ALS Limited (ALQ) Earnings Call Transcript & Summary

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

Thank you, Josh. Good morning, and thank you for your attendance on this call today. I hope this call finds you, your family and colleagues all safe and healthy. With me today is our Chief Financial Officer, Luis Damasceno; and our Head of Investor Relations, Simon Starr. As usual, I will present the highlights of our full year 2021 financial performance as well as provide an overview of all operating business streams and divisions. 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 of our full year results released today to the market as being read, and I will only refer to individual slides as appropriate during my commentary. Please note that all financial results are presented post AASB 16 unless otherwise stated. This is a very strong result given the circumstances last year and one that was achieved through prompt and decisive actions from management and the Board through the pandemic and which has positioned the company to benefit from improving trading conditions. Slide 3 of the presentation highlights our proactive response to COVID-19 with a clear commitment and priority for the health and safety of our staffs and clients. Slide 4 provides visibility on managing the company through the current pandemic. This includes growth opportunities, including investment in capacity for the Life Sciences and geochemistry businesses to meet growing demand; investments in greenfield operations in life science in India, Ireland, Australia and the USA; a continued focus on accretive acquisition opportunities in Life Sciences and the development and rollout of COVID testing in humans, surfaces and wastewater; our balance sheet strength and cash generation that Luis will highlight during his presentation; our focus on cost reduction, which includes aligning our cost base to client demand; leveraging our hub-and-spoke model, reducing our corporate costs in line with the group's revenues; and EBITDA margin expansion across all divisions despite the impact of the pandemic. Slide 5 demonstrates the alignment of our strategic priorities to our full year performance and our ability to manage the business through the current pandemic. These include: Margin expansion of 72 basis points in Life Sciences despite the pandemic; organic revenue growth of 3.8% in commodities, supported by increased sample volumes in geochemistry; improved sustainability profile of the group, including our climate change policy, targeting a 40% reduction in Scope 1 and 2 emissions by 2030. The group also continues to make strong progress towards the 2022 target of 50% total contribution from our noncyclical businesses. For the full year '21, this was 50% total contribution from our noncyclical businesses. Following the improvement in trading conditions in the second half of the year, the group renewed its focus on acquisition opportunities, resulting in the acquisition of Investiga in March 2021, a pharmaceutical and personal care testing business in Brazil and the USA. The group continues to focus on strategic acquisitions in growth markets and continues to invest in technology and innovation to support the growth of the business. Slide 6 illustrates the group's ESG vision, its climate change strategic plan and robust sustainability program to meet its ESG obligations. Instead of adopting 3 pillars to address E, S and G, the group has created 4 pillars to highlight people and its own segments to align our core values while safety is a priority and people development. Slide 7 highlights the fiscal year '21 ESG program achievements, which we are very proud of. As noted on Slide 10, we are pleased to announce an underlying net profit after tax of $185.9 million for the fiscal year '21. This is a decrease of only 1.5% compared to the previous corresponding period, following a strong recovery in the second half of the year. This result excludes government subsidies, which we are in now process of repaying in key geographies and the related direct costs. The second half of the year saw a significant recovery across the group as economic activity increased following shutdowns related to the current pandemic seen earlier in the year. Life Sciences was resilient throughout the year as it provides testing services essential to the economy, reporting a revenue decline of 3.2%. Commodities total revenue declined by 2.7%, following a strong recovery in the second half of 7.5%, particularly in geochemistry and metallurgy, following an increase in mining activity. The company also delivered an earnings per share of $0.385, a decrease of 1.5% compared to the prior corresponding period. The directors also declared a final dividend of 14.6% -- $0.146 per share. This dividend reflects a favorable trading environment and strong liquidity of the company moving forward. Our CFO, Luis, will provide more details during his commentary. This is a solid result for ALS that demonstrates the company's ability to manage the business well through these uncertain economic times and position the company for future growth. I want to take a moment and thank our staff and management team with delivery of this result during a very difficult and challenging year due to the pandemic. On Slide 25, Life Sciences had a 3.2% total revenue decline to $930 million. The division had a 2.7% organic revenue decline, but saw a significant improvement in organic revenue growth in the second half of 1.9%. Underlying EBIT grew by 1.3% to $150.6 million, while the margin continued to expand to 16 -- 16.2%, an improvement of 72 basis points compared to fiscal year '20. This was driven by the alignment of the cost base to client demand early in the pandemic, followed by a solid recovery in sample volumes during the second half of the year. Australia, Asia, Canada and Europe were all strong performers throughout the year, with Latin America making a strong recovery in the second half. The recent acquisitions of ARJ and Aquimisa made a strong contribution to this result. And the integration of Investiga, a Brazil- and U.S.-based pharmaceutical testing company acquired in March 2021, is proceeding as planned. On Slide 27, the Commodities division reported a revenue decline of 2.7% due to the impact of the pandemic in the first half of the year, with organic growth of 3.8% and unfavorable currency impact of 6.5%. The second half showed significant improvement with a 7.5% increase in revenue, following an improvement in mining activity as commodity prices strengthened. The underlying EBIT margin of 27.6% was an increase of 199 basis points for the year. Geochemistry sample volumes were up 2% for the year compared to the prior corresponding period following a strong recovery in the second half, an increase of 19% compared to the prior corresponding period. Major miners primarily drove the volume growth with an increasing contribution from junior miners. The investment in capacity, combined with the global hub-and-spoke model, is being leveraged to manage the growth in sample volume. Slides 28 and 29 illustrate a strong recovery in geochemistry sample flows in the second half of fiscal '21 as commodity activity increased. There's been an increase in junior equity raising since mid-calendar year 2020, particularly in gold exploration, driven by an appreciating gold price with copper making an increased contribution following strong appreciation in price and mining activity. On Slide 31, the Industrial division delivered a 17.5% decline in total revenue, including an unfavorable currency impact of 2.1% and 18.7% decline in underlying EBIT. The underlying EBIT margin of 9.9% was down 10 basis points as Asset Care continues to be impacted by the current pandemic. Asset Care revenue declined by 21.2% as clients delayed the start of the new projects and reduced scopes of work. The welding business in the USA was closed early in the year as part of efforts to align the cost base with client demand. Tribology saw a 7.7% revenue decline, although there was a solid recovery in the second half of the year as activity in the commodity sector increased. I will now turn the call over to our CFO, Luis Damasceno.

