CA - Major Drilling Group International Inc. (MJDLF) Q1 2023 Earnings Call Transcript

Major Drilling Group International Inc. (MJDLF)

Q1 2023 Earnings Conference Call

September 07, 2022 9:00 AM ET

Company Participants

Chantal Melanson – Investor Relations

Denny Larocque – President and Chief Executive Officer

Ian Ross – Chief Financial Officer

Conference Call Participants

Daryl Young – TD Securities

Ryan Hanley – Laurentian Bank

James Vail – Arcadia Advisors

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the First Quarter 2023 Results Conference Call.

I would now like to turn the meeting over to Chantal Melanson. Please go ahead, Ms. Melanson.

Chantal Melanson

Thank you, and good morning, everyone. As mentioned, we would like to welcome you to Major Drilling’s conference call for the first quarter of fiscal 2023. On the call, we will have Denny 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 Denny Larocque. Please go ahead.

Denny Larocque

Thank you Chantal and good morning everyone and thank you for joining us today. I’m pleased to welcome you to Major Drilling first quarter results for our fiscal 2023. During the quarter, we saw a continued increase in the demand for our complex specialized drilling services, despite the economic uncertainties experience over the last three months. With the strong operational leverage in our business model, we were again able to produce robust results with our revenue growing 32% to $200 million and our net earnings more than doubling over last year to $24.2 million.

Our training efforts around the world are going very well, helping our growth and productivity, which has contributed to the growth in gross margins over the past year. Developing our crews is crucial in order to maintain our position of dominance in the specialized drilling market. Demand for our specialized drilling services continues to grow, as senior customers rely on Major Drilling to execute their increasingly challenging drill programs.

With that Ian will walk us through the quarter financials and then I’ll – I’d like to discuss our market outlook further before opening the call to questions. Ian?

Ian Ross

Thanks, Denny. Revenue for the quarter was $199.8 million, up 32.3% from revenue of $151 million recorded in the same quarter last year. Activity levels remained elevated despite macro headwinds related to inflation and volatility in the equity and commodity markets. All regions contributed to the growth as demand for our specialized services continued through the quarter. The favorable foreign exchange translation impact on revenue and net earnings for the quarter when comparing to the effective rates for the same period last year was approximately $4 million and $1 million respectively. The overall gross margin percentage, excluding depreciation, was 30.8% for the quarter compared to 26.3% for the same period last year. We were pleased with the margin performance as inflation impacts were offset by strong operational quarter aided by our successful training programs and prudent inventory management. We continue to work with both our customers and suppliers on pricing to ensure minimal impact to our operations and financial results as we navigate through these periods of high inflation.

G&A costs were $16.2 million, an increase of $2.6 million compared to the same quarter last year. The increase was driven by inflationary wage adjustments and the resumption of travel as COVID-19 restrictions loosen in most jurisdictions. Other expenses were $3 million, up from $2.6 million in the prior year quarter due primarily to higher incentive compensation expenses throughout the company given the increased profitability. The income tax provision for the quarter was $7.3 million compared to $2.7 million for the prior year period. The increase in the income tax expense was related to an overall growth in profitability.

Net earnings were $24.2 million or $0.29 per share for the quarter compared to net earnings of $11.1 million or $0.14 per share for the prior year quarter, making this our best quarter in 10 years. EBITDA was $43.5 million compared to $24.2 million in the prior year quarter. The 80% EBITDA growth versus the same quarter last year illustrates the operational leverage in our business model as revenue levels have grown over the past few years.

Turning to the balance sheet. We finished the quarter in a net cash position of $8.5 million, a $10 million improvement from three months ago. With interest rates on the rise, the company repaid $20 million of its long-term debt, keeping the balance sheet a competitive advantage for us in the industry. The company continued to reinvest in the business by spending $13.2 million on capital expenditures, adding seven new drill rigs and support equipment while disposing of 10 older, less efficient rigs bringing the total rig count to 600. We continue to invest in our equipment and inventory to ensure our valued customers receive safe and productive drilling programs.

The new breakdown of our fleet and utilization is as follows: 296 specialized drills at 50% utilization, 116 conventional drills at 52% utilization, and 188 underground drills at 59% utilization for a total of 600 drills at 53% utilization. While utilization rates have gone up, we continue to increase the number of shifts and improve productivity through our enhanced training programs, which is allowing us to generate more revenue per utilized drill. 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. These standards are becoming increasingly important to our customers.

