Imdex Limited (IMD) Earnings Call Transcript & Summary

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

Paul Evans, our Chief Financial Officer. We're delighted to provide an update on our performance for the FY '22 financial year. So listening to a new to IMDEX, we are a 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 and disciplined investment in R&D to deliver patented technologies to the market. We are neither capital-intensive nor people-intensive, and we are truly global with limited contract risk, commodity risk and geographic risk. 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 FY '22. IMDEX Technologies overall enable resource companies and drilling contractors to find, define and mine their ore bodies with precision, confidence and at speed. Today's presentation agenda is set out on Slide 4. We'll focus on four key areas: our financial and operational highlights, including a deeper dive into our financial performance, which Paul Evans will provide; an update on our broader operating environment; growth opportunities within our core business and within the mining production market; and finally, our focus areas and our outlook for FY '23. Following the presentation, Paul and I are happy to take any questions. We've included a number of slides in the appendices covering our corporate profile, our product portfolio, our areas of ESG focus and the value proposition that we as a business offer both our clients and our employees. Turning now to Slide 6 and our financial highlights. The FY '22 year was defined by a combination of positive market demand, offset by some challenging labor and supply chain considerations. Our revenue of $342 million was an uplift of 29% and a record result. It demonstrates the strength of our business model and our objective to outperform market growth and the responsiveness of our global teams under all operating conditions. The strong uplift in earnings has been driven by an improvement in our integrated offerings to customers and the increasing percentage of revenue coming from our higher-margin sensors and software business. At the close of FY '22, rentals and subscriptions represented 58% of revenue. Significantly, we achieved EBITDA margins of 31%, and that is our third consecutive year of EBITDA margin expansion. Importantly, whilst delivering strong results for shareholders, we continue to execute our strategy and invest in our business for the future. Our net cash of $24 million represents a combination of continuing to fund the business during growth and investing in accordance with our strategy. This includes our recent investments in MINEPORTAL and Datarock. Paul Evans will speak later about the investment into our working capital that has supported this growth period. And finally, our directors have declared a $0.019 per share final dividend, bringing the full year fully franked dividend to $0.034 per share. This represents a growth of 42% on the prior year full year dividend of $0.024 and remains in accordance with our well-established 30% NPAT payout ratio. Turning to Slide 7. Underpinning our financial highlights are our operational highlights. Protecting our people remains at the forefront of every initiative we undertake. Pleasingly, we saw a 146% increase in safety engagement across our team, which is the prime leading indicator of HSE behavior. In turn, our LTIFR for the year was 0.77, representing a 58% improvement. Moving from HSE engagement to employee engagement. During the year, we engaged Gallup to conduct a worldwide remeasurement of our employee engagement. The improvement of 15% from our prior Gallup survey, achieved at a time when many workforces around the world experienced heightened disengagement, is a credit to our leadership group, our people and our focus on enhancing our employee value proposition. Also during the year, we engaged ESG risk rating agency, Sustainalytics, to assess our company. Once again, we saw a marked improvement from 16.2 to 11.9, which classifies Imdex as low ESG risk. We are pleased that this score reflects our commitment to ESG and how we operated the business internally, plus how we place sustainability at the forefront of our products that we develop for our customers externally. Paul Evans will elaborate on supply chain. However, I would like to draw your attention to the shift in inventory volumes. Whilst these peaked in the third quarter, pleasingly, inventory volumes eased in the fourth quarter. Broadly speaking, inventory volumes today tend to be at warehouse stocking points within our global network as opposed to in transit where they were for a majority of FY '22. We continue to remain watchful on supply chains in general for the balance of FY '23. However, we are well positioned today to serve our business. Drawing your attention now to our research and development efforts for the year at the bottom center of the slide. Our R&D team had a very productive year with two objectives in mind. The first objective, to maintain the technical leadership in our core product portfolio. We achieved a number of new and next-generation product releases, including our OMNI sensor, our next-generation IQ-LOGGER, a fully automated version of our aiSIRIS software offering and the first chargeable IMDEX HUB-IQ quality assurance module. The second objective, to accelerate the development of BLAST DOG and our move into the mining production space, made great progress. In late FY '22, our BLAST DOG project moved from engineering prototype to commercial prototype, enable us to commence revenue earning trials. Most pleasingly, included in our announcements today is first 3-year commercial contract for BLAST DOG. I'll elaborate on this milestone a little later in the presentation. Finally and most importantly, I want to acknowledge our IMDEX employees and partners around the world. The value I place in our team's work efforts, intelligence and ability to challenge each other makes for the most rewarding work environment I have ever known. In turn, their ability to build, align and lead their own teams is exemplary, particularly under such challenging conditions as we've experienced these past two years. I will now hand over to Paul Evans to discuss the financials in more detail.

