Foraco International Reports Q3 2013

Return to profitability

Improved financial indicators quarter over quarter

TORONTO AND MARSEILLE, FR, Nov. 5, 2013 /CNW/ - Foraco International SA (TSX:FAR) (the "Company" or "Foraco"), a leading global provider of mineral drilling services, today reported unaudited financial results for its third quarter 2013. All figures are reported in US Dollars (US$), unless otherwise indicated.

Three months Q3 2013 Highlights

Revenue

  • Q3 2013 revenue amounted to US$ 66.2 million compared to US$ 103.2 million in Q3 2012, a decrease of 36%.  Excluding the impact of the JND acquisition, revenue decreased by 51%.

Profitability

  • Q3 2013 gross profit including depreciation within cost of sales was US$ 9.9 million (15% of revenue) compared to US$ 20.6 million in Q3 2012 (20% of revenue).
  • The Company has adapted its structure to the contraction of the market with significant reduction of operating and SG&A costs. The financial indicators have improved quarter over quarter:
             
in millions of US$ - unaudited   Q3 2013   Q2 2013   Q1 2013
Operations            
  Revenue   66.2   74.6   59.8
  Cost of sales   (56.3)   (75.5)   (68.5)
  Gross profit   9.9   (0.9)   (8.7)
  Gross profit after depreciation as a % of revenue   15%   (1%)   (15%)
  Gross profit before depreciation as a % of revenue   30%   13%   3%
  One-off costs in cost of sales   (1.8)   (7.0)   (9.9)
  Gross profit before depreciation and one-off costs   21.6   16.7   11.7
  Gross profit before depreciation and one-off costs as a % of revenue   33%   22%   20%
SG&A            
  SG&A   (7.4)   (8.3)   (9.0)
  One-off costs in SG&A   (0.7)   (0.4)   (0.4)
  SG&A excluding one-off costs   (6.7)   (7.9)   (8.6)
              
Total headcount   1,880   2,219   3,349
Utilization rate   35%   46%   37%
Under absorption of fixed operational costs   (5.7)   (7.2)   (10.8)
               
  • The improvement in gross profit is mainly explained by:
    • The ending of two troubled key contracts in Chile which negatively impacted previous quarters (losses of US$ 7.2 million and US$ 5.2 million in Q1 and Q2 2013, respectively).
    • The reduction in all operational and support costs, with a significant decrease in headcount and the continued implementation of the company-wide cost cutting action plan.
  • Capital expenditures were strictly controlled: Q3 2013: US$ 2.3 million, Q2 2013: US$ 2.9 million, Q1 2013: US$ 3.6 million.
  • Net Debt at each quarter end was: Q3 2013: US$ 134.6 million, Q2 2013: US$ 137.3 million, Q1 2013: US$ 139.6 million, Q4 2012: US$ 137.5 million.

Nine months Q3 2013 Highlights

Revenue

  • YTD Q3 2013 revenue amounted to US$ 200.6 million compared to US$ 298.0 million in YTD Q3 2012, a decrease of 33% due to the low level of exploration activities of mining companies in all regions which significantly impacted the activity since Q4 2012.

Profitability

  • YTD 2013 gross profit including depreciation within cost of sales was nil compared to US$ 67.8 million in YTD Q3 2012.
  • In accordance with IFRS an operating profit of US$ 18.8 million was recorded in H1 2013 to reflect the reassessed value of the second tranche payable to Servitec minority shareholders.
  • YTD Q3 2013 EBIT amounted to US$ (5.5) million compared to US$ 41.4 million in YTD Q3 2012.

"We posted a profit for this quarter, with financial indicators improving quarter over quarter since the beginning of the year. This return to profitability is the result of the positive contribution of the vast majority of our contracts, the ending of the two loss making contracts in Chile and the continued effect of the cost cutting action plan implemented since Q4 2012. This performance has been achieved in spite of an economic environment which continues to be challenging and a utilization rate which has remained low at 35% in Q3", said Daniel Simoncini, Chairman and co-CEO of Foraco. "The reduction in operational and support headcount included 339 employees during the quarter to reach a total of 1,469 since the beginning of the year. This impacted all categories of personnel, from senior managers to operational staff. However, particular emphasis was placed on retaining technical expertise and know-how, which will allow the Company to benefit from a future upturn in the market."

