ALS Limited (ALQ) Earnings Call Transcript & Summary

Welcome, everybody, to ALS Limited first half of FY '21 results call. [Operator Instructions] Thank you again for joining us today. I hand over to our first speaker, Raj Naran, Managing Director and CEO.

Thank you, Josh. Good morning, and thank you for your attendance today on the call. I hope this call finds you, your family and colleagues all safe and healthy during these unprecedented times. With me today is our Chief Financial Officer, Luis Damasceno; and our Head of Investor Relations, Simon Starr. I will present the highlights of our financial performance of our first half of fiscal year '21 as well as provide an overview of all operating business streams. Luis will then provide commentary on our financials, an update on our capital management as well as discuss other financial matters. The call will be then open to questions. I will take the ASX release and investor presentation released to the market today of our first half of FY '21 results as being read. I will only refer to individual slides as appropriate during my commentary. Please note that the financial results presented are post AASB 16. Our commentary will refer to financials post AASB 16. So results comparison will be on a like-by-like basis. Slide 3 highlights our proactive response to the current pandemic with a clear commitment and priority for the health and safety of our staff and clients. Slide 4 details the actions we have taken to manage the business through the current pandemic, in particular, how we were able to reduce our costs by aligning our cost base to client demand, focusing on the strength of our hub-and-spoke model, reducing our corporate costs, and delivering an EBITDA margin improvement in all divisions. We also strengthened our liquidity, continued to generate strong cash flow, refocused the business on growth by investing in capacity, reengaging with our acquisition pipeline, and we are building a solid foundation for future COVID-19 testing opportunities. Importantly, we maintained our high standard of service and capability through the pandemic thus far, which is appreciated by clients and gave us an advantage against our competitors, who are unable to adjust their businesses as effectively as we did. As noted on Slide 7, we are pleased to announce an underlying net profit after tax of $80.6 million. This result is 17.9% lower than the prior corresponding period. Our EBIT declined $23.3 million, but our margin remained resilient at 16.1%, only 114 basis points lower than the prior corresponding period. The company also delivered an earnings per share of $0.167, a decrease of 17.7% compared to the prior corresponding period. The directors also declared a final dividend of $0.085 per share. This dividend reflects the prudent capital management strategy of the company while also demonstrating its strong liquidity position and confidence in the business moving forward. Our CFO will provide more details on our financials during his commentary. This is a solid result for ALS and demonstrates the company's ability to manage the business well through these uncertain economic times. As also noted on Slide 7, I want to provide you with a current trading update. Our diversified portfolio of businesses and geographies has proven resilient during the current pandemic with the hub-and-spoke model leveraged to align the cost base with client demand. We have seen a strong recovery in the second quarter across all divisions, following a challenging first quarter due to the current pandemic. Our Life Sciences division remains resilient while economies continue to reopen and with new COVID testing opportunities beginning to deliver revenue. Geochemistry sample flows grew strongly in the late second quarter and early in the third quarter, driven primarily by majors. Junior and intermediate miners are yet to significantly deploy capital from recent strong equity raisings. I want to take a moment and thank our staff and management team for their hard work and the delivery of this result under these difficult times. Slide 8 highlights the improved EBITDA margins across all of our divisions in the first half despite the decline in revenue. This further reinforces the company's ability to manage its cost base aligned to sample flow and client demand. Slide 13 provides visibility to our first half underlying margin evolution. Clearly, our first half results are a story of 2 quarters of financial performance. The second quarter saw a significant improvement in revenue compared to the first quarter as activity increased as economies reopened following shutdowns related to the current pandemic. Turning to Slide 23. Life Sciences delivered revenues of $452.1 million, a decline of 3.5%, driven by an organic decline of 7.4% with scope growth of 5.5% and unfavorable currency impact of 1.6%. Underlying EBIT for Life Sciences declined by 2.9% to $74 million. However, the margin expanded further to 16.4%, an improvement of 10 basis points compared to the first half of FY '20. This is a particularly good performance in this environment, and it continues our record of accretive margin improvement in Life Sciences. Demand remained solid despite the pandemic with the cost base adjusted where required. Australia, Asia and Europe were strong performers while economic shutdowns in North and Latin America impacted volumes, although there was a significant improvement in the second quarter. Acquisitions including Mexican-based pharmaceutical testing business ARJ, and Iberian-based food testing business Aquimisa continued to perform well, driving acquisition growth. Slide 25 shows the Commodities division reported a revenue decline of 13% due to the impact of the pandemic. The second quarter showed a significant improvement with a 10.5% decline in revenue compared with a 15.7% decline in revenue in the first quarter, following an increase in mining activity as economies reopened and supportive commodity prices. The underlying EBIT margin of 24.7% was a decline of 107 basis points for the half compared to the prior corresponding period. Geochemistry experienced a challenging first quarter due to the current pandemic with sample flows declining by 23% compared to the prior corresponding period. The second quarter saw a significant improvement in sample flows with a 4% decline compared to the prior corresponding period, primarily driven by the increase in mining activities of major miners. Turning to Slide 30. The Industrial division delivered a 17.1% decline in revenue and a 24.5% decline in underlying EBIT. The underlying EBIT margin of 11.4% was down 111 basis points due to the impact of the pandemic on the business throughout the first half. Asset Care revenue declined by 20.4% (sic) [20.3%] as clients delayed the start of new projects and maintenance spend. Tribology saw a revenue decline of 8.1% primarily due to subdued activities in North and Latin America, although there was a strong improvement in the second quarter. I will now turn the call over to our CFO, Luis Damasceno.

