Foraco International - Third Quarter 2016 Report

TORONTO, ON and MARSEILLE, France, Nov. 4, 2016 /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 2016. All figures are reported in US Dollars (US$), unless otherwise indicated.

"During the quarter, we continued to suffer from low prices and had to cope with the postponement or temporary suspension of certain contracts, and this impacted again our level of activity and thus our financial performance." said Daniel Simoncini, Chairman and co-CEO of Foraco. "We enter now into the bidding season and for the first tendered jobs, we observed a significant increase of the duration of the proposed contracts. We view this as an indicator of regained confidence and visibility from clients. The next months will tell us if the annual drilling volumes will also be on the rise, which – if confirmed – will mark the turning point of the drilling market trend. We are also pleased to report the positive development of certain niche services offering new technically complex resources with higher added value, in underground and directional drilling. We dedicate the majority of our development capex to such niche markets.

"Despite the continuing global adverse market conditions, the Company managed to maintain a positive EBITDA for the quarter and the first nine months of 2016. Focus continues to be placed on cash management as working capital requirements increased due to the mobilization of contracts and extended terms of payments from certain clients" commented Jean-Pierre Charmensat, co-CEO and Chief Financial Officer. "As agreed in 2015, we met with our French lenders to resume discussions regarding the future of the credit facilities granted and new requirements for upcoming years. Our objective is to finalize the negotiations during the fourth quarter."

Three months Q3 2016 Highlights

Revenue

• Q3 2016 revenue amounted to US$ 30.0 million compared to US$ 31.1 million in Q3 2015, a decrease of 3%. Mining activity remains stable compared to the same quarter last year.
• The utilization rate was 35% in Q3 2016 (compared to 30% in Q3 2015).

Profitability

• The Q3 2016 gross margin including depreciation within cost of sales was US$ 2.1 million compared to US$ 4.4 million in Q3 2015, this reduction can mainly be explained by continued pressure on prices in the current challenging environment.
• SG&A costs were stable at US$ 4.1 million for the quarter.
• EBIT amounted to US$ (2.5) million in Q3 2016 compared to US$ 0.2 million in Q3 2015.
• During the quarter, EBITDA amounted to US$ 2.5 million compared to US$ 6.2 million for the same quarter last year.

Net debt

• The net debt was US$ 106.1 million as at September 30, 2016 compared to US$ 89.3 million as at December 31, 2015. This increase is mainly due to the negative free cash flows (US$ 10.2 million) and the adverse effect of foreign exchange rates (mainly Euro) of US$ 5.0 million.

YTD Q3 2016 Highlights

Revenue

• YTD Q3 2016 revenue amounted to US$ 86.4 million compared to US$ 108.2 million in YTD Q3 2015, a decrease of 20% (or 16% excluding the impact of exchange rates). This decrease is mainly linked to the late start of contracts in the first semester and continued pressure on prices in the current challenging environment.

Profitability

• YTD Q3 2016 gross margin including depreciation within cost of sales was US$ 1.4 million compared to US$ 6.6 million in YTD Q3 2015, this decrease can mainly be explained by the decrease in activity and continued pressure on prices in the current challenging environment.
• SG&A costs reduced by US$ 1.0 million between YTD Q3 2015 and YTD Q3 2016 as a result of certain additional savings and the reversal of an unused provision for doubtful debt (US$ 0.4 million) recorded during the first quarter 2016.
• Capital expenditure was US$ 4.1 million in YTD Q3 2016 compared to US$ 7.1 million in YTD Q3 2015.

Selected financial data

(In thousands of US$) - (unaudited)		Q3 2016		Q3 2015		YTD Q3 2016				YTD Q3 2015
Revenue..............................................		30,017		31,051		86,442				108,156
Gross profit / (loss) (1)....................		2,099		4,412		1,436				6,611
As a percentage of sales		7.0%		14.2%		1.7%				6.1%
Gross EBITDA (2)...............................		2,525		6,162		3,534				11,823
As a percentage of sales		8.4%		19.8%		4.1%				10.9%
Operating profit / (loss)...................		(2,522)		210		(13,042)				(7,551)
As a percentage of sales		-8.4%		0.7%		-15.1%				-7.0%
Profit / (loss) for the period..........		(3,213)		(973)		(14,832)				(9,584)
Attributable to:
Equity holders of the Company..........		(3,366)		(1,286)		(15,272)				(9,452)
Non-controlling interests....................		153		313		440				(132)
EPS (in US cents)
Basic.................................................		(3.77)		(1.45)		(17.08)				(10.70)
Diluted...............................................		(3.77)		(1.45)		(17.08)				(10.70)

(1)	This line item includes amortization and depreciation expenses related to operations
(2)	The nine-month periods presented have been normalized in order to exclude in 2016, an amount of US$ 900 thousand corresponding to the final settlement of an earn-out clause related to the 2012 acquisition in Australia.

