Geodrill Limited

Thank you, Operator. Good morning and welcome to Geodrill’s Q1, 2022 quarterly financial results conference call.

I'll begin with an overview of our operations and performance for the quarter. Our CFO, Greg Borsk will then give a more detailed review of our first quarter financial results, after which I will discuss our output for the remainder of 2022.

So the first quarter of 2022 was the best we've ever had in the company's 25 year history. Our record quarterly performance not only delivered on key financial metrics, but also demonstrated steady valuation generation.

We generated record revenue representing a year-over-year increase of 9%. Please recall that for the corresponding quarter, a year ago, we achieved a 70% year-over-year improvement, which was an exceptional result.

And therefore any increase on this is in itself also considered exceptional. We also achieved record EBITDA 31% of revenue.

We delivered record net income of $6 million or $0.13 per share. Total equity improved by a record $5.2 million or 6% on the previous quarter to $92.7 million and that is up year-over-year by $13.8 million or 18% generating for our shareholders return on equity of 16%.

We also achieved return on capital employed of 21% and we ended the quarter with net cash $5.6 million. And we also paid a cash dividend during the quarter of CAD$0.03 per share.

The bottom line is that rig for rig, Geodrill continues to outperform generating record profitability and demonstrating that our model works. I'll now turn the call over to Greg Borsk to discuss the details.

Thank you. Thank you.

Greg.

Thank you, Dave. As a reminder, all figures reported are in U.S.

dollars. The company generated record revenue of $33.4 million in Q1, 2022, an increase of $2.7 million or 9% when compared to $30.7 million in Q1, 2021.

The increase in revenue was a result of the increase in demand for the company's drilling services. With gold price averaging at approximately 1,900 an ounce during the first quarter of 2022 global exploration spending continues to be strong.

The gross profit for Q1, 2022 was $9.8 million being 29% of revenue compared to a gross profit of $9.6 million for Q1, 2021. The gross profit increase is a result of the increase in revenue.

Overall, the company realized record EBITDA for Q1, 2022 of $10.4 million being 31% of revenue compared to $10 million for Q1 ,2021. The company also realized record net income for Q1, 2022 of $6 million or $0.13 per share compared to $5.7 million for Q1, 2021 or $0.13 per share.

As Dave mentioned we ended the quarter strong with net cash of $5.6 million. At this point, I will turn the call back to Dave.

Thank you Greg. It was clear, our financial performance is a testament to the strength of our business and the demand for our drilling services.

Before I go to the Q&A portion of the call, I'd like to provide a brief outline and key growth opportunities for the remaining 2022. As mentioned, we're benefiting from strong gold and commodity prices and [indiscernible] continue to drive demand for our services.

We've increased exploration budgets, pushing utilization higher, we're now also seeing increased pricing for our services. Our sharp focus on executing on our capital markets objectives has put us in a strong position to continue to benefit from the robust exploration environment.

Against this backdrop and with more than $130 million in contracts in new drilling contracts, all with top tier gold producers and commodity producers and an expanded geographical footprint. We expect to keep executing at a solid pace, delivering steady revenue growth and profitability.

Ultimately making Geodrill more attractive than ever as an investment. This concludes our prepared remarks on our financial results.

Thank you for participating in today's call. I'll now be pleased to hand the call back to the operator for anyone who has a question.

Thank you.

Hey, good morning guys. And congrats on the good start to the year.

Thank you Daryl.

Just looking at the commentary made in the release about effectively acuity levels continuing from current, does that imply that there really won't be much seasonality this year and you're effectively running full steam at current kind of revenue at an EBITDA levels or should we expect some traditional seasonality with increases in Q2?

Well, the seasonality generally kicks in to Q3 down. So we do expect seasonality.

But we've expanded our geographical footprint into jurisdictions where we don't suffer from that seasonality. So I'm expecting that we will see seasonality but we'll probably have less of an effect than attending on a percentage basis in previous years.

The other thing I would just add is that whilst it was a strong quarter, the majority of the work that came from the quarter was as we pretty much exited March so the real story is here it's not the strong Q1, we think it was a great result. But around January, we're actually [indiscernible] February and that was because basically, I mentioned we've signed $130 million in contracts, so we're very busy getting ready to start those contracts.

The revenue is of course the lag out to any contract. And so bottom line is that threw out the quarter real story, there's a very, very solid back half at March.

And what this does is this all goes particularly well for quarter two. So yes basically, if you liked quarter one, and [should be] quarter two.

Okay, perfect. And then just in terms of the rigs that are being manufactured and as well, the rented rigs I don't think I've ever seen you report that before the rented rigs, but is that a reflection of just huge demand and maybe some backlog and getting new rates in the door or just a little color would be great?

Well, the rented rigs, it's not really, it relates to kind of a new contract and as we are, we've ordered a couple of new rigs and we'll be ordering additional rigs, but to kind of kick-start turnkey, start that contract we're renting rigs to get it go. But the plan is to eventually as soon as we can get our own new rigs in there to do that.

In terms of manufacturing, we always have rigs going through. You always see, each year we kind of do a mix of new rigs from manufacturers that there is a bit of a time lag on that.

