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Edited Transcript of ALQ.AX earnings conference call or presentation 21-May-19 3:00am GMT

Full Year 2019 ALS Ltd Earnings Call

MILTON , QLD Jun 24, 2019 (Thomson StreetEvents) -- Edited Transcript of ALS Ltd earnings conference call or presentation Tuesday, May 21, 2019 at 3:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Luis Damasceno

ALS Limited - CFO

* Raj Naran

ALS Limited - MD, CEO & Director

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Conference Call Participants

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* Alexander George Philip Karpos

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Craig Wong-Pan

Deutsche Bank AG, Research Division - Research Analyst

* James Redfern

BofA Merrill Lynch, Research Division - VP

* John Purtell

Macquarie Research - Analyst

* Michael R. Aspinall

CLSA Limited, Research Division - Research Analyst

* Nathan Reilly

UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials

* Paul Butler

Crédit Suisse AG, Research Division - Director

* Peter Drew

* Rohan Sundram

MST Marquee - Gaming and Contractors Analyst

* Siraj Ahmed

Citigroup Inc, Research Division - Associate

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the ALS Limited Fiscal Year 2019 Results Presentation Conference Call. Today's call is being recorded.

At this time, I would like to turn the conference over to Raj Naran, Managing Director and CEO. Please go ahead.

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Raj Naran, ALS Limited - MD, CEO & Director [2]

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Thank you, Christie. Good afternoon, and thank you for your attendance today. With me is our CFO, Luis Damasceno; our company's Secretary and General Counsel, Michael Pearson. I will present the highlights of our fiscal year 2019 performance as well as provide an overview of all operating business streams. Luis will then provide commentary on our financials, an update on our capital management as well as discuss other financial matters. The call will be then open to questions. I will take the investor presentation of our full year results as being read, and I'll only refer to individual slides as appropriate during my commentary.

As noted on Slide 4, today, we announced an underlying net profit after tax from continuing operations of $181 million for the fiscal year 2019 exceeding the guidance range of $170 million to $175 million provided to the market in November 2018. The result was 27.3% higher than the comparative underlying net profit after tax for the previous year. This was a good result for ALS, especially off the back of a strong performance last fiscal year and ongoing market volatility. I want to take a moment and thank the management team and our staff for delivery of this result.

Slide 5 demonstrates our continued strategic revenue growth in our noncyclical businesses in an environment that showed strong growth in our Commodities division. Our strategic plan is working. The strong financial performance reflects enhanced levels of profitability and organic growth across all regions in Life Sciences, our market-leading position in the business has leveraged to the expanding mineral commodities sector and acquisitions in high-growth areas of Food and Pharmaceutical in mainland Europe, Latin America and North America.

As noted on Slide 6, the company delivered a 15.1% growth in revenue with 84% of that growth being organic revenue growth or 12.7% total organic revenue growth across all businesses. The Commodities division underlying contribution was up 35.8% with higher revenue and EBIT coming across from the geochemistry, coal, Inspection and Metallurgy businesses. The Life Sciences Division delivered a strong revenue growth and margin improvement across all regions with total revenue up 13.3% and margin up 110 basis points, leading to an underlying segment contribution increase of 21.8%. The Industrial Division revenue was up 9.9% driven by successful business development efforts focused on maintenance-related services, however, their EBIT was down 18.3% due to reduced margins associated with the change in mix of services and price pressure particularly in Australia.

Slide 10 provides an update on our key priorities. Luis will talk to finance and capital allocation. Of note on this slide is our continued investment in learning and talent development within the organization to support our continued growth of the company as well as our strengthened M&A governance and processes that has resulted in an increase in our M&A pipeline.

Slide 11 provides an update in our continued investment in innovation and technology as we position ALS to be the TIC company of the future. We continue to partner with world-class technology institutions, invest in robotics and automation, introduce the Internet of Things into our businesses, globalize our software platforms and use data analytics to solidify key client relationships. We are also beta testing multiple artificial intelligence projects across all businesses.

The Life Sciences Division continued its consistent pace of growth during the year-end discussions by strengthening its leadership position in existing markets and new geographies. A strong strategic growth focus, both acquired and organic, continues to be placed on food and pharmaceutical components of Life Sciences in key geographies in Australia, Asia, North America, Latin America and Europe. Key building blocks to accommodate these newer businesses are in place ready for future growth. The division's financial performance exceeded expectations, with total revenue growth of 13.3%, driven by 7.9% organic growth. The division delivered a significant margin improvement of 110 basis points. All regions within Life Sciences were successful in improving their EBIT margin. This improvement is a direct result of continuous and focused implementation of the initiatives around cost management, rationalization, the introduction of new technologies and the positive results obtained from the full integration of the ALcontrol business in the U.K., which was acquired in December 2016. Further acquisitions and greenfield startups are being targeted for the fiscal year 2020.

Slides 14 and 15 provides the estimated available market size for the food and pharmaceutical markets and further validate our focus for growth in these markets.

Now on to commodities. Stronger market conditions and scalable business models drove significant improvements in the Commodities division financial results for the year. Geochemistry sample flows increased globally as both established mining clients and junior explorers continued to lift their activities -- spending levels, particularly in the first half of the fiscal year. Sample flows were 7% higher than the previous corresponding period, which translated into a 31% improvement in underlying contribution at an underlying margin of 30%. While cost management remained a focus for the geochemistry business, equal attention was paid to productivity and timely injection of human and capital resources to service the increasing workloads.

Slide 18 shows our updated sample flows. Although sample flows were up 7% for the entire year, the second half sample flows were flat compared to the prior year due to an extended slow season and uncertainty in global trading conditions, which seem to be temporarily reducing investors interest in this sector. It was disappointing to see the overall decline in sample volumes during the fourth quarter, however, sample volumes with our major clients still improved during the same period. Sample volumes from our junior miners declined due to the lack of available funding for exploration. We have seen an improvement in capital raisings in the last 2 months as noted on Slide 20, and the long-term drivers for the commodity market remain strong as noted on Slide 19.