In the first quarter, revenue from specialized work accounted for 64% of our total revenue, up slightly from the previous quarter as we continue to see increased demand from our specialized services. Conventional drilling made up 13% of our revenue as most juniors continued their programs and finally underground drilling revenue was down slightly compared to last quarter at 23% of total revenue. Despite the volatility and equity and commodity markets impacting the abilities for juniors to raise new capital, they remain 25% of our business, which is down from 31% in the previous quarter. While some junior projects have slowed down, the majority of the growth in the quarter was driven by increased activity with the seniors and intermediates as they continue to replenish their depleting reserves.

In terms of commodities, gold projects represented 50% of our revenue, which remains flat from the previous quarter as we continue to see senior gold miners active in replenishing reserves. Copper continues to drive the base metal growth as it now makes up 21% of our business compared to 19%, the previous quarter. The battery metals continue to get mainstream attention as we also saw an increase in zinc during the quarter.

With that overview on our financial results, I’ll now turn the presentation back to Denny to discuss the outlook.

Denny Larocque

Thanks, Ian. Despite the decline in – that we have seen in commodity prices since the beginning of 2022, we’ve seen activity levels remain stable. We’ve seen a slowdown in junior mining financing but that’s being offset by a desire from our senior customers to continue to grow their reserves in both precious and base metals. Let’s not forget that metal prices remain at levels well above what is needed to support exploration. In that vein, we are already in discussions with several senior customers for their calendar 2023 programs, with many looking to book their rigs early.

We are seeing more and more customers recognizing the impact that the higher quality of our services can have on their overall drilling costs. Completing each hole and safe production are more important to most of our customers than the pure price per meter as these items can make a huge difference on their drilling programs, especially when dealing with a specialized project. That is why we are keeping our commitment to investing in the development of our people and investing in our fleet. With the growing supply shortfall in both gold and copper, several of our senior customers have committed to prioritizing value adding grassroot exploration and development programs.

The global demand for electrification continues to grow and will require an enormous amount of copper, battery metals and uranium, which will increase pressure on the existing supply and demand dynamic.

We expect all of this to lead to substantial additional investments in copper and base metal and exploration projects as we help our customers discover the metals that will allow the world to accelerate its efforts toward a green economy. Many of the new mineral deposits in questions are located in areas challenging to access, requiring complex drilling solutions, continuing the demand for Major Drilling’s specialized services.

With the fundamentals – with these fundamentals still firmly in place, the long-term outlook for our company remains extremely positive. Major Drilling remains in a unique position to react to, and benefit from these market dynamics. Backed by our strong financial position, our success in recruiting, training and inventory management has allowed us to maintain our position as both the operator and employer of choice in our industry.

As well, I’m extremely pleased to announce that over the next few weeks, we will be coming out with our first sustainability report detailing all of our ESG initiatives in calendar 2021 and highlighting Major Drilling’s work to advance our environmental, social and governance strategy.

It will touch on our ongoing carbon emission reduction efforts, and the fact that we’ve been able to decrease our GHG emissions intensity by 14%. On the social front, we’ll be highlighting our culture of safety through all of the initiatives we have in place. Also, I’m very proud to be able to showcase in the report, all the great work that our branches are doing around the world in the communities where we operate.

One of the stories will highlight our Australian team’s efforts to raise awareness around mental health and suicide prevention on their Dooga Day, which honors a former colleague, Josh Dooga Jones. On governance, we’re pleased to report that our Board of Directors has achieved gender parody. This gender parody is slated to continue following our upcoming AGM.

Finally, we would like to thank our outgoing Chair, David Tennant for his longstanding dedication to Major Drilling as Board Chair since 2005 and as a Director since 1995. His exceptional leadership, vision and strategic guidance have helped put Major Drilling in the strong position is enjoys today as the leader in the drilling industry.

On a personal note, I want to say that it has been a pleasure to work with David for the last 27 years. After a process that began last year, we are very pleased that our current Board member Kim Keating has agreed to take on the role of Board Chair following the AGM. As a national leader in the engineering profession, Kim brings a strong operational experience at an exciting time for the company as it continues its success in the current industry upturn.

With that, we can open to questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question is from Daryl Young from TD Securities. Please go ahead. Your line is open.

