This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: This conference has been recorded. Cette conférence est enregistrée. All participants, please stand by. Your conference is ready to begin. Good morning, ladies and gentlemen, and welcome to the fourth quarter 2023 results conference call. I would now like to turn the meeting over to Chantal Melançon. Please go ahead, Ms. Melançon.
spk00: Thank you, and good morning, everyone. As mentioned, we would like to welcome you to Major Drilling's conference call for the fourth quarter of fiscal 2023. On the call, we will have Denis Larocque, President and CEO, and Ian Ross, our Chief Financial Officer. Our results were released yesterday evening and can be found on our website at www.majordrilling.com. We also invite you to visit our website for further information. Before we get started, we'd like to caution you that during this conference call, we will be making forward-looking statements about future events or the future financial performance of the company. These statements are forward-looking in nature, and actual events or results may differ materially from those currently anticipated in such statements. I will now turn the presentation over to Denis Larocque. Please go ahead.
spk01: Thank you, Chantal. And good morning, everyone, and thank you for joining us today. I must say I'm quite happy with the progress our company has made this year, considering that major drilling generated the second highest annual revenue in the company's history. at a time where mineral exploration expenditures is still at only 60% of the amount spent at the peak in 2012. This allowed us to grow our EBITDA to $1.74 per share, and we saw our net earnings grow by 40% to close the year at $75 million, again, the second highest in our company's history. What I'm particularly proud about is the fact that despite this growth, and adding new crews, we were able to achieve a new milestone of 9.4 million hours worked without a lost time injury, achieving an industry-leading LTI rate of 0.05. This shows the dedication and attention of our employees in applying the company's tools like the Take 5 program and our 10 life-saving rules. Also, I commend our recruiting and training teams for their success in the development of our workforce at a time when we brought in a significant number of new employees over the last two years. Great job, everyone, and please continue to stay safe. Looking at the fourth quarter, as mentioned on the last call, the quarter got off to quite a slow start with challenging weather conditions in Nevada, northern Canada, and February. which affected our revenue for the quarter. Fortunately, we were pleased to see robust activity levels return by the end of the quarter and moving in the first quarter. The strong performance this year allowed us to grow our net cash position by $61 million during the year to $59 million net cash at the end of the year, while at the same time continuing to modernize our fleet and invest in our future. With that, Ian will walk us through the quarter's financials, and then I'd like to discuss the market outlook before opening the call to questions.
spk06: Ian? Thanks, Denis. Revenue for the quarter was $185 million, down 2.6% from revenue of $190 million recorded in the same quarter last year. Despite a slow start to the quarter due to weather impacts in our larger markets, activity levels rebounded to finish the quarter off strongly. The quarter saw a favorable foreign exchange translation impact on revenue when compared to the effective rates for the same period last year of approximately $7 million. The overall gross margin percentage, excluding depreciation, was 30.8% for the quarter compared to 31% in the same period last year. Margins held steady year over year as inflationary headwinds have largely been covered through price increases and enhanced productivities. G&A costs were up $1.1 million at $16.3 million when compared to the same quarter last year. The increase in the prior year was mainly attributed to increased employee compensation in keeping with rising inflation, increased insurance costs, and increased travel costs with the ease of COVID-19 restrictions. Other expenses were $4 million up from $3.4 million in the prior year quarter due to an increase in the annual allowance for doubtful accounts, offset somewhat by lower incentive compensation expenses throughout the company given the decreased profitability as compared to the prior year quarter. The income tax provision for the quarter was an expense of $5.3 million compared to an expense of $6.5 million for the prior year period. The decrease in the tax expense was related to a reduction in overall profitability. Net earnings were $20.8 million or $0.25 per share compared to net earnings of $22.4 million or $0.27 per share for the prior year quarter. Our operational leverage remains prominent as we generated $37.2 million in EBITDA in the quarter. With the strong cash generation, we spent $16.6 million on capital expenditures, including the purchase of five new drill rigs and support equipment for existing rigs being deployed to the field. To continue our fleet modernization, we also disposed of seven older, less efficient rigs, bringing the total rig count to 600. Despite the typical fourth quarter ramp-up in receivables, we were pleased to end the year with $59.3 million in net cash. With the company in excellent financial position, we announced a normal course issuer bid to provide additional flexibility to our capital allocation strategy. The company will not instate an automated share purchase plan, however, will look to repurchase shares at opportunistic valuations in order to maximize the value for our shareholders as we move through the current industry cycle. The new breakdown of our fleet and utilization is as follows. 