It is important to note the journey, growth and diversification of all businesses in our Commodities division. Our geochemistry business has grown its global footprint and increased its wins and revenue contribution in mine-site projects. Our Inspection business continues to grow organically and globally with the recent acquisition in Chile, and greenfield startups in South Korea, China and Mexico. Our Metallurgy business has shown strong organic growth globally, and our coal business has had important wins in mine-site services and market share gains particularly in Australia.

Industrial Division recorded revenue growth of 9.9% delivered by substantial increases in work volumes in both the U.S.A. and Australia. The Asset Care business delivered total revenue growth of 11.5%. Investment in business development efforts focused on maintenance-related services, solidified the partial replacement of revenue shortfalls in the reduced activity in LNG construction and power station outage programs in Australia and materialized significant growth in the U.S.A. The transition to longer term but lower margin maintenance-related services resulted in an overall decrease in contribution to EBIT.

The Tribology business continues to deliver solid growth with revenue up 7% across global operations as a result of improved conditions in the Australian mining sector and increased business development activities globally. The business yield a strong profitability, notwithstanding the underlying contribution margin was slightly down to 21% compared to 24% during the same period last year.

I will now turn the call over to Luis.

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Luis Damasceno, ALS Limited - CFO [3]

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Thanks, Raj, and thank you, everyone, for joining the call today. I want to start by providing some highlights on the financial summary on Slide 25. Revenue growth from continuing operations was 15.1%, of which, as Raj mentioned, 12.7% was organic. It was really reassuring to see this strong organic growth across all divisions, with Commodities growing organically 21.7%, Life Sciences 7.9% and Industrial 8%.

Underlying EBIT margin from continuing operations increased from 15.3% in 2018 to 16.9% this year, thanks to improvement in Commodities margins across all business and as well improvement in Life Sciences margins across all regions.

Interest expense is up $6.2 million and this mainly attributed to the increasing debt due to the funding of acquisitions, while the surplus of new free cash flows had been directed mainly to CapEx initiatives and to the share buyback. Underlying tax expense from continuing operations of $67.1 million represents an effective tax rate of 27%, which is up slightly from 26.7% in 2018. And this increase is due to the higher levels for which the whole income tax paid on distribution of (inaudible) from related products.

From 2020 on, it's expected that the group's effective tax rate will trend higher as the recently enacted Australia anti-hybrid measures will start to impact ALS from the first part of the year. This will likely add approximately 1% to 2% to the underlying effective tax rate in future years.

But in the coming years, the group also expects to have the effective tax rate benefit from the lower U.S. corporate income tax rate environment as the loss-making U.S. oil and gas operations are closed and the quantum of interest cost with the U.S. is expected to decline aligned to the upcoming refinancing.

Discontinuing operations comprise the entire oil and gas-led segments, which was classified as discontinued operations starting 2018, following the decision to sell the business. After considering several options for the oil and gas-led business in the U.S., the company decided to close it. The financial impact of this event is reflected in the divestments impairment chart column.

On the dividends, a final dividend of $0.115 per share and in total $0.225 per share for the full year, represents 60.4% of underlying net profit after tax from continuing operations and an increase of 32.4% compared to last year. The company policy remains to pay between 50% and 60% as a ratio of underlying profit and effect should be towards the top of that range during the recovering commodity cycle. The dividend will be paid on July 1 and franked to 35%. And I want to add that it's important to note that the company intends to maintain its practice of distributing franking credit to shareholders as quickly as it accrues them, while it's still likely that this percentage will be kept in the short term, future franking levels will depend of course on the mix of tax paid in Australia versus offshore.

Turning now to capital management on Slide 26. I'd like just to make a couple of comments on the share buyback. As you know, the share buyback of up to $175 million was announced in November 2017 and later extended for 12 months to a total amount of $225 million through December 2019. To date, $131.4 million has been bought back at an average price of $7, having 18.7 million shares being bought, which represents 3.7% of the original base. We expect the buyback to continue through December 2019, in the absence of any significant acquisition opportunity during the next months.

Looking now to cash flow on Slide 27, please note that this numbers here cover all operations, both continuing and discontinuing. The main highlights for this year free cash flow are the improved EBITDA, as already outlined. The strong cash conversion of 93.7% of the EBITDA into cash despite the organic revenue growth above 12%. And this result is a reflection of our continuous focus in working capital management.

The good cash generation enabled us to invest $180.9 million in CapEx, which is an increase of $35.5 million to last year. The main driver for this increase besides the expected increase linked to revenue evolution is the investments in growth projects. As for example, equipments for new testing methods or expansion of existing facilities and startup operations in Life Sciences as well investments in business expansion in the Industrial business. We consider that these investments are an important part of our strategy to accelerate growth in the most cyclical business complementing the M&A strategy.

I'd like also to note few points on the investing financing activities. First, the acquisition in food, pharma and commodity, inspections with total investment of $65.8 million, we had also net proceeds of $5.7 million from the divestments of a couple of small business from our portfolio, and finally, our market share buyback in the amount of $24.6 million and the payment of dividends of $98 million.

Moving now to Slide 30. On debt metrics. The March 2019 numbers reflect the company's focus on capital management. As we see, at the end of 2019, we have the leverage ratio at 1.8x EBITDA, gearing ratio at 36% and EBITDA interest cover at 10.9. All metrics indicates that the company maintains a very strong balance sheet, positioned well for the future growth.

Looking at the debt maturity and CapEx profile in the lower right part of the slide, it's important to note a few points. First, the undrawn bank debt capacity of $392.8 million in yellow composed by the revolving multicurrency bank facility renegotiated back in October 2018. And also in April 2019, the company placed new long-term USPP senior notes totaling $252 million equivalent, which is not reflected yet in this picture, which in fact portraits the debt profile as of March 2019.

