Imdex Limited (IMD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the IMDEX 1H '22 result presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Paul House, Chief Executive Officer. Please go ahead.

Thank you, Matt, and welcome, everyone. Joining me on the call today is Paul Evans, our Chief Financial Officer. We are delighted to provide an update on our strong performance for the first half of the 2022 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 built that technical leadership through 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, commodity risk and geography risk. And finally, we are developing an integrated solution set that works together rather than as individual products to build a high-quality revenue base with increasing EBITDA margins. As you'll shortly see, the features of this business model are evident in our results for the half. IMDEX technologies enable resource companies and drilling contractors to find, define and mine ore bodies with precision and at speed. Today's presentation agenda is set out on Slide 4. We will focus on 3 key areas: our financial and operational highlights, including a deeper dive into our financial performance, which Paul Evans will give; an update on the broader industry trends and the IMDEX business growth; and finally, an outlook for the balance of FY '22. Following the presentation, Paul and I are happy to take any questions. Turning now to Slide 5 and our financial highlights. We achieved record revenue of $167.8 million, up 35% on the prior period. We achieved a strong EBITDA of $51.5 million, up 55% from 1H '21. Our EBITDA margin of 30.7% represents a 15% uplift and highlights the strong fixed cost leverage available in our business model. Net profit after tax at $24.4 million was another record result and is up 81% on 1H '21. The combination of 35% revenue growth, 55% EBITDA growth and 81% NPAT growth is the strongest possible statement of the underlying quality of the IMDEX business and the IMDEX business model. This performance has been achieved with a stable net operating cash position, the overall reduction in net cash being directly attributable to investments in our growth strategy. Finally, our directors declared a fully franked interim dividend of $0.015 per share, consistent with our capital management policy. Our record financial results continue to be driven by our exemplary operational performance. As highlighted in our announcement this morning, there were many operational achievements to the half, and I will call out some of the key points on Slide 6. Safety is always a priority. No growth comes in the expense of our people, and our focus remains heightened during COVID. Pleasingly, there were no lost time injuries for the half. I'd like to acknowledge our IMDEX teams around the world who should be commended for their ongoing commitment and focus to keeping each other safe. Initiatives introduced by IMDEX' Chief People Officer, Kiah Grafton, and her team have made a significant contribution to our culture as reflected by our recent employment engagement survey. One of these initiatives is our traineeship program, which was officially launched during the half. This program develops a pipeline of skilled talent to build a capable workforce aligned to our current and future business needs. Similarly, our annual internship program continues to evolve, and this provides high-caliber university students with practical on-the-job training opportunities at IMDEX. During [indiscernible], we hosted 14 interns across 7 work group domains with a number being offered permanent graduate positions. Both of these initiatives form part of our new kickstart a career at IMDEX. You'll note on the top right, there continued to be strong demand for our Rock Knowledge Sensors and software. The average number of sensors on hire for the half was up 35%. Pleasingly, the volume of spectra analyzed through our recently acquired aiSIRIS platform was up by 45%, highlighting the importance of this acquisition and its successful integration. There are 2 further R&D achievements that I would like to call out. Firstly, additional client trials with our IMDEX BLAST DOG took place during the half. These trials included: end-to-end integration of BLAST DOG, IMDEX HUB-IQ and the MinePortal software; secondly, the development and deployment of our first premium revenue IMDEX HUB-IQ module, a paid for SaaS quality assurance solution to survey data. During the half, we made significant progress in mitigating supply chain risk that existed for high-tech components and raw materials for our drilling optimization fluids. We undertook a number of measures, including increasing our internal manufacturing capabilities, you will note our manufacturing of gyro-related technologies for the period exceeded 2H '21; securing additional sources of supply of raw materials and key components; increasing inventory in response to increased freight times; reducing freight volumes by shipping concentrates and then reblending locally and improved utilization of our sensor fleet. If you'll recall our global digital rentals project, which formed part of our Digital 1.0 Transformation, which enables us to track and efficiently distribute sensors to where they are needed anywhere in the world. Our Digital 2.0 Transformation will build on our ability to maximize return on assets and further streamline operational costs. Finally, and most importantly, I want to acknowledge our IMDEX employees and partners around the world. Without your efforts, we would not have been able to respond to the market demands and fundamentally improve the quality of our business. It is a genuine pleasure to represent such a great team. I will now hand over to Paul Evans to discuss the financials in more detail.

