ALS Limited (ALQ) Earnings Call Transcript & Summary

All right. Thank you. 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. My name is Raj Naran, Managing Director and CEO. And with me today is our Chief Financial Officer, Luis Damasceno; and our Head of Investor Relations, Cameron Sinclair. I will present the highlights of our financial performance of our first half of fiscal year 2023 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 2023 results as being read and I will only refer to individual slides as appropriate in my commentary. Turning to Slide 3 of the presentation. We continue our positive journey on delivering on our corporate social responsibility performance. And to date, our ratings are ahead of industry averages. We have achieved AA rating four years in a row. We have the highest rating for ESG reporting per ACSI, and we continue to improve on all measures. I encourage you to download a copy of our most recent sustainability report from our website that demonstrates the transparency in the way we manage a wide range of aspects across our four sustainability areas: our people, environment, governance and society. You can also request a copy of this report from Cameron. Slides 4 and 5 highlight the group's first half of fiscal year 2023 performance delivering on current short- and longer-term strategic priorities. These being the company delivered an NPAT of $164.3 million, exceeding the guidance of $157 million to $162 million provided to the market at the company's AGM in August. The NPAT and the interim dividend increased 29% versus the prior corresponding period. Strong financial performance, a 23.9% total revenue growth, of which 13% was organic and 10% was scope revenue growth supported by both commodities and Life Sciences. The group's EBIT margin expanded 19.9%, a 65 basis point increase versus the prior corresponding period in a challenging environment. The commodity business continued favorable pricing outcomes. And the contract renewal process and pricing uplift benefits in Life Sciences are expected to continue to materialize in the second half of fiscal year 2023. Wage inflation is offset by price uplift and procurement benefits within the Life Sciences business. The strong price discipline enabled the overall business to grow and retain operating margin. The business has a disciplined capital management approach. Luis will provide more details in his discussion. The balance sheet continues to be strong. 80% of the total debt drawn is fixed at 2.96%. The business has a liquidity of approximately $433 million, a 6.2-year debt maturity and a leverage ratio of 1.9. As noted on Slide 7, the group completed 8 strategic acquisitions year-to-date contributing $90 million in revenue on a full year run rate. Luis will also provide more details on the acquisition. On Slide 6, at the division level, the Life Sciences business was resilient with a margin improvement of 3 basis points on a constant currency basis. This performance excludes the acquisitions. The Life Sciences business continued to grow recurring revenue from its portfolio supported by successful strategic acquisitions and strong organic growth. The total Life Sciences margin erosion was due to global economic conditions, geopolitical conflicts and the expected initial margin dilution from recent acquisitions. The recent acquisition of Nuvisan is experiencing headwinds due to the conflict in Europe. We remain confident and committed to the long-term strategic value of this business to ALS. The commodity margin expanded due to price improvement and sample volume growth. The Geochemistry business had a solid sample volume growth, price improvement and a consistent mix of 60% majors and 40% juniors and there is positive medium- to long-term outlook. Capacity expansion within the Geochemistry business kept pace with -- demand. The Industrial Division had a margin decline of 108 basis points impacted by labor inflation at a junior level within the Tribology business. The Tribology business delivered a solid organic revenue growth with key countries supporting the growth. The Asset Care business improved earnings following execution of a margin improvement plan. I will now turn the call over to our CFO, Luis Damasceno, to discuss the financials in more detail.

