Trajan Group Holdings Limited (Z0M.F) Earnings Call Transcript & Summary

Good morning, everyone. I'll just give people a moment to come into the room. I can see that there's still plenty of people entering. Okay. I think we'll get started. So I'd like to say good morning to everyone who's joined the webcast today, and welcome to Trajan's full year results for FY '25, the period ending 30th of June 2025. [Operator Instructions] And today's webinar will feature a presentation from Trajan's CEO and Managing Director, Mr. Stephen Tomisich; and Chief Financial Officer, Mr. Alister Hodges, and that will be followed by a Q&A session. [Operator Instructions] Please note that we will hold all questions until the conclusion of the presentation. And I'd now like to hand over to Stephen Tomisich, our CEO and Managing Director at Trajan.

Thank you, Marie, and thank you, everybody, for joining the call today. Looking forward to sharing with you a review of our fiscal year just completed fiscal 2025. First of all, just like to be a bit of a recap on Trajan and our journey. Trajan started around 14 years ago when we made our first acquisition. And that first acquisition saw us at about $3 million in revenue and around 7 people. And today, we're more than 50x that scale in terms of revenue and around 100x that scale in terms of the team that is part of the Trajan organization worldwide. But our beginning and our consistent theme even today is to deliver a positive impact on the world. And one of the things that I think we're all really proud of is that we can stand back and look at that 14-year journey and really appreciate the positive impact that we are delivering, whether it's about assisting with drug development in North America whether it's about pathology diagnostics here in Australia or even things like ensuring food safety in Europe and in Asia right down to the ability of all of us around the world to have clean drinking water every day. In all of those areas, Trajan has been playing a role. And we play that role by delivering products and services that really underpin the quality of analytical science, science that enables those discoveries to be made, science that allows those measurements to be made that ensure those safety and health benefits are there to be delivered. And we are truly global. When we look at Trajan's business, we have the 3 segments. And the first segment is our components and consumables business. That's now a $100 million business. And it should never be confused as being interpreted as some sort of commodity or disposable type business. This is not that. That components and consumables business is very focused on what are those devices, what are those parts that interact with the sample that's being analyzed and how do we optimize the design through precision engineering, manufacture, surface coatings to ensure the integrity of the analytical result. When we look at capital equipment, that's now a global business and about 1/3 of our revenue. And that's where we combine our scientists with our engineering capabilities to solve really complex analytical workflows in the laboratory, targeting really difficult analytical work, things like how do you detect toxic components in food samples, how do you enable better understanding of the behavior of proteins in drug development. And thirdly, our disruptive technologies. And there's some really exciting things to report there. We now have a blood microsampling business that is a world leader. That is now a business that is breakeven or better. And alongside that, we have portable technologies that we're developing for what we think comes next in this world of analytical science. So we step right into fiscal '25 in review. On the left-hand side, revenue is now at a record of $166.5 million. And when we look at that performance and we look at the growth of 7.4%, we make a note on the right-hand side that, that's despite a $4 million headwind through the loss of one of the key products that we had to a particular customer. The rest of the business grew almost at double-digit rates. And when I talk about growth, it's not related to any one particular product. It is very broad across our portfolio, across our customer set and also across geographies. EBITDA profitability performance, up 26% over the prior year, a bit short of where we thought we would land, but nonetheless, still in the right trajectory, and there is some momentum behind that number as well. The disappointing result potentially is the pro forma gross margin, and we'll be able to talk a bit more about that. The fundamental cause of that was a significant mix in the channel usage for our capital equipment business. We saw significant growth in our capital equipment business, and it was globalized, but a bit of a mix in terms of direct sales compared to sales through some of our distribution partners around the world and it was primarily that channel mix that was quite extraordinary last year that caused a bit of a dilution of the margins in capital equipment. When we look at the capital situation, cash has improved. Cash flows still remain strong as we've reported in prior years. And we saw a further reduction in our net debt. So when I look at our balance sheet now and our debt leverage, we're now back under the multiple of 2 that we had spoken about publicly and had targeted. We've also made some changes to our financing arrangements, which reclassifies our long-term debt again as noncurrent. And we have additional capacity in those facilities. So from a balance sheet point of view, looking forward to what potential growth opportunities lie ahead, we're feeling in quite a robust position once again. And even though that might suggest some potential M&A activity, another thing that I just want to remind everybody of is even though Trajan has been quite active with our 12 acquisitions over that 14-year journey, we should not forget that today, about 1/3 of the revenue that we have is a result of organic growth and you can calculate based on the revenues we acquired that, that means that our organic growth rate just continues to run at that mid- to high digit -- high single-digit rate. So that's the financial snapshot, and Alister will be talking in a bit more detail later in the presentation down at the segment level. Another thing I want to touch on briefly is just to revisit Trajan's business model. Sometimes I feel that our business model is misunderstood, and I hear language like Trajan is a contract manufacturer. One of the first things to convey here is that, that is not the case. We're not a contract manufacturer. Also, there's a misconception about the ratios, if you like, between the amount of business we do through our various channel partners versus the direct business we do with our end customers. And today, the majority of the business that Trajan has around the world through capital equipment and through consumables combined, there is a greater proportion that is direct than that goes through our various partners. But nonetheless, I'd like to just point out this graphic of just how our business model works. On the far right-hand side, you can see the 4 verticals that are our area of focus, clinical, food, pharma and environmental. And one of the things we're constantly doing is looking at what is holding back the analytical workflows in these target areas. Where is there a need to underpin analytical sensitivity? Where is there potentially a need to improve laboratory productivity? And they are the types of developments we look at. We then test and work with customers around concepts and early products testing some of those advancements. And once we have a product ready to be commercialized, then we're working with our various partners around the world to identify what's the best way to scale that? What's the best way to leverage that underlying new concept, new product development in ways that can deliver the greatest impact in the fastest time frame. And that's the role that we play with our various partners around the world. And it's another attribute of the Trajan profile that when we look at each of our partners, the vast majority of them have grown with us over the past 10 years as well. Some key bullet points here, left-hand side on the top, the momentum. As I mentioned, the momentum is there, both in terms of the customer mix, the sales across the various