Thanks, Paul. Paul has covered the headline numbers, and I'll expand on some of the key metrics on Slide 8. Our EBITDA of $51.5 million differs from the reported statutory EBITDA of $50.7 million as it excludes the $2.7 million gain reflected in deferred consideration adjustment. This gain is based on the regular assessment of a number of factors, including forward revenue estimates for the technologies, FX, dividend projections and the increase in share price. The appreciating share price has given rise to the majority that is gained in the half. Net cash 31 December was down $17.4 million or 36.7% from the pcp. This was a positive cash flow for operations, which I'll talk to in more detail later in the presentation, with the majority of the reduction largely representing cash outlays during the half to support our growth strategies, most notably, the $1 million AusSpec deferred consideration payment and the $14.3 million paid for our MinePortal and Datarock investments. Additional CapEx expenses to support the strong industry demand and the high debt payments were also contributing factors. Our FTEs were up 11.6% to 558 compared to 31 December 2020 to support the additional growth in the business. I would now like to refer you to the graph on the top right. This illustrates the half-on-half revenue profile since 1H '20, being the last equivalent period not impacted by COVID. Paul mentioned revenue had increased 35% over the pcp, and it is now 31% over the 1H 2021 period. To better understand the increase in our revenue, it is important to highlight 1H '21 was more heavily impacted by COVID, particularly in the earlier months. Activity gradually recovered throughout calendar year '21, boosted by strong industry fundamentals and a keen willingness by clients to increase operations. All regions are now exceeding pre-COVID revenue levels with rig capacity constraints starting to appear most notably in North America and Australia. South Africa, South America and Asia, which were slow to recover, are showing continued improvement. Moving now to Slide 9 and expanding on our revenue by region on the left. 47% of our revenue is now generated from the Americas, up from 41% in the pcp; 30% from Asia Pacific; and the balance from Africa and Europe. We continue to outperform industry growth rates as demonstrated by our 15% 5-year revenue CAGR. One of our internal benchmarks is the S&P exploration expenditure for nonferrous metals, which had a 5-year calendar CAGR of 9%. The graph in the center illustrates our strong trend of earnings growth with a 5-year EBITDA CAGR of 24%. Despite the increasing supply chain cost in our drilling optimization fluids business, this demonstrates the strength in our gross margin with sensors and software revenue growing at a faster rate. This has allowed the business to fund additional investments to support this growth, as evidenced by the increase in FTE and investment in systems. The graph on the right shows our steady EBITDA margin growth and demonstrates ongoing cost leverage as our revenue base has increased. You will note our EBITDA margin continued to be maintained above 30% for the half. Looking at Slide 10. Our operating cash flow conversion continued to be strong at 75% on a pretax basis. From the EBITDA result of $51.5 million, there was a net inflow of operating cash of $52.1 million. In absolute terms, the net inflow from operations were similar to the pcp and up 14% when excluding the tax paid during the period. Also noted, our working capital investment ratio of $0.40 for every dollar of incremental revenue increased above historical levels. This is in response to the longer freight times for products that Paul mentioned earlier. A large portion of this increase is still in transit at the end of the period. This is evident with our higher inventory holding on the next slide. Looking briefly now at our balance sheet at 31 December on Slide 11. I have spoken to the net cash and mentioned the inventory increase. Other notable balances include intangibles. This includes the increase by [indiscernible] from the acquisition of MinePortal and $1.8 million of capitalized software costs. Investment in our associates. This relates to our initial 30% investment in Datarock and other disclosed lease liabilities, together with the deferred consideration for the purchase of Flexidrill of $9.9 million and AusSpec of $1.5 million. Pleasingly, with the improved financial performance, average return on equity and return on capital employed increased to 19.4% and 23.3%, respectively. I'll now hand back to Paul for an industry and market update.

