FORACO INTERNATIONAL S.A.
MANAGEMENT'S DISCUSSION & ANALYSIS
Three‐month and nine‐month periods ended September 30, 2023
FORACO INTERNATIONAL S.A.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis ("MD&A") relates to the results of operations, liquidity, and capital resources of Foraco International S.A. ("Foraco" or the "Company"). This report has been prepared by Management and should be read in conjunction with the Company's unaudited condensed interim consolidated financial statements for the three‐month and nine‐month periods ended September 30, 2023, including the notes thereto. These quarterly unaudited interim financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS"). Following the decision taken by the Accounting Standards Board, IFRS became the accounting standards for all issuers in Canada on January 1, 2011. The Company adopted IFRS and made an explicit and unreserved statement that its consolidated financial statements comply with IFRS in 2004.
Except as otherwise stated in Note 2 to the unaudited interim condensed consolidated financial statements, these quarterly unaudited condensed interim consolidated financial statements were prepared using accounting policies and methods consistent with those used in the preparation of the Company's audited consolidated financial statements for the year ended December 31, 2022. Except when otherwise stated, all amounts presented in this MD&A are denominated in US Dollars ("US$"). The discussion and analysis within this MD&A are as at October 30, 2023.
Caution concerning forward‐looking statements
This document may contain "forward‐looking statements" and "forward‐looking information" within the meaning of applicable securities laws. These statements and information include estimates, forecasts, information, and statements as to Management's expectations with respect to, among other things, the future financial or operating performance of the Company and capital and operating expenditures. Often, but not always, forward‐looking statements and information can be identified using words such as "may", "will", "should", "plans", "expects", "intends", "anticipates", "believes", "budget", and "scheduled" or the negative thereof or variations thereof or similar terminology. Forward‐looking statements and information are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to significant business, economic and competitive uncertainties and contingencies. Readers are cautioned that any such forward‐looking statements and information are not guarantees and there can be no assurance that such statements and information will prove to be accurate and actual results and future events could differ materially from those anticipated in such statements. Important factors that could cause actual results to differ materially from the Company's expectations are disclosed under the heading "Risk Factors" in the Company's Annual Information Form dated March 3, 2023, which is filed with the Canadian regulators on SEDAR (www.sedar.com). The Company expressly disclaims any intention or obligation to update or revise any forward‐looking statements and information whether as a result of new information, future events or otherwise. All written and oral forward‐looking statements and information attributable to Foraco or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements.
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This MD&A is presented in the following sections:
- Business Overview
- Interim Consolidated Financial Highlights
- Results of Operations
- Seasonality
- Effect of Exchange Rates
- Liquidity and Capital Resources
- Related‐Party Transactions
- Capital Stock
- Critical Accounting Estimates
- Non‐IFRS Measures
- Litigation and claims
- Subsequent Events
- Risk Factors
Business Overview
Headquartered in Marseille, France, Foraco is a global provider of drilling services, maintaining a presence in 22 countries across five continents. As of September 30, 2023, the company had close to 3,000 employees and had a fleet of 302 drill rigs worldwide, offering a broad range of drilling services to its clients. The Company has developed and acquired significant expertise including proprietary drill rig design capabilities. Its global operations cater to a variety of industries, with an emphasis on long‐term valuable commodities and water.
Foraco's strategy involves assisting its clients in exploring or managing their deposits throughout the entire life cycle, with particular emphasis on activities extending the lifespan of mines. The Company plans to persist in expanding its services worldwide, prioritizing stable jurisdictions, high‐tech drilling services, and an optimal mix of commodities, including battery metals and gold. Foraco maintains a substantial presence in water‐related drilling services. It is also gradually implementing advanced digital applications. The company anticipates achieving its strategic goals primarily through organic growth and targeted acquisitions.
Foraco is attentive to environmental, social, and governance (ESG) requirements. It has implemented a pragmatic and measurable approach to ESG, using quantitative KPIs to ensure maximum improvements and efficiencies.
