Energold Drilling's (EGDFF) CEO Frederick Davidson on Q1 2016 Results - Earnings Call Transcript

| About: Energold Drilling (EGDFF)

Energold Drilling Corp. (OTCPK:EGDFF) Q1 2016 Earnings Conference Call May 26, 2016 4:30 PM ET

Executives

Jerry Huang - Manager, Corporate Development and Investor Relations

Steven Gold - Chief Financial Officer

Frederick Davidson - President, Chief Executive Officer and Director

Analysts

Daryl Young - TD Securities

Steve Kammermayer - Clarus Securities

Operator

Good day, ladies and gentlemen, welcome to the Energold Drilling Corp. first quarter 2016 results conference call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, May 26, 2016. It is now my pleasure to introduce Mr. Jerry Huang, Manager, Investor Relations, who will then pass the call to Mr. Steven Gold, Chief Financial Officer. Please go ahead, sir.

Jerry Huang

Thank you, Ron, and thank you everyone for joining us today. My name is Jerry Huang, Investor Relations Manager for Energold Drilling Group.

Before we review our 2016 first quarter financial results, we will like to go over our disclosure policy. Certain statements in the following conference call regarding Energold Drilling Corp.'s business operations may constitute forward-looking statements. Such statements are not historical facts, but are predictions about the future, which inherently involves risks and uncertainties. These risks and uncertainties could then cause our actual results to differ materially from those contained in the forward-looking statements.

I would like to now turn it over to CFO, Mr. Steven Gold.

Steven Gold

Thank you, Jerry. I'll do a financial review of the first quarter and then I'll pass it over to Fred Davidson for his comments and outlook.

Revenue in the first quarter of 2016 was $16.6 million across all of our divisions and that compares to $19.5 million in the same period of 2015. Gross profit margins as a percentage of revenue was almost 11% in the period compared to 22.4% in the same period of last year.

Company had a net loss in the period of $0.13 per share compared to a loss of $0.07 per share in the same period of last year. The drop in revenue in the first quarter of 2016 compared to the same period in 2015 is entirely due to the downturn in energy, which comes as no surprise.

Elsewhere, however, there are substantial signs of improvement in the key mineral drilling segment that have helped offset some of the decline in the energy market, and what is typically a weak quarter for mineral drilling, this segment nearly doubled, an increase of almost 95% on a year-over-year basis. We feel the sector has recovered significantly from its multi-year lows, and is in the early stages of recovery at this time.

Meters drilled in the first quarter of 2016 increased by 55% to 46,400 meters and that compares to just under 30,000 meters in the same period of last year. Moreover, average revenue per meter in the first quarter of 2016 improved significantly to $173 per meter from a $146 per meter in the same period of 2015, representing an improvement of 18.5%.

As capacity utilization rises, pricing should continue to strengthen and margin should also continue to expand, given the operating costs are likely to remain at multi-year lows for some time. The gross margin for the period in the mineral division was 8%, in that period, compared to negative 5.6% in the same period of last year.

The company's energy business continue to be impacted by weak hydrocarbon pricing. While some recovery in oil prices have been evident as of late, the first quarter of 2016 reflected ongoing lower levels of activity in the oil patch. Revenue for the period fell to $6.1 million from $12.1 million in the same period of 2015.

There are some signs of improving activity in the oil sands coring market, heading into the balance of 2016 and 2017, but programs in that region will not become definitive for at least the next six months.

The infrastructure business reported modest revenue in the period due to late period closing of the acquisition of our latest infrastructure drilling company, Cros-Man Direct Underground. Over the coming year, management expects this segment to start to make more material contribution to overall revenue and profitability, as this sector continues to benefit from infrastructure spending in development countries, and more so in developing nations, while having no exposure to volatile commodity prices.

In the manufacturing segment, revenue for the first quarter of 2016 was $2 million compared to $3 million in the same period of last year. Typically, the first quarter is weak in the manufacturing segment given the seasonal sales cycle, and therefore, that revenue level in the period provides very little indication of the annual revenue potential or projection or the market itself. Typically, the tendering process occurs in the first half of year with revenue late, and almost all deliveries of product are made late in the third quarter and fourth quarters.

Energold ended the quarter with one of the strongest balance sheets in the industry, remaining well-capitalized with almost $12 million in cash and almost $64 million in working capital. Having closed the acquisition of a new infrastructure business early on this year, management is focused on building out all of its business units organically, but does continue to evaluate prudent, yet accretive, acquisitions across all business segments, while allocating capital on case-by-case basis to improve productivity and grow internally as well.