The new USPP insurance comprised by 3 tranches, each of 15 years tenure and composed by a mix of currencies, will extend significantly the company's weighted average debt maturity profile to 5.3 years and reduce the funding costs by approximately 20 basis points. The funding will become available in July 2019, and the proceeds will be used to refinance near-term debt maturing also in July. This insurance will preserve existing funding facilities for future investments as part of the execution of the company's strategic plan.

Finally, referring to the pie chart at the bottom left of the page. The debt nomination has changed by the amount drawn from the Australian -- in Australian dollars from the bank facilities put in place in October 2018.

At this point, I will hand it back to Raj for final comments.

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Raj Naran, ALS Limited - MD, CEO & Director [4]

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All right. Thank you, Luis. I guess in summary, in the absence of any prolonged trade uncertainty, the underlying global economic conditions in which ALS businesses operate continue to remain stable and the outlook for fiscal 2022 is positive.

With a platform underpinned by strong balance sheet and prudent capital management structure, the group is set to take advantage of opportunities in the environmental, pharmaceutical, and food sectors and leverage its assets, market share and reputation in the Commodities division. Combined with the continued internationalization of the business through consolidation of its hub in the U.S.A., global diversification of the Board and the senior executive team, ALS is on target to deliver on its strategic objectives and consolidate its presence as a leading provider of services to the global TIC sector. The company intends to follow its usual practice of providing formal financial guidance for the first half at the AGM on July 31, 2019. Thank you for your time and attention.

I will now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question.

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Alexander George Philip Karpos, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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This is Alex Karpos from Goldman Sachs. First of all, congratulations on the results. One quick one from me. Just want to dive a little bit into that sample flow commentary. I appreciate the color on the trade disruptions impacting the result. But has this weakness persisted into the first half thus far of the year? And any more regional color on how it's driving that?

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Raj Naran, ALS Limited - MD, CEO & Director [3]

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Yes. So thank you for your question there. I mean we have seen continued stability of the sample flows through the first half of this year. I think I mean our expectation is we should see sample flows remain stable through the first half. I think from my perspective, what we're seeing in capital raisings, we expect to see an uplift during the second half of this year, but currently sample flows still remain stable relative to the same period last year.

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Alexander George Philip Karpos, Goldman Sachs Group Inc., Research Division - Equity Analyst [4]

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Got it. And then by region any differentiation or is that a global trend?

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Raj Naran, ALS Limited - MD, CEO & Director [5]

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It's a global trend. I mean most -- what we're seeing is probably Australia slowing down slightly, and again, I think some of it's geopolitical, some of it's funding. We are seeing other areas around the world that continue to show strong growth though, especially where our major clients are operating.

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Operator [6]

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And we'll take our next caller.

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Michael R. Aspinall, CLSA Limited, Research Division - Research Analyst [7]

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It's Michael Aspinall from CLSA. Firstly, just on geochem, price and mix looks to have contributed to me at least 16% to geochem revenue in the second half versus, say, 9% or 10% in the first half. Even if prices don't move much from here, how much growth should we expect in FY '20 from the run rate of higher prices flowing through?

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Raj Naran, ALS Limited - MD, CEO & Director [8]

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So our expectation for the Commodities business during this new year is probably -- we're expecting to see low double-digit growth come out of the business.

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Michael R. Aspinall, CLSA Limited, Research Division - Research Analyst [9]

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And then do you have a split for geochem as well or just that's for the Commodities overall?

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Raj Naran, ALS Limited - MD, CEO & Director [10]

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Yes. What we've seen is -- I think the expectation is to see it across all businesses while knowing that we haven't seen any movement, I mean, the rest of the businesses within the Commodities sector, the Inspection, Metallurgy, Coal, still continue to perform well. So really what the growth in the Geochemistry we expect -- we expect to see growth in Geochemistry, but it's really a factor of funding and capital raising.

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Michael R. Aspinall, CLSA Limited, Research Division - Research Analyst [11]

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Okay. Great. And on Life Sciences, the Americas grew revenue by 16%. Can you break that down into South America and North America?

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Raj Naran, ALS Limited - MD, CEO & Director [12]

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Yes. So typically, we don't provide that detail, but it's fair to say, in terms of general commentary across all the Life Sciences business, while we showed a strong improvement in margin across all the businesses. All regions had a minimum of at least 40 basis points improvement in margin, and we've seen similar sort of performance in EBIT contribution. So -- and that's -- and I'll preface that commentary because I'm sure it'll come up in the call that we still are seeing flat revenue growth in the U.S.A.

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Michael R. Aspinall, CLSA Limited, Research Division - Research Analyst [13]

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Yes. Great. That's what I was trying to get at and see if that had turned around yet. It doesn't look like it. On food and pharma, EBIT margins, it seems to me that they might have gone backwards. You had very strong revenue growth and 5% EBIT growth. Can you just run us through the dynamics for that business?

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Raj Naran, ALS Limited - MD, CEO & Director [14]

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Yes. So for the food and pharma business, I mean that business -- typically, the way you grow that business is, you grow the microbiology part of the business, which is a low EBIT margin part of the business, which attracts the higher chemistry. So the second half of this year was really growing the business in terms of revenue, so we saw more microbiology come into the business and the expectation is that now we'll see some of the higher margin work -- all that microbiology will attract some higher margin work in this fiscal year. So it's really a step-wise growth and it's performing as expected.

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Michael R. Aspinall, CLSA Limited, Research Division - Research Analyst [15]

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Okay. Great. And one last one, this one might be for Luis. As you noted in the accounts that if the acquisitions you made had occurred at the start of the year, continuing impact would have been $169 million. Can you just confirm what the right comparator is for that? I mean if it's statutory impact left for discontinued or does it exclude some of the restructuring costs as well?