291 specialized drills at 47% utilization, 111 conventional drills at 41% utilization, 198 underground drills at 46% utilization, for a total of 600 drills at 46% utilization. As we've mentioned before, specialized work, in our definition, is not necessarily conducted with a specialized drill. Rather, it is work that requires that we meet the rigorous standards of our customers in terms of technical capabilities, operational and safety standards, and other related factors. Over time, we expect these standards to be increasingly important to our customers. In the fourth quarter, revenue from specialized work accounted for 66% of our total revenue, up from 63% in Q3, while our underground drilling revenue was 24%, down from 28% in Q3. The ramp up of our specialized work coming out of the holiday season explains the shift in our revenue mix as our underground operations held steady but decreased as a total percentage of revenue with the other categories growing. Conventional drilling, which is typically driven by juniors, made up 10% of our revenue, up slightly from 9% in Q3 as activity levels remain impacted by access to capital. As mentioned, revenue from juniors continues to be impacted by tight financing markets accounting for 24% of our revenue while seniors and intermediates helped offset the impact of juniors with expanded programs providing 76% of our revenue. This quarter saw gold activity return from lower levels in Q3, representing 47% of our revenue, in line with historic norms of 50%. Battery metals continued supporting the uptick in the industry as we are seeing strong demand from copper, nickel, and lithium. Nickel was 9% of revenue and lithium 5%, which are both up significantly year over year. With that overview on our financial results, I'll now turn the presentation back to Denis to discuss the outlook. Thanks, Ian.
spk01: Looking ahead to fiscal 2024, the outlook for major drilling remains extremely positive as most industry experts believe the anticipated copper and gold supply deficit will further drive the urgent need to replenish reserves. I'd like to come back to a comment I made at the start of the call. Despite the urgent need to replenish mineral reserves, both gold and base metal, the industry is still only at 60% of what was spent in exploration at the peak after a decade of low exploration levels. According to S&P Global Market Intelligence, global non-ferrous exploration budgets increased to $13 billion in 2022, which is 60% of the $21.5 billion spent in 2012, which if you were to adjust for inflation, means that less than 50% of the effort spent during the last upcycle. The mining industry is still in the discovery phase and will have to go through an intense multi-year process infill drilling period to develop those new mines in order to fill the projected supply gap in the different commodities. Therefore, we expect all of this to lead to substantial additional investment in exploration projects as we help our customers discover the metals that will allow the world to accelerate efforts towards decarbonization. And as the growing global demand for EVs increases, the need to find metals like copper, nickel, lithium will only increase. But above the demand created for EVs, governments around the world also need to build the infrastructures to meet this demand for electricity, which will add a layer of demand above what is already needed. And as the new mineral deposits will be increasingly located in areas more challenging to access or requiring more complex drilling solutions. We continue to see our strategy to focus on specialized drilling as being key to providing top quality service to our valued customers. Therefore, as part of our ongoing efforts to prepare for future increases in activity, and what is lining up to be a busy calendar 2024, the company expects to spend approximately $80 million in capital expenditures in fiscal 2024. We will, however, remain vigilant and flexible in order to react and adjust to unforeseen market conditions. There's a need to increase the number of specialized and underground drills in some of our busiest markets, to continue to meet and exceed the rigorous standards of our customers. As well, we'll be retrofitting some of our drills with updated technology and rod handling capabilities. This falls in line with the enhancement of our recruiting and training systems as we bring in new generation of employees while strengthening our customer service. And through this, we will continue to invest in ESG with energy-efficient solutions on and around our drills with systems such as energy-efficient drill heating system, solar-powered lighting towers, and water recirculation systems. And speaking of ESG, over the next few weeks, we will be coming out with our sustainability report detailing all of our ESG initiatives in calendar 2022 and highlighting major drilling's work to advance our environmental, social, and governance strategies. It will touch on our ongoing carbon emission reduction efforts and the fact that we've been able to decrease our GSG emissions intensity by 12%. On the social front, we'll be highlighting our culture of safety through all the initiatives we have in place. Also, I'm very proud to be able to showcase in the report all the great work our branches are doing around the world and in the communities where we operate. Finally, I want to thank our more than 3,500 employees around the world for your enthusiasm, great ideas, amazing dedication, and unquestionable loyalty that have been truly impressive. This year, I've traveled to many different sites across the company, and I'm always amazed by the passion and commitment of our crews and staff to safety and getting the job done. This is what makes Major Drawing a great company. Thank you for a great year and continue to stay safe. With that, we can open the call to questions. Maud?
