Imdex Limited (IMD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the IMDEX 1H '20 Teleconference and Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Bernie Ridgeway, Managing Director. Please go ahead.

Thanks, Rachel. Welcome, everyone. Thank you for joining us today. It is a pleasure to present our half yearly results for the 2020 financial year. Joining me on the call today are Paul Evans, our CFO and Company Secretary; and Paul House, our COO and Chief Executive Officer-elect. As announced in November last year, Paul House will take over as CEO following my retirement on 1 July this year. This presentation will take approximately 15 to 20 minutes, and then we'll turn the call over to the operator to moderate a question-and-answer session. I'll begin with a brief overview of our company and technologies. However, like our previous presentations, we have included some additional information in the appendices. Starting on Slide 2. Who is IMDEX, and what do we do? We are a leading global mining-tech company with operations in all of the key mining regions of the world. Our connected technologies and integrated solutions enable cost-effective operations from exploration to production. Looking at Slide 3, which highlights the key points of our investment proposition. We have a market cap, which is in excess of $0.5 billion. We have been outpacing industry growth, where our revenue and EBITDA compound annual growth rates over the last 3 years have been 16% and 27.5%, respectively. This reflects the investment we have made in technology and value-added solutions for our client base. Our balance sheet continues to strengthen, and we have a strong net cash position. We are present on approximately 70% of drilling programs globally, which provides an excellent opportunity to market a wider range of products to clients. We are the only company providing end-to-end solutions to the whole mining value chain. And we always have a rich pipeline of new technologies. FY '20 is no exception. It is these unique end-to-end solutions and new technologies which will continue to build sustainable revenue and earnings growth in the coming years. Now moving now to Slide 4, which illustrates what our technologies do. The graphic depicts how our cloud-connected sensors and drilling optimization products improve the process of identifying and extracting mineral resources globally. For example, drilling optimization solutions, downhole survey and logging sensors and real-time subsurface intelligence. We help drilling contractors and resource companies, both. We help them drill faster and smarter, obtain accurate subsurface data and receive critical information anywhere in the world in real time or near real time. We have included Slide 5 to emphasize that our portfolio of technologies is applicable to the whole mining value chain, that is at all stages from exploration to production. Applying our portfolio of connected centers and drilling optimization products to this broad spectrum is a key part of our strategy for sustainable growth. Slide 6 highlights our strong competitive position. Increasingly, our breadth of solutions means we stand alone in the marketplace. We have a first-mover advantage for cloud-enabled technologies in this market. Our ongoing investment in R&D and the world-class team we've established in the U.S.A. and Australia continue to build our portfolio of IP year-on-year. Protecting this IP provides a high barrier-to-entry and is an integral part of our product development stage gate process. With the inclusion of the Flexidrill patents, our registered patents are up 56% on June 2019. The breadth of our patent families is largely unrivaled, and our IP portfolio currently protects over 80% of current and future revenues. Our global presence is a key component of our strong competitive position. It enables us to support our clients in their regions of operation and efficiently introduce new technologies to these markets. For listeners who may not be familiar with IMDEX, we have included a map of our IMDEX facilities in the appendices of this presentation. Looking at our 1 half '20 highlights on Slide 7. As we announced in our release this morning, it has been a positive start to FY '20 with 7 consecutive halves of revenue and earnings growth. We achieved our strongest half yearly revenue which was up 2% on first half '19 and an underlying EBITDA increase of 12%. The directors declared a fully franked interim dividend of $0.01 per share, which was up 25% on 1 half '19. The full year FY '19 dividend of $0.014 per share was paid during the half. As was a special dividend of $0.02 per share following the sale of Vaughn Energy Services or VES, our last remaining oil and gas asset. Our balance sheet is robust with a net cash position of $25.5 million. We continued to strengthen our rental fleet with more sophisticated connected technologies. This enabled a 12.7% increase in the average monthly rental rate from first half '19. We exercised our option to acquire Flexidrill and its COREVIBE and MAGHAMMER technologies. This transaction was completed on 6 January 2020. We remain on track to commercialize and accelerate our new drilling productivity and mining technologies in the second half of this financial year. We continued our disciplined spend on core engineering and product development, and our IMDEXHUB connected technologies are up 53% on the pcp. Safety is an ongoing focus, and we are pleased to report our lost time injury frequency rate was below our internal targets at 31 December 2019. We achieved the highly sought-after information security management standardized ISO 27001, which is recognized throughout the world. Importantly, it provides additional assurance to clients regarding the end-to-end security of their information. And finally, we continue to streamline our operations and realize the benefits of our internal digital transformation. I will now hand over to Paul Evans to cover the financials in more detail.