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Luis Damasceno, ALS Limited - CFO [16]

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Yes. The right comparison would be this statutory number that we have in the financial report, that we have $166.9 million, if I'm not wrong from -- by memory, yes. The starting point.

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Operator [17]

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And we'll take our next caller.

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Paul Butler, Crédit Suisse AG, Research Division - Director [18]

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It's Paul Butler here from Crédit Suisse. I just want to ask a question about the margin improvement in Life Sciences. So I think, all of that improvement that you've seen has been in the second half where I think the margin was up 240 basis points versus the prior year, versus a 20% decline that you saw in the first half. So I'm just wondering can we -- should we assume that, that 240 basis point improvement is also likely to play out in the first half for FY '20?

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Raj Naran, ALS Limited - MD, CEO & Director [19]

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Yes. So our expectation on a full year basis for FY '20 is that we should see a total of 50 basis points margin improvement for the entire Life Sciences business.

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Paul Butler, Crédit Suisse AG, Research Division - Director [20]

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Okay. So that's just cycling what you've already achieved? Or is that factoring in further improvements in the business?

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Raj Naran, ALS Limited - MD, CEO & Director [21]

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Well, I think the expectation is we'll continue to see further improvements, but we're also going to benefit what we are achieving because some of the margin improvements have been efficiency improvements, rationalization, so there will be a continuous effect there.

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Paul Butler, Crédit Suisse AG, Research Division - Director [22]

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Okay. Because given the result that you had in the second half, I would have thought that the improvement for full year '20 should be a similar level to what you've done in '19 because it looks like all of this benefit has come in the second half?

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Raj Naran, ALS Limited - MD, CEO & Director [23]

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Yes. But a part of that there, Paul, is we've also seen benefit and it will only benefit us through the first half of this year is the work, the [Bahai] dam project that we saw down in South America that was a one-off project unless work continues there, but the expectation is we see benefit of that come through in February and March, and we will see benefit go on for another 3 or 4 months and then that project will come to a standstill. So I think if I just look at the underlying benefit that we demonstrated in terms of just overall and continuous margin improvement, the expectation is, I think, that would be about 50 basis points on an ongoing basis.

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Paul Butler, Crédit Suisse AG, Research Division - Director [24]

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Okay. Then on the Commodities business, I think you've told us you're expecting the sample flow in Geochemistry to be relatively steady in the first half. What have you been seeing in metallurgy and the other parts of the Commodities business?

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Raj Naran, ALS Limited - MD, CEO & Director [25]

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The other parts of the Commodities business are performing as expected. So all of those businesses have budgeted for growth and they are -- so far, we've only seen 1 month of data. So April is the only month that we've got visibility into. And we've seen those businesses for the first month perform as expected. So we're not seeing any difference in those businesses.

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Paul Butler, Crédit Suisse AG, Research Division - Director [26]

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Right. So it's a similar trend to what we've seen for the second half of FY '19. Is that fair?

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Raj Naran, ALS Limited - MD, CEO & Director [27]

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Yes. I mean, I think when we start comparing trends and we look at looking at the same period of PCP, we've got to sort of all come to grips with the fact that it's off a much higher base. So even -- we are seeing improvement, and we're seeing good improvement, but in terms of percentage improvement, I think you'll see the percentages numbers come down a little bit because it's off a much higher base.

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Paul Butler, Crédit Suisse AG, Research Division - Director [28]

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Okay. And just one final one, if I may. Last -- in FY '19, the pace of the buyback, I think slowed down quite considerably compared to what you'd done in the prior year. I think, you've got about $94 million to go up to the $225 million. How do we -- how are you sort of thinking about what's a sensible pace to continue the buyback at?

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Raj Naran, ALS Limited - MD, CEO & Director [29]

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Yes. So from our perspective, Paul, we've always said that the buyback is part of our capital management strategy. So in the absence of good acquisitions, we believe that the buyback is a very efficient way to return money to our shareholders and the next best investment is ourselves. We've eased up on the buyback, we've got a -- we've had a strong pipeline of M&A activity which we're in various stages of diligence and completion, we completed some of them this last fiscal year. I think we completed $66 million worth of that. Some of the other money was used and we're starting to provide some visibility in terms of our spend in greenfield start-up and organic growth projects, and we see that similar to investments in acquisitions, we just -- it's just a more efficient way to grow the company.

So I think in the absence of good acquisitions or -- then we'll continue the buyback, and if we've got a full pipeline, then we'll sort of keep our money till we get these acquisitions over the line, and again, we've always stated that we will not do an acquisition for the sake of doing an acquisition. We've got a very rigorous M&A process, so if it passes due diligence and gets Board approval, we'll move forward with acquisitions, and then again, in the absence of that we'll do share buybacks.

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Paul Butler, Crédit Suisse AG, Research Division - Director [30]

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Okay. So you've said in Life Sciences, you're expecting the M&A activity to accelerate. I guess if that plays out then there's probably not going to be a lot of the buyback completed, is that fair?

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Raj Naran, ALS Limited - MD, CEO & Director [31]

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That's a fair assumption.

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Operator [32]

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And we'll take our next caller.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [33]

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Just on the sample volume growth, just clarifying, you're saying first half '20 has been stable so far because fourth quarter as you can see from the chart has been pretty weak, so have you seen an improvement? I know it's only one month, but just trying to see if you're seeing any improvements in (inaudible) flat now, is it?

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Raj Naran, ALS Limited - MD, CEO & Director [34]

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Yes. So Siraj, we've seen a slight improvement.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [35]

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Okay. And just on the regional commentary. Do you think Australia is weak? Other participants have said Canadian junior has been an area of weakness. Are you seeing anything similar or is it really Australia that's been impacted?