Thanks, Raj, and good morning, everyone. As Raj mentioned, there was good demonstration of our ability to manage our business through the current pandemic. And it was achieved by the successful implementation of our COVID-19 response plan from earlier this year. This plan was centered around our employee safety and the presentation of high quality service to our clients while also focusing on margin protection, strong cash generation, proactive liquidity management and execution of our capital allocation that balance short-term requirements with investment in future growth opportunities. I want to start off by highlighting a few points from the financial summary found on Slide 14. First, it's important to remind you that the figures that are presented are in AASB 16, but I also want to emphasize that COVID-19-related subsidies and related direct costs, which were initially included in the [ H1 2021 ] margin, are fully excluded from the half year underlying results and set out on this slide. The group delivered $838.8 million underlying revenue from continued operations, 8.7% lower than the previous corresponding period. As a result of the pandemic, organic revenue declined by 9.4% in the half but with significant improvement in the second quarter, notably in the Life Science and Commodity division. Revenue from acquisitions added 2.8% over the last year with -- while ForEx had a negative impact of 2.1% due to appreciation of the Australian dollar against the main currency. It's important to note the underlying margin improvement across all divisions, demonstrating our ability to quickly address our cost base supply to demand. Life Science, in particular, showed its resilience and was the least impacted in revenue and delivered the largest EBITDA margin improvement among all businesses. Underlying margin from consumer operations was 16.1%, down 114 basis points from the prior period. And I want to take a moment to highlight a few items in this margin evolution. First, at the group level, the largest margin deterioration was associated with the currency impact, which drove 85 basis points decline compared to the prior corresponding period. Second, we could see an underlying margin improvement of 10 basis points in Life Sciences. This result was supported by the good performance of the latest acquisition, ARJ and Aquimisa, both delivering margins aligned with the business plan and accretive to Life Sciences and to the group. It's also important to note there was significant reduction of margins in the Commodities and Industrial divisions considering the decline in revenue experienced in the first half. And finally, I want to point out our reduction of corporate costs maintained its proportion to revenue. The underlying tax expense from continuing operations was $32.5 million, represents an underlying effective tax rate of 28.7% with a slight increase over the 28.6% in H1 2020. I will turn our attention to debrief on the underlying restructuring results noted on Slide 15. You have the breakdown of the restructuring and other items and COVID-19 subsidies net of direct costs summarized by each business. First, the $20.6 million for restructure and other items. As part of the response to the challenge of COVID-19, the group took several actions to adjust cost base to client demand. These actions included workforce reduction, the consolidation of costs and the shutdown of physical locations where recovery was unlikely to happen in the medium term. These costs totaling $17.4 million are largely composed by the owner's lease impairment related charge of $10.3 million primarily linked to the Asset Care business in the Industrial division. The group also incurred a total of $1.4 million start-up costs, $1.1 million acquisition-related costs and $0.7 million associated with other items. Finally, I want to stress on the $12.4 million related to COVID-19 subsidies and grant. Now during the first half the group has received a total of $14.4 million in government grants and subsidies, including $3.5 million in Australia under the JobKeepers scheme, and $8.4 million in Canada under the Canada Emergency Wage Subsidy. These government subsidies were partially offset by $2 million, leading to [indiscernible] costs, related adviser fees and increased [indiscernible] provider increase, personal protective equipment. I'll now turn to Slide 16, where we present an overview of the H1 cash flow covering continuing and discontinued operation. The company continues to deliver very strong conversion of EBITDA direct to cash from operations led by the execution of a coordinated cash improvement strategy and by the permanent focus on working capital management. In H1, we achieved an adjusted underlying EBITDA cash conversion of 99%, a substantial improvement from previous years despite the challenges associated with the pandemic. The cash generation from operations before CapEx increased by $29.4 million, up 21% compared to the first half -- of H1 2020. The strong cash generation allowed us to properly balance short-term liquidity needs with continued investments in future growth opportunities. Although the total CapEx of $36 million, represents a reduction of 30% compared to the first half of the last financial year, which is a small reduction than we projected at the beginning of the pandemic, more than 2/3 of the H1 CapEx was associated with growth initiatives as our performance improves in the future. This includes the results of a new COVID-19-related test in Life Sciences and the expansion of geochemistry laboratory capacity to meet growing client demand. You can find the breakdown of CapEx from our different business on Slide 17. I'd now like to highlight a few points regarding financing activity. First, the borrowing movements of $257.9 million, which was driven by the repayment of the U.S. dollar-denominated bank debt initially [indiscernible] last March in a precautionary approach to guarantee that the obligation of [indiscernible] the U.S. during this time of 2020 could be met. It's an amount of $245 million was the cost in U.S. dollar-denominated accounts, and we used last September to repay the associated bank debt after the new USPP contract was executed. The transaction also explains the $50.8 million cash outflow associated with the realized cash FX retranslation and the [ effect ] of the Australian dollar's appreciation against the U.S. dollar during the first half. This amount is fully offset by the reduction of the U.S. dollar-denominated [ drawn bank ] debt completed in March. And therefore it has no impact in the net debt, loss or in the net cost of the company. I'm now turning to Slide 18 to cover the debt metrics. The September numbers reflect the company's focus on working capital management and disciplined approach in the [indiscernible]. We closed the first half with a leverage ratio of 1.9 to the underlying EBITDA, which was a good improvement compared to 2.1 in March 2020. The gearing ratio was also down to 39% from 42% at the end of last financial year. And the EBITDA interest cover closed at a comfortable level of 10.4x. Now looking at the debt maturity profile in the lower right half of the slide, I want to remind you that the new USPP with a total amount of $281 million was executed in September and it will be funded in late November. The proceeds will be used to repay the $211 million USPP tranche due in December 2020. And the remaining cash would be used to reduce any outstanding balance of drawn bank debt. This placement, once funded, we have extended the weighted average debt maturity profile to 5 years and it better aligns the current debt profile to the group's net assets and cash flows. Finally, it's important to mention that we intend to refinance at the appropriate level the next debt that will expire in October 2021. Now moving ahead to Slide 19. I'd like to emphasize that the company balance sheet remains strong and enables ALS to consume funding for organic growth and acquisitional opportunity. Despite the robust level of cash generation by operations, we have proactively implemented several immediate actions to improve liquidity in [ key assets ] including the increase of our bank facility by $175 million to temporarily increase the leverage ratio covenant from 3.25x to 4x until March 2021 and the execution of a new USPP . The total liquidity at the end of September is approximately $620 million, with $510 million of undrawn capacity. We continued with prudent approach to capital management, focused on working capital improvements and balanced capital preservation in response to the pandemic, with investments in growth opportunities and shareholder returns. We also continue to assess value-enhanced acquisition opportunity, particularly in the food and pharmaceutical markets, which may present itself through this period of uncertainty. The share buyback program has been extended until December 2021. If this is approved in our capital management toolbox, [indiscernible] the program what is the best use of our cash to serve our shareholders. The Dividend Reinvestment Plan remains suspended while the buyback program is in place. Considering this practice, the company has announced an interim dividend of $0.085 per share represents 51% of underlying net profit after tax from continuing operations. This is then to be paid on 16th of December 2020 and is fully franked. The interim dividend is consistent of prudent capital management strategy while support for the [ group's ] liquidity and debt metrics improvement. Now I'll hand back to Raj, who will go over additional aspects of the business performance.

