Imdex Limited (IMD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Imdex Limited Financial Year '21 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Paul House, CEO. Please go ahead.

Welcome, everyone. Joining me on the call today is Paul Evans, our Chief Financial Officer and Joint Company Secretary. We are delighted to provide an update on our strong performance for the FY '21 financial year. For listeners who are new to IMDEX, we are a leading global mining-tech company. We distinguish our business from the broader mining services arena in the following ways: We place technical leadership at the core of our growth strategy. We build that technical leadership through the consistent investment in R&D to design and deliver patented technologies. We are neither capital intensive nor people intensive. We are truly global with limited contract risk, limited commodity risk and limited geographic risk. And finally, we're developing an integrated solution set that works together rather than individual products and with a high-quality revenue base and increasing EBITDA margins. IMDEX technologies enable resource companies and drilling contractors to find, define and mine ore bodies with precision and at speed. Turning to Slide 4. We will focus on 4 areas: our financial and operational performance for FY '21, the current market conditions, an update on our position as a growth company and the outlook for FY '22. As with previous presentations, we have included additional slides in the appendices. These slides expand on our investment proposition, our leadership team, product offering and the importance of real-time rock knowledge. You'll notice Save the Date at the bottom of the slide. We are hosting a call on the 15th of September to align with the release of our first IMDEX sustainability report. That presentation will cover our people, culture and other ESG-related initiatives. Turning now to Slide 5 and our financial highlights. Revenue at $264.4 million was a record for the company. And our EBITDA of $75.5 million was up 39% on the prior period. On a constant currency basis, revenue and EBITDA grew 18% and 50%, respectively, highlighting the real strength of our underlying business. Our discipline around net working capital ensured our balance sheet outperformed, with net cash up 48% on the PCP. Our directors declared a fully franked final dividend of $0.014 per share, consistent with our capital management policy. And in light of our strong growth and cash balance, a special fully franked dividend of $0.004 per share was also declared. This brings the total full year dividend to $0.028 per share. Our record financial results were driven by our strong operational performance, the key highlights of which are captured on Slide 6. Our safety engagement improved considerably. And pleasingly, our lost time and total reportable injury frequency rates reduced by half. It has taken a lot of attention and engagement and is a testament to our team. Our decision to use joint development agreements to bring new products to market has been a success in its first year. With 3 agreement signs and 4 more in the works, we are excited by this new model. Increasingly, our solutions benefit more than one participant in the mining value chain. The joint development agreement model is designed to bring those multiple stakeholders together in a structured manner. Building on our record December 2020 sensors on hire and a strong uptake in 2021 today meant we had a record number of sensors on hire at the close of FY '21. We're immensely proud of how everyone in our business amended their priorities and helped clients navigate COVID-19. Our ability to be flexible and redirect resources to meet the changing needs is a highlight of their culture and our results. Two examples include the upgrade of IMDEXHUB-IQ and the release of IMDEX ioGAS 7.3. Both are supporting remote working models where site access has been limited by COVID. Our result is a fitting reflection of our team's hard work all around the world. I'll now hand over to Paul Evans to discuss the financials in more detail.

