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Edited Transcript of OGD.TO earnings conference call or presentation 21-Sep-22 2:00pm GMT

Q4 2022 Forage Orbit Garant Inc Earnings Call VAL-DOR Sep 26, 2022 (Thomson StreetEvents) -- Edited Transcript of Forage Orbit Garant Inc earnings conference call or presentation Wednesday, September 21, 2022 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Daniel Maheu Orbit Garant Drilling Inc. - CFO & Corporate Secretary * Eric Alexandre Orbit Garant Drilling Inc. - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Gordon Lawson Paradigm Capital Inc., Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, and welcome to Orbit Garant Drilling's Fiscal 2022 Fourth Quarter and Year-End Results Conference Call and Webcast. (Operator Instructions). Please be aware that certain information discussed today may be forward-looking and that actual results could differ materially. Certain non-IFRS financial measures will also be discussed. Please refer to the company's SEDAR filings for additional information on both risk factors and non-IFRS measures. This call is being recorded on Wednesday, September 21, 2022. And I would like to turn the conference over to Mr. Eric Alexandre, President and CEO of Orbit Garant. Please go ahead, sir. -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [2] -------------------------------------------------------------------------------- Thank you, Sylvie, and good morning, ladies and gentlemen. With me on the call is Daniel Maheu, CFO. Following my opening remarks, Daniel will review our financial results, and I will conclude with comments on our outlook. We will then welcome questions. We generated improved financial performance in the fourth quarter driven primarily by sustained customer demand and increased contract pricing in Canada. Revenue was $53.8 million in the quarter, up 5.3% compared to Q4 last year, representing the highest revenue we have ever generated in a single quarter. Our profitability also increased significantly. We generated EBITDA and adjusted gross margin of $5.7 million and 17.2%, respectively, compared to $1.2 million and 9.8% in Q4 last year. Increased contract pricing in Canada in the quarter more than offset higher wage, materials and fuel costs. In addition, worker productivity improved as our newer drillers gained more field experience, and our costs related to project ramp-up and mobilization declined compared to recent quarters. We also did not face adverse weather and Omicron-related work disruptions, which were issues that impacted our performance in last quarter. As I have previously noted, we incurred significant costs in fiscal 2022 related to driller training and project ramp-ups in Canada and new project mobilization in our international operation. While these costs impacted our margin in the short term, they were necessary in order to scale up our operation to meet increased customer demand. The scaling of our business contributed to our improved fourth quarter results. We expect to continue building on this positive momentum in fiscal 2023. Customer demand for our drilling services remains strong, and we anticipate further improvement in profitability as price increases continue to offset the cost pressures and -- that are impacting our business. Cost-related projects -- related to project ramp-up in Canada and project mobilization in Chile and Guinea have largely been absorbed, and our driller productivity continued to improve. I will now turn the call over to Daniel to review our fourth quarter and year-end results in more detail. Daniel? -------------------------------------------------------------------------------- Daniel Maheu, Orbit Garant Drilling Inc. - CFO & Corporate Secretary [3] -------------------------------------------------------------------------------- Thank you, Eric, and good morning, everyone. As Eric noted, our fiscal 2022 fourth quarter revenue totaled a record of $53.8 million. Canada revenue totaled $42 million, up 10.4% from Q4 last year, reflecting sustained customer demand and improved pricing on drilling contract. International revenue was $11.8 million compared to $13 million in Q4 last year. The decline was due to a lower drilling activity in Burkina Faso, partially offset by increased drilling activity in Chile and Guinea. Our drilling utilization rate in the quarter was approximately 59% compared to 66% in Q4 last year, reflecting lower drilling activities in Burkina Faso. Gross profit for the quarter increased to $6.9 million from $3 million in Q4 last year. Adjusted gross margin, excluding depreciation expenses, were 17.2%, up from 9.8% in Q4 last year. Higher margin in Q4 this year were attributable to an increase in average revenue per meter drilled, decreased project ramp-up costs in Canada and a reduction in mobilization costs for new long-term projects in Guinea and Chile. G&A expense were $3.8 million in the quarter or 7% of revenue compared to $3.9 million or 7.7% of revenue in Q4 last year. EBITDA for the quarter increased to $5.7 million compared to $1.2 million in Q4 last year. Net earnings were $0.5 million or $0.01 per share compared to a net loss of $2.2 million or $0.06 per share in Q4 a year ago. The positive variances were attributable to an increased pricing on drilling contracts, decreased project ramp-up costs in Canada and reduced mobilization costs for new long-term project in Guinea and Chile. Now turning to the results for the fiscal year-end June 30. Revenue for fiscal 2022 was a record of $195.5 million, an increase of 19.7% compared to fiscal 2021. Canada revenue totaled $145.2 million, an increase of 11.7% compared to last year, primarily due to the improved contract pricing. International revenue increased to $50.3 million, up 50.9% compared to last