ALS Limited (ALQ) Earnings Call Transcript & Summary

Welcome, everybody, to the ALS Limited First Half of Financial Year 2022 Results Conference 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 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 '22 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 for our first half of fiscal year '22 results as being read, and I'll only refer to individual slides as appropriate during my commentary. Slides 3 and 4 highlight our proactive sustainability and ESG programs. Our commitment to climate change is clear and focused. We aim to be carbon neutral in fiscal year '23. I encourage you to download a copy of our most recent sustainability report from our website. It demonstrates the transparency in the way we manage a wide range of aspects across our four sustainability areas of people, environment, government and society. You can also request a copy of this report from Simon Starr. Slide 5 highlights the group's first half of fiscal year '22 performance, delivering on the current short- and longer-term strategic priorities, these being strong revenue growth and margin expansion for Life Sciences; strong revenue growth and margin expansion for Commodities; increase our market-leading position in Geochemistry; improve the sustainability profile of the group; our noncyclical businesses to contribute 50% of the group's underlying EBIT at the top of the cycle for our first half, we are at 48%; a strong balance sheet to fund the continued growth of the group; strategic acquisitions in key growth markets; and an investment in technology and innovation. As presented on Slide 8, we are pleased to announce an underlying net profit after tax of $127.1 million, exceeding the guidance provided to the market of $115 million to $125 million. This result was 57.7% higher than the prior corresponding period. Our underlying EBIT increased to $197.1 million. This is 45.8% higher than the prior corresponding period with a margin of 19.1%, which is 299 basis points higher than the prior corresponding period. The company also delivered an earnings per share of $0.264, an increase of 58.1% compared to the prior corresponding period. The directors also declared an interim dividend of $0.158 per share, franked at 30%. This dividend reflects the prudent capital management strategy of the company while also demonstrating its strong liquidity position and confidence in the current trading environment. Our CFO, Luis Damasceno will provide more detail on our financials during his commentary. This is another good result for ALS that demonstrates the company's ability manage the business well through these uncertain economic times. I want to take a moment to thank our staff, management team and the Board for their support and hard work in the delivery of this result. Slide 13 highlights the improved EBIT margins across our Commodities and Life Sciences division in our first half. This further reinforces the company's continued ability to manage its cost base aligned to sample flow and client demand during a period of growth as well as the challenging circumstances seen during the pandemic. Turning to Slide 21. Life Sciences delivered revenue of $537.9 million, a total growth of 19%, driven by an organic growth of 17.8% and scope growth of 3.6% with an unfavorable currency impact of 2.4%. The underlying EBIT increased by 28.5% to $95.1 million with the margin expanding further to 17.7%, an improvement of 131 basis points compared to the prior corresponding period. This was driven by volume growth, process automation and efficiency gains combined with the reduced depreciation and amortization recognized in the second half following limited CapEx spend in the prior corresponding period in response to the COVID-19 pandemic. The acquisition of a 49% stake in NUVISAN was completed in early October 2021 and will make a full contribution to the second half of fiscal year '22. This is a highly strategic acquisition, which will significantly expand the service offering and geographic reach of our pharmaceutical business. Management teams from ALS and NUVISAN are working together to implement the strategic plan to leverage growth opportunities and benefit from synergies across both businesses. There's also been good progress in replacing the revenue from the contract with the major pharmaceutical company, which is scheduled to reduce over time as is common with this type of outsourced contract from both existing and new potential clients. Slide 24 shows that the Commodities division reported a total revenue growth of 37.7%, of which 41% was organic as it was supported by the strong commodity cycle. This drove an underlying EBIT margin 29.9%, which was an increase of 519 basis points for the first half of fiscal year '22 versus the prior corresponding period. Geochemistry sample volume was up 46% for the first half as compared to the prior corresponding period as both major miners, which represent 70% of the sample volume, and junior miners, 30% of the sample volume, increased their contribution with the latter deploying some of the significant capital raise during the past calendar year. as presented on Slide 27. Geochemistry organic growth benefited from gradual price increases achieved during the half and the improved sample volume contribution from junior miners. There is currently an investment to increase Geochemistry capacity by approximately 15%, which is anticipated to be completed at the end of fiscal year '22. This, combined with the global hub and spoke model, are designed to capture the expected ongoing growth in sample volume. Turning to Slide 28. The Industrial division delivered a 1.5% increase in revenue but delivered a 16.3% decline in underlying EBIT. This led to an underlying EBIT margin of 9.4%, a decline of 199 basis points as both Asset Care and Tribology target margin declined. Asset Care organic revenues grew by 1%. However, the ongoing state border closures in Australia and the closure of the Asset Care business in the U.S.A. impacted the underlying EBIT margin, falling by 95 basis points. Tribology also saw organic revenue growth of 8.7%, with temporary labor shortages and increasing consumables primarily in the U.S.A. lead to a 486 basis points decline in the underlying EBIT margin. I will now turn the call over to our CFO, Luis Damasceno.