Thanks, Raj, and good morning, everyone. I will start on Slide 12 with the divisional highlights. Life Sciences delivered revenue of $656 million, an increase of 23.8% over H1 FY '22 with organic growth of 6.8% and scope growth of 16.5%. All business delivered a stronger organic growth. Life Science also completed established strategic acquisitions while expanding geographic reach across Europe, the Americas and APAC both in food and pharmaceutical business and maintained a promising pipeline of acquisitional opportunities. The underlying EBIT increased by 16.9% to $111.2 million with the overall margin declined by 99 basis points to 17% due to challenged economic conditions, disruption caused by geopolitical conflicts and the expected initial margin dilution from the recent acquisitions. Excluding acquisitions, the business expanded its margin by 3 basis points on a constant currency versus that of H1 FY '22. This performance reflects the resiliency and continuation of the margin improvement journey of the Life Sciences business, the successful execution of price management strategy and its abilities to manage supply chain and the labor market challenges. Moving now to the Commodities division. The division had a total revenue of $503 million with a strong organic revenue growth of 27%, underlying EBIT of $156 million and a margin of 31%, up 111 basis points versus prior corresponding period. Geochemistry delivered a 31% organic revenue growth, supported by price improvement, increased the volume within both major and junior miners and a stronger growth in the mine site activities. The business also reported a 5.4% scope growth from the recently acquired MinAnalytical. The underlying EBITDA margin of 33.7% represents an increase of 37 basis points compared to H1 FY '22. Metallurgy benefited from an increase in mining activities notably by the growing demand for critical metals for energy and battery technology, delivering a strong organic revenue growth of 32% and an EBITDA margin of 31.9%, an increase of 540 basis points versus prior year. The Inspection business revenue grew organically by 6.2% and delivered a good margin of 21.6%, a decrease of 158 basis points versus prior year explained by the impact of China's COVID lockdown. The coal business was affected by the reduction in superintending revenue, which was a negative organic growth of 5% and a margin of 7.5%. At the closing of H1, the coal business accounts for less than 1% of the group's EBIT. Finally, the Industrial division delivered revenue of $109 million, a decline of 1.3% explained by the shutdown of the Asset Care business in the U.S.A. last year. The underlying commodity decreased by 180 basis points to 8.3% impacted by raising labor cost at the junior level in the Tribology business. I'll move now to Slide 16 and cover key aspects of our capital management. I want to highlight that the group continues to preserve a solid balance sheet that supports our growth ambitions and reflects the disciplined and proactive approach for capital management. We closed H1 with a strong level of liquidity of $433 million, a comfortable leverage ratio of 1.9x, within our target range of 1.6% to 2.3x, and an improved EBITDA interest cover of 17x. The group's debt profile also places the business in a solid position to face the current economic environment. With an improved weighted debt maturity of 6.2 years, 80% of our drawn debt is fixed with an average rate of 2.96%. The debt profile by currency is broadly aligned with our operational cash flow and net assets, creating natural hedging and significantly reducing FX risk. We also had another period of strong cash conversion. The group generated $229 million of cash before CapEx represents an increase of $31 million over H1 FY '22 and a strong EBITDA cash conversion of 80%, a significant achievement considering the working capital demand to fund the group's double-digit organic growth. This is a solid cash conversion level considering as well the typical cash flow seasonality of the business and it placed us on a good track to deliver above 90% cash conversion rate in FY '23. The strong level of cash generation has allowed the group to continue to finance the investments in organic and inorganic growth opportunities. In H1, we invested $7 million operational CapEx, representing 4.5% of the group's revenue, having 2/3 of the total deployed CapEx direct to the growth price. We also completed as of today eight acquisitions in FY '23, which I expect to contribute approximately $90 million of revenue on a full year basis. These opportunities consistent with our acquisition strategy focused on expanding geographic presence, providing a platform for growth into attractive adjacent market life science and data analytics in the commodity division. I'll now move to Slide 19 where I want to highlight that the refinance of the U.S. private placement that in March was funded in July 2022 by proactively completing displacement a few months before the maturity date of the USPP during July, the group was able to secure very favorable rates and eliminate any refinance risks associated with the volatile market. To conclude, based on the strong performance delivered in H1 FY '23 and the business solid financial position, the group declared an unfranked interim dividend of $0.203 per share, represent a payout ratio of 59.8% of the H1 -- and an increase of 28.5% compared to the interim dividend declared in H1 FY '22. It's important to mention that the unfranked nature of the dividend was driven by lower tax payments in Australia in H1 FY '23 due to the participation in the Australian federal government's instant asset write-off scheme. Existing $100 million share buyback program announced in July 2022 remains active as a capital management tool. And as such, the Board has determined not to restate the dividend reinvestment plan. Now we hand it back to Raj, who will go over additional aspects of the group's strategic priorities and the outlook for FY 23. Thank you.

