Imdex Limited (IMD) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the IMDEX 1H '23 Results Presentation. [Operator Instructions]. I would now like to hand the conference over to Mr. Paul House, Chief Executive Officer. Please go ahead.

Thank you, Lucy, and good morning, everyone, and welcome to the IMDEX FY '23 First Half Results Presentation. Joining me on the call today is Paul Evans, our Chief Financial Officer; and Kym Clemens, our Head of Investor Relations. As always, we'd like to begin on Slide 3 by outlining how we distinguish our mining tech business in the broader mining services arena. First, we placed technical leadership at the core of our growth strategy; and second, we build that technical leadership through consistent and disciplined investment in R&D to deliver patented technologies to the market. Our recently proposed acquisition of Devico and our investment in Krux Analytics speak directly to these two themes, and we will be pleased to elaborate on these later on in the presentation. Thirdly, our mining tech business model is neither capital-intensive nor people-intensive. We are truly global with limited geographical risk, limited contract risk and limited commodity risk. And finally, we are developing an integrated solution set that works together rather than as individual products to put a high-quality revenue base with increasing EBITDA margins. IMDEX technologies enable resource companies and drilling contractors to find, define and mine ore bodies with precision, confidence and at speed. This message, our purpose at IMDEX, is highly aligned to that of Devico's and in our announcement of January 19, we highlighted that Devico's purpose and the addition of their core technologies to ours directly enhances our combined capability to find, define and mine ore bodies. Today's presentation agenda is set out on Slide 4. While we have already shared our unaudited results with the market on January 19, we are delighted to expand upon our performance for the first half, which Paul Evans will do and discuss the outlook for the industry and our business in particular. And finally, to provide an overview of our recent proposed investments in Devico and Krux and how they support our growth strategy. Following the presentation, Paul and I are happy to take any question. Turning now to Slide 5 and our financial highlights. 1H '23 was a juxtaposition of strong client demand during a period of significant market uncertainty. Macroeconomic concerns regarding rising inflation, geopolitical tensions, fluctuating commodity prices and declining capital raisings by juniors impacted some sentiment. At IMDEX, we regarded that as uncertainty rather than cyclicality, and we have long been clear that it should not impact our ability to grow our business. We are most pleased to report that we did indeed rise above that noise to achieve above-average industry growth for the period once again. We generated revenue of $198.8 million, which was an uplift of 18.4% and a record half year result. This result again demonstrates the strength of our core business and our objective to outperform in all operating conditions. The uplift in earnings continue to be supported by our higher-margin sensors and software business together with our transition to next-generation cloud-connected centers. At the close of 1H '23, rentals and software represented 58% of revenue, and our ARPU was up 8.8% on PCP. The normalized EBITDA growth of 22% highlights the leverage in our operating model, achieved whilst continuing to fund various strategic initiatives. Significantly, the result of normalized EBITDA margin of 32% represents our fifth consecutive year of margin expansion. I'd like to draw your attention to the footnote on this slide that explains the normalization. As