Thank you, Paul. Looking at Slide 9, Paul has covered the headline numbers, so I'll expand on some of the key metrics. Our net profit after tax of $44.7 million was up 41%. We achieved strong EPS growth of 41.3% and our return on equity of 16.2% and return on capital employed of 19.3% were up 13.3% and 15.5%, respectively. Net cash was down from the pcp. As Paul mentioned, the majority of the reduction can be attributed to supporting our growth strategy. Outside of the working capital, which I will explain in more detail shortly, the notable included a $1 million [indiscernible] deferred consideration payment contingent on meeting a number of post-acquisition milestones which were achieved and $14.4 million for our MINEPORTAL and Datarock investments made during the year. Additional CapEx expenditure to support strong industry demand, together with the higher dividend payments, were also contributing factors. Our FTEs were up 19.4% to 622. Of this increase, approximately 1/3 relates to supporting revenue growth in operations, which you will recall, was up 29%, reinforcing the value of our [ Digital One ] project and the leverage in our business. The remainder of the increase is largely associated with product and software development, IMDEX Mining Technologies around [ tool ] and Digital 2.0, which track to plan. I would like to point out our operating EBITDA of $104.9 million differs from the reported statutory EBITDA of $102 million as it excludes a net impairment loss of $2.9 million. The impairment relates to COREVIBE tangible and intangible assets that were acquired with the Flexidrill transaction. During the period, we completed a body of test work on COREVIBE. As a result, the decision was made to cease further development as it did not meet the stage gate hurdle rates, both operational and financial, that we had set forth to be an IMDEX product. And currently, we completed our body of test work in MAGHAMMER, which also form part of the Flexidrill transaction. This work validated its valuation on the balance sheet. Whilst the business case continues to be supportive, we recognize the need to find the right partners in order to bring the technology to market. This will include exploring partnership opportunities or possible divestment. A feature of the Flexidrill option structure and the ability to share risk has meant the net adjustment from the impairment is not material. As an R&D organization, a core discipline is the ability to seize or continue investment as projects move through the stage gate process. It is important to acknowledge the teams involved and the significant advancements they have made with both of these technologies. We also recognize the support we had from the prior Flexidrill shareholders. I would now like to refer you to the graph on the top right. This illustrates our half-on-half revenue profile since 1H '20 being the last period not impacted by COVID. Paul mentioned revenue had increased 29% over the pcp, and it is now 36% of the 1H '20 pre-COVID peak, with all regions comfortably above pre-COVID levels. Moving now to Slide 10. In line with our objective, we continue to outperform industry growth rates as demonstrated by our 5-year CAGR, revenue CAGR, of 14%. One of our internal benchmarks is the S&P exploration expenditure for nonferrous metals, which had a 5-year CAGR of 9%. The graph in the center illustrates our strong trend of earnings growth with a 5-year EBITDA CAGR of 27%. Despite increasing supply chain costs, particularly in our fluids business, this demonstrates the strength in our gross margins, our ability to manage input costs and revenue from our centers and software continue to grow at faster rates. This has allowed the business to fund additional investments to support growth, together with the initiatives we have called out throughout the year, which included IMT acceleration, investment in MINEPORTAL and Datarock and our Digital 2 investment. The graph on the right shows our continued EBITDA expansion, margin expansion, and demonstrates ongoing price leverage as our revenue base has increased. You will note our EBITDA margin has continued to be maintained above 30% at 30.7% for FY '22 and is up from 28.5% in FY '21. Looking at Slide 11. Paul has covered the headline numbers, so I will expand on some of the -- sorry. Now looking at Slide 11, from the EBITDA result of $104.9 million, there was a net inflow of operating cash of $55.9 million. Pretax, this represented a 66% conversion rate and was lower than historic levels. The lower rate largely represents the additional investment in inventory to mitigate supply chain delays for our customers. As Paul highlighted, entry volumes peaked in 3Q '22 and started to ease in 4Q '22. Of the $38.6 million working capital investment made, approximately 20%, or $8 million, of this represented or related to inventory to mitigate supply chain delays, whilst the balance related to supporting the 29% revenue growth. As supply chain pressures ease, we expect to see some or all of this additional entry investment unwind over FY '22. Turning to Slide 12 and a very important part of the IMDEX DNA. Our investment in R&D in all market conditions is to maintain our technology leadership and continue to deliver value to our customers. In FY '22, $26.2 million was expensed on product development and $3.2 million was capitalized in relation to software. This represents 8.6% of total revenue, a 30% increase on FY '21. Of note is the increase we previously mentioned to accelerate [ IM 2 ], BLAST DOG and our acquisition of the MINEPORTAL software. This overall investment remains well within industry benchmarks and is conservative as a growth company. I would like to mention three further points on this slide. Firstly, IMDEX has a long development wish list that is governed by disciplined stage gated R&D process, as illustrated at the bottom right of the slide. Secondly, it is critical we invest in our core business, for HORIZON 1. However, it is also important we invest for the future into HORIZONs 2 and 3, BLAST DOG being an example of the latter. And finally, in recent years, we have seen a larger percentage of us being directed towards software products that support our hardware, and we expect this to continue. Looking briefly now at our balance sheet on Slide 13. I have spoken to the net cash and mentioned the entry balance increase. Other notable balances include intangibles and investment in associates. Intangibles include the increased IP of $16.2 million from the acquisition of MINEPORTAL and $4.7 million of capitalized software costs, $3.2 million relating to R&D with the balance relating to internal systems. Investments in associates relate to our initial 30% investment in Datarock. As I mentioned, with the key metrics, our return on equity and return on capital employed was strong for the year, and our dividends were in line with our historical payout ratio. I will now hand back to Paul for an industry and market update, commenting on Slide 15.

