Good morning everyone, and welcome to the Foraco International SA second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. I'd now like to turn the floor over to Daniel Simoncini, CEO. Please go ahead.
Thank you, Jimmy. Thank you all for joining us on our Q2 2022 results conference. I'm Daniel Simoncini, Chairman and CEO of Foraco, and with me today is Vice CEO and CFO, Jean-Pierre Charmensat. The news release of these results was issued this morning prior to the opening of the TSX through CNW Newswire. If you did not receive a copy of the release, please visit our website, www.foraco.com. We are pleased to report our best quarter since 2012, despite the ongoing macroeconomic headwinds we all observe, with revenue up 14% year-over-year and a similar utilization rate at 60%, although the mix of rigs employed differ from a year ago, and we increased our EBIT by 26% year-over-year. Metal prices index retreated 18% from last March all-time high, with copper, nickel, and iron ore being still above last year's average.
On the commercial front, we noticed some junior explorers are having more difficulties to finance their exploration campaign. While our large top-tier customer base didn't change their plan, and on the contrary, some added more rigs to our long-term contracts recently. The commercial activity has been quite satisfactory as our order book stands higher now than January 1st, despite EUR 150 million delivered in the first half of the year. I will now pass the conference to Jean-Pierre, who will walk us through the financials in more detail. Jean-Pierre?
Thank you, Daniel, good morning, everyone. Revenue for the Q2 2022 quarter amounted to $86.5 million compared to $75.7 million for the same quarter last year, 14% increase, as Daniel mentioned. This increase is the result of the favorable market dynamics with long-term core drilling contracts and our capacity to deliver. By reporting segment, mining represented 85% of Q2 2022 revenue, and water represented 15%. During the quarter, North America and South America were the most active regions. In North America, revenue amounted to EUR 26.6 million in Q2 2022, a slight increase compared to Q2 2021. The region continues to face crewing issues. Revenue in South America increased by 95% to EUR 25 million, compared to EUR 12.8 million in Q2 2021. New long-term contracts were mobilized during the first quarter of 2022.
Revenue in EMEA for the quarter was EUR 21 million compared to EUR 24.5 million in Q2 2021, a 14% decrease. The activity was stable in Europe and CIS, while the activity decreased in Africa due to the phasing of some contracts and logistics challenges. Revenue in Asia -Pacific increased 10% at EUR 13.9 million compared to the same quarter last year, reflecting the ongoing improvement of the activity with two new significant contracts starting during the period. In Q2 2022, the geographical activity split was North America 31%, South America 29%, EMEA 24%, and Asia Pacific 16%. During this quarter, the gross margin, including depreciation within cost of sales as per IFRS rules, was a profit of $18.8 million versus $15.8 million for the same quarter last year, a 19% increase.
Ongoing contracts reported solid performances. Inflation of costs impacted gross margins, but most of the cost increase were compensated in our selling prices. SG&A increased by 7% to EUR 6.2 million, compared to EUR 5.8 million for the same period last year, but decreased as a percentage of revenue from 7.6% to 7.1% in Q2 2022. The EBIT, our operational result, was a EUR 12.6 million profit versus EUR 10 million in Q2 2021, a 26% increase. The EBITDA amounted to EUR 17.9 million or 20.7% of revenue, a 21.5% increase compared to EUR 14.7 million in Q2 2021, or 19.4% of revenue.
We do not report, as always, adjusted EBITDA or any other adjustment to the IFRS figures. On a six month basis, revenue amounted to EUR 154.2 million compared to EUR 130.3 million in H1 2021, an 18% increase. This increase arises from the combination of favorable market dynamics and the capacity of the company to deliver despite the COVID variants, which caused some delays to operations. Revenue increased 9% in North America, 104% in South America, and 20% in Asia Pacific compared to H1 2021. The revenue decreased 16% in EMEA, mainly in Africa, due to phasing of contracts and logistical challenges. The activity was stable in Europe and CIS.
The year-to-date 2022 gross profit was EUR 28.3 million versus EUR 21.9 million for the same period last year, a 30% improvement, mainly due to increased activity and performance on contracts despite the tight labor market and cost inflation. The year-to-date 2022 EBIT was a positive EUR 16.2 million compared to EUR 10.9 million in the same period last year, a 50% increase. The year-to-date 2022 EBITDA for the six months period was a positive EUR 26.4 million compared to EUR 19.8 million in the same period last year, a 33% increase. In H1 2022, the working capital requirement was EUR 12.4 million compared to EUR 3 million for the same period last year. This increase is the result of the activity ramp up, especially during the end of the quarter.
