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Edited Transcript of OGD.TO earnings conference call or presentation 16-Jun-20 2:00pm GMT

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Q3 2020 Forage Orbit Garant Inc Earnings Call VAL-DOR Jul 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Forage Orbit Garant Inc earnings conference call or presentation Tuesday, June 16, 2020 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Alain Laplante Orbit Garant Drilling Inc. - VP, CFO & Corporate Secretary * Eric Alexandre Orbit Garant Drilling Inc. - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * James Moore;JR Moore Associates;Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen, and welcome to the Orbit Garant Drilling, Inc. Fiscal 2020 Third Quarter Results Conference Call and Webcast. (Operator Instructions) This call is being recorded on Tuesday, June 16, 2020. I'd now like to turn the conference over to Eric Alexandre. Please go ahead. -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [2] -------------------------------------------------------------------------------- Thank you, Pam, 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 filings for additional information on both our risk factors and non-IFRS measures. Following my opening remarks, Alain will review our financial results, and I will conclude with comments on our outlook. We'll then welcome questions. We had strong momentum in our domestic drilling business during the quarter until we were impacted by the COVID-19 pandemic beginning in mid-March. At that point, we began to reduce or suspend activity on projects due to government restriction or customer decisions. In Quebec, we suspended all drilling between March 24 and April 20 as a result of the provincial government order. In Ontario and Nunavut, projects were permitted to remain active, but activity on certain projects was reduced or temporarily suspended. While we still managed to generate 13.7% revenue growth in our Canadian operation during the quarter, the abrupt slowdown in business activity had a significant impact on our financial results, attributable both to postponed customer drilling activity and onetime costs associated with the temporary operational shutdowns. The month of March is typically an active time for winter drilling in Canada, and we were on track to generate year-over-year revenue growth during that period. We look forward to recapturing the lost business as we gradually ramp up our operation back up. In addition, to the negative impact from COVID-19, our third quarter results were affected by high demobilization costs as we terminate 2 major contracts in Canada. Despite these impacts, we generate positive EBITDA in the quarter and drilled nearly 15% more meter in Canada compared to Q3 last year. Turning to our international operations. Revenue declined by $4.9 million in the third quarter compared to the same period last year. The decline was due to the completion of a multiyear drilling contract in Chile during the fourth quarter of fiscal 2019, and decreased drilling activity in Burkina Faso and Ghana. We believe that the recent civil protest in Chile, regional security concerns in Burkina Faso, and the impact of COVID-19 also contributed to a reduction in drilling activity. We temporally suspended some international projects late in the quarter and reduced drilling on others, as a result of government orders or customer decision to relate it to COVID. As part of this business continue plan, we continue to manage our variable cost structure and cash to support the reduced level of operation during this period. We have taken a number of initiatives to reduce costs and manage our liquidity position, including a significant reduction in our capital expenditures, lower inventory purchases and a program to progressively reduce overall inventory levels. These measures will not affect our ability to resume more normalized operation as COVID-19-related restrictions are lifted, customer drilling projects are resumed, and general economic conditions improve. We also recently negotiated amendments to certain financial covenants in our credit facility with National Bank, applicable to the third quarter and to future quarters. I arranged the deferral of our debt payment with Export Development Canada until October 2020, and obtained new financing in Chile. As the quarter ends, we comply with all covenants in the credit facility and in the EDC loan agreement, and we expect to continue to remain in compliance, giving these new amendments with our lenders. Alain will discuss this in more detail shortly. Further, our management team and Board of Directors have taken a temporary 15% reduction in pay, effective April 1, to further support the company. Once the World Health Organization declared COVID-19 a global pandemic on March 11, 2020, and we acted quickly in implementing precautionary measures across our operation to prioritize the health and safety of our employees, customers, suppliers and the communities in which we operate. Our precautionary measures, which are there to the recommendation and directive issued by the public health authorities in the countries in which we operate, remain in place today, and we continue to monitor the situation closely as we gradually ramp up our operations. Now I'd like to turn the call over to Alain to review our financial results in more