Thank you, Paul. Paul has covered the headline numbers, so I'll expand on some of the key metrics on Slide 8. I'd like to point out the EBITDA line in the table excludes the net $2.9 million gain in FY '21 for the Flexidrill and AusSpec deferred consideration fair value adjustment and the $3.6 million gain for the sale of Vaughn Energy Services in FY '20. The net $2.9 million gain adjustment is based on the regular assessment of the deferred consideration payable to the prior owners of Flexidrill and AusSpec. The Flexidrill deferred consideration is updated for a number of factors, including forward revenue projections of the technologies, FX, IMDEX' share price and dividend projections. The AusSpec deferred consideration is updated for expected client targets. Looking now to the revenue graph on the top right, which shows 2H '21 was up 27% on the first half '21. Our revenue in FY '20 and FY '21 was impacted by COVID, most notably in 4Q '20 where we saw the sharp drop-off in activity in April 2020. Activity gradually recovered throughout 1H '21 boosted by strong industry fundamentals and a keen willingness by clients to increase operation. This positive momentum continued into 2H '21. The majority of the regions are now exceeding pre-COVID revenue levels. The exceptions are South Africa, South America and Asia. These regions have been slower to recover, with parts of Asia still lagging. The graph at the bottom right of the slide shows the equivalent half-on-half EBITDA performance. With strong activity in most regions, our EBITDA performance during 2H '21 was up 28% on 1H '21. This was achieved with good margin drop-through. EBITDA margins for 2H '21 reached 30%, up from 26.6% in 1H '21. More on this on the next slide. Looking at Slide 9 and starting with revenue on the left. On a regional basis, 31% of our revenue was generated from Asia Pacific, 44% from the Americas and the balance from the Africas and Europe. These revenue splits, although broadly in line with last year, show a revenue uplift in the Americas, particularly the U.S.A. and Canada. The graph to the right illustrates our strong earnings growth and a 5-year EBITDA CAGR of 23.5%. Our EBITDA margin was 28.5% compared to 22.9% in FY '20. Part of this uplift can be attributed to lower travel and marketing costs due to COVID restrictions. The majority of the uplift is due to an increasing percentage of revenue coming from our higher-margin sensors and software business and our strong fixed cost leverage. Looking at Slide 10. Our operating cash flow conversion continued to be strong and returned to pre-COVID levels. From the EBITDA result of $75.5 million, there was a net inflow of operating cash of $56.9 million. On a like-for-like basis, this represents an uplift of 9% on the PCP and a 75% conversion rate. This is in line with historical conversion levels, remembering that at 30 June 2020, this was heavily impacted by COVID when we saw a strong cash release in the lead-up to 30 June. You will note our working capital investment ratio has also returned to historical levels at $0.33 for every dollar of incremental revenue. Turning to Slide 11. To maintain our technology leadership, we invest in R&D in all market conditions, including the COVID pandemic. In FY '21, $19.1 million was expensed on engineering and product development. This represents 7.2% of total revenue and a 9% increase on FY '20. During the same period, $2.6 million of software development cost, largely for IMDEXHUB-IQ, was capitalized. This compares to $2 million in the PCP. When combining expensed and capitalized costs, 8.2% of revenue was spent on product development. This is in line with industry benchmarks and conservative as a growth company. The final point I would like to make include we have a long development wishlist that is governed by disciplined stage-gated R&D process. And in recent years, we have seen a large percentage of our spend directed towards software. Looking briefly now at our balance sheet at 30 June 2021 on Slide 12. Our strong cash generation was reflected in our net cash position, which was up 48%. There are a few other balances I would like to expand on. Intangibles include the increased goodwill and IP from the acquisition of AusSpec in FY '21 and Flexidrill in FY '20. Borrowings include additional USD funds to manage our currency exposure and other lease liabilities of $38.9 million, together with deferred consideration for the purchase of Flexidrill of $12.2 million and AusSpec of $2.5 million. At 30 June 2021, our return on equity and return on capital employed was 13.3% and 15.5%, respectively. Maintaining a robust balance sheet remains a priority. Our current net cash position of $47.4 million provides the capacity to accelerate targeted R&D, commencing our Digital 2 program of works and pursue opportunities for acquisitive growth. I'll now hand back to Paul for an industry and market update.