Thank you, Paul, and turning to Slide 13. The fundamentals driving industry growth remain very compelling. As reported with our full year results, strong commodity prices are leading a significant budget increase for exploration programs. Capital raisings have remained strong throughout, and a large portion of that money is still to be deployed. Finally, the trend towards decarbonization is expected to drive a longer industry up cycle. Corresponding demand for mining technologies that originate and enrich ore body data is increasing. The quote on Slide 14 from the BHP Head of Geoscience Excellence elegantly describes how IMDEX add value, specifically generating not only more data but better quality data and providing critical insight down the stream to enable more efficient decision-making in the pursuit of real-time ore body knowledge. Turning to Slide 15. Paul has made earlier comments on activity by regions at the half and the overall growth opportunity. The most significant challenges remain the supply chain bottlenecks for the industry at large, together with labor availability and labor mobility. Whilst high levels of drilling activity have driven the demand for our established technologies, the combination of low labor availability and restricted site access has limited the ability for resource companies to conduct new product trials, including the Flexidrill technologies, which we continue to drill with at our test sites. As you saw in the first half, we are successfully mitigating supply chain risks, and we have a number of initiatives underway to attract additional talent we need. Concurrently, we are continuing to pursue additional joint development agreements for new product trials. Our progress with BLAST DOG demonstrates the strength of this more collaborative approach. In summary, we continue to believe that COVID and its ever-changing requirements will be with us for the next 2 years, and we are setting our business up accordingly. Slide 16 includes a selection of quotes from significant industry players that highlight the labor and supply chain pressures, particularly in Australia, Canada and the U.S.A. We maintain, however, that the industry is certainly keen to keep -- to increase exploration expenditure and associated activities to meet the strong underlying demand. Once again, with constraints come opportunities, particularly through IMDEX technologies. In our view, the challenges we will continue to meet in the short term may lead to a stronger, longer, more stable cycle. I will now provide an overview of the strength of our core business and our growth strategy on Slide 18. IMDEX remains a strong and resilient business. Our year-on-year EBITDA margin expansion highlights our relentless focus on efficient operations and improving the quality of our product mix. Our global reach to some 70% of mine sites worldwide is unmatched. Our world-class R&D capabilities, facilities and intellectual property portfolio is unrivaled. And accordingly, our business consistently outperforms minerals industry growth rates. It is worth noting that over the last calendar year, total S&P expenditure was forecast to grow by approximately 35%. Critically, however, total meters drilled is only 20% to 25% depending on the region. This disparity can be attributed to increased spend on nondrilling activities such as targeting, permitting, increased health and safety compliance for all drilling operations, the challenge of drilling at depth and finally, the gradual impact of increased input costs. We have included the graph on Slide 19 in many of our previous presentations. It serves to illustrate the breadth of our product offerings and how the products work together as solutions. We develop and offer these solutions in 3 broad groups: First, drilling optimization products have reduced the cost of drilling, enhanced safety and a critical driver in improving exploration success, particularly with deeper drilling; second, best-in-class Rock Knowledge Sensors have delivered quality data across the 4 components of rock knowledge being location, grade, texture and mineralogy. And third, cloud-based software to originate, enrich and distribute quality data to where it needs to be anywhere in the world with secure chain of custody. We are accelerating our investment in the mining production space across all 3 solutions. 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 across 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 the following. Our recurring higher-margin sensors and software revenue has been steadily increasing and as advised earlier, 59% for 1H '21, up from 57% at the full year. We are expanding our presence into the mining production stage, and we are seeing accelerated growth opportunities in the Americas. Our commodity exposure continues to be representative of exploration expenditure globally, and our product offering is largely commodity agnostic. You'll note on the right that we expect critical metals to grow at a faster rate due to the shift towards decarbonization, and the IMDEX product offering is well suited to leverage this shift. Moving to our growth strategy on Slide 21. While our market is dynamic, our underlying strategy remains the same. Prioritizing our technology leadership remains key, and leveraging our core competencies into the mining production market is a natural extension. As highlighted in our previous presentations, our growth opportunities come from 4 key areas, and I'll now provide a brief update on these drivers on Slide 22. We have shared a number of highlights for the half, and I will speak to a selection of them across all 4 quadrants of our growth strategy, as you can see on Slide 22. Starting in the bottom-left quadrant, our core business in exploration and development had a number of successes. Our average revenue per unit was up 12% on the pcp, demonstrating the increasing demand for our next-generation technologies. While total revenue was up 35% over the same period, our IMDEX HUB-IQ connected revenue was up 46%. IMDEX [ HUB-IQ ] completed 106 million meters for the half, an uplift of 31% from the pcp and rapidly chasing down the record 173 million meters that we surveyed during FY '21. Moving to the top left and new technology development in exploration. The acquisition and integration of the aiSIRIS software has been successful, as is evident by the increase in customer utilization and uplift in spectra analyzed. Moving now to the 2 right-hand quadrants representing the mining production side. We are pleased BLAST DOG testing has resumed with our JDA partners late in FY '21, and we were able to sign up additional trials with new clients during this last half. Most critical to these trials was the end-to-end integration of the BLAST DOG sensors with our IMDEX HUB-IQ platform and our recently acquired MinePortal software, which enables clients to visualize a 3D ore body in real time throughout the duration of the trial without having to travel to site. The power of this technology offering and the ability to monitor progress in real time has been critical to the success of the trial. Moving now to the final section of this presentation and our focus areas and outlook on Slide 24. Protecting our people and protecting our business will remain our priority. Similarly, we will continue to pursue the 4 focus areas we announced in August: one, prosecuting our R&D road map to accelerate product development and growth opportunities; two, sourcing additional joint development agreements to engage with resource companies and drilling clients alike for new product development and delivery; three, building our key account management capabilities and our technical teams to deliver optimized solutions into the market; and four, our Digital 2.0 Transformation to further streamline our cost to serve and enhance the client experience. More specifically, during 2H '22, we anticipate additional investment will be directed to our mining production technologies and the integration of our MinePortal and Datarock software solutions, both of which we have called out previously. It is pleasing that we've been able to make these investments in the future of our business and continue to expand our margins, highlighting the discipline with which we approach these investments. Finally, some brief commentary on the outlook for FY '22. It's on Slide 25. For IMDEX, it is compelling. At an industry level, the underlying fundamentals are excellent, notwithstanding the short-term constraints. January activity is strong and has resumed as we expected it would. Our sensors on rent at 31 January are up 22% on the pcp. Our core business is stronger than it has ever been and continuing to improve in quality with each half. And finally, we have 4 clear growth drivers, all of which are on track. That concludes our presentation today, and Paul and I are now happy to take any questions.

