Trajan Group Holdings Limited (TRJ) Earnings Call Transcript & Summary

Thank you, everyone, for being part of this morning's call. It was only in June last year that we took Trajan to IPO, and that was after 9 years of consistent expansion and growth. We went to IPO because we felt that with additional capital, we could really start to realize the potential of this business. So we went to the market. We provided solid guidance around what we thought the underlying business would achieve in terms of revenue and profitability throughout fiscal '21 and then fiscal '22. We also highlighted that we would take the majority of the funds raised at IPO and deploy them into our active M&A pipeline. Well, here we are a year later. We've performed as we said we would. We've invested over $130 million in our M&A program in the last 12 months. And as we sit here today, Trajan is more than double the size that it was when we went to IPO. So this is a story of a planned execution of our plan and delivery of the outcomes. It's about our vision becoming a reality. And we've taken the business now to a very different scale. We've expanded our customer set. It's a broader range of customers that we're now servicing. You'll see in this morning's presentation that we are getting traction now around the technology adoption through the significant pipeline of new technologies that we've had under development. And we've delivered on each of the financial metrics that we had forecast, and we're not done. There is more to come. Here are the key bullet points. We've seen revenue in the last 12 months grow by over 40% to reach $107.6 million. The good news behind that is that again, it's so broad. There's underlying organic growth of just under 11%, still running at that strong double-digit rate, and that organic growth is across multiple customers, multiple jurisdictions and also a very broad range of applications. If we look at the performance in just the half year of the acquisitions that came on board, they have also successfully integrating to Trajan and overdelivered both in terms of revenue and in terms of EBITDA contribution. Normalized EBITDA came in strongly at $12.5 million. And again, a combination of us being able to manage the business through a whole range of headwinds that the world has been experiencing, but also that strong underlying consistent performance of the Trajan business and the solid contribution of the new acquisitions that we brought on board. And you'll see here the other key point is that our margin expansion, again, tracked spot on with where we had forecast that it would be, and that's at that 41.9%. The key operational highlights now to talk about is that -- let's remember the Trajan already completed 7 acquisitions before the start of this fiscal year. So this makes 11 that we now have under our belt. And I think our track record there is very strong in terms of successfully being able to identify businesses that synergistically align with us, but also can be brought under our umbrella in a way that respects culture that realizes the benefits over a period of time. 4 key acquisitions in this last 12 months, but also a strategic and quite important investment in Forth With Life in the U.K., taking us a lot closer at his society and the deployment of scientific measurement to the consumer. You'll see me today also touch briefly on microsampling because microsampling is key to our long-term vision of the decentralization of health care. And if you like, in many ways, health equity, making measurement and signs available more broadly and Hummingbird, our miniaturized instrumentation platform has also made good progress in the last 12 months. Just to recap here. If we look at this table on the left-hand side, I just want to highlight what we said at prospectus just over a year ago. We gave guidance at the time in terms of fiscal '21, fiscal '22 revenues and also normalized EBITDA for those 2 fiscal years. And if you look at the actual results, we're within a very low single-digit percentage of where we said we would be. Then the next table down, we can look at the acquisitions that have come on board, what we expected based on the track record of those acquisitions prior becoming part of Trajan. And again, they have delivered in line with what we expect. In fact, a little bit better than what we thought would happen in that first period of time under the Trajan belt. And then in the lower part of the table here, the guidance that we updated back in February around our revenue range and also the guidance that we provided in February and again in June around our profitability. And you can see that the normalized EBITDA has delivered in line with those projections. So what's my message here. My message is that we are a business that plans and executes, I think quite methodically. And while we are at times confronted with volatility and headwinds like many of these issues that are highlighted on the right-hand side of this screen, we are a strong management and leadership team that's able to look at those adverse, if you like, evolving type conditions and mitigate risk and be able to maneuver in ways to retain our performance trajectory. So now we're confident and pleased to be updating our outlook for this fiscal year. We think in this fiscal year '23, that we're now looking at revenues heading up towards $160 million and an expected normalized EBITDA range between $21 million and $25 million. And I'll repeat what I said at the opening. I mean that is this fiscal year right now. Right now, we are