spk02: Thank you. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your handset before making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from Dahil Young from TD Cohen. Please go ahead.
spk05: Hey, good morning, guys. Good morning. First question is a bit of a two-part question around the Outlook and the CapEx. trying to get a sense of maybe how much of your business is already booked and contracted for the year relative to what you just reported in 2023. And then the second part of it is there's some language around the capex. It sort of caveats that maybe it all won't be spent. Is that a function of if you get the contracts, then you would add the rigs and that's when we would see growth?
spk08: Okay.
spk01: To the first part of your question, the work we have ongoing right now, most of it is booked to, well, before Christmas. As you know, there's always a slowdown at Christmas. So, and typically, a lot of our contracts tend to be a year long, and we have a few of our base contracts that are multi-year. But even for the ones that are for one year, a lot of those have been ongoing for years. It's just the contract gets renewed when things change. turn around most of the time around that January, December, January time. So in very good shape there. And in terms of the capex, we will adjust if there was... When we put the caveat there, it's basically if there was a big turn in the commodity cycle, not necessarily... having contracts in hand. To get rigs in hand for the beginning of calendar 2024, we need to place orders early. Some we might have to put right now, some we might have to put in the summer or in the fall. And so for us, our plan is if things remain the same, that we'll be looking at placing those orders and then those orders coming in in Q4 or in January, that's what makes up like that extra in that $80 million. Now, our thinking there is that to do our fiscal 2024, we have a budget of CapEx, which is in line with what we've had over the last couple of years. But the extra is really to get ready for the next year because what we're seeing out there is we're talking to customers and although it's still very early to make calls on 2024, we're having conversations and what we're hearing is that People are gearing up, and as I mentioned, to be able to bring mines into production, you need a lot more infill drilling, which means that you need to intensify your drilling campaign on existing projects, or you need to get out there and find some more. And from the seniors, when we're talking on certain projects, that's kind of what we're getting, And then when we talk to investment banking firms, right now we understand it is a difficult time to raise money and in the commodity world right now might not be, you know, everything's not rosy in terms of raising money. The fact is that there's a lot of companies out there that have all their ducks in a row And all that's missing is the financing. So the minute that there's a turn in the financing window, there could be a lot of financings and mine income or juniors or even some intermediates will be ready to go and deploy those capital. Contrary to what we saw in 2020, in 2020, there was the window open. You had all these people go raise money, but They didn't have their plans ready. They didn't have permits. They basically played catch-up, and there was kind of a bit of a delay, but also a ramp-up that was, I wouldn't call it disorganized, but it was kind of as you go, like they were getting those things in place. This time around, A lot of them have their perspectives ready, they've got permits ready, they've got their plans, they know what they want to do, and all that's missing is the financing. So once this whole copper supply gap hits Main Street, and we see financing come back, I think that's where things could unravel fairly quick and strong. But this is all based on history. Again, if you go look at what happened in the previous cycle, 2005 and 2006 was kind of similar to now, and then everything really ramped up between 2006 and 2007, and then 2008, and then on to 2012. So that's the thinking we have. And that's why we've put that extra capex is to be ready for that. And some of our markets right now are already very busy in terms of utilization. So it's to give us the ability to add more rates to those markets so we don't miss the opportunity if it comes. Sorry, it's a long-winded answer to your question, but I hope, like I was trying to position the idea of why we we have put that extra capex budget in place.