All right. Thank you, Luis. As a recap of our current trading environment, for Life Sciences the business was resilient, while global economies continue to reopen, and the business continues to deliver margin improvement. So positive momentum in the second quarter in North America and Latin America as their markets improve and restrictions are eased. Capacity and capital expenditure was increased in several markets in Life Sciences to meet the growing demand as sample volumes increase. COVID-19 and new testing opportunities are beginning to deliver increased revenues. For Commodities, as noted on Slides 26 and 27, there was a strong increase in Geochemistry volumes in September, over 10% versus the prior corresponding period and early in the third quarter, primarily driven by the increase in activity by majors. Junior and intermediate activity and sample volumes are expected to increase as capital raised from equity markets is deployed. Some may be delayed until the Northern Hemisphere field season in the fourth quarter. There is continued investment in capacity increase in Geochemistry to meet the growing demand as sample volumes and our current inventory continued to increase. For Industrial, the cost base was adjusted in Asset Care and Tribology to align with client demand. There was significant improvement in tribology sample volumes and margins in the second quarter as the business continues to demonstrate its value proposition to its clients. In summary, as noted on Slide 33, the company's diversified portfolio of businesses and geographies proved to be resilient during the current pandemic with the hub-and-spoke model leverage, aligning cost base with client demand. The first quarter of this fiscal year is expected to be the most challenging quarter with a strong recovery in all divisions in the second quarter. The company has reengaged its acquisition pipeline, focused on accretive opportunities primarily in life sciences and the food and pharmaceutical markets. The company's key priority continues to be its employees' health and safety, business resilience, margin protection and liquidity management. Thank you for your time and attention. And Paul, we will now open for questions.