Thanks, Raj, and good morning, everyone. I want to start by highlighting key elements of the financial results presented on Slide 9 and 10. As Raj indicated, the group delivered a lot of strong results with robust organic growth, margin improvement and cash generation. The $1.031 billion revenue from continuing operations was up 22.9% over the prior corresponding period, with organic growth of 23.6% and scope growth of 1.9% and a negative FX impact of 2.6%, mainly driven by the appreciation of the Australian dollar against the U.S. dollar, euro and Peruvian sol. The strong revenue growth translated into a 45.8% growth in underlying EBIT and to a group EBIT margin of 19.1%, up 299 basis points over the first half of FY '21. The margin expansion is partially driven by the low CapEx spent in the last fiscal year, which led to a reduction in depreciation, amortization as a percentage of revenue in the first half of FY '22. The margins in the second half are expected to be impacted by the increase of CapEx being deployed to support the organic growth initiatives in Life Science and Commodities. I want to point out the strict control of our corporate costs, which, as a percentage of revenue when excluding insurance costs, was at the same level of FY '21. Slide 34 provides additional information on the evolution of corporate costs. Slide 14 shows the bridge from the underlying to statutory results, noting that Slide 15 contains the breakdown of the restructuring and other items detailed by each business. $26.9 million are related to realized FX losses linked to internal corporate loan restructure with no economic impact as it is merely accounting transfer from the existing foreign currency retranslation reserves to the P&L. Also as disclosed in the FY '21 results, the group has elected to voluntarily repay grants and subsidies net of direct costs. The $24.5 million reported under the column COVID subsidies and grants includes a total of $3 million paid to the Australian government from funds received under the JobKeeper scheme and $21.5 million related to the Canada Emergency Wage Subsidy program to be repaid when the mechanism for reimbursement is agreed with the Canadian government. I'll turn now to Slide 16, where we present the key aspects of our capital management strategy. First, I want to reemphasize that the group's balance sheet remains strong and has improved further in the half. The ongoing focus on working capital management is yielding excellent results. We closed H1 with a DSO of 52 days, an improvement of 4 days versus H1 FY '21 and 60 days versus H1 FY '20. The total cash flow from operations before CapEx was $198 million, represents an excellent EBITDA-to-cash conversion of 85% despite the working capital requirements to finance the strong organic growth delivered in the period. The solid organic growth and margin improvement, combined with the good progress made in working capital management led to an improvement of our key financial metrics. We closed the half with a leverage ratio of 1.5x underlying EBITDA compared to 1.6x at the closing of FY '21, with available liquidity of approximately $720 million and 14x interest coverage. This solid financial position enabled the group to continue investing in inorganic growth initiatives, such as the acquisition of NUVISAN completed in October 2021. Had we paid all the consideration for the 49% stake in NUVISAN in September 2021, the group would have report a pro forma leverage ratio of 2x underlying EBITDA and available liquidity of approximately $490 million. The solid financial position also enabled us to materially increase CapEx investments to capture growth opportunities in Life Science and Commodities. The $56 million CapEx invested in H1 represents a 70% increase over the previous corresponding period and a total of 5.5% of the group's revenue. As a comparison, in H1 FY '21 when investment levels were significantly reduced as part of the COVID-19 response, our CapEx represented only 4% of the group's revenue. Given the superior capital allocation opportunities available to the group, such as investments in organic growth and accretive acquisitions, the Board has elected not to renew the share buyback program. With the share buyback program discontinued, the Board has elected to restate the dividend reinvestment plan available to eligible shareholders who elect to participate at a price representing a 1.5% discount to the 5-day volume weighted average share price for the period from 7 to 13 December 2021. The DRP will be funded by the issuance of new shares. Let me now turn to Slide 19 to cover the group's debt metrics. First, I want to highlight the continued diversification of funding source and debt maturities to mitigate refinance and liquidity risks and the further alignment of our denomination of debt by currency, the group's cash flow and net asset maturity reducing FX risks. In addition, the group extended its weighted average maturity of debt to 5.4 years compared to 4.9 years at the closing of fiscal year '21. This was attributed to the implementation of new bank facilities. In May 2021, the group enter into a new multicurrency revolving facility totaling USD 350 million and, the latest in September 2021, implemented a euro-denominated fixed rate debt facility equivalent to AUD 177 million. These new debt facilities provided additional liquidity and funding flexibility to finance the acquisition of a 49% stake at NUVISAN and conservatively position the group to cover the repayment of the $263 million of USPP terms during July 2022, reducing refinance risk. It's important to mention that the group intends to refinance the USPP terms during July 2022 at the appropriate level to maintain its strong liquidity position. To summarize the capital management review, the group closed the first half of FY '22 with a strong balance sheet, well positioned to continue pursuing value-enhanced acquisitions and to fund organic growth initiatives, which are crucial elements of the execution of our strategy. The pillars of our solid financial performance in recent years, we are continuing to permeate our actions: the continuous focus on capital management and the disciplined execution of our acquisition strategy. Finally, based on the solid performance delivered in the current trading conditions, the group also declared the final dividend of $0.158 per share, partially franked to 30%, represents a payout ratio of 60% of the H1 FY '22 underlying NPAT and an increase of 86% compared to the $0.085 per share declared as interim dividend in the previous corresponding period. Now I will hand back to Raj, who will get -- go over additional aspects of the business performance. Thank you.