Thank you, Luis. The current economic climate remains challenging and uncertain due to the current geopolitical issues, the risk of a recession and rising interest rates. The outlook for the group remains positive despite these challenging economic conditions. The group expects to deliver for the full fiscal year 2023 an underlying NPAT of between $300 million to $320 million, representing an uplift of 17% at the midpoint compared to fiscal year 2022. The business model remains resilient and has demonstrated ability to manage any disruption with exposure to key end markets that contain structural growth. The Life Sciences division is expected to show margin improvement in the second half of fiscal year 2023 as client contracts renew and prices increase as well as labor shortage challenges stabilizing. Price increases and procurement practices has allowed the division to manage inflationary pressure to date but the environment remains volatile. The commodities division, particularly Geochemistry and Metallurgy are continuing to benefit from the strong demand for commodities and energy metals. Sample volume growth slowed towards the end of the period and this trend is expected to continue through the second half. However, growth is structurally supported over the medium to long term by an increasing demand from a broad range of metals, including metals that support decarbonization, electrification, transmission and storage of energy. There are several mega trends that are driving the long-term growth of the testing, inspection and certification industry. These include increasing regulation and outsourcing, increasing requirement for sustainability, testing services, technological development and connectivity, digitalization of technology and transition towards renewable energy sources. These mega trends underpin ALS' future growth plans. And the group remains well positioned to capture these long-term sustainable structural growth opportunities in the market in which it operates. Thank you for your time and attention. The call is now open for questions.

[Operator Instructions] Your first question comes from John Purtell from Macquarie.

Just in terms of Life Sciences there, Raj, in your comment around improved margin improvement in the second half of '23. Are you comparing that to the first half of '23 or the pcp?

So we're comparing it to the first half of '23. And I think we'll see margin improvement compared to the second half as well.

Second question, if I can, in relation to the Geochem business and the outlook there. Obviously, we did see that sort of flattening out there in the second half or towards the -- sorry, towards the end of the first half, should I say. Are you assuming any sample flow growth for Geochem in the second half of '23 and any preliminary views on calendar '23? I note that one of the forecasts is expecting a down year for exploration next year.

Yes. And so we are seeing coming out of the half, we have seen a slowdown in Geochemistry volumes. What we're cautiously optimistic over, John, is that we have seen quote activity significantly increased over the last month or two. We are seeing activity -- and again, we're not seeing the sample volume drop. What we're seeing is sample volumes sort of flatten out for us. So again, I think it's a little bit early days for us. We are going into sort of the end of the field season. My expectation is we'll see a normal slowdown over the holiday season. And I think sample volumes will remain flat through the end of the second half.

Your next question comes from Rohan Sundram from MST Financial.

Just a question around, Raj, how would you rate your forward visibility at the moment? Obviously, it's very encouraging that you've issued forward guidance. But how would you rate that? And how are you seeing the pressures around labor and inflation? Are there any green shoots, any easing that you're seeing at the moment?

Yes. No, thank you. I mean I think our visibility continues to be over the next 6 to 12 months. I mean I think when you look at things at a high level, we've issued a dividend on the higher end of the scale. We're providing guidance. And I mean clearly, that shows our confidence in the performance of the business in the second half and sort of moving forward. So again, I think we do have good systems and processes in place that provide good visibility to provide that level of sort of certainty or confidence if you want to call it that. So I think we are there. And sorry, your second question was, Rohan?

Just around labor pressures, inflation. Are you seeing any easing in those pressures at present?

Yes. So I think what we're seeing with labor, I mean, again, we are seeing labor easing up a little bit. I mean you are -- a lot of companies have sort of started hiring. We're seeing overall labor pressures easing up. We are seeing the availability of technical staff being a lot better than what we've seen over the last 12 months. And we've also put in some good measures in place for labor for retention. So I do believe over the next six months, we'll see labor pressures ease up and we've seen that already. So I think -- and we've already pushed through price increases. So I think just the price increases will help offset the current labor pressures. And from my perspective, I don't think we'll see labor pressures continue to increase. The current environment is probably as challenging as I think it's going to be. I don't think it's going to get worse.

Your next question comes from Jakob Cakarnis from Jarden Australia.