we have previously informed the market, we undertook legal action during 1H '23 over and above our ordinary course of business. This action took place in both Australia and the U.S.A. to protect our intellectual property from infringement. A positive outcome was the successful defense of our unique IP in both Australia and the U.S.A., the former by way of court judgment and the latter by way of settlement. It will result in the withdrawal of the infringing tools from those markets and the opportunity for our business to support that demand. The award of costs and damages, including additional damages as highlighted in the judgment, are still to be determined by the court. We do not expect these exceptional legal costs to recur in 2H '23. Paul Evans will expand upon our operating cost base and outlook when he discusses the financial performance in more detail. Finally, our directors declared a 0.015 cents per share interim dividend. This is well within -- this is within our well-established 30% NPAT payout ratio. Turning to Slide 6, and as always, our financial performance is now working of our operational achievements as identified here. Once again, I'd like to commend our global teams staying focused and [indiscernible] between the half. [indiscernible] with an increase in engagement as indicated [indiscernible]. In turn, our LTIFR for the year was 1.6%, and our TRIFR was 3.11%. These equate to a 9% and 10% improvement on the pcp, respectively. Our team should be acknowledged for their unwavering commitment to protecting each other, particularly during a highly rewarding and incredibly busy half. It highlights the strength of our teams and the maturity of our safety culture. To them, I express my direct thanks. The other highlights speak for themselves. However, I'd like to draw your attention to the achievements on the lower left-hand side under people and leadership. During the half, we closed a gender pay gap for roles on a like-for-like basis. This was an important and significant body of work that, in a perfect world, should never be required. And yet it remains at the forefront of challenges for many organizations still, both in Australia and around the world. We are pleased with the progress made and our commitment to sustaining equality in all its forms, and it is one of our highest priorities. Our objective, which has strong support from our Board, is to make IMDEX a safe, inclusive and stimulating place to work, a community where everyone is rewarded appropriately for thriving at their talent and contributing to the success of our business. During the half, we were very pleased to welcome Uwa as Non-Executive Director; and Wayne Panther as Chief Information Officer. Uwa is based in Seattle as Chief Commercial Officer, Worldwide Energy and Mining for Microsoft. Wayne joined us in January and has previously held roles in both Chevron and Microsoft and will take custodianship of our Digital 2.0 program of work. Both gentlemen bring a wonderful breadth of capability and experience to our leadership, and we welcome them to our team. Finally, under the strategic investments heading, Devico and Krux are significant highlights, both requiring a large amount of work during the first half and both announced shortly after December 31. I'll expand on each of these later. We also made progress with our investment in Datarock and further development of our AusSpec aiSIRIS software. During the half, we increased our interest in Datarock from 30% to 40.9%, and a notable achievement is the release of the first of their first SaaS-based geotech product. Our aiSIRIS software continues to grow transaction volumes and its full integration with IMDEX HUB-IQ remains on track. I'll now hand over to Paul to discuss the financials in more detail.