Financial results

Revenue

(In thousands of US$) - (unaudited)	Q3 2016		% change		Q3 2015		YTD Q3 2016		% change		YTD Q3 2015
Reporting segment
Mining....................................................	28,481		0%		28,535		77,821		-19%		95,650
Water....................................................	1,536		-39%		2,516		8,621		-31%		12,506
Total revenue....................................	30,017		-3%		31,051		86,442		-20%		108,156
Geographic region
Europe, Middle East and Africa..........	7,170		-14%		8,302		29,450		-11%		33,710
South America....................................	8,796		16%		7,572		21,183		-20%		26,555
North America.....................................	7,609		11%		6,874		20,522		-14%		23,863
Asia Pacific.........................................	6,442		-22%		8,303		15,287		-36%		24,028
Total revenue...................................	30,017		-2%		31,051		86,442		-20%		108,156

Q3 2016

Q3 2016 revenue amounted to US$ 30.0 million compared to US$ 31.1 million in Q3 2015, a decrease of 3%.

In EMEA, revenue decreased by 14%, from US$ 8.3 million in Q3 2015 to US$ 7.2 million in Q3 2016. The reduction in activity in Russia was partially compensated by a higher level of activity in France. In Africa, the higher activity in Mining was offset by the decrease in activity in Water.

Revenue in South America amounted to US$ 8.8 million in Q3 2016 (US$ 7.6 million in Q3 2015), an increase of 16%. This is mainly attributable to the increased activity in Brazil.

Revenue in North America increased by 11%. This increase is linked to the signature of new contracts in 2016.

In Asia Pacific, Q3 2016 revenue amounted to US$ 6.4 million, a decrease of 22% mainly due to unfavorable weather conditions in Western Australia and certain reductions of drilling programs in Australia and New Caledonia.

YTD Q3 2016

YTD Q3 2016 revenue amounted to US$ 86.4 million compared to US$ 108.2 million in YTD Q3 2015, a decrease of 20% or 16% excluding the impact of exchange rates.

In EMEA, revenue decreased by 11% (from US$ 33.7 million in YTD Q3 2015 to US$ 29.5 million in YTD Q3 2016). Excluding the foreign exchange impact mainly linked to the Russian Ruble variance, revenue decreased by 7% compared to the same period in the previous year.

Revenue in South America amounted to US$ 21.2 million in YTD Q3 2016 (US$ 26.6 million in YTD Q3 2015), a decrease of 20% (or 14% excluding the foreign exchange variance). This can mainly be explained by the reduced activity in Chile and lack of activity in Argentina. Brazil remains stable in local currency.

Revenue in North America was US$ 20.5 million compared to US$ 23.9 million, a decrease of 14% mainly due to the reduction of volumes on certain ongoing contracts.

In Asia Pacific, YTD Q3 2016 revenue amounted to US$ 15.3 million, a decrease of 36% mainly due to the reduction of drilling programs and to certain delays in the start of new contracts in Australia and in New Caledonia.       

Gross profit

(In thousands of US$) - (unaudited)	Q3 2016		% change		Q3 2015		YTD Q3 2016		% change		YTD Q3 2015
Reporting segment
Mining..................................................	2,223		-52%		4,647		1,503		-78%		6,759
Water..................................................	(124)		47%		(235)		(67)		n/a		(148)
Total gross profit / (loss) ..............	2,099		-52%		4,412		1,436		-78%		6,611

Q3 2016

The Q3 2016 gross margin including depreciation within cost of sales was US$ 2.1 million compared to US$ 4.4 million in Q3 2015, this reduction can mainly be explained by continued pressure on prices in the mining segment.

YTD Q3 2016

YTD Q3 2016 gross margin including depreciation within cost of sales was US$ 1.4 million compared to US$ 6.6 million in YTD Q3 2015, this decrease can mainly be explained by the decrease in activity and continued pressure on prices in the current challenging environment.

Selling, General and Administrative Expenses

(In thousands of US$) - (unaudited)	Q3 2016		% change		Q3 2015		YTD Q3 2016		% change		YTD Q3 2015
Selling, general and administrative expenses	4,419		0%		4,115		12,716		-7%		13,676

Q3 2016

SG&A costs were stable compared to Q3 2015.