running at a rate that is around double where we were just over a year ago. We have truly changed scale in terms of the enterprise and the activities and the growth of the business. If we get into a little bit more detail here around revenue and normalized EBITDA, you can see the revenue trajectory on the left-hand side. It shows the actuals for the last 3 years and our forecast range for this current year. But don't forget, there's another 6 or 7 years before that, that showed a similar trend in terms of consistent growth since the inception of Trajan back in 2011. When we look at the $107.6 million, I highlighted earlier, that around $22.7 million of that was contributed by the acquisitions. And the rest is the organic growth that's still running at around about that 11% number. If you look at the percent gross margin, the expansion has been tracking as we had hoped and expected. And when you look at our fiscal '23 projection, that's really a result of us assuming we land roughly in the midpoint of that revenue range, and if that was the outcome, roughly where we think that margin would land. On the right-hand side, again, you can see the trajectory around normalized EBITDA. And importantly, when you look at the percent EBITDA margin trajectory, what we've done is looked at the midpoint of our projection and roughly where we think that we'd land if we achieve the midpoint of that range. So the takeaway message on both of these screens is progress, growth in line with our expectation and in line with the execution of our strategic plans. If we look at the segment analysis, Analytical grew around 15%. Around 1/3 of that growth was related to acquisitions. We have put a small portion of the LEAP PAL Parts business into that Analytical segment. And on the right-hand side, you can see the significant growth in the Life Sciences area, and that's largely due to the fact that the majority of the acquisitions in this fiscal year fell into that segment. If you look at the gross margin trajectory on the Analytical side, you'll see that it's been holding steady. But as you can imagine, that steady number is actually the outcome of some pretty strong opposing forces. We saw costs escalate quite significantly in the fiscal year. And we also saw a little bit of a dilution of margin because of some of the LPP products that went into that segment reporting. You might have seen in some of the notes already that the conflict in the Ukraine detracted around $0.6 million in revenue from the Analytical portfolio, and that revenue was also at a healthy margin. On the flip side, we've seen now the benefit of growing sales through the existing infrastructure and the sort of margin expansion we expect from that. And we're starting to see some of the benefits of Project Neptune play out here. Right-hand side, the growth in the margin, the businesses that we've acquired running at a significantly higher margin than the pre-existing Life Sciences Solution business. So from a segment perspective, again, the sort of trajectories that we had expected and some nice healthy progress in terms of gross margin performance. Let me just spend a few minutes and getting into an operational update here. One of the things that is important to us is how we behave as a global business. I think most of the audience here understands that the vast majority of Trajan's customers and businesses is not located in Australia. And over the last year, we've seen our presence, our footprint, our staff become increasingly located close to customer. It was just over 5 years ago that we set ourselves a goal that by about now, more than half of our staff should be outside of Australia, closer to our customers. And in this fiscal year, it was a significant milestone to see us go through that barrier. It's now only around 45% of staff that are located here in Australia. And importantly, we're heading towards 150 staff in the U.S., which is our largest market and now starting to have some real critical mass there close to our major customers. You can see the growth in our Malaysian operations, and we're really pleased with how that's been progressing. And of course, we can see in Europe with the Axel Semrau acquisition, the numbers increasing significantly there in Germany. So we are truly a global organization, not just in terms of our customers and revenue, but now increasingly in terms of where we are, where our teams are located. If we look at these acquisitions in a little bit more detail, there's a good news story tied to each one of these. Axel Semrau came on board in November of last year. And in many ways, it's been a light touch from our perspective in terms of the integration of that business into Trajan. That has been very supportive in terms of providing the team with the backing, the support, the guidance that they've needed in some cases. And in many ways, that's helped them to expand their growth rate and their order book reached record levels in this fiscal year. We have invested now in a new warehouse facility located next to the existing Axel Semrau facilities and we see that being used in the future, not just for Axel Semrau, but for the broader Trajan group located within the European zone. Axel Semrau now is working more effectively in Asia and the Trajan Japan organization is now partnering with them strongly. And we've recently appointed a business lead into the Malaysian area to start to expand growth of the business in Southeast Asia. And I think that highlights as well that our Malaysian facility isn't just about excellence in assembly