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Raj Naran, ALS Limited - MD, CEO & Director [36]

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Yes. So I think with Canada -- and again, I'll preface my comments, I'm not a Canada's expert in any sense of the word. But what we are seeing in Canada is a fairly aggressive movement of capital away from the resource sector into Canada. So even a lot of the publicly traded shell companies have been acquired, so they can be a vehicle for -- so we have seen that shift. What we have seen in Canada over the last couple of months is we've actually seen money raised in Australia being deployed into Canada because of the lack of funding in Canada. So I think your commentary is fair and we have seen that as well.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [37]

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Sure. And if you could just mention, what's the mix of majors and juniors in your business -- in your geochem business, if you could?

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Raj Naran, ALS Limited - MD, CEO & Director [38]

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So we still -- about 70% of our business is our majors.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [39]

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Okay, okay. And just moving on to Life Sciences. I mean, you previously talked about a medium-term target of 17% EBIT margins. So if you're showing 50 basis points, the next year it's 15.5%. So is 17% still the targets or...

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Raj Naran, ALS Limited - MD, CEO & Director [40]

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Yes. So I think for us, I mean, originally -- and again, I understand the comment. Originally, we thought we could get to 18%. We tempered our comments to say we could get between 16% and 17%. For me, I believe the journey started with Life Sciences. I mean, we are seeing a strong improvement actually better than expected. On my part, I saw -- we saw that margin improvement for this last fiscal year. And I think as long as that discipline can be maintained and we get contribution coming out of the U.S.A. I mean, the U.S.A. is the piece that is still a drag on the Life Sciences business there. We are starting to see improvements there. We've made -- as we noted in our commentary, we've made some management changes there and the expectation is that we'll see improvement. So again, without sort of putting a number out there, I think as long as we get on the journey, I think we expect continued margin improvement.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [41]

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Okay, sure. And just on acquisitions. I mean, can you just talk to the pipeline? You previously commented on what the pipeline is looking like. If you could you just mention what is the quantum of acquisitions should we look at -- should we be considering for FY '20?

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Raj Naran, ALS Limited - MD, CEO & Director [42]

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Yes. So we've always -- we indicated when we first talked about our 5-year strategic plan that we felt we'd need between about $300 million to $350 million worth of acquisitions to achieve our strategic plan. Just to cover off on the strategic plan, we are now entering our third year of that strategic plan, and we've achieved our strategic plan the first year, we've achieved our targets for the strategic plan of the second year. And for this year, I think between now and the end of our strategic plan, the expectation is that we should do about $200 million worth of acquisitions. And our current pipeline is much bigger than that, with the preface that these are at various stages in due diligence and not all of them are going to pass our due diligence criteria.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [43]

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Sure. Just a couple of questions for Luis. Just on the CapEx, obviously, it stepped up in the second half, as you mentioned, because of investments. What should we think of CapEx for the FY '20? Because, I think previously you guided to 4% to 5% of revenue, do we assume the same ratio?

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Luis Damasceno, ALS Limited - CFO [44]

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Yes. In the last 3 or 4 years, the average was around 5.1% or 5.2% of revenue. This year, as we mentioned, we have invested in stock up and growth projects in order to foster organic growth for the upcoming years. For the next year, we believe that we'll be back to about 5.3%, 5.2%. That's more or less the average that we had in prior years. So as we have significant opportunities that we have in greenfield operations that we're going to evaluate the opportunity to invest. But that will be the general guideline, about 5.3%.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [45]

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Okay, sure. And just clarifying, Luis, just on the tax comment, I didn't quite catch that. Did you say the taxes -- effective tax rate will be going up like by 1% next year or just...

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Luis Damasceno, ALS Limited - CFO [46]

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Yes. It's expected to grow through 1% to 2% next year, and it is related to the anti-hybrid measures that we have in Australia on the tax side.

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Operator [47]

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All right. We'll take our next question.

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John Purtell, Macquarie Research - Analyst [48]

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John Purtell from -- can you hear us?

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Raj Naran, ALS Limited - MD, CEO & Director [49]

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Yes, we can John. Thank you. Sorry, I don't know what happened with...

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John Purtell, Macquarie Research - Analyst [50]

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Just had a couple of questions, if I can. Just circling back to commodities, Raj, you mentioned a low double-digit growth expectation for this year. Just to confirm that you're referring to revenue?

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Raj Naran, ALS Limited - MD, CEO & Director [51]

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Yes.

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John Purtell, Macquarie Research - Analyst [52]

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So just picking up then on that, the -- obviously, the sample flows are flat in terms of, I guess, particularly that first half. You were expecting an ongoing positive contribution from price and mix along the lines of what we're seeing through fiscal '19?

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Raj Naran, ALS Limited - MD, CEO & Director [53]

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Right. And we saw -- I mean -- and I guess, I'll -- the basis for my commentary there is we saw that happen during the second half of this year. I think we'll continue to see that flow through the first half of this year. And the expectation or the hope is that we will start seeing activity pick up again in terms of sample volumes in the second half of this year.

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John Purtell, Macquarie Research - Analyst [54]

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And just the second aspect, a question for Luis. But just in terms of restructuring costs, below the line. What do they relate to and which segments? And should we expect these to continue going forward? Or would they reduce in size?

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Luis Damasceno, ALS Limited - CFO [55]

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They relate to -- the restructuring factors -- the restructuring costs and there's (inaudible) that we have in that particular line. The restructure costs, we believe that should be going down in the upcoming year. Of course, this is a result of the fact that we're continuously looking for opportunities to redesign and optimize the organization and to consolidate labs, for instance, in order to improve margin. And any time that we have a decision to implement such kind of initiatives, you might have restructuring costs that arise from that. As well in the years that we accelerate the startup investments, you might see also a pickup in those costs. So it's the kind of cost that we most likely continue to see in the future as we continue to optimize organization and grow the business. But I would say that I would not expect to go up next year, and in fact as a percent of revenue this year, it even came down compared to prior years.