Thanks, Paul. Moving to Slide 14. We've included this COVID impact table in a number of our presentations and highlight the evolving restrictions in our key mining regions. Whilst the mining industry has increasingly been permitted to operate, the real impact is on the mobility of people to projects and the supply chains to support them. To this end, IMDEX is well prepared but not immune, and a considerable effort has been directed to supply chain. Pleasingly, this planning and foresight has ensured we've sustained delivery during FY '21 without material disruption. We remain watchful of the risks, and we are planning for COVID restrictions to be with us in some evolving form for at least the next 2 years. At the same time, we remain ready to meet increasing demand for mining technologies. Turning to Slide 15. Despite COVID, the fundamentals driving industry growth remain excellent. Strong commodity prices are leading to significant budget increases for exploration programs. Capital raisings have been strong throughout the last 12 months, and a large portion of that money is still to be deployed. The key driver remains a trend towards decarbonization. We are seeing examples of government, downstream customers, financial institutions and players in the automotive industry continuing to double down on this investment. In summary, the outlook for the mining industry is positive. And based on both current and planned exploration expenditure, we are still a long way off the previous peak. Looking at Slide 16. Whilst the prospects are positive, the delivery of intended exploration budgets may be constrained in the short term by capital investment in rigs and access to labor by drillers, most notably in Australia, Canada and the U.S.A. Based on our internal global rig count conducted in March, some key regions are at near capacity, which we regard is between 75% and 80%. There are plenty of industry anecdotes where clients are paying million dollar deposits just to secure a rig, and there is an upward pressure on labor rates. We maintain that the industry is keen to increase expenditure but may not be able to run quite as fast as it would like to in the short term. I'll now provide an overview of our business and how we have been positioning IMDEX as a growth company on Slide 18. IMDEX is a strong and resilient business. Our goal is that we consistently outperform minerals industry growth rates. Our 5-year CAGR -- revenue CAGR of 13% can be benchmarked against S&P's 5-year exploration spend CAGR of 8.3%. Our year-on-year EBITDA margin expansion highlights our relentless focus on efficient service delivery and improving the quality of our product mix. Our global reach and world-class R&D resources are unrivaled. Turning now to Slide 19. The key to delivering value to clients is providing quality data in real time. We develop and offer solutions in 3 broad integrated groups: first, drilling optimization products that reduce the cost of drilling, enhance safety and the critical drivers for improving exploration success, particularly with deeper drilling; second, best-in-class rock knowledge sensors that deliver quality data across the 4 components of rock knowledge, being location, grade, texture and mineralogy; and third, cloud-based platforms and software to aggregate, store and distribute data to wherever it needs to be anywhere in the world with a secure chain of custody. We allocate our R&D across these 3 groups. As Paul Evans outlined, we were agile enough to deploy more R&D capital to IMDEXHUB-IQ in FY '21 in response to the demand for real-time workflows. This year, we're accelerating the application of these 3 product categories in the mining production market space. We help drilling contractors and resource companies both. We help them drill faster and smarter. We help them understand their ore bodies in real time, and we do this right throughout the mining value chain. Slide 20 shows the evolution of our revenue profile over the past 5 years. I would like to draw your attention to 3 key points. Our recurring higher-margin rental and SaaS revenue has been increasing over time. We are increasing our presence in the mining production stage, and we have a strong geographic spread and are increasing our presence in the Americas. Our commodity exposure continues to be representative of exploration expenditure globally, and our product offering is largely commodity agnostic. Turning now to our strategy on Slide 22. Although our business and industry have been impacted by COVID, our underlying strategy remains unchanged. Prioritizing our technology leadership and embedding value for clients is key, and leveraging our core competencies within the larger and less cyclical mining production market is a natural extension of our current business. As highlighted, our growth opportunities come from 4 key areas: one, disciplined R&D to maintain our technology leadership and gain market share; two, extension into mining production where it is the same client and the same ore body; three, solution selling to maximize the value for both the client and IMDEX; and four, complementary acquisitions to grow our overall product offering. I'll expand on each of these drivers in the next 4 slides. Looking now at our technology leadership on Slide 23 and how we measure our success. I would like to highlight 2 things. First, our revenue was up 11.2% over the prior period, and our IMDEXHUB-IQ revenue was up 30%. My apologies, one moment, please. Secondly, during FY '21, we surveyed 173 million meters in IMDEXHUB-IQ. This represents a 60% uplift on the previous year and highlights that our technologies enable better workflows for clients. And that is how we measure the success of our products. Turning to Slide 24 and our progress with extension into the mining production market. We resumed BLASTDOG testing with our joint development agreement partner in Queensland late in FY '21. And our sensors are currently in Chile, ready for mobilization to site. We have also been making good progress with our drilling optimization products for mining. We have recently commenced our doser and fluid system for stabilizing blast holes. The commercialization of this product is an important milestone. It is a high-margin solution that is embedded into the daily operation of the mine. It also gives us a presence in mining operations for the future introduction of our rock knowledge sensors in that market. The graphic on the right is a screenshot of our BLASTDOG in a virtual training environment. We look forward to our shareholders experiencing it in action in our next IMDEX technology deep dive. Turning to Slide 25. The case study and graphic that we've included on Slide 25 illustrates how IMDEX solutions deliver increased value to clients and IMDEX both. During FY '21, our largest 250 clients had an average of 3.25 products on site. This average was up from 2.25 products in FY '20. As you can see from the graphic on the left, there is currently substantial potential to further increase the number of products we deliver to a site as we optimize solutions for their ore body. Our development road map and the delivery of new products will increase its potential offering. Finishing now with our fourth driver on Slide 26. The strength of our balance sheet enables us to make on-strategy acquisitions as they present. To be on strategy, acquisitions must complement our product offering, have unique IP and accelerate our development road map to deliver real-time ore body knowledge. We have an extensive technology watch list and maintain a very disciplined approach to M&A. All investment opportunities are subject to a gateway process and are rigorously assessed by our Board and Executive Committee. Moving now to the final section of this presentation, our focus areas and outlook for FY '22, as captured on Slide 28. For the balance of FY '22, protecting our people and protecting our business will remain front and center. During this time, we will focus on 4 key areas: one, prosecuting our R&D road map to accelerate growth and build scale; two, additional joint development agreements to engage with resource companies and drilling clients for new product developments and delivery; three, building out our key account management capabilities and technical teams to deliver the optimized solutions; and four, commencing Digital Transformation 2.0 to further streamline service delivery and enhance our client experience. At all times, we will maintain the high level of discipline and a relentless focus on execution to maintain best in class. Finally, some commentary on the outlook for FY '22. The outlook remains brighter than at any time in our past. Notwithstanding the short-term constraints, underlying fundamentals for our industry are excellent. The pipeline of our technologies has been put together with input from our clients is long. And the team we've assembled both to build and deliver these products has never been stronger. We have the ability in talent, network and balance sheet to respond to the evolving market needs and new opportunities as they present themselves. We look forward with great excitement to FY '22 and what the years that follow will bring to IMDEX' team, its clients and, ultimately, to its shareholders. Paul and I are now happy to take any questions.