[Operator Instructions] Your first question comes from Mitch Sonogan from Macquarie.

Paul and Paul, Congrats on the results there. Just quick on the outlook. You've mentioned a strong resumption of activity in January with the sensors on hire up 22% versus pcp. Can you maybe just provide a little bit more color about what you saw through that December and January period in terms of timing of activity? And maybe can you provide any color on what sort of growth you should expect in the rental fleet over the second half?

Yes. Thanks, Mitch. Happy to. As predicted, most regions went into the Christmas break at a fairly strong run rate. Normally, we would be looking for a very cold transition to enable winter drilling in the Northern Hemisphere, most notably in Canada. That was a little bit hit and miss over that December, January period. And we saw in Canada a number of projects that were scheduled to resume on January 5 got put out to January -- or January 4, I think, got pushed out to January 25, whereas the resumption in Australia was probably slightly stronger than expected. So between Canada and Australia, that balanced each other out. The seasonality of that Canadian Christmas weather pattern has been a little bit up and down. And that said, there still have been opportunities to drill rigs, which would normally be deployed onto frozen lakes to conduct drilling. There's still plenty of targets then to drill on hard ground. And so we're not seeing too much interruption overall because of the unseasonable weather simply because underlying demand drivers are very strong. Resource companies have been leading the charge to ensure strong activity or strong resumption. A part of the challenge is drilling companies making sure that they can secure enough labor to staff their rigs, give them a break over periods like Christmas and then bring them back refreshed and ready to go at the start of the calendar year. So there's a -- I'd call that a little bit of a positive tension as we've been through that period. And hence, you're seeing that strong resumption in line with expectations as January opened up. We think that the growth in sensors looking forward is likely to be driven by the availability of additional rigs coming into the marketplace. We've previously reported that many drilling companies, in fact, most drilling companies have got orders in the pipeline for drill rigs, some of -- which shows a forward-looking confidence in the outlook. The delivery times for some of those drill rigs is slipping for all the same supply chain constraints we've been talking about. But as those rigs come into the market, so, too, we would expect sensors to grow. And beyond that general market demand, IMDEX is looking to further grow their sensor fleet through that solution-selling aspect and continuing to have technical leadership with the best sensors in the market. I hope that answers your question, Mitch.