[Operator Instructions] The first question comes from Alex Karpos from Goldman Sachs.

Two questions for me, both on margins. First, if we talk about mining, clearly a big recovery there in Q2, and it seems to be looking well into Q3. Can you talk about how margins tracked over those periods and how they're looking so far in September and into, I guess, today?

Go ahead, Luis.

Well, we saw margin improvement in September with margins overall for the company greater than the last year margin the same month. In October we had the same trend.

Yes. So basically, just in general, overall, for the company, we saw margins improve as a company over the same period last year. We saw a similar trend in October. But in geochemistry and mining, in particular, we've actually -- I mean, that business has very good leverage in terms of revenue to EBIT conversion. So as we saw sample volumes and revenue improve, we also saw the margins improve within that business.

Got it. Very clear. And one more, just on Life Sciences. Good result there on the margin as well, growing year-over-year. Can you just remind us on your long-term targets for margins for that segment? And how should we think about timing for hitting those targets?

Yes. I mean, I think our target for Life Sciences, we had targeted a 16% to 17% sustainable margin. I think what we're seeing here is we've seen about a 6-month pause in that margin evolution. It's pleasing to see that the business was able to align itself well with its cost base through the first half to get that 10 basis point margin improvement and further demonstrates the management's ability in Life Sciences to do that. My expectations for that margin evolution is I would expect on a full year basis for this year to see Life Sciences margin improve 30 to 40 basis points. And then again the expectation is as we go into FY '22, we'll continue to see margin improvement.

The next question comes from James Byrne from Citi.