Thank you, Paul. Consistent with our first half '23 results update provided to the market on January 19, I would like to expand on this and the highlights Paul mentioned earlier. Our reported EBITDA is $53.4 million, up 3.7% from the pcp. Normalized EBITDA for the period was $62.8 million, up 22% on the pcp and up 11% on a constant currency basis. The normalized result excludes $9.4 million of exceptional litigation costs related to the Boart Longyear, Globaltech IP ligation, which are not expected to recur during 2H '23. Total legal fees for the period in relation to this matter were $12.4 million versus $1.5 million in the prior period. On a normalized basis, our EBITDA result represents a 31.6% EBITDA margin compared to 30.7% in the pcp. Pleasingly, we achieved this margin expansion while progressing Digital 2.0, increasing investment in R&D, particularly software development, and building up our IMT business. We also note there was an increase in global travel expenses as mobility started to return. D&A, depreciation and amortization, was slightly higher over the pcp, directly related to the revenue growth profile of the business. The effective tax rate for the period was 32%. These 2 points combined resulted in a 6.9% decline in net profit after tax. Excluding the exceptional legal costs, this would have shown an increase in NPAT of 20%. Notably, our operating cash flow was up 46% from the pcp, and net cash at 31 December was 8% up on the pcp. I will provide more detail on working capital shortly. It is important to note that of the $9.4 million exceptional legal costs not expected to recur during 2H '23, the majority is unpaid at 31 December 2022. Three other items funded during the period are worthy of mention. Firstly, the $12.2 million CapEx largely into our sensor rental fleet to support strong industry demand and $3 million into capitalized software development. Secondly, final deferred consideration payments to former owners of AusSpec of $1.5 million and to Flexidrill of $1.8 million. And finally, $3.5 million to purchase shares to meet our long-term incentive plan outcomes. You will see at the bottom of the table that FTEs were up 15.9% on the pcp. Approximately half of the increase relates to supporting core business operations at 18.4% revenue growth, supported by circa 8% core FTE growth. It reinforces the leverage in our business model and the value of our [ Digital 1 ] project. The remaining half of the increase in FTEs is largely associated with the initiatives we have previously called out Digital 2 software development and scaling our IMT business unit. I would now like to refer you to the graphs on the right. They illustrate our strong half-on-half revenue and earnings profile since 1H '20. Our 1H '23 revenue is now 56% over 1H '20's pre-COVID peak revenue. And our 1H '23 EBITDA is more than 100% over the same period. Before covering the balance of this financial performance section, I'd like to reinforce that our reporting philosophy is always to focus on statutory results and highlight complete performance of the business. Our strong preference is not to provide normalized numbers and only do so where necessary. For FY '23, this will include the elevated legal fees and the anticipated co-transaction costs, which will occur in 2H '23. The integration of Devico [ with 8 ] reporting entities across 15 countries and sales in over 50 countries is a significant body of work. This is likely to extend our FY '23 reporting time line. Further details will be provided following completion. Moving now to Slide 9. Our 5-year CAGR of 13% continues to demonstrate our ability to outperform industry growth rates. Our benchmark is the S&P exploration expenditure for nonferrous metals, which had a 5-year CAGR of 9%. The graph in the center again illustrates a strong trend of earnings growth with a normalized 5-year EBITDA CAGR of 24%. As noted, the 1H '23 bar is the normalized result. This positive trend demonstrates the strength in our gross margins, our ability to manage input costs and revenue from our sensors and software continuing to grow. This has allowed the business to fund additional investment to support growth. The graph on the right shows our continued EBITDA margin expansion and demonstrates ongoing price leverage as the revenue base has increased. You will note our EBITDA margin has continued to be maintained above 30% at a normalized level of 31.6% on 1H '23 and is up from 30.7% from the pcp. Moving to Slide 10. Our strategy has seen our revenue profile strengthen over the past 5 years. I'd like to draw your attention to a number of key points on this slide. The growing portion of revenue coming from rental and SaaS products, which have higher margins and are occurring in nature. Increasingly, these sensor products are being actively managed in our HUB-IQ platform. You will note 30% -- 32%, sorry, of revenue continues to be hub-connected versus 8% in 1H '17. Our strong geographic footprint and increasing presence in the Americas, which now represents 45% of total revenue. And finally, acknowledging our product offering is largely commodity agnostic, and therefore, we are well positioned to benefit from the accelerated spend in critical metals. Looking now to Slide 11. From the normalized EBITDA result of $62.8 million, there was a net internal of operating cash of $44 million. Pretax, this represented an increase of 46% over the pcp. Within this, we saw a 31% investment into working capital. This is in line with historical levels and a higher EBITDA to operating cash conversion rate due to a higher level of rental sales, fleet sales in the period. As highlighted in previous presentations, we increased our investment in inventory by $8 million during FY '22 to mitigate supply chain delivery times. Pleasingly, supply chain pressures are easing, and we expect inventory levels to unwind once delivery times begin to improve. At this stage, we expect this to be towards the end of FY '23 and into FY '24. Moving to Slide 12, the last slide in this section, you'll see on the right our normalized return on equity and return on capital employed was strong for the year and our full fully franked dividend for 1H '23 is in line with our historical payout ratio. Looking briefly now at the remainder of our balance sheet, I've spoken to net cash and inventory. Other notable balance sheet movements include investment in associates. The increase relates to our planned additional 10.9% investment in Datarock and payables. The increase includes exceptional [ level ] costs mentioned earlier. I'll now hand back to Paul for an industry and market update commencing on Slide 14.