"Quarter over quarter, our gross profit as a percentage of revenue has dramatically improved from -15% in Q1 to -1% in Q2 and to +15% in Q3.This Q3 gross profit of US$ 9.9 million includes one-off costs of  US$ 1.8 million and under-absorption of US$ 5.7 million.  Additionally, SG&A costs excluding one-off costs have decreased by 21% since Q4 2012. In spite of one-off costs and low utilization rate, EBITDA for the quarter reached US$ 12.4 million or 19% of revenue" commented Jean-Pierre Charmensat, co- CEO and Chief Financial Officer. "Capex and working capital remain strictly controlled, and our net debt amounts to US$ 134.5 million as at September 30, 2013, slightly down from the US$ 137.5 million as at December 31, 2012. This includes US$58.9 million of drawn credit lines rolled over on a yearly basis, some having already been confirmed for more than 12 months. Credit lines are granted individually by several banks and are mostly unsecured with no covenants. At September 30, 2013, we have cash available amounting to US$ 37.5 million and unused available credit lines of US$ 57.7 million. Discussions with banks related to amendments to the long term financing debt covenant and to securing further long term financing are progressing positively and should be concluded in the coming months."

Acquisition of businesses

Servitec

On April 20, 2012, the Company completed the acquisition of a 51% shareholding in WFS Sondagem S.A. ("Servitec"), a Brazilian drilling service provider, for an amount of US$ 44.2 million. As part of this agreement, the Company has an option to acquire, and the current minority shareholders of Servitec have an option to sell, the remaining 49% after three years. The corresponding purchase consideration will depend upon a formula based on the average 2012, 2013 and 2014 EBITDA of Servitec and on the net cash as at December 31, 2014. A first estimate at transaction date of the present value of the amount payable was US$ 57.0 million. As a result of the change in market conditions, the Company revised this estimate and adjusted the amount payable to US$25.3 million as at September 30, 2013. In accordance with IFRS 3, an adjustment amounting to US$ 18.8 million was accounted for within other operating income in the six-month period ended June 30, 2013. As at September 30, 2013, the Company considers that the situation does not require a further adjustment to be recorded.

Servitec has been consolidated into the Foraco International financial statements since April 20, 2012. The financial statements for the nine-month period ended September 30, 2012 did not include the full contribution of Servitec.

John Nitschke Drilling

On November 19, 2012, the Company acquired a 100% shareholding in John Nitschke Drilling, ("JND"), an Australian drilling service provider, through a combination of AU$ 30 million (US$ 31.2 million) in cash, an earn out amount and the issuance of 7,000,000 shares in August 2013.

JND has been consolidated into the Foraco International financial statements since November 19, 2012. The financial statements for the three month and nine-month periods ended September 30, 2012 did not include the contribution of JND.

Selected financial data        
         
(In thousands of US$)
(unaudited)
  Three-month period ended
September 30,
  Nine-month period ended
September 30,
    2013   2012   2013   2012
                 
Revenue   66,212   103,240   200,635   298,008
                 
Gross profit (1)   9,872   20,638   276   67,755
As a percentage of sales   14.9%   20.0%   0.1%   22.7%
                 
EBITDA   12,395   21,260   25,593   69,052
As a percentage of sales   18.7%   20.6%   12.8%   23.2%
                 
Operating profit / (loss)   2,444   11,363   (5,548)   41,413
As a percentage of sales   3.7%   11.0%   -2.8%   13.9%
                 
Profit / (loss) for the period   887   6,992   (4,422)   27,458
                 
Attributable to:                
Equity holders of the Company   (949)   3,061   (7,080)   21,748
Non-controlling interests   1,836   3,931   2,658   5,710

   
(1) includes amortization and depreciation expenses related to operations
   

Financial results                      
                       
Revenue                      
                       
(In thousands of US$)
(unaudited)
Q3 2013   % change   Q3 2012   YTD 2013   % change   YTD 2012
Reporting segment                      
Mining......................................... 64,416   -37%   101,575   193,837   -33%   289,143
Water..........................................  1,796   8%   1,665   6,798   -23%   8,865
Total revenue.............................. 66,212   -36%   103,240   200,635   -33%   298,008
                       