Thank you very much, Luis. In closing, Slide 30 provides a recap of our first half of our fiscal year '22 results. For Life Sciences, strong performance with 18% organic growth and 4% organic growth as volumes recover to prepandemic levels. All three businesses in all regions delivered double-digit organic growth. Margin expansion of 131 basis points to 17.7% due to process improvement, automation and reduced depreciation and amortization charge following the reduction in investment in the prior corresponding period. For Commodities, a very strong organic growth of 41% and margin expansion of 519 basis points. Geochemistry had a very strong performance with sample flows of an increasing -- sample flows increasing 46% versus the prior corresponding period and an increase of 27% compared to the first half of fiscal year '20. For Industrial, the Asset Care environment continues to remain challenging due to ongoing state border closures in Australia and the closure of the U.S.A. business. Tribology had an organic revenue growth, but the margin was declined due to temporary labor shortages and an increase in consumable costs primarily in the U.S.A. The group had a strong first half with a 24% increase in organic revenue growth and an increase of 58% underlying NPAT growth, driven by the Life Sciences and Commodities divisions; a 70% increase in CapEx growth, reflecting strong organic growth opportunities, funding process improvement and automation in Life Sciences; and a 15% expansion in Geochemistry capacity. Solid cash conversion of 85% despite the strong organic growth. We completed the acquisition of a 49% stake in NUVISAN in October, and our management teams are working together to deliver on the strategic plan, and we have good early progress in replacing revenue from a scheduled contract rundown. Company is pleased to provide a full year of fiscal year '22 guidance of an underlying NPAT between $242 million and $252 million as strong performance in the first half has continued in the early part of the second half of the financial year. Our guidance includes the 6-month contribution from our 49% stake in NUVISAN. Slide 31 provides some additional clarity on key drivers for the group. These include second half of fiscal year '22 will be compared to a particularly strong prior corresponding period. Life Sciences margin expansion of over 30 basis points is expected for the full year of fiscal year '22. with the second half of this fiscal year to be impacted by the increase in depreciation and amortization following growth in CapEx spend in the prior corresponding period. There are some headwinds and inflationary pressures on labor and consumables currently in North America and expected to be on a global basis. Commodities division continued to benefit from the positive commodity cycle. Approximately 15% expansion in Geochemistry capacity anticipated to be completed by the end of this fiscal year with some further price increases expected during the second half, which may somewhat offset some labor shortages and wage inflation. There continues to be long-term sustainable growth drivers by the TIC market megatrends, including increasing requirement for sustainability testing services, technology development and connectivity, advancement of food and biopharmaceutical activities and transition to renewable energy sources. Thank you for your time and attention, and my sincere apologies for some of the technology challenges we've had on this call. The call is now open for questions.