CapEx amounted to EUR 8.6 million in cash compared to EUR 10.5 million in cash in H1 2021. This CapEx relates to acquisition of rigs, rig overhauls, and spare equipment and rods. At June 30, 2022, our net debt, including lease obligations, IFRS 16, amounted to $91.1 million versus $100.8 million at March 31st, 2022, and $85.7 million at the end of December 2021. Our leverage ratio improved to 1.8x. All of this confirms our capacity to finance our ambitious CapEx and development program. We benefit from a higher proportion of long-term contracts, which provide us with visibility on our financial perspectives. Nevertheless, remain focused on cost control, and we are convinced that this is a vital issue, securing long-term relationships with our clients.
I will now return the call to Daniel for his closing remarks. Daniel?
Thank you, Jean-Pierre. Over the last three months, the climate change impact, the macroeconomy and geopolitical environment have continued to deteriorate, and people now talk openly about a growing recession risk, which may be already there, as the latest statistic of the U.S. GDP came out an hour ago. Some central banks are raising rates boldly, and this has been coupled with a new COVID-19 wave, and the result of it is a great uncertainty for the near future, which markets hate. Yesterday, Bloomberg published an opinion on the U.S. economy, which I can't resist in quoting. They say, "The word recession seems to be in every other headline these days, but a shift in how U.S. consumers are spending just landed in the Wall Street echo chamber.
Shoppers are returning to stores, traveling, and going to concerts, but they are spending less on remodeling and entertaining themselves at home. Partway through the latest U.S. earnings season, corporate results, some good, some bad, are feeding the debate about just how much damage the U.S. economy has really sustained in recent months. Job creation is healthy and unemployment extremely low, but prices are rising, eroding consumers' buying power. In other words, nobody seems to know what's happened next. I like to share that because we share this opinion. Nobody knows. At Foraco, we observe that the inflation that everybody talks about is made of three components which are not necessarily synchronized, goods, wages, and energy.
For us, as far as we are concerned, prices of industrial goods seem to have now stabilized after surging as soon as Q4 2021, and we see now them stabilizing somehow, even if delivery times are still through the roof. Wages have been adjusted according to local market conditions, and we can't do much on the energy prices, which we pass to our customers. We are not taking, as we speak, any specific measure to fight inflation more than that, and we are keeping our prices in a fair range, to the contrary of certain other economic actors which do not hesitate to apply revenge pricing. Just look at the hotel prices in Canada.
Most of our top-tier clients have recently acknowledged publicly these tensions and prices softening for metals, but they all show excellent balance sheets above par operating profits, and most have confirmed their drilling plans, if not increased them, like in the battery metal segment. This is why we are still cautiously optimistic, and we remain very focused to deliver the service quality as expected by our customers. In this environment, we are very active to confirm our resilience in the current circumstances. Thank you for listening. I will now turn the call to Jamie, who will take the first question. Jamie?
Ladies and gentlemen, once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from Steven Green from Ordnance Capital. Please go ahead with your question.
Hello, Daniel. Hello, Jean-Pierre. How are you?
Hey. Hi, Steven.
How are you?
Good.
After that economic speech, I realized you guys are in a great position because you guys can pass on your costs and you have long-term contracts. That's probably a good thing for you, but I'm glad you are doing so well. My first question is, in South America, you had a huge increase. Was that a start of a lithium contract in South America?
Partly, yes, in copper as well.
The lithium market seems to be everybody's looking for lithium. Is that a real growth area for you now?
Yes. It's the demand for lithium drilling is rising in both in two areas. One is Argentina, Chile, I mean South America, and the second one is in Australia. As we speak, we start small programs in both regions, and we hope they are going to be promising. In South America, it's you know, the brine version.
Mm-hmm.
of lithium, whereas in Australia it's a rock version. Yes, it's. We are happy to add lithium to our metal portfolio growth.
Does your expertise in water help you with the brine in South America? Gives you an advantage there?
Yeah. Of course. The fact that we're able to explore with small piezometers and then transform, you know, these exploration wells into production wells or injection wells is a great advantage we have.
Well, that's great. That's exciting because this, you know, if the battery metals are obviously and the environmental metals are the ones that are really gonna be exploding in the future. My real question and concern is, I think you guys are doing an amazing job, and by next year, you guys could be doing $100 million in EBITDA. The only people who seem to care are you, me, and Jean-Pierre.
Yeah.
I mean, your company is gonna be selling 1x EBITDA. I mean, it's already selling at 2x EBITDA, and if you put in the debt at $90 million, your enterprise value to EBITDA is, you know, 3.0x. This company should be
Yeah.