Thanks, Raj, and good morning, everyone. ALS delivered solid results in a very challenging year. Our team's hard work and dedication allowed us to safeguard employee health and safety, continue to provide quality service to our clients and deliver solid returns to our shareholders. I also want to take a moment and thank all members of our ALS family. I'll start by highlighting a few aspects of group's financials, presented in the deck on Slides 12 to 17. First, please note that, as Raj mentioned, all figures are presented post AASB 16; and that all COVID-19 related subsidies, net of associated direct costs, are excluded from the underlying results. The group delivered total revenue of $1.76 billion, 5% lower than the previous corresponding period, with a material negative FX translation impact of 4.9%, explained by the strong appreciation of the Australian dollar against the main currencies. At constant currency, the total revenue was broadly flat compared to last year. We closed the year with an organic revenue decline of 2.1%, but was a notable improvement in the second half when the group posted a positive organic growth of 5.1%. This improvement was driven by good recovery in Life Science and a strong volume increase in Geochemistry. Looking now at the margin performance, it should be noted that all divisions delivered solid improvement compared to FY '20. The group EBITDA was $425 million, with EBITDA margin of 24.1%, up 86 basis points over FY '20 despite the significant FX headwind. As presented in Slide 15, the group delivered an underlying EBIT of $301.4 million, which represented an increase of 8.9% over FY '20 on a constant currency basis. The total underlying EBIT margin was 17.1%, up 52 basis points over FY '20, having all divisions delivering margin improvement in the second half of the year compared to the previous corresponding period. At constant currency, the underlying EBITDA margin was up by 151 basis points with an organic contribution of 119 basis points and scope contribution of 32 basis points. It's very pleasing to see the solid performance of recent acquisitions translate into a positive impact on the group margin evolution. As I mentioned, FY '21 was marked by the strong appreciation of the Aussie dollars against the main currencies, leading to a substantial FX impact on the group financials. We closed the year with a negative FX impact of $31.6 million in the group's EBIT, representing a drop of 89 basis points in EBITDA margin compared to FY '20. This impact is composed by translation effects linked to the translation of the EBIT in denominated foreign currency to the Australian dollar, and by the working capital effects linked to realized and unrealized FX impact on working capital. We continue to actively manage the corporate cost, balancing short-term cost containment needs with the required investments for growth. The total corporate costs in FY '21 remained at the same level of FY '20 at 2.1% of group's revenue. This was achieved despite the substantial increase in insurance costs driven by current market conditions and despite the group revenue decline explained by the translation FX impact. Let's turn now to Slide 18, where you can see the bridge from the underlying results to discuss our results. And this slide is complemented with the information provided on Slide 19. First, look at $29.4 million associated to restructuring other items, which most significant amount is the $20.2 million related to actions implemented in response to the pandemic, including workforce reduction, office consolidation and the shutdown of specific locations where recovery was unlikely to happen in the medium term. The group also incurred $2.8 million start-up costs, $2.7 million in acquisition-related costs and $3.7 million in other items, such as realized effects on the company loans, integration cost of acquired companies and tax restructuring. Finally, I want also to point out that the group received a net benefit of $25.4 million related to COVID-19 subsidies which are entirely excluded from underlying results. The subsidies received from various jurisdictions included net benefits of $3 million from the Job program in Australia and $20.5 million from the Canada Emergency Wage program. Considering the solid financial performance in FY '21, the group has committed to voluntarily repay the COVID-19-related government subsidies, net of associated costs in all countries where repayment mechanisms exist. I move now to Slide 20 and cover key aspects of capital management. The group further enhanced its balance sheet in FY '21, closing the year with the best performance over the last 2 years in all key financial metrics. The leverage ratio improved to 1.6x, a significant reduction compared to 2.1x at the close in FY '20, and far below the 3.25x threshold defined in our bank covenants. The gearing ratio went down to 36%, also solid improvement compared to 42% in March 2020. The strong results were driven by the group's ability to align its cost base with the clients' demand in the first half of the year and had another year of good progress in working capital management, in particular, in days of collection. Despite the challenging year, we reduced the number of days of sales outstanding by 6 days. This reduction of the DSO and the careful management of suppliers' payment terms, led to a robust underlying EBITDA cash conversion of 102% in FY '21 compared to 98% in FY '20 and 94% in FY '19. This solid cash generation and this disciplined approach in investing CapEx and acquisitions were instrumental for the group in reduce its net debt by $186 million and we closed the year with a strong liquidity, over $650 million. Turning to Slide 21, I want to highlight a few key points on cash flow covering both continuing and discontinued operations. The total cash flow from operations before CapEx was $380 million, an increase of $9 million compared to the previous financial year. The strong cash generation allowed the group to properly balance short-term liquidity focus, primarily in H1, with continued investment in growth opportunities. Our CapEx in FY '21, a total of $81 million, was reduced by 33% compared to FY '20, but we have maintained our focus on investing in future growth. Approximately 70% of the FY '21 CapEx was directed to growth opportunities, notably expanding the footprint and increasing capacity in the Life Science and Geochemistry business. You can find a breakdown of FY '21 CapEx on Slide 22. The group also invested $49.6 million in acquisitions, including the initial payment for Investiga and the earnout payments from prior acquisitions. Looking now at the dividends paid. A total of $71 million in dividends was paid in FY '21, a reduction of $41 million compared to the dividend paid in FY '20, reflecting this prudent approach adopted by the group when declaring the final FY '20 dividends when the world economy faced one of the highest levels of uncertainty driven by the pandemic. I'd like to highlight a few points regarding the financial activity as well. First, the net borrowing movement of $265.7 million, which is largely explained by the repayment of USD 150 million-denominated bank debt, which was initially drawn in late March 2020 as a prudent liquidity measure to guarantee that the obligations of the U.S. [ when the trends during ] December 2020 would be met. These funds, together with a further USD 30 million draw in early April 2020 were held as a prudent liquidity hedge in U.S. dollar-denominated deposit accounts; and then later in September 2020, to repay the associated U.S. dollar-denominated bank debt once the USPP contract was executed. These transactions also explains the $50.8 million cash outflow associated with realized cash FX retranslation resulting from the appreciation of the Australian dollar against the U.S. dollar during the first half. This amount was fully offset by the reduction of the U.S. dollar-denominated drawn debt completed in late March 2020, and therefore, it has no impact on the net debt, nor in the net profitability. Finally, I want to point out the $18.1 million cash outflow linked to restructuring one-off costs and the $25.4 million cash inflow linked to the net government subsidies received. Moving now to Slide 23, which highlights key debt metrics. I want to emphasize that in FY '21, we also focused on improving our diversity of funding source and debt metrics to mitigate refinance and liquidity risks. And this is a challenge imposed by the pandemic. Our weighted average debt maturity profile was extended to 6.6 years, following the completion of a new placement of $281 million USPP during the first half and the refinance of $350 million in bank subsidies completed now in May 2021. There is also very good improvement over the 4.1 years at March 2020. We're also able to further align our denomination of debt by currency to the group's cash flow and net assets, significantly reducing FX risks. To summarize the capital management review. The group closed FY '21 with a strong balance sheet and with a liquidity level above $650 million. The current financial strength positions well the group to continue to pursue value-enhanced acquisitions and to fund the organic growth initiatives which are key for the execution of our strategy. The important pillars of the solid financial performance delivered in recent years will continue to permeate our actions in the future, with sustainable focus on capital management and disciplined execution of our acquisition strategy. Finally, based on the strong performance delivered and the current trading conditions, the group has decided to maintain the share buyback program until December 2021 and it keeps the dividend of investment plan suspended while the buyback program is in place. The group also declared a final dividend of $0.146 per share, 70% franked, with -- which represents an increase of 139% compared to the $0.061 per share declared as final dividend in FY '20. Together with the interim dividend of $0.085 per share, the total partially franked dividend for the year will be $0.231 per share, an increase of 31% compared to the previous corresponding period and represents a payout ratio of 59.9% of FY '21 underlying net gross after tax from continuing operations. Now I will hand it back to Raj, who will go over additional aspects of the business performance.