Geographic region                      
South America............................  17,466   -67%   52,250   67,331   -53%   142,572
Europe, Middle East and Africa.... 18,442   -24%   24,200   56,016   -29%   79,338
North America.............................  13,278   -34%   20,103   32,870   -37%   52,327
Asia Pacific................................. 17,026   155%   6,687   44,418   87%   23,770
Total revenue ............................ 66,212   -36%   103,240   200,635   -33%   298,008
                       

Since Q3 2012, Europe, Africa and Middle East have been grouped into one geographic region for management and reporting purposes (EMEA). Previously, Africa and Europe were presented separately.

Q3 2013

Q3 2013 revenue amounted to US$ 66.2 million compared to US$ 103.2 million in Q3 2012, a decrease of 36%.  Excluding the impact of the acquisition of JND, revenue decreased by 51% due to the continued low level of exploration activity of mining companies recorded in all regions.

Revenue in South America amounted to US$ 17.5 million in Q3 2013 (US$ 52.3 million in Q3 2012), a decrease of 67%. Excluding Brazil, revenue decreased by 85% due to reduced activities in ongoing contracts and the end of certain contracts in Chile and Argentina.

In EMEA, revenue decreased by 24%, from US$ 24.2 million in Q3 2012 to US$ 18.4 million in Q3 2013. This is mainly due to reduced activity levels across West Africa (-44%).

Revenue in North America decreased by 34%, from US$ 20.1 million in Q3 2012 to US$ 13.3 million in Q3 2013. This decrease was mainly due to reduced activity levels in Eastern and Western Canada.

In Asia Pacific, Q3 2013 revenue amounted to US$ 17.0 million, an increase of 155% compared to Q3 2012 as a result of the integration of JND since November 19, 2012. Excluding this acquisition, revenue decreased by 43% compared to Q3 2012.

YTD 2013

YTD 2013 revenue amounted to US$ 200.6 million compared to US$ 298.0 million in YTD Q3 2012, a decrease of 33%.  Excluding the impact of acquisitions made during fiscal year 2012, revenue decreased by 51% due to the continued low level of exploration activity of mining companies recorded in all regions.

Revenue in South America amounted to US$ 67.3 million in YTD Q3 2013 (US$ 142.6 million in YTD Q3 2012), a decrease of 53%. Excluding the acquisition of Servitec in Brazil during Q2 2012, revenue decreased by 73% due to reduced activities in ongoing contracts and the end of some contracts in Chile and Argentina.

In EMEA, revenue decreased by 29%, from US$ 79.3 million in YTD Q3 2012 to US$ 56.0 million in YTD Q3 2013. This is mainly due to reduced activity levels across West Africa (-51%) partially compensated by a 22% increase activity in Europe in both France and Russia.

Revenue in North America decreased by 37%, from US$ 52.3 million in YTD Q3 2012 to US$ 32.9 million in YTD Q3 2013. This decrease was mainly due to reduced activity levels in Eastern Canada and weather related delays in Western Canada.

In Asia Pacific, YTD Q3 2013 revenue amounted to US$ 44.4 million, an increase of 87% compared to YTD Q3 2012 as a result of the integration of JND since November 19, 2012. Excluding this acquisition, revenue decreased by 43% compared to YTD Q3 2012.

Gross profit                      
                       
(In thousands of US$)
(unaudited)
Q3 2013   % change   Q3 2012   YTD 2013   % change   YTD 2012
Reporting segment                      
Mining........................  9,560   -53%   20,255   (460)   -101%   65,281
Water.........................  312   -19%   383   736   -70%   2,474
Total gross profit........ 9,872   -52%   20,638   276   -100%   67,755
                       

Q3 2013

Q3 2013 gross profit including depreciation within cost of sales was US$ 9.9 million (or 15% of revenue) compared to US$ 20.6 million in Q3 2012 (or 20% of revenue).

Significant actions have been taken to reduce the cost base and adapt the organization to the lower activity levels.