and manufacturing, but increasingly will become a Southeast Asian hub for the business. Neoteryx, what a start exclamation mark, incredibly pleased with the rapid progress we have made there. This is the team that has led the adoption of microsampling around the world. And the pivot that we have done with Neoteryx is instead of just being product focused to be technique focused. And what we mean by that is that we're quickly establishing our position as being the go-to organization from microsampling tools. With Neoteryx came the Mitra device. We've now taken our hemaPEN device, our microbiopsy device and merged them all into the Neoteryx organization, making California head office for microsampling and also the center of activity around how we drive adoption in microsampling. And that commercial activity has now been accelerating across that group. They are already integrated into our global ERP system and something we were able to bring forward quite quickly well as to take their assembly operations and start to relocate those 2 into our Penang, Malaysia facility. This week, we are now producing commercial Neoteryx Mitra devices in Trajan's operation in Penang. And that, again, is a pretty impressive achievement given the short amount of time that Neoteryx has been part of the group. With LEAP PAL Parts, we've seen a nice extension of the customer set into the group that they were servicing. We are now rapidly progressing towards site consolidation in North Carolina. We have 2 sites at the moment. One was the LEAP PAL Parts site. The other was the LEAP technology site. We've identified a new location where we will be consolidating the 2 operations together. And we're already starting to see some of the benefits of flowing Trajan manufactured product are alongside the LEAP Parts business into their customer set and that we think will continue to expand in this fiscal year. And of course, with a few days to spare at the end of the fiscal year, we acquired CRS. And by November, our goal is that we will see globalization of the supply path to market for that business. And so we're rapidly working on integrating the full product line into Trajan Asia, Trajan Europe, so that we're able to provide growth for that key business as well. So the takeaway here is how have these acquired businesses performed under Trajan in the first 6 months or so. And the answer is to plan, if not better than plan and very pleased with the progress we've been making with the group. Some of the key other points around operations. Project Neptune has started to deliver gains, and you'll see in the numbers, we invested about $0.5 million in this fiscal year. The investment is accelerating. We successfully appointed a new regulatory resource in the U.S. based in Massachusetts with significant background experience working with the FDA. We've made some great progress already in terms of understanding some of the limitations that the Neoteryx business may have had, in particular, around FDA approvals and registrations. And so we're quite confident in addressing some of those issues. And the other point I want to make here was that is very pleasing this year to see the business at a Bethel, Connecticut emerge with around 21% growth. I was asked last year of all the acquisitions that we made, were there any of the concern me. And I did share the concern that last year, after about 2.5 years, we weren't seeing the growth added Bethel that we had expected, that had remained relatively flat. Well, I'm very pleased to say that in the last year, we've seen that change and now running at quite a significant growth rate out of that facility. And of course, that flows into gross margin expansion benefits because we've always known that the operation there has been underutilized and this growth allows us to start to see the benefits of leveraging that capacity. From a new technologies perspective, briefly, I wanted to touch on Hummingbird. Hummingbird is portable instrumentation technology that Trajan has developed. We see it having 2 key areas of application. One is in pharma, and we've continued to work with a major customer in the U.S. around those pharma applications. And the second has been an emerging application in the environmental segment. You can see the instrument here located literally on the back of a truck down into Tasmania, where was doing some work detecting forever pollutant in water samples, but we're seeing similar work done here in Melbourne utilizing the system to detect forever pollutants in soil samples. The results are proving to be quite impressive. And so ahead of us now, we have the challenge around how we take this product to full-blown commercialization. It's not going to contribute significantly in the next year or so, but we think it is a product range that over the next 3 to 5 years has quite significant growth potential. I now just want to spend a little bit of time talking about microsampling. I emphasized microsampling at the half year report out. The reason I do that is because our vision of personalized preventative database health care is absolutely dependent on the broad adoption of remote sampling, taking analytically credible samples outside of the clinical setting. And what we've seen, particularly since the arrival of COVID, is that the attitude, the paradigm around the utilization of at-home measurement or at-home testing or indeed at-home sampling or out of the clinic sampling has changed significantly, and that works in our favor in terms of driving the adoption of microsampling. We saw orders