ALS Limited (ALQ) Earnings Call Transcript & Summary

Welcome, everybody, to the ALS Limited post-AGM management conference call. [Operator Instructions] Thank you once again for joining us today. I'll hand over to our first speaker, Raj Naran, Managing Director and CEO.

Good afternoon, everybody, and I hope this call finds everybody safe and healthy as well as your families. Thanks for joining the call today. With me I have our CFO, Luis Damasceno. You all would have seen that we've provided an update on our first quarter performance at our AGM today, and I just wanted to walk through that today and then open the call up to Q&A. I need to be clear from the onset that I can only discuss what appears in AGM and the materials released to the ASX this morning. So I'd appreciate if you would keep your questions focused on these areas, and I apologize in advance if I'm unable to answer your questions at this time. Just some key messages from me in terms of some opening comments. At a group level, we saw total revenue decline of 9.8% for the first quarter of fiscal year '21 compared to the prior corresponding period. Our total revenue performance improved by the end of the quarter -- Q1 of fiscal year '21. Underlying EBIT margin was maintained compared to the same period last year despite the fall in revenue. This demonstrates the resiliency of our portfolio and the resiliency of the geographies that we operate in. Recent acquisitions are performing well and made a strong contribution to the group. Hopefully, we believe that Q1 was our most challenging quarter as economies continue to reopen around the world and sample flows return to our laboratories. We are carefully watching the second wave of COVID-19 and hoping that, that does not have a material impact for our Q2. The company has strong liquidity of over $600 million, and our leverage ratio is at 1.9. So we feel we've got good support for our acquisition strategy, which continues to be focused on bolt-on acquisitions in the food and pharmaceutical sectors. In terms of the different businesses, Life Sciences, this division was the least impacted by COVID-19 as it was operating in key supply chains. Most of our laboratories remained open during economic shutdowns as they were in the essential businesses. We did see a small decline in total revenue in Q1 of fiscal year '21, although each successive month we did see an overall improvement in the business. New opportunities for the business to support our clients during and post-COVID-19. Short-term opportunities are testing for the presence of COVID-19 in humans. Short to medium term, we're doing surface testing in workplaces and public transport to detect viruses. Medium to long-term opportunities, we believe that regulatory bodies may mandate virus testing across our key environmental food and pharmaceutical markets, which we are well set up to support any regulations that may come along. In terms of the Commodities business, Geochemistry sample volumes were heavily impacted by COVID-19 in April and early May before we started seeing recovery in late May and June compared to the same period last year. Junior equity raising data and production update from majors indicate an increase in mining activity, which we are starting to see in sample flows, and we expect to see positive sample flows from the equity raisings in the next 60 to 90 days. Industrial business, the Asset Care continues to be the most challenged as clients defer nonessential maintenance work due to -- and also due to our business exposure in North America to the oil and gas market. So I'm just going to leave it at that. I mean I believe everyone's seen the transcript from the AGM or heard it. And again, I appreciate your attendance on the call, and I'll open the call up for questions.

[Operator Instructions] The first question comes from Michael Aspinall from Jefferies.

Just firstly, on the revenue side. Can you give us any indication of what the 1Q looked like for the different segments at the revenue? And did you say, I think I might have missed it, that Life Sciences was down slightly in the first quarter?

Yes. So Life Sciences was down slightly, and we do not provide a revenue breakdown by quarter. So we've not done that in the past. I think we'll provide more visibility at the H1 results.

Okay. And did you have much of a contribution from the new testing services related to viruses in the first quarter?

We did. It started to come through in June, and we'll -- and we believe we'll continue to see that come through the remainder of this fiscal year.

Okay. And what have been the most and least affected end markets for Life Sciences today?

I mean I think the most affected would be Latin America because that region is still significantly impacted by COVID-19, and they're still seeing significant shutdowns. I think the least impacted region would have been Australia.

And what about end markets instead of regions? Or it doesn't really look like that?

Yes. I think in terms of -- I mean, we just don't normally provide that. So I'd prefer to stay away from that.

Okay. And on the cost side, has there been much of a benefit from the various government support programs for furloughed employees?