Thank you, Bernie. Looking at Slide 9 and our key metrics for 1 half '20. You will note, we have included an additional white-ly shaded column to highlight impacts from the new leasing accounting standard, AASB 16, which came into effect for this reporting period. In line with the new standard requirements, comparatives in first half '20 financial report have not been amended, and therefore, the table has been extended to demonstrate the reporting result -- the reported results, sorry, removing the impact to AASB 16 to allow a clear comparison to the prior comparable period. We achieved our best half yearly revenue of $127.9 million, which is a 2% increase on the pcp, the latter being a particularly strong half. Underlying EBITDA was up 12% to $28.1 million. This underlying result excluded a $3.6 million gain from the sale of VES and a $3.2 million benefit from the new leasing standard I mentioned earlier. Excluding the AASB impact, we recorded a net profit after tax of $18.5 million, up 37% on the pcp. Earnings per share prior to the leasing standard impact was $0.482, up 32% on first half '19. Our operating cash flow, excluding the AASB 16 impact, was $21.7 million, a 14% increase from the prior year. Net assets, again, excluding the AASB 16 impact, increased by 10% to $225.4 million. And net cash, excluding the AASB 16 impact, was $25.5 million, up 24%. Given our strong cash generation, our directors declared a fully franked interim dividend of $0.01 per share for the half. This equates to a dividend NPAT payout ratio of 21%. Moving now to Slide 10. As you can see from the graph, we are continuing our positive trend of growth. Our best half yearly revenue and our strongest December result was largely driven by increased activity within Asia Pacific, a late Christmas shutdown and growing demand for our integrated solutions and cloud-connected technologies. The result for the Americas was impacted by client consolidation within the industry in North America and industrial unrest in South America. Exploration activity within this region is expected to increase. Europe and Africa experienced steady growth. Approximately 35% of our first half '20 revenue was generated in Asia Pacific, 45% in the Americas and the balance in Africa and Europe. The pie charts on the right provide more detail regarding our revenue profile in January. Our percentage of rental revenue is increasing due to market adoption of our integrated solution and cloud-connected technologies. We are increasing our percentage of revenue from the surface and underground mining phase, which is a key part of our growth strategy. Moving now to Slide 11 and our underlying EBITDA. Again, you can see, we're achieving a strong trend of earnings growth as demonstrated by our underlying 3-year CAGR of 27.5%. As mentioned, our first half '20 underlying EBITDA result of $28.1 million was up 12% on first half '19. This result largely reflected the increased percentage of rental revenue, which yields a higher gross margin and our ongoing focus on benefits from our digital transformation and supply chain initiatives. Slide 12 shows the reconciliation from our underlying EBITDA result to net cash flow from operations. From the underlying EBITDA result of $28.1 million, there was a net inflow of operating cash of $21.7 million, which represent an uplift of 14% on the pcp. This was after our investment in working capital, noncash items and $4.6 million of tax paid. Our first half '20 working capital investment ratio was approximately $0.30 for every dollar of incremental revenue. We anticipate a similar ratio for the full year. Looking briefly now at the balance sheet, as of 31 December 2019, on Slide 13. Excluding the impact of AASB 16, the strong cash generation was reflected in our net cash position which was up 24% on the pcp. Excluding the impacts of AASB 16, our net assets increased $22.6 million or 11% since 31 December 2018. We paid a FY '19 final and special dividend in the half, totaling $0.034 per share, and we continue to invest in leading technologies to drive future growth for shareholders. As of 31 December 2019, our return on equity and return on capital employed was 17% and 19%, respectively, both were up on 30 June 2019. Maintaining a robust balance sheet remains a priority, and we are comfortable with our current net cash position. I will now hand over to Paul House to cover our growth strategy and operations.