perform as we expected in the first 6 months, 6 acquisition, but we're now seeing this commercial team secure orders for the hemaPEN device. We're Seeing the order rate accelerating as we go into fiscal '23. And to give you an example, there is around a dozen pharmaceutical drug trials happening sponsored by large pharma utilizing Trajan's microsampling devices right now. We have a range of proposals that seem to be growing as well around in-pharmacy use, at-home use, companion diagnostics, direct-to-consumer, digital health companions, utilization in pediatrics and the monitoring of infectious diseases and so forth. So as the capabilities of microsampling becoming increasingly evident, we're seeing the inquiries accelerate as well. Now the next sentence, training completed this month for in-space use. That means exactly what it says. And it will make [IC] quite an interesting story that we recently did conduct train for the use of some of our microsampling tools in orbit to be utilized in a zero-gravity environment to allow sampling in that situation. And I think it's going to be a huge market anytime soon. But again, it starts to highlight once you can sample in these ways, you start to consider all different types of approaches that can be taken. We've seen the commercialization now of microsampling -- our microsampling tools with a partner in the U.S. for looking at biomonitoring or what we call environmental exposure. And pretty soon, you're going to see the full range of Trajan's microsampling products hit the market under a brand-new website and under a consistent Neoteryx brand. Neoteryx is going to be our identity. It's going to be our flagship brand for driving microsampling. This slide here, my second last one, again, I wanted to highlight because you'll hear more news about this very soon. This is a key partnership we have been conducting here in Melbourne with the Baker Heart and Diabetes Institute. They have worked on, and we've been working with them since 2019, an artificial intelligence tool to assess the cardiovascular risk from serum or blood samples. So this tool measures hundreds of biomarkers in blood and applying smart learning and smart algorithms able to take that data and start to become predictive about cardiovascular risk actually calculating a number that we refer to now as metabolic age. The combination of that technology in partnership with Trajan really now allows us now to start to demonstrate our vision in reality. So what I mean by that is that the lab that we have here in Melbourne that has been part of our extraordinary investment in commercialization of new technologies is combining our microsampling tools, our lab automation products as expertise now in method development to be able to create a streamlined process to work with these samples and to generate the output, to generate the data. And as we progress towards a medical laboratory certification, we intend to complete this solution and take it from research on, which is what it is today, to a registered diagnostic. And that operation, all of these activities, again, has been made possible by going to IPO just over a year ago. And by the additional access we've had to capital through the IPO process that has allowed us to invest in those areas that we saw just like this, where we see the potential to accelerate our growth and to realize our vision. And the last slide, you may have noticed that we quietly launched a new endeavor, a new initiative called MonitorYou. So MonitorYou is Trajan's first step towards providing access to scientific data that relates to human health and human well-being to the consumer. And our first steps in this space has been to start to work with a business-to-business type model around corporate well-being but we've also been working with our own teams. And indeed, it speaks to, I think, the investment and the dedication of the Trajan team here that around 30 or 40 staff already under our ethics guidelines have been participants in the development of this new platform. You can go and have a look for yourself at monitoryou.com. But it's all supporting our trajectory towards progressing our medical laboratory accreditation here in Melbourne which is primarily around demonstrating and driving the global commercial adoption of microsampling technologies. So that's my final slide there. I do want to wrap up by saying that, now Trajan is very much not just about Steven and the management team, but now about 660 people around the world. And most of you probably haven't met most of those team members, but they are a very impressive group and the vast majority of them are dedicated to a mission, are dedicated and motivated by what it is that we're delivering around the world. I'm incredibly proud of them and incredibly thankful to them because it's their efforts, their dedication and their skills and expertise that has allowed us to achieve what I think is quite an impressive list of outcomes in our first year as a public company. One of the things that you can notice about Trajan is that we have some of the, I would say, most talented and experienced people across the industry, and they choose to be part of this team really because of who we are and our true purpose-driven vision and driven culture and strategy as we execute around the world. And so if nothing else, it is the talent that we have that gives me increasing confidence about what lies ahead with Trajan. So thank you, everyone, for being part of the call today. Thank you for listening and very happy to take a few questions.

