Geodrill Limited

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00:05 [Call Starts Abruptly] the lower than average gross profit margin in Q3 twenty twenty one and Q3 twenty twenty is characteristic of the wet season, typically our weakest quarter. 00:17 The EBITDA for Q3 twenty twenty one was four point seven million dollars being seventeen percent of revenue.

On a year to date basis, EBITDA is twenty two point one million dollars or twenty five percent of revenue, reflecting the strong demand for the company's services throughout the year. 00:45 The net income for Q3 twenty twenty one was one point seven million dollars or zero point zero four dollars per share.

On a year to date basis, we have more than doubled our net income from five point four million dollars to eleven point four million dollars. Another highlight, as at September thirty twenty twenty one, the company significantly increased its cash position to fifteen point eight million dollars and ended the quarter with a net cash position of five point five million dollars.

01:24 At this point, I will turn the call back to Dave.

01:29 Thank you, Greg. Before we move to the Q&A portion of the call, I'd would like to provide a brief outlook for the remainder of twenty twenty one.

Twenty twenty one today has been marked by robust demand for drilling, strong oil prices and increased utilization. With the strong market fundamentals, our outlook for the remainder of the year remains exceedingly positive.

01:51 Consistent with our long standing commitment of being equipped with a modern fleet of rigs and a clear business vision still remains a serious contender in our industry as we remain focused on growth and on being drill-ready in twenty twenty two and beyond. 02:10 Thank you for participating in today's call.

We'll now be pleased to answer any questions you may have. At this point, I'd like to say operator to provide directions to anyone who wishes to ask question.

Thank you very much.

03:01 Good morning. Congrats on a solid top line.

I guess my question is mainly around the gross margin, like what do you see in the cycle that is going to help us understand how these gross margins are going to look? I mean activity looks very strong and continues to be pretty strong, but the gross margin looks like a bit of a moving target, like -- any color on that?

And why the weakness this quarter despite the strong top line?

03:32 So the growth -- sorry, Greg?

03:37 Go ahead, Dave. And then I'll just -- if you want to start and then I'll just add in or I can [Multiple Speakers]

03:45 I'll give it to you from an -- I'll give you my explanation, I mean, from an operational perspective I'm dealing. The front phase of the bidding, and I see the rigs come in the door and out the door and come into maintenance and so on and so forth.

Whereas Greg gets to sort of break it down into numbers. 04:05 But basically, quarter three is always bit of a slippery side, because it's our wet season quarter.

And what typically happens is, rigs come in from the field. And when the revenue stops, unfortunately, cost do not stop on the same day.

So what happens is, the rigs have to basically be [indiscernible] base. And for a period in time, we still have the costs without the revenue.

04:42 Were this quarter was a little peculiar as compared to the quarter three and twenty twenty? Is that the -- we had the cost as the rigs came in from the field and then the wet season ended rather more quickly than expected.

So we actually had the costs at the tail end of September where the rigs were going back out to the field. And at this point in time, when we remobilize back to the field, we have the high costs of training and preparing the guys so that they go out to the field and do their job safely and this comes without revenue.

So essentially what happens is, we have the costs either side of the parabolic in this particular quarter as opposed to the quarter three last year. 05:48 So we had the costs without the revenue.

So this year it was a factor of two versus last year. If you recall last year, we had a slow quarter one, then we had COVID, so we had reasonably slow quarter two.

And as we ended quarter three, things started to pick up. And the run rate at the end of quarter three was reasonably strong and that resulted, if you recall, in a record quarter four.

The difference really between this quarter and the quarter a year ago is that we didn't have the revenues and therefore we didn't have the costs on the left side, if you like, in July side of -- in the quarter we only had the costs as we exited and went out to work. 06:35 That was point number one.

There was a couple of other things. We had different -- we had different mix of drilling.

