Forage Orbit Garant Inc

TSX:OGD

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to Orbit Garant Drilling Fiscal 2023 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 and non-IFRS measures. This call is being recorded on Wednesday, September 20, 2023. I would now like to turn the conference over to Mr. Pierre Alexandre, President and CEO of Orbit Garant. Please go ahead, sir.

[Pierre Alexandre, executive]

Thank you, Joel, 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 in greater detail, and I will conclude with comments on our outlook. We will then welcome questions. We generate improved financial performance during the fiscal 2023 as strong customer demand in Canada drove increased specialized drilling activity and improved pricing on contract relative to the prior year. Revenue for fiscal 2023 was a record of $201 million, an increase of 2.8% compared to fiscal 2022. Adjusted gross margin increased to 16.2%, up from 12.2% last year. And adjusted EBITDA nearly doubled to $19.1 million compared to EBITDA of $10 million last year. However, the positive momentum that we carry through most of the year was impacted in our fourth quarter by a temporary reduction of drilling activity in Canada. The decline is partly attributable to forest fire in Quebec. We had to suspend drilling activities on all of our surface and underground drilling projects in Quebec as well as one surface project in Ontario for various period beginning on May 29 and continuing into July. This resulted in a revenue reduction in Q4 of approximately $3 million. In addition, certain customers decided to temporarily suspend our reduced drilling activity on other projects. These decisions were company-specific and have nothing to do with our performance. However, the impact revenue in Q4. Fortunately, we began ramping up the project that were suspended due to forest fires in early July. By July 26, all of these projects were fully resumed. We expect to resume operation on all our projects in which drilling activity was temporarily suspended and reduced due to customer decision by January 2024. One of this project, which is a major customer already resumed in the middle of the last month. Our fourth quarter results were also impacted by a onetime noncash restructuring charge of $4.2 million related to our decision to wind down drilling activities in Burkina Faso and exit the country. We expect to complete our drilling program in Burkina Faso during the second quarter of fiscal 2024. This decision to exit Burkina Faso is based on our assessment of the significant additional investment required to generate an acceptable return on our investment in this market as well as the increased and ongoing security concerns within the country. I will now turn the call to over to Daniel to review our fiscal fourth quarter and full year results in more detail. Daniel?

[Daniel Maheu, executive]

Thank you, Pierre, and good morning, everyone. Our fiscal 2023 fourth quarter revenue totaled $46.8 million compared to $53.8 million in Q4 last year. Canada revenue totaled $32.6 million, a decline of 22.6% from Q4 last year. As Pierre noted, the decline reflects the reduction of drilling activity in Canada due to forest fire in Quebec and customer decision to temporarily suspend or reduce activity on certain other projects. International revenue increased to $14.2 million compared to $11.8 million in Q4 last year, primarily reflecting increased drilling activities in Chile. Our drilling utilization rate in Q4 was approximately 54%. That was lower compared to the recent quarter due to the impact of forest fire and customer decision to temporarily suspend or reduce activity on certain other projects. The $4.2 million onetime noncash restructuring charge relating to our decision to accept Burkina Faso, reflect a write-down of inventory to the net realizable value. Gross profit for the quarter was $0.7 million compared to $6.9 million in Q4 of last year. The decrease was primarily due to the restructuring charge and the reduced activity in Canada. Adjusted gross margin, excluding depreciation expense and the write-down of inventory from restructuring was 15.9%, compared to 17.2% a year ago, reflecting lower revenue due to reduced drilling activity in Canada. G&A expenses were 10.9% of revenue in the quarter compared to 7% of revenue in Q4 last year. Adjusted EBITDA for the quarter was $1.8 million compared to EBITDA of $5.7 million in Q4 last year, reflecting the reduced drilling activity in Canada. Net loss was $4.1 million or $0.11 per share compared to net earnings of $0.5 million or $0.01 per share in Q4 a year ago. The net loss in Q4 this year was primarily attributable to the restructuring charge and reduced drilling activity in Canada. Now turning to the results for the fiscal year-end June 30, revenue for fiscal 2023 was a record $201 million, an increase of 2.8% compared to fiscal 2022. Canada revenue totaled $152.1 million, an increase of 4.8% compared to last year, reflecting increased specialized drilling activities and improved pricing, partially offset by the reduction of drilling activity in Canada during the fourth quarter. International revenue was $48.9 million, a slight reduction from $50.3 million last year, reflecting reduced drilling activity in Burkina Faso, partially offset by increased activity in Chile and Guinea. Gross profit for fiscal 2023 increased to $18.3 million from $13.7 million in fiscal 2022. The increase was primarily attributable to increased specialized drilling activity, improved pricing and cost control in Canada, partially offset by the $4.2 million restructuring charge and the reduction of drilling activity in Canada during Q4. Prior year margins were also impacted by higher project ramp-up cost in Canada, mobilization costs for a new long-term project in Guinea and Chile and Omicron-related work interruption that began in November 2021. Adjusted gross margin, excluding depreciation expense and write-down of inventories from restructuring was 16.2% in fiscal 2023 compared to 12.2% a year ago. The increase was primarily attributable to increased specialized running activity, improved pricing and cost control in Canada, partially offset by the reduction of drilling activity during Q4. G&A expense were 8.2% of revenue in fiscal 2023 compared to 7.4% of revenue in the prior year. Adjusted EBITDA for fiscal 2023 increased to $19.1 million compared to EBITDA of $10 million last year. Net loss for fiscal 2023 was $0.7 million or $0.02 per share, compared to a net loss of $6.6 million, or $0.18 per share in fiscal 2022. Our growth in adjusted EBITDA and our reduced net loss for fiscal 2023 was primarily due to a higher of specialized drilling activity, improved pricing and cost controls in Canada, and a foreign exchange gain of $1.9 million, partially offset by right down of inventory from restructuring and reduction of the drilling activity in Canada during Q4. Our net loss for fiscal 2023 also reflect $1.1 million increase of interest expenses. EBITDA and our net loss in fiscal 2022 also reflect higher ramp-up cost and mobilization costs and Omicron-related work interaction. Now turning to our balance sheet. During fiscal 2023, we repaid a net amount of $4.4 million of long-term debt and lease liabilities. In fiscal 2022, we generated a cash flow of $2.7 million from financing activity. We repaid a net amount of $9.3 million on our credit facility during fiscal 2023 compared to a withdrawal of $7.3 million last year. Our long-term debt under the credit facility including USD 2 million drawn from our USD 5 revolving facility and the current portion, was $22.2 million as at fiscal year-end, compared $31.5 million as at June, a year ago. The reduction primarily reflect the utilization of a substantial portion of the $8.5 million loan from the Business Development Bank of Canada that was secured in the first quarter of fiscal 2023. As of June 30, 2023, our working capital position was $50.4 million, compared to $53.4 million at our fiscal 2022 year-end. I will now turn the call back to Pierre for closing comments. Pierre?