YTD Q3 2016

SG&A costs reduced by US$ 1.0 million between YTD Q3 2015 and YTD Q3 2016 as a result of certain additional savings and the reversal of an unused provision for doubtful debt (US$ 0.4 million) recorded during the first quarter 2016.

Operating result

(In thousands of US$) - (unaudited)	Q3 2016			% change		Q3 2015		YTD Q3 2016		% change		YTD Q3 2015
Reporting segment
Mining ........................................................	(2,187)			n/a		778		(11,537)		n/a		(5,759)
Water.........................................................	(335)			n/a		(568)		(1,505)		n/a		(1,792)
Total operating profit / (loss) .............	(2,522)			n/a		361		(13,042)		n/a		(7,551)

Q3 2016

The operating loss was US$ (2.5) million, compared to a profit amounting to US$ 0.4 million in Q3 2015 for the same reasons as stated above.

YTD Q3 2016

The operating loss was US$ (13.0) million, compared to US$ (7.6) million in YTD Q3 2015 for the same reasons as stated above. The YTD Q3 2016 operating loss includes a US$ 0.9 million one-off cost linked to the settlement of the earn-out relating to the acquisition of JND in Australia.

Financial position

The following table provides a summary of the Company's cash flows for YTD Q3 2016 and YTD Q3 015:

(In thousands of US$)	YTD Q3 2016		YTD Q3 2015
Cash generated by/(used in) operations before working capital requirements	2,479		11,764
Working capital requirements	(5,776)		(480)
Interest and tax	(2,830)		(3,982)
Net cash flow generated by / (used in) operating activities	(6,127)		7,302
Purchase of equipment in cash	(4,081)		(6,679)
Payment related to the Servitec acquisition	-		(1,111)
Net cash used in investing activity	(4,081)		(7,790)
Free cash flow	(10,208)		(488)
Consideration payable related to acquisitions	(934)		-
Debt variance	3,808		(4,013)
Dividends paid to minority shareholders in affiliates	(500)		-
Acquisition of treasury shares	(111)		-
Net cash generated / (used in) financing activities	2,263		(4,013)
Net cash variation	(7,945)		(4,501)
Foreign exchange differences	(133)		(2,824)
Variation in cash and cash equivalents	(8,078)		(7,325)

In YTD Q3 2016, the net cash flow used in operating activities amounted to US$ 6.1 million. In YTD Q3 2015, the net cash flow generated from operating activities amounted to US$ 7.3 million.

The level of working capital requirements is significantly affected by the phasing of activity which may result in temporary variations period on period. In addition, certain clients increased their payment terms. 

During the period, Capex amounted to US$ 4.1 million in cash, compared to US$ 6.7 million in cash and US$ 0.4 million through capital leases in YTD Q3 2015. The total rig count remains unchanged at 302.

Free cash flow was US$ (10.2) million in YTD Q3 2016 compared to US$ (0.5) million in YTD Q3 2015.

As at September 30, 2016, cash and cash equivalents totaled US$ 8.5 million compared to US$ 16.6 million as at December 31, 2015. Cash and cash equivalents are mainly held at or invested within top tier financial institutions.

As at September 30, 2016, net debt amounted to US$ 106.1 million (US$ 89.3 million as at December 31, 2015). This increase is due to the Free Cash Flows (US$ -10.2 million) and the effect of foreign exchange rates (mainly Euro) of US$ 5.0 million.

As at September 30, 2016, financial debts and equivalents amounted to US$ 114.6 million (US$ 105.8 million as at December 31, 2015):

Maturity	Credit lines	October 1, 2016 and September 30, 2017	October 1, 2017 and September 30, 2018	October 1, 2018 and September 30, 2019	October 1, 2019 and September 30, 2020	October 1, 2020 and September 30, 2021	Total
Drawn credit lines rolled over on a yearly basis	54,902	-	-	-	-	-	54,902
Long term financing related to:							-
- Brazil acquisition		3,591	3,591	3,591	-	-	10,773
- Australia acquisition		5,611	5,611	5,611	5,611		22,444
- Acquisition of fixed assets		9,219	7,305	5,476	3,319	530	25,849
- Acquisition of fixed assets through capital leases		320	217	62	33	-	632
Total	54,902	18,741	16,724	14,740	8,963	530	114,600	(*)

(*)	The non-current portion of long term debt, i.e. from April 1, 2017 onwards is US$40,957 thousand

The Company currently has used and unused short-term credit facilities amounting to US$ 58.2 million, of which US$ 54.9 million was drawn down as of September 30, 2016. Other facilities are granted individually by various banks, mainly in Chile, Brazil, Australia and Canada. They are generally granted on an annual basis and are subject to review at certain dates.