Daryl Young

Hey, good morning, gentlemen, and congrats on a solid quarter.

Denny Larocque

Thank you.

Daryl Young

First question for me is just around your commentary around the juniors and the slowdown in activity levels there. And I guess just wanted a little bit more color on what the implications of that could be for pricing across the industry. From the perspective that generally they’re the incremental buyer of rig services and if that frees up capacity. And then secondly, if there’s any mix impact of the juniors versus the seniors in terms of the pricing and profitability of the junior work.

Denny Larocque

Yes. Well, the junior, I wouldn’t say it’s a huge slowdown, but it’s – the fact that the financing is more difficult as you can appreciate with the markets as they are right now. We can certainly see juniors not necessarily increasing their efforts and some are slowing down a bit. But it’s not – I wouldn’t say it’s large enough to create to disrupt the market at the moment.

And also, as we’ve mentioned, the seniors are looking at doing more have been adding or kind of soaking up the excess rigs that are coming out of juniors. So for us, we haven’t seen much of an impact in the market. So in terms of pricing or it’s not really impacting the pricing environment at this point. I don’t know if that answers your question.

Daryl Young

Yes. No, that, that, that’s good color. Yes. Just wanted to make sure we weren’t – you’ve done a good job passing costs through and it seems like demand continues to be very, very strong. So sounds like that’s going to continue here in the near-term and that kind of parlays into my next question. I think this is the earliest I’ve ever seen you guys book out the next year drill rig commitment.

So can you just give us a little bit more color? Is there – is it specific complex underground work or is there anything happening here that would cause the seniors and intermediates to be booking so early in comparison to historical?

Denny Larocque

Yes. You’re right. It is as early as I’ve ever seen and but it’s not like on a large scale, but it’s certainly noticeable in terms of just the discussions that are happening. Those discussions are happening much sooner. And what’s going on is right now going towards Christmas, you’ve got the usual tapering with budgets come basically being exhausted for the year as you go towards Christmas, which gives us our typical Q3 slowdown.

But they’re already – there’s already lots of companies that are thinking ahead to 2023 and they’re kind of saying, okay, well, we’re going to go through our budgets, but right after that, we want to get going early in January. And we want to make sure that you’ll have X amount of rigs ready for us.

In a lot of cases, they’re talking about the same amount of rigs. Some they want to add a couple more here and there. So yes, it is earlier and it’s very encouraging, but I think it just points to the fact that they need to replace their reserve and they need to address this. They are – they have the cash to do it, and this is the time to do it.

If they sit on their hands for another three, four years, we’re going to be in deep trouble in terms of copper supply and well, all the supplies out there. So the slowdown in the commodity prices, I don’t think it’s cooling down their efforts. And again, even with this slowdown in the commodity prices, they’re still making good profitability with at these prices. So there’s still – it’s still a good business at these prices. It’s just not what they saw before, but still makes a lot of sense to invest. So that’s why I think we’re seeing those discussions happening this soon.

Daryl Young

Got you. Okay. And then just one last question for me, the Australasia market, if you excluded the McKay acquisition, looks like the growth wasn’t quite as strong as the rest of the world. Is there anything specific happening there with a large customer or anything you could point out of note there?

Denny Larocque

Yes. The – our Asian market is a bit different in its making, if you want. If you remember, I mean, we’ve got in there, we’ve got four countries, if you exclude Australia, we have Mongolia, Indonesia, Philippines, and South Africa. And in our two largest one are Indonesia and Mongolia. And in those two cases, we have – it’s a mature – those are mature markets in Mongolia. We’ve been at OT for 20 years in Indonesia. We’ve been at Grasberg for 30 years.

It’s been steady, it’s continued steady. And those markets have not seen the influx of money yet in terms of just the exploration. It’s a little bit like Latin America. We – Latin America was slower in growth than North America. We just recently have seen an uptick in Latin America. And we could see opportunities come up in our Asian market in the future. But – you’re right. At this point, it’s been flat, but really it’s because it’s a steady business. It’s just a little bit of a different make than the rest of our operations that are more levered to the pure exploration.

Daryl Young

Got it. Okay. That’s great. I’ll get back in the queue. Thanks. Thanks guys.

Operator

Thank you. [Operator Instructions] The next question is from Ryan Hanley from Laurentian Bank. Please go ahead. Your line is open.