Can you just make a commentary on the pricing dynamics that you're seeing in the Geochem business? Just wondering if we move into the second half as that sampling flow tends to slow down, whether or not there could be price competition across your competitors?

Yes. So thank you. I mean we're still seeing our ability to push price in this environment and that continues. So we are still -- there is still high demand for capacity within our business. And up until last week, we were still pushing price and we don't see that easing up through the second half provided, there's still demand. And again, my personal view is that we should be able to push price through the end of this fiscal year.

And then just on the Life Sciences business. You've mentioned contract renewals. Can you just talk about some of the major contracts that are coming up and whether or not there's any changes to the contract structure, the rise and flow that you're now introducing or any derisking mechanisms that you're introducing into those renewals to deal with higher inflation as we move forward?

Yes. So what we've done -- and again, we call that Life Sciences but it's a general comment across all of our businesses. What we've done is we've put in inflationary and CPI clauses across all of our businesses. So should this current environment continue, we have mechanisms in there to recover on our pricing strategy. And that's across all of our contracts now. So I feel like the business has reacted well to the current environment. And again, with the uncertainty looking forward, our clients seem to be accepting our position. So I think the business has positioned itself well moving forward. And in terms of the contracts themselves, again, it's across all contracts. So it's not like one major contract at risk. I mean we're doing it as contracts renew across the board.

Your next question comes from Andrew Hodge from Credit Suisse.

Just I guess in following the theme that's sort of been going through. I'm interested just in terms of the guidance that you provided. When you look at it in a big picture sense for the second half, where do you think the risks are in terms of what needs to change from where we stand today? So you're seeing some improvement in labor inflation. You're seeing sample volumes hold up. What would make the change in the world where you think that would present some risk to your guidance?

Yes. I mean I think what we're seeing, I mean if we sort of again look at the business from a bird's eye view, I mean the business has reacted proactively. So we have improved our procurement practices to offset sort of cost of consumables, et cetera. We put price through with our clients and we continue to do that provided we are in this environment. I mean I think we just see -- I think when we -- for us, the major risk would be around geopolitical. I mean the conflict in Europe, it's very dynamic, changes by the day, sometimes several times a day. I think that's where the risk lies. From my perspective, I still believe there's pent-up demand in terms of both energy, metals and for life sciences. I just think with the current economic climate and a little bit of uncertainty around geopolitical issues, I think the overall economy is a little bit subdued. I think if we see a settling in that situation, I think there is a significant upside. And I think if the business -- if the current environment continues, then I think our guidance is relative. And again, if there's any sort of escalation, then I think the risk is there. All the other trends and mega trends and drivers for the markets that ALS participates in remain strong. I mean there's still strong structural drivers that will support both our commodities and the Life Sciences business.

Your next question comes from Nicholas Rawlinson from Jefferies.

Just on Life Sciences, Nuvisan EBIT margin at 11.9% looked to decrease by 240 bps half-on-half and were a pretty deep drag on Life Sciences margins. Could you just elaborate on what happened there and how quickly you're looking to turn this business around?

Yes. I think for us, I mean that situation, again, I don't want to blame conflict for everything. But the business, again, if we look at Nuvisan at a high level, we think -- we still remain committed. I think strategically, it's a good fit for ALS. The business has performed well in replacing new revenues and commercializing. The situation in Germany overall remains very fragile. And what we've seen is we've just seen activity levels slow down in Germany overall, not just only with Nuvisan. I mean I think you look at the overall economic situation in Germany and the concern over energy and a variety of other things. There is a little bit of uncertainty. And that's really what happened. We've seen projects get delayed, not canceled. And again, just the overall marketing in Germany is behaving a little bit erratic due to their concerns as it relates to energy.

And then just my final question. How much capacity have you added in Life Sciences with the 3.5% growth CapEx?

We probably added between 5% and 10% capacity overall. I mean -- so I think the CapEx is a combination of maintenance CapEx and growth CapEx. And we do provide that visibility in our presentation.

There are no further questions at this time. I will now hand back to Mr. Naran for closing remarks.

All right. Thank you very much for everyone's time and attention. As always, Cameron and we remain available for questions. So thank you very much and everyone have a good day.