Thank you, Paul. Thank you, Bernie. Before providing an update on our growth strategy in operations, I would like to briefly review our recent ESG activities on Slide 15. We are taking a stepwise approach to ensure consistent, quality and relevant information is provided, and we are working towards preparing a sustainability report in accordance with the Global Reporting Initiative Standards within 3 years. In December 2019, our Board endorsed the establishment of an ESG Committee to enhance reporting for our stakeholders and the broader investment community. This committee will be responsible for identifying activities that support our ESG position both internally and how we engage with our clients. As referenced in the appendices, we already have a suite of products and services embedded in our business that support the sustainable operations of our mining industry stakeholders. Looking now at our strategy on Slide 16. We remain committed to our 2-tiered strategy, which expands our presence within the complete mining value chain. It includes growing our core business by enhancing our technical leadership, technical integration and increasing our share of client spend and further extension into the larger adjacent mining market to build our noncyclical revenue. Our growth has been driven by offering more comprehensive value through the real-time power of IMDEXHUB-IQ and provisioned as an integrated solution to our clients. The quadrants on the slide depict our growth strategy into products and markets. Product extension within the exploration and development market is on the left, with ongoing core R&D and the development of new drilling productivity technologies, for example, COREVIBE, XTRACTA and MAGHAMMER, which I will elaborate upon. Market extension into mining production is on the right and includes existing products, plus the development of new technologies, including BLAST DOG, the Drill & Blast application. Our strategy opens a door to an addressable market that is far greater than our traditional business within the exploration and resource development sector. It provides more value to our clients and to the industry as a whole, and importantly, it is less exposed to cyclical impact. On Slide 17, I'd like to highlight several points in relation to our ongoing R&D for our core business, which is depicted in the bottom left quadrant of our strategy graphic. It is continuous process, albeit a very disciplined one. And it's the reason we have market-leading technologies and are president -- present in some form across 70% of mineral drilling projects globally. Connecting our technologies to IMDEXHUB-IQ is a priority. And as of 31 December 2019, 58 of our top 100 clients were HUB-enabled. This number is up from 49 clients as of 30 June 2019. Our connected clients continued to generate over 60% more revenue for IMDEX by pulling together an increased number of our product offerings into comprehensive real-time solutions. And our connected instruments are up 53% on the pcp. This has been partially driven by the issuance of new instruments and partially by the release of our new survey IQ app, which works across all tools and has been designed to connect some of the older generation instruments in our fleet. Increasingly, our clients are demanding real-time ore body knowledge, and this is what we are delivering. Slide 18 shows the extensive range of integrated end-to-end solutions. While we are present on 70% of mineral projects globally, we can expand our offering to clients and provide greater value. For example, where we traditionally have 1 to 2 product lines at a project, we can now provide many more. This allows us to grow our business within our core current strategy quadrant without being dependent on growth in the exploration and development cycle. Like our core business, we have made good progress with our new drilling productivity technologies throughout the first half. As a quick recap, these technologies include COREVIBE, which utilizes high-frequency, pulse-assisted drilling and can increase productivity by more than 30%; MAGHAMMER, a new hybrid form of drilling that achieves high penetration rates compared to conventional coring, it is also significantly safer and delivers cost and environmental benefits both; and XTRACTA, which was developed by IMDEX, this technology enables drillers to inspect or change the drill bit when core is retrieved, and there is no need to pull the rods. For those of you who may not be familiar with this practice, tripping the rods is time-consuming, nonproductive and increases the risk of injury. Looking now to the progress update on the right of the slide. Successful client trials with COREVIBE were undertaken throughout the first half. These trials continue to validate the significant benefits of this unique technology, including substantial increases in productivity. For the balance of FY '20, we have a full pipeline of client trials. We are confident of converting trials into active rentals. XTRACTA has been extensively trialed at our test site in New Zealand for the past 12 months, and client trials are scheduled to commence in late 3Q '20. Development of the MAGHAMMER at our test site is also progressing well, and we intend to commence client trials in 4Q '20. The key takeaway is our new drilling productivity technologies remain on track to generate revenue in the second half with significant growth forecast in FY '21 and beyond. Moving now to our BLAST DOG, IMDEX Mining Technologies, which is the top right quadrant of our strategy graphic. Our BLAST DOG project is one of the most exciting developments we have. It enables optimizing blasting outcomes, based on high-resolution 3D material models and material tracking in the pit. The potential upside to the global mining industry and our company is substantial. As the BLAST DOG is commodity agnostic, our trials to date have included precious and base metals, together with bulk commodities, with global resources in Australia and the Americas. IMDEX' track record of successfully developing new technologies is further strengthened with this project. We are hitting our milestones and anticipate generating revenues for 4Q '20 with further revenue generation in FY '21 and beyond. That concludes the review of our strategy and operations. So I'll now hand over to Bernie for the outlook and summary.