Thank you, Paul. Whilst all regions grew in FY '22, the strongest growth at 39% was in the Americas. The Americas now represents 47% of total revenue, up from 44% in FY '21. 29% of revenue is from Asia Pacific and the balance from Africa and Europe. Activity in the Americas was supported by demand for IMDEX solution offerings, and notably, the 5-year revenue CAGR for this region sits at 18.5%. Revenue from our Africa and Europe region was up 21%. We saw strong 4Q growth activity, particularly in fluids products, whilst Europe remained steady. Importantly, our decision to withdraw from the Russian market was not material and represents less than 1% of total revenue. Revenue from our Asia Pac region was up 22%. Activity was strong in Australia across all aspects of our business, whilst largely steady in Asia. Notwithstanding the strong activity in all regions, the pace of industry growth continued to be tempered by rig availability, supply chain pressures and skilled labor shortages, predominantly in North America and Australia. Moving now to Slide 16. We regard the industry as continuing to have strong underlying fundamentals, and this is reflected in the FY '22 activity that you saw in the previous slide. Whilst there has been a recent decline in capital raisings, juniors and producers both remain well funded with ongoing exploration budgets and commitments to their drilling program. The volatility in commodity prices is creating some uncertainty in the capital markets, though it is not yet impacting exploration activity. The underlying fundamental around diminishing reserves and long-term demand, particularly for battery metals, suggest that this uncertainty is likely to be short term. Turning to Slide 17. At the half year, we highlighted a number of constraints that we face in the exploration market as a whole. At the full year, I'm pleased to advise that those constraints continue to ease for IMDEX. In particular, access to mine sites, which was previously restricted due to COVID, is improving, although working with COVID means employee absenteeism remains a factor impacting productivity. Introducing new products during periods of high activity remains a challenge, and our ability to redirect R&D efforts to deliver next-generation existing products, as we outlined in our operational highlights, is a feature of our agility in responding to the current market needs. Supply chains appear to be easing globally and specifically for IMDEX, as Paul referred to earlier. And whilst IMDEX is relatively immune to the impact of labor shortages, we do expect attracting labor to the market and navigating employee absenteeism will remain a challenge for our clients in the short term. Moving now to Slide 19 to recap our growth strategy. While the industry is actively navigating evolving market conditions, our underlying strategy remains the same. The key components include grow our core business in exploration and development and leverage our core competencies into mining production. As we have consistently reported, our growth drivers fall into 4 key areas: technical leadership in our core, extension into mining production, integrated solution offerings and making disciplined complementary acquisitions where possible. Pleasingly, we have made significant progress with each of these drivers during FY '22, and I will now provide a brief update in the coming slides on each. On Slide 20, prioritizing our technology leadership and competitive position is key, and I draw your attention to two statistics. The first, our total revenue was up 29% for the year. Our IMDEX HUB-IQ connected revenue was up 58%. And the last, our hub connected survey sensors are increasingly being used to drive day-to-day decision-making and operating behavior with meters surveyed exceeding 223 meters for the year, an uplift of 26% from the pcp. Turning to Slide 21 and our extension into mining production, which has made considerable progress in FY '22. Engineering trials with customers in Australia, North America and South America have continued to refine this technology. The result and progression of BLAST DOG from engineering prototype to commercial prototype in 4Q '22 is a significant milestone. This now commits us to building the operating model required to support both trials and commercial contracts. Included in our announcements this morning was the first commercial contract for BLAST DOG at Iron Bridge in the Pilbara. This agreement provides for the stage utilization of up to 3 BLAST DOG sensors, together with associated products, software and support over the initial term. This will result in an estimated contract value of $13 million. Beyond BLAST DOG, other products for the mining production phase are under development, and we'll continue to invest in these in FY '23. Turning to Slide 22. Our focus on providing clients with integrated solutions incorporating a full range of IMDEX products is tracking well. And during the year, 44% of our top 250 clients had more than 3 products working together as a solution. This is up from 33% in FY '21. Slide 23 provides an update on our most recent investment. AusSpec is progressing well. And during the year, we released the next-generation fully automated aiSIRIS software version. The volume of mineralogical spectra being analyzed was up 62% in FY '21. Our MINEPORTAL software, which we acquired from Data Cloud in September '21, has been instrumental in demonstrating the value of BLAST Dog to customers. Our focus now is on integration of MINEPORTAL with IMDEX HUB-IQ. And finally, an update on our initial 30% investment in Datarock made in November last year. Datarock processed and analyzed more than 1 million meters of new core imagery for the year. Its SaaS revenue was up and its product development road map is tracking ahead of schedule, and around our group, we love working with that Datarock team. Moving now to the final section of this presentation and our focus areas and outlook on Slide 25. Protecting our people will remain our priority. We will continue to pursue the following growth drivers and operational initiatives, and they are investment in our core, investment in IMT and investment in Digital 2.0 whilst maintaining a disciplined approach to our product portfolio management. And in Slide 26, we have a positive outlook for FY '23. IMDEX has had a strong start to the new financial year, and demand across our product portfolio remains strong in all areas. The underlying long-term demand drivers for the industry are robust. Our drilling clients are reporting strong forward-looking order books with many continuing to expand rig fleets, and our resource company clients are reporting sustained exploration budgets. In the near term, we anticipate workplace absenteeism will continue to impact labor availability for customers and their ability to maximize their drilling programs. Similarly, whilst there are early signs of supply chain pressures easing, we remain watchful of its potential impact on exploration activity should this change. These current uncertainties will not substantially impact our industry's activity nor its commitment to medium- and long-term development. And IMDEX is well positioned to leverage these robust industry fundamentals and the unique competitive position that our global presence, our leading technologies and our integrated solutions provide. That concludes our presentation for today. And Paul and I are now happy to take any questions.