Thank you very much, Luis, for that detailed discussion. Just in closing, as a recap of our fiscal year '21 performance for the groups. Resilient performance across the group with strong recovery in the second half of fiscal year '21. Organic revenue decline of 2.1%, [ its ] growth of 2%, with strong margin performance from our acquisitions of ARJ, Aquamisa and MARSS. There's EBITDA margin growth across all divisions. The company delivered a cash conversion of 102%. A strong balance sheet with over $650 million of available liquidity and a leverage ratio of 1.6 at March of 2021. For Life Sciences, resilient performance throughout the year as a key provider of essential testing services globally. Margin improvement to 16.2%, a growth of 72 basis points, driven by swift actions to align our cost base to client demand, efficiency gains and recovery of sample volumes in the second half of fiscal year '21. For Commodities, geochemistry sample volumes increased by 2% versus the prior corresponding period, with significant improvement in the second half versus the prior corresponding period. The Commodities underlying EBIT margin was up 199 basis points to 27.6%, driven by leveraging the global hub-and-spoke model as activity increased in the second half of '21. Metallurgy recovered well in the second half of '21 as mining activity increased. The coal business was impacted by falling coal prices, trade issues with China and a reduction in the superintending revenue. For the Industrial business, this business was impacted by the cancellation of projects in Asset Care as scopes got reduced and the markets remained subdued. Tribology saw a solid improvement in the second half of '21, driven by a recovery in the commodity sector. Overall, the company's key priorities continue to be: Our employees' health and safety, business resilience, margin expansion and capitalizing on growth opportunities as global economies continue to recover. In summary, the first half of fiscal year '21 was most impacted by the current pandemic due to economic shutdowns. The sustained increase in global economic activity during the second half resulted in a significant improvement in performance across the group, although the risk of new economic shutdowns remain as the pandemic continues. The Life Sciences division has demonstrated resiliency throughout the pandemic due to the essential services it provides, and this has continued into early fiscal year FY '22 as economic activity continues to increase across global markets. The Commodities division saw a strong improvement in the second half as mining activity increased, driven by major miners with an increased contribution from junior miners. This trend continued into early fiscal year '22 as the commodity cycle remains positive. The ongoing investment in expanding Geochemistry operations, which, combined with leveraging the global hub-and-spoke model, will see capacity to continue to grow during the fiscal year '22 to meet client demand. The trading environment for the Industrial division remains subdued as Asset Care's clients continue to delay and reduce the scope of projects. Tribology is seeing a solid recovery as client activity increases. The diversified portfolio of operations and geographies, combined with the flexibility of the hub-and-spoke model, positions ALS well to take advantage of these growth opportunities. Focus will continue to be on executing on accretive opportunities in Life Sciences, primarily in the food and pharmaceutical markets with a strong pipeline in place. Long-term structural drivers remain strong and should offer sustainable growth for the company. A further update on the business will be provided at the company's Annual General Meeting in late July following the completion of the first quarter of fiscal year '22. Thank you for your time and attention. The call is now open for questions.