Thank you, Paul. During the half, the strongest growth was in Africa, Asia Pacific and South America. Within the Americas, North America grew even though Canada remained flat on the pcp. The Canadian market was impacted by two factors: firstly, uncharacteristically warm weather, which delayed the winter drilling programs that typically require a hard freeze and a lack of funding for juniors. Pleasingly, junior financing increased towards the end of calendar year '22 with strong raisings reported in December and January both. These funds are expected to underpin strong support of the summer drilling season in the Canadian market. There was strong growth within South America, particularly in Brazil, Chile and Argentina. Growth in Peru was impacted by some political-driven social unrest, which was slightly down on the pcp. Drilling is expected to gain traction again in the second half. From all reports, large and intermediate producers are progressing or increasing their planned drilling programs, and drilling clients continue to report strong to full order books for the balance of calendar year '23. Rig utilization remains high in the majority of regions but not at the level that is restricting growth. And similarly, while demand for skilled labor remains high, resourcing personnel is no longer impeding a large majority of operations. Inflation remains a challenge for some clients. However, it is beginning to moderate. In some regions, particularly the U.S.A. and Australia, resource companies have recommenced tendering processes, which suggests greater availability of rigs in the market and their willingness to revisit pricing. Utilization rates in the underground rig remain high -- underground rig market remain high and are expected to stay that way for some time. This reflects the increased growth in underground activity overall and the greater cost of mobilization and demobilization from underground rigs. In summary, we remain optimistic about our industry's operating environment in the near and medium term. Moving now to Slide 15 and a quick recap of the drivers behind our operating environment, we regard the industry as having strong underlying fundamentals with increasingly less restrictions on the pace of growth. The large and mid-cap producers remain well funded, and forward-looking exploration budgets remain high or growing. Junior and intermediate financings were significantly higher in December, and Bloomberg recently reported mining equity raisings were up 29% year-on-year in January. Commodity prices are strengthening, those will be gold and copper, and price levels remain supportive of increased exploration budgets. Based on S&P data, nonferrous exploration budgets are still are still well below the peak of 2012. Finally, the underlying mining industry fundamentals of diminishing reserves, greater demand for critical metals and drilling at depth is continuing to support growth in drilling activity and the adoption of new technologies. For IMDEX, this is our sweet spot. Turning now to Slide 17 and a quick recap of our growth strategy. Our growth strategy has been established for some time. It is clearly defined, clearly articulated and clearly executed. This slide aims to provide context for our achievements during the half and our future areas of focus. At all times, our Board and executive leadership team exercise a great deal of discipline to ensure that all of our initiatives remain on strategy. Key components of this strategy include growing our core business in exploration and development and leveraging our core competencies across into the mining production segment. Our four growth drivers are outlined to the left-hand side of Slide 17. A notable achievement against these four growth drivers during 1H '23 include the following: increasing software for IMDEX HUB-IQ connected revenue currently at 32% of total revenue; releasing version 8 of IMDEX's ioGAS software; completing IMDEX's first-generation mine portal software to support all future BLAST DOG trials and contracts; progressing the commercial prototype trials with BLAST DOG; increasing IMDEX's interest in Datarock from 30% to 40.9%; and finally, the proposed Devico and Krux investments. The following slides on the Devico acquisition are largely in line with the presentation we spoke to on January 19. Let's turn to Slide 19. What a wonderful team. Over the half, we were fortunate enough to spend considerable time getting to know the Devico business and Devico's people. Our Chairman's quote below their team photo summarize our shared sentiments very well. I would add that it was a pleasure to discover a strong alignment of our corporate values and our purpose as we look for ways to bring mining technology to the mining industry. Turning to an overview of the transaction on Slides 20 and 21. The enterprise value of Devico at $324 million is a full fair and stand-alone valuation. We approached that valuation prior to the consideration of any synergies that accrue to IMDEX or the combination of the businesses or the inclusion of any new products. The EBITDA multiple is very similar to IMDEX. The EBITDA multiple is at a slight premium. This reflects the high-quality, high-growth and high-margin nature of the Devico business. Once again, our valuation and these multiples are prior to the consideration of any synergies that may accrue post completion. Completion is expected to occur on 28th February and is subject to a number of conditions that we do not place significant risk upon. Devico itself was started in 1988 by Viktor Tokle and the Tokle family and is headquartered in Trondheim, Norway. Devico has a well-established global network complementing our own operations and enhancing our presence in Europe, in particular. It has a world-class R&D and manufacturing facilities and in the heart of the Scandinavian region. A key feature of this investment is the Devico management team that will be joining us. They will reinvest approximately 30% of their equity proceeds back into the IMDEX business by way of shares. There's a strong vote of confidence in the strategic combination of our two businesses. Turning to Slide 21. Funding for the transaction is by way over $224 million underwritten equity raising and a new $120 million bank facility. The institutional offer of $125 million achieved a take-up rate of 97.3% receiving strong support from existing and new shareholders. The fully underwritten retail entitlement offer of circa $36 million