Thanks, Paul. As the title of Slide 22 suggests, we are confident the outlook for IMDEX is positive and the fundamentals underpinning business growth continue to be strong. Positive drivers include: the major and intermediate resource companies are increasing their 2020/'21 expenditure to replace diminishing reserves; new discoveries are likely to be under cover and at depth, resulting in larger drilling campaigns; resource companies are embracing innovation and new technologies to lower costs, increase safety and achieve greater productivity. Importantly, there has been a positive start to drilling activity in the second half '20, and the company generated its highest January revenue. The number of IMDEX instruments on rent at 31 January 2020 was up considerably on the prior corresponding period. Moving now to the key points we would like to leave you with on Slide 23. IMDEX has a strong financial platform, generating recurring revenue, strong cash flow from operations and increasing shareholder returns. We are outperforming market growth, largely due to our continued investment in R&D to deliver market-leading technologies. We are expanding market share and margins, driven by an unrivaled range of technologies and the benefits of being the first-mover to cloud-enabled instruments. We are building sustainable revenue and earnings growth generated by our core business and via product and market extension. IMDEX is an established global company with an ability to leverage our extensive client network and achieve economies of scale. And we have a strong and disciplined leadership team with a successful track record of developing and commercializing technologies. That concludes the formal presentation. And I would like to hand back to Rachel for questions. Thank you.

Your first question comes from Michael Aspinall from Jefferies.

Bernie, Paul and Paul, just a couple for me. Revenue from products sold moved from 53% in '19 to 50% in the half, and total revenue growth was 2%. It seems that revenue from muds are down in the half, offset by strong growth from tools. Can you just talk to what occurred on both sides of the portfolio during the half?

Michael, it's Paul here. We did have strong growth in the tools side of the business. We have -- we're -- you're aware of the industry consolidation that's taking place in North America in a number of areas, particularly, for example, the Barrick and Newmont tie-up in Nevada Gold. So areas -- so a couple of those consolidations which were more exposed to the fluid side of the business is where we've seen a bit of a hiatus in that H1. We're also seeing a shift in consumption of muds as a product to SRUs as a rental. And so that shift in portfolio which has been part of our strategy to provide a more comprehensive fluid or drilling optimization solution is also playing into that story.

Okay. Great. And could you maybe just talk to then what you're seeing in terms of industry volumes in 1H '20? And then you mentioned tools are up in January, some idea of what you think industry volumes are looking like in January?

You mean in terms of exploration expenditure?

Yes, industry exploration volumes.

Right. So you would have seen S&P came out and said that the total exploration activity was below what they had originally forecast. Certainly, the underlying fundamentals and outlook, the need to replace diminishing reserves, all of those fundamentals remain absolutely true. There are -- there continue to be increased budgets allocated by the majors and intermediaries towards increased exploration activity. I think some of the slowness we've seen is the speed at which they've been able to take that money and find targets to invest it. We always know that it takes a little while between capital raisings or budget allocations to put that money into drilling programs. So as I've said, the outlook fundamentals haven't changed. They remain positive and strong. It is just taking some time to get it moving.

And you mentioned tools on rent at the end of January are up. Are you willing to give us a kind of feel of what that number was?

Not really.

Michael, it's Bernie here. The reason we haven't given you a percentage -- but it is meaningful, is that we've done this once before and when we get to 30 June, and if the June number is below the comparative at a point-to-point -- on a point-to-point basis, you guys think that the industry is slowing. So we spent a lot of time on our full year roadshow sort of 12 months or so ago on the back foot trying to explain that to people. So we just said, "Look, it's up considerably at the end of January and the same in February, so where we are in February, we're considerably up on this time last year as well." I think the other thing that should be mentioned in terms of activity levels out there, the freeze-up in Canada was normally a really busy 2 or 3-month period for us. This year, that's been completely missing. So there's been no freeze-up drilling in Canada. So despite the fact that that's been -- that's gone AWOL, where the other #2, as we head on right at the end of January, is well up on same time last year. So -- but yes, the guys up there report that there's lots of activity, and like the promise going forward, looks strong. So our programs are being lined up and tools being awarded and that sort of stuff. But when I can get on that ground, that would normally be subject to freeze-up. So that's good.

Okay. Great. I have 2 quick ones for Paul on the financials. Are there any tax on the profit on sale of energy services?

There is no tax on the proceeds from the sale of VES. It was a capital gain.

Capital gain. And there are any on the -- from the sale that you saw through the P&L, the tax there?

So of the $3.6 million that went through the P&L, the stock that was provided for -- against that, which was to do with just stock related to the joint venture is deductible. So that is deductible, whereas the proceeds were not accessible.

Okay. And then just the impact of AASB 16, what was that at depreciation and amortization?

Yes. Look, if you treat -- about 3.5% is the impact in the half.

On D&A?

On D&A, yes.

Your next question comes from Ben Brownette from CLSA.

Paul, can I just -- on that tax line, I didn't really understand that. Could you go over it again? So what tax should be effectively below the line versus above the line? Because it just looks like, at first instance, that tax is quite low.