We had -- we drilled basically higher percentage of diamond core drilling in this particular quarter versus the reverse circulation and just different cost structures and different profits for different services. 07:04 And the other thing is, we had less multi-rig jobs, and that was just characteristic of this particular quarter.

Basically, what this all resulted in was lower revenue per shift per rig. Look, I think as Greg was pointing out on as he was speaking through the financials.

I think the thing we really need to focus here on is the strong result that we achieved. That’s how we end the day.

And at that point I will just hand that over to Greg.

7:34 Yes. let me add on to that, Ahmad.

I mean, I think if you -- the way we look at it from the finance perspective is, if you look at Geodrill’s gross margin for the last three years, and I'm talking annual, okay? So for twenty twenty, twenty nineteen and twenty eighteen we have a twenty five percent gross margin which is the highest in the industry.

So, we have a very strong gross margin. What you're seeing in Q3, Q3 is typically we view it as almost an investment quarter in the business.

08:10 So you're seeing -- we expect a lower gross margin in Q3 for the points Dave mentioned. But what you really have to focus on is the year to date margin.

And the year to date margin, because we had an extremely busy Q1 and Q2. As Dave said, we entered into wet season a little earlier and we're out of that a little earlier.

But Q3 is wet season. So year to date our gross margin is twenty seven percent, and that's an exceptional gross margin.

08:48 We also -- we tried to communicate. I think when we are in Q1 we had thirty one percent gross margin, we were trying to communicate to people that that's really on the high end.

That was reflective of an extremely busy Q1, same in Q2. Q2 the margin was twenty seven percent.

So, hopefully, we're explaining -- I think for Geodrill. And just the exploration in general, a lot of this is the first half of the year loaded.

And then what happens is, wet season is upon us, but at Geodrill we take advantage of that. We continue with a very active workshop to make sure we have rigs ready for Q4 and twenty twenty two, but we don't slow down.

9:40 We used to -- we actually used to manage Q3 just to breakeven or make a penny. It truly is an investment quarter for us.

So this Q3 we were able to earn zero point zero four dollars a share, one point seven million dollars. So we're very, very happy with the outcome of this wet season.

10:05 That's great color. So if I understood correctly from a year-over- year comparison there was remobilization costs within this quarter that was not -- it was not present in last year's quarter, that's one of the factors, right?

10:22 Sorry, I just missed that Ahmad, what was that?

10:24 There was mobilization cost, because I think Dave mentioned that you guys had to put the rig back out on the field during the quarter as well, right?

10:33 Yes. Exactly.

10:34 So that should benefit the Q4, right? Because those normally come in Q4.

10:40 Yes, it's -- you really have that -- you have to average out the quarters for us. And I mean, again, when we had such an exceptional Q1 and Q2, we tried to let people know.

Look at the --look at the averaging for us, because then we had rigs coming back off.

10:59 That's great. And just in general terms, how are you guys seeing the pricing trends amid this increased activity.

Are you starting to see any pushback on prices or should -- just trying to think how we should look into twenty twenty two bidding season.

11:18 Pricing is on the move, Ahmad, but cost are as well. So as pricing increases it tends to move in lockstep and you would hope as the industry gets a little busier than it might get a little bit more pricing power.

At the moment we are seeing some unusual things going on. We're living in a very different world.

Shipping cost are continuing to doubled, if not tripled. The cost to move one twenty foot container used to be three point five thousand dollars, it's now seven thousand dollars or eight thousand dollars.

And that's just because as the world is coming out of COVID and there's a shortage of chips, supplies all starting to raise their prices and the cost of hiring people generally is increasing. And as a result we are having to increase our pricing to capture some of those costs.

12:15 But the margin squeeze that you see in this particular quarter has nothing to do with that. It was really just as I was say, either side of the parabolic.

In this particular year we had some costs and we didn't have that last year. So, when you look at it on a year over year basis, I mean, the obvious question is, how did revenues go up forty four percent to relatively flat EBITDA result.

