IMDEX’s shifting business model
In this week’s video insight IMDEX’s (ASX: IMD) CEO Paul House joined Dominic Rose to discuss the businesses recent first quarter FY23 result. The result showed stronger revenue growth than the market was expecting despite all the macro doom and gloom. Paul House also discusses the businesses shifting business model and new products.
Dominic Rose: Welcome to the Montgomery Small Caps CEO series. Today we are lucky enough to have a regular guest back with us, Paul House, the CEO of mining technology company, IMDEX (ASX:IMD). Paul, good to see you and appreciate you making the time to chat today.
So lots of topics to cover today, Paul. Why don’t we start with your recent first quarter FY23 result? Can you take us through a few of the highlights of the quarter, which showed much stronger revenue growth than the market was expecting, despite all the macro doom and gloom out there.
Paul House: Well there is a fair bit of uncertainty out there, but as we’ve long said, we think the underlying fundamentals for our industry have been strong. And the first quarter certainly showed that. We saw strong growth through July, August and September, respectively, a continued trend of strong demand in North America and Australia. But interestingly, we saw a strong influx of investment into the African region. And so the way we look at our business across all of our metrics, the portfolio of growth across our products, HUB-IQ adoption and the like, we saw a good uptick in tools on hire, the way our software products are being used effectively, and good strong long-term demand across all of those regions.
Dominic Rose: Paul, there are some market concerns around a potential downturn in exploration spend over calendar year 2023, based on softer capital raisings amongst the junior gold miners, and noting S&P’s recent predictions of double digit declines in exploration spend over 2023 before recovering again in 2024. Interested in your view on this outlook, and perhaps you could remind us of your exposure to the junior gold explorers plus commodity mix. While gold has been challenging, the green metals activity’s been very strong.
Paul House: There is always more volatility in the junior sector than in the broader marketplace. From IMDEX’s perspective, we are less exposed to juniors than the total amount of exploration spend that takes place, so we are watchful of what happens in the junior area because it is a good pulse check of what is really going on at the edge of our industry. And whilst we’ve seen some projects around the world pause or slow down while they look to raise cash, we are however seeing strong ongoing demand in all regions around the world, as we outlined in our first quarter result. A lot of the narratives that we have with our major resource companies speaks to continuing to find ways to complete drilling programs that they’d planned last year, making those commitments for next year. Most drilling companies have forward order books that are nine to 10 months clear to them, and historically that would only be three or four months.
And so whilst there may be some pressure on juniors, the majority of them still remain well-funded. They can raise some monies, albeit it is a little harder at the moment. And that’s probably more a reflection of the broader risk off in the market than it is about the underlying industry fundamentals, which do remain positive.
There is another dynamic playing out, and that is that as some of the junior resource companies slow down their rig utilisation, the major companies are looking to step in. And so it’s a little bit like switching gears as you move from second into third, you’ve got to take your foot off the accelerator a little bit and I think that’s what S&P is referring to when they look to that slight shift in activity at the end of FY23, calendar year ’24.
Dominic Rose: In your result, you also touched on supply chain pressures easing. Can you help us understand, what you’re seeing there and what that means for your working capital and cash flow positions?
Paul House: It’s no secret that the time taken to ship products and to get the raw materials required to construct products has lengthened during COVID. We saw growth in our net working capital in FY22, and what we called out at the end of FY22 is that those supply chain pressures had eased. IMDEX is well secure in its ability to secure raw materials and we’re certainly seeing that inventory levels that we need to maintain are now at what we would call BAU or their normal operating levels and are not worsening. We expect to see some of that release as supply chain delivery times improve over time. Fortunately, the IMDEX business, none of our stock and none of our holdings are perishable or fashionable, sorry to say, but it does mean that we do have capital deployed in that area that we’re looking to get back as supply chains continue to improve.
The labor side’s a little more interesting. And whilst IMDEX is relatively labor light, unfortunately our industry can be quite labor heavy, and so we are expecting that labor challenges in North America and Australia will continue to remain a challenge for a while. So despite some of the macroeconomic uncertainty, you still have fairly low unemployment levels in North America and Australia in particular. So until you see that shift, you’re still going to struggle to see labor move into the industry and stay in the industry. The flip side of that is you’re starting to see some of the drilling companies upgrade their rig fleets to more modern fleets that require two FTEs rather than three FTEs. So there’s a lot of activity going on to try and alleviate that pressure of labor in our industry. And again, I think you’ll see that a feature of our industry for the next one to two years.