But through our workshop, Daryl we're also able to get rigs out on our own. And so you'll see, throughout 2022, you'll see a mix of rigs coming out of the workshop being available for use and brand new rigs that we get and put in operation right away.

Okay. Great.

And then just one last one on the labor environment and margins. Seems like you're doing a pretty good job of passing through costs at this point.

But should we expect anything on the horizon in terms of labor costs, inflation or any risks there?

It's definitely there. And it's alive and well.

So we in a fortunate situation this demand rising. I think it's an even playing field for us and most of our competitors.

So our costs are rising. So too our competitors, we raise our prices, so too our competitors.

I think the trick is what we run into if we can is get a little bit ahead of the curve so that we get some gripe out of it. And we should, we're doing reasonably well on that.

But it's certainly far from the suppliers market at this point in time. I think that that's going to be imminently arrive.

But we're not there yet.

Okay. Great.

I'll hop back in the queue. Let someone else ask a question.

Thanks, guys.

Thanks Daryl.

Thank you Daryl.

Good morning, guys. Good morning Dave.

Congrats on a solid quarter. I guess I want to go back just to the margin profile.

If we look at, on a trailing 12 month basis, we haven't really seen the operational leverage that we'd normally expect. Maybe help us understand why is that?

Is that a function of the longer term contracts that are more stable and tied to mining operations? Just trying to wrap our head around looking at ahead, revenue is strong, but trying to wrap our head around where the margins are going to settle on.

And should we get back into some seeing the benefit of that operational leverage and a little bit of a margin expansion back in the last four quarters trend?

I think, you are aware that -- sorry --

Do you want me to start or just the –

No, no. You are fine.

If you look at the gross margin that in 2021, very strong in Q1 and Q2 and then it dips in Q3 when we have wet season and that's because we still keep the workshops functional. We still have the cost of goods sold without as much revenue.

So earlier we had a question on seasonality. There is definitely seasonality in the business, but overall the margins, if you look at, I think for the last three years we have a gross margin of 25%.

And the key whenever you have, whenever you're in an inflationary environment labor costs are increasing, shipping costs are increasing, everything's increasing. We operate under that scenario and we try to recover some of that through the revenue line.

But I think the point is we manage the business but try to maintain our gross margin, which isn't always easy. I mean, if you're increasing revenue and you're able to maintain your margins we look at that as a positive.

So if you look at Q1, again and I think in Q1, 2021 we had exceptionally high gross margins, 29% this quarter and 31% last quarter and that was a function of being extremely busy. In terms of busy, I mean having a lot of revenue.

So a lot of the rigs, most of the rigs utilization wise are out drilling. And that is characteristic of Q1 and Q2 where you have high gross margins.

And then when we get into Q3 and then Q4 kind of with the holiday season, those margins kind of come in. But I guess what I'm trying to communicate is again, there is seasonality, you see extremely high gross margins in the first two quarters and then they kind of level off in Q3 and Q4.

But overall, we managed towards our 25%, 26% gross margin and through Q1 and when we were able to release Q2 we'll be well ahead of that.

I will just jump in just very quickly. I didn't think the margins were that far off.

Actually, I thought given what happens is when a bunch of contracts are signed, the lag out is always the revenue and to go through this sort of negative cash generation for a couple of months while everything's getting started. I actually thought the results were exceptional given the start of all this new work we had to get on the way.

You recall, some years ago, we had a very busy amount of startup stuff going on in the quarter four. And it reflected in the following quarter that we actually saw the margin growth in the quarter that follow, I think there's just going to be a similar situation here.

So I didn't see anything. I thought the margins were pretty good under the circumstances.

And also you got to appreciate that no matter where you go, no matter who you're talking to, everyone who is complaining about pricing these days, doesn't matter whether you're going down the supermarket to buy [those mix] a bottle of beer or gallon, gallon of petrol for your car. Costs are arising everywhere you go.

And it's no different in our business to maintain these margins in a fast moving cost environment as we in, as everyone is in I think we do pretty well. I am happy with the results.

No, that's great. I mean I guess my point was on the EBITDA line.

I mean, I've seen revenue growth. If I go from Q2 last year, until Q1 this year, which is the last 12 months revenue growth is [47, 44, 8% and 9%].

While EBITDA is lagging that in growth and 16%, 21% and 5% this quarter, typically, I mean the way we think about it is that in an upcycle EBITDA growth should outpaced revenue growth. I'm just trying to understand if that's, if the trend over the last 12 months as a function of a little bit of a change in the business mix and the contract mix that you guys have taken advantage of the sub-cycle to get into longer term more stable contracts or was there something else in terms of some ramp up that will react to see the full benefit off on the profitability line going ahead?

A bit of both.

A bit of both. That's great.

That's it. That's my question.

Thanks, Dave.

Thanks Ahmad.

Thanks Ahmad.

Okay. With just no other calls -- no other questions, we will end the call there.

Wish everybody a belated Happy Mother's Day for yesterday, so Mother’s Day out there in all the countries where it was Mother’s Day, Happy Mother’s Day! Have a great day.

Thank you everyone.