product families, but also across the various geographies. Precision manufacturing, the 2 key words here. One is that in many of the components and the consumables that we produce, a key attribute is around physical precision because that underpins the way the sample is handled and helps to reassure the scientists and the laboratory that the results that are being produced are consistent because of the confidence of that physical precision. But being a manufacturer, combined with that says that another unique talent that Trajan has is that through our own in-house IP, through our own production engineering expertise, we then design and manufacture our own production equipment that allows us to scale those products and maintain that physical precision. And that's a difficult thing to do. Top right-hand side, in region for region. So this is probably one of the most significant changes over the current year. And that is in the first decade or so of Trajan's journey, one of our fundamental assumptions was around globalization. And everybody would be well tuned into some of the dynamics that are happening at a macroeconomic level now, particularly around the U.S. And so one of the pivots that we are doing right now is looking at changing that assumption around globalization to really an assumption of polarization and looking at how do we now start to produce in region for region. When I talk to and have dialogue with some of our industry captains around the world, this pivot is quite common that many of us in our industry are looking at now how do we embrace a strategy of in region for region. And Trajan has some advantages here. If I look at our physical footprint, our locations embedded in the U.S., our locations in Asia as well, unlike many companies of our scale, we have that agility and flexibility to be able to utilize that platform to service our customers in the proximity of where those customers reside. And that is something that is going to allow us to both mitigate some of the potential threats that the use of tariffs pose in terms of being a negotiating tool, if you like, between trading countries, but also it potentially represents some opportunities for Trajan as well as we leverage that competitive advantage. Along the bottom, it's continuing to touch on the innovation that we roll out really every year, something that may not be obvious is that while we have various new product developments and launches, we also have a very broad portfolio where we're constantly engaged in enhancements and extensions of that product portfolio. Financially, again, we would look at our current trajectory. And all things being equal, we would be, I think, reasonably bullish going into the next financial year. But as you will note, we are being reasonably conservative when we look at the outlook, and I'll touch a bit more on that towards the end of the presentation, just given the volatility and the number of uncertainties that exist out there. Some of the key highlights, again, perhaps giving you a good flavor for Trajan's business. Number one, we said that we were going to globalize our capital equipment business. What does that mean? Well, we made an acquisition in North America back about 8 years ago. We made an acquisition in Germany about 3 years ago. We've put those 2 businesses together. And what we've seen over the last year is a really healthy integration and now the development of a global capital equipment business. That business saw some significant growth into the Asian region. But importantly, we also saw that team develop global service and support strategies and more recently, starting to drive some growth in terms of software capabilities. We said that we, on the second point, had some high potential product lines, some of them coming about through the acquisitions that we've made. A good example is our plasma coating technologies that reside in Kentucky, in Louisville. That was part of the CRS acquisition. And we've now seen some significant growth there where we're able to take some of these well plates. Now these are plates used for the transport of samples in laboratories, but for very high throughput, high-volume type labs. And one of the challenges that those labs have at times is that you can lose sensitivity if the surface of those sample transport devices are not inert. And so we're able to apply a glass-like coating to those plastic plates. And that provides an enhanced sensitivity and of course, also a reliable analytical performance, very much in line with our overall vision and direction. And we saw that business grow by about 50% in fiscal '25. Third point around new product capabilities. We acquired the MS Studio platform from the University of Calgary about a year or so ago, and we have now launched the first product out of that suite called HDX Pro. And that allows us to deliver to the scientists a package that provides a far deeper interpretation of mass spectrometry data translating into protein structures. We've received our first order, and this is the beginning of a new SaaS software revenue stream for the Trajan business. It was launched at the American Society of Mass Spectrometry Conference a few months back in Baltimore, and the interest level was quite robust, and there's a suite of customers now on trial for that platform. We've continued our work in delivering product variations and extensions in fiscal '25. And the last point I wanted to touch on was the talent development within Trajan. I think many organizations have been challenged around how do you work with this new environment post-COVID in the office versus at home type setups. But one of the things that we've embraced is that there's an opportunity to reset the whole relationship between the employer and its staff, its employees. And we're pursuing ways to be more of a partner and things like introducing our volunteering program this last year, which allows staff to have a couple of days a year where they too can contribute to their local communities in line with Trajan's vision and direction. We remain as flexible as possible around working arrangements. And when we look over the last 3 years or so at the retention rate of Trajan staff in every jurisdiction around the world compared to those countries averages, Trajan is outperforming by some margin. So we have a very talented global team. We consider our team as being partners in the business. I'm incredibly grateful to that team for the contribution that they make every day. And we're continuing to work as to how do you retain and develop that talent. So it's an important part of our initiatives. The last thing I want to touch on from a product and strategic perspective before handing over to Alister to talk down into the financials and the segment detail was the second half of the disruptive technologies. So you would have seen last year, Disruptive Technologies made a loss of $4.9 million, I should say, in fiscal '24, not fiscal '25. Fiscal '24, that improved by $3.4 million. And part of that was that the micro sampling business reached breakeven and, in fact, started to exceed that expectation. The other part was our portable instrument technology, our modular technology called Versiti. This is where Trojan has been developing what I would call over the horizon technology that starts to locate the instrument itself in a modular, custom-built form right where the sample needs to be measured. And the first area of attack has been in those settings where there are bioreactors. This is happening in pharma in the U.S. It's also happening in the precision fermentation area with alternative food materials. And we've done a lot of work over the last year in terms of looking at what the need is and what is the gap between the capability we have right now in these early production models and what's required to take it down the path of commerciality. We're quite confident now that we've clearly identified that gap. We're in the process of the development of those next stage modules, and we would expect to see it progress more towards commerciality as we head towards the end of this current financial year. So that's a snapshot again of the Trajan business, some of the key initiatives that we're pursuing. And I'll come back again after Alister has gone through the segments just to talk a bit more about the outlook for fiscal '26. So over to you, Alister.