[Operator Instructions] The first question comes from Rohan Sundram from MST.

Yes. Couple of questions for me. Firstly, Raj, can I ask, how does the junior miner mix of 24% of volumes compare to previous up cycles?

I mean, I think what we've seen historically, Rohan, is that's really the -- it's the correct mix as the cycle continues to -- as we ramp up the cycle. I mean, I think what we saw last year, we saw strong mining activity in fiscal year '21 from the majors, and we saw strong capital raisings, but we did not see that capital being deployed immediately. And now we're starting to see the majors all deploying a lot of capital in exploration, but we're now seeing equal contributions from the juniors. And we're hoping, at some point, that mix will start changing a bit. But it really, for us, it's an indicator of a ramp-up in the cycle.

Sure. Okay. And Luis, not sure if I missed it from the deck, but are you able to share your expectations for corporate cost and CapEx as a percentage of revenue in FY '22?

Corporate costs, we expect to be at the similar levels that we have this year, maybe with an enough testing costs, given the pressure that you see in the insurance costs, and there is FX 2 impact that we might have in next year. And the CapEx, well, depends on the evolution of the business. We have been -- managed well the level of CapEx and the correlation with the organic growth that we have in the business. And if we see -- continue to see an improvement in the conditions that will require additional CapEx, we'll be ready to depute CapEx needed for the growth. And I would expect to be more a direct range between 5% to 6% at historical levels of CapEx investment as a percentage of group revenue.

The next question comes from Adam Martin from Morgan Stanley.

Just back in March, you sort of mentioned you're experimenting with price in the Commodities division. Obviously, strong margin, particularly in that fourth quarter, volumes are good. Can you just talk what you're doing around price there in that division, please?

Yes. So I think with that, I mean, pricing is now -- we're focusing our attention on pricing as we see demand increase and we see capacity being reduced amongst our competitors, we'll start pulling the price lever. So -- and it will be geographically driven. It's not a one size fits all, but we are starting to experiment with price, and we will -- as we ramp up through the cycle, we will continue to pull that lever.

And just like labor cost inflation has definitely been a theme in the market in Western Australia, I suppose, how is sort of labor cost impacting your business? I suppose in WA, but also thinking about other geographies around Commodities globally, please?