Ryan Hanley

Perfect. Thanks. Good morning guys and congrats on another great quarter here. Just wondering, I guess, maybe on the utilization rate. So I think you had mentioned about 53% for the quarter. It seems like we’re kind of hanging around that low 50% mark lately. Just wondering, assuming peak is about 75%. How much of that gap is caused by, call it, I guess, labor related or is it more just that with the shift in work, going to maybe more seniors, moving more rigs around, just kind of trying to get a little bit more color on that number.

Denny Larocque

Yes, it’s more – I’d call it, it’s more market related. In a sense, we’ve got some markets that are at very high utilization and those markets are doing really well. And some markets that are still at fairly low utilization. So there’s growth in certain markets. I just mentioned Asia, for example, where it’s been steady, but we do have excess rigs in the region and be – and we’d be able to respond if there was opportunities that came up in those regions.

And the same thing in Latin America, we do have excess capacity in that region, but it’s been coming up and our revenue has been going up, but our productivity has been going up as well. So therefore, we’re producing more revenue per rig, which is why the revenue has been growing faster than our utilization rates. But it’s more – again, it’s more – we do have that capacity available and it’s more the – where the rigs are in terms of the markets rather than the labor or missed opportunity, if I might say.

Ryan Hanley

Okay. That makes sense. And is 75% kind of still a fair peak number to be using?

Denny Larocque

Yes.

Ryan Hanley

Okay. And then maybe just switching gears a little bit. So you’ve been generating some great amounts of cash flow here. I’m just wondering, this probably comes up more frequently now. I guess, what the plans are in terms of thoughts on maybe reinstating the dividend, buybacks basically what your plans are in terms of deploying the capital that you’re building up.

Denny Larocque

Yes. Thanks, Ryan. From our standpoint right now, the capital allocation strategy in the near-term is to focus on growth. We think where we are in this cycle and where our company is positioned, that’s the best value we can bring our shareholders right now is to grow this business, continue to grow it by looking at either some tuck-ins or new jurisdictions that could use up some capital. So in the short-term, that’s certainly where our focus and priority is. And as net cash levels continue to increase, if there aren’t any other good opportunities for growth that would make sense to our business then we would turn our heads to the dividend or buyback or other capital allocation strategies.

Ryan Hanley

Perfect. That’s super helpful. I think that’s it for me in terms of questions. Thanks again, and congrats on the quarter.

Ian Ross

Thanks, Ryan. Thanks.

Operator

Thank you. The next question is from James Vail from Arcadia Advisors. Please go ahead. Your line is open.

James Vail

Thank you, sir. Good morning, everybody. Ian, this question is really for you. And I think I asked it in the last quarter. I’m trying to get my arms around this contingent consideration. And here’s what I’m looking at. On the net cash calculation, if you will, that consideration is 2023, I guess, it’s $1 million. On the balance sheet, the contingent consideration is $14.3 million. And when you go back to the calculation for the consideration, I guess, it’s of McKay, the contingent consideration is $20 million. And I guess the question is, how could you eliminate that? Could you pay it down like you do debt or would you have to get into a negotiation? I know, it’s based on milestones at McKay, but – or maybe that’s something you don’t even have to worry about getting rid of it’ll – pay for itself. I’m just trying to understand why there’s three different numbers.

Ian Ross

Yes. Well, the easy one – the one piece you’re missing is there is a current portion of contingent consideration. That’s in the current liability section. So you there’s $8.7 million there, and then you’ve got $14 million in the long-term. So that’s – those two together. That’s the easy solution.

The next piece, yes, is effectively the way these earn outs are made is that assuming the McKay acquisition performs and generates its cash, it will effectively pay for itself the cash that it generates. So that’s – yes, that’s – but we do factor it into our net debt when we give that number out, because it is a liability that we will be paying, but the cash effectively will be generated to pay it. That’s the way we look at it.

James Vail

Okay, great. Thank you so much. It’s very helpful. All the best. Thank you.

Ian Ross

Thanks, Jim.

Operator

Thank you. There are no further questions registered at this time. I will return the call back to Mr. Larocque.

Denny Larocque

Thank you. And please don’t forget to join us for our AGM, which will be held virtually tomorrow at 3:00 PM Eastern Time, you can find the details on our website. Thank you for listening today.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

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