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John Purtell, Macquarie Research - Analyst [56]

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Were they more prevalent then in Life Sciences or Commodities, if you had to categorize?

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Luis Damasceno, ALS Limited - CFO [57]

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I would say that we have primarily in Life Sciences and Industrial and a little bit in Commodities as well. I would say start up more in Life Science and also Industrial, and the optimization and consolidation of the ops is pretty much across all the business -- all the business we look for opportunities for efficiency.

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Operator [58]

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And we'll take our next caller.

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James Redfern, BofA Merrill Lynch, Research Division - VP [59]

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James Redfern here from Merrill Lynch. Just a few questions please. In late January, there was a presentation -- ALS release and you were expecting 8% to 10% for sample volume growth in the second half of FY '19. So to see such a sharp drop in the March quarter and then have flat growth in the second half, that must have come as quite a surprise to you. Just wondering if you can comment on that. And then also, what gives you confidence that we will see low double-digit growth in sample volume growth in the second half of FY '20? And I have got some after that.

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Raj Naran, ALS Limited - MD, CEO & Director [60]

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All right. Thanks, James. I mean, I think your commentary is fair. We went into a normal seasonal, slow season or low season and really the drop in sample volume was unexpected. Again, I think we're all aware of the lack of capital raising towards the end of calendar year. But the expectation is that we would see a pickup as the field season started up again. So the sample volume dropped during the last 3 months or in the fourth quarter where the acute drop was unexpected. I think for us, as we look into sort of this next year, the general fundamentals continue to be strong in the economy. I mean, we're not seeing a softening of the economy. I mean, there is a lot of uncertainty. There's some geopolitical issues going on. There's still high demand. Inventory levels are at an all-time low. So most inventory levels probably only have 12 or 18 months' worth of inventory out there. So those need to be replenished. And there's also a high demand for what we would call all the energy or rare earth metals, so all the battery elements, lithium, cadmium, vanadium. We're also seeing a high demand for copper. So we're not seeing a reduced demand. And at some point, the inventory has to be replenished. I mean -- so my view is, as -- again, if the political uncertainty continues, then I would not expect to see volumes tick up in the second half. But if all of that settles, I do believe that we'll see increased spend in exploration and we'll see more funding flow into the sector. And that's the expectation on our part, right? So again, I think that's where my commentary is based around. And it's also based -- we're not seeing a drop with our major clients. What we are seeing a drop in -- it's a fairly acute drop is with the junior explorers.

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James Redfern, BofA Merrill Lynch, Research Division - VP [61]

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And then just on geochem, what were the price increases in the second half FY '19 and what you're expecting for FY '20?

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Raj Naran, ALS Limited - MD, CEO & Director [62]

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Yes. So on -- I think for the second half, we saw about a 3% to 4% price increase, and that's continuing. I mean, those are being carried forward into this fiscal year. So I think the expectation will remain there. I don't think we'll see anything better because of the reduction in sample flow. So everybody's got capacity right now.

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James Redfern, BofA Merrill Lynch, Research Division - VP [63]

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And then any CapEx guidance and -- with regard to acquisitions in FY '20? Historically, it's been provided...

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Raj Naran, ALS Limited - MD, CEO & Director [64]

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So CapEx, I think, Luis talked about that, spending about 5.2%, 5.3% of revenues in -- for CapEx for this coming year predominantly for growth in capacity. And again, acquisitions, we've sort of indicated what we intend to spend over the next 3 years. And we've got a full pipeline. We'll see what sort of comes -- passed due diligence and passes our internal criteria. But the expectation is our M&A activity will increase or has already increased. It's just a matter of what comes over the line and we close. So we should see that -- relative to last year, we should see an increase in M&A activity.

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James Redfern, BofA Merrill Lynch, Research Division - VP [65]

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One more question, if I may. Just really quick one on the Industrial Division. The margin dropped to 10% because of the more maintenance activities in Asset Care. Is this going to be an ongoing phenomenon? So is the 10% margin for Industrial what we should be assuming going forward?

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Raj Naran, ALS Limited - MD, CEO & Director [66]

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Yes. I mean, I think that business, if it performs at that level, it's reasonable. We have -- and that's the expectation. We do not expect to see continued margin deterioration. But we are seeing a fairly strong growth in the business in the U.S.A., because up until this point, the bulk of that business has been Australian-based. So hopefully, we will see that margin stabilize and improve. But currently, we don't expect the margin to drop any further.

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Operator [67]

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And we'll take our next caller.

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Peter Drew, [68]

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Peter Drew here from Carter Bar. Sorry, just I've got a couple of questions on Commodities and a couple of questions on Life Sciences. Firstly, on Commodities, can you just confirm, just so I'm clear, are you saying that volumes, like financial year-to-date, are less in Geochemistry?

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Raj Naran, ALS Limited - MD, CEO & Director [69]

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So what we -- yes, so what we said, Peter, was that volumes for the full -- for our full financial year that -- for fiscal year '19 improved 7% relative to the same period last year. So if I had to compare fiscal year '18 and fiscal year '19, we saw a 7% growth in sample flows. But what we saw was the second half of this past financial year, sample volumes were flat relative to the same period in fiscal year.

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Peter Drew, [70]

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Yes. But I mean -- so I mean -- sorry, just to clarify, I mean, fiscal '20 year-to-date, because just in -- on Slide 18, it just looks like the volumes are tracking down sort of year-to-date about 10%, just by that chart, although it's very hard to see. But I'm just wondering where are you at? Now you're saying you're sort of steady. I just want to clarify what steady actually means? So into FY '20, how Geochemistry volume is tracking year-to-date?

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Raj Naran, ALS Limited - MD, CEO & Director [71]

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So okay, I see. I guess, as for FY '20, what we're seeing is sample volumes are probably about 5% to 7% lower than the same period last year.

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Peter Drew, [72]

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Yes. Okay. So in terms of...