I mean, labor is a real issue for all businesses globally. And I mean, 2 drivers there. One, all the government subsidies has really encouraged people to stay home and not find employment. And secondly, the job markets are strong. I mean, economies are coming back strong. There's a high demand for labor. And I think from an ALS perspective, we're responding appropriately. Our HR teams around the world are reviewing, and we've got a strategy built around labor attraction. I mean, in WA, it is a little bit of a challenge. Borders are closed, both state-wide and internationally, and there was a fairly strong migrant worker group that was available, not only to ALS, but do a lot of businesses. Now that has gone away. But the business is responding. And I think from a cost perspective, I think we're managing that well. I think it will be -- it will continue to be a challenge, I think, for the next 12 to 18 months still.

The next question comes from Michael Aspinall from Jefferies.

Raj, Luis and Simon. A few from me. Can you just talk to us a little bit about where turnaround times are around the world, and what that means for kind of your outlook for pricing?

So I'm assuming you're talking about turnaround times in Geochemistry, right, Michael?

Sorry, yes. Starting off with Commodities.

Yes. I mean, I think as demand for capacity has gone up, our turnaround times are not ideal for ALS currently. But I think when we put it in perspective, we're better than our competitors. We're ramping capacity very quickly, and we've seen a significant improvement in our turnaround time. And I think as that capacity is available to clients, that's when you can pull the pricing lever because you've got the ability to provide turnaround time and you have the capacity to do the work. So you can tell by just our CapEx spend. And we continue to be investing a lot of CapEx, especially in the first quarter of this year, in terms of building capacity within that Geochemistry business.

Yes. That's helpful. Can you just talk to us about how much you are increasing capacity or what your utilization is? If you're seeing bottlenecks anywhere?

Yes. I mean I think bottlenecks for us, we know WA's, there's a lot of demand there, so there is a capacity requirement there. There's a -- I mean, for us, there's capacity requirements in the USA, in Canada. We're seeing now with Latin America coming back online, we're starting to see a demand for capacity there. So we're sort of looking across the globe. And as we win contracts, as we see our quote activity grow, we're growing capacity. I mean, typically, we always try to keep 15% to 20% headroom in our capacity. So our goal is to build at least 10% to 15% additional capacity within the business over the next few years.

Okay. Great. And from your sample volume chart, it looks like sample volumes are up kind of 70% in April, but that clearly is affected by a very weak April last year. Given the very significant volatility, do you have any kind of expectation for what first half might look like once we kind of get through the COVID-impacted period?

Yes. I mean -- yes. And Michael, you pointed out, I mean, the comparable is poor, it's unreasonable. I mean, probably a more appropriate comparable is to look at fiscal year '20, and so look at April of '19. And that seems to be a more appropriate comparable. That comparable is about 23% to 25%. So the expectation is that we will see sample volumes taper off as we look at things. But the expectation is still -- we're building a lot of capacity currently. Now this is a build year for ALS in capacity with that Geochemistry business as we expect volumes to continue over the next few years.

Yes. Great. And on Life Sciences, there are a lot of moving parts kind of this year, but you mentioned volumes have improved in early 1Q. I mean, 1Q last year was down 10%, again, given COVID. Is that kind of -- should we see that normalizing to be kind of up 10% in the first quarter in Life Sciences?

I think it's early to say. But the expectation is we should start seeing improvement. I'm not sure it's 10% yet. I think Latin America is starting to recover, we're starting to see recovery in the USA. I think when we see both those regions recover, we'll see probably more double-digit growth at this point. I don't believe it's double-digit growth yet.

Okay. Great. And one last one, maybe for Luis. Did the first half results that you presented include the subsidies from the government in the reported earnings? And I'm just trying to think, as we get to next half, will the first half '21 results be restated lower?

We have not reported the H1 with the subsidies. It means that they were also excluded from the underlying results for H1 this year. [ This implies a sort of ], Michael, just yet.

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

Just a couple of questions from me. Just firstly, given the strong first half '21 -- sorry. Given a strong FY '21 cash performance, how does that change how ALS was thinking about M&A? Are we thinking about more activity or perhaps larger M&A?

I mean, I think from an M&A perspective, ALS is very disciplined. I mean, our focus has been on key geographies and value-enhancing M&A. So I think as we look at M&A, I mean, there's several factors. One, we know there's a lot of liquidity out there in the marketplace, and there's a lot of competition for good assets in the market. I think from an ALS perspective, we approach M&A. One is a bolt-on acquisition where we can get entry into new geographies and new services, and we look at just brand-new services that we can add to our portfolio. I think ALS has taken a very disciplined approach to M&A, so I'm not sure whether we will look at larger or smaller M&A. I think for us, it's more that the M&A is value-enhancing and it stands up to our due diligence. But our cash position, our liquidity is strong. We have the ability to execute on the right acquisition if it was to pass our due diligence process.

All right. And then just a question on just FY '22. Is looking at the second half performance on an annualized basis the right way to think about FY '22? Or would you be expecting an acceleration of the second half 21's run rate into FY '22?