Dominic Rose: So we’ve touched on what’s happening on the ground at the moment, but why don’t we shift the conversation into something a bit more big picture. In a recent presentation you gave, you highlighted that IMDEX’s business model continues to shift. So just coming back to the earlier comments around market fears of potential downturn, investors do like to go back and check the history books and see what happened last time, but it does sound like IMDEX is a very different business today and continues to evolve. So maybe you could provide some color on that evolution of the business model.
Paul House: It’s something we’re very proud of. Our teams around the world have done a really great job at shifting our business model. Historically, we had a narrow range of fluids and a narrow range of tools that we would rent or sell to our customers. Today that business model is a much more complex portfolio of sensing tools, software solutions to enhance those sensing tools and a fluids portfolio that’s complemented with rental products that help improve drilling performance in the market or in the field. And so that additional complexity means that we shift from a product, by product type go to market model to a much more integrated solution model. That means that we’re working closer with resource companies and drillers together, and optimising the solution for any given ore body. As a result, we’re seeing that the number of IIMDEX products that we’re looking to deploy on any given site, is greater today than it was at any time in its past.
And there’s two reasons for that. One is our R&D investment has been specifically focused at how can we build the next set of products that complement the existing set of products and how can we provide better quality, better quantitative representation and faster data back to our customers? And the key for us in that space has been our HUB-IQ platform. So the ability to get any of the drilling data or any of the rock sensing data into our HUB platform so that whether you’re a driller or a resource company, you can see that data anywhere in the world in near real time and make the next decision now, that’s been a key feature.
And so for us, I think if you go back five years, the percentage of our revenue that was connected through our HUB platform was 8 per cent. Today it’s 32 per cent and it’s a key metric inside of our business. It’s a key metric for our clients who are looking to see greater utilisation of the data that they originate being acted on in real time because that ultimately makes a better business for them. So between that as our portfolio and how we work with our clients and the geographic shift as we see a stronger activity in the Americas in particular, those two things are starting to shift the portfolio business pretty heavily. And Dom, that’s before we start talking about our shift into the less cyclical production side.
Dominic Rose: Well that’s a good segue into my next question, Paul. We should probably finish up with the new BLAST DOG product, which does extend the exposure to the mining production phase. Please walk us through the product, what it does, why it’s special, and help us understand the size of the prize.
Paul House: So I should point out firstly, the extension from exploration and resource definition into production is a very logical strategy 101 play. So it’s the same resource company, it’s the same ore body, and it’s ultimately the same rock measurement properties or the same drilling activities that you’re trying to measure as we do in our existing business. So it is really truly a fundamental relationship that we already have. It’s a core capability that we already have. What we’re working on, is how do we take those technologies and change the workflow so that it’s useful in production and give an answer that’s useful in production. And so that’s what we’ve been working on with our borehole stabilizer product for drilling optimization and our BLAST DOG product for rock knowledge sensing, and indeed our MinePortal and HUB-IQ products for the data capture and data analytics.
Now, BLAST DOG in particular has been a five year journey of investment. It was a Horizon 3 project that has made its way all the way through to commercial prototype, and pleasingly, we saw our first contract up at Iron Bridge announced when we did our first quarter results this year. So what that tool does is it’s a multi-sensing logging tool that is important technically to capture a large amount of data altogether. But it’s also important operationally to be able to survey not just every 10th blast hole, but every single blast hole, and not just look at the data later, but again to provide that data in real time. And so that holistic product, everything from its robotic and automation capabilities to its real time data capture capabilities to the 3D visualization that you can do in MinePortal, it’s an end to end solution that we’re very pleased to see getting its first run.
On top of that commercial contract, we now have a number of trials in the pipeline lined up, three underway and three more planned. And we’re looking to complete those in FY23 with a view to turning a couple of those into a commercial contract by the end of the year.
Dominic Rose: Thanks, Paul. And so we should probably let you get back to the day job now. Thanks for your time today. Always good to catch up and talk about your business. Take care.
The Montgomery Small Companies Fund own shares in IMDEX. This video was prepared 1 November 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade IMDEX you should seek financial advice.