closed on 7 February, and these new shares are expected to be issued tomorrow. For some time, we have advocated that our balance sheet could be put to better work for investors given the high quality of our core business today. We are pleased to use this investment opportunity to draw down on the new bank facility. This maintains a conservative balance sheet position, with a net debt-to-EBITDA ratio of approximately 0.7. The Devico transaction is expected to be cash EPS accretive from the first full year of ownership and again, prior to the consideration of any synergies that may accrue. Looking now at Devico's complementary product offering on Slide 22. Devico essentially operates two business units that align very closely with our IMDEX business units. On the right-hand side, we have Devico's directional drilling technologies where they are the market leader in one of the fastest-growing mining technology markets. Their #1 position has been established for more than 20 years. On the left-hand side are their sensor technologies. Devico's product suite complements our IMDEX product suite very neatly. Devico's R&D process follows a similar stage gate model to ours, and they have a number of new products in their R&D pipeline similar to ours. DeviStar and DeviDrill RSS have recently moved to the commercial prototype phase. And whilst we have not factored in any revenues for these products in our valuation, they represent great potential upside. Turning to Slide 23. The combination of facilities and locations around the world deliver three key benefits. Firstly, the extension of our reach into the key mining regions around the world by combining IMDEX and Devico operating footprints. Secondly, there is a natural overlap in some areas, which speaks directly to some of the occupancy synergies that we may unlock over time. And finally, the addition of a world-class R&D facility in Europe and Norway specifically, perfectly complements our existing global R&D hubs today. Turning to Slide 24 and the financials of the business. Devico has a strong track record of revenue growth and EBITDA growth. I draw your attention to the center box and the margin profile. The sensing technologies business, with an 80% gross margin, is similar in profile to the IMDEX sensor technologies business today. To the right-hand side, the Devico directional drilling business has a 60% gross margin profile. This market-leading technology complements our drilling optimization portfolio and presents opportunities for cross-selling with our fluid engineering expertise. In summary, Devico has strong and fast-growing revenue, presents good operating leverage, delivering strong incremental EBITDA margin drop-through and is highly complementary to the IMDEX business and product suite today. Slide 25 demonstrates clearly the strategic rationale of combining IMDEX and Devico and how it complements our four strategic growth drivers. In particular, Devico delivers us the #1 market position in Europe, consolidates our #1 market position globally, adds the #1 directional drilling technology in the market and provides a world-class R&D team and manufacturing facility in the Scandinavian region. Although not included in our valuation, the expanded and complementary product suite, together with our expanded and complementary operating footprint within increasing opportunities for cross-selling and revenue growth. Looking briefly now at the proposed Krux acquisition on Slide 26. On January 13, we were pleased to announce that we have entered into a Heads of Agreement to acquire 40% interest in Krux for $6.42 million cash. Krux is a Calgary-based business that develops market-leading drilling analytics software, focusing on the collection and analysis of exploration and production drilling data in real time. Like Devico, Krux has a high-quality team. That team has developed and commercialized a robust SaaS business, providing contractors and resource companies the means to digitize their drilling operations and embark on a pathway to real-time advanced data analytics in the drilling section. The key terms of the proposed investment are being refined. However, like our investment in Datarock, our investment model will incorporate provisions to enable a sharing of risk. We expect to finalize the transaction in April of this year. The subheading on Slide 28 encapsulates why Krux is on strategy. The combination of our drilling analytics software will establish us as the #1 provider to customers globally. And moving now to the final section of this presentation and our focus areas on outlook on Slide 30. Protecting and developing our people will remain our priority. We will continue to pursue growth drivers and operational initiatives that focus on investment in our core, investment in IMT and expanding our software offering, investment in Digital 2.0 and completing the Devico and Krux transactions. As Paul Evans mentioned earlier, the integration of Devico is a significant body of work and is likely to extend our FY '23 reporting time line. Finally, some brief commentary on the outlook for FY '23 on Slide 31. We had a positive start to 2H '23. Pleasingly, the January start-up recommenced faster than in prior years, and the average number of centers on hire for the month was up 2% on the pcp. Demand for our drilling optimization products is also increasing, particularly in Africa and South America. As I mentioned earlier, we regard the current macro-related uncertainty as short term. The underlying long-term demand drivers for the industry are robust, strengthened by a fundamental supply/demand [ imbalance ]. Our drilling clients are reporting strong forward-looking order books. In some regions, they have forward visibility for the balance of calendar year '23, and our resource company clients are reporting sustained or increasing exploration budgets. Our core technologies speak directly to the increasing demand for drilling at depth, increasing demand with greater ore body knowledge and the increasing demand to sustainable operations in mining in general. The addition of Devico's core technology strengthen our breadth of offering to address these thematics head on. We remain positive about the outlook and excited about delivering on our growth strategy. Paul and I, together with our global teams, are looking forward to the balance of FY '23 and beyond. And for the day, that is now a wrap. Thank you for your time, and we're happy to take any questions.