I mean, I think it's -- again, it's too early to tell. I mean we're still seeing -- if there was a full recovery from the current pandemic, we would say that's probably an appropriate way to look at it. But currently, we're still seeing shutdowns. I mean, we saw -- again, we just saw shutdowns in Chile, in Argentina and Peru. India is still struggling. Europe is trying to open with a stop and start. I think once we see the volatility subdue and the vaccinations sort of improve across the globe, I think we'll have better visibility in terms of the overall trading environment. From our perspective, our focus continues to be managing the business based on client demand. So as volumes increase, we'll build capacity. We'll grow the business as we see volumes not returning to the business. We're managing the business with a focus on margin improvement and also investments, so that as we come out of this, the business is well positioned for growth.

Yes. And then just on the borders -- or the international businesses that you mentioned then, what do we need to see before Asset Care can start recovering in a meaningful way? Which borders or which countries would be most material to that?

Yes. So our Asset Care business, the largest part of the Asset Care business, is in Australia. And that is a time and materials business, and that involves folks being able to fly across state lines and access client sites. And that's been a little bit stop-start. Early indications from our clients, let's say, in a normal world, they intend to go back to the normal sampling and maintenance schedules. So I anticipate we'll see recovery in the second half of this year.

The next question comes from Nathan Reilly from UBS.

Raj, just got a question around your 5 global geochemistry hubs. Could you just talk me through, I guess, the capacity within each of those hubs at the moment, or latent capacity within each of those hubs at the moment? And maybe also, just speak to the volume trends you saw at each of those hubs during the fourth quarter, please?

Yes. So I mean, I think from a capacity standpoint, I mean, because of our global limb system, we try to balance workloads across the 5 hubs. So we try not to overload any one hub. So at any given point in time -- I think what we saw initially was significant volumes in Western Australia. Volumes would -- as we saw that increased volumes were diverted into Ireland, they were diverted into Canada, they were diverted into South Africa. So I think we balanced that fairly well. I mean, I think from a capacity standpoint, we're building capacity. But I'd venture to say that capacity is tight right now. We probably only have about a 10% headroom right now, and that's why we're investing in capacity currently, Nathan.

And that investment, is it mainly around people? Or is it property and also equipment?

So we're not really investing in facility in terms of bricks and mortar. We have large hubs with significant space available. Our investment currently is in equipment. So building the -- getting additional analytical equipment or sample prep equipment. So that's our investment, and it is adding additional staff as we -- as our volumes increase to manage sample preparation. So it's a combination of both, probably more in the equipment side of things currently.

Okay. Great. And when you're thinking about, I guess, the demand for that new capacity that you're looking to put in, I presume you're looking to match that up with what you're seeing in terms of upstream demand. Do you mind just talking us through what you're seeing there in terms of drilling activity or demand on drilling contractors? And any other potential bottlenecks further up the stream that might be an issue?

Yes. I mean, currently, I mean, everybody is -- we've seen our major miners continue to deploy capital, continue to increase their budgets, and we've seen very strong capital raisings in the equity markets, and that's all sitting in the hands of the junior miners, and they all want to deploy that capital. So what we -- I mean, I guess we monitor billing activity. We monitor equity raisings. We also monitor our quote activity, which we've seen an increase. And that really gives us a little bit of visibility in terms of what we can expect. I mean, what's interesting for us is just on a comparable. So it sort of not look at fiscal year '21 and just look at fiscal year '20 in terms of sample volumes versus what we're seeing in early fiscal year '22. I mean, the volume growth there is higher than what S&P is predicting, so the volume growth that we've seen is slightly higher than what S&P has predicted. So we continue to believe that we're picking up market share. And with that, we know that we need to build capacity here. So that's currently -- on that basis, we're investing in the business.

The next question comes from Jakob Cakarnis from Jarden.

I was wondering if you could just illuminate some of the challenges logistically maybe of flexing back up that hub-and-spoke model. So you've spoken about maybe 10% of headroom, where you're targeting 10% to 15% of capacity headroom, and you've also spoken about some of the challenges around labor. Is there anything that we need to think about maybe moving into the second half of fiscal year, as the volumes potentially lessen due to higher comps, about how you guys will be managing the cost base again in a more normal operating environment?

Yes. I mean, I think that -- I mean, Jakob, what we've learned, and I think you all are seeing it in the results, is when we went -- one, going through cycles is not unusual for ALS. I mean unfortunately, the pandemic created its own set of challenges. But the company has always managed the businesses through cycles and managed it well. Last year was a good year for us to reevaluate our cost base, and we continue to look at our cost base. So we need to add staff. We need to invest in the business as the business grows, but we are -- we've got a very keen eye in terms of our cost base and our expectations of the business. The challenges for ALS are not any different to what other people are seeing. They are supply chain issues that came out of this last year. There is a competition for staffing. There is a competition for equipment. So as you look for crushers and analytical equipment, there will be a competition for it. I think -- and this is just anecdotal, this is just my personal view, is I think ALS has been an early adopter of building capacity. We've not seen our competitors build capacity, other than in Western Australia, around the world, which I think is a little bit proactive on ALS's part. But I think -- again, I think supply chain will continue to be a challenge for the world throughout this year and maybe next year. And I think staffing will be the biggest challenge. And I think the company has got a solid plan around both of those, where we're picking up and building capacity as fast as we can because we know that volumes will continue to grow under the current market conditions.

