Foraco International SA - Third Quarter 2026 Earnings Call - DEFI TECHNOLOGIES INC

Financial Performance:

• Revenue for Q3 2026 reached $86.2 million, a 21.4% year-over-year increase from $71 million, marking three consecutive quarters of >20% growth.
• EBITDA rose 8.2% to $15.4 million; however, EBITDA margins compressed to 17.8% from 20.0% in Q3 2025 due to revenue growth outpacing profitability.
• Gross margin declined to 16.7% from 19.7% in the prior year period; net profit decreased to $4.4 million from $5.5 million year-over-year.
• Year-to-date (first nine months) revenue was $237 million (up from $195 million), with EBITDA of $37.8 million (16% margin vs. 18% prior year) and net profit of $8.5 million.
• Net debt stood at $78.1 million at quarter-end, an improvement of $8 million (specifically noted as $7.6 million in closing remarks) driven by investment program completion and working capital discipline.
• Capital expenditures for the first nine months were $21 million (up from $14.5 million), including $11 million allocated to seven new rigs and ancillary support equipment.
• Working capital absorbed approximately $15.7 million in the first nine months compared to $6.8 million in the prior period due to contract mobilization.

Guidance and Future Outlook:

• Management emphasized a strategy of disciplined, profitable growth over volume, prioritizing margin recovery and cash conversion.
• No formal margin targets for Q4 2026 or 2027 were provided, though sequential gross margin improvement is expected as pricing adjustments take effect.
• Utilization rates of 60% are deemed achievable based on operating capacity and a strong backlog, though not formally guided.
• The company anticipates continued deleveraging and further debt reduction as the major investment cycle concludes and cash generation improves.
• Working capital normalization is expected to occur in the near term as contracts progress and receivables are collected, with Q4 historically performing better.
• Long-term growth is underpinned by sustained demand in North America, West Africa, and South America, with opportunities expanding in Australia for water, gold, and copper.

Business Segments and Product Lines:

• Geographic Performance: Americas drove growth (North America +39% to $35.6M; South America +29% to $21.2M); EMEA surged 51% to $8.1M; Asia-Pacific declined 10% to $21.4M.
• Segment Performance: Mining revenue grew 25% to $76M (the primary growth engine), while Water revenue remained stable at $10.3M.
• Operational Drivers: Mining profitability faced headwinds from hyperinflation in consumables and contract-specific productivity issues, whereas Water segment profitability improved 16% year-over-year, supported by technical execution in Canada and Australia.
• Product Focus: The company is prioritizing technical, proprietary equipment solutions (e.g., deep directional drilling, water dewatering) over commodity-style junior exploration to command appropriate pricing.
• Fleet Utilization: Increased to 53% in Q3 2026 (up from 35% year-over-year and 51% in Q2 2026), reflecting higher operational activity.

Market and Competitive Landscape:

• Market Drivers: Gold prices are the primary near-term catalyst for exploration and mine life extension; copper demand is supported by electrification and energy transition requirements.
• Competitive Positioning: Faraco is well-positioned for long-term brownfield and near-mine drilling programs where technical advancement is critical.
• Pricing Strategy: Management is avoiding "volume for volume's sake," selectively bidding on large tenders that reflect current high cost environments (labor, maintenance, consumables).
• Demand Independence: Drilling activity remains robust even if gold prices were to moderate from $5,000 to $4,000, as current mining costs provide significant headroom.
• Partnerships: Water services are frequently performed alongside other drilling activities, acting as a strategic differentiator to win broader contracts with major miners.

Risks and Challenges:

• Inflationary Pressure: Rising costs in labor, maintenance, and consumables (particularly "hyperinflation" in mining consumables) are compressing margins.
• Labor Constraints: The market for experienced drillers and supervisors is competitive, though the company has successfully scaled recruitment to support capacity increases.
• Productivity Variability: Profitability in the mining segment has been impacted by specific contract challenges and variable productivity levels, unlike the more stable water sector.
• Cash Conversion Risk: Significant working capital absorption during contract mobilization phases delays cash flow realization, though expected to normalize over time.

Management Commentary and Tone:

• Tone: Confident regarding market fundamentals and order book strength, yet realistic and cautious regarding margin recovery and the necessity of pricing discipline.
• Strategic Focus: Repeated emphasis on translating higher rig activity into stronger field performance and margin expansion rather than just revenue growth.
• Capital Allocation: Declared the current capital investment program "sufficiently complete," shifting focus to free cash flow, debt reduction, and working capital management.
• Selectivity: Management explicitly stated a shift toward being more selective in bidding, avoiding low-margin commodity drilling in favor of high-value technical programs.

Analyst Questions and Answers:

• Labor Market: Confirmed competitive hiring conditions but noted successful capacity scaling to 53% utilization, with ongoing recruitment of new industry entrants.
• Segment Margins: Explained mining profit decline due to consumable inflation and productivity issues, contrasting with water segment growth driven by technical execution and proprietary equipment.
• CapEx Breakdown: Clarified $21M YTD spend included $11M for seven new rigs and support equipment; specific rod vs. maintenance breakdown not disclosed.
• Utilization Targets: While 60% utilization is operationally achievable with current backlog, management declined to provide formal guidance, citing market variability.
• Gold Price Sensitivity: Reiterated that drilling commitments remain stable even if gold prices soften, with customers requesting increased work at current price levels.
• Tender Pipeline: Confirmed the existence of large, high-value tenders in negotiation for water and deep directional drilling, with a focus on technical specialization.
• Deleveraging: Committed to further reducing leverage as the investment cycle winds down, targeting a ~1x leverage ratio eventually, though no specific timeline was given.

Other Key Points:

• The transcript contained a minor inconsistency in the opening speaker's name (referenced as "Tim Bremner" then "Farakhan International" initially, corrected to "Ferroco/Faraco International" contextually throughout).
• The company reports under IFRS using U.S. dollars.
• There is a noted distinction between "water well work" (often a capital project with a unique customer) and dewatering services (operating environment), both contributing to the segment.
• The call concluded with an invitation for follow-up questions via contact numbers provided in the presentation deck.