[Operator Instructions] Your first question comes from Nicholas Rawlinson from Jefferies.

The outlook was positive but pretty vague. Any indication of centers on ramp for July compared to where they were last year or a similar quantitative metric for 1Q?

Nick, look, activity is robust as we called out on the call and sensors are moving up. And I think referring to the S&P 5% to 15% growth rate for calendar year '22 shows the general trajectory, and we are seeing that at the moment, albeit with those delays around supply chain and labor that we've called out earlier. They do provide some [ heaviness ] for that.

Nicholas, it's Paul House here. I might just add to that. In terms of the outlook thing vague. I mean, typically, diamond drillers have forward order books in any given year that are about 40% committed. And today, most diamond drillers that we talk to, they have forward order books that are committed of 75% to 80%. And so that outlook is actually very strong.

Yes, that's interesting. I just had a few follow-up questions. Congratulations on the BLAST DOG contract. Could I just ask how many FMG mines would be in your addressable market? I know you gave like [indiscernible] market in the deck there previously.

Yes. So the contract relates to 1 mine site, which is Iron Bridge. We are in a number of trials with other companies in the Pilbara as well as Queensland, North America and South America. And I think we've identified a total addressable market in previous literature that says it's about 1,200 total operating mines. You reduce that to about 600 in the addressable mines. And then depending on the commodity and the value proposition of each, it scales up accordingly. So Fortescue obviously have a number of mines in their portfolio. But we're in -- at this stage, this contract is only for the Iron Bridge operations. Probably the other way to look at the total addressable market is -- from an independent perspective is the way [indiscernible] did their addressable market commentary for their IPO. Their total addressable market numbers in terms of mine sites, there's a very strong correlation to how our market assessment works if you wanted some external data.

And just on BLAST DOG, how quickly can you scale it up? Like what are the concerns? Is it the robot or the build time for the tools or more commercial trial?