And then just moving to the Life Sciences division. Are there any indications or early indications that you're getting from customers about a preference, potentially, for increased outsourcing of testing, particularly in food and pharmaceuticals?

Yes. So we've seen a very strong trend. I mean, currently, ALS participates. So if we sort of look at both of the businesses, there's a very strong trend in food. And that's really why there's a big focus on ALS to grow our food business. And equally, there's a strong outsourcing focus in the pharmaceutical markets, both from a contract research perspective as well as QC testing, which is what ALS does well and does a lot of. So we've seen a fairly significant uptake. There are some challenges currently based on where a lot of the pharmaceuticals are being produced. I mean, there's some real challenges coming out of India. But we've seen, currently with our pharmaceutical business, there's an uplift in sample volumes, and we are seeing a lot of outsourcing to commercial laboratories like ALS, and I think that trend will continue.

The next question comes from Alex Karpos from Goldman Sachs.

Hear me? Hi. Can you hear me?

Yes. Yes, Alex.

Okay. Just a couple on my end. First, on the mining margins, very strong in second half, approaching 30%. I think highest level since, I believe, 2014. Is there anything one-off in that second half? And when we look to '22, any reason to think you can't hit that margin or potentially higher if growth continues?

Yes. I mean, there's nothing unusual about the margin. I think just the leverage in that geochemistry business is strong. I think that, that's a sustainable margin. I think, as indicated earlier in my commentary, that this is a build year for us. So we are building capacity. And so I think the expectation is to see the margin improve significantly better than that. I think that's not our expectation. I think we'll see the benefit of that coming through in fiscal year '23 and '24. But that margin's a strong margin. And our expectation is that the business should maintain that margin throughout this year.

Perfect. And on the capacity side, I appreciate all the detailed color about you all adding and where you're adding all that. What do you think your competitors are doing? Are they making similar moves?

Yes. So I mean, I -- so earlier when we're talking to Jakob, I mentioned that we're not -- we're seeing our competitors building capacity in Australia. So we are seeing that. We've not seen similar levels, meaning a high ALS levels of activity in other regions. And that just may be us, our market position. And I'm sure that we'll see our competitors build capacity. But we're not seeing them invest in other regions other than Australia, like we are. But again, I think that's just -- it's a matter of time before they see a similar uplift. And if they do, it's a positive indicator for us to say that we've seen the entire sector moving upwards. So we're looking forward to hearing positive commentary from them, too.

And maybe one final one. If we look at Life Sciences margins, it stabilized and improved quite a bit over the past several years, even over COVID. How do we think about the long-term margin targets for that segment?

Yes. Again, I think our expectations, I mean, the business exceeded our expectations. I had called out about a 50 basis point margin improvement expectation. For FY '21, the business delivered 72 basis points. I still believe that this year, we should see about another 30 to 40 basis points margin improvement. I think with our current portfolio mix, our target is still to get to about 17% over the next couple of years. And until we materially balance our portfolio, I think that's a reasonable margin expectation, and it is actually better than our current margins are probably better than our competitors, so it's a reasonable margin expectation, and it's a great result from that Life Sciences team.

The next question comes from Peter Drew from Carter Bar Securities.

Raj, Luis. I guess just a follow-on question on the Life Sciences division. The acquisition that you've made more recently have been in that food and pharma category, which my understanding, is that they're typically lower than group margin. So I'm just sort of trying to understand, how much kind of organic improvement are you sort of factoring into that 30 to 40 basis points that you just highlighted for this year? And how much of a drag, I guess, or benefit are you getting from the acquisition side?

Yes. So I mean, our acquisitions have been margin-accretive for us. All of the acquisitions. So for -- on a full year basis was ARJ, Aquamisa and again, there was MARSS, but that was in the commodity inspection business. Both of those businesses have performed better than our current margins. The Aquamisa business was able to reinvent itself very well with COVID and COVID testing as well as pick up some additional food contracts. The ARJ acquisition is -- was the largest independent pharmaceutical laboratory in Mexico. And that business has really benefited from outsourcing. And our expectation is that we'll see those businesses continue as expected. I think the margin improvement for us across the group is going to come from efficiency gains, it's going to come from innovation, it's going to come from automation that we're investing in. There's still improvement to be made in the USA, there's continued improvement to be made in Latin America as well as in Europe. So I think we'll see that margin expansion come from across the globe at varying degrees.

Yes. Okay. And I might have missed it earlier, but how much capacity do you actually intend on adding to the Geochemistry business, say, over the next 12 months?

15%.

15%. Okay. And then just another one, just in terms of -- on CapEx. Again, I might have missed it. I mean, typically, when you're investing at least about 5.5% of revenue. Is that a fair place to start in terms of an estimate for this year's CapEx?

Yes. I think Luis called out 5% to 6%, and depending on what sort of organic growth we see. I mean, that's our target for this year.