It's not material. Yes. No. I mean, we've -- I think the biggest stimulus package globally was the JobKeeper in Australia. And for us, that was not material because I think independent, if the JobKeeper was not in place, we would have made greater reductions to our workforce. So overall, the impact is not material to our results.

Okay. And then one more on the cost side. Apart from employee costs reducing in response to revenue, what are the other cost levers you've been pulling?

Yes. So we've done everything from site rationalization to managing our supply cost to all discretionary spend, travel. The business up until the impact of COVID-19, and everybody is aware of this. The business was showing continued growth over the last 3 years, and the business was structured for continued growth. And we adjusted our entire cost base to really manage our way through this pandemic. And so we eliminated more than just head count. We did a lot of structural changes within the organization here.

Okay. And then just the last one for me, and I'll let someone else have a go. How are you seeing the potential for any opportunistic M&A? And is there any appetite from vendors and/or yourself in this kind of environment?

Yes. So I think from our perspective, our strategy on acquisitions remained solid. We had a full pipeline of potential acquisitions pre-COVID. We've started to engage again with potential acquisitions, and we believe the appetite is still there. We -- liquidity-wise, balance sheet-wise, we're strong and there still is an interest on that end. I mean, our discipline around acquisitions remain the same. So we are seeing opportunities come up, and we continue to explore those opportunities.

The next question comes from Paul Butler from Crédit Suisse.

I just wanted to confirm the comment that you made just before. So in Geochem, you're saying you expect the sample flow to be up year-on-year within the next 60 to 90 days. Is that -- did I hear that correctly?

No, that's -- yes, that's not what I said. What I said regarding Geochemistry sample flows is we are seeing improved Geochemistry sample flows currently. So we saw that starting in June. We've seen continued improvement in July. And what I did say is that we've seen improvement in equity raisings, and we should see benefit from that in our sample flows in the next 60 to 90 days. I made no reference to comparison to the prior year.

Okay. Okay. All right. So what you're seeing with the financing data is constructive and expect that to benefit. Okay. The other thing I just wanted to ask about is you're saying that some of the cost cuts that you put through are structural. Hopefully, when things return to something closer to normal, hopefully sooner than later, so how much of that structural benefit do you think you can hang on to?

I mean we believe that -- yes. No. I mean, I think from our perspective, we're still managing our cost base very carefully. I mean the management team is very experienced at managing its ways through cycles. And whilst we're pleased with the outcome of the first quarter, I mean, maintaining margins, I saw as very positive, especially in light of looking to see what our competitors have been delivering. But we're still watching our cost base very carefully. I mean, I'd like to see a solid H1 worth of positive trading. And I still think after that, we'll be still able to maintain our costs carefully because, again, once you sort of adjust your cost, we'd have to see 1 or 2 years of continued growth for us to readjust our cost base to where it was prior -- pre-COVID-19.

Okay. And are you able to sort of give us a bit of a quantum around the COVID-19 testing opportunities? Is it -- how significant could it be in the context of the broader group?

Yes. I mean -- yes, I think at this point, we'll provide clarity on that at the H1 result. I mean it's early days for us. We -- as we're rolling out our services, we are seeing greater uptake of the services in -- and I think to provide a more accurate number, it'd be more appropriate to provide at the half year results.

The next question comes from Alex Karpos from Goldman Sachs.

Look, just want to touch a little more on the margins. Quite frankly, a pretty impressive result, obviously, given all that's going on to hold those flat. Can you give any more color around by segment? Any trends we should be aware of? How it played out for mining, Life Sciences, et cetera, in the period?

Yes. No. I mean, the only commentary I'll make there is that I think what we've seen is that Commodities and Life Sciences performed better than expected. I mean, we've made it very clear that the Asset Care or the Industrial business was the most impacted. So we saw that business have a margin drag. So -- I mean, I think that's about as much as I'm willing to say at this point.

Got it. And on Life Sciences, I appreciate the commentary about revenue holding up okay throughout the period. In the U.S. specifically, have you seen that hold up okay in recent months as things have gotten a little bit worse over there? Or has it been deteriorating or has it held up okay as that quarter ended and into today?