Going concern and impairment testing

Current economic conditions make forecasting difficult, and there is the possibility that the Company's actual operating performance during the coming year may be different from expectations. Based on internal forecasts and projections that take into account reasonably possible 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 for a period of at least twelve months provided the Company continues to benefit from the support of its lenders:

• In February 2015, an agreement was reached with the Company's French lenders, resulting in (i) the postponement of installments, (ii) the securing of short-term credit facilities and (iii) the confirmation of bank guarantee lines until October 31, 2016. The agreement with these lenders included certain covenants.
• As at December 31, 2015, the Company complied with the required financial covenants.
• As stipulated in the February 2015 agreement, the parties met since June 2016 to resume ongoing discussions regarding the future of the French credit facilities. In October 2016, an agreement was reached with the French lenders with the objective to finalize the new financial conditions of the French credit facilities before December 31, 2016. According to this agreement, a waiver was signed consisting in postponing the debt repayments due between October 2016 and December 2016 to December 31, 2016.
• The Company is confident that it will continue to benefit from the support of its lenders given it has proved its capacity to limit the negative financial impact of the severe adverse conditions in the mining industry.

Accordingly, the Company continues to adopt the going concern basis in preparing its financial statements.

The current economic conditions in mining services are seen as an indicator of potential impairment of the carrying value of the Company's long lived assets. Accordingly an impairment test based on expected discounted cash flows was performed as at December 31, 2015 at the level of each business segment and geographic area. Taking into account the assumptions made, the expected discounted future cash flows exceeded the carrying values of the long lived assets considered for each business segment and geographic area and accordingly, no impairment was recognized as at December 31, 2015.

During the first nine months of 2016, the Company was negatively affected by certain postponements and late starts on contracts while the overall market continues to be weak. The Company considers that these developments do not reflect the long term trend and do not require a revision of the long term forecasted cash flows used for impairment testing as at December 31, 2015. The Company regularly monitors its financial performance and considers that no significant change was necessary to its medium term plan. Therefore, no impairment testing was carried out as at September 30, 2016. The next impairment testing will be performed as at December 31, 2016 at the latest.

Currency exchange rates

The exchange rates for the periods under review are provided in the Management's Discussion and Analysis of Q3 2016.

Non-IFRS measures

EBITDA represents Net income before interest expense, income taxes, depreciation, amortization and non-cash share based compensation expenses. EBITDA is a non-IFRS quantitative measure used to assist in the assessment of the Company's ability to generate cash from its operations. The Company believes that the presentation of EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the drilling industry. EBITDA is not defined in IFRS and should not be considered to be an alternative to Profit for the period or Operating profit or any other financial metric required by such accounting principles.

Net debt corresponds to the current and non-current portions of borrowings and the consideration payable related to acquisitions, net of cash and cash equivalents.

Reconciliations of the various non IFRS measures are as follows:

EBITDA

(In thousands of US$) (unaudited)	Q3 2016		Q3 2015		YTD Q3 2016		YTD Q3 2015
Operating profit / (loss)..................................................	(2,522)		210		(13,042)		(7,551)
Depreciation expense ...................................................	4,961		5,781		15,413		18,861
Non-cash employee share-based compensation..........	86		171		264		514
Settlement related to the 2012 acquisition in Australia...	-		-		900		-
EBITDA .........................................................................	2,525		6,162		3,535		11,823

Net debt:

			(In thousands of US$)  (unaudited)	Q3 2016		Q4 2015
			Cash and cash equivalents...............................	8,493		16,571
			Borrowings - Non-current portion.....................	(40,957)		(46,167)
			Borrowings - Current portion.............................	(73,643)		(59,663)
			Total Net Debt.................................................	(106,107)		(89,259)

Outlook

The Company's business strategy is to actively prepare for the next growth phase of the metallic commodities cycle in the best possible conditions through the development and optimization of its services offered across its range of geographical regions, industry sectors, commodities and customers. The Company expects it will execute its strategy primarily through organic growth in the near future.

Conference call and webcast

On November 4, 2016, Company Management will conduct a conference call at 11:00 am ET to review the financial results. The call will be hosted by Daniel Simoncini, Chairman and co-CEO, and Jean-Pierre Charmensat, co-CEO and CFO.

You can join the call by dialing 1-888-231-8191 or 1-647-427-7450. 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://event.on24.com/r.htm?e=1302282&s=1&k=1E58B6BA53975EC408F8CE19514F7577

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 22 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 March 30, 2016, 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

Brenda Patterson-Mack ([email protected]), Tel: [phone]