[Operator Instructions] Your first question comes from William Park from Citi.

Just wanted to sort of touch on average [ sensors and hire for ] first half. You're saying it's 6% growth. But at the AGM, you were talking about how that was up 13%. So that implies slowdown in second quarter. Could you just elaborate on what's happened between first quarter and second quarter, please?

Yes, William. I think the -- as you know, the Christmas shutdown normally causes that drop off in the second quarter. And we have called out that over the two halves, it's 6% up first half '23 versus first half '22. So it's that seasonal slowdown in the second half that you're seeing there -- in the second quarter, sorry.

Yes. And in terms of the revenue growth for drilling fluids versus rentals and SaaS, looks like the drilling fluids revenue growth has outpaced it. Could you provide some color around what's driven this?

Yes, I think the -- William, we've previously been quite open to the market that some of the -- again, post COVID, the recovery period has taken sort of 18 months or so, and that the areas that were slowest to recover or regain running speed post COVID were areas that were higher weight in the fluids business. And so as those regions have come back online, which was initially South America, then Africa and now Southeast Asia, those areas were -- had a heavier ratio of fluids in their revenue profile than sensors. And so as those -- as investment starts to go to those regions, you're seeing a higher proportion of fluids revenue coming back in those regions, consistent with that regional activity.

And just last one for me. Looks like the margin in Africa and Europe and APAC have gone up quite substantially. Could you just -- I appreciate that you've already provided some color around some of the, I guess, tailwinds in these regions. Can you just give some specific examples as to what drove those margin expansion?

Yes. Look, there's a couple of things. So you have called out that currency was obviously a tailwind, which did feature between the two halves and reflected in the constant currency numbers. I think the other callouts, if you look at Asia Pacific, we saw Asia coming back strongly, which was one of the last regions to come back post COVID, seeing that grow in the half. We also had a -- I suppose, a higher level of rental fleet sales in Asia, in Asia Pac, in the half, which has contributed to that revenue growth. And then as you move into the other regions, the African market particularly saw strong growth, particularly in West Africa and the rental fleet and thus the margin growth that came through there. Also fluid sales were quite strong in that region as well. And as you move into the Americas, there's Canada, which we have spoken to previously, did have an uncharacteristically warmer winter and therefore, their drilling program wasn't as strong as it would otherwise have been. Plus, as we know, there was some considering of capital with the equity raising or the software equity raisings which Paul called out. We did see an increase in December and into January, which is likely to only be seen as we move into the summer program. But as you move into U.S.A., where we saw good growth, we did see South America, particularly into Chile and Brazil, strong return of growth and activity in that market.

Your next question comes from Josh Kannourakis from Barrenjoey.

Paul, first one, just with regard to the outlook statement. Could you give us a little bit of clarity just with regards to those January figures in terms of centers on hire? Obviously, that's up 2%. The commentary sort of around the Devico acquisition felt like you're comfortable for a similar second half on sort of first half, all else equal. Can you help us maybe bridge that a little bit to give a bit of extra clarity on the outlook and how we should bridge that gap between centers and ARPU, and obviously the sales into the second half on the base IMDEX business?

Yes, sure. Look I think with the 2% that was up in January over the previous average for the -- this September through January, what we're trying to show there was that the activity or the comeback in the market post Christmas was stronger than prior year, which was a good start in any case. I think what -- and reflected in our comments about our positive outlook for the second half reflects that we feel that, that growth profile -- and I'm sort of picking up on William's question previously, we know that in the second half of -- when we lead up to Christmas [indiscernible] out of second half '22. But that growth profile had slowed, but is continuing at a similar rate as we go into '23. So in that context, on the back of those comments I noted earlier about the growing activity in those Asia, Africa and South American markets, supports those positive comments into the next half. And just on ARPU, we know that there was some currency benefit in ARPU, increased -- aforementioned 8.8%, but we do expect that to continue to grow on an absolute basis with the rising tool fleet and new technologies coming to the market.

I might just add on there that just to build on Paul's point about January, Josh. I mean, 2% up on pcp. Last year was a good year, post Christmas. That start-up was good. This is slightly stronger than that, which was a faster start-up, but it also absorbed probably a weaker Canadian market where it was so warm in Canada this year that a lot of the winter drilling that would normally get done and got done last year did not get done this year. So that 2% increase over pcp is after absorbing that warmer Canadian winter season depression as well.

Got it. So just to -- I guess, maybe to confirm those. So in terms of how we're thinking about the base IMDEX business, ex Devico and the acquisitions, do you think a similar sort of second half to first half is achievable, all else equal?

Correct.

Okay. Great. Second one just really quickly. On BLAST DOG, could you give us a little bit of progress? I know you mentioned that there was some additional prototype revenues expected in FY '23. But could we just get a little bit of an update on the progress, how much revenue, if any, is expected in '23 and how we should be thinking about the sort of key milestones over this year and next.