Yes. Great. And just one last one. I mean, in terms of, I guess, the volume growth that we can see in the chart, which is accelerating a lot, are we now in a situation where we'll see, I guess, revenue growth exceed volume growth in the Geochem business?

Yes. I don't think we're there yet. I think what we have to see is we have to see pricing improvement overall. I think some of the challenges that need to be factored in is also the FX headwinds as well that will go with that revenue growth. But again, what we'd want to see, currently our expectation is we would not see those 2 -- we would not see the revenue growth accelerate past the sample volume growth.

The next question comes from Daniel Seeney from Queensland Value.

Yes. Raj, in previously, you've pointed to the margins that you've earned in Geochem and the Commodities business in 2011, '12, 13, as margins we should be thinking about -- or a margin profile we should be thinking about with the forthcoming cycle. I'm just wondering how that view has evolved over the past few months, and if anything at all has changed.

Yes. I mean, our view has not changed in terms of the margin expectations as we ramp up through the cycle. I think for us, we've got to put it all in context. I mean, last year was a little bit of a stop-start for us because prior to the pandemic, we actually started seeing sample volume growth, and we actually started to see some recovery in that commodity cycle and then so the pandemic. So all of our growth plans were put on hold, and we just sort of manage the business based on what was coming in. So we managed the business based on current volumes. This year will be a build year for us, where we are going to build capacity and we will continue to build capacity. So we do expect margin improvement, but I just don't think it will fully deliver this year. I think we will -- as we ramp up through the cycle, the expectation is we will start seeing margin improvement. And it shifts the leverage and flow through that we see in the Geochemistry business.

The next question comes from John Purtell from Macquarie.

Just 2 questions, please. Look, just picking up on what's been a pretty popular theme. Look, just trying to sort of tease out your 15% addition to capacity target for this year. Has ALS got preferential supply arrangements with, say, equipment providers that enable you to do that? And in terms of the labor environment globally, obviously, your diversification's a virtue. But where are you seeing relatively more easy labor access, where you're able to actually add labor heads more readily?

Yes. I mean, John, I appreciate the questions. I guess 2 answers. I guess when it comes to capacity, I mean, we've been proactive. So I mean, where equipment is available, we're buying entire inventories. We're just sort of saying, give us all you have, and we'll take it. And I think that's a very proactive approach to things. I think -- again, I still think supply chain is going to be an issue. And we're trying to build inventory as well as we can based on availability. In terms of staffing, I mean, for us, we have our hub labs. And unfortunately, we compete for staffing with our clients. I mean, they're in the same place as we are. So I think it's really around having a real structured and strategic approach to staffing. And I think -- and I'm hoping once all of these government subsidies start disappearing and people decide to start working again, I think we'll see the labor market improve, at least slightly. So again, I think it's really about putting together a defined plan in terms of how we intend to staff our business and proactively do it. Typically, in the laboratory business, everything is done on a just-in-time basis. As you need staff, you got to -- you want to hire them as quickly as you can. And I think we're being a little bit more proactive in recruiting and getting staff. But there's no single market that gives us a benefit because, again, we're competing with our competitors and our clients for the same pool of people.

And look, a final question on Life Sciences. I mean, where are you seeing the greatest sort of potential for recovery in the Life business, possibly by region, post-COVID? And the second part is, when do you expect to benefit from, I suppose, this long-awaited infrastructure stimulus that we've seen under the Biden government?

Okay. I mean, I think our expectations there, John, is really -- we think the opportunity for us is in the Americas. I mean, Latin America has done it really tough through this current pandemic. We are starting to see recovery there. So I think there's opportunity there. I think as it relates to the U.S. infrastructure, I mean, we are seeing overall economic conditions improve. So we are starting to see sample volumes starting to return to fiscal year '20 levels in the U.S.A. and I think currently, that's our expectation until we see some real deployment of stimulus money into the economy. Although all governments have printed a lot of money. So again, we are seeing infrastructure projects around the world, and I think the Life Sciences business, especially environmental, will benefit from that. We're hoping Brexit will settle along with the current pandemic in Europe, and we'll see an opportunity there in Western Europe for the business to improve. And again, we've got some greenfield startups in India. And currently, that environment has been a challenge. So as we see that area improve, we do see an opportunity for growth out of that region as well as the rest of Asia. So I do think overall, is this -- with all the stimulus money that's been put into economies, governments are going to be spending a lot on infrastructure, and that's an opportunity for ALS. I think we're well positioned to benefit from that globally, and we're very proactive in terms of sustainability and what we're doing in Europe. So there's some big drivers there that I think the environmental business will benefit from.

[Operator Instructions] We have no further questions at this time, so I'll hand it back over to Mr. Naran for his closing remarks.

All right. Thank you very much for you folks' time and attention today, and I appreciate the questions. And we continue to appreciate the open and transparent dialogue we have. So thank you very much, and I hope everybody has a good day. And as always, if you all have any questions, please reach out to Simon, and we're happy to answer them. So thank you very much.

That concludes the ALS Limited FY '21 Results Call. Thank you once again for joining us today and for your interest in ALS. We wish you a pleasant day.