I also wanted to just ask a little bit about the margins here. In terms of the margin expansion drivers that you're seeing, how much of that would you attribute to the hub-and-spoke cost reductions versus, say, price increases or favorable mix? And it also sounds like you expect to hold on to the margins going forward as activity increases despite adding in more resources again. So is that perhaps suggestive of price increases that then flow into the future.

Yes. I mean, I think -- James, I mean, it's fair to say that during this pandemic we did not see price increases. I mean other than pricing that was established last year, pricing remained relatively flat. In fact, I would say that there was some pricing pressure during that period. So I really think the margin improvement is really around the hub-and-spoke model and our COVID-19 response plan. I mean the business adjusted its cost base very well. It managed its cost. And I really think that's what we see coming through for the first half results. And I think as we go into the rest of this fiscal year, I mean we'll see recovery through the rest of the year. I mean we are seeing demand, and we are seeing inventory and sample volumes increase in the Geochemistry business. But I think as capacity fills within the business over the next 6 to 12 months, I think that's where you'll actually start seeing some benefit of price increases. At this point, I think it's going to be purely a volume gain and maybe a bit of price and mix as we start seeing juniors and intermediates deploy all the capital. And again, we've seen -- while I mentioned, we've not seen a significant improvement, we have seen some improvement and we still believe that a significant amount of capital will get deployed moving forward.

Yes. So then if I can just be clear about the business as you add back more resources into that hub-and-spoke model, commence through it with the rise in demand, are those margins going to be sticky? Or is there a little bit of pressure on those margins going forward?

Yes. I mean, I think -- I would say that I think the margins will be stickier. And in fact, the expectation is that we'll actually see margin improvement. Just to leverage in that geochemistry business is significant leverage across all of our businesses. So as we add resources, the resources are predominantly labor. There is -- you saw the increase in CapEx spend. But relative to the revenues that we expect to get, it's not going to be a significant cost. So our expectations is we'll actual see improvement in margin.

That's excellent disclosure. I just have another question just around capital allocation and the balance sheet. Luis, in the past, you've talked about wanting to maintain "a low leverage ratio". Maybe it's wishful thinking to perhaps you'll give us a bit of a quantitative year on what constitutes low, maybe that's the range that moves with the risk and returns of your capital allocation. But perhaps if you can provide us a bit more of a grounding on how you think about the headroom there on your balance sheet as you're weighing up the decisions around CapEx, acquisitions and buybacks.

Sure, James. Thank you for your question. We [ have a low ] leverage ratio. Historically, ALS has kept a leverage ratio of around 1.8, 1.9. That's the level that we tried to manage the business even though our covenant says 3.25 and we have an exact quarter to get into March. And we started Q1 with a very deep focus on liquidity and capital management, finances cost due to improving -- we deployed more capital in the form of [indiscernible] and we tried to manage the liquidity and the leverage ratio at the level that we historically have. The way that I see the capacity of the business is composed of organic growth and acquisitions. It remains strong, following the same strategy that we had in the past to acquire midsize companies and the focus on the efficiency in terms of working capital management. I don't see any significant challenge at this point. As far as the share buyback, this could be [ as a prudent ] process of broad capital management strategy that can be utilized if it gets a situation that makes sense [indiscernible] to return capital to our shareholders, but not necessarily something that we have to execute during the period that the share buyback plan is in place. Did I answer that question or you have anything else?

Absolutely. That was fantastic. I guess the only follow-up I have is -- and maybe it's too early to give us a concrete number, but how are you thinking about the size or the magnitude there of growth CapEx over the near term, say the next sort of 6 to 12 months?

I believe that we'll probably end the year between 4.5% to 5% CapEx as a percentage of revenue. And I wouldn't state that most of that CapEx would be associated with growth CapEx. Continue to support the growth that we're seeing in the [ divisions ] specifically inside Commodities but also in Life Sciences in particular regions where we see even growth compared to last year.

The next question comes from Ben Brownette from CLSA.

Raj, I was just wondering if you could talk a little bit geographically what you saw in terms of the worst parts of the business in the Americas? And then what's changed and where we're at now? And what, if any, weakness you're expecting over the next 3 to 6 months?