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Interim Consolidated Financial Highlights
Income Statement
(In thousands of US$) | Three‐month period | ||
(unaudited) | ended September 30, | ||
2023 | 2022 | ||
Revenue | 95,060 | 91,414 | |
Gross profit (1) | 26,863 | 24,446 | |
As a percentage of sales | 28.3% | 26.7% | |
EBITDA | 25,002 | 23,024 | |
As a percentage of sales | 26.3% | 25.2% | |
Operating profit | 20,169 | 18,156 | |
As a percentage of sales | 21.2% | 19.9% | |
Net profit for the period | 12,366 | 11,151 | |
Attributable to: | |||
Equity holders of the Company | 10,848 | 8,351 | |
Non‐controlling interests | 1,518 | 2,800 | |
EPS (in US cents) | |||
Basic | 11.00 | 8.46 | |
Diluted | 10.77 | 8.25 |
(1) includes amortization and depreciation expenses related to operations.
Nine‐month period ended September 30,
2023 2022
283,503 245,652
73,94452,793
26.1%21.5%
67,94549,417
24.0%20.1%
53,23934,382
18.8%14.0%
31,42119,093
26,29813,238
5,1235,855
26.6113.41
26.0513.07
Three‐month period ended September 30, 2023 - Q3 2023
Revenue
In Q3 2023, Foraco's revenue was US$ 95.1 million compared to US$ 91.4 million generated in Q3 2022, a 4% increase.
Profitability
- Q3 2023 gross margin, including depreciation within cost of sales, reached US$ 26.9 million (representing 28.3% of revenue), compared to US$ 24.4 million (or 26.7% of revenue) recorded in Q3 2022. The uplift was driven by the satisfactory performance of contracts and an increase contribution of value‐added drilling services.
- For the quarter, EBITDA totaled US$ 25.0 million (or 26.3% of revenue), from the US$ 23.0 million (or 25.2% of revenue) for the corresponding quarter of the previous year.
Nine‐month period ended September 30, 2023 - YTD Q3 2023
Revenue
- For the nine‐month period ending September 30, 2023 (YTD Q3 2023), the revenue amounted to US$ 283.5 million, representing a 15% increase over the US$245.7 million recorded in YTD Q3 2022. This surge in revenue is due to the solid performance of main contracts and the delivery of more‐added drilling services.
Profitability
- In YTD 2023, the gross margin, inclusive of depreciation within cost of sales, was US$ 73.9 million (or 26.1% of revenue), a significant 40% increase from US$ 52.8 million (or 21.5% of revenue) in YTD Q3 2022. This increase resulted from good contract performance, improved selling prices, and the delivery of more value‐added drilling services.
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- During YTD Q3 2023, EBITDA amounted to US$ 67.9 million (or 24.0% of revenue), a 37% increase from US$ 49.4 million (or 20.1% of revenue) for the same period last year.
- For the trailing twelve months (TTM) ending September 30, 2023, the net profit was US$ 38 million, resulting in an EPS of C$ 0.44, a 109% increase from the previous year.
Results of Operations
Comparison of the three‐month periods ended September 30, 2023 and September 30, 2022
Revenue
The following table provides a breakdown of the Company's revenue for Q3 2023 and Q3 2022 by reporting segment and geographic region:
(In thousands of US$) ‐ (unaudited) | Q3 2023 | % change | Q3 2022 |
Reporting segment | 5% | ||
Mining | 83,369 | 79,027 | |
Water | 11,691 | ‐6% | 12,387 |
Total revenue | 95,060 | 4% | 91,414 |
Geographic region | 15% | ||
North America | 32,164 | 27,870 | |
South America | 29,930 | 2% | 29,398 |
Asia Pacific | 19,440 | 28% | 15,158 |
Europe, Middle East and Africa | 13,526 | ‐29% | 18,988 |
Total revenue | 95,060 | 4% | 91,414 |
The increase in revenue was driven by the solid performance of main contracts and the provision of more value‐added drilling services which more than compensated for the decline in activity in certain regions due to political and economic instability. The rig utilization rate for Q3 2023 held steady at 58%, marginally up from 57% in Q3 2022, with underlying disparities across regions, CIS reporting lower rates, and other regions witnessing higher utilization.
The uptick in the Mining segment's revenue can be attributed to favorable market dynamics. Long‐term rolling contracts, renegotiated and extended last year, coupled with the company's proven delivery capability, played a crucial role. In the water segment, revenue experienced a slight dip due to the phasing of contracts.
North American operations reported a 15% revenue increase (18% without adverse foreign exchange variance), reaching US$ 32.1 million in Q3 2023 from US$ 27.9 million in Q3 2022. This improvement was driven by heightened activity on long‐term contracts renewed last year with senior customers.