It's more the latter, Nicholas. It's more about taking the time to conduct a trial and give it an objective view of how the operations perform beforehand, how the operations performed afterwards and the ability to extract the value of that data set at multiple downstream stages in the mining value chain. And so that is fairly highly engaged sales cycle. But like I say, we're very happy with the trials that we have underway at the moment.

Yes. Just two more quick ones from me. Obviously, we saw Orica make that acquisition from one of your key tools competitors. In my mind, it seems like they made that to make a product to compete with BLAST DOG. Just wondering how far ahead in the pack do you think you are against your competitors with BLAST DOG.

Yes, in terms of understanding total ore body knowledge, there are multiple rock properties that you would be looking to measure. The acquisition you referred to relates to their survey technologies, which is one of a dozen or more technologies that you might need for comprehensive ore body knowledge. BLAST DOG is not -- today, the version of BLAST DOG that we have in the market does not include survey tools. But as you well know, IMDEX has a very high capability in survey tool. And so I see them as quite distinct and different, and there's a number of sensors you need to complete total ore body knowledge, and BLAST DOG stands alone at this stage.

Great. And just on employee costs, they were up 25% year-on-year. How should we think about the cadence of that going forward?

Yes. I think -- so first of all, the growth in our OpEx has been exactly as we said it would be. And so we -- it's very important that we do exactly what we said we'd do. And what you saw is the growth in FTEs, and I think Paul Evans spoke to the fact that only 1/3 of that FTE growth is related to supporting the 29% revenue growth. And the rest was discretionary, if you like, to enable us to further our IMT program and our Digital 2.0 program. So we think those numbers will hold at those levels for now, save for the support we need to grow the IMT business. which is probably in any other underlying growth in our core business, which, obviously, exhibits great operating leverage.

Your next question comes from Josh Kannourakis from Barrenjoey.

A couple of quick questions. Firstly, just following on from the BLAST DOG comments before. On the revenue timing, could you give us a bit of an indication of how that's skewed over the 3 years? And also just any, I guess, upside or downside risk to that contract?

Yes. So it begins, it's for 3 BLAST DOG units over 3 years, scaling up -- as those operations scale up, so starting with 1 unit. There is -- Iron Bridge, of course, is going through its own start-up phase. And so there is a blend of services in that total package, and so there is some flexibility in there so that we can align our service provision with Ion Bridge's need.

Okay. Got it. Just on the second question, just around portfolio mix on a go-forward basis. I think everyone is obviously trying to work out both outlook in terms of volumes, but also just what IMDEX can do on a stand-alone basis as it's continued to increase its average revenue per tool. How should we think about the portfolio, Paul, on a go-forward basis? And just what tailwinds should be built in there in terms of improving average revenue across -- per tool across the business?

Yes, I think there's two areas of upside. The first is the continued solution selling element that we've called out. And as we've said previously, the percentage of customers who have 3 or more products working together as a solution should be something that should continue to grow regardless of market conditions. Secondly, again, as we called out in this presentation, using our R&D effort to build the next-generation versions of existing core products means that you're creating additional value from those products, and you [ continue to see ] that profile continue to improve within the core fleet.

Perfect. And final one, just on OpEx. I know you mentioned before. But as an all-in OpEx and taking consideration for some of the R&D investment as well, how should we be looking at that on a go-forward basis? I think you said before sort of second half as sort of the base on a go-forward exit. But just in terms of R&D, how should we think about it on an all-in basis going forward?

Yes. Look, I think if you think of the FY '22 that we called out, that number will be similar, we would expect, for FY '23.

Sorry, are you there? I can see some other questions in the waiting room.

The next question comes from Mitchell Sonogan.

Just following on from Josh there. I guess just thinking about, you've talked about a positive outlook, but obviously, there are some constraints in terms of labor and actually growing the number of rigs in certain regions. Can I just talk about actual pure pricing in terms of are you pushing to any increases in this inflationary environment outside of the upgrades to going from the older to the newer tools and what we should be expecting over the next 12 months?

Yes. So I think there's 3 pricing points, which we've been fairly consistent upon in the past. One is, as you referred to, new tools set new prices depending on the value they unlock. The second is, to the extent that input cost or raw materials, particularly in our fluids business, have been fluctuating around the world, we've had the ability to see that and pass them on in a timely manner so that our gross margins are maintained. And thirdly, there is a gradual cycle of upgrading tools from older generation tools in our fleet to newer generations, which gives us a slight uplift in net ARPU. And there is still some runway in that area for us to go as we continue to engage with the market and show them what additional value we can unlock.