Thanks, Stephen. As highlighted, the Components and Consumables segment includes all high-precision products and services. As you can see in the graph, FY 2026 saw net revenue return to the historical growth trajectory. Full year net revenue of $102.7 million was higher than the prior comparative period by $6.5 million or 6.7%. This result demonstrates growth across many product portfolios compared to FY 2024 despite a decrease of $4 million caused by lower revenue relating to a specialized biotech syringe as reported previously. Net revenue growth is supported by the strength of this segment, including a leadership position and a high level of customer connectivity in key market segments, combined with a broad, diversified product portfolio mix comprising of mature products supported by emerging product lines. Pro forma GP margin also increased in line with higher sales volume to 41.6% over the prior comparative period of 41.1%. Resulting from higher net revenue and pro forma GP margin, full year normalized EBITDA at $34.9 million is up 8.1% over the prior comparative period. This segment is well positioned to support growth in FY 2026, particularly given Trajan is recognized as a preferred partner by global OEMs and a diversified product portfolio, including emerging product lines and the in-region for-region supply chain model. Turning to the Capital Equipment segment. This segment includes all robotic workflows automation systems, related parts, services and software. Net revenue was up by 4.9% over the prior comparative period to $58.6 million. With the geographical sales shift during the year into more price-sensitive emerging markets where Trojan still utilizes legacy distribution channels, the overall pro forma gross profit margin decreased from 40.2% to 35.1%. Full year normalized EBITDA of $3.9 million is consistent with the prior comparative period, explained by higher net revenue generated -- generating a lower pro forma gross margin. Moving into FY 2026, gross margin growth within this segment is a key area of focus for management. Moving to Disruptive. The Disruptive Technology segment activity includes miniaturized portable instrumentation, including Versiti and all products and services related to microsampling. Net revenue increased to $5.1 million from $4.9 million in the prior comparative period with a focus on micro sampling customers placing repeat orders. Pro forma gross margin in the segment grew to 57% from 52.7% in the prior comparative period with higher-margin blood microsampling products contributing 59.2%, offset by other lower-margin early-stage products, which are currently sold for investigative or research use only. Normalized EBITDA improved by $3.5 million to negative $1.5 million over the prior comparative period, reflecting a breakeven result in micro sampling for the year and ongoing investment in Versiti. Looking at cash flow. Operating cash flow grew in FY 2025, driven by higher normalized EBITDA, offset by changes in working capital and noncash items, particularly unrealized FX movements driven by the appreciation in the Euro against the AUD. Inventories increased by $1.2 million during the year to $29.1 million with continued investment in key areas to support demand signals and future growth opportunities, particularly in the Components and Consumables segment. Receivables increased due to a higher net revenue. A key advantage of Trajan's level of customer connectivity in key market segments is the high receivables collection rate to terms and very low bad debt. The expected annual rate for maintenance CapEx is $4 million per annum. And in FY 2025 CapEx included the asset acquisition of Mass Spec Studio software, which will complement Trajan's HDX platform. Net debt was reduced by $3.3 million to $29.5 million, improving the net debt-to-equity ratio to 28% and the net debt to normalized EBITDA ratio to 1.9x. Finally, late in the financial year, Trajan's long-term debt arrangements were renegotiated, moving to a new debt provider, resulting in a return to the balance sheet disclosure of long-term debt into noncurrent. Thanks, Stephen.