With that brief financial review complete, I'll pass the call over to my colleague, President and CEO, Fred Davidson.

Frederick Davidson

Thanks, Steve. And excuse me today, ladies and gentlemen, my voice has gone today. But in any event what we have seen, as Steven mentioned, that the minerals we are starting to see a fairly dramatic recovery in mineral activity. First quarter is normally one of our weaker quarters for minerals, it was fairly strong. We're seeing the second quarter similar strength. And going forward for the balance of the year, we expect to achieve the total drilling for last year by a significant amount.

Energy is a little frustrating, we all know that. The very nature of our aspect of the energy drilling at least in the hydrocarbon sector is that we're servicing the oil sands. And while some of those programs can be deferred, it can't be stopped. Therefore, we do expect in 2017 to regain some initiatives in the energy side, continuing programs that are required to [ph] repatch, but can be deferred, as I mentioned before.

What is interesting is the manufacturing sector. Steven was quite right, first quarter, and generally first half is light, but right now we have booked over 6.1 million pounds in orders and we expect that to grow towards the end of the year. The only issue we'll have is whether we can get it all out prior to the end of the year. But manufacturing is now looking quite a bit stronger than it did in prior years and we are anticipating the additional growth going forward.

Company itself is focusing, as we've always said, as a diversified driller. We're starting to see that. The initiative takes time to implement. We're starting to see the response with some of our clients and we're starting to see new clients coming to the door and we expect this year will be a modest recovery over last year, especially in the latter half of the year as the minerals gain its ongoing strength.

Our [ph] crew is already sustainable. We have gone through some effort and we are improving certain cost in the first quarter to see that represented what we call a hibernation strategy where in very weak markets we put equipment into storage, we reduce the staff significantly and we're tying to keep the G&As in certain markets down to the point where it's a minimum churning over, but still be available, should the market opportunity present itself in the future.

Other markets we're seeing are steady and just strengthened up. Europe is becoming stronger. We're seeing growing activity there. Africa is starting to slowly regain its position after the Ebola event from the last year-and-a-half, two years. And Central Africa is becoming more apparent in some of the rather larger jobs we're currently bidding.

I do want to stop for a minute and just mention the Hail Mary's as we call them. We are pursuing a number of very large potential contracts. We call them the Hail Mary's, because the each one is heavily tendered, heavily bid and very competitive, but each one would be very significant to the topline.

We spend a considerable amount of time pursuing those in dollars in the event of when it works. And certainly, at this point in time, we're seeing some indications as we go forward, that is, there will be an opportunity to add significantly to the topline and hopefully bottomline.

We've reduced our crews to bare minimum, I think, at this point in time; still keeping on the critical staff. And that's probably why we're seeing the margins are still tight. There are certain personnel you don't want to layoff because they are our future. And we're investing in our future and future growth.

The response in minerals is exactly that situation, virtually add nobody, but in the process we're able to double revenues and the margins went from negative to positive. So if the strategy works, especially there is additional growth event, we're planning for growth in the next year. Steven?

Steven Gold

Well, that's it, I think as far as our review is concerned. Operator, we'll be happy to take any questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from the line of Daryl Young with TD Securities.

Daryl Young

Just had a quick question for you. Wondering if you can clarify a little bit on the revenue growth prospects and margin expectations within manufacturing?

Frederick Davidson

What we're looking at there is a twofold approach. The manufacturing has always been frustrating, because its very cyclical, tends to defer. You get a large contract and it comes through, and then there is a dull, sort of a dead period in between where you're incurring costs.

We've done two things in our strategy. One, we're selling more small equipments supplies and rigs and this is after reestablishing the credibility of Dando when it suffered so badly in 2011. That base is sort of the average sale per month. But more importantly, it's the big contracts that we're bidding on to net margin. And we would expect those margins to stay in the 25%, 30% range. Now, having said that, there's one contract we're bidding on, I know is its lowest 20%, but it's a very large contract. So I'd say, 20%, 25%.

Second part is, the way we recorded is a little differently, because labor is a fairly small [ph] collocation of Dando's work. We generally throw in labor as a period expense where direct costs, such as some contracting, et cetera, going against the margin, so it can be a little confusing in that respect, but yes, 25%, 30%, at this point in time.

Daryl Young

And then you're expecting topline to be kind of flat to up from 2015 levels, if you can get the contracts through?

