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Edited Transcript of OGD.TO earnings conference call or presentation 19-Sep-19 2:00pm GMT

Q4 2019 Forage Orbit Garant Inc Earnings Call

VAL-DOR Sep 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Forage Orbit Garant Inc earnings conference call or presentation Thursday, September 19, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alain Laplante

Orbit Garant Drilling Inc. - VP, CFO & Corporate Secretary

* Eric Alexandre

Orbit Garant Drilling Inc. - President, CEO & Director

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Conference Call Participants

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* Gordon Lawson

Paradigm Capital Inc., Research Division - Senior Research Associate

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Orbit Garant Drilling Q4 and Year-End Fiscal 2019 Conference Call and Webcast. (Operator Instructions) Note that this call is being recorded today, Thursday, September 19, 2019.

And I would like to turn the conference over to Eric Alexandre. Please go ahead, sir.

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Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [2]

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Thank you, Susie, and good morning, ladies and gentlemen. With me on the call today is Alain Laplante, CFO.

Please be aware that certain information discussed today may be forward-looking and that actual results could differ materially. We will also be discussing certain non-IFRS measures. Please refer to our SEDAR filing for additional information on both our risk factors and non-IFRS measures. This call is being recorded and a replay would be available shortly. Instruction for accessing the replay can be found in our news release. Following my opening remarks, Alain will review our financial results, and I will conclude with comments on our outlook and growth strategy. We will then welcome questions.

We are pleased by our revenue performance in the fourth quarter which was in line with our record quarterly revenue in Q4 a year ago, and we are now seeing greater demand for drilling services in Canada. While our International drilling revenue declined in the quarter due to the conclusion of a large multiyear contract in Chile at the beginning of the period, new projects in Chile, Argentina, Burkina Faso and Ghana nearly offset this impact. Our expansion into Burkina Faso through the acquisition of the drilling business of PPI in Q2 this past year has provided a solid contribution to our business and we are seeing good opportunities in this market.

Our gross margins for the quarter primarily reflect lower productivity levels in Canada as we rapidly ramped up on new and existing projects and lower productivity on certain contracts where we made adjustment to the drilling program as well as the conclusion of a large contract in Chile. We are encouraged by the recent pickup in customer demand, particularly in Canada and believe it is supported by the sustained rally in the price of gold, which reached a 6-year high of approximately USD 1,550 per ounce earlier this month. With approximately 70% of our revenue generated from gold-related projects and a strong presence in Canada and other leading gold-producing jurisdictions, we are well positioned to benefit from demand growth.

Now I'd like to turn the call over to Alain to review our financial results in more detail. Alain?

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Alain Laplante, Orbit Garant Drilling Inc. - VP, CFO & Corporate Secretary [3]

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Thank you, Eric, and good morning, everyone. I'll start with a review of our fourth quarter. Revenue totaled $44.4 million, slightly below the $44.5 million we generated in Q4 a year ago. Drilling Canada revenue was $31.6 million, up approximately 4% from Q4 last year, reflecting increased specialized drilling activity. International revenue was $12.8 million, a decline of approximately 9% compared to Q4 last year. The decrease was primarily attributable to lower revenue in Chile due to the completion of a multiyear drilling contract at the beginning of the quarter. As Eric noted, this decline was partially offset by new drilling projects in Chile, Argentina, Burkina Faso and Ghana. We drilled a record 439,000 meters in the quarter, a 14.5% increase from Q4 a year ago.

Average revenue per meter drilled in the quarter was $101, down from $116 in Q4 last year. This decrease in average revenue per meter drilled was attributable to a lower proportion of higher priced specialized drilling activity in the International drilling segment. This is partially due to the reverse circulation drilling we are doing in Burkina Faso which is charged at a lower rate.

Our adjusted gross margin, excluding depreciation expenses, was 15.8% in the quarter compared to 21.2% in Q4 last year. As Eric noted, we experienced lower productivity in Q4 this year because of a sudden ramp up in both new and existing projects in Canada as well as adjustment to drilling programs of certain contracts. The aforementioned conclusion of a large drilling contract in Chile also negatively impacted margins.

Our sequential 18.7% revenue growth from Q3 to Q4 this year demonstrates this ramp up on new and existing projects whereas last year our sequential revenue growth from Q3 to Q4 was a more moderate 3.2%.

G&A expenses were $4.4 million or 9.8% of revenue in the quarter compared to $3.8 million or 8.6% of revenue in Q4 last year. The increase was partially attributable to $200,000 of acquisition and integration costs related to our acquisition of the drilling business of PPI in Burkina Faso earlier this year.

EBITDA totaled $2.6 million compared to $5.5 million in Q4 last year. We incurred a net loss for Q4 of $0.8 million or $0.02 per share compared to a net earnings of $3.3 million or $0.09 per share in Q4 last year. Again, lower productivity in Canada and the conclusion of a large drilling contract in Chile contributed to our decline in EBITDA and our net loss for the quarter.

For the year ended June 30, 2019, revenue totaled $152.8 million, a decrease of 11.7% last year. Specialized drilling services accounted for approximately 55% of total revenue compared to 60% last year. Approximately 72% or $109.5 million of our consolidated revenue was from domestic drilling projects and 28% or $43.3 million was generated from international operations.

Drilling Canada revenue was down 9.4% from a year ago, primarily due to lower amount of meters drilled. International revenue was down 17% from last year, primarily due to the conclusion of a large drilling contract in Chile during the third quarter of fiscal 2018 and a previously mentioned conclusion of a large multiyear drilling contract in Chile at the beginning of Q4 this year. The decline was partially offset by an increase in drilling activity in Burkina Faso and new projects in Argentina and Ghana. We drilled 1.43 million meters in fiscal 2019, a 7.1% decrease from the record 1.54 million meters drilled last year.

