Geodrill Ltd

TSX:GEO

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen, thank you for standing by. [Operator Instructions] I would like to remind everyone that this conference call is being recorded on Thursday, November 11, at 10 a.m. Eastern Standard Time, and it is being broadcast via the Internet.During today's call, management will make statements regarding management's expectations for the company's future financial and operational performance. These are statements -- these statements are considered forward-looking statements. Each forward-looking statement speaks only as of the date of this call, and actual results may differ materially from management's expectations for a variety of reasons, including the market and general economic conditions and the risk and uncertainty details from time to time in company's SEDAR filings.I will now turn the call over to President and CEO of Geodrill Limited, Mr. Dave Harper, who will review the company's operations and performance for the quarter. Geodrill CFO, Greg Borsk, will then give us more detailed review of our first quarter financial results, followed by an outlook from Mr. Harper. I will now like to turn the call over to Mr. Harper. Please go ahead.

[David Michael Harper, President, CEO & Director]

Thank you, operator. Good morning. I hope you and your families are staying well. Momentum in the first half of 2021 continued into the third quarter. This resulted in another strong quarter for Geodrill. Despite Q3 typically being our weakest quarter due to wet season, we delivered a solid operating performance and significant revenue growth. During the quarter, we generated a 44% year-over-year increase in revenue. We maintained strong profitability. We generated a return on capital employed of 21% and a return on equity of 16%. We also secured significant multi-rig, multiyear contracts, and we ended the quarter with an increased rig count of 71 drills.So during the quarter, we demonstrated strong and consistent operational execution. These core strengths drove momentum throughout the quarter and pound double digit revenue and profit growth in our year-to-date results. Year-to-date, we have generated USD 88.5 million in revenue, representing a 53% year-over-year increase. Significantly, this result eclipses our 2020 fiscal year and equals our best ever fiscal year in 2018. We also strengthened our year-to-date profit through the 67% year over increase in EBITDA being 21 -- USD 22.1 million, an increased net earnings to USD 11.4 million or USD 0.27 year-to-date. These results build on the strong operating momentum that our team has achieved over the long term, enhancing our positional strength as we close out the final quarter of the year and we move into 2022.I'll now hand the call over to Greg to comment on the quarter's overall financial performance in more detail. Thank you.

[Gregory Borsk, Chief Financial Officer]

Thank you, Dave. As a reminder, all figures are recorded in U.S. dollars. The company generated revenue of $27.2 million in Q3 2021, an increase of $8.4 million or 44% when compared to $18.9 million in Q3 2020. The increase in revenue is a result of the increase in demand for the company's drilling services. With the gold price in the first 9 months of 2021, averaging approximately $1,800 an ounce, global exploration spending continues to increase. Approximately 95% of Geodrill's clients are exploring for gold. So we have benefited from the momentum over the past year and are well positioned for the remainder of 2021 and 2022.The gross profit for Q3 2021 was $5.6 million, being 21% of revenue compared to a gross profit of $4.3 million for Q3 2020. The lower than average gross profit margin in Q3 2021 and Q3 2020 is characteristic of the wet season, typically our weakest quarter. The EBITDA for Q3 2021 was $4.7 million being 17% of revenue. On a year-to-date basis, EBITDA is $22.1 million or 25% of revenue, reflecting the strong demand for the company's services throughout the year. The net income for Q3 2021 was $1.7 million or $0.04 per share. On a year-to-date basis, we have more than doubled our net income from $5.4 million to $11.4 million. Another highlight. As at September 30, 2021, the company significantly increased its cash position to $15.8 million and ended the quarter with a net cash position of $5.5 million.At this point, I will turn the call back to Dave.

[David Michael Harper, President, CEO & Director]

Thank you, Greg. Before we move to the Q&A portion of the call, I'd like to provide a brief outlook for the remainder of 2021. 2021 to date has been marked by robust demand for drilling, strong oil prices and increased utilization. With these strong market fundamentals, our outlook for the remainder of the year remains exceedingly positive. Consistent with our long-standing commitment of being equipped with a modern fleet of rigs and a clear business vision, Geodrill remains a serious contender in our industry as we remain focused on growth and on being drill ready in 2022 and beyond.Thank you for participating in today's call. We'll now be pleased to answer any questions you may have. At this point, I'd like to ask the operator to provide directions to anyone who wishes to ask a question. Thank you very much.

[Operator]

[Operator Instructions] Your first question does come from Ahmad Shaath from Beacon Securities.

[Ahmad Shaath, Research Analyst]

Congrats on a solid top line. I guess my question is mainly around the gross margin. Like what do you see in the cycle that has kind of help us understand how these gross margins are going to look? I mean, activity looks very strong and continues to be pretty strong, but the gross margin looks like a bit of a moving target. Like any color on that and why the weakness this quarter despite the strong top line?

[Gregory Borsk, Chief Financial Officer]

So the growth -- sorry.

[David Michael Harper, President, CEO & Director]

Sorry. Greg?

[Gregory Borsk, Chief Financial Officer]

Go ahead, Dave. And then I'll just -- if you want to start and then I'll just dive in or I can start if you're fine.