So it’s kind of -- it's a bit of -- it's a bit compelling when you first look at it. When you break it down, it's quite easily explained in two or three things.

12:57 So one was the double cost of the mobilization and the demobilization and all the salary costs without the revenue, essentially we had the cost layout, we had fixed costs put out without revenues. And a certain portion was also in mix.

We just had an unfavorable mix in this particular quarter and that had a little bit to do with the geographical mix, most of the business moved into a region where they just happened to drill a less favorable mix force. And I expect things should normalize as we exit quarter three and we end to quarter four and twenty twenty two and beyond.

13:41 I would never encourage anyone to judge us based on our Q3 results. We normally look at Q3 and say, hey, if we can make a penny, maybe two, that'll be a great year.

So we're pretty happy.

13:55 That's great. Thank you.

Thank you guys for the color and congrats again on the solid quarter. Thanks.

14:03 Thanks, Ahmad.

14:04 14:03 Thanks, Ahmad.

14:17 Good morning, guys.

14:20 Good morning, Daryl.

14:21 Just following up on Ahmad’s questions about some of the added costs that went into Q3. So does that position for a strong growth quarter in Q4 and revenue quarter in Q4?

14:41 Q4, when you say strong, again, our two strongest quarters are Q1 and Q2. So, I think we're comfortable.

October is behind us in November, And then you hit Christmas season here. But Q4 is looking strong.

But again, when we look at this business, we look at it annually and really we're seeing a lot of the -- twenty twenty two is going to be exceptionally strong, and that's going to be exceptionally strong again, because you're going to have the Q1 and the Q2 in there. So hopefully I'm answering your question.

Q4 is going to be another solid quarter, but I think where we're really going to see the strength again. And we put in the press release ninety five percent of our clients drill for gold.

Gold is eighteen sixty, so there's tremendous demand, but a lot of our clients start their programs in the New Year. We expect a solid Q4 and an exceptionally strong twenty twenty two.

16:00 Okay, great. And when you're talking about twenty twenty two, is there any change in the mix of drilling that you've got planned for twenty twenty two [indiscernible] in terms of some of these new exploration contracts versus maybe more mine side drilling and if we should be aware of any margin impacts when we look at a twelve months run rate for twenty twenty two versus what you guys have been doing thus far in the recovery of drilling cycle.

16:26 I think if you average it out over the full quarter – sorry, I was going to say, I think if you average it out I think the revenue for twenty twenty two would be where your build model today. I think where I would be guiding you to is look on across the four quarters and average twenty five percent, twenty four percent, twenty five percent over the fourth quarters over next year.

I think that's pretty much where we're going to end up this year. Which in itself is a reasonable result I think.

17:04 Looking at your -- I'm just looking at your -- while you guys have been speaking, I' just pulled up where you you're at twenty twenty one and I think we're going to land about there. I think you can just basically put in an increase of revenues for next year, and we would say that the margins that you've got in [indiscernible].

17:34 Okay. Perfect.

And so no real change in the drilling mix either?

17:39 Well, we don't, because we provide a service with the reason that we provide, the customer has the option being able to switch from one to the other. And we never really know in any given day, what percentage it's going to be across the various quarters.

But is the three hundred and sixty five days next year is going to play out, I think that if you're shooting for a zip code, I'd work on twenty five percent.

18:06 Got. Okay.

Thanks very much guys.

18:08 I think, Daryl, the mix is also a function of the type of drills we have. And if you look at -- again, we put significantly [indiscernible] through the first nine months in PPE, but it's consistant amongst the [indiscernible] we'll add an underground drill rig, because we need that.

We'll add a couple of multi-purpose, we will add a core, etcetera. So the mix should stay the same.

18:38 Okay, great. Thank you.

18:42 Thank Daryl.

18:50 Okay. No further questions I just want to thank everyone for being on the call today.

Thank you very much. Have a great day and be safe.