Thanks, Alister. Just to talk a little bit now about the current setting and the Trajan performance. We are a global business. That means that we are producing products in various jurisdictions and shipping in and out of the U.S. to various customers. And so the arrival of tariffs, the volatility in tariff settings, both by the U.S. and also some retaliatory tariffs by other nations creates a little bit of a challenge for us. We've also seen some reduced funding in the U.S. government agencies, for example, the NIH and the CDC. And some of the capital equipment business is often related to funding that comes through those channels. But nonetheless, the business remains resilient. We've seen this business go through COVID, go through stocking, restocking cycles. And we've also seen now in a similar vein, our ability to respond to some of these challenges. For example, some of the products that we were producing in one of our U.S. facilities that was servicing our customers, shipping them into China. We've been able, in a matter of 8 weeks to set up and be able to replicate some of those production activities into our Malaysian operation and being able to switch to provide product in region for region for those Chinese customers. We've also seen the ability of us to transfer some of our glass technologies from Australia into the U.S. to service better some of our U.S. located customers. And we're continuing to work now on the evolution of this in-region for-region strategy, and we're well positioned to do that. We are seeing some margin benefit from the deployment of our automation and technology transfers, but we have a way to go there. I would like to see us improving our gross margins at a faster rate. We also still have scope for further improvement in terms of the productivity that we're realizing out of our Malaysian operations, and we have a team focused on that and confident that in the longer term, we will achieve our goals there. But I think as most people know, we went from a greenfield site there to now something like 180 staff on site and have transferred a significant amount of activity into that facility in Penang. Touching briefly on ESG. It's another area where we've been making steady progress. Over the last year, we were able to do the baseline emission measurements for Scope 1, Scope 2, Scope 3 emissions. We've been able to make some practical differences in terms of addressing packaging materials, a mix of renewables energy supply to some of our facilities here in Australia and into Malaysia. We've also been able to do some practical things that in line with ESG. For example, we noted with one of our major customers that there were some products that we would produce for them where we would scrap them simply based on cosmetic issues. Functionally, they were absolutely fine. And so we're able to work with that customer to divert those products instead of going into the scrap heat and contributing to waste to be utilized by them in other ways other than for resale. And that really speaks, I think, of our overall approach to ESG. We're doing it in and pursuing improved sustainability and a reduced footprint, but in ways that are in line with also improving the business. We achieved an EcoVadis score in 53%, which is a good rating. And EcoVadis is becoming really the standard that I'm seeing in our industry. I recently went to a conference in Chicago and a number of the industry participants would have on their conference booth their ratings from an EcoVadis score perspective. And so we'll continue to make progress in this current year, and it's a background activity that is steadily making progress. So as we look at the fiscal year at hand, we're in a strong starting position. And I have to say if all things were normal, but it seems like in the Trajan journey, all things are never normal. We'd be sitting here, I think, quite robust and bullish about going into this next financial year. But there's a lot of variables that are playing out, particularly with government funding in the U.S. tariff settings and whether or not we will see some stabilization of those tariff settings. So in that light, we also -- as directors of the Trajan Board, we had some lengthy conversations about the merits of providing guidance or not in that degree of uncertainty. And what we felt was the best thing to do was to certainly indicate that despite all of that volatility, we still have strong confidence in this business and expect to see growth, top line and bottom line growth. Now the extent to which that may happen, we're quoting some fairly broad ranges here, which are indicative, I would say, of a conservative view of what we would expect to happen this year, taking into account some of that volatility. And so that takes us into fiscal '26, and I think takes us to the end of that presentation. And so back to you, Marie, happy to take any questions that may have come in.