[Operator Instructions] The first question comes from Andrew Hodge from Crédit Suisse.

I just got a couple of questions, if I could. The first relates to your balance sheet. You've mentioned that you've got some CapEx coming through and some expenses there. But notwithstanding that, given the strength of the balance sheet and that you've decided not to renew the buyback, it sort of points to maybe some good vision on some acquisitions that you would make -- that you plan to make. Is that a fair assumption?

Yes. I mean I think, Andrew, I think from our perspective, we do have a promising pipeline of acquisitions, and all of them are in various stages in the process in our M&A governance process. And the expectation is that if those potential acquisitions pass our due diligence, then we would move forward with them and -- but we are cautiously optimistic on the acquisition pipeline.

And just a second question with regard to the Commodities division and, specifically, Geochemistry. The result is really strong. So I want to ask this: I'm not suggesting that it's not a very strong result, but is the capacity constraint to do better in Geochemistry, at the moment, demand driven? As in you're reaching the point where there's not an increase in demand or it's supply constraint as in you're adding a bit of capacity that will come on board by the end of '22. And all junior miners report assay times being out. That suggests that there's plenty of demand there, and it's just a capacity constraint as to why that division can't do better at the moment.

Yes. No, that's a fair question, Andrew. And sort of the honest answer there is we have deployed a lot of capital. There are some real challenges in supply chain in terms of getting analytical equipment delivered, some real challenges logistics-wise on a global scale and some challenges around consumables. And I think as we continue to build capacity, we believe we'll continue to be able to manage the current demand. So I don't think it's a sample volume issue. I think it is an overall capacity issue, and we are working very hard to continue to build out capacity.

The next question comes from Jakob Cakarnis from Jarden.

Sorry, I'm not sure if I started already, but could you please just call out some of the efficiency gains that you've seen in the Life Sciences business when they started and what they relate to, please?

Yes. So the efficiency gains really -- I mean there are several areas that we work around. One is miniaturization in terms of sample volume and extraction techniques that we use on a global basis. And these have started several years, and we've been talking about them and cascading them and implement them on a global basis. So they sort of originated in the APAC region, moved to Europe, and now they're moving into the Americas, and we are seeing gains there. We are also continue to invest in automation, and that helps us with productivity and improved run time. So there's a series of initiatives that we run, Jakob, that probably would probably range from anywhere from 6 to 10 major initiatives that we're running through the business at a variety of different levels, both from a sample process then from an analytical technique as well as an overall sample management. And we are running some very proprietary production management tools within the business to improve the productivity in the business.

And then how do we think about penetration of that? I mean you said that the genesis is in APAC and now moving to the Americas. Is that more mature at the end of the first half of '22 in the Americas? Or is there still a way to go on that efficiency gains?

Yes. So I think this is -- I mean, one, that there is -- I think we're making good progress in the Americas, and that journey will continue. But I think just the current demand when you look at the inflationary headwinds and sort of the challenges with consumer -- consumables, I mean, the business is in constant improvement mode. So we're constantly looking at efficiency gains, and we're constantly looking at innovation and technology sort of to improve our processes, sort of reduce our demand on chemicals and consumables. So now this is an ongoing process. It's part of the ALS DNA. So I think we are seeing some positive gains that are -- that we're seeing in the margin improvement. Again, we did call out that some of the margin improvement was related to amortization and depreciation. But the expectation for us is that this will continue not only in Life Sciences but in the other parts of the business sort of on an ongoing basis. So our expectation there is good work being done now in APAC and Europe as we continue to look to improve our systems and our processes and our efficiency in our productivity.