Yes. That's great. And maybe just one on pricing there. Obviously, there's been -- you called out a few cost savings there from freight, input costs. But can you maybe just talk through any pricing that you've put through the business in the first half and maybe just differentiate, is there any difference that you're seeing from cost pressures and pricing you're putting through in the fluids and rental business? And is there anything further planned for second half?

Yes. So we are watching input costs very closely. Typically, we get good visibility of the change in input prices and being able to pass that through. It's fair to say that over the last 12 months, the speed that input costs are changing has increased. And so we've had to be very agile to make sure that we do pass through those increased input costs in a timely manner, and we've been able to do that. But we're very watchful of it. We have made some minor price adjustments but really more in the areas of strategically how we are managing our fleet. Our products already command a premium in the marketplace for tools. And so there is a healthy gap there, and our customers do have a choice. So they're prepared to pay a premium over others in the market. So we're very respectful about how we manage our overall pricing in this environment.

Your next question comes from Michael Aspinall from Jefferies.

I've got a few questions. First thing is fluids looks to be lower than growth in tools. And can you just talk to that dynamic, given I would have thought we were coming off a bit of a low base in fluids with South America slow to come back post-COVID?

That is correct, Michael. The fluids business has grown, but sensors and software have grown at a greater rate. We did call out that fluids, particularly in those slower regions that we had mentioned previously, South America, South Africa and Asia, had returned to pre-COVID levels and were exceeding pre-COVID levels in this half. But they are recovering at a slower rate.

I would add to that, Michael, and say that the Canadian market grew at a slightly faster rate than other regions. And the nature of the geology in large parts of that Canadian market don't require a lot of additional fluids. So drillers can drill quite effectively using water. And so the geological challenges don't necessitate a significant step-up in fluids demand. So whilst the activity in Canada is great, it doesn't pull through as much fluids revenue as it would, say, in Nevada.

Okay. Cool. No, that makes sense. And the employee costs, they were up about 20%, order of, I think, $7 million or $8 million. Can you just talk to what the investment in people you're making that's driving that?

Yes. Look -- yes, we can. So we called out the strategic investments that we had been undertaking with Digital 2 Transformation, the IMP acceleration. We've had the MinePortal acquisition during the period. So there has been an increase attributed to that, and that will be about 2/3 associated with that and the initiatives that we're undertaking. The balance would be due to supporting the increased revenue and business that we've had coming through.

Okay. Yes, that's really helpful. And then there's been a couple of ideas with the seasonality of the business really just overwhelmed by COVID lockdowns. In normal times, what would the seasonality of kind of top line look like for IMDEX?

We typically have a pretty informal rule of thumb that says that drop-off into that Christmas period is between 10% and 15%. And so -- that's seasonality. If you get a very hard freeze, then they deploy into frozen lakes and marshes. If they don't get a hard freeze, they miss it, but it wouldn't move the total revenues by more than a few percent. It has a bigger impact in Canada as a region. But across our total breadth of business, that 10% to 15% range pretty accurately reflects the difference between a cold winter and a warm winter.

Yes. Just thinking kind of from half to half, would -- so you'd expect to then -- given the drop-off in the lead up to Christmas that the second half would usually be a little bit stronger than the first half at the revenue line?

Typically, that will be right. As your -- if your sensor fleet continues to grow, then you would typically see that stronger in the second half.

Yes. Okay. And last one for me, I'll turn it over. It looks like you've made meaningful progress with BLAST DOG. Can you give us any metrics on kind of the level of growth in activity we should see in the next 6 to 12 months, either the number of units or the number of holes or the number of meters you're targeting?

So the BLAST DOG project is still in a prototype phase. And so as we've been fairly consistent in saying over the last couple of years, we don't give too much guidance about projects before their products. Obviously, BLAST DOG is a significant investment and a large part of our strategy. And so we do talk about it a little bit. It is still very difficult to get access to sites and enough people and enough time to be able to conduct these trials. We're very pleased that we managed to get some new trials up with BLAST DOG. We've indicated previously that if we could get enough trials done in FY '22, we would be looking to start commercial revenues in FY '23. That remains the case. It really depends on whether we can do enough time at those trial sites to then convert them into a commercial prototype phase.