Yes. I mean I think as a general comment, and we called it out in our commentary, I mean the business that's been impacted the most for us was our Asset Care business. That business is predominantly an Australian based business. It does have a component in the U.S.A. related to the oil and gas industry. Luis noted that we actually shut down part of that business in the U.S.A. because we just didn't see any short-term recovery. So that's sort of broad brush across Asset Care. I mean for the other parts of our business in the Americas, I mean, clearly it's been the U.S.A. and Canada. The U.S.A. really just without a cohesive approach to COVID-19 and different states taking different approaches, we saw a little bit of a stop/start there in some regions. So all of those businesses support critical infrastructure, which was deemed essential, but really a lot of them had a lot of the growth projects or infrastructure projects put on hold. So what we've seen in the U.S.A., we have seen an easing up, and we have seen improved volumes there. I mean, I think it's fair to say that we've seen over the last 6 or 8 weeks -- sample volumes higher over the last 6 weeks than we have over the same period last year. So we do have some level of confidence that, that Life Sciences business in the U.S. is showing improvement. In the Americas, Latin America has been a real challenge. I mean probably the greatest impact with COVID-19 big parts of the country is shut down. They still struggle with the current pandemic. But we are seeing the first quarter -- probably first 5 months probably the toughest for Latin America. We have seen economies opening up despite the challenges of COVID-19, and we have seen improvement in the business. And we expect that improvement to continue. There are signs of significant improvement going into the second half. So those are our expectations. The other parts that we do just a global tour. I mean, clearly, Australia has managed the pandemic well. So the impact to our business is that other than Asset Care, whilst there was impact in the first half, it was not significant. Asia had some challenges there. So there was impact but not significant. Southern Europe, there was significant impact to the business in the first half, and we've seen that improve in -- as we go into this second half. And Northern Europe saw little or no impact from the pandemic. I mean the business is performing at last year's levels and some regions, in particular, are performing better. So we are sort of seeing a little bit of a mixed bag. But again, in particular with the Americas, Canada, they've managed the pandemic well. We've actually seen that business continue to improve for us.

Okay. And can you just help at least me understand when you talk about this hub-and-spoke model, and there's obviously some costs that were in the business that you don't believe need to be in the business going forward because your commentary suggests that you've been able to protect margin, but then you can still gain margin on the upside. So normally, those 2 things don't work together, obviously. So just wondering why when all of this revenue comes back, you can still, as you say, either maintain or grow margins because that's potentially counterintuitive from what you're experiencing over the last 6 months where revenue was down and you held margin. So is there something that is costing you that no longer need -- that you're finding you no longer need going forward or is there some other dynamic?

Yes. No. I mean, I think from an ALS perspective, I mean the business has been growing over the last 3 years. I mean, I think over the last 3 years, the business has continued to deliver growth. Part of that growth strategy, we actually structured the business for growth when the pandemic hit and going through cycles is very normal for ALS, not the pandemic, which is unprecedented. The company is able to adjust its cost base, which we did. I think as the business grows, again, I think we're cautiously adding cost back in the business. But I think the leverage across all of our businesses, not just geochemistry, continues to be strong. So as revenues improve, we still believe we can get the revenue to EBIT conversion that's aligned with the margin expectations or improved margin expectations. I mean I think the business has been able to sort of relook at -- revisit its cost base and adjust cost where we think there may have been some additional cost in the business that shouldn't be there moving forward.

The next question comes from Paul Butler from Crédit Suisse.

Raj, I was just wondering if you could help me reconcile some of your commentary from the AGM versus what you've reported today in respect of first quarter. So obviously at the AGM you talked about the revenue for first quarter being around 9.8% and margin being held in line with prior year. But just looking at the numbers you've got in the presentation today, there seems to be a few differences there. I was just wondering if you could help me understand that.

Yes. Go ahead, Luis.