And then just one final one on the Commodities business. How in sync should we expect the price increases and that capacity investment being realized to be through the second half? And just on the price increases, how critical is increasing the mix of junior miners in the sampling flows, please?

Yes. So we have provided some sort of [indiscernible] back here a little bit. We have provided some visibility in terms of the mix between juniors and majors, a 70-30 mix currently, one that provides us a better margin per sample with the juniors, and we know there continues to be increased demand. I mean, currently, with the current demand and sort of overall reduced capacity, it is an opportunity for us to continue to pull the pricing lever. So we will continue that through the second half. And our view is we continue to invest in capacity, not only this year, but we're also starting to build capacity for fiscal year '23, and we feel like we can continue that journey into future fiscal years.

The next question comes from Rohan Sundram from MST Financial.

Raj and Luis, just a couple for me. I might start with Raj. Maybe if you can just expand on some of the early learnings from NUVISAN and maybe the traction you are getting in replacing that revenue from the scheduled contract rundown?

Yes. So I mean I think the early learnings is that the teams are working very well. There's very strong cultural alignment between the groups. We did spend a fair amount of time, probably longer than usual just because the acquisition was during the pandemic. So the management teams have spent a lot of time with each other, and the teams are working well. I mean I think as -- it's early days for us since we only closed on the business in October, but my current view is that the business is on track in terms of replacing those revenues. They have a very, very solid strategic plan and an aggressive business development plan that is starting to deliver some early positive results. So again, I'm optimistic that the teams are doing all the right things, and we are seeing the desired outcome then. And I think we'll provide more visibility that, Rohan, at full year. But again, early indications are positive for us.

And last one for Luis. I might have missed this, but what should we expect in terms of CapEx as a portion of revenue in the second half? Is it more of the same? Or could it ramp up further?

I think that would be more or less in the range that we had in the past. So we closed at 5.5%. I would expect for the full year between 5.5% to 6% as a percentage of revenue as we catch up in the CapEx investments for couple of Life Sciences and Commodities.

The next question comes from Nathan Reilly from UBS.

Just trying to tease out your second half guidance a little bit more. Could you just help me with the expected contribution from NUVISAN? And also starts at the NPAT level, but can you also just confirm how you're accounting for that at the Life Sciences? Are you proportionally consolidating that? Or is that equity counted?

So I can take that point. The account will be equity-accounted, Nathan, in our financials. And we'll provide some visibility in terms of the underlying results of the NUVISAN in the full year results as we have communicated before. I think that's too early to talk about specific numbers for the second half. As Raj mentioned, early days. So we're working out with the teams. But in the full year results, we'll provide a little bit more color on the results.

You expect it to be profitable?

Absolutely.

Absolutely. Yes.

Absolutely.

Good. Okay. So can I also just get your [indiscernible] of what's included in the second half guidance, the -- what you're broadly speaking in terms of your assumptions around volume growth for Life Sciences and geochems, and that would be second half versus first half, please?

Yes. So I think when we look at our fiscal -- our full year guidance, one, the guidance represents the 33% increase over fiscal year '21, which is a strong uplift, and it also takes into account H1 and H2 seasonality. We know Life Sciences margin will be impacted by depreciation and amortization because we have increased our CapEx spend during the second half of last year. There will be the usual Northern Hemisphere winter shutdown for both Commodities and Life Sciences. And I think if we just sort of look at normal trends and sort of go back to prepandemic levels, we believe that the second half is in line with the past performance of the business. So I think -- again, I think our guidance is reasonable, and it is a little bit of a broad range, but I think it's appropriate during the -- while we're still having some headwinds with supply chain and some labor challenges.

Yes. So have you got an idea of how much additional cost you don't expect to recover in the second half on the back of those challenges?