Okay. Yes. Fair to say, though, that in the last 6 months, you've -- the level of activity in progressing that has stepped up quite a bit. Is that fair?

Yes. It has. We're very happy with the maturity of the tool, the resilience, the robustness, the reliance of the tool. It's really a high-quality IMDEX sensing tool. We're very happy with the software development and our team in Perth working on IMDEX HUB-IQ and our team in California and around the world building on MinePortal. That integration has been a major step forward over this last half, and that facilitates significantly the ability for us to show both the quality of the tool and the real-time access to that data to potential clients during trials.

Your next question comes from Andrew Donlan from UBS.

Paul and Paul, just following up just on the costs. Like if you look at the operating costs, excluding the R&D, it looks to be up about $10 million, maybe a little bit more year-on-year. And I know you just mentioned Digital 2.0 and MinePortal and things like that. You do mention the increased marketing and travel. I'm just keen to understand how we should think about that OpEx base as we go into the second half. Should we think about an uplift or around where it is at the moment?

Yes. Look, yes is the answer to that, Andrew. It's -- we are starting to see resumption of travel and expect that to continue into the second half. The run rate in the first half, we would expect that to continue into the second half as we continue to work on those initiatives that I mentioned earlier, and we do start to support that higher level of business coming through. Travel itself is in the order of -- was a $5 million spend pre-COVID. It fell to less than half of that during COVID, lower -- or much lower actually. And we're -- will mostly be back to half of that now and moving up to 2/3 expected in the second half.

Okay. Great. And then just on the revenue mix, I can see all the exploration fundamentals. But that mining production stayed at about 20% of revenue, so I guess it's growing at a similar rate. Can you just talk to what you're doing in that market to drive that level of growth?

Yes. Look, the mining production side, obviously, BLAST DOG and our initiatives are focused towards pushing into that mining production side. We are and we have mentioned, we do have other products in that IMP part of our business, which is around the BHS, which is a more stabilization fluid, which we're starting to now introduce into that side of the market. And also, we have some of our gyros starting to test into that side of the market. So we are seeing and expect in '23 that we'll start to move that forward, particularly now with MinePortal and software and IMDEX HUB-IQ playing a greater part in that new technology suite.

Okay. Great. And then just final one for me. I think at the FY '21 results, you sort of called out 3 new joint development agreements. Just wondering how that's going. Have you signed some more over the first half? Just any update on that?

We've really been -- other than the additional BLAST DOG trials, it's really been an extension. So we completed, I think, one of the joint development agreements that we're doing the data and analysis on that now, and another one has been extended. But that's about it at this time. So some progress in just prosecuting the JDAs we signed. One was extended and the BLAST DOG trials.

Your next question comes from Hamish Murray from Bell Potter Securities.

Can you hear me?

Yes, Hamish.

Perfect. And congratulations again. Just a couple of things just joining, I guess, on the cost conversation. Just the first one, around MinePortal. I think that was completed about halfway through September. How much extra cost will that add in that second half? Is that annualized? Or can you give us any clarity, I guess, around that?

Yes. Look, we've called out previously that MinePortal would be an incremental net $2 million impact in FY '22. That is still where it sits at the moment, maybe a little bit more, but generally, I reckon, that order.

And so does that mean annualized, we're talking close towards $2.7 million or something like that?

Yes. As an annualized number, correct.

Yes. And then just on the -- on Digitalization 2.0 or 3.0. I noticed that $1.8 million is coming through additions to software. Maybe you've got some in R&D as well. Could you just -- how long is that expected to take? I think it was going to be a 2-year investment program. And how far are you through it? And do we expect any ramp-up?

Yes. So Digital 2, we expect that to be a minimum 3-year program in the order of $3 million per year. Some of that capitalized cost was associated with IMDEX HUB-IQ and additional feature sets on that, which is linked to Digital 2 but wasn't part of that Digital 2, if that makes sense.