I think that related to revenue, the reference was total revenue. When we were presenting here, again, is therefore organic growth by quarter. And that I think is the main deviation, therefore. And in terms of margins, the main deviation is that, as I mentioned in my [ conversation ] here, we have considered government subsidies net of the related costs as part of the underlying margin when we gave the update to the -- in the AGM. And after that given the quantum that we have associated with those points, we thought that was appropriate to point to the best health of the underlying results and this is the main driver there. The total net effect expense in Q1 was roughly $4 million. And that's the main point that relates to the difference in margin that we've seen.

Okay. Okay. And can I also ask, you mentioned that you're starting to see some revenue coming in related to the COVID testing opportunities. So I'm guessing that's not significant yet, but what's your outlook on where that could potentially get to?

Yes. I mean, I think from our perspective, I mean, just again to follow through on your comments, Paul, and just one quick comment on the margins. I mean [indiscernible] business that any subsidies after we saw the results of the first quarter should not be part of the underlying performance of the business. So we removed those out completely. We didn't feel that the business management, anybody needed to benefit from a subsidy. So we readjusted the way we viewed our business, and we wanted to provide transparency to the investment community in terms of how the underlying business is actually performing. So that's one. On the COVID-19, I mean, ALS is really focused on non-human testing part of the COVID-19. We are still doing approximately 2,500 to 3,000 human tests a week in Southern Europe. And we believe, and we've held that from the beginning, that as there's movement towards a potential vaccine, we feel that, that testing will be short-term gain. So really we focused on the other opportunities that relate around continued safety, swab testing, environmental testing and water testing. So whilst it's not insignificant the first half, and I think we'll see some benefits the second half, we think it's more a medium to longer-term growth for the business. And I think it just adds a whole new revenue stream. I think it's early days for us to put a hard number around it, but I do believe it will contribute in line with some of our other businesses as it relates to water and some other things we do, but it's still early days for us, Paul.

Okay. And you also commented that while there's been a recovery in geochem, sample volumes is more driven by the major miners. And you're expecting that the juniors may not sort of come back until the fourth quarter. I mean is -- how much visibility do you have on that?

I mean we have a fair amount of visibility, Paul. I mean sort of in my summary commentary, I made mention of the fact that we continue to deploy capital to increase capacity because we are seeing sample volumes and our inventory continue to grow. So we are seeing visibility into that. I mean everyone is aware of the fact that there was significant capital raisings over the last 3 or 4 months. Platform was a little bit softer, but albeit -- but still good. And we believe that some of that capital is being deployed relative to what we're doing with the major miners. It's still small but we do expect to see that capital going into the ground as the Northern Hemisphere field season starts. And there's also a general view that this could be a shorter holiday season. Again, there's a lot of liquidity out in the market. And our hopes are eager to put that into the ground and deploy the capital.

The next question comes from Wei-Weng Chen from JPMorgan.

Just a couple of questions on my end. Just wondering, first one, are you seeing any shift in customer behavior as a result of this pandemic? Are client outsourcing more, or less? And if there are changes, do you believe these are transient in nature? Or do you think there's a structural shift afoot?

I mean, I think in client behavior, I mean, the fact that we support a lot of critical industries, I mean, I think the client behavior is all around health and safety. People have moved to a virtual environment. We have got indications where people are getting Zoom fatigue. But I think overall from an overall client behavior standpoint, we've not seen a significant structural change. I mean, very -- I think businesses have to adapt to be more contactless, more paperless. I mean we adjust most of our businesses where a contactless report, dropoff, all of those type of things. But I think that's just adjusting to safety measures. In terms of actual behavior in terms of the procurement practices, in terms of their sampling or delivery programs, we've not seen a significant change there. Again, a second or third wave could easily slow things down, albeit that, that slowdown will come in what is normally just a seasonally slow period anyway. So we're still cautiously optimistic that things will continue to improve for us. But I don't know, other than that we've not seen -- I guess, in what you're looking for is a material structural change, we've not seen that.

Yes. Okay. Great. And then just another sort of pandemic related question. I guess is a second wave lockdown as disruptive as the first wave lockdown? And also you just made a comment the first quarter is expected to be the worst. But if we think about third quarter, and the current second wave that's going on now, are you expecting quarter-on-quarter decline or growth?