year, reflecting new long-term contracts in Chile and Guinea. Gross profit in fiscal 2022 was $13.7 million compared to $20.3 million in fiscal 2021. Adjusted gross margin, excluding depreciation expenses, was 12.2% compared to 17.9% a year ago. In Canada, our gross profit and margin in fiscal 2022 were impacted by increased driller training program and costs, a decline in productivity because of higher proportion of less-experienced driller, adverse weather condition in the third quarter and higher wage and project ramp-up costs. Internationally, we incurred significant mobilization costs related to our new contract in Guinea and Chile. We also experienced supply chain disruption and cost inflation for material and fuel and Omicron-related work interruption across our operation. In addition, our cost of contract revenue was reduced by $2.9 million in fiscal 2021 due to the financial support record from the Canadian Emergency Wage Subsidy Program. We were not longer eligible for the CEWS program in fiscal 2022. G&A expense were $14.5 million in fiscal '22, which was similar to fiscal 2021. As a percentage of revenue, G&A expense decreased to 7.4% in fiscal 2022 compared to 8.9% last year. EBITDA for fiscal 2022 was $10 million compared to $17.6 million last year. Net loss was $6.6 million or $0.18 per share compared to a net earnings of $2.3 million or $0.06 per share in fiscal 2021. The negative variances were attributable to increased driller training costs and project ramp-up costs; new project mobilization costs; higher cost of material, fuel and wages; Omicron-related work interruption; the cessation of financial support from the CEWS program; and a reversal of $1.96 million provision from -- for litigation in Burkina Faso recorded in Q3 last year. These negative factors were partially offset by increased drilling activity globally and increased pricing on contract in Canada. Now turning to our balance sheet. During fiscal 2022, we generated cash flow of $2.7 million from financing activities. In fiscal 2021, we repaid a net amount of $3.8 million long-term debt and lease liabilities. We withdrew a net amount of $7.3 million on our credit facility in fiscal 2022 compared to a repayment of $4.4 million in fiscal 2021. Our long-term debt under the credit facility, including USD 1 million drawn from our USD 5 million revolving facility, and the current portion was $31.5 million at the fiscal year-end compared to $24.3 million as at June 30 a year ago. The debt was used to support more capital requirement and the acquisition of capital assets, property, plant and equipment. As at June 30, 2022, our working capital position was $53.4 million compared to $54 million at the end of fiscal 2021. Subsequent to the year-end, on September 9, we entered into an additional loan with Business Development Bank of Canada, which provides for a term loan of $8.47 million. The loan bears interest at a fixed rate of 6.7% per year as a 20-year term and is repayable in 240 consecutive monthly payment. The fixed interest rate may be reduced by 0.2% from November 2023 if we met certain financial covenants. As a result of this loan agreement and in order to extract our head office building from the borrowing base under the credit agreement, we concurrently entered into a third amending agreement to our credit agreement with National Bank. Under this agreement, the amount available for borrowing was reduced from $35 million to $30 million, and modifications were made to certain financial covenants applicable to the first quarter of fiscal 2023 and further quarter. I will now turn the call back to Eric for closing comments. Eric? -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [4] -------------------------------------------------------------------------------- Thank you, Daniel. Our improved fourth quarter performance demonstrates that the investment we made in our business has better positioned us to capitalize on strong customer demand and drive increased revenue and profitability. As I noted earlier, we expect margin to continue to improve as the price increases, we have implemented in our contracts offset increased wage, materials and fuel costs. And we expect continued gains in worker productivity as the newer members of our team gained more field experience. We were pleased to see productivity improvement in Q4. While we are proud of our outstanding driller training program, there is no substitute for working in the field. Customer demand remains strong, and we anticipate continuous trend throughout fiscal 2023. Gold and copper prices have declined from their highs earlier this year, but they remain at elevated levels that provides a strong incentive for mining companies to expand exploration and development spending. According to S&P Global Market Intelligence, global nonferrous exploration budgets are expected to increase 5% to 15% in the 2022 calendar year after increasing 35% in 2021. This positive outlook is consistent with what we are seeing from our customers in the industry as a whole. Looking ahead, we will remain focused on driving productivity and margin expansion to build value for shareholders. That concludes our formal remarks this morning. We'll now welcome any questions. Sylvie, please begin the question period. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). Your first question, sir, will be from Gordon Lawson at Paradigm Capital. -------------------------------------------------------------------------------- Gordon Lawson, Paradigm Capital Inc., Research Division - Analyst [2] -------------------------------------------------------------------------------- Congratulations on an excellent quarter. Can you please talk about some of the ongoing challenges in growing contracts both nationally and internationally? And any pushback issues you're experiencing? -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Sorry, could you repeat the question? I just missed a part of it. The line was not that good. -------------------------------------------------------------------------------- Gordon Lawson, Paradigm Capital Inc., Research Division - Analyst [4] -------------------------------------------------------------------------------- Okay. Let me -- okay. So can you please elaborate on some of the ongoing challenges in growing your contract book both nationally and internationally as well as any pushback issues you're experiencing? -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Okay. well, first of all, the challenges we have, especially in Canada, is access to experienced people. While we have our training school here, we are not able to push enough people into our group, I mean, experienced people. So we have to respect the pace that we are able to do out there. So at some point, it was very difficult just to serve our actual client in terms of number of machine and meters to be drilled. We do see a little bit of slowing down in the junior financing capacity. So that is another challenge that will show up in the months to come. But on the other hand, we have our actual client that was asking for more. So now we're better able to serve them with the number of people we have available right now, and we also recoup some guys that were going away to other contractors in the past year, and they are coming back. So it's good news for us. We will be able to sustain our growth in Canada. Internationally, our biggest challenge now is in Burkina Faso, where we see a lot of things happening in 1.5 years, including a coup. We had a lot of issue with security into the country. And we also have a business relationship with a Russian company called Nordgold that we have to stop operation. So actually, we are in a process to -- we're not taking any more contract in Burkina Faso unless the ones we have with our actual client right now, and we are moving some equipment out of the country in other West African country or Chile or Canada right now. So that's the main challenge we have internationally. We also -- we were able to increase prices in the last 6 months. Now we are doing it in order to absorb the cost increase of material and logistic costs out there. So this is mainly the challenge we have, but now we are addressing it with those price increases. -------------------------------------------------------------------------------- Gordon Lawson, Paradigm Capital Inc., Research Division - Analyst [6] -------------------------------------------------------------------------------- So to follow up on that, with moving your rigs out of Burkina Faso, where exactly are you seeing growth elsewhere? -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- Well, it's not already decided. We still have challenge about just pulling out the machine into -- from Burkina Faso. But we have a good contract that we started 1.5 years ago in Guinea where they are asking for more capacity. So this is one thing we're going to do. And we also see some good chances to increase volume as well in Chile, while the copper market is supporting our growth out there. The biggest challenge we will have in Canada, again, would be the people. So this is not a challenge we have internationally. So we do see some opportunity out of West Africa as well as South America. -------------------------------------------------------------------------------- Gordon Lawson, Paradigm Capital Inc., Research Division - Analyst [8] -------------------------------------------------------------------------------- Okay. And looking at your balance sheet, with the increase in debt, I see your statement about being in compliance with all covenants. But are you able to give a little more color as to your numerical limits? -------------------------------------------------------------------------------- Daniel Maheu, Orbit Garant Drilling Inc. - CFO & Corporate Secretary [9] -------------------------------------------------------------------------------- Yes. With the new finance, same with... -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- BDC. -------------------------------------------------------------------------------- Daniel Maheu, Orbit Garant Drilling Inc. - CFO & Corporate Secretary [11] -------------------------------------------------------------------------------- With BDC, we now have a more -- we [distribute] the risk of the interest rate increase. So in the next fiscal year of 2023, we would like to -- we expect to reduce the debt by $2 million, $3 million at the end of June 2023. -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [12] -------------------------------------------------------------------------------- And we're very concerned about the interest rate increasing, and we know that we're financing everything from our overdraft protection. So for us, it was normal just to extract the building here and just put it on a long-term basis with a reasonable interest rate, which gives us more flexibility in terms of cash position. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- (Operator Instructions) And at this time, Mr. Alexandre, it appears we have no further questions. Please proceed. -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [14] -------------------------------------------------------------------------------- If there is no more question, we'll now end the call. Thank you very much for participating today and see you next quarter. Thank you. -------------------------------------------------------------------------------- Daniel Maheu, Orbit Garant Drilling Inc. - CFO & Corporate Secretary [15] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good day.