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Raj Naran, ALS Limited - MD, CEO & Director [73]

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So what we saw was -- yes. So I'll just clarify that, Peter. So what we saw in April was sample volumes were reduced relative to the -- so what we saw in April, sample volumes in April '19 versus the same period of April '18, we saw a reduction in the sample volumes. What we're seeing in May is we're seeing sample volumes remained flat. So if I compare sample volumes in May relative to the same period in May last year, we're seeing sample volume stabilize. Does that makes it clearer for you?

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Peter Drew, [74]

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Yes, that's good. And so as we ramp up into the field season, obviously, the volumes get larger. So that getting a flat outcome really starts to flatten out the numbers. And then so -- so in terms of you sort of thought -- are you thinking around low double-digit revenue growth for Commodities for the year. Should we be assuming that in the first half, you might get slightly below that, supported mainly by price and mix, less volumes and then it sort of turned around a bit in the second half where it's more driven by volume and you get less benefit from mix and price?

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Raj Naran, ALS Limited - MD, CEO & Director [75]

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I think that's a fair evaluation of it.

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Peter Drew, [76]

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Okay. And then just looking -- just one for Luis. Just looking in the notes, there was about $9 million in restructuring taken in Commodities. Could you just clarify what that related to, please?

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Luis Damasceno, ALS Limited - CFO [77]

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This is related to oil and gas, the discontinued operations that we had already reported.

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Peter Drew, [78]

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Okay. I see, I see. Because you've got 2 columns in there, one discontinued and the other one is Commodities. So I wasn't quite sure on that. And then just skipping over to Life Sciences. I guess, there's a fair few sort of moving parts. You're guiding to sort of 50 basis points improvement in margin this year. But in terms of the moving parts, you've got investments in greenfield, you've got the food and pharma business, which has a different margin profile. And so I'm just wondering, I guess, would you give us a bit of an idea of what you're thinking about organic revenue growth for Life Sciences? Do you think you can sort of maintain that mid-, high single-digit sort of level for this year?

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Raj Naran, ALS Limited - MD, CEO & Director [79]

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Yes. So I believe we delivered about 7.9% or 8% organic revenue growth this past year. And the expectation is we'll do the same moving into this new financial year.

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Peter Drew, [80]

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Okay, great. And then just lastly, could you just give us a bit of an idea of, I guess, where you see -- the EBIT margin of 15% for FY '19, a very big improvement in the second half. I'm just wondering on that EBIT journey to 16%, 17%, where do you expect to get that? How much of it is internal restructuring, how much of it is kind of operating leverage?

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Raj Naran, ALS Limited - MD, CEO & Director [81]

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I think it's -- Peter, it's a combination of both. I mean, I think we're -- we continue to restructure as appropriate. I mean, the change in management in sort of the North American Life Sciences business was expected because of the lack of delivery of performance there. I believe we've got a good strong management team in place. And so I don't believe there's additional restructuring to be had there. So the expectation there for this financial year is that the businesses that have been performing will continue to perform and the businesses that haven't and which really is predominantly now around the U.S.A., we expect an uptick -- or uptick in their performance. And we have seen signs both in March and April that we are seeing that business improve. So I think that's where the overall performance of that business will come from.

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Operator [82]

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And we'll take our next caller.

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Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [83]

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It's Craig Wong-Pan here from Deutsche Bank. Just one question firstly on your like organic growth projects. Could you just provide some more details on what those are and (inaudible)?

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Raj Naran, ALS Limited - MD, CEO & Director [84]

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So yes. Okay, yes. Well, thank you for your question. I mean, our organic growth projects really are about greenfield startups. So we've got a multiple list of greenfield startups. We did greenfield startups in -- across all the businesses. So we did greenfield startups in geochem. We did coal. We did a lot of mine site projects. We're doing greenfield startups in the food and the pharmaceutical and environmental. So these are projects like greenfield startups with the pharmaceutical businesses in India, expansion of our geographic footprint in Thailand, refurbishing of some of our facilities and increasing laboratory capacity in the U.S.A. and across the globe. So those are really what we relate to when we talk about our greenfield projects or organic growth.

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Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [85]

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Okay. And do you expect that to be profitable after how many years? Is it a long startup or are they pretty quick returning projects?

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Raj Naran, ALS Limited - MD, CEO & Director [86]

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Yes. So typically, the expectation on our end is once the business is fully accredited, we expect to see positive contribution within 2 years.

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Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [87]

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And then my final question is just on your Everest targets. I'm not sure if they are specifically in your strategic pane or not, but are you still aiming for that $3 billion of revenue and $400 million of operating profit in 2022 excluding acquisitions?

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Raj Naran, ALS Limited - MD, CEO & Director [88]

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So in finish, you said excluding acquisitions?

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Craig Wong-Pan, Deutsche Bank AG, Research Division - Research Analyst [89]

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I think the comment, like when you first put out was to exclude significant acquisitions, so it would include some bolt-ons that might not be significant?

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Raj Naran, ALS Limited - MD, CEO & Director [90]

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Yes. So just -- and I provided earlier on the call an update of where we were with our Everest strategic plan. We're on track. We're about to -- we're getting into our third year of our strategic plan, and we've delivered on the first year, we've delivered on the second year. We're now getting into our third year of that plan. And if we deliver, as we budgeted internally, we'd be on track at the end of our third year. But we're just entering the third year. So our belief is we'll be on track. Again, part of that program involves acquisitions. And if we don't find the right acquisition, we're not going to make an acquisition for the sake of making an acquisition. So we'll adjust it. But currently, we're on track and we've got a full pipeline with -- of acquisitions that fit the profile to meet our strategic plan.

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Operator [91]

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(Operator Instructions) We'll take our next caller.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [92]

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It's Nathan Reilly here from UBS. Sort of a real quick question on corporate costs. Just looking at that, when you net off those FX gains this year and the loss on the PCP, just looks like -- I think you had about sort of $37 million of net corporate costs. That's up from about $26 million to PCP. Just wondering what's driving that uplift and what's the sort of outlook for the run rate into the FY '20 on that figure?