[David Michael Harper, President, CEO & Director]

I'll give it to you from an -- I'll give you my explanation, Ahmad, from an operational perspective. I'm dealing at the front face of the bidding, and I see the rigs come in the door and out the door and come in from [ Athens ] and so on and so forth, whereas Greg gets to sort of break it down into numbers. But basically, quarter 3 is always a bit of a slippery slope because it's our wet season quarter. And what typically happens is rigs come in from the field. And when the revenue stops, unfortunately, costs do not stop on the same day. So what happens is the rigs have to basically be demobilized back to base. And for a period in time, we still have the costs without the revenue.With this quarter, it was a little peculiar as compared to the quarter 3 in 2020 is that the -- we had the costs as the rigs came in from the field. And then the wet season ended rather more quickly than expected. So we actually had the costs in -- at the tail end of September where the rigs were going back out to the field. And at this point in time, when we remobilize back to the field, we have the high costs of training and preparing the guys so that they go out to the field and do the job safely. And again, this comes without revenue. So essentially, what happens is we have the costs, either side of the parabolic in this particular quarter as opposed to the quarter 3 last year. So we had the costs without the revenue. So this year, it was a factor of 2 versus last year.If you recall last year, we had a slow quarter 1, and then we had COVID, so we had reasonably slow quarter 2. And as we ended quarter 3, things started to pick up, and the run rate at the end of quarter 3 was reasonably strong. And that resulted, if you recall, in a record quarter 4. The difference really between this quarter and the quarter a year ago is that we didn't have the revenues, and therefore, we didn't have the costs on the left side, if you like, the July side of the quarter. We only had the costs as the rigs exited and went out to work. That was point number one. There was a couple of other things. We had different -- we had a different mix of drilling. We had -- we drilled basically a higher percentage of diamond core drilling in this particular quarter versus reverse circulation and then just different cost structures and different profits for different services.And the other thing is we had less multi-rig jobs. And that was just characteristic of this particular quarter. And basically, what this all resulted in was smaller revenue per shift per rig. But look, I think as Greg was pointing out on -- as he was pegging through the financials, I think we really need to focus here on is the strong result that we've achieved thus far year-to-date. And at that point, I'll just hand that over to Greg.

[Gregory Borsk, Chief Financial Officer]

Yes. Yes. Let me add on to that, Ahmad. I mean, I think if you -- the way we look at it from the finance perspective is if you look at Geodrill's gross margin for the last 3 years, and I'm talking annual, okay. So for 2020, 2019 and 2018, we have a 25% gross margin, which is the highest in the industry. So we have a very strong gross margin. What you're seeing in Q3, Q3 is typically, we view it as almost an investment quarter in the business. So you're seeing -- we expect a lower gross margin in Q3 for the points Dave mentioned. But what you really have to focus on is the year-to-date margin. And the year-to-date margin, because we had an extremely busy Q1 and Q2, as Dave said, we entered into wet season a little earlier, and we're out of it a little earlier, but Q3 is wet season. So year-to-date, our gross margin is 27%. And that's an exceptional gross margin.We also -- we tried to communicate. I think when we were in Q1, we had a 31% gross margin. We were trying to communicate to people that that's really on the high end that was reflective of an extremely busy Q1, same in Q2. Q2, the margin was 27%. So hopefully, we're explaining, I think, for Geodrill. And just the exploration in general, a lot of this is the first half of the year loaded. And then what happens is wet season. Wet season is upon us. But Geodrill -- we take advantage of that. We continue with a very active workshop to make sure we have rigs ready for Q4 and 2022, but we don't slow down. We used to -- we actually used to manage Q3 just to breakeven or make $0.01. It truly is an investment quarter for us. So this Q3, we were able to earn $0.04 a share, by $1.7 million. So we're very, very happy with the outcome of this wet season.

[Ahmad Shaath, Research Analyst]

Right. That's great answer. If I understood correctly from a year-over-year comparison, there was remobilization costs within this quarter that it was not present in last year's quarter. That's one of the factors, right?

[Gregory Borsk, Chief Financial Officer]

I'm sorry, I just missed that, Ahmad. What was that? The...

[Ahmad Shaath, Research Analyst]

There was remobilization costs because I think Dave mentioned that you guys have to put the rig back out on the field during the quarter as well, right?

[Gregory Borsk, Chief Financial Officer]

Correct. Yes. Yes. Exactly.

[Ahmad Shaath, Research Analyst]

Okay. That's good. So that should benefit us in the Q4, right? Because those don't really come in the Q4?

[Gregory Borsk, Chief Financial Officer]

Yes. Yes, it's -- you really have to -- you have to average out the quarters for us. And I mean, again, when we had such an exceptional Q1 and Q2, we tried to let people know, look at the averaging for us because then we had rigs coming back off.

[Ahmad Shaath, Research Analyst]

That's great. And just in general trends, how are you guys seeing the pricing trends amid this increased activity? Are you starting to see any pushback on prices? Or should -- just trying to think how we should look into 2022 bidding season?