[Pierre Alexandre, executive]

Thanks, Daniel. We are pleased with our overall performance for fiscal 2023. Unfortunately, our results for the year were negatively impact by the suspension of drilling activities in Canada late in the fourth quarter as discussed previously. These project suspension will negatively impact our fiscal 2024 first quarter results and to a lesser extent, our second quarter results. Despite this temporary challenge, we remain positive on our longer-term outlook. Customer demand, particularly in Canada, remains strong, although we have experienced a softening in demand from our junior customers. We are experiencing in our drilling activities in Chile -- we are experiencing growth, sorry, in our drilling activity in Chile and Guinea. Our pending exit from Burkina Faso will allow us to focus more on these markets and customers. The underlying fundamentals driving our business are solid. Gold price remained at historically strongly a bit above $1900 an ounce, gold producers are generating very strong margin at this price while struggling to replace their reserves. We are confident that continued high level of exploration and development spending will be maintained in this industry for the foreseeable future. We continue to generate approximately 2/3 of our revenue from gold drilling. So we have high exposure to this sector. Copper price have also remained at elevated level over the past 12 months despite rising interest rate and economic uncertainty. Copper is needed for the ongoing electrification of the global economy, which is expected to drive strong demand for the red metal for many years to come. A healthy copper market is positive for our Chilean operations. Looking ahead, we remain focused on our 5-point plan, which consists of primarily focusing on Canadian gold drilling operation, prioritizing long-term specialized drilling contract with major and intermediate customer, pursuing international contract that offer attractive return and high degree of cost and margin certainty, continued investment in driller training and computerized drilling technology and building a team-oriented leadership structure that fosters collaboration and personal accountability. By continuing to execute on this plan, we believe we can drive growth and build value for our shareholders. That concludes our formal remarks this morning. We will now welcome any questions. Operator, please begin the question period.

[Operator]

[Operator Instructions] Your first question comes from Gordon Lawson with Paradigm.

[Gordon Lawson, analyst]

Your International segment had an excellent year-over-year gain. Can you provide more insight into the Chilean contribution and if you can further break that down, how much of that comes from senior and intermediate copper companies?

[Daniel Maheu, executive]

Yes. In Chile, most of our $30 million revenue came from major company in Chile, and Anglo American and also this kind of companies. So the level of $30 million increase from the $27 million last year. So from $27 million, we came to $30 million this year, and we expect to increase this level of income because we are actually in the process of being with the major customer for new contracts in Chile, at least 1 or 2 major contracts are in discussion actually in Chile.

[Gordon Lawson, analyst]

Okay. Great. Also, your margins had an excellent improvement from last year. And aside from the ramp-up costs you mentioned earlier, can you help us get a better understanding of that increase in terms of which segments and commodities are providing the boost?

[Daniel Maheu, executive]

Essentially, the ramp-up cost is related to copper contract with essentially a major customer in Chile and we -- actually, these contracts are going well, and they are extend for 2024 as well. So these costs are nonrecurring, and we expect margin in Chile to be stable or increase in the next fiscal year. And we see very good opportunity actually in Chile.