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Raj Naran, ALS Limited - MD, CEO & Director [93]

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I think Luis will answer that.

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Luis Damasceno, ALS Limited - CFO [94]

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Yes, the increasing corporate cost has been related to the investments that we are making to implement our strategic plan. So when we break down the corporate cost increase, we have significant investments in IT and IS infrastructure, that's a number one for us. There's also investment in M&A resources in order to accelerate the acquisition process and the volume of revenue that we intend to bring onboard with new acquisitions. And as well in human resource and specifically on investment in learning development, for training of our employees and training of future leaders in the organization. So there was an acceleration of investments in corporate costs this year. As a reference, last year, the total corporate costs, excluding FX impact, was about 1.8% of revenue. This year, there was an uptick to 2.2% of revenue due to those elements that I just explained. And we expect that this kind of capacity that's created this year will come down next year as we leverage those results with additional revenue. So just to give some guidance for next year, we expect to be around 2% to 1.9% of corporate costs as percentage of revenue as we leverage the infrastructure that we're just creating right now.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [95]

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Okay. And just in relation to the M&A activity that was undertaken this year, I think you've called out the $66 million of M&A that was deployed, can I just get a quick update on what the I guess average EV/EBITDA multiple on those acquisitions as well?

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Raj Naran, ALS Limited - MD, CEO & Director [96]

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Yes. So -- I mean, I think the average EBITDA multiple is probably about 8.5 or 9x.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [97]

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Got it. Okay. And in terms of -- sorry, I was just going to say, I think you -- in one of your revenue bridges, you've shown that those acquisitions contributed about $20 million of revenue. But I think on the following slide, that EBIT bridge slide, we didn't get an update there on what the level of earnings contribution was. Should we assume it was largely material?

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Raj Naran, ALS Limited - MD, CEO & Director [98]

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Yes -- no. I think -- so what you're seeing there on the revenue bridge, and that's really Slide 6, is really just the benefit of the acquisitions -- actual benefits, so while noting that those acquisitions did not provide full revenue benefit for the full year. So really what we really saw was just $20 million worth of benefit from those acquisitions. We typically don't break out the contribution from the acquisitions as a separate bridge. It would just -- it rolls up into the different businesses.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [99]

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Okay. And can I just ask about the Chinese environmental divestment, which went out sort of this year? When is that likely to be formally divested or (inaudible) already?

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Raj Naran, ALS Limited - MD, CEO & Director [100]

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So that business is -- was fully -- we closed on it at the end of April. So that business is no longer part of ALS. It's been -- I mean, there's some last-minute closing. But for all practical purposes, that's business is sold and funded.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [101]

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Okay. And on annualized basis, what would have been the revenue contribution and also the EBIT contribution from that business?

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Raj Naran, ALS Limited - MD, CEO & Director [102]

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Yes. So we've never provided that, but it is not material to the business or to the Life Sciences business or for the Life Sciences APAC business. I think the greenfield startups that we do in Asia as well as acquisitions are more than offsetting anything that was being contributed by that Chinese environmental business. So it is not material at all to the overall business.

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Nathan Reilly, UBS Investment Bank, Research Division - Executive Director & Research Analyst of Industrial Materials [103]

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And the multiple that was tied to that, was that consistent with the businesses you've been acquiring, sort of 8 to 9x EV/EBITDA?

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Raj Naran, ALS Limited - MD, CEO & Director [104]

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Yes. So we held the confidentiality on that. The acquirer made us keep that information confidential. So we're bound by contract not to disclose that.

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Operator [105]

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We'll take our next caller.

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Siraj Ahmed, Citigroup Inc, Research Division - Associate [106]

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It's Siraj again. Just a quick question for Luis. Just a follow-up just on the interest costs. You mentioned there's a 20 basis point reduction in funding cost. Just is that the overall funding cost or is it just for that tranche?

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Luis Damasceno, ALS Limited - CFO [107]

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This is for the overall funding costs. So in translating dollars, we're talking about a reduction of about $1.4 million per year is the result of reduction of the 20 basis points for the total debt.

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Operator [108]

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And we'll take our last caller in the queue.

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Rohan Sundram, MST Marquee - Gaming and Contractors Analyst [109]

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It's Rohan Sundram from MST. Just one question. Most of them have been answered. But with regards to Life Sciences margins. In the past, you've talked about environmental margin pressures and in the last call, you talked about Asia pressures. Have we seen the cessation in that? Or is it just the case we're now comping the environmental margin pressures and they're not necessarily going away? But has there been any improvement in that outlook?

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Raj Naran, ALS Limited - MD, CEO & Director [110]

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So we've actually -- so I think as a general -- Rohan, as a general market commentary, and I'd be shocked that we don't see the same commentary from our peers, is there's always going to be pressure in the environmental and there will always be margin pressure in food. What we're seeing within ALS is our efficiency projects, our rationalization, sort of our globalization of all the initiatives that we've been talking about, we're actually seeing those benefit in terms of margin improvement. So we are seeing organic growth, but what we're seeing is we've been able to improve our margins. So for the environmental business, we are seeing the margin improve overall for our businesses globally. And so -- again, I think there will always be margin pressure. It's really for that part of the business, which is all regulatory-driven. I think it's a continued focus on cost base management, efficiency, technologies. And I think we're doing -- all the things that we've been talking about are now starting to deliver a reasonable outcome.

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Operator [111]

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And we have no further questions in the queue. I'll turn it back to you for any closing remarks.

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Raj Naran, ALS Limited - MD, CEO & Director [112]

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Right. I appreciate everybody's time today. Thank you very much.

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Operator [113]

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And that concludes our call for today. Thank you for your participation. You may now disconnect.