South American revenue remained stable at US$ 29.9 million in Q3 2023 compared to US$ 29.4 million in Q3 2022, a level expected in a period of low activity due to the austral winter season.
In the Asia Pacific region, revenue for Q3 2023 was US$ 19.4 million, a 28% increase that reflects a quarter‐over‐quarter increase in demand and the acquisition and commissioning of new rigs.
Revenue for the EMEA region saw a 29% decrease, moving down to US$ 13.5 million in Q3 2023 from US$ 19.0 million in Q3 2022. Revenues in Southern Europe and Africa remained stable compared to Q3 2022, while activity in the CIS decreased by 42% due to political and economic uncertainties in the region.
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Gross Profit
The following table provides a breakdown of the Company's gross profit by reporting segment for Q3 2023 and Q3 2022:
(In thousands of US$) ‐ (unaudited) | Q3 2023 | % change | Q3 2022 |
Reporting segment | 23,165 | 13% | 20,523 |
Mining | |||
Water | 3,698 | ‐6% | 3,923 |
Total gross profit | 26,863 | 10% | 24,446 |
For Q3 2023, the gross margin, inclusive of depreciation within cost of sales, reached US$ 26.9 million (or 28.3% of the revenue) compared to Q3 2022's US$ 24.4 million (or 26.7% of the revenue). This reflects the solid operating performance of contracts.
Selling, General and Administrative Expenses
The following table provides an analysis of the selling, general and administrative expenses (SG&A):
(In thousands of US$) ‐ (unaudited) | Q3 2023 | % change | Q3 2022 |
Selling, general and administrative expenses | 6,694 | 6% | 6,290 |
SG&A increased compared to the same quarter last year mainly due to the level of activity. As a percentage of revenue, SG&A remained stable at 7.0% of the revenue.
Operating result
The following table provides a breakdown of the Company's operating result for Q3 2023 and Q3 2022 by reporting segment:
(In thousands of US$) ‐ (unaudited) | Q3 2023 | % change | Q3 2022 |
Reporting segment | 17,294 | 15% | 15,085 |
Mining | |||
Water | 2,875 | ‐6% | 3,071 |
Total operating profit | 20,169 | 11% | 18,156 |
The operating profit reached US$ 20.2 million, resulting in a US$ 2.0 million increase driven by activity levels and enhanced profit margins.
Finance costs
In Q3 2023, net financial expenses climbed to US$ 3.6 million, up from US$ 2.9 million in Q3 2022. This uptick is primarily attributable to the increased reference interest rates over the period.
Income tax
The income tax for Q3 2023 totaled US$ 4.2 million compared to US$ 4.1 million during the same period in the previous year. This figure was calculated using management's best estimate of the annual average income tax rate for the full financial year, determined on a jurisdiction‐by‐jurisdiction basis.
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Comparison of the nine‐month periods ended September 30, 2023 and September 30, 2022
Revenue
The following table provides a breakdown of the Company's revenue for YTD Q3 2023 and YTD Q3 2022 by reporting segment and geographic region:
(In thousands of US$) ‐ (unaudited) | YTD Q3 2023 | % change | YTD Q3 2022 |
Reporting segment | 16% | ||
Mining | 245,820 | 211,831 | |
Water | 37,683 | 11% | 33,822 |
Total revenue | 283,503 | 15% | 245,652 |
Geographic region | 33% | ||
South America | 100,088 | 75,097 | |
North America | 93,066 | 22% | 76,068 |
Asia Pacific | 52,178 | 33% | 39,342 |
Europe, Middle East and Africa | 38,171 | ‐31% | 55,145 |
Total revenue | 283,503 | 15% | 245,652 |
The uptick in revenue for the Mining and Water segments can be attributed to favorable market dynamics, with the Company having renegotiated and extended its long‐term rolling contracts since the previous year. Coupled with the Company's proven capacity to deliver, this has generated significant growth.
North American operations saw a 22% surge in activity, with revenues climbing to US$ 93.1 million in YTD Q3 2023, up from US$ 76.1 million in YTD Q3 2022. This increase primarily resulted from the early remobilization of long‐term contracts with senior clients, renewed in the previous year.
In South America, revenues spiked by 33% to reach US$ 100.1 million in YTD Q3 2023, a notable increase from US$ 75.1 million in YTD Q3 2022. This was driven by all countries ramping up their activity levels, supported by new long‐term contracts with senior companies.