[Operator Instructions] Your first question comes from Andrew Donlan with UBS.

Paul and Paul, just 2 questions for me. The first, instruments up 35% on that pre-COVID level and at record levels. Can you just talk to your utilization of tools and maybe how you're thinking about CapEx and capacity if demand continues to grow, Paul Evans?

Yes, sure. Let me start with that one, Andrew, and then I'll hand to Paul Evans. I'll start by simply saying that one of the features of our business in the way we build our tools is that we have very good forecasting ability to look ahead in the marketplace, and it's that forecasting ability that meant that we can manage supply chains to ensure we have components ready to build out as required. So as those forecasts indicate that we have a shortage of products in certain areas, the turnaround time between forecasts, ordering, building and delivery is relatively well managed and quite tight. That has come under some pressure in FY '21 as some of that supply chain planning was really thoroughly tested with COVID. But really just wanted to highlight that our ability to respond to that change in demand is very good. We are quite agile. But I'll let Paul just add to what that outlook now means in terms of the capital expenditure in FY '22. Paul? Maybe I can just speak to that until Paul sort of rejoins us. We don't expect the -- or sorry, have you joined, Paul?

Yes, sorry, I should take my line off mute. Sorry. Andrew, CapEx is up on FY '21 versus '20, as you can see. We do expect that through FY '22, there will be a similar level of CapEx running and, as Paul indicated, making to demand, so around that $24 million, $25 million of CapEx in FY '22.

Great. And then just the second one, gross margins, I think 69.5% in the second half. I mean there's a lot of moving parts, but can you talk to sort of price mix, I guess you've got HUB-IQ as well, and how sustainable that level of gross margin is maybe as some of those more fluid markets recover?

Yes, I'll grab that one. So look, in FY '21, we saw instrumentation and software where a high proportion of revenue compared to fluids, and that was primarily as we saw the -- us coming out of COVID, the regions that were still most heavily impacted were fluid -- more fluid dominated. What we expect to see is as fluids return, there will be a re-weighting of that gross margin. But I think you can say that as we put more instruments into the market, there will be a gradual risk to the upside on that gross margin as we move forward. I hope that explains it.