Yes. I mean I think we have materially. I mean I think we have an estimate. I mean I think the supply chain or all the headwinds we're seeing in terms of inflationary pressures as well as labor pressures, I think we've seen them come through the first half. I personally believe there will be more during the second half until we see supply chain and logistics improve over on a global scale. We'll also see that the labor shortages -- I mean our view is that as people come back to work and people are getting vaccinated, people are more comfortable returning to the workforce, we will see the labor shortages ease up for us. So I think it will be probably more acute in the second half, and then we'll see. As we go into fiscal year '20 (sic) [ '22 ] full year, the expectation is we'll see some easing up of that.

Got it. Understood there. And final question, Luis, just in terms of that D&A increase you're flagging in the second half, can you give us an idea, at group level and also at Life Sciences, just what that increase is likely to be?

Yes. I think that in terms of CapEx, we go back to the level of CapEx investment as a percentage of revenue that we had prepandemic. This one we wrap it between 5.5% and 6%. And as we deploy more capital cost, [indiscernible] additional pressure to the mines. But then the important element is related that in the depreciation and amortization, we have pretty much two components. One is the CapEx. And the second component's the right of use of assets. That's pretty much the leasing that we have in our facilities. So the depreciation and amortization account for around the 70 to 80 basis points benefit that we have in H1. And this is why we are still considering that we can have some margin improvement in H2 despite a very strong at H2 FY '21 that we had last year.

The next question comes from John Purtell from Macquarie.

Just have a few questions, if I can. Look, firstly, on 18% organic growth in Life, can you just talk about the drivers of that and how we should think about long-term organic growth?

Yes. I mean I think with the drivers for -- we still believe, I mean, our volumes have now surpassed prepandemic levels. We know all three businesses in all geographies are now delivering double-digit organic growth. So we know that demand continues to improve. We have seen margin improvement in our recent acquisitions are performing well. So they're the most -- prior to NUVISAN, Investiga was our most recent acquisition. That business continues to perform well. So I do think there is -- the drivers are there. We are seeing increased demand. We are seeing continued recovery from some of the regions that did not perform last year. So Lat Am continues its strong recovery. There's a little bit of patchiness in the U.S. as the pandemic is still sort of hit-and-miss year and a small minor impact to the Australian lockdowns, but we feel like going into the second half other than just the seasonality. We continue -- we believe that the drivers for organic growth will be there, and we've expanded our portfolio, and the overall market megatrends is one of compliance and additional testing, and we believe ALS is well positioned to benefit from that.

Look, just the second one and just touching on an earlier question there, but your Commodities margins in the first half looked to be flat on the sequential second half of '21. Just in terms of the factors there, I think you've called out supply chain challenges. Inspection margins were also weaker. Just any other factors at play there, Raj.

Yes. No, I think that's the biggest challenge. I mean I think for us, and I believe it was Jakob that brought this up, I mean it really is just a capacity issue. So I think if we look at our business, our businesses are running at capacity. We're building capacity. So we've had no issues building the capacity where we've seen some issues in just delivery and lead time on analytical equipment. So we sort of if you look at the sort of supply or our overall process, you've got sort of the sample prep area first, and we build capacity very quickly with our hub-and-spoke model in sample prep, and now we're addressing the analytical capacity. And historically, we've not seen these sort of lead times from our suppliers. I mean, typically, we get equipment delivered in 30 or 60 days. And right now, with just logistics and supply chain issues, we have analytical equipment sitting at board is up to 90 days before we can put it to production. So that is getting better. So we have seen improvement over the last 30 days, and we've got a reasonable backlog in the system. So we do think we will be able to work through that backlog and get back to our expected level of productivity.

And just a final one. In terms of the price opportunity in Commodities, obviously, some of this at the moment is reflecting increases in costs. But do you see an opportunity to increase price above cost as we move into '23?

Absolutely. I mean I think that's been our -- that's always been our business model and operations model. And I think from our perspective, our expectation is as we go to the second half and into fiscal year '23 that we will be pulling the pricing lever to not only offset some of the inflationary headwinds we've seen but also get the benefit of the continued improvement in the commodity cycle.

The final question comes from Michael Aspinall from Jefferies.