Our average revenue per meter drilled in fiscal 2019 was approximately $107, down from $112 last year. The decrease was primarily attributable to a lower proportion of specialized international drilling activity.

Adjusted gross margin, excluding depreciation expenses, was 16.4% in fiscal 2019, down from 17% last year. The slight decrease was primarily attributable to lower overall drilling volume in Canada, partially offset by improved margin in international operations.

EBITDA totaled $8.3 million in fiscal 2019 compared to $14.7 million a year ago. The decline was primarily attributable to lower drilling volumes in Canada and to $1.1 million acquisition and integration costs related to the acquisition of drilling business of PPI in Q2.

We recorded a net loss for the year of $3.5 million or $0.09 per share compared to a net earnings of $4.5 million or $0.12 per share last year.

Turning to our balance sheet. We withdrew a net amount of $7.2 million during fiscal 2019 on our credit facility compared to a withdrawal of $4.9 million in last year. As at June 30, 2019, we had $25.3 million drawn under the credit facility compared to $18.1 million as at June 30 last year. Our working capital position was $55.1 million at year-end, up from $53.3 million a year ago.

I'll now turn the call back to Eric for closing comments. Eric?

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Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [4]

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Thanks, Alain. Our results in fiscal 2019 reflect decreased customer demand in the first 9 months compared to the last year. However, we are pleased with our increased activity in our fourth quarter. The recent rally in the price of gold should help support financing activity in the mining sector and the advancement of drilling project in the quarter ahead, particularly in Canada. Gold projects remain our primary focus, so we are well positioned to benefit from increased demand for gold drilling as mining companies look to replenish reserves.

We also are encouraged by the opportunity we are seeing in our International business. Our international expansion strategy, which we commenced in fiscal 2015 and really accelerated in fiscal 2016 with our acquisition of Captagua in Chile has created a solid platform for growth. We are well established in the Chilean market, and we have been working with some of the world's leading mining companies there, including Anglo American, Codelco and BHP, delivering exceptional performance. While our revenue was down from the year in this market compared to a year ago, we remain very positive about the near- and long-term opportunities in Chile and the broader South American market. We are applying our same strategy in growing our operation in West Africa. As I noted earlier, our PPI acquisition in Burkina Faso in Q2 fiscal 2019 has been an important overall contributor to our International operation. We expect continued solid performance in Burkina Faso in fiscal 2020.

Looking ahead, with our solid balance sheet, well-established expertise in surface and underground drilling, expanded international presence, vertically integrated manufacturing capabilities and constant focus on innovation, we are well positioned to continue strengthening our market leadership position and to seize opportunities in our target markets.

That concludes our formal remarks. Alain and I will now be pleased to answer any question. Susie, please begin the question period.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will be from Gordon Lawson of Paradigm Capital.

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Gordon Lawson, Paradigm Capital Inc., Research Division - Senior Research Associate [2]

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Could you please provide some more details regarding the utilization of your specialized rigs versus your standard rigs and what kind of margins you expect on West Africa?

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Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [3]

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I don't understand the first part of your question. You were asking about the difference between specialized and conventional drilling, right?

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Gordon Lawson, Paradigm Capital Inc., Research Division - Senior Research Associate [4]

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If you could provide any more details with respect either margins or utilization rates of your specialized rigs?

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Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [5]

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Okay. Well, first of all, we are, of course, focusing on specialized operation in all of our market, which is typically charged at better margin as opposed to conventional drilling and there is less contractors that are able to perform those kind of work. So usually, we target margins that are 10% to 15% more than conventional drilling, that's one thing.

Second thing, on a yearly basis, we are trying to optimize this amount and usually we run around 55%, 60% of our revenue from specialized drilling. Of course, we would like to do more because of the potential margins to be generated, but it relates to the work to be done from our client.

And what is specialized drilling, it's, like I mentioned, drilling that a small amount of contractor can do like very deep hole directional drilling, heli-portable drilling and so on. Drilling in the new network in minus 50 during the winter, recycling water. So it's very, very detailed and specialized work to be done, which again are -- is performed by a little amount of contractor. And this is revenue or contract that are -- for the client, it's hard to switch contractor, so usually it's more stable on the long run.

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Gordon Lawson, Paradigm Capital Inc., Research Division - Senior Research Associate [6]

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And can you provide any more details with respect to the margins you expect from West Africa versus North America?

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Alain Laplante, Orbit Garant Drilling Inc. - VP, CFO & Corporate Secretary [7]

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Gordon, and with that -- we do not really provide margins. It's really important information. And West Africa obviously is -- West Africa is priced differently than some other parts of the world because where they are located and so on. But we do not provide much more information than this on the margin in other countries.

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Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [8]

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But you have to take in account that margins -- usually, expected margins in those markets are better than it would be in Canada based on the fact that the cost of manpower is less than Canada. So we expect better gross margin in our international, especially in West Africa.

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Operator [9]

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(Operator Instructions) And at this time, Mr. Alexandre, we have no further questions. So I would like to turn the call back to you for any additional comments.

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Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [10]

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Okay, thank you. So if there's no further question, we'll terminate the call. Thank you for participating.

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Alain Laplante, Orbit Garant Drilling Inc. - VP, CFO & Corporate Secretary [11]

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Thank you, everyone. Have a nice day.

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Operator [12]

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Thank you. Ladies and gentlemen, this does 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. Enjoy the rest of your day.