Thanks, Stephen and Alister. And I'd like to now open up the webinar to questions. [Operator Instructions] And our first question was a preregistered one from an investor, and it's how do you see the impact of the U.S. Australia relationship impacting the business over the next 12 months and the next 4 years?

A question that I'm sure many business leaders will be grappling with when they have a business that is producing products in either jurisdiction and shipping to the other. The setting right now between Australia and the U.S. compared to many other jurisdictions seems to be reasonably stable. So in the current setting, we are confident to be able to march forward with our business in a relatively unaffected way. But of course, if there was some significant deterioration of that relationship if, for example, for some reason, we saw tariffs escalate for Australia-produced product, then we would need to respond to that. Having said all that, again, I would point to the resilience of our business model in particular. So if a worst-case scenario played out there and there was a deterioration between our U.S. operations and our Malaysian operations, we are in a position to be able to pivot and to be able to offset to a large extent to whatever effect that might have on our business.

And our next question is looking at key end markets, are you seeing macro volatility dampen underlying demand? And do you expect global pharma R&D activity levels to improve given outlook for cost of capital?

So in the first part, where we're seeing the most uncertainty at the moment with capital equipment funding is in North America. And in those research projects, some of those collaborative projects that had some sort of tie into government agency funding. In some cases, we can see projects potentially being canceled. In other cases, we can see them being delayed. But nonetheless, when I look at our global opportunity funnel for capital equipment, at the moment, it's still holding up reasonably well. An interesting trend that we are observing is that while that's happening in North America, there is some underlying strength in our pharma business in Europe. And I haven't ascertained if there's a correlation there or relationship there, but -- we are certainly seeing some of the weakness in capital equipment in the U.S. being offset by some gaining strength in Europe, and that may indeed be related to some of the funding dynamics as highlighted in the question.

In the in region for region supply chain repositioning largely -- sorry, is the in-region for region supply chain repositioning largely complete? And what are the impacts on gross margin in FY '26 and beyond?

So it is not complete, but we have made very significant progress over the last 3 months. We are looking at each of the jurisdictions and product lines on a case-by-case basis. The audience will know that Malaysia now has a 19% tariff that was imposed at the beginning of this month. That creates a situation where we're looking at to what extent do we uplift further U.S. capability to offset that, to what extent might that cause some minor margin erosion and to what extent would some of that be passed along in terms of pricing to our customers. So there's a mix there. One of the things that we would like to see, I'm sure many would like to see is does this volatility settle down. So it's difficult to say that something is complete when if we reflect over the last 4 months or so, the way that tariffs have moved, the way that short-term escalations have been implemented. And indeed, if we reflect that the U.S.-China situation is still at play and how might that develop and where might that land. So we are continuing to stay very close to this, not doing any knee-jerk type reactions. And as we deal with each situation determining what is the best method to counter the risk that it presents -- but I'll just remind everyone that we're also looking at in each of these cases, what opportunity does it present for Trajan as well as we start to have that in-region for-region capability and closer to some of our end customers.

The next one, do you have a debt target for longer term? And are you happy around the 1.9x leverage?

I've mentioned before that our target was to get under a leverage of 2. We're there now. I'm comfortable at that sort of level. I can see right now that our requirement or our desire to cause further debt reduction probably isn't as urgent as it was, let's say, a year or 2 ago. We have additional head space in our new facilities. And I'm feeling pretty robust about the way we've been able to rebuild that balance sheet, get more favorable funding arrangements in place and really position us now for what comes next.

And how much exposure do you have in large pharma versus small pharma?

A lot of our pharma business is large pharma and the organizations that are adjacent to that, so contract research groups and so forth.