A couple from me on Life Sciences. So Life Sciences EBIT margins are going to be down in 2H. I was just wondering if NUVISAN is a negative margin mix in the second half for Life Sciences.

Yes. I mean, Luis can answer that, but we don't expect it to be but go ahead, Luis.

No, not expecting negative margin of -- we are -- we're going to provide additional information of that H2. But no, the margin -- the increase over last year in terms of margin is driven by the dynamic with depreciation and amortization, as I have mentioned, Michael. If you look in the first half, we had an improvement of over 130 basis points in margin for Life Science compared to H1 last year, of which about 7 to 8 basis points is related to reduced depreciation, amortization linked to CapEx investments. And as we accelerate the investment in CapEx already in H1 and continue to do in H2 in order to capture organic growth, that gap is going to close pretty quick. But we still have some kind of room there because, as Andrew mentioned, we have the depreciation and amortization as well provides us use of assets. That's the leasings -- leasing offices that we have pre-IFRS 16 that still allow us to leverage somehow those costs and benefits continue to benefit in H2. So this is why the margin will [ better ] put the improvement over last year, and H2 would be with a lower magnitude given the dynamic of depreciation, amortization.

Yes. And then EBITDA margins, would they be relatively flat then?

Yes, that's the expected. And keep in mind that last year, Life Sciences had extraordinary high margins, given the increase in volume in H2, benefiting from still a better low-cost base in the second part of the year there. As we enter now in growth mode for Life Science, and of course, we have some cost increase, but the expectation that the EBITDA margin would be dissimilar.

Okay. Great. And you kind of have spoken to us about what you're investing on the geochem side in terms of capacity. Can you just give us some examples of what you're investing in on the Life Sciences side?

Yes. So on the Life Sciences side, we're investing in additional analytical equipment, so new technology, better automation, additional capacity. So there's been a high demand for PCR testing, both in ways [indiscernible] that. We've landed some large contracts in Asia that -- so we've got to increase capacity. We've added additional analytical equipment both for organic and inorganic analysis. So most of our investment in Life Sciences has been in building analytical capacity. We've done a little bit of redos and improvement on facilities. But I would say 90% of our investment is in capacity or replacing old equipment to newer technologies.

Okay. That's great. That's very helpful. And one last one on Life Sciences. Any seasonality in NUVISAN that we should be aware of when we think about kind of EBITDA that you gave us for FY '21, [ EUR 40 million ]?

Yes. No, I mean I think with the NUVISAN business and being it in the pharmaceutical space, they will see some seasonality as it relates to December, January, being just normal holiday period, and that business is predominantly in Germany and France. So there will be some seasonality there. But in terms of sort of weather-related issue, that business continues to build a good backlog into next year. So again, other than just the normal holiday seasonality, we're not expecting some major fluctuations there.

Yes. Are you able to help this time, is it -- of the [ EUR 40 million ] last year, was it kind of [ EUR 25 million ], [ EUR 15 million ] or any kind of indication of what it might look like given these shutdowns?

Yes. No. I think for us, it's early days. I mean, again, we closed on we did good due diligence. It took us a while to get regulatory approval to close. We've just closed on the business at the end of October. Luis and the team there are going through all the numbers. And I think it would be a little bit premature for us to sort of provide some numbers here until we get a clear understanding and we can present a true set of numbers to the investment community. But my current understanding is that the business is on track. It's in line with our business plan and strategic plan. And I think once we see a good clean set of numbers under the ALS reporting structure, then we'll be very transparent to the market.

Okay. Cool. And a couple on geochem. You mentioned that there are kind of real supply chain issues in getting capacity. Are your competitors seeing that, too? And so I'm just wondering what you're seeing in terms of turnaround times around the world, if there's still extended at all.