YTD 2013

YTD Q3 2013 gross profit including depreciation within cost of sales was nil compared to US$ 67.8 million in YTD Q3 2012.

This reduction in Gross profit is the result of (i) reduced contract contributions, (ii) under absorption of fixed operational cost, (iii) contract losses in Chile, (iv) redundancy costs, and (v) net impact of pricing and productivity.

Selling, General and Administrative Expenses              
               
(In thousands of US$)
(unaudited)
Q3 2013 % change Q3 2012   YTD 2013 % change YTD 2012
               
Selling, general and administrative expenses 7,428 -20% 9,275   24,649 -6% 26,342
               

Q3 2013

SG&A decreased by US$ 1.8 million compared to Q3 2012. These savings are the result of the continued implementation of the company-wide cost cutting action plan. Non-recurring redundancy costs of US$ 0.8 million during the period mainly relate to the departure of two senior managers.

YTD 2013

YTD Q3 2012 SG&A expenses do not include the full impact of the 2012 acquisitions (JND was purchased in November 2012 and Servitec in April 2012).

The continued implementation of the company-wide cost cutting action plan resulted in a reduction of 29% of SG&A headcount since December 31, 2012, a year on year saving of US$ 4 million. The related non-recurring redundancy cost of US$ 1.5 million is included in the period.

Operating profit              
               
(In thousands of US$)
(unaudited)
Q3 2013 % change Q3 2012   YTD 2013 % change YTD 2012
Reporting segment              
Mining.............................   2,333 -79% 11,130   (5,386) -114% 39,717
Water..............................  111 -52% 233   (162) -110% 1,696
Total operating profit......   2,444 -78% 11,363   (5,548) -113% 41,413
               

The YoY difference is the result of the changes in gross profit and SG&A described above.

In addition, during H1 2013, the Company reestimated at US$ 24.9 million the present value of the amount payable related to the second phase of the Servitec acquisition, compared to US$ 43.7 million as at December 31, 2012. The adjustment amounting to US$ 18.8 million was recorded in other operating income and expense within operating profit in accordance with IFRS 3. No adjustment was deemed necessary during the third quarter.

Financial position

The following table provides a summary of the Company's cash flows for YTD 2013 and YTD 2012:

     
(In thousands of US$) YTD Q3 2013 YTD Q2 2012
     
Cash generated from operations before working capital requirements 6,860 69,367
Working capital requirements, interest and tax (3,677) (32,536)
Net cash flow from operating activities 3,183 36,831
     
Purchase of equipment in cash (8,361) (32,284)
  Consideration payable related to acquisitions - (17,223)
Net cash used in investing activities (8,361) (49,507)
     
Drawing from credit lines, net 16,700 28,711
Acquisition of treasury shares (1,556) (1,945)
Dividends paid (5,983) (7,068)
Net cash from financing activities 9,161 19,698
     
Exchange differences (2,348) 426
Variation in cash and cash equivalents 1,635 7,448
     

For the nine-month period ended September 30, 2013, cash used in operations before changes in operating assets and liabilities amounted to US$ 6.9 million compared to US$ 69.4 million of cash generated during the same period a year ago.

After working capital requirements, interest and income tax paid, the net cash used in operations was US$ 3.2 million in YTD Q3 2013 compared to US$ 36.8 million of cash generated during the same period a year ago.

During the period, the Company acquired operating equipment for US$ 8.4 million in cash. This compares to a total of US$ 32.3 million in cash purchases during YTD Q3 2012.

As at September 30, 2013, cash and cash equivalents totaled US$ 37.5 million compared to US$ 35.9 million as at December 31, 2012. Cash and cash equivalents are held at or invested within top tier financial institutions.

As at September 30, 2013, the net debt amounted to US$ 134.6 million (US$ 137.5 million as at December 31, 2012). The ratio of debt (net of cash) to shareholders' equity increased to 0.73 from 0.62 as at December 31, 2012 mainly as a result of the cash used in the period.

On September 30, 2013, financial debts and equivalents amounted to US$ 172.1 million (US$ 175 million as at December 31, 2012). The financial debt also includes the present value of the consideration payable in 2015 for the acquisition of the remaining shares of Servitec totaling US$ 25.3 million.