Yes. No, that was great. That's it for me.

Your next question comes from Michael Aspinall with Jefferies.

Paul and Paul, well done on a great year. Two for me. So starting on cash, the working capital outflow is in line with historical trends. Should we expect this to continue, to see continued revenue growth? And I just wanted to touch on if there are any notable differences in kind of the payment terms on the rental side versus the sales side of the business.

Yes. Look, maybe dealing with the second one first. No, there isn't any notable differences. And yes, in answering your first question, we would expect to see that working capital trend continuing into FY '22 that we have seen historically pre-COVID. Obviously, we -- what we saw in FY '21 was -- with our operating cash flow was that release as we work through to June '20, and then that gradually renormalized as we worked through FY '21. And particularly, you'll notice in the first half, second half, that tax was quite -- it was only just over $1 million in the first half with the government deferrals and that there has been a catch-up of that in the second half, so thus the normalization of that for the full year.

Okay. Great. And on one of the slides, you talked about investment opportunities to accelerate growth. Can you just give us some kind of examples? Is that product or technology gaps that you're looking to fill, Paul?

Yes, let me grab that one. So there's really -- and Paul Evans will pick up what I miss. But our focus really is -- we've crossed a couple of milestones in our development of products for the mining sector, which we called out in the presentation. So in FY '22, we're looking now, on the back of those milestones, to accelerate some of the investment in R&D, to get them through their next phases of the stage gate process. That's number one. And the second one is on the back of the success of Digital Transformation 1.0, we're now going to make another investment in Digital 2.0. And you might remember, in Digital 1.0, we identified a number of customer-facing systems or customer delivery systems for our rentals business plus some internal systems. And as we look forward to FY '22, we're now going to repeat that for our fluids business and a couple of other projects that are in that digital transformation bundle and leverage on that delivery discipline that we had with Digital Transformation 1.0. Paul, did you want to elaborate on that?

Yes. No, I think the only other point to mention when we look at investment, and Paul touched on it earlier with the demand that's in the market, obviously, R&D, us meeting the client demands and burying our spend accordingly, we are expecting to spend slightly more on R&D product development in FY '22 in response to that. So that will be part of the theme coming through in FY '22.

Yes. Okay. Maybe while we're talking about that, can we just maybe flesh out the incremental cost investments you're making? I think you've talked about R&D, account management, the digital transformation and I'm assuming some travel and marketing -- well, hoping some travel and marketing costs will come back in the next 12 months.

Yes. Look, I think if you -- Paul called out to be a similar level for Digital 2 versus Digital 1, which was $3 million, and expecting a similar increase in the R&D spend over FY '21.

Okay. Great. And so those 2 kind of $3 million, $3 million are the 2 major components of year-on-year OpEx increases?

Correct. Correct. And I think as you called out, we'd hope to see a little bit more mobility in the year, and thus with travel and conferences potentially returning could be the other side of that.

Great. And 2 more for me. Your tools on rent at plus 6% as of the 13th of August versus the 30th, is that representative of what we might see in terms of tool numbers growth in the first half? Or is there a seasonal aspect to that as well?

Yes. Look, the tool growth was very strong in the second half. And that was particularly, as we called out, in Canada and the U.S., more and more so Canada. We are expecting that to -- that current activity level to continue, albeit, as we call out in the presentation, we are seeing that labor and rig shortages are having an impact and do expect that to be a constraint on the industry in FY '22.

Okay. And last one for me. I think last time, we were talking about your expanding production capacity for the gyros. Has that come online yet? Or is that still being invested in?

Yes, I can grab that one. So yes, we have completed that investment. We actually have -- and so that was -- if you remember, that was the ability to increase the number of calibration stands that we have, a pretty critical point to both manufacture and maintenance of new gyro-related tools. In addition to that, we've actually built a number of calibration check stands that we're delivering to our major or regional offices, which just gives us further ability to accelerate the turnaround time with any calibration need. So yes, we've met those targets.

Your next question comes from Mitchell Sonogan with Macquarie.

Paul and Paul, can you hear me?

Sure can, Mitch.