Yes. So I mean, I think, overall, what we saw from COVID-19 -- and really, it's not only the U.S.A., but we saw an initial erosion of revenue, and what we're seeing is a gradual improvement of revenue as things improve. I mean, I think with the U.S.A. and what everybody is seeing on a global scale, I mean, it's still a very, very hot topic here in terms of infections and transmission rates. But we are starting to see the states fight very hard not to shut down again. And so we are seeing a gradual improvement at this point.

The next question comes from Rohan Sundram from MST.

A couple of questions from me. Firstly, Raj, are you able to comment on where the U.K. is at in terms of the potential for Brexit to become more of a tailwind rather than a headwind?

Yes. So what we are seeing in Europe is we are seeing improvement in Europe overall. So we are starting -- and I think the headwinds are sort of easing up a little bit, and we are seeing overall improvement in Europe. And in particular, we are seeing things pick up in the U.K.

Are you expecting the prospect of food exports out of the U.K. to be double-tested in EU? Is there any indications around that transpiring anytime soon?

Yes. It seems like everyone's forgotten about Brexit during COVID-19. I think we will see a benefit of that coming through the second half. We will start seeing double-testing. So we're hoping there is a fair amount of rhetoric and regulatory drivers there that say, that's the way they're headed. We've not seen anything material come through yet, but I believe that, that's going to come through. It's just a matter of timing here, Rohan.

Okay. Quick one for Luis. Luis, are you able to give an indication of where you see depreciation and amortization expense versus last year, like broadly?

We're not going to provide a projection at this time of depreciation for the year, but I would say that we are to implement our action plan aligned to what to communicate to the market with the full year results. We'd be targeting a reduction in CapEx as a percentage of revenue to help us to leverage the liquidity and the leverage ratio in the group. So you should expect some level of reduction. But at this point, I'm not feeling comfortable to provide you a clear projection on that.

The next question comes from John Purtell from Macquarie.

Look, just a few from me, if I can. Raj, just operationally, again, just picking up on Life Sciences, I mean, back in May, you did flag the potential for weakness in some of the more cyclical areas of Life Sciences, so capital projects and infrastructure in markets like the U.S. How has that played out? Because it would appear that it had a relatively minimal overall impact, which implies that the impacts have been minor from those discretionary areas or there's been other offsetting positives?

Yes. So John, from our perspective, there have been offsetting positives. I mean, we've not seen a significant uptake in capital projects or discretionary spend at this point. But we have seen increased testing in our normal, what we would call, compliance work. So we've seen things pick up, and we've seen some increased testing there. So it's been offsetting versus really seen an uptake in the capital discretionary spend area.

And just in relation to Geochem, obviously, price and mix have been a positive for you for the last -- certainly, in the last 12, 18 months. I mean, to what extent has that been an ongoing positive for you in this period and help support margins?

Yes. So we think it's too early to really quantify that data because, I mean, we've provided a graph in our presentation and everyone saw the extent of the decline in the Geochemistry sample flows. What we are seeing is we're seeing that uptake -- I mean, it's fairly clear that gold is a significant driver for exploration and sample flows across the globe and -- as well as for ALS. So I think for us, the price could potentially help play a role in here. I'm not sure mix is going to -- has played a role yet. I think as we see capital raisings come through, I think there is the possibility that mix could play a positive role for us.

And just a couple of quick questions for Luis. In terms of cash flow and working capital, how have you seen that in terms of your working capital and DSOs through the first quarter? And how are you managing markets like Latin America?

Yes. We saw certain stability in terms of DSO despite the deterioration that we saw in the markets around the cash collection or credit risk that we have. Although DSO remains relatively stable, we have managed this -- applying the same principles that we applied last year in order to boost cash generation that allowed us to have very good cash generation -- cash conversion last year. So far, we have maintained this very well. Our approach is in a very granular base with the management teams in each one of the geographies and the financial controllers. And so far, we have good results as was posted here with the updates with leverage ratio in fact going down from 2.1 in March to 1.9 now in June. So far, we keep on track with our objective here to maintain a very good level of cash management in the group.

And just the last one, Luis, in terms of restructuring costs, I mean, we've seen some of those sort of in the last few periods. Presumably, we may see more below-the-line restructuring costs this period, given what's been a bigger head count reduction given global events?