detail. Alain? -------------------------------------------------------------------------------- Alain Laplante, Orbit Garant Drilling Inc. - VP, CFO & Corporate Secretary [3] -------------------------------------------------------------------------------- Thank you, Eric, and good morning, everyone. Our fiscal third quarter revenue was $36 million, a decline of 3.8% from Q3 a year ago. Our drill utilization rate was 56% in the quarter compared to 60% in Q3 last year. Our revenue in Canada increased 13.7% to $28.6 million, reflecting increased meter drilled. International revenue was $7.4 million, a decrease of $4.9 million compared to Q3 last year. Eric already discussed the reasons for this decline. Average revenue per meter drilled in the quarter was $100, down from $103 in Q3 last year. The decrease was attributable to a lower proportion of higher-priced specialized drilling activity in the international drilling segment. Our adjusted gross margin, excluding depreciation expenses, was 10.2% in the quarter, compared to 14.3% in Q3 last year. The decline was primarily attributable to the completion of a large drilling contract in Chile in Q4 last year, decreased drilling activity in Burkina Faso and Ghana, the negative impact of the COVID-19 late in the quarter, and demobilization costs associated with termination of the 2 large contracts in Canada. G&A expenses were $4 million or 11.1% of revenue compared to $4.2 million or 11.1% also of revenue in Q3 a year ago. EBITDA was $0.4 million compared to $1.4 million in Q3 last year. Net loss was $3.4 million or $0.09 a share compared to a net loss of $1.4 million or $0.04 a share in Q3 last year. Turning to our balance sheet. We withdrew a net amount of $1.5 million during the third quarter on our credit facility compared to a repayment of $2.6 million in Q3 last year. As at March 31, 2020, we had $31.9 million drawn under the credit facility compared to $25.3 million as at June 30, 2019, and our fiscal 2019 year-end. During March and June of 2020, we negotiated amendments to certain financial covenants in our credit facility agreement with National Bank applicable to Q3 and future quarters that provide us with additional financial flexibility as we deal with the reduction in business attributable to COVID-19. In addition, during April 2020, we reached an amended loan agreement with Export Development Canada, whereby, among other things, all payments of principal and interest under our EDC loans are deferred until October 2020, and therefore, the terms of these loans were extended by 6 months. As a result of these measures, we expect to continue to meet our obligations under our credit facilities and have sufficient resources to carry on our business operations. I am also pleased to note that during May 2020, our Chilean subsidiary obtained 2 loans totaling CLP 1 billion, which represent approximately CAD 1.7 million in loans from Banco Scotiabank. The loans bear interest at a rate of 3.5% per annum at the term of 36 months and are 70% guaranteed by the Chilean government as part of a government program created in response to COVID-19. The loans have no capital repayments for the first 6 months and the interest over such period will be capitalized over the remaining period of the loans. Our working capital position was $56 million at March 31, up from $55.1 million at June 30. I'll now turn the call back to Eric for closing comments. Eric? -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [4] -------------------------------------------------------------------------------- Thanks, Alain. The COVID-19 outbreak has caused massive disruption across the global economy and the impact on our company and our industry has been significant. We cannot predict how long the pandemic will last or when our drilling activity will reach pre-pandemic levels. However, we are seeing some positive signs in our business. Our operation in Canada are gradually ramping back up, and we anticipate a gradual increase in our international drilling operation in the coming months as well. While the crisis has significantly impacted our operation during our fiscal fourth quarter, we expect to receive benefits through the Canada Emergency Wage Subsidy. We are also encouraged by the current strong price of gold, which is trading near its highest level since 2012. The price of gold has increased by approximately 30% in the last 12 months. That has significantly improved the economic of gold mining, and we are not surprised to see that our gold mining customers in Canada were eager to resume their drilling project after the shutdowns or temporary suspensions. We generate approximately 70% of our revenue from gold-related operation, so we are well positioned to benefit from rising demand from gold drilling. While market conditions remain challenging as COVID-19-related restrictions are lifted, customer drilling projects are resume and general economic conditions improve, we believe we are positioned for long-term success. That concludes our formal remarks, and I now -- will now be pleased to take any questions. Pam, please begin the question period. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from James Moore with JR Moore Associates. -------------------------------------------------------------------------------- James Moore;JR Moore Associates;Analyst, [2] -------------------------------------------------------------------------------- First question is just kind of around the environment, generally. So I noticed in your reports published last night, MD&A, I think you showed the fundraising environment out there. So it's -- I imagine at this point, too, it's slowly coming back, at least from the press releases and stuff that I've been watching, particularly in Canada, with respect to gold. And the currency depreciated is probably helping also. But clearly, base metals are still lagging. Are you seeing any improvement in the recent months, with respect to just levels of interest generally? You have anything interesting? -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes, James, we receive especially more demand from the gold sector. As you see, the base metal is more effective in terms of the value of the base metal. But right now, where we do drilling, like in Chile, it's calmer than it is as opposed to Canada because of the COVID-19. We still -- because of the lack of new discovery in copper, we're still receiving some interest from big names like Codelco. That could resume in future work right now, but it's pretty calm on that side. But on the other hand, we see more activity related to gold, which is positive for us, which represents usually 70% of our revenue. -------------------------------------------------------------------------------- James Moore;JR Moore Associates;Analyst, [4] -------------------------------------------------------------------------------- Right. Right. Okay. And can you talk about some of the restrictions that are currently in place that are slowing you down just given the COVID-19, whether it be governmental or whatnot? -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Yes. Well, just as an example, before we're going on a site, there was no questionary, nothing to about the distanciation and everything. Now we go on a site, we need to answer questions and being tested with temperature and all that. And then we cannot travel more than 2 in a pickup truck as we were, like, traveling 4 people. Underground, we have to take the cage. Usually, we were, example, 40 taking the cage, now it's 10. So it's more trip. So it slowed down the process to get in a moving project as well as if there is somebody with symptoms, that person has to turn back home and be in quarantine, which was not the case before. If it's -- even if it's not COVID-19, precautionary measures are there. So then you lose some shift by the time you replace this person and so on. So there's many factors there that affects productivity there, but we have to live with that fact. And honestly, we are surprisingly doing well on that side. But we will still need to monitor this moving forward, for sure, because it's very fragile, as I can explain because if a case comes in, then it will affect all the operations. -------------------------------------------------------------------------------- James Moore;JR Moore Associates;Analyst, [6] -------------------------------------------------------------------------------- Okay. So just a follow-up on that with -- would like 10 days' worth of work become 15 days' worth of work? Or is it -- would it not be that drastic? Or is there any way to quantify in that? -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- I don't get the question, James. -------------------------------------------------------------------------------- James Moore;JR Moore Associates;Analyst, [8] -------------------------------------------------------------------------------- I mean, 10 days of work pre-pandemic, would it now take 15 days to kind of do the equivalent type of work in terms of drilling? -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [9] -------------------------------------------------------------------------------- No, I would not say that. It might be affected by -- and it's difficult to answer exactly because we don't have this exact number. While our operation has reduced, we have access to more experienced driller, which will increase our productivity rate on one hand, and the other hand, we have all those measures to take in. But just like a rule of thumb, I would say that we have at least an hour per shift that has affected our productivity out there, so could represent 1 hour on 12. -------------------------------------------------------------------------------- James Moore;JR Moore Associates;Analyst, [10] -------------------------------------------------------------------------------- Okay. Okay. And then you mentioned in your remarks that -- you mentioned some positive indications over with international in the coming months. Can you maybe highlight that or just what you're referring to? -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [11] -------------------------------------------------------------------------------- Well, we got from 30% of our revenue international low to zero at certain point with the COVID-19, and now, especially in West Africa, we're starting to see signs of recovery there. So we will have some machines there. We're not going to get back to 30% right away. But the positive way that we will have like drills running internationally as opposed to zero for a certain period of time. So you will see this ramping up in the months to come, which is a good news for us because we do believe -- strongly believe that international expansion we made would be supportive in our future. -------------------------------------------------------------------------------- James Moore;JR Moore