I mean, you're growing. You know, I know people lump you in with industrials, but this has been a growth company, and you know, you should be selling at 8x, 9x , 10x EBITDA. I mean, you're in solid foundations. You have everything that people want. You have, you know, people call that talk about subscriptions. You have long-term contracts that, you know, give you visibility into the future. You have pricing power. Everything that the market seems to want, we have here. You guys are an amazing management. You've managed through amazingly difficult times, and now you seem to have this company, and you know, the basis to really grow, and it doesn't seem to be recognized. It's just frustrating for me because do we give a special dividend?
What do we do to make this thing stand out? Because trading a couple hundred shares a day on the Toronto Stock Exchange, you know, this thing deserves more.
We cannot agree more, Steven. Just bear in mind that, of course, we cannot go against the market. I tell you if the Russian aggression on Ukraine and everything which was collateral to that, I mean, you know, the high price in energy and then inflation on some part of our day-to-day business would have been avoided. We wouldn't be at, you know, trading at such a low EV to EBITDA ratio. Having said that, if you. There is a timing issue. There is a market sentiment issue. You cannot open, you know, the press or, you know, whatever, without being totally depressed, right? Nowadays.
Right.
This is weighing a lot on the morale of the investors and the sentiments. Everybody is getting, in my opinion, too much, you know. I'm not an economist, but, you know, I don't see how three points of increased rate by the Fed will stop inflation but not wreck the economy. Who knows, right?
Right.
The issue is that you look at the space, and you're gonna see that compared to our peers, I think we have the second best EV to EBITDA valuation ratio. I'm talking about analyst 2023 forward, okay? We are in the range of 4.4x-4.7x. I think the top guy is just above 5x. Okay? Yes, it's very modest. Yes, we have been valued at much higher multiple, but that was the market in a good timing and in a good mood. You get me?
Mm-hmm.
We decided to pause for the summer break, the investor relation effort that we do. We're gonna resume that in September to make sure that nobody's forgetting about us. We are trying to regenerate some, you know, liquidity on the market.
All right.
We'll go from there. Okay? We are totally aligned with you. We are frustrated, but sometimes we have to look at what the market thinks about, you know, the space. You see that we are not that bad in this kind of space, okay? Even if it's far from being satisfactory from a pure shareholder point of view. Just be patient a little bit more. I know you are a big fan of us, but I think if and when the general situation stabilizes, we'll have a lot of growth ahead of us.
All right. Well, if next year you do $100 million in EBITDA, I want you to give a special dividend.
We'll see what we give us a little bit, you know, a summer break, and then we can resume this conversation.
Hopefully. Because you will. You're gonna increase your utilization to 70%. You're gonna increase your utilization to 10%. You're gonna grow. You're gonna do $100 million in EBITDA next year. I mean, it's. That's the way it looks like.
Cross fingers. We have some very large contracts which are just starting to ramp up. So, you're gonna see the impact of that, let's say, I would say Q3, mid -Q3 and Q4, but Q4 is already, I mean, sorry, always a little bit kind of weird because of Christmas break.
Right.
H1 next year is gonna show the full force of this contract. We are monitoring the market very closely, okay? To see if there is any corner of the market getting cold feet. As I said, the only one where we saw some kind of cold feet is on the junior explorer financing with equity because the financial markets are really wary nowadays, okay?
Right.
That's a specificity of this market and, thank God we are not that exposed to this. Jean-Pierre, how much is it now on Q2? 15%?
We remain at 15% on.
Yeah.
On junior, yeah.
Okay.
That's a good place to be.
Yeah. I mean, it can be a good place, but it's so volatile. This is why we prefer to be much more resilient and keep working for the big guys.
Yeah. No, I think
These guys.
Competition is a great place to be, being with the big guys.
Yeah. This is what we feel. They are not easy customers, you know. They are very professional and very tough sometimes, but very good people to work with because they have the vista, they have the visibility, and they have the balance sheet.
Right. Yeah. With your IR, I mean, this really is. The EVs are gonna explode the next 10 years, and this is the place. You're the place to get the minerals they need. Copper, they need lithium, they need everything.
Yeah.
Cobalt.
Yeah.
They need all that stuff. You guys make it for them, you know?
Exactly.
Anyway. Well, thank you again. You guys have a good summer, and hopefully.
You too.
The fall picks up.
You too, Steven, and talk to you soon. Okay?
Thank you, Steven.
Bye-bye.
Bye.
Bye.
Once again, if you would like to ask a question, please press star and one. Gentlemen, it's showing no additional questions. I'd like to turn the floor back over for closing remarks.
Thank you, Jimmy. Thank you, everyone. We talk to you in November next time, and have a good summer break. Bye-bye.
Thank you. Bye-bye.
Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining. You may now disconnect your lines.