[David Michael Harper, President, CEO & Director]

Pricing is on the move. Our EBIT costs are as well. So as pricing increases, it tends to move in lockstep. And you would hope as the industry gets a little busier, then it might get a little bit more pricing power. At the moment, we're seeing some unusual things going on. We're living in a very different world. Shipping costs, I can tell you, have doubled, if not tripled. The cost to move 120 foot container used to be $3,500. It's now $7,000 or $8,000. And that's just because as the world sort of is coming out of COVID, there is a shortage of ships. Suppliers are all starting to raise their prices and the cost of hiring people generally is increasing. And as a result, we are having to increase our pricing to capture some of those costs.But the margin squeeze that you see in this particular quarter has nothing to do with that. It was really just, as I was saying, either side of the parabolic, this particular year, we had some costs, and we didn't have that last year. So when you look at it on a year-over-year basis, I mean, the obvious question is how did revenues go up 44% for relatively flat EBITDA result or -- so it's kind of -- it's a bit of -- it's a bit confounding when you first look at it. When you break it down, it's quite easily explained in 2 or 3 things. So one was the double costs of the mobilization of the demobilization on all the salary costs without the revenue. Essentially, we had the cost, but our -- we had the fixed cost, but our revenue -- without the revenues.And a certain portion was also in the mix. We just had an unfavorable mix in this particular quarter. And that had a little bit to do with the geographical mix. So most of the business moved into a region where they just happened to drill a less favorable mix for us. And I expect things should normalize as we exit quarter 3, and we are in the quarter 4 '22 and beyond. I would never encourage anyone to judge us based on our Q3 results. We normally look at Q3 and say, "Hey, if we can make $0.01, maybe $0.02, that will be a great year with [indiscernible]." So we're pretty happy.

[Operator]

[Operator Instructions] Your next question comes from Daryl Young from TD Securities.

[Daryl Young, Mining Research Associate]

Just following up on a lot of questions about some of the added costs that went into Q3. So does that position for a strong growth quarter in Q4 and revenue quarter in Q4?

[Gregory Borsk, Chief Financial Officer]

The Q4 -- well, when you say strong, again, our 2 strongest quarters are Q1 and Q2. So I think we're comfortable October is behind this in November, and then you hit Christmas season here. But Q4 is looking strong. But again, we're -- when we look at this business, we look at it annually. And really, we're seeing a lot of the -- 2022 is going to be exceptionally strong. And that's going to be exceptionally strong again, because you're going to have the Q1 and the Q2 in there.So hopefully, I'm answering your question. Q4 is going to be another solid quarter. But I think we're really going to see the strength again. And gold, we put in the press release, 95% of our clients drill for gold. Gold is $1,860. So there is tremendous demand, but a lot of our clients start their programs in the New Year. So expect a solid Q4 and an exceptionally strong 2022.

[Daryl Young, Mining Research Associate]

Okay. Great. And when you're talking about 2022, is there any change in the mix of drilling that you've got planned for 2022 and just speaking in terms of some of these new exploration contracts versus maybe more mine site drilling? And if we should be aware of any margin impacts when we look at a 12-month run rate for 2022 versus what you guys have been doing thus far in the recovery of the drilling cycle?

[David Michael Harper, President, CEO & Director]

I think if you average it out over the fourth -- sorry, I was going to say, I think if you average it out, we take your revenue for 2022, whatever you build your model to be. I think where I would be guiding you to is work on -- across the 4 quarters, an average of 25%, 24%, 25% over the 4 quarters of next year. I think that's pretty much where we're going to end up this year, which in itself is a reasonable result I think. Looking at your -- I'm just looking at your -- well, while you guys have been speaking, I just pulled out what -- where you're at for your 2021. And I think we're going to land about there. And I think you can just basically put in an increase in revenues for next year. And we would say that the margins that you've got in there look about right.

[Daryl Young, Mining Research Associate]

Okay. Perfect. And so no real change in the drilling mix either?

[Gregory Borsk, Chief Financial Officer]

Well, we don't...

[David Michael Harper, President, CEO & Director]

Really, no. Because we provide a service where the rigs that we provide, the customer has the option of being able to switch from one to the other. And we never really know in any given day, what percentage it's going to be across the various quarters. But as the 365 days of next year are going to play out, I think that if you [indiscernible] for a ZIP code, I'd work on 25%.

[Gregory Borsk, Chief Financial Officer]

And Daryl, the mix is also a function of the type of drills we have. And if you look at, again, we've put significant [indiscernible] through the first 9 months in PPE, but it's consistent amongst the types of drills [indiscernible] we'll add an underground drill rig because we need that. We'll add a couple of multi-purpose. We'll add a core, et cetera. So the mix should stay the same.

[Operator]

There are no further questions at this time. You may please proceed.

[David Michael Harper, President, CEO & Director]

Okay. No further questions. I want to just thank everyone for being on the call today. Thank you very much. Have a great day, and be safe.

[Gregory Borsk, Chief Financial Officer]

Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you very much for participating and ask that you please disconnect your lines.