In the Asia Pacific region, YTD Q3 2023 revenues rose to US$ 52.2 million, a 33% increase, reflecting the period‐over‐ period market growth and the capacity of the Company to meet demand.
In the EMEA region, revenue for YTD Q3 2023 was US$ 38.2 million, showing a 31% decrease compared to the US$ 55.1 million in YTD Q3 2022. While revenues in Southern Europe and Africa experienced a slight increase compared to YTD Q3 2022, operations in the CIS countries saw a 48% decline, primarily due to political and economic uncertainties in the region.
Gross Profit
The following table provides a breakdown of the Company's gross profit by reporting segment for YTD Q3 2023 and YTD
Q3 2022:
(In thousands of US$) ‐ (unaudited) | YTD Q3 2023 | % change | YTD Q3 2022 |
Reporting segment | 63,654 | 46% | 43,749 |
Mining | |||
Water | 10,290 | 14% | 9,044 |
Total gross profit | 73,944 | 40% | 52,793 |
In YTD Q3 2023, the gross margin, inclusive of depreciation within the cost of sales, rose to US$ 73.9 million (or 26.1% of the total revenue). This marked a significant surge compared to the US$ 52.8 million (or 21.5% of revenue) in YTD Q3
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2022. The substantial increase underscores the robust performance and efficiency of contracts.
Selling, General and Administrative Expenses
The following table provides an analysis of the selling, general and administrative expenses (SG&A):
(In thousands of US$) ‐ (unaudited) | YTD Q3 2023 | % change | YTD Q3 2022 |
Selling, general and administrative expenses | 20,705 | 12% | 18,411 |
SG&A increased compared to the same quarter last year mainly due to the level of activity. As a percentage of revenue, SG&A decreased from 7.5% in YTD Q3 2022 to 7.3% in YTD Q3 2023.
Operating result
The following table provides a breakdown of the Company's operating result for YTD Q3 2023 and YTD Q3 2022 by reporting segment:
(In thousands of US$) ‐ (unaudited) | YTD Q3 2023 | % change | YTD Q3 2022 |
Reporting..............................................................................................segment | 45,717 | 64% | 27,858 |
Mining | |||
Water | 7,522 | 15% | 6,524 |
Total operating profit | 53,239 | 55% | 34,382 |
The operating profit reached US$ 53.2 million, resulting in a US$ 18.9 million increase driven by heightened activity levels and enhanced operational margins.
Finance costs
The net financial expenses for YTD Q3 2023 stood at US$ 10.6 million, which is a rise from the US$ 8.3 million recorded in YTD Q3 2022. This uptick is primarily attributable to the increased reference interest rates over the period.
Income tax
The income tax for YTD Q3 2023 totaled US$ 11.2 million, up from US$ 7.0 million during the same period in the previous year. This figure was calculated using management's best estimate of the annual average income tax rate for the full financial year, determined on a jurisdiction‐by‐jurisdiction basis.
Seasonality
The worldwide presence of the Company reduces its overall exposure to seasonality and the influence this can have on business activity. In Canada, seasonal slow periods occur during the winter freeze and spring thaw or break‐up periods. Depending on the latitude, this can occur anytime from October until late December (freezing) and from mid‐April through to mid‐June (break‐up). Operations at mining sites continue throughout the year. In Asia Pacific and in South America, where the Company operates exclusively in the Mining segment, a seasonal slowdown in activity occurs around year‐end, during the vacation period. Certain contracts are also affected in Chile in July and August when the winter season peaks.
Effect of Exchange Rates
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The Company's operations span across a vast array of countries, each with their own functional currencies such as, Canadian Dollars, Brazilian Reals, Australian Dollars, Chilean Pesos, and Euros. The US Dollar has been adopted as the presentation currency for group reporting purposes. Over recent quarters, the US Dollar has experienced significant fluctuations in its value. This volatility has an impact on the Company's financial statements, due to the currency conversion required for financial reporting purposes.
The Company however, mitigates its net exposure to foreign currency fluctuations by balancing its costs, revenues and financing in local currencies, resulting in a natural hedge.