Frederick Davidson

Well, we're expecting to hit 2015 levels anyhow, but we're hoping, and quite frankly, it's a matter of getting the contract signed, equipment delivered and everything else. But it's almost going to be, some of it, over and above, but we're talking about for 2015 -- or compared to 2015, it's going to work its way into 2016.

And in that case, 2016 first quarter will be busier than our normal first quarter, as those contract carry through. And some of the contracts we're tendering, and in fact some of that we've signed, are the ones that we'll probably extend the construction period through 2015 or rather 2016 into first quarter of 2017. So I'm actually looking for to a fairly positive 2017 first quarter compared to our normal trend.

Daryl Young

And then just a quick housekeeping question. Is Cros-Man going to continue being reported through energy division?

Steven Gold

Well, for the time being, yes, the whole group of infrastructure and energy, we break it out in the segmented results. But depending on its growth, it's probably worthwhile to separate it as we do see it as a separate business unit. But for the time being, it will be grouped with energy.

Frederick Davidson

Yes. In the first quarter it was only $0.5 million, which is left it in there, because it's basically Canada, if you will, and they do, do work in the energy side pipeline work, et cetera, so about 40% of their business is pipeline work last year.

Daryl Young

And then just one other question. In terms of the convertible note, I know it still weighs out, but I was just curious as to what the strategy was around on unrolling that?

Steven Gold

You're right, it's year out, but we do think about it regularly. At this time, I have to admit, whether it converts who knows, we're not basically basing our projection on the basis that does convert. We would consider rolling it forward if the right opportunity is there. Certainly the interest rate that we're paying now is not something that we'd like to see if we do roll it. So broad answer to your straightforward question, but we haven't gone to the point where we have decided what we're going to do either way.

Operator

We'll now take our next question from the line of Steve Kammermayer with Clarus Securities.

Steve Kammermayer

Just a question on, I guess, the so called Hail Mary share you're talking about. Can you give us a little more color on that? How many could possibly be out there, the size of them, the duration of the contracts?

Frederick Davidson

Well, actually, that's the interesting part. A number of the contracts including one that we're going to be tendering on is up to 10 years, but we call it a Hail Mary. It has to have at least the 10% impact on total revenue otherwise it really doesn't qualify from our point of view. We have Hail Mary's actually in three sectors. In the mineral drilling, we're bidding on one right now. And in fact, we've already done the pilot work for that program on behalf of the clients, so we're well down the way on it.

The second one is in the manufacturing side, where we're bidding for some large national programs. And as you know, more and more things like water is becoming critical and we're now getting national entities approaching us to provide a large scale sort of rig supply. And when you supply the one set of rigs, it tends to follow-up with more sets of rigs, as they like to keep consistent. And boy, I wish I can tell you that we're ready to build, [ph] they probably wouldn't want to change it. But there are some that are very significant in size, and again, we regard a Hail Mary is at least 10% up.

And the third one it tends to be on the energy related, but in non-traditional marketplaces. And basically, we're focusing on Latin America and Africa, where we can use our expertise both in logistics and working in these countries, but with the technical expertise provided by our experience in Alberta. And again, it's not a Hail Mary unless it's 10% from gross revenue from the growth. So these are the magnitude in size. But the other side, of course, is they're highly a competitor.

Steve Kammermayer

And now just earlier in your prepared comments, you talked about some optimism coming through. Does that include winning some of these Hail Mary's or is that strictly for existing business?

Frederick Davidson

That's existing business. We don't even model Hail Mary's into our forecast. We run our forecast, which is on the conservative basis internally. We do our planning on that. And it works as a separate unit on these programs where in many ways they'll be self-financing and self crewing, self resourcing. So our plans right now -- and Steve's comments were totally valid that we are seeing strength in the mineral side, we are seeing some recovery on the energy side and the manufacturing is strengthening as well, but none of those reflecting what we would call a Hail Mary.

Operator

[Operator Instructions] There are no further questions at this time. Please continue.

End of Q&A

Jerry Huang

Thank you, Ron, and thank you, everyone, for joining us in reviewing our 2016 first quarter financial and production results. We look forward to our next quarter's call with everyone. If you have any questions or would like to submit questions for our next conference call, please visit our website www.energold.com or call us at the office 604-681-9501. Thank you for your continued support of Energold Drilling. Have a great day.

Operator

Ladies and gentlemen, this concludes today's call. Thanks for your participation. And you may now disconnect your lines.

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