Associates;Analyst, [12] -------------------------------------------------------------------------------- Okay. And then just getting into the debt levels. You guys have increased your debt-to-equity ratios from 10% 4 or 5 years ago to a little over 50% now, and it's difficult to see, just from a financial perspective, how this has been helping very much in -- just through results. So -- and now the covenants are certainly getting a little more burdensome in terms of -- I don't know how much room you guys have to increase debt even more if you have to, if things take a lot longer to recover than expected. So I guess, at this point, I'm just curious as to are there plans to try to get your ratios back to historic levels? Or how are you thinking about the risk of taking on more debt? -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [13] -------------------------------------------------------------------------------- James, first of all, good comments. We -- nobody has planned, like, a pandemic situation in their financing. So that's one point. So that's why based on what was happening with COVID-19, we had to go back with the bank and readjust the covenant we had put in place prior COVID-19, which is normal. And it well done with the bank, no problem with the bank, they still support the management there. They understand the situation, and we just readjust based on what we have to go through and where we're going to get moving forward. Secondly, if you look behind why we did increase our debt level was to expand our operation internationally, and we still believe that was a great move that we have diversifying the company geographically by implementing a division, a full division in South America with the Chilean operation through an acquisition and some equipment that we made CapEx. Same thing in Burkina Faso that we duplicate this business model that we think moving forward would put us in a favorable position. Our plan right now is to capitalize on this. And we are, like, putting a plan in place to reduce the debt level at abnormal levels, I would say, moving forward. So our plan is to get back to where we were prior this activity. We took advantage that the cycle, starting 2012, was going down to position ourselves and making acquisition at very fair price and taking advantage while the market picked up. And we look forward to see the market picking up and taking advantage of this strategy. -------------------------------------------------------------------------------- James Moore;JR Moore Associates;Analyst, [14] -------------------------------------------------------------------------------- Okay. And when you say getting back to debt levels before this activity, what do you mean by that? -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [15] -------------------------------------------------------------------------------- Well, we're not going to get back tomorrow. That's the point. But gradually, what we are working at right now is we reduce our CapEx expenditures to the minimum. Reduce the inventory level, and we cut some expenses here and there just to get back gradually to what we are comfortable with. And usually, our like rule of thumb in the past was not to have debt more than 1.5x, 2x EBITDA. So we will try to get back to this level. -------------------------------------------------------------------------------- James Moore;JR Moore Associates;Analyst, [16] -------------------------------------------------------------------------------- Okay. And the last question for me is related to the Emergency Wage Subsidy. Do you guys have any visibility? Is that going to be in hundreds of thousands of dollars? Or is that millions of dollars? Do you have any clarity on that? -------------------------------------------------------------------------------- Alain Laplante, Orbit Garant Drilling Inc. - VP, CFO & Corporate Secretary [17] -------------------------------------------------------------------------------- Yes. We -- right now, our investment is about -- is worth about $1.5 million. The amount is -- might be more depending of new eligible conditions that will be established by the authorities. They've announced yesterday or a day before that they provided new conditions. We have to review that. They also said that they will be -- the subsidies will continue up to the end of August. Once again, as they have to put up the conditions that goes with it. So at this moment in time, we can expect about $1.5 million. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- . Your next question comes from [Michael Dukas] with the Canadian Press. -------------------------------------------------------------------------------- Unidentified Analyst, [19] -------------------------------------------------------------------------------- (foreign language). I'm going to be asking my questions in English because I figure many of the participants in that conference do not speak French. So I have 2 questions basically. The first one is, you guys said your Board of Directors has taken a 15% pay cut due to COVID-19. What are your plans for rehiring people on the field? You were talking about the Emergency Wage Subsidy there, but do you have any other plans depending on your financial situation? -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [20] -------------------------------------------------------------------------------- Well, this thing is done on a case-to-case basis, depending where we are, in