The exchange rates against the US Dollar for the periods under review are as follows:
Average | Average | Average | Average | Average | Average | Closing | Closing | |
Q3 2023 | Q3 2022 | Q2 2023 | Q2 2022 | Q1 2023 | Q1 2022 | Q3 2023 | Q4 2022 | |
€ | 0.92 | 0.85 | 0.92 | 0.94 | 0.93 | 0.89 | 0.95 | 0.94 |
CAD | 1.34 | 1.30 | 1.34 | 1.28 | 1.35 | 1.27 | 1.35 | 1.35 |
AUD | 1.53 | 1.46 | 1.50 | 1.40 | 1.46 | 1.38 | 1.55 | 1.47 |
CLP | 851 | 929 | 800 | 842 | 810 | 809 | 899 | 853 |
BRL | 4.88 | 5.24 | 4.94 | 4.91 | 5.19 | 5.23 | 5.02 | 5.28 |
Liquidity and Capital Resources
The following table provides a summary of the Company's cash flows for YTD Q3 2023 and YTD Q3 2022:
YTD Q3 | YTD Q3 | |
(In thousands of US$) | 2023 | 2022 |
Cash generated by operations before working capital requirements | 67,945 | 49,417 |
Working capital requirements | (23,015) | (18,526) |
Income tax paid | (9,601) | (5,685) |
Purchase of equipment in cash | (20,719) | (14,096) |
Free Cash Flow before debt servicing | 14,610 | 11,109 |
Proceeds from / (repayment of) debt | (4,895) | 2,355 |
Interests paid | (10,435) | (7,097) |
Acquisition of treasury shares | (1,097) | (927) |
Dividends paid to non‐controlling interests | (1,098) | (1,098) |
Net cash generated / (used in) financing activities | (17,525) | (6,767) |
Net cash variation | (2,915) | 4,342 |
Foreign exchange differences | (854) | (635) |
Variation in cash and cash equivalents | (3,769) | 3,708 |
Cash and cash equivalents at the end of the period | 25,640 | 27,631 |
In YTD Q3 2023, the cash generated from operations before working capital requirements amounted to US$ 67.9 million compared to US$ 49.4 million in YTD Q3 2022, a 37% increase.
During the same period, the working capital requirements reached US$ 23.0 million, up from US$ 18.5 million in the previous year. The additional working capital requirement is a result of the heightened activity levels.
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During the period, Capex totaled US$ 20.7 million in cash compared to US$ 14.1 million in YTD Q3 2022. Capex relates essentially to the acquisition of rigs, major rig overhauls, ancillary equipment and rods. Three large rigs were added to the fleet during the period.
As at September 30, 2023, cash and cash equivalents totaled US$ 25.6 million compared to US$ 29.4 million as at December 31, 2022. Cash and cash equivalents are mainly held at or invested within top tier financial institutions.
As at September 30, 2023, the net debt including operational lease obligations (IFRS 16) amounted to US$ 79.5 million (US$ 76.2 million as at December 31, 2022).
The Net debt to EBITDA ratio as at September 30, 2023 was 0.9 (1.1 at year‐end 2022) reflecting enhanced financial position in a quarter generally affected by increased activity and associated working capital requirements.
Bank guarantees as at September 30, 2023 totaled US$ 7.2 million compared to US$ 9.4 million as at December 31, 2022.
Cash Transfer Restrictions
Foraco operates in a number of different countries where cash transfer restrictions may exist. The Company limits its activities in countries where there are such restrictions. No excess cash is held in countries where cash transfer restrictions are in force.
Related‐Party Transactions
For details of related‐party transactions, please refer to Note 14 of the unaudited condensed interim consolidated financial statements.
Capital Stock
As at September 30, 2023, the total common shares of the Company are distributed as follows:
Number of | |
shares | |
Common shares held directly or indirectly by principal shareholders | 34,155,191 |
Common shares held directly or indirectly by individuals in their | |
capacity as members of the Board of Directors (*) | 698,462 |
Common shares held by the Company (**) | 796,469 |
Common shares held by the public | 63,601,676 |
Total shares issued and outstanding | 99,251,798 |
Common shares held by the Company | (796,469) |
Total common shares issued and outstanding | 98,455,329 |
*In the table above, the shares owned indirectly are presented as an amount corresponding to the pro rata of the ownership interest
**796,469 common shares are held by the Company to meet the Company's obligations under the employee free share plan.
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Foraco International SA published this content on 30 October 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 02 November 2023 07:51:45 UTC.