services. And they're available, they're relatively easy to import into the country. And again, then we would staff them with known quantities and transition to local employees.

Speaker 4

That's very helpful, Tim. And I guess with all that said, it seems that you guys are looking to establish a base in the U. S. And make that sort of a part of your business over the next 3, 5 years. Is that a fair statement?

Speaker 1

Yes. We've been in the U. S. A number of times before, but really operating a U. S.

Speaker 1

Subsidiary managed from Canada. And we're going to be transitioning from that to a permanent base in the U. S. With the right people and develop the business as a standalone U. S.

Speaker 1

Operation.

Speaker 4

That's great. That's very helpful, Samuel. I really appreciate it.

Operator

Thank you. And we've had one further question come through and that's from the line of John Bair at Ascend Wealth. Please go ahead. Your line is open.

Speaker 6

Thank you and good morning. Thank you for taking my question here. Following up on the staffing issues coming into the U. S, I was wondering what kind of capabilities traditional oil and gas field hands might have and with the rig count for the energy industry being way down, I would imagine there is a fair number of qualified personnel that are used to working out in the field and so forth that you might be able to encourage to join your fleets as you move them into the U. S?

Speaker 6

Could you talk about that at all?

Speaker 1

Sure. There is some cross pollination between the oil and gas and our rotary business. We see that in Canada all the time. But that is really in the supporting positions of like a forehand or a roughneck or whatnot. When it comes to the more senior positions as a driller or or as a Porsche or drill supervisors, we call it in mining.

Speaker 1

That's a little bit more challenging because the water business requires a full skill set of the crew. I mean, drilling the hole is really only one portion of it. Then there's the installations, the development of the well, installing the pumps and whatnot, and you need to be a lot more than just a driller. And in that business, we're left to our own devices, unlike the oil and gas business where you have the client representative assisting all of these operations. We're on our own.

Speaker 1

So it's there to answer your question, there is some crossover, but not at the key positions. So we're those people exist in the U. S, don't get me wrong. There's a tremendous capability in the U. S.

Speaker 1

In terms of water won't work. It's just a matter of us attracting those people to our company.

Speaker 6

Very good. And then what would you say would be sort of a ramp up time to get bring somebody, let's say, that's not experienced in that area to train them to where you felt capable that they were capable of handling the operations that they were entrusted to?

Speaker 1

A minimum of 2 years.

Operator

Okay.

Speaker 2

Yes.

Speaker 6

Okay, very good. I appreciate you taking my questions.

Speaker 1

You're welcome. Thank you.

Operator

Thank you. And there are currently no further questions in the queue at this time. So I'll hand the floor back to Tim for the closing comments.

Speaker 1

Thank you, Mark. Well, we appreciate your time and interest everybody. And thank you for listening. And we look forward to seeing some of you in Toronto at PDAC. Have a nice day.

Operator

Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.

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Foraco International Q4 2023
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