spk05: That was a great color and it was a long-winded question to kick it off with. Just one more on the NCIB versus M&A. Your shares are trading now down where you've done some acquisitions in the past at similar valuations. How are you balancing the trade-off between the strategic benefits of acquisitions versus buying back your own shares?
spk06: Yeah, thanks, Daryl. I think you just nailed it on the head right there with our current valuation, and that's why we wanted to get it in place. These are historic low multiples we're trading at right now, so that's exactly the conversations we're having internally is does M&A make sense or does our own shares? And at current valuations, I think there's a great opportunity out there.
spk05: Perfect. I'll jump back into the queue. Thanks, guys.
spk02: Thank you. The following question is from Gordon Lawson from Pranding Capital. Please go ahead.
spk04: Hey, good morning. Thank you for taking my question. I have one for you today. Can you please elaborate on the Mexico mining reform and if you're planning on shifting your focus away from juniors and more towards producers of, say, silver and gold in that region? Thank you.
spk01: Yeah. You're right. The Mexico reform will make tricky for investments going forward, that's for sure. But there's still good prospects out there. But like you said, for juniors, it will make it a bit more difficult. Having said that, for us, it has been difficult. difficult already, the juniors, what we've seen. So it's not like it's bringing things to a halt for us. The work that we have ongoing right now, most of it is with intermediate and seniors that are well financed. So we don't see that having a big impact on us in the short term. But we'll see how things play out in the in the long term in terms of just, as you mentioned, the juniors being able to raise capital for Mexican projects.
spk08: Okay, great. Thank you very much.
spk02: Thank you. Our following question is from Shannon Goats from SG Capital. Please go ahead.
spk05: Congrats on the quarter, guys. I saw revenue was up by 13.1%. I was just wondering if you could comment how much of that was driven by price and how much that was driven by new volume.
spk01: Yeah. For the year, our revenue was up 13%. There's... Basically, if I had to give you an answer on that, probably half of it would be price and half of it would be volume. During the year, last year, we had a good price increase environment, but that's because it was coming from really low low levels coming out of the downturns and everything so we were able to normalize prices last year and this year basically what we saw as an inflation was uh in line with uh with the rest of the industry great and then just just another one on utilization rates for for your rigs um how should we think about kind of the the difference between the utilization rates for rigs that you purchase
spk05: versus the utilization rates for the rigs that you've been divesting recently?
spk01: Well, the rigs that we divest, for the most part, they haven't been utilized in a few years. They were rigs that, usually rigs we divest are rigs that are parked in the back, and the way we operate is, As you put more rigs in the field, you take rigs in the back. We do have some. We have kind of a cycle where we always have some on the shelf ready to go, and we have some in the back that haven't been touched since the last downturn. And as we put a rig in the field, we bring a rig from the back in the shop, and we reassess the fleet. And that's where you get to the point where you say, okay, well, that rig with all rigs with the new kind of standards or would cost too much to retrofit to bring back. So that's where we make the choice of buying a new rig or just discarding that rig. So for us, that's how we look at that. And also from a utilization rate, The utilization rate is not equal in all of our markets. We have some markets where we're close to max utilization. And by the way, I want to remind people, in our world, max utilization, the way we count utilization is 75%. When we reach 75, the highest we've ever reached, and that was when the effective fleet, I would call it, was utilized because there's rigs always in motion or rigs that Basically, you've got different types of rigs. So the highest we've ever been is 78. So 75 is kind of max. So we have a few branches that are close to that. And when you get close to that, that's where you say when the branch comes in and says, I have a customer that wants a rig or I have an opportunity. that's where you basically say, yeah, no, I mean, we need, so that's where we add rigs. So that's where a lot of our new rigs have been going is to markets that are busy. And the other markets, the utilization is lower, but we don't necessarily want to move out and rigs out of those markets because it could change real quick and we wouldn't want to be out of position. That's why we keep our fleet in those regions.