Hamish, it's Paul House here. So you might recall that Digital 1.0 was a slightly longer than 3-year program that was about -- were just over $3 million a year at that time. And that led to our global digital rentals platform amongst others, which has led to a lot of the EBITDA -- the gross margin and the EBITDA expansion that we've reported over the last few periods. Digital 2.0 is essentially a repeat of Digital 1.0 in terms of timing and quantum, allowing time to build those and build and deploy those solutions. And we expect a similar kind of output or return on that investment as we saw from Digital 1.0.

And just on overall costs, the other one was CapEx going through. I saw in the cash flow statement, it's about $18 million on PP&E. That's 10.7% of revenue, a bit at the high end of what you guys normally do. Is that all related to the increased capacity for gyro? Or is some of the trials with BLAST DOG? Anything that you could split that out for us, Paul?

Yes. Look, it is predominantly the sensors and gyros, as you called out. And really, that demand has driven that. So we would expect going into next year that will -- with that demand still being there that we would see continuing CapEx for those new tools. So majority of it is gyros additional spend.

And the majority is to support growth. And then just one more, if I may. Just that EMEA margin looks like it's -- despite pretty strong growth, it's the only one that's sort of stepped off. And is there any reason for that versus the key regions?

Yes. Look, EMEA is -- had the slower recovery out of the -- COVID and particularly on the fluids side. So you are just starting to see, I suppose, the leverage coming into that now as we move through the second half and into '23. So I think you'll see that start to lift up as we go forward.

No issues. That's it for me. One more, if I just may, actually. Just on the -- you guys look like you've capitalized some of the patents and other intangibles for the acquisitions you've made. Would we expect that acquired amortization to step up next from $1.9 million? Or would you just continue to amortize at that clip?

Yes. Look, that's correct, Hamish. So that MinePortal amortization, we're amortizing every 10-year period. So it will step up by that order.

[Operator Instructions] Your next question comes from Josh Kannourakis from Barrenjoey.

Paul and Paul, just a quick question on the sensor ARPU. So obviously, some great progress in the first half. I was hoping you could give us some context about how that will look maybe half-on-half. And just in terms of both when we're looking at that, how much coming from mix change, how much in terms of maybe the integrated solutions selling and also in terms of direct price rises that have been put through or will be put through?

So that ARPU is obviously measuring that on our sensors. And we have seen a step-up, as highlighted from the pcp at 12%. That is as the new-generation gyros have gone out at a higher monthly rental. And as that weighting has changed, that has helped that margin move -- that ARPU move up. We would expect that to increase again as we introduce more into that fleet but not at -- maybe not at that rate as we go into the second half.

Got it. So just in terms of half-on-half, Paul, you still expect half-on-half increases, maybe low to mid-single-digit increases in ARPU sort of growth? Or how should we be thinking about that?

Yes. In that order, correct, Josh, yes.

Okay. That's perfect. And just in terms of the -- your software revenues. Obviously, you've put that in. At this stage, you haven't broken out. I'd just love to get a bit more context and color around at what point in time do you think you may look to sort of break some of the software revenue out and what some of the key milestones we should be looking for in that respect?

Yes. Look, we're very aware that. At the moment, software revenue is, for the most part, heavily integrated into our sensors. And so we -- the value of that software to capture and enrich the data that we originate with our tools is vital. So delinking them is actually a little bit of a challenge to show where one starts and one stops and where we represent that value. Increasingly, we do have a few stand-alone software products, Josh, and we will break that out in time. Unlikely to be at the full year, but we -- there's a point at which it will come. But right now, we're making sure that our priority has always been to provide those integrated solutions. And the origination of data off our hardware and the ability to add value to it through the software is the business strategic priority. And so that's how you should expect us to report it for the balance of this year.

There are no further questions at this time. I'd now like to hand back to Mr. House for closing remarks.

Thank you, Matt, and thank you, everybody, for dialing in today. Obviously, as you would have heard, the IMDEX business is well positioned. The industry fundamentals remain strong. We are very pleased with the business model and the progress we've made in building on that business model over the first half of the year and, in particular, the disciplined and focused growth initiatives that are supporting that strategy. Most importantly, our thanks to our people around the world for their continued ability to find ways to service our clients in an ever-changing environment. And I look forward to being able to report to everyone in the full year results. Thank you very much for your time.

That does conclude our conference for today. Thank you for participating. You may now disconnect.