Yes. So I mean, from our perspective, and maybe it's a relative issue. But our clients, I mean, we probably have received some of the highest client satisfaction surveys that we have typically during this point in the cycle. So typically, when you're running up the cycle that's hard, you do get a little bit of noise coming out of our clients in terms of turnaround times, et cetera. So we are managing our turnaround times. They're probably a little bit longer than normal. But I think we're doing a good job with turnaround time. So we're managing turnaround times with shifts and labor. And I think the supply chain issues are not exclusive to ALS. I think this is a global phenomenon, and it's not only for our analytical businesses. I think everybody is seeing this across the board. But we are optimistic that things are starting to look better. I think we'll get acute in the second half, and I think things will significantly improve. So turnaround times for us are good. We're not seeing, again, and maybe our competitors are struggling in turnaround time as well.

Okay. So good but still not kind of probably slightly extended to where you'd usually be operating?

Yes, absolutely, especially with the current demand and pent-up demand to get volumes. I mean we're coming close to the end of the field season now. So we sort of, in November, things will slow down a little bit. We've got a reasonable backlog going into the holidays. So I do think we will play catch-up very quickly and then get ready for the field season, and we are hoping by the time this field season starts early next year, we would have put all that additional capacity and CapEx that we've deployed into the business getting ready for the continued increase in sample value.

Yes. That's very helpful. One on coal. It's a significant drag. It looks like the EBIT was down kind of in the order of 50% year-on-year. So a significant drag on the kind of commodity segment. Can you just talk to what's happening there? And should we see that again in the second half?

Yes. No, I think with Coal -- I mean I think we're at a new sort of state of normal. I mean there is -- we know that the superintending business, the demand has declined, and your production volumes are off across all major miners. While there's been a strong coal price in the short term, we still produces a year to invest in increasing the sample volumes. We've seen -- our focus has really sort of been beyond superintending and really looking at mine-type work. So I think what you're seeing with Coal is probably the new state of normal for us until we see a material uptick in production in coal. And we continue our sort of our diversity of our portfolio. So really getting into mine sites versus just doing superintending work. And again, we have seen a drop of in superintending work based on the issue that we have in Coal and the clients that have left us and not returned. We have not seen further departure of clients, but there is that impact as well, Michael.

Yes. That's understandable. Was that kind of in the second half of last year? Or will it be kind of down second half of [indiscernible]?

Yes. I mean it's -- there was that impact in the second half of last year. So I think what we're seeing now is it will follow a normal trend for us at its current level.

Great. Two last ones, so I've got a couple. Cash flow conversion expectations for the year. I mean the first half was 85%, which is actually pretty strong versus previous years. I think cash flow conversion is seasonally skewed to the second half. Would you expect kind of to be back at 100% for the year?

I think so. I think that we should be back to 95% to 100% of the closing of the year, given the profits that we had so far.

Cool. And then just the last one for me. Consumables has impacted margins in a few different areas. Can you just talk to your ability to pass through inflation more broadly, maybe just by segment in Life Sciences, in Commodities and the Industrial?

Yes. So just broadly speaking, as we see these inflationary pressures with consumables, I mean there's an across-the-board improved and focus in procurement, so we have continued to leverage the group's global buying power to try to hold consumable prices or get them down lower. There's also a pricing strategy across all businesses to pass those costs on. I think, again, for the first time in probably many years, we are seeing the Life Sciences business pushing price and get price increases because this is very normal in the current market conditions. So again, we do have a clear procurement strategy, and we also have a clear pricing strategy that's designed to not only offset headwinds and inflationary pressures but also to continue our journey on margin improvement.

Okay. Great. So that was particular across Commodities, too?

Yes. I think it's -- I mean the consumables that we use across the businesses are common. So it's chemicals. It's reagents. It's disposable items. So it's across all businesses, but the two biggest businesses we have is sort of that Commodities business and Life Sciences. So there's a very strong focus there. That's the low-hanging fruit for us.

[Operator Instructions] We have no further questions, Raj. I'll hand it back over to you.

Thank you very much, everyone, for your time and attendance today. And again, I'm embarrassed on the technology issues, and we will address them prior to the full year results. And as usual, if there's any further questions, the management team, Luis, myself, are available. Just reach out to Simon, and we're happy to address any questions. And thank you very much, and I hope everyone has a great day. Thank you.

That concludes the ALS Limited First Half of Financial Year 2022 Results Conference Call. Thank you once again for joining us today and for your interest in ALS. We wish you a pleasant day.