spk08: Great, thanks.
spk07: Thank you.
spk02: Once again, please press star 1 at this time for any questions or comments. Our following question is from James Vail from Arcadia Advisors. Please go ahead.
spk03: Thank you. Good morning. Ian, can you give some idea of how much the weather in that quarter actually hurt in dollar claims that kind of give us an idea what the earning power of the company is right now? And secondly, in the current quarter, are the forest fires going to have an impact similar to what the weather did in the last quarter?
spk08: Hi, Jim.
spk01: Yeah, the quarter was going off to a slow start. Probably if we were to compare to to what it could have been, we were probably off by 10% for the month of February, just that month. So that would give you an idea. In terms of the fires, we've been fortunate. It has impacted a few of our projects, but really nothing material. We've been I would say for us, we've been fortunate not to be, the rigs we have turning, not to be that much affected by those.
spk03: All right, that's good, good. Down here in New York, the fire certainly affected us. Okay, thank you so much. Yeah, no doubt.
spk01: Okay, thank you.
spk02: Thank you. Our following question is from Shailen Goats from SG Capital. Please go ahead.
spk05: Thanks, guys. One thing that you kind of talked about in the press release was expecting around $80 million of capital expenditures for fiscal year 2024. I was just wondering if you could maybe disactivate that or provide a little bit more color on how that cap is going to be spent and if you could break up between how much is maintenance versus how much is growth.
spk08: Yeah.
spk01: As I mentioned, I would I would characterize it in three buckets. There's the maintenance, there's the capex that we need to achieve our plan for this year, and then there's the capex, the orders we need to get, which basically will only bring in revenue or growth for next year, assuming that things pan out the way we think they might in calendar 2024. So the maintenance capex, we always say, is around 15 to 20 million in our company. That's been historically, and that's just really, it's just to keep things turning. You need pickup trucks on the existing fleet that is turning just to renew your pickup trucks, your well, the trucks and all the ancillary equipment. So that's part of it. Then the other piece, as I mentioned, we were looking to achieve our budget this year, we were looking at a CapEx that would be similar to what we spent last year. So between that $15 to $20 million and what we spent last year, you could say that that is the CapEx that... that would be needed to achieve our business plan this year. And then the extra is really what would be for growth, but really growth for next year because that would be for deliveries in January and in our fourth quarter and to be put to work next year. And again, that extra, that third bucket, will depend on how the commodity cycle evolves over the next six months. But if you were starting to hear more and more the copper story, and every day there seems to be one more article about that supply gap coming, and typically, historically, these things, they shift on a dime. They all of a sudden it becomes, it's not just news for the commodity players, it becomes a Main Street story that's still to come. But if it does come, then that's where that extra bucket will get spent. And we've put that aside ready to go into place to be able to place those orders.
spk05: Great, thanks. And then just one more for me. You already kind of talked about thinking through M&A versus shared buybacks. Can you maybe talk about the opportunity to, like M&A versus organically growing rigs or just CapEx? Think about that.
spk01: Yeah. On M&A, we've always been very disciplined. It needs to fit everything. We always look at our specialized aspect and also our diversification, which is mostly underground. Those are kind of the two that typically fits in our definition. Again, we're very disciplined in terms of both looking at strategy or valuation when we look at those. And there's always opportunities that come up, but lots of times they just don't fit in one of those two, either strategic or valuation, and then we pass. It all depends on how things play out, but we're always looking. I always say we always have lines in the water. The ones that... We know the ones that really fit are strategic and we have people we talk to and lots of time it just happens when either a generational or just a change of mind in the owner's view. And by the way, most of those are private. And then you...
spk08: you end up with an opportunity. Great, thanks.
spk07: Thank you.
spk02: We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Larocque.
spk01: Thank you, and again, it's been a great year, and thanks again to our employees around the world, and thanks to our investors for for the confidence in our company and confidence in our plans for years to come. Thank you.
spk02: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
Disclaimer