which region we are and how competitive the market is. Of course, we reassess all the expense we made. But so far, we have changed a little bit the way we pay our crews and we focus more on productivity and health and safety at this point. But there is measures that we put in place to address this as well. I'm not going to go in detail, but we are applying this moving forward. -------------------------------------------------------------------------------- Alain Laplante, Orbit Garant Drilling Inc. - VP, CFO & Corporate Secretary [21] -------------------------------------------------------------------------------- Michael, maybe just as a complement, is just to say that we have no choice but to put some people on temporary layoff, and rehire them as business is picking up. That's the comment we can make. And as we haven't reached full pre-pandemic situation, obviously, we're not able to rehire everyone. -------------------------------------------------------------------------------- Unidentified Analyst, [22] -------------------------------------------------------------------------------- So your plans are not dated yet as when you are going to rehire these people that you had to lay off? -------------------------------------------------------------------------------- Alain Laplante, Orbit Garant Drilling Inc. - VP, CFO & Corporate Secretary [23] -------------------------------------------------------------------------------- Well, we are winning from our customers and the market really picking up in terms of level of activity. So the level of activity will justify the level of rehiring personnel. We do hope to rehire everyone, but at this moment in time, it's premature for us to say what will be the percentage of people that we will rehire on a short period of time. -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [24] -------------------------------------------------------------------------------- It goes with the demand. -------------------------------------------------------------------------------- Alain Laplante, Orbit Garant Drilling Inc. - VP, CFO & Corporate Secretary [25] -------------------------------------------------------------------------------- It goes with the demand. -------------------------------------------------------------------------------- Unidentified Analyst, [26] -------------------------------------------------------------------------------- You're telling us about the -- 70% of your customers are into gold mining. What about the Abitibi situation, are your clients picking up the pace here in Abitibi or... -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [27] -------------------------------------------------------------------------------- Yes, yes. While it's funny to see that all those guys working in gold were so eager to get back on track, and the day that the Quebec government announced that we could go, they were all ready to get back on track, most of them. Of course, they had been challenged with the financing situation, which is better now with the price of gold. So some of them still need, especially the junior, pure exploration ones as to raise money, but the market is favorable for this. So we look to a more positive future related to gold. And to the Abitibi, it's running well right now. And over that, we don't have a lot of COVID cases here into the Abitibi region, which helps the situation. -------------------------------------------------------------------------------- Unidentified Analyst, [28] -------------------------------------------------------------------------------- My last question is regarding COVID, precisely. Do you think there are going to be permanent measures on your drilling sites regarding COVID-19? And if so, how much do you think it's going to increase your operating costs? -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [29] -------------------------------------------------------------------------------- It's too soon to say if there would be, like, measures that would be applied, all-time, moving forward. And we have been able in the past to adapt ourselves to any situation. And I think that moving forward, we will find ways that will reduce the impact of measures of COVID-19. But I still think now that some of the measures will stay in place like a simple thing with distanciation and washing hands and the simple thing, which not delayed any productivity. The more -- the biggest challenge right now is to travel underground and respecting distanciation. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- (Operator Instructions) There are no further questions at this time. Please proceed. -------------------------------------------------------------------------------- Eric Alexandre, Orbit Garant Drilling Inc. - President, CEO & Director [31] -------------------------------------------------------------------------------- If there is no further question, we now terminate the call. Thank you, everyone, for participating today. We wish you all good health. Thank you very much. -------------------------------------------------------------------------------- Alain Laplante, Orbit Garant Drilling Inc. - VP, CFO & Corporate Secretary [32] -------------------------------------------------------------------------------- Thank you very much. Have a nice day. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes your conference call and webcast for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.