Yes. So at this stage, we have just the 1 commercial contract that we've announced previously. What we've said in the past is that we have a number of trials in the pipeline. Our focus is to continue to execute those trials. Those trials are complicated because you need to, first of all, schedule the trial, conduct the trial, then analyze the data and work out how you would roll that back into the operations to take advantage of some of the data that gets made visual by an operation like BLAST DOG. And so we've been quite methodical about how we go about those. We have had some -- those trials, the physical element of those trials has been bouncing around with weather challenges. I mean, I think the level of rain in Queensland, and indeed in Chile, is well known. And so that's just put a slight delay on executing it, but we don't think the overall trial time line is going to change at all. And our focus for the balance of FY '23 is, as it was, just to complete those trials, go through those discussion with the clients to unlock the value of that data and bring one of those through to another commercial contract, hopefully, by the end of FY '23, which is our expectation.

Your next question comes from Mitch Sonogan from Macquarie.

Just a couple of quick ones. First up, I think you mentioned during the call that the majority of the legal costs were unpaid at the period end. Can you just provide us the quantum here and the timing of those upcoming payments, please?

Yes. Look, it was pretty much what the exceptional amount called out of $9.4 million is what was unpaid as at 31 December. And that will be paid in the third quarter of this -- in this half.

Paul, just so I've got you as well, just on the tax outlook, 32%, up from around 30% on the pcp, can you maybe just talk through the drivers there and what we should expect in the second half and going forward?

Yes, sure. Yes, look, slightly up. There are a couple of factors that caused that to be up slightly. We have largely extinguished the majority of our carryforward losses across the group. There's a certain amount there, but that has allowed the tax rate to lift up to, what I would call, the average going forward of around that 31%. 31% would be a normalized rate to go forward. So you would see -- and some -- the hyperinflation in South America has caused some of that additional expense charge in the half and in the full year.

Yes. And Paul, just maybe jumping over to Devico. Can you maybe just give a little bit more detail around, I guess, the penetration of the directional drilling tools over here in Australia, but also in the North American market? And maybe just talk about if there's any challenges to increasing the penetration or how you see that going over the next couple of years as you close that acquisition.

Yes, sure. So the direction of drilling revenue today is really focused around Europe, North America and South America. They are highly underweight in Africa and nonexistent in Australia. So we are looking for opportunities whereby our relationships can introduce directional drilling to customers that have suitable programs that we think meet the -- that have challenges that directional drilling can help solve. So introducing any new technology always requires quite an engaged body of work. So you need a combination of the resource company and the drilling company to work together to determine when you use directional drilling and then progressively introduce it on to the site. So I think that remains -- that will remain the challenge as we introduce directional into those new markets of Africa and Australia. However, it has been around 20 years, it is the #1 player. They are very adept at introducing those conversations to resource companies, particularly in Europe, North America and South America. We think that there is significant growth opportunity in all of the Americas in addition to the -- which are existing territories in which they play. And then if you roll forward, the overall thematic around drilling at depth, more complex ore bodies and requiring gradual information about an ore body, all of those play into that theme for directional drilling. And particularly with the higher cost of drilling, one of the advantages directional drilling offers is that once you get to depth, you can get to depth and then spur off the mother hole to a number of daughter holes without having to redrill that first pilot hole. And so you can do that. You save significant money. You can drill at speed. You can still recover the core. There's quite a few advantages in introducing directional drilling. But it is, of course, a change to a lot of conventional drilling practices. And so it's just about steering that conversation.

Your next question comes from Ben Brownette from Jarden.

Paul Evans, can I start with you? I see you've moved a few things around in the IMDEX Technology segment again. And so if you back out, the legal cost is about $22 million for the half. Is that about right?

That -- well, we're calling out -- if you're talking just core R&D and the reference to our 8.8% for the half, it's been $14.5 million plus the $3 million capitalized for software development. So $17.7 million would be for the half, and it could -- that run rate is -- will be similar for the full year.

Okay. So the note gives another number in there as well because the segment note is 31.4.

Yes.

In terms of IMDEX product, less than 9.4 in legal cost.

Yes. So we have our product management area, which is the corporate head office team, which is really responsible for the product if in that segment and is not a direct R&D cost. And similarly, the IP litigation plus the support for IP is in there as well and again, not part of our core R&D. So those two numbers are excluded. [indiscernible]