[Operator Instructions] Our first question is, how do the supply chain challenges you experienced in June are a capital items being resolved? Have you recognized these revenues?

One of the things that we highlighted as we approach the end of fiscal '22 was that in putting together our complete workflow solutions, what we referred to as our capital equipment business will be delayed in realizing revenue because of the delays in the supply chain seeing some of our electronics supplies, some of the component, even some of the instrument supplies to us pushing out significantly items that were once delivered in 4 to 6 weeks, taking 16 to 18 weeks. So the answer to the question, I think, has 2 components to it. One is that those systems that were delayed, we realized in the fiscal year what we thought we would and we are completing those installations as we go into fiscal '23 of the ones that we couldn't realize before the end of the fiscal year. But the good news is that the order pipeline has continued to remain strong. So we still see the stream of orders coming in for our capital equipment businesses. At the same time, the supply chain delays are still there. So we are still seeing us taking longer to realize the full cycle between receiving an order, being able to configure and commission a system and then deliver to a customer and realize and recognize that revenue. I'm hopeful that by the time we get to the end of this fiscal year, those supply chain issues will start to tighten up a bit, and we'll be able to see the order book reduce a bit back to its normal historical levels. But at the moment, it's purely a timing issue and nothing else. It's not hindering our progress. And clearly, it's not hampering our growth.

Our next question with increasing cost of running a business, have we increased our product prices, if so, how are customers accepting them? And how are we placed in the market competition?

Yes. Thanks, [ Samy ]. That's a great question. You would have seen in the presentation that in the analytical portfolio, gross margin percentage stayed the same as the prior year. And that was the outcome of those competing forces, the cost escalations that we saw, offset by some of the initiatives that we've had underway, particularly Project Neptune. We implemented a price increase across the board very late in the fiscal year in June. And so in these numbers for fiscal '22, there really is no benefit being realized from that price increase. I'm pleased to say that the increase has rolled out without any major disruption. And the vast majority of customers have been quite understanding and can see that what Trajan has done in quite a transparent way has been to execute a necessary price increase to offset some of those headwinds that we've been experiencing with cost escalations. And so we expect in fiscal '23 that we'll be able to continue to offset those cost increases through the pricing actions that have already been taken.

The guidance range of $150 million to $160 million, what does this guidance assume in terms of organic growth for the base business?

So we're continuing to assume high single-digit growth in the organic business. And I should highlight that, that projection for fiscal '23 does not include any assumptions around any further acquisitions. So this trajectory that we're on right now, we believe will land us at those numbers based on the business that's at hand today.

You referenced some accelerated investment in your manufacturing facilities in FY '23. Can you tell us what the quantum of that incremental investment is for FY '23?

I might refer to Alister to speak to that a little bit. What I meant by that really was around the investment in the Malaysian activities and the investment in Project Neptune. The cost structures for a Project Neptune and the level of capital equipment investment we're expecting there has been outlined previously, and we can refer back to that. It was around, as I recall, $2.7-or-so million over the 3-year period, and we're continuing to pursue that plan. The overall investment into the Malaysian facility isn't as capital intensive, it's more around the continuous growth of the team there. And you can see that we have grown from around, as I recall, [ AGI ] staff to begin the fiscal year to around 130 now. We think we'll hold that number roughly for the remainder of this fiscal year. Alister, I don't know if you want to comment any further on that question around ongoing investment in the manufacturing expansions.

No, look, Stephen, nothing specific to a [indiscernible].