As at September 30, 2013, the financial debt is as follows (in thousands of US$):

Maturity Roll-over October 1,
2013 to
September
30, 2014
October 1,
2014 to
September
30, 2015
October 1,
2015 to
September
30, 2016
October 1,
2016 to
September
30, 2017
October 1,
2017 to
September
30, 2018
Total
Drawn credit lines rolled over on
a yearly basis
50,893 - - - - - 50,893
Long term financing related to:              
- Drawn credit lines rolled over
confirmed for at least 12 months
8,000 - - - - - 8,000
- Brazil acquisition - 4,326 4,326 4,326 4,326 - 17,305
- Australia acquisition - 6,760 6,760 6,760 6,760 6,760 33,800
- Acquisition of fixed assets - 8,525 7,861 6,615 4,736 1,818 29,556
- Acquisition of fixed assets
through capital leases
- 5,369 1,579 203 26 - 7,177
               
Total 58,893 24,980 20,526 17,905 15,848 8,578 146,731
               

The Company has used and unused short-term credit facilities amounting to US$ 116.6 million out of which US$ 58.9 million was drawn as of September 30, 2013. These facilities are granted individually by several banks, mainly in France, Canada and Chile. They are generally granted on a yearly basis and are subject to review at various dates. They are not subject to any covenant obligations. A relatively small portion of the credit facilities, in Canada, is secured by short term receivables and inventories.

The Company is subject to certain covenants linked to two long term debt financings related to the 2012 acquisitions of Servitec and JND. These covenants are mainly related to a net debt / EBITDA ratio which is measured as at December 31 of each year. A breach of these covenants as of this date requires the initiation of discussions with the representative of the lenders, but would not result in an automatic acceleration of debt repayment. Negotiations with the representatives of the lenders are being carried out and should be concluded in the coming months.

Bank guarantees as at September 30, 2013, totaled US$ 24.3 million compared to US$ 22.8 million as at December 31, 2012.

Going concern and impairment testing

Based on internal forecasts and projections which are regularly updated in order to take into account foreseeable changes in the Company's  operating performance, the Company believes that it has adequate financial resources to continue in operation and meet its financial commitments (mainly related to debt service obligations) for a period of at least twelve months. In addition, impairment tests based on expected discounted cash flows were performed at the level of each business segment and geographic area as at June 30, 2013 and indicated that no impairment was required on the carrying values of the long lived assets for each business segment and geographic area. As at September 30, 2013, the Company considers that the situation does not require impairment tests to be updated.

Currency exchange rates

The exchange rates for the periods under review are provided in the Management's Discussion and Analysis of Q3 2013.

Outlook

The Company continues to carefully follow the evolution of the market and considers that beyond its efforts to adapt to short term demands, it has nevertheless retained its capacities in terms of technical expertise and know-how which will allow it to benefit from a future upturn in the market.

Conference call and webcast

On November 5, 2013, Company Management will conduct a conference call at 10:00 am ET to review the financial results. The call will be hosted by Daniel Simoncini, Chairman and CEO, and Jean-Pierre Charmensat, Vice-CEO and CFO.

You can join the call by dialing 1- 888-231-8191 or 647-427-7450. You will be put on hold until the conference call begins. A live audio webcast of the conference call will also be available through http://www.newswire.ca/en/webcast/detail/1250733/1378205, or on our website.

An archived replay of the webcast will be available for 90 days.

About Foraco International SA 

Foraco International SA (TSX: FAR) is a leading global mineral drilling services company that provides a comprehensive and reliable service offering in mining and water projects. Supported by its founding values of integrity, innovation and involvement, Foraco has grown into the third largest global drilling enterprise with a presence in 23 countries across five continents. For more information about Foraco, visit www.foraco.com.

"Neither TSX Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Exchange) accepts responsibility for the adequacy or accuracy of this release."

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 by the use of words such as "may", "will", "should", "plans", "expects", "intends", "anticipates", "believes", "budget", and "scheduled" or the negative thereof or variations thereon 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 April 2, 2013, which is filed with 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.

SOURCE Foraco International SA



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