[Gordon Lawson, analyst]

How much of that would you say is specialized versus simply having an excellent relationship with the majors?

[Pierre Alexandre, executive]

Well, I would say that the type of service that we offer over there. So we do dewatering and other service that we offer that's one of the reasons why our margins are better with this customer, this client.

[Operator]

Next question comes from [ Terry Balima ] with -- he's a private investor.

[Unknown Attendee]

In the fourth quarter, the adjusted EBITDA had a $1.8 million income tax hit -- I'm sorry, a $2.1 million income tax hit. Did I see the table correctly there? So the actual you had a net loss in the quarter, yet the company paid $2.1 million in taxes. And so the adjusted EBITDA adjusted for the income tax expense would actually be the $1.8 million plus the $2.1 million added back that you paid in taxes, it would be $3.9 million?

[Daniel Maheu, executive]

You're right. In the Q4, we made an adjustment for income tax because essentially in Chile, in the last 2, 3 years, we are negative. So we don't record any income tax expenses or, let's say, tax loss was not accounted as an asset, so a future asset income tax. So with the results we have in Chile in the last year, so we are, let's say, more -- that's reduced a lot our income tax expense for the year, and we take this provision in Q4. So essentially, as we -- so it's a kind of adjustment for the Chilean tax, which affect our global tax expenses and we do this adjustment in Q4.

[Unknown Attendee]

Also, the $3 million revenue loss to fires reduced your adjusted EBITDA, roughly how much in the Q4? I'm assuming you had to pay crews despite no revenues. So maybe a $2 million, $2.5 million EBITDA was affected there?

[Daniel Maheu, executive]

You see we have an adjusted percentage as a percentage of roughly 10%. So I don't think it's $2 million, but it's probably more around $1 million EBITDA adjustment negatively for the quarter and Q4, yes.

[Unknown Attendee]

Okay. And when I see your adjusted gross profit margin in the high teens, and I compare it to your market peers, the adjusted gross profit percent is below your market -- below the market peers who are in the low to mid-20%. What is the reason for that. Is that from Burkina Faso losses possibly? Or is there something else?

[Daniel Maheu, executive]

No, you're right. This is related to our International operations. We are experiencing very hard results in Burkina Faso and that's why we want to exit this country. And also Chilean operation is going well now. But in the last few, let's say, in calendar year 2022, Chilean operation was not so good. So we are not -- we are now since January 2023 in a better position in Chilean operation. But if we look only our Canadian operations, the margins are near the 20%, you're right, the International operation in fiscal 2023 affect us a lot. And we expect to have a better contribution with the International operation in the 2024 and 2025 fiscal year, essentially based on the exit of Burkina Faso and the growth of the gross margin in Chilean operation. And as I mentioned before, we are looking for major contract in Chile for 2024, 2025. And if that -- its conclude, that will be a good contribution to our gross margin in the next fiscal year.

[Unknown Attendee]

Okay. In the last 12 months, what was the amount of losses for Burkina Faso?

[Daniel Maheu, executive]

It's too much. First, I would like to say that is too much, and that's why we go through. You see we take a $4.2 million write-down essentially based on the inventory. The loss, let's say, EBITDA is -- if we look only at Burkina Faso, the EBITDA was negative for roughly $2 million.

[Unknown Attendee]

That was for the last 12 months, yes?

[Daniel Maheu, executive]

Yes.

[Unknown Attendee]

Okay. Okay. Last question. In the Q4 with the $3 million sales from the revenue from fires loss and the $6 million temporarily suspended being pushed out into future quarters. So without those two things happening, your sales would have been about $56 million in the Q4 versus $53 million year-over-year. Is that about right?

[Daniel Maheu, executive]

It will be -- the sales in the Q4 should be around $8 million and $10 million better if we don't have this suspension and fire, let's say, between $8 million to $10 million...

[Unknown Attendee]

Okay. Those $8 million to $10 million -- okay. The $8 million to $10 million sales have not been lost, they've been pushed out to future quarters. Is that correct?

[Daniel Maheu, executive]

We are affected with the fire till the end of July. So in Q1, it will be, let's say, around $1 million less, between $1 million and $2 million less revenue in Q1 and the suspension will be less than 6, it will be around 4 let's say, but we saw some customer start operation, but we saw in the market actually with large, major and intermediate customer, a reduction of budget for exploration. We -- they want to restart later in the year, in the calendar year of 2023. So Q1 will be effect for sure with fire for a month and for the suspension of operation or reduction because in one contract we have 4 drill, and now we run only 1 or 2 drills. So this is -- we saw this trend with a lot of, let's say, 5, 6 large customer in Canada.

[Operator]

[Operator Instructions] There are no further questions at this time. Please proceed.

[Pierre Alexandre, executive]

Thank you. Thank you, operator, and goodbye, everyone.

[Operator]

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